These days SIP Investment is turning into a generic term, few people even think Systematic Investment Plan a.k.a. SIP is Mutual Fund. To give you clarity, “SIP is not an investment” it is a “way of investing systematically/regularly” in an asset class. Even Mutual funds are not investments – Mutual Fund is a term used for investment vehicle, which invests in Equity, Debt or other asset classes.

Read: Magic of Systematic Investment Plan to know what is SIP, how it works, its benefits, SIP Calculator & also check SIP Presentations.

SIP Investment – 5 Myths

SIP is a great way to invest but there are few myths surrounded. Let me burst few of these through this post.

SIP Investment – Myth 1

SIP in direct equities/stocks is a biggest myth

When you do a direct investment in Equities the first decision that you take is why you are buying a particular stock? Are you aiming a Value buying or a momentum gain? And in both the cases a prudent investor is clear of an entry level and target appreciation when he would enter or exit a stock. So why would he try to do a Rupee Cost Averaging if he has done the fundamental analysis? One would do a SIP in direct equities if he is unsure of growth of a particular company and sanity says one should invest equities when you have done your homework. But if your reason is that you don’t have a lumpsum amount to invest, I have another important point to share.

Second reason is SIP works for portfolios/indexes/mutual funds and not stand alone investments. Imagine what will happen to your investments if that stock price never recovered but now you will say that you will do SIP only in bluechip stocks or index stocks. And I am not surprised by your argument but let me tell you that even couple of year’s good performance of a stock or sector can make it a bluechip & even part of index. Let me share:

• Do you know about Zenith Ltd – I am not talking about Zenith Computers. Zenith Ltd was a top steel company & part of Sensex from 1982 to 1992.
• Few more stocks (definitely bluechips of that time) that were part of Index Couple of years back – Premier Auto, Arvind Mills, Balrampur Industries, Century Textiles, Hindustan Motors, Indian Organics, Indian Rayon, Mukund, Zee Telfilms, SCI India, GE Shipping, MTNL, NIIT.(If you keep interest in direct equity investments then you can check what happened with these stocks)
• What happened with Jaiprakash Associates – it was part of Index till Jan 2012.

Now you can say I would have avoided all these stock & many more that have not performed good. Just would like to share Warren Buffett here “In the business world, the rear view mirror is always clearer than the windshield.”

SIP Investment – Myth 2

SIP is for small investors or salaried guys

Once I was talking to an HNI, and was explaining him about SIP, he was grinning all the time and at last he asked- Do Mutual Funds allow SIP of Rs 5 Lakh per month? Yes why not? It is made to believe that SIP is for Rs 1000 and that’s all. In fact the messages have gone wrong that if you are salaried and have a small disposable income; SIP is the only tool for wealth creation. SIP as we all know is a concept and not limited to the amount of investment. Irrespective of the amount one invests, he is investing in an asset where instead of timing the purchase he is averaging his per unit cost of his investment. The returns that he gets are in percentages and he tends to benefit in proportion to his investment.

SIP Investment – Myth 3

SIP is a fund or a scheme

As I mentioned in starting that SIP are not mutual funds. When I was working for HDFC Mutual Fund, investors called and asked “What’s the NAV of HDFC Top 200 SIP Fund”? Lot of people thinks that SIP is a security or a fund. Basically SIP is a concept and not a fund or a stock or an investment avenue. It is a vehicle to invest. So almost all open ended mutual funds (yes, including debt and money market funds) offer a SIP. Besides mutual funds one can do a SIP in almost every asset class. Do you think a person investing Rs 5000/- every 1^st of the month when he gets his salary in NPS is a SIP? Yes it is a SIP investment your ULIP investment & similarly.

SIP Investment– Myth 4

SIP should be started when markets are high and should be stopped when it is low or vice versa

If you know when the markets will be high or low why are you doing a SIP in first case? SIP is a method where you tend to average the cost of investment through the volatility that is built in the price of the asset in which you are investing. So when we say something is volatile it means that it will have ups and downs. So if you play only when it is “up” or “down” how do you expect that the concept will work for you? SIP works when you give it time, whether the time is smooth, breezy or cyclonic. I know it is tough to invest when markets are bad, but here comes the Financial Behavioral aspects of disciplined investing. (Read: Do you really understand SIP)

SIP Investment– Myth 5

I can withdraw money entire from ELSS after 3 years of SIP

It is true that you can withdraw the money in ELSS after 3 years, when you invest in a lump sum. But in case of a SIP each installment is a purchase transaction and each of these installment is locked for 3 years from the day it is invested. It works on the First-in First-out (FIFO) method. So in case you wish to withdraw entire amount you invested in 3 years through SIP, it will take 6 years. Be clear of it and then take a decision to invest.

Now hopefully you will not say SIP Investment is giving good returns or these days, SIP Investment is negative. Feel free to add your SIP related questions in comment section.

Let’s review LIC Jeevan Ankur plan and try to come at a decision that one should buy this plan to fulfill the needs of child or with this plan LIC is fulfilling its own needs of business.

As a reviewer’s job (right now you can also call me a critic), it is very interesting when you are doing a review on a product which is from the giant Life Insurance Corporation of India. From a player which has a history and the backing of profitable books, coupled with most respectable (trusted) brand you expect a multi-bagger. Here comes their new offering LIC Jeevan Ankur, which is an endowment plan targeted for Child Future Goals.

LIC Jeevan Ankur in nutshell

In LIC’s words “Jeevan Ankur is a conventional with profit plan, specially designed to meet the educational and other needs of your child”.

1. It’s an endowment plan. (sorry and sick to say that these are even worse than a ULIP)
2. The life assured is the parent and not the child. This is good as logic goes that the economic loss is encountered when the bread winner meets a causality and loss of child’s life is an emotional loss and not an economic loss. (few child polices defies even this simple logic, they give benefit to parents on death of child)
3. The basic plan comes with Accidental and Critical Illness rider. (obviously with additional premium)
4. The plan will not have a loan facility so HNIs looking for a refinance on the policy cannot avail the benefit of leveraging.

Features & Benefits of LIC Jeevan Ankur

You check the presentation; I am waiting for you on the other side of it to explain what’s wrong with LIC Jeevan Ankur & how it will generate only 1.53% return (you can also check calculations).

Curious Case of Endowment Plans

My question is – why would somebody invest in an ENDOWMENT PLAN? Why LIC or a matter of fact any other insurer is offering an endowment plan wrapped in some emotional name and trying to pull business? (Read What is Insurance?)

The basic problem with any endowment plan is that it offers very little returns and forget about the return part, it barely covers the inflation itself. If you consider the inflation, the inflation in education sector is around 10-11%. So if some college is charging Rs 4.5 lakh today for any course, will charge around Rs 30 lakh after 20 years. And to get this money a person will have to invest around Rs 4200/- on monthly basis if he is sure of getting a 12% per annum return.  Do you think it is possible to get even double digit returns from any endowment plan? I don’t think but I am sure that LIC Jeevan Ankur will provide less than 6% returns. (Read Back gear of your Investment Vehicle)

If I take the present returns that endowment plans offer, these are around 5-6% if you are lucky. I have seen policies giving return less than 5% also & you will see 1.53% for LIC Jeevan Ankur. And I am not cursing the product manufacturer for the returns part as they have very few things in hand to deliver returns. The product by nature is low on returns due to its rigid fund management & high on expense due to heavy commission to the distributor. But when they also know that the product will just give marginal returns, why do they promote and market this kind of product? What kind of financial planning are they trying to promote when your offering cannot even beat the inflation. Is this not a mis-selling case when you use heavy and emotional word like “Child Future” and offer a product which is for your “Own Future”? And when I say “own”, it includes the manufacturer and the agent.

Have you ever thought why agents are ready to pay your first cheque in a quarterly premium policy? The answer lays in the fact that endowment plans offer the best & consistent commission which is available in the entire financial product category be it Equity, Mutual Funds, Small Saving instruments or Banking Products. At present the commission to the agent is around 15% to 35% for the first year and 5% to 7.5% in the subsequent years. Now you may guess!

Illustration of LIC Ankur Jeevan

Death benefits in this Policy

In the event of unfortunate death of the life assured, payment will be (let’s analyze according to above illustration – assuming someone expires after paying 5 premiums)

a)      One sum Assured Immediately (Rs 1 Lakh)

b)      10 % of Sum Assured every year till maturity (Rs 10000 for last 5 years = Rs 50000)

c)       Maturity benefits (Sum Assured and Loyalty Additions*) at the end of the term. (Rs 1 Lakh more – there is no guarantee that someone will get loyalty benefit)

Mortality Charges – how much you need to pay to get this benefit in case if you choose to go for some term plan. If you buy LIC Amulya Jeevan, You need to pay Rs 1683 per year for Rs 5 Lakh Sum Assured. If we assume total death benefit of Rs 2.5 Lakh in above illustration, you need to pay just Rs 841 per year. (this data is used in next calculation)

LIC Jeevan Ankur returns are just 1.53%

Would you like to buy a product which gives returns less than saving bank account? If yes, LIC Jeevan Ankur is a no brainer.

Let’s check returns as per above mentioned illustration. Yearly premium shown in illustration 2 of LIC Jeevan Ankur is Rs 9055 & if we add service tax, premium will be around Rs 9192 per year. So total premium paid will be Rs 91908 & final maturity according to scenario 1 (Projected Investment Rate of Return assumption of 6% p.a. – being traditional plan it will be illogical to assume scenario 2 that is based on 10% returns) will be Rs 1 Lakh. So if you calculate IRR (Internal Rate of Return) this will come around 1.53%. For other calculations check below table – you can check mortality charges in death benefit point.

If you still don’t believe these figures read an article from Moneylife Magazine “Just 2% from Your Life Insurance?”

“The kind of return you would get if you buy a traditional plan, depends on which one you buy. If you are not careful about what exactly you are buying—and most of us are not—it could be a pathetic 2%-4%.”

Should you buy LIC Jeevan Ankur ?

Does this question still make any sense? I have already said a lot now and you know what will be my answer. So in the language of a decent film critic my rating to LIC Jeevan Ankur is – Compulsory Miss.

If you agree with my views must share this article with your friends – we can save few more financial lives this year. If you have any question regarding LIC Jeevan Ankur or any other LIC policy, feel free to add in comment section.

The war of cheap insurance premium continues in the Online Term Insurance category and latest to enter is HDFC Life Insurance with their plan HDFC Life Click 2 Protect. The plan, like it peers aim to provide pure life insurance cover at a bargain cost. The online term plans are targeted at young savvy investors who lead healthy lifestyle. This write-up aims to review HDFC Click 2 Protect plan and will help you to take a decision based on our criteria of choosing Best Term Plan.

Features of HDFC Life Click 2 Protect

The good thing about the website is that it is very easy to use & does not ask for your mobile number or email id to calculate your premium.

Other basic features of HDFC Click 2 Protect

1. Minimum premium will be Rs 2000/-.
2. 30 days grace period is provided for payment of premium from the due date.
3. Once policy starts no alteration in sum assured or premium is allowed.
4. The policy comes with a Free Look period of 30 days. It can be returned stating the reason for the receipt of the policy. The premiums will be refunded deducting the Stamp Duty paid, pro-rata cost for the period under insurance cover and medical expenses if any.

HDFC Life Click 2 Protect is avilable in 750 cities:  Normally insurers launch online term plans to cater the tier 1 cities, but HDFC Click 2 Protect is available across 750 cities there by covering the tier 2 and tier 3 cities as well. It is also available (optional) with the help of the distributors as they are marginally compensated by the company.

What HDFC Life Click 2 Protect does not provide

Like a “plain easy to understand and apply” category this plan has a few limitations:

• The maximum age under cover is 65 years only. The competition is offering plans with 70/75 years cover. With increasing life expectancy people want policy with more years of coverage. (But I am not sure why people need insurance after retirement)
• The plan has no Riders. Riders are generally sweeteners which add to the base plan and provide additional security at a nominal cost. But this plan apologies on this aspect. (No issues, it’s always good to have separate Comprehensive Accidental Insurance Policy)
• The premium mode offered in competitive products also has options of paying monthly, quarterly, semi-annually or one time premium payment. Under this plan there is just the Annual option. So if you are thinking of dividing premiums or paying them at one go, the feature is not available. (Thank god, you don’t need to make sure every month that premium has gone or not)
• HDFC Click 2 Protect is cheap but not the cheapest in category (But being cheapest is not the only criteria to buy a product). Read: Psychology of an Indian when it comest to Life Insurance

Premium of HDFC Life Click 2 Protect

Now, let’s check the premiums. For a Male life, non-tobacco leading a healthy life style the premium for a 25 years term will be as follows:

These premiums are exclusive of service tax and education cess.

In case the policy buying procedure is carried out with the help of a distributor (optional), an additional 3.5% premium will levied as loading.

Premium Comparison of online term plans

As mentioned above the plan is cheap but still Aviva iLife, DLF Premerica U-Protect rule the premium charts.

Let’s take an example – we compare the premium with that of peers. Below table illustrate the premium for a 27 year male, non-smoker, based in Mumbai taking a policy for 25 years for a Sum Assured of Rs 50 lakhs.

Data is taken from different online sources – you should do your own research before finalizing any term plan.

HDFC Life Click 2 Protect Vs I Care from ICICI Pru

I-Care from ICICI Pru looks to be the closest competitor of HDFC Life Click 2 Protect – let’s compare them on Quantity (Features) & Quality (Selection Criteria): (Read: How to choose Best Term Plan)

• *ICICI is providing Accidental Death Benifit upto Rs 50 Lakh with some additional premium in i-care II.
• #No medical examination is required till the age of 50.

Should you buy HDFC Life Click 2 Protect Plan?

This is the final question. The answer is not straight but clear. Insurance is a part of overall financial planning. Any insurance buying decision should not be impulsive. It should be backed up with requirements and suitable facts which can only be derived once you have a Financial Plan in place. One should take this plan if:

• Term plan is the best gift that you can give it your family in shape of security. If you don’t have a term plan but have financial dependents go for HDFC Life Click 2 Protect.
• This plan comes from a company which has a high claim-settlement ratio, conservative, strong brand and is backed by the India’s biggest Home Loan company. If you feel these are good points, definitely go for it.

Note: If you are fans of LIC, there is good news for you. LIC online Term Plan is expected to be launched before March.

You can also read review of Apollo Munich Optima Restore, it is newly launched health insurance policy with some unique features.

If you have questions related to HDFC Click 2 Protect or any other term plan, add it in comment section.

Apollo Munich Optima Restore is different from other health insurance plans due to its restore & multiplier benefits. Apollo Munich Health Insurance is a pioneer in Indian health insurance market & their optima restore plan will again be a new milestone. Prima Facie it seems to be a new invention in Indian health insurance industry with the type of benefits available in this product. Although, the company has been running Easy Health successfully, this product makes an attractive proposition for meeting the need of health insurance for Indian consumers.

Let’s look at the Apollo Munich Optima Restore in detail – article covers its features, what is restore benefit, multiplier benefits, its limitation, comparison with other health insurance plans, premium & most important should you buy Apollo Munich Optima Restore.

Apollo Munich Optima Restore – Unique Features

Although the product has features similar to a standard variant of Apollo Munich Easy Health Plan, the company has introduced some unique ones which makes it an attractive proposition for the buyer. You can take benifit of Health Insurance Portability.

Restore Benefit in Apollo Munich Optima Restore

Under restore benefit the company claims to reinstate the basic sum assured in case it is exhausted in a policy year. What this means is that if someone has a Optima Restore policy of Rs 5 lakh and exhaust the entire amount during hospitalization for some illness, individually or in a floater, the company will restore Rs 5 lakh which you can use for some other illnesses or for other members covered in the plan in family floater. The option works very well for family floater plans as there is high probability of exhausting the insurance coverage.

Multiplier Benefit in Apollo Optima Restore

In all health insurance policies, the insurance companies give No Claim Benefit (NCB) by increasing the Sum Insured or giving benefit in the premium. Even in Apollo Munich Optima Restore you have NCB benefits. However, the benefit differs from other policies. For first claim free year the NCB is 50% and if the second year also goes claim free, the company doubles the Basic Sum Assured (SA) i.e. 100% NCB. So in third year your SA is double of what you have applied initially. ARs 4 lakh cover will increase to Rs 8 lakh in third year if there is no claim in two years.

Both these features are unique in the respect that it is multiplying your coverage within same premium. The major benefit which will appeal to all consumers, especially in family floaters, is the restoring of SA in case Basic SA is exhausted.Also, like other Apollo products, this one has no loadings if any claim arises which has kept the premium constant for same age group. This is a good advantage for someone who is not maintaining best of health. (Read: LIC Jeevan Arogya)

Some Limitations to Consider in Optima Restore Health Plan

• The restore benefits starts only when the Basic SA along with bonus is utilized completely.
• The restore benefit cannot be claimed on the disease/illness for which the claim has already been made in the policy year.
• The restore benefit is applicable only once during a policy year.
• If the restore sum is not utilized in a policy year, it is not carried forward.
• If a claim is made after the bonus has applied then in the following policy year the multiplier bonus is decreased by 50% of basic SA.

Other Features of the Apollo Munich Optima Restore

There are other features some of which have been enhanced from Easy Health Standard variant and will be liked by most policy buyers:

1. Pre & Post hospitalization benefits are available for 60 & 180 days which is very exhaustive.
2. For two years premium payment at one instant, additional 7.5% discount is offered on the premium.
3. No loading is there on renewal premiums.
4. Renewals are for life time.
5. You can easily upgrade the health cover to next level at renewals.
6. You can cover your parents too through this policy which will be beneficial since there is hardly any health insurance scheme which gives such benefits at higher age.
7. You can cover your child since minimum age required is 91 days.

What’s not covered in Apollo Munich Restore Health? 

There are certain exclusions which one has to consider before applying for this product-

• Pregnancy is not covered at all. So if you plan to have a child in future you will not be able to claim any expenses in this product.
• Preexisting disease covered after three years waiting period.
• Dental treatment is not covered under this product.
• Specific diseases like cataract, hernia has 2 years waiting period.
• Rests of the exclusions are similar to Easy Health product from Apollo Munich.

The exclusion is very important criterion for judging a product based on your specific requirement. For e.g. someone who is newly married will find this product disadvantageous as it does not cover maternity expense. Hence look at the exclusion in detail which is available in policy wordings of the product.

Apollo Munich Optima Restore Comparison

How Apollo Munich Optima Restore Fairs

Features of Optima Restore

Overall, Apollo Munich Optima Restore has come out with a unique concept in their health insurance product. Barring some specific requirement, it gives major benefits to the policy holders especially in family floater plans where taking a high SA for entire members is not feasible due to premium constraints.

“The best feature is that the restore feature of SI and NCB multiplier work together. E.g. Individual or family floater of Rs3 lakh SI will increase to Rs6 lakh SI in a couple of years with no claim. If for some reason, Rs6 lakh SI is exhausted in the policy year, the product will give additional Rs3 lakh (base SI) coverage for new illnesses. It means you can be covered for Rs9 lakh during that policy year by paying premium of Rs3 lakh SI.” Moneylife

Premium of Optima Restore

The premiums in Apollo Munich Optima Restore are slightly higher compared to standard variant of their Easy Health Plan. But the unique feature justifies the increase. As compared to other companies, Apollo Munich has maintained a competitive edge on premium rates. Example: Family Size 2 Adults (age 35 years) + 1 Child (age 5 years) – Sum Assured 3 Lakh (floater)

• Apollo Munich Easy Health – Rs 6370
• Apollo Munich Optima Restore – Rs 8281

Premium in Optima Restore is higher by 30% in comparison to Easy Health.

Should You Buy Apollo Munich Optima Restore?

The restore & multiplier benefits are unique when you look at the similar products available in the industry. Effectively the product covers you more than double the sum assured if NCB also adds up. Even the No claim bonus varies from 5-50% across health products but here the increase really multiplies. Apart from this there are other features which have been enhanced too. Barring some exclusions which may not fulfill some of the specific requirements it looks like a good option for health insurer seekers.

Review of Apollo Munich Optima Restore is done by Jitendra PS Solanki, CERTIFIED FINANCIAL PLANNER^CM

If you have any questions related to Health Insurance – feel free to ask.

If your exiting mutual fund portfolio is bleeding or you are still struggling to make your first investment – list of Best Mutual Funds to Invest in 2012 may help you. I have covered 12 diversified equity funds & couple of debt funds in this list so that you can make a proper diversified portfolio.

I have also attached consolidated factsheet of Best Mutual Funds at the end of this article – this includes investment objective, past performance, ranking in their category, chart, expense ratio, sector/stocks these funds have invested in and some other relevant information.

Best Mutual Funds to invest in 2012 – Equity Funds

Any fund with holding of more than 65% in equity can be considered as an equity fund. But to keep things simple I have just taken 4 categories of diversified equity funds & ignored balanced funds, sector funds, international funds or Equity Linked Saving Schemes. Equity funds are divided according to Market Cap (size of the company).

If you are still not convinced with Mutual Funds – you should read Magic of Systematic Investment Plan (SIP).

Best Mutual Funds to invest in 2012 –Large Cap Funds

Mutual Funds with more than 80 per cent of assets in large-cap companies over the last three years are added in this category. Large cap funds can provide stability to any portfolio.

Best Mutual Funds to invest in 2012 –Large & Mid Cap Funds

Mutual Funds between 60 to 80 per cent of assets in large-cap companies over the last three years. They are definitely bit aggressive than large cap funds but still can get part in conservative investor’s portfolio.

Best Mutual Funds to invest in 2012 –Multi Cap Funds

Funds with between 40 to 60 per cent of assets in large-cap companies over the last three years are categorized under Multi-Cap. It’s been noticed that Multi-caps funds also keep moving from one category to other as couple of month’s back Reliance Equity Opportunities was in Multi-Cap category but now it is part of Mid & Small Cap funds.

Best Mutual Funds to invest in 2012 – Mid & Small Cap Funds

Funds with at least 60 per cent of assets in small and mid-cap companies over the last three years will come under this category. Mid & Small Cap Funds are very volatile in nature but has delivered better returns over long period of time.

Rational behind selection of these funds is five star rating from value research – ratings can give you first level check to fund selection.

Best Mutual Funds to invest in 2012 – Year on Year Returns

You can see year on year performance to check the consistency of the funds.

Performance of different equity fund categories

You can clearly see that multi-cap & midcaps have given better returns than large cap but were more volatile.

Best Mutual Funds to invest in 2012 – Debt Mutual Funds

The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. (Read – Debt Fund Guide)

Best Mutual Funds to invest in 2012 – Short Term Fund

Short-term plans invest in shorter dated paper, i.e. debt paper with lower maturity. There is also significant chunk invested in cash/call money. This tends to insulate the fund from volatility in debt markets which impacts longer dated paper. Short term funds invest in debt securities that mature in the next 15 – 18 months. They invest mostly into AAA or AA+ rated debt securities and interest rate hikes mildly impact the returns. Short term funds are best suited for investors with an investment horizon of 1 – 2 years.

Best Mutual Funds to invest in 2012 – Monthly Income Plan (MIP)

MIPs are hybrid investment funds. They invest a minor portion (5% to 35%) in equities and the rest into debt securities. They aim to provide regular and periodic income. The income periods can be monthly, quarterly, half-yearly and yearly. But a point to be noted is that the income is not guaranteed. The fund will only be able to distribute income if it has surplus distributable income. These plans are suitable for people looking for regular income rather than capital appreciation.

Hope this best mutual fund list will give you a point – to start building a good mutual fund portfolio. You can download consolidated factsheet of above mentioned funds by clicking here. If you have questions – feel free to add in comment section.

Every New Year brings a new start & to get start, in the New Year I have decided to point out 12 investment mantras which will help you in getting a new perspective to your investments.

1. Do not invest without a sensible investment strategy

It is difficult to predict the direction, the markets will take in the coming years. We will see the markets that reflect the fast changing, world shaking events of this era. The markets are going to be unpredictable and full of surprises. We live in uncertain volatile times and the markets reflect these things.

2. Do not fall for get-rich-quick schemes.

A disciplined, long term strategy makes great sense in this unpredictable environment. Many opportunities will emerge in the coming years and these opportunities must be approached prudently by investors with long term objectives. (Read Speakasia – too good to be true)

3. Remain Humble Investor

Do not constantly judge your own success by that of others. Do not resent success of others when your own investments falter. Do not refuse to accept help or advice from others. Do not think that you alone know what the best investment is.

Being humble allows you to guard against thinking too highly of yourself. Humility reminds you not to bite off more than you can chew. It robs greed of its power over you, decreasing the odds that you will want more than what the market can provide you.

4. Beware of deceitful financial advisors

The best way to honor your financial advisor is by choosing one whose fee is based on a fixed percentage of the assets under management. Evaluate your advisor based on comparisons with a reasonable benchmark.

5. Do not be impatient with your investments

Do not press the panic button in a fluctuating market condition. Do not sacrifice long term growth for the quick hit. Your investment decisions must be based on common sense and what cold hard numbers tell you and not on media hype or industry buzz. If you have invested your money thoughtfully, then there is no need to worry.

Do not worship profits and take them just because you have them. It is wiser to hold on to your investment to meet your long term goals.

6. Avoid Speed Investing

For long term investors – slow is always better than fast. Entering and exiting the market with a short term objective is not good for your financial health. Regular and systematic investment for a long time is the best mode of investing.

Image Credit – Onemint

7. Stop Performance Chasing

Daily price movements seduce people to go for the most attractive investment. Do not buy something just because it is hot.

While it may be tempting to buy the best mutual fund, it makes better sense to stick with an investment plan that is well thought out to suit your investment goals. Chasing performance can prove to be dangerous in the long run.

8. Say No To Emotional Investing

An investor’s worst enemy is not the stock market but his own emotions. Do not let emotions drive your investment decision making. You need to be aware of your emotional temperature while making an investment decision. Calm investors have a far better track record than highly emotional ones. It is best to stay focused on your goals and be aware of risks at play while investing.

9. Show “The Door” to Ignorance

You must know your investments better than you know yourself. Do not act first and ask questions later. Thorough investigation is required before taking all investment decisions. It does not pay to live in ignorance.The only way to eliminate ignorance is by ensuring that you spend more time and effort towards being an informed investor.

10. Do Not Be Over-Optimistic

Avoid being too optimistic, too enthusiastic or too confident while making your investment decisions. Your investment decisions have to be logical and rational. Do not hold on to your investments long after they have lost their value, convinced that some day they will deliver a big return. Optimism is good but over-optimism is definitely a self-kill.

11. Do not sit on your savings

Remember that your money lying in savings account will not create wealth. Remove it from your bank account and put it at some place where it can grow. Accumulated money will not grow as fast as money that is spread across asset classes. Diversify your investments across asset classes to spread your risk. The sooner you start investing your savings the better it is for your financial health.

12. Accept a Loss /mistake

What would you do if you have taken a wrong route? Obviously you will return back, though it may have cost you time and money. But the same thing does not apply with most of the investors when they have chosen a wrong investment. Correct yourself, if you find that there is a mistake, don’t hang up with that investment.

This is a guest post by Anil Kumar Kapila.  He is an avid follower of TFL; and wanted to share his financial tips for the benefit of other readers. The views expressed herein are the author’s personal views.

We will open the book. Its pages will be blank. We are going to put words on them ourselves. The book is called Opportunity and its first chapter is New Years Day. I would like to share 12 personal finance articles that can help you to make most out of the Financial Opportunities in 2012.

Last year my first article on TFL was “Personal Finance Tips from a recent Trip”. With your motivation & support – I added 95 articles in 2011.

My Choice

My choice of these four articles is just based on the message these articles hold.

Secret of Achieving High Returns

Child Future Plan – Complete Guide

Guide to Financial Freedom

A penny-wise consumer – A pound-foolish Investor

You can check archive for Old Articles.

In Media

In 2011 almost 20 articles & more than 50 query section got published in different newspapers/magazines – I have selected four articles which can help you to face this brutal financial world.

Delay at your own risk – Business Standard

Thumb rules of Smart Financial Planning – Financial Chronicle

Identify Investor in you – Money Mantra Magazine

Retirement at Risk – Financial Planning Journal

You can check more Media Articles Here

Reader’s Choice

Most commented clearly means readers choice. Most commented article of TFL is guest post from Anil Kumar Kapila – Best Mutual Fund for SIP (461).

Magic of Mutual Fund SIP (303)

LIC Samridhi Plus Review – Don’t Invest (247)

8 Most important Mutual Fund Questions (202)

How to choose best term plan (178)

Must share what you learned from TFL in 2011 and what do you expect in 2012??

NHAI & PFC have launched their tax free bonds, which would close for subscription on 16^th Jan 2012. But looking at investors craze, it is expected that they will close earlier. Some other PSUs are in the queue with their offerings including HUDCO &India Railway Finance Corporation.

I have already shared 2 articles on the tax free bonds:

NHAI & PFC Tax Free Bonds

Can NRIs invest in tax free bonds?

Mails poured in with the subject “Should I invest in Tax Free Bonds?” and I replied with my favorite answer “DEPENDS”. But looking at the number of question, I have decided to share my view points.

They say “If you torture numbers enough, they will confess to almost anything” – so I will not torture numbers but will just ask three simple questions.

1. Are tax free bonds risk free?

For most of the people definition of risk is capital loss. So, in that case I believe there is not much risk as these are secured bonds from Public Sector Units. Even credit agencies like ICRA & Care have given their highest rating to NHAI & PFC issues. But what about other debt related risks:

Interest Rate Risk:There is negative relation between price of bond & interest rates – if interest rate will increase price of bond will go down & vice versa. This risk can be reduced if you hold bonds till maturity.

Liquidity Risk: Only way of exit from these bonds before maturity is selling them through stock exchange. If you have some bonds that you would like to sell for immediate requirement but there is no buyer or fewer buyers than sellers – you may have to sell your bonds at discount.

Reinvestment Risk: This is the biggest risk in these bonds. Prima facie it looks that these bonds are giving tax free 8.2% (10 year bonds) interest rate which should be equivalent to 11.87% taxable returns for someone who is in highest tax bracket. But important point her is these bonds are paying interest annually & not on cumulative basis – so you have to invest your coupons in some other investment at that point of time. Now this second instrument can be tax free or taxable with higher or lower interest rate. So reinvestment risk can have a major impact on your final yields.

2. Are tax free bonds better than SBI 10 year FD?

Every investment product should be compared with some similar product which can also have equal chances to be part of your portfolio. Here we are trying to compare SBI 10 year term deposit with PFC 10 year tax free bonds.

But first question is can we compare them at all? Not 100% as both the products have different features & risk. But still they can be compared if we assume that we are talking about a long term investor who will hold this product till maturity and SBI FD is as safe as these bonds.

SBI is giving 9.25% quarterly compounding on 10 year term deposits. If we convert quarterly compounding to yearly compounding, it turns to 9.58%. Now, I have Rs 2 lakh that I can invest for 10 years & I am in highest tax bracket. I distribute my money equally in Bank FD & PFC Tax Free Bonds.

My bank FD will mature with amount of Rs 249639 – assuming, no TDS was deducted. (TDS is part of overall tax so it will not make much difference in rupee terms) After paying 30.09% tax on the interest part I will receive Rs 203401 So my tax free CAGR (compounded annualized growth rate) on bank FD will be 7.36%. {Check Table A}

Now on other hand my investment in PFC tax free bond gives annual interest of Rs 8200 (on Rs 1 Lakh). As I am long term investor, I don’t want to use this amount and would like to reinvest it. I may or may not get tax free options or even lower interest rates in future. So assuming that I will invest interest amount in some other instrument which can give me taxable return 8.2% CAGR till the maturity date of my 10 year PFC tax free bonds. So in case of PFC tax free bonds my final maturity will be Rs 208168 means a tax free CAGR of 7.61%.

So there is just a difference of .25% in highest bracket and is just opposite in case of Lower tax slabs. {Check Table B}

3. Are tax free bonds for wealth creation?

This is the last question but most important. Everyone should know purpose of his investment & if your purpose of investment is wealth creation, answer to above question is NO. Tax free bonds are for capital protection in best case scenario – in high inflation scenario even they will not be able to beat inflation. Tool for wealth creation is equity & according to current tax laws there is no long term capital gain tax on equity as well. For me it is really hard to think that equities will give less than 8.2% return in 10 years and 8.3% return in 15 years. Have we forgotten the basic rule – equity for long term & debt for short term.

So, does that mean one should not invest in these bonds? My answer is “it DEPENDS on your personal financial situation”. Do all permutation combination with your financial life and then take a cool headed final decision. Think Twice – Act Once.

I will love to hear your views in the comment section.

NHAI & PFC tax free bonds are in the primary market for subscription & NRIs are allowed to invest in these bonds. This will also apply to upcoming tax free bonds by HUDCO & Railway Finance Corporation.

NRI including Person of Indian Origin (PIO) can invest in tax free bonds but I am not sure how they can invest in such a limited time. It is expected that NHAI & PFC bonds can oversubscribe in first three days. They may close their issues after three days so NRIs have very limited time to take any action. To save time, NRIs can think of investing through platforms like ICICI Direct or if they have given power of attorney to family members.

It is clearly mentioned in NHAI prospectus that applications by NRI in physical form shall be submitted only at the Collection Centres located at Mumbai, Delhi, Ahmadabad, Hyderabad, Chennai, Bangalore, Chandigarh and Kochi.

You can read detailed post on – NHAI & PFC Tax Free Bonds

Tax Free Bonds – NRI FAQs

Can NRIs subscribe to bonds in India?

An NRI is eligible subscribe to corporate deposits, NCDs and PSU bonds issued in India. However the issuer should specifically enable the ‘NRI Window’ in an offer.

Tax free bonds Public issue is open for NRIs to subscribe on both repatriable and non-repatriable basis.

What will be the tax treatment of income from Tax Free Bonds for NRI?

The interest on these bonds is tax free. Thus no income tax would be required to be paid, nor will it be subject to TDS. However, capital gains on these bonds (if any) are taxable like normal corporate bonds. Thus capital gains will be subject to TDS as usual.

Which accounts/facilities are required to invest in these bonds?

• An NRI can apply to these bonds through their NRE/NRO accounts.
  • To apply on repatriable basis: Apply with a rupee denominated draft/cheque drawn on an NRE account.
  • To apply on non-repatriable basis: Apply with a rupee denominated draft/cheque drawn on an NRO account.

How can NRIs withdraw their investments from these bonds? Can NRIs repatriate the proceeds to the foreign country?

The bonds will be listed on exchanges and can be sold any time before maturity. Otherwise the investor can wait up to maturity when the lender would return the face value. Only bonds in demat form can be traded. The sale can be made through any broker.

The interest income on these bonds can be repatriated after obtaining a certificate from a chartered accountant that the said amount is eligible for repatriation.

In case the application is made on a repatriable basis, the funds can be taken to the foreign country of the NRI.

What Documents would be required to apply to these bonds?

If application in made for allotment in physical form, the following documents would be required:

• Indian Passport
• PAN Card issued by Indian Income Tax Department
• Overseas address proof: Such as utility bills, driving license, bank details.

In which account will NRIs receive the interest and redemptions?

In case of application in demat form, the payments will be made to the bank account connected through the demat account.

In case of application by demat form, a copy of a cancelled cheque on the account, in which the investor wishes to receive payment, is to be attached to the form.

The account in which payments are received can be different from which the application is made. However, in both these cases, note that if initial investment is made from an NRO account, the payments will have to be received in NRO account. If investment is made from NRE account, the payments can be received in both NRO or NRE account.

What Demat details are required?

The applicant needs to provide the beneficiary account number and depositary participants identification number in the application form. The name in application form should be identical to those appearing in the demat accounts.

If you have any questions on these bonds – feel free to ask.

With Season’s Greetings the season for Tax Free Bonds has also started with announcements from NHAI (National Highway Authority of India) & PFC (Power Finance Corporation of India) – both companies are opening there issues on 28^th December 2011. But this is just a starting as you will also see other PSUs lining up there tax free bonds including HUDCO & Indian Railway Finance Corporation.

If I am not wrong in 2003 RBI was offering tax free bonds in name of RBI Relief Bonds – last rate was 6.5% tax free. HNIs were crazy about these bonds & now queue will be long as current bonds have limits. These bonds are tax free, secured, redeemable & non convertible.

Interest Rates on NHAI & PFC tax free bonds

According to guidelines, coupon rates on tax-free bonds should not be more than G Sec yield less 50 bps for bonds issue through public issue. So NHAI & PFC both opened full throttle – 8.2% for 10 year bonds & 8.3% for 15 year bonds. Interest is payable annually. {PFC Bond information is based on Business Bhaskar}

Effective yields in NHAI & PFC bonds

Note for Future Issues: As rates on these bonds depend on G Sec yields – you may expect a lower or higher rate depending on G Sec future Yields. If these bonds were launched in November 2011 – highest possible yields were 8.43% & 8.53% as G sec yields were close to 9% at that time.

What Tax Free means?

• The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income.
• There will be no deduction of tax at source (TDS) from the interest, which accrues to the bondholders in these bonds irrespective of the amount of interest or the status of the investors.
• Wealth tax will not be applicable on these bonds.

Note: If you redeem these bonds through exchange before maturity – there can be capital gain tax or capital loss depending on your sale price.

Changes in tax benefits after DTC

Hopefully the above mentioned tax benefits will continue but would like to add a point which is mentioned in both prospectuses.

The Hon‘ble Finance Minister has presented the Direct Tax Code Bill, 2010 (DTC Bill‘) on August 30, 2010, which is proposed to be effective from April 1, 2012. The DTC Bill is likely to be presented before the Indian Parliament thereafter. Accordingly, it is currently unclear what effect the Direct Tax Code would have on the investors.

Tax Free bonds issue dates

• Opening – Both the bonds will open on 28^th Dec 2011
• Closing – NHAI will close on 11^th Jan 2012 & PFC on 16^th Jan 2012

In both the case issues can be closed earlier (minimum 3 days).

Allotment Basis of tax free bonds

In NHAI bonds it is first come first serve basis for HNI & institutions but for retail it is on pro-rata basis. In PFC bonds allotment is on basis of first come first serve basis but last days applications will be treated as equal – bonds will be based on pro-rata basis. These bonds can be applied in both demat & physical form.

Credit Rating

Both NHAI & PFC Bond issues have got highest credit rating from ICRA & Care – that is AAA.

Issue Size

• NHAI Bonds – Rs 5000 Crores with option to retain oversubscription upto Rs 10000 Crores
• PFC Bonds – Rs 4033 Crores

30% of the base issue size is kept for retail clients. (Where application size is less than Rs 5 Lakh)

Minimum Application Size

In case of retail investors it is Rs 50000 & thereafter in multiples of Rs 1000.

Tax Free Bonds – Frequently Asked Questions

These FAQs are taken from RR Finance – who is lead manager in PFC issue. I have made some changes based my glance through prospectus of NHAI & PFC.

Where the bonds would be traded?  Whether in BSE and NSE or WDM?

NHAI bonds are proposed to be listed on both BSE and NSE. The trading can happen only in Demat form. PFC bonds will be listed on BSE only.

Who Can Apply

• Individuals and HUFs
• NRIs (both on repatriable & non-repatriable basis)
• Corporate
• FIIs
• Financial Institutions, Mutual Funds, Pension funds,
• Partnership firms & Limited liability partnerships
• Insurance Companies

Is the coupon fixed through-out the tenure?

Yes, the coupon will be constant and will be paid annually during the full tenure of 10/15 years.

Is there a lock in period in the issue?

The issuer will redeem the bonds only at the maturity and there are no buy back options. The investor however need not hold the bonds for any minimum tenure to avail the tax benefit. The bonds can be purchased or sold on exchanges any time at the prevailing prices.

What will be the tenure of the Bonds?

Choice of 10 years and 15 years will be there

Is Demat account Mandatory to invest in tax free bonds?

The bonds can be allotted either in Demat or Physical form. However, they can be traded in exchange only in Demat mode.

Will TDS be deducted from the interest payment?

Bonds are Tax free and not subject to TDS

Will there be the interest on application money?

Yes.  The interest will be decided by the issuer at a later date. Usually it is equivalent to the coupon but it depends from issuer to issuer

Will two applications from a single investor be accepted?

Multiple applications are allowed

Whether PAN Card is mandatory? What if the applicant, who is an assessee holds, only a letter from the IT Department (procedure in olden days) indicating the PAN?

The investor must have a PAN to apply for these bonds.

In case of application for securities in demat form, no PAN copy has to be attached. A self attested copy of PAN card of the investor is required to be attached to form when bonds are applied in physical form.

Is the interest on these bonds paid out periodically or is there a compounding option in the bonds?

The interest on these bonds will be paid annually (for example 31^st March every year) by credit into the account of the investor. There is no cumulative option.

What is the tax treatment of different flows from the bonds?

Please note that the sum invested in these bonds is not eligible for any deduction under section 80C, 80CCF or 54EC. The interest on these bonds is tax free. Thus no income tax would be required to be paid, nor will it be subject to TDS. However, capital gains on these bonds are taxable like normal corporate bonds.

If the bonds are sold within one year of the date of purchase, the short term capital gains arising would be subject to tax at slab rates. For sale after a holding period of one year, the long term capital gains will be taxable at 10% without any indexation benefit.

Whether the capital gains, if any, could be re-invested in any other instrument for avoidance of such tax?

Any capital gains arising on sale of assets can be set off by investment in eligible assets as the prevailing rules of the government.

Whether investments can be made by individuals jointly on “Either or Survivor” or “Anyone or Survivor” basis?

The application on bonds can be made on single or joint basis. Where two or more persons are holders of any Bond (s), they shall be deemed to hold the same as joint holders with benefits of survivorship subject to applicable laws. Where Bonds are held in joint names and one of the joint holders dies, the survivor(s) will be recognized as the Bondholder(s) in accordance with the applicable laws.

Whether an applicant applying in the first day of opening of the issue is assured of allotment? This is a very important question, especially from the HNIs.

The issue will remain open for at least 3 days. If the issue is over subscribed within this period, the applicants will receive allotment on pro rata basis. Thus investors who have applied during this period will receive at least some allotment. If issue extends beyond 3 days, the applicant in first 3 days will receive full allotment.

Disclaimer: I can’t take any guarantee that above mentioned information is 100% correct. Read the prospectus before investing in these bonds.

If you have any questions regarding these bonds – feel free to ask.