Category Archive : Risk Profiling

what is Credit score

Credit Score| What These 3 Digits Tell About You?

What Makes up Your Credit Score?

Introduction

In this article, we will discuss what is credit score, what these 3 digits tell about you, how is it calculated, what makes up your credit score etc.

Credit Score | What These 3 Digits Tell About You?

Credit Score : What These 3 Digits Tell About You?
Credit Score : What These 3 Digits Tell About You?

Understanding Your Credit Score

  • A Credit Score plays a critical role in the loan and credit card approval process. This is the first screening criterion applied by banks and financial institutions when reviewing your loan application.
  • It helps in evaluating the potential risks that could arise from lending money to a consumer. Thus, the score is used to reduce the probable losses on account of bad debts.
  • Credit Information Report (CIR) summarizes your payment history of loans and credit cards borrowed from all banks and financial institutions. Based on this credit history, a ‘Credit Score’ is generated. 
  • In short, credit score is the statistical number which evaluates or represents the credit worthiness of the consumer applying for loan or credit card.
  • Credit score has started getting reasonable attention in India. It is because an individual’s credit score is a key determinant of his likelihood to get big-ticket loans and the interest rate that will be charged on the loan. 
  • CIBIL, Experian, CRIF and Equifax are the four credit bureaus in India that create credit score after examining credit report of individuals. CIBIL (Credit Information Bureau India Ltd.) is one of the premier agency which provides credit score namely, CIBIL score.

What is Your CIBIL Score?

  • CIBIL score is a 3-digit numeric summary of your credit history. It is derived by using details found in the ‘Accounts’ and ‘Enquiries’ sections of the CIBIL report.
  • It includes (but not restricted to) your loan accounts or credit cards, and their payment status, as well as outstanding amounts’ days past due.
  • The score reflects your credit worthiness, based on your borrowing and repayment history, as shared by lenders. Your CIBIL score ranges from 300 to 900. The higher your CIBIL score and closer to 900, the stronger your credit profile.

What These 3 Digits Tell About You? How to Interpret your CIBIL score?

  • CIBIL Score < -1 : No Credit History
  • 300 < CIBIL Score < 600 : You are considered as a Credit risk for the banks and financial institutions. Your application for loan or credit card may not processed.
  • 600 < CIBIL Score < 750 : This is the intermediate range, in which the lender may allow you for credit. However, the lender may consider your overall financial health and other risk criteria for determining your true credit value. These include stability of employment, other sources of income, loan security and similar factors.
  • CIBIL Score > 750 : This range indicates the good credit worthiness of the borrower. Approval of the loan or credit card will not be a problem. A high credit score means you can leverage it to negotiate to get lower interest rates from the lender. The higher the CIBIL score and closer to 900, the stronger your credit profile.

Illustration : Two individuals ‘A’ and ‘B’ with Credit Scores of 810 and 620 respectively apply for a home loan. Depending on the credit policy of the bank, it is more likely that the bank will screen the individual ‘A’ with an 810 Credit Score for further proceeding of loan, while the application of ‘B’ with the Credit Score of 620 won’t proceed. Lender will check it for other risk criteria for determining his creditworthiness.

 How to Interpret your CIBIL score?
How to Interpret your CIBIL score?

What Makes up a Credit Score?

There are four key factors that impact your CIBIL score

  1. Payment history: Making late payments or defaulting on your EMIs has a negative impact on your score.
  2. Credit mix: Having a balanced mix between secured loans and unsecured loans is likely to have a positive impact.
  3. Multiple enquiries: Too many loan enquiries may have a negative impact on your score as it indicates that your loan burden may go up in the future.
  4. High credit utilisation: A high credit utilisation limit indicates a rising debt burden over time and may negatively impact your score.
Free-look Period in an Insurance Policy

Free-look Period in an Insurance Policy

All You Need To Know About Free-look Period in an Insurance Policy

Introduction

Free-look period in Insurance policy offers you an opportunity to review and cancel your policy, if desired before making a monetary commitment. In short, it gives you the second chance to review the terms and conditions of your policy.

Free-look Period in an Insurance Policy

Meaning

  • You have bought a new insurance policy and received the policy document and find that the terms and conditions are not what you wanted. What do you do? Grin and bear it? Not at all.
  • Insurance Regulatory and Development Authority of India (IRDA) has built into its regulations a consumer-friendly provision that takes care this problem. If you have bought a policy and realise you don’t want it you can return it and get a refund.
  • Free-look Period in an Insurance Policy is the window provided by the insurer to you to review your policy and return it if you feel you misunderstood or dissatisfied or were mis-sold the plan.
Free-look Period in an Insurance Policy
When to use Free-look Period in an Insurance Policy?

Key Points about Free-look Period in an Insurance Policy

How much is the Free-look period?
  • The free-look period kicks in from the time you receive the policy document. The law allows the policyholder 15 days as free-look period from the date of receipt of the policy document.
  • In case of online sale of policy, the free-look period of 15 days is extended to 30 days. Policy holder is allowed to cancel the policy during this period and get a refund.
Applies to which type of Policies?

Free-look period is available only for life insurance policies. For health insurance policies, the term should be at least three years. It does not apply to shorter-duration health insurance plans. However, if you have a travel policy that covers you for a year, as is with travel insurance for students, the free-look still applies.

How to make a Cancellation request?
  • Once the policy holder is convinced that the policy terms do not match his/her expectations, they should communicate their intention to cancel the policy in writing.
  • Some insurance companies prescribe a standard form for cancellation of policy during the free look period. Policy details, date of receipt of policy document, reason for cancellation and agent details must be mentioned in the application.
Comprehensive Personal Finance Knowledge Bank by Invest Yadnya
Comprehensive Personal Finance Knowledge Bank by Invest Yadnya
Proceeding of Cancellation request made by policy holder
  • On receiving the cancellation request, the insurance company will get in touch with the policyholder to know the reasons for cancellation and try to provide solutions.
  • However, if one still wishes to cancel the policy, the insurance company will have to process the request and issue refund.
What premium is refunded?
  • Once the refund application process is completed and approved, the refund premium is calculated after deducting the following:
    1. Pro-rated risk premium for the period on cover
    2. Medical examination expenses incurred by the insurance company
    3. Stamp duty charges
Refund process for ULIPs
  • In case of refund of a ULIP policy, since the policy is market-linked, the refund premium will be as per the prevailing NAV of the ULIP applicable on the date of policy cancellation (after deducting the above charges).
  • For example, if your premium was Rs 100, and the insurer deducted Rs.10 as ULIP charges and invested Rs.90 in the fund option, assuming the NAV of your units has grown to Rs.95 during this period, the insurer will have to refund Rs.95 plus Rs.10, but after deducting stamp duty, medical and mortality charges for the period from Rs 105.

Summary

  • IRDA has introduced a customer-friendly review policy feature ie. Free-look period in insurance policy. If you have made the wrong choice, do not hesitate to return your plan using the free-look option.
  • There are conditions though :
    1. This applies only to Life insurance policies and also to Health insurance policy that are for a term of at least 3 years
    2. You can exercise this option within 15 days of receiving the policy document. In case of online sale of policy, the free-look period of 15 days is extended to 30 days.
    3. It is the responsibility of the policyholder to prove the date of receipt of policy document.
    4. You have to communicate to the company in writing
    5. You will get refund of the premium adjusted for
      • proportionate risk premium for the period on cover
      • expenses incurred by the insurer on medical examination
      • stamp duty charge
  • Insurance companies strive to ensure you buy the policy best suited for your needs. However, if terms of policies are not as per your needs, you can make use of the free-look period.
Personal Risks classification

Major Types of Personal Financial Risks

Personal Risk Classification

Every investment has some risk associated with it. In the personal risk management, we must know how to identify what type of risk we are facing. In this article, we are going to see the major types of personal financial risks.

There are 4 broad classes of risks we may come across. They are Income Risk, Expense Risk, Asset/Investment Risk and the forth is Debit/Credit Risk.

Major Types of Personal Financial Risks

While planning your financial goals, you need to consider the risks related to your income, capital and investments. Prudent investors evaluate their risk tolerance and make appropriate investments in order to assure the achievement of their goals, despite the potential risks that may befall them.

Now, lets discuss major type of risks on your financial plan and how to avoid, share or transfer such risks. We will be looking at the following types of personal risks:

Types of Personal Risks
Types of Personal Risks

1.Income risks

This type of risks is directly related to your ability of earning an income. Thereby resulting into the loss of income, due to the following reasons:

  • Death
  • Disability and therefore unable to work
  • Losing of the job
  • Under-employment, due to which you are unemployed
  • Outliving the income produced from the assets, from the aging perspective (specifically, for retirees cases)
Methods to manage the Income Risk

There are majorly two ways of managing the income risk, such as avoiding the risks and transferring of such risk. Let’s see, how?

1.Avoid the risk :

  • For avoiding the risk, it is very relevant but it is not always possible to have the multiple alternative income streams like spouse income, part-time blogging/freelancing, etc. Also, it is very important to make the proper career management for continuous learning in order to help mitigating the risk of unemployment and under-employment (as the case may be).
  • Proper retirement planning, frugal i.e. economical living and annuity planning is very crucial, to reduce the chances of outliving the assets producing the income.

2.Transfer of risk :

  • Proper level of life insurance coverage must be taken in order to ensure that the surviving family members could maintain the same lifestyle, in case you die.
  • Disability insurance can be taken, for easing the financial pain, in case you become disabled.

2.Expense Risks

Expense risks are the risks, which may occur due to the following reasons:

  • When you spend more money, than you earn
  • When you are not earning enough, to meet your needs
  • When you have the emergencies, that forces you to spend money
Methods to manage the Expense Risk

In order to manage the risk, one may manage it by avoiding such risks or by transferring it. Let’s see, how?

1.Avoid the risk:

  • For avoiding the expense risk, one can in order to curb the expense practice budgeting. It helps to lower your expenses. One can follow, the India specific rule 50/30/20 for understanding the non-relevant expenses.
  • Learn how to earn the extra income, so that you could earn more than the amount you spend.
  • Start an emergency fund so that you have reserve cash to deal with emergencies i.e. contingencies. For further details, please refer our articles ‘Contingency Planning – An Overview’ and ‘Contingency Fund – How to Manage?’ on
    https://finplanyadnya.in/

2.Transfer of risk:

  • For planning of the expense management, one can take the proper insurance policies such as car insurance, home insurance and umbrella insurance, to ward against the major tragedies.

3.Asset/Investment Risks

Your assets include both your investments and other assets, such as your house, cars, jewelleries and other possessions. Unfortunately, they all are vulnerable to various kinds of risks, including the following:

  • Not saving enough or having the right investment, to meet your financial goals
  • Not having the right investment mix for the goal you’re trying to accomplish
  • Losing your investment (principal)
  • Sub-par return on investment
  • Under-diversified or un-diversified investment portfolio
  • Theft or destruction of your properties
  • Depreciation
  • Inflation
Methods to manage the Asset/ Investment Risk

In order to manage the asset or investment risk, one may again avoid it or transfer it. Let’s see, how?

1.Avoiding the risk:

  • Ensure that you save enough for your financial goals. For which you need to create a Financial plan and review it regularly.
  • Learn about the risk and return characteristics of each asset class and choose the right investment mix for each financial goal.
  • Learn about the capital preservation characteristics of each investment type.

For Example, your money is relatively safe in your savings account, CD (certificate of deposits), money market, and treasury — but the trade-off is mostly/ relatively at the lower rates or return, possibly lower than the inflation. On the other hand, you could lose it all with the stock market, small business and the real estate — but the returns on investment are potentially higher.

  • To reduce the diversification risk, one must the understand the concept of investment correlation and diversification. It helps in reducing the overall volatility and risk of your overall investment portfolio.
  • To reduce your depreciation risk, avoid spending money on assets than do not gain value over time. The most obvious examples are automobile, designer jewellery and electronics. These items are 99.99% guaranteed to lose value over time.
  • Inflation is a constant force that erodes your purchasing power with time. The only way to protect yourself against inflation is to choose investments that can beat inflation. That means such investments increases its value in tandem with inflation, such as Fixed Deposits, Debt Instruments, Debt Funds, precious metals, commodities, etc. However, the investments which has the potential to beat inflation are stocks, mutual funds, ETF (Exchange Traded Funds), Real Estate, etc

2.Transfer of risk :

  • Protect your physical assets against theft or destruction with appropriate types of insurance. 
  • For Example, Home insurance, car insurance, business insurance, etc. Moreover, limit your personal liability with an umbrella policy

4.Debt/ Credit Risks

Debt/ Credit Risks are the risks, which may occur due to the following reasons:

  • Accumulating of too much debt
  • Accumulating bad debt instead of good debt
  • Spending too much money on debt related expenses such as higher interest rates, finance charges, etc.
  • Bad credit
Methods to manage the Debt/ Credit Risks

In order to manage the these Debt/ Credit risks, one may avoid it. Let’s see, how?

1.Avoiding the risk :

  • We all know that too much debt is bad and we should try to avoid debt as much as possible.
  • Learn the difference between good debt and bad debt and avoid the bad ones. Good debt are the debt which builds an appreciating asset such as Home Loan, Education Loan and Business Loan, etc. Bad Debt are other forms of debt like Personal loan, Credit Card loan, Car loan, etc.
  • If you’re already in debt especially the Bad debt, pay down your debt as fast as you can, to reduce the debt related expenses. Go with the rule, that your overall expenses including the essentials such as household and wants such as lifestyle, debt, etc. shouldn’t be more than 50% + 20% of your income.
  • In India, it is a normal practice to give credit to others and earn a good interest on it. This is a very risky exercise and more often this can turn out to be a bad credit. It is always better to avoid this.
  • Credit Score is becoming an important parameter to get a new loan and it is important that you keep a track on it and improve it for easy and cheaper loans.
Personal Risk Management

4 Ways To Manage Personal Financial Risk

Personal Risk Management

Introduction

Risk is the possibility of loss. Sometimes the loss is minor, while the other times it may cause major personal and financial hardship. In this article, we will discuss what are the 4 ways to manage personal risk?

Suppose, you are investing for your financial needs. Then, there are only three things that can keep you from achieving your financial goals : Inflation, Taxes and Risk.

  • It is easier to plan for inflation and to reduce taxes. For the detailed explanation of the same, Refer our articles on : taxyadnya.in
  • Risk is another matter, because it is so unpredictable. It can come in many forms, but the results are always the same: loss of money. The reasons for loss of money may be beyond your control.

How To Manage Personal Risk?

  • Before going into the actual risk management, we must how to identify what type of risk we are facing. After that only we can apply the corrective measures for avoiding or for minimizing such risk.
  • There are 4 broad classes of risks we may come across. They are Income Risk, Expense Risk, Asset/Investment Risk and the forth is Debit/Credit Risk. We are going to discuss these 4 types of risks in detail in our next article.
  • There is no way to eliminate all risk. But there are ways to avoid, minimize and to protect yourself and your family from risk.
  • When risk is low or the cost is not too high, it is easy to assume the risk. When it is too costly to assume the risk, you need other ways to manage it.
  • Insurance provides a convenient way to manage financial loss happened, due to catastrophic i.e. unfortunate risk.

Ways To Manage Personal Risk

Persoanl Risk Management
Persoanl Risk Management

You can manage risk in four ways, as detailed below. 4 Ways To Manage Personal Risk are as follows:

1.Assume Risk

  • As the name itself suggests, one must assume the risk associated with various aspects and objects of life. Which, if not taken care of may lead to financial losses.
  • Thus, in order to safeguard and avoid the financial losses, one should first list out the possible risks associated. And then he/she should work accordingly to curb the same.
  • For Example,having a life insurance cover or health insurance, would be a remedy for you, in case of any uncertain situation such as disability, death etc.
  • That means, if any of such unseen and unfortunate risk occurs, in such case you would be ready with the remedy taken at your end. So that, you don’t have to pay the full cost of such loss out of your own assets. Because it will affect adversely the achievement of your financial goals.

2.Avoid Risk

  • Avoiding the risk may not be easy, but this is one of the ways to reduce the risk management costs by doing so.
  • Risk avoidance can lower the financial cost of risk, which is why insurance premiums are lower for persons and businesses, that take measures to lower the risk.
  • For Example, the automobile insurance premiums are lower for drivers with good driving records (no accidents and no cited violations of driving laws) and that the non-smokers pay lower medical insurance and life insurance premiums than the smokers have to.

3.Share Risk

  • Sharing the risk divides the cost of risk among those who are the participants in the risk sharing.
  • For Example, in a household where there are two earners, the family income might be reduced in case if one earner losses the job or has lost some money, at least in such case all the money/ income is not lost. Meaning, at least to some extent the risk can be shared and adjusted with the earning member of the family.
  • Some insurance policies allows you to share the risks with the insurer i.e. the insurance company, in order to keep the premium low. If you can assume a certain amount of financial risk, then the insurance premium on the balance of the risk will be lower.
  • For example, some automobile policies have lower premiums if you are willing to take responsibility for the first Rs. 10,000 of liability, known as a deductible, in case of the risk occurrence. Another example is, where, the Medical Insurance Premiums can be lowered if you have higher co-payments or if you choose a Family Floater Plan.

4.Transfer risk

  • Finally, for those who cannot tolerate any financial risk, risk can be transferred to someone else, usually an insurance company, who assumes full responsibility for it. Of course, this method of risk management has the highest premium cost. An insurer i.e. the insurance company will pay the costs of loss to an insured, in consideration of a fees called premium, which is usually a very small fraction of the benefits to be paid. Insurance works because an insurer can determine the mathematical probability of a risk occurring and the financial risk at stake.
  • For Example, anyone who owns an automobile knows that he or she is required to have the automobile insurance in order to cover the risk of damage to someone else.
  • However, with many years of statistics on automobile damage costs, the insurers i.e. the insurance companies are able to determine the amount of premium necessary, to provide the benefits to insure the automobile owners.
  • Using the same principles, one can buy the insurance to minimize the financial loss due to accident, illness, disability and even death. The purpose of insurance is to provide the financial relief from catastrophic losses. Money from many people is pooled to pay for the losses, incurred by few.

Inference :

Given below is the inference and comparison based on the, impact of such method used to control the risk and cost involved in the same.

Cost vs Impact of the Methods to Control Risk
Cost vs Impact of the Methods to Control Risk
  • Therefore, you must analyze the risk first. And also the level it has low risk or high risk, and what impact will it have on you.
  • And then, you can analyze basis on which whether it should be transferred, shared, avoided or is required to be assumed.

Risk Capacity + Risk Appetite + Risk Tolerance = Overall Risk Profile

Understanding risk appetite, risk capacity and risk tolerance is very important before making any investments or any investment decisions.

Risk Appetite –

Risk appetite can be defined as the amount and type of risk that an investor is willing to take in order to meet its financial goals. Investors will have different risk appetites depending on various factors. A range of appetites exist for different risks and these may change over time.

While risk appetite will always mean different things to different people, a properly communicated, appropriate risk appetite statement can actively help investors achieve goals and support sustainability.

Risk Capacity –

Risk capacity is the amount of risk that the investor can take in order to reach financial goals. The rate of return necessary to reach these goals can be estimated by examining time frames and income requirements. Then, rate of return information can be used to help the investor decide upon the types of investments to engage in and, the level of risk to take on.

Risk capacity is an objective measurement of the amount of risk you need to take in order to meet your established financial goals. It can also be used to assess the impact of any risk occurrence on your portfolio’s ability to meet your financial obligations.

Risk Tolerance –

Risk tolerance is a subjective measurement of your attitude toward risk, your willingness to accept potential investment loss in search of greater investment gain. Risk tolerance is the amount of risk that an investor is comfortable taking, or the degree of uncertainty that an investor is able to handle.

Risk tolerance often varies with age, income and financial goals. It can be determined by many methods designed to reveal the level at which an investor can invest, but still be able to sleep at night. Those with a higher risk tolerance are more comfortable with market volatility and uncertainty than those with a lower risk tolerance.

Risk aspects

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