Khota Paisa

Why Rebalance Your Portfolio?

Posted in Investment by khotapaisa on July 30, 2009

Rebalancing is a widely descussed & debated topic. Generally, the investor fixes a equity:debt ratio for his/her portfolio. Whenever this ratio for his/her portfolio chages significantly, he/she rabalances it. So, if equity gives pretty high returns, some of it is sold and invested into debt instrument. This keeps the ratio fixed. Since I don’t follow the fixed ratio portfolio (for me >10 years is all equity, others all debt), I try to rebalance my portfolio in a different way. Since all my financial planning calculations are based on 12% return from equity, I book profit whenever the overall return(not just for the current year) on my portfolio exceeds 12%. The excess gain is then invested in safe investments. This helps in two ways 1) the debt exposure increases as I get closer to my financial goals, 2) it reduces the risk as I discourage my portfolio to give higher returns. To show the effect of this rebalancing, here is a table showing the comparative results against sensex. The investment here is a monthly SIP for 10 years.



Tanishq Golden Harvest Saving Scheme – Does It Make Sense?

Posted in General by khotapaisa on July 26, 2009

Yesterday I went to a Tanishq store. During the course of window shopping, I was introduced to an investment offer from Tanishq. It is called Golden Harvest Saving Scheme. Under this scheme, you pay an amount to Tanishq every month for 11 months. In return, the twelfth installment is paid by Tanishq on your behalf. So if you pay 1000/- for 11 months, you will get 12000/- at the end of 12 months. The executive at the Tanishq store told me that it translates to 15+% return. I was surprised at this kind of return. If this would be the case, who would bother to invest in equity? Infact this translates to an IRR of 14.88%!  On coming back to home, I first opened the Tanishq website and went through the scheme details. The scheme has a catch –
You can’t redeem in cash, gold coin, silver coin or solitaire.
Basically, you can use the maturty amount to buy Tanishq jewellery only. And clearly this defeats the purpose of investment. So, who should invest in this offer? Well, if you plan to buy jewellery from Tanishq after an year or so, maybe you would like to look into this scheme. But even then, I am not sure if this offer really makes sense.
What do you think? Has any of you invested in this scheme?

How Much You Need To Save For Retirement?

Posted in Retirement Planning by khotapaisa on July 23, 2009
retirement tableNote: The expected average return on your investment is assumed to be 10%.

For all those who are interested in retirement planning, here is the table to make life easier for you. The table below gives approx. monthly saving required to cover 20 years of your post retirement life. Please note that the required monthly saving stated in the table is for every 10,000/- of your current expense.
E.g. if you current monthly  expense is 25,000/- and you plan to retire after 20 years, at 7% inflation, you need to invest 10741 x 25000 / 10000 = 26,852/- every month (Refer to the table below for the figure 10741 used here).
The expected average return on your investment is assumed to be 12%.

retirement table

Note : For your calculation, you should preferably use 7 or 8% inflation as this is the average historical inflation as per RBI data.

Review : LIC Market Plus

Posted in Reviews by khotapaisa on July 19, 2009

When I started analysis of LIC market Plus, I went to the LIC website looking for the policy brochure. Not surprisingly, I couldn’t find it on the website. LIC seems to be one of the very few insurers who don’t provide full policy details on the website. Anyways, there was some information along with benefit illustration provided on the website.
LIC Market Plus I is a ULIP based pension plan. There are three riders available for the customer i.e.  Life Cover, Accident Benefit & Critical Illness Benefit. The last two riders are available only if you opt for the life cover rider. It’s good to see that life cover is available as a rider. It’s always better to have the flexibility in insurance products. Since there is not much information available on the website, let’s look at the cost of the ULIP. Here comes the big surprise! For a 20 year policy without life cover, the net return turs out to be 8.6% for 10% return on investment. This makes it the one of the lowest cost pension plan (most probably the lowest cost ULIP) available in the market.
Overall, though not much information is available for this plan, it is an extremely low cost plan. So if you are planning to buy this plan, you will certainly be paying much less than most ULIP investors.

Please Tell Me How To Drive? I Want To Buy A Car.

Posted in General by khotapaisa on July 18, 2009

How would you respond to a question like this? Well, I see so many people asking questions like this. Sample this, “What is SENSEX? How can I invest money in the Sensex?” or “Does anyone know about XYZ Company? Is it ok to invest in it?“. People seem to be least cautious (and respectful) about their hard earned money. The chance that these people will eventually make profit in equity is same as someone being able to drive a car after being explained about clutch & gears. If you learn to driver before buying your car, why can’t you learn to invest before doing so? If you don’t know how to drive, you hire a good driver, don’t you? The same applies to your money. If you don’t have the skills to invest in stock markets, go ahead and hire someone who can. If you drive without learning, you will end up crashing.
And believe me, the financial crash takes a long time to recover.

Update : Which Child Plan? A Comparison of ULIP based Child Plans

Posted in Child Insurance by khotapaisa on July 17, 2009

Last time I did a comparative study of ULIP based child plan I considered only three plans. I got a lot of response asking me to consider other plans in market as well. So, I started a comparative study of all child plans I could come across. Well, a lot of things have changed since my last analysis.
Here is the result of my analysis. The calculations are based on annual premium of 25000/- for 18 years. For plan which don’t have 18 years policy period, the fund value is adjusted to 18 years.

Though the three child plans analysed in the last post remain competitive, we have a new entry in top three.

child plan new

Note :
This analysis only shows the cost of the ULIP plan. While selecting a ULIP, you should also consider various other aspects like insurance plan features, fund performance etc.

How To Build Your Emergency Fund?

Posted in General by khotapaisa on July 12, 2009

I never had any emergeny fund. In fact, I never had any substancial fund at all. After I  reaslised that I needed an emergency fund, I started looking for ways to buid it.  Here I would try to share some ways to do it.

1. The best way to build an emergency fund is by investing monthly. You can start a SIP in a debt fund or better start a recurring deposit in your bank or post office. I prefer the recurring deposit though.

2. Another way is to consolidate your long-forgotten & spread-out investments and encash them to form your emergency fund. Let’s say you have a matured NSC or KVP lying somewhere or some mutual fund(s)/share(s) which you bought long back and forgot. You maythen  encash/sell all these investments and use the cash towrads your fund.

3. A fast way to build your fund is to use any windfall that you recently had or you are expecting shortly. It could be anything from gift money to company bonus to your long forgotten friend returning you the money he owed you. Since you get it in bulk, you can keep it towards your emergency fund.

Once you have the emergency fund (anywhere from 3 months of your expense to 12 months), you should put it in a safe instrument. Typically, you should put 1 month equivalent in your savings account and the rest in a debt fund, fixed deposit (yes that’s right) or anywhere where you have both safety & liquidity.

Update : The (mis)Service of Insurance Agents

Posted in General by khotapaisa on July 11, 2009

In an earlier post, I had promised to update you on my policy issue. The good news is that my policy problem is solved. The agent did take a lot of time but finally got it corrected. Infact it was a five minute job which took more than a month. Another not-so-common thing about this policy was that I got the actual policy document 3 months after it was issued. The sarkari way of working.

At the end of the day, I would still recommend this policy to anyone who needs a term plan.

Which Term Insurance Plan to Buy?

Posted in Insurance by khotapaisa on July 9, 2009

While selecting a term plan, the premium is recommended to be the deciding factor. But there are few other factors which are more important than the premium. The single biggest criteria of selection should be the policy exclusion. Generally, term plans don’t have too many exclusions. But there are some and you need to know them. Let me give you an example. A pure term plan from CompanyX is low on premium whereas one from CompanyY offers higher premium. Going by widely accepted (and recommended) logic, you would go for the plan from CompanyX. But let’s get into some details. The exclusion policy for CompanyX-plan includes death due to riot and few other unnatural causes of death among others. On the other side the only exclusion for CompanyY-plan is suicide. So, if you had read the policy details, you would have rather selected policy from CompanyY even though it is costlier.

Another not-so-technical deciding factor is your comfort/belief with/in the insurer. This may seem to be an emotional issue, but seeing big private insurance players near collapse (AIG etc), it does become an important factor. All the talk about insurance being a contract, insurance regulation etc is on one side but your personal faith in the insurer does make sense. I know this is a contrversial suggestion, but i would anyday prefer being safe than sorry. Remember all the experts telling you that having 10% of your portfolio in cash is makes no sense? Well, check out the experts now and see what they tell you.

Insurance – Is Cheaper The Better?

Posted in Insurance by khotapaisa on July 8, 2009

Ask any financial advisor as to which term plan to buy and he/she will tell you to go for the cheapest one. That may be a good option as far as numbers are concerned, but personal finance is not just about number. It is better to pay a higher premium for your term plan in return for a better claim settlement ratio. Yes, I know all the claims about the regulations in insurance and the insurance being a contract. But then, every contract has these holes which you would never know till you see it being used.

The “Cheaper is Better” theory is actually counterproductive in case of health insurance. To give you an real life example, there is this company XYZ, which provides health insurance. As per their rule, if you don’t intimate them within an hour of hospitalization, they will reject the claim. How do you expect somebody to be able to call up the insurer when his/her family member is seriously ill and needs immediate medical attention? Keep in mind that this insurer provides one of the cheapest (may be the cheapest) mediclaim policy. So chances are that if you haven’t researched properly, you will endup buying this insurance, only to be rejected (most likely) when you need it.

On a side note there is a proverb in hindi which goes like this –
Mahnga roye ek baar, sasta roye baar-baar“.