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Saturday, January 31, 2009

Five tips to make sure your retirement money lasts till the end

Five major challenges faced:

  • Potential for outliving one’s assets;

  • Threat of rising living costs;

  • Impact of increasing health-care costs;

  • Uncertainty about future level of social security benefits; and

  • Damage to long-term financial security

With so much at stake when planning a retirement income stream, it pays to take a step back and see whether your plan takes into account the major obstacles to retirement income adequacy.

When you take this big-picture view, consider the five major challenges most retirees face: the potential for outliving one’s assets; the threat of rising living costs; the impact of increasing health-care costs; uncertainty about the future level of Social Security benefits; and the damage to long-term financial security that can be caused by excessive withdrawals in the early years of retirement.

Understanding each of these challenges can lead to more confident preparation.

Standard & Poor’s suggests you consider these five risks to your retirement income, including outliving your assets and higher health-care costs.

Points to Remember

• Today’s retirees have to assess several threats to enjoying a financially comfortable retirement. These include the potential for outliving their assets and the corrosive effects of inflation on future income.

• A sound retirement income plan needs to address specific risks, such as longevity, rising health-care costs, and excessive withdrawal rates, that can lead to premature depletion of assets.

• Demographic trends are likely to put added stress on government-run programs, including Social Security and Medicare, which help retirees balance their budgets.

• The goal of retirement income planning is to create a sustainable, predictable stream of income that also has the potential to increase over time.

Examining the Issues

Longevity. While most people look forward to living a long life, they also want to make sure their longevity is supported by a comfortable financial cushion.

As the average lifespan has steadily lengthened due to advances in medicine and sanitation, the chance of prematurely depleting one’s retirement assets has become a matter of great concern.

Inflation varies over time, as well as from region to region and according to personal lifestyle. Through many ups and downs, US consumer inflation has averaged around 4% over the 50 years ended December 31, 2006.

If inflation were to continue increasing at a 4% annual rate, a dollar would be worth 44¢ in just 20 years.

Conversely, the price of an automobile that costs $23,000 today would rise to more than $50,000 within two decades.

For retirees who no longer fund their living expenses out of wages, inflation affects retirement planning in two ways:

  • It increases the future cost of goods and services, and

  • It potentially erodes the value of assets set aside to meet those costs—if those assets earn less than the rate of inflation.

Health Care

The cost of medical care has emerged as a crucial element of retirement planning in recent years.

That’s primarily due to three things: Health-care expenses have increased at a faster pace than the overall inflation rate; many employers have reduced or eliminated medical coverage for retired employees; and life expectancy has lengthened.

In addition, the nation’s ageing population has placed a heavier burden on Medicare, the federal medical insurance program for those aged 65 and older, in turn forcing Medicare recipients to contribute more toward their benefits and to purchase supplemental insurance policies.

Because of the higher cost trends affecting private health insurance, the same retiree relying on insurance coverage from a former employer will have to allot nearly $300,000 to pay health insurance and Medicare premiums, as well as out-of pocket medical bills, according to a Money magazine report.

Excess Withdrawals

The decision about how much money may be safely withdrawn each year from a retirement nest egg should take into consideration all the risks mentioned above.

But retirees also must consider the fluctuating returns that their personal savings and investments are likely to produce over time, as well as the overall health of the financial markets and the economy during their withdrawal period.

Addressing the Risks

While the risks discussed above are common to most people, their impact on retirement income varies from person to person.

Before you can develop a realistic plan aimed at providing a sustainable stream of income for your retirement, you will have to relate each risk to your situation.

For example, if you are in good health and intend to retire in your mid sixties, you may want to plan for a retirement lasting 30 years or longer.

And when you estimate the effects of inflation, you may decide that after you retire you should continue to invest a portion of your assets in investments with the potential to outpace inflation.

Developing a realistic plan to address the financial risks you face in retirement may seem beyond your capabilities. But you don’t have to go it alone.

An experienced financial professional can provide useful information, as well as valuable perspective on the options for managing successfully what may stand in the way of your long-term financial security.

Friday, January 30, 2009

Financial Planning: Investing Styles

When it comes to investing, there are two styles to it. They are:

1) Active
2) Passive

Lets discuss these in detail:

1) Active

Active investing is a strategy in which the fund manager is highly involved in buying and selling of stocks (in case of mutual fund). Here the aim of the manager is to beat the returns generated by the corresponding benchmark or an index.

2) Passive

On the other hand, in the passive style of investment, stocks are bought with a long term perspective. Here the portfolio is not as frequently churned as it is in active investing and the manager does not resort to profit booking based on short term price fluctuations. Indexing is an example of passive form of investing. An index fund invests in same stocks, in the same proportion, as in an index like Sensex or Nifty.

Thursday, January 29, 2009

Mediclain Vs Health Cover

This article is on the basic difference between mediclaim and health cover

MAX New York life recently launched ‘lifeline series’ — health cover plans for individuals. While typically it is the general insurance companies, which have been active in the mediclaim space, thanks to IRDA, now there are alternatives from life insurers such as ICICI Prulife and Bajaj Allianz.

Protection and savings

Mediclaim is usually a cashless policy, in which you can undergo treatment at any of the hospitals listed with the insurer without paying cash at the time of treatment. On submitting hospital bills, the designated third party administrators (TPAs) pay off the dues directly to the hospital.

Newly-launched health products of life insurers extend the same cashless facility. But the structuring is different. The latter, for instance, have a health cover along with the savings option. In other words, the premium you pay for health cover also has an investment element to it.

The idea is to meet the growing health requirement at an older age. Premiums on health policies increase with age. At that point, savings come into play to meet their medical requirements. This could be particularly helpful for retired people as health expenses will not eat into their retirement corpus.

Life of the policy

The general insurance covers would be valid for a year requiring renewals each year.

The policies issued by life insurance companies do not require renewals till the term expires. Health policies are of a longer tenure starting up to 20 years.

In case of mediclaim, the right to decline the policy renewal is in the hands of the insurer.

In case of health insurance, the insurer is obligated to offer the cover till the policy expires.


Mediclaim insurance gives you a wider coverage. But mediclaim usually includes not so-critical diseases such as accidental insurance coverage and expenses incurred on cataract operation.

Under health products, you have general hospitalization products or specific disease management products.


Most life insurance companies define benefit plans. It means you know the amount you will get from the insurer for a particular treatment in advance, irrespective of the actual expenses. Let us assume you have to undergo a bypass surgery costing Rs 1.5 lakh. Under the defined plan, you may be eligible to get Rs 2 lakh. Then the insurer will pay Rs 1.5 lakh to the hospital, like a cashless product and the balance will be paid off to you. Whereas in case of mediclaim, it acts as a reimbursement plan. You have to file a claim with the TPA, who will settle the dues with the hospital directly.

Policy closure

The key difference between mediclaim and health cover is that, once you stake a claim under the latter, the entire amount under the policy is paid out and the policy closed.

Under mediclaim, you can claim reimbursement till the time there is an assurance of the balance sum.

Health product?

Health cover can act as an additional cover to your mediclaim as it cannot provide with a complete protection

One of the main reasons in these health products is the claim amount is related to sum insured. It’s not an independent policy. In case of mediclaim, you will get back whatever you spend. For example, if a middle class consumer takes lesser sum insured, the health product will not suffice his needs.

These health covers definitely plug the gaps of the mediclaim. The defined benefit plan could be a handicap for an individual who has signed up for a less sum assured. But it could be a plus for an individual, who has signed up for an adequate sum assured. Often with a mediclaim, you may end up getting a part payment of claims for some reason. The TPA may take some time to pay off the balance. At such times, a good health cover can come to your rescue. In fact, you will know how much you will earn from your cover in advance. Similarly, your mediclaim could have caps and limits, which can be well augmented by the health cover. But that doesn’t imply that a standalone health cover can substitute a mediclaim in your kitty, he adds.


  • Offered by General Insurers

  • No Investment option

  • Renewals every year

  • Wider cover like accidental cover

  • Cashless

  • Reimbursement plans

Health Insurance

  • Offered by Life insurers

  • Bundled Investment option

  • Long term product

  • Offers hospitalization and disease management products

  • Cashless

  • Mostly defined benefit plans

Wednesday, January 28, 2009

The five rules of money for your child

Using toy piggy banks and cash registers, while older kids can learn to manage cash and pretend to be real estate moguls by playing Monopoly.

To get a taste of trading stocks and mutual funds, there are online games and contests, as well as investment clubs.

The first step for parents, say financial planners, is to start talking about money matters at home. “Having conversations about money at a young age lays a good foundation.

With the right lessons and planning, your kids, as they grow older, may be able to avoid money traps like getting deep in debt from those alluring but deceptive Credit Card offers and embrace sound strategies as they save for big purchases such as graduate school, car, and a home.


Parents can start teaching kids about earning money as early as elementary school, Silverman says. Set a weekly or monthly allowance for chores done around the house, and offer extra for helping neighbors and performing other tasks. Then show your kids how to split their earnings into four money jars: for saving, spending, giving, and taxes. While younger children may not necessarily owe Uncle Sam a portion of their earnings, an awareness of taxes can be useful.


Show your kids your monthly bills such as car payments, mortgage, and utilities. This will not only teach them about your family’s cost of living, but also get them involved in the process. Teaching people about money is a lot like poker. No one will play until their money is in the pot.


Take your child to a bank and open an account that earns interest. Let the child decide how much to put in and let him or her calculate the interest the account is earning over time.

When it comes to investing, children should learn how owning a diverse number of stocks and funds can grow in value over a span of many years. Massimo says his wealthy clients set up investment club sand let their kids pick three or four friends to join to teach them investing basics. Show your kids your credit card bills and how to pay them off on time to demonstrate how the cost of an item goes up because of the interest charged. And teach children how the bad habit of paying late can put you in a deep financial hole.


Donating to charities, including volunteering in your community, is a really important value for children to learn. At a young age, your kids can donate clothes and toys that are usually collected by organizations around the holidays.

Tuesday, January 27, 2009

Equity v/s Mutual Funds

Go for equity or MF based on risk appetite

Some tips for investors in these volatile times when it is difficult to choose between equity investing and safer options

The domestic stock markets have seen a historic bull run over the last four years. From the beginning of 2008, the markets are in a correction phase due to weak investor sentiments in the local as well as global markets. We have witnessed unprecedented volatility in the markets in the last few months, especially over the last 4-5 months.

In fact, the domestic markets are among the most volatile markets in the world (volatility in the Indian stock markets is much higher than markets in developed economies like Dow Jones, NYSE, Nikkei, FTSE etc). There were many days when the Sensex recorded more than 1,000 points (above five percent) intra-day swings.

The rise and fall of share prices (market direction) depend of various market forces. In fact, the factors that affect stock markets have increased significantly over the last one decade due to globalization and technological advancements. Volatility is an important consideration while computing risk, and hence, the return expectations from investments.

These are some market forces that directly or indirectly drive the stock market volatility:

1) Global factors

The US economy data is showing signs of recession. Many analysts believe that the bottom of the US economic crisis is not yet reached. Since the US is the largest economy in the world, people are not clear about its impact on world economy and markets, especially countries which are mainly dependant on exports to the US.

Commodity prices are soaring across the board be it food grains (wheat, rice etc), precious metals (gold, silver etc) or crude oil. All major commodities are trading near all-time high prices. This is another sentiment dampener in the global markets.

In past correction phases, the Indian market had been the biggest out-performer compared to other Asian markets due to foreign funds coming in. But in the last couple of months, foreign institutional investors (FII) remained net sellers in the markets. We have thus seen a sharp fall in the markets. Momentum mid-cap and small-cap stocks were the most affected in the markets.

2) Domestic issues

Many local events saw the markets react quite strongly in the past. For example, the Government's proposal to write off Rs 60,000 crores in loans to farmers, and SEBI's proposal on restriction of further investments through the participatory note (PN) route had created panic in the stock markets.

Strategies for investors

The question is what should investors do? Invest in stocks, mutual funds or debt instruments (bank fixed deposits, public provident fund etc). The domestic markets and businesses should not be impacted much by the US sub-prime crisis and recession. The Indian economy is the second fastest growing one in the world today. India's real GDP grew at an average rate of more than eight percent over the last three years. According to the Reserve Bank if India's projection, the economy will grow by a healthy rate of around 8-8.5 percent this year too. Also, due to the slowdown globally, many foreign funds and companies are looking at investments in India.

These are some points investors can consider while taking investment decisions:

1) Hold stocks with potential

Investors invested in fundamentally good stocks (blue chip companies or mid-cap companies with good order books, track record and management) should remain invested. Although investor sentiments are negative in the market presently, with time, things will improve and fundamentally good scripts do not take much time to recover losses.

2) MF for the risk-averse

Risk-averse investors and investors who cannot keep a regular track of markets would be better off investing in mutual funds. These investors can look for diversification and creation of an investment basket of mutual funds itself.

3) Front runners for long-term investors

Long-term investors with higher risk appetite can look for investments in blue chip and fundamentally good stocks. There are many front runner stocks trading 30 to 50 percent lower their peak levels. Investors can identify some of these front runner stocks and build their investment basket. The key is to invest in small chunks at every market fall and accumulate stocks in your investment basket. An ideal diversified basket should contain 6-8 stocks from different business domains.

Monday, January 26, 2009

Power of compounding: Start a disciplined investment plan early

Once, a king, extremely pleased with his wise and able minister, said: “What would you like as a reward? Ask and it shall be granted.” The minister knew he couldn’t sound greedy but at the same time, in his 15 years at the royal court, the old king had never been so generous. The minister replied humbly: “Your Highness, it has indeed been an honor to serve you at your court for all these years. That itself is my reward.”

The king was pleased with his humble servant. But he insisted. The minister, after much hesitation, replied softly: “Your Highness, I request you to give me a grain of rice.” The king said: “Minister, now you are wasting my time. I insist you ask for your reward, else I’ll have you thrown in the dungeons.” The minister replied humbly: “Your Highness, if you insist, then I shall accept the rice every day for the next two months. Starting with one grain of rice tomorrow, the quantity can be doubled each day over the previous day for the next two months.”

The king was amused but he decided to play along. At the same time, he was impressed with his minister’s selfless bend of mind. He mentally patted himself for being able to cultivate such loyal selfless employees. Hence, from the next day onwards, the supervisor of the royal granary had one grain of rice delivered to the minister’s house. On Day 2, two grains of rice were delivered. On Day 3, when the supervisor delivered three grains of rice, the minister corrected him and said that he was given one grain short; the double of the previous day (Day 2, two grains of rice) was four and not three. The supervisor smiled and noted the error. “Anyway, what difference does it make to this man or the royal granary,” he thought to himself.

On Day 21, the granary supervisor paid a visit to the king. He had come to warn the king of a possible food shortage in the kingdom in coming month or so. “Why will that happen,” the king wanted to know. The last he heard was that the granaries were full and would last through any eventuality. The supervisor, with his eyes downcast, said: “It’s the reward you bestowed on the minister, Your Highness!” The king had almost forgotten about that ‘joke’.

The supervisor explained: “Sir, the average weight of a grain of rice is 0.30 grams. As per your orders, today, the minister had to be given, 10, 48,576 grains of rice which works out to 315 kg by weight. At the end of two months (60th day), we would have to give the minister 865,435,910,144 metric tone of rice, keeping in mind his wish of getting double the amount of rice from the previous day! Our godowns don’t hold that much food grain.” Shocked, the king realized that he had been brought to the brink of bankruptcy by his wise minister and that too at his own insistence.

For those seeking a lesson out of this chapter on geometric progression, its an oft-given advice by your financial planner. Start investing regularly and start now.

The point that needs to be driven home is not the size of your regular investment, but its commencement. So many of us have put off starting out on an investment plan just because we thought the amount we could spare towards our savings after meeting all expenses would not be worth the effort.

The bottom line is: probably years have gone by without making a start. (Showing you the difference made to your corpus at the age of 60, if you had started investing at the age of 25 or 30, is not something we will waste your time with)

In the above story, the king had been subjected to the compounding effect of a mathematical geometric progression. In the case of investments, though we wouldn’t be that lucky so as to have our money doubled every day, nonetheless one can see the benefits of compounding over a longer term, say over the years.

A sum of Rs 10,000 invested for 35 years growing at 15% pa compounded yearly will grow to more than Rs 13 lakh. A sum of Rs 10,000 invested every year for 35 years grows to more than Rs 1 crore in nominal rupees at the same rate. So, start your disciplined investment plan with your grain of rice today.

Sunday, January 25, 2009

ELSS to save on tax

How an equity-linked saving scheme works

An equity-linked saving scheme (ELSS) is an excellent avenue if you are looking at investing in the equity markets, and saving on tax. As the investments are locked in for a period of three years, the returns are also good in these schemes. Further, considering the tax advantages, the yield on investments is generally high.

ELSS is a type of diversified equity fund. Investing in ELSS is deductible under Section 80C of the Income Tax Act. ELSS is like any other equity fund. However, the lock-in period is three years. These funds come with all the usual trappings of an equity fund, which includes choice between dividend and growth options, and systematic investment plans.

The amount you plan to invest in an ELSS should be in multiples of Rs 500 with a minimum of Rs 500. The fund allots units to all complete applications, made in the specified form, not later than March 31 every year. Further, the plan should be open for a minimum period of three months. Investments in the plan will have to be kept for a minimum period of three years from the date of allotment of units. After the lock-in period of three years, you will have the option of tendering the units to the fund for repurchase. In case of death of the investor, the nominee or legal heir, will be able to withdraw the investment only after the completion of one year from the date of allotment of the units to the investor or anytime thereafter. The units issued under the plan can be transferred, assigned or pledged after three years of its issue.

Under the IT Act, investors investing in an ELSS can claim benefits under Section 80C. The limit under this Section is Rs 1 lakh. The dividends earned in an ELSS are tax-free. The returns on maturity are also tax-free.

The funds collected by the fund are invested in equities, cumulative convertible preference shares, fully convertible debentures and bonds of companies.

Investments may also be made in partly convertible debentures and bonds including those issued on rights basis subject to the condition that the non-convertible portion of the debentures so acquired will be disinvested within a period of 12 months. The fund needs to ensure that that the funds of the plan remain invested to the extent of at least 80 percent in securities as specified. The investments should be made within a period of six months from the date of closure of the plan in every year.

For short terms, the fund may invest the funds in short term money market instruments or other liquid instruments. After three years of the date of allotment of the units, the fund may hold up to 20 percent of net assets of the plan in short-term money market instruments and other liquid instruments to enable them to redeem investments of those unit holders who would seek to tender the units for repurchase.

The fund announces the repurchase price one year after the date of allotment of the units and thereafter on a half yearly basis. After a period of three years from the date of allotment of units, when the repurchase of units is to commence, the fund will announce a repurchase price every month or as frequently as may be decided by them.

To arrive at the repurchase price, the fund will take into account the unrealized appreciation in the value of investments made. While calculating the repurchase price, the fund may deduct such sums as are appropriate to meet management, selling and other expenses including realization of assets. Such sums should not exceed five percent per annum of the average net asset value of a plan. The repurchase of units will be at the repurchase price prevailing on the date the units are tendered for repurchase.

The investments made in any plan by an investor will be acknowledged by the fund through a certificate of investment or a statement of account. A plan operated by the fund would be terminated at the close of the tenth year from the year in which the allotment of units is made under the plan. If 90 percent or more of the units under any plan are repurchased before completion of 10 years, the fund may terminate that plan even before the stipulated period of 10 years and redeem the outstanding units at the final repurchase price to be fixed by them.

Saturday, January 24, 2009

Realty Funds: MYTH & REALITY

Ever since the Foreign Direct Investment (FDI) norms were relaxed for investments into the real estate sector, the Indian real estate market has been drawing the attention of foreign realty funds (i.e venture capital funds with a focus on investments in the real estate sector). These realty funds are essentially pooling vehicles that raise capital from a number of investors with a profit sharing model on returns.

The Indian real estate sector continues to be one of the most appealing investment avenues, despite issues such as land title, lack of rationalized stamp duty legislation and absence of specific tax incentives for realty funds. The government currently permits 100 percent foreign investment in companies engaged in the development of townships, housing, built-up infrastructure and construction development projects. However, such investment is subject to conditions contained in Press Note 2 (2005) which include conditions such as minimum built up space, minimum capitalization, lock-in period of three years, etc. There also exists a lot of ambiguity around some of the conditions contained in the said press note. Separately, under the existing exchange control regulations, no Indian company is permitted to raise debt from non-residents to be utilized for real estate activities.

Given the above constraints, realty funds which make investments into real estate companies in India invest only by way of equity or other instruments which are compulsorily convertible into equity, such as compulsorily convertible debentures or preference shares (as these are treated as FDI as per the existing policy). Under the existing regulations, pure play debt funds and mezzanine debt funds are not permitted to directly invest in real estate companies.

Another area of perceived disadvantage to the realty funds invested or wanting to invest in India is the absence of specific tax incentives for realty funds. Currently, venture capital funds investing in certain specific sectors including software, information technology, bio-technology, etc are eligible for tax relief on their income by way of dividends and long term capital gains. However, realty funds are not entitled to any such tax relief and therefore, invest either as normal investors and take benefit under the provisions of the tax treaties with Mauritius and other countries or have to rely on the normal provisions of tax laws to ensure single stage taxation.

Hitherto, the Indian real estate sector was not known to be an organized sector with good corporate governance and strict disclosure requirements. Real estate funds are good for the industry as they help in bringing organized money in this fragmented market and require the real estate companies to adhere to corporate governance and disclosure requirements.

Realty funds also provide real estate developers better access to competitively priced capital, particularly since banks are generally reluctant to lend to developers and in particular smaller and emerging players. Given the fact that a significant portion of the urban development in India is being undertaken by the private players, the presence of realty funds would boost the real estate sector in particular and the Indian economy at large. India, should take a leaf out of the book of some of the south Asian economies whose economies achieved sustainable high growth rates due to the real estate sector.

Friday, January 23, 2009

Tax Bonanza for '08 - '09

The Budget has announced a huge bonanza for tax-payers and it’s time you sow the hard-earned money where it would bear fruit

NOW THAT the finance minister has put more money in your hands by restructuring the income-tax slabs, it’s time you take charge of the finance ministry of your house. An yearly saving of Rs 45,320 (for an individual with an income of Rs 5 lakh) may look tempting and increase your urge to spend but some smart and calculated moves can help you grow that money. Here is a lowdown on how you can maximize your hard-earned money through efficiently using different financial instruments to your advantage.


ULIPs can be the best investment option for those looking for a single-window option of investment, insurance and tax efficiency, say analysts. “Considering the fact that universally the risk appetite of individuals is low, ULIPs are the ideal entry points into the stock market indirectly and for long tenures in a disciplined way. It acts like a Systematic Investment Plan (SIP). Besides, ULIPs work out to be more profitable in the long run as compared to mutual funds because they are only front-end loaded. Even though the front-end loads in initial year are high, it tapers in the long term, making them work better. The flexibility and liquidity of ULIPs makes it a potent product that offers peace of mind with risk cover and scope for asset creation through investments.

Mutual Funds

All investments should be based on one’s investment objective, risk profile and time horizon. And analysts feel that one should do an asset allocation to multiply earnings. For individuals with a short-term perspective, arbitrage funds is a better option than parking funds in a savings bank account. They are also tax-free. Thus, your money is growing not depreciating which is the case with savings account. Analysts say that with the rate of inflation more than the interest rate given by savings bank account (3.5%), it makes all the more sense to invest in arbitrage funds, which on an average give you 9-9.5% returns.

You can also allocate a part of the money (say 30%) to income funds. However, the best bet is long-term investment through SIPs. A judicious mix consisting of combination of these three financial products can be an effective strategy. If you are young and less than 35 years of age, you should put 50-60% in SIP, since you can afford to take risk at a younger age. However, there is no set formula for MF exposure and this would depend on the individual investor’s risk profile. As an investor you may prefer to change from one risk class to another to get a fit-in with your overall financial plan.


The stock market volatility may have been a cause for concern in the past few months, but intelligent investment can definitely help you reap money—short-term and long-term. Analysts say the revised slabs can be employed to earn handsome long-term tax free returns by the individual through investments in equities. Further, the current downturn in the markets provides a good opportunity.

This is an good time for the investors in terms of valuations. The macro story is also selling well. In terms of sectors, it is time to turn towards a combination of value and growth investing. Broadly, we recommend sectors like IT and pharmaceuticals. In terms of domestic consumption plays, we prefer the banking, telecom and automobiles.

Analysts say the markets have taken a cue from the Budget and US recession and have posted declines. At present the markets trade at 13.2xFY2010E earnings, which look quite attractive. As the current earning yield in the market is higher, the bond yield (adjusted for taxes) provides a case for minimal declines from hereon.


Besides choosing any financial instrument, making a tax-plan for yourself is also important. Analysts say this Budget was unique as it lowered the tax burden on people, putting more money in their hands, while there were no proposals to promote savings and investments. Since no new investment incentives are proposed, individuals have the same avenues for tax planning as last year — housing loan, deductions under Section 80C, medical insurance etc. However, I would recommend to individuals not to divert the entire incremental post tax earnings towards consumption.

So, if you’re staying in a rented accommodation and do not own a house, consider taking a housing loan and use the extra money from the tax cuts towards the EMI. Alternatively, if you’ve not utilized limits under Section 80C, that should be funded to its maximum limit. “With increasing cost of healthcare, some money should be utilized for buying comprehensive life and medical coverage for family and parents.

Thursday, January 22, 2009

Financial Planning: Take a BREAK

Before you decide to hang up your shoes and chase your dreams, it’s important to do some financial planning so that you can enjoy the golden age to the fullest.

THE definition of golden period in one’s work or professional life has now assumed a new meaning. Today, the ‘golden age’ is one when at the peak of your career, you decide to snap your ties with competitive work and spend time on what you always wanted to do. In terms of jargons, some prefer to call it — semi-retirement. Take the case of 42-year old Rajesh (Name Changed). He was doing well for himself as a marketing head in an MNC when he decided to take a break from the daily, hectic work schedule and started to learn pottery. Rajesh, who use to head a team of B-school graduates, is now enjoying his stint as a pottery teacher to young kids. But before you decide to hang up your shoes and follow your dreams, it’s important to do some planning so that you can enjoy the golden age to the fullest.


Analysts believe that though there are no thumb-rules to follow, keeping a few things in mind can help you chart out your life better after semi-retirement. It depends on individuals and on your background and enthusiasm as well. However, it is of utmost importance that you should check out the following aspects — immediate and near future financial requirements, including loan re-payments or EMIs, past savings to support the household expenditure, estimated time when the regular flow of income (part-time income) will start, and in case of married individual, whether the spouse’s income will be sufficient to meet the day-to-day needs.

Also, any major expenditure such as admission to education institutions, marriage in the family and major medical treatment should be borne in mind. Another factor you must consider is adequate insurance coverage, especially medical, household, disability, and loss of income. Inadequate insurance can adversely hit your retirement plan.

The focus should be on keeping your EMIs as low as possible. Second, you must try to pay off all debts before retiring. To retire early, you need a sufficient financial cushion to cover the unexpected, such as medical bills, higher than expected inflation, higher taxes and lower than expected returns on your investments.


According to financial planners, retirement is the time to review your existing portfolio and take a call whether you want to stay invested in the equity market, move out or balance your portfolio. One must evaluate your position as equity investments are always subject to market risks, though they might give better returns.

Some believe that you should play less in the secondary stock market and play more with mutual funds (who has a long term investment horizon). Speculation in stock market should be avoided completely. A small portion of the total investment portfolio should also be kept in the liquid fund.

Some see no risk in playing with investment in the primary market as it has fewer hassles and the chances of making a loss are very remote. From the point of view of investment planning, one should consider the aspect of liquidity as top of the agenda. Do remember that where there is liquidity, there is mobility. Hence, during semi-retirement period, investment planning should be so done that liquidity of funds is maintained.


Financial planners don’t see any problems with investments in real estate if you are doing it with the purpose of wealth distribution. However, if it is for generating ongoing income, then you should be clear about liquidity issues. Too much dependency on only rentals on the property value may have a negative impact, though it can also bring security. So, if there are no liquidity issues, then exposure to the tune of 15% is reasonable

The rules are still not clear in reverse mortgage schemes on how the property is valued or revalued, so it should be considered in a worst-case scenario. Reverse mortgage is too early for this age in India. Keeping in view that average life expectancy has increased; this may not be an advisable option at the semi-retirement stage, unless you have more than one house property.

Some Financial Planners are of the opinion that options such as reverse mortgage and fixed investment sources such as the rental housing may well fit in your scheme. The rental housing concept is a great favorite amongst people in the semiretirement period. And if you can get a 4-5 % increment in rent on an annual basis, it may well provide you the money required for monthly consumption.


To start with, financial planners believe that you should gift your funds to different family members so as to achieve optimum level of income tax planning. However, you should not gift your funds to your spouse and minor children. This is because their income would be clubbed with your income as per section 64.

Similarly, if you want to achieve full tax deduction by way of tax deduction in respect of investments made within the purview of section 80C of the Income-tax Act, then the best option would be to invest in shares or mutual funds, which are specifically demarcated for the purpose of section 80C deduction. You should also evaluate the option of repayment of housing loan vis-à-vis tax deduction for housing interest.

On the liquidation part, caution is that you must think twice before diluting your assets in the mid-age, especially those who have planned and invested for their retirement. Analysts recommend that you should first liquidate hazardous and risky investment options during the period of semi-retirement.

To summarize, keeping a few basics intact can help you plan your semi-retirement in a much structured manner and not only you can enjoy your new job but also afford to take those yearly vacations!

The choice is yours

• Keep your EMIs as low as possible and try to pay off all your debts before retirement

• Review your existing portfolio and take a call whether you want to stay invested in the equity market, move out or balance your portfolio

• Gift your funds to different family members to achieve optimum level of income-tax planning

• Speculation in stock market should be avoided, though you could consider investing in primary market which has fewer hassles and less chances of making a loss

Wednesday, January 21, 2009

Basic rules for investing in stocks

Last few years have been very easy for the investors to make money out of markets. Thanks to solid bull run. But situation has changes both globally and locally as well. This all started with US sub prime issue. This market correction has bought many of the investors back to basics and class room to review their stock selection strategy

Set a ceiling for exposure to a particular stock

You must set a maximum limit for exposure to a stock as over exposure can prove disastrous in a struggling market. In your portfolio, the value of RIL shares is around Rs 1.58 lakh, that's an upside of 108.7 per cent from your cost price. The rapid appreciation of the stock's price has resulted in it cornering 32 per cent of your portfolio. Consequently, one-third of your portfolio is dependent on just one stock. It would be great if you could moderate your risk by reducing your exposure to RIL.

Avoid small holdings

The price movement of the stock should never be the sole reason for buying it. You must have a sound reason for investing in a particular company. And once you do, try to have a meaningful exposure to each without going overboard. Your portfolio consists of 22 stocks, with just three losers. But 12 of your 22 stocks have an allocation of less than 3 per cent. You've missed out on enormous gains from stocks like IFCI just because of your small and negligible holding (under 1 per cent). Such stock holdings add little value to the portfolio and instead makes monitoring a more tedious job.

Book profits occasionally

If you plan to book profits occasionally, you must set a target price for your stock. This is another reason why you must have a meaningful position. If you do, you need not sell the entire holding. By adopting the strategy of booking partial profits, you can sell 20-30 per cent of your holdings on every price rise. Should the market tank and the price of the stock fall, you can re-enter at a lower level. Should the market rally, you can benefit from the upside by offloading portions of your investments at a later date. Whichever way the market moves, you win.

Limit the exposure to a particular sector

Just like a diversified portfolio is needed in stocks, the same holds for sectors. It must not be skewed towards one. In your case, 35 per cent of your portfolio comprises of energy stocks. Such high allocation to a single sector can make your portfolio look weak when the energy sector turns bearish. Hence, it is advisable to reduce exposure to energy stocks and move to some other sectors to make your portfolio more diversified. The practice of being exposed to various sectors makes the portfolio more resistant if a particular one underperforms.

Review periodically

When investing directly in equities, you must monitor your investments regularly. In a mutual fund, your fund manager does that for you. Keep a tab on policy changes and tax issues affecting the sector. If the sector outlook gets bearish, it would adversely affect your investments. But, if you are convinced about a company's future prospects, you should remain invested in it irrespective of its short-term price fluctuations. You can use the Value Research Online Portfolio service. It will help you keep a track on your investments as well as analyze your sectoral compositions.

Following the above rules will ensure that you have a well balanced and diversified portfolio.

But if you want to speculate, then it is another ball game. Our advice: Tread cautiously. Limit, say, 10 per cent, of your investments to speculate on stocks. Don't try it with all your holdings

Tuesday, January 20, 2009

Mediclaim policies may enter regime of portability soon

UNHAPPY with your mediclaim policy, want to change your insurer? You may soon be able to transfer your mediclaim policy from one insurer to another.

The General Insurance Council (GIC) is in talks with the insurance regulator, IRDA, to introduce mediclaim portability and renewability. Authorities are expected to prescribe a minimum defined cover to enable portability across insurers. Already, GIC has introduced a common definition of pre-existing illnesses and exclusions for all insurers as a first step towards portability.

The determination of pre-existing diseases are a contentious part of mediclaims’ settlement. By introducing a uniform definition of pre-existing diseases, the extent of litigation will come down, experts feel.

KN Bhandari, secretary general, GIC, said, “We are in talks with Irda to introduce mediclaim portability and renewability. A minimum defined cover which will have basic benefits will be arrived upon. It will not be too restrictive, but should be a balance between a high value and a low value policy.”

Pavanjit Singh Dhingra, vice-president, Prudent Insurance Brokers, said, “This is much like the no claims bonus in motor insurance. Policyholders should be able to transfer accumulated benefits. There will be no penalty for transferring your mediclaim policy, unlike now, where policyholders are penalised for making a shift. Besides, if a 50-year-old were to change his insurer, it would be difficult for him to get himself covered from another insurer. The costs of changing the policy would far outweigh the benefits, so policyholders have no incentive to make a change. With portability, they will be able to carry forward benefits. By defining pre-existing diseases, there is no ambiguity left. Further regulations on portability must be spelt out as well.”

According to the GIC, pre-existing diseases have been defined as any condition, ailment or injury or related conditions for which the policyholder had signs or symptoms, and/or were diagnosed, and/or received medical advice/treatment, within 48 months prior to the first policy with the insurer. As per exclusion wordings spelt out, the GIC has said that benefits will not be available for any condition as defined in the policy until 48 months of continuous coverage have elapsed, since inception of the first policy with the insurer. These wordings were implemented by all mediclaim policies by all insurers starting June 1, 2008.

After the fourth policy year, an insurance company will have to cover all pre-existing diseases. Prior to this change, insurers defined pre-existing diseases differently. Renewal of old health insurance policies, will adopt the new standard definition of pre-existing diseases.

Further, the GIC is in talks with the Irda about bringing parity between life and non-life companies in terms of health insurance policies issued by both. It does not want migration of policyholders from one segment of the insurance industry to another. But analysts feel that life insurance companies are not too big in the health insurance space. The GIC is also pushing for parity between life and non-life companies for issues including commissions and solvency margin requirements.

Monday, January 19, 2009

Senior Citizens and Investments

Like most budgets, these years' too had some minor measures that haven't attracted too much attention but are nonetheless interesting. One such measure has been the inclusion of the Senior Citizens Savings Scheme (SCSS) into Section 80C. Why is this interesting? Because it offers a significant new tax break to older people who still have an income but are short of options on saving taxes. Let me explain. The SCSS was introduced in 2004 budget. It is a deposit with the government that is serviced through the post office and is available only to those who are older than 60 years, or 55 years for those who have taken a VRS. The deposit fetches interest at the rate of nine per cent, which is a great return for a safe, government-guaranteed investment. Until now, this deposit had no tax-saving angle to it. Money put into it did not get the depositor any kind of a tax break and the interest earned was fully taxable. Mr. Chidambaram has changed this in this budget. Now, investments made in the SCSS get deducted from the investor's taxable income under Section 80C. Of course, this is a part of the overall limit of Rs 1 lakh that all section 80C investments must fit into. However, some of the options that normally make up younger taxpayers' 80C investment basket are either unavailable (like PF) to many older ones or are considered too risky (like equity ELSS funds) for them. Any senior citizen who is still working, or receiving income from a business or investments would want to fully utilise the 80C tax break. Given the much higher tax exemption (Rs 2.2 lakh) that the finance minister announced in the budget, the tax burden for low- and middle-income seniors is now very manageable indeed.

However, this brings to what is a common flaw in the way we generally think of senior citizens' investment needs. It seems to be a matter of deep belief that equity is too risky for older people and their investment needs must be met by fixed income alone. This, believe is a mistake. The risk in equity is a function of time. The longer your period of investment, the lower the risk from equity. Of course by equity I mean equity mutual funds with a good track record and not punting on 'tips'. Over long periods in excess of ten or fifteen years, the risk from sensible equity investments is practically negligible and the benefit of big returns is enormous. A sixty-year old senior actually has a very long investment horizon of twenty or thirty years. As a matter of fact, not investing anything in equity-based instruments leaves seniors exposed to a different and more insidious risk-that of inflation.

Remember, unlike a youngster who will probably earn more as the years go by, a retired senior is entirely dependent on investment income. Fixed income instruments, whether fixed deposits or debt mutual funds or post office schemes rarely deliver more than one or two per cent above the inflation rate. Remember that your real personal inflation rate is likely to be higher than the official one, specially when you take into account increasing medical expenses. When you think carefully, you will realise that not investing anything in equity leaves seniors exposed to the real risk of becoming poorer as the years go by. The right approach would be to try and estimate the actual spending requirements over the next seven to ten years and keep that in fixed income instruments. The remaining amount is your long-term holding and there's every reason to put around half of that in equity. This is probably best done by splitting that amount between two or three balanced funds.

Remember, over a genuinely long-term, equity offers an extremely good risk-to-reward trade-off and there is no reason for seniors not to take advantage of it.

Sunday, January 18, 2009

Investment Planning - From Me To You

Any investment planning must guard against the unforeseen, particularly when it pertains to your better half. Take stock of the must-do list

JOHN Lennon, one of the founding members of The Beatles, once noted in his album, Double Fantasy, that life is what happens to you while you’re busy making other plans. Perhaps, Lennon wouldn’t have given a second thought to what he said. But, life certainly did. Some years later, he was shot dead by Mark David Chapman, for whom Lennon had autographed a copy of Double Fantasy earlier that same night. Lennon has left a treasure of melodies for his admirers but some of us aren’t that lucky. Any eventuality, may not only affect your family emotionally but financially as well. Specially, for your spouse, who can be in dire straits if you haven’t planned for such a situation. Here’s a low down on what to keep in mind while building a financial reserve for your better half.


Financial planners hold the view that before you make any plan for investments, you should ensure appropriate risk management, which includes not only life insurance and health insurance but household and accidental disability insurance as well. But when it comes to your spouse, you’ve to start with some broad classifications such as is the spouse working, existing assets portfolio and ownership structure, intelligence quotient (IQ), emotional quotient (EQ) and age and financial literacy. Experts believe that the question you should ask is, can you live without your spouse’s income? Accordingly, you must leave an amount needed for living expenses and critical financial goals such as child education and marriage.


You may have pondered over planning your portfolio, but remember that an ideal allocation for your spouse reserve is decided on factors such as lifestyle, risk appetite and requirement on retirement (if your spouse is working). There cannot be a standard formula for investments as it varies from person to person and it’s better if decided by a qualified financial planner. Take an example of a single earner, aged around 35 years, with a monthly income of Rs 50,000. Now, this sole earner needs immediate cover of Rs 1 crore. Reason: if in case of an early death, the spouse needs around the same amount, setting aside personal expenses. So, Rs 1 crore, if invested in any debt fund giving a yield of 8%, will give around Rs 66,000 per month. While the spouse can spend around Rs 45,000-50,000 per month for personal expenses, the rest could be invested to counter inflation in future. Hence, this person should cover himself and his family with adequate health cover and disability cover for himself.

A quick review of your insurance policy should be done first. Make sure you have adequate insurance coverage to make up for the loss of income. Instead of taking one big policy, it is better to have insurance policies maturing at different points of time.

If you’re young, you can look to lock in the investment in less liquid investment. And as you grow, you can start liquidating them and investing in liquid assets. It is important to note that insurance should be ideally kept separate from investments and the core investment should never be influenced by considerations of tax planning.


Making a Will is an important task in your life. You should make a Will, which protects the interests of your spouse till she survives and should be well defined. It’s also pertinent that the spouse should be well informed regarding your Will, otherwise litigation and other problems can occur. Ideally you must share all information about the Will with the spouse. However, exceptions can be considered in cases of below average EQ and financial literacy. In such cases, you must exercise utmost foresight to devise mechanisms for efficient execution of the Will without the spouse being shortchanged.

If your spouse is working, the reserves can be common but they should ride on multiple objective driven vehicles similar to an SPV (special purpose vehicle). Experts feel that while you may build a common reserve from your incomes, it should be divided across SPVs that will help you achieve different objectives of your life. Cautions: You may have a common reserve but contribution of both should be identifiable and it should not be used for creating personal assets.

Financial planners feel that the purpose of such a reserve can span across objectives such as retirement/ pension, child’s education, healthcare and travel. It is, however, recommended that you should form a separate fund for each of these objectives.

The financial plan must be reviewed periodically to have the correct evaluation for timely adjustments in portfolio diversification and asset allocation. For instance, as you retire, your regular expenses should reduce by around 20% but other expenses increase such as travelling and hobbies. Financial planners say that you should not take major financial decisions in the wake of a loss. Put the lump sum amount aside for a while, preferably in a liquid fund or savings or fixed deposit account for three months. Don’t feel obligated to do something with it right away. After all, it takes time to fill that emotional gap.

Saturday, January 17, 2009

7 ways to use customer data effectively

If you suspect you’re not using your small business data to the utmost, here are seven steps to get you on track.


On the surface, information about your customers and market is certainly useful. But it goes much deeper: careful analysis of data can be invaluable in identifying broad based, reliable trends central to your business’ success particularly for small businesses. You need to understand and analyze data to keep your customers.


There are scads of proactive ways to gather data, such as customer surveys and other forms of feedback. That’s helpful, but don’t overlook information that you may already have at the ready. Customer purchase records, demographic data left by website traffic — these and other sources provide insightful material.


Start with your existing customer base. Chances are good that you have extensive customer information. Find out what they’re buying, how often and even where they’re coming from to do business with you — all telling tidbits that help you identify what they value and what keeps them coming back.


In large part, analyzing data is all about identifying trends and points of consistency. You can do that simply by watching your customers’ habits. If somebody cleans a dozen shirts a week, give that person a coupon for shirts. For a more comprehensive view, software products let you easily gather and break down data from a variety of sources, pinpointing common themes and other useful information.


Now that your data analysis has suggested common trends say the bulk of your customers have a certain income level it all becomes a matter of finding out where they are. Here, you can also go outside your existing base of information to collect demographic data from a variety of sources, ranging from census authorities to your local chamber of commerce. Basically, you’re asking ‘Where can I go to find people who look like this?’ Census data can provide you with neighborhoods with people that have the same sort of income and work in the same sort of jobs. From there, advertising and marketing can be targeted accordingly.


However important, don’t limit your analysis to customer data. Break down what you have about your competitors, product and inventory flow and other information. They can help suggest strategy for all sorts of issue staffing (your data may say business in the winter is too slow to warrant eight salespeople); sales forecasting (analysis suggests certain products simply aren’t moving at all); and even the physical layout of retail space


Used effectively, data analysis can be invaluable in suggesting all sorts of strategies and other decisions. But, never lose sight that, in the end, your data is, in fact, just a suggestion about what to do. It’s up to you to decide what to act on-and how to do it.

Friday, January 16, 2009

ULIPs - Safe & Stable

A ULIP is a two-in-one plan which gives you life cover and an opportunity to make investments

WITH Dalal Street in a range-bound mood, uncertainty has gripped investors whether to dabble in stocks right now or wait for bulls to charge. In times such as this, it’s market risks which is now playing in the mind of a first-time investor. Suddenly, investors are running for safe cover and insurance activity has heightened, especially Unit-linked Insurance Plans (ULIPs). But, is it really advisable to invest in a Ulip? Making the decision could become simpler if you are acquainted with the finer details.

For starters, a Ulip is a scheme which in addition to a life cover also gives you an opportunity to make investments. In simple words, a two-in-one plan which offers benefits of life insurance plus savings. Here’re five reasons why an investment in Ulips makes sense in the current market conditions.


Insurance experts advise that you should buy Ulips with a long-term orientation and not give much importance to market corrections. Ulips have always been seen as a good long-term source of wealth creation in an emerging market. You must considers a Ulip with a period of 10-15 years in mind. Experts believe that by investing for a long time frame, you are allowing yourself to witness two cycles of the bull and the bear run. If you can allocate resources rightly, you can derive maximum gains when the bull is charging ahead and leverage it during a bear run.


According to insurance experts, if you are a risk averse investor and believe in goal-based investing, Ulip is an ideal financial product where you can park your funds. Depending on your life stage, you can decide on equity and debt mix in your plan. Thus, in line with your financial expectations, it gives you a platform to plan for your child’s marriage or your retirement needs. This apart, it provides an extra cushion of a life cover, which means in case you are not alive to take care of your family, your family financial goals are intact and on track. Moreover, being an insurance product, you enjoy tax benefits under section 80C on the assets generated via this plan.


Seek discipline and find your liberty. If you believe in this philosophy, then a regular premium Ulip is a must in your portfolio. With a regular premium product, you need to pay premium for a minimum stipulated period, such as three years. This product works like a systematic investment plan and acts as a hedge against volatility in the stock market. Along with the long term portfolio profile, systematic investment in Ulip acts as an additional risk-mitigation tool. By investing a fixed amount in Ulip at regular intervals, you not only average out your returns but also offset the volatility of capital markets.


In terms of flexibility, insurance experts feel that Ulips have an edge over mutual funds. You have an option to switch between the investment funds to suit the changing requirements in life. This feature, believe experts, allow an informed investor to benefit from the vagaries of the stock market by switching from high risk to low risk fund options. Further, you have an added advantage of switching between funds which offer different ratios of equity and debt, a few times without paying any extra fees. But you should always remember that these options are designed not to speculate in the market but to help you choose an option fitting your risk appetite, investment horizon and objective, and your life stage.


The best part about buying a Ulip is that you have multiple options at your disposal — ranging from an aggressive to a balanced or even a conservative product. If you are a conservative investor, then you can buy Ulips with a capital guarantee clause attached. The product ensures that you have a guarantee for a certain level of returns, even in the case of a stock market crash. The product structure caters to the risk appetites of different class of investors. The blend of equity and debt in Ulip offer a balanced and steady return over a period.


Let’s now come to the downside. Insurance experts advise that you should be prepared for the risks surrounding the vagaries of the market, especially if your policies are set to mature in a period when the bear has the upper hand.

There is also a debate centring around whether the Ulip needs to be treated as an active or passive investment. Even while switching funds in favour of debt funds, you should keep in mind the increasing level of interest in the debt market.

Again, investing in a Ulip is not recommended for those who are highly active in the markets as they will never be satisfied with the kind of returns.

The risks are also great considering that Ulips are subject to the vagaries of the market. Those interested in Ulips also need to be wary of agents who promise returns of 30-40%. Agents often quote contextual data, for a period when the stock market was at its peak. The equity market will not give you returns greater than 14-15%. Even though insurance returns are tax-free, the maximum returns possible range between 19% and 20%.

Wednesday, January 14, 2009

Is Insurance a Savings Instrument?

An increase in the disposable income of Indians has led to an upswing in the lifestyle of people. A growing need for insurance has also been observed, as more families are dependent on only one earning member.

There are two types of life insurance –

1) Term plans - which are the simplest and cheapest form of risk cover, and savings based plans, where one can expect returns after a period.

2) The number of savings based plans have recently been on the increase.

People are viewing it as an investment instrument; like market-based Unit Linked Insurance Plans (ULIP) as equivalent to another Mutual Fund. But it is not entirely their fault. Insurance Advisers are 'misguiding' them into buying these savings based plans as investments with an added benefit of risk cover, instead of the other way round.

However, consumers need to keep in mind that most of these plans are beneficial (both risk-cover as well as returns wise) only in the long term, though most insurance agents push them as only a 'three-year' investment. Incidentally, neither ULIPs nor Mutual Funds 'guarantee' returns.

An ideal way of insuring, as most financial planners would put it, would be to buy simple term plans for life risk cover and diversified investment of the rest of the savings in other instruments like mutual funds, public provident funds, and bank deposits.

Monday, January 12, 2009

Investment steps for college fresher

WHEN we are a college fresher or in first job, saving and investment are the last things in our mind. Our priority is the latest gadget, movies or a dream car. This is natural among the youth. With so much media exposure, you get tempted to buy these items.

I would advise youth to follow five personal finance steps:


It’s easy to find ourselves wondering where our money went. Putting a budget in writing can show how we are actually spending our money and what we can do to help control where it goes. We should remember to add entertainment and shopping expenses into monthly budget and not forget to include savings. We should treat it with the same importance we would treat utility bills. In fact, the earlier we start saving, the earlier that money can start working for us.


Easy availability of credit cards has provided a major boost to spending. We should use credit cards in a proper way like for emergency payments or life insurance premium payments. If we are not careful and use “minimum payment option”, it could mean getting entangled in a debt trap. Interest rates are as high as 42% in most of the credit cards now. We should stick to the rule: “If we can’t pay cash, then we can’t buy it.” We should not use credit card unless absolutely needed.


As investor when we are young, we have time and money on our side. Most of the people are unaware about power of compounding. According to Albert Einstein: “Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.” The sooner we start, makes the difference. We should start SIP (systematic investment plans) at an early age to benefit from the power of compounding.

The term ‘systematic investing’, applies to the process of investing regularly ie. at fixed intervals, say, monthly or quarterly. Even we may start at as little as Rs 500 per month.


This should be starting point of any investment plan. We should split the objective in short term, medium term and long term. Some examples are like buying an electronic gadget (short-term), planning for higher studies (medium term) and planning for house (long-term). An investment objective is a simply a wish which we want to fulfil. After setting the investment objective, calculate the amount needed to achieve the financial goals. We should be able to earn decent return on the investment after assessing risk profile. The more we earn, makes a difference.


We should always retire the high cost debt first. We should never accumulate the debt on credit cards. Nowadays we have access to educational loans which are cheaper then credit cards. We should consolidate the debt when possible to take advantage of lower rates. It is better to take loans from parents and friends then to accumulate high cost debt.

Friday, January 9, 2009

Indians worry about outliving Retirement Funds

ALMOST 70% of Indians are worried about outliving their retirement money, yet only two out of ten full-time workers opt for a retirement plan, other than what is mandated by law.

More than eight out of 10 Indians (80%) have done no retirement planning independent of any mandatory government plans, said the MetLife surveys — the study of international employee benefits trends and the sixth annual us study of employee benefits trends.

Despite worries about funding a comfortable retirement or outliving their retirement savings, many fulltime workers in developing and mature economies, have taken few or no independent steps to plan for retirement.

In India, the surveys said, “while almost three out of four employees (71%) say they are concerned about outliving retirement money, only one out of every three (35%) say they have taken steps to determine retirement need; only 20% say they have done actual planning for retirement.”

The surveys further point out that while 80% employees in India and 81% in Mexico have no retirement plans other then the mandatory ones, the number was low in developed countries like Australia (58%), the US (46%) and the UK (31%)

The MetLife surveys noted that nearly half of the Indian employees (48%) whose employers do not offer retirement benefits would be interested in purchasing retirement planning products through their employer, even if they had to pay 100% of the cost. By tradition, typically a family would take care of its older members, but with the geographic mobility among more young people to locations far away from their family home base, the traditional family ‘safety net’ is becoming frayed in many fast growing countries, the surveys said.

The widespread lack of independent retirement preparedness is especially worrisome in both developing and mature economies as life expectancies around the globe continue to rise and pension reforms puts more responsibility on employees to fund their own retirements, they added.

Wednesday, January 7, 2009

SEBI: Easier share transmission rules soon

SEBI Likely To Accept Panel’s Recommendations For Friendly & Uniform Norms

THERE’S good news for legal heirs awaiting the transmission of shares of deceased shareholders. Market regulator Sebi is expected to accept most of the recommendations of the group that was formed to look into the matter. This will pave way for quick transmission of shares and benefit those who have inherited them in physical form.

Currently, companies follow different systems for transmission of shares in physical form. For instance, HDFC asks its local manager in some cases where the legal heir does not possess succession certificate or the probated will, to carry out verification once it receives the application. The manager then submits a report and the company then acts based on the recommendation. But market participants say this can be a tedious exercise.

The companies would have to fix a threshold limit of 200 shares or Rs 100,000 whichever is higher for transmission of shares after submitting the standardised documents. Companies would require an affidavit, deed of indemnity and a no objection certificate in case there are other legal heirs. The limit will be the basic minimum limit to be adhered to by all listed companies. Those companies that have higher threshold can continue with that.

Transmission means devolution of title to shares otherwise than by transfer, for example, devolution by death, succession, inheritance, bankruptcy, marriage, etc. Transmission is different from ‘transfer’; in transmission a person acquires an interest in the property by operation of law, such as by right of inheritance or succession, whereas, transfer is affected by act of the parties.

In spite of the legislative intent to simplify the transmission procedure, companies have different documentary compliances on the part of the legal heirs of the deceased security holder. In case of many companies, this is so time consuming and tedious that investors do not want to follow it up if the amount involved is not very big.

In transmission case, where titles to shares are passed by operation of law, the beneficiary need not carry out further formalities. A year ago Sebi had constituted a group to address this issue and to evolve an uniform procedure on transmission of shares. The group had unanimously suggested suitable measures to address issues relating to difficulties faced by investors while dealing with transmission of securities in the physical and dematerialised mode. It had also proposed the standardisation of these documents. Once the new process comes into effect, companies, depositories, recognised investors’ associations and Sebi is expected to put awareness on the use of nomination facility at the account opening stage itself. This might also be made mandatory going forward.

There is a need for the depositories to encourage the use of nomination facility in case of demat mode. It should ensure that all its existing accounts are updated with nomination. The DPs as well as companies would be required to ensure that the transmission cases are dealt with in a time-bound manner. BDV-270534-BDV

Monday, January 5, 2009

IRDA working out rules to value insurance firms

VALUATION of insurance companies is back on the regulator’s radar. The insurance regulator Irda is on course to develop commonly accepted benchmarks and disclosures to value insurance companies, as this would be crucial when Indian partners dilute their shareholding from 74% to 26%. The present regulation requires Indian promoters with a majority shareholding to dilute their stakes through an initial public offering (IPO) at the end of the tenth year of operations.

The value of insurance companies hinges on several assumptions, which could result in wide variations. It is different from valuing, say, brick-and-mortar companies listed on the stock exchange. Their valuation is generally based on the price-earning multiple — a measure of the price paid for a share relative to the profit earned per share. A high PE multiple suggests that investors expect higher earnings growth in the future. But this exercise is much more complex for insurers. Once an insurance company receives the premium from the policy-holder, it has to fork out money for commission and other marketing expenses. The balance is invested in debt and equities and interest is added to the original investment.

Then, on the date of valuation the solvency margins and mathematical reserves are deducted from this corpus. Solvency margin is the excess of assets over liabilities that an insurer maintains as a prudential measure in the interest of policyholders. Mathematical reserve is the provision made by an insurer to cover liabilities on long term insurance contracts. The balance (in the corpus) is used to pay claims and the net money that is available is the profit. If the insurance product is a participating product — eligible for bonus — only 10% of the profit belongs to the shareholder. The balance is used to declare bonus and belongs to the policyholder. If it is a non-participating product, the entire profit belongs to the shareholder.

Hence, the profit can vary widely as the actual experience may differ from what has been assumed in pricing cost, claims experience, investment yield and so on. In the worst-case scenario, the projected profit will be much lower than what has been assumed in the pricing. Valuation of insurers hence hinges on the assumptions and hidden profit, which can fluctuate wildly.

It is important for the industry to follow some uniform method in estimating various components. This, in turn, will bring some closeness in the final outcome on valuation between various companies. Internationally, this issue has gained prominence with professional bodies setting valuation norms. Rating agencies event comment on these norms. In the days to come, the same will happen in India

Issues such as valuation of companies will take the centre stage when the industry consolidates through mergers and acquisitions. Irda may now set up a broad-based committee to look at such issues. There is a case for significant improvements in transparency and disclosure standards of the insurance industry. As a run up to the prospective initial public offerings (IPOs), there is need to agree on common disclosure practices, financial-ratios and operational benchmarks so that there is a consensus among analysts to have a proper valuation for different companies.

Currently, the new business achieved profit (NBAP) — which reflects the value of a company’s earnings potential under a set of assumptions — is used for the valuation of insurance companies. Another method is the embedded value method — or the value of the existing business in the books of the company. With the largest number of life insurance policies in force in the world, India’s insurance sector accounts for around 5% per cent of the GDP.

Friday, January 2, 2009

Insurance on Mutual fund SIP

There are some fund houses that offer a life insurance benefit if you opt for a systematic investment plan in their schemes. It was initiated by DSPML Mutual Fund in 2005 with the name of Super SIP. Some other players like Birla Sun Life Mutual Fund, Kotak Mutual Fund and Reliance Mutual Fund have come out with the same concept.

You will have to look into the details to see which one suits you. For instance, here are some questions you can ask as a guideline.

  1. Is there a minimum amount that has to be invested in the SIP?

  2. Must the SIP be of a certain tenure?

  3. Are all equity schemes of AMC, eligible or is it offered only on certain schemes?

  4. Will the insured amount be given to the nominee or be used to continue with the SIP so that the investment plan continues?

  5. Will all the insurance expenses be borne by the AMC?

  6. Is there any age limit to avail of this scheme?

Now coming to your second question; yes, if you switch your units from one scheme to Equity Linked Saving Scheme (ELSS) of the same AMC after paying the entry load (if applicable), you can avail of the tax benefit from the tax-saving scheme.

Thursday, January 1, 2009

Wish you all Happy New Year 2009

Year 2008 has been an action packed one in all respects. It started off with stock market correction in mid January, later it turned out to be a bear market and eroded Billons of dollars of investor money.
By then sleeping giant was awaken, the sub prime. It had cascading effect all walks of the economy only in US nut all across the world. Then came the big investment bank failures. Fed has to Bail out leading mortgage lenders of the country Fannie Me, Freddie Mac. But, worst was yet to come, Lemon Brothers, a hundred year old investment bank went bankrupt.

It was the situation with Merrill Lynch and Morgan Stanley as well. Goldman Sachs was also taken a beating but was slightly better off. Merrill Lynch was acquired by Bank of America. Wachovia acquired by Wells Fargo, Washington Mutual (WaMu ) acquired by JP Morgan. Both Goldman and Morgan were converted to conventional banks. Meanwhile, Warren Buffet, greatest investor that the world has seen also showed confidence in Goldman.

On the other side Worlds largest insurance company AIG (American Insurance Group), has become the victim of sub prime. Stock price was as low as to $1. To life the ailing economy and overcome the sub prime problem US government came up with $700 Billon package. Later it found that it was short by couple of hundreds of Billon dollars. So second bail out package followed soon. Fed was cutting rate to give stimulus to ailing economy.

Mean while across the world there was severe liquidity problem. Credit Tsunami had hit the world and whole world was in shock. Central banks had to cut interest rate to inject liquidity. There was a fear of global recession all central Governments and banks were trying their best to hold situation under control. Central Governments of Germany, France, UK, Switzerland, were coming out with bailout/stimulus package to save the economy. Some of the biggest name like UBS, Credit Suisse, Barclays, HSBC all have become victims of sub prime and credit crunch. Meanwhile, surprisingly China was out with $560 Billion stimulus package to economy. Stock markets were falling day after day.

Metal prices was cooling off, Crude oil price was coming down on the fears of slow down in the global economy and hence the lower consumption. All these lead to lower inflation. With US interest rates going near zero, Deflation worries were looming large.

Stepping into New Year worldwide consumer confidence is multi decade low, Job less claims are at 26 years high, fear of deflation.

What lies ahead in 2009? Hope. Hope of recovery, Hope of job Security, Hope of Peace, Hope of Good life.

New Year is the time to unfold new horizons & realize new dreams, to rediscover the strength & faith within, to rejoice in simple pleasures & gear up for new challenges. Wish all our readers a very happy new year. Wishing you a truly fulfilling 2009. Let year 2009 be filled with Joy, Happiness, Prosperity, Safety & Security.

Have a great New Year ahead & happy investing. Thank you for all your Co-operation and Support.

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