When it comes to buying life insurance for yourself, the best option is to go for a simple term insurance policy. Period.
With that aside, your next question would be – which is the best term insurance plan to buy?
The answer isn’t simple anymore.
Earlier, term plans came in just one version, i.e. they paid lumpsum (sum assured) at the death of the insured person.
But now, the insurance companies have introduced many variations of these term life insurance plans.
Majorly, these variations give the policyholder different options to decide how the total sum assured is paid out to the nominee in case of policyholder’s death.
But think about it…
Why would you anyone even think about the other versions of the simple term plan?
It will become clear as I explain it in the next sections.
You will realize that just buying a Rs 1 crore term plan or some other plan is not enough. You really need to think hard about how the money will be handled after you and accordingly, choose the right version of the term plan.
So let’s move on…
Types of Term Insurance Policies in India
Let’s see how these term plan varieties differ from each other.
1 – Term Plan with Lumpsum Payout
This is the most basic version.
Let’s say you buy a term plan of Rs 1 crore. In case you die during the policy tenure, your nominee will be paid the full amount of Rs 1 crore in one go. Nothing more, nothing less.
There is nothing much to explain about this option.
In this plan, there is no lumpsum payout. Instead, the sum assured is utilized to provide a regular monthly income to the nominee for a fixed number of years.
For example – You take Rs 1 Crore term plan. Now if you die within the policy tenure, then the sum assured is paid out as a monthly income of Rs 83,333 for next 10 years (i.e. Rs 83,333 x 12 x 10 = Rs 1 Cr).
This monthly income can either be fixed (as above) or can also be increasing one.
3 – Term Plan with Lumpsum + Fixed Monthly Payout
In this plan, a percentage of the sum assured is paid out at the time of death. The remaining amount is paid as a monthly income, which is a fixed percentage of the remaining sum assured for a fixed number of years.
For example – You take Rs 1 Crore term plan. Now if you die within the policy tenure, a percentage of the sum assured let’s say 40% (i.e. Rs 40 lac) is paid out immediately. The remaining 60% (or Rs 60 lac) is paid out as monthly income of Rs 50,000 for next 10 years (i.e. Rs 50,000 x 12 x 10).
4 – Term Plan with Lumpsum + Increasing Monthly Payout
In this plan, a percentage of the sum assured is paid out at the time of death. The remaining amount is paid as a monthly income, which increases at a pre-determined percentage on a simple interest basis on every policy/death anniversary for a fixed number of years.
For example – You take Rs 1 crore term plan. Now if you die within the policy tenure, a percentage of the sum assured let’s say 40% (i.e. Rs 40 lac) is paid out immediately. The remaining is paid out as a starting monthly income of Rs 50,000 which increases by let’s say 10% every year. So next year, the monthly payout will be Rs 55,000 and so on. Generally, the total payout in this version is more than the original sum assured.
In both the above options (lumpsum + fixed monthly payout and lumpsum + increasing monthly payout), the lumpsum % can be different as per insurer’s or policyholder’s choice. There are many plans that even pay 100% of the sum assured upfront and additionally pay a monthly income (fixed or increasing) to the nominee.
For example – You take Rs 1 crore term plan. Now if you die within the policy tenure, full Rs 1 crore is paid out to the nominee immediately. In addition, a monthly payout of Rs 50,000 is made for the next 10 years. The total payout in this version is more than the original sum assured. To be exact, it is Rs 1 crore + Rs 60 lac (Rs 50,000 x 12 x 10).
These are the major versions of the term plans that are available these days.
Now let me address the point that I raised earlier – Why would anyone even think about the other versions of the simple term plan where the payout is staggered?
Quite often, the nominees lack proper personal financial knowledge when it comes to handling large sums of money. So once they receive a large amount, they may be unable to properly manage the sudden increase in wealth and end up losing it by listening to the wrong people.
So in order to overcome this concern, many insurance companies came up with various other payout options.
This way, the nominees receive a part of the amount as lumpsum to take care of immediate concerns (like closing all loans, other big expenses in the near term). The remaining amount is paid as monthly payments over a pre-decided number of years, to replicate the regular income pattern and help smoothen the life of the nominees.
That is the major reason for the launch of these different versions.
So depending on the ability of your nominees to handle money, you should pick the adequate option:
If you are sure your nominee is well-versed in personal finance, then you can go for the full lumpsum payout term plan.
If you feel the nominee is better off not having a large amount suddenly (due to any reason you think), then you can go for the staggered-payout term plans.
If you feel that if your sudden death will result in financial chaos (due to outstanding loan or planned big expenses in the near term), then you can take the term plan that pays a % as lumpsum and remaining as monthly income (if you feel the nominee will be unable to handle money properly).
As you might be feeling right now, there are cases where opting for the staggered payout option actually makes sense.
Ofcourse from a purely financial perspective, it’s best to take the lumpsum and invest it efficiently and try to generate income from it for the nominees. But all decisions cannot be taken just from mathematical perspectives.
Do premiums vary for different Term Plans?
Yes of course.
Different versions of the term plan have different premiums.
To give you an idea, here is a snapshot of the various versions, with their benefits and approximate annual premiums for a 30-year old, non-smoking male living in a metro city and buying a 30-year term plan:
The first one is the normal term plan that you know of – pays lumpsum amount (equal to the sum assured at the death of policyholder). Others are different plans paying different monthly incomes which is either fixed or increasing each year.
There are several term insurance premium calculator available online. It’s best to check out the premiums for different types of policies for yourself.
The actual premium that you will have to pay will depend on a variety of factors. If you take a policy for a longer tenure, then it will cost more. In general, shorter the policy term, lower will be the premiums. To choose the right policy term, do read what should be the ideal term insurance policy term?
And I almost forgot telling you about another variety of Term Plans that has been pitched by a lot of agents in recent times – Return of Premium Term Plan.
Is Return of Premium Term Plan Good?
A lot of people who wish to buy term plans have this feeling that since they will survive the policy period, the premium which they are paying will be wasted.
For these people, insurance companies have come up with a term plan where the premium paid over the course of policy tenure is returned back if the person survives.
At the face of it, this seems like a good idea. And this policy did address the concerns of people who thought that the term plans are a waste of money.
But if you deep dive a bit, things aren’t that great. Such policies have premiums much higher than the normal term plans.
If we were to compare a plain term plan (that only pays lumpsum amount) with a term plan (that also only pays lumpsum) with the return of premium option, then the premiums are Rs 9717 for a plain term plan and Rs 24,968 for return-of-premium term plan.
These premiums are for a 30-year old, non-smoking male buying a 30-year term plan living in a metro city.
Let’s compare these two plans a bit more.
The total premium paid is Rs 2.91 lac for plain term plan (Rs 9717 annually x 30 years) and Rs 7.49 lac for return-of-premium term plan (Rs 24,968 annually x 30 years).
In case of death during policy tenure, the nominee gets Rs 1 crore in both cases (as the sum assured is same).
But in case of survival, things change.
In case of plain term plan, you get back nothing – that is, you don’t get back Rs 2.91 lac. On the other hand in case of Return-of-Premium Term Plan, you get back your Rs 7.49 lac.
You may again feel that the return of premium plan is better. But remember that you are paying a high premium for that.
The difference between the annual premium of the two plans is a little more than Rs 15,000 (= Rs 24,968 – Rs 9717).
If you invest this difference amount of Rs 15,000 every year at just 8%, then at the end of 30 years you will have about Rs 18-19 lac. Compare this with the amount the return-of-premium offers you at the end, i.e. Rs 7.49 lac.
So the obvious conclusion is that it’s better to not purchase a return of premium term plan. You are better off with either a simple term plan (or some of its variants that offer monthly income).
But since term plans also come in various shapes in sizes, its natural to ask which is the best term insurance plan for you?
As mentioned earlier, the choice of the term plan variety is dependent a lot on how capable do you feel your nominees are in managing money. If they are financially aware, going for a lumpsum payout is best. If they aren’t and you want to provide them with a regular income for a few years after you die, then take the lumpsum + monthly income payout option. Or you can have the best of both worlds by taking two policies combining the two approaches.
Like previous years, I have once again revised the Nifty PE-Ratio & Return analysis to include fresh data (up to December 2018). Now, this analysis has data spanning from early-1999 to late-2018, i.e. full 20 years.
This analysis uses one simple valuation metric (P/E Ratio of Nifty50) and attempts to correlate it to the returns achieved across various time periods (rolling-periods ranging 3 to 10 years) when investments were made at different PE levels of the index.
The purpose of this analysis is simple.
To arrive at some sort of conclusion and see how well or not-so-well correlated are the two things – the market’s current valuation and its future returns.
This time, I have tried to make this analysis more comprehensive and have included a few additional updates that weren’t part of the previous years’ PE vs Return analysis. So even if you have read the earlier ones, I suggest you go through this one again. My guess is that you will find it incrementally useful.
But before we get to the findings, let me say this upfront that this is not a sure-shot method to make money.
Just because we can find some trends in past data doesn’t mean that the same trends will be replicated in future. Markets are dynamic and the history is no guarantee of the future. In markets, the history is known to rhyme but it is never exactly the same.
The sole purpose of this analysis is to highlight that there exists a relation between the broader market valuations and returns you can achieve.
If you buy low (valuation wise), chances of earning good returns increase and vice versa.
How to Analyse PE Vs. Returns?
What I have done is that I have calculated returns earned on investments made at all Nifty PE levels starting from the year 1999. The time periods of return calculations are 3-year, 5-year, 7-year and 10-years.
Let’s use a simple example to understand this.
Suppose you had invested money in the index Nifty50 on 24th-February-2004 when its PE was 19.97 (actual data).
Now in the next 3-year, 5-year, 7-year and 10-year period (starting from 24th February 2004), the CAGR returns would have been 29.3%, 8.5%, 17.0% and 13.0% respectively.
Using the above-described approach, I have done the return analysis for each and every trading day since 1st January 1999 (the day from which the Nifty PE data is available publically). Obviously, I had several thousand data points for each of these periods.
The days that do not have forward returns for 3-years have not been considered in the analysis of 3-year returns. Same is the case with 5, 7 and 10-year studies. For example, data for 15-July-2013 is used for calculating 3-year return (as data is available for July-2016) and 5-year return (as data is available for July-2018). But the same is not used for 7-year and 10-year returns as data is naturally not available for July-2020 or July 2023 (at the time of writing of this study).
To simplify the findings, I have been grouping Nifty PE into 5 groups earlier.
But to provide more granular data this time, I have decided to present my finding in a larger 7-grouping set.
Nifty-50 PE Ratio and Investment Returns
The findings are based on 4243 data points for 3-year analysis, 3751 data points for 5-year analysis, 3250 for 7-year analysis and 2509 for 10-year analysis.
And here is what has been found after updating the dataset:
Due to the choice of intervals in the PE range, the figures differ slightly if I revert back to the old PE-range choice. Here is the same summary on the basis of the old grouping:
Essentially, both tables tell you the same thing – when you invest at low PEs, your expected future returns are comparatively higher.
Remember, these figures are based on past data (of the last 20 years).
The trends no doubt are easily evident here. But they may or may not repeat in future. There are no guarantees that the future returns will follow similar patterns.
Markets won’t behave as you expect them to behave just because you have found its rhythm. You will not get returns just because you want them.
But the above data set and relying on a common-sense based approach to investing tells that investing at low PEs is difficult but profitable.
So let’s say if one had the courage to invest in Nifty when PE was less than 12, the average returns over the next 3, 5, 7 and 10 year periods would have been an astonishing 39%, 29%, 22% and 18% respectively! Unfortunately, it’s very rare to find days where Nifty is trading at such low valuations.
On the other hand, if investments were made when Nifty50 was trading at PE ratios of above 24 and above 27 (which are the supposed overvalued territories), the chances of earning decent returns in (atleast) near term are pretty low. This shows that if you invest in high PE markets, your chances of low (and even negative) returns increase substantially.
Investing at lower PEs can give bumper returns! But it is not easy. It takes a lot of courage, cash and common sense to invest when everybody else is selling (in times of crisis). This is what the 3 C’s of proper investing is all about too. It is very easy to sound smart and quote things like ‘be greedy when others are fearful’. Unfortunately, very few are able to be actually greedy when others aren’t.
Before we further slice and dice the dataset to find out more interesting things, let me highlight a few important points about using index data here:
The Nifty PE data is published by NSE (here) and is currently based on Standalone numbers. This means that actual earnings (that includes those from subsidiaries, etc.) in consolidated figures are higher than what the standalone numbers would suggest. And that also means that current actual PE may not be as high as that suggested by the standalone ones.
The constituents of Nifty50 keep changing. The index management committee that is responsible for maintenance of the index regularly brings in and moves out companies from the index. The Nifty composition of 2008 was quite different from that of 2018. Similarly, the index composition of 1999 might also be very different from that of 2008 and 2018. Try to understand it like this. If the index is made up primarily of companies that are low PE-types, then index at the overall level will tend to have low-PE. Whereas if the index is made up of high-PE companies, it will tend to have a high PE. So actual definition of high and low PE will be different for both type of companies, and so in turn for the index. A PE of 15 for a low-PE company might be very high whereas for a high-PE company might be very low. This is an important factor that should be kept in mind. I have addressed this to some extent in the latter part of this analysis by comparing returns while changing the periods under consideration from 20 years to 15 and 10 years.
Moving on, let’s address another important aspect here:
Risks when dealing with Average Returns
The table above gives a very clear relation between P/E and Returns.
But the above numbers are just ‘averages’. And that can be risky if you solely invest on basis of averages.
To explain this more clearly, let’s take an example.
Imagine that your height is 6 feet. Now you don’t know swimming. But you want to cross a river, whose average depth is 5 feet. Will you cross it?
You shouldn’t – because it’s the average depth that is 5 feet. At some places, the river might be 3 feet deep. At others (and unfortunately for you), it might be 10 feet.
To counter this, we need to analyze a few more things. So…
Adding More Data points to PE-Analysis
A better picture can be painted if in addition to the average returns, we also consider the following:
Maximum returns during all the periods under evaluation
Minimum returns
Standard deviation
Time spent in at a given valuation band
Have a look at the tables below now:
I want to spend some time here to highlight what all this means. I will also visually depict this using a small graph.
In the graph below, I have plotted PE ratios on X-axis and 3-year CAGR returns on Y-axis for all available data points in the last 20 years. As you can easily see, the trend is clear – returns are higher when investment happens towards lower PEs.
But you don’t always get the average returns that the preceding table shows. You can get anywhere between the MAX figure and MIN figure and the difference is huge.
Sounds confusing?
Let me try to segregate the above chart into PE-bands to highlight this:
As you can see, within each PE band, the actual returns are all over the place.
Focus on the first green block of PE12-15 band.
The red circle is the position of average return (38.7%).
But as the two text bubbles show, the Max and Min returns are very different from the average returns. Refer to the table above and you will find that max is about 58.1% and min is about 5.9%. And all this with a standard deviation of 14.6%.
What this means is that even though the average figure might tell you something, the actual returns can vary a lot.
I hope you get the drift of what I am trying to show you here…
Let’s now see the data for 5, 7 and 10-years:
Spend some time studying the above tables.
By now, you would be clearly noticing that there are big differences between the minimum and maximum returns for almost all periods.
So even though the average return figures will tell you one thing, the fact is that the actual returns that you get will depend a lot on when exactly you enter the markets and what happens afterwards.
Two different investors entering the markets at same valuation levels (let’s say PE=17.5) but at different times would have got 7-year returns ranging from 7.7% to 26.1%. Check the table for 7-year return above and you will know how.
For a lack of better word, the difference is shocking.
What this means is that even though the average return for 7-year period in the example taken above (PE17.5) is 16.2%, the actual returns have ranged from 7.7% to 26.1%.
This is equity investing for you. Welcome!
The statement that I made a couple of paragraphs before, ‘returns that you get will depend a lot on when exactly you enter the markets’, does sound like trying to time the markets. But this is a reality. I cannot deny it. For those who can, timing the market works beautifully.
Hence even though the average returns give a good picture for long-term investors (look at the table for 10-year analysis), its still possible that you end up getting returns that are closer to the ones that are shown in minimum (10Y Returns) column and not the Avg. Returns. 🙂
This is another reason why I introduced the column for standard deviation in all tables above (see the last column of the table above).
Analyzing standard deviation tells you – how much the actual return can vary from the average returns. So higher the deviation, higher will be the variation in actual returns. For completing the scatter analysis, here are the 3 remaining scatter plots for 5, 7 and 10-year returns:
Can You Catch the Markets at Right Investible PE?
Ideally, and armed with the above insights, it makes sense to buy more when valuations are low. Isn’t it? Buy Low. That is the whole idea of investing.
But real life is not that simple.
It is very difficult to catch markets on extremes. It’s like a pendulum – it keeps oscillating between overvaluation and undervaluation. It is almost never perfectly valued.
So should you wait to only invest at low PEs? Though it might make theoretical sense to do so, it is still very difficult to wait for low PE markets. And extremely low PEs are extremely rare.
Just have a look at this 5-year table I shared earlier in this post:
Look at the column ‘Time spent by the Nifty in PE band’ at Below-PE12 levels.
It is just about 1.5% of the time since 1999 that markets spent below PE12. This is extremely rare.
For common investors, it’s almost impossible to wait for such days. In fact, such days might be spaced several years apart!
So the best bet for common people is to keep investing as much as possible, via disciplined investing (like SIP in equity mutual funds). It is not perfect (like buy low sell high) but it is your best bet given all the constraints. And once your portfolio grows in size, make sure you rebalance it periodically to adhere to proper asset allocation and manage risks appropriately.
Long-Term Investors have Better Chance of Doing Well
Another insight that this study gives is that as your investment horizon increases, the expected returns more or less are reasonably OK-ish to good enough, even when one invests at high PEs.
Have a look:
So, even if an investor puts his money in the index at PE above 24, the historical average returns are more than 8 to 10%. That’s quite ok I guess. Atleast it’s much better than being in losses.
The longer you stay invested, higher are the chances of not losing money in stock markets…even if you have entered at comparatively higher levels.
Caution – I know that’s a dangerous statement to make but to keep things simple, please read it in the right spirit and get the drift.
Now let’s compare this with someone who is thinking to invest at high PEs (above 24) for less than 3 years. Have a look at the table below:
There are un-ignorable chances that the person will not do well. Chances of losing money are fairly high if you see the average figures and Minimum returns for PE24-27 and PE>27 bands.
But let me touch upon an important point now.
Will this Result change if only the more Recent Data (and not last 20 years’) is considered?
That is no doubt an interesting and fairly valid point.
In last few years, it does seem (and I repeat ‘seem’ – may be due to our recency bias) that average PE levels are much higher than what they used to be in earlier years. The Reason for this may be many:
One of them can be that unlike earlier years, the constituents of Nifty50 are companies which in general have high PEs. So obviously there is a case for slightly higher average PE figures as the new normal.
The PE figures are based on standalone numbers of constituent companies of the index. If we consider the consolidated numbers, then chances are that the earning would be higher and lead to lower (calculated) PE figures. Earlier, the difference between standalone and consolidated figures wasn’t much as Indian companies did not have large subsidiaries that would distort the figures. But as Indian companies grow and so do their subsidiaries, the consolidated figures will be incrementally bigger than standalone ones.
To accommodate these facts, it makes sense to give more weight to consolidated figures. But NSE publishes data on the basis of standalone numbers till now. So we live with it for time being.
Another option is to reduce our period in consideration from 20 years to a more recent one – like last 10 or 15 years – where the comparative difference in the nature of index constituents in not as stark as what might be (like) 20 years ago.
Ofcourse the number of data points would reduce. But we can atleast have a slightly more relevant comparison if not a perfect one. So I wanted to try out the above analysis with different (but more recent time periods).
As a first case, let’s consider the last 10 years data, i.e. Jan-2009 to Dec-2018.
Do note that the beginning of this period coincides with the depth of the last severe bear market. So numbers will change. Let’s see:
You would agree that the trend remains the same. At higher valuations (PE), the future returns reduce.
I have not done the analysis for 7- and 10-year period as the period under consideration (i.e. 10 years) is too small to have any sufficient number of data points for the 7- and 10-year analysis.
But how does this compare with our previous analysis where period under consideration was 20 years? Let’s see:
Spend some time comparing the above 2 tables. The left one is based on the analysis of the last 10 years and the right one is based on the analysis of the last 20 years.
The basic conclusion once again is the same.
But the extent of these returns changes when we the period under consideration is changed.
How?
Focus on the red arrows for now. The returns for PE12 case moderate from 38.7% to 23.0% (for 3-year) and from 29.2% to 18.4% (for 5-year) when we change the analysis period from 20-year to 10-year.
Now focus on the green arrows. The returns for PE18 and above (i.e. PE18 to 21 to 24 to 27 and beyond) increase somewhat for both 3-year and 5-year analysis when we change the analysis period from 20-year to 10-year.
This might be getting slightly number heavy but what I want to highlight here is that depending on the data set I chose, the return figures change to some extent (increase and reduce for different PE bands).
The overall conclusion still remains the same. But the expectations need to be revised when we give more weight to the recent past (last 10 years) than what we gave to the full last 20-year period.
You might feel that by choosing the last 10-year period, I am missing out on the Bull Run between 2004 and 2007. And rightly so.
So let’s consider a different period now:
The last 15 years (from Jan 2004 to Dec-2018).
This period takes into account the great bull run of 2004-07, the big crash of 2008-09 and the upmove since then 2009-2018.
Let’s see what the data tells here:
I may sound repetitive here – but the overall trend is still the same.
But once again, what changes though is the extent of returns in each case.
Let’s now compare 3-year and 5-year investment returns for each of the PE bands when different analysis periods of 20, 15 and 10 years are considered:
As is clearly evident, the figures moderate if we reduce the analysis period to data of the last 10 years instead of 20 years.
To be fair, there is no perfect answer as to which one should be used or which shouldn’t be. But this moderation analysis proves that we should revise our expectations to more rational levels. Due to various factors (like increasing difference between standalone and consolidated earnings and PE figures, change in index constituents and their normal valuations), we may have to keep a range of outcomes in our mind when making investment decisions. It was never black and white. It was always grey. Now it has even more shades of grey!
For the sake of completeness, I am tabulating the full findings for everything below. This includes 3-year, 5-year, 7-year and 10-year Nifty return analysis compared across various PE levels and after considering data for different sample space of 10, 15 and 20 years:
Also, note one more thing – this analysis is based on one time investing at specified PE levels.
If you are a SIP investor, then returns will obviously vary as your investment would be spread out across time and PE ranges. You cannot and should not expect to receive lumpsum-like returns on your SIP investments. The mathematical concept of average doesn’t allow that to happen.
Asking Again – Whether This Approach works in all kinds of investing?
My answer is that no one strategy can work in all conditions.
Knowing the broader market PE gives a fair idea about the valuations of the overall markets. It tells you when the market is overheating and that you should take cover (reduce equity in line with asset allocation). This, in turn, helps reduce the chances of making mistakes when investing.
Similarly, this knowledge of PE-Return Relationship also helps in identifying when markets are unnecessarily pessimist. If you are brave at such times, you can make some serious money.
And please don’t think about investing in individual stocks just because Nifty PE is low. Individual stocks have their own stories and need more in-depth analysis.
I have been doing this analysis now for several years. If you wish to access old ones done in the year 2017, 2016, 2015, 2014, 2013 and 2012, then please access the archives. But I think its best to stick with this current analysis as it’s the latest and most comprehensive one till date.
I am assuming that you are not Warren Buffett. 🙂 But jokes apart, the fact is that most people do not have the skill or time to get into deep investing.
So what should such people do?
First thing is to simply stick with a regular disciplined way of investing (easily achievable through MF SIPs). A proper way to do it is to first find your real life goals that require money (use this free excel) and then stick to Goal-based Investing. This is more than enough to begin with.
And once your corpus size grows, you should regularly rebalance your portfolio to de-risk it when needed and to position it for better risk-adjusted returns in future.
This is easier said than done but this is what really works in the market.
To sum it up…
There is a reasonable (but not guaranteed) correlation between the trailing PE and Nifty returns. And this study proves it and provides some useful insights. If we were to go by the historical data, the Nifty delivers higher return (in long-term) whenever investment is made at low PE ratios. On the other hand, it tends to deliver low to negative returns whenever investment is made at high PEs and when the investment horizon is short. You as an investor can use this insight as a backdrop to take your investments decisions.
I hope you found this detailed and comprehensive PE-Return analysis useful.
I will try to revise this study with new data points and other insights as and when practically feasible.
Term life insurance is the most basic form of life insurance. And I can safely say that it’s the most effective and the best form of insurance.
Why?
Because it gives you a very high insurance coverage (sum assured) at a very low premium. It’s perfect!
Many of you know about the benefits of choosing a term plan when compared to the whole menu of the available life insurance varieties. But this post is for those who are still not sure whether buying term insurance makes sense or not.
So here are answers to a few common questions that people have about term insurance plans.
Q1: How does Term Plan work?
A1: The buyer buys a term plan for a specified tenure. Let’s say 30 years. Now if the premiums are being paid regularly, then if the insured person dies between today and the 30th year, the insurance company will pay the sum assured to the nominee. If the person does not die during the tenure of the policy, nothing will be paid to either the insured person or the nominee.
Q2: Most people won’t die. So money paid in term plan premiums will be lost?
A2: Wrong way to look at it. Term plans are incredibly cheap. You can get a term plan of Rs 1 crore for just Rs 10,000 or even lower. On the other hand, a traditional insurance plan (like moneyback and endowment plans) can cost about Rs 25,000 for just a Rs 5 lac cover. The first thing to note is that this doesn’t make sense when you compare it with term insurance premiums. Second is that if you die, a payout of Rs 1 crore is more useful for your family than a payout of Rs 5 lac. Agreed that you won’t get anything back in term plan if you live. But what if you want to buy a Rs 1 crore cover using a traditional plan? Try to find it out. The premium will be so huge that you might not even be capable of paying it. So term plan allows you to give bigger protection to your family at a much lower cost.
Q3: What if I am lucky and don’t die? In any case, the premiums would be lost right?
A3: Read the answer to the above question again. That should convince you. Remember, insurance is being bought to protect the financial well being of your family if you die. It is not for your well being. But if it could make you feel any better, what you can do is this – Instead of buying a Rs 5 lac endowment plan for Rs 25,000, you go ahead and buy Rs 1 crore term plan for Rs 10,000. The amount you saved this way is Rs 15,000. Right? Invest this amount every year in equity funds. Chances are high that the total value of your investment after several years (like 20-30 years assuming that is your insurance policy tenure) will be much higher than what your Rs 5 lac endowment plan would give on maturity. And what more, all this while you had a big cover of Rs 1 crore as you bought the term plan. You get the best of both the worlds.
Q4: How much term insurance cover should I take?
A4: It is quite popular to go by thumb rules and take a sum assured of 15-20 times your current annual income. So for example, if your annual income is Rs 10 lac, you can buy a cover of about Rs 1.5 crore. But it’s better to not go by thumb rules alone and instead calculate it correctly. You can refer to this detailed post that I have already written on this topic – How to calculate the right life insurance amount?
Q5: How to decide the Right tenure of the Term Plan?
A5: Under most circumstances, an insurance cover may not be required much beyond retirement. And that is simply because most of your financial goals will be over by then and you would also have accumulated enough money to take care of your dependents (mostly spouse) if you were to die. So if you are 25, then you can take a cover of 35-years which covers you till you turn 60. But if you are 38, then even a 22-year term plan will be sufficient. Shorter the tenure, lower the premium. But if you want to be conservative, you can opt for a slightly longer tenure than what is necessary and just stop paying the premium when the need for insurance is not there. You can refer to this detailed post that I have already written on this topic – How to find the right tenure for the term life insurance policy?
Q6: Term plans are cheap no doubt. But why are online term plans cheaper than offline ones?
A6: When a term plan is purchased online, the costs incurred by the company are less, as there is no middleman between you and the insurance company. This lowering of cost is passed on to you as lower premium as no commission has to be paid to any agent. Most companies offer online versions of their term plans. If you are looking to buy the best online term plan, be sure to do your research and compare across insurance providers and then make the final decision.
Q7: Is the premium of term plans same for everyone?
A7: No. It varies for everyone as it depends on the person’s age, chosen policy tenure, the sum assured, payout method opted for and other premium loadings (if any) due to medical or lifestyle reasons.
Q8: Does the premium of the term plan change during the policy tenure?
A8: No. It remains the same.
Q9: If I die, are there different options in which the sum assured gets paid out to my nominees?
A9: Yes. Insurance companies allow you to chose how the money is paid out to the nominee in case of your death. Suppose you take a term plan of Rs 1 crore. Now if you die, the money can be paid out as any of the following (depending on what you have chosen):
Full Rs 1 crore paid at the time of death
Rs 10 lac paid at the time of death. Remaining 90% (i.e. Rs 90 lac) paid out equally as Rs 50,000 monthly (0.5% of sum assured) for next 15 years
Full Rs 1 crore paid at the time of death. Additionally, Rs 50,000 paid monthly (0.5% of sum assured) for the next 15 years
Full Rs 1 crore paid at the time of death. Additionally, starting with Rs 50,000 monthly (0.5% of sum assured) and increasing by 10% every year paid out for the next 15 years
And there can be many other options depending on what the insurance provider is offering at that time.
Obviously, the premiums charged in each variety would be different. Which one should you chose depends on your need. If your nominees know how to manage a large amount to generate regular income, you can go for simple 1st option. But if you feel they are better of receiving money regularly, then probably you can go for 2nd option (or even the 3rd or 4th option which will have higher premiums). You can even have 2 separate policies with different versions chosen for payout in case of death.
Q10: Should I opt regular premium or single premium?
A10: You can choose either. In regular, you pay premiums every year. In single premium, you premium once and never again. But let’s say you buy a 25-year term plan and die after 5th year. Now if you have taken the regular premium route, then you would only have paid 5 small premiums. But if you had opted for the single premium, then you would have paid in one go and that potentially means that the 20 premiums got paid extra as you died early. Nominee gets the same amount irrespective of what you chose. But I think that’s too small an issue to bother about. You can actually do whatever you feel comfortable with. Some people want to just tackle it upfront (via single premium) and be done with it. Others don’t have a lot of surplus money to do it so prefer regular route. Whatever works for the buyer.
Q11: Does it make sense to buy term plans early or I should wait for some time?
A11: The premium amount increases with age. So earlier you buy, better it is. Also, with passing age, it’s possible that you may unluckily develop some disease that might make it difficult to get a policy later on. So don’t wait too long to buy a term plan later on. Buy it as soon as possible even if it seems too early to do so.
Q12: Does the term plan pay out even if I die in an accident?
A12: Yes.
Q13: Wouldn’t a Rs 10-20 lac term plan cover be enough for me?
A13: No. Don’t be penny-wise pound-foolish. Simply answer this question – If you die today, will your family be able to maintain their lifestyle, pay for children’s higher education, pay off loans and live well for decades to come in just Rs 10-20 lac? The answer will be a big No. So take a plan that takes care of all the above things. You can refer to the earlier mentioned post (about the same question) – How to calculate the right life insurance amount?
Q15: I want to take a term plan of bigger amount, say Rs 2 crore. Should I split it?
A15: You can do it. But keep it limited to 2-3 policies max. Better limit it to just 2. If you die, your family will have to run around to get all the policies paid out. So think from that perspective.
Q16: What if I am outside India if I die? Will it still pay money to my nominees?
A16: Yes. In most cases. Unless you go and die in a country that is on the unsafe list of the insurance company. So check the list before choosing a country to go and die!
Q17: I want to buy a term plan. But I have a health condition (or family’s health history is odd). Should I hide this information?
A17: Please don’t hide any such information. Death claims can be rejected if the insurance company finds out that you had hidden any critical information. So don’t do it. This may result in slight loading of premiums (increase in premium) that you have to pay. I think that’s much better than having a hanging sword of the possibility of claim rejection in case of death. Be willing to accept the loading of the premiums and move on with it.
Q18: I have few existing insurance policies. Should I disclose them while buying term plans?
A18: Yes. Don’t hide these either. There is nothing bad in having previous insurance policies.
Q19: I have purchased the term insurance. Now what?
A19: Tell your nominees about it. They should be aware of the policy in case you die. Only then they can claim the amount. Isn’t it?
Q20: Anything else?
A20: Stay healthy and try not to die. Your family will get the money if you die. But that’s not an ideal scenario. Isn’t it?
I hope that if you or someone was looking to answer – How to buy the right term life insurance policy? – then they found this article useful.
Recently, I got interviewed by Ravichand of Stock & Ladder. The interview was originally published here (at Investing Chat with Dev Ashish).
It covers my background, investment philosophy (and how it has evolved over the years), how I invest and other related aspects. I thought it would be useful to publish it here as well, for the benefit of existing readers of Stable Investor.
This investing chat is a long one at about 6000 words and may require some time. But I hope you find it useful and worthy of your time.
So here it is…
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Ravichand (S&L): Hi Dev, Firstly a big thank you for sparing some time to share your thoughts with the readers of Stock and Ladder. First up, please tell us something about yourself especially the part about how you got into the world of investing and Personal finance.
Dev: Thanks Ravi, for considering me worth interviewing.
My story isn’t very inspirational or anything like that. I am just a regular person.
Being born in a family of lawyers and doctors, chances were high that I would take a similar path. But I have been the odd-man-out in my family. Maybe it was because of the powers above which had a very different plan for me and so, I began my journey in a completely different direction.
Currently, I am a practicing SEBI-registered Investment Advisor.
But even though I had a noticeable interest in finance since I can remember, I still went ahead and did my engineering. Later, I joined a government sector oil company and got posted in a remote location.
After working there for a few years, I made a conscious decision to gradually align my life and work towards my area of interest – which was investing in particular and finance in general.
This, however, was not going to be easy as for doing that, I would have to quit my safe government job. It was a tough decision but my family and then-friend-now-wife backed me fully for the decision.
So I quit, did my MBA and then joined a private bank. After a few years, I got a very good job offer from a startup. I was no doubt happy with the offer in my hand.
But I spent some time contemplating whether it was actually what I wanted to do. In the end, it didn’t seem like it. I realized that if I had to do something on my own, I had to take a call sooner or later.
So after having several rounds of discussion with wife, parents and a few people I consider to be my mentors, I quit my job and decided not to join the startup.
I decided to take a plunge into what I really wanted to do. I must mention here that I had sufficient savings by then to make this decision.
I took a license from SEBI to start my Investment Advisory practice and that’s what I am currently doing. After having worked in metros and other cities, I returned back to my hometown Lucknow, where I currently stay with my family.
Though my target eventually is to achieve financial independence, I think I can safely say that I will never actually retire, as is the norm in our family of doctors and lawyers.
As for my interest in investing, it got kindled when I was quite young. My father and grandfather had money invested in shares of a few MNCs. So every now and then, we used to get dividend cheques from these investments.
On enquiring, my father explained that these cheques were dividends – which he was being paid to hold pieces of paper (physical shares then).
This attracted me like anything. I just fell in love with the idea of getting a regular flow of passive income without going to work for somebody else! This was as clear a case of money working for you (rather than the other way around) that there could be.
So you can say that there wasn’t any one single moment when it happened for me. The seed was sown very early on and I tried to gradually align my life towards investing and working for my own self.
Ravichand (S&L): That’s wonderful Dev. Not everyone can make their passion the means for their paycheck and many usually end up spending their lifetime helping someone else build their dreams.
Mark Twain’s golden words come to my mind “Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”
Let’s get into investing proper. Tell us something about your investing philosophy and how it has evolved over the years?
Dev: I am 33 but have been investing in markets for about 15 years now. But initial few years are a grey area from investment philosophy perspective. Consciously or unconsciously, I was trying out several things then.
And to be honest, I did not even have a philosophy in those initial years. I simply went after ideas where I felt the probability of making money was reasonably high. Luckily, I have had this inherent bias of being a little conservative when it comes to stock picking. So more often than not, I gravitated towards good companies with proven businesses (this is an approach that I am still loyal to).
I am not exactly sure why I have had this conservative bias. Maybe it was due to my family’s history and me as a child having observed that most of the investments were in mature, dividend-paying safe stocks.
But whatever it was, I still made decent money. Maybe I got lucky in several cases. And I cannot ignore that I was amply helped by the rising tide of our great Indian bull run of 2004-07.
Thankfully, I have had an inquisitive mind that tries to look for answers to how things work. Not just in finance but everywhere. And one of the things that I really wanted to understand (after a good experience during the Bull Run) was what actually made the stock markets work and behave as they do.
So this pushed me into reading about markets and investors. Luckily, I got exposed to Warren Buffett and his philosophy at the start itself. And Mr. Buffett led me to Benjamin Graham.
The more I studied these value investors, the more I felt that value investing was best suited for me. Here I must say that I have nothing against other schools of investing. 3 plus 7 is 10 and so is 5 plus 5. So there are several ways of making money. It was just that value-conscious investing attracted me the most.
So from then on and for many years, most of my investments were based on valuation attractiveness. And I loved investing in dividend plays. Being valuation sensitive, my process was numbers driven.
But slowly I started realizing that just focusing on numbers wasn’t enough. Why? Because I was regularly missing out on other attractive opportunities that were not attractive valuation-wise.
So in due course of time and after having missed many good money making opportunities, I decided to gradually tweak my way of investing.
Valuations still mattered for me. But I was now willing to pay up (more than what I was earlier comfortable with) if I could find businesses that were of high quality, had good conservative (or let’s say non-adventurous) management, predictable growth runway and manageable debts which gave them some ability to suffer for extended periods of time.
So from a pure valuation’s guy, I became a valuation conscious investor who was willing to embrace growth. Not too much but still ready to pay up to an extent.
So instead of focusing on the cheapest stocks available, I was going after comparatively higher quality cos. which were not very cheap.
Along the way, I continued buying good companies when they faced temporary bad events. So in a way, I was and still operate as a virtual bad news investor.
This reminds me of a good analogy about why we should stick to good companies. Tennis balls are costlier than eggs. And both the egg and the tennis ball will fall occasionally. But only the tennis ball will bounce back. As for the egg, you know what fate does to a falling one. So when buying businesses, buy tennis balls. At least they will bounce back when they fall.
As of now, my approach is a little more structured than what it earlier was.
I run a core portfolio of about 20-25 stocks. But to ensure that I bet convincingly in my main picks, about 80-85% is allocated towards the top 12-15 stocks.
Remaining are ideas that I am either still working on and/or where I am yet to build full conviction about. I generally try to ensure that none of the stocks hold more than 12-15% of the overall portfolio.
A majority of the stocks in the core portfolio belong to the top-150 universe. So you can say that I am a conservative investor when it comes to stock picking.
Many people think that large caps cannot make money. I don’t agree but I don’t try to convince anyone now. Large caps have worked wonders for me over the years. So I stick with them.
I also run a smaller (call it satellite) portfolio where I enter into short-medium term bets. This is more to take advantage of temporary mispricing and other low hanging fruits.
Of course, it is easier said than done and chances of being wrong here are immense. But that’s fine. It’s my way to tackling my urge of doing something every now and then and trying to be the next Buffett.
And luckily, the results haven’t been bad and provide for more money to be pumped into the core portfolio.
I also maintain a watchlist of stocks where I keep an eye on businesses that I wish to buy but which still aren’t in my portfolio for some reason or the other.
Over the years I have realized the power and option that cash brings in times of distress. So I ensure that I regularly put aside some money in suitable debt instruments to act as a Market Crash Fund.
You never know when the market might throw up some interesting opportunity. So better to be prepared. This way, I will not miss having CASH, when there is a CRISIS and I have accumulated enough COURAGE to venture out in tough times.
The above point, as you might have guessed, refers basically to the idea of sitting on cash. And I swear it is extremely difficult to do. More so when I see people around me making easy money.
But in the long run, I think restricting the number of bets I make in most convincing ones (in my view) is how a larger part of the wealth will be created. So I try to sit on cash and do nothing if there is nothing to do.
Apart from direct stocks, I have a goal-specific investment portfolio that has equity funds, debt funds, PPFs, deposits, gold, etc. One of my major life goals is to become financially independent by 40. So these investments are aligned towards that goal.
There is one thing that I have learned over the years. And maybe this is because I still pay my respect to valuations.
A good investor knows that it is only occasionally that he has to do something. And when the time comes, he has to and should do that ‘something’. And then, there is no need to do anything else. Money will be made in most such cases.
Ravichand (S&L): Dev, that was the most detailed way someone has ever shared their process. That’s a great blueprint on which we can build our own investing framework.
As regarding to the way you have gravitated towards value investing, I remembered what Seth Klarman said “It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic”
From philosophy let’s move on to putting the philosophy into action. Tell us, what are the criteria’s or characteristics you look for in a business for it to be considered investment worthy?
Dev: I don’t have a very long checklist.
But broadly, I check stocks around 3 things – quality of the actual business, quality of the management and price in relation to my view on valuation of the stock.
Obviously, there are several things to check within these 3 broad heads.
Quality of business is all about doing the typical number-oriented analysis like examining sales and profit growths, margins, etc. – for the company and the industry peers.
Analyzing how industry and economy-specific environmental variables have impacted company’s trajectory in the past. And that of its competitors. Cost and capital structures and power that suppliers and customers have on the company or vice versa.
Then a good return on equity and return on capital are no doubt important. A less leveraged balance sheet is preferable as it makes business more robust in trying times.
I prefer sticking with businesses that have some barrier to entry that is not evaporating at least in the medium term. These are just some of the factors that I try to assess the company on.
Then there is that grey area of having a view on future growth of the business and more importantly, longevity of this expected growth. There is a big possibility to get this wrong but you need to have an objective and unbiased view on this to make your bets.
I will be honest that the quality of management is a difficult one to judge. And quality not only means their business sense but also their integrity.
So no matter how deep I go with analyzing these factors (from various sources), there will always be a chance of being completely wrong. But that’s fine. Sticking to what information is available and what signs the management is sending via annual reports and other ways is what I stick to. I really cannot get it right every time.
Even after several years in the market, I regularly end up feeling like an amateur when it comes to picking stocks. I am improving but there is a lot to learn.
I do run excel models but none of them are extremely complex or fancy. That’s because I feel that if I need a very complex model to prove a stock as a worthy of investment, then maybe it’s not that good after all.
Also, businesses are run by people and not excel spreadsheets. An Excel model cannot be an alternative to thinking. And that is where our subjectivity and biases come.
I think that good investment ideas are very simple. And to be fair and acknowledging the limitations of my ability to analyze any and everything, I would say that a stock idea has to be so good on just a few parameters that it should just jump out and find me rather than me trying to find it out.
And last but not the least, and extremely important… there is valuation. It is very subjective and what is undervalued to me might look overvalued to someone else and vice versa. But that’s how it is.
The stock should be in a comfortable valuation range for me to buy it. I generally start buying in small lots and accumulate over a course of time. I am not very comfortable buying large quantities in one go.
Here I will say that I generally avoid talking about the stocks I own or am contemplating owning. It puts unnecessary pressure on me as an investor to defend my position every time there is a news (which may or may not be relevant for me as a long-term investor). The ability to ignore and filter out the short-termism is I think necessary to operate well as a long-term investor. And there is no competition. So I try to reduce the stress to the extent possible.
Generating alphas is in itself so difficult, so why take on additional stress to justify your picks to people who may have different investment horizons or risk taking capacity. Isn’t it?
Remaining silent is all the more important as a valuation-aware investment strategy does not work all the time. Markets don’t and won’t always agree with you.
So going through extended periods of under performance is necessary and fine with me. I am more than willing to have return-holidays if I can get better longer-term returns. As they say that as a real investor, you should be willing to be misunderstood in short-term to be right in the long-term.
Talking of investment criteria’s I think I should also share my views on the somewhat related and important aspect of cycles.
Over the years, I have come to appreciate the importance of mean reversion. Or let’s say how cycles play out. I don’t have any expert advice to offer on this front as this topic tends to tread in the territory of market timing.
But I believe that we can improve our long-term investment returns by adjusting our portfolio in line with cycle requirements.
Talking of cycles, think of it like this – when recent market returns are high, the attitude of the masses towards risk changes. People forget what their real risk tolerance is and get comfortable taking more and more risk in search of better returns.
This is exactly what sows the seed for future declines. And when the time comes and the delicate balance is disturbed by some external event, it pushes the market off the cliff. That is where the cycle turns. So if one learns from the past data, then there are indicators which highlight when people are getting irrational. The same case can be built around people’s unreasonable fear after the market falls.
It is at such junctures that some level of portfolio adjustment (by re-balancing or taking cash out or bringing it in the portfolio) can improve future returns.
This requires operating against the herd. This is about being contrarian in real sense and not just for the heck of it. Which is easier said than done but with each passing year, it becomes not too difficult.
Ravichand (S&L): Completely agree on the point of simplicity and thinking of simplicity, Peter Lynch’s famous quote comes to my mind “Never invest in an idea you can’t illustrate with a crayon”.
You also brought up the important topic of market cycles which I believe to be a topic that every aspiring investor should be familiar with. Howard Marksbook Mastering the Market Cycle: Getting the Odds on Your Sideis an excellent read on market cycles.
From checklist let’s talk rules. If there were to be “Dev’s 5 rules for successful investing” then what would that be?
Dev: I feel there are no perfect rules out there for successful investing. Any day it is possible that the bets we make due to all our successful investing framework (that we are proud of) and where we have the maximum conviction, turns out to be super bad.
But if I had to list down few important realizations that I have had, then here are my rules:
Stick with good businesses run by capable and trustworthy management, which have the ability to survive bad years comfortably and operate in industries having clearly visible and reasonably long growth trajectory. As simple as it sounds, this I believe is the most effective filter to reduce the number of potential stock ideas.
Valuation should not be ignored at any cost. But be ready to pay a fair price for good businesses. Every now and then, the markets will surprise by offering unbelievable deals on a platter.
You may have the courage to go out, but if you don’t have the cash, forget about taking advantage of such few-in-a-lifetime events. So be prepared with surplus funds to the extent possible. It will test your patience. But that is the price that you should be willing to pay.
There is a time to be brave and there is a time to not be brave. Don’t try to be brave all the time. Protect and secure what you have earned. Remember Buffett’s 2 rules about losing money. Be willing to be laughed at for your investment ideas. But that is when it will work. In investing, you want others to agree with you…but later.
Ravichand (S&L): Great set of rules, Dev. The importance of protecting your investing capital cannot be emphasized enough. When you read the investing rules of super investors, the point that return of moneyis more important than return on moneybecomes obvious.
Next let’s talk mistakes. Mistakes are sometimes referred to as “unexpected learning experiences”. Can you share any investing mistake(s) you have made and what were the learning?
Dev: Let me talk about my mistakes.
One of my major mistakes (and I repeat it) has been to not average up when I entered in a good stock early on. You can say that I got anchored to the price I got in first. The result is obvious. I could have made a lot more money in absolute terms than what I made when you look just at the CAGR figures.
Selling early is also one of the crimes I regularly commit. The reason might range from increasing overvaluation to change in unintended negative signals that the management might be sending. But selling early has cost me in past. It’s like waiting for that elusive 20- or 50-bagger. For that to happen, you need to stay put and go through 5x, 10x, 15x and so on sequentially. You cannot jump straight to the 50x. Isn’t it?
At times, I did not pay attention to valuation when deciding to buy a stock. Very often, it backfired. One thing that we should not forget is that it’s not just what you buy that makes for a good investment.
It is also about what you pay for it. Valuation is something that really cannot be ignored. At least not for me. And you know what the biggest problem apart from these mistakes is?
I keep repeating these 3 all the time. The frequency is reducing. But maybe I can just never eliminate these fully.
Ravichand (S&L): To be honest, I believe that these mistakes you have mentioned would have been committed by every single investor. It’s only with experience and spending time in the market that we can avoid these potential investing landmines.
From Mistakes let’s talk on the skills required to succeed. What do you believe are the skills one need to hone for becoming a better investor?
Dev: I am not too sure about how to answer this question. But I feel that investing is unnecessarily made out to be too complex. It is in essence pretty simple. Some are born great investors. For others, I think they should do/have the following:
Basic understanding of how businesses work and make money. Before investing, think of how you would be running the business of which you are planning to buy the stock. Have an owner’s mindset.
A fair idea of finance, accounting and what numbers are telling or what they are ‘forced’ to tell or what they are hiding.
A growing understanding of how the market works and more importantly, how market participants (and not just investors) behave under different market conditions. This isn’t exactly a skill but for this, there is a need to study market history.
Reading is essential. To learn about how others have successfully invested and also because you will need to read annual reports, etc. if you are serious about investing.
Now this isn’t exactly a skill but eventually, one needs to understand that just being right or wrong doesn’t mean anything. As they say, amateurs want to be right but professionals want to make money.
So allow me to invoke George Soros here who rightly said that it’s not whether you are right or wrong that’s important, but how much money you make when you are right and how much money you lose when you are wrong that’s important.
You may call it skill, insight or art… whatever. But this is required to grow the portfolio.
Ravichand (S&L): Cannot agree more on the importance of reading in the life of an investor. Munger famously quipped “In my whole life, I have known no wise people who didn’t read all the time- none, zero” From skills required we move onto lessons learnt.
What has been the most important investing lesson(s) you have learnt from your time in the market?
Dev: You ask tough questions Ravi!
There must have been several important things that I must have learnt along the way. And to be honest, I may be still too young and inexperienced to know which one is the most important one for me.
But in recent years and as the portfolio size grows, I have come to realize that it’s not just important to push portfolio to grow faster. It is also important to start protecting what one has.
This may sound like being conservative at times. But that is what is necessary. As I said earlier, there is a time to be brave and there is a time not to be brave.
Of course when one decides to become aggressive and when one switches over to being conservative is fairly subjective. Mean reversion and how cycles work in the market is something that should be respected here.
We may not feel any urgent need to accept the cyclicity in market behavior when we start investing. But I think cycles are inevitable and more importantly, are heightened by the investor’s inability to remember the past.
Investor’s attitude toward risk also goes through a cycle. Of course the speed and timing of the cycle matters, but I hope you get the drift of what I am trying to say.
You need to position yourself and your portfolio after giving a deep thought to the cycle. Cannot ignore it. And that’s because at the extremes of the cycle, things can get really strange and uncontrollable if you don’t know what hit you or you aren’t positioned correctly.
Ravichand (S&L):Loved the lessons especially the one on the need to be brave and act decisively when needed. All the bookish knowledge like “Be greedy when other are fearful” or “Buy when there is blood on the streets” etc. are not useful if we are not going to act on this knowledge. Brian Tracyput this beautifully “Think before you act and then act decisively. Fortune favors the brave.”
From lessons let’s move on to advises. What has been the most important investing advice(s) you have received on investing? How has it influenced your investing process?
Dev: I admire a lot of famous investors as they have provided the intellectual base for my investing life. And I am grateful and lucky to be influenced by them early on.
But I think the most important investing advice I received was from someone whom I regularly interact to discuss ideas. He is a not-so-small investor but likes to remain in hiding.
What he told me (and keeps repeating) is that if I wanted to make good money in the long run, I needed to have a thick skin. And I needed to become deaf.
Why?
Because successful investing is all about being contrarian and making people agree with you…but later.
So in between, you will have to listen to all the reasons from others about why you are wrong and why they are right. But assuming you have done your homework before taking the position, you need to ignore all the pressure that is coming to you.
And for that, you need to have a thick skin and turn deaf. If you watch the movie ‘The Big Short’, this is exactly what Christian Bale playing Michael Burry is symbolic of.
Being contrarian isn’t easy. If I see some good opportunity to invest and the market seems to ignore it, then chances are that the particular opportunity exists because the conditions aren’t favorable for it yet. Or else price would have moved up already.
So if you have a thick skin and you are deaf, then you can be comfortable with people misunderstanding you in the short term. Eventually and in long term, you will be right and make money.
I know that there is always a risk of being arrogant if you do so. Who knows and it’s possible that you may be wrong in your judgment and others might actually be right. But that is fine. In investing, even if you are right 4-6 times out of 10, then you can make serious money (depending on your position sizing).
Other important advice is more on the personal finance front. My father has always been of the view that the allure for more wealth is an unhealthy obsession. It’s unnecessary and it’s not worth it.
He has time and again told me that we don’t need a lot of money to feel good. Having enough money and free time is more important. And as I age, I agree with him more and more.
Ravichand (S&L): John Neff described the essence of contrarian investing nicely “It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized”. Indeed a contrarian strategy is highly rewarding as long as we take care of few key things about contrarian investing approach.
Next we move from advice to influencers. Is there any particular investor(s) or author(s) who have had a significant influence in your investment thinking?
Dev: I read a reasonable amount of text (and not just books). But as years pass, the incremental benefit I get from reading new books keeps getting smaller.
Nevertheless, the investors/authors that have had an impact on me are Benjamin Graham, Warren Buffett, Charlie Munger, Peter Lynch, Howard Marks, Seth Klarman, Nassim Taleb and Daniel Kahneman.
But I must say here that one should read a lot. We really don’t know which idea in which book might influence us in ways we can’t even imagine. And who knows what learning we get from any particular book might be used for our life decisions.
And we are always just one decision away from a completely different life. So keep reading. It’s your mind’s software update mechanism.
Ravichand (S&L): Reading is a theme which gets emphasized by all the guests I chat with. Munger put it best “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” Next up is one of my favorite question.
Let us say a bunch of enthusiastic beginners approached you for advice on how to be a better investor then what would your advice for them be?
Dev:
It is very important to study great investors and also about companies that survived and ones that did not survive.
The market does not reward activity. Others will tell and push you to do something or the other at all times. But money is made by not doing anything most of the times. So be ready to do nothing 95% of the time.
Since you will have a lot of time, be willing to read a lot. And I mean a lot. And use this time to upgrade yourself with core knowledge as well as practical insights about how various industries actually work and make money.
Market cycles and investment behavior influence each other. Spend time learning about this aspect. For this read up on market history across cycles.
As you keep investing and learning, slowly build up your checklist of factors that you should judge a business and its stock on. No book or no one can teach you what comes from putting your money on the line.
So begin investing and learn in parallel. Losing hard earned money on your bets is the best teacher. It gives you a perspective that nothing else can.
Luck plays a lot bigger role in investing than you may attribute it to. Be humble and grateful and more importantly, acknowledge (at least privately) if you made money due to luck and not skill.
Have a thick skin but don’t be arrogant. This won’t come easy. So give yourself time to go through the process of growing a thick skin. Jokes apart, what I am trying to say is that be ready to take a contrarian stand and be ready to take brickbats for it.
But also be willing to acknowledge and backtrack if you have made a mistake. You are here to make money and not prove whether you are right or wrong. Bury that ego in a flowerpot.
This is difficult – as the years pass, try to be unemotional about investing. I don’t know how as there is no perfect recipe. But you have to gradually and intentionally reduce the role of emotions in your investing life.
If you are a beginner then you will not understand the gravity of this advice. But it is far more important than what people will ever realize.
You will only appreciate a good market when you have been through a bad one. So be ready to face the bad one sooner or later. It will humble you and help later in life when your portfolio is larger.
On a personal front, realize that time and health matter more than your wealth. And please do remember that you always know how much money you have, but you never know how much time you have. So act accordingly.
Ravichand (S&L): I think that’s a great set of advice for beginners. On studying great investors, that is precisely what Stock and Ladder is focused on. I also think your point on time and health is very important but we rarely bother about it when we are beginners. On health, I like what Jim Rohn said “Take care of your body. It’s the only place you have to live” Next question is on my favorite activity – reading. If you have to recommend 5 books that every investor must read then which ones would that be?
Dev: To answer your question specifically, here are the 5 books:
Also, re-read these books (or ones you respect) every few years. You will gain new insights from the same books as by then, you would have gained more experience. Also because you could relate the information in these books to various other texts that you must have read elsewhere in between your re-readings. I must mention here that reading is fine. And necessary and there is no substitute for it.
But reading alone is not enough. Don’t expect to be rich and happy just by reading a lot of books. You need to read, adapt and use the understanding to invest and live well.
Ravichand (S&L):Wonderful reading list and a great point on applying the knowledge as Aristotle put it “The mind is not only knowledge but also the ability to apply that knowledge in practice”. Even good things need to come to an end like this wonderful conversation and here’s the last question: Outside your passion for stock market and investing, are there any other interests / activities which are close to your heart?
Dev: I like to travel. And I am lucky my wife shares this interest too. We try to visit a new place every 6 months or so.
Also, I believe that I am an ancient mountain soul! So every year, I just have to spend at least a couple of weeks in the hills or mountains. That you can say is my indulgence.
As you might have already guessed, I also like to read. Not just books on money but a lot of other stuff as well. My interests lie in space science, science fiction, aerodynamics, ancient civilizations, etc.
Walking is something that I do a lot. No particular reason for it. I just like it.
Formula 1 is my longtime favorite sports. So almost 20+ weekends a year (that’s the approx. number of races) are booked to watch it. My wife hates F1 as they take up the weekends at odd hours.
Other obvious sports interest is watching cricket. I don’t play but spend a lot of time reading up on cricket records now. Socializing a lot is not my cup of tea. But I am lucky to have a few good friends and we meet often. That’s it.
Thanks Dev, it was a very enlightening, interesting and insightful conversation. Wishing you the very best in your career and life.
Neither 15% nor 25% can be called as bad returns. After all, risk free rates are at 8% or even less. But ofcourse, we are greedy and we prefer higher returns. Isn’t it?
I recently wrote an article for MoneyControl titled:
‘Which fund should you choose: A 15% annual return for 10 years or 25% annual return for 3 years?’
Here is a short snippet of the article…
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To be fair, both 15% and 25% average annual returns are pretty decent.
And let’s accept that the former is more achievable than the latter in the long run. At least for those who know their fund managers aren’t Warren Buffett.
But jokes apart…
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You can read the rest of the article by clicking the link below:
But time and again I have seen people overestimating these tax benefits. Why?
Because the tax benefits available on home loans are capped. So depending on the home loan they take, the actual benefit may not be as large as what many borrowers think.
Now there are 2 components of a home loan – principal and interest. And the home loan EMI also has the same two components – (i) principal repayment, and (ii) interest payment.
Deduction of up to Rs 1.5 lac for principal repayment under Section 80C of the Income Tax Act.
Deduction of up to Rs 2 lac for interest payment for self-occupied property under Section 24 of the Income Tax Act. The interest payment of up to Rs 2 lac is available as loss under income from a let out property
Additional deduction of Rs 50,000 on interest payment, over and above the deduction claimed in Section 24 is available for the first time home buyers under Section 80EE.
Tax Benefits on Home Loan Principal Repayment
A deduction of up to Rs 1.5 lac is available for principal repayment of home loans under Section 80C of the Income Tax Act.
There are few things to note here.
First, Section 80C’s tax savings are also applicable on your investments in EPF, PPF, ELSS and expenses like insurance premiums, school fee, etc.
So all these investments and expenses compete with home loan principal repayment for the Section 80C benefits. Chances are high that the sum of EPF + PPF + ELSS + insurance premiums + Home Loan Principal repaid will be higher than Rs 1.5 lac. If that’s the case, the cap of Rs 1.5 lac in Section 80C limits the benefit to just Rs 1.5 lac irrespective of what you claim from within EPF, PPF, ELSS, premiums or home loan principal repayments.
Even if you have a big loan and are repaying more than Rs 1.5 lac of home loan principal, the tax benefit is limited to just Rs 1.5 lac.
Tax Benefits on Home Loan Interest Payment
Deduction of up to Rs 2 lac is available for interest payment for self-occupied property under Section 24 of the Income Tax Act. And the interest payment of up to Rs 2 lac is available as a loss under income from a let out property.
This is where things get interesting and people get confused.
Due to the above-mentioned capping of benefit, even if you are paying more than Rs 2 lac interest in a given financial year, the excess interest above Rs 2 lac will not fetch you any tax benefits.
As you can see, in total Rs 3.91 lac is paid in EMIs in 1st year. Out of this, principal forms only Rs 61,633 whereas interest is Rs 3.29 lac. Out of this Rs 3.29 lac, only Rs 2 lac is eligible for tax benefits under Section 24. The remaining amount (can be seen in red-colored text) cannot get tax benefits.
The home loans are structured like this that during initial years, a major part of your EMI goes towards interest payment. So it’s possible that the interest you pay in the initial years will be much higher than Rs 2 lac (the limit for tax benefit).
Let’s take another example to find out another interesting aspect.
We compare two loans. First of Rs 25 lac and the second of Rs 50 lac. The loan tenure and interest rate on both are 20 years and 9.5% respectively. The EMIs are Rs 23,303 (for Rs 25 lac home loan) and Rs 46,607 (for Rs 50 lac home loan).
Now have a look at the table below:
For the Rs 25 lac loan, the interest part that misses out on tax benefit is very small (Rs 35,616 in the first year and goes on reducing). But for the Rs 50 lac loan, you initially pay Rs 4.71 lac as interest in the first year. This is much more than the Rs 2 lac per year limit. So you only get the tax benefit on Rs 2 lac of interest (under Section 24). The remaining Rs 2.71 lac doesn’t get any tax benefit.
And if you focus on the table (on right) of Rs 50 lac loan, you will see that you keep having an interest component that misses out on tax benefits till the 15th year. And more interestingly, during the first 7 years of loan repayment, the tax benefit on interest payment of Rs 25 lac loan is the same as tax benefit on Rs 50 lac loan!
So much so and hue and cry for home loan tax benefits. 🙂
This is all the more reason why one needs to look at the tax angle when planning to prepay home loans. And if that wasn’t enough, there is also the dilemma of whether to invest vs prepay home loan – to benefit from higher returns elsewhere as compared to low post-tax home loan interest rates that are prevalent in India.
But I suggest that before you decide to prepay your home loan, you run your own numbers or get in touch with an investment advisor to help you out.
And if you are one among those who are still deciding whether to take a home loan or not, then I suggest that even before you begin your search for home loans online, some time should be spent to understand how home loans actually work and how best you can manage home loans once you take them.
The idea of doing this post was to highlight that at times, people get over excited when it comes to tax benefits from their home loans.
It is quite possible that you may not even get as much tax benefit as you thought you would be getting from your home loan.
This is the November 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.
Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).
Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.
P/E Ratio (on the last day of November 2018): 26.31 P/E Ratio (on the last day of October 2018): 25.00
The 12-month trend of P/E has been as follows:
And here are the average figures of Nifty50’s PE for some recent periods:
Historical P/BV Ratios – Nifty 50
P/BV Ratio (on the last day of November 2018): 3.44 P/BV Ratio (on the last day of October 2018): 3.29
Historical Dividend Yield – Nifty 50
Dividend Yield (on the last day of November 2018): 1.22% Dividend Yield (on the last day of October 2018): 1.27%
Now, to the historical analysis of Nifty500 companies…
As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).
Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).
So obviously, Nifty500 is comparatively a much broader index than Nifty50.
Historical P/E Ratios – Nifty 500
P/E Ratio (on the last day of November 2018): 29.61 P/E Ratio (on the last day of October 2018): 28.88
Historical P/BV Ratios – Nifty 500
P/BV Ratio (on the last day of November 2018): 3.23 P/BV Ratio (on the last day of October 2018): 3.10
Historical Dividend Yield – Nifty 500
Dividend Yield (on last day of November 2018): 1.14% Dividend Yield (on last day of October 2018): 1.19%
You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).
For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:
Everybody wants to become financially independent. But very few actually get there.
Why?
There can be various reasons but I think that achieving something like Financial Freedom doesn’t just happen. It requires one to have a serious plan and more importantly, then commit to that plan. And that’s easier said than done.
If you were to ask me why then I will quote Charlie Munger – I did not intend to get rich. I just wanted to get independent.
And that for me is a goal worth having. But let’s not discuss my thoughts. I have already written about it in detail at F.I.R.E.
Let’s rather talk about you.
If you are beginning to get comfortable with the whole idea of financial independence or early retirement, then I am sure you would be wondering How much money do I need to Retire Early In India? Or how much is enough for Financial Independence & Retire Early (FIRE) in India?
It would be best to have a perfect formula for financial independence.
But there isn’t any.
Getting the right amount for regular retirement is a tough nut to crack in itself. And here, we are talking about early retirement. 🙂
But there are thumb rules that can get you going.
A popular one is – having a corpus equal to atleast 25 times your annual expenses.
This may be enough for some people but may not be for many others. For some 30X or 40X may be a more appropriate size. It depends on a variety of factors like current age, age of early retirement, life expectancy assumption, inflation % assumption before and after retirement, return estimates before and after early retirement and several other more serious factors like the sequence of returns risk, etc.
But as I said, if you are just beginning your journey – then the exact accuracy doesn’t matter and you can have atleast some target in front of you – which I think is a good one provided by the 25X, where X is your annual expenses.
You will, in any case, require several years to reach that first. 🙂 So relax about the accuracy a bit.
But as you get closer to your goal and/or the portfolio size grows, you need to run numbers more carefully and have additional buffers to make your early retirement plan more robust. And if it sadly means delaying it by a few years or saving more, then so be it. Better be safe than sorry when you are older.
So 25X is a good aim to have.
But what about the ‘secret’ that I mentioned in the title of this post?
Here it is…
If the X (i.e. Annual Expense) is small, you can save more and, in turn, reach the target of 25X faster.
Read that again.
And again if you are still unable to understand its importance.
Let’s take a small hypothetical example to make this idea crystal clear:
Suppose your annual income is Rs 12 lac. And your annual expenses (i.e. X) are Rs 8 lac.
So if we were to use the 25X thumb rule, then you would need 25 times Rs 8 lac – which is Rs 2 Cr as Early Retirement Corpus. And to achieve it, you will have Rs 4 lac every year (Rs 12 lac income minus Rs 8 lac expenses) to save for the goal.
Note – I have ignored inflation, etc. for simplicity here.
Now remember what I said earlier – If the X (i.e. Annual Expense) is smallER, you can save more and in turn, reach the target of 25X faster.
So let’s make the X a little smallER.
Your annual income is Rs 12 lac. And your smallER annual expenses (i.e. X) are Rs 6 lac (reduced from Rs 8 lac earlier).
Now if we use the 25X thumb rule, then you would need 25 times Rs 6 lac – which is Rs 1.5 Cr as Early Retirement Corpus. And more importantly, to reach it you will have a higher Rs 6 lac every year (Rs 12 lac income minus Rs 6 lac expenses) to save for the goal.
So the target has reduced from Rs 2 Cr to Rs 1.5 Cr. And you also have a higher amount of Rs 6 lac per year (instead of Rs 4 lac) to save for the goal.
So it’s a double benefit of having a reduced target and higher savings capability.
Decreasing your expenses (I know its tough) increases the potential to increase the savings – this fact alongwith lower target requirement can potentially accelerate your plan to reach the final corpus earlier.
Think of it like this – If your expenses are low, you will need a smaller corpus to support it for years to come. And a smaller corpus means that you will require a lesser number of years to achieve it. But if your expenses are high, then not only will your required corpus would be high, but it will also require more time and probably a higher saving rate.
And this is the real secret!
Remember – this 25X figure is just a thumb rule.
And you also need to understand the risks that such thumb rules or any early retirement plan is exposed to – like sequence of return risk, unexpected and unplanned expenses, living longer than you estimated(!), extremely high inflation in retirement years, high medical expenses inflation that isn’t covered by your health cover, etc.
The actual number will be different for different people and circumstances.
The idea here was to show that higher your saving rate, the sooner you can potentially retire.
If you save just 10% of your income, then you can forget about early retirement. You need to save a lot more – like 30, 40 or even more than 50%. I am able to do more than 50% as I aim to achieve financial freedom by 40. Fingers crossed. 🙂
So that was about the simple thumb rule for computing how much money do I require for financial independence and early retirement (FIRE).
I like to talk about financial independence on Stable Investor quite regularly. It is one of the big financial goals I have. But I must also warn you – the maths of FI is such that you can speed up the theoretical goal achievement if you reduce expenses by a lot. But then, that would mean you are sacrificing your present for the future, which is good to an extent but not beyond it.
Financial independence is a difficult goal which most people won’t achieve.
But even if you were to achieve it partially, even then it would provide you with a lot of control over your financial life. A solid early retirement corpus with reasonable return expectations will cover basic living expenses for longer than your life expectancy. That’s a good achievement no matter when you achieve it.
At the same time, I recognize that not everyone is eager to achieve early retirement. And there are also people who like their luxuries. And that is fine as it gives them happiness.
The bottom line is that your goals are unique and you need to do what is necessary to achieve your financial goals. If financial independence is not one of them, then you can ignore it. But if it is and it’s more than a passing wish, then you need to do something about it. The independence that a big corpus provides is amazing. It even gives you that magical ability to say F*** Y** to anyone without thinking too much about the consequences. 🙂
Imagine that kind of freedom!
So if you are planning early retirement in India, then sit up and take action. Just wishing and asking questions like how much money I need to retire early in India will not be enough.
