Tag: Beginner Level

Pune Readers Meet & Workshops in Different cities

Posted on by Jagoinvestor

Did you miss meeting other jagoinvestor readers and our team ? I am sure many did in Pune, where we did an offline readers meet recently. On 30th Apr (Saturday) we conducted an offline readers meet in Pune and it was well attended by 20+ readers . There were some last-minute cancellations, buts its part of the game, we need to accept it . In this article I would like to share 3 things . First, I would share what we all did in the event and what kind of things we discussed . Second thing would be the two things which participants experienced and its truely amazing I can guarantee you ! . At last, the last thing I want to share with you is our offline paid events which we are planning to do in various cities some time soon now . Lets start !

Pune readers meet

Last week,  my team travelled from Ahmedabad to discuss some new and exciting things we are building and planning to launch by next year . And as the whole team was there in Pune, we thought why not have a readers meet and share some great things with them ! . We decided to have a readers meet at my residence and give a talk on what are the key reasons most of the people are stuck in their financial lives and how they need to change the way they are if they want to make things work .

No data cruching, no product talks ! , the whole talk was only focused on how we as human beings make mistakes in our financial lives which we have inherited from various other parts of our lives ! .

We started at 10:30 am and we ended around 2:00 pm. For all these 3.5 hours, there was a wonderful session on topics which were truly unheard of for almost everyone . It helped the participants to understand the real reason of what stops us from having a great financial life and why we are stuck in our financial life and not able to move forward ? We also did something called as “Money exercise” in between the session with all the participants (not in great detail , but just a small part of it) which we do with our clients as a “warm up” exercise. We knew that it would be something which would give some additional life to the whole session. Then we chose one of the random participants answer and discussed her answer in detail.

Nandish Desai, my teammate did most of the talking (mind you, he is an amazing public speaker and you dont want to miss listening to him if you get a chance). The event was full of real life incidents and fun-filled one liners which really helped participants to understand the topics in an easy way . The simple examples made sure that they can connect what we were talking to their own financial life ! . It was not at a heavy session at all ! . It went better than what we planned  and the feedback was great . Most of the participants really felt that some part of them has changed after the event and they are ready to go and implement things in their life from that same moment .

Nandish talking on session

The best part was that we also had Jayant, one of our clients in the group who shared with all how his life has accelerated and he has truely taken charge of his financial life. He shared how he took some tough decisions in his financial life which were pending from years  and he completed them. He had weekly/monthly targets and we were after him to make sure he does not deviate from his promise of completing them .He shared how he is almost close to be “debt-free” and his financial life is now restructured . He feels his financial life has become more simple and easy for him to handle and understand too. He also have more clarity on how he has to move in his financial life from this point of time .

Group sharing and its power

Group is powerful, because the sharing and experiences is manifold in a group. I would like to share two things which I am sure would add a lot of value to your life and that comes directly from the group we had in the event .

1. How shock therapy changed Dhananjay’s Health Life

Dhananjay, one of the participants shared a very powerful thing with all of us . Here it goes in his own words –

Few years back, I had to go for a medical check-up provided by my employer and I hesitantly went for it because it’s a headache in Mumbai to travel . As it was a benefit for free, I finally went for it , but not with full enthusiasm ! . I did all the tests and checkups which was to be completed.

Next day I had to collect the reports and I was finally out of Doctor’s room. Doctor was suppose to tell me the “results”

Doctor : “Welcome to the world of Diabetes” – Doctor said with joy, the moment he saw me and smiled at me !

Dhananjay was shocked ! , he had a blank face and truly speaking he had no words. How can he have diabetes at the age of 30 ? He was devastated ! . It all seemed like a dirty joke played by life on him.

Doctor : “So Dhananjay, what all plans do you have for next 4-5 yrs ? Because that’s all you are left with ! , you have no time 🙁 ”
Dhananjay : But Doctor, I am just 30 , how can I be diabetic and I want to ask you, are you really sure I just have 5 yrs left in my life ? There might be some mistake in my reports ! .

Doctor :  I feel sorry for you , but I can’t do anything . You have ignored your health to an extent that fixing it is out of question now ! . You want to see more ! , See these blockages forming in your heart , they will kill you much earlier , forget 5 yrs ! .
Dhananjay (almost crying now) : Doctor , I can’t believe all this , how it can happen to me ! , this is just not done ! , I don’t deserve this , my family needs me . I have not done anything in my life yet ! .

Silence ….

Doctor : Ok Dhananjay , Calm down ! . Can you share with me how are you feeling ? Can you tell me whats going on in your mind ? What is that one thing which you really want to happen at this moment ! .
Dhananjay : umm .. What can I say 🙁

Doctor : Ok Listen , The conversation I just did with you, Its not for the today ! , but future ! . You will hear exactly the same things from me ,  if you don’t take care of your health from now-onwards . Please do something about it and dont ignore your health . If you continue the way you are and ignore your health , believe me things will get more ugly then what they are right now !  So please go and start taking actions .

Now, you can imagine how the next day started for Dhananjay ! . It was 7:00 am next day, Dhananjay was wearing a sport shoe worth Rs 5,000 (which he considered total waste at one point of time) and he was running in morning . That first day, it was accidently raining heavily in Mumbai , but to hell with rains ! . He was running ! . He was now committed to change things and improve this health .

After that event, even though he gave excuse in other areas, but he never missed exercising each day without excuse. Not matter what ! .  After an year, when he went for a medical checkup again, there were no traces of any problem and he was 100% healthy. He went to meet the doctor personally to really thank him to change his life , but doctor was not in India . He was abroad now, but Dhananjay really thanks him from the core of his heart ! .

Do you see a link between what happened with what happened with Dhananjay and what happens with most of the people’s financial life ? Most of the people I talk to have ignored their financial life to such an extent that things become too tough to repair at times , I hope they get some shock therapy and can see a future picture of what all can happen with them ! .

2. How Soumya feels more responsible and an equal participant in her families financial life

On of our client and his wife Soumya were present in the event. At the end of the session, Soumya was sharing with us (not the whole group, but to us personally) that how connected she feels with her financial life soon after they have taken those actions which were long pending . Earlier she was not bothered about whats happening in their financial life and it was just the husband who cared and thought about it. But once they have taken charge of their financial life, Soumya now feels more responsible and a strong relationship with her financial life . She is now an equal partner of her husband in area of money. Now each aspect of their financial life is discussed jointly and they come to a decision together . I think this is real financial planning and at a different level than what we hear everywhere else .

It was great hearing Soumya’s experience and her feelings as they are unique and not so common in our indian families (read this) where only one partner is bothered and responsible for financial life and the other person with “Not-my-cup-of-tea” and “Not-interested” kind of attitude !

Offline workshops in different cities [Paid]

Now, I am fulltime on jagoinvestor and we have a dedicated team with each one of us having a unique area of expertise, we feel that we can now take our jagoinvestor movement to next level. Hence one of the things which we decided was that we will soon do value-for-money paid seminars and workshops in different cities in big groups which really adds value to participants and also help them in taking actions right then and there. We would like to understand first that how many people are looking forward to some thing like these workshops which would be a full 1-2 day event depending on the level of deliverables.

Hence we are capturing the data of those readers who are willing to pay a fee and participate in these serious events designed for changing financial lives . We are thinking of doing the first event by this June-July 2011. Note that this is going to be a high value , extremely relevent and action oriented workshop which will literally move you from that comfort zone and activate things in your life. You can literally consider these events as events which will plan your financial lives and help you move forward, if you were stuck from years !

What you can expect from the workshops ?

If you ask me – “Manish, Can you tell me in 1 line that what can I as a participant can expect from these workshops? ” .

My answer would be “Once you complete the workshop, you will leave the room with complete clarity about your financial life and you will be clear on the next steps to be taken” .

Apart from that we will also share many resources, tools and calculators, and many more action oriented exercises. This is what we have in mind right now, but we are yet to design it fully ! , so there will be much much more ! .  Take my words !

Please note that these will be paid events and not a free one.  Once we have many of people interested from a city, we would be sending details of fees , the program deliverables and what participants can expect out of it and many other information. Feel free to give your suggestions and ideas on these events .

Readers on email can find the registration form here

So are you ready ? Please share if you have participated in such personal finance programs already and what was the experience ?

Are you suffering from Mental Accounting ?

Posted on by Jagoinvestor

Do you know that majority of the problems in your financial life are purely because of psychological reasons? We are all humans and are prone to think irrationally at times, due to which, a lot many wrong decisions are taken in our personal finance. Behavioural Finance is the area of finance that combines psychology and finance together and gives you an insight as to how a common man makes mistakes in his decisions. Today, I am going to talk about on its concept called ‘Mental Accounting’.

Mental Accounting

Lets imagine a scenario, which will give you a brief idea on mental accounting .

Scenario 1 : You and your wife visit an electronics showroom with the intention to buy a Laptop. After browsing various products you finalize a nice laptop with the price tag of Rs. 40,000. Just when you were to swipe your credit card, the couple behind you mentioned that another showroom about 3 blocks away (15 min drive max) is selling the same laptop for Rs. 39,800. Will you consider driving 15 mins to save Rs.200? Majority of us will not do so!

Scenario 2 : You and your wife visit the same electronics showroom to buy 4 GB Pendrive costing Rs.400. However, you come to know that this product is available for Rs.200 at another showroom which is 15 mins drive. So will you now choose to drive another 15 mins to buy this Pendrive? Most of us will happily choose to drive 15 mins to the second showroom.

If you look at both the scenarios, you will notice that both scenario 1 and scenario 2 are exactly the same, they both will save you Rs. 200 and both requires you to drive 15 min. Exactly same, no difference. But most of the people will choose the first showroom only in scenario 1 and will choose second showroom in scenario 2.

Why does this happen ?

Truly speaking, this happens because of Mental Accounting which makes Rs. 200 saved on laptop not a significant amount because its just 0.5% of the original price. Whereas, Rs. 200 saved on Pendrive looks attractive and substantial bargain because its 50% of the original cost.

What is Mental Accounting ?

Mental Accounting is very simple to understand. What makes is a crucial aspect to understand is the different ways we treat money depending on situation and its source. We often concentrate on the situation and the source of money in terms of the amount of hard work we put to get that money and all these points makes us human to fall prey to treat same amount of money in different ways. But coming back to the facts, Money is Money and it doesn’t matter where it comes from!

So, if you earn Rs. 100 from 3 different sources- Lottery, Salary or Tax Refund, all of them should mean the same as they all have the same purchasing power. Forget how you got it; all of that Rs.100 is valuable equally!

Personal Experience of Mental Accouting

Let me share on how I myself was a victim of Mental Accounting. Some 2 years back, when I did my first stock market trade in F&O. I made Rs. 2000 as profit on an investment of Rs. 6000 in the matter of 2 hours (options trading). This increase of Rs. 2000 actually increased my overall wealth, but to me it was ‘Cheap Money’. Naturally, I had made plans to spend this money and I had no 2nd thoughts on NOT spending. The decision to spend money was not at all rational, but it was fast money which came from stock market and it came without any hard work. Mental Accounting was doing its job in my mind!! Carefully evaluating the situation, all what happened here was that my networth went up by Rs. 2000 and I took out Rs. 2000 and SPENT it!

 

6 Examples of how our personal finance decisions are based on Mental Accouting

1. Treating some money as “Free-Money” or “Loose-money”

Most of us label money based on where it comes from, by doing so the value of that money appears to be less. E.g. if you get food coupons from your company, you will not consider it as cash! At the last company I worked at, it was amazing to see that people didn’t mind paying up to Rs.50 for Food Coupons for friends, but if the same person had to spend Rs. 10 hard cash, he will not be willing to do so. Food coupons have same purchasing power (at least in limited environment) as cash, so one should be treating it in the same way and not being bias just because it’s not in the form of currency. What I really want to know is that what will happen if companies start providing cash equivalent of these food coupons???

Another example can be with the money that we get from tax refunds, cash gifts on events etc…etc… We all in our heads label these as ‘Cash, but not as valuable’. Imagine that you got Rs. 2000 as your tax refund and you are more likely to be spending this money rather than the willingness you would have to spend from your salary. Also imagine that some friend gave you Rs. 1000 as gift voucher, will you even bother researching on what products can this voucher buy??? In the same way, if you earn yourself a bonus of Rs. 50,000; you will be more inclined to spend it on a holiday or for buying some item for the house. Would you do the same thing with the money from your salary??

So the message is clear, don’t label money as ‘salary money’, ‘tax refund money’, ‘bonus money’ or ‘Gift money’. It’s just MONEY!

2. Holding Stocks and Mutual funds with Loss

Mental Accounting is visible in buying and selling of equity products like stocks and mutual funds. Consider a person who bought shares at Rs. 100 each and the current price drops to Rs. 80. He does not consider this as loss until he books it, loss is not existent for him, and it’s just a possibility. But in real terms, that person is actually suffering loss already. The person in this case labels the loss as ‘potential’ and not ‘real’. On the other hand, if the same stock went up from Rs. 100 to Rs. 120, he will be happy and will be telling everybody that how he is in ‘profit’ even though he has not booked as yet. Profits have already happened according to this person’s thinking and this is exactly why many people fail in stock investments.

3. Size of the decision/money involved

A lot of times the size of the transaction also influences our thinking. Imagine that you went to buy a Plasma TV which costs Rs 20,000. You bargain with the vendor and successfully get a discount of Rs 500; it makes you happy and you feel as if you saved something. But do you put any big effort to find out how you can save much on groceries or vegetables? As the transaction size is bigger and bigger money is involved in case of Plasma TV, it clicks your mind that you should try to bargain the price and save as much as you can, but this thinking is not the same in case of small purchases. Even if we are able to save Rs 5 on small transactions, it would amount to Rs 1700 (approx) in saving in whole year and that would be bigger than Rs 500 saved in case of Plasma TV.

While there can be repetitive headache involved in saving that small amount, the whole idea is to communicate that we tend to think differently when there is a big decision and very different when in smaller ones.

4. Earn less interest and pay more interest

Many investors do the common mistake of earning less interest on their FD’s, PPF or Cash in their Savings account, but pay huge interest on their personal loan or credit card interests. For investors, money in FD’s and PPF is ‘safe’ and not to be touched, but in true sense you are earning less on a part of your portfolio and from that same portfolio you are paying huge interest for loans. If you see your whole portfolio as one and single element without labelling parts of it, your perspective will change. Ideally  one should clear a liability whose interest rates are higher than the part of portfolio earning lesser interest . But due to mental accounting , this idea does not look fine to many people .

5. Labeling money into safe money and risky money , loosing any money is just loosing

Ajay has Rs 1,00,000 in Bank FD, Rs 2,00,000 in his PPF account and 5 lacs in Balanced Mutual funds. All these investments are for his daughter’s education down the line and he has mentally labelled it as ‘safe’. However Ajay has also separated out Rs 50,000 to try out stock trading which is his passion and what he loves to do. He has mentally labelled this Rs 50,000 as ‘Risky’. You can see his total worth is 8.5 lacs.

Case A: Now imagine he is in loss of Rs 25,000 in his stock trading. This will not hurt him so much as he had accepted from start that it’s for stock trading and loss was a possibility. He is fine with this loss, as nothing has happened to his ‘safe’ investments.

Case B: Suppose market is down and he faces a loss of Rs 25,000 on his mutual funds. As the loss has happened in his mutual funds which was initially labelled as ‘safe’ and “for-his-daughter’s-education”, the level of disappointment and worry would be much bigger than Case A.

Even though the reaction of Ajay was different in both case A and case B, it’s purely because of mental accounting and the way he had unconsciously labelled both investments of his portfolio, but in both the cases the reality is that his total net worth went down from 8.5 lacs to 8.3 lacs, It’s as simple as that.

6. Paying for Financial advice

We recently encountered a very funny situation, one of the readers contacted us for our Financial Coaching service, he was very clear that he needs it (For readers who are not aware about financial coaching, it’s a paid program where we coach people in their financial life just like Garry Kirsten coaches Indian cricket team and transformed their performance). He was very much interested in being coached on his finances and what MONEY means to him, but was very uncomfortable paying the fee out of his wealth, as for him there were other important things in life; he said he would get back to us once he makes the decision. But he didn’t communicate for weeks, then just last week he told us that now he is ready for Financial Coaching. After we started his work, we asked him, what had happened in his life which motivated him to take our service. To our surprise, he had sold his old car and got price way beyond he expected, and he was fine to use that extra money to improve his financial life.

If you look at this incident closely, even the money which he got by selling his old car become the part of his overall wealth, the moment he sold it, in fact it was always part of his wealth even when he didn’t sold it. You must be thinking what was our first   coaching lesson for him? Yes, it was the way he looks at different aspects of his financial life and not fall prey to these kinds of behavioural patterns.

7. Treating unexpected money in a different way

There are lot of unexpected money at times coming in our life , It can be money in form of Bonus from your company , It can be money recieved from an old friend who took it from you ,didnt give back to you and you also forgot about it. It can be some money you find in old book which you had secretley kept long back . All these are examples of “unexpected” money and hence there is no mental accout for it , that money looks more of pocket money to you and you tend to spend it without thinking much .. However money is money , no matter from where it came . Its just different in your mind .

Please share your real life incidents where you fell prey to mental accounting . Do you think mental accounting is not applicable in real life and is more of a “time pass” concept or do you think its really something one has to understand and apply in their financial life ? Share your views

 

JagoInvestor launches its Paid Services

Posted on by Jagoinvestor

Firstly I want to thank & acknowledge each reader of jagoinvestor.com for their immense love and support from the bottom of my heart. Each reader is like an extended family to me. It is clear because you read my articles I write, the more you read the more I get connected to you. I am always excited to reply you on blog comments and e-mails.

I am really committed that each jagoinvestor reader experiences huge financial breakthroughs in their financial life, every reader achieving financial freedom. For a lot of you, jagoinvestor is just a blog which teaches them about personal finance and makes them an informed investor; as a reader you may or may not be aware about our paid financial services. Today I want to share what was happening from last many months and what is our vision in this space. I also want to officially launch our services today which we are providing from last 15-18 months.

Around a year back, I happen to connect with Nandish Desai. He is a powerhouse of amazing ideas and carries a powerful vision which I never saw in anyone. It was very clear that he really understood the real requirements of an Investor and what kind of assistance a person needs in his financial life. It went way beyond traditional financial planning; his style is non-linear in nature. Rather than just focusing on financial data and giving solutions to rectify those, he actually worked with people on their day today financial habits and showing them those internal mistakes which is causing all the financial mess in their financial lives. He works closely with people to get them in control of their financial life by being a coach. It is not just a plain vanilla planner. His coaching skills are deep and transformative in nature. Nandish was also the main speaker at our Pune and Mumbai meets and lots of readers have already interacted with Nandish and Me at these two cities . We plan to re-launch these meets soon in future .

We were inspired by each other, identified our individual strengths and decided to collaborate and work together, hence we teamed up and now we are “Jagoinvestor team“. We then started serving some of the readers of the blog who contacted us and were committed in working on their financial life, as paid service. We started to apply coaching principles. We started working with them in a way which we believed really connects to an individual. After working with lots of clients and repeated experience, we came with something called as Financial Coaching, which I will explain below.

Jagoinvestor Services

For many it might be a surprise that we started our services from today, but it’s not the case. Let me share with you that we are actually providing our services from last 12-18 months, but didn’t open it up for public till date, as we wanted to make sure we dont compromise on the service quality. We have already served many clients till date which are from different parts of India and a lot of NRI’s across some countries who contacted us and asked if we had any services. We offered them customized services which helped them in creating a financial life which they always wanted.

This blog was there to serve readers and give them immense knowledge . This is going to continue and get better each day now onwards. These services are extension of our committment to serve those people who need our deep personal involvement in their financial life, so that we can closely work with them and serve them. Now we are ready to offer our services to everyone. Right now we have total 5 services and I will give a brief overview of those.

1. Financial Coaching

When you hear the name “Financial Coaching”, you get many ideas in your mind, you will relate it as a better version of financial planning, but you are mistaken. It is not Financial Planning, It’s the next level of Financial Planning, and it goes deeper than just financial data and your goals. It works mainly on YOU. It understands why you have messed up your financial life till date? It works on your relationship with money. In Financial Coaching you have a Financial Coach working with you closely , and not a financial planner !

Financial Coach is someone who stands for your financial success , who is a mentor to you in your financial life , who observes you , listens to your financial worries and identifies the flaws in your financial life which is causing problems and not letting you move to next level. Financial Coach will make sure you are on track with your commitment to improve your financial life, Financial coach makes sure you are on track in your financial life and take actions which forwards you with each action.

Let me give you an analogy. Suppose you are not physically fit and have health issues. What will you do? Read below –

Model 1 : You go to a doctor and do a medical check-up. Doctor gives you a report and prescription to you on what to eat , how much to eat , When should you wake-up and how much exercise you should do each day. This is very much like financial planning where you get a Plan, actions required to improve your situation and overall roadmap. If you think, this is exactly what is required, you are mistaken, this works for only a very small number of people who are committed to stay on track and do things on their own. A lot of people are again lost in their personal life after few weeks and months and forget all this planning. They need an extra hand-holding to stay on track.

Model 2 : Let’s now see the same above example and see how coaching can help the same person in the same situation. Now the same person who has health issues gets a fitness coach. The coach studies person’s lifestyle, body, habits and designs detailed action plan for him. He reaches his residence each day in the morning at 7:00 am. The coach will make sure that he will complete his exercise in front of him, he motivates him each day to go to a next level in his exercise, and the fitness coach will observe him coach him each week/month. We can see that this model is more of action-oriented and not just solution-oriented.

In the same way Financial coaching works, financial coach does not just work on your data, he works on you. Financial coach re-designs your financial life and gives you a new eye to look at your financial life, he shows you NEW possibilities possible in your financial life which you can’t see yourself sometimes. He makes you understand how your situation got created, he tries to reach the source of the problem and attacks the source or cause of the problem, not just “the problem”, because unless the source of the problem is fixed, the main issues will keep on happening.

You can read more about financial coaching here

2. Basic Financial Planning

In general Financial Planning includes lots of things which can range from cash flow analysis, your debt management, Insurance and other goals planning along with Estate management. All of this important and everyone should aim to have it in their financial life. However what we feel is that a lot of people get stopped by this complexity and the denseness of financial planning. Hence we have come up with Basic financial planning which focuses on most important aspects of your financial life.

What if you’re Insurance Planning, Children goals and retirement is complete? What if you get guidance on health insurance and Emergency fund building along with this? Won’t you consider 90% of your financial planning complete? I am sure you will and many have told us that this is what the core of their financial life, and that’s exactly basic financial planning does. We make sure we complete your top most priorities in life and guide you on how to implement your plan.

You can read about Basic Financial Planning here.

Clients Testimonials

We asked some of our clients to give their feedback and their testimonial on how our services helped them in their financial life and what they think about us . I am putting up four such testimonials

Testimonial 1

“I wish I had gotten to know Manish and Nandish 5 years back when I started my professional career. My personal finance status would have been much more organized. I have known them for 6 months now and they have been singularly responsible for correcting my last 5 years of mistakes. They not just guide but more importantly educate their readers and clients. And that to me is their biggest contribution. Nandish has gone beyond the role of financial advisor to actually become sort of a personal mentor to me and I owe to him for bringing to my notice the most important SIP we all should make but usually don’t – “Health SIP” – investing every month in ensuring we stay healthy and fit.

I hope we will continue to engage for a long time and I wish them all the best in their future endeavors”

Brij Bhushan

Management Consultant , Gurgaon

 

 

Testimonial 2

I have always been grateful to my teachers in my school and my college right from my childhood because they were the one who opened me up to a sea of possibilities and an ocean of knowledge. I am educated ‘formally’ because of them. But was I financially literate? No. I wasn’t. I, then, went in search of quest for financial freedom through Education and subsequently Action. As the maxim goes if you ask the Universe gives, I came across Jagoinvestor blog and took a decision to pursue it seriously. You were my teacher encouraging me to learn about the most important aspect of our life, Money, which others ‘choose’ not to talk about either because of ignorance or because they don’t want to project themselves as running behind money.

Today (PRESENT), I can say, I am lot better in my knowledge of money than I was few months ago(PAST). Importantly, I am more confident of my FUTURE.

And all this is possible because of the awareness created by you guys. In short the most vital thing I learnt is Education combined with Action will lead to your Dream Destination.

Thanks a ton for that!!

Srinidhi Rajshekhar

Software Engineer, Bengaluru

 

 

Testimonial 3

My Husband and I are both in our late 30’s. While we were staying in Cambodia, about 1.5 years ago, I came across JagoInvestor and got hooked on to his site. I contacted Manish to help us do our investment planning and and he put us on to his team mate Nandish Desai. Nandish and Manish both worked on a detailed investment plan after understanding our needs, income etc and helped us be on track and motivated us to implement the plan. They are extremely professional and thanks to them we have a disciplined approach to investing now.

Shalu Mehra

Hiring Lead, Human Resources , Gurgaon

 

 

Testimonial 4

Once a girl asked to her dad “From when should I start saving for my retirement”, Dad replied”The day you get your first salary”. These words got engrossed on my mind, I started searching for guidance before I got on job so that I can save right from my first salary. In my journey I had been through various financial advisers who recommended me “Whole Life insurance”, “Ulips”,”Sick mutual funds”. With my research I knew everybody was trying to misguide me to attain their targets. I had been to big branded financial advisors but I found the same thing over there. I thought I am stucked, but to my grace I called Jago Investor on 25th Sept 2010 for the first time. After that no looking back I had been in touch with Nandish Sir, taking guidance on financial planning almost every alternate day and I wanted them to be my only financial advisors but due to certain financial problems I postponed the process but finally due to Nandish Sir faith I became part of there family on 22nd Jan 2011. I had read “Rich Dad and Poor Dad” where a Rich Dad, Business Man, guides a young chap to his journey to become America’s one of the Richest person called Robert Kiyosaki. At the age of 23 I found one named Nandish Desai, I am on my way to be what i intend to be. Thanks to Nandish and Manish Sir for their immense faith.

Kamaljit Ridlon

Deputy Manager
Kotak Mahindra Bank
Mumbai

Comments ? I would love to hear what do you think about our services and what other kind of services we can provide in future .

Will your children marriage be simple or grand ?

Posted on by Jagoinvestor

Marriages are made in heaven! But what about families who have to fund the marriages by taking loans? Those, who sell their assets and properties for these, at the most, 1-2 day events? Does it make sense at all?

You, as parents have goals for your children education sometime in future. Despite the pressure you undergo today to spend a lot on money for your children marriages sometime in future, will it be relevant to spend so much on that goal?

This is the second series of articles which sees how social and economical changes in our country will have impact on our financial goals in future, so that we can take decisions for saving for those goals today ! (Read first article of the series about Child Education here).

source

When we coach our clients in their financial lives, we see that one of the main goals in their life is “Children’s Marriage.” For most, the present cost of this goal is around Rs 10,00,000, and by the time their children will be marrying, it definitely would cost a bomb!

These investors keep investing money for that goal for several years and work hard all their life at it.

But the question is –

After 20-25 years when the time comes, will it be worth spending so much on this goal? Can’t you lower the target of that goal and instead use the money on something else which would add more value to your life? What about buying a better house? How about living a 20% better retirement than you have planned? Or best, why don’t you just fund the education of say 2 kids from the streets? That to me, is more inspiring, more satisfying and a much better act to boot !

What happens today?

Now a days, marriages have become more of an event where the whole focus has deviated from the main goal of the rituals, the gathering of friends & loved ones, spending quality time and shifted to show-bazzi, razz–matazz, DJs, expensive decorations, partying, showcasing 100 types of food, and functions which last long hours !

And the biggest problem, if it can be called that, is that all this is done for people who actually don’t matter most of the time! I personally come from Uttar Pradesh and I have seen marriages there, If you want to compete with our state in Show-bazzi and non-sense extravagance, I give you an open challenge !

We all know, what is the goal of marriage. It’s bringing together two individuals and their families. They enjoy the event, get to know each other and perform rituals which really contribute to marriage. For people who don’t know, the Arya Samaj rituals which is the simplest and purest form of Hindu marriage, takes only an hour to complete the marriage !

And it has all the rituals from Hindu vidhi! Even with regular marriages it does not take much time to complete the marriage. It’s normally, a balancing acts between parents who push for making sure the “rituals” are there and the current generation who look for speed and simplicity.

As per an Indian study, as close as 15% of all grains and vegetables in India are wasted through “extravagant and luxurious functions”.

Parents and society pressure

Most of the people who are pissed off by the idea of useless spending still have to pass through this trauma because of the parents. Parents have attended all the marriages till date in their “circle” and it was all nice and full of events and 3 days long. Now it’s their turn to show off or at least give back !

No matter how much logic you can throw at parents in doing a simple marriage with less people and a low budget, it still does not help!

Even though we are in the 21st century, the majority of parents still start saving for their daughters marriage from day 1.  I say daughter’s marriage because its considered as the bigger headache and there is this ‘rule’ in our society that girls side bear the main expenses. What a cheap mentality is this !

If its going on from years, we have to change it, but lots of guys family still show as if they are bound by some imaginary forces to follow it !  Shame ! .  A lot of families go into debt because of this “happy event” in their daughters life. They sell their land, houses at times, & even mortgage their assets to fund marriages.

Is this a happy event or a sad one?

Why do people spend in weddings in the first place? There is enormous pressure in the conservative society for marriage spending. These are costly social get-together’s, in this country of more than 900 million middle class and poor people. In the marriage celebrations, the hosts have to feed couple of meals to some 500 to 1000 guests.

They have to give gifts to some 50 to 100 relatives and wedding guests. The cost of lighting, flowers, decoration, booze, music, dresses and gifts to bride and groom, and travel expenses often hits the economic foundation of most families.

I personally know families, in which a man loses almost all his retirement benefits to get two of his daughters married, even when there is no dowry involved. For a middle class person, even the simplest wedding can cost rupees 5 lakhs (half a million rupees).

Does society or culture coerce people directly or indirectly to bear huge expenses during marriage of their children? Yes. People are coerced or forced by the culture to spend money to prove themselves in front of friends, relatives and neighbors. It is a social expectation imposed on people, which tramples their freedom and choice to lead a dignified life.  – by Desicritics

How our Indian marriages and our customs took their shape !

Lets flashback few centuries back and understand how the procedure of marriages got to where it is today. In earlier times, it was parents who decided who the life partner would be. In most cases, the girl and boy would not have even seen each other!

Marriage was then, actually an event of getting every one familiar with each other – all the relatives, neighbors, friends, everyone came with purpose of getting along, and knowing each other. And it was an event which was “opportunity to meet!”  People lived far apart, and communication & travel wasn’t as easy as it is today.

Marriages were therefore long events with series of ceremonies and rituals . A strong reason for this was that girl can spend more and more time with their future family members and get familiar with her “new” life & family. With the passage of time, the real meanings have been lost and only the rituals remain.

What do people think about Indian Marriages ?

I conducted a survey few days back and there was a great response . I came to know what urban Indian (mostly metro’s) thinks about Indian marriages and some interesting results came out . See the survey report which I have created out of it .

Most of the people participating in the survey said that they feel marriages should be simple and fast, which indirectly tells that there should be less spending on marriages. However still a quarter of the participants said that it should be a grand event as its once in a lifetime event and hence deserving of expenditure!

There was also a interesting pattern seen on what people think about who should be part of a marriage. There were equal number of people who opted for “close family and friends” as well as “All the family, relatives and all kind of friends.”

Some even went ahead to say that they would like to call everyone who can embarrass them later saying “Arre yaar, tumne bulaya nahi” .. Believe me whoever says that kind of sentence never actually comes anyway! You can safely request him to come and then forget about him/her 😉 .

This clearly shows that while most of the people would like to spend less on their marriages, they still feel the pressure of society and therefore would would like to invite people. This is very obvious, given the way our society is shaped.

While a person attends many marriages in a year, only 1-2 of those marriages are the one which he actually cares about. Most of the others are just a formality. Imagine, while just inviting others is a headache, even the person whom you invite, also gets a headache of attending it!

Attending marriage is also becoming like actually getting organizing a marriage! No one wants to do it, but everyone has to do it!

As many as 58% of the survey participants said that if they attend a marriage, it has to be fast and simple as its just another formality for them, 12% even went ahead and declared those events to be a headache for them. Only 30% participants said that they would love to attend marriages which are grand, after all they are guest ! .

All ceremonies are driven by “Looking Good” factor

We live an ordinary life but our eyes would like to capture things in movies or television shows which are larger than life. Most Indian weddings shown in Indian movies and television shows are larger than life. They are shown as if our entire life is about spending on weddings and nothing else.

While watching movies we forget that everything is fake, it is not a real wedding happening on screen. The scene is created where everything shown is picture perfect. ‘Everything is created so that it LOOKS GOOD’.

When we have a family function each person wants to look good or wants to avoid looking bad in the eyes of relatives. They want the event to be the best, they want it to be different, they want people to say “kya kharcha kiya hai, kya baaat hai”.

This is what it’s LOOKING GOOD, nothing else.

The spirit of celebration is quietly taken over by the looking good factor. Most people don’t know this, they are not present to how the looking good factor is running their financial life. They simply want to look good and inside of that they over shoot budget, invite more people to the event and will try his level best to impress the guests.

Looking good element is not only present in the Host , please don’t be mistaken. It is fully present in the guests who are invited. When we receive an invitation to attend any marriage or function we attend the event just to look good.

We go to the functions thinking “Nahi gaye toh aache nahi lagega”. Even the gifts we give on each wedding or occasion is decided by the looking good factor inside us. (Think about it). By the way where is all this coming from.

It is either to look good or you want to avoid looking bad when it comes to attending functions, giving gifts, organizing events. Some say it is my first son getting married so I will spend, some say it is my last son getting married so I will spend.

NO BOSS it is simply the looking good factor running the financial show of your life.

The point is you can go beyond “The looking good factor” you can get in touch with your true self-expression and focus on celebration rather than burning your hard earned money just to look good.

We have served dozens of our clients and almost all of them have been victim of this “Looking good” and messed up their financial life. however we have been successful in coaching them on how they should come out of this “looking good” and concentrate on a bigger goal in life , which is attaining financial freedom. I am sharing this with you, because I don’t want you to be one more victim of looking good factor. If you can get this lesson, you can design and live a simple yet extraordinary financial life.

But marriage is a one time event and to be remembered !

I agree !

Who’s stopping you from making it memorable and enjoyable? Life is to make each moment memorable and marriage is an event which has to be memorable. However do it in your capacity, thinking past and future and what impact it can have on you , not others.

If you want to spend 20 lacs on marriage, and you can afford it, then damn it all & just go do it! But shower it all on your family and people who matter, do it on people for whom you will be happy with, do it for everyone whom you will miss if they are not part of the marriage.

Instead of wasting it all on 750 people, of whom 600 are just weird acquaintances, better spend all 20 lacs on just 150 who are close to you and you would not regret spending it all on them. I would suggest, spend 15 lacs on marriage and go for a amazing honeymoon with those 5 Lacs!

Your spouse will love you for at least next 2 years for sure! Guaranteed! 😉

However if you spend 20 lacs on those 750 bums and are irritated at each moment, and then complain that real estate prices are high, paisa nahi hai, kaisa karenge, and all, then God help you! You choose your path and boy, please work on your emotional quotient! 🙂

Marriage’s in future

Now coming back to the point, If this is the condition today, in 2011, you can only imagine the scenario after 20-30 years. In this new India, more and more people are travelling to other parts of country, settling in other states, mingling with other communities and end up marrying with other castes.

This will only rise in future , not come down. Which means marriages will have to be more simpler. People will have much lesser time than today for “external” events .

With everyone busy in the rat race of life, and with new breed of individuals who will be “us”,everyone who will be part of your children marriage would be your friends and relatives who are almost of same age, and hopefully think alike and will be wise enough to accept that “uske ghar ki shaadi bade sidhe sade tarike se who rahi hai”.

We would not mind attending faster and simpler marriages.

So I want to give you no suggestions today; just food for thought. If you have a goal of your children marriage, discuss with yourself, rethink stuff…

It might happen that in future you might not have to spend so much money on marriages because the situation and those environment might not demand it. It may be they don’t even care for it! You might be losing on some other goal or some sleep over night on these points!

Experiences of Readers about Indian marriages

You can skip this part now if you wish to, I am just sharing some of the experiences of readers who have taken the survey and shared their personal views on Indian marriages .

Reader 1

Today people spend so lavishly on their son/daughter’s wedding like never before, even when they have to take personal loan for it. I really don’t understand the reason behind all this, I guess this is to do with their social/personal image.

Who dont want their daughter to be happy and not to face any taunt from future in-laws because uski baap ne uski shaadi acche se ni ki?? Maybe this fear makes them spend so much..!! For these people, I have a question, does spending so lavishly on their son/daughter’s wedding boost their social image and stop the taunt from in-laws family (PRACTICALLY)?

Did they work hard and save whole life to spend like this? Why not spend it on their own vacation, son/daughter’s honeymoon, things they desire most in their life etc? Why not buy a home they desire for (if they don’t have one), why not plan for retirement?

Why not use the money they want to spend to fund poor & needy child’s education than to spend on decoration & food at the marriage on rich & well settled family and friends (read everyone) who can say “arrey yaar, tumne bulaya nahin!”..

I am sure, the marriage can happen in small banquet hall (lawn) with only close friends and relatives invited, sharing the happiness immensely than to manage large crowds seeing your hard earned money flowing like daru from the bottle forming the ocean.. Shadi 3 crore ki can become shadi 3-5 lakh ki with happiness multiplied many times!

 

Reader 2

Today’s marriages are more of a show – “my cousin had a grand wedding, I will show them what a ‘grand’ wedding is next month when my son gets married.” It’s more like the Onida advertisement – neighbours envy sort of thing.

One who has attended a relatives wedding feels he can do a better show of it , like ‘people will forget that wedding, they will remember my wedding for a long time to come.  All show. I say go feed or look after some really needy people in that money spent on the lavishes of the wedding. Keep the wedding simple with minimum rites as required.

 

Reader 3

Few thoughts on the way today’s marriages are conducted these days in our country ( I may be little over the top being a bania 🙂  . First about the marriage ceremony itself – they are all the same.

A large glittering hall with a huge gathering of unrecognized people and a very few close friends / relatives. What’s the point of such expense ?

I’d think couple may be better off performing a simple marriage ceremony & utilize the money saved for themselves – expense on close friends / Honeymoon / Car purchase / House purchase etc.

Second, the marriage invitations have become much more transactional than an emotional invite. Your option of “Anyone who can say tumne bulaya nahin” captures that (wonder how many people will select it 🙂 ).

People invite everyone they can remotely relate to (it’s high fixed cost anyways as per grand arrangements – adding few people doesn’t matter).

If the ceremony were to be conducted in simpler manner, a much better & thoughtful function / reception party can be arranged for fewer people with lots of personal attention & hospitality that makes the event memorable for all rather than “aaj phir ek shaddi mein jana hai…dinner karke zaldi aa jayenge” 🙂 .

Ofcourse our parents generation for whom shaddi is an event to call upon the whole society would disagree. It ‘ll be nothing less than a crime not to call upon all and spend it all on a marriage.

I ‘d think as the current generation takes over the role of parents and arranging for child’s marriages (hopefully they will let us :P), we might move towards simpler marriages and grand functions for a lesser number of people.

 

Reader 4

Marriage used to be a divine affair, 2 people getting together and taking oath to live together until death, through thick and thin. Today some of the marriages I visit are more of wealth show and ego pumping affair for the couple and their parents.

Sure, those with hidden black money would want to spend it all here (visit a marriage of a real estate developers son/daughter, you will know).

I am a South Indian, and had visited a north Indian friends marriage in UP. It was an high expenditure marriage, with great food and gifts to all attendees.

Everybody enjoyed the food and drinks, and by the time the mooharat, started (midnight), there were hardly a handful of close relatives left to witness the rituals. It made me realize how fake and shallow Indian marriages have become.

Importance of your Child’s Education plan in coming times !

Posted on by Jagoinvestor

So, what’s your biggest financial goal in life? Your Child’s education?  Their marriages? Planning your own retirement? What is the strategy you’ll follow to reach these goals? What if I tell you that in the coming times, your way of looking at these goals needs to change?

You can’t look at goals the same way as your parents did! The lives & times of our parents, ourselves and our children will have lots of differences; difference arising because of the way our society and economy changes from year to year, decade to decade.

Let’s question the beliefs we have about some financial goals in our lives, how we should change our way of looking at them and planning for them. I believe this is really important; important enough to cover this over a series of articles. This is the first of a 3 part series and we will cover Child Education in this series.

Child's education

 

Let me start from basics. Here’s how typical financial planning works in India. A financial planner captures your situation, helps you define your goals and then he plans for how those financial goals should be achieved. Take any financial plan and topmost goals are

For years, traditional financial planning has been going on like this, & no one questions the way we plan for these goals and how much importance we give to these goals in our life. Note that these goals take up a good amount of your monthly investments and you end up with less money each month!

How will you feel if after 2-3 decades you realize that you shouldn’t have worked so hard on these goals?

How is Child’s Education Planning done in India?

Right now, almost every average India plans for their child’s education in an unstructured way. They just put some random amount in some generic financial product, without understanding how much would they require at the end, when the goal actually arrives.

The amount of investment done is guided by the potential of a person or some whole number like 5,000 per month or 10,0000 per month.

Normally Financial Planners will take a better and more structured approach to plan for your child’s education. They would first take the amount required for funding education in today’s world (this is often given by you).

They then, take the target date of the goal (for example, 25 years), assume an “education Inflation” to figure roughly how much education could cost in the future, plug-in other important factors like “regular inflation”, “Your earning potential”, “Increase in your investments each year”, “you risk appetite” and some more factors to figure out the amount of money you need to invest monthly or yearly to reach that goal.

There can be many variations to plan, but this is how most of the financial planners plan for the child’s education goal.

Watch this video to know the best investment for newborn child’s education:

What’s the problem in child education planning?

The problem is that we have taken into consideration changes like inflation, costs, etc., but not considered other factors like how these goals will look like in the future. Whose responsibilities will be it seen as? Who will be responsible for taking care of funding the education costs?

Will it be the parents, the child, or both – the parents and the child?

Planning for child education is not just dependent on the numbers, rather it’s a combination of a number of factors; social, personal beliefs, religious, your way of approaching & looking at life…

In the image given below, you will see the steps of a child’s education planning:

Steps of child's education planning

If you are a person who has seen enough hardships in life and have taken care of yourself right from the beginning, you may believe that your duty as a parent is to provide minimum support to your child, up to a certain basic level and they should become independent, sooner or later and that their life is their headache, not yours.

As far as our society goes, earlier providing a great education to children was seen as a passport to a good retirement, because you do your duty of providing support to your child, and in turn, he completes his responsibility of taking care of you in your old age.

But friends, the times are a-changing! Gone are those days and people and relations are going farther and farther. Even in Health Insurance, family means immediate family (spouse and children), not parents.

We are entering (or have already entered) an era where parents will provide for their child all the necessities up to the age of 18, then consider him or her, “self-dependent” , and then expect him/her to make their own path in life.

So the question which we are trying to answer here is, Is “Child Education” so important in today’s life? Or more, will it be so important after 2-3 decades? I don’t think so.

Change in social trend and our thinking

For years, it has been the parent’s responsibility to save money for their child’s education. His grandfather saved for his father, his father saved for him and now he saves for his children.

But will this chain of “responsibility” be the same always? Will, it always be the sole responsibility of the parent to save for his child’s education and in case he fails, is he or she a bad parent?

In 70s and 80s , it would be a really, deadly shock for a child if his parents told him, “Listen, we as Indian parents know that we should help you with your education, but sorry old chap! We can’t! We would rather prefer to keep the money we saved, for our retirement. You go right ahead please, & find some alternatives to fund your education. You can live in this house till you find another one.”

The child would have gone straight into a coma after hearing this! You would also be shunned by friends, relatives & society at large and labeled as an unsupportive and bad parent because you didn’t do your duty!

Education Loan is the new tool for self-funding

In the new India, it’s not a big thing to hear that someone is doing his studies with the help of an education loan. The trend is not really new, but it has started gaining popularity only recently in the last 10 years or so. SBI was the first bank to start giving Education loans in 1995, but it was not really sought after much in those times.

Only now, do we see increased awareness and a shift in parents’ mindset that “It’s fine to take education loan.”

Even so, taking an “Education Loan” is the last option for most people, rather than the default choice of parents and children. Parents do everything they can do to fund education and only if they fail, do they opt for a loan. It’s still not seen as the best option to fund education by the majority of the population. (though this is changing)

More and more people are opting for higher education after a first job, It’s not uncommon to hear people pay back an education loan EMI while they’re working, so you can see the trend emerging now. It’s only going to grow bigger and bigger and take a big shape.

Some Stats

There is a steadily growing market for education loans and govt is also encouraging and setting better targets. Banks had given Rs. 35,000 crore in education loans last year. The government has set a target to increase the amount in education loans to Rs122,838 crores in 2017 and Rs1,66,541 crores in 2020.

This would help increase the enrolment ratio from the present 12% to 30% by 2020. (source) .

Here is the chart which shows you the relative size of education loan disbursed by banks and you will be able to see the fast growth. Given the number of youth our country has, there is a huge demand as well as supply for loans.

eduation loan in india

As per a survey, 81% students would like to go for education loans if they are eligible for it. Only 2-3% of Indians apply for education loans compared to 85% in the UK and 50% in the US (2005 data).

Don’t stress a lot on Child Education

The motive of this article is to give you some idea about future and how child education will look like. This article is not discouraging you to save for your child education. The only point is that you can take some of your tension away from it, atleast partially. In the coming times, there can be more important goals in life, which needs more priority.

If you are an earning member of your family and feeling the pressure of creating a corpus of several lacs for your child after 20-25 yrs, I would suggest lower your tension! 🙂

While you can still save and plan for that goal to fulfil your “kartavya” as Indian parent, I say, don’t worry so much. Your target amount might be correct,  but don’t worry, the India of 2040 will not ask you to fund 100% of your child’s education. If you even save for 50% of what you have planned, rest would be funded by education loan.

Don’t become slaves to numbers! Understand and be with the changing India! Focus on some things more important in your life! We will talk about these in the last article of this series.

Please share your thoughts about this topic? How much do you agree with this way of thinking about a Child’s education?

Disclaimer : All the thoughts are purely authors opinion and does not reflect the opinion
of financial planners.

4 Home Loan rules most of the investors don’t know about

Posted on by Jagoinvestor

Can you claim a tax deduction for your under-constructed house? Can you claim tax for the home loan taken from your friend and not from Bank? These are some of the questions which are not generally discussed over and a lot of investors have no idea about actual rules. In the video below I will talk about four not so known rules of home loans. Keep reading. Readers on email can watch the video on this article.

1. Tax deductions for House under-construction

Can you claim tax benefits for home loan taken for under-construction house? A lot of investors assume that they can claim tax deductions and without doing much research, they go ahead with the loan. However, they should know the fact that claiming tax in the case of the under-construction houses is different. You cannot claim the tax deductions for the principal amount for the under-construction house. You need to have possession and certificate of ownership to claim tax under 80C. However, the Interest part is a little different. You can not claim the interest amount unless you get the possession of the house. However, you can always claim the deductions later in 5 equal installments for the next 5 yrs from the end of the financial year of possession.

Example : Suppose Ajay bought a house on loan on 5th June 2010 and he pays total 4 lacs as interest in next 2.5 yrs and gets possession on 7th Nov 2012 . He will be able to claim this 4 lacs Rs in equity installments in the next 5 yrs period , which is 80,000 per year in 2013 – 2017 . However the total limit for exemption will still be 1.5 lacs per year.

2. Selling the House before 5 yrs reverses the tax saved earlier

We think of saving tax, but once the tax is saved for a particular year, it does not mean the story ends here. The tax benefit under sec 80C is allowed for home loans considering the condition that it won’t be sold before 5 yrs from the date of purchase. Read some nice tips for house buying from real buyers

If you sell your house before the expiry of 5 yrs, all the money you saved under sec 80C in earlier years will be deemed to be your income in the year of sale and added to your salary. For example, if you bought the flat in Oct 2010 and in the next 4 yrs you saved 1 lac in tax under sec 80C, then this 1 lac will become your income in the year of sale and will be taxed. However, the interest component once saved is saved and it won’t be reversed.

The tax benefit under section 80c is allowed subject to the condition that house property should not be sold before a period of 5 years. If you sell the house before the expiry of five years from the end of the financial year in which you obtained the possession, the deduction will be discontinued and the entire tax deduction claimed in earlier years under section 80c – for repayment of principal component of the home loan – will be deemed to be your income (in addition to capital gains) in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.

3. A loan taken from Friends and Family is eligible for Deductions (Interest)

In case you want to take a loan from your friends, parents or any other person, you can still claim the interest on the loan under sec 24, which is up to 1.5 lacs per year. However you can not claim the principal amount under sec 80C, that’s applicable only if you take up the loan from some bank or financial institution. So you don’t always need to take the loan from Bank. if you can take it from a friend or family, you can still claim tax deductions on the Interest part.

4. 80C is not allowed for loans taken for Extension or Renovation of House

If you take a loan for extension or renovation of your existing house, in that case, you can not claim the principal part under sec 80C, but you will be able to claim interest amount under sec 24, but the limit, in this case, is only up to Rs 30,000 for self-occupied properties. However, for houses which are let-out (a rented or second home which is not occupied), there is no limit for a tax deduction.

Comments? Which one of above 4 facts you didn’t knew about?

Monthly Income Plan : A detailed guide on MIP’s

Posted on by Jagoinvestor

Monthly Income Plans– When you hear it for the first time, you get a feeling that it’s some kind of assured and non-risky product that will deliver you uninterrupted monthly income, but it’s not exactly that way. Do you have a lot of cash which you want to park somewhere with the expectation of better returns than a Fixed Deposit? Are you looking for some kind of instrument that will give you regular income with decent returns with moderate or low risk?  If yes, welcome to the world of Monthly Income Plans, which are also known as MIP’s.

Monthly Income Plans

What are Monthly Income Plans?

An MIP is nothing, but a debt-oriented mutual fund that gives you income,  in the form of dividends – simple as that. As MIPs are debt oriented mutual funds, they invest heavily in debt instruments like debentures, corporate bonds, government securities, etc. It generally has 75-80% of its money in debt and rests in equity and cash. The income you can get from MIP is not limited to the monthly option. You can also choose to receive income quarterly, half-yearly or annually. Just like any other mutual fund, the MIP too comes with two options.

1. MIP with Dividend option: MIP’s with dividend option provides you an income in the form of dividends. There is an option to receive this income monthly, quarterly, half-yearly and yearly. So you have to choose the option at the time of buying the MIP. Note that while the dividend from MIPs is tax-free in the hands of investors, the company has to pay a dividend distribution tax of around 14% on the dividend before it reaches your hand. So your returns reduce by that much.

For example, If a company declares a dividend of Rs 3 per unit, they have to pay 42 paise (14%) as a Dividend Distribution Tax and you will only get the remaining amount in your hand , on which you don’t have to pay any tax. I hope you know, that the NAV of your MIP will come down by Rs 3 after the dividend is declared and given to you. So don’t shout your excitement to all the world when you get dividends, it’s just your own money which you got!

2. MIP with Growth Option: Here, the money is not paid out to you in forms of dividends, instead it keeps growing in the mutual funds. Hence your money is just growing inside the fund itself and you can reap all the benefits at the time of redeeming the funds in the future. In this option, you have nothing to do with dividends. Note that you get the power of compounding in growth options because your returns also earn in the future. Here is an article on the difference between dividend vs growth option in mutual funds to give you a better idea of what I am talking about.

Features of Monthly Income Plans

1. Dividends can be declared only from the profits and not from Capital

Regulations demand that dividends can be paid only from surpluses and not from capital investment. What it actually means is that dividends can be declared from earned income only. If your initial NAV was Rs 10 and after a month the NAV rose to Rs 10.2, The dividend can only be given out of this 0.2 and not from the initial capital value. This makes sure that Company can not show to the world that they are constantly giving income in case they have not done well.

2. No guarantee of Regular Income

The biggest myth about Monthly income plans is that they provide guaranteed monthly income, which is not true (See this question asked by Krishna on our Forum).  While the aim of MIPs is to regularly declare dividends, it might happen at times, that they do not declare any dividends because of bad performance. To top that, there is no regulation or oversight on the MIP’s part to declare regular dividends. So take it on the chin, if you don’t get your income once in a while.

3. MIP’s return is influenced by interest rates and stock market

Just because it’s a debt oriented product, It does not mean that they are “safe” . Even MIPs can give a negative return, but in extreme cases.  The debt portion is influenced by interest rates. When the interest rate falls, the NAV rises as the price of bond increases. When the interest rate rises, NAV falls. At such times the equity portion of the fund helps to maintain the return. Here is an article on Interest Rates and how they affect Mutual funds.

4. MIPs are prone to mis-selling because of a high commission structure

MIPs offer lucrative commissions to agents as much as 1-1.5%  unlike 0.5-.75% in Equity funds. Due to this, it becomes easy to missell MIP’s as they can be labeled as “Safe Funds” and “Monthly Income Plans” which Indians like to hear a lot.

“Look what happened after the abolition of entry load in mutual funds in 2009 .  From the last 1 Year, the corpus of MIP schemes have seen a huge inflow all over India. Last year, the total industry AUM was close to Rs. 3700 crore and today it is well over 24500 crore. In this entire period, equity funds AUM have gone down. Now when the intentions itself are not good, needless to say that the outcome will be right. Many investors are not aware that there is an EXIT Load of 1% in almost all MIPs if you were to withdraw before one year & in some cases even 1.5 years.” – says Hemant Beniwal on this Forum post

Taxation of MIP’s

MIP’s are debt funds and hence the taxation is same as debt funds .

Short Term Capital Gains: Any profit before a year would be Short term capital gains and it would be added to your income and taxed at your slab rate. So for investors who are in higher tax slabs it would be wise not to sell their MIP’s (in case they can) before a year, else there will be a good amount of tax on your profits.

Long Term Capital Gains : Any profit you get after 1 yr in MIP would be taxed at 10 per cent without indexation or 20 percent with indexation, whichever is lower.

Short Term and Long term Capital Loss : The best thing about MIP’s over FD’s or Post office schemes is that incase you have any loss in MIP’s , you can set it off against the capital gains in the same year or in next 8 yrs , which makes sure that even losses can be used for tax saving purpose.

Dividends : All the dividends received from the MIP’s would be tax-free in the hands of investors,  but note that companies already pay Dividend distribution tax from the MIP’s

Read more on Short term and long term capital gains

MIP’s save money for bad times

Think about ants! They make sure that they save enough food for the rainy season, so that they don’t fast in bad times. In the same way MIPs do not declare all the earned income as dividends, instead they declare a part of earned income as a dividend and save rest for troubled times in future.

This makes sure that when there are bad days in future and MIPs do not see much growth, they can use the money saved, to declare dividends. For instance, in 2008, despite bad markets, 19 funds skipped only up to four monthly dividends.

However, a lot of MIP’s didn’t perform that well and could not save the part of earned income in a proper way. Hence they had to skip all 12 months dividends. Eg., Canara Robeco MIP Mn Div, which skipped all 12 dividends in 2008 and 9 months dividends in the year 2009. See the chart on the right to get more insight into how MIPS missed their dividends. Source: LiveMint

Beware: There is one more option called dividend reinvestment in MIP’s apart from Dividend payout and growth . If the payable dividend is less than Rs 250, then the dividend would be compulsorily reinvested.

Who should Invest in MIP’s ?

1. Investors looking for regular Income

If you are retired/semi-retired or just looking to generate some regular income can look at MIP’s as an option. Note that instead of choosing a monthly option of income, I would rather suggest a quarterly or half-yearly option .

2. Conservative investors looking for better returns

Are you a conservative investor but still looking for better returns than pure debt options like Fixed deposits or Insurance policies? Well, you can’t get 100% safety with MIP’s, but there are very good chances that you would be getting better than FD returns with MIPs.

3. Investors who want to park a big sum of money

A lot of people have questions like “Where to park my lump sum money for medium-term with lower risk ?” If your horizon is very less – like 6 months or a year, MIP’s might not be the best option, but if you want to park it for 2-3 yrs with low risk, MIPs with growth option can be a suitable instrument .

MIP vs Fixed Deposits/ Fixed Maturity Plans/ POIMS

You might get confused between so many debt products and might be wondering how Monthly Income Plans compare to Fixed Deposits (read this post by Deepak Shenoy) , Post Office Monthly Income Scheme or Fixed Maturity Plans (FMP) . There are various parameters on which they all differ . Below is the chart which shows you those differences .

Monthly Income Plans , Best MIP for Investments

Two ways of getting income from an MIP

We will see two different ways of generating monthly/quarterly income through MIP’s Monthly. One is the regular way of choosing a dividend option and the options one is starting a Systematic Withdrawal Plan from MIP after a year of buying it. Let’s look at both and its pros and cons …

1. Choose dividend option

The good point in this option is that you will start getting the income immediately as the company starts declaring the dividends, and you don’t have to take care of taxation issues. However, the bad side is that eventually 14% dividend distribution tax would be paid by the company and the stability of income will depend on how often dividends are declared by the company. If they skip the dividend you will not be getting the income for that month/quarter.

2. Choosing growth option and start SWP  (Systematic Withdrawal Plan)

If you use a bit of strategy, you can create a more stable and more tax efficient income by this method. You can choose growth option in MIP and after 1 yr you can start a SWP (systematic withdrawal plan , opposite of SIP) from your MIP to your bank account . What will happen with this option is that you will not have to depend on companies dividend announcement , as it’s your decision to liquidate a fixed part of your MIP’s, sell it and get the money in you bank account . Also as you are doing it after 1 yr, there wont be any exit load and the profits you get out of it would be Long term capital gains , so you only pay 10% on the profits (assuming you don’t want indexation benefits), which is 4% lesser than the dividend distribution tax . If you have a large amount of investments in MIPs, then this option can save some tax for you, but if your investments aren’t significant enough, it’s not worth the hassle .

Some best performing MIP’s  in Market

One of the readers Sagar asked his query on our forum: “Which is the best Monthly income plan ?“. While there is no guarantee that the MIP which you choose today will keep performing well always, but I have got a list of MIP’s which have done excellent in past and still look good. You can choose any of these if you are disciplined enough . Once you choose them make sure you concentrate on regularly investing in them without looking at their performance every week or month. Just review them in a year or so . watch out for the expense ratio of the MIP’s, lower the better

Monthly Income Plans , Best MIP for InvestmentsConclusion

So the main takeaway from this article for you should be to understand that MIP’s can be good alternative for you if you have been investing a lot in Fixed Deposits and do not mind taking small amount of risk. Another important point was to look at MIP’s are income-generating products with understanding that sometimes the income can go for a toss in between and you have to comfortable with that.

I would love you hear your comments on monthly income plans and do you feel that it can be helpful in your portfolio , share with us !

What is mean by Instant Gratification? And how does it affects your Financial Life?

Posted on by Jagoinvestor

Do you understand the meaning of Instant gratification and its affect on your financial life ? We will learn that today. How did we become a generation that “wants things now!” no matter what?

Think about this – both, our parents generation and ours, save , invest and spend. What then, is the difference between them and us? It’s mainly that they used to first earn money, save & invest that money and then spend it on things they needed.

They got ‘delayed gratification’; this quality of waiting before they are able to buy. However, we have reversed the equation. We first buy, and then pay for it later; without having a clue if we will be able to earn that money in the future or not!

And that’s is where the problem lies — Once we buy something, the deal is done! Then we have to live with it because we can’t change our minds about it later.

Instant Gratification in Personal Finance

We love ‘the thing!’ &  We need ‘the thing!’ . Our life is not complete / not possible without ‘the thing!’ . ‘The thing!’ can be a home (debate on buying ve renting), a car, some household item, the latest gadget  or 3 pairs of jeans from the big Sale!

I’m not talking about the planned and carefully thought out spending we do in life, rather I’m referring to the spending which ‘just happens’, the spending that does not add much value to our lives. Even if it adds any value, it’s mostly short-lived and makes us feel happy for just a while.

This ultimately, weakens our financial life, since we do not concentrate on our major and important financial goals, chasing the smaller and futile wants in life. A lot of this phenomena is result of the impulse called “Instant gratification!” which is what, we will look at in this article.

It’s important to realize, that the more we give in to Instant Gratification, the more we sink into the dal-dal of debt & misery. Sooner or later we’re in upto our neck and it gets too late to fix things. The biggest example of this was the recent sub-prime crisis in the US. “BUY NOW! Pay later” was the attitude!

Let me tell you a short story to give you an idea of what I am talking about.

Two small children Anita and Ramesh, lived in a small village with their parents. Their father gave Rs 5 to each of them to eat a watermelon. Both of them visited a  farm and asked the farm owner for a large watermelon.

“A big one will cost Rs 20 and a small one would cost Rs 5”, said the farm owner pointing to the watermelons in the field. With the irresistible urge of having the sweet and juicy fruit, Ramesh bought the smaller watermelon and started eating it. Anita however, wanted the big watermelon.

“OK, I too will buy a smaller watermelon”, she told the owner. “But can you please leave my watermelon in the field itself, I will be back in a month and take it at that time!” The little girl knew that her patience would be rewarded. By waiting one month, she could have a big, ripe watermelon for the price of a little green one. She got the bigger fruit, because she controlled her “Instant gratification” and waited patiently!

What is Instant Gratification ?

instant gratification

Instant Gratification is the habit, of always wanting to enjoy now, and not having the patience to wait for future benefits (an experiment). Anything which gives us temporary happiness or excitement, but is not actually a good thing for your life, can be put in this category.

For example…

  • When you sleep till late in morning and do not take pain of getting up and exercising.
  • You eat those unlimited sweets in your office cafeteria.
  • When you eat that burger with EXTRA cheese !

These were some examples to just give you an idea about what Instant Gratification is, – mainly concentrating on the immediate result and not thinking about its outcome in future or how it will affect us later in life.

If you can control yourself and concentrate on “delayed gratification” , your life can change! like anything , But we just are not bothered about it and do not have motivation.  Do you know why this is? Let me be straight & blunt! The challenge is that most of us do not have to face life or death situations, or seek food and shelter and defend our territory everyday anymore ! (like these people)

The result, is that we can’t see the impact of our spending in the future. Think about a poor person who struggles daily for food. If he has to spend Rs 100 on something, how will he think? If you offer him a burger, he will instead ask for the same amount in cash, because he knows that the money will help him get food for next 3 days.

He’s not focused on taste in this case.

We however, are privileged, blessed even. If something bad happens once in a while, our next meal or next place to sleep isn’t in danger. Hence some of us have just lost that attitude of looking at things without instant gratification . If you have seen bad times in your life financially, you will know, what I am talking about.

6 Examples of How Instant Gratification affects our Financial Life

Many a time, what we do in our financial life makes our future, dismal and weak, and we have no idea about it. We aren’t even aware!

#1 Not surrendering Endowment/ULIPs

This one is my favorite. “What should I do with my Policy? Should I Surrender it or make it Paid up?”  is one of the top most queries I come across. It feels bad, accepting and acknowledging that you’ve made a mistake, and it hurts psychologically when you lose by not continuing the policy. But what is the effect, long-term?

You still continue paying huge premiums and it earns you very, very little.

So you don’t take any decision on your junk policies, ergo you do not have to face a tough situation! It’s Instant gratification in a way! But for your own good though, you should take action and take that loss now because right now it’s a whole lot smaller than if you stick with the policy and try to quit later!

#2 Keep losing Shares and selling your winners

Have you ever bought a share which gave you instant profits? What was your reaction? Most of the people want to sell it off and take that profit right now, otherwise the profits can vanish! But what happens in most of the cases?

The same stock or portfolio gives huge returns in future if it was left untouched and that feeling of instant happiness is so powerful sometimes that so many can’t control it. It also happens, if one does not have proper understanding of how equity works.

Many people who understand also fall for instant gratification though!

In the same way, you might be holding some stocks which is not performing well, but instead of getting rid of it and investing in better stocks, we keep on holding on to the loser in the hope that some day it will go up! (Read 5 mistakes I did in my first stock investment).

It’s another case of instant gratification as you seek temporary comfort. You  don’t taking the tough decision of selling the loser, because the moment you sell it, it gives you a feeling of loss, but if you just keep it as it is, it’s a case of “I still have some hope !” Don’t do it!

3# Getting into wrong products for Tax saving

When we talk to lot of our paid clients on why they bought the Endowment/Moneyback policies or even ULIPs, the only reason turns out to be “Tax Saving”. Millions of people, get into the wrong products which they don’t need, & don’t understand, has no power to meet their financial goals in future, just to save tax!

I some times feel how much tax saving one does! If one invests with a premium of Rs 50,000 in a ULIP for instance, and if that person is in the 30% tax bracket, he will save 15,000 in tax. But if that was a ULIP with 50% premium allocation charges (as so often happens), 25,000 is lost the moment you sign the documents!

So you save 15k and lose 25k as charges! And yet,these are the same people who say “20k for a financial planner—too costly!” 🙂

#4 Not Paying a Financial Planner or a counselor

Now you know what stops you from paying for advice? Do you immediately get any instant results from advice which you can see? Does your portfolio return suddenly become higher than earlier? Do you immediately see the results which you wanted in your financial life ? No !

And that’s the reason most of the people are not excited about it . But now you would realize that, if years before you had paid some adviser and taken right advice, you could have saved a lot by not getting into wrong products , you might have got better results or same results with lesser risk than what you have got at without right advice!

The benefits of financial planning are always “delayed” as the planning will show the results years later.

We get a lot of inquiries for our paid services from readers who want more personalized service and paid guidance from us. We talk to them and they are very excited when they hear how their financial lives will get transformed working with us, however when we talk about the fee part, some of them just don’t come back!

Price is not a barrier for them as they are well earning, but the problem lies somewhere else which even they are not aware of, and that’s Instant gratification!. They can’t see the immediate results from it and hence they choose to live with their messed up financial lives instead of getting out of it.

I am sure they will lose 10 times more than what they tried to save in fees by not have proper advice over the next couple of years. What do you think ?

#5 Shopping for things you don’t need

How many times, have you bought things which you don’t need? But you still buy it, because it feels good! For example, you might buy another jazzy mobile phone even though your current phone is working well. You buy a nice new shirt – It was on display, which can be your 24th shirt but you actually don’t need it.

Women know very well what I am talking about here and if you are married, even you know what I am saying 🙂

Most of the instant gratification happens at “Sale”. Resist Sales. Sales tend to our minds into buying more than we need. We start justifying to ourselves, that we really do. If the “Sale” decides what you need in your life, then there is a problem!

6# Spending due to Peer Pressure

Suppose there was no one in this world except you and your family, would your life still be same ? I am sure not! People around us affect our mind and make us feel that we are lagging behind. If they buy House or car , we start feeling the need for it. Peer pressure is one of the top reasons why people spend a lot of money.

You are persuaded to join or pay for an activity that your friends are participating in. Whether you are interested or not, you go with the flow because they tell you to. There are occasions where you have to join them and you should!

But not always, and not in everything.

Develop a “Need Mentality” to save your self from Instant Gratification

Here are 3 solutions which can help you reduce or avoid instant gratification in your financial life.

Do your Financial Planning :

You should do your financial planning and have a full plan on how you will invest your money for your future financial goals. Once your Insurance, child related goals and retirement are planned, you will have to commit the investment for these goals which are more important in life than other things which come along the way .

You will be more responsible and think twice before you spend on other unimportant things.

Slow down :

Don’t be impulsive, whenever you have to spend your money on anything, call some family member and tell them 4-5 reasons why it’s a good investment and is worth buying for, tell them enough reasons why it makes sense to buy it. If you are able to pass this process, then you can buy it else, reconsider.

What happens when you do this, is that you slow down and take a logical approach in deciding if you really want to want something. Let me give you a personal example. I recently did this for myself, when I wanted to buy a high-end Nokia phone.

I started counted the reasons why I should buy it and how it will add value to my life, I was very convinced that it’s an important and a valid expense for me.

Try to pay cash for your purchases :

When we don’t feel bad about paying, we tend to buy unimportant things and credit card is the main culprit here.  You buy and you swipe your card, you don’t see the cash going out, so at the end you just make a single payment. It don’t hurt much.

Try paying with cash, and when every time you see those cash notes go out, you become more concerned and more logical in thinking about your expenses.

Instant Gratification in Personal Finance

Other area’s in Life which where Instant Gratification affects us

Some other areas in life which we mess up are Education , Marriage and Career .

Education:

If you have seen “3 idiots” and “Tare Zameen Par”, you will understand better what I want to say here.  Lot of people do not carefully plan their education. There are many people who have pursued something which looked easier to complete or seems to be paying well without understanding, if it aligns with their liking or not and thereafter suffer all life.

Marriage :

Marriage is another thing where people mess-up due to instant gratification. There are many couples, who are not happy after few years of marriage, because the whole situation didn’t turn out the way they imagined.

A lot of times people judge their partners within hours or few days of meeting them, where they like them a lot because they are handsome of beautiful , have lot of wealth, things which impress them at first. I am in no way saying that only love marriages are successful because they are NOT !

It’s the same case some times with love marriages too . The only point I am making is that even in marriages , their is this thing called Instant gratification which creates issues for many people.

Career :

Career is directly linked to Education, so if you mess up your education, you’ll certainly botch your career. But even after people do their education correctly, many mess up while choosing their jobs.

When I completed post graduation, many of my friends went for companies while showed the highest CTC, were the best known companies in IT, but they are shedding tears of blood now as they can’t see any growth for themselves after a point or it’s not something they really wanted to do in their jobs.

However some people who controlled their emotions and planned to choose their companies considering the work they will do there are very happy and excelling now. So don’t just see what makes you happy right now, see what will make you happy all life.

Conclusion

The whole point here, is that we don’t think much about long-term aspects of our spending and hence make bad investments and mess up our financial lives.  Instead, we should use Instant gratification in our favor. One way we can do it is start SIP’s for your Financial goals now, and take action. Get a financial Planner and pay him to give you best advice and transform your financial life.

As 2010 is about to end now, dont let this year go waste as you learned a lot of stuff this year . Start your new year with some commitments and resolutions for 2011 which you will honor and not just write down !.

Share your comments if you’re a victim of “Instant gratification” at any point in your life? Also share how we can use this Instant gratification in our favor ?

At the end wishing you all Happy New Year .

Term Insurance Plans – 20 different policies compared with charts !

Posted on by Jagoinvestor

Which is the best term insurance plan in India ? Which Insurance company has the best claim settlement Ratio? Should you buy online or offline plans ? These are some of the questions which comes in the mind of every insurance buyer! .

So are you looking for Term Insurance comparison at one place ? Do you have all the sufficient information to decide which is the best term plan you can buy? Today I will show you all the data like riders, maximum/minimum tenure, max age till when these plans covers a person and data on the premium, Claim settlement Ratio at one place! .

Best Term Insurance plans in India – A comparison List

There are many term insurance plans in India, but all of them have different premiums and features which confuses a prospective customer to choose the best term plan for him. Below is a table which shows most of the policies name along with their premiums. But before that, make sure you fully understand what is a term insurance plan ? Better read the 9 most asked questions about Term Insurance before you move ahead.

Company Name Policy Name Mode Riders Available Premium
(1 crore SA)
Aegon Religare iTerm Online Yes 7,300
Bharti Axa e-Protect Online No 7,300
Aviva i-Life Online No 7,368
HDFC Life Click2Protect Online No 10600
Kotak e-Preffered Online No 10825
Edelweiss Tokio Life Protection Plan Online Yes 11,500
Metlife Met-Protect Online No 11,600
ING Vyasa My Term Insurance Offline NA 11,891
ICICI Prudential i-Care Online Yes 13000
DLF Pramerica U-Protect Online Yes 13,400
SBI life Smart Shield Offline Yes 16,798
Bajaj Allianz iSecure Online Yes 18400
Max NewYork Platinum Protect Offline Yes 23,500
IDBI Fedral Termassurance Online No 25,350
LIC Amulya Jeevan Offline No 33,600
Future Generali Smart Life Online No NA
Birla Sun Life Protector Plus Offline Yes NA
Tata Aig Maha Raksha NA NA NA
Reliance Term Insurance Offline NA NA
Canara HSBC Life Pure NA NA NA
India First AnyTime Plan Online NA NA
Sahara Life Insurance Kavach NA NA NA
Star-Union Dai-ichi Term Plan NA NA NA

Note : The premiums above are for 30 yrs old non-smoking male, and 30 yrs policy tenure. The premium quoted is for Rs 1 crore sum assured and does not include service tax. The premiums displayed were taken from respective life insurance companies websites and should be treated as indicative premiums.

Brief overview of Riders

Most of the term plans also allow riders along with their plans. Riders are nothing but additional benefits which you can take by paying some extra premium. Lets see some of the riders and what they mean. A term insurance plan might be offering some of the riders mentioned below.

AD (Accidental Death) : The policy pays you additional sum assured in case the death happens due to an accident . Note that even if you don’t take this rider, the sum assured is always paid on death, whether accidental or not !.

CI (Critical Illness) : This rider gives you a lump sum amount if you are diagnosed with an illness which is mentioned in the policy . Generally all the major illnesses are covered in Critical Illness cover.

DR (Accidental Disability Rider) : This rider covers you for disability and pays you Sum assured in 10 installments per year  incase you becomes temporary or permanent disabled person.

WP (Waiver of Premium) : This rider makes sure that incase you are not able to pay future premium due to disability or income loss, the future premiums are waived off , but your policy is still in force like always !

Claim settlement Ratio of Life Insurance Companies

While deciding on a term insurance plan, the biggest point which a person concentrates is the Claim settlement ratio (read this comment) . Claim Settlement ratio of a company tells you that how many policies were settled by paying back the claims in case of death. However note that these numbers are not for pure term plans, but for any kind of policies.

Solvency Ratio of a Life Insurance Company

Another small things to look in a life insurance company is Solvency Ratio. It indicates how solvent a company is, or how prepared it is to meet unforeseen exigencies. It is the extra capital that an insurance company is required to hold to meet all the claims which arise . In other words , Solvency margin refers to the excess amount of asset the insurance company has to maintain over its liabilities. Basically, it is the amount the insurer has to stash away in order to pay the claims during emergency. IRDA requires the insurance companies to maintain a particular level of solvency margin for their smooth functioning

Below is the Table and a Chart showing Claim Settlement Ratio and Solvency Ratio of all the insurance insurance company in India. The data is taken from 2011-2012 IRDA annual Report.

Company Name Claim Settlement Ratio (2011-12) Solvency Ratio
LIC 97.4% 1.54
ICICI Prudential 96.5% 3.27
HDFC Life 96.2% 1.72
SBI life 95.5% 2.04
Kotak 92.1% 2.67
Birla Sun Life 90.9% 2.89
Bajaj Allianz 90.6% 2.86
Max NewYork 89.8% 3.65
Aviva 89.6% 5.4
ING Vyasa 88.8% 3
Bharti Axa 87.7% 2.14
Star-Union Dai-ichi 86.2% 6.7
Reliance 84.6% 1.66
Tata Aig 83.9% 2.16
India First 82.2% 6.36
Metlife 81.4% 1.69
Canara HSBC 80.6% 3.07
Sahara Life Insurance 78.0% 4.82
Future Generali 68.1% 2.21
IDBI Fedral 67.5% 6.6
Aegon Religare 66.1% 3.22
DLF Pramerica 24.5% 2.53
Edelweiss Tokio 100% (Just 1 policy) NA

Claim settlement ratio of Life insurance companies in india

Term Insurance – Online vs Offline

With online term insurance plans coming in market, two things has happened. First, Customers have really got excited seeing very low premiums which insure them at throw away prices, however low premiums does not appear on the top wish list of customers and what everyone needs is very high claim settlement ratio and excellent customer service. This is where online term policies have disappointed customers, there has been huge disappointment from ICICI iCare and Aegon Religare iTerm Plan in terms of customer service. There have been cases where customers bought an online policy and after that, they had horrifying experiences starting from increase of premium once they bought it, No-response from the company for long duration and Long & frustrating delays in medical tests. This is what pisses off customers most and they get a feel that If situation is bad at the time of buying the policy, then what will be the response when their families for claim settlement .

Another important point which comes to a persons mind is Are private Insurance companies safe ? and what is the claim settlement ratio of the company. From last year IRDA report, we came to know that Aegon Religare did not settle even a single claim out of total 7-8 claims they got . However, this years IRDA report (2009-2010) shows that its better at 48% settlement ratio for Aegon Religare, but Life Insurance is not a maths exam where 90-91% marks will make people happy. We all need 100% or 99% at least !. Because most of the companies are very new, the trust factor is missing from public. Note that not everyone who bought term insurance policies had bad experience, there are many buyers who got very good response and good customer service, but it was a smaller section .

So if you a kind of buyer who understand Insurance very well and how things work in this area and you also have trust in online term plans then you can go for online plans. But if you are not comfortable with it, then you should try the old way of buying insurance through an agent. However it would cost more than online plan, which many are comfortable with! .

If you concentrate on the claim settlement and trust factor then the only option is LIC of India Term Insurance (Jeevan Amulya). However if you are fine with the pvt Insurance, but still want the best features, I personally see Kotak-preferred Plan as a good option. The premium for Kotak-preferred is the lowest in the offline term plans and this plan has good riders along with other good options.

Term insurance plan from LIC is obviously the best option if you do not believe in the pvt companies and insist on high claim ratio, but premium for LIC term policy is too high . So I think you can consider a mix of the LIC term insurance and any one from Pvt insurer. Soon you will also see LIC online term plan

Special Features in Some Term Insurance Policies

There are some policies with very different set of features. Lets have a look at some of the those. These features can help you further in your decision.Term Insurance policy features

Which online term plan do you have currently and incase you planning to have one, which one those the above will you buy ? Will it be LIC Term Insurance or some one else and why ? Also share, If you need any other factor before choosing the term plan ?

Are you sharing agents commission ? Its Illegal

Posted on by Jagoinvestor

“Discount kitna doge ! Mishra ji mujhe 35% de rahe hain ” , as per Rakesh ,this is exactly how a lot of customers ask their agents commission to be shared with them in Insurance or Mutual funds. Have you ever asked your agent how much discount he can give you on the premium? This happens a lot with LIC agents and other insurance and mutual fund agents. Many times, even agents offer discount or some gift in return, if you buy the policy or mutual funds through them. This practice is illegal and totally against the laws of Insurance Act and SEBI. The agent can even face cancellation of his license if he is found to share his commission. (Read about agents commission in Insurance)

Insurance, mutual funds Commission passback to customers by agents is illegal

It kinda works like this. Suppose, an Insurance agent sells you a policy with a sum assured of Rs. 10 lacs, with a  premium of about Rs. 50,000/- per year. An agent will make around 15,000 in commission for that year, out of which he might offer you a discount of Rs 5,000-10,000 for the first year or he offers you some gift! A lot of insurance agents do this to make sure they do not lose the business or get more and more business . In the same manner, if you have Rs. 30 lacs invested in mutual funds, your agent will get around Rs 10,000/- in trail commissions. It might happen that he can offer you 50% of that commission to make sure you stay with him .

Why you should stop asking share in Agents commission ?

Mutual funds : As per SEBI mandate,  sharing the commissions received from AMC  is illegal and should be avoided . Pass-backs, the practice of sharing a part of the distributors’ commission with the investor, have been made illegal under the code of conduct issued to distributors. “Intermediaries will not rebate commissions back to investors and avoid attracting clients through temptations of rebate/gifts etc” – As per a SEBI circular.

If a mutual fund agent shares his commission with others, it opens a big hole, not just for mis-selling, but also dilutes the whole industry atmosphere. There have been rampant cases, when an agent asks customers to leave their current agent and transfer their funds with them as a new agent (link) and they are ready to transfer a part of agent commission to them (the customers). For example, if a person has Rs 30 lacs invested in a mutual funds, an agent would get around Rs. 10,000/- as trail commission in a particular year. A lot of agents offer 5,000 (50%) back to the customers to attract them. A lot of agents pass back a part of commission and customers get into wrong & ill-suited mutual funds because of their greed!

Insurance : Other than the fact, that it’s illegal, you should not encourage or engage in sharing the agent commissions because, for one thing, it hampers your relationship with agent. Don’t forget that your agent will be the one to help in claim settlement when you are dead. If you snatch his share of commission today, it might leave him with a bitter taste in the mouth and not result in a healthy relationship. So please live and let live! The other important reason, you should avoid asking for agents commissions, is that it leads to mis-selling. If you ask for a share in commission, it will leave agents with less earnings and that would encourage them to sell more by any means, which in turn fuels mis-selling. So in a way the whole “asking commissions back” will hamper investors in the long run. What you sow is what you reap!

As per section 41 of the Insurance Act, “No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to  take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out OR renewing  or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer.”

Real Life experience

As per Dhawal Sharma, a Delhi based agent shares his experience

I face this problem day in and day out and many a times have to miss out on prospective clients because they want “passback of commission“. This practice (Sorry to say, but started by LIC agents) is so much part of the Insurance selling culture that 99.9% of the public thinks that it is obligatory on the part of an agent to part with his commission. But even LIC agents were quite smart at that time as they use to pass back comission mostly on ENDOWMENT or MONEYBACK policies which generate hefty renewal commissions as well (Unlike ULIP) and reversely, would be of little or practically no use to the client in the long term. This practice is actually pound foolish , penny wise approach..

I know at least 100 people, regularly buying insurance for their entire family (father , mother, brother,uncle, aunty) for last so many years from SHARMA JI or OFFICE WALE CLERK who passback 20% commission, and if we make a thorough study of their Insurance portfolio, they are underinsured (No term plan), not properly equipped to handle retirement (their agent never knew that annuity fund is tax exempt only upto 1/3 amount), and no proper child planning (In many cases, child plans where child is life insurand and not father).

 

Violation of law using Multi-level marketing in Insurance Policies

For some years now, a new way of selling is evolving. It’s called MLM. Here a big agent sells a policy to some one and makes him a customer. Now, this customer also acts like an agent and starts adding new people in the network and sells them policies. This goes on to many levels, a person earns a part of commissions earned from every person under his personal network. This whole idea of multi-chain selling violates Insurance law and is illegal.

As per Section 41 of the Insurance Act, “A licensed agent, whether individual or corporate, can’t appoint a sub-agent and pass on a commission to another person or entity. Any passing of commission by an agent is construed as rebating and is prohibited under the Act.”

There are many companies operating in different part of our country like TLC Insurance (India) in Bangalore, RMP Infotec in Chennai, Golden Trust Financial Services in Kolkata and SecureLIFE out of New Delhi (read more here and  here)

Responsible Investor = Health Industry

We as buyers, shape this whole industry based on how we act. Over the years, we expected and asked for share in agents commissions, without realising that it will one day work against us resulting in misselling. So please do not support it! A couple of hundreds or thousands is not going to make you rich or poor, but it sure dilutes the whole environment!

Have you ever experienced a situation where agent has tried to give back his commission? Do you think if everyone stops asking for any agents commission back, it can really have any impact?