Prajna Capital

Premium back Term Insurance Policy is a Trap
Ulip Returns
Mutual Fund buying and selling stocks

Premium back Term Insurance Policy is a Trap

Posted: 28 Aug 2015 02:08 AM PDT

Do the math before picking these policies that cost 2-3 times more

There are no free lunches. Yet, words like free, discount or a cash-back offer never fail to excite the gullible consumer. It becomes easier to fool them if the general awareness level is low. Premium back insurance plans are the textbook example of this.

The proposition is simple--it is a term plan, which pays in case of death of the insured but returns the full premium if the policyholder survives the policy term. Sounds like free insurance, right? A perfect trap for the policyholder who always thought paying premium for a pure insurance product was a waste.

Though these plans cost 2-3 times more than a regular term plan, there are takers. Many customers expect some sort of return from life insurance policies, at least the capital. Since these products click with many , insurers like PnB Metlife also have a critical illness version of premium-back plans.

A term policy for a 30-year-old that covers him for `1 crore for a tenure of 25 years will cost around `10,000. On the other hand, the term return of premium (TRoP) version of the same plan would cost `30,000. `20,000 more every year for 25 years. Is it wise?

Well, here is the simple math. Instead of paying the insurer, if you had put that `20,000 every year in a fixed deposit (FD) that earned an 8% return, you would have Rs 15.79 lakh at the end of 25 years. The insurer on the other hand is going to pay back `7.5 lakh if it's a 100% return-of-premium plan.Different plans offer different return -of-premium policies. For instance, while some plans do not pay back the first year premium, others like PnB MetLife and Aviva Life's return of premium plan gives an additional 10% of total premium paid, Birla Sun Life pays 100-125% of premiums paid, depending on the product variant you choose. In case you had bought the 125% TRoP , you would still get back only `9.37 lakh, which is `6.4 lakh less than what an FD could have accumulated.

Apart from death, some of these plans also cover critical illness or have a built-in personal accident cover. Even if you consider the price of these additional covers, the product is still overpriced. A `10 lakh critical illness plan for a 35-year old costs `4,500 yearly .

Also, these plans can be quite complicated to understand. Some of the TRoP have fancy short-term premium payment options wherein you get protection for 20-30 years but pay premiums for only If additional premium paid is put in an FD that earns 8%, the money would grow ti `15.79, a difference of `7.54 lakhs. If you invest in an equity MF plan that gets around 12% return, you'll accumulate a corpus of `29.86 lakh, a difference of `21.61 lakh. 10-11 years. This is an even bigger ripoff as you are paying a higher premium during the initial term.

A lakh invested over 10 years will have a higher compounded interest than it being spread over 20 years.Meaning, you are foregoing a larger interest if you pick the short-tenure premium payment option.

The only advantage TRoP plans have over regular term plans is that they come with a `paid-up' option. So, if you default on premium payments or stop paying altogether, the policy continues, but with reduced benefits.

While the premium paid will be returned at maturity , the nominee will get a reduced sum assured if the insured dies

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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

Leave your comment with mail ID and we will answer them

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

Leave a missed Call on 94 8300 8300

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

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

Ulip Returns

Posted: 28 Aug 2015 12:29 AM PDT

Disquiet over IRDAI proposal to mandatorily invest 25% in government bonds.

Investors in unit-linked insurance plans (Ulips) may get lower returns and fewer choices if the insurance regulator's proposal on mandatory 25% investment in government bonds becomes a rule.

Equity tends to deliver the highest returns. Mandating a minimum exposure to government securities will run contradictory to this research-backed view. At present, Ulips make up 50-60% of life insurers' portfolios, with close to 90% of the premium being invested in equity.

The proposal will also whittle down choices available to policyholders. This draft reduces the flexibility offered to customers. All Ulips offer fund options with varying combinations of equity and debt, including pure equity, debt and balanced funds.

Since late 2013, Ulips have seen sustained revival in fortunes on the back of buoyant equity markets. In 2014-15, fresh premium income from Ulips grew 40% from the previous year to `13,250 crore.Overall Ulip premiums crossed `41,565 crore, a rise of 15% over 2013-14.

The Insurance Regulatory and Development Authority of India's (IRDAI) proposal could put a spoke in the wheel of this Ulip juggernaut. The proposal is regressive. A market-linked product should be in a position to give returns in line with the market. Insurers fear that the proposed restrictive provision will translate into lack of parity with mutual funds, resulting in investors abandoning Ulips in favour of the latter

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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

Leave your comment with mail ID and we will answer them

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

Leave a missed Call on 94 8300 8300

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

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

Mutual Fund buying and selling stocks

Posted: 27 Aug 2015 11:03 PM PDT

Equity funds that follow a buy-and-hold strategy have fared better than funds which churn their portfolio quite often.

How does a fund manger pick stocks?

Does she adopt a `buy and-hold' approach to investing or does she chase momentum in the hunt for returns? For the lay investor, it is often difficult to grasp a fund manager's approach. However, some easily available metrics can reveal a lot about a fund manager's investment style. The portfolio turnover ratio or churn is one such metric. Experts often suggest that investors should watch the portfolio turnover ratio while deciding which fund to invest in.

The portfolio turnover ratio at any point in time shows how often the fund has bought and sold stocks in its portfolio in the past one year. A higher ratio suggests more buying and selling in the portfolio, while a lower ratio implies that the fund's trading activity has been low. A turnover ratio of 100% loosely implies that the entire portfolio has been churned once during this period.

A higher churn is a given in funds which follow a `dynamic' investment style--where the mandate dictates that the fund manager calibrate cash exposure more aggressively compared to traditional equity funds. For others, however, the turnover ratio is indicative of the fund manager's investment style, and not an assigned mandate.

How does turnover impact returns?

A fund's turnover reflects the fund house's culture, says Vidya Bala, Head of Mutual Fund Research, Fundsindia.com. "A fund house that doesn't constantly aim to be a table-topper will follow a steadier buy-andhold approach in its portfolio. Others will look to churn constantly in an attempt to chase momentum and stay at the top of the charts," says Bala. So which is the better approach to investing?

Analysed the portfolio churn of equity funds over the past three and five years to understand how it has impacted a fund's performance. Funds with a turnover ratio of more than 100% have been categorised as high-churn funds and those with a turnover ratio less than 50% as low-churn funds. The study is based on open-ended equity diversified schemes which have been in existence for the past five years. Our analysis reveals that, across all categories of funds, low-churn funds have delivered higher returns. Over the past three years, high-churn large-cap funds have delivered 21.5%, while low-churn funds have clocked 22.5%. Over a five-year period, low-churn funds in the large-cap segment have delivered 12.8% compared to 11.6% by high-churn funds. The same trend is visible in the midand multicap fund categories. The multi-cap funds with high churn have delivered 23.9% and 11.8% over the past three and five years respectively compared to 25% and 13.6% generated by low-churn funds. Some analysts attribute the difference in returns to the hidden expense that accompany higher churn.The more frequently a fund trades securities, the higher the associated transaction costs--they keep adding up. These costs eat into the fund's returns. Frequent rotating of stocks, arguably, also suggests that the fund manager lacks conviction in her stock picks.However, this does not necessarily suggest that high churn is always a bad sign, or that low churn will always yield better results.

Go by performance

A buy-andhold approach works best in a trending market. But in a range-bound market, a higher degree of churn would be more suitable," he says. Some fund managers play a rangebound market better while others make the most of a trending market. Besides, level of churn should also be viewed from the perspective of the fund's size: As a fund grows in size, its churn is bound to come down. It doesn't necessarily reflect on the fund manager's investing style. For instance, large schemes from Franklin Templeton, ICICI Prudential and HDFC mutual fund have recorded the lowest turnover in the past few years.

Data shows that there are outperformers among the high-churn funds as well. And so, investors should not shun these funds simply because their portfolio turnover is high. Consistency in performance should ultimately guide your investment decision.

Click To Enlarge