Author: Jagoinvestor

I am Jagoinvestor Admin

Prevention is better than Cure even in Personal Finance

Posted on by Jagoinvestor

“An ounce of prevention is worth a pound of cure” I see that most of the people these days have bought wrong products like ULIPs, ULPPs, Endowment Policies and unsuitable Mutual funds (which they are not aware of most of the times) and then when they do come to know about it, they don’t have much choice left.

They either have to live with it or they have to lose a lot of money to correct the situation.

In this article we will see some thoughts on why we should focus more on “Prevention” and not “Solutions” for a bad situation from Financial planning perspective.

personal finance

A Small Story

There once was a little boy who had a bad temper. His Father gave him a bag of nails and told him that every time he lost his temper, he must hammer a nail into the back of the fence. The first day the boy had driven 37 nails into the fence.

Over the next few weeks, as he learned to control his anger, the number of nails hammered daily gradually dwindled. He discovered it was easier to hold his temper than to drive those nails into the fence. Finally! The day came when the boy didn’t lose his temper at all.

He told his father about it and the father suggested to the boy that he should now pull out one nail for each day that he was able to hold his temper. The days passed and the boy was finally able to tell his father that all the nails were gone.

The father took his son by the hand and led him to the fence and said, “You have done well, my son, but look at the holes in the fence. The fence will never be the same. When you say things in anger, they leave a scar just like this one. You can put a knife in a man and draw it out.

It won’t matter how many times you say “I’m sorry”, the wound is still there. A verbal wound is as bad as a physical one. Friends are very rare jewels, indeed. They make you smile and encourage you to succeed.

They lend an ear, they share words of praise and they always want to open their hearts to us.”

The Story is encouraging and gives an important message. We all make decisions in life. Some of these decisions can prove very unhealthy. We make mistakes and then when we come to know about it, we try to figure out ways to fix the problem.

Making mistakes is not a wrong thing, we all do it at some point in life and taking measures to cure it is another great thing. But it will some times have drastic impact on you and your money.

Some of the mistakes we make are

Watch this video of 4 biggest financial mistakes related to personal finance that every investor should avoid :

ULIPS

A lot of readers of this blog were sold ULIPs (they didn’t bought it, it was sold to them) without telling them the costs involved and sometimes promised with wrong returns (it was just an illustration and dependent on market condition, agents just said it was guaranteed).

Now when they come to know about it, they stop the premium payment and get out of it at right time, this getting cure for the problem but the damage has happened. You might not realise it, but the damage is big, some people have lost close to 80,000 – 1,00,000 in premiums or in costs.

One of the person I know has paid 4-5 lacs in premium and 60% was the cost in first year. Now he stopped the policy, that’s a loss of 2.5 lacs. If that same money is invested in some good Mutual funds for next 20 yrs and if we expect a return of 12%, it’s 24 lacs at the end.

This is opportunity cost. RS.2.5 lacs might look like a small or “chalta hai” kind of amount, think again, it’s opportunity you have lost. The amount can differ for different people but the lesson remains same.

Insurance

Another case can be of Insurance, most of us are still under-insured, even now!! Even after we know that Term Insurance is what we should take, still we are underinsured, that’s the risk. Once the disaster happens, it will be too late, you will never get the chance to cure it.

In fact you will not be there in this world to cure it and the outcome will be very horrible which you might not want to imagine.

Endowment Plans

Same with Endowment Policies, Investors who have taken Endowment Policies and are paying 50,000 per year for next 25 yrs. They do not realise what they are missing. You get 5-6% returns, that’s all! forget what agents promised or what was told to you. Endowment and money back plans are world-famous for “not able to beat the inflation” kind of returns.

So you are missing long-term equity returns of 12% at the least. So you are loosing 6% worth of returns. That’s loss of 45 lacs for the example I just gave you in long-term, what is the reason you lost that much, just simple laziness of not taking the action of “change” and restricting your mentality of “Equity is Risky”, that’s incorrect at least for long-term.

Late Investing

No matter what you always have some money to invest when you start. If you don’t want to invest, there will always be enough reasons to not have savings. Almost 99% of the people can live with their 90% of salary, whether they believe or not. Earning less is not a crime, it’s part of life, save what ever you can save, even Rs 100 is ok, but do something.

Some people can save more than 30-40% of their salary, but they are not doing anything about this! Don’t underestimate the power of early investing, Early investing is so powerful that it can compensate for big mistakes in investing later in life. If you are a 25 yr old person who needs 2 crores at retirement at age 60.

Assuming 12% return, you just need to invest  Rs.6,000 per month to reach your retirement target. Imagine what happens if you feel that you can do a little late, how does it matter and all and actually start 5 yrs late, with the same saving of 6,000 per month, you will have just half of your retirement target, that’s 2 crores.

Imagine the cost of saving late by 5 yrs, You have to but down each of your retirement thing by 50%. That can be a big hit!!

What is the Solution

Taking measures to fix your messy situation is worth appreciation and we all should do it if we get into it. But on the first hand why to get in a messy situation. You don’t need to do fancy things to be in healthy financial condition.

A simple 5 things can save you from disaster

Just practice these 5 Mantra’s and almost all of mistakes you make will go away.

Comments, what do you think about this? Please share your views.

How to look beyond short term returns in Mutual Funds

Posted on by Jagoinvestor

Want to buy a mutual funds which has given 105% return in 2009? Go ahead… How do most of the people choose a mutual fund? Let us try it once! Go to Valueresearchonline.com and find Top 10 funds across all the equity funds with 1 yrs performance. Below is the example of the page I got. So all these funds have given more than 100% return over the last 1 yr. Now it’s pretty simple to choose them, right? Just pick any of them and you have done your “Investment Planning”!!…… Far from the truth! Most of the mutual funds starts advertising their mutual funds “great” performance just after a strong market. They will claim that their fund has 1st rank in some blah blah category and they have the unique way of investing and what not. Let us see in this article, how we should look at short-term performing mutual funds and evaluate them on different parameters.

How Mutual Funds are marketed

Let’s take a case of “JM Emerging Leaders” Mutual Fund. Try to look at the points which a Mutual funds company can use to attract customers and What is the reason for each of them.

Its one of the 10 funds on the return parameter out of thousands of Mutual funds in this planet. Its 1 yr return is 144%.

 

[ad#big-banner]

True! But what are the reason for this? The fund is extremely risky, risky to the extent you can’t imagine! The fund portfolio looks like this:

Mid Cap: 56.18%

Small Cap: 43.82%

(as of Feb 7, 2010)

Now what else do you expect from a fund which has all 100% of its money in Either Mid cap or Small Cap companies which moves like crazy after a big bear market? If the fund is so great in 1 yr parameter, what is the reason its overall return since it came in existence is -5% (negative return in last 5 yrs)? The answer is simple, the fund is exposes to too much Risk. In order to get extremely high returns, it’s exposing itself largely to risk that the returns over long-term will be unstable and probably low.

The fund beats it’s benchmark and category average returns by huge margin

This happens for the same reasons we talked above. Benchmark is an Index and it’s returns are not based on some one’s judgement or decisions, but mutual fund returns are!! Fund manager decides how aggressively they want to invest, so if today the fund has beaten it’s benchmark or Category in positive side, tomorrow when there will be disaster, it will beat it’s benchmark by huge margin on the negative side and the performance will be much lower than the benchmark, it’s called Beta

Mutual funds high returns myth

NAV more than doubled in 1 year

Again an idiotic comment, it’s all about return, the fund has made 105% return in 2009, but what is NAV value? Ans: 7. something % . It’s 5 yrs in existence now, started from NAV of 10 and still its at 7.something. At one time in 2009 the NAV went down to Rs 2.9, this 144% year in last 1 yr has helped it come back to 7.something levels now and still the returns are the marketing factors. I am wondering how it manages to get so much of investment (Fund has 262 crores of Net Asset Value as of 31/01/2010). Who is putting all the money in this?

What are the Two important factors you can look at and make a quick opinion

Lets talk about two main things

  • Mean
  • Standard Deviation or Volatility

Mean: Mean is nothing but the average of returns over a particular time. It tells us how much can we expect over a period from the mutual fund. It’s important to look at Mean (average) of Mutual funds return so that we have an average expectation. For some period we can get 20% return, for some period we can get 10% and for some we can get -15% also. But we have to concentrate on the average. Look at average return from Equity in Long run from Indian Markets

Standard Deviation : Now this is some thing we never see, what is this? Looks like a scary term from our school maths, but dont worry, it’s very easy thing to understand. Its nothing, but how much deviation you can expect from the average. To clear the point, understand that (10,12) and (1,21), both have average of 11 but standard deviation of (1,21) is high because both the values are at much distance from their average of 11. In that same way if we have two mutual funds say Mutual fund A, which has given returns of 20% and 30% in 2 yrs and we have mutual fund B, which has given return of -10% and 60% in 2 yrs,  both of them have average of 25% (simple average), but the second mutual funds B has higher standard deviation compared to A. What it means is that its more risky, the return range of B is higher. This is directly related to risk/reward. It’s very risky and very rewarding compared to mutual fund A. So it does not suit general investors who need high and consistent returns.

Look at List of Best Equity mutual funds and Debt mutual Funds

What to look at in mutual funds

So over a long term, we have to choose funds which are higher in Return and Lesser in Risk . That mean is there are two Funds X and Y, we have to look which has higher Mean and lower Standard deviation in returns. This is not true for investors who have extremely high risk appetite and want to take extra risk, in that case this will not be very much recommended.

Make sure you dont calculate these things on just 2-3 data points, make sure you have enough (at least 10-12 numbers) so that its more accurate. In the Table Below I have taken two funds which I consider BAD  and 2 Funds which are GOOD and their quarterly returns from Q1 2006 – Q4 2009 (16 quarters) and finally calculated the Standard Deviation and Mean.

 

Fund Names BAD FUNDS Average of BAD FUNDS Average of GOOD FUNDS GOOD FUNDS
JM Emerging Leaders-G Magnum IT HDFC Top 200-G DSPBR Top 100 Eqt Reg-G
Quarters Return in % for 1 quarter

 

Return in % for 1 quarterQ1 200616.196.9911.5921.6720.3522.98Q2 2006-13.69-7.53-10.61-10.09-10.83-9.34Q3 2006-0.6618.438.8916.9317.516.35Q4 20061.1529.0215.0911.01913.01Q1 2007-8.981.63-3.68-4.27-4.93-3.61Q2 200722.266.4114.3416.5915.1518.03Q3 200723.4-10.046.6815.8716.7514.99Q4 200741.659.325.4823.4620.8626.06Q1 2008-40.36-26.34-33.35-23.78-22.53-25.03Q2 2008-13.84-2.24-8.04-11.04-12.25-9.83Q3 2008-25.45-20.02-22.740.892.89-1.12Q4 2008-48.73-37.83-43.28-20.2-21.86-18.53Q1 2009-16.26-10.24-13.250.52-0.271.31Q2 200981.5858.2769.9347.4155.3339.49Q3 200924.837.6131.2119.3819.4819.27Q4 20098.3915.7712.085.085.065.09Standard Deviation

32.2424.3827.0718.3919.5717.47Mean3.224.323.776.846.866.82

 

Interpretation of the numbers

So you can see the Standard deviation and mean of returns for 2 Bad Funds and 2 Good funds and their mean return and mean standard deviation in a single quarter. So you can see that Bad funds have given return of around 3.77% per quarter on average (simple average , not compounded one) and the standard deviation is 27.07%, which means that it can deviate up to 27.07% on the upside or downside with 68% chances. (forget the maths, you have to go into probability and normal distribution and all those things, interested people can look for this link to get more insight on this. Similarly the good funds would return on an average 6.84% every quarter with deviation of 18.39% on upside or downside with 68% probability.

Conclusion

So, the conclusion of this whole mind boggling exercise is that we should understand that short-term performance of mutual funds is not where we should aim! We should properly evaluate the fund performance with different parameters. We should also concentrate on volatility and risk exposed by the mutual fund.

POLL (please vote, It will help me write a new post)

Comments please. Please share your views on how do you feel about Mutual funds with short-term performance ?

How to Open a PPF account at SBI Bank

Posted on by Jagoinvestor

Most of us want to open a PPF account, but keep postponing it just because we don’t know the requirement of doing so? It seen that majority people open their PPF account with State Bank of India. Let us see 3 easy steps of opening a PPF account in SBI branch.  The whole process does not take more than 30-45 minutes if you prepared in advance and go with all the documents that are required and there are no road blocks in between. The biggest advantage of opening the PPF account with SBI is the online transaction facility you can use to deposit in your PPF account online and dont have to rush to the branch every now and then. Read why you should open a PPF account in SBI even if you dont need it right now.

3 Steps of Opening a PPF Account in SBI Bank

PPF account in SBI

1) Choose a SBI branch which is authorized to go government business.

Usually any ‘large’ branch with lots of customers should be able to this! Usually newer and smaller branches may not have this clearance facility. One doesn’t need to have a Saving Bank  account in that branch. Locate your nearest SBI Branch using this

2) Procure and submit PPF account opening form and Identity/address Proofs

It would only 3 minutes to fill. Choose a nominee and get a witness signature. Now you have to submit anyone of following Proofs.

  • Passport
  • Pan card
  • Driving license
  • Voter id
  • Ration card
  • Two Passport Size Photographs

Any government issued identity card or address proof should work. Keep originals for proof in hand to simplify the verification if needed. That’s it. The bank should now be able to open the account. Usually it may take about 20 minutes or so.

3) Get PPF Passbook

A pay-in slip needs to be filled and the initial subscription needs to be credited into your account. A passbook similar to a Saving Book passbook will be issued with your photo affixed and the nominee’s name stated.  PPF rules can be found on the back. This is all, your PPF account in SBI is opened now.

How to Link your Online SBI Account to SBI PPF account for Online Transaction

If you have an online SBI account, you can add the PPF account as a third party account for transferring money directly. As mentioned above the PPF account can be in any SBI branch. There are no processing charges for doing this transfer. When you do this online for the first time, go to the bank and update your PPF passbook and check if the transaction has occurred correctly. This has to be done since you cannot look at the amount in the PPF account as yet in SBI. This is a major drawback of SBI-PPF (and post office) accounts.

A standing instruction maybe issued from your online account for auto-credit to PPF. However there are two disadvantages

  • Rarely there maybe system failures and the standing instruction may not get honoured. So you need to check if it has occurred.
  • You cannot subscribe a lower amount if you need the cash for emergency use (this situation wont arise if you had an emergency fund )
  • You need to go to the bank to cancel the standing instruction .

There are only 12 credit transaction allowed per year. So take care of this before issuing a standing instruction.

How to Transfer your PPF account from One Bank to Another

  • Go to the branch where you want to transfer your PPF account and deposit an application with your PPF passbook
  • takes 10-15 minutes

How to Submit Proof for Tax

Take xerox of the PPF passbook updated with all transactions and get it attested in the branch. (not sure if the attestation is really required) [ Update 5th Feb, thanks for Mithilesh ]

Other points to Consider

Subscriptions must be made before the 5th of every month for the amount to taken into account for interest calculation for that month. If you want to open a PPF accoun in the name of a minor in addition to yours, the total PPF investment limit is Rs. 1,00,000. The total tax benefit is also the same. This is a new rule and is not yet printed in the PPF passbooks! See Here, Here and Here for more detail

Comments please. Are you going to Open a PPF accoun this year? Do you feel one should open a PPF account at Post Office?

A short guide to Hire a Good Financial Planner in India

Posted on by Jagoinvestor

Are you looking for Financial Planner? If you are, you should go through this article that talks about almost all the necessary information you need before hiring a financial planner. Most of the clients are confused on simple things like, where to find a good financial planner, what they should expect from financial planner and most importantly they do not understand the financial planning environment in India and how it operates. There are lots of myths and misunderstanding around the financial planning field and this article will give you most of the basic information you need to be aware of while hiring a Financial Planner.

What is a Financial Planner and what is the Certification for Financial Planning

A financial planner is a professional who helps his clients to deal with various personal finance issues through proper planning. Just like we have a doctor for our physical problems, we have Financial planners for our Financial problems. Just because you know “what is a Mutual fund” or some “Tax laws” or can buy and sell stocks on Stock market, it does not mean that you don’t need a Financial planner. Financial Planners are professionals who have done the certification, have learned strategies and have gone through in-depth knowledge to understand how to restructure a common man’s financial mess and come up with a sound long term plan which will help a client achieve his/her financial goals in future.

Just like CA, MBA, CS and other professional certifications, there exist a certification course for Financial Planning which is called CFP (Certified Financial Planner). Read more about CFP Here. CFP is regarded as the top most certification in Financial Planning and it is recognized worldwide in majority of the countries.

The 6 steps of Financial Planning which every Financial Planner has to go through are

  • Step 1: Setting goals with the client
  • Step 2: Gathering relevant information on the client
  • Step 3: Analyzing the information
  • Step 4: Constructing a financial plan
  • Step 5: Implementing the strategies in the plan
  • Step 6: Monitoring implementation and reviewing the plan

Who is not a Financial Planner:

A lot of CA’s, CS’s, MBA (finance), CFA, ICWA and other Finance related professionals feel that they are the right professionals to do Financial planning for individuals. Just because “Financial Planning” or “Personal Finance” has “finance” word associated with it; does not mean that any one from different finance field can be a Financial Planner. Financial Planning is very different from what CA, CFA or a MBA Finance does.

Financial planning deals with individual personal finance, his future financial goals, the risk taking appetite. Having  CFA or MBA (finance) as qualification will definitely help at some level and may be some CA’s, CFA’s or MBA (Finance) have a great understanding of Financial Planning, but it’s not true for everyone in general. In the same way, any ULIP Agent, Insurance Adviser or Mutual funds agent, Wealth Manager, PMS guy is not a Financial Planner. These people are there to assist a Financial Planner to sell the products. In the analogy of Medicine field, Financial Planner is a Doctor and all these agents, Wealth managers etc. are like Compounders.

[ad#big-banner]

Where to find a Financial Planner (Important)

There are two ways of hiring a Financial Planner for your self:

1. Hiring a CFP

In case you want to hire a CFP (which is recommended) you can get a list of CFP’s in India at FPSB website link, Click here.  You can find out CFP based on

  • Name/Company
  • City/State
  • Nature of Employment

Tip: You should search for CFP’s who are “Independent Financial Planners” or “Self Employed”. Read further to understand the reason.

[ad#link_unit]

2. Hiring a non-CFP

You can also Hire a non-CFP but you have to be very careful while doing that. Before CFP certification came to India, we had excellent planners in the Industry who understood the financial planning process subconsciously and still practice that but without having the CFP certification. These people can be from various backgrounds but can have sound financial planning knowledge. They are rare species. Some of them who I can think of are people like P V Subramanyam.

The biggest problem one faces in hiring a Financial planner is the “Trust”. So you need to have some level of trust with Financial planner and for that you need to interact with him, spend time with him, get references from family and friends and once you are satisfied you can then hire him/her. A financial planner at the end is someone who is also interested in educating you and not just making money from you. Just imagine a doctor who gives you medicine, but does not tell you the preventive measures to take, so that you are not ill next time. Would you like to visit him again and again?  He should be interested in educating you up to a level where you can take informed decisions yourself. Only then you can call him a good doctor, the same applies to a financial planner.

Current Status of Financial Planning Practice in India

There are two ways a Financial Planner makes money

  1. By pure consulting and advising (by making the financial plan)
  2. Through Commissions (from products sold to clients)
  3. Combination of 1 and 2

In India people dont value consulting and hence Financial planners are having a hard time getting clients whom they can charge on pure consulting basis. Therefore what has happened is most of them make money through commissions from selling the products. Based on this fact most of the agents, wealth managers etc have completed CFP certification just because they can get the tag of “Financial planner” and then make a financial plan and finally sell products to them and make good commissions, hence at present the current status is that 8 out of 10 CFP’s in India are associated with some mutual funds or Insurance company as  either of

  • Analyst
  • Asset manager
  • Branch manager
  • Accountant
  • Vice president
  • Adviser
  • Senior manager
  • Wealth manager

They are still doing the same old work with a new certification in hand called “CFP” because they know that in coming days  CFP’s is what everyone will prefer to hire for their Financial planning and similar services. These so called just for name sake CFP’s make the financial plan and when you buy the products, they will make majority of their money through commissions.

So what you have to look for while hiring a financial planner is that He/She should be independent Financial planner and should not be associated with some Mutual funds or Insurance company and has no compulsion of executing the plan through him. There should be freedom in Clients hand that he/she can execute the plan from anywhere he/she wants. As an additional service Financial planner can give an option to have financial plan executed through them, but it should never be compulsory because otherwise there will always be some level of biased attitude while recommending products to you.

The biggest problem with Financial Planning is that still “Financial Planning” is confused with “Investment Planning”. The moment I tell someone I am a Financial Planning writer, they start asking me stupid questions like

  • What do you think Market will do tomorrow?
  • Which is the best mutual fund?
  • I have 5 lacs spare cash, how should I invest it so that I get maximum returns?

No one talks anything other than investment. Financial Planning is more than just investment planning, it’s much more than that. Read more to understand what is the goal of Financial planning.

Why to Hire an Independent Financial Planner

Do you know how a Financial Plan is made? No you don’t! Here are the problems with the Financial Plans:

1  No Personal Touch

What most of the Financial planning company or professionals do is that they have automated Financial Planning software in which they just stuff your data and create a Financial Plan automatically with a single click. This can take just minutes. While there is nothing wrong in creating the basic template of Financial Plan with help of a software but what really matters is how much of that is customized to a client’s needs personally? So a financial planner should give enough time to tweak the financial plan to suit a clients need, which is more though for Financial planners working for big organisations especially mutual funds and Insurance companies because they have to stick too much to the template they use and not to much of customization is done or recommended.

An Independent Financial Planner has more liberty and flexibility to make a financial plan which will be more suitable for you. So if he wants to add some extra part to financial plan or want to restructure something totally, it’s possible with independent financial planner but it’s rigid with non-independent financial planners.

2. Lack of quality

Everyone like beautiful pictures, we are attracted to beautiful people no matter what crap they are from inside. Some of the best looking things in the world are totally shit. Same is true for Financial Plans, that most of the financial plans I have seen has beautiful pictures, amazing color schemes, beautifully designed tables and great back ground but when it comes to content and the quality of Financial plan they suck big time! There is nothing great about them. But clients like them because we are visual animals and we assume a clean and beautiful thing literally at face value. I do not say that all clean and beautiful financial plans are crap but most of them really are. A simple analogy is a dish you get at 5 star hotels and some authentic but not so well known eating place, the food you get at 5 star hotel will look great and there will be too much time spent on making it beautiful but at the end it can taste very average or some time even foul, but the food you get at home or some less known place may taste better and may be more healthier but then it might just look okay and not “beautiful”.

A financial planner who is independent and takes limited clients does not have time and energy to work on beautification of financial plan, he mainly works on making financial plan better and not the looks of financial plan. So if you watch a financial plan from an Independent financial planner, it might not look as beautiful as from other planners.

What to Look into a Financial Planner

You should watch out for following things in Preference

  • Competence or Knowledge
  • Confidence
  • Your level of Trust and comfort with Financial Planner
  • Frankness

What to not look into a Financial Planner

  • Promise of Returns
  • Magic (financial planner is not some magician who will fix all your problems and will make a financial plan which will try to achieve all you want)
  • Instant Performance

How much to Pay to a Financial Planner

This is a debatable topic, still let’s try to understand and find out how much do Financial Planners deserve.

Financial Planners in US and Australia gets as much as $150 to $200 per hour. (that’s close to 7.5k – 10k per hour). Financial Planners in India cannot and should not ask for that kind of money for two reasons:

  1. They will not get it 🙂
  2. FP is new in India and there is still not standard procedure or standards to create a financial plan. So what they can expect is not more than $30-$40 max per hour.

Now in India people will literally laugh if a Financial planner asks money in per hour basis, it’s just not what Indians can imagine. Imagine doctors asking per hour fees here or lawyers or anyone. We Indians like to pay one time fees or lump sum fees, that’s the model India runs on. A good financial plan takes around at least 10-12 working hours (strongly focused and distributed across several days). From that stand point a price in range of 10k – 25k looks reasonable for a Financial plan. Anyone who is charging less than Rs 10,000 is undervaluing it and working more for less money. Other point is, you have to understand that all financial planners differ from each other and the amount of detail and care they take while creating it.

Comments, Please share your views on what are the other issues you guys face/ will face while choosing a financial planner. In case you know of a good Financial Planner, feel free to share here.

Check my latest trip Pictures at Netrani Islands . I did Scubadiving , snorkeling and Tent Camping .

What is 80/20 rule and how it applies to Financial Planning

Posted on by Jagoinvestor

Let us first understand what is 80/20 Rule? It means that 80 percent of your outcomes come from 20 percent of your inputs! It’s also called “law of the vital few” or Pareto principle. This rule applies to almost all the areas of life, even though it’s called 80:20 rule the main idea of this principle is that a large part of outcomes are result of a few number of actions and 80:20 was the best fit for most of the things. A very simple example of this rule is that 80% of the world Wealth is owned by 20% of population. Let us see some example to understand this rule:

  • Look back at your exams, 80% of your marks came from the studies you did on 20% of the days 🙂
  • If you are coder, you will accept that 80% of the execution time is taken by roughly 20% of the code.
  • Even on this blog, 80% of the comments are written by roughly 20% of the readers 🙂
  • Also 80% of the total comments are from 20% of the total articles.
  • 80% of the recognition you get is for a small amount of work (20%) that you do.
  • 80% of sexual satisfaction comes out of 20% of total time spent.
  • Most of our worries (80%) are a result of small number of problems (20%).
  • 80% of the Assets under management is with 20% Mutual funds.

[ad#link-unit]

Some Examples from Financial Life

The same 80:20 rule applies to our Financial Life as well…

  • 80% of the good returns we get is from 20% of good investments we make or 20% good decisions that we took.
  • 80% of the money lost or opportunities lost are result of the 20% small things we didn’t took care of.
  • 80% of the money we could have made in Stock markets are due to those 20% of the times we didn’t take risk.
  • 80% of the Financial Planning clients are handled by 20% Financial planners (individual or companies) in India.

How to change our way of thinking

There are many small things in our financial life which looks very small but we don’t concentrate on them neither do we appreciate the impact it can have on our financial life. Some of the 20% things which we don’t take care of are:

[ad#big-banner]

These are 20% part which if taken care properly can greatly improve the performance or your returns (at least mental satisfaction) by great deal . We concentrate mostly on things like strategies , “finding best funds” , “finding cheapest plans” , “finding the easiest way to maximize the returns” , but these are 80% part of process which accounts for less than 20% of the success .. Just ask yourself

  1. How many times have you made money from the best stock tip or best Mutual funds for the year
  2. If finding the best plan (term plan , ULIP , or any other product) was so easy and clear , why is there so much competition and confusion.

You have to understand the real goal of financial planning first and then identify the areas you really need to concentrate on .

Here is a 1 hour talk on “Behavioral Finance : Role Of Psychology” from Yale University . Have a look

Comments , please share your views about 80:20 rule . Can you give some other real life example ?

Upcoming Next article : “How to Choose a Financial Planner”

How to Miss your Income Tax Returns (ITR) Deadline

Posted on by Jagoinvestor

Did you miss your deadline for filing the tax return by 31st July? Most of us pay the taxes before the deadline of 31st Mar, but when it comes to filing the return we are lazy people and many times we make mistakes in hurry. However very less people know that even if you have missed the deadline to file your Income Tax Returns, there is no need to panic, as when it comes to filing of your income tax returns, tax laws are not so stringent. In this article, tax implication will be explained considering all the scenarios. You being a salaried person may have missed the filing of your tax returns if you have an income on which all the taxes have been deducted or have been deposited by way of advance tax, no need to panic. There should be no additional penalty or interest for not filing the return by July 31, 2009, provided you act now. You still have the time to file your return of income for the assessment year 2009-10 till March 31-2011.
See the basics of how tax is calculated.

Rules

  • However, persons who have any Business or Capital loss to be carried forward may have a cause to worry as the said loss would not be allowed to be carried forward to next year if the return of income is not filed before the due date.
  • If you still have any outstanding taxes to be paid (after deducting TDS and Advance taxes paid, if any) you would be liable to pay simple interest @ 1% per month or part of the month, on the tax payable commencing from the date following the due date till the date of filing the return.

 

Some Basics

  • TDS: TDS is tax deducted at Source, Generally Employers deduct our taxes in advance and pay to govt in advance. TDS in detail
  • Previous Year: Previous Year means the year when we earn Income.
  • Assessment Year: Assessment year is the year when we actually pay tax for the income earned for previous year.
  • Example: So if we earn income in year Apr-2008 to Mar-2009,  2008-09 is our Previous Year and 2009-10 is our assessment year.

In case you have still not planned your taxes, here is a small guide for quick tax planning.

[ad#big-banner]

The Implications of not filing the income tax return on time and the steps to correct the situation

Scenario 1#  You do not have outstanding tax liability

In case you have already paid your taxes before 31 March, 2009, but could not file the return within the due date, you may file a return at any time before the end of one year from the relevant assessment year, simply put; for the financial year 2008-09 return can be filed at any time before 31st March 2011, however you may invite a tax penalty of Rs 5,000 u/s 271F of income tax act even if all your taxes have been paid if the same return is furnished after 31st March, 2010.

Scenario 2#  You do have some Outstanding Tax liability

If you do need to pay any balance tax, there is some financial implication. The basic principle remains the same: The income tax return for a given assessment year can be filed any time till the end of that assessment year without any penalty. If it is filed after the end of the assessment year, there may be a lump-sum penalty of Rs. 5,000. On top of this, there is a penalty of 1% per month on the net tax payable u/s 234A.

Example:

Say, your income tax liability for the year is Rs. 40,000. You have TDS (Tax Deducted at Source) of Rs. 20,000, and you have paid an advance tax of Rs. 6,000. Thus, the remaining tax payable by you is:

Net Tax Payable = Income tax liability for the year – TDS – Advance tax paid

= Rs. 40,000 – Rs. 20,000 – Rs. 6,000
= Rs. 14,000.

[ad#link-unit]

Now there are two cases, which we have to consider

Case 1:  File income tax return before the end of assessment year

Say you file your income tax return on 17th September, 2009. In this case, you would be filing your return 2 months late (partial months are considered as full months).

Final Amount = Net Tax Payable + Interest for 2 months at the rate of 1% per month Amount payable ,

= Rs. 14,000 + (2% of Rs. 14,000)
= Rs. 14,000 + Rs. 280
= Rs. 14,280

Case 2:  File income tax return after the end of assessment year

Say you file your income tax return on 4th June, 2010. In this case, you would be filing your return 11 months late (partial months are considered as full months). On top of this, you would be filing the income tax return after the end of the assessment year for which you are filing the return. So, in this case,

Final Amount = Net Tax Payable + Interest for 11 months at the rate of 1% per month + Lump sum penalty of Rs. 5,000

= Rs. 14,000 + (11% of Rs. 14,000) + Rs. 5,000
= Rs. 14,000 + Rs. 1540 + Rs. 5,000
= Rs. 20540

Save some tax by understanding Income clubbing provisions of Income tax

Additional Scenario

You have losses that you need to carry forward. This applies irrespective of whether you have any net tax payable or not. If you do not file the income tax return for a year by the due date, a loss for that year can not be carried forward. The only exception to this rule is loss from house property– this loss can be carried forward even if the IT return is not filed in time. Thus, if you have a loss from any of the heads of income (except for the head “Income from house property”) and you file your income tax return late, you would not be able to carry forward your losses. Thus, you would lose the benefit of set off of these losses against the income of the next year.

Conclusion

Not filing a return on time does have financial implications, especially if you have a net income tax payable and/or if you have losses to be carried forward. This can really hurt especially if the losses to be carried forward are significant. Therefore, your best option is to ensure that you file the income tax return by the deadline.”Better late than never” is the best policy when it comes to income tax return filing.

Notes from Manish:

Disadvantages of filing a late return

As per Income Tax Department of India : “Aa tax return may be furnished any time before the expiry of two years from the end of the financial year in which the income was earned’. This means that if you earned your income during FY 2009-10, you may file a belated return anytime before 31st March, 2012 ” . But there are some disadvantages if you dont file your returns on time .   They are

  • You will not be able to carry forward your Business loss (Speculation or otherwise) , capital loss , loss due to owning and maintaining of race horses.
  • Loss of Interest on refund : You may loose interest on refund u/s 244A specially in case if you are claiming a Major amount as refund.
  • You cannot revise your return.

NOTE: Dear Friends, the above article does not mean to encourage people for filing late return but only to make taxpayers aware about the provision of IT act and help them taking informed decision.

This is a guest article written by Mr. Rishabh Parakh who is a Chartered Accountant and Director at  Money Plant Consulting

Top 10 tricks used by Agents for misselling financial products

Posted on by Jagoinvestor

Buyers Beware. This is the mantra one has to follow in Indian financial markets. From last many years agents and so-called “Financial Advisors” are using fancy words and tactics to lure investors and sell them inappropriate products like wrong Mutual funds, ULIPS, ULPP’s and Endowment Policies.

In this article we will see what are the common tactics used by agents and how we should handle them and demand logical explanation.

mis-seling

Note that this is not an exhaustive list and there are many more miss-selling techniques which is not covered here. Lets see them one by one.

1# High Dividends declared by Mutual funds.

This is very common tactic used by agents. Even the mutual fund companies advertise about big dividend payout to lure investors.

Investors who do not how mutual funds with dividend options work fall in the trap thinking that dividend is something extra which they get apart from growth, where as the reality is that dividend is your own money which comes back to you and then NAV goes down by that much quantity.

Have a look at Difference between Growth and Dividend option in Mutual funds

2# Premium can be stopped after the first 3 years

This is a very effective statement because every investor wants “no trap” investment option, hearing that we just have to premiums for 3 yrs and still our insurance cover and policy will keep running makes us interested in these products.

There are two wrong things here:

Firstly, ULIP premiums can be stopped even before 3 yrs, there is just lock in period of 3 yrs, even some agents don’t know that you can stop the premiums of ULIP’s anytime after 1 yr and you won’t loose 100% money.

The other thing is that advising paying premiums just for 3 yrs is wrong thing as ULIPs are long-term products and should not be used for short term. This is against the basic principle of any equity related product.

3# This fund has returned 36.6% annual return in last 4 years

Last 4-6 yrs have been extremely good for Indian markets and performance of every mutual funds, ETF or Equity linked product has been great. This single most fact has been used by agents and they have been advertising about the “great performance” of their respective ULIP’s and mutual funds.

What one has to really look at are the returns a product has provided over and above its benchmark or other peers. If Nifty has given 40% return and a mutual funds with bench mark as Nifty has given 41%, there is nothing great in this1p..

In fact its better to use Nifty ETF’s then and get 40% return without the fund manager risk and other costs associated with Mutual fund . We should also ask the agent about the performance of product in bad times and not just good times .

4# ULIPs offers guaranteed returns

This is not true! Any Unit Linked product does not come with Guaranteed returns. Agents some times just say this to attract customers and moreover their Greed! There might be the case that there is some guarantee for initial years premium or over all but then it will be so low that its not even worth considering.

A simple thumb rule is that anything beyond Bank FD returns will always carry some level of risk otherwise why will someone buy FD at all if they can get some guaranteed returns. Nothing comes free in this world, there is always some risk involved.

Watch this video and don’t get fooled by the agents selling ULIPS plan:

5# This is regarding 180% – 250% guaranteed return plan Sir.

Now a days I can see this strange thing with most of the products, that they have started giving “guaranteed returns” with first year premiums.

This has two reasons, people in India like words like “guaranteed” and “secure” especially at times when markets are doing bad, second reason is that they can use these words at the time of promoting their products, I get a lot of calls which start with “Hello sir, this call is regarding 250% guaranteed return plan sir, Can i explain it to you?”

I can sense that sense of pride in the caller’s voice clearly when they say this even though they dont know whom they are talking too.

My first question to them is “Just tell me the IRR of this policy” and then starts the process of “wait sir, let me transfer the call to my senior” and then “wait sir, Let me transfer the call to the regional manager and CEO” who have no idea what is IRR!!! Finally

6# I will give you 10% of Cash back on premiums paid.

ULIPs and an endowment plans have very high commissions in the first year [See a case of miss-selling in ULIP]. So agents lure customers by giving back some part of their commissions back, in this way they get more clients and more money overall.

Don’t fall in trap of this. Many agents also offer to pay your premiums for 1 yr so that you fall into the trap and take the policy.

7# Money doubling in three years

This is again based on past performance, ask for the average rate of return over long term and anything above 15-16% should look unrealistic. Many agents tell the illustration by taking 20% or as high as 30% as return, they will show your last 5 yrs data when this has actually happened, but its not a right thing for 2 reasons.

First reason is that as per IRDA they are supposed to show you illustration with 6% and 10%, nothing other than this. Ask the agent to explain why they are showing you anything other than 6% or 10%. The other reason is that 20% and 30% are not realistic returns from equity in very long run, you should not expect more than 12-15%.

see this article which explains what are the realistic long term returns from Equity

8# You also get Free Insurance and Tax Benefit.

“Free”, we love this word. You can see that even I have used this word at the top of the page right hand side of this page to lure visitors to subscribe to this blog. It works in most of the cases.

There is nothing called as “Free Insurance”, most of the investors do not understand how insurance works and what are the terminologies, they don’t know that there is something called as “mortality charges” which we have to pay as cost of Insurance.

Apart from this agents also stress on tax saving part which is not something which is unique to those products. We have tax savings on different products anyways.

Dont forget to grab your Free Ebook by Subscribing to this blog by Email or RSS.

9# These are most bought product in the market and have good returns.

Now this is vicious circle, ULIPs are around 70-80% of the products sold by Life insurance companies these days, the reasons are simple. They are explained by agents in such a way that things looks so rosy that customers feel its a worth buying product.

So agents pitch these products to other investors and then they feel “if everyone is doing it then it should be right thing“, far from the actual and real truth. Common sense is not common, so don’t do what others are doing just blindly, think about it yourself, evaluate it.

You should rather be doing what very less people do. Buy Term Insurance which is not even 1-2% of policies sold 🙂 .

10# Low NAV of a NFO from mutual funds

Most of the NFO’s pay very heavy commissions to agents. This is the reason agents tell investors that they should invest in this mutual funds because they will get more units. Even Investors confuse NAV of mutual funds as share price of a company.

At the end its fund performance which should matter and not NAV number, truly speaking we should request IRDA to ban publishing NAV numbers. Some agents also lure investors saying that they should buy low NAV mutual funds because they will get more units and then more dividend as dividend is paid per unit basis.

This is true but again at the end investor will not benefit as dividend is nothing but their own money.

11# Readers Contribution

Add a comment telling how agent tried miss-selling a product to you and I will add it here :). You can also share any incident small or big.

Readers Tip, How to reduce Misselling:  One of the readers “Jagbir” has suggested an excellent idea for IRDA to curb miss-selling:  As per Jagbir, “Agents must get commission only after customer feedback, If customer is not satisfied with the agent suggestion or his way of selling, they can give the feedback and then agent commission will not be paid “.

What do you guys think about this ? Please comment ..

Conclusion

India financial markets have two main issues

High commissions for agents:

Because of high commissions, agents tend to go beyond limits and start unethical selling. Apart from this lot of sales pressure, pressure of meeting targets force agents to achieve the target by hook or crook. IRDA should finally come up with some rule where they remove the commissions on the products.

Low awareness and understanding from investors:

Finance Industry has very smart people at higher level, CEO, Relationship managers, advisers and everyone. they are smart people. they understand human psychology. They know Indian public more than Indian public knows themselves. They know what words to use when and how to divert our minds, our thinking.

Why do they come up with “Guaranteed return products” when markets are low?

That the the perfect and the most right time for everyone to enter Equity, but companies know we are afraid of losing, we don’t like losses, we have lesser risk appetite and then all the Jeevan Astha and Jeevan Nishchay and other Secured products like RGF will pop up.

Most of the NFO’s will come in the bull markets and when markets are already up because that is the time we are charged up and ready to bet our home on anything, that is the time when we have to avoid those things.

So finally avoid the trap, ask questions, doubt everything!!

I would like to hear if anything like this has happened with you did some agent every tried some tactic to missell a product to you. Please share your experience and let others know what happened with you.

List of Different Asset Classes for Investing

Posted on by Jagoinvestor

Below is the list of different Asset classes one can consider for investing in Indian markets. For building a successful balanced portfolio one has to understand different asset classes and as per their risk appetite, one has to build his/her portfolio so that it’s optimal from his risk return point of view. In this post you will look at different asset classes and their sub categories with the risk potential. This is not an exhaustive list of categories, however it covers most of them. See the Chart Below

[ad#big-banner]

Readers who are reading it in Email can see the chart here or visit blog article

Points to Remember

  • The above chart does not contain exhaustive list of products and asset classes. See What is Asset Allocation
  • REIT and REMF are yet to come to India, they are not there in market yet
  • Mutual funds classification is not complete. There are different ways to classify mutual funds, the one I have shown is one of the way. Here is the list if good Equity Funds and Debt oriented Mutual funds

Comments! I am sure I missed out somethings in this chart, please suggest me something I can add.

How to save and invest money for your Child’s Education? – Ready 5 easy steps.

Posted on by Jagoinvestor

Child Education is one of the biggest goals of parents these days because of the tough environment and high expenses involved.

Most of the parents start saving for Child Education right from the birth of Child, which is a great! In this post we learn how you should evaluate the target cost of Children Education and how you can achieve the targets within expected deadline. We are mainly talking about Higher education in this article.

Many Companies come up with Child plans and other products which are nothing more than ULIP’s bundled with special features like Wavier of Premium option and some other features. However Planning for Child Education is not a big task and you can do it yourself, given you have some interest and eagerness to do it.

So following are the 5 steps you can do yourself to plan for your Child Education:

 

Step 1: Set a Target Date

The first step is to find out the target date for the child education goal. I feel the that average age when a child goes for Higher education can be taken as 21 or 22. You can take your own target tenure depending on your expectations and situation.

If you are not yet married then find out the estimated time left for your marriage and when you want to start your family (i mean children) and add target years to that number. For me personally it would be 4 + 21 = 25 yrs. what about you?

Step 2: Set a target amount in today’s term

The next step is to determine how much does it cost in today’s value for giving education to your child.  All of us have different aspirations when it comes to our child education, courses like  MBA, Engineering, MBBS, Software related courses are on our minds.

So let’s say for example you determine that Rs 10 lacs is good enough to provide a good education to your child in today’s value. Now you can jump to next step, but before that make sure you understand the effect of inflation on our Money. Here is another good article on Inflation

Step 3: Find out the amount you need on target date

Next step is to find out how much amount you actually need in the end. For this you first need to determine the rise in education cost per year. As per the recent year numbers, Education costs are increasing at 10% per annum.

A decade ago you could have done an MBA at 1.25 or 1.5 lacs, but today it costs more than 4 lacs. That’s more than the average inflation. Education cost in our country has been increasing at higher speed than other things. so you need to consider some figure. I would like to take this as 10%.

Now, you can just inflate the today’s cost using simple compound interest formula. Understand Compound Interest and other important Formulas.

Target Amount = Amount today X (1 + rate) ^ Tenure

Example: Considering myself, the amount I would require today is around 8 lacs. My tenure is 25 yrs and rise in education cost I would like to take as 10%. So

Target Amount I need after 25 yrs = 8,00,000 X ( 1 + .10) ^25 = 86 lacs (approx)

So, I can see that I need to make around 86 lacs in 25 yrs. Please note that this figure is based on your assumptions. The actual Figure you might need may be more or less to this amount. But still this is good enough, as we have a plan at least and we are near the goal.

Step 4: Estimated the return which you can generate over your investments

This is an important step where each investor has a different level of risk appetite and knowledge. Depending on those factors one can choose different products for investments and can generate some return through it.

One who is not much interested in finances and has lesser risk appetite can choose Balanced Funds or Debt Funds and can generate around 10-11% returns. On the other hand a person who can take more risk and have more interest in finances can invest in products like Equity Mutual funds, ETF’s, Direct Equities etc and can target close to 14-15% returns.

Getting more or less return is fine. All it matters is, does it suit your risk appetite? 

There is no point in investing in risky products if you are not a risk taker. As a rule of thumb, a person who is investing for long-term like 10+ yrs should take Equity route because over that kind of time frame Equity has performed the best with maximum returns and with small risk.

So for long-term, Equity is what you should invest in and for short-term prefer equity only if you are great risk taker. Your range of return expectation should be from 8% – 15%. Anything above that is a bonus but getting more than 15% is tough for general investors like us.

Anything like 20-25% should be the target of more professional investors who have advanced knowledge and who are full-time into stock market and related fields. So better be satisfied with suitable returns which will be able to achieve your goals.

Understand Equity and Debt here

Step 5: Calculate per month contribution

The next step is to find out what is the monthly contribution you need to do. For this you have to use this scary formula.

C = [FV * r] / [(1+r) * { (1+r) ^ t – 1 }]

Where

  • C = contribution per month
  • r =Rate of return you expect to generate on your returns .
  • t = tenure (It would be multiplied by 12 if payments are monthly)
  • FV = Future value of your goal (this is calculated in step 3 .

You can Use this Calculator to calculate these figures. Just fill in your details and get the output. Now you can invest this money in product you have chosen.

Important Points to Remember

  • Apart from these 5 points, there are other points you have to consider which will make your Child Education planning more strong and successful.
  • Make sure you are Insured Properly  because in between if you die prematurely the amount of insurance your dependents get should be good enough to achieve your Child Education. Make sure you buy a good term insurance plan to cover this risk.
  • When you are near the end of the goal, when still 4-5 yrs are left then you should better start withdrawing your money from riskier products to more safer products, so that you do not get surprise drop in your Corpus. If another subprime crisis happens at the same time when your kid is ready to go to college, it will be a tough situation. So better start withdrawing your money every month from Riskier products to safer products.
  • Make sure you review the performance of your Child Education plan every year and make sure that things are going as expected. If not, find out why? See if you need to change your numbers, if you do it’s fine. No one can plan for things in advance with accuracy and it’s totally find if things go little off track. Just be ready to adopt the changes.
  • At the end, sticking to this plan is the deciding factor of whether you are successful or not. The consistency in Investing for this goal is the main thing. Returns will follow when you follow the plan.
  • Make sure the Asset Allocation is right and make sure you stick to same asset Allocation.
  • Make sure you do not force your Child to adapt as per your Plan. Make sure you don’t have anything rigid for Child. Let him/her decide what they want to do, You are mainly a motivational parent who are paying for cost of what your child wants to do in their life. A successful Child Education plan won’t make any sense if he/she is not able to pursue what they are passionate of and love doing.

Conclusion

You have several products in market which claim to be Child Plans. They are costly and complicated for most of the general investors. The simple funda for successful financial planning is “Dont buy if you dont understand it”. Planning for Child Education can be a step by step designed simple plan which we can do ourselves.

Please leave your Comments to let me know how did you like the article? Which one of these steps is the most challenging part? What do you suggest is the rough estimate of Child Education expenses today?

Introduction to Health Insurance in India

Posted on by Jagoinvestor

How many accident you need to realise that you need Health Cover? It takes just one visit to a hospital to make us realize how vulnerable we are, every passing second. For the rich as well as poor, male as well as female and young as well as old, being diagnosed with an illness and having the need to be hospitalized can be a tough ordeal. Heart problems, diabetes, stroke, renal failure, cancer – the list of lifestyle diseases just seem to get longer and more common these days. Thankfully there are more speciality hospitals and specialist doctors – but all that comes at a cost. The super rich can afford such costs, but what about an average middle class person. For an illness that requires hospitalization/ surgery, costs can easily run into five digit bills. A Health insurance policy can cover such expenses to a large extent. Read why Health Insurance is more Important these days compared to Old days

Types of Health Insurance

There are mainly three types of Health Insurance covers:

  • Individual Mediclaim : The simplest form of health insurance is the Individual Mediclaim policy. It covers the hospitalization expenses for an individual for up to the sum assured limit. The insurance premium is dependent on the sum assured value. Example : If you have 3 family members you can get an individual cover of Rs 2 lacs each . In this case each of you are covered for 2 lacs , if 3 members face a need for hospitalization , all 3 of them can get expenses recovered upto Rs 2 lacs . All the 3 policies are independent .
  • Family Floater policy : Family Floater Policies are enhanced version of the mediclaim policy. The sum assured value floats among the family members. i.e  each opted family member comes under the policy, and it covers expenses for the entire family up to the sum assured limit. The premium for family floater plans is typically less than that for separate insurance cover for each family member. Example : In this case if suppose there are 3 family members , you can take a Family floater policy for Rs 6 lacs in total . Now anyone can claim upto 6 lacs in expenses , but then the cover will go down by that much amount for that year . So if one of the family member is hospitalised and the expenses are 4.5 lacs . It will be paid and then the cover will be reduced to 1.5 lacs for that particular year . Next year again it will start from fresh 6 lacs. Family floater makes sense for a family because that way each one in family gets a big cover and probability of more than 1 getting hospitalized in same year is too low untill and unless whole family is travelling together most of the times in a year .
  • Unit Linked Health Plans : Taking the ULIP route, health insurance companies too have introduced Unit Linked Health Plans. Such plans combine health insurance with investment and pay back an amount at the end of the insurance term. The returns of course are dependent on market performance. These plans are very new and still in development phase . This is only recomended for people  who can handle market linked products like ULIP and ULPP . Read who should buy ULIPs .

For a number of reasons, it is advisable to steer clear of unit linked health plans. The best way is to treat insurance purely as an expense. So if you are single, opt for an Individual Mediclaim policy and if you have family, opt for a Family Floater policy. The amount paid (by cheque or debit/ credit card) for health insurance premium provide tax exemption under section 80D for a maximum of Rs.15,000.

What is the Ideal Cover for Health Insurance

As mentioned earlier, the cost of Health Insurance depends on the sum assured , age, current health condition and your previous medical history. Higher the sum assured, higher the premium. So what is the ideal health insurance cover requirement? There is no standard answer or thumb rule for this. If we agree that health insurance is important, one has to look at his/ her own lifestyle, health condition, age/ life stage, family history of illnesses and affordability. Keep in mind that most insurance companies limit the sum assured to a maximum of 5 lakhs. Also note that many health insurance policies “provide additional benefits” such as daily allowance, ambulance charges, etc. for hospitalization. Not only are such “benefits” superfluous, they tend to drive the premiums higher. So it is best to avoid such plans and stick to something basic and simple.

Image courtesy

Health Insurance provided by Employer

Many employers provide health cover for their employees. Isn’t that sufficient? Three aspects need to be considered in such a case – Is that cover sufficient? Is the insurer good enough? What happens if you change your job? Health insurance is provided as a perk to the employees. So it is important to understand the policy a bit more in detail and to check for coverage. The best way is to ask the HR Department for policy details. Get into details , what is covered , what is not covered ? Many times Employees just think that they have health Insurance and are just relaxed only to find later that it does not cover X and covers Y only upto a limit . That can be a painful situation .

Health Insurance for the aged

Till a few years back, health insurance companies were reluctant to provide cover for the aged. But nowadays there are a lot of insurance companies providing policies for the senior citizens. Insurance cover paid for a person of age 65 years and above, can provide additional tax exemption of up to Rs.20,000. But keep in mind that the premium rates are higher for senior citizens. For the employed, another option is to approach the employer to negotiate with the official insurer to provide an option for additional cover to parents. Since the volumes are high, the insurer can provide such added cover at attractive premium rates.

One of our readers Pattu has shared a great calculator which he discussed in his comment is uploaded here , If you want to download it , Click here

Tax Exemption from Health Insurance Premiums

Sec 80D covers Health Insurance . You can get exemptions of

  • Upto Rs. 15,000 paid for self + spouse + cildren.
  • Upto Rs 15,000 paid for Parents (Rs 20,000 if parents are senior citizens)

So in total if you pay your health insuance and your parents health Insurance premium , you can save upto maximum of 35,000 .

Note : If you take Health Insurance riders with Term Insurance like Critical Illness cover , the extra premium paid for that will be actually be covered under Sec 80D , not sec 80C . See Tax Rules

What is TPA (Third Party Administrators) ?

TPA stands for Third Party Administrator. TPA is a middlemen between Insurer and the Customer . Customer can directly deal with TPA at the time of claim and TPA will help with with all the process of claim settlement . A TPA is a specialized health service provider rendering variety of services like networking with hospitals, arranging for hospitalization and claim processing and settlement. The concept of TPA has been introduced by the IRDA (Insurance Regulatory and Development Authority of India) for the benefit of both the insured and the insurer. While the insured is benefited by quicker & better health service, insurers are benefited by reduction in their administrative costs, fraudulent claims and ultimately bringing down the claim ratios. An insurance company can have more than one TPA and a TPA can serve more than one insurance company. Some of the services TPA provides are

  • Maintain database of policyholders
  • Issue of identity card to all policyholders
  • Provide ambulance service
  • Provide information to policyholders about hospitals.
  • Check various investigations
  • Provide Cashless service
  • Process claims

Health Insurance Claims settlement process

A bit on how health insurance claims processing works. In most cases, the Insurance companies appoint a third part administrator (TPA) for claims processing. That means once the health insurance policy is sold, the insurer passes on the baton to the TPA. In case of a claim, the insured has to get in touch with the TPA for all versification and formalities.

There are 2 ways by which health insurance claims are settled:

  • Cashless : For availing cashless treatment (only at authorized network hospitals), the TPA has to be notified in advance (for planned hospitalization) or within the stipulated time limits (for emergencies). The insurance desk at hospitals usually helps with all paper work. The claim amount need to be approved by the TPA, and the hospital settles the amount with the TPA/ Insurer. Typically there will be exclusions and such amount will have to be settled directly at the hospital.
  • Reimbursement : Reimbursement facility can be availed at both the network and non-network hospitals. Here the insured avails the treatment and settles the hospital bills directly at the hospital. The insured can claim reimbursement for hospitalization by submitting relevant bills/ documents for the claimed amount to the TPA.

The TPA mode of claims settling has its own problems. The TPA is incentivized to limit insurance claims and they are not the one’s who sells the policy. There are many cases where the insured had a tough time to claim for his hospital expenses. So before taking health insurance it would be useful to check who the TPA is and how good are they when it comes to claims processing. Internet search and a friendly chat with the hospital staff can give you good insight on the insurer/ TPA. There are also some health insurance providers who do not employ TPAs and does claims settlement directly (this is called Inhouse TPA) .

Comments , What are the best health Insurance policies you are aware of ? Do you feel it makes sense to buy health insurance at early stage or after getting married only ? Please share your views on this .

This is a Guest Article from Ganesh who is an avid follower of this blog and his blog is My Graffiti Page. Please note that this post is NOT intended to promote or suggest any Health Insurance plan. If anyone is planning to take Health Insurance this New Year, the post can possibly provide some useful tips and pointers for selecting a suitable plan. Your comments and thoughts are most welcome.