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JUNE 3, 2007
 Cover Story
 BT Special
 Back of the Book

Trillion-Dollar Club
India has joined the elite club of 12 countries with GDPs in excess of a trillion dollars. The country's GDP crossed the trillion-dollar mark for the first time when the rupee appreciated to below Rs 41 against the greenback. According to a report by Swiss investment bank Credit Suisse, India's stock market capitalisation has risen to $944 billion (Rs 39,64,800 crore), which is also closing in on the trillion-dollar mark. An analysis of the Indian economy.

Minding The Monsoon
The India Meteorological Department's prediction that the total rainfall in the coming monsoon season is likely to be 95 per cent of the long-period average, with an error margin of 5 per cent, is good news for agriculture. But experts say there's a need to revamp monsoon prediction so that the region-wise and timing of rainfall patterns can be forecast much earlier. A look at the credibility of monsoon models and their impact on agriculture.
More Net Specials

Business Today,  May 20, 2007

A Portfolio For Your Kids
It's the all-important investment decision. Here's how to leave enough for your kids for different milestones in their lives.
The Medury family
When Ram Kalyan Kumar Medury, 32, worked the numbers for his now two-and-a-half-year-old daughter Ritsika's education, he figured it would cost him almost Rs 70 lakh 20 years from now. So the family is earnestly building wealth for their kid by saving 25-30 per cent of their income, of which 60 per cent goes into long-term equity funds and the rest into a combination of debt, ULIPs and equity

The Medurys began investing for their child a couple of months after the birth of Ritsika, their only daughter, now two-and-a-half years old. When he did the math, Ram Kalyan Kumar Medury, 32, Group Project Manager at Infosys-Hyderabad, came up with numbers that will shape the future of their playschool-going child and was taken by surprise. "I did some arithmetic a few months after Ritsika was born and was shocked at the estimate of the cost of her education in inflation-plus terms. For instance, an MBA at a leading B-school costing about Rs 15 lakh today would, at 6 per cent inflation, cost Rs 45 lakh, 20 years from now. Throw in similar numbers for college education and the total would go up to almost Rs 70 lakh, and we are not even talking about Ivy League education abroad," he says.

It's one of life's biggest and all-important investment decisions. And it does not come cheap. There are bills-and huge amounts-to be paid at every stage of life, whether it's pre-school, school, college education and professional courses or marriage. Then you may want to do more: you may also want to leave your child with more than enough for the future and set her up for life-leave her with a legacy to cherish.

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Goal Seek

Indeed, most parents find themselves in the familiar spot-where to begin? But there's nothing like setting targets for your kids or milestones and then working to achieve them. "Determine your broad long-term objectives, short- and middle-term needs and investments you can make keeping in mind your cash flow requirements. Begin by covering against risks and proceed with asset allocation that will encompass your main objective: create wealth for your kids," says Viraj Ghatlia, Head (Financial Planning), IL&FS Investsmart.

Determine where and how much your kid will require for his future. Says Rohit Sarin, Founder Partner, Client Associates, a private wealth management firm: "Every couple must set specific milestones and then resolve to meet them through savings. It's easy to assess your performance midway and make adjustments-such as revising your milestone, increasing your savings, or pushing your horizon farther."

SCHOOL (Years: 5-15)
Rs 5-7 lakh; Yearly cost: Rs 70,000
Portfolio: Equally in stocks and debt

COLLEGE (Years: 15-20)
Cost today: Rs 7 lakh; Cost after 10 years: Rs 12.5 lakh
Yearly investment: Rs 60,000
Portfolio: 70 per cent in stocks

Cost today: Rs 15 lakh; Cost after 15 years: Rs 35 lakh
Yearly investment: Rs 75,000; Portfolio: 95 per cent in stocks

MARRIAGE (Years: 25-27)
Cost today: Rs 7 lakh; Cost after 20 years: Rs 22 lakh
Yearly investment: Rs 22,000
Portfolio: 95 per cent in stocks

Illustrative example for a five-year-old
Inflation: 6 per cent
Rate of return: 15 per cent
Approximations and indicative costs


The Biswas family
Agnimitra, 36, and Sarmistha, 34, have distinguished investment plans into two parts-a protection plan and a wealth building plan. A Smartkid plan provides a part of their child's monetary requirements at different milestones. A wealth building plan relies on mutual funds largely through systematic investments. Six-year-old Soham is the nominee of all their investments

Investing enough for their kids' higher education is their number one goal and Chennai-based B. Sriram, Zonal Manager (Finance), Spencer's Retail, is doing just that by accumulating assets that will be really useful for his children-eight-year-old son Shreyas and 18-month-old daughter Sandhyaa. "We are from a middle-income group and are beginning to see surplus funds only recently. I hope to accumulate at least Rs 10-12 lakh for each of my children for their higher education," he says.

Build a Solid Foundation

A bulk of children's financial requirements, thankfully, comes at a later stage. So, start with equity. "If your objective is to create wealth for your kids, your portfolio will have to be skewed towards equity. The equity part can compose of 60-80 per cent of equity-based mutual funds and 40-20 per cent direct investment in stocks. I would recommend diversified equity funds and the rest blue-chip large-cap stocks of companies that have excellent prospects," says Amar Pandit, a Mumbai-based Certified Financial Planner of My Financial Advisor. "For most working class couples, direct investment in stock market is a riskier proposition than investing in mutual funds and so I would recommend well-rated MFs," says Rajiv D. Bajaj, Managing Director, Bajaj Capital.

Equity investing also comes with its own share of risks. "Building an investment portfolio depends upon your willingness to take risks, ability to take risks and the need to take risks. For a relatively young couple wishing to build wealth for their children, equity comes across as an asset class with highest returns.

For the debt part of the portfolio, Pandit recommends investments in PPF, which gives 8.5 per cent tax-free return. "The fixed maturity plans (FMPs), which give 9-10 per cent, are also not bad in the current interest scenario.

Four ways to invest for your kids.
Equity Power: The longer your goals, the more you invest in equity or equity MFs, which select stocks for you. For direct investors, it's prudent to stick to sound and growing blue chips. Equities compound wealth the fastest

Balance with Debt: Add on debt to balance your portfolio. If your goals such as, say, college entrance is nearing, it's prudent to shift to debt to balance your payments. Steady investments such as government savings can be used

Gold's a Shield: Gold has not been a wealth builder, but it acts as a hedge in the long-term against global currency risks. For the long haul, a bit of gold is no harm, as it can counter any global reaction

Real Estate is Steady: If you want to give a gift to your child when she's older, go for one. Real estate normally appreciates steadily and gives inflation-beating returns

Bajaj says that couples should seek to build a portfolio aggressively tilted towards equity, which will gradually shift more towards debt over the years, noting that asset allocation is a dynamic, not a static, process. As your child needs, say, entrance fee to join a B-school, you can gradually shift from equity to debt.

Amar Pandit
My Financial Advisor
"If your objective is to create wealth for your kids, your portfolio will have to be skewed towards equity"
Viraj Ghatlia
Head (Financial Planning)/IL&FS Investsmart
"Determine your needs and investments you can make keeping in mind your cash flow requirements"
Rohit Sarin
Partner/ Client Associates
"Every couple must set specific milestones and
then resolve to meet them through savings"

As for real estate as an investment avenue, Ghatlia says property is not as liquid as equity and may not work for a couple wishing to boost their wealth. Agrees Sarin: "For a typical working class family, as much as 45 per cent of household savings go into buying a house to live in. There is hardly anything left to invest in property as investment vehicle considering the skyrocketing price of real estate."

The Sriram family
The Srirams believe in building real assets for their kids. B. Sriram, 39, bought a plot and made a small beginning by investing in small quantities of gold. "I hope to have Rs 10-12 lakh for each of my children's higher education," he says

For the Srirams, however, property has been a good investment. A 2,400 sq. ft plot that he bought 18 months ago near Tambaram, a Chennai suburb, for Rs 3.5 lakh is now worth Rs 10-12 lakh. It's not a bad idea also to include a bit of gold in your assets. "You can have gold as 5 per cent of your portfolio because it is considered a good bet against inflation, war and global currency risks," says Pandit. Sriram, for example, plans to collect 350-400 gm of gold for his daughter.

Tune and Fine-tune

Review your portfolio regularly. If it's not doing well, assess the reasons and rejig it for growth. Your plans can go for a six if you are not beware of the future shockers-as your income rises so does your 'lifestyle costs', your debt may have crossed the reasonable threshold, your health may be taking a turn for the worse, and the cost of education may be rising dangerously. "Today, lifestyle inflation is the biggest threat to your saving and investment potential. An annual review of your budget can save you from sliding into extravagance. Also important is regular health check-ups," says Sarin.

Adds Pandit: "Instead of keeping an expenditure budget, keep a savings budget and stick to it."

Reap A Bumper Harvest
As agri-sector booms, related companies offer good opportunities for investors.

Investment gurus such as Jim Rogers saw it coming as early as 1999. Prices of agri-commodities are soaring in the face of sustained uptick in global demand and stagnating production. Notwithstanding the scorching economic growth in India, Indian agriculture is painfully ambling along at around 2 per cent due to decades of under-investment. That, however, is changing.

With the policy-makers renewing efforts to boost agriculture-the last two budgets were agri-focussed-now, a clutch of companies is poised to capitalise on the coming boom. Right from companies that provide farming inputs such as seeds to farming techniques and machinery to those involved in distribution of farming products-companies in the agri-sector are slowly coming into the limelight. As the farm income increases, another class of companies that has traditionally focussed on urban centres has rapidly increased its penetration in rural India. These are banks and consumer durable companies. There are many themes playing out in the agri-sector. (see The Seeds of Growth).

The Base Producers

The first to benefit are direct agri-products companies. Commodity prices affect the earnings of rice millers, sugar producers and tea manufacturers. Investment opportunities abound in this category as the global and domestic demand is expected to remain strong over the coming years, and prices are expected to remain reasonably firm. "Strong demand will require a substantial increase in acreage, which has been virtually unchanged for decades. Until that happens, agricultural prices are likely to stay elevated," says Si Kannan, Associate Vice President of Kotak Commodity Services.

Hence, companies producing agri-based products are well poised for the future. A case in point is rice and wheat miller Usher Agro, which listed last year at Rs 9, but zoomed to Rs 30 levels soon thereafter. The stock thrived on the back of steady demand for its products by acquirers such as Food Corporation of India, among others. Besides companies such as REI Agro, krbl, exporters of the long-grained and aromatic basmati rice, are also riding the crest of the same wave.

"The seeds business is cyclical but fetches high return on investment"
Harendra Kumar
Head (Research)/ ICICI Direct

Sugar is yet another agri-commodity which is on an upswing. ADBI Capital's agri-analyst Maitali Shah picks up India's top two sugar producing companies, Bajaj Hindusthan and Balrampur Chini, along with Dwarikesh Sugar for a long-term play of four years and more. She cautions though, "sugar stocks are not in favour just now as off late, sugar industry is facing a glut." Arun Kejriwal, Director, Kejriwal Research and Investment Services, however, points out that the long-term story in sugar will play out more aggressively once India starts looking seriously at ethanol as an alternate fuel. Ethanol is a by-product of sugar processing. Brazil has made a significant move towards using ethanol and that move alone has affected global sugar prices tremendously.

Besides, companies in the business of food and solvent extractions are seeing a revival in their fortunes. Among the many companies, Ruchi Soya and KS Oils-companies into solvent extraction-also feature high among investors' favourite stocks.

Indirect Beneficiaries

However, soft commodities apart, there are many more investment opportunities within the broad agro-theme. One company that has been in focus is Jain Irrigation. It is the largest supplier of micro-irrigation equipment in the country. As the government stresses on increasing the arable land under irrigation, the company is well poised to take advantage of the investments coming in new irrigation techniques. Finolex Industries, KSB Pumps and Kirloskar Brothers, too, fall in the category of agri-infrastructure companies.

As production techniques are spruced up, the agri-input sector which provides the much-needed stimulant to crops is the seeds and the fertiliser sectors. There are a number of players in this segment-among them Advanta India, which debuted recently on the stock market, and Monsanto India. "The seeds business while being cyclical shows high return on investment once the seeds are launched in the market," says Harendra Kumar, Head (Research) at ICICI Direct. Kumar points out that increased corporatisation of agriculture will provide a tremendous fillip to the seeds business as companies try and improve the low yields from most crops. Other companies worth considering are agro-chemical companies such as Rallis India, United Phosphorus which deal with crop protection chemicals.

Fertiliser companies such as EID Parry, Coromandel and Godavari Fertilisers or gnfc are good bets as we look into the future even though they operate in a highly regulated environment as yet.

Among other equipment producers, tractor companies also provide a good opportunity as increased mechanisation of farming results in an increased demand for tractors. M&M has significant share of this market.

The Fringe Gainers

There are many companies not directly related to agriculture but thriving nevertheless on the agri-sector. Mahindra & Mahindra Finance is essentially a play on India's rural economy with more than 70 per cent of its business coming from rural and semi-urban areas. Brokerage house SSKI believes that the "increasing focus on agriculture by the government, corporates and organised financiers would propel India's rural economy on to a higher growth trajectory. M&M Finance is ideally placed to capture this opportunity." ICICI Bank is also aggressively zooming in on rural markets.

Agriculture contributes about 20 per cent to the gross domestic product. As of now its capital market exposure is fairly insignificant. But market observers reckon that the shift is imminent as agri-sector gains dominance in the coming years. Says Jaideep Goswami, Head (Research), UTI Mutual Fund: "As investment picks up in agriculture, the sector will improve its share of market capitalisation to reflect its importance in the overall economy."

Get The Accident Cover
An accident protection plan could help you recuperate or get your family to bounce back in case of the worst.

If there was a way of telling when and where a calamity can strike, you would avoid it, of course-and you wouldn't need accident insurance either. But since that's impossible, most people, especially for on-the-move individuals, personal accident insurance offers a contingency plan not just against road accidents, but against seemingly innocuous sounding incidents such as falling off a ladder or even being whacked by neighbour's cricket ball.

In fact, an accident insurance policy covers your life at three different levels of contingencies-death due to accident; permanent total disability (total loss of eyesight or limbs, deafness, paralysis, etc.); permanent partial disability (loss of vision in one eye, loss of one hand, etc.) and temporary disability (loss of work due to short-term disability). And they come in handy, particularly when you have been hit by a shocker that sets you back financially.

Besides, accident insurance policies come cheap relative to the risk because accidents are unpredictable. For a cover of Rs 1,000 sum insured, the premium rates vary between 75 paise and Rs 3.5, depending on the policy you choose. Most accident insurance polices are valid for a year, but there are exceptions. Insurers such as ICICI Lombard, for instance, offer a continuous policy for a term option of three years and five years, which means renewal does not fall every year, though you must remember the year it lapses so you can opt afresh for a new policy.

Accident covers, however, have different features. But one that offers a combination of death, permanent total disability and permanent partial disability is your best option in case you are on the move. Some companies also offer a 'loss of income compensation' for a temporary partial disability, but at an additional premium. Some standard policies offer an additional education benefit for no extra cost-a one-time amount of Rs 5,000 or Rs 10,000 or a percentage of premium, whichever is less-for the child that has lost a parent or other costs such as carriage costs to cremation grounds.

Should you opt for an accident rider on life?
» Don't opt for this, unless you are reluctant to approach a general insurer separately for the purpose. An accident insurance rider on a life cover is more expensive than one taken separately
Family covers for accident insurance benefits cannot be tagged to the cover of a life insurance policy which has a single beneficiary. Your spouse and children, too, could do with accident covers
An accident benefit rider on a life insurance policy will not have many of the feature variations offered by a general insurer
Once a rider lapses (upon its first use), you cannot take another rider for the next year to the same policy. You can, however, opt for a general insurance cover
General insurers spell out clearly the process involved to make a claim when the policy is taken, besides there are help desks. They are equipped to deal with policies that require yearly renewal
Why an accident cover is a must.
» Accidents can happen anywhere. If it results in death, the beneficiary will get a decent sum which is far more than a traditional life cover
» There are benefits in case of total permanent disability-100 per cent of sum assured is given
» In case of temporary disability, some companies cover loss of income for 52-102 weeks
» There are compensations for various levels of injuries. A hospital confinement/medical expense up to a percentage of sum insured is available at an extra cost, and must be taken

The amount of compensation, however, varies depending on the type of disability. In case of death, survivors get 100 per cent of the sum assured. Besides, total permanent disabilities are given due consideration by most insurers. "Companies generally treat total permanent disability as equal to death and compensate 100 per cent of sum assured," says Vinod Sehgal, Managing Director, Bajaj Capital Insurance Broking. In case of semi-disablements, the compensations are usually determined in percentages. In fact, compensations for partial permanent disability can go up to 60 per cent-but this really depends on the kind of disability. Further, Royal Sundaram, for instance, offers 75 per cent of capital sum for loss of hearing in both ears and 40 per cent in the case of loss of four fingers and thumb of one hand or 6 per cent for loss of middle finger.

"It is best to opt for a policy that would have a sum assured of five times the annual salary"
Vinod Sehgal
MD/Bajaj Capital Insurance Broking

But there are certain product extensions that go some way in reducing your financial burden. If you have to undergo inpatient treatment, you are reimbursed medical expenses up to a pre-set limit. With medical costs being what they are, this is a must-opt provision, although you have to furnish medical bills to settle the claim and it also covers other costs such as extra nursing, or transportation of attendant to hospital.

Sometimes, insurers offer their own USPs to the product. Cholamandalam ms allows 'for modification of car or house' on account of disability up to a maximum of Rs 50,000. This is for people who may require sudden modifications such as installing hand brakes in cars or ramps in a house to ease movement.

But how much accident cover do you need? "It is best to opt for a policy that would have a sum assured of five times the annual salary," says Sehgal. "Housewives should be covered for at least 75 per cent of the principal amount, while children should have 50 per cent cover," he feels. True. It's your only back-up plan.



Now, Taxing Forms
Saral has made way for the new ITR forms. What's changed?

"The new way of filing means that the individual taxpayer is dealing with a different animal. He will have to do things in time"
Sandeep Shanbhag
Investment Consultant

Over the last few days, the debate over the changes in the way income tax returns will be filed for salaried employees has been getting more intense. The old income tax return form-Saral-will now make way for what is being referred to as the Income Tax Return (ITR) form.

The question that most people are asking is rather simple: what are the significant changes in the new system and what is it that the income tax payer needs to get ready for? For starters, it is possible that the taxpayer may have to get ready to submit more details with respect to his sources of income and how he has been spending his money. All this comes under the broad heading called the Annual Information Return (air). In all, the air captures seven kinds of transactions among which are credit card payments of Rs 2 lakh or more in a year, property purchase or sale of Rs 30 lakh or more, purchase of mutual funds of Rs 2 lakh or more or investing over Rs 1 lakh in an IPO (initial public offer) or a rights issue.

Has this, therefore, become more detailed a process? "Paperwork will certainly increase since there is a lot of detail that is involved," says Sandeep Shanbhag, an investment consultant. For instance, it could well be necessary for the taxpayer to keep his credit card statements for a year. Shanbhag points out that the changes proposed are towards facilitating electronic filing of returns at a later date. The paperwork for a salaried taxpayer having only interest income could actually increase by three pages and five schedules. Likewise, for an individual having no business income, it will entail six pages and 15 schedules.

The new tax return forms spell out more details for you.
THEN Saral was what was used and individuals used different, easy-to-understand forms such as Form 2, 2D, 2F
NOW There are various new ITR forms depending on which category the taxpayer falls into. For instance, a salaried taxpayer who earns only interest income will use the ITR-1 form while those investing in mutual funds and shares will have to use the ITR-2 form

THEN Less emphasis on big-ticket transactions. Required less details under the different heads of income

NOW Very different this time around. There are seven transactions which will be tracked and these include, among others, credit card payments in excess of Rs 2 lakh per annum or investments in bonds or debentures of Rs 5 lakh or more. All these come under the purview of the Annual Information Return (AIR)

THEN Fairly simple process involving relatively less paperwork

NOW Paperwork will increase as the number of forms has gone up. For a salaried taxpayer with an investment income, it will entail six pages and 15 schedules

Importantly, within the ITR there are a few categories. Those individuals who earn only interest income will now file their returns using a form called itr-1 while those who invest in mutual funds and stocks will have to fill out the details in a form called the itr-2. Effectively, the effort on the part of the income tax payer will increase and he will now need to have a lot of things in order. The positive from the exercise, thinks Shanbhag, is that tax evasion will now be difficult. The question of what the individual taxpayer needs to do is most obvious. "He should not wait till the last moment. The fact is that the new way of filing means he is dealing with a different animal. To that extent, he will have to do things in time," adds Shanbhag. Quite clearly, Saral or no Saral, if the taxpayer is organised and his timelines are planned out, there's no reason for concern.