A conversation with friend on avoiding financial responsibility

Posted on October 29, 2008February 6, 2019 by Jagoinvestor

In this article I’m going to tell my conversation with one of my friend about investment and different investment tools. We have discussed on both advance and traditional investment tools.

Read this chat conversation with one of my old classmate in Graduation.

“Manish : So where are you going to invest you money this year?

XYZ : May be PPF or Bank FD

Manish : But do you think they would give you good returns? also they would be locked for a long time, don’t you need that money in near future?

XYZ : Not exactly!, actually I can leave that money invested for more than 5 yrs, or may be 7-8 yrs too ..

XYZ : also, But I would like to invest some money in mutual funds … around 20k, May be I need some money to send to my brother for his MBA coaching ….

Manish : hmm.. But I think you should do exactly reverse. Invest this 20k in FD and Rest money in Mutual funds + PPF or only mutual funds.

XYZ : No no, I cant !! I have already lost 50% in mutual funds this time, I cant take risk now, I am fine with less return but a secure one …

Manish : hmm… I told you don’t put all money in lump sum. You never heard !!

XYZ : I invested because I trusted you, I thought you know more than me, but it fell so much … you gave wrong advice at wrong time.

Manish : Don’t you think it was your desire for high returns which made this happen? Equity are risky? I told you this too !!

XYZ : Whatever …

Manish : ok .. np … Consider what I said … good night … 🙂

XYZ : Good night“

What is the problem of these people?

First they need high returns, then they cant wait for long term to get that kind of return. They just hear that equity are risky but don’t believe it, they will make you feel that you are responsible for the crash. They just don’t take responsibility for what they did !!

What I actually told her?

I told her that its OK to invest at these high levels but don’t invest in Tax saving mutual funds as they will be locked for 3 years, also invest less and that too through SIP (What is SIP?), so that it can eat up the volatility and insure less losses if things go wrong.

But the only things on her mind was:

It will save her tax
Will give superb returns like it did during 2002-2007 (these are the people who don’t read “Equity investments are risky and passed performance is not guarantee for future performance”)
If she does SIP and markets goes up and up, she will be buying less units.

This is a classic example of “Overestimating Returns and Underestimating Risk”

How should you do your tax planning for the year?

First thing, if you have not done your tax savings yet, its a bad thing. It should be done at the start of the year itself, at least planned.

If you need money for short term goal, don’t invest in Shares or mutual funds !! Put it in some assured investment instruments like FD.

“Return of investment” is more important than “Returns from investments”.

If you have money which you can invest for long term, invest in Shares or Mutual funds (but only for long term). As per your risk taking capability choose combination of Debt and Equity and invest for the long term …

Why Equity?

Do you know that most of the stocks have beaten down so much that they have come down below than the price they deserve, There value has exceeded there price (Read about Value Vs Price).

Unitech : One of the largest and most respected Real Estate companies has fallen down to levels which are unimaginable !! from 532 to 40-50.

Tata Motors : Nano will be manufactured in some months, every thing looks so good, but people just sold it because of Singur tension (It was fine to sell it , but now its oversold).

There are countless examples like this in current market. Things will go fine, but with patience.

5 Elements of a well-planned financial portfolio management

Posted on October 24, 2008August 22, 2019 by Jagoinvestor

Everyone is concern when it comes to investment. But lot of investors does the mistake of focusing on investments only and not on their portfolio. Having a good financial portfolio is also as important as an investment.

This article will talk about 5 things every financial portfolio must have and we will see that it should be good for almost every type of investor . We will try to judge it over the important parameters discussed in my one of the earlier Article : Pillars of Success

financial portfolio

What is mean by a financial portfolio?

Financial portfolio is a road-map which you can use to achieve your future financial goals. It is build up by considering your risk appetite and investment objectives. You can handle your own financial portfolio or you can also take help of the professional financial managers which will make it easier for you to reach your financial destination.

Your investments alone can not help you to build a healthy portfolio, there are some other elements also which are important as much as your investments.

Let’s see the Five most important and must have things that each and every financial portfolio must have:

1. Life Insurance

Each and every person who has financial dependents must have a good Life cover through Term Insurance. This must be taken at an early stage of life for the longest term possible.

For India :

Aegon Religare Life Insurance
SBI Life Insurance
Max New York Life Insurance
LIC (Jeevan Amulya)

For Other countries :

Please search for your respective countries and find out which term insurance is the best one.

2. Health Insurance

This is extremely important to have a health insurance now a days, because of rising health-care expenses. A Family must be covered with a Family Floater plan for a good amount (Rs 5 lacs/$10,000) depending on your budget .

3. PPF

Each and every financial portfolio much have debt exposure and PPF (for India) is an excellent investment product for anyone, backed by government , its 100% safe and one of the most efficient and tax efficient products available , with post-tax returns of 8% , its a must have in each portfolio .

4. SIP in Mutual Funds (for long term)

For long term investments, its hard to beat this . For long term investments Equity must be the route and for systematic and disciplined investing , SIP is the best way to channelize your money . Considering the undebatable growth for Indian economy , no can afford to miss Equities for long term investments.

5. Contingent/Emergency Fund (Cash + Liquid Funds)

Each and every financial portfolio must have good amount of cash and liquidity to meet unforeseen and emergency expenses. Other wise you will have to liquidate and break you investment products which may attract penalties and may not give you enough cash at the time of requirement which can create problem .

Better to have money equivalent to 3-4 months of expenses in emergency fund . You can also put 1-2 months expenses as Cash and rest into Liquid funds which may also provide you some returns .

Analysis

Understand that these 5 things are a list of things one would have for sure , but its not an exhaustive list . Depending on your profile and requirements you should have other products as well. but i would say this will solve 90% of the problem . Let looks how a finanacial portfolio consisting of this 5 things passes on 4 parameters called Pillars of Success ?

1. Capital Appreciation :

With SIP in mutual funds and PPF , the capital appreciation should happen to a great extent , PPF would provide stability and assurity or returns , where as Equity will gives exceptional returns .

2. Liquidity :

We have already covered that Contingent fund should be able to provide good Liquidity.

3. Risk Management :

Term Insurance and Health Insurance will take good care . SIP will take care of the market volatility. some other techniques like Hedging using Derivatives and being well informed will manage extra level of risk .

4. Goal Oriented :

Each and every product is for a specific and important goal , as described above .

For Non-Indian Readers

Hi all , the article is specifically with Indian context , but article is helpful for each of you , please find the similar products in your country .

Conclusion

Each and every financial portfolio can be different and should match the requirement of the investor , But these 5 things are such that it can be for any kind of investor . Just like we have master key for any kind of lock , we have these products for any kind of investor.

If you have an query ask us in the comment section.

A reply to one mail

Posted on October 16, 2008February 6, 2019 by Jagoinvestor

This post is most probably the one on which i didnt worked hard . This is just an email reply from my side to one of my friend who queried me regarding his Endowment Policy package which an agent has created for him .

The policy looks like this … 15 small polices of 1,00,000 each which will mature one by one every year after 27 years and will act as yearly pension in his old age

His mail :

>>>

On Wed, Oct 15, 2008 at 9:37 AM, ajay patel wrote:

15 policies of Rs. 1 Lakh each, starting from sept 2007, first policy matures in 2034 and others follow every year from there on.
Cover of 15 Lakh is for life time. There is an extra Rs 500,000 accidental insurance along with it till the age of 70(2053) (if the world exists till that time).
Annual premium of Rs. 42,000 till 2034, a total amount of 3,400,000 will be received from maturity of these policies.

Say after ten years, I see myself earning around 2.5-3 lacs per month. with one child (if i get married :))

My Reply :

now lets see some of the facts for you to ponder .

Starting from 2007 you are paying 42,000 each year till 2034 (for 27 years) . You will receive money starting from 2034 – till 2049 (15 years , each policy matures) .

Points to note :

– You are paying 42,000 and then its locked for 27 years
– You are getting maturity value of each policy per year , just like a annual income(around 2.25 Lacs/year ie : 34/15 , which is not taxable (you keep all the money).
– You are getting Tax exemptions under sec 80C for this.

I think these are the points you have to agree , because they are not opinion , they are facts .

Some of the flaw or issues with this plan are following , which you never considered at the time of taking this .

– The premium you are paying each year equals to your current monthly salary , also you said that you see your self earning 2.5-3.0 lacs (6 times , your current) per year just after 10 years from now . i am not sure what kind of figures will it be after 27 years . At that time , the money which you get from the policy should not last even 2 months . Considering your expenses currently at 25,000 per month (considering you are married and have children) . the same expenses will rise to 1.2 lacs assuming 6% inflation (also remember that the expenses will keep rising each year ie : 1.66 , 1.77 , 1.9 … 4.2 lacs , whereas the money you get each year will be around constant 2.25 lacs only , this may look unimaginable , but ask your father to grandfather about the monthly expenditure of family before 25 years , i am sure it should be 5% of current, people always forget inflation).

– The insurance provided by this policy is so less that you are highly under insured . What can your loved one do with 15 lacs today ? Will it be sufficient to replace you ? If you consider time after 10 years (when you think you will earn 2.5-3 lacs / month , will the insurance money be sufficient to cover the dependents ? When you will be of age 60+ , the insurance amount is able to meet not more than 9-10 months expenses .

Having this policy is as good as not having it . The issue is not that Can there be policy better than this? ,The main problem is what kind of value is this giving to you . Is the benefit provided by this policy after 27-42 years is much less than than the pain you are getting by paying hefty premium now .

With the same money (42,000) , let me see what can i plan for you with same money .

Lets first take a most conservative way (which is undebatabely safe).

You take an insurance of 50,00,000 (50 lacs) for 30 years and pay a premium of just 10.5k per year . You are left with 32k per year which you put in

1. PPF account

In PPF the money 32k @8% will become 2,55,000 in 27 years and you will get this money every year (total 38 lacs till end) , till age 66 ( In Endowment policy it was 2.25 lacs)

2. In MF considering 12% return

32k invested will become 6.83 lacs in 27 years , so you invest every year 32k and get 6.83 lacs just after 27 years of payment . so it can provide a regular income of 6.23 lacs after 27 years for continuous 15 years till you are 66 .

3. In Mutual funds considering 15% return

The amount would be 13.93 Lacs , every payment of 32,000 will become 13.93 lacs.

Question: How realistic are these mutual funds returns ?
Answer : Over the history no asset has returned more than equity over long term . India Equity markets have returned 17.5% CAGR annually (since inception) . 15% is a very realistic return considering the money is invested for long term like 15+ years . Equity investments risk are inversely proportional to tenure of investments .

After 30 years you will not even need Insurance , because this money will be available every year . and i am assuming that you will earn enough till than that you don’t need insurance .

Some other things to ponder are :

Investing in your Endowment policy does not give you any flexibility of stopping or missing your premiums . In case of PPF or mutual Funds , you can be very flexible and stop for 2 years if you want money to be utilized some where else .

The plan which i told you has everything which you had in that endowment policy , even more than that . its like Buying Nokia 2600 @20,000 when you have iPhone available at same price , you just didn’t knew where you can get it 🙂 . Ok , i know that was pathetic analogy , but i need some platform to show that i can think .

So better stop those policy and take the loss of premiums which you paid , anyways you are not going to be affected now , and life will be normal as it was .

I have done nothing extraordinary here , but some calculation based on some common sense , which is not common .
disagreements are welcome .

– manish

– Show quoted text –

—
Manish Chauhan
Bangalore
https://finance-and-investing.blogspot.com/

Lets understand some basic things here . No matter what people tell you or design things for you , Always calculate and apply the simple formula’s which will give you certain numbers, which can be used as benchmarks by you .

Some must know formula’s : https://finance-and-investing.blogspot.com/2008/09/3-most-important-formulas-you-should.html

Please post your comments .

Why buying an Endowment policy is not a good choice?

Posted on October 7, 2008February 6, 2019 by Jagoinvestor

Today we are going to see why Endowment policy should be avoided in any portfolio and how other things are much better than Endowment policy with the same cost .

The assumption is that you understand what are Endowment policies and What are Term Insurance Plans, if you don’t know click here to read about it

endowment policy

A look at the Endowment Policy

An Endowment policy would look like this for a 25 yrs old

Tenure : 30 yrs
Yearly premium : 31,000
Sum Assured : 10 Lacs
Maturity amount : 23.1 Lacs ( this you get when you survive full tenure, It includes the sum insured + Bonus accrued)

This data is from website of an Insurance company.

Q . How much money to be paid every year? How much will the person get in case of Death or Survival? What are the Risk factors?

Ans :

Tenure : 30 yrs
Money outgo : Yearly 31,000/yr
Money received In case of Death : 10,00,000
Money received In case of Survival : 23,100,000
Risk : Virtually no risk (The only risk is when the Insurance company goes bankrupt)

What is the interest earned on this investment? 31,000 per year for 30 years becomes 23,10,000.

Annuity formula is :

Maturity value = Amount paid per year * [ {(1+r)^n – 1}/r ] * (1+r)
Here n = 30 years
and r = rate of interest earned

Putting all these values

23,10,000 = 31,000 * [{(1+r)^30 -1}/r] * (1+r)

The value of r which satisfies this equation is 5.4. Which means that the interest earned by the investment in Endowment policy is mere 5.4%, which is truly pathetic by any standard in India at least. There is no investment product known which is known to pay so badly.

The reason why people feel that endowment policy are so good is that they also get insurance cover ( which is virtually useless because its so less that it does not even cover the financial dependents to even a fraction of what they need in reality)

So can we mix Insurance + investments product which can be better than supremely better than Endowment policies and still cost the same( or even less).

Now let us see that by spending same amount (30,000, 1,000- less than the endowment policy) every year for 30 yrs, can one achieve better than this.

Watch this detailed video in which the difference between Endowment policy and Term plan has been explained from basic concepts

1. For Safe Investor (Let us first see a almost 100% safe way to do this)

Term Insurance of 30 Lacs for 30 yrs : 6k
Investment of 24k in PPF for 30 yrs : 30 Lacs (this is assured returns, as its invested in govt backed PPF, which gives 8% post tax returns )

Amount invested = 30,000 per year for 30 years (same as Endowment policy)
Amount received on death : 30 Lacs + investments done in PPF
Amount received without Death : 30 Lacs (investments)

2. For Aggressive Investor ( A person who can take more risk that the former one)

Term Insurance of 70 Lacs for 30 yrs : 14,157
Investment of 17,843 ( 30000 – 14157) in ELSS for 30 yrs assuming 15% CAGR : 92 Lacs

Amount received on death : 80 Lacs + investments done in ELSS
Amount received without Death : 92 Lacs (investments)

Equity investments for long term are almost risk free.

So, we can see here than in any case term insurance + MF is supremely better than Endowment policies.

#Solution for People who have taken fresh policies

People who have already taken fresh policies and have not completed 3 yrs should just forget there payments and stop there premium payments. The profits of switching from Endowment to “Term + MF” will be far greater than the loss from leaving Endowment policies.

#Solution for People who have completed more than 3 yrs

Either convert your policies to Paid-up or just surrender your polices and take the Surrender value (take your call on what you are comfortable with)

#Solution for people near the Maturity

You have almost paid most of the installment, so better stick with it, but don’t forget to insure yourself to a respectable cover through term insurance

Summary

Endowment policies according to me are totally incorrect and worst product i have ever seen (ULIPS are not far behind). It is structured and presented in such a way that investors are attracted to it. Agents present them in such a fancy way and give judgements which make these policies look like must have products.

Disclaimer : The exact figures can differ, this is just a demonstration of how Endowment policies can not be better than Term Insurance + MF combo. All the Insurance premium are for Aegon Religare Life Insurance and Mutual funds payments are considered monthly (amount/12).

All the view on this article are personal, some people may disagree with it which is totally acceptable.

Aegon Religare Life Insurance – New hope for Indian Insurance Industry

Posted on October 6, 2008February 6, 2019 by Jagoinvestor

Aegon Religare Life Insurance which is recently renamed as Aegon Life Insurance is a new Player in Indian Insurance Market.

This company seems to have clear understanding about the Insurance Market and what India needs exactly, there main focus is on Term Insurance and that makes it respectable in my opinion, its not like other companies concentrating on Endowment and Money Back plans and tag them as Great Insurance products, which is nothing but Saving and investment products with a pinch of Insurance.

aegon life insurance

About Aegon Life Insurance

AEGON : Aegon is one of the largest life insurance and pension groups with market in over 20 countries (Americas, Europe and Asia) with 40 million customers. It has more than 160 yrs of experience.

RELIGARE : Religare is one of India’s leading integrated financial services groups. They have 1550 locations spread across over 460 cities and towns in India.

Products Offered by the Company

AEGON RELIGARE Life Insurance has excellent products as far as Term Insurance is concerned. They also have ULIP plans.

In Term Insurance they have the minimum rates for Term Insurance plans. You can check their Premium Calculator here. They have 3 different plans.

1. Level Term Plan :

In this cover remains same through out the Tenure. Premium for amount Rs.50,00,000 (50 Lacs) for 30 years.

Male/Female (25 yrs) : 9,000 per year
Male/Female (30 yrs) : 12,150 per year

2. Increasing Term Plan :

Cover increases by 5% every year. Premium for amount Rs.50,00,000 (50 Lacs) for 30 years.

Male/Female (25 yrs) : 13,800 per year
Male/Female (30 yrs) : 19650 per year

3. Decreasing Term Plan :

Cover decreases by 5% per year (Tenure = 20 years max). Premium for amount Rs.50,00,000 (50 Lacs) for 20 years.

Male/Female (25 yrs) : 7,100 per year
Male/Female (30 yrs) : 7,900 per year

One can choose the plan as per there requirement. The best part is that there rates are very very low. This Term insurance is worth a consideration.

Click here to understand why you need Term Insurance and not Endowment or Money Back Plans.

What are Gold Mutual Funds

Posted on September 16, 2008February 6, 2019 by Jagoinvestor

Gold Funds

In India Gold investment is considered as the traditional and most safe toll for investment. In this article I’ m going to tell you what are the alternatives to invest in GOLD other than physical Gold and GOLD ETF?

gold etf

What are Gold Mutual Funds?

Gold Funds are mutual funds which invests in stocks of companies engaged in gold mining & production. They do not buy gold directly but invests in stocks of companies engaged in gold mining and production world over.

When gold prices rise, the profitability of gold companies tends to increase more than proportionately, thereby providing long-term capital appreciation as stocks of gold companies have the potential to outperform gold prices by a significant margin over the long run.

Even though these are Gold funds, they can invest some part in Platinum and Silver.

According to the website, DSPML World Gold Fund has invested over 80 per cent in gold followed by platinum (9 per cent) and silver (5.10 per cent).

As per the December 2007 portfolio, Australia based Newcrest Mining is the top holding of the fund accounting for 8.4 per cent of the fund’s assets, followed by Barrick Gold (7.50 per cent), Kinross Gold (5.50 per cent) and Lihir Gold (5.20 per cent).

Why to invest in These Gold Funds?

Investors can benefit from the global demand for gold by investing in the precious metal and in companies involved in its production. In times when Equity markets are uncertain , Gold can be a good hedge. After Equity markets crash of Jan 2008, Gold Mutual funds were the best performers in any Mutual Funds category.

Also, this fund has an edge over GOLD ETF’s (What are GOLD ETF’s) as the portfolio of gold equities is actively managed as against the passive management in Gold ETFs.

Click here to know the returns of gold investment in past few years.

Taxation and Returns

From the taxation point of view, These fund will not enjoy the tax benefits that equity funds are eligible for. Long term gains would be taxable at 10% and short term gains would be taxable as per slab rates applicable to the investor.

Most of the Gold mining companies will be outside India and hence these funds would eventually be invested in dollar denominated assets, any currency fluctuation would directly affect your rupee return.

For example – the US dollar has depreciated by over 8% in the last 3-4 months against the rupee. Such appreciation of the rupee directly eats into a dollar return and investors should be aware of the currency risk that they undertake when they invest in this fund.

What are Gold Funds Available (In India)

– DSPML World Gold Fund
– AIG World Gold Fund

Read Why to invest in GOLD and What is the Best way
Read How to Calculate your Life Insurance ?
Also read Creating Wealth for retirement

I would be happy to read your valued comments. Thanks ………

How to calculate Insurance Requirement

Posted on September 16, 2008February 6, 2019 by Jagoinvestor

There are lot of assumptions related to buying life insurance in India, because of underestimating the future non-life threats like job loss, accidents and also the life threats which will have a bad impact on your families future requirements in case of your untimely demise.

Today i will discuss about the calculation of insurance Amount one needs to protect his family even though he will not be there for them.

Life insurance

How much should be the Insurance cover?

You will hear that it must be 6-7 times of Gross yearly income which is good enough estimate. but it does not consider other things like Debts or living style. It may be true for you but not for other. Some people may have simple lifestyle, whereas some other can have expensive lifestyle. So lets answer this question in another way.

This is pretty easy to answer, The life Insurance amount much be enough to –

Pay off all the debts
Should be able to provide monthly income which is good enough to cover family expenses
Any emergency or unplanned needs for future.

How to calculate the Sum Assured?

While deciding the total sum assured, you need to consider all the factors that may affect to the financial life of your beneficiary when you will not be around. You should understand the expected cost of living for your family in your absence.

Some of the basic aspects that you should take into consideration in order to calculate the total sum assured are listed below:

Calculate the total one time expenses which can be paid in lump sum also, like, Loan, credit card bills etc.

Make a addition of all the assets like mutual funds, stocks, FD/RD, property etc. (Exclude those assets which your family is not willing to redeem or offset with the lump sum amount of liabilities)

Deduct the liabilities from the assets ( or assets from liabilities in case liabilities are higher)

Calculate the annual expenses of your family

Decide the number of years for which you want to provide insurance cover

Consider this amount for as a sum assured for your life insurance cover.

Let’s take an example.

Example :

Ajay is 30 yrs old and earns 40,000 per/month. He is married and has 2 kids. There monthly expenditure is 20,000 per month.

His debts and future expenses.(total : 47 lacs)
Home loan of 24 lacs (remaining)
Car loan of 3 lacs.
His children studies expenses. (20 lacs , in future)

His investments are (total 8 Lacs)

5,00,000 in Fixed Deposits
3,00,000 in Mutual funds

He has 47,00,000 worth of Debts and expenses in future and monthly expenses of 20,000 , considering inflation @5% , which will also increase every year. His Insurance money should be able to pay for both of these.

We have to answer that how much money will provide 20,000/month (post-tax) or 2,40,000/year.

Considering 15-20% tax, the family should get 3,00,000, so that after paying tax they are able to get 2,40,000 per year. So how much money will give them 3,00,000 per year.

Fixed Deposits rates are around 9-9.5% per year. Which means 3,00,000 X 100 / 9.5 = 32,00,000 (approx).

So if they have this much amount in Bank which pays interest of 9.5% yearly, they will receive around 3,00,000 per year as interest and after paying taxes, they will be left with 2,40,000, which can meet there monthly expenses.

Also the insurance amount should have 47 lacs extra, which will be used to pay there debt and future expenses.

So total = 32,00,000 + 47,00,000 = 77,00,000

As he has 8,00,000 worth of investments also, His Insurance needs comes down to 77,00,000 – 8,00,000 = 69,00,000 (let’s make it 70,00,000)

This is the minimum amount for the insurance needs.

It should also be considered that the expenses will rise and some emergency may also happen. So insurance can be increased by 10-15%. But for the moment we will not do it. Its in fact not necessary in this case because the money for future expenses can be invested and which will grow .

Tracing Back

So we arrive at the figure of 70,00,000 . Now lets go back again and see that in case there is sudden death of the family head (earning member), how this money helps the Family..

They receive 70,00,000, Out of which they pay 24,00,000 of home loan

Money left = 70,00,000 – 24,00,000 = 46,00,000

They put 32,00,000 in bank or Monthly income plans, which will provide them with monthly income of 20,000 per month (post-tax).

Money left = 46,00,000 – 32,00,000 = 14,00,000

Now this 14,00,000 can be invested in Debt or Mutual funds which will grow to become at least 20,00,000 in some years (considering its needs after 10 yrs at least.

At the end of 10 yrs, when family needs this 20 lacs for there children education, they can use it. And for any emergency needs they have another 8,00,000 in investments.

So in general All the requirements of Family is taken care of. If insurance amount is less than 70,00,000 they will have to compromise at one place or the other.

Why it is necessary to have as life insurance cover?

Life insurance is an important instrument to make your dependents life secure, in case of your untimely demise.

Life insurance requirements

Though there is nothing great in that, but most of the people miss on this part and according to studies, more than 80% of people in India are under insured, which means the amount there nominees will get will not be able to cover them against the financial crisis.

In case you have not read my previous articles on Life insurance, please read them

How much will the Life Insurance cost him per year?

As I write this Article, I can see on https://www.click2insure.in/ that for a 30 yrs old non smoking male for 25 yrs of cover, the minimum premium per year for 70,00,000 Term Insurance is Rs.21,000 per year (taxes extra).

The premium is just 4.4% of this yearly income. Just imagine how cheap term insurance for total peace of mind for rest of the life.

So whats the final formula?

Insurance cover = A + B + C – D

Where,

A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest rate which bank gives in a year , example 9.5%)

B = Future Debts or Expenses.

C = Some money for contingency or emergency.

D = Your investments or Assets (excluding HOME)

If you are under insured, please take extra life insurance and cover your family. You can also buy insurance under MWP act.

Please read my earlier articles on Term Insurance to understand more.

I would be happy to read your comments.

Some of the best investment products I know about

Posted on September 4, 2008February 6, 2019 by Jagoinvestor

When it comes to investment, everyone is conscious and curios to know about the best investment products. In this article I’m going to tell you about few of such products that I know and I thing they will be helpful for you.

Best investment products

1. Term Insurance

Term plan is an affordable insurance which provides a full protection cover for your family at a very low premium cost. One of the best products in Term insurance markets I know is SBI life Insurance Shield Plan.

Before taking any Insurance into consideration, we should give importance to

Premium amount you pay : Premiums are among the cheapest in market
Claim settlement Rate : Next only to LIC

There Shield plan is designed very nicely, have a look at it and you will love it.

2. UTI Gold ETF’s

It is simply an investment in gold which tracks it’s price on day to day basis. It has its own expense ratio which is very high is compared with US market, but it is the price that we pay to invest in gold electronically. You should have a demat account to invest in Gold ETF’s and you can trade these ETF’s through stock market.

If you want to invest in GOLD, try this ETF, search GOLDSHARE or UTGOLD (if you are on ICICIDIRECT).

3. Mutual Funds

Mutual funds are categorized on the basis of its objectives, style and strategy. Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.

See here some of the good options of mutual funds to invest in :

ELSS

SBI magnum tax shield
Principal Tax saving

Equity Diversified Mutual Funds

DSPML Equity
HDFC top 200
Magnum Contra

Balanced Funds

HDFC Prudence
DSP Balanced
UTI Mahila Unit Scheme

Debt or Liquid Funds

Kotak Flexi
Birla Sun Life Income

(see details of these mutual funds at https://www.valueresearchonline.com/)

Understanding what is Fixed Maturity Plan & what are the benefits of FMP?

Posted on August 22, 2008February 6, 2019 by Jagoinvestor

Attaining financial goals is does not happen overnight, it needs a long term investment. But in case of Stock market, lot of people avoid a long term investment because of the fear of volatility of the returns.

Fixed Maturity Plan is the better option for such investors because of its higher security concerns. Let me explain you a bit detail about FMP.

Fixed Maturity Plan (FMP)

What is FMP?

Fixed Maturity Plans are the equivalent of a fixed deposit in a bank, with a little difference. The FMP’s returns are only indicated and not ‘guaranteed’, Since the fund house knows the interest rate that it will earn on its investments, it can provide ‘indicative returns’ to investors.

Fixed Maturity Plans are debt schemes, where the corpus is invested in fixed-income securities.

Where do FMP’s invest?

FMPs usually invest in certificate of deposits (CDs), commercial papers (CPs>), money market instruments, corporate bonds and sometimes even in bank fixed deposits.

Depending on the tenure of the Fixed Maturity Plan, the fund manager invests in a combination of the above-mentioned instruments of similar maturity. Say if the FMP is for a year, then the fund manager invests in paper maturing in one year.

The expense ratio, generally varies from 0.25 to 1 per cent.

Tenure of Fixed Maturity Plan

The tenure can be of different maturities, from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.

These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.

Benefits of Fixed Maturity Plan:

1. Minimal risk – Fixed Maturity Plan’s are hold by fund manager till maturity which helps in getting fixed returns. Because of this FMP’s exposed least to the interest risks.

2. Protection from capital loss – FMPS’s invest in debt funds and this reduces the loss of capital relatively than that of equity funds.

3. Liquidity – Normally it is suggested to hold the Fixed Maturity Plan’s till its maturity, but if you want an exit then you will have that option and can exit from the FMP at any point.

What is the difference between FMP and FD?

FMP are differentiated form FD on the basis of some major key points like interest, returns, tax and indexation. As a debt fund, FMP enjoys the benefit of indexation on a long tern investment for more than 1 year.

FD is a risk free investment tool whereas FMP’s are risky because of the corporate debt default. Besides this, the returns from FD are fixed, but in case of FMP, the returns are only indicative and not fixed.

You can watch this video given below to know more about how FMP’s are different from FD’s.

Actual return Vs Indicated Return

The actual return can vary slightly, if at all, from the indicated return. Against that, a bank fixed deposit exactly prints the amount which is due to you on maturity on the FD receipt. However, FMPs do earn better returns than fixed deposits of similar tenure.

Have a look at the list of closed ended FMP’s , and there returns : https://www.personalfn.com/research-it/mutual-funds/fundarena/SchTypNat.asp

Tax Implication

1. Dividend :

Tax-free in the hands of the individual investor.

2. Investment in growth option of the FMP for less than a year :

The gains are added to the investor’s income and taxed at the investor’s slab rate.

3. Investment in the growth option of the FMP for over a year :

Either 10% capital gains tax without indexation or 20% with indexation.

What is indexation benefit?

The finance minister has been generous enough to recognize that inflation erodes the real value of any investment. So every year, he comes out with an inflation index based on the prevailing rate of inflation.

The cost of investment is indexed by multiplying the index of the year of maturity and divided by the inflation index prevailing on the year of investment. If you have arrived at an indexed cost, then the long-term capital gain is taxed at 22.44 per cent and if you do not opt for the indexed cost, then the tax is 11.22 per cent.

To understand more on indexation, Read this

Conclusion

FMP’s are investment options for sure if you want to park your money for short term. They are more tax efficient and give better post-tax returns. Though returns are not 100% guaranteed , they are almost risk free (remember almost) .

If they really give better than returns then FD’s and practically as safe as FD’s why don’t people invest in these ?

Ans : No awareness among people and they less risk taking attitude

If you have question or any doubt related to FMP, you can leave your query in the comment section.