Today’s financial sector has become very complex with the introduction of many hybrid and complicated products. Since financial education is lacking in India, distributors/companies are exploiting the investors in many ways. Only companies /agents with customer centric policies are doing good to customers. But majority are simply product pushers, concentrating only on their commission. We have summarized the most common issues in 9 points, which will help an ordinary investor to avoid any exploitation.
1. Life Insurance
Last 1 year, we are hearing lot of news in the media regarding the most popular ULIP policies. SEBI created the news first by banning the ULIP plans approved by IRDA. This has created lots of discussion and government intervened by an emergency ordinance! What is the story all about?
ULIPs are hybrid products where insurance and savings are packed in one. This is suitable for those, who cannot manage their savings and insurance separately. The customer ends up in paying huge charges under various heads, which is very complex for an investor to understand. The present ULIPs are the modified version of the original ones after IRDA put some restrictions in charges during last year. There exists lot of loopholes in the structure, whereby customers pay huge charges under various fancy heads even now. After SEBI intervention, Insurance regulator has become very aggressive in bringing out changes in record speed. Even now, ULIPs will benefit customers only, if he is paying the premium for atleast 15 years.
There are so many modified versions of ULIPs like, highest NAV guarantee plan. Please note that the investment philosophy of this plan is debt oriented and you can expect only debt returns (read around 8%), if the investment period is 10 years! The new entrants in this sector are the Universal Life Policies, where, you will have lot of flexibility, but the investment is in low return debt investments. Now with IRDA putting lot of restrictions in ULIPs, action will be shifted to promote our old version Endowment and money back policies where the returns will be in the range of 4-5%, but the agent is making a whopping 40% commission in the first year! IRDA will take some more time to regulate these plans.
Insurance is a must for us, if somebody is financially dependent on us. It is a must, if we have outstanding liabilities like housing Loan. The most cost effective way for going for this is Term assurance policies, whereby, we can insure our life for a decent amount, at a nominal rate of premium. A person aged 40 can go for a term assurance of 50 Lakhs for 10 years at an annual premium of Rs.8500/-.With new mortality rates are going to be announced, this rates will come down further. The only Life Insurance which makes financial sense is Term Insurance.
2. Equity Investments
Only equities can beat inflation and give decent returns on the long run. You can make direct equity investments, if you have the necessary knowledge and time to monitor it. Also avoid futures, options, margin trading, leveraging etc. because, these are high risk areas for a beginner. Start with cash market, by buying few blue chip shares and if you feel confident, you can enter these sectors later. Don’t go by shares as per the recommendations of the brokers, because they are getting their brokerage, whether you are making money or not. Please operate with caution in known shares of blue chip companies.
3. Mutual Funds
This is the most ideal and transparent investment tool for a disciplined investor for creating long term wealth. You can start investing with as small as Rs.500/- per month and see how, your money is growing. This type of investing a fixed amount every month is called systematic investment plan. This will help you by Rupee cost Averaging (buying few units, when the market is up and buying more units, when the market is down). You can invest a lump sum in liquid fund and opt for systematic transfer plan, to get the same effect of rupee cost averaging.
The Advantage of Mutual fund is that, you are getting an exposure in different companies spread across various sectors with even a small investment. This will minimize the risk attached to the equity market. There are various schemes like Diversified Equity Fund, Balanced Fund, Index fund, Mid Cap Funds, Sect oral Funds, and Liquid Funds to suit different needs of customers.
Don’t invest in an NFO unless, you are sure about its objectives. Rs.10/- NFO is a marketing strategy by fund house, but there is no attraction in it. Always go for a time tested diversified fund for better returns. Don’t get tensed by dividend declaration by mutual funds, because it is nothing but, your money coming back to you as dividends!
Investing through SIP in Diversified Mutual Funds and gradually transferring the accumulated amount to debt funds 3 years before the financial need is the time tested way of creating and preserving wealth. Indian mutual Funds have given returns in the range of 15 to 20% over 15 year time horizon.
4. Health Insurance
Medical costs and longevity are increasing day by day. We are expected to have around 20-25 years of post retired life! Modern medicine is not within the reach of an average Indian. Even those who are having medi claim policies while in service will not be covered after their retirement in most cases. It has become a must to go for a comprehensive medi claim policy now, so that, we can renew it in chain till an advanced age. Family floater policies will be the most ideal one, to cover the entire family in a single policy. You can also opt for accidental cover, Critical illness cover etc. at extra costs.
Select a reputed health insurance company and go for cashless scheme and renew the policy in chain to be useful for any emergency. Please keep the list of empanelled hospitals handy for emergency.
5. Retirement Planning
Most of us start planning for retirement around 40, where there is only 10-15 years left for retirement. Actually, this is not correct. We have to start planning for our retirement in our thirties, so that we can benefit by the power of compounding. We should plan investment of atleast 10% of our annual income for our retirement and increase it by annual increments. At young ages, this investment should be in equity and gradually moving to debt instruments.
6. Real Estate
Investment in house property is a specialised task and it involves so many accompanied costs like registration charges, Title deed verification cost etc. There are so many risks attached to it also. All of us should go for 1 house for self use and better to limit with that. This will ensure optimum income tax benefits, Diversification etc. Liquidity is a major issue, when it comes to real estate investments.
Please go for an insurance cover for the loan amount if any. Term policy with annual premium will be better here, compared to the single premium policies offered by the loan provider.
7. Credit Cards
If use effectively, this is a very good tool, but if we don’t know that art, this can create problems for you by way of huge outstanding! Once we get into this debt trap, it is very difficult to come out of it, because, the interest rates are very high. Don’t try for cash withdrawal from cards, because interest at this rate is charged from the day of withdrawal. Use it for the convenience of usage, but settle the full amount on or before the due date. Don’t have more than 2 credit cards, because it is very difficult to monitor the due dates.
Don’t opt for loan for unproductive investments. In fact this lifestyle only crated problems in the western countries. Conversion of Credit card dues into EMIs is another way of loan. Keep away from loans, if you are not confident of prompt repayment.
9. Go for an independent and qualified Financial Advisor
Don’t make any investments through the neighborhood advisor. You may have the comfort of dealing with a known person. But be careful, this person represent a particular company and limited products and is working on targets for those products. He will sell those products to you, whether it is matching your needs or not. He cannot be unbiased, because of his commitments and incentives! The financial sector has become so complicated with complex products which will eat away even the entire amount you invest in the first year!
An independent and qualified advisor will recommend the best products available in the market according to your requirements and this will definitely benefit you. Since he is not representing any particular company, he can be loyal to the customer. What you are paying to the advisor as his fee is really worth.
-The author is the promoter cum Chief Financial planner at FINVIN FINANCIAL PLANNERS. He is a Certified Financial Planner and is a Fellow of Insurance Institute of India. You can reach him at firstname.lastname@example.org