Asset Allocation – formula for investment success

Investment Planning

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August 7, 2012

Asset Allocation – formula for investment success

Last week we thought of spoiling ourselves and have a Gujarati thali. The moment you enter the restaurant you get the heavenly aroma and wait for the feast to arrive. I am calling it a feast, as you get a huge variety of eatables in small katoris. You get at least 15 dishes but in small quantities. Out of these 15, 4-5 dishes would be something you dislike, so you will not eat them and then get confused over which is the main meal. So, in the end, you will fill your stomach with something which is not the main meal and you would pay for all the 15 dishes. Now just compare this to your daily meal. Normally we take a fixed quantity of chapattis or rice and vegetable or salad. The variety is less and you know which the main meal is, as you never think of replacing pickle with rice. Actually, this discipline makes your platter more enjoyable and longer-lasting in terms of appetite.

Must Check –Aligning Investing with Life Goals

Now try connecting this disciplined life with investments. You will have a lot of options to invest and a lot of opportunities to invest but you need to prepare a fixed road map and stick to it. That is your asset allocation. See where you stand in terms of your financial behavior from the adjoining graphic.

Where do You stand?		Timing of Market
Where do You stand?		Possible	Not Possible
Selection of Best Security	Possible	1	3
Selection of Best Security	Not Possible	2	4

In which corner do you stand

No. 1 box

It says you believe that selection of the best stock or fund that will outperform the market in the future is possible. Also timing the market is possible.

Who stands in 1^st Box: Normally all investors and their agents/brokers stand in this box

Asset Allocation – formula for investment success Click to Tweet

No. 2 box

It says best security can be selected that will outperform the market but they can’t time the market.

Who stands in the 2^nd box: Normally Fund Managers & Long term investors fall in this category.

Must Check –How you benefit from long-term orientation in Life and in Investing?

No. 3 box

It says that there is no need of selecting a security for the long term. They believe in timing the market – they don’t see what they are investing in be it stock, index, commodity.

Who stands in the 3^rd box: Day traders & technical analysts fall under this category.

No. 4 box

This box says it’s not possible to select the best security & even the timing of the market is not possible.

Who stands in the 4^th box: People who think they are not smart & still want to easily achieve their goals.

And if you fall in Box 4, don’t think you are a duffer, since 93% of the return that investors get is due to this strategy only. Only 7% is contributed by a selection of security & timing of the market.

Strategy is very simple but hard to stick – as they say investing is simple, but not easy.

What is Asset Allocation

Asset allocation means dividing the ratio of asset classes for investments as per the risk and time horizon of investment. The weightage of each asset class is kept constant. Once you have made this portfolio you just need to rebalance it at a pre-decided date. The profit in the asset lass which outperforms is booked & the proceeds are used in the asset classes which underperform in that particular period. This is done keeping the original weightage of the asset class in the portfolio. If we see in 2007 equity gave exceptional returns so if you would have followed this strategy your assets would have automatically moved from equity to debt. And in 2009 when equity underperformed it would have indicated you to increase your exposure in equity. With time this strategy reduces the risk & increases return.

Asset Allocation Video

Example of Asset Allocation

Just take an example where one investor invested Rs 10 lakhs in 1999 with an asset allocation of – Equity(Sensex): 50%, Debt (Kotak Gilt Fund – oldest gilt fund): 30%, Gold (Average yearly prices): 20%

If the investor maintains the asset allocation & rebalances it every year he gets Rs 53 Lakh and through buying and hold strategy he gets Rs 45 Lakh. The timing of the market is an even poorer strategy that we have already seen in the last article.

Asset Allocation	Without Asset Allocation	Rebalancing Dates
1000000	1000000	1st Apr 1999
1233364	1233364	1st Apr 2000
1101071	1076842	1st Apr 2001
1221322	1211901	1st Apr 2002
1218293	1243348	1st Apr 2003
1809825	1696932	1st Apr 2004
1988364	1845985	1st Apr 2005
2887432	2644098	1st Apr 2006
3077850	2823512	1st Apr 2007
3723127	3440719	1st Apr 2008
3365425	2899053	1st Apr 2009
4817546	4074742	1st Apr 2010
5331417	4527598	15th Dec 2010

Check- What are Alternative Investment Funds In India (AIFs)?

How to choose right asset allocation

Imagine yourself to be a racer. Now the race is form Point A to Point B. what speed you will drive in this race?

A…………………………………………………………………………………………………B

Tell me will it be 40.. 80… 100 or 150 kmph?

An experienced racer will always ask these basic questions before answering this?

1 What is the distance between A & B: This is the most logical question – before knowing how far the distance is how we can decide the speed? If Point A is your home and Point B is your grocery store you will not speed, rather go slowly around a 40 kmph speed. When it comes to deciding your equity exposure the ground rule is, if goals are far we should have higher equity exposure & if goals are short term we should invest more in debt.

2. In how much time you would like to reach: Oh! I am not talking about the time, speed & distance formula which we read in our schools. If you apply this formula in investments, you will fail the exam – as we have already seen what investors do. In practice, you will have to make these decisions on the race track. Say, if your start is late, that doesn’t mean you will drive at speed of 200 kmph – It involves risk. So at 45 you cannot have a 100% equity portfolio.

3. Would you like to ask about the road conditions? Normally every investor asks this “will the market rise?” in investments forget this question as asset allocation strategy will take care of it.

Other factors like your past experience with equity will also determine asset allocation. A certain person at age 60 might be comfortable with 15 percent equity where as another investor of same age may not like equity due to certain bad experience in past. Also, it will depend on your comfort with the service provider. Normally, he would be your advisor or a firm taking care of your investments. Market condition at the time of investing also plays an important role. Our suggestion is that you engage a Certified Financial Planner who will draw your goals, design your asset allocation & rebalancing strategy and then all you have to do is to turn on auto drive mode of your financial vehicle.

Asset allocation in modern financial planning is not only restricted to just determining your equity or debt mix. With the advent of time, there are more assets which have emerged in form of commodities, reality, exotics, arts etc. All these assets have different risk-reward characteristics and therefore open an opportunity for a wide range of products to invest. But again as Chetan Bhagat says “Don’t be serious, be sincere”.

Download & read the full Behavioral Finance Guide from here

– this will change your response to the investment world.

Happy Birthday TFL

Miscellaneous

Hemant Beniwal

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July 27, 2012

140

A birthday is just the first day of another 365 day journey around the sun. Enjoy the trip!!

Yes, its time to celebrate. Our TFL is now a three year old kid. We call it a kid because it has just started and there are lot many things The Financial Literates(TFL) have to do.

TFL was born to educate masses, masses which are ignorant about handling financial matters, masses which are literally crucified by greedy agents, masses which are big times savers but yet to mature as investors. We are not talking about you as you are now Financially Literate but about millions of Indians who are yet to be heard by us. Our goal is to provide quality financial education to as many people as possible including kids, teens and adults that empower them to create financial freedom in their lives.

So what all TFL did in last 3 years

As a famous quote of Warren Buffet goes, “An investor has to do very little things right as long as he/she avoids big mistakes.” So our focus in last 3 years was mainly to let you know what all you should not do. TFL educated more on “What not to do” and “how to avoid large – scale mis-selling that is taking place” and our very first article was on “Mis-selling Month”. Yes July 2009 was a mis-selling month when Mutual Fund industry came up with maximum NFOs and distributors asked investors to invest all that they can invest within that month as from the month of August “No Load” regime came.

In last 3 years, we have written more than 200 articles

– articles that debated a lot on how insurance is misunderstood in India

– articles that talk about emotional mistakes of investors

– articles that influence the psychology of the investors

– articles that gave timely information to you

– articles in Hindi, articles in English

– articles that are for you and me

Through TFL, we initiated Quarterly Financial Planning Newsletter that is reaching more than 20000 people and we wish that this number only increase.

Under TFL banner, we also started writing articles in media – few of the newspapers/magazines where our articles regularly feature include Business Bhaskar, Indian Express, Business Standard, Money Mantra etc.

You shall be happy to know that TFL within 3 years is now a big family.

We have readers across the world, close to 20% of our readers comes from USA, UK, Australia, Canada, Singapore & Middle East. Right now we have approximately 17500 email subscribers & close to 2500 subscribers from other social media sites including Facebook, Linkedin & Twitter.

Now we want all our family members to really make this family even bigger. If you like our efforts/articles, please do refer www.tflguide.com to your friends, relatives, colleagues, near and dear ones. Please do interact with us and let us know how we can improve ourselves and how can you benefit more. Please do share your thoughts on articles that reaches you and do help us to make each Indian a Financial Literate.

Hope that coming year would be much better than the year gone by.

Why Do we Make Financial Mistakes

Financial Planning

Hemant Beniwal

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July 24, 2012

22

Last week I shared (confessed) that Club Mahindra Membership is my biggest financial mistake. Why I am saying confession? Because one reader said “Usually success is a public affair and failure a private funeral”. But I don’t think there is any harm if readers learn from my confession or they can save themselves from a mistake. Assuming that someone has never done any mistake is in itself a big mistake (may be a very big lie too). But I am bit surprised that no one asked me WHY part of that equation. So let me introspect:

Why you purchased Club Mahindra Membership & now you are saying it is a mistake?
You are so called financial savvy guy, WHY you did that dumb mistake?

What is Financial Mistake?

First we have to clearly define what is mistake & then only we can find the reason.

Have you said “where we lost money”?? But this is just hindsight or postmortem of our financial decision, which we took couple of days or years back. And sometime even wrong decisions can generate positive results, may be in short term – does that mean we should say that was right decision & should be repeated.

For example: Most of the employees who get ESOP or ESPP benefits hold these stocks close to their heart. And in most of the cases I have seen that with time these stocks become their biggest financial asset or biggest equity assets. But I have to ask these people:

WHY do we make Financial Mistakes Click to Tweet

Is this (your company) the best stock available in the market?
Don’t you think you are losing the benefit of diversification?
What will happen if your company starts underperforming – you will see tough times in your job as well as your stocks will underperform?
And the worst case – what will happen if your company becomes next Satyam or Enron?

So we should not judge our decision based on the results but the principal that decision is based on. Then only we can expect our financial life on right track with great amount of confidence.

WHY do we make Financial Mistakes

There can be many reasons but the biggest reason is this image

Because we don’t ask WHY at the time of taking decision

Simon Sinek is a motivational guru & he gave the concept “Start with WHY”– he shared the golden circle that you saw in above image.

If you look at the outer layer of golden circle there is WHAT & the core is WHY. Most of people never reach the WHY before taking decisions.

WHAT: Most of the people know WHAT they do in life. WHATs are easy to identify.

HOW: Some people know HOW they do WHAT they do.

WHY: Very few people can say WHY they do.

When most people think or act they do from outside in, from WHAT to WHY. They go from the clear thing to unclear thing. We say WHAT we do, we sometimes say HOW we do it, but we rarely say WHY we do WHAT we do.

Knowing your WHY is not the only way to be financially successful, but it is the only way to maintain a lasting financial success.

Let me Simplify

Everyone is interested in knowing the product or telling the product. You open any business channel, magazine or pink paper everyone is ready to recommend you something without knowing you & your requirement. It is a right solution for you or not is none of their business. I wonder how a doctor can write a prescription before understanding your requirement.

Even your thought process is changed or should I say it is still the same & even your questions start:

WHAT should be the best fund?
WHAT will be the best insurance policy?

But if you would like to improve the things WHAT should always come after thinking about WHY & understanding HOW.

Product manufacturer or distributor is only interested in WHAT part of the equation. So they push you the product & you keep wondering where to fit this in your financial “Picture Puzzle”.

But let’s stop blaming others – it’s your responsibility to make your family’s future bright – so you should first ask WHY (plan – the bigger picture). No matter what is your methodology, just reverse the old-fashioned judgment circle. Start with the plan (ask why), then move on to the process (ask how) and only then look for the exact products (ask what). Starting with “Why” means achieving clarity about your personal financial goals and creating a plan. To reach that point, you need to consider your values and then set some SMART goals.

Read: Setting SMART Financial Goals

Single Goal Vs Plan

It was start of 2008 when I was in job as most of you are now – my overall finances were on track, with decent corpus & regular savings every month for my basic goals. I was working with WHAT company & my yearly bonus was more than club Mahindra membership fees. My question was not that – “will it make sense in my overall financial life” but it was a simple comparison which today I can laugh on “Club Mahindra Membership Vs Equity Diversified Mutual Funds”. Luckily I was having knowledge about Equity Market Valuation & their history across the globe; plus I read couple of books including “Intelligent Investor” by Benjamin Graham. I easily related to Mr Market commentary & equities were clear NO at that point of time. So second obvious choice was membership but I think I should have applied other acid tests before taking it.

Even if I assume I knew WHY – “my goal was holidays every year”. But even that was piecemeal approach where I have not analyzed impact on other goals. Focusing on single goal like child marriage, retirement or buying flat will not help in winning the financial war & achieving financial freedom.

When we start concentrating on one goal, there is good chance that we may achieve it but it can have significant impact on other goals. Financial Planning takes into account the inter-related nature of the goals that one has & helps in deploying the finances so that the high priority goals are given precedence & are met. It takes away the uncertainty out of life and brings in peace of mind.

Hope you learned lot of lessons from last two posts, now I would like to understand – you start with WHAT or WHY & if you start with WHAT are you planning to change it.

Club Mahindra Membership is my biggest Financial Mistake

Family Finances

Hemant Beniwal

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July 17, 2012

639

Club Mahindra Membership is my biggest Financial Mistake

Upfront I am accepting that buying Club Mahindra Membership was my biggest financial mistake. Readers may be thinking “biggest is a comparative word – that means there must be few more”. 🙂 Yes, Why not. I am also a human and allowed to make some mistakes. Each day one takes 4-5 financial decisions and if not more, there is a fair chance that few of them will prove to be wrong. Sometimes money involved can be small for eg going for a newly released movie. If your family likes the movie – then fine. But what if the opposite happens? (If the decision was wrong – cost Rs 1500-2000 if tickets bought in Royale or Rs 500-1000 if bought tickets for Executive class and additional loss of Rs 200-300 if buying Pepsi or eatables – even choosing large or small Pepsi is a financial decision – impact Rs 100 on the budget)

Let me also share that one decision which is a blunder for one person can be a small mistake for other & for the third person it may also prove to be right – again financial planner’s favorite line “it depends on person to person”. So why I am saying Club Mahindra Membership is MY biggest mistake (in short) – because:

Amount & time involved is huge.
It doesn’t suit my type of person, who doesn’t want to sit & enjoy – I want to explore the places in & around the city that I am visiting.
It was mis-sold – lots of things were hidden & misrepresented.
I am frugal when it comes to food on a trip & they charge me bomb for that
There is a big difference between what Club Mahindra promises, what people expect & what they deliver. Must Read –Diabetes health insurance

Club Mahindra Holidays Membership Features

If you want to know about membership features, check their website…..

Club Mahindra Membership Fees

Before looking at the Club Mahindra Holidays Membership Fees we have to understand – criteria on what this fee is based on.

First is a type of Rooms

Studio Apartment – is a room for 3 adults or 2 adults & 2 kids.
1 Bed Room (BR) – room for 4 adults
2 BR – room for 6 adults

Must Read – Market Bubbles And The Damage They Cause

Second is Type of Seasons

Club Mahindra has divided 52 weeks into 4 Seasons/Colors. (Check Season chart here)

Purple: This is a period like New Year, summer holidays, or Diwali holidays.
Red: Its second-best category which covers all major long holidays & peak season for a particular location.
White: Normal Season
Blue: It’s offseason

Club Mahindra Membership is my biggest Financial Mistake Click to Tweet

Membership is also divided into these categories where you can utilize holidays in your season or lower. So Purple Members can have holidays in any season but white can only go for White & Blue. A holiday in a higher season is also possible but there are limitations like bookings can only be made 15 days in advance & you can jump only one season so White can think of going in red but not in purple.

Must Read –How you benefit from long term orientation in Life and in Investing?

Club Mahindra Membership Fees (2017 – 2018)

Price

Just to share a lot of existing members are willing to sell their membership at 30-40% discounts.

Club Mahindra Membership Annual Subscription Fees (ASF)

Club Mahindra Claims their membership is Inflation Free but other than one-time fees members have to pay Club Mahindra membership annual subscription fees (irrespective of usage), depending on the type of room they own. They charge ASF on the type of rooms so Studio will pay the lowest ASF & 2 Bed Room will pay the highest. But at the time of booking you can choose any room so I am having Studio but can book 2 BR & pay 50% less ASF. (You people will be feeling pity about me & I am feeling same for people who have bought 1 BR & 2 BR) This fee is not fixed – it increases every year according to urban inflation numbers.

ASF Charges in 2011-2012 (in bracket 2010-2011) – including service tax

Studio Rs 9,681 (Rs 8,994)
1 BR Rs 13,593 (Rs 12,629)
2 BR Rs 19,069 (Rs 17,717)

Must Read – What is finance planning

Club Mahindra Membership Cancellation Policy

They have a very transparent membership cancellation policy that there is 10 days free-look period – where the whole amount can be refunded but I was not allowed to use that. After 10 days you can cancel the membership but there will be no refund – sounds similar to our favorite endowment plans. But after that, if you want you can sell your membership in the open market – but there are no buyers. Check sites like Quikr or Olx and you will find a lot of sellers but no buyers.

In the last financial year, there were 4000 membership cancellations – I assume that as they don’t have a proper cancellation policy, these are the people who have not paid Annual Subscription Fees (ASF) & their membership was automatically canceled.

44% of members are not utilizing their holidays

Club Mahindra Holidays can advertise “Happy Families” but the truth is 44% of members are not availing their holidays. Why?

The First & biggest reason is there is a gap between the number of members & inventory (number of units) available in the resorts. They proudly say that their membership is increased by 26% Compounded annualized growth rate but their Inventory was not able to keep pace & just grown by 22%. The gap was 9% in 2005, which has now grown to 26%. (You can check the below table – Club Mahindra Members Vs Inventory)

Second, Club Mahindra gives resorts on rental to nonmembers, even in the peak season. So members compete with nonmembers. Their annual report show earning of Rs 15 Cr from rental they have received from nonmembers. If I assume Rs 4000 per night room rent – it turns to 3% of the total available inventory.

Third, when there is a big gap in available inventory & some competition from nonmembers; few people will definitely be disappointed because they will not get what they desire. Club Mahindra expects that people should plan their holidays 6 months in advance – I think I can do it but it’s not possible for people who are in jobs. Their annual report shows that occupancy was at 77% & if we adjust even 2% that was utilized by nonmembers so member occupancy is at 75%. If we compare that with the number of members, it turns out to be 44%. (check below graph – Club Mahindra Yearly Membership Unutilised)

I don’t think I again have to tell you that Club Mahindra charges Annual Subscription Fees (ASF) irrespective of you go on holidays or not. In addition, they don’t allow members to accumulate more than 3 years (21 days) holidays. If members don’t pay ASF, their membership will seize.

My Story

I am passionate about traveling – I bought Club Mahindra Red Studio in Feb 2008. Just after my sister’s marriage, we were having some cash in our account & coincidentally we were also planning to buy LCD TV. Then came THE SUNDAY & I saw an advertisement in a local newspaper, where Club Mahindra also shared about FREE Sony Bravia TV. My mind stopped working something similar to when people see emotional ads of child plans. I called up the number & the executive reached my doorstep in 2 hours. In the next 5 days, we finished all formalities & were part of Club Mahindra roller coaster rides.

There is a lot of bitter experience with Club Mahindra – starting from purchasing to doing bookings to services in resorts to checkouts but I must appreciate they have good properties.

Must-Read –Personal Finance Lessons from the Olympics

My Mistakes – from which you should learn

They say “Learning from your mistakes is smart, learning from the mistakes of others is wise.” But learning from own mistake is really expensive….

I have not analyzed my requirement: I am passionate about traveling but they have resorts at limited locations. When I go to someplace I try to explore other good places which are close to that city – I don’t like sitting on the poolside throughout the day. 31^st Dec 2010 I visited Jim Corbett – I had bookings for 4 nights. You won’t believe we spent very little time in the resort – we were more interested in visiting Nainital & Ranikhet. Even we spent one night in some other hotel because we thought rather than going back to resort to sleep let’s directly go from Nanital to Ranikhet. 🙁

I have not researched the product before buying: I have not researched the product & matching it with my requirement. I believed in brand Mahindra, the limited information that was shared by the executive & my gut feeling. After buying the product I started searching about how existing members feel about it & I was shocked. But that was too late.

I agreed for the things that were not documented – I was interested in Red Studio because that was most flexible in usage as I can go in Red, White, or Blue & even purple if there is some chance in the last 15 days (purple weeks were not available at that time for purchase). I can choose any type of room & that too with lower ASF.

But the executive said FREE TV is only available with 1 BR so first you buy White 1 BR & we can later convert it in Red Studio. It took me 7 months in conversion & that too after a lot of threatening calls & what not.

There are a lot more things to share about Club Mahindra Membership but I will try to share that in the comment section. If you are a member of any such time-share resort or planning to buy one or approached by someone, please share your views in the comment section.

ICICI Prudential Smart Kid Review – Just Smart Ad

Insurance Planning

Hemant Beniwal

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July 10, 2012

105

ICICI Prudential Smart Kid Review – Just Smart Ad

Good education for one’s child is something that will always be a cherished dream for every parent. And good education means good colleges, which means need for funding. The education costs are going up tremendously every year, hence it is necessary to save and invest regularly to build up a decent amount by the time the child is ready to go to college. Though we don’t now which field our child might like to get into, it is a good idea to keep a funding corpus ready for use. Check where ICICI Prudential Smart Kid fits..

Since this is such an emotional issue for most parents, there are several products which are being served on the emotional platter. And people do buy such products due to the perfect sales techniques and sepia toned advertising blitzkrieg! What is needed is a practical look at whether the product will be able to do everything that you want from it.

Check – Best Insurance for Parents

ICICI Prudential Smart Kid Regular Premium Plan – Review

It is this need that the product ICICI Prudential Smart Kid (RP) is trying to meet. The need is established, but does the product answer the requirements. Let us have a look.

ICICI Prudential Smart Kid Review – Just Smart Ad Click to Tweet

Features of Smart Kid Regular Premium:

1. It is a traditional insurance product. This means the returns will have no link to the vagaries of the stock market. It has a pre-defined payment and benefits schedule.

2. The premium is to be paid on a regular basis till maturity of the product.

3. The policy provides for a premium waiver benefit. This means that in case of death of the parent, the future premiums of the policy will be waived (or as mentioned in the illustration- the company pays the balance premiums on your behalf). So essentially, the benefit will be paid to the child as per schedule even if the parent is no more.

Check – LIC Jeevan Arogya Policy

ICICI Prudential Smart Kid Riders

1. Income benefit Rider: 10% of the sum assured will be paid for 10 years in case of the unfortunate demise of the parent. This is apart from the regular benefits.

2. Accident and Disability Rider: In case of accidental death, an additional amount is paid. If total, permanent disability occurs due to an accident, an amount equal to 10% of the sum assured under this rider is paid to the child for 10 years.

Let us look at the illustration given on the website.

The illustration is for a 30 year old parent who has a new-born child. The tenure of the policy is 22 years. The sum assured is Rs 2,50,000 and the premium is Rs 12,336 to be paid for 22 years. For simplicity, we are not considering any riders or the service tax component in the policy. Fixed amounts, depending on the sum assured are paid at the end of 15, 17, 20 and 22 years. A guaranteed amount equal to 3.5% of the sum assured of the first four years is paid on maturity. In the above illustration, this is Rs 36,881. Rest of the maturity amount is non-guaranteed and will depend on the performance of the company’s investments. (Download detailed illustration)

It is important to note that the premiums continue even when the payout starts. Thus the effective amount in hand will be less.

Health Insurance – Religare Care Vs Apollo Optima Restore

ICICI Prudential Smart Kid Few points to note:

1. Does it give me money when I want?

Big amounts are usually required at +2 stage for extra coaching etc (age16/17), then at graduation for fee (age17/18) and post graduation (age21/22). This policy pays in those years. There is also an option to get payouts in the last five years.

2. Will the amount suffice?

The payouts will happen as pre-defined, but the premiums still continue. So the net amount will be less. The fixed amounts will depend on the sum assured. Thus, to have a decent amount in hand, a higher sum assured will be required. Maximum sum assured allowed in this policy is Rs 30 lakhs. So the maximum payout at the end of 15 years will be Rs 6 lakhs. The premium in above case will be Rs 145029. This amount might be prohibitive for most young parents.

3. Time Value of Money

Inflation eats away into the purchasing power of money. In the above example a payout of Rs 6 lakhs sounds very attractive today. But considering inflation @8% – the value of that Rs 6 lakhs in 15 years will be only Rs 1,89,145. If you consider the premium that is still to be paid, you have net Rs 454871 in hand, which will be equal to Rs 143394 today.

4. Will it support my child if I die?

Yes, to the extent of the sum assured. The amount of sum assured will be paid immediately on death of the parent. There is a premium waiver benefit. Hence future premiums will be waived. The benefits will be paid to the child as and when due.

Must Read – Ulip Vs Mutual Fund – which is better

5. What is the rate of return?

This policy has a rate of return of 3.35%-6.3%. Compare this to the current inflation in education which can be on an average 10% per annum. It is thus, not an inflation protected product.

What is Family Floater Health Insurance

6. Are there other options to fund my child’s education?

Yes, there are. Combination of mutual funds, direct equity, PPF, personal accident cover and term insurance can provide a good corpus and protection for your child’s education. Term insurance provides a big sum assured at a nominal cost. This can protect the child and the entire family in the unfortunate event of death of the earning parent. A personal accident and disability policy can provide additional amounts to support the amount in term insurance. It also provides the income benefit and the disability benefit. Equity and equity oriented mutual funds are known to deliver superior returns over longer terms. They are products that beat inflation. PPF is a guaranteed, tax-free and almost negligible risk product which can help build the corpus in a stable manner. Building a portfolio consisting of these components gives you a better chance at fulfilling the requirement of your child’s education funding.

Read- New LIC Jeevan Akshay VI a Crazy Guaranteed Annuity Plan

Before buying any product that promises to support any of your important goal in life like education funding for your child, it is important to have a rational view on the offerings. It is very easy to get swayed by the emotional pitch of the advertising, but do your calculations and see whether it will stand true to its promise. Only then pick up your pen to sign on the dotted line.

Review of ICICI Prudential SmartKid Regular Premium Plan is done by Kiran Telang, CERTIFIED FINANCIAL PLANNER^CM– the views expressed herein are the author’s personal views.

If you have any questions related to Child Plans or any other life insurance policy – feel free to add it in comment section.

Download ICICI Prudential Smart Kid PDF

Should I Take Loan?

Family Finances

Hemant Beniwal

-

June 25, 2012

32

Have you ever asked yourself or any professional “Should I Take a Loan?“

Have you ever asked yourself that “Am I doing it Right” before swapping your credit card?

Have you ever told your wife “I don’t think we should buy this on Loan” while shopping for a Washing Machine or TV . If your answer is NO go ahead and read this article.

Read – Do NOT opt for Home Loan Protection Insurance Plans

If you think loans are difficult to get, believe me, creditors love giving loans. It is a big business after all. Be it the bank or a private financier, the interest they earn from your loans is what keeps them running. The more loans you take, the happier you are, but you are also making them profitable. And make no mistake about this either as long as you are in debt, you will never attain financial freedom.

Check – Must have features for your credit card

Indians have just developed a tendency of getting into debt. The most common kind is credit card debt. The credit card was made to ease you to carry bundles of notes. But many of us use it as an EMI solution. This is simple; buy now and worry later philosophy. That is the easiest way of ruining your financial freedom. Credit cards should be used not as a source of credit, but just a convenience that saves you from having to carry cash. Spend only what you can pay off immediately or before the due date. The focus should be on retiring the balance that has accumulated on your card as soon as possible. At 30 percent plus a year interest rate, this is the worst kind of debt possible. And that is the reason every bank or financier is behind you to take a credit card.

Read – Top 10 Credit Score Myths that need to die

However not all debt is bad, there is good debt as well. Good debt is used to create productive and long-term assets or to increase one’s income-generating capabilities. So a home loan, loan to buy land, education loan and business loan to set up a business would fall under the ‘good debt’ category. Here maximum one can do is to evaluate and go for the option which is less costly. And the cost is the interest charges that one pays. The simple way to evaluate is to compare the EMIs of different loan providers. Just remember that for comparison the loan amount and the tenure of repayments should be the same. With the loan amount, also compare the processing fees. It ranges from 1% to 4%. This is also a part which can be negotiated.

Read – 7 Costly Credit Card Mistakes Almost Everyone Makes

Nowadays, debt repayment is basically your credit-character certificate. If you have chosen to take a debt, it is equally very important to repay in a disciplined manner. Any overdue, late charge penalty will spoil your ability to take further loans. The data of loaners is centralized by the CIBIL (Credit Information Bureau (INDIA) Limited) and before you apply for your next loan or credit card the financier checks your responses to the loans taken earlier. A lot of times when one starts earning, people accumulate credit cards overdue and this default keeps on reflecting in your CIBIL report. And than in your serious days, when you have actually made up your mind to buy a dream home or a car, the bank refuses to give you a loan until you clear your credit.

Should I Take Loan ? Click to Tweet

Debt is like Mount Everest, difficult to climb and even tougher to come back. While getting out of any debt is vitally important, it is even more important for bad debts. When one is servicing multiple loans, the costlier one should be settled sooner. So credit card dues should be paid first followed by personal loans, car loans, and housing loans.

Another thing that should be kept in mind is the tax implication. Certain loans, a home loan, for example, would avail tax benefits for the principal paid under Section 80C and for the interest repayment under Sec 24 of the Income Tax Act. Hence, when faced with two loans, first settle the one which has higher interest rates and doesn’t provide any benefits.

Of course, the best way of avoiding debts is to not get into any. But modern lifestyle directs you towards it. While some loans might not be avoidable, a lot are. Use a strong justification while getting into more loans and always maintain a fact that you will not go overboard as more debt means more sacrifices in terms of money, in your present lifestyle.

It will be great if you can share your love & hate relationship with loans 🙂

4 Lessons from the Real Estate Crash in US

Hemant Beniwal

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June 18, 2012

49

4 Lessons from the Real Estate Crash in US

The real estate market has been heating up in India; you can see people advertising real estate jobs on Facebook and the other day I received an email on doing a Diploma in Real Estate!

All this reminds me of the real estate crash in the US that took place about 3 years ago, and there are several lessons we can draw from those events.

Keeping these things in mind may end up saving you from facing a bad real estate investment yourself, so read on!

1. Don’t over – leverage: During the peak of the housing boom it was common to see people owning two or three houses or buying a house that was worth a lot more than what they could afford.

Banks gave housing loans with teaser rates to entice people to buy a house which was actually a lot more than they could have afford.

Banks also enticed people by giving them ARMs (Adjustable Rate Mortgages), which initially had a low interest rate, and would then reset to a higher rate after some time. The idea was to get people to take a huge loan at an artificially lowered interest rate, and then when the interest rate resets upwards get that person to take another loan at a lower rate. This was only possible till the time house prices went up, and when prices started to fall – banks didn’t reset their rate and it soon became apparent to people that they can no longer afford to pay the monthly installment on their loan.

4 Lessons from the Real Estate Crash in US Click to Tweet

A lot of people badly extended themselves by taking out huge loans in the US, and they had to pay very dearly for that – in a lot of cases such houses went into foreclosure as well, and people not only lost the money they paid off in installments but their houses as well.

The lesson here is to not fall for teaser rates, and stick to a loan amount that you can pay off easily. Housing loans last for number of years, and if you over – extend yourself, sooner or later you will repent it.

2. Don’t treat your house as an ATM: HELOCs or Home Equity Line of Credits became very popular during the housing boom. Suppose you take a house on a loan which is worth Rs. 50 lacs, but you have already paid Rs. 25 lacs on this loan. So, in this case you have equity of Rs. 25 lacs in the house and banks were willing to loan you money against this.

Two problems surfaced with this: If you took out a loan of Rs. 25 lacs and the value of the house fell, then the banks will call back their loan, and that will spell trouble for you.

The second issue was that people took out loans out of this and spent it on luxuries like vacations or remodeling their kitchen. It’s like selling the family silver to pay for a big shopping day. Even if home prices don’t fall this is not a good strategy and is only likely to cause heartache in the long run. Treat your primary home as a residence, and not like an ATM – even if the prices go up.

3. Understand that house prices can fall:A lot of people were under this illusion that house prices can only go up, and ignored examples from other countries like Japan where property prices had crashed before they had done so in the US.

If your rationale for buying real estate is that house prices never crash, then you’re living under an illusion. Real estate is an asset like any other, and there is no guarantee that prices won’t fall. The biggest lesson you can learn from the real estate crisis in US is that just because something hasn’t happened earlier doesn’t mean it can’t happen in the future.

4. Resist Peer Pressure: During the peak of the crisis it was hard to avoid conversations on real estate. People in parties were talking about houses, people at your lunch break were talking about the new re-modeling they were going to do, and even distant cousins were sending you pictures of their new houses. All this made it very hard for someone to keep calm and avoid getting sucked into all the frenzy. A lot of people were handing out real estate advice, and many others were calling you stupid if you were “wasting” money on rent. There was so much excitement around house buying and selling that it became impossible to stay calm.

This is true with most bubbles, and is probably the hardest thing to control because of the psychological aspect of it.

Knowledge helps fight peer pressure, and if you’re aware that bubbles happen and have happened in the past it is that much more easier to ignore this peer pressure.

The lesson here is buying a house just because your cousin or neighbor has done so is never a good idea.

Conclusion

History is a great teacher and we should strive to learn from not only our own history, but of those around us. Public memory is usually short, and that’s why you see crash after crash and people not learning from the mistakes. Whenever you evaluate real estate investments make sure you keep these 4 factors in mind because they were pervasive just before the US housing market collapse, and you don’t want your investments to go the same way.

This is a guest post by Manshu, who blogs at www.onemint.com – the views expressed herein are Author’s Personal Views.

It will be great if you can share about your real estate investment or about property price rise in your city.

Retirement Planning Vs Child Future Planning

Financial Planning

Hemant Beniwal

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June 12, 2012

68

Retirement Planning Vs Child Future Planning

I keep repeating this very often – I was talking to a client who was approaching his retirement very soon – both of his parents are alive. I asked “do your parents stay with you” & he politely said, “NO, we stay with our parents”. This one line created a lot of respect for the client but the question is will we be that lucky in our retirement days.

Do you know that the major reason why people take loans on their PF or withdraw their retirement savings is due to a child’s educational needs or for the child’s marriage? When we talk about the long-term goals of any person, normally his 2 primary goals are:

Children future planning
Retirement planning

And irony is that people mix these two goals – at least the funding part. These are two separate goals which have a long term horizon but still lot of people fails to meet these goals. In India we also see a common phenomenon that when it comes to funding child’s education, people are very reluctant to go for education loan which is a right way to fiancé this goal. Instead, they dig their retirement corpus or borrow from other sources. Some also give lame excuses like “my son will take care of me when I am old”. And we all know the present reality & future can be even dramatic. Hence,these two goals if not properly planned and executed can screw the financial life. And, worst is one will realise this when he has lost the most important fact called “time”.

Retirement Planning Vs Child Future Planning Click to Tweet

Let’s try to understand these two goals, their interdependence and implication on overall financial planning:

Planning tenet	Aim	Example in terms of goals
Child Future	1) Planning for education.2) Planning for expenses in case of casualty to bread winner.3) Marriage planning.	1) Plan for IIM whose current fee is Rs 15 lakhs.2) Life covers of at-least 10 times of CTC with proper allocation to disability and accidental death cover.3) Planning for marriage of daughter. Cost of marriage today Rs 10 lakh.
Retirement	1) Providing funds for a decent lifestyle.2) Planning for health related expenses.	1) Providing for monthly expenses whose current value is Rs 25000/-.2) Providing for treatment of any major ailment or surgery. Present cost Rs 400000/-.

Important Points for Child Future Planning:

1) The first important phase when child will have financial needs is when he appears for his 10^th and 12^th board. The subjects that he chooses give you a fair idea about how much money he will require when he joins a UG and PG course.

2) Second phase comes when child takes admission to his professional course. The course and the number of years the course will take, have an important bearing on the amount that will be requiring. Also the choice of college is important, as MBA abroad will be more costly in comparison of pursuing the same course in India.

3) Encourage child to avail an Education Loan in case the requirement is more. There is no negative such as “burdening the child, before s/he starts a career” thing. Instead child learns to be disciplined in finance besides gaining tax advantage when his repayment starts.

4) Check if you really need to plan for marriage or not. Late marriages are also common. Now a day’s youngsters are settling in career and then getting married. S/he can also partly/fully fund the wedding.

Important Points for Retirement Planning

1) Unlike child education expenses, you are not planning for one-time expense. The amount is normally required on frequent basis till the person survives.

2) Now a day factors like longevity of life, better life style and costly medical needs need to be considered for retirement planning.

3) Time of retirement and income flows after retirement is also important to consider. Today people plan to retire by 45 or 50 and start their own ventures. They call it retirement but actually this is just a shift in career as the income continues. Also we find executives like AM Naik (L&T) who is 70 but still has a long to-do list.

4) Retirees today believe in “sar utha k jeeyo”. They like to be independent rather being on the mercy of their children.

5) Also remember that for educational need you can get assistance (loan, scholarships etc.), but for retirement needs no such facility is available.

I read something interesting & would like to share that.

You don’t need to save for Child Future Goals if…

If you take the time to really focus on parenting your kids in a way that makes them functionally independent and critically thinking adults, you don’t need to save for their education. They’ll be able to make their own way in the world without your financial support. Thus, you can channel almost all of your long-term savings into retirement savings so that you’re not a burden to them in whatever they wind up doing in life.

How do you do that?

First of all, praise children on their hard work, not their natural gifts. Focus on when they improve their results, not on when they simply succeed because of their talents.

Second, give them room to explore independently. Don’t hover. Don’t be paranoid about kidnapping. Send them out to explore things on their own, then when they’re done, ask them about it. The more independent exploration they do, the more resourceful they’ll become.

Finally, put them into challenging situations. Don’t protect them from failure. One of the most valuable childhood lessons is learning how to fail. What do you do next? You pick yourself back up and try again. If you go through childhood without knowing how to do this, adulthood becomes much, much harder.

If you are constantly conscious of these three things, you’re going to naturally mold your children to be self-reliant and independent. Those traits will serve them very well in whatever they choose to do in life, and because of that, you don’t need to hand them their education.

They’ll be able to make it themselves.

I will love to hear – how you are planning to achieve both goals??

Financial Advisors are like Doctors (and Vice Versa)

Family Finances

Hemant Beniwal

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June 2, 2012

72

Financial Advisors are like Doctors (and Vice Versa)

There are lot of similarities between doctors & financial advisors – including the process, advice, buying products & product manufacturers. Both the professions are counted as Noble Professions & this is the reasons I came to this profession. If you read My Story (interview for financial planning journal), when question was asked “What made you get into this profession?” I said – I read a book “The New Financial Advisor” by Nick Murray (he is most renowned coach for financial advisors in US) where he shared that financial planners do great work for society. He says ‘The whole population is sick. You have the power to cure it.’ You need hell lot of positive motivation to start your own business/practice 🙂

Satyamev Jayate

I always believed that financial planner/advisor work is as noble as doctors but things are not as simple as they look from naked eyes.

Two years back I thought of writing “Financial Advisors are like Doctors” but 1 year back something happened which convinced me to write “Doctors are like Financial Advisors”. Unfortunately I was not able to write both the articles but recent episode of Satyamev Jayate, which talks about deteriorating values & ethics in medical profession pushed me to write this. You can check the full episode of Satyamev Jayate here, to understand how ethics in this profession are sacrificed and to check how financial advisors are not behaving in expected manner – click here.

Financial Advisors are like Doctors (and Vice Versa) Click to Tweet

My part of the Story

Last year my mother met with a small accident & had a fracture in hand. We consulted a big doctor & he told it should be operated ASAP else there is a possibility that it will lose the complete strength. (we met this doctor with some close reference) He also told that there are 2-3 type of rods & you should go for best one (swiz titanium plate) – budget was…. you can imagine. Luckily we consulted second doctor & he told there is no need for operation – he told that surgery is a product available with doctors – some time they push it even if it is not required. Still we have some good doctors – my mom is fine now. (total cost was less that 5% of what first doctor suggested & without operation)

How we got reference of the second doctor? One of my friends, who is also a financial advisor is having almost 150 doctors as his clients. After meeting first doctor it was easy for me to identify that he is unnecessary threatening us for operation. So I thought of taking a second opinion & called this friend. He told me that he is having around 10 doctors who are orthopedic as his clients. He told me most of them are just behind money & they will charge you a bomb. (all are his big clients) One of them is genuine & will definitely suggest you right solution – he is his small client & you can understand why.

Are we as an advisor following how doctor’s work or they are trying to mimic financial advisor in their profession. Clueless…

Why this is happening?

The reason here is now days few definitions are changing.

Rich means Successful

This we can blame to our society & definitely ourselves – these days we see rich people as successful. We feel people driving BMW are successful but we have no clue on whose bodies their foundation is built.

Agents/Advisors that are doing international tours by winning contest in insurance & mutual fund companies are considered successful – without realizing that this is because of your hard earned money.

Expensive means Better

A participant was sharing on the same show that son of her maid was died because she was not having enough money to buy medicines. Medicines that doctor prescribed were of Rs 400 but the generic version can be bought in just Rs 2. When outcome of both the medicines is same why there is a huge difference – this is because of branding & major part going in commissions. (30% to doctors, 30% to chemists, 30% to manufacturer & 10% is the actual cost)

Even investors are sold expensive products in shape of PMS (portfolio management services) or structured products and sometime combining insurance & investments. But when outcome is same why expensive product is bought – branding & exclusive.

Big means Best

Again a big misconception the biggest hospital is the best hospital or the biggest financial firm is best. One of the doctors from big hospital was saying “we are asked to push patients to get operations ASAP because this will increase the revenue”. So doctor is not allowed to take independent decision which will benefit the patient but on back of his mind hospitals revenue is having more importance.

Same thing happens with Relationship Managers of banks or national distribution house; they are not allowed to take decision according to needs of clients but wants of their employers. Clear Conflict of Interest. Some days back read a tweet “Wealth Management Divisions of Banks called WMD. Weapons of Mass Destruction.”

Should everyone be blamed?

Amir Khan talked lot about intention [NIYAT] & it is again very important link between both the professions. If infant falls from mother’s lap & dies – this will not be counted as murder as intent was not of killing. But if you throw someone from first floor it is a cold blooded murder. So if a doctor was not able to save someone in his operation, he is not charged for murder but what about doing things which are not required or are done just to make extra money.

Same with qualified financial advisor, if intention was to help clients but due to some reasons that thing is not achieved he can’t be hold responsible for that because he was working in your best interest. But if some advisor is having intent to mis-sell the things just to earn extra buck……………

Will love to hear your experience with medical doctors & financial doctors.

Should you buy LIC Jeevan Vaibhav?

Insurance Planning

Hemant Beniwal

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May 29, 2012

25

Before reading review of LIC Jeevan Vaibhav – check what’s the current position of insurance industry & specifically LIC. The insurance industry is at cross roads. The wide spread misselling in Insurance Products, even by reputed Banks has marred the image of the industry. The Insurance regulator has started cleaning operation since the year 2010 starting with new ULIP regulations. The Government of India has also joined the chorus and made protection cover 10 times the annual premium for eligibility on Income Tax exemptions. It is widely believed that the customers interest is the last thing by the Insurance Companies. Even now the regulator has come to the level of making “Needs analysis” mandatory as a pre selling exercise.

In this back ground, the Life Insurers should be careful about their image. They should bring transparency in their functioning by more disclosures and display seriousness while dealing on policy holders interest.

LIC is the largest Life Insurer who commands 77% of market share as of April 2012. LIC was in the news recently for some wrong reasons. LIC is a sovereign pride and trusted universally across the whole country in rural, semi urban, urban and metro areas. We expect LIC to reciprocate the trust and goodwill in designing appropriate products suitable for the consumers.

LIC Jeevan Vaibhav Review

Let us look at Jeevan Vaibhav launched recently and analyse if it has taken consumers interest in product design:

Insurance or Mutual Fund ?

LIC Jeevan Vaibhav is a close-ended single premium endowment assurance plan which offers guaranteed benefits on death and maturity along with loyalty Addition, if any, payable in the last policy year. The plan is opened for sale for a maximum period of 120 days. The loyalty addition can be decided only at the end of 10 years. The protection cover is a little more than twice the premium paid.The question now is whether LIC aims to provide protection to the under-insured masses or mobilize funds by promising doubling money in 10 years?

Should you buy LIC Jeevan Vaibhav? Click to Tweet

Transparency in Surrender value?

The Policy term is for 10 years, but the policy can be surrendered after 1 year. The minimum Guaranteed Surrender Value allowable is equal to 90% of the Single premium paid. LIC may however pay Special Surrender value as applicable on the date of surrender provided the same is higher than the guaranteed Surrender Value. The Special Surrender Value will be the discounted value of the Sum Assured as on date of surrender. It is widely known that in traditional products, the insurers pay 30% of the premium paid excluding the first year premium. Will the surrenders be discouraged with high discount rates to the premium?

Lack of clarity in Tax treatment!

In the recent Finance bill, it has been proposed that the Sum Assured should be atleast 10 times the annual premium so as to be eligible for exemption under Section 80C income tax and exemption of maturity benefit under Section 10(10D). But there is no clarity on single premium like LIC Jeevan Vaibhav. So it is presumed that the maturity benefit will be subjected to Income Tax . However 10% of the Sum assured can be taken for 80 C deduction in terms of the extant Income Tax regulation. The tax issues should have been clarified so that the prospects are not taken for a ride.

Inappropriateness of Benefit illustration!

The investment regulation of IRDA has prescribed the exposure norms of traditional products by specifying that the investments will be made mostly in Govt and AA and above rated securities. Since this is a single premium product, the investment will be made initially for which yields can be known at the beginning. So what is the appropriateness of 6% & 10% benefit illustration?

Higher service tax will lead to Lower returns!

It is also known that the prescribed asset allocation cannot generate more than the yields of Fixed Income Securities. But the recent hike in service tax from 1.55% to 3.09% for the traditional products in the Finance Bill should have been mentioned since this will increase the premium and suppress the return. Taking the service tax , the expected returns are furnished in the table.

Who should buy LIC Jeevan Vaibhav?

The consumers who have already adequate protection cover.
The consumers whose risk appetite is low and who do not want to take risk in investment.
The consumers who do not come under Income Tax or come under lower tax slab.

Alternative Products

Bank’s Fixed deposit (100% tax rebate under 80C for FDs of 5 years and more)
Mutual Funds(Debt/MIP ; Short term gain at Tax slab rate and long term gain at 10% without indexation /20% with indexation)
PPF(EEE category in Tax treatment but maturity after 15 years)

Review of LIC Jeevan Vaibhav is done by Prakash Praharaj, CERTIFIED FINANCIAL PLANNER^CM– the views expressed herein are the author’s personal views.

Prakash also worked as Chief Risk Officer in one of the insurance companies so feel free to ask any questions related to insurance.