Questions and Answers , Part 4

Posted on September 14, 2009August 13, 2018 by Jagoinvestor

Why should you read answers of other questions? The reason is that there are many questions asked to me which can relate to you also, if not today, maybe later. Hence, Here are a set of 4 questions and answers asked to me on “Ask a question section”.

These questions are on the topics on ULIPs, General Investing and Achieving Financial Goals. You can also look at other Questions and sections part here at Part 1, Part 2 and Part 3

ask a question

Question 1# [ULIPS] – by Shivang Desai

I had invested rs. 1 lakh in sbi ULIP (as wrongly advised by my uncle)in march 2006 when sensex was 12000 now after 4 years worth of it is just 96000 should i withdraw the money or wait longer since the damage of allocation charges and all is already done…or by withdrawing i can allocate this sum in equities or mfs…..what is the right time to withdraw this money

Answer

Well ..weather you sell your ULIP right now or later does not depend on its current value , You can always buy something else which is going to give you better performance , the fact that you want to sell it at higher price than your buy price is a psychological issue , which every one faces . If the ULIP is bad just sell it and if its good then continue 🙂

I think it would be wise to sell the ULIP and use the proceeds to buy simple mutual funds . One can not guess the right time, but a wise thing would be to wait for a jump in stock markets when you sell it and then buy mutual funds on a drop . Doing this is tough and not easy in itself

If you have a question: Ask Here

Question 2# [General Invsting] – by Sugeet Arora

I am 30. Blessed with daughter 4 months back. Now as the time passing, I am worrying how to secure future of my baby. Where and how to invest. Though I am aware of market fundas.. Still as I am planning for long term, I need an advice.

From research on your site and other places, I concluded that all ULIP scheme are worthless… Rather MF would be a good idea to invest for long term… & what abt equity.. If I rather keep investing in equity and booking profit whenever get chance… What do u suggest ?
Also I wish to use this as tax exemption tool.

Answer

Sudeep, you have to understand one thing that you have ample time in your hand, like 20 years, and the savings you have to do is linked to very important thing, your Daughter’s Future, may be Education or Marriage, whatever, now the first thing you have to know is how much you want to generate, 10 lacs, 20 lacs or 50 lacs, this is something you need to do.

After you know how much to generate, the next question is How, Answering it is not tough, its its 20 years, means its long term, and its important too .. so you can mix up Mutual funds and PPF.

So the best thing you can do is to start a SIP in 3-4 good mutual funds and also start a PPF in your and your Daugther name. Keep investing in these instruments and thats it.
I think this should be enough for your requirement. Dont try equity too much unless you really have interest in that and you have enough knowledge to make some thing there. And dont try to time market and find out when to sell and when to buy, its a tough thing.

Just stick to SIP and make sure you review your investments atleast a year and see that its on track, this simple roadmap should easily take u to your destination. If its not simple, its not worth !!

Question 3# [General Invsting] – by Sugeet Arora

Sir, I want to invest 10000-15000 for my newly born daughter. What do you suggest for the same? I am little bit confused in Fixed deposits, RBI relief bonds and Kisan Vikas Patra

Answer

Sugeet, I dont approve your decision of investing any money in FD, Bonds or KVP for your daughter. Its totally incorrect.

Why, you must be thinking, the reason is that Its a long term investment for you daughter, If you just invest 15,000 one time for you daughter in these instruments, after 20 yrs, its value will not be more than 40k.

It has no ability to fight inflation and its just eating away the purchasing power. For long term you should be using Equities, like Mutual funds, start a SIP in mutual funds, take a SIP of 1,000 per month in a good Mutual funds and keep on investing in it for next 20 yrs.

SIP in mutual funds is the right decision for you, I am sure you must be concerned with the safety of investments, may be thats the reason why you choose FD and Bonds etc. Equity is risky in short term and in long term its risk decrease over time, for 20 years, I dont think you should be at all worried about it.

Question 4# [Achieving Financial Goals] – by Satya Vyas

I have a question. My monthly take home salary is 2.5lacs. I am 24 years old. I want to invest and invest majorly in equities. My goals are :

1)buy a flat with the max. budget of 18lacs.
2)plan for retirement (age 50)
3)buy a sedan with a budget of 20lacs.

The first and the foremost goal is to buy a house, simultaneously planning for retirement. I need to send around 75k to my parents and another 75k to support my lifestyle per month.

The left 1lac I am planning to invest 70% in equities through MFs and Shares etc and the remaining 30% towards my planning of retirement i.e pension plans SIP, insurance SIPs and other fixed and more stable instruments like gold etc. Also I don’t like to take mortgage for too long maximum 4-5 years for any of the goals.

Please advice me when is the ideal time for me to buy my own house and also is this financial planning in sync with my own objectives or not.

Answer

2.5 lacs is great per month salary 🙂 . All your financial goals can be easily met with that kind of money . Let see your goals one by one

a) Your Home: shall not be tough at all .. If you save 1 lac each month , you can buy it in 1.5 yrs . thats the way you should save it.

Don’t put money in mutual funds or shares for this, have a RD for this , or if you can really take some risk, then try some balanced fund for 10-20% part of the money . Also my question is why home for 18 lacs, you can actually take a big enough home for 60-70 lacs and clear the loan in 10 years max. go for that .

b) Plan for retirement (age 50): This is a big enough question and cant be explained in isolation , read my article on 6 steps of Retirement planning . you will get idea on this .. investing 20k per month in SIP would do the job i guess .

c) Sedan: This will depend on when you want to do it , if its a priority , then save more per month , target it in 4-5 years. At last , I must say , if you manage your money well, you can take care of all your financial goals easily soon, I am afraid if you have not taken a 2+ crore term insurance till now, go for it, cover your parents.

At the end, its none of my business, but You should bring down your expenses and lifestyle may be. I am only talking about the part which is unnecessary and can be taken care of. Save now and earn all life.

If you have a question: Ask Here

What is Top-up facility and how to make use of this facility in ULIPS?

Posted on September 14, 2009August 19, 2019 by Jagoinvestor

I got a query from one reader on ULIP’s top-up facility. The question was

“I have a ICICI pension plan, recently, when thinking about topping it up, ‘i was told that top up attracts only 1%charge, as usual, I didn’t believe the agent n called up call-centre. they also confirmed the same, any idea? whats the catch?

Say, for example, I wanna invest 1 lakh yearly, so I incur 30%charge or 30000rs first year. now instead of that I just take the least possible amount that is,10000/year policy, and later top it up with 90000 every year, this way I end up saving as much as 90%, well, what do you say”. Top-ups are a good way of managing ULIP’s, Read further

ULIP's Top-up facility

Do you know is the most important element in Wealth Creation ? Click here

What are Top-ups facility in ULIPS?

A top up premium is something that a policyholder can invest in his ULIP on top of the existing premium payment. The charges on Top-up premiums are generally very low in the range of 1-3%.

At any time during the policy term, as long as the total of top-up premiums does not cross 25% of the total regular premiums paid till then, you do not need to buy an insurance cover with the top-up premium. So if your ULIP is performing very well, you can top it up with extra premium. See this article to read about ULIP misselling

How to make the best use of TTop-upFacility?

When you buy a Policy, make sure you take the policy for the minimum premium available and then once the policy shows good performance, you can then top it up with extra premiums, there will be some advantage of doing so. Go through This Article by Deepak Shenoy on Top Up facility.

Low Charges in initial years (note this will go away after new ULIP rules by IRDA).
If your ULIP is performing well, only then you put extra money
You pay less charges on premium which is top up

Go through This Article by Deepak Shenoy on Top Up facility.
This is another article you can look for more details on Top up.

Conclusion

Top ups are a tricky tool to make your investments in ULIPs better. Take advantage of ULIPs Top up facility if you are going to take any ULIP product, but make sure you first understand if ULIP is right for you or not?

Which is the Cheapest Bank for Home Loan in Market

Posted on September 13, 2009August 22, 2019 by Jagoinvestor

Some days back I wrote Review of BankBazaar.com . One of the readers NKanani tried there Home Loan section to find out best Bank for him and he didn’t get satisfactory results and commented to me

“I checked out the home loan section – it gives me three options – axis bank, ing vysya and deutsche bank… all having interest rates higher than sbi… The calculations are all good, but it would have been better if we could add banks of our interest.”

I contacted BankBazaar.com personally and got a reply from Chief Product Officer . Read Below

Home loan

Reply from Chief Product Officer , BankBazaar

“Your reader is right in saying that we do not have SBI on our list. Unlike lead generators who list generic rack-rates of all banks, the way BankBazaar.com works is that we integrate deeply with our partners to enable instant, real time, custom rate quotes from them.

This means BankBazaar users will be able to see offers only from our partners. Right now SBI is not on our partner list. We are however working very hard to onboard them to our marketplace.

Right now Axis is the 2nd largest private sector bank and HDFC Ltd, which is the largest private sector bank for home loans, with over 50% market share will soon be joining our marketplace. We are constantly working on improving our offering and adding more banks to our suite.

Coming to the point on SBI offering the lowest rate, this however is not entirely true. This is a commonly misunderstood rate. Home loan buyers must be completely aware of the long term implications of this teaser rate before taking the decision.

Axis Bank’s home loans are actually cheaper than SBI for loans below Rs. 30 lakhs, and for loans above Rs. 50 lakhs, when you actually calculate the total interest that will be paid out over the course of the loan. To reference this, the calculations of a number of scenarios comparing Axis and SBI’s offers are provided below.

You will notice that SBI’s 8% rate is only valid for the first one year. In the 2nd year, the rate is 8.50% and from the 3rd year on, the rate is 9%. At this point, Axis Bank (8.75% for entire term) is a cheaper option to go with for loans <30l>50L.

Note: All of the above calculations assume that floating index rates will remain unchanged, as it is not possible to predict how they will change. Even if floating rates were to change, the calculations of relative cost above would continue to have value as the floating rates of Axis and SBI would more or less move in concert.

See the Comparision between Axis Bank and SBI for different loan amount HERE

Read how to find the best Fixed deposit for youself

Conclusion

All the results from websites which gives you best result or compare two company work on this Model. So you must do your own finding in detail before taking the result as final Truth.

Key to Excellent Financial Planning is Early Investing

Posted on September 6, 2009May 21, 2018 by Jagoinvestor

Today’s article is my favorite, Today we will see that what is the biggest secret of Generating Long term Wealth.

Most of the people run after choosing great Mutual fund and choosing right policy, but they do not understand the most important element of Investment Planning, which is Early Investing.

In this article we will discuss how important is Early Investing, We will see that what you contribute early in your Life is what matters the most.

early investing

I did some Excel calculations and found out some important Rules you should remember. All the Examples in this articles assumes 12% or 15% CAGR annual return over long term (30+ yrs). Lets see some Important Ideas you should keep in Mind.

If you are reading this article in Email, you wont see important charts and graphs, make sure you visit the blog for this particular post. thanks

The amount you invest does not increase drastically when you cut your Tenure by huge Margin.

What I mean to say here is that if you have a goal of generating a fixed amount at the end of a long period like 30 yrs and If there are two cases

Case 1 : You invest amount A per month for 10 yrs and then let it grow for next 20 yrs .
Case 2 : You invest amount B per month for all 30 years .

In this case amount A will be too big compared to amount B. It would definitely be more, not by great extent. Lets take an example. If you want to generate a corpus of 2 crores in 30 yrs and you assume a return of 12% annually.

You need to invest Rs.5666 per month to achieve this target if you can invest for whole 30 yrs. But what if you want to invest only for 20 yrs or 15 yrs? In that case how much money you need to invest per month?

The answer is Rs.6065 (20 yrs) and Rs.6611 (15 yrs). So you can see that the monthly contribution required to meet the same goal does not increase drastically even if you reduce the tenure by 10 or 15 yrs. See the chart below (Click to Enlarge)

The Tenure and amount required are :

30 yrs : 5666
25 yrs : 5801
20 yrs : 6065
15 yrs : 6611
10 yrs : 7903

In the above chart you can see how “Monthly Contribution Required” increase at very small amount if you want to save the investing years later in your Life . Download this Monthly Contribution Calculator to calculate how much you need to invest monthly for your Financial Goals.

Even if you cut your Contribution at the end of the Tenure, It wont affect the final Corpus Drastically.

What this means is that If you want to invest for long term and in case you are not able to invest for many years at the end, the final amount generated will not be drastically less .. The difference will not be worth a concern.

Lets see an example, If you want to invest Rs.4000 per month for next 30 yrs (retirement amount, see 6 steps of Retirement Planning) and you assume 15% annual CAGR return, you would be able to generate a corpus would be 2.8 crores, But in case you just invest for 20 yrs and don’t invest for rest 10 yrs, in that case your corpus will still be 2.69 crores, 96% of the original amount.

If you invest for 10 yrs and don’t do anything for 20 yrs, still you will be left with 2.19 crores. You can see that how your corpus is not getting affected a lot because of laziness in investing.

If you are successful in early investing, your 90% job is done, even if you are not able to invest money in later years, your final amount will not be affected a lot.

See the chart Below (Click to Enlarge). See this Video to understand the CAGR or Annuity Calculation, Or see this Article if you are on Slow Bandwidth.

If you see the chart above, you can clearly see that in the first 15 yrs, the total corpus at the end does not decrease with great rate. Its more than 2 crores even if you miss 22 yrs (thats more than 70% of total tenure).

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Investments Done in Initial years are the main chunk of your Final Corpus

What this means is that what you in the start has major chunk in your final corpus , the money you invest at the end generally has no major contribution because the money compounding has done its work on the money you invested in the start , not end .

See the chart below . .

The time frame of this example is 30 yrs investment with assumption of 12% annual CAGR return. You can see two kind of lines here. Blue Line shows contribution of a particular year in the final corpus and Red line shows cumulative share of years till then in the final corpus.

If you see the chart and concentrate on 6th yr, you will realize that what ever you invested till 6th yrs contributes to 52% share of your Final corpus which means that if you stop at 6th year, you will still be able to make 52% of original amount.

You can also see that last 12 yrs contribution helps in 10% of final corpus, this we saw in the first chart itself.

So at the end, lets see some numerical facts which will help us understand power of early investing.

“Investing 1500 per month for 10 yrs and letting it grow for next 20 yrs” will generate more than “Investing 1000 per month for 30 yrs” @12% return.
“If your Original time frame was 30 yrs and later you want to cut your Tenure by 50% , you corpus will decrease just by 14%” @12% return .
A : “Investing 5000 per month for 30 yrs” B : “Investing 6,000 per month for 15 yrs and do nothing for next 15 yrs” C : “Investing 11,000 per month for just 5 yrs and do nothing for next 25 yrs” Here, C will make 1.95 crores.

If you are a young person below 25 and you have 35 yrs in your hand and want to make 5 crores, If you start right now, you will have to invest just Rs.3,400 per month, But if you are later by 10 yrs, then you will have to invest more than 15,000 per month to achieve same target.

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Conclusion

Start Early, The secret of Sound Financial Planning is Early Investing, not making excellent return or choosing great funds or buying multibagger stocks. If you can take little pain and invest more money now, then better do it, It will save you from lot of trouble later.

Please spend a minute to take these polls

Please put your comment and let me know how was the article and if you liked it? What do you think that early investing is not the most important element of Investment planning, if not, what other thing do you think is the Key 🙂

Are Personal Finance Articles and Advice is Useless

Posted on September 4, 2009August 13, 2018 by Jagoinvestor

Some times back I gave my Interview to Ranjan Varma, where I discussed My views on Financial Planning. I also read his views on Why Personal Finance Articles and Advice is Useless?

Personal finance web has increased to a big size in last some years and most of them give useless information. I decided to Find out what do Readers think about this themselves and here are the results.

Results Of Poll

This is the result of the Poll I conducted some time back at this blog with question “Are Personal Finance Articles and Advice Useless”? The results are based on just 74 votes but its quite an ok sample and the results suggest that only 21% people thinks that its of no use but majority (54%) thinks that’s its useful and rest of all thinks that it depends on the person.

I agree with Ranjan Varma on the fact that Personal Finance articles can give you sense of Direction, but its you who have to take Action at the end. This is totally true. Here at Jagoinvestor that’s the reason why I talk on two things HOW and WHY?

HOW

These are the articles which tell you how you do something, How to judge something etc etc . These are Process oriented articles which are important to know but they are not the Key !! . You can get this information from many places . Examples are

See List of other “How to” Articles on Archives Page

Why

There are other Categories of articles which are Psychology oriented articles which make you think which actually answer your question of Why Financial Planning is important .

These are thought provoking articles which will open your mind and make you feel what you are missing from so many years… I hope I am doing it successfully on this blog. These are the type of articles which you can use to do your Free Financial planning but remember that it needs a lot of efforts and time.

People who do not understand much of these or Are not interested should see a Personal Financial Planner (Certified Financial planner). Check out RupeeManager, A personal Finance Software which Ranjan is building.

Examples of these kind of articles are :

What is Goal of Financial Planning ?
Can you live with 90% of your Salary ?
Why SIP works well in Long term
How much does Securing your Family Cost
Why people dont take Term Insurance and why they are wrong

So what is the Conclusion

My take on the subject is that Personal Finance articles will be useful to someone only when he thinks about his Finance with a Responsible Attitude. You need to ask lots of “Why” questions, you need to know a few “How’s” and a fraction of “Interest” to take care of your Financial Planning.

Lots of Readers have mailed me and told me how they are changing there views about Financial Planning by reading this blog and how there Finances have taken a better shape now… I feel good hearing this.

Please comment on wheather articles on Financial planning helps you and if yes in which manner, which was teh recent action you took, or which changed your mindset about something? I thank all the people who participated in the Poll… 🙂

Why is Decision Making so Hard in Financial world?

Posted on September 2, 2009August 3, 2018 by Jagoinvestor

“Secret of Happiness is low expectations” In this article we will discuss why it is so hard for us to make financial decisions and what factors play role in delaying our decisions?

When we have to make a decision, there are lot of choices offered to us, which makes our life difficult and hence it results in delayed decision. We will see how can we change our thinking and help ourselves to make our decision making a smoother and better process.

We will also have a look at some examples which will make reading this article better for you.

What makes Decision Making Hard?

The top most reason why we are unable to answer decision making questions is having Lots of Choices. As per Barry Schwartz in his excellent talk

When we want to choose a particular product from a group of products, it’s hard to decide because of more choices that we are exposed to. More choices means more data to process and more data to process means less chances of finding the best product that is suitable for our needs.

What is the reason Behind it?

As per Decision Theory: We want to make the best and accurate decision given a lot of choices, because we don’t want to be guilty later when we find that we missed out on the best choice. This is called “Opportunity Cost”. We don’t want to blame ourselves for not picking up the best choice. We often try to avoid that regret which can arise later because of the outcome.

The point to note here is that many a times, just because of the comparison we make, the satisfaction level goes down even though the results are good. Haven’t you felt bad when you saw giving 15% return and others gave an average of 23-24%. But you didn’t ever appreciate the fact that 15% in a year is a good return and you should be happy about it.

Next time while choosing the fund to invest in, you make sure that you buy something which is among the top performers. Watch this Video on how to choose a good mutual fund

Example

One of the example is my close friend Chetan Chouhan from Pune. I advised him Sundaram Tax and SBI magnum Tax saver as tax saver funds in early May 2009 he shouted on me after seeing my post on Best Mutual Funds for year 2009, because of the “Opportunity Cost”.

He wanted the “best” fund and now compares the list with what he has currently. He should appreciate that what he has is a good fund and can fulfill his requirement… One should try to get the best fund and maximize his returns but if you give your mind and soul for it .. its just not worth it.

What exactly is the Confusion now a days:

Which is the best mutual fund at this moment?
Which is the right ULIP policy for my Child?
Which Bank will provide me best Home Loan that suits me?
Which Bank has the best FD rates for my profile?
Which Term Insurance is best?
Which Shares should I invest in so that I get maximum return?

Check this ebook if you are new to Stock Market

Some Statistics of Indian Financial World:

3800 Mutual funds in India (Approx Data as on 31st July 2009): Source
36 Different Mutual Funds AMC in India: Source
86 Banks in India (Public , Private and Co-operatives, Small , Big): Source
22 Life Insurance and 21 Non-Life Insurance Companies (most of them are common to both Category): Source
1319 companies registered in NSE [Source] and more than 10,000 Companies listed with BSE
There are 100’s of Insurance Policies and ULIPs from Different Insurance Providers
293 Insurance Brokers: Source
59 Commodities for Future Trading on MCX: Source

A Different World!!

Now with so many choices and lucrative offers, it’s too hard for us to choose the best one. Even in my list of Best Equity Funds, you will find it very difficult to choose 1 or 2 funds to invest in. But I gave you just 2 funds and asked you to choose 1 fund. It would be so easy for you because less the choices higher the chances that your choice will be a good one.

Just Imagine a world where there were 2 Term Insurance products, 3 ULIPS, 5 type of Mutual funds and 3 Banks providing Home Loans. What a wonderful world it would have been! I am sure everybody would have a desire of that kind of Environment.

Then we will have very less information to process and there will be less changes of Regret and high chances of Satisfaction.

Do we delay our decisions?

Ask yourself…

Are you not delaying your Investments just because you are not able to figure out which is the best Mututal funds or ULIP?
Are you not trying to find the least rate of interest for your Home loan so that you don’t regret later that you didn’t get the best deal?
Don’t you want to stop your existing mutual funds because now there are other funds who are top ranked and more talked about on television and magazines, even though your Fund returns are very good and it has potential to achieve your goals?
Are you not confused on which stock will move higher and may be don’t invest at all?

There are so many websites, newspapers, blogs out there giving reviews, recommendations about products that a common person’s mindset is now totally confused because of all this. In case you really think you want take your decisions, you should consider Hiring a financial planner?

Is common person really confused or Am I talking Nonsense?

At the time of writing this post at 1:30 in morning… Here are the poll results with 97 votes which I conducted over last 3-4 days and here are the results. 72% people think that “Having lot of Choices in Mutual funds and Insurance Policies does not make “decision making” easier?

In case you are one of the person who voted for YES or NO please leave your comment and let every one know what was the reason for your Vote.

What is the Solution for this Problem?

How to made a decision making process an easy process? It can be to some extent solved using these ideas.

Change your Focus

By this I mean that we are here for achieving our financial goals comfortably, without compromising our family future and smoothly without much tension. That’s the real goal of Financial planning. Once your mindset is set like this, you will automatically not run behind the “best” funds.

What you will try to do is to find out a good product which suits you, just stick to it.

Filter out the Bad policies

Choosing the best product is not an easy task and not worth too. The easy thing would be to filter out the bad products which is easy to do! So in mutual funds you already get rankings and lists of top 10 or top 5 funds or Best policies from ULIPs or good Home loan from a Bank.

I would say they are worth a look and finally you should decide soon enough on one of them but for this you must have shifted your focus from choosing “best” product to “a suitable” product. People who want to Buy good mutual funds for long term can Choose any one of mutual funds listed in my article on Best Equity funds for year 2009.

Think Less and concentrate more on Fundamentals

There are more Important things than Best timing and Best product which you have to concentrate on. One of them is Consistency in your Investing and your Plan, your Asset allocation, your Diversification. Once you concentrate on this and forget all other materialistic things, it would be a more peaceful activity to manage your Finances.

Conclusion

So we can say finally that it was never like this before. Now a days we have too many things to choose for which has made like worse than even. Hundreds of products do exactly same thing but they all claims to be better than another. We have to narrow down our choices and choose any one of them and not try to hunt for that exactly best product for our self.

Readers, please share your experience of being in a situation where you had to think a lot before making a decision or had to delay your decision. What are your suggestions on this problem? Please post comment.

Review of Jeevan Tarang Policy from LIC

Posted on August 30, 2009August 21, 2024 by Jagoinvestor

We will discuss about LIC’s Jeevan Tarang Policy today, One of the readers asked me my review about Jeevan Tarang in “Ask a Question” Section.

I thought it would be a good idea to discuss it with every one here. So lets see Whats the policy and lets evaluate and answer the question “Is Jeevan Tarang worth consideration or Not”? Also see How can we beat this Policy by huge margin.

Jeevan Tarang Policy Highlights

Jeevan Tarang is a Whole Life Plan from LIC, Whole life plan means that you are insured for whole life (max age 100) The plan offers three Accumulation periods – 10, 15 and 20 years. A proposer may choose any of them. This is the Tenure by when your Policy Matures.
Whenever you die, you will ge the Sum assured and then the Policy Expires. This policy will expire if you are at age 100.
If you Die before the Maturity, you will get the Sum Assured + All the Bonus Accumulated till date.
The yearly Premimum will depends on two things, your Tenure and your Age. It can range from 11% (Policy for 10 yrs), 7-8% (Policy for 15 yrs) or 5-5.5% (policy for 20 yrs).
For exact numbers see here. The percentages are with respect to your Sum Assured, 5.5% premium means 5.5% of your Sum assured. so Rs 10,00,000 of Sum assured means 55,000 of Premium each Year .
Incase you surviuve till your Policy Tenure, then at the end of your Tenure, you will get Bonus accumulated (not the Sum assured) and an annuity of exact 5.5% each year after the Policy Matures. One will get 5.5% of the Sum Assured each year till his death or upto age 100 whichever is earliar.
If you can not pay the Premiums and want to stop the policy (only after 3 yrs), you have two choices, either make it a Paidup policy or take back the Surrender Value. This is explained in detail later, so move on.
These are the main basic and approximate points of the Policy, for exact detials see the policy page at LIC website.

Let us now see an example with different Scenario. This will help you understand it better. Read Important of Life Insurance

Now let take Scenario’s

Ajay’s age is 30 and he takes Jeevan Tarang Policy for a tenure for 15 yrs with Sum Assured of Rs.10,00,000 (10 Lacs). His Yearly Premiums will be 71.40 for every 1000 sum assured, which is 7.14%. Which comes to 71,400 per year.

If Ajay dies before 15 yrs

In this case he will get Sum Assured + Bonus Accumulated till date. The Bonus amount is not fixed and we can not tell how much it will be now , But on LIC webpage its mentioned in range of Rs 20-88 .

Lets take a good figure of Rs 30 . In that case Per year it would be 30,000 more . So If he dies in 8th year , it would be 10 lacs (Sum Assured) + 2.4 lacs (bonus for 8 yrs) = 12.4 Lacs and the policy Expires .

If Ajay survives the Policy and does not die at all

In this case, Ajay will pay his premium upto 15 yrs and then in 15th yr, he will get back the Bonus accumulated (not sum assured), so may be it would be 4.5-5 lacs assuming Rs 30 as Bonus for every 1000 SA. Also he will get 55,000 per year(remeber 5.5% of Sum Assured) as annuity till he dies or upto age 100 .

He will also get Loyality additions , this will again be a very small amount just like Bonus , but this is not assured at all. Read this for same concept : Term Insurance with Return of Premium

If Ajay survives the Policy and Dies Later.

Its almost the same case as above, in this, Ajay will get Bonus at the end of 15 yrs and then He will start recieving 55,000 ever year. And suppose he dies before age 100, he will receive the Sum Assured of Rs.10 lacs and thats it .. The game is over and then LIC doesnt recognise him there after.

Ajay is not able to pay premiums because of some problem and wants to stop.

This is possible only after 3 yrs of taking the Policy, If he wants to stop it before 3 yrs, then sorry buddy, just forget your Money and go home cry. If its after 3 yrs, then He has two choices

Make the Policy Paid up : In this case, you stop the Premium payments and you will get your Premiums and Bonus Accumulated will date at the end of the Maturity. You Sum assured will also reduce in Proportion to Premiums Paid, so if you stop the policy in 6th year, your Sum assured will reduce from 10 lacs to 4 lacs (40%), as you have paid the premium only for 40% of the tenure (15 yrs), thats 6 yrs.
Take your Money Back : After 3 yrs of completion, the Policy acquires a Surrender value, generally its the Net Present Value of money in todays term what you are going to get at the end. See this post on Net Asset Value. So if you are going to get 5 lacs at the end of 15 yrs and todays worth of that money is 2 lacs, you will get 2 lacs today.

Watch this video to know about other features of this policy:

What is the Return of Jeevan Tarang Policy overall ?

Even if you receive all the annuity upto your age of 100 , the CAGR return for this policy using IRR Analysis comes to mere 4.72% .

I have taken the above example and assumed 5 lacs of Bonus and no loyality additions , even if we consider 7-8 lacs of Bonus and Some loyality additions, the CAGR return Does not cross 6% CAGR .

Why this Policy excites people and general people get fooled?

These kind of Endowment policies make sure that you concentrate too much on numbers and it traps your mindset in the present moment , One who is able to forsee beyond “now” can understand the real value of these Policies .

We concentrate on numbers, If we get something for a long time and we pay for less time, it appeals to us, and hence this policy takes care of that very beautifully, You pay for 10, 15 or 20 yrs and you get back till you are Age 100, Sounds great !!0

Psychologically our mind is programmed by nature to think about the best case for ourself, but how many of us will survive upto 100 yrs to get annuity back, The average person thinks emotionally , Insurance Companies work on Data, Statistics, probability Theory and complex calculations, which tell them that average person will die at 60-70, and only 1-2 will survive till 100 years of their age.

Most of the people see Numbers and Present, The policy will demonstrate how much You will get at the end of the Maturity but it never tells you how much will it be worth then and how much will it help you in your Financial goals. We never think that Rs.100 today can buy much more than Rs.100 after 15 or 30 yrs.

We know this somewhere inside us, but out mind just doesn’t feel everytime the same way, that’s the reason you need to calculate things by hand, on paper or computer and do some small analysis like I did on this article. Then you get the clarity

Trust and Blind Faith, We trust companies because they have been in existence from long time and our parents were made to believe that these are the best friends in our life, they will protect our Future. Love and “Taking Endowment Policies” in India has similarity.

I grew up hearing Love is Blind and experienced it too, and I feel that its same with Taking Endowment Polices. People just take it blindly, some new Policy comes up and bang !! It has to be great, no matter what, because it comes from the GOD company !!

No one will concentrate on 4 important features of his portfolio and how that policy fits in, Look at GFactor of a product to find if it suits you.

What are the Limitations of the Policy

Why age 100? How many people are going to live upto age 100 , why putting that number at 100, why not increase it to 500, even though life expectancy is just 60-70. Not more than 1-2 in 100 live upto 100.
In case of Ajay, if his monthly expeses is 30,000 (considering married, even though I doubt he will ever get any one), after the accumulation period of 15 yrs, he will start receiving yearly pension of 55,000 per year, read it again, 55,000 per year, but now after 15 yrs, even with 6% of inflation his monthly expenses has gone upto 72,000 . And his policy pays him 55,000 which cannot even take care of his 1 month of expenses . Now i can see him pulling all his hairs .
If he is dead at age 70 , His family would get back the Sum assured of 10 lacs and at that time , it can only pay for his family’s 3-4 months of expenses and his Funeral cost , thats it .. Aha .. atleast something , so one this is confirmed , There will be no financial burden , pun intended .

Have a question in Mind , Ask a Question from Jagoinvestor Here .

Can we do better?

This is the question which we should always ask in every situation of our life, not just Financial planning. Lets take care of Ajay’s situation in Jagoinvestor’s way and plan him something better than Jeevan Tarang.

With Rs.71,600 per year to pay for 15 yrs, lets see what can we do.

First thing First, Lets cover his Family first from the Mis-happenings of life an secure his dependents, Lets take a Term Insurance of 50 lacs for maximum tenure of 30 yrs, Premium would be close to 13k or 14k approx, lets assume 14k. So out of 71,600, 14k is gone and we are left with 57,600.

Now lets put 21,600 each year in PPF for 15 yrs. We are now left with 36,000 to invest, we will start Rs.3,000 SIP per month (Rs 1000 each in 3 different Equity funds) for 15 yrs . See list of some good Equity Mutual funds for 2009 .

PPF will accumulate to 6.3 lacs in 15 yrs and Mutual funds will accumulate to 15 lacs in 15 yrs assuming a pessimistic return of just 12% (Historical return has been more than 17% and last 5 yrs return are more than 25%). Lets assume just 12% and not 18-20% even though its possible because our aim is to do better than Jeevan Tarang and achieve our goals and not compete with some one.

So total amount will be around 21.3 lacs at the end of 15 yrs. Now lets visit and see our Scenario’s again and hows does it compare now.

If Ajay dies before 15 yrs :

Gets 50 lacs from Term Insurance and also the money from PPF and mutual funds, which will be more than 50 lacs 🙂 . We beat Jeevan Tarang by huge margin in this case.

If Ajay survives and Does not Die at all :

In this case he already has 21.3 lacs accumulated and now he can use this amount to buy an Annuity which will pay him more than 1.6 lacs Per year, much more than what he was getting in LIC policy.

As a toppings, he also has a 50 lac cover for another 15 years. We can generate 3 times more annuity than Jeevan Astha here, again beat by huge margin.

If Ajay survives the Policy and Dies Later :

In this case if he dies in next 15 yrs , his family would get 50 lacs from Insurance (10 lacs in LIC), apart from this he will have his 21.3 lacs growing every year.

If he dies after 15 more year, There will be no Insurance money, but his money would have grown a lot by now .. If he dies after 15 yrs (total 30 yrs from starting), his money would have grown to 1.17 crores assuming 12% return per year (no annuity every year). and if he dies after 25 years (total 40 yrs from starting , means at age 70), his money would have grown to 6 crores.

Now incase you don’t want to faint, don’t ask me how much would have he had if he lived till age 100 and left his money to grow, Its 13 crores 🙂 . I have not assumed any annual annuity here, we can do that but the result would remain almost same. We beat Jeevan Tarang by hugest margin in this case. See how we can create Wealth using Equity in Long term.

Ajay is not able to pay premiums because of some problem and wants to stop.

His money will still be in PPF and Mutual funds and keep growing, there is no liquiditity issue with Mutual funds, he can withdraw from mutual funds anytime, even from PPF he can withdraw partially.

If he has limited money, he can at least pay his Insurance premiums and still get covered for 50 lacs, no big deal there. In every aspect it beats Jeevan Tarang

Note : For doing better than Jeevan tarang we have invested in Mutual funds which are risky instruments , but anyways we are not in great position with Jeevan Tarang .. so taking risk is worth it . If one is too concerned about risk , then even plain PPF will be better .

Conclusion :

Think Logical , Think mathematical , Think smartly and at last THINK !! .

Note : The figures have not considered the rebate provided by LIC, and hence the actual figures can deviate a bit from the actual numbers used here, but it wont be significant and the review still holds . ahh .. tired now !!

Reality of Financial Planning – Knowledge and Perception

Posted on August 28, 2009July 31, 2018 by Jagoinvestor

Sometime back, I had a Financial Planning Survey on “Where do you place your self on understanding and knowledge of Personal finance and Financial Planning”.

In total 96 people participated in the poll. Let’s see how the result compares overall. What were the results and what is the reality and what reasons are connected for this behaviour.

financial planning example

Comparison of Data

Let us first look at the results. In the above two pie charts you can see that Most of the people placed themselves in “Much above the average” and “Above Average” Category. That is 60% of total participants and only 40% people placed themselves “Below average” or “No Knowledge at all”.

From my experience, understanding and logic, majority of people are Below average in Financial Planning Advice. I think it’s around 80% and only 20% will be above average with a handful really way above the average. A huge chunk has to be below average but most of them have put themselves about as ‘Average’.

What is the Reason for this?

overconfidence and overestimation of their knowledge. For example they will argue about why not to take Term Insurance but they dont know that they are wrong
No idea about where others belong in the category
They underestimate the process of Financial Planning, they think that they can do it well

There can be other reasons as well but these are the top reasons.

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What is the Effect or Result of this Thinking?

Most of the people live in the belief that Financial Planning is something they can do themselves without any profession help and hence mess it up at the end. They do not understand the Goal of Financial Planning
It causes delay in there Financial Planning and hence the situation becomes worse. They don’t get better “financial planning advice” because of this. They don’t understand how to figure out if a Financial Product suits them or not

Basically its a comparison between “Thinking” Vs “Reality”. I must admit that this blog is getting a lot of readers who still need to learn a lot to manage their Personal finance in a better way. Read “Do you need a Financial Planner ?”

Question: What do you think about this post, why do you think most of the people ahead of others? Is it Reality or just a sense of disagreement that you are not ahead of others.

Review of BankBazaar.com , Excellent User Interface

Posted on August 26, 2009August 21, 2019 by Jagoinvestor

BankBazaar.com is an excellent one stop destination for all your loans and insurance products Needs . BankBazaar is partner’s with India’s leading financial institutions and insurance firms, and provide all information at one single place in a very user friendly manner .

Lets see in detail what all it has to provide a retail investor like you and me in India .

BankBazaar.com

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What can you compare at BankBazaar.com

Home Loans
Personal Loans
Home Loan Transfers
Loan Against Property
Credit Cards

Home loans section is my favorite and I am really amazed by the level of detail they ask and based on that they suggest you the best Bank suitable for you .

Anyone going to take a home loan should first go thorugh this to get an idea about it . The best part I like in BankBazaar is cool Scale type Amount and Duration Selector .Also check out there amazing EMI Calcualtor . Read an article explaining how to choose best Fixed Deposit for you .

Personal Loan is another section I like , You can find same kind of comparision calculator at many sites , but bankBazaar really goes in detail and takes care of all the details which your Bank will ask anyways at the time of Application .

Home Loan Transfer gives you information about the Bank with lowest interest rate when you transfer your existing home loan . Read an article on How Home loan EMI is calculated .

Loan Against Property This Calculator will take all your inputs and let you know how much amount are you eligible for taking Loan and for how much tenure . It will give the list of Banks which will provide the least interest to you .

Credit Cards This is for getting the best Credit card offer for you.

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Overall I think its the best place at the moment to get information on best products available on Home Loans. I hope to see many other things on Bankbazaar over time .