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
21 November, 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
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
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
“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
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
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
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
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
04 October, 2009
10 steps to get your spending back on track
How you could get back the controls, by reining in your expenses
“I would like to talk to you regarding a home loan”, a nurse told me, when I was in the hospital to visit my wife, who was admitted there. The nurse had come to know that I’m a Financial Planner and had wanted to take my advice about a home loan.
Like in all cases, I asked her about the investment she is planning to make. She wanted to buy a room, which would cost her Rs.2.5 Lakhs, in a wayout suburb. She wanted to buy that for her two young sons. She has about Rs.1.5 Lakhs and wanted to know about the home loan for the balance Rs.1 Lakh. “That should be no problem at all”, I told her. Then I asked her about her income. She was earning Rs.5,500 pm & her husband pulled in another Rs.3,500 pm. They were living with her in-laws. She told me she could stretch and pay upto Rs.4,000/- pm. I was deeply impressed. It showed single-mindedness of purpose & thrift. I asked her, ”Why don’t you approach the nearest bank and get going? They will need your payslip to let you know about eligibility amount”. She informed that she and her husband are both temps and don’t get any payslips. Now, I knew why she wanted to talk to me. It was not that simple a case at all. I suggested personal loans, from the bank with which she is having an account. I cautioned her that they may sanction maybe Rs.50,000/- or less, without collateral. With collateral, it may be more, I informed her. She thanked me for my advice.
On my way home, I was mentally thanking her for the revelation. Here was a woman of limited means, who wanted to buy a home as an investment for her sons and was prepared to save 44% of their income for that ! It was simply amazing.
Many of us, have that Rs.1 Lakh which she wants to borrow, in our SB accounts. A lot many spend what she saves in a month, on a weekend blowout! Lots of people also tell me that they are unable to buy a home as they do not have enough money to give upfront. Most who say this, are earning pretty well.
Expenses are like a multi-headed hydra, which can rear it’s ugly head, if one is not on top of it. Many of us do not have too much control over income increase, but we have control over expenses. But again, we have ceded control here and expenses torpedo us from all sides. We need to get back the control over it, so that we can get our life back on track.
Here are 10 Simple steps to get off the “Expensive” train
1. Properly plan for your goals & invest your money in the correct assets. Take professional help, if needed. Put the investments on auto pilot like a SIP, RD etc. That is what works best for most people. This will ensure that you can spend only the rest.
2. Understand how much you are spending by tracking the expenses. You will be surprised how much you’re spending on the “misc” head
3. Don’t borrow to spend. Credit card spends ensures that you do precisely that. Use a debit card instead.
4. Buy most provisions for a month at one go. You’ll end up spending less time, effort & money.
5. Do focused shopping. Write out what you want buy, buy that & head for the exit. Don’t take children with you on these occasions… they fill the shopping cart with unwanted fluff.
6. Don’t buy unwanted items or in huge quantity, just because there is some offer.
7. Don’t buy a toy due to your guilt that you are unable to spend enough time with your child. Try and find the time instead. You child wants you, not another toy.
8. Stop spending on that item, once you reach the limit in that month. For instance, if your entertainment allowance for the month is Rs.3,000/- and that is spent by the middle of the month, then it needs to be dal-chawal & TV for the rest of the month.
9. Same goes for fuel. Long drives and excursions on weekends are out, once the fuel limit for the month is breached.
10. Don’t switch on the AC by force of habit. Use AC as required. Switch off fans/ lights & other appliances, when no one is around. In many households, TV is on, irrespective of whether someone is watching or otherwise.
Have a bash if there is money left at the end of the month. That gives this exercise a positive spin. Take the family members into confidence as to why you have turned into an Uncle Scrooge. When they learn the larger picture, they will pitch in willingly.
I’m asking for too much, ain’t I? But, think of your future, your family’s future. If you are spending too much today, is it not tantamount to messing your future? The Americans have found that out to their dismay, in this downturn. You want to be like Americans or like that nurse, who was willing to save 44% for a goal? For her it is as difficult to find that Rs.1 Lakhs as it is to get Rs.50 Lakhs for us. My sense is that she will find the balance Rs.1 Lakh for that room.
Published in Moneycontrol.com on 1/10/09
“I would like to talk to you regarding a home loan”, a nurse told me, when I was in the hospital to visit my wife, who was admitted there. The nurse had come to know that I’m a Financial Planner and had wanted to take my advice about a home loan.
Like in all cases, I asked her about the investment she is planning to make. She wanted to buy a room, which would cost her Rs.2.5 Lakhs, in a wayout suburb. She wanted to buy that for her two young sons. She has about Rs.1.5 Lakhs and wanted to know about the home loan for the balance Rs.1 Lakh. “That should be no problem at all”, I told her. Then I asked her about her income. She was earning Rs.5,500 pm & her husband pulled in another Rs.3,500 pm. They were living with her in-laws. She told me she could stretch and pay upto Rs.4,000/- pm. I was deeply impressed. It showed single-mindedness of purpose & thrift. I asked her, ”Why don’t you approach the nearest bank and get going? They will need your payslip to let you know about eligibility amount”. She informed that she and her husband are both temps and don’t get any payslips. Now, I knew why she wanted to talk to me. It was not that simple a case at all. I suggested personal loans, from the bank with which she is having an account. I cautioned her that they may sanction maybe Rs.50,000/- or less, without collateral. With collateral, it may be more, I informed her. She thanked me for my advice.
On my way home, I was mentally thanking her for the revelation. Here was a woman of limited means, who wanted to buy a home as an investment for her sons and was prepared to save 44% of their income for that ! It was simply amazing.
Many of us, have that Rs.1 Lakh which she wants to borrow, in our SB accounts. A lot many spend what she saves in a month, on a weekend blowout! Lots of people also tell me that they are unable to buy a home as they do not have enough money to give upfront. Most who say this, are earning pretty well.
Expenses are like a multi-headed hydra, which can rear it’s ugly head, if one is not on top of it. Many of us do not have too much control over income increase, but we have control over expenses. But again, we have ceded control here and expenses torpedo us from all sides. We need to get back the control over it, so that we can get our life back on track.
Here are 10 Simple steps to get off the “Expensive” train
1. Properly plan for your goals & invest your money in the correct assets. Take professional help, if needed. Put the investments on auto pilot like a SIP, RD etc. That is what works best for most people. This will ensure that you can spend only the rest.
2. Understand how much you are spending by tracking the expenses. You will be surprised how much you’re spending on the “misc” head
3. Don’t borrow to spend. Credit card spends ensures that you do precisely that. Use a debit card instead.
4. Buy most provisions for a month at one go. You’ll end up spending less time, effort & money.
5. Do focused shopping. Write out what you want buy, buy that & head for the exit. Don’t take children with you on these occasions… they fill the shopping cart with unwanted fluff.
6. Don’t buy unwanted items or in huge quantity, just because there is some offer.
7. Don’t buy a toy due to your guilt that you are unable to spend enough time with your child. Try and find the time instead. You child wants you, not another toy.
8. Stop spending on that item, once you reach the limit in that month. For instance, if your entertainment allowance for the month is Rs.3,000/- and that is spent by the middle of the month, then it needs to be dal-chawal & TV for the rest of the month.
9. Same goes for fuel. Long drives and excursions on weekends are out, once the fuel limit for the month is breached.
10. Don’t switch on the AC by force of habit. Use AC as required. Switch off fans/ lights & other appliances, when no one is around. In many households, TV is on, irrespective of whether someone is watching or otherwise.
Have a bash if there is money left at the end of the month. That gives this exercise a positive spin. Take the family members into confidence as to why you have turned into an Uncle Scrooge. When they learn the larger picture, they will pitch in willingly.
I’m asking for too much, ain’t I? But, think of your future, your family’s future. If you are spending too much today, is it not tantamount to messing your future? The Americans have found that out to their dismay, in this downturn. You want to be like Americans or like that nurse, who was willing to save 44% for a goal? For her it is as difficult to find that Rs.1 Lakhs as it is to get Rs.50 Lakhs for us. My sense is that she will find the balance Rs.1 Lakh for that room.
Published in Moneycontrol.com on 1/10/09
Retire with a smile!
A smile on the face. A happy looking 60 something “Dadaji” playing badminton ( having Chyamprash, before and after the game ) with his Grandson. Nana Nani frolicking on the beach in floral print tops… you get the scene. Vignettes of happy retired seniors as seen on the brochures of Pension plans.
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retirement. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.
Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.
Published in Moneycontrol.com 23/09/09
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retirement. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.
Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.
Published in Moneycontrol.com 23/09/09
Retire with a smile!
A smile on the face. A happy looking 60 something “Dadaji” playing badminton ( having Chyamprash, before and after the game ) with his Grandson. Nana Nani frolicking on the beach in floral print tops… you get the scene. Vignettes of happy retired seniors as seen on the brochures of Pension plans.
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retremennt. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.
Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.
Published in Moneycontrol.com 23/09/09
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retremennt. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.
Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.
Published in Moneycontrol.com 23/09/09
How critical is a Critical Illness insurance for you?
Build a security net, over and above the medical insurance that you have. But, do you really need this… read on.
“An open-heart surgery is required for Bhushan as there are multiple blocks”, the doctor was telling Seema, his wife. Tears welled up. Doctor was comforting her. “Don’t you worry. Medical Science has advanced so much that the risks in such a surgery is not that high any longer. Bhushan will be fine”, said the Doctor. Seema with tears still in her eyes asked, ”But, how much will it cost? “. Doctor replied that it may cost about Rs.3 Lakhs. Tears welled up again in Seema’s eyes. She knew that they have a medical insurance that covers them for Rs.2 Lakhs each. Now the surgery alone will cost Rs.3 Lakhs; and then there are the hospital charges, medicines… What she did not know was that Bhushan had taken a Critical illness cover and most of the expenses are going to be covered. Good news then! Seema however wants to know what this plan is all about and how this works.
Critical illness cover :
This is an insurance cover available against specified diseases/ conditions. Lumpsum payment based on the Sum Assured taken is made on diagnosis of the condition, irrespective of the amount spent or will be spent on illness. Such policies are available from both Life & General insurance companies.
Features & benefits :
• Benefit amount paid, over and above other medical policy claims as this is a defined benefit policy
• This is available as a separate product or as a rider in a life insurance policy. Depending on that, it may be a yearly renewable or a tenured contract.
• Will cover a specified number of illnesses – may be just 10 in some cases, especially riders and is over 30 in case of most standalone policies
• No maturity benefit is payable in these policies.
• There is a premium guarantee for a certain number of years, in most policies. Premiums can change post that, subject to IRDA approval.
• Premium varies widely. Indicative premium for a 40 year old can be between Rs.3000/- & Rs.8,500/- depending on the term, coverage & other benefits.
• Age at entry varies widely between product to product – 6 years or more, depending on the product chosen.
• Coverage term and age upto which covered ( 75 is the best I’ve seen in these policies ) also varies widely from policy to policy.
• Claim Payment made as per pre-decided payouts ( as a percentage of Sum Assured ). Many policies have a pre-defined list of illnesses for which they pay a certain percentage of Sum Assured - typically 50% to 100%
• Some policies limit the claim in case of a particular disease. After a payout is made for a disease, balance Sum Assured can be carried forward for other diseases – the premium is set accordingly lower in consonance with the balance Sum Assured.
• Claim can be done more than once, upto the Sum Assured. After that, the policy terminates.
• Some policies impose a survival condition of a certain number of days ( eg. 30 days ) for claim admittance.
• Waiting period for claims under this policy would be there in almost all cases – typically 3-6 months.
• Tax benefits available under Sec 80D or Sec 80C, according to the plan structure.
Analysis & deliberation
This policy is not a replacement for the Medical insurance policy. This cover needs to be taken to protect against the jolt like what Bhushan’s family would have received. However, the point to bear in mind is that this policy terminates once the sum assured is paid, unlike in a medical insurance policy, which I would rate as the most important limitation. Some policies allow you to carry the policy forward after settlement of a portion of the Sum Assured for the other covered diseases, for the balanced Sum Assured. This is a very useful option as atleast a portion of the cover is available for other illnesses. The other limitation is that the policy is only for a limited number of diseases/ conditions. In life, one may incur huge expenses in hospital bills for diseases other than those covered in the policy. Also, the number of diseases/ conditions covered by different policies is different. Also, this policy does not come very cheap especially considering it has limited applicability and can at best be an add-on policy.
Do you require it?
Insurance companies have come out with this product as there is a clear need for it. However, this is best taken in conjunction with a proper medical insurance plan – not in isolation as this a very focused, useful but limited plan. One should look at the family history, nature of work, station in life, ability / disability to absorb a jolt etc., before deciding on whether a Critical illness cover is required.
In the final analysis, one needs to take a view on the age upto which the cover is sought, diseases covered, special benefits in the policy, waiting period, survival condition imposed etc. apart from the premium before arriving on the final choice of the policy. If you can afford to put aside money for this, it is a good safety net to have.
A check on the claim history would be a good idea. You would not want to run around with IV needles still stuck to body parts, do you? Seema does not like that one bit and hopes like hell that the Critical illness policy of Bhushan pays. She is however wondering if a Surgical assistance policy would have been a better idea , as his friend Ajay suggested. She needs to wait till next week to know that!
published in DNA Money on 11/9/09
“An open-heart surgery is required for Bhushan as there are multiple blocks”, the doctor was telling Seema, his wife. Tears welled up. Doctor was comforting her. “Don’t you worry. Medical Science has advanced so much that the risks in such a surgery is not that high any longer. Bhushan will be fine”, said the Doctor. Seema with tears still in her eyes asked, ”But, how much will it cost? “. Doctor replied that it may cost about Rs.3 Lakhs. Tears welled up again in Seema’s eyes. She knew that they have a medical insurance that covers them for Rs.2 Lakhs each. Now the surgery alone will cost Rs.3 Lakhs; and then there are the hospital charges, medicines… What she did not know was that Bhushan had taken a Critical illness cover and most of the expenses are going to be covered. Good news then! Seema however wants to know what this plan is all about and how this works.
Critical illness cover :
This is an insurance cover available against specified diseases/ conditions. Lumpsum payment based on the Sum Assured taken is made on diagnosis of the condition, irrespective of the amount spent or will be spent on illness. Such policies are available from both Life & General insurance companies.
Features & benefits :
• Benefit amount paid, over and above other medical policy claims as this is a defined benefit policy
• This is available as a separate product or as a rider in a life insurance policy. Depending on that, it may be a yearly renewable or a tenured contract.
• Will cover a specified number of illnesses – may be just 10 in some cases, especially riders and is over 30 in case of most standalone policies
• No maturity benefit is payable in these policies.
• There is a premium guarantee for a certain number of years, in most policies. Premiums can change post that, subject to IRDA approval.
• Premium varies widely. Indicative premium for a 40 year old can be between Rs.3000/- & Rs.8,500/- depending on the term, coverage & other benefits.
• Age at entry varies widely between product to product – 6 years or more, depending on the product chosen.
• Coverage term and age upto which covered ( 75 is the best I’ve seen in these policies ) also varies widely from policy to policy.
• Claim Payment made as per pre-decided payouts ( as a percentage of Sum Assured ). Many policies have a pre-defined list of illnesses for which they pay a certain percentage of Sum Assured - typically 50% to 100%
• Some policies limit the claim in case of a particular disease. After a payout is made for a disease, balance Sum Assured can be carried forward for other diseases – the premium is set accordingly lower in consonance with the balance Sum Assured.
• Claim can be done more than once, upto the Sum Assured. After that, the policy terminates.
• Some policies impose a survival condition of a certain number of days ( eg. 30 days ) for claim admittance.
• Waiting period for claims under this policy would be there in almost all cases – typically 3-6 months.
• Tax benefits available under Sec 80D or Sec 80C, according to the plan structure.
Analysis & deliberation
This policy is not a replacement for the Medical insurance policy. This cover needs to be taken to protect against the jolt like what Bhushan’s family would have received. However, the point to bear in mind is that this policy terminates once the sum assured is paid, unlike in a medical insurance policy, which I would rate as the most important limitation. Some policies allow you to carry the policy forward after settlement of a portion of the Sum Assured for the other covered diseases, for the balanced Sum Assured. This is a very useful option as atleast a portion of the cover is available for other illnesses. The other limitation is that the policy is only for a limited number of diseases/ conditions. In life, one may incur huge expenses in hospital bills for diseases other than those covered in the policy. Also, the number of diseases/ conditions covered by different policies is different. Also, this policy does not come very cheap especially considering it has limited applicability and can at best be an add-on policy.
Do you require it?
Insurance companies have come out with this product as there is a clear need for it. However, this is best taken in conjunction with a proper medical insurance plan – not in isolation as this a very focused, useful but limited plan. One should look at the family history, nature of work, station in life, ability / disability to absorb a jolt etc., before deciding on whether a Critical illness cover is required.
In the final analysis, one needs to take a view on the age upto which the cover is sought, diseases covered, special benefits in the policy, waiting period, survival condition imposed etc. apart from the premium before arriving on the final choice of the policy. If you can afford to put aside money for this, it is a good safety net to have.
A check on the claim history would be a good idea. You would not want to run around with IV needles still stuck to body parts, do you? Seema does not like that one bit and hopes like hell that the Critical illness policy of Bhushan pays. She is however wondering if a Surgical assistance policy would have been a better idea , as his friend Ajay suggested. She needs to wait till next week to know that!
published in DNA Money on 11/9/09
28 August, 2009
Get medical cover to avoid a hole in the pocket
Taxes and death are the only certainties in life - we have heard that before. And one more to that – Medical situations, that include a stay in the hospital, is also almost a given for everyone, at sometime in life. The problem is that we do not know when that may happen. Medical insurance comes in there.
But, which kind of medical insurance is appropriate? Most people go with a medical insurance policy, which again goes by the generic term “mediclaim”, though it a product of the PSU insurance companies. Let’s see what a medical insurance from a General Insurance company covers.
What it covers?
1) Hospitalisation for more than 24 hours, which will cover room & board, doctor’s fees, ICU charges, nursing expenses, surgical fees, Operating Theatre expenses etc.
2) Pre-hospitalisation expenses on medicines. It is typically between 30-60 days.
3) Post-hospitalisation expenses on medicines. Typically between 60-90 days.
4) A number of daycare procedures ( over a hundred in most cases ) – that require less than 24 hours of hospitalization. Due to medical advances many treatments do not require hospital stay and hence would not have been otherwise covered under medical insurance.
5) Most policies also allow complimentary health checkup once in a few years, upto a certain limit, subject to conditions like certain number of claim-free years.
6) Again, ambulance charges are also paid by some policies
7) Some policies give a cash allowance for the days of hospitalization, to cover various incidentals like travel, out of pocket expenses & stay of relatives etc.
Other features & benefits
• Medical insurance is typically a yearly renewable contract. There are however policies which can be taken for upto three years, at a go too.
• No medical tests are required for upto 45 years of age. Application processed based on one’s health status declaration.
• Now Sum Assured of upto Rs.10 Lakhs is available in most policies
• Individual & floater policies are available, with most companies
• Cashless hospitalization is a reality in most cases today, giving unprecedented benefits to the policy holders.
• 5% bonus for claim free years, allowable upto 1.5 times of the Sum Assured opted for initially
• Family discount of upto 10% is applicable
• One can take treatment from a non-network hospital in which case the expenses will be reimbursed. But, most companies impose a co-pay option of between 10- 20%, as in these cases the insurance company would not have the advantage of negotiated, better rates like in a network hospital.
• Claim settlement has now been taken over by the companies themselves in many cases, to ensure better service & exercise better control. In others, it is done through a Third Party Administrator ( TPA).
Exclusions & conditions
• There is no-claim period of 30 days ( typically ) when one goes for a policy.
• Pre-existing illnesses are not covered in the first year. Most policies cover pre-existing illnesses only after 2-4 years
• Only Allopathic treatment will be considered for claims
• Certain conditions ( like hernia ) & surgeries/ procedures which can be planned ( like Angiogram etc. ) are excluded for a much longer period – typically a year. There are policies which have upto 4 year waiting periods for specific conditions – like joint replacement surgery
• Only treatments within India are covered
• In some policies, there are sub-limits on how much can be claimed as room rent, ICU expenses , doctor’s fee etc. This can limit the amount of claim, even though the expenses are well within the Sum Assured
• Renewal of policy till a certain age. This can be between 70-80 years, depending on the policy.
Policy renewability
Policy renewability was a contentious issue for Medical Insurance policies. However, IRDA has issued a circular that a company cannot deny renewal or force the policy holder to move to another policy, just because there was a claim in the prior years. This is com
Income tax benefit
Premium paid for medical insurance comes under Sec 80D ( as a deduction). Upto Rs.15,000/- pa can be claimed by an individual and Rs.20,000/-pa can be claimed by a Senior Citizen. Additionally, a medical insurance premium paid for ones’ parents, upto Rs.15,000/-pa can also be claimed under the same section.
Discussion
For most people, this kind of policy will be good enough, since it covers hospitalization, pre & post medications, daycare procedures & other facilities. Policy renewability is a positive development. When taking a policy one should not go by the premium alone. A proper understanding of the benefits offered is a must – for instance, if one policy covers pre-hospitalization of 60 days & post hospitalization expenses upto 90 days, it may be better suited over a cheaper policy that covers these for a lesser number of days. One needs to look at the offering in totality, before deciding.
There are however certain things a typical medical insurance may not address. A) If one wants to enhance the coverage, it may still pose a problem ( due to claim history ). B) Also, if the policy term is only till 70 or 75 years, it poses a problem - as beyond that period one has to remain without any cover at all and be vulnerable. This is probably the time when medical attention will be most required. C) In many diseases and conditions, medication and attention will be required on an ongoing basis. In extreme cases, it could diminish the person’s ability to earn.
The other aspect that is quite common is the overcharging by doctors & hospitals, which is detrimental to the insurer & insured. It is detrimental even to the insured as the coverage amount in real terms diminishes. Many insurance companies have addressed this by entering into a contract with their network hospitals and fixing rates. However, the doctors, surgeon, anesthetist charges vary and in such situations they are prepared to engage only if the patient is from the first / premium class room. So, issues exist even today which would probably get sorted out in future. As of now, one needs to be alive and aware of all the benefits a medical insurance offers, limitations & the problems.
Could some of these be eliminated? Can it be addressed through some other product? Will some other type of offering be more cost effective? There are many other insurance options available today – for Critical illness, senior citizens accident related, hospital reimbursement , top-up. How will these help? Watch this space.
But, which kind of medical insurance is appropriate? Most people go with a medical insurance policy, which again goes by the generic term “mediclaim”, though it a product of the PSU insurance companies. Let’s see what a medical insurance from a General Insurance company covers.
What it covers?
1) Hospitalisation for more than 24 hours, which will cover room & board, doctor’s fees, ICU charges, nursing expenses, surgical fees, Operating Theatre expenses etc.
2) Pre-hospitalisation expenses on medicines. It is typically between 30-60 days.
3) Post-hospitalisation expenses on medicines. Typically between 60-90 days.
4) A number of daycare procedures ( over a hundred in most cases ) – that require less than 24 hours of hospitalization. Due to medical advances many treatments do not require hospital stay and hence would not have been otherwise covered under medical insurance.
5) Most policies also allow complimentary health checkup once in a few years, upto a certain limit, subject to conditions like certain number of claim-free years.
6) Again, ambulance charges are also paid by some policies
7) Some policies give a cash allowance for the days of hospitalization, to cover various incidentals like travel, out of pocket expenses & stay of relatives etc.
Other features & benefits
• Medical insurance is typically a yearly renewable contract. There are however policies which can be taken for upto three years, at a go too.
• No medical tests are required for upto 45 years of age. Application processed based on one’s health status declaration.
• Now Sum Assured of upto Rs.10 Lakhs is available in most policies
• Individual & floater policies are available, with most companies
• Cashless hospitalization is a reality in most cases today, giving unprecedented benefits to the policy holders.
• 5% bonus for claim free years, allowable upto 1.5 times of the Sum Assured opted for initially
• Family discount of upto 10% is applicable
• One can take treatment from a non-network hospital in which case the expenses will be reimbursed. But, most companies impose a co-pay option of between 10- 20%, as in these cases the insurance company would not have the advantage of negotiated, better rates like in a network hospital.
• Claim settlement has now been taken over by the companies themselves in many cases, to ensure better service & exercise better control. In others, it is done through a Third Party Administrator ( TPA).
Exclusions & conditions
• There is no-claim period of 30 days ( typically ) when one goes for a policy.
• Pre-existing illnesses are not covered in the first year. Most policies cover pre-existing illnesses only after 2-4 years
• Only Allopathic treatment will be considered for claims
• Certain conditions ( like hernia ) & surgeries/ procedures which can be planned ( like Angiogram etc. ) are excluded for a much longer period – typically a year. There are policies which have upto 4 year waiting periods for specific conditions – like joint replacement surgery
• Only treatments within India are covered
• In some policies, there are sub-limits on how much can be claimed as room rent, ICU expenses , doctor’s fee etc. This can limit the amount of claim, even though the expenses are well within the Sum Assured
• Renewal of policy till a certain age. This can be between 70-80 years, depending on the policy.
Policy renewability
Policy renewability was a contentious issue for Medical Insurance policies. However, IRDA has issued a circular that a company cannot deny renewal or force the policy holder to move to another policy, just because there was a claim in the prior years. This is com
Income tax benefit
Premium paid for medical insurance comes under Sec 80D ( as a deduction). Upto Rs.15,000/- pa can be claimed by an individual and Rs.20,000/-pa can be claimed by a Senior Citizen. Additionally, a medical insurance premium paid for ones’ parents, upto Rs.15,000/-pa can also be claimed under the same section.
Discussion
For most people, this kind of policy will be good enough, since it covers hospitalization, pre & post medications, daycare procedures & other facilities. Policy renewability is a positive development. When taking a policy one should not go by the premium alone. A proper understanding of the benefits offered is a must – for instance, if one policy covers pre-hospitalization of 60 days & post hospitalization expenses upto 90 days, it may be better suited over a cheaper policy that covers these for a lesser number of days. One needs to look at the offering in totality, before deciding.
There are however certain things a typical medical insurance may not address. A) If one wants to enhance the coverage, it may still pose a problem ( due to claim history ). B) Also, if the policy term is only till 70 or 75 years, it poses a problem - as beyond that period one has to remain without any cover at all and be vulnerable. This is probably the time when medical attention will be most required. C) In many diseases and conditions, medication and attention will be required on an ongoing basis. In extreme cases, it could diminish the person’s ability to earn.
The other aspect that is quite common is the overcharging by doctors & hospitals, which is detrimental to the insurer & insured. It is detrimental even to the insured as the coverage amount in real terms diminishes. Many insurance companies have addressed this by entering into a contract with their network hospitals and fixing rates. However, the doctors, surgeon, anesthetist charges vary and in such situations they are prepared to engage only if the patient is from the first / premium class room. So, issues exist even today which would probably get sorted out in future. As of now, one needs to be alive and aware of all the benefits a medical insurance offers, limitations & the problems.
Could some of these be eliminated? Can it be addressed through some other product? Will some other type of offering be more cost effective? There are many other insurance options available today – for Critical illness, senior citizens accident related, hospital reimbursement , top-up. How will these help? Watch this space.
09 August, 2009
A guide in Tough times
Picture this. You are trekking in the Himalayas. The biting cold and breathtaking scenery are exhilarating and the atmosphere within the trekking group is relaxed and serene. And then it happens—an avalanche. It lasts just a few minutes, and immediately after the noise, there is an eerie silence and nothing to be seen for miles but sparkling white. Your group is shaken but manages to pull together. You find that you are lost, with no idea of where to go.
Your guide, a native of the parts, manages to calm the group. He surveys the area, looks around at the peaks and the sky and instructs the group to walk behind him. In a couple of hours, he leads you to the base camp. Without the guide, you would have been lost in the wilderness.
A financial planner is a bit like that guide—helping you achieve your goals through the rough and tumble of life. When times are good, any advice will work. Like they say, all boats float when the tide is high. It is when times are uncertain that you really feel the need for expert, professional advice. A planner can help ensure that you don’t get carried away by swirling rumours and doomsday predictions that abound at times like these.
Because a financial planner is not focused on investments alone, he can help you achieve your life goals through holistic financial management. In times of upheavals, plans may have to be reworked to get them back on track. It might surprise you to know that in times of massive uncertainty, I have found it better to take no action than to act in haste. That’s because financial planning is about achieving long-term goals and not about making short-term profits. In fact, when the market is going through turmoil, your financial planner might even recommend a new action to take long-term advantage of such situations.
But what about adverse situations in life, such as job loss or the death of a family member? Does that warrant a break in financial planning? No, the changed situation may warrant a changed response, not the abandonment of financial planning. A financial planner can actually add tremendous value in times of distress. Assume that one of my clients, Gopal, has lost his job. He is worried about his EMIs and bills. As his financial planner, I would try to shore up his finances. I have already ensured that there is a three-month expense liquidity fund.
Now, the task will be to liquidate assets to take his liquidity to beyond six months. Once this strategy is in place, the next course of action would be to find ways of bringing the plan back on track. For instance, Gopal will need to revisit some of his goals, and remove those that have become irrelevant or unattainable in the current situation. Appropriate course correction will also be made to keep his plan viable to suit his changed situation. If these are done, Gopal will just have to worry about finding his next job, not about the state of his finances.
During times of personal turmoil, a financial planner can be a stabilising influence. Since the planner is not emotionally involved, he is able to offer clear-sighted solutions. All of which is to say that a financial planner assumes more importance when times are uncertain—whether in the general economy or in your life.
Published in Money Today 3 August, 2009 issue
Your guide, a native of the parts, manages to calm the group. He surveys the area, looks around at the peaks and the sky and instructs the group to walk behind him. In a couple of hours, he leads you to the base camp. Without the guide, you would have been lost in the wilderness.
A financial planner is a bit like that guide—helping you achieve your goals through the rough and tumble of life. When times are good, any advice will work. Like they say, all boats float when the tide is high. It is when times are uncertain that you really feel the need for expert, professional advice. A planner can help ensure that you don’t get carried away by swirling rumours and doomsday predictions that abound at times like these.
Because a financial planner is not focused on investments alone, he can help you achieve your life goals through holistic financial management. In times of upheavals, plans may have to be reworked to get them back on track. It might surprise you to know that in times of massive uncertainty, I have found it better to take no action than to act in haste. That’s because financial planning is about achieving long-term goals and not about making short-term profits. In fact, when the market is going through turmoil, your financial planner might even recommend a new action to take long-term advantage of such situations.
But what about adverse situations in life, such as job loss or the death of a family member? Does that warrant a break in financial planning? No, the changed situation may warrant a changed response, not the abandonment of financial planning. A financial planner can actually add tremendous value in times of distress. Assume that one of my clients, Gopal, has lost his job. He is worried about his EMIs and bills. As his financial planner, I would try to shore up his finances. I have already ensured that there is a three-month expense liquidity fund.
Now, the task will be to liquidate assets to take his liquidity to beyond six months. Once this strategy is in place, the next course of action would be to find ways of bringing the plan back on track. For instance, Gopal will need to revisit some of his goals, and remove those that have become irrelevant or unattainable in the current situation. Appropriate course correction will also be made to keep his plan viable to suit his changed situation. If these are done, Gopal will just have to worry about finding his next job, not about the state of his finances.
During times of personal turmoil, a financial planner can be a stabilising influence. Since the planner is not emotionally involved, he is able to offer clear-sighted solutions. All of which is to say that a financial planner assumes more importance when times are uncertain—whether in the general economy or in your life.
Published in Money Today 3 August, 2009 issue
15 July, 2009
King Louis & the MF Industry
I suddenly remembered the amazing work of Disney in their immortal classic “Jungle Book”, penned by Rudyard Kipling. The immediate stimulus for this sudden recollection was, the abolition of loads in Mutual Funds. In Jungle Book, in one of the scenes, King Louis – a Chimpanzee had kidnapped Mowgli to learn, among other things, “How to make fire”. In the meantime, Bageera the Panther & Baloo the Bear come there, looking for Mowgli. In the melee which ensues, at one point accidentally the temple pillar breaks and the entire superstructure starts shaking. Seeing this, King Louis, goes and stands in place of the pillar. Baloo sees an opportunity here. He goes and tickles King Louis. King Louis is not able to stand steady now and the superstructure comes crashing down. After this, King Louis is shown, still holding, just a small stump. This image of King Louis standing in place of the pillar, flashed in my mind as the Mutual Fund industry is already in that situation. With entry loads abolished, the situation can look like the other image. King Louis standing with the stub. I do not want that to happen to MFs, a promising sector in the investment firmament.
On the face of it, the abolition of entry loads looks like a great idea… Jai Ho Investors and all that. One of the arguments is that in the developed markets ( read US ), entry loads are very low or not there at all. It is true that in US there are lots of funds where entry loads are nil. However, there are 1971 funds charging 4-6% entry load and another 143 funds charging 2-4% entry loads. I also found a fund that charges 8.5% entry load! So, that justification is not tenable. Also, entry loads for direct investments are already nil for all funds here and in that sense we are ahead of the US! Even in the US, funds pay distributor charges, in all these cases where entry loads are present. So what is the provocation here? Is simply justifying this move as an investor friendly step logical? Will investors actually be served better this way?
Clearly not. Mutual Funds are a great way for lay investors to participate in the Stock market. As it is, the penetration of Equity among Retail investors is in single digits. Now, with no entry loads, more investors are expected to participate, right?
Maybe not. Lot of handholding, counseling & advice is required, which the distributor traditionally gives. Now, as per the new scheme, he is to seek a fee from each client investing with him. Think of a distributor servicing a hundred clients. For each and every investment, he has to ask for another cheque, as a fee. Possible, yes. Practical, No. Also, the investor psyche has been to get advice for free. It has to change at some point. But suddenly changing over to an entirely new system could have the effect of wiping out a large chunk of the distributors. I’m again reminded of King Louis.
But Investors stand to benefit as they can ensure good service, right? Probably yes. But that depends on whether they find someone to give them the service. Let’s face it. If distributors are reduced to pan handling, will they stay in this industry? Probably not. They would start selling Insurance, FD, NSC etc., as that allows them to earn with dignity and not be reduced to the state of virtually begging for twenty & forty rupees from investors. So, investors will be forced to go direct to MFs. Investors will be left to their own devices to find out which type of funds to invest in, scheme to invest in, which companies etc. If they approach companies directly for advice, they will try to sell their funds. So, where does the investor get advice from? They need to start reading up on the economy, about performance of the stock markets and stocks, happenings abroad etc., to be on top of things. In other words, by saving the entry load, the investor is back to square one – fending for himself & taking on a whole lot of work on himself.
This proposal seems to be on the verge of implementation, in spite of all the problems that it can potentially unleash. So what is that the investor can do for a win-win relationship.
It may still be workable if the investor understands & follows certain basic rules-
1. First, find a good distributor who can give proper advice & is dependable. If the current distributor is good, stay with him/her. See their past track record, if you have dealt with them; if they are coming from a reference, find out about this aspect.
2. Ensure & understand why a distributor is recommending a particular scheme or sector and get proper explanations. This way, you’ll protect your investments and ensure that the distributor recommends only the correct schemes to you.
3. Find out if they have the software support ( preferably web enabled, so that you could check your portfolio anytime ) to provide you with reports, when you need. Will they advice you & assist you with back-office support while redemption, switching, STP, changes in address/ bank etc.
4. Look at creating a win-win relationship with the distributor. Do not try to squeeze him to forfeit the commissions, just because you now have the liberty to do that. The distributor may not offer good services or may not service you at all in future, if you do.
This way, everyone can enjoy Jungle Book … King Louis tracks will become enjoyable then… instead of looking like the pathetic reflection of the mayhem that could have been.
published in Moneycontrol.com on 13/7/09
On the face of it, the abolition of entry loads looks like a great idea… Jai Ho Investors and all that. One of the arguments is that in the developed markets ( read US ), entry loads are very low or not there at all. It is true that in US there are lots of funds where entry loads are nil. However, there are 1971 funds charging 4-6% entry load and another 143 funds charging 2-4% entry loads. I also found a fund that charges 8.5% entry load! So, that justification is not tenable. Also, entry loads for direct investments are already nil for all funds here and in that sense we are ahead of the US! Even in the US, funds pay distributor charges, in all these cases where entry loads are present. So what is the provocation here? Is simply justifying this move as an investor friendly step logical? Will investors actually be served better this way?
Clearly not. Mutual Funds are a great way for lay investors to participate in the Stock market. As it is, the penetration of Equity among Retail investors is in single digits. Now, with no entry loads, more investors are expected to participate, right?
Maybe not. Lot of handholding, counseling & advice is required, which the distributor traditionally gives. Now, as per the new scheme, he is to seek a fee from each client investing with him. Think of a distributor servicing a hundred clients. For each and every investment, he has to ask for another cheque, as a fee. Possible, yes. Practical, No. Also, the investor psyche has been to get advice for free. It has to change at some point. But suddenly changing over to an entirely new system could have the effect of wiping out a large chunk of the distributors. I’m again reminded of King Louis.
But Investors stand to benefit as they can ensure good service, right? Probably yes. But that depends on whether they find someone to give them the service. Let’s face it. If distributors are reduced to pan handling, will they stay in this industry? Probably not. They would start selling Insurance, FD, NSC etc., as that allows them to earn with dignity and not be reduced to the state of virtually begging for twenty & forty rupees from investors. So, investors will be forced to go direct to MFs. Investors will be left to their own devices to find out which type of funds to invest in, scheme to invest in, which companies etc. If they approach companies directly for advice, they will try to sell their funds. So, where does the investor get advice from? They need to start reading up on the economy, about performance of the stock markets and stocks, happenings abroad etc., to be on top of things. In other words, by saving the entry load, the investor is back to square one – fending for himself & taking on a whole lot of work on himself.
This proposal seems to be on the verge of implementation, in spite of all the problems that it can potentially unleash. So what is that the investor can do for a win-win relationship.
It may still be workable if the investor understands & follows certain basic rules-
1. First, find a good distributor who can give proper advice & is dependable. If the current distributor is good, stay with him/her. See their past track record, if you have dealt with them; if they are coming from a reference, find out about this aspect.
2. Ensure & understand why a distributor is recommending a particular scheme or sector and get proper explanations. This way, you’ll protect your investments and ensure that the distributor recommends only the correct schemes to you.
3. Find out if they have the software support ( preferably web enabled, so that you could check your portfolio anytime ) to provide you with reports, when you need. Will they advice you & assist you with back-office support while redemption, switching, STP, changes in address/ bank etc.
4. Look at creating a win-win relationship with the distributor. Do not try to squeeze him to forfeit the commissions, just because you now have the liberty to do that. The distributor may not offer good services or may not service you at all in future, if you do.
This way, everyone can enjoy Jungle Book … King Louis tracks will become enjoyable then… instead of looking like the pathetic reflection of the mayhem that could have been.
published in Moneycontrol.com on 13/7/09
Garibi Hatao, Common man & the Budget
Poverty alleviation programs are great on paper. What else could be done to fight this menace
I was attracted to this topic, thanks to our budget. It set me thinking on the whole “Garibi Hatao” plank of Congress party. Investment consultants would advice you against averaging, when the investment inherently is not good. They would advise that you would be throwing good money after bad. Averaging as a concept works well if one wants to eliminate the timing risk, not the asset risk. With so much rhetoric, sound & fury on poverty alleviation, why is not going away… especially, when gargantuan amounts are being thrown at it? Some success can be rightfully claimed, though. But, that is like saying that I sowed a bag of seeds & 10 saplings did sprout. It is such a waste.
So, poverty is as much a reality as is Taj Mahal! At least, Taj Mahal was temporarily made to vanish by P C Sorcar. Alas, he can’t do that for poverty, even for an instant!
Poverty is well entrenched
We have had a socialistic mindset and have been wanting to “Garibi Hatao”, for about 62 years now. But Garibi is well entrenched. There are various figures bandied about – from two thirds to 80% of the population living on less than US$2 a day.
So, where is all the money that has been spent on poverty alleviation, since independence? Government machinery is like a sieve – most of it passes through and very little is left. Rajiv Gandhi had once said that only 20paisa of every rupee spent reaches the beneficiary. He had been optimistic. It is the middle men & politicians who benefit from these and what is left is not targeted very well. So, why is the government persisting on the same formula, though it is not working? Political & personal gains, partly answers that. Then, there is the charade of keeping up the pretence of doing something for the poor. If such “Garibi Hatao” ideas work, West Bengal would be a rich state, being under communist rule for over three decades. But, it is one of the states in India where poverty is pervasive.
So, why keep doing the same things to eliminate poverty?
For one, “Garibi Hatao” connects with these people as it at least states what needs to be done. Hence, being seen as a doer of good is important than doing good.
National Rural Employment Guarantee Scheme ( NREGA ) is assuring 100 days of work and the allocation for the same is Rs.39,100 Crores. Fine. But it is essentially manual work. And this amount needs to be spent y-o-y. Will there be work y-o-y for a population that starts depending on these? Under National Food Security Act, the Government intends to give 25 kilos of rice or wheat for BPL families ( about 25% of the population ). Are these sustainable ? Will it really help them in the long run? Give a man a fish and you solve his problem for a day; teach him how to fish and you solve it for a lifetime, goes a Chinese proverb. How true.
What could be done
Education & Health - Is it not better to ensure that the schools in these areas have teachers and the health centres, doctors do come in? Education & better medical facilities are only there on paper for these people. But proper delivery will make all the difference to them. Fixing these through proper implementation & oversight could be the answer, instead of throwing more money at it. It would be a far better idea to upgrade the human capital through proper education & allow them to progress & upgrade in life, rather than putting them on life-support systems endlessly.
Training - Is it not a better idea to train them in Vocational courses? Indians are good entrepreneurs. Why not train the rural population through such courses that will empower them to start their own micro businesses ? And do this pan-India vigorously to help create jobs.
Financing & Empowerment - Government is supporting Women’s Self Help Groups, which is good. But what about encouraging micro-financing and assisting in development of this sector, instead of trying to lend more and more and incurring bad debts. Private microfinance institutions like SKS Microfinance works on a for-profit basis. Grameen Bank in Bangladesh is another such institution, that has made a huge difference to the poor. Still, these institutions are profitable and delinquencies less than 1%, inspite of servicing an “unbankable” customer base. Why not provide such institutions access to cheap credit ( currently, they are all from private sources ) so that they can expand their geographical coverage ? Government will help in poverty alleviation better if it were to support such efforts which already exists.
Borrowers do not pay back the banks as they feel there will be a loan waiver somewhere on the horizon. Past Loan waivers have created an incentive for those who do not pay. Hence, it will lead to more and more bad loans in future, which have to be waived off.
Agro-processing -Much has been said about this aspect. The current budget gives Investment linked incentive on Cold chains & ware houses for agro-processing. Since bulk of the people in India live in villages, agro processing should be given priority and incentives extended to such industries. It would be a good idea to have a agro-mission for seeding the country with such projects and assisting & guiding entrepreneurs to set up such industries.
Tax incentives to those who empower - Imparting appropriate skills to the people across the country is a mammoth task. Corporates who are present throughout the country could be roped in offer appropriate skill training in rural areas ( where their factories are located ) and can be allowed some tax rebates for doing that. That way, corporates will have an incentive to train the people, will be able to employ some of those trained & will get a tax break.
“Garibi Hatao” is a noble intention. Implementation is the key. Government could walk with others who can help in it’s mission of achieving a poverty free society by 2020. And save a lot of tax payer’s money.
I was attracted to this topic, thanks to our budget. It set me thinking on the whole “Garibi Hatao” plank of Congress party. Investment consultants would advice you against averaging, when the investment inherently is not good. They would advise that you would be throwing good money after bad. Averaging as a concept works well if one wants to eliminate the timing risk, not the asset risk. With so much rhetoric, sound & fury on poverty alleviation, why is not going away… especially, when gargantuan amounts are being thrown at it? Some success can be rightfully claimed, though. But, that is like saying that I sowed a bag of seeds & 10 saplings did sprout. It is such a waste.
So, poverty is as much a reality as is Taj Mahal! At least, Taj Mahal was temporarily made to vanish by P C Sorcar. Alas, he can’t do that for poverty, even for an instant!
Poverty is well entrenched
We have had a socialistic mindset and have been wanting to “Garibi Hatao”, for about 62 years now. But Garibi is well entrenched. There are various figures bandied about – from two thirds to 80% of the population living on less than US$2 a day.
So, where is all the money that has been spent on poverty alleviation, since independence? Government machinery is like a sieve – most of it passes through and very little is left. Rajiv Gandhi had once said that only 20paisa of every rupee spent reaches the beneficiary. He had been optimistic. It is the middle men & politicians who benefit from these and what is left is not targeted very well. So, why is the government persisting on the same formula, though it is not working? Political & personal gains, partly answers that. Then, there is the charade of keeping up the pretence of doing something for the poor. If such “Garibi Hatao” ideas work, West Bengal would be a rich state, being under communist rule for over three decades. But, it is one of the states in India where poverty is pervasive.
So, why keep doing the same things to eliminate poverty?
For one, “Garibi Hatao” connects with these people as it at least states what needs to be done. Hence, being seen as a doer of good is important than doing good.
National Rural Employment Guarantee Scheme ( NREGA ) is assuring 100 days of work and the allocation for the same is Rs.39,100 Crores. Fine. But it is essentially manual work. And this amount needs to be spent y-o-y. Will there be work y-o-y for a population that starts depending on these? Under National Food Security Act, the Government intends to give 25 kilos of rice or wheat for BPL families ( about 25% of the population ). Are these sustainable ? Will it really help them in the long run? Give a man a fish and you solve his problem for a day; teach him how to fish and you solve it for a lifetime, goes a Chinese proverb. How true.
What could be done
Education & Health - Is it not better to ensure that the schools in these areas have teachers and the health centres, doctors do come in? Education & better medical facilities are only there on paper for these people. But proper delivery will make all the difference to them. Fixing these through proper implementation & oversight could be the answer, instead of throwing more money at it. It would be a far better idea to upgrade the human capital through proper education & allow them to progress & upgrade in life, rather than putting them on life-support systems endlessly.
Training - Is it not a better idea to train them in Vocational courses? Indians are good entrepreneurs. Why not train the rural population through such courses that will empower them to start their own micro businesses ? And do this pan-India vigorously to help create jobs.
Financing & Empowerment - Government is supporting Women’s Self Help Groups, which is good. But what about encouraging micro-financing and assisting in development of this sector, instead of trying to lend more and more and incurring bad debts. Private microfinance institutions like SKS Microfinance works on a for-profit basis. Grameen Bank in Bangladesh is another such institution, that has made a huge difference to the poor. Still, these institutions are profitable and delinquencies less than 1%, inspite of servicing an “unbankable” customer base. Why not provide such institutions access to cheap credit ( currently, they are all from private sources ) so that they can expand their geographical coverage ? Government will help in poverty alleviation better if it were to support such efforts which already exists.
Borrowers do not pay back the banks as they feel there will be a loan waiver somewhere on the horizon. Past Loan waivers have created an incentive for those who do not pay. Hence, it will lead to more and more bad loans in future, which have to be waived off.
Agro-processing -Much has been said about this aspect. The current budget gives Investment linked incentive on Cold chains & ware houses for agro-processing. Since bulk of the people in India live in villages, agro processing should be given priority and incentives extended to such industries. It would be a good idea to have a agro-mission for seeding the country with such projects and assisting & guiding entrepreneurs to set up such industries.
Tax incentives to those who empower - Imparting appropriate skills to the people across the country is a mammoth task. Corporates who are present throughout the country could be roped in offer appropriate skill training in rural areas ( where their factories are located ) and can be allowed some tax rebates for doing that. That way, corporates will have an incentive to train the people, will be able to employ some of those trained & will get a tax break.
“Garibi Hatao” is a noble intention. Implementation is the key. Government could walk with others who can help in it’s mission of achieving a poverty free society by 2020. And save a lot of tax payer’s money.
07 July, 2009
Muzzling MFs puzzling
In life, some boys keep getting bullied… they are probably the meeker, weaker ones or those that don’t protest. These boys are taunted endlessly and they become introverted & reclusive. That could be the Mutual Fund Industry, which is facing it’s survival test today. It has been pushed into a corner now and is looking helplessly into a future that looks black & darker shades of grey.
How did it come to such a pass? The various constituents of the financial services industry are under different regulatory bodies like SEBI, IRDA, RBI etc. Now, different regulators have different views of furthering the industry’s cause, investors’ cause…SEBI has been looking at everything from investor’s point of view only.
One of the latest regulations for MFs, was Zero entry loads for direct investments. The logic was that those who did not want or do not avail of any advice need not be made to pay any loads. But it makes better sense in insurance products in view of the much higher commissions. And the same should apply to company FDs, Post office products PPF etc. as advice here is minimum or nonexistent.
Another logic given was that in US entry loads are less than 0.5%. Not true. There are no-load funds as well as other actively managed funds which charge low to very high entry loads. Legg Mason Partners Dividend Strategy Fund ( US$1.6 billion ) charges an entry load of 8.5%. Evergreen Omega Fund A is one of the top funds, according to Lipper, charges Front-end load of 5.75%. US Blackrock Basic Value Fund ( US$3.3 billion ) charges 5.25% entry load. There are 1971 funds which charge entry loads between 4-6% in the US… another 143 funds charge between 2-4%. Even very large funds such as US American- The Growth Fund of America ( US$131.4 billion ) charges 5.75% Entry load. The funds pay the distributors there too.
Then, now we have this proposal for abolishing entry loads altogether, in all funds. We already have a direct route, where there is no entry load. Hence, if the investor did not want any advice, he could save on the entry load. When this option already exists, abolishing entry loads by fiat, reeks of biased targeting of MFs & their distributors. What is sought to be introduced here is a new, untested architecture which SEBI feels is good for the investors and the markets. It is not possible for all distributors to become consultants overnight and be confident about charging fees.
It’s ironical, as MFs are an ideal route for retail investors to participate. Muzzling the industry and tying it up in knots, is hardly the way to facilitate broad investor participation.
One of the explanations is that they want a level playing field for all players, big & small. They say it is unfair that big operators get bigger commissions for doing the same work. It is an accepted practice in intermediation. In any industry ( across the world ), the ones that bring in more business gets a higher commission. As long as the higher commission is paid by the AMC ( entry load in most cases is 2.25% only, whether it is a big or small distributor ), why is it such an irritant? Why does a stockbroker ( also coming under SEBI ) not collect a separate fee and charge a brokerage? Wouldn’t their investors want to pay them based on the advice rendered?
The other legitimization sought for introducing this proposal is that distributors would sell products that give them maximum commissions and not the one that is best for the investors. A distributor can anyway take the money away to a ULIP instead of a MF scheme and that is already happening now, looking at the accretions to Insurance companies. Secondly, investor education is important. They need to know broadly if their investments are going to the right places, if they want to be on top. This is an area SEBI needs to work on. Thirdly, commissions offered are within the framework set by SEBI.
This proposed system will necessitate negotiating with each client about the amount he would pay as fees. This itself is a tortuous process, which will increase the work for distributors. It is not going to be easy for distributors to get their clients to part money, every time they invest. The amount involved may be low, like twenty rupees. There will be hundreds of such small transactions for which a distributor will have to now raise bills, which will again be onerous. Handling fees for SIPs, poses a different level of problem.
This proposal has been put forth with the idea of pushing distributors towards the fee model. But, what about the others? There is no level playing field. All other constituents do not come under this legislation. Hence, immediate upshot would be that ULIPs will get sold more as distributors sell all products and this legislation for MFs will only force their hand to sell ULIPs and others instead. Even NSCs or KVPs will be sold instead of MFs. So, where does this leave investors?
Investors may be elated now, thinking that they can squeeze and get more from their distributor. But any win-lose relationship will not work. Distributors will move on to other areas, if they are not wanted here. Accretion to MFs will definitely be affected. MFs will no doubt come up with some ideas on remunerating distributors, even in this constricting regime. But then, MF industry is now running with it’s hand tied behind. It’s a battle for survival.
A level playing field is required for all players in Financial services. That will be fair and will ensure that all participants have an equal opportunity to place their products before customers. If investor’s interests are the ones that SEBI seeks to protect, then this legislation is in the wrong direction.
Published in DNA Money on 2/7/2009
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