Should you invest in Monthly Income Plans?

It's common for diversified equity funds to emerge as a top-of-the-mind investment when stock markets are booming. In such a scenario, hybrid funds like Balanced Funds and Monthly Income Plans (MIPs) are relegated to the sidelines. Investors can miss out on a very critical component in their portfolio by shutting out hybrid funds completely. Hybrid funds (powered by their flexibility to invest across asset classes) can add immense value to the investor's portfolio (especially during the down turn). While the role of balanced funds in the investor's portfolio has been well-documented, it is time for investors to sit up and recognise the value MIPs can add to their portfolio.

MIPs invest predominantly in debt instruments with a small portion of assets allocated to equities. The equity component provides MIPs with just the edge it needs to outperform conventional debt funds. The equity component usually varies between 5%-30% of assets. So under what circumstances would MIPs add value to an investor's portfolio? The graph below answers this question.

As is evident from the graph, during the crash in the stock markets last year, MIPs have fallen less as compared to the BSE Sensex indices. And this is where it adds value to an investor's portfolio. When the stock markets rally, they will lag conventional equity funds, but when the markets move down, they will limit the fall in an investor's portfolio.

Hence MIPs become important from an asset allocation perspective. Although, you can reach the desired asset allocation by allocating the assets in equity and debt; MIPs offer a convenient way of achieving the same.

Time to cash out?


Though the stock markets continue to be volatile, they have recovered from the lows touched in March this year. The markets have posted a growth of around 93% (as on August 26, 2009) since March 8, 2009. Expectedly, many investors who have lost a huge chunk of their invested corpus in the stock market crash last year are now eager to recover whatever they can. Now the question is - is it the right time for you to cash out? While you would promptly say YES, at Personal FN we have a contrarian view on this.

Sensex: Rise of the fallen

Broadly, there could be two reasons for making investments. First, and the most ideal reason, is to invest for the purpose of meeting one or more of your future goals/objectives. Second, and unfortunately the most commonly practiced, is to make "quick bucks" by participating in market movements. The latter option amounts to timing the markets, something that many investors try to do, but rarely succeed.

In our view, redeeming investments should not be a function of market movements, but rather a result of the following:

1. Redeem if you are sure that the fund in question has failed to meet its purpose in your financial plan. The reasons behind this could include poor performance or change in investment mandate of the fund, which makes it a misfit in your portfolio.
2. Redeem if you have to rebalance your asset allocation. Also,before you cash out, make sure that you have decided where to reinvest the redemtpion proceeds.
3. Redeem when you have achieved your investment objective.

Financing Avenues available for Studying Abroad


If you aspire to study abroad and are looking to fund your education, then this piece is for you. Financial aid, education loans and bursaries are the broad categories of finances available to students aspiring to study overseas.

Financial aid primarily comprises of scholarships offered by governments, universities, corporates and charitable trusts. Generally, exceptionally intelligent students qualify for such scholarships. Students who wish to apply for university scholarships have the opportunity to do so at the time of applying for the course. For example, HSBC offers two scholarships for students with guaranteed admission in Oxford, Cambridge and London Universities. Applications for these are accepted between April and June, every year.

Bursaries are endowments given to students based on financial need, and are used to supplement the student's primary source of funding. While this will be a starting point, it would bring down the requirement for funds to some extent.

Education loans are granted by banks and many private institutions (like the JN Tata Endowment for Higher Education of Indians). Education loans offered by banks normally have interest rates in the range of 11%-13% p.a., along with strict norms and collateral requirements for overseas degrees. The repayment period is normally between 5-7 years, and starts after completion of the education or 6 months after securing a job, whichever is earlier.

If a student is not able to get a scholarship and is short on funds, then he has no other option than to opt for an education loan. Although financing avenues have increased nowadays, it is imperative that students take the initiative to research the various funding options available to them and ensure that it meets their requirements.
Where to invest: Liquid Funds...Liquid Plus Funds...or Bank FDs


Liquid funds with no entry and exit loads and practically no credit risk, have not only been popular with banks and companies to park their short term money, but have also emerged as stiff competition to the savings bank a/c. For the past few years, post-tax returns from liquid funds have been in the range of 5%-6% p.a. making them a hit among individual investors especially the high net worth investors (HNIs). However, liquid funds are fast losing their edge over the savings bank a/c with average returns dropping to 3.5% p.a. This is mainly on account of the decline in short-term interest rates and the SEBI guideline restricting these funds from investing in any security having a residual maturity of more than 91 days. The average maturity period of most of these funds ranges from 50 to 60 days.

Is there an alternative to liquid funds? Yes, investors can consider investing their money in ultra short bond funds (erstwhile liquid plus funds). These funds can invest in securities with higher maturities and hence are able to generate returns which are 50-80 basis points higher than liquid funds. However, these extra returns come with slightly higher interest rate risk and credit risk. Most of these funds also have a lock-in period of at least 7 days. The average maturity period of these funds ranges from 140-150 days.

There is yet another option for individual investors. Of late banks have been offering a facility to transfer the money sitting idle in savings bank a/c to fixed deposits. The rate of fixed deposit is however, slightly less than the rate of a conventional FD for similar maturity.

The beauty of this facility is that the money lying in the fixed deposits is not subject to any kind of lock-in i.e. the investor can withdraw the money as and when required either through the ATM or by issuing a cheque without any penalty for premature withdrawal. Moreover, if the interest rates move up, money can be moved from lower interest rate FDs to higher interest rate FDs without any penalty. To top it up, the amount can be transferred either online or through simple instructions on the phone using the ATM/debit card number and the PIN. We urge investors to check with their bank for any such facility and if it does exist go for it NOW. After all, opportunity only knocks once!

LIC ATM Plan Analysis

LIC Jeevan Saral Plan is also called as ATM plan

==================================

Product Summary

-------------------

This is an Endowment Assurance plan where the proposer has simply to choose the amount and mode of premium payment. The plan provides financial protection against death throughout the term of the plan. The death benefit is directly related to the premiums paid. The Maturity Sum Assured depends on the age at entry of the life to be assured and is payable on survival to the end of the policy term. It also offers the flexibility of term and a lot of liquidity.

Benefit Illustration

---------------------

http://www.licindia.com/special_plan_001_illustration.htm

Amount invested per annum = Rs 4704

Term = 25 years

Normal Circumstances :- Investor survives full term

-----------------------------------------------------

Sum Assured (Gauranteed) = 117600

Maturity Bonus (Variable @ 10%) = 211000

Total Amount (Maximum as per LIC) = 346296

Un-usual Circumstances :- Investor dies before full term

---------------------------------------------------------

Death Benefit:

250 times the monthly premium together with loyalty additions, if any, and return of premiums excluding first year premiums and extra/rider premium, if any, is payable in lump sum on death of the life assured during the term of the policy.

Year Sum_Assured Maturity_Bonus Total

----------------------------------------------------

1 100000 0 100000

2 104800 0 104800

3 109600 0 109600

4 114400 0 114400

5 119200 0 119200

6 124000 0 124000

7 128800 0 128800

8 133600 0 133600

9 138400 0 138400

10 143200 18000 161200

15 167200 41000 208200

20 191200 100000 291200

25 215200 211000 426200

DISCLAIMER

==========

TO BE FAIR WITH LIC I AM TAKING THE MAXIMUM RETURNS THAT LIC IS DEPICTING ON THEIR SITE.

LIC CALCULATED THE RETURN @ 10%.

BUT IN THE 25-30 YEARS OF HISTORY OF LIC, THEY HAVE NEVER GIVEN MORE THAN 6% RETURNS.

BUT STILL TO BE FAIR, I HAVE BASED MY CALCULATION ASSUMING THE MAXIMUM RETURNS SHOWN ON THEIR OFFICIAL SITE.

Normal Case - Survival Benifit

-------------------------------

If you go through the link provided above (LIC site) you will see that in normal case (Survival),

For first nine years, You have paid the amount Rs 42,336 /-

And in return LIC is giving you Rs 37,892 /-. Less than what you have actually paid.

The policy term is of minimum 10 Years.

So in 10 years you have paid to LIC RS 47,040 /-

In return at the end of 10th year LIC will payback :-

43,360 (Guaranteed) + 18,000 (Bonus) = Rs 61,360 /-

What is the Rate Of Interest that you are getting ? [You need to apply ANNUITY Formulla]

Ii comes to 4.8 % ONLY (For survival person) (Shame on LIC)

If you continue for whole 25 years term

You would have paid Rs 1,17,600 /-

In turn LIC gave you back Rs 3,46,296 /-

What is the Rate Of Interest now that you are getting ? [You need to apply ANNUITY Formulla]

It comes to 7.55 % ONLY (For survival person)

Only in case of Un-Usual circumstances the benefit your "Nominee" will get is if you "DIE" before the first 10 years of the policy term. The benefit amount is less that 1.5 Lacs.

Is this really sufficient after 10 years?

As you know, I have always/repeatedly/insistly told not to go for ENDOWMENT POLICY.

Again I am repeating same thing, do not go for any endowment policies.

--------------------------------------------------------------------------------

Keep INSURANCE and INVESTMENT different. Do not try to merge both things.

Investment

========

Go for PPF @ 8% returns. What will be the returns after 10 years ?

You paid # 47040 /- You will get # Rs 73,596 /-

If you continue this for 25 years

You paid # 117600 /- You will get # Rs 3,71,401 /-

Insurance

=======

Go for Term Insurance Policy

LIC Anmol Jeevan - I

Policy Term # 25 years

Current Age # 30 years

Sum Assured 5,00,000 [5 Lacs and not 1 Lacs]

Single premium comes to Rs 23,245 /-

Yearly Premium comes to Rs 1,911 /-

--------------------------------------------------------------------------------

After 25 years in case of LIC ATM plan you are getting Rs 3,46,296 /-

After 25 years in case of PPF you are getting Rs 3,71,401 /-

Gain in case of PPF # Rs 25,105 /-

This is more than the difference that you will be paying as one time to get the Term Life cover of 5 Lacs.

--------------------------------------------------------------------------------

If you could not afford single payment then next option will be :-

Go for annual premium of Rs 1911 /-

So you will be left with ( 4704 - 1911 ) = Rs 2793 /-

Invest this Rs 2793 in some tax free Mutual Fund.

Last 5 years return for top 10 Mutual funds are as below:-

MF Performance Link

---------------------------------

Mutual Fund Percent

---------------------------------

SBI Magnum taxgain 37.22

Sundaram BNP paribas 32.57

HDFC Taxsaver 29.43

Canara Robeco tax 28.69

Tauras Tax Shield 27.73

ICICI Prudential tax 25.79

Sahara Tax gain 25.78

Franklin Taxshield 23.40

HDFC LT Adv 22.64

Franklin Index Tax 21.95

---------------------------------

If we think of conservatively and think to get the decent return of 12% ONLY

So the amount Rs 2793 /- invested for 25 years at 12% returns will fetch Rs 4,17,089 /-

--------------------------------------------------------------------------------

So what you should do (Instead of LIC ATM Plan)

Take Term Insurance "LIC Anmol Jeevan - I", Term # 25 years

Sum Assured 5,00,000 [5 Lacs and not 1 Lacs].

You will have to pay Rs 1911 /-

Remaining amount Rs 2793 /-

You can invest in any one of the above top 10 TAX FREE Mutual Funds

Mutual Fund Returns after 25 Years Rs 4,17,089 /- (Insurance of 5 Lacs)

PPF Returns after 25 Years Rs 3,71,401 /- (No Insurance cover)

LIC ATM Plan Returns after 25 Years Rs 3,46,296 /- (Insurance of 1 Lacs) (Survival)

--------------------------------------------------------------------------------

LIC ATM Plan :- In case of Death :- Benifits to nominee are as below :-

Returns after 10 Years Rs 1,61,200 (You have paid Rs 47,040)

Returns after 20 Years Rs 2,91,200 (You have paid Rs 94,080)

Returns after 25 Years Rs 4,26,200 (You have paid Rs 1,17,600)

Term Insurance + Mutual Funds @ 12 % returns in case of Death :-

Benifits to nominee are as below :-

Returns after 10 Years Rs 5,00,000 + Rs 54,895 (You have paid Rs 47,040)

Returns after 20 Years Rs 5,00,000 + Rs 2,25,391 (You have paid Rs 94,080)

Returns after 25 Years Rs 5,00,000 + Rs 4,17,089 (You have paid Rs 1,17,600)

Term Insurance + Mutual Funds @ 10 % returns in case of Death :-

Benifits to nominee are as below :-

Returns after 10 Years Rs 5,00,000 + Rs 48,965 (You have paid Rs 47,040)

Returns after 20 Years Rs 5,00,000 + Rs 1,75,966 (You have paid Rs 94,080)

Returns after 25 Years Rs 5,00,000 + Rs 3,02,151 (You have paid Rs 1,17,600)

Conclusion :- The LIC ATM policy is not WORTH !!!

Reason to Pay OFF Your Bank Loan ASAP

How Bank Loan EMI is calculated

In this post we will learn how do we calculate monthly EMI for home Loan (or any Loan) and how increasing tenure does not help much after a certain point.

In Housing Finance, Equated Monthly Installment(EMI) refers to the monthly payment towards interest and principal made by a borrower to a lender. EMI is calculated using a formula that considers.

- Loan Amount
- Interest Rate
- Loan Period

Formula to get EMI = ( L x i ) X (( 1 + i ) ^ N) / ([(1+i)^N] - 1)

Where,
L = Loan amount
i = Interest Rate (rate per annum divided by 12)
^ = to the power of
N = loan period in months

Assuming a loan of Rs 1 Lakh at 11 percent per annum, repayable in 15 years,
the EMI calculation using the formula will be :

EMI = (100000 x .00916) x ((1+.00916)^180 ) / ([(1+.00916)^180] - 1)

====> 916 X (5.161846 / 4.161846)

EMI = Rs 1,136

Note : i = 11 percent / 12 = .11/12 = .00916


EMI calculator : http://contentlinks.asiancerc.com/mt/tools.asp?pageSubType=emi_calculator


Do the calculation yourself to get better understanding.

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30 Lacs at 12% interest rate.

Ans: The difference in EMI value is not very significant compared to the change in tenure and at one stage its almost of no gain to increase the tenure. To prove this argument i would like to present an example.

I am listing down the EMI value for different tenures from 10 years to 100 years.
Check the difference in EMI when tenure is increased by 5 years.
Loan Amount 30 Lacs taken on 12% interest rate.

==============
Tenure EMI
==============
10 43041
15 36005

20 33032

25 31596

30 30858

35 30466

40 30254

45 30139

50 30076

55 30042

60 30023

65 30012

70 30007

75 30003

80 30002

85 30001

90 30000

95 30000

100 30000

==============
What it tells us is that it's almost useless to extend the tenure after some time.
So better pay off your loans as soon as possible.


Few more EMI Calculator
http://www.icicibank.com/Pfsuser/loans/homeloans/emicalculator.htm

http://www.ucobank.com/EMI_calculator.htm

Diversified Protfolio

What is Portfolio ?
Your investments all together is your portfolio , as simple as that .

So , if i have
10,000 in shares
20,000 in real estate
30,000 in Fixed Deposits
1,000 cash

that's my portfolio


What is an Asset Class ?

An Asset class is something where we can invest and build assets. If i buy a Home or land, i build an asset in real estate category, if i buy anything in shares or mutual funds (equity), i create assets in Equity asset class. They are just categories.


Following are some asset classes:

Asset Class	Source	Return	Risk	Liquidity
Equity	Shares, Equity Mutual Funds, Derivatives	Very High Returns	Very Unsecure	Good
Debt	Fixed Deposits, PPF, NSC, FMP	Low Returns	Secure	Average
Real Estate	Land, Flat, Home, Commecial Plots	Good Returns	Stability	Very Low
Gold	Gold/Silver	Hedge against Inflation	Stability	Average
Cash	Cash	Negative due to Inflation	N/A	Excellent

Why Diversification ?

When you diversify you investments over different asset class, not only your money gets diversified, but also risk, so if some particular asset class is not performing well, it will affect only that part of your portfolio and not whole of it.

Obviously it also effects the returns, you returns are collection of returns from all the asset class, so even if some asset class did not perform over a period, it doesn't affect you hardly.


Lets see some examples :

1. Anyone who was heavily invested in "Debt" around 2003-2004 didn't get high returns
from the zooming stock markets (equity) for 4-5 yrs
2. Anyone who was heavily invested in Equity around start of 2008, saw his investments
go down by 40-60%
3. Anyone who is totally invested in Debt cant get instant money if required, either he has
to take some loan over those investments or break his PF or FD etc.


That does not mean, non-diversification always hits ...

1. Anyone heavily invested in Equities before the bull run of stock markets in 2003 onwards
made fortunes (but at their risk) .
2. And people who had most of there money in GOLD in 2007 got the highest returns
compared to any asset class.
3. It totally depends on person to person. Also inside every asset class, another level
of diversification is important. Like in Equity there are different categories like Large Cap,
Mid Cap, Small Cap

In Mutual funds there are sectoral funds, equity diversified, balanced funds, debt funds, liquid funds etc. Another level of diversification is also necessary to achieve high level of diversification .


Case study

Ajay a software engineer earning Rs 35,000 monthly (post tax) with a Family of 4 (1 wife and 2 kids) has following portfolio

Expenditure : 20,000 per month

Portfolio :

Tax savers Mutual funds : 1.25 lacs (locked for another 2 years)
Fixed Deposits (for 5 years) : 2 lacs
PPF : 1 lacs
Cash (in bank) : Rs 25,000
Insurance Payout : He pay 50,000 per year as life insurance premium for an endowment policy, for which he is insured for 12.5 lacs for 20 years. he started this policy before 4 years.


His Future plans

1. His goals are to buy a home in another 5 years for which he need down payment
of 3-4 lacs
2. Want to save 10 lacs for his each son's education in 10 years
3. He want to retire early with monthly income of 45,000 atleast


This Portfolio looks like diversified, and yes it is, but not in a well mannered way.
The asset wise allocation is

* Equity : 25%
* Debt : 70%
* Real Estate : 0%
* Cash : 5%


His overall Portfolio Shortcoming

- His exposure to different asset class is not well balanced
- His Life insurance is very less and and not at all enough.
For this he is paying a hefty amount every year which adds a lot to his burden.
- His Equity Allocation needs to go up
- His Debt allocation needs to go down
- His cash needs to go up for liquidity.
If he needs 1 lacs suddenly he can't get it, or will get it after breaking his FD.


Suggestions :

The first thing he must do is to restructure his portfolio.

* He shall surrender his existing Endowment policy and take a Term Insurance of 35-40 lacs for 20 years for which he will pay around 13000-14000 per annum. he will save surplus of 40,000 per year because of this. Also when he surrenders the policy he will get back around Rs. 2.4 lacs

* He must invest more in Shares and Mutual funds (as his risk taking capabilities is more because of his less age and less dependents). Now he got 2.4 lacs back after surrendering endowment policy

* He shall consider increasing his Cash to a level which can meet his contingent needs if any arised. He shall have atleast 2 to 3 times of his monthly expenses as contingency fund, which is totally liquid. Soo in this case it will be Rs 60,000.

* Also apart from Cash and investing in Tax saver mutual funds, he shall consider investing in some non-tax saver mutual funds which also gives him near liquidity. As per Govt laws you cannot break Tax Saver mutual fund investment before three years (lock in period)

* He may leave the debt investments as it is. If he wants he can break his FD incase he is going for the Home loan, he can increase the down payment part from this money.

* Incase he is going to take home loan after 1 year, he can also take some loan on his PPF, atleast for some part he will pay less interest than the home loan.

* Also he shall invest some money in GOLD, to give more stability and security to his portfolio.

* Atlast he shall consider taking a Family Floater Health Insurance plan , which helps him to secure his Family from and health problems or illness.


Recommended Portfolio

Apart from His Home (considering he takes Home soon)

* Equity 65% ( Direct shares 20%, Equity Funds 60%, Balanced Funds 20%)
* Debt 20%
* Gold (ETF) 10%
* Cash 5%

Diversification does not say that you have to invest in some money in every asset class for sure , the idea behind it is just that the risk is minimized by diversification and the portfolio is more stable.