Chris's "Call"

Brand Ambassador's Loyalty?

2009-10-15T09:49:00.000-07:00

(Couldn't get a better pic)

Yuvraj was recently signed as the Brand Ambassador for Birla Sun Life Insurance and Fiat Punto. And already there is conflict of interest, when it comes to the Ad’s. In the Birla SunLife Insurance ad you can clearly see him getting out of a car, which is definitely not Fiat Punto. This clearly shows that he doesn’t believe in the product he endorses. If a Brand Ambassador endorses a product then he should take care that he uses the same product in public. Think of Sharukh holding a coke bottle in an ad for another product!!??

The best example for a brand ambassador who takes this very seriously is a south Indian actor called ‘Surya’. He endorses for TVS bikes and even in his movies or any other ads he’ll be seen only in that bike.

Click here to for the Ads : http://www.youtube.com/watch?v=k0SkYTBBpRc (Birla Sun Life)

http://www.youtube.com/watch?v=ER-64u67H4k (Fiat Punto)

Incredibly Spacious Aveo

2009-10-13T03:54:00.000-07:00

This is an incredibly well made ad, which clearly explains the USP of U-VA. However it misleads the audience in every way possible. In the ad they show some 7 or 8 guys coming out of the car, which explains the USP - Spaciousness. But according to law, the car’s capacity is driver + 4 passengers. So, Is this right in the part of the company and the Ad agency to communicate illegal methods of travelling to the public?

Wondering whether it could be banned because it communicates something which is illegal?

Check out the Ad : http://www.youtube.com/watch?v=pwo_9C597DM

2009-09-07T01:59:00.003-07:00

ULIP Vs ‘Life Insurance + Mutual Fund’ -- Comparison 1

The Policy that I have taken for comparison is,

· HDFC Unit Linked Endowment Winner Policy

The reason for taking this policy for study is because my bro has taken this policy. I have nothing against this company and this study is done purely for academic reasons. Even though I am taking only this policy for comparisons, the results can be generalised for all the companies which are in the ULIP business.

ASSUMPTION:

1. I am assuming that the policy holder pays the premium amount at the exact date and continues the payment till policy term. This way the late charges or the surrender charges can be excluded from the study, which will make the study easier to understand.

2. Just to make calculation regarding the Term Assurance Policy easier, I am assuming that the policy holder dies after paying the last premium. This will give a more understandable cash flow situation. This is because the nominee of the policy holder will get the sum assured and also the units available at the end. Since this amount is quantifiable, the study can be understood easily.

HDFC UNIT LINKED ENDOWMENT WINNER POLICY:

Details:

Date of Commencement of policy: 30^th June 2009

Age on Commencement of Policy: 34

Instalment Premium: 120,000 Rs

Frequency of Payment: Annual

Sum Assured: 600,000 Rs

Term of Policy: 15 yrs

The sum assured refers to a Term Assurance Policy for which risk premium is paid every year and which is deducted from the premium paid by the policy holder. Also the policy administration charge is assumed to increase by 5% each year to factor in inflation. The various cash flows that happen for this policy for 15yrs are given in Table 1.

TABLE 1

Year	Premium Allocation Charge	Policy Administration Charge	Risk Charges (for death benefit)	Fund management Charges	Death Benefit
1	48000	750	1225	1.25% of NAV	_
2	36000	788	1225	1.25% of NAV	_
3	2400	827	1300	1.25% of NAV	_
4	2400	868	1340	1.25% of NAV	_
5	2400	912	1400	1.25% of NAV	_
6	2400	957	1450	1.25% of NAV	_
7	2400	1005	1530	1.25% of NAV	_
8	2400	1055	1610	1.25% of NAV	_
9	2400	1108	1680	1.25% of NAV	_
10	2400	1163	1770	1.25% of NAV	_
11	2400	1222	1890	1.25% of NAV	_
12	2400	1283	2040	1.25% of NAV	_
13	2400	1347	2200	1.25% of NAV	_
14	2400	1414	2310	1.25% of NAV	_
15	2400	1485	2560	1.25% of NAV	600000 (inflow)

This information is taken from the schedule given by the company. The policy holder pays Rs120, 000 in the beginning of every year. These charges mentioned above are levied from it and then the remaining amount is invested in funds and converted to units. The fund management charges are levied by selling the units appropriately. Other charges like service charges are also levied, but they are not included here for ease of calculation.

This ULIP is similar to taking a Term Assurance Policy along with investments in Mutual Funds. The Term Assurance Policy I have chosen for comparison is ‘HDFC Term Assurance Policy’. If the same policy holder wants a Term Assurance Plan for 15yrs for an assured sum of Rs 600,000 the premium per year is Rs. 1802 with Policy Management Fee of Rs 150 per year.

The amount of money invested in Mutual fund is considered to be same as that invested by ULIP managers. So the entry and exit load, if any will be the same. Also service charges for this combination of investment also will be less than a ULIP. But it is ignored for ease of calculation. The cash flow for this combination of investment is shown in Table 2.

TABLE 2

YEAR	Premium for Term Assurance	Policy Fee	Fund Management Charge	Death Benefit
1	1800	150	2% of NAV	_
2	1800	158	2% of NAV	_
3	1800	165	2% of NAV	_
4	1800	174	2% of NAV	_
5	1800	182	2% of NAV	_
6	1800	191	2% of NAV	_
7	1800	201	2% of NAV	_
8	1800	211	2% of NAV	_
9	1800	222	2% of NAV	_
10	1800	233	2% of NAV	_
11	1800	244	2% of NAV	_
12	1800	257	2% of NAV	_
13	1800	269	2% of NAV	_
14	1800	283	2% of NAV	_
15	1800	297	2% of NAV	600000 (inflow)

The policy fee is increased by 5% per year to factor in inflation.

Now if we compare Table 1 and Table 2, we can clearly see that ULIP investing in funds and customer investing in Mutual funds are almost the same. So the charges relating to investment can be avoided. But the ‘Fund Management Charge’ has a difference of almost .75%, which can have an impact in the long term. But since this depends on market movement which is beyond the scope of this paper, we deduct a considerable amount from the final result.

Table 3 gives the differential cash flows for ULIP and ‘Term Assurance + Mutual Funds’. The Present Value of these differential cash outflow is found, to quantify the amount lost by the policy holder. To find the present value, the discount rate used is 8.5%, which is the return for a provident fund.

TABLE 3

Year	Cash outflow for ULIP	Cash outflow for 'TERM + MF'	Differential outflow	PV of Differential outflow
1	49975	1950	48025	44263
2	38013	1958	36055	30627
3	4527	1965	2562	2005
4	4608	1974	2635	1901
5	4712	1982	2729	1815
6	4807	1991	2816	1726
7	4935	2001	2934	1658
8	5065	2011	3054	1590
9	5188	2022	3166	1520
10	5333	2033	3301	1460
11	5512	2044	3467	1413
12	5723	2057	3666	1377
13	5947	2069	3878	1343
14	6124	2083	4041	1290
15	6445	2097	4348	1279
	Total Present Value			95267

As we can clearly see from Table 3, the outflows are more for ULIP. That is every year the customer pays more for the ULIP when compared to taking a combination scheme of ‘Term Assurance + MF’. This comparison can be made only because; the combination of ‘Term Assurance + MF’ gives a similar investment vehicle like ULIP.

Present Value of the differential outflow is Rs.95267, which gives the extra amount that the customer is paying for ULIP. Now the difference of 0.75% for the Fund Management Fee has to be included in this PV. An approximate sum of Rs25000 is taken as the PV of differential cash flow got from the difference of 0.75%. So as a whole the customer looses Rs70267, if he opts for ULIP over the combination of ‘Term Assurance + MF’.

CONCLUSION:

From the above study we can clearly see that it is favourable for a customer to go for a combination of ‘Term Assurance + MF’ when compared to ULIP.

PS:

Many assumptions have been considered for this study. If these assumptions are not taken it will make the paper more complicated, which will be beyond the scope of this paper.

These are my inferences and care should be taken before following this conclusion.

To be Contd...

I will be happy to discuss about any difference in opinions regarding the above view . Looking forward to many interesting discussions.

2009-09-07T01:48:00.000-07:00

ULIP Vs ‘Life Insurance + Mutual Fund’ -- Intro

OBJECTIVE:

Unit Linked Insurance Plan is life insurance solution that provides for the benefits of protection and flexibility in investment. It actually combines both Life Insurance and Investments. So,

ULIP = Mutual Fund + Term assurance

In this paper I will compare the charges for ULIP with a similar ‘Mutual Fund + Term assurance’ combination. After this comparison, appropriate inferences from the same will be made.

INSURANCE:

Insurance can be defined as a contract between 2 parties, where one (the insurer) promises the other (the insured) to indemnify or make good any loss suffered by the latter, in consideration for an amount received by way of premium. The contract of insurance is referred to as an insurance policy. Insurance becomes a very important part for any entity, be it an individual or a group of people or a business. In this paper we are concerned about the Life Insurance part of insurance, which forms a major part of Insurance industry.

LIFE INSURANCE:

Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums. There are many types of Life Insurance, however in this paper we will concentrate on Term Assurance which is what ULIP’s are offering.

TERM ASSURANCE:

Term Assurance is nothing but death benefit. That is the sum assured will be paid on the death of the life assured. The insured should pay a predetermined premium for the policy period, if the insured dies within the policy period, the sum insured will be paid. If the insured is alive after policy period nothing will be paid.

MUTUAL FUND:

Mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually. Mutual funds are a good way of diversification, even with small amounts of money. It also gives professional management for one’s money.

UNIT LINKED INSURANCE PLAN:

Unit Linked Insurance Plan (ULIP) provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). ULIP came into play in the 1960s and is popular in many countries in the world. The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offers.

Unit Linked Insurance Plan - is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire - equity, fixed-return or a mixture of both. So as mentioned earlier

ULIP = TERM ASSURANCE + MUTUAL FUND

VARIOUS CHARGES FOR ULIP:

Premium Allocation Charge:

This means a percentage of the premium appropriated towards charges from the premium received. The balance known as allocation rate constitutes that part of the premium which is utilized to purchase units for the policy. This charge is levied at the time of receipt of premium.

Policy Administration Charge:

This charge is levied in the beginning of every year for the various administration charges that the company incurs for running the policy. This is usually a constant amount charged in a monthly basis.

Fund Management Charge:

This means a charge levied as a percentage of the value of assets and shall be appropriated by adjusting the NAV. This is a charge levied at the time of computation of NAV. This charge will be levied by selling the units available at the current market price. The maximum allowable limit for this charge is 2.5%. But various companies charge different percentages according to the funds they are invested in.

Switching Charges:

This means a flat charge levied on switching of monies from one fund to another available within the product. The charge will be levied at the time of effecting switching. This charge is free for certain number of switching per year, in many of the companies. This is usually a fixed charge and not a variable charge.

Mortality Charge:

This refers to the cost of life insurance cover and is levied at the beginning of each policy month from the fund by cancelling units for an equivalent amount. This charge increases as the number of payment increases. And this charge refers to the premium for paid for the Term Insurance covered for the customer.

Surrender Charge:

This means a charge levied on the fund value at the time of surrender of the policy. When the policy holder wants to get out of the policy before the policy period, he/she has to pay these charges before opting out. This charge varies form company to company and it decreases (in percentage terms) as the number of premium paid increases.

Rider Charge:

This refers to the cost of Rider benefit and is levied at the beginning of each policy month from the fund by cancelling units for equivalent amount. This charge is levied if the policy holder has taken more covers along with the term insurance. This varies with the rider that the policy holder chooses.

To be Contd...

I will be happy to discuss about any difference in opinions regarding the above view . Looking forward to many interesting discussions.

A PRISONER OF BIRTH

2009-09-01T11:29:00.000-07:00

First of all I have to say that it took me almost 5 months to finish this book. I started it almost 4 or 5 times but the starting was so boring that I couldn’t complete it. But once I crossed the first 150 pages it became interesting. At last I finished it yesterday!

The first part of the book looks like a copy from a Grisham’s book and is very boring. I would say Archer is not that good with court scenes, but he’s very good with drama and explaining business battles. This is exactly why the latter part of the book was interesting. The second part is fully about life in a jail and the next part is about business battle and revenge. These two parts are a good read, and I finished the last 300 pages in about 3 days. (actually trying to divert my mind, so have lots of time to read.)

The book’s name “A Prisoner of Birth” doesn’t suit this story according to me. The book actually tells how a guy’s life changes into a tragedy because of tragic happenings of one night, which will haunt him for another 5 years. And all the tragic incidents does not happen to the hero because of how he was born or as who he was born, but indeed because of how badly his enemies wanted to escape from jail term. The title would suit films like “step up” or “coach carter” more appropriately, where the kids try to get out of their life style (which would have ruined their future) and end up working hard for a good future.

Finally my take on this book is that there are many books out there which are very good, and so don’t waste your time on this one. And I’ll rank this book at bottom of all the Jeffrey Archer’s book that I have read till now and I guess I have read most of his books.

Books to be reviewed : Irrational Exuberance, Intelligent Investor, Snowball.

Current Reading: Investment Fables, Security Analysis.

Sensex to BSE 100 : Is it downgrading!!??

2009-09-01T11:23:00.000-07:00

I want to discuss about something that has been in my mind for a long time now. Actually the heading itself clearly explains this something, that I have in my mind. But let me explain it in detail for those who didn’t get it.

When a stock is removed from Sensex and added to BSE 100, the stock price usually goes for a dive. Actually just the announcement of the change by the exchange will cause such a panic, that the sellers will be lined up without much buyers. This creates downward pressure on the stock price and the pressure will mostly be there till the change actually happens. It almost seems like a downgrade given by the stock exchange for a particular stock. What really happens in this situation? Is it really like a downgrade? Do the fundamentals of the stock go for a dive with this change? What happens to the stock which gets added to Sensex?

First of all it surely is not a downgrade. Why will the stock exchange give a downgrade signal for any of the stocks? The exchanges are there just to facilitate the smooth transaction of the securities. So they won’t do the brokers job of downgrading and upgrading a stock. Usually the stocks in the Sensex are stocks with highest market capitalisation (there is some calculation regarding this). So when another stock, through market forces, achieves higher market cap than a stock in Sensex, it might replace a stock in the Sensex. This decision is usually taken by the exchanges.

Therefore these changes are done without any reference to the underlying fundamentals of the company. This clearly shows that these changes are in no means a reflection of the future performance of the company. So without any underlying change in the fundamentals of the company, the stock price of these companies becomes very volatile (which to an extent explains market inefficiency). This also holds good for the stock which has been added to the Sensex. The prices of the stock which gets added to the Sensex moves upwards. What really makes these stocks volatile, that too just with an announcement?

My take in this is that it has everything to do with behavioural finance. Most of the retail investors think that Sensex is a superior Indices than other broader Indices and come to the conclusion that when a stock is removed from Sensex it is a bad signal. The traders, who are always in the lookout for chances to earn money, grab this opportunity and try to drive that stock down. Retail investors link this initial decrease in price to the announcement about the stock being removed from Sensex. Therefore they start to sell, which puts more downward pressure on the stock. This starts a negative feedback, which is actually nothing but more and more people selling just because the price is going down. This clearly explains that, one announcement by an institution (exchange), which has nothing to do with the fundamentals of a company, can drive the price of the stock up or down. This I think is market inefficiency (if am wrong correct me).

There is actually one reason, which according to me is a valid reason for this decrease in stock price. The index funds, which exactly follow the composition of Indices will have to buy and sell stocks according to the changes in Indices. Since there will be more Index Funds following Sensex than other broader Indices, the stocks present in Sensex will be bought more. So when a stock is removed from Sensex there will be selling pressure, which will drive the stock price down. But this should happen only when the stock is moved from Sensex to BSE 100, and not with the announcement itself.

I will be happy to discuss about any difference in opinions regarding the above view . Looking forward to many interesting discussions.

PE ratio – Demystified!!!???

2009-09-01T11:17:00.000-07:00

Price to Earnings ratio is an important ratio that almost all investors in share market will track. It is an easy way to value a stock. But is this ratio so easy that one can take it from the print ad for results given by the company? Nopen it's not. It’s far tougher and complicated. In fact PE ratio can’t be considered in isolation for one company alone. In this section, I will try to analyze all the different aspects of PE ratio.

For starters PE ratio is nothing but the ratio of market price of a stock to its EPS (earnings per share). EPS is profit after tax of the company divided by the total number of outstanding shares. In simple terms what this ratio refers to is the number of years in which the company can earn the investor’s invested money (if the company continues to maintain its performance). For example if a company’s PE is 5, then it means that in 5 years the investor earns his money back (but doesn’t get it back). Now let us get into the complicated part:

The three different types of PE ratios that one can come across in many newspapers,

· Normal PE : It is the PE ratio that takes into account PAT at the end of a financial year. The problem with this ratio is that even after 9 or 10 months into a new financial year, one will be using data that is pretty old. Instead of this, one can use the quarterly results to find the current PE.

· Trailing PE : This ratio takes into account the PAT of the company for the previous four quarters. This ratio might give you the current status of a company, but it won’t be useful when you want to study the company over a period of time. Also if it is a seasonal business then the interpretation of this ratio might lead to incorrect decisions.

· Forward PE : This ratio takes into account the estimated PAT for the next financial year. This estimation is usually done by analysts who might not be correct. To avoid this pitfall usually what one can do is to take an average of all the analyst estimation and give an average PAT. However no one can estimate the future with confidence and with happenings in the recent economy, investor’s confidence in these analysts has deteriorated. When a company’s estimation of their own future earnings goes wrong, why should anyone care about these estimations?

Now there are three ratios, each one with their own advantages and disadvantages. What one can do is, keep track of all the above ratios for a perfect analysis of any stock. But care should be taken about the inferences that can be inferred from each ratio. Otherwise one might end up choosing the wrong stock for investing, which can be easily avoided using simple rules for screening stocks using above ratios.

The EPS we saw till now takes into account the number of outstanding shares. There is one more terminology called diluted EPS, which uses the total number of shares that can be outstanding. That is outstanding shares along with convertible bonds and stock options. This will give a more conservative EPS estimate because it takes into account future dilution of the company. An investor should always have an eye on this because there might be companies which has issued so many convertible issues or stock options that its diluted EPS tends to be lot less than EPS. So Diluted PE should is also important to pick stocks for long term.

To be Contd....

Diversification and Employee Stock Option

2009-09-01T11:05:00.000-07:00

Employee stock option is the option given to an employee by a company, to buy stocks of the company at a particular price in the future. ESOP is usually given to employees to boost their morale by giving ownership in the company, which is linked to their performance. The reason behind ESOP is that the employee will work hard to improve the performance of the company, which in turn will improve the company’s share price. ESOP has gained more importance in the past decade because of the tax incentives which it got, when compared to bonuses. But in the recent past this advantage has reduced by the imposition of taxes by the government.

Diversification is the process of reducing(hopefully) your risk in savings by investing in wide range of products. The range of products should be negatively correlated with each other so that when one investment reduces in value the other will increase, thus giving a cushion against losses. Diversification is considered very important to avoid the pits of short and medium term fluctuations in the markets.

Now the question in everyone’s mind is “What is the connection between employee stock options (ESOP) and diversification?” One can consider the time they spend in their job as an investment, and the salary they get as return for the time. Since employee spends at least one-third of his time in his job, this assumption becomes very important. Also in the same line, the salary increments and the promotion that the employee expects can be considered as the future expectation from the investment. So when an employee is investing almost one-third of his life in the company, is it a prudent decision to invest his savings also in the same company? Isn’t this against the basic reasoning for diversification?

I am not telling that ESOP is bad for everyone. But care should be taken when one accepts ESOPs. The terms and conditions under which the ESOP is given should be scrutinized before exercising the option. Employee should not be lured into the hype around ESOP and accept it. He should consider it as another of his investment and try to take an informed decision. ‘Overconfidence’, one of the key concepts in behavioural finance, is one of the biggest hurdles that the employee has to overcome to take an informed decision. The employee thinks that he knows a lot about his company and is overconfident about its returns. But rarely does anyone knows about the real status of the company, other than the top management (good example for this is Enron). Think of a situation in which the company goes bankrupt, the employee looses both is job and his savings, which is a catastrophe for any employee.

Therefore an employee who believes in diversification should be very careful before he accepts his ESOP.

I will be happy to discuss about any difference in opinions regarding the above view . Looking forward to many interesting discussions.