Ask Readers: How to Save Maximum Tax

Tax Planning

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February 4, 2011

Few months ago, I started running Ask Us page & TFL readers are asking their queries there and finding solutions. I am also doing query sections for Business Bhaskar & Indian Express and have faced quite a good number of tough questions, but this question from Mr. Srinivas made me nervous. He asked about “How to Save Maximum Tax” but he smartly covered every tax saving instrument in his mail itself.

So this time I thought why not I ask this question to TFL readers – they may add few more points from their practical experience where one can save tax.

Mr Srinivas’s Mail – How to Save Maximum Tax

Please clarify one question about Tax free savings.

How ever way we do the tax savings all will come to

the following list only.
1 lac in 80C + 20 K in Infra Bonds + 15 K in Medical Insurance + 1.5 L of Home loan Interest

Pl. suggest if there are any other savings which are over & above this for a male employee. Not a senior citizen. I don’t have any disable dependents. Please don’t include parents and company car loan adjustments etc..

Basically what I am looking is any pension / Insurance / savings for kid (which may give them after their 18 Years or my death) schemes which are over and above that 80C slab in which I can contribute for 15/20 (or lifelong which will be eligible for my kids after my death) years and the amount contributed is not considered in the Taxable amount now.

Hasn’t he asked me a DREAM Question? Actually he is right when he says that tax saving just revolves around Sec 80C, Mediclaim, Infrastructure bonds and Home Loan. When I take look what Income Tax department intentions are, it is clear that any how they want to maximize the tax collections (they also have a boss and targets 😉 ). Every year they make some and take some, leaving the common man confuse about whether they should pay all tax or save tax. Kudos Srinivas you have a very valid question.

Read this before going further – “Year End Tax Planning” where we have shared all legitimate tax saving tools from 80 C & Beyond 80 C.

Ask Readers: How to Save Maximum Tax Click to Tweet

My Views:

This reminds of my school age when I was asked to write “If you were the Prime Minister of India” or “If someone gives you a chance to be Finance Minister of India for one day”, can you solve this problem. But we are not Anil Kapoor of Nayak or Mr India and we have to choose from what we have been given.

Random Points that came to my mind:

1) We have to think beyond 80C as it is already having so many instruments & best one are ELSS (Equity Linked Saving Scheme) & PPF.

2) Sec 80G, which allows deductions from taxable income for the amount donated to specified charitable trusts. Oh! But Srinivas never mean that.

3) House Rent Allowance (HRA) benefit – I think he will be already using this. (If he is eligible)

4) Interest payment on second home loan which is rented but for that he need capital + home prices are too steep to consider investment in it.

5) Other options which will not help on immediate basis

a. Amount can be gifted to major children but from Srinivas question it seems kids are still in early age.

b. Creation of HUF

c. Creation of Trust – Since most of our investments gives Tax free returns so there’s no point creating a trust also. (But it can be really helpful after DTC)

Last point that I would like to add here is there is difference between Tax Saving, Tax Avoidance & Tax Evasion – we are here talking about Tax Saving.

So I am now leaving this question for readers to brain storm – the floors are open and let’s help Srinivas and make this an interesting discussion. And with Srinivas, may be we can help each other also from this.

there is difference between Tax Saving, Tax Avoidance & Tax Evasion – we are here talking about Tax Saving

Double Your Money – Scam

Mis-Selling

Hemant Beniwal

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January 31, 2011

10

Recently, we all got to know how a Citi bank employee took for a ride to about 100 wealthy investor including a Venture Capitalists and one of the group companies of the number one bike producers in our country. Do not be mistaken that the scams or frauds are at a metro location or happens in big financial companies. If you are a middle class person thinking that you cannot be a victim of a fraud, you better read the below news, which got published recently in Dainik Bhasker.

The mis-selling is happening every where. No matter which economic bracket you fall into. There are lot of “Puri” clones who are living right in our neighbors and have excess to information of our earnings and social status. These small run-away outfits have just one modes operandi to operate and run away after collecting a few crores:

1) First these companies open a main office (which they will call a HEAD OFFICE) in the state capital. This office will be in a cheap area usually near the bus stand or the railway station so that even if a smart investor wants to check, he can drop in to see old furniture and lame staff who will say the “manager is in field or sir to bambai gaye hain”. See in the above company, the HO is in Jaipur with branch offices at Jodhpur and Balotra.

2) They will give advertisements in the local newspaper and that too in the city addition for the recruitment of the agents. The advertisements appear some what like this “earn double of your salary or commission agent baniye aur 5%-10% tak commission paiye”. These guys are now advertising through SMS now days.

Double Your Money - Scam Click to Tweet

3) When people apply they make agents providing them literature of a multilevel scheme or deposit which is “registered” under some micro finance act or the SEBI. Even if the agent ask how they will double, he is made to believe that the company is engaged in a business (may be construction, jewels or mining) which is giving them such huge returns.

4) During recruitment the basic check is that the agent is well networked in his village or community and also he represents the same caste which the majority of the residents have. In the above case the “Meghwals” were taken as agents who reside around Jodhpur and Pokhran Area.

5) Usually the cycle of operation is 1-2 years so to “charge” and “motivate”, the company organizes the annual function or the agents meet and agents get bicycles, sewing machines, mobikes, televisions to maruti 800. This ensures that the company gets the publicity and people maintain the faith that the company is cash rich.

6) When the maturity time comes and investors are normally said that the maturity cheques are just on the way or payments will be made end of the year. In come case the PDCs are also given and than MAGIC…. Moment the cheque bounces the employee at the branches and the HO go hiding. People just gather around the closed offices with help of the agents, media and police in expectation, that some day they will get the money back.

This is so simple and yet we fall to these tactics. So next time when any of your so called neighbor or a caste honcho approach to invest in these schemes just do these 2 things:

1) Call your Financial Advisor, and ask him his advice.

2) Hand over the scan or print out of the above news article. At least with you he also is protected, as he may not be aware that he is also in mess.

One more thing…. Till date I have not seen, heard or read, that the money which is cheated returned back to the common investor. In some cases the police has caught hold these smelly brains but, did the investor get his money back is a question. If you or someone you know has managed to get the money back, do share the process in the comments below.

This article is written by guest author Madhupam Krishna. A Post Graduate in Finance, currently he heads sales function for Rajasthan for Principal PNB Mutual Fund.

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.

Story of a Life Insurance Advisor

Hemant Beniwal

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January 27, 2011

47

I received a comment on one of the Insurance related articles from an Insurance Advisor based out of Delhi. When I was just planning to add my reply – there was one more comment/query from one of the readers (you can consider a message from the Indian Public). Both prospective were totally different but they had one thing in common both were in deep pain. So let’s hear their stories and try to reach some conclusion.

The pain of Insurance Advisor

Great writing Hemant but still not fully convinced… (He was reading this Article – Why ULIP got banned). I being an insurance advisor can tell you from my experience in this line, for last 4 years now that whenever I am sitting with my prospective client/existing client, the first thing THEY DON’T WANT is TERM PLAN.. To them, this type of insurance concept is FOOLISH howsoever hard I may try… (This I think is also a main factor why an average Indian is under-insured)…

The public at large wants to invest in PLANs which give them good returns at maturity (That too in a short-term period of 3 to 5 years)… Nobody himself/herself is ready to look into the distant future… (The reason why most of them end up with their hands burnt, bcoz they check their fund value after 2 or 3 years, found it to be less than even the premium paid – resulting because of upfront charges in the initial years). If given advice to stay put for long period, they are greatly reluctant.

Story of a Life Insurance Advisor Click to Tweet

On top of it, day in and day out we have to hear that agents are making a killing…Now tell me, does anyone give it a thought that how hard it is to procure even a single policy?? I meet on an average 100 people in a month, only 17-18 are convinced to proceed further, and finally, 4-5 are converted into final policies/cases… and for these 4-5 cases, I am on the phone for practically half a day every day of the month (Working majorly on Saturdays-Sundays-Public holidays), traveling from one part of Delhi to other (Everywhere in NCR) by my car/bike or metro. Giving them/sending those presentations/illustrations over mail or hard copies and in return, I get 10% to 20% COMMISSION upfront and not more than 3% on renewals… And in lieu of this, the client treats me like a slave (Bhai Saab, POLICY nahi aayi? – mere phone number galat chhapa hai); mere premium JAMA kara ke aaj hi raseed de do kyunki apne accounts department mein deni hai… After a year, calling me over to pick-deposit-return renewal premium receipt and also from time to time, asking me to check his portfolio of other companies (I am an agent for LIC and KOTAK) so giving them opinion, fund value, etc for BAJAJ, ICICI, etc. So you think am I making a loot?

The only thing I want to further is please make a differentiation between an AGENT and a FINANCIAL ADVISOR. Please check if your friendly neighborhood agent is a PART-TIMER or otherwise?? Is he working for quite some time or just started out and always bring some SALES MANAGER with him to clear doubts or explain the product?? Or trying to pick the case from the client only by passing on 30% of the commission or paying the first monthly installment of the policy?? If he is doing so, he is an AGENT, don’t deal with him, avoid him… But the first thing he advises is TERM PLAN, working full-time for last 3-4 years, has a good client base, then he is a FINANCIAL ADVISOR, trust him – try to grasp as much from his knowledge – and proceed further.

One more point I want to add is if Mr. X wants to take a TERM PLAN for SUM ASSURED of Rs 25 lakhs for 30 years and company Z says that premium will be Rs 8,500… and Mr X is happy and willing to pay this much, how does it affect him if the agent is earning 20% out of those Rs 8,500.I believe the policyholder will be the effect if a company says that over and above this Rs 8,500, he is required to pay Rs 1000 additionally as agent’s commission that should be worrisome and note otherwise..

Please note that a FINANCIAL ADVISOR of an insurance company is working as hard as anybody but it’s just that his income looks like FLEECE to everybody… Please don’t blame the entire FINANCIAL ADVISOR community for mis-spelling or misdeeds of few AGENTS…

So we have heard story of Insurance Advisor now read the query and comment of 1 reader who is representing Indian public. (He was reading Bankers are biggest Mis-sellers)

The pain of Indian Public

Recently a LIC agent approached me and told me that LIC has launched a new “attractive” plan called Retire and Enjoy. Even though I will never buy those idiotic products, I made a search in the net about this one. LIC’s website didn’t even have a mention for that. But agents from all over India had advertised about this. Then I came to know that this is a clever product made by agents by combining many LIC policies. The catch here is that since there are many policies and each are starting on consecutive years, they promise a good commission to the agents, unlike the direct plans which are not attractive after the initial one or two years. A plan just made for the agents and a really big loss for the customer.
My Questions are:
1. Even though this is an agents created one, how come an all India spread has occurred.(Read LIC Wealth Plus) Without a clever central planner and executor, this is not possible. Who is behind this?
2. Does LIC has any roles in this?

Views from my Side : This case is like “No one killed Jessica” I will not add any conclusion or decision as I have already written a lot on it.

I think let readers decide what’s wrong & what’s right – end of the day it’s their financial life. Must share your views.

Insurance Advisor in this post is Mr Dhawal Sharma from New Delhi.

The reader who is representing the Indian Public is Mr. Shinoj Jose from Bangalore.

Note: This is a story from one of your fellow readers. Please be nice. It is not easy to put your story out in public. Unduly wicked comments will be removed or edited. If you wish to share your story about money – feel free to mail me at ask@tflguide.com

5 Funny Investment & Insurance Cartoons

Hemant Beniwal

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January 23, 2011

8

A Picture speaks 1000 Words then a Cartoon can speak………… today I will keep my mouth shut. 😕

Enjoy Cartoons & don’t forget to add your comment in the end. (you can click on pictures to enlarge) 😕 😕

Cartoon on Investment

Related Articles:

Behave Yourself… Financially

What is Financial Planning?

Cartoon Insurance Mis-Selling & Retirement

Related Articles:

Insurance & Mutual Fund Mis-selling Tricks

How to Choose Your Financial Advisor

Funny Equity Jokes

Related Articles:

What is Equity?

Stop Fooling Investors

Cartoon on Gold

Related Articles:

Should Indians buy Gold Now

All that Glitters is not Gold

Cartoon on Equity and SENSEX

Related Articles:

Sensex PE Ratio – is stock market overvalued?

Hot Equity Tips

Waiting for your funny comments 😉

Hidden Charges in Buying or Selling a House

Hemant Beniwal

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January 20, 2011

13

Hidden Charges in Buying or Selling a House

In India, it is widely said that marriage and home are made in heaven. This is just due the fact that with the financing, luck also is an important factor. Here we leave the luck part to the astrologers and focus on the financing aspect. Transacting in residential property, whether you are selling it or buying a new one, there are lot of things that need to be taken care for. Normally it happens that we dispose off the old property and buy a new one. During such events there are lots of hidden and unexpected costs that one should be ready to meet.

Let’s discuss charges and expenses of buying or selling a house:

Capital gain tax on selling property: When you sell a property, you should be aware of the tax implications. Selling a property involves Capital Gain Tax. If a property is bought and sold in within 3 years, the gain will be Short-term capital gain. This will be includes as normal income in your gross total income of that year. If the holding period exceeds 3 years, the gain is termed as Long-term capital gain. The tax rate is flat 20% with benefit of indexation. Also you can invest the gain amount in specially issued capital gain bonds subject to a limit of Rs 50 lakh per year. But investing in bond will have a lock-in period of 3 years. Also if you buy a house within two years or construct a house within three years of selling the previous house you can save this long-term capital gain. But, it is misconception that they can save long term capital gain, by investing in a land. Consult your tax planner for more information. The idea is if you are selling a property to finance a new one, you should be aware that these will be the cost that will go towards taxation.
Transaction Cost: Whether you buy a new property or sell an older one, the transaction costs are normally heavy. Sometimes the opposite party also insists that you pay for all the transaction cost. These cost involved are stamp duty, appraisal fees, reality valuator’s fees, laboratory fees for checking the construction quality, fees to the lawyer’s etc.
Statutory Dues: Lot of charges which are collected by the authorities is also required to be financed. These include regularization charges, land usage conversion charges, transfer charges, development charges, map charges or documentation verification charges.
Middleman’s commission: Normally as per the prevailing trend, for residential property the rate is 2% of the transaction. But this can be negotiated also, and specially when you are buying and selling the property from the same broker. Do not go by the market terms and conditions. Although it is advisable to fix the middleman’s remuneration before the transaction so that he is positively involved.
Charges associated with the previous property: You must have seen that a vegetable seller sprinkles water on vegetables he is selling after every 5-10 minutes. Basically in order to sell you have to provide a decent quality property also. If it a residential flat or a house you need to get it painted and repaired. This activity will get you better rates and the proceeds can be used to buy the new property. Also sometime the buyer may insist that you improve or modify a certain part of the property. That will involve cost and if not planned properly will lead to cash crunch.
Foreclosure Charges: If the previous property is on loan, you need to close the loan before you transfer the property. This foreclosure charges can be in range of 1% to 4% of the balance principal amount of the loan. This amount is to be arranged before as the loan company will issue a no-lien certificate only when you have cleared all dues.
Home Insurance: This is something very important. When you are buying a new property to shift, you also need to get the Home Insurance done. The cost will depend on the size, location, value of household articles and the cost of the property.
Mortgage Cover: If the new property is bought on a loan, one should also get an additional life insurance cover. Lot of times the loaner insists that with the loan you a take an insurance policy and the premiums will also be added to the loan amount. Beware of such acts and prefer a Term Insurance instead of the normal mortgage cover as in term insurance your cover remains same throughout the loan repayment period, where as in mortgage insurance the cover get reduced as you repay the loan through your EMIs.
New Loan: The new loan will be on new prevailing interest rates. There may be chances that your older loan may be on less interest and now the expenses would be more. Also, all loan companies charge a flat fee for processing and the documentation. Also some companies insist you to pay an advanced EMI. One should be ready with these expenses.
Parking and other expenses: If the new property is a flat, you need to pay a lumpsum for life or annual parking fees for parking your vehicles. The fees are decided by the building maintenance and are based on the category of the parking whether you opt for a covered or an uncovered parking. Also you need to shell out more if you are taking a servants room or accommodation.
Utilities: When you are shifting to a new residence, you may also be required to take new utility connections like, electricity, telephone, cooking gas etc. if you combine them, there will lot of money that you will have to arrange as all these utilities providers will charge security deposit for the new connections.
Moving Expenses: Finally you have completed all formalities and ready to shift to your new home, but you should be ready with expenses pertaining to new furniture, curtains, electronic goods etc. It is human tendency that we will not stop ourselves to spend when we are doing something auspicious. But these small expenses make a larger sum and burn holes in the household budgets.

Hidden Charges in Buying or Selling a House Click to Tweet

Acquiring a property is a very important thing like marriages. And same as it happens in marriages one may be required to pay for something which is unexpected or hidden. Remember acquiring a property is also a celebration time. Check for all the above mentioned points before you transact. After all no one would like spoil the party just because he ran short of cash or was not anticipating the hidden surprises.

This article is written by guest author Madhupam Krishna. A Post Graduate in Finance, currently he heads sales function for Rajasthan for Principal PNB Mutual Fund. This article also got published in Business Bhaskar.

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.

Behave Yourself….. Financially

Investor Psycology

Hemant Beniwal

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January 16, 2011

5

Our entire childhood has gone hearing this phrase from our parents and elders—“Behave yourself…” Thanks to this stock phrase, most of the mannerisms, etiquettes and emotions that we display in public, are shaped by our desire to “prim and propah”. Basically, it is the behavior which controls our cognitive responses and emotions and overall personality. But imagine a day, your Financial Planner or your Mutual Fund Advisor calls & tell you to behave. We know that would be his final call, as you will end your business with him. But seriously, the financial behavior of most of us has not been shaped properly.

Let me elaborate with some live cases that we have faced in our career, to show how your behavior is important in managing your personal finance:

Mr Mudgal sold all his stocks including the blue chip stocks that he bought a week ago, on hearing the news of artillery firing between the two Korean countries.

Mr Ravi a heart patient, invested into a sector specific fund, even though his agent advised for a SIP in that fund.

Mr Gautam did not sell his stock 3 months before his daughter’s marriage when the markets topped. His answer was “not to take a decision to sell, is also a decision”.

Mr Paswan shifted all his mutual fund investments to liquid & stopped SIPs in March 2009

Let’s check if whole market participants think in same direction. See the graphic below. With the Sensex movement investor entered at wrong time. The maximum investments in equities were made by all of us in the FY 1999-2000 when the markets were high and touched 6000 and in the year 2002 when the markets were down at 3000 index, we were investing less in equity. Similarly, in FY 2008-09, when markets were going down, we literally made 25% of the investments as compared to 2007-08. But why do we blame market participants. It was us the investors who had signed forms and handed over cheques to the market participants.

And are mutual funds or passive investments, safe? Check below graph – When the nifty PE increased, the sales increase simply shows that investor got carried away in the euphoria and as a result lost money. (Credit Principal AMC)

We all agree that the peace of mind is the most important thing when it comes to financial decisions. But the common behavioral blunders, makes for some sleepless nights.

Read: Sensex PE Ratio

The symptoms to identify the financial behavior errors are:

Overconfidence: if you ask, who manages better finances, man or woman? Lot of men will reply in favor of former. That is overconfidence. Same type of arguments goes when it comes to predicting markets or economy. People in their middle age are affected by this symptom to a large extent. “I did this” or “I started with Rs 1,000 in stocks” are the statements you get, when you speak to them. They would have no correct predictions but will have an “I knew it” kind of smugness to all things which go wrong in the investment space.

I follow – you follow: …my boss is very good when it comes to managing his finances. See him – he is so rich. So I do what he does. I invest where he invests. He is my financial mentor… now the poor subordinate fails to understand that two individuals will always have different goals, income, risk appetite and tolerance and time horizon. They think that all trains in the country ends at the capital. So just catch the fastest train available, to get there. This is herd mentality.

Herd mentality can also be explained with below grid. Normally when a person acts as member of the group he does not feel so bad in case the decision is a blunder. So basically this is under-confidence and failure to own up to decisions, which prompts him to display a herd’s behavior.

Fear of change: These people are smitten by past. Actually they are very risk averse. They have a very negative view about everything. They think that the markets are moving towards doomsday and any change in the momentum means… phew loss of capital. They forget that markets do not guarantee returns and capital either.

Read- 10 Investment Mistakes

Fear of action: They have actually made bad decisions over money issues and now they think non-action is the best action. They wait for the other person to convince them so that in case of not achieving the desired results they can play the blame game.

Scandal sniffing: We feel this is a very dangerous symptom as these people are capable of changing individual decisions by possessing his mind. They talk things that would shatter the investor’s confidence. They would keep reminding you of the fact that “India is the land of corruption” and “market is place for scandals and not for investors”. They would constantly refer to the world history where the bubbles have burst and investors lost money. All wrong reasons are associated to justify “the forthcoming bear phase”.

Information overload: When you have too many options to act, you either take a wrong decision or postpone the decision. But the irony in markets is that you will always have many options. You just need to be aware of your requirements and follow a few basic rules of investing.

Warren Buffett says “Investing is not a game where the guy with the 160 IQ beats the 130 IQ… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people onto trouble in investing”. So, to master the art of investing you need to control the urges and what if you cannot control them as changing basic behavior is a herculean task? Don’t worry. Then you have two easy guide ways- Diversification and Asset Allocation.

Download & read the full Behavioral Finance Guide from here

– this will change your response to the investment world.

Bankers are Biggest Mis-Sellers

Mis-Selling

Hemant Beniwal

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January 13, 2011

49

Bankers are undoubtedly biggest mis-sellers across world. But the latest Rs 400 crore scam by CITI bank manager shows – in mis-selling even sky is not the limit.

Bankers are ‘BHAYANKAR’ Mis-Sellers

Way back on June 6^th, 2008, one of the employees of Kotak Mahindra Bank, Jaipur posted a fake letter to the bank itself that the bank is under the target of terrorists and a bomb would explode in next 4 days. When this employee was arrested, he confessed that he was under severe TARGET PRESSURE and he was not able to meet his on time. Hence he thought that since the bank would remain close for a week due to security purpose, he would get time to meet his target. This is the reality as far as Banks and National Level Financial Intermediaries are concerned.

1. The top level management of Banks etc. takes huge targets from Insurance Companies, Mutual Funds etc. Then employees of the organization are put under severe pressure to meet the targets.

2. Since, the employee carry a SO CALLED BRAND name, they just make Investors fool by making any false commitment.

3. Since the employees get the remuneration and incentives from the Management and any good performance would mean their increment or bonuses, they hardly care for investor.

4. The attitude for the Banker is too short term and hence they don’t feel scared cheating the investors. In fact, we have not seen many banker carrying the same mobile numbers for more than a year.

Must Read: Confession of a mis-seller (Business Today)

Please find the few of the Sales Pitch used by banker to make you fool.

Insurance Mis-selling Tactics

Selling a Regular Insurance Plan as One time Investment Plan so that he get maximum incentive.
Selling an Insurance Policy as an Fixed Deposit and misleading investors by saying that it is a Guaranteed Return Product.
Selling ULIP before you actually avail any other service like Home Loan, Mortgage Loan etc.

Bankers are Biggest Mis-Sellers Click to Tweet

Mutual Fund Mis-selling Tactics

Churning the Portfolio would give you better return.
Asking Investors to invest in new funds as New Fund is recommended by their so called Research Team.
We get reports from our Management about the Future movement of Market and hence we can maximize your return.
Offering Loan so that you can invest in Mutual Funds. Double benefits for Bank.

Banking Product Mis-selling Tactics

Offering Credit card as you are a “Preferred Customer”.
Opening Savings Bank account by saying Zero Balance Account. But they don’t disclose that after a period of time, huge charges are levied as Minimum balance is not maintained.
Selling GOLD Coins which are very expensive in comparison of Market Rate.
Giving personal loan saying that interest rate is at 9-10% but it turns out to be 18-20%

Must Read –bank locker the games bankers play

Financial Planning Mis-Selling Tactics

No comments on this as they don’t even understand what is Financial Planning

These are just few tactics which we could list down though the list in endless & everyday it increases. We advise you to deal with such an advisor who can carry long term vision with you and would be happy when you grow rather than being happy when an organization grows.

Also Read: Metlife Monthly Income Plan – Mis-selling

Quotes & Sound Bites on Mis-selling

RBI Bulletin “It is genuinely believed that the recent financial crisis is largely precipitated by rampant financial illiteracy or the lack of transparency that financial literacy is supposed to bring into the model code books of financial service providers. We have a plethora of instances of mis-selling and customers undertaking financial contracts without understanding the risk import of such transactions leading to unforeseen volatility and unsustainable business.”

Romesh Sobti, Managing director and CEO, IndusInd Bank Ltd “There is endemic mis-selling in the system. The issue is that there is no sales culture in banks. As a bank, for instance, we have thousands of people from different institutions. They have different ways of selling. Somebody who comes from a foreign bank has a different way of selling. Public sector banks have a different way of selling. The question is: Do we have a common approach? There must be manualized sales processes with stringent guidelines on what you will sell and what you won’t. You must have guidelines and training. You must have surveillance and you must penalize those who mis-sell. If you are selling insurance, don’t position it as a fixed deposit product. The whole system is based on incentives. The point is that if you sell insurance, you must look at lapsation. Lapsation rates are a clear indication of mis-selling”

Must Read – LIC Wealth Plus NAV – are you feeling cheated?

Mr KN Vaidyanathan, Executive Director SEBI “It’s true that banks alone enjoy the trust of investors and some of them have been abusing that trust. Maybe the fund distribution will be done by a different set of banks, provided the fund companies get their product right.”

HN Sinor CEO of Association of Mutual Funds In India(AMFI) “The most predominant problem is the mis-selling of schemes by distributors. Then you have the AMCs stating that they find it difficult to control them. I have been a victim of mis-selling myself.” 🙁

Be-Aware & Beware

Would you like to share your experience on mis-selling? (Mis-sold or Just Survived)

t is genuinely believed that the recent financial crisis is largely precipitated by rampant financial illiteracy or the lack of transparency that financial literacy is supposed to bring into the model code books of financial service providers. We have a plethora of instances of mis-selling and customers undertaking financial contracts without understanding the risk import of such transactions leading to unforeseen volatility and unsustainable business.

Personal Finance Tips from a Recent Trip

Financial Planning

Hemant Beniwal

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January 6, 2011

30

Personal Finance Tips from a Recent Trip

Have you ever gone to ‘SATSANG’. I know 90% of you will say no – we all think that at satsang they just talk about god. Few months back I visited one such event, but was, surprised to see what they speak. They talk about people’s life experiences & how you can learn from them. The correlation was amazing. It was so easy to relate those examples to real life – both personal & professional.

3 things I am passionate about – 1^st personal finance, 2^nd reading, 3^rd playing sports & bonus traveling. And during the New Year I was fulfilling the bonus one. So I thought of sharing few learnings from my New Year trip to Uttrakhand & you can relate them to your personal finance. That is the reason we call Financial Plan a Road Map.

Plan for Trip – This is really so important. We plan for vacations well in advance – we check if we can spare time from work, will kids suffer school classes, who all in the family would accompany, what location, which hotel, budget etc. Do we put in same efforts for our financial life? Think!!

If you know you are traveling 500 kms, will it make sense that you check the milometer every km? This is just wasting time. Similarly monitor your investments at a gap and not on day to day basis.

Personal Finance Tips from a Recent Trip Click to Tweet

Can you reach this long distance at speed of 40 Kmph? You can but it will take triple time and efforts. So maintain a speed which is rational. In personal finance also the speed of investment has to be constant and with less turbulence.
It is unlikely that the road will be smooth throughout the way – there will be pot holes, fog & traffic jams that you will not be able to avoid. Similarly in life there will be periods of uncertainty, unwanted events – keep time and liquidity on your side.
Can you cover such long distance with an auto? Auto driver will drive from 1 point to point 2 & then back to his stand. Equity trading is similar to this. Here you will never earn a penny and loose your hair due to hypertension.
Selection of vehicle is equally important. By train, ship or car? Similarly choosing an asset to invest is equally important. All assets have there pros and cons, hence you need to take your goals and risk appetite to decide the correct mix. Asset allocation is the key.
Can you drive 600 km yourself or you need some driver. If you love driving you can, but you will miss the time together with the fellow travelers and will not enjoy. Also you will exhaust yourself. Alternative can be to hire a driver. Similarly hiring an advisor for planning your finance can guide and make your journey pleasant. And why I am saying hiring is, when you pay adequately for services you have full right to demand quality. Pay you advisor so that he work for your goals.
If you realize that you are on wrong road, you seek help – so in personal finance never be afraid of taking help of a professional. The professional ensures that you choose the right goals for your life and he reviews that you are on a correct path towards your goal.
Negative surprises – When we reached our resort at Jim Corbett, we came to know that for New Year Party the charges would be extra, and worst was that the charges were almost 25% of the total cost of the trip. So take calculated decisions. Check before you leap when you are making investments as there can be hidden charges. Also put in an emergency fund to meet such surprises.
Accident can happen & they do happen, so take insurance. Lot of times it is not the question of “I” as “My” gets more important. Make sure you have all adequate insurance covers so that your family has full chances to reach the destination.
Avoid Credit cards – Best way to avoid debt is to actually not getting into it. But modern lifestyle and requirements force us to leverage. Manage debt and make sure debt is taken for a productive use and not for the depreciating assets.

Journey is equally important to destination. Life is short and so we have a full right to enjoy it. Do not wait to throw a party when you finally achieve something. Enjoy the small achievements, instead of waiting for the big day. Remember Alexander the Great, passed away before he could reach his country to celebrate after conquering the world.

10 Articles that you should remember in 2011

Financial Planning

Hemant Beniwal

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December 29, 2010

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10 Articles that you should remember in 2011

10 personal finance articles – this is going to be last post of this year. Hope you all have planned for New Year Party. I am leaving this Financial Jungle for 5 days & going in real Jungle, as I will be celebrating the New Year at Jim Corbett National Park joined by my family.

I wish you all a very happy & prosperous New Year.

Exit Strategies for mis-sold insurance policies

Sometimes the greatest gain in productive energy will come from cleaning the cobwebs. Be it endowment, moneyback or ULIPs – these are cobwebs. In New Year remove these and start fresh.

What is Insurance – Investment or Expense?

If your answer is Investment or tax saving instrument – you love your agent more than your family. Think!!

KISS Strategy in Financial Products: Keep It Simple Stupid

The point what we are trying to make is that investor/user of Financial Products tries too hard to get the best and in doing so, he actually makes a mess and then blames the same on other factors may it be markets, cheating by intermediary/agent etc.

Long Term and Short Term Investments

If someone ask why Indians have not made money in equity – answer lies in this article.

What is Financial Planning ?

Very basic article on Financial Planning.

What is equity ? Understand its right meaning to reap the benefit

If you don’t understand this – no one can help you in achieving your financial goals.

Understanding Mutual Fund With a different perspective

Do you know everything you invest today is mutual Fund.

Do you really understand SIP(Systematic Investment Plan)

Now when you have understood meaning of Mutual Fund – let’s understand SIP which is going to be wealth creator for you – if you understand it’s right meaning.

The Great Indian IPO Mania is Back

Investor think 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.

10 investment mistakes to Avoid

And in the end or a new beginning – There is very famous quote of Warren Buffett, “An Investor needs to do very few things right, as long as he or she avoids big mistakes.” There are ten common mistakes made repeatedly by investors. You can significantly boost your chances of investment success by becoming aware of these typical errors and take steps to avoid them.

What is Standard Deviation in Mutual Funds?

Mutual Fund

Hemant Beniwal

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December 27, 2010

12

What is Standard Deviation in Mutual Funds?

Standard Deviation in Mutual Funds will tell you how risky is particular fund. While choosing a Mutual Fund – Return is not the only criteria; we have to check Risk-Returns, Tax, Inflation, Liquidity, etc. There are few more scientific formulas that help one to choose funds – we will be covering them at some later stage.

Thumb Rule: Higher the Standard Deviation of Mutual Fund – Higher the Volatility.

You can also read Importance of Beta in Mutual Funds.

If you are really serious about fund analysis, you need to understand this is all about judging returns and risk. Stripped of a lot of complexity, this task involves determining a fund’s average performance over a period of time. Let’s get down to basics and take a refresher course on this concept.

Why do we use an average? Why don’t we use the actual numbers that the average is calculated from? Obviously, because an average gives us a single value that represents the numbers it is calculated from. It is far easier to use a single number for judgments and comparisons.

Also Read: Sector Fund

But like most things in life, averages can be both good and bad. They can be trustworthy, or they can be worthless, or they can be anywhere between the two. For example, the average age of children in a nursery school is three years. You could walk into a kindergarten expecting most kids to be more or less three years old and you would not be wrong. However, the average age of students in a school is 12 years. You could walk into a school expecting most students to be more or less 12 years old and you would be almost completely wrong. Around 90 percent of the students would NOT be 12 years old — they would be all ages from 5 to 18 years.

What is Standard Deviation in Mutual Funds? Click to Tweet

What happened? Was the average wrong? Obviously not, but it was not a very useful figure. It would have been far more useful if you had been told that most of the individual ages in the kindergarten were close to the average but most of the individual ages in the school were far from the average.

Standard Deviation – Is the average deviation from the mean returns. It’s an indication of volatility i.e. deviation from mean returns.

Calculation – Square Root of Variance. Where Variance is the average of the squared deviations from mean returns. Oh! Sounds complex – if you use excel it’s very simple to calculate. Check the below picture.

Must Check- Exchange Traded Funds

Calculate Standard Deviation of Mutual Fund

You can clearly see Standard Deviation of Equity Mutual Fund is higher than Debt Fund.

This is exactly what Standard Deviation does. It gives you a ‘quality rating’ of an average. The Standard Deviation of an average is the amount by which the numbers that go into an average deviate from that average. It tells us how closely an average represents the underlying numbers. Let’s put it this way: There was very little risk in assuming that the kindergarten’s average represented the real ages but there was a great deal of risk in assuming that the school’s average represented the real ages.

Risk! Isn’t that what we are trying to figure out? So a recipe for figuring out the risk level of a fund takes shape:
1. Calculate a fund’s monthly performance over a long period of time.
2. Calculate the average for all these monthly performances.
3. If the individual monthly performances are very different from the average, then that fund is risky, delivering high returns in some months and poor returns in others. If they are mostly similar, then the fund is a low-risk one, with about the same returns month after month.

Read about – 2 important categories of mutual fund – ELSS & MIP

And how do we find out if mutual funds are ‘very different or ‘mostly similar’? By calculating their average, of course. We just calculate exactly how much each month’s performance is different from the average and then calculate the average of these differences. This is Standard Deviation. (While the actual formula is complex, this suffices as a simplified explanation.)

Standard Deviation of Reliance Mutual Fund (Different Schemes)

Mutual Fund Name	Standard Deviation
Reliance Media & Entertainment	40.54
Reliance Regular Savings Equity	40.03
Reliance Banking Retail	40.02
Reliance Equity Opportunities	36.91
Reliance Growth	35.69
Reliance Pharma	35.49
Reliance Vision	33.69
Reliance Diversified Power Sector Retail	33.57
Reliance Tax Saver	33.05
Reliance Equity	28.21
Reliance Regular Savings Balanced	27.31
Reliance Gold ETF	21.23
Reliance MIP	10.41
Reliance Gilt Securities Retail	2.9
Reliance Income	2.03
Reliance Short-term	0.69
Reliance Liquidity	0.12
Reliance Money Manager Retail	0.1

Standard Deviation Mutual Funds: In the above table, you can notice that in equity category midcap, sector & multi-cap funds have a higher standard deviation if we compare it with large cap of balanced funds. MIP & Gold is showing low Standard Deviation. In the Debt fund category Gilt & Income have higher volatility than Liquid Fund.

But you do need to be careful of one thing — a high Standard Deviation may be a measure of volatility, but it does not necessarily mean that such a fund is worse than one with a low Standard Deviation. If the first fund is a much higher performer than the second one, the deviation will not matter much.

Standard Deviation of a Mutual Fund Portfolio

Now try comparing Birla Sunlife Top 100 with DSP BR Top 100 or ICICI Prudential Top 100. And also compare ICICI Prudential Top 200 with HDFC Top 200 or even ICICI Prudential Top 100. (3 years data is taken for construction of above table)

For an original and unforgettable illustration on Standard Deviation of Mutual Fund, try and compare the Standard Deviation of Sachin Tendulkar’s batting average with that of, say, Zaheer Khan’s!