Coasting and power steering

If you are like me who does not enjoy the buzz of the automobile engine, then surely you would be tempted to turn off the engine while taking a long cruise down the hill (on a road/highway of course). My father used to frequently do that when he drove his Fiat Padmini. It’s also good for the environment because anyways the engine power is no longer needed while cruising down a hill. However no matter how much I desire to do that, recent advancements in car technology require the engine power to operate the power steering and power brakes. Theoritically one can still steer and navigate in a modern car with engines on, but the performance, response time (and effort required) would take the joy out of a nice eco-friendly road trip.

I wonder if there is a way I could have the best of both the worlds.

 

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Insurance cover and inflation

Recently I had an interesting discussion with a colleague of mine.

His stance was: As time passes you need higher insurance cover.

While my stance was: As time passes you need lesser insurance cover.

Even after a lot of brainstorming and even exchanging excel files, we both think we are right. Hence I decided to publish the gist of the debate.

My logic: Your ideal insurance cover is the net present value of the all the expenses your family (sans you) would incur in the foreseen future. (Say next 70 years) One should deduct the wealth one already owns/would inherit and the future income from your spouse’s occupation/business. By this logic, every extra year you live and provide for the family this value would decrease (because now only the next 69 years have to be accounted for). Also you would save some capital and build some assets for the rainy day which would again reduce the value of the cover required.

So effectively one would require a very high insurance cover at the beginning of family life which would taper down gradually to zero by the retirement year.

His stance: Lifestyle is downward sticky. As your income and wealth grows, so does one’s standard of living. A refrigerator might be a luxury for the middle class 20 years ago, but now a bare necessity. So the luxuries and habits of individuals tend to move up as time elapses and it is very hard for someone to go back to the age old Spartan days.

This compounded by inflation results in rupee losing nine tenth of its value every 20 years results in one needing to increase the insurance cover each year. Simply said there is never enough of money and people would even find ways to spend kuber ka khajana (with a sly reference to the recent treasure found in a Kerela temple)

RIL embezzlement

I was surprised to hear about fraud and embezzlement accusations that have been raised against reliance group of companies (both Mukesh and Anil) recently.

The most celebrated one being the 51 page report from the Canadian research firm Veritas analyzing Reliance Communications and RIL. He has highlighted various instances (with factual data) of accounting fraud and suspicious issue of share/ownership. Please google and try to go through a copy of this report. (I don’t have distribution rights)

Then Firstpost (TV 18) took a dig against Reliance Ports and Terminals (RPTL) and Reliance Gas Transportation and Infrastructure (RGTIL). Both firms are privately owned and have a bare minimum equity capital of 5Lakhs (lowest possible as per govt regulations). Yet for their operations they have secured over 3,500 Crore debt (and bank guarantees) from RIL. Also not to mention lucrative long term contract with RIL to ensure steady revenue. Hence effectively all the risk of ownership/non-performance is transferred to RIL while the gains would be cornered by Mukesh (who has invested a bare minimum 5 Lakhs into the company).

Have you ever wondered why all of a sudden everybody is after Reliance?

Well answer is simple Reliance Industries was founded with almost no capital from its legendary founder. Over the years through IPO/FPO, mergers, convertible debentures (both public and private) the equity base has grown substantially. So the only way the promoters could preserve their ownership and position in the board was by secretly and clandestinely issuing shares to itself and almost zero costs.

Interestingly most people are aware of this fact, but till recently they did not care. Simply because, RIL traditionally made a lot of money for its common stock holders. So who cares how much the Ambanis make as long as you were getting more than you had dreamed off. However over the past 10 years the stock has consistently under-performed and Ambanis haven’t stopped fudging their books of accounts. Hence the public outrage.

BTW if you still believe that there is some element of truth in Reliance’s financial statements, then consider this:

One of the basic elements of corporate governance is having your books scrutinized by independent auditors. Although Satyam and PWC fiasco has proved that even the Big 4 auditors are not entirely an unbiased and shareholder friendly, but still Reliance has taken it totally different extremes.

Reliance auditors work *exclusively* for RIL and till recently operated out of Reliance Industries’ premises.

Don’t believe me, then check out: http://www.cas.ind.in/clients.html and http://www.rajendraco.com/aboutus.htm These auditors need to work hand in hand with the promoters in order to bring food to the table.

 

Term Insurance

I always believe insurance as a tool to safeguard against the risks rather than as an investment vehicle. This is a reason why I have always advised people for a term insurance plan. These days I am in the market scouting for a term insurance plan and hence I decided to share some of my research.

1. Premium: On a 30 year plan, even a small 100/- difference in premium would impact your total premium paid by 3,000/- rupees (1,050/- in present value terms). Hence this is the most important criteria. In ULIP/Endowment/investment cum insurance plan 3 aspects are mixed together. A. Return on Assets, b: Fund management fees and c. insurance premium. Most companies make their policies so confusing that one could not isolate the 3. But luckily a term insurance can allow you to isolate the 3 charges and find the best deal.

2. List of exclusions: Only if you know how you would die, life would be so simple; you could simply avoid that situation all together and live forever. Jokes apart, none of us know when and how we are going to die and we don’t want to leave our spouses and family in financial distress. Here comes the conflict of interest. Most insurance brokers/agents will not highlight what is covered and what is not. What more is that if you ask for a list of policy exclusions they would say that they will get back to you, which they never will. Aviva (i-life), Birla Sun life (protector plan) and Aegon Religare (i-term) insurance companies don’t attach any major exclusion. ICICI (i-protect) has several exclusions hence I would avoid it. The most important exclusions to look for are SARS and other epidemic diseases, terrorist attacks, civil commotion/unrest/war, death on foreign soil. No matter how farfetched your broker tells you these situations are, they are very real. By IRDA law, suicide after first year is covered under all policies. Some exclusion I won’t worry about would be death while engaging in illegal activities, dangerous recreational sports.

3. Riders: Critical illness is a very important rider because a prolonged terminal illness can induce a lot of financial distress for the family. Accident rider is a stupid rider and just a means for the insurance company to mint money. Reason behind is that to get paid under this clause death has to occur due to a very narrow spectrum of causes, violent and sudden. So effectively, unlike prolonged critical illness, the family does not have to inherit a huge unpaid medical expenses bill. Hence making it unnecessary and useless.

4. Inflation protection: Birla protector plan has a unique feature which allows the sum assured to increase year over year at a 5% or a 10% rate. The premium for this plan is higher, but the best part is that a 50,00,000/- sum assured after 30 years of 10% inflation becomes 793,15,465 /-, while the premium is only slightly higher. Considering that as you grow old, your mortality rate goes up, this could be a really cost effective way of getting a huge cover at a small price.

5. Track record of insurance company: Go to IRDA website, in their annual report (2009-10) they have summarized the performance metrics of all the insurance companies. Statement 12 has a table of individual death claims.

6. BEWARE OF FRAUD: Insurance agents are notorious for mis-selling. Hence no matter what always go to the company website and read the fine print. Remember you are entering into a 30 year contract in which you have to pay every year. If you smell something fishy, walk away there are just too many insurance companies ready to take your business.

7. Buy term insurance when you think you need it. Agent would always like you to buy insurance NOW by saying that next year your premium will go up, but it is a lie. NPV of a 30 year plan bought in 2012 is always higher than an NPV of a 29 year plan bought in 2013. (if you don’t believe me download a premium calculator tool from the insurance website and calculate it yourself) BTW over the past 5 years, due to increased competition the insurance premiums for term plan have been only coming down.

8. Your agent would always like to cross sell you some other product, because term insurance is a commodity and since the premium is too low, it does not generate much commission income for him. But don’t be dissuaded. Check online, visit the company’s website. Many companies sell term insurance exclusively online.

9. Ideal cover: Outstanding home/other loans + some money (say 5L) to cover for the outstanding medical bills that you would have incurred during your last days + some money for college education for your kids + living expenses that your family would incur (reduce it by the amount spend on you). Also if your spouse is working you can reduce your insurance substantially because sans house rent, your spouse income (no matter how meager) can cover the living expenses. Also deduct your inheritance and value of assets you own from the insurance cover calculations. Remember the premium might be low, but it does not mean that you have to sacrifice your present to pay for a huge insurance cover that your family would never need. Just make it big enough that your obligations towards family are met.

Remember: a portfolio of a term insurance and a good investment (bond, mutual funds, stocks etc.) will always out perform a insurance cum investment combined product and will not have the restrictions of heavy exit loads, lock in, asset management fee etc.

For a long time I have been debating between Birla Sunlife protector plan (with 10% inflation protection) and aviva’s i-life plan. Finally I have gone ahead and booked Aviva’s i-life plan.
PS: I am not a certified insurance selling agent. So please consult your financial adviser.

 

INTELLIGENCE SNAFUS

Now we are told that intelligence info is not shared with those who should be in the loop. Where does the root of this problem lie? It lies with the netas who have converted intelligence agencies into a party-cum-personal protection agency. Intelligence officers have to keep a track on opposition netas, engineer defections and even provide the cash for this. Read the book “Khakhi” By Mr. E. Rammohan, a former police chief. That’s why the budgets of the intelligence agencies are a big secret. The quality of intelligence shared also depends on factors like whether the state is ruled by the opposition and also the personal equations of various officers in Delhi and the state if they are from the state cadre. Information is also watered down semantically or sent too late so that the other person looks like a fool. Multiple dotted line reporting structures also add to the confusion. Later the excuse of “systemic failure” is trotted out. But these systems are humanly created.

Even now the Mumbai Police has not learnt from 26/11. There was severe criticism whether the DGP or the Commissioner was responsible. Now we have a DG (Operations) in the DGP’s office and the ATS Chief now has to report to him and the Commissioner Mumbai Police. More confusion. The Government has also pulled the wool over the eyes of the public and the Courts by appointing the DGP who failed on 26/11 as Acting DG. Now there is very little difference and he may continue “acting” till his date of retirement in a few months. Now how long can someone “act” – is this the police or Bollywood? Perhaps the media needs to also look at the various police top officials in the Mumbai Police who have nothing to do. There is a DG Home Guards who also has an ADG under him. They have no other officers and only part time factory workers etc who function as guards. Why a DG and an ADG here?
– T.R.Ramaswami

 

INTERNAL SECURITY

Guest post from T.R.Ramaswami

How did the bombers sneek in and place bombs all over the place with impunity? Because the Intelligence Bureau was perhaps busy in ensuring the “security” of the government and fixing MPs before the trust vote. This is a fact as even the media has mentioned and publicly congratulated the efforts of the Director, PC Haldar. Is this what the IB is for? And the security agencies know that even if they catch anyone nothing will happen as every politician is looking for minority votes and even more so now since the next elections are not far off. That’s why not a single Home Minister has been sent home or the Chief of the security agencies been sacked. In fact many have become Governors/Ministerial Positions etc for the “good” work done. Historically, it was Ashoka who made us intolerably tolerant. Later this non-violent cult was politicised by Gandhi. Our interpretation of “secularism” in the Constitution has made us a weak and servile nation. That’s why we have had at least 15 serial bombing incidents in as many years. Look at the US, London and Madrid. After the incidents there no one has managed another. How? Because they have caught and kicked the terrorists.
– T.R.Ramaswami

 

SUCKROOTY

Guest post from T.R.Ramaswami

That’s what we should call our security because it sucks. The other day I drove into the multi-storey parking lot at Inox, Nariman Point. I was asked for my licence and they also opened the boot of the car. After parking the car I took the lift down and walked out of the mall with my brief case. No checking because I was walking out. Then on my return I was asked to open the brief case and I was also frisked/ checked by the metal detector. But no one checked the brief case or the inside of the car when I drove into the complex! What is this half-baked security? The problem is that we think that putting a uniform on an illiterate, installing metal detecting door frames and frisking people is security. There is a lot more intelligence needed even at the ground level. Let me recount a story.
A man used to walk out of a factory everyday on his cycle with a sack. Everyday the sack was checked thoroughly. This continued for more than three months but nothing was found. One day the factory owner told him – Look, I know that you are doing something wrong but I can’t find out. Let me know and I will make you security chief. The man said – I was stealing cycles.
– T.R.Ramaswami