Khota Paisa

Review : ICICI Pru ACE Plan

Posted in Reviews by khotapaisa on May 9, 2010

I must admit that I was introduced to this plan by one of the blog readers. And once I went thru the details of the plan, it really surprised me. This plan has some really attractive terms making it a relatively cheap ULIP. Though there is nothing sunstancially new in this plan, what makes it more attractive is that it doesn’t have many too many fine-prints for the investor to worry about, making it simpler.

The plan has no premium allocation charge. The policy administration charges are 720/- per annum while the fund management charge (for equity fund) is low at 1.35%. By comparison, most of the equity mutual funds charge you 2-2.25% for fund management. Overall these charges result in you getting a higher net return over long term. The fund offers two investment strategies namely Trigger Portfolio & Fixed Portfolio Strategy. In Trigger Portfolio Strategy, the equity-to-debt ratio is always mentained at 3:1 while in Fixed Portfolio Strategy, the asset allocation is the resposibilty of the investor. Since it makes sense to invest 100% in equity during early years of investment, you make like to opt for Fixed Portfolio giving you the flexibilty to manage your equity exposure. Though for the layman, the Trigger Portfolio offers a simpler investment strategy. The plan also offers 2% loyalty bonus from the 6th years of policy.

On the downside, the fund charges 1% load on top-up premium, though it is not a big issue. Infact people using the top-up mechanism frequently would prefer it as there seems to be no upper limit to the top-up. Another limitation can be stated as the low free switches available every year, though in practice it shouldn’t effect the investor much. Some of the policy terms encourage you to invest regularly & for long, which is good for the investor.

Overall, it a comparatively low cost ULIP. So if you are looking for a plain, low-cost ULIP, you may like to consider this plan.

When To Exit ULIP?

Posted in ULIP by khotapaisa on April 17, 2010

Most of us buy & sell ULIPs based on the unsolicited advice of the insurance agent. The agent would convince us to buy a particular ULIP plan (and get 30% commission on it) and after three years come back with a new plan to replace the existing one (earning another 30% or so). The only person who gains through all this is the agent himself.  With the buy & sell going on, most of us want to figure out which ULIP is the best to buy. You would get countless writings on web on this subject. So, for a change, let’s try to figure out when to sell/exit a ULIP plan. Here are some conditions which will justify your exit from ULIP.

Money Crunch – You may need to surrender a ULIP if you have serious money crunch. In addition, you may realise that you can’t afford the premium. In this case you should preferably stop paying ULIP premium instead of surrendering the policy.

Poor Performance – You may like to exit a ULIP if it is consistently performing bad in comparison to the market. Though it is tricky to say when a ULIP qualifies for this, you should generally see the performance of a ULIP for few years before deciding. There could be exceptional cases where in a boom year your ULIP gave a return of 5% while other ULIPs gave a return of 25%. But then be sure about the poor performance of you ULIP before exiting it. Not an easy feat by any measure, I must say.

Why You Don’t Need A Demat Account?

Posted in General by khotapaisa on February 16, 2010

When I first started investing, I opened a demat account with my bank. I started investing online thru mutual funds. I was doing exactly what others around me were doing. But soon I was using the demat account as my current account. I would buy fund (though on ad-hoc basis) and feel good about the fact that I had saved. But I would end up redeeming units whenever I needed money. The reason for withdrawal could be anything from birthday expenses to jewellary to even plane tickets. Over a period, I realised that I was withdrawing just because it was too easy (just few clicks) for me to do so. The ease of investment prvided by online demat account also resulted in many unneccesary emotional buys as I would buy on impulse. The demat account was actually becoming an impediment to saving towards long-term goals like retirement, child education etc. I finally decided to stop using my online demat account. I moved to the good old way of investment (paper based) thru my financial advisor. This meant that for any buy or sell, I had to call the advisor. He would then come to get the signature, cheque etc and process the request. This added extra hassle & time to any transaction I did. Though I never felt the extra hassle  or time involved, it drastically reduced no. of buys & sells in my portfolio. Another added advantage was the absense of online status of investment (though recently, the advisor has started providing this service). For a lot of investors, a big reason to sell or churn the portfolio is the ups & downs the investor observes on daily basis. So the less the investor looks at the portfolio, the better for the investor.
Recently, I sold the last holding in my online demat account. I am demat-free now!

Mutual Funds – Going The Wrong Way

Posted in General by khotapaisa on February 14, 2010

A few days back, I read a news about these new mutual fund enabled ATMs called Super ATMs. It seems that SEBI is going ahead with this concept of super atm which would allow the investor to access mutual funds at the click of a button. What surprised me was the need to commoditize MFs. Why does the investor need to be able to buy/sell fund at the click of a button? First of all mutual funds, unlike stocks, are not tradable entities. Mutual funds are not designed to be bought/sold daily. Secondly, financial products (specially investment products) are complex products. They need to be understood well before being bought/sold. This means that funds, like any investemt product, MUST NOT be bought or sold without advice or knowledge. Infact, the more easy you make it for the investor to buy/sell funds, they more likely they are to churn or tap into the portfolio. Having said that, I am not against use of technology/automation to make life easy. But the question is how easy? A more prudent step would have been to spend the money on investor education. Another significant step would be to make it mandatory for fund houses to regularly release fund paramaters like standard deviation, churn ratio, sharpe ratio etc. This would be a big step towards pushing product information towards the ingestor as against the current pull-based mechanism where the investor has to put effort to get these information. There are so many issues with the mutual fund industry and the last thing it needs is the so-called Super ATMs.

The New Pension Scheme (NPS)

Posted in Retirement Planning by khotapaisa on February 5, 2010

If you are looking for market linked pension plan, you would typically consider various ULIP based pension plan. You would then be advised to select a low cost ULIP. But before you decide, consider the New Pension Scheme (NPS) launched a few months back. I would try to sumarize the NPS in short here so that you get a fair idea whether it makes sense for you or not.

Features :

  • Equity based pension plan with minimum 6000/- pa contribution.
  • Account can be opened at various banks & other contact centers.
  • Can select your equity exposure upto a max of 50%.
  • Type I and type II account available. Type II allows you to withdraw money anytime unlike type I. But a type I account is required for a type II account.
  • Available for everyone i.e. no bank account or PAN no. required.

What’s good :

  • A simple, no-nonsense pension plan for the masses.
  • Very-very low cost.
  • High level of customization available for investor.
  • Facility fo choose, change your fund manager.
  • Can use the same account throughout India.
  • One way transfer of money from type II account to type I account allowed.
  • Most investor friendly equity-linked product in market.

What’s bad :

  • Maximum equity exposure limited to 50% thus limiting your possible gains.
  • No pre-mature partial/full withdrawal facility.
  • On maturity (when your reach 60), you can withdraw a max. of 60% of your corpus. Rest must be used to buy annuity.
  • Maturity proceed (max 60% of corpus) is taxed on withdrawal.
  • No loan facility.

Overall, it’s a revolutionary product. At first, you may find various problems but most of them are designed to make it a pure pension plan (long term). Some of the major drawbacks include the tax treatment, though it is expected that in coming times this will be rectified. With introduction of type II accounts, the problem of no-withdrawal has been solved. Some may see the limit of 60% for withdrawal as a big problem but I guess it has been kept to prevent you from misusing (using it for anything other than retirement) your retirement fund. In theory this may not look good but, in practice, it is a boon for the investor. 
So if you have opted for NPS, you have selected the most investor friendly product in the market. If you have not, just wait for some time (a year or two) till the tax issue is resolved.

SIP – The Silver Bullet?

Posted in Investment by khotapaisa on January 25, 2010

Today I was watching a program on a leading financial news channel. A viewer called up and asked his investment query to the guest expert. The viewer had 5 lakhs (if remember correctly) for investment. He had a time horizon of 5 years after which he needed 15 lakhs towards his father’s medical needs. He wanted to take low risk so as to keep the principal investment amount safe. He wanted to know how to invest the money. The guest expert advised the viewer to start a SIP/STP in equity funds (I guess in HDFC Top 200, Reliance growth & SBI contra). He also suggested that at a reasonable 15%, he won’t have 15 lakhs after 5 years. So, either the viewer needed to increase time-horizon or take more risk.

This forced me to think about the common misuse of the systematic investment plan(SIP). Nowadays, SIP is being used as a silver bullet. No matter what your financial needs & profile, you will by default be suggested to invest in equity thru SIP. In reality, SIP has no magical properties. It doesn’t make your equity investment safe. In the example above, given the investor need and time horizon, equity is not exactly what the investor needs – SIP or no SIP. For a 5 year horizon, equity is avoidable for safety seeking investors. In this case, equity becomes less suitable given the purpose of investment. These days SIP is being offered as a equity-with-no-risk (what else would you ask for) investment option. This is another worrying trend like the ULIP trend. Remember, there is no one financial products that fits all. And this applies to SIP as well. The fact that you are going to invest thru SIP should not have any effect on your decision to invest in equity. You should first decide whether you can/want to invest in equity. Once you have decided to invest in equity then you decide whether to go SIP or no-SIP way.

Choosing a Health Insurance Plan

Posted in Insurance by khotapaisa on January 7, 2010

With so many players offering so many health plans, choosing one can be a frustrating task. In general, there are certain parameters like premium, exclusions, coverages etc that you are expected to consider while comparing health plans. But believe me, even with all this information in front of you, you will find it difficult to choose a plan. To keep it simple, I would try to list out some important points which you should keep in mind.

1. Go through the exclusion list. Read it in full and see if any of it is relevant to you.  Just go thruough the list.

2. Pre-existing diseases should generally be covered after 1 year.

3. Go through the list of network hospitals in your city. The policy you choose should cover most of the reputed hospitals in your city or the nearest big city.

4. Always go for a family floater plan unless you are single.

5. You must opt for atleast 3 Lacs of coverage.

6. Check out about the claim settlement record of the company. For this you could talk to your friends who have claimed earlier under health insurance. Typically, you will be paying higher premium for companies with better claim settlement record.

7. With the earlier point in mind, don’t just go for the cheapest plan.

Retirement Calculator

Posted in Calculators by khotapaisa on January 4, 2010

Here is a tool to find out how much you need to save for your retirement. Please note that the expense you enter in the tool is your current living expense. But it shouldn’t include expenses that will not be there after retirement like EMI, premiums, school fee, expense on children etc.

Retirement Calculator (Opens in a new window)

ULIP – A 3 Year Love Story

Posted in Investment by khotapaisa on December 30, 2009

The single biggest reason for the extraordinary success of ULIP plans is the 3 year lock-in period. This feature of ULIP is disastrous as far as financial logic is concerned. But it is a masterstroke in terms of financial behaviour of humans. When a risky investment product like ULIP is presented to investors, you would expect the ever cautious investor to generally keep away from it. But the flexibility to stop paying premium after 3 years is what attracts the common investor. The common man actually sees the ULIP as a 3-premium-with-continued-benefit policy. And this explains the common practice of paying premiums only for three years.
The first three years are the costliest in terms of various charges that the investor pays. To cover this loss, the investor must remain invested for the full term of the ULIP. Calculations show that it is only after 10 years or so that this loss of income (by the way of high front end charges) is covered. The figure of 10 years also alignes well with the concept that any equity investment must be held for atleast a full equity cycle(typically 10 years). Another fine print that people fail to see is related to the idea that the benefits of ULIP (insurance or protection) continues even if you stop paying after first three premiums. It is actually not the case. All the protections that the ULIP offers, go away when your corpus falls below a certain value. So if market performs really bad during a certain period, you may stand to loose the insurance benefit from the ULIP if your corpus falls too low.

If you are one who is planning to take ULIP plan then make sure that –

1. Your premium paying term is more than 10 years.

2. You pay all the premiums.

3. You invest in all-equity fund option within the ULIP plan until you are 3-5 years away from maturity.

Loan Prepayment – To Do Or Not To Do!

Posted in Calculators by khotapaisa on December 21, 2009

Here is a nifty tool that I am posting for all of you who want to see the benefit of loan prepayment, full or partial. The tool will tell you how much you will save if you prepay a loan. It also tells you how many less EMIs you need to pay if you prepay partly.

Loan Prepayment Calculator (Opens in a new window)