Author: Sanjeev Govila

31 Aug 2020
A Good Safety-Umbrella... the least you can do for your loved ones!!

A Good Safety-Umbrella… the least you can do for your loved ones!!

Gp Capt Akhil Kumar Singh is an ace pilot of the Indian Air Force. He works hard, plays hard and parties hard. Like everybody else, he has huge dreams for his family – a comfortable 4 BHK flat in Delhi-NCR and a cottage near Dharamshala, his native place. His son is already pumped up to be a pilot, though in a commercial airline, whose training and other costs will be about Rs 1 Crore as on date. Daughter’s dreams are far bigger than her present height of 3.5 feet – it has to be graduation in fashion designing in Paris. And wife has always been sold out on all the exotic places that this planet has on offer to see. Of course, tomorrow’s dreams are not allowed to cast any shadow on the twice-a-week partying of today!

Fortunately, with some support from parents, and some regular money flowing in from sizeable ancestral land, life is good!

So, the expensive flat has been booked, land for the cottage is in the process of acquisition, and some investments are being done to meet the family’s other dreams.

But the disaster…..when it came, came totally unannounced. Nobody could imagine that the air crash from such a low height can cause death too…..

Though AFGIS insurance money will come and other benefits will also be there including the pension, but most of the bulk money received will go off in paying back the loans taken for the flat and the land. Hardly anything will be left thereafter. Selling off real estate, which is really not required for a whittled-down life, is again a nightmare nowadays.

Will all the dreams of the family come crashing down like a pack of cards now?

The constant heightened risk

Armed Forces fraternity faces a constant higher life risk than others. As unfortunate as it is, but it is a fact. Over the years, we all have seen many families facing one or the other financial difficulty if they lose the family’s bread winner. And, this happens despite the support that our unique ecosystem has.

Somehow, each one of us thinks that only others have an untimely death!

In our hey days, we are either unable to imagine or don’t want to think about what life could look like for our loved ones in our absence. Hence, we don’t make Wills, don’t do nominations, don’t plan and in short, don’t give any thought to it – ‘my-life-is-forever’ syndrome!

In fact, most of the people rarely think how their families would fulfil their needs like house, house rent, school or college fees of children, marriages etc in case of such an unfortunate incident.

How to know what more of the safety umbrella is required?

Let us assume a realistic situation.

Your family has a monthly expense of Rs 70,000 per month as of today, you plan to take or already have a home loan of say Rs 50 lakhs and the desired education abroad for your kids costs close to Rs 75 Lakhs per child at today’s value.

Assuming that you both are around 30 years as of now, and assuming a life expectancy of the surviving spouse to be 80 years, we need to account for regular expenses for the next 50 years, plus the cost of education of children, children’s marriages and the home loan. Even after accounting for the family pension, the bare minimum comes to a term life insurance of over Rs 2.5 crores. Count out the covers that you already have – AGIF/AFGIS/NGIS or any other term insurance – from this and there you have the term life insurance required for that safety umbrella your family should have from you.

Please do not count the paltry insurance covers of your ULIPS, ULPPs, endowment policies (money-back plans, huge-return plans, and the likes mis-sold to you some timein your life) etc – they are not the policies for you and your family. They are designed to be your agent’s pension plan!

So, do you need an extra term insurance of Rs 1.75 crores or so, after counting out the AGIF/AFGIS/NGIS? Here comes the role of investments. The existing investments should be counted out from this required cover to include your bank FDs, mutual funds and stock investments, disposable real estate and the likes which are not tagged to any future commitment or liabilities.

Also, it is likely that the surviving spouse has another source of income; in which case, the requirement could come down accordingly.

You can also consider a joint term-insurance plan for couples. More about that, sometime later.

Lastly, what about a cover for you if you are retired or retiring soon. Please remember that everything depends on what are your liabilities balance and what disposable resources you have built up over time to cater for them in case of your untimely demise. If you have been prudent about it and comfortable, you don’t need any insurance cover probably at this age.

So, judge where do you stand and how do you need to go ahead?

26 Aug 2020
A Chit-chat on safety shield for your loved ones

A Chit-chat on safety shield for your loved ones

Being part of the armed forces often means having to bear a higher degree of life-risk than others. This is also something that comes up in our financial planning discussions quite often with serving officers. While there are insurance provisions under the Army/Navy/Air Force Group Insurance Funds (AGIF/NGIS/AFGIS), it is but natural for all to think about having their own safety net too. Also, is the cover provided by these Govt agencies adequate in this hyper-inflation era? May not be so.

Typically, one will buy an ‘insurance’ from someone in their own hometown or community circles and then the word spreads fast in the peer group. Now everyone is thinking of getting the same ‘policy’!
Someone from that peer group gets in touch with us to discuss the pros and cons. Here is how the conversation goes.

I’m getting Guaranteed returns!

This is something that all of them are hooked on to. A junior Officer with limited personal responsibilities at his age, was considering paying Rs 30,000 per month (☹!) for this ‘insurance policy’ for a period of 10 years. That is quite some money given out every month!

The ‘hook’ was that the insurance company is guaranteeing that he will start getting a regular income from the policy from 15th year onwards till the end of 20th year and the total amount paid to him will be around Rs 67 lakhs these years.

But what about insurance, we ask? Weren’t we talking about insurance in the first place?

Yes, there is ‘also’ a life insurance of around Rs 37 lakh which is assured in case of mortality of the policyholder.

What do we say to it?

We listen to these promises of the agents often. And then tell them that they are not gaining much or what they actually deserve, in this entire scheme.

Prompt comes the reply that the invested money is getting doubled. Then we need to explain that even if it is getting doubled, it is happening over a period of 20 years, which turns out to be a return of about 4.32% per annum, and this doesn’t even come close to several other safe investments done for such a long period of time.

The interesting part is yet to come though.

Despite keeping that much money with the insurance company for such a long period of time, the actual life insurance amount is almost equal to your originally invested amount. And after the policy period is over? You are again left without this insurance at the age of 50 years.

Let’s do some useful calculations

As the primary discussion was regarding insurance, we then do some reverse calculation of how much should that officer be paying for that actual insurance of Rs 37 Lakhs in question.

Many of them are surprised when inform them that they can get the same insurance cover, that too till 60 years of age, for as little as Rs 4000-5000 a year. Yes, just above 1% of what they actually planned to invest in a year.
How? We will get to that in a bit.

Just one important point we need to highlight. That Rs 30,000 a month investment is a good commitment – just that it needs proper planning and appropriate execution. The one that was being explored was not the right one.

Coming back to insurance. How to get that cheap an insurance?

The simplest insurance product will do the trick!

This is the simplest and in fact, the purest form of life insurance. You pay some money as a premium and the insurance company, in return, assures that a fixed amount will be paid to your nominees in case of your untimely demise. Just that you pay the premium and forget about it, in other words you do not get the money back. There are some policies that offer a return of premium even in term insurance, but then the premium is not as low and again defeats the purpose of ‘insurance’.

Taking more realistic aspirations and family goals, a Term Insurance policy assuring your nominees of Rs 2 crores in case of an eventuality, costs only around Rs 15,000 a year at the age of 30 years. The caveat here is that this is for a person buying this policy at a young age. But even at an increased age, premium of such policies remains very reasonable. Why? Because the agent commissions are very low and this is no fancy product.

The premium then remains constant throughout the policy term. If the same policy is bought by someone at, say, age 35, the premium could go up to just around Rs 25,000 a year. So, the key is getting this early on in your career.
In case of any eventuality, this money can be used by your nominees and loved ones for any purpose. Be it for repaying existing loans like a home loan or retirement of the spouse or higher education of children. It can be anything.

A challenge

Being part of the defence fraternity comes with its own set of challenges. One such challenge is that if you buy a Term Plan when you are posted to a field area, it is likely that the insurance company could deny you the policy or load some extra premium on it. This is due to the higher risk your life could face in those situations. So, the trick is to take it when you are in a peace area – this is all within rules.

Discuss with your financial planner about all the factors you should take into account to arrive at an ideal term insurance amount and tenure for you.

We hope this post acts as food for thought to make you think in the right direction, and prevent you from going for ‘too good to be true’ promises.

17 Aug 2020
This Article will surprise all those seeking tax-efficient Regular Income!!

This Article will surprise all those seeking tax-efficient Regular Income!!

The importance of timely investments

This is something that is talked about quite often but still requires reminding time and again. It is only prudent that everyone starts saving and investing early on in his or her career. Investing in early years help you understand market dynamics as you have more time for your investments to fructify, and more energy to work harder if things do not go as expected. Hence, it is always a pleasure when a Lt or a Capt or a Flt Lt knocks our door to enquire about ‘investing’!

Mutual fund investments, especially through Systematic Investment Plans (SIPs), are the best way to start, maintain, and then scale-up your investments as you progress in your career. You will discover and get comfortable with the rise-fall-rise again, and so on of the markets while your corpus is still small. You will realise how a fall and rise in the markets is a part of the investing journey. Well, the key here is also to not panic and take hasty decisions but develop the investing discipline. This also has the potential to provide you with a regular income in times of need, or during retirement.

However, this article not merely about investing when you are young, but about the best way to get a regular income from investments.

SIP is fine but Is Regular income from mutual funds possible?

When we talk of a regular income from investments, in most cases, this discussion is in the context of retirement planning. The idea is to have a stable and a regular income whether it is supplementing your existing pension or simply to get that pension, if you don’t have one.

It becomes important that the corpus from where this income is coming should also remain safe. Hence, most people gravitate towards FDs in banks or other government-backed schemes like the Senior Citizens Savings Scheme (SCSS), Post Office Monthly Income Schemes (PO MIS) or even Pradhan Mantri Vyaya Vandana Yojana (PMVVY).

The merits and demerits of these schemes deserve a dedicated discussion by itself. What we want to highlight today is that these might not be the best option for you to get a regular and stable income when we take into account some realistic variables.

Most of these schemes need you to lock-in your corpus for at least a few years, while they pay the returns from time to time, as per THEIR TIMELINE. What if you suddenly need a large part of the corpus for some reason? Well, there are provisions to get that, but with layers of complications.

Another very important factor to consider is taxation. Some of these schemes, not all, do allow you a tax benefit at the time of investments under Section 80C of the Income Tax Act. But the income from these investments is fully taxed as per your tax slab.

What if you could reduce your tax by at least 15 times!!
What? 15 Times – you may ask incredulously.
If you want this, look at the Systematic Withdrawal Plans (SWP) from mutual funds.

What is a Systematic Withdrawal Plan?

To be sure, taxes will remain in the picture even in SWPs of mutual funds but in an extremely benign manner.

A SWP is in a way the exact opposite of a SIP. In SWP, the regular money, as determined by you, flows directly from your invested corpus to your bank account, on your pre-determined dates, regularly. Just like market lows and highs are averaged out in a SIP investment because you are not investing all at once, the same thing is applicable in SWPs too.

Since safety is a pre-requisite for most of SWPs, we are only talking about a SWP from the safe Debt Mutual Fund, though there is no bar on a SWP from an equity Mutual Fund also.

While most of the safe, Govt offered instruments mentioned earlier force you to lock-in your hard-earned money for years at length, there is no such lock-in when it comes to SWP in debt mutual funds. This maintains complete liquidity of your investments and that too in your control. You do not need to furnish a reason and fill an extra form to withdraw your own money! And in case you wish to increase, decrease, temporarily or permanently stop the withdrawal – you can do what you wish.

Coming down to a big surprise of Tax. Let us illustrate it with an example. Say you wish to invest Rs 15 Lakhs either in Senior Citizens Savings Scheme (SCSS), or Debt Mutual Funds. How would your monthly income be taxed?
Let us say, both give 7% interest per annum. See the big surprise in taxation below:-

surprise in taxation

Surprised? Kicking yourself for paying 15 times more tax all these years!

Why didn’t anybody tell you this?
Because you asked those who themselves didn’t know!

There must be a catch? Yes, there is.
The catch is that, like most other good things in life, you need to do some amount of research yourself or contact the right financial advisor to guide you.

Is it that Debt MFs are not safe? No. They can be as safe as you want. Invest in ‘Banking & PSU Debt Funds’ which primarily invest in Bank and PSU papers. Or go in for ‘Money Market Funds’ which only invest in Govt bonds, PSU bonds or highly rated corporate bonds of short maturity. And start SWP from there.

And there’s more – if you continue with SWP in Debt Funds for more than 3 years, your tax will further go down by at least 50%, generally more!

Contrast this with bank FDs, SCSS, PMVVY, PO MIS and the likes, where tax will never go down.

Hence SWPs of Mutual Funds give you Regular income of the amount that you want which can be varied as per your wish, at a frequency that you want and with tax at least 15 times lesser than other avenues. No need to tell you that tax saved is money earned… And all this while, you retain the flexibility to withdraw a bulk if you wish so.

Found the magic trick to get the best flexibility and tax saving on your regular income Now!