Category: General

Force Selling combined with other financial products

Posted on by Jagoinvestor

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.

Link to original comment

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!!

Top 10 tricks used by Agents for misselling financial products

Posted on by Jagoinvestor

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

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

mis-seling

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

1# High Dividends declared by Mutual funds.

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

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

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

2# Premium can be stopped after the first 3 years

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

There are two wrong things here:

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

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

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

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

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

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

4# ULIPs offers guaranteed returns

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

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

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

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

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

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

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

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

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

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

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

7# Money doubling in three years

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

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

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

8# You also get Free Insurance and Tax Benefit.

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

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

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

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

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

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

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

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

10# Low NAV of a NFO from mutual funds

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

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

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

11# Readers Contribution

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

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

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

Conclusion

India financial markets have two main issues

High commissions for agents:

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

Low awareness and understanding from investors:

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

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

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

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

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

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

List of Different Asset Classes for Investing

Posted on by Jagoinvestor

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

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

Points to Remember

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

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

Top 5 things you should do in 2010

Posted on by Jagoinvestor

Look around, the world is lovely and bright
Look inside, understand yourself and you’ll see new light
Follow your dreams, follow your heart
Do everything that fills you with delight

Wish All the readers a Happy New Year

In this short post we will see what are te things you should make sure you have completed . We will actually see the points you should keep in mind through the older posts only . Take it as a guide for what you have to do in coming year if you have not done .

New readers can look at Archives to find out Old articles categorised by Month and Category

Important Points

  • Make sure you have adequate life cover , Calculate how you can calculate your Insurance cover and then take a good Term Plan to cover your self . It is extremely important .
  • Open your PPF account if you have not done it yet , I know its tough to take action , but there is no alternative 🙂 .
  • Make sure you understand the concepts and importance of Debt and Equity , understand the importance of Asset Allocation . Understand that Equity is extremely risky in Short term and Debt is extremely risky in long term.
  • Make sure you don’t buy products which you do not understand. This is important , Don’t get into wrong products . doing nothing is a better thing then doing wrong things . Learn from this blog and other blogs , read before you do . don’t do before you read . This is the common mistake . Read some Tips in Personal Finance .
  • Share, We cant grow unless you share things. 5 ready to learn, less knowledgeable people are better than 1 Albert Einstein. When you share links, tell your friends about this blog, Give your comments in articles, There is conversation happening and that leads to more ideas, disagreements , which are the essential things in life to grow . Do more of it . If you are silent reader , I can understand that you don’t like to talk much , but occasionally come in and say how you feel about the idea , put 2 lines , that’s enough .

What I Wish for in 2010

All the right decisions we can make in life are “simple” and “extremely tough” to take. We get confused because of lots of choices and the simplicity of products. It does not fit with our complicated environment these days.  All the wrong decisions we take in life are easy to take , looks good to us at first moment and hence give an impression that they are great and worth taking. Same thing happens in our financial lives . Simple products like Term Plans , SIP in Mutual funds look too easy and simple and hence make us feel that there is some thing wrong with them , We think that how can they be so simple and so powerful, and when we see them in comparison with complicated products like ULIP’s and money back plans, they make us feel like we are doing some thing wrong by buying something which not much people buy.  More than 80% Insurance p9licies sold in India are ULIP’s, Just because 80% people do it , It does not mean they are right product for you . Think and judge your self . Just like the top of the ladder is never crowded in any profession , the same way the best products is not the one which is most sought after . Don’t let 2010 be a year when you make the same mistakes which you have done earlier in life . Making mistakes is one of the greatest gift , Repeating them is the biggest curse . So make a mistake, don’t repeat it 🙂 .

I am not a religious person and I am yet to discover if I am a spiritual one either , but there is some thing inside me which asks me to wish for each and ever reader of this blog that he/she should be more educated , more empowered with the psychology of how to succeed in Financial Planning . I feel like this blog is a platform where any new person can come , learn , discuss the ideas and one day he/she can become his/her own financial planner , who is capable of taking all the right decisions one should be making , you don’t need to depend on anyone , neither this blog nor me , you can be your own master and together we can and we will do it . It might take some time , but its going to happen . I know .

I thank you all for the great support and motivation you have provided to make this blog one of the best financial planning blog in the country today. Happy And Prosperous New year to you and your Family .

Manish

Comments , Give me suggestions on how I should take this blog in 2010 and what are the different things we can do on this blog . You are a part of this Family and your views matters .

Updates

  1. The blog completes 2 yrs
  2. Monthly Pageviews are now touching 70,000 per month
  3. 800+ comments in last 30 posts in less than 3 months

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Last moment tax planing in 30 minutes

Posted on by Jagoinvestor

Just in case you have not done your tax planning for this year and you are in a rush of doing it for providing documents proof to your employer, I will tell you how you can quickly do your tax planning at the last moment. First of all it’s not advised that you wait for last minute for your tax planning investments but now if you are late, let’s see how you should plan for your investments at the last minute to save your taxes. We will also discuss in this short article what are the things you should not do in hurry.

Don’t get mad about tax saving: If you have short term Commitments and can’t afford to lock your money for long term it’s better you do not put money in Tax saving Instruments. You should never do Investments just for tax savings. I have personally not invested for much tax saving this year apart from my company PF and Insurance. I have short term commitments and I cannot afford to lock my money for another 3 yrs. So I better pay tax on the part which I could have invested. There is no point in locking my money and then again running around for personal loan or credit from Friends and Family when need arises.

Life Insurance: Make sure you have adequate life insurance cover. If not, take a term insurance for amount of the cover your are short of. Protection is the first step of successful Financial planning. Take a Term Plan from two Insurers. Look at how to calculate your Insurance requirement. The cheapest Term plan at this moment in market is iTerm from Aegon Religare.

Planning for Long Term Goals: Make a list of goals for long term like Retirement, Child Education, Child Marriage etc (Anything thing with a target date of 5+ yrs). For these goals you can invest in Tax saving Instruments. If the goal is extremely critical and you are not a risk taker then the best thing would be Tax saving Fixed Deposits. If you can take some amount of risk, you can invest your money in ELSS Mutual funds (here is a list of good Equity Mutual funds). For goals which are 10+ yrs away, you can also put partial money in PPF. Investors who have sound knowledge of Markets movement and can spend time and efforts on switching can go for Low cost ULIP’s (see Wealthsurance and Aegon religare). Short term ULIP investing is a BIG and BOLD No No!!

Health Cover: The next thing you should target is your Health Insurance. Better take a Family Floater Plan for your Family  and  the premium will be exempted under Sec 80D up to max of 15,000.

Short Term Goals: If you have any short term goals then do not put money in any tax saving instrument, rather put money in non-tax saving instruments like Plain FD (See, how to find best FD), Debt Oriented Mutual funds, Avoid Equity as far as possible if you are not a risk taker.

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So the hierarchy of your products should be like this

  • Life Insurance
  • Health Insurance
  • Long Term Investment products like ELSS and PPF
  • Medium term Investment Products like tax saving FD

What you should not Invest in?

Another Important Point is what no to do in Hurry? So here are some of the things you need to remember

  • Do not invest in ULIPS in hurry, the last 3 months of financial year is the time when Agents will give their best performance in luring away investors. Don’t listen to their stories of India Shining and other bakwaas, if you don’t understand the product and you do not have skills to manage ULIP’s. Same applies to ULPP’s or any other market linked products.
  • Do not invest in Endowment or Money back plans for tax savings. Your Father, your Grandfather or your Uncle might push for it but investing in those policies is a long term commitment and just for saving tax this year you cant invest in those policies.
  • Evaluate your risk appetite again and then take decision. Most of the people can take risk and their situation allows them but they don’t take risk. On the other hand there are people who’s situation does not allow taking risk, but still they take the risk. They confuse between Willingness to take risk Vs Ability to take risk.

Conclusion

Tax saving should be done at the start of year always so that we dont take wrong decisions in hurry. But if you are late you can take some logical decision and still do your tax planning.

Please share your ideas about what other instruments can be used for long term tax savings. Let other know how early tax saving decision has helped you.

Review of Stockezy.com , A Social Investing Community

Posted on by Jagoinvestor

Ever thought of a Social Investing community website in India . I am glad to review Stockezy.com today which has grown to a popular stock investing community in last couple of months in India . Stockezy.com is one of the best online places you can get education, stock tips , great links for other financial resources (mainly stock market related) . Let me point out main features of this website which you can use to increase your knowledge and also contribute . There are different sections in Stockezy , Below is a short description of each of them .

Stock Picks : You can stock picks from members on different stocks in indian stock market . With every stock pick there are important things like  target price , target date , Stop Loss . There are picks for Buy and Sell both .  Link

Opinions : This is a section where you are read opinions of different members on variety of topics from market outlook , stock movement , Short term view , Long term views about something . In short this is a place where you can get to know what a person feels about a topic . There are different categories for opinions so that its easy to find out some opinion . Link

Questions & Answers : You can consider this as a forum for questions and answers , If you have any question on some stock , market direction or any other similar thing , you can just post a question and anyone who wishes can reply to your question . You can see it as a thread which discusses some idea . Link

Portfolio Tracker : This is one of my favorites , this is a place where you can test your investing skills and buy and sell in real time, Its a great platform to test your abilities before you enter the market . You can get your statement which shows your Profit/loss and all the transactions summary in short . So if you are a new investor who is going to enter the market , its an ideal place to test out your strategies and skills . Link

Share Links : This is a very nice addition recently on Stockezy.com . You can view this as a twitter of Financial Markets . Different Financial blogger post links to variety of topics here with different categories . Even I post my personal Finance posts there .  Link

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Other Features

  • You can subscribe to RSS feeds of any particular sub features like  Stock Picks | Opinions | Answers .
  • You can watch out different top traders for different Time frames like Top day trader , Top medium term Investors etc
  • Gives you a list of Most active investors and top pickers , which gives you a good idea of whom to listen and whom not .

Stockezy is a fast growing Investors community with close to 1 million page views a month , You can get lots of great bloggers like Nooresh Merani , Arun the Stock Guru and other famous bloggers.  If you wanted a platform to show your investing skills , Stockezy is the place you belong to . Register to Stockezy using This Link

Further Improvements

There are couple of things which can make its much better . they are

  1. An online  technical Analysis Software system which users can use if they wish . There are many investors who like to technically analyse a stock and hence its a much have .
  2. More data on Derivatives segment . there is lack of quality data on F&O segment , so it can add the segment for that .

How should you use Stockezy ?

There are different ways you can use Stockezy.com , if you are new to stock market and want to learn how to to trading , learn the basics, you should join it and start doing the mock trading and see your porformance over a period of time , there are so many great people with knowledge out there who can give you some wisdom , listen to them . Before that you would like to read my ebook on How a newcomer should start in Stock Market .

Comments, Have a look at it and tell me if you like it , Feel free to give your negative and positive feedback .

Disclaimer : I am part of Stockezy.com Bloggers Network

Till what age should you take your Life Cover ?

Posted on by Jagoinvestor

From some last some days I am getting queries that some Life Insurance Policies are not giving cover for more than 65 yrs of age or for Tenure of more than 25 or 30 yrs and why they dont want to take those policies because they want a cover till 70 or 80 yrs of age . So People are confused on which one to take. They generally want a cover which covers them till 70-80  yrs of age or sometimes whole life . Let us talk about till what age should you target your Life cover generally .

Why do we buy Life Cover ?

Now lets talk Logic and think logically , no expertise required here . What is Life Insurance and How much Life cover do you need ?  Life cover is to cover the risk of early Death of bread winner and for hedging the risk of loss of income due to the sudden unexpected death of the main earning member . So ideally Life Insurance cover should only be there till the retirement of the earning member , because anyways after that he/she wont be earning , so no one will financially dependent on that person . You only think , If you are 70 yrs old , do you need Insurance cover ? Who is dependent on you by that age , generally ? How many of you are dependent on someone who is in that age ? Are you ?

Hence if a person age is 30 and he is planning to get retired at age of 58 . He requires a policy which covers him till age 58 , not more .. See the Diagram Below …

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So what do we learn ?

Life Insurance is in other terms a replacement of your potential Future earnings. Hence, Insurance amount which your dependents gets should be a substitute of all the amount the bread winner is going to earn in his life time and provide for needs of his Family. Therefore when you are near the retirement and  if you die, your potential future income  which you were going to bring in the family will be less and hence your Insurance cover at that time should be less . We today have Level Term Insurance where we have the same level of Insurance at that time , which is ok . Note that we also have decreasing life insurance cover and Increasing Life Insurance cover also . So lets see the main points we learnt here

  • We need High Insurance cover at the start of the Career when have no Investments . Look at iTerm Term Insurance from Aegon Religare and Some Tips while taking Term Insurance
  • We need to be covered till the time we want  retirement .
  • The day we earn enough money which our dependents need even if you die , you can get rid of your Insurance and then you don’t need Insurance .
  • So there is no point in having Insurance after your Retirement , unless your intention is to get a big sum of money at the end even if it does not matter much .
  • This is the main reason why Insurance companies also give Cover till age 65 because that’s the time most of the people on earth get retired anyways .
  • Whole Life p0licies does not make any sense apart from the fact that they provide pension which is very low. See review of Jeevan Tarang Policy from LIC to understand more on this .
  • You should have sound Investment Planning so that when you reach your retirement you have grown your Huge Corpus .
  • Insurance at the end is the hedge against your risk of loosing the earning Potential , its just not a tool to make money on your death .
  • Use Insurance as Protection not for Saving , Dont just invest for Tax saving !!

Final Take Away

You have to Notice some imporant point here , Dont take the above diagram by heart and assume that your Insurance cover goes down every year , It can happen that because of other commitments you might have to increase your cover . The main takeaway from this article is that at the end of your career (your retirement life) you should have enough investments and money so that you dont need Life Insurance. Also there can be exception cases where this logic does not apply , we are talking a general case here and not a specific one 🙂 .

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Questions/Doubts ? Share your comments please

A close look at Real Estate Returns in India

Posted on by Jagoinvestor

Real estate is one of the largest employer after agriculture in India. It is also a globally recognized sector which is witnessing a high growth in recent times because of increasing demands of offices and residential places.

One of my friend has shared his own experience about real estate, let me share it with you.

Real estate in India

One of my friends experience about real estate:

“The current market value of my flat in Mumbai is close to 1 crore, I bought it at 28 lacs in year 2000. The returns have been Mind boggling 72 lacs in 9 years, i.e. 8 lacs a year approx. , more than my current salary and now I am planning to invest more in real estate instead of Equity, What do you think”.

A not so close friend was discussing his Real Estate portfolio with me.

He belongs to first category of common sense deprived idiots, who do not understand mathematics well. 28 lacs flat became 1 crore in Value in 9 yrs, the returns are great, but not exceptional enough to make someone eyes pop out.

Simple math’s will tell you that its 15.2% CAGR return over 9 yrs.

Now what’s so great return about this 15.2% Return?

15.2% return over long term is desirable and great and what’s normal return from Real estate in last decade in our Country, The only thing irritating is how people make fuss about it.

Even Gold has outperformed, Gold was $300 per ounce in 2001 and now it’s close to $1100 ounce, that’s 15.5% return, 0.3% more. On the top of that Builders are not keeping their promises of Delivering Projects on Time and with same quality Promised.

Real estate investments have caught everyone’s attention in the past decade and every Tom, Dick and Harry with 5 lacs salary tries to grab a 40 lacs flat. I will try to throw some light on Average Real estate returns in past 8-9 yrs in India.

Coming back to my Friend:

I told him that it’s been a very good return, and I appreciate his timing, good job. But definitely he is bragging more than it deserves. A second person (his friend) suddenly comes to his rescue and challenges me.

“But Manish, I bought a flat in 2003 @20 Lacs with 3 lacs of down payment and rest a home loan. I spent total of 7 lacs till date and the flat is already quoting around 60 lacs, that 40 lacs of profit in just 3 yrs through investment of 7 lacs, that’s 78% return on annual basis”, showing off his fast calculations skills and giving me a “anything-else-you-young-financial-planner” looks his face .

These people are from another category of “common sense deprived and mathematically challenged” people. It is worse than first category. The problem with these people is that they do not understand “leveraging” .

What is mean by Leverage?

A situation of sitting on huge profits by just investing a small amount as down-payment and rest with home loan is pure example of leverage and very common in India, This gives a feel to people that they are very smart.

These people never consider the case when their house value drops by a big margin like say 15 lacs and they have just invested 5 lacs from their pocket, then they are in loss of -300% (absolute). But as you know, investors like to consider a rosy picture; they somehow believe that it can’t be the case with them.

When Real Estate broke in US:

As US citizens who bought Real estate in the middle of the Bubble just because credit was cheap and they could have made a lot of money by taking a Home loan and almost nil Down payment, When Real Estate broke in US, people who has put $10,000 from their pockets for a $4 million house were in losses of $1 million, because they had to pay $4 million as a loan money for something which is now costing $3 million.

That’s an unrealized loss of $1 million in a short time. That’s the problem of Leverage. Investors never think about this, India is a success story and housing is scarce, that’s enough for them to take a chance.

With my amazing quality of self-control, I kept all this in my mind and didn’t argue with him, sometimes your skills of explanation is limited to blogs only.

What is RESIDEX?

Don’t feel amazed if I tell you that there is an Index for tracking Real Estate in India. Its called Residex and maintained by National Housing Bank in India. It’s updated once every 6 months.

It covers all the major cities and the sub-areas in that city. The index Value over time will tell you how real estate prices are doing in some area or city.

Please understand that these prices are average real estate prices and not some general case which would negate what we discuss here today.

I don’t know how that is calculated but a common sense way of calculating it is to take a sample of real estate plots/flats in an area (for example 1000 units) and calculating the appreciation in value from last 6 months .

Lets see the RESIDEX values for 5 cities

Here is the chart of the same table

What is the mistake people do when they calculate Returns?

The beautiful mistake which everyone does is that they calculate pure absolute returns from Real estate which is in many lacs of rupees obviously.

So, if a person invested 30 lacs in a flat and it becomes 60 lacs in 5 yrs, they are sitting on a 30 lacs profit.

That’s a lot of money and people are excited to see that much money, but you also have to see that they invested damn 30 lacs !! for that, which is not every one’s cup of tea and the returns are normal 14-15% return/year on investment if you compare it with Gold or Equity.

You could have made more returns if you had invested in Equity (SIP in mutual funds in some top funds) . If you consider the risk taken for the return people have got in Real estate , personally I am not very much excited then, Investors forget the risk taken to get some return and only concentrate on Return part.

See an Article on GFactor , A tool to find out if an investment suits you.

What you have to see is how much return you got from something after adjusting the risk taken for that . So given a time frame of 1 year .

  • If you do a FD and make 9%, it’s amazing !!
  • If you invest in Real estate and make 10%, its ok
  • If you invest in Equity and make 11%, its just fine.. not a big deal
  • If you speculate in Options for one year and make your money grow by 500%, I would be personally disappointed a lot .

Some smart (second category people) people think that they can buy Real Estate on loan and make 30-40 lacs in 4-5 yrs from house value appreciation, While that is possible and has happened to a lot of them and definitely the return would be amazing.

But this exposes them to a great amount of risk which they don’t understand, its pure leveraging. There are better ways of leveraging than this. This kind of Leveraging is still nothing in front of Options trading in Nifty or some Stocks.

Not that I discourage people from taking a home loan and invest in real estate , but don’t overdo it , and understand and accept the risk involved, be ready for it.

“Risk happens when you have no idea what you are doing”. If you pre-calculate it and consider it, then it’s called Speculation, which is my favorite 🙂 .

An option trading is something I would recommend who have great risk appetite and dream of millions in short span of time, better than real estate.

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What is Average Real Estate Returns in India

IF we see the above chart of RESIDEX Values (for 8.5 years), you can find out the CAGR return of Real Estate in different cities. Let me show that for 5 cities in India.

Chart f or the same data

Note : I have assigned Index value for “India” by assigning weights of 25% , 25% , 25% , 10% and 15% to all five cities in same order .

What Should you Do ?

First of all, understand that Real Estate is important and you should always invest in it for Diversification of your Portfolio (If you can afford it right now). But that does not mean compromising with your Risk Appetite and investing just for the sake of Investing.

If you want to buy home, make sure you afford it, Buy a 1 BHK which you can afford if you want to live in it. If you want more than 1 BHK, plan for it, take it later. There is no rush. Real Estate is not the last thing in the world.

Don’t feel left out when you see others minting money in Real Estate, believe me they are making similar returns which you can make from Equity, just that the magnitude of profits they are making is high, not the returns on average. So Chill !! .

Note: Understand that whatever we have talked here is based on the RESIDEX index and there will be many specific cases which would make this all talk a nonsense, but we have to look at general case and not a specific case.

Download More data on Residex from HERE (From 2001-2007) and after 2007 at NHB website. Note that you can’t get all data of Residex at one place.

I combined the data from NHB from 2001-2007 and combined it with data on their Website to construct all 8.5 yrs of data. There was a shift in Base year because of which I had to do so.

What do you think about the Real Estate Prices at the moment in India?

I do not feel they are justified and the prices are mainly driven because of unnatural demand created by easy access to Loan. People buy it, but cannot afford it, If things continue for some more years. I would be surprised to see a big bubble burst in India like we saw in 2007.

Leave your Comments and let me know you are reading this blog.

Disclaimer: I have not invested in Real Estate, I am not very much excited about it and I don’t have money for it.

Readers Reviews of this Blog

Posted on by Jagoinvestor

Jagoinvestor is one of the simplest blogs that you can find to kick start your investing.There is such a nice variety of posts that all individuals can get benefits from it.Manish Chauhan the blogger behind it seems to spend a lot of time making his blog perfect for his readers.It is no surprise that his blog is so popular.It is a constant reference for all financial basics, explained in a very light manner.Whether you are a blogger, an investor,analyst or just someone passing by it is definitely worth spending some time here. — Sumayya Shaikh

Jagoinvestor is a great blog on investing. It is extremely rich in content, some of the posts are written extensively. The interesting part of this blog is most of the queries are answered from different posts present here itself. And by the way he’s a great cook…so you can expect a treat J — Charu Gupta

Jagoinvestor blog is an excellent one stop destination for understanding basics on a variety of topics in money management and stock markets.The content is presented in a way that is easy to grasp avoiding the complex lingo that usually scares away readers.This helps in a big way to get those crucial money matters fixed in one’s life without becoming too dependent on other advisors. — Saif Shakeel

This is one of the best blogs i have come across which explains the nuances of financial planning and investing in a way which everyone can understand.Especially the articles on financial planning, compounding power of money and endowment plans are real eye openers. This blog really help me avoid many pitfalls and I have educated my friends also.In a nutshell ,it is a one stop blog for anyone who wants to reap good harvest for their hard earned money. Keep going Manish !! — Swathi Kota

This is a great website ! Thanks for all the information. This website has provided a wealth of information for me and i really appreciate it and look forward to learning more. Now i know no agents can fool me anymore. Thanks Manish for the great job. — Anu Lopez , Dubai

Discover tips on saving money, investing smartly, managing your finances and getting the most for your hard earned money from the Smart Investor blog by Manish Chauhan. This would be the one website I would suggest to anyone who is new to investing or just starting up. — Skandhakumar

It is a must read for the people who want to plan their personal finances using a range products available in market.You would be wrong if you think it is a stock market blog .The title ‘Smart investor’ perfectly suits this blog — Sandip Naidu

I just happened to see Manish’s blog few months ago accidentally while reading other links in famous TA analyst. Manish brings out very simple but important issues on personal finance, stock market, insurance, interest rates etc. I am an Accounts Manager by profession but i never looked in to these aspects in my personal financial planning. After following his blog regularly i could review my financial planning and advise my peers. I appreciate Manish’s efforts — Venkateswara Ravi Prasad

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Questions and Answers , Part 6

Posted on by Jagoinvestor

I am putting some questions answered by me to users on “Ask a Question” form . I am putting 3 questions and there answers  . If you have any comments or better suggestions please feel free to add as comment . You can see other questions and answers done in the past Here .

You can also ask your questions from other experts on recently started Jagoinvestor Forum

ask a question

Question 1#

I’d like to invest Rs 5,000 – 7,000 a month through SIP to build a corpus for my child’s education in 20 yrs from now. I think I will need around 20 lakh (which will be around 60 lakh when we count the inflation). I’d like around 80% to go in equities for 1st 15 years and then switch to a more risk averse equation. Which funds do you suggest? Child will be born in Apr 10, can I start rightnow?

I’ve a term plan for 70-80 lakhs. So, ULIP would not be appropriate for this goal, right?

Answer 1 :

Excellent , congrats on planning this .

>>> 7000*(1.01)*(1.01**240 – 1)/.01
6994035.4332886515

Understand the Formula here

7000 per month can make around 70 lacs assuming 20 yrs and 12% yearly (1%) return . This is as per your requirement , which looks achievable easily , considering you review your investments every year and maintain your asset allocation .. .

You can put some amount (20-30%) in PPF (child name or yours) .. and then rest divided in some 2-3 good funds through SIP .. this should do the job .

you can choose any good fund listed on the article some days back .. You can also look for Balanced funds if you dont want to take too much risk ..

Question 2#

I am planning to invest my money in some CHIT fund scheme where in on an average you get more interest than in SB/Fixed deposits. What is your view on it and can we really trust these chit fund companies.
Following are links of couple of chitfund companies:

Answer  2:

I havent looked at what they have to offer , but without seeing that I am telling you dont invest in these .. Have you every heard these names from more than 3-4 people , Might be they have made some money out of this , but is that under law and are there contracts which are legally binded .

There are cases of frauds in these kind of chit funds . I found some complaints against these chit funds on net .. please go through them .. they might be offering higher returns but always remember that anyting above 8% is with risk 🙂 otherwise everyone will go with them only .. Don’t get into this unless you are ready to loose all your money someday ..

https://www.consumercomplaints.in/complaints/shriram-chit-funds-c41300.html
https://www.consumercomplaints.in/complaints/margadarsi-chits-karnataka-pvt-ltd-c217337.html

I feel even options trading is safer than these .. because you only loose because of yourself there , not someone else .

Question 3#

I would like to invest Rs.7000/ month by auto SIP ( for 2to 4 Years. My risk profile is moderate and my preference is to invest in Balanced Fund, Debt Fund & Diversified fund. My age is 45 years. Please recommend some of the good fund and amount to be invested per month.

Answer 3:

2-4 yrs is a modetate time frame .. You should go for Equity funds or Balanced funds only if you can take some risk on your investments , Risk does not mean negative return , it means below normal returns also ..

If you are ok to invest 7k per month , then even if you invest in something which gives 10% , you can generate around  4.14 Lacs . If you take risk and target equtiy funds , you can get 15% returns also , which will make 10 Lacs ..

Incase your Goal after 4 yrs can be met by 4 lacs , then i would recommened 10% route which will involve mostly debt funds or Balanced funds .. or Debt funds + Equity funds (30-40%) ..

You have to ask your self if you want your goal to be met or Generate higher returns with RISK 🙂

The best thing I think would be

  • 3k in Debt fund or FD
  • 1k,1k in 2 Balanced Fund
  • 1k,1k in 2 ELSS funds (equity , tax saving also)

Have a look at

Best of Luck , Dont hesitate to ask any other question and reply back if there is any doubt yet

Do you have a question ? Ask it here on “Ask a Question” Form or talk to others readers on Forums