Shruti Agrawal, Author at CAGRfunds - Blog

August 21, 2018February 1, 2019

The debate between Term Insurance and Endowment Plans is finally over!

Yesterday, I was scrolling through Facebook and chanced upon this really funny ad starring Akshay Kumar and Sumeet Vyas. While the deceased Sumeet pleads the new age Yamraaj (aka Akshay) to give him another life in lieu of “behen ki shaadi, beti ki padhai, ghar ka kharcha, gaadi ki EMI”, he is asked a very simple yet daunting question – “Term Insurance nahi liya tumne?” To which comes the aptest reply – “Bhul Gaya”.

See the ad here

I did some research and the statistics shocked me. Although the insurance industry in India is growing at a fast pace, only 4% of our population has insurance coverage. Which means that 96 out of every 100 people have not safeguarded their dependents in an unfortunate eventuality of their death. I shudder to think of a family where the father is the sole bread earner and should anything happen to him, what was to be the future of his wife and kids. Add to that, cases where several liabilities in the form of a home loan, vehicle loan etc. are ongoing. Indeed, our priorities are completely misplaced.

But let us not blame the tendency to procrastinate as the only driver behind the low penetration. While a lot of people understand the importance of Term Insurance, they often struggle to figure out which plan is apt for them.

So I decided to do a mini survey. I went around asking 22 of my neighbours as to what had they done about Life Insurance? Well, 6 of them had not thought about it, 8 of them had thought but

got confused between the available options, 7 of them were covered by Endowment Plans and ULIPs and only 1 person was covered by a Term Insurance Plan.

Let me try and focus on the people who are covered or the ones who are thinking about coverage but are not fully aware of all the alternatives. Therefore, let us first understand what Endowment Plans and Term Insurances are.

Endowment Plans

Endowment plans, a bulk of which are sold by LIC, are a mix of Insurance and Investment. This means that you get some life insurance coverage in exchange for an annual or quarterly premium and after a certain maturity period, you get your premiums back, and maybe some bonus amount. That sounds quite appealing. You get back what you pay for. So you get insurance for free!

That is the pitch that agents make to us and like 11 out of 10 people, we scamper for anything and everything that is marked as “FREE”. Let us analyze them in more details a little later.

Term Insurance

Term Insurance is pure insurance. You pay only what is required to pay for Insurance. In case of death, the nominees get the full insured value. But you get nothing for staying alive.

Why are we even talking about Term Insurance then?

Let us see a small comparison.

	Endowment Plan	Term Insurance
Insurance Cover	1,00,00,000	1,00,00,000
Policy Period	30 years	30 years
Annual Premium	3,24,734	8,279
Total Amount Paid	97.4 lacs	2.5 lacs

Note: The above details are for a 30 year old, male, non-smoker.

Term Insurance Benefit 1: You pay only for Insurance, the cost of which is quite low. When compared to an Endowment Plan, everything being paid over and above the cost of Insurance is either getting allocated towards charges or are being invested.

Now when you are paying for investment, you ideally should also expect some return on the money getting invested. Historically, Endowment Plans have not given more than 4-6% annual returns. And this is true for a period when Fixed Deposits in Bank were giving around 7-8% annual returns and equity surpassed 15-16% annual returns. So basically, had you taken a plain Term Insurance and left the remaining money as a fixed deposit every year, you would have still made more money than your Endowment Plan did.

Therefore, Term Insurance Benefit 2: You can separate your investment objective and get better returns by following the right investment strategy.

So what do people do?

In most cases, we do not witness people taking an endowment plan with an insurance coverage of more than 10-20 lacs. This is because, for a vast majority of the middle class, an annual premium of approximately 50-70K towards insurance is a big amount. And if this is true, then let us revisit our objective of Insurance. If something were to happen to the bread earner of the family today, will a Life Insurance coverage of 10-20 lacs be sufficient to safeguard the family? In most cases, that is highly unlikely.

So, Term insurance Benefit 3: Get adequate coverage for a low premium.

But if that is so straightforward, why don’t people take Term Insurance?

Comfort with familiarity: A lot of people have seen their parents and grandparents taking endowment plans. It feels like home to them. Change results in resistance.
Affinity for “FREE”: We seldom do the math to figure out how much are we giving up over a period of time to get something for free now. Endowment Plans demand much higher premiums as compared to term Insurance but at some point in time, we get it all back. However, what we do not take into account is the time value for money. A 4-6% return over premiums paid is essentially capital destroyed. With that kind of return, you really did not generate any additional wealth, thereby defeating the whole concept of investing.
Dislike for “Expense”: We don’t like anything that we don’t get back. Term Insurance premiums albeit low are an expense. If we don’t die, we don’t get back anything. And this is one of the most prevalent reasons why people stay away from Term Insurance. Even though it makes no logical sense for them to manage their hard earned money in this way. If you want to experience this in real, next time someone sells you an Endowment Policy, ask him or her the annual return that you will make.

Our Recommendation:

Insurance shouldn’t be used as an investment vehicle. One should always go for a plain vanilla Term Insurance Policy and plan out his investments separately. Mixing the two creates a lack of transparency towards allocation to charges and leads to lower potential returns.

If you have any further queries, feel free to call us on +91 9769356440 or email us at contact@cagrfunds.com .

June 14, 2018

Who will be paying for your old age?

Shrivastava uncle is 72 and his wife, Manjula aunty is 68. They are my next door neighbours. Extremely sweet and affectionate, they love to talk. They have three kids – all married and employed. Uncle himself was a tax consultant till a few years back. As he grew older, his ability to work 8 hours a day and scout for new clients declined. His existing client base who was also largely retired did not need his services anymore. Aunty is a quintessential homemaker, devoted to the family ever since she was married to uncle. To me, they are a classic representation of the vast majority of our retired parental generation in India.

Last Sunday we met over tea and aunty made some delicious pakodas. As I noted down her recipe, uncle advised me to go slow on fried food. Two reasons – rising oil prices and rising healthcare costs. He said, the joy of fried food is “not worth it”.

Uncle and aunty had always lived a middle class lifestyle. Moderate income with significant monetary commitments towards their children. They wanted their children to get the best of education. But they had not fathomed the kind of money they would need to shell out just for schooling and tuitions, let apart the cost of higher education. So every child ended up taking a loan for pursuing their masters / post – graduation. They bought a home early in life and the EMIs continued till after their second child got married. And for all of his working 35 years, uncle’s sole intention was to save enough for getting his three kids married off in style. But with rising costs of the pomp and show of marriage, his fixed deposits were not enough. So he ended up withdrawing his PF and PPF – because it is so much more fulfilling to walk your chin up in the society than leading a comfortable retired life. So now, they have a handful of savings, minimal passive income and no monthly inflows. They definitely do not live the way they would have liked to.

I sometimes asked them why their children could not send him a monthly cheque so that they did not have to cut down on their lifestyle. They never really answered but I knew that like most parents of their generation, they always wanted to be a giver to their children. It was a matter of self – esteem to not depend on the ones you have raised. Sometimes, uncle used to say that his children need to save for their own retirement, not his. I have met his children – they are very nice people. They visit their parents often and want to help them. But they do not help because they cannot see their father feel dejected at the reality of having to depend on children.

This predicament is not unusual in our current social fabric. Some children don’t care about their parents. For those that do, the parents don’t want to be termed as dependents. It is an eternal sense of insecurity that lingers once the monthly inflow stops. The eventualities are something no one really plans for. Cost of living rises in ways we don’t visualize well in advance. We need to outsource daily chores more than we have ever had to and healthcare constitutes a big chunk of monthly expenses. Since there is so much more free time in a day, the desire to have a social life also increases. The costs of upkeep of that social life varies from household to household.

In India, we do focus on saving for our child’s marriage and may be also education. But retirement was and still is missing from the list of priority financial objectives. To our generation who has just started out on their long careers, retirement seems just too far off. And we hate to look that ahead in time. Some of my friends jokingly retort – who knows if we will be living till then. Well, the mortality rates have definitely gone up.

Some people believe that purchasing a house is all that they need for retirement. But what about the daily cash-flows? The salaries you need to pay to the domestic helpers, the driver and the newspaper man. The rising expenses on milk and flour. The medicines. The gifts that you want to give to your grand- children. We hardly plan for a life which is perhaps going to be so different from what we are currently living. And by the time we do, it is usually too late.

Let us therefore awaken and become more responsible, starting with ourselves. Next time, before you start planning for your child’s graduation expenditure, do set aside a sum for your happy retirement. It is alarmingly more important than you think it is.

About the author:

Shruti is a financial planning enthusiast and spends substantial amount of her free time in helping out her friends and relatives sorting out their finances. Currently working with Mahindra & Mahindra, she is one of our esteemed guest writers. She is an MBA from MDI Gurgaon and a CFA (CFA Institute, USA).

About CAGRfunds:

We are a bunch of financial experts who help people manage and grow their wealth. We focus on making our clients financially independent by educating them and guiding them throughout their financial journey. If you think you need help with your money, reach out to us on +91 97693 56440.

May 21, 2018May 21, 2018

Is trading in stock markets your answer to create wealth?

I grew up watching the black screen with constantly changing green and blue tickers. For a little while, I even used to handle my father’s clients who used to call every 15 minutes with a new “Buy” or “Sell” order to be placed. I was a kid just out of school then, with very little idea of what stock markets were. But, it was thrilling! I remember telling my father – I want to make money like this for myself one day.

But as I got deeper into the industry of financial planning and wealth creation, I realized a lot of things about trading in stock markets. And all of these are applicable to almost all of the traders.

Most of the stocks are bought to be sold on the same day
Most of the buyers have no idea of what business the company is in
All of those who are buying a stock believe (or hope) that the stock price will go up and vice versa
Sometimes, such buyers think that they know why the stock will go up
The quantum of buying on any particular day is equal to the quantum of selling (which means that while the buyers are convinced about the price going up, the sellers are of a diametrically opposite view)
Every day at 9 o clock, analysts tell us the stocks which will be doing well for reasons X,Y and Z
Every day at 6 o clock, no one really asks those analysts if they really did well.
In most cases, the probability of the recommendations doing well or not well is pretty much the same as a tarot card reader’s prediction

So you get the drift of what I mean.

Let us look at a simple scenario. Say for example Mr. A believes that the price of Stock X is likely to go up by 10% today and hence he buys at Rs. 100. X indeed rises to Rs. 110 and Mr. A sells it off to Mr. B who also buys it with a belief that the price will rise further. X further rises to Rs. 118 and Mr. B sells it off to Mr. C. Obviously, Mr. C also wants to make money and believes that the upward movement will continue. He therefore sells it off to Mr. D at Rs. 128. This continues till that moment when the cycle breaks. The last man standing ends up making a loss. In this cycle, there is a high probability that none of the players have any idea why the price is behaving the way it is. But what they do know is that there is a bigger fool who will pay a price in anticipation of the price rising further.

And that is trading for you, my friend. It of course is one of the most thrilling activity to indulge in. But so is poker. Therefore, one of the economists, Paul Samuelson once said –

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Long story cut short – Trading is a risky activity and is under no circumstances a medium of creating wealth. Yes, a lot of people have made money with trading. But will you be one amongst them is the question you need to ask yourself.

And for those who were thinking of taking that leap – Money is hard earned. Care for it the way you would care for your child.

May 10, 2018June 5, 2018

What we ought to learn from our mothers!

The last time I went back home, I noticed something I had never noticed so far. My mother who happens to be a quintessential homemaker was scribbling something on what looked like a pocket diary.

I have always been a curious kid. So after she was done, I asked her to explain her earnest efforts. In a very matter of fact tone, she said, “mahine ka hisaab”.

Sounds familiar, doesn’t it? For all these years when we were growing up as kids, our mothers have done exceedingly well on managing the domestic spends. Sadly, we don’t have any report cards to showcase their innate ability to budget, spend and save – all at the same time.

In my personal experience, most of the households where the women is a homemaker, the concept of “petty cash” is common. These days where both partners are working, having a joint bank account is usual. Back then, the earning husband used to give a lump-sum monthly sum to his wife which he aptly termed as “ghar kharch”. But to the wife who in most cases had no other regular flow of income, that was her bit of monthly salary. And while she had the responsibility of ensuring that the home operations run comfortably, she also had this target number in mind which she wanted to save every month.

That saving would usually be a very small amount (for the husbands knew their maths well!). Also, almost all of it was always stored in cash (and hence was not growing in value) But that little number every month was adding up to her dream corpus. Every month, bit by bit, she got closer to fulfilling her dreams.

That evening as I saw my mother doing her monthly calculations, I walked back in time. In a flash, I re-visualized all of those moments when she victoriously saved more than she intended to. Or those occasions when she spent a small part of those savings to buy me a new dress. Not to mention the recurrent bargaining sessions with the kirana store bhaiya to save a little extra that month.

While we talk a lot about the sacrifices our mothers make for us, I think we completely miss to appreciate this excellent acumen that they inherently possess. And this acumen isn’t really about being a woman. A lot of women of my age are unable to control their urge to spend. They shop just a month before the sale is about to start because they dread the crowded malls during the sale days. They also shop when the sale starts because oh, who doesn’t shop during the sale? And wait, what about the new arrivals just after the sale got over? There you go, the pleasure of saving by not spending is just so middle class!

So this mother’s day, I don’t want to tell my mom how well she has brought me up. Or how I love her for all the sacrifices she has made. This mother’s day, I will try and learn a little more of the art to budget right, spend light and save bright!

A very happy mother’s day maa!

About the author:

Shruti is a financial planning enthusiast and spends substantial amount of her free time in helping out her friends and relatives sorting out their finances. Currently working with Mahindra & Mahindra, we are happy to on-board her as one of our guest writers. She is an MBA from MDI Gurgaon and a CFA (CFA Institute, USA).