26 June, 2011

A strategy to get the right medical coverage

It is almost a clichĂ© to say that the medical costs have sky-rocketed in the past several years. But, this is entirely true. We all tend to spend a lot of time and grey cells on how to save money for the future to meet our various goals like children’s education, retirement, home purchase, vacation etc. We generally don’t give as much thought to medical exigencies.

Well, we should… for medical emergencies can truly be draining on the family finances. If one does not have a proper medical cover, expenses on medical emergencies can empty one’s savings and even put a person in debt. This means your entire future can get compromised by not having a proper medical cover, to take care of unexpected medical emergencies. Time for some thought and planning…

Many people assume that since there is no history of ill-health in the family, it will continue that way in future. Medical emergencies don’t announce themselves in advance, before striking. The only thing to do is to be prepared.

How do we start?

We need to start by assessing how much cover may be required in one’s situation. That depends on the age of the family members, family history of illnesses, one’s vulnerability should a medical emergency strike, how much & what kind of protection one is seeking & how much premium one is willing to pay for it. Clarity on this will help us proceed to the next step.

Most people are advised to take at least Rs.5 Lakhs for every adult member and Rs.3 Lakhs for every child. There may be seniors who may not be eligible for Rs.5 Lakhs in some policies and may have to make do with Rs.2-3 Lakhs, the policy may be offering. But, will this be enough?

The question is moot. There is no way to predict how much could be medical expenses, in case of an emergency. We just need to look at the probability of covering most events. A Rs.5 Lakh cover for an adult should cover 85-90% of medical situations. There is always a possibility of the medical expenses going beyond that. But that is the risk one needs to retain. And have a cash-backup as a contingency reserve. Else, more cover could be taken ( say Rs.7 Lakhs instead of Rs.5 Lakhs ). But this will entail an increased premium outgo. Here, one narrows the risk and is not eliminating it. Hence, the right approach would be risk transfer by taking an appropriate medical insurance cover and be prepared for spending, in case the expenses go above the cover opted for.

What kind of policies to consider and what are the things to look for?

We generally recommend individual medical cover. A normal medical insurance policy covers hospitalization & also an exhaustive list of daycare procedures. They also cover domiciliary hospitalization, pre & post hospitalization medical expenses, hospital daily cash ( in some cases ), Health checkup expense reimbursement in some cases. These days, the policies allow cashless settlement, which results in a hassle-free experience. Depending on the policy there can be other bells and whistles, like maternity expenses coverage, dental expenses, eyecare expenses etc., after a certain number of years. Before selecting a policy one needs to clearly understand the benefits that the policy offers. Premium alone cannot be the sole consideration for deciding on the policy. Claim settlement is of paramount importance. If you have got a thumbs up there and policy benefits are good, that company’s policy should be considered in your shortlist.

There are people who prefer floaters, which are comparatively cheaper. Benefits in a floater are similar – only that there is one umbrella cover for the entire family. A family can take for instance a Rs.8 Lakh floater and may save some money in a family of four. It also stands to reason that all members may not fall sick in the same year. But, they could too – like, if there is an outbreak of Chikangunya. That is a call one needs to take. For a smaller premium, one will have to assume higher risks.

What about Group medical cover?

For many people who are employed, they enjoy cover from their employers. This would be a group insurance cover that generally tends to be more beneficial than a general medical insurance policy. A group medical insurance policy covers preexisting illnesses from day one & maternity benefits on an immediate basis. Some of them may also allow coverage of parents, who may not otherwise be eligible for medical covers. Some of these policies also allow one to pay further premiums and increase the cover. The premium in a group medical insurance policy are also lower as compared to normal policies. There is one major downside to it – this cover ceases when one leaves employment. Today, when people are mobile and change jobs frequently, this can become a problem. When a person is in transition from one job to another, there may not be any cover at all. This is one of the pitfalls of depending on a group medical cover. Also, the next employer may or may not have a medical cover which is as comprehensive as the current one.

Hence, it is always a good idea to have a separate medical cover, even though there maybe a company cover. The separate medical cover one opts for, can be at an appropriately lower level.

What about other covers to consider ?

There are several covers like Critical illness cover, Hospital cash, Surgical covers, accident covers etc. These are all good to have – not must have. There is no end to the extent of the security net that you may want to have. But everything costs money. So, one needs to tread the fine line after taking into account appropriate cover required & the premium outgo.

Article by Suresh Sadagopan ; Article published on 26/6/2011

20 June, 2011

Putting together a proper MF portfolio

What are the things to consider while choosing the schemes to invest in, while constructing a MF portfolio.

For a normal investor, investing their money has mostly been just a matter of doing what they have been doing in the past, like investing in FDs, NSCs, PPF etc. Lately, many people have been investing in Mutual Fund schemes too. Many among them have understood the significance of SIPs and are staunch devotees who pay their monthly obeisance.

But then, picking up the right set of schemes for investments is a challenge. Many do not see it that way. They just pick up what their friend / colleague has gone in for… what is being currently advertised. A favourite among investors is the NFO route. Even after a blizzard of articles specifically debunking the Rs.10 advantage in a NFO and highlighting the negatives of investing in a new scheme without a performance track record and possibly a new fund manager, investors continue to patronize NFOs.

So, how does one construct a proper MF portfolio? Let me offer some pointers.

Fund house filter – There are some fund houses which have built expertise in equity fund management/ debt fund management etc. Go to the experts and you would have won half the battle. AMCs which have a proven track record in equity asset management would be the fund houses to go to, for equity funds. Such fund houses would have the capacity to manage equity assets better than most, due to their better experienced fund managers, their processes & systems. There are some fund houses with niche capabilities like global investing or commodity stock investing etc. Again the same filter needs to be applied before zeroing in, on the fund house.

Fund manager filter - Fund managers play a major role in the scheme performance. Though there are systems and processes that tend to minimize the individualistic nature of fund management, fund managers skill is essential for funds to perform well. You will be able to see that in any category of schemes… you see a major difference in performance of schemes in the same category over different cycles of the market. One would see that some schemes have consistently outperformed the corresponding index and have beaten the category average, over various time frames. That’s fund manager’s skill working for you.

Performance filter - There are funds which have consistently performed over time and there are others which have delivered stellar performances, from time to time. While constructing a portfolio, one should look for consistency in performance rather than sudden bursts in the charts. The former is far more desirable and is achieved through proper selection processes, conviction, understanding and correct judgement at various points. Also, one should choose funds which have at least a 3 year performance history. This will help in validating if the fund is worthwhile to consider investing.

Portfolio construction - This should be a carefully thought about process. An investor needs to keep in mind their goals and their requirements for cashflows, over time. They should also consider their risk taking ability which would consequently dictate the kind of portfolio that one should construct. The portfolios for different people are hence going to be different. But broad principles apply.

The portfolio stability will need to be ensured through a mix of Large cap funds, Index funds & equity oriented balanced funds. Even a debt oriented fund with a dash of equity, like in the case of MIPs would be suitable here. This is to be the bedrock of the portfolio for most people. How much of large caps and how much of index funds, will depend on the amount of risk one is willing to take for the sake of returns.

Over this, there can be a satellite portfolio comprising of some aggressive funds like midcap & smallcap funds, value & opportunistic funds, all cap funds etc. The satellite portfolio can also comprise of thematic and sector funds. However, one needs to think through why a thematic / sectoral fund is required in their portfolio. A banking sector fund may be superfluous in a portfolio today as most schemes anyway have exposures to Finance sector anywhere between 12-20%. Some sectors like pharma, media and entertainment are extremely vast sectors and exposures in them is best achieved through a sectoral fund. Such sectors, if they make sense in the portfolio, can be invested in through sectoral funds. Again, the allocations towards various categories is best left to individual discretion and their expectations for the future.

In one’s portfolio, there could be a need for commodity, gold & global equity exposure too, especially if the portfolio is large and the need to diversify the portfolio is acute. In such a case, choosing appropriate schemes could add value to the portfolio. These should not be included in the portfolio as a fad.

When choosing schemes to invest one can broadly allocate about 10% in a scheme, going up to 15% in select cases. The fund house allocation should be not more than 20% among all the chosen schemes, going up to 30% in select cases. Allocation in equity schemes should be across time frames. SIP ensures that. Lumpsum investments also can be invested through Systematic Transfer, after investing in debt funds to tide over the timing risk.

That is not too hard to do, is that?

Article by Suresh Sadagopan ; Published in Business Standard on 19/6/2011

18 June, 2011

Is a tied agency model good for the investors of Mutual Funds?

Recently there was a news item in the press that SEBI is contemplating introducing a tied-agency model for Mutual funds. Is this good news for investors?
For that, we need to understand the tied-agency concept. This model is currently at work in Insurance industry with their agency channel. In this model, an agent can sell the products of any one company only. Even if the agent finds that there are other insurance products from other companies that are far more suited, he would not recommend that… for he is not empanelled with other companies and cannot sell their products.

As it is evident, this model ensures that the agent is just a sales person of that one company and always needs to look at all client needs through the limited vision afforded by his company. This model is a fertile breeding ground for sub-optimal advice. The biggest loser in this model is the investor. The AMC may find this worthwhile. For them, the agency channel is an extended sales-force of the company, who are not on the payroll. The company needs to pay a commission only if they sell a product. It’s like having the cake and eating it too.

In mutual funds, currently a distributor can empanel with any number of Fund houses. This allows a distributor to pick and choose and create a portfolio of good funds, suitable for his client. Now, if this were to be straitjacketed into the tied-agency model, like it exists in Insurance, investors will start experiencing unwanted sales push with a skew to a particular company’s product only.
It is felt that it will help Mutual fund industry when they are reeling today under the impact of various regulations that have come up in the past 2-3 years. Mutual fund houses may get a temporary reprieve through this. But this is a retrograde step and will result in aggressive selling on part of distributors, of the company products they are aligned with. This will result in a flood of complaints, sooner than later, from the investors. If investors find that it is not working for them, they will stay away from the MF schemes, further adding to the pressure that MFs are facing.

Though I had mentioned earlier that it would be good for the fund houses, it would be positive for some & a big problem for most fund houses. If distributors are allowed to empanel only with one fund house, the top few fund houses only, will be able to empanel distributors. The smaller and unfancied fund houses will not be able to attract any distributors to their fold. These MFs will have to start wooing the distributors with various attractions like a sign-on bonus, regular salary like payments, special incentives, trips etc., which could entice a distributor to a particular AMC. It is obvious that the cost of doing business will go up for most AMCs.

National level distributors & Banks would find that they are hugely in demand due to their distribution muscle. They will be able to extract their pound of flesh with the AMC they are aligned to. In this, those fund houses which either have a bank in the group like ICICI & HDFC or have a strong distribution setup like Motilal Oswal, Birla Sunlife will find that they are able to come out of this relatively unscathed & even increase their stranglehold.

The outcome of all this is that it will increase the concentration of MF assets with a few fund houses only and concentrate power in the hands of a few MFs. The diversity in fund houses & schemes which are seen now, will be a thing of the past.

The smaller fund houses will have to sell more through the direct & internet platform. To sell through these channels, marketing efforts would be required. If such efforts are to be fronted by their own staff, it will tremendously add to their fixed cost. Distributor channel is a low-cost channel for MFs, which are only paid for the sales they put through. Hence their costs will go up if they have to migrate most of their sales to direct or internet platforms. Again, this is not great news for the AMCs, as their revenue stream is limited to the expense they are permitted to charge.

In a nutshell, if tied-agency model were to be introduced it will be a losing proposition for the investor & for most of the AMCs. The distributors will also find it difficult to suggest a bouquet of MF schemes which are suitable to the client and will find resistance from the client, who may want good schemes from across the board. This could mean that atleast some of the clients would want to desert the distributors and go the direct route, in the interest of a diversified portfolio. This will again drive distributors away from the system. This will be useful to a few big AMCs and big distributors only. So, why consider such a retrograde step at all? We have enough headaches in the industry as it is.

Article by Suresh Sadagopan ; Published on 17/6/2011 in DNA Money

Putting together an Equity MF Portfolio

As a child I used to love fruit salad. The mix of fruits with custard and icecream used to enthrall me. I used to have it with a relish that bordered on a famished man seeing food! Would a fruit salad without all the fruits have been as good? I had never thought of it. But these days when people are calorie conscious and have advice from their doctor about which fruits to have and which ones to refrain having, I have started to look at the fruit salad in a new light.

I still have fruit salad… but now I’m more conscious about the various fruits that make up this heavenly concoction. Individually, they are nice. It’s when they are together, they taste sinfully delectable.

It is something like that when putting together an Equity MF portfolio. A portfolio which have only largecaps would be like having a salad made of just bananas – there would be no colour, variety or variation in taste. I don’t think it will be half as appealing.

A properly constructed portfolio needs to have exposure to varying extent to the different types of MF schemes. Just which type of schemes should be in the portfolio is something that can be decided based on individual requirements.
There are however broad pointers to constructing a portfolio. The first rule is to select the base or the bedrock schemes that will be building blocks of the portfolio. These will be the stabilisers of the portfolio. Large-cap, Index funds & Equity oriented balanced funds would come in as important components of the bedrock portfolio. Large cap funds by it’s very nature would have low beta and would represent the large, well-managed companies which are the market movers and mostly are also leaders in their category.

Index funds score as they represent the index – the fund mimics the correct proportion of the companies in the index. Index funds are hence passively managed funds. The only role a fund manager plays is to constantly ensure that the fund has the correct proportion of the underlying stocks of the index. Since the index itself is dynamically managed to represent those which have the largest market cap & are among the most liquid equities it is positive to have index funds in one’s portfolio. Also index funds have some very low expense ratios. Index ETFs are even better as their expenses are even lower.

Balanced funds ( equity oriented ) have atleast 65% in Equity schemes. The advantage in investing in these schemes is that since there is a certain equity debt allocation that a fund manager seeks to maintain, it can potentially take advantage of upsides and downsides. When the market is going up, the fund manager can move some portion of debt to equities and in the reverse swing, it could be exactly the opposite. This ensures that there is a bit of rebalancing which tends to happen in these kinds of funds.

The next level would comprise of aggressive / actively managed funds. Aggressive funds would choose from mid-cap & small cap space. These funds have the potential to deliver high returns though the risk inherent in such a fund is also higher. Their volatility tends to be higher as the underlying companies in which they invest in would be fast growing companies but they could also get affected to a greater extent due to any external impact like inflation, interest rates, commodity prices etc., more than a large cap company, which tends to be market leaders and have higher pricing power, may have better forward and backward integration leading to higher capacity to absorb external shocks. But in the longer term, they tend to perform well. Actively managed funds would be all-cap funds where the fund manager invests across market caps and themes and will take calls on which sectors to invest in, what kind of companies to invest in etc. This calls for a higher degree of skill on the part of the fund manager. Some of these funds have performed well and have managed to beat the index consistently over long periods.

For those who are bullish on specific sectors, sectoral funds are good options. For instance, investing in Pharma or FMCG would help in ensuring that there is stability in a volatile markets. Similarly, Media & entertainment & pharma are vast sectors, where one can get proper representation in these sectors only by investing in such sectoral funds. Thematic funds like Lifestyle & Infrastructure funds are tactical allocation calls, which depends on the portfolio one is trying to construct. Similarly, funds with exposure to equities abroad, commodity oriented, particular country theme etc. can have a place in one’s portfolio based on the diversification one is attempting to achieve in terms of geographies, underlying asset class, economy/ currency diversification.

MF schemes available now allow one to construct exactly the portfolio that is suitable to one’s situation. Like the fruit salad, it tastes good when they are put together in the right proportion.

Article by Suresh Sadagopan; Published in Moneycontrol.com on 17/6/2011

13 June, 2011

Coping with Volatility

Life is never linear. There are times when elation is the dominant sentiment and at other times gloom reigns supreme. Investors get in when the markets are trending higher. There are lots of fence sitters when the markets are rising. It is when the markets have run up almost to the top that the stampede to get in, starts. But, that’s the wrong time. Again, when the markets have started sliding, investors want to sit out the slump. But they suddenly lose their nerve when markets go down the tube, on a continuous losing trend. At some point like that, a stampede starts. They just book their losses and exit out, costs be damned. They don’t look at the market at all, till there is a frenzy again. This is all too familiar right?

This is not inevitable. This will probably not happen if there is a clear time horizon and a goal for which investors are investing. Most investors are aware that the equity markets are volatile and that they tend to give returns over the long-term. If they have understood that, they would stay invested. In a situation like the present where the markets have drifted downwards and is now staying in a range, what is it that an investor can do. Let’s take a look.

1. The dumb thing to do would be to cash out equity assets at this point in time. As per the asset allocation principle, one would need to commit more money to equities, as their values would now have eroded and they would have a smaller share in the asset allocation pie. Hence, actually equity allocation needs to be bumped up. Though it may be a gut-wrenching decision to take at this point, it will prove to be a winner over time. Even if one is not doing that, one could at least wait out this slump.

2. Continue the SIPs that have been going on. We get calls to know if they should stop the SIPs at this point. On the contrary, all purchases done in this period through SIPs would help the investors get higher number of units, ultimately helping them when the markets turn again.

3. Running after Gold as it is giving exceedingly good returns now is also not advised. Gold is going up due to speculative activity. Gold ETFs worldwide are collecting huge corpuses and they are buying gold to be kept in their vaults. There is no productive use for this gold. It is just that there is a widespread expectation that Gold will trend higher, which it could. But this is speculative activity. Due to currency debasement & uncertainty in the world, Gold is a comfort investment. Keep it that way. Invest between 5-10% of your corpus in Gold and other precious metals through ETFs or other similar options, instead of direct physical investments. Physical investments have additional costs and is also subject to wealth tax. Silver had already shown what can happen when there is massive speculation – it dropped 30% in 3 days, when higher margins were imposed.

4. For those who invest in stocks, they could look at picking defensive themes like FMCG, Pharma etc. Profitability of companies are coming down. In such situations Largecap companies & others who have leadership positions in their industries, could be good bets. Such companies have better pricing power & ability to weather the storm. If investments are through MFs, schemes investing in the above mentioned areas, would be good bets.

5. For those who have a long time horizon of 3 - 5 years and beyond, Mid & small cap companies would be good picks, as their prices are beaten down and offer good valuations now. If the goals are longterm, these investments could be a good idea.

6. For Fixed income investors, FMPs are a good idea now. The underlying investments in FMPs viz. CPs and CDs are now offering over 10% returns. If a person is in Dividend option, they could get 8.6% or more returns post-tax. This is attractive and is well above what PPF offers. Best of all, this comes in an FMP with just over 1 year duration. There are Bank FDs, company FDs and bond offerings which are attractive too.

7. There is another excellent option available before retail investors. Since the interest rate cycle is more or less at the peak and is expected to taper off in about 6 months, there is potentially money to be made by investing in G-sec funds which will give very good returns when the markets turn. Even other funds holding corporate paper can similarly give good returns. One could invest in dynamically managed debt funds which a fund manager would manage and time the entry and exits of various investments, which is critical here.

8. For those wanting to put in a large sum of money in equity assets, they could break up the money and invest over time to take advantage of market fluctuations & spread their risks. In case of MF investments, investments can be done in debt funds and can be transferred to appropriate equity funds, over time.
Predicting the direction of the market is fraught with danger, which even experts are not able to do. Taking a longterm view and investing & taking advantage of the present situation, is the wise thing to do.

Article by Suresh Sadagopan ; Published in Business Standard on 12/6/2011

08 June, 2011

The spirit of the Hippocratic oath

Truth & Integrity are words we hear a lot about… but tend to see it far less in practice… in every walk of life. Politicians talk a lot about it and almost have nothing to show for it. Their oath of allegiance when they assume office is hollow, as politics today is a game of private enrichment at public cost.

It is not just there. Integrity has been gaining value as there are too few practitioners. It is equally surprising that people have this conviction that integrity and truthfulness do not have a place in the present day world.
Integrity ofcourse does have a place in today’s world and those who are practicing it know it and are doing extremely well. There are many who practice the highest levels of integrity in their personal lives and in their corporate avatars.
Infosys, Wipro, Tatas, Godrej, TVS group are some of the well-known companies/ groups, which come to mind when we are on the subject of integrity. For some of them, it is their calling card. For Tatas, apart from their management acumen, they are sought after by any company looking for an India entry, due to their impeccable credentials.

Integrity can be an actual differentiator. In the finance field, which deals with people’s money, it is even more important. Finance field has received a severe battering in the past three years and the integrity of this industry is in tatters. To this day we have been receiving stories of deceit and wanton misleading of various participants.

Integrity is at the heart of building longstanding relationships. Integrity is difficult to maintain at all points… it is easier to bend the rules a bit, to suit one’s convenience. But that would bring down the moral stature a person has and their all-weather dependability. Trust is built over time. One wrong move and their integrity is compromised.

Trust is a word that is often used by many in business. It is used even more in the world of finance… for to allow another to handle your money and with it your future, requires quite a leap of faith. Hence, trust and integrity has even more salience in the financial space.

Come to think of it, this can be one’s calling card. It will be an effective one at that. Each one of us operating anyway require something to distinguish us from the rest. Why not integrity? Why not actually take the moral high ground and stay there, where the clients like us to be?

Think of this as a longterm strategy… An insurance agent might lose some potential income by foregoing on the opportunity to push a product with a juicy commissions – especially to a client who anyway does not know much about insurance. That is where integrity comes in. Integrity is what you do when no one is looking. What does the agent gain by doing the right thing? On an immediate basis - nothing. But the agent can always communicate to the clients, all options available before the client and educate the client why among the various options, he is suggesting a particular product. This willingness to spend time to engage and do the right thing, will certainly be appreciated and remembered. These are the agents who will go on to become the star agents of the branch, region, company… because, a happy client refers ten others.

It works. Not just in insurance. It will work everywhere. It is even more fundamental in the Financial Planning profession, where I come from. Integrity is the backbone of this profession. Financial Planners get to handle the complete client information, unlike any other, who may only get to see bits and pieces. Hence, integrity needs to be of the highest order here– not just beyond reproach. Trust is the currency here. And trust needs to be earned.

Earning trust is a relentless, dogmatic pursuit. Talking the truth all the time is immensely tough. But it needs to be done… because that is the highroad that one needs to take, if success of the highest order needs to be courted. Quite simply it is in our own self-interest – enlightened self-interest.

The doctors take the Hippocratic oath to always act in their patient’s interest. A similar oath is what we all require. Both professions have a fiduciary responsibility. Done right, Finance is as much a noble profession as medicine is – for one treats the body and other takes care of the other most important part – money.

We all need to think about it. Each of us have to attest to the highest standards of honesty, integrity & truthfulness. This is not some utopia that I’m talking about. It’s what regulators are trying to create… it is what we can create ourselves and reap the benefits too. And be counted as some of the best professionals there are.

The choice is ours.

Article by Suresh Sadagopan ; Published in The Economic Times on 8th June 2011