There are many newcomers in Personal Finance who have no idea of very basic things . So I thought of doing a video presentation covering topics like Section 80C , HRA , HRA Example , LTA and Medical Exemptions , Tax Calculations , Tax Slab and example , Power of Investing Early , Understanding Equity and Debt , Investments Options , What is Insurance , Insurance Options , 4 most important things in Personal Finance . Lets see how everyone likes it . I would love to hear your views and suggestions so that I can create much better video tutorials in future .
Risk free returns, in our country are amongst the highest in the world. In countries like US, the interest rates are 1-2%. Equity markets in our country continue to provide 12-15% annual returns (Find Why) . But how much do investors expect from equity these days? A lot! No one is ready to settle below 20-25%? 12% is abusive to them, & makes them feel like they are cheated. A reader told me that he earned 100% this year from equity (2009) and he will be happy with even 25% next time! LOL! This happens when you look at short-term returns. Investors who started in 2004 started thinking that they are all “Warren Buffet” and can leave their jobs in some years! Whereas all investors who started in 2007 end or 2008 start compare equity with their mother-in-laws, they just can’t stand it.
Think long-term, and timing will just not matter much. For retirement and child education, which is 15-20+ years away, just start a SIP in an Index fund and then go into a COMA, come back once in a while and just review it every 6 months to a year. That’s all.
Feeling special when it comes to Life or Health Insurance
I’m not sure why, but some people feel that they are god gifted. They feel good health is a good excuse to skip Health Insurance and just because they don’t drive carelessly, it makes them “Accident proof”. They don’t realise that most people die in accidents not because they don’t drive well; it’s because the other person does not. Probability of dying is almost the same for everyone, but everyone feels that they have better chances, of not being part of an accident or an attack.
Be realistic; especially in bigger cities the chances of accident is higher than smaller cities. Most and more casualties happen in bigger cities. Take adequate Life and Health cover.
Excessive Leverage and careless spending
In recent times, we spend like there’s no tomorrow. Easy available credit for home loan & the tax breaks available on them, EMIs available as an option for buying almost anything these days; all these easy means for laying hands on money has suddenly changed the way we see “Acquiring Assets” and “Spending”. Unlike our parents and grandparents, we are spending money, which we haven’t even earned. We buy houses, cars, vacations etc., and then pay the cost for the rest of our working lives. In some cases, it might make sense, but a large section of society just lives beyond their means (See this eye-opener from Subrmoney) .
Research shows, that we feel less guilty when we pay with our credit cards rather than cash. When we use cards, we don’t see money going out; there’s just a consolidated bill at the end. Nothing can be done (or undone) then, you just pay it. Imagine you are paying cash every time you are buying something you really do not need. We buy unwanted clothes, & unnecessary gadgets we can do without. How many of us claim, sometimes that we just can’t survive without a certain device, or feel that we can’t enjoy our life without certain doodads? Didn’t our parents and the old generation live without them or with limited quantities ?
Why have we all suddenly shifted to plasma TV rather than the old TV we have used in our childhood? Of course, technological changes should happen and we should always move forward, but buying a Plasma TV just because it looks cool in your drawing-room, does not make sense at all; that too, if you haven’t yet planned for your retirement or taken care of all the important goals in life. If it’s really your need , then go ahead , I would encourage , but most of the time people buy it out of comparison with friends and relatives. Once your other priorities have been achieved , you can go for it, But not at the cost of something more important .
I’ve heard horror stories of people who have bought homes and are crying today. Their home prices are moving up, but the quality of life has drastically decreased. They suffer horrible amounts of stress because now, even small things in life which gave them happiness, look unaffordable… all because that 2 BHK Flat’s EMI has to go through next month (A close look at Real Estate Returns in India).
No quality trips & vacations, heavy stress because of insecurities of jobs. Imagine a double income family with income of more than Rs 1 lac, who belongs to top 1 percentile of the highest earners in the country, but not leading a happy life because of excessive debt they have taken on all the loans and not enjoying little things in life because of these issues . Whats the point of earning so well then ? Don’t try to be over ambitious at the cost of your current lifestyle and happiness! If you can’t manage your life successfully and happily, then the car, and the house, and all that financial planning is just a waste. (Read What is the goal of Financial Planning)
Short vision
Close your eyes and try to imagine your retirement, child education & marriage related expenses, and health care costs after 30 years. Can you predict your grocery bills after retirement? Living in present is great, but planning your future is critical now. Let us do a small exercise to show you what your dietary (food & eating) expenses at home after retirement will be.
Consider a 30 years old couple today… How much do they need to eat a decent breakfast, lunch and dinner at home? Even if you consider a meal at Rs 25, that’s Rs 150 for 3 meals/2 person a day, thats Rs 4,500 per month. I guess that’s what the grocery bill of most married couples in their 30’s would look like (I am unmarried, as yet). Now, Rs 4,500 per month today, means 25,000 per month after 30 yrs, which is 3 lacs per year just for groceries. Forget inflation for now, if you live for 30 yrs after retirement (worst case), that’s 30 years X 3 lacs = 90 lacs just for your breakfast, lunch and dinner and this, doesn’t even consider inflation. Some people think they would need 1 crore for their retirement , LOL !! . You will require at least 10-15 crores, start working on it NOW !! . Pray to God, you don’t live longer than that, else it would be really painful!
Not ready to pay for Advice
This is in our culture & our genes, it seems. The very idea of paying for advice is anathema to us. We rely on “free” advice most of the time. If we can get the top 10 mutual funds from valueresearchonline.com, then why pay someone for advice? When we know term insurance is best, and we have a good formula to calculate life insurance requirement, then why do we need a financial planner to tell us how much Insurance we need? If we have so many personal finance websites and magazines then why do we need financial planner, we can do it all by ourselves? We are a DYI (do it yourself) country! . I get many questions over email and comments, Imagine me asking for money for giving personalised advice, How many people will consider paying or will even accept that its fine ?
We must understand, however, that there are situations where you just can’t match professionals in some areas. The other thing is some advice can be general. For example “top 10 mutual funds” might not work for you, & might not be suitable for your situation. A different set of mutual funds might work in your case and to analyse your situation, an investment consultant can be helpful. You have to take a call on whether its worth doing it all yourself or pay the fees & have a pro handle it.
Take large real estate transactions for example; I am amazed to see many people mailing me questions on complicated real estate deals, they are doing themselves, which actually might need a CA attention or professional advice to deal with. But why pay the CA that extra 10k or 15k he will ask for? They then, make mistakes and in long run lose a big amount of money just because of ignorance and not having optimized the whole deal.
In my opinion we are going to see far-reaching long-term consequences once the SEBI-IRDA issue gets resolved for Financial Planning profession. I base my fact & assumptions that SEBI is on a strong wicket rather than IRDA. However we need to go to the origin of this situation. In this article we will see what exactly is happening at this moment between SEBI and IRDA over ULIP ban and whats its implication on financial planning . Also Read : A short guide to Hire a Good Financial Planner in India
What is SEBI & IRDA issue all about? How it actually originated?
The IRDA was formed before SEBI and with the help of IRDA insurance companies came out with a Jugaadu product called ULIP which is just identical to MF with one minor difference that apx.2-5% of a clients investment goes to provide a life cover and rest is invested in either market, Govt. Securities, corporate debt or Equity, depending on the mandate of that fund. Now the second part is nothing but just like a mutual fund scheme.
Where is the problem now?
There is no problem with it as 90% of insurance premium world over goes to market or securities. However, in India the ULIP products become terrible investment products because if one invests Rs.100 in a ULIP then 20% of your money goes into commissions and approx. 2% into insurance, only 78% of one’s money is invested in market or securities. So to get back to 98 ( 100 –2 ) it would take in normal market conditions at least 2 years in Equity oriented funds and 4 years in debt oriented funds. So all you are doing is just recovering your principal in next 2 to 4 years. Now, the miss-selling by an insurance agent gets hidden in the bull run and because of rampant financial illiteracy even among so called highly qualified professionals & corporate executives leave alone the advisor selling the ULIP, the investor is fooled into putting more money in these bull runs saying that your money will double in “x” years and in the bear runs when the ULIP loose even their principal, the advisor gives them a either long term talk or plays on the investor fear and switches them to another products. Hence, an advisor in India is the a true definition of an “opportunist”. In the bull run he plays on the “greed” of the investor and in the bear run he plays on the “fear” of the investor.
What the above does is that apart from loss to investors it gives an unfair advantage to insurance companies compared to mutual fund houses where commissions are in fraction of your investments. What is the incentive for an advisor or even big distributors like banks & distribution companies to sell MF schemes when they have the option of selling a similar scheme where they gets heavy commissions… as an agent what would you do go for Rs.20/- commission on ULIP or Rs.1 on Mutual Fund Scheme on an investors investment of Rs.100/-.
Now, taking stock of the above problem SEBI has gone for an eagle eye’s view of the whole problem and to create a level playing field among all market participants.After a lot of cajoling & convincing IRDA which failed to budge, SEBI issued the harsh step of issuing an quasi-judicial order restraining Insurance companies from offering ULIP without proper registration with SEBI.
What will happen now?
Though there is likely to be a stay on the SEBI order given the large number of clients who hold ULIP products by the high court. This can be a short-term breather to insurance companies but it is not a long-term solution.
Who is on strong wicket when the issue goes to Court – SEBI or IRDA?
Mr. Bave is a master strategist, he knew that the lobby of insures is very strong and united and it will take him years to bring them to negotiating table. With the powers conferred to him by parliament, he issued a quasi judicial order.
Now, quasi – judicial order is such that even Mr.Bave cannot revoke it. The IRDA may win a temporary relief in this war, but SEBI stands on a strong footings as in the court of law the court will go where investor interests remains. Insurance companies must see the larger picture and rather than worrying about loosing valuations post an unfavorable order, they must prepare them self to change with the times.
What are the implications of the SEBI & IRDA issue for Financial Planning profession?
So lets come back to the question what’s in it for Financial Planning profession ? In my opinion, realizing the investors interest the court will rule in favor of SEBI, post which Insurance companies will have to bring down the commissions to Mutual Fund level on ULIP’s.
Is this is a good news for Financial planners?
Yes, but how many of us are changing as fast as the opportunity provided by structural changes effected by such orders? Time & again it has been proved that great opportunity lies when you have big structural changes in an economy. Every century gives some opportunity during financial turmoil and this time we are in the midst of such an opportunity.
There are many areas which we talk about regarding financial awareness, however there are things which a retail investor is never aware about and that’s “International finance”. It’s equally important to understand what is happening at national and international level which can hugely impact a common man. With financial markets becoming increasingly complacent about the recurrence of a crisis, we believe it is relevant to explain a couple of areas of concern which could trigger the next round of the crisis.
Greece – Europe’s Achilles Heel
Source : DNA
What’s Going on in International markets
In the last few weeks, Greece has taken the centre stage in the financial markets. Within the next two months, Greece has to pay back the maturing bonds [to investors across the world] and finance its budget deficit. The country needs to borrow around $40 billion from the international market. With 10 year Greek Government bond interest rates of around 7% (more than 3% to 4% higher than 10 year U.S. Treasury or German Government Bonds), this has led to fresh worries over a potential default by the Greek government. What has added to the problem over the last two days is a rapid withdrawal of deposits from Greek banks by individuals in the country. Unless, Greece agrees to the terms set forth in the rescue package put together by European Union and IMF [to reduce government spending and increase taxes], it is difficult to get the support of this consortium to raise the $ 40 billion to stave off the crises. As you can see from the graph, Greece’s debt is over 111% of GDP. We believe the situation in Greece is getting grimmer day by day and could be a trigger for a crisis in other European nations – Portugal, Italy, Spain.
Read more on this through the following links :
http://ow.ly/1wR0D (Retry opening this several times , if it does not show you article)
The fiscal stimulus initiated by China last year through bank lending to the tune of $ 1.2 trillion has led to potentially unstable conditions in their economy. According to well-known investor James Chanos with 60 percent of the country’s GDP relying on construction ‘China is on a treadmill to hell’. Marc Faber a long time optimist on China and well-known economist Kenneth Rogoff have also spoken of a China Bubble recently. With the Chinese government trying to enable a slowdown in real estate speculation via a recent tax on sale of homes when they have been owned for less than five years, one cannot rule a rapid decline in prices which would have a negative impact on economic growth.
Any one or combination of the two global factors identified above could trigger a mild to deep correction in the financial markets and slow down the world economy. Due to the strong financial linkages with the U.S. and the rest of the world, India will not be spared.
This is a Guest Column by Partha Iyengar – Founder and C.E.O and Srinivasa Sharan – Adviser, Investment Management – Accretus Solutions
Disclaimer : The article is for information purposes only and should not be construed as any recommendations. Accretus Solutions does not intend to solicit any business. Accretus Solutions do not take any responsibility of the losses that may arise out of actions taken based on the article. This article is not a substitute for developing an investment strategy or plan with a professional adviser. The views expressed in the article are that of the authors only.
There was a survey conducted on blog, which tried to capture what readers feel about JagoInvestor and what are their suggestions/expectations from Blog in Future. Please have a look and share your views. Thanks for every one who took the survey. I personally called random 5 people over phone who took the survey and had a talk in detail about what are their suggestions and what would they like to see here . Note ; I am changing the blog layout/design in 1 week time , please share your suggestions in comments sections .
Do you read comments ? There is huge amount of discussion doing on in comments section, however many readers do not find time or interest to dig into the comments and follow the discussions, I would say comments have more knowledge than the article itself , as there are personal experiences and knowledge from many different readers, there is a threaded discussion on some topic in comments, which are more lively and engaging. So if you are just reading articles and not comments, you are missing a lot of things . So I went through some articles comment one by one and consolidated some learning and facts for my readers 🙂 .
RBI has changed the way of interest calculation on your saving account now, earlier the interest was paid on the minimum balance in your account between the 10th of the month and the end of the month. Now the interest is paid on daily basis , Read More
As per research Women are better investors than men, This is because of many factors like women risk adjusted returns are generally higher than Men , women tend to hold investments in stock market for longer then men . Read in detail Here and Here
In Public Banks the cashier or officers can tell you things like “ULIP’s are for young people , PPF is for old people” , and hence try to influence your decision-making. Once they find out that you are an NRI or from upper middle class, they can start pestering you too much because of the sales pressure or the attractive commission’s attached to it .
Why the Guaranteed NAV Plans stress over number 7 ? Anoop asked me this question and my views were that the stock markets in India has been running in a 8 yrs cycle from last some decades, so after this recent crash, another big crash is expected to be after 7-8 yrs now. So they want to make sure they are giving investors “highest NAV in 7 yrs” which will be the maximum point in coming 10-11 yrs assuming markets do crash after 7-8 yr and then stay below that point for another 2-3 years . 8 Year cycle Trend : Sensex is following an eight year cycle trend. The break of the channel lines in 1992 saw the index correcting over 53%. After eight years in 2000, the index once again fell into the grip of bearish cycle and corrected over 57%. In 2008, the faced the similar fate. Breaking the long term rising channel, the index once again echoed the similar trend and has shed more than 63.7% of its weights from the top : LINK
If you sit back and think for just a moment, you’ll realise that there is reasonable outward evidence that the Unit Trust’s history could repeat itself with LIC. It’s true that there’s a lot that is different about the regulatory framework and the nature of LIC’s liabilities. However, the core reasons that led to UTI’s collapse also exist for the LIC today: there is an unapologetic tendency to use the LIC as a bottomless pit of money of which there wasn’t enough accountability. The blatant use of this money to bailout the public sector IPOs is only the most recent and the most visible example-given the lack of public information, it’s not possible to make any assumptions that everything else must be OK with LIC’s investments-just as it wasn’t with the Unit Trust. – Views of Dhirendra Kumar of Valueresearchonline at “LIC can be the new Unit Trust of India?” .
The way KYC is done in banks is different from Mutual Funds. Banks KYC is to be done at time of A/c opening only. They just take your documents and the concerned form is attached with A/c opening form. Since you are signing A/c opening form you don’t need to sign KYC form seperately. Thats the reason banks only take your documents for the proof. Even later also you need to give only the proof. – Thanks to Jitendra Solanki for answer .
A horrible Credit Card Experience from Brij Mohan
My Experience with HDFC CC is very terrible, I paid all my dues before I left for UK, and this was a free CC, after one year when my CC expired, they sent me a new CC and made some charges of around 300-400 rs (approx). Since I was not in India so I was not able to receive the Credit Card, I sent them a mail first few mails I did not get proper reply as I was referring to my old credit card number. I also tried to call on ISD rates to HDFC call center they said we can’t help you as you do not have valid Credit Card. When after around 2 years I returned I found my bill is blown up to 6000. I tried to convince them, at last they told that they have their office in Bangalore too you can go and settle there, as they have added my name in defaulters database also. I went there and literally they were blackmailing that if you don’t pay all the amount they will not remove my name from the defaulters database, and finally I paid whatever the amount they said. I thought it’s all over. Finally last year when I tried to apply for car loan, it was rejected by ICICI Bank and few other bank, fortunately it was approved by Axis bank. But still just to check I applied for ICICI Bank CC, and CitiBank credit card they rejected my application without mentioning any reason. I am feeling like I am a terrorist or they have banned me in this country for my life time, even though I paid off all the dues(which was all illegal). Just last week only i came to know about CBIL properly, so I have sent a snail mail to them for my credit record. Just to check my credit record. but still I don’t know what will be the Next surprise. I will only tell if you are using CC use it very carefully and never take anything lightly, even if it is a single paisa, just clarify this and clear it off and make sure it is really done. In short I feel using a Credit Card is like walking on the Sword or Fire. It’s very dangerous thing.
Difference between Auto-Debt and ECS : ECS is a facility to credit/debit funds between banks using clearing house. However Auto-debit is the facility within bank.
Tip from Partha Iyenger : If you want to complain about some products, the customer care is generally not helpful and they do not care, However the CEO’s and MD’s of the company are helpful and are very sensitive to customer feedback, they are generally responsive. The problem lies in contacting them, so here is a Tip : If you have a complaint against dell computers. First find who is the CEO of the company , for example its Michael Dell , now simple write to [email protected] , [email protected], [email protected], [email protected]and [email protected]. One of them will work. Please use cc while addressing to the CEO, the person you are addressing will get jitters and before he can act, he will get a call from the ceo’s office to sort it out asap. This trick can work most of the times .
Again an info from Partha Iyenger : Many people know that our credit cards and other credit history is stored and tracked by CIBIL, but do you know now even your other utilities bills get tracked and reported to industry associations and in turn to cibil ? for eg, if you don’t pay your mobile bills by moving to other city, you can be easily tracked or for that matter if you do not pay electricity bills of reliance, your phone connection would get cut and your rating system would go for a toss, its all happening In india now , but you don’t know 🙂 . That means when you apply for your home loan or car loan or personal loan, you would be disqualified. so every one, please pay check your bills, resolve any payments with the bank or respective firms (file complaints with the ceo, don’t ever talk to call centres. It doesn’t work ) and clear it . Read A close look at Real Estate Returns in India
Personal Debt to GDP ratio has tripled in 5 years in India. Personal debt includes – credit card, personal loan, auto loan, home loan and consumer durable loans. To be precise, India’s personal debt to gdp ratio has moved from 5% to 15% and micro finance institutions adding to this kitty in a ferocious pace, of course its nothing compared to america’s 120% ! but we could get there in the next 10-15 years, if we don’t watch ourselves. The onus is on us to be prudent in our spending. Today, most youngsters swipe the cards through emi schemes to buy consumer durable and electronic goods as if there is no tomorrow. Our older generation saved first and then bought it, today we don’t wait, we want everything now. The credit cards is a great tool for instant gratification rather than saving and buying it.
We feel ECS is very convenient and safe, while that is true, but anything which is good can turn out to be very bad also. Read a horrible experience on How a customer faced Experience like Hell with Kotal and ICICI for stopping his ECS facility . Here is another article on ECS from PV Subramanyam , a must read .
Jitendra Solanki shares a shocking story on how you can become an LIC Agent. “Around three years back I went to an LIC DO to talk to him for an agency.After submitting the required fees i was given a question paper and the answers of the same and was told to just ratto the answers and start generating business.Is this how an agency of LIC is given? ”
Conclusion
All this wealth of knowledge is present in Comments section and different readers provide these information when there is discussion , so please ask questions, those questions will lead to discussions and in turn it will lead to more information from other readers who have faced an issue or have some experience .
Comments , Let me know how you liked this “Learning from Comments” section ? Is it a good idea ? What are your experiences with comments overall ?
Finance Minister Pranab Mukherjee on Friday announced revised tax slabs for individual tax payers and also said that the New tax rates would offer relief to 60 per cent of taxpayers.
But looking at the below comparison between the tax payable last year and the proposed one it seems that the so called “Aam Aadmi”, the middle class would not be gaining so much tax benefits as there are absolutely no tax savings for the person earning up to Rs. 3 lakh p.a. and those who are earning up to Rs. 4 lakh would end up saving only Rs. 10,000.
New tax slabs would benefit greatly to the higher middle class as compared to the Aam Aadmi, though the additional investment of Rs. 20,000/- in the infrastructure bonds would provide some relief especially to those who are interested in traditional savings tools.
Introducing Saral-2 form back is a good initiative and would make it more Saral for the tax payers to file their IT returns without hassle as the current ITR are not easy for the taxpayers to prepare & file on their own.
In order to make tax compliance process more efficient two more CPCs (Centralized Processing Centre) are proposed to be set up apart from extending “Sevottam” a pilot project at Pune, Kochi and Chandigarh to four more cities in the year. Sevottam provides a single window system for registration of all applications including those for redressal of grievances as well as paper returns.
Long awaited increase in the limits for turnover over which accounts need to be audited is also enhanced to Rs. 60 lakhs for businesses and to Rs. 15 lakhs for professionals as compared to the existing limits of Rs.40 lakh and 10 lakh respectively.
Tax Slabs for 2010-2011
The basic threshold limit for income tax exemption will remain at Rs.1.60 lakh. Under the new proposal, 10 per cent tax will be levied between Rs.1,60,001 and Rs.5,00,000, 20 per cent on incomes between Rs.5,00,001 and Rs.8,00,000 and 30 per cent above Rs.8,00,000.
Apart from this you also get Rs 20,000 additional Tax benefit if you invest in long term Infrastructure Bonds.
Tax Slabs
OLD
NEW
TAX RATE
Upto Rs.1.6 lakh
Upto Rs.1.6 lakh
NIL
Rs.1.6 – 3 lakh
Rs.1.6 to 5 lakh
10%
Rs.3 – 5 lakh
Rs.5 to 8 lakh
20%
ABOVE Rs.5 lakh
ABOVE Rs.8 lakh
30%
Tax Slabs
OLD
NEW
TAX RATE
Upto Rs.1.6 lakh
Upto Rs.1.6 lakh
NIL
Rs.1.6-3 lakh
Rs.1.6 to 5 lakh
10%
Rs.3-5 lakh
Rs.5 to 8 lakh
20%
ABOVE Rs.5 lakh
ABOVE Rs.8 lakh
30%
Exemption Limit for Women : 1.9 Lacs
Exemption Limit for Senior Citizen : 2.4 Lacs
How Much do you Save because of New Tax Slab?
Income
Old Slab
New Slab
Your Savings
60,000
0
0
0
3,00,000
14,000
14,000
0
4,00,000
35,020
24,720
10,300
5,00,000
55,620
35,020
20,600
6,00,000
86,520
55,620
30,900
7,00,000
117,420
76,220
41,200
8,00,000
148,320
96,820
51,500
9,00,000
179,220
127,720
51,500
10,00,000
210,120
158,620
51,500
What are your comments on New Tax Slab ? How is it going to Impact you?
This is a guest article written by Mr. Rishabh Parakh who is a Chartered Accountant and Director at MoneyPlant Consulting he had been contributing to leading newspapers like DNA & NavBharat (Money Plant Consulting is a premier outsourcing & a financial services provider which aims to offer solutions for all your financial needs and queries.)
Investment in how many mutual funds is enough? Though it depends on individual needs and situation, we can always arrive at a number or a range which should be optimal for a large chunk of mutual funds investors. Many a times Investors invest in a large number of mutual funds which does not add any additional value to their portfolio most. They have to understand that investing in every new mutual fund coming into the market will not help them in any ways because after a point they have their investment in most of the companies in stock market. In this article lets see how many mutual funds a common man should invest in general.
We invest in Mutual Fund because we have money to invest but we dont have the expertise to invest in Stock Market. We do not want to spend time to manage the investments directly in different stocks and we want to make sure that we diversify our investment across a number of different companies.
Statistics on Number of Mutual funds in a portfolio
I conducted a Poll on this topic and we have some interesting results .
Facts
63% people invested in less than 6 Mutual funds
84% people invested in less than 10 mutual funds
50% people invested in 1-6 mutual funds
The maximum number of investors were in the optimal range of 4-6 .
Total Vote : 225
Average number of Mutual funds : 5.57
If you look closely the graph results mimic binomial distribtution (Ignore this if you don’t understand), which shows that law of numbers apply even to this phenomenon and somewhere the average number of mutual fund converges to the most logical number by default .
Why it does not add much value when you invest in more mutual funds?
Each mutual fund on an average invest in at least 50-60 companies. If you buy 3-4 mutual funds then you are anyways going to invest in close to 100 companies overall (considering there will be some overlaps). So If you buy any equity diversified mutual funds, your money is going to be invested in some of the best companies probably 50-100 of them. Now when you buy another Equity diversified mutual fund there are high chances that the money is going to be invested in almost same set of companies in some proportion, so you are going to invest in same set of companies again. Buying 2nd mutual fund of same category will obviously increase your reach to some companies which were not part of the 1st mutual fund. But now as and when you add 3rd, 4th or 5th mutual fund, you will actually be invested indirectly to same set of companies. The price movement of these companies share prices will be same for all the mutual funds (most probably).
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So what you have to understand is that after a certain point, adding more mutual funds of the same category is of no much value for the portfolio. Adding more number of mutual funds leads to another problem which is tracking problem if you are a kind of investor who buys a mutual funds and just looks at the NAV to find out if you are in profit or loss then you are not doing right thing. Mutual funds investing is very much close to Share investing where you track the instrument, see how it’s performing, what’s going inside the fund, how is fund manager doing, how are they churning the portfolio etc etc. So if you have too many mutual funds in your portfolio, it will be too tough to track them and your portfolio will be very cluttered.
You have to understand that investment of 1 lac in 20 mutual fund will roughly behave in the same way as investment in 5 mutual funds because finally the investment has happened in shares of top companies (roughly the same number of shares), so the investment value is result of the underlying share prices movement and not the number of mutual funds in the portfolio.
Thumb rules:
You can ask two basic questions to yourself to find out if your portfolio size is too big for yourself:
Can you name all the mutual funds in your portfolio and a 2-3 line explanation about what the fund does?
Can you guess roughly how does the movement in stock market affect your corpus in general? If stock market is going to drop or increase by X%, so you have a rough idea of what will happen to your portfolio at a high level?
Example of a Portfolio of Mutual funds
Let’s create a sample portfolio of mutual funds. We will consider ETF’s as a mutual funds for this example:
2-3 Equity diversified Mutual Fund (Tax + Non-Tax saving): See the List
Note that 2-3 Equity Diversified Mutual funds will cover almost all the big companies in your portfolio. Some ETF or index fund will give index level exposure and make sure you invest in top companies. Debt funds will add exposure to Debt part and no-correlation with Equity.
Most of the people do not invest in the same old fund they have bought, they feel that buying every other mutual funds in market will some way help them earn extra returns which is far from truth. Consistency in investment and faith in one of the good funds you have chosen is the right way to invest in mutual fund.
How having more than one Mutual fund in portfolio reduces the risk?
You have to understand the concept of standard deviation, it’s nothing but risk and return potential from mutual funds point of view. So a single mutual fund has the highest standard deviation and the risk and return can be very high. Adding more funds will help in reducing the standard deviation of the portfolio. As per Morning Star Research (Many thanks to Hemant Beniwal for sharing this)
After 4 funds, the effect of adding another fund diminished. It’s still noticeable, but not so dramatic. After 7 funds, things have mostly leveled out and after 10 funds, a portfolio’s standard deviation stays nearly the same regardless of how many funds you add. Thus, once you own between 7 and 10 funds, there may be no need for more. In fact, the more funds you own, the more likely you are to own at least a couple that do practically the same thing. That could be a drag on your returns because if you have multiple funds doing the same thing, one is likely to be better than the others. Focus on the superior fund and you’ll get better returns .
How do you Buy Mutual Funds? [POLL]
Comments, Please comment on what do you think is the optimal number of mutual funds?
Can some one force you to buy ULIPs when you take a loan from the bank? I am seeing very unethical things going on in financial world these days in India. Lot’s of people are complaining that many companies are selling junk things like Endowment plans or ULIPs (which make big commissions) along with big loans or something big where a small ULIP might look like “Ok, let’s take this small thing for that big thing”. But this is not right! This is breaking the faith and such practices are against the principal of utmost good faith! Let’s see some real life cases:
Force Selling along with Loan Approval
I had to take this policy without knowing any details about this, as the Barclays finance company said this is mandatory for approving any loan , not sure how far it is correct. But as I was running out of time, i opted for it.
Force Selling along with Locker Facility
I requested for a locker in ICICI Bank in Hydderabad, VIdyanagar Branch, and they said there is lot of people in queue for lockers so they cant give me. But if I invbest in ULIP or make a FD of 5-10 Lakhs he said they will consider my Locker request on priority. This is forced selling and I told them straightaway that making investments for a locker is ridiculous reason and stayed away. I wish I could complain this to somebody but there is no written proof of they asking for investing in ULIP as it was verbal conversation.
Force Selling along with Home Loan
I thought banks like SBI would be straight in their clauses. I had a difficult experience recently with my loan.
Pre-Processing Blues:
The loan agent who works in my office, did not have any clue on the terms and conditions on loan. He was a retired officer from SBI and used his position to leverage the file movement. One fine day, he asked for payment against the services rendered (It was a shock to me). I guess, he would be getting some service fee on my loan from Bank already. I gave some required papers for gaurantor to him which was not in my file. I think he lost them. I reduced my loan amount during processing, for which I had submitted the request letter. Upon my loan approval, I noticed that there is a 1.9 Lakh additional loan sanctioned for me and added to the loan amount. I had declined the insurnace cover for the loan as I had planned to cover it on yoy basis. I discussed this with the manager and he agreed to waive it.
Next, the gauranor must be present when you go to sign the papers. I managed to get the gaurantor to accompany me during early morning hours.
Forcibly Selling SBI-Insurance with the Loan
I saw that Insurance cover has not been removed and the SBI person would not agree to waive it even when i told that i would buy SBI insurance policy. I was told that I need to go to branch where I applied for loan and get the approval from bank manager and then it will again go for approval in the loan processing center. After a lot of persuation with the sanctioning office and Chief manager, I managed to convince for a year on year insurance cover which I had to buy for this year on the spot.
Further, I was told that my this year loan is fixed for 8% ( I was happy that I was wise in choosing SBI) then I was updated that my loan is fixed at 9.75% for next 4 years. No one had told us this clause until we went for signing. We had asked this question from clerk to Manager level. No one had a clarity on it but the clause was there in the documents and I had no option but to sign it. In the recessionary situations, I understand that the rates will look further south but I will be stuck at 9.75 for next 4 years.
Otherwise, I am kind of satisfied with the pace and professionalism of officers but I feel that more transparency in the terms and condition is must.
Moral of the story: Read all the clauses before you go to sign and do not be satisfied if you do not get an answer. Private or Public banks – every one has clauses in fine prints that suits the bank and there is no one to tell you about them.
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Force selling along with Opening NRE Account
About a year ago, a 70-year-old non-resident Indian (NRI) woman went to one of the largest private sector banks in the country to open a non-resident external (NRE) account. While opening the account, an executive from the bank lured the lady into buying a co-branded insurance product under the pretext of ‘mandatory’ rules. He also told her that she will have to pay the amount of Rs10 lakh only once. With no option left for opening the account, the lady obliged and left for her overseas home.
“When that lady returned after 12 months, she was asked to pay one more premium for the insurance plan. Since the bank would not return the money which she had paid for the first premium, she was again forced to pay the second instalment for the insurance policy that was forced upon her,” revealed an independent financial advisor (IFA). Read full article
Another Case of force selling along with transfer of loan
I also also seen a case where one guy wanted to transfer his Home loan (ICICI Bank) from Pune to Delhi and just for this , he was being forced to buy an ULIP from the officials who would be helping him in the paper work , other wise his work was stuck . At last when he approched Delhi branch , his work was done smoothly . So in this case the officials were forcing the unsuitable product.
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How to Complain for the Force Selling
To tackle such increasing fraudulent cases, the Reserve Bank of India (RBI) introduced a banking ombudsman scheme under Section 35 (A) of the Banking Regulation Act, 1949. The Act is in effect from 1995. A customer can register a complaint with an ombudsman if no reply is received from the bank within one month or if the bank rejects the complaint, or if the customer is not satisfied with the reply given by the bank. If a complaint is not settled within one month, the banking ombudsman may pass an award up to Rs10 lakh or to the extent of the losses suffered by the customer up to Rs10 lakh, whichever amount is lower. Between the years 2002-06, the banking ombudsman has settled around 36,000 complaints.
Conclusion
This is nothing but a form of corruption happening in Financial world these days. Sellers are thinking that loans are critical things for everyone and in order to let them happen smooth they can force people by miss-selling them, they feel like people in India are anyways frustrated with other things, what will they do? They will enquire a bit and then finally they will lose the patience and just buy the products and that happens. But please don’t let this happen. Raise your voice, ask explanation, demand proof and evidence, threaten them to complain and take matter higher to banking ombusdsman and consumer court etc. I am sure they will budge after some time.
Even on this blog which discussing PPF account opening at SBI we came to know that SBI bank officials sometimes force PPF account openers to start a Saving Bank account at SBI, which is a form of force selling.
Comments, please share some live examples you know of? Has this happened to you? What can be done to solve? Come unite and share ideas, you can leave a mark!!
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.
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.
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.
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..
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%.
“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.
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.
Source : DNA
This is not true! Any