MONEY MAKEOVER

Financial planner
Gaurav Mashruwala warns that, these days, job loss is a routine part of life

Trevor Almeida's entire life has been a financial roller coaster ride. During his childhood, his mother was the main bread earner and, while she was an excellent money manager, things were tight. As Trevor grew older and started earning, the situation eased a little. However, his mother went through a prolonged illness which drained them financially. When things became good again, the economic slowdown hit him. Currently he is in between jobs. His wife Joyce is employed. They have a lovely son, Craig, who is five years old.
WHAT ARE THEY SAVING FOR? (1) Their topmost priority is to pay back the home loan of Rs 24 lakh. (2) They need about Rs 5 lakh for their son's education and another Rs 7 lakh for his marriage. (3) Further, they need a corpus which can generate Rs 5 lakh a year during their retirement after 18 years. All this is at today's rate of inflation.
WHERE ARE THEY TODAY?
Cash flow: Until March this year, the Almeidas' joint annual inflow was Rs 26.21 lakh. This has been reduced to about Rs 14 lakh after the break in Trevor's career. They spend about Rs 16.21 lakh annually. This includes large amounts paid towards life insurance, taxes, home loan and routine household expenses. Yearly EMI on home loan is Rs 3.84 lakh.
Statement of net worth: Value of assets is Rs 1.35 crore. This includes assets worth Rs 88 lakh for self consumption. Their outstanding home loan liability is Rs 24 lakh — 17.75% of assets.
Contingency fund: While mandatory monthly expenses total Rs 1 lakh, the balance in savings bank, bank FD and cash at home is Rs 21 lakh — about 20 months' reserve.
Health & life insurance: They have a family floater policy of Rs 6 lakh. Total life cover for Trevor is Rs 22 lakh. Most life insurance policies are ULIPs.
Savings & investments: Value of savings and bank FD is Rs 20.90 lakh. Other investments include, direct equity Rs 23 lakh, equity mutual fund Rs 1.30 lakh, bonds Rs 50,000 and balance in post office schemes Rs 1.31 lakh.
FISCAL ANALYSIS: On termination of one income flow, expenses seem higher than income. Huge outflow towards insurance premium. Borrowing is within permissible limits. Health cover is in the form of a floater and hence not optimal. Life cover is through a ULIP. It takes away lots of family income and yet does not give sufficient cover. Overall, the portfolio is skewed towards equity. Large funds are lying idle.
WAY AHEAD:
Contingency fund: Until Trevor is between jobs, keep aside funds equivalent to six months' mandatory expenses. Once the new assignment begins, reduce the corpus to three months' reserve. Use balance funds to pay off the home loan.
Health insurance: As far as possible, opt for independent health cover. In turbulent times if there are multiple family illnesses, then coverage may not be sufficient. Get Rs 5 lakh cover for each family member. Life insurance: Trevor should have at least Rs 50 lakh worth term plans besides the ULIP policies. The ULIP plans are eating into their annual income without either generating optimum returns or giving sufficient cover, so should in part be terminated.
PLANNING FOR FINANCIAL GOALS: Repay home loan:As discussed, use funds parked in the bank FD to partly pay off the home loan. Once Trevor starts his career again, use the investment in direct equity to pay off the maximum loan amount. Son's education and marriage: These goals are more than a decade away. Firstly focus on repayment of home loan. After that, start systematic investment in (1) index fund (2) gold fund (3) international equity fund.
Retirement: Use those funds (same as in Craig's education and marriage) to create a corpus for retirement.
PLANNER'S EYE
Job loss is a part of life these days. It can be a both financially and emotionally turbulent time for the family. The wise family is one which prepares for bad times during good times. Unfortunately, when the going is good, most of us get complacent and postpone preparations for bad times.
Standard prudence suggests that (1) Have sufficient health insurance. Especially in case of job loss, get cover directly from insurance companies in addition to cover provided by employer (2) If you have outstanding loans, pay them off aggressively. In most cases, families may pay their EMI in time, but invest their excess funds instead of using them to pay off more of the loan. The combustible combination of an outstanding loan, job loss and fall in equity markets, can lead to more emotional and financial anxieties. (3) Lastly, always ensure that a portion of your portfolio is liquid. While real estate can generate good returns, they can create an illiquid portfolio.

Let client Know - NO Entry load on SIP!!

Let client Know - NO Entry load on SIP!!

As per the new SEBI circular, there shall be No Entry Load for all mutual fund schemes.

Applicability:

No entry load shall be applicable for:

a. Investments in mutual fund schemes (including additional purchases and switch-in to a scheme from other schemes) with effect from 1 August, 2009 ;

b. New mutual fund schemes launched on and after 1 August, 2009; and

c. Systematic Investment Plans (SIP) registered on or after 1 August, 2009.

What to do with running SIPs of clients?

It is clear that existing SIPs will continue to attract entry load, only those SIPs registered on or after 1 August 2009 will not attract any entry load.

Therefore, from investors’ point of view it is beneficial to re-register their SIPs to get away from the burden of entry load.

Actions required to avoid entry load: AMCs-wise

If AMCs is…

Reliance
Action-An investor just has to fill one form to re-register his/her SIP to avoid entry load. No benefit will be lost on SIP Insure (Please find attachment of form)

Franklin Templeton
Action-An investor just has to fill one form to re-register his/her SIP to avoid entry load.

DSP BR
Action-A consent letter from investor addressed to Ventura

All other AMCs#
Action-STOP existing SIP and RESTART it again

#Birla
Action-Century SIP should not be discontinued as this will lead to stoppage of insurance.


Note: AMCs are still contemplating on the procedure of applying No Entry Load on existing SIPs. Few more AMCs may come up with a Re-registration Form like Reliance and Franklin.

In case of further clarification do revert.

Morning update on markets on 31st july 09

Last night dow finally closed up by 83 points at 9152.it went up to 9246 and most of the time remained far above the yearly high of 9175 finally giving up the gain during closing minutes to close below the 2009 highs. One should not be surprised to see sharp up moves in dow towards 10000 mark in coming days with small corrections in between. Similarly brazil too made a new yearly high by crossing june highs during intraday trading and finally closed 1.3% up. European markets which are now trading above the june highs, were up nearly 2% with uk ftse closing up by 1.9%. Asian markets which are already above their june highs have opened strongly and are likely to remain bullish for the day but what is more important is, how strong these markets are around indian opening at 9.55 a.m. One can see much more higher moves in asian markets in coming days.

For indian markets expect a bullish opening near or above the critical level of 4600 and sensex & nifty may try to move up towards june highs of 15600 & 4693.traders may trade long intraday, meaning wait for an intraday correction to go long as the possibility of breaching june highs are quite high in next 1 or 2 days. Future traders may wait for an intraday decline to take long positions in stock futures of metals, oil & gas production, cement, capital goods & power stocks for good gains during coming week.

Option traders should hold on to their 4600 bought calls & wait for intraday declines in the markets to add more. As markets move up towards june highs, they may buy put of 4400 to hedge the calls in the ratio of 3 calls to 1 put. Sensex & nifty managing to stay above 15000 & 4500 levels is a strong bullish signal for further up move during coming week. The only thing to be kept in mind on fridays trading is how much dow can surprise everyone by falling on friday night to impart a negative influence on monday morning.

NIFTY FUTURES INTRADAY TREND ANALYSIS FOR 31st JULY 2009

FOR TODAYS INTRADAY, NIFTY "TREND DECIDER" IS 4565.
BULLS ACTIVE TILL 4565 INTACT.
ABOVE 4565 IMMEDIATE RESISTANCE PEGGED AT 4591.
""1st TREND REVERSAL"" IS AT 4591.
SUSTAINING ABOVE 4591 WILL TAKE NIFTY FUT TO 4615 - 4639.
"MAXIMUM" 4639 FOR TODAYS INTRADAY SESSION.
BELOW “TREND DECIDER” OF 4565 IMMEDIATE SUPPORT 4540 - 4527 - 4515.
""1st BOUNCE"" BACK IS 4515.
BELOW 4515 SUPPORT AT 4500 - 4482.
CRUCIAL SUPPORT 4482 IF 4482 CRACKS THEN SUPPORT AT 4467 - 4452.
2nd & ""LAST BOUNCE BACK"" REGION 4452.
IF 4452 CRACKS THEN LAST SUPP 4422

Understanding Implied volatility

ABOUT VOLATILITY INDEX

Volatility index or VIX, also called the "fear index" or "risk index," is an indicator that captures the level of fear in the capital markets and help investors understand market risks better and take decisions accordingly. When investors turn fearful, the VIX index moves higher. The Chicago Board Options Exchange (CBOE) was the first to develop volatility index in 1993. There is also the VXN which tracks the Nasdaq and VXD that tracks the Dow Jones Industrial Average.

The implied volatility, as captured by the volatility index, is not about the size of the price swings, but rather the implied risks associated with the stock markets.

Implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.

Market volatility keeps changing as new information flows into the market. High readings indicate a higher risk in the market place. For instance, the reading of VIX reached almost 45 in 1998 as the LTCM (Long-term Capital Management) crisis exploded. It took a few months for the investor's fears to abate and the VIX to return to below 20. The World Trade Center attack in 2001 also made the VIX climb above 45, as the investors' fear level reached the zenith.

India VIX is a volatility index based on the Nifty 50 Index Option prices. It uses the same methodology that CBOE uses to compute its VIX, which is based on the prices of options of the S&P 500 index. From the best bid/ask prices of Nifty 50 options contracts (which are traded on the F&O segment of the NSE), a volatility figure percentage is calculated, which indicates the expected market volatility over the next 30 calendar days.

Higher the implied volatility, higher the India VIX value and vice versa. There are some differences between a price index, such as the Nifty 50 and India VIX. Nifty 50 is calculated based on the price movement of the underlying 50 stocks, which comprises the index. India VIX is calculated based on the bid-offer prices of the near- and mid-month Nifty 50 Index Options.

While Nifty 50 signifies how the markets have moved directionally, India VIX indicates the expected near-term volatility and how the volatility is changing from time to time.

It has been observed that when the market is range bound or has a mild upside bias, volatility is globally observed to be typically low. On such days, investors prefer buying call options (a position taken on the view that the market will move higher) over put options buying (a position taken on the view that the market will move lower). This kind of market may indicate lower risk.

Conversely, when the selling activity increases significantly, anxiety among investors tends to rise. Investors rush to buy puts, which in turn pushes the price of these options higher. This increased price that investors are willing to pay for put options shows up in higher readings on volatility index.

At present, NSE will publish only the index values at the end of the day. Once there is stabilization, products based on India VIX will also be launched.

India Volatility Index Vs Nifty 2009
Date	VIX Close	NIFTY Close
01-Jan-09	41.34	3033.45
02-Jan-09	40.67	3046.75
05-Jan-09	38.6	3121.45
06-Jan-09	38.73	3112.8
07-Jan-09	44.36	2920.4
09-Jan-09	47.82	2873
12-Jan-09	48.57	2773.1
13-Jan-09	53.47	2744.95
14-Jan-09	44.26	2835.3
15-Jan-09	45.17	2736.7
16-Jan-09	44.3	2828.45
19-Jan-09	44.46	2846.2
20-Jan-09	45	2796.6
21-Jan-09	45.41	2706.15
22-Jan-09	45.55	2713.8
23-Jan-09	34.01	2678.55
27-Jan-09	42.86	2771.35
28-Jan-09	40.76	2849.5
29-Jan-09	43.11	2823.95
30-Jan-09	42.1	2874.8
02-Feb-09	43.69	2766.65
03-Feb-09	49.24	2783.9
04-Feb-09	44.39	2803.05
05-Feb-09	43.92	2780.05
06-Feb-09	50.65	2843.1
09-Feb-09	44.58	2919.9
10-Feb-09	44.3	2934.5
11-Feb-09	46.65	2925.7
12-Feb-09	45.65	2893.05
13-Feb-09	43.31	2948.35
16-Feb-09	42.56	2848.5
17-Feb-09	44	2770.5
18-Feb-09	43.04	2776.15
19-Feb-09	42.91	2789.35
20-Feb-09	45.21	2736.45
24-Feb-09	45.2	2733.9
25-Feb-09	41.94	2762.5
26-Feb-09	39.87	2785.65
27-Feb-09	40.61	2763.65
02-Mar-09	43.36	2674.6
03-Mar-09	44.44	2622.4
04-Mar-09	42.77	2645.2
05-Mar-09	41.56	2576.7
06-Mar-09	37.97	2620.15
09-Mar-09	41.03	2573.15
12-Mar-09	39.38	2617.45
13-Mar-09	35.57	2719.25
16-Mar-09	36.64	2777.25
17-Mar-09	38.47	2757.45
18-Mar-09	38.19	2794.7
19-Mar-09	35.98	2807.15
20-Mar-09	34.86	2807.05
23-Mar-09	37.63	2939.9
24-Mar-09	36.85	2938.7
25-Mar-09	28.18	2984.35
26-Mar-09	36.93	3082.25
27-Mar-09	37.14	3108.65
30-Mar-09	40.25	2978.15
31-Mar-09	39.48	3020.95
01-Apr-09	36.53	3060.35
02-Apr-09	37.4	3211.05
06-Apr-09	41.72	3256.6
08-Apr-09	43.55	3342.95
09-Apr-09	43.54	3342.05
13-Apr-09	46.56	3382.6
15-Apr-09	48.02	3484.15
16-Apr-09	50.51	3369.5
17-Apr-09	50.8	3384.4
20-Apr-09	54.22	3377.1
21-Apr-09	53.64	3365.3
22-Apr-09	57.88	3330.3
23-Apr-09	51.3	3423.7
24-Apr-09	47.78	3480.75
27-Apr-09	49.43	3470
28-Apr-09	48.8	3362.35
29-Apr-09	46.63	3473.95
04-May-09	49.54	3654
05-May-09	50.53	3661.9

So in the above chart we can see that when the Nifty close increases then the VIX value decreases and when the Nifty close decreses then VIX value increases.

I hope this article will help in understanding the impact of the implied volatility.

Happy investing