Laxmi Ji or Saraswati Ji – whom should you worship this Diwali?

Hemant Beniwal
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13
Laxmi Ji or Saraswati Ji – whom should you worship this Diwali?

Indian's household saving patternFirst of all, wishing you and your family a very Happy & Prosperous Diwali.

Diwali is the most celebrated festival for Indians and we all light our homes with diyas. It symbolizes victory of Light over Darkness. We also do LAXMI PUJAN on this very auspicious day. But have you ever wondered at the time of performing puja that why Devi Saraswati Ji is always there along with Devi Laxmi?

In our view, Laxmi Ji – the Goddess of Wealth, stays with person who also worship Saraswati Ji – the Goddess of knowledge. Wealth may come to someone who does not have knowledge but it does not stay there. As they say a fool and his money are soon parted.

We are always of this belief that Investor’s knowledge is of first importance in being financially well off. Indian Investors save close to 30% of their income and financial instruments from 60% of their savings. It means that 15% of the income of Indian Household is saved through investments in Financial Instruments.

Indian’s Household saving pattern:

If we look at the break-up of investment pattern of Indian Household, it will clearly show that Indian Investors lack knowledge in the field of Financial Instruments which from the maximum part of their Financial Planning. Because of lack of knowledge, we either make wrong decisions by following path which everyone else are following or land up  investing where we feel most comfortable. Mind you, the most comfortable position in life is not the most successful one. Our maximum  savings are in Bank Deposit and that is because we are not Financial Literate. Now despite being one of the biggest savers in the world, we the Indians, are not richest and it proves the very fact that Goddess laxmi blesses only those who worship Godess Saraswati. Take a look at the graph below which gives you the breakup of our financial saving pattern:

Indian's household saving pattern

Now if you analyze it closely, 76% of our investments are in the from of Bank Deposits, Life Insurance, Non – Banking Deposits and Cash. If you look at their returns net of inflation and taxes, you will be astonished  that these investments make you poorer rather than richer. We must take Real Return in Consideration rather than the return on investment. In the last 20 years, the average rate at which prices of petrol & diesel has increases is well over 9% & 12%. The cascading effect of such rise increases the prices of almost everything that we buy and use. Just analyse your monthly budget or school fees that you used to pay and now that you are paying for your kids.

Laxmi Ji or Saraswati Ji – whom should you worship this Diwali? Click to Tweet

Because of lack of Financial Knowledge, we tend to make many mistakes, the list of few are mentioned below:

Why Laxmi Ji Rides on an Owl Carrier?

Sir John Templeton said “If you want to have a better performance than the crowd, you must do things differently from the crowd.” what is peculiar about owls is that they can see more clearly at night than during the day – means doing opposite to others. So rule is being fearful when other are greedy, and being greedy when other are fearful. If you follow this simple rule of Owl, laxmi Ji will come & stay your place.

We are not trying to convey that you should invest everything into equity. We just want to convey that look at share or equities with different perspective. Don’t invest into shares directly unless you don’t have the knowledge to do so. As said earlier, first worship Goddess Saraswati and then Laxmi Ji will herself come to your doors. Investors who do not have the knowledge and experience in stock market are well advised to take route of Mutual Funds. (Read Benefits of Mutual Fund)

This article of ours got published in leading Personal Finance Magazine “Money Mantra” as their Cover Story(Diwali Issue 2010) Click here to read full article.

Key to Wealth Creation

Hemant Beniwal
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31
Key to Wealth Creation

Key to Wealth CreationOne of the hazards with my job is that wherever I go I am always on my job. My wife often gets annoyed with me as even in social gathering, I am talking to people something related to my job. And you know what people keep asking me more often in social gathering or otherwise:
1. Where do you think markets are headed?
2. Which is the best mutual fund now days?
3. Can you give us some HOT TIP so that I can double my money in next 6 months?
And when I tell them honestly that I do not know such thing, either they think that I am just stupid who does not know his job or I am not interested in sharing the same to them without fees.
All these questions are asked as people just do not follow the secret rule of creating wealth. The easiest way to become rich is “START EARLY” and let the POWER OF COMPOUNDING work for you.

Secret of Wealth Creation

I did some calculations with 15% return on investments and came up with some astonishing facts and figures. Let’s assume I am touching the age of 30 and I have decided to plan for my retirement at 60. I shall invest Rs.5000 per month in an investment which should give me 15% p.a. return.

Key to Wealth Creation Click to Tweet

Following are some options that I am considering.
1 Invest Rs 5000/- per month and keep investing for next 30 years. Total Investment will be Rs.18,00,000/-
2 Invest Rs.5000/- per month and keep investing for 20 years till the age of 50 but withdraw 10 years after the age of 60. Total Investment will be Rs.12,00,000/-
3 Invest Rs.5000/- per month and keep investing for 10 years till the age of 40 but withdraw 20 years after the age of 60. Total Investment will be Rs.6,00,000/-

Since the total investment in the Option 2 and Option 3 is 2/3rd and 1/3rd respectively of Option 1, the corpus should also be significantly lower. Let’s check it out.


You see the difference in the end corpus does not vary in the same proportion when compared to the investment amount.
Let me explain my point with a different example. I need Rs.2 crore at the time I retire at the age of 60. Now I have again three options.
1. Invest for full 30 years starting from the age of 30
2. Invest for next 20 years and leave the money for next 10
3. Invest for next 10 years and leave the money for next 20
In this case, the gap between option 1 and 3 should be huge. Let’s check it out..


The above two examples just explain us that the KEY TO WEALTH CREATION IS STARTING EARLY.
Let’s take another example which is other way round. This time, I have three options
1. Invest Rs.5000/- per month from the age of 30 for next 30 years.
2. Invest Rs.10000/- per month from the age of 40 for next 20 years.
3. Invest Rs.30000/- per month from the age of 50 for next 10 years.
You know what will be my retirement corpus at age 60?


What if I need Rs.2 crore at the time of my retirement and I again have 3 options
1. Start investing at the age of 30 – The monthly investment will be Rs.3551/- and total investment will be Rs.12,78,461/-
2. Start investing at the age of 40 – The monthly investment will be Rs.15071/- and total investment will be Rs.36,16,981/-
3. Start investing at the age of 50 – The monthly investment will be Rs.76,040/- and total investment will be Rs.91,24,844/-

So now you know Secret of Wealth Creation. Remember “Investments Done in Initial years are the main chunk of your Final Corpus”

“Timing” or “Time in” in Equity Markets

Hemant Beniwal
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51
“Timing” or “Time in” in Equity Markets
“The markets are looking bearish and it can fall further. I shall wait and watch and shall invest only when they start turning positive”. This is a not something which is unusual with the investors in stock market. Mostly people change their profession when it comes to investment in Share Market whether directly or otherwise thru mutual funds. They are Doctors, CAs, Engineer MBA etc. but as an investors in share market they become astrologers and try to predict market’s future.
“Timing” or “Time in” in Equity Markets

Few common statements are:

1. Mansoon is not good this year and markets will touch 12000 very soon.
2. Markets will witness turbulence during diwali as it happened last year, so that time I will invest. Lets withdraw and invest agains when the markets go down.
3. I missed 8000 levels, I believe they will go up and hence lets put everything right now.
4. And these days Greece, US, Europe & Gold are in Highlight.
These statements are no more than sheer guess work which can only be right if you are too lucky. But mind you, even stop clock is right twice a day. However, expert after expert has gone on to say that trying to time the market is a fool’s game and should be avoided at all costs – but few so called experts keep trying. The below charts further highlights the point.

Market timing benefits – An illusion

2 friends started investing Rs 1000 per month in Sensex from Jan 2000. Smart Guy invested every month at the lowest level & Dumb guy unfortunately invested at the highest level. They both contributed Rs 140000 till 3oth August 2011. (Source Tata AMC)
You can see value of their investments on 30th August 2011 – Smart Guy Rs 3.84 Lakh (16.23%) & Dumb Guy Rs 3.41 Lakh (14.42%). A difference of less than 2% – even when w lucky have assumed that someone can be extremely lucky to catch all bottoms & another can be so unlucky that he always invest on peak. You can just imagine what would have happened if this Dumb Guy would have used root of Systematic Investment Plan – difference in returns would have been negligible.

Timing the Market – A losing proposition

During the last ten year period, if an investor would have missed out the ten best days in the stock market, a sum of Rs 100,000 would have returned only a sum of Rs 133,592 as opposed to Rs 349,256 had he stayed fully invested. Even missing the two best days would have lowered his final figure by a significant 23%.

Data considered: Sensex closing between 5th Aug 1999 and 5th Aug 2009 (equitymaster)
And Greed & Fear will make sure that you miss best days. The moral of the story is that it pays to remain invested for the long haul rather than trying to move in and out of markets in an attempt to try to time them.
Markets will rise and fall but by investing at regular intervals you’ll make sure that you get the benefits of buying low as well as catch the long term trend which is upwards.

Some of the well known investors and economists have said:

We’ve long felt that the only value of stock forecasters is to make fortune tellers look good – Warren Buffett

I never ask if the market is going to go up or down next month, I know that there is nobody that can tell me that. – Sir John Templeton

I don’t know anyone who’s ever got market timing right. In fact, I don’t know anyone who knows anyone who’s ever got it right. – John Bogle

There are two sorts of forecasters. Those who don’t know, and those that don’t know they don’t know. – John Kenneth Galbraith

If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what`s going to happen to the stock market. – Benjamin Graham

Prediction is very difficult, especially if it’s about the future. –Nils Bohr

By the way until today nobody has got Nobel Prize in economics for a theory on “predicting tomorrow’s stock prices today.” You can try your Luck!!

It’s not “timing” the market –
It’s “time in” the market that creates wealth.

A penny-wise consumer – A pound-foolish investor

Hemant Beniwal
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43
A penny-wise consumer – A pound-foolish investor

Mrs. and Mr. Verma is one tough customer to handle. They haggles with vegetable vendors to save a couple of rupees, is always on the alert for sales and discounts schemes and quibbles with domestic help — the maid, the dhobi, the driver. They saves a few hundred rupees every month through these small bargains. And then they signs away thousands — sometimes lakhs — of rupees blindly in insurance or funds that brokers ask him to invest in. They look nowhere except for the “x” marks for signatures in the forms.

In many ways, Mrs. and Mr. Verma are true Indian Family — a penny-wise consumer, a pound-foolish investor.

A penny-wise consumer - A pound-foolish investor

Penny Wise, Pound Foolish

There is a British saying “penny wise, pound foolish.” It means, “making decisions with small amounts of money (pennies) that end up making bad sense for affecting larger amounts of money (pounds, as in Great British Pounds).”

I recently met a doctor couple who came to my office and when I saw their insurance portfolio, I could see that they have invested (they think its investment) over 12 lakh in last 3 years in different ULIPs from LICs to HDFCs to Reliance to Max and what not. Their total cost of insurance was over 4.5 lakh per year & still underinsured. Can you believe that?

A penny-wise consumer - A pound-foolish investor Click to Tweet

We Indians don’t understand finance very well and when it comes with investments, we make reckless decisions. When it comes to consumption we spend hours looking for the best possible deal but when it comes to investment we take hasty, unconsidered decisions that have little or no bearing on our financial goals. Given the rising financial and job insecurity— which have come hand in hand with increasing levels of prosperity—such a casual and illiterate approach to investing is inexcusable.

Sure, many people have begun to think of financial planning. But they never get down to doing it. It’s not uncommon to hear ‘I will retire at 50’; ‘I will start my own business at 40’; ‘I will have a second career’… But thinking to plan is not planning — it’s daydreaming and nothing more than that..

Sooner, not later, we all have to do financial planning of some sort. If you don’t do it by will, you may be in for a rude awakening.

The first step to financial planning is financial literacy. And if you are waiting for a reason to begin, it is right in your hands. At TFL, our endeavor is make Indians “FINANCIAL LITERATES”.

But does that means you should not hire financial advisor

Got a comment on “8 Most important Mutual Fund Questions”.
I am here for some advises from expert here. I have some amount (80,000) which I got by cancelling fixed deposit as it was gaining only 7%. I would like to have your views, where to invest this amount? Should I invest it again in bank FDs as the interest rates are high or should I invest it in lump sum to MFs as the sensex is down now.

Also please guide me some MFs for lump sum investment. I want to have a diversified portfolio as hubby has already lost 7 lakh in intraday trading 🙁

One more question, I am investing through MF distributor, do I need to pay any commission to him? Shall I directly invest through my bank or should I personally invest through each fund house . Why investing in MFs is so confusing?
My MF distributor told me that Investing through distributor, is better idea as I do not need to pay any charge for fund management, is he true? Please guide. Looking forward to hear from the experts.

I think this cartoon from XKCD hints something. My Reply to the query:

Just read your message – sorry to hear that you people lost Rs 7 Lakh in trading.
Don’t feel offended by what I am going to write now – I don’t want to lose a good learner like you.
See at one place you have lost a big money & on another place you have a hitch to pay financial advisor. This is a very common approach by people & it is called “Penny wise – Pound Foolish”. A good financial advisor would have saved you these Rs 7 Lakh & many more – people need to understand this. Being financial literate never means that you don’t need to hire financial advisor. Hiring a right financial advisor is a time consuming process but may be one of the most important thing in your financial life.

One more thing few people think that finding few good performing mutual funds is Nirvana but how you will control your behavior. Then they will say we are very patient about our investments – we are investing since 2005 & we never sell in fear. (even in 2008 when market was down more than 50%) And they are very sure that they will not do this in their lifetime – so my question is which one was your equation in 2008:

  1. Your income was 10 Lakh & your equity portfolio size 5 Lakh. Or
  2. Your income was 10 Lakh & your equity portfolio size was 1 Crore.

If your answer is 2nd you may not need investment advice from anyone. THINK

Paying for Advice or Do it Yourself or Free Advice

Compare do-it-yourself investing/planning to do-it-yourself brain surgery. I wonder how anyone who lacks the proper education, training and experience could ever dream of going it alone.

Free advice is also available through TV, Newspapers, Magazines & latest trend personal finance blogs like TFL. But be very frank it is information & not knowledge. And let me also add – most of the blogs are run by people who understand Google GOD & Google Advertisement rather than your requirement or even basic finance in most of the cases. Free advice is also available through agents but you have already seen what happened with doctor couple.

How Much to Pay

Charles Schwab “Cheaper isn’t always better. If you found yourself on the wrong end of a significant legal action, would you get the cheapest lawyer you could find, or would you hire the best one you could afford? The same principle should apply when it comes to your investments. You certainly don’t want to pay more than is reasonable, but neither should you ignore suitability or quality solely for the sake of price.

Your financial goals and dreams are intensely personal, and more important to you than they will ever be to anyone else, even the most dedicated of advisors. But it’s possible to find an financial advisor to partner with, someone you can trust to deliver suitable, high-quality advice at a reasonable price. All it takes is some discerning effort.”

Would you like to share your experience?

Hot Equity Tips

Hemant Beniwal
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27
Hot Equity Tips

Smart Fooling Tips

 

 

Guaranteed: This is the perfect Word for such Ads, we Indians love Guarantee.

 

 

Daily Profits: Just follow this & you don’t need to work.

 

 

 

 

 

Perfect: Just Read “ALL” in place of “Many”.

 

 

 

 

Truth: They are saying “We cannot be Successful without YOU”.

 

Read what Bombay Stock Exchange(BSE) have to say.

Such kinds of false promises are not only given in Equity Investments but also in Insurance & Other Investment Products.

There are no Short-Cuts in Life & same applies to Investments as well.

Always remember Investments Also follows The Rule of Farm: You will Sow the Seed, it will turn into a Small Plant & then Tree. Finally it will give you Fruits.

If something appears too good to be true then probably it is not: So better if something sounds great; then make sure you investigate well because there are more chances that it’s not that good as it sounds. हर चमकती चीज़ सोना नहीं होती|

Must remember there are no Free Lunches. These are the Big Financial Mistakes & should be Avoided.

Feel Free to Add your Comments.

How critical is Critical Illness Insurance

Hemant Beniwal
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22
How critical is Critical Illness Insurance

Medical care and treatment costs are on the rise and according to research diseases like Cancer can affect individuals in all age groups. If you are financially well-off, then you would have enough money to comfortably pay for such high medical costs. However, there are individuals who would have to make ends meet at any cost as emergency medical treatment cannot be put aside. Smart individuals plan for such contingencies ahead in life.

But before taking such steps, it is important to know the various options that are available. Most people know about a health insurance policy or a mediclaim cover. But there are very few who know about a Critical Illness Policy.

How critical is Critical Illness InsuranceA critical illness policy covers major illnesses like Cancer, Stroke, Heart Attack, Coma, Kidney Failure, Paralysis and various others. If a person contracts any of these conditions, the treatment costs can be extremely high. In most cases a single dose of medication can put a hole in your savings. Critical illness policy is different from a health insurance policy.

Health Insurance policy: Covers medical expenses only if you are hospitalised for more than 24 hours. There are some policies which cover day care procedures that do not require 24 hours hospitalisation, but only the ones mentioned in the policy document.

Let us understand the coverage of a Health Insurance Policy with the help of an example.

Mr. Joshi buys a Health Insurance policy with a sum insured of Rs 5 lakhs. He gets hospitalised for 7 days and his hospital bill amount is Rs 80,000. The insurance company will pay this amount of Rs 80,000 only, even though his sum insured is Rs 5 lakhs.

Critical Illness Policy: Pays the sum insured on diagnosis of the condition, irrespective of the amount incurred on the treatment.

 If Mr. Joshi buys a Critical Illness policy of sum insured Rs 5 lakhs. He contracts any of the major illnesses and informs his insurer; the insurance company will pay him the entire sum insured of Rs 5 lakhs. He can utilize this lump sum money to cover any expenses as per his requirement.

Critical illness plans offer a much higher coverage amount and the illnesses covered under one policy may differ from another.

How critical is Critical Illness Insurance Click to Tweet

How to pick the right Critical Illness Policy:

  • Compare features, benefits and premiums of at least 2-3 insurance plans.
  • Choose a policy which covers the highest number of illnesses
  • Read the exclusion list carefully before buying the policy
  • Look for a policy with the highest renewal age limit

Generally there are 2 alternatives that you can choose from while taking a critical illness plan. One is payment or reimbursement on diagnosis; in which the insurance company pays lump sum amount immediately on diagnosis. Second option is payment or reimbursement on survival for 30 days or more, which means that the insurance company pays only if the insured survives the pre-specified waiting period.

If you want to cover your family, then you can opt for family floater option. Under this you can choose a sum insured for your spouse, dependent children. This sum insured covers family members for one or multiple claims during a policy period.

Comparison of Critical Illness Policies

Company No. of illness SA (Lakh) Entry Age Rs 3 Lakh Rs 5 Lakh
Bajaj Allianz

10

 1 to 50 6 to 59

1650

2400
ICICI Lombard

9

 3 to 12 20 to 45

1687

2801
IFFCO Tokyo

10

 1 to 5 5 to 60

1292

1933
Tata AIG

11

 3.5 to 15 18 to 60

2823

3949
Bharti AXA

20

 2 to 5 5 & above

1752

2920

*approx premiums are for age 36. (table added by Hemant Beniwal)

Should you buy a Critical Illness Rider instead?

There are some health insurance policies that offer Critical Illness Rider as well. The sum insured for critical illness in such case can either be 50% or 100% of the basic sum insured. If you do not want a separate critical illness policy, you should at least buy critical illness rider on your health insurance policy. This will increase your premium by a small amount but is totally worth the price!

This is a guest post by Deepak Yohannan –he is the CEO of MyInsuranceClub.com , an insurance price and features comparison site in India.

Disclaimer: This post represents the opinion of its author only, and does not in any way reflect the opinions of the author’s employer, The Financial Literates or the other authors who write content for this Website.

Importance of Beta in Mutual Funds

Hemant Beniwal
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20
Importance of Beta in Mutual Funds

Beta in mutual funds represents market risk or systematic risk. Standard Deviation measures volatility of fund in comparison to its mean return but beta measures sensitivity of a fund to its benchmark/index. (Sounds alien – let’s make it simple)

How often have you tuned into a business channel or opened the pages of a pink paper to be told where the markets are headed? The word currently going around is that markets should move up by approximately 25 per cent in the next year. (added just to make you happy) This seems so reassuring. Wouldn’t it be equally reassuring if one could get an indication of how a mutual fund would perform in the future? Especially when all performance data is just an indication of how a fund has performed in the past. And more so when this ‘past performance’ is accompanied by the warning that it may or may not be replicated in the future.

Importance of Beta in Mutual Funds

What is Beta ?

There are statistical tools, which can give you an idea of how a fund will move in relation to the market. Beta is a statistical measure that shows how sensitive a fund is to market moves. If the Sensex moves by 25 per cent, a fund’s beta number will tell you whether the fund’s returns will be more than this or less.

Importance of Beta in Mutual Funds Click to Tweet

The beta value for an index itself is taken as one as it is expected that this funds will just mimic INDEX.(so you would have heard this song “tu jahan jahan rahega mera saya saath hoga”)  Equity funds can have beta values, which can be above one, less than one or equal to one. By multiplying the beta value of a fund with the expected percentage movement of an index, the expected movement in the fund can be determined. Thus if a fund has a beta of 1.2 and the market is expected to move up by ten per cent, the fund should move by 12 per cent (obtained as 1.2 multiplied by 10). Similarly if the market loses ten per cent, the fund should lose 12 per cent (obtained as 1.2 multiplied by minus 10)

This shows that a fund with a beta of more than one will rise more than the market and also fall more than market. Clearly, if you’d like to beat the market on the upside, it is best to invest in a high-beta fund. But you must keep in mind that such a fund will also fall more than the market on the way down. So, over an entire cycle, returns may not be much higher than the market.

Beta in Mutual Funds

SBI Magnum Tax Gain fund was made open ended in 1999 & it was managed by Sandip Sabharwal till November 2005. You can check the beta of the fund in comparison to its peers – Yellow line.

Beta of Mutual Funds

Performance of a High Beta Mutual Fund

You can clearly see how a fund with high beta performs in different market cycles.

Sbi Magnum Tax Gain

Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way down. When safety of investment is important, a fund with a beta of less than one is a better option. Such a fund may not gain much more than the market on the upside, it will protect returns better when market falls.

So beta seems to be just what the doctor ordered. But as in the case of all things which seem to be too good to be true, there is a catch. The problem is that beta depends on the index used to calculate it. It can happen that the index bears no correlation with the movements in the fund. Thus if beta is calculated for large cap fund against a mid-cap index, the resulting value will have no meaning. This is because the fund will not move in tandem with the index.

R-Squared in Mutual Funds

Due to this reason, it is essential to take a look at a statistical value called R-squared along with beta. The R-squared value shows how reliable the beta number is. It varies between zero and one. An R-squared value of one indicates perfect correlation with the index. Thus, an index fund (check DSP Equal Weight Index Fund)  investing in the Sensex should have an R-squared value of one when compared to the Sensex. For equity diversified funds, an R-squared value greater than 0.8 is generally accepted to mean that the underlying beta value is reliable and can be used for the fund.

Beta and R-squared should thus be used together when examining a fund’s risk profile. They are as inseparable as risk and return.

Some Funds with high & low beta

(data March 2011)

Fund Beta R-Squared
JM Emerging Leaders

1.54

0.86
Magnum Emerging Businesses

1.34

0.87
Magnum Midcap

1.33

0.86
Taurus Discovery

1.27

0.86
L&T Small Cap

1.25

0.84
Canara Robeco Emerging Equities

1.24

0.88
ING C.U.B.

1.23

0.89
Escorts Growth

1.01

0.69
IDFC Premier Equity Plan A

0.92

0.87
Reliance Long Term Equity

0.92

0.89
Principal Dividend Yield

0.88

0.92
Tata Dividend Yield

0.88

0.92
Birla Sun Life Dividend Yield Plus

0.84

0.9
Escorts High Yield Equity

0.7

0.79

Findings from above Beta table:

  • Someone who has ever invested in mutual funds can clearly see that why JM funds were so volatile.
  • Escorts Growth has R-Squared of .69 – data is unreliable similar to this fund
  • Birla Sun Life Dividend Yield Plus beta is low so if you see last 3 years data it is one of the best performing fund. Will it participate in next Bull Run – check its performance when SENSEX touches 40000.

If you like this article you must read about Standard Deviation in Mutual Funds – which tells you about volatility/risk of a particular fund or portfolio.

Do you think it’s important to see factors other than returns while choosing a fund?

Understanding Gears in Investment Vehicle

Hemant Beniwal
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30
Understanding Gears in Investment Vehicle

Understanding Gears in Investment VehicleDo you know that investment products are called Investment Vehicles as well. The reason is that vehicles takes you from Point A to Point B; so as Investment products take you from where you are today to  where you want to be tomorrow in terms of your financial goals. They are meant to make sure that you reach your financial destination or in other words you reach your targeted goals. For example, let us assume that your daughter is 2 years old and you have to plan for her marriage at the age of 22. Now Point A is where you are today and Point B is where you have to reach after 20 years. Your target is the amount that you want to accumulate so that you can marry her. So you need a vehicle which can take you from today to tomorrow.

https://www.retirewise.in/2012/02/sip-investment.html

Now at times, your destination is very nearby and at times very far away. Now this article will make you understand what kind of investment products are well suited for different needs that you have for your financial goals.

To understand it in a much better manner, think of Gears in your vehicle. There are 4-5 gears in vehicle and each gear is meant for a specific speed. When your destination is very nearby, we use 1st or the 2nd gear and our speed is slow. But when our distance is quite far away we are in high speed gears like 4th and the 5th.

https://www.retirewise.in/2011/09/types-of-risk.html

We will try to understand it by analogy

Just imagine a situation where you have to go to nearby grocery shop. Would you take go for an air journey for this purpose? Sound funny! Let us change the example; you have to go to Canada for a vacation. Would you go walking or take cycle for this purpose. Sound irritating!

Now in Financial Investment products, there are mainly two types of Investment vehicles. One is Debt and another is Equity. Debt is where we get returns in the forms of Interest like Fixed Deposit, PPF, Post Office MIS etc. Equity is about ownership of companies/Businesses and sharing their profits and losses through Share holdings.

https://www.retirewise.in/2011/02/7-types-of-indian-investors-which-one-are-you.html

Ownership VS Lending in investments

When we plan for long term investment, the return on investment can be higher as you have the road and time to accelerate and decelerate. This is also required as much more money will also be required for longer term goals like retirement. Also, one needs to contend with inflation, which will have a major impact over a long period. You have to make sure that the returns on investments are greater than the rate of inflation. This can happen only when you invest your money in Ownership Assets. Ownership assets have short term fluctuations but in long haul, they beat inflation and create wealth. Long term financial investment which beat inflation is Equity and it is equity which creates wealth in the long term. When we talk of equity, we would like to clarify that we don’t advocate people to invest in equity directly unless they have in-depth knowledge of markets. For people who are not specialists, it is better we leave to professionals and invest in Equity Mutual Funds.

Now Debt is a slow speed gear where returns are less and when you take inflation into consideration, the returns are almost negligible or at times negative. We should invest in Debt mainly when our financial target is nearby. For example, if you need to marry your daughter in next 2-3 years, you should invest in Debt products. They are good investment as they will protect the capital and there is no downside risk in short run.

https://www.retirewise.in/2017/03/best-investment-options-for-senior-citizens-india.html

But if your daughter is 2 years old and you need to plan for her marriage after 20 years, would you take debt? It is something like driving your vehicle on first and second gear. But do you think you would do that if you were to travel long distance like from Mumbai to Delhi. No, you will not. You will have to shift to higher gears, for that journey. The chances of meeting with accident are there but for that you need to know how to drive well and you take calculated risk and if you don’t take the risk, the risk of going slow is much higher. This is what we should do in our investment as well. We should invest in Equities when your financial target is far off.

Equities have always delivered returns in long run but they are risky in short run. In last 20 years, sensex have delivered over 17% return p.a. that means your Rs. 1 lac investment in 1990 is worth Rs. 23 lacs today. In last 30 years sensex have delivered over 19% p.a. growth which converts your Rs. 1 lac investment in 1980 to Rs. 1.8 cr today. That is the power of Equity. (data September 2010)

But Road was never smooth….

Fall of 2008….

Sensex fall of 2008How I forgot reverse gear??

Indians are one of the biggest savers in the world but what about investment. There is huge amount laying in our saving bank account or for investment we use insurance endowment plans – these are examples of driving your vehicle in reverse gear. You are not moving ahead but going back every passing year due to investor’s biggest enemy that is INFLATION.

As legendary investor Warren Buffett quoted “Investor has to do very little things right as long as he avoids Big Mistakes.”

Practically, Equity should be for Long term and Debt for short term, but investor does the opposite, Equity for short term and debt for long. Equity investments are best when you invest through SIPs in a well diversified Equity oriented Mutual Fund. For Debt, one can opt for FDs in case tax liability is low and if tax liability is high, one can go for Fixed Maturity Plans as well.

Bring your vehicle in the right gear before its too late.

Ask Readers: Your views on Gold Prices

Hemant Beniwal
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33
Ask Readers: Your views on Gold Prices

SBI Gold Fund is there as every Indian is trying to participate in the gold rush. Let me first share few facts about gold : 1. This year Gold may generate its best 1 year return in last 32 years if it will touch $2000 (In 1979 Gold went up by 127%). 2. SPDR Gold Trust is now the largest exchange traded fund in world, surpassing the SPDR S&P 500 ETF – SPDR Gold has $77.9 billion (Rs 35,05,50,00,00,000 or Rs 3.5 Lakh Crore). 3. In India assets of gold ETFs jumped 58.3% to Rs 5,568 crore by the end of June & has moved up to Rs 6,119 crore in July. The assets were only Rs 483 crore in March 2008.

Ask Readers: Your views on Gold PricesSo now everyone is trying to prove “Make Hay while the Sun Shines” – but will they be successful or there will sunset before they exit. Let’s try to answer 2 questions – 2nd one is more important.

1. Should you invest in SBI Gold Fund NFO?

Without keeping any suspense answer is a BIG NO. This not only applies to SBI Gold Fund NFO, but to all Mutual Fund NFOs. One should never invest in Mutual Fund New Fund Offer for few reasons:

  • Saves you from getting in herd mentality. Take the time out and go back to your asset allocation to check if the fund offers you something unique and worth allocating your money.
  • Gives you time to analyze that is it right investment for me to achieve my goals. Fancy of Gold, Craze of SIP, Advertising Campaign, Supporting views from media & a big push from agents may drive you to wrong decision.

If you would like to invest in gold funds – go for Reliance or Kotak Gold Fund which are carbon copies of SBI Gold Fund. Benefit is you will immediately get NAVs rather than waiting for couple of weeks.

2. Should you invest in Gold now?

Now this is even a bigger question & it’s not only about SBI Gold or other Gold Funds but about GOLD. Frankly saying I have no idea how to value gold or say this is the right price for gold. So let me share views expressed by our reader, other blogger & few experts.

Deepika Said on SBI Gold Fund Article

“Gold price movements is not a rocket science – When the world has excessive liquidity (more dollars), its price will go up because people now will have more money to buy that same amount of gold and when the world has less liquidity (less dollars), its price will crash because now people will have less money to buy that same amount of gold.

Ask Readers: Your views on Gold Prices Click to Tweet

And if you are financially intelligent to know that how to calculate gold price in comparison to the money supply and know from the key interest rates that when the liquidity will be increased or decreased than yes….You can make fortunes from Gold Investing…..

The above advise is not for all the people. If you think that you are not financially intelligent enough than please don’t go for more than 10% gold allocation. This is a gold bubble and once the liquidity will be absorbed, it will burst. The above advise is only for those who actually know everything about US monetary base, inflation & key interest rates like Fed fund rate, prime rate…etc… and keep himself updated about all of these events.” August 25, 2011

Manshu from Onemint Says

“I’m going to sit at the sidelines as far as gold is concerned, but if you do want to buy it then buy it systematically, and don’t let it become more than 5 or 10% of your portfolio. I see a lot of folks saying very proudly how gold is the biggest component of their portfolio so even though the market has crashed they have made money, but the question is what if they are wrong about the future of gold?

What if they are wrong like the people who owned real estate stocks were wrong, and the people who owned IT stocks before them were wrong?

If you truly own so much gold, and find that prices go back to where they were two years ago – that will destroy your portfolio.

Do you really want to take that chance?” August 26, 2011

The Wall Street Journal

“Is there a gold bubble?

In one respect, gold always is in a bubble. An inert metal in every sense, gold has no intrinsic value as an asset so buyers focus primarily on its resale value. This search for the greater fool is characteristic of bubbles. Yet gold having accelerated this year, the question of whether it is now too expensive takes on new urgency.

Compared with other bubbles, gold’s rise actually looks tame. In the 10 years leading up to Aug. 22, when gold closed at a record nominal peak of $1,888.70 a troy ounce, the price had risen 587%. In comparison, crude oil rose almost tenfold in the decade preceding its all-time peak in 2008. But neither hold a candle to Nasdaq: The index climbed more than 2,000% in the tech-crazed decade that ended in March 2000.” August 27, 2011

John Paulson – the largest gold fund player

Famed gold bull Paulson held his ground with his $4.6 billion stake in the SPDR Gold Trust in the second quarter of 2011. “Paulson basically is putting his money where his mouth is. He believes that gold is earmarked to move substantially higher,” said Mark Luschini – August 16, 2011

Barclays Capital

“A developed world with slower growth, a large fiscal deficit and near zero rates over the next few years, inflationary pressures in emerging economies, and larger political and economic uncertainty bodes well for history’s oldest form of wealth (gold)” August 18, 2011

George Soros – one of the world’s smartest investor

Last year, Soros said gold was the ultimate asset bubble due to in part to low interest rates. In the first quarter, Soros sold nearly $800 million worth of shares in gold ETFs. George Soros’ hedge fund continued to scale back its investment in the world’s largest gold exchange traded fund in the second quarter, according to regulatory filings. August 16, 2011

Jim Rogers – Commodity Guru

“I do not like buying anything going straight up. I like to buy something going down. So if and when gold goes down, I hope I am smart enough to buy more and I would buy silver the same way.

There is no such thing as a safe haven investment. I wish they were. Gold went down something like 70% from its top during the 1980s and 1990s, even silver went down over 90% during its bear market in 1980s and 1990s. There is no such thing in the investment world as a safe haven. I would rather own silver than many currencies these days and would rather own gold in many currencies. But I do not want to buy gold when it is going straight up. I would rather buy something that is down rather than things that are going straight up.” August 8, 2011

Hope you enjoyed reading different views on gold. My view is “Trees do not grow to heaven” – I don’t know it is a bubble or not but if it is, gold price will come down at some point of time. That doesn’t mean gold price will not go higher from current level but do you think you will be smart enough to exit before the bubble burst?? If your answer is NO then have a proper asset allocation & if answer is YES – question is do you think you will be smart enough to exit before the bubble burst?? (Keep asking this question till you get the answer NO)

What’s your view on Gold? Write it here & comeback to see it after 1-2 years.

Reliance SIP Insure – free life insurance but bad idea

Hemant Beniwal
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60
Reliance SIP Insure – free life insurance but bad idea

Reliance Mutual Fund is aggressively promoting Reliance SIP Insure now days, which provide free life insurance cover with SIPs in its equity schemes. You must have seen I never miss a chance to mention that SIP (systematic investment plan) is a great way to invest in equity. In fact I also advocate that investors must refrain mixing the 2 giants- insurance & investment. Normally when we say don’t mix insurance & investment – we were talking about any insurance policy. But does that mean we can take Reliance SIP Insure or similar schemes?

Let’s First check what is the benefit provided by Reliance SIP Insure, then we will hear to dilemma of one of such investor & finally why it is a bad idea.

Reliance SIP InsureRead – Ulip Vs Mutual Fund for Long Term

What is Reliance SIP Insure

If you are a Reliance Mutual Fund Investor you must have got this message “Reliance Mutual Fund presents Reliance SIP + Insure “Aisa bhi kabhi hota hai offer”.  Ab investments ko SIP mein badlo aur free life insurance pao. Conditions apply.”

Reliance SIP Insure is provided as an additional/optional feature with all equity funds of Reliance Mutual Fund. This insurance is pure term insurance (group) & the premiums are paid by Reliance AMC. (But remember there are no free luncheons)

Reliance SIP Insure – free life insurance but bad idea Click to Tweet

How Much insurance one can get in Reliance SIP Insure

Insurance depends on the SIP amount & your term. Maximum Insurance one can get is of Rs 10 Lakh. (even if you are going for multiple schemes & multiple folios)

Eg.  Mr XYZ have started Rs 3000 SIP in Reliance Growth fund for 15 year – sum assured in starting will be Rs 3000 * 15 years * 12 Months = Rs 540000.

If Mr XYZ dies after 5 years his family will get Rs 3000 * 10 Years * 12 Months= Rs 360000. So you can see insurance reduces with every passing month or in other words insurance cover is equal to remaining SIP payments.

You can check few more Reliance SIP Insure permutation combination in the below table.

Features of Reliance SIP Insure

  • Investor age should be 18 to 45 to be eligible for insurance. (insurance cover will be valid upto maximum  age of 55 )
  • Minimum Monthly SIP amount should be Rs 1000 but there is no maximum limit.
  • Minimum tenure for SIP is 3 years but no maximum tenure.
  • In case of death amount will be added to the fund in the name of nominee or second holder. (but they can redeem the amount – there is a catch here*)
  • There is an exit load of 2% if someone switch/redeem fund before completion of tenure. Exit load is over & above normal exit loads that schemes charges. *this rule also applies in case of death.
  • Insurance will not be available in first 90 days. (except accidental death)

Investor’s Dilemma Regarding SIP Insure in Mutual Funds

I am 46 years old, working for a PSU and saving mainly for retirement corpus (10-12 yrs ahead), daughter’s  marriage(10-12 yrs from now) I am investing predominantly investing in mutual fund (Both through  regular SIP’s and sometime s small amount directly through online, whenever I get an opportunity for savings) and partly in shares.

I request you to enlighten me on the following:

About 1 & ½ years back, I have come across a scheme called SIP-Insure or insurance with Mutual fund with following funds

Sl no Fund Name  Amount of monthly SIP Approx insurance cover
1 Reliance RSF equity- growth  Rs 1500.00 Rs1 to  1.5 lacs
2 Reliance RSF equity- growth  Rs 2000.00 Rs 1.5 to 2 lacs
3 Reliance growth- growth  Rs 1500.00 Rs1 to 1.5 lacs
4 Birla sunlife dividend yield plus Rs 1500.00 Rs 1.5 lacs
5 Birla sunlife mid cap Rs 1500.00 Rs 1.5 lacs

Apart from Birla Sunlife dividend plus, other funds are miserably lagging behind. Usually, I try to balance my mutual fund portfolio once in six months after a thorough review of mutual fund portfolio. But I am unable to change these funds as there is clause in SIP insure that any change/switch in the SIP or Accumulated units will lead closure of insurance cover (which is group insurance – as per Birla sunlife letter).

Please enlighten me about is there any merit in continuing these sips in spite of their recent poor performance or it will be better to close and switch to good funds & lose insurance cover which is slated to be for another 10 years.

Why you should not invest in Reliance SIP Insure

My suggestion to above investor is immediately he should discontinue all these insurance policies (sorry SIPs). It is better to have small pain today then a big disappointment in future. Check reasons.

1. Your insurance can be discontinued for n number of reasons

  • If you discontinue your SIP at any point of time.
  • Redemption or Switch of units before term
  • 2 ECS bounce
  • Even Change of Bank details in auto debit/ECS mandate

2. Huge Exit Load

2% exit load if you redeem amount before the tenure – how many people will actually be able to keep amount in a single fund for 10-15 years.

Worst part is exit loads even in case of death of insured – if Mr XYZ started Reliance SIP Insure of Rs 5000 per month for 10 years. But unfortunately if he dies after 3 year – Rs 420000 will be added to his fund in name of nominee. Now if nominee would like to exit he needs to pay 2% Load.

3. Why should you remain invested in single fund for 10-15 years?

We always talk about sticking with good consistent funds for long term but what will happen if my selected fund underperforms for couple of years. If sticking to a single fund is a good choice – I think ULIP is a better option than Reliance SIP Insure. (I think this is my first ever statement in favor of ulip) You have seen the same thing in dilemma of investor.

4. Is Rs 10 Lakh a sufficient sum assured?

If we even go by rule of thumb you should have insurance around 8-10 times of your yearly income. That means if your yearly income is Rs 1 Lakh – Rs 10 Lakh is sufficient. But in this case the question is why you should invest only in 1 Mutual Fund House.

5. Death due to Pre existing diseases will not be covered

Normally in a group insurance it is expected that pre existing disease will be included.

6. Is free really free

I have taken an example for 45 year man – he want to take Reliance SIP Insure for 10 Years & monthly contribution Rs 5000. I have chosen age of 45 as it is the maximum permissible age & premium rate for this person should be highest. (Premiums I have taken from Reliance Life Insurance)

Year SIP (Yearly) Insurance Fund Value AMC Charges Insurance Charges Group Insurance Premium Exit Load
A B C D (10% return) E = D*1.25% F = Age 45 G = F*50% H = D*2%

1

60000

600000

66000

825

3822

1911

1320

2

60000

540000

138600

1733

3359

1680

2772

3

60000

480000

218460

2731

2930

1465

4369

4

60000

420000

306306

3829

2548

1274

6126

5

60000

360000

402937

5037

2200

1100

8059

6

60000

300000

509230

6365

1914

957

10185

7

60000

240000

626153

7827

1665

833

12523

8

60000

180000

754769

9435

1449

724

15095

9

60000

120000

896245

11203

1260

630

17925

10

60000

60000

1051870

13148

1097

548

21037

I have assumed that group insurance premiums will be half of individual term insurance – but normally these are 25-30% of individual term plan.

  • Now let me tell you from my experience that 80-90% people will discontinue these sips before completion of term plan so they are going give 2% exit loads.
  • Even if people continue their SIPs for whole term Reliance will be a clear winner with earning more AMC charges. They also need to pay less & less premium every passing year.
  • In case insured dies there is very high probability that family will immediately withdraw that amount after paying exit loads of 2%. Even if they continue Reliance AMC will be earning higher AMC as now the investment amount also include the sum assured.

Always remember 2 + 1 (free) is never equal to 3. Why do you want to live in an illusion that by buying such product that you will be fully/partially insured?  You buy insurance, to cover your life goals which are time bound in nature. In case if something happens to you the goals are indemnified by the insurer. Even if you get claim after spoiling your investments – do you think Rs 10 Lakh is enough to meet the future requirements of your family? Insurance is a slightly more complex matter. Do not rely on alternatives instead get your cover requirement calculated and buying a suitable Term Plan for you. A simple meal at home is always better than a Pizza Hut’s menu card.

If you agree with the views expressed in the article – must share it with your friends. Let’s save few more financial lives.

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