Importance of your Child’s Education plan in coming times !

So, what’s your biggest financial goal in life? Your Child’s education?  Their marriages? Planning your own retirement? What is the strategy you’ll follow to reach these goals? What if I tell you that in the coming times, your way of looking at these goals needs to change?

You can’t look at goals the same way as your parents did! The lives & times of our parents, ourselves and our children will have lots of differences; difference arising because of the way our society and economy changes from year to year, decade to decade.

Let’s question the beliefs we have about some financial goals in our lives, how we should change our way of looking at them and planning for them. I believe this is really important; important enough to cover this over a series of articles. This is the first of a 3 part series and we will cover Child Education in this series.

Child's education


Let me start from basics. Here’s how typical financial planning works in India. A financial planner captures your situation, helps you define your goals and then he plans for how those financial goals should be achieved. Take any financial plan and topmost goals are

For years, traditional financial planning has been going on like this, & no one questions the way we plan for these goals and how much importance we give to these goals in our life. Note that these goals take up a good amount of your monthly investments and you end up with less money each month!

How will you feel if after 2-3 decades you realize that you shouldn’t have worked so hard on these goals?

How is Child’s Education Planning done in India?

Right now, almost every average India plans for their child’s education in an unstructured way. They just put some random amount in some generic financial product, without understanding how much would they require at the end, when the goal actually arrives.

The amount of investment done is guided by the potential of a person or some whole number like 5,000 per month or 10,0000 per month.

Normally Financial Planners will take a better and more structured approach to plan for your child’s education. They would first take the amount required for funding education in today’s world (this is often given by you).

They then, take the target date of the goal (for example, 25 years), assume an “education Inflation” to figure roughly how much education could cost in the future, plug-in other important factors like “regular inflation”, “Your earning potential”, “Increase in your investments each year”, “you risk appetite” and some more factors to figure out the amount of money you need to invest monthly or yearly to reach that goal.

There can be many variations to plan, but this is how most of the financial planners plan for the child’s education goal.

Watch this video to know the best investment for newborn child’s education:

What’s the problem in child education planning?

The problem is that we have taken into consideration changes like inflation, costs, etc., but not considered other factors like how these goals will look like in the future. Whose responsibilities will be it seen as? Who will be responsible for taking care of funding the education costs?

Will it be the parents, the child, or both – the parents and the child?

Planning for child education is not just dependent on the numbers, rather it’s a combination of a number of factors; social, personal beliefs, religious, your way of approaching & looking at life…

In the image given below, you will see the steps of a child’s education planning:

Steps of child's education planning

If you are a person who has seen enough hardships in life and have taken care of yourself right from the beginning, you may believe that your duty as a parent is to provide minimum support to your child, up to a certain basic level and they should become independent, sooner or later and that their life is their headache, not yours.

As far as our society goes, earlier providing a great education to children was seen as a passport to a good retirement, because you do your duty of providing support to your child, and in turn, he completes his responsibility of taking care of you in your old age.

But friends, the times are a-changing! Gone are those days and people and relations are going farther and farther. Even in Health Insurance, family means immediate family (spouse and children), not parents.

We are entering (or have already entered) an era where parents will provide for their child all the necessities up to the age of 18, then consider him or her, “self-dependent” , and then expect him/her to make their own path in life.

So the question which we are trying to answer here is, Is “Child Education” so important in today’s life? Or more, will it be so important after 2-3 decades? I don’t think so.

Change in social trend and our thinking

For years, it has been the parent’s responsibility to save money for their child’s education. His grandfather saved for his father, his father saved for him and now he saves for his children.

But will this chain of “responsibility” be the same always? Will, it always be the sole responsibility of the parent to save for his child’s education and in case he fails, is he or she a bad parent?

In 70s and 80s , it would be a really, deadly shock for a child if his parents told him,Listen, we as Indian parents know that we should help you with your education, but sorry old chap! We can’t! We would rather prefer to keep the money we saved, for our retirement. You go right ahead please, & find some alternatives to fund your education. You can live in this house till you find another one.”

The child would have gone straight into a coma after hearing this! You would also be shunned by friends, relatives & society at large and labeled as an unsupportive and bad parent because you didn’t do your duty!

Education Loan is the new tool for self-funding

In the new India, it’s not a big thing to hear that someone is doing his studies with the help of an education loan. The trend is not really new, but it has started gaining popularity only recently in the last 10 years or so. SBI was the first bank to start giving Education loans in 1995, but it was not really sought after much in those times.

Only now, do we see increased awareness and a shift in parents’ mindset that “It’s fine to take education loan.”

Even so, taking an “Education Loan” is the last option for most people, rather than the default choice of parents and children. Parents do everything they can do to fund education and only if they fail, do they opt for a loan. It’s still not seen as the best option to fund education by the majority of the population. (though this is changing)

More and more people are opting for higher education after a first job, It’s not uncommon to hear people pay back an education loan EMI while they’re working, so you can see the trend emerging now. It’s only going to grow bigger and bigger and take a big shape.

Some Stats

There is a steadily growing market for education loans and govt is also encouraging and setting better targets. Banks had given Rs. 35,000 crore in education loans last year. The government has set a target to increase the amount in education loans to Rs122,838 crores in 2017 and Rs1,66,541 crores in 2020.

This would help increase the enrolment ratio from the present 12% to 30% by 2020. (source) .

Here is the chart which shows you the relative size of education loan disbursed by banks and you will be able to see the fast growth. Given the number of youth our country has, there is a huge demand as well as supply for loans.

eduation loan in india

As per a survey, 81% students would like to go for education loans if they are eligible for it. Only 2-3% of Indians apply for education loans compared to 85% in the UK and 50% in the US (2005 data).

Don’t stress a lot on Child Education

The motive of this article is to give you some idea about future and how child education will look like. This article is not discouraging you to save for your child education. The only point is that you can take some of your tension away from it, atleast partially. In the coming times, there can be more important goals in life, which needs more priority.

If you are an earning member of your family and feeling the pressure of creating a corpus of several lacs for your child after 20-25 yrs, I would suggest lower your tension! 🙂

While you can still save and plan for that goal to fulfil your “kartavya” as Indian parent, I say, don’t worry so much. Your target amount might be correct,  but don’t worry, the India of 2040 will not ask you to fund 100% of your child’s education. If you even save for 50% of what you have planned, rest would be funded by education loan.

Don’t become slaves to numbers! Understand and be with the changing India! Focus on some things more important in your life! We will talk about these in the last article of this series.

Please share your thoughts about this topic? How much do you agree with this way of thinking about a Child’s education?

Disclaimer : All the thoughts are purely authors opinion and does not reflect the opinion
of financial planners.

4 Home Loan rules most of the investors don’t know about

Can you claim a tax deduction for your under-constructed house? Can you claim tax for the home loan taken from your friend and not from Bank? These are some of the questions which are not generally discussed over and a lot of investors have no idea about actual rules. In the video below I will talk about four not so known rules of home loans. Keep reading. Readers on email can watch the video on this article.

1. Tax deductions for House under-construction

Can you claim tax benefits for home loan taken for under-construction house? A lot of investors assume that they can claim tax deductions and without doing much research, they go ahead with the loan. However, they should know the fact that claiming tax in the case of the under-construction houses is different. You cannot claim the tax deductions for the principal amount for the under-construction house. You need to have possession and certificate of ownership to claim tax under 80C. However, the Interest part is a little different. You can not claim the interest amount unless you get the possession of the house. However, you can always claim the deductions later in 5 equal installments for the next 5 yrs from the end of the financial year of possession.

Example : Suppose Ajay bought a house on loan on 5th June 2010 and he pays total 4 lacs as interest in next 2.5 yrs and gets possession on 7th Nov 2012 . He will be able to claim this 4 lacs Rs in equity installments in the next 5 yrs period , which is 80,000 per year in 2013 – 2017 . However the total limit for exemption will still be 1.5 lacs per year.

2. Selling the House before 5 yrs reverses the tax saved earlier

We think of saving tax, but once the tax is saved for a particular year, it does not mean the story ends here. The tax benefit under sec 80C is allowed for home loans considering the condition that it won’t be sold before 5 yrs from the date of purchase. Read some nice tips for house buying from real buyers

If you sell your house before the expiry of 5 yrs, all the money you saved under sec 80C in earlier years will be deemed to be your income in the year of sale and added to your salary. For example, if you bought the flat in Oct 2010 and in the next 4 yrs you saved 1 lac in tax under sec 80C, then this 1 lac will become your income in the year of sale and will be taxed. However, the interest component once saved is saved and it won’t be reversed.

The tax benefit under section 80c is allowed subject to the condition that house property should not be sold before a period of 5 years. If you sell the house before the expiry of five years from the end of the financial year in which you obtained the possession, the deduction will be discontinued and the entire tax deduction claimed in earlier years under section 80c – for repayment of principal component of the home loan – will be deemed to be your income (in addition to capital gains) in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.

3. A loan taken from Friends and Family is eligible for Deductions (Interest)

In case you want to take a loan from your friends, parents or any other person, you can still claim the interest on the loan under sec 24, which is up to 1.5 lacs per year. However you can not claim the principal amount under sec 80C, that’s applicable only if you take up the loan from some bank or financial institution. So you don’t always need to take the loan from Bank. if you can take it from a friend or family, you can still claim tax deductions on the Interest part.

4. 80C is not allowed for loans taken for Extension or Renovation of House

If you take a loan for extension or renovation of your existing house, in that case, you can not claim the principal part under sec 80C, but you will be able to claim interest amount under sec 24, but the limit, in this case, is only up to Rs 30,000 for self-occupied properties. However, for houses which are let-out (a rented or second home which is not occupied), there is no limit for a tax deduction.

Comments? Which one of above 4 facts you didn’t knew about?

SBI bonds @9.95% , Who should buy ?

SBI retail bonds or SBI bonds are the latest offers from the State Bank of India. These savings bonds issue will open from 21st Feb 2011 and closes on 28th Feb 2011.

These bonds are offering attractive interest rates to investors which are better than even fixed deposits, however, it does not suit every kind of investor. Only if you are looking at income generation, these bonds will be good for you, but if your aim is capital appreciation, you will benefit by investing in PPF instead of these bonds.

Lets look at the details of these retail bonds . .

SBI retail bonds

Tenure and Interest Rates on SBI bonds

These SBI bonds will come in two variations. The first one is with 15 yrs maturity period offering 9.95% interest and the other option is with 10 yrs maturity period offering a 9.75% interest rate. Note that these interest rates are applicable only if you are investing less than Rs 5 lacs (retail category).

If you invest more than Rs 5 lacs then you will come into the category of non-retail investors for whom the interest rates are 9.30 percent for a 10-year bond and 9.45 percent for 15 years bond. The interest offered by these bonds is a payable yearly, which makes them a great alternative to Bank Fixed Deposits.

Following is an illustration which will clear a bit about how it works.

Ajay invests Rs 1,00,000 in 10 yrs SBI Retail bonds. He is entitled for 9.75% interest each year. So he will get Rs 9,750 per year for next 10 yrs . Note that each year this interest amount of Rs 9,750 will be added to his income and he will pay the tax on it accordingly as per his tax slab.

He can sell off these bonds on stock exchange incase he is getting a good deal . One more thing which can happen is that SBI can force him to sell off the bonds back to them if SBI exercises their “call options” , which we have talked about below ! .

Call option

There is something called “Call Option” in these SBI Bonds. For people who are familiar with “Futures and Options” , they know that a Call option is nothing but “Right to Buy” . So as per this call option, SBI has the right to buy back these bonds from you and terminate the contract with you much earlier than the actual maturity.

If they choose to “exercise” the call option, SBI will pay the principal back to you. For 15 yrs bonds, the call option can be exercised in 10th yr and for 10 yrs bonds, the call option can be exercised in 5th yr. Note once again that it’s the right of SBI, not yours.

For example: If you buy 15 yrs bond in 2011, then if SBI wants to buy back the bonds after 10 yrs which is the year 2021, they can do it. In which case, they will pay back the principle amount to you and close the contract.  But in case they dont want to do it, they will continue the bond and you can’t do anything :).

How to Apply for SBI Retail Bonds


There is no way to apply for these bonds online. You will have to physically go to SBI Bank and get the form from there and fill it up  (See the list of all the designated branches of SBI in PDF and EXCEL format, thanks to Babu for providing the list).

However, these bonds will be issued in Demat form only and therefore you will need to have Demat account for buying these Savings Bonds from State bank of India. So be clear on two points

  • You need to have Demat account to apply for these SBI Bonds
  • For applying you need to go to SBI Bank Branch and fill-up the form , there is no way to apply online

sbi retail bonds summary

Listing on Stock Exchange

One great thing about bonds is that they are listed on a stock exchange so that you can buy and sell them in the secondary market in case you want to exit from it before maturity. SBI retail bonds will also list on the stock exchange after 1 month of the issue, after which you can buy or sell them on the stock exchange.

Last time when SBI came with a similar issue, the buyers benefited a lot because the bonds listed at 5% premium on the first day itself, so there was an instant 5% gains for those who bought these bonds. However, there is no guarantee that it will happen again.


The interest which you get from these bonds will be taxable. The interest will be added to your salary and taxed accordingly. Also, these bonds do not give you any tax benefits on investment amount and are not covered under sec 80C. So effective return for these bonds will be much lesser for investors in 20% and 30% bracket post-tax. Watch this video on 7 tips of saving tax

Should you Invest in these bonds?

So the main question anyone will ask is “Should I invest in these bonds?“. It would depend on your goal as an investor. Just by looking at 9.95% you cant say that its the best investment. Note that the interest payout if yearly. It’s not compounded like your PPF or FD’s. This means that the returns do not earn anything on it later, but its paid out to you.

So in case, your goal is to generate yearly income at decent rates, It would be a nice investment. However if your goal is capital appreciation and you are looking at the growth of your investments, these bonds would not be the best option. Note that even PPF would give more money to you at the end.

Below is a chart that shows the yearly amount you have got by the end of each year.

SBI bonds vs PPF

SBI bonds vs PPF

You can see that in the case of PPF you are having more money with you even though the interest you get on it is just 8% because of the compounding of money which is happening there .. However, in the case of SBI bonds, it’s not the case.

Here the reinvestment of those yearly payouts is not taken into consideration. So the point here is that if you want yearly income, only then these bonds make sense.

What about interest rates in the future?

But the only suspense is what will be the interest rates in the coming years? What you don’t know is how interest rates will move in the long-term and if interest rates offered by these bonds will look attractive in the future?

SBI might not be too dumb to offer these returns for such a long-term. Here is an except Deepak Shenoy …

“why is SBI doing this? They don’t need to. They’re really smart people. Let me reiterate that. SBI has extremely smart people. If they could have offered a lower rate, they would have. That means this is actually a low rate compared to what they expect rates to go to.

Meaning, there will be more rate hikes, and the 9.95% that looks good now, won’t look so great if you can get, say, 12% outside. (Don’t tell me 12% is out of reach, please. Even 10% was out of reach a couple of years ago) So that’s the risk – the feeling of regret if rates go up to 12% – in fact, you will think of it as a “loss” because the market value of the bonds will be below par, in that case.

But if you have a different view on interest rates or can swallow such regret, go ahead.”Excerpts from Deepak Shenoy on his blog post.

Some Great Advice from Experienced Investor

In case you are going to buy these bonds, you need some real-life tips.  One of the readers Mr. Sundar shares some good and worthy points based on his experience of applying in these SBI bonds in 2o10. Read it below …

1. Apply in retail quota and do it on the first day. It is first to come first depending upon the day. I applied for HNI Quota and failed. Retail gets preference over HNI. Read the offer document carefully.

2. Those who apply for 15-year bonds get first preference over the 10-year bond applicant. Read the offer document carefully. So don’t apply for 10 years if you want to improve your chances of allotment.

3. SBI Bonds are listed on the NSE as N1 and N2. Go to NSE Website and search for SBI equity. You will get SBI, N1, and N2. Trading per day is not that good. 15-year bonds are trading with a premium of 4% (N2)and 10 years (N1)at 2.5% as of yesterday.

4. On the whole this offering is good. But if you are looking for holding it up to maturity you will be shocked to know that the gains will be treated as interest and not as capital gains. So it will be better to sell this bond in the market in which case it will be treated as capital gains on Debt Funds.

Unfortunately, the trading is small and only small lots can be sold on a per-day basis. See the trading pattern on NSE.

Other Features

  • There is no Loan facility on these bonds. You will not be able to pledge these bonds for taking the loan.
  • The minimum investment is Rs 10,000 and the maximum is Rs 5,00,000 for the retail investors.
  • NRI and PIO can’t apply for these bonds
  • CRISIL has assigned a rating of “AAA” to these bonds which comes into the “safe” category.

Comments? Have I missed anything in the article which you want to point out? Are you investing in these bonds?

Calculate returns from your Insurance Policies [Video]

How many times have you come across a situation when you wanted to know the returns from your Policies , It can be Endowment Plans, Money-back plans, Pension plans or a ULIP plan . You might be some money going out of your pocket in some years and money might be coming in your pocket in some years, which would eventually translate to some return overall . In this video tutorial, we will see how you can use MS Excel and use a tool called IRR (Internal Rate of Return) to find out the returns from your policies.

When can you use IRR?

Actually, IRR is a tool which you can use in any kind of situation where you are paying some premium across some fixed time frame, like per year or per month or any period with equal gaps! , not random payments with unequal gaps.

For the sake of simplicity, I have taken the case of yearly payment in this article. In the above video, I have covered 4 types of situations, like See More Financial Calculators

  • Endowment plans with maturity amount
  • Moneyback plans with money coming back to you in between
  • Pension Plans
  • ULIP Plan

Important Points

  1. There will be years when money goes out of our pocket, we have to put negative value. For example, if we pay a premium of 20,000, we will pay -20,000.
  2. In years when we get some money, we have to put positive value, like if we get 20,000 in some year, we have put +20,000.
  3. If we pay a premium of Rs 20,000 in some year and we also get 25,000, eventually, the money coming to us is Rs 5,000, so we put +5,000 for that year.

Bonus Quiz to test your understanding!

Ajay bought a pension plan with maturity tenure of 15 yrs , but his premium paying term was only 10 yrs . So he does not have to pay anything after 10th year .

He is paid the premium of Rs 40,000 each year for 3 yrs, but after that he missed paying premiums for 4th and 5th year. He revived his policy in 6th year and payed 6th year premium along with 4th & 5th year premium with 8% interest (8% interest on 80,000)  in the 6th year and thereafter He continued paying the premiums after that till 10th year . After the maturity period of 15 yrs, he has two options

Option A) Get 4,00,000 lump sum + pension of 25,000 for next 40 yrs , starting from 16th year

Option B) Take the lump sum of 10 lacs and Policy terminates

Question : Which option should Ajay choose ? which one is better than the other ?

Lets see who gives the right answer !

So now if someone tells you that you can invest Rs XXX for Z yrs and get amount Y for next ABC yrs you can find out how much IRR its turns out to be , if its claims to be a safe fund and IRR is more than 9-10% , you can clearly see that its a pure cheating ! .

Your Homework

Now go back and take out your ULIP’s , Insurance Plans and use this method to find out what is the return you are getting out of those policies , are you satisfied with it? if not , its time to rethink if you really want to continue those plans or not . Take Action !

So , go ahead and calcualte the IRR for your policies and ULIP’s and Share your examples and numbers with everyone on the comments sections ,  I will personally verify each one’s number and confirm if those are right or not . Happy IRR’ing !

LIC Bima Account Policy [with Return analysis]

LIC Bima Account is the latest product launched by LIC of India on this festive tax season (generally known as JFM, JAN-FEB-MARCH, Tax saving season). There are mainly two varieties of this insurance plan called LIC Bima Account 1 and LIC Bima account 2, which differ a bit in terms of premiums, tenure, etc. No wonder that it’s the best time to launch the insurance plan as everyone is looking forward to investing in tax-saving, and when something has a tag of “Guaranteed returns” + “LIC” , its an instant favorite :).

LIC Bima account comes under sec 80C, you can save income tax on the amount invested.  A lot of risk-averse investors will be investing in these plans. However, It’s important to know what these plans have to offer in terms of returns and see if it’s as transparent as it looks like. The company claims to pay a 6% return, but will it be 6% by the time it reaches your hand? Let’s look at it.

LIC Bima Account

Did you notice the above picture? It’s very much related to our financial services industry. Every other financial product has a face, which is shown to public, but if you analyze it further and look at  it from the mirror of IRR, you can see its real face which is too horrifying sometimes .. Be it ULIP’s, Endowment plans and even PMS schemes, every other product has some real face which we need to find out . I have tried it find the real face of LIC Bima Account policy here. It’s up to you to decide is it beautiful or not!

Features of LIC Bima Account 1 and LIC Bima Account 2

The chart below gives you an idea of both the variants of the policy. While LIC Bima Account 1 is for investors who can pay smaller premiums, Bima 2 is for investors who are looking fo paying higher premiums.


The lock-in period for these policies is 3 yrs, You can surrender the policy after paying the premium for 1 yr, but you will be paid back only after completion of 3 yrs lock-in period. The common part of both the plans is that you will get 6% returns from these plans if you continue paying the premiums till maturity, but only 5% return if you make it as paid-up policy. There will be a bonus also paid by LIC in these plans, but it would depend on the company experience with the plan and bonus is not guaranteed. Also the bonus will only be applicable for investors who have completed the whole tenure.

Important: Taxation of LIC Bima once DTC is in Force

Another important point worth nothing is taxation of LIC Bima Account policy after the Direct Tax Code is in effect. As per DTC, the tax exemption will be allowed only if the Sum assured is more than 20 times the yearly Premium, however, both LIC Bima Account 1 and LIC Bima Account 2 offers options where a person can choose Sum Assured which is less than 20 times the yearly premium (see the chart above).

In that case, they will be able to claim the tax deductions in this current year and next year also, however there after they won’t be able to claim any deductions on this policy. I am not sure how many investors are looking at this point. The majority of investors in LIC Bima are going to be from small cities, who will definitely have no idea about this taxation point.

Commission for agents in LIC Bima Account 1 & 2

So what is the commission LIC agents will make from selling these policies? Here are the numbers shared by an LIC agent with me over the phone.

  • 16.5% for first year
  • 3.5% for the second and third year
  • 2% for 4th year onwards

What are the returns from LIC Bima plans?

This is where one has to pay attention to. Note that the returns of 6% are offered only in the Net amount invested (Final Amount in the charts below). We will take an example of LIC Bima account 2 Plan 806 below which I got from. Suppose you invest 1,00,000 per year in this plan for tenure of 10 yrs,  then at the end of the tenure you will receive 12,36,911, guess how much actual return does it translate to? So we have to do an IRR analysis for this to find out the actually CAGR return an investor will get. As per IRR analysis, the returns turn out to be 4.217 %. So this is the return an investor would earn in 10 yrs, note that is the return without considering any bonus.  For investors who will make the policy paid up or surrender it, for them the IRR would be drastically low and might be as low as 0% or negative also depending on how early investor makes it paid up.

Look at the chart below which shows you the IRR analysis for LIC Bima Account 2 policy, The numbers below are provided by an LIC agent over email to me.

LIC bima account insurance plan returns

So the main point here is that why is an investor not informed about the actual return which he gets in his hand? Why the returns of 6% are shown in a way that common public will not be able to find it out. One can also show the returns like 9% or 10% and then increase the charges to such a level so that the investors in hand returns are just 4-5 %. These plans are going to generate a lot of attention and crores and crores will be generated. Do you feel it can be called misselling or Mis-use of Public trust, as the returns are in a way misleading? This is a question from you as an investor !.

A trusted source Dhawal Sharma had a talk with LIC Development Officer and here is what he found out –

I met with an LIC DO yesterday and he explained to me that BIMA ACCOUNT is for someone looking for other option than Saving Bank Account and thus the name.. Bank Account gives 3.5% and here it is with Minimum Guarantee of 6%, that too with Insurance Cover and tax benefit.

It’s another LIC stunt of JFM (JAN-FEB-MARCH) Tax saving season..Remember, LIC launched WEALTH PLUS last year on 8th FEB…Crores of policies were sold and crores of premium was raised by LIC in 2 months flat..I am eye-witness to last year’s madness when LIC agents were asking people to come along with FILLED FORMs for WEALTH PLUS and public obliging..and there we were, the KOTAK (or PVT PLAYERs) doing everything for the client but still being made to look second-grade in comparison to LIC..That the NAV of WEALTH PLUS now is Rs 9.63 is a different matter altogether 😉 Just wait and look for a new product from LIC every year in FEB..

Actually its not misselling, its MISSUSE of the TRUST that people have in LIC..”Whatever LIC come up with must be good” according to Indian public and thus the result..

Note that the actual returns from LIC Bima after considering the non-guaranteed bonus will be higher, but still it would hardly be attractive enough.

Comments? Are you buying it? What kind of investors should buy LIC Bima Plan?

Is Stock Market Crash on the way ? [ 4 charts ]

Did you invest in ELSS recently for tax saving? If you have done that with the intention of getting quick great returns in 3 yrs and then liquidate the funds, you might not like this article. Indian stock markets are seeing some serious sell-offs in the last 1-2 months and there are some reasons for it. In this article we will look at some indicators which can help you take further decisions.

Stock Market Crash India

Why Nifty Started Falling from levels of 6300?

You should ask why shouldn’t it fall? Everyone has bad memories about markets and 6300 in nifty is a level from where we saw one of the biggest crashes in 2008. A lot of investors had a really bad experience at that point, as they were stuck at that point and could not sell-off in 2008. They kept their stocks with them in the hope to sell it off next time when the market reach the same levels. This is what exactly happened when markets reached the levels of 6300 recently, everyone said .. “BOSS. I am now getting out of markets as I have reached my previous levels, No matter what happens next, I am just out !”, which is very natural and well-known phenomena is markets.

When the majority of people do this,  there is serious sell-off suddenly. In technical terms, this phenomenon is called Resistance and we can see a probable double TOP at the level of 6300, not a very great thing for people looking to BUY :). I say probable double top because it will only be confirmed after markets break the target of 5350 at nifty (got this tip from Nooresh Merani). It would be a bad situation to watch ours for. Look at the last 11 yrs chart of Nifty below.

Stock Market Crash

3 major indicators indicating the fall in Indian Markets

There are some serious events which are worth looking at. Let’s look at them

1. FII’s are selling

The biggest reason for the current market fall is due to FII (foreign institutional investors) selling off. Suddenly American and European markets are looking better than Indian or Asian Indices. Note that US markets are rising from last some months and Europe has outperformed Indian markets by 20%+ in Jan alone. FII’s have sold a lot of in the last 1 month, below is the data are taken from the NSE website.

FII sold in Indian markets

However, not everyone agrees to this argument. “FII’s have invested around 50,000 crores in Indian markets from the point when Nifty was around 5,400 last time, which was around Aug 2010,  However FII’s have sold taken out just 15% of what they invested, and right now we are at the same levels , so still lot of FII’s money is lying around.

So, the biggest reason for the fall is the fear of rising inflation and interest rates and the way it will affect our markets and economy in coming days”- says Deepak Shenoy of .

2. Markets broke its 200 day EMA + important Support points

This is not a small thing to ignore, breaking of 200 EMA is a significant event, and it has happened only twice in last 2 yrs, but it bounced back from that point, However, this time it has broken it again and got below it and not bouncing back. Incase it does not bounce back above it, It’s not a comfortable situation. So if you know GOD personally, please pray.

Look at the 3 yrs chart below which shows the 200 EMA breaking and other trend line breaking. Learn more about Support and Resistance and other important things related to stock markets here, here and here

Should retail Investor Buy right now for the long-term?

I had a talk with Nooresh Merani, a technical analyst at Analyse India, and he feels that the main panic button is still not triggered.

As per him – “The major point comes at 5350 on Nifty which is very crucial, we can not say we are entering a Bear market unless market crashes below the levels of 5350. If that is broken, then there can be further weakness in Indian markets and sell off, However if markets bounce back from these levels of 5350-5400 and go up further, it would be safe to buy only if markets move above 5700 levels , unless then better to be high on cash and not take any action. If markets can move above 5700 again , it would be a great idea to deploy cash and see levels of 6800-6900 on Nifty” – Nooresh Merani (blog)  .

Stock Market Crash

3. Nifty PE touched 25 and now moving down

Please read this post on Nifty PE incase you have no idea what is it. Nifty PE has been a good indicator till now to show the over-bought and over-sold regions and we can expect it to be a good indicator. In the last 10 yrs, It was the second time when Nifty PE went beyond 25, Only in 2007-2008 it was around 27-28 and even body knows what happened after that. Even now Nifty PE touched 25 and now it’s moving towards 20, I would not be very bullish for long-term in this kind of scenario. But there are cases where it has bounced back from 20 again to move higher, so keep it as a possibility. See the chart below which shows you the Nifty PE movement in the last 10 yrs.

NIFTY PE indian stock markets


Technical analysis is an art of reading charts and there are some serious concerns seen in the chart, however, it’s not at all recommended to take the words on rock and believe it blindly. This article and the information here are to facilitate your decision-making process. By no means, this article suggests you sell off anything.

If you are a long-term investor with monthly SIP’s running in Mutual funds, you should better concentrate on what you are good at in life and keep your SIP’s running. Only traders or short-term investors trying to catch the market movements should take decisions based on the information provided. Also if you are going to invest in markets or mutual funds for 1-3 yrs and are a first-time investor, you should understand that there is a possibility that you do not get much out of markets in returns.

Comments please. Give your comments on the charts above and what do you think should be the next move? Let’s not predict, but prepare ourselves for whatever happens next.

Note : Nifty was at 5526 at the time of publishing this article .