Posted tagged ‘reliance’

Politics and Money

July 10, 2008

I normally do not write about politics but this are special times! There is a chance that the government will fall (this is a defeat for Anil Ambani) or the government will survive (there is enough that AS and AA can do to irritate Mukesh).

However, there is a good chance that if the UPA government survives this scare, it will call for elections as soon as they announce some populist schemes. However in the meanwhile both the brothers will take a few millions from their market capitalisation, and this will hurt the sensex.

Congress and SP need to collect money for the elections (and for 5 years of unemployment perhaps) so you will find some shocking policies, and this will hurt. Badly.

Anil’s fight will mean Mayawati will not clear any proposal of his in UP. Reliance Power has quoted prices which are difficult to achieve in the best of situation. In a revised situation like this, I guess you will be able to get his share at the same price at which he took it.

If there is a “windfall tax” on Reliance, will Mukesh hit with a “you got cheap spectrum tax” on Reliance Communication? A good idea.

Uncertainty, political (business) fights, snatching Mukesh’s plane (posturing?), Chidambaram at his giving best – he telephones people to reduce prices while giving salary hikes to govt employees,…will see the market swing sensationally. So, like a broker told me buy puts and calls – both will make money if you do not panic!!


Choosing the financial adviser..

June 30, 2008

This is arguably the most important financial decision in your life you will ever make! Not too long ago life was simple. You wanted a bank account, you went to a bank. If you wanted to buy shares, you went to a sub-broker (a broker was out of reach till about 15 years back). If you wanted a life insurance, a LIC agent sold you some policy which you hoped was good.

Today you find bankers who actively discourage you from coming to a bank. Insurance agents who sell you anything buy a life insurance product. Bankers who sell you mutual funds, life insurance, broking accounts, and real estate!

And the companies that sell you financial products are dime a dozen – Reliance (Mukesh) has a loyalty card, Reliance (anil) has a credit card. A call from Reliance Money says “Reliance Bank” and offers you a loan! Airtel offers you money transfer, cell phones can be used for paying utility bills. Why do I need a bank, a cheque book, a relationship manager? I do not know!

Now into this mess comes in a financial adviser. He should tell you the difference between information and noise. He should encourage you to write down your goals. He should be able to understand the difference between a 3 month track record of a scheme and a 3 year performance. He should be able to FORCE you to buy life insurance MUCH BEFORE you need it. Your pension plans and medical insurance plans should be in place when you CAN rather than when you must. He should be able to help you prioritise your goals. He should have the guts to tell you that your goals make sense only when you allocate resources for the same.

HOWEVER, he should not sell any products to you EVEN if it is a zero load mutual fund. Because then, he loses credibility. It is like a rep of a pharma company – I cannot trust him like i trust my family doctor. Sorry, I know this is an old world view.

Innumeracy means you are weak in Mathematics

January 11, 2008

Innumeracy – a lack of understanding of mathematics. It keeps happening in the media all the time. Many writers and broadcasters do not understand the difference between “what cannot happen” and “what has not happened”. Yesterday Mr. Anil Ambani was saying that he has 100 million customers – i.e. about 10% of India’s population who use his services – mutual fund, life insurance, electricity, telephone etc.

Is this correct?

Well what about the double counting that has happened? What about the reliance subscriber who has a reliance mutual fund, life insurance and has reliance electricity connection at home? Well reliance power will enlighten us, I presume!

Life insurance simplified

January 10, 2008

The idea of life-insurance will probably first come your way when you are planning your tax returns. That’s how it is for most Indians – insurance is a tax saving device. Well, there is a lot more to life insurance that it pays to know. Let’s begin by looking at every step of getting insurance.

(By the way did you know that filing your tax returns can be done by just a simple (FREE) download that is available at do try it)

Selecting the right life insurance plan:

Life Insurance in India is offered by a number of players, including:

  • Aviva Life Insurance
  • Bajaj Allianz
  • Birla Sun Life Insurance
  • Future Generali India Life Insurance Company Limited
  • HDFC Standard Life Insurance
  • ICICI Prudential
  • Kotak Life Insurance
  • Life Insurance Corporation of India
  • Max New York Life
  • MetLife
  • Reliance Life Insurance
  • Sahara India Life Insurance
  • SBI Life Insurance
  • Shriram Life Insurance.
  • Tata AIG Life

Each of them offers many different types of policies. Broadly, you can choose from Term Insurance or Endowment policies. In addition, there are Unit Linked Insurance Plans that offer the twin objectives of risk protection and capital appreciation.

Term Insurance

A term insurance policy is the most inexpensive type of insurance policy. As the name suggests, it covers the policyholder only during the term of the insurance. The benefit gets paid only if the holder dies during that period. So what happens if he lives beyond the term period? Well, the holder gets nothing.

Perhaps the simplest form of life insurance, the only purpose of this type of insurance is protection. It was developed to provide temporary life insurance on a limited budget. Since a large amount of cover can be purchased for a small initial premium, term insurance is good for short-term goals such as providing extra protection during child raising years.

Within term insurance, you can opt for either an annual renewable term or a level term life insurance.

Annual renewable term means you renew the term every year and you pay an increasing premium every time, since obviously the likelihood of dying will increase with age. Sooner or later, the premiums paid will become unviable and exceed the cost of a permanent policy. But of course the likelihood of payout will also increase commensurately.

Level term life insurance makes the same costs more even on your pocket by averaging them out over the entire term, which means the higher costs do not accumulate towards the end.

Endowment Insurance

An endowment policy helps you meet the twin goals of savings and protection. You get life cover for a certain period here too, but if you do not die during the term, you still get certain the sum assured plus any bonuses, upon maturity. Premium is generally higher than term insurance.

Unit Linked Insurance Policy

ULIPs are a fairly new entrant in the insurance space. They are plans that offer a mix of protection and investment. Meaning, part of your premium goes towards mortality charges and the rest gets invested in an investment plan of your choice. This investment plan is a mix of debt and equity, and you get to choose what percentage each will be.

The good news about ULIPs is the two-in-one package, plus flexibility in altering your premium and sum assured. But the bad news is that the charges for a ULIP plan often far exceed what you would have paid if you had invested separately in a term insurance plan and a mutual fund scheme.

In mutual fund investments, expenses charged for various activities like fund management, sales, marketing and administration are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India.

When it comes to ULIPs though, insurance companies do not have an upper limit and have complicated expense structures. The percentage of your premium allocated to investment in the first two years is typically anywhere between 20% to 80%, given the high premium allocation charge during these years. This means, all your money is not invested, and this is something you ought to know, even if your agent might not inform you.

Tax benefits under section 80 c are available to both ULIPs and mutual funds, but you should take a call only after you carefully study all charges associated with the ULIP and determine if it is more profitable than a pure insurance plan in combination with a mutual fund investment.

A combination of plans

Always remember though, you can mix and match plans till you have adequately covered risk and invested well. You don’t need to confine yourself to a single type of policy. You could take a term insurance policy from the cheapest source for a short period, and then add endowment policies every year as a way to keep up with the inflation.

Deciding on coverage

Don’t use ‘thumb rules’ while deciding insurance cover. If you are going to be paying hefty premiums, you might as well spend some time calculating how much insurance you need rather than multiplying your income by 7, and buying approximately that amount of insurance, like most people would suggest.

Here are a couple of ways you could do it.

The Human Life Value Approach

This approach calculates how much life insurance a family will need based on the financial loss the family will incur if a person passes away. Using the insured individual’s age, gender, planned retirement age, occupation, annual wage, employment benefits, as well as the personal and financial information of the spouse and/or dependent children, one can determine the financial contribution from the insured to the family. This approach is usually used for a working member of the family.

In the human life approach, one tries to replace all of the income that’s lost when an employed family member dies. The income will include after-tax pay, less expenses incurred while earning that income. Health insurance or other employee benefits also help in augmenting income, and need to be factored in as well.

Once the income is determined, you need to decide the sum assured based on assumptions of return on the corpus. Suppose you decide an income stream of Rs 80,000 has to be generated in a year for your family to get by. Assuming a 5% return per annum on your corpus, after taxes, you can aim for a sum assured of Rs 1,000,000. This corpus will allow withdrawals of Rs 80,000 every year for at least 20 years, a comfortable situation.

The Needs Approach

The needs approach contrasts with the human life approach, in that it calculates how much life insurance is required by an individual/family to cover their needs (i.e. expenses). You work backwards from the required expenses to arrive at the income stream needed to support this, rather than track previous income streams and seek to maintain it, like in the human life approach.

Needs include funeral expenses, legal fees, estate and gift taxes, business buyout costs, probate fees, medical deductibles, emergency funds, mortgage expenses, rent, debt and loans, college, child care, private schooling and maintenance costs.

It is crucial in the needs approach to overestimate your needs a little. After all, the cost of being over- insured is not so substantial compared to the risk in being under-insured and being left with an inadequate income stream.

Also read How much you should insure for?

Selecting your nominee

Once you have decided on your sum assured, you will need to select a nominee who will receive the sum assured in the event of death. This has to be a very careful exercise, leaving no room for misinterpretation, given the money involved.

Indicate your beneficiaries by name and designation and review your choices regularly, at important occasions in your life – marriage, childbirth, divorce, career change, economic change, etc. Your nominee list, for example, might need to expand to include the newest addition to your family.

You could consider naming beneficiaries by class or group – for example, ‘All children of insured’ could be your specification. But if this is not such a homogenous class – the case if you have had more than one marriage – well, remember to specify who exactly you are referring to. For a complete understanding of implications your nominee designation might have, discuss the laws applicable to you with your consultant and get specific recommendations on what to do