In 2009, expect a Few developments in the personal finance space that will change things for the better.
The year 2008 would be remembered for the sharp fall in stock markets and closure of legendary institutions like Lehman Brothers and Bear Stearns.
Even in the personal finance space, structured products that use an investment strategy of that includes both the cash and derivative market, besides other elements was in vogue for sometime. But many high networth individuals burnt their fingers in such exotic products.
In 2009, things could be quite different. Though things have started on a bad note for markets because of the Satyam Computers imbroglio, there is one big development that could make them stronger during the year. That is, the introduction of the New Pension Scheme (NPS).
Today, there are a large number of people in the organised as well as the unorganised sectors that do not have any access to social security. So far, most people have had defined benefits in the form of an Employees' Provident Fund, which included a minuscule contribution to the Employee Pension Scheme (EPS).
The Pension Fund Regulatory and Development Authority (PFRDA) has now fixed a fresh date of April 1, 2009, to launch pension funds for all Indian citizens.
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With the launch of NPS, a government employee would make defined contributions of 10 per cent of his salary. The employer would match this contribution. For government employees, at present, there would be a fixed 15 per cent investment in equity and rest in debt.
However, for private sector employees, things will be different. While the employer will not make any contribution, the employee's contribution for the pension scheme can be optional. However, employees will get the option of investing in purely debt and equity or even, hybrid versions, depending on their risk appetite. While this would mean that the returns will not be fixed, it would also aid the contributor to be aggressive or defensive.
Also, this would imply that the Indian stock market would get big money from these schemes and that too, long-term money. This should expand the market significantly and help markets to stabilise and also, help employees to get the benefits of investing in the equity market for a very young age without having to go through the rigours of registering with a stock broker or going for a mutual fund distributor.
In the insurance space, the most important development in the next few months would be the introduction of portability of medical insurance schemes. That is, policyholders will be able to transfer schemes and yet, get the advantage of the benefits that have accrued to them like the no-claims bonus, from the early insurer.
This would be especially help policyholders, who were dissatisfied with their general insurers. In order to get a new policy, they would have to forego the entire accumulated no-claims bonus and track record established for coverage of pre-existing illnesses.
Thus, one was forced to suffer with the same insurer or lose benefits by opting for another insurer. All of this is set to change in 2009.
Under the medical insurance portability, a person dissatisfied with his general insurer, can change to another general insurer without losing benefits. However the catch is that insurance policies vary across insurance companies at this point of time.
The General Insurance Council (GIC), an association of general insurance companies, has now worked on recommendations that will allow only a minimum benefit value can be transferred to the other company.
Let's understand this with an example. Say your sum assured on the policy is Rs 2 lakh and the bonus that has been accumulated is Rs 1 lakh. This would mean that your present cover is Rs 3 lakh. Under the current regime you lose the no claim bonus. However, under medical insurance portability, you could transfer Rs 3 lakh or a lower value (subject to minimum benefit) to the new insurer.
And last but not the least, the return of debt funds. After three-four years of a bull run, the last few months has brought back debt instruments back in vogue. In the last few months of 2008, gilt and income Funds, who had no takers, have delivered stellar returns. The absolute returns given by these debt funds in the range of 15 per cent -20 per cent over a short period of time can put even an equity investment to shame.
Globally treasury bonds have rallied much faster than corporate bonds primarily because of the zero credit risk attached to treasury bonds. We have seen a similar situation in India where gilts (government securities) have rallied much faster than corporate and other bonds. The corporate spreads currently are in the vicinity of around 300 basis points over similar maturity government securities.
Interest rates are likely to be lower for quite some time around the world. This along with improved liquidity and a possibility of further rate cuts by the Reserve Bank of India will make debt funds an attractive option.
Amar Pandit is director, My Financial Advisor