Month: June 2021

Return on Investment or ROI shows you the return from your investments. It helps you to choose the best investment across different investment options. You may evaluate the investment based on your financial goals and risk tolerance. You could also gauge the cost of your investment and look for hidden charges that could eat up your returns. The return on investment is usually expressed as a percentage. In simple terms, the return on investment is a financial ratio that helps you determine the benefit of your investment against the costs. You may calculate the return on investment using the formula:

ROI = Net Profit / Cost of the investment * 100

Compounded annual growth rate (CAGR) is one of the most commonly used terms in the mutual fund industry. CAGR represents the compounded growth rate of your investments made in mutual funds. It helps you gauge a mutual fund scheme’s average annual growth over a given time period.

Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s life span.

The Compound Annual Growth Rate (CAGR) formula is:

CAGR = (Ending balance/beginning balance)^1/n – 1

Here,

Ending balance is the value of the investment at the end of the investment period

Beginning balance is the value of the investment at the beginning of the investment period

N is the number of years you have invested

Use in Mutual Fund:

Compare returns between different funds and benchmarks. You can also use the CAGR calculator to compare the returns you earn on a particular fund against similar funds. This can help you understand how well the mutual fund is performing compared to its peers. You can also compare against the benchmark indices for greater clarity.

Better investment decisions: The CAGR calculator is a very handy tool to help you analyze your investment decisions every year. For instance, if you have purchased an equity mutual fund five years ago, the CAGR calculator gives you the average rate of returns you have earned every year over the past five years. This can help you understand whether the fund’s returns are as per your expectations or not. If the fund is not performing well, you may want to reconsider your investment in the future.

Post Tax Return

An after-tax return is any profit made on an investment after subtracting the amount due for taxes. Many businesses and high-income investors will use the after-tax return to determine their earnings. An after-tax return may be expressed nominally or as a ratio and can be used to calculate the pretax rate of return.

After-tax returns break down performance data into “real-life” form for individual investors. Those investors in the highest tax bracket use municipals and high-yield stock to increase their after-tax returns. Capital gains from short-term investments due to frequent trading are subject to high tax rates.

Businesses and high tax bracket investors use after-tax returns to determine their profits. For example, say an investor paying taxes in the 30% bracket held a municipal bond that earned $100 interest. When the investor deducts the $30 tax due on income from the investment, their actual earnings are only $70.

High tax bracket investors don’t like it when their profits are bled-off in taxes. Different tax rates for gains and losses tell us that before-tax and after-tax profitability may vary widely for these investors. These investors will forego investments with higher before-tax returns in favor of investments with lower before tax returns if lower applicable tax rates result in higher after-tax returns. For this reason, investors in the highest tax brackets often prefer investments like municipal or corporate bonds or stocks that are taxed at no or lower capital tax rates.

An after-tax return can be expressed nominally as the difference between an investment’s beginning market value and ending market value plus any dividends, interest, or other income received and minus any costs or taxes paid. After-tax can be represented as the ratio of after-tax return to beginning market value, which measures the value of the investment’s after-tax profit, relative to its cost.

Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company’s health, providing a useful snapshot of its current financial position.

Your net worth, quite simply, is the amount of your assets minus all your debts. You can calculate your net worth by subtracting your liabilities (debts) from your assets. If your assets exceed your liabilities, you will have a positive net worth. Conversely, if your liabilities are greater than your assets, you will have a negative net worth.

The term “net worth” refers to the book value of the equity owned by shareholders of a company. It can also be seen as the net value of a company that can be claimed by its shareholders in case all its assets have been liquidated and all its debts are repaid. In other words, it is the dollar amount of assets left after all the liabilities have been paid off. The net worth of a company is also known as stockholder’s equity and shareholder’s equity.

Your tangible net worth is similar to your net worth in that it totes up your assets and liabilities, but it goes one step farther. It subtracts the value of any intangible assets, including goodwill, copyrights, patents and other intellectual property.

Businesses, for example, calculate tangible net worth to determine the liquidation value of the company if it were to cease operations or if it were to be sold. This figure can also be important to individuals who are applying for personal or small business loans, and the lender demands a “real” net worth figure. Your lender may be interested in your tangible net worth because it provides a more accurate view of your finances and how much the lender could recoup if it had to liquidate your assets if you defaulted on their loan.

Tangible Net Worth = Total Assets−Liabilities−Intangible Assets

Net Worth in business

In business, net worth is also known as book value or shareholders’ equity. The balance sheet is also known as a net worth statement. The value of a company’s equity equals the difference between the value of total assets and total liabilities. Note that the values on a company’s balance sheet highlight historical costs or book values, not current market values.

Lenders scrutinize a business’s net worth to determine if it is financially healthy. If total liabilities exceed total assets, a creditor may not be too confident in a company’s ability to repay its loans.

A consistently profitable company will register a rising net worth or book value as long as these earnings are not fully distributed to shareholders as dividends. For a public company, a rising book value will often be accompanied by an increase in the value of its stock price.

Net Worth in personal finance

An individual’s net worth is simply the value that is left after subtracting liabilities from assets.

Examples of liabilities, otherwise known as debt, include mortgages, credit card balances, student loans, and car loans. An individual’s assets, meanwhile, include checking and savings account balances, the value of securities such as stocks or bonds, real property value, the market value of an automobile, et al. Whatever is left after selling all assets and paying off personal debt is the net worth.

Calculating Liabilities

Liabilities include any financial obligations that need to be repaid. It can include loans, mortgages, rent, or bills. When calculating liabilities, take the repayments that are currently outstanding not something that will be due in the near future.

For example, if we are computing the net worth of an individual at the end of the year, and they pay their utility bill each month, we will only take the amount due for that month (say December) and not include subsequent amounts for January or February of next year.

Assets are defined as resources owned by the company from which future economic benefits are expected to be generated. Total assets are the sum of non-current and current assets, and this total should equal the sum of stockholders’ equity and total liabilities combined.

The formula for Total Asset is:

Total Assets = Non-Current Assets + Current Assets

Non-Current Assets: Non-Current Assets are those assets that a company holds for more than one financial year, which are not readily convertible into cash or cash equivalents.

Current Assets: Current Assets are those assets that are expected to be converted into cash or cash equivalents within one financial year.

Asset for Small Business

• Cash
• Accounts receivable (money owing)
• Customer deposits
• Office furniture and equipment
• Cell phones
• Computer hardware and software
• Tools, machinery and equipment
• Vehicles
• Real estate (buildings etc.)
• Lease agreements and money spent to improve a leased space
• Inventory
• Investments that mature in less than 90 days (i.e. stocks, U.S. treasuries, bonds, mutual funds)
• Pre-paid insurance
• Intellectual property (i.e. know-how)
• Brand equity (recognition)
• Company reputation
• Copyright
• Trandmarks
• Patents
• Franchises
• Licensing agreements
• Domain name
• Employment contracts
• Customer lists
• Client relationships

Goals-based planning is the process of helping clients prioritize their financial goals and determine the optimal plan to fund them. Goals-based planning expands your focus into all aspects of your client’s financial life and eliminates the retirement-only focus.

Goal based financial planning is a method which can help you achieve multiple goals across different stages of life. There are some common life-stage goals of most investors e.g. buying a house, children’s higher education and marriage, retirement planning and leaving an estate for your loved ones. In addition to these goals, some clients may have other goals specific to their individual needs and aspirations e.g. planning for a foreign vacation, buying / building a vacation home, saving a corpus to start a business, accumulating for early retirement etc. Goal based planning is the process of defining different goals, quantifying these goals factoring in inflation and having an investment plan to meet these goals.

First, you need to know your various financial goals which you wish to achieve over various time periods. Then you need to figure out the time you have in hand to reach those goals. Once you are clear about these two – goal and the time frame work out the present cost of each of these goals. Now, apply inflation to the current cost and you know the future value of your goal.

For example: your current cost of a future goal, which is 10 years away from now, is Rs 20 Lakhs. Assuming the average annual inflation rate at 6%, the future goal value would be Rs approx 36 Lakhs. Therefore, you need to plan investments to reach the goal of Rs 36 Lakhs and not Rs 20 Lakhs.

A great many wealth management firms claim they are financial planners by defining a few large goals such as saving for retirement or leaving a legacy and recommending investment strategies to help you achieve those objectives. However, goals-based planning digs much deeper working with you to crystalize precisely what those vague future concepts actually mean to you.

It can be a difficult challenge to work from a blank piece of paper and write those first few sentences of your financial planning story. Questions such as “What are some of the important financial goals you hope to achieve?” or “How do you envision your retirement lifestyle?” might initially be daunting. But by asking more personal questions, carefully listening to you and offering examples of what certain elements of that story might look like, a good planner can help you bring it to life. A goal of retiring at a certain age and traveling the world is merely a starting point. Meaningful planning then probes deeper into where you hope to travel, how many trips you would like to take each year, and who would be traveling with you.

Life Goal’s

• Buying a house
• Buying a car
• Children’s education
• Children’s marriage
• Retirement planning
• Aiming for early retirement
• International holiday
• Purchasing other high-value items like a diamond ring for your wife
• Putting an Emergency Fund in place
• Modifying your house
• Starting a business

Goal based financial planning is usually a six step process:

• Setting goals: You should lay-out all your goals in different stages of life. You should estimate how much money you need for each and always factor in inflation, especially for your long term financial goals.
• Expense Budgeting: You should assess your post tax income, your expenses (essential and discretionary), assets (bank deposits, mutual funds etc.), liabilities (car loans, home loans etc.) and create your budget. Once you have a budget, you know how much you can save and invest in a systematic way for your financial goals. Suggested reading: Maximise your SIP returns in volatile markets
• Assessing your risk appetite: This is an important step in financial planning because you need to take the right amount of risk to achieve your financial goals. If you take too much risk, you may lose your hard earned money due to adverse market movement at the time you need it. If you take too little risk, you may not be able to get sufficient returns to meet your goals. Your risk appetite depends on your age, stage of life, goal time-lines and financial situation. You should always invest according to your risk appetite.
• Asset allocation according to goals and risk appetite: Risk and returns are interrelated higher risk, higher returns in the long term and vice versa. Different asset classes have different risk profiles, e.g. equity has a higher risk profile compared to gold or fixed income. Remember that for different financial goals, you should invest in the right asset class depending on the goal and risk appetite.
• Prepare an investment plan: This is the final step of the financial planning process. Once you know your goals, risk appetite and asset allocation profile, the rest of the job is simply to calculate how much you need to save and invest based on goal amount, goal horizon and expected return on investment based on your asset allocation. Sometimes in this step, you may realize that you need to save more and cut down some discretionary expenses. Do not despair, if you are not able to save more. You should start with what you can save. Over period of time, as your income goes up, you will be able to save and invest more. You can use facilities like Top-up SIPs, to increase your investments over time and achieve your goals.

Advantages of having a goal while investing

• Disciplined investing: Discipline in investing e.g. sticking to your SIPs irrespective of market conditions, adhering to your asset allocation, regular re-balancing of the portfolio etc., are essential in achieving success. Since there is an emotional attachment with financial goals, investors are likely to be much more disciplined in goal based investing.
• Helps you reduce debt / be debt free: Cost of debt can be a huge burden on your savings and harm your long term financial interests. If you practise goal based investing, you can fund big ticket spending e.g. vacation, buying / upgrading your vehicle, bigger down payment for house etc. from your investments, reduce debt burden and interest payments thereof.
• Save and invest more for your goals: It is a no brainer that the investor who saves and invests more will be able to create more wealth. Attaching investments to goals, instils greater determination and doing what is required to achieve the goals. It has often been seen that families which practise goal based investing save and invest more.
• Save taxes: Having an investment plan can help you save taxes under section 80C and also invest in the most tax efficient investment options according to your financial goals and asset allocation.
• Improve lifestyle in a sustainable way: Despite rising disposable incomes, average household debt in India is rising. This shows that investors are funding their lifestyles through credit cards, personal loans etc. Debt funded lifestyle improvements may not be sustainable. Sometimes it is seen that, parents spend a bulk of their savings on their children’s higher education and then compromise on lifestyle to save for their retirement. If you practise goal based investing, you can improve your lifestyle in sustainable way, without relying on debt or compromising on other financial goals.

Investment risk is defined as the probability or uncertainty of losses rather than expected profit from investment due to a fall in the fair price of securities such as bonds, stocks, real estate, etc. Each type of investment is exposed to some degree of investment risk like the market risk i.e., the loss on the invested amount or the default risk i.e., the money invested is never returned back to the investor.

Liquidity risk

The risk of being unable to sell your investment at a fair price and get your money out when you want to. To sell the investment, you may need to accept a lower price. In some cases, such as exempt market investments, it may not be possible to sell the investment at all.

Market risk

The risk of investments declining in value because of economic developments or other events that affect the entire market. The main types of market risk  are equity risk, interest rate risk and currency risk.

Equity risk: Applies to an investment in shares. The market price of shares varies all the time depending on demand and supply. Equity risk is the risk of loss because of a drop in the market price of shares.

Interest rate risk: Applies to debt investments such as bonds. It is the risk of losing money because of a change in the interest rate. For example, if the interest rate goes up, the market value of bonds will drop.

Currency risk: Applies when you own foreign investments. It is the risk of losing money because of a movement in the exchange rate.

Concentration risk

The risk of loss because your money is concentrated in 1 investment or type of investment. When you diversify your investments, you spread the risk over different types of investments, industries and geographic locations.

Reinvestment risk

The risk of loss from reinvesting principal or income at a lower interest rate. Suppose you buy a bond paying 5%. Reinvestment risk will affect you if interest rates drop and you have to reinvest the regular interest payments at 4%. Reinvestment risk will also apply if the bond matures and you have to reinvest the principal at less than 5%. Reinvestment risk will not apply if you intend to spend the regular interest payments or the principal at maturity.

Horizon risk

The risk that your investment horizon may be shortened because of an unforeseen event, for example, the loss of your job. This may force you to sell investments that you were expecting to hold for the long term. If you must sell at a time when the markets are down, you may lose money.

Foreign investment risk

The risk of loss when investing in foreign countries. When you buy foreign investments, for example, the shares of companies in emerging markets, you face risks that do not exist in Canada, for example, the risk of nationalization.

Liquidity risk

The risk of being unable to sell your investment at a fair price and get your money out when you want to. To sell the investment, you may need to accept a lower price. In some cases, such as exempt market investments, it may not be possible to sell the investment at all.

Credit risk

The risk that the government entity or company that issued the bond will run into financial difficulties and won’t be able to pay the interest or repay the principal at maturity. Credit risk applies to debt investments such as bonds. You can evaluate credit risk by looking at the credit rating of the bond.

Inflation risk

The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation. Inflation erodes the purchasing power of money over time the same amount of money will buy fewer goods and services. Inflation risk is particularly relevant if you own cash or debt investments like bonds. Shares offer some protection against inflation because most companies can increase the prices they charge to their customers. Share prices should therefore rise in line with inflation. Real estate also offers some protection because landlords can increase rents over time

Longevity risk

The risk of outliving your savings. This risk is particularly relevant for people who are retired, or are nearing retirement.

Risk profiling is important for determining a proper investment and asset allocation for a portfolio. Every single person has a different risk profile as the risk appetite depends on psychological factors, loss bearing capacity, investor’s age, income & expenses and many such other things.

A risk profile is an evaluation of an individual’s willingness and ability to take risks. It can also refer to the threats to which an organization is exposed. A risk profile is important for determining a proper investment asset allocation for a portfolio. Organizations use a risk profile as a way to mitigate potential risks and threats.

Traditional finance uses the concepts of classical decision making, modern portfolio theory, and the capital asset pricing model (CAPM) to define the risk profile of an investor. In this model, investors are inherently risk averse and take on additional risk only if they judge those higher anticipated returns will compensate them for it. One of the fundamental results of modern portfolio theory is that, under the assumptions of the CAPM (Sharpe 1964), all investors invest in a combination of the risk-free asset and the market portfolio. The allocation of funds between the risk-free asset and the risky market portfolio is determined only by the risk aversion of the investor. Thus, in the world described by this traditional model, the investor’s risk profile is given by the risk aversion factor in the utility function of the investor.

Risk capacity applies to the objective ability of an investor to take on financial risk. Capacity depends on objective economic circumstances, such as the investor’s investment horizon, liquidity needs, income, and wealth, as well as tax rates and other factors. The primary distinguishing feature of risk capacity is that it is relatively immune to psychological distortion or subjective perception. Risk aversion, however, may be understood as the combination of psychological traits and emotional responses that determine the investor’s willingness to take on financial risk and the degree of psychological or emotional pain the investor experiences when faced with financial loss. These emotional factors are often even more important for practitioners to understand than the objective economic circumstances of the investor; yet, they are harder to measure.

Aggressive

Willing to take significant risks to maximise returns over the long term

*Possible Allocation – Equity: 90-100%; Debt and others: 0-10%

Moderately Aggressive

Seeking to maximise returns over medium to long term with high risk

*Possible Allocation – Equity: 70-90%; Debt and others: 10-30%

Moderate

Looking for relatively higher returns over medium to long term with modest risk

*Possible Allocation – Equity: 40-60%; Debt and others: 40-60%

Moderately Conservative

Willing to take small level of risk for potential returns over medium to long term

*Possible Allocation – Equity: 10-30%; Debt and others: 70-90%

Conservative

Seeking safety of capital, minimal risk and minimum or low returns

* Possible Allocation – Equity: 0-10%; Debt and others: 90-100%

Rights of Insured

• Once you fill the proposal form, you should hear from your insurer within 15 days about the decision to issue or refuse the grant of life insurance
• You can appoint one or more nominees. When you do so, the sum assured will be divided among them
• If your proposal is accepted, the policy bond should reach you within a reasonable period of time
• You can ask for altering the mode of premium paid and the term of policy
• In case of loss of the policy document, you can get a duplicate copy that confers the same rights as the original policy except 15 days Free Look period.
• You can cancel your life insurance policy within 15 days from the date of receiving the policy documents.
• You can change the nominee details once the policy is issued by intimating your insurer

Responsibilities of Insured

• Fill up the proposal form correctly
• Pay premiums on time
• Don’t hide any information, however immaterial it may seem
• Don’t disclose your policy number and other confidential information to imposters identifying themselves as IRDAI officials. IRDAI never makes such calls.
• Inform your life insurance company immediately if you lose your policy documents

Rights and Responsibilities of Insurer

Duty to Defend

Depending on the nature of your agreement, your insurer may have a duty to indemnify or defend you under certain circumstances. The duty to defend provides you with legal representation if you’re sued. The duty to indemnify pays for any legal judgments against you. Both are dictated by the terms of your policy.

Insurance Contract

Your insurer must honor any responsibilities outlined in your policy. It’s free to provide you with rights above and beyond those provided by law, so your agreement may have extra responsibilities. Additionally, if a provision in your policy is found to be ambiguous it’s interpreted by a court as being in your favor if there’s a dispute.

Claim adjustment

An insurer must treat its insured’s interests with the same consideration it gives its own interests. This means that a claims adjuster must give the policy holder the benefit of the doubt. The claims adjuster should be looking for reasons to find coverage, not for reasons to deny coverage. The claims adjuster should be looking for reasons to pay the claim, not reasons to deny it. Unfortunately, sometimes insurance companies lose sight of this fundamental rule.

General Duties

An insurance company has a legal duty to fully investigate your claim, not just the parts that support their position. It must also provide you with all necessary information so you can protect your claim under the policy. Additionally, the company must respond to your communications and promptly pay your claim if it’s found valid.

Fair Deal

An insurance company’s duty of good faith and fair dealing means it must always act in the client’s best interest. This responsibility, implied in all insurance agreements, prevents the company from acting in bad faith in transactions involving your claim. If it breaches this responsibility you are entitled to sue for damages.

Payment

If payment is owed, an insurer must promptly pay the claim. In Wisconsin, an insurer must pay a claim that is owed within 30 days, or the insurer may be subject to paying the policy holder 12 percent interest per year. Even though this is the law, there is no good reason for an insurance company to hold payment for 30 days if it owes benefits under a policy.

India is grappling with several health problems. It has turned into the diabetes capital of the world. Around one million new cancer patients register, every year and the rising rate of non-communicable diseases (NCDs) causes 61% of deaths in the country. No doubt, medical advancement bringing new hopes to the health care sector. But, at the same time, it is giving rise to medical inflation. Diagnosis, medication, treatment, and hospitalization costs are burning holes in the pockets and become unaffordable for the common mass. Either one has to sell the assets or lend money whenever there is a medical emergency. It results in financial distress for the entire family. So, to combat such a medical crisis, we offer mediclaim insurance that covers your risks and provides you with financial support whenever you need it.

Benefits

• It provides a cashless hospitalization facility during a medical emergency.
• Avail tax benefits under Section 80D of the Income Tax Act up to Rs.1,00,000 for the premium paid for a family floater policy, depending on the age of proposer & insured.
• It has additional add-ons such as an international second opinion you can select according to your healthcare needs for complete protection.
• It offers coverage for your pre and post hospitalization medical expenses such as OPD expenses, diagnosis, doctor’s fee, medication, therapies, etc. It will cover various out-of-pocket medical expenditures.
• One has the lifelong renewability option with additional benefits, such as coverage for alternative treatments, day care procedures, annual health check-ups, etc.
• You can choose the advanced treatment facility on a cashless basis at any in-network hospitals in nearby locations.

Features:

• Coverage for medical expenses during pre and post hospitalization
• Claim settlement either by a cashless facility or by reimbursement up to the sum insured
• Cover for in-patient hospitalization
• Lifelong renewability is easily available
• Minimum 24 hours hospitalization is required to get the claim
• It also has a list of specific exclusions
• No upper age limit for enrolment
• In a family mediclaim, you can pay a lump sum premium instead of paying for individual policies.

Different mediclaim policies:

Individual Mediclaim: An individual mediclaim plan covers only one individual for the specified sum insured. The policy benefits and the entire sum insured are available to the policyholder for the premium applicable.

Family Floater Mediclaim Cover: In a family floater mediclaim insurance policy, the coverage and benefits are available to all the insured family members, including spouse, children, and parents. The policy has a floater sum insured that either one individual or the entire family can utilize for any hospitalization or medical treatment.

Critical Illness Mediclaim: Critical illnesses require long-term medical treatment that may lead to astronomically high medical bills. Critical illness mediclaim policies are designed to cover severe ailments, such as stroke, cancer, heart disease, etc. We offer coverage for 32 critical illnesses.

Senior Citizen Mediclaim Policy: It is a type of mediclaim designed to provide coverage and benefits, including hospitalization cover, for elderly individuals aged above 60 years.

Heart Mediclaim: Heart mediclaim insurance plans provide comprehensive hospitalization and medical treatment coverage for various heart-related ailments, thus saving a person from facing any financial stress. At CHI, our heart care mediclaim covers 16 major heart ailments.

Cancer Mediclaim: Cancer mediclaim plans provide lifelong protection and comprehensive coverage for various cancer treatments along with chemotherapy and radiotherapy cover. It’s wise to invest in this policy early as people already diagnosed with cancer cannot get it.

Mediclaim covers:

Day Care Treatments: If you have to undergo any surgery or treatment or therapy that requires hospitalization for a day, then from room rent to medicine bills, we bear your daycare treatment expenses, up to the sum insured. We cover 540 daycare treatments, the highest in the industry.

In-Patient Hospitalization: If the in-patient hospitalization is for more than 24 hours, we cover your hospitalization expenses. These expenses include your room charges, nursing expenses, ICU, surgeon’s fee, doctor’s fee, blood, oxygen, and OT (operation theatre changers).

ICU Charges: We value every life and know the importance of the right healthcare services. If you are admitted to ICU, we will cover the charges.

Ambulance cover: This policy provides reimbursement against the expenses that you incur on an ambulance during a medical emergency.

Pre and post hospitalization: It covers your pre and post hospitalization expenses that include diagnosis, treatment, and medicine expenses, along with doctor’s fees.

Recharge of Sum Insured: If your coverage amount gets exhausted, you get an automatic recharge of the sum insured. You can use this amount for the treatment of any other insured family member or yourself.

Other Benefits: Organ donor cover, second opinion, NCB, and alternative treatments are other useful benefits.

Annual Health Check-Ups: Under the mediclaim plan, you will get an annual health check-up facility at our empanelled healthcare services providers. It includes complete blood sugar, urine routine, kidney function, ECG check-ups, etc.

Human Life Value (HLV) is a number that tells the present value of future income expenses, liabilities and investments. The HLV number is taken usually to understand how much money would be required to secure the lives of your dependents with term insurance, in case you are no longer around.

Importance

In life insurance, it is important to measure your economic worth. This worth can be expressed in the form of human life value. Thus, HLV is the rupee value of your economic worth in terms of what you create for the people who depend on you. So, if your life is cut short, an amount equivalent to the HLV should be available so that the people dependent on you can lead their life properly.

The Belth yearly rate of return formula:

The yearly rate of return method calculates the rate of return you’re getting annually on the savings (investment) component of your life insurance policy. The figures used in the formula are the same as those used in the Belth yearly price of protection method, although their meanings differ slightly:

i = (CV + D) + (YPT)(DB – CV)(.001) – 1 / (P + CVP)

YPT: The assumed yearly price per $1,000 of protection

P: The annual premium

D: The annual dividend

CV: The cash surrender value at the end of the year

DB: Death benefit

CVP: The cash surrender value at the end of the preceding year

I: The yearly rate of return on savings component, expressed as a decimal

Asset allocation is a very important part of creating and balancing your investment portfolio. After all, it is one of the main factors that leads to your overall returns even more than choosing individual stocks. Establishing an appropriate asset mix of stocks, bonds, cash, and real estate in your portfolio is a dynamic process. As such, the asset mix should reflect your goals at any point in time.

Strategic Asset Allocation

This method establishes and adheres to a base policy mix a proportional combination of assets based on expected rates of return for each asset class. You also need to take your risk tolerance and investment time-frame into account. You can set your targets and then rebalance your portfolio every now and then.

A strategic asset allocation strategy may be akin to a buy-and-hold strategy and also heavily suggests diversification to cut back on risk and improve returns.

For example, if stocks have historically returned 10% per year and bonds have returned 5% per year, a mix of 50% stocks and 50% bonds would be expected to return 7.5% per year.

1. Age-Based Asset Allocation

Age-based asset allocation is the simpler of the two techniques of strategic allocation.  In the age-based asset allocation technique, the investment decision is based on the age of the investor using the following formula:

Percentage of Equity in Portfolio = (100 – Age of Investor)

For example,  if you are 35 years old, the recommended percentage of equity in your portfolio should be = 100 – 35 = 65%.

While this approach does provide a starting point for asset allocation, it is clearly not sufficient especially as it does not factor in key variables such as your investment objective or your risk tolerance. The second type of strategic allocation technique risk profile-based asset allocation is designed to overcome this limitation.

2. Risk Profile Based Asset Allocation

This technique of strategic asset allocation is a significant improvement on the age-based method as it uses the investor’s risk tolerance in determining how investments need to be allocated across different types of assets.

This method assigns investors the following 5 labels based on their ability to tolerate risk and volatility in their portfolio:

• Conservative
• Income
• Balanced
• Growth
• Aggressive

In this classification system, Aggressive Investors are the most risk-tolerant hence they have the ability to withstand the highest degree of volatility in the portfolio. This is because Aggressive Investors tend to be return-centric and understand the variability of portfolio returns in the short term. On the other hand, Conservative Investors are the least risk-tolerant and prefer to get consistent returns from their investment.

Tactical Asset Allocation

Over the long run, a strategic asset allocation strategy may seem relatively rigid. Therefore, you may find it necessary to occasionally engage in short-term, tactical deviations from the mix to capitalize on unusual or exceptional investment opportunities. This flexibility adds a market-timing component to the portfolio, allowing you to participate in economic conditions more favorable for one asset class than for others.

Tactical asset allocation can be described as a moderately active strategy since the overall strategic asset mix is returned to when desired short-term profits are achieved. This strategy demands some discipline, as you must first be able to recognize when short-term opportunities have run their course and then rebalance the portfolio to the long-term asset position.

You can avail the benefit of tactical asset allocation by investing in Dynamic Asset Allocation Funds that are also known as Balanced Advantage Funds. These funds use models to change their portfolio exposure to Equity, Debt, and Cash depending on changing market conditions to provide investors an optimal balance between risk and return.

Dynamic Asset Allocation

In this asset allocation strategy, you continuously adjust your asset allocation mix depending on market conditions. The most common dynamic asset allocation strategy used by mutual funds is counter-cyclical strategy. These funds increase their equity allocation (reduce debt allocation) when equity valuations decline (become cheaper) and reduce debt allocations. This is also known as contra strategy. it essentially follows the investment tenet of buying low and selling high. Different fund managers use different valuation metrics for dynamic asset allocation, the most common being P/E and P/B ratios. Some fund managers use multi-factor asset allocation models which combine 2 or more factors e.g. P/E, P/B, Dividend Yield etc. in dynamic asset allocation strategy.

Though dynamic asset allocation based on counter-cyclical or contra strategy is the most common strategy by dynamic asset allocation funds, other asset allocation strategies are also used. A few dynamic asset allocation funds follow a pro-cyclical strategy. The funds increase their equity allocation in rising markets and reduce it in falling markets. Some fund managers believe that following the trend is a good strategy which has worked in the past. Then there are dynamic asset allocation funds, which combine both approaches in what they call, core and tactical approach. The core portfolio (usually 70–80%) follows the typical valuation-based counter-cyclical dynamic asset allocation strategy, while the tactical portion follows a momentum-based approach, which is not dissimilar to the pro-cyclical strategy.

Factors affecting:

1. Risk tolerance

Risk tolerance refers to how much an individual is willing and able to lose a given amount of their original investment in anticipation of getting a higher return in the future. For example, risk-averse investors withhold their portfolio in favor of more secure assets. In contrast, more aggressive investors risk most of their investments in anticipation of higher returns. Learn more about risk and return.

2. Goal factors

Goal factors are individual aspirations to achieve a given level of return or saving for a particular reason or desire. Therefore, different goals affect how a person invests and risks.

3. Time horizon

The time horizon factor depends on the duration an investor is going to invest. Most of the time, it depends on the goal of the investment. Similarly, different time horizons entail different risk tolerance.

For example, a long-term investment strategy may prompt an investor to invest in a more volatile or higher risk portfolio since the dynamics of the economy are uncertain and may change in favor of the investor. However, investors with short-term goals may not invest in riskier portfolios.