The Repo Rate is the official short term lending rate set by the Reserve Bank of India (RBI).
Repo is short for repurchase, and the full form is repurchase agreements. Outside of India, a repurchase agreement is usually a private interbank borrowing and lending practice. Banks will own certain kinds of what are known as liquid assets, usually government bonds, or the highest rated corporate debt which are short term in nature, ensuring that they have the deepest markets.
If a bank needs to raise cash or wants to borrow, then, it enters into an agreement with another bank that has money to lend, and it puts up these liquid assets up that is owns as security, and pledges to repurchase them at a later date and at a higher price in the future. The increase in price that the lending bank receives when it sells back those securities to the borrowing bank, represents the interest that the lending bank receives on making such kind of loans. Usually the interest is dependent upon the things one normally expects would determine the cost of borrowing, credit worthiness of the borrower, liquidity of the securities put up as collateral, the term of the loan etc.
In the rest of the world, the Repo Rate is largely a private affair with banks using this method of lending and borrowing to and from one another. In India, the rate is used as a monetary policy tool and the RBI uses it as a means of setting official short term interest rates.
Instead of banks transacting with one another, borrowing and lending from each another using such agreements, they tend to transact with the RBI instead. This is largely due to the fact that the majority of banks are government owned public sector banks, which control 80% of India’s deposits; it is perhaps easier and also cheaper for such banks to conduct open market short term borrowing and lending operations with a central clearing house like the RBI rather than deal with each other directly.
The other reason the Repo Rate is used as a monetary policy tool, is that under Indian banking regulations, banks are required to hold a large proportion of their liquid assets (i.e. funds they have not used to make cash advances to their customers with) in government securities rather than corporate debt (A market for corporate debt in India is almost non-existent), since the issuer of assets held as security is unique, it is far easier to set a standardised rate.
In most countries there are similar mechanisms whereby banks can pledge collateral to the central bank and borrow against it. In fact in America, the use of this financing technique has increased dramatically over the last year, and has been expanded since the failure of Lehman Brothers. The Federal Reserve, the US central bank has allowed even non banking finance companies such as Investment Banks to borrow from them using this method, and they have been increasingly liberal in what securities they will accept as collateral. This in fact was the only alternative available to them to ensure there was some liquidity remained in the market since the credit crisis froze short term interbank lending completely towards the middle of September.
A Reverse Repo is exactly what the name suggests, and is the opposite process of a repurchase agreement. A Reverse Repo is an open market operation of the RBI and is used as a means of borrowing back from individual banks in the Indian financial system rather than lending to them. The RBI engages in such an operation when it feels there is too much liquidity in the system, it is a short term method of mopping up cash rather than issuing bonds outright or tightening the Repo Rate which would also do the same thing.
The other monetary policy tools the RBI has in its arsenal, is the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The Cash Reserve Ratio is the amount of funds that commercial banks must keep with the RBI as cash. If the RBI decides to increase this ratio, the available amount that banks have to lend falls and vice versa. Similarly the SLR is the proportion of deposits that banks must hold as government bonds, and the RBI can use either of these two ratios to either add or reduce liquidity in the financial system.
Central banks use monetary policy to control money supply, the main reason they do this is to try and limit inflation. The most basic reason for inflation in economic theory is that there is too much money chasing too few goods, which is why prices end up rising. Hence it is the central bank’s mandate to try and keep a lid on inflation by ensuring money supply is monitored and not allowed to expand uncontrollably.
Central banks are also faced with the conflicting goal of maintaining growth and ensuring that money supply is not too tight nor interest rates too high as a result. High interest rates have the effect of reducing investment which impacts economic growth negatively. The higher the interest rate, the less demand there is for private firms to raise capital, because it costs more and the less investments they make as a result.
India is one of the few countries to use Repo Rates as a benchmark for official lending rates. In most other countries Repo Rates are usually associated with interbank borrowing and lending practices and are usually unofficial. For reasons mentioned earlier, the RBI uses the Repo Rate as its official short term lending policy. As of October 20th this year, the Repo Rate stood at 7.5 percent. The CRR stands currently at 5.5 percent whilst the SLR is a whopping 24%.
The Government should not be eating up close to a quarter of all retail and corporate deposits. Though western banking systems are probably looking at the Indian SLR with some envy right now, because it would have meant that their banks would have made less risky loans, that is no way to run an economy. Indian Government debt as a proportion of GDP is unhealthy and such a regulatory regime will only ensure that situation persists. Excessive Government borrowing results in higher interest rates for everyone and means that less private investment takes place constraining long run sustainable economic growth.

MOST of us have an inner rebel. That’s why often fall for the guy mother warned us against. Or continue smoking even when told not to.

So, it’s no wonder that when mutual fund advertisements worth millions of dollars, tell us to ‘Please read the offer document (OD) carefully before investing’, we still don’t! This is understandable; after all it’s a 100-page document filled with jargon. But in the long run, you will be the loser, if you don’t.

The Securities and Exchange Board of India (SEBI) have even come out with an abridged version called the Key Information Memorandum, which stipulates standard sections and disclosures in all ODs.

An OD is critical because it tells you whether your money is in the right hands, at the right place and at the right time. Your financial advisor will have a copy, and the company web site should have it online, too.

If you still don’t want to read the whole document, take the easy way out. wealth scopes out 10 must-reads in the OD.

1. Date of issue

Verify that you have the latest edition of the OD (an OD must be updated once a year, at least).

2. The minimum investment

Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments.

For example, equity funds may stipulate Rs 5,000, while institutional premium liquid plans may stipulate Rs 10,000,000 (Rs 10 crore) as the minimum amount.
3. Why invest

The goal of each fund must be clearly defined, from income to long-term capital appreciation. You, the investor, must be sure that the fund’s objective matches with your’s.

4. Investment policy

An OD will outline general strategies implemented by the fund managers. You will learn what types of investments will be included, such as government bonds (with ratings) or stocks, considered appropriate. Be sure to check if it offers adequate diversification.

5. Risk factors

Every investment involves some level of risk. Look for descriptions of the risks associated with investments in the fund (like credit risk, market risk or interest-rate risk) and decide if it matches your risk appetite.

For example, a mutual fund Monthly Income Plan (MIP) invests mainly in bonds and gilts (up to 90 per cent) with a sprinkling of equity(10 per cent) to generate capital appreciation. This is passed on to customers as monthly income.

But remember: it is subject to availability of distributable surplus. In 2004, many mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns.

They may have been better off with a a Post Office MIP that assures an 8 per cent monthly income payment for its six-year tenure.
6. Past record

ODs contain selected per-share data, which includes the net asset value and total return for different time periods, since the fund’s inception.

Performance data listed in an OD are based on standard formulae established by the SEBI and enable investors to make comparisons with other funds. So investors should check track records over a period of time that matches their own investment horizon but always remember that ‘past performance is not an indication of future performance’.

Additionally, investors must check that the benchmark chosen by the fund to compare its relative performance is appropriate. In addition, investors should keep in mind that many of the returns presented in historical data don’t account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.

Life (including investments ) is not about not making mistakes, but to learn from them. A wise person quickly learns from his mistakes - and those of the others too. Given below are 7 do’s and don’ts which we can follow to avoid mistakes commonly made by investors in MFs.

Rule 1 : Don’t look at NAV
I would be repeating this maybe a 100th time - Rs 10 NAV does NOT mean that the fund is cheaper than an existing fund with say Rs 200 NAV. Therefore, never look at NAV when you are making an investment decision.

Rule 2 : Do systematic investment
The market valuations today, despite the recent correction, are still not cheap. Also, there is risk of a possible slowdown in the economy. Therefore, averaging one’s investment by doing SIP is a safer route to investing in equity markets.Lump-sum investment is advisable only at very low market PE levels, when the risk of markets going down further is low and the probability of appreciation high.Of course, this does not apply so much to debt funds, where the returns are relatively much more stable.

Rule 3 : Don’t go for Dividend option
If the investment horizon is more than 1 year (which should ideally be the case when one invests in equity funds), Growth option is generally preferable both from the point of view of wealth creation and tax efficiency. For investment period less than 1 year for the short-term needs - and usually invested in debt funds - dividend option would generally be better.

Rule 4 : Don’t have too many or too few funds
Don’t invest in too many or too few funds. While, there is no specific number of funds which you may own, a portfolio of 12-18 funds should in most cases be OK.Too large a portfolio will mean many similar funds, which could dilute your overall returns. Too small a portfolio will mean that you are not covering the entire breadth of the market, besides exposing yourself to high risk of a concentrated portfolio.Further, your corpus should be appropriately spread across large-cap/diversified funds, mid-cap funds and sector funds from different fund houses. Large-cap/diversified funds are relatively less risky, mid-cap funds are riskier and sector funds carry highest risk. Therefore, to have a balanced and stable portfolio, maximum money should go to large-cap/diversified funds, some amount to mid-caps and only a small portion should be invested in sector funds.

I have seen many portfolios which are stacked with infrastructure funds (the latest market fancy). Such concentrated portfolios carry very high risk.

Rule 5 : Don’t invest in New Fund Offers
Do not invest in NFOs; unless they have something very different to offer, which the existing funds don’t.Since there is no portfolio or performance to look it, it is difficult to assess whether the fund would add value to our portfolio or not. Besides, most of the NFOs launched today are the risky sector funds.

Rule 6 : Do your own study before investing
Ads are meant to lure people. Therefore, it will not be prudent to invest just because some advertisements say so.

Further, it would also not be prudent to blindly trust your distributor (especially those who are not professional advisors too). One, they may not be fully equipped to understand your needs and advise accordingly. Two, they may not be selling all the products you may need. Three, they may be guided more by their commissions than your interest.Hence, always cross-check the advice you receive with multiple sources, before you commit your money.

Rule 7 : Don’t invest too much in global funds
Be very careful when investing in global funds. Global funds would probably be the riskiest amongst the equity funds. Like any equity funds, they face the equity-risk.Besides this they are also open to currency risk. If the rupee appreciates, you will get less rupees/dollar. Therefore, it is possible that whatever returns you make in dollar terms, may get fully eroded if in the meantime the dollar has depreciated. Given the strength of the Indian economy vis-à-vis the US/Europe etc., the chances of rupee appreciation are high. In fact, had RBI not intervened, dollar might have already depreciated to Rs 35-38.Therefore, invest only a small percentage of your corpus in good diversified global funds; that too primarily for diversification purposes.

These rules will guide an uninformed investor to invest his money wisely and profit from the potential that the Indian economy offers today.

Step1
Talk to your agent about multi-policy discounts. Most companies want to write your home and auto coverage and will provide significant discounts for packaging them together.
Step2
Tickets and accidents can severely increase your insurance premium … remember to be a safe and courteous driver.
Step3
Be aware of WHAT you are driving …. sporty and classic vehicles as well as large trucks can be higher to insure. Contact you agent for a quote before purchasing a new vehicle.
Step4
Raise your deductible and drop any unnecessary coverages. (As a general rule, any car worth less than $1,000 should not carry comprehensive and collision coverage.)
Step5
Check your credit. Many insurance companies are now using an insurance score to evaluate your premium. Your credit score can have a huge impact on your insurance score.
Step6
And finally, shop with an independent agent. They will have access to more carriers and can quote you many companies at the same time

Undoubtedly, the life insurance industry has been growing at a steady pace over the last few years. From a low of 2.6 per cent contribution to the GDP figure in 2006, it rose to 3.26 per cent and 4.09 per cent in 2006 and 2007, respectively. The biggest propeller of this growth has been the unit-linked insurance plans (Ulips), which have, according to some estimates, accounted for nearly 90 per cent of the new business being generated by life insurers.

The new edict. The Finance Bill 2008-09 has brought the management of Ulips of life insurance companies under the service tax net. The mortality portion of the premium was already being taxed. The direct impact of this, however minimal, would be on the fund value of a policyholder.

What gets taxed. The charge is on the service provided by the insurer to the policyholder. The amount charged for levy of service tax will be the difference between the premium paid and the investible amount segregated for actual investment (including the mortality). For example, on a premium of Rs 100, if the mortality charged is Rs 10 and the investible amount is Rs 85, then the service tax is to be charged on Rs 5, that is 100 - (10 + 85). In the same scenario, if the investible surplus is Rs 75, the tax gets levied on Rs 15.

In simple words, the service tax of 12.36 per cent on Ulips is going to be charged on the entire amount that the insurer keeps after deduction of mortality charges and the investible amount. Much of it is reflected in the front-end premium allocation charge. So, higher the charge, higher is the impact. Nitin Chopra, CEO, Bharti AXA Life Insurance says, “By placing the allocation charges of Ulips under the service tax fold, while the entry load of other market-led instruments are not, Ulips are not being provided a level playing field.”

Elsewhere. In mutual funds, the service tax is charged only on the asset management charge. This fee is only a part of the recurring charges that the fund house can charge based on the size of the corpus. Usually it is 2.25 per cent of the corpus. The asset management charge is part of this and capped at 1 per cent.

Anil Sahgal, director of strategy and chief investment officer, Aviva Life Insurance, says, “The intent of the Budget speech was to bring equality between mutual funds and Ulips, which, perhaps, is not the case according to the illustration given in the Finance Bill.”

Further, the industry feels the tax will hurt insurance penetration in India. Chopra says: “Indian customers prefer investment-cum-insurance plans. Ulips as a category, promote buying of financial protection with the value-added benefit of market-led investments. Hence, Ulips need to be supported on the tax front to improve insurance penetration in India.”

The impact. The service tax will lower the returns for a Ulip holder. Says V. Srinivasan, chief financial officer, Bharti AXA Life: “Our analysis indicates that the internal rate of return (IRR) to customers on our products will reduce by 20-40 basis points per annum over a 15-year holding period, on account of this service tax.”

This would hold true with most other insurers as well. Shikha Sharma, CEO and managing director, ICICI Prudential Life Insurance, says: “The service tax, perhaps net of input credit on service tax available to the life insurance company, will likely be passed on to the consumer. As such, there will be no change in the expense ratio of the life insurance company.”

What to do. As various components of the premium of a Ulip are under the service tax net, the overall tax incidence for customers has gone up.

Look for plans that have a low upfront premium allocation charge. However, that does not mean that overall returns would be higher as insurers might resort to higher policy administration and fund management charges. A better way to view the cost-adjusted returns of any Ulip of any insurer is to get a hold of the net-yield figure.