Best Personal Finance Blog in India - The Financial Literates

Common Man & Rise in Fuel Prices

Economic Trends

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June 25, 2011

Everybody seems to be shaken up with the rise in kerosene, diesel and LPG prices and how it is going to impact the family budget. Was it required or not? Did government had any other option or they were economically tied up? Opposition parties have sensed this as a political issue that can swing votes in their favor. They have untied and talking about BHARAT BAND etc. Overall a common man feels that he is being cheated.

Subsidy on fuel price

Last year Govt Deregulated the price of petrol – so price is linked to international prices and same is charged to us. But in case of other petroleum products government pay the difference of what were the international prices and what was charged to us, by way of subsidy. For example, if the prices of diesel according to international prices is Rs. 50/- per liter but Rs.40 was charged to end user from filling station the difference of Rs. 10/- per liter is paid by Government through subsidy. Now this Rs. 10 becomes rupees in lakh of crore when it comes to the entire consumption in India. Now to subsidize, government have to either rise taxes or print notes. Printing notes leads to higher inflation and raising tax leaves us poor. So, either way we were charged, either directly or indirectly. Last time when these prices was hiked international crude price per barrel was $72 & currently it is $107 – 50% more. Govt is not having any choice but to hike the price.

But Govt charges so much tax on fuel

The notable point is that the prices of the petrol or diesel also carries the load of huge custom and excise duty. Government has tried to reduce it but still under recoveries for oil company are above 1 lakh crore. If government were to control their unnecessary expenses and expense that go waste, the price can come down drastically as the taxation shall come down. (have I wrote corruption)

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Government Financial Health

Now, imagine a listed company you are analyzing for potential investment. Its profit & Loss shows it spends more than what it earns. To fund this gap it raises debt every year. Will you invest in such company? We are talking about India as that company & investors are FDI, FII & people who trade with us. In economics it’s called the Fiscal Deficit. A fiscal deficit occurs when government spends more money than it collects in from of revenue. India’s Fiscal deficit target was 6.7% of GDP in FY 10 but they managed at 6.4% as they reduced spending on rural areas. You can check fiscal deficit figures in below table. In last table of duty cuts you can see government will loss Rs 49000 crore – which may turn into .5% extra fiscal deficit if we are not able to find any other revenue source. Pranab Mukherjee said “I have taken the risk of reducing the duties so that relief can be given to consumers”.

Economics Vs Politics on Fuel prices

“I am sandwiched between economists on one side and populists on the other. Political problems will always be there and economic problems don’t wait for solutions of so-called political crisis.” Oil Minister S Jaipal Reddy. I think that charging us directly is much better way than being charged indirectly by way of subsidy and then raising taxes or printing notes. In fact, mechanism of linking to international prices should have been in place much earlier but due to political reasons, such decisions were never taken and therefore delayed. The economic sense is kept on back burner and politics took the front seat – Diesel, kerosene and LPG are still heavily subsidized. Now, when the government really could not afford to further carry on subsidy mode – the market should determine what should be the prices. The only thing is that timing of such decision is not appropriate in our view as public is anyway under tremendous pressure of rise in prices. It would have been a great if the same could be done when the inflation was 5-6%. [Government keep saying that we have to import 80% of the petro products – true we agree but are you using other natural resources in most efficient manner. India in world no.1 source in Iron ore but we are waiting it. ]

The matter would be hot for some time and there will be lost of debates but soon people will forget and get used to paying the increased prices. Also check what are neighbors are paying.

Inflation in India

Please understand that Inflation in India will remain high as it is a developing nation and demand of goods and services is much higher than the supply side. Due to this demand and supply mismatch, the prices will keep going up. When it comes to investing, our aim should be to beat the inflation by a margin. Now, the major concern is that people invest their savings which give them return less than that of inflation rate. Current inflation rate(Chart) is above 9%. This rise in current fuel prices can add another.5% to inflation. Check Historical graph of inflation in India. (since January 1969)

Inflation & your Investments

Now look at where most of our investments are lying. Indians have more than 60% of their saving in Bank Deposits or Post Office or they ENDOWMENT or MONEY BACK policies which give even lesser return than FD. The return on fixed Deposit Currently is less than 9% and if we subtract taxation liability to it, then the net return is even less. Does our investment really keep track with the rate of inflation? Is Our investment leaving us poor at the time of maturity? We need to think about all this before we actually invest.

Credit: Few tables used in the article are taken from Business Standard.

Mind you, it is not where you stand that matters,

but in what direction you are moving that matters the most!

Please share what do you feel about Fuel Price Hike Now.

When you are not ready for your retirement …

Financial Planning

Hemant Beniwal

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June 21, 2011

19

When you are not ready for your retirement …

Last week I wrote an article on “Are you ready for your retirement?” based on a survey which says 74% are financially prepared for their retirement. I raised my doubts on that survey & showed that there is an illusion. There is huge gap between our perception regarding goals & actual goals – this gives us confidence that we will achieve goals but when we reach closer to goals…….

Must Read-5 Reasons you should not Retire

Why people are not able to make a proper retirement corpus?

Normally there are 4 main reasons:

People don’t save enough: this happens mainly due to some expectations from family members or under estimating their retirement goals. Most of the government employees have an illusion that there pension will be sufficient to take care of their goals so they give other goals more priority then retirement.
Don’t have enough money to save: People think this happens because they are earning less but in most of the cases it is also that they are spending more than they should or excessive debt.
Market Risk: It’s very much possible that someone has burnt his hands in last market crash. So he is afraid of investing and frittering away his savings.
Too conservative portfolio: Most Indians understand risk in wrong senses & keep most of their portfolio in debt (in some cases 100%) throughout their accumulation phase.

Check- Is Rs 1 Crore enough to Retire?

What corrective measures people can take in case of retirement shortfall?

It actually depends on when you have identified the problem. Most of the people realize it when their retirement is happening next month or next year but that’s too late to do much on financial front with respect to savings… so they have limited options – stretch the corpus they currently have, ensuring liquidity, ensuring medical cover etc., to ensure a fairly comfortable living.

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Few more suggestions that are common for all:

Reduce expectations: This is first & foremost thing that one has to do when facing shortfall in retirement corpus. People would have dreamt a lot about their golden years & also planned some luxurious vacations or grand party for family members – but they should see the real picture.
Cut expenses: In whatever stage a person is this is definitely going to help –check what are the discretionary expenses that can be reduced or removed. Also start making monthly budgets.
Save more aggressively: Reducing expenses can give some more room for savings – but savings should be channelized in right investment instruments.
Review and revamp investment portfolio: Investor’s experience with some particular asset class can be good or bad. That’s the reason most of the people have portfolio tilted towards single asset class be it real estate, debt or in some cases even equities. People should have a proper asset mix.

Must Read- Retirement Planning Vs Child Future Planning

Are there any other options?

There are but they are even tougher:

Scale Back Lifestyle: This is not just about cutting expenses but actually compromising few of needs. Difference between need & want can be judged by size of wallet – so we have to draw clear lines again. Reducing lifestyle drastically can be a painful thing so should be done in phased manner.
Moving to a smaller city: Expenses in smaller cities are comparatively less than metros – you have a choice to shift there after retirement.
Delaying Retirement: Working longer was not the actual plan but this is the last resort as actually there was no plan. You have to convince yourself that retirement is a boring idea or retirement is about retiring from 9-5 job but that doesn’t means that you stop working. Delaying retirement in which ever form it is have 3 benefits – more years for savings, conserving retirement corpus & less years in actual retirement.

So if you would like to avoid such financial hardship – plan your retirement. One of our readers Pattu who was very active on “How to choose best term Plan?” has shared an Excel Based Retirement Calculator on Onemint.

Case of a person – who was bit late in preparing for his retirement

Last year I got a call from a prospective client, who was looking for his retirement in couple of years. He was in mid 40s & planning to retire as soon as possible. He was working in South Asia & sounding very positive about his financial situation. We enrolled him for financial planning but while filling data he was bit confused. He thought there is some problem in our excel sheet where we were filling his present cashflows. He was earning Rs 25 lakh every year but his net cashflows were showing negative figures & that too by 10%. He was not able to digest this – he never realized that he is in this situation.

Once data was filled picture was clear he had taken too many loans to buy properties including few personal loans. His 90% of the assets were in real estate & that too on loan to the extent of 80-90% of the value of the real estate. When we calculated some financial ratios – things were even scary. His solvency ratio was less than 15%.

First we suggested him to reduce some of his discretionary expenses, making paid up few endowment policies & renting one of the properties so that cashflow can be taken to positive territory.

Then came the tougher decisions of selling one of the real estate properties. We tried to explain him that he is closer to debt trap & also about risk associated with having all his assets in single asset class. He agreed to sell one of the properties – this helped him in reducing EMIs.

Now we had some different figures all together so we again constructed the plan from scratch. Still there was shortfall in retirement figures. In this whole period we tried to teach him a lot about finance. We suggested him 2 choices either adjust your lifestyle or delay your retirement by 3 years. He agreed with second choice and now he feels more relaxed & confident about his retirement.

There is a famous quote from George Foreman “The question isn’t at what age I want to retire, it’s at what income.”

If you have any question regarding retirement planning – feel free to add in comments.

Are you ready for your Retirement ?

Financial Planning

Hemant Beniwal

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June 17, 2011

14

Recently 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.

These days retirement is a real challenge due to low pension or no pension, the shift towards the nuclear family system, the longevity of life is increasing, rising medical expenses, etc. It may sound a bit odd but actually, most people don’t realize they will have a shortfall in their retirement corpus & when the realization happens it is too late. Most of the clients when thinking of retirement planning, have simple calculations in mind that they need X amount every year & for this, they need 12.5X retirement corpus assuming a rate of 8%. But they ignore their biggest enemies – inflation & tax. These enemies actually start hitting them after 4-5 years & after retirement, they don’t have much choices other than adjusting their lifestyle.

Check videos on Retirement Planning

Do you know how much you need for retirement?

Current Age	25	35	45
Retirement Age	60	60	60
Income(I)/Expense(E)	300000(I)	800000(I)	1500000(E)
Retirement Corpus Required	Rs 6.35 Crore	Rs 4.29 Crore	Rs 5.57 Crore

If you don’t believe these figures or would like to check your retirement figures – download software from here.

74% of the Indians are financially prepared for retirement: Survey

According to a survey done across 17 countries by Canara HSBC Oriental Bank of Commerce Life Insurance. Indians are second best in Asia Pacific with 74% ‘feeling’ adequately financially prepared to handle their retirement.
I don’t know why insurance companies are on survey drive. (I know but I don’t want to mention) Some days back ING did one survey on financial literacy & showed that India Ranks at no. 2 out of 10 leading nations in financial literacy. I really doubt both the surveys.

Also Read: When you are not ready for your retirement

Let’s check some findings of the retirement survey:

33% of Indian respondents see retirement as a whole new chapter of life as well as a time for rest and relaxation. Only 22% associate it with financial hardship. (33% are optimist or 22% are pessimist)
Just 7% of respondents believe they will be worse off than their parents’ generation in retirement, though 51% are worried about being able to cope financially in old age. (51% are worried then how 74% can be financially prepared – is there some calculation mistake or typo)
Older respondents are less enthusiastic about retirement and are far more likely to associate it with financial hardship. (older respondents know something that young guys don’t know)
14% think that their personal pensions will provide their largest source of retirement income, while 13% will rely on other forms of saving and investments. (I don’t know about rest 86% but these guys are going to have problem “Individual Personal Pension Schemes”)
One in ten people in India expect to continue working in later life to provide an income for them. (Few people have already realized the hard facts of life)
76% of respondents have financial plans in place – far more than the worldwide average of 50% – while 57% of Indians have also sought professional financial advice. (This is awesome – 76% HAVE FINANCIAL PLANS – do even 7.6% of Indians know what is financial planning. No comments on professional financial advice or what you call the insurance agent’s advice)
The internet is emerging as a prominent source of financial information and advice for people in India, with 50% of respondents using official financial websites to guide their decision making. (It is good news for TFL but what I write is an information & even other websites provide information – but the information is not KNOWLEDGE)
Independent financial advisers (33%) and banks (21%) are the most common sources of professional financial advice in India. (Check what kind of professional advice people are getting – Banks & Independent financial advisers)

For individuals who want to take action now to improve their financial well-being later in life, there is a simple 5-step checklist based on the research:

Establish some clear goals, both short and long term
Benchmark yourself
Establish a comprehensive financial plan
Implement the plan
Keep your plan under review

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These are great 5 points but are these based on the survey. Is this survey done by the world’s no. 1 online survey company – Speak Asia.

I am not against these surveys – these guys have definitely done some hard work but it doesn’t show the picture that we see every day.

Why there is always a positive attitude shown when talked about personal finance

When someone reaches me for financial planning – I always ask when you would like to retire & what should be your retirement corpus. Most of the people reply they would like to retire not later than 55 year of age & very few dare to write corpus required above Rs 1 crore. If you have checked figures in starting of the article there is a big difference.

This difference is actually a gap between what we think (Perception) and what the reality (Actual) is. But when people reach near retirement, their perceptions of what they can expect to experience grow increasingly negative.

This is also part of this HSBC Survey (Global Report) – this is one of the best slides of survey. I don’t think it needs any explanation – this tells what I am trying to convey in my last 900 words.

Mark Twain said, “Plan for the future, because that’s where you are going to spend the rest of your life”.

Would you like to share reasons – why people fail to plan for retirement?

LIC Jeevan Arogya Review – Should you buy it ?

Hemant Beniwal

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June 12, 2011

224

LIC Jeevan Arogya Review – Should you buy it ?

When it comes to financial products no brand can be bigger than LIC. Recently LIC Launched LIC Jeevan Arogya & queries started showering:

Deepak “kindly advise me of the new lic plan jeevan arogya. Whether I should purchase it.”
Kiran “Please give me details for Jeevan arogya lic plan I want to take this”
Anup “Suggest me about lic’s mediclaim policy jivan arogya……..”
Munish “Query on lic Jeevan Arogya – can I go with this one or not.”

So go ahead and read its complete review – features, some special features, limitations, complications, comparison with other health insurance products & finally should you buy it.

There’s nothing wrong if we say that Health Insurance should be purchased to “save your savings”. On one side there’s increase in Life expectancy due to improvement in medical facilities and on the other there’s deterioration in health due to life style changes. And accompanied with increasing medical costs and other healthcare expenses, keeping one self adequately insured with proper health insurance cover has become inevitable.

Though individuals start realizing the importance of health insurance but still they are more confused with number of products available in the market. Previously there were only general insurance companies that provide this insurance, then came Standalone health insurance companies and now Life Insurance companies has also started selling health insurance. This confusion is clearly visible among people as, whenever any new plan is launched in the market people gets excited and starts enquiring about the same. Recently LIC has launched a new Health Insurance Plan naming “Jeevan Arogya”.

So, we have tried to review this from a Financial Planning perspective and how does Jeevan Arogya stand against existing policies in the industry.

Must Read- Best Medical Insurance for Parents

Who can be insured under LIC Jeevan Arogya ?

Under a single policy you can cover your complete family (which includes you, your spouse and children), your parents and your parents –in-law.

The Minimum and maximum age at entry is as under:

	Minimum age at entry	Maximum age at entry
Self/Spouse	18 years	65 years
Parents/Parents in law	18 years	75 years
Children	91 days	17 years

Features & benefits of LIC Jeevan Arogya

LIC Jeevan Arogya is a defined benefit, non linked plan where the benefits are fixed and will be payable to you in full, irrespective of the actual amount spent on treatment.
It covers the Hospital cash Benefit (HCB) which means that you will be paid a defined amount for the number of days you have stayed in the hospital. There are 4 variants available under this feature. Rs 1000 per day, Rs 2000 pr day, Rs 3000 per day and Rs 4000/- per day. Your premium and other features and sum assured will be dependent on the variant you have chosen under HCB.
Jeevan Arogya covers some 140 defined major surgeries. In case you get operated for any surgery as defined under this policy feature you will be paid lump sum amount which is equal to 100 times the HCB chosen. Which means that if you have chosen a plan of Rs 2000/- per day HCB then your Sum assured under Major Surgical benefit (MSB) feature would be Rs 2 lakh. And this amount will be paid to you irrespective of your actual expenditure on the procedure.
There is some 140 day care procedures defined under this plan. If you get operated under that specific procedure than you will be paid 5 times of HCB plan you have chosen. Which means if you have chosen a plan of Rs 2000/- per day HCB then your sum assured under day care Treatment feature would be Rs 10000/-. And this amount will be paid to you irrespective of your actual expenditure on the procedure.
In the event of an Insured under this plan, undergoing any surgery not listed under MSB or day care treatment causing the insured hospitalization to exceed a continuous period of 24 hrs with in the cover period, then a daily benefit equal to 2 times the HCB shall be paid for each continuous period of 24 hrs.

Check- What is Health Insurance Portability in India

Special Features of LIC Jeevan Aarogya

Double benefit: If due to medical complications patient has to admit to ICU then he becomes eligible to claim 2 times of HCB as per the plan.
Coverage for all: You can cover your Parents and Parents-in-law under the same single policy along with you, your spouse and children.
Quick Cash Facility: Though this is a Reimbursement policy which means that you have to make claim of the policy benefits after getting the treatment done. But in special surgeries covered under MSB, insured can claim 50% of the Sum assured which may be paid during hospitalization period. This amount will be adjusted in the final settlement.
Premium Waiver benefit: In case the procedure operated under special categories defined under the MSB then one year premium will be waived.
Riders : There are 2 additional riders offered under the policy- Term assurance rider under which the maximum sum assured offered is 100 times of HCB and Accident benefit rider where the sum assured offered should be less than or equal to Sum assured under Term assurance rider.

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Limitations of Jeevan Arogya

In this we’ve not covered the basic and general limitations and exclusions that are applicable to almost all the Health Insurance policy. But specific limitations as is there in the features of the policy.

There’s annual and Lifetime limit imposed on the Daily cash benefit feature in LIC Jeevan Arogya. In the first year one cannot claim for more than 30 days in case of NON ICU stay and for ICU stay the LIMIT is 15 days. Second year onwards this limit will be increased to 90 days for NON ICU stay and 45 days for ICU stay. In lifetime you can claim maximum of 720 days in case of NON ICU stay and 360 days in case of ICU stay.
In Major surgical benefit you can claim only once in one year and 8 times in lifetime.
In day care Procedures you can claim maximum for 3 procedures in a year and limit is 24 for lifetime. Also, it’s not paid if you claim for Hospital Cash Benefit
For Term assurance rider your Total Sum assured from other policies and riders should not exceed 25 lakh.
For accidental Rider your total sum assured under all other individual and group policies should not exceed Rs 50 lakh.
Maximum Sum Assured in the policy is Rs 4 lakh.

Complications in LIC Jeevan Arogya

Here we’ve covered those limitations which usually gets hide under the noise of benefits but comes to cover at the time of claim. As the Policy is Reimbursement policy so one must know what to be claimed for otherwise this will lead to unnecessary harassment afterwards.

If both of the parents (father and mother) are alive and are eligible for cover, then either both of them will have to be covered or none of them will be covered. The PI will not have any option to choose one of them. The same condition will apply for parents-in-law also.
All the benefits will become payable only if the Hospitalization or surgery has been performed in India
If more than one major surgery is performed during the same surgical session, you can claim for only one surgery.
If more than one day care procedure is performed during the same surgical session then you can claim for only one procedure.
No benefit will be paid for first 24 hrs of stay in the hospital. Which means that if your stay in Hospital is for 5 days , you will be paid for only 3 days. But if your stay exceeds 7 days then afterwards you become eligible to be paid for first 24 hrs also.
The HCB will be paid for continuous stay of 24 hrs in Hospital or part there of provided any such part exceed continuous period of 4 hrs ( after having completed 24 hrs as above).

Comparison of LIC Jeevan Arogya with other Health Insurance Policies

If you draw a comparison between existing policies from Apollo Munich, Bajaj Allianz and Tata AIG, you find these much simpler in terms than LIC. Also the desired benefits which an individual seeks from the policy are higher in certain areas.

Should you buy Lic Jeevan Arogya

Health insurance is a very specialized field and requires a good amount of knowledge to understand the jargons a company uses in the policy terms. LIC is a life insurance company and whether agents have equipped themselves to sell these kinds of product, time will tell. In the case of Reimbursement policies and that too from nationalized companies, role of agent increases as they don’t have the culture of customer service centers/ 24 hr service numbers.

As we have been debating, linking investments with Life Insurance in ULIPs, one can also debate that LIC has tried to bring in life and health benefits together through this product. This has only introduced complexity in the mind of consumers especially in areas where financial literacy is too low.

With regard to LIC Jeevan Arogya – it cannot be considered as an adequate health insurance policy as it does not cover actual hospitalization cost. Also the maximum SA of Rs 4 lakh available only in the case of major surgeries which in turn is too low for treatment costs related to heart, kidney or stroke etc. However, if you are adequately insured through other Health insurance policies but want to get cover of additional expenses like room attendant costs, expenses on food, travelling etc, then you can consider such policies. But again that insurance policy needs to be simpler. Now days many Health insurance providers have added Daily cash benefit feature with other benefits in their basic plans. Hence, our recommendation is to evaluate your needs first and after comparing the policy benefits in details (check policy wordings) with your basic policy, make your decision. Unawareness on terms of the policy can lead to dissatisfaction to your family during the claim settlement.

If you have any questions related to Health Insurance – feel free to ask.

This is a guest article by Jitendra Solanki & Manikaran Singal – they both are CERTIFIED FINANCIAL PLANNER^CM

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

Must have features for your credit card

Family Finances

Hemant Beniwal

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June 10, 2011

8

As credit card usage grows, and you get more and more calls from banks trying to sell you their credit cards you will need some parameters to help you evaluate the best credit card for you.

Check – Are you ready for your retirement

Today, we’re going to take a look at 5 factors or credit card features that you should keep in mind while deciding which credit card you opt for. These factors are fairly easy to evaluate and it shouldn’t take you more than 10 minutes to figure it all out in your head.

1) Your Credit Card Must Be Free:

All credit cards have interest on the outstanding balance, but there are some on which you have to pay an annual fee. You should try to avoid such cards because there are plenty of banks that provide you a credit card without an annual fee.

There are some cards on which there is no annual fee, but a renewal fee. This is nothing more than the fee waived off for the first year. Basically, they don’t charge you for the first year, and then have a fee to renew your membership after that. I recommend staying away from these cards as well.

The only time you should be willing to pay for your credit card is when you see real value in the service they offer. They could be offering concierge services, or there could be a good cashback or rewards program that you think you can take advantage of. If you don’t see any tangible benefit then don’t pay for the card as you can find plenty of free credit cards in the market.

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2) Easy to manage:

Your credit card should be really easy to manage and pay off. The easiest way is to link your credit card to your bank account and pay the bill online. It should be your goal to find a card that’s very easy to pay off because if you end up missing a payment you will end up paying very high interest needlessly. As far as possible – go for the credit card that’s easy to pay off. We often underestimate inconvenience and end up paying a price for it. For example – you may not think much of driving to a nearby ATM to drop off a cheque, but ask yourself how many times you’ve forgotten to make a payment, and how many times have you just delayed a haircut because you were feeling lazy? Life is complicated as it is and you don’t want to make it any harder on yourself by adding another task of driving to a bank or ATM to drop of the credit card payment. As far as possible look for a credit card that can be paid online, and if possible link it to the bank you have an account with anyway. That way your payments will be instant.

3) Where do you spend the most?

Some people have a lot of air travel, others need to fill up petrol quite often, and then there are others who shop at a particular mall very often.

Find out where you spend most of your money, and then see if there is a credit card that will give you rewards on where you spend the most money. Most petrol pumps have co-branded credit cards that give you some money off, and there are air travel credit cards as well. Find out the credit card that gives most bang for your buck.

I’m sure you know friends who got a toaster for all the reward points they gathered over years! You don’t want to be that friend, so be smart and do a little planning before you apply for a credit card. A little thought on the rewards program can go a long way in terms of reaping benefits later.

Must Check- Should I pay a debt or invest

4) Rewards that don’t expire:

Some credit cards give reward points but they expire after a certain period. Make sure you are familiar with how the reward points work; ideally they shouldn’t expire at all, but if they do – then make sure you’re familiar with how long they last and how you can take the most advantage of it.

5) Reward points used to pay off outstanding balance:

There are some credit cards that allow you to use the reward points to pay off your outstanding balance, and that’s just great because sometimes it’s a challenge to use reward points. However, such cards may have an annual fee, so be careful – you don’t want to pay so much in the annual fee that the rewards become meaningless.

These are five factors that you must think about while selecting a credit card, as a credit card can be a great tool if used wisely, but can be the most lethal of weapons if you don’t give enough thought to which one you use, and how you use it.

This is a guest post by Manshu Verma – he is an MBA in Finance and writes about investing and personal technology at Onemint

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.

Financial Planning Questions

What is the tax liability on selling a property?
Can you provide details regarding Education Loan?
How much pension I will get after retirement?
Which is the best-secured investment for retirement planning?
What do clients can expect from financial planning?

Income Tax on sale of House Property

Question: My father is retired from a Central Government job and is a senior citizen. He sold his house recently for Rs.40 lakh. What is the total tax liability on him? If he does not invest this amount for some time, can he deposit it in his savings bank account?

In real estate investment, you are liable to pay capital gains tax based on your period of holding. If your father sold the house after three years of purchase, he will have to pay long-term capital gain tax at a rate of 20% with indexation benefit. However, if the period of holding is below three years, the short-term capital gain tax will apply and the gain will be added to his income. Hence, based on the year your father purchased the house calculate the gains he has made which will give you the total tax liability on him.

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But tax liability on property investment can be saved by investing the amount under two schemes. If you buy another property (not land) within two years or construct within three years of selling the house, you will not be liable to pay any capital gain tax. Subsequently, you can also invest in capital gain bonds, with a maximum limit of Rs 50 lakh per person per year. However, if you intend to do any of these after few months, the amount realized should be deposited in a capital gain deposit scheme account in any nationalized bank for a stipulated time.

Must Read- Insurance Questions

Education Loan

Question: I want to take an education loan for my child’s higher education. Can you please advise what factors to look into before going for it?

Before going to the bank for checking the loan formalities, I would advise you to zero in on the course and Institution where you are seeking admission of your child. Check on the fee structure and placement record. Compare the fees vis a vis the expected salary following the course completion. All this information would be helpful to understand how easily the loan will be repaid and also if it is worth taking a loan for such kind of Institution for your child admission. Banks don’t ask for any security for loans up toRs 4 lakh but will do their due diligence. If the loan amount would be more than 4 lakh but less than 7.5 lakhs than bank will ask for a 3^rd party guarantor or co-loaner and if the loan is more than 7.5 lakhs than you have to submit collateral of the equal amount of loan. It is also advisable to serve the interest in the moratorium period as this will help in reduction of interest rate to be charged by bank.

EPF (Employee Provident Fund) & Pension

Question: I am a Central Govt. employee. I joined the service on 04/09/2010. From October 2010 from my salary a sum of Rs. 1475/- is deducted by my employer towards EPF. My date of birth is 31/08/1974. How much amount I will get after my retirement and also how much pension I can get per month after 60 years. Please clarify.

Employee Provident Fund is a defined contribution scheme and one of the best tools to accumulate a corpus for your retirement. With a disciplined investment, it compounds your money at a pre-defined interest rate. You have 24 years for your retirement. If I assume your income grows constantly at 8% p.a. (although it is 9% as on today, but may increase or decrease in future) till your retirement, you will be able to accumulate a surplus of Rs 57 lakh only from EPF contribution. Through this corpus, you can buy an annuity/pension from any life insurance company in India. The pension will be at the rate prevailing during your purchase of an annuity. If I assume a rate of 6%, which is the current rate of annuity, you will receive a pension of approximately Rs 28000 monthly. However, insurance companies have different options for annuity-like joint pension, pension for a defined period, pension for you with the return of purchase price to the nominee, and others. The amount of pension varies in all the options. You will have to choose any one option at the time of buying the annuity from the company.

Check- Mutual Fund Questions

Best investment for retirement

Question: My income per month is Rs. 25000/- approx. I want to invest Rs. 7000/- to Rs. 10000/- per month upto retirement age for my benefit. Please let me know the best secured investment idea for best return. Besides this I want to invest another Rs. 1000/- to Rs. 2000/- in every year due to getting DA / increment. Waiting for your comments.

There is nothing called “best secured or ideal investment”. Any investment decision you make should align with your goals to achieve. There are various investment options available to an investor but each one has its risk and return as per the time horizon for investment.

Retirement is a long-term commitment and probably the most neglected goal by individuals. Since there is a good amount of retired life to live, there is always a need for a higher corpus to be accumulated. The primary reason for this is the longevity of your life and the expenses you bear post-retirement. Hence the investment should be made in such instruments which can not only beat inflation but are capable of generating higher returns with maximum utilization of your resources.

Equity as an asset class has proved its sustainability of giving consistent returns with a probability of risk-reducing if invested for more than 10 years. Hence, it’s advisable to have maximum exposure in this asset class, gradually reducing when you are approaching near your goal. To allocate your investments in the right manner it is necessary that you quantify your retirement goal. This means that you should know how much expenses you will have to incur post-retirement which will give an estimate of the corpus required at age of retirement. Since you haven’t disclosed time for your retirement and current expense and liabilities; it will be difficult for me to give any estimation and allocation of your investments. However, assuming you have 15-20 years for your retirement, I will advise you to adopt Mutual Fund Mode and start SIP in well diversified equity funds like HDFC Top200, DSPBR Top 100 equity, Fidelity equity and IDFC Premier Equity Fund. This will generate you the required return and will help you in reaching your goal. You can also consider PPF and NPS which are good tools for generating wealth for your retirement. For more advise on allocation of your visit a Certified Financial Planner and work on your retirement goals.

Financial Planning

Question: What’s involved in financial planning? As a client what should I expect?

On its most fundamental level, Planning acts to eliminate your financial fear: what would happen if you become unemployed or became disabled, or passes away? Planning can’t prevent those things from happening, but it can, within certain tolerances, prevent them from turning into financial disaster. On the upside, I think planning gives you the best possible chance to grow and protect your earnings and assets so that you can live, as nearly as possible, financially worry-free. And so that you can do the things you want for the people you care about & achieve all your financial goals.

You can ask your financial planning & personal finance questions in the comment section.

Ask Common Investment Questions 2021

Hemant Beniwal

-

June 4, 2011

182

Investment is the backbone of financial planning. So if financial planning is battle training, investment is the Kargil. This is an ultimate practical experience and while doing this question or query is bound to surface. Hence this is the page where I have collected the common investment questions 2021 that arise in every once mind. You are likely to get a solution to your query here or else ask me through the comments section.

Investment Questions:

Should I take a loan & invest in Stocks?
Are Company Fixed Deposits Safe?
What are ETFs & which Indian ETF I should Invest in?
How much do I save for my goals?
How to get good returns through futures & options?
What about investments made in IPO.
What will happen if we are caught in spiral-like Japan?
What should I expect from my Bank Fixed Deposits?

Must Check – Insurance Questions

Leveraged Investment

Question: My Friend who’s a stockbroker, advising me to purchase some stocks as stock markets is at very attractive levels? As I don’t have enough money so he’s told me to get a Personal Loan. I can pay EMIs easily, but is it advisable?

This is not friendly advice. Either your friend wants to earn brokerage out of your risk or he’s also not that equipped with the knowledge to advise you on financial matters. The stock market is one of the riskiest asset classes at least for the short term where you can earn or lose the fortune. But even if you want to stay invested for the long term and you are comfortable in paying the EMIs then also I would not advise you to enter this investment by taking Loan. No one can guarantee you returns in the stock market. A personal loan is among the costliest Loan available as the bank doesn’t ask for any security or collateral along with it. Its Interest rate varies from 16%-20%p.a. As there’s no guarantee in the Stock market so it’s very risky to take a loan and invest. Moreover, there’s a condition attached with a personal Loan that this money should not be used for Stock market Transactions. I advise you to start a SIP in Equity Diversified Mutual Funds with the amount you are comfortable paying as Loan EMIs. This will help you in building up the corpus and also satisfies your desire to enter into the stock market.

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Company Fixed Deposits

Question: I want to invest in company fixed deposits which are safe and good to invest with fairly good returns. May I request your good self to suggest the name of safe company for investment? The period of investment is 3 years.

There’s no company which I can call as safe. Fixed deposits are unsecured loans that companies procure from general Public. If a company defaults and goes bankrupt, fixed deposit investors will be paid second last i.e before Equity Investors. But still you can check those companies which have good rating by credit rating agencies. Rating does not make company deposits safe but at least it helps in gaining confidence on the soundness of repayment capacity. There are some Government companies also which issues FDs. You can consider those also.

Check- Financial Planning Questions

ETF or Exchange Traded Fund

Question: Can you please provide me an update on ETF…. What is ETF? How much return do we get? For someone at my age of 25 it is right time for me to invest in ETF? Which ETF should I invest for long term?

ETF or Exchange traded funds are passive funds which follows some particular index be it Sensex or CNX 500. These funds are similar to index funds with only difference that these are listed on exchange – so you can also do transaction any time in the day rather than waiting for end of the day. Returns in ETF are directly linked with index performance so if Sensex will give 12% return in year – you can also get the same amount. My suggestion as India is still a growing economy – there is a scope for fund managers to beat index. So you should make your portfolio through 3-4 diversified equity funds.

How much one should save

Question: How much percentage of my total Income should one invest and in which financial instrument considering children education and retirement planning?

Actually percentage of income going in goals depends on once age & type of asset class you are choosing. If someone is around 30 years & invest in equities – approx 15% income will be sufficient to achieve these basic goals but he is investing through debt may be 25% of income is needed. But if someone is close to 40 the he needs 25% through equity & 35%-40% in case if debt. But as I said other factors like Job security, other goals also determine the quantum of investment.

Must Read- Mutual Fund Questions

Future & Options

Question: Please tell me about how to invest in Futures & Options. How I can earn good returns from it.

Future and options are most common “Derivatives”. Derivatives are financial instruments that derive their value from an ‘underlying’. The underlying can be a stock issued by a company, a currency, or a commodity like gold etc. The derivative instrument can be traded independently of the underlying asset. As per most famous investor “Derivatives are instruments of financial mass destruction”. Why he said this – because derivatives are leveraged instrument & very risky for any investor. Institutional players use these Instruments for hedging their positions but retail investors use them for speculation. Assume that you have capital of Rs 50000 – that you used to buy a future of x company by paying 25% margin. Now if particular stock(underlying security) will rise by 10% in a month you will gain Rs 20000 on your portfolio or 40%. Now think if it goes down by 10% – as retail investor don’t have understanding or control over their investment; they soon lose their capital.

IPO or Initial Public Offer

Question: I have 300 shares of Jsw energy, which is received at the time of IPO offer. I want to know about the future of this share from the point of view of as an investor, I am not a trader. Please give the expert opinion.

Investor often thinks IPO is a good way to make QUICK money and gets attracted towards it. It is true that few of the companies who came up with an IPO have done well but it is not easy to pick the right ones. Do you remember Reliance Power IPO in Jan 2008 & same happened with other power & infrastructure IPOs. Investor thinks that IPOs are good Investment Vehicle but in reality they are against investor’s interest as they arrive in market when promoters are sure that they will fetch good premium. Do you know BSE IPO index which was launched in August 2009 is down by 9% & in the same period Sensex has given more than 25% return? One should stay away from IPOs or be very choosy.

India Vs Japan

Question: What will happen if we are caught in spiral like Japan i.e. correction of 80% & still bleeding though Japan’s companies are not bleeding then why the Nikkei is not giving the returns? I hope u must be getting what i wanted to ask. Please do clarify why we will go on making new highs on index although with ups n downs

There are 2 reasons for what happened in Japan- first when their market topped it’s valuation was almost 5 times of average. Their PE was approximately 100 at that time. Second Japan is now a developed country & in last 2 decades their GDP growth is 2-3% max. Hope it answers your concern. India is still growing economy and the best is still to come. Next 10-15 year will be Golden years for India – you will like to sit out & watch the game or would you like to participate.

Bank Fixed Deposits

Question: What are the historical real returns on Bank Fixed Deposits in India? When will they turn positive?

Real rate of return is when we remove adjust normal/nominal rate of return (like 7.5% on FD or 8% on some post office scheme) is adjusted for inflation. Normally bank interest rates gives close to 1% of real rate of return but if consider taxation actually we are making losses. Last 2-3 years were pathetic for a debt investor as real rates are negative – even RBI is concerned regarding this. India is a growing economy & inflation will always be higher due to demand coming from public – one must hold equities & real estate to take benefit out of it.

In Case you have questions related to investments ask in the comment section.

9 common Insurance Questions & their Answers

Insurance Planning

Hemant Beniwal

-

May 31, 2011

441

Insurance is one of the greatest inventions in the field of personal financial products. But it becomes fatal to financial life and costly once you end purchasing a wrong insurance solution. I have selected most common questions that keep coming on TFL. You can also ask your queries in comment section.

Insurance Questions :

Are all traditional polices useless?
What are expenses in ULIPs after 3^rd Year?
Should I go for Term Plan or Endowment/ULIP policy?
Can I get Term Plan of 1 Crore?
Should I buy LIC’s Magic Plan?
Suggest some term & medical insurance for NRIs.
Do some ULIPs charge 100% allocation charges in 1^st year?
Should I go for pension plans from Life insurance Companies?
Should I buy Medical Insurance or build my own Medical Corpus?

Must Check- Investment Questions

Useless Endowment & Money Back Policies

Do you believe that all endowment / money back policies are not useful? Also I have one Money back endowment policy with 45000 Annual Premium and already paid for three yrs…so again the same question whether to continue or not. I have one money plus from LIC with 5000 Annual Premium and have already paid for three yrs.. So shall I continue? or withdraw?

You have asked something like all are politicians bad – now should I say no or yes. There may be few good politicians but as a class they are not – similarly my answer is endowment/money back policies are not useful. Few of them can be good – few polices that were launched by LIC in 2003-4 or before that period have some good features & higher guaranteed bonuses. But even in those policies return will not be higher than 6.5% or 7% taxfree – so if people feel that it’s sufficient for them they can continue otherwise they should plan to withdraw. My preima facia suggestion for you is discontinuing both policies.

9 common Insurance Questions & their Answers Click to Tweet

Expenses in ULIP Policies

I and my wife taken the one ULIP policy from Max New York Life name of policy is Life Maker Premium unit linked investment plan, both 20000/- per annum. 3 yrs has been completed in October-2010……what we should do whether it should be continued both the policies……. because all major charges have been removed now. We have taken these policy only to pay the home loan after completion of 7 yrs of policies….as agent told us after 7 yrs we will get around 2.50 lac each..

It’s a good thing that you are aware about charges – but there is a misconception that charges gets over after 3 years. Check the table & compare 4^th year charges with mutual funds.

Charges	1^st year	2^nd year	3^rd year	4th Year Onwards	Mutual Funds
Allocation	25%	10%	5%	2%	0%
Administration Charges	12%	12%	12%	5%	0%
Fund Management	1.25%	1.25%	1.25%	1.25%	2.25%
Total Charges	38.25%	23.25%	18.25%	8.25%	2.25%

So my suggestion is if you have paid the premium for more than 3 years – whether you should withdraw or hold that investment is based on Alternative Opportunity you have at that point in time. If you find that you will be better off investing in Mutual Fund directly instead of remaining Invested in ULIP, then it’s better to withdraw the same and make Mutual fund investment. Now this statement applies to all your investment. Check surrender charges before you make this decision.

Read: How to exit mis-sold insurance policy

Term Plan Vs Jeevan Anand

Last week I was reading TFL where Stress was given to Term Insurance rather than Endowment Policy/ULIP (Expensive Product)….Why so….Sir, I have taken Jeevan Anand Policy from LIC thru agent which will cover the life’s risk even after maturity of policy….till 100yrs… so I will get money on maturity and on death after that? Isn’t my family protected? Please guide…..

I think answer is there in your question only. These are very expensive products & should be avoided if your purpose is insurance. You have purchase Jeevan Anand – I am assuming that you are 35 & premium paying term is 25 Years. In this case your premium for 2 lakh sum assured will be close to Rs 9000. Now go & ask your agent that how much sum assured you will get in this premium if you buy term plan. You will be shocked that it will be more than Rs 25 lakh in case of LIC & if you go for some private insurance it can be as high as 30-40 Lakh. Now coming to your second question where you are saying that Jeevan Anand will cover you till 100 years –here the problem is Indians don’t realize that why Insurance is bought. Insurance is bought because if you die before fulfilling your financial goals it can be taken care through insurance & once you retire means that you have already build sufficient corpus for your financial goals.

Check- Financial Planning Questions

1 Crore Term Plan

Can you please let me know about much talked about term plan insurance policies that offer Rs 1 crore. Is it really possible or have some conditions attached?

You are the first one who ever told me that term plan is much talked about. Most of the people who interact with us hear TERM PLAN for the first time. In term plan even 1 crore is not a limit you can even go for higher sum assured if required. There are as such no conditions attached but your income should justify that you can take this sum assured + you should be asked to go through some medical tests.

LIC Magic Plan

I have been propositioned this MAGIC PLAN – by LIC for my wife (age 31) and me (age -35). It is 20 Jeevan ANAND policy of 1 lakh each with sequential years of maturity to get 1 policy matured from age 55 onwards; they call it all in one – magic plan to cover insurance, accident, retirement etc. I’d appreciate your time and help in dissecting this proposal.

When I say even 1 Jeevan Anand policy is bad – how 20 will become good. This is nothing but a pure mis-selling started by few new era insurance agents. They propose this plan as this will help you to achieve your financial goals but actually it helps them to achieve their goals you are lucky that you know that Jeevan Anand is given to you but most people I have interacted think that is some special policy by LIC. My suggestion is to avoid not only this policy but also the agent who is pushing this.

Must Check – Mutual Fund Questions

Insurance policy for NRIs

I got convinced of the need of a medical insurance and term insurance (though an NRI of 38 yrs) and am finding out the best for me. Appreciate to know your view on ICICI lombard vs Appolo munich fpr the medical insurance and Kotak e preffered vs Aegon Religare life insurance.

It’s good that you got convinced that there is importance of insurance in once life. As you mentioned you are an NRI my suggestion will be that you should buy it in country where you are residing. But for other readers I have found that Apollo Munich policy features are better & also serving better in comparison to ICICI Lombard. No coming to your life insurance question – yes you should buy a term plan from India. If we compare the cost of Kotak e-preferred to Aegon Religare – it’s almost same but if we talk about claim settlement Kotak wins the bout.

100% allocation charges

Last year in July 09 I purchased a LifeStage Assure policy of ICICI Prudential from one of my friend who was in this company that time. I purchased this policy without knowing anything about it. I have paid two premiums against it till today, worth rs 10,000/- each. The Sum Assured is 1,00,000/- rs and time period is 3 years. So now kindly let me know, what kind of policy it is? What shall I get after completion of 3 years? I would be thankful to you sir.

This is a Unit linked pension plan which gives some guaranteed addition & manages your portfolio allocation according to your age. Let’s talk about worst part of this product & that will be shocking for you & other readers – not a single rupee from your premium was not allocated for investment in first year. This amount will be added as guaranteed addition after 10^th year. So from this you can see that you are stuck – if you withdraw it after 3 years you will approximately get 60-70% of your premiums. Even I am shocked that you are saying that agent was your friend – no real friend can sell such long term product by saying this is 3 year product.

Check illustration with 100% charges: Insurance Schemes or Insurance Scams

Pension Plan or Tension Plan

I am 28 years old. I AM ALREADY INVESTING RS 7000/MTH IN DIFFERENT SIP FUNDS. MY AGE IS 28. I WANT TO INVEST IN SIP FOR 20 YEARS. AS I AM WORKING IN PRIVATE SECTOR I AM THINKING ABOUT SOME PENSION PLANS. HOW CAN I GET REGULAR GOOD PENSION?

Good to hear that you are investing through SIPs. Let’s understand this right now you young – this means you have to accumulate as much as you can through good products. No need to worry that what kind of products will give me pension when I will retire – In next 20 years we will see lots of new products emerging that will help us to get some regular income. Right now you should worry about accumulation of amount. Let’s take one example – you have to reach a destination that is 1000 km from your home. There are 2 ways to reach there:

1. A slow train that directly reach there but take 2 days.

2. You can take a fast train which will take you to mid-way & then there are lots of other options to reach your final destination. It will also save your 1 day.

Which one will you choose – expenses are almost equal. 1st one is your so called pension plans. Second one is right now you accumulate till retirement & then choose best option that is available at that time. Hope it clarifies your question – other than SIP you can also start some small contribution in PPF.

Medical Insurance or Medical Corpus

My purpose is to set aside 2000 Rs. per month for medical expenses(surgery,hospitals etc)that might occur in future. I am thinking of investing this amount in monthly income plan(growth option) type of mutual funds rather than recurring deposits and then making FDs. This investing will be long term i.e. till I retire. This fund might be used(in case of surgery/hospitalization etc) OR may not be used in long term. Is this a correct decision? Is MIP the best suited type of MF for this purpose.(priority1:capital protection/priority2:appreciation) What is the difference between MIP and debt oriented conservative funds? Thanks in advance for response. Note: This is apart from medical insurance. Once enough funds are available with above strategy, I will stop mediclaim.

It’s a good idea to build some medical corpus for retirement years but that should be over & above medical insurance. Any amount of corpus can’t replace benefits of medical insurance. Medical Corpus can be exhausted in a single medical emergency but insurance will give you benefit year on year. My suggestion is do some reverse calculation – what kind of corpus you need for medical emergency at the time of your retirement. Then calculate how much you should contribute every month to achieve it. To simplify the things you can just add this amount to retirement corpus needed & start accumulating. Regarding selection of fund my suggestion is go for balanced or diversified equity fund in place of MIP as it is your long term goal.

In case if you have any question related to insurance – feel free to add it in comment section.

You can also check these pages:

Sector Fund – the complete guide

Mutual Fund

Hemant Beniwal

-

May 27, 2011

67

Before you start reading about sector fund – I would like to tell you clearly that this is the riskiest category in mutual fund. Time to time few of the sectors have given phenomenal returns but end of the day losers are more than winners when we talk about investors. My suggestion is they should never be part of your core portfolio but depending on the individual you may think about this in your satellite portfolio. In this article I have covered what are sector fund, best sector funds, benefits & risk associated with them and finally should you invest in sector fund.

First understand what diversified equity mutual funds are. Diversified funds are the funds which don’t have any restriction on particular theme or sector. Or we can say diversified funds invest in different sectors like banking, information technology, pharma, power, FMCG etc. If I talk about Indian stock market it is divided into 56 broad sectors. So if you want to take advantage of entire market, you would look for a fund which is democratic when it comes to choosing a stock for the portfolio.

Read – DSP Health Care Fund Review

Let’s see sector allocation of a diversified equity fund. This is a large cap fund & you can see its top ten sectors – you can also see it’s comparison with nifty composition.

Now a classic example from a foodie. Once I was on a training to Hyderabad, and before going I was very happy as I thought I will eat only Biryani, which I was really fond of. Moment I landed in Hyderabad, I started my expedition of eating Biryani’s. I tasted Biryani at all places including the gali behind Char Minar and the thela outside the Salarjung. Although the training was supposed to be for 10 days, I had to rush back home on the 8^th day as I was sick and my throat caught an infection as I was eating too much of spices. Was I wrong? I was a Biryani lover and now if it is served in a buffet, I feel vomiting.

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What is Sector Fund?

So now without even writing what are sector funds you must have guessed what these are? Sector funds are those funds which invest in particular one sector. Like funds dedicated to Information Technology or Banking. There is very low diversification as they are taking concentrated bets on a single sector or 2-3 main sectors.

Best sector funds

This is list of top 10 equity funds of last 3 years – total equity funds 383. (25^th May 2011) You can clearly see 7 funds out of 10 are sector fund or theme fund.

Rank	Scheme Name	Performance (%)
Rank	Scheme Name	1 Mth	3 Mths	6 Mths	1 Yr	3 Yrs
1	Reliance Pharma Fund	-1.40	9.15	-1.50	13.14	31.45
2	Franklin Pharma Fund	-2.20	5.75	-3.25	14.27	28.12
3	Reliance Banking Fund	-13.17	-1.22	-13.53	19.99	21.25
4	ICICI Prudential Discovery Fund – IP	-4.28	6.82	-3.60	15.01	20.62
5	UTI Transportation and Logistics Fund	-5.14	10.74	-11.28	14.46	20.55
6	Franklin FMCG Fund	0.63	11.57	1.33	28.47	20.23
7	Birla Sun Life MNC Fund	-3.37	8.89	-2.18	16.70	19.21
8	ICICI Prudential Discovery Fund	-4.35	6.57	-4.04	13.91	19.20
9	UTI Pharma and Healthcare Fund	-1.42	7.08	-3.52	16.64	19.11
10	Birla Sun Life Dividend Yield Plus	-5.89	5.46	-7.80	12.88	18.78

So should we read more about it? Yes.

Benefit of investing with sector funds

If you are sitting in the right sector & that particular sector performs – your fund will substantially rise. This will give boost to your overall investment. Take example of Reliance Diversified Power Sector Fund – if you invested in 2004-06, it would have given additional return of 1-2% to your investment portfolio. Check comparison graph between Reliance Diversified Power Sector Fund & Sensex.

Risk associated with sector fund

The vice versa of the above mentioned benefit is also there. The benefit of higher return turns into risk if you are sitting in wrong sector & at the wrong time. There can be substantial losses which will pull back your portfolio. So, if your agent sold you an IT Fund in 2000 or Infrastructure related funds in 2008, probably you also had your “Biryani” as they have underperformed in comparison to the broader markets. (Check image on left) One of my friends when approached me was sitting in Reliance Natural Resource Fund(Red) – we suggested him to move in Reliance Pharma(blue) & green line is Sensex. You can see how wrong selection of sector can have adverse impact on the portfolio. From Friends Account Statement.

Can we learn from what happened with IT sector funds in 2000

None of my investors invested in IT sector fund 🙂 because I was not part of investment world at that time. But I was there to face aftershocks of IT earthquake & learn from them. Every second investor I met that time was having more than 40-50% of their total funds in IT related funds – even diversified funds were heavy on IT sector ranging from 20% to even 50%-60%in some cases. Few of the IT sector funds were having 4-5 funds on name of diversification – even few diversified funds were having exposure of 20-30% in a single IT stock. 🙁 NAV were drifting down from Rs 10 to Rs 2 – investors were not ready to sell at that price. Investors burnt their hands, legs, clothes, homes & few of them swear that they will never return to equity markets. AMCs were facing lot of pressure – few changed name of their funds, few investment objectives & few others hided those funds by merging. But loss was done & their was nothing other than lessons to learn. Picture will tell the full story

Sector Fund Vs Theme Fund

Theme Funds are not 100% diversified but include particular set of sectors. As infrastructure theme includes construction sector, banking sector, energy sector, power sector etc. If we talk about rural theme it will cover Fertilizers, FMCG, Chemicals etc.

Why I am writing about sector mutual fund now

2-3 instances happened recently which forced me to write on sector funds.

Lot of people started asking us about “Silver Funds” or “Natural Gas Funds”. The biggest mistake our retail investors do is they try to catch train at the last moment. And in the end you only get to land in the Guards Cabin or the Luggage Room. The markets have already discounted the price of these assets (Silver, NG etc) but we want to invest in them NOW. When smart people are booking profits (and the non-smarts are still carrying their short contracts) the retail person wants to taste a new avenue. This is not directly related to sector funds but shows how people attract to fancy of the market.
Recently one of our new clients asked for investment in some Pharma based fund & we said no, but actually few of our clients have exposure to it.
I have done a case study for Business Bhaskar where this guy was having exposure to some Banking fund & I said to redeem it. I got a furious call on the same day “Why you advised him to redeem Banking Fund – you nuts don’t you know it’s among the best performing funds & if India will grow banking sector will get benefited.” I just laughed & kept the phone down.

Should you invest in Sector Fund?

Nothing is good or bad but how we use it makes the difference. Guns are used by army as well as terrorist – nuclear energy is used for construction as well as destruction. So you should remember these points before buying sector funds:

For a new investor who have not seen 2-3 market cycles, the answer is NO Or should take prescription from Financial Doctor. (Financial Advisor)
You should not invest in those sectors which are already heavy in your portfolio. If you talk about banking, it’s already 20-25% in every diversified equity fund – so when you add banking sector fund you are increasing risk.
You can add a sector fund when you are sure about growth of particular sector but your portfolio is lacking it. In other language you are trying to be smarter than fund managers but we know it is not always possible. But we as an advisor introduced Reliance Pharma Fund to our clients when we thought there was nothing to lose & it paid well. At that time total exposure of Pharma sector in diversified equity funds & index was less than 3-4% – so we think we have not increased the risk but given some more diversification to portfolio. (In image you can again see comparison between Reliance Pharma Vs Sensex. From my sister’s portfolio.)
If you follow Shariah Rules or you would like to avoid particular stock for any other reason – you can construct your equity portfolio with sector funds.
Sector Funds Vs Direct Stocks: If you have understood that you have to invest in particular sector you have 2 choices – either you go through direct route & buy 2-3 equity stocks or go through mutual funds. Now here comes benefit of diversification – yes diversification in stocks in that particular sector. Fund manager will be holding 10-12 good researched stocks in a sector fund – so you can take benefit of it. So if you are very sure of just 2-3 companies you should go directly to bourses but this surety would only come if you have researched the stock well. If you have not but still feel bullish on a particular sector or theme mutual fund is your way out.

In Financial Planning, there are 2 school of thoughts, one which says that investor should invest a part of its portfolio in Sector Specific assets considering his risk appetite and the other thought says that one should stick to Diversified Funds as these fund will themselves tilt the portfolio towards a sector which is showing a potential of beating the broad markets. So I leave this to you to take a call.

How many sector funds one should have?

Sector funds work like Chris Gayle & Yousuf Pathan – when they perform you easily achieve the winning totals but when they don’t perform you should not feel sorry. One thing is clear we should have a balanced team & we can’t have 11 Gayles on one side. Know your limit while adding sector fund.

Disclaimer: I can be biased towards particular fund, sector or theme because they may be part of our client’s portfolio. Few of our clients have 5-10% exposure to Reliance Pharma Fund depending on their portfolio requirement & risk appetite. We have shared statements after taking permission from the clients. Credit: data used & graph made are with the help of tools available with mutual funds India & value research

Have you ever invested in sector or theme funds? What was your experience?

TFLindia is now TFLguide + Hindi Personal Finance Blog launched

Miscellaneous

Hemant Beniwal

-

May 25, 2011

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TFLindia is now TFLguide + Hindi Personal Finance Blog launched

You would have noticed that there are no updates on TFL from last 10 days – behind curtains we were making “The Financial Literates” a better experience for you. Changing name from tflindia.in to www.tflguide.com was not small decision, but keeping long term future of TFL in mind we have to do it & instead of delaying, we thought of doing it now.

Most of the things are working fine but we lost some 30-40 odd comments in this process. We also lost all our search rankings but there was no choice on this.

Launched Hindi Personal Finance Blog

In starting days of this publication, we were adding Hindi & English articles on same blog but it was reducing readability of the blog. We saw that most of the readers preferred articles in English so we stopped adding Hindi articles. But we were regularly getting request for Hindi articles so now we have launched www.tflhindi.com which will also be updated weekly. You can subscribe to its mailing list by clicking here.

TFL Journey

We started TFL for our clients because being a financial planner we always preferred that our clients understand the solutions that we are providing. Most of the posts initiated as an when our clients raised some query. Then the media came who liked our articles & published few of them. And finally more readers added on who were having some similar question in mind or finding a better advice. Taking TFL to a new stage we will soon launch few financial advisory services – some will be free of cost & others very reasonably priced.

Keep visiting TFL and TFL-Hindi & sharing it with your friends.

Regards,

Hemant Beniwal,

CFP Professional

www.arkfp.in