Guide to investing in MFS and ULIPS

Volatile Market: What should I do?

2008-10-18T13:50:00.002+05:30

The stock market is always going to be volatile. There are going to be bull runs and bear runs. This is part and parcel of the stock market. Most investors in stock markets are illetrate when it comes to shares. They act on tips and do not know how to select stocks to invest in. They buy stocks that are are overpriced when the sentiment is good. During a bearish market, the seintiment is low and everybody is scared of the stock market and they sell. They end up losing in both cases. One will be successful if they acted the reverse. Don't we all preach buy cheap and sell expensive. But when it comes to the markets it is always fear and greed that drives investors actions and not simple logic. If one can learn to control their fear and greed, they will be successful. If they don't they will fall prey to the operators who cash in on sentiment.

Many investors also try to time the market. But the market does not listen to anyone, nor can anyone predict the market. Even some of the greatest investors could never time the market everytime (If you watch CNBC TV18, just try to check how many of these expert analysts get there calls right during volatile times like now). Instead of timing the market to maximize returns, one should focus on asset allocation to minimize risk.

My advise for any investor would be to come up with a good investment plan.

Identify your financial goals.
Identify the risk that is appropriate for you.
Come up with an asset allocation strategy based on your risk.
Build an investment plan catering to your asset allocation needs.
Be disciplined and strictly follow the investment plan.
Rebalance your portfolio atleast once every year to readjust the deviations in your asset allocation.
Ignore the occasional turbulance in the market and stick to your investment plan. There are always going to be lot of stories around, but learn to ignore them and strictly follow your plan.

My Conclusion

It is essential for everyone to have a good investment plan. It will ensure your investments are aligned to your goals. It will also help you stay focused on your long term goals and do not overreact to market turbulence. If one is not sure how to build an investment plan tailor-made to ones needs, then please seek professional help.

Should investors be worried about Mutual Funds filing for Bankruptcy

2008-09-18T18:39:00.002+05:30

With the current financial crisis in the US, a lot of us has questions about what happens to our investments in mutual funds if the MF files for bankruptcy. To understand the implications, I would like to quote an extract from the Workbook published by Association of Mutual Funds of India.

"A mutual fund in India is constituted in the form of a Public Trust created under the Indian Trusts Act, 1882. It should be understood that a mutual fund is just a pass-through vehicle. Under the Indian Trusts Act, the Trust or the Fund has no independent legal capacity itself, rather it is the Trustee or Trustees who have the legal capacity and therefore all acts in relation to the trust are taken on its behalf by the Trustees. The trustees hold the unit-holders money in fiduciary capacity, i.e., the money belongs to the unit holders and is entrusted to the fund for the purpose of investment. In legal parlance, the investors or the unit-holders are the beneficial owners of the investments held by the Trust, even as these investments are held in the name of the trustees on a day-to-day basis."

The investments being managed by the mutual fund does not belong to them hence no one can claim them except the unit holders who invested in the fund. Investors of mutual funds need not panic about their investments even if the mutual fund files for bankruptcy.

Some myths about entry and exit load

2008-08-19T22:40:00.005+05:30

A lot of us think that an entry load of 2% is reasonable but an exit load of 2% is expensive. Our reasoning is simple. The exit load of 2% is charged on the accumulated fund value (including returns earned) whereas the entry load is only paid on our initial investment. Lets us delve deeper by looking at the below two examples.

Example 1 : I invested Rs.1,00,000 in a fund XYZ. It charges an exit load of 2% but does not charge any entry load. Let us assume the fund gave returns of 18% for 20 years.

Net Amount Invested = Rs.1,00,000 (no entry load)
Rate of Return = 18%
Number of years invested = 20
Fund value after 20 years = Rs.27,39,303
Exit Load = 2% * Fund Value = 2% * 27,39,303 = Rs.54,786

Example 2 : I invested Rs.1,00,000 in a fund ABC. It charges an entry load of 2% and does not charge any exit load. Let us assume the fund gave returns of 18% for 20 years.

Entry Load = 2% * 1,00,000 = Rs.2,000

Initial Interpretation : At the first glance one will obviously think that entry load of Rs.2,000 is reasonable but an exit load of Rs.54,786 is expensive.

The Bigger Picture
Now lets take a look at the bigger picture and revisit the same examples.

Example 1 : I invested Rs.1,00,000 in a fund XYZ. It charges an exit load of 2% but does not charge any entry load. Let us assume the fund gave returns of 18% for 20 years.

Net Amount Invested = Rs.1,00,000 (no entry load)
Rate of Return = 18%
Number of years invested = 20
Fund value after 20 years = Rs.27,39,303
Exit Load = 2% * Fund Value = 2% * 27,39,303 = Rs.54,786
Redemption Value = Fund Value - Exit Load = Rs.26,84,517

Example 2 : I invested Rs.1,00,000 in a fund ABC. It charges an entry load of 2% and does not charge any exit load. Let us assume the fund gave returns of 18% for 20 years.

Entry Load = 2% * 1,00,000 = Rs.2,000
Net Amount Invested = Investment - Entry Load = Rs.98,000
Rate of Return = 18%
of years invested = 20
Fund Value after 20 years = Rs.26,84,517
Redemption Value = Rs.26,84,517 (no exit load)

The redemption value in both the cases are exactly the same. What this tells us is the impact of an entry load of 2% is equal to an exit load of 2%.

My Conclusion
It is essential to look at the bigger picture to understand numbers related to investments. Like in our example an entry load of Rs.2,000 turned out to be equal to an exit load of Rs.54,786.

How to select a mutual fund scheme to invest in?

2008-08-14T17:10:00.004+05:30

A simple way to select a mutual fund scheme to invest in is to select a 5 star or 4 star rated fund from one of the following portals.

Each of these portals have there own logic for rating funds. For instance Money Control's ratings historically gave more relevance to short/mid term performance. Value research gives more importance to consistency and long term performance. I am not going to debate which method is the best as the experts behind each of these portals have there own logic/reasons for there ratings. There is no harm in selecting star rated funds based on any of these portals as each of these ratings have there own relevance.

For a more informed investor who has the time to research, I would recommend selecting mutual fund schemes to invest in based on the following criteria.

Longterm Performance , consistency in Returns
Short Term Performance (though a fund has performed well in the past, is there a let down in short to mid term performance)
Performance across market cycles, like during bullish and bearish phases (how well did the fund perform during the bearish phases)
Fund Corpus (When selecting midcap funds, the corpus size is very important)
Fund Managers performance with the scheme(If a fund just got a new fund manager, I would observe the performance under this new manager before I select the fund)
For equity mutual funds, one will also need to evaluate risk. (Exposure to midcaps, Standard Deviation of the fund)
For debt mutual funds, apart from risk one also need to examine entry/exit loads and expense ratio are very important.

In these days it is very difficult to find an unbiased financial advisor. Always validate the advise your receive by doing some research online so you know you are not being taken for a ride. Please stay away from NFO's as much as possible.

Some common misconceptions about Mutual Fund Dividends

2008-08-11T19:15:00.004+05:30

Lot of people think dividends in mutual funds is equivalent to dividends received from shares. In shares, the dividend you receive is because the company wishes to share some of their profits with its share holders in the form of dividends. What you are getting is something extra. Dividends in Mutual Funds is a very different. The mutual fund companies are not sharing any profits by declaring dividends. All they are doing is returning a portion of your investments in the form of dividend.

Let me explain this with an example: You own 100 units of a mutual fund ABC Equity. The current NAV of the the fund is Rs.14. The company declares a dividend of 40% or Rs.4 per unit.

Stage 1: Prior to declaration of Dividend
NAV prior to dividend = Rs.14
Your Fund Value = Rs.14 x 100 units = Rs.1,400

Stage 2: Dividend is paid to the unit holders.
The fund pays dividend of 40% or Rs.4 per unit
The dividend you receive = Rs.4 x 100 units = Rs.400

Stage 3: Post dividend NAV adjustments.
In mutual funds, the NAV of the fund is adjusted based on the dividend given by the fund.
New NAV post dividend = Rs.14(Old NAV) - Rs.4 (Dividend Paid) = Rs.10 (New NAV)
Your Fund Value post dividend = Rs.10 x 100 units = Rs.1,000

Prior to dividend you had Rs.1,400 invested. Post dividend you have Rs.1,000 invested and Rs.400 in your bank account. In short dividends in mutual funds is equivalent to selling a portion of your investment and returning it back to you.

When does it make sense to opt for dividend payout?

ELSS (Tax Saving Schemes): All your investments in ELSS are locked for 3 years. By opting for dividend payout, you are receiving a certian amount of your investment prior to 3 years.
Debt Mutual Funds (Short-Term): Debt funds pay a dividend distribution tax of 12.5%. Short term capital gains from debt funds are added to your taxable income. So a short term investor who falls in the 30% tax slab can save tax by investing in a debt fund with dividend payout option. Indirectly you are paying a 12.5% dividend distribution tax rather than 30% tax on your shortterm capital gains.
Mutual Funds which offer free Insurance (FIP): You loose your insurance cover when you make partial withdrawals in FIPs. By opting for dividend payout, you are liquidating a portion of your investment and at the same time your insurance cover continues.
Profit Booking: If one wishes to book profits at intervals.(This can actually be handled by investor himself by selling a portion of his investments)
Asset Allocation: Some funds offer you the flexibility to sweep dividends into another scheme of the same fund house. This facility can be used for moving the dividends declared from equity to debt schemes. On the long run this helps adust your equity/debt ratio in turn minimizing your risk.

Disadvantages of Dividend Payout?

One invests in mutual funds for creating wealth over time. By receiving dividends, you are actually liquidating your investments. Hence you are losing out on the earning potential of the amount liquidated (unless you reinvest this amount somewhere).

Get upto 45 Lakhs of Free Insurance

2008-08-04T20:35:00.007+05:30

Oflate we have seen mutual fund houses offerering free life insurance cover. The following are some fund houses which offer life insurance cover.

Reliance Mutual Fund ( SIP + INSURE)
Birla Sunlife Mutual Fund ( CENTURY SIP )
Kotak Mutual Fund ( STAR KID )
DWS Mutual Fund

Let us take a closer look at the schemes offered by each of these fund houses

Reliance SIP + INSURE
SIP Insure is an add on feature of life insurance cover to individual investors opting for SIP in the designated schemes. In the unfortunate event of the demise of an investor during the tenure of the SIP, an amount equivalent to two times the targeted SIP contribution will be paid to the nominee. (i.e. Number of SIP Instalments enrolled for X Amount of SIP Installment X 2, subject to a maximum of Rs.10 lakhs per investor)

Example: An investor does a monthly SIP of Rs.2,000 for 15 years in Reliance Growth Fund. If he dies after a period of 3 yrs, then his Sum Assured = Number of SIP Instalments enrolled for X Amount of SIP Installment X 2 = 180 X 2,000 X 2 = Rs.7,20,000 (360 times your SIP amount (or) 30 times your yearly sip amount).

What is the catch? There are no additional charges. But there is an exit load of 2% if you withdraw your funds before completion of the specified term. If you stay invested for the complete term, you donot have to pay any exit load. Your life insurance cover ceases if you stop SIP or make withdrawals.

My Verdict : Reliance SIP + Insure is a very good product. This should be part of every disciplined investor's portfolio. One can get free insurance cover of upto 360 times your SIP amount. To get a cover of 10 Lakhs one should start a monthly SIP of Rs.2,800 for 15 years.

Birla Sunlife CENTURY SIP
Century SIP is an add on feature of life insurance cover to individual investors opting for SIP in the designated schemes. In the unfortunate event of the demise of an investor during the tenure of the SIP, the nominee gets Insurance Cover equivalent upto 100 times monthly SIP installments. (i.e. Amount of SIP Installment X 100, subject to a maximum of Rs.20 lakhs per investor)

Example: An investor does a monthly SIP of Rs.5,000 for 10 years in Birla Sunlife Frontline Equity Fund. If he dies after a period of 3 yrs, then his Sum Assured = Amount of SIP Installment X 100 = 5000 X 100 = Rs.5,00,000

What is the catch? There are no additional charges. But there is an exit load of 2% if you withdraw your funds within 3 years of starting SIP. If you stay invested for longer than 3 years, you donot pay any exit load. Your life insurance cover ceases if you stop SIP before completion of 3 years or make withdrawals.

My Verdict : Birla Sunlife CENTURY SIP is a very good product. This should also be part of every disciplined investor's portfolio. One can get free insurance cover of upto 100 times your SIP amount. To get a cover of 20 Lakhs one should start a monthly SIP of Rs.20,000.

Kotak STAR KID Facility
Star Kid SIP facility is an add on feature of life insurance cover to individual investors opting for SIP in the designated schemes. In the unfortunate event of the demise of an investor during the tenure of the SIP, the nominee gets Insurance Cover equal to cumulative unpaid SIPs from the date of death till the completion of the term chosen (i.e. Amount of SIP Installment X Balance SIP installments) subject to a maximum of Rs.10 lakhs per investor without medical tests. With medical tests an investor is eligible for insurance cover upto Rs.1 Crore. The nominee can only be your kid and not anyone else.

Example: An investor does a monthly SIP of Rs.5,000 for 15 years in Kotak Opportunities Fund. If he dies after a period of 2 yrs, then his Sum Assured = Amount of SIP Installment X Balance SIP installments = 5000 X 13 X 12 = Rs.7,80,000

What is the catch? The are no additional charges. But there is an exit load of 2% if you withdraw your funds within 5 years. If you stay invested for 5 years, you donot pay any exit load. Your life insurance cover ceases if you stop SIP or make withdrawals. Insurance cover is only upto the age of 50 years.

My Verdict : Kotak Star Kid SIP facility is a good product. The biggest advantage is one can get free insurance cover of upto Rs.1 Crore with medical tests. To get a cover of 1 Crore, one should start an SIP of Rs.44,000 for 20 years and undergo medical tests. To get a cover of 10 Lakhs, one should start an SIP of Rs.4,400 for 20 years.

DWS Tax Saving Fund
DWS Mutual Fund offers free insurance to individual investors investing in DWS Tax Saving Scheme. In the unfortunate event of the demise of an investor an amount equivalent to five times the invested amount will be paid to the nominee. (i.e. Amount Invested X 5, subject to a maximum of Rs.5 lakhs per investor)

Example: An investor does a one time investment of Rs.50,000 in DWS Tax Saving Fund. If he dies after a period of 3 yrs, then his Sum Assured = Amount Invested X 5 = 50000 X 5 = Rs.2,50,000

What is the catch? There are no additional charges. Life insurance cover ceases if you make withdrawals.

My Verdict : This is an excellent product. This product suites both one time investors and disciplined investors. One will need to invest Rs.1,00,000 to get a cover of 5 Lakhs. Since this is an ELSS scheme, it qualifies for deductions of upto Rs.1,00,000 under Section 80C, which is an added tax saving benefit.

CONCLUSION
You can get upto 45 Lakhs of free insurance without any medical tests(10 Lakhs from Reliance MF, 20 Lakhs from Birla Sunlife MF, 10 Lakhs from Kotak MF, 5 Lakhs from DWS MF). One should plan your investments well to extract the maximum benefit from these products.

Some common terms used in ULIPS

2008-03-31T08:01:00.002+05:30

Premium : The amount you have decided to invest into your policy at the frequency you chose.

Sum Assured : The amount one is insuring their life for.

Death Benefit : The amount paid to the nominee upon death of the insured. (This amount depends on the Sum Assured. Death Benefit and Sum Assured are not the same in some cases).

Term of Policy : The number of years the policy will be active.

Premium Paying Term : The number of years you have commited to paying premiums towards your policy. Term and premium paying term need not be the same. In some cases one might decide to pay premiums for a like 3 or 5 years but the policy will be active for 15 year or more.

Riders : These are additional benefits you can opt for, for a charge. Riders are not free. The charges you pay increase based on the riders you choose.

Fund Management Charge : This is a fee charged for managing your investments. It is usually in the annual interest range of 0.75% to 2.25% depending on the fund you choose to invest in.

Administration Charge : This is the charge for handling paper work and other miscellaneous back office expenses.

Mortality Charge : This is the charge for insuring your life. The charge depends upon the sum assured you have chosen.

Surrender Charge : This is the charge if you wish to surrender and close your policy prior to its maturity.

Premium Allocation Charge : This is the charged deducted from each and every premium paid towards agent commission and other marketing and initial expenses.

Benefit/Policy Illustration : This is an illustration of the plan with numbers. It includes the premiums being paid, all the charges, and the value of your investments based on return of 6% and 10%. Never invest in a ULIP without reviewing the policy illustration.

Investment Funds : You have a choice of multiple funds to choose from to invest in. Each fund has it defined range of equity and debt allocation. These funds you invest in dictate the risk you take and the returns you can expect from your investments.

Never invest in a ULIP without understanding the charges. Always spend time to review the illustration to get a better idea of where your money is going. It will give you a breakup of the premiums you pay, the charges being deducted and amount invested. Per the new IRDA norms, it is mandatory for all insurance agents to show you the policy illustration and get your signature on it.

Financial Planning Calculator (Part I: Children's Needs) - INDIA

2007-04-28T14:40:00.003+05:30

I am sharing a financial planning calculator to help you get started in planning for your children's needs.

How much money do I need for my child's education?
How much money do I need for my child's marriage?
How much money do I need to save on a monthly basis towards my child's education?
How much money do I need to save on a monthly basis towards my child's marriage?

Children's Planning Calculator

How to use this calculator

Click on the above link to access the calculator. Once the spreadsheet opens, click on "Power Edit Read Only" to be able to enter values relevant to you.
Cost of college education today: Enter the amount that it would have cost you for sending your kid to college today. (Eg. 5,00,000)
Time to College: Enter the number of years your kid will be ready to go to college. (Eg. 13 years)
Expected inflation rate: Enter what you think will be inflation rate. I suggest 8% though the actual inflation rate today is around 6%.
(Optional) You can also input the returns percentage to calculate how much you need to invest assuming a certian returns.

Results

The calculator will give you the cost of education and marriage based on inflation.

The calculator will give you the amount you need to invest based on your risk profile

Aggressive (high risk) Investments: How much money you need to invest if you choose aggressive investment instruments like equity mutual funds and ulips(equity).
Safe (very low risk) Investments: How much money you need to invest if you invest in safe avenues like government schemes.
Moderate (medium risk) Investments: How much money you need to invest if you take medium risk. (Having investments in equity and also safe avenues).

If you found this calculator useful, please share it with your friends so they can also benefit from it and start planning for their kids education and marriage.

PS: Calculator for planning your retirement will be posted sometime in the future.

Tips to avoid becoming a victim of financial advisors

2007-04-21T13:27:00.000+05:30

I have come across many people who have been victims of misselling. I also fall into this category many years back when I was a novice to investing. I have come up with some simple rules which if followed will greatly reduce the chances of you becoming a victim to many of the financial predators out their who will always try to con you out of your money.

Understand the PRODUCT
Prior to investing anywhere, I always advise everyone to first understand the PRODUCT. Be it mutual funds, ULIPS, traditional endowment plans, shares, futures and options, post office Small Saving Schemes, one needs to understand how these products work. Spend as much time as possible in understanding the product. Do your home work, research on the internet and use any other source that is available to you.

Understand RETURNS and RISK
Once you have narrowed down on the product, evaluate the returns that can be expected from the product. Next understand the RISK associated with the product. Evaluate if your stomach can digest the risk associated with the investment product.

Understand the CHARGES and BENEFITS
Once you have decided on the product to invest, the next step is to evaluate the benefits and charges of the product. One needs to have the patience to read the product brochure to understand the benefits and charges. Evaluate if you are willing to pay the charges for the benefits provided. Not evaluating the charges is one major reason for discontent.

Not understanding either the product or the risk or the returns or the charges or a combination of all of the above is one major reason why one ends up buying the wrong product. Once they realize that they had bought the wrong product, they start to regret. Their emotions are heated, they get angry and upset. They start blaming their so called investment advisor (who is purely a salesman who is more interested in his commission than your interests). To avoid falling into this trap, every investor needs to do their home work.

ULIPS are a long term investment

2007-04-20T23:13:00.003+05:30

I have recently come across agents selling ULIP's as three year plans. You might hear them ask you to invest for just three years and then reap the benefits. All this in my opinion is miselling. Investing in ULIP's work only if your investment horizon is more than 10 years.

Below is an illustration of returns from HDFC Unit Linked Endowment Plus based on term of the plan. These illustrations are for a 34 year male. Assuming returns of 10% per annum the following is what the figures look like.

Term	Premium	Sum Assured	Fund Balance	Net Returns
3 Years	25,000	1,25,000	68,796	LOSS
10 Years	25,000	1,25,000	3,17,657	7.17%
15 Years	25,000	1,25,000	7,37,790	8.07%
20 Years	25,000	1,25,000	13,01,447	8.43%
25 Years	25,000	1,25,000	21,74,310	8.62%

Clearly, if you look at the net returns, investment in ULIPs only work if you plan to stay invested for long term. If someone is selling you a ULIP for a time frame of 3 to 5 years, it will not work. All he is doing is mis-selling

Insurance and Taxes

2007-02-12T11:43:00.002+05:30

Lot of people in India invest in insurance products to save taxes. Taxes also happens to be one of the biggest selling weapon used by insurance agents. But saving taxes should n't be the primary criteria for buying an insurance policy. The purpose of insurance is defeated if one is looking purely for tax breaks. The main purpose of insurance is to provide adequate financial security to your family. One should first ensure that the Sum Assured is adequate to meet all your liabilities and future obligations towards your family. Taxe breaks are only an added benefit.

If you are buying insurance purely for tax breaks, then you have choosen the wrong product. Equity Linked Saving Schemes are a better product to invest in for saving taxes.

Tips for buying Insurance (Part I)

2006-12-06T20:09:00.000+05:30

Each person's requirement is different. With so many companies and so many products available, the selection of the right policy could be difficult. One needs to spend time to identify what their primary requirement is and then select a policy which meets your requirement. The following are some of the factors that one should consider prior to selecting an insurance policy.

High Sum Assured with small premium
If your requirement is buying a policy which offers maximum cover with minimum premium, the "Term Plan" best suits your needs. Please be aware that with term insurance you don't get anything back. Kotak offers one of the best term plan for non smokers. You might also want to get the quotes for term insurance from other companies like LIC, ICICI and HDFC and checkout which term plan works out to be the best.

Maximum Term
If your priority is to have insurance cover for the rest of your life without any age restrictions, then "Whole Life" ULIPS should suit you best. There are ULIPS from Metlife, LIC which offer insurance cover for the rest of ones life without any age restrictions. You might also want to check with other insurance companies if they offer Whole Life ULIPS.

Maximum Insurance Cover with Returns
If ones priority is to get maximum insurance cover with the option that you get decent returns at the end of the term, then the best plan for you is regular ULIPS. You might want to get quotes from Reliance, Bajaj Allianz, ICICI which offer sum assured of 100 times the premium.

Childrens Education
If one is looking for an insurance product for saving towards their "Childs Education/Marriage" then I would recommend Children's ULIPS. I would recommend getting quotes for HDFC Young Star and ICICI Smart Kid or a children's ULIP from any company. In my opinion, these are very well designed ULIPS which offer excellent security for your kids future. Incase anything unfortunate happens to the proposer, these plans offer immediate "Sum Assured" to the beneficiary. The company also pays the balance remaining premiums towards your kids education. On maturatiy or whenever the need arises, the kid is entitled to all the funds contributed by the proposer and also to the funds contributed by the insurance company. (If it is for your Children's future, please donot go for anything less than a Children's ULIP. You might run into insurance agents who might be selling you regular ULIPS for your kids education but this in my opinion is a bad deal!).

Guaranteed Returns
If ones priority is "some guarantee on returns" rather than maximizing returns, then one should opt for traditional endowment plan from LIC. These plans guarantee the "Sum Assured". But please be aware that traditional endowment plans are not flexible like ULIPS and might not yield as much returns. There are also some ULIPS which guarantee the premiums paid and with the added benefit of investing in equities for maximizing returns like Kotak Safe Investment Plan 2.

Investments/Maximizing Returns
If ones priority is mainly investments/"return on investment" with decent insurance cover, then one needs to opt for a good ULIP with less charges and good returns. I would recommend getting quotes from SBI, HDFC. These have been the top performers among ULIPS and have been yielding good returns (better than many MF's).

Conclusion
No one product will suit the needs of every person. One will need to identify what his priorities/needs are and then select a product that will meet his needs.

Why it is important to examine all products offered by an insurance company before buying one

2006-10-29T14:26:00.001+05:30

In todays market, you have different products offered by the same company. Some of these products are designed with the investor in mind and to provide maximum benefit to the Investor whereas some of products are designed to rob the Investor for the benefit of the insurance agent and the insurance company. I have used a strong word ROB because that is what some of the products actually do. To explain the relevance of my earlier statement, I would like to compare two different ULIPS offered by Bajaj Allianz

Policy Name	Policy Admin Charge	Initial Loading Charge
New Unit Gain	Rs.600 per annum	71.5% first year
New Unit Gain Plus	Rs.240 per annum	24% first year

Clearly, the charges in "New Unit Gain" are significantly higher than "New Unit Gain Plus". I checked to see if New Unit Gain offers any additional benefits to justify the higher charges. You will be suprised that "New Unit Gain" does not offer any additional benefit to justify these additional charges over "New Unit Gain Plus".

Very recently my co-worker was asked to take "New Unit Gain" policy by his insurance agent. He was not even told about "New Unit Gain Plus". The incentive for the agent to sell "New Unit Gain" is because he gets higher commision. I had a similar experience in the past with ICICI. The agent kept offering me "Lifetime" while "Lifetime II" was a much better product.

It is sad when insurance companies resort to such tactics to exploit the ignorance of thier customers for their own benefit. They should be more proactive in "stopping sale off" older products(like LIC) once they have launched newer/better products.

CONCLUSION
Donot leave it to the insurance agent to identify the product that best suits your needs. I have come across many insurance agents who are more interested in thier commission than your interests. So do your home work before buying a policy. Visit the website of the insurance company and download the brochures of the different products they offer and spend some time reading them. If you can't seem to understand the brochures, you might want to visit forums/blogsites (like moneycontrol.com) to get the opinion of others.

Have a question about Insurance/ULIPS??

2006-10-25T07:11:00.000+05:30

If any of you have any questions related to insurance that you would like my views on, please feel free to ask.

Risk Management: Allocation of funds to equity and debt

2006-10-09T15:38:00.002+05:30

I am sure many of you might have wondered how much exposure to equity is safe at any point of time. I am suggesting two methods, one based on weighted average PE Ratio of Nifty or Sensex, and the second based on term of the policy.

Fund Allocation Based on Nifty/Sensex PE Ratio
In this approach, I decide my allocations to equity and debt based on weighted average PE Ratio of Nifty or Sensex. At higher PE Ratio levels, I advise reducing your exposure to equity. Similarly at lower PE Ratio levels increase your exposure to equity. You will be able to find weighted average PE Ratio of Nifty or Sensex at bseindia.com or nseindia.com. The reasoning behind this approach is we have lesser exposure to equity when we think the market is expensive. We have more exposure to equity when the market is cheap. The following is the asset allocation I would suggest based on PE Ratios.

PE Ratio	Equity Exposure %	Debt Exposure %
Below 13	90 - 100	0 - 10
13 - 16	70 - 90	10 - 30
16 - 20	50 - 70	30 - 50
20 - 24	20 - 50	50 - 80
Above 24	0 - 20	80 - 100

Fund Allocation based on the Term to Maturity
This approach is applicable to goal based investing, example planning for children's marriage. In this approach we decide asset allocation ratios based on the term remaining till goal or maturity. The longer the term to maturity in years, the higher the exposure to equity. The idea behind this approach is that we take higher risk when we have more time on our side. We take less risk if the by when we need to funds is less.

Term Left from Goal	Equity Exposure %	Debt Exposure %
Less than 3 years	0 - 20	80 - 100
3 - 6 Years	20 - 50	50 - 80
6 - 10 Years	50 - 80	20 - 50
More than 10 years	80 - 100	0 - 20

Which charges have the biggest impact on returns

2006-10-07T07:23:00.000+05:30

I have been trying to measure the impact of the following charges on overall returns

Loading Charges

Admin Charges

Fund Management Charges

I have used the following three plans in my comparision.

Bajaj Allianz Unit Gain Plus

HDFC UnitLinked Endowment Plus

ICICI Lifetime Plus

Loading Charges
HDFC - 60% first year
Bajaj- 24% first year
ICICI- 25% first year

Admin Charges
HDFC - Rs.240 per annum
Bajaj- Rs.240 per annum
ICICI- Rs.720 per annum

Fund Management Charge
HDFC - 0.80%
BAJAJ- 1.75%
ICICI- 1.50%

For an Investment amount of Rs.24,000 per annum assuming an annual return on investment of 10%, the following is how the returns look like

Investment Time Frame - 5 Years
Best Returns - BAJAJ (7% more than ICICI)
Second Best - HDFC (2% more than ICICI)
Last - ICICI

Investment Time Frame - 10 Years
Best Returns - HDFC (5% more than ICICI)
Second Best - BAJAJ (3% more than ICICI)
Last - ICICI

Investment Time Frame - 15 Years
Best Returns - HDFC (8% more than ICICI)
Second Best - BAJAJ (1% more than ICICI)
Last - ICICI

Investment Time Frame - 20 Years
Best Returns - HDFC (12% more than BAJAJ)
Second Best - ICICI (0.5% more than BAJAJ)
Last - BAJAJ

Investment Time Frame - 25 Years
Best Returns - HDFC (16% more than BAJAJ)
Second Best - ICICI (2% more than BAJAJ)
Last - BAJAJ

For an investment time frame of 5 years, Bajaj Allianz Unit Gain Plus seems to offer the best returns. For any investment time frame of 10 years to 25 years, HDFC seems to offer the best returns.

Regarding charges, on the long run, Fund Management Charges have the most significant impact on performance. You will notice the gap in returns between HDFC and other widening as time passes(inspite of 60% loading charge). This is because it has the least FMC. Even ICICI which offer slightly better fund FMC than Bajaj has been able to surpass the returns of Bajaj Allianz Unit gain plus on the long run.

CONCLUSION
Fund Management charges are the most important charges for long term investments. Chose a ULIP product that has the least fund management charge to maximize your returns.

Why one should avoid traditional endowment plans

2006-09-24T08:59:00.000+05:30

Just wanted to illustrate with this example why Term + PPF is better than LIC guaranteed return endowment policies (or) any traditional endowment policy from any company.

In the below example, I am comparing the returns from Komal Jeevan(which guarantees 7.5% per annum bonus) against term insurance plan(for insurance) and PPF(for investments). The plans are for a 30 year old male for a sum assured of Rs.5,00,000.

Komal Jeevan Plan
Sum Assured: Rs.500,000/-
Yearly Premium: Rs.37,177/-
Total Premium Paid in 18 years: Rs.6.69 Lakhs.
Returns by the end of 26 years: Rs.14.75 Lakhs.

Term + PPF:
Sum Assured: Rs.500,000/-
HDFC SL Term Insurance Yearly Premium: Rs.1,600/-
PPF Investment Yearly: Rs.35,577/-
Total Investment(PPF + Term Insurance): Rs.37,177/-
Total Premium Paid in 18 years: Rs.6.69 Lakhs.
Returns by the end of 26 years (8% PPF returns): Rs.26.63 Lakhs.
Percentage of investment that is used to pay term insurance: 4.3% per year.

Returns from Komal Jeevan which gives Rs.37,500 bonus per year is lot less than what you get back from PPF.The reason for this is quiet simple. Endowment Plans gives bonus based on the sum assured. Your returns each year is the same irrespective of your investment. In an endowment plan there is no compounding effect on your investment, interest. Hence the returns are very low. On the other hand, investments in PPF which is guaranteed by Government of India gives 8% returns compounded annualy. The power of compounding is immense, hence your returns are almost double than what you get from an endowment plan. Even if you invest in avenues which offer compund interest of 5%(like bank FDs, RDs), you will get back Rs.15.5 Lakhs at the end of 26 years.

Lesson 1 for an Investor: Power of Compounding
Compound Interest of 5% per annum will give higher returns than bonus of Rs.75 per thousand. Please donot be tricked by LIC agents who say 7.5% bonus has been declared for that year. Bonus is purely on sum assured and not on your investment. Only invest in avenues where your returns are compounded. Stay away from traditional endowment plans. These plans are the most beneficial to the insurance agent(in terms of commision received) but are not the best plans for the investor.

Lesson 2 for an Investor: Understand your charges properly
Insurance agents use the terms 80% charges on endowment plans is better than 100% charges on term insurance. But are you really paying 100% charges on term insurance. From the above example
100 % Charges for Term Insurance = Rs.1,600/-
80% charges on Endowment Plan = Rs.29,741/-
One is paying Rs.1600 charges in term insurance while paying Rs.29,741 as charges in endowment plan the first year. But how come insurance agents say paying Rs.1600(100% charges) is worse than paying Rs.29,741(80% charges). In reality, the actual percantages are different. The total percentage of your investment that you pay for term insurance charges is just 4.3%(Rs.1600 out of total investment of Rs.37,177). The insurance agents hide the overall picture. It is your duty,the duty of the investor to understand the overall picture of charges.

Lesson 3 for an Investor: It is your Money!
What ever you invest is your money so understand where you are putting your money. Donot rush into something because someone else said so. Donot buy LIC plan just because your father said it is the oldest insurance company, most profitable and hence will offer the best returns. Do your home work. Explore all possible avenues of investment. Understand the product where you want to invest. Understand the charges, returns and also RISKS. This is no Rocket Science. All you need is pure common sense to understand most of the products. It is your hard earned money. A rupee saved is a rupee earned.

Comparision of ULIPS vs MFS (India)

2006-09-22T23:18:00.002+05:30

Below is a brief comparision of ULIP (Unit Linked Insurance Product) vs MF (Mutual Funds) specific to the Indian market.

Primary Objective
MFs : Investments
ULIPs: Protection + Investments

Investment Duration
MFs: Works out for Medium term, Long Term Investors. Risky for Short Term investors.
ULIPs: Works out for Long Term Investors only.

Flexibility
MFs: Very flexible. Plenty of scope to correct your mistakes if you made any wrong investment decisions. You can easily shuffle your portfolio in MFs.
ULIPs: Flexibility is limited to moving across the different funds offered with your policy. Correcting mistakes can turn out to be expensive. Moving funds from one ULIP to an other ULIP of a different fund house can be expensive.

Liquidity
MFs: Very liquid. You can sell your MF units any time(except ELSS). Some MF's like those from Reliance have introduced redemptions at ATMs.
ULIPs: Limited liquidity. Need to stay invested for the minimum number of years specified before you can redeem.

Investment Objective
MFs: MF's can be used as your vechile for investments to achive different objectives.(Eg: Buying a car three years from now. Downpayment for a home five years from now. Childrens education 10 years from now. Childrens marriage 15 years from now. Retirement planning 25 years from now. Medical expenses after retirement 25 years from now)
ULIPs: ULIPs can be used for achieving only long term objectives (Chidrens education, Childrens marriage, Retirement planning)

Tax Implications
MFs: All investments in MF's don't qualify for section 80C. Only investments in ELSS qualify for 80C.
ULIPs: Provide Tax Benefits under section 80C.
MFs: Returns on equity MF's are exempt from long term capital gains tax. (Unless tax laws change in the future).
ULIPs: We are moving from EEE to EET. No clarity if ULIPs will be taxed under EET.
MFs: Tax liabilities when moving across from debt to equity funds.(Returns from debt MF's are taxed.)
ULIPs: Very flexible in moving between equity and debt funds(not tax implications until maturity of the policy).

Strings Attached(fine print)
MFs: None so ever. At most you pay a small exit load if any.
ULIPs: Some strings attached for your policy to be in effect. Minimum number of premiums need to be paid. Minimum fund balance need to be always maintained. (I personally donot like policies which say pay three years premium and get insurance cover for the next 25 years since there are a lot of ifs and butts involved. A lot of assumptions made and nothing is in your hand, it could turn out your fund balance might be exhausted after just 12 years of insurance cover).

ADVANTAGES ULIPS

Can easily rebalance your risk between equity and debt without any tax implications.
Best suited for medium risk taking individuals who wish to invest in equity and debt funds(atleast 40% or higher exposure to debt).
No additional tax burden for those investing mainly in debt unlike in MFs.

ADVANTAGE MFS

Better returns than ULIPs.
Lower charges than ULIPs.
Very flexible and enables you to switch your investments from non performing MF's to better performing MFs
Very Liquid can be redeemed at anytime.
Best suited for medium to high risk taking individuals who wish to invest a significant portion in equity funds(atleast 65% exposure in equities).