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Sunday 9 February 2014

Significance of the Financial Sector

Why you MUST be overweight in the Financial Sector while investing ...


Came across a rather interesting article on how the Financial sector enjoys an undue and highly exaggerated status, certainly disproportionate to their true contribution to society (some would be tempted to add - "If any"):


The above article, which is set in a global context, is a bit "high-funda" and more relevant for those who have a predisposition to read such esoteric stuff. For the large majority of you, I would recommend that you simply take a quick and brief glance just enough to get the general drift of what the article is all about.

What's relevant for us is that

  • For the same quantum of capital deployed the financial sector generates much greater revenues vis-a-vis most other sectors- due to leverage
  • For the same quantum of capital deployed / revenues generated, the financial sector generates greater profits than a good chunk of other sectors
  • Ditto for the rate of growth of the firms in the financial sector - For instance, banks which started around a decade back like Kotak are far bigger today than similar-sized firms which started off around the same time in other sectors.
  • Due to systemic risks, more often than not, the governments around the world will NOT allow financial sector firms to go bust. They may allow a steel manufacturer or a real estate player or an automaker to go under - but not banks.
  • Due to all the above, the ever increasing proifts of banks accrue to the shareholders, but the downside risks due to issues like leverage are "sort-of" protected by the governments around the world.

Hence, while investing in shares, it may be a good idea to keep a keen eye on financial sector players and be willing to be significantly overweight in players in the financial sector vis-a-vis the market as a whole.

The gains will belong to you but not the losses.

Caveat: The last line above will obviously depend on your prudence, your entry levels, your fear and greed levels. But then, that's always true while investing in shares!

Regards,



N

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Thursday 26 December 2013

Importance of Insurance - Part 5

Be safe or You'll be sorry! Part 5
Choosing the right Life Insurance Policy




Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on Choosing the right Life Insurance Company:


By now, you'd be clear about whether you need a Life insurance cover, the quantum required and the company / companies from which it is OK to buy a life insurance policy.

In this post, I propose to talk about how to identify a suitable life insurance policy...

Some points to note:

  • As a thumb rule, I dislike combining insurance and investment. Reason is quite simple - Lack of transparency. And in any case, once you decide to make an investment, especially for the long term, you would like to base your decision on factors such as returns, risk, liquidity and flexibility of shifting to better investment options and/or fund managers from time to time. Whereas, life insurance products should be bought primarily (almost exclusively) on the basis of reliability of the actual assurance given by the life insurance company to honour its commitment to cover the risk of your life. To combine two such diverse objectives would lead to certain lack of clarity and perfect confusion.
  • Hence, if a life insurance policy promises to return any quantum of money during the life time of the policy holder, be clear in your mind that they are combining insurance and investment. Such policies will usually come under the garb and nomenclature of money-back policies, endowment policies, return of premium policies, Unit-Linked Insurance Policies (ULIPs), etc.
  • All such "insurance+investment" policies, in my opinion, have the potential and high likelihood of turning out to be bad choices for a vast majority of people. In all such policies, a part of your premium is used for providing a risk cover. The balance part is used to make investments and provide you the returns. And in most such policies, you don't know the break-up of how much of your premium is going to cover the risk and how much is being invested. The portion which is invested, if invested in "debt products" such as bank deposits, government or quasi-government bonds, etc., the returns you get are sub-optimal vis-a-vis what you will get from making pretty much from the same bank deposits, bonds, etc. The reason: They have to "manage your money" and hence they incur certain administrative costs - Such costs are obviously deducted from the returns generated from your investments. In case of the investment portion being deployed in equity products, you are "stuck" for a really long time with that fund management house. If you were to invest the same directly, you will deploy the same in mutual funds which can be sold off if you find the fund performance inadequate or if other better options are available.
  • Hence, in a nutshell, when you are covering your life, make sure that you do just that and nothing more. Go in for a very simple, easy to understand, "no return of money till you die" kind of life insurance policy. They are typically categorised as  "Term Insurance Policies".
  • The concept of term insurance policy is very direct and simple: They take your premium and provide a risk cover. During the term of the policy, if something untoward were to happen and if the policy-holder dies, the insured amount as per the policy is paid to the nominee. If the policy holder were to remain alive at the end of the term of the policy, he/she can simply be happy that he/she is still around to crib about all those premium payments "going waste". He/she gets nothing in return. To understand this in a proper context, it is similar to insuring your car / two-wheeler. In case your vehicle gets involved in an accident, you can claim the amount lost from the insurance cover subject to the policy amount. If your vehicle does not get involved in any accident, most rational human beings don't feel sad or disheartened by it. On the contrary!
  • Now that you've hopefully decided to go in for a "Pure Term Insurance Policy", you are free to choose virtually any term insurance policy from those that are offered by the life insurance companies that you have shortlisted. A good and sensible option would be to choose the specific term insurance policy where the premium payment is the least. Obviously, it is preferable to have a policy which provides a cover for the maximum duration of time (ideally till the very end of your life on this planet).
  • In this context, you must seriously consider the relatively recent development of "Online Term Insurance Policies". These policies often provide an insurance cover at much lower premium vis-a-vis traditional Term Insurance Policies. This is because they are offered directly by the insurance company and a vast majority of the process is being done online and hence at a much lower cost. This elimination of middlemen (the insurance broker, insurance agent, etc.) and the reduction in process costs is passed on to you by way of a lower insurance premium.
  • Hence, my vote will be to go in for an appropriate Online Term Insurance Policy. Go for it. Go for it TODAY!

Caveat:

All that I've stated above happens to be quite valid - no conditions apply. However, it is imperative to remember the following:

  • Once you decide that you need a life insurance cover, it is better to have ANY LIFE INSURANCE POLICY than to have NO LIFE INSURANCE POLICY.
  • Hence, it is actually better to have one of those sub-optimal policies that I've described than to have NO LIFE INSURANCE POLICY.
  • The much desired Online Term Insurance Policy that you have identified must obviously be bought. But if you are under compulsion to buy some other policy from a friend / relative / spouse's relative / classmate, etc., it is actually better to buy such a policy from such a source than NOT to have any life insurance cover. If possible, minimise the latter and go in for a good quality term insurance policy over and above the sub-optimal policy.
  • In any case, if you already have one or more of those sub-optimal insurance policies (the baggage of history), DO NOT discontinue such policy / policies till at least three months AFTER you have received the policy papers from your carefully chosen Online Term Insurance Policy.

Critical words of wisdom:

  • You need to remember that the sole purpose of making premium payments for a life insurance policy is to ensure that you do have a life cover. You do not wish to be in a situation where after the demise of the policy-holder, the nominee fails to get the insured amount due to some fault while filling up the form or due to some intentional/inadvertent false declaration while filling up the form. Hence, while taking such a life insurance policy, make sure that you are very meticulous when it comes to filling up the proposal form. Ideally, you MUST fill it up all by yourself. Even if an agent were to fill it up, you must ensure that every single item in the form is filled up accurately and truthfully.
  • Especially, you must be very particular about the spellings of your name and that of your nominee. There must be NO MISTAKE in such basic details such as postal address, contact numbers, email addresses, nominee details, details of the chosen policy (including sub-options that may be applicable), Date of birth, etc.
  • And, having a medical check-up done by the insurance company's team of doctors is actually an ideal situation. Once that's done, they will not be in a position to reject a claim later claiming that the policy-holder did not declare his/her true medical condition.

In my next few posts, I plan to write about health insurance policies.

Watch this space!


Regards,


N

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Thursday 21 November 2013

Importance of Insurance - Part 4

Be safe or You'll be sorry! Part 4

Choosing the right Life Insurance Company

Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on the quantum for which an individual should obtain a life cover:


In this post, I propose to talk about how to identify a suitable life insurance company.

How do you choose a life insurance company from which you can buy a life insurance policy? Some points to note:

  • The industry has evolved over the years. Despite MoneyLife (magazine, website) and others who claim that our regulators are toothless tigers, IRDA has evolved into a regulator on which I'll personally have quite a lot of confidence and trust.
  • Based on the IRDA norms, virtually every single player in the insurance industry has to take care of issues like capital adequacy, sustainability of the policy, basic levels of customer satisfaction, etc. There's always scope for improvement, but then, things are broadly "so okay" now that you can go ahead and rely on any life insurance company - All of them are "reasonably" reliable and trustworthy.
  • Having mentioned the above, it is possible that you might be personally uncomfortable with Company X or Management Y - with or without any reason whatsoever. By all means, drop those companies from your list of "suitable life insurance companies" - After all, unlike a few years ago, today you have the luxury of CHOICE - There are quite a few active life insurance companies even if you decide that you don't wish to buy a policy from half a dozen companies.
  • Next, look at GEOGRAPHY. It is possible that a couple of specific life insurance companies may be relatively inactive or perhaps even be absent in your city / town / village. While it may still be OK to take a policy from such a life insurance company, it is likely to be that much more difficult to handle issues related to claims processing - Certainly in comparison with another life insurance company which has an active presence in your place of residence.
  • Now, you have a bunch of companies which continue to survive in your shortlist of life insurance companies from which you can consider buying a life insurance policy.
  • Thanks to the first point above, you can virtually choose ANY of the above life insurance companies that continue to be part of your shortlist.

In my next post, I propose to write about the actual process that you need to follow to try and identify that particular policy that will be suitable for your specific needs.

Watch this space!



Regards,

N

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Tuesday 12 November 2013

Importance of Insurance - Part 3

Be safe or You'll be sorry! Part 3


Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on whether you need Life Insurance in the first place:


In this post, I propose to talk about how to identify the quantum of amount for which an individual should obtain a life cover.

At the outset, let's be clear on what should NOT be the amount of coverage that you require:

  • It should not be the amount recommended / suggested by your friend, parent, spouse, child, financial advisor, blog author, insurance agent, bank manager.

Clearly, each of the above will have his/her own reasons to suggest varying amounts as "just the right quantum" for you. While some may have your genuine needs in mind, others may have ulterior motives. However, it is unlikely that any of them will have a clear and holistic idea about your current situation and hence, you can't depend on their suggestions.

You need to keep in mind various factors while determining the amount for which you should buy a life insurance policy. Some of these would include:

  • Your personal profile - age, academic / professional qualifications, job profile, current income, future prospects
  • The number of financial dependents, their ages and the period for which they are likely to remain financially dependent on you
  • Your current wealth level
  • Your desire to "care for" those who are financially dependent on you (this factor is often ignored by most people including competent financial advisers due to their emphasis on being "politically correct" - As you're aware, I give a damn!)

Each one of the above will influence the amount for which you need to obtain life insurance cover.

The actual amount will obviously vary from person to person. And the only person who can identify it is the person whom you meet every day when you look into the mirror. But it would help to keep in mind the broad (and simple) rules of thumb:

  • The more the number of financial dependents whom you care for, the higher you need to buy life insurance
  • The better your academic / professional qualifications, the higher your future potential is likely to be. Obviously, when you die, the financial loss would be that much greater. Obviously, you need to think of a higher life insurance amount
  • Ditto for higher income / wealth levels, the stability of your job, etc.
  • The younger you are, the longer you're likely to live, earn and prosper. This warrants a higher sum assured for your life.
  • The number of years for which your dependents will need to survive after your death before they get a meaningful alternative source of sustaining themselves
  • Your ability to afford to pay the premium REGULARLY for servicing the policy that you take based on the amount arrived at after taking into account all the above factors

Obviously, you can't have a "one-size-fits-all" formula to calculate the ideal amount for which an individual needs to buy insurance. Every individual needs to identify the amount required on his/her own.

You calculate the amount required by you - By the time you've identified the amount required, I hope that my next post would be ready to help you further in the process to be followed to identify the appropriate life insurance policy for you.

Watch this space!


Regards,

N



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Sunday 10 November 2013

Importance of Insurance - Part 2

Be safe or You'll be sorry! Part 2


You would have read my earlier post on


In this post, I propose to talk about insuring the most important risk that any human being faces - His / her life. Life insurance happens to be the most popular but gravely misunderstood insurance product.

A Life insurance policy essentially promises to cover the risk of life and during the tenure of the policy, if the policyholder were to die, the nominee / beneficiary who has been named in the policy would be paid the sum assured. (I'm consciously using the word "die" instead of using the usual euphemism which says "if anything untoward were to happen to the policyholder" - After all, I believe in calling a spade a spade!)

In its simplest form, let's assume the following:

  • Ms. X has insured her life for a sum of Rs. 25,00,000/=.
  • She's nominated her son Mr. Y as the nominee and beneficiary as per the terms of the policy
  • (Unfortunately like all of us including you and me, she also has to die some time or the other). Ms. X dies a couple of years after taking the policy while the policy is very much continuing to remain valid.

In the above example, after the death of Ms. X, Mr. Y will get a sum of Rs. 25,00,000/= from the insurance company, subject to the usual terms and conditions of the insurance policy being complied with to the satisfaction of the insurance company in terms of proper documentation of:

  • The validity of the insurance policy
  • The death of Ms. X
  • Identification of Mr. Y as the nominee & beneficiary as per the policy.

There are, as I've mentioned in my earlier post, a whole range of life insurance products that are available. A vast majority of those products would be completely unsuitable to you. Hence, you must learn to identify the basis on which you will choose a life insurance product that's relevant for you.

Here are some cues for the process:

First, do you need a Life Insurance policy? Well, most of the readers of this blog will require a life insurance policy. Some exceptions:

  • If you have no financial dependents, who is going to get the amount of sum assured after you die? Obviously, it doesn't make sense to have any life insurance policy.
  • If you're stinking rich like a Bill Gates or Warren Buffett or Azim Premji or Mukesh Ambani, you need to seriously evaluate if your dependents or near and dear ones are likely to be financially at a disadvantage due to your death. An additional million or two dollars may not make any difference to the wealthy heir of such a rich person. If you are truly wealthy, in my opinion, you (and your dependents) do not need a life insurance policy unless there are very strong reasons for the same.
  • If you're NOT earning any income or are earning a negligible income, your legal heirs are unlikely to be at any significant financial disadvantage due to your death. Again, a life insurance policy is of no use for you.
  • If your legal heirs are  "well-settled" and are financially completely independent, they won't be impacted adversely due to your death - at least financially. Again, in such an instance, you don't need any life insurance coverage.

I'm sure that based on the above, you'll have a better idea as to whether you require Life Insurance cover.

In my next post, I hope to talk about how to identify the quantum of amount for which an individual should obtain a life cover.

Watch this space!


Regards,

N


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