For the first time in more than 9 years, the Indian Rupee crossed Rs. 40 mark against US Dollar!
The Indian Rupee has been on a rally that had put many a companies, especially IT and other export oriented ones, on fire. The Big Four of Indian IT industry (TCS, Wipro, Infosys, Satyam) had already lost almost 75,000 crore of market capitalization. So is the story of textile, jewellery and drugs sectors. This article which came on rediff.com explains the side effects of Rupee appreciation.
While an appreciating Rupee is the sign of a strong economy, it may not be good for one that depends heavily on exports and outsourcing. As far as exports go, the back firing happened because they charge clients in dollar terms. Had they charged foreign clients in Rupee terms, they wouldn’t have been affected by Rupee strengthening. But India needs dollars and exporters need margins. So there is no option but to get dollars from foreigners. I was wondering, what if we had charged them in Rupee terms? When will we become strong enough to do that? One’s wildest dream may be, but it’s sweet to think about such a situation. May be, its not too far...
Thursday, September 20, 2007
Saturday, September 15, 2007
Endowment Policies – when it comes to maximizing returns
“Back in July 2002, I took an endowment policy. I was in my first job and for the first time in my life I was submitting investment proof to claim the munificent tax rebate. I had heard from someone that taking an endowment policy would be a better option as the higher premiums I pay would take me near the magical, tax rebate figure of One Lakh and to top it, I would get good returns on policy maturity! I didn’t think twice; called up an insurance agent. All he told me was about endowment policies. Finally, for an annual premium of around Rs. 21,000, I took an endowment policy with a policy term of 25 years. The rest I managed with National Savings Certificate.”
“It’s been three years and having diligently paid all the premiums, now I am a loyal customer of the insurance company. But some of my colleagues who had invested in stock markets that time, directly or through Mutual Funds, have already tripled or quadrupled their savings. Some had made even more. That’s when I started thinking about my endowment policy and the kind of returns it gave me with respect to the investment I made in the form of premiums. Is my endowment policy actually giving me good returns?”
I’m sure most of us who own an endowment policy would have thought like this at least once. This post succinctly examines the same. In the due course, we will find out how endowment policies don’t give much returns or insurance cover vis-à-vis some of the other investment opportunities.
Let’s have a closer look at Endowment Policies. Endowment Policies by definition agree to pay a lump sum on maturity while giving a small insurance cover during the policy term. Thus it’s a combination of both insurance and investment. The policy holder pays premium (this is the investment) reasonably higher than a term-insurance policy and gets yearly bonuses from the insurance company that get accrued and added to the lump sum. On the event of death or on maturity he gets the sum assured plus the accrued bonus (both constitutes the return on investment), which according the insurance company or the agent, is a formidable amount.
Thus, on policy maturity, the policy holder gets money in two ways.
Every year,
a) Reversionary Bonus: Distributed from company profits, based on plan, term and sum assured.
b) Terminal Bonus: Distributed from company profits for customer loyalty, based on plan, term and sum assured.
On maturity
a) Sum assured
So that the Total Amount on maturity = Sum Assured + Accrued Annual Bonuses.
Now let’s study an endowment policy in detail to calculate the returns from it. The policy under study has the following parameters.
Annual Premium = Rs. 21,000
Policy Term = 25 years
Premium Paying Term = 25 years
Sum Assured = 5 Lakh
Bonus declared by the insurance company for this particular policy during the years 2003-04, 2004-05 and 2005-06 were Rs. 53, Rs. 47 and Rs. 44 respectively, for every thousand rupees sum assured, i.e., an average of Rs. 48. Though I understand that the bonus amount would vary from year to year and may increase in the coming years, I take this average value for the calculations. Also, please to note the decreasing trend in bonus amount.
Thus for a sum assured of Rs. 5 Lakh, the bonus would come out to be Rs. 24,000 per year which is Rs. 6 Lakh for 25 years.
The terminal bonus is usually not made public by the insurance company. Hence we have no other way but to assume it to be on the range of Rs. 4 Lakh.
That makes the total amount the above policy holder would get after 25 years to be Rs. 15 Lakh. And the total premium he would have paid during the policy term would be Rs. 5 Lakh [21,000 X 25]. Thus the policy gives him an annualized return of 12%. [((15 / 5) X 100) / 25]
In this way you can calculate the returns you get from your endowment policy.
Now we got an idea about the returns from an endowment policy. Going ahead, let’s think about the next question. Is there any other way for us to get more returns and more insurance cover from the same investment amount? Is there a way to maximize our investments without compromising on the insurance cover?
So, let’s look at another investment option; say Mutual Funds. Over the years, mutual funds have been giving very good returns, in the range of 40% per year. But if we assume an average return of even 15%, an investment of Rs. 21,000 per year for 25 years would give the above person a return of Rs. 51 Lakh, had he invested the same amount in Mutual Funds every year! Quite amazed?
Unlike endowment policies, mutual funds don’t give any insurance cover. So how do we take care of the insurance part? Well, one way to do that would be to cut down the investment amount a bit and take a term insurance using that. Just to give you a hint, for an annual premium of around 6,000 rupees you will get a term insurance of about Rs. 25 Lakh for the same time period of 25 years! Hence splitting the endowment policy into term insurance + mutual fund combination would be an intelligent way to get more returns and insurance cover. When you play around with such a combination, probably you would end up with a better investment, having more returns and more insurance cover for the same investment amount.
Now one may ask, with endowment policies he will get a return for sure but if he invests in mutual funds, isn’t there a risk of losing money? Well yes, since the mutual funds invest in shares there is a risk of losing money. But mutual fund companies maintain a portfolio of shares to reduce this risk, due to which the downfall may be less. Also, for the less risky, there are balanced funds which invest only half the amount in shares. By the way, the bonus amount of an endowment policy is based on the insurance company’s profit. What if the company made a loss?
Thus there are better ways to invest than taking an endowment policy. Though I haven’t told you how to plan your investment or what to take, I hope that this post would have helped you to think a bit before going for an endowment policy.
Back Slash: An insurance agent gets commission for every premium you pay. For an endowment policy, you will pay premium for longer time periods; 25 years may be, possibly the reason why he may persuade you to go for an endowment policy and may not tell you about the more essential, term-insurance policies.
“It’s been three years and having diligently paid all the premiums, now I am a loyal customer of the insurance company. But some of my colleagues who had invested in stock markets that time, directly or through Mutual Funds, have already tripled or quadrupled their savings. Some had made even more. That’s when I started thinking about my endowment policy and the kind of returns it gave me with respect to the investment I made in the form of premiums. Is my endowment policy actually giving me good returns?”
I’m sure most of us who own an endowment policy would have thought like this at least once. This post succinctly examines the same. In the due course, we will find out how endowment policies don’t give much returns or insurance cover vis-à-vis some of the other investment opportunities.
Let’s have a closer look at Endowment Policies. Endowment Policies by definition agree to pay a lump sum on maturity while giving a small insurance cover during the policy term. Thus it’s a combination of both insurance and investment. The policy holder pays premium (this is the investment) reasonably higher than a term-insurance policy and gets yearly bonuses from the insurance company that get accrued and added to the lump sum. On the event of death or on maturity he gets the sum assured plus the accrued bonus (both constitutes the return on investment), which according the insurance company or the agent, is a formidable amount.
Thus, on policy maturity, the policy holder gets money in two ways.
Every year,
a) Reversionary Bonus: Distributed from company profits, based on plan, term and sum assured.
b) Terminal Bonus: Distributed from company profits for customer loyalty, based on plan, term and sum assured.
On maturity
a) Sum assured
So that the Total Amount on maturity = Sum Assured + Accrued Annual Bonuses.
Now let’s study an endowment policy in detail to calculate the returns from it. The policy under study has the following parameters.
Annual Premium = Rs. 21,000
Policy Term = 25 years
Premium Paying Term = 25 years
Sum Assured = 5 Lakh
Bonus declared by the insurance company for this particular policy during the years 2003-04, 2004-05 and 2005-06 were Rs. 53, Rs. 47 and Rs. 44 respectively, for every thousand rupees sum assured, i.e., an average of Rs. 48. Though I understand that the bonus amount would vary from year to year and may increase in the coming years, I take this average value for the calculations. Also, please to note the decreasing trend in bonus amount.
Thus for a sum assured of Rs. 5 Lakh, the bonus would come out to be Rs. 24,000 per year which is Rs. 6 Lakh for 25 years.
The terminal bonus is usually not made public by the insurance company. Hence we have no other way but to assume it to be on the range of Rs. 4 Lakh.
That makes the total amount the above policy holder would get after 25 years to be Rs. 15 Lakh. And the total premium he would have paid during the policy term would be Rs. 5 Lakh [21,000 X 25]. Thus the policy gives him an annualized return of 12%. [((15 / 5) X 100) / 25]
In this way you can calculate the returns you get from your endowment policy.
Now we got an idea about the returns from an endowment policy. Going ahead, let’s think about the next question. Is there any other way for us to get more returns and more insurance cover from the same investment amount? Is there a way to maximize our investments without compromising on the insurance cover?
So, let’s look at another investment option; say Mutual Funds. Over the years, mutual funds have been giving very good returns, in the range of 40% per year. But if we assume an average return of even 15%, an investment of Rs. 21,000 per year for 25 years would give the above person a return of Rs. 51 Lakh, had he invested the same amount in Mutual Funds every year! Quite amazed?
Unlike endowment policies, mutual funds don’t give any insurance cover. So how do we take care of the insurance part? Well, one way to do that would be to cut down the investment amount a bit and take a term insurance using that. Just to give you a hint, for an annual premium of around 6,000 rupees you will get a term insurance of about Rs. 25 Lakh for the same time period of 25 years! Hence splitting the endowment policy into term insurance + mutual fund combination would be an intelligent way to get more returns and insurance cover. When you play around with such a combination, probably you would end up with a better investment, having more returns and more insurance cover for the same investment amount.
Now one may ask, with endowment policies he will get a return for sure but if he invests in mutual funds, isn’t there a risk of losing money? Well yes, since the mutual funds invest in shares there is a risk of losing money. But mutual fund companies maintain a portfolio of shares to reduce this risk, due to which the downfall may be less. Also, for the less risky, there are balanced funds which invest only half the amount in shares. By the way, the bonus amount of an endowment policy is based on the insurance company’s profit. What if the company made a loss?
Thus there are better ways to invest than taking an endowment policy. Though I haven’t told you how to plan your investment or what to take, I hope that this post would have helped you to think a bit before going for an endowment policy.
Back Slash: An insurance agent gets commission for every premium you pay. For an endowment policy, you will pay premium for longer time periods; 25 years may be, possibly the reason why he may persuade you to go for an endowment policy and may not tell you about the more essential, term-insurance policies.
Wednesday, September 12, 2007
Entrepreneurship, the next Indian way?
I was reading an article that came on rediff which talked about a few young entrepreneurs who started something that they were passionate about and then succeeded in it. A techie who started a restuarant, a gamer who started a gaming company, another techie who started a resort; great and inspiring stories!
I have always felt that India is a land of family owned businesses. Almost all the big business names in India have the same story behind it. I know, there are a few Infosyses out there, but then, when you take the larger picture the names you would hear would be nothing but the Tatas, Birlas, Ambanis, Wadias, Bajajs, etc. Okay, when they all started they did it through the entrepreneurship way, but the point is there isn't enough entrepreneurial ventures in India being started these days, not to the extent that the country can produce.
Is it because of the lack of availability of funds? If it was 10 years ago I would have definitely considered this sentence, but now, with a lot of Venture Capital Funds operating in India, I would not agree to that. During this year's placement at IIMA, along with companies, a few VC Funds also visited the campus to hear whether the bright minds in the country have got any bright ideas with them so that they can pour the required money to let those ideas see the light of the day. Now, that was a welcome change. Hmm.. India is not only shining but changing too!
I hope the talents in our country would get inspired by the stories such as those posted by rediff and do some thing substantial to take our country towards the next era.
I have always felt that India is a land of family owned businesses. Almost all the big business names in India have the same story behind it. I know, there are a few Infosyses out there, but then, when you take the larger picture the names you would hear would be nothing but the Tatas, Birlas, Ambanis, Wadias, Bajajs, etc. Okay, when they all started they did it through the entrepreneurship way, but the point is there isn't enough entrepreneurial ventures in India being started these days, not to the extent that the country can produce.
Is it because of the lack of availability of funds? If it was 10 years ago I would have definitely considered this sentence, but now, with a lot of Venture Capital Funds operating in India, I would not agree to that. During this year's placement at IIMA, along with companies, a few VC Funds also visited the campus to hear whether the bright minds in the country have got any bright ideas with them so that they can pour the required money to let those ideas see the light of the day. Now, that was a welcome change. Hmm.. India is not only shining but changing too!
I hope the talents in our country would get inspired by the stories such as those posted by rediff and do some thing substantial to take our country towards the next era.
Monday, September 10, 2007
India and her perpetual debt
I read this on Economic Times and I couldn’t but write a post on it.
The piece says, India was by far the largest borrower from two World Bank institutions, accounting for $3.75 billion, or 15 percent of their total lending as the bank group globally committed $34.3 billion in fiscal year 2007.
It’s not under my proficiency to criticize and say why India is the largest borrower despite showing a tremendous economic growth rate, surging capital inflows and increased earnings through taxes. At least from the taxes front, I know for sure that it’s more streamlined than ever. In such a situation, I thought India have had reduced her borrowings in the recent times and would have been making it to zero over a period of time; 2020 may be!
But one may not forget that due to the trickling effect (!) only less of these funds reach the needy poor, for eradicating poverty, for providing basic infrastructure, education etc. Majority of which end up in the deep and ravenous pockets of the needy rich, politicians, middlemen! Well, that could be one of the reasons why more such funds are encouraged to flow from organizations such as World Bank to India every year, even today.
I also read experts saying 15% GDP growth will eradicate poverty in India.
Which one India should adopt to eradicate poverty? Working hard to make the GDP grow 15% or working hard to borrow from World Bank and make our debt a perpetual one?
The piece says, India was by far the largest borrower from two World Bank institutions, accounting for $3.75 billion, or 15 percent of their total lending as the bank group globally committed $34.3 billion in fiscal year 2007.
It’s not under my proficiency to criticize and say why India is the largest borrower despite showing a tremendous economic growth rate, surging capital inflows and increased earnings through taxes. At least from the taxes front, I know for sure that it’s more streamlined than ever. In such a situation, I thought India have had reduced her borrowings in the recent times and would have been making it to zero over a period of time; 2020 may be!
But one may not forget that due to the trickling effect (!) only less of these funds reach the needy poor, for eradicating poverty, for providing basic infrastructure, education etc. Majority of which end up in the deep and ravenous pockets of the needy rich, politicians, middlemen! Well, that could be one of the reasons why more such funds are encouraged to flow from organizations such as World Bank to India every year, even today.
I also read experts saying 15% GDP growth will eradicate poverty in India.
Which one India should adopt to eradicate poverty? Working hard to make the GDP grow 15% or working hard to borrow from World Bank and make our debt a perpetual one?
Friday, September 7, 2007
The magic of Inflation
Business Standard reported, “Inflation based on the Wholesale Price Index (WPI) dropped to 3.79% for the week ended August 25 from 3.94% in the previous week. Inflation close to 7% few months back to 3.79% is more welcomed than ever. As one won’t be having any doubts regarding the importance of inflation to an economy and how it affects the economy, let’s see how it is calculated in India.
But before that, there are two methods to calculate inflation rate; Wholesale Price Index (WPI, introduced in 1902) and Consumer Price Index (CPI, introduced in the 1970s). In WPI, the calculation of inflation is done on the basis of the average rate of change in prices of a set of commodities in the wholesale market. Where as CPI is a statistical time-series value based on the weighted average of rate of change in prices of a set of goods and services purchased by consumers. Thus the CPI is much more comprehensive and it catches the inflation value from the end-consumer's side rather than from the wholesale seller's side. CPI is published on a monthly basis while WPI is available every week and has the shortest possible time lag of 2 weeks. India uses WPI while most of the developed countries use CPI to calculate the inflation rate.
The prices of a set of 435 commodities (such as onion, rice, dal etc.) are used for calculating WPI in India. Economists say that India should adopt CPI for inflation calculation as it is the one that shows price rise an end-consumer would experience. Finance Ministry counters it saying that in India there are 4 CPI indices (CPI Industrial Workers, CPI Urban Non-manual Employees, CPI Agricultural Labourers and CPI Rural Labour) in existence which makes switching over to CPI riskier and complex and also CPI has too much lag time in reporting. But then, the question remains how the United States, the United Kingdom, Japan, France, Canada, Singapore and China use CPI for inflation calculation?
The way in which WPI inflation rate is calculated in India can be found out in the article, How is WPI inflation rate calculated in India?.
Related Articles
- How is WPI inflation rate calculated in India?
- Commodities and their weight-ages in WPI calculation of India
- Inflation rates of India (2009)
- Inflation rates of India (2008)
- Base year and number of commodities used for inflation calculation in India
But before that, there are two methods to calculate inflation rate; Wholesale Price Index (WPI, introduced in 1902) and Consumer Price Index (CPI, introduced in the 1970s). In WPI, the calculation of inflation is done on the basis of the average rate of change in prices of a set of commodities in the wholesale market. Where as CPI is a statistical time-series value based on the weighted average of rate of change in prices of a set of goods and services purchased by consumers. Thus the CPI is much more comprehensive and it catches the inflation value from the end-consumer's side rather than from the wholesale seller's side. CPI is published on a monthly basis while WPI is available every week and has the shortest possible time lag of 2 weeks. India uses WPI while most of the developed countries use CPI to calculate the inflation rate.
The prices of a set of 435 commodities (such as onion, rice, dal etc.) are used for calculating WPI in India. Economists say that India should adopt CPI for inflation calculation as it is the one that shows price rise an end-consumer would experience. Finance Ministry counters it saying that in India there are 4 CPI indices (CPI Industrial Workers, CPI Urban Non-manual Employees, CPI Agricultural Labourers and CPI Rural Labour) in existence which makes switching over to CPI riskier and complex and also CPI has too much lag time in reporting. But then, the question remains how the United States, the United Kingdom, Japan, France, Canada, Singapore and China use CPI for inflation calculation?
The way in which WPI inflation rate is calculated in India can be found out in the article, How is WPI inflation rate calculated in India?.
Related Articles
- How is WPI inflation rate calculated in India?
- Commodities and their weight-ages in WPI calculation of India
- Inflation rates of India (2009)
- Inflation rates of India (2008)
- Base year and number of commodities used for inflation calculation in India
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