Money Smart

Strangle

2007-08-16T20:57:00.001-07:00

An options strategy where the investor holds a position in both a call and put with different strike prices but with the same maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset.

This is a good strategy if you think there will be a large price movement in the near future but are unsure of which way that price movement will be.

The strategy involves buying an out-of-the-money call and an out-of-the-money put option. A strangle is generally less expensive than a straddle as the contracts are purchased out of the money.

For example, imagine a stock currently trading at $50 a share. To employ the strangle option strategy a trader enters into two option positions, one call and one put. Say the call is for $55 and costs $300 ($3.00 per option x 100 shares) and the put is for $45 and costs $285 ($2.85 per option x 100 shares). If the price of the stock stays between $45 and $55 over the life of the option the loss to the trader will be $585 (total cost of the two option contracts). The trader will make money if the price of the stock starts to move outside of the range. Say that the price of the stock ends up at $35. The call option will expire worthless and the loss will be $300 to the trader. The put option however has gained considerable value, it is worth $715 ($1,000 less the initial option value of $285). So the total gain the trader has made is $415.

Call & Put Options

2007-08-16T20:52:00.000-07:00

To opt or not to opt...
Anup Menon

FROM July, options trading is likely to start in the capital market.

Starting this week, there will be a series of articles on options, aimed at increasing the awareness on the product.

An option gives you the right to buy or sell an asset at a future date. This can be done at the price specified in the option contract.

But you need to use it only if the option contract price is favourable to you. If the price trend is unfavourable, you need not exercise the option.

Instead you can go and buy or sell the asset in the market at a price better than the option contract price. This means an option holder has a right but not the obligation to exercise the contract. But this facility comes with a price; options help you benefit from the contract price if there are unfavourable movements asset prices in the market.

Options are classified into two types:

* Call option: A call option gives the holder the right but not the obligation to buy the underlying asset at a specified exercise price. Since the initial cash flow to buy the option is comparatively small, investors bullish on the asset (can be a stock or any other asset for that matter) can use call options to maximise their returns by buying into the product. Further, even in the case of the asset moving the other way, the maximum loss for the investor is only the premium he has paid.

* Put option: A put option is the reverse of the call option. It gives the holder the right to sell an asset at a predetermined price. Investors bearish on the future trends of the asset price can use a put option. It confers the same benefits as in a call option.

The players in an option market are holders (buyers) and writers (sellers):

* Option holders: Option holders are actually the buyers of the contract -- be they puts or calls. They have the `right' but not the obligation to do something at expiry. For instance, if the option holder has a call option and the asset price does not move in the expected direction, he will not exercise his option. From this perspective, his risk is limited.

* Option writers: Option writers are those who sell options. In other words, for a fee, they promise the holders delivery of an asset at a fixed price-tag. For instance, if an investor decides to exercise a call option, then the option holder will have to provide delivery of the underlying asset at that price. From this perspective, the risk is much greater for option writers.

Next week, we shall look at some more basic terminologies of the options market.

Option Basics - II

Anup Menon

LAST week we defined what an option is and talked about the two basic types of options namely calls and puts. We also saw the difference between an option writer and a buyer. This week we shall discuss some more key terms in options.

European Options: In India all options that are being introduced are of the European type. We can have a European put, call or any other advanced option variants. The question is what is the European Option. We know that an option holder has the right to exercise his option but not the obligation. The question is when can he exercise his right. Should it be on the maturity date or can he exercise it at any time after he has entered the contract. If the option can be exercised on the maturity date only, then the option is a European option.

American Options: The other type of option is known as the American Options. Most option contracts traded in developed markets are of the American type. The biggest advantage with the American Option is that it can be exercised by the holder at any point of time after entering the contract. However the question remains whether early exercise is optimal. Since the discussion of that topic is fairly academic, we shall deal with it on a later date.

Now that we have seen some of the basic types of options, let us look at some of the key valuation parameters that we should look for. The most important valuation parameter is volatility.

Measurement of volatility has been a subject for financial research, both academic and applied. This is all the more important in options since most positions tend to be leveraged and a wrong call on volatility can cost the trader a packet. The simplest and most widely used measure of volatility is the standard deviation. The standard deviation measures the deviation or changes in the return series from an average value. The higher the standard deviation, the more volatile the series.

However there have been many revised versions of volatility. For instance computation of the standard deviation assumes that the mean is unconditional. Modern volatility measurement techniques such as ARCH and its variants have been frequently referred to.

Next week we shall look into some of the other major valuation parameters such as exercise price and follow it up with a brief discussion on pricing models.

Option Basics - III

Anup Menon

Last week we saw what is meant by American and European options. We also discussed volatility, which is one of the key factors in valuation of options. This week we shall see some more key terms in options.

Expiration Date: Options quoted in exchange include the date and the month on which the option can be exercised. This is called the expiration date. In the case of the European option, the investor can exercise his right on the specified `expiration date' only. In the case of an American Option, investors can exercise the option on or before the `expiration date'.

Strike Price: The `strike price' is the price at which an option can be exercised. For instance, assume that you hold an European Option on XYZ company for one share. The strike price is fixed at Rs 5,000 and the expiration date is 15th June 2001. If the prevailing market price is say Rs 5,500, then you can exercise your option on the 15th and buy one share of XYZ for Rs 5,000.

In-the-money options: Those options which are trading in positive territory are called in-the-money options. This means that in the event of exercising the option, it leads to a gain for the investor. For instance, in the example given above, if the stock was trading at Rs 5,400 on 13th June, then the option is in-the-money from the point of view of the holder.

Out-of-the-money options: Those options which give a negative cash flow to the investors are classified as out-of-the-money options. For instance, in the above example, if the price of XYZ on 13th June was Rs 4,500, then it would have generated a negative cash flow if exercised. Hence the option is classified as out-of-the-money.

At-the-money options: Those options which do not result in any cash flow, in other words, which result in zero cash flow for the investors are called At-the-money options. For instance, in the same example as described above is the price of XYZ was Rs 5,000 on 13th June, then the option is at-the-money.

Next week we shall look into some of the properties of the factors affecting valuation of options.

Option Basics -- IV

Anup Menon

This week we shall look at an option strategy known as collars.

Assume you are an investor and want to own the stock of ABC company. You also know that the stock is not likely to move up at a rapid pace and you want to limit your downside. Under these conditions, an investor can consider using a collar strategy. A collar strategy involves three distinct transactions, namely the purchase of the asset in the spot market. purchase of an out-of-the-money put option and sale of an out-of-the-money call option. The potential risk and reward from using this strategy is limited.

Normally investors using this strategy try to even out the cash outflow on buying the put with the cash inflow from selling the call. In other words the premium paid for the buying the put and selling the call will be equal. This effectively means that the cost incurred by the investor is the equal to that of buying the stock in the spot market. An example would make the operation clearer.

Assume that the stock of ABC is selling at Rs 100. The investor purchases 10 shares of ABC, which means a net outflow of Rs 1,000 (for the purchase in spot market). At the same time the investor also purchases 1 put option (10 shares) with strike price at Rs 95. The investor also sells 1 call option (10 shares) with a strike of Rs 110. Since the premium paid for the put option is the same as the premium received for the call option, the net cost for the investor is Rs 1,000 only.

Assume that the stock price moves down to Rs 90. In that case three events happen. Firstly the call option is worthless. The investor will exercise his put option and thereby receives a cash inflow of Rs 50. The spot position incurs a loss of Rs 100. Therefore, the maximum loss that an investor will suffer is Rs 50. The same condition holds true for any combination of the spot price. If the asset price falls below the put strike, then the maximum loss that the investor can suffer is the difference between the put strike and initial spot price.

Similarly assume that the price of the asset rises to Rs 120. Then the put option is worthless. The investor will have to provides the shares at Rs 110. This means that he will lose Rs 100 (10*10) in the process. However the spot position will gain by around Rs 200. Therefore the net gain will always be Rs 100, that is the difference between the call strike and the original asset price.

Hence we can see that while the risks are contained, the rewards are also constrained.

Option Basics -- V

Anup Menon

ASSUME you are an investor and want to own the stock of ABC company.

However, at present, you are not sure as to the direction in which the stock will move. Is it possible to devise a strategy with limited risk but unlimited gains. Yes, the investor can consider using the (long) straddle strategy. A straddle involves two distinct transactions. For the (long) straddle involves the purchase of a call and put option with the same exercise and terms and conditions. The (short) straddle involves selling of a put and a call option with the same exercise and terms and conditions.

Normally, investors using this strategy are unable to gauge the direction of the stock. Therefore, the more volatile the stock, the better the payoffs from a (long) straddle and vice versa. Investors have to be careful when using this strategy. Why? Options tend to lose value quickly. In the case of a straddle, the erosion is twice that of holding a call or a put option. This apart the transaction costs would also be higher as the investor has to buy twice the number of options. An example would make the strategy more clear.

First let us look at an example of the (long) straddle strategy. Assume that the stock of ABC is selling at Rs 100. The investors purchases one call option at a strike price of Rs 105 and one put option with the same strike price. All other terms and conditions are similar for both options. Further assume that the investor pays a total premium (inclusive of call and put) of Rs 10. Therefore the cost for the investor is Rs 10. This effectively means that if the stock price moves beyond Rs 110, the call option will make money and if it falls below Rs 95, the put option will make money. In the event of the stock price remaining rangebound between Rs 95 and Rs 110, the maximum loss suffered by the investor is Rs 10.

Now let us look at the (short) straddle. This is an extremely risky strategy. For instance, as in our above example, the investor will write a call and a put option with a strike price of Rs 105. He receives a total premium of Rs 10 for his troubles. Therefore his maximum profit from the transaction is Rs 10 only. However of the stock fluctuates beyond the range stated above, the loss for the investor is unlimited. This is an extremely risky strategy and advised only for players with substantial financial backing and experience in trading options.

Next week we shall look at another strategy known as strangles.

2007-07-16T19:26:00.000-07:00

Don't lose money

How to get high returns with low risk? Phil Town offers an answer in `Rule #1' (www.crosswordbookstores.com), a book that guides you to `returns of 15 per cent or more in the stock market, with almost no risk.'

There are only two rules of investing, Warren Buffett would say. "Rule #1: Don't lose money... and Rule #2: Don't forget Rule #1."

The first rule can work for the majority, assures Town. It is easy to learn, and you don't even have to be that smart, either, he says.

How not to lose money? Invest with certainty, says Town. "Certainty comes from this: buying a wonderful business at an attractive price." Wonderful implies three Ms, viz. the business should have meaning, moat, and good management.

The business must have meaning for you, and reflect your values; "you understand it enough to want to own the whole thing if you could." Moat refers to the criteria of financial strength and predictability.

Business that is wonderful isn't enough; the price has to be attractive, meaning `a very big margin of safety,' the fourth M.

Thus, the `four straightforward steps' of Rule #1 investing, according to Town, are: find a wonderful business, know what it is worth as a business, buy it at 50 per cent off, and repeat until very rich.

Rule #1 is just about being a good shopper, cheers the author. "There are opportunities to buy wonderful companies at attractive prices - they really do exist - if you're willing to do your homework and say good-bye to mutual funds."

Meaning is important, because you buy a business, not a stock, the author reasons.

To infuse discipline into investing, he lays down the 10-10 rule: "I won't own this business for ten minutes unless I'm willing to own it for ten years."

The rule doesn't, however, preclude you from buying and selling the business over and over; rather, it makes you think as a long-term investor.

Identify your list of `wonderful' companies using three circles: passion (`what do you love to do, professionally and as recreation'), talent (`what things are you really good at'), and money (`what do you do to make money or what do you spend money on').

See how the words that show up in the circles point to a product, an industry, or a certain business.

"Anything that's in two or all the three circles is something you probably understand much better than most of the rest of us. It's probably something that has meaning to you, which automatically makes it an industry worth researching."

Elsewhere in the book, you'd read about `the three tools' to help you "have the courage to grab the stick from Mr Market, which is a good thing because we don't want Mr Market to beat us... "

Too imperative to ignore.

http://www.blonnet.com/iw/2007/06/17/stories/2007061701331200.htm

2007-07-07T19:18:00.000-07:00

How to read an Annual Report

Shanthi Venkataraman

The thought of poring over annual reports to glean information about a company or its growth prospects may seem terribly dull to most new investors. At a time when there is an overflow of information across media channels and scores of analysts churn out stock calls on a daily basis, you may be excused for taking the short cut and just looking up financial snapshots on the Internet.

Nevertheless, the annual report remains the most authentic source of information about a company and contains important facts about its financial condition, growth strategy and current challenges that are not readily available upon an Internet search. A well-written report can give you a rare glimpse into the management’s outlook for the industry or its views on new trends in the market. So for those who do not know (or remember) what an annual report looks like, here is a quick guide to reading this document.

The manner of presentation differs from one annual report to the other; some are mini opuses that promise to be a one-stop guide to the industry and company, others barely make the cut when it comes to providing crucial information. Most reports, though, will have the following important components:

The director’s report, which will detail the company’s operational performance in the year gone by.

Management Discussion and Analysis, where the management provides an outlook on the industry, competitive scenario, new challenges and risk factors and outlines its future strategy.

Detailed financial statements of the company and its subsidiaries, as well as consolidated financials, along with the auditor’s report.

The basics, for starters

You may also find pictures of happy employees participating in corporate events. Heart warming, but we suggest that you skim through all that gloss and start with the director’s report. This will give you an overview of the company’s performance across various segments and an idea of the factors that drove performance.

If you are unfamiliar with the industry the company operates in, then the Management Discussion and Analysis (MDA) is the best place to begin. Clueless about the pig iron industry? Read the Tata Metaliks report for data on the globa l pig iron and foundry market and pig iron price trends. The report also includes an interview with Tata Metaliks’ management, which discusses some of the key events that took place during the previous year and its perception about the competitive scenario.

Companies put forth their views on a variety of topics that concern their industry, be it Government regulation, consumer or user industry trends or changes in the global picture in the MDA. They then articulate their own plans to capitalise on unfolding opportunities.

Between the director’s report and MDA, you will get a fairly good idea of the businesses the company operates in, its key focus areas, the challenges ahead and the measures it has in place to improve financial performance in the year ahead.

For number-crunchers
For those who believe that it is numbers that do all the talking, the financial statements in the annual report provide you with details that you are unlikely to find on the BSE or NSE Web sites. For instance, you can figure out the extent to which a company is able to fund its expansion plans on the strength of its current operations by looking at its cash flow statements.

The schedules to accounts provide break-ups of income, expenditure and other items. For instance, you may want to know what components constitute “other income”, particularly if it has been a significant contributor to profits that year. The item-wise split-up of the components classified under other income will help you decipher how much of the non-operational income is recurring in nature. You are also provided with segmental information — both geographic and business.

Similarly, schedules elaborate on balance sheet items such as long-term and short-term loans. For retailing companies, for instance, inventory management is crucial and you may have to compare the inventory positions over a three-year period to understand how efficiently the retailer manages its stores. Or for cash-rich companies, the quality of their investment book may well play a role in valuations.

The annual report also discloses the financial information of the company’s subsidiaries, besides providing financials on a consolidated basis.

As new, high-growth ventures are typically routed through subsidiaries, companies are beginning to command valuations based on their consolidated numbers.

Be sure to look at the notes to accounts to understand the accounting treatment of various revenue and expenditure items. Those who are unfamiliar with accounting practices can make-do with looking for changes in accounting policies . This might tip you off on the impact of one-time earnings or expenses.

Also look for the auditor’s qualifications to accounts for any assumptions that have been made while preparing or auditing accounts.

Nooks and corners
The annual report also contains little nuggets of information that could provide you with additional insight into the company.

Management background: For instance, you can find brief profiles about the directors on the board of the company. The presence of directors with strong industry standing lends credibility to the management of the company.

The shareholding pattern of the company will reveal the extent of promoter holding and the extent of institutional interest in the company.

Production and utilisation figures: For manufacturing concerns, the production figures assume significance. The production as a proportion of installed capacity (utilisation) could give you an idea of the efficiency at which the compan y is operating and the headroom for further volume growth. This information is particularly pertinent if the company is planning further expansion.

IPO proceeds utilisation: For newly listed companies, the progress on the expansion plans that had been outlined in the offer document and the utilisation of the IPO proceeds are also disclosed in the annual report.

Notices to resolutions: Some special resolutions passed at the annual board meeting also merit attention. For instance, resolutions passed to increase borrowing limits are cues to the company’s desire to leverage its balance shee t.

Explanations are also available on why the resolution has been mooted. For example, Colgate Palmolive India’s latest annual report explains the reasons for its declaration of a special dividend and a capital reduction.

This list is far from exhaustive. Going through all this might mean a lot of time and work. But it does make your information more authentic than the tip from your broker friend or the analyst on TV.

http://www.thehindubusinessline.com/iw/2007/07/08/stories/2007070850701300.htm

2007-06-24T19:31:00.000-07:00

Seven deadly sins of investment
D. Murali

A crow will conquer owl in broad daylight, so too a king who wants to crush his foes needs fitting time to fight. More than two millennia old counsel, this is, from one of the 1,330 Kurals of Tiruvalluvar. Can any work be hard in very fact, if men use fitting means in timely act, asks the poet-saint in a different couplet included in a chapter titled `Knowing the fitting time'?

There are many such nuggets of wisdom in the ancient Tamil work for aspiring investors who want to profit from the market. It is not unusual to find contemporary instructions echoing ageless guidance. Take for instance, Colin Alexander's Streetsmart Guide to Timing the Stock Market (www.tatamcgrawhill.com). "Technical analysis tells you when to buy or sell a stock on the basis of what its price action says about it," he writes.

Fundamental analysis can tell you which stocks to buy on the basis of companies' financial statements and assumptions about their business prospects. Remember, however, that fundamental analysis "does not necessarily lead you to stocks where the action is." Therefore, supplement technical analysis with fundamental analysis, because when both analyses support the same conclusions, the results are likely to be spectacular, as Alexander assures.

Timing is not about finding `absolute tops and bottoms,' because that cannot be done with acceptable consistency, clarifies the author. He'd instead suggest that you study the market action to "avoid getting caught in a serious bear market for stocks generally or get caught in an individual stock that is going down the drain."

Take personal responsibility for your investments, says Alexander. "Owning stocks is like owning a business... Few businesses do as well as they should when an absentee owner farms out management."

In a chapter on `The Winning Attitude' the author urges you to be prepared to do things to be successful. Preparation includes the challenge of guarding yourself against seven deadly sins of investment:

Impatience ("one partial cure for impatience is to look at the rate at which a long-term moving average or a long-term trendline is going up").

Fear (which can be overcome "by the repetition of acts of courage").

Greed (watch out, "greedy use of margin can double losses instead of doubling profits").

Hope (don't "fall back on hope when the technical case turns against a stock").

Pride (this can attack "investors who believe that their intelligence and personality are superior to the market or to a systematic approach to buying and selling stocks").

Carelessness (for, "it is easy to get sloppy about doing your homework").

Gambling (please note, stock market is not a substitute for Las Vegas!)

Timely read.

Overpower dissatisfaction

What if you were given a ticket that could magically start your life anew? Would you redeem it?

With these enticing questions begins Life's Golden Ticket, an inspirational tale by Brendon Burchard (www.landmarkonthenet.com).

The prologue cites Richard Bach's simple test to find whether your mission on Earth is finished: "If you're alive, it isn't." Burchard finds himself alive after a ghastly car accident, and realises how the crash was "a perfect metaphor" for his life at that point: "A journey down a dark road, a sharp turn, utter loss of control."

How familiar these phrases may be to those who play the markets!

Well, turn the pages to follow the protagonist to a park where a wizard addresses the crowd from atop a stool: "You've been raised with the question `What should I do with my life?' That question, of course, is secondary. The primary question is, `Who should I be in my life?'"

You are in the park because of a quiet dissatisfaction with yourself, the wizard tells the people assembled. "You feel there is something more inside you... Deep down, you know you are more than what society has said you are or told you to be."

There are more lessons to learn from the park, such as this one, from `the centre ring' preceding `the last ride': Many of us live our lives desperately seeking to draw attention to ourselves, writes Burchard.

"We live our lives to be noticed, accepted, and adored. We live our lives as if we were in the centre ring, as if the world should sit around applauding our every move."

Thankfully, however, "there are a small number of people in this world who live their lives to make others smile, to remind others of the magic and hope in the world, to help them discover the possibilities that live within them... "

Refreshing ride.

http://BookPeek.blogspot.com

http://www.blonnet.com/iw/2007/06/24/stories/2007062401221200.htm

‘I want to be rich too, should I buy this IPO?’

2007-06-16T23:30:00.000-07:00

The first part is implied, but the second part of the sentence above is what a young colleague asked me on the last day of DLF’s IPO. I’m not surprised — this is almost a process that happens towards the peak of every bull run. Hype runs in like adrenalin and there is almost an itch to join the investing bandwagon. Different matter that many of these highly competent, highly intelligent people have generally been risk averse. Whether this time it signifies the peak or a pause remains to be seen.

“That’s very good,” I said. “Do you have a demat account?”

“Demat? I have my PAN number¿”

Sensing she had never heard of the word, I tried to explain in as simple words as possible about how shares, including IPOs, can be bought only in dematerialised form and that she would have to open one.

“Like how?” I put her in touch with our in-house expert on stocks and off she went to become Client Account No. 7,903,390 on NSDL’s (National Securities Depository Ltd) 7,903,389 strong database of direct equity investors. The depositary holds Rs 31,42,645 crore worth of stocks in its custody, and my colleague will add her thousands to India’s stock story.

I believe she should not buy into the DLF IPO — or any other IPO or any other stock. Not until, that is, she’s learnt a thing or two about reading balance sheets, understanding businesses, tracking companies and the market. She did mention the last: “I’m planning to enroll on a stock simulation website to get a feel of things.”

“Sure, do that,” I said, “but also read One Up on Wall Street by Peter Lynch”, a prescription I’ve given to all my relatives, friends, colleagues, neighbours, e-groups — and even my doctor. (And a bible that many fund managers constantly refer to.) And if the dose is inadequate and the investor-patient needs a stronger antibiotic to negotiate the perceivably dangerous world of equity investing, I prescribe that too — Warren Buffett’s letters to shareholders, downloadable free from berkshirehath-away.com. Between the two, you’ve got your equity strategy education in place.

Next come the details — opening a demat account, applying the fundamentals to real life, finding out the difference between cyclicals and turnarounds, fast-growers and stalwarts, RoCE and RoE, PE multiples and how to apply them, when to use them and when to discard them. On this, there is no one source and the education is largely experiential and constant. Experts say you need to lose money to learn. I disagree. What you need to do in this age of information overload is be able to sift information from noise.

The most important edge you as a lay investor have while investing in stocks is your non-investment decisions. Did you go to Big Bazaar and buy the monthly groceries? Did you notice the crowds, making it so difficult to negotiate your way? Did you observe the long lines at the cash counter? Have you been seeing it for the past year or so? Yes? Congratulations, you’ve just finished 75 per cent of the research.

Now, all you need to do is to study Pantaloon Retail’s (Rs 447) financials and answer this question: is it still investment worthy?

Yes? Go buy.

No? Move on to your mobile phone - Bharti Airtel (Rs 813) or Reliance Communications (Rs 493)? Or banking - ICICI Bank (Rs 909) or State Bank of India (Rs 1,324)? And so on. Find a good company, then see if it’s worth the price.

I then asked my colleague another question: “What will you do if the DLF stock crashes to Rs 250 on listing?” She said, “Since I’m investing for the long term, I won’t worry about it too much, it’s from money I’ve set aside. But if it falls really low, I may sell it.”

Right answer, but: “Why sell a good company? If you thought DLF was investment worthy at Rs 550, it should be even more interesting at Rs 250. Why not buy more?”

“I guess, I should, yes.”

“No - not now, that is. You must buy stocks, but first you must understand them, be ready to spend time with them - at least as much time as you spent on buying your new phone. Until then, stay with equity funds.”

Meanwhile, I’m wondering whether her wanting to buy into IPOs today means crash of the market next week.

editor@expressindia.com
http://www.indianexpress.com/story/33730.html

Stocks update on Hindu

2007-06-16T19:43:00.000-07:00

Reliance

Though RIL did not head lower as expected, the recovery was not convincing either. The evening star in the weekly chart has been followed by a harami, which implies indecision. The stock faced resistance from Rs 1,715. The short-term outlook will turn neutral only if the stock closes above Rs 1,735. Inability to do so will make the stock move lower to Rs 1,621 or Rs 1,566 shortly.

The medium-term outlook remains unaltered. We expect a dip to Rs 1,580. Investors can hold the stock with a stop at Rs 1,570. Fall below this level will signal the end of the move from Rs 1,262.

SBI

SBI has retraced 32 per cent of the up-move since April 2007. The next retracement target for the stock is at Rs 1,250, which is the medium-term trend deciding level.

Investors can hold the stock till it stays above Rs 1,250.

Momentum indicators too denote that though there can be weakness in the short-term, the larger trend is not under threat as yet.

Upper target for the week are at Rs 1,346 and then Rs 1,388.

Inability to move above Rs 1,346 will be a cue for traders to initiate fresh short positions with a target of Rs 1,180.

ACC

ACC is pausing just below the 50 day moving average positioned at Rs 825. The hurdle beyond this level will be at Rs 852.

Inability to move beyond Rs 852 will imply an imminent fall to Rs 760 again.

Fourteen-day RSI at 47 and 10-day ROC in the negative zone imply that the stock needs to move a little higher before the short-term outlook turns positive.

But the medium-term outlook will turn negative only on a close below Rs 768. Investors can hold the stock with a stop at Rs 760. Fall below Rs 760 will take the stock to Rs 680.

ONGC

ONGC bounced higher in line with our expectation to an intra week high of Rs 891. But a strong impediment exists at Rs 900. A reversal from this level can drag the stock down to Rs 842 and then Rs 801. The 200 DMA at Rs 850 should lend support in the near term.

Sustained sell signal in the weekly chart implies the continuation of the downtrend that began in April.

A close beyond Rs 935 is required to make the medium term positive for this stock. Investors can hold with a stop at Rs 840. Target beyond Rs 840 is Rs 760.

Infosys

Infosys could be charting the C wave of the flat correction that commenced from the April low of Rs 1,912.

This C wave has the target of Rs 2,041 and then Rs 2,140. The 200 DMA present at Rs 2,070 will be an interim impediment.

In other words, a cluster of resistances exist between Rs 2,040 and Rs 2,140.

The medium-term outlook is negative though a fall below Rs 1,900 is required to reinforce this assumption. A close above Rs 2,140 will negate this outlook. Traders can short on rallies with a stop at Rs 2,075. Stop for investors would be Rs 1,900.

Tata Steel

Tata Steel staged a minor pullback last week that took it to an intra-week peak of Rs 622. The laboured nature of the pullback and the sell signals in the weekly oscillators herald short-term weakness in the stock.

The short-term resistance for the stock exists at Rs 630. Inability to rally above this level will make the stock move to Rs 567 and then Rs 533 next week.

The band between Rs 560 and Rs 570 can lend medium term support. Investors should not initiate fresh buys if the stock falls below this level. That would pave the way for a fall to Rs 500.

Lokeshwarri S. K

Fiat Palio Stile: Stylish looks, sluggish drive

2007-06-16T19:40:00.001-07:00

S. Muralidhar

Fiat has attempted to make the Palio Stile more acceptable as a small car, one that is affordable and fuel-efficient. But it seems to have lost its way a bit in this pursuit.

Just as there is no person who is perfect in every respect, there is really no perfect car either. What we could call a perfect car is one that offers features that exceed the buyer's expectations, in a mix that also includes ones that are just plain acceptable and those that may even be minor negatives.

Customer expectations in each car segment differ and unfortunately in the small cars it is so skewed in favour of fuel-efficiency that they are willing to compromise on many other parameters. So cars that are designed and engineered better, have more modern features or offer a better ride quality find fewer takers than ones that are more fuel-efficient.

Of course, the situation is now fast changing. When Fiat launched the Palio in India, the excessive focus on fuel efficiency was one of the factors that worked against it. Fiat India also had to tackle issues relating to its marketing and servicing network at the time when the Palio was coming around to facing up to the competition.

But unfortunately the good start for the Palio could not be sustained and sales started to nosedive just months after the car was launched. Clearly, its relatively poor fuel-efficiency vis-à-vis its peers in the small-car segment was a big reason for its lacklustre performance.

Fiat attempted to redeem the situation by reworking the engine management system of its 1.2-litre FIRE engine. Fiat fine-tuned the mapping of the engine to ensure more optimised fuel injection and also reworked the air-conditioner to reduce the load on the engine.

The Palio, after these changes were made, was christened Palio NV (short for New Version). Of course, we all know the rest of the story — the Palio NV and the new marketing tie-up with Tata Motors have still not been enough to make customers throng the showrooms.

For small-car manufacturers, the pursuit of perfection basically involves improving fuel efficiency. The Government's special lower excise duty benefit for small cars lead manufacturers to look at ways to meet the norms for small cars, as defined in last year's Budget.

The Fiat Palio satisfied the overall length norm for a small car, but its 1,242cc engine was just outside the 1,200cc limit for petrol-driven small cars. Fiat, along with Hyundai and Tata Motors, were among the first to try and rework their products to meet the small-car norms so as to gain a price advantage through lower excise duty.

Fiat had been talking about the new Palio (introduced in other markets almost four years ago) making it to India. The promise of better fuel-efficiency from a smaller, 1.1-litre engine only made it twice as convincing for Fiat to consider.

And so, finally, the new Palio Stile has made it to the showrooms, with redesigned exteriors and a whole new engine buzzing inside its bonnet. We had presented the photos and provided a sneak preview months before the car made it here.

A face-lift

On the outside, the car still retains the smart, well-proportioned familiar looks of the original Palio, and is still clearly the best looking in the segment. The headlamps have been replaced with new dual-barrelled, clear lens headlamps that house halogen bulbs. The headlamp unit now cuts deeper into the front bumper. Honeycomb bonnet grille with the blue Fiat logo in between lends more character to the Palio Stile. The front bumper has been restyled with larger airdam and fog lamps. Minor modifications to the bonnet panel and side turn indicators have been made. The previous model's outside rear-view mirrors have been replaced with a bigger unit that improves visibility. The door handles are now grab-type.

There are quite a few changes in the rear too, with the most important being the new trapezoid tail-lamps that closely resemble the earlier version's tear-drop-shaped cluster. The arrangement of the tail-lamp combination has also been changed to better suit the vertical orientation of the new shape. Minor modifications have also been incorporated to the rear bumper and the hatch door.

The new Palio, which is by now not so new in markets such as Brazil, also comes with a new interior package. But, here, Fiat has chosen to carry forward the overall design and layout of the older model, except for some changes to the colour theme. Obviously, the one factor that must have worked against a complete overhaul of the interior would have been the cost.

The Palio's interior was never gloomy, claustrophobic, or uncomfortable. Except for the relatively poor quality of the plastic on the dashboard, Palio owners liked the layout and feel of the features. Added to this was the superb ride quality, ample shoulder and leg room, and excellent steering feel making it the best passenger cabin among all the small cars currently in the market. Thankfully, all of these positive attributes of the earlier Palio have been carried forward to the new Stile.

The new colour theme, with beige and brown combination, and the brushed aluminium dashboard inserts (in the top-end model) make the Stile's interiors look a bit out of sorts. Other interior features have all been carried forward from the original. Cabin lamp now gets courtesy time delay.

Fiat has lost an opportunity to spruce up the interiors a bit more to try and offer Palio buyers that bit extra compared to the competition that has left this very capable car way behind in the premium hatch segment. Nonetheless, the new exterior features do give it a freshened, unique look.

New engine

Fiat has fallen for the mass-market trap in its choice of the engine for the new Stile. The absolutely lovable, but unaffordable, 1.6-litre engine with a delectable 100PS of peak power, that was offered in the original Palio was an aspirational hatch for small-car buyers. This engine has been now carried forward and continues to be offered in the Stile.

However, the 1.2-litre FIRE engine that was the more affordable option and the one whose performance was more suited to fit a premium small car has been yanked out of the Palio and, instead, a new 1.1-litre engine has been shoehorned into the Stile's bonnet. The earlier 1.2-litre engine, that put out a peak power of 72bhp felt barely right for the Palio's build and weight. With no serious attempt having been made to lighten the Palio's solid build, the new 1,108cc engine's 57bhp of peak power is decidedly underpowered to handle the load.

The new engine's low performance parameters show easily on the road and the Stile's power delivery and on-road acceleration are nothing to write home about. The engine's maximum torque of 92 Nm is also generated only at a high 2,750rpm. This means that the amount of low-end torque available is pretty poor.

Floor the accelerator and you could have heard the engine first before being able to discern any decent level of acceleration even in the earlier 1.2-litre engine. The new 1.1-litre is even worse. Spacing between gears and a bit of a confused attempt at optimising engine mapping for achieving better fuel efficiency has meant that the performance of the new Palio is heavily compromised.

Fiat has attempted to make the Palio more acceptable as a small car, one that is affordable and fuel-efficient. But somewhere in its pursuit to rework the magic of the Palio, Fiat seems to have lost the way and has come up with what looks like a half-hearted attempt.

However, the Palio Stile still offers a decent package for customers who are less concerned about engine refinement and performance. But to be able to confidently take on the existing pack of small cars, Fiat has to do better than this.

Investment versus financial planning

2007-06-16T19:38:00.001-07:00

Rajesh Saluja

Financial and investment planning are terms that are interchangeably used in personal finance parlance. But nothing could be farther from the truth. To understand the difference between the two concepts, we first have to understand them well.

Investment Planning (IP) has the "rate of interest" factor at its core, thus making the approach a little myopic. The IP process involves several steps, ranging from setting investment goals and understanding the risk appetite to designing an investment portfolio after evaluating the markets and the investment landscape. IP refers to a commitment of funds to one or more assets that will be held over a specific period. Anything not consumed today and saved for future use can be considered an investment.

Financial planning (FP), on the other hand, is the process of meeting your life's goals, through prudent management of finances. It provides direction and meaning to financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. By viewing each financial decision as part of a whole, you can consider its short- and long-term effects on your life goals.

FP contrasts sharply with the individual-need-driven approach of IP as it takes into account the needs of the individual as well as the family.FP would ordain that even before you begin considering how and where to invest your money, it is important to identify and prioritise your wealth accumulation goals. It would mean answering questions such as:

What does IP mean to you?

What dreams are you saving for (retirement, a home, education)?

How have you approached such issues as risk tolerance and diversification?

It should create a clear picture of your current financial situation. Spread your investments across `asset classes' to reduce risk. It should help arrive at the optimal asset allocation strategy with regular monitoring to maintain the allocation in line with your then current needs and should be tax efficient

Financial planner vs broker

A normal broker makes recommendations for investments. However, FP is not simply the ad hoc purchase of a range of investments; rather, the investments are the end process of a financial plan's implementation. Implicit in the process of personal financial planning is the preparation of a written plan that details a client's financial needs and resources, establishes set objectives, and in appropriate circumstances, details specific recommendations. Your financial planner will help you to not only identify but also prioritise your needs and then make a judicious allocation of your resources.

Successful investing for you does not mean sourcing the highest possible return, but means placing your money with investments that satisfy your needs. When investing, much attention is directed towards the choice of investments, but in financial planning, the emphasis is on exploring and meeting the investor's needs. Investors and their advisors spend much time understanding the merits of the investment avenues available. Little time is spent understanding the needs of each person and ensuring that the most appropriate investments are selected. That is essentially the difference between a broker and a financial planner. The success of a financial planner is measured by how well he manages to meet the client's needs. Your dreams will change. Your tolerance for market risk may change. That is why it is important that your financial plan is adjusted as necessary. Your financial advisor can help you revisit your investment strategy to make sure it stays in line with your long-term goals.

(The author is CEO & Managing Partner, ASK Wealth Advisors. The views are personal and of his organisation.)

Please send suggestions and queries to younginvestor@thehindu.co.in, or The Research Bureau, The Hindu Business Line, 859-860, Anna Salai, Chennai-600002.

ICICI Bank — Bankable for the long term

2007-06-16T19:36:00.001-07:00

T. B. Kapali

There is scope for good medium/long-term returns, given the prospects for the core banking business, strong brand value and possible contributions from the insurance subsidiary.

An investment in ICICI Bank's follow-on public offer may only suit those with a three-four-year investment horizon. Such investors may bid at the cut-off price. Those looking for gains over the short term would be better off not participating in the offer, as there is a possibility of the stock offering better entry points in the market at the issue closes.

Medium/long-term prospects

But there is scope for good medium/long-term returns. The business is bound to benefit from the bright prospects for the core banking business in a growing economy, the prominent position and the brand value acquired in the banking space, as well as the possible improvements in the profitability of the (insurance) subsidiaries.

The life-insurance business, by its very nature, takes time to break-even and the red on the balance-sheet appears magnified during high growth phases. ICICI Prudential Life, for instance, recorded a 60 per cent growth in premium income in FY-07 and this has naturally led to high actuarial provisions (which are based on the liabilities the insurer contracts on policies issued).

Besides, any future re-alignment in the Foreign Direct Investment policy relating to insurance (even if it appears remote at present) could have a bearing on the banking company's valuations. ICICI Bank may then be in position to encash or monetise, with capital gains, the investments it has made in the subsidiaries. The bank's investments in its subsidiaries — the material ones being the two insurance subsidiaries — amount to around Rs 2,300 crore. The value of the core banking franchise would automatically become more critical in a scenario where the bank's stake in the other financial businesses is brought down.

Value of subsidiaries

The re-organisation of ICICI Bank's subsidiaries has turned out to be almost co-terminus with the bank's fresh capital-raising programme. The reported pricing on the shares to be issued by the proposed new subsidiary (ICICI Financial Services) — a 5.9 per cent stake at Rs 2,650 crore — values the new subsidiary at approximately Rs 45,000 crore which is more than half of the current market capitalisation (around Rs 82,000 crore) of the parent bank itself. This has naturally raised the question if the parent stock now needs to be revalued. Other investors indeed seem to have placed a high valuation on businesses — mainly life insurance — that are still a net drain on the consolidated financials and may continue to be so for some time to come. The life-insurance subsidiary's net loss for 2006-07 at Rs 650 crore is one-fifth of the bank's (standalone) PAT (profit-after-tax) of Rs 3100 crore.

Short-term investors to wait

Short-term investment prospects in the stock though may not be that attractive. A possible moderation in economic activity in the near term could prove a drag on the earning prospects. The reported slow down in the growth of the bank's flagship lending product — housing loans — attests to this. The near-term financials may also be impacted by the pressures on the funding side brought over from the interest rates tightening of the past two-three quarters. Apart from bank-specific risk, overall systemic risk in the form of a possible rise in risk aversion (particularly towards emerging markets) may also affect near-term valuations. Therefore, investors with a holding period horizon of six months to one year can possibly wait to pick up the stock at lower levels.

Factors that bear watching

Quality of core bank financials

The core banking business and the associated financials will possibly come under greater investor scrutiny now that the hiving off of the investments in subsidiaries has been accomplished.

Such a study of the financials of the core bank point to a number of areas which, if acted upon, could lead to better long-term valuations for the stock.

Given its prominent position in the industry, its size and the reputation it has built up in the market, one would have imagined that the overall balance-sheet would present a structure that is intrinsically capable of optimally managing diverse interest rate environments. ICICI Bank, though, has relied on a kind of regulatory forbearance to insulate itself from interest rate shocks which otherwise may have seen its earnings under greater pressure.

Among financial intermediaries, ICICI Bank possibly stands out for the low level of interest rate risk it is carrying on its balance-sheet. Almost 40 per cent of its total assets as of March 2007 — Rs 1,35,000-1,40,000 crore on a balance-sheet of Rs 3,45,000 crore — is not subject to interest rate risk. This has been accomplished mainly through two mechanisms.

The bank has placed almost its entire statutory liquidity ratio (SLR) portfolio (25 per cent of its demand and time liabilities) — comprising investments in government securities — amounting to around Rs 60/65,000 crore in the "held to maturity" (HTM) category. The value of investments held in this category need not be adjusted to reflect current (and changing) market interest rates.

To give a perspective, based on its current balance-sheet and the growth in its liabilities base in the last four years, the bank may need to invest Rs 25,000-28,000 crore in SLR securities in FY-08 (assuming the CAGR of 45/50 per cent in the deposit base recorded in the past four years is maintained). Assuming this entire incremental SLR investment is not categorised as HTM, a rise in interest rates by say 0.50 percentage points, could possibly increase provisioning requirements (and lower profits) by as much as Rs 500 crore. (This assumes a "duration" or weighted average time to maturity of four for the portfolio — a higher "duration" would mean larger losses). Compared to that, the bank's increase in provisioning for investments in 2006-07 was only around Rs 60 crore even as investments in government securities increased by around Rs 17,000-18,000 crore and interest rates also stiffened by close to 0.50 percentage points.

Secondly, the bank's flagship lending product — home loans — which at Rs 64,000 crore in March 2007 constituted 30 per cent of the total advances, is largely in the form of floating rate loans. This transmits the risk of rising interest rates entirely to the borrower.

The point to be noted here is that the bank carries a fairly large interest rates derivatives trading book. While it operates in the interest rates derivatives markets as a proprietary trader, it has not found or used that market as a platform to engage in financial intermediation in the strict sense of the term. As of March 2007, the outstanding notional principal of its interest rate derivatives trading book was around Rs 2,80,000 crore. And this book is positioned to benefit from rising interest rates. A 1 percentage point rise in rates would increase the value of the trading portfolio by around Rs 70 crore.

Using the interest rate derivatives markets to offer better interest rate solutions to borrowers could have a direct impact on the quality of the loan portfolio and in turn on provisioning/earnings.

So far the quality of the housing loan portfolio does not seem to have been adversely affected — gross and net NPAs in the collateralised loan book, which is mainly housing loans, were 1.3 per cent and 0.7 per cent respectively at March 2007. But this is one parameter to be watched as the bank has reiterated the critical role of the housing loan business in its overall strategy.

From a valuation perspective, such immunity in the balance-sheet, obtained either because of regulatory forbearance or market imperfections may not be optimal. For when the interest rate cycle turns, there could be opportunity losses in sticking to book value accounting for a major part of the balance-sheet.

Overall prospects

Overall, the medium/long-term investment prospects for the stock appear good. The chinks in the armour, as can be seen from the company's balance-sheet, are capable of being removed. The company could build on its position and the growth it has recorded in many banking parameters — deposits, advances, market share and the so far muted impact on loan portfolio quality despite rapid business growth. Non-interest income at around 20 per cent of the total and the steady performance on this front indicate a buffer available for the earnings stream. The bank also has been a leader in leveraging technology to provide a range of services — particularly in the retail segment. This provides considerable earnings cushion. Risks to this outlook emanate from the pressure that has been seen on interest margins, the slide in overall returns on equity/assets and a reasonable probability of such pressure continuing in the ensuing period.

Offer details: ICICI Bank's follow-on public offering in the price band of Rs 885 to Rs.950 is set to raise Rs 8750 crore. Retail investors have the option of paying Rs 250 on application, Rs 250 on allotment and the balance on call. The offer is open from June19-22.

Question & Auto

2007-06-16T19:17:00.000-07:00

S. Muralidhar

I want to buy a new car and have narrowed my choice to the Hyundai Santro Xing and the Chevrolet Spark. Which one should I choose if I intend keeping the car for the next five years?

Iftekhar Hussain

I plan to buy my first car. I had short-listed the Chevrolet Spark and the Maruti Suzuki WagonR. I am looking at both fuel efficiency and style.

My usage will mostly be during the weekend and once a month out of town on a long trip.

I want value for money in the long run, rather than save money at the time of purchase.

Sunil Dhawan

The Chevrolet Spark is a serious contender in the small-car segment. But it is not the best endowed in terms of interior space. The Spark, possibly along with the Suzuki Zen Estilo, best leverages its exterior dimensions to gain the most cabin space. And yet, the Chevy's rear seat is relatively cramped and it will be quite a squeeze for three passengers.

Overall, in terms of shoulder space the Fiat Palio, the Tata Indica and the Hyundai Santro Xing are leaders in the small-car segment.

These cars will probably also be joined by the Maruti Suzuki WagonR, when the legroom parameter is considered.

Clearly the Chevy Spark will still be a couple of notches lower in the interior space department. The Spark is taller than the more low-slung small cars such as the Alto and the Palio, but doesn't offer the kind of headroom that the tallboys such as the Santro, the WagonR and the Zen Estilo offer.

However, excluding the Maruti 800 and the Alto, the Spark will rate marginally better than the Santro Xing and WagonR in the fuel-efficiency parameter. The Spark's frugal 995cc engine offers a decent power of 63PS, even as it manages to generate a high peak torque of 90.3Nm. The Chevy small-car is also the lightest of the lot, which should help improve fuel-efficiency.

It is too early to comment about whether the Spark will retain value. But this is a small car that will be around for quite some time to come. A redesign or a model change for the Spark is still more than a couple of years away. GM is also going to great lengths to explain that the Spark will be easy and inexpensive to maintain in the long run and to add credence to this claim is also offering a three-year or one-lakh km warranty on the car.

The Spark could well be the car for you if you are not concerned about its relatively less spacious interior, marginally lower engine refinement and the notchy, long-throw manual gearbox.

Recently, I bought a Maruti Esteem petrol car. It is a year-1995 model with an air-conditioner. For a 12-year-old car, the engine seems to be smooth and the performance, satisfactory. The car has clocked 71,000 km. What is the life of an Esteem engine and, considering its age, how safe is it to take it for long trips, which may involve travelling 500-1,000 km at a stretch.

Jagadish Karekoppa

Globally, the average lifespan for a car is considered to be about 14 years. But, in India, we are less reluctant to part with our vehicles and are constantly trying to squeeze more out of them.

In most modern petrol cars, age starts showing on engine performance and reliability much after it has on the other parts. Of course, here the assumption is that the car has been reasonably well-maintained and all necessary precautions have been taken during the years of ownership.

The Esteem's 1.3-litre engine is a tried and tested mill that has performed efficiently for most owners. Since multi-point fuel injection was introduced only in 2000-2001, the Esteem that you own probably still features a carburettor. Excluding the possibility of any external factors affecting the life and performance of the Esteem's engine, it should very easily be able to do its job for over a lakh km before it needs any form of intervention.

As mentioned, the age of the car will probably show on its other parts and these would need to be checked and replacements made before you plan to take this 12-year old on a long drive. The components that you will need to check to reconfirm the car's roadworthiness will include:

The battery, which needs to be replaced at least every five years on average.

All the filters — air, oil and fuel.

Tyres will need to be checked for tread wear. On average the tyres need to be changed every 35,000-45,000 km based on the usage pattern and quality of roads that the car has been driven on.

All the fluids in the car, such as engine oil, radiator coolant, brake and power steering fluid (if available) and windscreen wiper fluid.

Check the carburettor and the spark plugs and ensure that they are clean and have been adjusted for optimum performance.

Check refrigerant gas in the compressor and check if the radiator fins are clean and free of debris.

Check other components that are prone to wear and tear such as the fan belt, clutch plate and brake pads.

Check whether the scheduled maintenance tasks such as oil change, wheel alignment, etc., have been performed.

Finally, check the car's chassis, under-body and body panels for cracks, leakages, weak spots or other damage that may be a threat to its performance on the road.

Queries may be sent to: q&a@thehindu.co.in or by post to Q&A, Business Line, 859/860, Kasturi Buildings, Anna Salai, Chennai - 600 002.

An insurance plan your child can do without

2007-06-13T22:07:00.000-07:00

Amar Pandit Thursday, 14 June , 2007, 08:34

Insurance in India is synonymous with the Life Insurance Corporation of India and vice versa. For a long time, LIC was the only life insurance institution and the only products available were investment-oriented. Till the entry of private players, it did not even have a term product - one major reason why term plans aren’t very popular in the country, yet.

The popular plans include endowment, money back, whole life, pension, special and children’s plans. These are available in various flavours, but most of them are a combination of endowment and money back. Komal Jeevan, a children’s plan, is one such popular scheme. The sales pitch for Komal Jeevan includes:

It is a guaranteed product with a bonus of Rs 75 per 1,000 sum assured per year. It can be utilised for your child’s education and marriage and you wouldn’t have to worry about your child should something happen to you. The returns are amazing and the highest in the industry. No one guarantees you a bonus of Rs 75.

One of my readers had bought this plan for his son a few years back, falling for these claims. What he did not realise was that this plan essentially covered the life of his son and not his. In order to ensure that subsequent premiums didn’t need to be paid on his son’s policy in the event of his death, he would have to pay an additional premium.

What’s really on offer?

As per the LIC website, “This is a children’s money back plan that provides financial protection against death during the term of plan with periodic payments on survival at specified durations. This plan can be purchased by any of the parent or grandparent for a child aged 0-10 years.”

Mark the wording “financial protection against death.” One would assume that the policy covers his life. But, no; as the reader discovered, it is the child’s life that the policy covers and one has to buy the premium waiver benefit (PWB) along with it.

Risk cover: The risk commences either 2 years from the date of commencement of the policy or from the policy anniversary immediately following the completion of 7 years of age of the child, whichever is later. This means, if you buy this policy for a child whose date of birth is March 12, 2003 (4-yrs-old), then his risk cover will start after 2 years or after he completes 7 years, whichever is later. In this case, the risk cover will start in 2010 for a sum assured.

Death benefit: In case of the life assured’s death before the commencement of risk (say before 2010), the policy shall stand cancelled and premiums paid (excluding the premium for PWB) under the policy will be refunded (i.e., the parent will receive only the premiums paid). However, if death occurs after the commencement of risk but before the policy matures, the full sum assured plus guaranteed additions, together with loyalty additions, if any, is payable.
Loyalty additions: Along with the guaranteed bonus, this plan also gets a share of the profits in the form of loyalty additions, which are terminal bonuses payable along with death or maturity benefits. Loyalty addition may be payable depending on the experience of the corporation.

Survival benefit: A percentage of the sum assured is paid on survival to the end of specified durations. Let’s consider an eg. For a sum assured of Rs 10 lakh for a 4-year-old, the premium is Rs 93,521 p.a. without the PWB and Rs 96,087 with PWB. The risk cover in the first year is Rs 96,087 (i.e., the premium paid). The returns work out to around 4.96%.

Is it worthwhile?
As one can see, premiums for this policy are exorbitant. Life covered is that of the child and not yours. Returns are low despite a guaranteed bonus
You and your child would do well to opt for a sizeable cover for yourself and investing the difference.

What should you do if you have this policy?
This policy may be surrendered after it has been in force for 3 years or more. The guaranteed surrender value before the date of commencement of risk is 90% of the premiums paid excluding the premiums paid during the first year and any extra premium paid. Thus, in our eg, if you surrender the plan at age 6 after 3 premiums have been paid, you will receive Rs 1.72 lakh (90% of Rs 96,087 + 96,087 - the first year’s premium).

After the date of commencement of risk, at age seven in this case, the guaranteed surrender value is 90% of the premiums paid before the date of commencement of risk excluding the premiums paid during the first year and any extra premium paid plus 30% of the premiums paid after the date of commencement of risk.

So, you will receive Rs 1.72 lakh + 30% of Rs 96,087= Rs 2.01 lakh if you close the policy after 4 premiums have been paid. If you have bought this policy in the last couple of years, you can certainly look at surrendering it and instead buying yourself (parent) a sizeable cover.

http://sify.com/finance/fullstory.php?id=14471587%20&vsv=SHGTslot5

2007-06-10T19:28:00.000-07:00

Know all about ULIPs
Priya Kapoor

A look at the types of Unit Linked Insurance Plans, how they work, and what the subscriber ought to look out for.

Till recently, individuals seeking to provide protection to their family had no other option except a life insurance term plan. The plan promised a stipulated amount to the family of policyholder in the event of his death.

However, the insurance sector has evolved over the last few years and a number of innovative products have hit the market. One product category that is increasingly catching the fancy of individuals is the Unit linked Insurance Plan (ULIP). These plans, a combination of insurance and investment, provide the policyholder with life cover and additionally offer the opportunity to earn a return on the premium paid.

How ULIPs work

ULIPs work on the lines of mutual funds. The premium paid by the client (less any charge) is used to buy units in various funds (aggressive, balanced or conservative) floated by the insurance companies. Units are bought according to the plan chosen by the policyholder. On every additional premium, more units are allotted to his fund. The policyholder can also switch among the funds as and when he desires. While some companies allow any number of free switches to the policyholder, some restrict the number to just three or four. If the number is exceeded, a certain charge is levied.

Individuals can also make additional investments (besides premium) from time to time to increase the savings component in their plan. This facility is termed "top-up". The money parked in a ULIP plan is returned either on the insured's death or in the event of maturity of the policy. In case of the insured person's untimely death, the amount that the beneficiary is paid is the higher of the sum assured (insurance cover) or the value of the units (investments). However, some schemes pay the sum assured plus the prevailing value of the investments.

Key types

There are various unit linked insurance plans available in the market. However, the key ones are pension, children, group and capital guarantee plans. The pension plans come with two variations — with and without life cover — and are meant for people who want to generate returns for their sunset years.

The children plans, on the other hand, are aimed at taking care of their educational and other needs. The Children's Dreamz Plan offered by Birla Sun Life Insurance and Young Star offered by HDFC are good examples of unit linked children plans.

Apart from unit-linked plans for individuals, group unit linked plans are also available in the market. The Group linked plans are basically designed for employers who want to offer certain benefits for their employees such as gratuity, superannuation and leave encashment.

The other important category of ULIPs is capital guarantee plans. The plan promises the policyholder that at least the premia paid will be returned at maturity. But the guaranteed amount is payable only when the policy's maturity value is below the total premium paid by the individual till maturity. However, the guarantee is not provided on the actual premium paid but only on that portion of the premium that is net of expenses (mortality, sales and marketing, administration).

Market-linked returns

Though there are various benefits attached to buying a unit linked insurance product, the return on the ULIPs is directly linked to the performance of the stocks or bonds it invests in. An individual must remain prepared for bullish as well as bearish market conditions. Gaurav Mashruwala, a certified financial planner, says, "Usually people consider a scenario of the market going up while buying Unit Linked Insurance Plans. However, it is important to look at the other side of the coin too. If the market goes down, the fund value will also decline. Individuals easily give in to the illustrative returns presented by the sales person, projecting a 6 or a 10 per cent growth in the years ahead. What if the market crashes? This aspect has also to be kept in mind while parking money in Unit plans".

(The author is a Faridabad-based freelance writer.)

http://www.blonnet.com/iw/2007/06/10/stories/2007061000961300.htm

What to check out

Every individual needs to ask his/her advisor the following questions before investing in a ULIP.

What are the total expenses charged?

If an individual is keen on making money through ULIPs, it is important to know the various expenses the policy entails. The charges, meant to recover various costs, eat into the returns of the policyholder. Therefore, before buying a ULIP, an individual must ask his advisor to provide him with two concrete numbers. One, the value of the fund at the end of the term, without the impact of charges, and, two, the value of the fund after deducting charges. The fund with a wider gap between the two is the more expensive one.

How much of the premium would be actually invested?

In ULIPs, the whole of the premium you pay is not invested. The insurance company offering the product usually deducts certain charges from the premium money and invests only the balance. It is necessary to know from the advisor what proportion of the actual premium would be used for making investments, as the returns would be made available on the net premium (premium less charges) and not what the investor shelled out.

What would be my life cover?

Insurance policies are meant basically to provide you with a life cover. Though ULIPs combine insurance and investments in one product, an individual must be aware of the extent of protection that a policy offers and the number of years of life cover provided.

How is the premium allocated?

Allocation is another very important factor that cannot be overlooked. The individual should ask the agent to provide details of how assets will be allocated between different classes — equity, debt and cash.It is not enough to opt for an aggressive growth fund, you should know the exact percentage of equity and debt in it. The allocation would determine the returns you can expect from your chosen fund.

What is the ULIPs' track record?

The most significant question, however, is about the product performance. An individual must opt for a fund that has shown consistently good performance over the past few years. An agent must be asked to disclose the fund's fact sheet for at least a three-four-year period.

Priya Kapoor
http://www.blonnet.com/iw/2007/06/10/stories/2007061001011300.htm

Maruti equips new cars with anti-theft device

2007-05-19T19:19:00.000-07:00

Our Bureau

New Delhi May 18 Maruti Udyog Ltd has said that the company is equipping its cars with Immobiliser, an anti-theft device. Cars fitted with the device would be soon available at all its showrooms across the country.

Due to the Immobiliser, there has been a marginal price change in the range of Rs 1,000 to Rs 4,300 (Ex-showroom, Delhi) for various Maruti models.

Immobiliser, branded as iCATs (Intelligent Computerised Anti-Theft System), is an electronic system that works on digitally encrypted codes on the car key fob.

The car starts only after the code in the iCATs matches with the corresponding code on the Electronic Control Unit of the car.

"We have been concerned at the increasing number of car thefts and the loss and inconvenience caused to our customers.

"The factory fitted iCATs will provide the customer a fool-proof device that prevents theft of their cars," said Mr Jagdish Khattar, Managing Director and CEO, Maruti Udyog Ltd.

It pays to invest in reading

2007-04-27T23:28:00.000-07:00

2007-04-27 12:52:50 Source : Moneycontrol.com

Being a good investor is hard work. And, you can't be one without reading -- a lot. Buying stocks that outperform the market is an immensely competitive task. And not being armed with insight from investment literature is a serious handicap.

I have compiled some investment reading that could help you stay way ahead of the pack, when it comes to investing. I can personally vouch for this literature, though some of it includes recommendations by friends.

Let me start with a personal experience. A big portfolio management company asked me if I would help set up their library.

I said, “Yes, provided you give me four or five of your employees who will ‘own’ the book. They should know the book, have read it, understood it, and be able to make a presentation on the book.”

This was in 2005; I am still waiting!

Attitude towards money

If you need to check your own attitude towards money, read Ayn Rand’s Atlas Shrugged and see who your sympathies lie with. However, keep in mind the Bhagwad Gita attitude towards effort, and the result seems better than Ayn Rand’s “Virtue of selfishness”. But Ayn Rand, you must read!

Starting Out

Random Walk Down Wall Street by Burton Malkiel is a solid and wide-ranging survey of finance that's as good a place to start as any.

Jeremy Siegel's Stocks for the Long Run, though sometimes criticised as a product of the bull market, is also a good general overview of stocks as an asset class.

Analysis for Financial Management by Robert Higgins, is one of the best (read, least painful) introductions to accounting that I've found. Yes, you simply have to be able to understand how cash flows through a company if you plan on picking stocks. In the Indian context you could read Finance Sense by Prasanna Chandra. Accounting isn't exciting. But it is the language of business. And investors must be able to talk the talk before walking the walk.

The Five Rules for Successful Stock Investing is an accessible overview of fundamental analysis, and covers some topics that aren't always emphasised elsewhere, such as economic moats.

Why Smart People Make Dumb Money Mistakes by Gary Belsky and Thomas Gilovich is the best entry-level book I've found on the fascinating topic of behavioral finance.

Great managers

My favourite of the many Buffett biographies is Roger Lowenstein's Making of an American Capitalist, after which you should read the insightful annual letters written by Buffett to shareholders of Berkshire Hathway (visit their web site).

Benjamin Graham's The Intelligent Investor is a must-read, and the recent edition has copious – and excellent – footnotes that bring Graham's classic ideas into the modern age. Phil Fisher is in many ways the original growth investor, and his Common Stocks and Uncommon Profits should also be high on any investor's reading list. It's the perfect compliment to Graham.

However, though Fisher may have been a great investor, his book does not exactly make for easy reading. If you use his ‘criteria’ for selecting a company, you may not end up being the richest man on earth. But you will definitely NOT lose money.

Moving to the more recent stars of the investment firmament, Peter Lynch's Beating the Street is essentially the journal of a very successful money manager, which is what makes it so readable and informative. His other book One up on Wall Street is also good, and both these books are a must read.

John Train's Money Masters of Our Time profiles about a dozen successful investors of wildly varying styles. This will tell you why a Chandrakant Sampat, a Nagnath, a Vallabh Bhansali, a Rakesh Jhunjhunwala, a Prashant Jain or a Madhu Kela might have different stategies, but are good in results. Knowing how you will behave in a particular investment situation might save you a lot of angst.

Marty Whitman's The Aggressive Conservative Investor, and David Dreman's Contrarian Investment Strategies. In the Indian context, Contrarian investing is not easy and not too many fund managers have any track record doing it. But at least you will understand the concepts when you hear the Mutual fund managers talk about their strategies.

Poor Charlie's Almanack, collects Buffett partner Charlie Munger's major speeches and writings over the past couple of decades. Munger's biography, Damn Right! by Janet Lowe was good. So, I imagine a collection of thoughts from Munger himself should be even better.

Looking for history?

John Kenneth Galbraith's A Short History of Financial Euphoria is a slim volume that's a fine place to start. Devil Take the Hindmost by Edward Chancellor is a fantastic and in-depth history of manias through the ages.

Peter Bernstein's Capital Ideas has been often recommended to me as an interesting and accessible history of academic finance. While on Bernstein, one cannot forget Against the Gods, easily one of the finest books I have read on risk. A recent book that I read on this is Innumeracy, a book showing how people are mathematically illiterate.

On the lighter side, two classics by Michael Lewis, stand out; Liar's Poker and Moneyball. The former, featuring some laugh-out-loud episodes, tells the story of the larger-than-life characters who made the Salomon Brothers the kings of bond trading in the 1980s. The latter chronicles how the Oakland A's parlayed one of baseball's smallest payrolls into a winning track record.

I have not read Moneyball but I have heard that it has more lessons about investing. Liar's Poker is a great read and gives an insider's view of life inside an investment bank during a bull market.

In all fairness, that may be because I've yet to read even one of the many books that have come out since the firm Enron's demise. The two that have been recommended to me most often are Bethany McLean's The Smartest Guys in the Room and Kurt Eichenwald's Conspiracy of Fools.

Will make you think

The final category on the ultimate investment reading list are volumes that force you to think more deeply, or in a different way, about investing.

Robert Cialdini's Influence is written on the lines of (though it is more sophisticated) of Why Smart People Make Big Money Mistakes, and shows how and why we are susceptible to persuasion by others. If you think this doesn't sound like it has anything to do with investing, think again – following the herd is one of the easiest investment traps to fall into, and Influence will help you realise when you're being led astray by the crowd for irrational reasons.

Fooled by Randomness, by Nassim Taleb, is more directly about finance, but is no less thought provoking than Influence. Taleb explores how easily we confuse luck with skill and the importance of knowing which is which. Taleb is more of a quantitative analyst and a trader than the other authors on the reading list, which adds to the book's appeal.

Finally, I would be remiss if I didn't recommend Michael Porter's Competitive Strategy, which is still the best primer for thinking about competitive advantage. It can be repetitive and dry in parts, but it's still a worthwhile read.

You can't understand economic moats without being familiar with Porter. Another good book, perhaps to start your personal financial planning exercise is The Richest Man of Babylon, a classic, and like all classics, easily forgotten by the new kids on the block.

Conclusion

Needless to say, this list could have been much longer. Shareholder letters in particular, I only mentioned in the passing. They are a great (and free) resource – a good starting point for your investment education.

For lay investors, I have a simple take. In the US markets, professionals underperform the INDEX by a margin. Let us say the average fund manager underperforms the index by a percentage or two. See how much you under-perform, and you could be surprised.

So, if you think you can change – and change you must – start reading!

http://www.moneycontrol.com/india/news/financial-planning/it-pays-to-investreading/278171/2