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Investment Plan: Use the KISS Principle

Simple works. Complicated designs make your systems, your life decisions complicated. The US Navy discovered this simple fact in 1960, and what better way to remember the same but through an acronym:

KISS for “Keep It Simple, Stupid”!

Your lives need not be complicated. Your day-to-day life decisions need not go through a complex analytical process. Investment decisions, more so.

To make your investment decisions simple, here are some pro-tips:

  1. Do not invest in any device that you do not understand fully.
  2. Do not invest in policies that offer too many things. One policy, one offering. Let that be your mantra.
  3. Do not trust agents selling policies, and investment ideas blindly. They have their own agenda.
  4. Study. Google. Bing. Research. Spend at least one hour a week studying about personal finance. That is it. Take notes, if possible. A page a week. That is all.

Keep-It-Simple-Website.png

If the tips are self-explanatory, you need not read any more, and can better invest your time reading up something else. If not, read on:

Do not invest in any device that you do not understand fully. 

With the investment market maturing, we have a plethora of opportunities in the market. You have insurance policies, mutual funds, shares, future, options, ULIPs and tens of others types of opportunities floating all around. So, which do you invest in?

Each device serves some definite purpose, but if you think about it, you invest or spend your money in these devices for two specific purposes:

  1. Minimise risk: It may be health risk or death risk or accident risk. We want risk to minimised. Remember, risk can never be eliminated. (We would talk about risk more in subsequent articles.)
  2. Maximise return: You want to retire comfortably, and make your money do all the hard work. The harder your money works, the more are your returns, the more relaxed you would be.

Try and understand what purpose a particular device serves. Click here to know the purpose that is to be served by Insurance Policies. 

If any device “claims” to serve both the purposes – high return with minimum risk – be aware, and read the next point.

Do not invest in policies that offer too many things. One policy, one offering. Let that be your mantra.

There are these insurance policies for which you pay a high amount of premium, and they provide you both insurance coverage and also some nominal return over the tenure. Trust me, you would have done better to take a term insurance (life coverage) paying a fraction of the premium required for the all-offering-policies, and investing the remaining amount in a PPF (Public Provident Fund) account. [Read about Retirement Plan: Just PPF! by clicking here.]

Likewise, you have this Unit-Linked Insurance Plan (ULIP) which claims to provide investors “both insurance and investment under a single integrated plan”. Really? Just find about the administrative charges. In its stead, you would be better off taking a term insurance and investing the rest in Mutual Funds.

One device, one offering. Term insurance for hedging risk, mutual funds for healthy returns. No complications.

Do not trust agents selling policies, and investment ideas blindly. They have their own agenda. 

To be fair to agents, they have a family to run, and obviously they would push policies that maximise their return, their commission. These agents can be physical agents or online platforms. That does not mean that you do not consult them, if need be.

But just do not trust them blindly. Ask them questions like:

  • What are the assured returns?
  • What would be volatility like?
  • What are the inherent risks?
  • What are the administrative charges? Are their companies providing the same policies for a lower administrative charge giving a bigger bang for your buck?

But to ask these questions, and appreciate their dodging answers better, you need to:

Study. Google. Bing. Research. Spend at least one hour a week studying about personal finance. That is it. Take notes, if possible. A page a week. That is all.

Personal finance is interesting. That you are reading this, means you are interested. Who is not interested in money! Just read more. Take notes. Discuss with your peers. There is no shame in discussing mistakes you made, or learning from the mistakes of somebody else.

Not that complicated, is it now?

Just Keep It Simple. 

Amartya Dey, India

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Getting Insured [Part II]

In the last article, we saw how Aadeshna calculated the returns on her mother’s “Cash Value” insurance policies. (Click here to access the article.)  And she was shocked to find that not one of the multiple policies her mother had subscribed to gave returns in excess of 6% which meant that the money invested would only double in 12 years (calculated using the “Rule of 72“).

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Now, what are “Cash Value Plans”?

The Cash Value Plans are those insurance policies which typically have two parts:

  1. Risk Cover
  2. Savings Component

The risk cover part provides you with the death benefit. Say, a policy holder has an insurance coverage of INR 1 crore. That means that the risk coverage is of 1 crore implying that in the event of death, the nominee of the policy holder – typically a family member – would get INR 1 crore.

And the savings component ensures that you receive a a lump-sum at the end of the policy coverage period or get an annual survival benefit every year. Sounds great, right?

But it is not.

This brings us to lesson number 2 (Click here for lesson 1):

Keep It Simple, Stupid! – the KISS principle designed by the US Navy in 1960

Insurance companies, like any other company, exist to make profit. They are not into charity. That you would receive a lump-sum or an annual survival benefit does not mean that the insurance companies are paying you out of their own pockets. They are making you pay for it. How?

Through your premiums!

This is why premiums of cash value plans are on the higher side as compared to the premiums of the useful “Term Insurance” plans which just do one thing: provide risk coverage. Typically, the premiums of cash value plans are 2 to 3 times the premiums of term insurance plans.

And it is the difference in the premium amounts which is used to provide you with the cash-back at the end of the coverage period.

To know more about the differences between cash-value plans and term insurance plans, wait for the next post!

P.S.: The motive of the post is not to show that getting insured is not necessary. That is absolutely not true. Getting insured is imperative. But there is a better way to get insured which shall be discussed in the subsequent posts of this series on Insurance.

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Picture Credit: www.telegraph.co.uk

Getting Insured [Part I]

One Sunday afternoon, Aadeshna’s mother brought up the topic of the investments she had made in her lifetime. Her mother had retired last year from the Indian Post Office. Most of the investments were in the form of life insurance policies  which were going to mature within the next 3 to 5 years time-frame along with some recurring deposits and fixed deposits. Her mother wanted Aadeshna to calculate the returns on the insurance policies. Aadeshna had recently graduated from one of the best B-schools in the country. Although not an actuarial professional, she had a clear understanding about Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR) among other concepts all finance professionals are privy to.And  Aadeshna was curious to try them out!

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Picture Credit: http://orixinsurance.com/

She did the math. Not one of the half dozen policies returned more than 6%. 6%! What is 6%? Doubling the money in 12 long years? (Click here to know how she calculated that in a jiffy!)

She explained to her mother how she could have enjoyed a better return, more liquidity and bigger life coverage if only her mother would have known that:

Insurance is not an investment. It is an expense. A necessary one, but an expense nevertheless. 

That is lesson number 1, people. And while we understand it when we pay the insurance premiums for our cars and motor-bikes, somehow the cash value plans are able to fool us into believing that they add more value to our lives, when in reality there are better options available.

What are Cash Value Plans, you ask?

Click here.

Clue: Aadeshna’s mother had opted for Cash Value Plans.

P.S.: The motive of the post is not to show that getting insured is not necessary. That is absolutely not true. Getting insured is imperative. But there is a better way to get insured which shall be discussed in the subsequent posts of this series on Insurance.

Like the post? Help us know how we can help you better.

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