Category Archives: TITBITS

Who is Right?

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Dear Friends,

                            Navratri wishes to all of you!

In this titbit, I am presenting a real-life case of Life Insurance and leave it open to you for response as who is right!

Mr. Mayur, aged 32, IT professional lives in a newly purchased property along with his wife Shilpa, homemaker and 1-year old daughter Niveda. Mayur has taken a home loan of Rs. 90,00,000/- to be paid over 20 years resulting in a monthly EMI of 84,000/-. He does not have any other assets and both Mayur and Shilpa will not be beneficiaries of any inheritance.

One of Mayur’s colleagues, who knows his background, suggests that Mayur should meet a professional investment advisor and seek his help to plan his finances. In the initial meeting with the advisor (Manish), which was brief and more like an icebreaker session, Manish suggests that Mayur needs to buy a life cover as any contingency to his life will be a huge burden on his family. Based on the evaluation of Mayur’s human life value (HLV) by both Income Replacement and Expenses & Liability approach, Manish determines that Mayur would need a cover of atleast 2 Crores. Manish recommends Mayur to buy a 1 Crore term cover from 2 Life Insurers totalling 2 Crores of Sum Assured (SA). The total premium for 2 Crores sum assured would cost approx. Rs. 20,000/- per year

Mayur feels happy that this insurer is going the extra mile to service him.  The representative from Insurance company 2, meets Mayur and asks him the background of the Insurance requirement. Once he understands the requirement, he makes a different pitch to Mayur. Mayur has anyway bought a 1 Crore term insurance which will not provide him anything in return and the entire money paid to the insurer will go waste. Instead he proposes a ULIP cover with a premium or Rs. 12,000/- per annum that will provide a small SA of 1 Lakhs or the value of the investment, whichever is higher.

He convinces Mayur by showing him different scenarios of the return potential of the ULIP, with 100% equity investment. The Equity market soared that year and the ULIP bought by Mayur attained a value of 16,000/- for an initial investment of 12,000/- Mayur continues to pay for both the Term Cover and ULIP and at the end of 5 years finds the value of his ULIP to be about 1.25 Lakhs while the 10,000/- premium that he pays for the Term Cover has gone down the drain leaving him confused and thinking whether the decision of taking a Term Cover was right.

< PenguWIN TITBIT # 102 – Who is Right?>

SWP Campaign by a Leading Asset Management Company – 101

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               I am not sure how many of you have seen the Systematic Withdrawal Campaign (SWP) by a leading Fund House (AMC). The advertisement (ad) has been published in several Newspapers and Magazines (Not sure about TV)

Today, one of our clients, who is close to his retirement, sent me a note and asked for my opinion on the ad. Initially when I had seen the ad, couple of days ago, the text ‘SWP’ caught my attention. Since I am very familiar with SWPs, I did not spend time in reading the details. They had shown an illustration as how you can look at Systematic Withdrawal Plan as a periodic cash flow. The ad had also explained the advantage of SWP by which you can save on taxation.

Now comes the interesting part. As per the illustration, an Investor does a purchase for 50 lakhs in an equity fund and starts monthly withdrawals of 30,000/- (which will work out to 3.6 Lakhs) and at the end of the year the balance is about 52 Lakhs.

The following section details my point of view:

The Idea of investing a huge amount as a Lump-sum is not a good one (I wouldn’t do that for our clients or me, unless we are taking about a person whose networth is 50C+ and can afford to take such huge bets). In case if that approach is taken, starting to withdraw from month 1 is a poor decision and can backfire since the volatility in equity markets can erode the principal amount. A 10% fall will erode the corpus by 5 lakhs making it 45 lakhs. This is the reason why we insist on a cooling/settling period of 5 years for equity investments to play out. That way the stock movements of ups and downs and volatility of returns settle down. This is also supported by historical data. It is possible that the stock prices keeps increasing throughout the year which will then support the illustration (like a 1 year bull run). However, the risk level with this approach is very high. It’s like I need 10 Lakhs for one of my impending financial goals (say kids’ education) next year and I am investing this 10L corpus in equity based instruments.

Typically our suggestion would be build a corpus (Diversified Equity Funds or/and Balanced funds) over a period of time through SIP/STP/small Lumpsum and allow it to stabilize. During the distribution (when cash flows are required) phase, the SWP approach of monthly/periodic withdrawals can be effectively used.  

Category: TITBITS