Home loan? Floating rate is best

2006 has been the year of the winners. Almost all asset classes have performed well, be it equity, debt, commodities or even real estate. CNBC Awaaz spoke to a mix of experts to understand what kept the market moving.

Gaurang Shah, MD of Kotak Life Insurance; U K Sinha, chairman and managing director, UTI Mutual Fund; and Rajiv Agrawal, senior general manager, ICICI Retail Assets, in a discussion:

Tell us about the performance of ULIPs (unit-linked insurance policies) during the last year.

Gaurang Shah: Guidelines for ULIPs were announced last year. With the guidelines coming into effect from July 1, the tenure of ULIPs increased to a minimum of five years. Now the focus of the industry is to promote long-term investment in ULIPs.

Basically, performance of the ULIPs is linked to the capital market. ULIPs and all life insurance products are positioned as a very long-term saving product and risk cover. It can take care of long-term savings requirements like retirement days, child's education etc.

Do you think the money garnered by the mutual fund industry from investors has been well deployed? Taking advantage of the bull-run in 2006, UTI garnered record equity funds. There were 32 schemes having a total amount of investments of Rs 31,739 crore. If we look at the year that ended, the average return figures have been unimpressive. 70% of the diversified funds have performed below the broader market index.

U K Sinha: The market has been going up since February 2003, though the trend witnessed a change in May 2006. The changes were driven by global factors and the trend stayed throughout May, June and July. It was the time when nobody presumed this kind of volatility and everyone thought the bull-run would continue. In such a situation, the performance of the fund should be seen on the basis of its performance in a long run.

If you talk about mutual fund industry and their five-year performance before August 2006, the data shows that returns from diversified equity funds were 40% as compared to 29% returns given by the market. Someone who invested during April or first week of May might have got low returns or lost money. But if you remain invested for a long time (one or two years), you will get good returns.

How has the year been for home loan investors?

Rajiv Sabhrawal: 2006 has been a good year for the real estate industry. As far as residential spaces are concerned, its market has grown at 25%. The borrower is buying his house at a very young age. With interest rates going up, people are availing of loans for longer tenures.

As far as market growth is concerned, real estate prices and interest rates have influenced it. Since we have seen growth in both the areas, it has had its impact on growth rate and the market that has been growing at 30-35% is now growing at 25%. The average income in the past two years has grown by at least 50% if we analyze the loans.

How should an investor choose his/her investment portfolio from among so many types of products – equity oriented, debt oriented, balanced fund, ULIPs, pension plan and child plans?

Gaurang Shah: First the person should decide on the risk cover depending on his/her income, regular expenditures, future requirements and loan liabilities. Also one has to keep in consideration his/her requirement regarding financial savings and the ratio of equity and debt based on risk preference. Take advise from the expert.

One must check out the charges while buying ULIPs. As per the new guidelines, all insurance companies are required to show the charges under the same head so that charges can be compared easily.

What are the things to focus in 2007? For example you are bringing capital protection schemes. Last year, people were interested in equity funds.

U K Sinha: In 2006, many new products were launched. One such product, capital protection fund, is expected to fetch better returns as compared to bank deposits and provident funds. In capital protection fund, about 70-80% is invested in fixed instruments so that you get full capital protection and the benefit of equity on the 20-30% at the end of expiry.

In the last 15 years, the Sensex has given average returns of 19%. If you invest 30% of the portfolio in equity and 70% in fixed instruments and considering that it grows at the traditional rate of 30%, the total portfolio will grow at 12-15%.

Should

Rajiv Sabhrawal: Home loans are long tenure loans spanning over 20-25 years. If the growth rate of 8% or above continues in future, incomes are going to grow and so is the liquidity in the system. Therefore the interest rates are likely to remain stable and low. So taking into account all these points and long term view, majority of customers are going for floating rate of interest.

Difference between fixed and floating rate is between 1.5 and 2%. If interest rates go up by less than 2% customers of floating loan will benefit from it. While it is still difficult to predict which way the interest rates will go, 90% customers have been preferring floating rate of interest.

What will be the trend in insurance related investments? Will pension plan and retirement plan dominate the insurance industry?

Gaurang Shah: Such trend has already started. Most of the insurance companies are focusing on retirement and child plans.

Awareness about retirement planning is increasing at both ends. Customers are asking for these products. So far, ULIP has given them good returns. Every working person has a dream to retire as soon as possible, and with this product they will reach the retirement age very soon.

If you see the penetration of insurance, it is 3% of GDP as compared to 1.6% seven years ago. During the last seven years, the industry has grown at 4%. But the penetration level is still low. Out of 40 crore working people, only 10 crore are insured. Even these are under insured.

Will Kotak Life Insurance like many life insurance companies focus on health insurance?

Gaurang Shah: Absolutely. The trend of offering specific products has just started. Earlier it was available in the form of a rider.

Even today, you can buy critical illness cover or personal accident cover with any insurance policy. Now specific products such as individual covers for cancer, diabetes and fourteen other diseases are going to come. Loss of earning will also be protected under this. Professional and employees can gain from it.

One can't invest in gold and property through mutual funds. Will it be allowed in 2007?

U K Sinha: Gold ETF should be launched in next 3-4 months. Sebi has already issued the guidelines. UTI mutual fund has also taken a step in this direction by filing papers. As far as indirect investment in real estate is concerned, Sebi has issued a press release. Sebi is likely to come up with guidelines in next 2-3 months and then by the end of 2007 real estate fund will come.

Both are good for investments as it gives a new asset class for diversification. Earlier the investor was investing in equity and debt instruments only. For investment in real estate, the person should have at least Rs 2 lakh.

You can't benefit from real estate market by investing small amounts like Rs 10,000 or 20,000. However, you can invest Rs 10,000 in gold to start with. So small investors can also invest in gold. If you invest through mutual fund, you also have safety.

Will home loan rates go up in 2007? Are you coming up with new product for consumers?

Rajiv Sabhrawal: As far as 2007 is concerned, the way the money has been flowing in real estate market, real estate prices will go up by 10-15%. But it is difficult to predict the real estate prices. But two things if they happen will benefit the customers. The real estate prices should not go up and secondly interest rates should remain stable if not go down.

And in order to keep the real estate prices stable or low, we will have to make such policy so the supplies are increased. Old laws will have to be changed to increase the supply in real estate market. One such option is to create instruments and increase the liquidity in the market. We also need real estate mutual funds to keep interest rates stable. So it is better to take longer tenure loan.

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