Tuesday, October 11, 2011

Prajna Capital

Prajna Capital

Trust structure is better in estate planning

Posted: 11 Oct 2011 01:49 AM PDT

 

ESTATE planning involves planning for the succession of one's assets to reduce taxes, to avoid probate, avoid post-death disputes and issues. The process also includes giving clear instructions in case of disability or ill health, where one can no longer make decisions. You work hard to build your assets, such as investments, home, personal property, and to provide a level of financial security for loved ones. Then, doesn't it make sense to work just as hard to protect them in the event something should happen to you?


That's the primary goal of estate planning ­ to protect, preserve and manage your estate/assets during your life and after death.


Significance :Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death or incapacitation. An estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.

The primary goal of estate planning is ensuring that the estate of the individual passes to the estate owner's intended beneficiaries, often including efficient tax and succession planning and avoiding or minimising court proceeding in probates (that is a "will" certified under the court with the grant of administration to the estate of person who has made the will). First introduced in 1953, going to courts on disputes arising out of wills either on the question of authenticity, mental soundness of the person making the will or alleged forgery, the trust route created during the lifetime of the individual is emerging as a more viable solution to estate planning.

The grounds on which a will may be challenged are numerous, the time taken in India to get a probate of the will, in case the will is contested, could be several years and it could be a very expensive affair, exactly what any family doesn't need. In addition, the necessity to obtain a probate of the will makes it public.

As a public document, a will is subject to scrutiny by anyone who wishes to know its contents.


Benefits of trust structures: By adopting the trust structure for planning your estate, you can achieve: Estate protection because a trust is a bankruptcy remote structure.

Self beneficiary: The person who creates the trust can himself be one during his lifetime. As a beneficiary, he can enjoy the benefit of his own estate during his life time.

Efficient succession planning by providing for children and grandchildren and great grandchildren.

Management of all types of assets through expert advisers.

Accumulation of the estate during the lifetime and after death through the hands of trustees.

Avoidance of family disputes leading to disintegration of family businesses.

Retaining confidentiality, as obtaining a probate is not necessary.

Efficient management of the estate as a trust can be operational during the lifetime and after the death of the client.

Providing for future administration of assets to protect against future incapacity and for incapable beneficiaries.

Making provision for religious or charitable purposes.

Lower contestability as compared to a will.


Conclusion: Although planning one's estate may feel uncomfortable, the cost of procrastination can be high. Though some people are put off by the belief that estate planning will be complicated, time-consuming and costly, set ting up an estate plan doesn't have to be a complex process.

You execute a trust deed where you appoint a trustee, name your beneficiaries and specify how and when the properties of the trust would be distributed to the beneficiaries.

In a trust, you transfer ownership of some or all of your assets (which can include investments, real estate and bank accounts, among others) and even personal property (jewellery, antiques or furniture) from your name to that of the trust.

Transfer of ownership of assets to the trust can be done at anytime after the creation of the trust either by the settler or any other person.

After you transfer the assets, you maintain the same access and control as you did before you put them in the trust in case of a revocable trust.

In case you create an irrevocable trust, then you can retain some control over the assets in the trust by either having the trustee consult you or by appointing an administrator/protector who will be consulted by the trustee.
 

Mutual Fund investing myths

Posted: 10 Oct 2011 08:27 PM PDT

 

Mutual funds are an effective engine to route your investments in the equity markets. They offer several advantages over direct stock picking viz., diversification, professional management, light on wallet, economies of scale, liquidity, etc. But even after knowing the importance of investing in mutual funds, very often, we see that mutual fund investors are surrounded by myths based on widely held, yet incorrect beliefs and also based on flawed information. Both these kinds of myths can consequently lead investors to make incorrect investment decisions. We'd like to take this opportunity to debunk some common mutual fund investing myths:

 

Myths based on Incorrect Beliefs

 

When asked why the avid investor of stocks/shares does not take to mutual funds with the same passion and enthusiasm, the likely response is that mutual funds investments are dull and boring. They lack the thrill that one gets by investing in stocks. Bringing us to Myth # 1:

 

·                  Mutual funds lack excitement

"Who wants to invest in a staid investment like a mutual fund that probably grows half as fast as some 'exciting' stocks like Infosys, ONGC or BHEL during a bull run?" The poser is relevant. Underperformance almost always gets the thumbs down, no matter what the reason. After all, every investor wants his money to work for him and if a stock does that better, why invest in a mutual fund?

Yes, stocks can be exciting. And mutual funds may lack the excitement of a stock, but it's the kind of excitement that investors can do without for their long-term wealth as well as health. Mutual funds may not give an impetus to the investor's portfolio in a bull run like some 'exciting' stocks. But, you can be sure that they won't burn a huge crater in the investor's portfolio either. Something that could be inevitable, should individual stocks be crashing by say 40%.

·                  Mutual funds are too diversified

"Mutual funds own too many stocks to be of any serious benefit. A focused portfolio of 8-10 stocks will generate a more attractive return than a mutual fund portfolio comprising 30-40 stocks."

We are not sure if there is any theory to prove or disprove that concentrated portfolios (8-10 stocks) do better than diversified portfolios (30-40 stocks) in the Indian context. Of course, Mr. Warren Buffet has successfully managed a small portfolio over a long period of time. But, not too many investors can claim to have his investment discipline, insight and experience. In the absence of these important traits, it would be incorrect to expect a concentrated portfolio to outperform a diversified portfolio, at least over the long-term (3-5 years).

Remember, fund managers are experienced money managers and their mandate is to outperform the benchmark index of the fund. And if these experienced managers have chosen the diversification route that tells us a little about how to go about making money in the stock markets.

·                  Mutual funds are too expensive

"Mutual funds aren't cheap. On an average, the recurring expenses for a diversified equity fund ranges from 2.25% to 2.50% of net assets."

The 2.50% (maximum) recurring expenses charged by the mutual fund go towards meeting the brokerage costs, custodial costs and fund management cost. These are expenses that stock investors incur as well (barring the fund manager's salary). Consider this, when you have a competent fund manager who combines his time, effort and expertise to research stocks and sectors to pick his best 30-40 stocks and also buys and sells them for you, you have someone who is doing a lot of work for you and is charging only a maximum of 2.50% of your investments. Of course we agree that this must be followed by sheer out performance of the benchmark index and even peers. You don't want to pay for underperformance.

The good news is that quite a few diversified equity funds have managed to put in what can be termed as 'a very good performance' over 3-5 years vis-à-vis the benchmark index and peers. Which are these funds, you ask?

Scheme

6-mth (%)

1-Yr (%)

3-Yr (%)

5-Yr (%)

Since Incept.

IDFC Small & Midcap Equity (G)

-6.96

10.66

23.08

-

21.93

ICICI Pru Discovery (G)

-4.53

11.37

20.04

13.19

26.93

HDFC Equity (G)

-5.00

17.54

18.19

16.53

22.74

Quantum LT Equity (G)

-4.12

16.37

16.51

16.70

17.29

Mirae Asset India Oppor-Reg (G)

-4.50

11.91

16.41

-

17.86

HDFC Top 200 (G)

-5.22

15.70

15.81

16.65

23.27

Reliance Equity Oppor-Ret (G)

-7.62

12.26

15.74

13.45

23.40

IDFC Premier Equity-A (G)

-8.06

12.81

15.67

20.49

23.75

DSPBR Small & Mid Cap-Reg (G)

-9.06

12.88

15.53

-

13.99

UTI Master Value (D)

-6.32

14.86

14.42

11.81

23.22

BSE SENSEX

-5.34

8.48

5.02

10.05

NA

S&P CNX Nifty

-5.71

8.81

4.93

10.24

NA

·                  Performance as on April 18, 2011

-----------------------------------------------------------------

 

Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in L&T Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

 

 

 

Value Investment Plan (VIP) with mutual funds

Posted: 10 Oct 2011 10:23 AM PDT


   A value investment plan (VIP) is a new investment option launched by a few mutual funds. This concept may gain popularity in the times to come. A VIP is supposed to be a better form of the SIP (systematic investment plan).


   A VIP too follows the averaging concept. This investments strategy also works on monthly contributions. The differentiating point is the approach to the amount of each monthly contribution as compared to a SIP. In case of a VIP, you have to set a target growth rate or amount for each month, and then adjust the next month's contribution according to the relative gain or shortfall made on the original portfolio. In this case, you have to invest more when the market prices fall. On the contrary, you have to invest less when the stock prices rise.


   Your investment pattern follows the market. You buy more when the prices are low and invest less when the markets are rising - the ideal thing an investor should do. The investment pattern mirrors the market trend. For example, assume you want to add Rs 5,000 per month to your mutual fund portfolio, and on the first of the month you invest Rs 5,000. Next month say the value of your investment is Rs 5,200. So, you will invest Rs 4,800 only next month rather than Rs 5,000. The balance is contributed by selling securities of an equivalent value (Rs 200 in this case). In the third month, let's say the value of your investment falls to Rs 8,000. You will have to contribute Rs 7,000, so as to make the target amount of Rs 15,000 (Rs 5,000 for three months). This roll-over goes on during the specified period.


   With this plans, you invest a higher amount when the markets are going down. Similarly, you invest a lesser amount when the markets are going up. This is precisely what investors should do. An investor cannot predict the direction of the markets. The VIP mode of investing helps synchronise the investment amount with the market movements. In contrast, a SIP mode of investing is based on the principle of rupee cost averaging. The cost of acquisition in VIP is usually lower vis-a-vis a SIP.


   Another difference from a SIP is that each month the amount to be invested will vary. In case of a SIP, a fixed amount is invested each month. In case of a VIP, the difference between the target value and the portfolio's actual market value is to be invested. So, you cannot really plan out the cash flows with precision, because the amount to be invested is based on the market values, which itself is volatile. In case there are prolonged bear market phases, the amount required to be invested will be much higher. The point to be kept in mind is that if a bear phase continues, let's say for 3-4 years, it can be value eroding for an investor. He will continue investing in a falling market. In case of bull phases, the incremental investments to be made will be smaller. So, in case one expects a cash crunch, it is advisable to fix a lower target rather than go aggressive and fix a higher target.


   Usually, in the long term, a VIP is expected to give better returns than a SIP. This is mainly because investments are automatically triggered as the markets fall. The basic premise is that money is invested in periodic intervals in a portfolio in such a manner that the portfolio tries to approach a target rate of return.

 

-----------------------------------------------------------------

 

Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 

Medical Insurance: Must for a healthy financial future

Posted: 10 Oct 2011 08:08 AM PDT

Without adequate cover, you may have to dip into savings or borrow, in case of emergencies

It is almost a cliché to say medical costs have rocketed over the years. We all tend to spend a lot of time and grey cells on how to save money for the future to fulfil our various goals like children's education, retirement, home purchase and others. We generally don't give as much thought to medical exigencies as required. Considering, if one does not have a proper medical cover, expenses on medical emergencies can drain out his savings and even put a person in debt. This means your entire future can get compromised by not having a proper medical cover. Medical emergencies don't announce themselves in advance before striking. Therefore, the only thing to do is to be prepared.

For this, you must start by assessing how much cover would be required and look at the probability of covering most events. A `5 lakh cover for an adult should cover 85 - 90 per cent of medical situations. The right approach would be to transfer risk by taking an appropriate medical insurance cover and being prepared to spend if expenses overshoot the same. We generally recommend individual medical covers. A normal medical insurance policy covers hospitalisation and also includes an exhaustive list of day care procedures. They also cover domiciliary hospitalisation and pre- and post hospitalisation medical expenses. In some cases even hospital daily cash and health check-up expense reimbursement may be included. These days most policies allow cashless settlement of all the claims.

Depending on the policy, there could be coverage for some atypical expenses like maternity, dental or even eye care procedures, coming into effect after a certain number of policy years have lapsed. Before selecting a policy, one needs to clearly understand its benefits. Premium alone cannot be the sole consideration for choosing the policy. Claim settlement is of paramount importance. If your insurer of choice has a history of processing claims fast and the policy benefits, too, are good, this insurer's policy should definitely make it to your policy shortlist.

There are people who prefer floaters, which are comparatively cheaper. The benefits are similar, but there is one umbrella cover for the entire family. For a smaller premium, one will have to assume higher risks.

Many who are employed enjoy cover from their employers. This would be a group insurance cover, that generally tends to be more beneficial than a general medical insurance policy. The latter covers pre-existing illnesses from day one and maternity benefits on an immediate basis. Some of these may also allow coverage of parents, who may not otherwise be eligible for medical covers. Some of these policies also allow one to pay further premiums and increase the cover. The premium in a group medical insurance policy are also lower as compared to normal policies.

There is one major downside to it though this cover ceases when one leaves employment. Today, when people are mobile and change jobs frequently, this can become a problem. When a person is in transition from one job to another, there may not be any cover at all. This is a pitfall of depending on a group medical cover. Also, the next employer may or may not have a medical cover as comprehensive. Hence, it is always a good idea to have a separate medical cover, even if you already have one. The separate cover can be at an appropriately lower level.

There are several additional covers like critical illness cover, hospital cash, surgical covers, accident covers and so on. Typically known as riders, these provide additional benefits but are not must haves. There is no end to the extent of security you may want. Whatever choice you make, make it carefully, after considering your needs and premium outgo.

1.        Prior to buying medical insurance, start by assessing the cover needed and look at the probability of covering most ailments

2.        Build a corpus to foot expenses if medical cover falls short

3.        Choose a medical cover based on premium outgo, claim settlement record of the insurer and policy benefits

Riders such as critical illness cover, hospital cash and accident covers provide additional benefits
 
Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)