Why ULIP's are bad for your financial life.

Flashback...चार साल पेहले...

The row between the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (Sebi) is turning into an arm-wrestling match between two statutory bodies with huge clout. The chain of Sebi's argument goes like this: Life insurers offer unit-linked insurance plans (Ulips), Ulips invest in equity, hence, Sebi wants Ulip schemes registered like mutual funds. IRDA has no intention of ceding control. Since both regulatory bodies have clout, they will eventually work out some compromise.

और अब And Now....

The so-called turf-war on ULIPs that SEBI and IRDA have been fighting has now taken a life of its own. In reality, just about the least important thing is who regulates ULIPs, while the most important thing-or rather, the only important thing-is that investors understand what they are getting into and make the choices that are best for them. I find that there's a great deal of misinformation floating around about ULIPs and why exactly are so called investment - insurance advisors in favour of them.

Perception: ULIP expenses have been lowered by IRDA. Expenses are now down to just 3 per cent for ULIPs of up to 10 years and 2.25 per cent for longer ones. Mutual funds, by comparison, have higher fund management charges.

Reality: The way IRDA has framed the rules, 2.25 or 3 per cent is effectively the average over the entire lifetime of a ULIP. The charges are heavily front-loaded. During the first year, these charges are as high as 40 to 70 per cent. If the customer cannot continue with a policy for any reason, then his real expenses are far higher. And as it happens, a huge proportion of policies lapse during the earlier years. The front-loading has no logic, except to enrich insurers and agents. And fund management charges being lower than mutual funds is a not a full comparison. In mutual funds, total expenses are capped at 2.25 per cent for equity funds and less for other funds. These are not comparable to the fund management charges of ULIPs because ULIP customers also pay premium allocation charges, policy administration charges, mortality charges, and for guaranteed ULIPs, guarantee charges. Comparing fund management charges alone is a joke.

Perception: ULIPs have led to a massive rise in insurance penetration in India.

Reality: Insurance means insurance, in the sense when the insured person dies, his family gets money to pay for food, rent and education. In a country with minuscule social security as ours, the growth of insurance has to mean the growth in the reach and quantum of risk cover for lives. To call a non-insurance, market risk-bearing product such as ULIP insurance and then present it as evidence of the growth of insurance is simply dishonest.

Ulips have been around for several years. The structures are known. Almost every financial newspaper and business magazine of repute has analysed Ulips and shown in detail why investors should avoid them.In themselves, Ulips are not fraudulent; it's just that investors can get far better deals. So this is a classic case of “buyer beware”. If investors insist on buying Ulips, there isn't much more that can be done since there are already ample warning signs in the public space. It is also easy to understand why agents push Ulips - due to huge front-loaded commissions.

Having said that, the mistake investors make, is to confuse insurance with investment. Insurance is a bet you want to lose. Investment is a bet you want to win. 

Two entirely separate intentions. Use two different instruments.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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Image Source: GKtoday.in

Why You need Health Insurance

Consider this : 

In Bengaluru, consultant architect Francis Jackson had to rush to the hospital in January this year as he complained of shooting pain in the abdomen. Sure enough, it was diagnosed as a kidney stone and Francis had to undergo surgery for the same.
The cost of the procedure and stay at hospital was Rs 75,000.

Thankfully he didn’t have to shell out a single rupee, as he was covered under a Health Insurance plan with a limit of up to 3 lacs.

What is Health or Medical Insurance ?
The term health insurance is generally used to describe a form of insurance that pays for medical expenses. It is sometimes used broadly to include insurance covering disability or long-term nursing or custodial care.

To understand it in simple words, you pay some amount of premium every year to a company, and if some thing happens to you, like an accident or if you have to undergo a surgery, the company will reimburse/pay for it, provided the illness is covered under the Health Insurance Plan.


Why do I need a Health Insurance ?
This is the most common thing you can hear from a person who wants to avoid Health Insurance, but its one of the most important part of any financial portfolio or plan. People concentrate on the fact that, what if nothing happens to them, but they fail to imagine the situation when some thing can actually happen.

The human body is a complex thing, and no one knows what can happen in future, even things like accident is not in your hand , you can take try to avoid it, but what about others, what if some car hits you? What if accidentally you fall from some place? It can happen and it does happen, and when you have to pay a hefty bill for the treatment, you will soon realise that its a good idea to get covered by paying a small premium every year, rather than spending your hard earned savings.

Why is Health Insurance more important now as compared to earlier years
Yes , Health care costs have increased many fold in last 20-30 yrs. Also now, more and more young people are complaining of heart and other diseases which were seen in older people earlier. Because of high stress jobs, poor eating habits and other similar problems, rise in the number of cars, pollution etc, the probability of getting some illness or meeting with an accident has increased substantially compared to earlier days.

What can you do..

• Get a good coverage for diseases and surgeries.
• You have to pay the premium annually for which you can plan ahead, set up a Recurring Deposit A/c or start an SIP in a Liquid fund to set aside money for your annual premium.
• You get tax deduction under section 80D up to Rs 15,000(subject to IT Rules)
• You can also go for group insurance(family floater), its ideal for a family with spouse, parents, kids … With group Insurance every one is covered and you pay less premium , also its more advantageous because there are many things which are covered in group insurance and not single person health insurance.
• Do some online research and choose the product.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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Wealth can only be created...........

Hello everybody, A couple of week's back I had an interesting conversation with my cousin who works for a very very reputed IT company in Bangalore. As we were discussing about personal finance, financial awareness and of course this blog, I happened to ask him if he would be interested in writing a guest blog for my readers, to which he promptly agreed.

So, here is what Prabhav has to say about his experience with personal finance:

"Wealth can only be created not earned" something which I recently heard on a financial news channel. How true!

First of all my introduction. My name is Prabhav and I am Ninad's cousin. I am an engineer and not related to the field of personal finance, but I do have a basic understanding of different financial products.

Until I started earning, I did not even know that a concept of financial planning existed. It is only when I was planning my taxes, I came upon this concept.

It was summer of 2008, when I was filing my tax returns for the first time. It was a horrible experience. I was too late to do any tax saving investments as I had not done any for the whole year. Why was I in this situation? It could be attributed to only two things...lack of knowledge and lack of planning.

I had to first get knowledge and start planning so that I didn't end up in a similar situation in 2009. First, I went for advice from my friends and family and asked them how they are doing their tax planning. I was shocked that some of them were in same situation as mine year after year even after working for more than 5 years. Some struggled at the last moment to do tax savings (lack of planning) and some did not bother(worst case of laziness).

Without any proper solution, I started researching on my own. It took me some time to understand that only equity investments can help me create wealth in the long term (it is not rocket science. A simple calculation will show you that). I was intrigued by the concept of SIP. It was  quite simple, as the amount to be invested was small and I could invest on a monthly basis. I also came upon some tax calculators which were quite helpful. Now I was equipped with knowledge about how my investments would flow and also a plan. I had identified the correct amount that I needed to invest every month and started a SIP in a tax saving equity mutual fund. Until then the only tax saving I was doing was putting money (cannot be called investing) in an endowment plan. 

The following has been my investment strategy for last few years:

1.Monthly SIPs in Equity Mutual funds for tax savings.

2.Monthly SIPs for additional investments in MFs and ETFs to meet my financial goals (thanks to Ninad for his help)

3.Monthly RDs to accumulate money for yearly payment of Insurance policies (term plan and health insurance)

Once you get a hold of things, all your investments are quite easy to manage. There is a certain feeling of elation when you see your money grow steadily over the years; your money working harder than you, helping you achieve your goals!!

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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Sketch is sourced from Carl Richards of behaviourgap and is used with prior permission of the creator. It is subject to copyright.

Acche Din aane wale hein (Part II)

Last week I shared a news byte on the outcome of election results. In this post I would like to put forth some of my views, i.e.  from a financial planner's perspective, and what you as investors need to be careful about.

High Returns = High Arrogance

Although it's very much certain that we are in midst of a bull phase in the equity markets, Yes you would be rewarded handsomely in the long run but as a financial planner, I would like to remind you that along with high returns there comes a high degree of arrogance(human behavior), you need to be careful about this arrogance. The best way to travel this path of high growth is to be disciplined, and no better feature than a SIP imparts discipline in your investments allowing you to accomplish your pre-determined Financial Goal.

Beware of Dubious "New" Financial Products:

Historically, it is seen that a lot of भूल भूलैया financial products follow a bull market, beware of such products. Try to understand your need and whether that product is suitable for you and fits your scheme of things(financial plan & risk appetite). Just because a new product is launched its not necessary for you to be a investor in the same. Take a well informed decision and do not get swayed with wonderfully convincing sales pitches.

Aim for Real Returns

Choose the right advisor(to be addressed in detail at a later date)

Taking the help of a financial planner depends on your goals and not really on your income. Whether you earn Rs. 40,000 a month or Rs.2 lakh, you may need professional help if you don’t know how to manage money for multiple goals. Getting the right financial planner can set your money matters on track as he/she will help you fulfill your specific financial goals by telling you the best way to save and invest appropriately (tax efficiently too). But this will happen only if you have the right advisor.

Some tips to keep in mind while selecting the right advisor:

1. Avoid a salesperson

2. Ask for credentials

3. Pay for advice

The markets for now look promising but it will not be free from turbulence. This does not mean you should be focusing only on Equity based products, PPF and other debt products like fixed deposits and debt mutual funds are equally important for the success of your overall financial plan.

Acche Din aane wale hein

It is a historic day for our nation, the largest democracy in the world. The Indian voter has given a thumbs up to the NDA,  BJP has swept the polls and our nation now stands Modi-fied. Following is a byte by Navneet Munot, CIO SBI Mututal fund on what we can expect in the next 60 months from the new Government with respect to our Investments. 

The world has just seen the glimpse of the biggest show on planet earth with 800 million people voting so peacefully. With a man determined to change the destiny of its people at the helm, everyone will see an economic miracle unfolding in years to come. In a world struggling with structural issues, anemic growth and lack of leadership, India is likely to emerge as an 'oasis of hope'.

This is a vote for growth and governance. A country with vast natural and human resources starting with such low base can correct the self-inflicted pain of low growth-high inflation with right policy mix and better governance.

The main agenda of the new government would be to get higher economic growth with focus on creation of jobs and containing inflation. Having witnessed the dark side of external vulnerability, policies will gear towards boosting exports/import substitution. For these three critical goals to be achieved, better governance, fiscal discipline and execution ability would be the keys. Building physical and social infrastructure is essential for increasing productivity of the economy which will go a long way in job creation, containing inflation and make India globally competitive. While legislative reforms may take time, the new government will focus on clearing the execution logjam and creating a feel good environment which can revive the investments. There are several low hanging fruits like resolving the Coal and iron ore mining issues which can have positive consequences. 

After 30-years, we are seeing a single party gaining majority in the parliament. The next PM has a strong belief in the federal structure and can push through the growth agenda to a different scale by working cordially with state governments. People have clearly rejected the "dole out" policies of UPA regime. Fiscal consolidation will have to be achieved with larger focus on cutting the wasteful expenditure particularly subsidies, broad-basing the tax revenues net and moving from a mind-set of 'outlays' to 'outcome'. Both fiscal and monetary policy should be in sync to ensure inflationary expectations are well-anchored while investment climate is supported. Both these goals are inter-twined and not mutually exclusive as the debate goes.

The way bold policies of Mr. Ronald Reagan as President and Paul Volcker as Fed chairman changed the course of US from a country dealing with severe stagflation in late 1970s to a long period of sustained non-inflationary growth and a golden period for investors, something similar can be expected from the duo of Mr. Narendra Modi and Mr. Raghuram Rajan. The parallels are striking.

The global investors have maintained their faith in India story with allocations of over $ 90 billion into equities over the past 5 years. In a world awash with liquidity and so short of investment avenues, India will continue to attract large flows given the relative opportunity and valuation. Spain and Italy whose solvency was questioned 2 years back are seeing their 10-year bonds trading at even less than 3%. However, domestic investors have remained skeptics while Sensex is touching new highs. Having missed the rally so far, the question in everybody's mind is whether India can return to high growth path so soon and is all the good news already in the price?

Our belief is that macro fundamentals have already started bottoming out. There are near term challenges such as fiscal constraints, possibility of a poor monsoon impacting the growth and inflation outlook and stress in the bank's balance sheet. However, a new government has the opportunity to unleash the growth potential by leveraging the structural strengths notwithstanding these near term challenges.

Corporate profit growth in absolute percentage terms and relative to nominal growth has been below the long term trend for last 5-year. Bulk of the profit growth has come from select sectors like consumers, IT and Pharma. Sectors dependent on domestic economy have lagged. This can change with recovery in domestic economy, mainly driven by revival in investment cycle. With relatively weaker rupee and restructuring done during the downturn, manufacturing sector is regaining competitiveness and can benefit from a sizeable opportunity in exports. Given the BJP's manifesto and Mr. Modi's track record, India can be expected to leap-frog in building physical and social infrastructure using innovative technology. He has mentioned that agriculture, manufacturing and services (tourism can see a quantum leap) are the three pillars of India's growth structure and would be paid equal attention. These will create opportunities for a variety of businesses across sectors.

We expect a gradual increase in domestic savings that will be channelized into productive financial assets. The current rally has a potential to gain sustained momentum as the local investors start increasing equity allocations.

Valuations are reasonable as a large section of the market is still using a rear-view mirror rather than looking forward to the possibilities. We expect tremendous opportunities in stock picking with a long horizon as India finally embarks on its "tryst with destiny."

Acche Din Aane Wale Hai (Good days will be here soon).

Stay tuned for key takeaways....coming up next week....

A life stage 30's plan

Yes, for all those who are well versed with Mutual Funds, the tagline for this post is derived from a product of Franklin Templeton Mutual Fund. Having said that, I do not wish to write about the fund for obvious reasons(you can just visit the link for that). The intention of using this tagline is to draw your attention to a bigger picture.

It may be because of my early entry into this financial advisory profession that I have built a healthy and well diversified portfolio aligned to my financial goals, but that was possible only because I took interest in different and new financial products. Yes, I agree that, being in the same profession your awareness is automatically higher, but that should not be a reason for all others who are into different professions to neglect their financial health and take no interest altogether. I have always felt that each individual especially those in their 30's should take some time out to update and take control of their financial health. 

This post will help you build a basic perspective about your own life stage 30's plan

1. Take a term insurance policy:  (I know I have said this before but its never enough)

Buying a term plan tops the list of smart money moves especially if you have dependents. The earlier you buy life insurance, the lower is the premium. It is best to lock in at a young age when you are hale and hearty. More importantly, a person who buys late is taking a big risk till he gets protection. 

If you develop a medical condition later in life, you may have to shell out a significantly higher premium. If the problem is severe, you may be denied the cover altogether. Keep a few things in mind when you go shopping for a term plan. First, the insurance cover should be big enough to generate a monthly income for your family, cover major expenses, and settle outstanding loans. Second, the policy should cover you at least till the age of 60. Don't take a short-term cover of 10-15 years, which ends when you are in your 40s. You need insurance most at this stage of life and a fresh policy will cost you a bomb. Lastly, don't try to lower the premium by mis-stating facts in the form. If you smoke, drink or suffer from a medical condition , don't hide it. It may bump up the premium by a few hundred rupees, but your nominee's claim won't be rejected because of misstatement of facts.

2. Take adequate health insurance:

Health insurance is also cheap when you are young and costlier when you are old. More importantly, the rule about pre-existing diseases makes a compelling case for buying a cover early. When you are young and in healthy, the 3-4 year waiting period is a breeze. Delay buying the policy and you may be afflicted by medical conditions that usually crop up later in life. It's a misconception that the employer's group health plan is sufficient. While these are useful, they do not provide adequate coverage. Besides, if you lose or change your job, you may be rendered uninsured for a certain time.

3. Open a PPF account 

4. Automate investments:

One of the most common excuses for not investing is, "I don't have the time." Days become weeks and weeks turn into months. Get past this stumbling block by automating your investments. For instance, you could start an SIP in a mutual fund and give an ECS mandate to your bank. On a designated day of the month, the money will be invested automatically. Saving time and effort is just one of the many benefits of automating your investments. It also takes emotions out of investing and enforces a discipline an investor may lack. If the money has been earmarked for investment and is debited from your account, you will not use it for any other purpose. I recommend that you opt for SIPs at the start of the month, this induces the much-needed financial discipline

5. Maintain an expense tracker

You have factored in the car EMI, the house rent and the grocery bill in your monthly budget, but have you kept tabs on the itsy-bitsy expenses, such as casual shopping for clothes, eating out, gifting, and entertainment? Most of the time, these smaller expenses go unnoticed even though they take up a large portion of the monthly budget. Studies reveal that discretionary spending can be as high as 18-20 % of young people's income. That's quite a large chunk and could impinge on other, more crucial, long-term goals. A 2011 study by Assocham revealed that almost 35% of the urban youth spend up to 5,000 a month on clothing alone. To plug the leaks I suggest you download this free app on your android smartphone.

6. Set up a contingency fund

It's always good to be prepared for an emergency. This is why I insist all of you to stash away some money that can be accessed at short notice. The contingency fund will come in handy if you are faced with unforeseen expenses, such as a medical emergency or losing your job. The size of this fund depends on your financial situation. Ordinarily you need to put away at least 3-6 months' living expenses for this purpose.

The money need not idle in a savings bank account, earning a measly 4%. Instead, you can put it in a liquid fund or a short-term debt fund. Check if the fund levies an exit load when the money is withdrawn within 6-12 months. There are also flexi deposit accounts in banks, where any sum above a specified limit flows into a fixed deposit to earn higher interest. Your money will earn the interest applicable to fixed deposits and at the same time will be available to you whenever you need it. 

7. Start saving for major financial goals in advance

If the rise in prices of food items is bothering you, here's an even more disturbing statistic. Education costs tend to rise twice as fast as wholesale inflation. Assocham conducted a survey of 2,000 families across 15 cities in India and found that the annual school education cost had risen from 35,000 in 2006 to 94,000 in 2011. Higher education costs are increasing even faster. Five years from now, the tuition fee for an engineering course, currently pegged at roughly 7 lakh, would be close to 12 lakh. In 10 years' time, it's likely to cost around 22 lakh.

The only way to beat this jump is to start saving for your child's education early and a growing number of parents are already doing that. An ET Wealth survey in 2011 found that roughly 63% of parents started saving for their children's education before the child turned 3. Another 9% started even before the kid was born. That's good news, because the earlier you start, the more the time available for your investments to grow. 

Conclusion:

There are obvious advantages of starting early. Most of us know that the longer we stay invested, the greater is the power of compounding. But not many investors realise this simple arithmetic,  most of us have frittered away the early bird advantage. This post is intended as a wake-up call for Gen Y. 

Wake Up!!

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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Data Source: Assocham, ET Wealth, 

Image Source: Google images

You just lost Rs. 4.8 Lakhs!!

It is time for me to take a break this week, but not before I leave you with a very interesting and thoughtful post from Sanjay Matai.

Here it is.............

I am sure you have heard of Moneyback insurance policies.

In fact, I am sure you have bought such a policy.

And, I am sure you don't know you lost Rs.4.80 lakhs by buying that policy.

Want to know how? Here's the answer... straight and simple.

Say you are a 30-year old person and have bought a 20-year Moneyback policy for a Sum Assured of Rs.10 lakhs. Your premium out go would be around Rs.70,000 per annum.

As with any typical Moneyback policy, let us suppose that your policy gives you 15% of the Basic Sum Assured at the end of 4th, 8th, 12th and 16th year. Further, on maturity you get back the balance 40% of the Basic Sum Assured + Bonuses Accrued. 

Thus, you will receive 
- Rs.1.50 lakhs after 4th year, 8th year, 12th year and 16th year. 
- And after 20 years, on maturity you will get Rs.13.50 lakhs (which includes Rs.4 lakhs as 40% of sum assured + bonus of maximum around Rs.9.50 lakhs, assuming 8% p.a. policy returns.)

(Imp: Though the policy returns may be 8% p.a., your effective returns would be 4-5% p.a. only; after deductions towards agent's commissions, policy admn. charges, fund management fees, etc.). 

Instead, suppose you go for the good old and truly trusted Bank FD. And to make a like to like comparison you 
a) Buy a Term Policy of Rs.10 lakhs for 20 years. This would cost you about Rs.3000, leaving you with Rs.67,000 to invest in the FD. 
b) Take out Rs.1.50 lakhs at the end of 4th, 8th, 12th and 16th year.

Then, under this approach, you will receive
- Rs.1.50 lakhs after 4th year, 8th year, 12th year and 16th year. 
- And after 20 years you will receive Rs.20.40 lakhs / Rs.18.30 lakhs / Rs.16.48 lakhs / Rs.14.85 lakhs based on your tax bracket of Nil / 10% / 20% / 30% respectively (assuming 8% bank interest).

(Imp: Since there are no deductions of any kind in FDs, entire 8% p.a. yield comes to you.)
   
Clearly, you lose Rs.6.90 lakhs / Rs.4.80 lakhs / Rs.2.98 lakhs / Rs.1.35 lakhs depending your tax slab rate.

(By the way: As you move up the tax bracket, you can buy more tax efficient products than bank FDs and improve your returns. But for simplicity sake I am ignoring the same here.) 

ACTION PLAN
Act 1: Call your agent and ask him how to salvage the situation. You will still lose money, but it is better to cut losses at the earliest.

Act 2: Don't just share jokes and anecdotes on Facebook, Whatsapp, LinkedIn etc. Share this article too with everyone and help them save lakhs of rupees.

Lets keep the conversation going.....

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

^{www.letsmakeaplan.in}

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