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One Common question that every beginner investor has – Is Direct Equity for you ?

Posted on March 16, 2009July 21, 2019 by Jagoinvestor

This is one of the questions which everybody wants answer to . You can do it , but it will require some effort, learning and dedication. Also you will have to develop some kind of discipline and change your attitude a bit.

We shall first see who all are into Direct Equity Investing. They are Mutual funds , FII’s , Big experienced Investors with high experience and qualification . These people are 24/7 doing this job of researching the companies for long term investing . And even these people do mistakes and even they can predict markets directions always .

Direct Equity

So now you can be one of the two kind of people.

1. Someone who has no interest in the markets and have no desire to learn things on his/her own.

They want to earn better returns than debt, but at the same time without bothering much. Then you better invest in mutual funds (SIP would be a good idea).

That way you can get returns over long term and don’t have to put much effort (apart from choosing good mutual funds in the start and monitoring them once in a while in a year, which is not a big deal).

2. Someone who is ready to take more risk and can also devote some time to do his own study of stocks (not a big one, but basic atleast).

He has better than average interest in these things and also enjoys the stuff. If you are one of those than you can put some money directly in shares of companies after your own research and understanding, it can be any way you are comfortable with. You should learn some basics of Fundamental Analysis and then apply it.

For example: I can say, that After RPL – Reliance Merger, Reliance will be among the biggest refineries of the world (it was anyways, but now in better position), It has lots of exploration projects going on and company’s is in safe and great management (as per the current information).

On the top of it Company has great valuations, and is available at many years low price and now overall markets are near its bottom. Just by looking at these facts, you can understand that it would make sense to BUY Reliance for long term, better accumulate it over the next 6 months, to catch the volatility too.

Can we go wrong and it may not give us good returns?

Definitely yes, Markets are the place where you should expect the unexpected. But at this moment that’s the best we can do and should do.

Can you do better than Fund managers of mutual funds?

Some people may answer yes , and may be they are true, But personally I would say at this moment I can’t do better than them. Reasons are as follows:

They are doing it from last 10 yrs, I might be doing it from last 6 months or 1 yrs (personally i dont do any ).
They are highly expert and qualified people. I learned accounts till my 12th only and it really sucks for me.
They have access to internal information and resources to do better research. I don’t have it.

So, I may be able to pick a company once in a while which gives 100% in 6 months against there 20%. but over long term, chances of there sustaining in the business is very high. So think long term. Don’t over estimate yourself.

You should understand that i am not trying to tell you cant do it. I am just trying to make sure that you understand your position in this game and your abilities to do things.

I personally like to do things on which i am good at and transfer the responsibility of other things to experts in that field. If I want the joy of it anyways, I will take a small portion of my portfolio and will play with direct equity. That is allowed 🙂

Watch the video given below to learn everything about Direct Equity:

Why Mutual funds Makes sense for Retail public?

Mutual funds are the products which are formed on the philosophy that many inexperienced and uninterested people who have money but no knowledge will pool all the money together and hire a person who has experience, understand the markets well, and can take better decision.

This person also has all the time dedicated to investing, so that thousands of investors don’t have to monitor the investments and the returns which will be generated will be distributed to investors after paying this fund manager for services.

So it makes sense you any one like you , who may be a Software engineer, Doctor, businessman or another person, who has no time for all this investing thing. Its you who have to decide who you are?

Don’t fell in the trap of high returns, With high returns comes the disaster too.

“Good return with some risk is much better than Exceptional returns with catastrophic losses”.

I hope this article will prove helpful to your. Leave your views about this article in the comment section. You can also ask me if you have any query.

DSP Black Rock Top 100 – A good old Equity Diversified mutual fund

Posted on March 10, 2009July 21, 2019 by Jagoinvestor

Let’s see a good Equity Diversified mutual fund today, DSP Black Rock Top 100, is an old fund, Its name was DSP ML Top 100 earlier, but now its renamed. It comes from one of the best Mutual funds houses DSP Black Rock.

The fund has very good record and consistently outperformed its Benchmark. To get more information see here

DSP Black Rock Top 100

Returns

If you see last 1 years returns its only -35%, which is much better than others who have given close to -50% return.

1 yrs : -35%
3 years : 1.2%
5 years returns : 15%
Since Inception : 29%

It has consistently outperformed its category average by good difference. Which is one the evaluating criteria.

Portfolio

Its portfolio is well diversified with high concentration on Large cap companies (50%), which is good.

Derivatives usage : There is one point to note in the portfolio is that the fund also uses tries to take advantage of Futures (derivatives). This is a smart action, considering Fund manager understand the risks. Else it can be disaster.

Rating

Its rated as 5 star fund and is places in Low risk High Return Grade by value research online. Though we should not put lot of focus on ratings, its one of the things to look at.

Conclusion : Overall the fund looks good. We have not done any detailed analysis but see it in a way which should be done at the minimum level by an average investor. The main thing is not the product, its the usage and utilization . You can take a normal fund and make most out of it using SIP and portfolio re balancing.

Please do your own findings and see if the fund fits your risk-appetite and criteria. People who want to invest money for atleast 3-5 yrs and without putting lot of efforts on monitoring the market , can invest there money using SIP in this Fund.

Keep the money invested for at least 3-4 yrs, and keep monitoring the fund performance minimum once every 6 months.

If you want to check one of my favorite scenes from movie “Socha na Tha”, see this

What is long term in Share market? – Understand short term, mid-term and long term investment

Posted on March 9, 2009July 21, 2019 by Jagoinvestor

Long term investments are the investments that are suppose to be held for an extended time period which will be considered to be more than 1 year.

There is no exact definition for long term investments. Let’s see how it is different from short term and medium term investments.

How long is long term ?

There are mainly 3 time frame in markets

Short term (6 months – 2 yrs)
Medium term (2 yrs – 8 yrs)
Long Term (8+ yrs)

We are taking about long term investing from point of view of Investor , which invests in a company on the basis of fundamentals and valuations .

Time Frame is a relative term , Short term for some one can be medium term for some one and long term for other . similarly if some time duration is long term for you , it can be short term for someone else .

I have also written a small post on IDBI FORTIS WealthAssurance ULIP , Read it

But here we are talking about an average investor . So lets look at predefined tenures .

from my understanding, any time frame less than 6 months shall be considered as trading Time frame . Traders are people who like to take advantage of short term price movements based on news , Charts patterns etc .

One thing you must understand before hand is that Risk and returns are proportional , If you take high risk , there are chances of high Returns.

Now , lets see different time frames .

Short Term (6 months – 1 yrs) :

Any investment made from 1-3 yrs should be considered as short term .

Risk/Return Potential :

VERY HIGH .

Investing for short term :

Invest for short term only if you can afford take the risk. Its always good, not to invest for short term for any goals which are very important. Like for example, if you are going to have an operation or a marriage after 1 years, don’t put your money in stock markets for less than a year to gain extraordinary gains .

Its for professionals , not for an average investor. do it if you can afford to risk loosing it.

Low risk Short term investment option :

Corrections in a BULL RUN : If there is a BULL Run, wait for a correction, It happens many times that there is some correction in stock markets , At that time you can do some investments for short term like 6 months – 1 yrs. Invest only when markets start rising again .

Have a level in mind where you will take loss if it goes against you. There is no guarantee of profits ever. If you are in profit after 6 months, take your profits and get out, don’t convert your short term investment in long term one, One who can not be loyal to his plan in markets will eventually loose it all some day.

Same thing can be applied to short selling in corrections in Bear markets.

Example : In April 2005 , Oct 2005 , June 2006 , there was very good correction, after which it gave 30-40% returns within 6 months – 1 yrs.

If you want to understand the short term and long term in share market, watch the video given below:

Medium Term (1 yrs – 3 yrs) :

Any investment made from 2-8 yrs should be considered as Medium term .

Risk/Return Potential : HIGH/Medium :

Higher the tenure , lesser the risk .

Also it depends on the situation , there is again no guarantee , There can be some time , when there can be high risk in 3 yrs and some time it can less , but over all it should be less than the short term investment .

Investing for Medium Term :

You should invest for medium term for goals like Car , Vacations , etc and some part of portfolio for House , etc (close to 5+ yrs , not 2 yrs) . Choosing well diversified portfolio and investing in strong fundamentals is extremely important . Good timing is always important in any time frame .

But its difficult to time the market .

Low risk Medium Term Investment Time :

After a Bear Market is there for some time around, and markets have fallen considerably, you can start accumulating good stocks with good valuations every month in installment. Don’t jump and put all your money at once ,just because you feel, “now markets have fallen much”, Markets are supreme and you are no one to “feel” or “tell” markets movements.

Just expect it to come back soon and now start accumulating good shares , or start a SIP. There is no guarantee of any profits, we are just discussing the low risk opportunities here.

Read why SIP helps in falling and Volatile markets , Part 1 and Part 2

Example : Current time . This is an excellent time to start accumulating fundamentally good stocks in installments over next couple of months , especially a big chuck should be invested when there October lows are breached within some days ,which is expected with high chances .

Long Term (8+ yrs) :

Any investment made from 2-8 yrs should be considered as Long term .

Risk/Return Potential :

LOW , By Low do not think that we are saying you will get lower return , we are talking about CAGR, obviously the CAGR you can expect over long term is lower than the CAGR which you can expect in short term or medium term, but more important is the risk, the loss potential, and that is extremely low here, almost Nil i would say, This I am saying on the basis of past historical data.

Loss is possible but chances are very bleak .

Investing for Medium Term :

You should invest for Long Term for goals like Retirement , Child Education , Children Marriage or any financial goal which is to be taken care of after 8+ years , Do it using SIP .

Low risk Long Term Investment Time :

Ideally speaking, you can start doing this any time without seeing the current situation of market, because over long term it would matter less that when you entered markets. This does not mean that timing is not important in growth of money, obviously, If you enter neat the end of bear market or at some other important time, it would help .

But the point here is that , it would not harm if you start investing for long term at any time frame assuming that you are diversifying it well across sectors and stocks and also apply some extremely beneficial techniques like Portfolio rebalancing over this long tenure .

Don’t get scared by these words ,they are extremely easy to understand things and can be applied by anyone , and it does not take much time also , The only thing required from investor is the his share of determination to do all this .

Read what is Portfolio Diversification and Portfolio Rebalancing.

Final Note :

What ever i have talked about here are my personal views and my own idea of short term, medium term and long term. It can differ from people to people with different risk – appetite. Also understand that deciding your time frame is important to deal with the situation in markets after investments.

For example: if you decide that you are investing your money for your retirement which is going to come after 25 yrs, then it would be really easy for you to digest the volatility of markets and to see it going down while you invest. So know your time frame and invest it smartly at correct time.

Don’t try to get smart and get greedy. Markets are the place where Albert Einstein and Issac Newton also failed and returned to try what there were good at. That does not mean we will also fail. try to made fast money, in fact try to make smart money.

For new comers in this area, its advisable not to enter through Direct equity, better go though mutual funds, and please listen to people when they tell you all this, don’t get smart, else you will be ruined like millions others.

I have also written a small post on IDBI FORTIS WealthAssurance ULIP, Read it

My trip to Savandurga on Saturaday was Great, check the pics at flickr here

What Are RBI Relief Bonds?

Posted on March 5, 2009July 21, 2019 by Jagoinvestor

In this article we will talk about RBI relief Bonds. Some bonds have a special provision that allows the investor to save on tax. These are termed as Tax-Saving Bonds, and are widely used by individual investors as a tax-saving tool. Examples of such bonds are:

Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
Capital Gains Bonds under Section 54EC of the Income Tax Act, 1961
RBI Tax Relief Bonds

Are you a new Reader ? See all the articles by Categories

RBI Relief Bonds

What Are RBI Relief Bonds?

RBI Relief Bonds are instruments that are issued by the RBI, and currently carry an 8.5 per cent rate of interest, which was reduced from 9 per cent early this year. The interest is compounded half-yearly. Maturity period of RBI Bonds is five years, and interest received is tax-free in the hands of the investor.

INVESTMENT OBJECTIVES

How Suitable Are RBI Relief Bonds For An Increase In My Investment?

RBI Bonds are not very suitable if you are looking for an increase on your investment. Since RBI Bonds carry interest @ 8.5 per cent, capital appreciation is better in other safe instruments that offer a higher rate of return.

However, if safety is of paramount importance to you, you couldn’t ask for a better deal as this is the safest instrument to invest in. In case of the cumulative option, bonds issued at a face value of Rs 1,000 are redeemed at Rs 1,516.

Are RBI Relief Bonds Suitable For Regular Income?

Yes, you can opt to receive interest either on a half-yearly basis or on maturity of the instrument, along with the principal invested.

If you opt for the first option, i.e., to receive interest on a half-yearly basis, you will receive interest every six months from the date of issue of the bond up to 30th June or 31st December, whichever is earlier. Interest is paid on 1st July and 1st January each year.

To What Extent Do RBI Relief Bonds Protect Me Against Inflation?

RBI bonds do not offer any protection against inflationary pressures. As with other instruments of a similar nature, this risk has to be borne by the investor.

Can I Borrow Against RBI Relief Bonds?

Yes, you can borrow against RBI Bonds by pledging them as security in a bank.

RISK CONSIDERATIONS

How Assured Can I Be Of Getting My Full Investment Back?

RBI Bonds are issued by the country’s central bank, the Reserve Bank Of India. These are among the safest instruments available for investment, and you can be assured of getting back the full amount of your investment.

How Assured Is My Income From RBI Relief Bonds?

Your income from RBI bonds is assured. Since the issuing entity is the country’s central bank, the risk on this investment is nil. In case of the half-yearly interest payment option, the rate of return is 8.5 per cent.

In case of the Cumulative Scheme, where you receive the total interest at the end of the tenure of 5 years, the simple interest works out to 10.32 per cent at the end of the tenure.

Are There Any Risks Unique To RBI Relief Bonds?

No, there are no risks associated with your investment in RBI bonds. This is one of the safest investments you can make. Inflation and fluctuations in interest rates affect investment decisions in RBI Relief Bonds. An increase in the interest rates result in a decrease in bond prices, and vice-versa, if you want to sell them in the secondary market.

Are RBI Relief Bonds rated for their credit quality?

No, since the issuing party is the country’s central bank-the RBI-these bonds are extremely safe, and require no commercial ratings.

BUYING, SELLING, AND HOLDING

How Do I Buy RBI Relief Bonds?

Application forms for RBI Bonds are available and accepted at all branches of the Reserve Bank of India, designated branches of the State Bank of India, and designated branches of nationalised banks across the country.

What Is The Minimum Investment And The Range Of Investment for RBI Relief Bonds?

The minimum investment on RBI Relief Bonds is Rs 1,000. You can apply in multiples of Rs 1,000 thereafter. There is no prescribed upper limit to your investment in this instrument.

What Is The Duration Of RBI Relief Bonds?

The period of holding of RBI Bonds is five years from the date of issue. The bonds are repayable on the expiration of 5 years from the date of their issue.

Can RBI Relief Bonds Be Sold In The Secondary Market?

Yes, the bonds can be sold or transferred to another party. If the bonds are in the form of Bond Ledger Account (BLA), they can be transferred by execution of a Transfer Deed in the prescribed form. However, transfer shall not be deemed as complete until the name of transferee is registered as holder of the Bond in the Office of Issue.

A new BLA will be opened in the name of the transferee (whom the bond has been sold to) for the remaining period by closing the BLA of the transferor (original holder of the bond). The Bond in the form of Promissory Note (PN) will be transferable by endorsement and delivery.

What Is The Liquidity Of RBI Relief Bonds?

While RBI Bonds cannot be redeemed prematurely and must be held for the entire duration of 5 years, you can always exercise the option of selling RBI Bonds in the secondary market if you so desire.

How Is The Market Value Of RBI Relief Bonds Determined?

Market value of RBI Relief Bonds is determined on the basis of prevailing (8.5%) interest rates and market conditions.

What Is The Mode of Holding RBI Relief Bonds?

RBI Relief Bonds can be held at the credit of the holder in an account called BLA or in the form of PN. The bond can be held in demat form, i.e., a certificate of holding will be issued to the holder of bonds in the BLA.

The bonds in the form of BLA are issued and held with the public debt offices of the RBI or any branch of a scheduled bank authorised by the RBI. The bonds in the form of PN are issued only at the offices of RBI. However, bonds issued in one form will not be eligible for conversion into the other.

TAX IMPLICATIONS

Interest received on RBI Relief Bonds is completely exempt from income tax as per the provisions of the Income Tax Act, 1961. RBI Relief Bonds are also exempt from Wealth Tax. However, there is no tax benefit on the amount invested in these bonds.

Hope you liked this article. Leave your views about this article or any query if you have in our comment section.

How safe private insurance companies are?

Posted on February 27, 2009July 21, 2019 by Jagoinvestor

Many people have this concern about taking policies from Private Insurance companies. Let us try to understand about the factors which takes care of financial stability and ability to repay back customers there money.

In reality the only things differentiates one insurance company from other is the service the provide, there settlement track record.

Want to know why Insurance is Important ? Read this

Private insurance companies

Solvency Margin

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.

Why is Solvency Margin there?

Companies have Assets and Liabilities. In some adverse situation, Assets are used to payoff all the Liabilities. Suppose there is company which has assets of 100, and liabilities of 100. In ideal case it would be able to payback the liabilities. But what if some adverse situation occurs and liability increases unexpectedly.

In that case company will be declared Insolvent (Bankrupt). This will be a bad situation which every customer does not want to experience.

Thats the reason, Solvency margin comes into picture, The excess margin maintained by the company provides that extra cover which may be required in case some thing totally unexpected happens.

by the way, i am now on twitter, so you can follow me and get updates on twitter.

What is the current Solvency Margin?

Current Solvency Margin is at 150% for Life Insurance Companies. It means for every Rs 100 insured the Insurer should have 150 with them.

Does it mean customers are totally safe?

You must have understood Solvency margin till now, but what if some bad event of High Magnitude happens and then Liabilities of company (the claims they have to settle) crosses there total assets + extra margin, in that case they will not be able to pay back, but the chances of this happening is very very small, and generally Solvency margin takes care of it.

Some bad unexpected event like Earthquake or some terrorist attack which kills say 1000’s of people can dramatically increase Insurer’s Liability, but in most of the cases its always taken care by choosing adequate Solvency margin. But there are always that small percentage chances of the Failure which you have to live with and we cant do anything.

So what does it mean for us common Investors while choosing Insurance Products?

Solvency Margin has to be maintained by all the Insurance Companies in India whether its Private or Public sector. All the companies are at same level, Some of them are old, some are new, some are big and some are small, but its same for all and everything is under IRDA norms and scrutiny.

So decisions based on How safe or unsafe a company is not relevant now . Risk is with every company and that is equal for all.

So for people who are going to take Term Insurance, the best thing is to go with the cheapest price and good record of claim settlement. There are many new players in this market who are so new that we don’t have any long track record . like for Religare Aegon (which is my favorite).

So for term Insurance, just break your cover into 2 parts and take insurance from 2 companies to diversify the risk further.

Read tips while taking Term Insurance

Summary

This is what many people never knew and they take there decisions based on just trust and how long company has been in existence. Huh, people trusted Satyam and Lehman Brothers also, so what !!

All you want to know about “Jeevan Varsha Analysis”

Posted on February 25, 2009July 21, 2019 by Jagoinvestor

Update : As pointed by Ranjan, there was a mistake in the analysis about the paying term of the policy, I have corrected it now. Please re-read the analysis.

If you like the article : Stumble it and Buzz it

Today we will talk about the market product “Jeevan Varsha”, If you are a regular reader of this blog, by now you must have gained enough knowledge on how to evaluate a product like this, if not then go ahead and see.

Jeevan Varsha

JEEVAN VARSHA

You can see the features in detail here . Mainly there are 2 things .

Survival Benefits

10% of the Sum Assured is payable at the end of 3 years.
20% of the Sum Assured is payable at the end of 6 years.
30% of the Sum Assured is payable at the end of 9 years
40% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 12 years.

Guaranteed Addition

The policy provides for Guaranteed Addition at the following rates

Rs. 65 per thousand Sum Assured per year for a policy of 9 years term.
Rs. 70 per thousand Sum Assured per year for a policy of 12 years term

We will analyse the policy for 12 yrs here . We will talk about two things using an example.

1. Returns from this Policy at the End

2. Can we do better than this policy with same amount of premium [ you know we can 😉 ]

Example : Lets take an example of a person 30 yrs, who takes this policy for Rs 5 Lacs and wants to make yearly payment.

Tenure of Policy : 12 yrs
Tenure of Payments : 9 yrs
Sum Assured (SA) : Rs 5 Lacs
Premium : Rs 78500 (calculated adjusting Mode rebate and High Sum assured Rebate)

Method of calculation of Premium

Total Annual premium for 30 yrs old for 12 yrs policy = 165.30
Mode Rebate of 2%
High Sum Assured rebate of Rs.5 .

So Total premium = (500000/1000)*(165.3 – 5) * .98 = 78547.0 (So i took it approx 78500 .

In Case of Survival , he will get

In 3rd Year : Rs.50,000 (10% of SA)
In 6th Year : Rs 1,00,000 (20%)
In 9th Year : Rs 1,50,000 (30%)
In 12 Year : Rs 6,20,000 [2,00,000 (40%) + 4,20,000 (70 for per 1000 for 12 yrs , 70 * 12 * 5,00,000/1000 ]
Returns from this Policy at the End

Now how do we calculate the returns from this policy for this person. There are two way (Models) of doing this . One way is that we can just add the amount of money he receives from the policy and see how much total money he gets at the end of 12th year.

The other way is to assume that he is investing his money (which he gets at 3rd , 6th and 9th) year somewhere , so that he can get it at the end of 12th year (this way is a better way of calculating) .

First Model : Amount is just added

Total Sum received = 50,000 + 1,00,000 + 1,50,000 + 6,20,000
= 9,20,000

Second Model :

Amount received is invested @8% such that he recives it at 12th yr . (for 9 yrs , 6yrs and 3 yrs)

50,000 after 9 yrs : 99950 [ 50,000 * (1.08)^ 9 ]
1,00,000 after 6 yrs : 158687 [ 1,00,000 * (1.08)^ 6 ]
1,50,000 after 9 yrs : 188,957 [ 1,50,000 * (1.08)^ 3 ]
6,20,000 : 6,20,000

Total = 99950 + 158687 + 188,957 + 620000
= 10,67,594

We have not consider Loyalty additions and lets us see what are the reasons?

Bonus’s and Loyalty additions are not guaranteed and thats the reason you cant claim it as entitlements. These components are not backed by the sovereign guarantee that extends to the sum assured and guaranteed additions components.

In the (unlikely) event of Company going insolvent, you’ll only be entitled to the sum assured, at the time of death or on maturity, and the guaranteed additions thereon.

This applies to any Insurance company with products giving Loyalty Bonus as one of the components.

Now lets calculate the CAGR return from this policy, We have to use annuity formula for it for 9 yrs and then simple compound interest formula for 3 yrs. The formula would be
A = [ annuity part for 9 yrs] * [compound interest part 3 yrs ]

A = [ P * [{(1+i)^9 – 1 }/i] * (1+i) ] * (1+i)^3, where

A = Total money he accumulated till now .
P = yearly Premium (78,500)
i = CAGR return which we want to find out .

What have we done here?

The person we have calculated annuity returns for first 9 yrs (because he is making the payments for 9 yrs), then he does not pay anything for 3 yrs, so we have calculated compound interest for next 3 yrs. It may be a bit complicated to understand i know.

For First Model

The value of i which satisfies this equation is 3.3%, Yes you read correct. But this is not a good way of seeing things, so lets look at Second Model.

>>> (78500 * (1+.033) * ((1+.033)**9 – 1)/.033)*(1+.033)**3
919262

For Second Model

The value of i which satisfies this equation is 5.1% . This is the true representative of returns .

>>> (78500 * (1+.051) * ((1+.051)**9 – 1)/.051)*(1+.051)**3
1060497.7183573653

thanks to “Raja” for correcting my calculation

Which model is more better?

So lets take the Second model as the standard model for evaluation, So we conclude that returns from this policy would be around 5.1% considering

Consumer is smart enough to invest the proceeds again into some debt product using which he can get 8% returns .

Note that this return is considering there is no Loyalty Additions because they were not assured.

Total payment in 12 yrs was 12 * 79,000 = 9.48 lacs and at the end of 12 yrs he gets

9.2 Lacs (First model , 50k , 1 lacs , 1.5 lacs and 6.2 lacs, not reinvestment)

11.78 Lacs (If proceeds are reinvested)

Some policy lovers would argue i am not considering Insurance and tax benefit part.

Regarding Tax benefit : We will compare this product with PPF, Mutual funds and Term Insurance and they also have 80C benefit with them, so tax benefit is something common with all, so there is nothing special with this policy regarding Tax benefits. For Insurance I will cover it in next part which we will discuss.

Can we do better than this policy with same amount of premium

Let us first understand the Insurance part.

The sum Assured is 5 lacs, so if a person dies before 3 yrs, he gets 5 lacs, if he dies after 3rd yr, he will also get the Guaranteed additions. So the maximum a person can get by dying is in 12 yr, in that case he will get 9,20,000 (50k, 1 lacs, 1.5 lacs, 2 lacs + 4.2 lacs GA, No loyalty additions in this case).

So lets be graceful and say that this person will get 9.2 lacs in case he dies.

The first thing to note here is Insurance cover, I don’t know what will happen to the family of this person if they get 9.2 lacs as Insurance money. If a person has the ability to pay 78,500 per Annam as premium, a wild guess for his Insurance cover is around 30-35 lacs at least. So the Insurance cover is not enough

Now lets see, what I recommend for this person who pays 78,500 per year to take care of his Insurance of 9.2 lacs.

So a person who pays 78,500 per year, can divide his 78,500 yearly payment into two parts, For insurance and Investment separately. You know what i would suggest, its simple Term Insurance and Investment in PPF or MF’s

Read Importance of Insurance (Term Insurance)
Read about Mutual funds and how to choose them

Let us first take care of his Insurance part, though he is covered of max 9.2 lacs just for 12 yrs, we are not that uncaring in nature to under-insure him, we understand importance of Insurance and his Family needs and the tenure of cover should be 25-30 yrs, not just 12 yrs, His Insurance requirement is around 30-40 lacs and we will provide it anyhow, even if the investments are to be compromised .

So we will try to provide him 35 lacs cover for 30 yrs.

For Defensive Investor

Insurance

Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)

Investments

So he is left with 68,900 (78,500 – 9,600), for his investments. If he invests this in PPF (though there is limit of 70,000, lets assume he can do it). he will get around 14.12 lacs (annuity formula) at the end of 12th year.

He can then take out 1.73 lacs out of this to fund for his Insurance premium for next 18 yrs left, still the amount left would be better than the Jeevan Varsha. The other alternative is to keep the money in some Fixed Deposit and keep using the interest amount to fund Insurance premium for next 18 yrs.

There can be other ways of doing it, but the main point is that we have done better than Jeevan Varsha in all respects.

This investor can also use balanced funds for investments.

For Aggressive Investor

Insurance

Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)

Investments

He can invest 68,900 yearly (5741 per month) left in Equity Diversified Mutual funds using SIP every money month in max 3-4 mutual funds.

He should expect to get around 12% compounded returns over 12 yrs , and your money should grow to 18.5 lacs (12% is again not guaranteed , its not based on Historical returns )

Summary and Notes

We have seen the policy from a broad level and see its main components, we have not seen small details, because they are not significant enough to change the views anyways. We have seen how its too complicated and provides returns which are less than what you can easily get in PPF.

Conclusion

Term Insurance + (MF or PPF) is a great combination, its easy to understand .The main this is to first Insurance your self Sufficiently and then think about investments.

That’s what i had to say for the day, don’t forget to recommend this blog to others so that they can also benefit. Also be sure to follow me on twitter here in case you are on twitter.

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Disclaimer : The views on this article are my personal. All the things discussed on this article are for learning purpose only. This blog will not be responsible for your investment decisions. There may be some mistakes while calculations, so please do your own calculations for taking any decisions. thanks

What is mean by Risk Appetite? What determines Risk-appetite?

Posted on February 19, 2009July 21, 2019 by Jagoinvestor

Have you heard the word “Risk Apetite”?

You might have heard this word from your mutual funds agent, your Ulip agent, your stock broker, from analysts giving tips or any other place, we hear the word and then we feel we understand it. may be you understand it, But how do you define it?

risk appetite

One of the reader asked me to include this in my article and it seemed a good idea to me. Before writing this article, I had a good understanding and explanation of “What is Risk-appetite”? but instead of using my words I thought it would be a good idea to surf the net and try to find some material on it to help it write article. As expected, each one was totally correct, but not easy to understand by common public.

So at last I thought I should write it the way I see it and feel it. One of a simple funda I apply in my life is “if its complicated, its not worth”, So let me start this small explanation.

What is Risk appetite?

Risk appetite is the amount of risk you can take on your investment. It is the point till which you feel that you should be in the game because still in the long run you will be rewarded finally. Till that point there will not be enough change in your mental state.

The moment it reaches a point from where you feel like getting out is the best thing you can do, That is the point where you accept that you were wrong at the time of investment. that’s your Risk appetite point. Now this is for a situation where you can not decide in advance about your risk.

Lets see a Psychological aspect of this, When you see your money increase or decrease it has direct relationship with your emotional state. If your money keeps increasing, you will feel euphoria and get excited, you will be on top, and when you see it decrease or going down day by day. Our emotions guide us in our life, and they are very helpful in your financial life (to determine risk).

Lets see an example :

Ajay and Manish invested 100 in Share A, After some days the value dropper to 90, at this point both were calm, and accepted that this happened because of market volatility and its totally normal. After some more days price went down to 70. At this point Ajay thinks starts feeling oohh.. and oucch.. in his stomach.

This is the point where his emotional pain increases to a point where he can no longer stay with this investment. That’s the risk Appetite for Ajay. whereas Manish is not affected that much, still he can take loss of 20 more, only where prices drop to 50, he will feel jitters.

What determines the Risk-appetite?

Risk Appetite is determined from many factors like Your Expectations, Your current Situations and your past experiences.

Your Expectations

You risk appetite has to be proportional to your expectation. If you want more you Will have to take more risk.

In the above example, Ajay will exit the investment and take Rs.30 loss, but what if Shares drop to 60 and then starts moving up and up and finally reaches 130. Who will make profit. The person who had more risk-appetite.

Your Current Situations

Your current situations determine your risk appetite, If you are sound financially and can afford to loose more, you can have high risk appetite and vice versa. A person with a family to support will have less risk appetite than some one who is is totally independent and has all his salary to spend on his own.

Your Past Experience

Obviously, what happened in past with you in different situations will determine your future decisions. People who lost lot of money by investing in Jan 2008 will now have less risk-appetite, because next when they invest there money somewhere, they will get panicked easily by a small drop and hence may get out fast.

Where as a person who made great money in 2003-2007 bull markets will have high risk appetite.

I personally like Equity a lot, the reason may be because I want to make lots of money fast (expectations), I can afford to loose some money currently because of less responsibilities (current situations), and because I have made some (very small number) of quick profits (past experience).

What is good? High or Low Risk Appetite?

Its a personal thing, There is nothing like good or bad. Its a subjective matter. At last everything boils down to “You get what you wanted”, It must give you emotional satisfaction and joy.

There are people who are fine with 9% return per Annam and there are people who are not even satisfied with 20% returns.

What is Risk Factor of a Product?

Many people do not understand what is there risk appetite, I have friends who invested in Dec 2007 in ELSS funds, and cried a lot after it went down by 50%. The reason was they never understood the risk factors. I also saw my investments drop to same levels, but my mental state was not affected because I knew that it was possible with mutual funds and before investing I had accepted that if it happens, Its fine.

Risk and returns are always proportional. If A gives more returns than B, than A has to be more risky than B.

Generally people choose a product which matches there return expectation and then compromise with the risk and then later when there is loss more then there risk appetite, they cry.

The better thing would be to choose some thing which matches your risk-appetite on risk side and then accept that you deserve the returns provided by the product.

I know people who want more than 12% returns and also don’t want to see there investments see any negative returns ever. they are totally foolish to expect this. This will not happen.

Also I know people who are ready to see there investments dip by 30-40% with happiness but they only invest in PPF or bank FD’s, these people are bigger fool than former one;s, by not utilizing the equity power.

I hope you got all of your answers. If you still have any query feel free to ask us. You can leave your doubt in the comment section.

The Chemistry of Equity and Debt

Posted on January 28, 2009July 21, 2019 by Jagoinvestor

Following is a small Table which discusses the Equity and Debt allocation for your Investments . (Click on the chart to enlarge it). It will tell you how Equity and Debt should be used for long and short term financial goals .

It has two parameters .

1. Importance of your investment goal (Left Downside)
– Low : Buying an a/c for you car , Going for a vacation .
– Medium : Buying a Car , Saving for a second home
– High : Retirement , Child Education , Family health Related things , Down payment for Home Loan .

2. Time Duration of your Goal . (Upper Right)

– Short term : 1- 2 years
– Medium Term : 3-7 years
– Long Term : 8+ years

Basic Idea : It is based on the following facts .

– Equity is extremely risky in short term
– Equity is highly rewarding in long run with almost no risk
– Debt is safe always
– Debt eats away your money purchasing power.

So on based of these observation. Your Equity : Debt allocation should be based on both parameters of Importance and duration of goal , not just one one them

Some Examples

Example 1 : Ajay wants to invest 1,00,000 for his brother Education in next 1 year .

His Action : This is extremely important thing and cant be risked with , also its a short term goal. Equity should not be used . He should invest in anything giving him pure protection of his money (even though he does not get high return) . A plain FD for 1 yr will be good enough .

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Example 2 : Robert want to save some money for his house down payment in next 4-5 yrs .

His Action : As this is an important thing with time goal of medium term , His investment should be mixed in both Equity and Debt . He should invest 35-40% in Equity (SIP in mutual funds) and rest in Debt products like Tax FD’s and Debt funds% .

Alternative : He can also choose to invest his money Balanced mutual Funds (as they have mix of both Debt and Equity built in)

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Example 3 : Ankit wants to retire in next 25 yrs .

His Action : Now this is a important thing , with a goal tenure of around 25 yrs . There is no reason why Debt must be involved here at all . The matter that Equity is risky does not apply here its true for short – medium term , not for Long term like 25 yrs . (probabilistically only , If you are extra unlucky , what can one do) .

He must invest 50% in some good 3-4 Equity Diversified Mutual funds though SIP route and and he can invest 50% of his money also in some very good fundamentally strong mid caps and large caps stocks directly .

Note : Understand that , your definition of “Importance of Goal” and “Duration” depends on your situation , For me buying a Car is “Not Important” ,whereas for some one with a family of 4 and requirement of often going places can be “Important” .

Review of Jeevan Astha Collections

Posted on January 24, 2009July 21, 2019 by Jagoinvestor

Few days back I had talked about “why an investor should avoid Jeevan Astha Policy”

But looks like Indians have developed unshakable belief and trust in these companies. Let us see some statistics about the policy.

review of jeevan astha collection

A report from Economic times (Thursday, 22nd Jan 2009) says

“Collections for the policy which closed on Wednesday is expected to cross Rs.8,000 Crore. Some insiders say that collection could go even higher. Although the corporation had said that it targeted collections of Rs.25,000 Crore this was seen as a marketing gimmick not a real target.

– A sports person is understood to have put Rs.35 crores.
– A leading Film actor has invested Rs.8 Crores.
– A little known business family has invested Rs.50 Crores.
– Insiders day that over thousand of policies are over Rs.1 crore plus.

The policy has helped to bring LIC’s flagging mark ship back on the track and has enabled several offices in metro centers to achieve there targets for whole year.”

Despite the success the scheme has some limitations. Jeevan Astha is more of a bond and less of an insurance policy. Although the sum insured is five times the premium in its first year, the cover declines to 2 times in the second year. Smaller investor who were not all that savvy in reading the fine prints were mis-sold the policy promising returns of 10%.

My comments :

Goodwill and trust is the biggest thing, especially in country in India where people are not not much educated and can not take much informed decisions.

I can imagine SBI failing or running with public money, but not LIC (pun intended). That’s the kind of faith and trust in India. Which is fatal.

It may make sense for a filmstar or a sportsperson or a big business family to put there money in this kind of Policy, because there 10 crores will become 20 crores in 10 years (10 crores in 10 years is the return), and I am sure even if that is 7% CAGR return, its a good return for them as 10 crores is a big money. But we have to see it as a small investor point of view and goals.

A small investor who invests 10,000 or 50,000 in it and get double of his money after 10 years.

I am not sure if he is getting any return at all when you consider 6-7% of inflation. He is just getting his capital back with almost same purchasing power.

I come from a very small town in UP and I am sure that it represents India when you see per capital income, education level and living standard. And people there are not ready to hear anything other than LIC policies and FD’s of SBI or some other nationalized bank, will a small percentage having heard of Mutual funds or ULIPS even term insurance etc.

This is the story of India.

When millions of uninformed and unrealistic investors come together and put there small money together in these kind of polices, its bound to generate thousands of Crores of Rupees.

But I am sure of one thing, who ever invested in these kind of policies will get guaranteed returns, but I am not sure if he will get guaranteed and benefit for there investments when you take it for 10 yrs period. People investing there money in this policy are going to double there money in 10 years to buy something which will more than double in price in 10 years.

Fear is an excellent thing to take advantage of, when financial markets are down heavily and thing are looking bleak in short term, Anything with guaranteed “tag” will act like a magnet to hard earned money.

I am happy to not invest in anything like this and do not want my money to double in 10 years.

Jago Investor, ab to Jago !!!