Introduction to Equities, Debt funds and Liquid Funds

Introduction to Equities, Debt funds and Liquid Funds – For beginner investors

Posted on November 13, 2008February 6, 2019 by Jagoinvestor

We will talk about Equity, Debt and Liquid Funds. We will also discuss dividend distribution tax is treated for all these funds.

mutual funds

First understand what is DDT (dividend distribution tax)

Dividend received from a mutual fund is tax free, but only at receivers hand. But mutual funds have to pay a tax on that dividend to Govt before giving it to us. So actually the tax is paid by mutual fund on behalf of us. This tax is called DDT.

Now lets go ahead and see different types on Funds.

Equity Funds

They are the funds that invest more than 65% of their corpus in equity shares of companies. The dividend distributed by such funds is exempt from the dividend distribution tax. So all the dividend which is declared comes to the unit holders, you get 100% of dividends.

But don’t think that this is some extra income .. it is just a part of your own money, after you get the dividend, NAV comes down by that much. This is difference between growth and dividend funds. You actually got some money back, nothing else.

Dividends are are totally tax free and not even DDT is applied to it.

Why to invest : You should invest in Equity mutual funds when you want to invest for long term and when you can take risk. Understand that these funds invest primarily in Equity, so there is more risk, but if you are investing for long term and want capital appreciation to happen, these are the funds for you.

Debt Funds

These funds invest in medium-to-long term debt securities like government bonds and corporate bonds/debentures. The dividend from these Funds are subject to 12.5% Dividend distribution tax. The fund is also liable to pay a surcharge and a cess of 10% and 3%, respectively, on the tax. The effective tax rate comes to 14.16%.

Why to invest : They are debt products and offer good liquidity also. If you want to invest some money for safe returns and for short term goal, then Debt funds are something you can look at.

Liquid Funds

These invest in short-term debt securities (which have a duration of less than a year) like commercial papers, certificates of deposit and call money. The income distributed by such funds is subject to an income distribution tax of 25%. The fund is also liable to pay a surcharge and cess of 10% and 3%, respectively, on the tax.

The effective tax rate for liquid and money market funds is 28.32%.

Why to invest : The main reason for investing in Liquid funds should be Liquidity factor, these funds are most liquid and least volatile .. So if you need to have liquidity in your portfolio, always invest some money in Liquid funds, any extra money lying in your Saving Account above your 1 month requirement should be in Liquid fund.

Conclusion :

There are different type of funds and they all have different purpose, you should see which one suits you and accordingly invest in that. Dividend received from mutual funds are not any extra money like Stock dividend. It is your own money.

Are you willing to buy term plan? – Here are some important tips you should know before buying term insurance

Posted on November 12, 2008February 6, 2019 by Jagoinvestor

We will today discuss some of the best practices and must do things while taking a Term plan.

Click here to read what is Term Insurance and its Importance

Tips before buying term Insurance

1. Take a policy just before your Birthday.

Term Insurance premium depends on your Age. So if possible try to avoid taking the policy just after your Birth date. What i mean by this is that try taking it before you turn +1 year in age. If your Date of birth is 10/11/1983, and you take the policy on or before 10/11/2008, you will be considered of age 24.

But if you do a delay of 2 days … and you take a policy on 12/11/2008. You will be considered 25 yrs old and hence your premium will increase by 4-5%.

Note : It does not mean that if your birthday just passed by and now you want to take Insurance, then you should wait for another year. that’s not what i am saying 🙂

For example:

For a male with DOB on 10/11/1983 (24 yrs old), the premium for Rs 50,00,000 cover with tenure of 25 yrs, is 10157, if the policy is taken on 09/11/2008 (just 1 day before the birthday). Where as if he takes the policy on 12/11/2008, the premium will shoot up to 10647 (Rs 490 more) .. though 490 is a small amount, but if we can avoid it by taking the policy little early .. always try to do it.

Even a small amount like 490 saved over 25 yrs in a PPF would give 45,000 and in mutual fund with 12% return will give 77,000.

Note : The gist of the point is that try to see this small point while taking the Term insurance, it does not mean that you wait for 8-9 months just to take the policy before a birthday.

2. Try to diversify your Policy

If possible try to diversify your policy amount over different Insurance companies. If you want to take an Insurance of 50,00,000, it would be better if you take 2 polices, rather than 1 single policy.

How it helps?

– If you hold a single policy and the company does not honour the claim, dependents wont get anything, but if there are 2 parts, then there are less chances that both the companies with not honour the policy.

– If your liabilities come down or you have less dependents after a couple of years and ultimately you need to bring down your Life insurance cover, you can simply stop one of the policies and continue the other one.

– It helps in diversifying the risks involved with the Insurance company.

3. Buy a policy early in life and for longer Tenure.

Its always recommended to buy a Term Insurance early in life and for maximum tenure possible. In your early life you are more healthy and hence your premium will be lowest. Also by taking insurance for a large tenure you are making sure that you are covered for a large period, but the premium will be marginally more.

For example : For a cover of 50,00,000

Example - why it is necessary to buy term insurance early

You can see here that you have to pay marginally more for an extra cover of 5 yrs. So for example, a person with age 25 will pay 14,000 more than the 30 yrs old, but he will be insured for 5 additional years. So it always pays in long term.

Also taking a 30 years term insurance once will be very cost efficient than taking a 20 yrs term insurance now and then taking a term insurance of 10 additional years after 20 yrs. Because after 20 yrs, the premium you will pay for that 10 yrs tenure term insurance will depend on your Age that time and health that time.

Note : Premiums are from Aegon Religare Life Insurance.

Personal Finance quiz – For all types of investors

Posted on November 6, 2008February 6, 2019 by Jagoinvestor

Today Let me ask some questions on personal finance to you which you can answer to see how much you understand things in investing. This small quiz will help you and me know where you belong to.

How much have you learned? I request you to give answers of the questions as a comment back to this article. I will announce the winners after some days. Also please mention your reasoning about the answer.

Personal Finance quest

Information : I have started a chat box on this blog, please see the right hand side to see it, you can post your questions or queries to it and I would try to answer them as soon as I see them.

Q1. Ajay and Priya are married and both of them earn 40,000 each. They earn total of 80,000 and there monthly expenses are around 20000-30000 per month. In case they have to opt for a Insurance plan. which one they should go for?

a) Term Insurance
b) Endowment or Money back plans
c) ULIPS
d) No Need to take Insurance

Choose one option among these and give the reason.

Q2. Ajay lends 1,00,000 to Manish on following conditions.

He will get 7,000 per year for next 30 years.
He will receive whole 1,00,000 back after 30 years.

What is the best way for Manish to utilize this money and make some profits for him too if possible.

No options here, you should give a detailed description of step he should take.

Q3. Your friend wants to enter magic world of Stock markets. He/She is determined and very confident that he/she can make huge profits. What will be 3 things you would say to him/her.

For an example : The first thing I would say to him/her is “Don’t concentrate much on making profits, rather concentrate on avoiding losses”.

What are the 3 things you would say to him/ her.

Q4. There are two strategies of investing in Stocks of blue chip companies in Stock markets. Time Frame : 2-3 months.

Strategy 1 : Can give profits upto 50%, or loss upto 50% with equal profits. (Assume the stock is very volatile)

Strategy 2 : Can give profits upto 10%, or loss upto 10% with equal profits. (Assume the stock is very less volatile)

Which Strategy will you choose? You are free to make your assumption

Note : Please answer these question to help yourself and see if you actually deal with these situation. What kind of thinking you have? What kind of advice can you give to someone? And more than that, to learn.

I will review all the answers and reply them. Also I would choose the best answer in some days.

Everything you want to know about CRR and Repo rate – How they help !!

Posted on October 30, 2008February 6, 2019 by Jagoinvestor

Today we will see what is CRR and Repo rate and how they help in combating Inflation and other monitory issues of Economy. CRR and Repo rate are nothing but the tools available in the hands of RBI to maintain the liquidity and growth.

You might know what is CRR and Repo Rate, but may not know what is there significance and how they help. Read whole article to understand.

What is CRR Rate ?

Each Commercial Bank has to keep certain percentage from their deposit amount in the current account with the Central Bank of India i.e. RBI. This amount is called as CRR i.e. Cash Reserve Ratio. It is the ratio of deposits which banks have to keep with RBI.

Banks do not have access over this amount for any economic or commercial activity. It means Bank can’t invest the whole deposit and they can’t use the CRR money for any lending or investing purpose.

Let’s see an example – When you deposit Rs.100 to your bank, bank gets Rs.100 and now can use this money to lend others, but they have to put some part of it with RBI, if CRR is 8%, they will have to deposit 8 with RBI and they are left with Rs.92.

CRR

So when CRR is decreased, Banks are left with more money to lend and when its increased they are left with less, even though 1% decrease in CRR leaves bank with 93 instead of 92, this Rs.1 is big enough thing.

What is Repo Rate?

When we need money, what do we do? We take loan from particular bank. And when we pay back that loan bank charges some interest on principle amount. This is called cost of credit.

Similarly, when banks need money they borrow it from RBI and the rate of interest which RBI charges on that loan on Banks is called Repo Rate or Repurchase Rate.

Repo rate

So if repo rate is 9%, and some bank takes loan of Rs.100 from RBI, they will pay interest of Rs.9 to RBI. This is a short term loan i.e. upto 1 to 2 weeks.

Higher the Repo Rate higher the cost of short-term money, Lower the Repo rate lower the cost of short-term money. This means at higher Repo Rate the economic growth will slow down and at lower Repo Rate economic growth will enhance.

How is Repo Rate linked to the interest we pay for loans from Bank ?

Simple, Banks need to charge more interest than they are paying, so if repo rate is 8%, they will charge more than 8% for loans which they give, If Repo rate comes down, banks’ may also consider the interest rate they charge us.

That’s the reason why with this latest Repo rate cut, people are talking about home loans rates coming down, so what will happen is that Bank need to pay less interest for the loan they take from RBI, now because they are paying less, they may think of charging us less on the interest for the loans which we have taken from them.

What is Money Creation ?

How does money get created? When A gives 100 to B, Rs.100 is created for B , then when he gives this to C, 100 is again created for C, this way money creation happens for different people from that same 100.

How does CRR help ?

Suppose CRR is 8% you had 100, which you deposit to bank, now bank will Deposit 8 to RBI and lend this 92 to some one, This 92 will be another money which is created for someone, now this 92 will exchange hands and then come back to bank somehow, out of this 92 again bank will deposit 7.36 to RBI and then lend the rest of it to someone … and it goes on like this.

The money creation from this 100 is :

100 + 92 + 84.64 … (100 + 100*.92 + 100*.92*.92 + 100 *.92 * .92 * .92 …)
= 100 *( 1+ .92^1 + .92^2 + .92^3 …)
= 100 * (1/(1-.92)) (because 1 + x + x^2 + x^3 … infinite times = 1/(1-x) for x<1) 08 =”1250″

CRR(C) = M/C

It means that this 100 actually generates 1250 in the economy indirectly. What will happen if CRR is increased by 1%, from 8% to 9%. though it may looks like that this is a small change and it would affect a lot.

Lets see what happens now . . .

How much money will 100 create now?

Ans = 100/.09 = 1111 (approx)

So the same money is now generating 1111 instead of 1250, that’s 139 less or 11.12% less money in the market.

How does Repo Rate and CRR help to ease Inflation?

Repo Rate:

When Repo Rate increases, the banks have to pay higher interest to the RBI and thus Banks also charge higher rate of interest to the common public who borrows loan from bank. Due to this people gets discouraged to take more credit from banks, because of which there is less supply of money in system and there is less Liquidity.

So on one hand Inflation is under control as there is less money to spend and on other hand growth will slow down as companies or people avoids taking loans at such a higher interest rate.

CRR:

It’s easy, if CRR is increased, banks have to deposit more money with RBI and banks will have less money to invest. So now bank will increase the interest rate on the loans which they will lend to other people.

People will avoid taking loan because of higher interest rate and it results in less money creation in economy, and hence people have less money to buy things and they will think twice before paying higher price for something. Due to this prizes will fall because of low demand.

A conversation with friend on avoiding financial responsibility

Posted on October 29, 2008February 6, 2019 by Jagoinvestor

In this article I’m going to tell my conversation with one of my friend about investment and different investment tools. We have discussed on both advance and traditional investment tools.

Read this chat conversation with one of my old classmate in Graduation.

“Manish : So where are you going to invest you money this year?

XYZ : May be PPF or Bank FD

Manish : But do you think they would give you good returns? also they would be locked for a long time, don’t you need that money in near future?

XYZ : Not exactly!, actually I can leave that money invested for more than 5 yrs, or may be 7-8 yrs too ..

XYZ : also, But I would like to invest some money in mutual funds … around 20k, May be I need some money to send to my brother for his MBA coaching ….

Manish : hmm.. But I think you should do exactly reverse. Invest this 20k in FD and Rest money in Mutual funds + PPF or only mutual funds.

XYZ : No no, I cant !! I have already lost 50% in mutual funds this time, I cant take risk now, I am fine with less return but a secure one …

Manish : hmm… I told you don’t put all money in lump sum. You never heard !!

XYZ : I invested because I trusted you, I thought you know more than me, but it fell so much … you gave wrong advice at wrong time.

Manish : Don’t you think it was your desire for high returns which made this happen? Equity are risky? I told you this too !!

XYZ : Whatever …

Manish : ok .. np … Consider what I said … good night … 🙂

XYZ : Good night“

What is the problem of these people?

First they need high returns, then they cant wait for long term to get that kind of return. They just hear that equity are risky but don’t believe it, they will make you feel that you are responsible for the crash. They just don’t take responsibility for what they did !!

What I actually told her?

I told her that its OK to invest at these high levels but don’t invest in Tax saving mutual funds as they will be locked for 3 years, also invest less and that too through SIP (What is SIP?), so that it can eat up the volatility and insure less losses if things go wrong.

But the only things on her mind was:

It will save her tax
Will give superb returns like it did during 2002-2007 (these are the people who don’t read “Equity investments are risky and passed performance is not guarantee for future performance”)
If she does SIP and markets goes up and up, she will be buying less units.

This is a classic example of “Overestimating Returns and Underestimating Risk”

How should you do your tax planning for the year?

First thing, if you have not done your tax savings yet, its a bad thing. It should be done at the start of the year itself, at least planned.

If you need money for short term goal, don’t invest in Shares or mutual funds !! Put it in some assured investment instruments like FD.

“Return of investment” is more important than “Returns from investments”.

If you have money which you can invest for long term, invest in Shares or Mutual funds (but only for long term). As per your risk taking capability choose combination of Debt and Equity and invest for the long term …

Why Equity?

Do you know that most of the stocks have beaten down so much that they have come down below than the price they deserve, There value has exceeded there price (Read about Value Vs Price).

Unitech : One of the largest and most respected Real Estate companies has fallen down to levels which are unimaginable !! from 532 to 40-50.

Tata Motors : Nano will be manufactured in some months, every thing looks so good, but people just sold it because of Singur tension (It was fine to sell it , but now its oversold).

There are countless examples like this in current market. Things will go fine, but with patience.

5 Elements of a well-planned financial portfolio management

Posted on October 24, 2008August 22, 2019 by Jagoinvestor

Everyone is concern when it comes to investment. But lot of investors does the mistake of focusing on investments only and not on their portfolio. Having a good financial portfolio is also as important as an investment.

This article will talk about 5 things every financial portfolio must have and we will see that it should be good for almost every type of investor . We will try to judge it over the important parameters discussed in my one of the earlier Article : Pillars of Success

financial portfolio

What is mean by a financial portfolio?

Financial portfolio is a road-map which you can use to achieve your future financial goals. It is build up by considering your risk appetite and investment objectives. You can handle your own financial portfolio or you can also take help of the professional financial managers which will make it easier for you to reach your financial destination.

Your investments alone can not help you to build a healthy portfolio, there are some other elements also which are important as much as your investments.

Let’s see the Five most important and must have things that each and every financial portfolio must have:

1. Life Insurance

Each and every person who has financial dependents must have a good Life cover through Term Insurance. This must be taken at an early stage of life for the longest term possible.

For India :

Aegon Religare Life Insurance
SBI Life Insurance
Max New York Life Insurance
LIC (Jeevan Amulya)

For Other countries :

Please search for your respective countries and find out which term insurance is the best one.

2. Health Insurance

This is extremely important to have a health insurance now a days, because of rising health-care expenses. A Family must be covered with a Family Floater plan for a good amount (Rs 5 lacs/$10,000) depending on your budget .

3. PPF

Each and every financial portfolio much have debt exposure and PPF (for India) is an excellent investment product for anyone, backed by government , its 100% safe and one of the most efficient and tax efficient products available , with post-tax returns of 8% , its a must have in each portfolio .

4. SIP in Mutual Funds (for long term)

For long term investments, its hard to beat this . For long term investments Equity must be the route and for systematic and disciplined investing , SIP is the best way to channelize your money . Considering the undebatable growth for Indian economy , no can afford to miss Equities for long term investments.

5. Contingent/Emergency Fund (Cash + Liquid Funds)

Each and every financial portfolio must have good amount of cash and liquidity to meet unforeseen and emergency expenses. Other wise you will have to liquidate and break you investment products which may attract penalties and may not give you enough cash at the time of requirement which can create problem .

Better to have money equivalent to 3-4 months of expenses in emergency fund . You can also put 1-2 months expenses as Cash and rest into Liquid funds which may also provide you some returns .

Analysis

Understand that these 5 things are a list of things one would have for sure , but its not an exhaustive list . Depending on your profile and requirements you should have other products as well. but i would say this will solve 90% of the problem . Let looks how a finanacial portfolio consisting of this 5 things passes on 4 parameters called Pillars of Success ?

1. Capital Appreciation :

With SIP in mutual funds and PPF , the capital appreciation should happen to a great extent , PPF would provide stability and assurity or returns , where as Equity will gives exceptional returns .

2. Liquidity :

We have already covered that Contingent fund should be able to provide good Liquidity.

3. Risk Management :

Term Insurance and Health Insurance will take good care . SIP will take care of the market volatility. some other techniques like Hedging using Derivatives and being well informed will manage extra level of risk .

4. Goal Oriented :

Each and every product is for a specific and important goal , as described above .

For Non-Indian Readers

Hi all , the article is specifically with Indian context , but article is helpful for each of you , please find the similar products in your country .

Conclusion

Each and every financial portfolio can be different and should match the requirement of the investor , But these 5 things are such that it can be for any kind of investor . Just like we have master key for any kind of lock , we have these products for any kind of investor.

If you have an query ask us in the comment section.

Traits of an excellent financial portfolio which makes it better

Posted on October 18, 2008February 6, 2019 by Jagoinvestor

What makes an Healthy financial Portfolio? There are some good traits of portfolio which makes it better than others. A good and strong portfolio has some strong elements or parameters which it must meet. These are the Pillars for a strong Portfolio or Investments.

Important Elements are :

1. Capital Appreciation
2. Liquidity
3. Risk Management
4. Goal Oriented

Lets take each of these points one by one :

Capital Appreciation

This is one of the biggest reason to invest. Isn’t it very obvious? Yes, it is. But the main point is not just its growth in numbers but its real worth. We are talking about Post-tax and post inflation returns.

The real return of Plain Fixed Deposits in these high inflation days are negligible when you factor out Inflation and tax. The best investment must be robust and good enough to provide appreciation in real worth over long period of time. Real Estate and Equity (Long term) can generate good returns.

Liquidity

Another important aspect of a good financial portfolio is that its provide enough liquidity, so that in case of need, you can get the money.

What is Liquidity? Liquidity is how fast and easily asset can be sold and you can get cash. For example Mutual funds and Shares are highly Liquid, If you have them and want to sell, you can get the money soon. Where as Real estate is not a Liquid asset. So if you need urgent cash, you might not find right price and or buyer.

Every portfolio must have some element of Liquidity, as per the requirement of the investor.

Risk Management

Every portfolio or investment must be to some level insured or have element of risk management

What do we mean by this? A good investor is one who sees beyond what an average investor cant see. Average investors concentrate very well on Profits, How good an investment can be, High returns etc.

An exceptional investor goes beyond that and takes care of Worst case Scenarios and situations which may cause damage. He is the real investor.

Some of the steps to be taken are :

Adequate Insurance to be taken .
Proper monitoring of performance of investment.
Getting out early in a bad investment and accepting that you made a wrong decisions.
Keep your self updated with news, laws, things which can affect you investments.

Risk management is not buying some product for managing risk but being aware of things and taking right and logical decisions.

Goal Oriented

“A good investment is one which has a purpose”

Each and every investment should be done because of a strong reason. I see people who take Insurance policies to save tax at the last rush hour of the year !!! Better loose the tax benefit and don’t take that policy.

That kind of investment is nothing more than a waste or burden. On the top of it these people don’t even need insurance !!!

When someone asks you the reason for making a investment, you should know why you did it?

Some of the bad or idiotic reasons for doing investments are :

I can save tax by that
My friend did it and recommended me
Everyone is doing it .. why shouldn’t I?

Every time you take a decision ask yourself some questions like :

Do i really need it at this point of time?
Can i afford it?
Do i understand it well? Can i protect myself if people make me fool?
What is the purpose or goal of this investment?

If you get satisfactory answers go for it else take an expert advice.

watch this video to learn more about investment analysis and portfolio management :

Sample Portfolio Analysis.

Sample Portfolio 1

Robert is a married person earning 40,000 per month. He is the sole Earner of the family and and has 2 kids. He is not a risk taker and his portfolio looks like.

50,000 invested in NSC (opened before 3 years)
An endowment policy with 10 lacs cover and 40,000 premium for 30 yrs, with maturity benefits.
1,40,000 in a Tax saving mutual funds (investment 70k for 2 years for tax saving)
Home (Rs.30,00,000)
Cash : 20,000
Car : worth 5,00,000
Jewelry worth 80,000

Lets rate his financial portfolio on all the parameters on the scale of 5 stars

Capital Appreciation : A small portion in Equity, and that too for a wrong reason of just tax saving, Saving through Endowment policy is another wrong decision, the returns are too less.

Liquidity : None of the assets are Liquid and Cash available is not enough to meet emergency requirement.

Risk Management : No Risk management, What if he dies after 10 days, What if he meets an accident, What if suddenly he requires 1,00,000, what if he looses his Job.

Goal Oriented : * (The reasons for investment in most of the things looks like they are for Tax saving, or some one suggested )

Sample Portfolio 2

Ajay is married and has 2 kids and parents who are all dependent on him, He earns 40,000 per month.

Long term investments in Tax saving Mutual Funds (Rs.4,000 per month)
Term Insurance of Rs.80,00,000 (80 Lacs)
Health Insurance of each member up to 3,00,000 – 4,00,000 (Family Floater Policy)
Yearly Contribution to PPF (Rs.50,000)
Invested 1,00,000 in Liquid Funds
Home loan taken by him and his Wife Jointly (Along with Home Loan Insurance)
30,000 invested in Gold ETF and some good shares.
Rs.25,000 Cash

Lets rate his financial portfolio on all the parameters on the scale of 5 stars

Capital Appreciation : Appropriate investment in Equity with long term view, and some money in Debt.

Liquidity : Has good amount of money in Liquid funds, Cash and Gold ETF, which have good liquidity and can provide him Money quickly in case of requirement.

Risk Management : In case of any type of Eventuality, He is properly covered. He is protected well against Death, Health Issues, Home related issue, Emergency issues.

Goal Oriented : Most of the investments have strong and valid reasons.

Like Term Insurance is required for Financial Cover, Mutual funds investment was for Long term Wealth Creation, PPF investment for Wealth Creation with Debt Route and safe investment, Joint Home Loan with wife for Tax benefits, Health Cover for Tax benefits and cover against Health Issues, Gold Investment in ETF because of Diversification and Liquidity, Cash for instant requirement, Liquid funds investment for Liquidity along with some returns.

Note : Both the financial portfolio’s are created just for the illustration.

Summary

Each and every person portfolio should be strong on all the areas, it should pass all the criteria to some extent. A portfolio should pass all the parameters for different requirements. If you have a financial portfolio ask yourself all these questions :

Is it good enough to provide stable and good returns over long term. Is capital appreciation happening in Value or just numbers are growing, but post-tax and post-inflation returns are negligible.
If i require instant money within 2 hrs, 2 days or 5 days, Is my portfolio smart enough to provide me.
Is my portfolio good enough to provide protection to me and my family against calamities or any unexpected events . Do i review my Portfolio in regular basis to cut out the losers.
Is my portfolio a result of my Needs and requirements or Greed, Ignorance and Hearsay and emotional Buying? If that’s the case, take action !!!

Some I would be happy to read your comments !!!

A reply to one mail

Posted on October 16, 2008February 6, 2019 by Jagoinvestor

This post is most probably the one on which i didnt worked hard . This is just an email reply from my side to one of my friend who queried me regarding his Endowment Policy package which an agent has created for him .

The policy looks like this … 15 small polices of 1,00,000 each which will mature one by one every year after 27 years and will act as yearly pension in his old age

His mail :

>>>

On Wed, Oct 15, 2008 at 9:37 AM, ajay patel wrote:

15 policies of Rs. 1 Lakh each, starting from sept 2007, first policy matures in 2034 and others follow every year from there on.
Cover of 15 Lakh is for life time. There is an extra Rs 500,000 accidental insurance along with it till the age of 70(2053) (if the world exists till that time).
Annual premium of Rs. 42,000 till 2034, a total amount of 3,400,000 will be received from maturity of these policies.

Say after ten years, I see myself earning around 2.5-3 lacs per month. with one child (if i get married :))

My Reply :

now lets see some of the facts for you to ponder .

Starting from 2007 you are paying 42,000 each year till 2034 (for 27 years) . You will receive money starting from 2034 – till 2049 (15 years , each policy matures) .

Points to note :

– You are paying 42,000 and then its locked for 27 years
– You are getting maturity value of each policy per year , just like a annual income(around 2.25 Lacs/year ie : 34/15 , which is not taxable (you keep all the money).
– You are getting Tax exemptions under sec 80C for this.

I think these are the points you have to agree , because they are not opinion , they are facts .

Some of the flaw or issues with this plan are following , which you never considered at the time of taking this .

– The premium you are paying each year equals to your current monthly salary , also you said that you see your self earning 2.5-3.0 lacs (6 times , your current) per year just after 10 years from now . i am not sure what kind of figures will it be after 27 years . At that time , the money which you get from the policy should not last even 2 months . Considering your expenses currently at 25,000 per month (considering you are married and have children) . the same expenses will rise to 1.2 lacs assuming 6% inflation (also remember that the expenses will keep rising each year ie : 1.66 , 1.77 , 1.9 … 4.2 lacs , whereas the money you get each year will be around constant 2.25 lacs only , this may look unimaginable , but ask your father to grandfather about the monthly expenditure of family before 25 years , i am sure it should be 5% of current, people always forget inflation).

– The insurance provided by this policy is so less that you are highly under insured . What can your loved one do with 15 lacs today ? Will it be sufficient to replace you ? If you consider time after 10 years (when you think you will earn 2.5-3 lacs / month , will the insurance money be sufficient to cover the dependents ? When you will be of age 60+ , the insurance amount is able to meet not more than 9-10 months expenses .

Having this policy is as good as not having it . The issue is not that Can there be policy better than this? ,The main problem is what kind of value is this giving to you . Is the benefit provided by this policy after 27-42 years is much less than than the pain you are getting by paying hefty premium now .

With the same money (42,000) , let me see what can i plan for you with same money .

Lets first take a most conservative way (which is undebatabely safe).

You take an insurance of 50,00,000 (50 lacs) for 30 years and pay a premium of just 10.5k per year . You are left with 32k per year which you put in

1. PPF account

In PPF the money 32k @8% will become 2,55,000 in 27 years and you will get this money every year (total 38 lacs till end) , till age 66 ( In Endowment policy it was 2.25 lacs)

2. In MF considering 12% return

32k invested will become 6.83 lacs in 27 years , so you invest every year 32k and get 6.83 lacs just after 27 years of payment . so it can provide a regular income of 6.23 lacs after 27 years for continuous 15 years till you are 66 .

3. In Mutual funds considering 15% return

The amount would be 13.93 Lacs , every payment of 32,000 will become 13.93 lacs.

Question: How realistic are these mutual funds returns ?
Answer : Over the history no asset has returned more than equity over long term . India Equity markets have returned 17.5% CAGR annually (since inception) . 15% is a very realistic return considering the money is invested for long term like 15+ years . Equity investments risk are inversely proportional to tenure of investments .

After 30 years you will not even need Insurance , because this money will be available every year . and i am assuming that you will earn enough till than that you don’t need insurance .

Some other things to ponder are :

Investing in your Endowment policy does not give you any flexibility of stopping or missing your premiums . In case of PPF or mutual Funds , you can be very flexible and stop for 2 years if you want money to be utilized some where else .

The plan which i told you has everything which you had in that endowment policy , even more than that . its like Buying Nokia 2600 @20,000 when you have iPhone available at same price , you just didn’t knew where you can get it 🙂 . Ok , i know that was pathetic analogy , but i need some platform to show that i can think .

So better stop those policy and take the loss of premiums which you paid , anyways you are not going to be affected now , and life will be normal as it was .

I have done nothing extraordinary here , but some calculation based on some common sense , which is not common .
disagreements are welcome .

– manish

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—
Manish Chauhan
Bangalore
https://finance-and-investing.blogspot.com/

Lets understand some basic things here . No matter what people tell you or design things for you , Always calculate and apply the simple formula’s which will give you certain numbers, which can be used as benchmarks by you .

Some must know formula’s : https://finance-and-investing.blogspot.com/2008/09/3-most-important-formulas-you-should.html

Please post your comments .