November 2012

Understand : What is Paid Up Value in your Insurance Policy

What is Paid Up Value , Insurance Policy, Surrender Value, Life Insurance Concepts, Policy Lapse, Assignment, Nomination, .

Awareness precedes success

Most of the Insurance Policy Holders are unaware of the concept of Surrender Value and Paid  Up Value in case of lapse of a policy for any reason. This note with an example will help understand the concept. 

Guaranteed Surrender Value 

Under Sec 113 of Insurance Act 1938 if a person discontinues a policy, the insurer will not be allowed to forfeit all premiums paid. In every premium there will be an element of savings element accruing in a reserve fund. Insurance Act 1938 stipulates that the insurer should pay a guaranteed surrender value, if the premiums are paid for a minimum period of 3 years. Some Insurers pay more than the amount stipulated by the Act and this is called Special Surrender values. 

Paid Up Value 

When policy lapses after 3 years the Insurer will reduce the sum assured to a sum in the same ratio as the number of years premiums paid, bearers to total number of years in term of the policy. 

If Mr X. had taken a policy for 32 years for 10 Lakhs and he has paid the premium for 8 years only, then he would have paid for the term only. The Insurer offers to pay the Sum Assured, due payable on the maturity date or death if earlier as Paid up value that is Rs. 2,50,000. 

Reduced Sum Assured (RSA is the Reduced Sum Assured or the Paid up value) =
(Total number of years premium paid X sum assured) / (Total term of the policy)

Policies are with Profits or Participating polices wherein the policy holder will be eligible to get share of surplus of insurer called the bonus. 

No bonuses will be added to the sum assured of policies without profits or non – participating policies. 

 In case of policies wherein bonus eligibility is available, the sum total of Reduced Sum Assured + bonus allocated, shall be the Paid up Value. 

Where there is no bonus eligibility for the policy, the Reduced Sum Assured shall be the paid up value. 

Premiums are paid in advance in Insurance transaction. So the policy will be in force for the term depending on the mode of payment. Obviously, a monthly mode will keep the policy alive for 1 month, in quarterly it will be for 3 months, Half yearly for 6 months and yearly for 1 year.

Mr. X had taken a Half yearly mode of payment for 10 Lakhs with profits for 32 years term. The policy had commenced on 28th March 2002. He paid the premiums due on 28th September 2009. Due to certain financial constraints he could not pay further. Upon lapse of his policy due to non payment of premiums, not all of the money paid is lost.

What is Paid Up Value , Insurance Policy, Surrender Value, Life Insurance Concepts, Policy Lapse, Assignment, Nomination,





Reduced Sum Assured = Rs 2,50,000
Add Bonus Accrued = say 1,60,000
Total Paid Up = Rs 4,10,000

How much Life insurance is another article which you will find useful….

October 2012

How do you compare and evaluate Mutual Fund Performance

 Risk-adjusted Returns, Evaluating Mutual Fund Performance, Sharpe Ratio, Treynor Ratio, Beta, Alpha, tracking error, Index funds, .

Risk-Adjusted Return is one of the concept investors should be aware when comparing returns of mutual funds.  

One way of comparing the returns between two different funds is to look at the their relative returns over a period. However, a weakness of this approach is that it does not differentiate between two schemes that have assumed different levels of risk in pursuit of the same investment objective.

It is possible that although two schemes share the benchmark, their risk levels will differ, and sometimes quite dramatically as well. Evaluating performance, purely based on relative returns, may be unfair towards the fund manager who has taken lower risk but generated the same return as a peer.

An alternative approach to evaluating the performance of the fund manager is through the risk reward relationship.

The underlying principle is that return ought to be commensurate with the risk taken.

A fund manager, who has taken higher risk, ought to earn a better return to justify the risk taken. A fund manager who has earned a lower return may be able to justify it through the lower risk taken. Such evaluations are conducted through Risk-adjusted Returns.

There are various measures of risk-adjusted returns. We’ll look at the three most commonly used :

Sharpe Ratio

An investor can invest with the government, and earn a risk-free rate of return (Rf). T-Bill index is a good measure of this risk-free return.

Through investment in a scheme, a risk is taken, and a return earned (Rs).

The difference between the two returns i.e. Rs – Rf is called risk premium. It is like a premium that the investor has earned for the risk taken, as compared to government’s risk-free return.

This risk premium is to be compared with the risk taken. Sharpe Ratio uses Standard Deviation as a measure of risk. It is calculated as

(Rs minus Rf) ÷ Standard Deviation

Thus, if risk free return is 5%, and a scheme with standard deviation of 0.5 earned a return of 7%, its Sharpe Ratio would be (7% – 5%) ÷ 0.5 i.e. 4%.

Sharpe Ratio is effectively the risk premium per unit of risk. Higher the Sharpe Ratio, better the scheme is considered to be. Care should be taken to do Sharpe Ratio comparisons between comparable schemes. For example, Sharpe Ratio of an equity scheme is not to be compared with the Sharpe Ratio of a debt scheme.

Treynor Ratio

Like Sharpe Ratio, Treynor Ratio too is a risk premium per unit of risk.

Computation of risk premium is the same as was done for the Sharpe Ratio. However, for risk, Treynor Ratio uses Beta.

Treynor Ratio is thus calculated as: (Rf minus Rs) ÷ Beta

Thus, if risk free return is 5%, and a scheme with Beta of 1.2 earned a return of 8%, its Treynor Ratio would be (8% – 5%) ÷ 1.2 i.e. 2.5%.

Higher the Treynor Ratio, better the scheme is considered to be. Since the concept of Beta is more relevant for diversified equity schemes, Treynor Ratio comparisons should ideally be restricted to such schemes.


The Beta of the market, by definition is 1. An index scheme mirrors the index. Therefore, the index scheme too would have a Beta of 1, and it ought to earn the same return as the market. The difference between an index fund’s return and the market return, as seen earlier, is the tracking error.

Non-index schemes too would have a level of return which is in line with its higher or lower beta as compared to the market. Let us call this the optimal return.

The difference between a scheme’s actual return and its optimal return is its Alpha – a measure of the fund manager’s performance. Positive alpha is indicative of out-performance by the fund manager; negative alpha might indicate under- performance.

Since the concept of Beta is more relevant for diversified equity schemes, Alpha should ideally be evaluated only for such schemes.

These quantitative measures are based on historical performance, which may or may not be replicated.

Such quantitative measures are useful pointers. However, blind belief in these measures, without an understanding of the underlying factors, is dangerous. While the calculations are arithmetic – they can be done by a novice; scheme evaluation is an art – the job of an expert. 

Source : NISM
More on Mutual Funds

September 2012

Procedure for Transmission of Shares, In the Event of Death of the Shareholder

Procedure for Transmission of Shares,in the Event of Death of the Shareholder , Stock Investing, SEBI India

Life is uncertain..But Death is certain

Recently, an acquaintance had to undergo the process of transmission of shares when she lost her spouse to an unfortunate mishap. It is good to be aware of the process of transmission as documented by SEBI. I am putting this here for the benefit of our readers.

“Transmission” is the terminology used for this procedure that means passing of property in shares to the legal heirs. In the event of death of the shareholder procedure for transmission of shares is as follows;

 Where there is a nominee;

For shares in demat mode, you have to send to the Depository Participant (DP);

  1. Notarized copy of the death certificate
  2. Duly filled Transmission Request Form (TRF).

For physical shares, you may be requested to send any of the below documents to the Registrar and Share Transfer Agent (RTA);

  1. Original Share certificates.
  2. Duly filled Transmission Request Form (TRF).
  3. An affidavit / declaration by the nominee declaring his rights.
  4. Notarized copy of the death certificate.

Where there is no nomination: (Part A)

 Shares held in Demat mode;

 Where value of the shares is upto Rs. 100,000, one or more of the following documents is to be furnished to the DP;

  1. Notarized copy of the death certificate
  2. Transmission Request Form(TRF)
  3. Affidavit – to the effect of the claim of legal ownership to the shares,
  4. Deed of indemnity – Indemnifying the depository and Depository Participants (DP)
  5. NOC* from legal heir(s), if applicable or family settlement deed duly executed by all legal heirs of the deceased beneficial owner.

Where value is more than Rs 100,000, the Depository Participants (DP) may additionally insist on one or more of the following documents;

  1. Surety form
  2. Succession certificate
  3. Probated will

Shares held in Physical mode:

 Where the Shares are in physical mode, The RTA (Registrar/Share Transfer Agent) may insist on any of following documents;

  1. Original Share certificates.
  2. Duly filled Transmission Request Form (TRF).
  3. Notarized copy of the death certificate.
  4. Succession certificate or
  5. Probate or letter of administration duly attested by Court Officer or Notary

 * In case of multiple successors, NOC from non-applicants shall be recorded on the share transmission form of the applicant instead of insisting separate share transmission form from each of the successors.

 Transmission of shares is required to be done within a period of one month for share held in physical form and within seven days for shares held in Demat form, from the date of lodgment of the Transmission Request Form by listed companies.

Sources: SEBI

August 2012

Investors Guide to the Capital Market & 20 mantras for investing

Investors Guide to the Capital Market ,20 mantras for investing, India Stock Markets, Investing in IndiaI came across the document ‘Investors Guide to the Capital Market’ produced by the Ministry of Corporate Affairs under the Aegis of ‘Investor Education and Protection fund’ (IEPF)

It contains some 20 generic mantras for investors to follow for successful investing. It would have been nice if the document contained some more depth in terms of the material. It appears to be put together in haste.

Also, I disagree with Mantra 4 (Invest in IPO & book profit on listing) & Mantra 5 (Invest in all PSU IPO’s. Don’t bother about listing price, stay invested). These two mantra’s mention that the investor will not lose money while investing in IPO’s and should try to take the profits on listing, aka recommending trading and timing.

Also, why should an investor invest in all PSU’s. Investors should invest in companies which will generate cash flow and maintain growth year on year and give returns in forms of either dividends or capital appreciation. Do all PSU’s guarantee outperformance over Private sectors. Answer is NO.

Beginner investor can refer to the document (albeit with a pinch of salt.) It starts off as follows.

Save prudently…
Invest even more wisely
• Investing is compulsory.
• You have to invest otherwise your savings
will depreciate in value/purchasing power.
• However, mindless or reckless investing is
hazardous to wealth.
20 Mantras to Wise Investing

The complete link to the document is here. Investors Guide to Investing – NSE

July 2012

Tax Filing ~ Which ITR (Income Tax Return) forms to file~File Online

Income Tax India, Tax filing, Online, Form 26AS, ITR forms, Income from salaryNow you can File taxes online using the website : Follow these simple steps for filing online.

1. Register using  your PAN. Once you login you can choose the Assessment Year for filing the tax :

Tax Filing, Which ITR (Income Tax Return) forms to file, Form 26AS, Individual , HUF,

2. Use the following ITR forms based on your type/ source of Income.

Tax Filing, Which ITR (Income Tax Return) forms to file, Form 26AS, Individual , HUF,

3. Download the return preparation excel sheet. There is excel utility excel templates which are provided for each type of ITR forms. 

Income tax return, Excel Utility, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-4

4. Use form 16 to fill in the form (4 pages). Click Validate. This will generate the XML File. Now you just need to upload the file using the following form :

Income tax return, Excel Utility, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-4Income tax return, Excel Utility, XML, Upload return, refund, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-45.  You will get an email from income tax office. You need to send the signed form to the address mentioned on the file by ordinary post or speed post.

And that’s it… Remember online tax filing is mandatory for Income over 10lacs/Optional for income < 10lacs. You can either sign digitally or send by post.

Ensure that you check Form 26AS for TDS information and verification. 

The document : Common_Mistakes  which should be avoided when filing taxes online. 

Happy Tax filing

IRDA Consumer Education website ~ Insurance ~ Educating Customers

insurance, IRDA, consumer education, life insurance, health insurance, car insurance, plans, Insurance is a sophisticated financial instrument which requires a fairly high level of involvement on the part of the consumer to make it effective. Yet insurance is also a basic requirement that every person should have. This universal need coupled with its complexity makes for a difficult combination since there is a mismatch between the perceptions of the customer and the reality of the product. It is this perception-reality gap that consumer education bridges.

The best protection for a consumer is education.

The IRDA website appears to be a sincere effort in this direction. Make use of the resources given in the website. It is useful.

You can access the site here : IRDA Consumer Education website

Financial Planning Workbook from NISM ~ An Excellent read

NISM, SEBI, Financial Planning, Risk Management, Insurance, Retirement, Estate, Investments, Planning

The Financial Planning Workbook has been jointly developed by the National Institute of Securities Markets (NISM) and Financial Planning Corporation (India) Pvt. Ltd (FPCIL) to assist candidates in preparing for the non-mandated Certified Personal Financial Advisor (CPFA) Examination.

NISM is an educational initiative by SEBI.

It covers various Concept of Financial Planning , Managing Investment Risk ,Measuring Investment Returns ,  Investment Vehicles , Investment Strategies, Insurance Planning, Retirement Planning, Tax and Estate Planning & Need for Regulation.

It is an excellent read for anyone looking for an overview of financial planning.

Certified Financial Planner Advisor Workbook from NISM (National Institute of Securities Market)

June 2012

Understanding Options Gamma ~ What is it

Understanding Options Gamma , Delta, Theta, Vega, Options Greeks, Pictures, Finance, Trading Strategies, Basics,
Options Gamma is the Change in an option’s delta for a one-point change in the price of the underlying. It indicates the sensitivity of the Options delta with respect to the underlying. This is important to know because the delta indicates how much/many contracts are long/short based on underlying.
The Gamma , on the other hand, indicates, how fast are they ‘effectively’ changing. So by watching the Gamma, the Delta Risk can be effectively managed.
Option’s delta changes as the underlying price changes (Refer to the earlier article on Options Delta Basics)
Gamma of a long option position (put and call) is always positive
Delta increases as the underlying price increases and that delta falls as the underlying price falls
At-the-money options have the largest gamma 
As volatility falls..,
 – Gamma of at-the-money options increases
 – Gamma of deep in-the-money and out-of-the-money options decreases
Basics of Options Delta ; Vega
“The greatest ignorance is to reject something you know nothing about”…If you are invested in Markets, it makes sense to be aware of & have an idea about Options

Brand Position & Brand Image

branding, Brand Position,Brand Positioning,Brand IMage, Marketing, Success, Pictures, Quotes, Management, .
What’s a BRAND
A singular idea or a concept that you own inside the mind of the prospect ~ Al Ries ~ Marketing Strategist
“Your brand is what people say about you when you are not there”
~ Jeff Bezos – Amazon
Remarkable experiences leave a mark, whether the experience is remarkably good or remarkably bad. These memories are mind share, essentially brand equity, the capital of brands
A cardinal rule in marketing :
“NEVER position a BRAND based on performance….” 
 So what exactly is Brand Positioning, Brand Image and Brand Position and the relationship between them…
 Let us see…..
Brand Positioning: Brand Positioning is the SPACE that the company occupies in the consumer’s MIND.
Brand Position: Company spends money to own this SPACE…
Brand Image: This is what the customers say about the company
Successful Brands are the one’s where there is a  match the Brand IMAGE & Brand POSITIONING….. which creates a Brand Experience….
Someone has rightly said ” If you are not a Brand… you are a commodity … where price is everything and low cost is the winner”
One way to Protect Brand by focussing on customer service here

Relative Valuation ~ Primer

relative valuation, multiples, PE Ratio, EPS, EBIDTA, ROE, ROI, WACC, Cost of equity, researchRelative Valuation is Valuing an asset by comparing with prices of similar assets in market. In relative valuation the value is relative to how the market is pricing comparable firms
There are three basic steps
–Identify comparable assets
–Standardize – price of the asset or the value of equity
–Adjust for differences  
Why popularity of Relative Valuation in analyst circle?
•It is Easy to sell a story based on comparables
–Pebble beach golf – Japanese paid 750$ mn in late 1980’s
–At that time All of Tokyo real was estimated to be cost more than all of US real estate put together
–Business potential did not justify the price
–Imagine selling a DCF based valuation!!!
•Most  Assumptions and inaccuracies are hidden
•If you mess up so would have others
–You don’t want to be wrong all alone on the street
Is there widespread use ?? Of course …
•Majority of research reports are based on Relative Valuation
•Mergers and Acquisitions derive valuations based on a  multiple based prices of comparable firms.
•Many investment strategies  are based on multiple (eg: Venture Capital/PE fund investing in entrepreneurial ventures)
•Terminal Value in DCF often calculated using Relative Valuation
•DCF used to justify Relative Valuation quite often
More on Common Multiples later….

May 2012

Present Value (PV) Basics….Formulae

Present Value, PV, Formulae, Time Value of Money, Tutorials, basics, Money, Investment fundamentals, Cash Flow

Terms uses :
PV = Present Value;
A = Annuity;
r = interest rate;
g = growth rate;
n = number of periods;
CF = Cash Flow;
“A bird in the hand is worth two in the bush” – Miguel de Cervantes
If someone owes you 10,000/- , it is advantageous to get the money today If you get this money today:
–> You could earn interest and invest it and you will receive this quantity plus some other amount in the future.
–> You can use it to pay your debts and therefore, lower the interest amount paid on your debt.
–> Or you can spend it and enjoy it as you wish.
More on Time Value of Money here

April 2012


COEFFICIENT OF VARIATION , Financial Terms, Understand, Risk, Return, Investing, Stocks, Standard Deviation


It Measures risk per unit of return.

It helps us choose between two investments where one has both a higher expected return and higher standard deviation than the other.

A simple example to understand the concept :

Investment 1 has an expected return of .40 and a standard deviation of .22.

Investment 2 has an expected return of .23 and a standard deviation of .14.

Which should we choose assuming we are a risk averse investor?

Coefficient of variation is calculated by dividing the standard deviation by the expected return.

Investment 1 : .22/.40 = .55

Investment 2 : .14/.23 = .61

A risk averse investor would choose investment 1 because the risk per unit of return is less.

The vast majority of investors are risk averse, i.e., when choosing between two investments they will choose the less risky of the two.

March 2012

February 2012

Common Non Verbal Mistakes made at a Job Interview

Interview, Mistakes, MBA, Engineering, Medical, Job, Tips, Confidence, Preparation


  • The first 90 seconds of an interview are critical and almost 33% of the interviewers decide whether they will hire someone
  • Prepare about the company. Having little to no knowledge of the company is the most common mistake made during interviews
  • Failure to make eye contact is a common nonverbal mistake
  • When meeting new people, majority of the impact comes from the way the person dresses, acts and walks through the door
  • Clothes also play a deciding factor between two almost-identical candidates
  • “Tell me about yourself” is the number one question which every participant should prepare as this question is the most oft asked.
  • The number one most common mistake at a job interview is: the confidence to actually ask for the job