asked and answered

I regularly receive emails where readers express their horror stories about LIC’s Jeevan Anand policy. Believing an agent’s (who often happens to be a neighbor/relative/friend) fictional stories of risk and return, they buy the policy only to discover that they need to pay exorbitant premiums for the next 20-years and that when they want to surrender the policy realize that they have a pure yellow lemon in their hand. This realization usually comes after two annual premiums have been paid and the third one is shortly due. So, the question that I am asked to address is should they choose to “pay exorbitant premiums for a few more years and incur a loss” or “pay one more exorbitant premium and incur a loss.”

Here are two sample emails that I recently received.

Email #1

Please suggest whether I should opt for LIC’s Jeevan Anand policy or not. I am looking for a short-term plan. My agent suggested taking a Jeevan Anand policy for 5-years. I need to pay an annual premium of Rs 24,000 and after the term of 5-years, I will supposedly get Rs 2 lacs (1 lac sum assured plus 1 lac bonus as quoted by the agent).

Does this sound OK or are there any hidden loop holes? Will I get al least Rs 2 lacs after 5-years? Is there any better short-term plan offered by LIC?

Email #2

I have an LIC Jeevan Anand policy for which I have already paid 2-annual premiums of Rs 25,000 each. In February, I need to pay the third premium. When I purchased the policy, the agent had said that I can close the policy after 3-years. But he never disclosed the fact that even after paying the third premium, I will only get 30% of the last two premiums paid which comes to somewhere around Rs 15,000. If I close the policy now, I won’t get even a rupee back.

I’m not able to understand how you got Rs 50,000 after 6-years. My agent isn’t helping me with any information either. Should I wait for 6-years and get back Rs 50,000 (like you did)? But I don’t want to pay any more premiums after 3-years. Won’t it be better to pay Rs 75,000 in premiums and get back Rs 50,000 after 6-years rather than pay Rs 75,000 in premiums and get back Rs 15,000 after 3-years?

And, way back in May last year, reader Raghuram had asked:

I have been a regular reader of your blog and have learned a lot from you. I have made good investments and have taken proper health insurance and pure term insurance covers for my family. But one mistake I’ve made goes 3-years back when I took an LIC Jeevan Anand policy for 10 lacs cover for 20-years.

After my marriage, because of pressure from a relative (who happened to be an insurance agent), I buckled and bought this policy without reading it or knowing what I was doing. Now I am repenting. I am paying a premium of Rs 42,016 per annum and I have paid 3 premiums so far. The next premium is due in June, 2011.

I went to the local LIC Office and inquired about “the surrender procedure and the surrender amount” that I may get. If I surrender the policy now, I will get around Rs 24,000, which is less than 20% of what I have paid till now. The officer suggested that I hold on to this policy for 2 more years (total 5-years) and then surrender it so that I can get a surrender value of 12.5% of the insured amount (means 12.5% of 1,00,0000 = 1,25,000.)

That means I have to pay another Rs 84,000 and wait for 2 more years to get 1.25 lacs. Here’s what I’m thinking:

Plan #1 — Surrender the policy today

Total Payment = Rs 42,016 x 3 = Rs 1,26,048
Surrender Value = Rs 24,000
Loss = Rs 1,02,000

Plan #2 — Surrender the policy after 2 more years

Total Payment = Rs 42,016 x 5 = Rs 2,10,080
Surrender Value = Rs 1,25,000
Loss = Rs 85,000

Now I need your help. What shall I do? Please let me know your views and thoughts on this and help me out. Waiting to hear back from you.

Here’s what I had replied and this could be a framework to base your decision upon:

Hi Raghuram,

I’d cut my losses today.

Reasons –

Think about it this way.

Surrender value of 24,000 today = 28,250 two-years from now @ 8.5% in an FD

1st extra premium of 42,000 today = 49,500 two-years from now @ 8.5% in an FD

2nd extra premium of 42,000 one year from today = 45,600 two-years from now @ 8.5% in an FD

So, at the end of two-years you’ve roughly made 15,350 in interest. More if the interest rate is higher. The notional loss of 17,000 b/w Scenario 1 and Scenario 2 is more or less made up by the interest you earn. Plus, you don’t know what will happen 2-years from today…and the 12.5% return is somewhat suspicious…I didn’t find any such Terms and Conditions in my Jeevan Anand.



What do you say?


Reader Subrata asks:

Is leave encashment on superannuation taxable? I’m nearing retirement and would have accumulated 300-days of leave.

I have absolutely no clue on this topic (and I can’t remember the last time I accumulated leave). Therefore, I thought I’d open it up for a wider audience right away.

Do you know the answer?

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Reader Subrata writes-in:

My Public Provident Fund (PPF) account shall complete the original term of 15-years plus an extended term of 05-years in February, 2012. But I’d like to withdraw the balance only in September, 2013 to coincide with my retirement. Will my PPF account continue to earn interest in the interim period from February, 2012 to September, 2013? Please revert with actual clause numbers, etc. from the PPF Act.

My first response was to ask Subrata to check with the bank where he has his PPF account. To this, Subrata wrote back:

No one has so far given me a concrete answer. The bank staff who handle provident fund accounts don’t know even the basic rules pertaining to PPF. If one asks them a question other than the routine ones, their eyes look like those on a dead fish. I do remember reading somewhere that interest is given for the interim period but I’m not sure.

I then actually looked at some of my previous articles on the Public Provident Fund. The answer was right there in one of the comments. I wrote back to Subrata:

I think I have some good news. Here is a link to the PPF Act, 1968. On Page 3 it says (emphasis mine):

(3) Closure of account or continuation of account without deposits after maturity:- Notwithstanding the provisions of sub-paragraph (1), any time after the expiry of 15-years from the end of the year in which the initial subscription was made by him, a subscriber may, if he so desires, apply in Form C or as ‘near thereto as possible’ together with his pass book to the Accounts Office for the withdrawal of the entire balance standing to his credit and the Accounts Office, on receipt of such an application from the subscriber, shall subject to the provisions of sub-paragraph (4) allow the withdrawal of the entire balance (together with interest up to the last day of the month preceding the month in which the application for withdrawals made) after making adjustments, if any, in respect of any interest due from the subscriber on loans taken by him and close his account.

So, you will get the interest till the time you withdraw.

A happy reader who I’m sure will now give the bank staff an earful and a copy of the Public Provident Fund Act!


A reader writes-in:

Hope you are doing good. Need your ideas on saving for my child’s future.

I have made a few investments for my kid’s education. But these are long-term investments which will give returns only after 18-years. In addition to this, I would like to have investments allocated exclusively for my child. These investments must be utilized for ongoing school education and also for meeting irregular/unforeseen child expenses. The investment scheme must be flexible enough to withdraw a partial amount at any moment and must also give good returns. I believe that I am a disciplined investor.

Is investing in a Balanced Fund the right option?

Kindly suggest if you know of any other investment plan that will cater to my need.

And here’s what I answered:

For me, questions regarding investments for children-related goals are tricky because D and I haven’t reached that stage of life yet. But I’ll still give this a go (some of my advice comes from the discussions that I’ve had with my sisters regarding investment options for their kids). I’ll also throw-open your question to other readers on the blog since they might be in a better position to answer.

That said, here are my thoughts:

[Caution: Some general investment advice to begin with.]

For any financial instrument, there are three factors:

  • Investment Liquidity
  • Perceived Risk
  • Expected Return

It’s generally impossible to optimize for all three in one go. If there was such an instrument that has high liquidity, low risk, and high rate of return, we’d all be in the queue to pick (no, grab) a piece of that instrument. You need to always keep this in mind — plus the fact that each of these three factors are subjective (what’s liquid or low risk to you might not be so to me) — when picking-up an investment option.

Coming back to the question on hand,

I think you can split your goals for you child’s ongoing education/expenses into two: short-term ones such as paying for school expenses each year and long-term ones (3- or more years away) such as saving-up for your child’s higher-education. I couldn’t think of any medium-term ones exclusively pertaining to children (Donations? Building Funds?).

With such a split, here’s what my investment approach would be:

For the short-term ones, go for a simple Recurring Deposit at your Bank.

Example: If annual school fees are approximately Rs 60,000, open a 1-year Recurring Deposit with an automated monthly payment of Rs 5,000. While it’s possible to mathematically optimize the Rs 5,000 such that you precisely have Rs 60,000 at maturity, I’d refrain from doing so because the extra cash (in the form of the annual interest earned) will act as a margin of safety.

For the long-term goals (3- or more years away), I’d go with either a pure-Equity fund (such as HDFC Equity or HDFC Top 200) or a balanced fund (such as HDFC Prudence or HDFC Balanced) (growth options).

I’m personally inclined towards the balanced fund route. But if you have time on your side, you could start with a pure-Equity fund and two-thirds of the way in start switching out to a balanced fund. But whatever you choose, do review your investments at least once every quarter. The balance in this kitty can also serve towards unexpected expenses incurred towards your child.

Having put across my thoughts, I’d like to now throw it open to you. What do you think of this plan? Can you suggest a better plan based on your experience?

Bonus reading material:

Here’s a great article (unrelated to the subject on hand but has some really good takeaways) that I came across. I particularly liked this statement:

I’ve also learned some things about Risk. Risk is an arbitrary concept, until you experience it. And I’ve noticed myself focusing more on the consequences of something going wrong than just the probability of that happening. As a result, I tend to urge my clients to make decisions that err on the side of caution.”


Asked and Answered: March, 2011

by Vinaya HS on March 24, 2011

in Finance

Here’s what was asked and answered by Capital Advisor in March, 2011. It’s a loan closure special. If you have a question on managing your personal finances, send me an email and I’ll respond at the earliest. If your question’s beneficial to a wider audience, I’ll publish it in a future edition of “Asked and Answered,” without revealing your personal details.

Query #1: On closing a personal loan.

I need your advice. Here’s my scenario: Loan Amount: Rs 150,000; Tenure: 48 Months; Interest: 15%; Bank: Axis Bank; Loan Date : 01-May-2009; No repayment charges. Can you please evaluate whether this is the right time to close my personal loan and what could be the amount I should close it for?

You can download my calculations with respect to your situation.

There are 2 sheets:

  • One which assumes the Advance EMI model, and

  • One which assumes the Arrears EMI model.

If you compare your Loan Amortization Sheet given by the bank with both of the above sheets, you’ll know which model is being used with your personal loan. In either case, you’ve already paid over 65% of the total interest due. Therefore, in my opinion, it doesn’t make sense to close the loan now since you’ve already paid the majority of the interest due to the bank. Whatever EMI you pay now will mostly be towards the principal itself.

But, if your overarching goal is to be debt-free at any cost, then this psychological factor overrides any financial calculations.

Let me know what you decide.

Query #2: Again, on closing a personal loan.

I have a query related to my personal loan. Let me give a brief history. Loan Amount: Rs 200,000; Tenure: 5-years; Interest Rate: 11%; EMI: Rs 4,400; EMI Paid: 10-months. While availing the loan, I had originally opted for a repayment duration of 2-years. But an Executive at the Bank suggested that I opt for a repayment duration of 5-years since that option doesn’t have loan preclosure charges or penalties. Now I want to close my loan and before going to the Bank I want to do some homework and be prepared with some figures in my mind. Could you please help?

The Bank asked you to opt for a longer duration simply because they can make more money off you in the form of interest charges. The Bank also recovers a major portion of the interest due early into the tenure of the loan (in the calculations that you can download below you can see that the Bank has recovered almost 30% of the interest due in the first 10-months of a 60-month loan!).

Download my calculations with respect to your situation.

Again, there are 2 sheets:

  • One which assumes the Advance EMI model, and

  • One which assumes the Arrears EMI model.

If you compare your Loan Amortization Sheet given by the bank with both of the above sheets, you’ll know which model is being used with your personal loan. Either way, you’ve paid about 26% – 28% of the total interest due. Therefore, in my opinion, it does make sense to close the loan now since you haven’t paid the majority of the interest due to the bank.

Let me know if you have any questions.

Query #3: On closing a home loan.

I have taken home loan for Rs 1,870,000 from SBI for 15 years tenure @ 10.75% interest per annum. I started paying the EMI from January, 2008. I am planning to pre-close my loan before December, 2012. Is it good idea to pre-close within half the tenure? Please advice.

Download my calculations with respect to your situation — this one’s different from the earlier two and is simpler to understand.

By December, 2012, you’d have paid around 48% of the total interest payment due. But since it’s a home loan and since the remaining 52% represents a huge chunk of money, it’d be a good idea to go ahead and pre-close the loan.

Again, if you have a question on managing your personal finances, send me an email and I’ll respond at the earliest. If your question’s beneficial to a wider audience, I’ll publish it in a future edition of “Asked and Answered,” without revealing your personal details.


Asked and Answered: February, 2011

by Vinaya HS on February 25, 2011

in Finance

Here’s what was asked and answered by Capital Advisor in February, 2011. If you have a question on managing your personal finances, send me an email and I’ll respond at the earliest. If your question’s beneficial to a wider audience, I’ll publish it in a future edition of “Asked and Answered,” without revealing your personal details.

Query #1: On continuing a guaranteed-return life insurance policy.

I have a question regarding my TATA AIG Maha Life Gold life insurance policy. For a sum assured of Rs 400,000, I am paying Rs 35,000 as annual premium for 10 years. After the 6th year, which is this year, the policy gives me a small cash dividend of around 2%. After the 10th year, a guaranteed annual coupon of 5% that is Rs 20,000 would be paid to me. I am not sure if its good to discontinue this policy at this point of time. Please suggest.

I ran the numbers on this situation — you can download my analysis here — and the results were quite shocking. (Note: The sheet doesn’t consider the paltry cash dividend. Even if it did, the results would still be shocking.) And as I told the reader, “if you play around with the Excel sheet, you’ll find that all TATA AIG needs to do is park your money in a FD and they’d still make money off you! But since you’re already in the 6th year (and I don’t find a surrender option), I guess you have no choice but to continue this policy.”

I then ran the numbers on a similar policy from Bharti AXA called Bharti AXA Aajeevan Anand — you can download my analysis here — and the results were equally shocking.

I’d stay away from such policies. In my opinion, the minimum guaranteed coupon should be equal to the current risk-free rate of return, but then that wouldn’t make business sense to the life insurance company, would it?

Just put those premiums in a Fixed Deposit and you’d do far far better.

Query #2: On the New Pension Scheme.

Could you review the New Pension Scheme (NPS)? I want to invest in a Pension Plan without being taken for a ride.

In my opinion, most Pension Plans, these days, take you for a ride — so much so that sometimes I wonder who the pension is for: you or the insurance company.

While I have a general sense of the NPS, I’m not intimately familiar with its structure and working. Therefore, I pointed the reader to a recent article on NPS in ET Wealth for further information.

Personally, though, when it comes to financial instruments, the NPS isn’t on my radar.

Query #3: On infrastructure bonds.

Have you analyzed the Infrastructure Bonds from IDFC and L&T?

I haven’t. But reader Nikhil Shah was kind enough to share his detailed analysis of these infrastructure bonds some time back.

(Note: Follow me on Twitter, and you’ll have advance access to these downloads.)

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Asked and Answered: January, 2011

by Vinaya HS on January 28, 2011

in Finance

I sometimes receive queries over email from readers who are in a particular situation with respect to their personal finances and want to know what actions they ought to take in order to move ahead. Some of these queries are generic enough to apply for a broader audience. In the past, I’ve tried publishing these ad hoc in one way or the other, but would like to have a more organized approach moving forward. My plan is to collate these queries and my responses over a period of one month and publish them here.

Here’s what was asked and answered by Capital Advisor in January, 2011.

Query #1: Saving for higher education.

I want to save for the higher education of my 2 daughters aged 13 years and 11 years. I’m already investing Rs 5,000 per month in the Post Office Recurring Deposit since 1 year. I can set aside (at maximum) another 4,000 to 5,000 rupees per month. I am a single parent and cannot invest more that this. What should I do? Please advise.

Since you have started a Post Office RD for Rs 5,000 per month a year back and since the Post Office RD requires you to make monthly contributions for a period of 5 years, I’d suggest that you put the additional Rs 5,000 per month into what I’d call a buffer fund. Being a single parent, you could run into a financial situation (for whatever reason) where you’re unable to make the monthly contribution into the Post Office RD and that’s where the buffer fund would be quite handy.

First save up a 6 to 12-month buffer fund. This will cushion you against defaulting on the RD in the event of an economic hardship. Once you do that, you could consider investing the additional Rs 5,000 each month in a Moderate Allocation Fund with a great track record. I particularly like HDFC’s Prudence Fund (Growth option) — I have a SIP in D’s name.

Useful Reading: MorningStar Fund Investor — November, 2010.

Query #2: Building a contingency fund through high-returns investments.

I am looking for an investment scheme wherein I want to invest biweekly or monthly with a variable amount (say Rupees 2,000 or 5,000 or 10,000 — depends on the amount I have with me) and which gives higher returns (15%) and from which I’d be able to withdraw at any point in time.

Follow-up revealed that the reader wanted to do this for contingency planning (read emergency use).

I’m afraid that’s the wrong approach. Funds meant for contingency planning or emergency use shouldn’t be put in investments that seek to generate higher returns. Funds meant for contingency planning/emergency use need safety of capital (read as low a risk as possible) whereas investments that seek to generate higher returns promise exactly the opposite.

If you’re still willing to be adventurous, I’d recommend that you preferably stick to a Conservative Allocation Fund — you can begin your research here.

Query #3: Prepaying a housing loan.

I have a home loan of around 10.5 lacs. I have saved 5 lacs in the form of a fixed deposit and have earmarked this as an emergency fund. I’ve been thinking of using this for making part prepayments on the home loan but haven’t taken a decision yet. I also have a ULIP from ICICI Prudential with an annual premium of 1 lac. It completes 4 years next year and I want to close this and invest in a Post Office Monthly Income Scheme. What would you suggest?

Wouldn’t it be a better idea to close your ICICI Prudential insurance policy sooner? If you’ve already completed 3-years, you can surrender it right away. Think about the Rs 1 lac that would straightaway appear on your cash flow each year. You can use this to make part prepayment on your home loan (and make your home truly yours) instead of dumping it in that lame insurance policy for another year (and making ICICI richer!).

If your goal is to be debt-free, you could also use the surrender proceeds to make an immediate and huge prepayment on your home loan. But if your goal is to create a passive source of income, you could opt for the Post Office Monthly Income Scheme and do what I suggested earlier.

I’d continue to keep the Rs 5 lacs as a major-emergencies fund — probably split it into 5 fixed deposits of Rs 1 lac each.

Would you recommend anything different?