Will a nominee inherit your assets?

If you think appointing nominees for all your investments, from insurance to property, is as good as drafting a will, you may be wrong. Mumbai-based Nalin Shah found this out recently when he approached his lawyer for drafting a will. In 2010, he had appointed his wife as a nominee in an insurance policy, but his lawyer informed him that his wife would not automatically receive the sum insured.

Instead, the legal heirs named in his will would inherit it. Experts say that a nominee is merely a trustee, who must distribute the assets to the legal heirs named in a will, or as per succession laws.

However, there are some investments, like company shares, where the provisions of the respective Acts override those of succession laws. Here's the legal position of the nominee in different situations.

Insurance

As per Section 39 of the Insurance Act, 1939, the insurance company must hand over the amount to the nominee mentioned in the policy. The nominee is expected to distribute it to the legal heirs listed in the policyholder's will. In the absence of a will, individual succession laws come into play. In 1983, in the Sarbati Devi vs Usha Devi case, the Supreme Court took a clear stand on this matter.

Usha Devi was appointed the sole nominee in her husband's insurance policy, and upon his death, she claimed absolute right over the amount. However, her mother-in-law, Sarbati Devi, claimed a stake in the insurance amount.

The Supreme Court stated, "A mere nomination made under Section 39 does not confer on the nominee any beneficial interest in the amount payable under the life insurance policies on the death of the insured." The amount, however, can be claimed by the heirs of the assured in accordance with the law of succession governing them.

Property in cooperative housing society

As with insurance amount, a nominee to a property in a housing society does not automatically inherit it. On the death of the original owner, the housing society has to transfer the shares of the deceased to the nominee, who must, in turn, transfer them to the legal heirs.

In 2009, in a case that had dragged on for 29 years, the Bombay High Court gave a verdict that reiterated the legal position of a nominee. In the Ramdas Shivram Sattur vs Rameshchandra case, the former had bought a plot in Nav Rajasthan Co-operative Housing Society in Pune.

Sattur had named his wife, Tarabai, as nominee, and on his death, she tried to sell it. However, she was sued by her four children, who claimed a share in the property.

As per the Hindu law, if the deceased doesn't leave a will, the property is shared equally among the wife and children. The Bombay High Court ruled that since the nominee represented the legal heirs of the deceased member while dealing with the cooperative society, he/she was only empowered to act on behalf of the real owners, that is, only till the court decided the legal heir(s) entitled to the property.

Bank accounts, mutual funds & other investments

The nominees in the case of bank accounts, mutual funds and other investments also need not be the automatic, sole beneficiaries. The RBI guidelines make this amply clear, as does the Calcutta High Court, in the Arnab Kumar Sarkar vs Reba Mukherjee & Others case of 2006.

It ruled that "a nomination with respect to a bank deposit cannot be elevated to the status of a testamentary disposition merely by reason of the death of the depositor prior to the receipt of the proceeds from the deposits". In such a situation, refer to Section 45ZA of The Banking Regulation Act, 1949.

Employees' Provident Fund

The situation is different in the case of EPF. Here, it is the nominee, not the person stated in the will, who inherits the amount. In fact, according to the rules, you cannot nominate any person other than a family member to your EPF account, unless you do not have a family at all.

Moreover, once you acquire a family, you will have to change your nomination in favour of a member. You can also nominate multiple family members and state the proportions in which they will inherit the EPF monies. For further clarification, refer to Section 61 of the Employee Provident Fund Scheme, 1952.

Equity, gold, real estate: Tips to make your first investments

It is not an easy time to be an investor. Even though you may be spoilt for choice, there is a high degree of volatility across asset classes. This means that one has to be extra cautious while choosing investments. Whether you are opting for equity, fixed income, property or gold, the current environment will punish you for rash or untimely decisions. For those who have just started saving, taking the initial steps into the world of investing is even more daunting. It's the same for anyone exploring a new asset class.

Often enough, initial investments are done without proper planning, homework or understanding one's requirements. Prasenjit Paul from Kolkata recalls his maiden steps in the stock market. "I started intra-day trading without adequate knowledge and suffered a huge loss by taking deliveries; the value of my portfolio reduced by 30-40%. I couldn't use the stop-loss arrangement and the losses kept increasing," says the 22-yearold. Paul learnt from his mistakes quickly and today runs a stock advisory firm.

For first-time investors, identifying the right initial investment can be a challenge. Where should I begin? Should I play safe and invest in a fixed-income instrument that offers guaranteed returns? Should I go for high-growth investments like stocks or equity mutual funds? You have to be careful with your choice to ensure that you begin on a solid footing and build a stable foundation. It should provide a sense of confidence as you move ahead. As Lao Tzu, the Chinese philosopher, said, 'A journey of a thousand miles begins with a single step.' In the following pages, we offer you a helping hand as you take your first step.

EQUITY

Many of us choose to stay away from the stock market because of the risky nature of such investments. For some, it is akin to gambling in a casino. However, we also hear of stories where people have made fortunes from stocks. Some of your friends, relatives or acquaintances will recount their experiences of doubling or trebling their money within a short span of time. Naturally, this gets you thinking. Should I try my hand at the stocks game? How can I make handsome gains from equities? More often than not, you take the plunge. You open a demat and trading account, and make your initial purchase—possibly a strong blue-chip company that you admire, or an emerging company you have heard a lot about. Either way, this may not be the ideal route for everyone.

WHY TO INVEST

If you have made up your mind to invest in stocks, make sure you are doing so for the right reasons. If you are looking to make quick gains and exit, then you are setting yourself up for long-term pain. Unless you are able to time your entry impeccably, you cannot earn good returns consistently. Equity is an asset class that rewards you the most if you stay invested for a reasonably long period of time. It is probably the only asset class that has the potential to beat inflation over the years. It is crucial that investors come equipped with the right attitude and understand the risks involved. Hemant Rustagi, CEO, Wiseinvest Advisors, urges first-time stock investors not to treat it as a source of excitement. "Stock investing is not a gamble. It is a serious investment opportunity," he says.

Strategic investing can ensure easy retirement

By: Uma Shashikant

etting a strategic orientation to investing is a tough task. Typically, investors become too ambitious about what they want: good return, low risk, capital protection, and access to money at any time. The quest for the best investment choices begins with this question: what is the one thing that cannot be compromised? This is the core investment objective.

After this, strategic investing demands to know the constraints in getting there. The resulting investment plan is a compromise solution because it recognises that one cannot have it all. However, it is strategic because it focuses on what matters the most and seeks to get there. The investors who are about to retire hold a corpus built through several years of work.

They are past their peak income and primarily depend on this corpus for their post-retirement income. Many of them recognise their primary strategic need as a steady flow of income and, therefore, choose fixed income assets.

Bank deposits, government saving schemes and bonds are the popular choices. They believe their decision is strategic and correct because they have chosen on the basis of what they need—interest income, protection of capital and low risk. However, they may have missed a critical point. The single most important objective after retirement is to earn an income that fights inflation.

The fixed interest income from these traditional investments might look good in nominal rupee terms, but inflation is a number that compounds year after year. So, Rs 9 lakh of interest income from a corpus of Rs 1 crore might look more than adequate today, but if inflation were 7-8%, the expenses will double every 10 years. The corpus should double to keep the investor afloat, but since capital protection was sought to earn the interest income, the corpus will remain unchanged.

If the investor lives for 25-30 years after retirement, penury will hit at an age when increasing the corpus in any manner would be impossible to achieve. Investment decisions for the retired investor should take on board this core objective: the corpus should continue to grow and compound in value so that it fights inflation, while the investor draws income from it as required. On the face of it, this is a complex problem to solve.

There are two broad types of assets—those that offer growth in value, but earn a limited income; and those that offer a regular income, but do not grow in value. Growth assets are typically risky since their value fluctuates in the short term, but they appreciate in value in the long term. Real estate, equity and gold are examples of growth assets. The rental yield and dividend yield is tiny, and gold offers no income. However, these assets hold the potential to appreciate in value. Deposits, bonds and saving schemes are income assets.

They provide a regular income, but do not appreciate in value. If the retired investor chooses growth assets, he would be able to fight inflation as his corpus would appreciate, but there would be no income to draw. If he picks income assets, there would be income without the ability to fight inflation. Assume that Rs 1 crore is invested at a fixed interest rate of 8% and the investor hopes to draw Rs 6 lakh a year as expense.

If you consider an inflation rate of 7%, the interest income will fall short of the expense in a short span of five years since inflation would have taken the Rs 6 lakh at the start well past the Rs 8 lakh of annual interest income. The reinvestment of the initial years' surplus will enable the investor to stay afloat for another two years.

There will be a serious shortfall if one considers 25-30 years as the post-retirement period. How does the retired investor attain the core objective of inflation-adjusted income over the years? He should consider the compromises. What can he give up to achieve his strategic objective? The investor should see his expenses as withdrawal from a corpus that is allowed to grow, rather than ask for a regular income and preservation of the principal.

Five signs you need help to manage money

1) You don't know where your money goes

You know how much you earn, but are you aware where the money is spent? 'I don't know where all the money goes,' is a common enough refrain among investors. The proliferation of plastic has made matters worse, for credit cards are a convenient way of slipping into the debt trap.

You could fix the problem by drawing up a household budget and establishing some ground rules about spending. However, this is easier said than done, especially if you have been a spendthrift.

If you are living beyond your means and don't have any money to invest after all your expenses, you certainly need professional guidance. A financial planner could bring order to the mess by prioritising your spending and allocating resources to your crucial goals.

2) You have insurance plans, but don't understand

Insurance is the bulwark of any financial plan, and it is critical that you understand the features of the policies you have bought. Policyholders typically know how much premium they pay every year, but don't have a clue about the life cover or extent of coverage. It's difficult to blame them because there is a vast array of choices.

If you don't know the features of your policies, you will not be able to face the disaster it is supposed to cover. A professional planner will be able to guide you on the policies that meet your requirements.

For instance, the adviser may suggest term insurance, instead of the costly endowment policy the agent is trying to push. He may suggest a basic floater health insurance policy for your entire family, instead of a critical illness plan that covers specific diseases.

3) You have no provision for a contingency

'What if' are probably the two most unused words in the financial space. There are millions of people who have made no arrangements for eventualities or emergencies.

The question they need to ask is: what would my family do if I died today? Besides buying adequate life and health insurance, an individual must also have indulged in basic estate planning.

Writing a will allows you to choose who receives your assets after your death. Without a will, your heirs may find it difficult to access what is rightfully theirs. A financial planner will not only help you draft a will, but also advise you on the most appropriate ways to distribute your assets.

4) You are not prepared for your retirement

Retirement planning should be a primary financial goal, but not many investors consider it one. They think about retirement in their 30s, but start investing only when they have reached their 40s. Do you also fall in this category? A qualified financial planner may be able to help you get started. The first step is to estimate the cost of your retirement.

This is not as easy as it may sound because there are so many variables at work. At what age do you want to retire? What is your life expectancy? How much have you already saved and what are the returns you expect to earn on it?

A professional adviser will be able to identify the most suitable investment option for you depending on your age, risk profile and expectation of returns.

5) Your investments are not linked to specific goals

You invested in a mutual fund three years ago on a friend's advice. Then you bought some gold ETFs because they promised good returns. An insurance policy was purchased during the tax saving season two years ago.

You also have some money in a mutual fund that protects the capital, as well as fixed deposits. These are a lot of investments, without any goals. Experts say that every investment should be done to meet a specific goal.

Random investment decisions lead to a haphazard portfolio. A financial planner will be able to chalk out an investment road map for you, formulating a plan to reach each of your financial goals.