Khota Paisa

Comparison of Pension Plans

Posted in Retirement Planning by khotapaisa on June 30, 2009

A lot of people want to know as to which is the best pension plan. So, I did a comparison of few ULIP plans available in the market. Based on the brochure available on the insurer’s website, I calculated the fund value of the plan (@10% returns) for a fixed premium. Then I ranked the plans based on the fund value. The plan with higher ranking here is cheaper and hence better (on cost basis). The plans that I compared  are –

Birla Sunlife Flexi SecureLife II (seems to have been withdrawn)
– HDFC Unit Linked Pension II
– ICICI Pru LifeTime Super Pension
– SBI Life Horizon II
– Bharti-AXA DreamLife Pension

Here is the how the funds fared.

pension-plan

The difference in fund value (hence ULIP cost)  for the first three funds was not big but the fund ranked 1 gave ~10% more corpus than no. 5.
I guess you can select any of the top three plans here. But, please remember that this comparison is only on the basis of ULIP cost (cheaper the better). Though, the fund performance should also be factored in while selecting the plan.

Note:

– All the calculations were based on data available in the respective product brochure.

– The calculation didn’t consider mortality charges.

– The ranking didn’t use the illustration available on the insurer’s website because of lack common standard for illustration. Some of the insurers don’t even provide online illustration.

– There may well be better options in market, as I didn’t analyse all of them.

Update :
I have reviewed LIC Market Plus I pension plan. You can read the review here.

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Review : Birla Sunlife Dream Plan

Posted in Reviews by khotapaisa on June 21, 2009

I must say that this is one product that took the insurance market with a surprise. It was (and probably still is) the only product with no premium allocation charges. That means that all the premium you pay is fully invested. Compare it to other ULIPs which deduct anywhere between 10%-60% of premium just in the first year. Add to this the fact that it offers a very low mortality charge and hence is a good alternative to term plans. Infact, it looks too good to be true. Last month, I asked my financial advisor as to how this product is able to maintain such low charges and why is there still no competitor to it? Well, I didn’t get a clear answer. But if you look deeper, it is not as good (still better of the lot) as it looks. On the term plan side of it, the minimum premium for a 1 crore policy (30 year old for 25 years) is 23050/-. The same cover from HDFC costs 19878/-. So, if you are looking to take Dream plan as a term plan (a lot of us do it), you better go for HDFC term plan. Even cheaper term plans are also there. On the ULIP front, the Dream plan manages to beat the competition. Though it has higher fund management charges, it still is the one of the lowest cost ULIP in market.

In short, this is arguably the best ULIP (on cost basis) out in the market. But if you plan to take it as an alternative to pure term plan, it may well not be a good idea.

Update on 29/11/2009Thanx to palash for pointing out the hidden lines. I did some recalculations and found that I has missed on the administration charges which are extremely high in this plan. So much that the return from the policy is significantly lower. Given this new light, I would recommend you against my earlier conclusion (as above).

House – Buy or Rent?

Posted in Calculators by khotapaisa on June 16, 2009

This is one question on which I almost always end up in a not-so-cordial discussion with my wife (no rewards for guessing who favours rent). Well I hope you have crossed that stage! In case you have the same dilemma, here is a calculator to find whether it pays to buy a house or live on rent.

Buy vs Rent Calculator (opens in a new window)

Note : The calculator decides based on the net asset value at the end of the load tenure.

Gold is After All Not That Shiny

Posted in General by khotapaisa on June 15, 2009

After giving unprecedented returns recently, Gold became the buzzword in the investment circles. Everyone wanted it to be part of his/her portfolio. Traditionally, Gold is considered to be a safe investment and hedge against inflation. Since I was planning to invest in gold, I thought why not see the historic returns in gold. So I downloaded historic gold price. When I was analysing the price variations to get a clear picture of the volatility in gold, I realised that unlike common perseption gold is a fairly volatile investment often returning ‘-ve’ returns even over 10 years.  The table below shows the returns (CAGR) you would have got if you had bought gold and held it for 10 years before selling.

goldThe table shows that there is ~25% chance that you may incur loss on your gold investment over 10 years (Note: Most of the ‘-ve’ returns were during 1987-1992 period). Infact the compounded retuns from gold over the past 100 years has been mere 3.9%. The same for the past 50 & 25 years has been 6.64% and 2.93% respectively.

Well, all that it means is that gold is not so safe (still safe enough i guess) and it certainly needs to be held for much longer period. BTW, I still plan to invest regularly in gold, albeit in small quantity. Afterall it’s Gold!

Note : This calculation is based on gold price in dollar terms. In rupee terms, Gold become much more appealing.

The Simplest Portfolio Ever

Posted in General, Investment by khotapaisa on June 11, 2009

Some time back, I was watching an interview of an well known expert(perhaps the best in india) of equity investment. During the discussion, he sort of gave the broad details of his portfolio. In addition to being ultra simplistic, it is an interesting portfolio. His portfolio constitutes of just Equity Investment & PPF. That’s right, no other fancy stuff. In fact more than 90% of his portfolio is invested through equity. This may look like a funny portfolio but a second glance shows that it is indeed a very smart portfolio. The matter of fact is that there are only two types of investments, Equity & Debt. Everything else, we know of, is just a combination of these two. That’s what this portfolio is about. It consists of the most risk free investment available (i.e PPF) & pure equity.
It sure does look like an interesting portfolio. But does it suit all?  I guess not.

Facts : Historical Returns From SENSEX

Posted in General by khotapaisa on June 10, 2009

Of all the readings I have done on the internet and all the personal finance books(not many) I have read, there is one common message in all – “Equity is for a long time horizon(5-10 years or more) and it beats any other investment”. I, myself, am a strong believer in long term equity return. Infact my thumb rule is that any investment for longer than 10 years is for equity and equity alone. Just today, I downloaded historic SENSEX data starting 1991. During analysis of this data, what I found has forced me to re-evaluate(not reverse) my take on equity investment. Have a look at the table below. It shows 5 & 10 years compund annual return from SENSEX.

sensex returns

It shows that over any 10 years period, the SENSEX return has varied from 2.59% to 18.69%. The same return for a 5 year period has given negative reurn more than once. What is not shown in the table here is 15 years return which varied somewhere from 7% to 14-18%(don’t exactly remember it).

What is worrying me is that anyone investing for 10-15 years time frame (typically child education, marriage etc as goals) is clearly (and maybe significantly) at risk of getting sub 10% returns. Remember that everytime the financial advisors/experts plan your goal, they assume the equity returns to be ~15% over the same time frame. Even for my calculations, I use 12%  returns from equity.

For me, Time to think about it all over again. What about you? Have you already factored it?

Note: As our reader Amit pointed correctly, the calculation doesn’t takae into account the dividend. But I guess it won’t change the volatility of SENSEX by much.

How Much Insurance Do You Need?

Posted in Insurance by khotapaisa on June 8, 2009

When I was looking to take insurance, I talked to a no. of financial advisors. I also read articles, blogs etc on the net. But I couldn’t arrive at a satisfactory insurance figure. Infact, the insurance needs are very specific to the individual. Ideally, if you need enough insurance to allow your family to live off it for the rest of life. But it is not practically possible to take such a huge cover. There are few thumb rules to calculate insurance needs. But I have my own thumb rule to figure it out.  It goes like this –

Step 1. You need to fix the no. of years you want the insurance amount to last for your family. Typically, 20 years is good enough.

Step 2. You take your current annual expenses (minus your expenses) and multiply it by the no. of years from the previous step.

This amount will be sufficient to cover your family for the no. of years you planned for (refer step 1) no matter what the inflation. As an example, if your annual expense on your family is 4,00,000/- and you want your insurance amount to last for at least 20 years, you should take an insurance of 80,00,000/-.

Assumption – It is assumed that the insurance amount is invested to give enough returns to match the inflation.

Note – Treat this is as another thumb rule.

Monthly Budget Planner

Posted in Budgeting by khotapaisa on June 8, 2009
For all of you who, like me, find it difficult to make a monthly budget, here is a sample budget sheet you can try out. You can print it and use it to track your monthly budget. A few tips before you start with your budget.
Use it for few months before you decide if it really is useful.
Overbudget household expenses initially.
You may use the sheet along with ‘envelop method’ of budget planning.
track

Click on the image to view full-size image.

Do share your budgeting experience with me.

Am I Spending Too Much?

Posted in Budgeting by khotapaisa on June 7, 2009

Ever since I started monthly budgeting, I felt that some parts of my expenses were bloated. I could see the opportunity of cutting the flab specially my phone/net bill, fuel expense and maybe grocery. But I could never manage to trim it down. My wife said that the grocery expense was already optimized. Infact I was warned against cutting it down any further. On the fuel front, I could cut it if I started using public transport. Though I must say that I have resisted it till now. Here is the breakup of my monthly expenses. The insurance entry includes all premiums as well as PPF. The buffer entry is what I keep in hand for any spikes in the expenses(believe me, they are rarely missing).expense

How To Plan Your Child’s Education?

Posted in Child Insurance by khotapaisa on June 6, 2009

When I was doing my child’s education planning, I did a lot of reading only to realise that there was no clearcut answer. After a lot of calculations & analysis, I settled for a combo of Child ULIP and PPF. Why? Well let me explain it to you.

The idea behind child education planning is that we look for ways to invest money which cover all the following three requirements.

– Insurance (make sure child gets money no matter what)                                        

– Return (ensure that the investment grows well)                                                          

– Minimal risk (Take minimum risk in investment)                                          

Clearly, no single investment avenue can provide all the three. So you can  choose three instruments and combine them to get your child education portfolio. The first requirement will be met by buying a child insurance plan. The second one can be met by investing in equity or preferably mutual fund(s) while the third one can be met by investing money in a debt instrument. Since child education is requires long term investment planning, what better than the good old PPF.  To make it simpler you can combine the first two into a ULIP based child plan. Now the portfolio consists of –

ULIP based child education plan
– PPF

Since both the investments are preferred for a minimum duration of 10 years(ppf for 16 years), this portfolio is recommended to people with kids younger than ~8 years.
As an example, a monthly investment of Rs.7500 (5000 in ULIP & 2500 in PPF) should give you a corpus of about 35Lacs after 16 years.