Buying life insurance policy? Don’t ignore these 5 things

 Buying life insurance policy? Don’t ignore these 5 things

Your life insurance policy can be your lifeline if you avoid these mistakes…

Having adequate life insurance cover in your portfolio is a must. Life insurance is bought for many reasons which may not only include protection purpose but also to meet various financial goals of your life like child marriage, wedding planning and so on. Therefore, it becomes necessary to understand the main motive behind every life insurance policy.

Here are few mistakes one should avoid while buying a life insurance for themselves:

Not Knowing The Purpose

Many of us buy insurance only to save ignoring the fact that life insurance is mainly bought for protection purpose. Life insurance policy helps in securing your dependents and your future liabilities if something happens to you. Providing you tax benefit is not a primary objective of any insurance policy. It is an additional benefit which every individual enjoys once they buy a life cover to protect their family.

Not Calculating The Insurance Cover 

Most of the time people get into the trap of buying life insurance policy which provides them highest sum assured without calculating whether they really need that much cover at that point in time or not. It is important to calculate your overall annual expenses. Therefore, you should take a cover accordingly, otherwise you may end up paying a heavy premium.

Not Knowing The Policy You Need

Do you need a ULIP plan? Or, do you need a term insurance to protect your long term liabilities? It becomes very important to know which policy you need so as to cover your financial liabilities well. ULIP is a combination of insurance and investment basically giving dual benefit of growth and protection. On the other hand, Endowment plans invest in low risk instruments and offer guaranteed maturity benefits but the returns offer by these plans are quite lower as compared to ULIPs.

Not Knowing The Premium Paying Term

For every insurance plan you have to pay a certain amount of premium. Every plan has different-different premium paying terms (PPT’s) as per the policy. Knowing the PPT will let you know the exact amount you are going to pay for that particular insurance cover. Also, you can calculate returns which you may get on your survival if it’s a non-term plan.

Not Knowing The Claim Settlement Ratio | One of the important factors to choose the insurer is knowing the company’s claim settlement ratio. You should know whether the company is reliable and settle one’s insurance claim on time or not? “Claim settlement ratio is the ratio of approved claims to the total number of claims filed. Therefore if you know the claim settlement ratio, you can make a better decision on selecting the insurer and the kind of life insurance policy.”






Happy investing

5 Situations in which you should avoid availing a personal loan

5 Situations in which you should avoid availing a personal loan

Personal loans are generally taken to restructure one’s unexpected debt while meeting emergency needs, but one has to be careful while opting such loans.

Have you been recently offered a personal loan either by your own banker or by another bank through their telemarketers? The offer might seem attractive because of the offer of easy disbursement. However, if you are interested in such a loan you should know what other things it entails. A personal loan is an unsecured loan whereby banks do not take any collateral against the amount. These loans can be availed to meet an emergency financial needs or for some personal reasons.



Thus, it is only be taken at the time when one is in urgent need of money. These short-term loans are generally taken to restructure one’s unexpected debt but one needs to be careful while opting such loans. Personal loans are a good option only if the amount you require is not very big and your monthly budget can easily fit in the added EMI expense.



While there may be situations where you may have no options but to avail of a personal loan, there are situations where such a loan is avoidable given the generally high-interest rate attached and the high repayments.





We list here few situations for which you should not avail a personal loan:



Do not take loan on behalf of others



Some people make the mistake of taking personal loans on behalf of their close friends when such friends claim they are not eligible themselves. If lenders are not giving them loans, taking the loan on your head is a very bad idea. “Whenever you think about getting a loan, ask yourself two questions. Is the loan absolutely necessary? Is the loan for an appreciating physical asset like a house? Only when the answer to both questions is yes, should you think about taking a personal loan,” said Anil Rego - CEO, Right Horizons.



Do not substitute for a regular saving



The key thing to remember about a personal loan is that it is a loan that needs to be repaid with interest over time. It is not and should not be a substitute for regular savings. So as much as possible, restrict its use to emergency situations you have no other option.

“Repay your loan in as less a time frame as possible to help you save on the interest cost. This helps in two ways. In the first place, you will not be overwhelmed by your debts. Second, and more important, you will have a fallback when you are really in an emergency,” said Navin Chandani, CBDO, BankBazaar.com



Do not opt it when specific loans are available



Do not opt for a personal loan if it for a specific purpose where you can opt for a secured loan. For example, if you are considering renovating your home, select a home-improvement loan and if you are buying a car, opt for a car loan. These are secured loans and have a lower interest rate compared to personal loans.



Do not take loan to make investments



Personal loans should not be taken for gambling, investing in stock market. “Do not take a loan to invest in stock markets or other speculative purposes. This is nothing short of a gamble where you might lose out the money invested. There are no quick ways to get rich. It takes planning, dedication, and patience to build a corpus,” said Chandani.



Do not take loan to start your business

Taking a loan and opening a business is not a good option because under such situation one may not be able to meet their cash outflow comparing to inflows over a period of time and hence, one can seriously fell into a severe debt trap. If you have a dream of becoming an entrepreneur and want to open a business of own, then one should accumulate funds through some good investment route like investing in mutual funds, holding good equity stocks, or getting funded by some good investors.

Happy Investing

Source:Moneycontrol.com

Preparing for the next crisis

The Eighty Twenty Investor
 

Preparing for the next crisis

Nowadays, everyone is a long term equity investor..


Recently I had a conversation with one of my friend, who wanted my views on his equity mutual fund portfolio and the market.

“While I have no clue on what will happen to the markets going forward, expecting the last 3-5 year returns to repeat will definitely be a tall ask. The expectations need to be toned down and we need to brace ourselves for intermittent declines” went the conservative me.

“No worries. I can handle the falls, I am a long term investor and my horizon is 15 years!!”

Here is an additional data – He has started investing in equities only recently and is yet to experience any serious market decline.

Now honestly, it would be awesome if he really turns out to be a long term investor. But my worry is what if he is underestimating the actual emotional stress that he will have to undergo during a equity market correction.

My bigger worry is the fact that there are thousands of new investors entering the equity markets day by day, with heightened expectations and misplaced confidence on their ability to handle the market declines.

Am I being overly pessimistic here?

A honest confession…

Despite being a part of a large experienced firm with access to a support system in the form of brainy colleagues, market veterans, fund managers, name-it-and-I get-it data access and sophisticated software tools, we ourselves have our moments of panic, self doubt and fair share of mistakes. I know one thing for sure – handling a falling market is a lot tougher than we think. And even the best of investors have had their share of mistakes during a falling market.

Now why am I talking about a bear market now?

“The macro is improving, earnings are set to pick up, domestic flows are strong, interest rates are low, real estate and gold are not doing well, blah blah ..we are in the mother of all bull markets” goes the narrative.

I don’t have a view on the above but instead have a simple rule which I follow..

“When everyone is focused on the returns, focus on the risk and when everyone is focused on the risk, focus on returns”

So while, I profess no predicting capabilities or ability to time the market, inevitably good times in markets have always been followed by bad times.

Now that things are going great for the market, we are relaxed and have a clear mind, why don’t we spend some time thinking about a plan on how to handle things if at all something goes wrong.

And just in case something goes wrong, we have a plan and are slightly better prepared. Otherwise if the bull market continues, then it’s happy times as usual

Sounds fair?

So here we go..

Assuming things will go bad someday in the future, we need to answer two questions..

1. Why is it so difficult to handle a bear market?

2. How do we prepare ourselves for a bear market?


The heat of the moment effect

The popular behavioral scientist Dan Ariely and his colleague George Lowenstein in 2006 came up with a weird yet very interesting experiment.

This tendency for us to behave differently when in a calm state of mind (cold state) and differently when in the heat of the moment (hot state) is what behavioral scientists call as “empathy gap” or “heat of the moment” effect.

Now while most of wouldn’t have heard of this technical term “empathy gap”, but we can easily relate to the fact that when we’re emotionally upset, angry, happy or aroused, we don’t always make the best decisions.

The key takeaway for us is this:

When we are calm and comfortable, we turn out to be extremely bad in imagining how we will act during times of emotional strain (think fear, anger, hunger, exhaustion, thirst etc).

Such an under-appreciation of how we behave during times of emotional strain is where the trouble actually starts.

Now before we move ahead, spend some two minutes and answer this question

How do you think you will behave if the market cracks by 25%?

But remember, this is you in your “cool & calm” avatar!

Your “emotionally charged” avatar might have different plans.. and if you are like the rest of us it will panic and freeze!

Now that you are self aware, that is one step in the right direction.

But the problem of our “emotionally charged” avatar panicking and giving up on our equity investments still remains.

What do we do?

Odysseus to the rescue

In the legendary greek mythology, The Odyssey, the hero Odysseus takes on several challenges throughout his travels and at one point, he and his men are required to sail past an island that is inhabited by Sirens. The Sirens were beautiful but dangerous mermaids who lured sailors with their enchanting music and beauty. Under the spell of these Sirens, the men would hopelessly sail their ships towards the island of the Sirens, crash their boats on the shores and die.



Knowing this cruel fate of men who came before him, Odysseus though a man of great strength, not trusting his ability to resist temptation, decided to plan much ahead.

He instructed his men to plug their ears with wax so that they wouldn’t be able to hear the Siren’s song. He also asked his men to men to tie him to the mast of his ship so that he wouldn’t be lured to steer the ship towards the Sirens.

This method of previously committing towards an action while in a normal state is called pre-commitment.

The bear market is the Siren in our case. While we don’t know when, we must always be prepared for the Siren.

We have to protect ourselves from “ourselves” whenever the bear market arrives.

As Odysseus recognized that he would become a different person when subjected to temptation, we must recognize the same in ourselves when subject to a bear market.

All this points to a simple strategy –

We need to have a battle plan and pre-commit to it!


The Battle Plan



The last thing you want to do in a falling market is to be forced to sell equities to fund a near term requirement.

So let us solve this problem first

1.Emergency Fund

Build your 3-6 month spending needs in a liquid fund

With all talks about pay cuts, job losses etc during a bear market, this becomes a welcome relief



2.Fund your short term requirements (next 5 years)

Build using a short term debt mutual fund or arbitrage fund – you can invest the entire amount if you have or start an SIP

Now with near term money requirements out of our way, we are left with our long term investments and the most important thing from hereon will be our ability to remain calm and hang on.



3.Pre-commitment plan

Write down what would you do when the

Market falls 10%?

Market falls to 20%?

Market falls to 30%?

Market falls to 40%?

Market falls to 50%?

Take some time out and really think this through.

When the market goes down by 10%, what would you do?

Would you increase your equity allocation? Do you have cash which you can deploy? Should you wait for further correction? Have you identified where to invest? Should you sell some equity? If you sell, when will you get back? What are the parameters you plan to check? etc

Similarly start thinking about your decisions to be made at 20% fall, 30% fall, 40% fall and 50% fall.

The key thing to remember:

This plan is never going to be a one-size fits all plan. Each and everyone of us based on which stage of life we are, our overall portfolio size, understanding of equity markets and our ability to take risks will have a different plan.

So build a customized one for yourself.

Here is the most important part – put it in writing and whenever the situation arises and you have to make a decision, refer to this and get a sense of what your “cool & calm” avatar wanted you to do.

Also discuss with your better half and make sure both of you are convinced of the plan.

Hopefully, we should be able to steer clear of the lure of the siren!



4.Set the right frame

If you have just started saving, then approximate the expected 15 year value of your SIP. Then find the current % of your equity portfolio vis-a-vis your overall future portfolio. If it is a small proportion then don’t be too worried at this juncture. Even if there is a fall, the bulk of your portfolio is yet to be built, and what better period than a bear market to build your portfolio.

If the amount is large (say >5x your salary), then follow asset allocation, and decide on how you will increment equity allocation at various falls (the pre-commitment plan).



5.Stop listening to experts

Remember the “authority bias” – i.e in times of decision making during uncertainty we always turn towards the experts and they will have a substantial influence on our decisions


The truth will always be this – “No one really knows”


So stop listening to doomsday theories and continue with your pre-committed plan



6.Instruct your financial advisor (if you have one) to monitor you to act as per the committed plan

Most of us think a financial advisors job is to recommend investment products and ideas. But I believe, even a half decent investment website or a blog can help you out in that. The true value add of a good advisor however is actually on the behavioral front. During bad times there is nothing which can replace the support and comfort that a fellow human advisor can provide.

Anyway, in case you have a good advisor, work with him on the pre-commitment plan, take a printout with your sign on it and tell him it’s his responsibility to make sure you execute as per plan.

There you go..Your battle plan is ready

Parting thoughts..

But wait, hang on..

What if after all this we still panic and fail in executing our pre-committed plan.

Truth be told. That’s a pretty bad thing to do. But nevertheless, some of us may still succumb.

In that case, we need to go back to our battle plan sheet and update on what really happened vs what you had planned. This will serve as a mirror for our true risk profile rather than those theoretical questionnaires which are usually used to access our risk profile. This will also be our self introspection moment in understanding us as investors.

Based on this, in the future, we need to adjust ourselves to a much more realistic equity allocation going forward.

Remember, investing is a lifelong activity.

The idea is always to keep improving and becoming a much better investor version of ourself with the passage of time.

And yes, never let a crisis go waste.

So while we wait for the next one, get your battle plan ready and as always happy investing

 Happy Investing