TERM INSURANCE

Term Insurance-

Term Insurance is an oft repeated word you hear in any investment planning. What is Term insurance? Term insurance is a type of life insurance policy that provides coverage for a specified period of time and in the rare event a death happens, a death benefit amount is provided to the nominated member or heir (generally family member).

Key thing to note is that the person on whom Term insurance is taken is not the beneficiary. It is his family or heir whom he has nominated to receive the amount.

Since Term insurance per se is not very beneficial to Insurance companies, they generally club it with investment and have many variants like pension for life for the family, return of the amount after a certain years etc. What this effectively means  is insurance company takes extra money and probably invests @12-15% returns but gives you @3-4%  and thus makes money. ULIPs is one example of extra money being taken for life benefit.

So, what should one do? Should they take Term Insurance at all?

If you have a family and care for them or old parents with no source of support other than you or any such close relative who are all dependent on you providing them financial support, it is critical to take a Term Insurance. The reason being after you, who will take care of them and provide the basic necessities.

Thus a pure Term Insurance (i.e without any investment product attached to it) should be taken for a significantly large amount ( say, 15-20 times of your current annual income). This comes at a small cost (as young people in their 30's who take such insurance are expected to live at least beyond 60 and risk to insurance companies is small). Note that insurance companies work on probabilities and if risk is high, premium is high, low risk lower premium. This is based on the payouts in the happening of the event. Further, their payout risk decreases if the person commits suicide or such other clauses they put in fine print. 

Overall, the Term insurance is a standard product with a few clauses like self inflicted death not covered, but payout on death of the person taking the insurance is normally a given. Further, to protect the beneficiaries, these do not allow loans to be taken keeping it as a collateral.

Amongst the many reasons why a large amount is taken for Term Insurance are a)  in the event any incident of death happens, the family/beneficiary gets a significantly large amount for them to put in, say, FD and earn interest to keep themselves off the streets and b) since the risk for the insurance companies is small as it is a single event (death) and probability is less at a young age, the premium is also small for such a large amount.

Who all should take the Term Insurance.

a)  As mentioned above, if you have people to take care and are dependent on you providing them support you should take the Term Insurance. 

b) If you have take a large loan for a house to stay for your family and beneficiaries and EMIs are there, you should take the Term Insurance.

c) If you are in a business and significant debt, you should take both Term Insurance as well as Key Money Insurance (which your business entity pays) to meet your debts in the event of any untoward incident to you.

Please note that the payout will happen only on death and not on serious injury or disease you suffer. For that health insurance comes into play.

For how long should you take the Term Insurance

As I said earlier, the Term Insurance is cheaper to take when you are young. As you grow older the risk to Insurance Companies is larger and a higher premium is charged. Many Term Insurance plan comes with 10-25 years locked premium where if you join in your 30's you pay a small fixed premium every year till you are 40 or 55 years. Beyond 60's the risk of death increases and thus premium increases. But most people, by the time they reach 60's are financially secure and for some the older dependent parents are also no longer there and the financial risk is only for the immediate family member, primarily the wife, as children also would have by now taken a job after education etc. Best is to assess the financial situation after 60 and then go for a term insurance if required, but note that the premium would be higher.

To summarize, Term insurance, apart from health insurance, must be in any young person's investment portfolio and Term insurance can be kept till you reach a financial comfort zone where you feel paying this extra amount does not add any significant value to my support for my family or any liabilities clearance that I have. At 30's till 50's it is critical to have, beyond 60 it is a choice 

There is another insurance called the Key Man insurance and this is applicable for business where the insurance is taken on a key member of the business as in his absence the business could collapse or take a long time to recover.

 

CASTE

 Caste as a construct has been vilified by the west and milked dry by the Indian politicians for their vote banks.

Let me at the outset, make it clear that I believe in equality and do not discriminate against economic caste, religious caste, occupation caste or any other caste for that matter. 

My view of Caste in India arises more from the division and classification of work associated many years ago. It exists even today in this world in a different way, not just in India and I will come to that argument a bit later. Going back ages ago, a little smarter and knowledgeable guys became the brahmins who used their brains as the weapon, a more aggressive and fighting class became the warrior class, the smarter in terms of managing money became the business class and other classes depended on the work they did like a plumber, mason, cleaner etc. etc.

And in order to protect each one's hold in the group, they prevented intermingling of jobs amongst the groups and it was kept that way to prevent more supply than demand. At the lower end, since they were poorly paid for the manual work, they tried to ensure their child/children also picks up that task and the parampara (lineage continues) and provided a steady career, albeit a lower income. It ensured at least a skill was learned and a job could be obtained.

Since 1947, when we got independence and wanted to remove the caste system to ensure every citizen had a right to work where he pleases, we brought in the reservation system to uplift the lower strata of people to higher learning and income category. We thus have now had 75 years of reservations to uplift these people. Question to ask is "Has it really uplifted them or created a new caste (or class as we call these days) amongst the rich lower caste who ensured the reservation continues ad-infinitum. My belief is that for reservation to be truly effective, those who got reservation should be allowed only 2 generation of reservation and move on and give space to the next economically weaker section of the lower caste. One cannot continue to be rich and still take the benefit of reservation.

The second point on reservation is the quality of work. While the focus should be on primary and secondary education, lowering the standards, through reservations using a lower cutoff in marks, in colleges and critical areas of medicine, engineering causes immense damage to society. Not only Indians, would anyone in the world employ someone who did not study but breezed through college because of caste and lower marks passing was the order of the day. It is important to bring their education and financial levels to the top in such a way that they focus on the studies and be equal to those who got admission without reservation. Reservation cannot be a tool to pass through college without effort.

Coming back to my argument of the first para, where I said I will revisit. Everyone talks of caste system in India. Does it exist only in India. My belief is it exists all across the world  though subtly and stealthily done. The borders across nation is a caste system of discriminating people and casting them as belonging to X country or Y country. True caste less system will be like a Vasudeva Kutumbum- everyone stays together and does their job for the benefit of the world.

Again, would any of the richie rich marry off their children to a plumber or sweeper. They will look for a match that matches their financial strengths so that it is easier for the person to adapt. This is also a type of casteism which people will not talk. In many countries, they have adopted consanguineous marriages (at the cost of giving birth to impaired children) to keep their core class to themselves. This too is a casteism.

Again, would the sweeper or plumber or electrician be paid a high salary that enables him to live a good life and send his children to good schools and colleges. This is also casteism to keep them lowly paid and ensure work is done generation onwards by their families.

Maybe USA of the old times only had a true caste less society where people get paid as per the work they do and marry whom they please and caused by a huge migration and opportunity aplenty.

To conclude, casteism or whatever form it is called by, can be truly wiped out only in a borderless world, paid fairly well for all types of work (not just huge payouts for bankers, consultants, only), not much disparity in pays and human ability to work any type of jobs and given equal respect - be it an MD or a lowly worker.

It is only an Utopian dream to have a uniform society like above across the world and caste or what ever name it is called by  or even not called as such will continue so long as pay and work differentiation is there for jobs .

Valuation

 Valuation is the Buzz word for all finance guys in the financial market. But what is valuation. Valuation basically means what a company is worth now and likely to be in future.

While what a company is worth now can be obtained from its assets and liabilities in the balance sheet as well as how it has done in the past, valuing a company in the future is at best a shot in the dark. Why do I say that? Because nobody can predict the future. Future is so uncertain and has political, policy, regulatory, business impact, alternate business impact, competition and so many other variables to correctly predict the future.

When it is difficult to predict what is going to happen in the next minute (if it can be predicted, there will be zero accidents or disastrous events), how can one look at a crystal ball of the future many years hence.

Another non physical factor in a Valuation is a bias like if your job is to do a valuation for a client, you will try to match the figures of valuation that looks nice to the client, irrespective of what your model says. eg. If your model growth of sales is 5% and you value the company at $50 and client's expectation is $100, you tend to bump up the sales growth to 15% or 20%. This bias is evaluator bias as he wants to finish this deal with the client and earn a fat bonus for himself. How else does one explain a Paytm valued at 2000 Rs and crashes to 400 Rs or many such IPO companies.

Valuation also depends on the bias you carry because of the environment you live in. Eg ITC was poorly valued a few years back and even if somebody had valued  at that time, he would have valued at 150 Rs or 200 Rs. Now with the prices touching 600 Rs, if the same evaluator does the valuation he will do around Rs 550-600. This bias of going towards the market price valuation happens because you do not want to be proved wrong. If it goes down, you can always say, Everybody said so. You do not want to put your head out like the guy Michael Burry - on whom the movie The Big Short was made. He bet against the market in 2008, as his data showed him it was going to crash. Very few in the world can take such a contrarian call.

So, how do we value a company. My personal belief is the PE ratio should be reasonable (<20 or what is the average in the industry and much less than that. Eg Tech PEs are 60-80. I prefer valuing them at 30-40- even a 50% drop is bearable. Why do I do that? Tech is a very unpredictable beast. Anything can happen with in matter of days or months. Nokia is one eg, Netscape is another, Lotus 123 the pre excel pioneer, EVs of today and possibly AIs of the future. AIs can technically replace CAs, Lawyers, MBAs or knowledge based industry. MIT courses, for eg are available for free on You tube and so many other DIY courses for which once upon a time you paid huge amounts to learn.

I follow the following 5 pointed star valuation

a) PE at a reasonable rate (<20)

b) Sales Growth - 3-5 years - growing at 15-20% per year (Rolling returns)

c) Ebitda - 3-5 years - growing at 15-20% per year

d) ROCE- 3-5 years growing at 15% per year

e) ROI -3-5 years growing at 15% per year

If all the boxed at b) to e) get ticked and PE is <20, I multiply the EPS * PE to get the value of the company.

I do not say, I will be right all the time, but hopefully most of the time as stock prices are a function of many factors- momentum, shorting, margin calls, valuation bias and a lot more.

Solar - Aditya

With the PM's first task after Sri Ram temple inauguration was the launch of Suryodaya Scheme or every house with rooftop solar, the question that quickly comes is what happens to the distributors and generators of electricity  companies.

The way electricity works so far is that Power companies generate power using a variety of methods/fuels- Coal, gas, diesel, solar, wind etc. These sell to Power Transmission companies which in turn sells to the final consumer. Many of the Power Transmission companies are in serious financial situation either because govt. is asking them to give free up to a limit and more than that the illegal drawal of electricity by many.

With smart meters and net monitoring, while the meter manipulation is reduced, the issue is still of illegal drawdown of electricity during transmission. If only Tesla had popularised the wireless electricity, this issue would not have come as like internet everyone has to prepay or get a postpaid connection to tap the electricity. No need for cables and wires and a huge savings due to that. But fortunately for Power Transmission companies Tesla's wireless electricity remained in books only.

Now the next issue to hit the power transmission and power generating companies is the rooftop solar. There are two types of rooftop solar - One is called Off grid and one is called On grid. Off grid is expensive and difficult to maintain. It calls for a series of costly batteries to be kept for storage and will have to be changed after a few years. The other one On grid is with the help of a switch/meter the power generated is delivered to the power company. A separate standard connection is given for the electricity consumption. End of each month, the solar electricity generated vs the electricity consumed is netted and payment is made to electricity company if consumed more than generated. The other way around is credited to your account and not paid.

The issue comes if a large number of people opt for the solar electricity that the demand side from suppliers gets reduced.  The transmission company has now to pay for the electricity generated by these numerous solar roof tops. Thus to make these transmission companies profitable, they may introduce a minimum drawdown payment i.e. even if you travel and lock your house, while the solar is generating, you are not consuming. To offset this Transmission Companies may seek a minimum drawdown payment which is assumed to be consumed even if not consumed. i.e if you say that you want a minimum drawdown of 100 units at time of connection, and you use 20 units of electricity, you will be assumed to have consumed 100 units of electricity.  This mechanism is essential as electricity generated cannot be stored and has to be consumed on production.

As the electricity cannot be stored, one more issue that arises is the skewed production. During day, Solar will generate electricity, while at night it won't. Power generating companies have to work full load in the night to provide power.

These are the issues that need to be discussed by experts  in making the Suryodaya project a success.

 

EGO vs SANITY

It is often noted, ad nauseum, that once people taste a wee bit of success, they start to feel that they are demigods and anything they touch will turn into Gold.

Success often does not come in leaps and bounds, but through steady work. Yes, sometime luck turns the table, but do not think those as Midas touch.

Take the example of Anil Ambani, one of the richest businessman at that time. After the split between brothers and got lot of money and modern era business - like ICE- Infrastructure, Communication and Entertainment. He went on to establish Ultra Mega Power Station, he went on to buy internet cable companies and set up a huge infra for mobile and internet and of course the Bollywood area thanks to his actress wife- the entertainment business. All these businesses required huge amount of CASH and TIME for it to fructify. He was on steroids, borrowing left, right center to finish his projects. End of the day, he ended up in such a huge pile of debt, that he has not been able to come out till today. His brother helped to buy for a pittance, the communication part of the business and renamed it Jio.

His elder brother has refinery, which is a cash cow and generates cash, which he can slowly deploy into communication and wait it out. No need to go in for large borrowings or Ego issues to grow big quickly.

 The fundamental lesson you learn from above is that taking a small debt where you have the ability to repay by sale of some of your assets is fine for a short term, but longer growth financed by debt where the outcome is not a certainty would land you in one big hole that will be difficult to come out.

Ego in business may be good, but has to be accompanied by Sanity. Ego helps you to push forward, but Sanity roots you to the ground. When the going is good, repay Debts, try to hoard cash for a rainy day and when opportunity comes you can use it. Life is a cycle. It is not that you miss one you are out, there will come a time to join the cycle. One has to wait out. This equally applies to our investments. Just because everyone is making money on a flavor, you may be tempted to join. But just check out and do not put everything into that as one day the flavor goes out you have huge debts and unable to sell. That is the most difficult situation for a businessman.

 In any case, ensure that family is assured of a steady income stream not linked to any business venture to avoid creditors and govt. to come after that. 

Trade Skills vs Knowledge Skills- The fear of AI

 With Artificial Intelligence gaining ascendancy and everyone jumping on to the band wagon, a thought occurred to me that the Knowledge based skills like finance, MBA's, lawyers etc. will soon become redundant as the knowledge will be all with the likes of google and anyone can search and use AI to get a solution.

Many clarifications, like what computer I want to buy based on my requirement, what type of agreement required for a particular action, etc is easily done with the help of CHATGPT. And this is just one of the tool. So, what does knowledge based AI do that a human can also do. It takes the information available and analyses and provides solution as per your requirement. Take for eg. to file a tax return, it will seek some basic information and then use the database of knowledge of the tax information and churn out a tax return for submission to the IT department. Eg is clear tax. Thus a CA or Tax consultant is made redundant.

Or to prepare a business plan, one may not need an MBA to do. Put in the basic inputs or even that is not needed in an ERP environment(Enterprise Resource Planning), which may have past data and looks at trends (which an MBA also does) and churns out a 10 year forward Business plan, cashflow and various other reports.

Even for doctors, the symptoms put out and AI generated reports of your blood, pressure, heart rate etc. makes an ordinary doctor redundant as all the 5 years knowledge from the Harrison's Principle of Internal Medicine, Gray's Anatomy etc. are input in AI.

Even for translators, Google and other machines fluently translate and speak on your behalf in a language you choose.

Thus Knowledge based info is thus passe'. What will be required in future is the physical aspect of skills. That is someone whose physical presence may be required to help out. Examples of such ones are Nurses, Plumbers, Farmers, Electricians, Surgeons etc. who has to physically come and sort out the issue. Even software guys will be made redundant - already with GITHUB, standard routines are put up there and people can easily copy the coding.

Trade skills will be the key learning of the future. And the value of those will increase.

THINK - Do you still want to send your child to a high paying college getting a knowledge based education or to a Trade School.

RISK Profile

 Risk profile is generally asked by any financial advisor. What does Risk Profile mean? In simple terms it is your capacity to take risks. You may want to take a 100% risk with your capital, but the questions they ask before slotting you in a particular risk profile is the real risk YOU can take. I may have 10 Lakhs and may want to invest it in a 100% risky investment. It can fetch you good returns after a few years or it may not. But till such time how are you going to survive. So, the risk profile takes your income, expenses, emergency fund etc and your age (key) to determine the risk profile.

Risk Profiling is important and I have categorised as follows: 

a) 20 years to 35 years (assuming you start earning) - High Risk (Equity/Ipos/crypto/nft) - Risk (Equity/Mutual fund) - Safety (some long term debt funds)

b) 36 years to 45 years (assuming you have invested above and have some capital)- Risk (Primarily Equity, Index funds and some IPO's)- Risk (Mutual fund -aggressive ones/sectoral)-Safety (some medium term debt funds)

c) 46-59 (assuming you have made a neat pile by now)- Risk (Mutual fund- Multi asset/Multicap/some sectoral, Equity large caps/index)- Safety (More medium and short term debt fund)- Income (funds/equity that generate dividends or deferred annuity plans)

d)60 and above - Safety (liquid funds, short term funds)- Income ( funds that get you regular income). By this time, your investment should focus on Safety and getting regular income for living a normal life. If over and above that you have funds, you can risk by trading/playing the market for time pass.

The above may or may not be applicable to all as each one may have some other commitments in terms of debt of house/family commitments/health issues etc. But investments like above sample is required for ensuring a financial freedom, at the age of 60