How to choose Medical Insurance Policy ?

Does the premium amount guide your decision on whether to buy a medical insurance policy? No. Premiums are not the only factor to consider when buying a medical insurance policy. These factors need to be taken into consideration before looking at the premiums.

medical insurance

1# TPA (Third Party Administrator)

These days, companies have an in-house settlement process and thus do not outsource their settlement processes to outside TPA’s. Why do we need to look at a company providing an in-house settlement process? This is very much needed in the case of cashless settlements. Settlement processes are easier when handled in-house. Also make sure, that the company’s in-house settlement process is in your own city or in your own state. (TPA list in India)

Some of the General Insurance Companies having In house TPA’s are :

  • Bajaj Allianz General Insurance Company (Basic)
  • Star Health And Allied Insurance Company
  • ICICI Lombard
  • Max Bupa Health Insurance

2# Network of Hospitals

The next really important factor is the network hospitals of the company. In the case of hospitalization, the hospital that you would visit should be there on the Insurance company’s network hospital list. Not only the number, but the quality of the hospitals should also be taken into consideration.

Eg:- If you fall ill and need to get admitted, which are the first few hospitals that you would go to in your locality? Check, if these hospitals are part of the Insurance company’s network hospital list.

3# Relation of the Insurance Company with the Network Hospitals

It’s important to note, how fast the Insurance company/TPA makes the settlement with the Hospital in case of cashless hospitalizations. This is a major factor, but only a few of us understand its importance. The Insurance company may provide us cashless hospitalization, but if the Insurance does not settle the Hospital claims on time or only has a partial payout, then there’s an increasingly likely that the hospital will increase your bill to claim the amount. If the company pays the claims on time and in full, then the Hospital would not try to increase the bills as they know, that particular insurance company is a prompt paymaster.

See how your Life + Health Can be covered for less than 5% of your salary

Family Floater or Individual Cover Policy?

For people who do not understand Individual and Family Floater Policies please read about it here. Most of the people think that Family floater’s are always the best choice compared to Individual health plans, which is totally wrong. Your requirement and your situation should guide your decision, on which kind of cover, you should choose. There are many problems that buyers do not have any idea of. They do not care to read fine prints and get nasty surprises after many years and at crucial junctures. (compare Health Insurance)

Features of Family Floater Policies

  • It turns out to be cheaper for younger families and less maintenance, as there is just one single policy for everyone.
  • Limited cover for other members in the family, if one person claims health insurance in any given year.
  • The Policy expires on the death of the oldest member of Family or if he/she reaches the maximum age of renewability, depending on the policy. So other family members will need to take a fresh policy, without having the benefit of their claim history and pre-existing disease coverage that comes from the continuous renewal of the policy.
  • Only immediate family members are included in the policy, not your parents or siblings. So it does not suit people with dependent parents or siblings in the family.
  • When children turn 25, then they are not part of the policy and will have to take a fresh policy. Apart from this, any pre-existing disease will not be covered at that time.

Features of Individual policies

  • Extra maintenance of each policy separately.
  • Turns out to be generally costlier than Family Floater plans
  • Lower coverage for each family member at the same cost of a Family floater in case of a single claim in any given year.
  • There are no age restrictions on the maximum age for the members for renewable.
  • You can avail of the benefits of Loading and Discounts until the policy lapses.

Hence, a Family Floater will not suit a Family where the oldest member is in his 40’s and they are more prone to health issues. However, younger families might want to consider Family floater plans as they are less prone to health ailments and can afford lesser premiums in the beginning. Look at Harsh Roongta talking about Family Floater Vs Individual Plan in the following Video



How much of Sum Insured would be sufficient?

Do you know, what disease you could be diagnosed with tomorrow? So you can never say that Rs.1,00,000 cover is sufficient 🙂 The basic rule here, is to take whatever you think you can afford. If a person can afford to say Rs.5,000/- as the premium per year, check as to how much of Sum Insured he would get, and take the amount of insurance offered. That would be sufficient to cover at least some risk. So never think, that you cannot afford any medical insurance policy. Take what you can afford so that at least you know that you can be rest assured, that you have covered some risk.

IMPORTANT: It’s never too early to take medical insurance and critical illness policy, because once you are diagnosed with any illness, then the insurance company will have the liberty, of not issuing you an insurance policy. So take it as early as possible and have your risks covered.

Comments? What are the other difficulty or doubts from an investor’s point of view to select a medical policy?

Jagoinvestor Group meets every month

It has been an excellent journey so far and we have to build a great community of readers who want to learn and understand the importance of personal finance. We have readers who are ready to learn much more if given a chance and they will if they are provided more support and platform.

So whats next? I have decided to take this blog to next level, so I have decided to form groups of enthusiastic people who are ready to learn at different levels and also want to join this “Jagoinvestor” movement and help to spread financial literacy. So we will group meets in different cities (Read Update). We will start from Bangalore first as I am in Bangalore. Later we will extend it to all the major cities in India like Mumbai, Delhi, Chennai, Pune, Hyderabad, Ahmedabad, Kolkatta etc.

Update

As I will be in Pune this coming weekend (Sat and Sun) and in Mumbai one day (preferably Saturday), We will start off these groups in Pune and Mumbai with whatever number we have, will choose one lead there and let’s kick off this idea fast :). I am sure we will have 15-20+ each place :). And we will start the group in Bangalore in July (as I will be in Bangalore only after June).

Note: As there are many readers from the Bay Area in the US (Sunnyvale / San Fransisco / San Jose). Readers there can also make the group (even 5 is ok), I have included Bay Area in Registration form Below.

What will happen in these Meets?

  • We will meet offline in person and build a community that will share their knowledge, ideas about a variety of topics that we discuss here on the blog.
  • We will also cover one focused topic in the form of presentation or session by any volunteer or expert in every meeting, it can be for 30-60 min long.
  • Discuss various strategies to invest money in the stock market (only after some meets, when more people are interested)
  • Discuss various topics like how to make better Real estate deals, tips, and tricks in investing which are not known generally to investors.
  • Build presentations and other content that can be shared back on the blog to all the readers.
  • Take up some research topic and then brain storm on the idea and find out why’s  and how’s (example, BUY OR RENT ? )
  • How to plan all major aspects of financial life in the best way and be self-dependent

Current Registrations

(Changes dynamically with every Entry)

Any thing more?

This will be an informal meet which will start from the cafe’s or odd places and later we can think about how to formalize it more in a better way. There will be leads from each city who can take up the responsibilities so that it can function independently. Each city will have the main lead of the group who can be the main person in the group and take the responsibility of the meets. The meets will only be on weekends (2-3 hrs)  so that everyone can join. In the start we will start this only in Bangalore (with me leading all the meets) and let’s see how this whole stuff goes, we can then take up this group meet idea to other cities once the situation permits and there are enough readers interested. Below is a registration form for registering yourself with jagoinvestor for these group meets, we will soon start these groups in all the cities once we get more than 10 interested people in any city. Please share your views and how we can make this concept a success.

Register

What is Reverse Mortgage ?

What is Reverse Mortgage ?

Simple! Reverse Mortgage is the exact opposite of a Home Loan. Anyone, who has a fully owned House can get a loan. The way, this works, is that his loan money will be divided in chunks (EMI’s) over many years and given to him every month. This can easily act as Monthly income. At the end of the loan tenure, the Bank stops paying the monthly income. If one of the spouses dies, the other can still continue living in the house. If both die, the bank gives their heirs two options – settle the overall outstanding loan and retain the house or, the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs. For people who don’t know – “Mortgage” means “Loan” 🙂

Reverse Mortgage Loan in India

How is the loan paid ?

With a reverse home mortgage, no payments are made during the life of the borrower(s). Which means the loan has to be paid only after both the borrower and spouse die.  Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas, where the appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.

When both, the borrower and spouse pass away, the ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remains. Read about Real Estate returns over last 10 yrs .

Example :

Mr Ajay is around 62 yrs old, and his wife is 60 yrs old, they live and own a house in Karvenagar, Pune which is worth Rs 1 crore now . They have a daughter and son who are their legal heirs (50:50) . The old aged Ajay and his wife do not have a monthly income source, so they decide to go in for a Reverse Mortgage loan. The Bank is ready to loan upto 60 lacs to them, which means they will be paid Rs 35k per month for next 15 yrs (just an example.)

Now, they start getting monthly income of 35k per month for next 15 yrs, & they continue to live in the same home. After this point, their children support them financially and then Ajay dies at age 79. After this, his wife still continues to live in the house. Sadly she too, passes away at age 85. By this time the total loan outstanding becomes Rs 1.1 crores (It was 60 lacs at the end of 15 yrs, but after that, it starts growing.)

Now the loan has to be paid off. The son and daughter does not have money to pay to the bank, so the bank decides to sell off the property. At that time, the price of the house is Rs. 3 crores. The bank sells the house and get total 3 crores, out of which 1.1 crores is taken by the bank and rest is paid to legal heirs, which they split amongst themselves. Look at EMI Calculator

Which Banks Offer Reverse Mortgage ?

  • National Housing Bank (NHB)
  • Dewan Housing Finance Limited (DHFL)
  • State Bank of India (SBI)
  • Punjab National Bank (PNB)
  • Indian Bank
  • Central Bank of India
  • LlC Housing Finance
  • Andhra Bank
  • Corporation Bank
  • Canara Bank.

Tip from Hemant : “Star Union Dai-ichi offers annuity cover with reverse mortgage . When a person approaches the bank for a reverse mortgage loan on house property, the bank, after assessing the value of the property and sanctioning the loan, will approach the insurer and buy an annuity plan for the borrower. The annuity will be passed on to the borrower’s account on a monthly, quarterly or annual basis. The installments will depend on the purchase price, age and whether the insured person opts for a lower or higher lifetime annuity. “

Important Points in Reverse Mortgage

  • Reverse Mortgage is available to Senior Citizens only. Any house owner over 60 years of age is eligible for a reverse mortgage. If wife is a co-applicant, she  should be above 58.
  • The maximum loan is up to 60 per cent of the value of the residential property subject to maximum of Rs 50 Lacs.
  • The maximum period of property mortgage is 15 years with a bank or a HFC (housing finance company.) Minimum tenure will be 10 years. Some banks like Punjab National Bank offer RML for 20 years also.
  • The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
  • The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
  • The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. How to do last moment Tax Planning ?
  • Reverse mortgage rates will vary according to market conditions depending on the wheather borrower has choosen Fixed or Floating interest rate.
  • Processing fee for the loan would be between 0.15 per cent and 1.50 per cent of the loan amount.
  • One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.

How do I apply for Reverse Mortgage?

  • Decide to pledge your house for reverse mortgage.
  • Go to the branch of the bank, who you have a banking relationship with, and provides Reverse Mortgage
  • Fill up the necessary form, the bank offers for reverse mortgage
  • You need to furnish your personal and financial details like: the property, your legal heirs, and so on.
  • Proof of ownership; you will also need to furnish property papers and a proof that the house that you are pledging is your residence.

When to consider taking Reverse Mortgage ?

Even though Reverse Mortgage seems like a nice idea, it should not be the primary tool to fund one’s retirement expenses. It shouldn’t be used to fund the shortfall in the retirement income if any. A valid reason can be – if one does not have any legal heirs or leaving money to/for them after death, is not high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income. One can use reverse mortgage in that case. In India, Reverse mortgage isn’t very popular yet, because of bad/negligible marketing and our mentality, where we dont take loan on our most valuable and most emotional asset “Home” 🙂 Another reason could also be that there are old / aged people who own 100% of home and are living alone with spouse are few & far between. These products might become very popular in coming decades .

Comments? What do you feel about Reverse Mortgage Products? Do you think it’ll become more popular & successful in the coming decades?

Introducing JagoInvestor Financial Calculators

Readers, I was working on building some basic calculators over the last month . They are ready to use now . The calculators are very basic and have a bare minimum look and feel , but works !! .

Please use them and provide any changes you feel should happen . one important point you should note is that all the figures are approx and the numbers you get might differ a bit from other calculators on net as the formula’s used might be on yearly compounding or payments have been considered at the end of the period rather than start . So don’t put much thinking on the exact numbers , take them as a general approx figures , anyways how does it matter if your retirement corpus is 4.53 crores or 4.58 crores !! 🙂

Financial calculators

Look at this page for all the calculators listed at one place . Below is the list of all the calculators

Provide your Feedback Please . What can be done for Improvements ? Any other calculators you want ?

Business Bhaskar Copied my GFactor Concept without permission

Some days back I had written about GFactor concept for choosing a Financial Product based on 4 factors and formulating it in mathematics , Recently one of the writers for Business Bhaskar has copied the original idea of GFactor and republished it with same name “GFactor” and all the other names like “Trap Factor”, “R/R Factor” etc, without any permission from me .

This is not a general republishing of a general concept like SIP or Life Insurance that one can just change the wording’s and rewrite the same concept . It’s just the translation of the original idea and hence copyright violation. I have mailed the editor of the newspaper to look at it . The article was published in the online edition (Link) as well as print media (Newspaper Link) .

Update Jun 1 , 2010 :  Business Bhaskar has resolved this issue with me and apolosized to me for whatever happened, they will republish the article with due credit to me .

Comments , please share your views on this issue ? How appropriate is it to copy content and translate it without permission ?

How to insure your Credit and Debit Cards ?

Last night I was having dinner with my friends and suddenly on of the friend realized that he has lost his wallet. The problem was not the cash in the wallet, or the cards. It was the misuse of the card and contacting card issuers to block the cards as soon as possible .

Have you found yourself in similar situation ever or have you lost your wallet which had many debit and credit card along with other important documents. Do you want solution for this problem ?

Here is the solution.

Lost credit or debit card

There is nothing like the shock of losing your wallet or purse with all the money and your Credit or Debit cards in it as these cards plays a significant role in our lives.

In India there are two service providers who provide this service of protecting your cards – Credit Protection Plan (CPP) and OneAssist.

If someone steals it by purpose or if you lost it and it goes in a wrong hand then there is a risk that the person may misuse your cards. To avoid this CPP is one of the good options.

What is CPP Card Protection ?

CPP Card Protection is India’s first comprehensive Card Protection service for use in the event of card loss, theft and related fraud.

lock your credit and debit card

If you lose your wallet or your handbag, simply make one free call to CPP. They will quickly notify the issuers of your cards to cancel your cards immediately, also they will provide emergency travel and hotel assistance to take care of you and help you get back home.

CPP Assistance Services is the part of CPP group which has already started services in other asian countries like Hong Kong, Singapore and Malaysia.

As per a report by Medianama, in January 2017 there are 28.8 Million credit cards and 818 Million debit cards in India

Every wallet on an average now a days contain one debit and credit card in cities . CPP has tied up with leading banks including Citibank, Standard Chartered, HSBC and Kotak Mahindra , Axis Bank , LIC and ICICI Bank to sell the CPP services. Read 5 tips for effectively using your Credit Card .

Features/Benefits of CPP:

  • Loss Reporting : Incase your cards are lost or whole wallet is lost you can call CPP on their helpline number and they will cancel all your cards immediately and will help you in replacing them after that
  • Fraud Protection : If your card has been misused then your get protection for it before or after the notification from your side . You are covered from 7 days prior to your loss report to CPP until your membership is valid.
  • Emergency Travel & Hotel Assistance : Incase you can’t pay your hotel bill or have lost the travel tickets or have money to buy travel ticket, CPP will arrange for your travel tickets for your return and will also help you pay your bills to the hotel . This applies to travel abroad as well. For Indian premium users they will also help you with Cash if you have lost cash in the wallet .
  • Document Registration : You can register important documents like passport, driving license, insurance policies with CPP which will ensure easy access if you should lose the originals.
  • Cash: For Indian premium users they will also help you with Cash of upto 20,000 if you have lost cash in the wallet.
  • PAN card & Driving License lost: In case you lost your PAN card with your wallet, CPP will also help you to get new PAN. There is no need to apply for that separately.

You can watch this video to know how CPP helps you..

Membership and Plans

They have three main plans and each plan have difference in the benefits they are providing. The plans are as follows:

  • Classic: single person membership
  • Premium: Additional membership to spouse only
  • Platinum: Additional membership to spouse and parents.

Besides membership they have differences in other benefits which they are providing and also their premium charges.

The membership plan is different as per the insurance companies or the banks from whom you are getting the CPP. The facilities provided by insurance companies are almost same.

You can pay the premium by master or visa card and the amount will be deducted from your account at the beginning of every year until you close for the plan.

There is a limit for ever benefit like Rs 1.5 Lac for Hotel Assistance and traveling and Rs.20,000 Cash in India only.

Procedure to apply for CPP services

Applying for the CPP service is a very simple procedure. Just follow the steps:

  • Fill the application form for the CPP service. These forms are available online on the website of the service providers or on the websites of the related banks.
  • Pay the premium fees as mentioned in the plan you have selected. Generally you need to pay full premium at the beginning.
  • Once you pay the premium fees the service providers will send you the welcome pack comprising the registration form, confirmation letter and a form of terms and conditions of your plan.
  • You need to fill the details of each card which you want to protect and come under the plan you have selected.
  • After filling the form completely, check it for the correction and send it back to CPP service providers.

Why Should you pay for CPP services ?

Incase you are using debit and credit cards heavily and carry bigger account balance than few thousands , It might make sense for you to protect your cards using their services .

It’s all about if you want to take risk or loss and fraud or not . The cost associated is not huge and can be considered, however I feel that card companies should have CPP built in with the card itself .

Things to remember before applying for CPP services

If you are paying for something then it’s your responsibility to check for every detail about that particular plan. Here are some important points you should check related to CPP:

  • Check for the benefits of each plan included in CPP before selecting any one of it.
  • Decide which plan you want to buy according to your needs.
  • Check for the premiums of the same plans at different service providers or banks.
  • Keep every detail of the payment of the premium.
  • Once you take the plan make sure you added each and every detail needed accurately.

Comments , Put your views on CPP and does it appeal you ? Do you think it will work with Indian Mindset ?

How to think about Retirement Planning (Video)

Retirement Planning is one of the most important aspects of financial planning. Here is a 3 part video series on Retirement planning which gives you a good idea of how to plan for it and how to think about retirement planning . Look at how to 6 Steps of doing Retirement Planning by yourself

Part 1


Part 2


Part 3

A very good book every one should read is “Retire Rich Invest” written by P V Subramanyam . Give your comments 🙂

GFactor , A decision making tool for Financial products

How do you find out if a product suits your requirement ? What about a very simple calculation which can take into account most important requirements like lock in factor , complexity of a product , your requirement and its return and risk potential and tells you if it really suits your requirement. This Post will talk about a concept developed by me called GFactor , which is a score system for any Financial Product. You can input 4 factors and get a score for a product . So this GFactor score system will tell you about goodness/badness of a product.  Gfactor stands for Goodness Factor .

What is GFactor ?

GFactor is a very simple rating system for Financial products which gives a score on a scale of 0-1 . 1 represents excellent , 0 means worse . There are mainly 4 factors which we consider when we design this GFactor .

  • Trap Factor (Liquidity)
  • RR Factor (Risk/return Factor)
  • Complexity Factor
  • Need Factor

Trap Factor

Trap Factor is nothing but its score for the product on scale of 0 – 1 for the lock in period. The more trapped you have to be in product , the more will be the Trap factor score. One important point you should note here is that you should also consider how much loss you have to take even after you can freely come out of the product . For example : Endowment policies trap you for long periods like 15 to 20 yrs . Even though there is an option to close the policies you loose a lot of money. So the trap factor of Endowment Policies will be more like 0.9 or 1 , where as Mutual funds (non tax saving funds do not have any type of locking period) . So they can have trap factor of 0.1 or 0 . In ULIP you are stuck for at least 3-5 yrs , only after the 5th year. So it can have a trap factor of 0.6 or 0.7  you can get out without any penalties . For term insurance there is no trap factor , you can stop the policy any time .

Years of Trap

Trap Factor

No Trap 0
1-3 yrs 0.2
4-10 yrs 0.5
10-15 yrs 0.75
15+ yrs 1.0

 

 

Risk/Return Factor

Risk/Return Factor is a factor which will evaluate a single digit score for its risk/return potential . This score takes into consideration both risk and return . You can look it as risk adjusted return potential . so this factor will determine the return potential considering the risk potential. To calculate this you should know average return and average risk figures of a product in its total duration . Lets see the calculation first .

Risk Return Factor = (Average Return – Average Risk)/Average Return

Lets see an Example in case of ULIP : Robert wants to buy some mutual funds for next 5 yrs . In these 5 yrs , as per the historical data , we know that he can expect an absolute 100% return on average  (his money can double) , and if some thing bad has to happen hecan loose around 30% of value (the figures will differ for everybody) . So

Example for Mutual Funds (5 yrs)

  • Average Return = 100%
  • Average Risk = 30%

Risk Return Factor (Mutual funds) = (100 – 30)/100 = 0.7

Example for Fixed Deposits (2 yrs)

In this case suppose the returns from FD are @8% .

  • Average Return = 16%
  • Average Risk = 0%

Risk Return Factor (FD) = (16 – 0)/16 = 1.0

Note : For term insurance , the return will be the max amount you can get and Risk would be amount you can loose all , which is total premium over many years.

Complexity Factor

Complexity score is a number you assign to the product, depending on the how complex of easy it looks to you . For example Mutual funds can be easy to understand for me , so I can put 0.1% for it a complexity, whereas  NPS is more complicated to me , so I will put 0.5 . This means If it looks too complicated for you, then give a higher score, whereas if you understand it well, assign lower score .

For a normal person I would say ULIP is complicated , so we gave give a score of .7 or .8 or 1 ,depends on you, where as term insurance is extremely easy to understand, so it will get 0 or .1 , Mutual funds would be .2 or .3

Need Factor

Its a score given on the fact that how badly you need or require the product and will it be the best thing for you. One person may need it more than other, so the score will be different for different people. If you are not in a hurry, but your relative suggests you a policy , then it does not become a very high priority product for you, because you do not require it at that time, so you will assign a lower score to it .  For a person who is in his 26-27 age and just married and has some financial dependents , His score for term insurance will be around .9 or 1 because he badly needs it . Make sure you know difference between your needs and wants

A person who is 45 , for him/her NeedFactor for Health Insurance would be .8 or .9

A person who is Extremely High risk taker and understands equity investing well , his need factor for NSC or FD would be low , say a score of .2 or .3 because he really does not need it and it does not suit his requirement also .

Now Lets construct the formula

Variables are

TF : Trap Factor
RRF : Risk Return Factor
CF = Complexity Factor
NF = Need Factor

You should understand how the formula should be constructed. Out of the 4 variables, 2 scores shows strength of the product(Need Factor and Risk Return Factor), where as two scores are negative(Trap and Complexity Factor), so below formula should take care of this aspect .

GFactor Formula = (NF * RRF) – (CF*TF)

Lets take an example . Ajay is a 35 yrs old Indian working in a Software company, He has 2 kids and 1 wife 🙂 and 1 parent to support . His risk appetite is moderate and he cant take more than 20% downside in his investments at any given year . He has a home loan and a car loan at this moment and has just 10 lacs of overall savings . Below is the chart which calculates GFactor for some products considering Ajay’s situation. Understand that these numbers are for Ajay, it can change for you .

Products
Trap Factor
Return/Risk Factor
Complexity Factor
Need Factor
GFactor
 Term Insurance
0 0.95 0 1 0.95
 Health Insurance
0 0.85 0.3 0.8 0.68
 ELSS
.25 0.5 0.1 1 0.48
 ULIP
.25 0.5 0.4 0.4 0.1
 Tax Saving FD
.5 1 0 0.1 0.1
 Endowment Policy 1 1 0.5 0 -0.5

Rules

  • If GFactor value is more than .7 , you can consider that product as “Must buy. Go for it” .
  • If its more than .4 , you can consider it as “Average”
  • If its more than .2 , you can consider it as “Look for alternative product. Buy only if nothing else is available”
  • And if its less than .2 , then you must avoid it .

GFactor of a Portfolio

Just like we have Gfactor of a product , we can have GFactor of a Portfolio , which is average of GFactor’s of all the products in a Portfolio . Example

  • Term Insurance : 0.95
  • 4 ELSS : 0.43
  • 4-5 shares : 0.35
  • 10 gm of Gold ETF : .72
  • EPF contribution : 1
  • 3 months of Cash : 1

So average of all the GFactors = (.95 + .43 + .35 + .72 + 1 + 1)/6 = .742 . This  is a good Score for a Portfolio , But I can do better than this . Whats your Portfolio GFactor ?

 

Conclusion
There are 4 main factors which matter when taking the decision regarding a Financial product , The above concept is my own thinking and It may not fit everyone criteria , but I am sure it would be true for most of the people , If you have disagreements , its fine . We subconsciously understand how there 4 factors affects our decision making process , but the idea is to put it into formula and get a Score out of it , so that we can compare and know how good or bad a product can be for us .

Ques tion

  • Can you design a better formula for GFactor which makes more sense that what I have given .
  • Do you think GFactor can be useful to general investor to take decisions .
  • Please share with me GFactor of your overall Portfolio .

Note : This is an old post , I am republishing it with changes

Learning from Comments (Part 2)

Do you read comments ? There is a huge amount of discussion doing on in comments section, however many readers do not find time or interest to dig into the comments and follow the discussions, I would say comments have more knowledge than the article itself , as there are personal experiences and knowledge from many different readers, there is a threaded discussion on some topic in comments, which are more lively and engaging. So if you are just reading articles and not comments, you are missing a lot of things . So I went through some articles comment one by one and consolidated some learning and facts for my readers . ( See  Learning from Comments Part 1)

learning from Comments

1) Partha Iyenger shares what will happen to your mutual funds units if you bought it from Demat account and Company went bankrupt

If your online distributer Financial institution and asset management companies in India are regulated by RBI and SEBI. They constantly monitor the balance sheets and other relevant data of these firms and the respective regulators have put together necessary steps to ensure that the investors are protected by taking corrective steps. For eg.. when global trust bank collapsed, it was merged with Oriental Bank of Commerce and clients/depositors who had funds/securities in dmat accounts were able to get it back or transferred to the new Oriental Bank of Commerce account.. The process takes a while but you would get it. In India, we have excellent systems and process (much better than developed world) partly due to conservative policies framed by RBI and others regulatory bodies. For more information on the GTB scam related to deposits and demat accounts, you can read the link here . Another interesting aspect is that your order verification (on equity and etf purchases/sales) is posted on the NSE site on the same day. Your can ask your broker for the unique order number for the trade executed by you. You can verify the stock, price, qty, etc through this unique order number in the nse site. The orders are archived for a period of 8 years!

If am not wrong, NSE is probably only one or very few exchanges to have this facility for investors. This is a valid documentary proof for transactions done by you, which you can use in case your broker fails to send you the contract notes or ledger statements or if there are any discrepancies. Apart from this, the clearing corporation ensures that investors are protected from defaults by members by acting as third-party and your transactions are cleared. For more information you can read the RBI circular here . Next, all asset management companies have to follow strict guidelines in terms of their financials as prescribed by SEBI. The foremost criteria is 40% of net worth of the AMC has to be brought in by the sponsor. A sponsor is a company/consortium/institution which would like to float the asset management company. It also appoints trustees who oversee the amcs. The trustees have the authority to monitor and replace the asset management company , if they fail to perform their duties effectively at any point of time.. This is apart from the regulators and government.. Of course, one needs to be more careful while choosing your broker and investment companies and constantly monitor news and events related to the company.. If at any point of time you get uncomfortable, you could pull out your investments and park it in other stronger firms. (Link)

2) Milind Kotibhaskar shares his experience with a ULIP Agent (over email with me)

Many years back, I was studying in the college and staying in hostel. One evening, one decent looking young man entered my room. He told me that he was from my home town and gave me few references. He thus established a good rapport with me. Then he gently told me that this night he has to leave for Delhi ( or Bangalore or such place ) to attend a job interview. But he has lost his train ticket and he does not have money to buy new one. This job is a lifetime opportunity for him, but he will not be able to make it due to lack of money. So would I be so kind as to lend him some money so that he can travel and attend the interview ? He looked sincere and genuine. I gave him whatever money I had. He thanked me and said that he will return my money as soon as possible. Later when I told this to my friends, they started laughing at me and said I will never see him again in my life, and that is what happened.

Years after, 6 months back, ABN Amro people visited me ( I have salary account with them ). All dressed nicely ( tie and all that ). They wanted to sell me ULIP. They made impressive speech, talked about the returns that I would get etc. All this to a fellow who has crossed 50. I think these people were no different from the conman that duped me in the hostel. I know mutual fund agents who persuaded their clients to sell their existing MF schemes and buy NFOs ( agents used to get very good commission on NFOs ). I know LIC agents who ask their clients to surrender existing policies and buy new one so that these agents can meet their annual targets and to earn hefty commissions on Insurance policies . I feel sorry for the conman who took few rupees from me, and if caught in the act, would have faced police action. Instead he should have become an LIC agent or ULIP agent. He then could have conned more people without fear of police action and got more money in return.

3) Partha Iyenger shares How Real Estate prices gets manipulated by handful of big players .

During the period of Nov 2007-January 2008, large number of high net worth investors got carried away by the bull market assuming that they could make quick returns by booking profits when the sensex moves to 25,000. A large sum of the money allocated for real estate investments (in parts or full) by these investors were moved to stock markets and commodity markets. When the markets crashed immediately, which they did not expect, they were struck. The couldn’t pull out the monies, due to losses. The real estate market which was also on a bull run till then, found the buyers who had shown interest earlier [some of them made advance payments], specifically in premium apartments, backing out. Read Real Estate Returns in India

Hence the Mumbai markets went through a period of correction (though the cycle was shorter) and picked up again gradually when the markets started its rally since April 09..In fact, some of the developers to speculate [through leverage as well] in the stock markets and move it back to their business.. As usual timing is very difficult and that’s why one of the problems faced in the last two years by real estate markets is ‘cash’.. Which means not completing projects in time!

The single word for this phenomenon is ‘liquidity’. I am afraid you could get reliable statistics on real estate, since India lacks transparency[ be it in title deeds or transaction mechanisms] and we are yet to have real estate investment trust vehicles or REITS which would help track data and give a better picture. It should happen soon… (Link)

4) Pramod Moudgill shares his excellent insight on how to look at Fund houses and Fund managers

a) Whether it has some discipline and process set for investments or it is only a One man show i.e. fund manager is calling all the shots.  The former is always better.

b) Whether the fund is keeping an eye on the funds if they are being true to their mandate and the fund manager is not deviating from the mandate for the sake of returns.

c) Whether the motive of fund house is to make money for investors first for the long-term or just to Raise it’s AUM via a flurry of NFOs.

d) What is the performance and association of the investment team with the fund house. Is it changing fund managers every year ? if so then a big problem.

e) I dont know about others but to me the important point is the credibility of the parent company.

Let us evaluate fund houses on above parameters

1) Sundaram has a strict cap that none of its diversified funds will invest more than 5% in a single stock (Except select focus – Its mandate is to remain focus), At FT the  stock selection is done by a team of experts and the same is true with HDFC. These things make sure that one person can not skew the investments to his will.

2) Sandip Sabharwal is arguably the shrewdest fund manager India have ever seen. If you see the portfolio of SBI funds then you can observe that all the diversified funds had 90% stocks in common, so a global fund a contra fund a midcap fund and others were same despite their different mandates. Now look at DSP top 100 it doesnt have a single midcap stock, DSP midcap not a single large cap. Same with HDFC Top 200 and Sundaram midcap or Growth fund. When I invest in a large cap fund I know that I will be geting a large cap fund for sure. FT blue-chip and Prima do not have a single stock in common. Look at some good Equity Mutual funds

3) DSP has only seven equity funds and is winning so many awards based on that only. HDFC has only one sectoral fund. Sundaram recently has launched some new funds but if you compare these houses are conservative with new launching. They have every kind of funds and that is good. Look at Tata , Birla, Reliance they work like NFO Factory. The sole aim is to get money via NFOs.

4) Fund managers, – Prashant Jain is with HDFC for 10 Years, Naganath with DSP for a decade, Sukumar ans Siva Subramaniam with FT for over 12 Years. other that Anup Bhaskar no fund manager has left Sundaram in a long time. Can others (of course Nilesh Shah and Madhu Kela are there) boasts of such long relations.

5) Finally the corporate governance, Check yourself about the credibility of Sundaram and HDFC. Other two are internationally acclaimed.

OK that is the criteria I used, There are some others which may be fitting in these parameters but then performance is foremost and you can check about the consistency for these funds over many years. It has not been a flue. Keep a watch on IDFC and ICICI. Former is transforming itself and the latter is relatively new. Somehow I feel that 2010 will belong to these two guys. In the first quarter fall they have shown character. (Link)

Comments please , Did you like these comments and the learning ?

Impact on Direct Tax Code on various products

Direct Tax Code is the new proposed bill for changing the tax rules in India. If it comes into effect from April 1, 2011, it will change the whole taxation system and will change the way our taxes are calculated from years . The new tax code will have impact on Insurance Policies, Home Loans, PPF, Ulip, Mutual Funds, Shares and Taxation slab. A common man has to understand whats there in future for him so that he can plan accordingly. However the Direct Code tax is still in draft and might come into effect, but there is no guarantee. Experts feel that it can not come in its original form. Lets see what are the impacts on different investment products if DTC comes into effect .

Effect on Endowment/Moneyback insurance policies

As per Direct tax code, any amount you receive at maturity from an insurance policy (including bonus) will be taxed. However this rule will not apply for policies where;

  1. In any given year , premium paid in a year is less than 5% of Sum Assured , and
  2. The policy runs till maturity.

So if you have anyEndowment Policy or Moneyback Policy and in any year if you paid or will pay more than 5% of Sum assured as premium or make your policy as paid up in between, all the money you receive in the end will be taxed at the time of maturity. For policies where premium paying term is lesser than the total tenure, still all these rules will apply. For example , if you have a policy where sum assured is Rs 5,00,00;  then there can be two cases where you will be taxed at the end.

  • First : If you pay more than 25,000 as premiums .
  • Second :  Even if you pass this 5% rule , but you do not run your policy till maturity.

Effect on ULIP’s

The same rule applies to ULIP also. The first point is exiting before 10 yrs will badly hurt you from cost point, as all the Ulip’s are heavily front loaded and exiting before 10 yrs means the total cost is (commissions) turns out to be too much for you. Only if your total premium per year is less than 5% of the Sum assured, you can save yourself from getting taxed. But most of the Ulip plans in the country will not meet that criteria as majority of the policyholder’s pay much more than 5% of sum assured as premiums. A big number of policies have sum assured as 5 times of the premium, as it’s the minimum requirement of a Ulip policy . Read about recent war between SEBI and IRDA over ULIP control

Effect on PPF

For PPF account any amount you have accumulated till 31 Mar 2011, will be tax free in any year of withdrawal. However any new contribution made after 31 mar 2011 will be taxed in any year when its withdrawn . All these rules will apply to existing as well as new accounts. One important point you should consider here is that PPF will still remain one of the best debt product, because this “tax on maturity” rule will be applicable on all the products, so from that point , PPF will still have one of the best returns in debt segment. This whole rule applies to your EPF as well . (Tip : Read Why you should open a PPF account even if you dont need it right now)

Strategies

  • Deposit more this year (2010-2011, so that amount becomes tax-free at the end .
  • Invest in your child who is below 3 yrs, so that you get benefit of tax on amount contributed for next 15 yrs, and after 15 yrs , when your child is age 18 , he/she will get that amount and it will be considered as his/her income , but at that time the tax outgo will be lesser as they will not have any other source of income , so the tax outgo will be less . This will not be a significant, but still 😉 (Read Clubbing Rules of Income tax)
  • Dont withdraw big partial chunks in between. Better withdraw smaller amounts so that in any particular year your taxable incomes remains low

Effect on Home Loans

Self occupied house

The tax benefits on self occupied home loans will be withdrawn once DTC comes into effect . At present Rs 1 lac is exempted for principle repayment and Rs 1.5 lacs for the interest repayment. After DTC comes, you will have not get tax benefits (Report on Returns from Real Estate in India)

House given on Rent

1.5 lacs interest deduction will be applicable for the home loans where the house is the second one and is given on rent. You might want to reconsider taking home loans if tax break was one of the major deciding factor .

In true sense tax break on home loans should always be secondary factor while deciding the purchase of house, because if you look back in your home loan documents, it’s clearly written that tax benefits are always as per the applicable rules of the year. So dont feel cheated and yell on govt for this.

Effect on Mutual Funds & Stocks

DTC does not differentiate between short-term and long-term capital gains, which means that any withdrawal after 31st Mar 2011 will be taxed in the year of withdrawal.  Currently any profit earned after 1 yrs of investment is tax-free in Equity mutual funds and Stocks , this will not remain so . So if you have any Equity mutual funds or stocks with you, better sell them just before 31st Mar 2011 , so that current tax rules apply to that part of your investments .

Effect on Kisan Vikas Patra(KVP)/NSC/Tax Saving FD

All of these will loose the tax benefits

Effect on Income Tax Slab

The following tax slab will be applicable

 

Income Level Tax
Upto 1.6 Lacs NIL
1.6 – 10 Lacs 10%
10 – 25 Lacs 20%
25+ Lacs 30.00%

 

Effect on 80C

Sec 80C will be replaced by Sec 66 and limit will be raised from 1.2 Lac (20k for Infa bonds) to 3 lacs . Have a look at following classification of profucts from taxation point .

Direct tax code Effects on different financial products

What do you feel about Direct Tax code ? Are you Happy about it ? Do you think it would be easy for Govt to bring Direct tax code without much fuss ? Share your thoughts