investment strategies

Given life’s vagaries each of us would like to save and invest our hard-earned money to tide us through the rainy days, and the occasional black swan, when they come. Where we err though is to jump headlong into “investments” just because we need to be seen with the “crowd.” Someone in the next cubicle made a neat killing on that small-cap stock…so investing in small-cap stocks is the way to go. Let me invest all of my money there. Wrong! Did you stop for a minute and think about any of the following: “Do I have a BIG fat emergency fund in place?”, “Have I planned for those annual expenses (they are investments, vehicle insurance, gym fees, et al.) that seem to popup each month?”, “Have I planned for all those expenditures that I know will happen within the next 6-months?”.

Investing before saving is akin to building the first-floor of a house before the foundation and ground-floor. Looks nifty but is a house of cards eagerly waiting to collapse at the first wind. You should never plan your finances to be this house of cards. Remember this mantra: Savings are for short-term goals. Investments are for medium and long-term goals. Savings always come before investments. I like to think of anything less than a year away to be short-term, between a year to three years away to be medium-term, and more than three years away to be long-term. Get this simple formula right and you’re well set for a bright and prosperous financial future.

With a myriad of savings and investments options available at your fingertips today how do you decide where to save and where to invest. Short-term goals require instant access to your money and full safety of principal for which bank savings accounts and liquid mutual funds are perfect options. Medium-term goals require safety of principal and a small amount of growth for which money-back life insurance policies, recurring deposits, fixed deposits, and debt mutual funds are typical choices and some of these choices such as insurance are tax effective too. Long-term goals require a large amount of growth for which, endowment and unit-linked (equity-oriented) life insurance policies, and equity mutual funds are great choices.

Insurance deserves a special mention. To those of us who are too busy to manage our finances insurance in various forms serves as the perfect vehicle for meeting our savings obligations and investments goals. From money-back insurance policies that return cash back to us at regular intervals, to traditional endowment insurance policies that accumulate money over the long-term, to unit-linked insurance policies that have a growth component (and not to forget, should something happen to you, all life insurance policies come with an automatic payout benefit to your near and dear) insurance can help meet your savings and investment targets. I view health insurance as an investment too – just think of it as a future investment into your own health and into your family’s health.

Once you’re on this path to financial prosperity, the very next question that comes to mind is “Am I saving and investing enough?” Really a tricky question to answer because as John C. Bogle would perhaps ask you: “How much do you think is enough for you?” My advice to everyone who asks me this question: Clearly write down your short, medium, and long-term goals. Then write down how much money you specifically need to set aside each month for each of these goals. Got any spare cash left? Save it. Or invest it. Or splurge it. The choice is fully yours to make. And that to me is enough!

{ 0 comments }

The Capital Advisor Tribe

by Vinaya HS on November 28, 2012

in Finance

I was itching to write that title.

It’s been a while since I posted — yet again due to travel, this time a planned one — and by the time I got back there were some super-awesome comments on some of the recent posts.

First up, reader Ashwin introduced me to the concept of a “Restore Clause” in a health insurance policy (read the comments on that post for details). And as with any fancy-sounding marketing verbiage there’s more to it than meets the eye. Simply put, health insurance companies explain the terms and conditions of their restore clauses in gobbledygook. You simply can’t figure out what you’re getting into.

Next up, reader Madhu introduced me to the Reliance ATM Card (read-up details on this concept here and here).

I was hooked in an instant because –

  • The underlying primary mutual fund schemes have returned around 7% per annum.

  • No-fee cash withdrawal at any domestic ATM. No limit on the number of free transactions.
  • International cash withdrawal at Rs 69 + Service Tax. I recently paid Rs 125 + Service Tax for withdrawing cash from my Bank’s debit card. Ouch!

I like it a lot on first glance and if I like it some more I’ll give it a shot.

Quite some learning there.

Hats off to the Capital Advisor Tribe. You guys rock!

{ 1 comment }

About a week back, I received a PR email from IDBI Bank announcing the launch of their Floating Rate Term Deposit scheme. Thought I’d look it up and give you a quick review (a side effect being the evaluation of this scheme for it’s suitability in my ere portfolio).

  • To begin with, if things such as a 364-Day Treasury Bill, average yield, interest rate outlook, etc. don’t really make much sense to you, then it’s a good idea to stay away from this product. This investment has a lot of underlying technicality and is suitable for you if and only if you understand all of that. I’m really glad that IDBI Bank states this upfront in the product literature. To quote — “FRTDs are ideally suited for the financially literate investor, who is not averse to taking a call on the directionality of future interest rates/inflation.”

If you’re still reading, I’ll assume that you’re a pretty savvy investor. So, I’m going to highlight some of the nuances that aren’t readily inferred from a casual read of the product literature.

  • The minimum term is 1-year and the minimum lock-in period is also 1-year. That’s a disadvantage because given the current market scenario, you’d definitely want to have as much financial flexibility as you can. You don’t get that when premature withdrawals aren’t allowed for a year.

  • The base interest rate is reset each quarter but the mark-up (what you get over and above the base interest rate) is only reset once every year. While, the base interest rate is pegged to the 364-Day Treasury Bill, the mark-up seems to be an internally calculated number. So, while you can have your personal opinions about the T-Bill rate movement, you don’t have even that choice on the mark-up. I think the mark-up would be adjusted to keep the total interest rate competitive in general to what’s available from other Banks.

  • I couldn’t determine what would happen if, for example, you open a new FRTD on, say today, 03-Sep-2012. Would your interest rate be reset at the next fixed quarterly reset point of 01-Oct-2012 or at the point when your FRTD crosses a quarter (on 02-Dec-2012). I’m guessing it’d be the former but it’d be better to clarify with the Bank.

  • Personally speaking, I won’t be taking this up for my ere portfolio. Vis-à-vis fixed deposits, I’m currently doing much better elsewhere and with a monthly payout (the FRTD offers a quarterly payout and the other thing I’m not sure about the product is whether the interest accumulated is compulsorily paid out each quarter).

Here’s some additional information from the mailer –

The product is likely to appeal to the retail investors who borrow at floating rates (say, for home loans) but invest at a fixed rate, and are consequently exposed to high interest rate risk. FRTDs ensure that their loans and deposits move in tandem and would help to partially immunize their asset-liability portfolio from such risks.

Investment in FRTDs is also beneficial when the interest rates are expected to rise as it enables the investors to take advantage of periodic increase in the market rates. In a rising interest rate scenario, the customers generally go in for short term deposits and keep rebooking them as and when interest rates move up. FRTD would help do away with this cumbersome process.

  • I contest the first argument because say when home loan rates go down why would you want your deposit rates to also go down in tandem? You’d always want to earn as high as possible on your deposits no?

  • I contest the second argument because there’s no published logic for calculating the mark-up.

That said, do you think this product has a place in your portfolio?

I’d love to hear your thoughts.

{ 3 comments }

About three months back, I first wrote about the possibility of including high dividend yield stocks as one component of my early retirement portfolio. That combined with the little known fact that D has a keen interest in equity trading (seriously, she just started trading one day out of the blue and has become quite adept at it now) meant that I was passively watching — for some real world experience — if anything in D’s portfolio would yield dividends.

By chance, and I’m really lucky here, that happened twice.

First, TELCO with an average purchase price (including the trading cost of buying) of Rs 239.31 gave a dividend yield of 1.67% (Rs 4 / Rs 239.31).

Second, INDGAS with an average purchase price (including the trading cost of buying) of Rs 227.66 gave a dividend yield of 2.20% (Rs 5 / Rs 227.66).

Paltry? Yeah! (That annuity plan we recently tore apart was much much better.)

The other problem is that dividends are most often a once-in-a-year event while I’m looking at a steady monthly income. Or maybe I should consider having a few such annual payouts in my portfolio as booster income? Or maybe I should just give D a separate corpus and ask her to generate a target monthly income [from profits, say Rs 1,000 per month for every Rs 100,000 invested] through equity trading and have that feed into my ere portfolio?

More thoughts to chew upon.

{ 4 comments }

Since I’m now on the lookout for ways and means for generating a steady investment income each month, my eyes and ears perk up at the slightest sight and sound of any financial instrument that would let me achieve that. That’s how I got interested in the LIC Jeevan Akshay VI Immediate Annuity Plan. Thought I’d quickly review this plan and see how it stacks up against my “targeted monthly investment income” strategy.

But first, some highly recommended pre-reading — features and benefits of this plan.

Now here’s what I think about this annuity plan –

  • Here’s the most important fact – Keep in mind that you, as the purchaser of this annuity plan, will never get to see your lumpsum money invested in this plan ever again once you’ve handed it over to LIC. You do have an option where your nominee or spouse gets back the lumpsum invested — but that’s only after you’re no more. Personally and financially, I’m still not at that stage where I can just close my eyes and handover a chunk of my money to LIC and forget that I ever had it. It seriously requires a big leap of faith which I might probably cross a few years down the line but certainly not today.

  • This plan is also a bit complicated with seven different flavors for paying out the annuity. The annuity amount varies with each flavor and once you choose an option it can’t be changed even when your personal situation changes (say when you get married and therefore you’d like your spouse to continue to receive the annuity when you’re no more or when you have a child and therefore you’d like to add him/her as a nominee). This lack of flexibility sounds pretty lame to me! Does LIC expect one to get through all of these stages (the minimum age at entry is 30-years) before thinking of buying this policy?

  • If you’re already married but don’t have a kid yet, the option that makes most sense is “#6 — Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.” But remember, when you do have a kid, you can’t go back and opt for Option #7 (see below) which is what you’d typically want to do.

  • If you’re already married and already have a kid, the option that makes most sense is “#7 — Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of annuitant. The purchase price will be returned [to the nominee] on the death of last survivor.”

I then ran the numbers for “example scenarios” for my case and got these results –

Lumpsum investment of Rs 5 lacs (service tax of Rs 15,450 is extra!) with Monthly Payout option –

Image of LIC Jeevan Akshay VI annuity calculation for monthly payout.

That works out to (2,990 x 12)/(515,450) = 6.96% simple interest equivalent.

Lumpsum investment of Rs 5 lacs (service tax of Rs 15,450 is extra!) with Yearly Payout option –

Image of LIC Jeevan Akshay VI annuity calculation for yearly payout.

That works out to (37,350)/(515,450) = 7.25% simple interest equivalent.

Compare that with something much much simpler — one of my Fixed Deposits that’s currently yielding (and will continue to do so for the next two years) 9.18% simple interest equivalent. That’s nearly 2% higher than the annuity!

Since both the annuity plan and the fixed deposit result in taxable income and both are subject to interest rate risk, it’s a direct apple-to-apple comparison. The annuity guarantees a fixed rate which as long as it is lower than the fixed deposit rate is disadvantageous to you. On the other hand, you don’t know what the fixed deposit rate would be say 5-years from today. So it’s a toss between predictability vs. probability.

I then ran some additional calculations to see how the yield would vary across lumpsums invested.

Image of LIC Jeevan Akshay VI yield calculations in Excel.

Download IconFeatured Download –
Click here to download the LIC Jeevan Akshay VI (Online) Excel spreadsheet for calculating your yield.

Link to image of LIC Jeevan Akshay VI yield curve.

As you can see there’s no big variation. I also didn’t see too much of a difference in yield across the age bracket of 30 — 40-years (when you’d typically expect to be looking at ere).

Finally, to wrap things up, I don’t think I will be opting for this annuity plan right away primarily because it’s a bit inflexible given my current family situation, the yields are on the lower side, and I’m a bit hesitant to send my money into the cloud.

How about you? Do you find this plan advantageous to your situation?

Funny thing is, a few days after I’d registered myself on the portal, an LIC Direct Marketer called me up and his advise to me was that since I was only 32-years old I didn’t need a pension/annuity plan but instead needed a Jeevan Anand policy.

Maybe I should email this link to him.

{ 7 comments }

In my most recent early retirement update, I’d published the below chart –

Image of Chart showing Potential Income vs Expected Expenses

This chart illustrates potential monthly income earned and actual expenses incurred as a function of time over the past four-quarters. I’d explained these terms further by saying –

When I say potential income, I am referring to any passive income plus the income that I could potentially generate by liquidating all of my low-liquidity and medium-liquidity investments, consolidating it into one corpus, and earning a monthly interest off this corpus at an assumed average rate of interest. My first target is to have at least two successive quarters where the income line is above the expense line. Now, that would be something!

After I wrote that article up, I began thinking could not stop thinking why “just potential income?” By now, I have saved-up a pretty decent corpus. So, what lucky star am I waiting for to fall from the skies? Why don’t I actually start earning that monthly interest right away and see how much of that “potential” is really “actual”? The interest rates are pretty high and solid right now (especially around the 24-month tenure). So, I can actually begin to test the waters of early retirement while I continue to earn a pretty good salary from work.

These incessant thoughts got my head into a high-rev mode and I began to dig deeper into options that I could explore for generating a steady monthly income (because after the what, why, and when of a financial goal the real pain lies in the how to get there). I considered –

  • Fixed Deposits with monthly interest payouts

  • The Post Office Monthly Income Scheme

  • High-interest Liquid Mutual Funds

  • Debt/Income Mutual Funds

  • Monthly Income Plans from Mutual Funds

  • [And to some extent even] Annuities from Life Insurance Companies!

Each of these options has its own idiosyncrasies — investment style, lock-ins, income tax efficiencies or lack thereof, and so on. For example, you’re not really guaranteed a monthly income by a Monthly Income Plan from a Mutual Fund, the Post Office Monthly Income Scheme guarantees a fixed monthly income but locks-up your money for five years, an Annuity from a Life Insurer guarantees a fixed monthly income for quite a long time but you don’t get to see your money ever again, and so on.

All of that brainstorming and research was frankly overwhelming — seriously, once you get into the passion of early retirement, it starts to take a life of its own! To come back on track, I started to question my real intention — was it “To test the waters of early retirement?” or was it “To build the most optimized early retirement portfolio?” And that was pretty easy to answer. I really only want to test the waters of early retirement and therefore I simply settled on a “Think BIG, Start small” strategy.

So here’s what I’m going to do (or have already started doing) in the coming days –

  • Accumulate all of my high-liquidity savings and investments into a single corpus (say X). Most of these are anyway nearing maturity and so I don’t have to prematurely close anything.

  • Keep X/2 in fixed deposits with a monthly interest payout. I’m shooting for the 24-month tenures (or approximately, because in some cases 24-months plus 1-day gets you a higher interest rate!). But, on an average, the monthly payout seems to cause a discount of 0.07% on the published interest rates. So, if the published interest rate is 9.25% you’ll end up receiving 9.18% simple interest with the monthly payout option.

  • Keep X/2 in high-interest Liquid Mutual Funds (my research suggests that the yields here are a bit higher than what you get on the 24-month fixed deposit). Then withdraw exactly the interest (or gains) earned each month and add it to the above monthly payout.

  • Try to live off this investment income plus the passive income from a couple of other sources and figure out how to make ends meet. I foresee this to be a serious challenge — given the current pretty indulgent salary-based lifestyle (and that’s also why I want to test the waters of early retirement from this aspect as well).

  • I also want to retain the flexibility to discard this strategy at any time should it not work as expected (and the above investment choices would give me the needed flexibility). I’m also currently OK with having to pay any income tax that needs to be paid on the investment income. After all, my primary objective beyond everything is to test the early retirement waters from all angles.

  • As some of my other investments mature over the next couple of quarters, I will divide the proceeds equally between the above two investment vehicles. I’m also going to add all savings from my salary in the same proportion. The intent is to keep growing the monthly payouts.

  • Finally, overarching is the support and commitment that I have from D for this experiment.

I think it’s going to be a great challenge.

What do you think? Can you spot any drawback with this strategy?

{ 8 comments }

Goals First. Investments Next.

by Vinaya HS on May 28, 2012

in Finance

Here’s a question that I often receive –

Hi. I’ve recently started my career at a software firm. I earn Rs XX,000 per month. Being new to personal finance, I’m not aware of investment options for beginners. Could you please guide me towards suitable investment options?

Whenever I see such a question or an equivalent variant, my first thought is “Oops! Wrong way to approach one’s personal finances.” Investing is a worthy cause, but what are you investing for in the first place? Do you want to buy your first vehicle? Do you want to clear your education loan? Do you want to double your money overnight? Every investment that you make has to be driven by a “Why?”

It’d be very easy for me to blindly ask you to put your money in a balanced mutual fund or in a dividend yield fund or in the public provident fund. But without knowing that “why” you’d end up putting your money in the public provident fund when all you wanted to do was to save some money for a down payment on your bike.

So, sit down and identify your [financial] goals first (here’s a great starting point). Investments come much later.

And if you currently have no idea what you want to invest for, I’d recommend that you simply open a 1-month fixed deposit each month and keep renewing them till you figure the “why” out. By then, you’d have learned to save, to invest, to earn interest, and to make your money work for you.

Finally, I’m not sure if this problem is specific to the software industry — too much money too early in one’s career and no clue what to do with it all.

What do you think?

{ 4 comments }

A few days back, I happened to see an ad for this Monthly Income Plan from MetLife, a life insurance company. In this plan, you’re supposed to pay the premiums for about 10-years and then post these 10-years of paying premiums you’re guaranteed a fixed monthly income for the next 15-years.

As it always happens, I immediately started to think if a Do-It-Yourself (DIY) Monthly Income Plan (MIP) would be much much better off for you (after all why would you ever want the monthly income to stop after X number of years?) than a monthly income plan from a life insurer. In the MetLife plan, there are some complexities involved around your death and the related death benefits (since this is an insurance-cum-investment plan) but we’ll ignore all of these since I assume that you’d want to enjoy the monthly income in your own hand and not eye it virtually (!) from up above.

In the product brochure of the MetLife Monthly Income Plan (click here to download the product brochure), the following example illustration is shown –

Image of an example benefits illustration from the MetLife Monthly Income Plan product brochure

You can see from the above illustration that you pay Rs 35,541 each year for 10-years and then you get back Rs 2,500 per month for 15-years. After 15-years, the monthly income stops!

But what if you think a bit different from everybody else, don’t mix insurance and investment, and go for a do-it-yourself monthly income plan? Here’s what the above illustration would turn into –

Image of a do it yourself monthly income plan at a 6 percent rate of interest

You’d get the same Rs 2,500 per month in perpetuity! You could open a new Fixed Deposit each year for 10-years and implement this plan. It’s as simple as that. Or, you could even open a Recurring Deposit with a monthly payment of Rs 3,000 per month. There are many options. But what’s more important is that you stay in complete control of your money (it’s in front of your own eyes).

For the purpose of comparison with the insurance plan, if your DIY MIP were to earn an 8% rate of interest, here’s what your monthly income would look like –

Image of a do it yourself monthly income plan at an 8 percent rate of interest

About Rs 3,700 per month in perpetuity! (The insurance plan still continues to pay out only Rs 2,500 per month.)

And at a 10% rate of interest, here’s what your DIY MIP look like –

Image of a do it yourself monthly income plan at a 10 percent rate of interest

More than Rs 5,000 per month in perpetuity! (The insurance plan still continues to pay out only Rs 2,500 per month.)

Finally, the corpus left over (the maturity benefit figure in the insurance illustration) from the insurance plan is seriously laughable when you compare it with the corpus left over from your DIY plan.

So, why would you ever want to give your hard-earned money to a life insurer?

What do you think?

{ 13 comments }

[Sorry if this topic seems a bit advanced and haywire in its presentation but I felt it'd be good to share with you.]

I was reading-up on and strategizing the other day about the possibility of including high dividend yield stocks as one component of my early retirement portfolio. The general line of thought in this strategy is to buy and hold high dividend yield stocks and then use the dividends paid out each year as one of your sources of passive income.

Post my initial reading, here are some of the thoughts spinning around in my head –

  • The dividend yield for a chosen stock over a 5-year window should consistently have been above the post-tax rate of return on an equivalent debt instrument (possible benchmarks — a one-year fixed deposit or a one-year recurring deposit at prevailing rates of interest). Else you might as well stay invested in the equivalent debt instrument.

  • I haven’t even heard the names of most of the current highest dividend yield stocks (an example list). On the other hand, the stocks that I am comfortable and familiar with don’t seem to payout a high enough dividend yield (when compared to the equivalent debt benchmarks).

  • Does one need to even bother about capital appreciation in such a portfolio?

  • If picking individual high dividend yield stocks into a portfolio, when’s the correct time to recalibrate/churn the portfolio (because you can’t predict dividend yields)?

  • Or should I chuck it all and simply be conservative in a good old fixed deposit?

I think I need to explore more. But have you ever attempted such a strategy before? How did it fare? I’d love to hear your thoughts. Even if you haven’t, I’d still like to hear about any research that you might have done on this topic.

{ 2 comments }

To date, I haven’t understood why some — actually many — financial experts advise you to not save-up your money in a Public Provident Fund account. Thankfully, I’m not in that camp of thought. I have always encouraged you to save the maximum allowed limit (currently Rs 100,000) each year in your PPF account. In fact, I wrote this post as soon as I came home having made my annual deposit into my PPF account. Let me tell you that I was very happy when I saw the interest credited for the past financial year (though not as happy as I could have been).

Let’s make some simple calculations –

Let’s suppose that you’ve managed to save-up a total of Rs 500,000 in your PPF account over a period of 10-years. In the 11th year, at the current rate of interest, you’d get Rs 44,000 (!) purely as interest earned. In the 12th year, you’d get nearly Rs 48,000 (!!) purely as interest earned. In the 13th, you’d get nearly Rs 52,000 (!!!) purely as interest earned. This continues to only increase according to the laws of compounding.

Seriously, what’s not there to like about that? Don’t forget that the amount that you put-in, the interest that you earn, and the amount that you withdraw are all income-tax free. There’s no need for you to worry about whether the capital markets are headed-up or headed-down or headed-nowhere. What more should the PPF account offer to convince the financial experts? (Hint: With equity there’s something to write about each day and get you to take action/change course but with the provident fund there isn’t.)

But here’s a previous post with an extremely healthy debate in the comments section where readers suggest various other options including the Employees Provident Fund and SIPs in Mutual Funds. I encourage you to read that article in its entirety.

As I’ve commented over there, it’s not an either this one or that one decision. In fact, I’m currently invested in all three forms. Just that I’m a lot peeved when someone says that the Public Provident Fund isn’t a worthy option and especially when that advise is geared towards a younger audience. Suppose you start at 23, by the time you’re in your early 30s, you’d be making a cool Rs 50,000+ per year (per the example above) simply in interest alone. And if you managed to save-up a whole lot more, you’d be making an even cooler amount as interest earned.

Seriously, don’t listen to those financial experts! Show them what an expert you are!!

{ 21 comments }

While early retirement is my primary goal, a common feedback that I hear from readers of the blog is that I am quite vague when it comes to specifying absolute amounts and absolute figures with respect to my own situation. I’d really love to share these figures with you but the very nature of the medium where I have to share it also ensures that I can’t do so. As a middle ground, I’ll try and publish as much data as I reasonably can out here and if you’re really interested in the specifics just write to me and we’ll continue the conversation over email.

Here’s the first chart showing the percentage of high liquidity, medium liquidity, and low liquidity investments [in my early retirement portfolio] as a function of time over the past four-quarters –

Image of Chart showing Percentage of High Medium and Low Liquidity Investments vs Time

You can observe from the chart that I’ve slowly increased the low-liquidity investments over the past year in order to take advantage of the current interest rate cycle. In other words, I actively manage my early retirement portfolio to take advantage of any opportunistic market situations.


Here’s the second chart showing potential income and expected expenses as a function of time over the past four-quarters –

Image of Chart showing Potential Income vs Expected Expenses

When I say potential income, I am referring to any passive income plus the income that I could potentially generate by liquidating all of my low-liquidity and medium-liquidity investments, consolidating it into one corpus, and earning a monthly interest off this corpus at an assumed average rate of interest. My first target is to have at least two successive quarters where the income line is above the expense line. Now, that would be something!

{ 3 comments }

For the first six-years of my professional career, I think I paid credit-card bills in the five-figures each year! I bought huge quantities of stuff that I simply threw away later. If instead, over these early six-years, I had saved Rs 70,000 each year in the Public Provident Fund (PPF) account that my mother had opened in my name –

  • I would have been richer today by close to Rs 700,000 (even if I had just deposited the minimum Rs 500 per year post the six-years)! Let’s translate that number into something real. 700,000 @ 9% rate of return = 63,000 per year or more than 5,000 per month in passive/interest income alone. My early retirement graph would have looked very very different.

Here’s how the situation would have looked today but actually looks today –

PPF_Graph_1

I’ve already lost the magical power of compounding and no matter how much money I put-in today I can never catch up with the “could have been here” line. Compounding works best when you save the maximum you can as early as you can.

And here’s how the situation would have looked vs. will actually look upon maturity of the account –

PPF_Graph_2

A 2x difference! Seriously! Nothing that I bought on those credit-cards was worth this loss.

{ 14 comments }

In the past one year, my Fixed Maturity Plans (FMPs) have fared only slightly better than my Bank Fixed Deposits (FDs) of comparable tenure.

  • A 1-year FMP from IDFC achieved an APR of 10.05% (equal to an APY of 10.44% with quarterly compounding).

  • A 1-year FMP from SBI achieved an APR of 9.89% (equal to an APY of 10.26% with quarterly compounding).

  • A 1-year FD from HDFC Bank achieved an APR of 9.25% (equal to an APY of 9.58% with quarterly compounding).

Ignoring the complexities of investment timing and income tax, that’s less than a percentage point in difference! Have you seen anything different with your FMP and FD investments?

Note:

Here’s how you do the APR (simple interest) to APY (compound interest at a certain compounding interval) conversion.

If you’re totally lazy to the APR to APY conversion by hand, here’s a quick Android-application that I hacked. If you’re adventurous enough, you can download the .apk file and install it on your Android-phone as an unsigned application. Let me know if you run into any trouble — it should run fine on most Android environments.

{ 5 comments }

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.

Regards,

Vinaya

What do you say?

{ 26 comments }

The following is a guest post from reader Nikhil Shah and deals with the intricacies of investing in the soon to close investment opportunity in PFC’s Tax Free Bond Issue along with the income tax angle. Nikhil’s analysis also contains a very interesting perspective on how you can plan for major financial goals through this investment route. A couple of weeks back, Nikhil had also put-up a detailed analysis of NHAI’s Tax Free Bond Issue.

Since I’ve already provided some background information to these tax free bond issues, this time we’ll go straight to the calculations and analysis which you can download from the link below:

Click here to download calculations and analysis for the PFC Tax Free Bond Issue (courtesy Nikhil Shah).

Please let me know if you have any questions by leaving a comment to this post. I will respond to your queries at the earliest.

Disclaimer:

All views and opinions are my own and have no relation whatsoever with any person or firm. The information provided is just for guidance. It may not be absolutely or technically correct. The information could easily be dated. Always check with Fund Company/Brokerage/Financial Advisor/other relevant institution for the correct information. Information provided on this Blog/Web Site is for informational purpose only. It is the reader’s responsibility to ascertain the facts, conditions and risk factors. All investments are subject to market risks. Read all scheme related documents carefully before investing. You are advised to consult your financial advisor before taking any investment decision. Read the prospectus before investing in these bonds.

{ 4 comments }

DSIJ_Stock_Market_Book
Here’s how you can participate and win the Stock Market Book by Dalal Street Investment Journal this January. Simply leave a comment explaining what, in 2012, is your primary financial goal and why? Remember, the more detailed your entry the better are your chances of winning.

And here’s a sample chapter from the book.

I’ll announce the winner in about a week’s time.

{ 8 comments }

The following is a guest post from reader Nikhil Shah and deals with the intricacies of investing in the soon to close investment opportunity in NHAI’s Tax Free Bond Issue along with the income tax angle. Nikhil’s analysis also contains a very interesting perspective on how you can plan for major financial goals through this investment route. A couple of weeks back, Nikhil had also put-up a detailed analysis of L&T’s Infrastructure Bond issue.

The Central Board for Direct Taxes (CBDT) has allowed four firms to raise up to Rs 30,000 crore through the issue of Tax Free Bonds in FY 2011-2012. The National Highways Authority of India (NHAI; an autonomous authority of the Govt. of India under the Ministry of Road Transport and Highways (MoRTH) constituted on Jun 15, 1985) and the Indian Railway Finance Corporation (IRFC) have each been allowed to raise up to Rs 10,000 crore. The Housing and Urban Development Corporation (HUDCO) and Power Finance Corporation (PFC) are allowed to raise up to Rs 5,000 crore each. Tax free bonds means that the interest earned from these bonds is exempt from income tax and is therefore not considered while computing one’s total income.

The Rs 10,000 crore National Highways Authority of India bond offering which opened for subscription on December 28, 2011 offers a good opportunity for investors to lock-in funds at higher yields and earn tax-free interest income.

40% of the Rs 10,000 crore issue is earmarked for institutional investors while another 30% is earmarked for retail investors and high net worth individuals. The bonds will have differential coupon rates of 8.2% for 10-years and 8.3% for 15-years. The NHAI issue presents a good opportunity for investors to lock money in “AAA”-rated sovereign-like bonds at higher yields. Apart from high coupon rates and safety, these bonds will be very liquid because of the large float. Investors will easily be able to buy and sell these bonds on the exchange.

An 8% tax-free coupon rate is very much comparable to an investment product that delivers 12% pre-tax returns. This issuance is even better than bank fixed deposits which are currently giving about 9% pre-tax returns. Also, with interest rates expected to slide over the next few months, these bonds can generate higher returns by giving you an option to sell these bonds at a relatively higher coupon rate.

I’ve prepared detailed calculations and analysis which you can download from the link below:

Click here to download calculations and analysis for the NHAI Tax Free Bond Issue (courtesy Nikhil Shah).

There are six sheets containing the following information:

  • Sheet #1 shows Present Value to Future Value computations.

  • Sheet #2 shows computation of pre-tax yield for Individuals & HUF and also for Banks & Corporates.

  • Sheet #3 shows some useful calculations and tools.

  • Sheet #4 shows how much to invest to get desired amount.

  • Sheet #5 shows Child Education Expenses Planning via Tax Free Bonds

  • Sheet #6 shows Retirement Expenses Planning via Tax Free Bonds.

For additional information about this bond issue, please download the FAQ from the link below:

Click here to download FAQs for the NHAI Tax Free Bond Issue (courtesy Nikhil Shah).

Disclaimer [from Nikhil]:

All views and opinions are my own and have no relation whatsoever with any person or firm. The information provided is just for guidance. It may not be absolutely or technically correct. The information could easily be dated. Always check with Fund Company/Brokerage/Financial Advisor/other relevant institution for the correct information. Information provided on this Blog/Web Site is for informational purpose only. It is the reader’s responsibility to ascertain the facts, conditions and risk factors. All investments are subject to market risks. Read all scheme related documents carefully before investing. You are advised to consult your financial advisor before taking any investment decision. Read the prospectus before investing in these bonds.

{ 6 comments }

The following is a guest post from reader Nikhil Shah and deals with the intricacies of investing in the soon to close investment opportunity in L&T’s Infrastructure Bond issue along with the income tax angle. Earlier this year, Nikhil had also put-up a detailed analysis of the previous L&T bond issue.

Dear All,

The year is coming to an end and it’s time to plan and invest for saving your income tax. Apart from your regular tax saving instruments eligible for deductions of up to Rs 1 lakh, there are long-term infrastructure bonds in the market. These infrastructure bonds are debt instruments wherein an investment up to Rs 20,000 is eligible for individual income tax benefits under section 80CCF.

The yields on Government Securities have been on a downturn in the recent past. Currently the 10 year G-sec is trading at around 8.31% which is 57 bps (basis points) lower than the October closing which was 8.88%. In other words, INFLATION is going down.

So you are requested to please grab this wonderful opportunity and invest in L&T Infra Bond issue which is currently running and closes on 24-Dec-2011. I’ve also created an investment analysis calculator which you can download from the link below.

Link:

Click to download a detailed analysis of L & T Infra Bonds.

Regards,

Nikhil Shah

{ 5 comments }

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.”

{ 0 comments }

A reader writes-in:

Is it worth taking term insurance when you’re in your late 30’s? Let’s say I purchase term insurance for a sum assured of 50 lacs and for a period of 22-years. The yearly premium is around 18,000 which means I will be losing nearly 4 lacs by the end of the policy term. Can you suggest a better option so that I am covered on both insurance and investment? I am not interested in other types of life insurance schemes.

Now I fully understand that the purpose of term insurance is death benefit to family who are dependent on me. My only worry is paying such high premiums and not earning any returns. It’s really pinching. Please share if you have any thought that covers life and gives good returns so that my hard earn money does not go to insurance company.

First things first. When you have family dependent on you, term insurance is always great to have. Irrespective of your age — but only so long as you can afford to pay the premium. Next, as you have correctly pointed out, term insurance is a pure-risk cover. You (and several others) pay X amount to Insurer Y in the hope of your dependent family receiving Z (a very high multiple of X). Since Z is a very high multiple of X, it’s not fair to also expect returns on X. You give up earning returns on X so that your dependent family can get Z.

Now, there are indeed some term insurance schemes that do offer a Return of Premium (RoP) (such as this one). Perhaps this might be what you’re looking for. But do note that the premium on RoP-term schemes will be higher than that on non-RoP term schemes.

Here’s another thought. Perhaps you could also stagger/ladder your term insurance purchase. Say instead of buying one term plan for one big amount in one go, you could buy multiple term plans for smaller amounts and with varying maturity periods. This way, as you slowly build your own safety-net or self-insurance corpus, you can easily drop one or more term plans and hence reduce your premium outgo. This does however require some upfront thinking and planning.

This directly leads to a much broader question: Should you invest to [self-] insure or should you insure to invest? Too many of us think of investment as a great side-effect of purchasing insurance (because it is marketed that way and so we obsess over ULIP NAVs!) whereas it should be the exact opposite. But how does investing — not only your money but also your time and your skills — with the purpose of becoming self-insured in most aspects of life sound? When you are self-insured you stop worrying about 99% of the things that generally keep people awake. Very easy to say, not that easy to do, but definitely doable if you keep chipping away at it.

What do you think?

{ 4 comments }