Turning 30? Here are 10 Financial Mantras to keep in Mind

Hemant Beniwal
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17
Turning 30? Here are 10 Financial Mantras to keep in Mind

We often see people making lists of things to do by the time they are 30 or before they reach 40. These lists usually have items like traveling to exotic destinations; having a child; learning a new language etc. These are good goals to have of course, but what I see missing in these lists are goals related to financial security. So we made a list of financial goals to make when you are in your 30s.

Read – 10 Financial Planning Thumb Rules

10 Financial Mantras for Your 30s

1. Take Adequate Insurance 

Are you insured properly? You must take a term policy so that your near and dear ones are financially secure and comfortable in case of any unexpected events. If you have a housing loan, do ensure that it is covered by home insurance so that in case of default, there is some backup.

2. Take steps to ensure dependents are taken care of 

Are family members dependent on you? If you have aged parents, you should take a medical cover for them. If you have children, you should take into account the expenses that would be incurred on them like their education. You should invest in various options like PPF, FDs/RDs and mutual funds and keep this amount separately.

3. Asset allocation 

Are your savings lying only in bank accounts and bonds. You should invest in a variety of assets so as to get better returns and diversify risk.You should invest in equity as well. Typically allocation in equity should be 100-(your age) in percentage terms. So if you are 30 years old, 70% (100-30) of your investment should be in equity and equity based assets. As you grow older, reduce equity investments, as they are considered more risky/volatile compared to other assets.

4. Invest in yourself

If you are in a job, take courses to upgrade your skills to enhance your career. Learn new things related to your industry and job so that you don’t find yourself obsolete in the job market. If you are a professional or have a business, attend conferences and seminars for networking and latest news in your subject matter. Invest capital to expand your business. You should also learn new things so that you have a well-rounded personality.

5. Tax Planning 

When you started off your career or business, you may have just invested in tax saving instruments so as to avoid paying tax. Change that. Invest in proper tax planning instruments so that it helps you in reaching your financial goals and provides financial security. Plan your income and taxes from the beginning of the financial year rather than putting money in some ‘tax saving’ instruments advertised heavily in February and March or because your friendly neighbor, the finance advisor has to reach his sales target.

6. Buy a house

Investing in real estate is not easy. You need to consider various things like price, location, the reputation of the builder, appreciation value, etc. But if your job is such that you will not be in a new city or country every year and you have a family or plan to have a family, you can think of buying a house. It will help in tax saving. Post-retirement, you will have a place to stay and rents increase with inflation, and renting out, in the long run, will be expensive. But read this… Buying Vs Renting

7. Estate Planning

Estate is the total net worth of a person. You have to plan your estate be it big or small. It means taking steps such that your wealth is taken care of and distributed to recipients, as you want after your death without legal problems. Some steps here are creating a will, nominating guardians for dependents, and monitoring the estate plan regularly. 

8. Retirement Planning

You should have started planning your retirement in your 20s. If you have not done it, follow the adage – ‘Better late than never’. You have to check how much you need after you retire. It should be equal to an amount that can maintain your lifestyle factoring inflation and take care of medical expenses. 

9. Bring in self-discipline

You might have splurged on a lot of things and experiences in your 20s as you were young and having cash in your hand was a newfound freedom for you. But now you need to discipline yourself. People around you might be buying fancy gadgets, latest fashion gear and holidaying abroad every year. Do not get distracted by this. You have to plan for your and your family’s future and your retirement. You have save regularly and ensure you are on track to reach your financial goals.

10. Budget 

This has to be done from when you were much younger. But it is never too late to start a good habit. Draw up a budget, categorize your expenses and set targets for each category. Make sure that you don’t exceed the targets. If one expense goes above the limit, take steps in other areas to curtail overall expenses. There are many software applications like Perfios & Android/Apple Apps that will help you manage your budget.

Have you made financial goals? Do let us know what are your goals to ensure financial stability and your experience on trying to achieve them. 

8 SMART Ways to Increase Your Credit Score

Hemant Beniwal
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16
8 SMART Ways to Increase Your Credit Score

As you know, a credit score is a statistical number that represents how you have used credit over a period of time. It is important to be consistent in your credit repayments to have a good credit score. A high credit score increases the probability of getting credit/loan easily as it indicates to lenders that the probability of you repaying a loan is higher. Good Credit Score becomes even more important because interest rate that you pay on any loan, can also depend on your credit score. 

Smart ways to increase your Credit Score:

1. Clean up your credit report –You should apply for a credit report to check your score regularly. Many times there are errors in the report, which will lead to an inaccurate score. Removal of mistakes will improve the credit score.

2. Automate your payments – We have a busy life and we might miss paying credit card bills or mobile phone bills. You should therefore automate payments. Most banks have this facility now. There are many software tools and mobile apps available as well to keep track of payments or you can use good old calendar reminders.

3. Use credit cards- It is advised that credit cards should be used only for emergencies but from a credit score perspective; do use your credit card once in a while. This helps in many ways. The card remains active and repayment behaviour is reflected on your credit score. If the credit card gets cancelled due to inactivity, the good record of that card will also be lost.

Read: 7 Costly Credit Card Mistakes Almost Everyone Makes

4. Use old cards first – You get tempted to get a new credit card looking at the offers and reward points. But before you get the new card and leave your old credit card unused, do remember that the proverb, ‘Old is gold’ holds true for credit cards. Older cards have a longer history and a history of good payments increases your credit score.

8 SMART Ways to Increase Your Credit Score Click to Tweet

Many people also think they can improve their credit score by closing old unused credit cards, but this is not necessarily the case. Open sparingly used credit cards actually help improve your score as it shows that you have a high credit limit and low credit utilization. You need not use the card very often too. Using it once in a while will ensure that it stays on the credit report.

 Must Read – How To Make Money with Credit Cards

5. Old loans should be seen in the credit report – Do you remove the names of companies that you had worked with when you join a new company from your resume? You don’t as they offer an insight into your experience and expertise. Similarly, a longer history of good repayment practices will help increase your credit score. In case if you are planning to prepay some loan – go for newer one. 

6. Behaviour indicating credit risk should be avoided – You should always be aware of your actions around credit. If you do something out of the ordinary like missing a credit card payment or reducing the monthly instalment on a loan or taking an advance on your credit card, it sets the alarm bells ringing and credit issuers can associate this with money troubles.

7. Get the Settlement Certificate – In some cases, even after you make a payment or you default on a loan but settle it after the due date, the lender does not update the records. You find your name is still present in the defaulters’ list of the Credit Bureau. You should send the ‘No Dues’ or ‘Settlement’ certificate to the lender. The bank would have issued this to you when you made the payment. The lender would then inform the Credit Bureau accordingly.

8. Be Fastidious – Do not agree to be the guarantor for anybody’s loan. If that person defaults on the loan, your credit score will be affected negatively. Conduct a due diligence on the borrower and guarantee loans selectively.

 Read: Top 10 credit score myths that need to die

Few basic Rules – from Cibil

  • Rule 1: Always pay your bills on time.
  • Rule 2: Keep your balances low.
  • Rule 3: Maintain a healthy mix of credit. Your credit history should contain a mix of a home loan, auto loan and a couple of credit cards.
  • Rule 4: Apply for new credit in moderation. (don’t show you are credit hungry)

If you would like to read more about reducing liability or strategies to get out of debt trap – you will find that in my book “Financial Life Planning – solve your biggest puzzle”.

It is important to have a high credit score so that you get credit easily when you most need it & at lower rates. Please share your experience & experiments with credit score – hope that will be helpful for TFL readers.

Image courtesy of renjith krishnan / FreeDigitalPhotos.net

5 Reasons you should not Retire

Hemant Beniwal
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13
5 Reasons you should not Retire

Are you waiting for the day when you will retire and relax and spend time with near and dear ones? But have you thought of life after retirement from all aspects? When you scale the peak of a mountain, your climb is not finished. You have to climb down. Similarly you have to live through retirement. It is not a destination, but a point from where a new journey begins.

Many sportspersons like Michael Schumacher and Shane Warne came back to competitive sports after retirement. Ronald Reagan the former president of the United States said “Two weeks ago I went into retirement. Am I glad that’s over! I just didn’t like it. Took away all the fun out of Saturdays”.

That might be the case for many of us. Here are some reasons that might make you think twice about retirement:-

1. Longevity –The average lifespan of the Indian has increased. According to World Health Organization (WHO), the average life expectancy of Indians in 2013 is 70 years and this is expected to rise. As quality of life becomes better and with advances in medical technology, there is a high chance that you may outlive your retirement savings. Medical costs are also rising. With age, this is an important component of your expenses. With increasing age and rising medical costs, it is better to work for more time and earn more to get the benefits of higher savings and investments. (I recently read “40 per cent elderly work for a living in Maharashtra”)

Read – Your Post Retirement Plan

2. Work adds meaning to your life – You get the Monday morning blues when you have to get up and go to work. But then at the end of the day, you feel a sense of achievement. You will be a little lost if you did not have to go to office, meet your colleagues/employees and do something substantial. If you are healthy enough to work, have a meaningful work life where you contribute to your organization significantly, it makes sense to continue.

You might have a well-planned second career in place waiting to take off after your retirement from the current job/business.

5 Reasons you should not Retire Click to Tweet

You can also transform your hobby or an old passion into a full-fledged career. For example, my neighbour retired as a highly ranked executive from a bank. He returned to photography, his first love. He sharpened his skills, attended workshops and now travels worldwide for photography assignments. He earns more than what he used to when he had a full-time career.

Read – Things to do after Retirement

3. Improve your lifestyle – If you have your financial plan in place and executed it properly, you might pay off all your liabilities before your planned retirement. You can now think of improving your lifestyle. Maybe your family wants to live in a bigger house or go for exotic vacations. You might have nurtured some dreams of living a better life that got lost along the way. Then you should not retire, but aim to for such lifestyle improvements.

4. Society needs your skills –You earn more if you don’t retire. But society also benefits from you being in the workforce. You contribute to the organization you work with and to the country’s GDP as well. After all every penny counts. You can take up activities like teaching the less privileged, coaching children etc. that will also pay you albeit lesser than what you used to earn.

Read: Is Rs 1 Crore enough to retire?

5. Family and Social Life – In earlier times, when a person retired, there was a large family and he/she was never short of conversations and companions. Today most families are nuclear households and children go away to pursue their dreams. You should give a thought to what you would do the entire day. It will not help if you meddle into your spouse’s everyday affairs. Do you have a social life so that you do not get bored at home? Most people have colleagues as friends and spend the entire weekday with them. But just like, there is no contact with them over the weekends, once you retire you may not have anything common with them and realise that you have no friends to socialize with.

My uncle had an active life when he was working. Once he retired, he was at a loss as to what to do and became dull and depressed.

Maybe you like the rush of getting up early and going to work and facing challenges. If that is what keeps you going, you should not think about retiring early. But that doesn’t mean you should not plan for it –

Retirement is a process for which one has to have a proper approach and plan from all aspects. If you are a person who has opportunities for self-growth even at the retirement age and feel complete only if you are earning money or are occupied doing something substantial, do not hang up your boots.

I will love to hear your views on this subject.

Image courtesy of Ambro / FreeDigitalPhotos.net

Review: LIC New Term Plans – Amulya Jeevan II & Anmol Jeevan II

Hemant Beniwal
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93
Review: LIC New Term Plans – Amulya Jeevan II & Anmol Jeevan II

In India we have looked insurance as a tax saving vehicle. That’s why most of our money goes into this instrument in the month of January, February and March. For the same reason, insurance companies and agents’ earnings rises manifold during these months. And for the same reason, our finances are really stretched during these months. Every year insurance companies launch new products in this period but I am not sure why LIC relaunched (may be because of new regulations & changes in mortality rates) “Term Plans – Anmol Jeevan II & Amulya Jeevan II”.

Image courtesy of cooldesign / FreeDigitalPhotos.net

Why Term Plans?

We always believed insurance is to cover life risk and not for investment. To understand more about insurance read –  what is insurance? Because of this, we always recommend term plans, as their only purpose is to cover life risk. The benefits in the case of term plans are received only upon death of insured person. These are the least expensive policies & there is no comparison with investment based insurance plans.

Review: LIC New Term Plans - Amulya Jeevan II & Anmol Jeevan II Click to Tweet

Basic Features of Anmol Jeevan II and Amulya Jeevan II unraveled

LIC has recently launched two term plans – Anmol Jeevan II and Amulya Jeevan II. (discontinued the old ones).

  • Both Anmol and Amulya Jeevan II are protection plans giving only death benefits during the policy term.
  • No other benefits – survival benefit, loans or surrender values are applicable.
  • The sum assured for Anmol Jeevan II ranges from 6-24 lakhs (increments of one lakh)
  • Amulya Jeevan II comes into picture when sum assured exceeds or equals 25 lakhs
  • Important difference is the sum assured but premium paid per lakh for Anmol Jeevan is approximately double that of Amulya. It means an Aam Aadmi who insures less than 25 lakhs has to bear more burden than the high networth individual.
  • Income Tax Benefit – Available under Section 80 C for premiums paid and Section 10 (10D) for Death claims

Read – LIC Jeevan Akshay Plan – Pension Fund

Are LIC Anmol Jeevan II and Amulya Jeevan II old wines in new bottles?

Whenever LIC, the biggest and the oldest life insurer, comes up with new policies, there is a lot of buzz around them. Let us see whether these term plans have something new to offer. Here is the comparison table of new term policies with the old policies.

lic term plans Amulya Jeevan

At a first glance the basic features of LIC’s latest term policies look similar to the old ones. But the important points to note are :-

  • Premium is definitely lower in comparison to older policy.
  • The premium paid for term insurance greater than 25 lakhs is a lot lesser than the old plan.

How do these policies fare against their competition?

Even though the new LIC term policies seem to be faring better than the old ones in terms of premium payment, let us see how they compare to the other insurers ICICI prudential – iCare, HDFC Life –Click2Protect and SBI Life – Smart Shield.

Term Plan comparison lic 2014

  • For insurance of 15 Lakhs – LIC is charging close 60% more on annual premium than iCare and Click2Protect.
  • For insurance between 25 and 50 lakhs, LIC managed to reduce the premium this time.  Even then the private insurers are charging approximately 15% less on annual premium paid.
  • For insurance above 50 lakhs, term plans iCare and Click2Protect fare lot better than LIC.

Should I buy LIC Anmol Jeevan II or Amulya Jeevan II?

Private insurers especially HDFC life and ICICI prudential are faring far better by charging less for more insurance. But even with premium reduction on their annual term plans, LIC new term plans still have a long way to go, if they have to compete with its alternatives HDFC Click2Protect and ICICI Prudential iCare. If you are looking for offline term plans – premiums are competitive.

According to the recent IRDA statistics, the trends indicate HDFC life and ICICI prudential are catching up with LIC in terms of claim settlement. The quality difference between LIC and these private insurers seems to be only in our mindset.

We put forth all the positives and the negatives of LIC new term plans. It is up to you to decide whether you are willing to pay more for LIC brand.

Any queries in relation to existing or new insurance policies will be highly appreciated. We are looking forward to hearing from you in our comments section.

7 Costly Credit Card Mistakes Almost Everyone Makes

Hemant Beniwal
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10
7 Costly Credit Card Mistakes Almost Everyone Makes

Don’t you see RED in the credit card? Read this story… Rishi just graduated and joined a call centre recently.  He was very excited to get his first credit card as it meant a lot to him – freedom to party, shop and entertain.  He got easily carried away with offers and rewards and ended up with multiple credit cards from different banks.  He overspent on gadgets and parties without keeping a track on his credit cards. Very soon what started as an effortless transaction became a nightmare. It became exceedingly difficult for Rishi to pay off his monthly credit card bills.  This is a very common story and it can happen to anybody if you are not aware of these mistakes. 

Image courtesy of stockimages / FreeDigitalPhotos.net

7 Costly Credit Card Mistakes

1. Not checking for hidden charges: All credit card companies woo gullible people with zero charge credit cards and overwhelm them with discounts and rewards. Holding multiple cards is considered a style statement as was the case with Rishi. But every youngster forgets to ask one basic question before adding another card “Are credit cards really free?”

Yes the credit cards happen to be free with some riders.  The credit card may be sometimes free for the first year, but there are annual renewal charges subsequently.  They may be lifetime free as long as a person is ready to spend enormous amount of money yearly.  Before waving -swiping a card in petrol pump, do we realize that many cards charge upto 2.5% of surcharge. The different kinds of charges that normally apply are annual renewal charges, late payment charges, surcharge, processing fee for EMI (Equated monthly installments), cash withdrawal charges and so on.

7 Costly Credit Card Mistakes Almost Everyone Makes Click to Tweet

2. Ignoring Interest rates: Every credit company make money on credit. It means that every time credit card user does not pay a bill in time, he ends up paying high interest rates. The following three instances make it extremely clear. 

Rishi forgot to pay the bill for one month – the credit card company charged late payment charges and only 3% interest. Rishi was pretty happy with that – but what he forgot to notice is those monthly interest rates are concealing the annual rates, which come to +36%.

Rishi pays only the minimum amount, as late payment charges are not applicable.  He does not know that he has to pay significant annual interest rates of 36% not only on the outstanding amount, but also on any new credit transactions as the credit card company feels/assumes that Rishi is no longer in a position to pay.

Rishi used credit card to withdraw cash as he needs cash urgently.  He  pays 2% transaction charges for the withdrawal. There’s no credit period in case of cash withdrawal, so he will be charged with 36% rate from the day 1 of cash withdrawal.

The lessons to be learnt are – completely pay off the credit card bill in the stipulated period.  Always pay your credit card bills in time and avoid taking EMI’s or cash using credit card. If there is a tendency to forget bill payments, then link your bank accounts with credit cards so that the bill due is directly debited from your account

3. Overlooking safety: One of the biggest blunders, people do is disclose credit card number, CVV number (card verification value), PIN (cash)  or online PIN on the phone or email.  Do not give credit card details, especially to your good friends or credit card employees, as they have other details of you. Sign the strip at the back of card before using it for the first time. Losing unsigned card could pose a serious problem.

4. Paying no attention to Online Security: Our darling (No SEC 377 😉 ) Rishi likes to shop online as he feels he gets good offers from these websites. He uses an application for storing all his credit card details so that he can access it from anywhere.

Rishi unwittingly provided all the credit card information for future fraud. Do not duplicate your credit card information by giving it to unknown apps or unsecure sites. There should not be any duplication even on very popular shopping sites as passwords can be easily stolen.

5. Paying no heed to Credit limits: Set credit limit at moderate level neither too high nor too low.  Do not set the credit limits very high as there is a tendency to overspend and also a risk of high loss if credit card is lost.   At the same time do not set it so low that you exceed your credit limits sometimes.  Credit card companies charge high interest rates on transactions above credit level.  Indian banks are also taking note of credit score, which suffers every time you exceed your credit limits. A bad credit score means you may be charged high interest rates for all future loans or may find difficulty in getting a loan.

6. Losing track of Credit card transactions: Getting back to the example of Rishi – he treats a special friend in a five star hotel on her birthday.  He was expecting a 15% discount on one of his credit cards.  As he wanted to show off, he never bothered to find out with the hotel employee whether the discount is still valid.  He not only went overboard with expenses but lost 15% discount as the offer is no longer valid.

If Rishi was a little smarter he could have enquired with the hotel employee whether he can get discount on any of his other credit cards. To make an informed decision it is important that the user is not only cautious of his expenses but also aware of credit card rules and rates that apply. One easy way to keep track of payments and current rates is to read in detail each and every transaction on the credit card statements.

7. Loss of credit card – It is very difficult to detect a credit card loss.  Since the advent of chip cards, the credit card chip insert takes a longer time than the swipe which was used before. So there is a tendency to forget the credit cards.  Link credit card transaction updates with your email or sms.  It not only helps users to manage expenses and also protects them from credit card fraud or loss.

Credit card when used right is an amazing tool that simplifies one’s life, but the wrong or untamed use of it can prove to be a disaster to your financial life. It has almost become a necessity, unless one wants to carry huge amounts of cash. So understanding its importance, Let us not blame credit cards for our careless mistakes and poor spending habits and be a bit cautious while carrying and using these.

We would like to hear and learn from your credit card blunders.  Do share with us any interesting incidentor experience you had with a credit card?  Please express your views in our comments section.

Top 10 Credit Score Myths that need to die

Hemant Beniwal
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12
Top 10 Credit Score Myths that need to die

A Credit Score is a report on how you have used credit over a period of time. When you apply for a loan, it helps lenders like banks to get an insight into your credit usage patterns which eventually gives them the probability of repayment of loan, if issued.

In India, CIBIL is the primary institution that issue a credit report. Although there are other companies like Experain or Equifax which are trying to get their foothold in this business, CIBIL report is now increasingly being used by organization before they approve your loan.

Image courtesy of digitalart / FreeDigitalPhotos.net

Top 10 Credit Score Myths & Misconceptions

Credit Score is relatively a new concept in India and so there are many myths and stories hovering around it. People tend to believe a lot of hearsay that goes around. Here are the top 10 myths which you will hear very oftenand why you should NOT believe in any of these-

Top 10 Credit Score Myths that need to die Click to Tweet
  • Checking your credit score very often will have a negative impact on it

Just like the balance in your bank account remains the same whether you check it once a week or once a month, the credit score will not be affected if you apply for a credit report to check your score.

  • Credit score is not important if you do not need a loan

Some of you may not need loans now and so you may not bother about the score. But that is a wrong belief, as you never know when you might land up in a financial emergency and require a loan. Loans also help you leverage your money which you might think of sometime in the future. In all such situation, a bad score may deprive you from availing the very needed loan. Soon, many institutions like insurance companies will start using your credit score to decide on the plan/service they want to offer you  and even the premium may vary with your credit score.

  • Keeping a credit card balance will lead to a better credit score

Not paying your credit card bills on time only leads to penalty charges and interest payments. It does not help in improving the credit score in any way.

  • Your income is factored in the calculation of your credit score

Your income, bank balance, assets, wealth etc. are not factored in your credit score, as these numbers are not available with the credit rating institution.

  • You can avail loan in name of spouse if yours credit score is not good

The credit score for husband and wife is calculated by CIBIL separately and so both will have a different credit score based on their individual credit repayment history.Institutions at times reject the loan applications, especially joint loans, even if one spouse is having a bad credit score.

  • Increased usage of credit card will lead to a higher credit score

I am not sure if this was a case of misleading promotion that higher usage of credit cards will lead to a higher score but that line of thinking is totally wrong. More or less usage of credit cards does not lead to change in your credit score. It’s the way you use your cards, the number and type of loans you avail and the payment history which impact the credit score.

  • Your academic background affects your credit score

It does not really matter to CIBIL whether you are an undergraduate or have a doctorate in Astrophysics while calculating your credit score. Your loans and credit payment pattern are the primary factorswhich forms the basis of your credit report.

  • Credit score is the only parameter for institutions to evaluate your loan application

When you approach a financial institution for loan, they consider a number of factors apart from your credit score like your income, risks involved in the project or risk appetite of the lending institution etc. So even if your credit score is good, it does not guarantee a loan.

  • Bad score in the past cannot be rectified at all

A bad score will have a negative impact on your ability to avail loans. But it is not set in stone. If you start paying your credit card bills on time and do not default on other loan payments, your score gets improved in the future.

  • CIBIL has a cut-off score for credit institutions

CIBIL does not command whether to give you a loan or not. It gives a score based on your credit repayment historyand the financial institutions decide on the basis of this score, along withother factors, whether to lend money or not.

A credit report will tell you how good or bad you have been in repaying your liabilities/dues. To avoid getting deprived from a loan when you actually need it, remove all myths around the credit score and check it periodically. It will also ensure you can take appropriate measures timely, if you have a bad credit score. Please share your questions & concerns about credit score in comment section.

Aam Aadmi’s Question – Mutual Funds or Direct Equity?

Hemant Beniwal
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28
Aam Aadmi’s Question – Mutual Funds or Direct Equity?

It is now no more a secret that Equity investment for long term is the key to planning your long term goals and beating inflation. (If not, read this “Indian Equities – Past, Present & Future”) And traditionally to invest in equity market, there are two options available to an investor- Mutual Funds and going direct to buy Stock/Equity Shares form open market. Today we analyze the merits and demerits of these two options.

mutual funds vs direct shares

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

What is a Mutual Fund?

‘Mutual Fund is a pool of money that is collected from investors who have a common goal and is invested in stocks and securities by professional team with the aim to achieve the fund’s predetermined objective.’

Aam Aadmi’s Question – Mutual Funds or Direct Equity? Click to Tweet

What is a Stock – Direct Equity?

‘Stock or share is a security that represents ownership in a company. As it is commonly said …’A share is a share in the share capital of the company’’

Here are the basic differences between mutual funds and stocks.

Which is a better option to invest – Mutual Fund or Direct Equity?

Below are various factors which a person should consider before making his decision to invest.

mutual funds vs shares 

    1.  Time to research stocks: Studying the share markets is a full time activity and requires a lot of time and energy on part of the investor.  And it is just not confines to share market but also includes analyzing economic numbers and macro-economic factors like government policy changes, currency trends etc.. If an investor is ready to dedicate adequate time in studying these markets and can continuously monitor his investments, he can go for investing in direct stocks. If a person does not have time to select and monitor his stocks, he can invest through mutual funds.  In mutual funds, the investor leaves this task to the fund managers who are professionals in their field and manage the investment on behalf of the investors.
    2. Market Expertise: A person requires adequate skills and expertise in managing the investments. The skill lies not in having information about the market alone but in the ability to analyze the information. So, if a person is holding a stock in auto ancillary sector, must be able to analyze the trend if the Automobile Association announces that “Q3 sales drop in passenger segment” and “Maruti is developing petrol engine with more than 22 km mileage”. The information comes in the crudest form as these may not refer to studying a particular company or sector but it encompasses the study of the micro and macro factors affecting the economy as a whole. In mutual funds, the fund managers have quality access to research material and have adequate skills and experience in managing the fund to the best of their discretion.
    3. Amount to invest: The cost and time involved in research study for selecting stocks is not justifiable for small amount of investments. For eg to invest Rs 5000 a month in Nifty stocks, are you going to go through financial data of all the fifty companies? Thus, for small investors mutual funds are a better option. Small investors can invest through SIP (Systematic Investment Plan) route in mutual funds which helps them in investing small amount regularly on monthly/quarterly basis. The investor gets the benefit of rupee cost averaging which is not available in case of stocks.
    4. Expenses and Transaction/Trading Cost: The main charge involved in mutual funds is the annual expense ratio (fees charged as percentage of total investments) whereas the charges involved in stocks are demat, brokerage and transaction charges. A person has to be prudent in studying the costs involved. As mutual funds involve high trading volumes, the transaction cost is comparatively lower than that of an individual investor who has lower trading volumes. Further, if an individual investor trades frequently, he will be paying significant brokerage commission + Capital Gain on every transaction. 
    5. Affordable diversification: The units of a mutual fund scheme provide the investor exposure to a range of stocks held in the portfolio of the scheme. Thus even for a small amount of Rs 5000 in a particular mutual fund scheme, the investor enjoys a diversified portfolio as schemes have 30-60 stocks in the portfolio. In case of stocks, for the same amount of Rs 5000, the investor can purchase limited number of different stocks. In order to achieve the same level of diversification as in a mutual fund scheme, a person needs to invest huge amount.
    6. Desire for ownership:  If a person wants ownership in a company, he should purchase the stock of the company directly. Equity share is part of shareholding so howsoever small it is you become the owner and like an owner, you have to discharge your duties and have the right to share loss or profit. In case of mutual funds, as the stocks are held indirectly by the investors, they don’t get the ownership right. Thus in case of purchase of stocks, the investor is entitled to various benefits, like attending the shareholders meeting, voting right etc.
    7. Investment Strategy: Mutual Funds provide various investment strategies to investors like SIP (Systematic Investment Plan), STP (Systematic Transfer Plan), SWP (Systematic Withdrawal Plan). Also portfolios are managed as per various strategies like growth, value, contra etc.. These investment strategies are not available in case of individual stocks. Further some mutual funds provide various other options and facilities like dividend reinvestment, trigger facility (shifting or redeeming investment based on happening of a certain event in future, like Sensex rising 10% up etc..) again not available in case of purchase of stocks.
    8. Control Over Investments: If a person prefers to have control over his investments, he should invest directly in stocks. In case of mutual funds, the decision to buy, sell and hold stocks is delegated to the fund manager and the investor has no control over his investments. So even though if you have hunch that markets may fall, you cannot do anything. Or if you hate companies manufacturing liquor, you may not be able to tell you liking to the fund manager.

I raised Mutual Funds Vs Stocks on LinkedIn & got few interesting comments on both sides – check here

Read – 3 Principles & 3 Practices to generate Superior Lifetime Returns 

Thus both mutual funds and direct equity have their own pros and cons.  Investment in stocks is recommended only to those investors are a great stock picker and have developed expertise in securities market. For beginners in equity market and those who don’t have adequate time to monitor their investment, should invest in equity market through mutual funds as mutual funds provide various benefits which are summarized below:

  • Professional management
  • Portfolio diversification
  • Economies of scale
  • Liquidity
  • Tax benefit
  • Convenient options

What is your take on this? It will be great if you can share your experience – Mutual Funds vs Direct Equity. Do share in comments section.

LIC New Single Premium Endowment Plan Review – Nothing New!

Hemant Beniwal
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51
LIC New Single Premium Endowment Plan Review – Nothing New!

LIC has a tradition of launching a single premium plan in the last quarter of financial year and it has kept it going. Amid the sea changes made by IRDA on traditional products from 1st January 2014, LIC has launched the first product – LIC Single Premium Endowment Plan, in compliance with these changes. The main reason of coming out with such a product in the last quarter of financial year can be attributed to the tax benefit which most salaried individuals seek to avoid high deduction from their income in these months. Due to this aspect, even the business of Life Insurance companies increase manifold and LIC too have always garnered a heavy collection with its single premium product.

LIC New Single Premium Endowment Plan

Image courtesy of bplanet / FreeDigitalPhotos.net

But considering the change in the tax provision in Budget 2012 and the alternatives available to investors, is LIC Single Premium Endowment Plan or any other single premium product worth investing now? Let’s find out through this brief review-

Features of LIC Single Premium Endowment Plan

General: The new plan is a single premium endowment plan and so the premium has to be paid only once. On completing the required term the policyholder receives the maturity amount. Anyone from age 90 days to 65 yrs can invest in the product which means it can be bought for children/grandchildren too. It’s a participating non-linked savings cum protection plan so the policy will accrue bonus during the term. The benefit, which will include sum assured and bonuses declared, will be paid either on maturity or on death of the policyholder. The minimum term policy can be bought is for 10 years and the maximum term of the policy is 25 years. However, the maximum age of maturity is kept at 75 years which means a person with age of 65 years cannot buy the policy for more than 15 years.

LIC New Single Premium Endowment Plan Review - Nothing New! Click to Tweet

Sum Assured: The minimum sum assured in LIC Single Premium Endowment Plan has been kept at Rs 50000 while there is no limit for maximum amount and it has to be in multiple of Rs 5000 only. As per IRDA new regulations, the sum assured in all traditional products has to be min 10 times of annual premium if less than 45 years of age and minimum 7 times if age of life assured is more than 45 years for all policy term greater than 10 years.

Read – LIC Jeevan Akshay – Pension Plan

Maturity/Death Benefit in LIC New Single Premium Endowment Plan

On Maturity, LIC will pay the sum assured along with the bonus accrued during the term of the product. The bonus declared in LIC Single Premium Endowment Plan policy will be simple reversionary bonus plus final addition bonus, if any.

The policy will pay death benefit differently at two instances:- If the death of the policyholder is after the risk commencement then sum assured along with accrued bonuses will be paid. But if the death occurs before the risk commencement then only the single premium paid to the company will be returned without any interest.

(In case the age at entry of Life Assured is less than 8 years, risk will commence either 2 years from the DOC OR policy anniversary after completion of  8 years of age whichever is earlier, for others risk shall commence immediately).

Surrender Charges of LIC Single Premium Endowment Plan: Since the policy is launched in 2014, it has to abide by IRDA new regulations. Hence the surrender charges in this product are in line with it. In first year 70% of the basic premium will be paid while any time after 1st year 90% of the premium paid will be paid as surrender benefit.

Read – LIC Wealth Plus Highest NAV Plan

Other Features

A loan can be availed from LIC which will be a defined % of surrender value. This option starts from 2nd year onwards and the loan value is higher in case the remaining policy term is lower. So for a term of 21 year and above if the loan is taken after completing 15 years, LIC can give upto 90% of surrender value.

The Return-IRR of LIC Single Premium Endowment Plan

Yes, this is the most important factor now to evaluate the product, especially after so many changes in life insurance from 1st January, 2014. Now all insurance companies has to show illustration on two assumptions – 4% and 8% investment return. One factor which all investors have to take in consideration is that this is return is on your investment amount i.e. net premium you paid after deducting the charges.

LIC Single Premium Endowment Plan – Illustration

I have assumed the figures based on LIC new Single Premium Endowment Plan benefit illustration at its website for a 30 year old. The policy term is taken as 25 years.

Premium Invested (Rs.) Bonus  (Rs.) Maturity Amount (Rs.) IRR
23545 52500 102500 6%

The IRR of the product comes to 6% at 8% investment return shown by the company.  Since there is no bonus illustrated at 4% return assumption, no IRR is calculated. 

Alternatives of LIC Single Premium Endowment Plan

First let’s see what alternatives you have for this product if you want to invest one time:

  • ELSS– Equity linked Savings scheme are market linked product and so it will not be wise to compare the net return of these two. But if investing for such a long period won’t ELSS be a more lucrative option considering thelower cost of investment and the returns it can generate.
  • PPF– A PPF is also a long term investment and can be continued for 15 years. If you have one going then considering the higher rate of return and tax free status, it will be more lucrative to invest your contribution in PPF to avail the tax benefit and fetch higher returns.
  • Tax saving FDs – not at all bad if we compare with LIC Single Premium Endowment Plan

Argument in favor of LIC Single Premium Endowment Plan 🙁

While I was looking at arguments in favor of the product I found the following three more common but interestingly they fails:

1. Family Protection– The first argument is the protection it gives to you for your family. But if you analyze your insurance need, the requirement is generally into lakhs or crore. The premium you will have to pay in this policy for such a cover will be way beyond your means.  A term plan is far cheaper means to avail a higher protection. For e.g.to buy a cover of Rs 50 lakh for a 30 year old person, the premium in this product will run into lakhs while in a term insurance it will be range between Rs6000- Rs 10000 p.a. So it’s difficult to avail any high insurance coverage here.

2. Investment– I have shown clearly that the investment return will be way below what you can generate from other instruments. Although earlier death can produce higher IRR but then you make investment for wealth creation in your life and not for early death benefit.

3. Tax Benefit– The product will come under section 80C & Sec 10(10D). As per budget provision of 2012 the premium paid towards insurance policy will qualify for tax benefit only when the SA in a respective year is at least 10 times of the premium paid.  If it doesn’t happen then even the maturity amount will not be tax free under sec 10(10D). The biggest losers in this provision are single premium policies which are not able to meet this criteria. If we look at the illustration alone, then this criteria is not met. Even the sample premium rates given by LIC at its website do not benefit either. If this is the case then you will loose any tax benefit on this product.

Thus, while analyzing on various parameters the single premium product launched by LIC does not fulfill either of the requirement- Protection and Investment.  Hence, It’s good to avoid. The basic of financial planning says “keep investment and insurance separate’. Choose a term plan if you really want to buy  high protection for your family but only after a detail analysis and weigh the investment options for long term instead of building your wealth from a combo product.

Review of LIC New Single Premium Endowment Plan is done by Jitendra PS Solanki, he is CERTIFIED FINANCIAL PLANNERCM and SEBI Registered Investment Adviser

Have you invested in any single premium plans? Were you aware of the tax provision of 2012? Have someone pushed traditional polices to you in last 2 months? Share your view in comment section & if this article makes sense share with your friends…

8 Surprising Ways a Small House Saves You Money

Hemant Beniwal
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23
8 Surprising Ways a Small House Saves You Money

Actually speaking I am not a fan of Antilla or Mannat, not for the reason that I do not have a house like this but due the fact that I like bumping into my kids (sometimes), observe my parents for their greatness and share warmth with my wife. Financially also, if you are shopping for a house, the size of the house makes a key component of your decision. ‘Living life king size’, ‘Living Large’ or ‘Living Bigger’ does not definitely mean living better and ‘going smaller’ does not mean sacrificing.

Image courtesy of phanlop88 at FreeDigitalPhotos.net

WHY A SMALL HOUSE/FLAT… 

A small house can save your money in many ways. Buying a small house is comparatively much cheaper than buying a large house. Besides this entry point, where we need to pay less price, there are a host of other financial perks available in a small house/flat. Read: Buy or Rent a House?

small vs large house

  1. Easy to make/purchase – the main expenditure in making a house is LAND cost. A small house allows a person to have a small budget as the small land will cost lower than buying a bigger piece. A person can buy a small land near to city amenities and save lot on transportation and safety. If he is buying on loan the outgo will be less in form of interest payments.
  2. Higher transaction time – It’s a global phenomenon that small property is sold in less time than the large one. This is because it is affordable and supply side of buyers is more. So in case of analyzing the relative liquidity, a small house is easy to sell and purchase.
  3. Lower property taxes & property insurance cost – People generally fail to consider property taxes while purchasing large houses. Property tax is based on assessed property value and property value is based on price per square foot/yard. Hence, property tax is comparatively lower for small houses. Hence a person living in a small house can make savings at this front. Similarly the insurance cost for small house is much less than large house. Although insurance depends on lot of other factors but area is also one consideration.
  4. Lower cost of maintenance – Small houses are easier and economical to maintain than large houses. For example, there would be savings in the material used and time in painting/whitewashing the house (due to less space) than large house. Similarly, a small roof will cost less to repair than a large roof. Replacing the floor tiles would definitely cost less in a small house than a large house. Further, there would be savings in purchasing cleansing materials as there is less space to clean. Also, there may not be requirement of domestic help or will require less aid to clear the mess of the house, thus saving on the monthly budget.
  5. Less documentation – To build small houses, some of the building related permits are not required. This depends on state policy on housing. These include setbacks, side walls, parking space, height of building and story levels. But for a small house the documentation and required approvals will be less. Thus a person can save the time and money required for seeking these building permits.
  6. Lower utility bills – There would be a great downsizing in electricity bills, water bills, etc. in case of small houses. Even the installation cost will be less as you will require a kw/h connection. Few rooms would mean less lighting and cooling cost, thus overall making saving in the energy utility bills. This also means less expensive for the house to equip with central heating and cooling system, renewable energy systems like solar water heater etc.
  7. Lower ongoing medical cost– There is various reasons to prove that small homes may be healthier than large homes. Firstly, since small houses are cheaper than large houses, it reduces the financial stress on the house buyer. A person need not take too big loans and the stress to pay them off for buying small house. Secondly, it is easier to clean small houses. A clean house can avoid major diseases which are spread because of unhealthy surroundings like contaminated water, dusty spaces etc.
  8. Save money on frivolous living– A small house has less storage space. Hence a person would purchase only those items that he actually requires. You will not be interested in buying unnecessary plastics and wood. In fact person will be tempted to sell off things that he don’t require to keep the space free. Smaller spaces help in thinking creative ideas to maximize every square inch of the house. It helps in optimum utilization of space.
8 Surprising Ways a Small House Saves You Money Click to Tweet

Besides the above reasons through which a person can make financial savings, there are a host of other benefits which are available in living in a small house.

Small house can actually improve a person’s way of living.

Below are few of many reasons:

  • Family bond– The bonding develops more between family members as they spend more time together.
  • Housekeeping efficiency– Doesn’t need a devoted person to spend the whole day in cleaning the house.
  • Keep wants and need in perspective– Due to less space, would buy only those items which are necessary.
  • Home security– Since there are fewer access points in terms of windows/doors, no intruder can enter the house without being noticed.
  • Easier to live simply– It is much easier to live simply, without fuss and societal peer pressure in a small house.
  • Environmental friendly– Less trees used to build (less furniture), less electricity, gas and water used, less of waste, will have a smaller environmental footprint.

Thus the advantages of a small house over large house are pretty obvious and inspiring to those who believe in economical and simple living without much stress. Warren buffet advocates that “affordability” should not mean “expenditure”. It means that even though you can afford, you should not pay more for what is not required. He has practiced what he said as he is been living in the same house he used to live when he started his career.

Read: Why it is important that affordability should be measured? 

What is your analysis or observation on this? Share your views in the comment section please.

QROPS & UK Pension for Non Resident Indians (NRI)

Hemant Beniwal
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7
QROPS & UK Pension for Non Resident Indians (NRI)

For NRIs living in UK the pension fund accumulation is a major hindrance. The stringent laws on taxation, especially on retirement assets, leaves very less in the hands of the people. The larger problem arises when one wants to leave the UK to return to their own country or shift to any other country. There is no choice but to pay this high tax to withdraw their pension fund. As per the rulebook of UK pension fund:

  1. The retirement age of receiving the pension starts at age 55
  2. On retirement, one can withdraw up to 25% of the fund value
  3. The pension income one receives is taxed at a rate of as high as 50%
  4. If you withdraw the entire amount at retirement, the rate goes up to 55%
  5. In the UK you have to even pay a death tax of 55% on the total pension fund before it is passed to your beneficiaries

With such rules, it’s difficult for NRIs who wish to leave the UK or have left the UK to withdraw their pension fund. Even during the accumulation period, there are very limited investment choices that are only denominated in pound sterling. All these scenarios were posing a huge problem for NRIs till a few years ago when UK came out with the concept of QROPS i.e Qualifying Recognised Overseas Pension Scheme.

Must Read – The UK – QROPS For NRIs

What is a UK QROPS?

It is a pension scheme outside the UK specifically for international workers. Here you can transfer the value of the rights from the UK registered pension scheme without incurring UK tax charges. As per UK regulations, any QROPS has to be approved by HM Revenue &Customes(HMRC), and then only it is a legal entity. It works in a similar way you will have a regular pension in the UK i.e.  Once you transfer the pension amount from UK Fund to QROPS, post-retirement, you can still receive the lumpsum and the pension similar to what UK rules allow. However, you will be subject to the tax laws of the country where QROPS is established or you become the resident.

Indian Pension Solution – LIC Jeevan Akshay

Eligibility & Transferable Pension Schemes

The scheme is eligible mainly for two categories-  One for UK nationals, who intend to or have already moved from the UK and the second to international workers returning to their home or other country. If you are an NRI from any of these categories, you can transfer your UK pension fund to QROPS. However, you will not be eligible if you have already bought an annuity plan in UK and receiving the payout as listed.

There are also various types of pension schemes in UK most of which can be transferred to QROPS. The only exception is any state pension scheme which is non-transferrable.

Also Check-  Gratuity in India

Why QROPS?

There are many benefits which NRI in UK derive when they transfer their pension funds to a Registered QROPS. The biggest of them is the relaxation in taxation laws which give more money in their hands. In some countries like Giblatar the taxation is almost Nil. Here are some of the benefits of a QROPS:

QROPS & UK Pension for Non Resident Indians (NRI) Click to Tweet
  • The tax on pension income depends on the country of residence which makes the tax payout very lower
  • The benefit of tax free lumpsum at age 55 can go upto 30%
  • There is no requirement to purchase an annuity much like in UK where if you don’t you are taxed very high
  • No inheritance tax to your beneficiaries which makes your entire pension fund available to them at your death
  • There are various investment option in some QROPS which helps in growing your fund

There will be other benefits too which make QROPS an attractive proposition for NRIs in UK.

A general comparison of QROPS and UK pension scheme benefits:

QROPS UK Pension Scheme
Maximum Lumpsum Withdarwal Upto 30% of fund value if more than 5 tax years out of UK 25% of fund value
Earliest Retirement age 55 55
Tax on Pension Income 0% Upto 50%
Tax on Death Benefit No Yes, upto 55% of Lumpsum payment
Pension Income Max 120% of UK GAD rates subject to Jurisdiction Based on 100% of UK GAD Rates
Investment of pension fund Flexible with wide range of option Limited
Consolidation of Different Pension Yes into a single pension No

The table is taken from IFAST, Singapore. The above comparison is general and may vary based on specific schemes or individual scircumstance.

Must Read – What is an Emergency Fund & how to create it?

Who can create QROPS?

Although there are many schemes which will be listed as QROPS even in India but the rule says that unless they are approved by HRMC they do not qualify as QROPS.The two main jurisdictions which has evolved as attractive options for QROPs are Gibraltar and Malta apart from Isle of Man. Both these countries run QROPS approved by HMRC. There are specifically two services within their QROPS- Trust services where the pension fund is managed and administered in a trust structure and investment services where the fund is invested on the basis of a portfolio created by the pension holder with the help of the adviser to ensure the money grows till you are enjoying it. (Clients should not ignore expense ratios & taxation issues before moving their funds to some QROPS. I have personally checked, in some cases expenses are very high & you lose benefit if any.)Although they both are tax friendly, still there are differences especially in taxation within these two schemes. One has to read the details of the scheme to identify the real benefits from their schemes. But the larger benefit of QROPS with these jurisdictions is that they communicate with HMRC for any approval or clarification on behalf of investor.

Coming to India there are various schemes which are listed as QROPS but cannot be taken as approved as clearly stated by HMRC. Here is what they say-

“This list is based on information provided to HMRC by non-UK schemes when they notify HMRC they meet the conditions to be a QROPS. Publication on the list should not be seen as confirmation by HMRC that it has verified all of the information supplied by the scheme in its notification. The purpose of this list is merely to help UK registered pension schemes carry out their due diligence when transferring pension savings to another pension scheme that is not a registered pension scheme. The list is not to be taken as a recommendation for a particular scheme or product. Nor should it be taken that any scheme featured on the list is approved or backed by HMRC.”

What should you Do – in India?

There are specific criteria laid down by HMRC UK on what type of QROPS can be approved by them. The best is to draw a checklist and confirm if the scheme really comes in the parameters. Here is a small checklist which will identify any scheme from India are really QROPS compliant:

Rules Indian QROPS
Is the pension scheme regulated by a pension regulator?
Is the scheme pen to both local and non-resident?
Is the scheme recognized by the tax authority?
Is income distribution earliest at age 55 years old?
Does it provide lifetime income like an annuity? [ LIC Annuity Plan ]
Is the maximum lump sum payment at retirement at 30%?
Is the pension scheme taxed similarly for both local and non-Resident?
Is it invested in low cost international funds?

Source: IFAST, Singapore

This is a general checklist which can identify the probability of any QROPS getting approved by HMRC. One can draw some conclusion by using such a checklist. Remember the penalty of noncompliance is heavy as the entire pension fund will become taxable and there can be penalty imposed to. So it will be wise to clarify whether the scheme is approved by HMRC and not only listed before you make a decision.

Disclaimer: This article is based on my discussion with a couple of NRIs & some reading. I will suggest you to speak your ‘Investment Adviser’ before taking any decision.

Hope you got some idea of QROPS – please share if you have some additional information or ask any questions related to the same.

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