Why ULIPs are not good for your financial health...

Source: Equitymaster Newsletter

Our dislike for Unit Linked Insurance Plans (ULIPs) is well known. Time and again we have highlighted why we are not fascinated by this bundled product which offers dual benefits of insurance and investment. And when recently we came across an article from one senior executive of a private Life Insurance Company propagating ULIPs, we thought it was an opportune time for us to re-iterate our stance on them. 

Well, the primary reason why people get attracted to such products in first place, is because of the twin benefit which is on offer. Plus, investment in ULIPs also presents income tax benefits to investors. Further, the bancassurance channel gave an easy platform to ULIPs. For the want of commissions they were pushed aggressively through the banking channel. 

However, when it comes to performance they have failed miserably. For one, their return was linked to market performance. And this factor was camouflaged when hard selling to a policy holder. So, when markets were in a downturn, many policyholders lost their net worth. And that too in insurance cum investment plan which is supposedly safe! Not to mention the host of charges that further ate away investor returns. 

Amidst huge losses, investors fled ULIPs. Since then, IRDA made rampant changes in the product proposition. It capped charges on them since September 2010. Even the fund management expenses had a fee cap. This was done to make the product more appealing. 

So, with regulatory changes having being made, should one invest in ULIPs? 

Well, investors need to know that charges were not the only factor that led to downfall of ULIPs. The primary reason why ULIPs failed is because they combined both insurance and investment needs of a participant. And investors failed to understand the nature of the product. For instance, the premium one pays includes mortality charges for providing protection. The balance is invested in stock markets. This not only raised ambiguity around the product but also led to a fall in fund value when stock markets fell. 

And when investors saw their fund value declining in an insurance plan, they redeemed in fear as they were unaware of such eventuality. High charges further erased their capital. With charges now being regulated, investors can draw some respite. However, the market risk will still prevail. 

Also, since these products are not tailor made, there is a scope of huge mis-selling. A 70 year individual can get exposed to equity risk by buying ULIPs which is undesirable at his age! The bottomline is that both insurance and investment needs are separate. We have highlighted this innumerable times. You cannot have a one size fits all policy here. These needs depend upon individual client circumstances. 

Hence, no matter what changes are being made to make the product more appealing, investors should be careful. They should keep in mind that lowering fund charges does not eliminate market risk which is inherent nature of this product. 

4 steps to an early retirement

With growing needs and increasing cost of living, people now-a-days are busy trying to climb the corporate ladder to earn a fatter pay-cheque. Every individual wants to earn a higher income than what he / she earned the previous year; so as to meet their family’s financial goals such as children’s education and / or marriage, buying a house and so on. Almost everybody is struggling and working hard to provide the best to their families. And while slogging out to achieve all such financial goals, there are some individuals who also wish to retire early and live their life in bliss after fulfilling their family responsibilities. But it is noteworthy that how early you retire or how will your post retirement life be, depends upon the approach that you adopt today. You see, even if you are not planning to retire early it is imperative to recognise that planning is paramount, especially if you are the sole bread earner of the family; because much depends on your income for your family to live a comfortable life once you are retired.

Hence for your benefit, we have listed down certain steps that can help you plan for an early and peaceful retirement.

• Determine the retirement corpus
  
  Unless you know where you are headed, it is very difficult to get there. In retirement planning as well, it is important to have a target in mind to live comfortably in your golden years. To arrive at this corpus, you might need to make certain estimations and assumptions. You have to work out – how early do you wish to retire, what is your life expectancy (based on family history and health conditions), how much will you spend every month, inflation that you expect on these expenses, pre and post retirement rate of return that you expect on investments, etc. Thereafter you can compute the corpus amount required for your retirement by taking the help of excel sheet. It is imperative that you set realistic expectations based on your current financial status and financial goals.
   
• Start saving regularly
  
  If you wish to retire early, it is extremely important that you save a fixed amount (as calculated) each month without fail. If your family expenditure leaves you with very little to save, it is high time you reduced unnecessary expenses and started working towards saving the requisite figure each month. It may also be wise to spend sensibly on necessities such as food, electricity, clothing and so on. If you prefer going for family dinners often then reduce these outings. Plan your shopping trips beforehand so that you can save on fuel costs and use coupons and discount offers to purchase required items. You or your spouse may also consider finding an additional source of income if you are yet unable to meet the target amount.
   
• Invest wisely
  
  Saving alone may never be able to help you to meet the desired retirement corpus as the inflation bug eats into your hard earned money every single day. Hence it is important to invest your savings in different asset classes (equity, debt, gold etc.) depending upon your risk appetite and time horizon. Different asset classes have different attributes, which help in maintaining the required balance in one’s retirement portfolio. While equity as an asset class has the ability to beat inflation and provide alpha returns over a longer time horizon, debt instruments usually provide stability to one’s portfolio and generate a regular income stream. Following a suitable asset allocation pattern will help your portfolio to grow at an attractive rate of return and also safe guard it from market volatility when your retirement age comes closer. However, you must remember that merely following a suitable asset allocation pattern alone will not help you reach your goals unless you invest in sound and appropriate investment avenues.
   
• Insure yourself adequately
  
  Insurance is inevitable in case of retirement planning. As an individual grows older, the number of physical ailments and emergencies also increase. Hence it is extremely important for you to have a suitable and adequate health insurance policy or mediclaim. Apart from this, it is also wise to opt for a personal accident and critical illness policy from an early age. It is advisable to maintain a medical contingency fund worth Rs 5 – 10 lakh (depending upon how much you can afford) and a general contingency reserve with 6 to 12 months of your expenses to compensate for unforeseen events. This will ensure that your retirement savings do not get eroded in case something unfortunate is to happen to you or your family.
  
  Moreover, everyone’s life is unpredictable and uncertain. While you might believe that something will not ‘happen to you’, God forbid but destiny may have a nasty surprise in the offing. Therefore, it is also important to insure your life with a term plan having an optimal cover which can take care of the family expenses in case the bread earner meets with an untimely death.

While you may think that you are too young to be thinking about retirement, let us apprise you that it’s never too early to start planning for it, as long as you have started making a living. In fact, if you want to retire early it goes without saying that you must begin the retirement planning process as soon as possible.

Have you secured your Family's Financial Future? 

 ✓ Child Education
 ✓ Child Marriage
 ✓ Dream House
 ✓ Retirement

Learn more about Value Investing Strategy in Simplify Investing eBook.

How to get maximum benefit out of Budget of 2014?

1) PPF increased from Rs 1 lakh to Rs 1.5 lakhs:

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In budget 2014 investment in PPF has been increased from Rs 1 lakh to Rs 1.5 Lakhs from this financial year. Investment in PPF is a good way to plan for child education plan, daughter marriage, retirement etc. apart from earning tax free income. If you can plan well by investing Rs 1.5 Lakhs by the 5th of April, you can earn higher tax free income in a year.

2) 80C limit increased from  Rs 1 lakh to Rs 1.5 lakhs

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In this budget, income tax 80C exemption increased from Rs 1 lakh to Rs 1.5 lakhs. Under 80C any amount invested in insurance, PPF, NSC, ELSS, ULIPS etc. are eligible for deductions. While all the options are good, you can bet for better returns from PPF and ELSS. PPF is a good option to earn 8.75%  tax free interest, which has a lock-in period of 15 years. This is good for low risk investors. Coming to ELSS mutual funds, these are a medium risk investment option which can help you to earn 12% to 15% returns per year. This has 3 year lock-in period.

3) Housing loan interest exemption increased from Rs 1.5 Lakhs to Rs 2 Lakhs

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This is a good news for everyone who are planning for or taken home loan. Interest from the home loan exemption has now increased to Rs 2 Lakhs per annum, i.e. Rs 16,667 interest would be exempted per month. If you can plan well by taking 30 years home loan tenure from the cheapest home loan provider, you can take maximum benefit from this.

4) Invest in infrastructure and banking Sector stocks / mutual funds

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It was not surprising that the new Government have provided preference to infrastructure sector in the Budget. It has allocated Rs 2 lakhs Crores to spend in infrastructure sector. This is 25% higher compared to previous years. We should invest in  infrastructure and banking sector stocks and mutual funds to get good returns in next 3 to 5 years. Apart from this you can directly purchase stocks like ACC, L&T, Ultra Tech and JP Associates which would benefit. Housing loan exemption limit increase could benefit to LICHFL, HDFC etc. where you can look to purchase such stocks.

5) Invest in specific stocks of consumptions

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Budget helped in reducing the prices of consumptions like television, telephone, refrigerators, footwear etc. This way consumptions will boost. Invest in stocks that deal with such business.  Excise cut on footwear could benefit Bata India, etc. which could be a good bet.

6) Invest in specific stocks  of insurance and defense sector

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In budget, there is an increase in FDI in insurance and defense sector and opens doors wider to foreign investors in the Indian debt market. Financial markets are expected to boost. You should invest in insurance and defense stocks.

7) Incentives for introduction of REIT's

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In this budget, the government has given the necessary incentives for the introduction of REITS (Real Estate Investment Trusts). This is going to increase valuations in the real estate industry. Companies like Prestige Estates etc. are going to benefit. You can look for undervalued stocks in this sector.

Conclusion: Markets have reached new peaks and expected to take some correction before moving ahead. Look for opportunities during these market corrections and start investing. Some of the above are promising sectors and you could benefit more.

Union Budget Highlights 2014-15 – In simple terms

Union Budget 2014-15 – Highlights – Personal Finance

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• Maximum IT exemption limit raised to Rs. 2.5 lacs for an individual.
• Uniform Know Your Customer (KYC) norms for the entire financial sector.
• Public Provident Fund (PPF) annual ceiling enhanced to 1.5 lacs.
• Senior Citizen are not liable to pay tax on income upto Rs. 3,00,000.
• Investment limit under Section 80C increased to Rs. 1.5 Lacs.
• Deduction for Interest on Housing Loan increased to Rs. 2,00,000.
• Finance Minister proposes one Demat account for all financial products.
• Special small saving scheme to be introduced for the education of girl child.
• Income of funds from portfolio investments shall be deemed as capital gains.
• Controversy over categorization of income of foreign investor funds as capital gains or business income shall end with this proposal.
• Finance Minister Proposes liberalization of American Depository Receipt (ADR)/Global Depository Receipt (GDR) regime.

Other Budget Highlights

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• Taxation issues for foreign funds with Indian managers to be clarified.
• The government will not bring any retrospective amendment, which is unfair to the taxpayers.
• Five more Indian Institute of Management (IIMs) to be set up.
• Four more Indian Institute of Technology (IITs) to be set up.
• Rs. 100 crores for Metro in Lucknow and Ahmedabad.
• Allocates Rs. 400 crores to incentivize the development of low cost housing.
• Rs 500 crores for solar power development project in Tamil Nadu and Rajasthan.
• Accounting Standards for Banks and Insurance sector would be notified separately.
• No change in tax rates for corporate tax payers.
• Concessional rate of tax on dividend from foreign subsidiaries continues.
• No sunset date for concessional rates for foreign dividends.
• Concessional rate of 5% on interest extended to all types of bonds.
• Government shall consider public comments received on DTC.
• 10 year tax holiday for power companies starting production and distribution on or before March 31, 2017.
• To boost manufacturing sectors – customs duty reduced on certain inputs such as fatty acids, etc.
• Import duty on steel increased from 5% to 7.5%.
• Government to provide investment allowance at 15% for 3 years to manufacturing company investing more than Rs. 25 crores.
• Portfolio income of Foreign Institutional Investor (FIIs) to be treated as capital gain.
• Imported electronics goods to cost more. A cess to be introduced.
• Customs duty reduced on certain types of coals.
• Government reduces basic customs duty on LCD/LED televisions.
• Customs duty cut to nil on import of LCD, LED Panels below 19 inch.
• TV sets, Solar power units, computers, oil products, soaps becomes cheaper.
• Footwear to go cheaper – excise duty reduced from 12% to 6%.
• Sugary carbonated drinks to get dearer.
• Cigarettes, Cigars, Pan Masala, Gutka and other tobacco product to attract more excise duty.
• Basic rates of customs duty @ 10%, excise duty @ 12% and service tax @ 12% remains intact.
• Excise duty hiked on aerated waters with sugar content.

10 Golden Rules to Boost Returns from Stock Market Investments

10 Golden rules to boost returns from stock market investments

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If you talk to some investors, they would say they are making good returns in stock market investments. Some say they burnt their fingers and stopped stock market investment. While there have been no foolproof rules on how to boost returns from stock markets, there are a few golden rules which one can follow and get good returns in the long run.

1) Understand before you invest

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Many of us would be in a hurry to invest and later blame the stock market that they incurred losses. Till 6 months back, I have seen that investors have seen good returns from Technology stocks / Funds and any new investors still felt that they can make 50%+ returns in the short term and started pumping more money. Now technology stocks are not doing good and in a down trend. I would have got more than 500 messages on this blog indicating they were new investors and they just invested without understanding them. You should first study various sectors, which are growing, which are declining, the risk appetite involved in such stocks or funds. If you are a new investor, spend 3 to 6 months just to understand on how they work before you invest. You should know stock market investments are high risk investments.

2) Invest in good options where you pay less

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Invest in options where you need to pay less fees. Understand various fees / charges which you need to pay while investing in the stock market. It could be brokerage fees for stocks purchased, fees charged by mutual funds brokers directly from mutual fund companies (trial fees), transaction charges etc. Try to avoid or reduce wherever possible. Open a demat account / mutual fund account which charge less transaction charges. Invest in direct plan of mutual funds where you can avoid trial fees. This could help you to get an additional 1 % to 2% returns.
3) Avoid market timings

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Don’t think you are too smart and investing at the right time and would exit at the right time. No one can predict market timings when it would go up or down. Many investors burnt fingers thinking they can exit at the right time. But when the market falls and keep falling, they sell with huge losses.
4) Don’t invest in too many stocks or mutual funds

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I have seen one reader commented on this blog indicating that he invested in 25 mutual funds and 50 different stocks. I got surprised that he spends several hours in a week to track how  they are being performed. Invest 5 to 8 mutual fund schemes and less than 10 stocks for investments.

5) Rumors are good to hear, bad to invest

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Don’t invest based on rumors. Though you may earn money in some cases, there are a majority of chances that you would lose. These cheap tricks are created by some of the stock brokers who want to earn money in the short term. They know that majority of investors has now become clever and keep targeting new comers to stock market investments.

6) Implement disciplined investment approach

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You cannot time the market, but disciplined investment approach in stock market would help you to come out from stock market fluctuations. Markets are booming now. If you ask who has earned more money, it could be short term investors and long term investors. However, what happens if the market falls now? Short term investors would lose money, but long term investors would have still made money as they have been investing for long term and their average cost of investing in a stock or a mutual fund scheme is less. Use System Equity Plan (SEP) in stocks and Systematic Investment Plan (SIP) in mutual funds to invest every month instead of lumpsum.

7) Avoid Emotions while investing

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Stock market is at peak now. Many of us are making money. However, don’t be too emotional and start investing in unknown companies or not well researched mutual fund schemes. Don’t judge with returns in last 1 year to make investment decisions. Soon you start incurring losses in such stocks or funds.

8) Believe in realistic returns

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When I write articles I indicate that one can expect 13% to 15% annualized returns in the long run in top stocks or good mutual fund schemes. I got several mails saying investors are making 30% annualized returns and in last 1 year on some stocks and mutual funds gave more than 60% returns and why I still indicate 13% to 15% only? Let us not forget stock market crash in 2000 (dotcom bust) and 2007 (financial meltdown). If you invest in next 10 to 15 years, consider all these points. If you are making good money beyond this, well, you can do party.

9) Invest your surplus money

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Last week there was a comment from reader Ms. Archana, indicating that she wants to invest in stock market for 1 year and she has some commitment to spend such money after that. She got disappointed when I told that we should invest in stock market for long term. We try to invest short term money. When we need money, markets are not in our favor and we sell such stocks or mutual funds with loss or less returns. If you invest your surplus money which you do not need for 10 to 15 years, you don’t need to book losses. You would wait and exit at the appropriate time when markets are giving good returns.

10) Track your investments regularly

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When you invest in the stock market, track your investments regularly. If you made a mistake, try to correct it immediately. If you have invested in good quality stocks, but they are not performing for short term reasons, be patient till you enjoy the fruits. I was indicating few months back that technology sector and FMCG sectors should be avoided at this point of time as these sectors are now under performing and one can lose money if you continue. While you may track your stocks or mutual funds, you also should track how well the sectors are expected to perform in coming years. This would help you to boost returns in stock market investments.