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 đ
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 .
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 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 0.7Â 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 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)
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% .
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 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
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 .
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 đ 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 |
| Â Term Insurance |
0 | 0.95 | 0 | 1 | 0.95 |
| Â Health Insurance |
0 | 0.85 | 0.3 | 0.8 | 0.68 |
| Â ELSS |
.25 | 0.5 | 0.1 | 1 | 0.48 |
| Â ULIP |
.25 | 0.5 | 0.4 | 0.4 | 0.1 |
| Â Tax Saving FD |
.5 | 1 | 0 | 0.1 | 0.1 |
| Â Endowment Policy | 1 | 1 | 0.5 | 0 | -0.5 |
Rules
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
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
Note : This is an old post , I am republishing it with changes
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)
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 couldnât 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 thatâs why one of the problems faced in the last two years by real estate markets is âcashâ.. Which means not completing projects in time!
The single word for this phenomenon is âliquidityâ. 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. Â 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 ?
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 .
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;
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;Â then there can be two cases where you will be taxed at the end.
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
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
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.
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 .
All of these will loose the tax benefits
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% |
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 .
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
Do you want your children to be smart when it comes to Finance? Donât you want them to learn all the things, which youâre learning today, from this blog & other resources? And that they donât repeat the mistakes, we made in our lives?
Financial Education for Children is as important as their regular education. Sadly, we do not have in our school curriculum. However, you can start teaching your children, the basics of money, so that they become, more aware, more responsible and think in a better way about finance.
Itâll not just help your children, but even you as a parent in many ways. Here, I present 9 things to teach your children.
Most kids today are indulged, like never before. All they do, is spend. The money mostly comes from one of the parents. The kid asks you for a 100 bucks to buy the latest thingamajig, you question them why, they answer you, and you give them the money.
This generally, makes them believe that once they give you a âgood enoughâ reason, the moneyâs in the bank (or their grubby liâl hands) đ . You need to make sure, that kids understand how you save money. This will happen only, when they themselves, understand how to save money.
Let them save some money for their little goals (even big onesâ). If your kid wants to buy something, which you think can wait, encourage them to save towards its purchase. Whenever you give them some money for anything, ask them to save 25% of it for that goal.
Apart from this, you can give them some small amount weekly to save for that goal directly. Please buy a piggy bank for your children. You can buy a fancy one or the clay one we had in our days đ It works!
You should teach your kids where the money at home comes from, where it goes and how much is saved. Iâd ask them to maintain a simple table where they can write how much money they received, & when, from whom, & where it was spent.
These 4â5 things are good enough for a small child to start with. If you have a computer at home, you can make an excel sheet and ask your kid to maintain the account, while making sure, that things are very simple for the kid to understand. Donât over do it đ
Once they start doing this exercise, theyâll gain an awareness of where they spend their money & to what extent. You can sit with them each quarter, and review the sheet. Don’t try to point whatâs right or wrong. Just gently point out facts; that’s all.
Have you ever faced a situation when your kid bought something and they were cheated & charged exorbitantly? Or demanded something from you, but they thought that it’s wasnât that expensive?  Kids don’t always realize, just how much something costs. They just want it.
The best way to deal with this situation, would be to ask them upfront, what they think, is the price of something. If they demand a video game from you, they might not know how much it costs. So ask them, what they think is the price, Â & what is the maximum theyâd like to pay for it.
Many times, you will find that the price is much more than they themselves think. In which case, they might want to reconsider buying it.
I remember, when IÂ was young, my brother & I demanded a video game from my dad. He fobbed us off a couple of times, but later he asked us, âPata bhi hai kitne ka aata hai?â (“Do you know how much it costs”) . We were puzzled, as we really didn’t know the cost.
We assumed itâd cost us something like a 1000 bucks, but we later found, that it actually sold for more than 3,000 at that time. Once we knew the price and compared it to the value it delivered, it didn’t make sense to buy the game. We had much better, healthier entertainment options.
And guess what? Dad bought us the game, next year! đ
Ask them their priorities, what they need this year, what their wishes are, and help them sort out their desires and their requirements. Ask them, what is more important? Whatâs secondary? This way, you encourage them to think in the right direction.
You are giving them an opportunity to understand difference between needs and wants. This might not be true for small kids below 10, but will be more relevant for children in between the ages of 10 & 18. Kids often times speak or figure out amazing things, which we adults don’t think about. Do this exercise and you might find, that your kid has real smarts!
Please share examples from real life if any đ .
You should make sure that your child’s attitude towards money is shipshape; that they respect money, understand that it takes an effort to earn, and also understand the fact that, while money is important, it’s only secondary, as far as happiness & a content life are concerned.
Talk about money in front of them in a way, which gives them an appropriate view. Make sure, you don’t give them an impression that the familyâs happiness isnât as important as your job or business. Read Personal Finance Mistakes
If you give your children pocket-money, make sure they live on it, the entire month and they do not come to you smack bang in the middle of month, asking for more, for things they could have managed with the same pocket-money.
This happens only when children deviate from their monthly needs and carelessly spend on what they don’t need. While, they may ask for more, because of some emergency need sometimes, over a long-term, you should make sure they stretch with that pocket-money.
Children will understand budgeting better, if you yourself practice it (ouch!). When they see how you allocate expenses each month, and stick to it, chances are, they will replicate it at their level. While, this whole thing can be tough initially, help them out, by giving them the extra money they need in first 2-3 months and then restricting gradually.
Watch this video to know how to raise a smart child about money:
Start teaching your child, the different ways of investing. Teach them basic banking, how banks operate and what it means to earn interest on an amount. You can also buy them some games which teach investing. Ask them to deposit some amount with you and you can pay them interest per month.
When you give them pocket-money, say Rs.500 per month, ask them to deposit back Rs.250 with you, with the assurance that next month you will pay them 10% interest on that amount, i.e : Rs.275. Though you might be out-of-pocket by Rs 25, the knowledge you impart to them is priceless !
This Rs.25 gives them the important message, that saving their money and investing regularly can increase their money many times over.
When they start earning later in life, this gyan will be something, they respect you for! Also, don’t forget to open a bank account for your child as soon as they turn 12-13 yrs.
Donât tell me you want your children to do regular 9-5 jobs! Donât you want to instill some entrepreneurial skills in your children right from start, so that they know what they want to do in life and take an initiative to work along those lines?
First step is to talk about different ideas your children have. When they are small, they can have weird ideas, but listen to them, & ask them how they can make money from some idea. Ask them questions like “Can you think of some idea, using which, you can make money?”
My own brother who is 13 yrs old makes weird stuff out of junk which can act like a toy gun! He once said, that if he can make 10 of those and sell at Rs 20 each, there will be many friends of his who will be ready to buy it. Though he didn’t do it, he surely has the right attitude.
You can encourage your child to do some random / different / creative stuff for a few hours every day (during vacations at least) and pay them extra money for it. This will help them earn some money and also help you do some work for which you wanted to pay someone!
If you have a garden, you can ask your child and his friends to do some random things for which you wanted to hire a guy anyway. This has some advantages; First â your children will understand, itâs not that easy to earn money and they have to work for it.
Here, you will help your kids to spend some time constructively, which they would have spent playing or roaming around or playing video games. And finally, your money stays at home đ
Thinking a bit bigger, maybe you can really involve your child and his friends and work on some month-long project… one, that has a whole business plan, revenue model and which then earns money for 1 month (may be this can be done in summer holidays). Wow… this seems exciting, talk to your child about this today and see the response.
Ideas? Anyone?
You should also start teaching your child, to handle credit.
If you pay them Rs 500 pocket-money and in the same month they demand Rs 200 extra, you can give them that money, but now introduce them a concept of âcreditâ. Tell them that it’s not going to be free and you are cutting Rs 50 for next 4 months from their pocket-money and paying them just Rs 450.
If you want to add some horror and suspense, make it 5 months (charge interest). This will make sure they ask for extra, only if they need to. Stick to this with discipline, and don’t fall for emotional atyachaar from your children,(they are really good at it, especially girls!)
The previous pointâs example can also be used here. If you are making some small project for them from which they can earn money, loan them some seed money like Rs 1000-2000 (as a venture capitalist) and then demand the money back after 1 month with interest. (I come up with crazy thoughts at times đ )
Teach your children basics of money from the very start. These tips will act as a foundation for your childâs financial education and they can build upon these learnings in the future. Most of these tips are for children, but can be used for your spouse, who may not be that good at personal finance. What say?
Comments, Can you also share your tips ? Do you think these tips will be helpful to your children? If no, then what are the obstacles?
There are many newcomers in Personal Finance who have no idea of very basic things . So I thought of doing a video presentation covering topics like Section 80C , HRA , HRA Example , LTA and Medical Exemptions , Tax Calculations , Tax Slab and example , Power of Investing Early , Understanding Equity and Debt , Investments Options , What is Insurance , Insurance Options , 4 most important things in Personal Finance . Lets see how everyone likes it . I would love to hear your views and suggestions so that I can create much better video tutorials in future .
Personal Finance Presentation Video
Here is the presentation
Comments please , can you give suggestions on what topics can I cover in video presentations and how can I improve upon it ? Did you like it ?
In this article we will see the commission structure of Insurance Policies . We will look at Endowment/Moneyback/ULIP plans and how much commission an agent earns per year out of those policies.
As per Insurance Act, 1938, The insurance companies are allowed to pay a maximum commission of 40 per cent of the first yearâs premium, 7.5 per cent of the second yearâs premium and 5 per cent from there on. The commission paid is limited to 2 per cent in case of single premium policies. In case of pension plans, the commission is limited to 7.5 per cent of the first yearâs premium and 2 per cent there on. Currently most of the policies are very much paying these kind of commissions . Let us quickly look some of the facts on Life Insurance .
| Policy Type | Premium Paying Term | Upfront Commission (1st Year) | Trail Commission (2nd & 3rd yr) | Trail Commission (from 4th yr) |
| Endowment / Term Plans | 15+ yrs | 25% – 35%Â * | 7.5% | 5% |
| Endowment / Term Plans | 10-14 yrs | 20% – 28%Â * |
7.5% | 5% |
| Endowment / Term Plans | 5-9 yrs | 14% | 5% | 5% |
| Endowment / Term Plans | Single Premium | 2% | 0% | 0% |
| Money Back | 15+ yrs | 15% – 21%Â * |
10% | 5% |
| ULIPs | Regular Premium |
20 – 40% | 2% | 2% |
| ULIPs | Single premium | 2% | 0% | 0% |
Note : Some of the numbers are in range, which means the commission can lie between that range . Mostly its minimum commission + Bonus if any
Agents Commission
| Year |
Commission Amount |
Method |
| 1st Year | Rs 35,000 | 1 X 35% |
| 2nd Year | Rs 15,000 | 2 X 7.5% |
| 4-20th Year | Rs 85,000 | 17 X 5% |
| Total | Rs 1.35 Lacs | 6.75% |
Q: So are you imaging which is more costly ? Mutual funds or Insurance Policies ?
Read subramoney’s article on this topic.
How to use this information ?
Agents have to make sure that they follow-up with clients and track the premium payment, this leads to overheads and regular feedback from agents side , apart from that there are operational expenses incurred by agents , so we should not forget those points . As a customer , you should be knowing how much an agent is making out of you , this should form the basis of the quality service for you . An agent should help you understand your Insurance requirement and provide you the best solution , He should assist you in buying the Policy and over the years he should update you/ help you with all the changes .
Hot discussion topic
As per a govt-appointed committee , Insurance commissions should totally be removed by 2011 . “Immediately the upfront commissions embedded in the premium paid (to agents by insurance companies) be cut to no more than 15 per cent of the premium. This should fall to 7 per cent in 2010 and become nil by April 2011”, said the consultation paper prepared by Committee on Investor Awareness and Protection. (Link) .
What do you feel about removing the commissions from Insurance products totally ? Will it impact the Insurance Industry , how much ? Do you think it will lead to fall in premium payments or new policy getting issued ? I personally feel YES . What are your views ?
Unrealistic returns
Risk free returns, in our country are amongst the highest in the world. In countries like US, the interest rates are 1-2%. Equity markets in our country continue to provide 12-15% annual returns (Find Why) . But how much do investors expect from equity these days? A lot! No one is ready to settle below 20-25%? 12% is abusive to them, & makes them feel like they are cheated. A reader told me that he earned 100% this year from equity (2009) and he will be happy with even 25% next time! LOL! This happens when you look at short-term returns. Investors who started in 2004 started thinking that they are all âWarren Buffetâ and can leave their jobs in some years! Whereas all investors who started in 2007 end or 2008 start compare equity with their mother-in-laws, they just can’t stand it.
Think long-term, and timing will just not matter much. For retirement and child education, which is 15-20+ years away, just start a SIP in an Index fund and then go into a COMA, come back once in a while and just review it every 6 months to a year. That’s all.
Feeling special when it comes to Life or Health Insurance
Iâm not sure why, but some people feel that they are god gifted. They feel good health is a good excuse to skip Health Insurance and just because they don’t drive carelessly, it makes them âAccident proofâ. They donât realise that most people die in accidents not because they don’t drive well; itâs because the other person does not. Probability of dying is almost the same for everyone, but everyone feels that they have better chances, of not being part of an accident or an attack.
Be realistic; especially in bigger cities the chances of accident is higher than smaller cities. Most and more casualties happen in bigger cities. Take adequate Life and Health cover.
Excessive Leverage and careless spending
In recent times, we spend like thereâs no tomorrow. Easy available credit for home loan & the tax breaks available on them, EMIs available as an option for buying almost anything these days; all these easy means for laying hands on money has suddenly changed the way we see âAcquiring Assetsâ and âSpendingâ. Unlike our parents and grandparents, we are spending money, which we havenât even earned. We buy houses, cars, vacations etc., and then pay the cost for the rest of our working lives. In some cases, it might make sense, but a large section of society just lives beyond their means (See this eye-opener from Subrmoney) .
Research shows, that we feel less guilty when we pay with our credit cards rather than cash. When we use cards, we don’t see money going out; thereâs just a consolidated bill at the end. Nothing can be done (or undone) then, you just pay it. Imagine you are paying cash every time you are buying something you really do not need. We buy unwanted clothes, & unnecessary gadgets we can do without. How many of us claim, sometimes that we just can’t survive without a certain device, or feel that we can’t enjoy our life without certain doodads? Didnât our parents and the old generation live without them or with limited quantities ?
Why have we all suddenly shifted to plasma TV rather than the old TV we have used in our childhood? Of course, technological changes should happen and we should always move forward, but buying a Plasma TV just because it looks cool in your drawing-room, does not make sense at all; that too, if you havenât yet planned for your retirement or taken care of all the important goals in life. If it’s really your need , then go ahead , I would encourage , but most of the time people buy it out of comparison with friends and relatives. Once your other priorities have been achieved , you can go for it, But not at the cost of something more important .
Iâve heard horror stories of people who have bought homes and are crying today. Their home prices are moving up, but the quality of life has drastically decreased. They suffer horrible amounts of stress because now, even small things in life which gave them happiness, look unaffordable… all because that 2 BHK Flat’s EMI has to go through next month (A close look at Real Estate Returns in India).
No quality trips & vacations, heavy stress because of insecurities of jobs. Imagine a double income family with income of more than Rs 1 lac, who belongs to top 1 percentile of the highest earners in the country, but not leading a happy life because of excessive debt they have taken on all the loans and not enjoying little things in life because of these issues . Whats the point of earning so well then ? Donât try to be over ambitious at the cost of your current lifestyle and happiness! If you can’t manage your life successfully and happily, then the car, and the house, and all that financial planning is just a waste. (Read What is the goal of Financial Planning)
Short vision
Close your eyes and try to imagine your retirement, child education & marriage related expenses, and health care costs after 30 years. Can you predict your grocery bills after retirement? Living in present is great, but planning your future is critical now. Let us do a small exercise to show you what your dietary (food & eating) expenses at home after retirement will be.
Consider a 30 years old couple today… How much do they need to eat a decent breakfast, lunch and dinner at home? Even if you consider a meal at Rs 25, that’s Rs 150 for 3 meals/2 person a day, thats Rs 4,500 per month. I guess that’s what the grocery bill of most married couples in their 30’s would look like (IÂ am unmarried, as yet). Now, Rs 4,500 per month today, means 25,000 per month after 30 yrs, which is 3 lacs per year just for groceries. Forget inflation for now, if you live for 30 yrs after retirement (worst case), that’s 30 years X 3 lacs = 90 lacs just for your breakfast, lunch and dinner and this, doesn’t even consider inflation. Some people think they would need 1 crore for their retirement , LOL !! . You will require at least 10-15 crores, start working on it NOW !! . Pray to God, you don’t live longer than that, else it would be really painful!
Not ready to pay for Advice
This is in our culture & our genes, it seems. The very idea of paying for advice is anathema to us. We rely on âfreeâ advice most of the time. If we can get the top 10 mutual funds from valueresearchonline.com, then why pay someone for advice? When we know term insurance is best, and we have a good formula to calculate life insurance requirement, then why do we need a financial planner to tell us how much Insurance we need? If we have so many personal finance websites and magazines then why do we need financial planner, we can do it all by ourselves? We are a DYI (do it yourself) country! . I get many questions over email and comments, Imagine me asking for money for giving personalised advice, How many people will consider paying or will even accept that its fine ?
We must understand, however, that there are situations where you just canât match professionals in some areas. The other thing is some advice can be general. For example “top 10 mutual funds” might not work for you, & might not be suitable for your situation. A different set of mutual funds might work in your case and to analyse your situation, Â an investment consultant can be helpful. You have to take a call on whether its worth doing it all yourself or pay the fees & have a pro handle it.
Take large real estate transactions for example; I am amazed to see many people mailing me questions on complicated real estate deals, they are doing themselves, which actually might need a CA attention or professional advice to deal with. But why pay the CA that extra 10k or 15k he will ask for? They then, make mistakes and in long run lose a big amount of money just because of ignorance and not having optimized the whole deal.
Read Part 1 of Common Mistakes in Personal Finance
Comments Please , What are your views on these mistakes , which was the real eye-opener for you ? Do you want more of these kind of articles ?
Spending more than you should
Sometimes, people spend impulsively, on things which they do not really need. Just because, your plastic card is in your wallet and you “might” need it in future makes you believe that you need to get it right now. A brand new camera, with a 100 megapixel sensor and a 2000 x zoom is available at an EMI of just 1999 per month â and suddenly youâre interested in Photography! An EMI of 2500 a month, for that magical million colour, anorexic Flat Screen TV creates a magical belief in you that your normal TV at home is now really blurry these days (not to mention really fat!)
Is there a need, to splurge on Movies and eat out, every weekend? A regular meal at home, with a movie on tv is also a good weekend, at times. With many people, savings occur, only if they are left with any money at the end of the month. This needs to change â start saving first, then spend on what’s necessary and then spend on your desires â last. Financial planning does not mean compromising your dreams or what you love to splurge on; itâs all about knowing what you need and what you donât, & knowing it well! . Read : Can you live with 90% of your Salary
No Financial Education to Spouse and Kids
Most people are more comfortable talking about SEX rather than FINANCE to kids (just kidding.) They dont feel the need to tell their children that they have bought life insurance for them (the kids) should they be hit by a bus tomorrow (the parents, not the kids đ ). Once children reach an age of maturity like 16 or 17; when they can understand things & reason well and can take on responsibilities to some extent… Please start telling them about money and finances. Once you are gone, you can’t even regret.
Kids should know what your work is & how much you earn. They should be clear on how you are saving money to fund their education, bike , trips etc. Once they know about life t it, chances are they will be a lot more supportive, would be realistic in their demands & stay well within their limits. Kids donât know sometimes, how much pain you take in earning money. Most of the times, kids know your salary and your designation at company and assume the family to be a âhigher middle classâ one. Once you tell them about Home loan EMI, Car Loan, other liabilities, Retirement Savings, Education Expenses, Marriage expenses and the medical emergencies for which you are saving, they will have a better idea about the current situation and they will act responsibly.
Parents feel a little uncomfortable, telling their kids these things, as they feel children are still young and such information will create unneccessary psychological pressure and they would not talk about their demands and be unhappy. Parents feel that children should start learning about finance and applying that knowledge, once they are in a job and start earning. I say, if your finances and spending habits are messed up today, a big reason could be that, your parents never talked about finance with you openly. The same applies to spouses. Imagine, if you had all the knowledge and best practices you have learned on this blog, 10 years ago; or when you started earning? The situation would have been very different today, wouldnât it?
Dont let this happen to your kids: Teach them!
Imbalanced Asset Allocation
A lot of people have a tendency to start working and then never look at, or review their finances. Tax Planning is nothing more, than a âsignatureâ on some form for them. Initiatives from their side are limited to just calling an âagentâ and nothing more. When they finally look back at their finances, they find that they have 40 Lacs in FD’s and 25Â lacs lying in Bank. This happens a lot with NRI’s working outside the country. These are 35 yrs old who have 90% in debt or Cash, and 3-4 mutual funds and shares bought in recent years just for âtryingâ. This category misses a huge amount of returns which they could have made with just 4-5 hours of planning or hiring a proper investment consultant.
On the other hand, there are investors who have no PPF, no FD, no Debt Funds, no bonds; they just do share trading, buy direct stocks, invest in just Mutual funds (pure equity). Their imbalanced Asset allocation is responsible for the huge ups and downs their portfolio takes. One year the worth of their portfolio will be 10 lacs, the next year it will be 7, then suddenly it will be 14 lacs the next year. The numbers dance with huge fluctuations, but at the end of letâs say, a decade, they look back & find they are nowhere better than their âHigh debt Instrumentâ kind of Investor brothers .
Buying products from Close One’s
Will you sell a junk product to yourself if thereâs a 35% commission and it will be a burden to you all your life ? I don’t think so, but if you had to sell it to your friend, colleague, brother-in-law, sister-in-law, fatherâs friend etc, youâd consider it, wouldnât you? Thatâs what happens in real life too.
Most times, the “Best plan” comes from one of your relatives or some one known. STOP IT PLEASE! A simple NO might hurt your relations with said person, but it will save you, your hard-earned money, rather than waste it on idiotic products, which youâll regret for life đ It’s just common sense that there are better advisors and consultants than your relatives or a close ones, unless they themselves are known and respected in the field (of finance). Read : âPapa Kehte Hainâ problem in Personal Finance
Most of the readers here, have shared their bitter personal experiences, where they bought products because it came from their relatives, Uncle’s et al. This happens a lot with young guys yet to start working, and their fathers have bought policies for them and then delegated the premium paying responsibility to them once they start earning, it’s a real âburden of legacyâ .
Read Part 2 of Common Mistakes in Personal Finance
Comments please , Any other mistakes you can think of ?
The common view of the stock market is that, itâs a place for gamblers and risk takers. Only if you have the capital, and the nerve to take risks, should you invest money in the stock market. Otherwise one is better off staying away from the stock market and putting money in safe fixed deposits. The truth is far removed from myth, if one looks at the stock market with a different perspective, and avoids the hype and hysteria associated with it. Letâs look at different aspects of investing in the stock market.
The stock market is a place, where buyers and sellers meet to buy and sell companies or rather small pieces of it. Thatâs all there is to it! Nothing more, nothing less! The small pieces are called shares and they represent a really small ownership of the company. Owning such a share, entitles the investor to his or her share of the profits, the business makes. This generally, is paid out to the investor, as a dividend. The management does not give out all the profits to the investor, of course. They retain some portion of the profits to re-invest and grow the business. Learn How to start in Stock Market
If you agree with the above definition of the stock market, the idea of investing in the stock market boils down to investing your money in a select group of companies. If the purpose of an investor, is to make a decent return on the money invested by him, then he should choose companies or businesses which are sound, consistently profitable for a long time and run by shareholder friendly management.
Letâs explore the above statement a bit further. The long-term return for a shareholder, (where long-term is 5 years or more,) equals the underlying returns generated by the company. The returns for a shareholder can fluctuate from year to year based on the market moods and sentiment, but over the long run, investor returns always track the returns of the company. If the company can earn 20% on its capital, then the investor will make around the same returns over the long-term. Thus, we now arrive at the first criteria for successful long term investing, i.e., To make above average returns, one should invest in above average companies.
The above criteria is not a revelation to most people. However very few people want to follow the obvious as they think, that thereâs some hidden magic in the stock market.
Look around you. Do you see products which have been around for quite some time and are used by a lot of people? Find out the companies behind them… That would be a good place to start. (Cue, the groans â I never said investing in the stock market does not require work. đ
Once you have identified a few names, the next step would be to get the annual report of the company and browse through it. The mention of reading an annual report sounds really daunting or off-putting to most people. However if you bring yourself to do it, it will place you ahead of 90% of the people in the stock market! The idea of browsing through the annual report is not to become an expert at it, but to get a feel for the nature of the company. One can focus on some of the following sections to see if the company is worth putting your money in,
Management discussion and analysis â This is the section where the management describes the business and lays out the plan for the company.
Profit and loss and balance sheet â This is the section which tells you, if the company is making a profit or not, how much debt is held by the company, the amount of dividend etc. If you come across a term you donât understand â search for it on the internet or talk to a friend or someone with a background in finance.
Letâs look at an example â Asian Paints. This is one of most well-known companies in India. This company has been the number one paint company for the last 20+ years. The companyâs products like tractor distemper and emulsion, apcolite enamel, Apex exterior etc are well known and are widely available. The company has been in business for over 30 years and hence we can be confident that the company has done something right consistently to be the no.1 paint company in India.
The annual report shows good performance over a long period of time. The âten year reviewâ in the annual reports shows an increasing profits and dividend over the years. The company has used these profits to reduce the debt, pay out an increasing amount of dividend and re-invested the balance in the business to grow it over the years.
The above performance has been reflected in the share price too. An investment of Rs 1000 in 1998-1999 would now be worth around 19000 which translates to an annual return of around 31%! And this doesn’t include annual dividends!
The immediate question which comes to mind is when should one buy the stock? There is an army of people out there, whose job is to advice investors the exact time to get in and out of stocks. I would personally say an investor would be far better off if he or she switched off the TV and ignored the advice of these so-called experts. If one is able to find a stock like the one above, the best approach is to invest in the company on a regular basis. If one can save Rs 2000 per month, then go ahead and invest 6000 Rs every quarter. A regular program of investing in good companies on a regular basis, while ignoring the noise and chatter of the stock market pundits, will give you very good returns and also good sleep at night.
So… whatâs the catch ? The catch is â us! A lot of investors like to get all excited and thrilled, when investing in the market. They want to chase the hottest stock, so that they can boast about it to their friends. At the same time, they ignore the gems lying right in front on them.
Investing is simple, but not easy. If one can find a few good and high quality companies and invest in them on a regular basis while ignoring the noise and chatter in the media, then that individual is likely to do well and have a really good amount of money secured for his or her retirement.
This is a guest article from Rohit Chauhan. He writes about his thoughts and analysis of various companies and industries and how to apply value investing principles, His blog is http://valueinvestorindia.blogspot.com
