Should you invest in Sovereign Gold Bond Scheme this Diwali?

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The Government has come out with the issuance of the first tranche of sovereign gold bond (SGB) scheme announced in the Union Budget earlier this year. Application for the bonds would be accepted from 5 November to 20 November 2015. The bonds would be issued on 26th November. SGBs would be available only for Resident Indians.

Key highlights of the scheme:

  • The gold bonds can be held either in paper form or demat form. Each bond unit is equivalent to 1 gram of gold.
  • The Government has fixed the minimum investment in bonds at 2 grams and the maximum investment is capped at 500 grams per investor per fiscal year. Presently, the issue price for the first tranche of bonds is been fixed at Rs.2,684 per gram of gold. This translates into a minimum investment of Rs.5,368 and a maximum investment of Rs.13.4 lakhs.
  • The tenure of the gold bond is 8 years. There is a lock-in period of 5 years and one can exit/surrender after that. The gold bonds would be listed and tradable on the stock exchanges. So anyone who wishes to exit before 5 years can redeem on the stock exchange in the secondary bond market. Anyone who wishes to stay invested can further extend for a period of 3 years after maturity.
  • Income from investment in SGBs will be in the form of fixed interest and capital gains. SGBs will earn a fixed interest of 2.75 per cent per annum. It will be simple interest and will be paid half yearly on the initial investment. Capital gains will accrue if there is a positive difference between the issue price and the redemption price.
  • SGBs carry sovereign guarantee. So there is no risk of default. But they carry price risk. The value of your investment would increase with the rise in gold prices and vice versa. Bonds have to be redeemed in cash on date of maturity at the then prevailing price of gold.
  • The interest income on SGBs will be taxable. Further, the capital gains would also be subject to taxation as per the holding period. If bonds are sold before 3 years, short term gains would accrue and taxed as per slab rate. If bonds are sold after 3 years or more, capital gains would be considered long term and taxed at 20 per cent with indexation benefit.

Good and bad points of SGB:

SGBs like gold ETFs are available in demat and paper form, so no need to bother about storing in a locker. You also need not worry about cheating or impurities in gold bond. You will always get 100 per cent of the value on redemption. The main point where SGBs score over gold ETF is the interest income even though it is taxable. An investor does not earn any interest while buying physical gold or gold ETFs. Further, ETFs carry an expense ratio which is not there in SGBs.

Liquidity however is an issue in SGBs with an investment lock-in of 5 years. Even if one wishes to exit before 5 years in the secondary bond market, it would not be easy because practically, there is no big trade market for such bonds. Further, you have to invest a lumpsum amount in SGBs at the stipulated price fixed by the government. So if tomorrow, gold prices fall below the issue price of Rs.2,684, you will not be able to benefit from it unlike in the case of ETFs where you can start an SIP and average out the cost.

Should you go for SGBs?

The objective of any investment has to be very clear and mapped to a goal. If you are planning your child’s marriage few years down the line, you need not invest in gold funds or gold bonds to accumulate gold. There are better options like equity mutual funds which would give you better returns over long term which you can utilise later to buy gold. You can also buy physical gold at periodic dips.

You can invest in SGBs if you want to diversify your portfolio. We at VSK have always advocated the importance of asset allocation & portfolio diversification considering that different asset classes behave in a different manner in economic situations. Gold should have a maximum 10 per cent exposure in your portfolio to provide hedge against any economic turmoil. However, if gold is already exceeding 10 per cent of your portfolio, then you can avoid SGBs.

How to make smart use of your credit card?

Credit Cards  Smart Use

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Credit cards have become an essential part of our daily lives. From eating at restaurants to shopping at malls or paying utility bills, it is used extensively. They are a convenient mode of payment and provide access to funds for an interest free period. The benefits of credit cards go beyond offering interest free float. Most people are not aware of these benefits and fail to utilize their credit cards to the fullest advantage. Here are a few tips on how to use credit card smartly to reap multiple benefits:

(1) Smart use of float: You can take maximum advantage of interest free period by planning your credit card purchases at the start of the billing cycle. So you get a maximum of 30 days float and a grace period which can go up to a maximum of 25 days. This means 55 days of interest free credit! If you are planning some big ticket purchase of over Rs.1 lakh, use your credit card to pay the bill. Then create an equivalent amount of fixed deposit for a 30 day period. If you have planned your purchase in advance, you can even create a fixed deposit for a 60 day or 90 day period to pay off the dues. This would earn better returns than the annual 4 per cent in a savings bank account. In this way, you not only fund your purchases for a certain interest free period, you also earn money on fixed deposit. Another advantage of this method is that it would instill discipline to keep funds ready in advance to pay credit card bills.

(2) Funding Financial Emergencies: Have you ever heard anyone paying hospital bills without spending a single penny out of own pocket? Yes, it is very much possible. To illustrate, a client underwent a hernia operation and his total bill came to Rs.40,000. He paid this bill via credit card and filed his mediclaim with the insurance company. By the time his credit card bill was due, he already received the mediclaim amount from insurance company! This was a smart way to fund hospital bills by using credit card.

(3) Reward Points: One of the prominent benefits of credit card companies is that they offer reward programme on purchases. These earnings are through reward points and are decided in proportion to the amount spent on using credit cards. The rewards also vary depending upon the type of credit card held. Today, the customer is flooded with multiple options for redeeming reward points accumulated on purchase through credit cards. Let us examine these benefits in general.

  • You can redeem points for clothes, jewellery, household goods including electronic items, etc. Many cards also offer shopping discounts and vouchers.
  • Many banks have tie-ups with retailers to offer benefits through co-branded cards. For e.g., HSBC has a tie-up with garments retailer Westside to offer benefits on HSBC Westside Credit Card. These include exclusive sale previews at Westside, complimentary gift vouchers on signing up, home delivery of altered garments, exclusive billing counters, more reward points compared to normal card holders, etc. Similarly, ICICI Bank has a tie-up with HPCL to offer fuel cards which provide discounts and cash backs when used at the time of refueling at designated oil filling stations.
  • You can avail discount offers on movies or free tickets when paid through credit cards. For e.g., the SBI signature credit card has a tie-up with the entertainment portal Any customer booking movie tickets through this site and paying through the SBI Signature credit card is entitled to 2 free movie tickets per month or Rs.500, whichever is low.
  • Many banks offer cash back offers on purchases. For instance, e-commerce portal, Flipkart has tie-ups with many banks to provide cash back offers for online shoppers.
  • There are cards which allow you to accumulate travel reward points. These can be redeemed for flight, hotels, holidays, excess baggage allowance and a variety of travel benefits. They also provide access to airport lounges and airfare discounts/vouchers with travel partners and facilities like priority check-ins and air miles.
  • There are lifestyle benefits offered like access to Golf clubs and discounts on dining at select premier restaurants.
  • There are cards which offer benefits to specific categories of individuals. For e.g., HDFC offers customised cards for doctors and teachers. There are also cards designed particularly to cater to women customers.

Conclusion: Avoid impulsive purchases and do not spend mindlessly just to chase rewards. Weigh the benefits first and then spend accordingly. It is important to select the credit card which best suits your requirements. For instance, if your profession requires you to frequently travel by air or if you take short holiday trips very often, then you can use a card which has a tie-up with airlines and offers various travel benefits.

All the goodies offered by credit card come with a caveat – not to buy stuff for which you do not have the money. Do not just pay the minimum balance and roll over the outstanding amount, or else you will be charged hefty interest ranging from 24 to 40 per cent per annum. Further, the additional bills would not enjoy a grace period and will be charged interest from the date of purchase.

Credit card is the most expensive form of debt with interest rate in double digits. If you do not regularly track your billing cycle, there is a good chance you may fall into a debt trap which can take many years to come out of. Your bad credit history will affect your CIBIL score due to which you may not be eligible for any future bank loans when you need one badly. (more on CIBIL score in our next article). Huge credit card debt will reduce your propensity to save and invest and affect your future financial goals. Credit cards can thus devastate your entire financial cart if not used prudently. So do not buy stuff with credit cards which you cannot afford. If you have the discipline to arrange the funds in advance, regularly track your billing cycle and pay in full on time, then credit cards are for you! Otherwise you are better off using a debit card.

Why a personal medical fund is essential in addition to health insurance?

Personal Medical Fund a Necessity final

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In today’s stressful times, cardiovascular diseases and diabetes have become common ailments. Ironically, people are living longer due to advanced medical science, but less healthy. As per a World Health Organisation (WHO) report involving a survey of 162 countries, India figures in the high danger zone of risk of cardiovascular diseases in the world.

It is thus very essential to have health insurance which funds medical costs during tough times. The average health cover usually bought by an individual is about Rs.2-5 lakhs. This is however a paltry sum and needs to be upgraded periodically with the rise in age.

There are health insurance plans available in the market like top-up plans and critical illness policies to enhance coverage. Top-up plans cover hospitalisation costs but only after a regular limit called deductible is crossed. Deductible is the portion of money which the insured has to pay before the policy comes into effect. For e.g., you have a basic health insurance plan of Rs.3 lakh and a top-up insurance of Rs.8 lakh with a deductible of Rs.3 lakh. Suppose you run a hospital bill of Rs.10 lakh, Rs.3 lakh will be covered by your base plan and Rs.7 lakh by your top-up plan. The premium paid on a top-up cover is cheaper as compared to a regular Rs.10 lakh health insurance policy.

Similarly, critical illness covers bought in addition to regular health insurance are useful. Especially, when there is a case of medical history in the family like heart attack, cancer, etc. One can thus maximize health insurance coverage by buying Rs.15 lakh top-up plan and Rs.5 lakh critical illness cover.

But would a health insurance package of even Rs.20 lakhs be adequate enough in the long run? Let us examine the reasons why one cannot rely only on medical insurance to take care of long term healthcare needs.

  • Inflation, the monster – Nowadays a single instance of hospitalization can easily wipe out about Rs. 2-3 lakhs. A by-pass heart surgery in a hospital presently costs in the range of Rs.3 lakh in an average hospital to Rs.7 lakh in a higher end hospital. Health care inflation in general is rising by about 10 per cent per annum. Assuming this inflation rate, the costs of a bypass surgery would cost a maximum of Rs.7.8 lakh after 10 years, Rs.20 lakh after 20 years and Rs.52 lakh after 30 years. The costs of other critical surgeries are likely to rise in a similar fashion. Do you think your current health insurance would be able to cover such huge costs? The answer is an obvious ‘NO’.
  • No options for long term healthcare funding Unlike the developed countries, India does not have adequate social security measures to take care of long term health care needs of its citizens. Unlike a government organization, a private employer cannot be relied upon for health care benefits after retirement. Senior citizens, old parents with no private health insurance have to depend upon children for their medi-care needs.
  • Health insurance not adequate to take care of medical needs during retirement – There are many health insurance products available in the market today which cater to senior citizens. However, while health insurance is a good safety net to prepare for medical emergencies, it has limited benefits during old age. Firstly, health insurance pays only for hospital bills. Even pre and post hospitalization costs are reimbursed up to 60 and 90 days respectively. Health insurance does not take care of medicine costs, preventive health-checkups, which are a routine during old age. Even domiciliary treatment, i.e. medical treatment taken at home is not covered under health insurance.Further, senior citizens have to pay a certain amount out of their own pockets, as usually 100 per cent of the medical bills are not reimbursed. And, premium loading can be high in the event of any hospitalization.

It thus immensely helps to have a personal healthcare fund to take care of medical expenses during retirement. We strongly advocate the creation of a medical fund as one of the essential goals in financial planning.

How much to save?

The target corpus would depend upon an individual’s situation. Someone who is already suffering from serious ailment and has incurred huge medical costs in the past 5 years may want to allocate more for the medical fund. We recommend an average of the hospitalization costs incurred in present times. In a worst case scenario, the average costs of treatment of critical illnesses like diabetes, stroke, cancer, etc can be considered as the base amount which comes to roughly about Rs.7 lakh. Considering healthcare inflation of about 10 per cent per annum, one can target to save approximately Rs.30 lakh for medical costs during retirement.

When to start saving?

Usually, creation of a medical fund would not be a topmost priority for an individual in his 30s who has more important goals to save for. While the medical fund is meant to be utilized during retirement, one can start saving for it after 45 and give it some time to grow. In some exceptional cases, where an individual has a medical history and has frequently spent on medical expenses, he can start a medical fund early on and contribute a minimum sum every year.

Where to invest?

To create a medical fund, you can start a systematic investment plan (SIP) in a debt fund. At the age of 45, you would have another 15 years to accumulate the medical corpus till retirement. Assuming a monthly contribution of Rs.3,000 in a debt fund which would rise by an annual 10 per cent and yielding 7.5 per cent per annum compounded return, you would accumulate roughly about Rs.30 lakh at retirement. This coupled with your health insurance package including critical illness cover and top-up plan would be adequate to fund your future medical costs.

Conclusion: You do not want medical costs to deplete your retirement savings and then worry about outliving your expenses. Remember, the purpose of creating an own personal medical fund is to take care of medical expenses in the twilight years. Consider it as a long term investment for your retirement period. In the event of any hospitalization before 60, you can utilize the health insurance cover first and then dip into the medical fund, if necessary. However, resist the temptation to utilize the funds for some other purpose.


How can you prepare against calamities?


Calamity Strikes

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In our recent article, we talked about ‘How to prepare financially for Emergencies’. In our latest post, we are going to talk about protection from calamities. While people seek protection for their life and health, it usually doesn’t occur to them that their belongings need protection too.

Last month there was a fire in one of the units in our office building. It started off with a spark in the air conditioner but quickly spread and in the process gutted the whole office. This gave rise to a whole host of problems for the owner like:

  • Monetary loss (mitigated if covered by fire insurance)
  • Loss of documents and computer network (again insurable)
  • Loss of data (unless saved and stored in a different location or on the cloud).
  • Additional issues like renting out another office for a short period which hopefully is near to the existing office.

Now imagine, instead of office, this kind of incident occurs in a residential house – your costliest asset. And it is exposed not just to the threat of fire. Your house and its contents face the risk of burglary. It can get destroyed by floods, earthquake, etc. Don’t you think most of the above challenges would remain? So how do you ensure its safety?

There are various types of covers available in the market which protects your house & belongings from unforeseen incidents and calamites. Let us examine these options:

  1. Fire Insurance: A fire insurance policy offers protection against any loss/damage/destruction of property arising out of fire. The different types of property covered under a fire insurance policy are residential house, office, shops, etc. and their contents. The policy also covers fire arising out of any lightning, explosion, riot, strike, storm, cyclone, hurricane, floods, etc. However, it does not cover loss or damage caused by war & warlike operations, nuclear perils, burglary & housebreaking, etc. Certain calamities like earthquake are covered with the payment of additional premium. Consequent losses such as start-up expenses, rent paid for alternate accommodation can also be covered through additional premium. The policy pays for depreciated value or replacement value of the items destroyed depending upon the type of policy and coverage bought.
  2. Burglary Insurance: A burglary insurance cover offers protection against theft in residential house, office, shops, etc. Besides offering cover for the contents in the insured premises, the policy pays loss/damage caused to any property caused during burglary. The policy pays for the actual loss/damage caused to the property due to theft/housebreaking subject to the limit of the sum insured.
  3. Home insurance policy: This is a comprehensive policy which provides security to your house/office and its contents against unforeseen calamities. These not only provide protection from fire, burglary but also from earthquakes, floods, terror strikes, riots, hurricane, cyclone, etc. There are certain policies which provide multiple covers and you have the option to choose from them at an additional premium. These insurance covers come at an unbelievably cheap cost but are largely ignored in India. For e.g. a 1,500 square feet house can be covered against fire and other perils for Rs.50 lakhs at a mere cost of Rs.2,100 per year.

Protecting your important documents from disasters

Proper insurance coverage can compensate you for the financial loss that you suffer during calamities. But it cannot retrieve your important documents which are destroyed forever. So how do you safeguard them?

Firstly, it is important to make a list of all your important documents. These include educational certifications, bank documents including KYC & home loan agreement, house property documents including share certificate, insurance policies including mediclaim card, identity proofs like PAN Card, Aadhar Card, Voting Card, Driver’s License, etc., investment documents like demat statements, mutual fund statements, etc.

Now let us examine the options of storing these documents:

  • Digi-Locker: This is one of the safest options to protect your documents in the event of any calamity. The Government of India recently launched Digital Locker, a facility aimed at eliminating the usage of physical documents and enable sharing of e-documents across government agencies via a mechanism to verify “authenticity” of the documents online. Resident Indians can also upload their own electronic documents and digitally sign them using the e-sign facility. This facility can store documents like Voter Id, Pan Card, BPL Card, Driving License, education certificates, etc. This cloud system ensures digital safety of data & the documents are considered as authorised. So even if your physical documents are lost during any calamity, you will have digital back-up. Even if you have to make physical copies again for any documents in any exceptional case, the digital data will act as a proof and make your job easier. Here is the link for further details –
  • Google Drive: This is one of the most popular systems to store your personal data. It is safe and comes with 5 GB of free storage which is sufficient enough to store your personal documents. The best part is that you can sync it with all your other devices like mobile, tablet, etc., and access your documents from anywhere in the case of emergencies.

Protecting your valuables from burglary & fire:

  •  Bank Lockers: These are a good option for storing your valuables. It comes with a cost ranging from Rs.1,000-Rs.5,000 depending upon the size of the locker. Banks however cannot be held responsible for the contents in the locker in the event of a burglary or fire. They can be held liable though if adequate security has not been provided to the lockers or they are not maintained properly. Nonetheless, this traditional way of storing valuables in bank lockers remains a safe bet. Banks have to follow stringent guidelines of safety as per RBI rules. They have to use the best quality lockers which undergo rigorous safety tests and are fire-resistant. Nowadays, it is not that easy to get a bank locker. We will cover this topic of hassles in renting a bank locker in detail in our next article.
  • Home Safe: While we usually entrust our valuables to bank vaults, what about the precious stuff that we use regularly? The banks have an annual limit on the number of visits for taking out valuables from lockers and it is a hassle to frequent the banks for taking out precious stuff used on a regular basis. To safeguard your treasures of regular usage (like gold chains, earrings, diamond jewellery, etc.) home safe is a good option. These are a better option than your traditional almirahs and cupboards which can easily be burgled or can get destroyed by fire. There are safes available in the markets which are certified to guarantee their strength and endurance. A home safe costs between Rs.3,000-Rs.60,000 depending upon their size and strength. There are various types of safes available in the market such as electronic safes, fire-resistant safes, fire and burglary resistant safes, etc.

To conclude, people realise the importance of insurance until a casualty hits them hard. Buying just life and health insurance is not enough though. Risk management should involve buying comprehensive covers which protect your property and its contents against disasters/calamities at an unbelievably lower cost. Having digital back-ups for documents and lockers for valuables can also help mitigate losses to a great extent. Being prepared does not cost a bomb and help to comfortably tide over tough times.

How prepared are you financially for any Emergency?

Financial Emergency. Are you prepared

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Life sometimes can deal a cruel blow to you and if not prepared, it can hit you hard. While many people buy insurance for protection, it does not go beyond life and health insurance for majority. But there are certain situations which can catch you off guard and later may prove to be a big drain on your financial resources. Let us examine them one by one.

(1) Loss of job: A couple with high paying jobs was working in a prominent healthcare company in the research department. The company one fine day decided to permanently shut the research wing. It was a big blow to the double income earning couple. Luckily, the husband was absorbed in another department by the company. The wife remained jobless for about six months and was at home. Recently in 2015, TCS, one of the largest software companies in India laid off thousands of employees. And not just the juniors, even middle and senior level managers who were working for over 5-7 years and earning fat packages. This can happen to anyone. It could take longer, even over a year, to get a new job, particularly in the recessionary period. Assume you lose your job today, then –

  • How many months living expenses can you afford to bear without a regular salary stream? (Living expenses here include – household expenses, EMIs, insurance premiums, children’s school/college fees, SIPs in mutual funds, etc.)
  • Have you maintained an emergency fund?
  • Can you compromise on your lifestyle and spending habits?
  • Do you have an alternate source of income when your steady job is lost?
  • Can you afford to continue your life insurance and health insurance policies?
  • Are you ready to compromise on low pay in a new job for temporary period?

These are crucial questions you would have to address were you to lose your job. So how prepared are you if such an eventuality strikes you?

(2) Exorbitant Medical Costs: Any medical emergency of a family member/relative can dent a big hole in your pocket, especially if the illness is chronic. One of our clients ran a hospital bill of Rs.17 lakh for his mother who was admitted in a heart institute for 2 months! His mother had a medical cover for Rs.5 lakhs and the balance Rs.12 lakh was paid by my client from his pocket. He was compelled to sell most of his mutual fund and stock investments. Let us examine a few options which can help prepare for sudden  & huge medical expenses:

       (I) Top-up Insurance Cover: With health care costs shooting through the roof, a medical cover of about Rs.2-3 lakhs (usually the average sum assured bought) is not adequate enough for a serious ailment or a chronic illness. To cover any shortfall, top-up insurance covers are a good affordable option. These are regular indemnity plans which cover hospitalisation costs but only after a regular threshold is crossed. This threshold is known as ‘deductible’, the portion of money which the insured has to pay before the policy comes into effect. For e.g., you have a basic health insurance plan of Rs.3 lakh and a top-up insurance of Rs.8 lakh with a deductible of Rs.3 lakh. Suppose you run a hospital bill of Rs.10 lakh, Rs.3 lakh will be covered by your base plan and Rs.7 lakh can be paid from your top-up plan. The premium paid on a top-up cover would be much cheaper as compared to the premium paid on a regular Rs.10 lakh health insurance policy.

       (II) Critical Illness Cover: Critical illness covers bought in addition to the basic health cover are of great help during inflationary times. If there is a case of medical history in the family like heart attack, cancer, etc., it makes sense to buy a critical illness policy. These policies give you a tax-free one time lump sum payment if you or your loved ones are diagnosed with a serious medical condition specified in the policy.

       (III) Emergency Funds: Last but not the least, emergency funds are a big help to tide over sudden medical situations. No matter how adequately insured you are, you would always require hard cash during health emergencies. It could be:

           (A) For uninsurable costs: There are certain expenses which do not come under the ambit of health insurance cover. For e.g., medical costs of certain equipment like ball usage in hip replacement surgery, hearing aids, external prosthetic devices like artificial limbs, 24 hour day care at home, etc. Emergency funds would act as a safety net to prepare for such uninsurable costs.

           (B) For advance payment: At the time of admitting in a hospital, one has to usually deposit large amount of cash even if the person has medical insurance. Emergency funds can be of great help to tide over temporary cash crunch.

           (C) For uninsured dependants:  What if your elder parents do not have any health insurance cover when the require the most in old age? A medical corpus is a must especially if an elder parent has a serious medical history involved. Maintaining an emergency fund of about Rs.5-10 lakhs could thus be of great help during any hospitalisation of the elderly.

(3) Disability: News of accidents are strewed over newspapers daily nowadays. Pick any newspaper and you will inevitably find at least one case of accident reported. Accidents cause not just death, but disability too. Disability could be temporary or permanent. It could physically impede you to earn potential income. Your earnings would not grow further but your household expenses and EMIs would be there to pay. While you may recover from temporary disability or any illness, it is not possible to recover from permanent disability. It stays for a lifetime. And, may bring along the routine of incurring regular medical expenses. You would need to address certain crucial questions in the event of physical incapacitation:

  • Do you have any personal accident insurance?
  • What if you are not in a position to work even from home after disability?
  • Do you have any alternate source of income to bear your living expenses?

Your health insurance would only pay for hospital bills but not cover for disability which may incapacitate you (temporary or permanently) to earn income. Personal accident insurance would go a long way in helping you cope with additional medical expenses in the case of accidental disability. These policies come unbelievably cheap but are the most ignored due to lack of awareness. These are easy to get and do not required any medical tests. The sum assured is paid depending upon the type of injury and the injury covered.

While your biggest financial asset remains your capability to earn money, it is better to be prepared and plan certain pertinent steps to sail through tough times. It is prudent to involve your family members in your entire planning otherwise it can go futile in your absence. A word of advice – Do not just read this article, take a notepad right now with you, make points and then assess where you are lacking.


Busting the Myth Series: Myth No 4: Life Insurance: Common misconceptions about Insurance

Myth I Don't Need Insurance

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Life insurance is one of the highly misunderstood products in the Indian financial industry. While some people buy insurance for all the wrong reasons, some do not believe in the concept at all considering it a waste of money. It is like saying ‘I do not believe in the concept of gravity’! Let us bust some bizarre myths & some common misconceptions about life insurance.

  • Do not require life insurance as I am going to live longer: This may appear strange but there are few instances where people think they do not require life insurance because they have a very healthy lifestyle and their ancestors had a high life expectancy. But they miss out on the fact that death is uncertain and can also occur due to accidents or medical negligence. Life insurance covers not only natural death but also any death caused by accidents. Life Insurance is not a wasteful expenditure. In the broader frame of financial planning, life insurance comes first before investment planning. It is a must to cover for the risk of loss of life of an earning member in the family.
  • Do not require insurance as I already have 2-3 life policies & I pay huge  premium: This is another common misconception among the insured people. Having multiple policies and paying huge premiums does not make one fully insured. In fact, it only implies that one has bought an expensive product and is still grossly under covered. It is not only essential to have life insurance but also the right amount of coverage. In the event of any unfortunate incident, life insurance should cover for

(i) Household expenses up to the spouse’s lifetime

                   (ii) Outstanding liabilities, if any

                   (iii) Children’s education & marriage expenses

  • Do not require life insurance because my spouse works too: Double income  earning couple certainly enhances the lifestyle of a family. With better repayment capacity also comes higher expenses and more liabilities. However, the loss of an earning member does put some pressure on finances, especially if the deceased spouse’s contribution to total family income is significant. The burden of household expenses and child responsibilities then have to be borne solely by the working spouse. Life insurance thus provides relief to the working spouse helping to recover from the loss of income.
  • Life insurance is a good investment & tax saving vehicle: Since the development of Indian economy in the 1990s, insurance needs have not only increased but changed for the people. Due to lack of choice of investment options earlier, people used to largely invest in traditional endowment policies. They were viewed as a compulsory saving tool and with tax benefits. Sadly, this approach of buying life insurance is still prevalent in these modern inflationary times. Traditional endowment and money back policies yield sub-optimal returns and with expensive premiums, one is left grossly underinsured. It is important to understand that the basic purpose of life insurance is to cover for the risk of loss of income of the bread earner in the family. It should not be mixed with investment and tax planning.
  • Investment in a child insurance plan is the best option to secure my kid’s future: One of the most important goals for any parent is to fund their educational goal. They do not want any hindrances to meet this important goal even in their absence. This insecurity and poor knowledge of financial products results in parents falling into the trap of buying child plans. These are nothing but modified endowment and money back plans which yield pathetic returns. Mutual funds can be a preferred option to invest for funding a child’s educational goal. Investing via a systematic investment plan (SIP) in a diversified equity fund would ensure financial discipline and allow the investments to grow and yield better returns for a child’s education funds.

It is important to understand that life insurance is a basic necessity & needs to be provided for just like we pay for our regular house hold expenses. The right amount of coverage also matters and sum insured should be arrived at after considering the financial implications in the event of loss of life of an income earning member. Term insurance is the cheapest form of insurance offering the best combination of coverage & cost. Term insurance does not pay any money against the premiums paid and is thus cheaper compared to the traditional insurance plans. It is also crucial to review life insurance needs at regular intervals and upgrade coverage as financial responsibilities increase at a later stage in the future.

Busting the Myth Series:Myth No.3: Investing for tax saving- is Investment Planning- Is Financial Planning

Although our current peak income tax rates are at a very reasonable 30% level, it would surprise a few to know that in the 70s they were at a ridiculous 90% plus.

I think our attitude to income tax is a legacy of those times. The majority of us would invest our money anywhere without understanding the merits of investment, if we were told that the investment would save tax.

A case in point.

A few years back there was a tax saving option under a sec called 80ccc. This could be availed only by investing in Pension schemes.

A good way to ensure that people saved for retirement? Yes of course.

The only hitch was that the tax benefit on the investment had a limit of Rs. 10,000 only.

So guess what? Nobody invested more than Rs. 10,000. Lots of 10 and 20-year pensions were bought with a yearly premium of Rs. 10,000. Now imagine after 10 years when the policy matures, the amount vested for an annuity even at an optimistic rate of return (8%), gives Rs. 1.4 Lakhs. What sort of an annuity is this corpus going to generate? Rs. 10,000 p.a.? Is this in any way fulfilling any Retirement plan?

But nobody thought about that. Everyone was focused on saving that Rs. 2000 or 3000 tax for the year. Worse, people felt they were smart by using all the available avenues of tax saving as also satisfied that they were doing their duty towards themselves and their family by investing their savings.

Another case in point is buying Life Insurance policies. Barring a few years of ULIP popularity, the most favoured insurance product is the Endowment Policy. It is an opaque and expensive scheme bought exclusively for tax saving. Bound by IRDA regulations, most of the investments of this product are made in Govt. Bonds. So you are stuck with very low returns for investments being done over a long period of time.

The disadvantage of this product is that firstly, it is very illiquid; you can’t withdraw money for the next 2 decades or more (if you do surrender values apply, which means you lose money) and secondly and more importantly, it is not even fulfilling your insurance requirement adequately. You can never buy adequate insurance with Endowment policies, as they are just too expensive.

The Right Approach

Tax saved is money saved is money earned.

Money saved (not spent) is also money earned.

Money invested and returns generated is money earned.

Ultimately, we save and invest money to spend it on the financial goals we want to achieve, on fulfilling our dreams and aspirations. Do we ever stop to think what they are?

Preparing a financial plan is very critical to start on this path. Once we articulate on paper what is that we are really hankering for or what are our true financial goals, we can get on the path of investment planning. Once we do that our battle is won because the investment plan now gives you choices of investment products, which are in line with your requirements, and in that space there are ample products, which also help you save tax to the maximum limit. 


Busting the Myth Series:Myth No.2: Real Estate investment: I can never go wrong with it.


This is a sample of an oft repeated conversation at any Financial Advisors office:

Client: I am planning to buy a house.

Advisor: Another one?

Client: Yes.

Advisor: Why?

Client: For “investment”.

Advisor: How will you fund it?

Client: That’s why I have come. I want to sell some stocks and Mutual Funds I am holding. I want your advice on which ones to sell. For the balance amount I will take a loan.

Advisor: (wondering to himself) “Aren’t Stocks and Mutual Funds  investments”

The problem lies in the client assumption that Real Estate is the only asset, which will definitely appreciate, and that too in a big way.

Lets tackle some of the popular misconceptions and issues related to Real Estate.

Real Estate  gives huge returns

Many a times we have seen headlines in newspapers reporting big real estate transactions. For instance one such headline came up in 2012 reporting the sale of a flat in Samudra Mahal building at Worli. The sale was made at a whopping rate of Rs.1,18,000 per sq.ft.The effect was enhanced because the purchase was reported to have been made at a price of mere Rs.700 per sq.ft, albeit in 1970. This is a typical showcase example for fans of Real Estate investments.

However, if you work the numbers you would realise that Rs.700 becoming Rs. 1,18,000 in 42 years gives a return of 12.66%.

Not so impressive now, is it?

Lets take another example. An investment of Rs.100 made in 1979 becomes Rs.19,500 in 2013. The return works out to be 16.76%. Incidentally, this is the return your stock exchange index gave over the period.

The return on Real Estate investment looks big mainly due to the large ticket size, but you need to look at the annualized return

Costs involved

Most people when they buy Real Estate especially as second or third homes, they are eying the rental income that comes with it. But they would do well to consider the costs of buying and maintaining a property.

Cost of acquisition, which includes stamp duty, registration fees, brokerage and lawyers fees can go up to 10% of the cost of property.

Then comes the cost of taking a loan in terms of processing fees and interest payable on loan. The argument of getting tax rebate does not cut any ice because on every Rs. 100 you pay as interest the maximum tax benefit is Rs. 30. Remember that balance Rs. 70 goes out of your pocket and is an additional cost.    

Recurring costs include maintenance costs like repair and painting, property tax and payment of electricity and water bills.

Finally the taxes you pay when you sell the property. If you choose to save tax you are either investing in the low yield Capital Gains bonds for 3 years or are re-investing in some other property. The latter option means you cannot ever cash out.

Other issues to consider

Real Estate transactions are not regulated transactions. The value discovery is difficult and it is left to the individuals entering the transaction. Most of the time it is left to the Builder’s whim or in case of resale the benchmark is the previous known transaction, which may or may not be known.

In an under development project a lot depends on the developer. It is difficult to ascertain whether he has all the requisite permissions. Many a projects are languishing due to misadventures of the builders and the investors are of course the losers. 

Lastly when you get into Real Estate you are taking on a huge financial commitment and entails taking loans and committing to EMIs. If there is a sudden job loss or even a scaling down of income due to recession in your industry do consider whether you would still be able to fulfill the EMI commitments.

Most Important issue

In all this hype about making big money by investing into Real Estate, we forget that our focus for investing is to fulfill our financial goals as and when they appear on the horizon.

What is the point of having one huge investment in a flat which is now worth Rs.3 crores, if for your daughter’s higher overseas education you need Rs.50 lakhs, and have to either sell this property or take an educational loan?

In conclusion, I want to say that this article is not about Real Estate bashing neither is there an attempt to prove that equity investing is superior.

People commit huge resources when they are buying their first home and they should. But when it comes to buying Real Estate as an investment, do consider whether it fits into your asset allocation or whether that piece of property is the biggest investment you have. If latter is the case you could have a problem.



Hazardous Headlines

Following newspaper advice can be injurious to your financial health

Investment-related newspaper articles are better taken with a pinch of salt. The recent article in The Economic Times stating PPF investment can beat Sensex returns over 20-year is one such piece that shouldn’t be taken at its face value. You can read it here

The all-time highs notched by stock markets have been attracting investors. Those sitting on the fence may be just gearing up to initiate baby steps into equity investments now that the sentiments are improving.

Many may have just found the courage to act on the financial advisor’s admonishment that one should not sweat over short-term fluctuations in the stock market as equity investments reward you over the long term for being a patient investor.

But, have your views about equity – which you had just resorted to for your long-term needs – been shattered by the recent articles in leading newspapers.

“PPF investments can beat Sensex over 20-year period” this and other headlines screaming through the newspaper would be forcing you to rethink the decision of shifting your loyalty to equity investments from the PPF and debt investments such as fixed deposits that you were devoted to so far.

We thought it is essential for us to justify whether the arguments made in the article – “PPF investments beat Sensex over a 20 year period” – hold any weight and what role equity plays in your finances.

The analysis holds true, but on paper alone. Actual investor returns would be way different from what we have seen in the article. Though extensive analysis has been done while presenting the PPF vs Sensex comparison, several aspects of equity and investor behavior have been ignored.

The argument falls flat on many fronts. Firstly, the PPF interest is controlled by the government and it reigned at the 12% level during the initial eight years that the author has considered.

No one can invest in PPF only once, as investments are mandatory each year. Similarly we also hope no one invests in equity only once. Today the most common mode of investing into stock markets is through systematic investment plans in equity mutual funds, where regular sum is invested each month to even out the costs over longer periods. This kind of investments at regular intervals into both PPF and equity haven’t been taken into account in the article.

Apart from index fund investments, very few try to mirror or invest completely into the index. One buys individual stocks or invests into mutual funds that hold a portfolio of varied stocks, whose returns may vary from those generated by the handful of companies that form the Sensex index.

In fact, the same author has mentioned in another article published the same day that equity funds have beaten Sensex by a huge margin. “The Sensex may have given mediocre 9.14 per cent returns since 1994, but …The Franklin India Bluechip Fund, the top performer in the past 20 years, has given an annualised return of 20.17 per cent,” the author writes in ET Wealth.

A lesson learnt here – we shouldn’t go by the sensational headlines alone as the devil always lies in detail.

Also, you may find other articles during different time lines throwing up contradictory results. A sister concern The Times of India wrote in 2007, “If you had invested Rs 1 lakh in October 2002, your investment would have become Rs 14.63 lakh (over five years). A similar amount invested in PPF in 2002 would have become only Rs 1.47 lakh (by 2007).”

This contradictory view point is a result of differing returns during varied time periods. Another lesson learnt – Data can be tortured to reach any conclusion. It is rightly said too much of analysis leads to paralysis.

Our view is that one should always compare apples to apples. Comparing a debt product with equity is a flawed way of looking through the glass.

Also, we have time and again harped on the fact that financial investments should never be skewed to purely debt or equity or real-estate. All these shades of investment in the right proportion help you weave the rainbow of contentment for a healthy financial life.

So should you be looking at PPF or equity? Well, you shouldn’t be looking at either one of them but both of them as these are designed to meet different needs and goals. Allocating appropriate sum to each, apart from other categories is quintessential.




Busting the Myth Series: Myth no. 1 – Gold is the jewel among my investments

Busting the Myth Series

Myth no. 1 – Gold is the jewel among my investments

Hindus believe in the sade teen (3 & 1/2) muhurat basically 4 days when it is considered especially auspicious to buy gold. Then we have Diwali, marriages and a host of other festivals, which keep the jewelers busy.

So Kharidne walon ko kharidne ka bahana chahiye.

It may be either in the form of coins or rings or in the form of jewelry.

Does this buying really constitute investment? When we think of an investment portfolio we generally think in terms of buying at an opportune time and selling when the goal requirement arises or when there is adequate appreciation. Now try and apply this logic to your Gold purchase. Recently the Gold prices reached a high of 32000. Did you in all seriousness even think of selling your wife’s gold ornaments or the family Jewelry inherited from your parents at this time? Will you think of selling when your daughter is seeking admission into an overseas university for higher education, instead of taking a loan?

Most of the Gold purchase ends up being a dead investment and does not make any contribution towards fulfillment of any of your financial goals except possibly gifting it to your daughter in marriage. If that is the aim by all means accumulate physical Gold to fulfill this requirement and no more. And while you are at it do not go overboard. Her happy married life is not linked to the amount of Gold you give her.

Investment in Gold as part of an overall strategy is a different ball game altogether.

Returns history








Per 10 gms


Per 10 gms


Per 10 gms


























































































Consider the Gold price chart above.

The biggest jump in the prices in numerical terms happened in last 10 years from 2004 to 2014 and the appreciation per year was 19%. But nobody invests in Gold for 10 years, so lets look at the longer-term return.

The 10 years prior to that the prices hardly moved. A 20-year period from the 80s till 2004 shows a 5% return. 

A 30 year period from the 80s to 2014 high, show a 9.6% return.

The obvious conclusion is that Gold is a good hedge against inflation. Do not have greater expectations from it.

 Does that mean you should not invest in Gold? Not at all!

In fact, we believe Gold should be a part of every investment portfolio because:

  1. As mentioned earlier, on a long term basis it is a good hedge against inflation
  2. During financial turmoil, it outperforms all other investment assets and hence reduces the overall volatility of the portfolio.

Practically we can’t wait for the next crisis to turn up for our Gold investment to glitter, hence the need for diversification.

A healthy and balanced portfolio will have growth assets like equity and real estate, steady assets like fixed income and debt investments and Gold to add further balance. How much percentage of each asset class in the portfolio? That depends on each individual’s profile.

In its latest Gold Investor report, World Gold Council’s Marcus Grubb, Managing Director – Investment Strategy and Juan Carlos Artigas, Director – Investment Research state, “Our research shows that a 5%-6% allocation to gold is ‘optimal’ for investors with a well-balanced medium-risk portfolio (a 60/40 portfolio in equities, cash and bonds).”

Different forms of investment in Gold

 Gold Exchange Traded Funds (ETFs):

If you have a demat account, you can buy gold in paper form on the stock exchange.

One can purchase gold in multiples of 1 unit. 1 Unit = 1 gram of gold. (A few fund houses also trade in ½ gram gold as one unit.) The price of unit of one gram gold follows the market price of 24 carat gold.

Features of Gold ETFs are listed below:

  • Safety & Storage: Since there is no physical gold involved, it is a safer avenue for investment in gold. So there is no question of storage as well.
  • Less expensive: No making charges or locker charges are applicable in case of ETFs.
  • Affordability: Gold can be bought in as small quantity as 1 gram.
  • Purity: ETFs guarantee purity of gold, usually 99.5%.
  • On redemption: One can get the money on redemption of Gold ETFs & not the physical gold. (Except one fund house – Motilal Oswal)
  • Wealth Tax: Gold ETFs do not attract any wealth tax liability.

Gold Mutual Funds:

Investing in gold mutual funds is like investing in any other actively managed mutual fund. It is useful for investors who do not have a Demat account.

The features are as follows:

  • Ease of Operation: No Demat a/c is required.
  • Safety & Security: Since no physical gold is involved it is safer to invest in gold mutual funds.
  • Less expensive: No making charges or locker charges are applicable.
  • Redemption Process: On redemption, the amount of funds will be dependent on the closing NAV of the fund.
  • Wealth Tax: Gold Mutual Funds do not attract any wealth tax liability.


The above article in Mindmap form.