Do you want to invest your money more safely? Here is one of the best options for you. ETF i.e. Exchange trade funds are one of the safe way of investing your money in equity market.
It is an investment fund traded on stock exchange, much like stock. These are attractive investments because of their low cost and stock like features. It offers both tax efficiency and lower transaction cost.
What are ETFs?
Exchange Traded Funds are a basket of securities that are listed and traded on a recognized stock exchange. Simply, they are mutual funds, whose units can be bought and sold on the stock exchange.
Given that an ETF is traded on the stock exchange, its price may not necessarily be the same as the NAV of the underlying portfolio. In other words, an ETF could have an NAV distinct from its market price. The reason being that the market price is usually driven by the demand and supply of units.
Hence there is a distinct possibility of an Exchange Traded Funds units trading at a premium or discount to its NAV.
For Example Nifty BeES , whose underlying is NSE , may not have same price as its underlying , For example if Nifty is 4500 , it may be possible that The ETF’s value is 4600 or 4400 , depending on the sentiments and expectations.
Watch the video given below to know the current status of ETF in India:
How does ETF work?
Exchange Traded Funds are just like stock exchange. For that you need to open a Demat account by any medium like through bank, online brokers or through any consultancy. Check for the prize value of the share so that you will know which of them are in your budget and then you can buy or sell your shares at any time you want to.
It is so easy like suppose you buy some shares at 10:30 in the morning and sell it at 12 pm. then again you can buy another shares after lunch.
Benefits of ETF
ETF’s are the low cost simple solution for the generating good returns from stock market investment. The benefits of ETF are as Given below.
1. Easy to access:
ETF’s can be purchased with just a single transaction. In EYF’s you are buying mini portfolio’s so it is way more easier than buying a basket of Indexes.
2. Cost effective:
Commissions are generally low on ETF as compared to the other tools. Besides this it there is no load fee’s and managing fee is also very low.
3. Transparent:
The most important thing of your investment is transparency. You should know where have you invested your money and how’s it performing. In Exchange Traded Funds, your portfolio details and underlying are publisher daily.
Difference between ETF and Mutual Fund:
Many beginners get confused between Exchange Traded Funds and Mutual Funds. Though ETFs are part of mutual funds, they are different in many aspects than Mutual funds. Lets see some of the differences between Mutual fund and ETFs:
ETF’s in India
Nifty BeES : Tracking NSE
Quantum Index Fund : Tracking NSE
ICICI SPIcE Fund : Tracking BSE
Bank BeES : Tracking CNX Bank Index
GOLD ETF’s or G-ETF’s
Gold ETF’s are the simple investments products that combines flexibility of stock investment and simplicity of Gold investment. Gold ETF’s are different from Gold savings.
IT tracks Gold prizes. Gold ETF’s are one of the best form of Gold Investments. Earlier investors used to invest in gold in metal form. Then comes paper bond and now you can invest in gold through electronic form.
BENEFITS OF GOLD ETF’S:
No risk of impurities.
Flexibility in buying Gold. Like one can buy in smaller lot.
Held in electronic form.
No storage cost.
No security concern like in physical form.
Transparent pricing and potentially cheaper.
Can track your investment values in real time.
No wealth tax like in Metal form.
Advantages of ETFs
1. ETFs tend to be more cost-effective vis-a-vis comparable mutual funds. The expense ratio of a passively managed ETF (tracking a benchmark index) would normally be in the range of 0.50%-1.00%; for an index fund, it can be as high as 1.50%. And for mutual funds the entry load is 2.25% .
2. ETF’s can be bought and sold anytime during the market hours , unlike the Mutual funds NAV at the end of the Day.
3. Given ETFs are traded on the stock exchange, and can be bought/sold on a real time basis; they tend to have low tracking error (deviation of ETF’s performance from that of the underlying index) as compared to index funds.
Disadvantages of ETF
1. Investors need to have a demat and a trading account, with a SEBI registered stockbroker, for investing in ETFs
2. Costly to operate – You need demat account to buy ETF and the charges for demat account might compensate the low expense ratio of ETF. One of our blog readers comments on that
While promoting ETFs it is argued that their 1% edge of expense ratio over mutual funds will be significant if it is compounded over a long period of time, say 20 years. So this advantage of less expense ratio is not there if the calculations in the previous comment are true. What I am trying to say is that the only advantage that ETFs have is that they are like mutual funds that will guarantee market related returns. Nothing less and nothing more.
If you have any query related to this topic you can leave your reply in the comment section.
1. Loss of money because of wrong decisions
2. Loss of potential profit because of lack of knowledge or having wrong information (I like to call it loss)
I personally feel and realized most of the losses happen to people because of the second point. Today after so much of progress, India Personal Finances still has some very immature characteristics. Indians have one of the highest saving rates in World, but we fail to invest our hard money in the best way.
What happened because of lack of knowledge
– Every insurance agent told that insurance is important, but not the best product for a person which suits him/her. They made Insurance policy synonymous with an Investment product to our average Indian. They packaged those Money back and Endowment policies as must have products for any married person with family.
– People love numbers, they love to get back 30 lacs back by investing just 10 lacs in a 20 years. They were never told about inflation, about decreasing purchasing power of money. Hence they can figure out that 30 lacs after 20 years is less than today’s 10 lacs, so actually they are getting cheated (yes, i like to call that cheated)
– Ask people what is an ETF, FMP, STP or REMF? Its like asking people what is LIC in 1957-58 or asking some one what is Mutual funds in early 90’s. These are important financial products of future, but people are not able to get benefited because of no knowledge.
– People who invest for long term (5-10+ years) still invest in FD’s and bonds, I don’t say that its wrong, but they do it because they don’t know that equity is best for long term, they know there is risk but don’t know that it almost no risk if they are investing in Equity for 10+ years.
When it comes to personal finance, people are almost clue less … Every one wants high returns but without any risk of loss. Everyone has heard about mutual funds giving 40-50% CAGR in 2005-06-07, but not even few know how what role did there excellent management and stock picks played to generate those returns.
Let me tell you what happens when you don’t know a lot of things.
See some of Real life examples :
Example 1 –
One of my classmate has taken ULIP, she pays 25000 per year as premium … She didn’t knew that there are high allocation charges of 18-20% in initial years… She didn’t knew that she can switch her investments in other safe options in ULIP if markets are down …
On the top of that she is given an Insurance of 1.25 lacs (i am not sure how it helps with her insurance needs) …
Example 2 –
One of my friend took LIC policy and pays 60000 per Annam as premium, he heard that it will save him tax … he did a great job in choosing the policy, returns are good … Insurance is fine .. but when asked if he has any financial dependents, he was clueless… I am not sure why the hell he took insurance at all then …
Example 3 –
One of my friend had put 100% of his investments (around 1.4 lacs) in Equity (80% shares and rest in mutual funds in early 2007 … when i asked on what basis he has invested all his money in Equity .. he said he needed good returns because this money will be used for his brother education in another 2 yrs …
I told him that they are risky and more than his risk appetite … he ignored it, saying that his money is almost grown by 70% already and gave him decent returns which he expected …. then came Jan 2008 crash and now his total investments are worth 80,000-90,000, he had invested in small -cap companies which gives nightmares to even great investment guru’s …
Example 4 –
Lot of my friends have invested in Mutual funds in lump sum in Dec 2007 or Jan 2008 and didn’t take SIP instead of my telling them several time that SIP is the the systematic approach and will bring down there average cost … and returns in volatile markets …
All of them have 30-40% loss at the moment, but all those who invested through SIP have loss of around 10-12% only … .
Example 5 –
I know many who earn good money, have good risk appetite and long term financial goals to meet … but they invest in what? NSC and Money back policy of insurance schemes … Any one who is out of his/her mind and is totally insane will invest in NSC or KVP in today time …
They take money back Insurance policy of 3 lacs or 5 lacs for 25 yrs or 30 yrs … I wonder how will that 5 lacs help them in 2035 when average monthly expenses of a medium class family will be around 1 lacs/month … they pay hefty premium of 30k, 40k or 50k in today’s time to get back the kind of money back after 30 yrs which will just pay there 1 yrs expenses …
They do it because they cant see not getting money at the end if they survive for all the money they have paid … they stay away from Term insurance because they don’t get any thing in the last .. So what if for 20 lacs insurance for 25 yrs they just have to pay 4200 total every year … they don’t get anything at last .. so better not to take term insurance .. its not giving anything … that’s what they feel …
Whats the solution?
It takes Rs.30 to buy “Outlook Money” and Rs.20 for “Money Today” (or read online : https://moneytoday.digitaltoday.in/index.php?latn=1 ) and 5-6 hrs to read all of it .
Just Rs.100 and some hrs per month can help anyone save thousands or lacs (depending on there investments), but it takes discipline and regularity
Today I am going to talk about something which is one of the extremely important tool for risk management and also something which is encouraged if you want stable returns from your investments. We are going to talk about the investments in Equity and Debt.
How Re-balancing the portfolio will help in –
Risk Management
Stability
Maximize returns
Understand the pros and cons of Equity and Debt
EQUITY
Pros : High returns, Low risk in Long term, High Liquidity
Cons : Risky, not suitable for short term investment
DEBT
Pros : Stable and assured returns, Good investment for short term goals
Cons : Low returns
Equity + Debt :
When we combine Equity and Debt, returns are better than Debt but less than Equity, but at the same time risk is also minimized compared to Equity and Debt, and when we apply technique of Portfolio Rebalancing, both risk and returns are well managed.
What is Portfolio Rebalancing?
The first step to understand is that each person must divide his investments into Equity and Debt in some ratio, it can be 40:60, 50:50, 60: 40, 75:25 or any ratio, The ratio depends on a persons risk taking capability and return expectation.
For an example let take the ratio to 60:40, portfolio rebalancing is nothing but rebalancing your portfolio in same ratio, in case they got changed after some months or years, as you wish. Preferably the good time is every 6 months or 1 yr, but not 15 days or 1 month.
Why Do we do it?
You have to understand that each person should concentrate on both returns and risk.
Case 1 : Equity:Debt goes up.
Action : Decrease the Equity part and shift it to Debt so that Equity:Debt is same as earlier.
Reason : As our Equity has gone up, we could loose a lot of it if some thing bad happens, we shift the excess part to Debt so that it is safe and grows at least.
Case 2: Equity:Debt Goes Down.
Action : Decrease the Debt part and shift it to Equity, so that Equity:Debt is same as earlier.
Reason : As out Equity part has decreased, we make sure that it is increased so that we don’t loose out on any opportunity.
Limitations Lets also talk about the limitations of this strategy, once your equity exposure has gone up, if you rebalance and bring down your Equity Exposure, you will loose out on the profits if Equity provides great returns after that, or if your Equity exposure as gone down and you bring up your exposure from Equity and if Equity does bad, then you will loose more.
Understanding the Game of Equity and Debt
But, we already said in the start that our primary concern is managing risk and profit is secondary. Let us understand that markets are unexpected and they can go in any direction, so better be safe than sorry. Many people are confused that if there equity has done very well then shall they book profits and get out with money and wait for markets to come down so that they can reinvest.
Portfolio rebalancing is the same thing but a little different name and methodology, so once you get good profit in something which was risky you transfer some part to non-risk Debt.
When we say Equity we mean shares or mutual funds which are related to Stock markets, which tend to go up and down, if it goes up, there are high chances that it will come down and when it comes down, its highly probable that it will move up again.
Lets us now see the most interesting part : Examples
Ajay has Rs 1,00,000 to invest and he want to invest it for 5 yrs and the 5 yrs returns are 30%, -35%, 40%, 60% and -30% .
Lets look at his money and its growth in 3 different mode
– Only Equity
– Only Debt
– Equity + Debt in some ratio (without Portfolio Rebalancing)
(click on this image to see in large resolution)
We can see here that Debt performed better than Equity, because of the uncertain movement in returns, also the Equity+Debt performed better than Equity but not Debt.
Let us now see the performance of Equity + Debt (with portfolio rebalance)
So now, every time our Equity and Debt ratio changes, we will rebalance it.
Ratio = 30:70
Investment = 1,00,000
Equity = 30,000
Debt = 70,000
At the end of 1st year (Equity return = 30% , and debt = 9%) :
Equity = 30,000 * (1.3) = 39,000
Debt = 70,000 * (1.09) = 76,300
Total Capital = 39,000 + 76,300 = 1,15,300
Now we will rebalance the portfolio
Equity = 30% of 115300 = 34590
Debt = 70% of 115300 = 80710
Now This is our new Equity and Debt investment
At the end of 2nd year (Equity return = -35% , and debt = 9%) :
Equity = 34590 * (1-.35) = 22484
Debt = 80710 * (1.09) = 87974
Total Capital = 22484 + 87974 = 110457
Now we will rebalance the portfolio
Equity = 30% of 110457 = 33137
Debt = 70% of 110457 = 77320
In this way we keep rebalancing the portfolio and lets see its performance for 5 yrs
(click on this image to see in large resolution)
Here, you can see that The column (E+D with PR) is the our main column which shows the performance with portfolio rebalancing. Here we have example for two ratio’s 30:70 and 70:30, we can clearly see that at the end of every year the final corpus for rebalanced portfolio was always greater than the non-balanced portfolio for both the ratio.
For ratio 30:70
Year 1 : 115300 vs 115300
Year 2 : 110457 vs 108517
Year 3 : 130671 vs 126142
Year 4 : 162424 vs 155595
Year 5 : 158039 vs 147452
For the 70:30 ratio also we can see that rebalanced portfolio outperformed the non-balanced portfolio.
Also you can see that for most of the years re-balanced portfolio outperformed “Only Equity” and “Only Debt” except 1st year and 4th year.
1st yr is very easy to understand why it happened and for 4th year, the returns were positive again after 3rd year and we made more profit in “Only Equity” portfolio because of high concentration on Equity side, but you can see that in 5th year, when there was a negative return of -35%, then the “Only Equity” fell heavily, but the rebalanced Portfolio fell very little because we have rebalanced it already and dropped our Equity Exposure to be safe.
Conclusion
So at last the question is what is the ultimate conclusion of all this talk.
Each person has his own Equity and Debt diversification, if the person is high risk taker his Equity component will be high else it will be less, every time your Equity and Debt component changes you have to see that it matches your risk profile, if it does not you bring it back to your level.
By bringing Equity exposure from high levels to your level, you are managing the risk you can take and by increasing the Equity exposure to your level back (in case it went down), you are making sure that you don’t miss out the chance.
Other reason is that Debt always increases, Every time your money goes up in Equity from your comfort level, you take that money which is earned by risk and shifting it to a safe place which will rise for sure though with less speed. Equity is linked with Stock Market and they tend to go up and down always and you don’t know when will it happen. So better manage that risk by Portfolio Rebalancing.
Please comment of this article to let me know how you feel about this article, Feel free to comment on anything which you feel is wrong .
Also, the example taken for this article was self made and does not represent any real life situation, but for sure its possible and similar scenarios have happened in our Stock Markets
The term health insurance is generally used to describe a form of insurance that pays for medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs.
To understand it in simple words, you pay some amount of premium every year to a company and if some thing happens to you like an accident or if you have to through an operation or a surgery, they will pay for it provided, its covered under the Health Insurance.
Why do I need a Health Insurance?
This is the most common thing you can hear from a person who wants to avoid Health Insurance in India, but its one of the most important part of any ones portfolio or plans. People concentrate on the fact that what if nothing happens to them, but they fail to imagine the situation when some thing can happen.
Body is a complex thing, and no one knows what can happen in future, Even things like accidents is not in your hand, you can take try to avoid it, but what about others, what if some car hits you?
What if accidentally fell from some place? It can happen and it happens, and when you have to pay hefty bill for the treatment, you will realize that its a good idea to get covered by paying a small premium every year.
Consider this :
In Mumbai, businessman Manas Kumar rushed his wife Anita, 38, to hospital in January this year because she complained of breathlessness and shooting pain in the chest. Sure enough, it was a heart attack and Anita had to get an angioplasty done.
The cost of the procedure and stay at Hospital: Rs 1.5 lakh. But he didn’t have to shell out a single coin as he and his wife were covered under the Health Insurance with limit up to 4 lacs.
Why is Health Insurance more important now compared to earlier days?
Yes, Health care cost has increased many fold in last 20-30 yrs, Also now more and more younger people are complaining of Heart and other diseases which were seen in older people earlier.
Because of high stress jobs, bad eating habits and other similar problems, more and more cars in the city, pollution etc, the chances of getting some disease meeting with an accident etc have increased compared to earlier days.
More about Health Insurance
You get a good coverage for diseases and surgeries, so most probably you will be covered for most of the things.
You have to pay the premium which you can plan ahead and manage it, else if some thing unexpected happens, your finance gets in problem and impact your plans.
Also you get tax deduction under section 80D up to Rs.15,000 (Rs.20,000 for senior citizens).
You can also go for group insurance, its a ideal thing for a family with spouse, parents, kids … With group Insurance every one is covered and you pay less premium, also its more advantageous because there are many things which are covered in group insurance and not single person health insurance.
Make you buy a good cover which suits you, do good research and then choose the product.
If you want to save money it needs to be invested somewhere. But lot of people makes some mistakes in investing which seems very small at that time but they can prove a disaster to your financial life.
This is my favorite, because it is the mistake done by majority of people, Most of the people are highly under insured. By default, a person must be at least covered for 10-15 times his annual expenses. So a person who has a yearly expenses of Rs 2.4 lacs (20000 per month), must have a cover of around 25-35 lacs at least.
But they have insurance like peanuts, 2 lacs, 5 lacs, or 10 lacs. The biggest reason for this is that they take wrong type of insurance. Most of the people need Term Insurance , but they end up with Money Back plans.
to read more at :
2. No Diversification in Investments
Most of the people don’t pay good attention at diversification. They are either in Debt or Equity. They must understand that they have to diversify along different types on investments to minimize risks and also to boost up there returns.
Some people have only FD’s, PPF’s or NSC in there portfolio, then there are people who hold only Shares or mutual funds. While the former misses on the returns, the later on is exposed to high risk. Combining both of them can decrease risk, increase stability of returns.
3. Tax investment because of Last month rush and not Financial Planning
Most of the people rush for tax saving only in the month of Feb-March, when they get a letter from company saying that they need to submit proofs of investments under section 80C, and that’s the reason why people end up taking wrong products, just because they don’t have time to plan there investments. The best thing is to start planning for tax saving right at the start of financial year.
4. Starting Late
This is another big mistake people do, they do not start investing at the right time. A lot of time people actually can save some money but they feel that its not worth to save a small amount, they think that when they will be in condition of saving enough per month, that would be the right time to start, which is far from truth.
Watch this video learn more about 4 biggest financial mistakes:
Consider this:
Ajay Started his career at 22. He has worked for 8 yrs and now he is 30 yr old, He wants retire at 60, and can invest for another 30 yrs. He want to generate 4 crores for his retirement. He has 3 choices
1. 6000 every month for next 30 yrs.
2. Invest 10,000 every month for next 7 yrs and then leave it to grow for another 23 yrs.
3. Invest 20,000 per month for 3 yrs and leave it for 27 yrs.
Guess which choice will give him maximum money , The one where he is investing more for less years !!! . Yes .. The corpus generated is as follows:
1. 4.2 crores
2. 4.59 crores
3. 5.11 crores
So the idea is, start early and invest more … remember:
Start Early, Invest less = Start Late, Invest a Lot
Btw, Had Ajay invested 4,000 per month right from the time when he was 22, and invest for next 8 yrs and waited for that money to grow till retirement, He can generate more than 6.5 CRORES !! That’s better than all the 3 choices 🙂
Also see this example :
Considering return of 15% per annum from Diversified Equity Mutual fund, If you invest 10,000 per month for 10 yrs and then leave it to grow for 20 yrs, your investments worth will be 4.5 crores, But before that if you also invested 5,000 for 5 yrs and then 10,000 for 10 yrs, your money will be 7.5 crores.
One of my good friend had a small argument with me, that she would not invest in Term Insurance, because she will not get any “returns” out of it. I believe investing in a term plan looked a very unprofitable thing to her as she never gets back the money she paid as “premiums”, if she survives.
Endowment plans looked nice to her, because they provide money if you are dead and even if you survive. You get back money as the prize for not dying !!!.
With respect to Term insurance, she understood the fact that her family will get the money from insurance company in case of her death, but she was concentrating on the fact that she would not get back anything if she survives.
What is the return in that case? Nothing !!! and looked like some one is fooling you with a product called “Term Insurance”, where you are “investing” premiums to get nothing at the end.
Let me now tell why this happens and some give you some insight on this matter.
I have already talked earlier in my last post “Life Insurance and how to go about it”, about Term Insurance. Let me now take more deep dive into it and talk about the reasoning part.
I will first talk about fundamentals of Insurance and then talk about Endowment Policies and why are they popular, and what people don’t realize about them. and how Term insurance is the right thing for most of the people.
Basics of Life Insurance
What happens in a average family :
There is someone who earns and his family comprises of wife, kids, parents. if not all there is a subset of these family members. The head of the family earns and his family lives happily. All the expenses are met from the earnings of this main member, most of the time the husband. Now consider this person dies in an accident or for that matter because of any event.
What happens?
What happens to his family members other than the psychological trauma. If they don’t have money to take care for them selves, either some one from family have to take up the job and start working which may not be possible for them, or They have to decrease their standard of life to maintain the expenses.
They are now totally unsecured from future’s point of view. In short they are totally messed up, which should not have happened. I gave this detailed explanation for the circumstances because i wanted you to understand how bad can happen and proper measures must be taken care for this.
What is the Solution?
Adequate Coverage !!! this cant be compromised… You must have a backup plan which can give your family the same kind of income which confirms that they are not short of money in case the main earner is gone. If there are some debts like Home Loan, or any other tasks which need money apart from regular income, the cover must be good enough to cover that too..
For example :
Robert has a family expenses of 25,000 per month and there is a Home loan of Rs.25 lacs to be paid within 10 yrs. He is 27 yrs old. He has a wife, 2 kids and parents. All of them are dependent on him financially. He has investments of 5 lacs. Now in this case. In case he dies, who will take care of Home loan, how will provide them enough money to live life comfortably. They need 25k * 12 = 3 lacs per year.
Which they can get per month if they have 35-40 Lacs of money. If they put this in bank, they will get Rs.25,000 per month as interest which they can use. Considering inflation it will not be enough after some years, but lets leave it now for this example.
Add home loan of 25 lacs to this 40 lacs and what we come to know is that this family must be covered with minimum Rs 65 lacs . Rs 75-80 Lacs is a decent cover for this family. Now if he takes a cover of 80 lacs for his family, from that day he can happily live all his life without any tension , thinking what will happen if he is not there.
He will be attain peace of mind , and not be worried for it.
He must get a lot of internal peace because his Family is protected with a good enough cover to take care for them. And this is what you get in “return” from Insurance. No monitory return can give you more satisfaction than peace of mind.
So before doing anything else, his first step is to give adequate cover to his family and that’s the most important responsibility for him as a Husband, Father, Son. He must understand that this is not an investment for monitory benefit later in his life, but its for his family happiness and future.
Life insurance under MWP act is also one of the better option for married man. One point to remember and not forget is that this is the minimum cover required for family and anything less than this will be taking risk with family future.
Endowment or Money back Policies
Lets discuss the problems with these plans with respect to the above example.
High Premium : For an 80 lacs cover for say 30 yrs, the premium payable will be At least 2-2.5 lacs/year (this is a conservative figure). So now premium so high is not possible for anyone like Robert, so what they do?
They go with a kind of cover for which they can pay premium easily, can then they take cover for 5 lacs, 10 lacs or maximum 20 lacs. And guess who suffers in case of his death : HIS LOVED ONE’s.
It might also happen that they are compromising on a lot of small things which are important at that moment in time, like buying a bike for son, which they cant buy because of the insurance they have to premium, or some vacation they could have gone to with family, but compromise on that because of premium.
Money back at the end of the maturity is like a penny after so many years :
This is some thing most of the people overlook. They just see the numbers, 5 lacs 10 lacs or 20 lacs. And at the time of taking Insurance it looks good figure to them, because they see numbers, they dont see its value after many years, They don’t consider Inflation into account.
In case of above example, if Robert takes a cover of 15 lacs by money back policy, what happens if he survives the tenure. He gets 15 lacs at the end, Great Money after 30 yrs. Isn’t !!!
Lets see how great this money is? His monthly expenses will grow from 25,000 per month to 1.5 lacs per month (considering inflation of 6%). Now this money will help him survive for not more than 10 months … For so many years he pays high premium each year, just to get back money to cover his 10 months monthly expenses? What the hell !!!
Under Insurance :
Because of the fact that people want money back on survival and because of high premium, people end up taking policy for which they have to pay premium under there budget, which means less cover.
Without realizing the fact that they are highly under insured, the reason for this is that they see Insurance as investment product and not a protection cover for there family. When they die, there family get the money from Insurance company, but most of the time its not enough for them and it erodes very soon.
Term Insurance Policies
Lets discuss the features of Term Policies with respect to above example.
Cheap Premium : The premium is very low for Term insurance Policies. For above example. The yearly premium for Rs.75 lacs cover for 25 yrs is just Rs.20,000 yearly or just 1,600 per month !!! .
This is in any way affordable for most of the people. Its providing the fundamental requirement of Good cover and low premium and if you think of returns, Good cover and low premium can themselves be seen as good enough return. You family protection at low cost is the return you get.
Watch this video to learn more about Term insurance and it’s benefits :
Opportunity to invest rest of the money in High return Investments :
With term Insurance you save a lot of money in premium and now you can invest this money as per your wish in high return instruments, anyways in Endowment policies you put money for long term and you get it after so long time. So you can now always put your saved money in things which are long term investment products and return great returns.
One of those things is Equity Diversified Mutual funds and Direct Equity (depending on persons ability and interest). In long term Equity Diversified gives fabulous returns (15-20 yrs) and the risk is minimized because of long term.
And if you consider India growth story , it looks great in long term , hence Equities for long term is the most obvious choice. They will give you return of 15%+ CAGR. (15-20 yrs)
Also it will be flexible , you can not invest for a year or two, if you want to use the money for your family vacation or some important event.
Conclusion :
Insurance is not an investment product, its a Protection instrument for your Family or any one your want to cover. There are other products for your investments.
Let your finances be the way you want your life to be , SIMPLE !!!
Don’t mix Insurance and Investments. There are products like ULIPS(What are ULIPS) and Endowment or Money Back policies which never excited me. They complicate things, confuse people. They can be good if you understand how to make most out of it, but it require knowledge and expertise. They offer some flexibilities, but still they are not worth it.
Read more on Term Insurance at my Old article. I would be happy to read your comments or disagreement on any topic. Please leave a comment.
Disclaimer: All the opinions are personal and shall be taken as knowledge sharing and not as encouragement
Option is a contract which gives buyer the right, but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. An option has an Expiry date, when its automatically exercised if it has any intrinsic value left.
When you buy an option you have to pay some premium at the time of buying it.
You can buy or sell Options just like you buy or sell Shares. They are traded in real time. An option value depends on some underling, which can be a stock or an index or even interest rate, The scope of this article is restricted to Stock options or index options.
An example of index option is Nifty option, so its underlying is Nifty.
You must know that its a kind of Derivative : Derivatives are any instrument whose value are derived from some other thing, there value depends on some other thing, like In case of options in stock market, there value depend on either a stock or an index.
Futures are also a kind of Derivatives, The minimum money required for trade in Futures are much more than Options. You can trade in options with as little as 2,000 or 3,000 (depending on the option you are trading in).
Types of option: CALL and PUT
CALL option gives you the right to BUY something anytime before expiry at a predetermined price. The value of the CALL option increases as the Price of the underlying thing increases. The reason for this is because you can still buy it at the fixed price and the difference is your profit.
PUT option gives you the right to SELL something anytime before expiry at a predetermined price. The value of PUT option increases as the price of the underlying Decreases. The reason is that you still have the right to SELL it at fixed price and difference will be your profit.
SOME OPTION TERMS
Exercising an Option :exercise an Option means to Buy(CALL) or Sell(PUT) the stock on the expiry date if they are European style else Buy or sell anytime on or before Expiry if they are American Style.
Expiry Date : The date on which an option will expire and then it will be exercised automatically if it has any intrinsic value left.
Option Style : Options are of two styles, American style (It can be exercised any time before or on expiry date) and European Style (exercised on expiry only).
STRIKE Price : Strike rate is Stated Price for which the underlying stock can be purchased or sold on expiry date.
SPOT Price : The current price of the underlying at a particular time.
LOT : Options are traded in lot size, you can buy 1 lot, 2 lot or any number of lots, and a lot has a particular number of shares in a single lot, Like Nifty options have lot size of 50.
Premium : Every option has some premium which users have to pay when they purchase an Option. So for a CALL option, the premium increases when its underlying price increase and decreases when its underlying price decreased and just opposite of PUT option.
How does an OPTION look like?
Example : CHAFER 90 CE 1.95, EXPIRY 26th June
CHAFER is the symbol for a stock called CHAMBAL FERTILIZERS, so its a Stock option. The expiry date of this option is 26th June (current year).
90 CE means its a CALL (C) option, which is European Style (E, can be exercised on expiry date only) and the Strike rate is 90, means that you have right to buy 1 lot (3450 shares, it depends on the option how many shares a lot has) of chambal fertilizers shares at Rs 90 on the date of expiry if you want.
What are the Profit and Losses you can make?
The Losses are always limited to the extent of premium you pay (in worst case you do not exercise the option and you let your premium go), On the other hand the profits are theoretically unlimited, because the option price can keeps increasing when underlying increases or decreases depending on the type of option.
What is time value and option value ?
The Premium you pay for the option has two components
– Time Value
– Intrinsic value
Premium = Time value + Intrinsic Value
Intrinsic value is the true worth of the option (premium) and Time value is the value which is there because of the time left for the expiry, because as the Expiry time comes near the risk of loosing the money is high. So time value keeps decreasing as the expiry comes closer.
There fore you will see that even if STRIKE price is closer to SPOT price, the option price will be very high if the expiry is after many days.
For CALL option price moves towards 0 if SPOT is less then STRIKE price and expiry comes closer.
For PUT option price moves towards 0 id SPOT is higher than STRIKE and expiry comes closer.
Watch this video to learn more details about Options trading:
How does it works?
You can either sell it at the profit or still hold it.
Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiry and the current price of premium is suppose 10, you can sell it at loss, because you don’t want it to become 0.
Suppose you didn’t sell it and market really closed above 4300 on expiry date, then you loose whole your premium (as SPOT Options used for Hedging
Example 1:
Suppose you buy CHAFER 90 CE EXPIRY 26th June, at a premium of 1.95 (you will have to pay Rs 1.95 * 3450 to buy this option), and the SPOT is 78, means currently price of Chambal fertilizer share is Rs. 78, now the price of option will follow the price of the share price.
If price increases to say 85, then the option may increase to 4.5 (depending on demand and supply), and at this point you can sell the option and earn a profit of 4.5-1.95 = 2.55 Per share, profit of 130%.
Now suppose on 26th June (Expiry day), the price of Chambal Fertilizer is Rs 100, then the option will be exercised and who ever has the option at that time will receive the profit of Rs 10 (total 10 * 3450) and the option will not be exercised if the SPOT (current price) of share is below 90, because then he will make loss if exercised.
(Remember, its not your obligation to exercises the option (you exercise if its in profit, or you loose your premium)
When do you buy Options?
Example 1 :
Suppose Infosys is at 2000 today (1st June) and you are optimistic that its price will go further go up 10% or 15% (2200 or 2300). so you buy a CALL option of Infosys which is going to Expire in approx 1 month, say INFOSYS 2200 CE 10.5 26th June is available and lot size is 1000, so you pay 1000 * 10.5 = Rs 10,500 for this option.
Now option price will move the same way as the price of Infosys share. At the end of the Expiry date if Price of Infosys share will be more than the 2200 then the option will be called “In the Money” as it will be in profit when exercised Else it will be out of money.
So suppose Price of Infosys share is 2280 at the end of Expiry then you exercise the option and get 1000 * 80 = Rs 80,000, you can also sell the option anytime before Expiry date if you want to make profit and convinced that the option price has reached at a good point.
Example 2:
You think that Economy is not doing well and markets as whole will fall because of high inflation news and political issues (or for any reason), Suppose Nifty is at 4600 and you believe that it will fall to 4300 in 2-3 months, Suppose current date is 1st June then you can buy NIFTY PE 4300 AUG , assume premium is Rs 15.
Case 1: If markets fall badly and reaches 4500 in 1 month and the premium increase to 330. You can either sell it at the profit or still hold it.
Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiry and the current price of premium is suppose 10, you can sell it at loss, because you don’t want it to become 0.
Suppose you didn’t sell it and market really closed above 4300 on expiry date, then you loose whole your premium (as SPOT Options used for Hedging)
The main use of Options is for hedging, So if you have bought some 1000 shares of company ABC at Rs 20 , and think that price may fall to 15 in one month ,you can ABC PE 20 or 19, and pay a small premium, Now you are covered for the loss you will make on shares, because you have right to sell the shares at 20 or 19 (depends on the price you bought the options at).
Some other important points
1. Options are very risky and very rewarding, it can give returns of even 100% or 200% in day, or can give negative returns of 50% or 80% in a day.
2. Options are very volatile, so its a good idea to be patient with options.
3. Buying Options near its Expiry dates are highly risky, because if they go in wrong direction they don’t have time to come back.
4. Its not a good idea to buy a option with strike price very far from the SPOT price unless there is some good reason for it. Options with more gap between between STRIKE and SPOT have less premium, but very risky (and can be very rewarding too).
5. Its not a good idea to put a Stop loss for your option very near to the current price, because its highly probable that it will come to Stop loss point and then again bounce back because of there high volatility.
6. Its a good idea to set a target to book profits and get out, rather than trying to get maximum out of option. If you don’t exit at a good point, the chances are that value will again bounce back to normal price and you will miss a chance.
(I sold Chambal Fertilizer CALL 90 option when it price went up to 6.5 though 8-9 looked achievable target next day, but i thought its a great return and didn’t miss the chance of booking 250% return in 2 days, Buy price was 1.95).
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
There is no doubt that 40% is more better return. But is it a right way to judge the return just by seeing the number. we ignore another important factor called as “RISK” involved. In most of the cases, people really don’t consider evaluating the return in relation to RISK taken to earn that kind of return.
Which is better?
1. 30% with High risk
2. 20% with moderate risk
In this case , 2nd is better than 1st , as the Return per unit of risk is better than the 1st case. (considering High risk is 3 units , and moderate is 2 and Low is 1 .
So the actual measure of return should be, Return per unit of risk
REAL RETURN = ABSOLUTE RETURN / RISK TAKEN
There are many balanced mutual funds which have given little less return than diversified equity funds , and hence can be called as much better investment tolls because there was much lower risk involved with them , in case there was any fall in markets , these mutual funds would have fallen less than equity funds. Many mutual funds advertise there products only on the basis of returns and don’t care to tell investors that there is high risk involved with the products.
If you are given 2000 for climbing a tree and 5000 for jumping from one building terrace to another , the first choice is much better. In that case you don’t go for the second option just looking at 5000.
If today all banks start giving 12-15% assured return on Bank deposits, Equities investments will fall to great extent , because bank deposits will have much better returns considering the risk involved. I would be happy to read your comments or disagreement on any topic. Please leave a comment.
Short Term Capital Gain : If you sell it before 1 yr , the profit is called STCG and taxed at 15% (revised in 2008-09 budget) ,So if you make profit of 10,000 on shares or Equity mutual funds , you pay 1,500 as tax. Long term Capital Gain : No tax Other Points
– Dividend income from any kind of mutual funds are not taxable.
Profit from Sale of House or Land
Long term Capital Gain : If you sell it after 3 years , its Long term Capital gain. and its taxed at 20% on profit.
Your profit = Sale Price – (Cost price after adjusting indexation , as per the cost inflation index)
Long term capital gain tax can be saved by investing the capital gains in some other residential property or in bonds of the Nabard, National Highway Authority of India, Rural Electrification Corporation of India or SIDBI redeemable after a period of three years.
Long term capital loss can also be set off against any Long Term Capital Gain in next 8yrs.
Short term Capital Gain : If you sell it before 3 yrs, its considered as STCG and added to your income and taxed accordingly.
Short term capital gains can set off against any LTCG or STCG within 8 yrs.
Other Points
– Capital Gains from Agricultural Lands are not taxable.
– A person holding more than one residential property would be liable to Wealth Tax on the market value of the second property.
Profit from Jewellery Short term Capital Gain : 20% tax on the profit if sold before 3 yrs (1 yr in case of GOLD ETF) .
Long term Capital gain : 30% tax on profit if sold after 3 yrs ( 1 yr in case of GOLD ETF)
Don’t know what is GOLD ETF ? Read this article , CLICK HERE
Profit from Fixed Deopsits , PPF , NSC Fixed Deposit : Interest Earned added to the income and taxed accordingly.
There are many things we hear and believe , but they are little different in reality, which helps if we know.
– Do you know that When you take an SIP for 6 months or 1 years or for any period , the first installment (which you make by cheque) is not counted for inside the tenure of your SIP. So if you take a SIP for 6 months , you make 6 payments other than your initial payment with cheque , so total is 7 payments.
– The short term capital gain period is 1 yr , means 365 days , but it does not work exactly that way , its 12th month other than your buying month. Means if you buy shares or MF on 12th May , 2008 and sell on 13th May , 209 it is still short term capital gain , to call it long term capital gain , it must see it after 12 months after May , 2008 (your month of buy) . which means you shall sell it on or after 1st June 2009.
– Suicide is also covered in Life Insurance after 1 yr of policy (atleast its there in my policy with SBI Life Insurance).
– ULIPS : The deductions availed under sec 80C is taken back if you surrender your ULIP before 5 yrs. If you surrender your policy in 4th or 5th year , then all hte premium paid till date will be added to your salary for that current year and you will have to pay tax on that too. ULIPS just put restriction on paying of premium fr the first 3 yrs, but offer tax benefit under 80C if you hold it for minimum 5 yrs.
– If you repay your housing loan by taking another loan , you can continue to claim tax benefit on the interest amount paid for new loan under sec 24.
– Tax deduction is available for the prepayment charges paid for the home loan .
– Dividend distribution tax is levied on the Dividend which you recieve , and it also affects the fall in NAV . So NAV falls not just to the extent of the dividend declared , but also by the tax which mutual fund company pays to govt (12.5% on dividend + 2.5% surcharge also , under sec 115-O )
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
If you have any query related to this topic you can leave your reply in the comment section.