CRUDE OIL AND PICK THEORY

CRUDE OIL AND PICK THEORY

EXCLUSIVE CRUDE OIL REPORT

Yes, Crude Oil Prices can touch to New Highs and Beyond...

“ACCORDING TO ‘PICK OIL THEORY’ THE PRICES OF CRUDE OIL MAY TOUCH $300 PER BARREL”

BELL CURVE:

The production of crude oil normally follows  the shape of a ‘bell-curve’ in which we can say it to be peak production when on the graph this curve comes in the centre top. At this level the production has been peaked i.e. this is the time and quantum of maximum production and from here on the production decreases. (see figure). Paring some exceptions this phenomena is true for a single oil well, a whole oil-field, a country and the whole wordl.

“Peak-Oil doesn’t mean we will become ‘oil-less’, but is surely means we become ‘cheap oil-less”.

The pick oil theory which was made by American Geologist King Herbert, is also known as Herbert Pick Theory. According to this theory’s conclusions, due to declining exploration and sharply decreasing production ; we may see tremendous blast and rocket pace rise in prices of fossil fuels, mainly crude oil. This Pick Oil theory works on the basis of principle based on long-term production and declining reserve rate of fossil energy sources such as coal, crude oil, natural gas etc.

We will try to evaluate this theory through various facts, figures, logics and arguments in this special ‘$300 CRUDE OIL SPECIAL REPORT’.

-       There are many reasons behind the strengthening fears of decrease in the reserves/availability of traditional sources of energy such as fossil fuels (like crude oil etc.)  such as,

o   The technology relating to acquisition and analysis of geological information, is improving day by day.

o   The number of finds and exploration by way of drilling activity is decreasing day by day.

o   Question mark on the so-called and claimed ‘proven reserves’ of many countries and regions.

o   The present supply of word’s need is coming from such mega-oil fields which are very old and over-exploited and becoming less and less productive. Out of which most are located in Middle East countries and surrounding regions.

o   Many experts believe the global “pick oil’ production year will be the year of 2010 or anywhere between 2010-2020. But research suggests that we have already reached ‘pick oil’ production stage probably in year 2004. This phenomena can be understood in Figure no.1.

Figure No.1:

o   Moreover, the ‘proven reserves’ stated by ‘OPEC’ countries is also allegedly overstated by almost more than 300 barrels. The OPEC stand for the Organisation of the Petroleum Exporting Countries.

About global ‘Proven Reserves’ of crude oil:

            According to a survey undertaken at the end of year 2007, it has been concluded that presently only 1000 billion barrels of producible reserves have been left on the earth.

            Moreover adding into this other 1000 billion barrel i.e. in total only 2000 billion barrel of crude oil reserve is out there in total for usage including explored, production able and still to be explored. Out of which 1000 billion barrel has already been produced. If we follow this calculation then the crude oil was at its maximum production level in the year 2006 and from now onwards we may start witnessing declining trend in everything ranging from exploration, production (and usage? Not really.). But if we deduct the allegedly so called overstated reserves of 300 billion barrels of the OPEC countries, then in that case few might have doubts that we already have passed the ‘pick crude oil production’ in the year 2004!

Other Reports raising concerns on the issue of declining reserves of crude oil, supply shortage and possibility of severe price rise:

Recently in a report published under title ‘Energy Trends and Their Implications for US Army Installations, by Pentagon also addresses this issues of ‘pick oil’. The report signals that the ‘pick’ has probably passed us or is very nearby and the global supply of crude is in shortage and will remain in such condition. Moreover the report also suggests that the previous run up in crude oil prices to as high as $150 per barrel was not purely due to speculation only but also due to demand-supply mismatch. It also signals more bad news from the demand supply front and indicated that the $150 price was merely a trailer and we may see the full picture in near future!

One another report published in March 2007 by the USA Government Accountability Office (GAO) titled ‘CRUDE OIL- Uncertainly about Future oil Supply makes It Important to Develop a Strategy for addressing a Peak and Decline in Oil Production”, also states similar concerns regarding crude oil production and its impacts. It states that the crude oil production may pick anywhere between now and 2040 and also warns that the US government is not at all aware and prepared to cope with this situation.

“January 2006 issue of “Petroleum Intelligence” weekly depicts that according to internal secret documents of Kuwait, the proven oil reserves of the country are only around 25 billion barrels which is wrongly being claimed to be 100 billion barrel. Moreover out of this 25 billion barrel 15 billion are from its Bergan oil-field.” OTHER NON-TRADITIONAL SOURCES OF OIL. HOW MUCH SUFFICIENT? Crude oil’s other forms i.e. traditional sources of crude oil includes (1) tar sand oil (2) extra heavy oil (3) bitumen and oil shell as well. The total reserve of the above mentioned sources of oil has been estimated at 6.5 billion barrel. Out of which only 745 billion barrel is classified as acquirable out of the said reserves, 315 billion barrel of tar oil reserves in Canada, 270 billion barrel of extra-heavy oil and bitumen oil mass in Venezuela, and other globally dispersed 160 billion barrel of oil shell type mass is estimated to be in reach.  But the question is how much is oil is produced out of these types of reserves? The National Energy Board or Canada puts a figure of 1 million per day of production of tar sand oil. The petroleum producers’ association of the country claims this figure to come to 3 million per day in/by year 2015. Now the problem is that to extract tar and sand to produce oil we have to use natural gas; and bad news is that the availability of natural gas is declining in Canada. This means that there will be less and less natural gas in days to come in Canada which can be deployed to extract oil out of tar and sand oil sources. There will be shortage of natural gas and we have to consider the prices of natural gas at respective times and the priority of usage, cost of opportunity for the commodity as well. According to estimated calculations if the production of tar and sand oil is aimed to increase by 2 million per day as mentioned above, then there will be 2.5 billion cubic feet of extra pressure and stress on the usage of natural gas or 15 per cent of the present 16.8 billion of usage. It is estimated that by the year 2010 the contribution of the such types of non-traditional sources of fuel shall be only 2.80 million barrels per day, which is further expected to remain million per day by the year 2030. The research also suggests that by the year 2010 and 2030 respectively 3 per cent and 5 per cent of the pressure of fulfilling world’s oil requirement shall be on the said types of oil non-traditional oil resources. During the year 2007 the said types of sources of oil contributed only around 1 per cent for the satisfaction of world’s primary energy and fuel needs, which is expected to go up to 6 percent in year 2025 and 13 per cent at the maximum in 2050. See Figure No.C2 for more figures and estimates. Figure No. C2. The contribution of non-traditional types of crude oil in global demand and usage of crude oil: 2007-2030: 2007 2010 2020 2030 Global Demand 85.76 93.30 111 117.4 Global Supply 81.53 83.6 81.58 82.90 Synthetic Fuel 1.72 2.80 4.20 6.00 Bio Fuel 0.53 0.60 0.70 1.00 Tar and Sand oil 1.00 1.60 2.50 3.56 Extra heavy type of oil 0.19 0.60 1.00 1.50 Global Demand in % 2 3 4 5 All figures are million barrels per day unless stated otherwise. Sources: European Bio-diesel Board, answers.com, …….  Table No. P1. Estimated and Actual production of oil. (2005-2030) X 2005 2007 2010 2020 2030 Global Demand 84.50 85.76 93.30 111 117.40 Global Supply 81.70 81.53 82.60 81.58 82.90 Traditional 81.10 79.81 79.80 77.38 76.90 Non-traditional 1.6 1.72 2.80 4.20 6.00 Supply Shortage (2.80) (4.23) (10.70) (29.42) (34.50) Non-traditional=such as tar and sand oil, extra heavy oil, bitumen and shell oil etc. All figures are in million barrel per day unless otherwise stated. Sources: US Department of Energy’s ‘Energy Outlook-2007’, IAEA’s ‘World Energy Outlook-2007’, BP Statistical review of world energy-June 2008, and other sources. Usage of primary energy. Year 2007-2050. X 2007 2025 2050 Primary Energy 11,099 16,194 19,679 Oil 3,953 5,135 5,288 Natural Gas 2,638 5119 6927 Coal 3,178 3526 2748 Atomic  Energy 622 1061 1937 Hydro Energy 636 314 299 Alternative (renewable) 72 1039 2480 Percentage in total 1 6 13 All figures are in million ton unless otherwise stated.  Sources: Shell International Scenarios in 2050, ………… WHAT COULD BE THE EFFECTS OF PICK OIL ON NORMAL POPULATION? In the pace for becoming more and more advanced and modern; man has made oil become an integral and inseparable part of his life.  Presently on lands, in water, and in air; 90% of transportation is fueled by using oil as energy. Moreover according to research and survey, 90 per cent of material or goods available for sale and consumption in shops and malls of the world require oil as important ingredient for its use and consumption. GEO POLITICS OF CRUDE OIL AND ‘PICK’ PHENOMENA: USA is the number one consumer of crude oil. In year 2007, USA consumed about 20.70 million barrels per day. Out of which only 6.87 million barrels was produced in USA and the rest 13.83 million barrel was imported from outside of the country. The foreign dependence of USA for oil increased from 34% in 1973 to 67% in 2007. Moreover this dependence is expected to increase upto 72% in 2010 and 84% in 2025. This could literally mean that the interference of USA  in oil rich countries will continue and infact rise. Also the autocracy structure in some oil producing countries, violence and violent protests against US as well as the competition for declining supplies is making things look even grimmer. The US strategy for oil would, over and above the five gulf oil producing countries, include another main eight sources of crude oil namely;  Russia, Maxico, Azerbaijan, Colombia, Venezuala, Kazakhistan, Nigeria, Angola. But the oil production and supply in these countries is entangled with rampant violence, terrorism, corruption, mafia, political upheavals, and weird dictatorships or communism. Thus the US is forced in deep relation with such states. The point is that political upheavels, corruption and violence in these countries could trap US troops and may cause a situation of putting military forces of the world one on one. Because all the countries (most importantly powerful ones), want to secure their oil supplies and would badly want. Moreover, we could we could see China taking closer and serious interest in middle-east politics. As well as try and strike various deals and contracts with these and the other eight problematic oil producing countries. This could also involve supplying arms, weapons, technology and other dangerous materials such as ballestic missiles, nuclear technology etc. and all these would help the agitators and anti-US groups to take their fight further and strengthen their position against the US. On the other hand if we look into the past, the policies of US have remained quite clear. Sine second world war, most US presidents have for one or the other reason, taken military activities in middle-east regions. To the extent that in 1980 the then president Jimmy Carter officially declared that the US must hold strong in the Persian Gulf region at any cost. And the same seems to have been followed till date, although many billions of dollars have been wasted in this practice. Iran: in last two years, the political action in crude and gas geo-politics has heated up. It is not proved how much oil reserves it has; although is continuously reiterates the threat  that if US and internation agencies continue to unfairly try to pressurize Iran for putting control and surveillance on its nuclear enrichment activities; it would divert the flow of its oil and gas supply to only and only China and stop supplying to US and its allies. Venezuala is also teasing US for similar and variety reasons. Russia has also threatened Ukrain to raise gas prices for its supplies or else it will stop production. This could have direct impact on Europes’ supplies, because Russia supplies the majority of Europe’s gas consumption.  Earlier, Russia stopped supplies to Belarus. Another worry some matter in geo-politics has been the practice of nationalizing oil and gas corporation in latin American companies. The US understands that in the way india’s economy is growing and demand and consumption of oil and gas is rising. It also understands that the Iran-Pakistan-India pipeline project could strengthen the relations of Iran and India. For this reason it is doing all the possible efforts to block this deal and put a standstill and consequently a full stop on the tri-nation developments and it seems to have succeeded in so much extent.

The Soudi Arabia has claimed a reserve of around 265 billion barrel within its territories. However the international oil experts have clearly negated this figure and puts it at only 100 to 120 billion barrel, almost half of what Soudi is claiming to have remained in reserves.

HOW MUCH PRODUCTION LEFT AND HOW MUCH EMPTY IN DIFFERENT OIL PRODUCING REGIONS:

Please refer to table A1.

Table A1.

Crude oil-exploration, production, reserve depletion and pick:                       

COUNTRY	YR OF (PICK) FINDS	YR OF (PICK) PRODUCTION	% OF EXPLORED OUT OF TOTAL	% OF CONSUMED/ DEPLETED	FINAL REMAINING PRODUCTION (BN BARREL)
CHINA	60s	2006	93	47	57
CANADA	50s	1973	95	76	25
IRAN	60s	1974	94	76	130
IRAQ	70s	2019	87	20	135
INDONESIA	50s	1977	93	65	31
KUWAIT	50s	1971	93	34	90
LIBYA	60s	1970	94	42	55
MEXICO	50s	2002	94	55	55
NORWAY	70s	2001	93	48	33
RUSSIA	40s	1987	94	61	200
SOUDI ARAB	40s	2013	96	31	300
UAE	60s	2014	94	23	78
UK	70s	1944	94	63	32
USA	30s	1972	98	88	195
VENEZUALA	50s	1970	96	48	95
WORLD	62	05-10	94	49	2100

Sources: ASPO, Peakoil.net, theenerrgyfiles ltd., chevron, petroleum review and others.

Moreover, three of the world’s major oil-fields have already picked. These includes Kuwait’s Burgan which is the world’s second largest oil-field and supplies 60% of Kuwait’s crude oil production. This oil-field is said to have picked in the year 2005.

The big Cantarell oil-field of Mexico is also picked in the year of 2006. From which in place of earlier daily 1.99 million barrel; last year only 1 million barrel production was witnessed.

Soudi Arab’s world’s largets oil-field Ghavar; which likewise Kuwait’s Burgan oil-field contributes about 60% of the oil production of the Gulf State. This oil-field produces daily 5 million barrel and it is said to have been picked in the year 2006, as well as registering a decline of 8% per year.

Soudi’s four big oil-fields namely Ghavar, Hanifa, Afji, and Safania; are more than 50 years older now. And the majority of Soudi’s oil during the last 5 years has been produced out of these fields.

The more worrisome thing is that recently a huge water treatment has been supplied to this oil-well by infusing water into it-and this treatment is very serious. Because these oil-fields shows full possibility of 30-40 per cent decline in normal production which could be in next three-four years or may be three-four months! Who knows!

Table-A0.

Use of primary energy globally (consumption in %) yr 2007.

CRUDE OIL	NAT GAS	COAL	NUCLEAR ENERGY	HYDRO-ELECTRICITY	TOTAL
36%	24%	29%	5%	6%	100%

  “January 2006 issue of “Petroleum Intelligence” weekly depicts that according to internal secret documents of Kuwait, the proven oil reserves of the country are only around 25 billion barrels which is wrongly being claimed to be 100 billion barrel. Moreover out of this 25 billion barrel 15 billion are from its Bergan oil-field.” 

 Table-A2.

World oil reserves, depletion rate, remaining reserves etc. (year 2007).

x	Billion Barrel	Particulars
Total Reserves	2100	Figure of total produced when production will completely stop.
Till date produced	1087	Uptill the end of 2007
Still remain to be produced	1013	Total reserves-produced (2100-1087=1013)
Till date explored	1994	Total produced+remaining
Till date still remains to be explored	106	Total reserves-explored (2100-1994)
Rate of exploration (million per year)	6	Addition in new oil reserves
Depletion/consumption rate	3	Annual production rate out of the remaining to be produced.

Caption:

Due to London’s status as a financial center, and its increasing dependence on financial services revenue. The production of crude oil from UK has been over and it was exporting crude oil for 26 years and now due to this phenomenal change its currency pound’s value (exchange rate) will decrease.

Caption:

“the basic funda of peak theory has been that from beginning the type of crude oil’s exploration and production method has been; on that basis the explorable and producible crude oil of that as well as the maximum producible-time; i.e both of these has been on peak in terms of plain figures. Which shows that the peak has passed us.”

Caption:

The production of crude oil normally follows a bell-curve. Where we can predict peak production when on this graph the curve is exactly in the centre of in the middle top. At this point it can be said that the half of the oil has been produced. (see figure.)

GEO POLITICS OF CRUDE OIL AND ‘PICK’ PHENOMENA:

USA is the number one consumer of crude oil. In year 2007, USA consumed about 20.70 million barrels per day. Out of which only 6.87 million barrels was produced in USA and the rest 13.83 million barrel was imported from outside of the country.

The foreign dependence of USA for oil increased from 34% in 1973 to 67% in 2007. Moreover this dependence is expected to increase up to 72% in 2010 and 84% in 2025. This could literally mean that the interference of USA in oil rich countries will continue and in fact rise. Also the autocracy structure in some oil producing countries, violence and violent protests against US as well as the competition for declining supplies is making things look even grimmer.

The US strategy for oil would, over and above the five gulf oil producing countries, include another main eight sources of crude oil namely;  Russia, Mexico, Azerbaijan, Colombia, Venezuela, Kazakhstan, Nigeria, Angola. But the oil production and supply in these countries is entangled with rampant violence, terrorism, corruption, mafia, political upheavals, and weird dictatorships or communism. Thus the US is forced in deep relation with such states.

The point is that political upheavals, corruption and violence in these countries could trap US troops and may cause a situation of putting military forces of the world one on one. Because all the countries (most importantly powerful ones), want to secure their oil supplies and would badly want.

Moreover, we could we could see China taking closer and serious interest in middle-east politics. As well as try and strike various deals and contracts with these and the other eight problematic oil producing countries. This could also involve supplying arms, weapons, technology and other dangerous materials such as ballistic missiles, nuclear technology etc. and all these would help the agitators and anti-US groups to take their fight further and strengthen their position against the US.

On the other hand if we look into the past, the policies of US have remained quite clear. Sine Second World War, most US presidents have for one or the other reason, taken military activities in middle-east regions. To the extent that in 1980 the then president Jimmy Carter officially declared that the US must hold strong in the Persian Gulf region at any cost. And the same seems to have been followed till date, although many billions of dollars have been wasted in this practice.

Iran: in last two years, the political action in crude and gas geo-politics has heated up. It is not proved how much oil reserves it has; although is continuously reiterates the threat  that if US and international agencies continue to unfairly try to pressurize Iran for putting control and surveillance on its nuclear enrichment activities; it would divert the flow of its oil and gas supply to only and only China and stop supplying to US and its allies. Venezuela is also teasing US for similar and variety reasons. Russia has also threatened Ukraine to raise gas prices for its supplies or else it will stop production. This could have direct impact on Europe’s’ supplies, because Russia supplies the majority of Europe’s gas consumption.  Earlier, Russia stopped supplies to Belarus.

Another worry some matter in geo-politics has been the practice of nationalizing oil and Gas Corporation in Latin American companies.

The US understands that in the way India’s economy is growing and demand and consumption of oil and gas is rising. It also understands that the Iran-Pakistan-India pipeline project could strengthen the relations of Iran and India. For this reason it is doing all the possible efforts to block this deal and put a standstill and consequently a full stop on the tri-nation developments and it seems to have succeeded in so much extent.

THE OPTIMISTS' VIEW

The optimists believe that still in the world there is 2 trillion barrel of crude oil reserves to be eand produced. Whereas other rationalists group believe that this figure to be even less than 1 trillion barrels. But in case if we go by the figure of optimists of 2 trillion barrels; the peak in crude oil could well be as far as in the year 2025. 

WHAT COULD BE THE EFFECTS OF PICK OIL ON NORMAL POPULATION?

In the pace for becoming more and more advanced and modern; man has made oil become an integral and inseparable part of his life.  Presently on lands, in water, and in air; 90% of transportation is fueled by using oil as energy. Moreover according to research and survey, 90 per cent of material or goods available for sale and consumption in shops and malls of the world require oil as important ingredient for its use and consumption.

Together with this we can give several other figures, surveys, facts and studies to show the high dependence of mankind on oil. Even more worrisome fact is that in spite of all the advanced technological development, we have not found any strong alternate source of energy.

EROI ratio (Energy Return on Investment ratio and crude oil):

For doing valuation of source of energy, this “net energy” or “EROI-energy return on investment” ratio becomes helpful. The countries of world have been growing at a rapid pace and one of the important reasons for this is high EROI ratio for the crude oil. In the beginning days of crude oil this ratio was 50:1 i.e. to produce 50 barrels of crude oil it take 1 barrel of crude oil as input. But recently this ratio has come down to 5:7, and at many production places it also equals to ratio of 1:1. Interestingly and apparently the EROI ratio of Ethanol and biodiesel has been even below 1. While the EROI ratio for wind-power is better than that. But the problem is that the kind of demand  that has been built into the routine of the industrial and emerging nations; the supply and capacity of such alternative sources are incapable.

The Third Depression | 27.06.10 | Paul Krugman

The Third Depression

By PAUL KRUGMAN

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

Experience and Learning

Experiences and learning:

“The second name of experience is to learn”

-Dhirubhai Ambani

         Would anyone contradict with this great personality? Every day is experience, every hour is experience, every minute is experience, every event is experience, every response is experience, every action is experience, and every reaction is experience. So does that mean all the life is experience? And by virtue of all the experiences being learning; there is nothing in saying that life is an experience or/and learning. Experience can also be described as the meeting place or convergence of the situation one faces and the mental effects of those situations.

            There is a thin differentiation understanding it. But there are few things to it. All experience, but all do not learn. So for those of them experience is not learning. (here we take the discussion forward on premises that (1) human being should learn from experiences.(2) human being should be progressive (3) human being is assumed to improve from after each experience.) On the other hand, it doesn’t mean those who learn stop experiencing. No, but they will have new experiences. Will become successful, less obstacles, things become easier, less problems, they become smart and smarter. And then they get new type of experience. The learning from their experiences makes them shielding of doing more right things while having new experience and less wrong things/mistakes.

This works in markets also. Because you know how to calculate numbers and that you have mastered the philosophy of value investing or you have seen two generations of bull and bear cycles-doesn’t mean you are done. Please Pay attention Here-These are all ‘experiences’= yourself (the physical you) and your emotions/brains (mind) meeting the events. But if you have learned from ‘those experiences’ then you will do more of right things and less wrong things WHILE HAVING NEW EXPERIENCES. 

Wait for prices to fall before investing in Gold ETFs: Experts

Gold Exchange Traded Funds (ETFs), where money is parked in bullion, have seen their assets rising over 15% in last two months, but analysts feel investors should wait since a correction in gold prices is round the corner.

Gold ETFs are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion. Gold ETFs are traded in exchanges and each unit of gold ETF is equivalent to 1 gm of gold.

The soaring gold prices, mainly on account of uncertainty in global economic recovery and stock market volatility, have made Gold ETFs more attractive for investors.

``Investors should go slowly in investing in gold ETFs as the market is waiting for some correction to happen,`` Kotak AMC`s Head (Products) Lakshmi Iyer said.
``Gold has seen a huge run-up so far which suggests that whenever there is some correction, one should put 5%-10% of the overall portfolio in gold ETFs with a long term horizon,`` Iyer added.

As per data from Association of Mutual Funds of India (AMFI) assets under management of Gold ETFs rose 15.5% to Rs 18.37 billion in May compared to Rs 15.90 billion in March.

Value Research CEO Dhirendra Kumar said with gold prices touching new highs, the real consumption has disappeared and there is lot of volatility in the market.

``One should stay away from gold ETFs since its scale of business is too small in India and there are other places like equities and mutual funds where you can invest,`` he noted.

On the other hand, soaring gold prices have also resulted in redemption pressure on Gold ETFs. In May, these funds saw a net outflow of Rs 60 million, as many investors booked profits.

Last month, Gold ETFs witnessed an inflow of Rs 800 million while the outflow stood at Rs 860 million.

According to Religare Commodities President Jayant Manglik, Gold ETFs in the country are doing extremely well and as much as 10% returns can be expected from these funds in the next months.

``Gold ETFs move in line with the gold prices. The immediate future of investment in gold ETFs is quite positive. There is financial insecurity across the globe... In such a scenario gold ETFs are the best place to be,`` Manglik said.

In recent months, gold prices touched many record highs. In May, it had touched a high of Rs 18,629 a 10 grams, while in the international market it went up to USD 1,248.55 an ounce (28.35 grams).

Bombay Bullion Association data shows that gold imports declined by over 50% to 17 tons in May as compared to 34.2 tons in April due to surge in gold prices.

The surge in prices internationally has been triggered by higher demand in European markets in the wake of debt crisis that has weakened euro as well as concerns about global economic recovery.

TRADING RULES FOR DAY TRADERS

• Never risk more than 10% of your trading capital in a single trade.
• Always use stop-loss orders.
• Never overtrade.
• Never let a profit run into a loss.
• Don 't enter a trade if you are unsure of the trend. Never buck the trend.
• When in doubt, get out, and don't get in when in doubt.
• Only trade active markets.
• Distribute your risk equally among different markets.
• Never limit your orders. Trade at the market.
• Don't close trades without a good reason.
• Extra monies from successful trades should be placed in a separate account.
• Never trade to scalp a profit.
• Never average a loss.
• Never get out of the market because you have lost patience or get in because you are anxious from waiting.
• Avoid taking small profits and large losses.
• Never cancel a stop loss after you have placed the trade.
• Avoid getting in and out of the market too often.
• Be willing to make money from both sides of the market.
• Never buy or sell just because the price is low or high.
• Pyramiding should be accomplished once it has crossed resistance levels and broken zones of distribution.
• Pyramid issues that have a strong trend.
• Never hedge a losing position.
• Never change your position without a good reason.
• Avoid trading after long periods of success or failure.
• Don't try to guess tops or bottoms.
• Don't follow a blind man's advice.
• Reduce trading after the first loss; never increase.
• Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake.

Irony of Investors

“When markets go up, Investors Want markets Not to Rise and decrease For them to Buy; and When markets Go Down they change their View and Think they will Buy only if and when markets Rise!!”

Optimal strategy - Equities, hybrids or MIPs

One of our readers who had a windfall from his employer to the tune of Rs 6 lakh informed us that that he was planning to invest this sum for long term in a combination of equity funds, hybrid debt-oriented schemes and monthly income schemes (MIP) for diversification. Would this be an optimal strategy?

Maybe not. If one has the risk appetite for equity investment and if the time horizon is long, an ideal strategy would be to invest in a pure equity fund and just stagger the investment over a long period.

Hybrid funds or monthly income plans are not good options to route the equity part of your investment. The expenses ratio and capital gain taxes are two major hindrances for the investors investing in them. Here is why.

Tax factor

Hybrid debt schemes have expense ratios varying from 0.75% to 2.5% a year and MIPs, by and large, have expense ratios of about 2%.

Consider this: An investor is willing to invest in a hybrid debt scheme a sum of Rs 2 lakh for a ten-year period. Assuming his investment is generating hybrid debt return (11.7% over the past five years) for next 10 years, an investment of Rs 2 lakh will become Rs 6 lakh at the end of the maturity period.

Since these are debt schemes, long-term capital gains in respect of units held more than 12 months are chargeable to tax at 20%, after factoring in the cost of inflation index. Alternatively, they are taxed at 10% without indexation. This means the investor would end up paying capital gains tax for the entire returns, including the equity portion.

For an appreciation of Rs 4 lakh, if the long-term capital gains are taxed at a flat 10%, the total tax out go will be Rs 40,000. Had the investor, instead, split his investment between equity and a debt fund, his tax outgo would be much lower because equity funds enjoy a more favorable tax structure.

If the investor had instead spread out the Rs 2 lakh as Rs 1.2 lakh in a debt fund and Rs 80,000 in equity fund, the maturity value could be Rs 5.8 lakh assuming that he generate similar returns. Under the second option, LTCG will be just Rs 24,000 and his overall return could have increased by Rs 16,000.

Similar to hybrid debt schemes, investors in MIPs too suffer higher tax incidence. Hence, investors will be better off separating the debt and equity investments to save a higher tax outgo and to generate higher return if their time horizon is for longer period.

However, debt would be a better option if your investments are for less than three years and you would like to stay away from the vagaries of the equity market.

Investors can separate their debt and equity investments to reduce tax outgo and generate higher returns over a longer period.

Investing in tough times: Some tips

Are we in a slowdown or in a recession? Well, nobody has an answer to this question. When we see the media hysteria we keep wondering how `shriller` can the voices become? 

If you are in the middle portion of your life and surrounded by EMIs for your house, children`s education, car payments the situation will of course be scary. And we in the media business love to write about `negative things` rather than positive things. The current state of the economy could be a worry. What should you do in such a slow down? Here is some generic advice that might help.

Your goals still standIf you are a scientific investor, most of your investments will be towards a specific goal. So unless you are sure that a particular goal is not important (and your spouse also feels the same way) do not touch the amounts set aside for a specific important goal. Early withdrawals from insurance and life insurance plans can be very expensive in terms of costs and taxes. Perhaps more importantly if the equity market looks up even a little your investments could recoup very well. Howsoever tempting, do not touch moneys to which you have given direction and momentum. 

Many eggs in 3-4 baskets
All types of financial assets - life insurance, mutual funds, savings bank accounts, bank fixed deposits, provident fund schemes, government securities, equities, etc. all of them have a role in life. Each asset class (real estate, debt and equity) - perform differently in different economic climates. Stop chasing media headlines. This is a time when you will hear statements like `Cash is King`, `Stay away from equities` - just ignore them. There is no permanently correct investment advice. Today there are people who can manipulate data for long periods of time and come up with `newsletters` - ignoring most of it has its advantages too! 

Track changes in your lifeIf you did your risk profiling 5 years back, do it again. Do not take on too much risk when the markets are rising and cut equity exposure when markets are down. Realise that `risk` is largely counter intuitive. If you feel there was no risk, risk may be at its maximum and vice-versa! However if you are closer to some event for which you are saving, then you may still find it worthwhile to sell. In the last 5 years you have built some assets, you son has started working, your EMIs are over, your car loan is paid off… if all this has happened you may need less insurance. But if the goals are valid, the savings and investments are not enough to fill the gaps, keep your term life insurance valid and in force. If you are dependent on your company`s group insurance - life and medical - take an individual policy and keep it live. In case of a job loss it will be vital. 

Think Long Term, not next quarter
Markets are cyclical! It is only the media which should be worried about quarterly results. You should not be so short term `ish` in your thinking. So it should call for long periods of inaction. Warren Buffet says at Berkshire Hathway we think of this as a good habit. Markets fall, and then they go up - the broad index is wavy, ALWAYS over the long term. Rather than react to the market, it makes sense to create a carefully considered long-term strategy, especially when it comes to your long-term needs. Frankly if you are saving money for your daughters post graduate education, and she is 3 years of age - how does it matter that the markets will take 6 months to recover? You should be worried about the corpus size only when your daughter is 3-4 years away from graduation. 

Use the Knowledge of Your Advisor / Relationship Manager, if any!
If any - was meant for the advisor, not his knowledge! Unfortunately most life insurance companies and mutual funds chase only the `potential` new customer with all kind of freebies. The existing advisors and investors are not helped at all - either in the form of guides or teaching aids. It is imperative that you learn and understand on your own - and know the art of wealth creation and for most of my clients` - wealth preservation!

Why managing your portfolio is exciting?

In India, more than 10 million people invest in the stock market and that number is growing fast. You might say that 10 million people couldn`t be wrong but that argument doesn`t always hold true.

Keeping up with the news, studying broker reports and punching in your own trades all takes time and effort and these days there are hundreds of low-cost, low-effort investment schemes you could choose from.

So, if managing your own portfolio means putting in more time and effort, shouldn`t you get more money back in return?

However, that isn`t really why we do it anyway. The reason why so many of us invest in the stock market is that `Do-it-yourself` (DIY) investing has an appeal that mutual funds will never have.

Excitement
Short-term investing or speculating has often been likened to gambling, not only because of the high risks involved but also because of the way it makes people feel.
Although few people would admit to being stock market thrill seekers, the excitement of the markets is clearly a factor in their popularity and the risks that put some people off are themselves a big draw for others.
The masses of eyeballs glued to ticking prices on broker screens up and down the country are testimony to that.

Enjoyment
For many of us, the appeal of investing is the research itself. Digging into a company`s background or researching a particular industry can be an extremely interesting activity and almost a reward in itself.

I say almost because like many pursuits it`s more engaging when there`s something riding on it.

Only a few die-hard hobbyists would spend hours researching an investment they had no intention of making so the prospect of doing it `just for fun` doesn`t have the same appeal.

Control
In the same way that some people prefer to keep gold at home rather than putting their money in a bank some of us prefer to know exactly where our shares are.
Although a fund manager may be more qualified than us to make investment decisions, there is a certain satisfaction that comes from doing things yourself.

This makes the business of managing your own portfolio seem less like a chore but does have the disadvantage of leaving you with no one to blame if things don`t turn out as planned.

Overconfidence
Like it or not, some of us just fancy our chances. It may be illogical to assume we can beat the market but most of us can be illogical sometimes.

Sure we know that 10 million of us can`t all be winners but that`s no reason to think one of the lucky ones won`t be me. Not only can human nature help us to mentally inflate our own abilities but also the markets themselves have an uncanny ability to reward even rank amateurs.

You would have a fairly good chance of making a profit by randomly buying any of the blue-chip stocks and yet all it takes is a couple of winning trades before we start seeing Warren Buffett in the mirror each morning.

Whatever your reasons may be there are plenty of people who say retail investors are better off staying at home and letting someone else manage their money for them. On strictly logical terms they are correct.

Many fund managers fail to consistently beat the market so there really is no reason to assume that the DIY approach will be the more profitable way to invest.

However, this argument ignores the real reasons why lots of us play the markets. It`s not only to make money (although that is very important), we also do it because we like it. Investing because you enjoy it makes perfect sense so long as you realize this is what you`re doing. If you find yourself spending more and more time shuffling a shrinking portfolio you might want to ask yourself whether this is a hobby you can really afford.

How the revised tax code impacts you?

Pressure from many sections of taxpayers has led the government to effect revisions in its Direct Taxes Code (DTC) proposals.

The revised code has several beneficial aspects of which the most beneficial is that it has toned down its stance on tax concessions granted to home loan repayments.

Going by the plea that without social security the proposed EET (Exempt-Exempt-Taxed) structure was harsh on individuals, the revised code has proposed to bring some relief to long-term savings investment such as PF, PPF, New Pension Scheme, approved pure life insurance, annuity schemes and GPF. These will now be subject to the Exempt-Exempt-Exempt (EEE) method of taxation rather the EET model proposed last year.

Here`s how some of the provisions affect your personal finances:

Existing and new home loan borrowers have a reason to cheer. The revised DTC proposes to follow the existing method of tax deduction on home loan at least for the interest paid. In case of the house being self-occupied, the individual will be eligible for deduction of interest on capital borrowed for acquisition or construction of the house, subject to a ceiling of Rs 1.5 lakh, from the gross total income.

This revised proposal is a change from the earlier stand of disallowing tax exemptions on the interest and principal paid on house property.

However, the revised code has preferred to be silent on the status of principal repayments on home loans, which are now allowed under section 80C.

While extending this benefit for self-occupied properties, borrowers need to note that the revised code suggests that interest paid towards home loan will be adjusted under the overall savings limit of Rs 3 lakh a year proposed for section 80C.

The New Pension Scheme, which was launched with fanfare as a social security measure, was struggling to find patronage owing to uncertainties relating to its tax structure. In an attempt to make this scheme more attractive and to introduce some flexibility in making withdrawals in lump sum without being subject to taxation, the revised code proposes to extend the EEE method of taxation to the pension scheme administered by the Pension Fund Regulatory and Development Authority, apart from PF, GPF and recognized provident funds.

The revised code has preferred to retain its stand on pure life insurance and annuity schemes, but has kept unit-linked plans out of the EEE method of taxation. ULIPs continue to be clubbed with savings options like the NSC, ELSS and bank deposits.
With annuity products brought under EEE it may encourage long-term savings, and help increase social security after retirement.

The earlier code proposed to remove the distinction between short-term and long-term capital gains, based on the investor`s holding period. Now that has been tweaked.

Under the revised code, capital gains arising on account of transfer of equity shares or units of an equity oriented fund held for more than one year will be computed after allowing a deduction at a specific percentage of capital gains without any indexation.
This `specific percentage` is yet to be notified.

After adjusting the capital gains thus, the balance will be included in the total income of tax payer and taxed at the applicable rate. According to the revised code, the individual in the lower bracket will pay a lower tax for capital gains compared to those in higher tax brackets.

To illustrate, if an investor has invested in an equity fund at a NAV of Rs 10 and sells his unit at Rs 110, the capital gains before deduction at the specified rate comes to Rs 100. Supposing the rate of deduction is 50%, this would stand reduced to Rs 50. The capital gain of Rs 50 would then be added to the tax payer`s income and taxed at the applicable rate. If tax payer is in a 10% slab, such gain will bear Rs 5 as tax.

ULIP row ends; but will investor be a final winner?

With the government bringing the curtain down on the tussle, insurance companies are now free to issue fresh ULIPs and their regulator IRDA can continue to guide them.

The finance minister has kept his word. A fortnight ago he had assured life insurance companies that the dispute between IRDA and SEBI over the regulation of unit linked insurance policies or ULIPs will be resolved soon.

Now the government has ended the row by promulgating an ordinance on Friday stating that unit linked insurance policies with investment component are insurance products which will come under the regulatory jurisdiction of IRDA and not SEBI.
It amended four Acts to make it clear that ULIPs are not securities and they did not form part of collective investment schemes or mutual funds.

These amendments nullify SEBI`s April 9 ban on 14 insurance companies from issuing ULIPs because they are made effective retrospectively from that date. While making it amply clear that SEBI has no regulatory jurisdiction over ULIPs, the government has also ensured that SEBI or any other regulator will not step into the jurisdiction of other hybrid products.

Joint Mechanism
To avoid any similar regulatory turf war in the future, the government has also set up a high-level panel, called a joint mechanism - with representations from RBI, SEBI, IRDA, PFRDA and the government.

It is made mandatory for the regulators to refer to the panel any dispute or difference of opinion over the regulation of a hybrid product. The panel will have to give its decision to the government within three months and it will be binding on all regulators.
The panel appears to be similar to that of the existing High Level Co-ordination Committee (HLCC) of the capital market under the chairmanship of the RBI governor.
The difference is that at HLCC decisions are based on consensus and they are not binding on the members.

With the government bringing the curtain down on the tussle, insurance companies are now free to issue fresh ULIPs and their regulator IRDA can continue to guide them.
Significantly, the ordinance has not only lifted the uncertainty that affected sale of ULIPs, but has also brought relief to thousands of unit holders who were worried about their investments ever since the turf war broke out between the regulators two months ago.

As an insurance company official pointed out, the government could have done this before the issue came to a head and the finance minister directing the regulators to approach the court to get a mandate on who has the right to regulate ULIPs. This would have avoided the two-month uncertainty and the public interest litigations filed by investors.

The IRDA, which emerged as the winner in the battle, is reportedly working on new guidelines for ULIPs. This could probably take care of the interest of investors in unit linked policies.

Investors Interest
The question now is whether the basic issues such as mis-selling and high agent`s commission over which SEBI took up the cudgels on behalf of investors get resolved. Its main contention was that ULIPs are essentially investment products and therefore insurance companies issuing them should take prior permission from the capital market regulator. But the underlying issue was the high commission (up to 30%-40% in the first year) paid to agents by investors in ULIPs.

SEBI was said to be under pressure from the mutual fund lobby as after it banned entry load on MF, their sales came down sharply as agents preferred selling ULIPs.
Though it was an investor protection move by SEBI, it came under flak for its unilateral action.

SEBI`s Achievement
Thought it is perceived that the ordinance has come as a slap in the face of capital market regulator SEBI, it has a score of things to its credit.

It was SEBI`s action that forced IRDA to take up reform of unit linked policies. After the tussle broke out, IRDA has initiated a slew of measures to make ULIPs more investor friendly. From July 1, agents selling ULIP will have to disclose to the customer the exact amount of commission they will get. IRDA has also fixed the minimum term of ULIPs to five years, made life cover compulsory for pension funds, and proposed capping surrender charges.

Now that IRDA has emerged as the winner, it is the regulator`s interest to ensure that policy holders` interests are taken care of - so that the investor becomes the final winner.

Choosing a pension policy

If you are looking to secure a regular income on retirement, pension plans offered by insurance companies possibly offer the widest menu of choices. Market-linked investment options, various choices on the annuity and a favorable tax structure for such policies are some of the reasons why investors should consider them.
Here we tell you what options are available:
An investor has to be clear about three things before buying a pension policy - the age at which he wishes to retire (vesting age), the retirement corpus, i.e. the money needed post-retirement, and the premium he can manage to pay to build that corpus.
In a pension policy, the buyer pays a fixed premium till he reaches the vesting age. Based on one`s choice of investment (in case of a unit-linked plan, the insured is offered choices; in traditional plans the choice is not in the hands of the buyer of the policy), the insurer invests this fund to generate returns.

At the time of maturity of the policy, that is, when the buyer reaches the vesting age, he will be allowed to redeem as a lump sum (called commuting) one-third of the accumulated fund. The remaining fund balance has to be converted into an annuity or annual pension payment.

An annuity policy is a product by itself. One need not buy the annuity from the same insurer who sold the pension policy. Under an annuity contract, the insurer uses the lump sum amount paid by the buyer to pay him back a guaranteed sum at regular intervals till his death (or for a fixed period). Annuity plans guarantee a nominal return. Annuity rates (return) are reviewed every month by the insurers. But once an annuity is taken, the rate remains fixed. LIC offers annuity at 6.5%-7% per annum. ICICI Prudential Life Insurance, HDFC Standard Life and SBI Life also offer annuity (also called immediate annuity) products.

Options
Pension policies come with and without life cover. However, recent IRDA regulations require an insurance cover, to be implemented in future. Pension products that come with life cover charge additional premium.

For example, ICICI Pru Assure Pension, a unit-linked pension product, charges Rs 133 per lakh of sum assured annually as mortality charge. Kotak Retirement Income Plan Premium, a traditional pension policy, offers life cover and without life cover plans. The with-cover plan comes at a premium of Rs 9,750 per annum for a male of 35 years when the sum assured is Rs 3 lakh. The same policy without life cover will come for a premium of Rs 9,060 annually.

Pension policies also fall under-traditional and unit-linked groups. Traditional policies do not give full disclosure of their underlying investments; they predominantly invest in government bonds and very little in equities. Some of the traditional pension policy providers offer even vesting bonuses (in case of with-profit plans where the insurer shares his surplus).

Traditional policies fit a conservative investor`s portfolio well. Unit-linked pension products (ULPPs) invest in stock markets and also offer a combination of equity and debt portfolio. As regular ULIPs these products too have some charges and the investment risk, linked to the market, is borne by the policyholder.

Insurers give a benefit illustration in the policy document stating the premium charges and fund value at maturity at an assumed rate of return.

Charges
Premium allocation, policy administration and fund management are the main heads under charges in an ULPP. Before subscribing to a unit-linked policy, do your homework to find out the charges across policies of different insurers. In some policies premium allocation charge is as high as even 100% (of the premium) in the first year. Higher the charges, lower will be your yield as lesser sum goes towards investment. The fund management charge is, however, capped at 1.35% by the IRDA.

Policies with life cover plans have mortality charge in addition to the above.
Some insurance agents have been pushing pension products to prospects on the argument that the product`s cost may rise once life cover is made mandatory. Do you need to rush in to buy a pension policy before the order comes into effect? Will the increase in premium cost be very significant?

Pension products do not offer strict comparisons to quantify the extra cost the buyer has to bear for life cover. However, it is not likely to be significant, especially for buyers of below 40 years.

In the series of regulatory changes that IRDA has been bringing on over the last few months, pension policies too have seen implications. They are: One, all unit-linked pension policies (ULPPs-pension plans that invest in equities) should compulsorily offer a life cover. Two, the unit-linked pension products will have a lock-in period of five years from the current three-year time period (traditional pension policies can continue with the current three-year lock-in). Three, partial withdrawals are not be allowed in ULPPs. The deadline for all of these was July 1. But it may be extended.

When life cover gets mandatory, one concern is that the elderly may be refused pension plans. But there are other options, says Andrew Cartwright, chief actuary, Kotak Life Insurance. ``Elderly clients will still have the option of buying an immediate annuity when they get to retirement.``

If pension is the goal then there are annuity products. If tax saving is the objective, there are products such as PPF, NSC.

A senior agent with LIC said that a mandatory life cover will save investors who had purchased unit-linked pension products from the risk of fall in the cover value when the market is down. ``For a ULPP buyer, there is always a risk of the fund value going down with the market. What if the death occurs in the period when the market is down? If life cover is combined, he will have some relief in the form of the sum assured.``

Currently, premium paid towards a pension policy (up to Rs 1 lakh) is allowed as deduction for tax purposes from the income. At the vesting age, one-third of the amount that is withdrawn is tax exempt; the remaining received as a pension through an annuity scheme is taxed as regular income. However, the revised Direct Taxes Code has brought annuity products under the EEE category.

If the DTC is implemented (it is proposed to be implemented from April 2011), pension policies will be treated on a par with endowment policies. Pension plans are, therefore, set to become attractive if the proposals in the Code are implemented.

We welcome resolution of ULIP-IRDA issue: Deepak Sood

With the government bringing the curtain down on the tussle, insurance companies are now free to issue fresh ULIPs and their regulator IRDA can continue to guide them.

Commenting on resolution of ULIP/IRDA issue, Deepak Sood, MD & CEO, Future Generali India Life Insurance Co said, ``The long awaited clarity in the regulatory framework is welcomed by insurers and customers alike. The uncertainty had led to insurers delaying their distribution thrust and customers delaying the decision to invest in insurance cover. Now with this ordinance and the clarity it offers, both the IRDA as the regulator and us as insurers can focus on our efforts to provide total insurance solutions to Indian customers and focus on the bigger macro-economic need (i.e.) Indians are uninsured and/or underinsured and there is a crying need to rapidly grow the real penetration (per capita) of insurance cover among our people, to help ensure the financial security and happiness that this provides.``

He further added, ``It has also been clarified that pension products need not compulsorily offer life insurance cover or health insurance cover as was required by an earlier IRDA circular. Now an insurance contract offering one out of three i.e. life insurance cover, health insurance cover or annuitisation on human life is sufficient to categories it as a life insurance product. Going forward, we are confident that customers will benefit from the awaited fresh guidelines on ULIPS from IRDA.``

Optimal strategy - Equities, hybrids or MIPs

One of our readers who had a windfall from his employer to the tune of Rs 6 lakh informed us that that he was planning to invest this sum for long term in a combination of equity funds, hybrid debt-oriented schemes and monthly income schemes (MIP) for diversification. Would this be an optimal strategy?

Maybe not. If one has the risk appetite for equity investment and if the time horizon is long, an ideal strategy would be to invest in a pure equity fund and just stagger the investment over a long period.

Hybrid funds or monthly income plans are not good options to route the equity part of your investment. The expenses ratio and capital gain taxes are two major hindrances for the investors investing in them. Here is why.

Tax factor

Hybrid debt schemes have expense ratios varying from 0.75% to 2.5% a year and MIPs, by and large, have expense ratios of about 2%.

Consider this: An investor is willing to invest in a hybrid debt scheme a sum of Rs 2 lakh for a ten-year period. Assuming his investment is generating hybrid debt return (11.7% over the past five years) for next 10 years, an investment of Rs 2 lakh will become Rs 6 lakh at the end of the maturity period.

Since these are debt schemes, long-term capital gains in respect of units held more than 12 months are chargeable to tax at 20%, after factoring in the cost of inflation index. Alternatively, they are taxed at 10% without indexation. This means the investor would end up paying capital gains tax for the entire returns, including the equity portion.

For an appreciation of Rs 4 lakh, if the long-term capital gains are taxed at a flat 10%, the total tax out go will be Rs 40,000. Had the investor, instead, split his investment between equity and a debt fund, his tax outgo would be much lower because equity funds enjoy a more favorable tax structure.

If the investor had instead spread out the Rs 2 lakh as Rs 1.2 lakh in a debt fund and Rs 80,000 in equity fund, the maturity value could be Rs 5.8 lakh assuming that he generate similar returns. Under the second option, LTCG will be just Rs 24,000 and his overall return could have increased by Rs 16,000.

Similar to hybrid debt schemes, investors in MIPs too suffer higher tax incidence. Hence, investors will be better off separating the debt and equity investments to save a higher tax outgo and to generate higher return if their time horizon is for longer period.

However, debt would be a better option if your investments are for less than three years and you would like to stay away from the vagaries of the equity market.

Investors can separate their debt and equity investments to reduce tax outgo and generate higher returns over a longer period.