KISS Strategy in Financial Products: Keep It Simple Stupid

By
Hemant Beniwal
41

KISS Strategy in Financial Products: Keep It Simple Stupid
‘Keep it Simple Stupid’ phrase is mostly used in Management Books where it is taught that the more simpler the solution would be, the more effectiveness it will have. Management is nothing but techniques that should be used in day to day life. Even in case of Financial Matters this rule of Management applies.

There is very famous quote of Warren Buffett, “An Investor needs to do very few things right, as long as he or she avoids big mistakes.” (Read: Warren Buffett’s Advice) The point what we are trying to make is that investor/user of Financial Products tries too hard to get the best and in doing so, he actually makes a mess and then blames the same on other factors may it be markets, cheating by intermediary/agent etc.

Are Financial Products Simple ?

In most of the Financial Products, we have a long term horizon, may it be Investment, Insurance Policy, Mediclaim, Bank Accounts etc. These products by their intrinsic nature are not complex and are simple to understand. For example, when it comes with Life Insurance, we have a simple product called Term Insurance, for our medical emergency needs, we have Mediclaim policy and for investments we have PPF and Equity Mutual Funds. All the three products are simple to understand and an user of these products would know what he has actually bought and how he will get benefit out of it.

Also Read – “Timing” or “Time in” in Equity Markets

 

But in Real Life 🙁

In real life, the story is all together different. People generally buy a life insurance policy which the agent says that it would offer you some critical illness rider as well and premium waiver rider is also there. The investment is either done in Government Bonds in case of Traditional Policies and if it a ULIP, then the product would have some Equity based investment.

In true sense, for user it is not less than ROCKET SCIENCE. In our real life experience, many investor do not even open their envelope as they are afraid that they any ways don’t know what it is, so what is the use of opening it. This is KAHANI GHAR GHAR KI.

Must Check – Returns cannot be your Goals in Investing

Simple Vs Complex

Guess – Why people serve Vanila Ice Cream and not Tooty Fruity in most of the social events ?

Basically, in long run, only simple products have long life and products which are complexed have short life. For example, while reading this article, you must be wearing a simple dress, probably made of cotton. If I ask you to wear this for next 12 hours, how uncomfortable you would be and what if I ask that you need to wear it for next 24 hours. In both the scenario, you will not really mind doing so.

But now assume that you are wearing the SILKY dress which you wore when you last attended a wedding. Now if I ask you wear this for 12 hours or 24 hours, you will be very uncomfortable, or you may rather refuse to wear it for so long.

KISS Strategy in Financial Products: Keep It Simple Stupid Click to Tweet

The reason is very clear. In the first case, you could mange it for long as the product was simple and in the latter case, complicated product was difficult for long run. But you see, the distributor and the manufacturer, both earns more in selling you complex product and they make less in simple products. This is what happens in case of Financial Products.

What happens in Financial Products

Users of Financial Products such as Insurance, Investments etc are sold what is complicated so that more money could be made by the agents and the manufacturer of the product. How many agents would advise you to go for PPF with term insurance rather than an Endowment Policy. The former is plain and simple and the latter is complexed, opaque and costly as well.

Why after ban on Entry Load in Mutual Fund, many agents started selling Structured Products, PMS from Mutual Fund Companies or Highest NAV Gurantee Plans from Insurance Companies? No prize for answer.

Read: The Surest Way to Wealth

What Investor should actually do:

He must buy plain vanilla products and keep the investment profile simple.

  • In Insurance, one should go for Term for life insurance, Accidental policy for Accidental coverage and mediclaim policy for Hospitalization risk. One must totally avoid any investment linked Insurance. Remember Insurance is an Expense and not Investment.
  • In Investments, one should have PPF account, SIPs in diversified Equity Mutual Funds. One should avoid fancy products and so called FLAVOUR OF THE SEASON.

When you deal with simple products, not only the intermediary cost is less, but even manufacturers have lower margins. The question  that arise here is that your agent won’t love to sell you such simple and effective products.

Lets end this article on little humor – ” Once my Insurance Agent and I were discussing Retirement Plans. At the end, I got to know that agent was discussing about his Retirement Plan and not mine.

Please add your Comments: Your comments will help us to write better in future.

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Hemant Beniwal
Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.

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41 COMMENTS

  2. Nice articles. You suggest Term Insurance, but how to choose among the products. Some have huge differences in premium. I am referring to Eigon Religare and compare it with others. How I should ensure that after taking term plan the company itself will continue or not. i.e. Should one prefer the govt. (LIC) operated ??.

    • @ Sanjeev

      As in investment Return is not the only thing that matters but Risk-Return, tax, inflation, liquidity are equally important. Similarly in case of term plan lower premium is not the only criteria to judge a plan, you should also check claim settlement ratio.
      http://www.slideshare.net/tflindia/insurance-companies-death-claim-ratio-3406070

      Govt & Private doesn’t make much difference as every insurance company follow same rules laid by IRDA.
      In case of Aigon Religare “If something appears too good to be true then probably it is not: So better if something sounds great; then make sure you investigate well because there are more chances that it’s not that good as it sounds.”

    • Hello,
      I am not much experienced but i regularly go through experts advises. I thing while choosing a term insurance, “Case settlement ratio” of the company is the first thing and the most important aspect to look for.
      Thanks

  3. thanks for the nice article, just one question regarding insurance, does the theory holds good for Child plans also, are the Child plans offered by insurance co.s really worth going for or there are other better modes to secure a child’s future financial needs?

  5. I am reading yours article since last few days.. & it is sure that unlike other yours articles are really simple to understand and hence more interesting to read. Don’t mind I do use some portion of yours article to educate my clientèle too.Keep it up, we are following you.

    Thanks & Regards

  6. 🙂

    Shishir “Our goal is to provide quality financial education to as many people as possible including kids, teens and adults that empower them to create financial freedom in their lives.” So by sharing with your client you are indirectly helping us.

    Our articles are simple because we learned a big lesson in starting of our career “Keep It Simple Stupid” 🙂

  7. Dear sir,
    thanks for your such a good article and you know sir, I regularly read your article very carefully and whenever i read your article it boostup me and refresh my knowledge.please keep it up .your wonderful articles may show the clear direction to the society people who don’t have the knowledge of financial products and to knowledgeble peoples also to refresh their knowledge also

    many many thanks
    deepak

  8. Thanks Deepak

    If you like our articles, please share them with your friends. We all can help lot of people to save their Financial Life.

  9. Thanks a ton to the author.
    Superb and eye opener to beginners like me.
    Thanks once again.

    Regards,
    Ravi Shankar Kota

    • Welcome Ravi

      Keep adding your comments, asking questions & sharing articles with your friends – this will motivate us 🙂

  11. Hi Hemant
    These days I see a lot of structured products in mutual funds.Some are mixture of debt,equity and gold.Some claim to preserve your investment.I really do not understand how it is possible.It is rightly said that one should invest only in a product which one can understand.Since I can only understand diversified equity funds, it makes sense to invest only in these funds.No one in my family likes ice creams with a lot of dry fruit which can get stuck in your teeth and are difficult to take out.Everyone prefers to have plain vanila icecream.Even dentists advise you to stick to vanila only.

  14. plz guide me abt aviva term plan. is it a good choice ? if not then plz guide for the gud one with the details: age-30, sum assured-50 lacs, term-30 years.

  15. Hi,
    again a gem from ur treasure! The last part shows ur humor and agents smartness. I learnt a lot from this financial series. Please, post something related to gold as its making new highs and going beyond ones pocket.
    Thank you.

  16. Hey friends,
    i am an insurance agent and i saw people in insurance business sell the product which they want to sell as posted in article and obviously they sell the products that benefits them most. it is a reality.
    i tried to sell Term plan to many of my friends and colleauges but they all are so biased about LIC policies that no one liked the idea.

  17. MR.HEMANT,
    WISHING YOU AND YOUR FAMILY A VERY HAPPY AND PROSPEROUS NEW YEAR.
    I LOVED THE ENTIRE ARTICLE AND SPECIALLY THE LAST CLOSING LINE.
    REGARDS
    RAJESH

  18. Hello Mr. Hemant,

    Wishing you a happy new year. You are doing a great job educating the masses. Wish if I could get something like this 8 years before. For I would have been far better off financially..

    Regards,

    bYJU

  19. 8.4.12

    No doubt the article is illuminating for a lay man but after reading it one finds being left in a lurch after he is made aware/cautious regarging the agents mostly more keen on planning their own retirement plans rather than their clients’.

    The endowment policy too has a purpose, alas the good & bad points could be stated & pitfalls to be avoided pointed out so as to really help the KISS -INFORMED readers, because they certainly have to invest somewhere besides SIP FOR WHICH AGAIN THE DETAILS NEED TO BE ELABORATED in larger Public interest—-the object of this write up.

    Regards,

    S.M.MITTAL, Advocate.

    ps for eg. recently when i wanted to explore the option for tax saving u/s.80 c & 10 dd i couldn’t find much help as pension plan of Axis/Max icici’s pinaccle or tata’s swaran yojna or Lic’s Bima Bachat were offered but the it transpired that Bima Bachat qualified only to a ltd. extent Axis’s offer attracted some 6% tax outright etc. & then there was a maze between one time investment & 5-6 yrs’ commitment for tax saving.

  20. Hemant ji.Namaskar.
    You have done what I can’t describe in words. Like me many people are confused in Insurance schemes and we were vesting our money instead of Investing.You opened my eyes.I was carting 8 policies in various schemes.Now I closed all the foolishness and will try to invest the money in true seances.
    Again THANKS A LOT for correct guidance.

      • Hi Hemant
        As per my need of term insurance I wanted to buy SA of 1.25 lakhs from Term plan. Out of that I have taken LIC term plan for 75 lakhs before 2 years. Now I want to buy term plan for SA of 50 Lakhs from Private Company (I just wanted to distribute my SA in two different companies). Now my concern is as my current LIC policy doesn’t have rider options (although I wanted to take) hence I would like to take that private insurance policy which will provide me pure term insurance with riders.
        So can you please suggest me any offline plan for same. (I don’t want online term plan).
        Thanks for help.

  21. sir i have the following mutual fund investment:
    all sips-
    birla mnc -1000,hdfc midcap-2000,sbi emerging bussiness-2000
    icici fmcg -1000,sbi fmcg-1000,reliance banking -2000
    can robecoinfrastructure-3000
    icici focc bluchip-2000, uti opp -2000
    icici tax saver-3000, reliance tax saver-3000

    please analyse my portfolio and give your valuble comments… i am expecting 15% returns in 15 years.

  23. hi Hemant, its nice to know that there still are good people like you on this earth, putting efforts and helping others selflessly. we are benefited by your literature. thanks!

  24. Hi Hemant
    i am student of undergraduate and i earn money 10000 per month by part time job i want to invest some of 5000 per month for 2 year for our higher study. what is good plan?

    • Hi Ravi,

      Since your goal is defined and your income is non taxable, you should consider investing your money in fixed income instrument. A recurring deposit for two years will meet your objective without incurring any tax liability.

  25. hello hemant

    your articles are very very informative.i am 30years earning upto 7lac/yr.
    i am gathering many information from your work.THANKS FOR THIS GREAT WORK.
    i want to know that ,how one should invest to save 1 lac in tax UNDER 80C ,80cc,etc.
    OR is it wise to to keep your 1lac of money just to save 10000rs.
    AGAIN THANKS.

    • Hi Dr. Manish,

      The tax provisions available to you should be utilized to the maximum. But care should be taken in selecting the appropriate instruments.There are investments which are ideal for long term investments and tax advantage is the inherent benefit available. Its wiser to inculcate tax planning in your financial planning and do not make it a last minute decisions.

  27. Just read your articles for the first time. They are quite informative.

    I’d like to share my portfolio/savings plans and seek suggestions. Do I write to you or update here?

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