A Guide to Indian Investors

Sunday, 5 June 2016

Why Term Insurance Policy is required till 60 years

There are so many term insurance plans in India right now which offers insurance for age up to 75 - 80 years, but the question is "Is it not good to have a look at why should you buy term insurance up to 60 years or retirement year which ever is earlier"

If you are buying a Term Insurance Policy you should read this article and I promise you it is going to be worth reading.

Imagine you are a 35 years old and want to buy a term insurance but before that you should check how much insurance do i need, I have seen many companies providing life coverage up-till 75 years of age which may look good but in reality it is not because the real fact is you end up paying more than the sum insured.

I would not recommend term insurance policy for a period that covers you beyond age 60 (65 in some cases) under any condition. I have mentioned the points below

Income Contribution

Insurance is a risk mitigation tool for your income whether generated through salary or business. If I had to ask you how many years you are going to work, your answer would be around 60 or 65 which is the normal retirement age. This indicates that your term insurance should be up-till the time you are going to retire. In such a case, you should have term insurance up till your age 60

Must Read : Why Real Estate is and always was a Dull Investment

Death beyond 60 Years

Another question comes up here is what if you live longer than 60 years?

Since you started earning from your first job or business whatever the case may be, you have to accumulate wealth by the time of 60 which would in turn should meet the expenses towards your post retirement. After 60 years you would be having income from wealth generated so where is the question of protecting yourself from death beyond 60 years

Term Insurance policy when bought to insure your liabilities (home and auto loans, etc.)

Out of liabilities (loans) like home loan, car and personal loans etc. home loans has the longest tenure may be 20 years or 30 years depending on what you select. Banks mostly now a day includes home loan insurance as they have tie-ups with insurance companies and in event of death the proceeds of the home loan insurance policy payoff the balance amount to the housing or finance company who provided you the loan. Most banks provides you a loan which is capped by your retirement age, this is because once you retire there is no income hence no question of EMI Liabilities. It simply means your liabilities end as soon as you reach your retirement age

A policy like term insurance is not at all worth when chosen for a longer period:

Let me explain you with calculations below

For our Example I have taken a case where you are male, 35 years of age , nonsmoker and life cover of Rs 1 Crore.

For a term insurance of 25 year I mean cover till age 60 premium is Rs 12878/-

Life Insurance cover of Rs 1 Crore is constant throughout the policy period. So whether you die at 45 or 55 or 65, you get the same – Rs. 1 Crore. It is important to understand with time, the value of money reduces drastically.

Premium paid at age 35 is Rs.12878.
(premium amount from www.policybazaar.com for ICICI Prudential Life Insurance)
By age 36, you have actually paid 12878 x 2 = 25,756. But since you paid premium more than a year ago, the actual value is 12878 x (1+12%) + 12878 = 27301. This is because of the opportunity cost, the cost of investing in a particular product and therefore forgoing the potential benefits of other product, in our case it would be investing in Mutual Funds with a return of 12% per annum.

Must Read : Top 3 Large Cap Fund to Invest in 2016 via SIP

By age 37, you have paid 12878 + 12878 x (1+12%) + 12878 x (1+12%) x (1+12%) = 43456, i.e. returns for 2 years on 1st premium, for 1 year or 2nd premium, … and so on. This is explained in the image below

Term Insurance for 60 Years

From the above image it is clearly visible that at the age of 60 your premium paid @12% is worth Rs 1717074
Still a good investment if you die (but who likes to die) and if you don't die,you know how much it is worth now,but why take risk ?

Good, Now let us take a look at below table where you have taken a risk cover of 75 years and premium paid is for 40 years with a premium amount of Rs 19,027

Term Insurance For 75 Years

With the same calculation, by the age 60 you would have paid a premium of Rs 2536944,do you really think it is worth?
Well, at the age of 72 your investment in premium amount becomes worth Rs 10343052 for a life cover of Rs 1 Crore, If you die after 72 years your nominee will get Rs 1 Crore in-spite of paying more premium.

Longer the tenure, Lesser is the actual worth of your term insurance policy! As simple as that and after your earning years there seems no logical reason to have a term policy, it is just a bet on your death!!!

Must Read : Best 3 Midcap Churning Money For Investors

Note : The above may not work if
a) your premium is too low
b) Being a risk averse person you are not interested in equity and your rate of interest is around 8% or may be even low
c) both a & b
But the fact remains that after your retirement age it is just a bet on your death!!!

I would suggest you to take a term policy for 75 years because i have seen many people who have lost their fortunes due to bad phases in life,you can anytime stop the premium at the age of 60 if you have accumulated wealth and if something goes wrong then let it continue up to 75 years.

So be a smart and informed investor – check how much insurance do you need and why you should in invest in Mutual Funds versus ULIP after analyzing the above two you can invest money via SIP in best 3 equity mutual funds in India for Retirement

PPS: If you think this page and blog will be useful to any of your friends please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left

Mutual Funds & Insurance Related Articles :-

Benefits of Systematic Investment Plan
What is Systematic Transfer Plan and How it works ?
Advantages of Equity Linked Savings Schemes
Top 3 Mutual Funds to Invest in 2016 for Long Term
How Much Insurance Do I Need ?
How to Select Mutual Fund for Portfolio ?
How to Budget your money with 40/30/30 Rule ?
Mutual Fund Versus ULIP
Why Term Insurance Policy is required till 60 years ?

Equities related article :

Market Order vs Limit Order vs Stop loss Order vs Bracket Order

Risk Management in Broking House for You as Investor
Understand Your Daily Margin Statement
What is Power of Attorney in Online Trading?

Futures & Options related article :

Futures Trading Terminologies
What is Futures Trading?
What is Derivatives ?
What are Forward Contracts ?
Advantages & Disadvantages of Futures Trading ?
Guide to Options Trading
Long Call - Bullish Trading Strategies
Long Put
Short Call - Bearish Strategies
Sell Put - Bullish Strategies
Buy Straddle Option
Short Straddle Option
Synthetic Long Call
Synthetic Long Put
Synthetic Long Futures
Synthetic Long Futures

Synthetic Short Call

Bull Call Spread

Bull Put Spread

In case of any further explanation you can reach me on vipuls1979@gmail.com or tweet me @vipuls1979

Disclaimer :-
The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.

Thursday, 2 June 2016

Equity Linked Savings Schemes - ELSS- Tax Savings Instruments

What are Equity Linked Savings Schemes in Mutual Funds?

Equity-linked saving schemes are open ended equity mutual funds which are eligible for tax benefits under Section 80C. Below are some of the features that will help you make better investment decisions.

Taking a walk through the Equity linked savings:

Well, to simply define Equity linked savings scheme is a mutual fund scheme that invests more than 65% primarily in domestic equity markets. ELSS offers a tax deduction of up to 1.5 lakhs to the investors under the section 80C of the Income Tax Act, 1961. Like any other equity schemes, this investment scheme is suitable for the people who have got an appetite for medium to high risk and aim to generate capital appreciation over the medium to long-term. In simple words, ELSS helps in dual advantage of tax savings as well as growth of wealth but the only problem is it comes with a lock period of 3 years.

Features of ELSS, making it worth:

When we talk about ELSS, there are many distinguishing features which actually make it a profit making investment.
The features are as follows:

It is a diversified equity mutual fund which has a majority of the corpus invested in equities.
Automatic long term investment since lock- in period is 3 years from respective date of investment
Tax benefits under Section 80C which has got a potential saving of 46,350 at the time of investment if you fall in highest tax bracket
Dividends declared are tax-free.
No long-term capital gains tax on the withdrawal
ELSS has got the potential for much higher returns compared to other tax saving instruments.
Available in both SIP and lump sum investment options.

Advantages of Equity Linked Savings Schemes
Looking at the trend of ELSS, the tax saving options in ELSS is simply turning out advantageous. This is true because it is one of the best taxes saving instrument one has got in its hand. The advantages of ELSS are as:

As compared to the traditional tax, this is indeed one of the best methods of growing your money.
ELSS is an investment in equity markets and investing in this for a long-term can give you better returns compared to other asset classes over the long term.
It has got the shortest lock period.

· ELSS are subject to market risk and volatility of Stock Market and because of this it has the highest earning potential

Disadvantages of Equity Linked Savings Schemes
Where there are advantages, there are disadvantages too. So, you need to deal with all of them. ELSS too has got disadvantages and they are as follows:

Money invested in ELSS are directly related to stock market, risk is involved.
Subsequent investment is also locked for 3 years. For Example you invested via SIP on 01/06/2016 & 01/07/2016 then on 01/06/2019 your units purchased on 01/06/2016 will be available for redemption
And lastly, you should consider that you can’t reduce the impact of market fall, as you can’t switch or redeem investment before 3 years

How can one invest in ELSS?

The investment in the ELSS is just similar to any other mutual fund investment scheme. So, you can buy this mutual fund unit through the mutual fund distributor. In many cases, the stock broker also serves as a mutual fund distributor. The are independent mutual fund portals which provides online services for buying and selling of mutual funds schemes. You can save your investment with the help of the online and offline mode.

Compared to regular equity schemes, ELSS funds have a lower investment threshold of Rs 1000. You can also invest a large amount at one go, but the best way to invest in equity-oriented instruments is through SIPs.

For example, if you have Rs 30,000 to invest in ELSS funds this year, split them into three installments between now and 31 March. This will lower the risk by averaging out your cost of purchase. To start an SIP, submit post-dated cheques or give an ECS mandate to your bank.

PPS: If you think this page and blog will be useful to any of your friends please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left

Mutual Funds & Insurance Related Articles :-

Benefits of Systematic Investment Plan
What is Systematic Transfer Plan and How it works ?
Advantages of Equity Linked Savings Schemes
Top 3 Mutual Funds to Invest in 2016 for Long Term
How Much Insurance Do I Need ?
How to Select Mutual Fund for Portfolio ?
How to Budget your money with 40/30/30 Rule ?
Mutual Fund Versus ULIP
Why Term Insurance Policy is required till 60 years ?

Equities related article :

Market Order vs Limit Order vs Stop loss Order vs Bracket Order

Risk Management in Broking House for You as Investor

Understand Your Daily Margin Statement

What is Power of Attorney in Online Trading?

Futures & Options related article :

Futures Trading Terminologies

What is Futures Trading?

What is Derivatives ?

What are Forward Contracts ?

Advantages & Disadvantages of Futures Trading ?

Guide to Options Trading

Long Call - Bullish Trading Strategies

Long Put

Short Call - Bearish Strategies

Sell Put - Bullish Strategies

Buy Straddle Option

Short Straddle Option

Synthetic Long Call

Synthetic Long Put

Synthetic Long Futures

Synthetic Short Call

Bull Call Spread

Bull Put Spread

In case of any further explanation you can reach me on vipuls1979@gmail.com or tweet me @vipuls1979

Disclaimer :-

The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.

Benefits of Systematic Investment Plans (SIP)

SIP IS A NEW AGE MIRACLE FOR YOUR SAVINGS!!!

SIP is a nonstop solution about averaging out your cost of investing and benefiting from power of compounding. You simply invest in the mutual funds monthly or quarterly over a period of time.

Imagine you are not feeling well, so you tried a medicine yourself but even after that you aren't felling better and it became worse.
So you went to a doctor , He gave you a medicine and after a day you were alright.
The logic is you can't be a doctor yourself same way when it comes to investing in Mutual Funds, there are fund managers who do in depth research in stocks and buy the stock in their portfolio , so your investments doesn't go ill.

Well, when it comes to SIP, the only thing that defines SIP is that it is a smart and hassle free mode for investing money in mutual funds. In more simple words, it is a method of investing a fixed regularly, sum, in a mutual fund scheme managed by professionals. SIP allows you to buy units on a given date each month.

It is similar like EMI but the difference is, in EMI you have purchased the product may be a Home loan or car loan and then paying the money back to the lender and in SIP you have a Goal which could be near term goal like purchasing a car or world tour or a long term goal which could be buying a dream home, child’s education or retirement planning.

SIP is a planned approach towards the investments and helps you in dealing with the terms of savings and accumulating wealth for your future.

How does SIP functions:

SIP is an easy going solution for all your problems. It is a flexible and also easy investment plan that works in accordance with your goals. Your money is auto-debited from your bank account as the case in EMI, It is invested in the mutual fund scheme. In return, you are allocated a certain number of units that is based on the NAV rates. Thus, you can call this as a vehicle which has so much to offer in a disciplined manner.

When you deal with SIP, the very first thing that you should know is the different NAV rates and the investor benefits from the Rupee-Cost Averaging and the Power of Compounding.

Rupee-cost averaging: There are investors which remain skeptical about when is the best time to invest. The Rupee-cost averaging actually allows you in opting out the guessing game. So, if you are a regular investor, your money will get more units when the price is low and lesser when the price is high.

Below is an example of SBI Bluechip Fund SIP from 01/06/2015 to 01/06/2016

From the above image, An investor would have accumulated units 461.93 with an average price of 28.1725 and the current NAV price as on 01/06/2016 is 29.746
That average price is rupee averaging cost because when stock market was down you got more units since NAV was low and vice -e-versa .
Profit = NAV Price (As on Date) – Average Price X No of Units
29.746 – 28.1725 X 461.93 = 740.57

Power of compounding:
Albert Einstein quoted , "The most powerful force in the universe is compound interest." Compound returns offer one of the most powerful ways to build wealth. Compounding means earning interest on interest.. Mutual funds offer a similar way to capture compound returns.

Let us take an example
With simple interest, Interest is applicable the principal amount (that is, the amount you initially invested); with compounding, you earn interest on the principal and also on earned interest on the interest. To understand better, let's take an example.
Say you've invested Rs.10, 000 for 10 years and it makes 10% interest per year.

In case of simple interest, you will make Rs. 1000/- per year. At the end of the 10th year you will get back your principal of Rs. 10,000 and you would have accumulated total interest of Rs. 10,000.
In case of compound interest, in the first year, you make Rs.1, 000 in interest. But in the second year, you'll make Rs.1, 100 (not only does your initial investment of Rs.10,000 accrue interest but so does the additional Rs.1,000 you made in the first year). In the tenth year, you'll make Rs. 2,358. In 10 years, the power of compounding will grow your total investment of Rs. 10,000 to Rs. 27,070 as compared to only Rs. 20,000 in case of simple interest.
Now that you've understood the power of compounding, let's see how you can make that power work for you. Compounding will work for you if you:
This is very simple, the sooner you start investing, the more time your money has to grow. For example, if you started investing Rs. 10000 a month on your 40th birthday, in 20 years time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach 60.

How to use IRR in calculating the returns from SIP:
SIP involves the usage of cash at different time periods and then you actually get a large flow of cash at the end. In this way, you can actually use the IRR for the calculation of the return percentage from SIP.

You should calculate your returns in SIP using IRR which is an inbuilt formula in excel
Check the below image where in Investment(s) are made in 1000, it has been marked as – (negative) as it is the outflow per month and return is 13740

Why is SIP a smart choice ?
When it comes to get acquainted with SIP, the only first thing that comes to the mind is that it helps you in inculcating your financial goal. It helps you put your financial investment on the top priority and helps you save for your future.

The key benefits which make SIP an essential tool are as follows:

Disciplined saving: This is a key to successful saving. You need to keep an assurance that you are saving every month with surplus cash you have.

Flexibility: There is flexibility in everything. You simply need to consider that while you are planning with SIP, there is no compulsion of continuing with the same plan. If you want to discontinue the plan and switch to another, then that’s available.

Long-Term Gains: When you are dealing with long-term gains, your SIP helps you in reaching your objectives and due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.

Convenience: The SIP deals in providing a hassle-free mode of investment. You can also issue a standing instruction for your bank to actually facilitate auto-debits from your bank account.

Planning through SIP:

There are many reasons for choosing SIP but before that, you need to have a goal for what reason sip is started, it may be because of Short Term Goal or a Long term Goal.

Firstly, you need to list down your dreams and goals and work out a plan to achieve them through SIP

Secondly, you need to make sure the amount required for monthly/quarterly SIP is available to achieve your goals

There are so many schemes in Mutual Funds but before obtaining a scheme check your risk profile

Then there is a need to identify the scheme(s) in which you would like to invest and complete the formalities for SIP investment including forms and cheques

After this come the investment strategies for the long term which would provide you dual benefits of power of compounding and rupee-cost averaging work through different market cycles

And lastly comes the diversifying of your investments for your dreams through multiple SIPs in different schemes to optimize returns as per your needs.

Hence, the SIP is all about bringing discipline in the investment process. Hence, if one is learning to invest properly, the savings too will turn out to be very fruitful

So be a smart and informed investor – check how much insurance do you need and why you should in invest in Mutual Funds versus ULIP after analyzing the above two you can invest money via SIP in best 3 equity mutual funds in India for Retirement

PPS: If you think this page and blog will be useful to any of your friends please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left

Mutual Funds & Insurance Related Articles :-

Benefits of Systematic Investment Plan
What is Systematic Investment Plan and How it works ?
Advantages of Equity Linked Savings Schemes
Top 3 Mutual Funds to Invest in 2016 for Long Term
How Much Insurance Do I Need ?
How to Select Mutual Fund for Portfolio ?
How to Budget your money with 40/30/30 Rule ?
Mutual Fund Versus ULIP
Why Term Insurance Policy is required till 60 years ?

Equities related article :

Market Order vs Limit Order vs Stop loss Order vs Bracket Order

Risk Management in Broking House for You as Investor
Understand Your Daily Margin Statement
What is Power of Attorney in Online Trading?

Futures & Options related article :

Synthetic Short Call

Bull Call Spread

Monday, 30 May 2016

Top 3 Equity Mutual Funds for SIP To Invest In 2016

Mutual Funds investing via SIP is one the best wealth creation tool but only and if you remain invested during turbulent times of stock market. I am personally a big fan of mutual funds because it is has always given me superior returns. It is not just that i only give recommendation but i do remain invested in this scheme.

I have selected on 3 funds rather than 10 -15 funds which actually confuse the investor i mean lesser the better

Below are the 3 best equity mutual funds (Large Cap) as on 30/05/2016 handpicked for you which are based on following parameters
1-> Funds having CRISIL ratings of 4 Star & 5 Star
2-> Funds having Value Research Ratings of 4 Star & 5 Star
3-> Superior returns compared to benchmark funds for last 10 years (where available) in SIP & Lump Sum investment (Proof below)
4-> Funds with positive Alpha
5-> Funds providing a return of more than 12% CAGR

Must Read : Why Real Estate is and always was a Dull Investment

#1 : SBI Bluechip Fund

Objective of the fund is to provide long term wealth while investing more than 80% in Equity & 20% in Debt related instruments

Materials and Industrial are some places fund is currently overweight compared to index.Fund Manager has taken that little bit of a contra approach in the sense where the other fund would probably be more towards financial and technology companies

SBI Bluechip Fund has outperformed its benchmark index BSE 100 Indices from last 10 years


Image Source : freefincalc.com

From the above screen we can analyze

If you had invested Rs 1000 in SIP for last 10 years then you would have accumulated Rs 245940 for an investment of Rs 120000 with a Compounded Annual Growth Rate (CAGR) of 13.8% and absolute return of 104.5% double the amount with a mere Rs 1000 a Month

Compared to Benchmark Index of BSE 100 your SIP invested value would be Rs 190269 vis a vis Rs 245940 generated from fund

Year after Year SBI Bluechip Fund has outperformed BSE 100 Benchmark

Must Read : Best 3 Midcap Churning Money For Investors

#2 : Birla Sun Life Frontline Equity

If I had to look at the consistency of returns; over the last 10 years it is been a quartile one or two performer throughout. So an investor like you getting into this fund would be very comfortable about the consistent track record of returns.

Let us take a closer look at the fund returns compared to Benchmark Index NIFTY 50

Best-Equity-Mutual-Funds-for-SIP-in-India

Image Source : freefincalc.com

If you had invested Rs 1000 in SIP for last 10 years then you accumulated wealth would Rs 253899 for an investment of Rs 120000 with a Compounded Annual Growth Rate (CAGR) of 14.4% and absolute return of 111.5825% infact double the amount with a mere Rs 1000 a Month

Compared to Benchmark Index of Nifty 50 your SIP invested value would be Rs 189384 vis a vis Rs 253899 generated from fund

Year after Year Birla SL Frontline Equity Fund has outperformed Nifty 50

#3 : ICICI Prudential Top 100 Fund

ICICI Prudential Top 100 contains a slightly different large-cap strategy that is aggressive in comparison to different funds from the AMC’s however what i might call it a contra strategy on the large-cap side. Therefore where as the portfolio would be holding regular sectors, the fund manager is truly at now overweight in sectors like materials, industrial and energy, which is what this fund is making an attempt to derive value from.

Let us have a closer look at the returns from Top 100 Fund

Image Source : freefincalc.com

If you had invested Rs 1000 in SIP for last 10 years then you accumulated wealth would Rs 233661 for an investment of Rs 120000 with a Compounded Annual Growth Rate (CAGR) of 12.8% and absolute return of 94.7175% almost double the amount with a mere Rs 1000 a Month