MAILY NANDA, 28, is a manager in a BPO and lives with her consultant husband. They are planning a family in two years. They have just started asset accumulation, and own a car but not yet a home. They have Rs 10 lakh insurance. Their goals include a luxury vacation, children's education, and looking after their aged parents.

When your grandmother told you not to put all your eggs in one basket and not to count your chickens before they hatch, you probably dismissed it as just another instance of her unhealthy interest in poultry. Now, those very same concepts are coming home to roost. And who is spouting these words of wisdom? None other than that ubiquitous new age guru, the financial planner.

There was a time not so long ago when the only financial planning you had to do was remember to pay your life insurance premium and keep track of a few bank fixed deposits (FDs). Sadly, things are not that simple now. Your assured return instruments are slowly being eroded despite benign inflation, but-on a happier note-incomes and investible surpluses are much higher than before. Your expectations from life are correspondingly climbing. The upshot: you expect your money to earn much more than it needed to earlier.

The quest for better returns will inevitably lead you to the mantra of asset allocation. Devang Shah, CEO, Right Returns, a financial planning practice, says: "Asset allocation is something every individual does, often unconsciously." We subconsciously try to ensure that we own a home, some gold, some stocks, and some insurance. The trick, however, is to do this scientifically-allocate assets according to your needs and not your wants. At its best, asset allocation can help control risk, match portfolios to specific goals, and increase predictability of returns.

While this article looks at the theory of asset allocation, we also have three examples of people who have shared some of their financial details with us. Certified financial planner Gaurav Mashruwala, Director of ace, a Mumbai-based financial planning consultancy, has studied these portfolios and made suitable recommendations. The idea is to give you a quick sketch of what you can typically expect when you set out on an asset allocation exercise.

Basic Theory

The principle behind asset allocation is simple: all asset classes do not move up or down at the same time. In the words of Harry Markowitz, "dividing a portfolio over asset classes that do not move up or down at the same time helps bring down the risk of the portfolio."

Of course, if you could, oracle-like, predict which asset class will do best during which period, you can do away with asset allocation altogether. In the absence of a crystal ball, though, what can you do? Simply this: balance the variability in returns in a typical portfolio by distributing your money among various asset classes like equity, debt, or property in certain proportions.

Thus, each asset class should be mutually exclusive, exhaustive in its category and have differing returns to give optimum results. Markowitz's Modern Portfolio Theory asks the basic question: how, for a given level of return, can I reduce risk? Or how, for a given level of risk, can I increase returns? Answering these questions means getting the risk-return equation just right. So, for the long-term investor, smart asset allocation is the primary determinant of returns. It combines market timing with asset distribution and risk diversification to maximise portfolio returns.

Diversifying Risk

In an investment dictionary, diversification is defined as distributing investments among different asset classes in order to limit losses in the event of a fall in a particular market or asset class. Explains Mashruwala: "Assume your entire investment is only in stocks; a sudden fall in the stock market will reduce the value of your entire portfolio. If you had diversified your investment across various asset classes, then even in the event of a stock market crash, your non-equity assets would have remained intact."

The whole point of asset allocation is to diversify the risk within your portfolio. Sir John Templeton, the legendary fund manager, once said: "To avoid having all your eggs in the wrong basket at the wrong time, diversify." This has to be done carefully-investments have to be diversified among given asset classes based on their various levels of risk, and in such a way as to ensure that investors get a rate of return in tune with their financial goals.

Asset allocation can be of two kinds-strategic and tactical. While volatility determines the choice of instrument in strategic asset allocation, tactical asset allocation depends on market timing and is based solely on recent price and volume movement data. The former will allocate a given corpus among various asset classes so as to nullify volatility; the latter will diversify portfolios in order to make the most of changing valuations. Of course, relying completely on market timing can cause high portfolio turnover and expose the investor to high risks. In the former approach, diversification is the goal; in the latter, it is returns.

PURNIMA RAO, 55, lives with her husband, and son, 29. She has one married daughter. The couple has no current liabilities and adequate insurance cover. Their main short-term goal is their son's marriage, for which they are budgeting approximately Rs 4.5 lakh. They would also like to save for travel overseas and to buy art, but they haven't quantified these goals yet.

The main argument against market timing is, of course, that it is notoriously difficult to time the market accurately, and is a practice best left to the experts. And secondly, why concentrate so much on 'when to invest' when other equally important factors are neglected? Have you considered why you are investing or for how long?

A point to remember here is that most investors do not need eight or 10 asset classes to invest in, as the maximum risk reduction comes early on in the process. So, there could be steeper risk reduction when an investor goes from one asset class to two, and not necessarily when he moves from six asset classes to eight.

The Parameters

So, can you then choose a few asset classes, divide your money equally among them to reduce risk, and then sit back? Sorry, but it's not that simple. Allocation is essentially driven by two parameters. The first is your time horizon-how much time are you giving yourself to get those dreamt-of returns? The second is your specific goal-is it a short-term goal like buying a car? Is it a long-term goal like retirement? Goals include both dreams and responsibilities; so, it is fine to list a luxury cruise on the to-do-list but don't forget to include an elderly parent's medical expenses.

What's the first thing that strikes you about these two parameters? They will never be static. Your goals will constantly change: with age, with changing milestones, and with increasing wealth. And each new goal will come with its own time horizon.

So can you safely say that two couples in their early 30s, wanting more or less the same things, can have the same asset allocation plan? The answer is no; and here, we come to the next important variable. Consider this: Couples A and B are in their mid-30s and want a luxury apartment in two years, a cruise three years down the line, and Rs 25 lakh a decade hence for its kid's higher education. While Couple A's portfolio mix is an aggressive 80 per cent equity and 20 per cent debt model, Couple B's is a more cautious 50:50 mix. Why are the two portfolios different although the age group and the goals are roughly the same? Because Couple A is comfortable with high risk, but Couple B is not. Individual risk appetite, then, is a crucial variable that will determine your asset allocation. "The willingness and ability to take risks is an important factor," explains Rohit Sarin, Partner at Client Associates, a wealth management firm.

S.B. ROY, 61, Eveready Industries, lives with his wife. Nearing retirement, the couple has accumulated most assets, and their daughter is comfortably settled. Their present responsibilities include taking care of Roy's mother-in-law, plus looking after two sisters-in-law. Their long-term goal is to take a world tour and cruise someday, although they have not earmarked any particular figure for this.

However, risk appetite is difficult to measure. Often, ignorance can be the driving factor behind an investment decision rather than a true appraisal of risk. This cuts both ways. A man in his 30s might describe himself, correctly enough, as a high-risk individual and invest heavily in stocks, again correctly. However, if he invests directly in equity without the slightest knowledge of the bourses and based purely on hot tips and guesswork, his portfolio allocation is completely wrong. He needs to look at entering equity through a mutual fund, perhaps hedge his bets with some debt, and look at long-term returns from post-office savings.

Equally, you could have a 40-year-old single woman with high income putting all her money into a savings bank account and FDs because she is risk-averse. This makes no sense. Her actual problem is that she does not know enough about investment alternatives. Given her age, her income and her lack of responsibilities, she can easily put at least 30 per cent of her portfolio in equity via mutual funds (MFs), while still retaining her risk-averse outlook. Shah points out: "Investors can sometimes end up being 'aggressively safe' in saving money even when they need not be."

The Age Factor

Ideally, for asset allocation purposes, age groups are divided as 25-30, 30-45, 45-60, and 60+ (see Age & Investment). The first age group is the early career years, when income is growing, responsibilities are low, and risk appetite can be set high. This is the asset building stage, and this age group should ideally have a portfolio that's 75:25 in favour of equity.

Then comes the high-income years, when your career and salary are growing, but so are responsibilities towards family, etc. In this stage, you are now accumulating larger assets like a home. You are looking at long-term growth but without too much risk, so your portfolio will be about 55:45 in favour of equity.

The next stage is when you are nearing retirement. You have mostly finished accumulating assets and are getting ready to meet important goals like a son's marriage or a daughter's higher education. Your main target is to maintain current earnings while putting away enough for retirement, and your risk appetite should be low now. Your asset allocation will ideally be 40 per cent equity and 60 per cent debt. The last stage is retirement, when your goals have been reached, assets are in place, and the main aim is to keep your principal safe while maintaining your income and standard of living. Your asset allocation is now 80:20 in favour of debt and safe avenues.

Goal Setting

In all of this, setting yourself tangible financial goals is vital. "If you don't have goals, you end up living somebody else's goals," warns Mashruwala. So, you can end up with somebody else's asset allocation as well. You will buy shares because your neighbour does so-regardless of the fact that he is a 30-year-old bachelor while you are 45 and have two kids.

The thumb rule for investing in an asset class is to ascertain the proximity of your goal. If your goal is a short-term one, say, buying a car, investing in a debt instrument is a good idea. This way, even if you end up losing out to inflation, your principal stays safe. On the other hand, if your goal is a long-term one, then equity is a safe bet because volatility evens out over time.

Ironically, the investment psyche in India is exactly the opposite, says Mashruwala. You end up buying equity for short-term returns while parking your money for years in assured return instruments.

COLUMN: Stuart Purdy, Managing Director, Aviva Life Insurance Learn To Juggle

Investors are inundated with information everyday-oil prices, interest rates, policy changes. Tying these snippets together into clear market trends can be a Herculean task. How do you then manage your investment? Simply use asset allocation. Asset allocation seeks to balance risk and return by investing specific amounts in various instruments like equity, bonds or cash based on your risk tolerance and financial goals. Your allocations should meet both long-term and short-term goals. For the short term, invest in the money market, short-term deposits or equity. And for long-term goals and financial security, look at pension funds, systematic investment plans (sip) or life insurance. Life insurance, for instance, now allows you to invest in equity, bonds or balanced funds, and gives you the same power of compounding as, say, a sip. In the absence of assured return instruments, it is time investors realised the role played by personal savings and investments in determining the quality of life. Your portfolio cannot be uni-dimensional. Debt, equity, property and gold-they all need to be represented. While equity gives you high returns, debt funds are safe and score over other safe avenues like fixed deposits on parameters like liquidity. So, take equity for returns and debt for stability. Treat your investments like stages in a life cycle. In your working years, equity-led investment will get you higher returns. In your middle age, a balanced strategy will help conserve assets. And in retirement, income and stability will be your priorities, although with some growth to hedge against inflation. Finally, though, individual goals and time frames will determine your allocation strategy, investors are going to increasingly turn to professional financial planners for help in asset juggling.

The Asset Classes

What are the chief asset classes, then, into which your funds go? The first is debt, where investors are the lenders and they get returns in the form of interest. Here, the principal is safe unless the company in which you've invested goes bankrupt. Your investment has liquidity but it does not beat inflation. The most popular debt instruments are National Saving Certificates (nscs), traditional insurance schemes, post office schemes and government bonds. The next asset class is equity, where the investor is a shared owner and gets dividends, but the principal is not safe. The investment is completely liquid and can beat inflation comfortably. Property or real estate is another asset. Here, the investor is the owner and gets the benefit of appreciation if he sells it at some stage, or rent in other cases. The disadvantage is that real estate is totally illiquid. Typically, investors who have made huge profits from equity move over to the property market. So, there is a negative co-relation between debt and equity, with property following equity, albeit after a time gap.

There are various routes and vehicles to enter these asset classes-mutual funds, direct investments, portfolio management services or insurance. The biggest and most common mistake that investors make is to enter the same asset class through different routes, which completely defeats the purpose of risk diversification. The other common mistake is to confuse life insurance with investment. Life insurance should be looked at only as something that covers the risk of death. "Just look at buying term plans and use the balance to aggressively invest," says Mashruwala.

Over and above this, what is the primary concern of any asset allocation plan? First and foremost is wealth protection. Create a contingency fund for events that can affect wealth-accidents, job loss, disability, etc. Wealth protection also includes insurance, such as property or health cover. The next goal of asset allocation is wealth accumulation, which includes planning for financial goals like children's marriage, education and retirement-this is where strategic allocation takes place and you invest aggressively with an eye to the future. Wealth distribution is the last piece of the puzzle. This happens either in the form of assets that are passed on to future generations or as erosion of accumulated wealth as part of natural retirement planning.

And if you still have doubts about the efficacy of asset allocation, let's leave you with this thought: in a study called Determinants of Portfolio Performance, it was found that asset allocation-right or wrong-could help explain over 93 per cent of a portfolio's performance.

That Three-Letter Word
Scrambling to file your income tax returns? Run a quick check to see if you are doing it right.
By Ritwik Mukherjee

Queuing again: TO file IT returns

Time and tide wait for no man. Add that other dreaded T word to the list-tax. Chances are you are still scrambling for forms and frantically calling your ca (chartered accountant). Ideally, of course, it should not be this last-minute rush. "The computation of expected total income and the tax on it should be made at the beginning of the new financial year, and reviewed sometime in the latter half," says Narayan Jain, a Kolkata-based it consultant and advocate. Getting into this habit can be a struggle, but it's worth it.

You must ensure that you make the most of all deductions and rebates. Drawing up the most efficient tax-planning avenue should be an important part of your financial plan. Let's take a quick look at the basics of tax planning as eligible for fiscal year 2005-06.

For the current year, the one-by-six criteria is still operational, so even if you fall outside the tax bracket, you have to file returns if you fulfil one of six conditions-ownership of car, home, club membership, etc. Forms and challans are available online, making filing easier.

Deductions: Almost all tax deductions have now been clubbed under the umbrella of Section 80C, with an upper limit of Rs 1 lakh. Try to make the most of this section. If you pay tax at the highest rate of 30 per cent, you can save as much as Rs 33,600 in taxes if you invest Rs 1 lakh in the products eligible under Section 80C. Exemptions under this section lower your total income by Rs 1 lakh, and it's available to people in all income brackets.

The instruments available under Section 80C (see table) include your contribution to the Employees' Provident Fund (EPF), Public Provident Fund (PPF), life insurance premiums, equity-linked savings schemes, the principal on housing loans, tuition fees (two children), pension schemes of mutual funds, and National Savings Certificate (NSCs). Except for PPF, which has a ceiling of Rs 70,000, you can put the full Rs 1 lakh in any one or a combination of these.

Plus, you can invest a maximum of Rs 10,000 in pension funds of insurance companies under Section 80CCC, but subject to the overall Rs 1 lakh cap. In Budget 2006, this will come under Section 80C. Under Section 80D, you continue to get tax breaks on mediclaim premiums.

As you can see, filing returns is getting simpler, but the quantum of deductions and rebates is being steadily reduced. Make the most of them while the going's good.

The Market Takes Stock
What's riding high, what's riding low post-Budget? The market makes up its mind.
By Anand Adhikari

North block might frame policies but you have to turn to Dalal Street to gauge the reaction from Corporate India. Sure, the Street is run by punters but it is still the best place to judge how investors are reacting to changes in official policy.

In the fortnight following the Budget, the stock market has risen and fallen, and much has been written about its reactions. Finally, though, the dust has settled and it is fairly clear that the market has discovered its winners, losers and upcoming stars.

So, while the bellwether BSE (Bombay Stock Exchange) Sensex, has returned 4.69 per cent post-Budget, sectors like automobile, metals and FMCGs (fast moving consumer goods) have outperformed it. Equally, while some stocks like Gujarat NRE and GAIL (India) Ltd have tanked, some others like BHEL (Bharat Heavy Electricals Ltd) and Suzlon have returned 11-18 per cent during this period. Obviously, the Budget has meant different things to different segments. Here's a look at just how it has impacted individual stocks, and how you should be reading between the lines.

Automobiles: The automobile sector is the biggest gainer from this Budget. Riding high on the incentives announced for small cars (duties slashed from 24 per cent to 16 per cent), scrips like Maruti and Telco are zooming. Even better, some small car manufacturers have already announced price reductions on both petrol and diesel models. "This is expected to push volumes growth and lead to increased revenues," says RSM, a leading chartered accountancy firm, in a post-Budget analysis. "We also expect margins to improve across the industry as customs duty cuts on aluminium and plastic will result in lower raw material prices," says IL&Fs Investmart, a research firm.

Metals: The metals sector has been on an upswing on the back of rising global prices. The Budget cut duties on alloy steel and ferro alloys. In reaction, steel stocks like Essar Steel, sail (Steel Authority of India Ltd) and Jindal are doing comfortably well. The Tata Steel stock has gone up close to 10 per cent to Rs 470 per share. The increasing focus on infrastructure projects is driving steel stocks. However, the reduction in customs duties on aluminium and copper is expected to impact the profitability of aluminium and copper players, while the duty cuts on ores and concentrates will impact raw material manufacturers. According to Capital Markets, a brokerage firm, companies like Hindalco, NALCO (National Aluminium Company Ltd) and GMDC (Gujarat Mineral Development Corporation) will be affected by the duty cuts on ores and concentrates.

Power: The finance minister's proposals to enhance power generation and reform the transmission and distribution sector has fired up power stocks. Public sector BHEL will be a major beneficiary of the five new ultra-mega (4,000 mw) power projects that the government plans to award before the year-end. Another gainer is Suzlon, which specialises in wind power solutions and stands to benefit from the government's focus on non-conventional energy sources. Finance Minister P. Chidambaram said the 10th Plan target of 3,075 mw of installed capacity for non-conventional energy was surpassed last December. The current capacity: 3,650 mw. Suzlon, which has successfully developed some of the largest wind power projects in Asia, has been attracting a lot of attention on the bourses.

Oil and Gas: Completely neglected in the Budget, stocks of most oil companies have declined sharply in the last fortnight. The Budget has hiked the cess payable on domestic crude from Rs 1,800 per tonne to Rs 2,500 per tonne. This will adversely impact exploration and production companies like ONGC (Oil and Natural Gas Corporation Ltd) and oil (Oil India Ltd). Many brokerage houses have lowered the 2006-07 earnings forecast for ONGC by 6-7 per cent. IDBI Capital Market says the increase in cess will result in an outgo of Rs 700 per tonne of production. Similarly, the import duty on petrochemicals has been reduced; this could affect companies like IPCL (Indian Petrochemicals Corporation Ltd), GAIL and RIL (Reliance Industries Ltd). The import duties have been reduced on plastics (PP/PE or polypropylene/polyethylene) to 5 per cent from 10 per cent, and on polyester and polyester intermediates to 10 per cent from 15 per cent.

Retail: The market has been slow to react to the retail sector even though the Budget has favoured it with many benefits. The excise and custom duty rationalisation on man-made fibres, yarn and raw material is expected to have a positive effect on the apparel segment. Similarly, the duty cut from 16 per cent to 8 per cent on ready-to-eat packaged foods and instant mixes is expected to increase sales of these products. Footwear is another item where duties have been reduced.

FMCG: This is another sector that's riding high in the post-Budget phase, following a long period spent away from the arc lights. The Finance Minister has lowered the excise duty on products like condensed milk, pasta, ice cream and instant mixes, and has also cut customs duty on some raw material like non-edible oils. Food processing has been treated as a priority sector, and banks have been directed to funnel more money into it. "We expect FMCG companies to gain the maximum in the long run since this sector has under-performed the overall market in the last three to four years," says a research analyst.

A Siren Song
NFOs have given great returns but take care-they come with high risk.

The growth in mutual fund corpuses has come overwhelmingly from investors buying units in new fund offerings (NFOs), often at the cost of existing funds. Fund managers, collecting humungous amounts through this route, aren't complaining.

Neither are investors-they pay less for NFOs since there's no entry load here compared to 2.25 per cent for existing funds. Says Rajiv Shastri, CEO, Sahara Mutual Fund: "Indians don't like to pay for services, which is why NFOs are receiving huge inflows compared to existing funds." But high outflows have made fund houses charge exit loads for both existing and new funds. So, an NFO investor, who stays invested for even one year, pays 1 per cent exit load and 1 per cent for expenses (NFO expenses are 5 per cent of corpus spread over five years), while an investor in an existing fund pays an entry load of 2.25 per cent plus an exit load of 1 per cent.

Luckily for investors, NFOs have given excellent returns in this bull market, and most have outperformed the Sensex. The 24 NFOs launched in the last six months-to-one year gave an average six-month return of 51.6 per cent; the corresponding Sensex figure is 49.8 per cent.

Unfortunately, this tempts investors into thinking NFOs are manna from heaven. Says Hemant Rustagi, CEO, Wiseinvest Advisors: "In today's market, outperforming the broad market is not difficult." But NFOs have no track record; so, the problem starts when you invest blindly. "It's a huge risk," says Rustagi.

Bottom line: Sure, take advantage of the bull run, but for long-term and comparatively safe returns, stick to existing funds with a good track record and high peer group ranking.

NEWS ROUND-UP

Will Cover Get Costlier?
With reinsurance now taxed, there's every chance of premiums getting hit.

Taxing reinsurance: Likely to backfire

Five years ago, the insurance sector was opened up ostensibly to increase affordability and penetration. But the Budget proposal to extend the 12 per cent service tax to reinsurance can only make the cover, especially non-life cover, less affordable. In the short run, premiums are expected to be hiked by about 2 per cent, but in the long run, rates might go up by as much as 5 per cent, say industry sources.

With the service tax exemption given to reinsurance now gone, the primary insurers are going to have to bear the tax on inward and outward reinsurance contracts. When insurance agents were brought under the service tax net in 2002, the insurers took on the burden, thus, sparing policyholders. This time around, they might not be so willing.

"Already, the industry is reeling under loss-making portfolios such as motor and mediclaim. A tax on reinsurance will aggravate the situation further," says K.N. Bhandari, former chairman of New India Assurance. "Premiums," he says, "are bound to go up."

With detariffing, insurers were expected to anyway increase premium rates on all personal lines of business like mediclaim, personal accident, and motor insurance. Now, companies are likely to take this chance to factor in the service tax hike as well. Says M.K. Garg, Chairman and Managing Director, United India Insurance: "Premiums will increase initially by the amount of the service tax, but we foresee additional increases subsequently."

The basic cavil, though, is at the idea of levying service tax on premiums. Insurance is a contract to compensate a person for losses suffered; 'service' comes in only at the time of settling claims. Perhaps, then, it could be called a premium tax, but taxing premiums is as unreasonable as taxing bank deposits or the issuing of passbooks.

-Nitya Varadarajan

Some Good, Some Bad

Good news for close-ended schemes-the budget brought them in from the cold by allowing them to pay tax-free dividends. Earlier, investors in close-ended schemes were paying 10 per cent dividend tax and 10.2 per cent service tax. However, some anomalies, like double taxation, remain, with investors paying tax both when the fund buys/sells equity and when it redeems units. As JP Morgan's CEO designate Krishnamurthy Vijayan says: "This is bad for the overall growth of the mutual fund industry." The other concern pertains to the redefinition of equity-oriented schemes as those having more than 65 per cent equity exposure. Says Ajay Bagga, CEO, Lotus India AMC: "The concept of balanced funds disappears; funds have to aggressively invest in equity." This increases risk, but industry watchers point out that most schemes constantly tweak their equity exposure and since it is the annual average exposure that's calculated, risk could still be kept under control.

-Mahesh Nayak

TouchWorld Travellers' delight

Traveller's Checks

Travelling? Now you can buy your foreign exchange, book your air tickets, call your host in the UK, and even send her a thank you gift-all from under one roof. Logistics player AFL has launched TouchWorld stores, a format that offers a whole gamut of services like forex, money transfers, international telephony, courier, travel insurance and e-ticketing. The first store is in Mumbai, and AFL Chairman and MD Cyrus Guzder plans to soon extend it to all major cities: "By end-2006, we will roll out 20 more outlets across the metros, Pune, Ahmedabad and Kochi." From persons of Indian origin, to inbound tourists, to Indian travellers, the store has caught the fancy of a lot of customers. The benefits include no transaction fees on foreign exchange and low-cost international telephony, but obviously time and convenience are the real deal on offer here.

-Krishna Gopalan

Rates Ride North
Banks might soon close the interest rate gap between FDs and small savings.

Panicking at the declining flow of low-cost deposits, banks had made a strong pre-Budget pitch to North Block to extend tax breaks to bank fixed deposits (FDs). This would have been much welcome to the beleaguered risk-averse investor too. Rather than concede the point fully, though, P. Chidambaram typically gave some partial relief. He drew long-term bank deposits (five years and above) into the overall Rs 1 lakh limit allowed under Section 80C.

Experts argued that if you had to lock in your money for five years, you might as well lock it for six years and get 8 per cent returns from NSCs (National Savings Certificates). Now, apparently recognising the flight of long-term money, banks are set to push up interest rates on FDs.

ICICI Bank has set the ball rolling with a 50 basis point hike in rate to 7 per cent for fixed deposits of five years and above. IDBI Bank is also giving 7 per cent for similar deposits. Other banks likely to follow suit: HDFC Bank, Allahabad Bank and Canara Bank. In fact, most banks are already offering over 7.5 per cent for bulk deposits of over Rs 15 lakh, but this hike will be a boon for small investors. According to G.V. Nageswara Rao, CEO (Commercial Banking), IDBI Bank, in a rising interest rate scenario, there is a strong possibility of long-term bank deposit rates closing in on postal savings rates.

In fact, given the scorching credit growth in the economy, bankers are also under tremendous pressure to hike deposit rates to mobilise low-cost funds. As things stand now, the interest rate differential between bank deposits and small saving schemes is not much; and the long-awaited demand of bankers for market-linked postal savings rates may well be around the corner.

-Anand Adhikari

SMARTBYTES

Look Beyond The Ad

-Mahesh Nayak

LifeLink Super: More smiles or....

Toeing The Line

After IRDA's (insurance regulatory and development authority's) new norms for unit-linked policies (ULIPs) came into effect from December 2005, ICICI Prudential has come out with the first modified unit-linked life plan. However, there aren't any major surprises in LifeLink Super. From an earlier lock-in of one year, the policy now comes with a three-year lock-in, after which partial withdrawals will be allowed. Also, the net asset value (NAV) of the scheme will be disclosed from the very first day. But you also pay a higher 2.25 per cent fund management charges (hiked from 1.5 per cent). The single premium plan allows policyholders to opt for death benefits of 125 per cent or 500 per cent of the premium, and is mainly aimed at people with variable incomes. Says Shikha Sharma, MD and CEO: "LifeLink Super does not dilute the concept of life insurance as a long-term instrument for protection and wealth creation."

Mahesh Nayak

Value-picker's Corner

TAMIL NADU NEWSPRINT AND PAPERS LTD; PRICE: RS 119.25

Among the most efficient paper companies, with a steady EBIDTA (earnings before interest, taxes, depreciation and amortisation) of around 25 per cent for the last four quarters, TNPL's results this fiscal bode well (estimated PBT or profit before tax: Rs 95 crore; estimated turnover: Rs 810 crore). Paper prices went up four times in the last fiscal and excise duty has been reduced from 16 per cent to 12 per cent. TNPL has capex plans worth Rs 565 crore underway, and expects turnover to touch Rs 1,000 crore by 2007-08. With a projected EPS (earnings per share) of Rs 15.2 for calendar 2007, it is quoting at a forward P-E of 7.4, and is both a good short- and long-term buy, says Rohan Gupta, Research Analyst, Emkay Share and Stockbrokers.

-Nitya Varadarajan

Trend-spotting

From this April, be prepared to take your PAN (permanent account number) very seriously indeed. Sebi (Securities and Exchange Board of India) making the PAN compulsory for DEMAT accounts looks to be the forerunner to its emergence as the all-purpose citizen's ID card. PAN has become vital for most financial transactions-IPO (initial public offering) investments above Rs 1 lakh, savings bank deposits above Rs 10 lakh, or property transactions over Rs 30 lakh will all require this number. Say NSDL (National Securities Depository Ltd) officials: "In future, any high-value transaction like car or airline ticket purchases, or even paying hotel bills will require PAN." The recent discovery of over a million duplicate PAN numbers does not augur too well but cross your fingers and watch this space.

-Mahesh Nayak