Monthly Income Plan : A detailed guide on MIP’s

Posted on January 20, 2011December 4, 2019 by Jagoinvestor

Monthly Income Plans– When you hear it for the first time, you get a feeling that it’s some kind of assured and non-risky product that will deliver you uninterrupted monthly income, but it’s not exactly that way. Do you have a lot of cash which you want to park somewhere with the expectation of better returns than a Fixed Deposit? Are you looking for some kind of instrument that will give you regular income with decent returns with moderate or low risk? If yes, welcome to the world of Monthly Income Plans, which are also known as MIP’s.

Monthly Income Plans

What are Monthly Income Plans?

An MIP is nothing, but a debt-oriented mutual fund that gives you income, in the form of dividends – simple as that. As MIPs are debt oriented mutual funds, they invest heavily in debt instruments like debentures, corporate bonds, government securities, etc. It generally has 75-80% of its money in debt and rests in equity and cash. The income you can get from MIP is not limited to the monthly option. You can also choose to receive income quarterly, half-yearly or annually. Just like any other mutual fund, the MIP too comes with two options.

1. MIP with Dividend option: MIP’s with dividend option provides you an income in the form of dividends. There is an option to receive this income monthly, quarterly, half-yearly and yearly. So you have to choose the option at the time of buying the MIP. Note that while the dividend from MIPs is tax-free in the hands of investors, the company has to pay a dividend distribution tax of around 14% on the dividend before it reaches your hand. So your returns reduce by that much.

For example, If a company declares a dividend of Rs 3 per unit, they have to pay 42 paise (14%) as a Dividend Distribution Tax and you will only get the remaining amount in your hand , on which you don’t have to pay any tax. I hope you know, that the NAV of your MIP will come down by Rs 3 after the dividend is declared and given to you. So don’t shout your excitement to all the world when you get dividends, it’s just your own money which you got!

2. MIP with Growth Option: Here, the money is not paid out to you in forms of dividends, instead it keeps growing in the mutual funds. Hence your money is just growing inside the fund itself and you can reap all the benefits at the time of redeeming the funds in the future. In this option, you have nothing to do with dividends. Note that you get the power of compounding in growth options because your returns also earn in the future. Here is an article on the difference between dividend vs growth option in mutual funds to give you a better idea of what I am talking about.

Features of Monthly Income Plans

1. Dividends can be declared only from the profits and not from Capital

Regulations demand that dividends can be paid only from surpluses and not from capital investment. What it actually means is that dividends can be declared from earned income only. If your initial NAV was Rs 10 and after a month the NAV rose to Rs 10.2, The dividend can only be given out of this 0.2 and not from the initial capital value. This makes sure that Company can not show to the world that they are constantly giving income in case they have not done well.

2. No guarantee of Regular Income

The biggest myth about Monthly income plans is that they provide guaranteed monthly income, which is not true (See this question asked by Krishna on our Forum). While the aim of MIPs is to regularly declare dividends, it might happen at times, that they do not declare any dividends because of bad performance. To top that, there is no regulation or oversight on the MIP’s part to declare regular dividends. So take it on the chin, if you don’t get your income once in a while.

3. MIP’s return is influenced by interest rates and stock market

Just because it’s a debt oriented product, It does not mean that they are “safe” . Even MIPs can give a negative return, but in extreme cases. The debt portion is influenced by interest rates. When the interest rate falls, the NAV rises as the price of bond increases. When the interest rate rises, NAV falls. At such times the equity portion of the fund helps to maintain the return. Here is an article on Interest Rates and how they affect Mutual funds.

4. MIPs are prone to mis-selling because of a high commission structure

MIPs offer lucrative commissions to agents as much as 1-1.5% unlike 0.5-.75% in Equity funds. Due to this, it becomes easy to missell MIP’s as they can be labeled as “Safe Funds” and “Monthly Income Plans” which Indians like to hear a lot.

“Look what happened after the abolition of entry load in mutual funds in 2009 . From the last 1 Year, the corpus of MIP schemes have seen a huge inflow all over India. Last year, the total industry AUM was close to Rs. 3700 crore and today it is well over 24500 crore. In this entire period, equity funds AUM have gone down. Now when the intentions itself are not good, needless to say that the outcome will be right. Many investors are not aware that there is an EXIT Load of 1% in almost all MIPs if you were to withdraw before one year & in some cases even 1.5 years.” – says Hemant Beniwal on this Forum post

Taxation of MIP’s

MIP’s are debt funds and hence the taxation is same as debt funds .

Short Term Capital Gains: Any profit before a year would be Short term capital gains and it would be added to your income and taxed at your slab rate. So for investors who are in higher tax slabs it would be wise not to sell their MIP’s (in case they can) before a year, else there will be a good amount of tax on your profits.

Long Term Capital Gains : Any profit you get after 1 yr in MIP would be taxed at 10 per cent without indexation or 20 percent with indexation, whichever is lower.

Short Term and Long term Capital Loss : The best thing about MIP’s over FD’s or Post office schemes is that incase you have any loss in MIP’s , you can set it off against the capital gains in the same year or in next 8 yrs , which makes sure that even losses can be used for tax saving purpose.

Dividends : All the dividends received from the MIP’s would be tax-free in the hands of investors, but note that companies already pay Dividend distribution tax from the MIP’s

MIP’s save money for bad times

Think about ants! They make sure that they save enough food for the rainy season, so that they don’t fast in bad times. In the same way MIPs do not declare all the earned income as dividends, instead they declare a part of earned income as a dividend and save rest for troubled times in future.

This makes sure that when there are bad days in future and MIPs do not see much growth, they can use the money saved, to declare dividends. For instance, in 2008, despite bad markets, 19 funds skipped only up to four monthly dividends.

However, a lot of MIP’s didn’t perform that well and could not save the part of earned income in a proper way. Hence they had to skip all 12 months dividends. Eg., Canara Robeco MIP Mn Div, which skipped all 12 dividends in 2008 and 9 months dividends in the year 2009. See the chart on the right to get more insight into how MIPS missed their dividends. Source: LiveMint

Beware: There is one more option called dividend reinvestment in MIP’s apart from Dividend payout and growth . If the payable dividend is less than Rs 250, then the dividend would be compulsorily reinvested.

Who should Invest in MIP’s ?

1. Investors looking for regular Income

If you are retired/semi-retired or just looking to generate some regular income can look at MIP’s as an option. Note that instead of choosing a monthly option of income, I would rather suggest a quarterly or half-yearly option .

2. Conservative investors looking for better returns

Are you a conservative investor but still looking for better returns than pure debt options like Fixed deposits or Insurance policies? Well, you can’t get 100% safety with MIP’s, but there are very good chances that you would be getting better than FD returns with MIPs.

3. Investors who want to park a big sum of money

A lot of people have questions like “Where to park my lump sum money for medium-term with lower risk ?” If your horizon is very less – like 6 months or a year, MIP’s might not be the best option, but if you want to park it for 2-3 yrs with low risk, MIPs with growth option can be a suitable instrument .

MIP vs Fixed Deposits/ Fixed Maturity Plans/ POIMS

You might get confused between so many debt products and might be wondering how Monthly Income Plans compare to Fixed Deposits (read this post by Deepak Shenoy) , Post Office Monthly Income Scheme or Fixed Maturity Plans (FMP) . There are various parameters on which they all differ . Below is the chart which shows you those differences .

Monthly Income Plans , Best MIP for Investments

Two ways of getting income from an MIP

We will see two different ways of generating monthly/quarterly income through MIP’s Monthly. One is the regular way of choosing a dividend option and the options one is starting a Systematic Withdrawal Plan from MIP after a year of buying it. Let’s look at both and its pros and cons …

1. Choose dividend option

The good point in this option is that you will start getting the income immediately as the company starts declaring the dividends, and you don’t have to take care of taxation issues. However, the bad side is that eventually 14% dividend distribution tax would be paid by the company and the stability of income will depend on how often dividends are declared by the company. If they skip the dividend you will not be getting the income for that month/quarter.

2. Choosing growth option and start SWP (Systematic Withdrawal Plan)

If you use a bit of strategy, you can create a more stable and more tax efficient income by this method. You can choose growth option in MIP and after 1 yr you can start a SWP (systematic withdrawal plan , opposite of SIP) from your MIP to your bank account . What will happen with this option is that you will not have to depend on companies dividend announcement , as it’s your decision to liquidate a fixed part of your MIP’s, sell it and get the money in you bank account . Also as you are doing it after 1 yr, there wont be any exit load and the profits you get out of it would be Long term capital gains , so you only pay 10% on the profits (assuming you don’t want indexation benefits), which is 4% lesser than the dividend distribution tax . If you have a large amount of investments in MIPs, then this option can save some tax for you, but if your investments aren’t significant enough, it’s not worth the hassle .

Some best performing MIP’s in Market

One of the readers Sagar asked his query on our forum: “Which is the best Monthly income plan ?“. While there is no guarantee that the MIP which you choose today will keep performing well always, but I have got a list of MIP’s which have done excellent in past and still look good. You can choose any of these if you are disciplined enough . Once you choose them make sure you concentrate on regularly investing in them without looking at their performance every week or month. Just review them in a year or so . watch out for the expense ratio of the MIP’s, lower the better

Conclusion

So the main takeaway from this article for you should be to understand that MIP’s can be good alternative for you if you have been investing a lot in Fixed Deposits and do not mind taking small amount of risk. Another important point was to look at MIP’s are income-generating products with understanding that sometimes the income can go for a toss in between and you have to comfortable with that.

I would love you hear your comments on monthly income plans and do you feel that it can be helpful in your portfolio , share with us !

A video on 7 Income Tax saving tips you might not know

Posted on January 11, 2011December 4, 2019 by Jagoinvestor

Are you bored of regular income tax-saving tips? Are you looking for some tips which are different, kinda unique and not very well known?

If yes, then you’re reading the right article, mate! I will share some tips which would help you in the area of income tax saving. Some of these tips will help you in this, current year and some, at some later point. But helpful at some level, they will be:). Below is a video on this topic where I explain those 7 tips.

In case you don’t want to watch the video, you can just skip it and move forward to read the tips in the text. Let’s look at them. If you are reading this article on email, you can watch the video on Youtube here

7 income tax-saving tips

1. Gift money to your major children and Save tax on Future Income

Imagine this, you have Rs 25 lacs. Logically you put this in a fixed deposit or invest in some other financial product through which you get an interest at 8%. You will get Rs 2 lacs as interest which will be added to your income and you pay tax on this income. Not good!

Now what? How do we save tax on these 2 lacs? As per income-tax laws, you can gift any amount of money to your major children without attracting gift-tax and as their money will become theirs any income arising out of it would be treated as their income, not yours. In case their income is below the limits, there won’t be any tax.

However, there can be times, where you might not feel too comfortable gifting away large amounts of money to your major children, in which case, there is another option of giving them loans. And guess what? you can make interest-free loans to your major children as per the law.

Please note that doing exactly the same thing with your spouse is not possible. Any income you transfer to your spouse which generates any income will be treated as your income only. However, if you are going to be married in some months and you have some big amount of cash, you can gift her right away, as a gift given to prospective wives would become hers lawfully.

I hope you liked this first point on income tax-saving tips

2. Claim stamp duty and registration fees in 80C

Many people dont know this, but the Stamp duty and the registration fees of the documents for the house can be claimed as deduction under section 80C in the year of purchase of the house. An important point to note here is that you should be in possession of the house if you want to claim these deductions.

So in case of under-construction properties, you lose out on claiming this deduction. As per the income tax

The stamp duty, registration fee and other expenses incurred for the purpose of transfer shall also be covered.

Payment towards the cost of house property, however, will not include, admission fee or cost of share or initial deposit or the cost of any addition or alteration to, or, renovation or repair of the house property which is carried out after the issue of the completion certificate by competent authority, or after the occupation of the house by the assessee or after it has been let out.

Payments towards any expenditure in respect of which the deduction is allowable under the provisions of section 24 of the Income-tax Act will also not be included in payments towards the cost of purchase or construction of a house property.

3. Get deduction for rent even without HRA

Do you get HRA

All the salaried class people get HRA from their companies, and hence they claim deductions on that. However, what if you are a self-employed professional or working for a company that does not provide you HRA benefits? Can you still claim HRA? Yes! But with some caveats.

Under Section 80GG, you can claim a deduction of the rent paid even if you don’t get HRA. However, not many people are aware of this deduction. If you are not being paid any HRA or don’t have any housing benefits from the employer. You can claim least of following 3 things as HRA

a) Rent paid less 10% of total income

b) or Rs 2,000 a month;

c) or 25% of total income.

Note that your spouse or minor child should not own any house with the city limit if you want to claim this benefit, You will have to submit a form called 10-BA that you are paying rent and not receiving HRA.

Bonus tip : If you are staying with your parents, you can pay them rent. If they don’t have
 significant income, it would mean you  save  tax on rent paid and even your parents income does
 not cross the  tax  limits, which is a win-win situation.

4. Declare your losses in a tax return to save tax in future

A lot of people do not show their losses in shares, mutual funds, gold ETFs, real-estate in their tax returns. This is a big mistake, as you lose an opportunity to save tax in future years. You can set-off your losses against profits in the current year as well as in the future too.

For example: Assume you had sold your real-estate property and made a profit of 10 lacs after indexation. You will have to pay a tax of Rs 2 lacs @20%. However suppose in the same year you have also made a loss of Rs 4 lacs in stocks, you can set-off this loss with your 10 lacs profit and just pay tax on Rs 6 lacs, which comes at 1.2 lacs only. That’s a cool 80k in savings!

Also if you have only losses this year and no profits, you can show this loss in your tax returns and carry forward and set-off this loss against any future profits for the next 8 yrs. For more details read this article.

5. Buy House with Parent or Siblings as joint-owners

Yes, if you thought only spouse can be co-owner in the real-estate property to claim the tax deductions, you don’t know the whole story.

You can have your spouse/parent/siblings as co-owner and all the co-owners can claims the tax deductions of 1 lacs for principal and 1.5 lacs for interest part. So if you take a housing loan with your siblings as co-owner of property and co-Borrower of loan, the loan amount interest and principle paid will be available for tax exemption in the ratio of your loan amount.

So if you are still a bachelor or a single who wants to buy a house, consider asking your brother, sister or parents to become the co-owner so that both of you can get tax benefits and reduce your tax outgo.

The only problem, in this case, is that loan-sanctioning companies are very stringent in giving loans to siblings, as there are higher chances of you parting your ways with them later in case of any family issues, however, in case of a spouse it happens lesser.

Bonus Tip : The co-owner who falls in the higher tax bracket should  hold a higher proportion
of home loan to make sure that the tax  benefits are maximised.

Income Tax saving tips

6. Use education loan to lower tax for your Children in Future

So what, if you have all the money to pay for your children’s education fees? It would be wise to opt for an education loan in the name of your children’s name as you can claim the full interest paid on education loan under section 80E. Note that it’s only is available if you are a parent or a legal guardian .

You can’t claim a deduction for your spouse education loan 🙂

The other thing is that you can take an education loan on your children’s name so that after some years when they pay off their loans, they can claim the deductions themselves. Apart from this, they’d be more responsible and this education loan payment from their pocket will make sure that they don’t spend too much money in the wrong places and you can use your money today somewhere else!

7. Take unlimited deductions for your second home loan interest payment

This one is the last tax-saving tips we will discuss here. If you have already bought a first home where you are living right now and want to buy another house, the good news is that you can claim full interest paid for the EMIs of the second house. As per tax laws, you can claim full deductions for the amount paid as interest on the loan for the second house.

For the first house you can claim up to 1.5 lacs in interest, however for your second house you can claim the full amount of interest without any upper limit. Read some tips on buying real-estate

Which of the above income tax saving tips were new for you? Please comment.

Are you sharing agents commission ? Its Illegal

Posted on November 30, 2010September 9, 2019 by Jagoinvestor

“Discount kitna doge ! Mishra ji mujhe 35% de rahe hain ” , as per Rakesh ,this is exactly how a lot of customers ask their agents commission to be shared with them in Insurance or Mutual funds. Have you ever asked your agent how much discount he can give you on the premium? This happens a lot with LIC agents and other insurance and mutual fund agents. Many times, even agents offer discount or some gift in return, if you buy the policy or mutual funds through them. This practice is illegal and totally against the laws of Insurance Act and SEBI. The agent can even face cancellation of his license if he is found to share his commission. (Read about agents commission in Insurance)

Insurance, mutual funds Commission passback to customers by agents is illegal

It kinda works like this. Suppose, an Insurance agent sells you a policy with a sum assured of Rs. 10 lacs, with a premium of about Rs. 50,000/- per year. An agent will make around 15,000 in commission for that year, out of which he might offer you a discount of Rs 5,000-10,000 for the first year or he offers you some gift! A lot of insurance agents do this to make sure they do not lose the business or get more and more business . In the same manner, if you have Rs. 30 lacs invested in mutual funds, your agent will get around Rs 10,000/- in trail commissions. It might happen that he can offer you 50% of that commission to make sure you stay with him .

Why you should stop asking share in Agents commission ?

Mutual funds : As per SEBI mandate, sharing the commissions received from AMC is illegal and should be avoided . Pass-backs, the practice of sharing a part of the distributors’ commission with the investor, have been made illegal under the code of conduct issued to distributors. “Intermediaries will not rebate commissions back to investors and avoid attracting clients through temptations of rebate/gifts etc” – As per a SEBI circular.

If a mutual fund agent shares his commission with others, it opens a big hole, not just for mis-selling, but also dilutes the whole industry atmosphere. There have been rampant cases, when an agent asks customers to leave their current agent and transfer their funds with them as a new agent (link) and they are ready to transfer a part of agent commission to them (the customers). For example, if a person has Rs 30 lacs invested in a mutual funds, an agent would get around Rs. 10,000/- as trail commission in a particular year. A lot of agents offer 5,000 (50%) back to the customers to attract them. A lot of agents pass back a part of commission and customers get into wrong & ill-suited mutual funds because of their greed!

Insurance : Other than the fact, that it’s illegal, you should not encourage or engage in sharing the agent commissions because, for one thing, it hampers your relationship with agent. Don’t forget that your agent will be the one to help in claim settlement when you are dead. If you snatch his share of commission today, it might leave him with a bitter taste in the mouth and not result in a healthy relationship. So please live and let live! The other important reason, you should avoid asking for agents commissions, is that it leads to mis-selling. If you ask for a share in commission, it will leave agents with less earnings and that would encourage them to sell more by any means, which in turn fuels mis-selling. So in a way the whole “asking commissions back” will hamper investors in the long run. What you sow is what you reap!

As per section 41 of the Insurance Act, “No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out OR renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer.”

Real Life experience

As per Dhawal Sharma, a Delhi based agent shares his experience

I face this problem day in and day out and many a times have to miss out on prospective clients because they want “passback of commission“. This practice (Sorry to say, but started by LIC agents) is so much part of the Insurance selling culture that 99.9% of the public thinks that it is obligatory on the part of an agent to part with his commission. But even LIC agents were quite smart at that time as they use to pass back comission mostly on ENDOWMENT or MONEYBACK policies which generate hefty renewal commissions as well (Unlike ULIP) and reversely, would be of little or practically no use to the client in the long term. This practice is actually pound foolish , penny wise approach..

I know at least 100 people, regularly buying insurance for their entire family (father , mother, brother,uncle, aunty) for last so many years from SHARMA JI or OFFICE WALE CLERK who passback 20% commission, and if we make a thorough study of their Insurance portfolio, they are underinsured (No term plan), not properly equipped to handle retirement (their agent never knew that annuity fund is tax exempt only upto 1/3 amount), and no proper child planning (In many cases, child plans where child is life insurand and not father).

Violation of law using Multi-level marketing in Insurance Policies

For some years now, a new way of selling is evolving. It’s called MLM. Here a big agent sells a policy to some one and makes him a customer. Now, this customer also acts like an agent and starts adding new people in the network and sells them policies. This goes on to many levels, a person earns a part of commissions earned from every person under his personal network. This whole idea of multi-chain selling violates Insurance law and is illegal.

As per Section 41 of the Insurance Act, “A licensed agent, whether individual or corporate, can’t appoint a sub-agent and pass on a commission to another person or entity. Any passing of commission by an agent is construed as rebating and is prohibited under the Act.”

There are many companies operating in different part of our country like TLC Insurance (India) in Bangalore, RMP Infotec in Chennai, Golden Trust Financial Services in Kolkata and SecureLIFE out of New Delhi (read more here and here)

Responsible Investor = Health Industry

We as buyers, shape this whole industry based on how we act. Over the years, we expected and asked for share in agents commissions, without realising that it will one day work against us resulting in misselling. So please do not support it! A couple of hundreds or thousands is not going to make you rich or poor, but it sure dilutes the whole environment!

Have you ever experienced a situation where agent has tried to give back his commission? Do you think if everyone stops asking for any agents commission back, it can really have any impact?

Beware of Loading and Co-pay in Mediclaim Policies

Posted on October 3, 2010January 10, 2020 by Jagoinvestor

Today we discuss two concepts in Health Insurance, generally present in the policy document, which policyholders are not normally aware about, because they don’t care to look at those clauses. We are talking about concept of Loading and Co-Pay . Let’s talk about both the concepts one by one.

What is Loading in Health Insurance ?

Loading, in terms of Mediclaim Insurance means the Insurer (Company) will charge more amount than the regular premium from the policy holder after a claim has been made. Suppose, for eg., you have an Insurance policy and you pay Rs 8,000 each year in premium, and now suppose in 3rd year you make a claim, then from the 4th year onwards, your premium increases by a certain amount which can range from 5% to even 300%. The increase depends on the company terms and the rules. If the loading is 50%, your premium will increase by 50%, which is Rs 12,000. Loading can apply with every claim you make. Please check the brochure off loading is 50% , your permium will increase by 50% , which is Rs 12,000. Loading can apply with every claim you make.

Please check the broucher of ICICI Lombard mediclaim policy stating different slabs for different amounts of claim made. One more product, I would strictly advice all the readers to stay away from, is Star Health’s Red Carpet policy for Senior citizens. This is one of the most fictitious policy, I have ever come to known. Not only is this policy, making an option of Co-pay up to 30% but also has Loading as well. So, a senior citizen, who is normally retired and must also be suffering from one ailment or the other, will be forced to shell out a huge amount of expenses for hospitalization in addition to the premium paid. According to me, it is of prime importance, for the prospective client to look for the clause of Loading in the policy document of said company.

But it doesn’t mean that all Mediclaim Policies in the market come with the Loading clause. There are a few companies in the market without such Hidden Riders like United India(Gold and Platinum only) and Max Bupa. This concept of Loading defeats the very purpose of Mediclaim. An individual takes a Mediclaim Policy, just so that he won’t pay anything extra, out of pocket but ultimately, he is spends more by way of Loading after the claim has been made..

Why Loading concept is there from Insurance Companies ?

Generally, the insurance company is of the view, that once a policyholder has made a claim due to any illness or some major illness, he might make the claim again in future (if not near then in the distant future), so just to be prepared to face those recurring claims, the company tries to safeguard itself, by procuring a larger premium by way of Loading. Sometimes, it make sense but most times, it does not! The only justification on the company’s part, is that they make this loading thing clear, at the very inception of the policy, in its brochure as well as its policy documents and they do take, a declaration from client that they knows about it with his/her signatures. If the client doesn’t read/go through these details and is later on required to shell out more from his pocket, then it is his mistake not the company’s.

So my advice for all the readers out there; Dear friends, don’t get fleeced! By the sheer laziness of not reading/going through the policy brochure or documents, we will be facing heavy Loading, both of money and of tension.

Is loading acceptable ?

On the brighter side, companies can not just have any kind of unreasonable loading in policies. These have been challenged by consumers, and often the consumer forums have taken decisions in favor of consumers. Here’s a case in point –

Amina Sheikh, an octogenarian, was insured for Rs 1.5 lakh for a decade by the National Insurance Co. Ltd. under its Mediclaim Policy. When her policy was due for renewal in 2007, the company increased the premium from Rs 5,305 to Rs 32,787. This was done to make it financially unviable to continue with the policy. Her daughter protested, so the premium was brought down to Rs 23,845, which too was very high. She was forced to pay this premium and renew the policy to avoid a break in insurance. Her daughter wrote to the company demanding an explanation for the arbitrary increase. The divisional manager replied that the policy now stood cancelled as Amina did not seem happy with the firm. He also clarified that the premium doubles immediately when a person crosses 80 years of age and for her, the premium had been loaded by another 100% in anticipation of claims arising due to advanced age.

CWA then filed a consumer complaint. Rendering the judgment on behalf of the bench, the forum president observed: “Managers of public sector undertakings are duty-bound to take decisions based on facts and not in an arbitrary and irresponsible manner based on their emotions.”

The Forum held that the loading of the premium was arbitrary, unjustified, and contradicted the terms of the policy, which is deficiency in service and unfair trade practice. The forum directed the firm to continue the policy by charging Rs 13,112 and to refund the excess premium collected. It also directed the company to continue renewals without loading as long as the insured paid regular premium in time. Also, compensation of Rs 15,000 for mental agony and Rs 2,500 as costs were granted. Source : TOI

[DDET Click to Read 2 more cases]

Case Study 2: In Dr Rupali Shirke’s case, the insurance company loaded her premium by 50%, increasing it from Rs 7,727 to Rs 11,824 and decreased the sum insured from Rs 5 lakh to Rs 2.5 lakh. This was done because of two claims lodged by her, which were genuine and settled by the company. This was considered as an “adverse claims ratio” by the firm. When she protested, the insurance firm ignored it.

CWA filed a complaint challenging loading of premium and reduction of the sum insured by United India Insurance Co. Ltd. The Forum held that the firm was bound to renew the policy on the same terms and conditions. It directed the firm to restore the sum insured and charge regular premium without loading. A compensation of Rs 5,000 and costs of Rs 5,000 were also awarded.

Case Study 3: In the case of Hoshang Khan, after a claim was lodged, the insurance firm imposed a loading of 400%, increasing the premium from Rs 10,558 to Rs 55,952. Khan could not afford the high premium, so he sent the premium cheque without the loading, but the insurance company returned it. CWA filed a complaint against United India Insurance Co. Ltd. The Forum held that loading of premium was arbitrary and unjustified. It directed the company to accept the premium without loading. On receipt of the basic premium, the firm was directed renew the policy with retrospective effect from 2006 onwards to maintain the policy’s continuity.

[/DDET]

What is Co-Pay in Health Insurance Policies ?

Co-pay, as the name signifies is the payment made by two parties, even if that is not in equal proportions This is another important factor to be kept in mind while selecting the Mediclaim policy for oneself. Under this clause, the insured is also required to bear a certain percentage of expenses incurred on illness/disease while hospitalized, either conditionally or under certain conditions..

Usually, in our country, the concept of Co-Pay only comes into picture after a certain age. Most of the companies levy this clause once the policyholder enters the Senior citizen category, that is after the age of 60. Mostly this percentage is mentioned as 20% pay – i.e., policyholder is required to pay 20% of the expenses out of his own pocket. For eg, if Mr X, who is 63 years old falls sick and has to be admitted to the hospital for 5 days, for which hospital bills come out to be Rs 80,000 and his Mediclaim Policy mentions 20% co-pay, then Mr X has to pay Rs 16,000 and rest Rs 64,000 will be borne by the company. The basic understanding behind this clause, is that the company is expecting an increase in claims from this particular section of the policyholders, – the senior citizens. The company’s thinking is that as the age progresses, the chances of policyholders getting sick increases. The expenses on his treatment for a given complication will also be higher as compared to the same treatment for someone who is much younger, say age 38 or 40. Looking at it from the prospective of the company, this clause seems logical but as an individual policyholder, I believe this is one of the main thorns in the flesh of the policyholder who is entering the age bracket of 60s. I believe this percentage has to go down, or associated to some very major complications/illnesses, or senior citizens should given some rebate on premium year on year just to balance out this Co-Pay clause.

Some other companies, preferably PSUs, charge this co-pay clause if the policyholder is taking treatment in out of network hospitals. Earlier, they would apply this co-pay concept, in case the policyholder chooses a higher-end hospital with air-conditioned services or someone from smaller city getting treatment in costly cities like Delhi, Mumbai, Chandigarh, Bangalore etc. At that time, co-pay clause was built in to ensure that the policyholder choose the appropriate hospital/doctor/room level relevant to his economical status as well as the premium paid by him to ensure there is no overspend just because of the existence of the mediclaim policy.

So dear all, please keep an eye for co-pay clause in the policy which you are thinking of buying for yourself as later on, it may negate the very concept of cashless or reimbursement later on as later on! And in the 60s when people have mostly retired with no real source of income, to pay even 20% of the total expenses out of own pocket would be a considerably big amount.

So should you choose a company without co-pay and Loading clause ?

No, not always , you should not make co-pay and other clause as the sole criteria for choosing the policy because even if a company does not have co-pay and loading clauses today , it can include them at later stage . As per Medimanage company

“Again in our opinion, a clear loading policy is better than those policies where there is no explicit loading clause. This is because every policy wording has a term where it clearly mentions that “all terms including premium are subject to change on renewal, based on claims or otherwise.” – this makes you exposed to an unlimited extent, when you grow older. Bajaj Allianz implemented a new loading clause in August 2010. The most scientific loading policy is that of ICICI Lombard, which has classified claims into Chronic and Non Chronic. Non-chronic claims like an accident or Malaria etc. would have a loading only above a certain threshold claim amount, which is not carried forward in the subsequent year. Whereas chronic ailments will have a loading of 75% and carried forward upto 200%.

Finally remember, even if you are buying a policy without loading this year, nothing stops the Insurance Company to add a loading clause at the time of renewal. Dont choose a company only because it does not have loading, choose a company which is stable in its services, and does not make frequent and big changes in their policy conditions.”

Please let me know your comments on this topic . Do you feel its ethical to just mention in the document and not make customers aware about it from their own side ? Do you think if companies disclose about it while selling the product face to face, it would create more respect for companies ?

The inputs are provided by Dhawal Sharma, who is an agent for Kotak and Max Bupa .

Invest in Gold and Silver through E-Gold and E-Silver

Posted on September 15, 2010August 22, 2019 by Jagoinvestor

The traditional, age old ways of buying gold have been ways like gold ornaments from jewellers or coins, bars, biscuits from banks or jewellers. However, since the last few years, new ways of buying gold have emerged. These include buying gold in demat form (electronic), through gold futures, gold ETFs and the latest one is E-Gold. So what is this E-Gold? This article makes an attempt to throw some light on this new product.

What is E-Gold?

The National Spot Exchange Limited (NSEL) has introduced E-series products in commodities. To start with, they have launched E-Gold and E-Silver. Later on, they also plan to cover few other metals and also some agricultural commodities in the same series. Trading in E-Gold has been on since 17th March 2010. E-Gold units can be bought and sold through the exchange (NSEL) just like shares. Here one unit of e-gold is equal to 1 gram of gold. For long term goals like accumulating gold for children’s marriage, retail investors can buy e-gold in small quantities in their demat account over a period of time. Once their target is achieved, the individual can take physical delivery of gold through the exchange. By buying gold in electronic form (demat), the individual need not worry about the purity of gold, storage costs and the insurance of gold. If the individual has bought e-gold only for investment purpose and does not need to take delivery of physical gold, then he can always sell the e-gold units and encash them. How to invest for Child related Goals

Requirements for E-Gold

To buy E-Gold units, the individual needs to open a demat account (beneficiary account) with one of the impaneled Depository Participants (DP). The list of the impaneled DP’s is given on the NSEL website (or see the list below.) Retail individual can place buy and sell orders for e-gold units with their broker through phone or through the internet (broker’s website). Investing in E-Gold or other metals opens up one more asset class for retail individuals to diversify their investment portfolio. It provides a means to buy, accumulate and sell E-Gold as well as to convert the same into physical gold. To invest in E-Gold you need to have your Demat account at any of these places… India Infoline Ltd, Karvy Stock Broking Limited, Geojit BNP Paribas Financial Services ltd , Anand Rathi shares & stock brokers ltd and many more.

[DDET Click Here to see the Full list of DP’s]
Globe Capital Market Limited
Religare Securities Limited
Goldmine Stocks Pvt. Ltd
M/s. IL & FS Securities Services Limited
Karvy Stock Broking Limited
Monarch Project & Finmarkets Ltd
SMC Global Securities Ltd
SSD Securities Limited
Alankit Assignments Ltd.
Zuari Investments Ltd.
Stock Holding Corporation of India Ltd.
Aditya Birla Money limited / Apollo Sindhoori
India Infoline Ltd.
Master Capital Services Ltd.
LSE Securities Ltd.
Geojit BNP Paribas Financial Services ltd
Farsight Securities ltd
Eureka Stocks & Share Broking Services limited
Microsec Capital ltd
Ashika Stock Broking limited
Anand Rathi shares & stock brokers ltd
IFCI Financial Services limited
These are also known as empanelled DPs
[/DDET]

Delivery Centres

If an individual wants to take physical delivery of his e-gold units then he / she can take it in multiples of 8 grams, 10 grams, 100 grams and 1 kg. To start with the exchange has delivery centres at Ahmedabad, Delhi and Mumbai. In due course of time the exchange plans to open more delivery centres in other cities. India for long has been the largest consumer of gold in the world as Indians love to buy gold. But since last few years because of the steep increase in the price of the yellow metal, it is getting further out of reach of the common man. By introducing the E-Series range of products, NSEL is focusing on the affordability factor by keeping one unit equivalent to 1 gram of gold which makes gold affordable once more, for the masses.

Charges

The Exchange shall levy the turnover charges of Rs. 20 per lakh of turnover to both buyer and seller member on monthly basis. This shall be applicable on all executed transactions. Storage charges shall be levied by the Exchange on monthly basis. Such charges will be computed based on the holding in the respective accounts on the last Saturday of every month. The charges per month per unit of E-GOLD will be 60 paise only. For conversion of e-gold into physical gold as per the current rates, VAT will be 1 % of the value of goods. In case physical delivery takes place in Mumbai, octroi @ 0.1 % of the value of delivery will also be applicable. Interested readers can read in detail in this circular

Conclusion

Though the product serves the purpose of common man of accumulating gold in small-small quantities over a period of time, not many people are aware of this product. To make it a success NSEL will have to create awareness about this product through various investor education channels, so that people realise the benefits of this product. How they go about doing this, remains to be seen.

This is Guest post by Gopal Gidwani , who writes on his blog BachatKhata.com . I have edited it with more information and added the chart .

Two awesome and hidden Health Insurance products

Posted on September 12, 2010February 2, 2020 by Jagoinvestor

Today, I will discuss about two Health Insurance policies which are not very known or popular. However, these policies are unique and reasonably priced. These policies are sold by National Insurance Company Ltd and Oriental Insurance Company Ltd. The insurance policies, which I am talking about, are not single products but a combination of two or more products to create a single good product. You can consider these policies by investigating further and if they meet your requirements. (Read Basics of Health Insurance)

Vidyarthi – Mediclaim for Students

Sold by National Insurance, Vidyarthi is designed to provide health and personal accident cover to the students. It also provides for continuation of insured students education in case of the death or permanent disablement of the guardian due to accident. The premium for hospitalisation expenses is substantially lower compared to a standard Mediclaim Policy.

Features

This policy is for students aged between 3 years to 25 years. Sum insured ranges between Rs 50,000 to Rs 4 lakh.
Any registered institution affiliated to any state board, council, university and All India Council for Technical Education (AICTE), University Grants Commission (UGC) or any other government statutory authority, in India, may take this policy.
Educational institutions may also take a group policy covering named students enrolled with them.
Parents/guardians of students may also take this policy.
The policy also provides for continuation of insured students education in case of death or permanent disablement of the guardian due to accident.
Sum insured under this policy shall be progressively increased by 5% in respect of each claim free year of insurance subject to maximum accumulation of 10 claim free years of insurance.
The policy also provides group discounts ranging from 10% to 30% depending on group size.

Cost Structure

Now, if we look at the premium table given below, for health insurance of Rs 1 lakh for a student, parents get personal accident coverage of Rs 2 lakh and the student also gets personal accident coverage of Rs 50,000. The premium for this plan is Rs 1,111 per year which is below the average price of medical insurance purchased from any other insurance company for sum insured of Rs 1 lakh for the age up to 25 years.

Scope Of Cover

Room, Boarding expenses as provided by the Hospital/Nursing Home.
Nursing expenses.
Surgeon, Anaesthetist, Medical Practitioner, Consultants, Specialists Fees.
Anaesthesia, Blood, Oxygen, Operation Theatre Charges, Surgical appliances(any disposable consumables subject to upper limit of 10% of Sum Insured), Medicines & Drugs, Diagnostic Materials and X-Ray, Dialysis, Chemotherapy, Radiotherapy, Cost of pacemaker, Artificial Limbs and cost of Stents and implants

* Service Tax Extra

The main reason why this product is not known to public is because people by themselves never take the initiative to find something better. Sometimes intermediaries, to whom people consult and buy insurance, are not aware of such products. In other countries, like US and UK, universities and colleges have made it mandatory for students to have health insurance which is not the case in India. If universities and parents take the initiative, then they can provide something better to their children as well as themselves through this product.

People can buy Vidyarthi from National Insurance directly or through the agents of that company. There are many other companies like Tata AIG, ICICI Lombard which offer similar kind of products but they are not as good as this one. (Read details in Policy document)

Nagrik Suraksha Insurance

This is a master piece product from Oriental Insurance Company. Nagrik Suraksha is also a combination of personal accident coverage and medical insurance. This policy not only provides personal accident insurance, but also hospitalisation expenses on account of accident which other insurance companies fail to provide. In this policy, 80% of your coverage amount is for personal accident, and the remaining 20% is for hospitalisation on account of accident.

Example

Suppose you take insurance coverage amounting to Rs 1 lakh. Out of Rs 1 lakh, Rs 80, 000 is for personal accident and the remaining Rs 20,000 is for hospitalisation on account of accident. The premium to be paid for coverage amount of Rs 1 lakh is only Rs 90 for the entire year. If you buy insurance coverage amounting to Rs 4 lakh, you can get personal accident coverage worth Rs 3.2 lakh and hospitalisation expenses worth Rs 80,000 by just paying Rs 360 for the entire year.

Features

Minimum sum assured is Rs 1 lakh, while the maximum is Rs 5 lakh.
Policy period ranges from 1 year to 4 years.
Coverage is also provided outside India, but the claim settlement is done only in Indian currency.
A discount of 10% of the total premium will be allowed comprising the insured and any one or more of a) Spouse, b) Dependent children c) Dependent parents.
Group discounts available.
This insurance is available to person between the age of 5 years to 70 years for family package and 18 years to 70 years for individual(s)/group cover.

Premium Chart

* Service Tax Extra

You can buy Nagrik Suraksha from either agents of Oriental Insurance or from the company directly. This is really a gem of a product and most suitable for people who are looking at some exotic products and not just plain vanilla kind of offerings. (Policy document)

This is a guest post by Kashyap Juthani from pocketsafe.in , I have added the charts and have done some minor additions and modifications .

Making sense of the market through Sensex at MRP

Posted on August 17, 2010August 19, 2019 by Jagoinvestor

In the previous article, we looked at Stocks@MRP and how a stock can have a price tag. Moving further, we now discuss how the concept of Stocks@MRP has been extended even to the benchmark index :

Sensex . Also there is an example of one stock each considerably above and below its MRP. The inherent volatility in the stock markets makes stock investing to be perceived, by many, as a gamble. However, the Stocks@MRP can help us get a very good idea about the worth of a stock.

Once we know the MRP of a stock, we should buy it at a 50% discount to its MRP and sell it if goes considerably above its MRP. Then, how does Sensex@MRP come into the picture? And why do we need to find out the worth of the benchmark index as well?

Going back to History

Let’s jump back a bit in time. It’s December 2007. The Sensex is close to 20,000. The media is going gaga over the Indian economy and the movement of Sensex (up by 55% in just 9 months) and is saying that the next stop is 30,000. Everybody is eager to jump onto the bandwagon.

Fortunately, you have been a part of the rally since the beginning and have seen a considerable rise in your holdings. So, what do you do? Do you sell off and book your profits? Or do you wait? After all everyone is saying that this is just the beginning.

You wouldn’t want to look like a fool selling too early and missing out on the further upside, would you? You stay in and within a few months, you regret your decision.

The market crashes (falls by 50% in 1 year), your stocks tumble and a large portion of your wealth is wiped away. All your companies are still doing well, they are still fundamentally strong. Yet, you have suffered because of the market’s over reaction to the sub-prime crisis.

You may have not lost your capital, if you bought your stocks at a discount to the MRP, but your profits have definitely vanished!

Sensex@MRP concept

Warren Buffett, one of the greatest investors in the world has said, “Be fearful when others are greedy and be greedy when others are fearful”. But to do this, you need to be aware when the others are being greedy and when the others are fearful. And this is the quest that exactly led us to finding Sensex@MRP.

The market represented by Sensex is known over react, to both positive and negative news. Be it national or international politics, capital inflows or outflows and favorable or unfavorable monsoon forecasts; the Sensex fluctuates widely because of these.

Even though Sensex is comprised of just 30 stocks, chances are that if these big names get hit, a majority of the other stocks also get clobbered. This thought led us to the logical extension of finding Sensex@MRP so as to enable investors to enter stocks at bargain levels and help them exit when things start getting over-exuberant!

The Sensex companies are some of the biggest and most well known names in the country. They are amongst the favourites amongst the institutional investors and hence are highly liquid. One can then expect these stocks and as a result the Sensex to trade close to the fair value i.e. MRP.

However this has seldom been the case. On quite a few occasions, the market has become irrationally exuberant or highly depressed. Knowing these phases of the market can help you become better investors. The graph below gives you a comparison of Sensex@MRP values plotted against actual Sensex values for a period of 10 years beginning March 1999.

Click on the graph below to have a look.

Movement in Sensex along with its MRP

March 1999 to December 2000 saw Sensex quoting consistently above its MRP. Many of us will remember this time as the Technology boom. During this time Sensex was trading at a multiple of 30 times earnings. As the Sensex was clearly above Sensex@MRP, this was a good time to ‘Sell’. As expected a correction took place and within a year, Sensex was trading 15% below Sensex@MRP.

June 2000 to March 2003, saw the Sensex trading at around 30% discount to its MRP. The earnings for the Sensex companies were stagnant during this period but clearly the market was undervaluing them. In hindsight, this was a good period to enter the market.

Post 2003, earnings of the companies entered a high growth phase and this continued till March 2008. This is evident from Sensex@MRP which increased from 6000 levels in 2003 to 19000 levels in March 2008. But the market seems to have over reacted during this phase with the Sensex crossing the Sensex@MRP in September 2007 and December 2007. Infact December 2007 saw an over valuation of as much as 15% – a clear sign to Sell and get out.

As the sub-prime crisis and the fears of a global meltdown spread, Sensex crashed and reached 9000 levels in December 2008 and March 2009. What is interesting to note here is the fact that earnings of the Sensex companies had not suffered much. Sensex@MRP, which is driven primarily by earnings, was in the 17000 levels. Thus the market was without a doubt over-reacting and Sensex was quoting at almost 50% discount to Sensex@MRP. This was the buying opportunity of a lifetime.

Within a couple of quarters, Sensex zoomed up and traded close to its MRP. Considering March 2010 quarter results, Sensex@MRP comes out to 18,996. This means currently Sensex is just about 4% below its MRP. Thus, Sensex is close to its fair value and as investors we need to tread with caution. Quite a few stocks are creating 52 weeks highs and it is difficult to find value picks at the current moment. Infact, some stocks are currently trading well above their MRP and one can consider selling them.

Reliance Infrastructure Example

An example of a company quoting considerably above its MRP is Reliance Infrastructure. In 1999, Reliance Infra was quoting at a discount of 20%. It crossed the MRP in year 2000 and remained close to MRP till 2003 inspite of an inconsistent financial performance. Its earnings infact witnessed a drop in 2002 and 2003.

The company’s performance improved post 2003 and the price zoomed above its MRP. In 2004, the stock was quoting as much as 150% above its MRP. This seemed like a sell signal but the stock rose further to unimaginable levels in 2007. In two quarters i.e. from June 2007 to December 2007, the stock more than tripled.

The irrational exuberance of the market was visible as the stock quoted at a PE multiple of 50 at Rs. 2130. The price crashed soon and in March 2009, the stock was quoting at a 35% discount to its MRP. Again, the prices corrected and the stock is currently trading 50% above its MRP of Rs.746.

However, even with the market at 18,000, there are a few stocks which offer good value. Let’s take a look at a Sensex company which is currently quoting at a discount to its MRP.

Bharti Airtel Example

Bharti Airtel currently at Rs. 327 is quoting at a discount of 44% to its MRP of Rs. 589. Click on the graph below to take a look at Bharti’s historical valuations. Except for the initial years, Bharti has always traded above its MRP.

Leadership in the telecom industry coupled with high growth in the mobile market, helped the company record great earnings growth over the years. However, since March 2006 as competition intensified, the premium commanded by Bharti has decreased especially after Reliance Communication’s entry.

Further, the telecom sector has been seeing all sorts of problems including an intense price war, detrimental policies and very recently audacious 3G and broadband license bids. To add to this, Bharti also completed the acquisition of Zain Telecom which led to questions being raised about its financial position.

All this led to Bharti tumble to levels seen in March 2009. However, over the last few weeks, Bharti has picked up quite a bit. Bharti’s MRP works out to Rs. 589 considering an earnings growth rate of 18% which is substantially lower than its past growth rates thus making it a value pick.

Finally, how effective is this concept of MRP especially as it is based on past data? After all as they say past performance is not a guarantee for the future, is it? But as we saw in the graphs, over a long term, stocks tend to move towards their MRP.

So, the rule of buying at a discount to MRP (ideally 50%) and selling above MRP would ensure good returns. Once the stock crosses the MRP, the probability of a correction increases. There is however always the chance of error. There is a possibility of the stock running considerably above the MRP as seen in the case of Reliance Infra.

You may miss out on the upside fuelled mostly by sentiments rather than earnings. But provided you buy the stock at a 50% discount, you would already be sitting on handsome, riskfree returns and hence would rather let this risky upside pass!

Now, Stocks too have a MRP Tag

Posted on August 15, 2010August 19, 2019 by Jagoinvestor

Have you ever asked what is the MRP of a stock ? I don’t think so !

The reason many investors shy away from investing in stock markets is because it seems to be a gamble. With the markets fluctuating every day, dropping or rising at the slightest bit of concern or euphoria, one is bound to be wary of putting one’s hard-earned money here.

And most of us experienced the worst of this volatility during the market crash in 2008; some of us are still recovering from its aftermath. So, how can we ensure that there won’t be a repeat of this scenario? How do we ensure that we do not lose our shirt at the market and make our hard earned money grow into wealth?

We all know that it is important to invest in fundamentally strong companies.

But what is equally important, if not more, is to invest at the right price. But how do we find out the right price for stocks?

Whenever we shop for anything, we are guided by a MRP tag on the wrapper or pack. Unfortunately, we do not have such a MRP tag to guide us when we buy stocks, do we? Well, now you can even have a MRP tag for stocks!

Stocks@MRP can be a great tool for investors to make sensible buy and sell decisions based on fundamentals and not on market sentiments. MoneyWorks4me, have labelled stocks with a MRP tag; something which each one of us can understand and relate to.

What is Stock@MRP based on ?

This price tag for stocks is based on the factor which primarily drives the price of a stock in the long-term – the earnings power of a company. The concept of MRP is based on the fact that, while in the short term, stocks might be affected due to news, sentiments, FII movements etc. over the Long term, the market will invariably reflect a stock’s intrinsic value based on its earnings.

MRP is a tool which helps you to gauge whether the market is under reacting or over reacting to these. As sensible investors, we would be well served if we bought stocks at a considerable discount (ideally 50%) to their MRP and sold off stocks if they are priced considerably above their MRP.

To verify whether this method could have worked well during different time periods, good times as well as bad times, we back tested it for the period 1999-2010 and found that the results are quite gratifying.

Let’s understand this concept with the example of Wipro.

The graph below shows two lines. The Red line is Wipro’s actual stock price for the period 1999 to 2010, whereas the green line is Wipro’s MRP for the same period as calculated by us based on its fundamentals.

The graph shows that Wipro was considerably overvalued for the period 1999-2001 during the Tech bubble. The company was quoting great numbers with a 60% growth in earnings (9 year CAGR growth rate) from 1990 to 2000. Add to it the euphoria of anything related to the IT industry during this period and you see Wipro quoting at as high as 400 times its earnings.

On the other hand, the MRP offers a better view on the intrinsic value of the stock based on its earnings. Not surprisingly then, as the bubble burst the price rocketed down and reached its MRP. From 2001 onwards, Wipro’s price remained close to its MRP, thus indicating that the stock was more or less fairly valued.

Wipro quoted above its MRP values from March 2005 to December 2006.

In March 2006, it was trading at as much as 30% above its MRP. Thus, it is evident that the market was expecting above average earnings in the next few quarters; a difficult thing to achieve continuously.

The EPS for the company grew at an average of around 8% during this period on a Q-o-Q basis. This was a good time to sell the stock as the price rise was not supplemented by a huge rise in earnings.

However, things started turning south for the company post december 2006 with the PE contracting. The company registered a Q-o-Q drop in EPS in June 2007 and it seems the market over reacted to this with the price reaching as much as 20% below the MRP. The company’s earnings registered a drop, again, in June 2008.

Also, after reaching a peak in January 2008, the Sensex started plummeting with the fear of a global economic recession on the cards. Wipro was available at a discount of as much as 60% in December 2008 and March 2009; a clear buy indication.

Within 2 quarters the price of Wipro reached close to its MRP giving an investor, returns of around 50%. Today Wipro is quoting at around 10% discount to its MRP and therefore one should wait for it to come to lower levels to enter. (Read Nifty PE analysis)

Margin of safety

We all know about great value investors like Benjamin Graham and Warren Buffet, who insisted on always buying stocks with a margin of safety. However, it becomes difficult to confidently ascertain what the intrinsic value of a stock is and hence we end up paying a premium for a stock instead of buying it with a margin of safety.

Stocks@MRP helps you to ascertain the intrinsic value of stocks thus ensuring that you always buy stocks which are at a discount to the MRP. As seen in the case of Wipro, following this strategy would have yielded great returns and that too at minimal risk .

Outlook Profit magazine has published a special story on this concept titled “The Right Price” in their issue dated 9th July 2010. The concept can prove to be a very useful tool for investors, enabling them to enter stocks at bargain levels and exit when things start getting over-exuberant!

You can read more about this concept on our blog Stock Shastra. In the subsequent post, we will see how this concept can be extended even to the benchmark index Sensex. We will also take a look at a few stocks which are trading considerably above or below their MRP.

This is the first of a series of guest posts by Nikhil Kale from MoneyWorks4me.com.

Tax Deductions from Infrastructure Bonds under 80C

Posted on August 5, 2010September 8, 2019 by Jagoinvestor

Finally govt gave clarity about the Infrastructure bonds under sec 80C where you can invest upto Rs 20,000 for additional tax deduction apart from the current Rs 1 lac. Look more on Income tax slab .

Infrastructure bonds in India for tax deducations

Who can issue those Infrastructure Bonds ?

Life Insurance Corporation of India
Industrial Finance Corporation of India
Infrastructure Development Finance Company
Any non-banking finance company classified as an infrastructure finance company by the RBI also qualifies, for example : L&T Infrastructure Finance

Other Features

Lock in period of 5 yrs
Mandatory to furnish PAN (Permanent account number)
Minimum Maturity period of 10 yrs (you can get out of those after 5 yrs if you wish, but not before that)

Read about changes in Direct Tax Code which will not have these Infrastructure bonds

Where will this money be invested ?

The money invested in these Infrastructure Bonds will be invested in building of Airports, power plants, roads and ports, which is mainly to meet the infrastructure need of the country. This is a good move, where people can invest money for tax saving and even govt can raise funds to improve the infrastructure of our country.

How to exit from the Funds after 5 yrs ?

It depends. If the bonds are traded on stock exchange, then you can sell them after 5 yrs on exchange or go for manual redemption from the issuer (filling form for exit etc.)

Yield/Returns of the Bond

This detail will actually differ from issuer to issuer and has to come from them , but government has notified that the yields from these bonds will not exceed the yield of govt securities of similar residual maturity bonds, as reported by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) .

Who should Invest ?

As the returns from these Infrastructure bonds are not exciting, you should only invest if your risk appetite is very low and security is your top most concern apart from tax saving being one of the reason . If you are looking at growth of your investments , better invest in equity oriented products even if they are not tax saving products.

Note : Even after the govt have clarified about the bonds , they are yet to be issued by the respective companies , I think they would launch them at the end of year when most of the people are hunting for tax saving products .Look at this video where IDBI executive is talking about about Infrastructure bond.

Question : Are you going to invest in these Infrastructure bonds ? Yes/No ? Why ?

What is Real Return and How Inflation eats your money

Posted on August 1, 2010August 22, 2019 by Jagoinvestor

Recently all news dailies carried the headlines : ‘inflation rate has crossed double digits’. This indeed is worrying. So what is inflation and how does it affect the common man. In simple terms inflation is nothing but rise in the general level of prices of goods and services in an economy. What leads to this rise in the price of goods? It is ‘too much money chasing too few goods’ which leads to the rise in the prices of goods. It is a simple demand-supply mismatch. Because of inflation, our paper money or currency starts losing its value.

Some 15 years back when I saw my first movie in a movie hall it cost me Rs 15 to watch that movie. Now 15 years down the line, to watch the same movie in a multiplex, it costs me about Rs 225. So in 15 years the cost of watching a movie has multiplied 15 times. Now it might cost you Rs 15 just to park your car in the multiplex basement, forget about watching the movie in Rs 15. That’s inflation for you.

Explanation

Let’s take a simple example to understand this. Suppose you have a currency note of Rs 100. Assume that as on today with this currency note of Rs 100 you can buy 1 dozen apples (mind you this is just an example. In real life good quality apples are much more costly and I doubt if Rs 100 will even buy you half a dozen of good quality apples). But you don’t need these apples as on today and need them 1 year down the line. So you don’t buy the apples today as you can’t store them for one year as they will get spoilt. So you invest this Rs 100 for 1 year in a bank fixed deposit which will fetch you 8% at the end of 1 year. Now at the end of 1 year you have Rs 108. But let’s assume that inflation as compared to last year has risen by 10%. This effectively means cost of living or general prices of products have risen by 10%. So now the same 1 dozen apples which were costing you Rs 100 about one year back will now cost you Rs 110. Your money has grown by 8% (Rs 100 has become Rs 108) but the prices of apples have gone up by 10% (price increased from Rs 100 to Rs 110). So to buy the same 1 dozen of apples now (1 year down the line) you will have to put an additional Rs 2 from your pocket. This effectively means your currency or paper money has lost value. This is because of the effect of inflation. If the cost of living goes on increasing at this rapid rate every year, then 10 years down the line I doubt whether the same Rs 100 rupees will be able to buy even a single apple, forget about buying 1 dozen apples with Rs 100.

Had you bought the apples last year you would have managed to buy 1 dozen apples for Rs 100. But since you are buying them one year down the line and the return on investment (8%) that you have earned is less than increase in inflation (10%), you have to put more money from your pocket. So inflation erodes the value of your money over a period of time if the money is not invested wisely.

Nominal Returns and Real Returns

At the time of making investments you should make sure that, you earn a return which is higher than the inflation rate. Many people while measuring the returns on their investment forget to consider the effect of inflation. In the above example if we don’t consider the effect of inflation then our investment in the bank fixed deposit has earned 8% return. But this is not the correct way of measuring returns. This is just the nominal return. The return calculated after considering the effect of inflation is known as the real return. Real return can be calculated using the following formula

Inflation in India

Here r is the rate of return (8%) and i is the inflation rate (10%)

1.08 / 1.10 is 0.9818

0.9818 – 1 is -0.01818

-0.01818 * 100 is -1.8181

So the effective or real return earned on this investment is -1.8181%

So even on the face of it, it seems that your investment has made a return of 8% (nominal return). After considering the inflation rate (10%), the real return is a negative 1.81. Which means actually on maturity you did not make any money, infact your money has lost value due to inflation. Surprised and hence the name of the article – ‘Inflation – The Silent Monster’ – inflation silently erodes the value of your money if you don’t invest wisely. So consider the effect of inflation while measuring your returns on maturity. Use following calculator to find your real investments real return .

Children Education Cost Inflation

Whenever the Weekly or Monthly Inflation Number is declared by the Government, the number represents average inflation which takes into account the rise in the average cost of living. This is a much broader number. If we break down this broad number into different components then we realise that different components have varied impact on individuals. All people are impacted by common things like food inflation and fuel inflation. People who have small children have to prepare themselves for Children Education Cost Inflation and Children Marriage Cost Inflation. So how do Children Education Cost Inflation and Children Marriage Cost affect and why do parents have to plan for this? Let us try to understand this with the help of a case study.

5 Easy Steps to do your Child’s Education Planning

Sample Case Study

Let us take the example of Ajay. He wants to make his 1 year daughter, Priyanka a MBA when she grows up. Priyanka will take admission for the MBA course when she turns 21 years old. So Ajay has 20 years in hand to plan for Priyanka’s education.
The MBA course as on today costs Rs 4,00,000. If we assume that education costs (inflation) will rise by 8% every year, then the same MBA course will cost a whopping Rs 18,64,382 after 20 years.
To accumulate this Rs 18,64,382 in 20 years, Ajay will have to make a monthly investment of Rs 2046 per month if his investments earn a return of 12%. So even though the amount of Rs 18.64 Lakhs seems huge on its face, with regular investments, and the magic of compounding over a period of 20 years, this mammoth target can be achieved with investments of as low as Rs 2046 per month. But the secret to success is to start early and make regular and disciplined investments.
If the returns earned by our investments are 15% then the investment amount further falls to Rs 1421 per month. Historically equities have given annual returns in the range of 15% over a long period of time.
If the target of Rs 18.64 Lakhs has to be achieved without taking much risk through a Public Provident Fund (PPF) account which guarantees a return of 8%, then this target can be achieved with a monthly investment of Rs 3276 per month.

9 effective financial education tips for your Children

Importance of Starting Early

It is very important for the parent to start investing for the child’s future as early as possible. Starting early allows his money the much required time to grow and reap the benefits of compounding. Let us consider the above example of Ajay planning to accumulate money for Priyanka’s MBA course.

His goal is to accumulate Rs 18,64,382 in 20 years. To accumulate this Rs 18,64,382 in 20 years, Ajay will have to make a monthly investment of Rs 2046 per month if his investments earn a return of 12%.
If Ajay delays the investment plan and starts investment when the daughter is 6 years old, then in this case he will have 15 years to achieve his goal. In this case the monthly investments that he will have to make will rise to Rs 3956 per month to achieve his same target of Rs 18.64 Lakhs if his investments earn a return of 12%.
If Ajay delays the investment plan and starts investment when the daughter is 11 years old, then in this case he will have 10 years to achieve his goal. In this case the monthly investments that he will have to make will rise to Rs 8400 per month to achieve his same target of Rs 18.64 Lakhs if his investments earn a return of 12%.
If Ajay delays the investment plan and starts investment when the daughter is 16 years old, then in this case he will have 5 years to achieve his goal. In this case the monthly investments that he will have to make will rise to a whopping Rs 23205 per month to achieve his same target of Rs 18.64 Lakhs if his investments earn a return of 12%.

Use this Goal Planner Calculator to Plan your future goals .

The below table shows the monthly investment that will be required by Ajay to achieve his goal of Rs 18.64 Lakhs based on his investment time horizon. It is assumed that the investments will earn 12% in all the scenarios.

Investment Time Horizon (Years)	Return (%)	Monthly Investment Required
20	12	Rs 2,046
15	12	Rs 3,956
10	12	Rs 8,400
5	12	Rs 23,205

inflation in india

The sooner the parent starts planning for the child’s education and marriage the better. These are long term goals and need proper planning. This is the best gift that parents can give to their children. As a parent the sooner you sow the seeds of early investments, the bigger will be the fruit the tree will bear which will take care of your child’s all future needs, primarily education and marriage expenses.

Children’s Marriage Planning

Like education it is the same story for children’s marriage expenses (inflation). If you as a parent feel that today your daughter’s marriage will cost you Rs 7,00,000 then the same marriage will cost Rs 11.27 Lacs 5 years down the line if expenses increase (inflation) at the rate of 10%.

Sample Case Study

Let us consider the following case study to understand this thing better in simpler terms.

Sharon has an 8 year old daughter Mini. Sharon needs to accumulate funds for her daughter’s marriage. The marriage is planned 16 years from now.
According to Sharon, as on today, Mini’s marriage will cost Rs 4,00,000. If inflation (rise in costs) of 5% is assumed the same marriage will cost Rs 8,73,150 after 16 years.
If Sharon wants to make a one time investment which will give her Rs 8,73,150 on maturity after 16 years, she will have to make a lumpsum investment of Rs 1,42,429 (assuming the investment earns a return of 12% p.a.).

But many of us don’t have lumpsum amount to invest and we prefer to make monthly investments. To accumulate this Rs 8,73,150 over a period of 16 years Sharon will have to invest Rs 1,615 per month if her investments will earn a return of 12% p.a.

Watch this video which shows you the effects of Inflation in Zimbabwe and how the paper money has lost all its value.

Conclusion

Last but not the least to end the article here is something for you all to ponder over your money in the bank savings account is earning an annual return of 3.5% and the annual average inflation rate (increase in cost of living) is 5-6%. So if you calculate the real return how much is negative return that you are making or how much is the value that your money is losing???? Think about it

This is a Guest post by Gopal Gidwani , He writes on his blog www.bachatkhata.com