The Wallet

breathe-easy

Fri Aug 09 14:56:43 IST 2019

As per the Global Burden of Disease Study 1990-2016, there are 93.2 million patients in India with asthma and chronic obstructive pulmonary disease. Increasing urbanisation, poor infrastructure and worsening pollution levels only add to the conundrum. Also, according to a World Health Organization report, in a test unit of not-so-well managed asthma patients, 42 per cent had to be given emergency treatment at least five times a year and 18 per cent had to be hospitalised twice or thrice. Asthma patients are at a high risk of developing conditions such as stroke, pneumonia and gastroesophageal reflux.

Hence, ongoing and timely management is absolutely critical and, if the condition is managed properly, the patient can live a healthy life without any barriers. It, therefore, becomes imperative for asthma and COPD patients to buy health insurance.

Below are five points patients should consider before purchasing health insurance:

Know the coverage: As an asthma patient, one would need a health cover that funds the outpatient expenditure, offer services of an experienced coach who can engage with the patient continuously to keep the condition well managed and covers hospitalisation, if needed. There are such condition-specific health insurance policies that offer comprehensive coverage. Thus, before purchasing health insurance, you need to know which type of plan best suits you and your budget.

Consider out-of-pocket costs: Health insurance does not cover certain elements of medical costs. There could be co-payments, deductibles, sub-limits and non-payable items. Co-payment is a specified percentage of admissible claim cost that the customer bears each time during a claim. Deductibles are the amount one pays for covered services in a given year before the insurer pays. Non-payable costs are those which the insurance won’t pay. Sub-limits are caps on amounts payable for specified items in the policy coverage. Therefore, it becomes vital to understand these costs before buying a health insurance policy.

Check if the drugs and doctor's outpatient consultations are covered: When choosing between options, the information provided may not be necessarily sufficient to know which one covers asthma best. After narrowing down your plan, it is recommended to call the insurance company to ensure if the doctor’s fees, medications and hospital charges are comprehensively covered. A good health insurance plan covers the expenses of the numerous tests along with doctor’s consultation fee and the cost of medication even if the patient is not hospitalised.

Hassle-free treatment and recovery: Asthma can make an individual go through the worst transitions, while the financial stress can cause depression, which usually hampers the recovery process. A good health insurance cover meets all the aforementioned asthma-related costs and aspects so that a patient can focus on her health and be rest assured that she is backed up by a financial safety net. Please check that you are comfortable with the brand of the insurance company and its past record of claims payment and turnaround times.

Check for other covers or services: There are products that offer services of a qualified health coach who guides an asthma patient to manage her condition well and ensures that she adheres to the treatment protocol. Relationship with a health coach is like that with a family doctor owing to the personalised attention.

It is important to be wise while investing in a health insurance plan. Please invest in a policy that can be a partner with you in health and illness and ensure that your health is well-managed to minimise hospitalisation. This will not only provide comprehensive financial protection, but also give peace of mind to you and your family.

Sriram is chief actuary, Aditya Birla Health Insurance Co. Ltd.

plan-of-action

Fri Jun 07 17:55:16 IST 2019

To answer the most pertinent question about life insurance—how much sum assured or life cover is enough—it is important to first realise one’s need. As per the recent ABSLI Protection Survey, 84 per cent Indians feel uncertain about their lives and these uncertainties have increased sharply over the last five years. Interestingly, 83 per cent people realise that life insurance, along with other investment tools, can help in managing these uncertainties better. Unfortunately, in spite of this revelation, an average Indian today is covered only 1.67 times their gross income. In other words, an average Indian is insured for Rs8 lakh while he or she requires a minimum cover of Rs75 lakh. This data highlights severe underinsurance which can be attributed to low awareness and the widespread fixation on insurance-cum-investment products.

It is important to treat life insurance as income insurance and not death insurance. Hence, this question—have I insured my current as well as future income? The biggest truth is that no one knows what the future beholds and uncertainty looms large. It is vital that you protect your income and plan for your finances. For that it is prudent to first decide how much is enough. What was your money doing and what were your plans? In case of income loss, what was the impact? Key to these answers is robust planning. Also, analysing well as to which financial instrument will best fulfil your financial requirements.

Speaking of life insurance, there are several products which offer diverse benefits. These policies must take care of the essential expenses that your family will incur, like standard of living, child’s education and marriage, and other liabilities like loans and debts. Asking yourself the following questions will take you a step closer to determining the ideal sum assured:

What is my income potential?

Life insurance works best as an income replacement tool. Take into account inflation, basic financial needs and your future aspirations to do the math. Therefore, it is important to consider your current and potential income until retirement. As per financial experts, life cover should be 10 to 15 times the gross annual earnings. Ensure the value is enough even after years from when you start.

What are my financial goals and liabilities?

While you decide on your income potential and decide on the total amount needed, do not forget to consider your financial goals and liabilities. They play a decisive role in choosing the appropriate cover, as a higher sum might be required towards protecting your finances completely while gunning for your dreams and aspirations. For instance, if you purchase a cover of 050 lakh, it may be insufficient after 10 years, considering factors like inflation, increasing financial needs and your existing liabilities like loans.

How long do I intend to work?

With millennials and Gen Z coming to the workforce, gone are the days when people would retire at 60. Many desire to pursue their dreams, start on their own, while some would want to work beyond retirement age. A well-planned life insurance cover can make it easy. It can be a second income or a substitute to salary as per one’s plan. Therefore, decide a cover amount that can help you plan your retirement or pursue your dreams at the right time, without the concerns of finances.

How healthy am I?

Its prudent to be realistic about your health conditions and lifestyle. The medical history of you and your family should be considered before deciding on your life cover. It is best to opt for an adequate sum assured at the prime of your health at a competitive and lower price. Higher probability of health risks can lead to draining of finances. It is best to plan and prepare for it, and ensure that it does not eat up your savings or interfere with other financial goals.

Can I augment my cover with need based plans?

Riders will be the answer to your question. These plans alleviate your primary sum assured with need-based covers. While your life insurance amount will protect your income and desired goals, the riders will come into action with lump sum benefits in case of a specific eventuality like critical illness, disability or death due to accident. Riders hand out a lump sum payment upon the occurrence of the event, over and above the base sum assured.

If your life insurance cover is insufficient, then the whole idea of securing your family is defeated. What is the use of a sum that would not even fulfil your future requirements? Answering these questions will guide you towards the adequate amount to truly protect your money.

Singh is chief actuarial officer at Aditya Birla Sun Life Insurance.

double-indemnity

Fri Jun 07 17:52:10 IST 2019

Chandigarh-based Arjun Chaudhary met with an accident resulting in a fracture that required three months of bed rest. The prolonged absence from work resulted in loss of pay. Arjun's health insurance policy only covered hospital expenses and did not offer income replacement. As a result, meeting his family's monthly expenses became a difficult task. A life insurance policy with a personal accident rider covering temporary disability would have been an answer to Arjun’s problems. Such riders offer a fixed sum to the insured person for a few weeks to months.

Life insurance policies are purchased with a vision to protect the financial future of the family in case of the unexpected demise of the breadwinner. Thus, they act as an income replacement device. A term insurance policy basically offers a death benefit—a lump sum to the family of the insured. Hence, such policies are the best tools to compensate for the early loss of an earning member.

However, purchasing an insurance policy merely to protect one’s family from one's death does not serve its purpose entirely. Apart from death, there are sundry other unanticipated threats, like total or partial disability due to an accident and critical illness. Thus, one must be equipped to face these challenges and have enough backing to guard against them.

The probability of risks varies from person to person, and so do insurance needs. Insurance riders are one of the most effective ways to customise one’s life insurance plans and thus opt for complete coverage. Riders are one of the distinctive features of term insurance that offer added protection and coverage for a marginally higher premium. Riders are available for diverse purposes, and they can be added to the term insurance policy to garner extended benefits.

Here are some of the most vital riders:

WAIVER OF PREMIUM

Several insurance policies cease to be active if you are unable to pay premiums for a specific period of time. This rider ensures that your policy does not become inactive if you default on a payment owing to disability. In such cases, the future premiums would be waived, but your policy remains.

CRITICAL ILLNESS

This rider offers a supplementary cover for critical illnesses like heart attack, stroke, cancer, kidney failure and paralysis. This rider goes a long way in protecting policyholders from any major medical expense and ensures that medical attention is not deferred due to lack of finances. Policyholders become eligible to receive a predetermined lump sum as soon as a critical illness is diagnosed.

DEATH IN AN ACCIDENT

Death of an earning member may burden the family with medical bills and unfulfilled financial liabilities. This rider offers the family additional benefits in such an eventuality.

PARTIAL AND PERMANENT DISABILITY

There may be times when policyholders suffer from partial or permanent disability owing to accident. In such scenarios, several policies pay you a percentage of the sum assured for the next five to ten years. This is to compensate for the possible loss of income because of the disability. Total disability gives you full sum assured, while partial disability gives partial sum assured. You can, thus, rely on this rider to substitute your regular income source.

INCOME BENEFIT RIDER

The aim of this rider is to provide regular income for the family of a deceased policyholder. Payment is usually made as some percentage of the total sum assured, and acts as an additional income for dependents. If an individual adds this rider, the policyholder’s family gets an auxiliary income for five to 10 years along with the regular sum assured. For instance, 10 per cent of sum assured for the subsequent ten years.

Riders are great financial tools to assist you to plan prudently for adverse and unanticipated events in your life. These events may not happen, but, planning for them is the best strategy to keep yourself and your family safe at all times and under all circumstances.

Anil Kumar Singh is chief actuarial officer, Aditya Birla Sun Life Insurance.

scare-free-sojourns

Fri Jun 07 17:48:09 IST 2019

Nirmal Kumar, a Bengaluru-based IT professional, was en route from Delhi to Haridwar with his family when his baggage, which had some costly items, was stolen. Luckily, he had bought travel insurance even for this short domestic holiday, and recovered his losses. Like Kumar, 32, more and more people have started opting for travel insurance for domestic travel.

“Flight delay or cancellation, loss of passport or baggage, and medical emergencies are still the biggest challenges for travellers, for which there is an utmost need to buy travel insurance,” Dr Shreeraj Deshpande, principal officer and CEO (officiating), Future Generali India Insurance Company Limited, told THE WEEK. “Also, in any unexpected incident, where a traveller might be held financially and legally responsible for damages caused to another person or their property, travel insurance can be helpful.”

Deshpande said there is a growing demand for international travel insurance as most countries insist on visitors having sufficient coverage. “For international travel, the expenses are often very high if a person is trapped in any unforeseen event or suffers any medical emergency,” he said. “Domestic travel insurance is also booming with growing travel within India, especially in metros and tier 2 cities.”

Younger travellers, especially students who travel overseas, were the driving factor behind upgrading travel insurance, he said. “We have the travel 'Student Suraksha' plan, which will totally take care of all the needs of students travelling abroad,” said Deshpande. “It also covers any unforeseen event that require prompt assistance, immediate evacuation or medical intervention from the insurer, as per benefits and other conditions of policy. A new traveller class is forcing many of these service upgrades.”

Broadly, experts agree that it is absolutely imperative for travellers to buy travel insurance depending on the nature and duration of the trip. “There are various risks that a person is exposed to while travelling, right from trip cancellation because of inclement weather to loss of checked-in baggage,” Gurdeep Singh Batra, national head, retail underwriting, Bajaj Allianz General Insurance, told THE WEEK. “Such risks are completely unpredictable and in case a person does not have adequate travel insurance, one may be caught unawares in an unknown city or in a country with no guidance. Travel insurance acts as a safety net that covers medical expenses in case of emergency hospitalisation, accidents arising out of participation in adventure sports, medical evacuation, repatriation of mortal remains, flight delay or cancellation, loss of baggage, loss of passport, trip cancellation, emergency cash advance, home burglary cover, etc. Thus, [insurance] ensures that people have a fun-filled [vacation], by negating the possible risks.”

One of the major reasons people opt for travel insurance is to cover medical expenses for emergency hospitalisation, considering the prohibitive medical costs abroad; some countries even have a double-digit medical inflation. Some of the other challenges are inclement weather, leading to travel cancellation, delays and missed connections. There is also increasing political turmoil and threat of terrorism, for which insurance coverage is a must.

“Many people opt for travel insurance as it is mandatory in many countries,” said Batra. “And, with the medical costs abroad, people feel compelled to get insurance to secure their international travel. However, with increasing awareness about the benefits of travel insurance and uncertainty during travel, people are increasingly securing their domestic travel, especially for covers like adventure sports.”

As per a latest survey, 8 per cent of Indian travellers buy travel insurance to cover medical emergencies, 15 per cent for loss of baggage, 8 per cent for accidental death and 11 per cent for cancelled flights. “The trip cancellation feature under a travel insurance policy falls under the pre-departure coverage, wherein the policyholder is reimbursed (up to the covered amount) for pre-paid, non-refundable trip costs,” said Tarun Mathur, chief business officer, Policybazaar.com. "The trip cancellation feature reimburses you for the cost of your entire package, up to the total sum insured. The covered expenses include travel tickets, hotel reservations, and any other activities for which you have paid in advance."

He added that Indians mostly prefer buying travel insurance for an international trip rather than for a domestic trip because many of them already have health and life insurance cover. “However, it is suggested that you buy travel insurance for domestic trips as unusual things can occur any moment,” said Mathur. “And buying domestic travel insurance, which comes at a minimum cost of 0200, will not harm travellers.”

winning-claim

Sat Apr 06 11:24:17 IST 2019

As a tool to mitigate risks related to financial worries, insurance is gaining prominence. With the availability of a variety of policies and with increased awareness about insurance, it has become common to find people who have multiple insurance policies—especially health insurance and personal accident cover. Many of us end up with multiple covers through employers, individual policies or under floater covers of parents, which might be bought through agents, banks or online. While having multiple policies can ensure appropriate coverage as per the needs of the customers, one also needs to understand the claim procedure to make claim in multiple policies, so that it is approved without hassles.

Below are a few things one needs to keep in mind while making claims in multiple polices of health insurance and personal accident (PA) cover:

HEALTH INSURANCE

Generally people are covered under employer’s group medical policies. They may also have individual health insurance policies. In some cases, a person may have individual cover and may also be covered under their parents' policy. Let us take two scenarios:

A person is covered under group policy with employer and also has personal health cover. The personal health cover may be a base cover or top-up. In this scenario, it is always beneficial to claim under group policy first as the cover is more inclusive. Also the cumulative bonus under the personal policy remains untouched. In case the expenses cross the group sum assured, other cover or top-up can be triggered. However, it is completely up to the customer to decide on which policy to claim from first.

A person has two different base covers or a base + top-up policy. In such a scenario, the person can claim under his policy of choice depending on room rent and other facilities offered. The other policy may be utilised after exhausting the first cover. Top-up policy always triggers after expiry of base cover only.

The basic rule is same expenses cannot be claimed under two different policies. If the claim amount is more than the sum insured under the policy on which the claim has been made, the balance amount can be claimed from the second health insurance policy. For this, the customer should submit attested claim documents and the settlement letter specifying the amount settled under the first policy to claim for the remaining amount from the second policy.

However, it is typically noted that most customers who buy two health policies go in for a top-up policy as their second, so that if their base sum insured is exhausted the top-up can take over seamlessly. It is important to note that the base policy and the top-up can be taken from different insurers keeping in mind aggregate deductible limits. Additionally, people should always look to upgrade their health insurance in line with medical inflation rather than add new policies. Better to be safe than sorry!

PERSONAL ACCIDENT COVER

Personal accident insurance gives financial protection to the policyholder and family in case of an unfortunate accident that may lead to death or disability. Unlike other general insurance policies which are indemnity based, PA cover is a benefit policy and claim can be made under all the PA policies unless the policy has a cap on maximum payment. Claim can be made from multiple PA policies on the basis of submission of photocopies of the necessary claim documents like FIR, death certificate and original claim form.

No matter how many policies you have; always opt for adequate cover. Regardless of the number of policies, it should be declared in good faith to the insurer while buying a new policy. This helps you get an appropriate premium and a hassle-free claims experience.

The author is head, health & travel administration team, Bajaj Allianz General Insurance.

better-together

Fri Apr 05 15:00:08 IST 2019

There is significant interest in fintech (computer programmes and technology to support banking and financial services) globally, and its ongoing evolution—the word fintech is now officially in Oxford dictionary. The fintech ecosystem in India has caught up fast with its global peers in terms of adoption and is expected to reach US$2.4 billion by 2020. Fintech firms are undoubtedly having a good time.

Fintech-driven alternative lending is the second most-funded and one of the fastest-growing segments in the Indian fintech space. There are about 20 digital alternative lending companies, each with its version of the truth, and probably another twenty in the stealth mode.

One thing common with most new-age lending companies is that they rightly understand that they have a better chance of succeeding by collaborating with the existing lenders like banks and non banking financial companies.

Banks and NBFCs have also reciprocated these sentiments and are actively tying up with fintech lenders.

How are these partnerships faring?

Many traditional lenders are finding it difficult to “let go” and adapt. They are still second-guessing, and, in spite of various tech solutions, they want to “eyeball” physical documents. Fintech lending is so much more than just another distribution channel, it is an opportunity for banks to reimagine themselves digitally.

As an ex-banker and now a fintech founder, I feel that banking and NBFC partners have to start by de-learning and adopt fintech lending truly. Every single process needs to be challenged, if it is not adding value the same must be dispensed. Open innovation is the core of digital revolution.

In their short journey, fintech in India has made credit process simpler. It is cost-effective and offers better risk assessment. However, while partnering with traditional lenders, they are often expected to carry forward their archaic pre-credit and post approval processes.

There are some gaps that need to be filled:

✤ Traditional lenders still expect physical business verifications, though there are solutions like work email and domain validation

✤ Instead of on-ground visits, use GPS tagging as an effective tool for residence verification

✤ Application forms and pre-credit documents are often required in physical format, though soft copies are available

✤ In spite of eKYC facility, physical copies of KYC are required

✤ Most of the existing lenders have not adopted e-agreements

✤ For traditional lenders, fintech is an opportunity to innovate and do away with artificially restrictive processes and documentation that have been embraced by their risk departments. They must see themselves as a stakeholder in fintech success

✤ Traditional lenders have an inherent advantage which fintech companies do not have. Similarly, fintech companies have nimbleness and technology which acts as a great equaliser.

A MATCH MADE IN HEAVEN

Fintech lenders have a responsibility to deliver on their promises. A quick look around and all you can hear is big data and machine learning. Credit grows extremely fast in good times, but can also contract suddenly and if not prepared, it may be overwhelming.

As an eternal optimist, I am sure traditional lenders like banks and fintech firms get better at working together. This is essential to reap the full benefits of innovation.

Hopefully, these are starting troubles and this partnership will eventually thrive. All it needs is a real sense of commitment to re-imagine the business model.

Anand is founder and CEO of Shubh Loans (Datasigns Technologies).

safe-and-steady

Sat Feb 09 11:42:33 IST 2019

Insurance is an industry that makes a real difference to people’s lives, especially in their dire hours of need. Unfortunately, though, the industry has quite a negative perception. Customers are worried that insurers are out to make profit and that they never settle claims.

This perception, however, is far from the reality. The combined ratio of the general insurance industry is over 120 per cent, which clearly highlights that the industry is bleeding in terms of the number of claims being settled. The industry should look to change this perception and highlight the role it plays in stabilising society and economy.

INSURANCE AS RELIEF

Thanks to climate change, the frequency of catastrophes across the world has been on a rise. Insurance comes to the rescue during such times, helping people recover financially. An example is the Jammu and Kashmir floods in 2014, which had the insurance industry instantly settling claims worth more than Rs4,000 crore, and providing a combined relief of Rs1,500 crore. After the 2015 Chennai floods, the insurance industry settled claims worth Rs800 crore, and provided relief of Rs1,000 crore. After last year’s Kerala floods, the industry settled claims worth almost Rs1,500 crore.

These figures clearly indicate the contribution of the insurance industry in bringing instant and effective financial relief, helping people with a faster recovery from the aftermath of a calamity. The unfortunate reality, though, is that economic losses have always been much greater than the insured losses.

INSURANCE IN INVESTMENT

Not only has the insurance sector played the role of a stabiliser, but has always played a critical role in the uplift and development of our country, both in terms of infrastructure and economy. General and life insurance companies in India invested more than Rs19 lakh crore in Central government securities in the first half of the fiscal year 2018-19. Including the investments in other industries, this figure comes to Rs53 lakh crore.

With these investments, the insurance industry is indirectly helping the government bridge the fiscal gap, and helping it spend on subsidies, pension, welfare schemes, infrastructure and defence. India’s equity market has been doing well, and has seen a significant rise in investment over the past few years. The insurance industry has invested Rs8.2 lakh crore in the equity market, making it a significant contributor with almost 7 per cent of the market share.

HELPING THE FARMER

Insurance has not just helped in the making of a modern India, but has also contributed towards securing our roots, which are still very much agrarian. Agriculture remains the primary occupation of most people in the country. Insurance provides the much-needed financial support to farmers in case their crops are damaged, thus protecting their hard work and money against the vagaries of nature. The industry today covers more than five crore farmers under the Pradhan Mantri Fasal Bima Yojana and the Restructured Weather-based Crop Insurance Scheme. The industry has settled claims worth more than Rs30,000 crore till the 2017 kharif season.

MAKING HEALTH CARE AFFORDABLE

The industry prides itself on contributing to the welfare of India’s most valuable resource—its citizens. Health insurance enables citizens to utilise the best treatment options available. Countries with higher health insurance penetration have people with higher life expectancy. Health insurance allows people to be self-sufficient. They can pay for the expenses on their own, without being dependent on anyone or digging into their savings. It helps them lead a respectable and dignified life.

Health insurance penetration in India has been increasing, thanks to the launch of Ayushman Bharat Yojana and other mass health insurance schemes. As of fiscal year 2016-17, insurers have covered more than 43 crore citizens under various government and nongovernment schemes. With the increasing awareness about health insurance, and the efforts of insurers to introduce products and services that cater to the needs of customers, health insurance penetration is on an upswing.

A SUSTAINABLE EMPLOYER

Providing sustainable employment is the duty of every responsible industry. As of June 30 last year, the insurance industry—both life and general—employ more than 30 lakh people directly or indirectly. Wherever insurance penetration is low, these figures will go up with the increase in awareness, making it one of the biggest industries in terms of the number of employees.

I truly believe insurance is a good social cause. As a customer, even if you do not submit a claim, your small contribution in terms of premium is helping people pick up broken pieces and reestablish something that they have lost. By opting for insurance, you secure not only yourself, but others as well.

Singhel is managing director and CEO of Bajaj Allianz General Insurance.

life-insurance-reloaded

Sat Feb 09 11:41:46 IST 2019

HENRY MINTZBERG once said, “When the world is predictable you need smart people, when the world is unpredictable you need adaptable people.” None of us will remain immune to the unpredictable and dramatic changes in every sphere of human existence driven by technology and its side effects. The implications of these changes on our food chain, health, transportation, communication, environment, jobs and economies in general are unknown today. Despite challenges of predicting the future, there is solace in the fact that over the ages, human ingenuity has made life better for society at large and adaptation to these changes will remain the only constant.

Technology evolution is one of the largest mega trends disrupting the world at large and insurance business is no exception. Today's consumers are more informed, more empowered and more social with higher-than-ever expectations of their service providers. They demand immediate gratification and tend to be impatient when they do not get what they want. They live and operate in a hyperconnected world of disparate service providers leaving behind a complex trail of digital footprint.

Traditional insurance models were largely product-centric and channel-marketing driven. With advancement of technology that we saw in the last decade, terms such as paperless, cashless, branchless are passé. The new-age insurers will turn the traditional model on its head with the customer at the centre and a suite of digital technologies, services and ecosystems will be used to tap the customer. If incumbents are unable or unwilling to change to this business model, they will cede space to new participants. With rapid changes in the operating landscape, new-age insurers will need to invest in robust mid-term and long-term digital strategies. Such digital strategies will help insurers notch up their digital quotient across the insurance value chain and exploit complete value of customer potential while being available for the consumer, 24X7, for instant servicing and query resolution. Such strategies will also aid to improve business quality, drive efficiency, reduce human dependence, make processes real-time and accurate while mitigating risks of fraud.

As per Global Findex Report released by the World Bank, the number of bank account holders in India rose from 35 per cent of the adults in 2011 to 80 per cent in 2017. Given the rising trends of financial inclusion in the country, the insurance distribution landscape is also broadening laterally. Besides proprietary brick and mortar channels like agency and direct sales, insurers have partnered with players like traditional banks, NBFCs, MFIs, payments banks and small finance banks to foray into insurance selling. With such a diverse set of distribution partners, it is important for insurers to have agile multi-distribution plug and play platforms. Such platforms can connect to hundreds of distribution partners at short notice with minimal effort, so that insurers can deliver their solutions across the length and breadth of the country on the back of the distribution partner's presence. Consumers will largely benefit through such platforms since access to insurance products will be far easier, servicing avenues will widen and transparency on the products being offered will enable them to make the right choice at the right price and convenient location.

With every passing day, consumers are shifting to online market places driven by aggregators. Until a few years ago, who would have thought the largest cab hiring company would not be owning a single car or the largest global retailer would actually be a technology company powered by Artificial Intelligence and analytics. These new-age consumers exist, live and breathe within these so called 'ecosystems' which span across diverse platforms in e-commerce, transport, telecom, health care, media, food delivery and social network, to name a few. Progressive insurers have already started work on building their own ecosystems or partnering with players owning these ecosystems. They see this as an avenue to exponentially increase their distribution penetration, keeping the operating expenses well within control. Consumers in these ecosystems can be 'nudged' at an appropriate time for an insurance product or an insurance service based on the activity or transaction the consumer is doing within the ecosystem. For example, a consumer buying baby products online can be nudged for buying a children's insurance plan or a consumer crossing a certain age threshold can be suitably nudged to buy an additional term cover on his insurance policy. Such ecosystems and platforms will enable non-intrusive insurance selling and right products can be made available at the right time to such consumers. In addition, given that the partner understands the consumer well, this information can be leveraged by the insurer to expedite and ease the issuance, underwriting and servicing of policies.

Automation and robotics technologies allow for intelligent and predictive capabilities offering virtual advice, automated decisions which are real-time and accurate with no human dependence or need for branch infrastructure. Banking, financial services and insurance sector, including some leading insurers, have invested in AI and robotics-based solutions in their technology stacks, which include chat-bots, emails and Twitter bots for answering sales and servicing queries. These bots automatically read, understand, categorise, prioritise and respond to customer queries within milliseconds, giving instant response to the consumer. Similarly, mobile servicing platforms have literally taken the 'branch office' to the customer's doorstep where servicing transactions can be performed on a mobile app at a place and time of customer’s choice and convenience. Besides, automation bots which leverage capabilities like optical character recognition, neuro-linguistic programming, voice and image recognition have streamlined backend and mid office processes to make them real time, error free and human independent. In perspective, these advancements have simplified the customer journeys both at new business and service stages, making them simple and hassle-free.

With huge volumes and variety of data being collected near realtime through application programme interface and availability of sophisticated methods for analysing and harnessing these data insights, big data, AI, machine learning and analytics are getting increasingly institutionalised across data intensive industries like insurance. Perhaps, data may become a new revenue stream for players and we may see the breakout of data-as-a-service (DaaS) strategies across players. In addition, cloud infrastructure allows firms to use and process this humungous enterprise data to enable fast and accurate decisions at the click of a button with abilities to scale on demand with no infrastructure limitations. These advancements have helped insurers in predictive analysis across areas of the value chain like reduction in claim settlement time from weeks to days, fraud analytics at the time of new business and payouts, product propensity model, persistency and employee attrition to name a few, ultimately ensuring the end consumers are benefitted.

Another key area the insurance sector management teams need to stay sharply focused on is attracting and retaining talent. Insurers which offer superior employee value propositions will enjoy greater loyalty in an era where the workforce is younger, geographically mobile, technologically skilled, demands more flexibility, strives for work-life balance and expects greater learning opportunities. Self-paced online learning, geo-location based field force and partner tracking, hyper-personalised incentive programmes, flexible work spaces and location or office agnostic work tools enabled through iOT and mobility devices will be the key drivers to attract and retain talent while making them successful.

Given the pace of technology that is sweeping the world on one side and the large under-penetrated consumer base which is far behind the digital influence, what remains to be seen is will the insurance sector take the plunge and adopt a technology embracing position or will it stand along the sidelines and play catch-up, learning from the best practices of other industries over time. How quickly incumbents adapt to these inexorable changes will determine the size of their share in the next generation of the insurance industry.

Mulla is chief operating officer, HDFC Life Insurance Company Limited.

system-upgrade

Sat Feb 09 11:41:00 IST 2019

In this age of instant gratification, customers want to be in the driving seat of their retail loan journey as the expectations and demands have changed with the emergence of digital and mobile-based applications. Today, a customer does not wait for the bank branch to do a funds transfer, as it can be done through the 24X7 funds transfer facility available through mobile banking applications. Also, when we buy a product online, we expect same standards and quality at a better pricing than the retail store next door, else we just return the product with no questions asked.

Similar is the case when a customer approaches banks for a retail loan. He expects the bank to deliver the loan with minimum documentation and without any delay. Gone are the days when one would visit the branch multiple times to get a loan. Today, the customer, especially an existing one, expects the bank to know more about her and her needs, and hence approach her in a refined manner, maybe with a pre-approved loan offer and minimum documentation.

So, the trend we see is a migration towards a complete digital process that is smooth and hassle-free. Bank of Baroda has created a centre of excellence where it is building a complete digital process for sanction of loans. It also plans to partner with a few fintech companies that have built many solutions, and crunch the timeline to process a loan without compromising on the framework the regulators want us to follow. For example, to verify income statements submitted by the customer, there is a manual process that takes 2-3 days to get the result. The same can be done digitally in a matter of seconds, and such solutions will now help deliver superior customer experience.

Another major trend we see is the use of analytics to know the customer better and address her needs and to build a quality lending model. We know the importance of data and what it can mean for different departments. For marketing, it can bring in customer insights and conversation data across multiple channels. From a business intelligence perspective, it can be used for portfolio analytics, risk modelling and prediction of risk in a portfolio. Bank of Baroda has another centre of excellence for data analytics, which is putting in various models to work on all the aspects to bring in efficiency, more profitability and a focused approach in sale of products to customers with greater insight through data analytics.

One more major trend we see is the use of artificial intelligence (AI) and machine learning (ML) to deliver smooth processes. In this space, Bank of Baroda is discussing with fintech players to move some of the monotonous processes to AI driven by ML. Allocation of a valuation can be initiated through the AI engine, based on some data analytics parameters set in the engine. For example, data of the last two years show that some valuers have better timelines for submission of reports or have submitted quality reports. This helps us in having a system where no individual can decide who will do a particular valuation, thus reducing risks.

Another trend that we are witnessing is technological upgrade of the legacy systems that cannot integrate into the new generation systems architecture. Bank of Baroda has replaced the legacy systems that did not have technological capabilities of integrating with various fintech solutions.

Omni-channel presence is another important trend. Traditionally, the retail loan products were sold only through bank branches. Today, a retail loan player needs to be present across all important channels that can be a potential touchpoint for the customer. Hence, a digital or a branch driven strategy alone will not work. Bank of Baroda has built teams to engage with corporates, government bodies, public sector undertakings, builders, car dealers, education institutes, overseas career consultants, direct selling agents and digital channels to market products. As the customer looks at the convenience of the service delivery, the digital channels have an edge. The face-to-face interaction and physical delivery will remain high in products like home loans, but will be very low in products like personal loans.

Banking and financial institutions are gradually moving from being product-based delivery channels to a seamless mobile platform where all products can be purchased or serviced. The fintech disruption in banking and financial services seems to be the next big change after 'Uberisation' and 'Amazonisation'. Blockchain technology might be the next big thing to deliver superior process through non-traditional channels. But with banking being a highly regulated business, all this systematic changes will start with the regulator adapting and indicating the need for adoption.

Sethi is head, mortgages and other retail assets, Bank of Baroda.

equity-surge

Sat Aug 10 11:38:53 IST 2019

The Union Budget presented in July proved to be a mixed bag, with Finance Minister Nirmala Sitharaman focusing on long-term growth measures to revive the agriculture sector and the larger economy. However, one particular measure that did not go down well was a higher tax surcharge proposed on the super-rich.

While the basic tax slab was kept unchanged at 30 per cent, the surcharge was hiked to 25 per cent from 15 per cent for individuals whose taxable income is between Rs2 crore and Rs5 crore, and to 37 per cent from 30 per cent for those earning over Rs5 crore. The increase in surcharge would mean that the effective tax rate—including 4 per cent cess—for those with an income of Rs2 crore to Rs5 crore would now be 39 per cent, and for those above Rs5 crore the tax outgo would go up to 42.74 per cent.

This higher tax outgo is likely to impact an estimated 40 per cent of the foreign portfolio investors (FPIs) investing in India. They are a worried lot, considering that this comes at a time the economy has slowed and corporate earnings remain lacklustre.

After pumping around Rs78,600 crore between January and June 2019, foreign institutional investors (FIIs) pulled out Rs12,400 crore from equity markets in July, even as they channelled in more than Rs9,000 crore in debt markets. The FII pullout led to the benchmark BSE Sensex falling more than 6 per cent in July.

“The budget announcement on taxation has adversely impacted investor sentiments and is reflected in the FPI outflows from the equity markets,” noted Sushant Hede, associate economist at CARE Ratings.

There were, however, also proposals in the budget aimed at attracting more FIIs to India’s stock markets. For instance, it has been proposed to increase the statutory limit for FPI investment in a company from 24 per cent to a sectoral foreign investment limit with option given to the concerned corporates to limit it to a lower threshold. FPIs will also be permitted to subscribe to listed debt securities issued by REITs (real estate investment trusts) and InvITs (infrastructure investment trusts).

The higher tax surcharge on the super-rich was not the only thing that spooked investors. They were left concerned after Sitharaman proposed that the Securities and Exchange Board of India (SEBI) consider increasing the minimum public shareholding in listed companies to 35 per cent from 25 per cent.

Increasing public shareholding in listed companies will lead to wider ownership of shares and deepen the market further. The move could also attract to the market foreign and institutional shareholders, who are keen to pick up some of the marquee stocks.

However, it would also pose a challenge for many top listed companies, including multinational corporations, who would have to bring down the promoter shareholding from 75 per cent to 65 per cent. Those who are not keen on it, may instead consider delisting their companies from Indian bourses.

According to a study by Jagannadham Thunuguntla, senior vice president at Centrum Broking, there are 1,174 companies, or close to 25 per cent of the total 4,700 listed companies, that had a promoter shareholding above 65 per cent. Promoters of these companies would have to pare their stake further if the market regulator is to go ahead and implement the proposal. “The quantum of sale that needs to be done by these 1,174 companies works out to about a whopping 03.87 lakh crore,” said Thunuguntla.

Among top companies that would have to divest the most are TCS, Wipro and Avenue Supermart (the owner of DMart supermarket chain) that have promoter shareholding of 72.1 per cent, 73.9 per cent and 81.2 per cent, respectively. Bandhan Bank, HDFC Bank, Hindustan Unilever, ABB, Abbott, Bosch, GlaxoSmithKline Pharma, Honeywell Automation India and Siemens are some of the other companies that would have to shed more than 5 per cent of promoter stake to comply with the proposed norms.

If not given enough time, it could lead to a flood of new paper into the market, which could suck up the liquidity. However, market experts feel if the proposal is implemented, it would be over a period of time, so that companies get enough time to take their decision.

“While we need to await SEBI regulations regarding how much time will be given to these companies to meet with these minimum public shareholding norms, the overhang of this requirement of off-loading of promoter shareholding can have significant impact on the markets and the specific stocks. The regulator needs to provide sufficient time to meet this requirement so as not to over-flood the markets with stake sales by promoters,” said Thunuguntla.

Similar norms were announced in 2010, when the market regulator had mandated minimum 25 per cent public shareholding in listed entities. At the time, companies were given three years to comply with the norms.

“This definitely cannot happen in one go. A sufficient timeframe will be given to companies to bring down the promoter stake, and over time, the additional supply will get absorbed,” said Mayuresh Joshi, portfolio manager at Angel Broking.

There are several state-owned companies, too, in which the government will have to substantially reduce its stake to comply with these norms, if and when implemented. The government is anyway going ahead with its divestment programme.

Disinvestment in public sector enterprises has been a key tool for the government to rein in its fiscal deficit target, given the shortfalls in direct and indirect tax revenue. For the year ending March 2020, Sitharaman has increased the divestment target to Rs1.05 lakh crore from Rs90,000 crore, proposed in the interim budget. This will be done via consolidation of state-owned companies in some cases, and strategic divestment in others.

Apart from launching offer for sale in individual companies, the government in recent years has also taken the exchange traded fund (ETF) route to pare down stake in PSUs.

In July, the government launched the sixth tranche of Central Public Sector Enterprises (CPSE) ETF. The government had set a base issue size of Rs8,000 crore for the sixth tranche. However, the issue got oversubscribed and the government exercised the green shoe option, taking the total offer size to Rs11,500 crore. CPSE ETF was first introduced in 2014 and has in subsequent tranches raised Rs38,500 crore.

An ETF is essentially a grouping of stocks that track an underlying index. For instance, several fund houses in India have the Sensex ETF that has a basket of stocks tracking the BSE’s benchmark Sensex index. In developed markets, ETFs could also contain bonds, commodities or there could be mixed ETFs.

Just like shares can be bought and sold, ETFs can also be traded on the stock markets, and thus are more liquid than normal mutual funds. The ETFs usually replicate the performance of the underlying index they track, compared with an active mutual fund, where the fund manager is looking to take bets that would help outperform the broader markets. ETFs also have lower expenses and fees.

The CPSE ETF tracks shares of 11 central public sector enterprises—ONGC, NTPC, Coal India, Indian Oil, Rural Electrification Corp, Power Finance Corp, Bharat Electronics, Oil India, NBCC, NLC India and SJVN.

Compared to some of the international markets, ETFs have not really taken off in a big way in India. Earlier, not much was done to promote ETFs, and lower fees and expenses meant distributors, too, did not get much margins by selling them. In turn, they did not promote them much. Furthermore, many actively managed mutual funds beat the benchmark indices, unlike in the more mature markets like the United States. So the active mutual funds always looked more attractive.

In the budget this year, Sitharaman may have just been able to draw the attention of retail investors towards at least the CPSE ETF. “ETFs have proved to be an important investment opportunity for retail investors and has turned out to be a good instrument for the government of India’s divestment programme. To expand this further, the government will offer an investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS),” said Sitharaman.

ELSS allows an individual investor a deduction from total income of up to Rs1.50 lakh under section 80C of the Income Tax Act. There is a lock-in period of three years, after which, an investor could continue to hold, sell or switch the units in the ELSS scheme.

Now, as per the budget proposal, the CPSE ETF will also get a similar tax treatment, a move that could also encourage long-term investments in state-owned enterprises.

There could be several advantages of investing in CPSE ETF, says broking firm HDFC Securities. “It enables large investment in blue-chip public sector enterprises without the constraint of market liquidity on the underlying individual stock. Investors will be able to diversify exposure across a number of public sector companies through a single instrument,” it said.

The PSU stocks selected in the CPSE ETF also have a lower price to equity (P/E) ratio, high dividend yields and are available at attractive valuations, HDFC Securities further added. However, it also notes that it is not very diversified and is skewed towards the energy sector.

Other wealth managers are not too convinced as far as CPSE ETFs are concerned. “We would not recommend CPSE ETF due to better investment avenues availability and with some risks associated: one, CPSE ETF consists of PSU stocks that are associated to energy sector, leading to concentration of risk to one sector. Two, PSU earnings can fluctuate depending on government policies, thereby it does not provide a clear long term view. Three, companies belonging to the public sector tend to suffer from slow decision making and lack of competitiveness, thereby resulting in reduced efficiency compared to private companies,” said Vijay Kuppa, cofounder of Orowealth.

Anant Ladha, founder of Invest Aaj for Kal, says granting investments in CPSE ETF a deduction under section 80C of the Income Tax Act is a welcome step, from the perspective that one more equity-linked instrument is being added to the basket, opening up another investment avenue for the salaried class looking to claim deductions. It will also help deepening of equity markets.

However, he too favours ELSS schemes over ETFs, for their underlying diversified investments. “ELSS schemes are much more diverse and have given better returns over the long-term compared with CPSE ETF,” said Ladha. In the last three years, the CPSE ETF has given returns of over 9 per cent. But, in the same period, ELSS has averaged over 11 per cent. Over a five-year period, too, ELSS funds have outperformed the CPSE ETF by a wide margin, Ladha pointed.

Just as the government has looked to generate more interest in CPSE ETFs and make them attractive, it also continues to push the national pension scheme (NPS) as a means to generate post-retirement income for the salaried class. In the budget, Sitharaman announced that withdrawals from NPS post maturity would finally be made tax-free, thus bringing it on par with other financial instruments like the public provident fund (PPF). This was a decision that the Union cabinet had already taken last year. But with it finding mention in the budget only now, its notification could be made soon.

So far, NPS had enjoyed an EET (exempt, exempt, taxable) status, wherein upon withdrawal, the NPS was partially taxable. Of the total accumulated corpus, 40 per cent had to be used to purchase an annuity plan. This portion was exempted from tax, although investors must remember that the annuity income is taxable as per the existing slab. Of the remaining 60 per cent of the NPS corpus, 40 per cent was tax exempt while 20 per cent was taxed. Now, effectively, the entire 60 per cent will become tax free.

“Under the existing provisions of section 10 of the act, any payment from the NPS Trust to an assessee on closure of his account or on his opting out of the pension scheme, to the extent it does not exceed 40 per cent of the total amount payable to him at the time of such closure or on his opting out of the scheme, is exempt from tax. With a view to enable the pensioner to have more disposable funds, it is proposed to amend the said section so as to increase the said exemption from 40 per cent to 60 per cent of the total amount payable to the person at the time of closure or his opting out of the scheme,” the finance bill says.

The finance minister has also proposed to allow deduction for employer’s contribution up to 14 per cent of salary from the current 10 per cent, in case of a Central government employee. Deduction under section 80C for contribution made to Tier II NPS account by Central government employees will also be allowed.

NPS can be one of the tools for the salaried class as a part of their investments towards building a retirement corpus. When you invest in NPS, the money is channelled to a mix of equity, government securities and corporate bonds. This, in a way reduces the risk that is generally linked to equity. There is an additional income tax exemption for individual subscriptions of up to Rs50,000 under section 80CCD1(B) of the Income Tax Act, which is over and above the Rs1,50,000 deductions that are allowed under section 80C. That could be another advantage.

In NPS, the fund management charge or service charge is as low as 0.01 per cent of assets under management per annum for the private sector and 0.0102 per cent of AUM per year for government employees.

Now, with withdrawals also becoming tax free, those particularly close to 50 or above should definitely contribute to NPS, to cash in on the additional tax benefits, said Ladha.

There are a few things that an investor seeking to contribute to NPS must consider, said Orowealth’s Kuppa. For instance, one has to invest for a very long term if she wants to accumulate a sizeable corpus. And, it is not a liquid instrument, which means one cannot withdraw fully before retirement. There is also the fact that 40 per cent has to be invested in an annuity plan of an insurance company.

“The investor has to decide if it is worth giving up extra tax-saving allowance, which can be invested in other instruments, but address the concerns of liquidity. In our view, NPS is still not an efficient tool to generate retirement income as the investor will be better off investing in equity-based mutual funds,” said Kuppa.

As can be seen, be it via the proposed increase in public shareholding of companies, or via CPSE ETFs or NPS, more money could certainly make its way to equity markets over time if and when the budget proposals are implemented. However, given the current environment of a slowing economy, tepid corporate earnings growth and troubles in the non-banking financial services sector, some would wonder whether it would be advisable for retail investors to buy stocks or put money in mutual funds now.

Since hitting a peak of 40,312.07 on June 4, the benchmark Sensex had fallen by 7 per cent by end of July. Joshi of Angel Broking says that in the short term, equity market is likely to remain “sluggish” and it is the debt holders who will make money. “A market re-rating hinges on earnings recovery, which is still only a hope. There could be some revival in consumption around the festive season and liquidity-related relief is expected in the second half,” he said.

Still, he says, systematic investments should continue in stocks. However, one should do a lot of due diligence and pickup quality stocks, Joshi added.

Many stocks currently have fallen sharply from their peak. For instance, small-caps are down 35 per cent from their peak in January 2018, while the mid-caps similarly have fallen close to 23 per cent, notes Sunil Sharma, chief investment officer of Sanctum Wealth Management.

While he expects markets to remain volatile in the near-term, there will be medium-term opportunities. “We continue to favour leadership stocks with competitive advantages and advise using times such as these to accumulate positions,” said Sharma.

fixing-finances-at-fifty

Sat Jun 08 17:13:22 IST 2019

Everyone dreams of retiring rich. But, it is easier said than done as it ultimately will depend on your financial planning and how early you started. You may have slogged through your job to get the higher increment and promotions. But, did you put the money to work wisely?

Today, the awareness about starting financial planning early is high. However, many still do not see the need for systematic investment and financial planning till in the later stages of their life, when expenses like a child’s higher education or wedding come up.

Typically, you are at the peak of your career when you are around 50. In an ideal situation, you would have already accumulated a sizeable corpus in your investment basket. Perhaps, some of you just depended on the monthly provident fund contribution that the employer deducted from your account, hoping that it would generate enough in your kitty over time. But, given the way the costs are rising, it may be extremely inadequate to meet all the expenses. Then when you are nearing 50, the realisation strikes that the savings are just not enough and you start worrying about funding large expenses. More importantly, you will have to consider how you will maintain your lifestyle post retirement. The dreams of retiring rich vanish as reality strikes.

But, all is still not lost. Though financial planners advise starting early and staying invested over long periods of time, it is never too late. Where should you park your money? Should it be left in the savings bank account? Should you open fixed deposits with scheduled banks? Should you buy bonds? Should you buy stocks or invest in mutual funds? The financial maze is a lot more complex than you think it is.

“I would like to quote Misty Copeland,” said Abhinav Angirish, founder of Investonline. “'Know that you can start late, be uncertain, and still succeed.’ It is never too late to start; the big challenge is to have a mix to have a steady income while ensuring capital appreciation.”

If you are a conservative investor, you might be inclined towards saving money in bank accounts or opening fixed deposits. But, savings bank accounts typically offer an interest rate of 3.5 per cent to 4 per cent, which is taxable. If you consider the average inflation to rise at 3 per cent to 6 per cent rate, just parking your money in banks is not going to help you accomplish your dreams. Some people choose fixed deposits, which offer a higher interest rate. However, that is also taxable, and coupled with the annual rise in inflation, your returns will not be much. Remember that if you are starting late, you have a shorter time horizon to invest and build a corpus.

Currently, State Bank of India offers an interest rate of 5.75 per cent (for term deposits up to 45 days), 7 per cent (for a period of one year to less than two years) and 6.70 per cent for three years to less than five years deposits. HDFC Bank’s deposit rates top off at 7.40 per cent. Other banks, too, offer interest rates in a similar range. The Reserve Bank of India has already reduced its benchmark repo rate twice and the expectation is that there will be more rate cuts this year to jump-start a slowing economy. So, the interest rates that banks offer are likely to fall. Add to that the income tax you pay as per your tax slab and the inflation rate; your returns on bank deposits will look too little.

“We must not forget that inflation is the only factor that stays forever,” said Angirish. “Any income will be subject to inflation. So if you are not beating inflation, then inflation will beat your capital. Traditional instruments like bank fixed deposits have lost their sheen due to falling interest rates.”

That brings us to equity or mutual fund investments. Many people consider it as a risky option, particularly in the short-term. At 50, one would rather protect the money one already has. But, the risk can be minimised by judiciously investing in a basket of quality equity funds, mixing it with debt funds of varied durations.

Pune-based Vinayak, 80, started investing in equity and mutual funds in his late 50s. Patiently investing across a mix of mutual funds and a small equity portfolio of quality stocks, he was able to grow a decent retirement kitty. “Earlier, I was saving up for my own house. So, I started investing very late. Now, half of my savings is in blue-chip stocks, and the other half is in equity mutual funds. Over time, the value of both the investments has continued to grow, which gives me confidence to stay invested,” he said.

There are different types of mutual funds. Pure equity funds invest the entire corpus in stocks; balanced funds invest 60 per cent to 70 per cent in equity, and the rest could be in money market or debt funds that invest in corporate bonds or government securities. There are pure debt funds, too, where some invest only in shorter-duration papers, while others invest in longer-duration instruments. Liquid funds can also be a great alternative to bank deposits. They invest in very short-term instruments like G-Secs and treasury bills, where the risk is very low. These funds offer yields in the range of 7 per cent to 8 per cent and are more tax efficient than bank deposits. So the post-tax returns are better. Another advantage is that many fund houses offer instant redemption facility with no charge or penalty. So, experts say, instead of leaving a lot of money in bank accounts, a sizeable portion should be parked in a liquid fund.

“Though bank deposits are a favourite, debt funds score over fixed deposits in term of better liquidity, diversification of portfolio and most importantly post-tax, inflation adjusted (real) returns,” said financial planner Ankur Kulkarni.

Equity investments can give annual returns of 12-14 per cent; some small-cap and mid-cap funds have also given more than 20 per cent returns in bull markets. With returns compounded each year, you will accumulate a respectable surplus, even though you have started late. Therefore, wealth managers say, equity investments should be an integral part of one’s portfolio. “While one might consider equity as being risky at 50, it becomes essential to add equity to deliver a decent corpus. Mixing it with debt can reduce the risks,” said Vidya Bala, head of mutual funds research at FundsIndia.

The other portion of the investment could be in fixed income assets like debt funds, company deposits or bank fixed deposits, which provide stable and regular returns.

There are advantages of starting investments early. Given the long time that you have on your side, you could accumulate a huge corpus with lower investments. But, if a person is starting at 50, the investments would have to be considerably higher. “Just as an example, an investment of Rs5,000 a month for 30 years through a systematic investment plan can deliver about Rs1.75 crore (at 12 per cent return). To just get the same corpus within 10 years, Rs75,000 a month of savings in necessary,” said Bala.

So, if you are starting late, you might have to do a careful study of your income and expenses and make sure that a larger corpus is earmarked for investment each month. “If the rate of savings is not high, no amount of investing in top products will help,” said Bala.

India has a large working class population. While government employees do get a pension, there is no such social security available to their private sector counterparts, except the provident fund. Therefore, over the last few years, national pension system (NPS) started being promoted as a tool for retirement planning.

Under the NPS, funds are invested in a mix of equity, G-Secs and corporate bond funds. It gets additional tax exemptions under section 80CCD of the Income Tax Act. The government has also tried to make it more attractive by making the withdrawals tax free. However, one must be aware of longer lock-in periods and that only 60 per cent of the amount can be withdrawn on retirement, which is tax free, and the rest has to be invested in an annuity (pension) plan of any insurance company, which will be taxed as per your income tax slab. Also, premature withdrawals are restricted barring a few circumstances.

Currently, there are eight pension fund managers for the private sector and three for the public sector. Investors can choose a fund manager after carefully studying their track records over various cycles. Here, too, the earlier you start, the larger the corpus you will end up with. Also, given that the investments are a mix of equity and debt funds, the risk is lower than pure equity funds.

“It has emerged as a good savings alternative,” said Angirish. “But while it provides tax benefit—up to 60 per cent of corpus can be withdrawn at the age of 60 tax-free—the funds get locked. For example, if you have accumulated Rs50 lakh as corpus in NPS, 40 per cent, or Rs20 lakh, gets blocked because it has to be compulsorily invested in annuity, and annuity is taxable in the hands of investor.” He recommends building a corpus via mutual fund investments and then opting for a systematic withdrawal plan after retirement based on the needs at the time.

If one is looking at investment plus tax saving as an option, then equity-linked savings scheme (ELSS) funds could be a good option. ELSS investments also get tax exemptions under section 80C of the Income Tax Act, and they have a lower lock-in period of three years. As ELSS funds invest in equity, they tend to give better returns than NPS, where equity investments are capped. “NPS can help by reducing tax burden and investing in market-linked products. However, given that there is a limitation on equity exposure to this product, especially with age, it can be used only in addition to mutual funds,” said Bala.

It is fairly clear that investments in equity-linked instruments will help you garner a larger corpus. However, if you are still averse to risk, traditional instruments like public provident fund (PPF) or a national savings certificate (NSC), which are secure and low-risk products, could help you diversify your portfolio. Just like a provident fund, PPF is a government-backed instrument, with an interest rate that is fixed on a quarterly basis; currently its at 8 per cent. A PPF account matures after 15 years, and subsequently it can be renewed for a period of five years at a time. Investments in PPF as well as the interest earned are exempted from tax.

One could also look at government-backed small saving schemes like NSC, which will become more attractive in times when interest rates are declining. This is also a fixed income instrument like a PPF. It can be brought from a post office with a fixed maturity period of five years or ten years. While, there is no maximum limit on the purchase of NSC, under Section 80C of the Income Tax Act, exemption is given only up to Rs1.50 lakh. Interest rate on NSC is also set quarterly by the government, which is currently at 8 per cent.

Banks offer tax saving fixed deposits, where the deposit is locked for five years. However, the interest earned is taxable and if interest rates continue to decline, interest rates offered on these tax saver FDs will also come down.

If you are only going to invest in fixed income instruments, then the amount you will have to invest will significantly go up, given that the returns are not as high as equity returns. If, for instance, you start at 50 and are targeting a corpus of Rs1 crore at the age of 60 through a mix of equity and debt instruments, at 10 per cent average annual returns, you would have to invest around Rs49,000 per month. In contrast, if you are only investing in instruments like term deposits and PPF, then at an estimated 7 per cent annual returns, you would have to invest close to Rs58,000 per month to reach the same goal of Rs1 crore.

So, while you will still be able to build a decent corpus, had you started earlier, say at the age of 30, the money that you would have had to invest per month would have been far lower at Rs4,400 (a mix of equity and other instruments), or 08,200 (if investing only in fixed income). So, the emphasis should always be on starting early and planning wisely.

A person at 50 must also take into account several other critical factors. Medical expenses have soared over the past few years and a sudden illness can hit an individual hard, wiping off a sizeable chunk of the savings. Therefore, an adequate health insurance cover is the need of the hour and this is the first thing that you should opt for unless you already have. “It shields your hard earned savings getting spent for your medical emergencies. In the absence of adequate health insurance, in case of any hospitalisation all the savings and investments may get wiped out leaving the family in tough times for the rest of the life,” said Kulkarni.

Premiums on health insurance go up every year. Also, gone are the days when health insurance was equivalent to a simple mediclaim policy. There are plans targeting particular diseases like heart ailments or critical illness. There are also family plans, so that your entire family (primarily self, spouse and two children) are covered.

Another critical thing to consider is your liabilities. Over the years, one takes several loans. Housing loan is often the biggest liability. You may have also bought things like cars, two-wheelers and consumer durables on loan. Then there is the credit card debt as well.

As you head closer to your retirement, you must pay back all your debts. As a thumb rule, you should try to make the full payment of credit cards each month on time. Not only is there a late payment fee, the interest charged is high, ranging from around 2 per cent a month to as high as 3.50 per cent. “Post-retirement, you would be looking for steady income. Hence, if you have outstanding debt, the interest outgo will be more than interest earned. This effectively defeats the purpose of investment,” said Angirish.

You might also want to look at converting some of your physical assets, like that second home, for instance, into financial assets, which will make things much more manageable after you retire.

Once you have built a corpus, you plan and use it with care in your post retirement years. One avenue could be the Pradhan Mantri Vaya Vandana Yojana, which is a pension scheme by the government for senior citizens. The minimum age of subscription to this policy is 60, and the policy term is ten years. You will get a pension of 8 per cent for ten years. Another option is mixing post office senior citizens’ scheme and senior citizens' bank deposits with low-risk liquid funds, which will help meet any emergency needs. At the same time, some savings could remain in equity funds, which will provide the long-term growth.

“There are a lot of people who knowingly or unknowingly delay retirement planning, which can hurt them significantly in their post retirement life,” said Kulkarni. “But, it is better late than never.”

emergency-exit

Sat Apr 06 20:05:01 IST 2019

Bengaluru-based IT professional Amit Kumar, who worked at the R&D centre of an American multinational company, had been doing well in his career. But one fine day, he was informed that he had been laid off as part of a global restructuring programme. The company gave him four months salary as compensation.

Kumar, 40, was shocked. He had a family to support—two school-going children and a homemaker wife. He had recently invested in a two-bedroom apartment in the city and had EMIs to pay. The severance package was just not enough to sustain him till he got another job. Kumar, however, had a habit of saving regularly for a contingency fund. And that was enough to manage for at least a year. Kumar landed a job in a few months, though not at the same level. The only thing, according to him, that helped him deal with the crisis was his contingency.

“One needs to do away with the ‘nothing-will-happen-to-me’ attitude,” said Sasikumar Adidamu, chief technical officer, Bajaj Allianz General Insurance. “Appropriate financial planning is important to live a life of dignity. One never wants to be in a situation where one has to borrow money to fulfil basic necessities or live hand to mouth. To avoid such situations, it is vital to have a contingency fund set aside that helps you deal with emergencies.”

Personal finance experts unanimously agree that contingency financial planning is a must. There can be unforeseen expenses in every sphere of life—a medical emergency, job loss or transfer. Prudent systematic saving and investing in various financial tools to meet such emergencies is an important part of maintaining financial stability.

While nothing can prepare one enough to face an emergency, having an emergency fund is the best one can do. “If one does not have an emergency fund, one should start working on one,” said Navin Chandani, chief business development officer, BankBazaar.com. “Ideally, it should be six to twelve months of your current monthly income kept in a risk-free and liquid instrument such as a fixed deposit. This emergency fund can help in situations such as loss of regular income. Try not to utilise this money for any other expenses.”

The objective of having a contingency fund is not limited to meeting unexpected events—one can channel it through planned events like job switch or marriage. “Those who don’t have a contingency fund should reconsider their monthly budget allocation, and try to minimise or cut off unwanted expenditure,” said Dinesh Rohira, founder and CEO at 5nance.com. “It is prudent to shell out at least 10 per cent of monthly income into an emergency fund, and gradually top up until it is sufficient to meet six months' expenditure. Nevertheless, it can also go beyond six months but it will block the money which can be deployed for wealth creation purpose. After reconsidering a budget, one should park this fund in a liquid scheme of debt mutual funds, and use it only for emergency purposes.”

An emergency fund is one of the most important aspects of any financial plan. While you put together one, you should factor in expenses such as payment of insurance premiums and EMIs. The contingency fund should ideally be parked into a separate bank account or liquid fund. “It is very common for people to panic in a state of confusion when faced with an emergency,” said Rahul Jain, head of personal wealth advisory at Edelweiss. “The first step is to utilise whatever savings or any investments one has rather than taking a personal loan or loan from friends or relatives. Within investment one should utilise the bank fixed deposit or any other fixed income instrument. Only if there is additional need of funds should one dip into long-term investments like stocks and equity funds. Personal loan should be the last resort.”

Job loss is one of the major reasons that land people in financial trouble. It can shatter them financially and emotionally. “If you have recently suffered a job loss, then the first step must be to reenter the job market,” said Chandani. “Full time, part-time, freelance, keep your options open. At the same time, cut down your expenses as much as possible. Stick to the essentials and cancel or reduce spending such as online subscriptions, eating out, buying gadgets, or travelling for leisure. Also, use your investments with care. Resist the urge to withdraw all money at once. Withdraw them in a structured manner according to your needs. Once you find employment again, make sure to put the money back in the investments. If you’re repaying a loan, you may be bound by contract to inform your lender about a change in your employment status. If you can continue to pay your EMIs, do so. But if you are struggling, work with your lender about increasing your tenure, lowering your EMIs, or any other way the loan can be restructured. Try not to let your insurance policies lapse. Most insurance companies offer you a 30-day grace period in which you can make your premium payments. Use this grace period to pay off your premiums.”

Another scenario in a salaried individual's life is changing a job for better opportunity, which leads to loss of primary source of income for a small period of time. It, however, may go longer than expected, leading to financial implications. In such a scenario, a person can use the emergency fund to meet the needs.

If the dry period lasts longer than you can manage with the contingency fund, you can opt for short-term loans. However, make sure you pay back the loan on high priority after getting a stable income.

Accidents and natural calamities can also lead to financial distress, and preplanning can help manage such events. A prudent approach is to insure oneself against such events with appropriate cover, and keep enough money aside to finance this policy.

Health care can be a major challenge in the absence a regular income. “If you are out of a job, you will not have your employee insurance to help you tide over. So always have your own, independent health insurance policy for your whole family in addition to whatever your employer provides. Also, consider a term plan if you have dependents. These are pretty low cost, and can provide you cover in case job loss occurs due to an accident or disability,” said Chandani.

Adidamu says health care costs can add immense pressure to a person's finances. “There is an increase in medical costs of at least 15 per cent annually, considering the inflation. Most of the people pay these expenses out of their savings, borrow money from their relatives or even sell their jewellery or assets. It is important to have a holistic 360 degree health insurance plan for yourself and your family members to deal with medical emergencies. One needs to have a basic health insurance plan of at least 05 lakh, considering the current medical costs along with a super top-up health plan that takes care of hospitalisation expenses in case the sum insured of the basic policy is exhausted. With change in lifestyle there’s also an increase in the number of people prone to critical illness. A critical illness plan provides you a lump sum amount in case you are diagnosed with the listed illness in the policy and it not only helps you with recovery, but also supports your family members,” he said.

People put in their lifetime's savings and pay huge EMIs to build houses, probably their most important asset. Then they spend huge sums on decorating it and to buy household items. One natural calamity can wipe off all this. A home insurance ensures that your years of labour does not go in vain and covers your home from dangers like theft, damage due to natural calamities and accidents. It not only covers the structure, but also the contents within.

Accidents can inflict serious damage on a family's financial health, more so if an earning member is involved. A personal accident cover can provide the much-needed financial support if a person meets with an accident that leads to disability or death. It is a benefit policy that also provides for children's education and medical expenses. This cover is an absolute must in addition to a life insurance policy that covers all causes of death.

The habit of planning finances needs to begin early, ideally right from the first paycheck one receives. So does a contingency fund. “One of the components of financial planning is adequate saving, which is invested in the right place to achieve growth so that when contingencies or emergencies arrive, one has a sufficient nest egg built up to tide over it,” said Dheeraj Singh, head of investments at Taurus Asset Management. “The fundamental principle of not spending more than one earns is sacrosanct. Even if one does take on debt to finance a big asset purchase, one should ensure that there is sufficient cushion in income to take care of servicing the debt. To build up a contingency fund one needs to start saving and investing early and spend only on things that one needs and not on things that one wants. Besides this one needs to invest in suitable instruments for growth. For instance, SIPs in mutual funds are a great disciplined investment mode to ensure long-term growth. Similarly, regular income needs can be taken care of through systematic withdrawal plans, which are also tax efficient. Also, one should prefer investing in liquid instruments (instruments that can be converted to cash quickly and easily) as opposed to illiquid instruments.”

Identifying and segregating your expenses as discretionary and non-discretionary is how you start with saving. “Consider your monthly household expenses, EMIs, school fees, medical expenses, etc. Buy a term plan and adequate medical cover and start saving for taking care for a minimum of six months of your non-discretionary expenses, invest them either in liquid fund or you can keep the same in a savings bank account as well,” said Rajesh Patwardhan of LIC Mutual Fund. “Save it in a separate bank account and try to add some money every month in the same. In case one has not planned for such a fund and an emergency arises, there are little choices left, but one has to be extra careful not to fall in debt trap. So either go for peer-to-peer short term borrowing or family borrowing, or selling family gold or going for loan against property or outright sale of property. Staying away from the debt trap will help you overcome the contingency period quickly when the bad phase passes. There are insurance policies available to cover such expenses, and if one feels he is into an unstable job and not in a position to build such a fund one should buy such a policy.”

Some experts are of the opinion that, if you don’t have a contingency fund, credit cards can prove to be helpful to pay for any financial emergency. “It is, however, not recommended to keep the credit card bills outstanding for long periods of time as it could be quite expensive,” said Raghvendra Nath, managing director, Ladderup Wealth Management. “Nowadays, many banks offer pre-approved personal loans depending on the financial track record of the individual, which could be at a very reasonable rate of interest. Other than this, if an individual owns gold jewellery, he can take a gold loan to deal with the short-term financial crisis. Also, if he has made any investments in mutual funds, equity shares or bonds, he may look to liquidate the investments to meet his financial emergency.”

Nath suggests one should keep at least nine months of expense requirement in liquid mutual funds or fixed deposits as an emergency fund. “Critical illnesses like cancer or tumour can also lead to high bills of surgery, medicines and hospitalisation together with no salary income. While health insurance policies can cover the individual for the expenses, the insurance claim can take two or three months to clear. In this case, the emergency fund would be required to cover the medical expenses in the absence of cashless health insurance policy and to meet the routine expense for the family without compromising the lifestyle. Also, as of now, none of the insurance companies offers a standalone job loss insurance policy. However, it is available as an add-on with other polices that cover larger risks such as accident and critical illness. The job-loss rider would cover an individual only in case of retrenchment by employer due to merger or acquisition. Considering the narrow scope of the cover, job loss insurance add-on does not seem to be a dependable option.”

Before buying any insurance policy as protection against contingencies, one should review and understand all the conditions mentioned in the policy documents and disclose accurate facts to avoid any delay in the claim settlement process. “Also, one should pay all his insurance premiums on time to avoid policy being lapsed,” said Nath.

Health insurance and critical illness plans need to be chosen carefully. “Though a health insurance plan (indemnity) typically covers expenses incurred during hospitalisation, pre and post-hospitalisation, a critical illness plan offers cover upon diagnosis of critical illness, where the insured can get lump sum benefit that can make up for his reduced earning capacity as a result of contracting the critical illness and can help his family to manage the cost of expensive treatment of critical illnesses. One needs to have a minimum hospitalisation insurance cover right from birth or young age,” said Shreeraj Deshpande, principal officer and key managerial personnel, Future Generali India Insurance.

Seeking a temporary credit line against mutual funds or stocks could also be considered in case of a financial emergency besides borrowing against traditional insurance policies or withdrawing from the provident fund kitty. “An individual can also redeem the most liquid asset class or fund category with the least loss and least exit cost,” said Shaily Gang, head of products, Tata Mutual Fund. “In the absence of financial assets, it will be difficult to tide over this situation, as physical assets would not be easy to liquidate immediately. Thus, it is extremely important to build a corpus by investing in mutual funds, SIPs, planning asset allocation basis risk appetite across equities and equity mutual funds, fixed income funds, bonds, provident fund and alternative assets. Also, cash balance in bank accounts and fixed deposits would be the first thing to come to the rescue in a financial emergency. Credit cards could be used for paying medical bills or making payments provided the person is mindful of the interest-free period available on the credit card. In case of a medical emergency, liquid funds redemption can be executed or a cashless mediclaim process can be initiated.”

There are some additional precautions that one needs to take in managing an emergency fund. “All bank accounts and investments should be easily accessible to more than one person in the family,” said Gang. “The best way is to maintain proper files with CAS reports, FD details sheet and policy documents. Expiries and renewals of policies should be tracked. Utmost care should be taken while making disclosures on policies, providing details while applying for policies and also while subscribing to any kind of investment. Return seeking should not take precedence over safety and liquidity while parking funds as contingency or emergency reserve. The investment objective of contingency funds is to keep the portfolio safe, liquid and then try to earn returns which are slightly higher than bank savings, current and short-term fixed deposits. Besides this, health insurance, mediclaim and term life insurance should be applied for in the life cycle. Also, a minimum of 50 per cent of the portfolio should be open ended. Nominations for all investments should be in place. Ideally, a will should also be planned and executed.”

While selling existing investments to meet an emergency fund requirement can save you from interest cost, it can adversely impact your long-term financial goals. “Redeeming market-linked investments during bearish market conditions can also lead to book losses,” said Naveen Kukreja, CEO and co-founder of Paisabazaar.com. “Those availing loans to deal with financial emergencies should visit online financial marketplaces to compare various loan offers available on their credit score, income and other parameters. Among various loan types, personal loans have the fastest disbursal time with most lenders disbursing personal loan within a few days. Their interest rates start from 11 per cent and their tenure can go up to five years.”

money-matters

Sat Feb 09 11:44:41 IST 2019

Indians had typically been averse to investing in equity and equity-linked instruments, instead preferring fixed deposits, property and gold. That, however, is changing. More and more Indians are buying stocks or channelling funds through systematic investment plans of mutual funds, although the percentage of the participating population is still quite low in comparison with some developed economies.

Since the NDA government came to power on May 26, 2014, the Sensex, the BSE benchmark, has jumped 46 per cent. In the year after demonetisation in 2016, the Sensex jumped 28 per cent. Bank interest rates have been falling ever since and the real estate market has not yet recovered from the shock of demonetisation. These things together led to massive flows into the equity markets.

The total assets managed by mutual funds have more than doubled, from Rs10.11 trillion in May 2014 to Rs22.86 trillion in December 2018. In May 2014, equity, balanced funds and equity-linked savings schemes (ELSS) together managed Rs2.31 trillion. In December 2018, it stood at Rs9.66 trillion, a four-fold jump.

Data from the Association of Mutual Funds of India shows that the share of equity-oriented schemes increased to 41.9 per cent of the industry assets in December 2018, from 40.3 per cent a year earlier. Individual investors held Rs12.91 trillion in mutual funds in December 2018. They now hold a higher share of industry assets at 53.6 per cent, 3 per cent up from a year earlier.

However, as mutual fund investments are market-linked, buying pure stocks or equity funds may not always give you good returns. Over the last one year, for instance, the market has been extremely volatile. It is currently down more than 7 per cent, since the high of 38,989.65 it hit on August 29, 2018. Small- and mid-cap stocks have seen a double-digit correction.

That has weighed on returns of equity mutual funds, which have ranged from a gain of around 5 per cent to a loss of 20 per cent. Most analysts do not expect the volatility to subside in 2019, at least not in the first half, as elections are round the corner, oil prices remain volatile and global trade tensions linger on. Corporate earnings, though looking up of late, are still not at their best. Expectations are still being moderated, even as the macro environment remains favourable. “Valuations remain a key issue dodging the market and fears of an adverse election outcome persist,” said Sunil Sharma, chief investment officer of Sanctum Wealth Management. “Cautious optimism remains our preferred path forward, which translates to strategies, managers and portfolios that minimise losses, while ensuring participation in gains.”

So, is it time to pare down the exposure to equity and switch to debt funds or traditional bank deposits?

Experts say one should never be worried about short-term uncertainties if the saving is for a long term. “One mistake that people often make is to look at the market as a get-rich-quick scheme. As an investor, bear in mind that equity investments are long-term investments. Focus on identifying a few strong companies for investing a part of your investment. Once you invest, have patience to ride through the ups and downs of the stock markets for the long term,” said Adhil Shetty, CEO of BankBazaar.

It is critical that one consider future goals, like saving up for a child’s higher education or retirement planning, or even foreign holidays, when making investments. One must not get swayed by near-term uncertainties. “More than timing the market, it is important to spend time in the market,” said financial planner Anant Ladha, founder of Invest Aaj for Kal. “Usually, in times like this, when keeping patience is difficult, it is very critical to manage emotions. I feel, now it is not the time to move out of the market. Rather, it is time to have patience and keep our goals in mind.”

Ladha expects at least one more correction in markets this year, and he recommends SIPs with a horizon of five years or more. “SIPs perform well, especially in fluctuating markets. But, one needs to have that five-year patience. For lump sum investment, selection becomes critical. We should stick to blue-chip, multi-cap or value-based funds,” he said.

And, an investor’s risk-return objective and the investment time horizon should drive her asset allocation. “If you are currently under-allocated in equities as per your risk profile, now would be a good time to start topping up allocations in equity funds. Investors should clearly focus on the long-term by cutting out short-term noise,” said Kaustubh Belapurkar, director, fund research at Morningstar.

Selection of right stocks is extremely crucial in uncertain times. “Mid- and small-cap funds are great wealth creators over the long term, but come with additional volatility as was witnessed in 2018. If your portfolio is under-allocated to small- and mid-cap funds as per your risk profile, there is a need to systematically start increasing exposure to this segment. But, the investment time horizon is crucial, as anything less than seven years in these funds could be counterproductive,” said Belapurkar.

Most analysts are of the opinion that large-cap stocks or funds investing predominantly in large-cap stocks should form the core holding in one’s investment portfolio. In recent years, a few asset management companies have even reduced their minimum lump sum investment requirement from Rs500 a month to just Rs100. This has helped even the people in the low-income category to put some money in mutual funds.

This is the time of the year when many people start hunting for last-minute tax planning options. ELSS funds are a good option for those who seek higher equity returns as well as tax benefits. This is a category of diversified long-term equity fund, where the investment is deductible under Section 80C. However, one must remember that investments in ELSS funds are locked-in for three years. Over a ten-year time horizon, most funds in this category have delivered returns ranging from 14 per cent to 20 per cent.

The government has taken many steps to make the National Pension Scheme more attractive. The withdrawals have now been made tax-free. Earlier, only the investments made each year were exempted. In a country where there is no social security offered or most private sector employees are without pension, NPS is a good option for saving for retirement.

In NPS, investments are mandatorily channelled to a mix of equity, government securities and corporate bonds, reducing the risk that is generally linked to equity. There is an income tax benefit for individual subscriptions of up to Rs50,000 under Section 80CCD1(B), which is over and above the Rs 1,50,000 deductions that are allowed under Section 80C. Another advantage of NPS is that the fund management charge is as low as 0.01 per cent of assets under management a year for the private sector and 0.0102 per cent of AUM a year for government employees.

However, remember that most of the funds are locked-in till you retire. Last year, there were some relaxations, but still only partial withdrawal (up to 25 per cent) is allowed. Also, equity investments remain capped at a maximum 75 per cent, and that also starts coming down after the age of 35. Another catch is, 40 per cent of the amount withdrawn post retirement would have to be put into an annuity plan, which will be taxed accordingly.

Despite the additional tax benefits, for the reason that equity investments are capped in NPS, some financial advisers recommend ELSS over NPS. “ELSS will continue to have an edge over NPS,” said Ladha. “First, lower lock-in period of three years. Historic average returns of ELSS have been more than 15 per cent compounded annual growth rate, and keeping India’s GDP and inflation in mind in future, too, at least 12 per cent returns can be expected.”

Conservative investors typically have little exposure to equity markets. Last year, when equity markets were volatile, many banks raised interest rates on the back of repo rate hikes by the Reserve Bank of India. In November 2018, State Bank of India, the country’s largest lender, raised term deposit rates to 6.80 per cent from 6.70 per cent for one year to less than two years. Interest rate for two years to less than three years was hiked to 6.80 per cent from 6.75 per cent. In the case of private sector lender HDFC Bank, interest rates currently range between 6.25 per cent for up to six months to 7.40 per cent for deposits for up to three years.

However, interest rates are unlikely to go up from here.

The 10-year benchmark yield on government securities (G-Sec) has fallen to around 7.30 per cent, from around 8.18 per cent earlier. With inflation trending below the band set by the RBI and low food inflation, it is expected that the Central bank will cut interest rates soon. Typically, interest rates and prices have an inverse proportion. When yields fall, the net asset value (NAV) of the scheme goes up. So, one could consider investing in debt funds.

“Foreign portfolio investors have turned positive on India’s fixed income market in the past two months with a net buying of $1.5 billion since November,” said Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management. “We believe there is a selective buying opportunity in the high quality corporate bond market as spreads have widened and yields have nicely priced risks.”

Investors who have a time horizon of less than four years should strictly stay away from equity at current valuations and look at debt instruments like liquid funds or short-term funds, said Ladha.

Liquid funds invest in short-term money market instruments such as government treasury bills, money markets, short-term corporate deposits and commercial papers. This makes them very liquid, and there is no exit load. A few fund houses also have liquid funds with instant withdrawal facility. People who usually maintain a large balance in bank deposits to meet sudden emergencies could look at this alternative.

“Most people maintain contingency fund in a savings bank account or a fixed deposit. They are easily accessible and can be liquidated when needed. However, keeping this money in a liquid fund will provide you higher returns than a savings account,” said Shetty.

As such, the interest rates offered by banks on deposits are less than what is offered by the Public Provident Fund. In the recent review, interest rate on PPF was left unchanged at 8 per cent. Traditionally, PPF has been seen as a tool to build a retirement corpus. The account matures after 15 years, which can be then renewed for five years at a time. But, experts point out that one would have to stay invested for a long period to build a sizeable corpus. A monthly investment of Rs10,000 for 30 years can help build a corpus of Rs14.6 million, at the end of the period. However, if the period is reduced by half, the returns will come down to a fourth, that is just Rs3.5 million.

Another option is the Sukanya Samriddhi Yojana (SSY), which has been floated with the goal of ensuring the welfare of girl children. A Sukanya Samriddhi account can be opened in a scheduled commercial bank or a post office by parents in the name of a girl child up to the age of ten. Like PPF, interest rates on this scheme are revised every quarter. Currently it is 8.5 per cent.

The rules for SSY were amended last year, lowering the minimum amount required to open an account to just Rs250, from Rs1,000 earlier. Deposits can be made into the account for 15 years and the account as such matures after 21 years. Contribution to SSY also qualifies for income tax deduction under 80C. But, one must remember that partial withdrawals here are only allowed after the account holder turns 18.

Another time-tested instrument is the National Savings Certificate (NSC). Just like the PPF, you will earn an interest of 8 per cent on NSC and it is more efficient than bank fixed deposits, considering that the interest earned is deductible under Section 80C.

The best option for senior citizens to earn a regular risk-free income post retirement is the Senior Citizen Savings Scheme. The interest rate that is being offered is 8.7 per cent, which is subject to review from time to time. This scheme is for people above 60 years and the account matures after five years, with an option to extend it for three years.

The real estate sector, which was rocked by demonetisation, has been showing some signs of a recovery. According to real estate consultancy Knight Frank, 2018 was the first time in this decade when annual numbers grew year-on-year. The total units launched last year in eight cities jumped 75 per cent to 1,82,207, and 60 per cent of the new launches were priced under Rs5 million, targetting the affordable and mid-range housing segments.

Sales also showed signs of uptick. In Bengaluru, sales were up 27 per cent. Elsewhere, the growth was more modest—Mumbai, Ahmedabad and Chennai seeing a 3 per cent growth, and sales in the national capital region and Hyderabad rising 8 per cent and 9 per cent, respectively. So, is it a good time to buy a house?

“This is, without doubt, a very favourable market for homebuyers looking to purchase properties for their own use,” Anuj Puri, chairman of Anarock Property Consultants. “One of the obvious reasons is the abundance of options in all categories of housing. Also, property rates have reduced considerably across cities.”

One thing to remember is that an under-construction property will attract a GST, so your net price will go up. Only those properties that have a completion certificate will now be eligible for exemption from GST.

If you are looking to just invest in residential real estate, a lot of due diligence will need to be done as market dynamics have changed in the last few years. “Capital appreciation is a reasonable expectation only in some categories, and in certain high-demand/low-supply areas. With some exceptions, luxury housing is currently not the best play. The preferred categories for investors currently are lower budget and mid-segment housing,” said Puri.

Though Indians traditionally invested heavily in gold, as returns fell over the past few years, the interest also diminished. 2018, however, turned out to be a surprise. Between January 26, 2018, and January 26, 2019, gold prices went up close to 7 per cent.

When equity markets are volatile, people tend to look at gold as a safe investment. Global gold prices topped $1,280 an ounce in the backdrop of falling equities towards the end of 2018, and some indications are that if the volatility continues into 2019, gold may continue to glitter.“We expect increased market uncertainty and the expansion of protectionist economic policies to make gold increasingly attractive as a hedge. While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Federal Reserve has signalled a more neutral stance. Structural economic reforms in key gold markets will continue to support demand for gold in jewellery, technology and as means of savings,” the World Gold Council said recently.

Ultimately, where you invest will depend on your risk appetite, time horizon and preferences. The thumb rule is, do not put all eggs in one basket. Always diversify your investments across asset classes. So, if equity does not give you returns one year, other asset classes may provide you a cushion. Also, do remember to stick to your goals.

evolving-luxury

Sat Aug 10 11:40:01 IST 2019

In today’s world, luxury isn’t a mere symbol, but a reflection of our ethos. As our consciousness has evolved towards sustainable practices, so have our choices when it comes to living spaces. Today, more people than ever are investing in their own homes, given a surge in their wealth. In fact, according to a global wealth report, since 2000, wealth in India has grown 9.2 per cent per annum, faster than the global average of 6 per cent.

There has been a simultaneous evolution of the luxury real estate industry as well. A decade or so ago, luxury used to be synonymous with sprawling bungalows, complete with private gardens. The paucity of space has created an opportunity for vertically built luxury homes, that is luxury apartments. Some call them ‘villaments’ (villa+apartment), and some luxury residences. These luxury apartments are spacious, replete with smart technology and fittings fit for kings.

But there is more to them…

Technology has entered the veins of design sensibilities, creating a ‘smart home’ revolution. With AI and robots making major inroads into the real estate sector, facilities like voice-activated locks, smart air-purification systems, climate and temperature control, IoT devices, and more, will grow in popularity. This will also enhance the comfort and convenience of home owners while incorporating entertainment, mobility and security.

However, along with technological revolution, we also see a seamless blend of sustainable design practices to promote holistic living. It creates a sustainable and socially cohesive neighbourhood that enjoys common energy generation, and water management and allows for naturally lit spaces that enhance human engagement with nature. This is achieved by integrating energy efficiency with the design process, essential to aid livability and the overall well-being of the residents.

Upcycling is another focus area while creating harmonised living spaces. The use of natural and upcycled materials is remarkably sustainable, even as it creates beautiful structures. These materials contribute to the embodied energy consumption of homes. Use of organic materials like wood, marble and copper can uplift the ambience.

Eco-friendly practices like rainwater harvesting, waste management and adaptive reuse create a sustainable edifice for the homes, strengthening their core. Architects are increasingly following the principle of wabi-sabi, which allows the building to age gracefully as time casts its shadow on it. They also blend the indoor and outdoor areas seamlessly, thus expanding the usable area and facilitating a dynamic flow of movement.

Even the facades used are intelligent. Structures increasingly have dynamic facade which improve the aesthetic quality while augmenting functional excellence. Dynamically tinted electrochromic glass, a new-age product, gives the end user the benefit of using a glazed façade without using blinds that obstruct the exterior view and daylight ingress. It maximises natural light and cuts glare, enabling better thermal and visual comfort. Moreover, during the monsoons, the façade system drains water away from the walls.

Technology has completely transformed bathroom spaces. A contemporary touch is now pervasive in the design philosophy, while keeping bathrooms clean and clutter free. Monochrome colour schemes are vastly preferred while bold curves and angular designs give them the required edge. Apart from being elegant, they are thoroughly planned spaces which are highly ergonomic. Minimalism is the foundation on which these ‘intelligent bathrooms’ are built. They are controlled through IoT connectivity, giving you smart showers, faucets and adjustable water temperature, among other things.

Even the lighting has shifted its focus from space illumination to mood creation.

Increasingly, luxury is becoming synonymous with authentic creation. Giving owners a sense of symbiosis with nature and creating a community of people who have similar living aspirations is the new luxury being provided by real estate developers.

Kolte is project director, 24K, Kolte Patil Developers Limited.

under-construction

Sat Aug 10 11:37:39 IST 2019

About five years ago, Rajesh Kumar, a 40-year-old IT professional, bought an apartment in an affordable housing project in Bengaluru. It was from a reputed builder and he got it for Rs35 lakh. However, as time passed, he realised that it was too far from the city centre, about 35km. At the time of possession, the builder had promised a lot of infrastructure development in the area, but alas. The area lacked proper public transport and there were no shopping malls, good schools or colleges nearby. As a result, Kumar thought of renting out the apartment and moving back to the city. But, despite trying hard, he could not find a tenant; no one wanted to live that far from the city. Kumar then thought of selling it, but found no buyer, again for the same reason.

He is not alone. Though there has been a lot of talk about the boom in the affordable housing segment, there are many challenges that hinder its growth. Anuj Puri, chairman of ANAROCK Property Consultants, said the main issue with such projects in metros was the location of the project—most of them were on the outskirts of the city, where the livability index was fairly low. “Many areas across cities lack basic infrastructure facilities and are least accessible from prime areas,” he said. “This puts off buyers to a large extent. Secondly, unlike earlier, builders today are keen to venture into the affordable segment—despite profit margins being lower than the luxury segment—mainly because it has the maximum demand. However, it is unfortunate that the high property prices within the municipal limits of major cities are preventing builders from launching affordable housing projects there.”

Other experts, too, agree. “Often, connectivity is a big challenge,” said Samantak Das, chief economist and head of research and REIS, JLL India. “It is true that many continue to wait for supporting infrastructure. It has been the main request of home buyers who want to have an easy commute and also have all necessary amenities in the neighbourhood.”

As per ANAROCK research, in Q2 2019, of the total 6.65 lakh unsold units in the top seven cities, more than 2.45 lakh were in the affordable bracket (priced below Rs45 lakh). During the same period for the previous year, more than 2.37 lakh units in the affordable category were unsold. “Though there has been an increase in the total unsold stock of affordable housing by 1 per cent in a year, this was also because maximum new supply came up in this segment across the top seven cities. Hence, the stock was bound to increase,” said Puri.

After demonetisation pushed up the unsold inventory, builders were cautious about launching new projects. This restraint helped sales gain momentum in 2018, and builders concurrently reduced the size of the offering in the affordable segment. And, with the recently announced decrease in interest rates and a spate of government incentives such as lower GST rates, the reduction of unsold affordable stock will continue in the immediate future.

“Economic growth can be accelerated through the linkage of affordable housing with other sectors of the economy,” said José Braganza, joint managing director, B&F Ventures Limited. “The demand for affordable housing is driven by the availability of low-cost credit, and policies such as the Real Estate (Regulation and Development) Act has infused new buyers’ interest in the realty sector. Providers and seekers of affordable homes face multiple challenges in their efforts to develop, finance or secure quality housing at a reasonable price. With restored trust and tax reforms, home buyers' prime concerns are the cost involved along with the quality and delivery of the project rather than location.”

There are others factors, too. “Even though the demand for affordable housing is humongous, there are multiple headwinds such as accessibility to finance at cheaper interest rates (a major roadblock for developers to enter affordable housing), and absence of public-private partnerships to bridge the gap between demand and supply, which have restricted the growth of this segment,” Surendra Hiranandani, chairman and managing director, House of Hiranandani, told THE WEEK. “Along with ramping up infrastructure, which is taking place at a stupendous rate, [there needs to be a] speedy approval process, and subsidies in buying land in urban areas and raw materials.”

To achieve the objectives of the Pradhan Mantri Awas Yojana, he added, the government needed to incentivise the key stakeholders through direct and indirect tax measures and increase the price limit of apartments that qualify for tax deductions. This would encourage home buyers from urban areas such as Mumbai, where real estate prices continue to remain high. “There is an urgent need to address challenges in the affordable housing space as urbanisation will escalate exponentially in the years to come,” he said.

Experts point out that the government must seriously reconsider revising the pricing of homes in the affordable segment as per the real estate prices in that city. “While size of units as per its definition (60 square metres carpet area) is fairly appropriate, prices of units are definitely not viable across most cities,” said Puri. “For instance, for a city like Mumbai, a budget of less than Rs45 lakh is far too low and hence it needs to be increased. Similarly, in Delhi and NCR, buyers have to go out to the peripheries to buy affordable homes, which are unfortunately not accessible via public transport or are fairly low on the livability index. With this price revision, more homes will fall within the affordable price tag and hence more buyers can avail of multiple benefits such as lower GST rates at 1 per cent without input tax credit, government subsidies and the most recent tax deduction of total Rs3.5 lakh on interest repayment of home loans. This will attract more buyers to take the plunge.”

Many also said that the issue of scarcity of land, the main ingredient for building homes, must be looked into seriously. “Some portions of land across cities falling under the department of heavy industries, Indian Railways, port trusts, etc, can be released by the respective government bodies,” said Puri. “By unlocking this land, there will be availability of low-cost land, which will also curtail property prices to a large extent.”

Interestingly, stakeholders are now focusing on delivering the existing ongoing projects instead of new launches and this is likely to reduce the gap between demand and supply. “The country needs price rationalisation and more affordable housing projects,” said Das. “With the government’s key agenda being ‘Housing for all by 2022’, the future of affordable housing is strong. Reforms such as tax exemptions for project developers and GST rationalisation will help the segment and, in a way, help the home buyers. As a result of these reforms, the affordable housing supply will definitely increase in future.”

Market experts emphasised that the prices for the segment should be revised on a priority basis. “Firstly, prices should be revised,” said Rachit Chawla, founder and CEO, Finway Capital. “An amount that the middle class can easily afford, with proper quality of infrastructure, should come into the picture. Secondly, one needs to boost the housing funds. Current reforms by the government with reference to real estate and initiatives being taken to provide housing to all, irrespective of caste, purchasing power or religion will provide a push to the housing sector at large.”

Despite the challenges, experts said the future of affordable housing was bright in India, especially with a stable government and the recent developer-friendly budget. The affordable price segment will continue to dominate the residential supply in the next few years. The catchphrase ‘affordable housing’ has also been drawing more and more fanfare and is being used rather freely by developers who, in previous years, did not want to be associated with it at all. “The budgets leaning towards the affordable housing segment will give further hope to those who were dreaming to own homes,” said Braganza.

Despite initial challenges on the quality front, some experts said the affordable segment seemed to be on track. “In the past three to four years, with participation of more grade A and corporate developers in this segment, quality issues have been addressed and the benchmark has been set,” said Shantanu Mazumder, senior branch director, Bengaluru, Knight Frank India. “Now, with RERA in place in most of the states, the developer also needs to fall in line with the guidelines that also talk about warranties and guaranties in construction. Affordable housing will soon see version 2.0, as the segment is gearing up to cater to the lower end of the segment, which is sub Rs10 lakh. But, for the same to happen, the government will have to release land to the private sector in some form so that affordability is achieved in its true sense across all segments and the prime minister's vision of 'housing for all by 2022' becomes possible.”

loud-and-clear

Fri Aug 09 14:43:31 IST 2019

In the April-June quarter, Chinese smartphone maker OnePlus had a shipment share of 43 per cent in the premium segment in India, according to Counterpoint Research. The popularity of the flagship OnePlus 7 series helped the company beat Samsung, which had a 22 per cent share. In the ultra-premium segment, OnePlus 7 Pro had a 26 per cent share. Overall smartphone shipments in the premium segment grew 33 per cent annually in India.

BIG BLUES

IBM is facing several lawsuits accusing it of firing older workers, including a class-action case and individual civil suits. According to a deposition from a former vice president, the company has fired a lakh employees in the past few years in an effort to boost its appeal to millennials and appear to be as “trendy” as Amazon and Google.

Once the world's largest tech company, IBM of late has been struggling with shrinking revenue owing to its late entry into cloud-computing and mobile-tech. It has fired thousands in the US and Canada in an effort to cut costs and realign workforce. IBM has 3,50,600 workers at the end of 2018, 19 per cent less than 2013.

BIG CONTRIBUTION

Indian IT companies contributed $57.2 billion to the GDP of the US in 2017, according to Harsh Vardhan Shringla, India's ambassador to the US. India-based global IT services companies employ more than 1,75,000 workers in the US, accounting for 8.4 per cent of employment in the segment.

DRIVE SAFE

The amendments to the Motor Vehicles Act will give the Centre power to regulate taxi hailing services such as Uber and Ola. The new rules are expected to make them more compliant in safety, passenger comfort and fair pricing. The government has recognised and defined taxi aggregators as digital intermediaries or marketplaces that can be used by passengers to connect with a driver for transportation. The earlier law, Motor Vehicles Act, 1988, did not recognise cab aggregators as separate entities | AP

SAFETY NET

Around 15 crore workers will be enrolled by the Union government into its flagship pension scheme Pradhan Mantri Shram Yogi Maan-dhan in the next three years. Labour secretary Hiralal Samariya said a sizeable portion of beneficiaries will be construction workers, and even agriculture workers and self-employed retailers could be a part of the scheme.

BACK TO MOON

Nasa will partner with 13 companies, including Jeff Bezos's Blue Origin and Elon Musk's SpaceX, to land humans on the moon by 2024. These companies will provide free expertise, facilities, hardware and software to Nasa. The project will cost $30 billion, around the same as the Apollo 11 after factoring in inflation.

NEW EPISODE

Subhash Chandra’s Essel Group has reached an agreement to sell a 11 per cent stake in its flagship media company, Zee Entertainment Enterprises Ltd, to the US-based Invesco-Oppenheimer Developing Markets Fund. Zee is valued up to Rs4,224 crore. Essel will use the money to pay off a part of its loans worth Rs13,000 crore so that it can avert a looming default of Rs7,000 crore of payments to mutual fund investors in September. A statement said “The group had initiated the process of divesting its key assets, with an aim to repay all the lenders by September 2019.”

struggles-of-the-second-sex

Sat Jun 08 15:49:00 IST 2019

With the movement for women empowerment firmly taking over social spaces, the number of women in professional spaces and positions of power have increased substantially. As the landscape has changed, I have observed a trend of women with education, ambition and passion taking every industry by storm. They have taken responsibilities and stepped up into positions of authority.

Though things have been changing for the better, the process is not always smooth sailing. Women still face a number of challenges in whatever job they do. Despite the comparatively positive numbers from past years, men still outnumber women in most industries. Additionally, the number of women starts decreasing as you look higher up the hierarchy. The disparity in the quality of positions is still evident. The glass ceiling metaphor, which has been applied to women in corporate spaces all around the world, is just as relevant in our country as well. Furthermore, with society teaching us to be more accommodating and compromising from a young age, breaking this glass ceiling becomes an even more difficult task to accomplish. The expectation for women to have families and be the primary care-taker in the household also hinders their professional progress.

Women at workplace often have to deal with the additional pressure that comes with their gender. The failure of an individual woman is often taken as an example for the gross generalisation that women are somehow incapable of producing the same quality and quantity of work as men. Though these challenges make it a daunting task for women to climb up the corporate ladder, so many of us carry forward and blaze new trails in these spaces every day.

There are certain advantages that women bring to the table that can stand them in good stead when dealing with colleagues, especially subordinates. Women in leadership roles tend to do well for a number of reasons. Primarily, women tend to be more proficient when it comes to soft skills. Society trains us to be empathetic and caring from a young age, and that translates very well when leading a team and communicating with subordinates. Leadership has a lot to do with making sure that everyone in your team is productive and content, and the easiest way to achieve this is through open and thorough communication. Secondly, because the female experience is so vividly different to the male experience, women can offer fresh perspective and insight in a number of fields. I have noticed that creative fields like design, marketing and advertising always benefit from having more women on the team, as they can provide an alternative viewpoint.

Lastly, I believe that most women learn to multitask because of the various roles they are expected to fill in society. This makes a difference in management positions as juggling the needs of your subordinates, answering to your superiors and managing your own work is of paramount importance to any manager. Women also tend to nurture talent in their teams with more patience and care than men. In my experience, these advantages do make for valuable qualities in any leader.

In the time that I have spent dealing with various companies and various industries, there have been a few moments that stood out for me. I was not as confident and efficient as I am today when I came into this space. I did have the benefit of having some fantastic mentors, though. The faith they showed in me has helped me. The abilities required to lead teams and tackle projects always existed within me, as they do within every woman and man, for that matter.

I have been blessed that my ambition, passion and talent have been nurtured without any particular attention paid to my gender and I firmly believe this has brought out the best in me. Furthermore, I believe that a lot more women can become invaluable assets to companies if they are given the confidence they require to let their talent shine. This is something I always aim to nurture in any teams I lead.

In conclusion, I can safely say that the number of women in the corporate world and the quality of positions they hold has been steadily increasing. This is promising for women all over the world, but there is still a lot of work to be done if men and women are to be equal at the workplace. If we just let our talent, tenacity and maturity shine through, us women can be incredible assets to any company or industry in the world.

Kolte is the founder of Imagination Inc.

big-slice-low-risk

Sat Apr 06 11:22:50 IST 2019

Indians had traditionally been big investors in real estate. However, in the last few years, the trend shifted towards financial instruments like mutual funds and stocks. Various reasons could be attributed to that—house prices in top cities fell or had stagnated, government’s demonetisation move hit cash transactions and the uncertainties around the rollout of the Goods and Services Tax and the Real Estate (Regulation and Development) Act also had an impact.

A few developers going bankrupt and money stuck in unfinished apartment blocks also dampened sentiments. Now, people looking to invest in real estate have a safer option to do so, with the launch of real estate investment trusts (REIT).

WHAT ARE REITS?

REITs are essentially companies that own a diverse portfolio of income-generating real estate assets. They specialise in specific sectors, for instance, office REITs, which own commercial real estate assets like IT parks and business centres. There could also be REITs investing in retail assets like malls and shopping and entertainment centres. An investor can invest in these REITs, just as one would invest in a mutual fund. In a mutual fund, your money is basically being invested in shares of companies. In a REIT, you are buying units, and the money is invested in the underlying real estate assets it holds. A REIT earns income via rentals earned by leasing out the properties or capital gains or both, and that, in turn, is channelled to investors via dividends.

WHAT ARE THE ADVANTAGES FOR INVESTORS?

Investing in a REIT has several advantages for individual investors. REIT assets are generally finished properties and are already generating income or rent. Furthermore, the investments are channelled across diverse realty assets and not in just one building or IT park. They are also regulated by financial market regulators, like the Securities and Exchange Board of India. An investor can make small investments and get a slice of large real estate assets, without taking huge risks.

"A unit shall be as small as Rs2 lakh, enabling the retail investors to participate in the realty market indirectly without the need of high capital to own a real estate asset," said Parth Mehta, managing director, Paradigm Realty.

"At least 80 per cent of the value of the REIT assets shall be in completed and revenue-generating properties whereas the balance 20 per cent may go in under-construction projects which can lead to generation of alpha (future income opportunities) in terms of potential returns for investors. With this configuration of deployment largely in completed projects, the capital protection of investors money is guaranteed,” added Mehta.

Therefore, an investor will not have to go through the hassle of searching for quality properties to invest in and also not have to worry about the rents. Publicly- traded REITs also offer liquidity as they are listed on stock exchanges and allow investors to buy and sell.

“REIT provides investors with a great investment avenue and brings portfolio diversification. Globally, REIT is recognised to offer better returns with minimal risks and a stable cash flow,” said Rohit Poddar, joint secretary, NAREDCO (National Real Estate Development Council) West.

MARKET SIZE OF REITS

REITs were established by the US Congress in 1960. Since then, there are now at least 12 established markets for REITs, and a further 25-odd markets are in the nascent or emerging stage.

In Australia, the first REIT was listed in 1971. Hong Kong, which is also a major market for REITs got its first REIT IPO in 2004. In the UK, they were introduced in 2007 and Singapore got its first REIT listing in 2012.

According to consulting firm Ernst & Young, the total market capitalisation of global REITs was $1.7 trillion last year. The market cap of REITs in the US alone was close to $1.15 trillion.

REITS IN INDIA

India is still at a nascent stage as far as REITs are concerned. Market regulator SEBI came up with REIT regulations in 2014, but they failed to take off back then. In order to attract interest, various efforts like exemption from dividend distribution tax were made. SEBI has recently proposed a reduction in the minimum allotment and trading lot for public issues of REITs. Despite the efforts of the regulator as well as the government, it took five years for the first REIT to hit the market.

So far, only equity REITs have been permitted in India. But globally, there are also other types of REITs, like mortgage REITs, where money is lent to real estate owners through loans and the income generated basically is the net interest margin (the difference between the cost of funds and interest they get on the loans). Hybrid REITs is another type.

Last month, Embassy Office Parks came out with its REIT IPO, the first such in India, to raise 04,750 crore. Embassy Office Parks is backed by Bengaluru-based real estate developer Embassy Property Developments and private equity investor Blackstone Group.

Embassy’s REIT portfolio comprises 33 million square feet of leased office space across seven infrastructure projects like office parks and four prime centre offices. The assets include the iconic Express Towers in Mumbai, First International Finance Centre in Mumbai’s Bandra Kurla Complex and Bengaluru’s Manyata Embassy Business Park.

The issue priced between Rs299 and Rs300 got anchor investments from global investors like Fidelity Funds, American Funds Insurance Series, TT Emerging Markets Equity Fund, DB International Asia, Citigroup Global Markets and Schroder. It is safe to say that the Embassy Office Parks REIT IPO got a thumbs up from investors—it was oversubscribed 2.57 times.

In India, the grade A office stock is close to 500 million square feet, according to industry experts. With high demand for quality office properties and vacancies dropping, rental yields in India are expected to remain strong.

“Rentals have been a rising trend, and with vacancies being sub-10 per cent in prime markets like Bengaluru, there is a possibility of continued rental growth in near future,” said Arvind Nandan, executive director, research, Knight Frank India.

Shobhit Agarwal, MD and CEO, Anarock Capital, estimates that around 50 per cent of India’s total office stock is REITable and if REITs are successful, it could further percolate down to other asset classes like retail and logistics.

“In Canada, the average return for REIT investors was around 10 per cent in 2017, while in the UK, it hovered between 8 and 10 per cent. This average return is on all REITable assets, including commercial and residential projects together. In India, the projected five-year returns on commercial assets is an optimistic 14 per cent, largely because grade A commercial real estate has been on a protracted winning streak since 2017,” he said.

Even on a conservative basis, yields on commercial real estate are likely to be around 8 to 9 per cent, which should drive fresh investments in the sector, say industry executives.

Surendra Hiranandani, founder and director of House of Hiranandani, says REITs will bring transparency, depth and liquidity for the commercial real estate marketplace. It will contribute to the long-term growth of real estate ecosystem and stimulate overall demand in India, he feels.

“REITs are likely to propel a new wave of market activity with greater availability of funds and investments in the country’s real estate sector,” he said.

Though Embassy Office Parks is currently the only REIT issue to hit the market, the expectation is that the success of this first issue in India will pave the way for more REIT IPOs from other developers.

In June last year, financial services firm IIFL Holdings had registered a REIT with SEBI. Several global investors like Japan’s NikkoAM-Straits Trading Asia and US-based North Carolina Fund, too, have received regulatory approval to invest in India under REITs.

“Indian commercial real estate is populated with several such high-quality assets, which can be rolled into REITs very soon. For the developers, this would be a good avenue for raising finance to repay debts or to raise capital for operations and maintenance of assets held by the REIT,” said Knight Frank’s Nandan.

As per rules, REITs need to ensure 90 per cent of the net distributable cash is channelled as dividends. Therefore, investors will closely watch the performance of India’s first REITs to gauge returns. Ultimately, the success of REITs in the country will depend on the stability of the dividends and the valuations of subsequent issues.

cutting-corners

Sat Apr 06 11:21:56 IST 2019

The real estate sector has been hurt by changes in government policies in the last three years, such as, the introduction of the Goods and Services Tax and the Real Estate (Regulation and Development) Act, 2016. These measures resulted in a huge pile-up of unsold properties (around 6.75 lakh units) in this period. Now, even with the government seeking to ease the pain by announcing a 7 per cent cut on GST on under construction houses, the situation may not improve drastically.

The rates were slashed in the last GST Council meeting on February 24. For affordable housing, it was reduced to 1 per cent (8 per cent earlier) and for other under construction houses, it was reduced to 5 per cent (earlier 12 per cent). Immediately after the announcement, realty stocks moved up in bourses. The expectation was that the reduced GST rates would encourage home buyers and would help reduce unsold inventories. However, the rate cut panacea did not provide comfort to developers and home buyers, who have been at the receiving end of the government's frequently changing policy stance.

Soon after GST was introduced on July 1, 2017, developers witnessed a huge dip in buyers' interest for new homes. While for all other goods and services, taxes like VAT (value added tax) were subsumed by GST, for home purchase, the government imposed GST while keeping alive the stamp duties to be paid to state governments.

“Given this anomaly on prices of new homes, under construction units stopped selling,” said Anuj Puri, chairman of real estate consultancy Anarock. “The consumer interest instead moved to purchase of ready-to-occupy or completed properties, on which no GST were to be levied.” According to data compiled by Anarock, of the unsold properties stockpiled with developers across the country, around 6.21 lakh are under construction flats. The rest are completed. “This shows a clear preference for buying completed properties,” said Puri. “While big developers could still cope with this situation over time, for small developers it is a real bane.”

According to experts, the 7 per cent reduction in GST rates may not make home buying cheaper by a similar extent. The reason cited for this is the GST Council's decision to end tax credits available to developers on paying GST for their inputs. (Earlier, developers could pay taxes towards their inputs, such as purchase of building materials, and claim credit to reduce their tax liability at the time of sale.) "This could trigger builders to increase their base prices by as much as 5 per cent to 6 per cent," concluded CRISIL in a brokerage report on the impact of the GST rate cut.

“Reducing the rate of GST from 12 per cent with input tax credits to 5 per cent without input tax credits, on non-affordable houses, and revising it to 1 per cent down from 8 per cent on affordable housing segment is only a buyer-centric move by the government,” said Rahul Prithiani, director, CRISIL Research. “However, developers will be burdened with GST payments to vendors, suppliers, agencies and contractors. This will increase cost further, amid the already shrinking margin in business due to dynamic policies implemented by the government.” Another brokerage firm SBICAP estimated that the unavailability of input tax credit would increase home prices by up to 7 per cent. “This would make the housing sector further out of reach for the common man,” its report said.

With the input tax credit regime ending on April 1 this year, a new fear factor about the move stalling formalisation in the real estate sector has started to emerge. “The denial of input tax credits to builders also means that introducing traceability of purchases by the sector, which would have led to the rapid formalisation, would now take a backseat,” said M.S. Mani, partner, Deloitte India. According to Mani, this could also result in the continued use of black money in the sector. “In the absence of any input tax credit, major inputs and input services in real estate, including cement, steel and labour are taxable at 18 per cent to 28 per cent,” he said. “Developers need to get clarity over where these costs will be adjusted, or they will be passed on to the home buyers.”

Currently, GST is levied on all services and goods used by the developer. A builder pays 5 per cent GST on inputs like sand and bricks, a tax of 18 per cent is levied on the builder for iron and steel used in construction and on electrical cables. The tax rate is even higher at 28 per cent for basic construction inputs like cement, ready mix concrete and sanitary fittings. Labour and other services availed from third parties attract a 18 per cent GST to be paid by the developer.

Developers have been demanding a reduction of GST rates on at least cement to a much more benign 5 per cent rate. However, the GST Council is yet to take a view on this. “A ministerial panel was formed by the Council to look into this issue and see if any further relief could be provided,” said Subhash Chandra Garg, finance and economic affairs secretary. “A final view may be taken in the Council’s next meeting on March 20. Some rules about the reduced tax rate on housing would also be finalised.”

The government had last month constituted a seven-member group of ministers to look into GST-related issues of the real estate sector. Its agenda was to analyse the tax rate of GST on the under construction residential properties to boost the realty segment. Members of the GoM comprise finance ministers of five states—Sudhir Mungantiwar of Maharashtra, Krishna Byre Gowda of Karnataka, T.M. Thomas Isaac of Kerala, Manpreet Singh Badal of Punjab and Rajesh Agarwal of Uttar Pradesh. Goa's Panchayat Minister Mauvin Godinho is also a member.

Meanwhile, many established builders like the Lodha Group, K Raheja Corp and DLF have already indicated that the end of input tax credit would shrink their margins and the impact of higher cost would be passed on to their consumers. “The availability of input tax credit helped developers to reduce the cost to some extent,” said Prashant Bindal, chief sales officer, Lodha Group. “But now, in the absence of input tax credits, developers across the sector will face an increase in the cost of construction. The cost of properties is now likely to rise by 5 per cent to 6 per cent.”

Like Bindal, most builders believe that the tax cuts would help only a handful of builders to liquidate their unsold units. Experts believe tax cuts have to also benefit the developer if it has to reach the buyer. “The reduction of GST rates on home purchase is some what superficial,” said B.K. Goenka, president, ASSOCHAM (Associated Chambers of Commerce and Industry of India). “GST on cement, for instance, is too high and you cannot build a project without cement.” ASSOCHAM and several developer's associations have therefore demanded that the GST rate in cement be reduced to 18 per cent.

Some builders are of the opinion that a slightly higher GST rate and the retention of the input tax credit would have lowered actual home prices even more. "It would have been better if the Council would have recommended slightly higher rates, say 3 per cent and 7 per cent, for under construction affordable and non-affordable housing, respectively, with the facility to avail input tax credit. This lower slab with restriction on input tax credit would lead to higher credit cost for builders as well as home buyers,” said Sanjay Dutt, CEO, Tata Realty.

Dutt suggested that the government should have bestowed some more benefits on beleaguered builders. “A lower cost for developers would have prompted the fence-sitters who had delayed their home purchase in last two years, to actively buy homes. It could have been a win-win for all,” he said. Instead, he said, home buyers would still prefer to wait and watch if builders can still manage to pass on more benefits to them.

Already a number of real estate sector trade bodies have represented to the indirect tax regulator seeking more relief. “We have represented to the GST Council that it is disappointing it has chosen to disallow developers from claiming input tax credit,” said Rajeev Talwar, CEO, DLF and chairman of National Real Estate Development Council (NAREDCO), the largest real estate industry body in the country, during a press meet earlier this month. “The real estate sector is currently in a very poor shape and needs significant help from the government to finish projects and grow at the rate that is needed for the economy as a whole.”

In a representation made to the GST Council and to Union Finance Minister Arun Jaitley, NAREDCO members have said: “It is imperative that the government remove the stamp duty and reduce the GST rate applicable, especially keeping in mind the housing for all target of 2022.” The government, so, far believes that the GST rate cut in home purchase would not affect tax collections. Ministers in the Council have independently admitted that it is still a long way off from improving sentiments of home buyers and boosting the sector which was registering stellar financial performance before demonetisation and GST were announced.

An assessment by the revenue secretary Ajay Bhushan Pandey on the revenue impact of the decision on the real estate sector is likely to be discussed during the next GST Council meeting. Indications from finance ministry officials are that the government had registered the issues that have risen after last month's decision.

“There are scope for some further rationalisation of tax rates of individual items used by housing developers,” said Pandey. “We are exploring some options in that direction.” While developers and home buyers hope that the GST Council abolishes stamp duty on new properties, the idea had faced objections from a number of states and may not be taken up for discussion any time soon.

fundamental-fillips

Sat Feb 09 12:29:47 IST 2019

Non-banking financial companies (NBFCs) have been in the news for all the wrong reasons recently. The sector took a beating in the stock market with defaults and liquidity challenges, specifically related to one large NBFC—Infrastructure Leasing and Financial Services (IL&FS). The IL&FS group defaulted on commercial papers (CPs)—promissory notes with a validity of one year. Several corporates, mutual funds, and insurance companies had their funds locked in IL&FS debt instruments such as CPs and non-convertible debentures. The situation created a liquidity shortage of close to Rs1lakh crore in the system.

The NBFC lending model is also under pressure as a result of increased internal and external forces such as stiff competition and the entry of fintech players leveraging technology-based operating models. Additionally, dynamic regulations are increasing the cost to comply and restricting the ability to freely impose pricing. Experts say that economic volatility, shrinking credit performance and pricing pressure (because of eroding margins and other disruptive forces) necessitate a relook at the building blocks of a robust, sustainable and profitable NBFC business model.

Although the problem seems isolated, it has caused concern among regulators because of the risk of contagion. Given that the NBFC sector is now large enough to impact the whole economy, this entails some remedial measures, including new compliance measures, lending slowdown and potential consolidation by larger players. Regulatory changes and government initiatives have altered the operating mechanism and necessitated changes in the risk management framework for NBFCs. In the first half of 2018, the RBI pro-actively cancelled licences of 368 NBFCs, deeming them economically unviable for failing to meet the requirement of Rs2 crore of net owned fund. This was more than double the number of cancellations in 2017.

“The health and success of the NBFC sector has far-reaching implications on the inclusive development of the economy, financial inclusion of diverse population segments, capital formation and eventually the growth in GDP,” says Rajendra Kumar Sinha, chairperson, Centre of Excellence in Banking, IFIM Business School, Bengaluru. “NBFCs have played a critical role as a key contributor to the economy by providing a fillip to infrastructure, employment generation, wealth creation and access to financial services for the rural and weaker sections of society. The sector continues to remain at the forefront in driving new credit disbursals for the country’s under-served market.”

Over the last five years, the NBFC lending book has grown at nearly 18 per cent, driven by a deep understanding of target customer segments, use of technology advances, lean cost structures and differentiated business models to reach credit-starved segments. It is estimated that the NBFCs may capture 20 per cent of credit market by 2020. However, the NBFC market has been dominated by large players, and many small players have struggled to scale up operations profitably.

Experts feel that in the wake of the IL&FS crisis, RBI may embark on another clean-up of the sector, and resort to cancellation of NBFC licences and making it difficult for new entities to obtain NBFC licences. “With the timely intervention of the government in resolving the crisis in the concerned NBFC, followed by the much needed clarifications and awareness messages given by the representative body— Finance Industry Development Council—and the leading players in the industry, the sudden panic seems to have died down,” says Sinha. “The sector has withstood such turbulent times even in the past, and has always come out stronger.”

Many experts from fintech companies believe that the NBFC sector will recover soon. “A recent report by the World Economic Forum and Bain & Company shows that consumer spending in India will increase from $1.5 trillion [now] to $6 trillion [by 2030],” says Sameer Aggarwal, founder and CEO of instant lending startup RevFin. “With this growth will come a demand for credit, especially through digital channels. Most of the growth will be in digital lending.” He adds that challenges of the macro economy will continue in India and globally. “Also, as new customer segments start demanding loans, it will become difficult to assess them based on existing criteria,” says Aggarwal. “Therefore, to survive in the future and to grow, NBFCs will need to make investments in digital technology, analytics, and development of alternate data sources to outperform their competitors. This can happen through partnerships with fintech companies, or better still through building in-house teams.”

Aggarwal also feels that investor confidence in the NBFC sector is low at the moment. “Being an election year, there is also general uncertainty in the market,” he says. “These are only short-term trends as the underlying credit demand and performance remains strong. The sector will bounce back in the next few months.” Besides this, says Aggarwal, liquidity is the biggest challenge for the sector. “When liquidity is low, growth gets restricted,” he says. “In such a scenario, delinquency ratios also increase because of the shrinking book size. When delinquency ratios increase, it leads to further reduction in investor confidence. Cost and time for loan processing also remain very high.” He says that Aadhaar-enabled KYC was instrumental in solving this problem. “Post the Supreme Court verdict, that has also stopped,” says Aggarwal. “While the government is mulling a new regulation for this, it is doubtful whether this can happen so close to the elections. Another challenge will be data security. This is a global challenge and governments everywhere are working on strengthening regulation. Compliance with new regulations will be time consuming and expensive.”

Analysts also say that with the recent liquidity crisis, there is a cloud of confusion, and all NBFCs, irrespective of their balance sheet strength and businesses, are being painted with the same brush. “What started because of default on debt obligations by a single entity is now being given the unfair perception of an 'industry-wide' problem, pushing up markets-based borrowing costs and affecting liquidity strength for everyone in the system,” says Piyush Khaitan, founder and MD, NeoGrowth Credit Private Limited. “The government and the RBI are taking swift measures to ease liquidity crunch fears. Securitising the assets should be the first step. Sufficient system liquidity comes second. Thirdly, the market needs to feel comfortable that the financial sector is well-regulated.”

Market experts are also of the opinion that banks are following a conservative approach by reducing their exposure to the NBFC sector. This is proving to be a challenge for smaller NBFCs to raise funds as most of the banks have decided not to fund NBFCs below a certain rating. Personal finance experts also feel that though the short term outlook for the sector looks tough, things will improve in the long term. Since early September 2018, when IL&FS defaulted, this market for short-term capital has completely dried up for many entities resulting in these institutions needing to cover their own funding gap with longer-term bond issuances, asset sales, and equity raises. This situation has eased slightly as the government has made some capital available through banks and has relaxed a few rules to enable funds to flow more freely. That said, investor confidence is still weak and the fundamental problem of duration mismatch—NBFCs borrowing in short terms and lending in long terms—is being scrutinised more closely by investors now.

“Over the longer term, India still has a large population of non-banked and under-banked individuals and businesses, so there is plenty of demand-side opportunities that NBFCs are best placed to fulfil,” says Lucas Bianchi, cofounder, Namaste Credit, a Bengaluru fintech firm. “Over the past few years, NBFCs have come out with new underwriting and operating models that have resulted in their rapid growth. For instance, NBFCs like NeoGrowth has a product ‘Merchant Cash Advance’ where a certain line of credit is extended to businesses in exchange for a percentage of your daily credit card and debit card sales. Undoubtedly, some of these new products and processes will survive the current challenging environment and thrive as the liquidity crisis eases.”

Bianchi feels that the liquidity problem can be improved by increasing equity capital among NBFCs in order to reduce leverage ratios and improve confidence among commercial paper investors that their funds are secure. “The situation can also be addressed through a range of government initiatives, including an improved regulatory framework that gives more flexibility to capital providers and some sort of guarantee that provides a backstop for high-quality assets,” says Bianchi. “There are many ways of doing this. In the US, for instance, the government extended its financial support to money market mutual funds during the last financial crisis to ensure that the net asset value of mutual funds was maintained above $1.”

The NBFC crisis has already affected the kind of business they do with borrowers, fintechs and each other. In particular, interest rates have increased significantly across many loan types and underwriting standards have been tightened. For those fintechs that relied on NBFCs to provide funding to their clients, the decreased liquidity resulted in much less capital being available. The overall decline in loan volumes has had a dampening effect across the industry.

Experts feel that different measures can be taken to help ease the liquidity crisis in the NBFC sector. “The focus should be on increasing the money available to the sector,” says Satyam Kumar, co-founder and CEO, LoanTap. “One way can be by increasing the sectoral caps of LIC and pension funds for the money which moves into NBFCs. Also, banks under the RBI's prompt corrective action can lend to healthy PSUs, which, in turn, can lend to NBFCs.” Kumar says the NBFCs which are using technology to reach out and serve the customers have been affected by the Supreme Court's Aadhaar judgment. “The time and money saved by processes like e-KYC and e-agreement have been impacted,” he says. “One immediate action should be to get all the banks on the National Payments Corporation of India’s platform for net-banking based 'E-Mandates'. Our country still has lot of untapped credit requirement. All the NBFCs which can save on operating expenses and which provide innovative solutions to the customers, would do well.” The corrective actions taken by RBI and government’s positive approach to the sector, says Kumar, has built confidence and will definitely help bring stability to the NBFC sector. “More and more Indians are becoming tech savvy,” he says. “Smart phones have reached even the hinterlands. The NBFCs which do not reinvent themselves in line with technological changes will lose out.”

Banking experts such as Sinha also feel that in order to sustain the market, NBFCs should reinvent themselves and formulate a segmentation strategy, defining target customer segments, product proposition, distribution channels and geographical locations for operations. “The enterprise strategy must play on the NBFC lender’s strengths and focus on right market opportunities that will enable differentiation and are likely to generate success,” says Sinha. “At the same time, NBFCs must offer customers personalised, seamless, round-the-clock sales and service interaction, with well-entrenched engagement programmes to attract and retain customers, while maximising lifetime value.” He adds that lenders should also be willing to overhaul processes and transform operations instead of resorting to short-term mechanisms. “NBFCs must leverage technology-based tools to transform underwriting and decision making, thereby, helping drive competitive advantage and robust risk management,” says Sinha. “Overdue collections must adopt a customer focused, data-driven, relationship-based approach to maximise recovery and minimise write-offs. NBFC players should also have efficient risk detection, management and mitigation mechanisms to survive regulatory dynamics and market uncertainties and ensure that lenders are well capitalised to operate.”

Given the crisis and despite concerns surrounding the sector, NBFCs with robust business models, strong liquidity mechanisms, governance and risk management standards are well positioned to take advantage of the market opportunity. Hence, it is even more critical for new-to-market NBFCs to define and implement a balanced strategy that meets requirements across essential, core capabilities and differentiates across value-adding capabilities.

security-check

Sat Feb 09 11:39:52 IST 2019

THE JANUARY announcement allowing tokenisation of debit, credit and prepaid card transactions to enhance the safety of the digital payments ecosystem in the country is a welcome move. It will be highly beneficial to address the safety concerns of payment channels, especially when card information is stored and saved for future transactions. With strong industry backing, clear guidelines and well-devised reference implementations, tokenisation is a positive move.

India has been undergoing a number of changes and developments in the form of reforms in the last few years. The reforms have led to higher growth rates, stable economy and improvement in macroeconomic stability and global integration. Further, there is an improvement in the business environment with the implementation of stable governance standards. The financial landscape, both in India and globally, has changed significantly over the last decade. Key forces driving this change include increased customer expectations, emergence of new disruptive technologies, new-age technology competitors and evolving regulatory requirements.

All this is making us redesign our strategy and allocate investments around technology. The payment ecosystem in the country has witnessed a series of innovations that has helped the industry grow. This holds true for payment data security as well, wherein there have been significant initiatives over the last few years. Leading the charge is a technology that has become a game changer for the industry: tokenisation.

Tokenisation is a highly-secure method of protecting payment and customer identification credentials. It is the process in which sensitive information is replaced with a randomly generated unique token or symbol. These tokens would ensure that data is not transmitted or stored in an insecure format. However, for the use of tokenisation to be efficient in the payments industry, a universal standard must be created to ensure that merchants can support the technology across multiple providers, and without negatively impacting customer experience. Moreover it protects the cardholder data at many points in the transaction lifecycle, especially during post-authorisation, and for recurring transactions once a card has been presented.

Essentially, tokenisation shields bank account numbers and credit card numbers in a secure, virtual vault that can be transmitted across wireless networks without adding unnecessary risk. To work, a payment gateway is needed to store sensitive data, which allows the random token to be generated. When customers swipe their credit or debit cards at the checkout counter, their personal account numbers (PANs) are not stored in the merchant's payment system. Instead, these 16-digit PANs get replaced with randomly generated token Ids.

Tokenisation offers a higher level of security as long as the system is logically isolated and segmented from data processing systems and applications that process or store the sensitive data replaced by tokens. Once the transaction goes through, the payment processor sends a confirmation back to the merchant with the randomly generated token ID which is stored in place of the PAN data in their system. At no point does the credit card data ever get stored within the retailer's environment. Furthermore, tokenisation can be the answer to securing not just payments, but other aspects of commerce as well, including the transmission and storage of electronic health records and age verification identity checks.

Over the course of time, it can be integrated with other technologies. However, to make the best of this technology, its elements cannot be adopted in a silo, and instead, they have to be deliberately ingrained into the core enterprise architectural fabric, which, in turn, must be driven by a lean, agile and dynamic operating model. In a majority of the cases, new-age channels and offerings have been layered onto an ageing core infrastructure, severely limiting their ability to integrate seamlessly and respond to the changing business demands.

For this, like in any payment initiative, the existing applications and infrastructure need to be updated and built to acclimatise the change. Also, the interoperability aspect that makes digital wallets far more convenient needs to be applied to tokenisation as well. This will h elp the technology be accepted at all point-of-sale terminals.

Mehta is a partner, Deloitte India.

betting-on-the-underdog

Sat Feb 09 11:43:41 IST 2019

WHEN YOU THINK of saving taxes under Section 80C of the Income Tax Act, your thoughts might immediately turn to traditional options like Public Provident Fund (PPF), endowment plans, National Savings Certificate (NSC) and the five-year fixed deposit. However, it would be a folly to ignore Equity Linked Savings Schemes (ELSS). They can offer tremendous value for money, ease of investment and, above all, the potential for high returns.

What is ELSS?

ELSS is a mutual fund where your money is invested in a portfolio of equity or equity-linked instruments. As a result, it can offer high returns in the long term with moderate risk. We have seen that equity as a long-term investment provides returns that comfortably exceed those from crowd favourites such as PPF, NSC and the five-year deposit. For example, Sensex has returned 10- and 20-year returns of approximately 11-12 per cent on average. ELSS schemes, too, have the potential to offer similar returns. Recent term returns from ELSS (and most other equity investments) have been in the red because of various macroeconomic reasons. However, any equity investment should be done with a long-term outlook in order to mitigate risks and maximise returns.

Key benefits of ELSS

Apart from the high returns, ELSS is an excellent tax-saving instrument. It has the lowest lock-in—just three years—among all tax-saving investments accepted under Section 80C. You can invest up to 01.5 lakh in one or many ELSS schemes of your choosing. Until March 31, 2018, returns from ELSS were entirely tax-free. Since FY 2018-19, equity long-term capital gains (LTCG) over 01 lakh in a financial year are taxed at 10 per cent. An equity investment becomes long term in one year. The 10 per cent tax on LTCG makes it marginally less tax-efficient than PPF. However, this is not an immediate problem for small investors as the tax incidence from ELSS can be smartly avoided by withdrawing gains less than Rs1 lakh.

How the lock-in compares

Let us compare the ELSS lock-in to traditional tax-savers. These typically include the five-year fixed deposits (FDs), PPF, NSC and endowment plans. ELSS is a true winner when compared to these instruments as it has the shortest lock-in period of three years. Your PPF matures in 15 years. The NSC and tax-saver FD mature in five years. On endowment plans and Unit Linked Insurance Plans (ULIPs), you need to make three to five years of mandatory payments. But with ELSS, an investment can be fully redeemed in three years from the investment date.

How the returns compare

Since ELSS invests in a diversified manner in equity funds, the returns that it offers are staggering and capable of beating inflation. As per CRISIL-AMFI’s Performance Index for March 2018, the average returns are 10.58 per cent for one year, 18.07 per cent for two years, 9.14 per cent for three years, 16.94 per cent for four years and 17.73 per cent for five years. These are past returns and do not guarantee future performance. However, it would be reasonable to expect inflation-beating returns from equity in the long term. In comparison, PPF and NSC currently return 8 per cent, a five-year FD returns 7 to 8 per cent. The returns from endowment plans are the lowest and may not be enough to beat inflation.

Ease of investing

With ELSS schemes, you can make a lump sum investment or do a monthly Systematic Investment Plan. The choice is yours. The former is ideal if you already have the amount to invest, and the latter is better if you want to develop an investment habit steadily. It is also a smart way to invest when you are young and have a lower income, as investing in ELSS requires a minimum of 0500. It is also convenient to invest in ELSS because you can do so from your cellphone or computer. Just log on to the website of any mutual fund distributor or fund house, and buy the fund you need. This can be done without getting up from your couch.

How to pick a rewarding ELSS

There are several attractive ELSS schemes, with impressive track records. When picking from them, there are a few things you need to keep in mind. Do not look at historical returns only. Instead, check risk-adjusted returns to get an accurate picture of the gains that you can expect. Look into the ELSS’s performance not just in recent times, but for the past seven to ten years to see if it has been able to consistently cross its benchmark or is on a recent winning streak.

Check the funds the ELSS invests in to understand if it ties in with your risk appetite. While most ELSS investments are diversified, some lean towards mid-cap stocks that carry high risk and offer high returns as well, while others rely on large-cap stocks that are typically a safer bet. So, it is important to look into the fund’s underlying stocks.

It goes without saying that you should pick ELSS from asset management companies that have been in the game for many years, have statistical data to back their claims as well as qualified fund managers.

So, in this tax-filing season, if you are on the hunt for a tax-saving investment that also offers excellent returns, picking ELSS may be your best bet.

The writer is CEO, BankBazaar.com.

borrow-an-experience

Fri Jun 07 17:36:50 IST 2019

The idea of travelling has transformed in the last decade. Today, millennials want to immerse themselves in life-changing experiences. Whether it is the hills or the beaches, a long break or just a short weekend getaway, travel has a profound impact on one's well-being. It rejuvenates, gives rest to the working mind and, more than anything, helps in self-reflection.

By providing such benefits, it becomes one of the most important tools for preparing ourselves for the future.

For example, there are annual expeditions to Ladakh, where responsible travellers from around the world congregate. They trek, swim and cycle to reach a village that has never seen electricity. And then, they electrify that village using solar power. There are villages in the forgotten hills, where entrepreneurs offer home stays and natural experiences such as folklore interpretation, agriculture learning, trekking and camping. Sometimes, these villages are opened to tourists to be part of their local festivities as well. Today, there are art trails, food trails and rural tours that are all experiential in nature.

In fact, a few companies which place the welfare of their employees at the core offer sabbaticals or short-term opportunities to work remotely. Even though they are few, we will see more such employee engagement programmes being adopted by companies in future. It could be offered to all employees or only to high-performing candidates. Companies would do this because they realise that travelling has become a way of life and it has a positive impact on performance outcomes.

One vacation a year is a thing of the past. Recent findings on the travel patterns of millennials suggest that they go on more vacations than their parents. Once the holiday schedule is out, travel weekends are often blocked. This is beyond the 7 to 14 days vacation during summers or winters. For them to take advantage of everything that travel has to offer, the core issue is finance. To travel frequently, to make travel an experience or to explore new destinations, good inflow of money is required. Often, travel becomes a challenge due to limited savings, lower salaries or even less credit available on credit card. But this generation is internet savvy and is open to adopting online financial services.

Holiday destination research starts on digital and social platforms and financial aid is readily available from online lending companies. Many such online financial institutions offer holiday loans that help millennials fuel their desire for travel. Without the need to submit one’s travel details and with a flexible repayment structure, these loans are a really good option to fund entire vacations. Holiday or travel loans are available from Rs50,000 to Rs5 lakh for a long tenure (12 to 24 months) to accommodate travel cost within salaries. Keeping in mind this generation’s appetite for digital processes, these platforms ensure that the loan application process is pretty straightforward. You can apply online without having to report in person anywhere. Also, holiday loans from fintechs are cheaper than a credit card.

A simple online application along with a valid identity proof, bank statement, address proof and a couple of salary slips will get the job done. Once approved, the amount is disbursed to the beneficiary within 24 to 36 hours of the initial loan application.

All Indians, and not just those in the millennial segment, are travelling more. This shows that holiday loans will become more popular. With reasons ranging from understanding different cultures to having an envious Instagram feed, millennials are determined and passionate about integrating travel into their lives. Holiday loans make sure that they do not need to maximise their credit card limits or go broke while travelling.

Kumar is cofounder and CEO of LoanTap.

rationalising-ratio

Fri Apr 05 14:28:47 IST 2019

A good credit score, the result of prudent financial management practices, can come in handy when you dream of having a car or a home financed in the future. Easy to build yet easier to ruin, a credit score is the sum of a few judicious calculations in terms of utilising your available credit options vis-a-vis your income. Lenders can squarely judge whether you are experiencing financial stress or not, going by your debt-to-income ratio and credit-utilisation ratio (CUR). Thus, keeping key ratios related to utilisation, debt levels and balance to limit can improve your overall credit score, and get you a better appraisal from lenders.

Let us understand more about these simple ratios:

Debt-to-income ratio: It is the ratio of the amount that goes towards paying debts and other financial obligations expressed as a percentage of gross income. For example, if you earn Rs 25,000 a month and spend Rs 12,500 to pay credit card bills and other debt obligations, including loan EMIs, your monthly debt-to-income ratio would be 50 per cent. Even though the debt-to-income ratio does not directly influence your credit score, it forms a critical part of your overall credit health and it is considered by lenders in loan application process.

Credit-utilisation ratio: Credit-utilisation ratio is a measure of your credit card balances versus the credit card limit. This is one of the factors influencing your credit score. To elucidate further, if a person’s overall credit card spending limit is Rs 1 lakh and his current outstanding balance is Rs 40,000, then, his CUR stands at 40 per cent. As against this, another individual who spends around Rs 40,000 a month, after acquiring a larger credit card limit of Rs 2 lakh manages to keep his CUR at a constant level of 20 per cent.

Both debt-to-income ratio and credit card utilisation are a measure of the financial leverage one has built over time. While there is no single cut off defined for these parameters, a continued increase in leverage could lead to drop in score. No single ratio is considered in isolation while calculating your credit score and your repayment regularity, level of borrowing, type of borrowing, etc, are other important aspects. However, the two key ratios say a lot about your efficient debt management and controlled spending, it holds much insight for a lender about your bonafide intentions when it comes to servicing debt obligations and hence influence the lending decision for lenders.

Jayaraman is MD, Decision Analytics at Experian Asia Pacific.

have-money-will-travel

Fri Feb 08 15:42:42 IST 2019

Unlike the previous generation, millennials today place more value in acquiring experiences than commodities. Did you know that 62 per cent of Indian millennials travel between two to five times a year, from short domestic trips to longer international sojourns?

With Indians travelling more than before, banks and financial institutions are offering loans at lucrative interest rates. Travel loans are quickly emerging as the preferred credit option; they are cheaper than credit cards, and have a faster disbursement turnaround time, less documentation and flexible repayment terms. If you are planning to take a travel loan, here are some points to keep in mind:

TAKE ONLY WHAT YOU REQUIRE

Typically, a travel loan can range from Rs10,000 to Rs25,00,000, with interest rates ranging from 11 per cent to 21 per cent. However, the higher the loan amount, the more you will have to repay. Hence, it is important to assess how much of the travel cost you can cover with your savings, and then decide on how much money, if any, needs to be taken on loan.

CHECK SECURED VERSUS UNSECURED CREDIT EXPOSURE

A right mix of secured and unsecured loans is important to maintain a good credit history and a high credit score. If you already have a large number of active unsecured loans (loans without collateral), such as an education loan, multiple credit cards and personal loans, it is not advisable to add to the burden with a travel loan.

A high number of unsecured loans on your credit report can negatively impact your credit score and may impede your chances to get a loan in future, especially during emergencies. Avoid falling into the debt trap by ensuring that the total EMIs you pay only amount to 30 per cent of your monthly income.

HAVE ALL DOCUMENTS AT HAND

Though getting a travel loan does not need a lot of documentation, you will need your address proof, identity proof, bank statement, salary slips and passport size photographs, in case you are a salaried individual. If you are self-employed or not yet employed, the requirements may vary. Some lenders might also require additional details such as your income, airfare, accommodation bookings and travel plans. Check with your lender and keep all your documents at hand to expedite the loan disbursement.

CHOOSE YOUR REPAYMENT TERM CAREFULLY

Usually, the repayment tenure on travel loans ranges between 12 and 60 months after the loan is availed. The interest rates on these tenures will also vary. Though you might consider a longer repayment term with a lower interest rate, the truth is you will pay more than what you would pay if you opt for a shorter one with a relatively higher interest rate. Also, check the lender’s terms and conditions about a prepayment option if you would like to pay more in case you have a bit of excess cash in hand, like from a bonus received.

In the midst of your travel plans and excitement, remember to keep your account funded for any upcoming EMIs scheduled for while you are away. Ensure you do not miss a single payment due date, which can impact your credit score. And always remember to monitor your credit score and report regularly. This will help you keep a tab on your credit portfolio, watch for score trends and ensure you are not taking on more credit than you can responsibly manage.

Ahlawat is head, direct to consumer interactive, TransUnion CIBIL.