Author: Jagoinvestor

I am Jagoinvestor Admin

Aegon Religare Life Insurance – New hope for Indian Insurance Industry

Posted on by Jagoinvestor

Aegon Religare Life Insurance which is recently renamed as Aegon Life Insurance is a new Player in Indian Insurance Market.

This company seems to have clear understanding about the Insurance Market and what India needs exactly, there main focus is on Term Insurance and that makes it respectable in my opinion, its not like other companies concentrating on Endowment and Money Back plans and tag them as Great Insurance products, which is nothing but Saving and investment products with a pinch of Insurance.

aegon life insurance

About Aegon Life Insurance

AEGON : Aegon is one of the largest life insurance and pension groups with market in over 20 countries (Americas, Europe and Asia) with 40 million customers. It has more than 160 yrs of experience.

RELIGARE : Religare is one of India’s leading integrated financial services groups. They have 1550 locations spread across over 460 cities and towns in India.

Products Offered by the Company

AEGON RELIGARE Life Insurance has excellent products as far as Term Insurance is concerned. They also have ULIP plans.

In Term Insurance they have the minimum rates for Term Insurance plans. You can check their Premium Calculator here. They have 3 different plans.

1. Level Term Plan :

In this cover remains same through out the Tenure. Premium for amount Rs.50,00,000 (50 Lacs) for 30 years.

Male/Female (25 yrs) : 9,000 per year
Male/Female (30 yrs) : 12,150 per year

2. Increasing Term Plan  :

Cover increases by 5% every year. Premium for amount Rs.50,00,000 (50 Lacs) for 30 years.

Male/Female (25 yrs) : 13,800 per year
Male/Female (30 yrs) : 19650 per year

3. Decreasing Term Plan :

Cover decreases by 5% per year (Tenure = 20 years max). Premium for amount Rs.50,00,000 (50 Lacs) for 20 years.

Male/Female (25 yrs) : 7,100 per year
Male/Female (30 yrs) : 7,900 per year

One can choose the plan as per there requirement. The best part is that there rates are very very low. This Term insurance is worth a consideration.

Click here to understand why you need Term Insurance and not Endowment or Money Back Plans.

The amazing truth of partial Profit booking

Posted on by Jagoinvestor

In this article I’m going to talk about importance of partial profit booking. The scope of this article is only risky investments where we have risk of loss. It’s not related to Debt products where we are sure of returns.

Partial profit booking is relevant if you invest in Shares, mutual funds or derivative products.

truth of partial Profit booking

What is the main goal of investments in Equity?

When we ask this question, most of the people would get it correct, Answer is Capital appreciation or fast growth of money. But most of the investors concentrate so hard on maximizing profits that they underestimate risks and that’s the main reason for most of the losses they make.

The biggest goal while doing Equity investments has to be “Capital Preservation” and only then you must think about any profits. So the main concentration must be on “Capital Preservation”. If you don’t concentrate on capital preservation, it can erode because of continuous losses and then you will have to try for profits just to get back to level you started.

Suppose by taking a lot of risk you can either earn 60% or lose 60%. If you get profits, it’s great. But if you lose 60%, then you will have to earn 150%, just to get back to your starting Capital. Whereas if you take a less risky route where you just earn 10% or 15%, your money will grow slowly and steadily, it will soon increase due to compounding effect.

We are investors, we are not god, we can’t predict markets move accurately. We can only avoid bad moves and take decisions which can help us minimize our risk and losses. We will soon see how Partial booking of profits can is so important while doing investments.

What is partial booking of Profits?

When we invest our money and if we get some profit and then we are not sure what can happen next, we book a part of it to minimize our risk. The main idea here is that if we gain some profits, we should book some part of it to make sure that we already got that profit in hand and not just in mind.

For Example

Ajay invested 1,00,000 in shares, which grew by 20% in 6 months. Now he is not sure what can happen, Markets are uncertain and now there might be 40% profit or 40% loss (just for example). He has 3 options here

1. If he does not book partial profits

His investments grew to 1,20,000 and now he can get profit or loss of 40%. Let us see the range of his return.

In case of 40% profit, he will get 1,20,000 * (1 +.4) = 1,92,000
In case of 40% loss, he will get 1,20,000 * (1 – .4) = 72,000

Total investment: 1,00,000

Returns: In range of -28% to +92%

2. If he books partial profits

Here we assume that he books his 50% profits. His investments grew to 1,20,000 and books profit of 10,000, he get backs 60,000 back and rest 60,000 is still invested. Let us now see the range

In case of 40% profit, he will get 60,000 * (1 +.4) = 96,000
In case of 40% loss, he will get 60,000 * (1 – .4) = 36,000

As he has got back 60,000 back earlier, the actual range will be

If 40% profit: 1,56,000
If 40% loss: 96,000

Total investment: 1,00,000
Returns: -4% to +56%.

So there is choice between -28% to +96% or -4% to 56%. The good idea will always be the second option. Because the second option is more close to giving positive returns. It saves us from risk. It makes sure that even though less, we get positive returns.

To understand more on why avoiding bad decisions is better than making good ones, Click here

Let us see another example :

Just before the NSG waiver meeting, Robert invested 35,000 in options, he was very sure that markets would rise. Just after news came about NSG waiver, markets were suddenly up and He was in 12k profit overnight. This was a positive news for market and he wanted to remain invested.

He was very sure that market would rise further for next few days and his money would grow to 60-70k. People who are familiar to option trading will know that 30k can become 60k or 90k in a single day.

Robert was so confident that he did not book partial profits. Next day there was Lehman Brothers Collapse and it was a great shock to world. From next day stock markets fell and his investments fell by 90% in 2-3 days. His money grew from 35,000 to 47,000 and then fell to 8,000 in 3 days. Now he was in 27,000 loss.

What if he would have booked partial profits?

If he would have booked 50% profits. It means he invested 35k which grew to 47k and he takes out 50% of his investments, He should have taken out 23k and left 24k invested. In that case even if markets feel by 80%, His 24k would become 5k. Remember here, that he has already booked half of his profits and his exposure has reduced by 50%, which will help him in minimizing losses.

Total investments = 35,000
Final value = 23k (booked earlier) + 5k = 28,000

Loss : 7,000

Summary

Markets are uncertain and volatile. If we get profits anytime, make sure that they are partly booked, By doing that, you make sure that you have actually got some profit materialized and reduced your exposure to investments after it has gone up. If your investments start falling again, you will suffer some loss, but that loss can be compensated by the profits you have already booked.

By partially booking profits you reduce your risk for huge losses, at the same time you also cut your chances of making large profits, which is fine. Concentrate on cutting and avoiding losses and risk and not making profits. Profits will automatically come once you know how to manage your risk.

How to hedge your Portfolio using Derivatives

Posted on by Jagoinvestor

When it comes to invest in equities or mutual funds lots of people becomes concern about their investments. This article is surely for you if you invest in Equities (Direct shares or Equity Mutual funds). In this article I’m going to tell you how to hedge your portfolio using Derivatives.

Using derivatives to hedge risk

Risk Management of Portfolio using Derivatives

Many people might have seen their investments go down to anywhere between 20-50%, if they invested in Indian Stock markets around Dec 2007 or Jan 2008, and they might be wondering if it will go more down in value .

Just like we know take life Insurance to cover the risk of Life, Home insurance or car insurance to cover the risk if anything goes wrong, Can we also take Portfolio insurance?

What does insuring the portfolio means?

What does insurance means? It means securing something from some event which can cause loss or damage. We ensure our Lives, our homes, our Car. What happens when nothing happens to our lives, Home or Car.? We pay a small price for it and that is a kind of fees, which we pay for the security.

In the same way, we can also insure our portfolio, we can make sure that our loss is limited, the loss is always limited. If you are one of those who invested in Equity mutual funds or Shares during 2007 or Jan 2008, and you are sitting on a loss of 30-60%, you will understand this very well.

Anyone who invested Rs.1,00,000 in stocks or mutual funds has loss of anything from 30,000 to 60,000 (depending on his investments). Just wonder if they could insure their portfolio and make sure that there loss cannot go beyond a certain limit. That would be wonderful. We are going to discuss this today.

How to insure your portfolio?

There is no specific product or service for this , you have to manage it using Options (Derivative Products). ( Read it in Detail)

I assume that you now understand what are Options and how do they work , what are call and put options and what is expiry date, in case you have not read about it, please read it at above links (try first link to get basic info).

If you have invested in Mutual Funds

Ajay has invested Rs.2,00,000 In Equity mutual funds in Aug 2008, Nifty is around 4,200. He has invested his money for 4 months and would like to withdraw his investments in Jan 2009. He is a smart investor and knows that markets can crash and there is no limit to how much down it can go, so he decides to minimize his risk.

For this he has bought Nifty 4200 PA DEC-2008 trading at 200, for which he spent Rs.10,000 (Rs.200 * 50 lot size).

Now let’s see 3 different cases and what happens to his portfolio

1. Markets boom and goes up to 5,000 : Nifty has gone up by 20%

I am assuming that his investments followed and his Rs.2,00,000 has grown to Rs.2,50,000

Value of his Nifty PUTS : 0

Profit from investments : 50,000
Loss in Puts : 10,000

Total Profit : 50,000 – 10,000 = Rs.40,000

2. Markets Crash by 25% and nifty goes down to 3,100.

His investments follow and now its value is around 1,40,000, but his PUTS will be valued at 1,100 (4200-3100). So its value at the end would be 1,100 * 50 = 55,000.

Loss in investments : 60,000
Profit in PUTS = 45,000 (55,000 – 10,000 investment)

Loss = Rs.15,000

Here you can see that Out of his loss of 60,000, 45,000 is covered from PUTS.

3. Nothing happens and markets are still at 4,200.

His investments will be almost same, and his PUTS will expire with value 0.

Profit from investments : 0
Loss from Options : 10,000

Total loss : Rs.10,000

In all the 3 cases, we should note that in all the cases his Losses are minimized.

Let us also take an example of Shares.

Ajay bought 300 shares of Reliance @2,000 on 1st Jun 2008. He wants to sell these shares around Dec 2008.

He senses that markets are uncertain, so he buys 4 lots of RELIANCE 2,000 PUTS DEC 2008 @100. One lot of Reliance options has 75 shares, that’s the reason he buys 4 lots, so that he has total 300 shares control.

What does it mean? It means that on Dec 2008, he has the right to see 300 shares of reliance @2,000 and for this right he has paid Rs.100 for each share.

The maximum loss for him is now Rs.100 per share.

Let us see the 3 cases.

1. Shares price has gone up to 2,500.

Profit in shares = 500 * 300 = 1,50,000
Loss in Puts = 100 * 300 = 30,000

Total profit : 1,20,000

2. Shares price remain same at 2,000

Profit in shares : 0
Loss in Puts : 100 * 300 = Rs.30,000

Total Loss = 30,000

3. Shares price go down to 1,500

Loss in shares = 500 * 300 = 1,50,000
Profit in Puts = 500 * 300 = 1,50,000 – (30,000 investments)

Total Loss = 30,000

Again, we can see that in any case his loss is capped by 30,000 (5% of his investments of 6,00,000)

So options can be used to hedge or security. Watch this Youtube video to understand.

Summary

So the main idea of options is to use them to minimize the losses. If there is loss in investments, the puts will end up in profit and we will have very less loss or maybe we can get some profits only. The same way, if people do short selling they can use calls to minimize their losses.

So if you have invested in Shares or mutual funds and want to minimize your losses, use options or Futures as Hedging tools.

What are Gold Mutual Funds

Posted on by Jagoinvestor

Gold Funds

In India Gold investment is considered as the traditional and most safe toll for investment. In this article I’ m going to tell you what are the alternatives to invest in GOLD other than physical Gold and GOLD ETF?

gold etf

What are Gold Mutual Funds?

Gold Funds are mutual funds which invests in stocks of companies engaged in gold mining & production. They do not buy gold directly but invests in stocks of companies engaged in gold mining and production world over.

When gold prices rise, the profitability of gold companies tends to increase more than proportionately, thereby providing long-term capital appreciation as stocks of gold companies have the potential to outperform gold prices by a significant margin over the long run.

Even though these are Gold funds, they can invest some part in Platinum and Silver.

According to the website, DSPML World Gold Fund has invested over 80 per cent in gold followed by platinum (9 per cent) and silver (5.10 per cent).

As per the December 2007 portfolio, Australia based Newcrest Mining is the top holding of the fund accounting for 8.4 per cent of the fund’s assets, followed by Barrick Gold (7.50 per cent), Kinross Gold (5.50 per cent) and Lihir Gold (5.20 per cent).

Why to invest in These Gold Funds?

Investors can benefit from the global demand for gold by investing in the precious metal and in companies involved in its production. In times when Equity markets are uncertain , Gold can be a good hedge. After Equity markets crash of Jan 2008, Gold Mutual funds were the best performers in any Mutual Funds category.

Also, this fund has an edge over GOLD ETF’s (What are GOLD ETF’s) as the portfolio of gold equities is actively managed as against the passive management in Gold ETFs.

Click here to know the returns of gold investment in past few years.

Taxation and Returns

From the taxation point of view, These fund will not enjoy the tax benefits that equity funds are eligible for. Long term gains would be taxable at 10% and short term gains would be taxable as per slab rates applicable to the investor.

Most of the Gold mining companies will be outside India and hence these funds would eventually be invested in dollar denominated assets, any currency fluctuation would directly affect your rupee return.

For example – the US dollar has depreciated by over 8% in the last 3-4 months against the rupee. Such appreciation of the rupee directly eats into a dollar return and investors should be aware of the currency risk that they undertake when they invest in this fund.

What are Gold Funds Available (In India)

– DSPML World Gold Fund
– AIG World Gold Fund

Read Why to invest in GOLD and What is the Best way
Read How to Calculate your Life Insurance ?
Also read Creating Wealth for retirement

I would be happy to read your valued comments. Thanks ………

How to calculate Insurance Requirement

Posted on by Jagoinvestor

There are lot of assumptions related to buying life insurance in India, because of underestimating the future non-life threats like job loss, accidents and also the life threats which will have a bad impact on your families future requirements in case of your untimely demise.

Today i will discuss about the calculation of insurance Amount one needs to protect his family even though he will not be there for them.

Life insurance

How much should be the Insurance cover?

You will hear that it must be 6-7 times of Gross yearly income which is good enough estimate. but it does not consider other things like Debts or living style. It may be true for you but not for other. Some people may have simple lifestyle, whereas some other can have expensive lifestyle. So lets answer this question in another way.

This is pretty easy to answer, The life Insurance amount much be enough to –

  • Pay off all the debts
  • Should be able to provide monthly income which is good enough to cover family expenses
  • Any emergency or unplanned needs for future.

How to calculate the Sum Assured?

While deciding the  total sum assured, you need to consider all the factors that may affect to the financial life of your beneficiary when you will not be around. You should understand the expected cost of living for your family in your absence.

Some of the basic aspects that you should take into consideration in order to calculate the total sum assured are listed below:

  1. Calculate the total one time expenses which can be paid in lump sum also, like, Loan, credit card bills etc.
  2. Make a addition of all the assets like mutual funds, stocks, FD/RD, property etc. (Exclude those assets which your family is not willing to redeem or offset with the lump sum amount of liabilities)
  3. Deduct the liabilities from the assets ( or assets from liabilities in case liabilities are higher)
  4. Calculate the annual expenses of your family
  5. Decide the number of years for which you want to provide insurance cover
  6. Consider this amount for as a sum assured for your life insurance cover.

Let’s take an example.

Example :

Ajay is 30 yrs old and earns 40,000 per/month. He is married and has 2 kids. There monthly expenditure is 20,000 per month.

  • His debts and future expenses.(total : 47 lacs)
  • Home loan of 24 lacs (remaining)
  • Car loan of 3 lacs.
  • His children studies expenses. (20 lacs , in future)

His investments are (total 8 Lacs)

  • 5,00,000 in Fixed Deposits
  • 3,00,000 in Mutual funds

He has 47,00,000 worth of Debts and expenses in future and monthly expenses of 20,000 , considering inflation @5% , which will also increase every year. His Insurance money should be able to pay for both of these.

We have to answer that how much money will provide 20,000/month (post-tax) or 2,40,000/year.

Considering 15-20% tax, the family should get 3,00,000, so that after paying tax they are able to get 2,40,000 per year. So how much money will give them 3,00,000 per year.

Fixed Deposits rates are around 9-9.5% per year. Which means 3,00,000 X 100 / 9.5 = 32,00,000 (approx).

So if they have this much amount in Bank which pays interest of 9.5% yearly, they will receive around 3,00,000 per year as interest and after paying taxes, they will be left with 2,40,000, which can meet there monthly expenses.

Also the insurance amount should have 47 lacs extra, which will be used to pay there debt and future expenses.

So total = 32,00,000 + 47,00,000 = 77,00,000

As he has 8,00,000 worth of investments also, His Insurance needs comes down to 77,00,000 – 8,00,000 = 69,00,000 (let’s make it 70,00,000)

This is the minimum amount for the insurance needs.

It should also be considered that the expenses will rise and some emergency may also happen. So insurance can be increased by 10-15%. But for the moment we will not do it. Its in fact not necessary in this case because the money for future expenses can be invested and which will grow .

Tracing Back

So we arrive at the figure of 70,00,000 . Now lets go back again and see that in case there is sudden death of the family head (earning member), how this money helps the Family..

They receive 70,00,000, Out of which they pay 24,00,000 of home loan

Money left = 70,00,000 – 24,00,000 = 46,00,000

They put 32,00,000 in bank or Monthly income plans, which will provide them with monthly income of 20,000 per month (post-tax).

Money left = 46,00,000 – 32,00,000 = 14,00,000

Now this 14,00,000 can be invested in Debt or Mutual funds which will grow to become at least 20,00,000 in some years (considering its needs after 10 yrs at least.

At the end of 10 yrs, when family needs this 20 lacs for there children education, they can use it. And for any emergency needs they have another 8,00,000 in investments.

So in general All the requirements of Family is taken care of. If insurance amount is less than 70,00,000 they will have to compromise at one place or the other.

Why it is necessary to have as life insurance cover?

Life insurance is an important instrument to make your dependents life secure, in case of your untimely demise.

Life insurance requirements

Though there is nothing great in that, but most of the people miss on this part and according to studies, more than 80% of people in India are under insured, which means the amount there nominees will get will not be able to cover them against the financial crisis.

In case you have not read my previous articles on Life insurance, please read them

How much will the Life Insurance cost him per year?

As I write this Article, I can see on https://www.click2insure.in/ that for a 30 yrs old non smoking male for 25 yrs of cover, the minimum premium per year for 70,00,000 Term Insurance is Rs.21,000 per year (taxes extra).

The premium is just 4.4% of this yearly income. Just imagine how cheap term insurance for total peace of mind for rest of the life.

So whats the final formula?

Insurance cover = A + B + C – D

Where,

A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest rate which bank gives in a year , example 9.5%)

B = Future Debts or Expenses.

C = Some money for contingency or emergency.

D = Your investments or Assets (excluding HOME)

If you are under insured, please take extra life insurance and cover your family. You can also buy insurance under MWP act.

Please read my earlier articles on Term Insurance to understand more.

I would be happy to read your comments.

Some of the best investment products I know about

Posted on by Jagoinvestor

When it comes to investment, everyone is conscious and curios to know about the best investment products. In this article I’m going to tell you about few of such products that I know and I thing they will be helpful for you.

Best investment products

1. Term Insurance

Term plan is an affordable insurance which provides a full protection cover for your family at a very low premium cost. One of the best products in Term insurance markets I know is SBI life Insurance Shield Plan.

Before taking any Insurance into consideration, we should give importance to

  1. Premium amount you pay : Premiums are among the cheapest in market
  2. Claim settlement Rate : Next only to LIC

There Shield plan is designed very nicely, have a look at it and you will love it.

2. UTI Gold ETF’s

It is simply an investment in gold which tracks it’s price on day to day basis. It has its own expense ratio which is very high is compared with US market, but it is the price that we pay to invest in gold electronically. You should have a demat account to invest in Gold ETF’s and you can trade these ETF’s through stock market.

If you want to invest in GOLD, try this ETF, search GOLDSHARE or UTGOLD (if you are on ICICIDIRECT).

3. Mutual Funds

Mutual funds are categorized on the basis of its objectives, style and strategy. Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.

See here some of the good options of mutual funds to invest in :

ELSS

  • SBI magnum tax shield
  • Principal Tax saving

Equity Diversified Mutual Funds

  • DSPML Equity
  • HDFC top 200
  • Magnum Contra

Balanced Funds

  • HDFC Prudence
  • DSP Balanced
  • UTI Mahila Unit Scheme

Debt or Liquid Funds

  • Kotak Flexi
  • Birla Sun Life Income

(see details of these mutual funds at https://www.valueresearchonline.com/)

3 most Important formula’s you should know – Compound interest, CAGR and Annuity calculator with example

Posted on by Jagoinvestor

1. Compound Interest

This formula is often used to calculate the returns some investment has given. The main concept in compound interest is that interest gets accumulated with the total principal amount and that interest again earns interest over the years. Which makes it very powerful.

Compound Interest, CAGR and Annuity - Important formula's

Formula : A = P * (1+r/t)^(nt)

Where,

P = principal amount (initial investment)
r = annual interest rate (as a decimal)
n = number of times the interest is compounded per year
t = number of years
A = amount after time t

Example 1 :

Investment = Rs.10,000
return = 9%
investment period = 8 years

Total amount = 10000(1+.09)^8 = 19925.63

Example 2 :

Sensex returned 17.3% return over 29 years since its inception in 1979. What would be worth of Rs 10,000 invested that time.

A = 10,000 * (1+.173)^29 = 1022450.64 (10 lacs)

You can see that a small amount has actually grown to 100 times.

Compound interest Calculator :

https://math.about.com/library/blcompoundinterest.htm

2. CAGR

This tool is very important because it helps in comparing two differnt returns from two investments, you can calculate how much an investment has returned per year on compounded basis, Its just the opposite of Compound interest

Formula : CAGR = (A/P)1/n – 1

where:

A = Final amount
P = amount invested
n = Number of years

CAGR can be a great tool to compare two different investments and there returns.

Example :

A. 10,000 invested in a XYZ mutual fund for 2 yrs became 20,000
B. 50,000 invested in GOLD for 7 years became 4,00,000

Which investment has given more returns?

Here the main doubt is that how to calculate which one is better .. the amount, tenure is different. So in this case we calculate and see CAGR, one with more CAGR will be good.

A) CAGR = 41.42 %
B) CAGR = 34.59 %

So, investment in A is better than B. Which is –

CAGR calculator :

https://www.moneychimp.com/calculator/discount_rate_calculator.htm

3. Annuity

This formula is very very important one, in our daily life we come across many situation where we do a fixed payment at the fixed interval, and we want to calculate the returns, but we don’t know how to do it .. Example can be

  1. Monthly payments in Mutual funds through SIP
  2. Yearly payment in a PPF.

Or any investment at a fixed inteval over some years. In that case we calculate the Final value using formula called Annuity.

Formula : A = P * [{(1+i)^n – 1 }/i] * (1+i) (if payment are being made at the start)
(it will be P * [{(1+i)^n – 1 }/i] if payments are made at the end of the year)

Where :

A = final amount
P = installment each time
n = total number of installments
i = interest rate for that tenure (example if yearly return is 24%, but payments are made monthly then i = 24/12 = 2%)

Example 1 :

Robert invests 10,000 each month in a mutual fund for 10 years and the annual return was 18%, what will be his final corpus?

Here as payments are monthly, total payment will be 10 * 12 = 120

so n = 120 and i = 1.5 % (18/12)

A = 10,000 * [{(1+ .015)^120 – 1}/.015 ] * (1+ .015) => 40,39.241 (40 lacs)

Example 2 :

Vikas is planning his retirement, and planning to invest 5,000 per month in a Mutual fund for 20 yrs where he expects a return of 15%, then take out all the amount after 20 yrs and then put it in a FD for 15 yrs which gives him 9.5% return.

Here, we there are two parts

A. He makes monthly payment for 20 yrs (here we have to apply annuity)
B. then he takes the money out after 20 yrs and then put it in FD for 15 yrs (as this is one time payment, here we will apply compound interest)

A ) n = 240 and i = 1.25% (as the payment are monthly)

His money after 20 years = [5,000 * (1 + .0125)^240 – 1) / .0125] * ( 1.0125) = 75,80,000 (75 lacs)

Now he invests this money into a FD for 15 yrs at 9.5%.

B) Final amount = 75,80,000 * (1.095)^15 = 2,95,00,000 (2.95 crores OR 29.5 millions)

So his final corpus will be 2.95 crores.

Creating Wealth for Long Term through Equity

Posted on by Jagoinvestor

We are going to discuss today, a huge wealth creation by investing with discipline over long period of time. We often think that investing a small sum of money will not be able to generate huge Wealth and we need to invest huge amount of money.

wealth creation

Creating Wealth

Its obviously true that more money will create more wealth, but we are going to see today that we underestimate small savings and how small investments over a long period of time can generate fortunes.

How much wealth you can create, if you earn around $1000 /month (Rs.40,000 per month) and can invest 10% of that amount every month for next 30-35 yrs. I am assuming you are a 25 yrs old and retiring at the age of 60 (though i want to retire at 40). Total dependents are 3-4.

And monthly expenditure is Rs.25,000 ($600/month).

What kind of wealth can this person create?

Can he invest Rs 5000 ($125) in a diversified Equity Mutual fund per month till his retirement. I hope the answer can be YES

As we said that he is investing in Equities, What kind of return should we expect? 5% , 20% or 50%, but Wait … Equities are risky, it can be negative also !!! that’s very true … but People may not know that Equities are extremely risky in short term, but its almost not at all risky in long term, and if the long term = 35 yrs, then forget it, you can get some great returns.

Risk in Equities are inversely proportional to the investment tenure. Well that’s a different topic to talk about (And i will post an article on that soon , keeping an eye !!!) Just for the data, Indian Stock markets have given return of 17%+ CAGR return in 28 years, from 1979 (inception) to 2007. We are talking about Sensex.

So, to be safe we can easily consider 15% CAGR return in Long term (remember LONG TERM).

Coming to the point, It may happen that during initial years, our investor may face difficulty investing this much money considering, he may have other important things to take of and later he may have more responsibilities. But during is career life, his salary will also rise and then 5000 will be a small percentage of his salary.

So assuming he can do the investment we are proposing, what kind of retirement corpus he can build? Guesses?

I am sure most of the people will be thinking the following way:

He invested 5000 * 12 in a year, which is 60,000, and then he does it for 35 yrs , so he invests total of 60,000 * 35 = Rs 21,00,00 0 (21 lacs). And he will get some return of 15% every year. if we take 15% of this 21 lacs, it will be around 3,00,00, so total corpus = 24,000 and also as this is compounded , his interest will also keep growing at 15%, so it will be more than 24,00,000 , so lets take it 50,00,000. Fine …

Ok , let take 70,00,000 (70 lacs) to be safe. This is a calculation done not exactly by the proper annuity formula, but a workaround, which a general person can think of.

How much does he generate with this strategy

You can also look at my another article on Early investing and power of Compounding to get an idea about early investing and how compounding is a great tool. But keep going ahead if you are enjoying this article.

How to create wealth

So the question is What will be his corpus , can it be anywhere near to 70,00,000 . The answer is that his actual Wealth will be way beyond this amount. After doing the actual calculation i can see that it will come around 7.43 Crores (Rs 74 million) .

But how is it possible , such a big amount !!! .

That’s because of compounding power . The interest earns interest and that again earns interest and this keeps on going. Initially the interest earned is very small , but as the time passes , the amount keeps growing and the interest also grows at an unbelievable amount.

Can you believe that this investor will earn more than 1.04 Crores only in interest in his 35th year (last year) , more than 4 times the money he actually invested whole his life. That’s all possible because of systematic and consistent investing with out fail and because of Power of compounding.

That’s the reason why one of the greatest Scientist Albert Einstein said “Compound interest is the 8th wonder of the World”.

So it that all we are going to talk about today , NO !!! We have more to talk on this topic.

Why does this investor takes pain of investing that 5,000/month all this life. What if he invests just 10 yrs and leaves that money to grow for another 25 yrs. What if this is his plan till retirement.

The sudden thing which will come to your mind is that he invests for 35 yrs and created wealth of 7.43 crores , What if he just invests for 10 yrs .. it should be 10/35 * 7.43 crores = 2.12 Crores . Is that true ?

Will it actually be 2.12 Crores only. The answer is NO !!! . Then the question is how significantly different will his Wealth be in this case. The Answer is 5.88 Crores. Yes it will not be significantly less but just 21% less .

So Just by not investing for 71% tenure he actually gets 21% less money , that’s not a bad deal !!!

But wait , What if he wants that same 7.43 crores at the end , and still wants to invest for 10 yrs. the obvious way out is to invest more than his regular 5,000 per month . The question now is HOW MUCH MORE !!!

The answer is Rs 1420 more . Instead of 5,000 , he should invest Rs 6,420 per month for 10 yrs and then leave the money to grow for rest of 25 yrs. And he can generate wealth of Rs 7.43 Crores.

Watch this video to know how one can use Equity to create wealth over long term:

What we can learn from this

So there is a learning here and a very important thing to note , that more pain we take in the start , the better it is . In the initial years of career , its possible for people to invest more , as they have less responsibilities to handle and less dependents.

So it may be feasible for them to invest heavily in the initial phase of there career, which will benefit them for long term . Now see this person . Instead of investing 5,000 for whole of 35 yrs , If he chooses to take a little more pain in the initial 10 yrs and manages to invest Rs 1,420 more per month, then he can save investing for 25 yrs of his life and still can generate same Money.

One great question now !!!

What if our investor is ready to invest his 50% salary (20,000) per month for starting 2 yrs and then let it grow for rest 33 yrs. He is ready to heavily invest first 2 yrs of his career and do some sacrifices like not spending too much , no vacation , no fancy spending and all.

Can he still beat the target !!

Will he be able to generate the same Wealth for himself like in earlier examples !!

So here you go !!! , He will not only achieve the target , but exceed it.

His Wealth will be 9.24 Crores (Rs. 92.4 million) at the end of 35 yrs. I know that’s an Eye-opener . So now you know that the best time to invest was 5, 10 or 20 yrs ago , but if you missed it , don’t worry 🙂 . there is another golden chance and that’s NOW !!! .

please let me know what you feel about this article , that helps me to refine and write better articles.

Thanks, Happy Investing.

Note: The formula used for calculation is called Annuity. https://en.wikipedia.org/wiki/Annuity_(finance_theory) See formula under “Annuity Due” on this wiki page

An investment advice for all the beginner investors for their healthy financial life

Posted on by Jagoinvestor

People say its always a wise thing to Diversify your investments. Its gives you better security and better returns. It minimizes your risk and if one part of your portfolio is doing bad, it will not affect others and you will benefit from other side.

That is true, But then there are some things to note here.

Diversification – By investors point of view

Ask any investor who Started investing in Equities around 2002 and then sold his holdings at the end of 2007. If he sold it just by luck its great, but if he managed to take this decision based on his study on markets and hard work. Then its worth appreciating.

Diversification is very good, but only when you don’t have much time to track whats happening in things which you have invested in. Its a trade off between return and the time you can contribute tracking your investments.

What if you can watch your investments closely and take decisions based on any move in markets or investing world. In that case Diversification is not that important.

Warren Buffet’s views on diversification:

One of the greatest investors of all time Warren Buffet also says that Too much diversification is needs only when investors doesn’t know what he is doing. If you are cautious and well aware of things which affect your investments, then too much diversification is not required. Because you will take actions fast as an when required.

People who can not give time for there investments on daily or even weekly basis need better diversification. Read https://finance-and-investing.blogspot.com/2008/04/what-is-diversified-portfolio-and-how.html
to read more on diversification of portfolio.

Warren Buffet says that he likes to put his eggs in a single basket and watches it closely.

Lets take a Case study.

Ajay and Manish want to invest 1,00,000 each for 1 yr. During this period returns from different things were

Equities : 25% (for a year, but there were ups and downs in Equities market for whole year)
Gold : 20%
Debt : 9%
Real Estate : -10%

These were returns after an year, so before making investment both of them did not knew that what will be returns.

Ajay do not have time to track his investments, but Manish has, so Ajay diversifies his investment like this/

Equities : 50,000
Debt : 10,000
Gold : 10,000
Real Estate : 30,000

His portfolio after 1 yr looked like after getting respective returns

Equities : 62,500
Debt : 10,900
Gold : 12,000
Real Estate : 27,000

Total : 112,400, which comes to 12.4% before tax.

On the other hand Manish do not diversify, because he has much time to track things closely, He does some study and understands that Real estate has short term bear market as there is lot of supply and interest rates are also going up which will affect demand and hence prices. He Invests most of his money in Equities and some money in Debt and Gold.

His portfolio looks like :

Equities : 80,000
Gold : 15,000
Debt : 5,000

His portfolio after 1 yr:

Equities : 1,15,000 (He sold his equities when he sensed that markets may fall in near term and then again bought at low levels, because of his good timings he earned more than 40% return)
Gold : 18,000
Debt : 5,450

His total = 1,38,450
Return = 38.45%

Conclusion:

Though this is hypothetical example, it shows that Because Manish kept a close eye on this investment, he does not need very highly diversified portfolio. He can have more concentration on something which he can closely track.

Diversification in portfolio is to minimize risk and to get benefit of all the form of investment.

But risk can also be minimized by keeping a close eye on your investments, So the investor can choose more risky products and hence also increase there chances or earning higher returns.

Understanding what is Fixed Maturity Plan & what are the benefits of FMP?

Posted on by Jagoinvestor

Attaining financial goals is does not happen overnight, it needs a long term investment. But in case of Stock market, lot of people avoid a long term investment because of the fear of volatility of the returns.

Fixed Maturity Plan is the better option for such investors because of its higher security concerns. Let me explain you a bit detail about FMP.

Fixed Maturity Plan (FMP)

What is FMP?

Fixed Maturity Plans are the equivalent of a fixed deposit in a bank, with a little difference. The FMP’s returns are only indicated and not ‘guaranteed’, Since the fund house knows the interest rate that it will earn on its investments, it can provide ‘indicative returns’ to investors.

Fixed Maturity Plans are debt schemes, where the corpus is invested in fixed-income securities.

Where do FMP’s invest?

FMPs usually invest in certificate of deposits (CDs), commercial papers (CPs>), money market instruments, corporate bonds and sometimes even in bank fixed deposits.

Depending on the tenure of the Fixed Maturity Plan, the fund manager invests in a combination of the above-mentioned instruments of similar maturity. Say if the FMP is for a year, then the fund manager invests in paper maturing in one year.

The expense ratio, generally varies from 0.25 to 1 per cent.

Tenure of Fixed Maturity Plan

The tenure can be of different maturities, from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.

These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.

Benefits of Fixed Maturity Plan:

1. Minimal risk – Fixed Maturity Plan’s are hold by fund manager till maturity which helps in getting fixed returns. Because of this FMP’s exposed least to the interest risks.

2. Protection from capital loss – FMPS’s invest in debt funds and this reduces the loss of capital relatively than that of equity funds.

3. Liquidity – Normally it is suggested to hold the Fixed Maturity Plan’s till its maturity, but if you want an exit then you will have that option and can exit from the FMP at any point.

What is the difference between FMP and FD?

FMP are differentiated form FD on the basis of some major key points like interest, returns, tax and indexation. As a debt fund, FMP enjoys the benefit of indexation on a long tern investment for more than 1 year.

FD is a risk free investment tool whereas FMP’s are risky because of the corporate debt default. Besides this, the returns from FD are fixed, but in case of FMP, the returns are only indicative and not fixed.

You can watch this video given below to know more about how FMP’s are different from FD’s.

Actual return Vs Indicated Return

The actual return can vary slightly, if at all, from the indicated return. Against that, a bank fixed deposit exactly prints the amount which is due to you on maturity on the FD receipt. However, FMPs do earn better returns than fixed deposits of similar tenure.

Have a look at the list of closed ended FMP’s , and there returns : https://www.personalfn.com/research-it/mutual-funds/fundarena/SchTypNat.asp

Tax Implication

1. Dividend :

Tax-free in the hands of the individual investor.

2. Investment in growth option of the FMP for less than a year :

The gains are added to the investor’s income and taxed at the investor’s slab rate.

3. Investment in the growth option of the FMP for over a year :

Either 10% capital gains tax without indexation or 20% with indexation.

What is indexation benefit?

The finance minister has been generous enough to recognize that inflation erodes the real value of any investment. So every year, he comes out with an inflation index based on the prevailing rate of inflation.

The cost of investment is indexed by multiplying the index of the year of maturity and divided by the inflation index prevailing on the year of investment. If you have arrived at an indexed cost, then the long-term capital gain is taxed at 22.44 per cent and if you do not opt for the indexed cost, then the tax is 11.22 per cent.

To understand more on indexation, Read this

Conclusion

FMP’s are investment options for sure if you want to park your money for short term. They are more tax efficient and give better post-tax returns. Though returns are not 100% guaranteed , they are almost risk free (remember almost) .

If they really give better than returns then FD’s and practically as safe as FD’s why don’t people invest in these ?

Ans : No awareness among people and they less risk taking attitude

If you have question or any doubt related to FMP, you can leave your query in the comment section.