Price Vs Value – The difference between Price and Value by investment perspective

A Rose can be of more value than a Dress to your Wife or Girlfriend on Valentines Day. Even though that Rose was very less in Price compared to a Dress.

Today we will discuss things about investment products from a different perspective – Value and Price.

Price Vs Value

What is Price and Value?

Price : Price is the amount of money needed to purchase something.
Value : Value is the worth or Importance of something.

An Example

We pay Rs.8/Kg (20 cents/Kg) for Salt as part of our Groceries, Will we stop using it if its price rises to Rs.100/Kg or even Rs.400/Kg. May be not !!! Why ? Because the Value of Salt even then will be Very high, compared to the price we pay for it. Considering that, its a very cheap product.

As a personal Example, I recently bought a second hand mobile (Nokia 6610) to keep at my home as a land line just for Rs.800 (worth 8,500 at time of buying, excellent condition). The price i paid for it was much much less than the value it would provide to me. So i consider it as one of the best investments made till date.

By cheap I mean its Price vs Value is very high.

Cheapness (P) = Value provided by P / Price we pay for P.

The same way there can be things for which we pay high amount, they don’t have high value for us.

Please understand that it depends on individual where something is of great value or not. For example for me, an expensive Mobile set with 134 different things costing Rs.10,000 is low in value and high in price. I don’t buy things like that, but a digital Camera worth 12K a value buy for me (because of my interest in Photography)

So, in short we can say “Price is What we pay actually, and Value is what are ready to Pay”

We understand this in our daily Life, but we forget this simple rule when it comes to money and investing. Most of the time we invest in things which we should not because of this basic rule, but we are carried away by emotions or simple stupidity.

Watch this video to learn more about the difference between Price and Value:

Let us now see Some of the products which are really High Value, Low price

Term Insurance :

Term Insurance is one of the best example for this.

“How much are you ready to pay as yearly premium for Rs.50,00,000 Cover for 25 yrs tenure?”.

This is a question I ask a lot of my friends in there 20-30’s. And I am amazed to see that even with a miser mind they tell me at least twice the amount what it really costs. Everyone said 2k/month or min Rs.20,000/year. The actual cost is not more than 13-14k, in fact the best price is 10,112 for 30 yrs tenure from AEGON RELIGARE Life Insurance (Click Here to read more on this).

This clearly shows that it cost way less than the expectations of people and what people are ready to pay for it. The value offered by Term Insurance is more than what it costs.

Endowment Policies :

I am not sure if its my hatred for Endowment Policies or they really deserve my criticism every time, Or may be there are both the reasons. We pay so heavy price for Endowment polices and the value provided by them is almost nothing. Its a product designed for Wealth Creation, but wait … not for investor but for the Insurance company. (Click here to read more on Badness of Endowment Policies)

The other products I would rate in category of Cheap and Expensive are :

Cheap financial products:

  • Term Insurance
  • SIP investments in Equity Mutual Funds
  • PPF
  • Good Stocks in low markets (Like current markets, Buy Reliance, Infosys and Jaiprakash Associates for Rs. 1,00,000 each today and your retirement planning is probably Done !! If you are around 25 and retiring at 60)
  • An interest free loan given to a close or a very good friend. (even if you don’t get any interest, you get some emotional satisfaction or valuable relationship which is more important).

Expensive financial products:

  • Endowment Policies
  • Bank FD (at the time of High inflation)
  • NSC
  • Most of the stocks in High Markets ( not true for all stocks but most of them) – A high interest loan given to someone whom you don’t trust much. (Even if you get good interest, there is risk of loosing money)

Every time you invest your money its important to understand the price of it and value of it. If you find that its cost is less than what you are ready to pay, consider it cheap and go for it and not in the other case. Price and Value depends on Situation, time, age and other factor, don’t forget it.

Stock Market Investments

Most of the successful investors become one because they invest in stocks which are trading at price lower than they deserve, which market eventually finds out later. Currently In this markets Reliance is trading at 1400 (Oct 11, 2008), the it was trading at 2300 before a month, and has lost almost 40-50% in a month.

Considering it is going to start its OIL exploration and other things, its a good stock to own and at an excellent price. Its price is less and its value. Which makes it a good investment regardless of what is going to happen next month or next quarter. Sooner or Later it will turn out to be a good investment and reward its investors.

Same is with Jaiprakash Associates, ICICI Bank, DLF, Ranbaxy and other similar blue chip stocks.

Summary

When you analyse some product, stock, mutual fund, Home (Real estate) or anything for investment matter or even for general shopping, always consider value and price for it.

Disclaimer : Any stock discussed on this article is not a recommendation. Please analyse it yourself and then invest. It can also result in losses.

What do you think about this article? Do you like it?

Why buying an Endowment policy is not a good choice?

Today we are going to see why Endowment policy should be avoided in any portfolio and how other things are much better than Endowment policy with the same cost .

The assumption is that you understand what are Endowment policies and What are Term Insurance Plans, if you don’t know click here to read about it

endowment policy

A look at the Endowment Policy

An Endowment policy would look like this for a 25 yrs old

Tenure : 30 yrs
Yearly premium : 31,000
Sum Assured : 10 Lacs
Maturity amount : 23.1 Lacs ( this you get when you survive full tenure, It includes the sum insured + Bonus accrued)

This data is from website of an Insurance company.

Q . How much money to be paid every year? How much will the person get in case of Death or Survival? What are the Risk factors?

Ans :

Tenure : 30 yrs
Money outgo : Yearly 31,000/yr
Money received In case of Death : 10,00,000
Money received In case of Survival : 23,100,000
Risk : Virtually no risk (The only risk is when the Insurance company goes bankrupt)

What is the interest earned on this investment? 31,000 per year for 30 years becomes 23,10,000.

Annuity formula is :

Maturity value = Amount paid per year * [ {(1+r)^n – 1}/r ] * (1+r)
Here n = 30 years
and r = rate of interest earned

Putting all these values

23,10,000 = 31,000 * [{(1+r)^30 -1}/r] * (1+r)

The value of r which satisfies this equation is 5.4. Which means that the interest earned by the investment in Endowment policy is mere 5.4%, which is truly pathetic by any standard in India at least. There is no investment product known which is known to pay so badly.

The reason why people feel that endowment policy are so good is that they also get insurance cover ( which is virtually useless because its so less that it does not even cover the financial dependents to even a fraction of what they need in reality)

So can we mix Insurance + investments product which can be better than supremely better than Endowment policies and still cost the same( or even less).

Now let us see that by spending same amount (30,000, 1,000- less than the endowment policy) every year for 30 yrs, can one achieve better than this.

Watch this detailed video in which the difference between Endowment policy and Term plan has been explained from basic concepts

1. For Safe Investor (Let us first see a almost 100% safe way to do this)

Term Insurance of 30 Lacs for 30 yrs : 6k
Investment of 24k in PPF for 30 yrs : 30 Lacs (this is assured returns, as its invested in govt backed PPF, which gives 8% post tax returns )

Amount invested = 30,000 per year for 30 years (same as Endowment policy)
Amount received on death : 30 Lacs + investments done in PPF
Amount received without Death : 30 Lacs (investments)

2. For Aggressive Investor ( A person who can take more risk that the former one)

Term Insurance of 70 Lacs for 30 yrs : 14,157
Investment of 17,843 ( 30000 – 14157) in ELSS for 30 yrs assuming 15% CAGR : 92 Lacs

Amount received on death : 80 Lacs + investments done in ELSS
Amount received without Death : 92 Lacs (investments)

Equity investments for long term are almost risk free.

So, we can see here than in any case term insurance + MF is supremely better than Endowment policies.

#Solution for People who have taken fresh policies

People who have already taken fresh policies and have not completed 3 yrs should just forget there payments and stop there premium payments. The profits of switching from Endowment to “Term + MF” will be far greater than the loss from leaving Endowment policies.

#Solution for People who have completed more than 3 yrs

Either convert your policies to Paid-up or just surrender your polices and take the Surrender value (take your call on what you are comfortable with)

#Solution for people near the Maturity

You have almost paid most of the installment, so better stick with it, but don’t forget to insure yourself to a respectable cover through term insurance

Summary

Endowment policies according to me are totally incorrect and worst product i have ever seen (ULIPS are not far behind). It is structured and presented in such a way that investors are attracted to it. Agents present them in such a fancy way and give judgements which make these policies look like must have products.

Disclaimer : The exact figures can differ, this is just a demonstration of how Endowment policies can not be better than Term Insurance + MF combo. All the Insurance premium are for Aegon Religare Life Insurance and Mutual funds payments are considered monthly (amount/12).

All the view on this article are personal, some people may disagree with it which is totally acceptable.

Aegon Religare Life Insurance – New hope for Indian Insurance Industry

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

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

aegon life insurance

About Aegon Life Insurance

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

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

Products Offered by the Company

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

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

1. Level Term Plan :

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

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

2. Increasing Term Plan  :

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

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

3. Decreasing Term Plan :

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

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

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

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

The amazing truth of partial Profit booking

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

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

truth of partial Profit booking

What is the main goal of investments in Equity?

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

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

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

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

What is partial booking of Profits?

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

For Example

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

1. If he does not book partial profits

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

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

Total investment: 1,00,000

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

2. If he books partial profits

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

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

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

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

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

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

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

Let us see another example :

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

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

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

What if he would have booked partial profits?

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

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

Loss : 7,000

Summary

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

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

What are Gold Mutual Funds

Gold Funds

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

gold etf

What are Gold Mutual Funds?

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

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

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

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

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

Why to invest in These Gold Funds?

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

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

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

Taxation and Returns

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

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

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

What are Gold Funds Available (In India)

– DSPML World Gold Fund
– AIG World Gold Fund

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

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

Some of the best investment products I know about

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

Best investment products

1. Term Insurance

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

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

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

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

2. UTI Gold ETF’s

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

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

3. Mutual Funds

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

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

ELSS

  • SBI magnum tax shield
  • Principal Tax saving

Equity Diversified Mutual Funds

  • DSPML Equity
  • HDFC top 200
  • Magnum Contra

Balanced Funds

  • HDFC Prudence
  • DSP Balanced
  • UTI Mahila Unit Scheme

Debt or Liquid Funds

  • Kotak Flexi
  • Birla Sun Life Income

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

Creating Wealth for Long Term through Equity

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

wealth creation

Creating Wealth

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

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

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

What kind of wealth can this person create?

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

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

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

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

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

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

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

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

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

How much does he generate with this strategy

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

How to create wealth

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

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

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

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

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

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

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

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

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

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

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

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

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

What we can learn from this

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

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

One great question now !!!

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

Can he still beat the target !!

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

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

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

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

Thanks, Happy Investing.

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

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

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

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

Diversification – By investors point of view

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

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

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

Warren Buffet’s views on diversification:

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

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

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

Lets take a Case study.

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

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

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

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

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

His portfolio after 1 yr looked like after getting respective returns

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

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

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

His portfolio looks like :

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

His portfolio after 1 yr:

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

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

Conclusion:

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

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

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

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

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

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

Fixed Maturity Plan (FMP)

What is FMP?

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

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

Where do FMP’s invest?

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

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

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

Tenure of Fixed Maturity Plan

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

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

Benefits of Fixed Maturity Plan:

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

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

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

What is the difference between FMP and FD?

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

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

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

Actual return Vs Indicated Return

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

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

Tax Implication

1. Dividend :

Tax-free in the hands of the individual investor.

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

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

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

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

What is indexation benefit?

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

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

To understand more on indexation, Read this

Conclusion

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

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

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

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

Everything you want to know about ETF.

Do you want to invest your money more safely? Here is one of the best options for you. ETF i.e. Exchange trade funds are one of the safe way of investing your money in equity market.

It is an investment fund traded on stock exchange, much like stock. These are attractive investments because of their low cost and stock like features. It offers both tax efficiency and lower transaction cost.

What is ETF?

 

What are ETFs?

Exchange Traded Funds are a basket of securities that are listed and traded on a recognized stock exchange. Simply, they are mutual funds, whose units can be bought and sold on the stock exchange.

Given that an ETF is traded on the stock exchange, its price may not necessarily be the same as the NAV of the underlying portfolio. In other words, an ETF could have an NAV distinct from its market price. The reason being that the market price is usually driven by the demand and supply of units.

Hence there is a distinct possibility of an Exchange Traded Funds units trading at a premium or discount to its NAV.

For Example Nifty BeES , whose underlying is NSE , may not have same price as its underlying , For example if Nifty is 4500 , it may be possible that The ETF’s value is 4600 or 4400 , depending on the sentiments and expectations.

Watch the video given below to know the current status of ETF in India:

How does ETF work?

Exchange Traded Funds are just like stock exchange. For that you need to open a Demat account by any medium like through bank, online brokers or through any consultancy.  Check for the prize value of the share so that you will know which of them are in your budget and then you can buy or sell your shares at any time you want to.

It is so easy like suppose you buy some shares at 10:30 in the morning and sell it at 12 pm. then again you can buy another shares after lunch.

Benefits of ETF

ETF’s are the low cost simple solution for the generating good returns from stock market investment. The benefits of ETF are as Given below.

Benefits of ETF

1. Easy to access:

ETF’s can be purchased with just a single transaction. In EYF’s you are buying mini portfolio’s so it is way more easier than buying a basket of Indexes.

2. Cost effective:

Commissions are generally low on ETF as compared to the other tools. Besides this it there is no load fee’s and managing fee is also very low.

3. Transparent:

The most important thing of your investment is transparency. You should know where have you invested your money and how’s it performing. In Exchange Traded Funds, your portfolio details and underlying are publisher daily.

Difference between ETF and Mutual Fund:

Many beginners get confused between Exchange Traded Funds and Mutual Funds. Though ETFs are part of mutual funds, they are different in many aspects than Mutual funds. Lets see some of the differences between Mutual fund and ETFs:

ETF and Mutual fund difference

ETF’s in India

Nifty BeES : Tracking NSE
Quantum Index Fund : Tracking NSE
ICICI SPIcE Fund : Tracking BSE
Bank BeES : Tracking CNX Bank Index

GOLD ETF’s or G-ETF’s

Gold ETF’s are the simple investments products that combines flexibility of stock investment and simplicity of Gold investment. Gold ETF’s are different from Gold savings.

IT tracks Gold prizes. Gold ETF’s are one of the best form of Gold Investments. Earlier investors used to invest in gold in metal form. Then comes paper bond and now you can invest in gold through electronic form.

BENEFITS OF GOLD ETF’S:

  • No risk of impurities.
  • Flexibility in buying Gold. Like one can buy in smaller lot.
  • Held in electronic form.
  • No storage cost.
  • No security concern like in physical form.
  • Transparent pricing and potentially cheaper.
  • Can track your investment values in real time.
  • No wealth tax like in Metal form.

Advantages of ETFs

1. ETFs tend to be more cost-effective vis-a-vis comparable mutual funds. The expense ratio of a passively managed ETF (tracking a benchmark index) would normally be in the range of 0.50%-1.00%; for an index fund, it can be as high as 1.50%. And for mutual funds the entry load is 2.25% .

2. ETF’s can be bought and sold anytime during the market hours , unlike the Mutual funds NAV at the end of the Day.

3. Given ETFs are traded on the stock exchange, and can be bought/sold on a real time basis; they tend to have low tracking error (deviation of ETF’s performance from that of the underlying index) as compared to index funds.

Disadvantages of ETF

1. Investors need to have a demat and a trading account, with a SEBI registered stockbroker, for investing in ETFs

2. Costly to operate – You need demat account to buy ETF and the charges for demat account might compensate the low expense ratio of ETF. One of our blog readers comments on that

While promoting ETFs it is argued that their 1% edge of expense ratio over mutual funds will be significant if it is compounded over a long period of time, say 20 years. So this advantage of less expense ratio is not there if the calculations in the previous comment are true. What I am trying to say is that the only advantage that ETFs have is that they are like mutual funds that will guarantee market related returns. Nothing less and nothing more.

If you have any query related to this topic you can leave your reply in the comment section.