Plan Your Investments

Cap on ULIP charges: How it affects YOU

2011-05-13T19:29:00.000-07:00

AFTER much heartburn over high fees and charges on ULIPs (unit linked insurance plans), there's finally some good news for investors! The insurance regulatory body, the IRDA, has implemented well defined changes that can make a significant impact for investors looking to invest in ULIPs. According to the norms, there will be a cap on overall charges that the insurance companies can impose upon the ULIPs.

The norm
For all ULIPs which have a maturity of up to 10 years, the difference between the gross yield and net yield would have to be maintained at 300 basis points or 3 per cent. Out of this, the investment management fee would not be more than 1.5 per cent. For ULIPs with a tenure longer than 10 years, the overall cap would be 2.25 per cent with an investment management fee cap of 1.25 per cent.

Remember that charges here would include allocation charge, administration charge, mortality charge and all such charges by any other name.

You will notice that the cap on overall charges become lower as the insurance term increases. This move is expected to encourage consumers to opt for long term insurance and investment rather than a short term plan, which is low in utility. This is expected to come into effect by October 1, 2009.

The jargon
The jargon here are the words 'gross yield' and 'net yield'. So let us simplify them:
Gross yield: This is the yield generated by the ULIP before all charges are deducted
Net yield: This is the yield generated by the ULIP after all charges are deducted

Illustration
Let us take an example where the annual premium on a ULIP is Rs 20,000 and the term is 10 years. Let us assume that the charges are as follows:
- Allocation charges
First year allocation charge: 25 per cent of premium
Second year allocation charge: 15 per cent of premium
Third year allocation charge: 5 per cent of premium
Fourth year onwards allocation charge: 3 per cent of premium
- Administration charges: Rs 30 per month
- Fund management charge: 1.5 per cent of fund value

Also let us assume that the fund grows at a rate of 10 per cent per annum. For the ease of calculation we have ignored mortality charges.

We need to arrive at two numbers, the gross yield and the net yield.
Gross yield: If the fund grows at 10 per cent every year for 10 years, the fund value at the end of 10 years without taking the impact of charges would be Rs 3.3 lakh. That would translate to an yield of 11.98 per cent.
Net yield: If the fund grows at 10 per cent every year for 10 years, the fund value at the end of 10 years after taking the impact of charges would be Rs 2.7 lakh. That would translate to an yield of 8.07 per cent.
Difference: The difference between gross yield and net yield is 3.91 per cent.

Next page: Find out how much you save because of the new norms

Now, post the new norms, this difference cannot be more than 3 per cent. We did a little bit of extrapolation and found that the charges need to be drastically reduced if the yield criteria must be met. The new charges would have to be:
- Allocation charges
First year allocation charge: 15 per cent of premium
Second year allocation charge: 10 per cent of premium
Third year onwards allocation charge: 1 per cent of premium
- Administration charges: Rs 26 per month
- Fund management charge: 1.5 per cent of fund value

By following these charges, at the end of 10 years, the fund value would be Rs 2.8 lakh instead of the current Rs 2.7 lakh, a saving of Rs 10,000. Of course, this might appear like a small amount, but the difference will increase if the existing charges are far more than what we have assumed above.

Loose ends
Having done this calculation, there are still some doubts. What happens if the ULIP gives only 3 per cent returns over the period of 10 years? The company would have already deducted charges, so how will they compensate the policyholder? Experts say that we would need to wait for clarity on these issues.

Tips for existing investors
Abitha Deepak, Head of Content & Research at BankBazaar.com offers these tips:
- Existing investors who have just started out should try and bide time until an opportune moment like say at the end of 3 or 5 year term and opt out of the policy factoring in how much money they are likely to lose. They can then invest the money in a brand new ULIP policy and benefit.
- Those who are well into their term with a few years left need not worry as the charges will anyways dwindle to around 3 per cent then.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

Source:-http://www.moneycontrol.com/

Stay secure: Plan for contingencies before planning for future goals

2011-05-13T19:25:00.000-07:00

February has always been a month of great excitement in India, especially with investors who eagerly await the annual budget. As the year comes to a close, it is always good to know how well did you did in the year and what you plan to do going forward.

But as investors were busy deciphering the path laid down by the budget (which was hardly anything), we saw a mammoth earth quake shake the world and pretty much destroy the entire eastern part of Japan. The earthquake has not only caused major loss of life and property but also has had a major impact on global financial markets. For the first time in history, the G7 countries had to intervene in the forex market to ensure stability. Japan infused record funds into its economy. Indian markets have not been spared either.

While we all wait for the perfect time to start planning for our future goals, we ignore or rather delay planning for contingencies. No one likes to plan for the worst. The biggest emergency that can come today to a family is any adverse impact on the health of the main bread winner or other members of the family. Spread of lifestyle diseases, higher chances of occurrence of heart diseases and diabetes amongst youngsters, spread of cancer and other diseases has not only meant greater hardships mentally but also a big blow financially.

Few recent media findings:

-   The International Diabetes Federation in October 2009 ranked India as the country with the most diabetics worldwide – Bloomberg report.
-   Average blood pressure falls globally, shoots up in India. From 1980-2008, the number of Indians suffering from high BP rose by 87 million, while the percentage of population suffering from the ailment rose from 21% to 26% – Times of India report.

The first and most important points to look at are:

-   Health insurance is a must for everyone in a family.
-   It is important to have a separate cover outside the one provided by your employer.
-   Sum assured of Rs 1 lakh to 2 lakh may no longer be sufficient, considering the rising cost of health services.

Assess your specific requirements and ensure that you don’t wait for perfection, get a health policy for yourself and your family.

Be prepared for the emergency and buying a health policy is the least we can do. The next step is to start planning for your future goals. But remember – planning for contingencies/ emergencies is the first step to a peaceful life.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

Top Mutual Funds in India

2011-05-10T20:49:00.000-07:00

Scheme Name	Nature	1 M %	6 M %	1 Y %	3 Y %
HDFC Long Term Equity Fu	Equity	-2.30	-8.74	15.95	10.45
ICICI Prudential Banking	Debt	0.82	4.26	7.58	-
HDFC Balanced Fund - Gro	Balanced	-0.47	-4.16	16.64	16.01
HDFC MIP - LTP - Growth	MIP	-0.43	-0.49	7.75	11.99
Escorts Liquid Plan - Gr	Liquid	0.83	4.92	8.32	7.83
HDFC Long Term Advantag	ELSS	-2.45	-11.05	13.97	10.48
SBI Gold ETS	ETF	4.64	8.38	25.44	-
Religare Gilt Fund - Lon	Gilt	0.33	2.02	13.71	5.50
HDFC Index Fund - Sensex	Index	-4.17	-10.46	10.76	8.71
*Note:- Returns calculated for less than 1 year are Absolute returns and returns calculated for more than 1 year are compounded annualized.

Source

US jobless claims rise, unit labor costs dip

2010-11-05T05:44:00.000-07:00

New US claims for unemployment benefits rose more than expected last week while unit labor costs fell in the third quarter, underlining the persistent weakness in the jobs market.

Although other data on Thursday showed nonfarm productivity rebounded at a much stronger-than-expected 1.9% annual rate in the third quarter, the general tone remained consistent with a sluggish economy.

Initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 457,000, the Labor Department said, reversing the prior week's decline.

Analysts polled by Reuters had forecast claims rising to 443,000 from the previously reported 434,000. The government revised the prior week's figure up to 437,000.

In a second report, the department said unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, fell at a 0.1% rate after rising a revised 1.3% in the second quarter.

"This suggests the labor market is not improving as much as we hoped .... and suggests there hasn't been that much of a change between September and October labor market conditions," said Zach Pandl, a US economist at Nomura Securities International in New York.

Concerns about the lackluster recovery and stubbornly high unemployment prompted the Federal Reserve on Wednesday to announce it would buy an additional USD 600 billion worth of government bonds by the middle of next year.

The second round of asset purchases is intended to push interest rates further down, thereby stimulating domestic demand, and prevent the current low inflation environment from spiraling into a damaging bout of deflation.

US stock index futures trimmed gains on the claims report, while Treasury debt prices extended gains. The US dollar extended losses versus the yen.

The claims data has little influence on October's employment report due on Friday as it falls outside the survey period. The government is expected to report that nonfarm payrolls increased 60,000 last month, which would be the first expansion since May, after dropping 95,000 in September.

A Labor Department official said there was nothing unusual in the claims data and described the report as fairly clean.

The four-week average of new jobless claims, considered a better measure of underlying labor market trends, rose 2,000 to 456,000.

The rise in productivity in the third quarter, which exceeded economists expectations for a 1% growth pace, implied little need for businesses to step up hiring.

However, economists say at some point firms will no longer be able to meet demand by making their operations more efficient and will need to increase payrolls.

"The big picture is that firms are trying to squeeze every ounce out of the workers they have and this is one reason they feel no need to hire," said Cary Leahey an economist at Decision Economics in New York.

During the third quarter, hours worked increased at a slower 1.1% rate after a 3.5% pace in the second quarter

Top Performing Mutual Funds (based on one year returns)

2010-11-05T05:41:00.000-07:00

Top Performing Funds (based on one year returns)

Category	Top Performer	3 mnt	6 mnt	1 yr
Equity Diversified	HSBC Small Cap Fund (G)	26.50	31.90	74.20
Equity Tax Saving	Reliance Tax Saver (ELSS) (G)	15.50	25.90	49.30
Equity Index	Kotak PSU Bank ETF	30.70	49.70	69.40
Equity - Banking	Reliance Banking Fund (G)	30.40	46.90	73.50
Equity - FMCG	SBI Magnum FMCG Fund	9.40	34.00	59.40
Equity - MNC	Birla Sun Life MNC Fund (G)	10.50	21.10	45.10
Equity Others	UTI Transport & Logistics (G)	14.10	25.90	50.70
Equity - Pharma	Reliance Pharma Fund (G)	8.70	15.30	55.20
Equity - Technology	ICICI Pru Tech. Fund (G)	12.90	23.60	51.80
Balanced	ICICI Pru CCP - Gift Plan	8.00	16.20	46.30
Monthly Income Plan	HDFC MIP - LTP (G)	5.10	8.30	14.70
Hybrid	ING Opti 5 STAR MM FoF (G)	12.20	21.50	38.70
Debt Speciality	UTI CCP Advantage Fund (G)	12.90	19.30	31.60
Debt - Short Term	BNP Paribas Bond Fund -RP (G)	1.60	3.10	9.10
Debt - Long Term	Baroda Pioneer Gilt Fund (G)	1.80	3.20	16.30
Debt - Floating Rate	Birla SL FRF - LTP - RP (G)	1.50	2.80	6.30
Money Market	Escorts Liquid Plan (G)	1.80	3.20	5.30
Money Market	JM Money Manager Fund -RP (G)	1.60	3.00	5.30
Money Market	LIC MF Income Plus Fund (G)	1.40	2.70	5.30
Gold	AIG World Gold Fund (G)	14.10	18.20	24.10

Source- www.moneycontrol.com

Life Stage Planner

2010-11-05T05:12:00.000-07:00

Young And Single

You are a single energetic twenty-something and have just kick-started your career. With the newly acquired financial independence, most of you feel more inclined to shop, travel and enjoy life. However, it is important to note that this is also the best time to take higher risks as there are least financial responsibilities.

Your Insurance Needs

Saving for future expenses – Whether for your home down payment or for your marriage, you need a savings plan to build a corpus for your future needs.
Tax Planning – Now that you are earning, you wouldn’t want your hard earned money to just flow out of your hands. Tax planning is an important aspect of financial planning and you should draw the maximum tax benefits that investment products offer.
Securing your parent’s health – Given their age, your parents would be vulnerable to ill health and therefore you need to plan for their medical needs as well.

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Just Married

Newly married, you are looking forward to building a whole new world with your life partner. Marriage brings additional responsibilities and thus additional expenses, which may burn a hole in your pocket unless you plan your finances wisely.

Your Needs

Saving for future needs – This is the stage in life where you need to set aside a regular savings for your family’s future needs. This may be for immediate needs such as car or vacation or for buying your dream house.
Life Cover – With marriage comes the responsibility of securing your partners life. A good life insurance plan can ensure that your partner is financially secure, no matter what.
Secure your health – With time and age on your side, it would be ideal to provide a cushion for any health contingencies that you or your family may face in the future.

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Married With Children

As you step into parenthood, your dreams increase manifold – it’s not just about you anymore, but about your little ones too. Take that extra step to ensure that no matter what the circumstances maybe, you don’t have to compromise on your dreams for your bundles of joy.

Your Needs

Child’s education & future expenses – Saving for your child’s education assumes utmost importance, at this stage. In the long-term, you may also want to set aside funds for his/her marriage expenses.
Safeguard family from loan liabilities – If you have a home loan, you may want to secure your family against the stress of loan repayment, in the unfortunate event of your death.
Retirement planning – You may now start feeling the importance of building a retirement corpus to enable you to continue the lifestyle you are used to leading even after retirement.

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Married With Grown Up Children

This is a stage when you have a well established career and draw a decent income. As your children are growing, so are your expenses. You may also have to spend on maintaining the house, for instance renovating the house, replacing old furniture, etc.

Your Needs

Child’s higher education / marriage – Your main goal, at this stage, is to fund your child’s higher education. With your children’s marriages around the corner, you may want to rearrange your investment plan to fund these joyous events.
Retirement planning – Retirement seems to be on the horizon, so planning for your golden years is a priority.
Health contingencies –Old age brings with itself a wide range of health issues. You would surely like to be well equipped to face any eventuality

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Nearing Retirement

Your children are most probably independent and well settled by now. At this stage, your income is at its peak. You have substantial funds at your disposal to set aside for your retirement.

Your Needs

Retirement planning – Your goal at this stage is to plan for your retirement. It is important to understand your true net worth and how you wish to spend your retired years. This is because even if you have not yet focused on retirement, investing wisely in the next 10-12 years can help significantly.
Investments – At this age you might also have substantial savings which can be invested for stable growth. You should consider investing in tax efficient instruments.
Regular income post retirement – You should focus on investing in those products that provide capital preservation and generate regular income to meet your post-retirement needs.

HDFC Unit Linked Plans

2007-12-20T07:00:00.000-08:00

HDFC UNIT LINKED PENSION

Today, you are busy climbing the ladder of success and realizing your dreams. Today, time is with you. Just take a moment and think. Will you be able to continue at the same pace? Will your income be the same forever? Will you be able to live life on your own terms even after you retire?
The HDFC Unit Linked Pension is an insurance policy that is designed to provide a retirement income for life with the freedom to maximize your investment returns. Stride into your golden years of retirement with dignity and pride.

The HDFC Unit Linked Pension gives you:-
An outstanding investment opportunity by providing a choice of thoroughly researched and selected investments.
A post retirement income for life.
Flexibility to plan your retirement date.
Freedom to invest premiums as per your preference.
You can choose your premium and the investment fund or funds. We will then invest your premium, net of premium allocation charges in your chosen funds in the proportion you specify. At the end of the policy term, you will receive the accumulated value of your funds, which will be used to provide your pension income.
In the event of your unfortunate demise during the policy term, your spouse will receive a cash lump sum to help him or her manage the retirement years.
Use HDFC Standard Life's excellent investment options to maximize your savings & secure your golden years. Don't compromise on self-respect, ever. Go ahead, hold your head high and enjoy life with the HDFC Unit-Linked Pension

3 EASY STEPS TO YOUR OWN PLAN
1. Choose your retirement age.
2. Choose the premium you wish to invest, based on your retirement needs.
3. Choose the investment fund or funds you desire.

You will be eligible for Tax Benefit under section 80CCC of the income tax act 1961
“Lead a life of respect and dignity. Even after retirement.”

HDFC UNIT LINKED ENDOWMENT

You have given your family the very best and there is no reason why they should not get the very best in the future too. With HDFC Unit Linked Endowment, you can ensure that your family remains financially independent, even if you are not around. You can ensure that they live a life of respect and dignity always.

The HDFC Unit Linked Endowment Plan gives you:-
· An outstanding investment opportunity by providing a choice of thoroughly researched and selected investments.
· Valuable protection to your family in case you are not around.
· Flexible benefit combinations and payment options.
· Flexible additional benefit options such as critical illness cover.
· Access to your accumulated fund before maturity.
In case of your unfortunate demise during the policy term, we will pay the greater of your Sum Assured (less any withdrawals you have made in the two years before your claim) and your total fund value to your family.

Use HDFC Standard Life's excellent investment options to maximize your savings & secure your and your family's future. We will provide financial security for your family in your absence.
You can choose your premium and the investment fund or funds. We will then invest your premium, net of premium allocation charges in your chosen funds in the proportion you specify. At the end of the policy term, you will receive the accumulated value of your funds.

4 EASY STEPS TO YOUR OWN PLAN
1. Choose the premium you wish to invest.
2. Choose the amount of protection (Sum Assured) you desire.
3. Choose the additional plan benefits you desire
4. Choose the investment fund or funds you desire.

You will be eligible for Tax Benefit under section 80C & Section 10. (10D) Of the income tax act 1961
“Invest in financial security and self-respect for you and your family”

HDFC UNIT LINKED YOUNG STAR

As a parent, your priority is your children's future and being able to meet their dreams and aspirations. Today, providing a good education, establishing a professional career or even a modest wedding is expensive. Costs are rising fast. Just imagine how much you will need when your children take these important steps in life.
Plan today to ensure a bright future for your children. Start saving today with our HDFC Unit Linked Young Star so that your child is able to lead a life of respect and dignity with a secured financial future.
The HDFC Unit Linked Young Star gives you: -
· An outstanding investment opportunity by providing a choice of thoroughly researched and selected investments.
· Valuable protection to your child in case you are not around.
· Flexible benefit combinations and payment options.
· Flexible additional benefit options such as critical illness cover.
· Access to your accumulated fund before maturity.
In case of your unfortunate demise during the policy term, we will: -
· Pay the Sum Assured you had chosen to your child
· Continue your policy AND continue to pay the original regular premiums you had chosen
This means we will continue to make your savings on your behalf, in your absence. The fund will be available for your family's use until the original Maturity Date. Use HDFC Standard Life's excellent investment options to maximize your savings & maximize your child's achievements.
“We will provide financial security for your child.”
4 EASY STEPS TO YOUR OWN PLAN
1. Choose the premium you wish to invest
2. Choose the amount of protection (Sum Assured) you desire
3. Choose the additional plan benefits you desire
4. Choose the investment fund or funds you desire

You will be eligible for Tax Benefit under section 80C & Section 10. (10D) Of the income tax act 1961
“Invest in your child’s dreams, and secure your self-respect”

Courtesy : www.hdfcinsurance.com

How long will you munch it?

2007-10-29T08:08:00.000-07:00

A Ulip or a combo meal of an ELSS and a term cover? That depends on the duration of the meal, the investment horizon

Should you go for unit-linked insurance plans (Ulips) or a combination of a term life cover and an equity-linked savings scheme (ELSS)? It makes sense to choose ELSS from the hemisphere of mutual funds for a comparison with Ulips because the tax breaks on ELSS and Ulips are similar.

There are two types of Ulips. The first (Type I) pays the higher of fund value or sum assured as death benefit. The second (Type II) pays both sum assured and fund value. Till Type II Ulips hit the market, the ELSS and term plan combo was better. But Type II Ulips have created confusion (see When You Choose a Term Plan & an ELSS, When You Choose a Type II Ulip and The Real 2-in-1 Ulip, 15 July 2007). Financial planners are of the view that one product should meet one financial objective and that investment and insurance should not be mixed. Says Gaurav Mashruwala, a Mumbai-based financial planner, “I try to keep the insurance and investment elements separate while preparing financial plans for clients.” We ran the numbers to settle the contest between Type II Ulips (referred to as
Ulips from now on) and the combo of ELSS and term plans.

Cost. The visible cost in an ELSS, which is a type of mutual fund, is the entry cost, around 2.25 per cent in most cases. A term plan is the cheapest life cover. The entry costs of Ulips are higher than those of ELSS. The premium allocation charge is 5-60 per cent of the premium in Year I, falling later to 2-4 per cent of the premium every year. Among other charges are mortality charge for the life cover and policy administration fees. Both are deducted every month.

Holding period. Like other life covers, Ulips should be bought for the long term, 10 or 15 years. The Insurance Regulatory and Development Authority has emphasised this long-term nature by stipulating that insurers levy a charge if an investor surrenders a Ulip within 5 years of buying it. In the following example, mutual funds are ahead in cost-adjusted returns in the medium term. Ulips win in the longer term. Here's how.

Assumptions. We assume that a 30-year-old male deploys Rs 1 lakh every year for 20 years in both a Ulip and in the combo of a term cover and an ELSS to compare the results of the two options. In the combo, the annual premium for the life cover with a sum assured of Rs 20 lakh is taken to be Rs 6,000. The remaining Rs 94,000 is invested every year in an ELSS which has an entry load of 2.25 per cent and a recurring charge of 2.20 per cent of the fund value.

In the Ulip, the sum assured is Rs 20 lakh, the tenure 20 years, the premium Rs 1 lakh per year, the option 100 per cent growth and the fund management charge 1.5 per cent. Figures for fund value and death benefit take into account all the other charges—those related to premium allocation, mortality, fund management and policy administration. The annual growth rate is 10 per cent.

Comparison
Returns. If you survive the policy term of 20 years, the fund value in ELSS is Rs 43,18,519 (the other part of the combo, the term life cover, won’t yield anything), lower than Rs 46,22,490 from the Ulip (see Maturity Benefits). But it is only in the 10th year that the Ulip fund value overtakes the ELSS value. This flip is observed in case of claims occurring after the death of the policyholder too (see Death Benefits). So, if you are looking at a horizon of 10 years or less, the combo is likely to give you more. For horizons beyond a decade, Ulips are a better deal.

Exits. The lock-in period of ELSS is three years. After that, you can withdraw your fund value without any leakages. However, most Ulips have substantial surrender charges if you exit within 10 years.

Disclosures. Despite the numbers, since disclosures remain tacky and costs hidden in Ulips, a term plan plus ELSS combination will work.

Bear these factors in mind along with the crucial aspect of time horizon while choosing between a Ulip and a combination of a term plan and an ELSS.

Sunil Dhawan-24/10/2007,http://www.outlookmoney.com/

ULIPS This Year Cover Story

2007-10-29T06:50:00.000-07:00

Courtesy :-DNA, Mumbai, 04/08/2006

Comparision Of Different Pension Plans

2007-10-29T06:43:00.000-07:00

Here, I am comparing 3 Pension Plans of 3 different companies.
1) HDFC Standard life Insurance Co – Unit Linked Pension Plus
2) ICICI Prudential-Life Time Super Pension
3) Bajaj Allianz- UG Easy Pension Plus

Let’s take an example of a person of 40 years of Age, who is interested to invest Rs. 50,000 annually as premium.
As per IRDA’s guidelines an Agent or a company can show the return of 10%( Higher) & 6%(Lower).
So, Following are the returns that the person will get if the market gives a return of 10%.

· HDFC Standard life Insurance - Unit Linked Pension Plus for Growth Fund
After 10 years-Rs. 7,66,606
After 15 years –Rs. 15,14,492,
After 20 years- Rs. 26,76,775

· ICICI Prudential-Life Time Super Pension for Maximiser II fund.
After 10 years-Rs. 7,59,608
After 15 years –Rs. 14,51,292
After 20 years- Rs. 24,84,178

· Bajaj Allianz- UG Easy Pension Plus for Equity Index Pension Fund II
After 10 years-Rs. 7.71,869
After 15 years –Rs. 14,77,377
After 20 years- Rs. 25,42,923

So, we can see clearly that the best plan for those people who are interested to take a pension plan is of HDFC Standard life Insurance - Unit Linked Pension Plus.

The reason why HDFC’s Unit Linked Pension Plan is able of give more returns that other companies are because of the Lower Fund Management Charges (FMC).
· In Case of HDFC the FMC charge is just 0.08 % of your fund value, which is minimum in the industry.
· FMC is the charge, which play a major role in the long term.
· Beside this HDFC is also giving addition units of 0.10%, which is called Loyalty Benefit. This additional benefit of Loyalty Units, which is being given, increases the total Fund Value.

So, my suggestion to all those people who want to take a pension plan is see the FMC charges of the plan before investing.

The Best Investment Options

2007-10-26T09:00:00.000-07:00

Choosing the best investment for you depends on your personal circumstances as well as general market conditions. For example, a good investment for a long-term retirement plan may not essentially be a good investment for higher education expenses. In each case, the right investment is a balance of three things: Liquidity, Safety and Return.

Liquidity - how accessible is your money?
How easily an investment can be converted to cash, since part of your invested money must be available to cover any financial emergencies.

Safety - what is the risk involved?
The biggest risk is the risk of losing the money you have invested. Another equally important risk is that your investments will not provide enough growth or income to offset the impact of inflation, which could lead to a gradual increase in the cost of living. There are additional risks as well (like decline in economic growth). But the biggest risk of all is not investing at all.

Return - what can you expect to get back on your investment?
Investments are made for the purpose of generating returns. Safe investments often promise a specific, though limited return. Those that involve more risk offer the opportunity to make - or lose - a lot of money.

Courtesy:- bajaj capital

The 'Crorepati' Syndrome

2007-10-26T08:59:00.000-07:00

For centuries, the Indian people could not even think about the very existence - the mere possibility - of an Indian Dream. But ironically, it was upto a former US President to define it.

As Bill Clinton put it in a speech - the dream of every Indian is to become a Crorepati. That is the difference between India at Independence and the new India, at the turn of the millennium. What was once not even a possibility has now been given a shape - a magic figure - Rs.1 Crore.
How does one go about achieving this figure? Surprisingly, the road to Rs.1 crore is not as difficult as it may seem. The answer lies in a planned and disciplined approach towards savings and investment. An amount as low as Rs.1,540, if invested monthly, can get you there in 25 years. The secret lies in the power of compounding where interest on re-invested interest ensures that your savings grow at a geometric rate rather than at an arithmetic rate. The other thing at work for you is the magic of systematic investments. Rs.100 invested monthly would grow to an amount larger than a one-time Rs.1,200 investment at the end of the year simply because of the interest earned on Rs.100 every month. Here, Rs.100 would grow to Rs.1,267 at year-end at an interest rate of 10%.

The lower the age when you start investing, the lower the amount that is needed for investment. For example, an individual starting at age 25, having 35 years till retirement, would need to save only Rs.6,985 per month (at an interest rate of 6%) as compared to an individual who starts saving at age 35, having only 25 years to retirement. In our example, the 35 year old would have to invest Rs.14,359 per month to reach a crore.

As your appetite for risk increases, so does the return. As a result, you would have to save less each month. For example, a 25-year old individual A, with a conservative risk profile, investing in RBI 6.50% tax-free bonds, would have to save Rs.6,216 per month for 35 years. Individual B, also 25 years old, with a higher risk appetite i.e. not averse to investing in equity funds, would earn a return of perhaps 12%. Individual B would need to save only Rs.1,540 per month for the same number of years.

The individual amounts that an individual would need to save would depend upon the tax-bracket that the person is in since except for the RBI Bonds, all the other instruments are taxable and the effect of tax has not been included in the calculations since it would vary for different individuals. But then should one invest only in a single asset such as the RBI bonds which provide tax-free income? This is not recommended since this would not only lock in your investments at a low rate of return, it would also expose the investor to interest rate risk i.e. progressively lower rates of interest on the bonds, which has been the trend in the past. Further, the investor would not be able to take advantage of returns from equity funds, should the equity markets turnaround this year.

Using insurance to plan for your child’s future

2007-10-26T08:50:00.000-07:00

For parents who are convinced about the need to plan finances for their children’s future but don’t know how to do it, help is at hand. You have already read about the various child-related investment avenues available at the parent’s disposal. One avenue that many parents are partial to is life insurance, i.e. child insurance plans. The reasons are not far to seek.

Why you must plan for your child’s future

Child insurance is popular with parents for the following reasons:

1. It is a dependable route for parents to plan their children’s future. Money back endowment plans for instance, tell the parent roughly how much he/she can expect and at what age (of the child) the money will be due.

2. Child insurance offers a lot of flexibility. There is something in it for all parents regardless of their risk appetites. Unit-linked child insurance plans (child ULIPs) have several options with varying equity components. Parents can select the one that suits their needs the most.

Let us bring each of these avenues under the scanner to see what they can do for parents anxious for their child’s future.

Money back child insurance plans
Money back plans are ideal for parents planning for life stage events like child’s education, marriage or seed capital for a business opportunity. Ideally, parents would have to set aside money separately for each event and plan their finances accordingly. A money back insurance plan allows them to combine their planning for all these events in a single avenue. We can understand this better with an illustration.

A father wants to set aside some money for his 5-year old daughter’s higher education. He also wants to have enough money for her marriage a few years after that. This is the ideal scenario for a money back plan.

The father can select a money back endowment plan with a 20-Yr tenure for a sum assured of Rs 10 lakhs (Rs 1 million). The annual premium that he will have to pay is Rs 67,175 (refer Table 1). The premium amount will vary across life insurers.

Age (Yrs) 30
Sum Assured (Rs) 1,000,000
Tenure (Yrs) 20
Premium (Rs) 67,175

(The figures used in the illustration are based on that of an existing life insurance company. The returns could vary across life insurance companies.)
In case of an eventuality to the parent, his nominee will receive the sum assured of Rs 10 lakhs plus bonuses accumulated till that period. In case of survival, the parent will receive disbursements over four regular intervals according to a pre-determined schedule (refer Table 2).

Year Guaranteed Amount (Rs) Bonus (Rs) Total Amount
5 200,000 - 200,000
10 200,000 - 200,000
15 200,000 - 200,000
20 400,000 300,000 700,000

(The figures used in the illustration are based on that of an existing life insurance company. The returns could vary across life insurance companies.)
Money back insurance plans are essentially variants of endowment plans, which give you a lumpsum payment at maturity. While endowment plans also serve the purpose of helping parents save for the child’s future, they aren’t as flexible as money back plans. For instance, in our illustration where the father has multiple objectives (daughter’s education and marriage), an endowment plan with a single disbursement may not be as helpful as a money back plan with multiple disbursements.

ULIPs
If parents are pleased with money back plans, then ULIPs should thrill them. As far as flexibility goes, it does not get any more flexible than a ULIP. ULIPs differ from conventional insurance in the way they invest your premiums. Unlike endowment plans that invest primarily in government securities and corporate bonds (as specified by the regulator), ULIPs can also invest in equities. Below, we have outlined some of the key features in a ULIP.

1. As an investor, you can decide how much your ULIPs must invest in equities and debt. For this ULIPs offer a range of options with varying equity and debt components. As an investor you can choose the option based on your risk appetite.

2. However, unlike conventional endowment plans, ULIPs do not guarantee a return, although your sum assured is guaranteed provided you have paid the minimum premiums (even conventional plans no longer assure a return). This is because ULIPs invest in equity and debt markets and offer market-linked returns. Your returns will fluctuate in line with the ULIP’s performance.

3. We mentioned that ULIPs are flexible. Their flexibility is evident in two features. One, they allow individuals to switch across options. For instance, as a parent you can afford to have more equity at an early stage of your investment plan for your child’s education. As your plan nears the end of its tenure, you can shift your monies to a debt option. Most insurers allow for a predetermined number of free switches across ULIP options every year.

4. The second feature that makes ULIPs flexible is that they allow for a larger number of withdrawals. In the money back illustration, there were four disbursements with a bonus disbursement at the end of the tenure. In a ULIP you can make many more withdrawals over the tenure of the plan; in fact some ULIPs permit multiple withdrawals every year.

5. ULIP expenses are usually lower than those of conventional endowment plans. Over the long-term, this reflects in the returns of the ULIP.

Our view on ULIPs

1. There is little doubt that if selected prudently, ULIPs can add considerable value to the portfolio you wish to build for your child’s future. Equities are well-placed to give a boost to your child portfolio’s over 15-20 years. They can also help you go one up on inflation. These are facts established by several studies.

2. However, the ULIP frenzy has made investors including parents ignore the prudent principles of financial planning. We are certain that parents with unduly high investments in Aggressive ULIPs (which can invest upto 100% in equities) would be concerned with the sharp drop in their child’s portfolio every time the market crashes. So going overboard in Aggressive ULIPs could make your child’s portfolio swing like a pendulum during stock market volatility, which is something you do not want.

3. The answer is in striking a balance between equities and debt, because during stock market volatility, debt can be a major ally. It is best for parents to go for a ULIP with moderate equity investments (balanced option), as opposed to a ULIP with a heavy equity allocation (aggressive option).

Courtesy:- http://www.personalfn.com/

5 steps to selecting the right ULIP

2007-10-26T08:44:00.000-07:00

Unit Linked Insurance Plans (ULIPs) were seen as a “wonder product” that simultaneously fulfilled an individual’s needs for investment and insurance. However the recent downswings in the markets have forced investors to do a rethink. Very often it was poor selection that was responsible for the investors’ woes. We present a 5-step strategy for investing in ULIPs.

1. Understand the concept of ULIPs
Try to do as much homework as possible before investing in an ULIP. This way you will know what you are getting into and won’t be faced with unpleasant surprises at a later stage. Our experience suggests that many a time people do not realise what they are getting into (in fact we have been approached by several people who wanted to cancel the ULIPs they had been coerced into taking by unscrupulous agents). Gather information on ULIPs, the various options available and understand their working. Read the literature available on ULIPs on the websites and brochures circulated by insurance companies.

2. Focus on your requirement and risk profile
Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments). Your risk appetite should play an important role in the plan you choose. So if you have a high risk appetite, go in for a more aggressive investment option and vice-a-versa. Opting for a plan that is lop-sided in favour of equities when you are a risk-averse individual might spell disaster for you (this is true in most cases currently).

3. Compare ULIPs of different insurance companies
Compare products of the leading insurance companies. Enquire about the premium payments as ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies. Check the fund’s performance over the past six months. Find out how the debt and equity schemes are performing and how steady the performance has been. Enquire about the charges you will have to pay. In ULIPs the costs involved are a big deciding factor.

Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can make to increase the savings portion of your policy. The companies give you the option to increase the premium amounts, thereby providing you with the opportunity to gainfully utilise surplus funds at your disposal.

Enquire about the number of times you can make free switches (i.e. change the asset allocation of the money in your ULIP account) from one investment plan to another. Some insurance companies offer you free switches for a 2-Yr period while others do so only for 1 year.

4. Go for an experienced insurance advisor
Select an advisor who is not only professional and informed, but also independent and unbiased. Also enquire whether he has serviced clients like you. When your agent recommends a ULIP of X company ask him a few product-related questions to test him and also ask him why the other products should not be considered.

Insurance advice at all times must be unbiased and independent and your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not just begin by filling the form and end after he deposits the cheque and gives you the receipt. He should keep a track of your plan and inform you on a regular basis. The key is to go for an advisor who will offer you value-added products.

5. Does your ULIP offer a minimum guarantee?
In market linked product if your investment’s downside can be protected, it would be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. This will enable you to make an informed choice.

Courtesy:-http://www.personalfn.com/

A guide to the taxing Season

2007-10-26T08:41:00.000-07:00

Investments In MF's

2007-10-26T08:09:00.000-07:00

Mutual funds are slowly becoming a preferred way of investing in equity by retail investors. This is quite welcome, given the benefits that mutual funds offer.

Professional management, diversification, transparency, affordability and convenience are some advantages, which have been highlighted time and again. Investors who wish to invest small amounts; are not very knowledgeable about the stock markets; and cannot devote much time to research and follow-up, would find mutual funds to be quite an attractive proposition to participate in the equity markets. (Also read - 10 myths about Systematic Investment Plans)
Investors in mutual funds should, however, be aware that investing in mutual funds does have a few disadvantages too. They must, therefore, do adequate research to minimize the impact of such negative factors.

Over Diversification

The fund may become very popular and attract lot on investments. Therefore at some point the corpus size may become too large vis-à-vis the investment opportunities available. The fund manager would, then be forced to invest in average stocks also, as he would have already reached the prescribed limits for the quality stocks. (Also read - 7-point action plan for Successful Investing)
Or the fund manager may take a cautious route and invest in much larger number of stocks than what is actually warranted for the purposes of diversification.
This can hurt the overall returns that the fund could have otherwise generated by limiting its exposure only to above-average stocks.

Higher concentration

Contrary to the above, it may also happen that the fund manager may take a much larger exposure to select industries, thereby exposing the fund to concentration risk. (Also read - Why should one invest in Arbitrage Funds?)
If your risk appetite is low or possibly you have already invested in a few sector-specific stocks, then this particular fund may no longer be suitable to your overall investment pattern.

Idle Cash

All funds must keep some amount of the corpus in cash/cash equivalents to take care of the day-to-day redemptions. If this amount is large, it means that the fund is forgoing the opportunity to earn higher returns.
However, care must be taken to see whether this is a permanent feature of the fund or only a temporary phase. It is possible that the fund manager expects the markets to fall. Therefore, he might have booked profits by selling off a part the portfolio and is waiting for an opportune moment to re-enter the market at lower levels.

Fancy Names

Mutual funds have been marketing their funds under very fancy and catchy brand names. These could sometimes mislead the investor in understanding the real objective of the fund. (Also read - Learn to invest in equities without an iota of risk)
The investor, therefore, must read the prospectus to find out the exact nature of the fund and then decide whether it suits his investment objective or not.
Moreover, there could be a perception difference in what you believe the name stands for and what the fund’s intention actually is.

Higher expenses

As compared to direct investing into equity, one has to generally pay a higher cost at the time of investing. Typically, brokerage for direct purchase could be about 1% maybe even less, whereas entry load in a mutual fund could be around 2.25%.
Second, in mutual funds one would have to pay on-going annual fund management charges of about 2.5%, which is nil if you have brought shares and these are lying in your demat account. Moreover, these fund-management expenses are payable even if the fund has failed to perform, which would further reduce your already below-normal profits or maybe even add to your losses.

Loss of control

When investing in a mutual fund, you are effectively handing over the charge of your money to a fund manager. You are, therefore, dependent on the fund manager’s investment philosophy to generate returns for you. (Also read - Fund manager or Fund house - Who do you invest with? )
Some investors may not be comfortable with this kind of passive investing. They would rather like to be in full control of their investment decisions.
One must keep the above issues in mind, when investing in mutual funds. However, given the fact that the advantages of a mutual fund far outweigh these negatives, they are still the best alternative available.
Moreover, given the easy liquidity, it is possible to sell and move to other funds, in case such disadvantages become too much of a drain on the returns. One must, therefore, be diversified across various funds and actively review one’s portfolios say at least 1-2 times in a year.

- Sanjay Matai

HDFC fastest growing company

2007-10-26T08:07:00.000-07:00

10 Myths About Systematic Investment Plans?

2007-10-26T07:53:00.000-07:00

What is a Systematic Investment Plan (SIP)?

SIP is a method of investing a fixed sum, regularly, in a mutual fund. It is very similar to regular saving schemes like a recurring deposit.

An SIP allows you to buy units on a given date each month, so that you can implement an investment / saving plan for yourself. Once you have decided on the amount you want to invest every month and the mutual fund scheme in which you want to invest, you can either give post-dated cheques or ECS instruction, and the investment will be made regularly. SIPs generally start at minimum amounts of Rs 1,000 per month and the upper limit for using an ECS is Rs 25000 per instruction. Therefore, if you wish to invest Rs 100,000 per month, you may need to do it on 4 different dates.

As is customary, I started with describing the concept of an SIP. Let us break some myths on SIP now.

Investment in equity mutual funds or unit linked insurance should always be done in SIP mode: I remember in 1999 when Templeton Mutual fund would talk about SIP – the market looked at it skeptically. And it took a lot of convincing for customers to accept it. Now, life has come a full circle. Everybody wants to (always) invest using an SIP.
If you have the maturity and calmness to realize that equities are for the long term and are willing to give your funds about 10 years, and you have a lump sum, you can afford to give the SIP route a pass. However, if your horizon is less than five years, you must do an SIP.

I do rupee cost averaging in a single equity – that is a kind of SIP is it not?
This is a question I face every day. No, a rupee cost averaging in a single scrip cannot be equated to an SIP. When the market brings down the price of a single scrip, it is giving you information. You need to react to that.

Let us take 2 examples – Lupin Laboratories – has moved from a high of Rs 700 to Rs 100 and back to Rs 700. The question to ask here is not whether an SIP would have worked. The question to ask is whether you would have had the stomach to continue the SIP through this period. Silverline Technologies moved from Rs 30 to Rs 1300 to Rs 7! In this case, if you had started an SIP at a price of Rs 1300, today you would be licking your wounds. SIP works in a portfolio, not in single scrip.

You cannot invest a lump sum in the same account in which you are doing an SIP: Many people assume that if they are doing an SIP in a particular fund, and suddenly they have a surplus, they cannot put that lump sum in that account. Fact is, in case you are doing an SIP of Rs 10,000 per month in an equity fund, and suddenly you have a surplus of Rs 100,000 and clearly you have a 10-year view on the same, then you can just push it into your SIP account. SIP is just a payment mode, not a scheme!

If I miss investing for a particular month, will they prosecute me? Now, this is the fear of EMI that people have. In an SIP you are buying an investment every month (or quarter), there is no question of prosecuting you for missing one investment. As a matter of discipline, you should not miss any month; however, missing one month’s investment is not a crime!

When you have a surplus (accumulation stage of your life) you should do an SIP and during retirement you should do a SWP: No. You should ideally keep your withdrawals only from an income fund or a bank fixed deposit. You should sell an equity fund on some other basis, say deciding to sell 20% of your portfolio in a year so that the return is 4 times the 30 year historic return. SWP, by definition cannot work in an equity fund

SIP works for everybody, but does not work for me: Another myth. SIP works in a well-diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a good fund or are looking at a 12 month horizon.

SIP is only for small investors: Nothing can be farther from the truth. I have a client who has invested Rs 32.66 lakhs using SIP, starting from January 1998 till date. Obviously, he has invested much more in later years as his income went up and the funds together are worth Rs 97 lakhs, substantially higher than his provident fund.

Market is at very high level to start an SIP: I have heard this when the index was 3000 also. I have no clue where the market is headed, but I know SIP works!

All fund houses are now charging a full load on the SIP, so now SIP will not work Why not time the market? Introducing an entry load was expected to happen and it has happened. What actually hurts the retail investor is the asset management charges – 2.5% in most cases is a bigger threat to compounding!

If I do an SIP in a tax plan, can I withdraw all the money on completion of 3 years? Another regular question almost! Every installment has to be with the fund house for 3 years. The lock-in comes from the Income tax rules, which say that a tax saving scheme should have a 3-year lock-in. You cannot escape that by doing an SIP!

Courtesy:- www.moneycontrol.com

Definition :- Mutual Fund

2007-10-26T07:45:00.000-07:00

Mutual Fund
A security that gives small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed.
Notes:
The fund's net asset value (NAV) is determined each day. Each mutual fund portfolio is invested to match the objective stated in the prospectus.It has been shown in study after study that a majority of mutual funds fail to beat the market. Also, picking mutual funds purely on the basis of past performance usually does not work.

The definition of a mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and/or other

# What are close-ended mutual fund schemes?
Close-ended mutual fund Schemes have a stipulated maturity period wherein the investor can invest directly in the scheme at the time of the initial issue and thereafter units of the scheme can be bought or sold on the stock exchanges where the scheme is listed. The market price at the stock exchange could vary from the scheme’s NAV on account of demand and supply situation, unit holders’ expectations and other market factors. Usually a characteristic of close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.
Up

# What are open-ended mutual fund schemes?
Open–ended schemes usually do not have a fixed maturity period and are available for subscription and redemption on an ongoing basis. The units can be bought and sold any time during the life of the scheme at NAV related prices.
Up

# What is the difference between an open-ended and close-ended scheme?
Open-ended schemes can issue and redeem units any time during the life of the scheme while close-ended schemes cannot issue new units except in case of bonus or rights issue. Hence, the number of units of an open-ended scheme can fluctuate on a daily basis while that is not the case for close-ended schemes. Another way of explaining this difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open-ended schemes while that is not the case in case of close-ended schemes, where new investors can buy the units from secondary market only.
Up

How ULIPs can make you rich!

2007-10-26T07:40:00.000-07:00

October 14, 2005 09:53 IST

Ever since unit-linked insurance plans (ULIPs) made their debut, they have become a subject of much discussion and debate. On the one hand, they were a trifle too complicated for individuals not yet exposed to the stock markets; on the other hand, they were much-maligned because of the 'unusually high' costs.

As ULIPs made their presence felt, insurers were more open to discussing the costs and how they evened out over the long term. This and the flexibility that ULIPs offer became important points that made individuals consider adding them to their portfolios.

· 5 steps to selecting the right ULIP

Today, more individuals are open to using the ULIP-way to create wealth over the long term. Here we outline exactly how ULIPs can help you fulfill that responsibility.
If you are between 25 and 35 years of age
You are young, probably married and even have kids. If you are the sole breadwinner in the family, then you have quite a few responsibilities to fulfill right from planning for your child's education/marriage to planning for your own retirement to providing for the family in your absence.

The last responsibility is the most critical and ironically it is the easiest and cheapest one of the lot to fulfill. At Personalfn, we have always been votaries of term insurance -- the cheapest way to get a life cover for yourself.

Term insurance is also insurance in its 'purest' form, in other words there is no savings element in it, which ensures your premiums are very low. There is no better product to provide for your family in case of an eventuality and all individuals must consider taking a term plan.
Term insurance of course takes a huge burden off your chest as also your wallet. But it still leaves you with a problem. If term insurance is only going to take care of the 'risk' element, who is going to take care of the 'savings' part.

This is where ULIPs come in. Of course, that is not to say that ULIPs do not have an insurance element, they do, but it is limited largely to the earlier years and after a point they don the mantle of an investment product.

So how can ULIPs help you save for child's education/marriage, planning for retirement and other investment-related objectives? ULIPs can do all this and more because they come with a lot of variety.

Consider this; except for term insurance (because it does not make sense), just about every life insurance product has a ULIP option. So you have endowment ULIP, child plan ULIPs and pension ULIPs. As a matter of fact, there are some life insurance companies that only have ULIP products; they don't have traditional endowment, pension and child plans at all!
What that tells you is that if you are willing to take on some risk, a ULIP can help you meet a lot of your financial objectives.

If you are looking to set aside some money for your child's education, the 5%-6% return on an endowment plan may not even take care of inflation, let alone provide for a medical or MBA degree. The return you earn on a child plan should not just counter inflation, it should be enough to cover the cost of education.

And the way cost of education is spiralling, your insurance plan must work very hard. Given their equity component, ULIPs are ideally placed to fulfill this role.
As we mentioned before, ULIPs are flexible; there are various options within a ULIP with the equity component varying right from 0% to 100%. This ensures that you are able to select an option that best suits your risk profile. Let us understand how ULIPs can be tailor-made to serve your financial planning needs.

You are in the 25-35 years age bracket. Your most pressing financial objectives are providing for your child's future and your own retirement. ULIPs can help you achieve both. Although you can take a single endowment ULIP to achieve both objectives, we think it is more prudent to make a demarcation between the needs and take separate ULIPs dedicated to each objective.
Opt for a ULIP child plan to provide for your child's higher education, marriage and seed capital for business to name a few needs. One way to handle this multi-faceted objective is to take a ULIP money-back plan. This way you get monies at regular intervals to address multiple needs.
The other important plan that individuals must consider taking earlier on their lives is a pension plan. Building a corpus to face the rigours of retirement should be given the priority it deserves.
Again, a long-term investment objective like retirement planning could do with an equity 'push'. Here is where a ULIP pension plan can add value to your retirement portfolio. Likewise a ULIP endowment plan can help you meet investment objectives like buying property or setting up a business for instance.

If you are between 35 and 45 years of age
By the time you reach the 35-45 age bracket, some of your existing ULIPs are probably nearing maturity. For instance, if you had taken a ULIP child plan earlier on, it is likely to mature in this age bracket to coincide with the need (higher education/marriage) you had in mind at the time of taking the ULIP.

However, if you married late or did not begin planning your finances at an early stage in your life, now is the time. If you haven't insured yourself as yet, go for a term insurance plan.
The advantage of taking a term plan at a slightly advanced age is that you have a better idea of how your lifestyle is likely to pan out going forward. In terms of costs, term plans remain your cheapest option no matter when you take one.

You can opt for some of the ULIPs we mentioned for individuals in the 25-35 years age bracket depending on your needs. Remember, unlike endowment, which gets really expensive at an advanced age, ULIPs because of the way they are structured, do not turn out that expensive.
If you are over 45 years of age

In this age bracket, it is likely that you are insured. However, you still need to review your insurance cover taking into consideration the changes in your lifestyle, income, needs and financial commitments. Beef up your insurance cover through a term plan.
By this time, your ULIP pension plan will have matured. You can then opt for an annuity, immediate or deferred, depending on your requirements.
6 points to note

Since ULIPs offer a lot of flexibility, you need to keep some points in mind to optimise the benefits associated with them.

· Notice we have recommended ULIP child plans/pension plans and even term insurance for most individuals. When you opt for these plans it is important you do this after taking your insurance consultant into confidence. He is the one who is going to help you with the numbers, so you need to tell him exactly what you are looking for in an insurance plan.

· Remember there is an insurance cover associated with ULIPs. Since it is also likely that you have other insurance plans like term and/or endowment, it is important you have a clear idea of exactly how much your insurance cover is worth after considering all your insurance plans. This number will prove helpful when you review your insurance cover at regular intervals.
· Likewise, ULIPs also have an investment element. You are likely to have investments in mutual funds, stocks, bonds and fixed deposits as well. You need to add up the market value of all these investments while calculating your investment worth. This number will prove useful when you wish to beef up your investments in a particular asset.

· ULIPs derive their 'power to perform' from equities. When you have a lot of aggressive ULIPs in your portfolio it means that you are overweight on equities. Add to this your investments in stocks and equity funds, and your exposure to equities increases even further. To temper your equity exposure, it is generally advisable to opt for conservative/balanced ULIPs (maximum 50% equity exposure).

· Even if you are a high-risk investor, you must gradually shift your assets to a conservative ULIP option as your age advances. Financial prudence dictates that risk reduces as age increases; this needs to reflect in all your investments including ULIPs.

· Like with all investments, it is prudent to diversify your ULIP investments. This is necessary due to several reasons with financial prudence being the most important reason. Varying flexibility levels in ULIPs across insurance companies is another factor that should make you opt for a ULIP from more than one insurance company. Varying level of expenses in ULIPs is another reason to opt for ULIPs across insurance companies to keep expenses on the lower side.

Courtesry:-http://in.rediff.com/money/

ULIPS are a long term investment

2007-10-26T07:38:00.000-07:00

I have recently come across agents selling ULIP's as three year plans. You might hear them ask you to invest for just three years and then reap the benefits. All this in my opinion is miselling. Investing in ULIP's work only if your investment horizon is more than 10 years.

Below is an illustration of returns from HDFC Unit Linked Endowment Plus based on term of the plan. These illustrations are for a 34 year male. Assuming returns of 10% per annum the following is what the figures look like.

Term : 3 years
Premium : Rs.25,000 per annum
Sum assured : Rs.1,25,000
Total premium paid : Rs.75,000
Fund balance at the end of 3 years : Rs.68,976
Net return on investments : Loss of Rs.6,024 on principal

Term : 10 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 1,25,000
Total premium paid : Rs.2,50,000
Fund balance at the end of 10 years : Rs.3,17,657
Net return on investments : 7.17%

Term : 15 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 1,87,500
Total premium paid : Rs.3,75,000
Fund balance at the end of 15 years : Rs.7,37,790
Net return on investments : 8.07%

Term : 20 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 2,50,000
Total premium paid : Rs.5,00,000
Fund balance at the end of 20 years : Rs.13,01,447
Net return on investments : 8.43%

Term : 25 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 3,12,500
Total premium paid : Rs.6,25,000
Fund balance at the end of 25 years : Rs.13,01,447
Net return on investments : 8.62%

Clearly, if you look at the net returns, investment in ULIPs only work if you plan to stay invested for long term. If someone is selling you a ULIP for a time frame of 3 to 5 years, it will not work. All he is doing is mis-selling.

Are MFs really cheaper than ULIPs ?

2007-10-26T07:19:00.000-07:00

I have soo many times come across the arguement that the charges in ULIPs are a lot more than MFs. I myself have been a strong advocate of the above statement having mainly invested in MFs with some exposure to ULIPs. I would like to share with you all some of my findings when I compared all the charges. (I have not compared mortality charges since MF's don't offer insurance).

Let us say, I wish to invest Rs.60,000 every year in a mutual fund of a leading fund house and also the same amount in ULIPS of HDFC, ICICI and BAJAJ ALLIANZ. The following are the charges I have considered.

MFS
Loading charges = 2.25%
Fund Management Charge = 2.50%

HDFC Unit Linked Endowment Plus
Loading charges = 60% first year, 1% from second year
Fund Management Charge = 0.80%
Admin charge = Rs.240 per annum
Loyalty bonus = 0.1% each year

Bajaj Allianz Unit Gain Plus
Loading charges = 24% first year, 3% from second year
Fund Management Charge = 1.75%
Admin charge = Rs.240 per annum

ICICI Lifetime Plus
Loading charges = 25% first year, 25% second year, 3% third and fourth year, 1% from fifth year
Fund Management Charge = 1.75%
Admin charge = Rs.720 per annum

If my investments grew by 10%, the following is what the returns would look like if I consider all the charges.

The returns from HDFC Unit Linked Endowment Plus will beat MF returns by 9TH YEAR

The returns from Bajaj Allianz Unit Gain Plus will beat MF returns by 11TH YEAR

The returns from ICICI Prudential Lifetime Plus will beat MF returns by 12TH YEAR

CONCLUSION

In the market HDFC has got the best ULIP plans which can beat Mutual Fund in long run.
ULIP's from HDFC is also the best in the market compared with other Ulip's.

On the long run(10+ years), ULIPs are infact cheaper than MFs in terms of charges. Hidden charges which are not quiet evident to the eye like fund management charge eat up a major portion of your returns in MFs making them more expensive than ULIPS over time.

Are ULIPS right for you?

2007-10-26T07:14:00.000-07:00

ULIPS are best suited for those who seek insurance cover. If a person is not interested in "Insurance" and is mainly interested in "Investing", then he is better of investing in "Mutual Funds". This will help him avoid unnecessarily paying the "Mortality Charges" associated with ULIPs. You might run across insurance agents who might project ULIPS as a very good avenue for investment based on the last two to three year returns. But before you fall into the trap of an insurance agent, always ask yourself "Do you need Insurance Cover". Invest in ULIPS only if the answer to the above question is "YES". ULIPS are a good avenue for investment ONLY for those who also seek "Insurance Cover".

Risk Management: Allocation of funds to equity and debt

2007-10-26T07:02:00.000-07:00

I am sure many of you might have wondered how much exposure to equity is safe at any point of time. I am suggesting two methods, one based on weighted average PE Ratio of Nifty or Sensex, and the second based on term of the policy.

Fund Allocation Based on Nifty/Sensex PE Ratio
In this approach, I decide my allocations to equity and debt based on weighted average PE Ratio of Nifty or Sensex. At higher PE Ratio levels, I advise reducing your exposure to equity. Similarly at lower PE Ratio levels increase your exposure to equity. You will be able to find weighted average PE Ratio Nifty or Sensex at bseindia.com or nseindia.com.

ULIPS give you free switches to transfer your investment across funds. You can use these free switches to re-adjust your allocation to equity and debt.

Fund Allocation based on the Term of the policy
In this approach, I would divide the term of the policy into two stages. The first being the aggressive wealth building stage and the second being a conservative wealth preserving stage. I would recommend maintaining a high exposure to equity for 50 to 65% of the term after which one would gradually reduce your exposure to equity. Let me try to clarify this with an example. If the term of your insurance policy is 15 years, I would suggest maintaining a high exposure to equity for 8 to 10 years. I would gradually reduce my exposure to equity for the balance of the term.

HDFC Standard Life Insurance has got 6 funds options to choose from
1)Growth Fund-100% in Equity Market, risk is high & so is the return
2)Equity Managed Fund - risk is shared betwen equity % govt. securities & bonds.
For More Information please visit http://www.hdfcinsurance.com/

Which charges have the biggest impact on returns?

2007-10-26T06:58:00.000-07:00

I have been trying to measure the impact of the following charges on overall returns

Loading Charges

Admin Charges

Fund Management Charges

I have used the following three plans in my comparision.

Bajaj Allianz Unit Gain Plus

HDFC UnitLinked Endowment Plus

ICICI Lifetime Plus

Loading Charges
HDFC - 60% first year
Bajaj- 24% first year
ICICI- 25% first year

Admin Charges
HDFC - Rs.240 per annum
Bajaj- Rs.240 per annum
ICICI- Rs.720 per annum

Fund Management Charge
HDFC - 0.80%
BAJAJ- 1.75%
ICICI- 1.50%

For an Investment amount of Rs.24,000 per annum assuming an annual return on investment of 10%, the following is how the returns look like

Investment Time Frame - 5 Years
Best Returns - BAJAJ (7% more than ICICI)
Second Best - HDFC (2% more than ICICI)
Last - ICICI

Investment Time Frame - 10 Years
Best Returns - HDFC (5% more than ICICI)
Second Best - BAJAJ (3% more than ICICI)
Last - ICICI

Investment Time Frame - 15 Years
Best Returns - HDFC (8% more than ICICI)
Second Best - BAJAJ (1% more than ICICI)
Last - ICICI

Investment Time Frame - 20 Years
Best Returns - HDFC (12% more than BAJAJ)
Second Best - ICICI (0.5% more than BAJAJ)
Last - BAJAJ

Investment Time Frame - 25 Years
Best Returns - HDFC (16% more than BAJAJ)
Second Best - ICICI (2% more than BAJAJ)
Last - BAJAJ

For an investment time frame of 5 years, Bajaj Allianz Unit Gain Plus seems to offer the best returns. For any investment time frame of 10 years to 25 years, HDFC seems to offer the best returns.

Regarding charges, on the long run, Fund Management Charges have the most significant impact on performance. You will notice the gap in returns between HDFC and other widening as time passes(inspite of 60% loading charge). This is because it has the least FMC. Even ICICI which offer slightly better fund FMC than Bajaj has been able to surpass the returns of Bajaj Allianz Unit gain plus on the long run.

CONCLUSION
Fund Management charges are the most important charges for long term investments. Chose a ULIP product that has the least fund management charge to maximize your returns.

Are ULIPS cheaper than Term Insurance ?

2007-10-26T06:44:00.000-07:00

I am using an illustration of HDFC Standard Life Insurance (ULIP) and HDFC Standard Life Insurance (Term Insurance) for comparing ULIP and Term Insurance.

HDFC Standard Life Insurance (ULIP)
I have an old quote of HDFC Standard Life Insurance for 20 premium paying years.
Yearly premium = Rs. 1,10,000
Sum Assured = Rs. 1,00,00,000

Total Charges(Mortality +Admin) in ULIP
1st Year = 33,220
5th Year = 23,451
10th year = 26,284
15th year = 31,412
20th year = 37,835
25th year = 33,649

Fund Value assuming returns of 10%
1st Year = 83,825
5th Year = 5,58,519
10th Year = 14,34,005
15th Year = 27,67,030
20th Year = 47,80,364
25th Year = 71,74,693

Cash Value on Death
1st Year = 1,00,00,000
5th Year = 1,00,00,000
10th Year = 1,00,00,000
15th Year = 1,00,00,000
20th Year = 1,00,00,000
25th Year = 1,00,00,000

HDFC Standard Life Insurance (Term Insurance)
Yearly Premium = 26,350 (25 years term plan)
Sum Assured = 1,00,00,000

Comparing Charges
From 2nd to 12th year, charges for ULIP are lower than Term Insurance. But for 13th to 25th year, the charges for term insurance is less than lifetime II. It is true that the charges for ULIP's are less during the initial years, but during the later years term insurance is cheaper than ULIP. One cannot generalise that ULIPs are cheaper than term insurance.

Comparing Death Benefit
The death benefit that is offered by both TERM and ULIP in case of death after 5/10/15/20/25 years is Rs.1 Crore. Since both ULIP and Term plan are offering the same death benefit, what happened to your invested fund value in case of death in ULIP. They just disappeared (GAYAB ho gaya).All the money you invested just disappeared. And this is the estimate of how much money disappeared based on 10% return per annum.

Mortality after 5 years = Fund value of Rs. 5,58,519 GAYAB ho gaya
Mortality after 10 years = Fund value of Rs.14,34,005 GAYAB ho gaya
Mortality after 15 years = Fund value of Rs.27,67,030 GAYAB ho gaya
Mortality after 20 years = Fund value of Rs.47,80,364 GAYAB ho gaya
Martality after 25 years = Fund value of Rs.71,74,693 GAYAB ho gaya

CONCLUSION
From the above example in ULIPs, though you think you are only paying a portion of your premium towards mortality charges, in reality you are actually paying your whole premium towards mortality charges. For this very reason, ULIPs are lot more expensive than TERM Insurance.

ULIPS are a long term investment

2007-10-26T06:39:00.000-07:00

Comparision of ULIPS vs MFS (India)

2007-10-26T06:34:00.000-07:00

Below is a brief comparision of ULIP (Unit Linked Insurance Product) vs MF (Mutual Funds) specific to the Indian market.

Primary Objective
MFs : Investments
ULIPs: Protection + Investments

Investment Duration
MFs: Works out for Medium term, Long Term Investors. Risky for Short Term investors.
ULIPs: Works out for Long Term Investors only.

Flexibility
MFs: Very flexible. Plenty of scope to correct your mistakes if you made any wrong investment decisions. You can easily shuffle your portfolio in MFs.
ULIPs: Flexibility is limited to moving across the different funds offered with your policy. Correcting mistakes can turn out to be expensive. Moving funds from one ULIP to an other ULIP of a different fund house can be expensive.

Liquidity
MFs: Very liquid. You can sell your MF units any time(except ELSS). Some MF's like those from Reliance have introduced redemptions at ATMs.
ULIPs: Limited liquidity. Need to stay invested for the minimum number of years specified before you can redeem.

Investment Objective
MFs: MF's can be used as your vechile for investments to achive different objectives.(Eg: Buying a car three years from now. Downpayment for a home five years from now. Childrens education 10 years from now. Childrens marriage 15 years from now. Retirement planning 25 years from now. Medical expenses after retirement 25 years from now)
ULIPs: ULIPs can be used for achieving only long term objectives (Chidrens education, Childrens marriage, Retirement planning)

Tax Implications
MFs: All investments in MF's don't qualify for section 80C. Only investments in ELSS qualify for 80C.
ULIPs: Provide Tax Benefits under section 80C.
MFs: Returns on equity MF's are exempt from long term capital gains tax. (Unless tax laws change in the future).
ULIPs: We are moving from EEE to EET. No clarity if ULIPs will be taxed under EET.
MFs: Tax liabilities when moving across from debt to equity funds.(Returns from debt MF's are taxed.)
ULIPs: Very flexible in moving between equity and debt funds(not tax implications until maturity of the policy).

Strings Attached(fine print)
MFs: None so ever. At most you pay a small exit load if any.
ULIPs: Some strings attached for your policy to be in effect. Minimum number of premiums need to be paid. Minimum fund balance need to be always maintained. (I personally donot like policies which say pay three years premium and get insurance cover for the next 25 years since there are a lot of ifs and butts involved. A lot of assumptions made and nothing is in your hand, it could turn out your fund balance might be exhausted after just 12 years of insurance cover).

ADVANTAGES ULIPS

Can easily rebalance your risk between equity and debt without any tax implications.

Best suited for medium risk taking individuals who wish to invest in equity and debt funds(atleast 40% or higher exposure to debt). No additional tax burden for those investing mainly in debt unlike in MFs.

ADVANTAGE MFS

Better returns than ULIPs.
Lower charges than ULIPs.
Very flexible and enables you to switch your investments from non performing MF's to better performing MFs
Very Liquid can be redeemed at anytime.
Best suited for medium to high risk taking individuals who wish to invest a significant portion in equity funds(atleast 65% exposure in equities).