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All you want to know about Mediclaim Policy

Insurance Planning

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May 25, 2010

There is a saying that ” an apple a day, keeps the doctor Away…” but this does not apply in today ‘s world . First of all, not everyone can afford to have an apple a day and even if people who can afford, eat impure apples, get sick and then meet doctors. End of the day, we meet doctors more regularly even more than we meet our near dear ones. Do some calculations on your own and find out, how much money you spend on monthly basis just to visit doctor, buying medicine and getting the RECOMMENDED test done. Don’t take into account any hospitalization cost you incurred, else you may well have a high BP.

Read – Best medical insurance for parents

India Vs USA

Bottom line, The medical expenses are increasing day by day, there is no escape to this. You will be astonished to know that in US, 15% US GDP is all spent on medical cost. 15 % of US GDP means, close to double of India GDP which is over Rs. 5,60,000 Crore. In US 15.3% population is not insured by health cover & another 35% of the population is under insured but in India 88% of the population is not covered by health insurance. Medical expense are now on the rise in India as well. In today ‘s fast moving and fast earning life, we spent our half working life in 5 star hotels and half in 5 star hospitals. There lies a huge risk with everyone about medical cost hitting ones finances in such a bad way, that at times, it is beyond repairable. We meet many people who sell even their house/gold or withdrawing from retirement savings just to cover the medical cost. In such a scenario, one has to cover themselves from such a risk and get a good Medical cover in the form Mediclaim policy.

Check – Health insurance portability

What Mediclaim Policy covers

Mediclaim policy covers against hospitalization cost one incur, provide one is admitted for more than 24 hours. It covers various cost during hospitalization including that of medication, surgery, room cost, ambulance etc. It also covers the cost you incur on medication, test, doctor’s fees etc. 30 days and 60 days post hospitalization provided the cost is incurred for the same cause for which one is hospitalized.

All you want to know about Mediclaim Policy Click to Tweet

Who provide Mediclaim policies

Mediclaim Policy is typically offered by General Insurance Companies & health insurance cos. both in public domain. There are many life insurance companies that also offers such similar products but it is better to take policy from specialist.

Read: The rising strength of Indian Middle Class

Type of Mediclaim Policies

Predominantly there are two types of medical policy available. The most common way of taking such policy is where, you buy a specific coverage called sum assured for each of the family members for which you want the cover(Individual Plan). The other way of taking the policy is that you buy a sum assured not specific to any particular person in the family but for the whole family, this is known as Floater Policy(Family Plan).

For example, a family of four, husband, wife and 2 kids. One may take Rs. 1 Lac cover for each of the person and if any one meets with casualty and is hospitalized, the insurer will pay up to the limit specific to the person. But if you have taken a floater policy, you buy a float cover, let say of up to Rs. 3 lacs for the entire family. Now if anyone in the family, meets with casualty, the cover is up to Rs 3 lacs. But if one has fully used that float, then for that year, insurance company will not pay anything if either the same person or someone else family incurs hospitalization cost.

Special policies for senior citizens are also available. Consult a Certified Financial Planner near you before taking the policy because it’s important to first judge your requirement & then select best suitable policy.

Also Read: How much medical insurance I need

Claim settlement process

There is a myth that taking claim from insurance companies is to difficult. Yes, it is, if you are not aware of methodology and at times, many people file claim for something which they are not covered for or not informing insurer at the time of hospitalization(in case of cashless claims). The system is such that most of the insurance company has a TPA (Third Party Administrator), TPA is an outsourcing agency of Insurance companies that services claims. Once the policy is taken, insurance company issues card to the Policy holder with name of TPA on it. Policy holder have freedom to select it from list of TPAs with insurance company. In case, one meets with casualty, he/she has to produce the same card in hospital. Earlier, there was a system of reimbursement of expense where in you first spend the money from your pocket and then apply for claim. Now, TPA offers CASHLESS arrangements with many hospitals. if you get admitted such hospitals, the TPA would directly make payment for which you are entitled and hence there is no problem of you arranging Cash immediately.

Tax Benefits on Medicalim Policies

Mediclaim Policy offers tax benefit as well under section 80(D) when premium is paid by any mode other than cash. A person who is 30% tax slab can income tax upto Rs 12360 by paying Rs 40000 as premium. Check Table:

Users of financial products make costly mistakes, either they buy costly life insurance policy or they ignore cheap Mediclaim Policy and then incur huge cost. Choice is yours.

Read More Articles on Insurance.

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ईएलएसएस

What Are Mutual Funds in India ?

Mutual Fund

Hemant Beniwal

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May 17, 2010

49

Whenever I talk to a normal Indian who is not related to the financial field, one of the common questions they will ask is “What are mutual funds In India ” and how do mutual funds work in India? Honestly, it’s not rocket science and anyone with decent knowledge about fiance basics can learn,

Once upon a time…..

…..all villagers who hail from one of the intelligent parts of the country, gathered during evening hours, to discuss their day-to-day chaos.

The problem at hand today was that each of them had small money each day but did not know how to make the best use of it. The money was so small individually that none of the schemes accepted that money as an investment. The Panchayat decided to form a Group that would solve this problem.

Also Read: Types of Mutual Fund

The Solution

The Group immediately proposed the solution. Let’s combine the money, and invest this money and the return shall be divided as per the proportion of investment. Villagers hooted… Wow good solution, but where would you invest the money? The group had some knowledge that money could be Invested in shares as but had a faint idea about it. Someone suggested let’s lend the money to someone and earn interest on it. But overall no one had the knowledge, so they decided to contact a wise person in the city who was well versed in the field of investments. So this, Wiseman accepted the challenge and came to the village.

Must Check – Rule of 72

But FEW VILLAGERS had some doubts about this idea. Firstly, who would keep a check on the learned person and how they know that their investment is making money or running losses. The concerns were genuine and again the Group started thinking. They came out with Rules on investing the money. The Wiseman had to take prior approval from the group before investing and a few other rules on managing the money. But the second concern still remained, which was solved by the Wiseman himself. He said each day I would calculate & declare the value of the investment at a fixed time.

What Are Mutual Funds in India Click to Tweet

Beginning of a New Era

The scheme was launched and the news spread to all parts of the country. People from other villages were also allowed to join. Soon the group realized that they had to manage the record of so many people and solve their queries. They appointed a team of literate people and called it the Record Team who would just keep the record of the investors. Now the learned man complained that his entire day into managing the investments, taking care of the investments or getting the investments to the village, or sending the invested assets to the seller. Another team was appointed to assist him. This was called the Caretaker Team.

Up till now, the group was managing this show on funds issued by the Panchayat. But, now Panchayat told the Group since the scheme is a hit why don’t you start charging fees from the investment and earn on your own. This was a good idea Group laid rules for charging the Fees on the investments. And through these Mutual efforts, the villagers of this country had a prosperous life.

Must check – Equity as Long Term Asset

Why Mutual Fund Emerged

Actually, through this analogy, we have just understood how a Mutual Fund works. As the name says, it is a mutual way of investing in Markets. They emerged because of two concerns faced by the Investors. First was the Quantum of investment, as people had small money to save on day to day or month-on-month basis. The second was the knowledge part as each of us has different education and profession, so we find our selves ill-equipped when it comes to investment Markets. So each of us needs the expert’s help during the investment process.

Organisation of a Mutual Fund

In the above story, the villagers are each of us and the Group is the Asset Management Company(AMC), who runs the entire affairs of the mutual fund. Since this group is appointed and answerable to the Panchayat, the Panchayat is the Sponsor of this Mutual Fund. The Wiseman appointed is the Fund Manager and his team who would take decisions in investing in different asset classes. The Rules laid are nothing but Objectives, which are set for each scheme, and the basic guidelines about the investment made under the scheme(Fund). The Value of investment that the wise man is reporting is the Net Asset Value or the NAV. NAV is the unit value of the asset and is calculating by dividing the assets by the numbers of unitholders.

Check – Stock Market Grapewine

The Record Team is Registrar & Transfer Agent or R & T for short. They keep the record of the investors and take care of the queries of the units holders. And finally, the Caretaker Team is the Custodian, who shoulders the responsibility of keeping records and possession of all the physical assets of the scheme. And Fees that the scheme is charging are called the Asset Management Fees. All villagers were Investors. Simple… isn’t it?

Now, through the picture, you can very well correlate the working of the mutual fund.

Read – Eighth wonder of the world

Benefits of Mutual Funds

Now let’s discuss the benefits of investing in mutual fund. The biggest advantage is Diversification. Each units holder contributing in small proportion becomes the owner of a large portfolio comprising of different assets. He, therefore, minimizes his risk by dividing his investments in many securities. Other advantages are, though mutual fund you and expert managing your investment. Also, you can invest in small amounts. Since this is a collective investment, the cost of management is very low and most important the liquidity aspect. Mutual Funds have schemes as per the time horizon of your investment. So you can get your money back when the need arises.

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In the subsequent series, we shall learn more about Mutual Fund’s benefits, types and how to choose & invest in these schemes.

If you have any questions regarding What Are Mutual Funds in India? Please add them to the comments.

KISS Strategy in Financial Products: Keep It Simple Stupid

Investor Psycology

Hemant Beniwal

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May 11, 2010

41

‘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.

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Changes that would Matter you in New Financial Year

Miscellaneous

Hemant Beniwal

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April 24, 2010

9

This financial year has come with some changes which would affect our personal financial in some way or the other. In this article we would like to highlight changes that are made in the interest that you get in your savings bank account, PPF account and also about PAN card regulation as far as your deposits are concerned. Let’s discuss these changes one by one:

Saving Account would earn more interest

Not many of us would be aware that prior to this financial year, we were getting less interest on balance in savings bank account as against what was publicized 3.5 % per annum. The bank used to pay us interest on the minimum balance kept in our account between 11th and last day of the month. Thanks to the method of calculation, it was truly unfair on us and cost us huge amount of interest loss. Assuming, you have deposited Rs. 2 lacs on 12th day of any month and from 1st to 11th the balance was only Rs. 5000/-. Banker would take Rs. 5000 as the lowest balance during that month and credit your account with Rs. 14.58. But starting this financial year, the banker would pay you same 3.5 % but this would be calculated based on daily closing balance.Taking the above example, if your 2 lacs continues to remain in bank till the end of the month, you would be getting Rs. 378.76/-. Quite a substantial gain, but do remember, the savings bank rate of interest is much below the inflation rate, so you should keep only that much amount in savings bank account, which you would require for your immediate needs only.

The impact would be that the banks cost of funds shall go up. Each bank has to pay more there by bringing the NII (Net Interest Income) of the bank a bit low. Worst hit would be the banks with more number of salary accounts in there deposits. But over all the investor are the winner of this regulation.

Also Read: Understand how to plan for Kids Future

Non quoting of PAN would, would attract TDS at higher rate

From April 1, 2010 if PAN (Permanent Account Number) is not quoted at the time of transaction the deductor shall deduct TDS at the rate of 20 percent as against the normal TDS rates of 2 percent to 10 percent.

This means that if you not have a PAN or fail to produce the PAN number the TDS rate would be higher. This is as per section 206AA introduction in Financial Act (No 2)2009. This would particularly impact people having low income and who do not fill income tax return. Also senior citizens with low income need to obtain a PAN number as banks would cut TDS at higher rate than the prescribed on their fixed deposits. Remember that this shall be done even if a senior citizen provides from 15 G or 15H. Also NRIs(Non Residential Indians) need to take care that in case they are expecting an income, they need to obtain the PAN number and provide it to the deductor and also this would be required for claiming the TDS from the IT department.

Changes that would Matter you in New Financial Year Click to Tweet

Considering the fact only 8 crore PAN cards have been issued till date, the tax base is just 3.3 crore, on account of massive under reporting and claiming of exemptions. the income tax department wants to check the tax evasion. Over all there are two ways to increase tax collection. One is to impose more tax and other is to widen the base or number of people who would pay tax. The exchequer is working on the second method.

Changes in PPF account

Earlier your date of deposit of cheque was treated as Deposit in PPF but now of realization of cheque shall be treated as deposit date. So just make sure that your cheque is cleared before 5th date of the month, so that you will get the full month’s interest and do not wait for 31st march depositing your cheque.

Also you can now open a PPF account in the name of minor child also, which was earlier not allowed by some agency banks.

The Indian financial systems are one of the best in the world and there are case studies taught in international MBA institute on our financial and banking system. Just one more reason which makes us proud to be an Indian!

Read this Article in Hindi

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Why Ban on ULIP ?

Hemant Beniwal

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April 16, 2010

16

On Sunday morning when people got up and read news papers, many got a shock of their lives and many were worried as well. Not that any calamity happen nor government raised any taxes. The news was “Banning of ULIPs” which made investor worried about their investments in various ULIPs which they were sold under some obligation or by showing some handsome return in future. Though, by now, lot many things have heard about fight between IRDA and SEBI, this fight is getting uglier day by day. Many of you would have called your agents or discussed to your friend and colleagues, but let us tell you why SEBI had to take such a harsh action.

Read Ulip Vs Mutual Fund

Problem of Under – Insurance

As per PFRDA Chairman, D Swarup Committee report, the average sum assured of insured is less than Rs. 90000. In Case of ULIPs, the sum assured is even less than the average sum assured and stands at just over Rs. 26000/-. Now, it is clear that Indians are grossly under insured and all the policies which are sold are mostly investment linked insurance where insurance element is negligible.

The order of SEBI clearly states that the insurance charges deducted in the form of mortality charges are generally less than 2% of the total premium, the rest goes towards other charges and investment which are similar to Mutual Funds. IRDA is regulator for insurance in India and SEBI for investment in “securities”. Mutual Funds(collective investment scheme) comes under the definition of security, hence SEBI wants to control the investment part of policy which account for more than 90% of your premium.

ULIP Vs Mutual Fund

ULIPs are expensive and complicated investment products. The investment are similar to mutual fund products and policy holder is allotted units based on which his returns are calculated. But when compared to mutual funds, they are very complicated. An investor seldom understand the language and set up of ULIPs, whereas mutual funds are far easy to understand. Apart from that, ULIPs are very costly product where your agent get high commission in the first year of its sale. The commission is as high as 40% in many of the policy.

Why Ban on ULIP ? Click to Tweet

Basically, ULIP is 10 to 20 years product and its best when someone buys for that long. But the commission which agents should get for the entire life of the product is bundled into the first year’s commission and hence they make most of their money in the year of sale. After first year, agent are not greatly interested in investor and once again. he tries to sell another new policy on which he will again make 40% commission. Most of the time, after 3 year are over, the agent will churn the old insurance money into the new one and again fool the investor.

You would be surprised to know that large number of policies in ULIPs are lapsed after payment of the first year premium especially in Tier II, Tier III cities and rural areas because agents afters collecting first year premium, just don’t appear once again. Many Banker sell, Regular Premium Paying Policy as single premium policy just because they make huge money out of it. When the investor does not pay the second or subsequent installment, the insurance company just forfeits the money. 40% of the first year goes towards Agents commission and 60% remain with insurance company.

Just take a look at this video that would show the way Innocent people are robbed by Insurance Agents.

This video Misselling of Insurance-ULIP was shot in one MELA in SRI Gangaganagar. Pamphlet Game

Now take the case of mutual funds, there are no upfront charges and it is in the hands of the investor to pay for the service which the agents provide to them. Because insurance product is highly remunerative, there are over 30 lacs insurance agents but less than 80000 mutual fund agents.

Now do you think, IRDA is not aware of this. These fact are well known to all who are in this industry and many times published in Media as well.

Regulatary Bais

D Swarup’ s Committee Report which recommended No LOAD Structure in Financial Product said, “Agents advise where they get good money”

There are over 30 lacs insurance agent and just over 78000 Mutual Fund distributor. After abolition of entry load, the mutual fund industry witnessed drop in their business and ULIPs sale have marched ahead. Do we have to explain, why?? Its common sense. But then as an investor, where do you loose and which is beneficial for you, it is better left to you to decided.

There is a clear regulatory bais and two regulators have locked horns over ULIP issue.

SEBI was established to make for the benefit of the investor and to protect their interest and they have been continuously working towards investor protection. Just to give you some example,

1. Abolition of entry Load

2.Reducing number of days for IPO subscription so to curb malpractices

3. Correcting Dividend strategy of Mutual Fund

There are number of instances which can be quoted let why not quote FINANCE MINISTER OF INDIA

“Turning Mutual fund’s advisors to investor’s advisors is good step by SEBI for the benefit of retail investor.”

And what does IRDA doing here….

They are protecting Insurance Industry and Insurance Agents…But where are the investors here..

IRDA wants companies to pay to agents to sell their policy. Now when an agent will get paid from the manufacture, he will work for the benefit of the manufacturer and not for the investor.

There is rampant misspelling happening in case ULIPs. But IRDA is silent
There are less then 5% of Indians who are insured. Indians have not understood insurance. But IRDA is silent
Out of those insured average Sum Assured is less than Rs.90000 and less than Rs. 26000 in case of ULIP. But IRDA is silent
Media has pointed out this kind of mis-selling number of times. But IRDA is Silent

On the top it, IRDA advantage ULIPs.

Please take out 10 Mins & listen to this audio of Ms. Monika Halan, Consulting Editor Mint(Hindustan Times). She is Certified Financial Planner & promote Financial Literacy.

Important point in interview : Why peolple make such mistakes, Why Agents Push ULIP, How its mis-sold & best one Mutual Fund is a Car – ULIP is a Truck.

“Just to Clarify – ULIP issue” Interview Live Mint

Conclusion

Indian financial industry is seeing some major changes where from guaranteed return products, we are moving in times where returns will be market linked. Here empowering investor is utmost important so that they make the most by understanding products. If an average Indian does not understand how to deal with such changes, he will land up loosing money making lesser money.

What should existing investor do now..

1. Review your policy.. It was grossly mis-sold.. open your policy document and look at the expenses you have incurred..

2. Deposit the premium in case 3 Years are not over till the insurance companies allow you to do so…

3. After paying the third year premium, it is upon you to decide whether you want to pay further or not. Even if you decide not to pay, it is not going to harm you in any manner and the policy will continue as it is.

New investor who were about to buy a ULIP are well advised to take TERM Insurance and start SIP in Mutual Fund.

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New Avatar of The Financial Literates

Miscellaneous

Hemant Beniwal

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April 5, 2010

4

We have been in the financial industry from a long time. We saw many innocent investors being taken for a ride by Greedy Agents, Bankers and Financial Product Manufacturer. All of them, instead of working for the investors, are working against the investors just to grab more and more money from them. Though at our individual levels, we were trying to educate people about personal financial matters, but it was not enough. Then, in May 2009, we got an idea to take this literacy campaign to all parts of the country and that was the birth of THE FINANCIAL LITERATES (TFL)

Through TFL, our aim is to create difference in the lives of as many people as possible so that they can have healthy financial lives. The blog www.tflindia.in was another major step towards our long term goals and through electronic medium we actually reach to masses. Initially, the blog was made on Blogspot, but for improve its efficiency, our communication to end user and to make it more interactive, we have now moved our blog to wordpress & also made many changes in it.

Moving to WordPress will give us & our readers following benefits:

Better interaction with readers.
More Reach as it will bring more traffic through search engine.
More subscribe features. You can join us at Facebook & Twitter
Better navigation & Search features.
Special Tabs for Hindi & Media Articles. (We will be adding more number of articles in Hindi in Future)
Video Tutorials on Personal Finance
You can check personal finance presentations.
Polls & surveys can be conducted.
And definitely much better feel & look.

Reading articles will enhance your theoretical knowledge but adding comments & interacting on blog will develop practical knowledge. So start adding your comments on articles which are of your interest.

We would like to request all our readers all that if you like our articles please share it with your friends & Family members. ज्ञान बांटने से बढ़ता है. And by this way you will also be helping us to take this projects to whole india.

# In next 15 days we will me making many changes in existing post to adjust them to new platform. So bear us if older posts start raining again.

Go and have a Look at All New The Financial Literates www.tflindia.in

Some Screen Shots of New The Financial Literates

TFL Second Screen & Usage of buttons

Fixed Deposit Vs Fixed Maturity Plan

Mutual Fund

Hemant Beniwal

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March 23, 2010

80

What is an FMP?

Fixed Maturity Plan (FMP) is fixed tenure, debt-based scheme, which terminate on a pre-determined date. FMPs are ideal for those investors who wish to park their funds for a specific period.

The return of these schemes are predictable as money is invested in fixed interest based securities maturing in the line with the maturity of the underline FMP.

The portfolio comprises of bonds, which normally mature in line with the defined period of the FMP and are passively managed with an eye on interest income rather than the trading profits.

Must Check – KISS strategy in Financial Products: Keep It Simple Stupid

Tenure: FMPs are available for as short as 1 Month to even more than 5 years.

How an FMP is better than Fixed Deposit ( FD)?

The major difference is the post tax returns of these instruments. Interest on Bank FDs is fully taxable u/s 56 and gets taxed at the highest rate at which the individual/assessee pays tax whereas the return from FMPs is either subject to the Dividend Distribution Tax (for the dividend option) or the capital gains tax rate (for the growth option). The Distribution Tax rate is @14.16% and the capital gains tax rate is @10% (or 20% with indexation). These taxation rates are lower than the income tax rate applicable on Fixed Deposits, especially in the case of investors in the higher tax bracket. Tax directly eats into returns, which is why FMPs have the edge over Bank FDs. Also for longer tenure FMPs the indexation benefit is allowed.

Fixed Deposit Vs Fixed Maturity Plan Click to Tweet

Take an example of a 13-month(1 year & 1 Month) FMP which, if launched now, will mature in April 2011. It will pass through two financial years – launch in 2009-2010 and maturing in 2011-2012. Thus, it can have a benefit of double cost indexation for the purpose of calculating its cost of purchase (post-tax yield). Look at the workings: Note: Cost Inflation Index for FY09-10 is 632. The assumption is that the CII for FY11-12 will be 697. * Approx CII growth @ 5% (It depends on inflations figures). Clearly, the post-tax return is superior for an FMP.

Must Read – What is Insurance – Investment or Expense

		FMP
	Bank FD	Without Indexation	With Indexation
Investment Amount (Rs.)	1,00,000	1,00,000	1,00,000
Assumed Net Yield to investor (p.a)	7.50%	7.50%	7.50%
Tenor (Months)	13	13	13
Amount at Maturity (Rs.)	1,08,125.00	1,08,125.00	1,08,125.00

Interest/Long Term Capital Gain	8,125.00	8,125.00	8,125.00

Indexed Cost of Acquisition	N.A.	N.A	1,10,250.00

Indexed Gain/ (Loss)	N.A.	8,125.00	(2,125.00)

Tax Rate ^	33.66%	11.22%	22.44%

Tax on Interest on FD/ Capital Gain on MF	2,734.88	911.63	–

Post Tax Income	5,390.13	7,213.38	8,125.00

Post Tax Rate(Simple Annualised)	4.98%	6.66%	7.50%
^ Assumed to be in the highest tax	bracket

Must Read – Returns cannot be your goals in investing

Benefit of investing in FMP in March: Say if you are investing for 13 Months in March you can use Double Indexation Benefit but if you are investing in April you will only be able to use single Indexation. This is applicable to all maturities over one year. Investing in March will bring your tax liability very low & net tax free returns very high.

New Direct Tax Code: It’s expected from 1st April 2011. According to this there will be changes in calculation of Indexation. Before investing, please consult us or your tax-planner on this aspect.

Must Check – Understanding the difference between Income & Wealth

How an FMP, different from a debt fund?

Investment in FMP is insulated from interest rate volatility unlike a normal debt fund. The bonds comprising the portfolio of an FMP is held till maturity and hence investors of the aforesaid plan earn the normal yield applicable without getting affected by any midway price fluctuations arising out of interest rate fluctuations.

What are the benefits of an FMP?

1) Minimal Risk: Debt funds, are exposed to three kinds of risks viz. interest rate risk, credit risk and liquidity risk. FMPs are designed to effectively minimize and in some case eliminate these risks.

Interest Rate Risk: FMPs are least exposed to interest rate risk as the fund manager holds the instruments till maturity getting a fixed rate of return like a normal FD.

Credit Risk: FMPs primarily invest in AAA or P1+ rated instruments with a short-term maturity profile from 3 months to 36 months and thus there are very low/ no credit risks.

Liquidity Risk: High credit quality automatically ensures high liquidity too.

This effectively means that investors can protect themselves from any capital loss on maturity.

2) Low Expenses: FMPs because of their very nature of holding the instrument till maturity, FMPs minimises expenses. Unlike a bond fund, there is no redemption pressure and as there is also no regular churning of the portfolio, this reduces costs incurred in buying these instruments and the fund managers cost of reviewing the portfolio on a regular basis.

3) Liquidity: Although FMP is best if held till maturity, but investors have an option to exit at any point as all FMPs are traded.

Please add Your Comments: Share your views about the article. Your comments will help us to write better in future.

LIC Wealth Plus – Aapki ya Aapke Agent Ki

Hemant Beniwal

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March 12, 2010

181

LIC Wealth Plus - Aapki ya Aapke Agent Ki LIC wealth Plus was grossly mis-sold to naive investors. LIC wealth Plus NAV is Rs 14.44 means just a return of 6.27% since launch. It was launched on 9th Feb 2010 at that time sensex was 16000 & today it is approx 30000 that means a return of 11%. Now investors are feeling cheated. We already told investor this will happen – you can read the complete article, this will tell you what went wrong with this product.

LIC wealth Plus NAV update in March 2017

You can check Latest LIC Wealth Plus NAV here.

If someone were to tell you that your money will grow @ 17% p.a. and your Rs. 1 lac investment will become Rs. 3.5 lacs in next 8 years, would not you get greedy? And what if it is told to you that such returns are guaranteed by one of the biggest financial institution LIC of India, it would be Icing on the Cake and a “Never Miss Opportunity”. But everything that sounds so good, if looked deeply may reveal something else. Someone rightly said “the big print give it and the fine print take it away”. Such is the case with LIC’s new insurance plan – Wealth Plus.

Game Started in 2007

Every year during the last quarter of Financial Year, insurance agent finds new ways to misguide people and make them invest in policies based on false assumptions and promises. Let us take example of year 2007 when LIC launched one of its most famous policy “Money Plus”.

During the launch, pamphlets were distributed in all the nook and corner of the country showing high returns. Eg., Invest Rs. 1 lac for next three years and get Rs.3.38 crores after 20 years at a return of 25% p.a. Based on such exuberant returns shown on a pamphlet and false promises made by agents, thousands and lakhs of investors all across India invested their money.Not only people invested their savings but there were many instances where smaller households sold their jeweleries and other personal belongings as they were told that LIC is guaranteeing such high returns.

Read – LIC Jeevan Akshay VI – Pension Plan

What LIC have to say

Later when the news of wrong selling was brought to the notice of LIC management, LIC states that such assumptions are unrealistic and false. Investors should not be misguided in the name of LIC. On a letter dated February 12, 2007 to all the Zonal Manager and Sr. Divisional Managers, Managing Director of the LIC Mr. Mathur, himself writes that “The unethical practice of circulating such pamphlets to misguide the public and get business is betraying the trust we built-in the last 50 years.” .

Though efforts were made to stop agents to use such pamphlets but since the agent community is so big and scattered, not much could be done. It was quite amazing that all over India, similar pamphlets were distributed and hence it is clear that without the help of Development Officer of LIC, such work was not possible. D.O. of LIC also gets commission or incentive when his agent gives more business to LIC. See the pamphlets Below

Pamphlets showing returns with Term 3 yrs and investment 25,000

Pamphlets showing returns with Term 1 yr and investment 1,00,000

What other Govt bodies have to say

Ministry of Consumer Affairs, Food and Public Distribution through “Jago Grahak Jago” also acknowledged that such misleading things are taking place and hence warned investors to refrain themselves from such high return promises.

D Swaroop(PFRDA Chairman) committee on investor awareness & protection states that “The chief cause of mis-selling is the incentive structure that induces agents to look after their own interest rather than that of the customer. If that were not true, the average sum assured of the insured Indian would be higher than the current Rs 90,000.”

Now when a bread earner of an average Indian family dies untimely, do you think his family will survive for the rest of their life with less than Rs. 90,000 ? Insurance is meant to cover risk of untimely death first and investment & tax saving are secondary criteria. But we the Indians, have been taught Insurance as an investment first, tax savings second and then somewhere in the last we talk of insurance as well. Now again such practice of mis-selling has emerged and agents are targeting LIC’s new product Wealth Plus.

LIC Wealth Plus - Aapki ya Aapke Agent Ki Click to Tweet

What is LIC Wealth Plus Product

This product of LIC which was launched on February 9, 2010 (Table 801) states that LIC will guarantee the highest NAV to the investor in the first 7 years and product will mature after 8 years. It nowhere guarantees the return. In its official web-site, LIC states that the minimum guarantee will be of Rs. 10 NAV as Rs. 10 will be the starting point. Actually that means that they are not even guaranteeing that you will get your entire money back as there will be certain charges in the policy itself. They have nowhere written that they will guarantee any amount of return to the investor. Nor they have mentioned that your money will be invested 100% into equity.

Now what Agents are telling

# LIC is giving guarantee on HIGHEST RETURN. (LIC is saying Highest NAV)

# Now what is highest return? Based on past performance of LIC’s ULIP policy (Bima Gold), you will get 17%-18% return on investment.

# Lumpsum Rs. 1 lac invested today will become Rs.3,45,693/- or give Rs 25000 for 3 years & get Rs.2,14,690/- after 8 years.

# You should switch all your earlier product (on which agents have already made huge commission) into this product as this is something which is as good as KOHINOOR DIAMOND.

To generate such high returns, the money has to remain but LIC nowhere states that. In almost all ULIPs it is clear how much money will go in equities and how much money will go in debt, but this olicy is silent on the allocation percentage and hence you may land up getting returns that of endowment or money back. (nearly 6%-7%).

Bima Gold of LIC was a ULIP where it was mandatory for the fund manager to remain invested in Equities in a pre-decided proportion. It was launched in 2001 when the markets were trading at 3000 sensex levels and later sensex touched even 21000. Is it a right approach to compare such high returns which were made during Bull Market and making investor believe that such returns will be now guaranteed by LIC. Now if you go to a small shopkeeper, a carpenter or a young executive and show them that you will get such high return, why he/she will not invest and that too if they are told that guarantee is done by the India’s biggest financial institution, LIC.

We feel sorry to say but such agents who are misleading people do not even think twice before selling such policies in a wrong approach. The fact of the matter is that the money is just not invested in policies but gets invested in someone’s kids higher education, someone’s retirement, some dreams which common man look to achieve. We believe that

Insurance agents have sold to Indian everything other than Insurance.

What is IRDA guidelines says

As per IRDA, agents and Insurance companies are mandated to show return either at 6% or 10%. But the pamphlet distributed have no regards for Regulatory guidelines. Let’s Compare return according to pamphlet & IRDA Guidelines:

	Regular Premium	Single Premium
Premium	25000	100000
Paying Term	3 years	1 Year
Pamphlet	214690	345639
As per IRDA guidelines
6%	87549	118442
10%	114306	161697

# Figures are approx.

Innocent Investors ?

We believe even investor is at fault and not all the blame should be transferred to the Agents alone. It is always “Buyers Beware”. We take well thought decision before we buy even a fridge in our house. We do research which fridge is best for us and look at least 4-5 shops before we finalize. But when it comes to financial products, we don’t really do our home work and at times decision is taken not even going through the pros and cons of the policy.

Now what investors should do?

If you have already taken the policy

# Cancel the policy if bought under false promises and high projection. The policy can be returned within 15 days of the receipt of the document without any charges under ‘free-loo
k’ option.

# If 15 days are over, nothing much can be done.

If Not Taken

# Take your well thought decision before jumping on to this product.

# Tell your friends about the same.

Exit Strategies for mis-sold insurance policies

Hemant Beniwal

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February 5, 2010

96

We at TFL, are working constantly on Investor Education and following different ways and means through which our message could be reached to as many people as possible.

Blog, Seminars are few of the ways through which we started Financial Literacy. From January 2010, we have come up with a JOURNAL which will be a quarterly edition wherein we have used print media to endorse Financial Literacy.

The First news letter was based on Insurance as we found that Indian Investor makes his Maximum mistakes while taking Life Insurance. Topics covered were:
• बीमा एक खर्चा है न कि निवेश
• टर्म प्लान
• Your Insurance agent is mis-selling if…
• Do’s & Don’ts in Personal Finance

Exit Strategies for mis-sold insurance policies Click to Tweet

The News letter was appreciated by all who read it and there came questions that WHAT SHOULD WE DO WITH OUR EXISTING INVESTMENT BASED INSURANCE POLICIES.

Due to mis-selling of Insurance; more than 91 Lakh policies worth Rs 1000 Crore lapsed in 2009. A policy is considered lapsed when the premium is not paid within 60 days of the due date.
If possible we should try for exit policy rather than getting it lapsed. Let’s check out some of the exit strategies.

Before checking strategies lets understand two terms PAID UP and SURRENDER VALUE.

What is meant by PAID UP?

When you stop paying premium but do not withdraw the money from the Insurance company, the company reduces all your benefits proportionality. The benefits like SUM ASSURED, MATURITY VALUE etc. But in case of Endowment & Money Back Plans Insurance Amount ceases to exist. You do not lose anything by this approach. For example, if your policy is for 10 years with SUM ASSURED of Rs. 2 lacs and you have paid premium for 5 years, your SUM ASSURED will now be 1 lac only and other benefits will also reduce by 50% as you have paid 50% of the overall amount that your were supposed to pay.

After making the policy PAID UP, you may choose to redeem the amount or continue with the insurance without further paying of Premium.

In case you were to redeem the policy, you get the amount as per SURRENDER VALUE.

Now what is meant by Surrender Value?

Surrender value is the amount that Insurance company will give you in case you were to withdraw policy before its maturity date based on their pre-decided calculation. For the first 3 years, the Surrender Value is NIL or very low. As the time increases, this amount keeps going up.

Typically, Insurance Policy people have either ENDOWMENT, MONEY BACK, ULIPs or Pension Plans.

If you have taken ENDOWMENT OR MONEY BACK POLICY(Traditional Policies)

After First Year premium, we suggest that you should stop paying further premium. You would lose all you have paid, but it is better to stop travelling on wrong road once you know it.
If you have paid 2 years premium, we suggest that you should pay one more installment and the stop paying premium. By doing that, you will actually make this policy PAID UP.
If you have paid the premium for more than 3 years, we suggest that you should stop paying further premium and get this policy into PAID UP ZONE until you get reasonable value.

Tax treatment: The entire surrender value added to your income in the year of receipt.

If you have taken ULIPs.

One of the most mis-sold policy is ULIPs. It is a combination of MUTUAL FUND and TERM INSURANCE prefixed by HUGE CHARGES.

After First Year premium: ULIPs are very expensive product and bit tricky in its calculation. The expense varies anywhere from 20% to 70% of first years premium. Do check the same and if you find those heavy expenses, say thanks to your Agent & get your insurance bond laminated so that not only you but others also don’t make such financial blunders in life.
If you have paid 2 years premium, do pay 3rd year premium as well – NO CHOICE
If you have paid the premium for more than 3 years: Whether you should withdraw or hold that investment is based on Alternative Opportunity you have at that point in time. If you find that you will be better off investing in Mutual Fund directly instead of remaining Invested in ULIP, then its better to withdraw the same and make Mutual fund investment. Now this statement applies to all your investment.

Tax treatment: Nil tax liability if withdrawn after 5 years but between 3-5 years if you surrender it then entire surrender value gets added to his income in the year of receipt (in this case, you can withdraw 99% of the fund value). Also check surrender charges before you make such decision.

How to exit from tension policy, by the way people still call it pension policy: The decision to hold or redeem is based on similar lines as Traditional Policy and ULIPS.

Tax treatment: The withdrawal from Pension Policy is always added to your income whether you do it before the maturity or when you get annuities.

The illiterates of the 21st century will not be those who cannot read and write but those who cannot LEARN, UNLEARN and RELEARN – Alvin Toffler

If you have made mistakes by taking BAD policies, we would say that learn from past experience and get rid of your Insurance Agents who pretends to be your friend. Always remember that Insurance and Investment are best bet only if they are not served as Cocktail.

Disclaimer:

Our recommendations are applicable to most of the investment linked insurance sold in India but before you take decision, we would advise that you should either read the fine prints of the policy document, or contact the insurance company. You may also mail us in case you look forward for our advise. You can mail us at [email protected]

Financial Resolution for 2010

Family Finances

Hemant Beniwal

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January 2, 2010

2

Every year we take some resolution because we want to change our bad habits or adopt something new that may bring happiness to us and our family.

According to various surveys across the world Financial Resolutions finds place in top 3 new year resolutions.

So we thought why don’t give some choices to our readers for their Financial Resolutions that may enable them to achieve financial success in their lives.

Loans

I will not take any loan for Spending or Investing in markets
EMI will not exceed 40% of take home income
I will try and pre-pay high interest loans first

Saving and Investing

I will work on my Asset Allocation and not on Market Momentum
I will invest thru SIPs and increase it at any given opportunity
I will follow the basic rule i.e., Equities are for Long Term and Debt is for Short Term

Financial Plan

I will prepare list of my financial goals and work towards achieving those goals
I will stick to my plan and not work on emotion
I will understand the difference between NEED and WANT

Insurance

I will say no to Investment oriented insurance policy
I will have adequate TERM insurance policy
I will buy Health Insurance and Accidental Insurance for my family