Month: July 2009

How Builders are Not keeping their Promises in Real Estate

Posted on by Jagoinvestor

Deepak Shenoy came up with a very nice article on How Builders are not keeping there promises while delivering the Residential Properties. He shares his views on Why it does not make sense to buy Real estate currently at idiotic prices level currently .

He also links to another article of this where he compares Renting Vs Buying a Flat. I am embedding the same video here which he has on this Excellent article. Have a look.

My take on the Subject

I am not a big Real Estate expert my self , but from Financial Planning point of view I have to say that Buying Home is an Important decision and we should look forward to it , but never at the cost of putting our self in a situation which can become disaster for our self. If you earn 50,000 per month, it does not mean you go next day and buy a Flat where you EMI is 40,000 .

Most of the people do not concentrate on Long term and have a short term view . Buying House needs planning and consideration of various factors . You need to find Value in the property which you are buying , just don’t see the value . A property worth 40 lacs may look Cheap , but its worth still be less than its price . Do you know the Formula to calculate the EMI on home loan ?

Given the uncertainty of Stock Markets in near term and no big improvement in Real – Estate sector , I am myself still not excited in Buying anything in real-estate (the main reason is that I don’t have much money).

Mohit Satyanand says

“I wouldn’t put money into real estate unless it fulfilled three conditions—

  1. It is a property I would be happy to live in.
  2. I could put down at least 25 per cent of the total cost;
  3. The EMI is less than half of my monthly savings.

With those conditions, it would be unlikely that I would exit the investment; not finding a tenant wouldn’t upset me; and with the balance of my surplus income, I could continue to build a nest egg of other assets. Read full Article“

This view can look like a pessimistic views at first, but in the long run, these things pay off. Don’t take much risk that you are not alive next time to take another is the Funda you should Remember.

Please comment on what do you think about the Real – estate sector currently in your City. Also do share what is the most important thing one should look at before buying a Flat?

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ULIP charges restricted to 3% by IRDA

Posted on by Jagoinvestor

Does God Exist? I don’t know, but IRDA surely does!!! And hence finally it has acted as GOD to the investors 🙂 . On 22nd July, IRDA capped the ULIP charges at 3%.

Let us see in this article how this will affect Investors and the implications on Investments and Insurance Sector as a whole. The decision will be effective from Oct 1 2009.

ULIP

IRDA rules for ULIPS

Gross yield: This is the yield generated by the ULIP before all charges are deducted.
Net yield: This is the yield generated by the ULIP after all charges are deducted.

1. “ULIP charges” here would include allocation charge, administration charge, mortality charge and all such charges by any other name.

2. For Products whose Maturity is less than 10 years

  • “The difference between gross yield and net yield cannot exceed more than 300 basis points” (100 basis points = 1%)
  • “In this case, fund management charge cannot exceed 150 basis points”

3. For Products whose Maturity is more than 10 years

  • “The difference between gross yield and net yield cannot exceed more than 225 basis points” (100 basis points = 1%).
  • “In this case, fund management charge cannot exceed 125 basis points”

4. The IRDA has made PAN card mandatory for all policies where annual premium is more than Rs 1 lakh OR there is investment in Capital Markets. IRDA said this norm is to be implemented with immediate effect and all insurers are to comply not later than August 1.

What will be the Implications

  • ULIP products will surely see a decline in commission paid to agents. It’s very logical, IRDA is giving nightmares to Agents for some time. First it was abolistion on Entry load from mutual funds and now its capping the charges on ULIP. Agents are now going to get commissions which will be very very less compared to what they used to get earlier (like upto 35-40% in first year). It’s a bad month for Agents in India.
  • Now Agents would be really confused on whether to work hard on Selling Mutual Funds OR ULIPS as both are going to provide them almost the same kind of Commissions!
  • Miss-selling will be reduced in ULIPS as the primary motive of “High Commission” is crushed by IRDA.
  • Though ULIPs are still long term Products, I don’t recommend common man for short term investments in ULIP. Investors who think they are smarter than average investor can invest in ULIPs for short term, considering you know how to manage ULIPS well and reap the potential of switches (this mainly to churn the portfolio fast and save the short term capital gains tax). Read how to use losses to save your tax.
  • This Rule does not apply to traditional Policies, so its not a very good news for all considering Traditional Policies from LIC still dominate the Insurance Market :(.

What will happen to Existing Polices?

As per IRDA, all existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31, 2009. I can only imagine the state of Agents and Insurance companies which created ULIP mess all these years. IRDA really nailed them hard this time.

Many agents which were getting fat commissions from so many months will be sad on this.

How much will this help Investors in reaping benefits from ULIPS

This is a good move from IRDA and investors will be benefited. But how much?

Earlier most of the ULIPS charged heavily in First and Second year and then reduced the charges to NIL or very very less in later years. Because of which the charges were heavily skewed in Initial Years, but the long term average charges were still in range of 3-5%.

Now after this new Rule from IRDA, almost all the ULIPS will charge for every financial year (that what i think). Hence the long term charges will now be evenly distributed over long term, but still the average charge over long term wont come down drastically!!

Read a nice article from Deepak Shenoy on “Tactics used by ULIPS to hide the charges”

Can you Invest in ULIPS now?

ULIPS for me has changed its status from “Ugly” to “Average” product after this announcement. For long term Investors, ULIPs can now serve as a good product.

Charges wise its much better in long term now ( 2.25% max) and the best thing is if you need immediate money and want to close the policy you will not be hit hard like earlier. Take the policy after Oct 1.

Some Internal Information

Just before writing this Article, I was chatting with Pradeep (name changed), an internal source who is himself an ULIP agent. See what he has to say

Guest_7FF767C0: attened a sales talk by XXX for their new ulip … XXX which guarantees highest nav for the next 10 years !!!!
Guest_7FF767C0: all ptvt. life companies are worried about mandatory PAN for annual premiums of rs one lac. and above.today smart money(black) is routed through ulip cash payments on binami names.

Guest_7FF767C0: but sir! IRDA may kindly look at the very very high incentives to the sales team(policy expences).sebi from aug 1 st declared no entry load for mutual funds so no early commissions to agents which is only 2.25% where as 40% plus in life!

So according to him, Due to the mandatory PAN for more than 1 lac premium. Lots of black money is coming through Benami Accounts now.

See The Benami Transactions (Prohibition) Act, 1988 High Net worth Clients do not want to share there investments with Govt to save tax, but because of the “mandatory PAN” rule, the money is being diverted through “Benami Accounts”. This is totally unethical and unprofessional, but this happens at the top ladder, Looks like IRDA still has some more work on this plate.

Conclusion

This move will help investors and it will check the mis-selling going on for last many years. It will also help in making Insurance sector more mature in India. IRDA is coming up with solutions now and Jagoinvestor sees this move as a friendly move which will help in achieving the goals of “Making each Indian an Informed Investor” Thanks IRDA.

Readers, what are your views on this Rule by IRDA, How do you think investors will take this ? And Is it helping you in any way. Please leave your Comments on this .

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6 Steps of doing Retirement Planning by yourself

Posted on by Jagoinvestor

In this post I will teach on how to plan for retirement. We will use simple tools like Mutual Funds and PPF for building Retirement Corpus.

We will also see what factors you should take into account when you plan for retirement. There can be other ways of doing this and it can be very complex with very advanced calculation. But in this post we will look at it in a very simple way which a common man can understand.

Retirement Planning

So you are finally deciding to plan for your Retirement. You need to understand following steps:

  • How much is your Current Yearly Expenses
  • How much will be average Inflation figure for the coming years
  • How much would you need at your Retirement
  • Finally coming up with the corpus you would need at the retirement
  • Calculating how much you should save per month
  • Understanding where to invest the money

We will see all the above points in detail and go through some examples side by side to understand the process in well. Let say we are taking an example of Ajay who is married and has 2 kids below the age of 6 yrs. He has a monthly salary of Rs 40,000 per month. His age is 32 yrs and he wants to retire at age 60.

Step 1: Calculating you Current Yearly Expenses

Take a piece of paper (do it now as you read this) and make a note of your expenses, things like Rent, House hold expenses, Children fees etc etc. You should have a rough idea of what is the minimum amount you require per month for living a good life. You should also try to save a part of your salary every month, Ask your self Can you live with 90% of your Salary ?

Ajay calculates his expenses:

Rent – Rs.10,000
House hold expenses – Rs.11,000
Medical Expenses : Rs.1,000
Entertainment and outing : Rs.3,000

Total Monthly Expenses : Rs.25,000
Yearly living Expenses : Rs.3,00,000 (12 * 25,000)

Other Expenses like Vacations and Surprise Expenses : Rs.50,000

Total Yearly Expenses : Rs.3,50,000

Step 2 : Understanding how much Inflation would be there in coming years

This is the inflation you expect in coming years till your retirement. I calculated the average inflation from last 28 yrs (1990-2008). The CAGR inflation was 7.3% Source.

Considering a better economy in future I expect the inflation over next 20-30 years to be 6-6.5%. Lets take 6.5% for our calculations here. However you can assume your own rate as it depends on your understanding.

Step 3 : How much amount would you require in your Retirement

By this we mean how much money will provide you same standard of living as of today. This will depend on the Current Yearly Expenses, inflation expected over the years and years left for retirement. Just like we require Rs 105 to buy something of cost Rs.100 in 1 yr at 5% inflation. The same way we can cost how much is is needed after X yrs.

So formula would be

Retirement yearly Expenses = Current Yearly Expenses * (1 + inflation)^(number of years left)

Ajay has already calculated his yearly expenses as Rs 3,50,000. He has 28 more years at hand. He calculates his retirement yearly expenses.

Retirement Expenses = 3,50,000 * (1+ .065)^28
= 20,40,000 (20.4 lacs approx)

Now one can tweak this figure depending on whether you want to have higher standard of lifestyle than now (earning years) or more simpler life. You can decrease it or increase it to the quantum of your compromise. You won’t have to compromise on your Retirement if you are a Early Investor.

Step 4 : Finally coming up with the corpus you would need at the retirement

Here you may want to receive the monthly income for whole of your life and preserve the capital for your Children or any nominee. So you need a corpus which if you put in Bank or invest in some “guaranteed return fund”, you should get an amount per year which is equal to your Expected Expenses per year.

So suppose you expect to get a return of 7% per year. Then you need X amount at the end where 7% of X is = your yearly expenses.

Corpus needed = (Monthly Expenses)/(interest expected )

So in the case of Ajay the yearly expenses expected was Rs.20,40,000 and return expected is 7%. So we calculated the amount required for Retirement that is 20,40,000 / .07 = 2,91,00,000 (2.91 crores).

Note:

You can also buy an Annuity for a fixed number of years till when you want to receive the income (which also means you should have an idea of when will you die, which is not easy). So for example if you want to receive the the monthly Income till you are Age 80 (for 20 yrs).

The following formula will be used. See this Video or this article on Net Present Value to understand the calculations and Concept.

PVA = A * [ {(1+r)^n -1} / { r * (1+r)^n } ]

Where

PVA = Present value of Annuity (Amount you need to have at your retirement)
r= Rate of interest you expect to get
n = Number of years you want the Yearly Income .

So at the end of this, you will have the Amount you need for your Retirement.
Do you calculations online just now Here OR download the excel sheet Here.

Watch this video to learn how to do your own retirement planning :

Step 5: Calculating how much you should save per month

Here comes the interesting part, here there are two things

  • How much Return you expect to earn in long term
  • How much you can afford to invest per month

Both are related to each other. If you expect more return, then you need to invest less every month and if you can afford to invest more every month, you need to generate less returns for your investments.

So which is the better way? What should you decide first? The returns expected or monthly contribution you can make? I would recommend the other way, better we first decide how much we can invest per month, because that is what we can control better way. We cant control returns !!

I have this monthly contribution calculator to calculate how much you need to put every month to generate Rs X after Y years if you expect R returns, please feed these inputs there and get your numbers. To understand how its calculated you can see this video which explains some important formula’s in Financial Planning.

So here is the process

  • You figure out how much you can save
  • Then you find out how much return you need to generate
  • Then you decide where to invest to generate that return

You can also go the other way deciding how much return you can generate and based on that how much you need to save. But I prefer the first way because then you control things in your hand but you can go the other way too.

So our friend Ajay has a saving of Rs 15,000 at the moment (40,000 – 25,000) And he thinks that he can easily invest 10,000 per month at least over a long term. So the return he needs to generate per year CAGR for 28 yrs to generate his retirement corpus of 2,91,000,00 comes out to be 12.25%, see the calculator mentioned above.

So now you got to know how much you need to get per year in returns.

Step 6 : Understanding Where to invest it

This is the last step as per our article. So you got the CAGR return number which you need to generate over a long term. This number will decide how much risk can you take and where can you invest depending on your time frame. See below to understand which are the suitable products you can invest to get your returns.

Understand the ground Rules

  • Higher the return expected, higher the risk you need to take
  • More the Tenure, Lower the risk

Above 15% : Direct Stocks, Sectoral Mutual Funds, Equity Diversified Mutual Funds
10-15% : Equity Diversified Mutual funds, Balanced Funds
8-10% : Mix of Balanced Funds Debt Funds
Less than 8% : FDs, PPF, Debt Funds, Balanced Funds [ find out which FD is best ]

However, if the tenure is more than 10 yrs you should always go for Equity Funds. Never go for FDs or Debt funds if your tenure is long enough. Understand the Chemistry of Equity and Debt please.

So in our Example of Ajay, he requires a return of 12.3% CAGR in 28 yrs, so for this, he can invest in Equity Mutual funds through SIP he has different ways to achieve this like Doing a SIP in 3 Equity mutual funds OR combination of PPF (25%) and SIP in mutual funds (75%) OR Direct Equity (5-10%) + PPF + Some Balanced Funds. You got to be creative in this :), there are endless ways of doing it.

Conclusion :

Here you go!!, you just did your Retirement Planning 🙂 . You can do your retirement planning yourself easily. A financial planner will look into more details and will do perfect planning for you which would be best but this is pretty much great way you can adopt your self.

Involve yourself in this journey of Financial planning and you will be amazed to find how much Fun it is.

Understanding the art of Asset Allocation and Portfolio Rebalancing

Posted on by Jagoinvestor

What is better? Equity or Equity + Debt In this article I will show you how always maintaining your Asset Allocation with Discipline helps you in long term.

We will see examples of Asset Allocation with Portfolio Rebalancing with Charts and a small Presentation. At the end we will conclude that Having A small part of Debt in your portfolio is better than having no debt.

Note: Make sure you read this article in one go, not in parts.

Data Collection and Making the Case Study

I gathered the NAV of SBI magnum Taxgain ELSS fund (click here to see which is the better fund that SBI Magnum) for last 10 yrs for each quarter. NAV are for 1 Jan 2000, 1 Apr 2000 and so on for each quarter (getting them each one by one from moneycontrol was really time consuming). So we have 38 NAV values from Jan 1 2000 to July 1 2009.

Scenario

  • Total Capital Invested : 1,00,000
  • Debt Return : 8% per/year , 2% per quarter (for simplicity) .
  • Equity Return : Calculated for per quarter (if Nav rose from 10 to 12 , return was 20%) .

Now I am comparing Two cases with and Without Asset Allocation and Portfolio Rebalancing .

Case 1 : Money was Invested One time in Equity and then it was left for Growing.
Case 2 : Money was Invested and Principles of Asset Allocation and Rebalancing was also used.

We are trying to Study which one of Case 1 and Case 2 is better. I did a Small Study and calculated the returns on different values of Asset Allocation like 20:80, 50:50 and 80:20 etc. Here are the findings:

Let us first look at the chart with Asset Allocation 80% Equity and 20% Debt which personally suits me and almost anyone in below 35 yrs age. (click to enlarge)


The Green Line is growth of investments with Asset allocation and Re-balancing (case 2), and Blue line is Growth of investments with no asset allocation (just equity, case 1). See how After 2 quarters, the Green line always was above Blue Line. Also see that final Value of Investments was higher in case 2 than case 1.

Also see, Magic of SIP , why SIP in mutual funds is best for long term.

The final Value of Investment kept increasing when Equity Allocation was raised from 0 to 70-80 and then started reducing when further increased it above 80.

See the Graph Below, this is a small presentation with each slide of separate Equity Allocation starting at 0% in equity and then increase by 10% every time. So first slide is 0% equity 100% debt, second slide is 10% equity and 90% debt and so on, it goes up to 100% equity and 0% debt.

It beautifully demonstrates the shift and change in value of Investment caused by Equity Allocation. To view it in the best way just have a look at each slide in one go and it will appear as a small video ;). Guys I worked hard on this.

Asset Allocation Effect (make fullscreen if you want)

Asset Allocation Effect

View more documents from manish.pucsd.

In a time span of 38 quarters (10 yrs approx), Case 2 consistently outperformed Case 1 i.e. if you see, in how many quarters Value of Investment was higher in Case 2 compared to Case 1, Case 2 beats case 1.

Below is the chart which shows in how many quarters Value of Investment was higher in Case 2 than case 1 i.e. for each quarter the case (case 1 or case 2) which has higher value of investment will get 1 point. You should also look at IV Ratio.

It was found that Case 2 always had higher points than Case 1 and Case 2 points kept increasing with higher Equity Allocation. The minimum Case 2 had was 19 points, when the asset allocation was 0% equity and 100% Debt. See the chart Below


Returns Were going up with higher Equity Allocation (around 70-80) and then fell further.

The final value of Investment was increasing for higher Equity Exposure till it was 80:20, and then it started Decreasing. See the chart below (click to enlarge)


To go deeper, I calculated some other returns.

Case 1 (Only Equity) returned

  • 13.2% CAGR in 9.5 yrs, see this video to learn how to calculate CAGR and other important formula’s
  • Value of 1,00,000 became 3,24,946 .

Case 2(Asset Allocation) returned

  • 13.1 % with 30:70
  • 15.11 % with 50:50
  • 15.67 with 70:30

In case you are new to Stock Markets, Download this Ebook on “How a Newcomer should Start in Stock Markets”, check out the Download Page for more.

What Does This Teach us

There are some important Learning’s here which we must understand well and have it deep rooted within us for our entire Life. This will help us in long term. Following are the Learning’s:

Learning 1# Equity Returns 12-15% over long term:

We can expect better returns from Equity in Long term, also average return over long term from Equity is around 12-15% as we saw in our case. So don’t expect returns like 30% or 40% every year. Once in a while you can get it but if you try harder and harder for it you tend to take unnecessary risk and hence screw yourself.

So better follow a disciplined approach and peacefully get 12-15% over long term. This does not apply to Traders and whole time participants in Stock Markets. They can/should/deserve to make more than 25-30% a year from stock markets.

Learning 2# Debt is extremely Important!!

Debt is an Important and vital component of Financial planning and your Investments. Love equity, Adore Equity and Worship Equity, but *don’t* forget Debt. Debt has eternal powers!!

Equity Combined with Debt can produce far superior returns over long term. In our examples above the best returns we got were for Equity and Debt ratio of 70-30 or 80-20 range.

Learning 3# Have a long term view to get results:

People who have recently started investing through SIP, ULIP or Direct Stock Investing need to understand that it takes time for the investment to grow!!

If you are doing right things like following specific Asset Allocation, Portfolio Re-balancing, Diversification, Investing with Discipline and control over yourself to avoid making stupid mistakes you need not worry at all. At the end you are the winner for sure. It will take time but things will show up.

You might see some person making 30% this or other year minting money from markets or from other investments and this can make you feel that you are left out but don’t feel bad, what you forget is that the other person is also exposed to extra risk which will kill him someday while you will be safe.

Learning 4# Returns is not Everything in Investments (my Favorite)

This is very important and you need to get this into your head and heart. Just like Money is not everything in life and there are other things like love, good health, Nature etc. etc. The same way in your financial life, you should have peace of mind. For which your investments value variation should not be wild enough to drive you crazy.

You should “aim for” and get “stable and good” returns which meet your financial goals, that’s it. Anything more than that will be a “treat” for you and should come to you without compromising your Needs in Life.

Suppose your money invested gives you return of 30%, -20%, 50%, -40%…. With these kinds of unstable and wild returns what will happen to your state of mind?

It will always be worrying over it and you will make mistakes in your financial decisions.

On the other hand if you get returns like 12%, -5%, 9%, 20%, -10% etc. It will not bother you much because there are no wild swings in your Investments value. At the end both will give you same kind of returns. The average returns would be same but the former case has higher variance of returns which “may be” good for your account, but it’s “not good” for your Mind and soul.

You will also notice in the charts above that with 70:30 equity : debt allocation, in 36 out of 38 quarters, the investments in case 2 were more than investments in case 1 which means that 95% it outperformed.

Learning 5# You should Start Early In Life

Ramit Sethi writes an excellent article on Why NOW is the best time for you to do anything , Be it early Investingg, Travelling, Meeting new people, whatever!! If you start early, you give enough time to your investments to grow and work for you. It also less risky if you start early because then the volatility is erased out in many years.

Partha shares a link for a study done on Similar subject at Accretus Solutions, Looks great link to me :).

** What do you think about This article, please leave your comment and suggest how did you like this article and what are your suggestions on making the investments in a much better way.

With this I will end this article, and dedicate this article to all the readers of this blog. I was working on this article for last 2-3 days, gathering data, doing calculations, creating charts, writing this article etc. etc.

It has come from hard work for some days, but the motivation behind it is my wonderful readers. Believe me or not, The person who has/will learned most from this article is ME, Thanks to you all – Manish

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How much Risk you should Take ?

Posted on by Jagoinvestor

Are you a High Risk taker? In this post we will talk about risk-taking in your Investments, be it share investing or mutual funds investing or just any kind of investing. Taking low risk can be equally disastrous as taking high risk. So in this article we will discuss how much risk you must take as an investor.

Financial Goals vs Risk you take

Firstly, we have to understand what is Risk-appetite? As retail investors we don’t understand the important issues attached with risk-taking.  We blindly invest in any investment product without considering if it suits our risk- appetite or not!

We have financial goals which we want to achieve in a defined time life “Buying a Rs 5 lac car in next 4 yrs” OR “Generate 20 lacs for my daughter education in next 15 yrs” and we figure out how much we should invest every month or year to meet our goals.

Depending on our Greed or Fear, we choose the products to invest in. Some choose Mutual funds, some choose Shares directly where as others may choose PPF or Bank Fixed deposits (Read how to find out Best Fixed Deposit for you). So it may happen that we may take risk which does not suit us.

This risk can either be over-risk or under-risk. Both are equally bad for us. You should read How Equity and Debt provides returns.

Problem with Over-Risk

Taking Risk that is much more than we can afford or take may lead to a situation where we are unable to meet our financial objective. This is a very bad situation. We in hope of getting better than “required” returns take unnecessary risks and increase our chances to meet failure.

Failure is okay but you should be ready for it. Taking higher than “required risk” can lead to this kind of situation. These issues happen because most of the times investors forget the first step of Financial Planning.

Example

Ajay wants to generate 5 lacs in 5 yrs for his Daughter Education. He can invest around Rs 6,000 per month (See this video presentation to understand how its calculated). To meet his goal he needs to get around 12% return annually. There are different ways of achieving this like

But what if he decides to invest his money in Sectoral Funds like Real Estate or Infrastructure or invests directly in Stocks without much idea of how things work?

This can either make him Much more than 5 lacs, may be 10 or 15 lacs OR it can be disastrous and he can lose his money and may not be able to generate even 3-4 lacs depending on the circumstances. Now this goal was something very important. He can not take risk for his daughter Education.

If it were a car or a vacation goal, I would have said “ok – go ahead”. But Education is a Need of life. He has to understand Difference between Needs and Wants . He has to understand where to take more risk and where to take less.

Problem with Under-Risk

Just like Over-risk, taking less risk has its own issues. Most of the people who invest in Endowment Plans or Bank FD for years suffer from this virus. If you take very low risk, you may not be able to achieve your goals at the first place. Read Why Endowment plans are bad to invest in.

Example

Robert wants to generate Rs 1 Crore for his retirement. He has 30 yrs and He can invest around Rs 2,000 for this in Mutual funds with SIP and this should be possible with Patience. He can take moderate risk but he thinks that equity markets are too risky and its something he should be away from.

He is a fan for Endowment plans and traditional Bank Deposits so he invests in these two instruments. He generates Rs 15 lacs from his Fixed deposits (before tax) and Rs 13-14 Lacs from Endowments plan with his 1,000 investments in each of them.

So at the end he has total of less than 30 lacs as Retirement Corpus. He has 30% of what he needs at the end. What are the issues here? He has to Compromise with the life Style and he cant enjoy his Post-work life as he wanted because of severe financial pressure. Because of fear and reluctance of taking “required” risk he has done un-repairable damage to his financial life.


Conclusion

Its very important to take the investments with our risk-capacity taking high risk can lead to situation when our returns are less than expected. Because of greed we sometimes take extra risk and only concentrate on the rosy picture and forget the part which looks bad. Its an Irony but most of the people think that somehow there are less chances of bad things happening to them.

The same way, taking too low risk can lead to under performance in returns and hence after you factor in Inflation and taxes you may be in a financially fatal situation you might have lost all your life believing that you are gaining (like in the example above).

Hence, you must take risk which is required for meeting your financial goals and also which you can take if things go wrong. Taking Over-risk is same as taking Low-risk. The best way to find if a Product Suits your Needs or Not is to Find the GFactor of that Financial Product.

Q. What do you think about “Required Risk” How should an investor estimate how much risk one should take?

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A Perfect Example of ULIP misselling

Posted on by Jagoinvestor

Recently I saw a perfect example of ULIP misselling. One of my friend’s parents gave their money to a close friend who was working for some Investment firm and assured them of doing great investments on their behalf.

The total money involved was more than 10 Lacs. I don’t know what else he did, but he bought a ULIP from their money and its the perfect example of miss-selling here. Lets see it in details.

ULIP misseling

So this agent buys a Canara HSBC ULIP.

  • The total premium yearly was around Rs 3 Lacs.
  • Premium Allocation charges are 48% in the first year.
  • The policy was stopped after 1 yr by the Family.
  • The Allocation chosen in the start was 70:30 (Equity : Debt).
  • Charges were not communicated while taking the policy.
  • No statement was sent them for next 8-9 months.

So may be they were not aware of important questions they should have asked a ULIP Agent.

Some Points

  1. Now 48% goes in Premium Allocation charges, rest of the money will grow at moderate return because it was mix of bear and bull market which the money was invested.
  2. Why was it invested in ULIP first of all and that too Rs 3 lacs as premium!! This is one of the costliest ULIPS in market and has to track record. Why was family financial needs not considered before investing? Why was their risk-appetite not considered?
  3. What kind of agent is this? He takes advantage of trust and invests in something which gives him maximum commission. There was no proper communication about charges and no statements reached them on time.

What is miss-selling here?

Giving “Wrong-Information” is not a big issue, the bigger issue is not giving “any information”. One of the reasons why this kind of things happen is lack of accountability on agents side. You take the product and sign the documents means you are responsible for your decision. While that is true legally, its totally unacceptable morally.

The only thing the investor can do here is make an issue out of it and tell the Insurance company that’s agent miss-sold the policy to him and did not tell him about the charges. Worst thing is investors don’t even know about the “Free Lookup Period”, which is 15 days from purchase of policy before which Investor can cancel the policy of they don’t like it or change their mind.

UPDATE

This is an update after my friend Rishi, whose case we are discussing commented on this article, I am putting up some more thoughts in this below. In case he takes some legal action on this matter. I can think of following things which will be useful and important to quote.

1. As everything was done legally, documentation and signatures taken from investor etc etc. The one thing which can make your case stronger is “explaination” from HSBC people that on what grounds “that Ulip” suited your needs.

How did they come up that this ULIP was the best choice for your family, I hope being the “trusted” and “portfolio managers” they think of your profits and hence they must have figured out why this ULIP was the best in the industry for you guys.

2. How do HSBC products best for you people (i hope 70-80 products they choose were HSBC products)?

3. as per IRDA “it is the moral obligation of the insurer to maintain the ethics and spirit of business across its workforce”. The mere fact that premiums were stopped after 1 yr and now your people are not happy with this shows that obviously you people were not informed well about the cost structure in the start.

Finally this is more of a matter of “Unprofessional Behaviour” than miss-selling per se. I am not sure how much HSBC will help you, as they generally pass the buck on “agent” and “investor who invested”.

You might have to take this case with IRDA. You must first talk to Bank, agent etc and then after you are not satisfied with them, you should go complain at the IRDA ombudsman: https://www.irdaindia.org/ins_ombusman.htm

The ground of plea should be based on “monetary + psychological loss”.

You can read here Confession of an Insurance agent in his own words

Please share if you think there is a good way for getting justice on this matter. Your comments are valuable? Should this is taken into court?

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A beginners guide to start investing in stock markets – Stock market strategy

Posted on by Jagoinvestor

This is the 4th and last part of the series on Stock Markets articles Newcomers. In other parts we discussed some important things which newcomers should know when they enter Markets.

In this article we will see how a new comer in stock market should start. Go through other 3 parts before this to get maximum out of this article .

How to invest in stock markets

Part 1 : Why Stock Markets Attract and Look Easy
Part 2 : Understanding What exactly you want to do in Stock Markets
Part 3 : 8 most Important Rules in Stock Market

“Small babies like Teddy Bears, and Market Bear likes Babies (newcomers) in Stock markets”

There are 5 things a new comer has to do , I will call it CLOPS model of starting in stock Markets .

  • Calm Down
  • Learn
  • Observe
  • Practice
  • Start Small

This model of learning is totally obvious and logical and applies to all the areas of life. Stock Markets are no different. Lets see each of them separately and what they mean in Stock markets.

Calm Down

The first thing a newcomer has to do is to calm down and not rush. Just be where you are. Most of the people come in stock markets and its totally a new place for them and every thing looks like a great “get-quick-rich” opportunity to them and they want to make most of that once-in-a-lifetime opportunity.

They don’t know its every-day thing in stock markets. Markets are like a wonderland for them. Markets are not going anywhere and its more true for the opportunities they provide.

So the first thing is to just calm down and do-not rush to get in. There are other important things you have to do before you get-rich-quick. Most common mistakes which newcomers do is mainly because of excitement and getting in without preparation not because of lack of skill or because of there abilities.

When you calm down first and don’t get excited you are doing an important thing which is not jumping in without thinking and making yourself ready for another important things which are discussed below.

Learn

The next step is to Learn, Learning is an ongoing process which will never stop as far as Stock markets are concerned, but at the starting level you need to learn lots of basic stuff.

Read how Stock markets are structures, what are different indices, what is Nifty and Sensex? What are the factors affecting markets? How to analyse a company? what are important things to consider while investing?

Read books, Read blogs, Read anything you can get on the subject. Some of the good resources are:

Books for Value Investing (Thanks to Rohit Chauhan to provide the names)

Blogs for Value Investing

Books for Trading

Blogs for Trading

Watch this video for beginners to learn how to invest in share market:

Observe

After learning, the next thing is to Observe the markets. See market movements, watch how prices are behaving on each news or with volumes, see what kind of patterns are developing on charts and does it behave every time in almost same way?

Look at how market behaves in relation with Nifty PE in this post.

When you observe these things, you will develop some understanding on relationship and you can validate those with what you have learned so far. A good amount of time should be given to this, markets have different faces and you need to see all the faces, just one good up move is not enough, see at least all different kind of moves.

Up-move, Down-move, trading in range. All of these in different time frame.

You can actually start this early and do it side by side your learning. Collect charts for each day for later reference so that you can see it later. If you know some programming , make a small program which can download the charts from yahoo customized to your purpose.

I have downloaded 15,000 daily and weekly charts for all the Nifty, Midcap stocks and Asian Indices. I can go back to them and test any of my strategy on those charts. Keep History to learn about the future 🙂 .

Practice

Now come the fun part and very important part, Practicing what you will do in real. So you have learned things and observed things, now is the time to practice. Before you try out anything in stock market with real money, just see if you able to make any money with practice or not.

I would recommend just have an excel sheet and put all the transactions there like

– Buy price
– Sell price
– Profit
– Profit percentage
– Time of holding the position
– Average Loss per trade
– Average Profit per trade

These are the statistics you should keep in mind and see how you are progressing each week, Don’t concentrate on each trade too much. It’s better to have a weekly target while you are practicing.  I would recommend at least 2-3 months of practice.

This step is important because when you get into market to trade, its totally a different thing. Your reactions to markets movement will be too different than what you had thought. If you jump in markets without practice, you will do lots of mistakes.

Better practice before getting in real. Important thing here is that even with practice (without money). It wont help you a lot but will give you good idea of things. The fun part comes when you start with money then you truly get idea of your behavior 🙂 .

Anyways this is important.

Some people think practice is taking all the time and they are losing all the money, which they “could” have made. This is a wrong way of seeing things.

Though it looks like a opportunity lost,  you are in learning mode and the best part is that you are not “losing” anything and getting ready for making money. There is a chapter on Practicing from a book “Enhancing Traders performance” on this post article by Brett Steenbarger, download it and read, its copyrighted material so i cant put it directly here.

Start Small

Now after you have learned things, Observed things and Practiced, here comes the last part, Starting Small, Start putting money in markets in small quantities, Grow gradually. View your self as a small baby who has just born, first start moving, then crawl, finally stand up one day and walk, once you can walk with speed then try Marathon. The same thing applies to Stock market.

But most of the new comers just want to win the marathon and start running fast without understanding that there body is not ready for marathons. they need to first know how to crawl and they want to win marathon.

You will fall a lot of times, you will have losses and will make money too. But if you don’t start small, one big loss will wipe you out of markets.

In the start it would be difficult for you to control your losses, you will need to have string of losses and the best way to tackle the situation is to start small and put little money in markets so that even a series of bad trades don’t hurt you much.

Many people may go slow and play small for learning and practicing part but when they start with real money, they start too big and that’s because of there over-confidence that are now ready to make money. First crawl baby, Marathon is long way to go. Make your legs healthy first, then dream of running.

Conclusion

Each and every newcomer in the market, should understand that Stock markets are places and from centuries people are trying to make money from it consistently but very few people are successful! This profession has very less success rate if your compare it with other professions like Medicine, Engineering, Computer Science etc.

There has to be some reason why you need to give time to it and learn things here. Take it as another professional course like any other and work hard on it. I think one should seriously give around 2 yrs for learning purpose.

See it as a career not just another place to get-quick-rich, that doesn’t happen in Stock Markets. Its a gradually getting rich place rather than get-quick-rich place. There is a famous quote in markets that “There are old traders and bold traders in stock markets, but not both”. that’s true!

Why it is mandatory file Income Tax Return even if your taxable income is below tax limit?

Posted on by Jagoinvestor

Filing Income Tax Return  is an important thing and as the date for filing ITR is approaching you should have a clear idea about how to file ITR. But is it mandatory to file Income Tax Return?

A lot of people are confused about this simple question of when to file your tax return, In this short article lets see what are the conditions under which you need to file your tax return.

Filing Income Tax Return is mandatory

Who should file Income Tax Return?

As per Indian Income Tax Act 139(1), it is mandatory to file Income Tax Return, for every individual who’s income exceeds the exemption level.

People say that if you don’t have to pay tax , you don’t have to file returns which is not true totally. Lets see the simple rules.

Rule : You have to file your tax returns if your Total Income for the year exceeds the exemptions limit. That’s it !! This is the only rule which applies.

Exemption limit can be different for male (1.5 lacs), female (1.8 lacs) or senior citizen (2.25 lacs). So if your Total income for the year exceeds your exemption limit, you have to file tax.

Do you know how to calculate your tax?

Should I file Income Tax Return even if I don’t have to pay any tax?

Didn’t you read what is said above :-). The only rule is already mentioned above. You don’t have to pay tax. This can happen in two cases.

Case 1 : Income itself is below exemption limit

In this case you don’t pay tax and don’t file your Returns.

Case 2 : Your Income exceeds, but not taxable income

Though your Income exceeds, but After all the exemptions and deductions like 80C investments, HRA, Home loan interest exemption etc etc, your taxable income is below your exemption limit. In this case you don’t have to pay tax, BUT !! you have to file tax returns because your income (not taxable income) was above the exemption limit.

What are the other cases when I have to file the returns?

There are other cases also when its more than paying tax. lets see those cases

  • If you have some form of losses carried forward in subsequent years to write off against profits in future, in that case its obvious, that you will have to file a return so that you can give this information.
  • If Govt itself gives you notice to file tax return, it may happen that you are cheating this nation and making black money , then tax department can ask you for details and you will have to file tax return.
  • If you want a Tax refund because of TDS (Tax deducted at Source by your company). This happens with people who do part time jobs for some months or with Interns in the company who are there for 3 months or 6 months and TDS is cut. So in order to get back the amount you have to file a tax return.

Watch the video given below to know why it is necessary to file ITR:

Why is it necessary to file Income Tax Return?

There are some reasons why should file income tax return, which may look simple but they have a major impact on your financial life. Lets see what are those reasons:

  1. If you are planning to take loan in future, the lender may ask the proof of your ITR filing.
  2. The ITR filing proof is also essential to get VISA if you want to travel abroad.
  3. It is also important if you want to claim the adjustment against past losses.
  4. ITR report is provided by Income Tax departments, so if you file Income Tax  Return regularly on time, it will make your future transactions easier without any complications.
  5. In some states, you can not but an immovable property if you don’t have the Income Tax Return filing proof.

Besides all these reasons, filing Income Tax Return on time makes you a responsible citizen.