Being Truly there for your Sister!

Rakshabandhan is an auspicious day in India. The festival signifies love and affection between brothers and sisters. It is a time where brothers reaffirm their duty to protect and care for their sisters during their entire life.

Usually brothers gift cash and or gifts to their sisters as a sign of their love. But what if you could give them something that will truly be there in their life? A sound piece of contribution could end being a much more significant gesture in the long run, both personally as well as her financial future.

Sounds to good to be true? Well here are some options you can consider:

Systematic Investment Plan (SIP) Investments: An easy option, but not not many know it can be gifted or that it can be started with an amount as low as Rs 500 per month. Also, one can not only do SIPs into mutual funds (either equity or debt) but certain blue chip equity stocks as well. So forget those fancy gifts for once and gift your sister that will truly be there for her in the future

Systematic Withdrawal Plans (SWP): A rather new feature in the Indian Mutual Fund environment. Certain AMCs now allow you to initiate an SWP, which essentially is the opposite of SIP such that money flows from the mutual fund to your bank account at pre – specified periods and at specific amounts; but with the added benefit that you can chose your relatives to be the beneficiary of this inflow rather than yourself. Another benefit of such a SWP is that because this inflow would be considered a gift in the hands of your relative, there is no tax applicable to the receiver of this SWP. Perfect way to support your sister with cash flow needs!

Insurance Cover: Few things may convey that you truly care for your sister’s health than an adequate health insurance cover. Now more than ever, health insurance is the need of the hour with parallel rise in not only health costs but also increase in reports of lifestyle diseases and ailments. A health insurance cover will insure that your sister is never financially affected by these hurdles.

On the other hand, providing a term cover for your sister who may have her own financial dependants is a warm way of showing that you are there to share her responsibilities

Estate Planning: This almost always is a personal and complicated topic. But having a solid estate plan is as important as any other life decision. And as a brother you could be the trusted guide to helping her make this important decision.

Furthermore, you yourself can be a part of Estate Planning as a potential guardian to her underage children. Or possibly a trustee in case she needs to make a trust. Ensuring one’s hard earned assets are bequeathed as they intended to is a huge responsibility and who better than a brother to take this up

Gold: The yellow metal will protect her from any economic crisis and will act as hedge during volatile times.But not the cumbersome physical gold that comes with its own headaches and costs. Rather you should consider paper gold i.e. instruments that invest into gold themselves or track their prices. These instruments range from Gold ETFs to the Sovereign Gold Bonds

On this day brothers take a pledge to protect and take care of their sisters under all circumstances. We at Plan Ahead Wealth Advisors understand the enormity of this pledge. And through our experience of understanding the complexities of money and human emotions, we also pledge to help you ensure that your sister stays financially secure in her lifetime.

 

 

 

 

 

 

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A Unit linked Insurance Plan – ULIP – Pointers to know your ULIP

 

Unlike a pure insurance policy, a Unit Linked Insurance Plan (ULIP) is a product designed to give investors the benefits of both insurance and investment under a single integrated plan. ULIPs are insurance + investment plans suited for investors with long investment horizons. They work well with investors who may not otherwise keep the discipline of investing as they usually come with long lock ins and high exit costs.

The tempting benefit ULIPs offer is the administrative convenience of not needing to execute the two legs of transactions i.e. insurance and investments separately.

From our experience with investors, we understand that there’s a good chance you already own a Unit Linked insurance plan (ULIP) that either your parents bought for you, or you landed up buying one in the hurry scurry of tax related investments, only to realize later that one should not be mixing insurance and investments.

In the case that you may have purchased a ULIP or you may be contemplating to buy one, it is critical to know a few important items related to them so that you are more aware of what you have or might get yourself into.

 

1. Understand the purpose for purchasing the ULIP – tax planning cannot be the sole motive

While tax planning is clearly on the agenda, you should also assess the objective for which you want to purchase an insurance policy. Is the policy being bought for long term wealth creation, retirement planning or building a corpus for your child’s future? A decision that is prompted solely by the need to save taxes often results in the purchase of a wrong or an unsuitable product.

 

2. Check the charges carefully

All Ulips come with a host of charges. Understanding each of them is crucial to understanding if the product is suitable or not. Such charges include:

• Premium Allocation Charges: As the name suggests, these fees are to cover expenses incurred by the company to allocate funds, do the underwriting, medical expenses, etc.Your agents commission is also covered under this head.
• Policy Administrative Charges: These are the charges that are deducted on a timely basis to recover the expenses incurred to maintain the policies under the fund.
• Surrender Charges: Similar to the exit loadin a mutual fund, these are the charges applicable when encashing a part or the full investment in a plan. As we know that in most of the Mutual Funds, exit load is at about one percent. In ULIPs, surrender charges could vary from a few percentage points to very exhorbitant amounts, basically to deter investors from exiting the plan in a short horizon.
• Mortality Charges: These are the fees that are deducted on a monthly basis to cover the costs borne by the insurerfor providing a life cover to the policy holder. Depending on the age and the sum insured, these charges are deducted for life cover.
• Fund Management Charges: The allocation of investment in debt and equity requires the insurer to bear the costs of managing the fund.These are charged as fund management charges.
• Fund Switching Charges: As the name suggests, switching from one fund to another requires the insuredto pay an amount for covering the expenses borne by the company for making the switch.

 

3. Understand the flexibility to Switch

An investor’s need for liquidity, time horizon, and risk appetite will determine the initial allocation but these change over time. ULIPs offer the flexibility of switching between the funds based on changes in market cycles and changes in investor preferences. The number of free switches during a policy year, the cost of switches and the ease of switching are factors that are important evaluation points when choosing a ULIP.

 

4. Analyse and estimate performance

With the complexity of the ULIP structure plus the huge list of charges and expenses that comes with it, it is difficult to approximate the kind of performance the product may have given during its existence. Always insist with the insurance agent/advisor to show illustrations and data demonstrating how the fund would has performed and is likely perform considering markets ups and downs. More often that not, data would help you decide better on the decision to invest or not.

 

Probably the only benefit, though largely accidental, of an ULIP is that the investor’s money is locked in due to the structure of a ULIP, forcing him to think long term. However, it is needless to say that other options must also be evaluated in comparison to ULIPs before making a choice to invest in them. The most common strategy might be a combination of Pure Term Life insurance policies along with separate investments in Mutual Funds. But like every investment decision, the first step to take is to determine the investment horizon and risk appetite and not get swayed by fancy words or past performance.

 

 

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The Best Financial Resolutions for 2018

 

The New Year is a great time to overhaul your life for the better. And what better way to do it is make those kind of resolutions that will act as a constant guide in that endeavor. For this, Resolutions, like goals, are best when they’re specific.

Financial resolutions made during beginning of the New Year can determine the shape of your short and long term financial objectives whether is it increasing your savings for retirement or putting aside a little extra for this year’s down payment of that property.

If getting your financial life in order is a resolution for you this year, here are some ideas that may help you get there faster:

1. Save Smartly!:It is common knowledge that

• Income -Expenses = Savings

We suggest change that equation from this year, make it

• Income – Savings = Expenses

This new equation will help create an automatic budget, and will ensure you only spend after saving.

Use automatic investment ideas like SIPs and STPs to transfer your monthly savings to dedicated investments for your goals.

 2. Have Contingencies, for everything!:

Dangers and risks are ever present. They can have sudden and significant impact on your finances if they are realized. So it’s better to be safe that sorry.

• Having a highly liquid corpus (available to you in 48 hrs or less) is one way of doing it.
• Another useful and highly critical step is getting adequately insured. While a variety of insurances are up for grab, focus on the basics first. Sufficient health cover for your family and yourself should top the list.
• Followed by insurance for specific risks such as critical illnesses, accidents and even insurance for your home.
• Another smart thing you should do is take a insurance for any big ticket loan you may be servicing, such as a home loan. You do not want to burden your dependents in the event of you passing away, do you? 

3. Have a Strong Debt Strategy:

• Home Loans / Education Loans

Not all debts/loans are equal. It is essential for you to know which loan is drawing the most interest from you. Also some loans are useful, such as home loan as you have access to an appreciating physical asset or a educational loan from which you stand to appreciate the biggest asset of them all, yourself! Plus it does not hurt that they have tax deduction benefits.

• Personal / Credit Card Loans

Personal/Credit Card loans should be ticked off at the first available opportunity, simply because they have high interest rates. If you had to choose between investing into a fixed income product or pay off a high interest loan, you should ideally opt for repayment. Interest saved is interest earned after all! 

4. Know what you want:

It is said “If you don’t know where you are going, well then, any road will take you there”. It is better to have well defined goals. A goal helps you focus because the end objective is clear. For example, it is probably not enough to say, “I will save some money for that amazing Europe vacation that I always dreamed of.” It needs a lot of planning and finances. You not only need to know the destinations you will visit, you also need to the travel routes you will need to take, how much funds you will need, where all do you intend to spend and so on so forth. The more crisp your goal is, the better actionables you will be able to achieve.

 

5. Invest in yourself:

In today’s highly dynamic world, the word of the day is “reskilling”. As a professional, now more than ever, you have to stay on top in your industry by constantly upgrading your skill sets. Therefore always ensure you have enough kitty set aside so that you can opt for those special courses which will give you that edge in your profession.

While not all resolutions can be worked on simultaneously, it is important that you start with some and even more importantly that you stick to them. Give your resolutions time lines so you know what to prioritize. And work towards strong finances and a worry free New Year 2018!

 

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Your daughter – have you planned for her goals?

Having a girl child is a moment of great joy for parents! But planning for the darling daughter’s future is also something that is always top of the minds of Indian parents. Early and sound planning can go a long way in ensuring the future of your daughter. Following are some ideas that as a parent you could consider when planning for your daughter’s future:

Ensuring Medical Cover is in place:In an ever changing environment and the growing threats of lifestyle related health problems, children are no more immune to major health concerns. As such, having them medically insured should be on high priority. While a stand alone health policy might be excessive, including them in your family floater is a practical option. Depending on the policy you chose, the minimum age requirements can range from 91 days to 3 years old.

Investing for your Daughter’s Future:Indian parents today are still actively looking to fund for their child’s future. Additionally parents of the daughter are still largely expected to fund for the “Big Fat Indian Wedding”. Following are some of the investment options out there which parents could consider and evaluate basis their requirements:

 

 

• Sukanya SamriddhiYojana: A government initiative to encourage Indian parents to invest specifically for their daughter’s future. It provides the highest guaranteed returns of all government investment schemes and is currently providing 8.4% p.a. tax free. Furthermore, contributions to it are eligible for tax deductions upto Rs. 1.5 lakhs under Sec 80C. While some might criticise its lock in policy, the other way to look at this that it is a significant tool to partially, if not fully fund, the most important requirements of the daughter i.e. Her Education and Marriage

 

• PPF: Another popular government scheme. Similar to Sukanya SamriddhiYojana in providing tax benefits under Sec 80C. However the current tax free returns are 7.9%. With a 15 year fixed lock in policy, its highly advisable that the parents open the account during the daughter’s early childhood and invest regularly in it to achieve a sizable corpus.

 

• Mutual Funds: A combination of Equity and Debt Mutual Funds are a great way to ensure both short and long term goals of the daughter are met. One needs to identify which type of mutual fund and subsequently which scheme under that type would be most appropriate to invest into basis the requirements.

 

• Gold: An all time favorite for Indians. While traditionally Indians have always bought and kept physical gold, there are more convenient options now available. Gold ETFs and Sovereign Gold Bonds are becoming increasingly popular among Indian investors.Both track gold prices and have the added advantage of no storage/making costs and no risks of theft/tampering.

 

• Child Plans: Various Mutual Funds and Insurance Companies provide plans that are specific for children. Most of these options have a stringent lock in period and take exposure in equity and debt markets.The lock ins on these plans may work in favor when parents are looking to match the lock-in with the daughter’s goals.

Estate Planning:As a minor, two aspects become critical in ensuring that whatever hard work that went into planning for the child does not go to waste in case of a sudden demise of one/both parents. A will helps to confirm who will be the legal guardian of the child in case of an unfortunate event. It will also ensure that the money meant to go towards the requirements of the daughter actually is received by her at an appropriate time and the wishes of the parents as regards their monies for the daughter are honored.

Parents are always concerned with providing for their children. As such, it is always advisable to start planning early on in the child’s life. Understanding the child’s near and long term needs is a good way to start planning. And the correct planning can ensure peace of mind and happiness for both the parents and the daughter.

 

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A Guide to Financial Planning for HR Consultancy Owners with Uncertain Cash Flows

I have uncertain inflows – how should I invest?

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. Therefore it becomes important how an individual plans to use his/her hard earned money. More so when the inflows are not necessarily streamlined and consistent like that of an employee. When your personal income is linked to the performance of your firm, a well thought out plan could be all the difference between financial stability or having to make huge compromises.

Being a HR firm owner can have its ups and downs. By following certain simple financial planning steps, you can have some peace of mind with regards to your personal financial situation even though you may not have a steady income:

1. Contingency Fund: This is a basic yet most critical part of any financial planning for a self employed individual. You never know when your next pay check may come. So it pays to prepare for the worst. Thumb rule has always been 3-6 months worth of household expenses to be kept aside in highly liquid assets as an Emergency Fund. Yet we feel that when it comes to a owner/manager, it should be at least 6-9 months worth of basic expenses!  A handy tip, do not forget to count any committed payments such as EMIs and any insurance premiums when calculating the corpus. 

2. Risk Planning: or in lay man terms, Insurance Planning. This could be a considered an extension of contingency planning, but for very specific events. Following are the types of insurance policies one must always have at all times: 

• Term Life Insurance Plan: The plain vanilla term plan is exactly the only kind of life insurance anyone should purchase. Handy tip, to know the amount of cover you might need, start with at least 15 times your annual revenue/income. Don’t forget, insurance should never be mistaken for an investment!

• Individual Health Insurance: If nothing else, an individual health cover to at least cover your own standard hospitalization expenses is a must. Financial independence means you should be able to fend for yourself at the very least, even if it paying for your own recovery. 

• Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lump sum payment to tide over the finances needed, in case of being diagnosed with a critical illness.

• Personal Accident Policy: Another source of financial risk associated with most professionals is loss of income/job due to an accident. Similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy. This can be used to either pay off medical expenses or help in taking care of household expenses during the recovery period.

While more types of insurances are available, it is essential that this set is acquired first. Having your Contingency funds and Risk Planning in place makes a strong base for you to venture into the world of investments.

3. Planning for Retirement: Retirement, or as financial advisors put it, Financial Freedom, is something we all aspire for. The dream of not working for the sake of survival is a goal we all work towards. Yet having an uncertain income can make such a dream feel a little distant more often than not. And while retirement always seem likes a far off goal in comparison to what seem like more pressing concerns, it should ALWAYS be top priority! Underestimating your retirement financial needs can be the one of the biggest mistakes you could make and more often than not, people realize it far too late to make any significant course corrections. Even if you have to start with small amounts, it is the consistency and discipline that will ultimately help you reach your goal.

4. Financial Goal Planning: Only after the first three steps are in place, is when you should really consider planning for the rest of the commitments/aspirations that you might have. As with any goal planning, the two critical aspects to consider are time horizon and future value of the goal, not current value. If you get these two right, the rest becomes clear.

For any individual with uncertain income flows, planning can become easier if you can channelize your savings, prioritizing in the above order! It is essentially in this area where the difference between financial planning for an owner of a firm/business versus that for an employed individual lies.

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Why Risk Management is critical for HR Consultancy firms!!

Insurance is still a highly misunderstood concept in India. People often look at insurance plans as an investment option. Yet the golden rule of insurance is that it should always be separated from your investments. For a HR Consultancy Owner, a combination of various types of insurance policies can insulate the business as well as themselves and their family from potential risks. Insurance policies such as:

• Vanilla Term Life Insurance: This is a primary insurance that one should procure for pure life cover. The sole objective of such a policy is to ensure continued financial stability for your family in the eventuality of your sudden demise.
• An Individual/Family Health Insurance: This type of policy is meant to cover for standard hospitalization expenses in case of an illness. Depending on the requirements, such policies can cover just a single individual to a family of four and even more.

However, one must now look beyond these basic necessities. Someone who is constantly on the move and if he/she is the sole bread earner of the family needs to have other risks covered. Risks such as:

• Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. This phase of “no cash inflow” could be extended if recovery periods take longer than expected due to a serious illness. As such a substitute income source has to be provided for such situations, either to pay, at least partially, for basic household expenses or fund the significant expenses that are part of any big medical procedure. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lumpsum payment to tide over the finances needed in case of being diagnosed with a critical illness.
• Personal Accident Policy: Another source of risks associated with most professionals is loss of income/job due to an accident. In such cases, temporary or permanent disability caused due to any accident can force the individual to stop or totally cease his work. On top of that the costs related to recovery are usually on the higher side. Hence, similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy which can be used to either pay off medical expenses or help in taking care of household expenses.

But insurance should not have to be curtailed to insure just the individual. Founders of HR consultancy firms are usually the most valued personnel in the organization. After all, they are ones that drive the image and the growth of the firm forward, eventually becoming indispensable to the firm. The firm therefore must look to protect itself from possible fall in revenue/image from unforeseen events related to such individuals. Policies such as:

• Keyman Insurance Policy: this is a policy that a firm takes for a key employee such as the CEO/Founder, through whom a lot of business is generated. Losing such a valuable individual due to his/her demise can lead to significant financial loss. Hence in addition to being tax efficient from the company standpoint, such a policy also helps the firm deal with such loss in case of an unfortunate event.
•  Directors and Officers Liability Policy: This is a little more unconventional type of a policy. It is specifically applicable only when to provide cover for the personal liability of Directors arising due to mistaken actions carried out by directors in pursuance of their managerial duties. Such policies covers paying for legal costs incurred while defending the individual director in a court of law. Such policies provide protection for claims brought against directors and officers for actual or alleged breach of duty.

A combination of such policies may be crucial for HR Consultancy Firm owners to cover risks. Uncertainties are the only certainty in life. And while you can never rule them out completely, you can soften the hardships that come with such hard times if you have the necessary insurances in place. In the end, that is the singular function of any Risk Management Plan.

 

 

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HR Consultants – can you plan your own finances?

Consultancy is the new age choice of profession. And being a consultant is right there amongst the top dream jobs!

One of the most upcoming fields in this professional niche is in the sector of Human Resources. Consultants in this sphere are referred to as Human Resource Business Partners.

A Human Resource Business Partner goes beyond the regular functions of the organization’s HR team. As such, HR Business Partners generally tend to be very busy as they handle important head hunting and hiring mandates. With bigger mandates and responsibilities comes a much nicer pay package alas with no time to look at personal finances!

But like all professionals, Personal Financial Planning should infact be at the top of the priority list. Why you ask? Let’s delve into the reasons.

Time Restraint: Like all consultants are occupied 24/7, a HR Business Partner is always vying for personal time. And when they do find some, the last thing on their mind is personal financial matters. In the catch up for personal things to get done, personal finances are a low priority. Yet should it not be the complete opposite of this? The importance of financial planning is not just related to finding out how much to invest and where. Financial planning and giving a structure to overall finances is aimed to attain peace in the thought that despite all other commitments, you are working towards insuring that financially your dreams and aspirations will be taken care of. And that is a great source of calm for a person constantly on the move.

Contract based Income: As a consultant, you are a contractual worker in essence. In other words, you are in receipt of the handsome income only as long as you manage to keep the contracts alive. Shouldn’t simple logic dictate your actions that this hard earned should be channelized for situations when no contract is available? Or in layman’s terms, creating a Contingency Fund for those truly lull periods in the industry. Wouldn’t you want to make this hard earned money work as hard as you so that your dreams of an early retirement or that fancy foreign holiday come true?

Insurance: While you may have already thought of the regular health and life insurance policies, what is worth considering are additional risk covers in terms of Personal Accident and Critical Illness Policies. These provide features which help augment income in case you cannot report in to work due to major accidents. In addition insurance that is worth considering for senior HR Business partners or top executives of HR Consulting firms is the Keyman Insurance Policies. (More on all these in the subsequent posts.)

What is it that you truly fancy doing with your hard earned monies that you worked so relentlessly for? Would it not be nice to know that your efforts can be enough to fulfil your life dreams? Most likely your answer would be a resounding YES! So then, what is stopping you? Mere inertia? An inherent fear of doing something wrong that can’t be taken back? Lack of knowledge on how to go forward? The questions are many.

And yet, the solution might be as simple as the professional choice that you have made for yourself. Why not consult an expert consultant from the financial advisory field? It is after all why you are hired right? So why the hesistance in doing the same thing for your personal benefit.

As fellow consultants and advisors we believe, like you, that specialization leads to credibility and expertise. And like consultants, we understand that trust is only gained through repeatedly providing sound and quality advice. Being credible and trustworthy is essential, more so in matters of personal finance.

Having a word with a Financial Advisor to make certain your hard earned wealth is doing the right thing may be a good idea and most certainly worth your coveted personal time.

Till then…continue the good job of quality consulting!

 

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Crisis Management 101 – It’s Better To Be Prepared!

In today’s ever changing world, with all the geo-political, social, and technological dynamics, job surety is no more a luxury anyone can afford. Be it the CEO of a M.N.C. or a mid level manager, the changing landscape compels us now more than ever to be prepared for the worst.

Even pilots aren’t immune to such extremes. From domestic industry uncertainties to global events, pilots need to be equipped to face such an eventuality. One such recent example is the Qatar diplomatic crisis. With the neighbouring countries cutting diplomatic ties with Qatar and shutting down their airspace for any Qatar bound plane or vice versa, a sense of being besieged looms in the country.  Now while this does not directly result in job losses, such incidents raise the fear, specifically for businesses closely linked to Qatar.

Therefore prudence calls for having certain provisions in place that can help ease this fear. A sort of backup or cushion for facing an event you might have never fathomed.

A checklist of such provisions could possibly look as follows:

Self funded health insurance coverage is important – Most pilots would argue that the employer already provides for this. But that’s the point right? What happens if you get the golden handshake? Guess what, no more health cover. And even if you get a new one, they always come with a waiting period. This means you won’t be covered for a certain period from any pre existing illness. This would not be a situation that you would like to end up with.

 

Personal Accident Policy and Critical Illness Policy coverage – Extending the above point, it’s critical that pilots have a personal accident and a critical illness policy. In the months of no income, one needs to ensure that one is covered for all kinds of risk. In cases where families may have accident or critical illness exigencies during such a period, such types of policies are a godsend. Such personal accident policies, for example provide the insured with either weekly allowances or in some cases a lump sum payout depending on the terms and features of the policy. These payouts can be used for medical expenses that come along with treating such eventualities.

 

An Emergency Fund is a must have – A highly liquid investment is the preferred choice to host such a fund, as it’s meant for immediate use. While Bank FDs and saving accounts is the age old choice, research and time has proven they are better options out there. One such alternative is Liquid Mutual Funds. These typically provide the similar liquidity and safety – principal features that a bank savings account offers, but with the added incentive of significantly higher returns on the investment. These returns currently are in the range of 6-7% versus 4% on your savings account.

 

The objective of this corpus should be to provide enough to maintaining the essential household expenses + EMIs in case of sudden exigencies and or temporary absence of income. Thumb rule states this corpus should ideally support 6 months of household expenses, including EMI’s and Insurance Premiums.

 

Move towards conservative assets – If you feel the crisis period is going to be prolonged then you are better off cutting down on riskier investments and moving towards conservative assets. Why so? Because liquidity needs could crop up anytime. Hence capital protection and not capital appreciation must take the driver’s seat.

 

While in all probability this crisis might be short lived, planning for it should not be left unattended. Like the saying goes, “Better to be safe than sorry”! And checking off this list could just go a long way in maintaining that safety net at all times, even when you might feel down in the dumps financially.

 

Till then, happy flying!!!

 

 

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Do Pilots need planning for retirement?

Retirement is usually something that is not considered by most of us till we are nearing it, so naturally we do not plan for it, until it is probably too late. This general ignorance or lack of attention to retirement planning can have far reaching consequences.

Retirement planning in the simplest sense means preparing for life after the tenure of paid work ends.  This does not only include the financial aspect, but other aspects such as what to do during retirement, the lifestyle choices that one can take and what dreams one might want to pursue during the remainder of the years.

While the concept of Retirement Planning applies to pilots just as it does to other individuals, there are certain unique points that are exclusive to retirement planning for commercial pilots. These unique points are crucial while developing a retirement plan for a pilot.

Firstly, under the current DGCA rules, the retirement age in India has been pushed up to 65. This is an entire 5 years longer than the mandated retirement age in most other industries. This translates to more income earning years, probably at the highest salary slab of the industry, since usually pilots around this age are most likely to have their designations as Captain. This extra income earning period is crucial in formulating and ironing out the retirement plan before the pilot ultimately retires. The significant income flowing could be the difference between living a compromised and a fulfilling retirement.

One of the most important things a commercial pilot has to consider is Lifestyle Inflation. Because commercial pilots have one of the best salary packages amongst all industries, they tend to have more lavish lifestyles. And they are comfortably able to match up the ever increasing expenses that come alongside their lifestyle choices. But on retirement, the salary stops. Yet expenses continue to stay, with inflation only adding to it. But more significantly no one would want to compromise on their lifestyle they have become accustomed to. As such it becomes imperative to plan much ahead so that lifestyle compromises don’t become the norm during your golden years.

Just to drive home the impact of inflation, let’s take an example. Consider a pilot Mr. A, currently 30 years of age and has a monthly expenditure of Rs 12 lakhs every year (not a very high amount, from what we hear from our pilot clientele). Assuming he will retire at age 65 and taking an average of 8% lifestyle inflation till retirement,  the same Rs. 12 lakhs expenditure will inflate to approx Rs. 1.75 crores. In other words, to maintain the lifestyle that costs Rs 12 lakhs as of today, Mr. A would require Rs 1.75 Crores annually to maintain the same expenditure choices, forget upgrading!

Furthermore, pilots are used to having extremely busy schedules. So when retirement hits, they are unprepared to handle the ample time in hand. Hence they always look for options to keep themselves engaged. This could mean, taking long leisure trips or finding, researching on and investing lump sums in “exciting investment avenues”, committing money to be part of a start up or just following their long drawn passions or enrol at the local flying clubs just so that they can regularly indulge their lifetime love of flying. All this comes at hefty financial expenditures.

All of the above means that Pilots would need to plan and develop customized retirement plans for themselves to ensure a smooth flight during retirement.

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IPO Under the lens – ICICI Prudential Life Insurance Company Limited

ICICI Prudential Life Insurance Company Limited is the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016. It’s a joint venture between ICICI Bank Limited, India’s largest private sector bank in terms of total assets and Prudential Corporation Holdings Limited, a part of the Prudential Group, an international financial services group. It offers a range of Life insurance, health insurance and pension products and services.

Source: Kotak Securities

Quick facts

1. They were the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016.
2. In fiscal 2016, their market share on a retail weighted received premium basis was 11.3% compared to a market share of 9.7% of its nearest competitor among all private and public insurance companies.
3. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches.
4. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies
5. As of March 31, 2016 their solvency ratio was 320% compared to IRDA prescribed level of 150%

Strengths

1. Consistent and robust fund performance

Funds representing 92.9% of their market linked assets performed better than their respective benchmarks since inception.

2. Quality service experience

In fiscal 2016 their grievance ratio was 153 per 10,000 new policies issued compared to private sector average of 345 per 10,000 new policies issued.

In fiscal 2016 their claim settlement ratio for retail death claims was 96.2% compared to private sector average of 89.4%.

3. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies

4. Diversified multi-channel distribution network

They have a growing bancassurance network. ICICI Bank and Standard chartered             Bank currently exclusively distribute their life insurance products. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches. According to CRISIL Research, Life Insurance Industry Report, July 2016, they have one of the largest channels among private sector life insurance companies in India in terms of premium as on 31 March, 2016.

5. Digitisation and transformation of sales, customer onboarding and internal processes:

They have created a device agnostic technology platform that provides their customers, employees and distributors with seamless experience from sales to claim settlement. In fiscal 2016, 92.3% of their new business applications were initiated on their digital platform either by distributors or customers. This has also helped them improve employee productivity. Their retail weighted premium received per employee grew at a CAGR of 29.1% from fiscal 2014 to fiscal 2016. They have an architecture which can integrate their systems with partners quickly which facilitates faster issuance of policies.

6. Robust risk management and control processes

Risk is an integral part of an insurance business. They have risk management and control processes with a detailed cost benefit analysis for risk mitigation and a strong focus on credit quality of their portfolios.

7. Experienced Senior Management Team

Their CEO, Mr. Sandeep Bakhshi has been with their company for over 5 years. He joined ICICI group in 1986 in project financing group of ICICI ltd. He has over 32 years of experience in the banking, financial services and insurance sector. 28 of top 36 members of their management team have been with ICICI group for over 10 years. Senior managerial persons in the actuary, investment, underwriting and claims department have average functional experience of 16 years.

8. It has fairly good persistency ratio compared to peers

Data Source: kotak Institutional Equities

Risk factors

1. Adverse effect on equity market in India could have an impact on their business as it will have an impact on their market linked products.
2. Change in market interest rates could have impact on their investments and business profitability.
3. Their inability to attract or retain distributors, key sales employees could have a material impact on their finances.
4. Any shift in consumer attitude towards financial savings could have an impact on their business.
5. Catastrophic events, including natural disasters could increase their liabilities for claims and have an impact on their finances.
6. Most of their new business premiums come from few products. Any constraints in selling these products due to regulatory changes could impact their business.

Valuations

The embedded value (EV) represents present value of future profits from assets after adjusting for risk. The price to embedded value multiple is approx. 3.4 times FY16 EV. Compared to multiple of HDFC and max life which is 4.2 times FY16 EV, valuations are attractive.

 

Data Source: Mint, 14 September 2016

Our opinion: Subscribe, but only if you are doing so for the long term

Whilst it is the first of its kind IPO in its space and has a large distribution network, strong brand franchise, strong solvency ratio, good settlement ratios, an attractive price to embedded value ratio relative to Max/HDFC and an experienced management, the fair value of the stock in our opinion is lower than the current offer price for the IPO. Thus, you should look to subscribe to this issue only with a long term investment horizon, as the offer price currently does not provide significant upside in the short term in our opinion.

 

 

 

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