21 November, 2009

Online trade for MF schemes

A welcome step to increase penetration – but many issues may need to be ironed out

“There are just too many changes in our industry – the pace is killing”, mumbled an industry colleague from the MF industry. Cannot fault him – for there have been order-of-magnitude changes in this industry and the latest one being the trading online through Stock Brokers. “This is a welcome step in the right direction, isn’t it?”, I interjected. “Time will tell”, he said enigmatically. He pointed out that there are too many changes which does not allow the dust to settle & things to get sorted out.
“Yeah, that’s there. But then, this will increase penetration in cities & towns across India – which is a very good thing for the industry…”, I ventured. He nodded and gave a listless smile.
This is one move that MF industry should really be happy about & thank SEBI for. They have not been able to take the products beyond 25-30 cities/ towns, till date. In one fell swoop, this will increase the penetration to 1000+ cities. That is great news for both the MF industry & the investors.
There are some nitty gritty issues & details, which need to be sorted out.
Brokerage – both ways? Stock broker typically charges on the buy & sell transaction. The typical brokerage for delivery is between 0.5% to under 1% for a retail investor. Now, if the same charges are applied for both buy and sell transaction, the cost will be between 1 - 2%. But this is just the transaction cost. After the entry loads have been removed, many MF distributors have not been charging anything and have been content with whatever the AMC offers upfront & the trail. The costs of doing the transaction with the stock broker will be higher, if the brokers do not decide to charge a lower rate for MF schemes as compared to Equity.
What about Advice? Any advice that may be offered will be priced over and above this. A stock broker is already very much engaged in his business. Unless a stockbroker takes Mutual Fund business seriously enough to invest time & effort, advice may again remain a neglected area for investors. Worse, advice may not be offered and the brokerage may be collected. The main accusation against MF distributors was that most were not giving advice & were getting paid for the transaction. That could mean a replay of what SEBI wanted to avoid, in the first place.
What about churning? Churning is a practice where the investment made is sold off & new investments are made with that money. This way a distributor / broker can keep getting brokerage on a regular basis. This was a major accusation as regards MF distributors. Now that could accelerate. In stocks, there is virtual official sanction to buy & sell in the short-term through the blessing that day trading has received. Day trading is speculation and is immensely profitable for the stock broker. Now, with everything being electronic, churning could well be a major problem. Exit loads in MFs are a deterrent. But many investors may not be even aware of Exit loads and stock brokers can take advantage of such investors. Protection on this front is necessary for this to work effectively. In fact, SEBI needs to do more to curb churning. Since Mutual Funds are excellent investment vehicles to participate in Equity markets for those with a lower risk appetite, it may be a good idea to have a lock-in of at least 3-6 months. Also, there should be metrics to penalize intermediaries, where the churn is beyond a threshold.
What about slowly weaning away clients to Stocks? Equity investments for stock brokers are profitable, as they are done with the same money, several times in a year. Mutual Fund investment, by it’s very nature, is for a longer investment horizon. A stock broker could convince clients to invest in stocks or PMS schemes instead, which are more lucrative for him than MF. This is a problem that MF industry has to contend with, as far as this new platform is concerned – as MF investments can well be weaned away to direct Equity.
There is a concern on increased volatility… That can happen too, as doing things electronically is a lot easier. It is far easier to punch a few keys than to fill forms and submit it to the R&T agent & wait for the transaction to happen. When markets go up or down, MF investments may also display an equity-like wave, going forward. That may increase the requirement for liquidity in schemes. Fund Managers may have to maintain more cash, depressing returns for all investors.
What about the direct route ? Direct route will exist. But for the multitudes who can only buy/ sell through a Stock Broker, this option is blocked. They will need to pay a brokerage. Hence the no-entry load regime will not benefit the vast majority who are expected to start transacting through stock brokers. Also, for those who want to have MF holding in demat form and do not want to pay brokerage, they will still have to buy directly with the AMCs and then demat it – a cumbersome process, which involves sending DD & the forms to the AMC and then dematting and getting it in their account.
The good old distributor is dead, then? Need not be. But the stock broker may have the advantage of directly being able to debit the client’s accounts, much like the banks, which a normal MF distributor cannot. Collecting two cheques – one for the investment & another for fee is onerous, to say the least. To avoid the hassles, the distributor may start partnering with the stock broker or become a sub-broker himself.
Penetration will increase; but will the situation be better for investors? Only time will tell. Currently, the situation is a bit hazy. There are quite a few issues that may have to be thought through, before implementing it. Investors still need to be on-guard, weigh the actions and proceed.
There could be many competing, electronic platforms ( apart from the stock broker, that could emerge. Space should be given for different distribution models to emerge, exist & thrive, instead of favouring one model or the other. That is what will give real power of choice to investors. We are looking forward to enlightened decisions from SEBI. Only time will tell.

Published in DNA Money Nov 20, 2009

Building your Finances - brick by brick

“When you want to build a house, would you not first get a blue-print done and then construct it according to that?”, I asked Rahul. He readily agreed. “ Then, how come you just invest here & there, without having any specific roadmap?”, I asked. This made Rahul think. But he retorted,”By investing, do I not take care of the future? Anyway, I can invest only what surpluses I have”.
Lots of people, think like Rahul. In chess, both players start with the same number of pieces. As the game progresses, one person gains an advantage and eventually wins… because he used a strategy to engineer his win. In life too, we all have some resources, at our command. How we use it, is left to us. Random moves in chess cannot ensure a win, just as much as random investments cannot take care of life goals & ensure a comfortable retirement. You would have to work to a plan, for that.
That is Financial Planning. Financial Planning lays down a pathway which ensures that the goals are met by deploying the resources at one’s command, optimally. Yawn! How boring?!
Yeah… possibly. But it will help bring home the bacon... or the dal roti, paneer makhanwala if you will, to your plate. A Financial planner can help you here. Just like a doctor would help you in diagnosing the disease, treat it & suggest some medicines, exercises & food for wellness, a financial planner will be able to look at the current state of finances, past investments & insurances & other information like Assets ,liabilities, Income, expenses etc. and suggest course correction as well as an action plan for the future, in line with the goals.
Cashflows will be drawn up and any deficits will be funded from available resources. Also, any expenses like insurance premium payment, holidays etc. may come up, which needs to be funded. Provision will be made for these as well. Also, a liquidity margin will be kept aside as a contingency. Appropriate allocations are made for all these in short term FDs, Bank account or in Debt Funds.
Insurance requirements are to be met before any investments are done. Most have some insurance cover. Many have medical cover from their employers. Some even have life and accident cover from their employers. These needs to be considered and further insurance requirements need to be estimated. Human life value, Expenses replacement method, goal oriented method may be used for arriving at the life insurance requirements. Appropriate medical cover, life cover , accident cover etc. are suggested, in line with their requirements.
Investment surpluses beyond this – both lumpsum & monthly surpluses are invested, in line with their specific situation like station in life, time to retirement, commitments, goals, risk appetite, past investments & liabilities etc. Again, the investments suggested will vary from person to person, in line with their specific situation. The complete plan recommendations are implemented & the investments are managed & monitored and a review is done typically after a year, to take stock of what has happened and to take the plan forward.
Does it not look like a chess player making a considered move than a random draw of a card? Now you decide, what you would like to do. But, choose a qualified financial planner with appropriate experience; not someone who calls himself/ herself one. There are lots of them who have given wing to their creativity and call themselves Financial consultants, Financial Advisors, even Financial Planners. Evaluate properly before engaging one to ensure that - else the plan will be for his/ her betterment, not yours!

Published in Moneycontrol.com in Nov 2009

Which insurance is the right one for me?

Each insurance plan has it’s merits and should be used according to specific requirements of the individual

Pritam was by now exhausted by the arguments and counter arguments on the merits or otherwise of insurance. Kavya, his wife was enjoying this wholesome banter with her cousin, Vaibhav. Vaibhav was giving all reasons why insurance is a must and Kavya was playing the devil’s advocate.

“Of what use is an insurance to a person, if the money will come only after his death”, Kavya was presently positing. Vaibhav was in no mood to back off. “A person would take such an insurance to protect the family if the income earner were to pass away, prematurely. Since, the income would stop & expenses won’t, a replacement is necessary. That is the purpose of most insurance policies”, he chimed.

He took a swig of the soft-drink and was off again. “There are many kinds of insurance policies to suit the requirements of various types of people. You have money-back policies, from which you would get a pay-back at regular intervals & an Unit-linked policy which allows the flexibility of withdrawals after a certain number of years. Endowment policies on the other hand, pays back the Sum Assured & the bonus at the end of the term. So it is not that in all policies the life insured will not get to see the money during his lifetime”.

This interested Kavya. She wanted to know more about these policies. Vaibhav was more than happy to oblige. He has not had a more obliging audience in all these years as an insurance agent. He straightened up in an effort to enlighten & empower.

“Endowment policy is a insurance cum investment plan, where there is a life-cover for the entire term. Also, the policy holder gets at maturity, the Sum Insured ( which is the life cover opted for ) and the bonuses declared year on year, till maturity. Typically, the premium payment is also for the entire term, although shorter premium paying terms are also available in some policies. Typically, endowment polices have given between 5.5% to 7.5% returns, based on the age, tenure and type. Since insurance returns are not taxed at maturity ( in most cases ), these are post-tax returns. That makes it doubly interesting”, Vaibhav summed up.

“If this is so good, why have people not been buying this policy?”, Kavya wondered. “It is not that people are not buying this. Endowment policy have given returns comparable or even better than FD/ NSC/ bonds etc. in addition to giving insurance cover. Hence, it is attractive. This was one of the most sold policies till about 6 years back. Then, Unit Linked Insurance Plans ( ULIPs ) came in and swept the market. After that, all traditional policies have been relegated to the background”, said Vaibhav.

“What about Money back policies? Are these not sold today? I found it interesting when I had bought them”, queried Kavya. Vaibhav gave his cousin Kavya an approving nod. For once, someone is hearing him out with genuine interest. “ Money-back policies return a portion of the Sum Assured at regular intervals of three to five years. At the end of the term, bonuses along with any residual sum assured to be paid, is given out. Since, money is given out at regular intervals ( and is probably used up ), the return without reinvestment is between 3.25% to 4.5% depending on age, tenure of policy & type of policy. Irrespective of this, Moneyback policies were pretty popular as they give some cashflows at regular intervals. Again, ULIPs were the game changer, which all but killed this product type”.

“I have been reading & hearing about ULIPs everywhere. Though I know something about it, I would want to hear it from the horse’s mouth”, said Kavya with a smile. Vaibhav launched forth. “ A ULIP is a combination of investment & insurance plan. In the traditional insurance polices, the investments are done by the insurance company, without any discretion of the client coming in. Hence, the investment risk is with the insurance company ( and indirectly borne by the insured, as the returns will affect the bonus paid, year on year ). However, in a ULIP, the investible portion is invested in one or more funds ( maintained by the company ), specified by the client. The funds range from Equity to debt funds, including hybrid funds. Many understand that the returns from ULIPs can be substantially higher as compared to a traditional Insurance product. They are right. If invested for a long period of time, the investment returns will indeed be higher than a regular insurance. However, the risks are higher too, as upto 100% of the investible amount could be invested in equity.” He paused.

“But ULIPs are the flavor of the season. One of the reason is the returns that it offers; the second is the flexibility – in premium payment term as well as in accessing the accumulated funds when necessary. The insurance advisors are also smitten by this as it is easy to sell, in view of the tremendous flexibility as well as the good returns, it has been able to deliver in the past. ULIPs have comparatively high charges for premium allocation in the initial years which tapers down or could even become zero in future. Very often ULIPs are compared to the combination of term insurance plus an Equity MF scheme. Some of the ULIPs are able to beat the term + MF combination post 10 years, assuming that both give a similar return. However, the jury is still out on this”.

“The other main category is the term insurance plan. Here, one pays a premium to cover the life risk and nothing is returned at the end of the term. The premium paid is substantially less than any other category of life insurance. The life cover is substantial in this policy and comes in handy if there is a death claim. This is the only really viable option if one wants a substantial cover. Some of the ULIPs that have come in today also allows one to take a substantial cover and they resemble a term insurance policy.”

“Each of these products has a role to play. What works for a person may not work for another. For instance, an Endowment product may work well for a young person taking a long-term cover. A ULIP will be useful for someone who wants the flexibility and is ready to assume some risk. A term policy is useful to another who wants to put in place a big life insurance safety net. It could be a bouquet of products which one could structure according to one’s needs”, he ended. At this point, Kavya got up and applauded. Pritam joined in and gave Vaibhav a standing ovation.

Published in Money Mantra Nov 30 2nd issue

The necessity of Financial Planning

“Where do you think the market is heading?”, queried a suited gent, when I was attending a friend’s marriage. He said he heard that I’m a Financial Planner and wanted to pick my brains. “Difficult to say”, I hedged. “ It all depends on so many factors like monetary liquidity across the Globe & India, state of economy, inflation, world events, demand factors etc.. Since many of these seem to be improving, we could surmise that the stock market will do well in the medium term, though short term whipsaw movements cannot be ruled out”, I concluded. This did not please the suited worthy and he went on to specific stocks.
“What do you think of Reliance, ICICI Bank & Cairn India?”, he demanded to know. I said, these are good companies but investment in them should be done, considering one’s overall situation. This confused him a bit.
“Investments are Investments , right? What situation are you talking about? My Financial advisor keeps telling me what to buy & sell, on a weekly basis. If you don’t do this, what is that you do?”, he wanted to know. I figured many others would too. I started explaining.
“Financial Planning is about laying out a road map which will help in achieving goals, through proper financial management. Here, every aspect of the person’s finances – Income, Expenses, Assets, Liabilities, Investments, Insurance & ofcourse… goals are taken into account and then a plan is drawn up that will be relevant to the person and the family, in their unique situation. While creating the plan, the planner looks into the person’s/ family’s goals, current situation, committed expenses, Income / expense pattern, risk exposure, cash flows, future commitments etc. and suggests a plan of action with which they could comfortably sail through life, meeting all the goals set within the timeframe. Hence, the plan is specially tailor-made for every family and will be most relevant to them”, I paused.
“So, you have to create a plan from ground up”, queried a cherubic gent who had now joined our table. “Yes, it has to be”, said I forking in some salads.
“Looks like, you’ll require a lot of information”, observed a gent in a pin-striped shirt. “We will require complete information on all aspects of investments/ Insurance, Assets/ liabilities, Income / expenses, down to the last detail. Without that, it is not possible to create a comprehensive plan that addresses their specific situation. It is like giving complete medical history to a doctor”, I ventured.
“That’s going to be pretty difficult for me. My information is all scattered”, said the cherubic gent. “You’ll then need me even more… for, once you take the trouble of giving me the information and I further scrutinise and organize it for you, you will know, probably for the first time, where you stand”, was my repartee. He agreed.
I continued. “Our work goes just beyond organizing. The planner would suggest corrective steps in existing investments and loans, as required & unlock money locked-up in unproductive assets. Beyond that when we create the plan, we spend time trying to understand the goals, discuss your goals, funding of assets, expense rationalization, provide clarity about future requirements for children, retirement funding, provisioning for medical exigencies, providing a security blanket for the family, correct asset/ savings mix, tax planning … in short, everything that concerns you. The plan looks at cash adequacy, after meeting all goals, and works out cash sufficiency, till retirement and beyond. “
“That sounds pretty good to me. But, is proper projection for such a long period really possible?”, queried an earnest looking woman in a smart cotton saree. “We do make assumptions regarding investment returns, inflation, salary increases, expenses etc. These are based on the actual ground realities, the historic patterns & our experience. However, the projections can go wrong. That is precisely why, a financial plan needs to be reviewed and recast every year, to take into account the changing situations as also incorporate any changes in the parameters assumed”, answered I.
“Ok… but is Financial Planning only for the rich? Many of us may not be able to afford the fees”, came in the same lady in cool cottons. Wanted to give her a gift for being the millionth person to ask this question! “Financial Planning is for all those who want to sort out their finances, have a overall view of their situation, ensure that they are in the right direction and have a clear roadmap to reach their goals. There is no particular class of clients who may require financial planning. Our clients are from all age groups ( 25-75 ), socio-economic strata, single/ married, salaried to business owners… People come with nil investments to very huge investments/insurance. So, the profile of people who opt for Financial Planning is truly diversified. “
“To answer your implied question – Can I afford you? Or, If I have to pay a good fee, is my wealth not actually eroding? The answer to these questions, ask these questions yourself.
Can you afford to be in the dark about your finances? Will it all work out, if you keep investing here and there, based on what you hear & read? Can you move ahead in life without knowing where you are heading? Don’t you want to know if your goals are achievable or not and how to achieve them? Do you have the time to do it all?
Now the answers… Most will answer the above questions with a No. If so, you need a professional to do these for you. Apart from these, a Financial Planner will also, sort out your finances, help you take critical decisions in life ( do I buy a home now? Or can I afford a new car? ) be your advisor on all matters financial & guide you over time. You will need to pay the fees for these services. You can judge for yourself if the fees are reasonable in comparison with the services offered and only then engage a planner “, concluded I.
The entire group had fallen silent. I thought they were mulling this information in their minds. I moved away for some desserts.

published in DNA in Nov 09

10 November, 2009

Financial Planning in a Nutshell

Financial Planning is a buzz-word, we all tend to hear quite often these days – Mutual Funds, Banks, Insurance companies & IFAs - all talk about it. Lots of them also sport designations like Financial Advisor, Financial Mentor, Financial Consultant & even Financial Planner. This certainly leaves the investors confused.
Investors are bewildered. Like blind men describing an elephant based on which portion they have touched & felt, investors have vastly differing opinions on what constitutes Financial Planning.
Financial Planning is a blueprint created specifically for the individual / family, to achieve their goals & objectives, through proper financial management. This definition, leaves lot of room for creativity, to all the constituents in the Financial Services space… which is why all of them talk of this and seem to imply that if you buy their products, your financial plan will be in place.
Facts lie elsewhere. Financial Planning is not about buying products of MF, insurance, bonds etc. It is about analyzing a particular individual/ family situation and based on their needs, coming up with a specific solution that addresses their needs and takes them forward on the path of goal achievement.
Financial Planners would analyse the client’s income, expenses, assets, liabilities, investment, insurance & goals before coming up with a plan. What has been done in the past is put under the scanner and their suitability in the current situation is validated. Cashflow position now and in future are analysed to find, if there are any deficits showing up when we factor in the goals. If deficits do show up, it is discussed with the client to clearly understand which goals are to be retained, diluted or dropped. Sometimes, it might be possible to achieve a goal, if more time is given for that goal itself. This is when the client will understand if their goals are realistic or are they just being overly optimistic.
Proper cashflow management is at the heart of a financial plan. The liquidity requirements of the client is analysed and specific allocations are made to cash/ bank balance and to other near cash options. There may be certain cash outflows that may happen in specific months only – like holidays, school fees, insurance etc. To take care of surges in payouts in certain months, special buffers are built to especially take care of this. This will ensure that they will not be swept away in the tidal wave of huge expenses, in some months.
Risk assessment is done taking into account the past insurances, any cover available from the employer, savings/ asset build-up & liabilities. Based on this, the actual requirement of life insurance is arrived at and a suitable cover is recommended. Similarly, requirements for Medical insurance is looked into. Since medical costs have substantially gone up and has the potential to surge in future too, adequate cover for the entire family & other dependants ( like parents ) is recommended.
There would be surpluses now that need to be deployed to address the goals. That will be done after taking into account their specific situation in life, the number of years to retirement, dependencies, risk bearing capacity, alternate income possibilities… After this, the plan is implemented and all the investments & insurances done are monitored/ managed. Review is typically done at the end of the year.
You would agree that this is not what is done during product sales, where they would like to push specific products without adequately understanding the underlying needs, much less their overall situation. Financial planning is substantially different. The client focus, specific study of the individual/ family’s needs, the elaborate analysis & a comprehensive solution, managing / monitoring what has been done & reviewing the plan at regular intervals, makes the Financial Planning process comprehensive & results in a specifically targeted solution.
Beware then. Clearly understand what you are getting into. Many may talk of Financial Planning, but it may have nothing to do with it actually!

Published in Sify.com Finance section on 7/11/09

Living life & loving it

Insurance helps you to enjoy life, without worry

The spotlight was on Harish. He was to pour his heart out about the tribulations of a widower, in this play he was acting. Instead he forgot his lines and was currently blinking. Understanding his plight, Bikram was now prompting from behind the screens, “O God, how will I bring up my daughters…”. Harish clutched the lines like a drowning man a lifeboat and launched forth on his soliloquy. And what a hit it turned out to be.

Bikram turned out to be a life saver for Harish. The director had envisaged the possibility of actors going blank before an audience and had a backup ready to support when there was a snag. That ensured that the program was a hit instead of a rout, it could have well turned into. That in a nutshell, is risk management.

Risks abound around us. Also, what one perceives as risk, may be par for the course for another. Risk is hence relative. It is a risk to drive a vehicle, to keep valuables at home, pass on to the nether worlds without paying the home loan in this world, be exposed to ruinous medical expenses…

Some of these risks may be retained… risks that are small & frequent, risks that no one will cover or cannot be passed on. Some may have to passed on. There are always others who are willing to assume your risk, for a consideration.

Many big businesses have sprung up to assume various types of risk… for a fee. Life Insurance, medical insurance, property insurance, accident insurance, professional indemnity etc. are available today for those who want to derisk and are willing to pay for it.

Insurance companies pool the risks and pay those suffering losses, from the funds ( premium ) collected. They aggregate similar risk profiles into pools. The people in the pool pay premiums and collectively share the risks.

To illustrate, let us take a pool of 1 Lakh people with similar risk profiles. Let us also assume that they contribute Rs.3000/-pa per 10 Lakhs of life-risk cover. If the overall Sum insured of people in the pool is Rs.50 Crores, the premium collected would amount to Rs.15 Lakhs. When someone in the pool now passes away, the insurer would compensate the insured person’s family based on the cover taken. Let us say A, from this pool, who has an insurance cover of Rs.10 Lakhs, passes away. The compensation would be paid from the premium collected. In the above example, A’s family was compensated to the extent of Rs.10 Lakhs and the financial shock to the family gets cushioned to that extent.

If there is just one claim in the year, then the premium collected would cover it. However, if there are 5 such claims from the pool, the insurer would have to pay Rs.50 Lakhs, though they have collected only Rs.15 Lakhs as premium. This means losses for the insurer. Hence, an insurer needs to assess the people coming into the pool and charge a premium that will enable them to pay any claims and run the operation successfully, from year to year. Insurance companies have actuaries, who decide the parameters that define the pool & the premiums to be paid based on past experience. This is constantly monitored and appropriate corrective measures are taken to ensure that the business remains viable. Other insurance businesses function in a similar manner.

Risk mitigation is a very important function that allows individuals & businesses to protect themselves from paralyzing shocks, that has the potential to derail them. Insurance, hence plays a very important role of risk reduction and orderly functioning of businesses, lesser disruptions & event driven bankruptcies and ensures peaceful progression in society.

There are many risk reduction mechanisms at work, in all areas. When a backup is taken from a computer at the end of the day, that is insurance at work. When a stock exchange has a hot, standby server to take over when the current server fails, that’s risk containment at work again. Rockets & other spacecraft routinely have built in redundancies of critical parts, upto level 5. That means, if part 1 fails, part 2 takes over and so on till part 5. That’s extreme insurance, ofcourse. But, space travel is not your usual drive to the club, either.

Businesses recruit more than they require to cushion themselves from unavailability of talent in future. IT firms typically have a certain percentage on the bench, as a cushion. BPOs have their centres in different geographies. Many companies stockpile raw material if they sense there is an impending deficit. US has a huge crude oil buffer. China has recently stockpiled raw materials like Copper, Nickel. All these are great derisking strategies.

There are various risk reduction mechanisms functioning from time immemorial. Insurance is hardly new. A patriarch in olden days had many wives to ensure continuation of his lineage. In fact, sons were thought to be the insurance of choice for old age needs. They used to have huge granaries to stock food grains – an insurance against hunger for the rest of the year. Every village had many ponds to collect rainwater – call it prudence or insurance against water shortage. People used to buy gold ornaments and pass it down the generations – ensuring wealth, prestige and a cushion against penury. The kings married from neighbouring kingdoms, to ensure friendly neighbourhoods as also to have trusted allies to ward off other invasions.

If by all these you conclude that insurance is the sole preserve of human beings, you couldn’t be more wrong.

The birds & bees seem to have been doing that for eons. An adult female cod fish spawns on a gigantic scale – they lay about 4 – 6 million eggs so that after the inevitable attrition, there are still enough to hold the banner high. Beavers build dams on streams to ensure that they don’t lack water in summer. Camels store water inside their body, in a spare pouch. Ants toil and store enough for a rainy day. Even plants have mastered it. They have such excellent seed dispersal mechanisms to ensure the survival of the species, that our commandos could well study & emulate!

What do you think of our own body? It has such excellent mechanisms - like storing fat and living off it when body does not get food, an amazing tolerance built in that you will feel normal even if the heart is functioning at 30% levels. I’m told it is something similar with kidneys too. God believes in insurance.

Still people keep asking, “Do I need Insurance?”

Published in Money Mantra in Nov 2009 issue

Surviving Surgeries financially through Surgical Assistance Insurance

The trauma of surgery is bad; the trauma of not having the money to pay for it is worse. Surgical assistance insurance could be a solution here

Seema had gone through the traumatic experience of her husband Bhushan’s heart surgery. Her husband had taken a critical illness insurance and that had saved the day, for them.
Seema realized after understanding about Critical Illness Insurance policies, that they are going to cover just a few illnesses. Surgical Assistance Insurance policies however cover a lot more surgical situations and she felt could be more useful for them.
Surgical illness insurance provides a payment in a situation where a surgery needs to be done, provided that is covered by the policy/ rider. This policy specifies the surgeries it specifically covers. Most policies here are of the non-indemnity type, where a certain sum of money will be paid out irrespective of the amount spent.
Let us look at the salient features of these kinds of products -
• Policy covers specific surgical conditions which are clearly enumerated, at the outset – less than 100 to about 1000 surgeries covered, which varies with the policy. Premium varies to a great extent, due to this.
• Policies can be stand alone from Life/ General insurance companies or riders that could be attached to life insurance policies. All policies/ riders of this type, were from Life Insurance companies.
• There is tremendous amount of variation in the number of surgeries covered, coverage tenure, Sum Assured permitted & benefits. Some policies cover upto a specific term; others cover upto a particular age or even a combination of the two.
• In some of the cases, the Sum Assured increases by a specific percentage ( 5% in two instances ) till it reaches 150% of the initial Sum Assured chosen. In other cases, it remains static throughout.
• Policies here are mostly the non-indemnity ( a specified amount is paid as per policy terms ) kind.
• Surgeries are generally classified by the complexity as Grade 1,2,3,4 etc. The more serious the surgery, the higher will be the charges. In case of lumpsum payouts, it will be higher for a more complicated surgery. For instance, it will be more for an open-heart surgery as compared to Hernia.
• Some policies also give a daily hospital benefit upto a certain number of days of stay in the hospital. Similarly, ICU charges are also paid for a certain number of days, in certain policies.
• Some policies give convalescence benefit if the patient has spent at least a certain number of days, in the hospital.
• There are exclusions as well. Surgeries traceable to pre-existing illnesses, within waiting period, surgeries of a cosmetic nature not necessitated by an accidental injury etc. will not be covered.
• Sec 80D benefit available upto Rs.15,000/- on premiums paid against this policy.

Analysis & deliberation

This class of policy is again a good to have additional policy, over and above the regular Medical Insurance, which is because it covers only specified surgeries and not general hospitalization. Hence, this should be considered after a medical insurance is in place. Again, as opposed to a critical illness policy ( most of which will involve some surgery ), a surgical assistance policy will typically be costlier as the number of surgeries covered is much wider. When evaluating this class of policy, it is necessary to look at the premiums as also the number of surgeries covered – for this varies in a wide range – from less than 100 to about 1000. Higher the coverage, higher the premium would be. Also some policies impose a condition that in a lifetime, one could claim upto 3 times the Sum Assured. Others have some other overall limits upto which claims will be accepted in a year & during the policy tenure. One hence needs to consider all these properly and then decide on one that is suitable.

Some policies & riders in this space –

What is given below is just a synopsis of the plans. There will be a lot of conditions & exclusions, which one needs to go through carefully before zeroing in on the one that is suitable. The following is just a representative sample.

HDFC Surgical Care Plan – A standalone policy from HDFC Std Life. A non-indemnity policy available with and without Hospital Cash benefits. 82 surgeries covered, divided into Grade A to D. Payout depends on the Grade of Surgery. Maximum claim during the lifetime of the policy – 300% of Sum Assured. Sum assured increases by 5% y-o-y.

ICICI Pru Hospital Care – A standalone policy From ICICI Pru Life Insurance. A non-indemnity policy with daily hospitalization cash benefits, ICU Benefits, Recuperation Benefits ( if applicable ) & Surgical assistance. Over 900 surgeries graded from 1 – 4 are covered. One can opt for Plan A to Plan D - total benefits during the lifetime are Rs.20 Lakhs to Rs.80 Lakhs respectively. Guaranteed Coverage during the tenure, irrespective of claims.

Tata AIG Surgical Benefit Rider – A rider that can be attached to two of the company’s products – Invest Assure Health & Invest Assure Flexi. Sum Assured can be between Rs.40,000 to Rs.3 Lakhs. Lumpsum payment based on the surgery category – Grade 1 to 5. 946 surgeries are covered. 5% increase in Sum Assured y-o-y.

After hearing this out Seema definitely felt that they would have been better served with a Surgical Assistance policy. But the moot point is, how many policies can one take? There will always be some residual risk that will be with the insured. As long as bulk of the risk has been farmed out, it should be fine. For, there is a life to live and expenses beyond premiums. Seema nodded.

Published in DNA Money on 8/10/09

Planning for Child's future

Planning for the child’s future is something close to the heart of most parents. So it was for Neha. She started worrying about her four year old son Roshan & her 6 month old newbie, Puja. She was getting psyched by the enormous sums being demanded as “donation” for admitting kids in school. They had paid Rs.75,000/- for Roshan’s admission, after much negotiation and using their contacts. The fee for him per month works out to Rs.2,500/-. This does not include book, uniform , picnics etc. And then, there were the other expenses for activities like skating, swimming, karate etc. No wonder, she was worried. In about three years Puja will also join the school. The expenses will then be quite a packet.
It is a fact that Avinash, her husband, was earning decently. At 32, he still has a long working life & a promising career ahead of him. His take home at Rs.45,000/- pm is decent. But Neha was worried as there are all those EMIs & expenses, which puts a strain on the purse. Many times, they stare at an empty void in their moneybox, at the end of the month.
What scares the daylights out of Neha is the children’s education expenses. She has heard about the galloping education expenses which can top 10% pa. Also, the college fees these days get revised year- on-year, in quantum jumps – which makes planning for future, that much more difficult. Add to that the fact that the child may pursue Arts / commerce/ Engineering/ medicine…which is not clear right now. Hence, what amount to provide for, for education needs of the child becomes tricky.
As financial planners, this is familiar territory. Let us help Neha in planning for her child’s education needs.
1. Lot of people gravitate towards child policies, as if it is a panacea that will somehow take care of the education requirements of the child. Child policies are nothing but money back policies, where the return on investments tends to be low. In case if the same policy is unit-linked, it looks broadly similar to a Mutual Fund scheme. Some child policies have unique features like Income benefit, which is typically a rider. If the parent were to pass away, the family will start receiving a portion of the sum assured back ( say 10% pa ) till the end of term. This could be useful to enable the child to complete the education. But one could also take a term plan. On demise, it could give a sufficient corpus to enable the child to complete education.
Hence, child policies can be one part of the planning. Term plans also can be considered to hedge the life risk of parent.
2. The other part of the strategy is to invest in child plans from Mutual Funds. Most of them are balanced funds. There are those which allocate more towards debt & others that allocate the bulk towards equity. These are available across Mutual fund houses and can be chosen in line with the overall strategy.
3. There are those who are conservative in their outlook and want to accumulate the education kitty in safe investment options. They have PPF, Recurring deposits, Bank Deposits, KVPs etc. Though safe, the growth of the corpus is also rather modest. Hence, this again cannot be the only way to build the child’s education corpus.
4. Mutual Funds can give excellent returns, over a long time frame. A lot of people get unnerved by the short term fluctuations that are endemic to the stock market. But the risk of losing money comes down when held on for a longtime. In fact, Mutual Funds have the potential to deliver a 12 – 15% pa returns, in the longterm ( about 10 years ). One can also invest in Equity. The risk profile here is higher and is recommended for those who can stomach the risk and who can get good advice on investing in stocks.
It is very easy to project what will be the future cost at an assumed inflation factor ( say 8% ) for education – Rs.6 Lakhs needed today would be Rs.25.9 Lakhs. Projecting for such long-terms, is fraught with danger – the child might end up doing a course requiring lesser or more money by way of education expenses, inflation rate could be off the mark, investment returns could be different from the one assumed or it might become difficult for the parent to consistently put aside the required investment every year. Hence, when a plan is created, it is a good idea to revisit the plan every year so that any changes can be incorporated and the plan can be brought back on track.
The most important part is to start off. When such planning happens early, the amount to be put aside is small. For instance, if the target amount after 19 years is Rs.25 Lakhs, she needs to put aside only Rs.4,696/-pm ( assuming 8% returns ). The amount goes up to Rs.13,665/-pm, if the savings tenure is 10 years – about 3 times more.
Let us now look at what might be helpful for Neha. A 50-60% allocation is recommended towards Equity MFs. Equity diversified funds ( with Large to Midcap orientation ), Index funds, balanced funds & a small exposure to Gold ETFs ( 5-10% of the MF allocation ) could make up this portion. A 30-40% allocation can be made to the debt investment options – like PPF, Bank Deposits, Recurring Deposits etc. A 10-20% allocation can go to insurance plans depending on what kind of plan is being contemplated – Term or a child plan. Her Puja should bear fruit now with roshan all around!

Published in Moneycontrol on 26th Oct., 2009