Ulips are products which are difficult to get out of

Ulips are products which are difficult to get out of

Mint, along with the Hindustan Times and NDTV, brings you a personal finance show called Let’s Talk Money. The weekly call-in show, anchored by Monika Halan, editor, Mint Money, and Manisha Natarajan, editor and senior anchor, special programmes, NDTV, aims to answer viewers’ questions about money-linked issues. This is an edited transcript of the show that was aired over the weekend on NDTV Profit and NDTV 24x7.

Natarajan: We urge you to save, we help you save and we help make your savings work smarter. Let’s talk money and make sure you reach your goals of a dream home, a healthy bank balance, a comfortable retirement fund and, most important, a trendy lifestyle today...With me, here in the studio are...

Deepak Mittal, 40, and his wife, Anita

Please advise on the following: Are my insurance investments good or not? Are the products good or not for long term? What else should I be doing so that my money grows faster and I have a satisfactory life after retirement? My immediate short term goal: shift to a bigger house in next six-eight months which shall cost Rs55-60 lakh...

Halan: We will take the home question in a bit but when I look at the numbers that you have sent, it looks like... everybody has this portfolio. You have a couple of LIC (Life Insurance Corp. of India) policies which look like endowment money backs, there are two Ulips (unit-linked insurance plans) and there is a little bit smattering of mutual funds. I am not very fond of Ulip route of investment because these are products which are really difficult to get out of... Now that you have bought it, you should continue both the plans.

Check with your policy if you are in a fully growth plan. We want you heavy in equity because you have provident fund—you should maximize that. But you are looking for growth, you are looking to build a large corpus through these plans. It doesn’t make sense to stop them because the costs are too high. So you continue the plan; just don’t buy any more Ulips or endowment or money back at all. What I would do is increase the mutual fund component. I see that there is a surplus of about Rs40,000. Let me tell you the difference. Right now you are doing Rs10,000. If you did this for 15 years, you will have Rs45 lakh and if you do Rs40,000 for 15 years, you will have Rs1.7 crore, and incomes tend to go up. So (if) surplus is there, instead of insurance buy more funds.

There is a little bit of gap between life insurance cover. You have got about Rs30 lakh of cover. I would be happier with about Rs60-80 lakh. (With the) remaining Rs30-40 lakh, you buy a term policy... Of course, there is enough money in your portfolio to buy the house, and in terms of funds, Manisha, I am looking at HDFC Top 200. It has done well.

Natarajan: ...You said that you need to prepare for a home loan. Just one more thing that we would suggest: bargain for a home loan. Pitch at least three-four banks against each other, and try a bargain of base rate plus 1-1.5%, it’s not easy, most banks will give you base rate plus 2%.

Sabyasachi, 27, engineer, Detroit, US

What do you think will (be) the right way to structure my investments for the next 10 years... Do you think I should change my current portfolio structure? I have a basket of 15 shares, which I track monthly and skim off the profits and reinvest elsewhere on a regular basis. Do you think this is a correct way, or do you suggest some alternative?

Natarajan: You are 27 and on a sound wicket. You have a home and no dependants, so what do you do? Take more risk buddy, increase your exposure to equity. 40% in FDs (fixed deposits) is too much... Prune down FDs. Increase exposure to equity through regular investments in large and multicap diversified equity funds. Aim for a 30% FD, PF (provident fund), bonds portfolio—stable, risk free... 5-10% in gold... rest 60-65% should be in equities and equity funds... you asked us for a plan for 10 years. Check your funds and stocks regularly to keep the outperformers and keep out the duds... how much have you been making on this portfolio?

Sabyasachi: Returns over the past 1-1.5 years have been good.

Natarajan: You know Sabyasachi. Then go ahead, there’s no bigger high than being able to make money on stocks... If you are making 25-30% and even if you pay capital gains tax, what’s the bother? I really don’t see anything wrong with this strategy.

Halan: It works if you have the time—and you said that you are unmarried; so that explains that you have that much time to do the stocks. Once you get a wife and you get a kid, then you may need a “fill it, shut it" kind of a vehicle.

Natarajan: Little bit of insurance, 10 years.

Halan: Are you planning to come back to India?

Sabyasachi: Yes, I work in Pune.

Halan: It’s a good age to get into cheap term policy; between the ages 27 and 30 you should take a 30-year policy for at least Rs60-80 lakh. That will take care of you; it will keep your dependants protected. The good thing is when you lock yourself into a low premium at this age, that is all you pay; term insurance premiums grow very fast, past the age of 30. So lock it in the next two-three years; do a research what company to get in, don’t settle for less than 30 years, and go for the largest cover because incomes tend to grow and so do responsibilities.

Anantha Padmanabhan, 47, businessman, Bangalore

While recommending equity investments, direct or through MFs (mutual funds), for the long term, one would expect a CAGR (compounded annual growth rate) of say, between 10% and 15%. Well, today the economy is booming. However, over the next 15-20 years, is it feasible to have such a year-on-year growth of the Sensex? Historical data over the last 15 years is fine, but going forward, I am a little sceptical...

Natarajan: ...We can only depend on historical data for projecting future returns... I have the Sensex returns in front of me. I am sure you have seen them too—last five, seven, 10 years, Sensex has returned 13-15 % and at sometimes also 17%. I will give you macro reasons why 15% in next 10 years is possible:

1) Because our economy is growing at 8% and you should be able to get double of that.

2) Corporate earnings are even better. Sensex 30 basket has been reporting earnings growth of 15%-plus for the last five years—barring 2008-09 which was a downturn.

3) For the last four quarters... net profit growth has been 20%-plus.

4) We have the demographics advantage which no other country has, including China, along with a democracy.

5) And the gloom doom in the global economy is behind us to a large extent—the US has averted a double dip...the problems in euro zone persist, but cohesively, the risk of sovereign defaults is low...