Beware of ULIPs

The so-called turf-war on ULIPs that SEBI and IRDA have been fighting has now taken on a life of its own. In reality, just about the least important thing is who regulates ULIPs, while the most important thing-or rather, the only important thing-is that investors understand what they are getting into and make the choices that are best for them. I find that there's a great deal of misinformation floating around about ULIPs and why exactly are so investment advisors so critical of them. ULIP proponents generally give a set of reasons which in their opinion invalidate criticism of ULIPs.

Argument: ULIP expenses have been lowered by IRDA. ULIP expenses are now down to just 3 per cent for ULIPs of up to 10 years and 2.25 per cent for longer ones. Mutual funds, by comparison, have a higher fund management charges.
Reality: The way IRDA has framed the rules, 2.25 or 3 per cent is effectively the average over the entire lifetime of a ULIP. The charges are heavily front-loaded. During the first year, these charges are as high as 40 to 70 per cent. If the customer cannot continue with a policy for any reason, then his real expenses are far higher. And as it happens, a huge proportion of policies lapse during the earlier years. The front-loading has no logic, except to enrich insurers and agents. And fund management charges being lower than mutual funds is a not a full comparison. In mutual funds, total expenses are capped at 2.25 per cent for equity funds and less for other funds. These are not comparable to the fund management charges of ULIPs because ULIP customers also pay premium allocation charges, policy administration charges, mortality charges, and for guaranteed ULIPs, guarantee charges. Comparing fund management charges alone is a joke.

Argument: ULIPs have led to a massive rise in insurance penetration in India.
Reality: Insurance means insurance, in the sense when the insured person dies, his family gets money to pay for food, rent and education. In a country with as little social security as ours, the  growth of insurance has to mean the growth in the reach and quantum of risk cover for lives. To call  a non-insurance, market risk-bearing product such as ULIP insurance and then present it as evidence of the growth of insurance is simply dishonest.

Argument: The insurance industry provides a huge amount of employment. 30 lakh people have found work through insurance.
Reality: If ULIPs were a sound financial product than this would be wonderful news. Since they are not (see above reasons), this issue is a complete red herring. It is not the responsibility of ULIP customers to provide agents employment by giving away vast proportion of their premiums as commission. If crores of people's money has to be mis-invested to provide employment for lakhs of people, then it's better for those lakhs to find some other, more productive employment.

Argument: ULIP fund flows are important for the stock market and for infrastructure development.
Reality: The same as the employment argument. It is not the responsibility of ULIP customers to buy expensive and non-transparent investment products so that the stock markets can be boosted. Wouldn't it be possible to create infrastructure if ULIPs could be made more investor friendly.

I find the last two points to be particularly dishonest. They somehow imply that if ULIPs were made more investor-friendly, then lakhs of people would immediately become unemployed and money would stop flowing into development. However, ULIP critics like myself have nothing against the concept of ULIPs. If ULIP cost is brought down and made non-front-loaded; and if transparency is enhanced to the level of other asset classes, then they would be a very good product. The fact that the ULIP's enforce gradual SIP-style investments could actually make them a superior product.

Also, do not forget the ULIP charges that are cut from an investors money so that the Insurance house can run smoothly !

Special Thanks to Value research online for write such a brilliant article !

Petroleum and Natural Gas Regulatory Board approves provisional gas tariff structure

Petroleum and Natural Gas Regulatory Board (PNGRB) has provisionally approved tariff rates for three natural gas pipelines, namely, the East-West Pipeline Project (EWPL) operated by Reliance Gas Transportation Infrastructure Ltd (RGTIL), the existing HVJ-GREP-DVPL network operated by GAIL and the DVPL/GREP Upgradation project operated by GAIL.

The regulator has approved gas transmission tariff of Rs. 52.23 per million Btu (mmbtu) for the EWPL, as against the RGTIL proposal of Rs. 53.64/mmbtu. The tariff rates for the HVJ-GREP-DVPL and DVPL/GREP Upgradation projects have provisionally been approved at Rs. 25.46/mmbtu and Rs. 53.65/mmbtu, respectively. GAIL’s proposal to increase tariff rate for existing HVJ-GREP-DVPL from the existing Rs. 28.48/mmbtu to a single levelized postal based tariff of Rs. 35.39/mmbtu (including DVPL/GREP Upgradation) has not been accepted by the board, as it would result in higher tariff charges for the existing customers.

The provisional tariffs will be applicable from the date of commission for the EWPL (i.e. 1-April-2009); and retrospectively from 20-Nov-2008 for existing HVJ-GREP-DVPL; and from the date of commissioning for the DVPL/GREP Upgradation. It may be noted that the tariff rates are provisional only and may be finalized on later date by the PNGRB on receipt of actual data by the operator.

“The board’s decision is a step forward and likely to provide more regulatory clarity to the gas transmission business” commented Ms. Revati Kasture, Head of Research, CARE Ltd. The provisional tariff structure is very positive for GAIL, as the 10.6% decline in its existing HVJ-GREP-DVPL pipelines would be outwitted by an increase of 88.4% in the DVPL/GREP Up-gradation, implying significant upside in future tariff revenues. CARE Research estimates that the proposed tariffs charges would imply tariff revenue of about Rs 19 billion from existing network and Rs 36 billion from up -gradation, totaling to Rs 55 billion for GAIL in 2010-11, as against Rs 49 billion proposed by GAIL under levelized postal based tariff of Rs. 35.39/mmbtu.

However, the tariff charges are applicable retrospectively from 20-Nov-2008 for existing HVJ-GREP-DVPL network. This would result in one-time pre-tax charges of Rs 3.1 billion for GAIL due to higher tariff charged to existing customers. Whereas, RGTIL is likely to show tariff revenues of about Rs 54 billion in 2010-11 as a result of the tariff structure. The one-time pre-tax charges due to retrospective implementation would be Rs 0.8 billion in case of RGTIL. The government has shown inclination towards approving an overall capital expenditure in range of Rs 1.5 million-per-km-per-mmscmd, and we expect this to remain as benchmark for future pipeline projects. On the other hand, the board has adhered to its volume provisions specified under the “Determination of Natural Gas Pipeline Tariff” by not accepting RGTIL’s higher volume assumptions and GAIL’s unaccounted gas volume assumptions
source

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Glimpse of RBI Annual Policy -2010-11

 Following are the highlights of the Reserve Bank of India's Annual Policy Statement for 2010-11

MAJOR HIGHLIGHTS

· Hikes reverse repo, repo rate, CRR by 25bps each

· Reverse repo, repo rate hikes with immediate effect

· CRR hike effective from Apr 24

· CRR hike to impound 125 bln rupees from banks

· FY11 GDP growth projection at 8.0% with upside bias

· March end inflation projection at 5.5%

· FY11 banks' credit growth projection at 20.0%

· FY11 banks' deposit growth projection at 18.0%

· FY11 money supply growth projection at 17.0%

STANCE


· Hike in policy rates, CRR to help contain inflation

· Hike in policy rates, CRR to anchor inflationary expectations

· Measures to sustain recovery process

· Govt borrow needs, private credit demand will be met

· Hikes to align policy tools with evolving state of econ

· To closely monitor macro events, prices; take warranted steps

· Econ firmly on recovery path, industrial growth broad based

· India economy resilient, recovery consolidating

· FY11 econ growth to be higher, more broad-based vs FY10

· Lower policy rates can complicate inflation outlook

· Lower policy rates also impair inflationary expectations

· Despite 25bps hike in rates, real policy rates still negative

· Need to normalise policy rates in calibrated manner

· Inflationary pressures "accentuated" in recent period

· Inflation getting increasingly generalised

· Capacity constraints to re-emerge as econ growth rises

· Must ensure demand-side inflation does not become entrenched

· FY11 fresh govt bond issuances 36.3% higher vs FY10

· FY11 fresh govt bond issuances "a dilemma"

· Policy considerations demands liquidity be curbed

· Govt borrow needs supportive liquidity conditions

· Need to absorb liquidity without hurting govt borrow plan

· To respond swiftly, effectively to inflationary expectation

· To actively manage liquidity, ensure private credit demand is met


INFLATION

· Significant changes in drivers of inflation in recent months

· Overall food inflation high despite seasonal ease

· Rise in global commodity prices upside risk to inflation

· Household inflation expectations remain at elevated level

· Demand pressures may rise as recovery gains momentum

· Monsoon prospects unclear, blur FY11 inflation outlook

· Volatile crude prices cloud FY11 inflation outlook

· To ensure price stability, anchor inflationary expectations

· To monitor overall, disaggregated components of inflation

· keeps medium-term inflation objective of 3.0%

· An unfavourable monsoon may exacerbate food inflation

· Unfavourable 2010 monsoon may add to fiscal burden


GROWTH

· GDP projection assumes normal monsoons

· GDP projection also assumes good industrial, services growth

· Industrial growth to take firmer hold going forward

FISC

· Fiscal prudence to avoid crowding out private credit demand

· Fiscal prudence must shift to structural improvements

· Govt borrow "very large", can pressure interest rates .
GLOBAL

· Pace of global econ recovery remains uncertain

· Uncertain global econ recovery downside risk to India GDP

· Trade, financial linkages to other economies may impact India GDP

· Commodity price seen up more if global recovery gain momentum

· Rise in global commodity prices may up inflation pressure

· Expansionary fiscal policy may not be unwound in advanced economies

· Expansionary policies may trigger large FX flows to India

· Excessive flows challenge to FX rate, monetary mgmt

· FX rate policy not guided by pre-announced target

· Keep flexibility to intervene in FX market to manage volatility

· Need to be vigilant volatile FX rate movements


MARKET


· RBI panel to mull single point reporting for OTC FX derivatives

· To launch reporting platform for secondary deals of CDs, CPs

· Asked FIMMDA to develop CD, CP reporting platform

· To allow banks to purchase non-SLR bonds by infra companies in HTM

· OKs bourses to launch plain vanilla dollar/rupee options

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Goldman Sachs charged with fraud by SEC...

Goldman Sachs Group Inc was charged with fraud by the US Securities and Exchange Commission (SEC) over its marketing of a debt product tied to subprime mortgages that were designed to fail.

The lawsuit is the biggest crisis in years for Goldman, which emerged from the global financial crisis as Wall Street's most influential bank.

It is also a huge test for Chief Executive Lloyd Blankfein, who has faced a firestorm of criticism over the bank's pay and business practices. It comes as lawmakers in Washington debate sweeping reform of financial industry regulation.

The SEC alleged that Paulson & Co, a major hedge fund run by billionaire John Paulson, worked with Goldman in creating a collateralised debt obligation, and stood to benefit as its value fell, costing investors more than USD 1 billion. That is roughly the amount that Paulson is estimated to have made by betting against the CDO.

Fabrice Tourre, a Goldman vice president who the SEC said was principally responsible for creating the product, was also charged with fraud. Paulson was not charged.

Inflation in Single digit...

Inflation touched a 17-month high of 9.9% in March spurred by an all-round increase in prices, mounting pressure on the central bank to raise key policy rates in the monetary policy review next week.

A spurt in global demand due to a remarkable recovery by China and positive signals from the US will allow the Reserve Bank of India to target inflation aggressively without worrying about derailing growth momentum. The central bank is widely expected to raise policy rates by 25-50 basis points on Tuesday.

Annual year-on-year inflation based on the wholesale price index stayed above the central bank’s year-end projection for the third straight month. In January the Reserve Bank raised its wholesale price inflation forecast to 8.5 % from 6.5 %.

Policymakers expect high inflation to persist in coming months on account of inflationary expectations that are building up. They are concerned about rising commodity prices and a rapid increase in core inflation, or inflation stripped of fuel and food prices.

The food price inflation eased in March as winter crops started entering the market. Asia’s third largest economy is expected to expand 8.5% in the current fiscal. It grew by 7.2% last year, after recording 6.7% growth in year ended March 2009. It had posted 9%-plus growth rates in the three preceding years.

India’s official weather forecaster will come out with the first forecast of monsoon rains next week. The rains are crucial for the summer crops that account for 40% of India’s farm output. Agriculture contributes only 17.5% to the country’s gross domestic product, but it provides livelihood to majority of India’s 120 crore population.

Last year India experienced the worst monsoon rain in more than 37 years, sending the food price inflation to a 12-year high of 21% in October last year.

Non-food manufacturing inflation rose to 4.7% in March from 4.3% in February. Inflation in this segment is expected to harden further, financial services firm Morgan Stanley said in a research note.

The world’s largest economies are showing faster-than expected recovery from the global economic downturn. Chinese economy expanded 11.9% in the three months to March, the highest rate in more than 3 years. The US economy is expected to recover at a moderate pace in the coming quarters, bolstered by a return of business confidence and increased consumer spending.

Banking Sector - Expected to give good results in Q4.

The banking sector is expected to return to normalcy in this result season if the analyst estimates are anything to go by. The top seven Indian banks are expected to grow their net profit by an average estimated 13% year-on-year (y-o-y) in March 2010 quarter. However, excluding Bank of India (BoI), the remaining six banks may record a net profit growth of 22%. It comes as a breather for bankers, who struggled to keep their growth rates afloat in December 2009 quarter.


One of the main reasons behind the turnaround is the revival in credit growth. As per the latest data released by the Reserve Bank of India (RBI), credit growth improved to 17% after plunging to 11% in December 2009. In the last quarter, experts were apprehensive of the banking sector’s ability to press the lending accelerators. The revival in credit growth puts to rest those apprehensions for the time being. What’s even better is that the gap between deposit and credit growths has narrowed down. The deposit growth stands at 17% as of now and is on par with credit growth. However, deposit growth was more than credit growth by roughly 8%, when the credit growth touched its low in December 2009. A higher growth in advances and a lesser growth in deposit will give a boost to net interest income (NII), which is the difference between interest earned and interest expense.


Backed by improved credit demand, the analysts expect even net interest margin (NIM) to improve, which is a measure of spread. Throughout the March quarter, bond yields remained marginally higher than the previous quarter. It was expected that banks with a higher share of available-for-sale securities in their investment portfolios would report mark-to-market (MTM) losses. However, bond yields cooled down at the end of the quarter.


Better scheduling of the government borrowing programme saved the day for public sector banks, as the 10-year yields on the reporting day stood at 7.83% compared to a consensus of over 8%, wrote ICICIdirect.com in its report. The only negative from the results is that a few banks may have to provide more for non-performing loans (NPLs), as the moratorium for restructured loan comes to an end. However, banks have stepped up provisions over the past few quarters and, therefore, the impact is likely to be marginal, if at all.


HDFC Bank is expected to lead the pack with an estimated 31% growth. Among state-owned banks, Punjab National Bank (PNB) with an expected 26% growth seems to be the lead runner. There seems to be no solace for BoI investors. Rising NPLs had crippled its performance in the past two quarters. The March 2010 quarter is expected to be no different as BoI (Bank of India) is expected to report a 39% drop in its profits.

Source: Economictimes.

SEBI out with new order on ULIP ban Advertisement

An apparent truce with insurance regulator IRDA notwithstanding, the SEBI today said that its Friday ban on new ULIP schemes by some insurance companies will continue, creating fresh uncertainty in the market.

The SEBI, which was party to the truce brokered by the Finance Ministry yesterday under which status quo ante as of April 09 would be maintained, today came out with a new order that new ULIP schemes and products would be governed by its Friday order.

"This is to bring to the notice of the investors that SEBI has decided to keep in abeyance, till further notice, the enforcement of the April 09 directions with respect to the ULIP schemes/products existing on the date of the order 09.04.10.

"However, with respect to any new ULIP schemes/products launched after 09.04.