Moneymanagement’s Weblog

Back to School

Posted in Uncategorized by moneymanagement on July 29, 2009

Ajit Menon, an IIM-B graduate is working with an MNC. He is at the post of a regional sales head and the climb has been fast and hard.  But after being at this level for the last 2 years he feels that his career is stagnant.  Though he likes his job, he is ambitious for bigger things and wants a competitive advantage over his peers. Like Ajit, do you feel that your career graph is plateauing and you the next step up may be long way away?

The best way to give your career a booster shot is to go back to school. For the working professional, returning to academics is a great way of honing up skills and networking.

There are great choices in India but a foreign degree added to your resume will (literally) open up the world to you.

You can choose to study further in the field of your specialization or maybe explore new areas which have high growth potential.

The question at the top of the mind is how best to work out finances. If you are past your thirties you are likely to have some responsibilities like a home loan. You would also like to make sure that your family should not be deprived of any luxuries even for the period of your education.

A study loan often works out to be the most feasible way of financing your education. Some careful planning and voila! you will be ready to fly off to explore new paths.

Why take a loan?

Even if you have adequate savings, it may be wise to go in for a study loan to finance your continuing education. You saving and investments can continue their job of acting as a cushion for your family.

An education loan is widely available at banks at attractive rates. Banks infact prefer giving loans to individuals with work experience who would be able to pay off the loans quickly because of their higher start salaries.

What is the procedure to take a loan?

Most banks will provide you with an education loan for studying abroad. The amount prescribed by RBI is Rs.20 lacs for studying abroad. The rate of interest will vary from 11% to 16%.

The repayment period will typically start within 6 months of completing the education and the loan will have to be repaid within 10 years after finishing your education.

You will also be required to put in margin money of 15% of the loan amount…i.e. the bank will finance 85% of the loan.

Education Loan Comparison

There are several banks vying to give you a loan. At a glance the loan schemes seem to be similar since they are governed by RBI regulations. However the difference lies in the terms and conditions and the ease of documentation and disbursal. For instance the banks with the lowest rates may not provide you with the amount of loan you want. Or the bank with the fastest disbursal procedure may not have your institution of choice on their approved list. So you have to scout around and ask plenty of questions.

Tips for taking loans from Arun C. Vakil, Consultant and author of Gateway to America

  • Do not over borrow. Make sure you are covered for the first year and look around for financial aid in the college.
  • Look out for charges…guarantee charges, prepayment penalties, processing charges all add up to your cost.
  • Choose colleges with wider acceptance as this will make your loan procedure easier. Many lenders have a list of approved institutions.

This article has appeared in Moneycontrol.com

Save money by cutting down your electric bills

Posted in economics, Energy by moneymanagement on July 18, 2009

Ever gasped at the huge electric bills that seem to climb up constantly. Your electricity bill is a recurring expense which could bring a substantial saving in your monthly budgeting.

Make a good choice in lighting

Lighting contributes to nearly 30% of the consumption of electricity and if we work at improving the lighting in our homes we can achieve a fair bit of energy efficiency.

Florescent light consumes much lower electricity than the bulb.  The newer innovation is Compact fluorescent lamps (CFL) which looks like a white bulb. They are long lasting and about 5-6 times more energy efficient than the regular light bulbs. Thus, using them in place of bulbs can result in substantial energy savings.

According to Bureau of Energy Efficiency (BEE) a 15-watt CFL produces the same amount of light as a 60-watt bulb.
BEE also rates CFLs with stars to show their energy efficiency. A 5 star rates CFL will gives out the best light per watt of electricity consumed.

Although a single CFL costs more initially, over the life of the bulb you actually save money. Here’s a comparison on the energy consumption to make you sit up and think before you buy a bulb again.

CFL Incandescent or Bulbs
Energy Input (watts) 13 60
Light Output (lumens) 810 830
Useful life (hours) 10,000 1,500
Electricity Used (kilowatt hours) 130 600

To make the most of the natural light available in your home, you need to know how to use it.

There are several ways to maximise your natural light. You can hang mirrors opposite windows. Take down unnecessary window dressings and replace with filmy materials, such as voile and muslin, to diffuse light. Trim trees or bushes that overshadow windows.

Cooling the bills

Cooling accounts for 11% of home energy usage, an Energy Star-rated cooling system can help reduce electric costs by hundreds of rupees. Don’t constantly move the thermostat up or down throughout the day because this wastes energy and money.

Consider setting the thermostat as high as comfortable in the summer.

Make sure your central air conditioning unit outside your home stays clean and free of debris.

Use ceiling fans to assist in cooling.  In the summer, blades should rotate counter-clockwise when viewed from below.

Make sure furniture and draperies are not blocking cooling outlets. Blocked outlets restrict air circulation, overwork the cooling equipment and increase operating costs.

The refrigerator

The refrigerator alone accounts for 7% of an average home’s total energy usage. What’s more, refrigeration efficiencies have come so far in recent years that anyone with a unit more than five years old should consider investing in a new refrigerator.

Defrost food in your refrigerator, this helps cool the refrigerator, easing energy requirements, and it is better for the food than defrosting in room temperature.  Keep refrigerator full so that it is cooling less open space (water jugs make good fillers).

This article has been written by me for MoneyLife magazine

Traveling in Mumbai

Posted in management of life by moneymanagement on July 10, 2009

I work out of home so I am quite become out of tune of the daily commute from hell across Mumbai.

While the local trains are still badly over crowded and traveling the rush hour feels like you have agreed to become a part of a huge mixed fruit jam making process, there were a few pleasant things I noticed.

1. The A.C BRTS buses which have started plying. I stay in Thane and it is my favorite means of transport while going to town

2. The Western Railway trains seems to cleaner, with new coaches and seats that are actually comfortable (gasp!!) Also there is electronic notice board telling you where the train is heading and which station is next. Goody.

3.There many Maruti 800 and Maruti Vans which are now in the cab system. Apparently Maruti has approached the cabbie community and is offering great deals on these cars to them. A upfront discount and near interest free loans.
Good for cabbies, good for Maruti (who is unloading stock in recession) and most of all good for commuters who get to travel in a car which is younger than them.

Building a financial plan for your child

Posted in investment, mutual fund by moneymanagement on July 9, 2009

When it comes to raising children, money is limited, and demands far exceed the supply. Your child, being the centre of your universe, is going to drive a lot of the financial decisions of your household.

From the moment your child is born and even before, if you consider the doctors visits and preparations for the arrival of the child it’s at least 20-25 years before your child can start earning, and is financially independent.

Bringing up a child takes more than can you imagine. Babies tend to outgrow things even before you buy them. As they grow older, peer pressure works not just on the kids but also on the parents. Isn’t it you who also want your kids to wear branded clothes or join a class that is popular? While it is laudable that you want the best for your child, it’s expensive too.

The cost of children’s education is one of the largest expenses that parents face so it’s crucial to start saving as soon as possible. Just the college years will cost you anywhere between Rs. 6-12 lacs depending on the course your child does and her/his   spending habits.

So on a rough estimate an upper middle class family would spend at least Rs.20 lacs on the child’s upbringing, education and to ‘settle the child’.

This estimate is at current levels of cost of living. We have not yet factored in the raging inflation.

Planning for your child’s education in the same way you would plan for other big life events will help enable you to secure your preferred education choices. While education can amount to one of the highest expenses you will incur for your child, it can provide the means for them to pursue a dream, prepare for future success and fulfil their potential.

Where to invest

Financial planning for children should start as early as possible.

There are various ways to save for your child

  • Savings accounts and fixed deposit accounts
  • Insurance plans for children
  • Mutual funds for children
  • Investing in the stock market for long term gains
  • Informal investments like chit funds, buying gold, property etc.

No matter which is your preferred avenue of investment, you need to ensure that you set goals and work steadily toward them.

This article first appeared in Moneylife magazine

Life insurance beyond ULIPs

Posted in insurance by moneymanagement on July 7, 2009

Every single individual who is married, owns a business, has dependent children or parents, has major financial obligations and should have a life insurance plan in his portfolio. Planning for Life Insurance cover is based on a number of factors like an individual’s life stage, personal priorities, number of dependants, child’s education/ marriage, retirement needs, loan liabilities, etc.

The ideal combination of insurance products is best explained in a pyramid of insurance needs. An individual who has dependents on him must look at a policy that covers life for a substantial amount at a very competitive / low price like a pure Term plan. The general thumb rule is 10-20 times one’s annual income. Many do not realize that term assurance plans are the most affordable insurance products to protect the family against financial consequences of death. It could be used to replace the loss of income, to face repayment of a loan liability. Term assurance product will not replace the loss of the loved ones but helps reduce the monetary burdens of the family by providing immediate lump sum money without any hassles. This gives an extended time frame for the family members to take any important financial decision.

However, when you contact your friendly neighbourhood insurance agent to agent your insurance cover, he is sure to recommend ULIPs as the ‘most popular option’. Unit Linked Insurance Plans (ULIPs) have become the flavour of the season. One of the main reasons that ULIPs get so push from agents and insurers alike is that these are high ticket items for them. The agent earns a percentage of the premium paid and since the premium of a ULP is several times that of a simple term plan, you will not find a single agent suggesting a term plan as an attractive option

ULIPs are often mis-sold by offering attractive returns and comparing them to mutual funds that offer insurance. However, it is imperative for you to know how to calculate the real returns generated by the ‘savings portion’ of a ULIP. Here are a few guidelines to help you…

Components of a ULIP

There are two components to a ULIP – the protection component and the savings component. The protection element is the underlying insurance cover while the savings element is that portion of the premium that is invested by the insurance company on your behalf in an investment fund of your choice. There are generally 3-6 investment funds on offer, each carrying a different debt to equity ratio and therefore varying amount of risk.

Quantum of Premium Invested: It is a misconception, that the entire premium that you pay is invested on your behalf by the insurance company in an investment fund of your choice. There are several costs that are deducted from the premium that you pay and only the residual is invested. The various costs that are deducted are:

Mortality Charges: These are charges that are deducted as a payment towards the risk cover that the protection element of your ULIP offers. While mortality charges are the same for across companies, the other charges differ

Administration and Sales Charges: These are operational and marketing costs and are largely made up of the agent’s commission.

Over and above these charges, your investment fund also attracts ‘fund management’ charges. These are charges that are levied by the insurance company for making and managing the investments on your behalf. These charges vary from each fund-type. For instance, a fund which has a greater exposure towards equity will attract a larger fund management fee than a fund that has zero equity exposure. These charges are deducted directly from your investment fund on a daily basis.

Details of all these charges will be mentioned in the policy document and in the premium payment receipts and they will vary from company to company. Jayant Khosla, MD & CEO for Future Generali Life Insurance Company Ltd. Explains “Mortality charge in Future Sanjeevani (a ULIP) per thousand for 30 yr male is Rs 1.06 and remaining charges are very competitive. Our FMC ranges from 1.10% to 1.50%, Premium allocation charge in First year is as high as 10%. Policy admin charges are Rs75 per month”

If you are a 30 year old buying a term insurance plan of Rs25 lacs for a period 10 year then you would pay an annual premium of Rs5,475/- One could consider this a basic mortality and administration cost.

The ULIP cost are hidden behind a multitude of figures. Usually the agent will ask you to tell him the premium you can pay and then calculate the life insurance for you. So you may actai=ully end up being under insured.

Where are the returns?

In order to evaluate the returns that are generated by a ULIP, you need to take into consideration only that portion of the premium that is invested on your behalf in the investment fund. The growth has to be calculated on this portion from which units are purchased on your behalf at the current NAV every time you pay your premium.

The catch in calculating returns is that often companies deduct ULIP charges of the entire policy period in the first few years. Hence you may see that for the first 3 years or so nearly 70 per cent of the premium you pay has gone towards paying a multitude of charges and only 30 per cent is invested. In the later years a higher amount is invested however this sort of investment pattern followed by many insurance companies is a lose-lose situation in two ways:

you lose out in the compounding of your investment since a small amount is invested initially

if you wish for an early withdrawal, you lose all around since your premiums have not yet be invested fully to get a fair chance to grow.

One often calculates the appriciation of ULIP in terms of increase of decrease in the net asset value (NAV), The NAV of ULIPs is not the real indicator of the actual returns earned on your investment. The various charges on your policy are deducted either directly from premiums before investing in units or collected on a monthly basis by deducting the units you own.

Either way, the charges do not affect the NAV; but the number of units in your account fall. You might have access to daily NAVs but your real returns may be substantially lower.

A rough calculation shows that if your investments earn a 12 per cent annualised return over a 20-year period in a growth fund, when measured by the change in NAV, the real pre- tax returns might be only 9 per cent. The shorter the term, the lower the real returns.

Understanding the policy account statement

Your policy account statement is the key to understanding the returns on your ULIPs. It includes

  • The premium you have paid for the year.
  • Policy loading fees.
  • Sales charges – usually in the first year.
  • Monthly deduction of insurance and administration fees which takes place by way of cancellation of units
  • The total number of units you currently own and its current NAV.

The statement of accounts is obscure and incomprehensible in many ways. It does not give a break up of how many units you owned in the previous year and at what rate nor does it give details about how many units were added on this year. Ofcourse if you wish to know the details you can take out your previous documents and play around with your calculator. Without base information of the previous years it is very difficult to calculate the returns on your policy.

ULIPs in a Bear Market

  • In today’s market conditions equity oriented ULIPs are likely to give you negative returns in the short to medium term.  The USP of ULIPs has always been high returns which have evaporated now.
  • ULIPs however do offer you a lot of flexibility in terms of increasing and decreasing investments and changing your risk profile as your life and the market conditions change. Your risk appetite and investment objectives will mirror the different stages of your life. Therefore, it is imperative that you rebalance your asset allocation plans to ensure that there is synergy between the two. Investors should always remember that investment fund options are designed not to encourage speculation in the market but to facilitate selection of a fund option that fits an individual’s risk profile and time horizon.
  • Use ULIPs as Systematic Investment Plans (SIPs) to offset market volatility and negate the need of timing the market. Invest a fixed amount of money in the same investment option at regular intervals. Therefore, you will automatically be entitled to more units of the investment fund when the prices of the underlying assets are low and more units when the prices are high.

For most of us it is best to separate out insurance and investment avenues. Term insurance is by far the most economical way to get insured. Bundling up the two may prove to be too heavy for the pocket