The term health insurance is generally used to describe a form of insurance that pays for medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs.
To understand it in simple words, you pay some amount of premium every year to a company and if some thing happens to you like an accident or if you have to through an operation or a surgery, they will pay for it provided, its covered under the Health Insurance.
Why do I need a Health Insurance?
This is the most common thing you can hear from a person who wants to avoid Health Insurance in India, but its one of the most important part of any ones portfolio or plans. People concentrate on the fact that what if nothing happens to them, but they fail to imagine the situation when some thing can happen.
Body is a complex thing, and no one knows what can happen in future, Even things like accidents is not in your hand, you can take try to avoid it, but what about others, what if some car hits you?
What if accidentally fell from some place? It can happen and it happens, and when you have to pay hefty bill for the treatment, you will realize that its a good idea to get covered by paying a small premium every year.
Consider this :
In Mumbai, businessman Manas Kumar rushed his wife Anita, 38, to hospital in January this year because she complained of breathlessness and shooting pain in the chest. Sure enough, it was a heart attack and Anita had to get an angioplasty done.
The cost of the procedure and stay at Hospital: Rs 1.5 lakh. But he didn’t have to shell out a single coin as he and his wife were covered under the Health Insurance with limit up to 4 lacs.
Why is Health Insurance more important now compared to earlier days?
Yes, Health care cost has increased many fold in last 20-30 yrs, Also now more and more younger people are complaining of Heart and other diseases which were seen in older people earlier.
Because of high stress jobs, bad eating habits and other similar problems, more and more cars in the city, pollution etc, the chances of getting some disease meeting with an accident etc have increased compared to earlier days.
More about Health Insurance
You get a good coverage for diseases and surgeries, so most probably you will be covered for most of the things.
You have to pay the premium which you can plan ahead and manage it, else if some thing unexpected happens, your finance gets in problem and impact your plans.
Also you get tax deduction under section 80D up to Rs.15,000 (Rs.20,000 for senior citizens).
You can also go for group insurance, its a ideal thing for a family with spouse, parents, kids … With group Insurance every one is covered and you pay less premium, also its more advantageous because there are many things which are covered in group insurance and not single person health insurance.
Make you buy a good cover which suits you, do good research and then choose the product.
One of my good friend had a small argument with me, that she would not invest in Term Insurance, because she will not get any “returns” out of it. I believe investing in a term plan looked a very unprofitable thing to her as she never gets back the money she paid as “premiums”, if she survives.
Endowment plans looked nice to her, because they provide money if you are dead and even if you survive. You get back money as the prize for not dying !!!.
With respect to Term insurance, she understood the fact that her family will get the money from insurance company in case of her death, but she was concentrating on the fact that she would not get back anything if she survives.
What is the return in that case? Nothing !!! and looked like some one is fooling you with a product called “Term Insurance”, where you are “investing” premiums to get nothing at the end.
Let me now tell why this happens and some give you some insight on this matter.
I have already talked earlier in my last post “Life Insurance and how to go about it”, about Term Insurance. Let me now take more deep dive into it and talk about the reasoning part.
I will first talk about fundamentals of Insurance and then talk about Endowment Policies and why are they popular, and what people don’t realize about them. and how Term insurance is the right thing for most of the people.
Basics of Life Insurance
What happens in a average family :
There is someone who earns and his family comprises of wife, kids, parents. if not all there is a subset of these family members. The head of the family earns and his family lives happily. All the expenses are met from the earnings of this main member, most of the time the husband. Now consider this person dies in an accident or for that matter because of any event.
What happens?
What happens to his family members other than the psychological trauma. If they don’t have money to take care for them selves, either some one from family have to take up the job and start working which may not be possible for them, or They have to decrease their standard of life to maintain the expenses.
They are now totally unsecured from future’s point of view. In short they are totally messed up, which should not have happened. I gave this detailed explanation for the circumstances because i wanted you to understand how bad can happen and proper measures must be taken care for this.
What is the Solution?
Adequate Coverage !!! this cant be compromised… You must have a backup plan which can give your family the same kind of income which confirms that they are not short of money in case the main earner is gone. If there are some debts like Home Loan, or any other tasks which need money apart from regular income, the cover must be good enough to cover that too..
For example :
Robert has a family expenses of 25,000 per month and there is a Home loan of Rs.25 lacs to be paid within 10 yrs. He is 27 yrs old. He has a wife, 2 kids and parents. All of them are dependent on him financially. He has investments of 5 lacs. Now in this case. In case he dies, who will take care of Home loan, how will provide them enough money to live life comfortably. They need 25k * 12 = 3 lacs per year.
Which they can get per month if they have 35-40 Lacs of money. If they put this in bank, they will get Rs.25,000 per month as interest which they can use. Considering inflation it will not be enough after some years, but lets leave it now for this example.
Add home loan of 25 lacs to this 40 lacs and what we come to know is that this family must be covered with minimum Rs 65 lacs . Rs 75-80 Lacs is a decent cover for this family. Now if he takes a cover of 80 lacs for his family, from that day he can happily live all his life without any tension , thinking what will happen if he is not there.
He will be attain peace of mind , and not be worried for it.
He must get a lot of internal peace because his Family is protected with a good enough cover to take care for them. And this is what you get in “return” from Insurance. No monitory return can give you more satisfaction than peace of mind.
So before doing anything else, his first step is to give adequate cover to his family and that’s the most important responsibility for him as a Husband, Father, Son. He must understand that this is not an investment for monitory benefit later in his life, but its for his family happiness and future.
Life insurance under MWP act is also one of the better option for married man. One point to remember and not forget is that this is the minimum cover required for family and anything less than this will be taking risk with family future.
Endowment or Money back Policies
Lets discuss the problems with these plans with respect to the above example.
High Premium : For an 80 lacs cover for say 30 yrs, the premium payable will be At least 2-2.5 lacs/year (this is a conservative figure). So now premium so high is not possible for anyone like Robert, so what they do?
They go with a kind of cover for which they can pay premium easily, can then they take cover for 5 lacs, 10 lacs or maximum 20 lacs. And guess who suffers in case of his death : HIS LOVED ONE’s.
It might also happen that they are compromising on a lot of small things which are important at that moment in time, like buying a bike for son, which they cant buy because of the insurance they have to premium, or some vacation they could have gone to with family, but compromise on that because of premium.
Money back at the end of the maturity is like a penny after so many years :
This is some thing most of the people overlook. They just see the numbers, 5 lacs 10 lacs or 20 lacs. And at the time of taking Insurance it looks good figure to them, because they see numbers, they dont see its value after many years, They don’t consider Inflation into account.
In case of above example, if Robert takes a cover of 15 lacs by money back policy, what happens if he survives the tenure. He gets 15 lacs at the end, Great Money after 30 yrs. Isn’t !!!
Lets see how great this money is? His monthly expenses will grow from 25,000 per month to 1.5 lacs per month (considering inflation of 6%). Now this money will help him survive for not more than 10 months … For so many years he pays high premium each year, just to get back money to cover his 10 months monthly expenses? What the hell !!!
Under Insurance :
Because of the fact that people want money back on survival and because of high premium, people end up taking policy for which they have to pay premium under there budget, which means less cover.
Without realizing the fact that they are highly under insured, the reason for this is that they see Insurance as investment product and not a protection cover for there family. When they die, there family get the money from Insurance company, but most of the time its not enough for them and it erodes very soon.
Term Insurance Policies
Lets discuss the features of Term Policies with respect to above example.
Cheap Premium : The premium is very low for Term insurance Policies. For above example. The yearly premium for Rs.75 lacs cover for 25 yrs is just Rs.20,000 yearly or just 1,600 per month !!! .
This is in any way affordable for most of the people. Its providing the fundamental requirement of Good cover and low premium and if you think of returns, Good cover and low premium can themselves be seen as good enough return. You family protection at low cost is the return you get.
Watch this video to learn more about Term insurance and it’s benefits :
Opportunity to invest rest of the money in High return Investments :
With term Insurance you save a lot of money in premium and now you can invest this money as per your wish in high return instruments, anyways in Endowment policies you put money for long term and you get it after so long time. So you can now always put your saved money in things which are long term investment products and return great returns.
One of those things is Equity Diversified Mutual funds and Direct Equity (depending on persons ability and interest). In long term Equity Diversified gives fabulous returns (15-20 yrs) and the risk is minimized because of long term.
And if you consider India growth story , it looks great in long term , hence Equities for long term is the most obvious choice. They will give you return of 15%+ CAGR. (15-20 yrs)
Also it will be flexible , you can not invest for a year or two, if you want to use the money for your family vacation or some important event.
Conclusion :
Insurance is not an investment product, its a Protection instrument for your Family or any one your want to cover. There are other products for your investments.
Let your finances be the way you want your life to be , SIMPLE !!!
Don’t mix Insurance and Investments. There are products like ULIPS(What are ULIPS) and Endowment or Money Back policies which never excited me. They complicate things, confuse people. They can be good if you understand how to make most out of it, but it require knowledge and expertise. They offer some flexibilities, but still they are not worth it.
Read more on Term Insurance at my Old article. I would be happy to read your comments or disagreement on any topic. Please leave a comment.
Disclaimer: All the opinions are personal and shall be taken as knowledge sharing and not as encouragement
Option is a contract which gives buyer the right, but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. An option has an Expiry date, when its automatically exercised if it has any intrinsic value left.
When you buy an option you have to pay some premium at the time of buying it.
You can buy or sell Options just like you buy or sell Shares. They are traded in real time. An option value depends on some underling, which can be a stock or an index or even interest rate, The scope of this article is restricted to Stock options or index options.
An example of index option is Nifty option, so its underlying is Nifty.
You must know that its a kind of Derivative : Derivatives are any instrument whose value are derived from some other thing, there value depends on some other thing, like In case of options in stock market, there value depend on either a stock or an index.
Futures are also a kind of Derivatives, The minimum money required for trade in Futures are much more than Options. You can trade in options with as little as 2,000 or 3,000 (depending on the option you are trading in).
Types of option: CALL and PUT
CALL option gives you the right to BUY something anytime before expiry at a predetermined price. The value of the CALL option increases as the Price of the underlying thing increases. The reason for this is because you can still buy it at the fixed price and the difference is your profit.
PUT option gives you the right to SELL something anytime before expiry at a predetermined price. The value of PUT option increases as the price of the underlying Decreases. The reason is that you still have the right to SELL it at fixed price and difference will be your profit.
SOME OPTION TERMS
Exercising an Option :exercise an Option means to Buy(CALL) or Sell(PUT) the stock on the expiry date if they are European style else Buy or sell anytime on or before Expiry if they are American Style.
Expiry Date : The date on which an option will expire and then it will be exercised automatically if it has any intrinsic value left.
Option Style : Options are of two styles, American style (It can be exercised any time before or on expiry date) and European Style (exercised on expiry only).
STRIKE Price : Strike rate is Stated Price for which the underlying stock can be purchased or sold on expiry date.
SPOT Price : The current price of the underlying at a particular time.
LOT : Options are traded in lot size, you can buy 1 lot, 2 lot or any number of lots, and a lot has a particular number of shares in a single lot, Like Nifty options have lot size of 50.
Premium : Every option has some premium which users have to pay when they purchase an Option. So for a CALL option, the premium increases when its underlying price increase and decreases when its underlying price decreased and just opposite of PUT option.
How does an OPTION look like?
Example : CHAFER 90 CE 1.95, EXPIRY 26th June
CHAFER is the symbol for a stock called CHAMBAL FERTILIZERS, so its a Stock option. The expiry date of this option is 26th June (current year).
90 CE means its a CALL (C) option, which is European Style (E, can be exercised on expiry date only) and the Strike rate is 90, means that you have right to buy 1 lot (3450 shares, it depends on the option how many shares a lot has) of chambal fertilizers shares at Rs 90 on the date of expiry if you want.
What are the Profit and Losses you can make?
The Losses are always limited to the extent of premium you pay (in worst case you do not exercise the option and you let your premium go), On the other hand the profits are theoretically unlimited, because the option price can keeps increasing when underlying increases or decreases depending on the type of option.
What is time value and option value ?
The Premium you pay for the option has two components
– Time Value
– Intrinsic value
Premium = Time value + Intrinsic Value
Intrinsic value is the true worth of the option (premium) and Time value is the value which is there because of the time left for the expiry, because as the Expiry time comes near the risk of loosing the money is high. So time value keeps decreasing as the expiry comes closer.
There fore you will see that even if STRIKE price is closer to SPOT price, the option price will be very high if the expiry is after many days.
For CALL option price moves towards 0 if SPOT is less then STRIKE price and expiry comes closer.
For PUT option price moves towards 0 id SPOT is higher than STRIKE and expiry comes closer.
Watch this video to learn more details about Options trading:
How does it works?
You can either sell it at the profit or still hold it.
Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiry and the current price of premium is suppose 10, you can sell it at loss, because you don’t want it to become 0.
Suppose you didn’t sell it and market really closed above 4300 on expiry date, then you loose whole your premium (as SPOT Options used for Hedging
Example 1:
Suppose you buy CHAFER 90 CE EXPIRY 26th June, at a premium of 1.95 (you will have to pay Rs 1.95 * 3450 to buy this option), and the SPOT is 78, means currently price of Chambal fertilizer share is Rs. 78, now the price of option will follow the price of the share price.
If price increases to say 85, then the option may increase to 4.5 (depending on demand and supply), and at this point you can sell the option and earn a profit of 4.5-1.95 = 2.55 Per share, profit of 130%.
Now suppose on 26th June (Expiry day), the price of Chambal Fertilizer is Rs 100, then the option will be exercised and who ever has the option at that time will receive the profit of Rs 10 (total 10 * 3450) and the option will not be exercised if the SPOT (current price) of share is below 90, because then he will make loss if exercised.
(Remember, its not your obligation to exercises the option (you exercise if its in profit, or you loose your premium)
When do you buy Options?
Example 1 :
Suppose Infosys is at 2000 today (1st June) and you are optimistic that its price will go further go up 10% or 15% (2200 or 2300). so you buy a CALL option of Infosys which is going to Expire in approx 1 month, say INFOSYS 2200 CE 10.5 26th June is available and lot size is 1000, so you pay 1000 * 10.5 = Rs 10,500 for this option.
Now option price will move the same way as the price of Infosys share. At the end of the Expiry date if Price of Infosys share will be more than the 2200 then the option will be called “In the Money” as it will be in profit when exercised Else it will be out of money.
So suppose Price of Infosys share is 2280 at the end of Expiry then you exercise the option and get 1000 * 80 = Rs 80,000, you can also sell the option anytime before Expiry date if you want to make profit and convinced that the option price has reached at a good point.
Example 2:
You think that Economy is not doing well and markets as whole will fall because of high inflation news and political issues (or for any reason), Suppose Nifty is at 4600 and you believe that it will fall to 4300 in 2-3 months, Suppose current date is 1st June then you can buy NIFTY PE 4300 AUG , assume premium is Rs 15.
Case 1: If markets fall badly and reaches 4500 in 1 month and the premium increase to 330. You can either sell it at the profit or still hold it.
Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiry and the current price of premium is suppose 10, you can sell it at loss, because you don’t want it to become 0.
Suppose you didn’t sell it and market really closed above 4300 on expiry date, then you loose whole your premium (as SPOT Options used for Hedging)
The main use of Options is for hedging, So if you have bought some 1000 shares of company ABC at Rs 20 , and think that price may fall to 15 in one month ,you can ABC PE 20 or 19, and pay a small premium, Now you are covered for the loss you will make on shares, because you have right to sell the shares at 20 or 19 (depends on the price you bought the options at).
Some other important points
1. Options are very risky and very rewarding, it can give returns of even 100% or 200% in day, or can give negative returns of 50% or 80% in a day.
2. Options are very volatile, so its a good idea to be patient with options.
3. Buying Options near its Expiry dates are highly risky, because if they go in wrong direction they don’t have time to come back.
4. Its not a good idea to buy a option with strike price very far from the SPOT price unless there is some good reason for it. Options with more gap between between STRIKE and SPOT have less premium, but very risky (and can be very rewarding too).
5. Its not a good idea to put a Stop loss for your option very near to the current price, because its highly probable that it will come to Stop loss point and then again bounce back because of there high volatility.
6. Its a good idea to set a target to book profits and get out, rather than trying to get maximum out of option. If you don’t exit at a good point, the chances are that value will again bounce back to normal price and you will miss a chance.
(I sold Chambal Fertilizer CALL 90 option when it price went up to 6.5 though 8-9 looked achievable target next day, but i thought its a great return and didn’t miss the chance of booking 250% return in 2 days, Buy price was 1.95).
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
Short Term Capital Gain : If you sell it before 1 yr , the profit is called STCG and taxed at 15% (revised in 2008-09 budget) ,So if you make profit of 10,000 on shares or Equity mutual funds , you pay 1,500 as tax. Long term Capital Gain : No tax Other Points
– Dividend income from any kind of mutual funds are not taxable.
Profit from Sale of House or Land
Long term Capital Gain : If you sell it after 3 years , its Long term Capital gain. and its taxed at 20% on profit.
Your profit = Sale Price – (Cost price after adjusting indexation , as per the cost inflation index)
Long term capital gain tax can be saved by investing the capital gains in some other residential property or in bonds of the Nabard, National Highway Authority of India, Rural Electrification Corporation of India or SIDBI redeemable after a period of three years.
Long term capital loss can also be set off against any Long Term Capital Gain in next 8yrs.
Short term Capital Gain : If you sell it before 3 yrs, its considered as STCG and added to your income and taxed accordingly.
Short term capital gains can set off against any LTCG or STCG within 8 yrs.
Other Points
– Capital Gains from Agricultural Lands are not taxable.
– A person holding more than one residential property would be liable to Wealth Tax on the market value of the second property.
Profit from Jewellery Short term Capital Gain : 20% tax on the profit if sold before 3 yrs (1 yr in case of GOLD ETF) .
Long term Capital gain : 30% tax on profit if sold after 3 yrs ( 1 yr in case of GOLD ETF)
Don’t know what is GOLD ETF ? Read this article , CLICK HERE
Profit from Fixed Deopsits , PPF , NSC Fixed Deposit : Interest Earned added to the income and taxed accordingly.
Finally many people like me have chance to take take plunge in the rising and booming Real estate sector , Any one who does not have Crores and Lacs to invest in flats , plots etc , to earn the capital appreciation will to be able to invest even small amounts like 5,000 or 10,000.
What are Real Estate Mutual Funds ?
They are simple close ended mutual funds which will invest in Real-estate , as simple as that … The lock in period will be 3 yrs. These REMF will invest in properties and they will be owners of those properties , they will also rent out these properties and pass on the rents to the investors as dividend. And when the mutual fund matures , it sells its holdings and pay us the returns.
REMF’s will be listed on Stock Exchanges and they will be traded just like shares.
How do they work exactly ?
Lets take simple example :
You invest Rs 20,000 in some ABC REMF and one unit costs Rs 10 at the start , so you get 2000 units. many people like you will also invest and Suppose the total money they get from investors in 10 crores. Now they invest this money as per the laws defined for them. Suppose they receive 50 lacs as rental income from their investments in a year and the total investments has grown to 12 crores (because of rise in value of properties and other factors).
From this 50 lacs they will distribute dividend and you will recieve your share for 2000 units and the unit value will be around Rs 12.
Rules and Restrictions for REMF’s
– They will have to invest atleast 35% in completed projects , ready flats , shops , houses etc.
– At least 75% should be invested in real estate and related Securities.
– They can partner with real estate developers and invest maximum of 15% in the project (not in company).
– The NAV will be published on daily basis.
– Most probably they will be in category of debt funds. Tax treatment not clear at the moment.
– Further caps will be imposed on the fund on investments in a single city, project or securities issued by associate companies and sponsors. Funds are not allowed to invest in assets owned by the sponsor or the asset management company or any of its associates during the last five years the aforesaid entities hold tenancy or lease rights.
– The cities for investment by real estate mutual funds would include 35 cities in million-plus urban agglomerates and 27 under the million-plus category as per the Census 2001
They are still to be launched , keep a watch !!!
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
ULIPS are investment cum insurance products, You take an insurance worth XYZ amount and then you pay some premium every year. Out of your premiums some amount is cut as administrative expenses (Premium allocation) and out of rest the mortality charges are cut for your insurance and the rest is invested in market linked things.
Some important points about ULIPS to note here :
1. You decide the tenure of your Insurance and the insurance amount, depending on which mortality charges are cut from your premium you pay.
2. The Premium allocation charges are very high in initial years (especially 1st year) and then reduces in later years. That’s the reason one should be invested in ULIP for long period to get maximum benefit.
3. The investor can switch between the investment style as and when he wants (max 4 free switches in most of the cases, there after some nominal fees).
4. ULIPS must be considered for long term investment products, so that the high cost in initial years are averaged out over longer period.
Advantages of buying ULIPS :
– The switching over different styles is not costly, you are not charged when you switch, which make them flexible.
– ULIPS are innovative products and suits people who want long term wealth creation with some insurance too..
Disadvantages of buying ULIPS :
– They are not good product for people who require high cover and can pay less cover, because premium depends on the cover. Higher the cover, higher the premium. So these people must take term insurance for there life insurance.
– For people investing only for tax benefit must avoid them as they will prove to be costly in short term because of there high allocation charges.
5 Benefits of investing in ULIPS
1. Tax benefit
ULIPS have sec 80C benefit, but for that you have to pay minimum of 3 years premiums to avail this tax benefit. You can not stop ULIPS before 3 years to get tax saving benefit. You will get the tax benefits at 3 different stages –
Entry level: You will get tax exemption on the premiums you are paying for ULIPS
Switch advantage: You don’t need to pay any taxes if you switch the policy from equity to debt or vice versa.
Exit level: The amount you will be getting after maturity period will also be completely tax free.
2. Goal based investing or planning
ULIPS also helps your to secure your future goals like retirement planning, wealth creation or your child’s education planning.
3. Freedom to choose your cover
You can choose the cover for your policy. In most of the insurance companies, the cover provided is 10 times your premium, however some of the insurance companies are providing the insurance covers of upto 40 times of your premiums.
4. Liquidity
ULIPS also provides you the benefit of partial withdrawal which will help you in case of emergency.
5. Option to choose your investment type
The money actually invested is invested as per your directions … ULIPS have different plans with different risk-return profile. One plan may have allocation of 80-20 to equity and debt, some other can have 50-50 and some can have 20-80 and like this.
ULIPS have become very popular in last some years as agents have put there life and souls in advertising them and making people believe that they are wonderful product. Every product is wonderful for some or the other. If you can take good risk , need less insurance and closely want to monitor markets and economy so that you can switch your investments from one plan to other, ULIPS are great for you … else they are not..
Evaluate yourself and dive 😉
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
Do you remember the price of a movie ticket or any or your favorite thing few years back? It is the same today also? I don’t think so. It has increased by some numbers. This increase in the price is known as inflation. In this article I’m going to tell you what is inflation and how it can affect your investment.
Inflation :
Inflation is the increase in the rate of prices caused because of devaluation of the currency. Is is also known as the decrease in purchasing power of the currency.
Its a tool to measure the increase in prices. If inflation is 6%, it means on an average the prices have increased by 6%, means anything which had cost of Rs.100 last year will cost 106 this year. (Its a average price and not exclusively for some item)
For example:
Considering inflation at 6%, the value of Rs.100 will go down to Rs.53.86 in 10 yrs and to 29.01 in 20 yrs. In order to keep value of you money same, the absolute return earned must be greater then inflation.
Inflation vs returns on different financial products
Fixed Deposit :
Investing in Fixed Deposits just retains its value, but people feel that they get good returns upto 8.5 or 9.0%.
There is a tax of 3.5% on your FD returns and then if you adjust inflation of 6% after that, you will realize that though your Rs.100 has become 109 in a year, you have to pay 3 or 3.5 tax on that, and then if you have Rs.106 after that, you can purchase the same thing which you could have purchased in Rs.100 a year ago.
Hence, FD don’t give returns in real sense, they just keep your buying power. (considering inflation + tax = return from FD)
Gold investment :
Investing in GOLD is considered the traditional way of investment and also it is consider as the best way to beat inflation. Historically Gold has always outperformed inflation. It has generated 13.66% annualized return since 15 years, which is almost double of the inflation rate.
See the graph given below, in this graph the returns of gold investment since 20 years is given. You can see that how gold prices have moved or increased in last 2o years.
Image source: www.Bemoneyaware.com
Cash in bank :
The worst thing one can do is to keep Cash in Bank account, instead of investing it in any product. The returns generated from this saving can not beat the inflation rate.
For example: Suppose you have some cash in your savings account on which the interest rate applicable is around 4-4.5%, whereas the inflation is around 6%. Here the returns can not even meet inflation rate.
Cash must only be kept to a limit which may fulfill your emergency needs (preferably 3 times of you salary). Any extra amount must be invested.
Mutual fund :
Mutual fund is an investment in stocks so the returns are volatile here but if you consider it as a long term investment product then you will realize that it has given returns way higher and beat the inflation rate by almost double.
So this is the difference between the inflation rate and the returns of different financial or investment products. Now you can compare the returns and choose which product is suitable for you to invest in.
We can help you to improve your portfolio by making a perfect financial planning for you. If you have any doubt or query you can ask us by simply leaving your concern in our comment section.
“You only have to do a very few things right in your life, so as long as you don’t do too many things wrong.” – Warren Buffet. What should be your motive as an investor? – To earn great return on your investments with minimum risk, right?
We generally take good amount of risk to get more return, and many times we get it 🙂 … It might happen that if we make good profit 2 times , we make 1 loss also because of the high risk we take. And we think its fair getting the losses, and you are right if you think so. We cant get profit always, if we take risk we have to accept losses.
But is it a good strategy?
Its questionable, lets explore on this topic today. Lets try to find answer of a question, what is better?
1. Taking high risk for high return at the cost of losses some times.
2. Avoid getting losses at the cost of just moderate return and not great return.
Case Study :
– Robert do not understand much about investments, but still invests in high risk high return instruments like shares and risky mutual funds. He invests Rs.1,00,000 for 5 yrs and gets returns of 50%, -35%, 30%, -20% and 45% for 5 yrs.
– Ajay does not take much risk and invests in something which gives him better returns than conventional FD’s or PPF, but has risk component much lower than Robert case. he earns return of 8%, 17%, -10%, 20%, 15%.
Observation : A fixed deposit will give similar kind of returns 1,00,000 * (1 + 8.5/100) ^ 5 = Rs.1,50,365
Why did this happen?
Getting 0% profit overall is better than getting X % loss after getting X% profit. if you get 40% profit and then 40% loss on your investment of 1,00,000, it will first become 1,40,000 after profit and then it will become 1,40,000 * (1 – .40) = 1,40,000 * .6 = 84,000, which is a loss of 16%.
So even if you get 40% profit, a loss of 28.57% is enough to wipe out that whole profit earned.
If Robert never got those losses and only profit, his final amount would be Rs.2,82,750. Just loss of 35% and 20% ate way most of it. On the other hand Ajay, who put more efforts on avoiding losses on the cost of getting less return way rewarded more at the end.
The return percentage required to cover the losses is more than then percentage loss.
Watch this video by Harsh Goela. In his talk, Harsh Goela talks about the stigma surrounding stock markets. He clarifies how it is different from gambling and how proper knowledge and avoiding reckless indulgence can yield profitable results.
Learning and Moral
What do we learn from this article and the examples above?
The important part of investments are not earning great returns but taking measures to avoid losses. Earning high returns must be secondary goal, the major goal must be to avoid losses at any cost though we have to compromise on moderate returns. Because one loss is enough to wipe out major portion of your profits and the hard work you take to earn great returns.
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
There are 3 Mutual Funds Options (Growth , dividend , dividend Re-investment) and we will discuss those today. There are lot of misconceptions and myths which add to confusion in the world of mutual funds and agents use it against investors and make them fool …
Different Options in Mutual funds
1. Growth Option
Under this option you get the units at the time of buying and you have same number of units till the end. The NAV keeps changing according to performance.
2. Dividend Option
This is the most misunderstood option in mutual fund.
Dividend option in mutual funds means that you will be repaid some amount of your investments every year and it will be called as “dividends”, this helps those people who want some regular returns every year from their investments in mutual funds.
People think that dividend is something extra which they receive other then their investments which is not true 🙂
Dividend is declared per unit basis, if you have 100 units and MF declares dividend Rs.4 per unit, you receive Rs.400, and you think that your earlier investments have the same worth, where as it decreases by the amount you receive as dividend, because its paid out of your investments only.
The NAV of the unit goes down after paying dividend proportionately.
Example : Let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs 100, you will have 1000 units. dividend declared : Rs 20 per unit
How it works :
You will get Rs 20,000 and then your remaining worth will be Rs 80,000 and as you have 1000 units, the NAV will go down to 80. So your actual worth is same as Rs 1 lac. The only advantage to you is that you are getting liquidity with your investments and getting regular cash every year, unlike growth option.
Agents generally lure investors to invest in NFO’s claiming that if company declared dividends, they will get more dividend compared to existing funds as they will have more units, Which is nothing but a idiotic myth 🙂
3. Dividend reinvestment
In this option ,the step is as follows
Re-adjust the NAV assuming that dividend is paid.
After that buy more units of same MF with that dividend money and allot it. So ultimately the number of units increases and the NAV goes down. In this case dividend money is not given to the investor but re-invested in the same scheme.
Example : Let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs.100, you will have 1000 units. dividend declared : Rs.20 per unit
How it works :
Your dividend will be Rs.20,000 , and NAV will come down to Rs.80 like it happened above. Now this 20,000 will be re-invested in same mutual fund and you will get extra 250 units (20000/80).
Your Total units = 1250
NAV = Rs.80
Worth = 1250 * 80 = 1,00,000
Which one is better Dividend or Growth?
It depends. There is no thumb rule to decide which one is better then the other, it depends on the situation and your needs.
Watch the video to learn more about growth and dividend option:
When is Growth Option better?
If you are a person who earns well and does not need regular money back from your investment and if you are looking at long term investments then growth option is best for you because your investments gets compounded, which does not happen on the dividend part in dividend option as it goes back to investor and its never part of future growth.
When is Dividend Option better?
If you are a person who need regular money every year from investments for some purpose, It may happen that you have more responsibilities and more dependents and if any small money which you get extra every year is helpful to you , in that case you can go for dividend option.
Conclusion : Different options in mutual funds are for different types of investors, before investing just see what do you want from your investments and take appropriate option.
Returns in long term from Dividend and Growth :
Below is an example which shows the returns from similar funds with growth and dividend options and there performance over 3 years.
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
SIP is a way of investing in Mutual Funds where you pay a fixed amount each month for a fixed tenure.
Like If you take an SIP of 5,000 for 1 year on Jan 1, 2008, you will be paying Rs 5,000 per month for next 12 months.
Please understand that its not a financial instrument, but a way of investing in mutual funds, some people confuse SIP with PPF, NSC, and mutual funds, they think they can invest in “SIP”, its just a mode of investment.
SIP CALCULATOR :
When to invest in mutual funds through SIP?
Investment through SIP must be done only when markets are uncertain or very volatile, when you don’t know which side they are headed to ..
SIP will be beneficial only if markets really are volatile or going down after you invested. If it happens that markets turns bullish and starts going up, in that case SIP will not be beneficial and will give less return compared to lumpsum investment in start.
SIP is a simple concept and hence very powerful, lets see some reasons why its worth investing through SIP
Reasons to invest through SIP in Mutual Funds?
More convenient for average person on wallet
Its more easy for a person to invest in small amount every month, rather than a lump sum amount. Investing through SIP is lighter on wallet. Its easy to pay Rs 5,000 per month for 1 years, rather than investing 60,000 at a same time.
It brings your average cost price for unit down (in volatile market)
The biggest advantage of SIP is this part, There is a concept of rupee-cost averaging, In SIP you buy less when market and NAV are UP and you get more units when they are low. When this happens, the average cost of per unit is lower.
Lets take an example of “Ajay” who invests 1,000 per month through SIP starting Jan 2, 2007.
How SIP helps in this case ? See the result below :
ADVANTAGES of SIP
Makes you a disciplined Investor
The other advantage of SIP is that it makes you a disciplined investor. Once you start SIP, each month you have to contribute certain money in mutual fund and that habit is cultivated.
DISADVANTAGES OF SIP :
It will not work in bullish markets or when market goes up over time
When market goes up and keeps growing over time, the units bought every time will be at high price then the previous one, which will ultimately bring the average cost up , compared to the lump sum investment at the start.
In case of tax saving fund, the lock in period gets extended for every investment.
Tax saver mutual funds lock your money for 3 yrs, When you invest through SIP, each of your investment is locked separately for 3 yrs from the date of investment. So if you pay your first installment on Jan 2007, it will locked till Jan 1 2010, then the installment paid on Feb 1, 2007 will be locked till Feb 1, 2010 and like this each installment will be locked with the gap of 1 month.
In which type of markets do you think SIP will not work?
