US financial crisis : A lesson for India

Looking back at the heydays of the Indian stock exchange, it's not news to the quintessential investor that derivatives were being seen as the next big thing after shares. However, since the recession in January, practically everything has fallen down, leaving little choice to any investor. The recent US debacle has also had its impact on stock exchanges around the world. However, while the former is of prime concern to us, we can also learn a lot from the latter. India's chief economist, Arvind Virmani, is of the opinion that India should take heed from the US situation and encourages investors to only invest in derivatives that are exchange traded. In his own words, “You have to be cautious. Say, for example, when derivatives are mentioned, the implication to me is that you should try and first open up derivatives which are exchange- traded because those are much more transparent.” For those of you who don't know, there are basically two groups of derivative contracts in India, Over the Counter (OTC) and exchange traded. OTC refers to a situation when contracts are traded between two parties directly with/without the use of an intermediary and without going through an exchange, while exchange-traded derivatives, as the name suggests, are traded on an exchange.

He further added that even if some people do lose out on certain derivatives, it could at least solve the purpose of others getting educated about staying away from the same. Relating this situation to the US situation is not a hard task. Even in the States, the structure of deals was a very complex one, with the common public clueless about what is happening. Analysts point out that the sub-prime crisis in the US went on to such a magnanimous scale primarily because lenders as well as sub-prime housing borrowers sold their portfolio through complex derivatives to other players, hence making it unclear as to what would be the size of losses to individual firms in case of a financial crisis.

According to an article in the Economic Times, the RBI and SEBI have recently permitted exchange traded currency futures, initially in a rupee-dollar pare, and are expected to allow exchange-traded interest rate futures by December-January. Further, there are certain OTC derivatives also in the interest rate and currency futures categories. I firmly believe that it is high time now that the government steps in with some regulatory measures to monitor derivatives, since we, as a country, can surely not afford another economic crisis at this stage.

Short Term Mutual Funds- The saving grace amidst all the confusion

I was just going through the Economic Times website for some new scoops to write about this morning when my eyes fell on this rather interesting article, to say the least. The article stated that in case you had invested your money into liquid mutual funds scheme some six months ago, then the right time has to reap the benefits was now, since statistics show that the last six months have depicted an average rate of return close to 4% on the investments in short term money market instruments. The analysis was conducted on 14 different types of open-ended mutual fund schemes which are continuously opened for subscription and redemption purpose.

It is normally seen that liquid funds offer lower returns as compared to other avenues. This is mainly due to the reason that these funds are available at low degree of risks. Linking to the soaring interest rate regime, short term mutual funds topped the charts in terms of offering positive returns. Next came the 'debt and debt (income)' mutual funds, with the only other scheme yielding positive returns in the last six months being the GILT funds, that invest only in government securities of different maturities.

Let's take a look at the general scenario over the past few months; funds that are exposed to equities haven't performed that well since the stock market crash in January. The average six month returns of equity funds (278 schemes) stood at (-)9.59% while the same for Exchange traded funds, Balanced Funds, Sector Funds and Index funds ranged between (-)16% to (-) 19%. Monthly income plans (MIP) funds, designed to give regular rate of return to the investors, have also done reasonably well when compared to equity linked schemes.

So where does that leave the investor? After considering all the above-mentioned factors, would he still be willing to risk his savings in the stock market for a mere increase of 4%, which can easily be had by any FD (add to that the reassurance of not losing out on any money)? I really don't know. Because the way things are going, it really seems like 2008 is going to be a very difficult year for the Indian economy. My advice : Put money in stock only if you are a long term player, and figure something else out for your short term needs, if any, because the Sensex is definitely not in the giving mood these days.

Are we over with the financial crisis?

Probably the much awaited part of the year has turned up. A slump in world oil- prices along with appreciation of US dollar has made everyone to think over whether the undergoing burgeoning pressure faced by the world has come to a standstill. Are we really over with the financial crisis? Economists all over the world have projected global economic conditions have will remain difficult for some time. However, future prospects seem good as it is predicted that economy will recover due to growth in China and rest of Asia. It is viewed that equity markets would regain strength over time, but it is not possible to tell when it would occur. I strongly believe that there is nothing to worry about as this phase of continued difficulty due to lower growth along with higher inflation will pass out eventually just like economies the world over have faced similar situations over different periods of time, if not worse, and have recovered.

The latest stats indicate that emerging economies like Brazil, India and China have been performing well and it is expected that the global economy will grow at 4 percent over the next fiscal year. Some economists have argued that lower oil prices will have a deflationary effect on the world economy, since this will in turn lead to high consumer spending as well as exports. In most likelihood, it is order to suppress this phenomenon that governments all over the world have decided to hike the interest rates for loans as this move will pose a large impact on consumer demand. So does that mean that after oil prices drop, the situation would return back to, well, normal? This is a rather tricky question to be answered so soon, since we have all been witness to how many times the stock markets, the foreign exchange, loan rates, and practically everything fluctuate so dramatically in the last few months. But yet, all we can do is hope.

Insurance Plans- Choose what Suits You

Usually, one holds an insurance portfolio that consists of only a term cover and a Mediclaim policy. A family takes refuge of an insurance policy mainly to finance its needs. Different persons have different needs and to satisfy these, insurance companies have come up with different plans, and continue to update on the same. It is essential to keep revising and improving insurance covers just as we re-examine our investment portfolio time to time. While buying any insurance policy, one must focus on the number of dependents as well as the amount of financial protection they are provided after the demise of insured person.

Although there are host of insurance plans suiting all age groups and purposes like children's education plan, retirement plan, life insurance, etc., one must choose the one that suits him the best, since the basic motive behind offering these plans remain the same, i.e., providing maturity benefits to the person till the end of policy term or death benefit to the dependents of the person in case of his demise.

In my viewpoint, it is better to opt for multiple policies as one can take the advantage of latest insurance products available in the market. These days, people are more inclined towards taking Unit Linked Insurance Plans (ULIPs) as these investment cum insurance plans aim at offering excellent returns. Another plan waiting to offer you the best is the term insurance plan, which works out best if you have dependents. Not only is this plan cheap, but also provide a comparitively larger cover than most insurance policies. Another category of insurance, endowment plans, are sought after those who are very skeptical towards taking risks and want assured returns, although the premiums are higher than term insurance plans. The latest scheme to hit the financial circuit is a combo of term and ULIP plans which returns back your premium but not the insured amount has recently hit the market, and is also a good option.

It is a good point to note that insurance as an instrument has undergone a drastic change in terms of its

relevance for the common man. Earlier, this was seen as just a kind of a reassurance in case things went otherwise, (life insurance, accident insurance). However, with the expansion of the investment market and the diversification of insurance plan options, the same is now also an attractive medium for savings . Hence, keeping that in mind, I sincerely believe that one should reconsider his investment portfolio as well while looking towards adding on more investment options.