## Weekend Links May 30th 2014

Let’s start this week with a touching story about a beluga whale who mimicked human language, and possibly tried to communicate with humans. This story reminded of the documentary “Blackfish” which is a very touching story about a killer whale in captivity, and if you get a chance to watch it, I highly recommend that you do.

An interesting op-ed in The Hindu about the declining power of the Pakistan Army.

India’s CAD (Current Account Deficit) is down a lot this year, and while this is great relief, it is probably only temporary, BL  has a nice brief editorial on some permanent solutions.

Obesity is rising in China, and in fact, India isn’t doing that great either.

Goldman Sachs predicts the world cup winner.

An immensely useful guide on free things on the internet that everyone should take advantage of.

Finally, did you hear that Google is developing a self driving car from the scratch?

Enjoy your weekend!

## How to calculate return on an insurance policy?

Colin posted the following comment on the Suggest a Topic page yesterday:

Colin May 28, 2014 at 1:04 pm 

I have a real tough time to measure the current value of insurance-linked products that provide payback after the 20-25 year period. Is there a way to do this easily? How should i evaluate whether its worth continuing with a policy? Or just putting money to better use somewhere else.

I am removing the insurance element (which is totally incorrect) from the equation but seems to be the only way to measure current worth. I could assume that i take a term policy perhaps to nullify this?

I know that this is a very big issue for a large number of retail investors whether they know it or not. I say that because Colin is actually in the minority in the sense that he is aware of the fact that he doesn’t know how to calculate the return of an insurance policy. The vast majority of people who own insurance policies don’t know how to calculate the returns, or if they know the mechanics of it, are not aware of the actual numbers they should use, and that is a bigger issue than the calculation itself.

How do  you calculate the return on an insurance policy?

At very basic level, there are two numbers you have which are how much premium you pay every year, and what is the final amount you are expected to get. You use these two numbers to get the rate of return on your investment.

This is very simple if you don’t want to understand the maths behind this (which you probably don’t need either). Go to this annuity calculator, and click on “Rate”. After that enter the values as follows:

• Total: This is the number you expect to get at the time of maturity.
• Annual Amount: The premium you pay every year.
• Years: The duration of the policy.

The system will calculate a rate of return for you after you enter these three values and this is the rate of return of your insurance policy, and if you are entering actual numbers from your policy, I would expect them to be in the mid to lower single digit range because that is generally what most insurance policies return.

Which numbers to use in the return calculation of your insurance policy?

This is often the harder part where the brochures and tables that you are shown often have little stars on them with subtle disclaimers that confuse the issue and make it hard to decide which numbers to use.

Every insurance policy that provides returns will either have a guaranteed and variable return, or just variable return or just guaranteed return.

If you just have guaranteed return then use that to see how much is the rate of return.

If you have only variable or a mix of variable and guaranteed then carefully go through the documents to ascertain where the distinction is and you will have to input one or more numbers to account for the assumptions they are making at various return points, and see what the policy is likely to net you in different projected scenarios. Even then, please appreciate that these are projections and may not come to realize at all if the insurance company doesn’t make as much money as they hoped they’d make.

This is definitely the harder part of calculating returns and requires some judgment calls and also the understanding that all you have is assumptions and there is no guarantee that any of this may come to pass.

How to measure the returns against a term plan?

Once you have calculated returns or have some general idea of what those returns might be, go to the website of any life insurance company and get an estimate of what an equivalent pure term plan will cost you. Now, deduct that amount from your premium and see how much money you save, and if you invested that in a simple bank fixed deposit how much money you’d make. In most cases, you will find that this combination is better than whatever policy you currently own.

If you have insurance policies, and have never done this exercise then I’d highly recommend doing it and getting a sense of how much you are paying for the insurance, and whether you can substitute that with a term plan and the remaining money in a fixed deposit or a mutual fund.

## Claim Settlement Ratio of Life Insurers 2012 – 13

When I wrote the post about LIC’s online term insurance yesterday, I said that I would myself opt for a much cheaper private insurer and that’s because all of them essentially offer the same thing.

The reason behind that a lot of the private life insurance companies are settling claims at a good rate, and while none of them come close to LIC’s claim settlement rates, they are not that far behind either.

This situation is quite different from the one we looked at about 3 years ago when I did a post on the claim settlement ratio of all life insurers in India. A quick look at that post shows that the LIC rejected a lot fewer claims than anyone else, and the difference was enough for me to say at that time that I would go for the more expensive LIC policy.

However, things have changed now as you can see from the chart below. (click to enlarge)

There are several players hovering at the 90% mark with a few that have crossed the 90% mark, and that should give you sufficient confidence that the claim will be paid.

I don’t know what the cause for the rejections between LIC and others is  — it could be that the data disclosed in the form is inaccurate more often in the case of the private players than in the case of LIC or it could be that the private players are more diligent in pursuing the cases where the data is incorrect.

However, this situation won’t even apply to a lot of people who are diligent about doing the forms themselves, and disclose everything upfront, or in other cases don’t have anything to disclose.

The second thing about this is the 2 year rule. If your policy has been in force for more than 2 years then the insurer can’t say that there is anything wrong with your form and deny your claim. For many private players their ratio of newer policy holders to existing policyholders must be relatively higher such that it probably affects their settlement ratio.

Either way, I think the situation has changed in the last few years, and it is worthwhile considering a private player with a good claim settlement ratio and an inexpensive plan.

Disclosure: I have a LIC term plan bought many years ago.

## Thoughts on LIC’s new online term insurance

LIC announced its second online product a few days ago, which is its online term insurance plan called LIC’s e-Term Plan.

LIC introducing an online term plan must be a bitter sweet feeling for the private players who already offer online term plans. While it validates the product they originally came up with, and shows it to be a lucrative enough market for LIC to enter in; I don’t think they are too thrilled about a competitor like LIC coming up with a product in direct competition to them.

They can take solace from the fact that LIC’s online term plan, while being cheaper than its offline version (Amulya Jeevan II) is still more expensive than private player’s online term plans, and in some cases, considerably so.

I did a quick comparison for a 40 year old who wants a Rs. 2 crore cover for 20 years, and used Max Life as a proxy for the private player as that’s a good company with decent prices, and you can see the results below.

As you can see, there is considerable difference in prices between the two plans, and if I were to personally take an insurance plan right now, it would be from a private player the online way, however I understand that not everyone feels this way, and some people are far more comfortable with LIC or companies like SBI Life.

This is a good option for them, and I’d definitely go for the LIC online plan instead of the offline plan if you have already made up your mind about buying insurance from LIC.

If not, then you will be well advised to look at other options like Max Life which are cheaper and essentially offer the same thing.

I say that they offer the same thing because as long as you are declaring everything correctly, there is no reason for a denial and there are several private players with a settlement ratio of over 90% which is quite a high number, and does inspire confidence.

That being said, I’m glad LIC has launched this online term plan as competition is always good for the customer, and the people who don’t want to try private players can take advantage of LIC’s lowered rates by choosing this plan.

This is a fairly simple plan so I’m not going into any details about it but if you have any questions then please leave a comment and I’ll try to answer them, and here is a link to a video instruction that Manish did which explains how to buy this plan.

## Announcing OneMint Financial Planning Services

Shiv and I have been working with some paid clients during the last few months, and have been experimenting with various type of services, and we are now ready to announce this on the blog, and reach out to a wider audience.

There are two services that we are going to offer, and I’m going to talk about each of them in this post.

## Comprehensive Financial Planning

Service

The first type of service is full blown financial planning, and we have developed a five step process for this. We conduct a weekly call and follow that up with a report at the end of each week.

You can see what each step of the process entails in the table below.

Each of the steps above lead into the next step, and finally helps prepare the comprehensive plan.

Fee

We will charge a fee of Rs. 15,000 for this service, which needs to be paid before we start the engagement.

Money Back Guarantee

We offer a no questions asked, money back guarantee that you can invoke at any time during the process and extends till 5 days after you receive the comprehensive financial plan.

There is no trick or hidden clause or disclaimers associated with this guarantee. We feel that 15,000 is not a small amount of money and if anyone feels that it has not been wisely spent, and they haven’t got their money’s worth, they should have it back. The loss in time and effort will be ours, and we will not ask you any questions or try to convince you of the value of the service. If the value wasn’t apparent enough to you during the process, then you needn’t pay for it.

## One Time Consulting

Service

There are often circumstances that need you to answer a question which requires some financial expertise. For example, you get a lump-sum, and need to know the best way to invest it to generate a monthly income, or you have your portfolio assessed, and need recommendation on what to do next. This type of analysis needs a couple of hours, and if you send your question to us, we’ll let you know if we can do this or not. We will have a call with you, and send out a written report here for this as well.

Fee

We will charge a fee of Rs. 2,000 for this service, which needs to be paid before we start the engagement.

Money Back Guarantee

The guarantee that we offer on the full blown consulting is applicable here as well, if you think your money wasn’t well spent, we will return it to you without any questions

## How will this affect the blog?

Both of us plan to write the way we were writing before, and we don’t plan to change the nature or frequency of our posts because of this announcement. If you have any questions, please leave a comment or if you want to keep it private, please send me an email.

## Muthoot Finance 11.75% NCDs – May 2014 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Muthoot Finance Limited will be hitting the streets again next week to raise Rs. 500 crore in the public issue of its non-convertible debentures (NCDs). The company will be issuing its secured and unsecured NCDs across eleven different interest payment options. This will be Muthoot’s first public issue in the current financial year.

The issue will open on May 26 and is scheduled to remain open for a month to close on June 26. Like always, the company has the option to either close the issue earlier or extend it further depending on the response to the issue.

Here are the issue details for you as an investor to consider:

Interest Rates on Offer – Muthoot has decided to cut its interest rates by 50 basis points or 0.50% per annum across all the options over the interest rates it offered in its last issue. Also, the company was offering to double your money in 72 months till its last issue, which it has increased to 75 months this time around.

Credit Rating – ICRA has rated this issue as ‘AA-’ with a ‘Stable’ outlook. The outlook was ‘Negative’ till the last issue as there were many uncertainties that the gold loan industry was facing due to some tough measures taken by the finance ministry as well as the Reserve Bank of India.

Also, these NCDs are ‘Secured’ in nature, except those which promise to double your money in 75 months.

Minimum Investment – To invest in these NCDs, you need to invest a minimum amount of Rs. 10,000 i.e. 10 NCDs of Rs. 1,000 face value.

Listing – Muthoot will get these NCDs listed on the Bombay Stock Exchange (BSE) within 12 days from the date the issue gets closed.

Demat/Physical Option – Though the investors have the option to apply for these NCDs in the physical form as well as the demat form, this option is limited to NCDs under options I to VI. Applicants will not be able to apply for allotment of these NCDs in physical form under options VII to XI i.e. these NCDs will be allotted only in dematerialised form under options VII to XI.

Taxability & TDS – Interest earned on these NCDs is taxable as per the tax slab of the investor and if the interest amount exceeds Rs. 5,000 in any financial year, then the company will deduct TDS on the interest amount.

Categories of Investors & Allocation Ratio – The investors have been classified in the following three categories and the maximum portion has been reserved for the retail investors:

Category I – Institutional Investors – 5% of the issue is reserved

Category II – Non-Institutional Investors, Corporates – 5% of the issue is reserved

Category III – Retail Individual Investors including HUFs – 90% of the issue is reserved

NRI Investment – Like in the past issues as well, Non-Resident Indians (NRIs) are not allowed to invest in these NCDs.

Gold prices have started to decline here in India. There are various reasons for that – a stronger rupee against the US dollar, the RBI easing the import curb norms, low demand due to high import duty and the US economy improving steadily. With an inevitable cut in import duty sooner or later, the gold prices are all set for a further decline.

With higher risks of gold prices coming down and concentrated business model, gold financing firms are set to face some riskier times ahead. I would personally avoid making any investment in gold financing companies, be it equity investment or debt investment.

Also, Religare and Edelweiss’ ECL Finance are planning to launch their respective NCD issues in the first fortnight of June. I would rather wait to check the interest rates and other features of those issues before I advise my clients to invest in any of these issues.

Application Form of Muthoot NCDs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in Muthoot NCDs, the investors can reach us at +919811797407

## Shoelaces revamp Nano to drink an IPA

Let’s start this week with The Economist which wishes Mr. Modi well, and highlights what can go wrong, and also what he needs to do to get things right.

Next, an interesting article from Al Jazeera which talks about what a Modi win means for Nepal. I don’t think I’ve heard that angle being discussed anywhere else yet.

This is a great, longish essay that I read this week about what happens to Asian American super achievers in the US. It’s a lengthy read but a lot of it will resonate with Indians living in the US as well, and is well worth the time spent.

Another good piece on the revamped Nano.

I’m not sure if IPAs (India Pale Ales) are as popular in India as they are elsewhere, but I certainly enjoy one every now and then and here’s a good piece on them.

Finally, do you know why shoelaces untie themselves while headphones get themselves into knots?

## Of Brokerages and Sensex Targets

One of the more futile functions of brokerages is to issue targets on indices, and to a lesser extent on stocks. Often these are horribly wrong and almost always, brokerages tend to issue a higher target when the market is going up, and revise it downwards when the market is going down.

These days since the markets are going up, all brokerages are scampering to issue higher Sensex and Nifty targets, and it’s funny to see a whole bunch of them issuing a target that is close to what the others are issuing, and you feel that surely these people are hedging their bets, and don’t mind being wrong in a herd rather than be correct alone.

There’s rarely any accountability on what happened versus what they said and I feel that anyone who uses these targets to buy or sell is doing a great dis-service to themselves.

I’m going to start a post here that collates Sensex targets from various brokers, and at a certain point in future compares them to what the market is actually doing, and see how various brokerages do.

Brokerage Target Target Date Issue Date
Edelweiss 29,000 (Sensex) Dec 31 2014 May-14
Macquarie 28,000 (Sensex) Mar 31 2015 May-14
Deutsche Bank 28,000 (Sensex) Dec 31 2014 May-14
BNP Paribas SA 28,000 (Sensex) Dec 31 2014 May-14
Nirmal Bang 28,000 (Sensex) Dec 31 2014 May-14
Nomura 27,200 (Sensex) Dec 31 2014 May-14
Bank of America Merrill Lynch 27,000 (Sensex) Dec 31 2014 May-14
Citigroup 26,300 (Sensex) Dec 31 2014 May-14
Goldman Sachs 8,300 (Nifty) Dec 31 2014 May-14
Sharekhan 8,000 (Nifty) Dec 31 2014 May-14
UBS 8,000 (Nifty) Dec 31 2014 May-14

The idea is that observing this for an year or two will either show that these targets are close to being right, and have some use or are completely bogus, and that data will be useful for people who are swayed by these things to make decisions to either buy or sell stocks, and will hopefully help them become better investors.

## Weekend links May 17 2014

How can you start with anything other than the big news this week, and like most of you, I have gone through several stories about the election, and for this post I finally settled on selecting three links that I thought were insightful and covered a broad array of subjects related to the Modi win.

First, Dr. Bibek Debroy’s post about what Narendra Modi’s massive victory means to us. It is balanced and insightful, and I hope it will add to what you have already read about this subject.

John Elliott touches writes about a few important subjects related to the new administration like foreign policy, cabinet ministers and of course the usual caveat about the possible downsides of a Modi led government.

The ET tells us how the new government can transform the economy in six months.

On to some other topics now.

Fascinating story about toilet malls in Nairobi.

8 things you didn’t know you could do with Google Drive.

A useful list of 30 incorrectly used words.

Finally, I really enjoyed browsing through this article of 13 places to visit in India.

Enjoy your weekend!

## There is a tide in the affairs of men

The extent and comprehensiveness of Mr. Modi and BJP’s victory has surprised everyone, and raised the hopes from his government even more than they already were.

Indeed, when one party gets a clear majority in 30 years — hopes and expectations are bound to be high, and when that majority is driven by a leader who appears to be strong willed, and transformational, that just adds tremendously to everyone’s expectations.

The current generation has never been so passionate about politics, and the highest ever turnout shows how important people thought these elections were, and how deeply they felt about it.

Now that the results are out, and Mr. Modi has a thumping majority – people want to see changes, and see those changes fast.

The very nature of democracies makes it hard for them to move fast, and my sense is that you will not see a lot of sweeping changes very quickly, and the inflation rate that has been terribly high in the last few years will remain high for some time to come.

You would probably see small things, and indeed the absence of some things that will tell you things are headed in the right direction.

The absence of certain actions is perhaps as important as the presence of some actions. For example – you don’t want to see the finance ministry interfering with how the RBI works, as it is one of the few institutions in the country that is doing a good job.

You don’t want to see the tax authorities going after corporates — foreign or domestic with retrospective changes to rules, and changing the rules of the game long after it started.

You definitely don’t want to see the government announcing a policy, then backtracking on it, and causing confusion among all involved.

And you certainly don’t want to hear politicians talk about regulating social media.

The number of things you want to see happen is perhaps endless, and range from big things like allowing FDI in retail, initiating massive infrastructure projects with private partnership, bringing back the Direct Tax Code, cutting oil subsidies, or relatively smaller things like picking up the disinvestment pace, and bringing changes to visa rules boosting tourism in the country.

Ultimately, everything good or bad will be reflected in numbers and a year from now, you can look at the current account deficit, or the fiscal deficit, the inflation numbers, or even something simpler like the forex reserves or the Rupee Dollar exchange rate to see how things are faring, and those numbers will tell you the whole story.

This is a great win for Mr. Modi, and he certainly recognizes this as the tide that will let him travel far, let’s just hope the country isn’t confined to shallow waters when he does that.