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Monthly Income Plan : A detailed guide on MIP’s

Posted on by Jagoinvestor

Monthly Income Plans– When you hear it for the first time, you get a feeling that it’s some kind of assured and non-risky product that will deliver you uninterrupted monthly income, but it’s not exactly that way. Do you have a lot of cash which you want to park somewhere with the expectation of better returns than a Fixed Deposit? Are you looking for some kind of instrument that will give you regular income with decent returns with moderate or low risk?  If yes, welcome to the world of Monthly Income Plans, which are also known as MIP’s.

Monthly Income Plans

What are Monthly Income Plans?

An MIP is nothing, but a debt-oriented mutual fund that gives you income,  in the form of dividends – simple as that. As MIPs are debt oriented mutual funds, they invest heavily in debt instruments like debentures, corporate bonds, government securities, etc. It generally has 75-80% of its money in debt and rests in equity and cash. The income you can get from MIP is not limited to the monthly option. You can also choose to receive income quarterly, half-yearly or annually. Just like any other mutual fund, the MIP too comes with two options.

1. MIP with Dividend option: MIP’s with dividend option provides you an income in the form of dividends. There is an option to receive this income monthly, quarterly, half-yearly and yearly. So you have to choose the option at the time of buying the MIP. Note that while the dividend from MIPs is tax-free in the hands of investors, the company has to pay a dividend distribution tax of around 14% on the dividend before it reaches your hand. So your returns reduce by that much.

For example, If a company declares a dividend of Rs 3 per unit, they have to pay 42 paise (14%) as a Dividend Distribution Tax and you will only get the remaining amount in your hand , on which you don’t have to pay any tax. I hope you know, that the NAV of your MIP will come down by Rs 3 after the dividend is declared and given to you. So don’t shout your excitement to all the world when you get dividends, it’s just your own money which you got!

2. MIP with Growth Option: Here, the money is not paid out to you in forms of dividends, instead it keeps growing in the mutual funds. Hence your money is just growing inside the fund itself and you can reap all the benefits at the time of redeeming the funds in the future. In this option, you have nothing to do with dividends. Note that you get the power of compounding in growth options because your returns also earn in the future. Here is an article on the difference between dividend vs growth option in mutual funds to give you a better idea of what I am talking about.

Features of Monthly Income Plans

1. Dividends can be declared only from the profits and not from Capital

Regulations demand that dividends can be paid only from surpluses and not from capital investment. What it actually means is that dividends can be declared from earned income only. If your initial NAV was Rs 10 and after a month the NAV rose to Rs 10.2, The dividend can only be given out of this 0.2 and not from the initial capital value. This makes sure that Company can not show to the world that they are constantly giving income in case they have not done well.

2. No guarantee of Regular Income

The biggest myth about Monthly income plans is that they provide guaranteed monthly income, which is not true (See this question asked by Krishna on our Forum).  While the aim of MIPs is to regularly declare dividends, it might happen at times, that they do not declare any dividends because of bad performance. To top that, there is no regulation or oversight on the MIP’s part to declare regular dividends. So take it on the chin, if you don’t get your income once in a while.

3. MIP’s return is influenced by interest rates and stock market

Just because it’s a debt oriented product, It does not mean that they are “safe” . Even MIPs can give a negative return, but in extreme cases.  The debt portion is influenced by interest rates. When the interest rate falls, the NAV rises as the price of bond increases. When the interest rate rises, NAV falls. At such times the equity portion of the fund helps to maintain the return. Here is an article on Interest Rates and how they affect Mutual funds.

4. MIPs are prone to mis-selling because of a high commission structure

MIPs offer lucrative commissions to agents as much as 1-1.5%  unlike 0.5-.75% in Equity funds. Due to this, it becomes easy to missell MIP’s as they can be labeled as “Safe Funds” and “Monthly Income Plans” which Indians like to hear a lot.

“Look what happened after the abolition of entry load in mutual funds in 2009 .  From the last 1 Year, the corpus of MIP schemes have seen a huge inflow all over India. Last year, the total industry AUM was close to Rs. 3700 crore and today it is well over 24500 crore. In this entire period, equity funds AUM have gone down. Now when the intentions itself are not good, needless to say that the outcome will be right. Many investors are not aware that there is an EXIT Load of 1% in almost all MIPs if you were to withdraw before one year & in some cases even 1.5 years.” – says Hemant Beniwal on this Forum post

Taxation of MIP’s

MIP’s are debt funds and hence the taxation is same as debt funds .

Short Term Capital Gains: Any profit before a year would be Short term capital gains and it would be added to your income and taxed at your slab rate. So for investors who are in higher tax slabs it would be wise not to sell their MIP’s (in case they can) before a year, else there will be a good amount of tax on your profits.

Long Term Capital Gains : Any profit you get after 1 yr in MIP would be taxed at 10 per cent without indexation or 20 percent with indexation, whichever is lower.

Short Term and Long term Capital Loss : The best thing about MIP’s over FD’s or Post office schemes is that incase you have any loss in MIP’s , you can set it off against the capital gains in the same year or in next 8 yrs , which makes sure that even losses can be used for tax saving purpose.

Dividends : All the dividends received from the MIP’s would be tax-free in the hands of investors,  but note that companies already pay Dividend distribution tax from the MIP’s

Read more on Short term and long term capital gains

MIP’s save money for bad times

Think about ants! They make sure that they save enough food for the rainy season, so that they don’t fast in bad times. In the same way MIPs do not declare all the earned income as dividends, instead they declare a part of earned income as a dividend and save rest for troubled times in future.

This makes sure that when there are bad days in future and MIPs do not see much growth, they can use the money saved, to declare dividends. For instance, in 2008, despite bad markets, 19 funds skipped only up to four monthly dividends.

However, a lot of MIP’s didn’t perform that well and could not save the part of earned income in a proper way. Hence they had to skip all 12 months dividends. Eg., Canara Robeco MIP Mn Div, which skipped all 12 dividends in 2008 and 9 months dividends in the year 2009. See the chart on the right to get more insight into how MIPS missed their dividends. Source: LiveMint

Beware: There is one more option called dividend reinvestment in MIP’s apart from Dividend payout and growth . If the payable dividend is less than Rs 250, then the dividend would be compulsorily reinvested.

Who should Invest in MIP’s ?

1. Investors looking for regular Income

If you are retired/semi-retired or just looking to generate some regular income can look at MIP’s as an option. Note that instead of choosing a monthly option of income, I would rather suggest a quarterly or half-yearly option .

2. Conservative investors looking for better returns

Are you a conservative investor but still looking for better returns than pure debt options like Fixed deposits or Insurance policies? Well, you can’t get 100% safety with MIP’s, but there are very good chances that you would be getting better than FD returns with MIPs.

3. Investors who want to park a big sum of money

A lot of people have questions like “Where to park my lump sum money for medium-term with lower risk ?” If your horizon is very less – like 6 months or a year, MIP’s might not be the best option, but if you want to park it for 2-3 yrs with low risk, MIPs with growth option can be a suitable instrument .

MIP vs Fixed Deposits/ Fixed Maturity Plans/ POIMS

You might get confused between so many debt products and might be wondering how Monthly Income Plans compare to Fixed Deposits (read this post by Deepak Shenoy) , Post Office Monthly Income Scheme or Fixed Maturity Plans (FMP) . There are various parameters on which they all differ . Below is the chart which shows you those differences .

Monthly Income Plans , Best MIP for Investments

Two ways of getting income from an MIP

We will see two different ways of generating monthly/quarterly income through MIP’s Monthly. One is the regular way of choosing a dividend option and the options one is starting a Systematic Withdrawal Plan from MIP after a year of buying it. Let’s look at both and its pros and cons …

1. Choose dividend option

The good point in this option is that you will start getting the income immediately as the company starts declaring the dividends, and you don’t have to take care of taxation issues. However, the bad side is that eventually 14% dividend distribution tax would be paid by the company and the stability of income will depend on how often dividends are declared by the company. If they skip the dividend you will not be getting the income for that month/quarter.

2. Choosing growth option and start SWP  (Systematic Withdrawal Plan)

If you use a bit of strategy, you can create a more stable and more tax efficient income by this method. You can choose growth option in MIP and after 1 yr you can start a SWP (systematic withdrawal plan , opposite of SIP) from your MIP to your bank account . What will happen with this option is that you will not have to depend on companies dividend announcement , as it’s your decision to liquidate a fixed part of your MIP’s, sell it and get the money in you bank account . Also as you are doing it after 1 yr, there wont be any exit load and the profits you get out of it would be Long term capital gains , so you only pay 10% on the profits (assuming you don’t want indexation benefits), which is 4% lesser than the dividend distribution tax . If you have a large amount of investments in MIPs, then this option can save some tax for you, but if your investments aren’t significant enough, it’s not worth the hassle .

Some best performing MIP’s  in Market

One of the readers Sagar asked his query on our forum: “Which is the best Monthly income plan ?“. While there is no guarantee that the MIP which you choose today will keep performing well always, but I have got a list of MIP’s which have done excellent in past and still look good. You can choose any of these if you are disciplined enough . Once you choose them make sure you concentrate on regularly investing in them without looking at their performance every week or month. Just review them in a year or so . watch out for the expense ratio of the MIP’s, lower the better

Monthly Income Plans , Best MIP for InvestmentsConclusion

So the main takeaway from this article for you should be to understand that MIP’s can be good alternative for you if you have been investing a lot in Fixed Deposits and do not mind taking small amount of risk. Another important point was to look at MIP’s are income-generating products with understanding that sometimes the income can go for a toss in between and you have to comfortable with that.

I would love you hear your comments on monthly income plans and do you feel that it can be helpful in your portfolio , share with us !

A video on 7 Income Tax saving tips you might not know

Posted on by Jagoinvestor

Are you bored of regular income tax-saving tips? Are you looking for some tips which are different, kinda unique and not very well known?

If yes, then you’re reading the right article, mate! I will share some tips which would help you in the area of income tax saving. Some of these tips will help you in this, current year and some, at some later point. But helpful at some level, they will be:). Below is a video on this topic where I explain those 7 tips.

In case you don’t want to watch the video, you can just skip it and move forward to read the tips in the text. Let’s look at them. If you are reading this article on email, you can watch the video on Youtube here

7 income tax-saving tips

1. Gift money to your major children and Save tax on Future Income

Imagine this, you have Rs 25 lacs. Logically you put this in a fixed deposit or invest in some other financial product through which you get an interest at 8%. You will get Rs 2  lacs as interest which will be added to your income and you pay tax on this income. Not good!

Now what? How do we save tax on these 2 lacs? As per income-tax laws, you can gift any amount of money to your major children without attracting gift-tax and as their money will become theirs any income arising out of it would be treated as their income, not yours. In case their income is below the limits, there won’t be any tax.

However, there can be times, where you might not feel too comfortable gifting away large amounts of money to your major children, in which case, there is another option of giving them loans. And guess what? you can make interest-free loans to your major children as per the law.

Please note that doing exactly the same thing with your spouse is not possible. Any income you transfer to your spouse which generates any income will be treated as your income only. However, if you are going to be married in some months and you have some big amount of cash, you can gift her right away, as a gift given to prospective wives would become hers lawfully.

I hope you liked this first point on income tax-saving tips

2. Claim stamp duty and registration fees in 80C

Many people dont know this, but the Stamp duty and the registration fees of the documents for the house can be claimed as deduction under section 80C in the year of purchase of the house. An important point to note here is that you should be in possession of the house if you want to claim these deductions.

So in case of under-construction properties, you lose out on claiming this deduction. As per the income tax

The stamp duty, registration fee and other expenses incurred for the purpose of transfer shall also be covered.

Payment towards the cost of house property, however, will not include, admission fee or cost of share or initial deposit or the cost of any addition or alteration to, or, renovation or repair of the house property which is carried out after the issue of the completion certificate by competent authority, or after the occupation of the house by the assessee or after it has been let out.

Payments towards any expenditure in respect of which the deduction is allowable under the provisions of section 24 of the Income-tax Act will also not be included in payments towards the cost of purchase or construction of a house property.

3. Get deduction for rent even without HRA

Do you get HRA

All the salaried class people get HRA from their companies, and hence they claim deductions on that. However, what if you are a self-employed professional or working for a company that does not provide you HRA benefits? Can you still claim HRA? Yes! But with some caveats.

Under Section 80GG, you can claim a deduction of the rent paid even if you don’t get HRA. However, not many people are aware of this deduction. If you are not being paid any HRA or don’t have any housing benefits from the employer. You can claim least of following 3 things as HRA

a) Rent paid less 10% of total income

b) or Rs 2,000 a month;

c) or 25% of total income.

Note that your spouse or minor child should not own any house with the city limit if you want to claim this benefit, You will have to submit a form called 10-BA that you are paying rent and not receiving HRA.

Bonus tip : If you are staying with your parents, you can pay them rent. If they don’t have
 significant income, it would mean you  save  tax on rent paid and even your parents income does
 not cross the  tax  limits, which is a win-win situation.

4. Declare your losses in a tax return to save tax in future

A lot of people do not show their losses in shares, mutual funds, gold ETFs, real-estate in their tax returns. This is a big mistake, as you lose an opportunity to save tax in future years. You can set-off your losses against profits in the current year as well as in the future too.

For example: Assume you had sold your real-estate property and made a profit of 10 lacs after indexation. You will have to pay a tax of Rs 2 lacs @20%. However suppose in the same year you have also made a loss of Rs 4 lacs in stocks, you can set-off this loss with your 10 lacs profit and just pay tax on Rs 6 lacs, which comes at 1.2 lacs only. That’s a cool 80k in savings!

Also if you have only losses this year and no profits, you can show this loss in your tax returns and carry forward and set-off this loss against any future profits for the next 8 yrs. For more details read this article.

5. Buy House with Parent or Siblings as joint-owners

Yes, if you thought only spouse can be co-owner in the real-estate property to claim the tax deductions, you don’t know the whole story.

You can have your spouse/parent/siblings as co-owner and all the co-owners can claims the tax deductions of 1 lacs for principal and 1.5 lacs for interest part. So if you take a housing loan with your siblings as co-owner of property and co-Borrower of loan, the loan amount interest and principle paid will be available for tax exemption in the ratio of your loan amount.

So if you are still a bachelor or a single who wants to buy a house, consider asking your brother, sister or parents to become the co-owner so that both of you can get tax benefits and reduce your tax outgo.

The only problem, in this case, is that loan-sanctioning companies are very stringent in giving loans to siblings, as there are higher chances of you parting your ways with them later in case of any family issues, however, in case of a spouse it happens lesser.

Bonus Tip : The co-owner who falls in the higher tax bracket should  hold a higher proportion
of home loan to make sure that the tax  benefits are maximised.

Income Tax saving tips

6. Use education loan to lower tax for your Children in Future

So what, if you have all the money to pay for your children’s education fees? It would be wise to opt for an education loan in the name of your children’s name as you can claim the full interest paid on education loan under section 80E. Note that it’s only is available if you are a parent or a legal guardian .

You can’t claim a deduction for your spouse education loan 🙂

The other thing is that you can take an education loan on your children’s name so that after some years when they pay off their loans, they can claim the deductions themselves. Apart from this, they’d be more responsible and this education loan payment from their pocket will make sure that they don’t spend too much money in the wrong places and you can use your money today somewhere else!

7. Take unlimited deductions for your second home loan interest payment

This one is the last tax-saving tips we will discuss here. If you have already bought a first home where you are living right now and want to buy another house, the good news is that you can claim full interest paid for the EMIs of the second house. As per tax laws, you can claim full deductions for the amount paid as interest on the loan for the second house.

For the first house you can claim up to 1.5 lacs in interest, however for your second house you can claim the full amount of interest without any upper limit. Read some tips on buying real-estate

Which of the above income tax saving tips were new for you? Please comment.

Why every investor should create a Personal Finance blackbox ?

Posted on by Jagoinvestor

How many different types of information, do you have stored in your head, relating to your financial life? Your PAN? Your policy details and where they are stored? That fixed deposit, which you opened up some years back? Maybe, you’ve kept the documents in the top cabinet of the red almirah, but no one has any clue about it! And if someday, God forbid, you die suddenly, and your family needs information in a hurry, where do they look? Where do they go? Yeah, eventually, they will figure it all out, but only after a whole lot of time wasted (weeks, months, even a year!) and a lot of heartburn! Why not create a better situation for them ?

Personal finance emergency kit

How about spending a few hours to make an emergency kit which has all the info, they might need at any point of time, so that they don’t have to get frustrated every time, they figure each investment / insurance policy, home legacy? Isn’t that a great idea? Here’s an example. Just to find out how to get the insurance claim settled, they have to start from scratch. They will start enquiring with others, search the internet (if they know how), and various other means. They might not have a clue that whom to contact and what options they have. Won’t it be the better, if they can find everything directly from you? TODAY? The kit is a kind of ready-to-use first aid box, only it relates to your overall financial life. Handy dandy for your family, if you’re disabled or immobilized or… dead! What normally, would take many months for them to find out – by playing connect the dots – can be given to them before hand, ready made & beautifully packaged! 🙂 This might seem embarrassing to many, but bluntly out, you choose!. Minor shyness / embarrassment now, or huge problems & inconveniences to your family later. Note that this whole emergency kit making will not help you today much, but a lot to your family at some later stage, read this article

What all details you can have in that kit?

  • Important Details of your life
  • List of important documents and their locations, eg.,  Passport, Driving licence,  PAN etc.
  • Important instructions for them to carry out, once you are dead. Eg., insurance claim process, steps to selling off some property, claiming the bank account, investments etc.
  • Important contacts, like the CA , lawyer, your stock broker and their details.
  • List of all assets and liabilities you have
  • All your investment and bank details

Following is the sample of how you can store that information in a tabular form.Personal Finance Documents for emergency

Who should make this kind of Document ?

If your spouse and parents are financially literate and are from this generation who surf internet, know how to find out information somehow, you won’t fully appreciate the beauty of this whole exercise. I’ll bet my hat however, that that isn’t the case :). Most of the spouse do not take much interest in these financial matters . Ergo, you can see, how important this document can be for your family! This can turn out to be one of the best gifts you ever make them.

Ideally, you should make your spouse aware of this. However many wives/parents don’t want to hear about death and deliberately don’t pay attention. This document is especially for those situation.  We must print it out and give one copy each to wife and one to your most trusted friend or relative. Also you can have this document stored in a Bank locker and tell a trusted friend about this fact that there is a location which has all the information which your family might need some day.

Important Instructions in the Document

Make sure, you mention all the things which you wish your spouse/parents/children to do or carry out.

It can be things like

1. Life Insurance claim procedure

Give them detailed instructions on what they should do to claim your Insurance amount from the Life Insurance company. It can start from contacting the agent, filling up the forms, making sure all the documents are in place, constant follow-up with company etc.

2. How to use your life Insurance money for future


Once they get money from your Life Insurance, suggest how they can channelise it into different instruments based on their understanding, risk-taking capability and the amount of ease you want them to have in dealing with those.

3. How to Break FD’s or redeem Mutual funds in case of emergencies

Put some details in, on how they can break the FDs or redeem the mutual funds, in your name, in case of emergencies.

Sample of an Instruction for Life Insurance Claim

Ajay has taken Amulya Jeevan Term Insurance policy for Rs 50 lacs cover. Ajay lives in Mumbai . He would write something like this.

Steps you should follow for claiming the Life Insurance cover money in case of my death.

I have a life insurance policy “Amulya Jeevan” with Sum assured of Rs 50,00,000. In case of my death, you should follow this procedure.

  1. Meet our Agent named Mr. Funsuk Bangdu and ask him for the claim settlement forms , incase he is not able to give it to you , you can download it from LIC website
  2. You should make sure you also have original policy document which I have kept at ________ .
  3. Make sure you have you proof of title like PAN , Driving Licence etc AND marriage certificate copy .
  4. Make sure you have taken my death certificate from ____________ which will act like my proof of death , this is Important ! .
  5. Incase I die in accident, also have a proof of accident, this you can get from police station or hospital.
  6. I have stored all the Medical treatment at ___________ , also keep with you just incase its required.
  7. Incase LIC asks for my employer’s certificate, I have kept it at __________ or you can also ask my friend Robert who works with me and can help you on this , See this article to understand how someone you trust can help you .
  8. Incase you face any issue in getting claim settlement, take help of Ombudsman whose address is as follows .

Shri S Viswanathan

Insurance Ombudsman, Office of the Insurance Ombudsman,

3rd Floor, Jeevan Seva Annexe,S.V. Road, Santacruz(W),

MUMBAI-400 054. Tel : 022-26106928, Fax : 022-26106052
Email :  [email protected]

Note : Worst case scenario — try to get help at jagoinvestor.com or contact Moneylife.com who can help you further in this regard!

This was just an example! You too, can mention detailed instructions for key things, which you feel can create issues for your family or where you feel they might get stuck because of lack of knowledge .

Download a Template

Now, this whole kit & caboodle won’t take more than a day, and it’ll be extremely helpful to your family and loved ones. And, to save your time and as my small New Years gift to you, I have created a template for you, to use 🙂 Just download it in any format (pdf , doc or image ) and fill it up .

Take Action today! Unless you take action, reading this article is worthless!. Share what you feel about this idea of creating a master document which would help your family in case of crisis. Do you want to add some more points which you feel i have left out? How much value do you feel one will add to his/her financial life by doing this? And aah… one more thing. Don’t forget to update this document every year 🙂

Bonus : Do you want to look at how our questions and answers Forum is helping VidyaSagar take his frist steps in personal finance ?

What is mean by Instant Gratification? And how does it affects your Financial Life?

Posted on by Jagoinvestor

Do you understand the meaning of Instant gratification and its affect on your financial life ? We will learn that today. How did we become a generation that “wants things now!” no matter what?

Think about this – both, our parents generation and ours, save , invest and spend. What then, is the difference between them and us? It’s mainly that they used to first earn money, save & invest that money and then spend it on things they needed.

They got ‘delayed gratification’; this quality of waiting before they are able to buy. However, we have reversed the equation. We first buy, and then pay for it later; without having a clue if we will be able to earn that money in the future or not!

And that’s is where the problem lies — Once we buy something, the deal is done! Then we have to live with it because we can’t change our minds about it later.

Instant Gratification in Personal Finance

We love ‘the thing!’ &  We need ‘the thing!’ . Our life is not complete / not possible without ‘the thing!’ . ‘The thing!’ can be a home (debate on buying ve renting), a car, some household item, the latest gadget  or 3 pairs of jeans from the big Sale!

I’m not talking about the planned and carefully thought out spending we do in life, rather I’m referring to the spending which ‘just happens’, the spending that does not add much value to our lives. Even if it adds any value, it’s mostly short-lived and makes us feel happy for just a while.

This ultimately, weakens our financial life, since we do not concentrate on our major and important financial goals, chasing the smaller and futile wants in life. A lot of this phenomena is result of the impulse called “Instant gratification!” which is what, we will look at in this article.

It’s important to realize, that the more we give in to Instant Gratification, the more we sink into the dal-dal of debt & misery. Sooner or later we’re in upto our neck and it gets too late to fix things. The biggest example of this was the recent sub-prime crisis in the US. “BUY NOW! Pay later” was the attitude!

Let me tell you a short story to give you an idea of what I am talking about.

Two small children Anita and Ramesh, lived in a small village with their parents. Their father gave Rs 5 to each of them to eat a watermelon. Both of them visited a  farm and asked the farm owner for a large watermelon.

“A big one will cost Rs 20 and a small one would cost Rs 5”, said the farm owner pointing to the watermelons in the field. With the irresistible urge of having the sweet and juicy fruit, Ramesh bought the smaller watermelon and started eating it. Anita however, wanted the big watermelon.

“OK, I too will buy a smaller watermelon”, she told the owner. “But can you please leave my watermelon in the field itself, I will be back in a month and take it at that time!” The little girl knew that her patience would be rewarded. By waiting one month, she could have a big, ripe watermelon for the price of a little green one. She got the bigger fruit, because she controlled her “Instant gratification” and waited patiently!

What is Instant Gratification ?

instant gratification

Instant Gratification is the habit, of always wanting to enjoy now, and not having the patience to wait for future benefits (an experiment). Anything which gives us temporary happiness or excitement, but is not actually a good thing for your life, can be put in this category.

For example…

  • When you sleep till late in morning and do not take pain of getting up and exercising.
  • You eat those unlimited sweets in your office cafeteria.
  • When you eat that burger with EXTRA cheese !

These were some examples to just give you an idea about what Instant Gratification is, – mainly concentrating on the immediate result and not thinking about its outcome in future or how it will affect us later in life.

If you can control yourself and concentrate on “delayed gratification” , your life can change! like anything , But we just are not bothered about it and do not have motivation.  Do you know why this is? Let me be straight & blunt! The challenge is that most of us do not have to face life or death situations, or seek food and shelter and defend our territory everyday anymore ! (like these people)

The result, is that we can’t see the impact of our spending in the future. Think about a poor person who struggles daily for food. If he has to spend Rs 100 on something, how will he think? If you offer him a burger, he will instead ask for the same amount in cash, because he knows that the money will help him get food for next 3 days.

He’s not focused on taste in this case.

We however, are privileged, blessed even. If something bad happens once in a while, our next meal or next place to sleep isn’t in danger. Hence some of us have just lost that attitude of looking at things without instant gratification . If you have seen bad times in your life financially, you will know, what I am talking about.

6 Examples of How Instant Gratification affects our Financial Life

Many a time, what we do in our financial life makes our future, dismal and weak, and we have no idea about it. We aren’t even aware!

#1 Not surrendering Endowment/ULIPs

This one is my favorite. “What should I do with my Policy? Should I Surrender it or make it Paid up?”  is one of the top most queries I come across. It feels bad, accepting and acknowledging that you’ve made a mistake, and it hurts psychologically when you lose by not continuing the policy. But what is the effect, long-term?

You still continue paying huge premiums and it earns you very, very little.

So you don’t take any decision on your junk policies, ergo you do not have to face a tough situation! It’s Instant gratification in a way! But for your own good though, you should take action and take that loss now because right now it’s a whole lot smaller than if you stick with the policy and try to quit later!

#2 Keep losing Shares and selling your winners

Have you ever bought a share which gave you instant profits? What was your reaction? Most of the people want to sell it off and take that profit right now, otherwise the profits can vanish! But what happens in most of the cases?

The same stock or portfolio gives huge returns in future if it was left untouched and that feeling of instant happiness is so powerful sometimes that so many can’t control it. It also happens, if one does not have proper understanding of how equity works.

Many people who understand also fall for instant gratification though!

In the same way, you might be holding some stocks which is not performing well, but instead of getting rid of it and investing in better stocks, we keep on holding on to the loser in the hope that some day it will go up! (Read 5 mistakes I did in my first stock investment).

It’s another case of instant gratification as you seek temporary comfort. You  don’t taking the tough decision of selling the loser, because the moment you sell it, it gives you a feeling of loss, but if you just keep it as it is, it’s a case of “I still have some hope !” Don’t do it!

3# Getting into wrong products for Tax saving

When we talk to lot of our paid clients on why they bought the Endowment/Moneyback policies or even ULIPs, the only reason turns out to be “Tax Saving”. Millions of people, get into the wrong products which they don’t need, & don’t understand, has no power to meet their financial goals in future, just to save tax!

I some times feel how much tax saving one does! If one invests with a premium of Rs 50,000 in a ULIP for instance, and if that person is in the 30% tax bracket, he will save 15,000 in tax. But if that was a ULIP with 50% premium allocation charges (as so often happens), 25,000 is lost the moment you sign the documents!

So you save 15k and lose 25k as charges! And yet,these are the same people who say “20k for a financial planner—too costly!” 🙂

#4 Not Paying a Financial Planner or a counselor

Now you know what stops you from paying for advice? Do you immediately get any instant results from advice which you can see? Does your portfolio return suddenly become higher than earlier? Do you immediately see the results which you wanted in your financial life ? No !

And that’s the reason most of the people are not excited about it . But now you would realize that, if years before you had paid some adviser and taken right advice, you could have saved a lot by not getting into wrong products , you might have got better results or same results with lesser risk than what you have got at without right advice!

The benefits of financial planning are always “delayed” as the planning will show the results years later.

We get a lot of inquiries for our paid services from readers who want more personalized service and paid guidance from us. We talk to them and they are very excited when they hear how their financial lives will get transformed working with us, however when we talk about the fee part, some of them just don’t come back!

Price is not a barrier for them as they are well earning, but the problem lies somewhere else which even they are not aware of, and that’s Instant gratification!. They can’t see the immediate results from it and hence they choose to live with their messed up financial lives instead of getting out of it.

I am sure they will lose 10 times more than what they tried to save in fees by not have proper advice over the next couple of years. What do you think ?

#5 Shopping for things you don’t need

How many times, have you bought things which you don’t need? But you still buy it, because it feels good! For example, you might buy another jazzy mobile phone even though your current phone is working well. You buy a nice new shirt – It was on display, which can be your 24th shirt but you actually don’t need it.

Women know very well what I am talking about here and if you are married, even you know what I am saying 🙂

Most of the instant gratification happens at “Sale”. Resist Sales. Sales tend to our minds into buying more than we need. We start justifying to ourselves, that we really do. If the “Sale” decides what you need in your life, then there is a problem!

6# Spending due to Peer Pressure

Suppose there was no one in this world except you and your family, would your life still be same ? I am sure not! People around us affect our mind and make us feel that we are lagging behind. If they buy House or car , we start feeling the need for it. Peer pressure is one of the top reasons why people spend a lot of money.

You are persuaded to join or pay for an activity that your friends are participating in. Whether you are interested or not, you go with the flow because they tell you to. There are occasions where you have to join them and you should!

But not always, and not in everything.

Develop a “Need Mentality” to save your self from Instant Gratification

Here are 3 solutions which can help you reduce or avoid instant gratification in your financial life.

Do your Financial Planning :

You should do your financial planning and have a full plan on how you will invest your money for your future financial goals. Once your Insurance, child related goals and retirement are planned, you will have to commit the investment for these goals which are more important in life than other things which come along the way .

You will be more responsible and think twice before you spend on other unimportant things.

Slow down :

Don’t be impulsive, whenever you have to spend your money on anything, call some family member and tell them 4-5 reasons why it’s a good investment and is worth buying for, tell them enough reasons why it makes sense to buy it. If you are able to pass this process, then you can buy it else, reconsider.

What happens when you do this, is that you slow down and take a logical approach in deciding if you really want to want something. Let me give you a personal example. I recently did this for myself, when I wanted to buy a high-end Nokia phone.

I started counted the reasons why I should buy it and how it will add value to my life, I was very convinced that it’s an important and a valid expense for me.

Try to pay cash for your purchases :

When we don’t feel bad about paying, we tend to buy unimportant things and credit card is the main culprit here.  You buy and you swipe your card, you don’t see the cash going out, so at the end you just make a single payment. It don’t hurt much.

Try paying with cash, and when every time you see those cash notes go out, you become more concerned and more logical in thinking about your expenses.

Instant Gratification in Personal Finance

Other area’s in Life which where Instant Gratification affects us

Some other areas in life which we mess up are Education , Marriage and Career .

Education:

If you have seen “3 idiots” and “Tare Zameen Par”, you will understand better what I want to say here.  Lot of people do not carefully plan their education. There are many people who have pursued something which looked easier to complete or seems to be paying well without understanding, if it aligns with their liking or not and thereafter suffer all life.

Marriage :

Marriage is another thing where people mess-up due to instant gratification. There are many couples, who are not happy after few years of marriage, because the whole situation didn’t turn out the way they imagined.

A lot of times people judge their partners within hours or few days of meeting them, where they like them a lot because they are handsome of beautiful , have lot of wealth, things which impress them at first. I am in no way saying that only love marriages are successful because they are NOT !

It’s the same case some times with love marriages too . The only point I am making is that even in marriages , their is this thing called Instant gratification which creates issues for many people.

Career :

Career is directly linked to Education, so if you mess up your education, you’ll certainly botch your career. But even after people do their education correctly, many mess up while choosing their jobs.

When I completed post graduation, many of my friends went for companies while showed the highest CTC, were the best known companies in IT, but they are shedding tears of blood now as they can’t see any growth for themselves after a point or it’s not something they really wanted to do in their jobs.

However some people who controlled their emotions and planned to choose their companies considering the work they will do there are very happy and excelling now. So don’t just see what makes you happy right now, see what will make you happy all life.

Conclusion

The whole point here, is that we don’t think much about long-term aspects of our spending and hence make bad investments and mess up our financial lives.  Instead, we should use Instant gratification in our favor. One way we can do it is start SIP’s for your Financial goals now, and take action. Get a financial Planner and pay him to give you best advice and transform your financial life.

As 2010 is about to end now, dont let this year go waste as you learned a lot of stuff this year . Start your new year with some commitments and resolutions for 2011 which you will honor and not just write down !.

Share your comments if you’re a victim of “Instant gratification” at any point in your life? Also share how we can use this Instant gratification in our favor ?

At the end wishing you all Happy New Year .

Term Insurance Plans – 20 different policies compared with charts !

Posted on by Jagoinvestor

Which is the best term insurance plan in India ? Which Insurance company has the best claim settlement Ratio? Should you buy online or offline plans ? These are some of the questions which comes in the mind of every insurance buyer! .

So are you looking for Term Insurance comparison at one place ? Do you have all the sufficient information to decide which is the best term plan you can buy? Today I will show you all the data like riders, maximum/minimum tenure, max age till when these plans covers a person and data on the premium, Claim settlement Ratio at one place! .

Best Term Insurance plans in India – A comparison List

There are many term insurance plans in India, but all of them have different premiums and features which confuses a prospective customer to choose the best term plan for him. Below is a table which shows most of the policies name along with their premiums. But before that, make sure you fully understand what is a term insurance plan ? Better read the 9 most asked questions about Term Insurance before you move ahead.

Company Name Policy Name Mode Riders Available Premium
(1 crore SA)
Aegon Religare iTerm Online Yes 7,300
Bharti Axa e-Protect Online No 7,300
Aviva i-Life Online No 7,368
HDFC Life Click2Protect Online No 10600
Kotak e-Preffered Online No 10825
Edelweiss Tokio Life Protection Plan Online Yes 11,500
Metlife Met-Protect Online No 11,600
ING Vyasa My Term Insurance Offline NA 11,891
ICICI Prudential i-Care Online Yes 13000
DLF Pramerica U-Protect Online Yes 13,400
SBI life Smart Shield Offline Yes 16,798
Bajaj Allianz iSecure Online Yes 18400
Max NewYork Platinum Protect Offline Yes 23,500
IDBI Fedral Termassurance Online No 25,350
LIC Amulya Jeevan Offline No 33,600
Future Generali Smart Life Online No NA
Birla Sun Life Protector Plus Offline Yes NA
Tata Aig Maha Raksha NA NA NA
Reliance Term Insurance Offline NA NA
Canara HSBC Life Pure NA NA NA
India First AnyTime Plan Online NA NA
Sahara Life Insurance Kavach NA NA NA
Star-Union Dai-ichi Term Plan NA NA NA

Note : The premiums above are for 30 yrs old non-smoking male, and 30 yrs policy tenure. The premium quoted is for Rs 1 crore sum assured and does not include service tax. The premiums displayed were taken from respective life insurance companies websites and should be treated as indicative premiums.

Brief overview of Riders

Most of the term plans also allow riders along with their plans. Riders are nothing but additional benefits which you can take by paying some extra premium. Lets see some of the riders and what they mean. A term insurance plan might be offering some of the riders mentioned below.

AD (Accidental Death) : The policy pays you additional sum assured in case the death happens due to an accident . Note that even if you don’t take this rider, the sum assured is always paid on death, whether accidental or not !.

CI (Critical Illness) : This rider gives you a lump sum amount if you are diagnosed with an illness which is mentioned in the policy . Generally all the major illnesses are covered in Critical Illness cover.

DR (Accidental Disability Rider) : This rider covers you for disability and pays you Sum assured in 10 installments per year  incase you becomes temporary or permanent disabled person.

WP (Waiver of Premium) : This rider makes sure that incase you are not able to pay future premium due to disability or income loss, the future premiums are waived off , but your policy is still in force like always !

Claim settlement Ratio of Life Insurance Companies

While deciding on a term insurance plan, the biggest point which a person concentrates is the Claim settlement ratio (read this comment) . Claim Settlement ratio of a company tells you that how many policies were settled by paying back the claims in case of death. However note that these numbers are not for pure term plans, but for any kind of policies.

Solvency Ratio of a Life Insurance Company

Another small things to look in a life insurance company is Solvency Ratio. It indicates how solvent a company is, or how prepared it is to meet unforeseen exigencies. It is the extra capital that an insurance company is required to hold to meet all the claims which arise . In other words , Solvency margin refers to the excess amount of asset the insurance company has to maintain over its liabilities. Basically, it is the amount the insurer has to stash away in order to pay the claims during emergency. IRDA requires the insurance companies to maintain a particular level of solvency margin for their smooth functioning

Below is the Table and a Chart showing Claim Settlement Ratio and Solvency Ratio of all the insurance insurance company in India. The data is taken from 2011-2012 IRDA annual Report.

Company Name Claim Settlement Ratio (2011-12) Solvency Ratio
LIC 97.4% 1.54
ICICI Prudential 96.5% 3.27
HDFC Life 96.2% 1.72
SBI life 95.5% 2.04
Kotak 92.1% 2.67
Birla Sun Life 90.9% 2.89
Bajaj Allianz 90.6% 2.86
Max NewYork 89.8% 3.65
Aviva 89.6% 5.4
ING Vyasa 88.8% 3
Bharti Axa 87.7% 2.14
Star-Union Dai-ichi 86.2% 6.7
Reliance 84.6% 1.66
Tata Aig 83.9% 2.16
India First 82.2% 6.36
Metlife 81.4% 1.69
Canara HSBC 80.6% 3.07
Sahara Life Insurance 78.0% 4.82
Future Generali 68.1% 2.21
IDBI Fedral 67.5% 6.6
Aegon Religare 66.1% 3.22
DLF Pramerica 24.5% 2.53
Edelweiss Tokio 100% (Just 1 policy) NA

Claim settlement ratio of Life insurance companies in india

Term Insurance – Online vs Offline

With online term insurance plans coming in market, two things has happened. First, Customers have really got excited seeing very low premiums which insure them at throw away prices, however low premiums does not appear on the top wish list of customers and what everyone needs is very high claim settlement ratio and excellent customer service. This is where online term policies have disappointed customers, there has been huge disappointment from ICICI iCare and Aegon Religare iTerm Plan in terms of customer service. There have been cases where customers bought an online policy and after that, they had horrifying experiences starting from increase of premium once they bought it, No-response from the company for long duration and Long & frustrating delays in medical tests. This is what pisses off customers most and they get a feel that If situation is bad at the time of buying the policy, then what will be the response when their families for claim settlement .

Another important point which comes to a persons mind is Are private Insurance companies safe ? and what is the claim settlement ratio of the company. From last year IRDA report, we came to know that Aegon Religare did not settle even a single claim out of total 7-8 claims they got . However, this years IRDA report (2009-2010) shows that its better at 48% settlement ratio for Aegon Religare, but Life Insurance is not a maths exam where 90-91% marks will make people happy. We all need 100% or 99% at least !. Because most of the companies are very new, the trust factor is missing from public. Note that not everyone who bought term insurance policies had bad experience, there are many buyers who got very good response and good customer service, but it was a smaller section .

So if you a kind of buyer who understand Insurance very well and how things work in this area and you also have trust in online term plans then you can go for online plans. But if you are not comfortable with it, then you should try the old way of buying insurance through an agent. However it would cost more than online plan, which many are comfortable with! .

If you concentrate on the claim settlement and trust factor then the only option is LIC of India Term Insurance (Jeevan Amulya). However if you are fine with the pvt Insurance, but still want the best features, I personally see Kotak-preferred Plan as a good option. The premium for Kotak-preferred is the lowest in the offline term plans and this plan has good riders along with other good options.

Term insurance plan from LIC is obviously the best option if you do not believe in the pvt companies and insist on high claim ratio, but premium for LIC term policy is too high . So I think you can consider a mix of the LIC term insurance and any one from Pvt insurer. Soon you will also see LIC online term plan

Special Features in Some Term Insurance Policies

There are some policies with very different set of features. Lets have a look at some of the those. These features can help you further in your decision.Term Insurance policy features

Which online term plan do you have currently and incase you planning to have one, which one those the above will you buy ? Will it be LIC Term Insurance or some one else and why ? Also share, If you need any other factor before choosing the term plan ?

3 categories of Investors, which one are you?

Posted on by Jagoinvestor

Suppose you have 3 buckets, and you have to put each kind of investor into those buckets!. What would be the criteria you will use?

In my experience of dealing with hundreds of readers and dozens of clients till date, I can categorize them in a very interesting manner which shows their knowledge and attitude towards personal finance. I call it “I know” or “I don’t know” model. If you look at all kind of investors, at a broader level, you can put them in 3 categories.

Lets see each of them and you can identify which one you fit in.

Categories of Investors

1. I know that I don’t know

The first category of investors is very basic and large in number. They are not very much familiar to personal finance concepts and how to manage their financial lives and mostly they have no idea on how good or bad their financial lives are.

These people are mostly careless in this area and don’t give sufficient time to manage their financial life. They take it as it comes. Many a times they are great in their respective fields, may be one of the best performers and very smart in what they do, but when it comes to personal finance or managing their own money, they are clueless.

People in this category are aware about the fact that they are not good at personal finance and they need assistance when it comes to recommendations, calculations or any kind of basic planning in area of money. They are lost in this overloaded world of information.

Who falls under this category?

Most of the salaried class people fall in this category. Software engineers, doctors, media personals, defense-personals and even self-employed. At times people related to finance like CA, CS, MBA finance also fall in this category!

Whats common in each of them is that they are modest enough to realize and accept that they don’t know. If you ask them simple question like “Does term insurance make sense compared to Endowment Policies ?” (read this and this), they would be very confused and might not come to a strong conclusion on their own. They will not have much idea on how to start.

Anyways, the point is not whether they know how to do it or they don’t, the point is, if they are aware about this fact that they know or they don’t!

People in this category get mis-sold by agents and often take wrong decisions because of tricks applied by marketers and often they feel that the other person is smarter and knows better than them. That’s the reason they fall prey. Most of the readers here I think would be falling in this category and they are constantly trying to shift to the 3rd category which we will discuss !

2. I don’t know that I don’t know

This is an interesting category. Just like first category, even people in this category don’t have much idea or have wrong concepts in area of money, But the main difference in this category is that they are not ready to accept the fact that they do not know things, but they feel that they know enough, and live in their own world with their own understanding which  in reality is incorrect.

They have their own way of looking at things and suffer a lot in their financial life because they have no idea what they are doing. They are actually not very smart in personal finance, but they “feel” that they are.

Finance is just some math’s and number’s game

Ironically, some of these people are very smart and intelligent in other areas of life. So much, that intelligence now comes on the way to their financial life. They assume that they know everything very well and are not open to listen to other views and learn from that.

They consider personal finance as something which they can excel easily, just because they have been successful in other things in life. After all its just some maths and numbers game, as they feel so ! . Interestingly not just investors but lot of agents and advisors also fall in this category. A lot of misselling which happens is accidental at times and not intentional. These agents/advisors do not have any idea that they are actually misselling.

They do it thinking that they are doing a great job. They themselves are not aware that they have missold accidentally, believing in what they were told in their sales-meetings.

Let me give you a personal example:

I used to talk a lot about Insurance commission and how insurance agents make huge commissions compared to Mutual funds. At that time I was not aware of the fact that mutual funds commissions are paid on AUM basis.

argument on insurance and MF AUM commission

I used to make my own theories based on calculations for some hypothetical examples. Even I use to argue with many Insurance agents on the commissions structure, some of them told me that even mutual f‌unds have high commissions, but I used to think that they are referring to the high ticket transactions only, and trying to cover themselves.

I was in this category because at that time I was not accepting that even mutual funds have AUM linked commissions and I used to just argue with them based on my ignorance. So I didn’t knew some important information and I didn’t knew that I don’t know.

In the same way, people in this category do not have proper understanding of basics, but instead of accepting it, they have some other kind of knowledge or wrong knowledge and notions and based on that they mess up their financial life.

3. I know that I know

Last section but a very small one is of people who understand truly what they say and suggest in personal finance. If you ask them some question, they would be very confident in what they tell you. This comes from the confidence, which is result of experience and deep self-learning in personal finance.

These people use their mathematical and analytical ability to understand what is right and wrong. You can find many of these people on this blog and our helpline Forum :). A lot of people from “I know that I don’t know” category get promoted to “I know that I know” in some months or years.

An experiment:

Try this!. If you ask a question like “Does term insurance make sense compared to Endowment Policies ?” to these people, they would eventually come out with the right answer even if they do not know.

They would not need any guidance or very little guidance and they would take this kind of problem as a pure logic based comparison questions and will try to compare both term plan and endowment plan from different points and would come up with a conclusion that Term insurance is the best way of Insuring one’s life and it makes sense to invest the rest money in some other product.

Also, if you don’t tell them how much return one can expect in long run, they would still find out somehow how to look at historical returns and equity is less-risky in long run ! . They are like a new-born baby who was not told anything, but they just start doing what needs to be done somehow.

What category are you in and What should you do ?

Which ever category you belong to, your final goal should be to get into 3rd category where you are aware of everything yourself and you can guide even others.

To eventually reach 3rd category, you have to do just one thing, whenever you are in conversation or debate with anyone, have an open mind of discussion and be open to accept that you can be wrong and might not have some information. Be ready to learn things from other person. With time you will slowly reach 3rd category .

These 3 categories are not just for personal finance, you can categories people in these categories for any area of life and solution to reach 3rd category is still same what I suggested above. Do you think there can be other categories than these 3 discussed above ?

Which category are you in currently ?

Did you shift from one category to other by reading this blog ? Share ! . Also have a look at these unansweed questions on forum Incase you can help in answering them. And if you are wondering why there is less activity on comments section, I am on vacation for your info !

Personal Finance doubts and their answers on Forum

Posted on by Jagoinvestor

Even if you are not participating on discussions at our questions and answers forum, I want to make sure you do not lose out of the valuable things  members are asking and all the valuable learnings which come out by participation of other members.

There has been discussions on variety of topics like Real-Estate , Insurance, Financial-planning, Stocks,  mutual-funds and general finance in day-to-day life. In this post I have just picked a handful of learnings and valuable parts from here and there on forum. Personal Finance doubts

Which small city looks most promising for real estate investment ? (Link)

Members gave some suggestions, but the two cities which were mainly recommended were Ujjain and Gaziabad . Ujjain was recommended because Govt has started Projects of Rs. 1600 Crores due to Next Kumbh after 4 years ) and Ghaziabad (Indirapuram, NH 58 & Vaishali) was recommended as its near to overpriced Delhi & Noida and Metro line will be extended soon. Other suggestions were Indore, Raipur and Hosur .

What is meant by Company’s book value ? (Link)

In simple terms, a company’s book value tells you how much money would be left for shareholders after selling all its assets and pay off all its liabilities at the particular point of time.

Book value = (Total assets-Intangible assets) – Total liabilities

1. Subtract the reported value of the company’s intangible assets from the value of the company’s total assets. Intangible assets are things like trademarks and patents, which are difficult to value. The valuation of intangible assets is highly subjective, so just exclude them from your calculation.

2. Then Subtract the value of the company’s total liabilities from the value of the company’s total assets less intangible assets. The resulting figure is the company’s book value

What is NCD (Non convertible debentures) ? (Link)

“NCD” is “Non Convertible Debenture” issued by corporates. This is fixed income instrument. NCD provides fixed return just like FD interest. Duration of NCD and rate of return are fixed at the time of issuing NCD. Some NCD are secured against assets.

NCDs more or less work like company fixed deposit. One advantage of NCD, at least in theory, is that they are listed on stock exchanges. Hence, provides liquidity to holder. However, there is normally not much volume for NCD. Hence, this advantage mostly remains on paper. For buying NCD, demat account is needed as these NCDs are credited to and debited from Demat account just like shares and no certificate is issued like FD.

When and how much can one withdraw from PPF ? (Link)

One withdrawal, once a year, is allowed from 7th year onwards. You can withdraw an amount not exceeding the lower of:

a) 50% of the balance at the end of the 4th immediately preceding year
b) 50% of the balance at the end of the immediately preceding year

Example: If the account was opened in 2005-06, and first withdrawal can be made during 2011-12. . The amount of withdrawal will be the lower of:

a) 50% of the balance as on March 31, 2008.
b). 50% of the balance as on March 31, 2011.

Facility of Loan: In case of emergency situations before the 7th year, you can take loans from your PPF account. You can take loans between 3rd and 6th year of opening the PPF account.
The maximum loan amount available will be equal to 25% of the balance at the end of the 2nd immediately preceding year.

Example: In your example, if loan is sought in 2010-11, the maximum amount of loan available would be 25% of the balance as on March 31, 2009.

The rate of interest on the loan is usually 2% over and above the rate of interest you receive in the PPF account. This loan has to be repaid within a period of 24 months. Once you repay a loan, another loan can be taken as long as you are within the 3rd and the 6th year of opening the account.

Is there a need of PAN Migration in case of Job Migration ? (Link)

Jayaprakash shares the answer and his personal experience

There is no need for PAN migration in case your residential address is changed. Your Pan card address details are nothing to do with your address given in ITR. Whatever you mention in your ITR is considered for your refunds. The bank and address given in the ITR form will be treated as current for refunds.I’ve submitted my returns in a different IT ward every year since financial year 2007. My address is different in all of those ITR forms.

For 2007 it is Pune, 2008 it is Pune (different ward) and for 2009 it is Hyd. I’ve changed my PAN card address in 2009 but they have not considered that address for refunds of 2007 and 2008 financial years. They have sent cheques to the address given in ITR form (2007, 2008) instead of new address, which I’ve updated with IT department. Now, I’m running behind local ward offices to get my refunds.

Forum Prize Winners for November

For the week of November, Winners for the Forum Monthly Contest are Ramesh Mangal and Shashank Kashettiwar. The first prize goes to Ramesh for answering lots of questions with his knowledge and second prize goes to Shashank for his detailed and amazing insightful/detailed replies . Big thanks to these guys !  .

Do you have any personal finance query which you wanted to clear ? Ask today on Forum !

How you can create huge wealth by small savings?

Posted on by Jagoinvestor

Small is Big? Are you worried, about how will your financial goals be achieved, because you are not able to save more? Do you feel that small savings will not help you much to reach your big goals in life? If that’s the case, you are mistaken!

While it’s true that small savings won’t be able to help you much in short run, they can impact your financial life in a really big way and contribute significantly in long run.

wealth creation through small savings

In the tribal villages of Cameroon, there is a community called “Mofu“, who grow and eat millet’s all year. They store their entire crop for the whole year in their store houses made of mud and wood. Unfortunately, in some bad years, termites attack these store houses and no matter what the villagers do, termites destroy just about all the crops in a short span of time.

The only creature which can now save these villagers, are driver ants which they call “Jaglavak” in their native language. They search the village and try to find those ants. Just a handful of driver ants, kill all the half-million termites in a few days!

How are these ants able to destroy a big army of termites? The answer lies in their strategy and their team work! If they are not disciplined in their approach, it would not be possible to defeat the big army of termites. It’s not the power of a single ant which makes them winners, its numerous ants working together and following a few simple rules.

Small Expenses can help us grow wealth

Just like the story above, we in our financial life have a lot of small/medium expenses which keep rotting and destroying our wealth and many a times, our health too.

Some of them are smoking, drinking, too much eating out without any reason or out of sheer laziness in cooking at home, spending on items which give us instant happiness, but in reality we don’t need them, buying things just for ego-satisfaction (My neighbors bought it, so we should also have it!).

Small pains taken today by saving money and investing properly will help you generate enough money in future (read this story). Most times, we keep thinking about bigger problems in life and do not value or think about taking care of small things. We ignore them because we see them in isolation a lot of time.

My friends case –

One of my really good friends works in a finance company and earns around Rs.25,000 a month. Just graduated from college and found a decent job in Delhi. He lives a great life! Movies with friends, eating out, smoking and drinking.

His credit card bill keeps piling up month after month, but the instant gratification of paying “Minimum due amount” is much higher than the pains which will follow years later when banks will deny or ask for a very high interest rate when we will need a Home Loan or a Car loan.

I asked him his financial goals in life, and got this answer –

1. Retirement corpus of more than a crore by the age of 60

2. 40-50 lacs to open a restaurant once he retires

3. 6-7 Lacs for a vacation in Europe after 10 years with his wife.

How cutting some bad habits helps in long term

He was expecting a big laugh from me. He expected me to tell him, that he is living in fantasy world. With a salary of Rs.25,000 per month how is it possible to achieve these financial dreams in a situation where he was not able to save even Rs.1,500/month?

To his surprise I told him that if he is ready to compromise on bad habits and have discipline in investing from today, it might just be possible to get closer to his dreams! He thought that my advice and plan for him would be tough, complex, and full of jargon and he will have to spare next some days to understand what I was going to show him.

Here was my plan for him.

Small savings can build wealth

Goal 1: Retirement

His retirement can be taken care of, by just investing the money which will be saved by quitting smoking. I don’t know how much a quality smoker spends on his daily quota of smoking, but I guess I can safely assume Rs.50/day which turns out to be Rs.1500/month.

Instead of using this money to deteriorate his health every month for next 35 years, if he invests it in equity mutual funds regularly through SIP. Assuming a 12% return, he can make around 97 lacs (calculate). Note that this amount is without taking into consideration any inflation, if we incorporate inflation of 5% (in cigarette price); it would turn out to be 1.2 crores in 35 yrs.

Equities in long run might give excellent returns and a 15-18% return can be expected from equities if the time horizon is 30-35 years, especially from Indian Markets (Read why)

Goal 2: Restaurant

My friend’s plan for opening a restaurant in retirement can easily be achieved if he controls his drinking and starts investing that money. I have some idea on how much it costs to booze per week (no, I don’t drink, I actually thank my friends in college), I assume it to be around Rs.200/week. Let’s consider Rs.800 for a month.

If he invests part of this in PPF and rest in balanced funds, he might be able to generate 10% returns , and with 35 years in hand, it would be Rs.48 lacs assuming that he also increases this investments by 6%/year (come on, alcohol prices also increase!)

Goal 3: International Vacation in 10 years

My friend spends a lot on phone with his 10 “best friends”, eating out, shopping gadgets and clothes every month/quarter. Not sure why he keeps flying from Delhi to Varanasi every quarter when he can take an overnight train! And save thousands.

Cutting a bit on all these habits I mentioned, it should not be a big deal and he should be able to save few hundreds from each of those and save another Rs.2,000 in total months.

If he saves this money in balanced funds, he should again be generating 3-4 lacs in next 10 years and if not Switzerland, he can go on a vacation to some near-by destination :).

Small savings can create wealth

Conclusion

A bit of restructuring and prioritization in your spending habits can give you a good idea on what all things can you saves on. If you are disciplined in your approach, over the time these small savings if invested with proper plan can help you in a big way in your financial life.

Just like my friend in above example, we have many areas in our life where we can cut our expenses or stop them. If we use it and invest systematically for some goals in our life, slowly it can turn out to be a very big amount. If you are still confused and can’t think of where to cut expenses, another alternative for you is to live on 90% of your salary. It works!

Assumptions : It’s assumed that all the spending might have continued for all life which are saved and diverted to investments. Also the investments are assumed in Equities.

Can you think of anything similar in your life and how it can help you in saving some money? It can be asking small as Rs.100 or Rs.200. Please share! Also share how it can help you in achieving something, use our calculators to find out.

Are you sharing agents commission ? Its Illegal

Posted on by Jagoinvestor

“Discount kitna doge ! Mishra ji mujhe 35% de rahe hain ” , as per Rakesh ,this is exactly how a lot of customers ask their agents commission to be shared with them in Insurance or Mutual funds. Have you ever asked your agent how much discount he can give you on the premium? This happens a lot with LIC agents and other insurance and mutual fund agents. Many times, even agents offer discount or some gift in return, if you buy the policy or mutual funds through them. This practice is illegal and totally against the laws of Insurance Act and SEBI. The agent can even face cancellation of his license if he is found to share his commission. (Read about agents commission in Insurance)

Insurance, mutual funds Commission passback to customers by agents is illegal

It kinda works like this. Suppose, an Insurance agent sells you a policy with a sum assured of Rs. 10 lacs, with a  premium of about Rs. 50,000/- per year. An agent will make around 15,000 in commission for that year, out of which he might offer you a discount of Rs 5,000-10,000 for the first year or he offers you some gift! A lot of insurance agents do this to make sure they do not lose the business or get more and more business . In the same manner, if you have Rs. 30 lacs invested in mutual funds, your agent will get around Rs 10,000/- in trail commissions. It might happen that he can offer you 50% of that commission to make sure you stay with him .

Why you should stop asking share in Agents commission ?

Mutual funds : As per SEBI mandate,  sharing the commissions received from AMC  is illegal and should be avoided . Pass-backs, the practice of sharing a part of the distributors’ commission with the investor, have been made illegal under the code of conduct issued to distributors. “Intermediaries will not rebate commissions back to investors and avoid attracting clients through temptations of rebate/gifts etc” – As per a SEBI circular.

If a mutual fund agent shares his commission with others, it opens a big hole, not just for mis-selling, but also dilutes the whole industry atmosphere. There have been rampant cases, when an agent asks customers to leave their current agent and transfer their funds with them as a new agent (link) and they are ready to transfer a part of agent commission to them (the customers). For example, if a person has Rs 30 lacs invested in a mutual funds, an agent would get around Rs. 10,000/- as trail commission in a particular year. A lot of agents offer 5,000 (50%) back to the customers to attract them. A lot of agents pass back a part of commission and customers get into wrong & ill-suited mutual funds because of their greed!

Insurance : Other than the fact, that it’s illegal, you should not encourage or engage in sharing the agent commissions because, for one thing, it hampers your relationship with agent. Don’t forget that your agent will be the one to help in claim settlement when you are dead. If you snatch his share of commission today, it might leave him with a bitter taste in the mouth and not result in a healthy relationship. So please live and let live! The other important reason, you should avoid asking for agents commissions, is that it leads to mis-selling. If you ask for a share in commission, it will leave agents with less earnings and that would encourage them to sell more by any means, which in turn fuels mis-selling. So in a way the whole “asking commissions back” will hamper investors in the long run. What you sow is what you reap!

As per section 41 of the Insurance Act, “No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to  take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out OR renewing  or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer.”

Real Life experience

As per Dhawal Sharma, a Delhi based agent shares his experience

I face this problem day in and day out and many a times have to miss out on prospective clients because they want “passback of commission“. This practice (Sorry to say, but started by LIC agents) is so much part of the Insurance selling culture that 99.9% of the public thinks that it is obligatory on the part of an agent to part with his commission. But even LIC agents were quite smart at that time as they use to pass back comission mostly on ENDOWMENT or MONEYBACK policies which generate hefty renewal commissions as well (Unlike ULIP) and reversely, would be of little or practically no use to the client in the long term. This practice is actually pound foolish , penny wise approach..

I know at least 100 people, regularly buying insurance for their entire family (father , mother, brother,uncle, aunty) for last so many years from SHARMA JI or OFFICE WALE CLERK who passback 20% commission, and if we make a thorough study of their Insurance portfolio, they are underinsured (No term plan), not properly equipped to handle retirement (their agent never knew that annuity fund is tax exempt only upto 1/3 amount), and no proper child planning (In many cases, child plans where child is life insurand and not father).

 

Violation of law using Multi-level marketing in Insurance Policies

For some years now, a new way of selling is evolving. It’s called MLM. Here a big agent sells a policy to some one and makes him a customer. Now, this customer also acts like an agent and starts adding new people in the network and sells them policies. This goes on to many levels, a person earns a part of commissions earned from every person under his personal network. This whole idea of multi-chain selling violates Insurance law and is illegal.

As per Section 41 of the Insurance Act, “A licensed agent, whether individual or corporate, can’t appoint a sub-agent and pass on a commission to another person or entity. Any passing of commission by an agent is construed as rebating and is prohibited under the Act.”

There are many companies operating in different part of our country like TLC Insurance (India) in Bangalore, RMP Infotec in Chennai, Golden Trust Financial Services in Kolkata and SecureLIFE out of New Delhi (read more here and  here)

Responsible Investor = Health Industry

We as buyers, shape this whole industry based on how we act. Over the years, we expected and asked for share in agents commissions, without realising that it will one day work against us resulting in misselling. So please do not support it! A couple of hundreds or thousands is not going to make you rich or poor, but it sure dilutes the whole environment!

Have you ever experienced a situation where agent has tried to give back his commission? Do you think if everyone stops asking for any agents commission back, it can really have any impact?

JagoInvestor/Moneylife helps a customer get his money back

Posted on by Jagoinvestor

What do you do when you are facing un-ethical practices by some company officials and You are not getting justice anywhere? You should reach out directly at the top of the management somehow because, believe me customer care just does not work ! . This is exactly what I did, when one of the readers complained on our forum that one of his friend is facing issues with India Bulls Real Estate from last some weeks. Here is his complaint

Dear Forum Members,

I’m writting this on behalf of my Friend-Colleague, Ravikumar GovindaNaik, who had a very Bad experience with Indiabulls Home Loan division.

Application Ref no with IndiaBulls – 150625

Name: Ravikumar Lamani GovindaNaik

In August 2010, he initiated the process to buy a 30×40 site near Hosur road, Bangalore. Since the property had only B-Khatha and loan amount was only 10 Lakh, most the major bank representatives denied his enquiries.

Then one Mr. Sivakumar from IndiaBulls Home Loans have appeared as life saver to him an agreed to get him the loan amount approved, with the whatever B-Khatha he have. Every now and then he asked for somany documents copies and it went for almost for a month. In between my friend got an SMS from indiabulls informing that his loan got approved. When he asked about this to Sivakumar he told, Loan is approved by Finance Division but Legal team still have to approve. Also he asked my friend to pay Rs. 5,000/- so that lawyer from Legal division would approve the loan amount. My friend disagreed to pay and asked the contact details of the Lawyer to talk. He refused to gave and tried to divert our attention.

When there was only few days to expire the sale agreement with the Land owner, Sivakumar again appeared and told Loan in COMPLETELY approved and shown photocopy of the cheque favoured the Land Owner. Later Land owner had some dispute on the registration amount and canceled the Land deal.

On October 05, 2010 My friend send a mail to Sivakumar and Indiabulls to cancel the Loan, since he no longer needs it. Nobody responded to mails and phone calls even after repeated attempts, and my friend was scared about the blank cheques he have given.

As he feared, on 13-Oct-10 Rs. 2,216/- was withdrawn from his bank account using the cheque claiming as Pre-EMI, eventhough the Loan Amount cheque was never delivered to him. Immediately my friend contacted Sivakumar and his Manager Praveen enquiring about this, but they suggested to contact customer care. When he contacted the customer care they told him to contact Praveen, The MANAGER. Many e-mail written to Sivakumar, praveen and customer care fell into deaf ears.

On top of that, again on 8-Nov-10  Rs. 20,275/- got withdrawn from my friends bank account using another blank cheque claiming as EMI of the Loan Amount, when the loan amount was never disbursed. Now they have stopped answering my friends calls. Do the Financial Institute have the rights to do like this?

The representative was from Indiabulls that we confirmed, called up the customer care, they also have the application reference number. The cheque’s were in favor of Indiabulls Housing Finance Ltd., only the amount was unfilled. They told that cheques are required for security and to initiate EMI-ECS facility. After the second incident of cash withdrawal, my friend used the “stop payment” facility of his bank. When I searched in Google, I could find lots of complaints against Indiabulls Loan services. In this case they have looted the money on top the processing charge Rs. 5,000, charged earlier.

Yesterday, my friend spoke to the representative Sivakumar again and threaten to send the details to RBI and would file a case, he was least bothered. He just told “Do it!”

What should my friend do now? Anybody knows a Higher official in Indiabulls, who could help? Or writing to RBI about this would help?

Please Help, Thanks, Surabhi R

What action I took ?

I emailed the whole incident as it is to Sucheta Dalal of Moneylife, who  helped in escalating the whole issue directly to Gagan Banga, CEO of the company . Moneylife got the reply directly from CEO within same day that he will look into the issue and by next day itself .

—– Forwarded Message —-
From: Gagan Banga <>
To: Sucheta Dalal
Sent: Sun, 21 November, 2010 1:31:12 PM
Subject: Re: Bad experince with Indiabulls Home Loans

Ma’am, this will be sorted out by tomorrow. Thanks for your feedback and for escalating this issue to me. Regards, Gagan

IndiaBulls had talked to the customer and apologized, they also handed over the refund cheques towards Pre-EMI & EMI the same day. They also dispatched Post dated cheque’s & loan cancellation letter to customer the same day. Here is a reply

From: “Gagan Banga” <>
Date: Mon, 22 Nov 2010 17:09:28 +0530
To: Sucheta Dalal

Subject: Re: Bad experience with Indiabulls Home Loans

Dear Ma’am, Firstly I would like to accept the mistake of my team and our system . We have already apologised to the customer for the inconvenience caused and handed over the refund cheques towards PEMI & EMI today. The remaining PDCs & loan cancellation letter are being dispatched today and should reach him in a day or two. Once again thanks for bringing this to my attention, such feedback will surely help us in improving our processes. Regards, Gagan

This was a reply made from Gagan Banga to Sucheta Dalal of moneylife and she forwarded to me later. Sucheta Dalal has been in journalism from last 25 yrs and its because of this fact that Moneylife has strong ability to reach top management. Moneylife has been helping investors like Ravikumar get justice from many years now and they routinely do grievance redressal with success rate of over 80%.  Moneylife also conducts various Financial literacy initiatives for common public in association with Industry experts .

Customer finally got Justice

After I got an email from Suceta Dalal that finally the issue is resolved, I personally talked to the Ravikumar (customer) on phone. Here is what exactly happened (as per the telephonic conversation)

Ravikumar went to Koramangala IndiaBulls office on Saturday (20th Nov) and the Manager-Praveen was not in office. One gentleman at office connected Ravi to Praveen over the office phone, and Praveen was not happy to talk with Ravi. He told that, today I’m on leave, will be back to office on Monday only, would look into then. There was nothing much to do for Ravi so came back home.

I think after that moneylife sent mail to Indiabulls CEO and he acted on it. On Sunday morning Ravi received a call from Mr. Praveen Pradhan (some other Praveen) , we claimed to the Location head of IndiaBulls in Bangalore. The other manager Praveen reports to this Praveen Pradhan. He might have received the communication from CEO by that time.

This Praveen Pradhan spoke to Ravi for 10-15 minutes, and collected the whole information about the story. He promised to Ravi that, he would receive money on Monday morning without fail. The interaction with Pradhan was pleasing and he apologised for the whole mess.

Monday morning (22nd Nov), Ravi visited Indiabulls office at Koramangala again, and he was directed to finance division. Straight away they have handed over the Refund-Cheque of Rs. 22,491 and as a latest update, while I was drafting this mail, some executive from Indiabulls called up and informed that he is coming down to our office in hour and would deliver the rest of the documents and those blank cheques collected.

– Ravikumar Govindanaik

Problem lies at Bottom level most of the times

This whole incident and what happened opens some questions . Is the problem mainly at lower levels or bottom of the pyramid which involves employees, and managers at lower level ? When we face any issues its never entertained by them or even customer care as they are just not bothered about the company ethics and only interested in their salary and day-to-day activities . However top of the management takes these issues very seriously and acts upon them faster ? What is your opinion on his point ?

Also what are your comments on this whole story ? Do you know some one who has faced these issues ? According to you, what can reduce these kind of frauds or un-professional behavior ?

You also make no mention of the fact that I told you in my email that Moneylife Magazine (www.moneylife.in) routinely does grievance redressal and that our success rate is over 80%.