Personal Finance 2.01

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The area under consideration today is availability of insurance along with mutual funds; and this is likely to remain in the spotlight because of huge attention focused on the area. An investor needs to distinguish the position with respect to other mutual funds that he has experienced. In this entire issue, the question of collection of insurance premium is important and a small distinction can make all the difference.

Regulation In the existing position, the mutual funds cannot collect insurance premium. This, according to many people, puts mutual funds at a disadvantage because unit linked insurance plans (ULIP) offer insurance as well as investment like mutual funds together.

There are schemes that still offer an insurance cover but comply with the main guideline. To understand this one has to look at the fine print of the entire issue.

Offering insurance Presently when a mutual fund offers insurance along with the investment in their specific schemes, the entire situation works in a different way Mutual funds that offer such insurance do not ask the investor to pay the premium.

This means that the funds are offering insurance but are not collecting premium and the later condition is the one that has to be complied with. Currently the funds enter into a tie up with the insurance companies to provide insurance and they pay the cost. This is not collected from the customer. This thus becomes affordable only for those funds that have a strong financial position and this is also the reason why such insurance is offered for specific types of investment.

Collecting premium This can be distinguished from the situation where a mutual fund house collects insurance premium from an individual. This is what has been demanded from several quarters to get the mutual funds back on a level playing field with other instruments in the market.

Once the fund houses start collecting premium, they are effectively giving both the benefits of insurance and investment at a single place and the character of the investment changes. Investors need to look at the fine print because it is this kind of small change that can lead to a different outcome. They need to understand what is happening and how they are getting affected in terms of the benefits received.

PREMIUM DIFFERENCE ¦ Insurance and investments are very popular offer ings in the market ¦ There is a demand for mutual funds to provide insur ance ¦ Currently mutual funds cannot col lect insurance pre mium ¦ So mutual funds offer free insurance to some investors ¦ This is different from a state where they offer insurance too and collect premium for the insurance

Financial infidelity is a pretty wide umbrella term, including any situation where anything less than the full truth about your money situation is shared with your partner. This not only includes outright lies (from the big ones down to little white lies), but also deception by omission and deception by misdirection as well. In short, any time you actively manipulate information to give your spouse a false impression of your personal financial situation, you’re committing financial infidelity, and since it is an act of dishonesty, it interferes with the trust in your relationship.

See this detailed post and review on The Simple Dollar

As the name suggests, company fixed deposits is a term associated with FDs issued by companies. They are distinct from the FDs offered by post-offices and banks (like nationalised banks for instance). Company FDs are known to offer attractive returns vis-a-vis FDs issued by banks and post offices.

But then the same comes at a price - higher risk. Company FDs are unsecured in nature. Hence, should a default occur, investors would find themselves in a rather unenviable situation. Of course, this doesn’t mean that every company FD is likely to result in a default; all the same, the risk involved shouldn’t be ignored.

Risk-averse investors who accord higher priority to safety of capital and an assured income over higher returns would do well to steer clear of company FDs, especially the ones that don’t carry an ‘FAAA’/equivalent credit rating indicating the highest degree of safety. For such investors fixed deposits from post-offices and nationalised banks may be more suitable.

What is the fundamental reason why people avoid personal finance?

We can think of three reasons.

One, there is an information asymmetry in this industry. That means that the seller of financial products knows more than the buyer and he uses it to his advantage and not the buyers advantage. The lack of transparency puts off people.

Two, the sellers use a lot of jargons and number crunching which makes people uncomfortable. Probably that’s another reason why people avoid personal finance.

The third reason that comes to mind is of a psychological nature. In Mahabharata, the great Indian epic, there’s a story of a Yaksha who challenges Yudishthira to answer his questions.

What is the most surprising thing in the world was one of the questions. Yudishthira answers that the most amazing thing is that even though every day one sees countless living beings that are old and dying but no one can imagine him/herself as old or taking that last journey!
That’s why people have a natural tendency to avoid financial planning.

After the Reserve Bank of India hiked the cash reserve ratio (CRR) from 8.75% to 9%, there has been a quantum jump in the number of home loan borrowers approaching banks for foreclosures and partial repayments.

Yes, it is very painful for borrowers to see all their repayments going as Interest and very little of it going into “Principal” So it is always better to prepay and take the pain in your stride. As they say that if you want to teach your kids about personal finance, show them what is poverty. So let’s take this as an education for your management of money!!

According to industry estimates, the number of home loan borrowers making foreclosures and partial repayments has almost shot up by 20-25% during the past few weeks. These borrowers are typically the ones who have taken floating loans in the last 12-18 months and are now trying to make balloon payments through their salary bonuses. Floating rates account for 90 % of the India’s home loan portfolio.

Here are the popular posts on India’s first online weekly on personal finance.

• How to select Tax Saving mutual Fund
• Why should we invest in Mutual Funds?
• Top Mutual Fund schemes based on 5 year returns
• Top Five Equity Linked Saving Schmes (ELSS) which also save Tax
• What are the charges of a ULIP
• Where to invest and Why
• Baby Steps for a newbie Stocks Investor

Which one is your favorite? Or do you have a question to ask?

Simpla Dollar is an amazing blog on Personal Finance and this post can help all of us deal with our financial fears

I think this is actually a pretty normal thing for most people. We all have areas where we’re less than confident and we all have areas that concern us about the future.

It’s very easy to push these fears aside and just not worry about them, especially if they’re not vital to our day to day life. We’ll tell ourselves, “I’ll think about that later,” and then when it comes up again, tell ourselves the same thing again, until it’s sat around for years, untouched.

This can really be dangerous. Take, for example, my fear of taxes. I’m making myself face this fear this year and that means I’m digging into an uncomfortable subject, saving for the taxes, and paying them when they’re due. If I had taken the “typical” route and worried about it later, I would be suffering dearly when tax time came around.

Here are six alternate tactics to try.

1. Make a list of what exactly makes you nervous
2. Do some research
3. Talk to someone about it
4. Write out the pros and cons of your decision
5. Spend some time each day thinking about the fear
6. Take a baby step