MyInsuranceClub.com is the best place to compare insurance, Go there

As we leave behind another memorable year and step ahead to welcome 2012, we look back at all the news and events that made headlines in the world of personal finance. Here is a snapshot of the 10 most important news items of 2011 that is sure to have an impact on most investors in some way or the other.

1. Deregulation of Savings Account

The interest rate on savings account, have always been regulated by the Reserve Bank of India (RBI). Banks seldom had much control, and the regulated interest rate always hovered around 3.5% to 4%. In a landmark move by the RBI, the interest rate on savings account has now been deregulated. This means that banks would now have a free hand in deciding the interest rates on savings account deposits and what they wish to pay to their customers.

Impact: Investors could now expect to earn much more from their liquid money parked in their savings accounts.   

2. Portability of Health Insurance
After a lot of delay, Insurance Regulatory Development Authority of India (IRDA) finally gave a go ahead to portability of health insurance. This facility lets health insurance policy holders to switch over from one health insurance provider to another under the same terms that exist under his current medical insurance policy. Though still in its nascent stage, portability would bring in a good amount of flexibility to policy holders.
Impact: Those unhappy with their insurance company and are seeking to switch over, no longer need to sacrifice their existing benefits or waiting period of Pre-Existing Diseases (PED).

3. No need to file returns for income less than Rs. 5 lakhs

Central Board of Direct Taxes (CBDT) passed a move to exempt all salaried individuals with an income of less than Rs. 5 lakhs from filing income tax returns. Applicable from assessment year 2011-2012 onwards, this exemption covers only income from salary and excludes income from other sources like house property, capital gains and gains from profession and business. If however a claim for tax refund exists for a salaried individual, he must file his returns.

Impact: The move comes as a great relief for a large number of tax payers.

4. IRDA Regulations on Distance Marketing

The year 2011 saw a number of regulations and guidelines set forth by IRDA to protect the interest of insurance investors. One such guideline is to regulate the distance marketing of insurance products. Marketing of insurance products through phone calls, SMS and emails, should be done by employees of insurance companies or their brokers or persons of a corporate agent only.  The person engaged in making sales, shall not promote a product but should assist the customer to choose a product that would suit him best. The guidelines also mandate brokers to provide a chart displaying the up-to-date price comparison of the available products under each category.

Impact: This directive makes it more reliable for customers to use alternative modes to buy insurance.

5. Stricter Know Your Customer (KYC) Guidelines

KYC or Know your Customer is the first step in customer identification that is employed by all financial institutions. KYC was earlier mandatory only if the investment was above Rs. 50,000. Under the new KYC guidelines, all retail investors must comply with KYC norms, irrespective of the amount invested. So whether it is a bank account, mutual fund scheme or a pension plan investors would now have to comply with the norms and furnish relevant documents for identity, address, and Permanent Account Number (PAN).

Impact:  KYC is a measure to prevent issues relating to identity theft, fraud and money laundering. 
 

6. More Time to Revive Discontinued ULIPs

Your discontinued ULIP could now be revived, if done so within two years from the date of its discontinuance, and before the expiry of its lock in period. The new norms set by IRDA allow insurers to review policies which would otherwise have been cancelled. The norms also make it mandatory for insurers to provide minimum returns for the discontinued period, equivalent to the savings deposit of State Bank of India at around 4%.

Impact: Now get more time to revive your policies and earn better returns for the discontinued period.

7. No Pre-payment penalties on your home loan

The National Housing Bank (NHB), the regulator of Home Finance companies, issued a directive to all Housing Finance Companies (HFC) to remove prepayment penalty on home loans. Though the move is currently applicable to HFC borrowers, the RBI too is in the process of making a directive to banks to remove this penalty. 

Impact: Relief to lakhs of home loan borrowers from.

8. Term Insurance Gets Cheaper

With the gaining popularity of the World Wide Web to purchase anything, insurance too is seldom left behind. Many insurance companies now provide an option to buy term plans through their websites. With the absence of any agents or pushy sales executives term plans are cheaper and are easier to buy too. Such online term plans are definitely here to stay and could be purchased from the comforts of your home or office.

Impact: A hassle free and cost effective way to take a life cover.

9. Widening of Tax Slabs

The Union budget of 2011 increased the basic tax exemption limit to Rs. 1, 80,000 from the Financial Year 2011 – 2012 (or Assessment Year 2012 – 2013). For senior citizens too, the exemption limit has been increased to Rs. 2, 50,000 along with reducing their qualifying age from 65 years to 60 years. A new tax slab has been introduced for senior citizens over 80 years in age-called as Super Seniors who will not be required to pay taxes for income up to Rs  5, 00,000

Impact: This widening has brought about great relief for the common man.

10. Fresh IPO Guidelines for the Insurance Sector

Insurance companies seeking to raise capital from an Initial Public Offering (IPO) now have to adhere to a fresh set of norms. As per the IRDA prescribed guidelines, an insurer before raising an IPO must have completed 10 years of operation in the sector. The company must obtain a go ahead from both the capital market regulator SEBI and from IRDA. Such approval from IRDA will be based on the insurer’s financial position, reputation, track record and the company’s post issue capital structure. IRDA holds the rights to decide on factors relating to the minimum lock in period, the maximum subscription of the IPO and even the extent of dilution of stake by promoters.

Impact: The guidelines prescribe certain disclosures that are mandatory for the insurance companies while raising capital through an IPO, thereby reducing problems related to mis-selling of a product.

We all go through this inertia of saving at a salary which barely manages our living expenses. Nowadays, the situation is going through a tough grind for many who have no or marginal salary hikes in the last couple of years. Plus the inflation seems to be in no mood to sober up. Last year, I did not add a single savings or investment product to my portfolio and moreover I discontinued paying premiums for one of my insurance policies. Mounting expenses at the same income levels just leave us with little choices.

So what does one do when the regular monthly salary doesn’t leave any scope for savings? Well see if my approach can be of any use to you.

First – Make a list of all your savings, insurance, investments, gold and other assets. Below is a list of some broad categories to give you a start. 

Second and the most annoying task is to jot down all those monthly expenses on a sheet of paper (or in an excel sheet if you can) which are incurred after paying for the basic needs of grocery, clothing and accommodation. For example –  

# refers to expenses incurred on eating outside and not to be confused with grocery bills

* may not apply to all

** internet charges, membership fees and other expenses that are not included in the other categories

Once you have done Step 1 and Step 2, you will be able to see the aim of this entire exercise – that is - Increase the contribution to your first table of savings by decreasing some of the expenses in your second table. That shall help us to achieve our objective of increasing our savings within the same disposable salary amount.

I do not want to get into the nitty-gritty of how you will reduce your secondary expenses. But I will give you an example of how I did it. Here goes - 

Movie ticket expenses – I started watching one of the movie shows in morning/noon when the tickets are really cheap. It surely saves me some money and excitingly I am less frustrated after watching a bad movie as compared to my friends.

Restrict frequenting the coffee shops – From visiting a coffee shop once a week, I pushed it to once a fortnight. I not only have lesser caffeine going in my head but I also escape from those tempting brownies and cookies.

Minus 2 Cigarettes a day – I took up this challenge of skipping two cigarettes every day. I am not sure of the monetary savings I am gaining but it surely is doing some good to my will power. Of course this can only work for people who do smoke or consume alcohol frequently.

Just by following these 3 steps I manage to save Rs 2,000 per month which adds up to Rs 24,000 per annum. Without any delay, I opened a SIP mutual fund plan and started transferring this savings amount into it. Small steps everyday leads us to a bigger destination and hence it should start immediately.

It surely is difficult to change or cut down something which is a habit or a source of entertainment but that’s where the challenge lies. And the best part is that the results do not take too much time to show up. When the magical moment comes and you see a growth in your savings with the very same salary, then it indeed is a great feeling – Zen like!

Retirement years should ideally be carefree years where you indulge in your favourite activities without worrying about the costs. These activities could be holidaying at your dream destination, buying expensive art, antiques or collectibles, showering your kids and grandchildren with gifts etc. Sounds like a dream retirement, doesn’t it? But the power to turn this dream into a reality lies in your hands and the best time to start working towards it is now.

So what is the right approach and what should one do?

Income-earning years is the time when you can save money, but most people end up spending all or most of their money without giving this any thought. The best way to deal with this is to train your mind into thinking that your earnings are at least 20% less than your actual income. This can best be achieved if you instruct your bank to automatically deduct 20% of your salary or income and to put it in a recurring deposit. This will ensure that you do not overspend or end up with a zero balance bank account at the end of every month.

The next thing you need to do is to look for the best possible way to multiply or grow this money. There are varied investment avenues and the choice would differ from person-to-person.  

One factor that will govern your decision will be your age. Your risk-taking capacity will be high when you are young say in your late 20’s or early 30’s. This is the time when you can take your chances and invest in medium-risk moderate-returns products, and the daring few can even experiment with high-risk high-returns products. However, if you are an extremely safe investor then you should look for low or no-risk investment options. As you get older, you must look for extremely safe investment options that will give you guaranteed returns.  

All-in-all, the safest bet to ensuring good returns and getting a large corpus of funds by the time you retire, is to maintain a balanced portfolio throughout your lifetime and to review your portfolio every few years.

Some of the investment options for a balanced portfolio are:

→ Bank Fixed Deposits

→ Company Fixed Deposits

→ Mutual Funds and SIPs

→ Gold and Gold ETFs

→ Provident Fund

→ Bonds and Debentures

→ Money Market Funds

→ Equity

→ Pension Plans

→ Real Estate

→ Public Provident Fund PPF – Minimum amount you can invest is Rs 500 per year and maximum amount is Rs 1 lakh per year. The interest rates on PPF have also increased to 8.6% per year.

→ National Savings Certificate or NSC – Minimum amount you can invest is Rs 100 and there is no upper limit on investment.

At the same time do not forget to invest in a life and a health insurance policy. A life insurance policy will act as a safety net and ensure that your family’s financial needs are taken care of in your absence. A health insurance cover with a critical illness rider is also a must. The reason for this is that medical treatment costs are escalating and incase of any disease or illness, the expenses can make a dent in your savings. Moreover, treatment of any critical illness like Cancer, Stroke etc can nearly wipe off your savings. And please do make the mistake of underinsuring yourself.

Remember this – Over aggressive investments can take away your hard-earned money, whereas conservative investments may not fetch great returns. The art lies in having a balanced portfolio for that dream retirement!

Life sure gives us a second chance for many things. But what about for investment mistakes we commit? Do we get a second chance to rectify them? Most often not, and so even a small mistake could probably result in a heavy financial loss. So what should you do and not do when it comes to your money matters and investments? MyInsuranceClub.com has picked the 10 most common investment blunders people commit. By avoiding these mistakes, one could sure hope to boost the value on their portfolio.

1) Investing Without a Financial Plan
One of the biggest blunders most people commit is investing without a well defined financial plan. A financial plan is necessary to ensure savings are effectively allocated to various assets to generate future income and thus satisfy life’s goals. Haphazard investing without a clear plan could result in inadequate or negative returns from the portfolio. Prioritize your needs and be clear of your goals.commitments. You could take the help of a professionally qualified Certified Financial Planner to guide you through. Remember investing is a long term and ongoing process, thus one must have a proper plan and a discipline to execute it.

2) Lack of Clear Understanding of Risk
Very often, we end up buying investment products, simply because it offers higher returns, or because it has been recommended by a friend. While making investment decisions we must have a clear understanding of how much risk we are able to take, and, what exactly is the intrinsic risk of the product. The risk you may be able to take greatly depends on liquidity at hand, family commitments and age (whether nearing retirement or in the beginning of your career etc…) Remember every individual has varying risk profiles. What may be ideal for your friend may not exactly be suitable for you.

3) Starting Late
The early bird catches the worm. So goes the age old proverb. The same is true when it comes to investments too. In the early earning years, when family commitments are lesser, you could actually save much more money. However, the common thought of most people is that saving could be done later. And “later” actually becomes too late. Start your financial planning early in life, and let the power of compounding work to make your money grow.

4) Lack or Improper Diversification
Diversification of assets is vital to ensure there is minimal risk in one’s portfolio and to boost up returns. Most often people do not diversify and stick to single asset classes, or, they invest in too many of them. Your investment basket must comprise of the right asset classes based on your goals and risk profile, including a mix of both debt and equity. Also a regular monitoring of the portfolio is necessary and if required fine tune them a bit as per changes in market behavior or personal circumstances.

5) Having Inadequate Life Insurance
The importance of having adequate life insurance can be stressed upon again and again. Life insurance is a necessity to ensure loved ones are entitled to a financially secure life in case of any unforeseen happening to the bread winner of the family. However most often people carry a very careless attitude towards this. A general thumb rule is that one should be covered up to 10 times his annual expense. Thus choose the right insurance policy to protect your family adequately.

6) Last Minute Investments in Tax Saving Instruments
Come last week of March and the tax saving rush begins. Financial institutions too cash in on this rush by aggressively marketing their tax saving products. And the end result, of course you save up some tax, but you may also probably end up with a financial product which may not actually suit your need. What one must ideally do is to start tax planning from the beginning of the financial year to ensure you don’t invest for the sake of investing, as you don’t have time left at hand.

7) Emotional Attachment to Investment
We all have favourite investments. However getting emotionally attached to it could have negative impact on your portfolio. If an investment is “non- performing”, then it is wise to weed them out when the opportunity strikes. Review on an occasional basis any investment not contributing returns and have them removed before they could cause any further damage.

8) Investing with Borrowed Money
Making investments with money borrowed from banks, credit cards, or friends is a sure shot step to financial disaster. Initially though it may seem to be really attractive. But it is a risky option. In case of a market fall, or in case of non commitment of debt payments, there could be a complete wipe out of the money, leaving you with loans that need to be serviced at high interest rates.

9) Making Investments Based on Word of Mouth or Market Rumors
Investments should be done solely on individual research. Of course taking cues from the market is required. However over dependence on them, without any self- research on the investment option, is not really a good thing to do.

10) Timing the Market
Trying to time the market to earn a quick buck, may not always yield positive returns. Many a times with volatile market behaviors even experts fail to make accurate judgments. An ideal investment strategy should involve contributions that are regular, disciplined and systematic, thereby earning maximum returns in the long run.

You have gone through tons of advice and inputs on investments and now finally made up your mind to start investing. You’ve worked out the annual investment amount, the duration of savings and now the only question left is which financial product to avail? Should I invest in ULIPs, Mutual Funds/SIPs or both?

It is that time of the year when everyone is scrambling to finish the tax planning for 2010-2011. We have put together a quick guide which can help you save money by using all avenues completely. We have only listed those items which you can use right now till 31^st March 2011.

For salaried people, who have already submitted their investment declaration proof for the year

Even if you are salaried and your company has already taken your investment proofs and you did not maximise the tax benefits, you can still invest and can claim income tax re-imbursement. The income tax re-imbursement process is now very smooth and the money gets automatically credited to your account. So read on…

Main Investment options which are eligible for tax deductions

1. Premium paid for Life Insurance policies (which include ULIPs) under Section 80C – This is by far one of the most popular modes chosen by a lot of people as you not only save tax but also ensure insurance cover for your family and/or also build an investment corpus for future needs. The best part is that the maturity amount in case of insurance policies is also tax free. To be noted: The maturity proceeds of only those policies in which the premium amount is less than 1/5^th of the sum assured is eligible for tax exemption. Click here to compare life insurance policies now.

2. Equity Linked Savings Schemes (ELSS) under Section 80C – This is an increasingly popular option for those trying to save tax and build an investment corpus over a large period of time. These are mutual funds and hence help the investor grow their investment in line with the markets. This mode is not completely risk free but when compared to the returns it can give, it becomes a very attractive proposition.

3. Public Provident Fund (PPF) under Section 80C – This is another great place to invest in case you are trying to save tax and get moderate returns. The rate of return may increase or decrease as decided by the Government of India from time to time. This is one of the safest and more poplar options for both salaried and self-employed individuals. To be noted: You can only invest upto Rs. 70,000 in a year for tax benefits.

4. National Savings Certificate under Section 80C – This is another Government of India guaranteed tax free investment option. It is gradually becoming less popular though in the current times. It can be purchased from post offices across India and gives a rate of interest of 8% compounded half-yearly

5. Bank Fixed Deposit under Section 80C – Fixed deposits in banks for 5 years or more also qualifies for tax exemptions. But the interest rates may not be as attractive as the other options and keep changing from time to time. The ease of doing this makes it a last minute option for a lot of people though! The interest earned from these FDs would be part of the taxable income.

6. Infrastructure Bonds under Section 80CCF – Over and above the Rs. 1,00,000 that you can tax free in Section 80C, these bonds provide an additional opportunity to save tax. We can invest upto Rs. 20,000 as tax free component. The maturity benefits would be taxable though.

7. Health Insurance Premiums under Section 80D – Health insurance is a often neglected but very critical component in our financial well-being. Given the escalating costs of medical facilities, it makes a lot of sense to invest a small amount every year to purchase a health insurance policy. Premium amount of Rs. 15,000 is tax free for self, spouse and children. You can claim an additional Rs. 15,000 as tax free if health plan has been purchased for parents. You can compare health insurance plans now at our website.

8. Donations to NGOs/Charitable institutions under Section 80D – Well this does not strictly qualify as an investment but is still an option in case you want to loosen your purse for a noble cause.

There are more areas in which you can invest and save tax, like for example, the interest and principal component of your home loan EMI or even on your education loan. But these are not avenues which should be tried in the last moment in a hurry.

Only the most popular and practical options which can be done in the next 6 weeks till 31^st March 2011 have been mentioned here.

We hope you find this useful.

Simple steps that can be taken by anyone to ensure that their hard earned money is put to best us.
By doing some basics we can ensure that we also have a healthy retirement kitty... 

Article length – 1592 words Avg. time to read – 5.2 mins

1. Start investing in Mutual Funds

There is a reason why I mention this as the first point in the article. Mutual funds are by far the best starting tool for any investor. And this holds true for any type of investor – extremely aggressive ones and those who do not know too much about investments. The tough part of managing the portfolio is best left to the experience funds managers who have adequate resources and the knowledge to best maintain the returns on their funds portfolio and manage the associate risks. They are far better informed than an individual can expect to be in most cases.

How to do it?

Always go the SIP way, at least initially. Well as the name suggests (Systematic Investment Plan), you systematically invest a certain amount every month, irrespective of the market conditions. Choose one or two large cap fund with a proven track record and then just stick to it. You can base your choice of funds based on recommendations from websites like mutualfundsindia.com or moneycontrol.com/mutualfundindia/ or taking help from your financial planners. The amount invested every month can be as low as Rs. 500 or maybe even 5% of your monthly salary to start with. You can start with small amounts and then gradually increase it when you get comfortable. You should have a minimum 5 year horizon, the longer the better.

What not to do?

Do not evaluate the portfolio every month or with every dip or rise in the stock market. Once decided on the funds (take your time in doing this), leave it for at least year. You may want to review the performance of your funds once every year and compare it with peers to check the relative performance and then maybe make a shift, if needed.

2. Build your Equity Portfolio

Once you have a couple of years of mutual funds experience, it may be prudent to try your hands at investing in equities directly. It is more fun and the returns can be better! Nowadays investing in equity is very easy and you can directly do the same online by opening a trading account with any broker. Equity is the purest form of investing in markets and if done properly the returns can be much better than other modes of investment. There are risks involved, but so do all types of investment – and if you have a long horizon, you are much better off investing in equities directly.

How to do it?

Once you open a trading account, you would need to narrow down on the amount you want to invest in a month and then the stocks you would like to buy every month. Again no need to start with a very high amount – but yes, you would need Rs. 5,000 to 10,000 per month to get going meaningfully on this one. Mutual funds SIP score higher on this note as you can invest in Blue Chip funds with an amount as low as Rs. 500 every month. Once decided on the amount, now for the stock picks. You can use the services of a relationship manager whom the brokerage will assign to you for the same. Idea is to pick only the best companies in their line of business. You might just end up buying 1 share of SBI and 2 shares of L&T – but that’s ok, stick to it. Spend time doing research on the companies you would like to buy – take help from experts and the web wherever needed. The idea is to build a portfolio of quality stocks over a period of 10 to 15 years – yes, yes dividends too would come to you every year.

What not to do?

Do not get into this if your time horizon is less than 5 years. You will see some fluctuations in the prices – stay calm and invested.

Do not get into speculative stocks – companies which you have not even heard of but are being recommended by a lot of people to make quick and handsome returns. Buy stocks of companies which have been the best in business for a long time and performed well in the markets.

Do not invest an amount every month which you need to fret and worry about. This can cause you to track them almost every day and even panic when you see a dip. The amount invested every month should be something which you can easily afford and view as a very long term investment – try just forgetting about it! This holds true for point 1 also.

3. Take a high cover Term Insurance Plan

Term insurance policies cover pure risk - that means in the event of the policyholder’s death, the nominee gets the sum assured. We very often ignore this or are heavily under-insured. We tend to live in a false sense of security that nothing can happen to us. We all hope this is happens, but why leave anything to chance and risk the future of your loved ones who are dependent on your income. We think we have a good income and savings which will grow as your income rises – but what if the income stops all of a sudden? Can your family live the rest of their lives out of the bank balance that you currently have? In most cases, the answer is a sad NO. So don’t take a chance – take maximum term insurance cover. And the earlier you take a large term insurance cover, the cheaper it would be for you. Read an interesting blog posted by us earlier. Click here.

This is also important from a peace of mind perspective when it comes to the investments you make. If you know for sure that the money you are investing might hit an all time low for a few months at a stretch, you might start worrying if you are directing your hard earned money in the right direction. And then you would stop investing when the markets are low – probably the worst time to stop investing!

4. Build an emergency cash pool

This emergency cash pool does not have to be too large. If you have adequate health and life insurance cover, it could be equal to 6 months of your salary. Just in case, there is a temporary job loss or inability to work due to some accident, it should not put all your plans on hold. So keep this small kitty in some fixed deposit and maybe a small part even in your savings account. Use a sweeping facility in your savings account where surplus from a particular level goes into a fixed deposit automatically.

5. Ensure that your family has adequate Health Insurance Cover

This is more important from your parents’ point of view. Chances are that they have retired or are close to retirement. It is during these periods that the medical bills also go up and if they do not have a cover, it would be constantly playing on your mind. A lot of insurance companies have a maximum entry age for health insurance policies, so it would not be very easy to get a health insurance policy for them. Also most health insurance policies cover only 2 adults in a family floater policy, so if you are covering your spouse, chances are that your parents would need a separate policy. There are some insurance companies which have health insurance policies for senior citizens – ensure that you take them for your parents.

Also, don’t forget to take one for your immediate family – spouse and children. The costs of medical facilities have gone through the roof in the last few years and it can take a toll on anybody’s finances in case of an unplanned surgery or even in case of a freak accident. Even if your company provides a group health insurance policy, it is advisable to buy a plan yourself. It is a small amount you pay every year – so why take chances. Imagine, getting a great job offer and you meeting with an accident on your way back after putting in your papers in the last job. You might even lose the new job if you are hospitalized for a couple of weeks. Is it worth it for a few thousand rupees in a year!

Conclusion

There are other financially savvy things that can be done in addition to the ones mentioned above. Buying a house and hence taking a home loan could be one of them and this could affect some of the things mentioned above. Well, buying a house can be a very personal call and it is surely a desirable and advisable proposition. My only advice would be – do not stretch yourself thinking of cashing out and making money through increase in property prices. Yes, your neighbor may have made some handsome profits and it would sound tempting – but do it only if you have an adequate amount of liquidity and risk taking appetite. If the purpose of buying a house is for staying in it yourself, things can be much simpler and you probably should go ahead. Why I have not mentioned “Buying a house” as one of the 5 things you should do before turning 30 is because of the fact that you leverage yourself substantially when buying a house. This point can be debated endlessly though!

I hope you liked these simple thoughts. I am sure there would be more things that can be done – please feel free to share your thoughts. Happy investing and planning ahead!

From a cynical perspective, every profession tries its best to confuse outsiders. This simply allows the profession to appear more esoteric and allows the professionals to charge hefty fees for offering their services. Imagine walking into an investment advisory firm and hearing words like – mezzanine tranche of a collaterized debt obligation, convertible debentures, double no touch structures etc. You are bound to walk out of the office thinking that I have no clue about all this, better pay the management / advisory fees to get the promised superior returns. True, right? Nowadays, even mobile phone packages have become so complicated that to get the best deal people might be willing to pay advisory fees. But advice can be a double-edged sword. It is totally dependent on the capabilities of the advisor. This is your hard earned money we are talking about and therefore having basic investment rules and guidelines become critical not only for maximizing your returns but also taking advice with a pinch of salt.

Be patient

Imagine the first time you sat behind a steering wheel? Felt great, right? You just wanted to zoom across as if you were on the Autobahn. However reality hits you in a few minutes when you get stuck behind a stream of cars ahead on your lane. Invariably the cars in the adjacent lane seem to be going much faster. So what do you do? Activate your blinker and immediately move to that lane. Now ask yourself this question – how many times after having done this do you notice cars in the original lane moving faster? 8 out of 10 times right? Finally you realize that it just doesn’t pay to try and out-smart the other drivers and in doing so you are just increasing your risk of a n accident without significantly increasing your speed. That day you settle down into being a much better driver. Ditto with investments. Identify trends, define broad horizons, but avoid frequent trading. The only companies that benefit from trading too frequently are the broking and advisory companies. The more you trade, the more spread they make.

Be hedged

Hedging, in my dictionary, does not necessarily mean reducing risk. Hedging means having investments which are opposite in profile to your normal cash flows. If you are an entrepreneur or a significant part of your salary is via stock options or if you are in a high risk job, your investments should ideally be safe. But in case you have a secure job with predictable cash flows, a significant part of your investments, I feel, should be risky, e.g. invest in penny stocks, invest in a start-up you believe in, invest in a highly volatile commodity etc. Seems counter-intuitive to be calling a penny stock investment a hedge for a salaried employee? Rationale is very simple – most of the time you are financially unhappy is actually relative. You see your childhood neighbor (who flunked Standard 8) driving a Mercedes! You start feeling that education is pointless, it kills your risk appetite and therefore disallows you the chance to be at the right place at the right time. So use your savings now and give yourself the opportunity to hedge the risk of not taking risk.   Invest according to your investment lifecycle Common knowledge says that with age risk appetite reduces. As your age increases, your percentage allocation in risky assets should be lower. Perhaps I happen to be a contrarian. When you start your career, investing even Rs. 5000 should be in relatively safe assets since it’s a big sum for you and you cannot afford to lose it. However as you progress, in case you are creating net worth at a rate faster than what is being eroded by inflation, you can potentially reach a stage when you are prepared to go to the next level in Maslow’s hierarchy of needs. At that moment, you should increase your risk appetite. However, if your progress is behind the inflation curve, then the old age logic of reducing risk with age would definitely be more appropriate. You are the best judge to know where you stand and act accordingly.

Believe in yourself

Nobody, not even Warren Buffet, knows the definite outcome in future. But sometimes you have a very strong sense about a particular investment. People typically call it gut feel. It can either be based on research or it can just be due to you being at the right place at the right time and having better access to information. I am sure all of us have had that so-called intuition a few times in life. I think this is life’s way of giving opportunities. Most knowledgeable people around you might feel otherwise, and might dissuade you to invest in this “stupid notion”. Since your confidence in your own abilities to judge investments is low, you might finally give up. Don’t do that! Back yourself and your instinct. Don’t bet your house on it, but if you have such a strong conviction, which in hindsight is correct, would you be able to forgive yourself? Would you then have any logic of not accepting the fact that the Standard 8 drop-out actually deserves the Merc while you do not?

Be adequately insured

When I was a child, I had heard a very interesting comment. God was asked – “What is the most perplexing thing you find about life?” and He it seems had replied “Any instant there is at least one person dying in this world but if you ask anybody around you whether he / she is likely to be the next one, everyone, irrespective of their physical condition or age will reply – No, not me”. We human beings are eternal optimists; which is extremely good for the progress of mankind, but do we actually know what will happen to us tomorrow. So isn’t it better to err by being over-insured instead of being under-insured. Perhaps life is like the clichéd statement on cricket “a game of glorious uncertainties”. I feel it doesn’t pay to challenge fate – it perhaps is a bit like Murphy’s Law – “if anything can go wrong, it will”. Get insurance now!

Have you wondered why it is that Asians, even the ones who are affluent, have a lower quality of life than the average guy from the developed world? Now why would that be so? Critics might say that this is due to bad infrastructure; population being very high etc. etc.; implying that the services available need to be shared by many. But the fact is that all our lives we save and save for a better tomorrow – but better tomorrow for whom? 

Going by text book economics, savings is the best thing that would lead to long-term economic growth right? Refer back to the oft used equation; Savings (S) = Investment (I). Although I have tried to be an ardent economics student, apart from mugging this for exams, I have never really understood the practical implications of this. In a single country model, this might work. Statistics also bear fruit to this. Savings rate of China and India are one of the highest, 14% and 27% respectively and that is perhaps one of the reasons why these economies are the fastest growing in the world. But let’s delve a bit deeper since we are definitely not living in a single country world. 

It’s a well known fact that the average Asian saves a huge amount. Where do savings come from? It means we produce more than we consume. We produce goods and services. The fact that we don’t consume all of it means we export the excess. We get paid for the services in foreign currency. The central bank keeps some of this foreign currency and injects an equivalent amount of rupees in the system. Then they devise ways to mop up the excess liquidity since they start fearing inflation. So far so good right? Confused? So am I. Let’s use simple numbers then.

Say we produce 100kg of rice as a nation. We consume 50kg of it ourselves and export the balance. The international market pays us USD 50 for that exported rice. We sell this to a bank and get Rs. 2500 to be spent on our other requirements. But we are middle class Asians, so instead of saving a little we set aside a substantial amount of this in our savings account. Moreover, the central bank buys back a part of this USD 50 from the bank, say USD 20. Although there are several reasons why they do so, the primary reason is to build foreign exchange reserves. Since the central bank pays the bank in Rs. for the amount of USD bought, they inject an additional Rs. 1000 in the monetary system.

Now we have all heard of the multiplier effect in the financial sector right? This Rs. is further lent by the bank to borrowers, which in turn is further deposited in an iterative manner and the effective value of the money keeps growing to a much larger amount. Since the Central Bank is now worried about stoking inflation they ask banks to park part of this back with them via cash and government bonds so that this money does not multiply indefinitely.

Now comes the question of what does the Central Bank do with the USD 20 they had bought from the bank. They go and invest in US government bonds since that’s perceived to be the safest asset. When all Asian countries do the same (which is definitely a fact), the US and other developed country governments get to enjoy the cash from all the hard work we had originally put in to produce the goods. Even after consuming them, they effectively borrow back some of the money they had paid for the goods via a long term loan. As long as the perception is that they are of superior credit rating and therefore our USD 20 is safe, they continue to use our money, to provide among others, healthcare and developmental benefits to their citizens. So while it is true that we are partly saving for our future, we are also effectively saving for the developed world. 

Two questions come to my mind, a micro and a macro. The micro question is very critical - Why do we save so much? The most common answer I have received is that “Unlike the West, the Government here does not provide us healthcare and retirement benefits and we need to have enough for a rainy day”. Very logical answer but what constitutes a rainy day? If we are hard-working and most importantly healthy then we should always be able to produce (not procreate mind you but earn for oneself and family). So if health and life are the two biggest risks, doesn’t it make sense to have large life & health insurance policies (accompanied with things like critical illness covers) so that we cover all the potential “rainy day” situations? And once we have done that we can then enjoy the money that we have without saving any further. 

A related question might arise. Since we don’t save enough how do we ensure a better future for our children? The answer to that is also quite simple. Instead of saving if we consume, we would effectively be creating more demand for the products that we buy, thereby creating more jobs for the whole country. Economics teaches us money multiplier, but what about people’s skills multiplying. We are a nation who can leverage people much more than we can leverage capital and that is where our focus should be. As more people get skills, their capacity to innovate increases, therefore the productivity per individual also increases. That way if all of us consume more today, we would as an aggregate nation ensure a better future for our kids. But yes, only “I” saving more than my next door neighbor would give my kids a better head-start than that of my neighbors. So by excessive saving more aren’t we being selfish, thinking myopic? 

The macro question that needs to be answered is – What is a logical end to this conundrum? The developing countries are saving, subsequently investing in the developed countries at low fixed bond returns. Using that same money, the developed countries are re-deploying that back but not in low fixed returns, but attractive equity returns via foreign direct investments and institutional flows. Who is the winner? I don’t think I need to answer that. The more hard work we put in to increase the profitability of our companies, a significant part of it is enjoyed by the developed nations while we continue to earn 2% long term US treasury bond returns? The logical end-game is that over time the US currency should depreciate, thereby ending this balance. But here again our Central Banks would be the biggest losers since they are holding huge amount of US assets. Which means that we will continue to further invest in the US (to support the currency) and the cycle might continue indefinitely? 

While bashing the government and central bank may seem simple and fashionable, given the fact that we have had balance of payments crisis and the fact that we are a poor nation, the task of the government and central banks is not so easy. Even they think of “rainy days”. Increasing exports and thereby increasing our reserves was definitely a good strategy for the better part of the last two decades. But now that we have enough reserves, even the Central Bank should stop worrying about excessive saving of foreign currency. 

As for us citizens, we should also learn to handle our “rainy day” situations better. Not by saving most of what we earn, but by removing the risks with adequate insurance protection. Save, but a prudent amount, not an excessive amount. Capital starved countries saving more than capital rich countries is something that has to and should change quickly. Going back to our simple numerical example, we should ourselves consume a significant part of the excess 50 kg of rice that we have been exporting all this while. The exports should just be sufficient to ensure that it covers the cost of our imports (like oil etc.) and nothing more. So let’s go out and buy the cars and dream houses that we have always wanted to instead of saving for the developed nations. 

~ Resident Expert @ MyInsuranceClub.com