Welcoming New Year 2017-18

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Dear Friends,

                  A very Happy New Year to you!

For the Finance world in India the New Year starts on 1st April XXXX and ends on 31st March XXX(X+1). However, this is not a standard practice across the globe and some companies use Calendar Year as the financial accounting period i.e. 1 Jan XXXX to 31 Dec XXXX. While these 2 are the predominant periods, companies do follow other timelines for financial accounting. Ex. Oracle follows 1 June XXXX to 31 May XXX(X+1) as the accounting period.

We should feel extremely happy at this juncture, when the returns from the Equity Markets (and Debt too) have been wonderful for the period ending 31 Mar 2017. Rewind it by 1 year, 31 Mar 2016, the portfolio of most of our investors were in Red. Though none of our customers exited in fear, I was definitely worried as most of them are first time equity investors and typical investor reaction is to salvage whatever they have and exit the market. Here, I must say that the level of Composure and Maturity demonstrated by our investors was really great.

Equity Returns are never linear and the risk of equity is the volatility and not that we will lose everything like the fund scams (Sharda, EMU birds, Ponzi schemes and Gold houses in Chennai). The volatility decreases over time and that is the reason why Equities are referred as long term growth products.

A simple approach that I follow for equity investing is

  • Do not look at Equity for short term goals. It might happen that investors who started investing a year back would have made handsome returns in just 1 year, but I would say that luck was in their favour as predicting the market is impossible.
  • Never lose your conviction on Equity to deliver. Whenever there is a blood bath in the markets, eroding significant value, people tend to question their conviction and negative thoughts arise as whether they made a mistake.
  • Don’t invest in Lump-sum mode when the markets are highly valued and stagger the investments over a period of time. Valuation can be figured out through Price to Earnings Ratio (P/E) and Price to Book Value (P/BV) which is easily available.
  • Leave the investment management part to experts through MFs (I would be publishing a separate note on this)
  • The advantage of Equity investment is not just the returns that it can generate but also the taxation aspect of the instrument – currently not taxed if the investment duration crosses a year. Let’s make hay while the sun shines and before Finance Minister brings a twist.

I am enclosing some interesting data on the returns delivered by Equity in the last decade i.e. 31 Mar 2008 to 31 Mar 2017

I cannot predict if the year 2017-18 will continue to be a fantastic year for equity but the drivers are in position today, unlike the past. Investments from Domestic Institutions (DIIs), EPF, NPS and Mutual Funds have significantly improved countering the FII flows. Real Estate and Gold are not expected to improve which helps money flow into Equity

I propose to conduct year end portfolio reviews starting the week of 10th April 2017 and will reach out to you.

<Blog # PenguWIN 1052 – Welcoming New Year 2017-18>

 

HDFC Charity Mutual Fund for Cancer Cure

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Dear Friends,

                      HDFC Mutual Fund has come up with a unique scheme to support needy and underprivileged Cancer Patients by donating the money to Indian Cancer Society (ICS) or other eligible institutions. A total of 3168 patients from 28 states have been benefited through this scheme. A Governing Advisory Council (GAC) meets every fortnight to identify the genuine cases for financial aid

This scheme which is open for investment until 24 Mar 2017 is the 3rd in the series of funds collected by HDFC MF for Cancer Treatment, the earlier 2 being 2011 and 2014. This is closed ended fund for a period of 1136 days and premature exits will not be possible. Typically, when 1 fund house launches a product, its copied by all other fund houses. However, HDFC MF is the only fund house that runs a fund for charity purpose, since 2011. The Scheme offers 2 types of funds for the investors,

HDFC Charity Fund for Cancer Cure

Debt – Income generated through debt/money market instruments and Government Securities

Arbitrage – Income generated through arbitrage opportunities between cash and derivative markets

The minimum investment is 50,000/- and multiples of 1,000/- thereafter.

Now comes the interesting feature of the fund.

The funds collected by HDFC in both the Debt and Arbitrage schemes will be deployed to generate income. The Scheme has only dividend pay-out option and dividends are paid every 6 months, subject to availability of distributable surplus. 

The Investors have 2 options:

50% Dividend Donation Option – Under this Option, Investors can donate 50% of the dividend amount, they earn and the rest shall be paid to them.

100% Dividend Donation OptionUnder this Option, Investors can donate 100% of the dividend amount.

In addition to this, the dividends donated by the investors is eligible for Income Tax deduction as per Sec 80G.  To claim this as a part of IT filing, a certificate with PAN of the investor will be provided.

HDFC MF will not charge any fund management expenses for this scheme and also match the contribution of Investors donation through dividends

At the end of 1136 days the scheme will be closed and the principal will be returned back to the investor.

Dividends paid by debt funds are taxed at 28.4% (Dividend Distribution Tax, DDT) while Arbitrage fund enjoys equity status and hence Tax Free. So, even if is we get a lesser return through Arbitrage, the taxation will make a difference making Arbitrage fund attractive over debt

Most of our clients know that we do not recommend a product that we will not buy and preach only what we practice. So, our contribution is definitely there for this fund.  

<Blog # PenguWIN 1051 – HDFC Charity Mutual Fund for Cancer Cure>

Business Ethics of Insurers

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Hello Friends,

           Last weekend (Feb 25/26) I watched a movie called “Rainmaker” directed by Francis Ford Coppola, rated as one of the best directors and has movies like Godfather to his credit. The movie is based on a book written by John Grisham, Lawyer and acclaimed writer of legal thrillers.

Matt Damon, plays the role of an Attorney, very enthusiastic and fresh out of college. He signs up the case of a poor family with their son, about 20 years old, suffering from Leukemia, which can be treated through bone marrow transplant. But their Insurance Company rejects the claim multiple times (saying treatment is very high and chances of survival is low) and Matt files a lawsuit against the Insurance Company. The insurance company is ruthless and as a protocol rejects every claim, atleast the first time, without going into merits of the case (their operational manual say “reject” the claim). The diseased victim dies during the trial, as the time frame to start the surgery got delayed. The parents of the victim pledge the entire money to social cause, if they get the verdict in their favour, as their son is dead and don’t intend to use that money for themselves.

Finally, the Jury gives the verdict in favour of the victim and his poor family and asks the Insurance Company to pay a huge amount as punitive damages, resulting in the Insurance Company going bankrupt. 

Before you start thinking that why PenguWIN has shifted lanes from writing about “Financial Topics” to “Movie Reviews”, let me assure that this is a personal finance blog and I am not a movie buff to demonstrate my competency in Reviewing Movies!

On the 2nd March (Last Thursday), I read an article on consumer protection by Jehangir in Business Standard. When I read the article, I was really shocked. It relates to a life insurance claim of a person for a Sum Assured of 2 Lakhs, who was hospitalised in Amritsar and died. The Insurance Company repudiated the claim made by the victim’s wife on grounds that the victim was suffering from chronic liver disease for 18 months and the same was not revealed when the insurance policy was taken. I don’t want to name the Insurer, which is what is frightening more so for the claim amount (I have attached the paper cutting in the link). 

http://penguwin.com/insurance-rejection-v02/

The Insurance Company lost the case in Gurdaspur district forum but went ahead to appeal in Punjab State Commission. The Insurer relied on Medical Certificates obtained from 3 doctors that claimed the victim was an alcoholic and had suffered cirrhosis of the liver (an abnormal liver condition in which there is irreversible scarring of the liver, resulting in failure).

The state commission upheld the Insurer’s stand and set aside the district forums award. The victim’s wife approached the National Commission and contended that her husband was a school teacher, used to go for regular health check-ups and the reason for death was an accident which had nothing to do with alcoholic Cirrhosis of Liver and produced the relevant records. This is where you will see another twist..

The national commission, on reviewing the medical certificates that the insurer produced from 3 doctors, found several loopholes – 1 is not even a allopathic doctor and the handwritten certificate did not have the date and reference. Similar observations were made on the other 2 certificates and the medical record of the hospital showed that it was uncertain whether the liver problem was associated with alcoholism. The National Commission indicted the insurer for their fraudulent practices and decided the verdict in favour of the victim.

Apparently, a claim cannot be declined on assumptions or on basis of medical certificates which are vague. The name of the Insurer and the way they had conducted themselves to decline a small sum of 2 Lakhs is definitely worrisome.  

Does the lawsuit ring a bell with a similar one which caught the attention of the entire the country?

 

<Blog # PenguWIN 1050 – Business Ethics of Insurers>