guarantee on the highest NAV of their ULIP scheme. ULIP funds invest in market listed securities which can be both

equity and debt related. Since these schemes are long term in nature, investors invariably choose 100% equity

allocations. Such investors had taken a huge beating during the crash of 2008 and have seen significant erosion in

their investment values. This volatility had put off potential as well existing investors from committing more funds into

these schemes.

Now “Assured Highest NAV” schemes have been projected as the ultimate solution to market risk. You are guaranteed

the highest Nav during a certain period, or fund value whichever is higher at the end of term. What sold to investors is

the idea that the fund will be invested completely in equities and the highest returns from such an equity portfolio will be

made available to them. This is not the truth.

First let us understand how these products work

1. The initial investments may be 100% equity or a combination of debt and equity depending on the strategy followed

by the fund manager

2. The fund manager follows a portfolio insurance strategy that can be done by allocating funds between debt and

equity – Here the fund manager sells equity as the market falls, so as to protect the downside. Unfortunately the

‘guarantee’ on highest Nav does not allow for the reverse to happen i.e. to buy equities as the market recovers. This

results in sub-par returns from the Equity portfolio

3. Money removed from the Equity portfolio is invested in debt. The proportion of debt increases steadily and soon the

debt part of the portfolio will become large enough to ensure the highest NAV.

So let’s say over the next 10 years a 100% equity portfolio will deliver a 15% CAGR. A ‘highest NAV assured scheme’

will deliver anything between 6 to 10% CAGR during the same period. From this further deduct costs that when spread

over the duration of the scheme could range from 3 to 4% p.a. You also pay for insurance (mortality charges). So cut

out that too from your returns and you will see that these are really inferior products. In fact they are inferior to even

regular ULIP products because the guarantee on highest NAV is available only if you survive the term. If you die during

the term, your nominees will get the prevailing value of the fund. They are inferior to even a regular debt product

because of the high cost structure.

A guaranteed NAV does not guarantee ‘equity linked’ returns. There is no way of knowing what the highest NAV would

be and that Nav would probably have nothing to do with the stock market’s highest level during the same time. The so

called guarantee is a marketing gimmick and is implicitly a result of the way the investment is structured i.e. with high

proportion of debt. As an investor you are paying for such a guarantee, by accepting less than optimal returns.

Please evaluate your insurance needs and asset allocations before investing in any product. And it is best to avoid

expensive investments for your long term goals. To get equity related returns invest in equities. A good quality, well

constructed portfolio is a better guarantee to optimal returns.

by kavitha menon

“ My father aged 69 years was retired and staying with me. He had a credit card since the last 15 years. He expired last year in October and since January this year I have been harassed by phone calls from the bank claiming that there is an outstanding of Rs. 32,000 on his card. Now they want me to pay this outstanding. Is it legal for the bank to demand the dues of the father from his son? What should I do? - Rajesh Batra, Gurgaon*.

As soon as I saw this query on our Ask the expert section of Apnapaisa, the memory of late Bollywood actor Kanhaiyalal (who played money lender Sukhi Lala in Mother India) flashed in mind…Circa 1959.

Here was the new age Sukhi Lala (Circa 2009) who is passing the debt baton from one generation to another…till now I thought that times had changed. The tradition of passing the debt from one generation to another was long dead say since independence.

I always felt that Sukhi Lala - the villainous moneylender in old Hindi films – notably Mother India – extracting money from sons for loans taken by their father was more a caricature than the truth. But here was Rajesh with exactly the same dilemma in 2009.

To rescue people like Rajesh, I consulted a few legal expert friends who gave me the low-down on this:

1) First they corrected me about the “Mother India” analogy. In Mother India the father (played by “Jaani” Raj Kumar) had mortgaged his farmland for taking the loan. Hence the repayment was forced from the heroine (the incomparable Nargis) and her two sons because they were emotionally attached to that land and wanted it to be released from the moneylender’s clutches. If they had refused to pay, the moneylender could have proceeded to take possession of the property and sell it to recover his dues along with interest (at a draconian rate). In the case of Rajesh’s father, it was an unsecured loan, hence clearly this was not applicable.

2) Second the bank only had the ability to proceed against the estate of the deceased. So Rajesh would be liable for the credit card debt only if he had inherited something from his father and that too, up to the value of what he had inherited.

Acting in accordance, I wrote to Rajesh to check if he had inherited anything from his father. He mentioned that he only inherited some personal stuff (such as a ancient copy of Ramayan that his father had nurtured his entire adult life) with almost nil economic value. We told him to write to the bank giving all these details and if they still persisted to file a complaint with both the RBI as well as the police for undue harassment. My lawyer friend also advised him that he would have a good case for damages against the bank if they persisted in trying to recover the money even after they had been advised about the facts in this case.

Rajesh accepted the advice and wrote to the bank. Post that the recovery calls from the bank stopped.

However the story had an unexpected ending. Rajesh checked with me whether his fathers name would show up as a defaulter in the Credit Bureau’s records. I informed him that I was not sure of how the bureau dealt with records of people known to be deceased but it was most likely that his father’s record will show up as a default for the next 7 years. This was not acceptable to Rajesh as he said that his dead father had led a blameless life and had never defaulted in his entire life. Rajesh said that he would settle up with the bank to ensure that his dead father’s name was not sullied anywhere. Last I heard he was in the process of settling the bank’s dues to get the name of his father cleared.

For me this was an extra ordinary ending as it highlighted not just Rajesh’s love for the memory of his dead father but also the efficacy of the newly established credit bureau to bring down the overall outstandings in the retail lending scenario.

Hail the spirit & concern of people like Rajesh!

* Name changed to protect the identity.

New Pension Scheme

You will lie on an examination table, and 10 electrodes (or leads) are attached to your arms, legs, and chest. The electrodes detect the electrical impulses generated by your heart, and transmit them to the ECG machine. It then analyze your heart’s performance and give a exact picture of how it is doing.

The Indian economy needs a different kind of ECG to resurrect the dead pension market, and thankfully they have one in place.

So what exactly is new pension scheme ?

New pension scheme is a boon for the investors, who wanted to maximize their returns in safe and efficient manner. The scheme is just like an ULIP product, where the investor have to pay make four contributions per year and the minimum contribution has to be Rs 500.

The investor has the option between two asset allocation methods called auto cycle and normal. The normal option gives flexibility to the investor as to how he wants his asset allocation to be and when he wants it. The auto cycle is also called as default option, where a pre-determined asset allocation system is place. The contributions are bifurcated in there three asset class called E.C.G

How does the E.C.G in new pension scheme mean?

The assets allocation in new pension scheme is segregated in three methods called E.C.G

Asset class E: investments are made predominately in equities (upto 50%)

Asset class C: Investments are made in debt securities issued be entities other than state and central government, fixed deposits (FD)of banks etc.

Asset class G: Investments in debt securities issued by central as well as state government.

The following table gives the bifurcation in exact percentages.

The basic feature of ECG method is it takes into the consideration of risk taking appetite of young lad in his early earning years hence the exposure in equity is much more in the early years compare to latter part of your life. The amount in this scheme keeps on compounding, helping the investor to reap the riches in most efficient manner.

So how new pension scheme better than other pension products?

When compared to any other type of investment, the distinguishing feature of the NPS is the shockingly low cost. The annual cost of record-keeping is Rs 380, each transaction will cost Rs 6 and the most amazing of all—the investment management fee is 0.009 per cent per annum. This alone puts the NPS to the pedestrian and it’s the best thing ever happen to the Indian investor Why is low cost so important? Because the magic of compounding over the long time horizon of the NPS means that its beneficial impact will be magnified massively.

The most important advantage the scheme has is that it allows the flexibility to manage your own scheme and make necessary changes.

The power of compounding itself makes the new pension scheme better than any other pension product. The N.P.S is also very competitive compare to other investment products , but the downside is for this product is that it cannot be considered as an investment, since you can only withdraw the money till your vesting age expect for critical illness or building a house.

Even with the downsides the N.P.S is still the most attractive pension product out there. So jump on the bandwagon and get the New pension scheme.

The topic “Credit card: debt trap”, the thought of writing this piece came to me because nowadays, I have been receiving a lot of all calls from various banks asking to take a credit card of their bank. And, to make it more lucrative, they have all these offers such as free insurance (not necessary), life time free and their gold card which make no sense at all. It doesn’t matter whether its gold or silver or a black card. Its after all a credit card, the only difference that you will find is the credit limit and may be the incentives attached when you use it more often.

I do not get this logic of having 5-10 cards when its difficult to maintain even one. I just have 2 cards , that also I use it in case of emergency or when I know I will be able to repay it by next month , after understanding my repaying capacity. I got a friend who has 5 to 10 credit cards and he doesn’t remember how much purchasing he has done on which card. Of course, he can afford too as he has a strong financial backup. But there are people who go ahead and get more than required credit cards when they know they don’t have the power to repay.

This problem has been noticed in US as many people own minimum 10 cards and they cant pay their debts and there has been instances that people have committed suicide.

I want to ask people who get these credit cards, don’t they think twice ,whether, is it necessary? People should use the credit card after checking if the have the repaying capacity . If you see the bigger picture here, then you will realize that you will have less of debts to repay .

In India, people should remember to have debit card rather than credit card or the best example would be the condition of Americans who suffer from debts. One of the episodes in Oprah Winfrey, the famous show in star world, showed how people suffered from credit card debt and one of the family nearly had debts of $60,000.00. Thats huge when you compare it to INR.

Now, people can take few precautions before getting a credit card. One, a check is it required, second- can you can afford to have a credit card and before using the card you should check have you met your basic necessity, have done enough savings for the future and then you may use it or else you know where your going.

The recent situation in the stock market has left most wondering how and by what means they can make some gains; or for that matter just not incur losses and preserve their capital to the extent possible without any erosion.

With some mix and match, investors can reduce the risk and save their capital from eroding. By making some informed decisions and application of some proven investments principles that have withstood the test of good as well as not so good times in the stock market.

Let’s start with an example.

Ajay and Vijay, both in their early thirties are employed at a reputed MNC company. Both of them are active investors in the stock market, keen followers of its movements.  Their experience in the stock market and the continuous flow of information through various mediums like newspapers, internet, and television has made them aware of that equity gives the highest possible returns over the long-term. Also their experience has taught them how to go about asset allocation. Ajay and Vijay both have split their investible surplus in equity as well as debt. Both invest their surplus in a 70: 30 equity-debt ratio.

But the recent market slump has baffled even them as to what strategy they need to adopt; they are in a state of panic and do not know what to do to save their investments or at least prevent capital erosion.

Most people are aware of the fact that they need to hold their investments for the long term for better gains; but here the point - what is long term? And how do we know that this is the right time to sell or buy? I have come across people who told me that if they would have had sold their portfolio in January 2008, they would have definitely made good gains. But then, at the time there was this positivity all over with everyone expecting the BSE index to reach 25000+. And now that the markets have climbed downwards these same people are expecting the index to touch lower levels. There is no way to find as to whether the indices have reached their peak or they have bottomed out. Markets are sentiments driven. You can is no way time the market.

There is no simple way out. You need to be patient and more importantly, there is no need to keep your distance from the market. Here is another question: What should the retail investor in the present situation and till the time the markets return back to their original glory?

The answer is ‘constant mix portfolio rebalancing’ and Ajay has adopted this strategy. His financial planner suggested that this would insulate him from market turbulence while ensuring that he remains the king of good times.

So, what is constant mix portfolio rebalancing? And how does it work?

Constant mix rebalancing is where you calculate the initial proportion of each investment in the portfolio and then maintain that ratio at all times.

As investments go, equity investments give a far higher rate of return than debt investments. Debt returns are more conservative, usually pegged at 10% year-on-year. Hence, over a longish period, an equity-debt portfolio that starts off as a 70-30 split can become lopsided in the equity section’s favor.

So, you constantly rebalance your portfolio by liquidating enough of your profits from the equity section of your portfolio and transferring it into the debt side, to keep up the 70-30 split between equity and debt.

Given below are the tables that tell two tales - Vijay who started off with his 70-30 split but didn’t bother to rebalance, preferring to buy and hold. And Ajay, who did indeed rebalance his portfolio every year to keep up the 70-30 equity-debt split.

Vijay’s portfolio

Look at year 2. The equity investment grew at 30% while debt plodded on at a steady 10%. The total corpus at the end of year two was Rs. 124,000. But the equity-debt split is no longer 70-30.

So, Ajay calculates:

70% of 124000 = 86800, while his equity holdings total 91,000, an extra 4200. So, Ajay transfers this to the debt section, thus keeping the 70-30 ratio intact.

What happens when Ajay keeps doing this? In year 5, when the stock market goes to the dogs, Ajay’s losses in his equity investments are eminently minimal. But more importantly, he has managed to avoid capital erosion.

Vijay, on the other hand, sticking to his buy-and-hold policy, suffers a 34% loss on his equity capital plus huge capital erosion.

Portfolio rebalancing is vital part of investment policy. There can be no asset allocation target without the discipline to preserve that target. Buy low sell-high strategy has most of the times been advocated by experts but greedy investors always fail to follow this principle. Constant mix rebalancing is mechanism for sensible timing of index movement. Through this process the investor naturally buys low and sells high and the most important benefit is it reduces the risk to greater extent ensuring adequately diversified portfolio.

We both earn and our collective take-home is Rs. 60, 000. We have credit card dues of Rs. 51, 000 and a personal loan with ICICI of about Rs. 2.93 lakh. There are no savings at the end of each month. We would like to close the debts and go in for housing loan to purchase a flat. Please advise as to how the debts can be repayed. Is it good to take on housing loan when we have credit card expenses, personal loan due and regular monthly expenses to take care of?

In the current scenario when inflation is at its peak the middle class is going to be in the soup. They need to be aware of many ways in which they have to maintain their basic standard of living, for which people fall into the trap of debt. The most common and easily available loan to for a cash infusion with the lowest documentation is the personal loan. All loans if not taken for a purpose that is not of need it causes pain and could lead to distress.

Let’s see how an individual lands up in a debt trap:

Mr. X belongs to a middle class family with four dependants. His father is retired person. His mom and wife are not earning members of the family. Mr. X is the only bread earner for the family. He has a daughter who just started with schooling. Due to unavoidable personal responsibilities he had to take a loan of Rs.1,00,000 at 21% for one year. The EMI was Rs.9311.37. He was working with a private limited company where the pay is just so-so. His take-home pay is hand to mouth. After taking the loan, within the next three months he lost his job. He was unable to pay the EMI on time. He defaulted on his payments with the bank. After few months he got a job in a good MNC company and wanted to take on one more personal loan to repay the previous loan and come out of the defaulters list.

Since Mr. X already defaulted once, it would be difficult to fetch him a personal loan. To pay back the first debt he wants to go for a second personal loan. This would make him fall again in the debt trap. This time it would be difficult for him to come out of it.

Before taking a personal loan think that whether you genuinely require it or not. In case you have decided to go ahead for a personal loan do not just go with one bank and stick with their terms. A bank knows that a personal loan is more of an “individual’s requirement”. It is not a product which the bank needs to sell or offer it to the people. In current situations many of us are forced to perform things which we do not like, but still we have certain responsibilities to fulfill. This compel us take a personal loan to meet our current obligations or desires only. One does not even consider how much essential one’s credit-worthiness is. In future when one actually requires a personal loan it will not be easy. The bad track record would be an obstacle. It is better to find out with more banks and financial institutions with what rates they offer. Then take a call and find a best deal.

The other option is to take a secured personal loan. They have lower interest rates. The securities which lie in the lockers are of no use to us. In India we are very emotionally attached towards our possessions and we feel we can not deploy them for taking a loan. But if in case it fetches a lower rate of interest on your personal loan, then those possessions are invaluable. In India by personal we understand it is unsecured in nature. Our insurance policy, shares, investments made in National Savings Certificate, Kisan Vikas Patra etc can help you get a personal loan at a lower interest rate which other wise would be very high.

A personal loan is easy to obtain because the interest rate charged are very high. In financial markets there is nothing said as free lunch, you pay for each and every thing you want. So it is sensible to approach many banks and then go ahead with that bank which can offer you the best deal. Loan against security would be a better option. It will not give you sleepless nights.