Category: Knowledge and Concepts

All you want to know about “Jeevan Varsha Analysis”

Posted on by Jagoinvestor

Update : As pointed by Ranjan, there was a mistake in the analysis about the paying term of the policy, I have corrected it now. Please re-read the analysis.

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Today we will talk about the market product “Jeevan Varsha”, If you are a regular reader of this blog, by now you must have gained enough knowledge on how to evaluate a product like this, if not then go ahead and see.

Jeevan Varsha

JEEVAN VARSHA

You can see the features in detail here . Mainly there are 2 things .

Survival Benefits

  • 10% of the Sum Assured is payable at the end of 3 years.
  • 20% of the Sum Assured is payable at the end of 6 years.
  • 30% of the Sum Assured is payable at the end of 9 years
  • 40% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 12 years.

Guaranteed Addition

The policy provides for Guaranteed Addition at the following rates

  • Rs. 65 per thousand Sum Assured per year for a policy of 9 years term.
  • Rs. 70 per thousand Sum Assured per year for a policy of 12 years term

We will analyse the policy for 12 yrs here . We will talk about two things using an example.

1. Returns from this Policy at the End

2. Can we do better than this policy with same amount of premium [ you know we can 😉 ]

Example : Lets take an example of a person 30 yrs, who takes this policy for Rs 5 Lacs and wants to make yearly payment.

Tenure of Policy : 12 yrs
Tenure of Payments : 9 yrs
Sum Assured (SA) : Rs 5 Lacs
Premium : Rs 78500 (calculated adjusting Mode rebate and High Sum assured Rebate)

Method of calculation of Premium

Total Annual premium for 30 yrs old for 12 yrs policy = 165.30
Mode Rebate of 2%
High Sum Assured rebate of Rs.5 .

So Total premium = (500000/1000)*(165.3 – 5) * .98 = 78547.0 (So i took it approx 78500 .

In Case of Survival , he will get

In 3rd Year : Rs.50,000 (10% of SA)
In 6th Year : Rs 1,00,000 (20%)
In 9th Year : Rs 1,50,000 (30%)
In 12 Year : Rs 6,20,000 [2,00,000 (40%) + 4,20,000 (70 for per 1000 for 12 yrs , 70 * 12 * 5,00,000/1000 ]
Returns from this Policy at the End

Now how do we calculate the returns from this policy for this person. There are two way (Models) of doing this . One way is that we can just add the amount of money he receives from the policy and see how much total money he gets at the end of 12th year.

The other way is to assume that he is investing his money (which he gets at 3rd , 6th and 9th) year somewhere , so that he can get it at the end of 12th year (this way is a better way of calculating) .

First Model : Amount is just added

Total Sum received = 50,000 + 1,00,000 + 1,50,000 + 6,20,000
= 9,20,000

Second Model :

Amount received is invested @8% such that he recives it at 12th yr . (for 9 yrs , 6yrs and 3 yrs)

50,000 after 9 yrs : 99950 [ 50,000 * (1.08)^ 9 ]
1,00,000 after 6 yrs : 158687 [ 1,00,000 * (1.08)^ 6 ]
1,50,000 after 9 yrs : 188,957 [ 1,50,000 * (1.08)^ 3 ]
6,20,000 : 6,20,000

Total = 99950 + 158687 + 188,957 + 620000
= 10,67,594

We have not consider Loyalty additions and lets us see what are the reasons?

Bonus’s and Loyalty additions are not guaranteed and thats the reason you cant claim it as entitlements. These components are not backed by the sovereign guarantee that extends to the sum assured and guaranteed additions components.

In the (unlikely) event of Company going insolvent, you’ll only be entitled to the sum assured, at the time of death or on maturity, and the guaranteed additions thereon.

This applies to any Insurance company with products giving Loyalty Bonus as one of the components.

Now lets calculate the CAGR return from this policy, We have to use annuity formula for it for 9 yrs and then simple compound interest formula for 3 yrs. The formula would be
A = [ annuity part for 9 yrs] * [compound interest part 3 yrs ]

A = [ P * [{(1+i)^9 – 1 }/i] * (1+i) ] * (1+i)^3, where

A = Total money he accumulated till now .
P = yearly Premium (78,500)
i = CAGR return which we want to find out .

What have we done here?

The person we have calculated annuity returns for first 9 yrs (because he is making the payments for 9 yrs), then he does not pay anything for 3 yrs, so we have calculated compound interest for next 3 yrs. It may be a bit complicated to understand i know.

So

For First Model

The value of i which satisfies this equation is 3.3%, Yes you read correct. But this is not a good way of seeing things, so lets look at Second Model.

>>> (78500 * (1+.033) * ((1+.033)**9 – 1)/.033)*(1+.033)**3
919262

For Second Model

The value of i which satisfies this equation is 5.1% . This is the true representative of returns .

>>> (78500 * (1+.051) * ((1+.051)**9 – 1)/.051)*(1+.051)**3
1060497.7183573653

thanks to “Raja” for correcting my calculation

Which model is more better?

So lets take the Second model as the standard model for evaluation, So we conclude that returns from this policy would be around 5.1% considering

Consumer is smart enough to invest the proceeds again into some debt product using which he can get 8% returns .

Note that this return is considering there is no Loyalty Additions because they were not assured.

Total payment in 12 yrs was 12 * 79,000 = 9.48 lacs and at the end of 12 yrs he gets

9.2 Lacs (First model , 50k , 1 lacs , 1.5 lacs and 6.2 lacs, not reinvestment)

OR

11.78 Lacs (If proceeds are reinvested)

Some policy lovers would argue i am not considering Insurance and tax benefit part.

Regarding Tax benefit : We will compare this product with PPF, Mutual funds and Term Insurance and they also have 80C benefit with them, so tax benefit is something common with all, so there is nothing special with this policy regarding Tax benefits. For Insurance I will cover it in next part which we will discuss.

Can we do better than this policy with same amount of premium

Let us first understand the Insurance part.

The sum Assured is 5 lacs, so if a person dies before 3 yrs, he gets 5 lacs, if he dies after 3rd yr, he will also get the Guaranteed additions. So the maximum a person can get by dying is in 12 yr, in that case he will get 9,20,000 (50k, 1 lacs, 1.5 lacs, 2 lacs + 4.2 lacs GA, No loyalty additions in this case).

So lets be graceful and say that this person will get 9.2 lacs in case he dies.

The first thing to note here is Insurance cover, I don’t know what will happen to the family of this person if they get 9.2 lacs as Insurance money. If a person has the ability to pay 78,500 per Annam as premium, a wild guess for his Insurance cover is around 30-35 lacs at least. So the Insurance cover is not enough

Now lets see, what I recommend for this person who pays 78,500 per year to take care of his Insurance of 9.2 lacs.

So a person who pays 78,500 per year, can divide his 78,500 yearly payment into two parts, For insurance and Investment separately. You know what i would suggest, its simple Term Insurance and Investment in PPF or MF’s

Read Importance of Insurance (Term Insurance)
Read about Mutual funds and how to choose them

Let us first take care of his Insurance part, though he is covered of max 9.2 lacs just for 12 yrs, we are not that uncaring in nature to under-insure him, we understand importance of Insurance and his Family needs and the tenure of cover should be 25-30 yrs, not just 12 yrs, His Insurance requirement is around 30-40 lacs and we will provide it anyhow, even if the investments are to be compromised .

So we will try to provide him 35 lacs cover for 30 yrs.

For Defensive Investor

Insurance

Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)

Investments

So he is left with 68,900 (78,500 – 9,600), for his investments. If he invests this in PPF (though there is limit of 70,000, lets assume he can do it). he will get around 14.12 lacs (annuity formula) at the end of 12th year.

He can then take out 1.73 lacs out of this to fund for his Insurance premium for next 18 yrs left, still the amount left would be better than the Jeevan Varsha. The other alternative is to keep the money in some Fixed Deposit and keep using the interest amount to fund Insurance premium for next 18 yrs.

There can be other ways of doing it, but the main point is that we have done better than Jeevan Varsha in all respects.

This investor can also use balanced funds for investments.

For Aggressive Investor

Insurance

Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)

Investments

He can invest 68,900 yearly (5741 per month) left in Equity Diversified Mutual funds using SIP every money month in max 3-4 mutual funds.

He should expect to get around 12% compounded returns over 12 yrs , and your money should grow to 18.5 lacs (12% is again not guaranteed , its not based on Historical returns )

Summary and Notes

We have seen the policy from a broad level and see its main components, we have not seen small details, because they are not significant enough to change the views anyways. We have seen how its too complicated and provides returns which are less than what you can easily get in PPF.

Conclusion

Term Insurance + (MF or PPF) is a great combination, its easy to understand .The main this is to first Insurance your self Sufficiently and then think about investments.

That’s what i had to say for the day, don’t forget to recommend this blog to others so that they can also benefit. Also be sure to follow me on twitter here in case you are on twitter.

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Disclaimer : The views on this article are my personal. All the things discussed on this article are for learning purpose only. This blog will not be responsible for your investment decisions. There may be some mistakes while calculations, so please do your own calculations for taking any decisions. thanks

Insurance Presentation

Posted on by Jagoinvestor

I have created a small and simple presentation for newbies regarding Life and Health Insurance . It will help new people to understand the importance of Insurance .

Life And Health Insurance

View more presentations from manish.pucsd.

Leave Travel Allowances and medial Reimbursements – The tax free allowances

Posted on by Jagoinvestor

As we are in mid Feb of the year and its tax time, I thought to talk a bit on LTA and Medical reimbursement benefits. Though many of you might already know about it, let me go over it in brief for readers who have less knowledge about it.

Leave travel allowance

What is LTA ?

As the name suggests, LTA i.e Leave Travel Allowance is an allowance that an employee receives form his employer for his traveling expenses while he/she is on leave. This allowance is given only for the domestic traveling, international traveling is not covered in this allowance.

There are normally two situations when employee gets this allowance :

#1. Employee receives this allowance while traveling alone or with family or dependents from his current employer.

#2. Employee receives this allowance while traveling alone or with family or dependents from his former employer after retirement or termination of job.

It is the benefit given to a salaried employee and you can claim travel expenses from any one journey in a year. Lets see some important features of this allowance:

Features of LTA

  • There is a block of 4 yrs decided by govt ( current block is 2006-2009). In a block you can claim LTA for any two years. For other 2 yrs you cant claim it, so total 50,000 will be taxable in those 2 yrs.
  • These blocks are not financial years (April 1 to March 31); they are calendar years (January 1 to December 31).
  • If your LTA is not utilized, it gets added to your salary and you will be taxed on it.
  • LTA covers travel for yourself and your family. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if your spouse is working) and children.
  • The entire cost of the holiday is not covered. Only the travel costs are covered. So, whether you fly, hop on to a train or take public transport, you will have to show the ticket to claim your LTA. This means you will need to keep your air, rail or public transport ticket.
  • If an employee doesn’t claim once or twice in a block year, he/she can carry forward one claim to the next block year. But the condition is he/she has to claim for that allowance in the first year only of that particular block year.
  • If husband and wife both are receiving LTA then they can claim for the allowance in the same year but for different destinations.

Restrictions on claiming LTA

  • You can claim on only twice in a block year
  • Only actual cost of traveling is covered in this allowance
  • You cannot claim LTA 2 times in a year.
  • If the children are born after 1 October 1998 then you can claim for only 2 children’s traveling expenses. There are no restrictions for the children born before 1 October 1998.

Watch this video of rules and exemptions of LTA:

How much amount can claim under this allowance to get tax benefit?

You have a limit up to which you can claim your spent amount on LTA and medical bills and save tax on that part. If you didn’t claim it, for that much amount you will be taxed .

Limit for LTA : 50,000 per year
Limit for Medical Bills : Rs 15,000 per year

So from your total salary, you can save tax on this 65000 if you want, if you don’t claim it, you will have to pay tax on this part .

Medical Reimbursement

You can also claim deductions on the medical bills for medicines and doctor visits. You just have to get the bills and submit a proofs .

The bills can be in the name of you or your dependents .

Final Note : Utilizing this benefit just requires you to keep the documents ready. many people do not claim this benefit because they are too lazy of keep the documents safe. Don’t be lazy …

What is mean by Risk Appetite? What determines Risk-appetite?

Posted on by Jagoinvestor

Have you heard the word “Risk Apetite”?

You might have heard this word from your mutual funds agent, your Ulip agent, your stock broker, from analysts giving tips or any other place, we hear the word and then we feel we understand it. may be you understand it, But how do you define it?

risk appetite

One of the reader asked me to include this in my article and it seemed a good idea to me. Before writing this article, I had a good understanding and explanation of “What is Risk-appetite”? but instead of using my words I thought it would be a good idea to surf the net and try to find some material on it to help it write article. As expected, each one was totally correct, but not easy to understand by common public.

So at last I thought I should write it the way I see it and feel it. One of a simple funda I apply in my life is “if its complicated, its not worth”, So let me start this small explanation.

What is Risk appetite?

Risk appetite is the amount of risk you can take on your investment. It is the point till which you feel that you should be in the game because still in the long run you will be rewarded finally. Till that point there will not be enough change in your mental state.

The moment it reaches a point from where you feel like getting out is the best thing you can do, That is the point where you accept that you were wrong at the time of investment. that’s your Risk appetite point. Now this is for a situation where you can not decide in advance about your risk.

Lets see a Psychological aspect of this, When you see your money increase or decrease it has direct relationship with your emotional state. If your money keeps increasing, you will feel euphoria and get excited, you will be on top, and when you see it decrease or going down day by day. Our emotions guide us in our life, and they are very helpful in your financial life (to determine risk).

Lets see an example :

Ajay and Manish invested 100 in Share A, After some days the value dropper to 90, at this point both were calm, and accepted that this happened because of market volatility and its totally normal. After some more days price went down to 70. At this point Ajay thinks starts feeling oohh.. and oucch.. in his stomach.

This is the point where his emotional pain increases to a point where he can no longer stay with this investment. That’s the risk Appetite for Ajay. whereas Manish is not affected that much, still he can take loss of 20 more, only where prices drop to 50, he will feel jitters.

What determines the Risk-appetite?

Risk Appetite is determined from many factors like Your Expectations, Your current Situations and your past experiences.

Your Expectations

You risk appetite has to be proportional to your expectation. If you want more you Will have to take more risk.

In the above example, Ajay will exit the investment and take Rs.30 loss, but what if Shares drop to 60 and then starts moving up and up and finally reaches 130. Who will make profit. The person who had more risk-appetite.

Your Current Situations

Your current situations determine your risk appetite, If you are sound financially and can afford to loose more, you can have high risk appetite and vice versa. A person with a family to support will have less risk appetite than some one who is is totally independent and has all his salary to spend on his own.

Your Past Experience

Obviously, what happened in past with you in different situations will determine your future decisions. People who lost lot of money by investing in Jan 2008 will now have less risk-appetite, because next when they invest there money somewhere, they will get panicked easily by a small drop and hence may get out fast.

Where as a person who made great money in 2003-2007 bull markets will have high risk appetite.

I personally like Equity a lot, the reason may be because I want to make lots of money fast (expectations), I can afford to loose some money currently because of less responsibilities (current situations), and because I have made some (very small number) of quick profits (past experience).

What is good? High or Low Risk Appetite?

Its a personal thing, There is nothing like good or bad. Its a subjective matter. At last everything boils down to “You get what you wanted”, It must give you emotional satisfaction and joy.

There are people who are fine with 9% return per Annam and there are people who are not even satisfied with 20% returns.

What is Risk Factor of a Product?

Many people do not understand what is there risk appetite, I have friends who invested in Dec 2007 in ELSS funds, and cried a lot after it went down by 50%. The reason was they never understood the risk factors. I also saw my investments drop to same levels, but my mental state was not affected because I knew that it was possible with mutual funds and before investing I had accepted that if it happens, Its fine.

Risk and returns are always proportional. If A gives more returns than B, than A has to be more risky than B.

Generally people choose a product which matches there return expectation and then compromise with the risk and then later when there is loss more then there risk appetite, they cry.

The better thing would be to choose some thing which matches your risk-appetite on risk side and then accept that you deserve the returns provided by the product.

I know people who want more than 12% returns and also don’t want to see there investments see any negative returns ever. they are totally foolish to expect this. This will not happen.

Also I know people who are ready to see there investments dip by 30-40% with happiness but they only invest in PPF or bank FD’s, these people are bigger fool than former one;s, by not utilizing the equity power.

I hope you got all of your answers. If you still have any query feel free to ask us. You can leave your doubt in the comment section.

Early Investor , Smart Investor – magic of compounding

Posted on by Jagoinvestor

You are 25, and want to retire at 60, after 35 yrs. You earn anything more than 10k+, and can save more than 2k per month for investing if you wish. You might be earning 30k or 60k or whatever, but I am considering an average urban Indian who is earning 10k or 12k or anything like that and can save more than 2k per month.

early investor

Now, What would you like to do?

Choice 1 : Start now and invest total of 8.4 Lacs (8,40,000) distributed in a span of 35 yrs (till your retirement).

Choice 2 : Or after 15 yrs, when your salary is increased and you have good money, then Invest 72 lacs (72,00,000), in a span of 20 yrs (start when you are age 40).

In Choice 1 you will have to invest 2,000 per month for 35 yrs, so you invest total of 2000 * 12 * 35 = 8,40,000 (8.4 lacs)

In Choice 2 : You invest 30,000 per month for 20 yrs, so you invest total of 30000 * 12 * 20 = 72,00,000 (72 Lacs).

In choice 1 you pay less than 12% of what you pay in choice 2. I am sure that you must have got a hint by now that which choice will lead you to generate more money, But it has to have some assumptions.

Choice 1 : You are investing for 35 yrs. What is the return we should expect in this case, In last 29 yrs of history, Indian Equities have returned 17.5%, So we will expect same return of 17.5%, but I am expecting it to be much more.

Choice 2 : In this case you are investing for 20 yrs, we can easily expect close to 15% returns in this case.

Lets reveal the secret and see the numbers now.

Choice 1 : You pay 2000 per month for 35 yrs @17.5% CAGR, total amount at the end : 5.9 Crores

Choice 2 : You pay 30000 per month for 20 yrs @15% CAGR, total amount at the end 4.5 Crores
The graph below shows how the money increases with each choice (Early start and Late Start, I spent 2 hrs figuring out how to plot this graph using gnuplot (linux command for plotting graphs … man, it took me so much time to just do this)

CLICK ON THE GRAPH TO ENLARGE …

Now, What is the Learning?

This article is for people who think they don’t earn much money to invest, There are many who earn 7k, 10k or 15k per month and there are many who earn 30k, 40k, 50k per month. People who earn less often think what can 1k per month do, they fail to see what will happen in long term, they do not appreciate power of compounding.

Wealth is generated by people who invest smartly and with discipline, not who just earn lots of money.

Where to invest?

If you are a regular reader of this blog, then you know the answer, if you don’t, then let me tell you, Its Diversified Equity Mutual funds, take a SIP and invest small sum of money every month, The more you can contribute in the start, the lesser you need to invest in later years of your life.

For example : If you can invest RS.4000 per month (Instead of Rs.2,000) in the starting years of your career like 10 yrs, then you can stop investing for rest of 25 yrs and still generate more wealth (around 7 crore), considering same interest of return.

Is it practical to put 4k for starting 10 years and then leave it for 25 yrs, May be NOT !! .. People tend to take the money out when they require it and never give compounding any chance to show its strength. But if people leave it, they will see how amazing and powerful it is.

Why do you believe me and whatever I write here?

Ans : You never believe me or for that matter any one when it comes to investing and your money, you just choose to learn from me and check the authenticity of what I say, you can read what I tell you and what I write, Ask your self if there is any logic behind anything or not.

When I say expect 17.5% CAGR return in 35 yrs time duration, Its because equity outperforms every other asset class in long, and it has happened over centuries.

When I say that if you invest X amount every month @r% return for t years, you will get A amount at the end, you should go and check using your own calculations to see if the figures are right or not.

For people who are new to Mutual funds and don’t how to choose it can read my earlier post : https://www.jagoinvestor.com/2009/01/what-to-look-for-while-choosing-mutual.html

Be a early Investor, be a smart Investor.

I expect your comments related to this article whether you like it or not. If you have any query you can leave it in our comment section.

What to look while you choose a mutual fund :)

Posted on by Jagoinvestor

One of my readers was confused with the question “Which mutual fund should he invest in through SIP ? ”

He started an SIP of 1000 in Reliance Regular Saving mutual fund , suggested by an agent . How was his investment? It is a mistake or a good decision? This is a common problem with investors .

Let me today give you a simple way to think and a methodology to choose mutual funds for your investment depending upon your requirement . In this article we will only talk about investment in Equity Diversified mutual funds for long term (5+ years) .

choose mutual fund

For Beginners : Read what are mutual funds

Question : What does the return from mutual funds tells us? and how do you interpret it?

Ans : Understand that the returns of a mutual fund shows you how did it perform over than period, How did it manage his funds and took there investment decisions in good times and bad times. It means that you should see its performance in good times and bad times.

A simple analogy can be how do you want your wife/husband to be like, One who is really great in good times and excellent person to be with in Good Times, when everything in life goes great.

Or you want a person who is there with you in good and bad times, supports you in good and bad times. When times are good, everyone behaves good and performs well, There is a saying “Don’t judge people by there Sunday appearances”. Look at a bigger Picture.

Looks how a mutual fund performed in good times, in bad times, did it invest according to there plan, Is there management excellent. It does not matter if they were No 1 or No 2 this year or that year.

But if they were just good in every year, and perform well above there benchmark, and keep performing over time, Its bound to be become an excellent long term consistent performer.

Question : What about the last 3 yrs returns of a mutual funds?

Answer: It will give you a good indication, but not an overall picture. If you see 3 yrs return, you have to understand that out of those 3 yrs, 1st and 2nd years were strong bull markets, where any dog and cat has also performed very good if not excellent. and in last year they gave very bad returns.

So ultimately they will be in positive returns in 3 yrs. You should also look at there 5 yrs return and 3 yrs returns. Both in synergy with each other.

When you see Reliance Regular Savings Fund you can see that its 3 yrs returns are 7.82% which is very good compared to other funds (this fund is Rank 2/135 in the 3 yrs category ), but when you see its 1 yrs returns, you can see actual face, the returns are -51%, if you see the rank for 1 yr, its 127/210.

If you look at its portfolio allocation at https://www.valueresearchonline.com/funds/portfoliovr.asp?schemecode=2790

you can see that its allocation to mid cap and small cap companies is very high, It can give you good returns but also it has very high risk. Please understand that i am trying to say that this fund is good or Bad. No !! I am trying to tell you what to see, how to interpret.

What factors should you keep in mind before choosing a Mutual Fund?


People get excited by seeing returns of years 2003-2007, that was in range of 35-50%. Which is not possible in long term. Now from this point on (2009), the returns in long term will be in range of 12-15% (max 20%). Its difficult to see this kind of bull run in another medium term (5-7 yrs).

Now you should just expect normal 12-15% kind of returns in long term.

So, whom should you rely on, On mutual funds who launched them selves near 2001-2002 and gave great returns from there onwards because they them selves don’t know how they gave them.

Or shall you choose those mutual funds who have seen all types of markets in India and continuously gave much better than average returns from long term, They performed in good market, bad market, quiet market and roaring market.

So the things you should look at mutual funds are :

1. Long term performance, It should figure out in top 10-15 at least over 5 yrs returns.

2. They should have a track record of consistently outperforming its Bench mark (this shows that they did better than what they were based on and tracking ).

3. See that its management is good, Don’t just buy Any Idiot MF just because it returns 45% last year, but you have never heard of its parent name. Some long term Great AMC’s are DSP, SBI, Sundaram, HDFC, KOTAK, PRINCIPAL, HSBC, RELIANCE (In order of my liking), Make sure you dont follow this, it is just to give an idea. DSP is one of the best and old AMC in India, dont look only for Indian names.

4. Once you shortlist some mutual funds, then look for its portfolio allocation, see how it has put its money for large, Medium and small cap companies. If its concentration is high on Mid and small cap funds, it means that it has more than average risk, but potential for very great returns also, choose it if it fits your risk appetite.

For people who just want to take a short route and want to choose some mutual fund based fast, but with not great accuracy, you can just see the list of mutual funds appearing on 5 yrs returns list or since inception returns (Should be greater than 3-4 yrs at least) and choose any one of them.

This will make sure that you have not made a bad choice, if not great.

Some links :

To see the rankings of mutual funds and compare them on different parameters

1. Go to https://www.valueresearchonline.com/funds/default.asp

2. In the right side, you can see “Compare Fund”, choose “Open Ended” in the first box and for the second part choose “Equity Diversified” or “Tax Planning” or any other thing which you want to compare. and now click on Go.

3. You can now see a list with different parameters like Snapshot, Performance, Portfolio etc etc.

4. Click on Performance and then you can see different parameters like 1 month, 6 months, 1 yr, 3 yr, 5 yrs and ranks. You can sort them by clicking on 5 yrs or 5 yrs ranking to see the ranking. Example. When you click on 5 yrs returns on the top, you can see the ranking either in ascending or descending form (click once again to see in different order).

5. In the same way you can choose different parameter also.

This article gave you a general idea on how to choose a mutual fund and interpret different things. You can also do some advanced analysis the way I discussed in one of my previous article : https://www.jagoinvestor.com/2009/01/95-of-salaried-people-are-rushing-to.html

Question : Which Mutual funds I will invest in if given a choice?

Ans : I hate this part for suggesting some mutual funds, but i know people look for it and expect so let me give some.

Equity Funds :

1. Sundaram BNP Paribas Select Focus Reg
2. DSPBR Equity-D
3. Magnum Contra
4. Sundaram Taxsaver (For TAXSAVING) : see this for more
5. Nifty Beas (Index Fund, take SIP in this) : see this article for more

If this article helps you in anyways, please comment to tell if you liked it and learned anything important from this. I would be glad to hear from you. If it helped u anyways, this article would be considered as success.

I write this article on Saturday, 3:00 Pm after a chat with one of my readers. I am now getting ready for a Trek next morning. Looks like I have written for next 2-3 days of my quota, huff … Feeling tired now. (kidding).

Disclaimer : I think Reliance Regular Savings FIf this helps you in anyway und is a good fund. But there may be much better choices for long term. I hold no mutual funds other than some tax saving funds.

The Chemistry of Equity and Debt

Posted on by Jagoinvestor

Following is a small Table which discusses the Equity and Debt allocation for your Investments . (Click on the chart to enlarge it). It will tell you how Equity and Debt should be used for long and short term financial goals .

 

It has two parameters .

1. Importance of your investment goal (Left Downside)
– Low : Buying an a/c for you car , Going for a vacation .
– Medium : Buying a Car , Saving for a second home
– High : Retirement , Child Education , Family health Related things , Down payment for Home Loan .

2. Time Duration of your Goal . (Upper Right)

– Short term : 1- 2 years
– Medium Term : 3-7 years
– Long Term : 8+ years

Basic Idea : It is based on the following facts .

– Equity is extremely risky in short term
– Equity is highly rewarding in long run with almost no risk
– Debt is safe always
– Debt eats away your money purchasing power.

So on based of these observation. Your Equity : Debt allocation should be based on both parameters of Importance and duration of goal , not just one one them


Some Examples

Example 1 : Ajay wants to invest 1,00,000 for his brother Education in next 1 year .

His Action : This is extremely important thing and cant be risked with , also its a short term goal. Equity should not be used . He should invest in anything giving him pure protection of his money (even though he does not get high return) . A plain FD for 1 yr will be good enough .

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Example 2 : Robert want to save some money for his house down payment in next 4-5 yrs .

His Action : As this is an important thing with time goal of medium term , His investment should be mixed in both Equity and Debt . He should invest 35-40% in Equity (SIP in mutual funds) and rest in Debt products like Tax FD’s and Debt funds% .

Alternative : He can also choose to invest his money Balanced mutual Funds (as they have mix of both Debt and Equity built in)

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 Example 3 : Ankit wants to retire in next 25 yrs .

His Action : Now this is a important thing , with a goal tenure of around 25 yrs . There is no reason why Debt must be involved here at all . The matter that Equity is risky does not apply here its true for short – medium term , not for Long term like 25 yrs . (probabilistically only , If you are extra unlucky , what can one do) .

He must invest 50% in some good 3-4 Equity Diversified Mutual funds though SIP route and and he can invest 50% of his money also in some very good fundamentally strong mid caps and large caps stocks directly .

Note : Understand that , your definition of “Importance of Goal” and “Duration” depends on your situation , For me buying a Car is “Not Important” ,whereas for some one with a family of 4 and requirement of often going places can be “Important” .

Review of Jeevan Astha Collections

Posted on by Jagoinvestor

Few days back I had talked about “why an investor should avoid Jeevan Astha Policy”

But looks like Indians have developed unshakable belief and trust in these companies. Let us see some statistics about the policy.

review of jeevan astha collection

A report from Economic times (Thursday, 22nd Jan 2009) says

“Collections for the policy which closed on Wednesday is expected to cross Rs.8,000 Crore. Some insiders say that collection could go even higher. Although the corporation had said that it targeted collections of Rs.25,000 Crore this was seen as a marketing gimmick not a real target.

– A sports person is understood to have put Rs.35 crores.
– A leading Film actor has invested Rs.8 Crores.
– A little known business family has invested Rs.50 Crores.
– Insiders day that over thousand of policies are over Rs.1 crore plus.

The policy has helped to bring LIC’s flagging mark ship back on the track and has enabled several offices in metro centers to achieve there targets for whole year.”

Despite the success the scheme has some limitations. Jeevan Astha is more of a bond and less of an insurance policy. Although the sum insured is five times the premium in its first year, the cover declines to 2 times in the second year. Smaller investor who were not all that savvy in reading the fine prints were mis-sold the policy promising returns of 10%.

My comments :

Goodwill and trust is the biggest thing, especially in country in India where people are not not much educated and can not take much informed decisions.

I can imagine SBI failing or running with public money, but not LIC (pun intended). That’s the kind of faith and trust in India. Which is fatal.

It may make sense for a filmstar or a sportsperson or a big business family to put there money in this kind of Policy, because there 10 crores will become 20 crores in 10 years (10 crores in 10 years is the return), and I am sure even if that is 7% CAGR return, its a good return for them as 10 crores is a big money. But we have to see it as a small investor point of view and goals.

A small investor who invests 10,000 or 50,000 in it and get double of his money after 10 years.

I am not sure if he is getting any return at all when you consider 6-7% of inflation. He is just getting his capital back with almost same purchasing power.

I come from a very small town in UP and I am sure that it represents India when you see per capital income, education level and living standard. And people there are not ready to hear anything other than LIC policies and FD’s of SBI or some other nationalized bank, will a small percentage having heard of Mutual funds or ULIPS even term insurance etc.

This is the story of India.

When millions of uninformed and unrealistic investors come together and put there small money together in these kind of polices, its bound to generate thousands of Crores of Rupees.

But I am sure of one thing, who ever invested in these kind of policies will get guaranteed returns, but I am not sure if he will get guaranteed and benefit for there investments when you take it for 10 yrs period. People investing there money in this policy are going to double there money in 10 years to buy something which will more than double in price in 10 years.

Fear is an excellent thing to take advantage of, when financial markets are down heavily and thing are looking bleak in short term, Anything with guaranteed “tag” will act like a magnet to hard earned money.

I am happy to not invest in anything like this and do not want my money to double in 10 years.

Jago Investor, ab to Jago !!!

Do you have an insurance policy? -Read an amazing irony about Insurance

Posted on by Jagoinvestor

Imagine you are 25 years old earning 6 lacs/year, with a family to support financially. A Term insurance policy with some cover (may be 25 lacs) will have premium of 5k per year (for 25 years old) as the premium for this policy.

Almost 99% people need Term Insurance, But most of the people show good amount of reluctance, because they see “wastage of premium” incase nothing happens to them.

The amazing irony about Insurance

Let us try to see what are the reasons for this?

This happens because of some psychological reasons. Some of the reasons and counter arguments are :

1. People are not ready to accept subconsciously that they have equal probability of death like others; everyone assumes themselves to be little safer than others.

Counter Argument : A different case, someone tells this person that he has chances of dying within 20 years somehow explicitly, there are greater chances that his perspective about Term Insurance will change and he may go for a good amount of cover with this premium, the reason is that now he sees these [premiums as risk cover fees and not wastage.

Now he has convinced himself that there are good chances that his “death” is possible and his family needs some good cover, although there has not been any change in his lifestyle or life in general, all what matters is his attitude towards Risk coverage.

2. People do not concentrate on the value provided by Term Insurance and its cheapness, it is taken for granted.

Counter Argument : I did this very small survey where i asked my friends online. See one of them below

manish_chn: if your company says that it will cover your family for 25 lacs, but will cut your salary to some %
manish_chn:what will be the max % you are ok with
manish_chn:just the first number which comes to your mind
manish_chn:no calculation
manish_chn:please
rajagopal: hi
rajagopal: never thought about such things.
rajagopal: probably 5%?
rajagopal: without any calculations

This shows that a person somehow feels comfortable with 5% of his salary getting cut for just 25 lacs of cover for his family; it means that he can pay the price of 5% of his salary per year for 25 lacs cover.

Some people were even ok with 10% or 7%, on the average it was greater than 5%, whereas the real worth of cost is less than 1% of their salary (everyone’s salary is more than 6 lacs/year ). Cost of 25 lacs cover in market = 5k – 5.5k per year.

3. People pay money from their pocket after getting salary, so it feels that they are giving money unnecessarily.

Counter Argument:

If you make term insurance mandatory for everyone and cut 1% from their salary (6 lacs salary, and cut 500 per month for insurance premium of 25 lacs). In this case there are very high chances that almost everyone will feel that it’s a good thing. And they will even appreciate this move (there are always exceptions, but i can’t help those people).

What it shows is that people are lazy, when you do things purposefully; there are great chances that they will understand the importance of something.

So, if you give them 100% salary, they might not take the term insurance.

But if you give 99% salary and 1% is cut as insurance premium, many people will tell others how great there Company is !! (You can also just cut 1% and put it in your pocket and give them 99%, some people don’t even notice these things)

Summary

Understand that a lot depends upon yours perspective about something. When you see things in a different way, its meaning and importance chances totally for you.

What is Nifty BeEs ?

Posted on by Jagoinvestor

Nifty BeEs an Index based ETF, which tracks Nifty index . Nifty BeEs can be a important part of your portfolio.

One unit equals around 10% value of index , Means if Nifty is around 3000 , one unit of Nifty BeEs will be around 300 (can be less or more a bit also , depending on demand and supply)

Some Advantages of Nifty BeEs

Simplicity : It is very simple to invest in Nifty BeEs, You can buy and sell it easily on stock exchange from your demat account, treat it just like a share.

Economical : It has no load scheme. The annual expense ratio including management fees is a maximum of 0.80% of the Daily Average Net Assets, which is one of the lowest for any mutual fund scheme in India. The costs reduce further to 0.65%.

Liquidity : Any time you want money, you can sell your units in the markets.

No Human Error or Bias : The performance of Nifty Baes is simply the result of performance of shares in the S&P CNX Nifty Index and demand & supply in the market. There is no Fund manager bias. Hence there is no chances of Human error.

If you see the returns, it has consistently outperformed Nifty.

Annual Returns
2008 2007 2006 2005 2004
Fund Return -51.28 55.97 41.49 37.75 12.30
Rank In Category 7/22 4/22 10/22 8/20 8/18
Category Average -51.78 49.97 39.13 37.22 10.16
S&P CNX Nifty -51.79 54.77 39.83 36.34 10.68
Sensex -52.45 47.15 46.70 42.33 13.08

What are the disadvantages of ETF?

As such, there are no disadvantages , but obviously there may be many mutual funds which may perform better than Nifty BeEs, It may be because of good decision or pure luck.

Who do ETF work?

See this article from Deepak Shenoy to know about this.

My view

Any one who wants to participate in long term growth and with less risk can divert some part of his cash in Nifty BeEs. It scores really high when it comes to convenience and returns over long term. Its easy to purchase. Just invest some small amount every month with discipline over long term.

Other ETF’s

There are many other ETF’s you can go for, they are

– ICICI Prudential SPIcE : Tracking NIFTY
– UTI Nifty Index : Tracking NIFTY
– PSU Bank BeES : Tracking Banking Stocks

ETF’s are the best way to invest in a sector, you can also go for sectoral funds , but these are ETF’s.