Author: Jagoinvestor

I am Jagoinvestor Admin

17 tips to tell you how to manage your Personal Finance and save money

Posted on by Jagoinvestor

Personal finance is not only about your saving and investment, it includes tax planning, savings, expenses, debts, retirement plans, investment products and all the insurance and other policies. It is an understanding of how these tools works together and also affects each other.

In this article I will tell some tips which will be helpful for your personal finance.

Personal Finance Tips

Image source: Wealthfit.com

1. Split your Term Insurance

You should split your Term Insurance for two reason:

1) Top most reason is flexibility in Decreasing the cover later. So in case you need cover of 60 lacs now, you can divide the cover into 30:30 or 20:40 and then in future whenever you need that your insurance requirement has gone down you can just stop one of the policy.

2) The second reason is that your risk of claim decline from insurance company goes down, but this is a secondary reason.

2. Invest in Tax Saving Products for long term goals

Most of the people still invest in Tax saving funds for their shot term financial Goals. The fact that the money invested will get locked for long term should be taken in positive way and hence you should invest in these for your Long term goal, so that you don’t feel bad about the lock in period because you anyways need money after many years.

For example – Child Education, Retirement, Holidays abroad after many years. For short term goals like Buying car, paying fees, saving for some short term commitment should not be taken care by Tax saving Instruments.

You should use Fixed Deposits, Fixed Maturity Plans, Debt Funds, Balanced funds and Non Tax saving Equity Funds (Risky) for Short term goals. Once you think like this the lock in period will not matter to you at all 🙂

Watch this video given below to know about the tax saving investment tools in detail.

3. Use Top up’s in ULIP’s to minimize Cost

For investors who are going to buy ULIP’s or using ULIP’s for their long term goals, they should use Top up facility in ULIP to minimize the cost. The Allocation charges are generally linked to the  regular premium you pay and not the Top up’s. So if you are investing 60,000 per year as premium, you should rather take a 20,000 policy and top up your policy with 40,000.

This way your will save charges on top up money. You can decrease your cost (charges) by anywhere from 50% – 75% using Top ups.

4. Investing in GOLD ETF’s instead of physical GOLD

Why do you want to invest in Physical Gold? The biggest reason is for Daughter’s Marriage and Jewellery required for the same. But the underlying reason always is capital appreciation.

So why not always invest in Gold ETF’s [ Understand what is ETF ] and whenever you need Physical gold, sell the ETF’s, take the money and Buy the Physical Gold at that time. Most of the people invest in Gold physically for Daughters marriage, but the better way would be to invest in ETF’s and when time comes you buy the physical gold by selling the ETF’s.

That is a better way because its more flexible, safe and easy route.

5. Use your LTA, HRA and Medical Reimbursement

I am amazed to see that many Salaried Employees especially youngsters do not care to take the benefit of LTA, Medical reimbursements and HRA just because of  their laziness.

So make sure you take advantages of these even if you partly use these things you will save couple of thousands in Tax. All you have to do is save the bills, take the xerox and walk couple of steps to your Finance department and submit them, don’t you think its worth if its can save you couple of thousands in tax saving?

6. Control your Credit taking Habit

good credit habits

Image source: freecreditreport.com

Most of the people take Debt more than they can afford or deserve. Criteria for giving credit is mainly how much you earn. The company never knows your expenses and your future goals, your risk appetite, your future plans etc.

People earning 5 lacs per annam take debt of 30 lacs for Home, unnecessary personal loans for buying LCD’s, going for vacation and other non-priorities in life. This can have ill-effects later on.

Also companies are now keeping an eye on your credit taking behavior and it affects your credit score through which companies in India have started using as a decision making variable. So watch out your credit taking behavior. Don’t over-do it.

7. Dont Over monitor your Portfolio

Keeping an eye over your portfolio is great. You should look at your shares, mutual funds, ULIP’s etc. but overdoing it can be fatal sometimes. Some of us have this obsession of watching shares, mutual funds NAV and ULIP’s NAV on daily or may be weekly basis. See How much time you should invest in Personal Finance.

This is not a good sign for long term investing especially for people like us who are into regular jobs and have no much time to contribute in your Finances.

When you are a long term investor, why keep track of short term movements, these moves will have not much value in your all growth and short term movements will affect you mentally and tempt you take take decisions in short term because your money is either going up or down fast.

More of anything is bad and same things is true for your over involvement. Couple of hours per month or every quarter is good enough. Don’t get a feeling that successful financial life means more action.

8. Share your Financials with Family

If you are dead in another 1 hour, do you think your Family will be able to find out all your investments and Insurance documents and successfully claim them?

Are they unaware of the fact that you took a huge Insurance cover for them or you invested 50,000 in a ULIP last month?

Most of us graduate from novice investors to a good investor but still are left behind in taking care of this extremely critical point of sharing each and every details of our finances and making sure that the documents are within reach.

Let your wife, children have a good idea of where the documents are and where your investments are, have xerox copies of every document and have them at 2-3 different places and make sure people know about them. Emotional pain of losing some one and no idea of the finances which will take care of them is a kind of  situation you never want you loved ones to be into 🙂

9. Don’t compare your returns with others

Comparing personal finance with others

Image source: i.ytimg.com

You are different, be proud of this fact. If your returns are less than your friend’s mutual funds that’s fine. Don’t compare your self with others, there are many things which determines what you get in life like knowledge, luck, skills, timing etc.

So just make sure that you are getting what you try for. Don’t lose focus from your goals, your main aim in life is to achieve your financial goals easily and smoothly. Financial Planning is a race where everyone who reaches their personal target is a winner.

Make sure you don’t hurt yourself by competing with others.

10. Investigate everything before you Buy it

When you buy something, make sure you try to get information on Internet, ask on forums at different websites and make sure you find out maximum about thing product you are buying. Spending 30 minutes investigating your product can save you from lot of trouble.

One person I know recently took a home loan from HDFC and went for additional Life over from same bank for 30 lacs. He didn’t investigate much about the cost. It was around 8k per year for the term Insurance. When some days back we saw quotes from other company, the cheapest quote was around 6,000 from ICICI Prudential.

He was paying 2,000 more for the same thing because he didn’t spend 5 min extra investigating about the product. Just think what is the loss of spending some time investigating your product. How many of you took an ULIP after agent explained it to you and didn’t inspect much about it.

Email This to your Friend:

11. Invest and Spend, not vice Versa

You receive your salary -> then you spend all your money -> then save or invest  if you are left with something. This is not a right attitude.

You should change it to Get Salary -> Invest your money as per your future goals -> Spend the rest.

Once you are saving some part of your salary, somehow you will find ways to spend on things which are of first priority and would refrain from spending on things which can be avoided but if you spend first and try to save later, you will end up spending on unnecessary things.

So better change the order of spending and saving. You can definitely live with your 90% salary , so at least save 10%. There is no harm in trying out this. If it does not work, you can go back to spend and save.

12. Build your Emergency Fund now

Make sure you have emergency fund. If you are listening about this from long time and haven’t done it yet, the best thing would be to take a pen and paper right now and plan for it.

This is the money with the aim to provide you immediate access, not growth of money. Don’t concentrate on getting great returns from this part of your portfolio. The aim of this part is just to give you high liquidity in case of emergency. That’s all.

So simple rule is 2 months of expenses in Cash which you can access in minutes from ATM and 3-4 months of expenses in Liquid funds, which you can get back in 3-4 days.

This is preparation for a situation like if you lose your job and need time to search for something you really like, or get a long term illness and cannot earn money in short term or special emergencies. You can always reach out to close friends and Family for money, but why to depend when you can be self-dependent.

Its’ all about strong planning.

13. Equity for Long term, Debt for Short term

I say this again and again, this is the golden rule, one of the fundamentals of Strong financial planning. Long term goals whose target date is more than 7-8 yrs like Child Education and Retirement should always be linked with  Equity products like Equity Mutual funds, Direct Stocks, ULIP’s, Index ETF’s, Index Funds.

That’s because you can get great returns in long run from these things with lesser risk. On the other hand short term goals should be achieved by debt products like FD’s, Debt Funds, Recurring Deposit, Short term bonds. You can also use Balanced funds if you have moderate risk appetite and time horizon is 3-4 yrs.

14. If you dont understand, Don’t take it

How many investors understand how their ULIP works and what are different costs and how to use it efficiently? Not more than 3-4 % I believe.

How many people know why they have invested in Mutual funds which had a fancy name and which makes you feel like you have invested in something great and how many Endowment Policy holders know the overall final return they would get from their Policies?

Investors get into products which they do not understand well and then they can’t make best use of it which defeats the purpose. In reality the best products are least complicated one’s like Mutual funds, FD’s, Term Insurance, ETF’s, Gold ETF’s etc.

So if you don’t invest in something which looks fancy, you are privileged and should be thankful to god. Companies come up with complicated things which makes general investors feel that they are dumb and these companies are some big shot high class super knowledgeable in field of finance.

Read features of a good Portfolio

Just ask yourself  if you want to eat the best, tasty and healthy food in this world then where will you go? 5 star hotels? I don’t think so 😉

15. Try new products now

There was a time when LIC policies, FD’s, NSC and PPF were the only thing in one’s portfolio. There was not much choice and people were risk averse. That was a different time.

Things have changed today and Finance world is different now and it’s more complicated now compared to olden days because of lots of choices in Financial products for us today. Don’t hesitate by trying out new stuff.

There are different products these days like Index ETF’s, Index Funds, GOLD ETF’s, SIP in Mutual funds, Reverse Mortgage etc. Don’t be stuck in same products like our Fathers and grand fathers have done.

16. Take Personal Loan to pay off your Credit Card Debt

In case you have any Credit card debt and you have converted it to EMI, it would be a better option to take a personal loan and pay off your Credit card debt as soon as possible.

Credit card interest charges are anywhere from 36% to 48% per annum which you don’t realise because it sucks your money slowly and it’s not significant per month so you don’t feel it. So taking a personal loan is a better choice and pay 15-20% interest on that.

You should always try to stay away from Credit card debt at the first place anyways.

17. Educate your self more

At the end, you have to learn stuff. No need to become a pro ,but you should keep updating yourself every month with basic things. Read Personal Finance Magazines like Outlook Money (Link to online issue) and Money Today (Link to online issue) and other blogs on Financial Planning .

Also if you are new to this blog, Subscribe to Email Updates to get fresh content in your Inbox twice a week. .

Readers Contribution

18.  If appears to good to be true then probably it is not: So better if something looks great, then make sure you investigate well because there are more chances that it’s not that good as it sounds .There is no free lunch 🙂 – Amit Kumar

19. Learn simple maths : This is very nice point . Learning basic formula’s can help you a lot , you should know CAGR , IRR and Future Value formula ..  – Amit Kumar

20. Find a right Financial Advisor : Find some one whom you trustand he is within your budget and you are comfortable with . – Guru

21. Plan for retirement Early in Life : See important of Early Investing and How to plan for your Retirement in 6 steps . – Swathi

Want to add yours…., please leave a comment 🙂

You are a valuable reader and your participation is needed , Please share any tip here like the one I have discussed , even 1 sentence is worth listening to. Also let me know which was your Favorite Point among these 16 points

How much Time should you spend for managing your Personal Finance

Posted on by Jagoinvestor

Some months back I wanted to find out how much time a person would spend on his Personal Finance? So I did a poll which asked them this question and gave them some answer options to choose from. Around 180 people participated in the poll. Let us find out what most of the people think about spending time on their Financials.

[ad#big-banner]

Results of the Survey

So the survey asked them a simple question “How much time you would like to spend managing your Personal Finance” and gave them following 5 options

  • 1 Hour/Week
  • 1 Day/Month
  • I would rather like to hire a trusted Financial Planner
  • 4-5 Days/Year
  • I have other important things in life

Any Debt funds and Stock Market experts here? Please step in our Forums and help in answering questions like “Best Investment theme for future in Indian Stock Market” and “Debt funds?”

Here is the pie chart which shows all the results

Important Learning’s and Insights

  • Around 60% people say that they would like to spend around 1 hr/Week. Another 18% said 1 day/month, which is again some how same as 1hr/week in some sense. So I can say that people are interested in spending around 4-5 hrs per month. Personally I feel that 3-4 hrs a month is more than enough. Choose last weekend of month and sit one Sunday or Saturday evening for 3-4 hrs after lunch and look at overall your portfolio. Find out  how everything in portfolio is performing, how your mutual funds are performing, track if your investments are growing as per your expectations and plan.
  • Very small percentage of people said that they have other important things in life than managing their personal finances. This shows that everyone somewhere in their heart recognizes that Personal Finance is an important part of their life. But may be because of ignorance or because its too boring. We don’t get into managing or understanding it and try to ignore it to a level when its too late 🙂
  • Only a small percentage of people think that they should hire a Financial planner. There are two reasons for this: First, that they don’t feel a need to hire a financial planner and they think that its an easy task which they can do themselves, they think like “why to pay Financial planner?”. Second, that people don’t yet understand what is the goal of Financial planning and don’t appreciate it’s importance in life.

Please put your comments and involve in discussion, What do you think is the best way and time to manage your money?

Note: I feel that I will not be interested in writing a review for any product now onwards. One of the reader feels that I have received Money from Aegon Religare and reviewed iTerm Insurance, see the comment . I don’t say that it looks very unbiased and yes my word seems to be very promotional may be because of my trust in the company and their philosophy.

I am not an emotional person at all but it has hurt me as a writer.  I would love to hear your comments on that. If most of you feel the same way feel free to put your comments there without hesitation. If most of the people feel the same way. In that case I will have to refrain from writing such articles, so that it does not put wrong impression. Miss-trust is the last thing I want from readers. If people are not happy, I should also think about removing the ads I put on this blog if it makes people uncomfortable and feel like I am biased. Please accept my public Apology if I have hurt your Trust 🙁

[ad#small-banner]

Ability to take Risk vs Willingness to take Risk

Posted on by Jagoinvestor

A readers tell me : ” I invested 4 lacs in Sectoral Funds and now its down by almost 45% in one year. Now I need the money for my Sister Education in next 1 month, Should I withdraw it or wait for 1 month ? Manish , please advice ..”
I asked “But why did you invest in Sectoral Funds or even Equity” ?
Reader :  “Because I am a High risk Taker, that’s why”

I call it breach of trust with your common sense. My hands were literally itching to slap this idiot when I heard this. We have to re look “Risk Taking” all together again . I have already talked about Risk here at How much risk you should take and Understanding your Risk Appetite .

[ad#big-banner]

What are the two elements on Risk Taking?

In our country most of the people are willing to take risk.  They will say that they are risk takers , they have high Risk appetite , they love challenge, and all kind of nonsense. But they forget to consider their “Ability to take risk”. Its not important enough whether you are willing to take risk or not , your situation should also allow you to take risk. Ignoring your “Ability to take risk” can lead to situation like above example.

So mostly there are two components of taking risk .

  1. Willingness to Take Risk : This depends on our inherent nature, our attitude towards life, finance domain , Knowledge of financial products etc. Our whole upbringing will contribute towards this, because our willingness to take risk will depend on our inherent self , who we are from inside . So you can either be extra cautious by nature and may not be willing to take risks or you can be a big risk taker who is willing to sell his pants and bet money on anything. This is answer to “Can you take risk ?”
  2. Ability to Take Risk : This is the next Important part in Risk taking. Does your situation allow you to take risk or not ? It has nothing to do with your willingness to take risk , you can be very much a risk taker and dieing to bet on the next multibagger or invest in that 100% return a year mutual fund , but you have to consider a worst case at the end. You have to visualize the worst case as if it has happened after you take that risky decision . This is answer to “Shall you take the risk ? “

Let us have a close look at definition of RISK .

\text{Risk} = (\text{probability of event occurring}) \times (\text{impact of event occurring}).\,

Boom !! .. So Risk is composed of two parts .  Probability of Event occurring should be the secondary thing one should look at and Impact of event occurring should be primary. See the picture below to understand it visually .

[ad#dark_link_unit]

Probability of Event occurring : Most of the people unconsciously think about this. It happens a lot in case of Life Insurance , a general argument is that the probability is very less for them to die and hence they take the risk of not taking adequate risk cover through Term Insurance because they loose money if they don’t die ,  idiots! (See this post to understand the reason) . Same case with buying a mutual fund which has no credit to itself apart from a 100%return in last 1 yr even though its 8 yrs old fund and have a return of 8.7% since inception. The probability of these mutual funds giving return may be high, but in-case they fail, the impact it can have on your investments can be fatal , especially if you have not considered its impact on your short term goals. So the person in the example above never thought of the impact on his short term goal of Sister Education . He only considered that chances of event happening, which was low  (mutual funds going in losses) and if he is a risk taker or not , but he never considered how it will impact his goal. Even though the chances of something bad happening is low and he is personally fine with it mentally by taking risk, the right decision was to better not take that risk because the goal associated with it was very important and the impact is severe overall .

Impact of Event occurring : This is the primary thing one should look at and then take a decision. Until an event happens its very tough to imagine it, that’s the reason you should literally close your eyes and try to visualise a situation and try to feel about it . So if you want to avoid a Term Insurance just because you never get your money back and you want to settle down with a money back policy (Like Jeevan Tarang from LIC) which gives you 10% of the insurance cover you actually require for a premium you can really afford,  try to visualise a situation that you died and now your family needs the money after you are gone . Visualise how are they managing , Visualise how your dependents are already emotionally terrified and how they will fulfill their financial goals without you ?

Does it mean we should not take Risk ?

I am not against taking Risk . I love risk taking personally (but my ability to take risk is limited) . We are only talking about taking calculated risk here and being aware of what is the outcome of what we do. Risk comes from not knowing what you are doing. So take calculated risk. Know what can be the impact of taking a decision and be ready to face it when it happens. if you are not happy with the impact, don’t do it . “Not taking a risk” is another very severe risk people do. “Not taking a risk in your life if you are ok with the impact” is equally bad . So not taking risk can also have a drastic impact in your life . Below is a nice video i found for you to get motivated to take Calculated risk .

Conclusion

Recently I came to know that one friend of mine met with an accident while crossing road in Bangalore. He used to cross roads in hurry, because waiting wastes time and meeting with a small accident was not a high probability event ever. Though he was a probability genius , he forgot the impact part of this event . He is safe after this accident but impact could be much worse. Mathematics can never win infront of logic .

Finally at the end I would like to summarize this article in short. We take all sort of decisions in life regarding money , relationship , marriage , health and all of those decision have two parts, First is our willingness and how we feel about it and second is the impact its going to have in our life. This post is to build your FPQ (Financial Planning Quotient , I coined this term 😉 ) and that’s the most important thing. Taking a decision is last thing , understanding what you are doing is of utmost importance . So now their are some questions unanswered , which i will leave to you if its applicable to you .

  • If you have a Endowment policy , its totally safe and secure , but have you thought of its impact in our life when they mature at the end ?
  • If you are avoiding Health Insurance of your elder parents because of high Insurance premium , Do you also understand that the Probability of them getting some health problem is very high and the Impact is pretty severe . So when it actually happens you will wonder why you were foolish earlier.
  • Is the travel Insurance of around Rs 110 worth when you go for air travel within India from one city to another or for that matter from one country to another (charges are not Rs 110 in this case)  ?
  • So if a mutual fund has given 150% return in last 1 yrs, has it happened without taking any risk? and are you ready to face the other side of coin ?

Don’t forget to put your Comments  !!

Till what age should you take your Life Cover ?

Posted on by Jagoinvestor

From some last some days I am getting queries that some Life Insurance Policies are not giving cover for more than 65 yrs of age or for Tenure of more than 25 or 30 yrs and why they dont want to take those policies because they want a cover till 70 or 80 yrs of age . So People are confused on which one to take. They generally want a cover which covers them till 70-80  yrs of age or sometimes whole life . Let us talk about till what age should you target your Life cover generally .

Why do we buy Life Cover ?

Now lets talk Logic and think logically , no expertise required here . What is Life Insurance and How much Life cover do you need ?  Life cover is to cover the risk of early Death of bread winner and for hedging the risk of loss of income due to the sudden unexpected death of the main earning member . So ideally Life Insurance cover should only be there till the retirement of the earning member , because anyways after that he/she wont be earning , so no one will financially dependent on that person . You only think , If you are 70 yrs old , do you need Insurance cover ? Who is dependent on you by that age , generally ? How many of you are dependent on someone who is in that age ? Are you ?

Hence if a person age is 30 and he is planning to get retired at age of 58 . He requires a policy which covers him till age 58 , not more .. See the Diagram Below …

[ad#big-banner]

So what do we learn ?

Life Insurance is in other terms a replacement of your potential Future earnings. Hence, Insurance amount which your dependents gets should be a substitute of all the amount the bread winner is going to earn in his life time and provide for needs of his Family. Therefore when you are near the retirement and  if you die, your potential future income  which you were going to bring in the family will be less and hence your Insurance cover at that time should be less . We today have Level Term Insurance where we have the same level of Insurance at that time , which is ok . Note that we also have decreasing life insurance cover and Increasing Life Insurance cover also . So lets see the main points we learnt here

  • We need High Insurance cover at the start of the Career when have no Investments . Look at iTerm Term Insurance from Aegon Religare and Some Tips while taking Term Insurance
  • We need to be covered till the time we want  retirement .
  • The day we earn enough money which our dependents need even if you die , you can get rid of your Insurance and then you don’t need Insurance .
  • So there is no point in having Insurance after your Retirement , unless your intention is to get a big sum of money at the end even if it does not matter much .
  • This is the main reason why Insurance companies also give Cover till age 65 because that’s the time most of the people on earth get retired anyways .
  • Whole Life p0licies does not make any sense apart from the fact that they provide pension which is very low. See review of Jeevan Tarang Policy from LIC to understand more on this .
  • You should have sound Investment Planning so that when you reach your retirement you have grown your Huge Corpus .
  • Insurance at the end is the hedge against your risk of loosing the earning Potential , its just not a tool to make money on your death .
  • Use Insurance as Protection not for Saving , Dont just invest for Tax saving !!

Final Take Away

You have to Notice some imporant point here , Dont take the above diagram by heart and assume that your Insurance cover goes down every year , It can happen that because of other commitments you might have to increase your cover . The main takeaway from this article is that at the end of your career (your retirement life) you should have enough investments and money so that you dont need Life Insurance. Also there can be exception cases where this logic does not apply , we are talking a general case here and not a specific one 🙂 .

[ad#text-banner]

 

Questions/Doubts ? Share your comments please

A close look at Real Estate Returns in India

Posted on by Jagoinvestor

Real estate is one of the largest employer after agriculture in India. It is also a globally recognized sector which is witnessing a high growth in recent times because of increasing demands of offices and residential places.

One of my friend has shared his own experience about real estate, let me share it with you.

Real estate in India

One of my friends experience about real estate:

“The current market value of my flat in Mumbai is close to 1 crore, I bought it at 28 lacs in year 2000. The returns have been Mind boggling 72 lacs in 9 years, i.e. 8 lacs a year approx. , more than my current salary and now I am planning to invest more in real estate instead of Equity, What do you think”.

A not so close friend was discussing his Real Estate portfolio with me.

He belongs to first category of common sense deprived idiots, who do not understand mathematics well. 28 lacs flat became 1 crore in Value in 9 yrs, the returns are great, but not exceptional enough to make someone eyes pop out.

Simple math’s will tell you that its 15.2% CAGR return over 9 yrs.

Now what’s so great return about this 15.2% Return?

15.2% return over long term is desirable and great and what’s normal return from Real estate in last decade in our Country, The only thing irritating is how people make fuss about it.

Even Gold has outperformed, Gold was $300 per ounce in 2001 and now it’s close to $1100 ounce, that’s 15.5% return, 0.3% more. On the top of that Builders are not keeping their promises of Delivering Projects on Time and with same quality Promised.

Real estate investments have caught everyone’s attention in the past decade and every Tom, Dick and Harry with 5 lacs salary tries to grab a 40 lacs flat. I will try to throw some light on Average Real estate returns in past 8-9 yrs in India.

Coming back to my Friend:

I told him that it’s been a very good return, and I appreciate his timing, good job. But definitely he is bragging more than it deserves. A second person (his friend) suddenly comes to his rescue and challenges me.

“But Manish, I bought a flat in 2003 @20 Lacs with 3 lacs of down payment and rest a home loan. I spent total of 7 lacs till date and the flat is already quoting around 60 lacs, that 40 lacs of profit in just 3 yrs through investment of 7 lacs, that’s 78% return on annual basis”, showing off his fast calculations skills and giving me a “anything-else-you-young-financial-planner” looks his face .

These people are from another category of “common sense deprived and mathematically challenged” people. It is worse than first category. The problem with these people is that they do not understand “leveraging” .

What is mean by Leverage?

A situation of sitting on huge profits by just investing a small amount as down-payment and rest with home loan is pure example of leverage and very common in India, This gives a feel to people that they are very smart.

These people never consider the case when their house value drops by a big margin like say 15 lacs and they have just invested 5 lacs from their pocket, then they are in loss of -300% (absolute). But as you know, investors like to consider a rosy picture; they somehow believe that it can’t be the case with them.

When Real Estate broke in US:

As US citizens who bought Real estate in the middle of the Bubble just because credit was cheap and they could have made a lot of money by taking a Home loan and almost nil Down payment, When Real Estate broke in US, people who has put $10,000 from their pockets for a $4 million house were in losses of $1 million, because they had to pay $4 million as a loan money for something which is now costing $3 million.

That’s an unrealized loss of $1 million in a short time. That’s the problem of Leverage. Investors never think about this, India is a success story and housing is scarce, that’s enough for them to take a chance.

With my amazing quality of self-control, I kept all this in my mind and didn’t argue with him, sometimes your skills of explanation is limited to blogs only.

What is RESIDEX?

Don’t feel amazed if I tell you that there is an Index for tracking Real Estate in India. Its called Residex and maintained by National Housing Bank in India. It’s updated once every 6 months.

It covers all the major cities and the sub-areas in that city. The index Value over time will tell you how real estate prices are doing in some area or city.

Please understand that these prices are average real estate prices and not some general case which would negate what we discuss here today.

I don’t know how that is calculated but a common sense way of calculating it is to take a sample of real estate plots/flats in an area (for example 1000 units) and calculating the appreciation in value from last 6 months .

Lets see the RESIDEX values for 5 cities

Here is the chart of the same table

What is the mistake people do when they calculate Returns?

The beautiful mistake which everyone does is that they calculate pure absolute returns from Real estate which is in many lacs of rupees obviously.

So, if a person invested 30 lacs in a flat and it becomes 60 lacs in 5 yrs, they are sitting on a 30 lacs profit.

That’s a lot of money and people are excited to see that much money, but you also have to see that they invested damn 30 lacs !! for that, which is not every one’s cup of tea and the returns are normal 14-15% return/year on investment if you compare it with Gold or Equity.

You could have made more returns if you had invested in Equity (SIP in mutual funds in some top funds) . If you consider the risk taken for the return people have got in Real estate , personally I am not very much excited then, Investors forget the risk taken to get some return and only concentrate on Return part.

See an Article on GFactor , A tool to find out if an investment suits you.

What you have to see is how much return you got from something after adjusting the risk taken for that . So given a time frame of 1 year .

  • If you do a FD and make 9%, it’s amazing !!
  • If you invest in Real estate and make 10%, its ok
  • If you invest in Equity and make 11%, its just fine.. not a big deal
  • If you speculate in Options for one year and make your money grow by 500%, I would be personally disappointed a lot .

Some smart (second category people) people think that they can buy Real Estate on loan and make 30-40 lacs in 4-5 yrs from house value appreciation, While that is possible and has happened to a lot of them and definitely the return would be amazing.

But this exposes them to a great amount of risk which they don’t understand, its pure leveraging. There are better ways of leveraging than this. This kind of Leveraging is still nothing in front of Options trading in Nifty or some Stocks.

Not that I discourage people from taking a home loan and invest in real estate , but don’t overdo it , and understand and accept the risk involved, be ready for it.

“Risk happens when you have no idea what you are doing”. If you pre-calculate it and consider it, then it’s called Speculation, which is my favorite 🙂 .

An option trading is something I would recommend who have great risk appetite and dream of millions in short span of time, better than real estate.

Make sure you get updated for all the future posts , Subscribe FREE through Email now

What is Average Real Estate Returns in India

IF we see the above chart of RESIDEX Values (for 8.5 years), you can find out the CAGR return of Real Estate in different cities. Let me show that for 5 cities in India.

Chart f or the same data

Note : I have assigned Index value for “India” by assigning weights of 25% , 25% , 25% , 10% and 15% to all five cities in same order .

What Should you Do ?

First of all, understand that Real Estate is important and you should always invest in it for Diversification of your Portfolio (If you can afford it right now). But that does not mean compromising with your Risk Appetite and investing just for the sake of Investing.

If you want to buy home, make sure you afford it, Buy a 1 BHK which you can afford if you want to live in it. If you want more than 1 BHK, plan for it, take it later. There is no rush. Real Estate is not the last thing in the world.

Don’t feel left out when you see others minting money in Real Estate, believe me they are making similar returns which you can make from Equity, just that the magnitude of profits they are making is high, not the returns on average. So Chill !! .

Note: Understand that whatever we have talked here is based on the RESIDEX index and there will be many specific cases which would make this all talk a nonsense, but we have to look at general case and not a specific case.

Download More data on Residex from HERE (From 2001-2007) and after 2007 at NHB website. Note that you can’t get all data of Residex at one place.

I combined the data from NHB from 2001-2007 and combined it with data on their Website to construct all 8.5 yrs of data. There was a shift in Base year because of which I had to do so.

What do you think about the Real Estate Prices at the moment in India?

I do not feel they are justified and the prices are mainly driven because of unnatural demand created by easy access to Loan. People buy it, but cannot afford it, If things continue for some more years. I would be surprised to see a big bubble burst in India like we saw in 2007.

Leave your Comments and let me know you are reading this blog.

Disclaimer: I have not invested in Real Estate, I am not very much excited about it and I don’t have money for it.

Readers Reviews of this Blog

Posted on by Jagoinvestor

Jagoinvestor is one of the simplest blogs that you can find to kick start your investing.There is such a nice variety of posts that all individuals can get benefits from it.Manish Chauhan the blogger behind it seems to spend a lot of time making his blog perfect for his readers.It is no surprise that his blog is so popular.It is a constant reference for all financial basics, explained in a very light manner.Whether you are a blogger, an investor,analyst or just someone passing by it is definitely worth spending some time here. — Sumayya Shaikh

Jagoinvestor is a great blog on investing. It is extremely rich in content, some of the posts are written extensively. The interesting part of this blog is most of the queries are answered from different posts present here itself. And by the way he’s a great cook…so you can expect a treat J — Charu Gupta

Jagoinvestor blog is an excellent one stop destination for understanding basics on a variety of topics in money management and stock markets.The content is presented in a way that is easy to grasp avoiding the complex lingo that usually scares away readers.This helps in a big way to get those crucial money matters fixed in one’s life without becoming too dependent on other advisors. — Saif Shakeel

This is one of the best blogs i have come across which explains the nuances of financial planning and investing in a way which everyone can understand.Especially the articles on financial planning, compounding power of money and endowment plans are real eye openers. This blog really help me avoid many pitfalls and I have educated my friends also.In a nutshell ,it is a one stop blog for anyone who wants to reap good harvest for their hard earned money. Keep going Manish !! — Swathi Kota

This is a great website ! Thanks for all the information. This website has provided a wealth of information for me and i really appreciate it and look forward to learning more. Now i know no agents can fool me anymore. Thanks Manish for the great job. — Anu Lopez , Dubai

Discover tips on saving money, investing smartly, managing your finances and getting the most for your hard earned money from the Smart Investor blog by Manish Chauhan. This would be the one website I would suggest to anyone who is new to investing or just starting up. — Skandhakumar

It is a must read for the people who want to plan their personal finances using a range products available in market.You would be wrong if you think it is a stock market blog .The title ‘Smart investor’ perfectly suits this blog — Sandip Naidu

I just happened to see Manish’s blog few months ago accidentally while reading other links in famous TA analyst. Manish brings out very simple but important issues on personal finance, stock market, insurance, interest rates etc. I am an Accounts Manager by profession but i never looked in to these aspects in my personal financial planning. After following his blog regularly i could review my financial planning and advise my peers. I appreciate Manish’s efforts — Venkateswara Ravi Prasad

If you want to Add your Review : Click Here

Questions and Answers , Part 6

Posted on by Jagoinvestor

I am putting some questions answered by me to users on “Ask a Question” form . I am putting 3 questions and there answers  . If you have any comments or better suggestions please feel free to add as comment . You can see other questions and answers done in the past Here .

You can also ask your questions from other experts on recently started Jagoinvestor Forum

ask a question

Question 1#

I’d like to invest Rs 5,000 – 7,000 a month through SIP to build a corpus for my child’s education in 20 yrs from now. I think I will need around 20 lakh (which will be around 60 lakh when we count the inflation). I’d like around 80% to go in equities for 1st 15 years and then switch to a more risk averse equation. Which funds do you suggest? Child will be born in Apr 10, can I start rightnow?

I’ve a term plan for 70-80 lakhs. So, ULIP would not be appropriate for this goal, right?

Answer 1 :

Excellent , congrats on planning this .

>>> 7000*(1.01)*(1.01**240 – 1)/.01
6994035.4332886515

Understand the Formula here

7000 per month can make around 70 lacs assuming 20 yrs and 12% yearly (1%) return . This is as per your requirement , which looks achievable easily , considering you review your investments every year and maintain your asset allocation .. .

You can put some amount (20-30%) in PPF (child name or yours) .. and then rest divided in some 2-3 good funds through SIP .. this should do the job .

you can choose any good fund listed on the article some days back .. You can also look for Balanced funds if you dont want to take too much risk ..

Question 2#

I am planning to invest my money in some CHIT fund scheme where in on an average you get more interest than in SB/Fixed deposits. What is your view on it and can we really trust these chit fund companies.
Following are links of couple of chitfund companies:

Answer  2:

I havent looked at what they have to offer , but without seeing that I am telling you dont invest in these .. Have you every heard these names from more than 3-4 people , Might be they have made some money out of this , but is that under law and are there contracts which are legally binded .

There are cases of frauds in these kind of chit funds . I found some complaints against these chit funds on net .. please go through them .. they might be offering higher returns but always remember that anyting above 8% is with risk 🙂 otherwise everyone will go with them only .. Don’t get into this unless you are ready to loose all your money someday ..

https://www.consumercomplaints.in/complaints/shriram-chit-funds-c41300.html
https://www.consumercomplaints.in/complaints/margadarsi-chits-karnataka-pvt-ltd-c217337.html

I feel even options trading is safer than these .. because you only loose because of yourself there , not someone else .

Question 3#

I would like to invest Rs.7000/ month by auto SIP ( for 2to 4 Years. My risk profile is moderate and my preference is to invest in Balanced Fund, Debt Fund & Diversified fund. My age is 45 years. Please recommend some of the good fund and amount to be invested per month.

Answer 3:

2-4 yrs is a modetate time frame .. You should go for Equity funds or Balanced funds only if you can take some risk on your investments , Risk does not mean negative return , it means below normal returns also ..

If you are ok to invest 7k per month , then even if you invest in something which gives 10% , you can generate around  4.14 Lacs . If you take risk and target equtiy funds , you can get 15% returns also , which will make 10 Lacs ..

Incase your Goal after 4 yrs can be met by 4 lacs , then i would recommened 10% route which will involve mostly debt funds or Balanced funds .. or Debt funds + Equity funds (30-40%) ..

You have to ask your self if you want your goal to be met or Generate higher returns with RISK 🙂

The best thing I think would be

  • 3k in Debt fund or FD
  • 1k,1k in 2 Balanced Fund
  • 1k,1k in 2 ELSS funds (equity , tax saving also)

Have a look at

Best of Luck , Dont hesitate to ask any other question and reply back if there is any doubt yet

Do you have a question ? Ask it here on “Ask a Question” Form or talk to others readers on Forums

iTerm , Term Insurance Aegon Religare

Posted on by Jagoinvestor

Did you recently bought a Term Insurance from some other Company ? Because here comes iTerm, the new sensational Term Insurance from my favorite Aegon Religare. This product has power to change the way Indians Look at Insurance. iTerm is currently the cheapest Term insurance in market, not only cheap, its dirt Cheap.

Imagine how much Rs 8162 provide as an Insurance cover? I went to their website and found out that I can get astonishing Rs 1 crore Insurance for tenure of 25 yrs (My age is 26) just for Rs 8162 (including Service Tax)

iTerm insurance policy by aegon religare

Update 18th Dec 2009 :

Disclaimer : Please note that this is my personal View and should not be taken as Promotional Review , Hence take decision only after you are satisfied . The customer care of AR is not working well and hence the user experience is not that great . I personally feel it will get better in coming week and months . So I will buy mine only after that .

If you are concerned about Security and do not understand Insurance products and their pricing , please do not get into this product and stay will well known names like LIC and SBI or HDFC . Thanks

Main features  of iTerm Term Insurance

  • How to Buy : Can be bought “only online” from Aegon Religare website. (Only Internet Explorer Supported)
  • Sum Assured can  be Minimum – Rs. 10,00,000 , Maximum – No limit (subject to underwriting requirements)
  • Entry Age : Minimum – 18 years , Maximum – 60 years
  • Policy Term : Minimum – 5 years , Maximum – 25 years
  • Maturity Age : Maximum – 65 years
  • Premium Payment Frequency : Only Yearly
  • Free Look up Period : 15 days (you can return the policy if you dont like it)
  • Service Tax : Right now iTerm Shows you all the figures inclusive of Service tax . So in the above example I took , The total premium is just Rs 8162 (Smart company)
  • More Details : iTerm Brochure or get more Information by calling on 1800 209 9090 .

Comparison with other Insurers

If I compare Term Insurance Premiums of Different Insurance Companies , iTerm Comes out to be really really cheap , The second cheapest Policy around was 85% more costly than this , and it was ICICI Pru Protect  . I found this amazing tool which can compare Premiums of Different Insurance Companies with iTerm Term plan (Thanks to Ganesh)

Some Quotes

  • 30 years Male, Tenure 25 years, Insurance Cover  50 Lacs, Premium 5600
  • 30 years Female, Tenure 25 years, Insurance Cover  50 Lacs, Premium 4850
  • 35 years Male, Tenure 25 years, Insurance Cover 1 Crore, Premium 14500
  • 35 years Male, Tenure 25 years, Insurance Cover 1 Crore, Premium 11800
  • 50 years Male, Tenure 10 years, Insurance Cover 50 lacs, Premium 17200
  • 40 years Male, Tenure 20 years, Insurance Cover 75 Lacs, Premium 14925
  • 35 years Male, Tenure 20 years. Insurance Cover 60 Lacs, Premium 8220  (11640 if Smoker)

My Notes

iTerm Term Insurance was announced at Bloggers meet in Mumbai on 21st Nov, 2009 and I feel proud to tell you that “Jagoinvestor was also invited” to be part of the Blogger meet and part of Discussion on iTerm and overall Insurance Industry. Though I was not able to go there personally, I had one representative attend the meet on my behalf  (Thanks Abhishek Chandran) .

From the day Aegon Religare was Launched, I always knew that this Company has an attitude , It really know what to do and How to do it in Indian Insurance Sector . I think iTerm is one of the best products launched in the history of Indian Personal Finance System .

You can not miss this product , especially if you are still looking for Insurance. iTerm is a value for Money . India had a total internet base of over 60 million .  I am sure that this product will rock our Insurance Industry and in coming years Aegon Religare will lead the Industry for at least Pure Protection Plans .

Important Doubts

What should you do if you already taken Term Insurance recently ?

You don’t have Term Insurance but you are Planning to take one?

  • You are the perfect person , Not that you have not done the sin of being without Term Insurance till now , Your timing is perfect 🙂 . Go for this .

Make sure you dont miss the future Updates , Subscribe through Email for FREE !!

But I am a hardcore fan of Endowment and Money back Policies ? Why do I take Term Insurane when it does not pay me anything back at the end ?

Is it Safe to Buy Online Product from This company , I trust public limited Companys only ?

  • Here is the Answer of Are private Insurance Companies Safe . Regarding Buying online products, don’t worry .. Indian Insurane market is much advanced these days and we already have companies like ApnaInsurance and InsuranceMall where you can Buy, Sell, Manage and even make the Claims for your Policies.

I want to go for a Big Enough Cover and Want to take only iTerm , no other . What should I do ?

  • Break your Policy into two and take two policies . so Instead of taking one Policy for 1 crore ,  take two policies of 50 Lacs .

How to Buy iTerm Term Insurance online ? Can I get a Demo Please ?

Below is a Presentation with each slide showing you each page you need to fill while Buying iTerm Term Insurance online , Make sure you see it in Full screen to get a better feel .

“I Term Term Insurance From Aegon Religare Online Buying Demo”

View more documents from manish.pucsd

If you are reading this in Email , you can see the presentation on the Blog .  Readers with decent Internet Speed can also see Video Demo on Youtube.

  • Are you a Jagoinvestor Fan , let Manish know what do you think about this Blog ,  Fill the Guest Book

Shortcomings

Nothing is perfect and Everything has shortcomings , and so has iTerm , Which are

  1. Will take time to reach in Rural Areas as iTerm can only be bought Online , because of this the first layer of target audience are people who have access to Internet . Aegon Religare need to formulate a Strategy to Capture Rural market .
  2. As their is no agent involved in between there are many people who would not be able to keep track of yearly payments and they are more vulnerable to forget the payment unlike the scenario where agents made sure premium was paid on time , Not sure how far its an issue , tough not a big one .
  3. iTerm came out with this Policy without Much Advertisement and hence it would take some time for people to know about this .
  4. There are no Riders available with this Policy , which  may look little bad , but the primary objective of Cheap cover is provided , so I think its fine .
  5. Company is pretty new , so it will take time for the company to gain confidence , and given its pretty cheap premium , its subject of Crticism and Suspicion form general public .

Conclusion

iTerm is a innovative Term Insurance, Its a must have Product in everyone Portfolio because of its Value for money and amazing simplicity and importance as a Life Insurance Protection . Aegon Religare is showing some great leadership in Insurance Area and the only thing I am waiting for is its IPO 😉 .

Comments Please , Are you going to take iTerm Policy ? Do you need any more Insurance , Please share with us in comment and feel free to raise more doubts .

What happens if you stop your ULIPs before 3 years

Posted on by Jagoinvestor

Lets Discuss quickly what happens when you stop paying your premiums in ULIPs before 3 yrs. So here is an interesting question and very bad answer. Its already there in your ULIP Brochure, but you never had the time to look at it.

ULIP - Unit Linked Insurance Plan

Read What are the Most Important questions you should ask from a ULIP agent ?

One of the readers on this blog asks me

“I started investing in a sip of Lic Plan Money Plus T-193.I was assured of atleast 20% returns, but I Found  out recently that my surrender value is much lesser than what I have invested.

So I want to stop freeze this policy.But the agent says that the value of units will also freeze and I will not get the amt. as per the value of units at the time of lock in period. So when the lock in period is over(3 years), I will get amount as per the current rates of the units.

How far is it true?

Now This is True, in LIC Money Plus and some other ULIPs, If you stop paying your Premiums but then your Units will be sold that time and your money will be Kept in Money Terms which you will get back after the lock in period is over .

So for an example:

If you take policy in Jan 2008 and Stop your premiums before 3 yrs of lock in period, you will get back the amount after 3 yrs are over, but the amount will not be as per the NAV after 3 yrs, but at the time when you stopped your ULIP payments.

Note that you will get back your money only if you have paid full 1 yrs premium, If you have paid anything less than 1 yrs, then you wont get back your money if you stop it. All this information is generally never passed to Investors because of Heavy misselling in ULIPS

Now this is the rule from some of the ULIP’s, not all .. Some Ulips give you a choice of surrendering the Policy when you want, so you can tell them that you want them to sell your units or not . If you want, they will sell those and Keep it with them and then give you back after Lock in period of 3 yrs are over.

You need to check your ULIP if its a choice or a forced rule. Check your Policy Documents and Find out whats written there.. Before Buying a Product make sure if a product suits your Requirement

Other Important Rules applicable when you Stop Paying premiums before 3 yrs

  • Your Insurance Cover will immediately be Ceased, so you are not covered for any amount once you stop the Policy
  • The Death Benefit is just your Fund Value
  • Other Charges like Fund Management Charges and Yearly Expenses will still be Deducted.
  • You can revive the Policy after 3 or 5 yrs depending on the Company rule

Question : So it means that If I stop My policy (means Premium Payments) before 3 yrs, I will still get back my money after 3 years?

Answer : Yes, Many people think that They have to pay the premiums for at least 3 yrs other wise they will not get their money back, That’s not true.

Conclusion

Who is to blame here? Company or the Agent, my vote goes for the Investor Himself, Agent or Company are to be blamed, but for very less part. If you stop your Premiums before 3 yrs Its a costly Affair. So better buy your products before much thought and planning. ULIP’s are only to be bought for long term and you should be able to manage it well.

* Dont forget to check out the New Forums added in this blog

Happy To Announce JagoInvestor Forum

Posted on by Jagoinvestor

Jagoinvestor now has a Forum !! . I am extremely happy to announce that I have added Forums to this blog and how are one step ahead of what we were earlier . I was working on finding the best forum I can integrate and Finally I used SimplePress Forums which is a Plugin in WordPress . The link of the Forum is https://www.jagoinvestor.com/forum

Jagoinvestor_Forum

Main Points

  • You can now Interact through Other readers and do all the discussions on the Forum
  • I have added 4 main forums currently called Insurance , Mutual-Funds , Tax and Financial Planning . I can add more Sub Topics like “Stock Market” and many more .. this is just a Start .
  • You can register on the Forum from Register Link which you can see on Right hand corner at the top of Forum Page .You can then fill your Profile Page and don’t forget to use gravatars so that I can see your Face 🙂 .
  • I am sure we have lot of knowledgable people here who can help newcomers with their basic questions and this will save me a lot of time answering the question . I can also make some of you as moderators when I feel you are perfect 🙂

Suggestions

The Forum is in Initial Shape and I am learning how to make it better Look wise , So feel free to post your Suggestions Here and May be your tips if you are a Forum or WordPress or CSS expert here 🙂

Click Here to Make a Suggestion

Feel free to tell me how you like it and if you dont like it and It sucks 🙂 . I am learning WordPress slowly and making changes in the look and feel of blog , Wait for some weeks (read months) and It would look much better and beautiful than what it is today 🙂 .

UPDATE

Jagoinvestor Has Collected Rs 3,600 for the 3 families we Talked at 3 stories that might change your perception about your own financial situation .

Here is the list of people who made the Contributions and I would like to thanks them for their Kindness and Help , every help is a Big help . I will be sending the money to My father who will hand it over to each of them . In case you want to make any contributions , It would be great .. you can make as small contribution as you wish .

Contributors List

Contributors