Are Ulips better investment now?

When a senior manager from a life insurer wrote a guest column on Ulips in the Economic Times in March this year, there was a tide of angry responses from readers.

"Never invest in a Ulip. I've invested Rs 2 lakh in the past five years and my fund value is only Rs 1.5 lakh," wrote Andy from Mumbai.

"Suggest a Ulip only to your enemies," wrote Joe from Bangalore. "I have lost so much in Ulips. This stupid instrument should be banned by the government," pitched in SCD, from somewhere in India.

It's easy to understand the angst of these investors, who were mis-sold Ulips by agents painting a rosy picture of the future. Ulips have been the most sold, as also the most mis-sold, financial products in the past 5-6 years.

Buyers were not told about the high charges their policies levied in the initial years, nor were they warned of the risks of investing in equities. It is not surprising that the fund value of policyholders like Andy is 25% lower than his principal investment.


What's surprising, however, is that the poor image of Ulips continues to haunt buyers even though regulatory changes have removed most of the shortcomings of these market-linked plans.

In their new avatar, Ulips are certainly more customer-friendly and transparent. "The Ulips have been bashed so badly that very few people want to buy them anymore," says Deepak Yohannan, CEO of Myinsuranceclub.com.

On the other hand, the capping of the charges on Ulips has led agents to avoid these low-commission instruments. In 2011-12, barely 15% of the total premium from new policies came from Ulips, down from almost 75% in 2007-8.

It's true that these market-linked plans are not the best investment option available in the market today. Other investments can yield the same results at a lower cost. Mutual funds are a simpler and cheaper option for wealth creation. You can save tax through 5-year bank FDs or PPF.

A term plan gives you a bigger insurance cover at a lower price. Even so, Ulips offer the convenience of combining everything into a single product. They also offer a host of benefits over other investments.

However, don't rush in and buy a Ulip without understanding its features or how it works. Here are a few points that buyers should keep in mind when they go shopping for a Ulip: Not the first policy: A Ulip should not be your first insurance policy. This investment-cum-insurance plan should be bought only if you have purchased enough insurance cover (roughly 5-6 times your annual income) with a pure protection term plan.

The simpler the better: There are several variants of Ulips in the market today. Some of these are structured products, which offer you a guaranteed highest NAV or capital protection. It's best to invest in a plain vanilla Ulip that invests your money in equity, debt and cash in the proportion decided by you. Just like a capital protection mutual fund cannot outperform a diversified fund, a structured Ulip may not be able to match the returns that are generated by a normal policy.

Ten thumb rules of household budgeting

1) Debt to income ratio: This denotes the portion of your income that goes into debt repayment.

Tip: The ratio should not exceed 40% for mortgage-based repayments and 10% for other debts.

2) Discretionary spending: It's not possible to live a frugal life devoid of everyday joys. But you must make the distinction between wants and needs.




Tip: Discretionary spending should not exceed 10-15% of your net take home income.

3) Savings ratio: This shows how much of your income you save. The higher the ratio, the better it is.




Tip: When you are young, the ratio should be 30-50%. It will gradually come down as liabilities rise with every life stage. It could be as low as 15-20% in your 40s and 50s.


4) Retirement planning: This should be the most important financial goal for any investor. You can get a loan for all other goals but retirement.



Tip:At least 10% of your gross income should go into retirement savings. As income rises, so should your savings for retirement




5) Contingency ratio: This measures your ability to raise money during extraordinary circumstances, such as a medical emergency or loss of job.




Tip: One should have a contingency fund that can take care of expenses for at least 5-6 months.

Five tips for investing in FD

Five tips for investing in fixed deposits

ET SPECIAL:

Samsung Galaxy S4

It may be a good time to open a fixed deposit and lock in at high levels before the interest rate cycle turns. ET Wealth lists out the key things you need to know before investing in these fixed income options.

1. FDs are not entirely safe

Don't think your money is completely safe when you invest in a fixed deposit. While corporate deposits are unsecured loans that do not guarantee anything to the investor, in case of banks, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures deposits of up to Rs 1 lakh per customer across all branches of a bank.

So, if you have Rs 3 lakh to invest, split it into 3-4 investments across different banks. While this will safeguard your money, an added advantage is that if you need the amount in case of an emergency, you won't have to break the entire deposit. This means that you will have to pay the premature withdrawal penalty only for the sum that you need, even as the rest of the money keeps growing.

2. Ladder your investments

Spreading your investments across different banks controls the default risk, but what about the risk of locking in your money for long periods at low rates? Fixed deposits are prone to uncertainty because interest rates tend to move in multi-year cycles. To avoid this, build a ladder of fixed deposits which have different tenures.

If you have Rs4 lakh to invest, split the amount in four deposits of Rs1 lakh each for one, two, three and four years. When the 1-year deposit matures, reinvest the maturity proceeds in the 4-year FD. By doing so, the highs and lows in interest rates will balance out over a period of time. This will also ensure liquidity because you will have one deposit maturing every year.

3. Premature withdrawals invite a penalty

Make sure you get the tenure right while investing in a fixed deposit. Locking up money for the long term and then making a premature withdrawal means lower returns. If your bank is offering a 9% interest on a one-year deposit, and 9.5% for a 5-year term, don't be tempted to go for the longer term if there is a possibility that you may need the money earlier.

If you opt for the 5-year fixed deposit and then break it after one year, you will get the rate applicable to the one-year deposit. Worse, you may be slapped with a premature withdrawal penalty that will lower the rate by 1 percentage point. So, instead of gaining half a percentage point, you may end up losing 1 percentage point. To avoid this, go for the ladder system mentioned earlier.

4. TDS is only an interim tax

The interest earned on your FD is fully taxable. If the interest amount exceeds Rs 10,000 in a year, the bank or corporate house will deduct 10.3% tax at source before you get the amount. Your tax liability doesn't end here. If you are in the higher income bracket (annual income of over Rs 5 lakh), you will have to pay more tax on this income. 

What to do if you can’t pay your home loan EMI

What to do if you can’t pay your home loan EMI

Here’s how the bank will react to the situation and how you can negotiate with it to resolve it.

Buying a house is the most expensive purchase you are likely to make, so you may need help in funding it in the form of a loan. What if you take a home loan, but after some time, find yourself unable to pay the EMIs? There could be several reasons for this, from losing your job to depleting your savings for a medical exigency. Will the bank seize your property if you miss 2-3 mortgage payments? No, not immediately, but if you continue to default for six months, the bank will take over your house.

Lenders are willing to negotiate

Attaching a property is the last thing a lender wants to do. Though banks have the power to enforce the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) to recover non-performing assets without the intervention of a court of law, this is the last step they prefer to take. A bank usually lets one mortgage payment default slip by, but for the next one, it will mail you a reminder to inform you that your payments are late. After three defaults, the bank will send a demand notice, asking you to pay your dues as soon as possible.

"If the borrower doesn't respond to any of the mails, the bank sends a legal notice through its legal department," says VN Kulkarni, chief counsellor at Abhay Credit Counselling Centre, which is sponsored by the Bank of India. A bank waits for three months before declaring an asset a non-performing one. "After the end of this period, the bank can officially term the home loan an NPA and start the process of recovering the property through the SARFAESI Act," says Kulkarni. Even after invoking the Act, the bank gives the borrower a 2-month notice period to repay the dues.

"Finally, five months after the first default, the bank sends a notice, stating that it has valued the property for a certain sum and that it will auction the house on a particular date. This is usually set for a month from the date that the bank mails you the auction notice," adds Kulkarni.

Says Pankaaj Maalde, head, financial planning, Apnapaisa.com: "Banks and financial institutions are more interested in recovering the money than in starting legal proceedings as the procedure of attaching and auctioning a house is lengthy and takes time. So, they will pursue the matter for at least six months before taking legal action."

The last stage is usually when a borrower gets a notice from the Debt Recovery Tribunal (for loan amounts of more than Rs 10 lakh).

It is compulsory for you to attend the hearing that is set by the tribunal, where you can reach an agreement with the bank. If you are serious about paying your dues and have a good repayment track record, the bank will be willing to offer a leeway.

The first step that the bank takes is to understand the reason for the default since a home loan is a secured one, with the bank having more control over the asset.

"If a bank is satisfied that the problem is genuine and that the borrower will start paying the EMI soon, it will be willing to wait for some more time. However, banks take such decisions on a case-to-case basis," says Maalde.

Adds Rajiv Raj, director of CreditVidya: "Most lenders take a practical view of the situation and understand how critical the house is for the individual. So they will closely interact with the borrower to understand the reason for the financial hardship."

In fact, a bank will allow you to reclaim your property even after it has seized it, though this has to be done before the auction takes place. Says Kulkarni: "Even if the auction date has been announced, the borrower can come in at any stage and pay the dues to save his property. However, if the bank has incurred any charges for announcing the auction, the borrower will have to pay these."