Learning from Comments [Part 1]

Do you read comments ? There is huge amount of discussion doing on in comments section, however many readers do not find time or interest to dig into the comments and follow the discussions, I would say comments have more knowledge than the article itself , as there are personal experiences and knowledge from many different readers, there is a threaded discussion on some topic in comments, which are more lively and engaging. So if you are just reading articles and not comments, you are missing a lot of things . So I went through some articles comment one by one and consolidated some learning and facts for my readers 🙂 .

  • RBI has changed the way of interest calculation on your saving account now, earlier the interest was paid on the minimum balance in your account between the 10th of the month and the end of the month. Now the interest is paid on daily basis , Read More
  • As per research Women are better investors than men, This is because of many factors like women risk adjusted returns are generally higher than Men , women tend to hold investments in stock market for longer then men . Read in detail  Here and Here
  • In Public Banks the cashier or officers can tell you things like “ULIP’s are for young people , PPF is for old people” , and hence try to influence your decision-making. Once they find out that you are an NRI or from upper middle class, they can start pestering you too much because of the sales pressure or the attractive commission’s attached to it .
  • Why the Guaranteed NAV Plans stress over number 7 ? Anoop asked me this question and my views were that the stock markets in India has been running in a 8 yrs cycle from last some decades, so after this recent crash, another big crash is expected to be after 7-8 yrs now. So they want to make sure they are giving investors “highest NAV in 7 yrs” which will be the maximum point in coming 10-11 yrs assuming markets do crash after 7-8 yr and then stay below that point for another 2-3 years .  8 Year cycle Trend : Sensex is following an eight year cycle trend. The break of the channel lines in 1992 saw the index correcting over 53%. After eight years in 2000, the index once again fell into the grip of bearish cycle and corrected over 57%.  In 2008, the faced the similar fate. Breaking the long term rising channel, the index once again echoed the similar trend and has shed more than 63.7% of its weights from the top : LINK
  • If you sit back and think for just a moment, you’ll realise that there is reasonable outward evidence that the Unit Trust’s history could repeat itself with LIC. It’s true that there’s a lot that is different about the regulatory framework and the nature of LIC’s liabilities. However, the core reasons that led to UTI’s collapse also exist for the LIC today: there is an unapologetic tendency to use the LIC as a bottomless pit of money of which there wasn’t enough accountability. The blatant use of this money to bailout the public sector IPOs is only the most recent and the most visible example-given the lack of public information, it’s not possible to make any assumptions that everything else must be OK with LIC’s investments-just as it wasn’t with the Unit Trust.  – Views of Dhirendra Kumar of Valueresearchonline at  “LIC can be the new Unit Trust of India?” .
  • The way KYC is done in banks is different from Mutual Funds. Banks KYC is to be done at time of A/c opening only. They just take your documents and the concerned form is attached with A/c opening form. Since you are signing A/c opening form you don’t need to sign KYC form seperately. Thats the reason banks only take your documents for the proof.  Even later also you need to give only the proof. – Thanks to Jitendra Solanki for answer .
  • A horrible Credit Card Experience from Brij Mohan
  • My Experience with HDFC CC is very terrible, I paid all my dues before I left for UK, and this was a free CC, after one year when my CC expired, they sent me a new CC and made some charges of around 300-400 rs (approx). Since I was not in India so I was not able to receive the Credit Card, I sent them a mail first few mails I did not get proper reply as I was referring to my old credit card number. I also tried to call on ISD rates to HDFC call center they said we can’t help you as you do not have valid Credit Card. When after around 2 years I returned I found my bill is blown up to 6000. I tried to convince them, at last they told that they have their office in Bangalore too you can go and settle there, as they have added my name in defaulters database also. I went there and literally they were blackmailing that if you don’t pay all the amount they will not remove my name from the defaulters database, and finally I paid whatever the amount they said. I thought it’s all over. Finally last year when I tried to apply for car loan, it was rejected by ICICI Bank and few other bank, fortunately it was approved by Axis bank. But still just to check I applied for ICICI Bank CC, and CitiBank credit card they rejected my application without mentioning any reason. I am feeling like I am a terrorist or they have banned me in this country for my life time, even though I paid off all the dues(which was all illegal). Just last week only i came to know about CBIL properly, so I have sent a snail mail to them for my credit record. Just to check my credit record. but still I don’t know what will be the Next surprise. I will only tell if you are using CC use it very carefully and never take anything lightly, even if it is a single paisa, just clarify this and clear it off and make sure it is really done. In short I feel using a Credit Card is like walking on the Sword or Fire. It’s very dangerous thing.

  • Difference between Auto-Debt and ECS : ECS is a facility to credit/debit funds between banks using clearing house. However Auto-debit is the facility within bank.
  • Tip from Partha Iyenger : If you want to complain about some products, the customer care is generally not helpful and they do not care, However the CEO’s and MD’s of the company are helpful and are very sensitive to customer feedback, they are generally responsive. The problem lies in contacting them, so here is a Tip : If you have a complaint against dell computers. First find who is the CEO of the company , for example its Michael Dell , now simple write to [email protected][email protected], [email protected], [email protected] and [email protected]. One of them will work. Please use cc while addressing to the CEO, the person you are addressing will get jitters and before he can act, he will get a call from the ceo’s office to sort it out asap. This trick can work most of the times .
  • Again an info from Partha Iyenger : Many people know that our credit cards and other credit history is stored and tracked by CIBIL, but do you know now even your other utilities bills get tracked and reported to industry associations and in turn to cibil ? for eg, if you don’t pay your mobile bills by moving to other city, you can be easily tracked or for that matter if you do not pay electricity bills of reliance, your phone connection would get cut and your rating system would go for a toss, its all happening In india now , but you don’t know 🙂 . That means when you apply for your home loan or car loan or personal loan, you would be disqualified. so every one, please pay check your bills, resolve any payments with the bank or respective firms (file complaints with the ceo,  don’t ever talk to call centres. It doesn’t work ) and clear it . Read A close look at Real Estate Returns in India
  • Personal Debt to GDP ratio has tripled in 5 years in India. Personal debt includes – credit card, personal loan, auto loan, home loan and consumer durable loans. To be precise, India’s personal debt to gdp ratio has moved from 5% to 15% and micro finance institutions adding to this kitty in a ferocious pace, of course its nothing compared to america’s 120% ! but we could get there in the next 10-15 years, if we don’t watch ourselves. The onus is on us to be prudent in our spending. Today, most youngsters swipe the cards through emi schemes to buy consumer durable and electronic goods as if there is no tomorrow. Our older generation saved first and then bought it, today we don’t wait, we want everything now. The credit cards is a great tool for instant gratification rather than saving and buying it.
  • We feel ECS is very convenient and safe, while that is true, but anything which is good can turn out to be very bad also. Read a horrible experience on How a customer faced Experience like Hell with Kotal and ICICI for stopping his ECS facility . Here is another article on ECS from PV Subramanyam , a must read .
  • Jitendra Solanki shares a shocking story on how you can become an LIC Agent. “Around three years back I went to an LIC DO to talk to him for an agency.After submitting the required fees i was given a question paper and the answers of the same and was told to just ratto the answers and start generating business.Is this how an agency of LIC is given? ”

Conclusion

All this wealth of knowledge is present in Comments section and different readers provide these information when there is discussion , so please ask questions, those questions will lead to discussions and in turn it will lead to more information from other readers who have faced an issue or have some experience .

Comments , Let me know how you liked this “Learning from Comments” section  ? Is it a good idea ? What are your experiences with comments overall ?

What is Systematic Transfer Plan (STP)

Imagine a scenario when you want to invest a big lump sum amount in stock market ? As markets are volatile and can go up or down very soon , there is always risk of loosing a big chunk of your investment (Learn about Stock Markets) . Take a case where you want to invest 10 lacs in Equity Mutual funds and suddenly market crashes for next 2 months, In this case a big chunk of your investment will be lost, on the other hand if market moves up pretty fast, you can make a good profit. Here you have to decide your main focus. If it’s minimizing risk and getting good decent returns in long-term, You should use something called Systematic Transfer Plan (STP) .

What is STP (Systematic Transfer Plan)

You should first understand SIP . SIP is way of investing in Mutual funds monthly, where a fixed amount of money goes from your Bank Account to Mutual funds, so if you do a SIP of 1,000 for 1 yr, it means that every month on a fixed date (chosen by you) 1,000 will be invested in a Fixed Mutual fund you choose. Lets understand STP now, In STP we invest a lump sum amount in some Mutual Fund and then a fixed sum is transferred  from that mutual fund to another mutual fund .

How does Systematic Transfer Plan works (STP)

For Example : If you have Rs 6 lacs lump sum to invest and you want to invest in HDFC Top 200 , The steps you will have to follow are :

  1. Choose a good Debt fund or Floating Rate Mutual Fund from HDFC , which allows STP to HDFC Top 200 .
  2. Invest all the money in the Debt Fund .
  3. Now you can start a 10k/20k/30k  per month STP from HDFC Debt fund to HDFC Top 200 .

Why and When to use STP

When will it work : STP will make sense from DEBT -> EQUITY when markets are mayvery volatile and you dont want to take risk with your money in a short span of time, If you invest through STP in markets and markets fall or have lots of volatile moves, then this situation will be better than the one time investment option. This is still better than putting money in Bank and doing a SIP, because at least you money is earning some returns on debt part in STP .

When will it not work : Incase markets are already at the end of a Bear market and markets can starts it upmove anytime, in that case STP will not deliver the best returns like SIP, one time investment is a good choice in that case. But then you never know that when will markets start go up. Given that a retail investor does not have all the tools and time to research the markets, it’s not advisable to invest lump sum in any case. It’s better to get 4-5%  less returns than to see a huge downside of your money in short time, Smart investors think about returns, Smartest one’s take care of risk first .

Understand How to time markets using Nifty PE analysis

Difference between SIP, STP and SWP

  • SIP : The way SIP works that your money is in your Bank Account and every month a fixed sum is taken away from your Bank and invested in a Mutual fund .
  • STP : The way STP works is, all your money is actually invested in a Mutual funds itself (probably Debt) and units are sold every month and its invested in another Mutual fund (probably Equity) or vice versa .
  • SWP : However If you redeem your units in mutual funds every month and get it deposited in your Bank accounts , it’s called SWP (systematic Withdrawal Plan) , which is recommended to liquidate your mutual funds corpus after you see a good bull market to protect your investment .

Difference between SIP and STP

4 advantages of STP

STP has 4 advantages and works in 4 ways for you . They are :

Works as SIP : You can invest in a Debt funds and from there you can start a STP to an Equity Fund , so it works like a systematic Investment Plan (SIP) .

Works as SWP : So STP can also work like SWP, because with some funds you can do transfer from Equity funds to Debt Funds, so when markets look risky to you, you can start a STP from Equity -> Debt funds, which will act like SWP .

Liquidity : Generally one does STP from Debt -> Equity funds, so your money is invested in Debt fund. This means you can sell it anytime if you want. Hence it works like a Emergency Fund also. Incase you need money urgently, it can act like a liquid asset (at least for the time being in the start when you have more money in Debt fund)

Growth in Money : Not to forget that your money is invested in Debt funds, so your money is also growing at debt returns , at least the part which is lying in the debt funds .

Some Helpful Tips

  • Invest in ELSS , If you want to invest in ELSS schemes and have lump sum money , better put it in a debt funds and do a STP .
  • Rebalance your portfolio, Use STP as a tool to rebalance your asset allocation, when your equity part goes up , start STP from Equity-Debt for 6 months or 1 yr, and bump up your debt part and if your Debt part goes up, do Debt -> Equity STP . Power of Asset Allocation and Portfolio Rebalancing
  • Take advantage of market condition , If markets have gone too high now and every other person on the road is talking about Stock and stock markets are more famous than “Saas Bahu” Serials, immediately start your STP from Equity to Debt (literally Rush) . On the other hand when markets are deep down and “Why don’t you buy stocks” is feels abusive and everyone face looks like some body has died at home when you mentions stock markets, know that it’s a time to start a STP from your Debt – > Equity (Literally rush again) . You don’t need to see any indicators to predict the markets, the two real life scenarios I have described here are enough, try to remember markets around 2007 End(bull market) and Jan 2009 (markets lowest point) . STP can be used as switching mechanism in ULIP , though it’s very restrictive and with less choices .
  • Using STP when an important goal is near, If you are saving for some important goal like Child Education , Buying Home or Retirement and your goal is approaching near by , don’t wait till target date , you don’t want to see your Money dip by 40-50% within 6 months or so if markets suddenly crash , start moving your money out of equity and transfer it to Debt now through STP .

Two types of STP

There are two types of STP plans , Fixed and Capital Appreciation. In Fixed Plan means a fixed sum will be transfered to the target mutual funds , on the other hand in Capital Appreciation , only the amount of capital which is appreciated gets transferred , that was the original lumpsum amount invested in the start is protected . Capital Appreciation choice is only with Growth Plan and not dividend plan . Here is the list of all the STP Plans as of now .

 

 

Important Points

  • Typically, a minimum of six such transfers are to be agreed on by investors in STP , just like SIP
  • Generally most of the mutual funds allow Debt -> Equity STP and not reverse , Only handful of Mutual Funds like Kotak allows it .
  • STP is a facility for convenience , when the transfer happens from one mutual funds to another its still considered as selling of mutual funds and then buying another one , so tax rules applies in the same way .
  • Most of the funds allow only Monthly and Quarterly STP , some allow weekly and fortnightly also .
  • There can be some minimum amount requirement for starting an STP like say at least 1,00,000 needs to be invested in Debt funds to start a STP to Equity . Some restriction like this will be there .
  • There can be additional Switching Charges for availing STP facility
  • Entry load and Entry load may still apply while buying and selling of mutual funds through STP.
  • Securities Transaction Tax @ 0.25% will be deducted on equity oriented funds at the time of redemption or switch to another scheme in STP .

Women & Personal Finance in India

Today, we’ll talk about Women’s involvement in Personal finance, especially in the Indian context. How many of us remember when our ladies at home took any decisions regarding banking, Insurance or Investments?

Their role has been always limited to household work and as caretakers of our homes & hearths, for decades and centuries now. Even in today’s world, when women are at par or even above par with men in all areas, they fall behind in this one.

Decisions (as far as finances go) are primarily made by men, & not women in general. In this article, we’ll see why it’s important for women, to know about Personal finance .

Women & Personal finance

Women not accepting their Responsibility in Personal Finance

One of the big problems, with women, is that they do not treat Personal Finance as something that’s important for them. For ages, they have not participated in Personal finance, regarding it as the man’s domain, just as they felt cooking was theirs.

Obviously, this isn’t true now, in this day & age. Cooking is as much a guy’s activity as Personal Finance ought to be a woman’s. Women, in general, don’t show real eagerness for these activities, for some reasons like

Women treating their earning as time pass activity : The biggest reason for this, is that, since the dawn of time, Man has been the main provider and the primary bread-winner of the Family .

He was responsible for earning and managing money and taking care of financial goals, Women, on the other hand, were mainly responsible for raising children and taking care of household activities and to a big extent, maintaining relationships outside the house and in the community.

Many women in spite of being qualified enough, and having skills to earn money, view their earning as secondary compared to men. They “feel” that they are not at the same level, even though its not true; most of this is psychological.

Everyone handling her money but her: From centuries women’s financial decisions were taken care of, by their fathers, then their husbands and then their sons. They never got involved & were never encouraged to do so, because they were not considered smart enough!

Men have always shown dominance over women in this space. One reason, which could be responsible for this, is that women, hardly ever ventured outside house for these activities and never got time enough from their household chores.

Current Situation Women Knowledge in Personal Finance [ Statistics ]

Personal finance literacy and Women in India

Poll Link

Why It can be trouble for Women to not Know Personal Finance

Sudden responsibility

A lot of women never learn about Banking , Insurance, Investments , how to grow money well and related topics throughout their lives .

They are smart, have a good job,  high earning , but they never learn about Money and some day when sadly, things go wrong eg., they lose their husband because of accident or some other reason; apart from emotional pain, there comes bigger pains in life , i.e. taking care of your children and overall finances, that day she has no idea on how to invest money for making sure of child education , her retirement , her Insurance etc .

She suddenly finds herself in very tough situation and will have to rely on others, (relatives , friends etc.) This is not a good situation. Girls! Ladies! please learn about money, even if you don’t like it… Learn a bit, at least up to a level, where you can take charge of things and no one is able to take advantage of your situation .

More Divorce rates

Gone are the days in India when Women would keep compromising in a relationship! Women these days, are independent, and have a say in every decision. Because of this, they have more flexibility to move out of a marriage, if things don’t work out. Divorce rates are on rise in cities from last decade.

Women who get divorces, have to, at some point in life, look after themselves and take charge of their finances.  So learning about money is important from start.

Women live longer so need a better Retirement Planning

Think Long Term! What does’t seem to be important today, might be very important tomorrow. Women worldwide, have a higher life expectancy than men, and hence have to live more than their male counterparts .

Women generally rely on their children, but they should be better planned and hence learn about things .

“On average, Women live 4-5 years longer than their husbands and over three-quarters of all women are widowed at an average age of 56. Women comprise a horrifying 87% of the impoverished elderly”.

Some Psychological Myths Women Face

women's personal finance

  • Somebody will manage my money for me : Yes, but only up to a certain age… If there is no well-wisher, don’t rely on relatives or friends! When it comes to money, no one is truly yours, and even if they are, you better learn things and manage things on your own. It’s not that tough!
  • I don’t know enough to do this myself : This is patently false! If you can be an Engineer, Doctor, House Manager, then you can definitely  understand and learn anything you set your mind to! There might be some topics which might scare you away, but there are always blogs like this and people like me to help you with doubts.
  • I will make too many mistakes : So what? Everybody does! We make mistakes to learn in life. I would encourage you to make mistakes and learn from them, because, “Making mistakes is a privilege unsuccessful people don’t get in their life” . Computers can never become more intelligent then human beings , because computers never make mistakes, only humans do .
  • I don’t have money to invest : There can be two things here… One is that you might not be saving enough. Do review your income and expenses, and find out where can you save without compromising your lifestyle. Try to live with 90% of your salary .The second point is that you have little money which is ok! Doing investments, does not mean you have to invest lots of money; every body starts small, & slowly we progress! So what, if it’s only Rs 500? Make a start, at least!  Develop self-discipline and start learning things. Tomorrow, when you have more money, you will already be way ahead of the curve .
  • I don’t have time to plan my money : This could be due to lack of interest. Review your monthly schedule and manage your time well. Even if you take out, couple of hours each month, to learn about money, its enough. Once you start learning things, you will enjoy it. If you make yourself believe that you don’t have time today, then you will never have it ever 😉

Women’s Personal Financial Dreams

For time immemorial, women have been dependent on their father or husband for money and to fulfill their dreams. If they want to go for some trip or buy some jewelry or anything else, for that matter, they have to ask (or demand) their husband for money.

Many times women have their own dreams, which they want to fulfill on their own, but they cannot . Women are good savers, but never good investors like men (even men are not for that matter.) Women diligently save money at home, but do not make best use of those savings.

That money is mostly lying idle, in the bank or at home. By learning about investments and how to invest well, women can grow their money and reach their goals. There is no need to always rely on men for everything.

I know many women readers on this blog who are excellent thinkers; they ask questions, get involved in discussions and given a chance, they’d give serious competition to their male counterparts in financial planning!

They have learned lot and can beat many women outside this space on Personal finance. Credit goes to their willingness to learn, and the time they take out in order to learn things . Here is a excellent Short Video from Manish Thakor ,  Personal Finance Expert for Women .

Even though its made for American Audience , everything applies to India Women .

Extra Benefits for Women

There are many Women only benefits like :

  • Generally Lower Education loan by 0.5-1% for Women
  • Lower Income tax for Women compared to Men
  • Premium for Insurance Policies is lower compared to Men  :  Compare at Apnainsurance .com
  • Lower Stamp Duty for Real Estate Registration in Some States

Role of Women in Personal Finance at Home

There are many men who do not involve ladies at home in the decisions regarding Insurance,  investments , retirement planning, banking , budgeting etc , and it’s not a right. Women have better understanding most of the times, about the future goals of the family, especially child education related expenses.

We men, sometimes can not understand, long-term expenses like how our expenses will be at retirement and what kind of situation we would be living in. However smart we feel we are, there are many things that women outsmart us at. We should involve them in every decision we want to take in our life.

So next time when you think about insurance, talk to her about her needs after you are gone. Don’t shy away, feeling that this is taboo in this country. You have to plan things well and understand her needs.

Also while planning for retirement, take her advice and her views on what your standard of living would look like at retirement, what are your (and hers) post retirement plans are. She will give you many suggestions and it will help in planning.

Women are the queens of Budgeting and they are the real help in making the budget and what is needed and what is not . So you can’t do without her. They also save lot of money compared to men. When we men, go out to buy vegetables and if the Vendor tells us Rs 20/KG price, we buy it!

Whereas women, tend to bargain and bring the same stuff at a much lower cost. So whatever we bring for Rs 100 , the same thing Women bring at Rs 90 or Rs 85 .

Respect and Confidence

We men, have to make sure that we encourage our Wife / Mother / Sister / Daughter to learn about money. If they understand money well, your children will also learn about money from early life!

Just imagine how many mistakes you’ve made financially… Your children, will at least not make stupid mistakes, (hopefully) you have been doing all these years before learning better. An educated Woman means an educated Family. We have to make them confident that they can learn things very well, and involve them.

When you learn about something on this blog or anyplace else, try to teach them those lessons. Ask them questions, and see if they can answer them, and if they fail, then guide them gently.

I see a day, when one of the major reasons India will outpace other countries in, is financial literacy among women of this country. Also if women learn about money they can share the financial work of men and also do it themselves. We have to respect our ladies in this field .

There are many great women personalities, like  Suze Orman and Monika Halan Personal Finance Space and each of our ladies can get there to that place, at least up to that level.

So if you are a Man and a true Jago Reader, make sure your Wife / Sister / Female friends / Girl Friend read this article and get motivated to learn about Personal finance. If you are a Woman, make sure more and more women friends of yours get to read this article .

Comments , Please suggest other tips to help Women increase their Financial Literacy levels , Any good links , websites for them ?

Myth Three: I will make too many mistakes

How do Highest NAV Guarantee Plans work ?

Now a days, we are seeing a new “Innovative” product in the market. They’re called Highest NAV Guaranteed Plans .These products have come in, after the recent crash in the market, and companies are taking advantage of the fact that Investors are looking for some kind of a safe investment equity product. Hence, they’ve launched these Highest NAV Return ULIP’s which confuse investors and make them (the investors :)), believe that they are going to get the highest return from the Stock market in long run – generally the tenure is 7 yrs, for these plans .

In this article, we look at how Highest NAV Guarantee ULIP’s work, and you will understand, how any Guarantee product can be created by simple methods . The simple catch, here is that these schemes, are structured in such a manner, that the collected funds can be invested either in equities, debt instruments or in money-market instruments in proportions varying from zero to 100%

How Highest NAV Guarantee Policy Works ?

These plans use strategies like Dynamic Hedging and CPPI (Constant proportion portfolio insurance), which are advanced strategies used in Derivatives world. But, let me explain a simplified version of the whole process.

Supposing a policy starts today and is guaranteed to give highest NAV in next 7 yrs  and we can control how money moves to debt and equity, its pretty simple.

In the beginning, let’s assume a NAV of Rs 10, and the Asset allocation is 100% in equity and 0% in debt . Now suppose, the market moves up and NAV goes upto Rs 15 by the end of the first year, at this point, try to understand what Insurance company has to provide – they have to make sure, that they provide at least Rs 15 as the return after 6 yrs . Now in order to achieve this, all they have to do is keep X amount in debt instruments which will mature in next 6 years and provide Rs 15 at the end of 6 yrs, so assuming the debt return at 7%, they need to put around Rs 10 in Bonds , so that the maturity of the bond is Rs 15 at the end of 6 yrs .

=>  10 * (1.07)^6
=>  15.007

They can now invest the rest Rs 5 in Equity as Rs 10 is allocated to Debt . So, now they’ve made sure that whatever happens to the market, they get Rs 15 for sure at the end of 6 yrs. Now, there are two possibilities

Case 1 : Market Goes down : If market goes down, the NAV will go down correspondingly, but as per the strategy, the maturity value will be at least Rs 15.

Case 2 : Market Goes up again : If market goes up at this point and the NAV rises above 15, for example say to Rs. 18, now again they will pull out money from Equity and allocate such an amount to debt, that the maturity at the end of total 7 yrs would be Rs 18 and so on…

Note :

  • These highest guaranteed schemes do not provide wide range of product categories, such as equity-oriented growth funds, balance funds and debt funds.
  • Guarantee on highest NAV is available only if you survive the term. If you die during the term, your nominees will get the prevailing value of the fund. This is inferior to even a regular debt product because of the high cost structure involved.

Following is a pictorial description of how the Guaranteed NAV plan works with assumption of a 7 year tenure.

How does a Highest NAV guarantee plan works

How Investors get Confused

You have to read in between the lines; Investors need to understand that these schemes guarantee the “Highest NAV”,  READ AGAIN! , it’s Highest NAV and not “Highest Returns” .  Normal Investors don’t give much thought before buying these products and normally assume that the returns will be linked to the Equity Markets .

Do you Know , you can Now Subscribe to All the Comments on JagoInvestor !! (You can Unsubscribe Later)

Returns from Highest NAV Guarantee Plans

So, what are the return expectations of these funds? We know, that long-term equity returns, are normally in the 12-15% range while, debt returns turn out to be 6-7%. So, considering the fact, that these products will shift most of their money to debt, by the end of the tenure , we can expect the returns to be in range of 9-10%. We do get some equity upside in these products, but that will be limited. After a point, this product will turn into a debt oriented fund with a major portion in debt . Also if you factor in costs, like premium allocation charges , fund management charges and other yearly charges, the returns will not be what you actually expect.

You will be amazed to know, that the returns expected from these schemes, may be lower than the returns offered by equity-oriented Ulips. The reason being, that the basic objective of protecting the previous high NAV of the fund, may constrain the fund manager’s ability to take risks while allocating funds. So if the market has fallen down, the fund manager can’t take the risk of shifting the money from Debt to Equity to gain from the potential upsides in future , because they have to provide the “Guarantee.”

Read : Important Questions you should Ask an ULIP Agent ?

Source :  LiveMint Research

Current Products in Market with Highest NAV Guarantee

  • ICICI’s Pinnacle
  • Birla Sun Life Platinum Plus-III
  • Bajaj Allianz Max Gain
  • SBI Life Smart Ulip
  • Tata AIG Apex Invest Assure
  • LIC Wealth Plus
  • Reliance Highest NAV Guarantee Plan.
  • AEGON Religare Wealth Protect Plan

Controlling your emotions with these products

Let’s talk about mistakes from the investors point of view. We, as investors, don’t think with inquisitive, susceptive minds. Getting good returns from stock markets is anyways a tough thing in itself. So when these companies come up with plans like these, which say “highest NAV in 7 yrs”, we have to ask, “How is this possible?” . Dont say it’s not possible at all, just ask how? How do they achieve it? Stop seeing dreams of getting high returns without looking at the risk involved, and try to find out – what is the strategy they’re using , Is there something in between the lines ?

We all want to get great returns, but we have to shed this belief that, companies come up with plans specially for us. All the companies out there exist to earn money, and their motive behind every product is to make money, & generate profits for their companies, so that they keep their shareholders happy. So next time a product like this comes up , you have to control your emotions before getting in and first investigate. The worst part of this whole business, (of guaranteed highest NAV products) is the timing and how it gives naive investors, high illusions about the product. Products like these, take major advantage of psychology of the ordinary saver. Many Investors in smaller towns have broken their Fixed Deposits and taken some loan to invest in products like these, especially SBI Life Smart Ulip and LIC Wealth Plus because of the trust factor with LIC and SBI . See How Agents are Misselling LIC Wealth Plus

Why you should be “Pissed off” At these Insurance Companies

  • Do you Know that, The Securities & Exchange Board of India (SEBI) , the stock market and mutual fund regulator, does not allow mutual funds to guarantee returns. Therefore Mutual funds can not provide guaranteed products which are related to stock markets, but IRDA can approve things like these and all these insurance companies come under the ambit of Insurance Regulatory and Development Authority of India (IRDA). So any Insurance Company can come up with a new Plan , link it with market and start providing “Guaranteed products” . You have to understand that “equity markets” and “guarantees” are a very risky idea together , so please stay away.
  • Do you observe when do all these “Innovative” products come up in Market ? The answer is around end of the year, which is a premier Tax Investment time (Jan , Feb , Mar) . Is innovation in Finance space limited to End of the year ? Why dont these products come through out the year? Why ? The answer is simple , if it comes after anytime other than last 4-5 months of the Financial Year (ie Dec , Jan , Feb , Mar) , no body will bother to invest in these, because no body is bothered to “invest” at all . Companies very well understand investors psychology and their helpless ness at the end of the year because they have to provide investment proofs for Tax exemption as soon as possible . This is not just limited to these products , its true for NFO’s , IPO’s in booming markets , More Sales calls at the end of the year, and other new products .
  • The so-called “Guarantee” is a marketing gimmick and is implicitly a result of the way the investment is structured . what it means is that the strategy they use itself is such that it will provide you the highest NAV , even we can create our own Plan and do what they are doing . But they make sure that Investors  feel like they have done years of research and came up with these amazing plans .
  • You have to understand that there is nothing “Innovative” in this product , the fact that 7 companies have come up with the same product proves that its not “innovation” because Innovation is unique . Aegon Religare has gone ahead in this stupidity and introduced their Guaranteed Plan which guaranteed 80% of the Highest NAV , Looks like they think that it makes them look different from others .

Who should Invest in These Products ?

If you are looking for modest returns, like 8-10%, you can invest in these policies. The return of these policies may be high in the beginning, if market does well; but when market starts performing badly, the returns can take a hit and then be in a tight range. Your NAV will be protected for sure, but the returns wont be, since over time the CAGR return will go down. Remember, if your NAV is 10 today and you highest NAV is 20, for a 2 year period, the return is a good enough 41%, but by the 4th year it’s just 18.9% and by the end of 7th year it’s a measly 10.4%. So what you really need, is protection of returns, not the NAV which is just a fixed number.

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Do’s & Dont’s for filing your Income Tax Returns

With the tax-planning season about to end, most individuals are rushing around to make investments to minimise their tax liability.

And although, the last date for filing income tax returns is just a few months away (July 31), some of us are still unaware about the procedure and guidelines. Have a look at recent changes in the Income tax slab and how it affects the common man.

Income tax return

Q. I have a Permanent Account Number (PAN). Do I still need to file my tax returns?

A. Just having a PAN number does not mean that you have to compulsorily file your tax return. As per the Income Tax Act (1961), you are required to file a “Return of Income”, if your taxable income exceeds Rs 1.60 lakh for the financial year 2009-10 (Rs1.90 lakh in case of women and Rs2.40 lakh in case of senior citizens).

However, you need to have a PAN in order to file income tax returns. Read more

Q. What are the benefits of filing income tax returns (ITR)?

A. Filing ITR is really beneficial for an individual. Apart from the legal obligation, it is mostly required for purposes like:

  • Availing any kind of loan, like home, personal or education.
  • Visa and immigration processing
  • Income proof / net worth certification
  • Refund claims (in case of excess taxes paid)
  • Applying for a higher insurance cover
  • and ultimately, “Peace of mind!”

Q. How does one plan for better investments under section 80C ?

A. Section 80C is the most important provision under the Income Tax Act (1961). Making use of the available tax deductions can go a long way in helping individuals accumulate wealth.

Benefits of tax planning (for FY 2008-09)

Income (Rs) Tax Rate (%) Maximum tax savings

after 80C deductions (Rs)

Savings invested

@ 8% pa for 20 years (Rs)

Savings invested

@ 15% pa for 20 years (Rs)Upto Rs 1.50 lakh

Nil Rs 1.50 lakh to Rs 3 lakh101030048008168575Rs 3 lakh to Rs 5 lakh202060096016337151Rs 5 lakh and above 3030900144024505726
The amount saved in turns can be invested in various, in order to gain maximum benefits. Prime examples:

Case in point: Consider an individual, in the highest tax bracket, with a gross total income of Rs 6 lakh. If he chooses to ignore the tax sops available under Section 80 C, his tax liability will amount to Rs 87,550 (for AY 2009-10).

Conversely, if he chooses to make eligible investments/contributions of Rs 1, 00,000 under Section 80 C, his tax liability will be Rs56,650 i.e. a saving of Rs 30,900.

Look before you leap – Tips for better and effective planning of your investments:

Every tax saving investment scheme has inherent advantages and disadvantages; & each individual has to decide his investment strategy based on:

  • Lock-in period and safety of the investment
  • Return, before Tax / Return, Post Tax / Tax Free returns
  • Whether interest will be treated as fresh investment under Income Tax Act
  • Age and risk appetite
  • Liquidity, surrender charges etc.

Some tips to plan your finances better:

  • One should by default set aside 10% of his/her income;  Start living with your 90% of salary
  • Avoid waiting to invest a lump sum, at the last minute, as most of the times we tend to run short of money, resulting in a loss of tax benefit, besides the savings and long-term capital appreciation.
  • Last minute decisions mostly result in investing in unwanted and futile schemes
  • Use ECS / Direct Debit facility offered by the bank for investments; this will help you invest, without fail, regularly.
  • Invest monthly or quarterly as it provides long term capital appreciation
  • Monthly or systematic investments also provide a check against market volatility

Watch this video to learn everything about Income tax return:

Q. Since tax is already deducted from the salary well in advance as a TDS, then why does one need to file Income Tax Return?

A. Although tax has been deducted and there is no further liability to pay tax, an employee has to compulsorily file his/her income tax return if he/she exceeds the maximum amount, not chargeable to tax.

It is, in essence, a declaration to the income tax department that you have derived only income from salary and not any other source (if you do have income from other sources, then the same needs to be incorporated).

Note. Many a times, employees do not include the interest that they receive on their savings bank account. The entire interest earned on the savings bank account is taxable.

Q. Can you please explain the complete procedure to file ITR?

Step 1: Gather all the necessary documents.

These are:

1. Form No. 16: This is issued by the employer, stating your income from salary, and tax deducted by your employer from salary income.

Form 16

2. Form No. 16A: This is received from all the payers, who have deducted tax, while making payment to you, during the year. For e.g. banks and companies.

Summary of all bank accounts operated during the year: This summary will give an idea about all the interest income earned during the year.

Details of property owned during the year: If you have bought some property during the year and put it on rent, then you will need details of rent received and receipts of municipal tax paid during the year.

In addition to this, if you have bought such property through a loan, do carry the loan details and a copy of certificate of interest paid during the year.

Sale & purchase bill/documents/contract note in respect of shares transactions during the year: You will also need purchase documents corresponding to the sales made during the year. In case of a large number of transactions, it is advisable that you prepare a statement of sale and corresponding purchase of these investments and arrive at the amount of profit or loss, before actually calculating your taxable income.

Details of tax payments made during the year: This is required only if you have made advance tax or self assessment payment during the year.

Step 2: Select the proper income tax return form i.e. ITR, which is based on the nature of income earned.

FOR INDIVIDUALS: Form No. Applicability

ITR 1 Meant for Individuals, who have

a) Income from salary
b) Interest income
c) Family pension

  • ITR 2 Individuals/HUF not having any income on account of business or profession
  • ITR 4 Individuals/HUF having income from a proprietary business or profession

Step 3: To file your tax returns:

You can file your returns either Manually or Electronically.

Electronically: The Income Tax Department has introduced a convenient way to file these returns online. The process of electronically filing your Income tax returns, through the Internet, is known as e-filing of returns. This is a really convenient facility, since it saves you the hassle of traveling all the way to the IT office.

This facility is available round the clock and returns could be filed from any place in the world. It also eliminates reduces ‘friction’ between the assessee and tax officials.

Manually: For manual/physical filing, the individual takes a print out of the respective ITR form , from the income tax site, along with the acknowledgment form, and after duly filling it, files it with the respective income tax office. Forms are available free of cost too

Q. What are the documents required, which has to be attached with returns of income?

A. Under the new procedure, be it is electronic or physical filing, individuals do not have to attach any documents or enclosures with the return of income. However, one should preserve the supporting documents as they can be called for, at a later stage by an income tax officer to check the accuracy of the claims made.

Some of the documents are:

  • Detailed calculation of taxable income and amount of tax payable/refundable
  • Form No. 16/16A (original)
  • Counterfoil of all the tax payments made during the year
  • Copy of documents, concerning sale of investments and properties
  • The Copy of bank statements
  • Copy of proof for all the deductions and exemptions claimed in the return of income

In case of a refund, the bank account details needs to be filled in accurately. In case the refund is opted to be received via ECS direct into the bank account, adequate care should be taken to correctly fill in the MICR code.

PRECAUTIONS THAT ONE NEEDS TO TAKE

Filing returns at the eleventh hour often lead to a lot of inconvenience. Also Filing online, very close to the last day, is risky, as the peak load on the servers of the e-filing website during the last few days may make the whole online filing quite frustrating, causing needless delay.

Filing return after the due date, may lead to empty the pockets of the taxpayer who have incurred losses; which he wants to carry-forward to future years. Under the tax laws, some losses are not allowed to be carried forward for being set-off against future income, unless the return has been filed by the due date, even though all the taxes have been pre-paid.

Similarly, if a paper return is filed, the acknowledgement slip should be preserved carefully.

SOME TIPS TO AVOID LAST MINUTE RUSH

  • Step 1: Select and get the appropriate forms from the Income Tax site or offices
  • Step 2: If a professional is handling your taxes, meet him and make an appointment early before your accountant’s schedule gets completely booked. If you’re preparing your own taxes, set a day aside on your calendar for preparing taxes.
  • Step 3: Review your tax documentation before  submission
  • Step 4: You can file your returns offline or online. However, before doing so, check whether you still have a tax liability. If you are still to pay taxes, do so through Internet banking or through cash/cheque at any bank along with Form 280. In both cases, you have to furnish challan details in the income tax return (ITR) form.
  • Step5: Prepare your taxes. Now that you have all of the necessary forms and documentation, you can prepare your taxes without waiting for the last minute.

PENALTY FOR FILING RETURNS LATE

For details , you should look at the article  “How to miss your tax return filing deadline and still Enjoy”

Conclusion:

A little extra care, planning & precaution on the part of taxpayers can help them avoid committing mistakes, while filing the tax return and keep away, unwelcome visits from the taxman.

It was a guest post by Rishabh Parakh, who is the director of Money Plant Consulting

https://www.jagoinvestor.com/2010/01/how-to-miss-your-income-tax-returns-itr-deadline-and-still-enjoy.html

5 Logical Tips about Credit Cards

Credit cards are becoming increasingly common in India, and while they come with a lot of convenience, the high interest rates and other charges mean that you have to be careful about how you use them.

In this post, we look at 5 tips on wise credit card usage, and how following them, can save you a whole lot of financial heartache. These 5 tips are pretty logical & self-evident; we have to understand that the free credit we get from a credit card is not really free. It’s actually a business for Credit card companies and hence somewhere in the whole process, they have to have a way to make money .

1. Pay your balance in full: This one is so basic, I was not going to point it out at all, but on second thought – I realized that this should really be the first point. Of all the loans you take, credit cards come with the highest interest rates. If you run a credit card balance every month, then the interest charges add up really quickly. If you have a balance on your credit card, pay it off in full before the next due date. This ensures that you don’t pay interest on your balance, which really is extra money you can keep to invest and build savings for yourself.

Curiously enough, I know of people who don’t pay off their credit card balance in full, but at the same time, put their money in low yield investments. This is really bad math. If you have a credit card balance that is charged at about 30% per annum and an investment that gives you just an 8% return – you are much better off paying the entire credit card balance before you even think of investing your money. The extra interest you pay on your outstanding balance offsets any interest income you receive from your investment. If you run a balance, realize, it normally is a strong indication that you are spending beyond your means.  This is a bad financial habit that you should get rid of as soon as possible.

2. Avoid credit cards with annual fee: Unless you have a specific benefit in mind, from the credit card, don’t get a card that has an annual fee. It is always good, to get a credit card with no annual fee, because then the only expense you have on it, is the interest payment; and if you pay off your balance in full every month – you don’t pay any interest and your credit card will, in effect, be free! Add to that, the fact, that even most free credit cards have some sort of a reward program, you can benefit from. Why pay for something when you can get it free?

The other thing to keep in mind, while evaluating the fee, is how likely you are to benefit on it, based on your usage. I reviewed the HDFC Value Plus Cash Back credit card a few months ago, which had an annual fee of Rs. 700 and up to 5% cash back. At a cursory glance, it seemed to me that Rs.700 may not be very high due to the cash back, but a deeper look at the terms and conditions told me, that the cash back will only be credited to your account if the monthly balance is over Rs.10,000. I realized the card was not meant for people like me, who aren’t likely to run up such a balance on their credit card every month.

Bottom-line: If you are going for a credit card that has an annual fee – make sure you go through the fine print and are certain it will be worth the cost to you.

Credit

3. Get a credit card that is easy to pay off: I used to have an ICICI credit card and a SBI credit card. Both of them had similar features, but the ICICI card was really easy for me to pay off, as I had an existing ICICI Bank account, and the credit card was linked to it online. All I had to do, was go online, and pay off the credit card balance, through my ICICI login. As a result, I ended up using the ICICI credit card a lot more than the SBI one. Ease of payment, means that I can pay off the balance very often, very easily, and rarely run the risk of late fees or interest charges. While thinking of which credit card to apply for – consider just how easy it is, to make a payment on it.

This might sound like a trivial thing now, but you’d kick yourself later, if you had to pay late fees just because you lost your cheque book, or were too busy with your work to go to the bank and deposit the cheque. In fact, I’d go on to suggest that you add payment reminders on your email, phone or even a little post it on your refrigerator. Life gets busy sometimes, and a little help can go a long way in saving you late fee and interest payments.


4. Keep a track of your statement: A few years ago I went through my credit card statement online and saw that there were some charges from an unknown merchant. I was pretty sure, I had not bought anything from them, and I called up customer care to know what the charges were all about. I was put on hold for a long time, and couldn’t get through. However, the next day, I noticed that the merchant had reversed the transaction, and I even had a small credit from them.

While I was lucky in this case, there is no guarantee that credit cards won’t get abused. Always keep track of your monthly statement. If you can go online and check your transactions – that is even better, because you don’t have to wait until the end of the billing period. I go online every week or so and check up on my credit card statement to make sure no unauthorized use is happening.

5. Don’t use your credit card as an ATM: By this, I don’t mean that you shouldn’t use your credit card at the ATM, (although you should really, really avoid it as far as possible). What I mean is, there’s a tendency to withdraw cash from your credit card (since it’s so convenient) and that’s pretty addictive. Treating your credit card as an easy, reliable, access to cash will not help you in the long run. For one, the interest rates on cash withdrawals are generally much higher, and if you get into this habit, – you will run up high outstanding balances pretty quickly.

The cash advance limit, is also generally, a lot less, than the overall credit limit, so it won’t get you very far, anyway. The interest will keep adding up and grow very quickly. Withdrawing cash from your credit card should really be the last option. Usually, cash withdrawals come with some sort of cash advance charges, and more than that if you regularly withdraw cash from your credit card – again, it indicates a tendency to overspend and go beyond your means. This really means, that your personal finances are going down-hill.

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Read a Customer review on Mouthshut

I have saved all my friends by sharing my horrible experiences with ICICI Credit Cards.The customer care people are polite only till the greetings other wise they behave and speak like a criminal and very sarcastically. I have been using it for 2 years. But the customer care behavior problem is consistent. Normally I have been paying them always on time and the bill is normally above RS 5000. But once (3 months back) I had to go outstation suddenly and missed the pay date for first time for a day or two. The amount this time was also very low (maybe 1500 or 1800) as compared to other months bills. I suddenly started getting calls from a HORRIBLY SPEAKING customer care lady. When I mentioned I am travelling and will not be able to pay for another 2 days as my journey is a 3 day journey she started abusing and threatening me. She even mentioned that by tomorrow morning if I will not arrange for the payment she will send some one to my home for payment, when I said this is rubbish and she should not speak like this she started shouting and said “I will send someone and can do anything if not payed by tomorrow and reminded me that if I will not pick this call after seeing her number further she will be worse”. Is this is the way a bank should treat a long time and good customer? I have stopped using the card from that day. [LINK]

Credit Card Mistakes [Video]

Conclusion

The overarching theme of these tips is, “Get the convenience of credit cards for free.” That’s what it really boils down to.

To me, credit cards make shopping convenient and that is a big benefit, but at the same time, they also tempt me to go beyond my means, and then pay extra by way of interest. The key is to get the benefit of convenience but not have to pay anything for it. The above tips will help you do both, or at the very least – strike a balance between the two. What do you think? Have I missed out any obvious tips or is there something you’d like to add, based on your experiences?

POLL

What is your Spouse’s level of Understanding and Interest in Personal Finance ?online surveys

Comments please ? Leave your comment to provide another tip 🙂 and let us know what you think about Credit cards .


This is a guest post written by Manshu from OneMint. If you liked this post, please consider subscribing to his site.

Review of LIC’s Wealth Plus

If you were to hear about an investment plan with 17% p.a. returns i.e. if you invest Rs. 1lac today, it would become Rs. 3.5  lacs  in next 8 years time, wouldn’t you get greedy?And what if it is told to you that such Highest  NAV Guaranteed ULIPs are guaranteed by one of the biggest financial institution LIC of India, it would be Icing on the Cake and a “Never Miss Opportunity”. But everything sounds so good, if looked deeply may reveal something else. Someone rightly said “the big print give it and the fine print take it away”. Such is the case with LIC’s new insurance plan- Wealth Plus.

Game Started in 2007

Every year during the last quarter of Financial Year, insurance agents find new ways to misguide people and make them invest in policies based on false assumptions and promises. Let us take example of year 2007 when LIC launched one of its most famous policy “Money Plus”.

During the launch, pamphlets were distributed in all the nook and corner of the country showing high returns. Eg. Invest Rs. 1 lac for next three years and get Rs.3.38 crores after 20 years at a return of 25% p.a. Based on such exuberant returns printed on a pamphlet and false promises made by agents, thousands and lakhs of investors across India invested their money. Not only did people invested their savings but there were many instances where smaller households sold their jewelry and other personal belongings believing what they were told by the agents that LIC is guaranteeing such high returns.

What LIC have to say

Later when the news of misguided selling of this policy was brought to the notice of LIC management. LIC states that such assumptions are unrealistic and totally false. Investors should not be misguided in the name of LIC. On a letter dated February 12, 2007 to all the Zonal Manager and Sr. Divisional Managers,  Managing Director of the LIC Mr. Mathur himself writes that “The unethical practice of circulating such pamphlets to misguide the public and get business is betraying the trust we built-in the last 50 years.” See the Letter Below (Click to read in bigger Size , recommended)

LIC Zonal officer letter for misselling in LIC Wealth Plus ULIP Policy

Though efforts were made to stop agents to use such pamphlets to increase their business but since the agent community is so big and scattered not much could be done. It was quite amazing that all over India similar pamphlets were distributed and hence it is clear that without the help of Development Officer of LIC such work was not possible. D.O. of LIC also gets commissions or incentives when his agents gives more business to LIC. See the pamphlets Below:

Pamphlets showing returns with Term 3 yrs and investment 25,000

LIC Wealth Plus Misselling Pamphlets

Pamphlets showing returns with Term 1 yr and investment 1,00,000

LIC Wealth Plus ULIP policy misselling pamphlets

Another template with LIC Logo

LIC Wealth Plus Guaranteed NAV ULIP Misselling

What other Govt bodies have to say

Ministry of Consumer Affairs, Food and Public Distribution through “Jago Grahak Jago” also acknowledged that such misleading things are taking place and hence warned investors to refrain themselves from such high return promises.

D Swaroop (PFRDA Chairman) committee on investor awareness & protection states that “The chief cause of mis-selling is the incentive structure that induces agents to look after their own interest rather than that of the customer. If that were not true, the average sum assured of the insured Indian would be higher than the current Rs 90,000.”

 

Now when a income earner of an average Indian family dies untimely, do you think his family will survive for the rest of their life with less than Rs. 90,000? Insurance is meant to cover risk of untimely death first and investment and tax savings are secondary criteria. But we Indians, have been taught Insurance as an investment first, tax savings second and then somewhere in the last we talk of insurance as well. Now again such practice of miss-selling has emerged and agents are targeting with LIC’s new product Wealth Plus.

What is LIC Wealth Plus Product

This product of LIC which was launched on February 9, 2010 (Table 801) states that LIC will guarantee the highest NAV to the investor in the first 7 years and product will mature after 8 years. It nowhere guarantees the return. In it’s official web-site, LIC states that the minimum guarantee will be of Rs. 10 NAV as Rs. 10 will be the starting point. Actually that means that they are not even guaranteeing that you will get your entire money back as there will be certain charges in the policy itself. They have nowhere written that they will guarantee any amount of return to the investor. Nor they have mentioned that your money will be invested 100% into equity.

Now what Agents are telling

  • LIC is giving guarantee on HIGHEST RETURN. (LIC is saying Highest NAV)
  • Now what is highest return? Based on past performance of LIC’s ULIP policy (Bima Plus), you will get 17%-18% return on investment.
  • Lumpsum Rs. 1 lac invested today will become Rs.3,45,693/- or give Rs 25000 for 3 years & get Rs.2,14,690/- after 8 years.
  • You should switch all your  earlier product (on which agents have already made huge commission) into this product as this is something which is as good as KOHINOOR DIAMOND.

To generate such high returns, the money has to remain in equity but LIC nowhere states that. In almost all ULIPs it is clear how much money will go in equities and how much money will go in debt but this policy is silent on the allocation percentage and hence you may land up getting return that of endowment or money back (nearly 6%-7%).

Bima Plus of LIC was a ULIP where it was mandatory for the fund manager to remain invested in Equities in a pre-decided proportion. It was launched in 2001 when the markets were trading at 3000 sensex levels and later sensex touched even 21000. Is it a right approach to compare such high returns which were made during Bull Market and making investor believe that such returns will be now guaranteed by LIC. Now if you go to a small shopkeeper, a carpenter or a young executive and show them that you will get such high return, why he/she will not invest and that too if they are told that guarantee is done by the India’s biggest financial institution, LIC.

We feel sorry to say but such agents who are misleading people do not even think twice before selling such policies in a wrong approach. The fact of the matter is that the money is just not invested in policies but gets invested in someone’s kids higher education, someone’s retirement, some dreams which common man look to achieve.  We believe that

Insurance agents have sold to Indian everything other than Insurance.

Comment from a Reader who is an LIC Agent

Thanks Manish for bringing up this burning issues today. As a agent I can confirm you that these pamphlet actually circulated by LIC office. If you have any doubts go to any LIC branch ask any sales manager or BM they will tell you same. Actually agents sell the product because they are misguided by Senior LIC officials but unfortunately when debate arise agents are vindicated and punished. The projection shown in the phamphlet, circulated to us at the time product launch meeting. For a wealth plus policy LIC given extra incentive to us. But yes you are absolutely true we should think about our client not LIC/BM/DO. It is not true that agents always think about their pocket,they bound to sell product sometime otherwise they face a painful situation. Ask any Insurance company/agent how many term insurance they sell, they wont tell you the truth. IRDA also not interested about selling pure term insurance product otherwise they also issue circular to increase the term insurance sales growth. If this is the situation what will a agent do? Either he has to terminate his agency or keep continuing same practice as Big agents/Insurance Company/IRDA like to do. ( Original Comment )

What is IRDA guidelines says

As per IRDA, agents and Insurance companies are mandated to show return either at 6% or 10%. But the pamphlet distributed have no regards for Regulatory guidelines. Let’s Compare return according to pamphlet & IRDA Guidelines:

Regular Premium Single premium
Premium 25000 100000
Paying Term 3 years 1 Year
Pamphlet 214690 345639
As per IRDA guidelines
6% 87549 118442
10% 114306 161697
  • Figures are approx

Innocent Investors ?

We believe even investor is at fault and not all the blame should be transferred to the Agents alone. It is always “Buyers Beware”. We take well thought decision before we buy even a fridge in our house. We do research which fridge is best for us and look at least 4-5 shops before we finalize. But when it comes to financial products, we don’t really do our home work and at times decision is taken not even going through the pros and cons of the policy.

Now what investors should do?

If you have already taken the policy

  • Cancel the policy if bought under false promises and high projection. The policy can be returned within 15 days of the receipt of the document without any charges under ‘free-look’ option.
  • If 15 days are over, nothing much can be done.

If Not Taken

  • Take your well thought decision before jumping on to this product.
  • Tell your friends about the same.

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Comments ? would love to here your views on Wealth Plus from LIC . Please share what do you feel about it ?

This is a guest article by Hemant Beniwal & Ashish Modani. They both are CERTIFIED FINANCIAL PLANNERCM & writes at The Financial Literates

Regular Premium

Single premium

Premium

25000

100000

Paying Term

3 years

1 Year

Pamphlet

214690

345639

As per IRDA guidelines

6%

87549

118442

10%

114306

161697

Floating Rate Mutual Funds – How, When and Why?

Let us say you have 1 Lac rupees and you want to invest for the term of 1 to 1.5 years that can earn a decent interest rate. You thought of investing in fixed deposit in a bank for 1.5 year @ 6% per annum. Just after one month, bank increased it’s FD interest rate by 0.5% and again after 6 months interest rate is increased by 1%. But you cannot avail this benefit since your FD carries fixed interest till 1.5 years. Is there any investment instrument that could work to handle this situation? Of course YES, Mutual fund industry does offer floating rate debt mutual funds to invest in.

Basic Definitions you should know

  • Coupon rate: The stated interest rate on a bond or other debt security when it’s issued.
  • Benchmark rate: A rate used as a yardstick for measuring or setting other interest rates.
  • Expense ratio: A measure of what it costs an investment company to operate a mutual fund.

What are Floating Rate Mutual funds?

These are the Debt mutual funds which invests about 75% to 100% in securities which pay a floating rate interest (bank loans, bonds and other debt securities) while the rest is in fixed income securities. See List of best Debt Oriented Mutual funds

There are two kinds of floating rate funds– long term and short term. The portfolio of the short-term fund plan is normally skewed towards short-term maturities with higher liquidity and the portfolio of the long-term plan is skewed towards longer-term maturities. However, even the longer-term funds are positioned more on the lines of short-term funds and are not very aggressive in nature.

Floating Rate securities vs Traditional bonds

As you may know, that most bonds have fixed interest rates which are set when they are first issued, either by a government or a corporation. That rate of interest doesn’t change for the life of the bond. A floating rate security on the other hand, has a variable interest rate. That means it’s interest rate will go up and down, or “float” to reflect changes in current market rates.
Depending on the particular floating rate security, the interest rate may change daily, monthly, quarterly, annually, or at another specified interval. The rate is generally changed to keep it in line with a particular interest rate benchmark, which is often called the “Reference Rate.” Among the benchmarks used to set the interest rate on floating rate securities are the MIBOR (Mumbai Interbank Offered Rate). Hence, each time the benchmark rate fluctuates; the coupon rate is adjusted accordingly.

Note

The MIBOR rate is the weighted average of call money business transactions done by 29 institutions, including banks, primary dealers and financial institutions. This rate is calculated and disclosed by FIMMDA-NSE.  [ Ignore If you dont understand ]

Credit Quality and Risk/Return spectrum

Credit quality is the measurement of a bond issuer’s ability to repay the debt it undertakes. Investment into AAA and equivalent rated instruments, call money market and government securities are the safest and most liquid instruments, while below AAA and equivalent rated instruments reflect downgraded quality and lower liquidity. However, their lower quality results in better returns, albeit at a higher risk.

All about floating rate mutual funds in india

Example analysis

Let us compare the floating rate, fixed rate debt fund and liquid funds over the years to understand the performance.

 

HDFC Floating rate Income fund long term plan (G) HDFC Floating rate Income fund Short term (G) HDFC High interest (G) HDFC Liquid fund (G)
Category Debt: Floating Rate Long-term Debt: Floating rate short term Debt: Medium-term Debt: Ultra Short-term
1 month 0.35 0.35 -0.65 0.3
3 month 1.20 1.06 -0.4 0.95
1 year 7.68 5.0 5.53 4.68
3 year 8.58 8.2 7.17
5 year 7.48 5.98 6.77
Expense ratio 0.25 0.75 2.25 0.5
Exit load 3% within 18 months Nil 0.5% within 6 months Nil

 

 

Why, When & How

Why to opt for floating rate funds

  • The primary advantage of these funds is that, they are less volatile than other types of debt funds. In case of fixed rate bonds, when interest rates in the economy change, the price of the bond adjusts to make up for the fixed coupon of the bond.
  • Looking at the performance table over different time frames, floating rate funds have delivered outstanding performance over the years and more importantly, with considerable consistency.
  • A look at the performance table also reveals a better consistency in delivering higher returns when compared to other type of funds.
  • Credit quality of floating rate funds’ category is more or less similar to liquid funds and ultra short-term funds. Average maturity does not play a very important role in case of floating rate funds as they invest in instruments, that have a variable coupon rate.

When to opt for floating rate funds

  • Floating rate funds make better choice when interest rates are set to rise.
  • Floating rate fund can be considered to establish emergency fund. In the above case of HDFC Floating rate Income Long term plan (G), one can slowly build up emergency fund and once 18 months are over, you can redeem any time.
  • If investment period is 1 to 2 years and liquidity is a concern, then one can look at floating rate funds over fixed rate debt funds. Now banks are coming up with recurring deposits with quarterly revision of floating rates. Always look for alternatives as per your investment period, returns, risk and liquidity.

How to select floating rate funds

  • Long term floating rate funds are better than short term considering performance, less expense ratio.
  • Select a fund which has proved its performance over a period. (This shows the effectiveness of the fund house in mobilizing the assets under management).
  • Select the fund which invests significant % of asset in companies/securities with highest credit rating.
  • Select the fund with low expense ratio.

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Floating rate funds in India

The primary reason for their lack luster presence in the mutual fund industry has been investor ignorance of the nature of floating rate funds. There is a shortage of sufficient long-term floating rate instruments. Due to this, fund managers divert certain portion towards fixed interest securities. In the present situation of Indian economy money market and higher inflation situation, interest rates are set to rise in near future. Always consider floating rate funds over liquid/ultra short term/debt funds.

List of Top Floating Rate Mutual Fund

Long Term

Short Term


Comments! Do you think you can add these to your Portfolio for some short term goals?

This is a guest post from Srinivas Girigowda who is one of the best contributors on this blog :), Kudos to him. Check out his finance blog Here