FDI (Foreign Direct Investment) in the Indian Insurance Sector

FDI or Foreign Direct Investment in the insurance sector has been a political hot topic for almost six years now. So, what does FDI in insurance mean? To answer this, we first need to understand what FDI is and what happens when a country like ours accepts direct investments from another country.

FDI, simply put, is a direct investment, by an individual or a company of another country, into business or production services of a country. This could be done in two ways viz. by either expanding the business in or by possibly buying a company in India.

Let's examine the condition of India's insurance sector. The Indian insurance sector has been in a state of constant unrest. It is facing a lot of problems due to reasons like rising costs, political reforms being stopped, etc. Thus, even though the insurance industry in India grew significantly in past decade, the Indian market still remains largely untapped. The Indian insurance industry needs to revived, and hence, the Indian government proposed to hike the foreign holding in joint insurance ventures from the 26% to 49%.

So, what are the benefits of increasing FDI in the insurance sector? There are plenty, but let’s take a look the four important ones:

1.  More money coming in will help new insurance companies to enter the market
2. Companies will be able to offer better and wide range of insurance products at extremely competitive prices
3. Companies will get product and technological expertise from their foreign counterparts
4. Companies will have to improve their infrastructure and better their operations to tap into the uninsured markets, which will lead to an increase in jobs

The good news is that, after going back and forth for almost six year, the government has finally given a go ahead to increase the FDI limit. With this happening, the insurance sector is looking at a capital inflow of nearly Rs. 60, 000 Crore in 2015.

Three Reasons to Invest in Fixed Income Schemes

What are Fixed Income Schemes?

Fixed Income Schemes invest in securities such as bonds, debentures, government securities, money market instruments and other similar instruments. The main purpose of such schemes is to invest is to generate a steady income against a balanced investment risk.

Fixed Income securities carry minimum investment risk as the main motive is to offer the promised returns to the investors. On the other hand equity securities have no such obligation to pay back the investors. Though the promised return is comparatively higher, equity funds have high risk of investment loss. So, conservative investors prefer going with fixed income schemes.

Following are a few schemes that offer investment benefits to investors:

More tax efficient

Fixed Income Schemes are more tax efficient than several other investment instruments. After a year, the invested income is always treated as a long term capital and is taxed at 10% or 20%. If you hold the debt fund for a longer duration or period, then the indexation benefit is higher. For instance, DSPBR Banking & PSU Debt Fund offers extensive tax benefits to investors by heavily investing in debt and money market instruments, which have special tax exemption.

Better returns

The longer the period of investment, higher are the returns. Funds that invest in long term bonds are not applicable to changes in rate which occur in short-term debt funds’ investments. For instance, DSPBR Government Securities Fund has a longer lock-in period and directly invests in GOI bonds. As lock-in period is longer, it offers better returns as compared to other short term funds.

More flexible

Fixed Income Schemes are more flexible than others and a person can invest small amounts in them every month. Certain schemes primarily invest in money market instruments that offer combined benefit of liquidity and growth. For instance, DSPBR Money Manager Fund has a portfolio of money market instruments that offer better gains than regular debt instruments.

Four Important Tips to Invest in Debt Funds

Financial Market in India offers different types of instruments to match the risk appetite of different investors. Products in the equity segment are labelled as high-risk entities that reap substantial returns while those in the debt segment are labelled low-risk investment vehicles that guarantee assured returns.

Debt instruments are popular for their assured return rates, which are somewhat lower than their equity counterparts. Since the returns are low, the risk associated with such investments is minimum. As a result they are considered as safe means of investments.

However, debt funds do not offer easy liquidity. So, mutual fund companies provide debt funds to overcome this shortcoming. Unlike debt vehicles, these funds are standardized and the investor does not require extensive financial knowledge to make the purchase decision.

Here are the four simple and easy tips to invest in debt funds:

1>    Plan the tenure

Debt funds invest predominantly in bonds and debentures. All these instruments offer substantial gain over a period of time. As a result, you should invest in debt funds for a long time in order to reap substantial capital appreciation. Furthermore, investment tenure should be more than a year in order to gain double digit returns.

2>    Compare the NAV values

NAV or Net Asset Value plays a crucial role while choosing the right debt fund. NAV value will not depend on the fluctuating market conditions in case of these instruments. However, the value gets affected with the cash flow of the fund. Funds with higher cash flow are often labelled stable as the NAV value does not fluctuate rapidly.

3>    Assess the Credit Quality

Credit rating is a vital parameter considered while purchasing a debt fund. Credit risk analyzing bodies like CRISIL determine the credit rating for all the debt schemes. Schemes that carry lower ratings often compensate their buyers with favorable returns. However, the one with higher ratings are considered the safest.

4>    Determine the Scheme's Portfolio

Debt funds do not necessarily invest in a single instrument. Fund managers choose different instruments in order to get balanced returns as well as to diversify credit risk. Understand the portfolio and determine the credit risk associated with every underlying instrument. This way you can get better insights on how the scheme will perform in the long run.