Save and build the nation Source: BUSINESS LINE (08-NOV-10)

Bombarded with calls from investment agents asking you to consider investments in infrastructure bonds to avail `additional` tax benefits? Institutions such as IFCI, IDFC and L&T Infrastructure Finance had hit the market with such bonds in recent times.

So, wondering what`s The India Infrastructure story, though fascinating, has continued to elude the government; lack of sufficient funds being one of the key constraints. For the 12th Plan (2012-2017), to fund projects in sectors such as roads, ports and power, the government had projected a need of about USD 1 trillion, part of which was to be funded by channeling household savings.

The product

To achieve the latter, the finance ministry, through the annual budget, had opened up the window for even private players to issue infrastructure bonds. As the funds have to be utilized towards infrastructure lending, the finance ministry has been selective about entities that can issue long-term infrastructure bonds.

These bonds can only be issued by IFCI, LIC, IDFC and non-banking finance companies that have been awarded infrastructure status by the Reserve Bank of India. Power Finance Corporation and Power Trading Corporation are some of the companies that have been recently provided infrastructure status by the RBI.

All infrastructure bond offers have to adhere to the broad conditions specified by the government for such issues. For one, the bond shall be issued during the 2010-11 fiscal. There is at present no enabling provision to extend it beyond this period. Two, there are restrictions on the amount of funds that companies can raise through the issues.

Such sum cannot exceed 25% of the disbursements/investments made by the companies in 2009-10. Three, the tenure of the bond would have to be a minimum of 10 years with a lock-in of at least five years (given the long-term nature of projects). Post the lock-in period, investors may exit through the secondary market (as these bonds would be listed in the stock exchanges) or through a buy-back facility specified by the issuer at the time of the offer. Four, the yield of the bond cannot exceed the 10-year government securities yield (prevailing in the month prior to the issue).
The investment angle
What do these bonds offer retail investors? The most notable feature of these bonds is the income tax deduction that they provide. The Government has enabled the bond issue through Section 80CCF of the Income Tax Act 1961. This primarily allows investors to take advantage of a deduction amounting to Rs 20,000 over and above the Rs 1 lakh limit under Section 80C. Besides, they provide a good diversification option.

While infrastructure bonds do not require credit rating, most of the existing companies that are eligible to issue the bonds rank high on credit worthiness. The IDFC issue, for instance, chose to get itself rated by ICRA and received a LAAA rating, the highest rating given by the agency.

Infrastructure bonds, therefore, also provide a relatively safe avenue for long-term investment. The bond also qualifies for any pledge, lien or hypothecation made by an investor to obtain loans from banks, after the lock-in period of five years.

However, there are some limitations as well. The bonds are unlikely to attract incremental investment over and above the tax deduction up to an investment of Rs 20,000. Two, given the five-year lock-in, it may not appeal to investors with short-term goals. Three, selling these bonds in the market post the lock-in would require investors to bear interest rate risk.

For hassle-free overseas travel Source: BUSINESS LINE (08-NOV-10)

Come this holiday season, and a good many of you may intend to take a trip overseas to make the most of it. While you`ve mapped out your holiday and budgets down to the last detail, how are you planning to take your cash overseas? Enter prepaid travel cards.

These cards combine the features of a debit card and a traveler`s cheque. These cards come loaded with a certain sum of money (amount left to you) and can then be swiped at stores, restaurants, and so on, besides withdrawing cash at ATMs. The card can be used any number of times until the money loaded on it is exhausted.

The basics
In a prepaid travel card the money is loaded in a foreign currency. The range of currencies in which cards can be got however depends on the bank. For instance, Corporation Bank offers only US dollars on its cards, while SBI adds the Euro and British pound to the offering.

A wider currency range is offered by banks such as Axis Bank and HDFC Bank, where currencies include Dhirams, Australian, Canadian and Singapore Dollars and Swiss Francs.

Akin to debit cards, prepaid travel cards come with a magnetic strip and a signature panel. They carry a PIN for cash withdrawals in the local currency.

The cards are either Visa or MasterCard and can therefore be used in ATMs, which permit usage of these cards. The come with expiry dates and can be renewed and cash reloaded.

Getting a card
Travel cards have both a minimum and maximum limit that can be loaded. The ceiling is fixed by the Foreign Exchange Management Act (FEMA), currently at $10,000 per year for personal travel and USD 25,000 per trip for business travel.

The minimum limit is stipulated by the bank issuing the card. For instance, Axis Bank`s Travel Currency Card requires at least USD 250 for a US-dollar denominated card and - 200 for a Euro-denominated card. Cards can be used only overseas, and not within India, Nepal and Bhutan. Now, getting the card is usually not too much of a hassle. Most banks provide these cards over the counter. Documentation required commonly includes a copy of your PAN, passport, visa and air ticket and Form A2 (a form required by the FEMA). Documents in order, you simply need to fill out the application form at the bank, and you will receive the card.

The card will be activated once the funds have been cleared. A copy of your passport will also be required when you want to collect refunds on the unutilized card balance.
The exchange rate used will be the one prevailing on the day you buy the card, plus a commission. The rupee equivalent of the foreign currency you require will have to be paid to the bank.

Note that you need not necessarily have to hold an account with the bank. Any amount remaining on your card will be returned by the bank. For currencies outside the range provided by the bank, you can still use the card, but the exchange rate will be applied on the day you use the card.

Should the card value dwindle down to nothing when you`re still on your trip, it can be reloaded. This is rather a bother, though, since it cannot be done online.

Your authorized representative has to go to the bank in India and pay the amount needed. Reloads are also subject to FEMA limits.

Fees and charges
Banks charge a flat fee, irrespective of card value. For instance, HDFC Bank charges Rs 125 for the issue of a card in any currency, while Corporation Bank charges as much as Rs 170. Issue charges may also vary depending on the currency. Axis Bank, for example, charges Rs 150 for cards denominated in US, Australian and Canadian dollars, Euros and Pounds, but hikes this up to Rs 250 for cards in Singapore Dollars, Swiss Francs and Swedish Krona.

Usage of the card at various outlets or establishments does not carry a charge. You may swipe any amount, subject to the limits of the card value. However you would be charged while withdrawing cash or determining card balance at ATMs, depending on currency used as well as the issuing bank. Limits also apply on the amount of cash you can withdraw. Minimum limits vary, and are normally set by banks. Upper limits are generally based on the laws of the country you are in. Reloading cards too carry fees, while refund of the balance carries a flat charge irrespective of amount.

An easier bet…But were you to use an international credit card instead, the exchange rates are determined on the day of usage. Swiping international debit cards at merchant outlets also carries charges. Besides, while fees on cross-currency transactions happens only once with a travel card (when you buy it), with debit or credit cards, it applies every time you use it.

Travel cards also score over hard cash or a sheaf of traveler`s cheques. The latter is not acceptable at all outlets and cashing them can be done only during working hours.

Reporting stolen cheques are also troublesome. On the contrary, 24-hour helplines are available for travel cards, allowing you to hotlist them immediately.

…but with some drawbacks
But they have some disadvantages. One, in an appreciating rupee exchange rate scenario, you stand to lock in at a more expensive exchange rate. Besides, for currencies outside those offered by the bank, rates apply on the day you use them, with a commission.

Two, if you are country hopping, you have to carry as many cards as countries since more than one currency cannot be loaded on a single card. Nor can you hold more than one card in the same currency.

Three, it is advised against using the card for temporary payments, such as hotel deposits or car rentals as the amounts are blocked for a few days.

Why diversify?

Author: Manjunath Gaddi
You hear it so often. Most financial advisers will encourage investors to diversify their investment portfolios. In actual fact, does diversification really work?

Diversification involves splitting up your money so that it can be invested in different kinds of investments. Put simply, it means not putting all your eggs in one basket. But some investors may argue that if all their money was to be placed into one `good` investment, they would achieve the `maximum` amount of returns. But that is only with the benefit of hindsight. In reality, it is difficult to predict the investments which will deliver the `best` profits in the future.

Wider exposure at lower risk levels

The uncertainty in the investment world may have led some investors to place all their monies into safer investments such as fixed deposits. Others may adopt another extreme way of investing by putting all their monies into just one high-risk investment. Both methods are not advisable. The latter is akin to betting, while the former means forgoing good investment opportunities. The benefit of diversification is that it gives investors a wider exposure to various investments at a lower risk level.
We set out a simple hypothetical example below:

In this instance, there are 5 possible investments, labeled A, B, C, D and E. At this juncture, each of these investments seems like it can deliver good returns. For investors who choose to avoid investing in all 5 investments, but put their monies into fixed deposits instead, they could be forgoing several potentially good investment opportunities. For investors who decide to put all their money into just one of these investments, their chances of making it big is around 1 in 5 mathematically, or just 20%.

Let`s see what happens to the portfolio if we diversify it by splitting our monies into 5 equal portions and invest them in the 5 investments, namely A, B, C, D and E. 

Table 1: Investment allocation
Investment	A	B	C	D	E
Amount Invested	Rs. 5,000	Rs. 5,000	Rs. 5,000	Rs. 5,000	Rs. 5,000

Let`s now assume that these investments are left untouched for 20 years and the investments had reaped the following annualized returns:

Table 2: Assumption for annualised returns
Investment	A	B	C	D	E
Annualised Return	+15%	+5%	0%	-5%	-15%

After the 20-year holding period, how many of you are thinking that the diversification exercise was a total waste of time because you are back at where you started with the original Rs 25,000?

In reality, you might be surprised to find that the actual amount of your total investment holdings, including profit, after 20 years, based on the above returns, is Rs 102,085! This is four times higher than the original investment amount.

The power of diversification

The portfolio has now effectively delivered an annualized return of 7.3% on average each year. How could the portfolio deliver such good returns when it appeared the portfolio should have made no gains at all?

Let`s consider the following illustration:

Table 3: Value of Investment After 20 Years
Year	Fund A	Fund B	Fund C	Fund D	Fund E	Total
0	Rs. 5,000	Rs. 5,000	Rs. 5,000	Rs. 5,000	Rs. 5,000	Rs. 25,000
1	Rs. 5,750	Rs. 5,250	Rs. 5,000	Rs. 4,750	Rs. 4,250	Rs. 25,000
2	Rs. 6,613	Rs. 5,513	Rs. 5,000	Rs. 4,513	Rs. 3,613	Rs. 25,250
3	Rs. 7,604	Rs. 5,788	Rs. 5,000	Rs. 4,287	Rs. 3,071	Rs. 25,750
4	Rs. 8,745	Rs. 6,078	Rs. 5,000	Rs. 4,073	Rs. 2,610	Rs. 26,505
5	Rs. 10,057	Rs. 6,381	Rs. 5,000	Rs. 3,869	Rs. 2,219	Rs. 27,526
6	Rs. 11,565	Rs. 6,700	Rs. 5,000	Rs. 3,675	Rs. 1,886	Rs. 28,827
7	Rs. 13,300	Rs. 7,036	Rs. 5,000	Rs. 3,492	Rs. 1,603	Rs. 30,430
8	Rs. 15,295	Rs. 7,387	Rs. 5,000	Rs. 3,317	Rs. 1,362	Rs. 32,362
9	Rs. 17,589	Rs. 7,757	Rs. 5,000	Rs. 3,151	Rs. 1,158	Rs. 34,655
10	Rs. 20,228	Rs. 8,144	Rs. 5,000	Rs. 2,994	Rs. 984	Rs. 37,350
11	Rs. 23,262	Rs. 8,522	Rs. 5,000	Rs. 2,844	Rs. 837	Rs. 40,494
12	Rs. 26,751	Rs. 8,979	Rs. 5,000	Rs. 2,702	Rs. 711	Rs. 44,144
13	Rs. 30,764	Rs. 9,428	Rs. 5,000	Rs. 2,567	Rs. 605	Rs. 48,363
14	Rs. 35,379	Rs. 9,900	Rs. 5,000	Rs. 2,438	Rs. 514	Rs. 53,230
15	Rs. 40,685	Rs. 10,395	Rs. 5,000	Rs. 2,316	Rs. 437	Rs. 58,833
16	Rs. 46,788	Rs. 10,914	Rs. 5,000	Rs. 2,201	Rs. 371	Rs. 65,274
17	Rs. 53,806	Rs. 11,460	Rs. 5,000	Rs. 2,091	Rs. 316	Rs. 72,673
18	Rs. 61,877	Rs. 12,033	Rs. 5,000	Rs. 1,986	Rs. 268	Rs. 81,165
19	Rs. 71,159	Rs. 12,635	Rs. 5,000	Rs. 1,887	Rs. 228	Rs. 90,908
20	Rs. 81,833	Rs. 13,266	Rs. 5,000	Rs. 1,792	Rs. 194	Rs. 1,02,085
Annualised Returns	+15%	+5%	0%	-5%	-15%	+7.3%
Source: Fundsupermart.com Compilations

In the first year, we see that the portfolio delivered exactly zero returns. However, as the years passed, the worst performing investment formed a smaller part of the total portfolio, while the best performing investment became a bigger part of the portfolio. Eventually, the compounded returns of investment A, (and to a lesser extent, investment B) helped the portfolio to deliver good overall returns.

This highlights both the power of compounding as well as that of diversification. On seeing the individual returns, some might think that the investments chosen for the above example were terrible. Two out of the five investments lost money consistently, and investment C can be likened to placing your money into a drawer! Even investment B was not that impressive, as it only returned 5% per year - nothing to be exceptionally excited about! However, the power of diversification has allowed the portfolio to reap an annualized portfolio return of 7.3%.

Thus, when you diversify your portfolio, not all your investments have to make it big; you may just need some of them to succeed.

Fund Managers` Widely Employed Strategy

Diversification is what fund managers usually attempt to do with their stock selection, and this is also the reason we advise investors to diversify their investments. In the examples we have examined, diversification could ensure that we would get a good return for our portfolio, even if two of the selected investments performed badly, and one was the equivalent of stashing your money away under the mattress!

In reality, it is also unlikely that an investor will end up with an investment that consistently loses money in every single year for 20 years. He would most likely have switched out from this investment long before the period of 20 years was up! At the same time, it is also not easy to have an investment that delivers annualized returns of 15% over 20 years.

Nevertheless, the above illustration was meant to highlight to the investors the concept of diversification and to show why it works statistically. Through the examples, we hope investors will realize why the concept of diversification is extremely important. This principle allows you to invest with greater confidence, as not all your investments will need to be huge winners in order to obtain good overall returns for your portfolio.