A Taxing Task

Three years back, I remember receiving my first paycheck when I was worried about the amount going away as income tax. New to the whole idea of tax saving options, which are available, I went to a Tax consultant, to seek his advice on these tax saving instruments.

He suggested the best way, or so did he call it, for tax savings the ULIP or Unit Linked Insurance Plans, which offer both insurance and investment returns. I bought both the idea and ULIP as a gullible rookie as far as tax savings go.

Again in the same year I thought of investing in some other tax-saving instrument and opted for a Mutual Fund, the guy who came to my office again started talking about this wonder called ULIP as the best tax saving instrument and tried to push me into it once again. But failed this time coz I was adamant on buying a MF rather than a ULIP.

So, the question is, Is ULIP the best tax saving option available, what are the Fine prints which go unread and why are the Tax consultants so eager and pushy to sell the ULIP’s.
Let’s analyze this one by one…

Tax saving options can be divided into two types, one which is tied to the market like ULIPs and MFs and therefore risky and others which are least risky like the PPF (Public Provident Fund), NSC (National Savings Certificate), Pension Funds, Fixed Deposits (FD) and Infrastructure Bonds (IB). But the returns of these instruments vary based on the amount of risk you are willing to take.

While PPF, NSC, Pension Funds, FD’s and IB’s offer a fixed rate of return, ULIP’s and MF’s offer varying returns since they invest in stocks and bonds depending on the type of plan which is chosen. Almost all these instruments have a lock-in period during which money cannot be withdrawn; The Lock-in period starts from a minimum of 3 years for ULIP’s and MF’s to a Maximum of 15 years in case of the PPF.

The best investment vehicle should be chosen based on the investment objective of the investor. The investor should understand that tax advantage is just an added incentive for investing in these options and not an objective in itself.

ULIP will be the preferred option if the investor’s objective is to buy an insurance policy which has investment also as an additional goodie. As an investment Vehicle ULIP will always fare far lesser than the Mutual Fund the entry load in an MF is far lesser than what goes in the name of service charges for an ULIP. And Insurance plans are available in the market for far lesser premiums than what is being charged under the name of ULIPs.

So what good is the ULIP, if you see ULIP as an investment vehicle providing high returns, a Mutual Fund will always fare better since for a ULIP the service charges range from 20% for the first year and 5-10% for the second year whereas a MFs are talking about the “No Entry Load” scheme suggested by SEBI means all your money is invested. But these service charges for ULIP are usually mentioned in fine prints or the tax consultant never even mentions it.
Also in an ULIP if the investor defers the payment and was not in a position to pay the premiums in a particular year, there is a risk of the policy cancellation due to the non-payment of premium making him lose the entire money.

As an insurance policy, there are many conventional policies available in the market for a lesser premium than the service charges demanded by ULIP. When I invested 25 K in ULIP 5K went as service charges whereas had I taken a Life Insurance I would have paid a premium of only 2500 to 3000 for the same amount of coverage (In this case 100000).
And ULIP tends to differ from each insurance company differing in terms of lock-in period, Sum Assured, coverage, service charges etc. with fine prints and terms and conditions insulting the intelligence of an average investor.

In spite of all these disadvantages why does the tax consultant push for this product? As Freakonomics puts it, man is an Economic animal who responds to various forms of incentives. The Tax consultants are also Insurance Agents, and always get a better commission by selling Insurance policies rather than the other products. And a flawed product like ULIP, will always carry a better commission rather than both MF’s and conventional insurance policies. So a lesson learnt and my ULIP policy has matured and will soon post on the losses I have made on this investment of mine…

And the Nobel Goes Too

Dec 10 2009, amid controversies Barack Obama was awarded the Nobel Peace Prize. Well there is a controversy looming around this decision of the Nobel committee, where some believe that Obama deserves the prize for not being Bush and others find Obama’s statement on the necessity of war for achieving peace a little more like the statement of a Jihadist.

But as the controversy takes its own time to metamorphose into fact, and finally turn into a butterfly, as does most of the controversies, let’s analyze some of the top 10 controversial decisions of the Nobel committee from its inception in 1901.

No. 10 – The Inventors War

When it comes to Inventions, the first name that will come to anyone’s mind is Thomas Alva Edison. There will be no text-books dealing with Physics or Electronics which do not have the name of Edison in them. But Edison never received a Nobel questioning the credibility of the award itself.

Same is the case with Nikoli Tesla, the man who is credited with not only the Alternating Current, but also known as the inventor of Radio. Whereas Marconi received the Nobel for Radio in 1909, Tesla was not even nominated in that year. The Magnetic field is measured by the name which was not considered for Nobel.
These two inventors, although were nominated during 1916, bad-mouthed each other so much that the Nobel committee decided to skip the Nobel award for physics that year.

No. 9 – E = MC2
In one of my Physics papers there was this question, that “For what did Einstein awarded the Nobel Prize?” I as usual did not go prepared for the exams, but believed that this is an easy one. Although I was a bit confused between “Theory of Relativity” and “Mass Energy Equation”, I took a gamble and went for “Theory of Relativity”.

But after the exams, it was a surprise that neither were right answers. He was awarded the Nobel on his explanation of the Photoelectric Effect in 1921. Even though when compared to his other theories which were instrumental in creating a new term called “Modern Physics” as opposed to the Newtonian Physics, he was never recognized for his path-breaking theories explaining relativity or Mass Energy relation.

Some see this as a fallacy and others say that this is justified because some of his theories were yet to be proved during those times, but at the end of the day, I did not clear my Physics paper.

No. 8 – Barracks Obama
The most recent controversy surrounding the peace prize, guess there is nothing required to talk more on this. It is time for the man to do it in action.
No. 7 – A Pre – Phosphorus mistake

The man who created the first periodic table of classification of the known elements, Mendeleev, never received the Nobel. He was nominated for the Nobel in 1906 but due to the behind the scene politics, he did not get the award. The Chemistry award that year went to a man who isolated fluorine from its compounds.

No 6. – War and Peace

1973 – Henry Kissinger gets the Nobel for Peace.
1969 – 1975 – Henry Kissinger was involved in bombing NVA infiltrators in Cambodia
1975 – Operation Condor, involving the assassination of more than 60,000 people belonging to the left wing in S. America. USA even though played a Supervisory role in this, Kissinger was the man on the forefront, allegedly well aware of the Operation Condor.
Nobel peace was put to good use in quelling all the opposing elements ensuring peace.

No 5 – Hesperisum – What is that ???

In 1938, Enrico Fermi was awarded the Nobel in Chemistry for creating this weird named element Hesperium. But later It was found that he has not created any new elements and the Hesperium is nothing but some isotope produced due to Nuclear Fission.

A Nobel once given cannot be recalled.

No 4 – Sabbatical wars
Anwar Sadat, the then PM of Egypt, who lead the Yom Kippur war, on the day of the Sabbath against Israel, was awarded the Nobel Peace Prize in 1978.
Also another person Menachim Begin, who was an alleged terrorist, against the British rule in Israel, was also awarded the Nobel Peace Prize the same year.

No 3 – The PLO and Peace Prize

1994 – Yasser Arafat, was awarded the Nobel Peace Prize. Arafat, a known terrorist leader, with a long history of violence was awarded the Peace Prize.

No. 2 – Ahimsa’s Way out

While Yasser Arafat, Anwar Sadat and Kissinger were given the peace prize, with known history of violence, the man who wielded his walking stick and travelled the nation promoting peaceful protests was shown the door by the Nobel Committee.

Gandhi was nominated five times and each time the Nobel committee failed to award him the Nobel. In 1948 after Gandhi’s assassination, no award was given stating that there was no living candidate with the word living underlined. This made sure that
Gandhi did not receive the prize even though he was nominated.

But Dag Hammarskjold was awarded the peace prize posthumously for being a fellow Scandinavian and not an Indian.

http://nobelprize.org/nobel_prizes/peace/articles/gandhi/index.html

No. 1 – Hail Hitler

Even though the Nobel Committee did not award the Nobel Peace to Hitler, he was still nominated for the award in 1936.

The list of nominees cannot be published until fifty years by the Nobel Committee, and when the list till 1955 was released, it was a surprise to find Hitler among the nominees.