ET has this interesting article on stock selection in a bearish/bullish market. The idea it churns out is something like this.
When the markets are declining, people don’t buy stocks because they doubt that the stock prices would decline further, resulting in a loss or else they will wait to buy the stock at the lowest point. But the article argues that waiting to buy stocks at the lowest point may not be fruitful because, less and less people sell stocks as its price nears the lowest point.
On the other hand, when the markets are bullish, people don’t sell stocks because they doubt the stock prices would go higher or they wait for the stock prices to reach the highest point. And, here the article argues that at the highest point there would be less and less people willing to buy the stock and hence selling it at the highest price may not be possible.
Due to this phenomenon, the article suggests that in a bear market, buy stocks when the market goes down by 20%, rather than waiting for it to touch the lowest point and in a bull market, sell stocks when the markets goes up by 20% rather than waiting for it to touch the peak.
Interesting though!
Related Articles
- SEBI makes IPOs more transparent
- Now Interest Rate Futures can be traded in National Stock Exchange
- SEBI mandates Rs. per share dividend declaration
- How does Short Term Capital Gain/Loss work?
- What are the 30 Stocks of BSE SENSEX
Showing posts with label Investments. Show all posts
Showing posts with label Investments. Show all posts
Wednesday, 23 December 2009
Wednesday, 16 September 2009
SEBI makes IPOs more transparent
The Securities and Exchange Board of India, SEBI, issued a new investor protection guideline that prevents companies doing IPO from sharing information, which is not available for the outside world, with their IPO arrangers.
Previously, a company going for an IPO shared key financial information with the investment bank arranging the IPO; information which is available only to the bank and not to others. The investment bank would then prepare research reports which are based on this extra information. The reports are shared with institutional investors prior to the filing of the prospectus and are not available to retail or ordinary investors.
So, one could easily make out that the additional information would make IPO estimations by the investment bank dealing with the IPO more accurate and give institutional investors an unfair advantage against other investors. Given this situation, the tweak from SEBI which says,
Related Articles
- Now Interest Rate Futures can be traded in National Stock Exchange
- SEBI mandates Rs. per share dividend declaration
- How does Short Term Capital Gain/Loss work?
- Application Supported by Blocked Amount for IPOs
- Money no longer gets locked in IPOs
Previously, a company going for an IPO shared key financial information with the investment bank arranging the IPO; information which is available only to the bank and not to others. The investment bank would then prepare research reports which are based on this extra information. The reports are shared with institutional investors prior to the filing of the prospectus and are not available to retail or ordinary investors.
So, one could easily make out that the additional information would make IPO estimations by the investment bank dealing with the IPO more accurate and give institutional investors an unfair advantage against other investors. Given this situation, the tweak from SEBI which says,
“no selective or additional information or information extraneous to the offer document shall be made available by the issuer or any member of the issue management team/syndicate to any particular section of the investors or to any research analyst in any manner whatsoever including at road shows, presentations, in research or sales reports or at bidding centers”shall provide a level playing ground for investors alike and would bridge problems associated with information asymmetry.
Related Articles
- Now Interest Rate Futures can be traded in National Stock Exchange
- SEBI mandates Rs. per share dividend declaration
- How does Short Term Capital Gain/Loss work?
- Application Supported by Blocked Amount for IPOs
- Money no longer gets locked in IPOs
Tuesday, 15 September 2009
Now Interest Rate Futures can be traded in National Stock Exchange
After a gap of six years, the National Stock Exchange (NSE) of India re-launched trading in Interest Rate Futures. This will give the investor an opportunity to speculate and trade with these advanced financial instruments.
Interest Rate Futures allow institutions to hedge risk associated with interest rate fluctuations. They can reduce the risk associated with cash flows resulting from underlying assets such as home loans, long term fixed deposits etc.
However, in India, the underlying asset on which the interest rate future is based on is a 10 year notional coupon bearing government security. Have a look at this small series that came in ET, which talks about few things one has to consider before trading in interest rate futures.
Interest Rate Futures allow institutions to hedge risk associated with interest rate fluctuations. They can reduce the risk associated with cash flows resulting from underlying assets such as home loans, long term fixed deposits etc.
However, in India, the underlying asset on which the interest rate future is based on is a 10 year notional coupon bearing government security. Have a look at this small series that came in ET, which talks about few things one has to consider before trading in interest rate futures.
Saturday, 18 April 2009
The Stock Markets may be on Recovery
The Indian Stock Markets have performed promisingly well in the last few weeks. Though the performance wasn’t an all-round one comprising many different stocks, few of them upped the ante of the markets and had set the mood.
While it can’t be said with certainty that the economic slowdown and the stock markets are on a recovery path, there are few factors which may make it happen.
1. The economic stimulus packages issued and to be issued by countries world-wide would have created confidence in investor minds that the markets may not go down further if they put their money in.
2. Monetary policies (reduction in CRR, prime lending rates etc.) by governments that result in more money in the hands of people there by increasing their spending and investments (or, increasing liquidity in the economy), improving the economic situation.
Meanwhile, here’s a list of 10 stocks, compiled by Economic Times, which rose by more than 100% in the current market recovery.
While it can’t be said with certainty that the economic slowdown and the stock markets are on a recovery path, there are few factors which may make it happen.
1. The economic stimulus packages issued and to be issued by countries world-wide would have created confidence in investor minds that the markets may not go down further if they put their money in.
2. Monetary policies (reduction in CRR, prime lending rates etc.) by governments that result in more money in the hands of people there by increasing their spending and investments (or, increasing liquidity in the economy), improving the economic situation.
Meanwhile, here’s a list of 10 stocks, compiled by Economic Times, which rose by more than 100% in the current market recovery.
Monday, 9 March 2009
How does Short Term Capital Gain/Loss work?
I found this interesting snippet circulated through email by ICICIDirect, which describes in simple anecdotes how Short Term Capital Gain/Loss works in India. I am posting it straight away, without any modifications.
1. Mr. Sharma purchased some securities on May 7, 2008 at a total cost of Rs. 100,000. On July 3, 2008, he sold these securities for Rs. 130,000. Here the Short Term Capital Gain, STCG (gain arising from sale of securities which is less than 12 months old) was Rs. 30,000 (a) and STCG tax (15% as per current laws) for this gain calculated to Rs. 4,500.
2. But Mr. Sharma had also purchased securities worth Rs. 90,000 on June 12, 2008 and had sold them at Rs. 40,000 on February 10, 2009. Hence there is a Short Term Capital Loss (loss arising from sale of securities which is less than 12 months old) and equal to Rs. 50,000 (b).
3. Now as per the tax laws, Mr. Sharma’s Short Term Capital Gain (a) is offset by Short Term Capital Loss (b). Hence there is no Short Term Capital Gains tax payable by Mr. Sharma for the financial year 2008-09. Also, he carried forward Rs. 20,000 loss for offsetting any Short Term Capital Gains he makes in the next 8 years.
Thus a person needs to pay STCG tax only for the difference between Short Term Capital Gain and Short Term Capital Loss if the difference is positive; no tax if the difference is zero or negative. Moreover, if the difference is negative, he can even carry forward and offset the loss to gains in the next 8 years, until the loss is completely used off to offset those gains.
Thanks to ICICIDirect.com
1. Mr. Sharma purchased some securities on May 7, 2008 at a total cost of Rs. 100,000. On July 3, 2008, he sold these securities for Rs. 130,000. Here the Short Term Capital Gain, STCG (gain arising from sale of securities which is less than 12 months old) was Rs. 30,000 (a) and STCG tax (15% as per current laws) for this gain calculated to Rs. 4,500.
2. But Mr. Sharma had also purchased securities worth Rs. 90,000 on June 12, 2008 and had sold them at Rs. 40,000 on February 10, 2009. Hence there is a Short Term Capital Loss (loss arising from sale of securities which is less than 12 months old) and equal to Rs. 50,000 (b).
3. Now as per the tax laws, Mr. Sharma’s Short Term Capital Gain (a) is offset by Short Term Capital Loss (b). Hence there is no Short Term Capital Gains tax payable by Mr. Sharma for the financial year 2008-09. Also, he carried forward Rs. 20,000 loss for offsetting any Short Term Capital Gains he makes in the next 8 years.
Thus a person needs to pay STCG tax only for the difference between Short Term Capital Gain and Short Term Capital Loss if the difference is positive; no tax if the difference is zero or negative. Moreover, if the difference is negative, he can even carry forward and offset the loss to gains in the next 8 years, until the loss is completely used off to offset those gains.
Thanks to ICICIDirect.com
Tuesday, 24 February 2009
Investing in times of recession
One of the reasons why the stock markets are taking time to comeback is the lack of ‘investible’ money in the hands of people. Most of the money is tied up in various investment options such as shares, mutual funds etc. and are not in a position to be liquefied through their sale and reinvested.
Adding to this, people are losing their jobs due the retrenchments that are happening these days, which significantly affect their income. But for those who have money, there is not a better time to invest. The markets are low, shares are trading low.
But then, there is one entity that seems to have enough money to invest in the times of recession; Life Insurance Corporation of India (LIC). The firm had increased its stakes in ICICI Bank, IOB, GAIL etc.
This might be due to the job insecurity that the people feel, which makes them insure themselves and their assets through insurance companies making the companies have enough money to invest. And not to forget the cash reserves they have.
Adding to this, people are losing their jobs due the retrenchments that are happening these days, which significantly affect their income. But for those who have money, there is not a better time to invest. The markets are low, shares are trading low.
But then, there is one entity that seems to have enough money to invest in the times of recession; Life Insurance Corporation of India (LIC). The firm had increased its stakes in ICICI Bank, IOB, GAIL etc.
This might be due to the job insecurity that the people feel, which makes them insure themselves and their assets through insurance companies making the companies have enough money to invest. And not to forget the cash reserves they have.
Tuesday, 17 February 2009
The Rising Gold
The markets seem to hold a Midas’ touch these days. Don’t get me wrong as I am not talking about the volatile stock markets, but about all those markets/financial products associated with the effervescent precious metal, Gold!The yellow metal, which is an obsession for Indian’s, costs more than 15,000 rupees a 10 gram block. This is close to 100% more than what it was worth a year and a half back. This rise in Gold prices is reflecting in various financial instruments associated with it.
Gold backed Exchange Traded Funds (ETF) are rising sharply in the last few days (9% in 7 days). So is the case with Gold Futures, which according to ET, is on a record breaking spree.
This story of glory seems to continue for some more time as the Gold demand in India is in tact as it increased by a whopping 84% during October ~ December 2008. Also, investing in Gold would be a reliable alternative for many an investor, as the global economic crisis and it’s after effects continue to loom large over Indian markets. These would be the reasons why experts say that despite the rise, one can still invest in gold.
Tuesday, 3 February 2009
Balance Sheet, Cash Flow Statement and Saving Tax
The balance sheet is one of the key financial statements of a company and is of particular interest to an existing or prospective shareholder of the company. Here’s an article from Rediff, which explains how to read a balance sheet.
Similar to balance sheet, cash flow statement is another key financial statement of a company and is a mandatory part of the company’s financial reports since 1987. It tells an investor how the company’s operations are running, where the money is coming from and how it is spent. This article describes what is a cash flow statement?
Two months from now, the financial year will come to and end and then starts the proceedings for filing tax returns. So, various ways for saving tax should be done in these two months. This ToI article, explains 10 smart ways to lower your tax bill.
Similar to balance sheet, cash flow statement is another key financial statement of a company and is a mandatory part of the company’s financial reports since 1987. It tells an investor how the company’s operations are running, where the money is coming from and how it is spent. This article describes what is a cash flow statement?
Two months from now, the financial year will come to and end and then starts the proceedings for filing tax returns. So, various ways for saving tax should be done in these two months. This ToI article, explains 10 smart ways to lower your tax bill.
Wednesday, 31 December 2008
Wait! Property prices to fall further!
Here's an indepth article about real estate prices in India, from rediff.
Few points from the article,
The recent housing boom was riding on the back of four broad factors -- rising incomes, job security, low property prices and interest rates, and tax benefits associated with buying a house.
A home loan is a person's show of confidence in his income earning capacity over the long term. As the demand for high-ticket loans falls, it also signifies a dip in the confidence in job security and future salary increments.
Says an industry analyst: "Major players in the premium segment have an operating margin of 50-55 per cent. On the contrary, in the mid-segment the margin is around 35 per cent."
"A minimum of 25 per cent correction can be expected. Correction in Tier-II and Tier-III cities will happen a little more. Even cities like Mumbai could see significant price correction," adds Mavani.
So, read on!
Few points from the article,
The recent housing boom was riding on the back of four broad factors -- rising incomes, job security, low property prices and interest rates, and tax benefits associated with buying a house.
A home loan is a person's show of confidence in his income earning capacity over the long term. As the demand for high-ticket loans falls, it also signifies a dip in the confidence in job security and future salary increments.
Says an industry analyst: "Major players in the premium segment have an operating margin of 50-55 per cent. On the contrary, in the mid-segment the margin is around 35 per cent."
"A minimum of 25 per cent correction can be expected. Correction in Tier-II and Tier-III cities will happen a little more. Even cities like Mumbai could see significant price correction," adds Mavani.
So, read on!
Wednesday, 30 July 2008
Application Supported by Blocked Amount for IPOs
The Securities and Exchange Board of India (SEBI) has introduced Application Supported by Blocked Amount (ASBA); a supplementary process for applying IPOs. Previously, when investors apply for an IPO, they have to pay the entire money upfront to the registrar/banker and hence stand to lose returns on the money that is locked until the IPO is allocated. The new move will protect the money of investors and will also make the IPO issue process more efficient and less time consuming.
In the new process, banks will block the money in investors’ account when they bid for an IPO and the money is released on the basis of number of shares being allotted. The remaining money will be unlocked by the banks. As a result, the IPO process is expected to be completed within 15 days of the closing date of the issue.
Related Articles
- Money no longer gets locked in IPOs
In the new process, banks will block the money in investors’ account when they bid for an IPO and the money is released on the basis of number of shares being allotted. The remaining money will be unlocked by the banks. As a result, the IPO process is expected to be completed within 15 days of the closing date of the issue.
Related Articles
- Money no longer gets locked in IPOs
Friday, 27 June 2008
Advantages of investing in Real-estate
Investing in real-estate, or more specifically, on a house or flat, is something that interests the salaried class very much. Though the scenario appears bleak due to the recent CRR and Repo rate hike by RBI (which could lead to an increase in home loan rates), buying a real-estate is something that is still worth pondering.Real-estate has certain advantages that other investment options don’t have. Let’s have a look at few of those advantages and see why investing in real-estate is still a better option.
Advantages
1) Property prices, in general, don’t show a downward trend, especially if selected at a location where there is ample scope for development. In such cases, it becomes a safer investment.
2) The rate at which real-estate prices increase sometimes even beat the stock market.
3) Inflation generally doesn’t affect real-estate (house/flat) returns because the costs of construction materials increase every year (with inflation). As a result, the cost of buying a house/flat is always going to increase with time. Hence properties will most probably be available at a higher price tomorrow.
4) Investing in a ready to occupy house/flat could save the money that you spend on a rented house. Till selling the flat, you can live in the flat and save on the rent amount.
5) If you are taking a home loan for buying the house/flat, the EMI could be afforded with 1) the money you otherwise pay as rent and 2) the tax savings (hence increased take home salary) you get on home loans.
Tax Savings
When you take a home loan, there are two ways with which you could save tax.
1) The principal component of the EMI is eligible for a deduction of up to 100,000 under Section 80C of Income Tax Act 1961. This is the same section under which Provident Fund, Insurance Premiums etc. are claimed.
2) The interest component of EMI is exempted up to 150,000.
3) If both husband and wife are working, then both can claim these exemptions for the same property, provided they have taken a joint loan and divide the principal and interest component of EMI among each other.
Tuesday, 24 June 2008
Online share trading websites of India
Ever since the dematerialization of shares happened in India, stock trading has shifted its base to the internet world. It made share trading a lot easier for people and more of them started buying and selling shares through various websites, which provided equity investors with facilities to do online trading. Online trading became so much popular so that today websites not only provide facilities to do share trading but also for Futures and Options trading, Commodities trading, Overseas trading, IPO application, Mutual Funds etc. and more.Here is a non-comprehensive list of websites through which you can do online share trading in India, on BSE and NSE, the leading stock exchanges of India. The websites are neither arranged in any particular order nor are they ranked here. And all of them provide more or less the same set of services. There could be a difference in customer service though!
ICICI Direct
ICICI Direct is owned by ICICI bank. They have one of the highest brokerage fees in India but also have a plethora of stock research information and trading tips available with them.
Sharekhan
Sharekhan is an old hand broker with a lot of experience in Indian stock markets.
Reliance Money
Reliance Money is owned by Anil Dhirubhai Ambani Group.
5paisa
5paisa.com is an IndiaInfoline owned online equity trading portal.
Geojit
Geojit, as a company, is in operation since 1987. As on today, it is the only company in which a government entity (Kerala State Industrial Development Corporation) has a stake.
Indiabulls
Indiabulls is a leading Financial Services and Real Estate company of India. They have over 640 branches across India.
There are other online equity trading brokers as well; like Motilal Oswal, Kotak Securities, Angeltrade, SMC etc. I will update the list with their information in future.
Thursday, 5 June 2008
CFDs: Contract for Difference
An agreement between buyer and seller of an asset saying that the seller will pay the buyer the difference between current value and end of contract time value of the asset, is called a Contract for Difference or CFD. Conversely, if the difference is negative then the buyer pays the seller. Thus, in a CFD, the seller makes money when the asset value decreases while the buyer makes money when the asset value increases, over the contract tenure.CFDs allow investors to speculate on asset price movements and do trading without actually owning the asset. It is much similar to margin trading such as short selling and short covering. In CFDs the investors can have longer contract durations, which will allow them to take long term positions.
CFDs were first traded in UK where they had the benefit of being exempted from stamp duty. Soon investors realized its potential to trade on leverage on an asset than just obtaining tax exemption. And thus started the growth of CFDs world over! Today they are traded in most of the leading stock exchanges in the world.
Today we have lot of websites that deal with online stock trading, especially for the trading of CFDs, like One Financial. They provide a wide range of trading instruments and also an investor can trade with a large number of exchanges through their site. Being a website they also have the advantage of geographic independence (anyone can trade from anywhere).
Online CFD providers like One Financial make the task of CFD trading a lot easier for investors. They are one of the few sites where investors can open a demo CFD account to get themselves acquainted with the interface and processes involved in CFD trading. For all those newcomers in the field of CFD trading, they have a CFD for beginners section in their website.
CFDs are indeed an interesting investment opportunity for investors!
Monday, 28 April 2008
Of Micro SIPs
For mutual funds having a Systematic Investment Plan (SIP) option, the SIP amount came down to as low as Rs. 500 per month but there were a lot of people out there for whom it was still unaffordable; people who are engaged in daily wage jobs, small businesses etc. and wanted to benefit from the higher returns of equity market.
From April 2007, few fund houses have allowed people to invest in SIPs with money as low as Rs. 50 per month. This could benefit about 330 million paid workers of India who didn’t have access to such investment schemes earlier.
But there are certain things that could affect the popularity of micro SIPs. PAN card being made mandatory for mutual fund investments by SEBI, distributors not pushing micro SIP due to lower commissions involved, longer SIP terms of around 60 months are few of them. But looking at the revenues that micro SIPs could rake in for Asset Management Companies due to its scale, let’s hope that this shall become a success, increasing the savings power of the average Indian and also making our equities market much bigger and stronger than they are now.
From April 2007, few fund houses have allowed people to invest in SIPs with money as low as Rs. 50 per month. This could benefit about 330 million paid workers of India who didn’t have access to such investment schemes earlier.
But there are certain things that could affect the popularity of micro SIPs. PAN card being made mandatory for mutual fund investments by SEBI, distributors not pushing micro SIP due to lower commissions involved, longer SIP terms of around 60 months are few of them. But looking at the revenues that micro SIPs could rake in for Asset Management Companies due to its scale, let’s hope that this shall become a success, increasing the savings power of the average Indian and also making our equities market much bigger and stronger than they are now.
Tuesday, 1 January 2008
Why Mutual Funds Entry Load scrapping by SEBI is justified
Starting January 4 2008, mutual fund investors wouldn’t need to pay the existing entry load of 2.25% while investing in a fund directly through the fund house’s website or through its own customer desk. This is applicable to further investments in existing portfolios, schemes and to new schemes launched henceforth; basically, for any new investment made on existing or new mutual fund schemes.
Initially, when mutual funds were sold through brokers, the entry load was used to pay commission to the brokers. When fund houses started selling their funds online and directly through their channels, the role of a broker ceased to exist. Still, the fund houses were charging entry load, which was questionable.
For an amount of Rs. 100000 (one Lakh) invested in a mutual fund, the entry load took Rs. 2250 away from the investment amount. Considering a one time investment of Rs 100000 made on a mutual fund having a yearly return of 30% for an investment period of 15 years, Rs. 2250 alone could get a potential return of Rs. 115168 (more than one Lakh), which the investor stand to lose.
The set motive of mutual funds was to allow small investors with small chunks of money to invest and get the benefit of scale from the stock market. But if you look at the entry load, it’s waived for investments greater than Rs. 5 Crore in most cases, thoroughly favoring large investors, which is contrary to its purpose. The irony is investors who are able to invest more than 5 Crore would normally be companies, who take the benefit of mutual funds, that are primarily meant for small investors. Also, normally companies won’t invest for longer time periods as compared to small investors. Thus, the entry load of a mutual fund was a deterrent factor for small investments.
The process behind this move from SEBI started in August 2007. And now, when it comes to effect on the start of the year, it has become nothing less than a great new year gift to the small investors.
Initially, when mutual funds were sold through brokers, the entry load was used to pay commission to the brokers. When fund houses started selling their funds online and directly through their channels, the role of a broker ceased to exist. Still, the fund houses were charging entry load, which was questionable.
For an amount of Rs. 100000 (one Lakh) invested in a mutual fund, the entry load took Rs. 2250 away from the investment amount. Considering a one time investment of Rs 100000 made on a mutual fund having a yearly return of 30% for an investment period of 15 years, Rs. 2250 alone could get a potential return of Rs. 115168 (more than one Lakh), which the investor stand to lose.
The set motive of mutual funds was to allow small investors with small chunks of money to invest and get the benefit of scale from the stock market. But if you look at the entry load, it’s waived for investments greater than Rs. 5 Crore in most cases, thoroughly favoring large investors, which is contrary to its purpose. The irony is investors who are able to invest more than 5 Crore would normally be companies, who take the benefit of mutual funds, that are primarily meant for small investors. Also, normally companies won’t invest for longer time periods as compared to small investors. Thus, the entry load of a mutual fund was a deterrent factor for small investments.
The process behind this move from SEBI started in August 2007. And now, when it comes to effect on the start of the year, it has become nothing less than a great new year gift to the small investors.
Friday, 14 September 2007
Endowment Policies – when it comes to maximizing returns
“Back in July 2002, I took an endowment policy. I was in my first job and for the first time in my life I was submitting investment proof to claim the munificent tax rebate. I had heard from someone that taking an endowment policy would be a better option as the higher premiums I pay would take me near the magical, tax rebate figure of One Lakh and to top it, I would get good returns on policy maturity! I didn’t think twice; called up an insurance agent. All he told me was about endowment policies. Finally, for an annual premium of around Rs. 21,000, I took an endowment policy with a policy term of 25 years. The rest I managed with National Savings Certificate.”
“It’s been three years and having diligently paid all the premiums, now I am a loyal customer of the insurance company. But some of my colleagues who had invested in stock markets that time, directly or through Mutual Funds, have already tripled or quadrupled their savings. Some had made even more. That’s when I started thinking about my endowment policy and the kind of returns it gave me with respect to the investment I made in the form of premiums. Is my endowment policy actually giving me good returns?”
I’m sure most of us who own an endowment policy would have thought like this at least once. This post succinctly examines the same. In the due course, we will find out how endowment policies don’t give much returns or insurance cover vis-à-vis some of the other investment opportunities.
Let’s have a closer look at Endowment Policies. Endowment Policies by definition agree to pay a lump sum on maturity while giving a small insurance cover during the policy term. Thus it’s a combination of both insurance and investment. The policy holder pays premium (this is the investment) reasonably higher than a term-insurance policy and gets yearly bonuses from the insurance company that get accrued and added to the lump sum. On the event of death or on maturity he gets the sum assured plus the accrued bonus (both constitutes the return on investment), which according the insurance company or the agent, is a formidable amount.
Thus, on policy maturity, the policy holder gets money in two ways.
Every year,
a) Reversionary Bonus: Distributed from company profits, based on plan, term and sum assured.
b) Terminal Bonus: Distributed from company profits for customer loyalty, based on plan, term and sum assured.
On maturity
a) Sum assured
So that the Total Amount on maturity = Sum Assured + Accrued Annual Bonuses.
Now let’s study an endowment policy in detail to calculate the returns from it. The policy under study has the following parameters.
Annual Premium = Rs. 21,000
Policy Term = 25 years
Premium Paying Term = 25 years
Sum Assured = 5 Lakh
Bonus declared by the insurance company for this particular policy during the years 2003-04, 2004-05 and 2005-06 were Rs. 53, Rs. 47 and Rs. 44 respectively, for every thousand rupees sum assured, i.e., an average of Rs. 48. Though I understand that the bonus amount would vary from year to year and may increase in the coming years, I take this average value for the calculations. Also, please to note the decreasing trend in bonus amount.
Thus for a sum assured of Rs. 5 Lakh, the bonus would come out to be Rs. 24,000 per year which is Rs. 6 Lakh for 25 years.
The terminal bonus is usually not made public by the insurance company. Hence we have no other way but to assume it to be on the range of Rs. 4 Lakh.
That makes the total amount the above policy holder would get after 25 years to be Rs. 15 Lakh. And the total premium he would have paid during the policy term would be Rs. 5 Lakh [21,000 X 25]. Thus the policy gives him an annualized return of 12%. [((15 / 5) X 100) / 25]
In this way you can calculate the returns you get from your endowment policy.
Now we got an idea about the returns from an endowment policy. Going ahead, let’s think about the next question. Is there any other way for us to get more returns and more insurance cover from the same investment amount? Is there a way to maximize our investments without compromising on the insurance cover?
So, let’s look at another investment option; say Mutual Funds. Over the years, mutual funds have been giving very good returns, in the range of 40% per year. But if we assume an average return of even 15%, an investment of Rs. 21,000 per year for 25 years would give the above person a return of Rs. 51 Lakh, had he invested the same amount in Mutual Funds every year! Quite amazed?
Unlike endowment policies, mutual funds don’t give any insurance cover. So how do we take care of the insurance part? Well, one way to do that would be to cut down the investment amount a bit and take a term insurance using that. Just to give you a hint, for an annual premium of around 6,000 rupees you will get a term insurance of about Rs. 25 Lakh for the same time period of 25 years! Hence splitting the endowment policy into term insurance + mutual fund combination would be an intelligent way to get more returns and insurance cover. When you play around with such a combination, probably you would end up with a better investment, having more returns and more insurance cover for the same investment amount.
Now one may ask, with endowment policies he will get a return for sure but if he invests in mutual funds, isn’t there a risk of losing money? Well yes, since the mutual funds invest in shares there is a risk of losing money. But mutual fund companies maintain a portfolio of shares to reduce this risk, due to which the downfall may be less. Also, for the less risky, there are balanced funds which invest only half the amount in shares. By the way, the bonus amount of an endowment policy is based on the insurance company’s profit. What if the company made a loss?
Thus there are better ways to invest than taking an endowment policy. Though I haven’t told you how to plan your investment or what to take, I hope that this post would have helped you to think a bit before going for an endowment policy.
Back Slash: An insurance agent gets commission for every premium you pay. For an endowment policy, you will pay premium for longer time periods; 25 years may be, possibly the reason why he may persuade you to go for an endowment policy and may not tell you about the more essential, term-insurance policies.
“It’s been three years and having diligently paid all the premiums, now I am a loyal customer of the insurance company. But some of my colleagues who had invested in stock markets that time, directly or through Mutual Funds, have already tripled or quadrupled their savings. Some had made even more. That’s when I started thinking about my endowment policy and the kind of returns it gave me with respect to the investment I made in the form of premiums. Is my endowment policy actually giving me good returns?”
I’m sure most of us who own an endowment policy would have thought like this at least once. This post succinctly examines the same. In the due course, we will find out how endowment policies don’t give much returns or insurance cover vis-à-vis some of the other investment opportunities.
Let’s have a closer look at Endowment Policies. Endowment Policies by definition agree to pay a lump sum on maturity while giving a small insurance cover during the policy term. Thus it’s a combination of both insurance and investment. The policy holder pays premium (this is the investment) reasonably higher than a term-insurance policy and gets yearly bonuses from the insurance company that get accrued and added to the lump sum. On the event of death or on maturity he gets the sum assured plus the accrued bonus (both constitutes the return on investment), which according the insurance company or the agent, is a formidable amount.
Thus, on policy maturity, the policy holder gets money in two ways.
Every year,
a) Reversionary Bonus: Distributed from company profits, based on plan, term and sum assured.
b) Terminal Bonus: Distributed from company profits for customer loyalty, based on plan, term and sum assured.
On maturity
a) Sum assured
So that the Total Amount on maturity = Sum Assured + Accrued Annual Bonuses.
Now let’s study an endowment policy in detail to calculate the returns from it. The policy under study has the following parameters.
Annual Premium = Rs. 21,000
Policy Term = 25 years
Premium Paying Term = 25 years
Sum Assured = 5 Lakh
Bonus declared by the insurance company for this particular policy during the years 2003-04, 2004-05 and 2005-06 were Rs. 53, Rs. 47 and Rs. 44 respectively, for every thousand rupees sum assured, i.e., an average of Rs. 48. Though I understand that the bonus amount would vary from year to year and may increase in the coming years, I take this average value for the calculations. Also, please to note the decreasing trend in bonus amount.
Thus for a sum assured of Rs. 5 Lakh, the bonus would come out to be Rs. 24,000 per year which is Rs. 6 Lakh for 25 years.
The terminal bonus is usually not made public by the insurance company. Hence we have no other way but to assume it to be on the range of Rs. 4 Lakh.
That makes the total amount the above policy holder would get after 25 years to be Rs. 15 Lakh. And the total premium he would have paid during the policy term would be Rs. 5 Lakh [21,000 X 25]. Thus the policy gives him an annualized return of 12%. [((15 / 5) X 100) / 25]
In this way you can calculate the returns you get from your endowment policy.
Now we got an idea about the returns from an endowment policy. Going ahead, let’s think about the next question. Is there any other way for us to get more returns and more insurance cover from the same investment amount? Is there a way to maximize our investments without compromising on the insurance cover?
So, let’s look at another investment option; say Mutual Funds. Over the years, mutual funds have been giving very good returns, in the range of 40% per year. But if we assume an average return of even 15%, an investment of Rs. 21,000 per year for 25 years would give the above person a return of Rs. 51 Lakh, had he invested the same amount in Mutual Funds every year! Quite amazed?
Unlike endowment policies, mutual funds don’t give any insurance cover. So how do we take care of the insurance part? Well, one way to do that would be to cut down the investment amount a bit and take a term insurance using that. Just to give you a hint, for an annual premium of around 6,000 rupees you will get a term insurance of about Rs. 25 Lakh for the same time period of 25 years! Hence splitting the endowment policy into term insurance + mutual fund combination would be an intelligent way to get more returns and insurance cover. When you play around with such a combination, probably you would end up with a better investment, having more returns and more insurance cover for the same investment amount.
Now one may ask, with endowment policies he will get a return for sure but if he invests in mutual funds, isn’t there a risk of losing money? Well yes, since the mutual funds invest in shares there is a risk of losing money. But mutual fund companies maintain a portfolio of shares to reduce this risk, due to which the downfall may be less. Also, for the less risky, there are balanced funds which invest only half the amount in shares. By the way, the bonus amount of an endowment policy is based on the insurance company’s profit. What if the company made a loss?
Thus there are better ways to invest than taking an endowment policy. Though I haven’t told you how to plan your investment or what to take, I hope that this post would have helped you to think a bit before going for an endowment policy.
Back Slash: An insurance agent gets commission for every premium you pay. For an endowment policy, you will pay premium for longer time periods; 25 years may be, possibly the reason why he may persuade you to go for an endowment policy and may not tell you about the more essential, term-insurance policies.
Wednesday, 5 September 2007
Bullion; much unnoticed
I was never in favor of yellow/white metals. Long past, I lost a chain and a ring to a crook during my summer internship days and that was the end of my story towards owning gold. Nonetheless, it surfaced two months back, owing to the occasion of my marriage and voila, I own a few sovereigns now!
Now coming to the point, I bought the gold at a price of Rs. 801 per gram on the 1st of July 2007 and today on the 6th of September 2007; the price of gold have gone up to Rs. 905 per gram. That translates to an out of the blue return of about 13 percent (approximate yearly return of 78 percent) in just two months! It may not be as lucrative a return as you get while investing in stock markets, but it’s not that small either.
I know that I shouldn’t go by the numbers as gold prices won’t increase like this round the year. There are times when the price falls as well. But the point is bullion also makes a great investment, provided you track the market well and put your money at the right time. While I don’t think I have done the same, like tracking and timing the market, this was an eye-opener and now I am going to track the bullion market too.
Now coming to the point, I bought the gold at a price of Rs. 801 per gram on the 1st of July 2007 and today on the 6th of September 2007; the price of gold have gone up to Rs. 905 per gram. That translates to an out of the blue return of about 13 percent (approximate yearly return of 78 percent) in just two months! It may not be as lucrative a return as you get while investing in stock markets, but it’s not that small either.
I know that I shouldn’t go by the numbers as gold prices won’t increase like this round the year. There are times when the price falls as well. But the point is bullion also makes a great investment, provided you track the market well and put your money at the right time. While I don’t think I have done the same, like tracking and timing the market, this was an eye-opener and now I am going to track the bullion market too.
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