Once again the trend in the insurance sector has moved back to ULIP's after a long lull. Many people who have not revived their polices has started reviving their policies after the upbeat in the stock market. But why is it that there has been so many lapsations during the market downtrend? where as it was the right opportunity to invest in the stocks to gain maximum.
As per my view 75% of the lapsations happen because the agent is not well trained and equipped to make his client understand the implications of investing in ULIP's.
Secondly, it has become a trend to sell insurance as a short term investment product to make maximum gains, whereas insurance is a long term investment product.
ULIP's are to be sold to those people who know about the stock markets or the clients are to be educated about the investment and the returns by investing in ULIP's.
One thing for sure ULIP's are good investment tool to clients if only their goal is long term, but it is never advised to buy ULIP's for short term gains.
Sunday, December 29, 2024
Compounding-The 8th Wonder of the World
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” ― Albert Einstein.
This little story shows you the power of compounding and the points out the fact that the earlier you start investing the better it gets.
Illustration
Let’s try and understand this through an example of two friends, Ram and Shyam. Both start working at the same time at the age of 23. Ram starts saving when he turns 25 and invests Rs 50,000 every year. Assuming that on this he earns a return of 10% every year, at the end of ten years, Ram would be able to accumulate Rs 8.77 lakh. After this, due to financial constraints Ram is not able to invest any more money. But at the same time he does not touch the fund that he has already accumulated, hoping to live of it when he retires.
He lets the Rs 8.77 lakh grow and assuming that it continues to earn a return of 10% p.a., he would be able to accumulate around Rs 95 lakh by the time he turns 60. So the Rs 5 lakh (Rs 50,000 x 10 years) he had invested in the first ten years of his working life would have grown to Rs 95 lakh. This even though he stopped investing entirely after the first ten years.
Now let’s take the case of Shyam. Shyam believed in enjoying life, spending freely rather than saving regularly. However, at the age of 35 as reality dawns, he starts putting aside Rs 50,000 every year. Unlike his friend Ram, who stopped after the first ten years, Shyam religiously invests the amount each year for all of next twenty five years i.e. till he turns 60. Now, assuming he also earns a return of 10% per year on his investments, in the end, Shyam would have managed to accumulate Rs 54.10 lakh.
Putting it differently, even after investing Rs 50,000 regularly for twenty five years, Shyam has managed to accumulate Rs. 41 lakh lesser in comparison to Ram. Remember Ram has ended up investing only Rs 5 lakh in total over the ten years that he invested. In comparison, Shyam over the twenty five years invested Rs 12.5 lakh (Rs 50,000 x 25 years). So even by saving two and half times more than Ram, Shyam has managed to build a corpus which is 43% lower! This happened because Ram started investing earlier which in turn allowed the money to compound for a greater period of time.
Also as the corpus grows, the impact of compounding is greater. Ram as we know had managed to accumulate Rs 8.77 lakh after ten years after which he stopped investing, allowing the accumulated corpus to compound for twenty years more. In other words, the total life of the investment was for thirty years. However, had his investment time frame been till he turned 55 i.e. had the money compounded for twenty five years instead of thirty then at the end Ram would have accumulated a corpus of around Rs 59 lakh. By choosing to let his investment run for just an additional five years, Ram managed to accumulate Rs 45 lakh more.
Real Life Illustration
In terms of a practical example, let’s take the case of HDFC Equity Fund. The five year return of this fund is around 9.31% p.a. On the other hand, from inception (December 1994), the fund has returned 20.2% p.a. Now, had an investor invested say Rs. 50,000 five years back, the investment would have grown to around Rs. 78,000. However, had the investment been made at inception (allowing the money to compound over a greater period of time) the investment would have grown over 24 times to around Rs. 12 lakh.
As mentioned in the beginning of the column, Albert Einstein himself has called the power of compounding the eighth wonder of the world. In this article we have given various examples of how potent this power is when combined with its ally --- Father Time. It’s never too early nor too late to begin investing. Or to put it differently, better late than later.
This blog is taken from Yahoo Finance.......................
Is Buying Gold Jewellery In Installments Wise.....
Gold is one of the most sought after commodities in an an average Indian's life, especially when it comes to festivals or weddings. So naturally, the escalating prices are a cause for great concern for many Indian families. Gold prices have surged to such astronomical levels buying gold has become next to impossible for families with modest income.Perceiving this difficulty and owing to the drop in sales, various jewelers have come up with indigenous schemes to lure buyers.Schemes like buying gold in investments where you have to pay only just 11 out of 12 installments, the last installment will be footed by the jeweler itself. You'll own the gold jewelry after the completion of the tenure.ExampleMrs. Sunita from Delhi decided to buy 20 grams gold as an investment, but realised she lacked sufficient funds. A jeweler offered a scheme under which she could buy gold jewelry after one year at the prevailing market rate after paying 12 monthly installments. The jeweler also offered to pay the 12th installment after she had completed the 11th installment.That means for jewelry worth Rs 60000, she had to pay Rs 55000 in 11 months, and Rs 5000 would be borne by the jeweler. She thought it was a good option. She sought to buy gold as an investment and under this scheme she would make both and investment and get herself an ornament.Did the buyer benefit from this scheme?The only benefit that a buyer gets is purchasing gold in installments. But from a buyer's point of view, this type of scheme has more to lose than to gain.Here's why one should not to buy gold under the jewelry schemeLet's examine the limitations of buying gold jewelry through this scheme:- The installment paid, can be used only to buy the jewelry, and it cannot be redeemed against gold biscuit or coins. The jewelry also carries the making charges, and its purity is lesser than the biscuit or coin. So if we compare 10 grams gold biscuit to gold jewelry, then buyer would gain if he chooses the gold biscuit. Let's check the comparison:
- The buyer is under an obligation to the seller to purchase the gold at the prevailing market rate. If at the time of booking jewelry, the gold rate is Rs 2800/gram but after the completion of installments, the rate increased to Rs 3000/grams, then buyer has to pay Rs 2000 extra for every 10 grams due to change in price of gold.- If the main purpose of a buyer is to invest, then buying jewellery is not a wise choice. The jewelry is not made of 24 carat gold, and it also carries some making charges, so the return value of jewellery would be much less when compared to gold coin, biscuit or bars.Other attractive options to buy gold in installmentsThe buyers have many other options to buy gold at a cheaper cost and at a better quality. Some of the options include:- If the buyer wants to buy gold after 12 months under the installment pattern, then it would be a better option if he buys Gold ETF in the stock market every month and averages out the inconsistency. He can also buy it in E-Gold format (National spot exchange) where he can buy as low as 1 gram gold. After 12 months, he can sell the gold in electronic form and buy the gold jewellery from the proceedings, or if he wants to carry it longer then he can keep it in the DEMAT A/c.- If the buyer wants to invest in a coin or bar, then he also has the option to put the money every month in a recurring deposit account for 12 months and earn interest on the money and buy gold with the maturity proceedings.The basic flaw in the gold jewelry scheme is that jewelers not only earn interest on the buyer's installment but also sell the jewelry after earning a handsome margin. For 20 grams gold jewelry, he earns Rs 600 making charge and sells 22 carat gold at rate of 24 carat gold. So he earns approx 8% extra by selling gold of 22 carat purity.For jewelers, this scheme is a win-win situation as he gets the chance to sell his product, and at the same time he earns interest on the customer's installment whereas buyers, who cannot distinguish whether they are buying gold as jewellery or as an investment, are always set to lose out in this type of deal.
| Details | Gold Jewelry | Gold Biscuit |
| Quantity | 10 Grams | 10 Grams |
| Purity | 22 K | 24 K |
| Making Charges | Up to Rs 30/Gram | Nil |
| Resale Value | Lower due to impurity | Full Return Value |
How Important is Retirement Planning In your Life?
I still remember my school days when we used to go in bus to our school.There used to be a cobbler who used to meet us everyday and slowly we became good friends with him. We used to talk about our schooling, family etc,. But when ever we used to ask about him about his past he used to go behind the wall. Slowly he started to open up with us and one day I was shocked to know that he was a school headmaster and was a very rich person once upon a time.
He said that he had all the riches but he had never thought of his grey days when he will be not in a position to earn.He said he always thought that he can save later for his retirement, why now?
Old age is something which is going to come to each and every person in his life cycle, when he will be weak and not in a position to earn. So retirement planning is the most important part of one's life. Be it for a man or for a woman. Planning for his retirement is very important.
Many people ask me why now? I say why not now? Poeple at young ages think that old age is something which is too far and they have the whole time in the world for them to plan at that time. But the conception is wrong as when you start earning and settling in life the responsiblities grows and we dont get time to think for our retirement.
One more importnat thing is the power of compounding of your money. The early you start saving for your retirement, the lesser is the amount required for you to save to arrive at your retirement needs. For example Mr.X starts to save for his retirement at the age of 25 and he is saving 25000/- every year for next 25 years. He will be left with a corpous of approximately 50,00,000/- for his retirement and he can live happily with the corpus. In the same way Mr. Y starts to save for his retirement at the age of 35 and to arrive at the corpus of 50,00,000/- he has to save 75,000/- app. for next 15 years, so as to enjoy his retirement benefits.
Hence from the given example on can understand the need of saving for retirement at young age so that you dont have to worry later when you have more responsibilities on your head.
Dinesh Sahgal
+91 9866638555
He said that he had all the riches but he had never thought of his grey days when he will be not in a position to earn.He said he always thought that he can save later for his retirement, why now?
Old age is something which is going to come to each and every person in his life cycle, when he will be weak and not in a position to earn. So retirement planning is the most important part of one's life. Be it for a man or for a woman. Planning for his retirement is very important.
Many people ask me why now? I say why not now? Poeple at young ages think that old age is something which is too far and they have the whole time in the world for them to plan at that time. But the conception is wrong as when you start earning and settling in life the responsiblities grows and we dont get time to think for our retirement.
One more importnat thing is the power of compounding of your money. The early you start saving for your retirement, the lesser is the amount required for you to save to arrive at your retirement needs. For example Mr.X starts to save for his retirement at the age of 25 and he is saving 25000/- every year for next 25 years. He will be left with a corpous of approximately 50,00,000/- for his retirement and he can live happily with the corpus. In the same way Mr. Y starts to save for his retirement at the age of 35 and to arrive at the corpus of 50,00,000/- he has to save 75,000/- app. for next 15 years, so as to enjoy his retirement benefits.
Hence from the given example on can understand the need of saving for retirement at young age so that you dont have to worry later when you have more responsibilities on your head.
Dinesh Sahgal
+91 9866638555
Investing in Bonds Funds- A wise idea?
As the equity markets are volatile and the economic scenario is too turbulent, people are looking at safe investments avenues. The first thing that comes to mind for an investor is bank fixed deposits. But with the interest rate scenario looking downward, the best instrument for investment for safe and secure returns is Dynamic bond funds.
What is dynamic bond fund?
Dynamic bond fund can be an alternative for fixed deposits. The investment pattern of this type of schemes is into AAA/AA rated papers and p1 deposits. These funds are inversely related with interest rates. As the interest rates are reduced, the returns generated by these funds increase and vice versa. These funds have generated around 14% returns in the last 1 year. The investment horizon for these funds should be anywhere between 1-3years. These funds can be advised to clients who look for safe investment and returns more than the bank fixed deposits. But these funds too come with risks. Risk of investment( junk bonds) etc.
What is dynamic bond fund?
Dynamic bond fund can be an alternative for fixed deposits. The investment pattern of this type of schemes is into AAA/AA rated papers and p1 deposits. These funds are inversely related with interest rates. As the interest rates are reduced, the returns generated by these funds increase and vice versa. These funds have generated around 14% returns in the last 1 year. The investment horizon for these funds should be anywhere between 1-3years. These funds can be advised to clients who look for safe investment and returns more than the bank fixed deposits. But these funds too come with risks. Risk of investment( junk bonds) etc.
Customers who look to invest in these type of schemes should first take a proper advice from their financial advisors about the track of the fund managers, and also the schemes previous performance.
Note: The views expressed are in general and readers are advised to consult their respective advisors before investing.
The Power of Systematic Investment
A lot is said about savings and investments and we find many instruments to save our hard earned money. But the question is, are we investing in a proper way and are we able to beat the inflation with our investments and also creating wealth.
People have the habit of investing their hard earned money in traditional instruments like F.D's, NSC, Post office Savings, Bonds etc, because of the fear of loosing their money by investing it in risky instruments like Equities, Mutual Funds, Commodities etc,.
Today we have so many options to invest our money. A person who has a disciplined approach in investing his money can beat inflation and also make his money grow at a faster pace than investing it in fixed income instruments.
Systematic Investment Plan is the best way of investing in a disciplined manner in mutual funds to beat inflation and also create wealth in long term. To make you understand please find a simple example:
A disciplined and systematic investment approach of investing just Rs.500/- every month in a diversified equity mutual fund gets rolled over 10.32 times in a span of 20 years on an expected annualised returns of 20%. This is called the power of Systematic Investment Plan.
Today, there are so many innovative products, the choice is of the investor how he wants to invest and which product suits his requirement.
People have the habit of investing their hard earned money in traditional instruments like F.D's, NSC, Post office Savings, Bonds etc, because of the fear of loosing their money by investing it in risky instruments like Equities, Mutual Funds, Commodities etc,.
Today we have so many options to invest our money. A person who has a disciplined approach in investing his money can beat inflation and also make his money grow at a faster pace than investing it in fixed income instruments.
Systematic Investment Plan is the best way of investing in a disciplined manner in mutual funds to beat inflation and also create wealth in long term. To make you understand please find a simple example:
| SYSTEMATIC INVESTMENT PLAN | ||||||
| Returns Calculator | ||||||
| Monthly Investment Amount Rs. | 500 | /- | ||||
| Investment Period In Years | 20 | |||||
| Returns Expected (% Annualised) | 20.00% | |||||
| End Value of your Investments | ||||||
| Rs. | 12,38,097 | |||||
| Amount actually paid | Rs. | 1,20,000 | ||||
| Times amount gets rolled-over | 10.32 | |||||
A disciplined and systematic investment approach of investing just Rs.500/- every month in a diversified equity mutual fund gets rolled over 10.32 times in a span of 20 years on an expected annualised returns of 20%. This is called the power of Systematic Investment Plan.
Today, there are so many innovative products, the choice is of the investor how he wants to invest and which product suits his requirement.
How investment in ELSS Mutual Fund is a superior choice over PPF
Section 80C of Income Tax Act 1961 allows investors to claim up to Rs 150,000 deduction from their gross taxable incomes by investing in eligible schemes. You can save up to Rs 46,800 in taxes (for investors in the highest tax bracket) by investing in 80C schemes. Some of the most popular tax-saving investments under Section 80C are Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), Public Provident Fund (PPF), National Savings Certificates (NSC), 5-year tax saver bank fixed deposits, life insurance plan (traditional and ULIP) and mutual fund Equity Linked Savings Schemes (ELSS).
In this blog post, we will compare and contrast the two most popular tax savings investments – PPF and ELSS.
What is PPF?
Public Provident Fund (PPF) is a small savings scheme of the Government of India. It is one of the most popular 80C investment options for Indian investors. You can open a PPF account with just Rs 100 in public or private sector banks or post offices. The minimum and maximum deposit amounts in a financial year are Rs 500 and 150,000 respectively. Since PPF is a Government scheme, your investment is risk-free. You will get interest on your PPF deposit based on interest rates which can be reset quarterly by the Government. PPF interest rates are linked to Government bond (G-Sec) yields of similar maturities. The current PPF interest rate is 7.1%.
PPF investment matures in 15 years. However, under certain conditions, you can take a loan from your PPF balance (between third and sixth year) or make pre-mature partial withdrawals (after 7 years). An account holder can withdraw prematurely, up to a maximum of 50% of the amount that is in the account at the end of the 4th year (preceding the year in which the amount is withdrawn or at the end of the preceding year, whichever is lower). Upon maturity of your PPF (completion of 15 years) you have the option of extending your PPF in blocks of 5 years. The maturity proceeds of PPF are entirely tax-exempt.
What is ELSS?
Mutual Fund Equity Linked Savings Scheme (ELSS) has been growing in popularity as tax savings investments among retail investors over the last several years. Investment in ELSS mutual funds like PPF, qualify for tax deduction under Section 80C of Income Tax 1961. However, unlike PPF, ELSS is market-linked and subject to market risks. Equity Linked Savings Schemes are essentially diversified equity mutual fund schemes that invest in equity and equity-related securities across sectors and market capitalization segments. An investor can invest in ELSS either in a lump sum or through Systematic Investment Plans (SIP). The minimum investment amount in ELSS can be as low as Rs 500.
ELSS funds have a lock-in period of 3 years. Investors should note that if you are investing in ELSS through SIP, each installment is locked in for 3 years. After completion of 3 years, you can redeem your ELSS units partially or fully without any penalty. Capital gains of up to Rs 100,000 in ELSS are tax-free and taxed at 10% thereafter. Dividends (now known as Income Distribution cum Capital Withdrawal Plan) paid by ELSS during a financial year will be added to your income and taxed according to your income tax slab rate.
Wealth creation potential – PPF versus ELSS
One of the main reasons for PPF being one of the most popular tax savings options for investors is the assurance of capital safety. Though equity is a volatile asset class, historical data shows that equity, as an asset class, has the highest wealth creation potential in the long term.
The chart below shows the growth of Rs 5,000 SIP in PPF and Nifty 50 TRI (a proxy for equity as asset class / ELSS) over the last 20 years ending 31st March 2021. You can see that with a Rs 5,000 monthly deposit in PPF you could have accumulated a corpus of around Rs 29 lakhs in the last 20 years (15 years maturity plus 5 years extension with contributions). Your cumulative investment would have been Rs 12 lakhs. With the same cumulative investment through monthly SIP of Rs 5,000, you could have accumulated a corpus of nearly Rs 65 lakhs.
The difference amount is huge Rs 36 Lakhs!
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