Friday, September 30, 2011

The Magic Word to Riches!

Now what would you give to know this one word that could radically transform your fortunes and could make you rich! And just saying this word could take you a really long way in achieving your financial goals! It isn't a magical word but nevertheless a word which we do not use sufficiently enough when it comes to investing. The word is – ‘NO’. I saw an article on Newsweek and Yahoo finance which spoke about the power of the word NO but in a different context, however it makes a lot of sense in the context of financial planning also!

In India, with so many financial planners, quasi financial planners, quacks, banks, life and general insurance companies, mutual funds, portfolio advisors, portfolio managers, Relationship managers, wealth advisers etc. obviously somebody would have got you! It is also so difficult NOT TO SEE THE ADVANTAGES when confronted by a good salesman who probably is dressed better than you and is showing you a laptop with an excel sheet with fancy graphs, charts and ‘potential return’ tables! They talk about the need for focus, asset allocation, pension plan, child plan, neighbour's wife plan, aunty in hospital plan, funeral plan, broken dentures plan, cancer plan, kidney failure plan, tiger eating you on the highway plan, - given the right name, selling it to the retail 'prospect' seems like selling toothpaste.

Friday, September 16, 2011

IRDA plans to scrap Highest Guarantee Plans

In order to keep the equity markets away from any systemic risks, the Insurance Regulatory and Development Authority (IRDA) is planning to scrap the highest Net Asset Value (NAV) guarantee products. This could further dent the sales of the Unit Linked Insurance Plans (ULIPs) as the highest NAV guarantee products account for 20% of ULIP sales.

Under the highest NAV guarantee products, customers are guaranteed returns based on the highest NAV a policy has achieved during the entire term of the insurance plan. However, IRDA is weary of the fact the insurers protect the guarantee by appropriately apportioning money in debt instruments. When the market falls the exposure in debt instruments increases and insurers try to sell equities at marginal profits. If there is too much concentration of such products in the market, a large number of insurers might sell equities at the same time to protect the guarantee, leading to a further market fall which leads to systemic risks.

In my opinion the IRDA has done the right thing by putting a stop gap on the so-called 'highest NAV guarantee plans'. Many investors have been lured to buy such ULIP plans by their agents / distributors / relationship managers in the name of providing huge returns based on the highest NAV achieved by the plan in its tenure.

Policyholders should keep in mind that insurance is for indemnifying your risk, and thus insurance and investment needs should be dealt separately. For insuring yourself only pure term insurance plans are appropriate, and while investing you should give due attention to your investment objectives, goals, age, income, no. of dependents amongst others; which is a holistic investment planning process rather than an ad-hoc activity.

Also read the article posted previously on Highest NAV Guarantee Plans -

Sunday, September 11, 2011

What does rising Gold prices mean?

Gold has been one of the best performing assets over the last year, as prices have skyrocketed to record levels. It seems as though a new record in prices is set nearly every week, and the trend appears set to continue going forward.

So how can we interpret the rise in gold prices? There are two issues to discuss here. The first is, why is it that investors want to buy gold, and the second is, what is the impact of rising gold prices on the rest of the economy.

Saturday, September 10, 2011

Deciding between Fixed Deposits and Fixed Maturity Plans

There is a lot of news, information and advertisements about Fixed Maturity Plans offered by Mutual Fund companies. As an investor you must have come across this dilemma as to what to choose from – a Fixed Maturity Plan (FMP) offered by a mutual fund house, or a Fixed Deposit (FD). Well it’s confusing for an investor because both of them start with the word ‘Fixed’. So, now let us understand what exactly a FMP is and how it is different from a FD.