Why IRDA v/s SEBI hasnt gone in your favour???

Those of us who are in India, we have been inundated with news of tussle between SEBI and IRDA to control/regulate the ULIPS launched by insurance firms. The SEBI's contention was that since ULIPS are primarily a MF in the garb of insurance plan with huge upfront charges, SEBI should have right over regulating that product, while IRDA position was that since ULIP is an insurance product it will be regulated by IRDA. This dispute was also referred to court,but, finally the finance minister intervened in favour of IRDA. So, it is settled now, IRDA is the regulator who will regulate ULIPS.

So what does this mean for an average investor like you and me?? Is it good or bad?? The answer is both, good and bad.

Let us see why

IT IS GOOD BECAUSE

1. ULIPS to become relatively a cost effective saving tool- My displeasure over ULIPS as an investment product is well known to the readers of this blog. I feel they are one of the worst products that one can invest in.The reason is its atrociously high charges which can be upto 50-80% of your premiums for first few years. But, now the situation is likely to get better after Sept 2010. The IRDA has mandated that charges be brought down and also should be evenly spread over the tenure rather than being just front loaded as it is now. SO the ULIPS as a product will RELATIVELY become better than its earlier AVATAAR.S o in case you like ULIPS and want to invest only in them, then this is good news for you.

2. The lockin to go upto at least 5 years-IRDA has also mandated that minimum lockin should be 5 years atleast than 3 years currently in vogue. This will ensure that people are stay put in the plan for a longer duration and are able to reap the benefits of long term investing. It will also reduce chances of agents misselling this product as "3 year" saving tool.

3. Charges to be uniformly distributed - Charges will now be equitably distributed over the term of the plan rather than being front loaded. This will ensure that even if one is surrendering the policy early he isnt heavily penalised because of charges.

4.No charges on policy surrender- Currently on surrendering the insurance policy in 3- 4 years time, one does not get anything or if you get then that is close to nothing . This is due to prohibitive charges and upfront commission that companies pay out of your premium. But this will change as now no longer companies can charge any fee on surrendering the plan. This is likely to be effective Sept 2010.

IT IS BAD BECAUSE

1. It is still a ULIP which will still have charges which may be lower than ULIPS current charges but will still be manifold higher than MF charges. They will still be one of the worst products to invest in.

2. With SEBI as regulator, things like high commission etc would have gone and that would have brought charge structure to MF levels and then ULIP would have been a really good product offering you the twin benefits of insurance and MF at a very effective rate.

In the end, I think the FInance Minister's decision is not really in the right interest of an average investor who wants to invest in a saving tool which gives maximum appreciation head room with minimum possible charges/fees.

WHY NOMINATION ALONE ISNT ENOUGH IN YOUR INSURANCE POLICY

Have you ever wondered who is the legal beneficiary of the insurance claim money? Most people feel that the insurance money will be passed on to their husband /wife and kids as the case may be . However, this is only partially true. As per law, every individual who is related /financially dependent to the insured person has legal claim over the insurance claim money. Lot of people nominate their wife/husband as their nominee in the insurance policy and then they believe that in case of their unfortunate death, the claim money will be passed on to their spouse.

This also is only partially true. Nomination only means that the nominee has the right to claim the money only and not use it . The money is then supposed to be passed on to all other legal claimants of the money. So, in case you want your insurance money to go to a specific person only , then just nominating that person in your policy document is not enough. You also need to prepare a will making it amply clear that the money received from the insurance policy is to be passed on to such specific person. This will also needs to be registered /probated to make it legally binding.

Hence, if you haven't done this, may be its good time to consult your lawyer and prepare a will. Because , the very reason why you pay insurance premiums over donkey years is to ensure that the money is available to your near and dear ones when it is required the most. A "will" will help you ensure that.

4 Golden principles of equity investments

If you want to invest in equities, there are only four things you need to remember.
1. Choose the right company
Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital.

Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.
2. Be disciplined
Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.
--Diversify your investments. Do not put more than 10 per cent of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number.
--Research and analyze your company's performance through quarterly results, annual reports and news articles.
--Get a good broker and understand settlement systems
--Ignore hot tips. If hot tips really worked, we'd all be millionaires.
--Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.

3. Monitor and review
Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking!
Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary

4. Learn from your mistakes
When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.

SHOULD YOU TAKE LOAN FROM YOUR EMPLOYER/COMPANY?

Companies , these days, increasingly position the loan benefits that they offer to their employees , as a major financial benefit to the employee. But, taking a loan from the employer is something I strongly recommend people to avoid . Here’s why I believe you should not opt for a loan from your employer:
1. Any loan from your employer ties you to your job. You can’t come out until the loan amount has been cleared in full. You might argue that you can always ask your new employer to bear the loan. But where does that take you? From one chain to the next? Plus, I’m not sure if any employer today would be willing to bear existing loans.
It’s psychologically debilitating to see your take home salary cut by the EMI (Equated Monthly Installment) amount on the loan even before it’s credited into your salary account.

2.There’s a hidden cost. Though you do not actually pay any direct interest on the loan amount, the notional interest surfaces as a perquisite in your income tax calculations and adds directly to your taxable income. I didn’t know this fact until I saw my income tax calculations; it was already too late.

3. People take loans that they dont really "need" . I have seen people taking loans from the employers just to take the benefit of saving on the interest differential that is there between the employer's rate and the prevailing market rate. This leads to people taking on credit liability when they do not really need the money. Most of the time credit is not used in the best possible manner leading to drain on savings and finacial stress.
With some fanatic fiscal steps, those already in the trap can manage to come out of this situation sooner than they think.

EXIT ENTRY LOAD, ENTER EXIT LOAD

SEBI is an institution which aims to act as watchdog to protect the interest of common investors in the equity markets. With this aim in mind, SEBI sometime back mandated that all AMCs do away with collecting entry fee to investors who wishes to invest in mutual funds. This is a revolutionary decision since it makes the mutual funds the best investment structure by a long distance. Now the investors will not be charged any entry fee and the entire money invested will be accounted for in the number of units. This will push up the effective returns that the investor will get.

But, all is not well with this step. There are certain concerns as of now which needs to be addressed.

1. No entry fee means lesser people willing to sell- The abolition of the entry fee has led to a dramatic fall in the number of distributors who are willing to distribute or sell MFs. Many banks who earlier used to aggressively sell MFs to their clientele have completely stopped or have gone slow on it since selling them does not make them money anymore. This is likely to impact the retail investor in the end since it will be difficult for him to locate point of sale of MFs now . The lower the distribution , lower would be the accessibility of this product which already has abysmal penetration of less than 3 % of the population in India.

2. Increase in Exit loads - While SEBI has mandated that entry loads be done away with, it has allowed AMCS to charge exit load of 1% . Now, most of the equity based funds have hiked their exit loads from 0% - 0.5% to 1%.

3. Increase in the holding period of MFs for no exit load - Earlier the average holding period for equity based MFs where no exit load was charged was about 6 months. Now the same has been increased to 2 years in most of the funds. This means that if an investor wishes to avoid paying exit load, then he may have to stay invested for a longer period of time.

4. The investor may be forced to pay more than 2.25% - With the abolition of fixed entry fee, the SEBI has allowed that an agent or advisor can charge his/her commission separately from the investor. This has opened up a small window where an agent might try and extract more commission out of an investor. This will then defeat the whole purpose of the abolition of the entry fee.

There are few glitches which need to be ironed out before things can be really streamlined for the AMC, the distributor/agents and the common investor.

CREDIT CARD REGISTRATION WILL MAKE ONLINE TRANSACTION MORE SECURE

One of the biggest risks associated with credit cards usage for online purchases was the possibility of misuse of the credit card by fraudsters. This was such a big demerit working against both credit card fraternity and net commerce that a solution to this threat was imminent. Till now , for anyone to make online payment, all one needed was the credit card number, the expiry month and year and the CVV number. All the 3 information required to transact on internet was the one which were mentioned on the credit card. So in case a person lays his hand on your credit card , he/she could have easily misused your card on the internet since all the information he needed was readily available on the credit card itself.

This was a huge shortcoming and as such needed to be fixed. Come August 1st, Reserve Bank Of India, has mandated that the credit cards will have to have one more layer of security check before the payment transaction is approved. Now, all the credit card users will have to register their card with the card issuer and get another password which will be unique and will be known only to them. They will have to use this password every time they want to make payment on internet through their credit cards. So, in essence, now one will have to enter the following info while transacting on net

1. Card Number and issuer (Visa/Mastercard)

2. Card expiry month and year

3. CVV number

4. New password or PIN

This extra layer of protection will make the whole process of transacting on Internet more safe and secure for credit card users. This will help the user in a big way. It will also help the credit card companies by increasing the spend per card since more and more people are likely to use their credit cards for online purchases after this security feature thrown in. It will also protect credit companies from booking looses due to misuse of cards.

In short , this is a good step taken in the right direction. So if you have a credit card and would like to use it for making purchases online, then do get that registered immediately.

Be wise and wealthy...

WHAT SHOULD YOU DO WITH YOUR RETIREMENT MONEY?

One of the most classic dilemma facing a retired or soon - to-be -retired person is whether he should use the retirement proceeds to start up some sort of business to keep himself busy while making good money out of it or should he just invest the money in a safe place like bank FD and live off the interest accrued? There are people who would argue in favor of starting up something on ones own using the money while there are equally good number of people who think otherwise.

So, what is the right decision or rather which is the better option? Well , I think there are no right or wrong options here . Both the options have their own merits and demerits , but, I would stick my neck out in favor of one option. But before I do so , let us examine the pros and cons of both the options :-

OPTION 1 - STARTING UP A SMALL BUSINESS

PROS

- The first and foremost benefit of starting a business after retirement will mean that the person will be able to productively employ himself or herself. This is a big consideration since there are numerous cases where people feel left out and are unable to cope up with the feeling of being unemployed . Sometimes retired people can suffer from depression if they are not doing anything productive. Having a small business or shop etc can easily help them stay active both physically and mentally.

- Business does offer chance of making more money than the retired person will get from bank FD.

- Business, if successful, can turn into an asset which he can pass on to the family thereby creating wealth not only for himself but also for the whole family.

CONS

- Starting up a business always has an element of risk associated with it. Generally the success rate of start ups is not more than 10-15% and as such the thought of putting one's retirement proceeds into starting up a business may not turn out to be a wise decision.

- To be successful in business one requires different type of skills than what one requires to be successful in a 9-5 job. Hence, it is increasingly difficult for retired salaried people to start up a business and turn it into a success. One can however overcome this challenge by hiring experienced person with the respective domain knowledge . One would also need to learn from experience.

- The trauma of failure may not be the best thing for a retired person to handle considering that the time that he has to make a success out of the business is much lesser than a young businessman starting out in life. Retired person will have much lesser headroom and time to make mistakes and learn from it .

OPTION 2 - INVESTING IN SAFE INSTRUMENTS AND LIVING OFF ITS INTEREST

PROS

1. The biggest advantage of this option is that one will get enough time to enjoy one's retired life as he will have plenty of time to do things he always wanted to do. Many people never manage to find time to attend to their hobbies in their working life time and as such this option will give them that option post retirement.

2. Another very important factor for a retired person is the safety of his capital. Since the retirement proceeds is all the money a retired person has, it is prudent to invest it in an instrument which has minimum to zero risks associated with it. This option of investing in Bank FD, Post Office Monthly Income scheme, Senior citizen savings scheme etc offers retired person exactly this benefit.

3. Since health also is major concern in old age, the fact that the person will not be required to do any physical activity ,unlike in case of starting up a business, is also a big plus .

CONS

1. The strategy on living off on interest income has a limitation that the interest income does not increase with inflation and the over a period of time inflation can reduce the real income in the hands of the investor.

2. The income generated out of interest alone will not be anywhere near the income a successful business can generate.

THE VERDICT

After going through both the pros and cons of the two options , I think it is always better to play safe adopt the second option viz investing the retirement proceeds and living off the interest income. The compelling reason for this is the fact that one must attach highest importance to the safety aspect of the retirement proceeds since this is the last sum of money the person has. As such he can not take any risk with this money . Investing it in safe instruments will give him modest income and considering that a retired person has almost no liability , this should suffice. And in case a person is worried about inflation eating into his interest income over a period of time, then he might consider investing part of his sum in equity based well diversified mutual funds. The superior returns from these mutual funds will guard the investor from ills of rising inflation.

RICH PAY LESSER FOR THEIR LIFE INSURANCE

These are good times for rich people. People who are affluent have many advantages and privileges in general life. An addition to their long list of privileges is the availability of term insurance at a much cheaper rate.

The term insurance premiums have seen drastic reduction recently for life cover of RS 1 cr and above. Even term plans having life cover of Rs 25 lakhs and above also have seen quite a large reduction in the premiums. This large scale reduction in the premiums is attributed to the following reasons:-

1. Better mortality rates - The recent experience has shown that the mortality rate isn't as bad as is shown in the mortality chart currently being used. And as such the premiums have come down owing to this.

2. Access to better health care and lifestyle - Rich and HNIs have greater access to health care and quality lifestyle which also plays a role in increasing the life span of the person. This in turn means lesser claims on insurance companies pushing the overall premiums down.

3. Wider coverage - Since insurance primarily is based on the concept of "risk sharing" with increase in the number of people under insurance cover , the premiums to be paid to make the whole exercise viable, also comes down. With more and more people getting in the insurance ambit in India, it is expected that insurance premiums might see some more downward movement going forward.

Today, one can avail of a LIC term policy with a sum assured of Rs 1cr for an annual premium of nearly Rs 25,700-32 ,000. But unlike LIC whose rates are available to most buyers, Birla Sun Life has stringent underwriting norms and the rates are available to only those in the best of health.Term insurance is a cover where the only benefit is a payment if the insured dies during the term of the policy is the most basic form of life insurance. The cover is now almost a commodity with web-based aggregators offering quotes from all insurance for term protection.