Category: Investment Advice for Defence Personnel

28 Aug 2017
Is this Diamond worth your money

Is this Diamond worth your money?

Life Insurance Corporation of India (LIC) is aggressively marketing its insurance policy, LIC Bima Diamond Plan, as a ‘Diamond for Life’. Let’s see if this ‘Diamond’ is worth your money?

LIC Bima Diamond Plan is a typical non-linked, with-profit, limited premium payment money-back life insurance plan. Non-linked means it is not ULIP or your money will not be linked to equity market movements. With-profit means, it is like investment product where you get returns on your investment based on the product feature. Money back means at a different interval of the policy term, you will receive some money from this policy.

Highlights of the policy

  1. It is a fixed tenure insurance policy. There are three tenure options – 16 years, 20 years and 24 years.
  2. The premium paying term is less than the tenure of the policy e. g. for a 16-year policy you have to pay only for 12 years.Money-Back (Survival Benefits)every 4th year.
  3. The premium rate of LIC Bima Diamond is one of the highest.
  4. It gives life cover even aftermaturity of the policy. It gives extra protection up to half of the policy tenure additionally. For example, for a 16-year policy, you would get life cover till 24 years. However, during the period of this extended protection, the sum assured would be half of the original amount.
  5. It gives life cover even after you stop paying the premium (called Auto Cover). This relaxation is up to two years.
  6. Itvdoes not give annual reversionary bonus. You would get loyalty addition after a certain tenure.
  7. This plan hasa loan facility.
  8. You can take accident & disability rider and new Term Assurance Rider.
  9. The maximum sum assured is Rs 5 lakhs, minimum 1 Lakh and entry age is minimum 14 years completed.

Positives of Bima Diamond Plan

  • It gives life cover even in case of non-payment of premium for up to 2 years. This feature does not leave you vulnerable at the time of financial distress.
  • The death cover continues beyond the policy maturity and can keep you insured till the age of 76 years.
  • You can add term assurance and accident rider to enhance your death cover.
  • You can avail loan from this policy for up to 80-90% of surrender value.

Negatives of Bima Diamond Plan

  • The premium rate is too high. For a sum assured of Rs 5 lakhs, the premium is up to Rs 46,000 per year.
  • Maximum sum assured is Rs 5 lakhs. This amount is exceedingly low for a normal middle-class family.
  • Though touted as a benefit, the sum assured gets halved in extended protection period which is grossly insufficient for a family after 20 years.
  • The maturity benefit would be very low as it pays the basic sum assured less the periodic money back payment already done. Thus if the sum assured for a 20-year policy is Rs 5 lakhs, the maturity sum assured would be only Rs 2 lakhs.
  • The returns from LIC Bima Diamond is less than the market rate. LIC is still giving 5-6% return. One would be in a better position by opting VPF and PPF for saving purpose.
  • Auto Coveris highlighted as a unique benefit but in case of death during this period, the due premium is deducted from the benefit payable. So it seems the idea is to run the policy as much as possible instead of showing in their books as LAPSED policies.
  • At maturity you are eligible for Maturity Sum Assured, which is 55% to 40% of Basic Sum Assured and Loyalty Addition. Hence, do notthink that the maturity benefit will be full sum assured as is the case with other plans.
  • Extended cover is showcased as a unique benefit. But, head-to-head, LIC’s New Jeevan Anand seems to be better in this aspect as offers the extended cover forever and full to the value of sum assured. In this plan, it is only up tohalf of policy term and half of sum assured.

Final Verdict

Any Endowment insurance plan of LIC is primarily an investment product, wherein you actually neither get good insurance cover nor satisfactory investment returns. It is sold as a good combination of protection and returns while all endowment insurance policies of all insurance companies fail on both the counts. In fact, the problem is mixing insurance with investment. Such a combo product never benefits the investor but only the insurance companies and the agents since the premiums are high, commissions are high and when time you discover this after taking the policy, you realise it has been structured in such a way that you can exit only at prohibitive costs (losses) to you.

Hence, we would recommend you to consider only a good term insurance plan for death cover, if you do need such a cover. For tax saving purpose, choose Equity Linked Saving Schemes (ELSS) or PPF/DSOPF. For investments, nothing better than a good portfolio of mutual funds.

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14 May 2016
Liquid Funds- 4% more Interest without you doing anything….

Liquid Funds- 4% more Interest without you doing anything….

Col Sher Khan is a go-getter infantry officer, known for his professional acumen and is a sought-after party animal. He and his family live life to the full. His only Achilles Heel is finance. He routinely has a large amount – anything from Rs 75,000 to even 2-3 Lakhs lying in his savings bank account at any given time, earning 4% savings bank interest. And just because it was lying there, unimportant expenditures would come up and suddenly become urgent and the most important ones to be done then and there. He was fully aware that bank interest is fully taxable and he being in 30% bracket, it practically earned him a mere 4% – (30% of 4%) = 4% – 1.2% = 2.8% interest. He wanted to do something about it but didn’t know what and how.

That’s the time he got introduced to Liquid Funds by a friend. He suddenly realised that he could earn double the interest, have the money safely tucked away so as not to be ‘very easily’ available but still be available at one working day notice through sms, phone call or net login. He started it and found it reduced unnecessary expenditure while not affecting his life-style in any way.

So what are Liquid Funds? Liquid fund is a category of debt mutual fund which invests primarily in extremely safe instruments like certificate of deposits of the banks,government treasury bills, commercial papers of highly rated companies etc. They have no lock-in period and withdrawals from them are processed within 24 hours on business days. The cut-off time on withdrawal is generally 2 pm on business days. It means if you place a redemption request by 2 pm on a business day, the funds will be credited to your bank account on the next business day by 10 am. Liquid funds have no entry load, exit loads and like all mutual funds, have no concept of TDS (Tax Deduction at Source) unlike the bank savings bank or FDs. This implies that you can put in any amount any time, and withdraw any time while the rest of it lying in the fund keeps earning its good interest.

Liquid funds are among the best investment options for the short term during a high inflation environment. Their taxation is as per your tax slab but double the savings bank returns ensure a large additional surplus returns to you. During the past years, some liquid funds have even offered higher returns than bank fixed deposits, which levy a penalty on premature withdrawal.Many fund houses give the option of transacting (investing and withdrawal using your bank account) in them through sms and phone from registered mobile number apart from the internet, thus bringing your money to your literal fingertips! One fund house even gives an ATM card for withdrawing up to about Rs 50,000 from bank ATMs.

Finally, what should you use your Liquid Fund for?

  • Surplus money which earns practically nothing, lying in your savings bank account.
  • Money you leave in bank account catering for EMIs or instalments over next few months.
  • Sales proceeds of your previous house/flat till you invest in new one.
  • Funds created for your child’s education /marriage till you use it.
  • Lump sum amount lying in your bank account which you may be required any time
  • Large amount of money lying idle over long weekends whether your own or the company’s. Example: Rs 1 Cr kept for one day will earn about Rs. 2200 per day as per current Liquid Fund returns. This means, this happening over weekends throughout the year in your company will earn you Rs 2,28,000 (salary of one person?).

 

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21 Jan 2016
Great times to increase your market exposure

Great times to increase your market exposure

Stock Markets have been unrelenting for the past one year and, it has only intensified in Jan 2016. Most of the retail investors have not understood the reason why it is so – Acche Din to Aane Wale The!

They’re told that China is slowing down, so the world is slowing down. But the US of A, the world’s largest economy, is on an acknowledged growth path now.

They’re told that Oil prices drop is affecting the world growth. But cheap oil results in India saving about 60-70 Billion USD a year – how can that be bad for us? Same is the case with other commodity price drops the world over.

They’re told that Govt’s policies have not delivered and the economy is not doing well. But everybody can see that the structural reforms being undertaken will cure the ills of past so many decades.

It all becomes very confusing as to what is the reason for this huge decline in markets so fast and so much. Actually the drop in stock prices in India has not much to do with India or Indian economy. The drop is largely due to Foreign Institutional Investors (FIIs) pulling money out of India. These FIIS are largely either the Middle East sovereign funds pulling out to meet their economy’s deficits due to oil revenues falling or the Emerging Market (EM) funds pulling out anticipating a big Chinese shadow on EM economies which are primarily the commodity producers. The poor Indian corporate earnings last year, which are likely to continue for about two more quarters at least, has also not helped. But ultimately, all global economy pundits expect India to have a robust growth in times to come.

Do you know that there is a big segment which is quietly buying in tandem with FII sales? The equity mutual funds (MFs) are buying what FIIs are selling. Till 19 Jan 2016, FIIs sold stocks worth 9666 Crores while Indian MFs bought worth 7866 crores. And do you know, your neighbour is quietly increasing his SIPs (Systematic Investment Plans) while you contemplate getting out of the markets. In 2015, a weak equity year, new SIPs increased by 66% compared to 2014 when the markets were really robust. In money terms, it amounts to Rs 2399 Crores worth of additional SIPs from people like you and me. Indian investor is really taking full advantage of the DISCOUNT SALE that is on in the equity markets now.

Please carefully read below what Prashant Jain, CEO of HDFC MF, has written in Economic Times today (21 Jan 2016). He has referred to his article on similar theme in 2012 which we had posted on our blog at http://humfauji.in/blog

Make the most of this opportunity

Finally our advice to you: This is as good as it gets to buy quality equity Mutual Funds. Use it to your advantage. Don’t treat your notional losses to be real losses – they turn real only if you panic, lose patience and get out of the markets. This is the time to buy equity MFs, increase your SIPs and sit tight. The long-term winner is being decided now by the markets – don’t throw it away. If you’ve invested for the long term, don’t judge your portfolio by short term volatile returns.

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17 Sep 2015
Gift to a loved one How about a Mutual Fund SIP

Gift to a loved one? How about a Mutual Fund SIP?

Divesh Kumar has recently retired as a contended man. He hasfulfilled his duties as a devoted father, caring son and loving husband all his life. He now wants to gift something long lasting for his two lovely grandchildren which he and his wife fondly dote on. They both decided to contribute for higher studies for them by contributing some money every month. Their first impulse was to save in a bank Recurring Deposit (RD) but wanted their decision to be validated by us.

We heard them out and asked them, “Have you thought of mutual funds for this purpose?” They never had thought so. We explained to them that they had a long time frame for their gift. The gift should actually work for the recipients to create value as they have planned and not be lost to inflation and taxes. In case of any emergent requirement some time later, they should also be able to take out the money fully or partly without any penalties or severe tax implications, though such withdrawals should be avoided since they were saving for the specific purpose of their grandchildren’s higher education.

We then went on to explain the superior tax-efficient returns that mutual funds offer with a lot of flexibility of how they wish to save or withdraw the money. They could contribute on a monthly basis through SIPs (Systematic Investment Plans) for as long as they wished. In case they could not contribute any longer, they could just let the accumulated money lie there and grow as long as they wanted. They could also put in bulk additional amounts of as low as Rs1000 on special occasions whenever they wished to. We made an illustrative table for them for contributing Rs 5000 per month, comparing RDs and various categories of mutual funds on the basis of current interest rates of RDs and past returns of best mutual funds of various categories.

5 years 10 years
Returns Amount Returns Amount
Bank Recurring Deposits 7.75% ₹ 3,65,000 7.75% ₹ 9,02,083
Pure Debt Funds 10.50% ₹ 3,92,345 9.40% ₹ 9,89,759
Balanced – Debt Funds 13.90% ₹ 4,29,808 13.10% ₹ 12,27,461
Balanced – Equity Funds 16.30% ₹ 4,58,951 17.40% ₹ 15,95,380
Diversified Equity Funds (Large Cap) 14.10% ₹ 4,32,147 17.00% ₹ 15,56,130

 

It was explained to them that while above returns of RDs will be fully taxable on yearly basis as per tax slab irrespective of time frame of investment, pure debt and balanced debt funds will have indexation benefits beyond 3 years, thus reducing tax liability substantially. In equity products, there will be no tax after one year. They also were made to understand the risks of various products – equity was subject to market risks while debt products including RDs were comparatively safer. However, statistically, risk of equity products declines to negligible levels over long periods of time. Hence, when saving for long periods, it is better to take some equity exposure, depending on one’s comfort level, to make the money grow in real terms.

 

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11 Jun 2014
The benefits of having a financial planner-humfauji.in

The benefits of having a financial planner

In a country where event managers are paid for organising weddings and nutritionists are paid for making diet plans, financial advisors struggle to make a case for earning a fee. Only a small segment has managed to break through the resistance. Investors continue to save, invest, and borrow without any framework or process in place and assume they can manage their money. Why does one need a financial advisor at all?

There was a time when getting a job meant meeting “commitments.” There were siblings who needed college education; there were marriage expenses; and, there were elderly parents to take care of. Today, a young earner begins financial life on a firm footing – a regular surplus income. He acquires a bank account and a debit card with the job. By the end of his first year of earning, he has bought some tax saving products and applied for loans. He has not engaged a financial advisor, yet.

If the earning class wants to focus on enhancing its income, it needs someone to take care of its surplus and keep its financial life in order. Engaging a financial advisor is not a felt need when the power to be able to spend keeps one confident and fearless about the future. But, soon enough, our young earner begins to default on that education loan, does not file tax returns in time, does not know where his tax-saving policies are, and finds himself locked into a house at a location where he is no longer working. It is rare to find earners with well-ordered financial lives. This is why anyone who earns, needs a financial advisor. Someone who will walk with you and work for you, and ensure that your finances are in order. Let me list a few simple things an advisor can enable every earner to do.

First, they should be encouraged to save a portion of their earnings. Just as a personal trainer will motivate you to hit the gym every day, a financial advisor will ensure that you have set aside a portion of your income for yourself. Many earners believe that they can do it themselves, and see this as too simple a task for an advisor. Many advisors think that unless they get a complete account of all income and all expenses, including the electricity bills and payments at restaurants, they cannot determine the earner’s saving potential. A simple engagement that asks a percentage of the income to be saved is a good starting point.

Second, earners should have a default choice to convert their savings into investments. Many of us save regularly in our Provident Fund (PF) and are not even aware that a fixed amount from our salary goes into a basket of fixed income investments. Earners need to realise that such default choices help them in the long run. If 12 per cent of the salary is already saved in the PF, setting up another 12 per cent in a diversified equity mutual fund would do no harm. A monthly SIP (systematic investment plan) into few such funds, chosen at the start of the year and, reviewed every year, is adequate for most purposes. The earner needs an advisor so that this allocation happens after careful consideration of choices, and so that a good fund is selected.

Third, they need tools to deal with the unexpected. There are times when unexpected expenses hit the family budget; there are times when unexpected income comes in, in the form of bonus and gifts. Borrowings hurt the saving ability; poorly allocated funds may end up in losses. An advisor should be the first port of call, when taking such important financial decisions. But, investors think they need not involve the advisor since it amounts to discussing private details, and advisors keep away assuming that investors will be reluctant to let them in. Unless the advisory relationship extends beyond investment advice, its ability to deliver value will get compromised. Over a period of time, the advisor should be able to evaluate loans, manage repayment crises, arrange liquidity as needed by the client, and smooth out contingencies for him.

Fourth, earners fail to see the impact of life cycle changes on their finances. Many believe that as long as they accumulate assets, they are doing fine. Over a period of time, their incomes, expenses, and their needs change. Without providing for these changes, a household would have to compromise on goals such as higher education and retirement. The biggest contribution of the financial advisor to a client is advice on asset allocation. It is the advisor who is able to orient the savings and investments of the earner towards specified financial goals and aspirations.

While DIY (Do-it-Yourself) is tempting, earners are likely to find themselves locked into property and gold, when what they need might be assets that are more divisible and liquid. An advisor is an asset allocation specialist who should help you align your assets to your goals.

Fifth, earners are prone to errors that they are loath to admit. Investing in the next big thing; selling out of an investment out of fear; buying a share based on a tip; being taken in by a sales pitch; leaving money idle in the savings account; failing to sell off what is not working; and, choosing the easy over the optimal are all routine mistakes investors make. A combination of inertia, lack of time, lack of information, need for control and overestimation of abilities, leads to a situation where investors manage their money inefficiently. Bringing an advisor is worth it, just to ensure that someone is in charge and is accountable.

If earners begin by describing what they want and, are willing to hold their advisors accountable, we will see the beginning of a process of engagement. Investors see advisors as sellers; advisors see investors as transaction-oriented. With one side being secretive and the other being scheming, we have dissatisfaction as the outcome. In the interest of their own long-term wealth, earners-investors should demand a process for their financial well-being and, advisors who lay it down and implement it, would have earned their fee.

 

[Source: Uma Shashikant; She is Managing Director, Centre for Investment Education and Learning]

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