Author: Jagoinvestor

I am Jagoinvestor Admin

Financial Planning and Stock Market Seminar in Bangalore

Posted on by Jagoinvestor

We had a Free session on Personal Finance and Stock Market Basics on last Sunday , 2nd Aug . There were total of 17 participants , I talked about Basics of Investing and Insurance principles along with a live case study , where I proved why one of the participant was severely underinsured , I told them How to calculate the Insurance Requirement .

Another Friend Trilok also talked about Basics of Stock market to get new people learn the basics terms and get them ready for Stock Markets in case they plan to trade . Some of the important points I noticed overall are :

  • People do not understand basics , but they can understand it very well if they guided properly
  • On an average level there is too much need of good Financial Education
  • Most of the people have money but little knowledge to invest it wisely and correctly

I had put the information about the session on this blog and I expected some good number of registration , but I got just 4 people from my side . I am not sure if people missed it or are not interested in ruining their Sundays for a personal Finance talk . Let me know .

We are planning to do some more more sessions on weekends , but we really require some things from people who come . Interest to learn and Some Time 🙂 . If you are interested please Fill this form to put down your Name . The session will be in JayaNagar 3rd Block , Bangalore . Check out some pics from last session Below .


Manish giving some knowledge about SIP and its Importance


Me trying to Prove why Endowment Policies are not the Right Answer to Insurance
Trilok Explaining from Basics of Stock market and Trading , check out this Ebook on How a newcomer should Start in Stock Market .


The wonderful Audience we had


Note : The session will be totally free , you just need to COME 🙂 .

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Why to open a PPF account in India

Posted on by Jagoinvestor

PPF i.e. Public provident fund is the most recommended long term investment tool offered by Central government of India for Indian resident employees.

In this article we will see why one should open a PPF account even if one does not need it or have no intention of putting his money in Debt.

It may look idiotic but we will see why it would make sense. We will also see an example which will help you understand things.

Open PPF account in India

But may be you don’t know what is PPF account? you will say. Click here to Understand what is PPF account.

Lets see in detail:

Imagine a situation, you need to invest your money in some debt product which gives you assured and good returns, but you don’t want it to get locked for long period, the maximum you want is 3-4 yrs of lock in. Is it possible right now is the question you need to ask? NO!! is the Answer

  • If you invest in PPF right now, the money will be locked in for 15 yrs (partial withdrawals allowed)
  • If you invest in NSC it will be locked for 6 yrs but the interest would be taxable and hence your post-tax returns are again very less
  • Fixed Deposits are again not helpful because their post-tax returns are not attractive enough. Even if you Choose the best Fixed Deposit it won’t help
  • Debt funds are again not answer because again the post-tax returns are less

So how does opening a PPF account now helps us?

Well, definitely it can’t help us at this moment, But imagine future let’s say after 11 or 12 yrs you need to invest some money for short term; at that time, you can put money in your PPF account and it will get matured in next 3-4 yrs and whole maturity amount would be Tax-free and earn you interest of 8%.

It costs just Rs. 500 per year for PPF account to stay active. So if you need the PPF account right now, then open it NOW and if you don’t need it right now, still open one NOW so that your Loan-in-period goes down by 1 every year.

Also, once in a while whenever you feel that you need your money to go in Debt component, simply use the PPF.

Read an article on Asset Allocation to understand the good mix of Equity and Debt Component.

So, here is what I suggest: Open PPF accounts in your name, your Spouse name and your Children name at interval of 2-3 years. So, after 12-13 years, each of the PPF accounts will mature in a gap of 2-3 years.

You can use this as an investment product that gives 8% assured tax free returns. 🙂

Please comment to let me know your views. Is there any issues involved with this article content? Is there anything I have not covered? Your comments are valuable.

Question and Answers , Part 1

Posted on by Jagoinvestor

You might have noticed that I started “Ask a Question” Section on my blog where anyone can ask any query to me, I will try my best to answer the questions, but please don’t expect instant reply. I am sharing the answers here for some questions asked by readers, this will help others to gain more knowledge about stuff.

ask a question

Question 1:

Hi,
I am new learner in derivatives trading !
any good web site to understand in detail , and my very specific question is when to be in Futures and when to trade in Options !
many thanks,
Umesh

Answer

There is no single website for understanding this. You have to search different sites for different things. What I would suggest is clear your basics by reading some books and some articles on web. and then trade your self. Download my ebook: https://manish.pucsd.googlepages.com/A_Small_Guide_For_Newcomers_In_Stock.pdf and follow it.

Regarding choosing between Futures and Options, The best answer what excites you? Futures or Options? I like Options, so i trade options (not doing it from some weeks). Basically Options are more leveraged products than futures. Options are more difficult than futures.

There are different strategies in Options which can be applied at different times. Don’t trade derivatives if you are not able to trade equities successfully. move gradually from Equities to Derivatives. Don’t jump directly to Derivatives.

Question 2 :

If I have to choose ONLY ONE equity mutual fund for a time horizon of 10 years – which ONLY ONE fund should I choose ? What about DSP TOP 100 EQUITY FUND ? Is there any better than this fund? – RAJIV

Answer

Ok, this is tricky. The one i would suggest is “Sundaram Tax Saver”. Now comes the best part. If you had asked me this question before 5 yrs, The answer would have been “SBI Magnum or HDFC taxsaver” and answer will keep on changing, There are different cycles in mutual funds life cycle, The best mutual fund today may not be the best all life.

So the best time frame you should look at is 3-4 yrs and then evaluate back and shift money in another mutual fund as per the situation.

For now take Sundaram, invest through SIP and maintain your asset allocation. Look at the comparison I did between SBI and Sundaram here : https://www.jagoinvestor.com/2009/01/95-of-salaried-people-are-rushing-to.html

DSP top 100 equity is an excellent fund , This should be good enough to invest in , Don’t look for the best mutual fund, there is nothing like that. It depends on your risk profile and other factors if it suits you or not.

Question 3 :

Me and my wife both are working in MNC’s. We both are in the age of 27 and don’t have any kid yet. We both also don’t have any dependent. We both are getting cumulative 8 lakhs medical cover from our company. I read a lot of places that it is good to have your own medical policy. Can you please suggest that should I buy and medical policy for me ? and if Yes ..what should be the criteria. – Manu

Answer

8 lack is a good cover . But i think it would be 4 lacks each , not 8 lacks for one person . even 4 lacs is good for one person . The reason why extra health cover is advised is because

– You can loose job or move to another job and may be “without Health cover” for the gap which is not a good thing.

– Health cover does not mean “everything you can think of related to health”, There are many things which group health cover wont cover, dig out more on that. See what is the most important thing for you and your wife and if your Company covers that or not. It wont hurt to take a good Family Floater cover for 4-5 lacs for you people, it would be 8-9k per year . Cover your self well..

There is nothing like the best policy, its not “the policy which suits your requirement”, the policy which is best for me, can not be best for you.

You may also want to look at a term cover for a small amount (20-30 lacs), I know you people are not financially dependent, but i am sure it would help if there is loss of income because of some unfortunate event.

Question 4 :

My question are

1) If I have invested in a ULIP for more than 3 years as of now, is it better to continue on that ULIP? I think the commission, other charges etc are negligibly small after three years of policy . Any amount I invest from now on will be invested in equity markets. Please let me know your thoughts
2) In case of term insurance policies, money that my dependents get is taxable or not ?(of course if I die during policy tenure) 🙁
3) I read in one of your blog post that it is better to split life insurance into two or three companies to that it will give us a flexibility to stop one or two later at some point of time. In case of my death , will my dependents get claims/money from all my policy ?
4) If I have health policy in different company , can i claim the refund from all policy or just one . Will those be taxable?

– Aby

Answer

Find the answers in line.

1) If I have invested in a ULIP for more than 3 years as of now, is it better to continue on that ULIP? I think the commission, other charges etc are negligibly small after three years of policy. Any amount I invest from now on will be invested in equity markets. Please let me know your thoughts

For this you need to see what is the current situation of your total fund value . For last 1.5 yrs markets have done very badly , so there would be significant change in fund value compared to normal years . Other charges are not always negligible after 3 yrs of policy . I think you can either link your ULIP with your long term goals , or start a SIP from now onwards .

2) In case of term insurance policies, money that my dependents get is taxable or not?(of course if I die during policy tenure) 🙁

Its not Taxable , however when they invest that money somewhere and when they start getting yearly income from that , then that yearly income will be taxable .

3) I read in one of your blog post that it is better to split life insurance into two or three companies to that it will give us a flexibility to stop one or two later at some point of time. In case of my death, will my dependents get claims/money from all my policy?

Yes, your family will, get money from all your policy, If you take Insurance of 30 lacs , 20 lacs and 25 lacs from different insurers, they will get it from everyone , so total will be 75 lacs .

However , you can not use this to your advantage and take crores of policies, because insurers ask for your previous policies and if they think that your insurance has crossed the limit which you should have , then they will refuse the insurance to you .

4) If I have health policy in different company, can i claim the refund from all policy or just one. Will those be taxable?

No, You can only get the refund upto the expenses occurred. So if you have taken Health insurance from more than 1 insurers , they will share the cost between themselves in the ratio of sum assured (this is basic rule , there can be some different rule here and there) .

So if you take Health insurance for 5 lacs and 10 lacs , and your expenses are 3 lacs which you want to claim , you will get 1 lac from 1st insurer and 2 lacs from 2nd. The amount is not taxable , because its not something extra you are getting, its just the same amount you have spent and getting it back . So for you its 0 profit 0 loss .

Question 5 :

Sir.,

Thanks for this service.i am working as a agent for mutual funds. From today onwards there is no ENTRY LOAD so no commission. yesterdays conclusion from our trade is to request(!) the same amount from the customers.
Is it possible to receive cash favor directly from clients?

Some clients are happy with our service, and some were not at all !!!

– Srinivas

Answer

So what if 2.25% entry load is scrapped. Clients are ready to pay for quality advice and good service. If you advice them well and help them take good decisions for there investments, I am sure clients wont mind paying you 2.25% commission (even more than that) . You should take this in positive way .

I hope you are AMFI registered and have good grip on Mutual funds and how to choose best one which suits your clients needs. I hope you are not just choosing the “top 5′ from some rating website (though its fine sometimes) . Research your clients needs and suggest them good mutual funds and let them understand why it suits them .

Trust is what they should have with you. Once they trust you and your advice, this IRDA rule of 2.25% thing will make no sense to you and other agents.

As I said earlier, This may look like a Disaster to you, but its your chance to start all over again and make things work for you , adapt to changes 🙂 .

Do let me know if you like this section or not.

Please note, that the question and answer are made public only after confirming it with the requester, If you want that your question and answer are not shared, that’s fine with me.

If you want to ask a question to me, Click here

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Why people don’t buy Term Insurance?- Analysis of a case study on Indian people’s mindset

Posted on by Jagoinvestor

“We have no desire to make anybody look like a blithering idiot, but we do love it when they do. “– Stephen Colbert. One of the reasons why most people do not take Term Insurance is because “They don’t get anything back at the end”.

In this article, I will show you why this is a psychological issue. Even if you get your money back at the end of the tenure it won’t make much difference. In this article I will prove that the argument “Term Insurance is waste of money because you don’t get anything back” is amazingly idiotic.

term insurance

What is the main Issue with People not liking Term Insurance

Why people don’t like Term Insurance is the question. The answer is simple: because you don’t get anything if you survive the whole tenure and hence the amount paid as premium is wasted – this is claimed by millions. Fair enough!

The first thing is, these people do not understand or appreciate the Importance of Life Insurance. Now let’s see this situation from a different angle. Assume you get the money at the end in your Term Insurance.

Let’s see a case study of a general Family. How does a family look like:

Manish is 28 yrs old and got recently married (oops!!). He earns close to 40,000 per month. His monthly expenses are around Rs.25,000 overall and he saves 15,000 per month (hehe). He also has his parents as financially dependent on him.

He is 30 yrs away from his retirement. He calculated his Insurance Requirement and it was close to 50-60 lacs minimum. Let’s take it as 50 lacs for simplicity for now. (Get more of Insurance Articles from Archives section.)

Analysis of Case Study

Now is the fun part: his current monthly Expenses are close to 25k. Now what will it be when he retires after 30 yrs?

So the average inflation for last 30 yrs was 6.5% (based on past data). Let’s assume it will be 6.5% for next 30 yrs on an average. Then the monthly expenses after 30 yrs would be 25,000 X (1.065)^30 = 1,65,359 (1.65 lacs). If he takes a Term Insurance at the start, his yearly premium per year for 50 lacs cover would be Rs.11802 for 30 yrs tenure from Aegon Religare.

Do you know how you can do your Retirement Planning in 6 steps ?

Click on image to Enlarge

Which means, he is going to pay total premium of 3.54 lacs in his entire life. How even if he gets this money back at the end, how much will it benefit him? How many months can he survive on this money? 2 months is the answer!!

With expenses of 1.65 lacs per month, the money he gets back from term insurance is enough for not more than 2 months. Let’s take maximum 3 months. That’s it!!! Are you confused with Calculations, See this Video presentation by me where I explain how to do important Calculations in Personal Finance.

So Following are the questions needed to be asked

  • Do you want to put your Family at Financial Risk because you are not getting 2 months’ worth of expenses back?
  • For a small amount you “don’t get” at the end are you not being childish to Secure your family?
  • Don’t you think you are seeing Term Insurance from a wrong attitude?
  • Are you not concentrating on “what you are not getting” rather than “what you are getting”?

We already have “Return of Premium Term Policies”, but they are themselves idiotic because they are again designed to just exploit the weakness of people who feel that term insurance is waste of money because they don’t get their money back.

Read this to understand why Plain Term Insurance is better than “Return of Premium Term Insurance policy”.

Watch this video to learn why Term insurance is better than regular insurance policies:

Reason why Indians don’t like Term Insurance’

Reason 1#: Most of the people concentrate on number and explicit data, like the money they are not getting back or it’s a waste of premium if nothing happens to them. They fail to look internal advantage which term Insurance provides.

Reason 2#: We are emotional with Money, we are more concentrated with Growing money and getting money back rather than what value it provides in our life.

Reason 3#: Most of the people think that the probability of dying is much lower than an average person which is again totally idiotic. We just don’t want to visualize a bad situation and hence do not concentrate on that situation.

Conclusion

In life we don’t appreciate things like Health, small moments of happiness, nature, time spent with our loved ones which are most wonderful and real things in life. Term Insurance is one of the similar things in personal finance domain.

You just need to shift your focus of view from “what you are losing” to “what you are getting” once you do this with Term Insurance and your Life, both will become wonderful.

Please comment on what do you think about this and do you agree with it. Are you victim of such mindset?

How Builders are Not keeping their Promises in Real Estate

Posted on by Jagoinvestor

Deepak Shenoy came up with a very nice article on How Builders are not keeping there promises while delivering the Residential Properties. He shares his views on Why it does not make sense to buy Real estate currently at idiotic prices level currently .

He also links to another article of this where he compares Renting Vs Buying a Flat. I am embedding the same video here which he has on this Excellent article. Have a look.

My take on the Subject

I am not a big Real Estate expert my self , but from Financial Planning point of view I have to say that Buying Home is an Important decision and we should look forward to it , but never at the cost of putting our self in a situation which can become disaster for our self. If you earn 50,000 per month, it does not mean you go next day and buy a Flat where you EMI is 40,000 .

Most of the people do not concentrate on Long term and have a short term view . Buying House needs planning and consideration of various factors . You need to find Value in the property which you are buying , just don’t see the value . A property worth 40 lacs may look Cheap , but its worth still be less than its price . Do you know the Formula to calculate the EMI on home loan ?

Given the uncertainty of Stock Markets in near term and no big improvement in Real – Estate sector , I am myself still not excited in Buying anything in real-estate (the main reason is that I don’t have much money).

Mohit Satyanand says

“I wouldn’t put money into real estate unless it fulfilled three conditions—

  1. It is a property I would be happy to live in.
  2. I could put down at least 25 per cent of the total cost;
  3. The EMI is less than half of my monthly savings.

With those conditions, it would be unlikely that I would exit the investment; not finding a tenant wouldn’t upset me; and with the balance of my surplus income, I could continue to build a nest egg of other assets. Read full Article“

This view can look like a pessimistic views at first, but in the long run, these things pay off. Don’t take much risk that you are not alive next time to take another is the Funda you should Remember.

Please comment on what do you think about the Real – estate sector currently in your City. Also do share what is the most important thing one should look at before buying a Flat?

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ULIP charges restricted to 3% by IRDA

Posted on by Jagoinvestor

Does God Exist? I don’t know, but IRDA surely does!!! And hence finally it has acted as GOD to the investors 🙂 . On 22nd July, IRDA capped the ULIP charges at 3%.

Let us see in this article how this will affect Investors and the implications on Investments and Insurance Sector as a whole. The decision will be effective from Oct 1 2009.

ULIP

IRDA rules for ULIPS

Gross yield: This is the yield generated by the ULIP before all charges are deducted.
Net yield: This is the yield generated by the ULIP after all charges are deducted.

1. “ULIP charges” here would include allocation charge, administration charge, mortality charge and all such charges by any other name.

2. For Products whose Maturity is less than 10 years

  • “The difference between gross yield and net yield cannot exceed more than 300 basis points” (100 basis points = 1%)
  • “In this case, fund management charge cannot exceed 150 basis points”

3. For Products whose Maturity is more than 10 years

  • “The difference between gross yield and net yield cannot exceed more than 225 basis points” (100 basis points = 1%).
  • “In this case, fund management charge cannot exceed 125 basis points”

4. The IRDA has made PAN card mandatory for all policies where annual premium is more than Rs 1 lakh OR there is investment in Capital Markets. IRDA said this norm is to be implemented with immediate effect and all insurers are to comply not later than August 1.

What will be the Implications

  • ULIP products will surely see a decline in commission paid to agents. It’s very logical, IRDA is giving nightmares to Agents for some time. First it was abolistion on Entry load from mutual funds and now its capping the charges on ULIP. Agents are now going to get commissions which will be very very less compared to what they used to get earlier (like upto 35-40% in first year). It’s a bad month for Agents in India.
  • Now Agents would be really confused on whether to work hard on Selling Mutual Funds OR ULIPS as both are going to provide them almost the same kind of Commissions!
  • Miss-selling will be reduced in ULIPS as the primary motive of “High Commission” is crushed by IRDA.
  • Though ULIPs are still long term Products, I don’t recommend common man for short term investments in ULIP. Investors who think they are smarter than average investor can invest in ULIPs for short term, considering you know how to manage ULIPS well and reap the potential of switches (this mainly to churn the portfolio fast and save the short term capital gains tax). Read how to use losses to save your tax.
  • This Rule does not apply to traditional Policies, so its not a very good news for all considering Traditional Policies from LIC still dominate the Insurance Market :(.

What will happen to Existing Polices?

As per IRDA, all existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31, 2009. I can only imagine the state of Agents and Insurance companies which created ULIP mess all these years. IRDA really nailed them hard this time.

Many agents which were getting fat commissions from so many months will be sad on this.

How much will this help Investors in reaping benefits from ULIPS

This is a good move from IRDA and investors will be benefited. But how much?

Earlier most of the ULIPS charged heavily in First and Second year and then reduced the charges to NIL or very very less in later years. Because of which the charges were heavily skewed in Initial Years, but the long term average charges were still in range of 3-5%.

Now after this new Rule from IRDA, almost all the ULIPS will charge for every financial year (that what i think). Hence the long term charges will now be evenly distributed over long term, but still the average charge over long term wont come down drastically!!

Read a nice article from Deepak Shenoy on “Tactics used by ULIPS to hide the charges”

Can you Invest in ULIPS now?

ULIPS for me has changed its status from “Ugly” to “Average” product after this announcement. For long term Investors, ULIPs can now serve as a good product.

Charges wise its much better in long term now ( 2.25% max) and the best thing is if you need immediate money and want to close the policy you will not be hit hard like earlier. Take the policy after Oct 1.

Some Internal Information

Just before writing this Article, I was chatting with Pradeep (name changed), an internal source who is himself an ULIP agent. See what he has to say

Guest_7FF767C0: attened a sales talk by XXX for their new ulip … XXX which guarantees highest nav for the next 10 years !!!!
Guest_7FF767C0: all ptvt. life companies are worried about mandatory PAN for annual premiums of rs one lac. and above.today smart money(black) is routed through ulip cash payments on binami names.

Guest_7FF767C0: but sir! IRDA may kindly look at the very very high incentives to the sales team(policy expences).sebi from aug 1 st declared no entry load for mutual funds so no early commissions to agents which is only 2.25% where as 40% plus in life!

So according to him, Due to the mandatory PAN for more than 1 lac premium. Lots of black money is coming through Benami Accounts now.

See The Benami Transactions (Prohibition) Act, 1988 High Net worth Clients do not want to share there investments with Govt to save tax, but because of the “mandatory PAN” rule, the money is being diverted through “Benami Accounts”. This is totally unethical and unprofessional, but this happens at the top ladder, Looks like IRDA still has some more work on this plate.

Conclusion

This move will help investors and it will check the mis-selling going on for last many years. It will also help in making Insurance sector more mature in India. IRDA is coming up with solutions now and Jagoinvestor sees this move as a friendly move which will help in achieving the goals of “Making each Indian an Informed Investor” Thanks IRDA.

Readers, what are your views on this Rule by IRDA, How do you think investors will take this ? And Is it helping you in any way. Please leave your Comments on this .

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6 Steps of doing Retirement Planning by yourself

Posted on by Jagoinvestor

In this post I will teach on how to plan for retirement. We will use simple tools like Mutual Funds and PPF for building Retirement Corpus.

We will also see what factors you should take into account when you plan for retirement. There can be other ways of doing this and it can be very complex with very advanced calculation. But in this post we will look at it in a very simple way which a common man can understand.

Retirement Planning

So you are finally deciding to plan for your Retirement. You need to understand following steps:

  • How much is your Current Yearly Expenses
  • How much will be average Inflation figure for the coming years
  • How much would you need at your Retirement
  • Finally coming up with the corpus you would need at the retirement
  • Calculating how much you should save per month
  • Understanding where to invest the money

We will see all the above points in detail and go through some examples side by side to understand the process in well. Let say we are taking an example of Ajay who is married and has 2 kids below the age of 6 yrs. He has a monthly salary of Rs 40,000 per month. His age is 32 yrs and he wants to retire at age 60.

Step 1: Calculating you Current Yearly Expenses

Take a piece of paper (do it now as you read this) and make a note of your expenses, things like Rent, House hold expenses, Children fees etc etc. You should have a rough idea of what is the minimum amount you require per month for living a good life. You should also try to save a part of your salary every month, Ask your self Can you live with 90% of your Salary ?

Ajay calculates his expenses:

Rent – Rs.10,000
House hold expenses – Rs.11,000
Medical Expenses : Rs.1,000
Entertainment and outing : Rs.3,000

Total Monthly Expenses : Rs.25,000
Yearly living Expenses : Rs.3,00,000 (12 * 25,000)

Other Expenses like Vacations and Surprise Expenses : Rs.50,000

Total Yearly Expenses : Rs.3,50,000

Step 2 : Understanding how much Inflation would be there in coming years

This is the inflation you expect in coming years till your retirement. I calculated the average inflation from last 28 yrs (1990-2008). The CAGR inflation was 7.3% Source.

Considering a better economy in future I expect the inflation over next 20-30 years to be 6-6.5%. Lets take 6.5% for our calculations here. However you can assume your own rate as it depends on your understanding.

Step 3 : How much amount would you require in your Retirement

By this we mean how much money will provide you same standard of living as of today. This will depend on the Current Yearly Expenses, inflation expected over the years and years left for retirement. Just like we require Rs 105 to buy something of cost Rs.100 in 1 yr at 5% inflation. The same way we can cost how much is is needed after X yrs.

So formula would be

Retirement yearly Expenses = Current Yearly Expenses * (1 + inflation)^(number of years left)

Ajay has already calculated his yearly expenses as Rs 3,50,000. He has 28 more years at hand. He calculates his retirement yearly expenses.

Retirement Expenses = 3,50,000 * (1+ .065)^28
= 20,40,000 (20.4 lacs approx)

Now one can tweak this figure depending on whether you want to have higher standard of lifestyle than now (earning years) or more simpler life. You can decrease it or increase it to the quantum of your compromise. You won’t have to compromise on your Retirement if you are a Early Investor.

Step 4 : Finally coming up with the corpus you would need at the retirement

Here you may want to receive the monthly income for whole of your life and preserve the capital for your Children or any nominee. So you need a corpus which if you put in Bank or invest in some “guaranteed return fund”, you should get an amount per year which is equal to your Expected Expenses per year.

So suppose you expect to get a return of 7% per year. Then you need X amount at the end where 7% of X is = your yearly expenses.

Corpus needed = (Monthly Expenses)/(interest expected )

So in the case of Ajay the yearly expenses expected was Rs.20,40,000 and return expected is 7%. So we calculated the amount required for Retirement that is 20,40,000 / .07 = 2,91,00,000 (2.91 crores).

Note:

You can also buy an Annuity for a fixed number of years till when you want to receive the income (which also means you should have an idea of when will you die, which is not easy). So for example if you want to receive the the monthly Income till you are Age 80 (for 20 yrs).

The following formula will be used. See this Video or this article on Net Present Value to understand the calculations and Concept.

PVA = A * [ {(1+r)^n -1} / { r * (1+r)^n } ]

Where

PVA = Present value of Annuity (Amount you need to have at your retirement)
r= Rate of interest you expect to get
n = Number of years you want the Yearly Income .

So at the end of this, you will have the Amount you need for your Retirement.
Do you calculations online just now Here OR download the excel sheet Here.

Watch this video to learn how to do your own retirement planning :

Step 5: Calculating how much you should save per month

Here comes the interesting part, here there are two things

  • How much Return you expect to earn in long term
  • How much you can afford to invest per month

Both are related to each other. If you expect more return, then you need to invest less every month and if you can afford to invest more every month, you need to generate less returns for your investments.

So which is the better way? What should you decide first? The returns expected or monthly contribution you can make? I would recommend the other way, better we first decide how much we can invest per month, because that is what we can control better way. We cant control returns !!

I have this monthly contribution calculator to calculate how much you need to put every month to generate Rs X after Y years if you expect R returns, please feed these inputs there and get your numbers. To understand how its calculated you can see this video which explains some important formula’s in Financial Planning.

So here is the process

  • You figure out how much you can save
  • Then you find out how much return you need to generate
  • Then you decide where to invest to generate that return

You can also go the other way deciding how much return you can generate and based on that how much you need to save. But I prefer the first way because then you control things in your hand but you can go the other way too.

So our friend Ajay has a saving of Rs 15,000 at the moment (40,000 – 25,000) And he thinks that he can easily invest 10,000 per month at least over a long term. So the return he needs to generate per year CAGR for 28 yrs to generate his retirement corpus of 2,91,000,00 comes out to be 12.25%, see the calculator mentioned above.

So now you got to know how much you need to get per year in returns.

Step 6 : Understanding Where to invest it

This is the last step as per our article. So you got the CAGR return number which you need to generate over a long term. This number will decide how much risk can you take and where can you invest depending on your time frame. See below to understand which are the suitable products you can invest to get your returns.

Understand the ground Rules

  • Higher the return expected, higher the risk you need to take
  • More the Tenure, Lower the risk

Above 15% : Direct Stocks, Sectoral Mutual Funds, Equity Diversified Mutual Funds
10-15% : Equity Diversified Mutual funds, Balanced Funds
8-10% : Mix of Balanced Funds Debt Funds
Less than 8% : FDs, PPF, Debt Funds, Balanced Funds [ find out which FD is best ]

However, if the tenure is more than 10 yrs you should always go for Equity Funds. Never go for FDs or Debt funds if your tenure is long enough. Understand the Chemistry of Equity and Debt please.

So in our Example of Ajay, he requires a return of 12.3% CAGR in 28 yrs, so for this, he can invest in Equity Mutual funds through SIP he has different ways to achieve this like Doing a SIP in 3 Equity mutual funds OR combination of PPF (25%) and SIP in mutual funds (75%) OR Direct Equity (5-10%) + PPF + Some Balanced Funds. You got to be creative in this :), there are endless ways of doing it.

Conclusion :

Here you go!!, you just did your Retirement Planning 🙂 . You can do your retirement planning yourself easily. A financial planner will look into more details and will do perfect planning for you which would be best but this is pretty much great way you can adopt your self.

Involve yourself in this journey of Financial planning and you will be amazed to find how much Fun it is.

Understanding the art of Asset Allocation and Portfolio Rebalancing

Posted on by Jagoinvestor

What is better? Equity or Equity + Debt In this article I will show you how always maintaining your Asset Allocation with Discipline helps you in long term.

We will see examples of Asset Allocation with Portfolio Rebalancing with Charts and a small Presentation. At the end we will conclude that Having A small part of Debt in your portfolio is better than having no debt.

Note: Make sure you read this article in one go, not in parts.

Data Collection and Making the Case Study

I gathered the NAV of SBI magnum Taxgain ELSS fund (click here to see which is the better fund that SBI Magnum) for last 10 yrs for each quarter. NAV are for 1 Jan 2000, 1 Apr 2000 and so on for each quarter (getting them each one by one from moneycontrol was really time consuming). So we have 38 NAV values from Jan 1 2000 to July 1 2009.

Scenario

  • Total Capital Invested : 1,00,000
  • Debt Return : 8% per/year , 2% per quarter (for simplicity) .
  • Equity Return : Calculated for per quarter (if Nav rose from 10 to 12 , return was 20%) .

Now I am comparing Two cases with and Without Asset Allocation and Portfolio Rebalancing .

Case 1 : Money was Invested One time in Equity and then it was left for Growing.
Case 2 : Money was Invested and Principles of Asset Allocation and Rebalancing was also used.

We are trying to Study which one of Case 1 and Case 2 is better. I did a Small Study and calculated the returns on different values of Asset Allocation like 20:80, 50:50 and 80:20 etc. Here are the findings:

Let us first look at the chart with Asset Allocation 80% Equity and 20% Debt which personally suits me and almost anyone in below 35 yrs age. (click to enlarge)


The Green Line is growth of investments with Asset allocation and Re-balancing (case 2), and Blue line is Growth of investments with no asset allocation (just equity, case 1). See how After 2 quarters, the Green line always was above Blue Line. Also see that final Value of Investments was higher in case 2 than case 1.

Also see, Magic of SIP , why SIP in mutual funds is best for long term.

The final Value of Investment kept increasing when Equity Allocation was raised from 0 to 70-80 and then started reducing when further increased it above 80.

See the Graph Below, this is a small presentation with each slide of separate Equity Allocation starting at 0% in equity and then increase by 10% every time. So first slide is 0% equity 100% debt, second slide is 10% equity and 90% debt and so on, it goes up to 100% equity and 0% debt.

It beautifully demonstrates the shift and change in value of Investment caused by Equity Allocation. To view it in the best way just have a look at each slide in one go and it will appear as a small video ;). Guys I worked hard on this.

Asset Allocation Effect (make fullscreen if you want)

Asset Allocation Effect

View more documents from manish.pucsd.

In a time span of 38 quarters (10 yrs approx), Case 2 consistently outperformed Case 1 i.e. if you see, in how many quarters Value of Investment was higher in Case 2 compared to Case 1, Case 2 beats case 1.

Below is the chart which shows in how many quarters Value of Investment was higher in Case 2 than case 1 i.e. for each quarter the case (case 1 or case 2) which has higher value of investment will get 1 point. You should also look at IV Ratio.

It was found that Case 2 always had higher points than Case 1 and Case 2 points kept increasing with higher Equity Allocation. The minimum Case 2 had was 19 points, when the asset allocation was 0% equity and 100% Debt. See the chart Below


Returns Were going up with higher Equity Allocation (around 70-80) and then fell further.

The final value of Investment was increasing for higher Equity Exposure till it was 80:20, and then it started Decreasing. See the chart below (click to enlarge)


To go deeper, I calculated some other returns.

Case 1 (Only Equity) returned

  • 13.2% CAGR in 9.5 yrs, see this video to learn how to calculate CAGR and other important formula’s
  • Value of 1,00,000 became 3,24,946 .

Case 2(Asset Allocation) returned

  • 13.1 % with 30:70
  • 15.11 % with 50:50
  • 15.67 with 70:30

In case you are new to Stock Markets, Download this Ebook on “How a Newcomer should Start in Stock Markets”, check out the Download Page for more.

What Does This Teach us

There are some important Learning’s here which we must understand well and have it deep rooted within us for our entire Life. This will help us in long term. Following are the Learning’s:

Learning 1# Equity Returns 12-15% over long term:

We can expect better returns from Equity in Long term, also average return over long term from Equity is around 12-15% as we saw in our case. So don’t expect returns like 30% or 40% every year. Once in a while you can get it but if you try harder and harder for it you tend to take unnecessary risk and hence screw yourself.

So better follow a disciplined approach and peacefully get 12-15% over long term. This does not apply to Traders and whole time participants in Stock Markets. They can/should/deserve to make more than 25-30% a year from stock markets.

Learning 2# Debt is extremely Important!!

Debt is an Important and vital component of Financial planning and your Investments. Love equity, Adore Equity and Worship Equity, but *don’t* forget Debt. Debt has eternal powers!!

Equity Combined with Debt can produce far superior returns over long term. In our examples above the best returns we got were for Equity and Debt ratio of 70-30 or 80-20 range.

Learning 3# Have a long term view to get results:

People who have recently started investing through SIP, ULIP or Direct Stock Investing need to understand that it takes time for the investment to grow!!

If you are doing right things like following specific Asset Allocation, Portfolio Re-balancing, Diversification, Investing with Discipline and control over yourself to avoid making stupid mistakes you need not worry at all. At the end you are the winner for sure. It will take time but things will show up.

You might see some person making 30% this or other year minting money from markets or from other investments and this can make you feel that you are left out but don’t feel bad, what you forget is that the other person is also exposed to extra risk which will kill him someday while you will be safe.

Learning 4# Returns is not Everything in Investments (my Favorite)

This is very important and you need to get this into your head and heart. Just like Money is not everything in life and there are other things like love, good health, Nature etc. etc. The same way in your financial life, you should have peace of mind. For which your investments value variation should not be wild enough to drive you crazy.

You should “aim for” and get “stable and good” returns which meet your financial goals, that’s it. Anything more than that will be a “treat” for you and should come to you without compromising your Needs in Life.

Suppose your money invested gives you return of 30%, -20%, 50%, -40%…. With these kinds of unstable and wild returns what will happen to your state of mind?

It will always be worrying over it and you will make mistakes in your financial decisions.

On the other hand if you get returns like 12%, -5%, 9%, 20%, -10% etc. It will not bother you much because there are no wild swings in your Investments value. At the end both will give you same kind of returns. The average returns would be same but the former case has higher variance of returns which “may be” good for your account, but it’s “not good” for your Mind and soul.

You will also notice in the charts above that with 70:30 equity : debt allocation, in 36 out of 38 quarters, the investments in case 2 were more than investments in case 1 which means that 95% it outperformed.

Learning 5# You should Start Early In Life

Ramit Sethi writes an excellent article on Why NOW is the best time for you to do anything , Be it early Investingg, Travelling, Meeting new people, whatever!! If you start early, you give enough time to your investments to grow and work for you. It also less risky if you start early because then the volatility is erased out in many years.

Partha shares a link for a study done on Similar subject at Accretus Solutions, Looks great link to me :).

** What do you think about This article, please leave your comment and suggest how did you like this article and what are your suggestions on making the investments in a much better way.

With this I will end this article, and dedicate this article to all the readers of this blog. I was working on this article for last 2-3 days, gathering data, doing calculations, creating charts, writing this article etc. etc.

It has come from hard work for some days, but the motivation behind it is my wonderful readers. Believe me or not, The person who has/will learned most from this article is ME, Thanks to you all – Manish

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How much Risk you should Take ?

Posted on by Jagoinvestor

Are you a High Risk taker? In this post we will talk about risk-taking in your Investments, be it share investing or mutual funds investing or just any kind of investing. Taking low risk can be equally disastrous as taking high risk. So in this article we will discuss how much risk you must take as an investor.

Financial Goals vs Risk you take

Firstly, we have to understand what is Risk-appetite? As retail investors we don’t understand the important issues attached with risk-taking.  We blindly invest in any investment product without considering if it suits our risk- appetite or not!

We have financial goals which we want to achieve in a defined time life “Buying a Rs 5 lac car in next 4 yrs” OR “Generate 20 lacs for my daughter education in next 15 yrs” and we figure out how much we should invest every month or year to meet our goals.

Depending on our Greed or Fear, we choose the products to invest in. Some choose Mutual funds, some choose Shares directly where as others may choose PPF or Bank Fixed deposits (Read how to find out Best Fixed Deposit for you). So it may happen that we may take risk which does not suit us.

This risk can either be over-risk or under-risk. Both are equally bad for us. You should read How Equity and Debt provides returns.

Problem with Over-Risk

Taking Risk that is much more than we can afford or take may lead to a situation where we are unable to meet our financial objective. This is a very bad situation. We in hope of getting better than “required” returns take unnecessary risks and increase our chances to meet failure.

Failure is okay but you should be ready for it. Taking higher than “required risk” can lead to this kind of situation. These issues happen because most of the times investors forget the first step of Financial Planning.

Example

Ajay wants to generate 5 lacs in 5 yrs for his Daughter Education. He can invest around Rs 6,000 per month (See this video presentation to understand how its calculated). To meet his goal he needs to get around 12% return annually. There are different ways of achieving this like

But what if he decides to invest his money in Sectoral Funds like Real Estate or Infrastructure or invests directly in Stocks without much idea of how things work?

This can either make him Much more than 5 lacs, may be 10 or 15 lacs OR it can be disastrous and he can lose his money and may not be able to generate even 3-4 lacs depending on the circumstances. Now this goal was something very important. He can not take risk for his daughter Education.

If it were a car or a vacation goal, I would have said “ok – go ahead”. But Education is a Need of life. He has to understand Difference between Needs and Wants . He has to understand where to take more risk and where to take less.

Problem with Under-Risk

Just like Over-risk, taking less risk has its own issues. Most of the people who invest in Endowment Plans or Bank FD for years suffer from this virus. If you take very low risk, you may not be able to achieve your goals at the first place. Read Why Endowment plans are bad to invest in.

Example

Robert wants to generate Rs 1 Crore for his retirement. He has 30 yrs and He can invest around Rs 2,000 for this in Mutual funds with SIP and this should be possible with Patience. He can take moderate risk but he thinks that equity markets are too risky and its something he should be away from.

He is a fan for Endowment plans and traditional Bank Deposits so he invests in these two instruments. He generates Rs 15 lacs from his Fixed deposits (before tax) and Rs 13-14 Lacs from Endowments plan with his 1,000 investments in each of them.

So at the end he has total of less than 30 lacs as Retirement Corpus. He has 30% of what he needs at the end. What are the issues here? He has to Compromise with the life Style and he cant enjoy his Post-work life as he wanted because of severe financial pressure. Because of fear and reluctance of taking “required” risk he has done un-repairable damage to his financial life.


Conclusion

Its very important to take the investments with our risk-capacity taking high risk can lead to situation when our returns are less than expected. Because of greed we sometimes take extra risk and only concentrate on the rosy picture and forget the part which looks bad. Its an Irony but most of the people think that somehow there are less chances of bad things happening to them.

The same way, taking too low risk can lead to under performance in returns and hence after you factor in Inflation and taxes you may be in a financially fatal situation you might have lost all your life believing that you are gaining (like in the example above).

Hence, you must take risk which is required for meeting your financial goals and also which you can take if things go wrong. Taking Over-risk is same as taking Low-risk. The best way to find if a Product Suits your Needs or Not is to Find the GFactor of that Financial Product.

Q. What do you think about “Required Risk” How should an investor estimate how much risk one should take?

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A Perfect Example of ULIP misselling

Posted on by Jagoinvestor

Recently I saw a perfect example of ULIP misselling. One of my friend’s parents gave their money to a close friend who was working for some Investment firm and assured them of doing great investments on their behalf.

The total money involved was more than 10 Lacs. I don’t know what else he did, but he bought a ULIP from their money and its the perfect example of miss-selling here. Lets see it in details.

ULIP misseling

So this agent buys a Canara HSBC ULIP.

  • The total premium yearly was around Rs 3 Lacs.
  • Premium Allocation charges are 48% in the first year.
  • The policy was stopped after 1 yr by the Family.
  • The Allocation chosen in the start was 70:30 (Equity : Debt).
  • Charges were not communicated while taking the policy.
  • No statement was sent them for next 8-9 months.

So may be they were not aware of important questions they should have asked a ULIP Agent.

Some Points

  1. Now 48% goes in Premium Allocation charges, rest of the money will grow at moderate return because it was mix of bear and bull market which the money was invested.
  2. Why was it invested in ULIP first of all and that too Rs 3 lacs as premium!! This is one of the costliest ULIPS in market and has to track record. Why was family financial needs not considered before investing? Why was their risk-appetite not considered?
  3. What kind of agent is this? He takes advantage of trust and invests in something which gives him maximum commission. There was no proper communication about charges and no statements reached them on time.

What is miss-selling here?

Giving “Wrong-Information” is not a big issue, the bigger issue is not giving “any information”. One of the reasons why this kind of things happen is lack of accountability on agents side. You take the product and sign the documents means you are responsible for your decision. While that is true legally, its totally unacceptable morally.

The only thing the investor can do here is make an issue out of it and tell the Insurance company that’s agent miss-sold the policy to him and did not tell him about the charges. Worst thing is investors don’t even know about the “Free Lookup Period”, which is 15 days from purchase of policy before which Investor can cancel the policy of they don’t like it or change their mind.

UPDATE

This is an update after my friend Rishi, whose case we are discussing commented on this article, I am putting up some more thoughts in this below. In case he takes some legal action on this matter. I can think of following things which will be useful and important to quote.

1. As everything was done legally, documentation and signatures taken from investor etc etc. The one thing which can make your case stronger is “explaination” from HSBC people that on what grounds “that Ulip” suited your needs.

How did they come up that this ULIP was the best choice for your family, I hope being the “trusted” and “portfolio managers” they think of your profits and hence they must have figured out why this ULIP was the best in the industry for you guys.

2. How do HSBC products best for you people (i hope 70-80 products they choose were HSBC products)?

3. as per IRDA “it is the moral obligation of the insurer to maintain the ethics and spirit of business across its workforce”. The mere fact that premiums were stopped after 1 yr and now your people are not happy with this shows that obviously you people were not informed well about the cost structure in the start.

Finally this is more of a matter of “Unprofessional Behaviour” than miss-selling per se. I am not sure how much HSBC will help you, as they generally pass the buck on “agent” and “investor who invested”.

You might have to take this case with IRDA. You must first talk to Bank, agent etc and then after you are not satisfied with them, you should go complain at the IRDA ombudsman: https://www.irdaindia.org/ins_ombusman.htm

The ground of plea should be based on “monetary + psychological loss”.

You can read here Confession of an Insurance agent in his own words

Please share if you think there is a good way for getting justice on this matter. Your comments are valuable? Should this is taken into court?

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