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- Difference between CPI and WPI
- Asset Allocation in Investing
- Unit Linked Insurance Plan (ULIP) Charges and Returns
| Difference between CPI and WPI Posted: 19 May 2014 03:06 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
The consumer price index (CPI) is a measure of the prevailing price of goods that are traded between the final consumer and the producer or producer's representatives. By measuring the change in the CPI at two points of time, say over a year, one arrives at the CPI inflation, that is the rise in prices for consumers.
On the other hand, as the name suggests, the wholesale price index (WPI) is the measure of the prevailing price of goods traded between wholesalers, that is bulk buyers and sellers, who could be the actual producers also. Again, by measuring the change in WPI at two points of time, one arrives at the WPI inflation.
For long, WPI was the main measure of inflation in India for the RBI and, hence, for most policy makers. But after Raghuram Rajan became the RBI governor, he has been focusing on CPI as the main inflation gauge.
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| Posted: 19 May 2014 01:25 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
What is Asset Allocation?In simple terms asset allocation is dividing the investment amount among different unrelated investment asset classes with a goal of minimizing the volatility and optimizing returns. Unrelated assets mean those which do not respond to the same market forces in the same way at the same time. This may lead your investments to gain on one front when the other side is losing (however there's no guarantee to it).It is just like having a balanced diet with a goal of taking all nutrients our body requires to stay healthy. Asset allocation is must to keep your investments healthy. With a lure of earning more return one has tendency to move into more of stock market investments in bull market phase but this portfolio starts bothering in volatile phase. In volatile environment investors tend to move towards safe assets but under high inflation scenario and low post tax return they could not achieve their goals. So having a proper mix of different asset classes is what one requires. For e.g. 2 years back everyone wants to buy more and more gold, and these days everyone feels that Stock market is the only place to make money. How to decide Asset Allocation required?The common misconception among people is that they decide the suitable asset allocation as per their Age. Well, this is not only their fault…many advisers or investment houses also works in the same fashion. They say 100 minus age is what you should have in equity (aggressive) and remaining in debt (Defensive). But this is the wrong strategy. I believe even 70 years old person can have a risk tolerance of investing 80% in equity if he's having arrangement of regular income and have surplus fund available with him with no goals targeted. So believing on "age funda" for asset allocation may prove to be lethal for investments. See asset allocation is a factor of your risk profile. Risk profile is something which tells how you generally react to different market and real life situation. Your perception towards an investment might change for short term but your inherent behavior towards risk will always remain same. Other factor that affects your asset allocation is the goals targeted. Even if you are high on risk tolerance but your goal is just 2 years away then there's no point in going for aggressive allocation How to determine your own asset allocation1. Understanding different Asset classes- This is the first and very important point. One has to understand that in India there are only 4 asset classes to invest in. Equity, Debt, Gold and Real estate. Equity and Real estate comes under aggressive and volatile asset classes whereas Debt and Gold is somewhat safer and less volatile. All these asset classes can be invested in directly or through Mutual funds or Portfolio management route. Even Insurance ULIPs provide you exposure in different asset classes. So whatever investment instruments you have, you have exposure to these 4 asset classes only. For e.g. If you have 4 endowment/money back insurance policies, PPF a/c. bank and corporate fixed deposits, NSC, Infrastructure bonds, tax free bonds etc. All this collectively result in your debt allocation. 2. Understanding your Risk profile – As I wrote above, your risk profile doesn't just come out of your age, it is how you generally reacts to different situation. Are you in a habit of taking chances with your money, at what speed you drive your vehicle- do you wear seat belts, do you use mobile phone while driving, do you favor a fixed salary with less bonus or low salary with high bonus etc. All these real life instances collectively form your risk tolerance attitude in investments. Risk profiling is like knowing one's blood pressure level and thus sensitivity to volatility. Doing a proper risk profiling is one of the regulatory requirements for SEBI registered investment advisers which include many banks too. So if you are dealing with a registered adviser he will take care of this part. 3. Knowing your goals – Relying totally on your risk profile sometimes may not be the right strategy for you, but it doesn't even mean you can ignore it. As the ultimate requirement is to achieve the goals comfortably so as you reach near to the goal you should move from aggressive to conservative. If you have invested heavily in equity or real estate for a goal targeted, then you should be out of these assets at least 2-3 years before the target year…even if you are very bullish on market performance When should Asset allocation be rebalanced?Over a period of time, with the adding on of capital gain or interests you will find that the ratio of your allocation has got changed. You may find yourself again high on equity or high on debt. So timely rebalancing of your investments allocation is very important. You can do the rebalancing by selling one asset class and buying the other with the same amount, or if you have surplus funds available with you, you may make some additional purchase in the asset where the value has gone down. Lets understand this with example: Say you have Rs 5 lakh with you as surplus available and after going through the risk profiling process your advised asset allocation comes out to be 60% Aggressive and 40% defensive. The above chart shows that now to rebalance the allocation suitable to your risk profile, you need to sell Rs 10200/- of equity and buy Rs 6900/- and Rs 3300/- of debt and gold respectively. Next Year- This calls for buying Rs 28793/- of equity and selling of Rs 22432/- and Rs 6361/- of debt and gold respectively. You have to repeat this process after every particular interval, which may be 1 year or 3 years. This rebalancing process will keep the volatility intact as per your acceptable risk tolerance and also help you in buying low and selling high. If this was not the process you follow then you would have bought more of equity in Year 1 under the lure of high returns as stock market was performing good and next year, you would have lost big money. Conclusion: Determining an asset allocation is a very important financial decision, more important than selecting right investment product, as this will have more impact on your overall portfolio return. And be sure to periodically review your portfolio to ensure that your chosen mixes of investments also have diversified among different sectors.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
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Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
2.Franklin India Smaller Companies E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF |
| Unit Linked Insurance Plan (ULIP) Charges and Returns Posted: 19 May 2014 12:15 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
What are ULIPs Unit Linked Insurance Plan is probably the most controversial investment product in the recent history. It was marketed aggressively by the insurance companies, and there was low awareness among investors about the fee structures. Under the revised IRDA guidelines the fees have been revised and ULIPs are now more attractive as investment option, than in the past. ULIPs are combined investment and insurance plans. The investors may choose between equity and debt allocations of their premiums, depending upon their financial planning considerations. ULIP also offers life cover, on the investor's annual premium. ULIPs have lock in period, usually ranging from 3 to 5 years. ULIP premiums are eligible for deduction from taxable income under Section 80C of the Income Tax Act. The maturity proceeds from ULIPs are also tax exempt under Section 10 (10D). In terms of gross investment returns ULIPs have performed comparably with mutual funds over a 5 year period, with top ULIPs giving annualized returns of 16 – 18%. However, net returns to investors would be very different due to various applicable charges. When the investors pay their premiums in ULIP, the insurance company deducts various charges from the premium and invests the balance amount in units of a fund chosen by the investor like equity fund, fixed income or bond fund, liquid funds and balanced or hybrid funds, to generate capital growth or income for the investor. The insurance cover or sum assured, offered by ULIP is a multiple of the premium, usually ranging from 5 times to 10 times of the annual premium. What are the applicable charges in ULIPs
In this article we will understand these applicable charges in greater details with an example, and see how these charges affect the returns of the investor. These charges differ from plan to plan, and therefore investors should read the product brochures of the ULIPs very carefully to understand these charges. For the purpose of illustration, we have taken the example of Max Advantage ULIP offered by Bajaj Allianz. The product brochure of the plan has all the details of the different charges and policy features, as shown in the table below.
Let us assume Ravi is an investor in the Bajaj Allianz Max Advantage ULIP. Ravi is a 30 year old male. He pays an annual premium of Rs 1 lakh, for which he gets a sum assured of Rs 10 lakhs. We will not discuss in this article, if Rs 10 lakhs of sum assured is adequate for Ravi's life insurance (please see our article How much life insurance is adequate). For his investment Ravi has chosen the equity index fund II. Let us assume this fund gives an annual gross return of 20%. For the sake of simplicity, let us assume the return is uniform throughout the year. Therefore the monthly return is 1.53% (1.53% return compounded monthly implies an annual return of 20%). Let us now see, how the various charges impact Ravi's return on investment.
The table below shows the monthly schedule of Ravi's ULIP charges for year 1, based on the above calculations.
The value of Ravi's investment at the end of year 1 is Rs 1.02 lakhs. Therefore, even though the fund gave a gross return of 20%, which is great by any standard, Ravi's net return is only 2%. This is because a significant part of the premium goes into the charges and is not invested in the fund. Some insurance agents say that the first year cost of ULIP is high, but returns from second year onwards are much better. There is some truth in what they say, but we should analyze objectively how much do the returns improve. Let us see how Ravi's ULIP performs in year 2. Let us assume that NAV continues to give a gross return of 20%. Let us briefly examine various charges for year 2.
The table below shows the monthly schedule of Ravi's ULIP charges for year 2, based on the above calculations. Please note, Ravi has carried over 3,749 units from year 1 (see table above).
The second year returns are undoubtedly better and Ravi's investment value will be Rs 2.29 lakhs. But the two year annualized return is still only about 7%. This is because, out of his Rs 1 lakh annual premium, Ravi will still continue to pay over Rs 10,000 as charges, which do not get allocated to investments. Even by years 3, 4 and 5 the annualized returns do not improve very much. Please the chart below for first 5 years returns from this ULIP, based on the assumptions above. Amounts are in Rs Lakhs.
The chart below shows the one, two, three, four and five years annualized returns from this ULIP.
Though we have assumed here gross annualized return of 20% every year from this ULIP fund, an important fact to note here is that ULIPs are exposed to market risks. Therefore, the NAVs of the fund will be volatile. If there is a market slowdown during this period, it is quite possible that the returns will be negative. Beyond year 5, premium allocation charge will not apply and so the returns will be better. However, certain charges like policy administration charge, mortality charge and fund management charge will continue to apply. Mortality charge will increase as the age of the investor increases. Conclusion ULIPs are complex investment products. Investors need to have a long time horizon for ULIPs. As discussed in this article, the returns in the first few years are low due to the ULIP charges. Investors should clearly understand the charges of the ULIP by carefully reading the product brochure, and estimate the impact of the charges on their investment returns, as described in this article. Investors should consult with their financial advisers, if ULIPs are suitable for their investment objectives.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
2.Franklin India Smaller Companies E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF |
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