Financial products for financial freedom – Happy Independence Day !

Happy Independence day friends. While independent India is now very old, financial freedom in India is still a distant reality which many entities like the regulator, fund houses, stock broking companies, banks, financial institutions, advisors, agents, CFPs and readers like you are trying to achieve.

Yet it is the very same entities who also often get led astray by monthly targets and monetary commissions that they ought to meet each month.

Last year, I had written an article on personal finance tips on India’s 65th Independence Day. Today I am writing about those personal finance products that you need in your entire life. If you have these, you don’t need anything else.

Insurance

Life Insurance

The only life insurance product you will ever need is term insurnace. This is the best, cheapest and least sold products in independent India.

You will often hear the media and agents peddling you other products like endowment plans, moneyback plans, whole life plans, Unit Linked Insurance Plans (ULIPs). All of them suck. Period.

Why would you put in money each year into a product that fetches you around 5-7% per annum ? Inflation in India these years are at 9% – a bank fixed deposit gives you more than these traditional insurance plans. Why do people who are free to think, read, understand and reject, buy these policies ? Even in term insurnace, do not get lured by the return of premium option – take a plain vanilla product.

Remember the mantra for term insurance – Lose premiums if you live, get money if you die.

Do not get lured by seasonal products and hyped products like NAV guaranteed schemes; single term insurance plans; child insurance plans among others. These are products that have been named to milk you high and dry by touching your emotional chords. Obviously you will spend tons on saving money for your child and getting things guaranteed. But underneath, they are unsuitable products which will deprive you the opportunity to make money faster.

Do not buy endowment plans, moneyback plans, whole life plans, Unit Linked Insurance Plans (ULIPs).

These are unsuitable products for you to achieve your future financial goals.

General Insurance

This is often another ignored section where risk can be managed without making your wallet any lighter but alas, investors are still ignorant about these. In general insurance, make sure you cast a very careful eye towards the following personal finance products.

Vehicle Insurance – If you own a car or two wheeler, you must have insurance. Thankfully, the law mandates this. But ensure you go for the comprehensive cover which includes both damages to your vehicle and third party legal liability.

Personal Accident Policy – If you think this is not needed, think again. Brush up about the importance of personal accident insurance and take one without fail. The premiums are very cheap – they will look more cheaper as compared to what you spend in a hospital with broken bones in case you meet with an accident.

Health Insurance/Mediclaim – This is thankfully the most common policy that investors are aware of. The importance of health insurance cannot be underestimated in these times – a simple hospitalization can erode your corpus and leave your personal net worth a tad shorter.

Critical Illness Cover – This is another one that you must take a note of Critical Illness insurance must be taken especially if there is a history of major illnesses in the family. With a lump-sum payout from the insurer, the money can come extremely handy in times when a critical illness strikes – you could easily be poorer by Rs 5 – 25 lakhs in such a case.

Home Insurance – Investors usually never insure their homes because natural calamities are not very common. But isn’t that what insurance is for – to cover those instances where you might be rendered poor ? In home insurance, while you can skip covering the contents of your home, ensure that you do cover the structure. Many investors have taken a home loan to purchase a flat or an apartment. Being the most expensive product in your life, you don’t want it falling like a pack of cards – if this happens, you will still need to pay the loan and then buy another house. Take insurance so that someone (insurer) can give you the money in case of a loss.

Investments

This is where almost everyone runs amok. I am going to lay it bare for you folks. If you follow goal based investing concepts and are a regular reader of this blog, you will realize that the best product to achieve all your future financial goals are mutual funds. Invest via the systematic investment planning route into these products and that will be it.

When I refer to mutual funds, I am essentially referring to equity diversified mutual funds, debt mutual funds and gold mutual funds. In fact, instead of gold mutual funds, try your hand with gold ETFs. In India, index mutual funds are not worth their expenses yet but you can still given them a shot.

Stocks – You do not need to hold stocks in your portfolio. Direct stock trading is still being learnt and allegedly mastered by self acclaimed stock brokers.  With a daily job that you have, the stock market field is so vast and ever changing that you could spend your whole life here and still make nothing. Avoid.

Future and Options – I am still hunting for the chap who evolved this. The most eligible way to lose money for ordinary investors. Abetting this purpose are stock broking companies who earn on every buy and sell that you make using their trading platforms.

You can achieve everything you want in your life with the help of mutual funds if you invest in the right manner.

Say yes to equity diversified mutual funds, index funds, debt mutual funds and Gold ETFs.

The rest of the investment products are all noise.

Others

Then there are other things you need to be aware of.

Fixed income instruments – Among fixed income instruments, do not buy all of them. Remember that such products are there to diversify your portfolio – it does not mean that you need to buy everything under the sun.  Start with the Public Provident Fund and add a dash of fixed deposits towards your emergency fund. Don’t saddle your basket with PPF, NPS (New Pension Scheme), National Saving Certificate (NSC), Post Office Monthly Income Scheme (POMIS), Company bonds, Fixed Maturity Plan (FMP) and others. A single investor never needed all of it !

Loans – While taking loans, remember that the only ones you should contemplate on is home loans and car loans. Do not go for personal loans and credit card loans to acquire things that will give you short term happiness and long term pains. Buying an expensive gadget, flying off for a vacation; excessive shopping on loans and credit cards debts will only tie you in chains and make your life a slave of the loan issuer.

Property – Do not buy property and real estate right left and center. Buy one for yourself to stay in first. Property is a very illiquid investment avenue and hijacks your portfolio allocation to a large extent.

That’s it then. On this Independence Day, keep away from all the noise and understand that though you are a free citizen of this country, you get tied down with unsuitable financial products because you are not aware of them. This is your opportunity to take the first right step. Read through the relevant articles on this website and ask questions. Now.