Author: Jagoinvestor

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Difference between Growth and DIvidend option in mutual funds

Posted on by Jagoinvestor

People are confused , really confused …

There are 3 Mutual Funds Options (Growth , dividend , dividend Re-investment) and we will discuss those today. There are lot of misconceptions and myths which add to confusion in the world of mutual funds and agents use it against investors and make them fool …

Growth vs Dividend Option in Mutual Funds

Different Options in Mutual funds

1. Growth Option

Under this option you get the units at the time of buying and you have same number of units till the end. The NAV keeps changing according to performance.

2. Dividend Option

This is the most misunderstood option in mutual fund.

Dividend option in mutual funds means that you will be repaid some amount of your investments every year and it will be called as “dividends”, this helps those people who want some regular returns every year from their investments in mutual funds.

People think that dividend is something extra which they receive other then their investments which is not true 🙂

Dividend is declared per unit basis, if you have 100 units and MF declares dividend Rs.4 per unit, you receive Rs.400, and you think that your earlier investments have the same worth, where as it decreases by the amount you receive as dividend, because its paid out of your investments only.

The NAV of the unit goes down after paying dividend proportionately.

Example : Let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs 100, you will have 1000 units. dividend declared : Rs 20 per unit

How it works :

You will get Rs 20,000 and then your remaining worth will be Rs 80,000 and as you have 1000 units, the NAV will go down to 80. So your actual worth is same as Rs 1 lac. The only advantage to you is that you are getting liquidity with your investments and getting regular cash every year, unlike growth option.

Agents generally lure investors to invest in NFO’s claiming that if company declared dividends, they will get more dividend compared to existing funds as they will have more units, Which is nothing but a idiotic myth 🙂

3. Dividend reinvestment

In this option ,the step is as follows

  • Re-adjust the NAV assuming that dividend is paid.
  • After that buy more units of same MF with that dividend money and allot it. So ultimately the number of units increases and the NAV goes down. In this case dividend money is not given to the investor but re-invested in the same scheme.

Example : Let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs.100, you will have 1000 units. dividend declared : Rs.20 per unit

How it works :

Your dividend will be Rs.20,000 , and NAV will come down to Rs.80 like it happened above. Now this 20,000 will be re-invested in same mutual fund and you will get extra 250 units (20000/80).

Your Total units = 1250
NAV = Rs.80

Worth = 1250 * 80 = 1,00,000

Which one is better Dividend or Growth?

It depends. There is no thumb rule to decide which one is better then the other, it depends on the situation and your needs.

Watch the video to learn more about growth and dividend option:

When is Growth Option better?

If you are a person who earns well and does not need regular money back from your investment and if you are looking at long term investments then growth option is best for you because your investments gets compounded, which does not happen on the dividend part in dividend option as it goes back to investor and its never part of future growth.

When is Dividend Option better?

If you are a person who need regular money every year from investments for some purpose, It may happen that you have more responsibilities and more dependents and if any small money which you get extra every year is helpful to you , in that case you can go for dividend option.

Conclusion : Different options in mutual funds are for different types of investors, before investing just see what do you want from your investments and take appropriate option.

Returns in long term from Dividend and Growth :

Below is an example which shows the returns from similar funds with growth and dividend options and there performance over 3 years.

options

 

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

All about SIP , systemetic Investment plans

Posted on by Jagoinvestor

SIP is a way of investing in Mutual Funds where you pay a fixed amount each month for a fixed tenure.

Like If you take an SIP of 5,000 for 1 year on Jan 1, 2008, you will be paying Rs 5,000 per month for next 12 months.

SIP - Systematic Investment Plan

Please understand that its not a financial instrument, but a way of investing in mutual funds, some people confuse SIP with PPF, NSC, and mutual funds, they think they can invest in “SIP”, its just a mode of investment.

SIP CALCULATOR :

When to invest in mutual funds through SIP?

Investment through SIP must be done only when markets are uncertain or very volatile, when you don’t know which side they are headed to ..

Read Magic of SIP

SIP will be beneficial only if markets really are volatile or going down after you invested. If it happens that markets turns bullish and starts going up, in that case SIP will not be beneficial and will give less return compared to lumpsum investment in start.

SIP is a simple concept and hence very powerful, lets see some reasons why its worth investing through SIP

Reasons to invest through SIP in Mutual Funds?

More convenient for average person on wallet

Its more easy for a person to invest in small amount every month, rather than a lump sum amount. Investing through SIP is lighter on wallet. Its easy to pay Rs 5,000 per month for 1 years, rather than investing 60,000 at a same time.

It brings your average cost price for unit down (in volatile market)

The biggest advantage of SIP is this part, There is a concept of rupee-cost averaging, In SIP you buy less when market and NAV are UP and you get more units when they are low. When this happens, the average cost of per unit is lower.

Lets take an example of “Ajay” who invests 1,000 per month through SIP starting Jan 2, 2007.

How SIP helps in this case ? See the result below :

ADVANTAGES of SIP

Makes you a disciplined Investor

The other advantage of SIP is that it makes you a disciplined investor. Once you start SIP, each month you have to contribute certain money in mutual fund and that habit is cultivated.

DISADVANTAGES OF SIP :

It will not work in bullish markets or when market goes up over time

When market goes up and keeps growing over time, the units bought every time will be at high price then the previous one, which will ultimately bring the average cost up , compared to the lump sum investment at the start.

In case of tax saving fund, the lock in period gets extended for every investment.

Tax saver mutual funds lock your money for 3 yrs, When you invest through SIP, each of your investment is locked separately for 3 yrs from the date of investment. So if you pay your first installment on Jan 2007, it will locked till Jan 1 2010, then the installment paid on Feb 1, 2007 will be locked till Feb 1, 2010 and like this each installment will be locked with the gap of 1 month.

In which type of markets do you think SIP will not work?

What is Diversified Portfolio and how to create it ?

Posted on by Jagoinvestor

Today we will discuss How to build a Diversified Portfolio and hence and strong portfolio and why we need it? If you don’t understand a lot of terms and terminologies related to investing and finance, have a quick look at terms and terminologies page to quickly understand the terms. it will take 5 minutes.

Diversified portfolio

What is Portfolio?

Your investments all together is your portfolio, as simple as that. So, if i have

  • 10,000 in shares
  • 20,000 in real estate
  • 1000 cash

that’s my portfolio

What is an Asset Class?

An Asset class is something where we can invest and build assets. If i buy a Home or land, i build an asset in real estate category, if i buy anything in shares or mutual funds (equity), i create assets in Equity asset class.

(Dont know what is mutual fund, click here)

They are just categories. Following are some asset classes:

  1. Equity : Shares, Equity Mutual funds, Derivatives (Future and Options)
  2. Debt : Fixed Deposits, PPF, NSC, FMP (How to find the best Fixed Deposit)
  3. Real Estate : Land, Flat, Commercial Plots, Home
  4. Commodities : trading in commodities, leave it if you don’t understand
  5. Gold or Silver : Recently these are also counted as Asset classes
  6. Cash : that’s the hottest thing 🙂

Now what is a Diversified Portfolio?

As the heading says, Diversified portfolio is a portfolio which is not heavily invested in some asset class, but has balance over every asset class, There is no thumb rule that what percentage of your portfolio shall go in which asset class. It depends purely on :

  • What is your Risk appetite
  • Goals (short , medium and long term)
  • Economy and Political atmosphere
  • Current market over long term

Why Diversification?

When you diversify you investments over different asset class, not only your money gets diversified, but also risk, so if some particular asset class is not performing well, it will affect only that part of your portfolio and not whole of it.

Obviously it also effects the returns, you returns are collection of returns from all the asset class, so even if some asset class did not perform over a period, it doesn’t affect you hardly.

Watch this video to know how to diversify your portfolio:

Every asset class provides some thing like :

  • Equity : Very High returns , Volatility , Liquidity
  • Debt : Low but Secure returns , No liquidity
  • Real Estate : Good returns , stability , No liquidity
  • Gold : Hedge against inflation , Stability
  • Cash : High liquidity

Every asset class provides some thing good and some thing bad . Diversification helps in getting all benefits in some or the other way and being at the center of all. With diversified portfolio you get all the elements of : Good returns, Stable returns, Liquidity, Security

Lets see some examples :

1. Anyone who was heavily invested in “Debt” around 2003-2004 didn’t get high returns from the zooming stock markets (equity) for 4-5 yrs

2. Anyone who was heavily invested in Equity around start of 2008, saw his investments go down by 40-60%.

3. Anyone who is totally invested in Debt cant get instant money if required, either he has to take some loan over those investments or break his PF or FD etc.

That does not mean, non-diversification always hits …

1. Anyone heavily invested in Equities before the bull run of stock markets in 2003 onwards made fortunes (but at their risk).

2. And people who had most of there money in GOLD in 2007 got the highest returns compared to any asset class.

3. It totally depends on person to person. I hope this point is cleared. Also , inside every asset class , another level of diversification is important. Like in Equity there are different categories like Large Cap , Mid Cap , Small Cap . Read Magic of SIP

In Mutual funds there are sectoral funds , equity diversified , balanced funds , debt funds , liquid funds etc . Another level of diversification is also necessary to achieve high level of diversification .

Case study

Ajay a software engineer earning Rs 35,000 monthly (post tax) with a Family of 3 (1 wife and 1 kid) has following portfolio

Expenditure : 20,000 per month

Portfolio :

  • Tax savers Mutual funds : 1 lacs (locked for another 2 years)
  • Real Estate (a land in his native place , pahari in UP) : 3.75 lacs
  • Fixed Deposits (for 5 years) : 2 lacs
  • PPF : 3 lacs
  • Cash (in bank) : Rs 25,000
  • Insurance Payout : He pay 55,000 per year as life insurance premium for an endowment policy, for which he is insured for 12.5 lacs for 20 years. he started this policy before 4 years.

His Future plans

1. His goals are to buy a home in another 5 years for which he need down payment of 3-4 lacs
2. Want to save 10 lacs for his son education in 10 years
3. He want to retire early with monthly income of 45,000 at least . Read 6 steps of retirement Planning .

This Portfolio looks like diversified, and yes it is, but not in a well mannered way.
The asset wise allocation is

* Equity : 10%
* Debt : 37.5%
* Real Estate : 50%
* Cash : 2.5%

His overall Portfolio Shortcoming

  • His exposure to different asset class is not well balanced according to his over all situation
  • Life insurance is very less and and not at all enough . For this he is paying a hefty amount every year which adds a lot to his burden.
  • His Equity Allocation needs to go up
  • And Debt allocation needs to go down
  • His cash needs to go up for liquidity. none of his investments in any asset class provide liquidity or near term liquidity, If he needs 1 lacs suddenly he cant get it, or will get it after breaking his FD.

Read a Nice article on Power of Asset Allocation .

Suggestions :

The first thing he must do is to restructure his portfolio.

1. He shall surrender his existing Endowment policy and take a Term Insurance 35-40 lacs for 20 years for which he will pay around 13000-14000 per Annam. he will save surplus of 40,000 per year because of this.Also when he surrenders the policy he will get back around Rs. 2.4 lacs back.

2. He must invest more in Shares and Mutual funds (as his risk taking capabilities is more because of his less age and less dependents)

3. The land in his native place is not appreciating in value much faster unlike other places like other real-estate hot spots. He shall consider buying his home sooner and sell his land at native place. if he sells his land he will get around 4 lacs.

4. With the money he gets from surrendering policy (2.4 lacs) and selling his land (4 lacs), he will get around 6.4 lacs and he should utilize this money as the down payment for new flat and rest he can take as Home Loan. (Want to know how EMI on home loan is calculated? click here ) He can do it later if he wants (when he can afford the monthly EMI)

5. He shall consider increasing his Cash to a level which can meet his contingent needs if any arised.

As per the standard rule, he shall have at least 2 to 3 times of his monthly expenses as contingency fund, which is totally liquid.

6.Also apart from Cash and investing in Tax saver mutual funds, he shall consider investing in some non-tax saver mutual funds which also gives him near liquidity.

7. He may leave the debt investments as it is. If he wants he can break his FD in case he is going for the Home loan, he can increase the down payment part from this money.

8. In case he is going to take home loan after 1 year , he can also take some loan on his PPF , at least for some part he will pay less interest than the home loan.

9. Also he shall invest some money in GOLD, to give more stability and security to his portfolio.

10. At last he shall consider taking a Family floater Health Insurance plan, which helps him to secure his Family from and health problems or illness.

Recommended Portfolio

Apart from His Home (considering he takes Home soon)

  • Equity 65% ( Direct shares 20%, Equity Funds 60%, Balanced Funds 20%)
  • Debt 20%
  • Gold (ETF) 10%
  • Cash 5%

Conclusion

Diversification does not say that you have to invest in some money in every asset class for sure, the idea behind it is just that the risk is minimized by diversification and the portfolio is more stable. Happy diversifying 🙂 and Leave comments …

All about TAX in 2008

Posted on by Jagoinvestor

There is just one word which can describe the year 2008-2009 tax structure … GREAT. This article will tell you everything about tax in 2008. Following things will be discussed :

1. Tax Slab in 2008 for salaried employees

2. How much will you save?

The exemption limit for the year 2008 is 1.5 lacs, which means that if your taxable income is upto 1.5 lacs, you don’t pay any tax.

income tax

What is Taxable Income?

The pay which you get has many components, like HRA, conveyance allowance and others.

Out of this income, some things are deductible on your hand and after deducting you arrive at an amount called Taxable income, on which you have to pay income tax.

Taxable Income = Your Gross Salary – (HRA) – (Investments under Sec 80 C) – (Conveyance allowance) – (Health insurance Premium, Sec 80D) and some more things which you may claim.

The slab for the year 2008-09 is as follows:

Exemption Limit for Men = 1.5 lacs
The Exemption Limit for Women = 1.8 lacs
Exemption limit for Senior Citizens = 2.25 lacs

3% Education cess also on the tax amount after tax and surcharge (if any)

What is surcharge?

* If salary is above 10 lacs, a 10% surcharge will also be applicable.

Example : Ajay earns Rs 14 lacs

Total Income (14 lac ) – amount under sec 80c (1 lac) – HRA (Rs 70k , for example) – Conveyence allowance (9,600 , 800*12) – health Insurance (10k , max 15k) under sec 80D (its seperate from sec 80C) = 14 lacs – 1,94,800 = 12,05,200

Now lets do tax calculation :

0 – 1.5 : 0
1.5 – 3 : 15,000 (@ 10%)
3 – 5 : 40,000 (@ 20%)
5+ : 2,11,560 (@ 30%)

= 2,66,560 + surcharge (10% of this amount)
= 2,66,560 + 26,656
= 2,93,216

Now education cess will also be applied : @ 3% , so 2,93,216 + 3%
= 2,93,216 + 8796.48
= Rs. 302012.48

This is the total tax payable.

Note: education cess is charged after surcharge is applied and not before.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

4 reasons why you should consider gold as an investment option for next 2 years

Posted on by Jagoinvestor

There are many reasons why we shall look beyond conventional Fixed Deposits, PPF and high growth Shares and Mutual Funds. Gold is always seen as a thing to own and only for consuming as ornaments, for jewelry but seldom as an investment purpose, in fact silver also for that matter.

But now there are many reasons to invest in GOLD, just like people invest in Shares, Mutual funds, PPF, NSC, and Fixed Deposits.

gold investment

Reason 1: Stock Markets are becoming risky and uncertain

Stock Markets are in Bad shape for at least short or medium-term at least. No one knows whats going to happen in 6 months or 1 year or 2 years. Long term may be good but still, a medium-term perspective is not very clear.

Not only the Stock Market but the whole of financial Markets are uncertain if you consider problems like Inflation, dip in projected GDP growth of economy, etc.

Reason 2: It acts like a hedge towards Inflation and Foreign currency

As the Indian currency is gaining against Dollar and other currencies, Rupees is set to become more strong in the coming years. Gold has an inverse relation with Dollar.

https://news.goldseek.com/SpeculativeInvestor/1171382460.php

In the future as Dollar weakens, GOLD will become more strong.

Reason 3: Its a relatively less known investment option and has high potential in future

Looking at history, and every time we see that an investment option starts becoming popular and by the time most people know about it, it already gives most of its returns and becomes a talk of past.

GOLD has started gaining attention as an investment option and becoming popular and still in its middle stage, if not early.

So it’s the time to ride the boat.

Reason 4: Future High Demand and less supply

In future gold is going to in high demand and it’s already in less supply, so according to the demand-supply logic, the prices are bound to go up in the near future. Indians account for 23% of the world’s total annual consumption and overall global demand has increased 15% year on year

Gold demands were an all-time high in 2007 and expected to increase in the coming years due to mismatch in demand and supply.

Reason 5: More Diversification

Before some time back, diversification of portfolio was limited to Equity, Debt and Real Estate and some cash, so that your risk is spread across different class of assets. GOLD has evolved as another asset class and not it help in diversifying your portfolio.

What’s the best way to invest in GOLD?

It really depends on the person and situation and the motive of investment.

ne can invest in GOLD directly by buying gold in physical form like jewelry, gold biscuits, gold bars. It all of these require some maintenance and some problems are associated with investing in a physical format like :

  • No surety of purity, you can be sure that you got the same purity as promised.
  • Preserving cost: if you have physical gold, you will invest in bank locker etc for secure storage.
  • Risk of theft, mishandling, etc.

To avoid all these problems, we have an alternative way of investing in GOLD, called Gold ETF’s, read it next …

Read about Gold Funds (Click here)

What is GOLD ETF’s

Gold ETF’s are a special type of ETF’s (Exchange traded funds), ETF are not covered here, but view them as open ended mutual funds, which are traded on stock exchange just like normal stocks. You can buy units on Stock Exchange, each unit is equivalent to one gram of gold or .5 grams of gold.

So if you want to invest in 100 grams of gold, you can buy 100 units of a GOLD ETF from the stock exchange, you can buy it just like any share from the stock exchange.

gold ETF’s price changes real-time, as they are traded on the stock exchange like shares.

Watch this video to know why there will be an increase in gold investment in upcoming years:

In India currently, there are Five Gold ETF’s.

– Benchmark Gold ETF (Stock Code on NSE/BSE: GOLDEN) (the first one in the country)
– UTI Gold ETF (Stock Code on NSE/BSE: UTGOLD)

and other 3 from Reliance, Quantum and Kotak listed on NSE.

Gold has returned 38% in the last 1 year and 170% in the last 5 years (absolute). And it looks great in the future.

You can easily enter and exit from GOLD ETF’s unlike physical gold.

How investing in Gold ETF’s scores over Physical gold like Bars or jewellery?

Comparison of GOLD ETF’s vs GOLD BARS vs Jewelry

Consider you are investing Rs.1 Lacs in Gold, there are 4 parameters to judge.

If you purchase Them

– Jewellery: Making charges of 15-20%
– Gold Bar: 10% to 20% mark up charges by banks.
– Gold ETF : 1.5-2.5% entry load

If you Sell

– Jewellery: 10% – 20% is lost due to Purity issues.
– Gold Bar: Banks do not take it back, so the premium paid at the time of purchase is written off.
– Gold ETF: Brokerage of 1% or even less.

Maintenance Charges

– Jewellery: Insurance charges and locker charges (if you put it in the locker)
– Gold Bar: Insurance charges and locker charges (if you put it in locker)
– Gold ETF : 1.5 – 2.5 %

Tax Implications

– Jewellery: Long term capital gain of 20%, but after 3 years. 1% wealth tax
– Gold Bar: Long term capital gain of 20%, but after 3 years. 1% wealth tax
– Gold ETF: Long term Capital tax of 20%, but after 1 year. No wealth tax

Note: Gold is taxed at 30% if held for less than 1 year in any format.

So on all these 4 scenarios, GOLD ETF’s score heavily over other means of investing in GOLD.

To read more on why gold is a must buy now and how silver is much better than gold, read https://silverstockreport.com/

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Everything you need to know about PPF and EPF

Posted on by Jagoinvestor

Everyone wants to spend an easy life without any stress specially related to money. And this is why people are becoming more and more conscious about their savings and investment.

It is good for now that you are working and earning good enough to cover your expenses, but what after your retirement? Have you thought how will you manage your expenses after your retirement?

EPF and PPF

Let me tell you, there are options like EPF and PPF in which you can invest and save your money which you can utilize after your retirement.

Let’s see each of EPF and PPF in detail. Both are provident fund benefits for retirement.

Employee Provident Fund (EPF)

The Employee Provident Fund is a retirement benefits scheme that is available to salaried employees. Under this scheme, a stipulated amount (currently 12%) is deducted from the employee’s salary and contributed towards the fund.

This amount is decided by the government. The employer also contributes an equal amount to the fund. However, an employee can contribute more than the stipulated amount if the scheme allows for it. So, let’s say the employee decides 15% must be deducted towards the EPF.

In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12%.

There are some specific features of EPF which are beneficial for the account holder. These features are as follows –

  • Return on Investment: 8.65%
  • If you urgently need the money, you can take a loan on your PF. You can also make a premature withdrawal on the condition that you are withdrawing the money for your daughter’s wedding (not son or not even yours) or you are buying a home.
  • tax benefit under Sec 80C.
  • The amount if withdrawn after completing 5 years in job will not be taxable.

Public Provident Fund (PPF)

The Public Provident Fund has been established by the central government. You can voluntarily decide to open one. For that you need not be a salaried individual, you could be a consultant, a freelancer or even working on a contract basis.

You can also open this account if you are not earning. Any individual can open a PPF account in any nationalized bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices.

You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 1997-98, the first loan can be taken during the financial year 1999-2000 (the financial year is from April 1 to March 31).

The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998.

You can make withdrawals during any one year from the sixth year. You are allowed to withdraw 50% of the balance at the end of the fourth year, preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.

For example:

If the account was opened in 1993-94 and the first withdrawal was made during 1999-2000, the amount you can withdraw is limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower.

If the account extended beyond 15 years, partial withdrawal — up to 60% of the balance you have at the end of the 15 year period — is allowed.

Watch this video to learn more clearly about PPF and EPF:

Features of PPF:

  • The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.
  • Return on investment : 8%
  • tax benefit under Sec 80C , no tax on the maturity and no tax on interest earned.
  • If you’re involved in a legal dispute, a court cannot attach or question the money in your PPF account.

Who should invest in PPF?

Usually, everyone can invest in PPF but it’s mainly for those people who are very conservative and cant take risks to a great extent.

Anyone who wants to invest in the long term in some secure saving instrument must invest in PPF. To achieve long term goals there are many option like:

  • Mutual Funds (Equity)
  • Shares (Equity )
  • PPF (Debt)
  • Fixed Deposit (Debt)
  •  NSC (Debt)
  •  Others

Out of these, all under the Debt category are safe. PPF is the most recommended if the investment horizon is very long like 15+ years. Because of compounding your money will grow into a big amount.

I would be happy to read your comments or disagreement on any topic. Please leave your queries or doubts in our comment’s section.

Finance Presentation , Excel Sheets and Ebooks Download

Posted on by Jagoinvestor

This is Download Page , There are Presentations , Ebooks , Excel sheets and other Reading Materials . Go ahead and download them and use them .

PRESENTATIONS


SHORT EBOOKS and READING MATERIAL

EXCEL SHEETS

All Tax Saving Mutual funds are not same !!!

Posted on by Jagoinvestor

All Tax Saving Mutual funds are not the same !!!

This post targets those who already know ELSS or Taxsaver mutual funds. But many people do not know that not all ELSS are the same.

tax saving mutual fund

They might know that Tax saver funds are Diversified Equity Mutual funds, yes they are !!! But still, they can be differentiated in the category of :

Aggressive Tax savers :

These are the ELSS who bet more on small-cap and mid-cap, stock and hence have more return potential.

Safe and balanced Tax savers :

They heavily bet on Large Companies, which are more safe then mid-cap or small-cap stocks.

A person who wants to invest in ELSS shall not put money in just 1 ELSS, but 2-3 different ELSS. Again Putting all money in the same type of ELSS is not good, as they will be of the same portfolio type ( i mean more stake in Huge companies and less in Mid and Small-cap)

Rather, they shall put money in ELSS both types.

Let us see some top-performing Mutual funds and their category:

Aggressive ELSS:

1. Birla Equity Plan – D
2. DSPML Tax Saver -G
3. Principal Personal Tax Saver

Safe ELSS:

1. HDFC Taxsaver
2. HDFC Long Term Advantage
3. SBI Magnum Tax gain

source: https://www.valueresearchonline.com

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Life insurance is an Insurance product not an Investment product – Indian people’s mindset about life insurance

Posted on by Jagoinvestor

Life Insurance is nothing but the insurance covered for your Life. In case of death the sum assured is given to the nominees. Unfortunately in India, people see Life Insurance as Investment Product and not as an Insurance Product.

They don’t understand that insurance gives financial security to their dependents in case of there death, rather they see it as the last benefit provided to them and the most important thing for them it that they get the money-back in case they survive the tenure of Insurance.

life insurance

Common people’s mindset about life insurance

People are ready to pay higher premiums to Insurance Companies for a policy which gives them death and survival benefits like Endowment plans and Money-back plans.

People are not ready to pay premiums if they don’t get any thing in case of surviving the tenure and that’s the reason why Term Insurance never became popular in this Country. That’s also the reason why many people are under-insured because of the high premium, they cant pay for higher insured sum.

Many People even don’t know that Term Insurance exists, the reason for that is their insurance agent never told them about it, because they get a very little commission on it unlike Endowment Plans.

Life Insurance is to provide a good enough cover to dependents in case of death. This is the only target for life insurance.

Watch this video to know the difference between life insurance and term insurance:

Case Study
——————-

Rajesh is a salaried person with a salary of around Rs 20000 per month, He has 2-3 dependents like his parents and wife.

Rajesh can afford a maximum of 10% of his salary as an insurance premium outgo in a year.

So Rajesh takes Endowment plan of Rs 10 lacs for 20 years in 2005.

  • If he dies between 2005 – 2025, his family will get Rs 10 lacs.
  • If he survives till 2025. He will get Rs 10 lacs.
  • Monthly premium = Rs 2,000
  • Total premium in a year is 24,000
  • Cover: Rs 10 lac

There are some points to consider here.

  • He is highly Uninsured, Rs 10 lacs is very less amount to get covered. He needs at least Rs 25-30 lacs as cover, as he has financial dependents.
  • The premium of Rs 2,000 monthly or Rs 24,000 yearly is not a small amount at the moment and adds to his financial burden a lot.
  • In case of survival, he gets Rs 10 lacs but in 2025. Considering inflation at an average of 5%, the current value of that amount will be Rs 3.5 lacs.
  • This means in 2025 the value of that 10 lacs will be very less and considering that after 20 years Rajesh will be earning very good money and Rs 10 lac at that time will be a small amount for him, may be less than what he may be earning in a year.
  • It means It does not benefit him a lot after 20 years.

He could have solved all of his problems if he would have taken term insurance instead of Endowment Plan …

If he takes Term Plan, he can get a lot more cover in very less premium and can invest the surplus money in much better investment avenues like Diversified Mutual funds or Equities.

He can take a term plan of Rs 30 lacs for 30 years, with an annual premium of 9,000 per year. (including service tax, approx).

So instead of Rs 24000 in a year, he can just pay 9,000 can be covered for 30 lacs and that too for 30 years.

He can invest the extra 15,000 (24000 – 9000) in diversified mutual funds with good track record for the next 20 years through SIP every month or yearly lump sum.

Equities in long term outperform all the investment options, In the last 10 years HDFC tax saver has given around 43% CAGR … that’s the magical returns one can expect … SBI MAGNUM Taxgain has done much better …

Let be on the safe side and be pessimistic and consider returns around 18-20% CAGR for the next 20 years.

The investment will be worth

  • Rs 16 lacs at 15% return
  • Rs 22 lacs at 18% return
  • Rs 28 lacs at 20% return
  • Rs 94 lacs at 30% return (less chance)
  • Rs 3.14 crore at 40% return (very less chance)

remember that this is for 20 years and not 30 years. In 30 years it will be much much more … for eg at 20% it will be 1.77 crores and 13 crores at 30%.

If we consider this case :

when he has taken Term Insurance He is in profit at any point of time

– If he dies early his family will get 30 lacs + some investments
– If he dies late , his family gets 30 lacs + his investments which has grown a lot now.
– If he survives , his investments are enough 🙂

The biggest thing to consider is that his Family is covered with good amount in case of his death, which is the main factor and sole idea of Life Insurance.

According to me, Endowment and Money back plans are investment products with a pinch of Life insurance in it. Term Insurance is the best, simple, “pure life insurance” and “must-have” product.

I am not against Endowment policy or Money back Plans, but they have a different motive.

Don’t see what it takes from you, see what it gives you.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Terms and Terminologies used in Finance, Insurance, Tax, Stock Market investment etc.

Posted on by Jagoinvestor

A lot of people avoid investing in shares because of the lack of knowledge about stock market investments. In this article, I’m going to tell you about the important terms and terminologies related to investment, finances, insurance, and tax.

First of all let’s know the meaning of each term.

Terms and terminologies of Stock market investment

Share or Stock: A Share is a representation of the amount of a company that you own. So if you own 100 shares of a company that has 100000 shares you are an owner for 1/1000th part.

Entry Load: Commission paid while purchasing units of a mutual fund from a broker, No Entry Load to be paid if directly purchased from Mutual Fund Office or its Website online.

Exit Load: Commission paid while selling off the mutual funds before a specified time limit. generally it is. 5% or 1% if exit before 6 months or 1 year.

NAV: The current price of each Unit of Mutual Fund, it goes up or down depending on the growth or decline in value of mutual fund investment.

NFO: New Fund Offer, When a new Mutual Fund is Launched, its call NFO of that Mutual Fund.

Different types of funds

Open Ended Mutual Funds: Mutual funds without restriction on Entry or Exit, Anyone can buy or sell the units anytime.

Close Ended Mutual Funds: Mutual Funds having restriction time on entry and exit , there is some particular time duration to buy the units and then its locked for some pre-decided period. For Eg. ABC mutual fund, a 3 years Close Ended Fund.

Growth option in Mutual Funds: Upon choosing this option, a unit holder does not receives any dividend from Mutual funds but the money it is added to investments which helps in increasing the NAV of mutual fund. Its good for people who do not want to receive cash regularly as dividend.

Dividend Option in Mutual Funds: By choosing this option a investor receives the dividend from the mutual funds whenever it is declared. Its good for investors who need regular cash.

Equity Fund: These are the funds which put most of there money in Equity and less in Debt. Equity refers to instruments with high risk and high returns like Shares, and Debt refers to instruments with no risk or low risk and less returns like bonds, Fixed deposits etc. These are high risky and with high returns.

Debt Fund: The funds which put more money in Debt and less in Equity. these are Less risky and with less returns.

Balanced Fund: The Funds which have money in both the categories in a ratio such that it makes it medium risk and medium return Fund. The ratio need not be 50:50 … even a ratio of 70:30 in booming markets can be considered as balanced. and 20:80 in bad situation will be considered as balanced.

Fund House: A Fund House is a company which manages money invested in different kind of mutual funds. Like all the HDFC Mutual funds belong to

Sectoral Funds: These funds put money in a specific sector or a group of inter-related sectors. They have high risk, high return nature.

Fund Managers: These are the experts who manage he Mutual Fund, they take the decisions like, which sectors to put money in, and which company they will pick up, the strategy, the road map, etc …

Watch this video to learn about different terms of the stock market:

Mutual Fund Benchmark: Every mutual fund has a benchmark against which they measure their performance, they perform better than there benchmark it’s considered that they have done good, else bad. For Eg. A lot of mutual funds have Sensex as the benchmark, some sectoral fund investing in Pharmaceutical may have BSE Heath care as its benchmark.

SIP (Systematic Investment Plan): This an investment method through which you can invest in mutual funds every month. Instead of paying 60,000 together, one can take a SIP of 5,000 for a year.

Stock Market: It’s a market that facilitates the buying and selling the shares of companies by connecting buyers and sellers. It can be considered as a mediator between buyer and seller. So anyone who wants to buy or sell shares can do it from the stock market.

Sensex and Nifty: These are indexes of BSE (Bombay Stock Exchange) and NSE(National Stock Exchange). Sensex and Nifty, are indicators of how prices of major stocks are moving at any point in time. Sensex comprises of 30 Shares and Nifty comprises of 50 shares.

They are calculated by a method called “Free Flow Market Capitalization” . When Sensex moves up it indicates that on an average more shares have increased there value and some have declined and vice-versa. It moves up or down depending on the combined valuations of the shares they comprise of.

Market Capitalization: This means how much worth all company shares collectively are. Simply putting:

Market Capitalization = Total number of shares available X Current Price .

Its the total money required to buy all the shares of the company available to the public.

IPO (Initial Public Offer): When a company offers shares to the general public for the first time, its call IPO. The purpose of this is generally to raise funds to finance their future projects and expanding there business.

Correction: It is a sharp increase or decrease in the stock market which was overdue for long. When market goes more up or down than expected because of rumors or for some short term reason, then to average out that correction happens …

Term Insurance: In this, you are insured for a big amount for a very less annual premium, but don’t receive anything when your maturity expires. Its a very cheap form of insurance and considered the best insurance anyone can get.

Endowment and Money Back Plans: In this you get insurance and you get a big lump sum after the tenure expires along with periodic payments in between. The premium is high per Annam.

ULIP’s: These are insurance+investment product, from the premium you pay, some amount is used as your premium towards insurance and rest is invested as per your choice. this product needs a lot of questions to be answered before taking it.

Short Term and Long term Capital Gain and Loss :

In the case of Shares and Mutual Funds, Any profit or loss made within 1 year. Tax treatment will be:

– Short term profits : 15% flat. (2008-2009)
– Long term Profits : Nil

In the case of Land, House, Jewellery, Any profit or loss made within 3 years. Tax treatment will be:

– Short term profits : 20% Flat
– Long term Profits : 30% Flat

Portfolio: Total investments combined are called Portfolio. So if Person ABC has invested Rs x in shares, Rs.y in Insurance, Rs z in PPF and Rs k in Real Estate, it will be combined to his Portfolio.

Trading Account: An account through which a person deals in instruments on the stock market.

Demat Account: An account where shares are stored in electronic format. It’s just an account which stores shares.

Commodities: Commodities are things like sugar, steel, etc … A person can trade in these things also just like shares and mutual funds. Multi Commodity Exchange of India Limited (MCX) is the commodity exchange in India just like BSE and NSE for shares.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.