The good side of the endowment plans which can be used smartly

I would like to call myself a rational person who likes to be without bias and greed. Well with a bit too much of rationalistic approach, I found myself actually biased towards 'being rational.' I can call myself rationally biased towards my investment choices, aggressive allocation of equity on portfolio and staying away from debt heavy instrumemts, especially the fixed deposits for short term amd endowment plans for long term to be specific. Well, that fits well with my current age, but that is not the only way to look at long term investing. Endowment plans fits perfectly for a set of investors based on their risk profiles, investment objective, personal choice and priorities. Endowment plans stand out in long term debt investments. 

Though I like aggressive equity allocation for long term, with all humility I will accept that endowment as on today stands equal with the other long term debt products in various ways. Endowment plans have always have been a popular insurance cum savings product in India, credit goes to the hefty commission the insurance agents receives from the insurance companies for decades. My personal opinion have been rationally biased against it because of its lack of transparency on asset allocation, high agents commission, low coverage and low returns. The fact which bothered me the most is the "miss-selling". You may think, if I have so many rational points against the endowment plans, why I am even writing this post and what is my agenda? You will come to know. 

source - Wikipedia

With my first job, I joined the bandwagon of mutual fund investing, as the mutual funds investments were just picking up at fast pace, SIP was gradually getting introduced as a disciplined way of investing, superior tax-free return over long term was very attractive. And I hated the Endowment plans. I do have a active policy, I bought this one before I signed my first joining letter. Every time I paid the premium, I felt irritated about what a waste of my hard earned money until... until the 'D' day 2018-19 union budget struck hard on my equity dreams. Levying 10% tax on my artistically built equity portfolio on long term capital gains hit hard on my mind. It wasn't that the few other factors were not coaxing me to have a rational look at endowment plans and completely reject it, but the budget day nailed it. Budget not only introduced tax on long term capital gains, it also introduced 10% tax on dividends of equity and mutual funds. The equity dreams came crashing momentarily for many of us.

I recalled my father's advice, my boss's suggestion, inflation numbers and newly introduced Long-term-capital-gain-tax. In a whole it did push me to give a thought about taking a rational look at the cost and return analysis. 

While my view of equity being the best investment for long-term capital growth remains the same, endowment plans have made a special space for itself. Here is the list of things you get as benefits of endowment plans.

1. Life cover, as per IRDA regulations, insurance companies have to give a minimum 10 times life cover of annual premium, so at given point during the policy term you have a life cover, which is upto 20 times incase of endowment plans. For a 10 thousand yearly premium, you will be covered for about Rs. 2 lakh. The maturity value will be the accumulation of premium and interest earned from various instruments as the insurance company deplys the same to generate return. 

2. Income Tax benefit under section 80c. This product gives you tax benefit under income tax, the yearly premium can be calulated to reduce the income tax burden. 

2. Loan against insurance at a minimum interest rate - This is an interesting benefit which mutual funds, ULIPs or term insurance plan can't provide you. This instrument can be used as a collateral for an emergency loan if required, the loan amount and eligibility will depend on how long are you invested in the policy. Few people in my circle were immensely benefitted during medical and business emergencies. 

3. At the current interest rates, the return of 4-4.5% tax free is equivalent to the post tax fixed deposit returns. Also,there are no long term fixed deposit schemes over 10 years tenure in India. Over the years, India is moving towards low tax regime, which means in coming years the interest rate could go well below 5%. Endowment plans could give equivalent returns.

4. Tax-free return of accumulated corpus. This is a bonus. Given the recently launched LTCG, very few instrument like PPF and Life insurance.

This option is ideal for individuals above 45 years of age, as financial planners suggest reducing the equity exposure gradually and look for fixed income options. This option is also applicable for people in the highest tax bracket, as the post tax return on Fixed deposits are equivalent to the maturity value of a long-term endowment plans.  

This is a viable option for somebody who dont like equity investments, above 45 and looking at saving a corpus for retirement. Individuals with 30% tax bracket bracket can also consider the same as a long term FD with a provision of getting loan and tax exemption at maturity with life cover. However, One should keep a low exposure given its low return. For savvy investors, Term insurance and ULIP are good product which has a low cost structure and puts your money to good use maximising your profits.

To maximise the benefits, you should ask your insurance agent to pass on some cash benefit to you by paying first two premiums. This is a negotiable deal you can broke with the agent.

Kindly note that endowment plan should be bought only for long term  like 20 years and above. Endowment plans attract heavy penalty on missing due dates for premium, surrender pre-mature and may close the policy if policy-holders consecutively  misses premium payments. Also, it is an illiquid inveatment as one cannot withdraw the investments before its maturity or policy-holder's death. If one doesnt continue paying premium upto atleast 3 years, the investors will not get any return on the investments. Also, this may give very low or no inflation adjusted return given India's average inflation rate is about 5%.

THIS POST IS FOR EDUCATIONAL PURPOSE, AND NO WAY I AM PROMOTING ENDOWMENT PLANS AS TOP CHOICES FOR INVESTMENT FOR EVERYBODY, THIS IS APPLICABLE TO SELECT SET OF INDIVIDUALS, THIS ARTICLE IS JUST A RATIONAL LOOK AT ENDOWMWENT PLANS. TAKE A CALL ANALYSING YOUR FINANCIAL POSITION

How to invest in IPOs online

While fixed deposits, mutual funds, ULIPs remain top investment options for Indian Investors, if you have an understanding in direct stock investing, Equity IPO is an option too.

Investing in IPOs are getting increasingly popular amongst the retail investors in India. IPO market in India has given big returns in the year 2016-17, IPOs like Avenue Supermart, CDSL, BSE, Salasar etc has helped investors get a listing gains above 50%. The websites like Chittorgarh and IPO central tracks IPO market very closely, listing of IPOs - current IPO, Upcoming IPO, IPO allotment dates,  etc. They also provide reviews on IPO shares. For a new investor, it will be a good idea to check these websites to get an idea of the upcoming IPOs and look for IPO reviews as one of the parameters to decide to buy new IPO. One must check few IPO reviews, read the company details carefully before investing.

What is an Equity IPO?

Many retail investors in India who have exposure in equity investments and mutual funds are unaware about IPO investments. 

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.- Wikipedia

IPO (Initial Public Offering) helps the equity shares to be listed on stock exchanges BSE and NSE. Once listed, investors can buy from any trading platform freely.

How IPO works for retail investors?

For the new IPO, Companies in consultation with book running lead managers come up with price band for the issue. The issue is then divided into lots. Investors can get the information on current IPOs and Upcoming IPOs in newspapers and business channels. The crucial details like price band, IPO opening date, closing date and lot size are key factors to look at. For example IPO issue of company A is opening on 15th April, 2018 with a price band of Rs. 95 - 100 and lot size of 150. An investor will be able to bid for a minimim quantity of 150 shares and multiples. Generally in normal IPO the minimum investment quota is Rs. 15,000 and the upper limit for application for individial investor in any IPO is Rs. 2 lakh.

How to invest in IPO online?

To invest through online method, one has to have an internet banking enabled Banking account. Trading account with a registered equity broker/platform and demat account with CDSL/NSDL which comes by  default with a trading account. 

Online IPO follows a process called ASBA, ASBA (Applications Supported by Blocked Amount) is a process developed by the India's Stock Market Regulator SEBI for applying to IPO. In ASBA, an IPO applicant's account doesn't get debited until shares are allotted to them. (Source - Wikipedia)

For test case, lets take Axis Bank online banking. 

Step by step guide to buy IPO online -

1. Login to your internet banking

2. click on Investments, go to the Online IPO section

3. One clicking the Online IPO Tab, (it will take you to a registration page, which will ask for Client Id (trading account) and depository ID. On submitting them, Bank will generate an OTP to complete online IPO registration) it will confirm the demat details and you can click on equity and debt IPO. 

4. This post is dedicated to Equity IPO. Hence, click the Equity IPO tab. It opens up the next page with list of equity IPO. Once the IPO name is chosen it moves on to the next page where you have to choose the bank account and investor type, for Indian individuals, you may chose the highlighted option and go to the next page which lists the details of the IPO including IPO lot size, price range etc.  

5. Submit the bid - chose the lot size and multiples you would like to apply for and confirm your bid. The Bank will generate OTP to conclude the transaction. 

Following the procedure, bank will send a confirmation message. After closing date, you will have to wait for the allotment date. Depending on the application no.s, electronically allotment takes place, the bank will deduct the money only if you are allotted the shares. 

The following day, the company gets listed on the stock exchange, and many retail investors likes taking advantage of high listing price and sale it for listing gains. 

#IPO #current IPO #Upcoming IPO #personal finance

Grandfather clause in equity investments to protect you from some tax liabilities on LTCG

The famous budget speech by Arun Jaitley left the investors dissapointed with the re-introduction of Long-term capital gains tax. LTCG which was abolished sometime in 2004, by introducing STT was re-introduced for the equity investors with a 10% tax on capital gains over and above rupees 1 lakh for the financial year for the investments made above one year.

The shocker was too much for the investors, leading to a short-term fall in the market. The finance minister tried to tame the anger by keeping a grand-father clause applicable till 31st Jan 2018. Now the point is what is this grand-fathering clause and how is it going to make any difference to the investors?

Step by step guide to buy ULIPs

As the LTCG was introduced, it simply meant April 1, 2018 onwards one has to pay tax on income on equity sales over 1 lakh. However, this is not exactly the case. Grand-father clause give you some respite. According to.this clause, investor need not pay tax on the notional profit accumulated till 31st of January. The returns generated over and above on the closing price of the equity as on 31st January will attract LTCG of the return is over 1 lakh. However, the return will be grand-fathered upto 31st July, 2018, post which investors will have to pay 10% tax on LTCG.

Let me give you an example with a real equity test case example. Lets take ESCORTS as a test case. Assume I purchased ESCORTS share on August 9, 2016 at a price of Rs. 260 per share. It reached a peak of Rs. 811 per share on Jan 31, 2018. So, according to grand-father clause, If I sale the shares at or below 811, I dont have to pay any tax on the same (before 31st July, 2018). Assume I sale it on 3rd April, 2018 at the price of 884 per share, my tax liability will be based on 884 - 811, 73 Rs. i.e. my tax liability would be 10% of Rs. 73 (Upto 1 Lakh tax free inclome still applies here)
Step by step guide to buy ULIPs

The Grandfather clause is applicable to domestic investors for equity and mutual funds investments on LTCG.

grand-father-clause-in-equity-LTCG, Long term capital gain

Dont be a financial fool - a suggestion on April Fool's day!

Step by step guide to buy ULIPs
Few days back I came across a news report on Rahul Dravid being conned by an entity on investments. A firm promised him more than 40% return on investments and duped him of crores. While I don't feel surprised when I hear my housemaid or my neighbor aunty are miss-sold a chitfund or endowment plan, Rahul Dravid, the ace cricketer known for his perfect calculation on field being conned, came as a big shocker to me. Shocked to know that a person who is a millionaire or even a billionaire on his own right who can afford a personal Charterd accountant or even a team to take care of his finances can fall in this trap. The point to note here is anybody can fall into this trap. These frauds in the name of ponzi, misselling wrong products and false promises has been existing since long. It is likely to continue in some form or the other. The point we should focus here is to catch it before it traps us. These wrong investments have a patern to it. If we learn the pattern and ask few questions, we can save ourselves from being cheated and a lot of mental agony along with it. Let me give you some points to ponder over.

It should strike if someone guarantees you high referral bonus, guarantee high returns, or kickbacks on your investments etc. The best way to identify and handle these, is stick to wellknown finanicial products, well known financial advisors and brokers and well known financial institution. Though there are numerous online frauds available, these fraudster may knock your door and call on your cell-phone, to give you a more genuine feel to it. Financial fraud is not limited to running away with money, it inculdes misselling as well. Be clear about investment objective and expected return. Do little bit of calculation and follow few steps to safeguard yourself.

These are the traps, however, there is no harm in double checking and being assured of you are not duped.   Whoever is the seller few points you definitely need to check before you say "yes"

So, take few steps and varify -

1. Google it - if it is a genuine company, or even false, it will have  a website or some online listing. If it doesn't have no internet presence, don't even bother looking at it. 

2. Do a little search - if you find the company name, check for the results its throwing up. Check for reviews. Reviews will guide you a bit.

3. Ask for the business model - no, you are not getting personal. If you are asked to invest 1 lakh rupee and assured of a 50% return in one year, you must know the source of the return. Any fixed deposit in India will not give 10% return if bank rates are hovering around 7%. Equity related investments have a potential of giving higher return.

4. Dont be emotional fool - last week my young cousin had a query that if I would like to buy an insurance product from her, a specific product which is her target. She was told by her bosses that it was the best seller product. Mind you, I am talking about a very very reputed company. I felt helpless. I was astonished to see it was a high cost endowment plan. I really wanted to help my little sis. And she wasnt working with the insurance company, but the retail broking wing. So, I offered to buy some mutual funds worth 4 times her target, incase it helped her. But to my surprise, the company refused to consider it. If I were not aware of the product features, I would have simply bought the insurance to make my sister happy, which is nothing but highest level of misselling. My sister is matured and understanding :-) but dont comit this mistake.

5. Call on that toll-free no. - It takes few minutes. Whichever financial product you are buying, in the brochure you will find a customer care no. Call up and verify the commitment s your broker made it you. Tally the benefits. If it suits you and if it completely match, you are quite safe.

Read, google, compare and ask experts on forums like Quora etc to make an informed decision. This financial year has brought in many changes, look forward to sharing updates and insights on them. Stay invested  Stay happy.