Why it makes sense to insure a loan

Almost every other adult in India has some form of debt or the other. Some of us might have taken a personal loan to fund a wedding, someone might’ve taken a home loan to construct his/her dream house, someone might’ve taken an education loan to study abroad. Whatever the reason might be, loans are extremely popular in the country, with certain organisations and individuals having debt to the tune of thousands of crores.

While we might not be under thousands of crores of debt, there would be a possibility that the loan amount is high, based on the individual’s income. Now, we know what happens to the ‘common’ people who default on loans. Lenders send agents to recover the amount, often seizing the collateral in case of secured loans. If we are unable to pay even after this, they could go after our loved ones, turning our entire world upside down.

Image Credit: economictimes.indiatimes.com

What is loan insurance?
Loan insurance or loan protection insurance, as the name implies, is an insurance cover which is taken for the loan. This can be understood by a simple example.

Say Mr. Jacob took a home loan of Rs.50 lakh, using this money to build a house. Given the loan quantum, he chooses to purchase a loan insurance. This loan insurance is taken for the loan amount, i.e. Rs.50 lakh, protecting him and his family from any liability which arises out of his inability to repay the loan. It is defined as an insurance which pays off any outstanding loan amounts under certain circumstances.

Why should you insure your loan?
Life is unpredictable, there are no two ways about it. Given this unpredictability, can we change the future of our loved ones on the basis of something taken by us? If anything were to happen to us, the lenders wouldn’t forget the money they lent. This sum would still need to be repaid, with the onus of repayment often falling on our family.

Now, this can take a toll on the family, especially if the sole breadwinner was the one who took the loan. His/her passing away would not only impact the family’s ability to continue with their normal way of life, it would also burden them additionally. As such, we wouldn’t want to put them through this, making loan insurance a good option in certain cases.

Alternately, there could be instances where the borrower loses his/her job. This can impact the payment of EMIs. Under normal circumstances the lender would attach the collateral and try to recover the amount borrowed. In cases where the money was borrowed without collateral, the borrower might be subjected to immense trauma. A loan insurance plan provides protection under such circumstances. The insurer will handle the EMI repayment for a specific number of months, providing the borrower sufficient time to find another job.

The third instance where a loan insurance comes in handy is when the borrower meets with an accident/is diagnosed with an illness. The insurance policy will typically cover a number of diseases, based on the cover chosen. Alternately, if the borrower met with an accident which resulted in total and permanent disability, the policy would provide compensation which would take care of the outstanding loan amount.

Should you insure all loans?
The answer to this question goes beyond a simple Yes or No. Insurance for loan depends on factors such as the loan amount, the loan tenure, the financial standing of the borrower, etc. In case of loans involving a high quantum, say a home loan or an education loan, it makes sense to insure the loan.

Image Credit: dierenmeldpunt.com

Alternately, if the loan amount is not extremely high, say in the case of a personal loan, one can choose not to insure it. It is imperative that one consider the cost of insuring the loan, for a certain premium needs to be paid for it. This premium depends on the age of the borrower, loan tenure, and the loan amount.

If one feels that the chances of anything happening during the loan repayment tenure are high, he/she should go in for an insurance cover. A number of general insurance companies currently offer this in India.

While a life insurance policy is a must in today’s world, most of us choose to ignore the other options provided by insurers. Only recently has the concept of health insurance picked up in the country.

Another concept which could truly benefit us is loan insurance, ensuring that we leave behind no liabilities for our loved ones.

This story first published on: sify.com

‘Life’ Insurance or ‘Death’ Insurance?

Term insurance is a pure risk-cover policy and is the most cost-effective financial instrument available to hedge against the risk of untimely death.

Image Credit: Forbes

It is widely believed that life insurance, especially pure term insurance, is all about death. Also, that you buy term cover because you are scared of death. There is an almost morbid aura that surrounds this theme!

Yes, that is one perspective to have. However, you can also flip the argument around if you were to consider the only real benefit that pure term insurance provides. It is a sum of money that is assured to be paid to the nominee/s, who now have to manage a living with no financial support from the life that was assured. It gives the family much needed financial succor to get on with life even when disaster strikes in the form of an untimely death of the breadwinner. It gives life a chance. That’s how ‘life’ insurance got its name.

And again, when one buys life insurance, is it because one is fearful of death or is it to make you fearless of the ultimate uncertainty in life? Perhaps, a hedge against a redictably uncertain life.

Though nothing can replace the loss of a loved one, financial support in the form of life insurance can help the family tide over this irreversible setback. It provides a hedge to the family in the face of disaster, that can otherwise lead to not just compromising on lifestyle but possibly even having to give up on bare necessities.

Term Insurance provides the most efficient financial cover

Term insurance is a pure risk-cover policy and is the most cost-effective financial instrument available to hedge against the risk of untimely death. Such a policy offers a lump sum payout in case of dear of the insured within the tenure of the policy and in some cases lump sum payout with monthly income for a pre-specified period. It helps settle one’s financial liabilities like loans, children's education and loss of income.

Large cover at low premiums

A large cover at low premiums is definitely on our radar while purchasing life insurance. Term insurance provides exactly that. For example, a 30-year-old non-smoking male can opt for a cover of Rs 1 CR for a period of 40 years by paying a premium of a little over Rs 10,000 annually, which works out to around Rs 30 per day.

The premium amount payable for the entire policy tenure (40 years in the above example) goes down when the policy is purchased early. The same cover for a similar period purchased at the age of 25 requires a premium of a little over Rs 7,000 annually. The amount of cover required would depend on the family’s lifestyle, current liabilities and present/ future expenses.

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Manage your liabilities

It is common to take on liabilities during our working lives. Most people opt for a home, car, and even education loans that are usually paid over a period of time. When the principal breadwinner is no more, the dependents need to shoulder the burden of these liabilities. This can become a mammoth task in the hour of distress.

A term policy with adequate cover arms the dependents to manage these liabilities with ease. The payout received from the insurance company can be used to pay off EMIs or even the principal amount of the loan(s) taken.

Monthly income benefit

Loss of the chief breadwinner results in the absence of regular income to the family, which can derail the finances and affect the lifestyle of one’s dependents. In the hour of distress, it may be difficult to gauge the investment options to utilize the large payout from a term policy.

A steady monthly income in this hour is crucial to meet day-to-day expenses. Thankfully, there are term plans that offer monthly income benefits along with a lump sum payout. There are policies that offer monthly income which increases by 10% every year (for a period of 10 years) in addition to the lump sum payout.

Financial pundits would say that the breadwinner of a family has an economic value that needs to be replaced in case of a premature death. The younger the family member, greater is the burden of financial replacement because of the number of earning years lost and subsequently the time to create a corpus. Secondly, the aggrieved family has a much longer period to fend for without the chief earning member. So, the thumb rule of income multiple for life cover calculation is not applicable in case of a young, untimely death.

Hence, it's prudent to find out the lifetime value of the principal earner and buy a term plan that can adequately substitute his/her financial value.

Addition of cost-effective riders

Riders help in customization of a policy. These offer additional benefits that strengthen a term plan. Critical illness, waiver of premium, accidental death and dismemberment are few popular riders that can be attached to a term plan.

Each rider has its own unique benefit. However, just as purchasing a policy requires in-depth analysis, adding a rider to a policy requires comprehensive study and research. The options are varied, and policyholders must make a smart move by understanding the benefits of each of the rider. A rider can be attached or dropped during the policy, subject to conditions.

Image Credit: mikeiamele.com

Option to increase your cover at important milestones of life

An important lesson of financial literacy is to review one’s life cover requirement periodically. There are term insurance policies available in the market which provide the flexibility to increase the sum assured in future, at important milestones in life like marriage, childbirth, etc. without even getting into a fresh medical check-up. Essentially, you are guaranteeing your option to increase your cover, irrespective of your health condition in future. After buying such an option, you need to intimate your insurance company about milestone events along with the requisite proofs. A careful need analysis at the time of life stage change helps in determining the coverage required at each stage of life.

Protection is foremost

It is well known that as Indians, family comes first for us, especially when it comes to financial savings and protection. Take a moment to imagine their life without you and you might get your answer. Get rid of this fear and become fearless by buying a term plan of your choice. The range and options of term plans available have never been as good as they are today. 

This article originally published on: indiainfoline.com

Want to invest in Equity Mutual Funds; here’s what you should know

Many of us are often scared to invest our savings in equity-related market, mainly because we are not aware of its working.

Confusion in such investment schemes is very natural as we fear that equity-related market is very volatile, uncertain and also guarantees no return.

Therefore, we often end up choosing investment modes like fixed deposits, savings account or any other small savings scheme.

Equity funds are those who gives you advantage of entering into stock markets, and your risk related to these funds are managed by expertise.

Here, you will come to know in detail about the advantages of investing in equity especially in mutual funds.

Equity Mutual Funds

Mutual funds are at booming stage in India currently and it comes in many category and one such is equity mutual funds.

As the name suggests, equity mutual funds are made in stock market, under which you buy shares of a companies in large quantities with prime object to earn higher returns.

There are several types of equity mutual funds like diversified equity funds (having more than one particular stocks), sector and thematic funds (like FMCG, auto, etc), large cap (well established firms), mid-cap and small-cap (smaller companies with turnover between Rs 20 crore – Rs 500 crore) and index funds (like all 30 Sensex companies).

According to Motilal Oswal, there are five advantages of investing in Equity MF.

1. Professional Management

Even though you pay for everything, your portfolio is managed by expert professionals whose main motive to manage your investment and safeguard your returns.

Asset Management Companies (AMCs) appoint experienced and expert professionals to invest your money in equity. Fund managers spend quality time learning about the past and researching about the future performance of companies they invest your money in.

2. Portfolio Diversification

Investments of as small as Rs 500 in this mutual fund scheme gives you the privilege to make a diversified portfolio. Portfolio diversification helps to reduce risk which means you are less likely to lose money on your investments. Compared to direct investments in stocks, equity mutual fund schemes are affordable yet diversified models of investing.

3. Liquidity

These are mostly liquid based schemes, as they offer you an opportunity to redeem your investment at any time or at a net asset value (NAV) higher than NAV at the time of purchase.

However, this is not applicable in equity linked savings schemes where lock in period of 3 years has to maintained by an investor.

You can even invest more in equity mutual fund schemes during the market fall to buy units at lower NAV. Such liberty of investing and redeeming gives you better control over your investments.

4. Systematic/ Regular investments

This scheme does not require a heavy amount of investment, it gives you opportunity to start your account at a small sum which can be paid at regular intervals via Systematic Investment Plan (SIP).

The small sums that you invest regularly are invested to buy stocks. This also develops a regular habit of investing which is useful in long term wealth creation.

5. Tax benefits

Usually it is advised to hold an equity mutual fund scheme for a period of one year, as the capital gain on your investment gets exempted from tax liabilities. Look at the brighter side , you create enough wealth in equity MF for one year and do not have to pay for taxes.

Apart from this, the Indian government also gives tax rebate for equity linked savings schemes (ELSS) under section 80C of Income Tax Act 1961. One can invest into ELSS and deduct upto Rs 1,50,000 from your taxable income to effectively reduce your tax liability.

So why not start creating SIP in equity funds.

An SIP is usually a monthly investment that happens automatically on a pre-decided date. There are many firms which offer you SIP on equity funds, you just have to open an account with them and they will take care of your investment.

By giving a mandate to the fund company for deducting your investment amount from your bank account, SIP gets average out from your cost of investment.

When SIP gets average out from your bank account, then takes place the allotment of shares in the equity funds.

Generally, when the markets are high you get allotted with fewer units, and when they are low you receive more units in your portfolio with the same amount.

One big advantage of carrying out a SIP in equity funds, makes investing become a habit. SIPs are automated investments that ensure you save the designated amount every month.

This way you can invest before you spend, as the SIP date is in the beginning of the month for most of investors.

This article first published on zeebiz.com
Written:
By Pooja Jaiswar
Updated: Fri, Dec 08, 2017
09:01 pm
Mumbai, ZeeBiz WebDesk

Mutual fund units cannot be transferred till the death of the unit holder

If a child is set up as a nominee in the mutual fund folios of the father, then upon his death, the child can stake claim to the units and get them transferred to her name

I am 31 years old, investing Rs10,500 via SIPs since last 6-7 months in—Large-cap: Birla Sun Life Frontline Equity Fund (G) (Rs4,000); Multi-cap: ICICI Prudential Value Discovery Fund (G) (Rs5,000); and Small-cap: Reliance Small Cap G Fund (Rs1,500). I want to invest for minimum 5-7 years. I want to know if my portfolio is good enough? Some people are suggesting that I add a mid-cap fund for better returns. My aim is to create wealth but at the same time, I don’t want to take too many risks. In the long run, should I top up these existing funds as and when possible?

Nikhil Malhotra 

There are a few things you need to consider before you decide on your fund selection. One, you need to have a goal (in the form of a target amount) for your investments. Next, given that you have a time-frame in mind, you need to check what the possibilities are of you reaching your goal with commensurate risk. Will having an all equity portfolio help you do this without much risk, is a question you need to ask yourself. Past data suggests that an all equity portfolio has a measurable chance of delivering negative returns even over 5-year timeframes. This is so even if you go with SIPs. Given this risk, it is better that you do an asset allocation for your portfolio, with a mix of equity and debt funds. How much equity you should have will depend on your risk profile. However, given your age and timeframe, a 70:30 equity debt allocation will do a good job of hedging your portfolio from risks. If you think this allocation suits you, then you would need some equity and debt funds. A balanced fund will give you some debt but given that the debt allocation there is low, even a 40% allocation to a balanced fund will give you a 10% allocation to debt. Hence, given your present amount, this may not be an ideal allocation.

Among the funds you hold, you can consider stopping investments in Reliance Small Cap and just hold the fund. Since you have stated that you do not want undue risks, you can do away with the risky small-cap category. Instead allocate it to a debt fund like UTI Short Term Income fund. Invest Rs3,000 in this fund and cut back on the ICICI Pru Value Disocvery by Rs1,500 to ensure you have sufficient debt allocation. Your Aditya Birla Frontline Equity fund is a good choice. You can continue it. The two equity funds and one debt fund should provide you a good mix. In future, if you plan to increase investments, you can consider adding a balanced fund.

Kindly assist me with the information that I would need to get started with investing in mutual funds. My friend says that it is better to buy directly from the fund website rather than going through an agent. I would save 1% of the brokerage. What are some good funds I can invest in, also keeping into account tax benefits, if any? I have around Rs20,000 to invest in a month. 

Joseph Falcao

For successful mutual fund investing, an investor needs to be able to do three things. One, be familiar with financial arithmetic and be able to do some basic planning. This is to figure out how much to invest and how long to invest for to reach defined financial goals in life. Second, the investor would need to understand asset allocation principles and be able to put together a good portfolio. While this is not rocket science, especially given that there are tools such as Mint50 funds available, it still requires an understanding of portfolio design. Third, and as important as the first two, one would need to be able to maintain this investment portfolio both from a review and rebalancing perspective as well as from a behavioural perspective. If an investor can do these three things then they should unhesitatingly go to mutual fund websites and invest directly. 

However, as I read your question, I can see that you are quite a distance from being able to build and maintain your own portfolio. Given this, I would recommend that you go through an adviser. If you can find a registered investment adviser (RIA) who can take a fee and guide you with direct funds, please go with such a person. Else, please seek an adviser who’ll use regular plans for your portfolio.

If a person is holding a few mutual funds in his HDFC ISA account for, say, 30 years, and is too old to track them, can he transfer them to his grown up son without selling them so that the son can benefit from the long-term compounding and also continue to hold them even longer? If not, upon death of father, can it be transferred and can the son still hold the units for long term?

Rajendra

Mutual fund units cannot be transferred to another person other than in the situation where the unit holder is no more. If the son is set up as the nominee in the folios of the father, then upon the death of the unit holder, the son can stake claim to the units and get them transferred to his name. However, this does not happen automatically and would require the son to be aware of these folios. So, it would be best if the father either creates a Will or lets the son know about these investments pro-actively. When the time comes, the son would need to approach the mutual fund companies where the folios are and produce a death certificate apart from regular KYC formalities and documents identifying himself (like PAN or Aadhaar card). When these are presented, the units will be transferred to a new folio in the son’s name. There would be no need to sell and re-invest these holdings in this situation, and the son can continue to benefit as a holder of the folio. 

Source: livemint

Which schemes should I invest for 25 years?

I am a beginner and want to invest Rs 15,000 per month in mutual funds. I am a moderate risk-taker. Please suggest some good funds to invest. I am 31 years old and my monthly income is Rs 75,000. I will invest for 25 years. 

--Rajiv Ranjan 

If you are not familiar with mutual fund and investing concepts, it would be a better idea to consult a mutual fund advisor or a financial planner before investing.

Here are our recommended equity mutual fund SIP portfolios: Best mutual funds to invest in 2017 . Choose a portfolio that is in line with your risk profile and SIP amount.

Though you are investing with a long-term horizon of 25 years, do keep track of the performance of your portfolio. Visit ET.com Mutual Funds in the first week of every month to check whether there is any change in the portfolio.

Source: economictimes.indiatimes.com
Read More about Mutual Fund: http://bit.ly/2jpvssa