Should one invest in ULIP’s

ULIP’s were the most widely sold insurance products some time back. As they served a dual purpose of being market driven as well as giving insurance. They even gave mutual funds a run for their money. Why did this happen, only one reason, the commissions for the agents were good, whereas commissions were stopped for distributors. It was a good sale for the insurance companies as well with very low regulation. This also led to a lot of mis-selling. This is when IRDA stepped in and brought many changes. With changes made by IRDA, the playing field between ULIP’s and Mutual funds has almost become level.

Though the field has almost become level, people have stopped buying ULIP’s as because of mis-selling, people are scared of getting duped again. But now with the changes there is money to be made in ULIP’s as well. Many financial planners would say do not mix insurance with investment. But if you look at ULIP’s only as investment also makes sense, look at it from long term investment point of view.

The biggest advantage of ULIP’s is tax; we keep shifting funds from debt to equity and vice-versa depending on the portfolio value and your requirements. When you do that, you need to sell, and every sale has got tax attached to it. Though tax is not applicable on sale on equity mutual funds after a year, there is tax applicable for debt mutual funds. But in case ULIP’s since there is no sale of units, there is no tax involved. Also maturity proceeds are tax free as long as the premium amount is 10% or less of the insured value.

Most ULIP’s allow shifting of units free of cost certain number of times a year. Though most of you might not do it that often, you should do it at least once a year. Also as you near maturity, start moving from equity to debt, this will help, if there is a sudden crash in the equity market. Looking at the advantages, on should definitely go for ULIP’s but only as supplementary insurance and more from an investment angle.

Making money during inflation

We all know that inflation means rising costs. But is it just costs, costs go up because the facilities that are given along with the item also have gone up. We are paying more for the convenience value as well. Let’s take the case of coffee or tea which you used to have in the good old days. We used to sit in the wayside cafe and chitchat. Today even if we have the same group, we will go to either Cafe Coffee Day or Starbucks. 

Oh! It struck you why you paying so much. You will not go to the same wayside cafe even if it present. Your status has gone up or you have assumed that your same old friend’s status is up. So we tend to showoff and this habit increases our expenses. Life has become more expensive just because of these small showoffs. 

So it is not only inflation, man, I have removed one myth of rising costs only because of inflation. But let us not forget, inflation is real and costs are going you, but we could save some amount by just not showing off. One might save my standard have improved; yes they are and should improve. But has your income gone up by the same percentage? If not improve your standard so that your income also increases.

Wow, your income will go up by just increasing your income or reducing your expenses. We are spending more in the hope of making more money either for ourselves of for our families. How? We send our children to international schools or to foreign countries, only because we want them to grow and by grow we mean make more money.

But this does not happen uniformly, our expenses increase at a faster rate than our income. So we need to work on reducing our expenses. It is always best to first increase your savings and provide enough before increasing your expenses. So how do you do this? One get a second income or as I said earlier, work harder that your income increases.

Now we come to expenses. We need to spend and that is not a choice but a need. But we can do it prudently. So if you need something, buy it, but buy something which will meet its purpose, lets say, you need a vehicle. Now you can either buy a two wheeler or a 4 wheeler. But since your family is big, you need a car. Here you can go for an economical car instead of a luxury car and you save both on cost and maintenance. In this manner, we can keep saving even during inflation. Ultimately money saved is money earned.

Taking advantage of credit cards

We find it difficult to keep noting down our expenses on a daily basis. But we keep using our credit card without thinking twice. Start using your credit card statement as your expense statement and start tracking where you are spending your money. This will help you remove or reduce your unwanted expenses, which will lead you to savings. We should stop looking at credit card as an alternative to cash, but look at it as cash. But the unfortunate thing about credit card is you can keep spending and you would not know that you do not have the money to repay what you have spent.

Credit Card is anytime more convenient than cash. Another advantage would be to see the type of expenses and shift to a credit card which would give you savings. Almost all banks have tie-ups with companies and come up with co-branded cards. These cards come with a host of advantages, deals and saving opportunities. Some of the popular cobranded cards are for fuel, dining, travel, fashion, groceries and travel.

These cards are a win-win for both the customer and company. For you as the consumer, you get deals and for the company they get loyal customers. This might lead you to have two or three credit cards. Don’t go for more than three, you would start losing track and in case you default your credit rating would also go for a toss. Always look at your credit card very carefully and pay in full. Most of the credit card statements tell you the full amount and mention minimum payment due in bold. If you pay only the amount in bold, you will land you paying interest and other charges.

After a few months you will notice that you have started saving some money. Savings won’t just happen, start tracking your expenses and switch to the right cards.

Employee’s Provident fund - Retirement corpus

In the last article we read about Employees Pension scheme. Now if you are part of the Employees pension scheme you are part of the Employees Provident Fund as well. See the government has thought about you. Did not get it? As you are part of the Employee Provident Fund, you are automatically saving for your retirement. This is in addition to the pension which you would get from the Employees Pension scheme. When you looked at it, the pension figures looked so partly. But along with this fund, you would be saving substantially, in addition to getting tax deduction.

Let us see how. Assume a fresher starts working at the age of 22 and his starting Basic Salary is Rs.10000. He would be contributing 12% of this to Provident fund. In addition the employer would also be contributing the same amount. So there is Rs.2400 getting saved from your salary every month. From this Rs.541 would be going to the Employees pension scheme. So you would be saving a net of Rs.1859 per month, which comes to around Rs.22308 per year. 

Now the government has declared an interest of 8.75% on this.

Now if you retire at the age of 58, you would be saving for 36 years. If we keep contributing the same amount for 36 years, the amount contributed becomes Rs.8.03Lakhs. Now this is without interest and we have not considered yearly increment. Assume a yearly increment of 10%. The amount after 36 years with 8.75% would be Rs.1.86 cr. Now this can definitely give you a good annuity. In addition to the annuity from Employees pension scheme.

We are always worried about our retirement and say we are going to find it difficult. The only reason for this is we keep dipping into this retirement corpus, without thinking. We feel that since we are allowed to withdraw from it, it is our right. But then, we are hurting our future. If it is such a pressing need, go ahead and withdraw, but withdraw in the form of loan. So that you repay whatever you have withdrawn. This will keep your retirement corpus intact.

Now we have seen how easy it is to build a retirement corpus of almost Rs. 2 cr. But most of us just do not think.

We have seen the rosy picture, let’s see the dark side as well. With current inflation, this amount of Rs.1.86 cr, will not give us enough annuity as the interest earned is not more than the inflation. Hence to take care of inflation we should look at stocks. By stocks I mean invest through SIP’s in Diversified Equity Mutual funds. You do not have to start with a big chunk, start with a Rs. 500 SIP and keep increasing it in the same proportion as increase in salary. This will give you a much bigger and inflation adjusted corpus.

Though we know that Stocks have always beaten inflation, Economic Times have shown that in the last 20 years, Employees Provident Fund has beaten the Sensex. On long term Stocks have given an average return of 13 to 15 %. So it is always good to have some portion in stocks.

So don’t be disheartened go ahead and start enjoying your life, start with this small investment to build a better future.

Employees Pension Scheme 1995

We work hard throughout our lives, so that we can have a good retired life. How do we achieve this? By planning for our retirement. Do we actually plan? No…

Knowing our culture, it is very difficult for us to save. Any occasion we have in our family, we call all and sundry and spend a bomb. We keep earning and spending for others always forgetting to save for our own selves. Knowing this our government did the thinking for us and started the Employees Pension Scheme.

All of us who are working and Provident fund is deducted, automatically also become a part of the Employees Pension Scheme. Now you are smiling, wow I would get pension, but do you know how much?

Before we get into the calculations, let me give you some good news.

Minimum monthly pension of Rs 1,000 will be implemented from September 1, 2014.  There is another part i.e. wage ceiling is increased to Rs.15,000/-, we will not get into this.

Now that we know what the minimum is, let us understand how this scheme came into force. We just keep paying, because it is mandatory. The Pension Scheme was started along with the provident fund scheme, but on 16th November 1995, the government changed the rules of calculations of the scheme with new rules called the Employees Pension Scheme 1995.

So for pension calculations the number of years of service is divided into 2 parts i.e. service before 16th November 1995 and service from 16th November 1995. The first part is called past service as it was with old rules and latter part as pensionable service. Already confused? This is the way, anything from the government is anyway done. Now past service is divided into 4 slabs, the reason given is to make it simple. Service upto 11 years, 12 to 15 years, 16 to 19 years and 20 & above.

If the salary as on 16.11.95 is below Rs. 2500, the monthly compensation will be Rs. 80, 95, 120 & 150 respectively. For Rs. 2500 & above this will be Rs. 85, 105, 135 & 170. In the case of those attain 58 years after 16.11.95, the above compensation will be multiplied by a factor stipulated in table B, according to the difference between 16.11.95 and the date of completion of 58 years.

For simplicity purposes I have only put factors which are relevant today.

TABLE – B

If Years to 58 of age from 15.11.1995 is:	then factor is:
less than 20 year	6.414
less than 21 year	7.056
less than 22 year	7.761
less than 23 year	8.537
less than 24 year	9.390

For greater than this use 1.08 raised to number of years

Now the best part Pension calculation, the formula is as follows

Pensionable salary*pensionable service/70

Pensionable salary is the amount on which the pension is given to an employee. The pensionable salary is divided into the following three ways:

(1) Salary that is below Rs. 6500
(2) Salary that is Rs. 6500 and above but contribution of statutory calling is Rs. 6500
(3) Salary that is above Rs.6500 and opted to contribute on actual salary.

In point 2 the pensionable service is Rs. 6500 but in point 1 and 3 the pensionable service will be the average of last 12 months .

If an employees has completed his 20 years and above of his service he will be given 2 years bonus.

Let’s take an example:

Date of Birth - 23.1.1967
Date of join - 23.10.1987
Salary on 16.11.95 – Less than Rs.2500/-
Salary on completion of 58 years on 22.1.2025 - Rs. 6500 (Statutory Ceiling)

Past Service - 8 yr 1 m (approx) rounded to 8 years
Compensation - Rs. 80
Factor as per Table B (for 30 years, i.e the difference between 16.11.95 & 22.1.2025) – 10.0627
Past Service Benefit - 80 x 10.0627 = Rs. 805 - (A)

Pensionable Service - 30 years
Bonus (Service is 20 & above) - 2
Pensionable Salary - Rs. 6500
Pensionable Benefit - 6500 x 32 / 70 = 2971 - (B)

Total Pension - (A) + (B) = Rs. 3776