Where will India be if the Dow breaks 7500?

The Dow Jones has hit its lowest level since November as stocks started the week off on a sour note. It finished the session down 298 points, Nasdaq lost 64 and the S&P 500 shed 38 points. India did not exactly lose as much in today's trade, probably because of short covering, which in turn was the fallout of relentless selling for the past two days following diappointment in the Interim Budget. The 30-share BSE Sensex closed at 9,015 points, down 19.82 points after swinging 191.61 points during the day. The 50-share NSE Nifty swung nearly 70 points before closing at 2776, up 5.65 points. Experts, however, feel India cannot escape the wrath of US meltdown for long because the gap between the events in the US economy and the rest of the world is narrowing. Some experts have predicted Dow can break the crucial support level of 7500 and can go as low as 6000, paving the way for India's devastation. Infact, Shankar Sharma of First Global feels the Indian markets may hit new lows of 7,200 by February or March. The main cause behind US crash: There has been a record contraction in New York manufacturing, which spurred concern that the government's stimulus package won't be enough to curb the deepening recession. The road ahead: For the Dow Dow Jones is on the verge of breaking 7500, which would lead to 6700 quickly and eventually down to 6200. 7449 is the key support level on the Dow with a target of 6000 points on the downside. As for the S&P 500if it breaks 740, it may go down to 540. That the Dow will touch 6000 seems to be the general consensus among experts.

Gold Run

Gold is trading at a seven-month high above USD 950 per ounce. The yellow metal has hit record high above Rs 15,000 per 10 gram in India. It is trading near record highs in currencies such as euro, pound, Canadian dollar and Swiss frank. In India, gold touched a high of Rs 11,500 per 10 gram on February 17, 2008 vs Rs 15,000 per 10 gram today. There are speculations that it may go up to a high of USD 965 per ounce and then, USD 1,165 per ounce. Gold has gained 30% over the last one-year. Gold prices are moving up due to a lot of newsflows on the currency front. Yen is at a five-week low compared to the dollar. Pound has also declined and is at a 2-week low, ahead of UK inflation data today. Asian currencies have also declined, Korean won is trading at 2-month lows. There are also speculations that exports and regional economies will contract further. Political scenario in Japan is further aiding the rise. Finance Minister of Japan has said that he will resign after budget bills are passed in Parliament. Other factors like an unstable global economic scenario, low interest rates, weak equity markets and depreciating rupee are also pushing the prices much higher. Factors - Unstable global economic scenario - Low interest rates - Weak equity markets - Central bank buying - Depreciating Rupee

LIC lifeline for lapsed policies

Tardy policy-holders have time till February 28 to revive their lapsed insurance policies. The Life Insurance Corporation (LIC) has given clients who haven’t paid their premia for up to seven years the opportunity to win back their risk covers by forking out a small penalty. “This is the first time that we are offering our clients the opportunity to revive policies that lapsed seven years ago,” said D.K. Ghosh, general manager (customer relations), eastern zone, LIC. The insurance giant has offered to revive these policies by charging 20 per cent less on the penal interest rate. LIC charges 8 per cent annual interest as penalty for not paying premium within the grace period from the premium due date. The penal interest becomes applicable from the premium due date till the time the premium is paid. The insurer allows customers to revive policies that lapsed for shorter durations. “However, there is a restriction in the case of policies that lapsed seven years ago. Such policies should have acquired the surrender value, that is the premium should have been paid for the first three years after the policy commenced,” said Ghosh. It is estimated that for an insurer, a life insurance policy achieves breakeven if the premium is paid for three years. The insurer begins to make profits on premiums paid after three years. Hence, a life insurance policy acquires a paid-up value — or a surrender value — after premium is paid for three years. “Policies which have lapsed for more than five years (but up to seven years) will be revived with a fresh underwriting, which means that the policy-holder will have to submit all documents and undergo a fresh medical check-up,” Ghosh explained. In the case of lapsed policies up to five years, a medical check-up would be required only for those who are above 50 years of age. “People who are below 50 years won’t have to undergo any medical test provided their policies lapsed five years ago,” Ghosh added. “In fact, we are mailing policy-holders all the forms and documents required to revive their lapsed policies in addition to public advertisements about the campaign,” Ghosh said. The ongoing campaign offers a 20 per cent discount on penal interest. However, the discount is capped at Rs 10,000. This means that if the penal interest amounts to Rs 60,000, the policy-holder will have to pay Rs 50,000 plus the outstanding premium to revive his/her lapsed policy. “In earlier offers, the lapsed period was capped at five years and restricted to some specified life insurance plans,” he added. The current campaign, in contrast, covers almost all plans launched by the public sector insurer. When a policy lapses, the contracted benefits become non-payable to the policy-holder. Till November last year, LIC used to treat a policy as lapsed if the premium was not paid within six months from the due date. The Insurance Regulatory & Development Authority (IRDA) came up with a uniform definition of lapsed policies for all insurers. The insurance regulator capped the grace period to one month for quarterly, half-yearly and yearly and 15 days for monthly premium payments and if the premium is not paid within the grace period, a policy is considered lapsed. However, the regulator said a lapsed policy could be reinstated by paying the due premium with penal interest in two to five years. “Till now, lapsed policies for more than five years could not be revived,” said Ghosh. “However, if a policy-holder has paid the premium for the first three years and then discontinued the payment but holds on to the policy for its full term, he or she would get back the premium paid on maturity,” he added. According to data available with IRDA, the total number of lapsed policies in the industry at the end of March 2007 stood at 86.57 lakh. The aggregate sum assured of these policies was Rs 79,300 crore. As for LIC, the total number of lapsed policies as on March 31, 2007 was 77.73 lakh and the aggregate sum assured of these policies was Rs 63,206 crore. Ghosh agreed that in the last few years the lapsed policy revival campaign was not done in such a large scale. “In fact, lapsed policies entail losses for both the insurer as well as the policy-holder,” he said. The insurer loses premium income and hence profitability when policies lapse, while the insured person loses the risk coverage and the financial benefits from the policy. Courtsy:The Telegraph,Kolkata,05/02/2009

Strike a balance

It’s that time of the year again: the financial year is drawing to a close while you are yet to chalk out an investment plan to save tax. There are many who choose to make tax-saving investments towards the end of the financial year. This is why life insurance companies get 40 per cent of their total annual business in the January-March quarter, while there’s a mad rush among mutual funds to launch products under the equity-linked savings scheme (ELSS). Given the bear run on the bourses since January last year, the investment scenario is different this time. What every investor is worried about now is the ‘return of capital’ and not the ‘return on capital’. Hence, unlike the last few years, people are wary of taking risks and would rather prefer to play it safe. The right mix So, how can one assure capital protection along with a decent return? There are instruments such as NSC, PPF and tax-saving fixed deposits (for a minimum of five years) with scheduled commercial banks or post offices that give assured returns as well as tax relief under Section 80C. However, the interest earned on all these instruments, except for PPF, is taxable. Banks will deduct tax at source (TDS) on the interest income at the rate of 10 per cent. Depending on the tax bracket, any additional tax liability will have to be paid by the depositors themselves. TDS is not applicable to NSC or a five-year post office fixed deposit. The onus of paying tax on the interest income is entirely on the depositor. Also, each instrument offers different rates of interest. Moreover, the calculation of interest is different for different schemes (see table 1). So, while all these instruments offer assured returns and same tax benefits under Section 80C, the effective return differs significantly from one another — PPF is the best followed by bank fixed deposits. But a PPF has a lock-in period of 15 years compared with five years in tax-saving bank fixed deposits and one cannot invest more than Rs 70,000 a year in a PPF account. Balancing act However, there is another way in which one can assure capital protection and yet look for a higher return. This involves a simple strategy of splitting one’s investment corpus between bank fixed deposits and equity-linked savings schemes of mutual funds. While the fixed deposit assures capital protection, ELSS promises a higher return as well as lower tax liability on the overall portfolio — investments in equities are tax-free after one year. Let us explain this. The maximum deduction one can claim under Section 80C is Rs 1 lakh. If you plan to invest Rs 1 lakh, split it between a bank deposit and ELSS. You choose a tax-saving deposit with a scheduled commercial bank that offers the highest interest rate (see table 2). After the latest round of reduction in deposit rates, some public sector banks are still offering an interest rate of 8.5 per cent on their tax-saving fixed deposits. At an interest rate of 8.5 per cent compounded quarterly, you need to deposit Rs 66,000 for a period of five years to get a maturity amount of approximately Rs 1 lakh. While you are left with Rs 34,000 more to invest, the bank deposit ensures protection of your entire investment of Rs 1 lakh. However, you will have to pay an income tax on the interest income of Rs 34,000 (maturity amount of Rs 1,00000 — the original investment of Rs 66,000). Assuming that you are in the highest tax bracket (30 per cent), your income tax liability on the accrued interest will be Rs 10,200 (30 per cent of Rs 34,000). Your interest income after tax will be Rs 23,800 (Rs 34,000 — Rs 10,200). After five years, your maturity amount after tax will be Rs 89,800 (Rs 66,000 principal+Rs 23,800 interest). Equity link The next step would be to find an ELSS that has a good performance record over a period of five years and invest the remaining Rs 34,000 in that scheme. In the past five years, tax planning schemes of mutual funds have given an average annualised return of 11.39 per cent — the best fund gave a return of 24.71 per cent and the worst fund generated 0.94 per cent. These returns take into consideration the recent mayhem in the equity markets. It is to be noted that none of the tax-planning schemes that are around for five years gave a negative return. Even the minimum annualised return generated by diversified equity schemes over the last five years was zero — that is, neither gain nor loss on the original investment. Thus, the probability of a capital loss on an investment in an ELSS is almost zero if you invest the money for five years or more. Let us consider three situations. n You get a 10 per cent annualised return on your ELSS investment. In this case, your investment of Rs 34,000 will grow to Rs 54,757.34 (compounded return) in five years. Taking into account the investment in a bank fixed deposit, your initial capital investment of Rs 1 lakh grows to Rs 1,44,557 net of tax (Rs 89,800+Rs 54,757). The effective return on investment thus works out to over 7 per cent. n Your ELSS investment doesn’t grow. In this case, your investment at the end of five years will be Rs 1,23,800 net of tax (Rs 89,800+Rs 34,000) and the rate of return will be over 4 per cent. n Your ELSS investment suffers a capital loss of 20 per cent, which is Rs 6,800 (20% of Rs 34,000). Post loss, the amount will come down to Rs 27,200. At the end of five years, your investment will stand at Rs 1,17000 (Rs 89,800+Rs 27,200) — a 3 per cent rate of return. The way many stocks have been battered on the bourses may prompt most to stay away from equities. But, remember, equity as an asset class generates the highest return. The markets are sure to make a U-turn. Hence, plan a judicious mix of fixed deposits and equities to save the maximum and reap the highest return.