Life Insurance is a 4 Letter word…continued

Yesterday I wrote about whole life and term life and why I think whole life is good and how I have started appreciating the benefits of whole life as I have aged.

One of the argument which I used to hear against endowment plans and whole life plans was that you could take the same life cover at a much lower value by taking a term plan and the difference can be invested in a mutual fund which will give a much higher return.

There are a few challenges that I have been able to figure out in this logic. If you know of others please let me know in the comments below.

1. With term insurance you don’t get any money if you survive the term, that’s a complete loss.

2. Mutual fund or stock market returns are not guaranteed. In the endowment policy you are guaranteed a minimum value at the end of the term. You may get a higher sum because of bonuses, but a certain minimum is assured.

3. When you sell your stock the amount attracts long term capital gains tax. The money you get from the insurance policy is generally tax free in quite a few countries both for you and after your death for your survivors

4. In most countries investing in mutual funds or stocks does not get you a tax rebate while investing in insurance does.

If you don’t have the financial capability to take an endowment or whole life plan, take a term plan. Take it as early as possible and take it for the highest value feasible. Getting the highest coverage on your life is absolutely necessary. Don’t ever think that Mutual Funds can cover that risk.

However once you have some lee way in your finances, start whole life and endowment plans to create predetermined cashflows.

Use mutual funds or stocks to give you growth in the very long term where the compounding kicks in.

This has been a learning for me and I would not like you to make the same mistakes that I did.

Till next time then.

Carpe Diem!!!

Benefits of SIP – nothing to do with the image above

Financial Independence, Uncategorized

I am a person whose attention span is very limited. I end up getting attracted to the next bright object all the time. It’s extremely easy to distract me. Due to this, even in my office I have taken a room which is in the corner so that my distractions are limited.

Whether its books – my other hobby – the moment I am given a reference of a new book, I end up buying it from Amazon for my Kindle. I have more than 30 books which I have bought and not even started reading and there would be another 30 which would be in semi-read state. This does not account for the number of physical books that I have which are lying unread and semi-read, in my book-shelf.

Similarly its with investments. I see a new theory or a new company or a new investment avenue and I start researching it on how I can benefit from it.

That’s where the benefit of investing via a Systematic Investment Plan (SIP) comes in. It’s forced money which gets deducted from my bank account. And since I don’t want to get a message saying that the SIP was not executed because of a lack of funds, I end up ensuring that there are always enough funds to cover my SIPs.

I originally started my SIPs with just Rs1000/- per month in 2013. Thats about USD16/- that’s all. Over a period of time I have been increasing the amounts in various mutual fund schemes.

While I was investing in the equity mutual funds, I was also studying some of the good companies. I read a whole lot of books on this – I have shared names of the books in an earlier post – and took every opportunity to watch videos on Youtube where legendary investors shared their knowledge.

Once I was able to analyse some of the good companies which had good management, I started SIPs for those individual stocks, again with very small amounts. The “kick” of investing in individual stocks is

I don’t have to pay a service charge to the mutual fund manager. The 2.5-3% service charge that they take for managing our money can substantially reduce the overall wealth you can create. I have shared complete tables of these calculations in earlier posts.
When the company declares a dividend or gives bonus shares then the pleasure I get is immense. This does not happen when you have mutual funds.

Having mentioned the two points above, I still have a lot of SIPs going into mutual funds, because I am not in a position to identify mid and small companies on my own because of paucity of time. Having a fund house do that for me makes more sense even if they are charging me a percentage, which eats up into my returns. Once I take my retirement, I intend to even do this on my own.

Another psychological advantage of SIPs is that your brain now works to live within the limits of the money which is leftover after accounting for the SIPs. This is a very important factor for people like me who end up choosing the next bright object. This keeps me focused on ensuring that I take up any new adventure only after I have paid for my SIPs.

From a financial perspective SIPs ensure that you get the advantage to being able to buy more when the price goes down thus ensuring you take advantages of the draw down in the market. On your own you would never be able to time the market so well.

I even started a few SIPs for my son so that he gets the advantage of age on his side. Even to my friends, I force them to start these for their children at as young an age as possible so that they get the power of compounding on their side.

Whatever your age or whatever you earn, you can start investments into a SIP and make your money work while you sleep.

Especially women (and girls) – they have this big “mindblock” on not knowing finance. With a SIP you don’t need to know anything about finance or stocks. You just need to tell your financial advisor about the amount of risk you are comfortable and she will suggest a scheme for you. You could also go to sites like valueresearchonline.com or moneycontrol where they showcase the risk ratings of funds. You could just choose from any of those.

Till the next time.

Carpe Diem!!!

Systematic Investment Plans

Financial Independence, Uncategorized

Recently I was watching a program on television channel ETNow ….it was programming related to Systematic Investment Plans. I am generally not very interested in watching content based on SIPs. It’s a well understood concept to me about how time and price averaging over long periods gives amazing results because of the discipline of continuous investing with small sums and the magic of compounding.

What however got me interested was the concept the speakers were talking about “Sahi SIP”. “Sahi” is a word in Hindi which means the right thing. So what got me interested was the idea that not all SIPs are the same. You could search for this episode on the Youtube channel of ETNow.

SIPs have to be decided based on your goals.So not every SIP can be applicable to everyone

While the basic concept of SIP is that you automate your investments and pay yourself before you pay others.

If regular investments are left to decisions of human beings then they will every month find some reason why they are not able to invest.

However with SiPs because the money goes outfrom your bank account before you even know, you learn to adjust your expenses according to what is left. The first few months are a little tough but eventually you figure out ways to get your expenses into control. i am a ready example of that.

Now coming to the”sahi or right” SIP….. what the speaker mentioned was that based on your goals you need to decide on the investment vehicle or mutual fund scheme and the amount that you will be willing to invest.

One other aspect was how inflation eats into your goals. However because of inflation you also get salary increases. If you can increase the amount of SIPs based on a certain percentage of increase in your salary, then you can control the inflation monster from hurting your goals.

So there is no one size fits all. You need to identify the goals at different stages of your life and accordingly decide on the type of schemes you want to invest.

However the one thing which I have been mentioning for a long time in all my posts still stands….. you need to start early in life. The longer your runway the bigger is the magic of compounding.

Till next time….

How a 15 year old can aspire to be a billionaire

Financial Independence, Uncategorized

Last weekend I was at one of my relatives place. She has two young kids. One of them is around 19 years and the younger one might be around 14-15 years of age

I was very glad to notice that they had an interest in making investments at such a young age. I also loved the idea that their father was actually instilling in them a habit of trying to evaluate different avenues in investing. This means that in India the efforts of channels like ETNow and CNBC TV18 & the efforts of the mutual fund industry and stock exchanges like NSE are starting to bear fruit. If kids and parents start discussing financial products then the future is definitely bright for the Indian middle class.

When they came to know that I write a blog on achieving financial freedom, they thought of asking me for some recommendations on stocks and other investments, which I denied. I prefer not to give advice on any specific type of instruments or stocks, because a) I am not qualified and b) because everyone has a different risk appetite.

Since I like to look at just the basics and compounding and the rule of 72 are simple things that anyone can do at the back of an napkin, I just spent time with them on that.

Using the above I just explained to them without any use of even a calculator how wealthy he could grow.

If the younger son invests today Rs10000/- at the age of 15. India’s long term growth rate has been about 15% average. Even the indices therefore will grow at a long term average of 15%.

Therefore if he was to put this 10000/- in a Nifty ETF, it would also grow at an average of 15%. By the rule of 72 if he divides the number 72 by 15% then he will double the money in about 4.5 years. For simplicity let’s assume 5 years. which means every ten years it will grow 4 times. So his investment table, if he keeps invested with this 10000/- would look like below. Just staying invested without doing any hard work (incidentally staying invested could be the hardest thing) he can convert his Rs10000/- into Rs10million or (Rs 1 crore)

Age	Amount@15%	Amount@25%
25	40000	100000
35	160000	1000000
45	640000	10000000
55	2560000	100000000
65	10200000	1000000000

The second column is if he looks out for investments which can lead him to compound at close to 25%. then you see the magic. The amount converts to Rs1 billion (100 crores). Look at what happens between the ages of 45 and 65. At 45 he would have Rs 10 million and at 65 Rs 1 Billion. Even Warren Buffet’s wealth if you Google at age 65 and now at age 85, he is one of the richest men on earth just because of this phenomenon.

Obviously getting 25% on a consistent basis is not going to be easy, over a long period of time. But the key is going to be about staying invested. I hope the young guy can.

If you have any young guy you know, just show him this table of what his 10000 today can do for him over 30-40 years.

Till next time….

Carpe Diem!!!