This post will teach you how to take advantage of different products tax rules keeping in mind your income tax bracket. Different products can yield different post-tax returns for people in different tax bracket. FD’s return can be 7.2% post tax for you, but may be its 5.6% for me 🙁
Lets take an example to understand this post.
Two of my friends Ajay and Robert asked me what should they invest in for 2 year. They have Rs.1,00,000 to invest.
You must be wondering why did I suggest different products to them? Both have same risk-apetite, Age etc.
The answer lies in there tax bracket. The post tax returns depends on your tax bracket too. Lets see how.
Ajay Case
Ajay does not earn much, His annual income is less and he falls in 10% bracket.
Tax treatment of FD’s interest : Returns are added to your income and then its taxed as per your tax slab rate.
Now it means that tax on FD’s for him would be just 10%. Considering 8% interest.
Interest Received = 16,000
Total Tax paid = 10% of 16,000 = 1,600
Total Return = Rs 14,600
Robert Case
Robert earns well and falls in 30% tax bracket, hence FD will not be best for him, He will have to pay 30% tax on the Interest for FD.
Tax treatment for FMP’s : For Long term capital gains (more than a year), the returns from FMP’s are either taxed at 20% after Indexation or 10% without Indexation
Assumption : Lets day FMP’s provide indicative returns of 9% and lets also assume that they actually provide that return. then
Note : I have not considered tax after indexation, please do it yourself. read this, Anyways it will be more than what he is paying without indexation.
you might think that Ajay could have gone for FMP’s too. The returns are almost same and tax is also same, But you have to realise that FMP’s returns are not guaranteed ,they are just indicative.
Also FMP’s carry Default risk , then why to take extra risk, The only advantage he would have got is .5 or 1% extra returns but at the cost of the risk, which is not worth.
Why FD’s were not better for Robert?
Now this you know , obviously the tax to be paid on it would have been 30% as Robert tax bracket is 30% and hence he might have paid 30% tax on the returns from FD’s
Conclusion
So now you understand that a product can yield different post-tax returns for two people in different tax bracket
So when you do your investment planning, you must take these small details about tax, If you choose your investments considering your post-tax returns, you can make much better decisions, how ever this should come after an investment passes the 4 most important aspects of investments and GFactor basis .
I have started active blogging on my Technical analysis and options blog, I have suggested to go long in Satyam, Please read it.
Does it makes any sense to buy “Return of Premium Term Plan”?
The one-line answer is “NO – it does not make sense”
A “Return of Premium Term Plan” or TROP as its called – pays back all your premiums at the end of the period, whereas the plain term plan doesn’t return back anything. Before we get into the analysis further, I want you to know why these return of premium term plan came into existence!
Why the Return of Premium Term Plan came into existence?
Term plans have become very popular in the last few years. We are seeing so many advertisements screaming about term plans importance. However, a lot of investors who don’t understand term plans fully, still feel a pinch that their premiums get “wasted” if nothing happens to them.
They equate “paying premiums” as “losing premiums” if they dont die. They compare it with an investment policy (read traditional insurance plans) where they get back there a sum assured towards the end of the policy.
Insurance companies sensed this behaviour and they introduced something called “Term Plan with Return of Premium” which can now proudly tell customers that they have nothing to lose. They get claim money on death, and if they don’t die, they get back all their premiums paid. Many investors who do not understand the time value of money concept fall for a product like this, as to human mind “getting back all your premiums” sounds very attractive offer.
Now, let’s talk about why it does not make sense as a product.
Return of Premium Term plan has an extremely low return
The premium for the TROP (return of premium term plan) is higher than the plain term plan and it can be 2x-3x times the normal premium in some policies.
So basically, you are paying an extra premium for getting your premiums back after 30-40 yrs!
Let’s look at an example of a 30 yr old male, who wants to buy a 1 crore term plan till 60 yrs of age (for 30 yrs tenure). In which case the premiums are as follows (Example is of Max Life Term Plan as on 21st Dec 2020)
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Type of Plan
Yearly Premium
Details
Simple Term plan
Rs 9912
One has to pay Rs 9912/yr for 30 yrs for Rs 1 crore cover. You don’t get back anything at the end on survival
Return of Premium Term Plan
Rs. 17,969
One will have to pay an extra amount of 8057 for 30 yrs (apart from 9912) and will get back Rs 5.01 lacs (this is all premiums paid excluding the tax amount) at 60th year
[/su_table]
If you look at the example above, you can see that in both the plans you are paying Rs 9912 for the Rs 1 crore cover. Only difference is that in second policy, you are paying an extra Rs 8057 to get back Rs 5.01 lacs (excludes the taxes part) at the end. This is the only difference between the two versions.
So internally, the term plan with return of premium is simply a bundled product of a normal term plan and an investment policy. If we ask what is the return of this investment policy where you are paying Rs 8057 per year and getting back Rs 5.01 lacs after 30 yrs.
The answer is 4.05% CAGR.
Yes, its barely above saving account rates and a little below a normal fixed deposit interest.
I did the same analysis for the tenure of 40 yrs and 50 yrs policy (read why you should not take such a long tenure term plan) and the IRR return was 3.92% and 3.00% respectively, which means that if you buy the policy for a longer tenure, the return gets lower and lower and the product becomes even worse.
Below is the IRR return calculated in an excel sheet for your reference
Note : The above calculations are done in Excel for just one company plan, however similar kind of numbers are expected from other companies return of premium term plan. Please do IRR calculations yourself if you looking at other companies plans.
Return of Premium Policy ties you up with the product
What do you do, if you want to stop a “Return of Premium Term plan” in-between? Let’s say after 10 yrs?
It will not be as simple as a normal term plan, because, with the return of premium policy, your mind will tell you that you just have to continue it for another 20 yrs and you will get back all your premiums. Very smartly, the insurance company has converted a pure term plan into an “investment policy cum term plan” with very bad returns.
so the better alternative than a “term plan with return of premium” is to buy a simple term plan (here are 20 checklists before buying term plan) and invest the extra amount in another investment products like PPF, FD’s, Equity mutual fund or debt mutual fund and you will have better flexibility and returns.
Check out this video from Subramoney talking about this product
What happens if you stop paying a premium for Return of Premium Term plan?
There is an option to get a surrender value if you stop paying the premiums in between. Just like traditional plans, there is the concept of “Guaranteed Surrender value” in these kinds of policies which comes into picture once you have paid 3 yrs premium. However, the amount you get back is a fraction of what you have paid. There is a percentage assigned for every year which tells what part of the premium paid will you get back if you surrender the policy in a year. Below is a snapshot of the chart taken from Max Life Brochure
So, as per this chart – if one wants to surrender the policy in 10th year, they will get back only 55% of the premiums paid (excluding premiums).
Some other Info
The TROP gives you income tax benefits as per sec 80C
There is an option to pay premiums on a monthly, quarterly or yearly basis
There is also an option for limited pay (pay in 10 yrs) or in one single premium
Conclusion
So TROP is a very carefully designed product which favours the insurance company but makes the product look very good and works on the psychology of the investor. Better stay away from it. The best idea is to buy the simple term plan with the lowest premium.
If you have already invested in this kind of plan, then you need to evaluate what will make sense for you!
Do let us know if you liked the article and does it make sense to you? Share in the comments section!
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 .
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
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.
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.
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 !!
A Rose can be of more value than a Dress to your Wife or Girlfriend on Valentines Day. Even though that Rose was very less in Price compared to a Dress.
Today we will discuss things about investment products from a different perspective – Value and Price.
What is Price and Value?
Price : Price is the amount of money needed to purchase something.
Value : Value is the worth or Importance of something.
An Example
We pay Rs.8/Kg (20 cents/Kg) for Salt as part of our Groceries, Will we stop using it if its price rises to Rs.100/Kg or even Rs.400/Kg. May be not !!! Why ? Because the Value of Salt even then will be Very high, compared to the price we pay for it. Considering that, its a very cheap product.
As a personal Example, I recently bought a second hand mobile (Nokia 6610) to keep at my home as a land line just for Rs.800 (worth 8,500 at time of buying, excellent condition). The price i paid for it was much much less than the value it would provide to me. So i consider it as one of the best investments made till date.
By cheap I mean its Price vs Value is very high.
Cheapness (P) = Value provided by P / Price we pay for P.
The same way there can be things for which we pay high amount, they don’t have high value for us.
Please understand that it depends on individual where something is of great value or not. For example for me, an expensive Mobile set with 134 different things costing Rs.10,000 is low in value and high in price. I don’t buy things like that, but a digital Camera worth 12K a value buy for me (because of my interest in Photography)
So, in short we can say “Price is What we pay actually, and Value is what are ready to Pay”
We understand this in our daily Life, but we forget this simple rule when it comes to money and investing. Most of the time we invest in things which we should not because of this basic rule, but we are carried away by emotions or simple stupidity.
Watch this video to learn more about the difference between Price and Value:
Let us now see Some of the products which are really High Value, Low price
“How much are you ready to pay as yearly premium for Rs.50,00,000 Cover for 25 yrs tenure?”.
This is a question I ask a lot of my friends in there 20-30’s. And I am amazed to see that even with a miser mind they tell me at least twice the amount what it really costs. Everyone said 2k/month or min Rs.20,000/year. The actual cost is not more than 13-14k, in fact the best price is 10,112 for 30 yrs tenure from AEGON RELIGARE Life Insurance (Click Here to read more on this).
This clearly shows that it cost way less than the expectations of people and what people are ready to pay for it. The value offered by Term Insurance is more than what it costs.
Endowment Policies :
I am not sure if its my hatred for Endowment Policies or they really deserve my criticism every time, Or may be there are both the reasons. We pay so heavy price for Endowment polices and the value provided by them is almost nothing. Its a product designed for Wealth Creation, but wait … not for investor but for the Insurance company. (Click here to read more on Badness of Endowment Policies)
The other products I would rate in category of Cheap and Expensive are :
Good Stocks in low markets (Like current markets, Buy Reliance, Infosys and Jaiprakash Associates for Rs. 1,00,000 each today and your retirement planning is probably Done !! If you are around 25 and retiring at 60)
An interest free loan given to a close or a very good friend. (even if you don’t get any interest, you get some emotional satisfaction or valuable relationship which is more important).
Expensive financial products:
Endowment Policies
Bank FD (at the time of High inflation)
NSC
Most of the stocks in High Markets ( not true for all stocks but most of them) – A high interest loan given to someone whom you don’t trust much. (Even if you get good interest, there is risk of loosing money)
Every time you invest your money its important to understand the price of it and value of it. If you find that its cost is less than what you are ready to pay, consider it cheap and go for it and not in the other case. Price and Value depends on Situation, time, age and other factor, don’t forget it.
Most of the successful investors become one because they invest in stocks which are trading at price lower than they deserve, which market eventually finds out later. Currently In this markets Reliance is trading at 1400 (Oct 11, 2008), the it was trading at 2300 before a month, and has lost almost 40-50% in a month.
Considering it is going to start its OIL exploration and other things, its a good stock to own and at an excellent price. Its price is less and its value. Which makes it a good investment regardless of what is going to happen next month or next quarter. Sooner or Later it will turn out to be a good investment and reward its investors.
Same is with Jaiprakash Associates, ICICI Bank, DLF, Ranbaxy and other similar blue chip stocks.
Summary
When you analyse some product, stock, mutual fund, Home (Real estate) or anything for investment matter or even for general shopping, always consider value and price for it.
Disclaimer : Any stock discussed on this article is not a recommendation. Please analyse it yourself and then invest. It can also result in losses.
What do you think about this article? Do you like it?
“You only have to do a very few things right in your life, so as long as you don’t do too many things wrong.” – Warren Buffet. What should be your motive as an investor? – To earn great return on your investments with minimum risk, right?
We generally take good amount of risk to get more return, and many times we get it 🙂 … It might happen that if we make good profit 2 times , we make 1 loss also because of the high risk we take. And we think its fair getting the losses, and you are right if you think so. We cant get profit always, if we take risk we have to accept losses.
But is it a good strategy?
Its questionable, lets explore on this topic today. Lets try to find answer of a question, what is better?
1. Taking high risk for high return at the cost of losses some times.
2. Avoid getting losses at the cost of just moderate return and not great return.
Case Study :
– Robert do not understand much about investments, but still invests in high risk high return instruments like shares and risky mutual funds. He invests Rs.1,00,000 for 5 yrs and gets returns of 50%, -35%, 30%, -20% and 45% for 5 yrs.
– Ajay does not take much risk and invests in something which gives him better returns than conventional FD’s or PPF, but has risk component much lower than Robert case. he earns return of 8%, 17%, -10%, 20%, 15%.
Observation : A fixed deposit will give similar kind of returns 1,00,000 * (1 + 8.5/100) ^ 5 = Rs.1,50,365
Why did this happen?
Getting 0% profit overall is better than getting X % loss after getting X% profit. if you get 40% profit and then 40% loss on your investment of 1,00,000, it will first become 1,40,000 after profit and then it will become 1,40,000 * (1 – .40) = 1,40,000 * .6 = 84,000, which is a loss of 16%.
So even if you get 40% profit, a loss of 28.57% is enough to wipe out that whole profit earned.
If Robert never got those losses and only profit, his final amount would be Rs.2,82,750. Just loss of 35% and 20% ate way most of it. On the other hand Ajay, who put more efforts on avoiding losses on the cost of getting less return way rewarded more at the end.
The return percentage required to cover the losses is more than then percentage loss.
Watch this video by Harsh Goela. In his talk, Harsh Goela talks about the stigma surrounding stock markets. He clarifies how it is different from gambling and how proper knowledge and avoiding reckless indulgence can yield profitable results.
Learning and Moral
What do we learn from this article and the examples above?
The important part of investments are not earning great returns but taking measures to avoid losses. Earning high returns must be secondary goal, the major goal must be to avoid losses at any cost though we have to compromise on moderate returns. Because one loss is enough to wipe out major portion of your profits and the hard work you take to earn great returns.
I would be happy to read your comments or disagreement on any topic. Please leave a comment.
They don’t understand that insurance gives financial security to their dependents in case of there death, rather they see it as the last benefit provided to them and the most important thing for them it that they get the money-back in case they survive the tenure of Insurance.
Common people’s mindset about life insurance
People are ready to pay higher premiums to Insurance Companies for a policy which gives them death and survival benefits like Endowment plans and Money-back plans.
People are not ready to pay premiums if they don’t get any thing in case of surviving the tenure and that’s the reason why Term Insurance never became popular in this Country. That’s also the reason why many people are under-insured because of the high premium, they cant pay for higher insured sum.
Many People even don’t know that Term Insurance exists, the reason for that is their insurance agent never told them about it, because they get a very little commission on it unlike Endowment Plans.
Life Insurance is to provide a good enough cover to dependents in case of death. This is the only target for life insurance.
Watch this video to know the difference between life insurance and term insurance:
Case Study
——————-
Rajesh is a salaried person with a salary of around Rs 20000 per month, He has 2-3 dependents like his parents and wife.
Rajesh can afford a maximum of 10% of his salary as an insurance premium outgo in a year.
So Rajesh takes Endowment plan of Rs 10 lacs for 20 years in 2005.
If he dies between 2005 – 2025, his family will get Rs 10 lacs.
If he survives till 2025. He will get Rs 10 lacs.
Monthly premium = Rs 2,000
Total premium in a year is 24,000
Cover: Rs 10 lac
There are some points to consider here.
He is highly Uninsured, Rs 10 lacs is very less amount to get covered. He needs at least Rs 25-30 lacs as cover, as he has financial dependents.
The premium of Rs 2,000 monthly or Rs 24,000 yearly is not a small amount at the moment and adds to his financial burden a lot.
In case of survival, he gets Rs 10 lacs but in 2025. Considering inflation at an average of 5%, the current value of that amount will be Rs 3.5 lacs.
This means in 2025 the value of that 10 lacs will be very less and considering that after 20 years Rajesh will be earning very good money and Rs 10 lac at that time will be a small amount for him, may be less than what he may be earning in a year.
It means It does not benefit him a lot after 20 years.
He could have solved all of his problems if he would have taken term insurance instead of Endowment Plan …
If he takes Term Plan, he can get a lot more cover in very less premium and can invest the surplus money in much better investment avenues like Diversified Mutual funds or Equities.
He can take a term plan of Rs 30 lacs for 30 years, with an annual premium of 9,000 per year. (including service tax, approx).
So instead of Rs 24000 in a year, he can just pay 9,000 can be covered for 30 lacs and that too for 30 years.
He can invest the extra 15,000 (24000 – 9000) in diversified mutual funds with good track record for the next 20 years through SIP every month or yearly lump sum.
Equities in long term outperform all the investment options, In the last 10 years HDFC tax saver has given around 43% CAGR … that’s the magical returns one can expect … SBI MAGNUM Taxgain has done much better …
Let be on the safe side and be pessimistic and consider returns around 18-20% CAGR for the next 20 years.
The investment will be worth
Rs 16 lacs at 15% return
Rs 22 lacs at 18% return
Rs 28 lacs at 20% return
Rs 94 lacs at 30% return (less chance)
Rs 3.14 crore at 40% return (very less chance)
remember that this is for 20 years and not 30 years. In 30 years it will be much much more … for eg at 20% it will be 1.77 crores and 13 crores at 30%.
If we consider this case :
when he has taken Term Insurance He is in profit at any point of time
– If he dies early his family will get 30 lacs + some investments
– If he dies late , his family gets 30 lacs + his investments which has grown a lot now.
– If he survives , his investments are enough 🙂
The biggest thing to consider is that his Family is covered with good amount in case of his death, which is the main factor and sole idea of Life Insurance.
There are many common myths about Mutual funds. Common investors do not apply their thinking a lot of times and agents/sellers of products a lot times are successful in taking advantage of this and cheat them .
Lets see some of the common myths associated with mutual funds below .
1. A Mutual fund with low NAV is better than other MF’s with high NAV.
This fallacy is due to the fact that investors perceive the NAV of a mutual fund (MF) as similar to the price of equity shares. Comparison of NAV of MF unit and Share price
NAV = (market value of all the shares held in the portfolio + Cash – Liabilities)/ total number of units
Share Price = combination of company’s fundamentals, demand-supply, public perception about the company + other complicated things
It is Funds Quality , Fundamentals and values that determines your returns and not NAV , its just the “book value” of the unit.
Example : Consider Fund A with NAV Rs 100 and Fund B with NAV Rs 5 . Both has corpus of Rs 10,00,000, Fund A has good fundamentals and is better mutual fund in terms of strategy compared to Fund B. After 1 year say their return is 40% and 30% as expected. So the NAV for A will be 140 and for B will be Rs 6.5 and fund A will give better returns compared to fund B.
The point to understand is its the strategy and the asset allocation which matters. Low NAV can only get you more units and nothing else 🙂
2. Mutual funds with good Past Performance are best choice
This is a common misconception among the Mutual funds investors that funds which have performed very well in past are the best choice . People believe that if a ABC mutual fund has given 60% return in past year and XYZ has given 45% return , then ABC is a definite choice this year also.
They should understand that performance over 1 or 2 years have very little to say about them. They must analyse performance over 4-5 years atleast to understand how a mutual fund has performed.
You can watch this video given below to know more about performance analysis:
3. NFO’s give better returns
NFO’s are more risky than the existing mutual funds as they don’t have no track record to compare. There is no advantage with NFO when it comes to investments , they have no extra magic. A NFO must be generally avoided until they have very strong strategy and unique and strong idea.
4. Putting money in lots of mutual funds will help
As a rule of thumb , no one should have more than 5-6 different mutual funds . and even those must be different kind of mutual funds . People buy 20-30 mutual funds and don’t see that all of them are of similar nature and with same kind of strategy. All of them have same kind investment portfolio. They should put money in some limited mutual funds and all should be of different type.
So these are the 4 most common myths that every beginner investor have while investing in mutual funds. Once you start your investments in mutual funds there are lot of things you should know about it to maintain a healthy portfolio and generate a good return.
Let us know if you have any query regarding mutual funds by leaving your reply in the comment section.
