We all like a story, don’t we? Upamanyu was a sishya in a Gurukul longtime ago, in the ancient past. His Guru wanted to test him and ordered him not to eat food. Upamanyu complied. But he was still healthy, even after several days after the Guru had forebade him. On inquiry, the Guru came to know that he was now having the left over milk straight from the cow’s udders. The Guru forbade that too. He started eating leaves and grass after that. That was forbidden too. Now, Upamanyu did not know what to do. Extreme hunger drove him to imbibe the milk of the Milkweed plant ( Calotropis ); but the milk being poisonous, Upamanyu become unconscious. The Guru comes to know of it and revives him, with his grace.
This story has a happy ending; but what about the MF industry. SEBI has been tying up the industry in knots by bringing in regulation that protects “investor interests”. First, they disallowed the amortization of marketing expenses for NFOs. Then, direct route was created. After that, no-entry load was brought in compulsorily from August 1, 2009 which directly slashed down the distributor margin. Latest in the salvo is the circular that MFs cannot dip into Exit load / Entry load accounts for paying upfront to the distributors. All these have been hailed all around as investor protection.
Are all these moves in investor’s interest?
It started that way. Even Upamanyu did not mind milk straight from the cow’s udders. It later became stifling. Like Upamanyu, the distributors were finding it difficult to survive… and many moved to other areas like Insurance, Real Estate, FDs & other Debt products… Investors were suddenly finding a vacuum as no one was there to service them.
SEBI abolished the entry load to distributors saying that many were pocketing the charge and were not advising their clients. 2% was what the distributors were receiving. This was to be seen as just a transactional fee. A distributor used to receive Rs.200/- if he puts through an investment of Rs.10,000/-. This amount is essentially to cover incidental expenses he incurs towards his efforts. If he is advising his clients, the distributor would charge over and above this. There were & are people who used to charge an Advisory fee ( over the distributor margins ) for proper advisory. The fallacy was that the distribution charge was seen as an advisory fee.
Between a rock and a hard place…
The Mutual Fund industry was a sunrise industry. Now, the sun seems to be going off with a pop.
As per estimates, only the top 10 MFs or so will be profitable as their margins shrink. They are finding that the distributors are no longer there to promote their products. They are now selling anything but Mutual Fund schemes. Mutual AUMs are not growing - Equity AUM has actually degrown from August 2009 to March 2010. The latest move to curb any payouts except from the expenses, has got the MF industry pinned against a wall.
Investor friendliness does not just mean low charges
An obsessive focus on charges is a fallacy. Most investors that I talked to were happy to pay a charge for services rendered. In fact, many of them were curious to know why charges have been removed and if it has been why one should collect the same charge as a separate cheque. They wanted to know why this convoluted method is adopted instead of a simple mechanism which existed, before 1st August 2009. A client would want a complete bouquet of services and is willing to pay for it. SEBI may then want to know – where is the problem?
The problem…
The problem with investors is that, though they understand that it is the same charge that they need to pay, it hurts when you have to write out another cheque. This is where the distributors have got hit. It becomes a fertile ground for haggling on fees – some do not want to pay anything at all, threatening to go direct if they do not want the business and others would want to pay a small fraction of the charge. The investors at large are not mature enough to write out a cheque.
And most distributors, themselves are not mature enough to charge a fee for services rendered. This sudden chill has thrown them off-gear and many have simply given it up. Why would they want to promote MFs when even debt products like PPF, NSCs/ FDs etc give them about 1%. Insurance product commissions are far juicier.
Adjustment time was sorely needed…
Suddenly foisting the no-entry load regime, without any time to adjust, has created problems for distributors. Had the distributors been given a couple of years time to prepare for the impending fee-based regime ( like in UK ), it would have been far easier. SEBI should infact have formulated a comprehensive training program for the distributors, upgraded them and then brought in no-load regime. Washing their hands off the industry & their distributors was a irresponsible move. Now, the distributors have moved on as they do not feel nice to pan handle for their services.
The icing on the cake
The Finance Minister has supported a no-load stance and which may-be construed as a pat on the back for SEBI. But, that is a political statement as well. Doing good is one thing; but being seen as doing good is far easier. Primary food prices have more than doubled in over a year; Fiscal deficit – which is a result of profligacy of government and it’s machinery, is at a dangerous level. Subsidies & benefits of the government run into lakhs of crores of rupees… In spite of all this, there is rampant poverty & misery. Naxalite movement itself is due to poverty & alienation. Such burning problems remain unaddressed. Yet, he supports no-loads as if that is the primary cause of all misery! No one apparently is interested in coming up with a holistic solution that takes along all stakeholders – for that is far more difficult and needs a lot of doing.
MFs have been painted as if they are greedy, avaricious dons who send their henchmen, their distributors, to deprive the citizens of the money they kept aside to buy milk for their infants! It’s really unfortunate as MF is a low-risk route for a lay investor to participate in the India Growth story. Direct investment is far riskier and is not for everyone. Also, MF money stays invested for a longer time as opposed to direct equity route, where day trading and short term trading is rampant. Are MFs the dirty guys of the Financial Services space. Are they the ones who are profiteering from the investors at large? Are other players in Financial Services space lily white?
What about the Banks?
They are the fatcats of the industry. They have access to CASA ( Current Accounts/ Savings Accounts ) which is virtually free money and they lend the money for double digit interest. Is this in the interest of the account holders? Potentially bank users are much larger than MF & insurance customers put together. Why is there no regulation there to eliminate the rather-handsome-spreads, which actually belong to the account holders?
Inspite of the huge spreads, they charge for everything from a statement, to a cheque book, account statement, closing an account etc. See the dichotomy… An MF does not charge irrespective of how many times one asks for a statement… whereas a bank, which is fattening with investor’s money, charges. Saw the hypocrisy in this ?
A bank sells everything from MF schemes, insurance, FDs etc. to their clients. The worst kind of misselling happens in banks. I was witness to this and have heard volumes from my clients. Yet misselling is only associated with the regular distributor.
The Real Estate ripoff…
Residential property is a necessity. And property prices are today nudging a Crore for an apartment. But, here is where they get the rawest deal. For a decision that a person probably takes once in a lifetime, he gets surprisingly little information. And then the ripoff is unveiled in front of the buyer in the form of the Saleable area for which he needs to pay for. These days one pays about 70% more than the carpet area. In a recent deal that a relative of mine entered into, the carpet area was 885 sq ft and the saleable area is 1550. This is wayside robbery. Every single citizen who buys a home is affected by this scam. And yet no one talks about this. Press does not write about this loot. The government is a mere mute spectator.
Mutual funds are hardly the problem to an average investor. Bringing more and more regulations and strangling the industry, is hardly in their interest. They have been made the whipping boys. There are worthier problems to tackle for the common citizen. In financial services a level playing field is a crying need. One regulator for the entire financial services will go a longway in solving the problems. Also, regulators need to be in touch with the ground realities and need to consult all stakeholders before taking such far reaching decisions. Else, unlike Upamanyu’s story, MF industry will not have a happy ending.
A truncated version was published in Money Today June 2010
11 June, 2010
Games insurance agents play
“This is the third call I’m getting today from an insurance company”, Shashank fretted to his friend Sudhir. Sudhir looked up from his work and just said, ”What’s new? I got four calls today, myself”.
Not surprising… for many it is a new calling ( pun unintended ). Insurance has become refuge of many a MF distributor, as that business has folded up since August 2009. The calls must have gone up since. The insurance agents have quite a few tricks up their sleeve. Not everyone is bad and uses these unsavory tricks. But, you better know them. Here they are –
1) Old wine in a new bottle… The agent is constantly on the lookout for business. If organic growth becomes a problem, exisiting patrons come in handy! That is when you get calls to surrender the three year old ULIP to put it in, what else… another ULIP or ULIP based pension plan. Only that, the insurance product charges are front loaded and you would have just completed paying most of the charges in the first product… and now you could start off with the second one.
2) Government Guarantee! This is a ploy used by LIC agents. They keep talking about sovereign guarantee. Guarantee in a traditional product is only for the Sum Assured. Every insurance company ( including private players ) guarantees the payout of the Sum Assured. It is only the bonus payout that is not guaranteed. For ULIPs, this anyway does not apply. So, this is a total con game.
3) New products that no one has heard of - Heard of Jeevan Amrit or Jeevan Sadhana? These are not LIC plans. They are conjured-up plans by putting together a few insurance products of LIC . Also, interestingly, the payouts which come in at various points are assumed to be invested in NSC, PPF, RBI Bonds etc. Then they calculate the returns and tell you that their Jeeven Amrit or Sadhana gives 8 -10%. Don’t be misled by this. The higher returns are because of these other products, not insurance. I have still not understood why they should show reinvestment in other products, when they are talking about insurance. And, how someone falls for these.
4) 6 & 10% returns in a traditional product - Recently, I found that a client of mine has gone for Jeeven Saral, a traditional policy of LIC. However, the agent had given an illustration with 6% & 10% returns! This was to be used for ULIP policies, where this is a possibility. In traditional policies, 10% return is virtually impossible. You would readily understand, why they use it then.
5) Insurance on the Child – There are products for the benefit of the child, where the child is the insured. It’s absurd, as the child is a dependant and insurance on the child is of no practical use. Yet, these kind of products are sold and are bought by emotionally charged parents, ending up with a bloomer.
Sudhir clutched his head when he came to know of these. He just bought a child insurance on his daughter and he remembers buying a Jeevan Aradhana or some such product, which is one of those “intelligently” packaged ones.
For those buying financial products, a basic level of financial literacy would help. Studying and doing some basic research, is a good idea too. If one is not sure, get an unbiased opinion from someone who knows about insurance. Else, it becomes a costly mistake, which lingers around for years.
Published in Moneycontrol.com 31/5/2010
Not surprising… for many it is a new calling ( pun unintended ). Insurance has become refuge of many a MF distributor, as that business has folded up since August 2009. The calls must have gone up since. The insurance agents have quite a few tricks up their sleeve. Not everyone is bad and uses these unsavory tricks. But, you better know them. Here they are –
1) Old wine in a new bottle… The agent is constantly on the lookout for business. If organic growth becomes a problem, exisiting patrons come in handy! That is when you get calls to surrender the three year old ULIP to put it in, what else… another ULIP or ULIP based pension plan. Only that, the insurance product charges are front loaded and you would have just completed paying most of the charges in the first product… and now you could start off with the second one.
2) Government Guarantee! This is a ploy used by LIC agents. They keep talking about sovereign guarantee. Guarantee in a traditional product is only for the Sum Assured. Every insurance company ( including private players ) guarantees the payout of the Sum Assured. It is only the bonus payout that is not guaranteed. For ULIPs, this anyway does not apply. So, this is a total con game.
3) New products that no one has heard of - Heard of Jeevan Amrit or Jeevan Sadhana? These are not LIC plans. They are conjured-up plans by putting together a few insurance products of LIC . Also, interestingly, the payouts which come in at various points are assumed to be invested in NSC, PPF, RBI Bonds etc. Then they calculate the returns and tell you that their Jeeven Amrit or Sadhana gives 8 -10%. Don’t be misled by this. The higher returns are because of these other products, not insurance. I have still not understood why they should show reinvestment in other products, when they are talking about insurance. And, how someone falls for these.
4) 6 & 10% returns in a traditional product - Recently, I found that a client of mine has gone for Jeeven Saral, a traditional policy of LIC. However, the agent had given an illustration with 6% & 10% returns! This was to be used for ULIP policies, where this is a possibility. In traditional policies, 10% return is virtually impossible. You would readily understand, why they use it then.
5) Insurance on the Child – There are products for the benefit of the child, where the child is the insured. It’s absurd, as the child is a dependant and insurance on the child is of no practical use. Yet, these kind of products are sold and are bought by emotionally charged parents, ending up with a bloomer.
Sudhir clutched his head when he came to know of these. He just bought a child insurance on his daughter and he remembers buying a Jeevan Aradhana or some such product, which is one of those “intelligently” packaged ones.
For those buying financial products, a basic level of financial literacy would help. Studying and doing some basic research, is a good idea too. If one is not sure, get an unbiased opinion from someone who knows about insurance. Else, it becomes a costly mistake, which lingers around for years.
Published in Moneycontrol.com 31/5/2010
Financial Planning
“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
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
PSU Funds - Are they good to invest?
Life has to be exciting. If it is not, you have to make it exciting. Else, the humdrum of life sucks you in and has you in it’s somber grip. Today, tv-serialwali-sarees are all the rage… straight hair is in ( I hear now that it is on it’s way out ! ), having a personal trainer in the gym, going on foreign holidays are the cool things to do.
Even in the somewhat boring world of finance, fads do have their sway. Suddenly one sees a rash of IPOs and the accompanying frenzy and another moment there is some capital protection fund that is keeping people in a tizzy. MFs have been cranking out amazing acronyms like SMILE, TIGER, FORCE etc. to endear themselves to investors. Then came themes. Infrastructure & Lifestyle funds were a rage about three years ago… Midcap Funds become red hot after that. Then FMPs and other debt funds gained currency. Now the flavor of the season in MFs seems to be PSU funds.
What is the logic of a PSU Fund?
Government owned companies are being disinvested now and there seems to be an interest in participating in it. Investing in government owned companies by itself does not look like a theme. The spin given is that these companies are storehouses of tremendous value and when it is unlocked, you will be frightfully rich. But the companies can be from diverse fields, making it a diversified fund in any case. But, the majority of the companies in the fund will be government owned. So, this a ownership-basis segmented fund.
Is it a good idea then?
Any company needs to be selected on merits. All government oriented companies are not pure gems… there are gems and there are coal lumps… bracketing everything under the PSU umbrella and investing in them is obviously not a great idea. The fund manager will have to sift within this pool and select the good ones from the pool. Owning such a fund in noway gives one a better scheme that what is available today.
Government companies are a varied lot. There are good, performing ones like BHEL, NTPC etc. and there are bad ones ( many performing too poorly to even merit a mention ). The real bad ones cannot be divested, in any case. There are others that will be a victim to government ownership and policies… like BPCL, HPCL and other oil companies, which are bleeding due to the onerous burden imposed by it’s owner – the Government.
Government companies can expect some favourable treatment in the policy space which molly-coddles them, like preference to them in government contracts, protection from competition etc. But there are several negatives in government ownership… recruitment policies, compensation policies , speed of decision making, indifferent client servicing and the image they consequently have, bureaucratic processes are all typically their Achilles heel. There may be some who have overcome these… but a majority have still got to surmount these and many other obstacles.
On the whole, government ownership per se, is not a positive for a business. It is a good idea to stay away from these funds. MFs are latching on to the latest fads. You don’t have to. It’ your money after all!
Published in Moneycontrol.com on 7/06/2010
Even in the somewhat boring world of finance, fads do have their sway. Suddenly one sees a rash of IPOs and the accompanying frenzy and another moment there is some capital protection fund that is keeping people in a tizzy. MFs have been cranking out amazing acronyms like SMILE, TIGER, FORCE etc. to endear themselves to investors. Then came themes. Infrastructure & Lifestyle funds were a rage about three years ago… Midcap Funds become red hot after that. Then FMPs and other debt funds gained currency. Now the flavor of the season in MFs seems to be PSU funds.
What is the logic of a PSU Fund?
Government owned companies are being disinvested now and there seems to be an interest in participating in it. Investing in government owned companies by itself does not look like a theme. The spin given is that these companies are storehouses of tremendous value and when it is unlocked, you will be frightfully rich. But the companies can be from diverse fields, making it a diversified fund in any case. But, the majority of the companies in the fund will be government owned. So, this a ownership-basis segmented fund.
Is it a good idea then?
Any company needs to be selected on merits. All government oriented companies are not pure gems… there are gems and there are coal lumps… bracketing everything under the PSU umbrella and investing in them is obviously not a great idea. The fund manager will have to sift within this pool and select the good ones from the pool. Owning such a fund in noway gives one a better scheme that what is available today.
Government companies are a varied lot. There are good, performing ones like BHEL, NTPC etc. and there are bad ones ( many performing too poorly to even merit a mention ). The real bad ones cannot be divested, in any case. There are others that will be a victim to government ownership and policies… like BPCL, HPCL and other oil companies, which are bleeding due to the onerous burden imposed by it’s owner – the Government.
Government companies can expect some favourable treatment in the policy space which molly-coddles them, like preference to them in government contracts, protection from competition etc. But there are several negatives in government ownership… recruitment policies, compensation policies , speed of decision making, indifferent client servicing and the image they consequently have, bureaucratic processes are all typically their Achilles heel. There may be some who have overcome these… but a majority have still got to surmount these and many other obstacles.
On the whole, government ownership per se, is not a positive for a business. It is a good idea to stay away from these funds. MFs are latching on to the latest fads. You don’t have to. It’ your money after all!
Published in Moneycontrol.com on 7/06/2010
Get the low down on Guaranteed NAV products
There is a frenzy in the market today regarding a category called “Highest NAV Guaranteed” product. This has a nice ring about it… but does it make sense to go in for it?
What the investor thinks?
It gives the impression that one will participate in the equity market growth. That ofcourse is not the case. What a company guarantees is the highest value of it’s own NAV. For guaranteeing the NAV they will have to invest in debt products whose maturity value is equal to the guaranteed value.
How these kind of products work ?
These products use Constant Proportion Portfolio Insurance concept. Here, the portfolio is managed and allocated dynamically between debt and equity in a way that the highest NAV attained is locked by moving a portion of Equity assets to debt, whose maturity value will be equal to highest NAV attained till then. Over a period of time, Equity assets are bound to move to debt. The reverse however may not be possible as when equity markets fall, it may not be possible to move debt funds to Equity as they may be locked in to assure highest NAV.
So, what is good about the product?
• Firstly, it offers capital guarantee from day 1. You are assured that you will get your principal back.
• Secondly, you are assured of whatever growth happens in it’s portfolio, in terms of NAV. For risk averse investors, it is a major source of comfort as they know that the principal is safe and any growth in NAV is locked in ( something like the concept of reversionary bonus in traditional policies ).
• Thirdly, one is taking advantage of Equity exposure in the beginning and overtime it is shifting to debt – which is inline with lifestage requirements, to an extent. But here the change will be much faster to debt.
• Fourthly, it can be treated as a debt oriented product which will give some returns with an equity kicker in the earlier years. It is like a hybrid product like MIP, with the difference that the equity portion comes down over time.
What are the downsides?
• In one word – Charges! Let us take the case of LIC Wealth Plus. For a regular premium payment between Rs.20,000/- to Rs.2 Lakhs, the Premium Allocation charges is 12.5%, in the first year and 2.5%p.a thereafter. Policy Administration Charges is Rs.60/-pm in the first year, Rs.25/- pm from the second year onwards, escalating at 3% pa. Fund Management Charge is 1%pa and 0.35% pa is the Guarantee charge. The charges in most products will be on similar lines. This does not look that cheap for a fund that will eventually be a debt fund in the later years.
• There is nothing stopping the fund manager from having a substantial debt component even in the earlier years, as the mandate in such products is that they can hold 0- 100% in Debt or equities.
• Those thinking that they will participate in the upsides of the Equity market will be disappointed as this category of product assures highest NAV of the fund itself.
• This then turns out to be a product that has a fairly long maturity – at least 3 years or more. For a return that is expected to be somewhat higher than a debt product, locking in for long periods makes no sense.
• Guarantee of highest NAV is applicable only at maturity, not otherwise. This clause immediately makes the product less attractive as it is a long duration product. Any withdrawals in between for any exigencies, beats the whole purpose of investing in such a product.
You have heard it all. You need to decide if it makes sense to invest in such a product.
Published in Moneycontrol.com
What the investor thinks?
It gives the impression that one will participate in the equity market growth. That ofcourse is not the case. What a company guarantees is the highest value of it’s own NAV. For guaranteeing the NAV they will have to invest in debt products whose maturity value is equal to the guaranteed value.
How these kind of products work ?
These products use Constant Proportion Portfolio Insurance concept. Here, the portfolio is managed and allocated dynamically between debt and equity in a way that the highest NAV attained is locked by moving a portion of Equity assets to debt, whose maturity value will be equal to highest NAV attained till then. Over a period of time, Equity assets are bound to move to debt. The reverse however may not be possible as when equity markets fall, it may not be possible to move debt funds to Equity as they may be locked in to assure highest NAV.
So, what is good about the product?
• Firstly, it offers capital guarantee from day 1. You are assured that you will get your principal back.
• Secondly, you are assured of whatever growth happens in it’s portfolio, in terms of NAV. For risk averse investors, it is a major source of comfort as they know that the principal is safe and any growth in NAV is locked in ( something like the concept of reversionary bonus in traditional policies ).
• Thirdly, one is taking advantage of Equity exposure in the beginning and overtime it is shifting to debt – which is inline with lifestage requirements, to an extent. But here the change will be much faster to debt.
• Fourthly, it can be treated as a debt oriented product which will give some returns with an equity kicker in the earlier years. It is like a hybrid product like MIP, with the difference that the equity portion comes down over time.
What are the downsides?
• In one word – Charges! Let us take the case of LIC Wealth Plus. For a regular premium payment between Rs.20,000/- to Rs.2 Lakhs, the Premium Allocation charges is 12.5%, in the first year and 2.5%p.a thereafter. Policy Administration Charges is Rs.60/-pm in the first year, Rs.25/- pm from the second year onwards, escalating at 3% pa. Fund Management Charge is 1%pa and 0.35% pa is the Guarantee charge. The charges in most products will be on similar lines. This does not look that cheap for a fund that will eventually be a debt fund in the later years.
• There is nothing stopping the fund manager from having a substantial debt component even in the earlier years, as the mandate in such products is that they can hold 0- 100% in Debt or equities.
• Those thinking that they will participate in the upsides of the Equity market will be disappointed as this category of product assures highest NAV of the fund itself.
• This then turns out to be a product that has a fairly long maturity – at least 3 years or more. For a return that is expected to be somewhat higher than a debt product, locking in for long periods makes no sense.
• Guarantee of highest NAV is applicable only at maturity, not otherwise. This clause immediately makes the product less attractive as it is a long duration product. Any withdrawals in between for any exigencies, beats the whole purpose of investing in such a product.
You have heard it all. You need to decide if it makes sense to invest in such a product.
Published in Moneycontrol.com
Investors - Served or harassed ?
“The more they change, the more they remain the same”, remarked a client of mine, who was irritated that his sell transaction was rejected because it was done online through a broker. I was able to understand his irritation. This client had done the transaction through HSBC. He was not aware that it was done online. When he wanted to cash out and we sent a manual transaction slip, it was rejected. The reason given was that the AMC has no way of verifying the genuineness of the transaction, as they do not have signatures or other details with them. So much for investor friendliness!
There are several issues which are faced by investors. Let us look at them –
Online trades cannot be done offline, ever! This is amazing. A client comes with the idea of investing in Mutual Fund schemes. He is not particularly taken up by online or offline. When he wants to do a transaction, he has to come running to the online broker. Reminds me of a travelogue… In Kashmir a tourist goes to a garment shop. The salesman asks the lady for her ring and passes a fine muslin cloth through it, much to her amazement… and then tosses it gently somewhat beyond her reach. Now, she is a captive. Whenever she tries to reach across, he unfurls a new silk or brocade. Even if she is not interested, she has to give him time. Something like what this client felt… like being chained to his previous online distributor. And what happens if the online portal shuts shop? Why does the AMC not take the information collected by the online broker to ensure smooth transaction processing, in whichever mode.
If you want to change the bank details… In case an investor is cashing out and want the cheque to come in with a different bank detail than what was updated, there could be issues if you are dealing with HDFC AMC & Reliance MF. In all other AMCs, they just want a copy of the cancelled cheque and all pertinent details filled out in the transaction slip itself. HDFC AMC has a separate form. They want the previous account original cheque leaf with name of the holder printed or a passbook certified by the bank manager or a letter from the bank. They want the same compliance for the new account as well. Asking for a cheque leaf of a new account is fine. How do you expect a client who has invested several years back and may have closed the account, to have original cheque leaves or have passbooks or expect a manager to issue a letter, several years after an account is closed? What if the client does not have a cheque book or a passbook? He needs to run to his bank and beg them to verify the records and issue him a letter? When we called up they talked about some fraud that happened due to which they have introduced this for “Investor Protection”! It looked like it was for their protection.
NOC required for change of broker A client is investing his money. If he is not served properly ( or for any other reason ) if he wants to change the broker, most AMCs are asking for a No Objection Certificate (NOC ) from the previous broker! A letter from the client himself stating that he wants to go to a new broker, is not good enough! Imagine… client signature is good for investment, redemption, switch … everything, but he cannot switch his broker! Who is being served here?
Cheque to be issued by the investor only… Not even the spouse can issue the cheque for investment in an MF scheme. This we found with Deutsche MF. Insurance companies are accepting spouses cheque & even cash upto a certain limit ( usually Rs.50,000/- ), for long-term contracts, spanning decades. And yet for just an investment, only the investor’s signature is accepted! Thankfully, it is only one fund house ( we have found ) that insists on this.
Individual Mutual Funds are like kingdoms and they seem to have their own set of rules. If investors are not aware of the peculiar quirks of various fund houses, he will keep filling forms & letters and running to banks & doing other stuff, for several moons. SEBI keeps talking about investor protection. Just removing the entry loads and creating a direct route is not protection. The mistake is, it is always thinking about the charges. Compliance in MFs is as it is, pretty stringent for the investor – PAN Card, KYC, only cheque transactions etc. Investors mostly do not have problems with the charges, if things happen smoothly.
Why does SEBI not talk of ensuring a smooth, investor friendly process which all AMCs have to comply? Why not have a standard form, transaction slips & a standard code which all AMCs need to follow? Investors are overwhelmed by the blizzard of paper ( in the name of compliance ) that comes to them & are underwhelmed when it comes to hassle free services. SEBI needs to act on these and others, if it wants to ensure good quality of services to investors.
There are several issues which are faced by investors. Let us look at them –
Online trades cannot be done offline, ever! This is amazing. A client comes with the idea of investing in Mutual Fund schemes. He is not particularly taken up by online or offline. When he wants to do a transaction, he has to come running to the online broker. Reminds me of a travelogue… In Kashmir a tourist goes to a garment shop. The salesman asks the lady for her ring and passes a fine muslin cloth through it, much to her amazement… and then tosses it gently somewhat beyond her reach. Now, she is a captive. Whenever she tries to reach across, he unfurls a new silk or brocade. Even if she is not interested, she has to give him time. Something like what this client felt… like being chained to his previous online distributor. And what happens if the online portal shuts shop? Why does the AMC not take the information collected by the online broker to ensure smooth transaction processing, in whichever mode.
If you want to change the bank details… In case an investor is cashing out and want the cheque to come in with a different bank detail than what was updated, there could be issues if you are dealing with HDFC AMC & Reliance MF. In all other AMCs, they just want a copy of the cancelled cheque and all pertinent details filled out in the transaction slip itself. HDFC AMC has a separate form. They want the previous account original cheque leaf with name of the holder printed or a passbook certified by the bank manager or a letter from the bank. They want the same compliance for the new account as well. Asking for a cheque leaf of a new account is fine. How do you expect a client who has invested several years back and may have closed the account, to have original cheque leaves or have passbooks or expect a manager to issue a letter, several years after an account is closed? What if the client does not have a cheque book or a passbook? He needs to run to his bank and beg them to verify the records and issue him a letter? When we called up they talked about some fraud that happened due to which they have introduced this for “Investor Protection”! It looked like it was for their protection.
NOC required for change of broker A client is investing his money. If he is not served properly ( or for any other reason ) if he wants to change the broker, most AMCs are asking for a No Objection Certificate (NOC ) from the previous broker! A letter from the client himself stating that he wants to go to a new broker, is not good enough! Imagine… client signature is good for investment, redemption, switch … everything, but he cannot switch his broker! Who is being served here?
Cheque to be issued by the investor only… Not even the spouse can issue the cheque for investment in an MF scheme. This we found with Deutsche MF. Insurance companies are accepting spouses cheque & even cash upto a certain limit ( usually Rs.50,000/- ), for long-term contracts, spanning decades. And yet for just an investment, only the investor’s signature is accepted! Thankfully, it is only one fund house ( we have found ) that insists on this.
Individual Mutual Funds are like kingdoms and they seem to have their own set of rules. If investors are not aware of the peculiar quirks of various fund houses, he will keep filling forms & letters and running to banks & doing other stuff, for several moons. SEBI keeps talking about investor protection. Just removing the entry loads and creating a direct route is not protection. The mistake is, it is always thinking about the charges. Compliance in MFs is as it is, pretty stringent for the investor – PAN Card, KYC, only cheque transactions etc. Investors mostly do not have problems with the charges, if things happen smoothly.
Why does SEBI not talk of ensuring a smooth, investor friendly process which all AMCs have to comply? Why not have a standard form, transaction slips & a standard code which all AMCs need to follow? Investors are overwhelmed by the blizzard of paper ( in the name of compliance ) that comes to them & are underwhelmed when it comes to hassle free services. SEBI needs to act on these and others, if it wants to ensure good quality of services to investors.
GOD and Finance!
“I saw God. I saw God”, exploded Satish, barging into my office. I thought I’ll have some uninterrupted time between 8 to 10 in the morning as I wanted to wade through and get over a lot of pending work. And now, this loony is talking about seeing God. “Do you mean Goa… or GOD?”, I wanted to know and be absolutely sure that I heard it right. “ I said GOD & I mean GOD… You don’t believe me, do you?”, Satish asked me in a pained voice. I wanted to humour him… nothing like starting a morning with a smile!
“So, when did you see GOD?”, I asked, with as much an honest face as I could contrive in 10 seconds. That seemed to work. “I saw God in the wee hours of the morning today. I thought it was a dream. But no, he was there and looked exactly like in my house Calendar”, Satish said. “He was so nice, you know. I offered him tea, as it was pretty cold. Then, we talked for sometime”, he said.
“You offered tea to God? Fantastic. What did you talk about?”, I pushed the thing along. It was getting interesting, by the minute. “So much pain and mayhem has been caused in the last 2 years. I wanted to know his perspective”, said Satish earnestly. Perspective from God, I was thinking to myself… Isn’t he going bonkers? I had to let him clear the doubts.
“I have provided for everyone in the World. Greed in Human beings is the root cause of all the problems. Why does a man want to amass wealth, beyond what he requires? Beyond a point, wealth becomes poison. The excesses committed due to greed is the cause for misery, inequity. I cannot intervene in everything. When man was given free will, he should also be responsible for outcomes. After all, you cannot cry over spilt milk. You should have been careful”, God had said.
“ That means God will not intervene in matters of the World?”, I wanted to know. “I had asked him that and He had said that He would take care only if a person had completely surrendered to him. But since most act out of free-will they would have to be prepared for the consequences of their actions”, Satish said.
“I thought humans would act rationally, intelligently & with compassion. I had created you all in my image and took it for granted that these qualities will enable the human race to live contentedly, in harmony with nature. Alas, I have been wrong. Greed is creating situations I never thought might happen… like the sub-prime crisis which was caused by indiscriminate loans given to people on basis of their home equity… the structured products that were sold as investment products and people buying them without understanding what was the underlying. This is really amazing. I always thought that you people will use the superior intellect you are all endowed with and not keep it in the freezer…”, God had trailed off.
Satish was getting impatient. “But God, what has happened, has happened. What about the future? Will it improve and come back to pre-crisis levels this year?”, he had asked.
“The fundamental problems remain. People have been living beyond their means. Every American, on an average, has a loan of over $1000 on his head. Over 70% of US economy is accounted for by consumer spending, Reckless spending has created unheard of debt levels now and it is escalating. Are they cleaning up? Nope. They are goading their people to go and buy more! But is that not what caused the problem? A chimp has enough brains to understand this. Yet, the US government is fuelling the problem, than solving it. They have brought the interest rates so low that people would be tempted to borrow. But very low interest rates are creating what is called the dollar-carry trade i.e borrow in dollars at almost no cost and invest in other parts of the world, creating bubbles elsewhere in the world. With such recklessness, it’s anybody’s guess when this situation will reconcile itself”, God said.
“But God, you are supposed to know”, Satish almost pleaded. “When you are given freewill, you are responsible for your actions. There is actually nothing good or bad. It is all your perception. This crisis could be used to clean up the system and lay the foundation for a better tomorrow. If it takes a couple of years, does it really matter?”, God had said.
“Does that mean that it’s going to take time for the recovery?”, Satish again queried, clearly worried. “Why do you worry so much? You people need to introspect. Greed creates problems. Greed emanates primarily in three areas – Money, Women & Territory. All upheavals in history can be traced to these. Can you people not learn from your mistakes? You need to see Avatar, the movie, where humans try to colonise an alien land, for resources. They are prepared to destroy & decimate the natives – all for greed of money. You people need to learn…”, God said impatiently.
“God, you have seen Avatar”, Satish had wanted to know. “ My child, I don’t need to see it. I thought, you knew I’m omnipresent & and a living witness of all that has happened all through history & am present and know all that would happen… you are asking me if I have seen a mere movie?! I mentioned it to just point out how greed is at the root of all misery. Huge disparities are the result of greed. Environmental degradation is the result of greed. Your trade imbalances, territorial disputes are all fuelled by greed… The thing to ask is not when the situation will get normal; but how to remove the fundamental problems dogging the system. For starters, the interest rates should be allowed to revert to appropriate levels, the idea of thrift needs to be inculcated, the swagger & the thoughtless “we-will-bomb-you-back-to-the-stone-age” threats need to abate & a more compassionate & broad world-view needs to emerge. That is what I’d want to see”, God had concluded.
It was 10.30 AM. The morning had certainly started in the most interesting way. “Satish, but God had not finally answered your question of what this year will be like”, I asked. Satish said, “God had told him that he obviously knows what will happen. But by exercising free-will humans could change the trajectory of the future events… Also, he did not want to reveal and smother enthusiasm or kindle unwanted expectation. He just wanted us to live in the way we were supposed to be – enlightened, compassionate, loving beings. God was particularly happy about the ending in Avatar. They fought back the aggressors and restored order. The question he left behind was, can we clear up the mess & restore order”, he finished.
He got up, bade me goodbye and moved on. Now the lingering question in my mind is – Can we?
Unpublished post - specially for the blog
“So, when did you see GOD?”, I asked, with as much an honest face as I could contrive in 10 seconds. That seemed to work. “I saw God in the wee hours of the morning today. I thought it was a dream. But no, he was there and looked exactly like in my house Calendar”, Satish said. “He was so nice, you know. I offered him tea, as it was pretty cold. Then, we talked for sometime”, he said.
“You offered tea to God? Fantastic. What did you talk about?”, I pushed the thing along. It was getting interesting, by the minute. “So much pain and mayhem has been caused in the last 2 years. I wanted to know his perspective”, said Satish earnestly. Perspective from God, I was thinking to myself… Isn’t he going bonkers? I had to let him clear the doubts.
“I have provided for everyone in the World. Greed in Human beings is the root cause of all the problems. Why does a man want to amass wealth, beyond what he requires? Beyond a point, wealth becomes poison. The excesses committed due to greed is the cause for misery, inequity. I cannot intervene in everything. When man was given free will, he should also be responsible for outcomes. After all, you cannot cry over spilt milk. You should have been careful”, God had said.
“ That means God will not intervene in matters of the World?”, I wanted to know. “I had asked him that and He had said that He would take care only if a person had completely surrendered to him. But since most act out of free-will they would have to be prepared for the consequences of their actions”, Satish said.
“I thought humans would act rationally, intelligently & with compassion. I had created you all in my image and took it for granted that these qualities will enable the human race to live contentedly, in harmony with nature. Alas, I have been wrong. Greed is creating situations I never thought might happen… like the sub-prime crisis which was caused by indiscriminate loans given to people on basis of their home equity… the structured products that were sold as investment products and people buying them without understanding what was the underlying. This is really amazing. I always thought that you people will use the superior intellect you are all endowed with and not keep it in the freezer…”, God had trailed off.
Satish was getting impatient. “But God, what has happened, has happened. What about the future? Will it improve and come back to pre-crisis levels this year?”, he had asked.
“The fundamental problems remain. People have been living beyond their means. Every American, on an average, has a loan of over $1000 on his head. Over 70% of US economy is accounted for by consumer spending, Reckless spending has created unheard of debt levels now and it is escalating. Are they cleaning up? Nope. They are goading their people to go and buy more! But is that not what caused the problem? A chimp has enough brains to understand this. Yet, the US government is fuelling the problem, than solving it. They have brought the interest rates so low that people would be tempted to borrow. But very low interest rates are creating what is called the dollar-carry trade i.e borrow in dollars at almost no cost and invest in other parts of the world, creating bubbles elsewhere in the world. With such recklessness, it’s anybody’s guess when this situation will reconcile itself”, God said.
“But God, you are supposed to know”, Satish almost pleaded. “When you are given freewill, you are responsible for your actions. There is actually nothing good or bad. It is all your perception. This crisis could be used to clean up the system and lay the foundation for a better tomorrow. If it takes a couple of years, does it really matter?”, God had said.
“Does that mean that it’s going to take time for the recovery?”, Satish again queried, clearly worried. “Why do you worry so much? You people need to introspect. Greed creates problems. Greed emanates primarily in three areas – Money, Women & Territory. All upheavals in history can be traced to these. Can you people not learn from your mistakes? You need to see Avatar, the movie, where humans try to colonise an alien land, for resources. They are prepared to destroy & decimate the natives – all for greed of money. You people need to learn…”, God said impatiently.
“God, you have seen Avatar”, Satish had wanted to know. “ My child, I don’t need to see it. I thought, you knew I’m omnipresent & and a living witness of all that has happened all through history & am present and know all that would happen… you are asking me if I have seen a mere movie?! I mentioned it to just point out how greed is at the root of all misery. Huge disparities are the result of greed. Environmental degradation is the result of greed. Your trade imbalances, territorial disputes are all fuelled by greed… The thing to ask is not when the situation will get normal; but how to remove the fundamental problems dogging the system. For starters, the interest rates should be allowed to revert to appropriate levels, the idea of thrift needs to be inculcated, the swagger & the thoughtless “we-will-bomb-you-back-to-the-stone-age” threats need to abate & a more compassionate & broad world-view needs to emerge. That is what I’d want to see”, God had concluded.
It was 10.30 AM. The morning had certainly started in the most interesting way. “Satish, but God had not finally answered your question of what this year will be like”, I asked. Satish said, “God had told him that he obviously knows what will happen. But by exercising free-will humans could change the trajectory of the future events… Also, he did not want to reveal and smother enthusiasm or kindle unwanted expectation. He just wanted us to live in the way we were supposed to be – enlightened, compassionate, loving beings. God was particularly happy about the ending in Avatar. They fought back the aggressors and restored order. The question he left behind was, can we clear up the mess & restore order”, he finished.
He got up, bade me goodbye and moved on. Now the lingering question in my mind is – Can we?
Unpublished post - specially for the blog
Maxima - Health Insurance policy from Apollo DKV
There was chaos in the Grover household. The family was in a tizzy as there was the last minute running around, before their trip. To add to the confusion, an insurance agent had come in regarding a medical policy and was asking them for photos, information etc. Amit Grover just about completed it and embarked on his trip.
On coming back, he was assailed with doubts as to whether he has done the right thing by taking Maxima from Apollo DKV. I explained to him that this is a medical insurance product which covers OPD, Dental, Optical, Maternity and other expenses, apart from hospitalisation. Also, critical illness can be taken on, optionally. I explained it to him in detail.
Policy Highlights :
• A medical insurance product that covers both hospitalization & outpatient treatments.
• Cashless claims in over 4000 network hospitals
• Inpatient treatment expenses due to hospitalization, including pre & post hospitalization expenses
• Outpatient treatments cover consultations with a doctor, diagnostic tests & medicines as prescribed by a doctor.
• 140 Daycare procedures and domiciliary hospitalization is covered.
• Medical expenses of organ donor is also covered.
• Emergency Ambulance, Maternity expenses coverage, option for covering newborn & daily hospital cash are other benefits.
• Dental treatment ( upto limits prescribed ) from a network dentist.
• Spectacles / Contact lenses if prescribed by network eye specialist ( upto specified limits ).
• Annual health checkup for the insured ( as per their terms )
• Rs.3 Lakhs is the only Sum Assured available under this plan
• This product can be taken for an individual or for a family of upto two children ( as a floater ). It can include dependant parents too, though maximum number that can be covered in a policy is four individuals.
Features & Benefits :
Inpatient Module -
Hospitalisation expenses - As a medical Insurance policy, it covers all hospitalisation expenses due to an illness or accident. The policy will pay for the expenses like Room rent, boarding expenses, Nursing, Intensive care unit, Medical Practitioner(s), Anesthesia, blood, oxygen, operation theatre charges, surgical appliances, medicines, drugs and consumables, Diagnostic procedures, Cost of prosthetic & other devices or equipments if implanted internally during a Surgical Procedure.
Pre & post hospitalisation expenses – The expenses incurred 30 days immediately prior to hospitalization & 60 days post hospitalization is covered. The cover is extended for a further 30 days in each case if claim is intimated 5 days prior to hospitalization.
Day care procedures – Due to technological advances, many conditions can be treated without the need for hospitalization ( like angiography ). 140 such procedures are coved under this policy.
Domiciliary treatment – The medical expenses incurred by an insured at his/ her residence on doctor’s advice, not in a position to be transported or room unavailability, is also covered.
Daily cash benefit - If a shared accommodation in a network hospital is chosen, a daily cash amount is given for every 24 hours of such hospitalisation.
Organ donor expenses – Hospitalisation expenses of the organ donor is paid, in an accepted inpatient hospitalization claim. Pre & post hospitalization expenses or any other treatment in respect of the donor is not covered in the policy.
Emergency Ambulance - This policy will reimburse ( upto Rs.2,000/- ) the expenses related to hiring an ambulance to transport the insured to the nearest hospital with adequate emergency facilities.
Daily cash for accompanying insured child - For a child aged 12 years or less, the policy will pay a daily cash amount ( Rs.500 per day, maximum Rs.3,000/- ) for one accompanying adult for each complete period of 24 hours if hospitalisation exceeds 72 hours.
Maternity Expenses - The policy will pay the Medical Expenses for a delivery (including caesarean section) while hospitalised or the lawful medical termination of pregnancy during the Policy Period ( limited to 2 deliveries or terminations or either during the lifetime of the Insured Person ). Waiting period – 4 years. Normal delivery – Rs.15,000/- & Caesarean delivery – Rs.25,000/-.
Newborn – Optional coverage - any medically necessary treatment while the Insured Person is hospitalised during the Policy Period as an inpatient for a Newborn Baby.
Critical illness – optional – An additional Sum Assured can be claimed ( over and above the medical insurance entitlement ) if the insured person is diagnosed with such an illness and survives a 30 day period. This will not affect the cumulative bonus entitlement.
Outpatient Module –
An entitlement certificate will be issued using which the following benefits can be accessed-
Outpatient Consultations - Outpatient consultation by a general / specialist Medical Practitioner can be availed of in a Network Hospital. Four consultations in a year for one adult, six consultations for two adults & eight for three adults, can be availed of. Outpatient consultations in non-network hospitals will be on reimbursement basis ( subject to their limits )
Diagnostic Tests - Outpatient diagnostic tests taken by the Insured from a Network diagnostic centre (not necessary to be prescribed by Network Medical Practitioner).
Pharmacy - Medicines purchased by the Insured Person from a Network pharmacy, provided that such medicines have been prescribed in writing by a Medical Practitioner (not necessary to be Network Medical Practitioner).
Dental Treatment - Any necessary dental treatment ( not cosmetic ) taken by an Insured Person from a Network dentist, upto Rs.1000/- per policy year.
Spectacles / Contact Lenses - Either one pair of spectacles or contact lenses, prescribed by a Network Eye Specialist, subject to a maximum of Rs.1000/- per policy year
Annual Health Checkup - A health check-up for the Insured Person in a Network Hospital. For those below 18 or above 45, this facility will be available from the second year onwards.
Bonus
Carry Forward Bonus - 50% of the unused Entitlement Certificates can be carried forward to the next year, on renewals without a break. All except Annual health checkup entitlements can be carried forward.
Cumulative Bonus – A 10% of initial Sum Assured is offered as a bonus for a claim free year and if the policy has been renewed without a break. The maximum cumulative bonus shall not exceed 50% of the Sum Insured.
Exclusions
• 30 day waiting period or longer is applicable in the first policy year and not applicable later if policy is in force continuously.
• Special Waiting periods – 2 year waiting period is imposed on ailments like arthritis if non infective, calculus diseases of gall bladder and urogenital system, cataract, fissure/fistula in anus, hemorrhoids, pilonidal sinus etc. Covered from third year if policy has been in force continuously. Similarly for treatments like benign ear, nose and throat (ENT) disorders and surgeries (including but not limited to adenoidectomy, mastoidectomy etc.), dilatation and curettage (D&C), fibromyoma, joint replacement etc., the same conditions mentioned above apply.
• Pre-existing Conditions will not be covered until 36 months of continuous coverage have elapsed, since inception of the first Maxima Insurance policy. A waiting period of 1 year will apply, if the Insured Person was insured continuously and without interruption for at least 2 years under another Indian insurer’s individual health insurance policy for the reimbursement of medical costs for inpatient treatment in a Hospital.
• Any claim directly or indirectly, due to war, civil war, revolution etc. will not be covered. A breach of law with criminal intent, or intentional self injury or attempted suicide while sane or insane. Also not covered would be any insured participating in racing, diving, aviation, scuba diving, parachuting, hang-gliding, rock or mountain climbing. Claims arising due to abuse of intoxicants or hallucinogenic substances are not covered. There are others too…
• Non allopathic treatment
After I explained all these aspects, he wanted to know if it is a good product. I had no hesitation in answering that. It is a good product – no doubt there. Since there are so many features that no medical insurance typically covers, it is an ace. The premiums are consequently high. The only grudge is that the cover that can be taken is just Rs.3 Lakhs. Today, that is too little. If you were to take individual policies for each member, it becomes too costly. But then, one can take advantage of 80D benefit, which gives a deduction of upto Rs.15,000/-. That’s an added benefit, I reminded Amit.
He seemed satisfied. He was currently steering me to Lalit, a well known sweet shop to have Jalebi. I taunted him,”You want to have jalebi, now that you have a cover?”. He laughed & I joined in.
Published in Money Mantra in Feb 2010
On coming back, he was assailed with doubts as to whether he has done the right thing by taking Maxima from Apollo DKV. I explained to him that this is a medical insurance product which covers OPD, Dental, Optical, Maternity and other expenses, apart from hospitalisation. Also, critical illness can be taken on, optionally. I explained it to him in detail.
Policy Highlights :
• A medical insurance product that covers both hospitalization & outpatient treatments.
• Cashless claims in over 4000 network hospitals
• Inpatient treatment expenses due to hospitalization, including pre & post hospitalization expenses
• Outpatient treatments cover consultations with a doctor, diagnostic tests & medicines as prescribed by a doctor.
• 140 Daycare procedures and domiciliary hospitalization is covered.
• Medical expenses of organ donor is also covered.
• Emergency Ambulance, Maternity expenses coverage, option for covering newborn & daily hospital cash are other benefits.
• Dental treatment ( upto limits prescribed ) from a network dentist.
• Spectacles / Contact lenses if prescribed by network eye specialist ( upto specified limits ).
• Annual health checkup for the insured ( as per their terms )
• Rs.3 Lakhs is the only Sum Assured available under this plan
• This product can be taken for an individual or for a family of upto two children ( as a floater ). It can include dependant parents too, though maximum number that can be covered in a policy is four individuals.
Features & Benefits :
Inpatient Module -
Hospitalisation expenses - As a medical Insurance policy, it covers all hospitalisation expenses due to an illness or accident. The policy will pay for the expenses like Room rent, boarding expenses, Nursing, Intensive care unit, Medical Practitioner(s), Anesthesia, blood, oxygen, operation theatre charges, surgical appliances, medicines, drugs and consumables, Diagnostic procedures, Cost of prosthetic & other devices or equipments if implanted internally during a Surgical Procedure.
Pre & post hospitalisation expenses – The expenses incurred 30 days immediately prior to hospitalization & 60 days post hospitalization is covered. The cover is extended for a further 30 days in each case if claim is intimated 5 days prior to hospitalization.
Day care procedures – Due to technological advances, many conditions can be treated without the need for hospitalization ( like angiography ). 140 such procedures are coved under this policy.
Domiciliary treatment – The medical expenses incurred by an insured at his/ her residence on doctor’s advice, not in a position to be transported or room unavailability, is also covered.
Daily cash benefit - If a shared accommodation in a network hospital is chosen, a daily cash amount is given for every 24 hours of such hospitalisation.
Organ donor expenses – Hospitalisation expenses of the organ donor is paid, in an accepted inpatient hospitalization claim. Pre & post hospitalization expenses or any other treatment in respect of the donor is not covered in the policy.
Emergency Ambulance - This policy will reimburse ( upto Rs.2,000/- ) the expenses related to hiring an ambulance to transport the insured to the nearest hospital with adequate emergency facilities.
Daily cash for accompanying insured child - For a child aged 12 years or less, the policy will pay a daily cash amount ( Rs.500 per day, maximum Rs.3,000/- ) for one accompanying adult for each complete period of 24 hours if hospitalisation exceeds 72 hours.
Maternity Expenses - The policy will pay the Medical Expenses for a delivery (including caesarean section) while hospitalised or the lawful medical termination of pregnancy during the Policy Period ( limited to 2 deliveries or terminations or either during the lifetime of the Insured Person ). Waiting period – 4 years. Normal delivery – Rs.15,000/- & Caesarean delivery – Rs.25,000/-.
Newborn – Optional coverage - any medically necessary treatment while the Insured Person is hospitalised during the Policy Period as an inpatient for a Newborn Baby.
Critical illness – optional – An additional Sum Assured can be claimed ( over and above the medical insurance entitlement ) if the insured person is diagnosed with such an illness and survives a 30 day period. This will not affect the cumulative bonus entitlement.
Outpatient Module –
An entitlement certificate will be issued using which the following benefits can be accessed-
Outpatient Consultations - Outpatient consultation by a general / specialist Medical Practitioner can be availed of in a Network Hospital. Four consultations in a year for one adult, six consultations for two adults & eight for three adults, can be availed of. Outpatient consultations in non-network hospitals will be on reimbursement basis ( subject to their limits )
Diagnostic Tests - Outpatient diagnostic tests taken by the Insured from a Network diagnostic centre (not necessary to be prescribed by Network Medical Practitioner).
Pharmacy - Medicines purchased by the Insured Person from a Network pharmacy, provided that such medicines have been prescribed in writing by a Medical Practitioner (not necessary to be Network Medical Practitioner).
Dental Treatment - Any necessary dental treatment ( not cosmetic ) taken by an Insured Person from a Network dentist, upto Rs.1000/- per policy year.
Spectacles / Contact Lenses - Either one pair of spectacles or contact lenses, prescribed by a Network Eye Specialist, subject to a maximum of Rs.1000/- per policy year
Annual Health Checkup - A health check-up for the Insured Person in a Network Hospital. For those below 18 or above 45, this facility will be available from the second year onwards.
Bonus
Carry Forward Bonus - 50% of the unused Entitlement Certificates can be carried forward to the next year, on renewals without a break. All except Annual health checkup entitlements can be carried forward.
Cumulative Bonus – A 10% of initial Sum Assured is offered as a bonus for a claim free year and if the policy has been renewed without a break. The maximum cumulative bonus shall not exceed 50% of the Sum Insured.
Exclusions
• 30 day waiting period or longer is applicable in the first policy year and not applicable later if policy is in force continuously.
• Special Waiting periods – 2 year waiting period is imposed on ailments like arthritis if non infective, calculus diseases of gall bladder and urogenital system, cataract, fissure/fistula in anus, hemorrhoids, pilonidal sinus etc. Covered from third year if policy has been in force continuously. Similarly for treatments like benign ear, nose and throat (ENT) disorders and surgeries (including but not limited to adenoidectomy, mastoidectomy etc.), dilatation and curettage (D&C), fibromyoma, joint replacement etc., the same conditions mentioned above apply.
• Pre-existing Conditions will not be covered until 36 months of continuous coverage have elapsed, since inception of the first Maxima Insurance policy. A waiting period of 1 year will apply, if the Insured Person was insured continuously and without interruption for at least 2 years under another Indian insurer’s individual health insurance policy for the reimbursement of medical costs for inpatient treatment in a Hospital.
• Any claim directly or indirectly, due to war, civil war, revolution etc. will not be covered. A breach of law with criminal intent, or intentional self injury or attempted suicide while sane or insane. Also not covered would be any insured participating in racing, diving, aviation, scuba diving, parachuting, hang-gliding, rock or mountain climbing. Claims arising due to abuse of intoxicants or hallucinogenic substances are not covered. There are others too…
• Non allopathic treatment
After I explained all these aspects, he wanted to know if it is a good product. I had no hesitation in answering that. It is a good product – no doubt there. Since there are so many features that no medical insurance typically covers, it is an ace. The premiums are consequently high. The only grudge is that the cover that can be taken is just Rs.3 Lakhs. Today, that is too little. If you were to take individual policies for each member, it becomes too costly. But then, one can take advantage of 80D benefit, which gives a deduction of upto Rs.15,000/-. That’s an added benefit, I reminded Amit.
He seemed satisfied. He was currently steering me to Lalit, a well known sweet shop to have Jalebi. I taunted him,”You want to have jalebi, now that you have a cover?”. He laughed & I joined in.
Published in Money Mantra in Feb 2010
You can save money, by splitting term plans
When an individual is working, the family is secured by the investments made, assets built and insurances taken by the income earner. These are the three pillars of security for the family. In the early stages, investments and assets may be rather low and insurance is the only available alternative to prop up the security cover requirement. But, insurance costs money. Most people are not happy to put money especially in term insurance, as it does not give any returns.
At this point, Manav was incredulous. “If I’m not going to get anything at all, is it not a waste of money ?”, hissed Manav through his teeth at the insurance agent who was trying hard to explain. I was quiet as I wanted this to play out. Shailendra, the agent, was explaining the concept of Human Life Value. “ A Human being is invaluable. However, based on the income earning potential of the person to the family, there is a financial value that can be assigned to a person. That can be the present value of all future income he is going to earn”, Shailendra was saying. “ Future income ofcourse has to be projected approximately and major increases in salary can increase the present value of the future income”, he said. Manav was lost. He was nodding ofcourse, but from the faraway look in his eyes, he could have been in New York!
I chipped in.” We can just say that if you have some corpus that will grow at a certain interest, it will be equal to your income stream in the future”. After saying this I realized that I was also not being very lucid. In a spark of inspiration, I ventured to take an analogy and explain. “ Suppose you put in Rs.100 in the bank at 8%, you would get Rs.108 after a year, right? So, we can also say that Rs.100/- today has the same value as Rs.108/-, one year hence. Rs.100 is the present value and Rs.108 is the future value. What Shailendra means by present value of your income is, what is the value today of the future money”, I said hoping to unravel the mystery for Manav.
Manav had clearly moved on. “I want to pay as low an amount as possible, if I’m not going to get anything back”, he said. Shailendra started explaining the benefits of a term policy and how it is extremely low-cost etc. I was able to sense again that Manav was not absorbing that. There was another thing that he needed to know.
There is a way of structuring a policy such that your premium outgo, even in a term policy is minimized, without any reduction in their life cover requirements. Let us look at how this could be done.
Normally, as the number of years in a policy goes by, the need for insurance comes down. That is because the income that needs to be covered keeps reducing with every passing year. This means that the insurance requirements would have reduced every year, on survival.
Also, savings and asset buildup would have taken place over the years which again decreases the risk of exposure to the family and the need for insurance cover. Since insurance is a tool to cover the risk financially, the cover requirement keeps coming down, year-on-year, as the residual present value of future potential earnings, keeps coming down. Hence, one will require lesser and lesser cover, going forward.
One of the important facets of term insurance policy is that the premiums go up as the number of years increase. This is unlike in any other policy where it goes down – that is, higher the term, lower the premium. If you were to look at the table, this will become clear. Let us say Manav wants to take a 50 Lakh cover. For the same cover, Manish needs to pay Rs.9,707/- for a 10 year term, Rs.11,182/- for a 15 year term and Rs.13,093/- for 20 year term, in case of ICICI Prulife Pure protect policy. This is because the mortality charges go up year on year. The longer the term, the higher will be the average charges for all the years covered.
Company Plan Sum Assured Term Premium
ICICI Prulife Pure Protect Elite 50 Lakhs 10 9,707
ICICI Prulife Pure Protect Elite 50 Lakhs 15 11,182
ICICI Prulife Pure Protect Elite 50 Lakhs 20 13,093
ICICI Prulife Pure Protect Elite 50 Lakhs 25 15,277
BSLI HNWT-NS 50 Lakhs 10 9,320
BSLI HNWT-NS 50 Lakhs 15 10,643
BSLI HNWT-NS 50 Lakhs 20 13,070
BSLI HNWT-NS 50 Lakhs 25 15,497
Given these facts, it makes sense to split your life insurance needs by buying a number of policies instead of just one. Let us understand this with an example. If one requires an insurance cover of Rs 1.5 crores for 20 years, the same policy could be split into, say, 3 policies of Rs 50 lakhs each with terms like 10,15,20. The point to understand is that Rs.1.5 Crores cover will not be needed for the entire 20 years, if you were to work out and may be required only in the initial few years. This way, there will be two advantages.
First, after completion of the period, the premium for that policy stops, boosting cash flows. In this example, after 10 years, the first policy would stop and consequently, that premium need not be paid. Secondly, since these polices are of shorter tenure, the policy holder will be paying lower premiums as well. This is a double benefit that can make a huge difference in the premium, without compromising on the protection requirement.
In Manav’s case who is 35 years old, suppose he takes a Rs 1.5 crore policy for 20 years, the premium for ICICI Pru pure protect comes to Rs 39,279/- pa. However, if he splits the policy into three of 10/15/20 year terms, he will pay a total premium of Rs 33,982 pa (see table ) which is a difference of Rs 5,297/- pa.
Now after 10 years, one policy would have ended and a premium of Rs 9,707 would not have to be paid. Over time, one policy after another will keep on closing and premiums to be paid becomes less and less. If we were to calculate the premiums in the first scenario where he takes one policy of Rs 1.5 crore for 20 years, he would pay a premium of Rs 7,85,580/- over that time period.
In the other scenario, where he takes three different policies, he will be paying in all, Rs 5,26,660/-. That is a staggering difference of Rs 2,58,920/-, over the period. This is without compromising on the life cover requirements. It does make sense to have a clutch of policies with different terms, doesn't it?
Manav was happy to note the huge savings that would be possible. He was smiling now. He even patted Shailendra on the back. I winked at Shailendra. Shrewd as he was, Shailendra was on his way to the exit. Even from behind it was apparent, he was smiling from ear to ear.
Published in Money Mantra , March 2010
At this point, Manav was incredulous. “If I’m not going to get anything at all, is it not a waste of money ?”, hissed Manav through his teeth at the insurance agent who was trying hard to explain. I was quiet as I wanted this to play out. Shailendra, the agent, was explaining the concept of Human Life Value. “ A Human being is invaluable. However, based on the income earning potential of the person to the family, there is a financial value that can be assigned to a person. That can be the present value of all future income he is going to earn”, Shailendra was saying. “ Future income ofcourse has to be projected approximately and major increases in salary can increase the present value of the future income”, he said. Manav was lost. He was nodding ofcourse, but from the faraway look in his eyes, he could have been in New York!
I chipped in.” We can just say that if you have some corpus that will grow at a certain interest, it will be equal to your income stream in the future”. After saying this I realized that I was also not being very lucid. In a spark of inspiration, I ventured to take an analogy and explain. “ Suppose you put in Rs.100 in the bank at 8%, you would get Rs.108 after a year, right? So, we can also say that Rs.100/- today has the same value as Rs.108/-, one year hence. Rs.100 is the present value and Rs.108 is the future value. What Shailendra means by present value of your income is, what is the value today of the future money”, I said hoping to unravel the mystery for Manav.
Manav had clearly moved on. “I want to pay as low an amount as possible, if I’m not going to get anything back”, he said. Shailendra started explaining the benefits of a term policy and how it is extremely low-cost etc. I was able to sense again that Manav was not absorbing that. There was another thing that he needed to know.
There is a way of structuring a policy such that your premium outgo, even in a term policy is minimized, without any reduction in their life cover requirements. Let us look at how this could be done.
Normally, as the number of years in a policy goes by, the need for insurance comes down. That is because the income that needs to be covered keeps reducing with every passing year. This means that the insurance requirements would have reduced every year, on survival.
Also, savings and asset buildup would have taken place over the years which again decreases the risk of exposure to the family and the need for insurance cover. Since insurance is a tool to cover the risk financially, the cover requirement keeps coming down, year-on-year, as the residual present value of future potential earnings, keeps coming down. Hence, one will require lesser and lesser cover, going forward.
One of the important facets of term insurance policy is that the premiums go up as the number of years increase. This is unlike in any other policy where it goes down – that is, higher the term, lower the premium. If you were to look at the table, this will become clear. Let us say Manav wants to take a 50 Lakh cover. For the same cover, Manish needs to pay Rs.9,707/- for a 10 year term, Rs.11,182/- for a 15 year term and Rs.13,093/- for 20 year term, in case of ICICI Prulife Pure protect policy. This is because the mortality charges go up year on year. The longer the term, the higher will be the average charges for all the years covered.
Company Plan Sum Assured Term Premium
ICICI Prulife Pure Protect Elite 50 Lakhs 10 9,707
ICICI Prulife Pure Protect Elite 50 Lakhs 15 11,182
ICICI Prulife Pure Protect Elite 50 Lakhs 20 13,093
ICICI Prulife Pure Protect Elite 50 Lakhs 25 15,277
BSLI HNWT-NS 50 Lakhs 10 9,320
BSLI HNWT-NS 50 Lakhs 15 10,643
BSLI HNWT-NS 50 Lakhs 20 13,070
BSLI HNWT-NS 50 Lakhs 25 15,497
Given these facts, it makes sense to split your life insurance needs by buying a number of policies instead of just one. Let us understand this with an example. If one requires an insurance cover of Rs 1.5 crores for 20 years, the same policy could be split into, say, 3 policies of Rs 50 lakhs each with terms like 10,15,20. The point to understand is that Rs.1.5 Crores cover will not be needed for the entire 20 years, if you were to work out and may be required only in the initial few years. This way, there will be two advantages.
First, after completion of the period, the premium for that policy stops, boosting cash flows. In this example, after 10 years, the first policy would stop and consequently, that premium need not be paid. Secondly, since these polices are of shorter tenure, the policy holder will be paying lower premiums as well. This is a double benefit that can make a huge difference in the premium, without compromising on the protection requirement.
In Manav’s case who is 35 years old, suppose he takes a Rs 1.5 crore policy for 20 years, the premium for ICICI Pru pure protect comes to Rs 39,279/- pa. However, if he splits the policy into three of 10/15/20 year terms, he will pay a total premium of Rs 33,982 pa (see table ) which is a difference of Rs 5,297/- pa.
Now after 10 years, one policy would have ended and a premium of Rs 9,707 would not have to be paid. Over time, one policy after another will keep on closing and premiums to be paid becomes less and less. If we were to calculate the premiums in the first scenario where he takes one policy of Rs 1.5 crore for 20 years, he would pay a premium of Rs 7,85,580/- over that time period.
In the other scenario, where he takes three different policies, he will be paying in all, Rs 5,26,660/-. That is a staggering difference of Rs 2,58,920/-, over the period. This is without compromising on the life cover requirements. It does make sense to have a clutch of policies with different terms, doesn't it?
Manav was happy to note the huge savings that would be possible. He was smiling now. He even patted Shailendra on the back. I winked at Shailendra. Shrewd as he was, Shailendra was on his way to the exit. Even from behind it was apparent, he was smiling from ear to ear.
Published in Money Mantra , March 2010
ULIPs and what you need to know...
There are regulatory changes galore. The latest is the lowering of the charge structure of ULIPs. They had come up with a formula restricting the difference between Gross and net returns ( after charges ) to 2.25 – 3%, at the end of the tenure. That looked like it will bring about a sea change in the way ULIPs are structured. It was felt that charges will be really down and will be good for the investor. Let’s find out.
Have the charges come down? Yes. But not as much as expected. The July 22nd 2009 circular from IRDA states… “ For insurance contracts which are of a tenor of less than or equal to 10 years duration, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For other contracts, i.e., those whose contract period is above 10 years, the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points.” A careful reading shows that this compliance is to be shown for the term and there are no caps, on a year by year basis. This is a trap door left open. This means that charges in the first few years can still be substantial. When we looked at a couple of products, this was borne out.
If we examine the changes that insurance companies have ushered in, taking a couple of products that have been launched now, it becomes evident that the charges are not that low. In ICICI Pru Maxima, premium allocation charges for year 1 is 7.5% & 3% for year 2 & 3 respectively. After that it becomes zero. These charges are indeed much lower than it used to be in the past. In case of another product – HDFC Endowment Supreme Suvidha, the first year premium allocation charges are 30%, 2 & 3rd year charges are 15% & 10%; After that, there are no premium allocation charges. However, there is another charge- policy administration charge, which can make all the difference. In case of ICICI Pru Maxima, policy administration charge ( as a % of Annual premium ) is 0.9% pm, charged for the first five years. In HDFC Endowment Supreme Suvidha, the policy administration charge ( as a % of Annual Premium ) is 0.4% pm for the entire term of the policy. In the earlier era, Policy Admin charges used to be a flat Rs.40- 70 pm, irrespective of the premium amount. Now, higher the premium paid, higher will be the policy administration charge. The work on the policy administration front is no different whether the premium paid is Rs.20,000/- or Rs.2 Lakhs, but in these products an investor will be paying higher charges for higher premiums, which is not justifiable. There are Surrender charges in both cases, till completion of five policy years. Fund Management charges are a flat 1.25%pa, chargeable on a daily basis in HDFC’s case and ranges between 0.75% to 1.35% in case of ICICI Pru Maxima.
On the plus side, ICICI Pru Maxima gives a 2% extra allocation from 6th year onwards and in HDFC’s Supreme Suvidha, they allocate 5% from 6th year onwards for every year of premium paid from 6th policy year onwards. Also in case of HDFC ‘s policy, they allocate a bumper addition of between 50- 100% of the annual premium ( something akin to the loyalty addition ) at the end of the tenure.
The charges are down compared to earlier times. There were products earlier charging upto 70% as Premium allocation charges in the first years. Now, that is not possible. But, there are still a whole lot of charges which are charged in the first few years. That brings me to the next point.
Front loaded charges creates a problem… By charging everything in the first three to five years and having surrender charges till five years, the insurance company is ensuring that all charges due to them come in and the policy holder cannot exit or can exit and get grievously hurt. Also, it presents an churning opportunity to the agents, some of whom will exploit to their benefit. The new regime does not address this pernicious problem, often reported against insurance advisors. A good idea would have been to impose caps on what they can get as commissions year-on-year, as also staggering the commissions, over a much longer tenure ( like 10 years ). An even better idea would have been to have a metric to ensure persistency of policies of the insurance advisor by having a differential remuneration – higher for those with high persistency and lower for those who show lower persistency. That way, there will be lesser incentive for misspelling & churning.
Rule applies only for policies held for the term - If an investor surrenders in between, the formula ( of difference between gross yield to net yield being a certain number ) does not apply to them. This means that investors should really treat ULIP investments as longterm investment vehicles. My experience on this is that people tend to exit after a few years ( with substantial inducement to move to another policy ).
Your yield can be different- The yields on the plans can be lower than the indicative yield. As per the same IRDA circular – “ Extra premium due to underwriting emanating from extraordinary health conditions, cost of all rider benefits, service tax on charges (as applicable) and any explicit cost of investment guarantee shall be excluded in the calculation of net yield”. This means there will be other charges like Service tax and cost of investment guarantee, which can be outside the purview of yield calculations. This obviously means that the net yield that an investor gets may be lower than what the plan illustration shows.
Is it all negative then. No really. The point is that the charges are down, but not substantially down. Also there are quite a few loopholes that can be cleverly exploited. The direction is good. But, there is scope for tightening, in the interest of investors. Insurance advisors still have traditional products, these rules don’t apply. It is hence a much more lenient treatment for insurance advisors especially as compared to their brethren in MF industry, where there are no entry loads and they have to charge a fee for services rendered. Probably, since there may be a reduction of the earnings compared to the period earlier, the agents may choose to sell traditional products more. Having such differentials in remuneration between MF & Insurance is not a good idea as many times the same person sells all these products. He could easily divert from MFs to Insurance products. Such imperfections in the financial services landscape is not good for the industry as a whole as it will ensure an unhealthy tilt towards Insurance products. It has been happening for sometime now. The investor needs to be aware of these and weigh the options before investing.
Published in Money Mantra in March 2010
Have the charges come down? Yes. But not as much as expected. The July 22nd 2009 circular from IRDA states… “ For insurance contracts which are of a tenor of less than or equal to 10 years duration, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For other contracts, i.e., those whose contract period is above 10 years, the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points.” A careful reading shows that this compliance is to be shown for the term and there are no caps, on a year by year basis. This is a trap door left open. This means that charges in the first few years can still be substantial. When we looked at a couple of products, this was borne out.
If we examine the changes that insurance companies have ushered in, taking a couple of products that have been launched now, it becomes evident that the charges are not that low. In ICICI Pru Maxima, premium allocation charges for year 1 is 7.5% & 3% for year 2 & 3 respectively. After that it becomes zero. These charges are indeed much lower than it used to be in the past. In case of another product – HDFC Endowment Supreme Suvidha, the first year premium allocation charges are 30%, 2 & 3rd year charges are 15% & 10%; After that, there are no premium allocation charges. However, there is another charge- policy administration charge, which can make all the difference. In case of ICICI Pru Maxima, policy administration charge ( as a % of Annual premium ) is 0.9% pm, charged for the first five years. In HDFC Endowment Supreme Suvidha, the policy administration charge ( as a % of Annual Premium ) is 0.4% pm for the entire term of the policy. In the earlier era, Policy Admin charges used to be a flat Rs.40- 70 pm, irrespective of the premium amount. Now, higher the premium paid, higher will be the policy administration charge. The work on the policy administration front is no different whether the premium paid is Rs.20,000/- or Rs.2 Lakhs, but in these products an investor will be paying higher charges for higher premiums, which is not justifiable. There are Surrender charges in both cases, till completion of five policy years. Fund Management charges are a flat 1.25%pa, chargeable on a daily basis in HDFC’s case and ranges between 0.75% to 1.35% in case of ICICI Pru Maxima.
On the plus side, ICICI Pru Maxima gives a 2% extra allocation from 6th year onwards and in HDFC’s Supreme Suvidha, they allocate 5% from 6th year onwards for every year of premium paid from 6th policy year onwards. Also in case of HDFC ‘s policy, they allocate a bumper addition of between 50- 100% of the annual premium ( something akin to the loyalty addition ) at the end of the tenure.
The charges are down compared to earlier times. There were products earlier charging upto 70% as Premium allocation charges in the first years. Now, that is not possible. But, there are still a whole lot of charges which are charged in the first few years. That brings me to the next point.
Front loaded charges creates a problem… By charging everything in the first three to five years and having surrender charges till five years, the insurance company is ensuring that all charges due to them come in and the policy holder cannot exit or can exit and get grievously hurt. Also, it presents an churning opportunity to the agents, some of whom will exploit to their benefit. The new regime does not address this pernicious problem, often reported against insurance advisors. A good idea would have been to impose caps on what they can get as commissions year-on-year, as also staggering the commissions, over a much longer tenure ( like 10 years ). An even better idea would have been to have a metric to ensure persistency of policies of the insurance advisor by having a differential remuneration – higher for those with high persistency and lower for those who show lower persistency. That way, there will be lesser incentive for misspelling & churning.
Rule applies only for policies held for the term - If an investor surrenders in between, the formula ( of difference between gross yield to net yield being a certain number ) does not apply to them. This means that investors should really treat ULIP investments as longterm investment vehicles. My experience on this is that people tend to exit after a few years ( with substantial inducement to move to another policy ).
Your yield can be different- The yields on the plans can be lower than the indicative yield. As per the same IRDA circular – “ Extra premium due to underwriting emanating from extraordinary health conditions, cost of all rider benefits, service tax on charges (as applicable) and any explicit cost of investment guarantee shall be excluded in the calculation of net yield”. This means there will be other charges like Service tax and cost of investment guarantee, which can be outside the purview of yield calculations. This obviously means that the net yield that an investor gets may be lower than what the plan illustration shows.
Is it all negative then. No really. The point is that the charges are down, but not substantially down. Also there are quite a few loopholes that can be cleverly exploited. The direction is good. But, there is scope for tightening, in the interest of investors. Insurance advisors still have traditional products, these rules don’t apply. It is hence a much more lenient treatment for insurance advisors especially as compared to their brethren in MF industry, where there are no entry loads and they have to charge a fee for services rendered. Probably, since there may be a reduction of the earnings compared to the period earlier, the agents may choose to sell traditional products more. Having such differentials in remuneration between MF & Insurance is not a good idea as many times the same person sells all these products. He could easily divert from MFs to Insurance products. Such imperfections in the financial services landscape is not good for the industry as a whole as it will ensure an unhealthy tilt towards Insurance products. It has been happening for sometime now. The investor needs to be aware of these and weigh the options before investing.
Published in Money Mantra in March 2010
ULIPs in the new dawn
“This product can give you fantastic returns, Sir. The earlier version of this plan had given a 32% return. It is a fantastic investment option, even though it is an insurance policy”, an insurance agent was telling Ravi when I came in. The agent was just leaving. He had left behind some colourful brochures.
Ravi turned to me and asked skeptically, ”Are such high returns possible from this ULIP?” . “Everything is possible in certain timeframes. What you need to have asked is, in which period it gave that return and what was the return of the benchmark in that period. That would have given you an indication of whether this fund has performed well or not.” I continued. ”You also need to look at the charges. The charges are supposed to have come down. But the charges in the first few years are still high. In one of the plans, the premium allocation charges for the first three years are respectively, 30%, 15% & 10%”.
Ravi was amazed. “But, I understand that the difference in gross & net yields should be no more than 3% for policies of term 10 years or less & 2.25% for policy term over 10 years. I thought it will be low due to this regulation”. I was able to understand the confusion. “ That will apply over the tenure of the policy, not year on year”, I said.
“There are other charges as well, if you want to know. Policy Administration Charges is another head, you would want to look at carefully. In the same policy, the Policy Administration Charges are 0.4%pm, for the entire tenure ie. 4.8% pa, throughout the policy term”, ventured I. “That high? “, gasped Ravi. Today was his day of surprises. “Yes. It is. And there are products where it is higher. Policy Administration Charges would be charged as a percentage of the premium, which penalizes those who pay higher premiums. ”, I said.
“So, what has come down then?”, Ravi wanted to know. I did not have a readymade answer to this. “ Fund Management Charges have come down a bit. Very high charge products ( Premium Allocation Charges in some were as high as 70%) have been weeded out. There are still charges which may not even come under the purview of the new regime. For instance, any cost associated with investment guarantee is excluded from the calculation of net yield. So, guaranteed NAV products have an element of cost that is open to creative use. Also, if you were to surrender after 5 years, most of the front loaded charges would have been paid and yet the regulation restricting the difference between Gross Yield & Net Yield, does not apply. Hence, it will be a big handicap for those who want to surrender early.”, I concluded. Ravi was absorbing all this intently. I now moved away to get my cup of tea.
published in Moneycontrol.com in May 2010
Ravi turned to me and asked skeptically, ”Are such high returns possible from this ULIP?” . “Everything is possible in certain timeframes. What you need to have asked is, in which period it gave that return and what was the return of the benchmark in that period. That would have given you an indication of whether this fund has performed well or not.” I continued. ”You also need to look at the charges. The charges are supposed to have come down. But the charges in the first few years are still high. In one of the plans, the premium allocation charges for the first three years are respectively, 30%, 15% & 10%”.
Ravi was amazed. “But, I understand that the difference in gross & net yields should be no more than 3% for policies of term 10 years or less & 2.25% for policy term over 10 years. I thought it will be low due to this regulation”. I was able to understand the confusion. “ That will apply over the tenure of the policy, not year on year”, I said.
“There are other charges as well, if you want to know. Policy Administration Charges is another head, you would want to look at carefully. In the same policy, the Policy Administration Charges are 0.4%pm, for the entire tenure ie. 4.8% pa, throughout the policy term”, ventured I. “That high? “, gasped Ravi. Today was his day of surprises. “Yes. It is. And there are products where it is higher. Policy Administration Charges would be charged as a percentage of the premium, which penalizes those who pay higher premiums. ”, I said.
“So, what has come down then?”, Ravi wanted to know. I did not have a readymade answer to this. “ Fund Management Charges have come down a bit. Very high charge products ( Premium Allocation Charges in some were as high as 70%) have been weeded out. There are still charges which may not even come under the purview of the new regime. For instance, any cost associated with investment guarantee is excluded from the calculation of net yield. So, guaranteed NAV products have an element of cost that is open to creative use. Also, if you were to surrender after 5 years, most of the front loaded charges would have been paid and yet the regulation restricting the difference between Gross Yield & Net Yield, does not apply. Hence, it will be a big handicap for those who want to surrender early.”, I concluded. Ravi was absorbing all this intently. I now moved away to get my cup of tea.
published in Moneycontrol.com in May 2010
Earning well and making it work
Julian – the Monk who sold his Ferrari – was exhorting to think of “Who am I ?”, “Why am I here” – the purpose-of-life kind of questions, in the book by Robin Sharma, I was reading. The Sages of Sivana had lot of practical wisdom which Julian was sharing with his protégé – John. Most of us do want these higher questions answered. At some point in time we feel pointless about the mundane existence. While the metaphysical angle does not worry all of us, the questions “Am I going in the right direction?”, “Am I investing enough?”, “Are the choices I’m making, right?”, is nagging most of us.
Most, have not found the answers to their simple, yet important questions. These are questions that keep people awake at night, make them break into a sweat and wake up with a start, in the middle of the night. But, what is the way out?
You might have heard the word Financial Planning? Yeah. This is something that has answers to your nagging problems. But, this is a term which is least understood and most abused. Every bank Mutual Fund, Bank & Insurance company is doing “Financial Planning”, when they are setting you up to buy one or other of their products. Most distributors/ advisors also talk of planning when they explain the merits of their products and how it will be useful to you. That is actually called selling.
Financial Planning is a blueprint or framework to achieve life goals through appropriate financial management. As you can see, we are talking about creating a blueprint so that life’s goals can be achieved. We are not talking about getting into products headlong. Again, there is a mention of life goals. Most product sellers would talk about specific goals like retirement, child education and the like and show you a scheme that will address that. While that is fine, one does not know what happens when all these goals are taken together and resources need to be allocated. Which ones will be achieved? Which ones will be left out? What will be the deficit? Will a goal be achieved, given more time…? For instance, if one wants a home after 5 years instead of 2 years, will it work? These are things that a Financial Plan will address.
A Financial Plan is created after understanding the goals & all other financial details like income, expenses, assets, liabilities, investments & insurance. A complete plan emerges after all the pieces in the puzzle are taken into account. Cashflows are examined, Insurance requirements are assessed, appropriate allocation of available resources are established, past investments & insurances are pored over, to find their suitability now and in future. Recommendations come in last. This obviously means that recommendations in a Financial Plan are a by-product of the entire plan workout and will be unique and customized, to the needs of the particular individual & the family.
This is an individualized and customized offering, just like your personal trainer at a gymnasium might guide you and help you set goals, lay down an exercise & diet regimen to achieve your goals. Aamir Khan would not have been able to sport the famous six-pack abs, without the help of a competent trainer. It looked like a miracle that he developed it after forty, in less than a year. But ask his trainer Satyajit Chorasia and he would attribute it to following a plan & sticking with it, assiduously.
A Financial Planner’s work is also like that of a surgeon. A Financial planner needs to examine the situation, look for symptoms of any ailments, diagnose the cause and prescribe medicines. In situations where nothing else will work, the surgeon will perform an operation or intervention to rectify the problem. After that, he would suggest appropriate medicines for recuperation & also alterations in one’s life style, which would ensure that the problem does not recur.
Most people tend to think that finance is an area they know. To be sure a lot of them do. About 10 - 20% may not require professional help. These are the ones who are willing to put in time, effort and resources in acquiring appropriate information about finances. These people may also take advantage of various sites, self-help books & magazines and other resources to equip themselves, to take decisions. The only thing they may not be able to get is the experience which a professional would have, from years of consulting experience. But for all others, it would be necessary to take professional help.
The problem is that most assume that they belong to that 10-20%. Having some knowledge is a curse. Taking decisions based on half-knowledge can prove to be disastrous. Many take the short-cut of doing what one of their well-informed friends is doing. Unfortunately, what works for that friend may not work for another… because goals are different, situations are different. There cannot be one path for everyone.
Almost everyone takes the help of a doctor for any ailments, lawyers for legal recourse, Architects to get a blueprint before constructing a home & doing it up after the construction. Yet, when it comes to their finances, most of us want to do it ourselves.
Chew on this. We work to get money to achieve our goals. Yet, we spend the least amount of time and effort, to manage it. Most investment decisions are done piece meal… insurance products, which are essentially longterm products, are bought to save taxes or because money is lying around, little appreciating that one is entering into a longterm commitment. Financial decisions are taken in a time-frame, that would make swilling in a softdrink seem like a Ramlila performance… It has low mindshare. How else can one explain money lying in the bank for months on end, for want of proper decisions? In such a situation, where is the strategy? And where will they reach?
Any road is right, when you don’t know where you are going. That’s a proverb I have heard in the past. That’s so true for most of us. A shot in the dark is not planning. Investing here and there and hoping for the best is not a strategy. Not giving it enough thought and taking spur-of-the-moment decisions is a recipe for disaster.
Like the Sages of Sivana say, know yourself… Get clarity on what your goals are. Know if you are competent enough to take decisions on important financial matters… Ask yourself if you have the discipline to follow through on a course you have set for yourself and are willing to revisit & reorient periodically. And lastly, are you willing to put in some serious time & effort to understand all about finances… If your answer is yes to all of them, you could do it yourself. For others, a Financial Planner would do a world of good. If you want higher, existential questions answered, ask Julian, the monk who sold his Ferrari.
A truncated version of this was published in DNA Money , 4th June 2010
Most, have not found the answers to their simple, yet important questions. These are questions that keep people awake at night, make them break into a sweat and wake up with a start, in the middle of the night. But, what is the way out?
You might have heard the word Financial Planning? Yeah. This is something that has answers to your nagging problems. But, this is a term which is least understood and most abused. Every bank Mutual Fund, Bank & Insurance company is doing “Financial Planning”, when they are setting you up to buy one or other of their products. Most distributors/ advisors also talk of planning when they explain the merits of their products and how it will be useful to you. That is actually called selling.
Financial Planning is a blueprint or framework to achieve life goals through appropriate financial management. As you can see, we are talking about creating a blueprint so that life’s goals can be achieved. We are not talking about getting into products headlong. Again, there is a mention of life goals. Most product sellers would talk about specific goals like retirement, child education and the like and show you a scheme that will address that. While that is fine, one does not know what happens when all these goals are taken together and resources need to be allocated. Which ones will be achieved? Which ones will be left out? What will be the deficit? Will a goal be achieved, given more time…? For instance, if one wants a home after 5 years instead of 2 years, will it work? These are things that a Financial Plan will address.
A Financial Plan is created after understanding the goals & all other financial details like income, expenses, assets, liabilities, investments & insurance. A complete plan emerges after all the pieces in the puzzle are taken into account. Cashflows are examined, Insurance requirements are assessed, appropriate allocation of available resources are established, past investments & insurances are pored over, to find their suitability now and in future. Recommendations come in last. This obviously means that recommendations in a Financial Plan are a by-product of the entire plan workout and will be unique and customized, to the needs of the particular individual & the family.
This is an individualized and customized offering, just like your personal trainer at a gymnasium might guide you and help you set goals, lay down an exercise & diet regimen to achieve your goals. Aamir Khan would not have been able to sport the famous six-pack abs, without the help of a competent trainer. It looked like a miracle that he developed it after forty, in less than a year. But ask his trainer Satyajit Chorasia and he would attribute it to following a plan & sticking with it, assiduously.
A Financial Planner’s work is also like that of a surgeon. A Financial planner needs to examine the situation, look for symptoms of any ailments, diagnose the cause and prescribe medicines. In situations where nothing else will work, the surgeon will perform an operation or intervention to rectify the problem. After that, he would suggest appropriate medicines for recuperation & also alterations in one’s life style, which would ensure that the problem does not recur.
Most people tend to think that finance is an area they know. To be sure a lot of them do. About 10 - 20% may not require professional help. These are the ones who are willing to put in time, effort and resources in acquiring appropriate information about finances. These people may also take advantage of various sites, self-help books & magazines and other resources to equip themselves, to take decisions. The only thing they may not be able to get is the experience which a professional would have, from years of consulting experience. But for all others, it would be necessary to take professional help.
The problem is that most assume that they belong to that 10-20%. Having some knowledge is a curse. Taking decisions based on half-knowledge can prove to be disastrous. Many take the short-cut of doing what one of their well-informed friends is doing. Unfortunately, what works for that friend may not work for another… because goals are different, situations are different. There cannot be one path for everyone.
Almost everyone takes the help of a doctor for any ailments, lawyers for legal recourse, Architects to get a blueprint before constructing a home & doing it up after the construction. Yet, when it comes to their finances, most of us want to do it ourselves.
Chew on this. We work to get money to achieve our goals. Yet, we spend the least amount of time and effort, to manage it. Most investment decisions are done piece meal… insurance products, which are essentially longterm products, are bought to save taxes or because money is lying around, little appreciating that one is entering into a longterm commitment. Financial decisions are taken in a time-frame, that would make swilling in a softdrink seem like a Ramlila performance… It has low mindshare. How else can one explain money lying in the bank for months on end, for want of proper decisions? In such a situation, where is the strategy? And where will they reach?
Any road is right, when you don’t know where you are going. That’s a proverb I have heard in the past. That’s so true for most of us. A shot in the dark is not planning. Investing here and there and hoping for the best is not a strategy. Not giving it enough thought and taking spur-of-the-moment decisions is a recipe for disaster.
Like the Sages of Sivana say, know yourself… Get clarity on what your goals are. Know if you are competent enough to take decisions on important financial matters… Ask yourself if you have the discipline to follow through on a course you have set for yourself and are willing to revisit & reorient periodically. And lastly, are you willing to put in some serious time & effort to understand all about finances… If your answer is yes to all of them, you could do it yourself. For others, a Financial Planner would do a world of good. If you want higher, existential questions answered, ask Julian, the monk who sold his Ferrari.
A truncated version of this was published in DNA Money , 4th June 2010
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