Oh my God! Look at these investment advices..

One of my friend called me to ask for my second opinion when he had these investment options offered to him.

First my friend was visiting his auditor ( Chartered Accountant) for some income tax advise. the Chartered Accountant suggested him to avail some good investment options from LIC ( pension plans).He also offered that it can be done through an LIC agent known to him.( His wife???)

Second my friend visited his bank to get a tax saving fixed deposit for his mom. The Manager of the PSU bank almost pleadingly forced him into buying a policy where he had to pay some amount annually for 5 years and after that he would get pension from the tenth year onward.

Last he visited a well known financial service provider for investing in an ELSS scheme.There he was lectured on the virtues of a pension policy from a private sector insurance provider.

In all of the cases, people were force selling him some insurance policies just for the sake of some hefty commission!

When the true RO (return on investment)was calculated for all of the schemes . it was less than savings bank interest currently being offered.

In none of the cases, the people selling these schemes were aware of the underlying securities in which the premium will be invested.

None of the parties who were selling these products had any true personal finance knowledge. All of them (except the Shattered accountant) were genuinely doing their job ( for what they were being paid for).

My friend at least had the guts to ask some basic questions and asked for a second opinion. if someone blindly makes an investment based on such random advises, they get tied to poor quality products due to their financial illiteracy.

God only can insure the investors from getting trapped by the insurance agents and insurance companies.

Happy New Year 2016 !

Call from HXFC Life Insurance

Caller: Hello sir

Me: Hello

Caller: Calling  from HXFC life insurance we have a very good plan for you which yields 12% return , Premium need to be paid for 7 years and you will get maturity at end of 10 years.

Me: What will be the sum assured and what is the amount that I will get after 10 years? How is the IRR ( rate of return) 12% calculated, where do you invest this money to get 12%?

Caller: Sir,I will hand it over to my boss.!!!

.......

Team Lead: Hello sir, this Name of the plan is # bla bla bla, 7 year , 10 year, 15 year option #bla bla bla .. (No correlation to the question asked by me).

Me: Hold On. Can you please answer my question

What will be the sum assured and what is the amount that I will get after 10 years? How is the IRR ( rate of return) 12% calculated, where do you invest this money to get 12%?

Team Lead: Sir, this is a very good plan. We invest in government projects like road, metro, etc and that's why we get 12%.

Me: Through what instrument do you invest??

Team Lead : Sir, we will give you in writing that you will give 12% return assured. We don't invest in equity and we will give you a BOND ( Don't know what a BOND means???)

Me: What is the amount that I will get after 10 years , if I invest XXXX for 7 years?

Team Lead: This plan is.....

Me: What is the amount that I will get after 10 years , if I invest XXXX for 7 years?

Team Lead: Roughly YYYY

Me: That amounts to only 5-6% return which I can get from my SB account. You said it was 12%??

Team Lead: Sir, you wont get return anywhere . FD has TDS and they wont pay you more than 7%

Me; What??? You said the policy offers 12% return and the maturity amount stated doesn't justify that? Are you getting my question.

Team Lead: Sir, no bank gives you this type of return!!!

I hang up.

My humble request to all Insurance companies: Please get any product rolling into market..But please have the people that sell your product trained on IRR and comprehending customers question.( But may be you are doing this with a purpose- if some one gets all the right facts - No one may opt for your products)

+91 9894509065 caller number 14 may 11.32am( ask the right questions before you invest)

Safest bet!

Recently, got to see an ad in the regional channel. The advertisement goes on like this.

A small time vendor stands before an old temple tower and talks about the virtues of holding an LIC policy. Similarly another old man holding a cycle talks about the security that he gets by investing in LIC.

People appearing in this ad or those who invest blindly in LIC don't know for sure , where is their money invested.  Lets  take  an example of a  endowment policy with bonus.  how many of the investors in these policies know , where does their money go. What does  LIC do with the money and how safe is their investment?. ( I am not saying that government would let go the LIC bankrupt, that is reserved for another post)

Whenever you make an investment, you need to try and understand a few things

1) What will be my rate of return ? ( in % per annum)

2) Tax impact on the returns.

3) Where does my money go, how does this scheme  make money and how are they able to provide the returns? ( For example, If you invest in bank FD for 8%, you know that bank lends it to someone for an higher % and hence is able to provide you decent returns)

4) What is risk involved in the investment vis -a vis the investment period and the return percentage?

I am not saying that LIC is good or bad. But you should have at-least a better view of where your money is invested.

I would end this post with another story.

XX:  Do you invest in equity?

YY: ( Who's a Manager with a top notch consulting firm): No way, it's just gambling

XX: What sort of investment do you trust.

YY: We trust only in LIC for the last three generations.

XX: What is the policy that you have and what money you have made on it??

YY: hhmmmmm, Not Sure,,any how- You can have a look at the policies ( brings them in a couple of minutes)

One was an ULIP with almost 40K pa invested  for 4 years in a row and standing at a value of 80K( 50% of invested value) and others were some endowment plans with inadequate insurance coverage.

YY was surprised to know that most of his money had gone into equity and his portfolio value was actually down.!! This might have happened, even if he had invested in equity direct or through mutual funds. But, making an conscious effort to understand an investment tool and managing it would really make a difference in the long run.

Please don't  take any advertisement by face value or invest in something because someone close to you is marketing it. Go through at least the basic set of questions listed above , before you invest.

Why a contingency fund is very important.

Praveer was a lucky go guy till very recently. His financial situation seemed to be in control till the time there was a medical contingency in his family . 

There was an approximate need of almost Rs 4 Lakhs towards the situation and only Rs 1 Lakh was covered under the medical policy that he had.  He had no liquid source of cash with him except Rs 10 k in his bank account. 

When he fell short of this amount , he started looking at all sources :- 1. Tapping employer for salary advance didn't work out  2. His equity portfolio and gold/jewellery had vanished a year ago ,for initial down payment for the house 3.  His savings out of a salary and on site assignment had been converted into a posh car, 6 months back.

This is a classical case of under insurance in one sense and in another way not having any money at all ( easily accessible and liquid) for contingencies. At least 6 months expenses needs to be kept aside in FDs or other liquid instruments. 

This  fund should be "sacro sanct" and shouldn't be touched for anything else other than contingencies like medical  needs, creeping through a job loss situation, unforeseen and critical expense in family, etc. 

This goal of having a contingency fund is very critical for all (Even  for those who struggle to keep their day to day living). Praveer could have easily sailed through the situation with a contingency fund or a better insurance planning. But finally, He  had to settle in for a 19% personal loan to make the ends meet.

So, Please set up a contingency fund NOW or if you have some substantial savings already, earmark a portion for contingency.

Single premium or yearly premium

" Term insurance policies" are the way to go for those who look for life insurance . If you are confused on whether it is better to opt for a single premium term policy over yearly premium , you must read the following post .

Also, do not forget to go through the comments on this blog post.

http://www.subramoney.com/2012/01/buying-term-insurance/

Medical insurance

This post is not regarding the best medical insurance policy or whether you need a medical insurance. If you are one who have a medical insurance , this post is for you.

1. Have the medical insurance information handy to yourself and your family members. If there is a medical insurance card provided by the insurer or service provider, have the card in an accessible and safe place.

2. If you are dependent on your employer's medical cover , then please get your insurance details from your employer as soon as you join the company.

3. Track the expiry date of the policy carefully and ensure it's renewed on time by you / you get the renewed policy details form your employer as applicable.

4. Please go through the policy information and be sure as to whom/how  to inform in case of a medical contingency for an insurance approval. Take time to educate your family members on the policy too .( This is important because , your family would need the information when you fall sick).

Ignorance is not bliss!

Normally I don't attend sales calls. But decided to attend a call when I was called by an insurance company.

Caller1: Sir, I am calling from XX company. We have a plan for you. Pay x for 3 years , no payment on 4th year, 5th year you would receive  6x ( roughly double of what one pays over 3 years).

Me: What is the rate of return?.

Caller1: I am not aware . Team lead will tell you.

Me: Is it an ULIP?.

Caller1: No it is not market linked and it is an endowment plan.So, returns are assured.

Insurance with SIP

Recently found this post on one of the blogs.

http://blog.costaverager.com/2008/08/get-upto-35-lakhs-of-free-insurance.html

Great job by the blogger on SIP+ Insurance. A thorough analysis of the latest available options wrt MF/SIP+ Insurance.

ULIPs

Recently read a news item that inflows from ULIPs to stock market could be around $15bn in 2009. Great news that so much money is coming in to the markets . But the sad part is so many investors have taken an uninformed decision of investing in equity through the wrong route.

A significant portion of premium money goes into paying hefty commission to insurance agents and other costs and Insurance is clubbed along with investment to hide all these costs.

I wouldn't only blame the agents. Investors also should try to do a basic analysis before they put across their hard earned money into such costly products. ULIP may definitely give returns but unfortunately not the full return that the investor deserves.

High time IRDA does something like the SEBI, by waiving the unnecessary entry loads.

Read the following articles if you need more insight on ULIPs

The most mis-sold financial product

Do not club insurance and investments

ULIP Vs Mutual Funds

ULIPs are Unit Linked Insurance Policy

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ULIP options

Investors who have invested in ULIP (Unit Linked Insurance Policy) have an option of choosing units from income, balanced and equity units. (some give a few more customised options too!)

This choice is given at the time of applying for the plan. Options can also be changed during the lifetime of the policy with most of the insurers.

1) Which option is best?

Since ULIPS are all supposed to be long term investments, 100% allocation to Equity units( growth option) should be the obvious choice. Even if you are an extremely conservative person , you should opt for at least 50%of your money to be invested in equity.

2) Most of the insurers give a 'Premium Redirection' and 'Switch' option. What is the difference between the two?

' Premium Redirection' can be used by the policy holder to divert all further premiums in a different proportion into income/balanced /growth than what he has already opted for. For example If I had opted to invest 100% of my premium into balanced units and I choose to buy only 100% equity units from further premium , I can give a premium redirection instruction.

'Switch' is switching of existing units in a policy from equity to balanced, income to equity,etc.

3) How often should I keep switching to units in a policy?

If anyone can predict the highs and lows of a market , he can do a great switching job. But no one can do this perfectly. So, it is always better to stay with your option unless there is a major change in economic scenarios or change in your risk appetite. Frequent switching wouldn't help you grow your money faster( unless you are extremely lucky!!) (Time or Timing ?? Market )

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Call from a ULIP company

Of late, the calls that I get from ULIP companies have increased by leaps and bounds.

All of them promise very high returns on the these insurance and investment plans. The Best way to tackle these guys is to ask for a letter in writing that I would get these returns.

I think IRDA ( Insurance regulators) need to take much more sterner action against these companies and agents who miss sell through false promises and propaganda.

Unless the buyer's get aware of what they are buying and what they are paying...these extortionists like Investment agents and real estate agents are going to take innocent investors for a toss..

With respect to Investments, Innocence of the investors is not definitely a bliss for himself.

KNOWLEDGE IS POWER for an investor.

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ULIP Vs Mutual Funds

Was going through an interesting article on ULIP VS MF. It stated five reasons why ULIPS donot score over MFs . They are

Higher Agent Commissions
Costlier exit options:
No Track record:
Larger Commitments:
Insurance versus Investment:

For more details

http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/Analysis/Five_key_reasons_why_mutual_fund_schemes_score_over_insurance_ULIPs/articleshow/2190289.cms

The most mis-sold financial product

We strongly feel that ULIP is the most mis-sold financial product in the market. We have seen a lot of individuals who have ‘invested’ in ULIPs without even knowing the ABC of what it is. Most of the folks who sell ULIPs are even unaware of what they sell. The thing often repeated by the person’s marketing these ULIPs are ‘Growth fund of our ULIP has yielded returns above 40% for the last three years consistently’. People get sold immediately and later grieve over it.

One of the oldest player in Insurance industry sold a ULIP plan and made news before a couple of months. Thanks to its agents who mis-sold it effectively. IRDA (Insurance regulator) also made a public statement on this one condemning such practices. Such things wouldn't help unless the buyer is AWARE and AWAKE.

We went through the brochure of a ULIP plan and found out the following charges being levied.

1) Premium allocation rate for the first year was 40%.(i.e. , if I invest 10000, only 4000 will be invested…guess what happens to Rs 6000 !!!.The premium allocation however gets better over a period of time)
2) Fund management charge. (Around 1% p.a)
3) Surrender charge for early surrenders.
4) Policy administration charges. (Rs 20 per month!!)
5) Mortality charges (for getting you insured)
6) Switching charge ( growth to balanced switch ,etc) Rs 100 for each extra switch
7) Partial withdrawal charge.
8) Revival charge (Rs 250)
9) Miscellaneous charge on top of it. ( charges for any alteration in the contract!!)

And nobody tells that the 40% plus return has been because of the phenomenal stock market performance and the same can’t be expected year on year.

The best thing is to have a term insurance policy for covering your life and invest through SIPs in mutual funds, if you want to get the benefit of equity (where the cost of investment is only the entry load and fund management cost, which may add up to 5% p.a on the higher end).
When a ULIP sales person calls you next time, be ready with the right questions.

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Nice article on ULIP

In the recent past, there was an article published in rediff on ULIP. ( Unit Liniked Insurance Plan - Insurance plan which has units that can be invested either in equity, debt or a combination of both)

The author had reasonably given a fair idea of what a ULIP can do for you(!!) based on your level of awareness.

The experiences of various people put up by way of comments was also extremely educative.

I would say , it is a MUST for everyone who wants to invest in ULIP to go through this article and especially the comments by various people.

http://www.rediff.com/money/2007/feb/02perfin.htm

Do not club insurance and investments

Most of us tend to club insurance with investment. Many of us invest in cash back policies when going for insurance . This is not a great idea.

Always prefer "term" insurance policies only. Use insurance only for covering risk.

What is term insurance?
When you put your money somewhere, you expect something back. With a term life insurance, that is not the case. If you die, your nominee gets something. If you live, no one gets anything.

Advantages:-

Premium for term policies are lot lesser than non-term policies.

You don't incur a hefty commission cost on the higher premium paid for non-term policy.

Insurance is used only to cover risk and you can decide other modes for investing your money.

if, term-policy is not advised by any of your broker/LIC agent , then he is more keen on his commission than your personal interest.


Like all financial dealings, "UNDERSTAND" the product before you invest and always have in mind that "Insurance and investments must be mutually exclusive".

What about insurance for retirement planning , child's future planning , etc ..?lets discuss that in the forthcoming articles.



Please write to ideas.money@gmail.com if you have any questions


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