Real Estate continues to be one of the most desired investment avenues. Many investors use Equity MFs (Mutual Funds) as a stepping stone. As soon as they reach say 50 Lakhs or so, they sell Equity MFs and invest in yet another real estate.  Many feel far better with an immovable, tangible asset like a house that they can touch and feel than an asset like Mutual Fund, on a paper. Many take a selective view and keep thinking about the worst period of Stock Market and have only the best of real estate in mind.

One common reason of attraction is seemingly huge profit in real estate. One need to give only 20% from the pocket and the bank gives 80% to buy a real estate. When one buys an Equity Mutual Fund, nobody funds that. “I paid Rs. 20 Lakhs; bank gave Rs. 80 Lakhs and bought a house for Rs. 1 Cr. I paid EMI for 5 years and now I am selling for Rs. 1.4 Cr. From Rs. 20 Lakhs to Rs. 1.4 Crore, this is such a great investment”. Nobody bothers to do a simple IRR formula calculation in Excel as this may be hardly a break even investment if one considers repayments, taxes and transaction costs.

Is this a right behaviour? Every family has a unique situation. Every investor is on a different phase in the learning curve. Sometimes, one learns by observation and sometimes only by experience. Below mentioned parameters can be of help, while making such a decision.

Goal based + Flexibility: One should make a goal based investment. This means that the maturity of the goal and the asset either matches or one is able to withdraw progressively before the goal maturity. While it can take far longer or be far difficult for one to withdraw from Real Estate and Equity Markets may not be doing well when the goal is due, clearly in many ways, Equity gives far more flexibility than the real estate. You could pause, decrease, increase or stop your SIPs. You can also decrease or increase your Home Loan EMIs with a corresponding change in the tenor though such changes may have an impact on your cost of borrowing and may involve lot of paper work.

Liquidity: Real Estate investments are illiquid in nature and disposing a real estate can take lot of time. Equity Mutual Funds can also be in a negative zone at a time but if withdrawals are planned sensibly then using SWP (Systematic Withdrawal Plan) gets one the best price even in the worst period. Selling an Equity Mutual Fund is far easier.

Risk Tolerance: The nature of Real Estate Investment gives limited choice. A conservative investor can stick to ready possession projects by reputed builders but then the price appreciation may be only nominal. Once an investment is made in Real Estate, no changes are possible unless one sells the investment. In case of Equity Mutual Funds, one has far greater choices to invest based on risk appetite. One can focus on required capitalization, take small exposure to a sector and opt for actively managed or index based management as the need may be. With increasing age, the SIPs can be shifted to different funds to tone down the aggression. The investment in Equity Mutual Fund is well diversified against the risk of a single project in Real Estate. One can look at Commercial Real Estate, Plots and Industrial Real Estates though the risk and return magnitude are of different nature and once again individual investments are a single point of risk.

Regulations: Real Estate does not have any regulator as such and the valuations are subjective.  The investors will need to depend upon general consumer grievance forums and judiciary channel in case of any dispute with the builder. Mutual Funds Companies (Asset Management Companies) are well regulated and they follow the compliance laid down by SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds in India). Mutual Fund affairs are far more transparent with Daily NAVs, Monthly Fact Sheets and regularly reports as per the mandate. A regulator for Real Estate is being expected from a long time.

Timing: In Real Estate the price commitment is one shot. While you can pay over period of time, say linked to construction progress, the price is agreed in the beginning. In case of Equity Mutual Funds, following SIP approach allows one to average out the purchase price.

Tax Savings: Real Estate allows one to save tax on the principle as well as the interest payment. The current limit is up to Rs. 1.5 Lakhs for Principle repayment under Section 80 C and Rs. 2 Lakhs for Home Loan Interest payment under Section 24 (B). When one has more than one residential real estate, the interest payment can be claimed for tax exemption without any limit, subject to certain norms. The gains on selling a residential real estate for holding period of > 3 years are treated in Long Term category, get indexation benefits and can be tax exempt subject to reinvestment and other norms. On the other hand, investments in Equity Mutual Fund can be liquidated after one year and being treated in the long term category, does not attract any tax.

Returns: It is difficult to benchmark returns in Real Estate given the lack of transparency. While Equity Mutual Funds do have their performance cycle, sensible holdings over a long period of time i.e. at least 5 years, are likely to get decent returns on an inflation adjusted basis. There are many studies available on internet that compares the performance of Equity & Real Estate as an asset class.

So who wins?  Objective here is not to say that Equity Mutual Funds are ever green and Real Estate is always bad. Equity Mutual Fund investing gives rewards only when a methodology is followed. Real Estate has potential to get sizable profits if the bet works out well. Asset Allocation decisions should be taken keeping in mind factors like current priorities, goal duration, risk profile, target asset allocation and liquidity. Blindly investing in ‘yet another’ real estate because everyone seems to be making money is certainly not a winning style. 

This article was originally published on Moneycontrol.
The author can be reached at rohit@gettingyourich.com

India has made some good progress in the process of eliminating diseases like polio and TB which are major causes of serious health problems and death. But with economic development and better living standards, new diseases on the rise are lifestyle diseases. Lifestyle diseases are health problems like diabetes, cardiac disorders etc. caused due to unhealthy living habits. As per WHO, heart diseases will be single greatest killer in India by 2015. As per a study by Fortis Memorial Research Institute in 2013, 17 out of 100 people suffer from kidney ailments. Kidney ailments lead to excessive and unnecessary accumulation of fluids, salts and waste in the blood.  Risks due to such ailments are more higher for the urban young typically because of their lifestyle choices. It has been discovered that the fasting glucose levels (sugar level in the morning when you are supposed to be on an empty stomach) on an average are higher for the urban young. The main reasons for these diseases and conditions on the rise are -

High Disposable Income -  With a high disposable income and the overarching want to have everything and do everything have caused many health issues. Eating unhealthy food, junk food and from restaurants, having soft drinks and consuming alcohol have increased cholesterol levels, obesity and other ailments of the stomach and liver.

Erratic Working Hours – Earlier there was a clear demarcation between work life and personal life. Today with technological advancement and competitiveness in workplaces, there is no demarcation. People are always checking their work mails and having conference calls at any time. People are glued to their smartphones and tablets for work, socializing and entertainment. This leads to mental and physical stress not allowing the body to relax and rest. Erratic and long work hours leads to consumption of processed foods and too much of caffeine intake. This leads to accumulation of toxins in the body  leading to stomach problems, decreased mental ability, joint pain and muscle pain.

Sedentary Lifestyle – We are too “busy” to exercise. We have time to go for movies, have late night parties with drinks and food but have no time for a daily morning walk or yoga. The young generation has no or very little physical activity and a very sedentary lifestyle leading to increased risk of diseases like diabetes.

Lack of Physical Exercise - When was the last time you played a game or ran a sprint? We are busy with our families and work and unable to schedule time for some physical activities. This combined with increased intake of soft drinks, fried foods etc. leads to unhealthy weight gain. Obesity can lead to many problems like high blood pressure, diabetes and heart diseases.

We have to bring about some changes in our lifestyle to be more healthy. Some good personal finance planning habits can lead to a healthier lifestyle -

Make Shopping Lists – When we go out shopping for groceries/ food, we should make a list of the items that we need and ensure that we only buy that. Shops will have an attractive display of interesting goodies to eat but most of them are unhealthy. We should go for shopping after a proper meal so that we are not tempted by coffee shops and restaurants. This will curb unnecessary expenditure and we will avoid eating processed food and junk food.

Commute Smarter – Many of us commute by car or taxi or auto rickshaw. It is not easy for all of us to walk or cycle to work but we can make an attempt to make our commute more healthy. We could walk till the train station or get down from the cab or auto a little away from office and walk it up. We can check out options of public transport. Commuting in this manner would give us some exercise. It also means we need to get ready earlier meaning getting up earlier. Getting up early is recommended for good health. At the same time, if you use public transport for example, you will save a little everyday .

Having home cooked food – We should try taking home cooked food to office and college instead of eating in the canteen and food courts. Items there are neither nutritious nor healthy. Eating home cooked food will lead to a healthier lifestyle and also save some money as we are tempted to binge on unhealthy items when we have to buy food.

Getting rid of unhealthy expensive habits – Smoking and Alcohol consumption lead to excessive damage of our health. It is best to quit these habits. Smokers have  a high risk of heart diseases and cancer.  Alcohol consumption can affect the kidney and stomach. It also affects your mental ability. Quitting these habits help financially as well. A packet of 10 king size cigarettes costs around Rs.90. Smokers normally need to pay higher premium on life insurance and term insurance. Quitting smoking will reduce expenses. Similarly alcohol consumption in a restaurant is expensive considering the prices, taxes etc. This money can also be saved.

Do you think you have a healthy lifestyle? Let us know what changes will you bring about in your lifestyle to be more healthy.

The article was originally published on Bizodisha.
The author can be reached at vidya@gettingyourich.com

Asset Allocation is popularly defined as the way an investor assigns his assets to different asset classes, according to various factors such as his risk tolerance, risk appetite, goals and investment timeframe. Asset allocation is extremely critical to how the investor’s portfolio performs. There are several studies which talk of the importance of asset allocation and financial planners also stress on this requirement. However, this is a highly neglected aspect by most investors. More importance is given to what stocks or mutual funds one should hold. While this is needed, what is more essential is for an investor to first decide the mix of asset classes he should have.

There is no one simple, straight forward solution to Asset Allocation. This depends on the individual’s factors and unique requirements. Nevertheless, it is imperative that asset allocation is adopted while planning finances, and constantly reviewed as well.

Asset Allocation primarily works on the principle of diversification. Simply put, this is something which is oft repeated by experts - do not put all the eggs in one basket. Attaining a fine balance between risk and returns is what achieves an ideal portfolio. Both movable and immovable investments are diversified across different asset classes so that at the portfolio level, losses are limited and volatilities of returns are reduced.

How to do Asset Allocation? One should look at all aspects of his/her finances while allocating assets. Understanding risk tolerance and risk appetite is very important before deciding on the asset allocation. For this purpose, it is recommended to undertake risk profiling tests which are available on the internet or with a financial planner. It is also important to be cognizant of one’s financial goals and liabilities. Online calculators or financial advisers help investors in arriving at the ideal asset allocation. It is also possible to understand which asset allocation best suits you by working backwards from your goals - estimate the return on investment which is needed to achieve the goals and choose the portfolio which can give you this return. Once an ideal asset allocation is arrived at, the current asset allocation should be mapped to this and steps should be taken to eventually move to this. Asset allocation once achieved should be periodically reviewed and re-aligned, if needed, depending on changing circumstances and needs.

Models of Asset Allocation: Asset Allocation models can work to achieve a portfolio which is Aggressive, Moderate or Conservative. These are three broad buckets. Within this, one can further classify it as Moderately Aggressive and Moderately Conservative. As mentioned above, the classification depends on the risk level, goals and surplus funds.

Benefits of Asset Allocation: Diversification of assets is an important benefit of asset allocation. As a result, the risk is reduced and returns are more stable. Asset allocation is also important to achieve goals. A long term goal can be achieved by having more aggressive assets such as equity mutual funds, while it is better to invest in safer assets to achieve short term goals. This balance is brought about by asset allocation.

How to avoid an imbalance: An incorrect asset allocation can upset finances. It is important to avoid this imbalance. Consumption and investment needs should be segregated. For example, if gold will be a critical asset in your child’s marriage, then the proportion of assets allocated towards gold should be increased. While allocating assets, the post tax return should be considered. It is recommended to choose avenues which can help in beating inflation rates over the long term. Risk and return are co-related. Hence, choosing investment avenues according to goals and timeline of goals can help in avoiding an imbalance in asset allocation. It is also important to look at your asset position in totality. For example, an investor with ongoing investments in employee provident fund is already investing in debt, and therefore may avoid fixed deposits for the long term. This is of course subject to other factors such as risk profiling and individual preferences.

Review of Asset Allocation: Achieving an ideal asset allocation position is not an end by itself. Change in goals can alter the asset allocation. For example, when one nears a goal, it is better to move to safer assets like debt. Similarly, time can also bring about a need for change in asset allocation. Risk capacity and risk tolerance can change over time. Also, as one becomes old, there is usually a preference to move away from volatile assets to safer avenues.  Hence reviewing the asset allocation position and re-aligning when needed is absolutely necessary.

Asset Allocation is critical for a successful investment portfolio. That said, it should be remembered that this is highly subjective and varies from person to person. Also, for the same person, it changes from time to time. Regular review and modification is necessary in the asset allocation process.

This was originally published on Moneycontrol. The author can be reached at smitha@gettingyourich.com. The above are suggestions only and readers should consult an adviser before making any decision. 

Rahul Jain used to diligently pay off his credit card balance before the last due date. But he did not realise that he was paying only the minimum amount due and therefore never managed to make the credit balance to nil. The interest payment kept increasing. Many of us do not understand the credit card statement properly and end up making costly mistakes. Here are a few things that you need to know in a credit card statement -

Amount Due – The statement has two amounts as due – Minimum Amount Due and Total Amount Due. The total amount due is the total payment that you have to make before the due date. The minimum amount due is a percentage of the total amount that you need to pay to keep your card activated. If you pay only the minimum amount due, you will be charged a very high interest rate (about 36%-42%) on the remaining amount which will appear as the total amount due in next month's statement. Your credit limit will also be reduced to the extent of the remaining balance unpaid. If you make the minimum amount due payment late, late charges are levied. It is obviously better to pay off the total amount due. It will save you money and your CIBIL score remains unaffected.

Credit Limit – Credit Limit is the extent to which the bank has given you the facility to use the card. The available credit limit is the difference between the maximum credit limit and the amount used till now. So if you have outstanding balance, you will have less credit limit. You should keep that in mind when you are using your card.

 

Cash Advance Limit – You can withdraw cash with your credit card. This amount is different from the credit limit amounts. It is normally less than the credit limit. You will incur charges of up to 2.5%-3% of the total amount. This facility should be used only in extreme emergencies.

Due Date – Due Date is the date by which the amount is to be credited to the bank. So you should make your payment such that the amount is realised by the bank before or on the due date. Cheques take 2-3 days to get encashed. You should keep that in mind if you are making a cheque payment. You should know the billing cycle as transactions made towards the end of the cycle will not get the same credit period as the transactions made at the beginning of the credit cycle period.

Interest Charges – You will be charged interest on the amount unpaid. The interest is calculated at 36%-42% on the amount unpaid and on purchases made in the next cycle if you have payment due. 

Reward Points – Many credit cards offer reward points. Earned reward points are mentioned in the statement. Read the terms and conditions of the same Ensure that you are getting the reward points promised to you. Check the expiry conditions of the reward points and remember to redeem as we all feel good when we gifts and would get upset if we find out that we lost out on the chance to get some goodies!

You should also remember to

- Check the card statement for your details like name, address, email, phone number etc. If there are discrepancies, inform the bank immediately to reduce chances of missing bills and fraudulent activities on your card.

- Check the Credit card statement regularly for the transactions, classification of transactions, total amount due, amount paid and due date. You should not just wait for the text message from the bank and pay the amount blindly.

- You should be aware of the terms and conditions of usage of the card.

- Some card issuers allow users to exceed their credit limit by charging an overdraft fee. Find out if your card allows that and ensure that you do not go above the credit limit unless it is an emergency.

Credit Cards are convenient to use but it is important to use them judiciously and check the statement thoroughly for all information.


This article was originally published on Indianotes.
The author can be reached at vidya@gettingyourich.com

EXECUTIVE SUMMARY: Saving for child’s future is always a priority for parents. Be it for Education or Marriage, these goals are emotional. Most of the times one tries to save either in the form of FD or an Insurance Policy. This article explores child plans of Mutual Funds which are lesser known to public but can generate better returns.

Anurag and Anupriya were very happy when they were blessed with twins. Anurag’s relatives and his friends blessed the babies with lots of blessings, gifts and cash. His parents decided to keep some money in the name of children for their future. His father gave him a lump sum amount and asked him to take a good decision. Anurag friends suggested him to take insurance plan for children; some suggested to keep the money into FD’s. Confused, Anurag finally consulted an adviser who introduced him the Child Plans of Mutual Funds. Anurag was curious to know about the same and then finally decided to invest into mutual funds.

So what are the Child plans from Mutual Fund companies? How they are different from a normal equity or debt scheme. Let’s have a look on what Anurag learned from his advisor.

Mutual Funds Schemes for Children: The goal of child education and marriage are the most important goals in one’s life. Every couple starts planning for these goals as soon as child is born. Most of the times people end up buying insurance policy for their children which turns out to be a bad decision as the returns generated are not in tune with the inflation. Not many people know about the mutual fund schemes which are dedicated towards child’s future planning.

Most of the funds under this category are generally Equity oriented hybrid funds.  As these goals are planned early, there is a long period to save and for that pure equity or equity oriented hybrid funds are the best bet.  In this category, there are also few schemes which are debt oriented.  HDFC Chidlren Gift’s Fund is one of the fund which provide both equity and debt oriented funds.

How Child Plan are different from plain schemes: There are some features which make child plan look different from plain vanilla schemes.

1. Child plan have a longer lock in period. For instance one of the schemes has a lock in period of 3 years from investment date or 18 years of age whichever comes later.
2. Usually when someone invests in the name of children or grandchildren, third party declaration is required. However, for these schemes, no such declaration is required.
3. The redemption proceeds will be in the name of child. It does not matter who the contributor is. (Parents or Grand Parents)
4. The exit load charges are higher. Few plans charge as high as 4% to those who want to redeem before 4 years and few charge 1-2% even after 7 years.

Let’s have a look on the comparison of different schemes available as child plan.

Source: Value Express   Date: 16/07/2014

Should you invest into Child Plan of Mutual Fund?

Investing for the child’s future requires a lot of discipline. It is always said that only long term investing has created wealth and discipline is the one of the reason behind creation of wealth. And with the kind of features child plan has, anybody will think thrice before withdrawing the fund.
These plans are definitely better than any of the child insurance plans available and the benefit of compounding in mutual funds makes it more attractive. However, the pure equity fund for the longer period will definitely fetch more returns than any hybrid funds. So while making strategy for investment, one can include the plain equity fund into the portfolio with child plan for a long term goal.
As child plans invest major portion into equity, Investing through SIP (Systematically Investment Plan) is suggested as it helps in reducing the average cost and also helps you in enabling a disciplined participation in market through ups and down.
Vice versa, if the goal is of short term one can invest into debt oriented child plan, though with the recent change in the Debt MF Taxation, this will be more or less like Fixed Deposit for a tenure of < 3 years. Please remember, merely by investing into these special funds one cannot achieve the goal. One has to make strategy with the proper asset allocation then only the chance of reaching towards goal increases.

Avoid investing majorly into Child’s name: There is no doubt that one should invest in child’s name, however it should not be more than say 30-40% of the targeted amount. Child goals are of long term, nobody knows what would be their maturity at that age and if the amount is substantial, it may create a problem as child gets full control over the funds. So it’s generally recommended that parents invest majorly in their own name even for Child goals.

Teach them about Money: To educate you children about finance at an early age, try to engage them while filling the form and if big enough then let them fill it so that they get an idea about what they are doing and what for. Also, encourage them to watch money related videos such as IDFC One Idiot movie or Franklin Templeton Academy’s investor education videos.

The author can be reached at ayush@gettingyourich.com

Cash in hand – People below the poverty line are many times uneducated and illiterate. They are not aware of how to open bank accounts etc.

Central Bank of India has a No-Frills Savings Deposit Account - The main features are - Initial Deposit of Rs. 50 and minimum balance of Rs. 50 though there are no charges for non-maintenance of minimum balance. 50 withdrawals are free of charge and 1 cheque book is given to the customer. Simplified KYC procedure for opening an account and an existing customer who has fulfilled KYC norms can introduce another customer.
Another product that Central Bank of India offers is the CENT Smart Variable Recurring Deposit. The investor can open this account through Business Correspondents and need not visit a branch. The account can be opened with a minimum deposit of Rs. 10. Deposits can be made on a weekly basis as well which is good for daily wage earners. The scheme is available for tenures of 12 months, 24 months and 36 months. There is also an option to close the account prematurely which is helpful in case of emergency withdrawal.

Investment – UTI Retirement Benefit Pension Fund (UTI RBPF) is a government pension fund which takes small contributions of Rs.50 to Rs. 200 per month and payments are flexible. The scheme invests in listed equities, government and corporate debt. It also allows withdrawals. It is distributed through third parties working at the grassroots levels like SEWA and other such groups which increase its reach.

Insurance - Rashtriya Swasthya Bima Yojana (RSBY), or “National Health Insurance Programme” has expanded health-care access among the poor. RSBY has provided about 110 million people with heavily subsidized health insurance. It targets the poor, illiterate and highly mobile population. It provides the insured a smart card that uses biometrics to identify patients and is able to make seamless and paperless payment from the insurer to the insured. It is issued on the spot to people who pay Rs. 30 as an enrolment fee. The remainder of the total premium which is about Rs.500-Rs.600 is paid by the government which provides a financial cover greater than Rs. 3,00,000 . This gives them the facility to go to any hospital. Organizations like Gram Vikas in Orissa help to distribute these cards.
Chola MS General Insurance provides insurance products for the rural sector like health insurance by being involved in RSBY. They provide other products like Cattle Insurance, Tractor/Farm Inputs Insurance, Critical Illness Insurance, Micro Insurance and Weather Insurance.

Retirement Planning - Invest India Micro Pension Services (IIMPS) promotes micro savings among the poor for their old age. They offer a range of products to the poor for financial security -
1. NPS Lite/ Swavalambam – This is a long term retirement savings plan. Those who save Rs. 1000 per year get a matching contribution from the government which is a big incentive for saving.
2. They also promote UTI (UTI RBPF) and Insurance products of LIC that caters to the poor.

Estate Planning – The lower income group also need to plan what happens to their assets after their death. A person with sound mind can draft a will with two witnesses signing it. The witnesses should be people who will not inherit anything. Though it is recommended, it is not necessary to register it or even notarize it for it to be valid. All pages have to be signed by the person drafting the will.

Social Service Organizations - There are organizations that help the lower income group in getting financial products. IFMR Rural Channels is an organization in Chennai that is devoted to the cause of financial inclusion. They offer products for financial planning, insurance and growth and diversification of investments to the poor by acting as an agent for bigger financial institutions. They claim to provide Crop loan, Salary Loan, Emergency Loan, Term Life Insurance, Livestock Insurance, National Pension Scheme (Lite), FD, and Savings Account. They are currently present only in Tamil Nadu.

The author can be reached at vidya@gettingyourich.com

Selling a property is no easy task. You have to keep several things in mind to complete the sale successfully. We give you some tips to make this transaction a little easier for you -

1) Find the market value of the house – You have to know the market value of the house to sell it. You cannot set a sale price on the basis of what you bought the house for. The real estate prices change depending on demand and supply, builder reputation, government regulations on property transactions, state of the economy etc. You can find out the value through property dealers, self-assessment, prevailing market rate for similar properties etc. There are professional bodies or real estate consultants also that help you determine the price and assist you in effecting the transaction.

2) Ensure that the house is liveable – No one likes to buy a house that is not clean, not maintained and has a lot of broken things around like leaking faucets or rusted windows. Repair the things that need to be repaired and make sure the house is presentable.

3) Market your house – You have to advertise your house and market it well. You can put advertisements in newspapers. You can upload photos on property websites. You can advertise by word of mouth among your friends, relatives and even in your society. If required, you can engage the services of a professional broker.

4) Dealing with the Buyer – You should ask for an optimum price. You should check the credentials of the buyer in terms of background, financial standing etc. You should not be affected by very high or very low offers but consider each one practically. Check as to how the buyer has arranged for the financing and how you will get your money.

5) Legal Documents and Taxation – Once you have decided to go ahead with the transaction, you have to get the legal documents in order. You have to keep the Sale Contract and past property documents (if you have purchased it from another owner), Encumbrance certificate and loan clearance certificate. Once the buyer is zeroed in, the seller needs to inform the society or the applicable governing body about the sale and buyer details and get a NOC from them for the same. Registration of property has to be done in the buyer's name.

The seller should ensure that he pays the relevant taxes. If he is selling the house within 3 years of purchase of the same, the proceeds of the sale will be calculated as per income tax slabs. If the sale is being done after 3 years of purchase, a long term capital gain tax of 20% is applicable. The seller can get exemption if he uses the sale proceeds to buy another house within 2 years of the sale or build one within 3 years of the sale. He can keep the sales proceeds in a Capital Gain Account Scheme (CGAS) account in a nationalized bank until it is utilised to buy/build a new house. He can also invest up to Rs. 50,00,000 in specific bonds  under Section 54 EC and get an exemption.

You need to do your homework, be practical and don't let yourself swayed by emotions to ensure that you get a favourable deal while selling the house. Let us know your experiences while selling a house. 

The author can be reached at vidya@gettingyourich.com

As a health insurance strategy, one can either use the health insurance provided by the employer or also buy a personal secondary health insurance on a safer side. A majority of employers provide for a group health cover. This corporate health cover is a huge benefit. But is having only this health cover sufficient? Personal Finance experts believe that it is far better to have a secondary health cover. Here’s why:

Job change: A change in job results in the health insurance provided by the previous employer coming to an end. The new employer may not offer a health cover, or may have lower sum assured or sub-standard features or poor services. That said, now, in the group health cover, insurance companies have also started giving an option for the employee to move to the normal health cover by the same insurance company. This is an early trend and needs to be watched carefully how this works out.

Start of own venture: If one starts on his own or joins a start-up, then he may not have any health cover. A secondary cover helps in this case.

Time between job changes: A cooling period of 1 or 2 month break in between job changes means that you neither have health cover from the old company, nor from the new one. Even when you join the new company, the claim may not be admissible for the first 30 days. It may be possible that during this interim period, there is a hospitalization in the family for which you need health insurance cover. A secondary health cover can help to meet such needs.

Cost cutting by the company: If your employer decides to lower the amount of health cover, features or flexibility, then it can be a risk exposure for you. It’s very difficult as an employee to negotiate against such changes.

Working abroad: If you move to a foreign location, you may get a health cover. But will this cover your family, back home? Maybe or may not be.

Cover for Older Parents: If one has older parents, it may be difficult to get a health insurance cover for them. The personal cover can be used for self & family and office cover can be reserved for parents.

Get in early: Given the standard waiting periods for specific diseases and for pre-existing diseases, opting for a secondary health insurance at an early stage will help as one may develop ailments at a later stage in life.

Retirement: There are very few corporates who extend medical cover benefits post retirement. If your health is not good, you may either have to pay a higher premium, or may even be declined a health cover. Thankfully, the maximum entry age is typically 65 years. However insurance companies are very conservative while extending the health cover at this age. Taking a new health cover while you retire may not only prove to be expensive, but may also not be possible in some cases.

Relying solely on a corporate health cover can therefore be a risky proposition. The main advantage of not taking a secondary health insurance is saving on premium costs.

Alternate way: If you are just starting your career in your late 20s and do not have a huge family responsibility, you can stick to a corporate cover and take a top-up cover with the deductible being equal to the corporate cover. Another scenario is if both the husband and wife are working with sufficient individual corporate covers which also include the parents, then you can opt for a top up cover for now. A top up cover is an additional insurance, over and above the existing health cover.

Top-up Covers

The Top-up health cover as a product is still evolving in the Indian markets. Although a top up plan is less expensive, there are some drawbacks. A top up health plan comes into force only above a certain limit, known as the ‘deductible’. If your corporate health cover amount is lower than this deductible amount, then you will have to pay the difference from your pocket. Further, top up plans usually work when the claim amount exceeds the deductible in a single occurrence of hospitalization by a single member.  Some of the top up covers have provisions to convert to a nil deductible policy at the time of retirement. Some of the super top up cover products also allows you to make multiple claims during the year.

Apollo Munich’s Optima Super is a Super Top up plan and can be converted to a full-fledged health insurance plan close to retirement. On conversion, you do not have to undergo the waiting period requirements. While this is a benefit, be aware that the premiums will increase on conversion, as you are moving from a ‘deductible’ to a ‘nil deductible’ plan. 

Conclusion

The question of whether or not a secondary health insurance is needed should therefore be analyzed carefully, keeping in mind individual requirements and financial situations. As a best practice, it is strongly suggested to have a secondary health cover in place.

The analysis is valid only on the day being published. Readers should study the prospectus of the insurance company for further analysis and consult an adviser before making any decision.

The author can be reached at smitha@gettingyourich.com

It was the period of April 2012 to May 2013 when RBI was in the phase of easing the interest rate. Looking at the opportunity Fund houses started pushing Debt funds and there was no sign of equity funds coming up. It was sold with a USP that NAV never comes down. Suddenly in July 2013 Debt fund shows negative return and becomes Villain in the market.

This time when Finance Minister announced the changes in the taxation related to the debt funds, suddenly AMC’s started discussing about Arbitrage funds. Few AMC’s started pushing it making it an alternative to the debt funds. So what are arbitrage Funds? How arbitrage funds work? Are these really an alternative of Debt funds? Let’s try to find the answer should you invest into it or not.

What are Arbitrage Funds?

People who are not familiar with the tem Arbitrage might think it as another equity fund. However, this is not true. The main aim of this fund is to seek an arbitrage opportunity between cash and derivative market and to generate an income.  Major part of the fund’s portfolio is invested into equities and rest is used for arbitrage opportunities.

How do these funds work?

There is always an arbitrage opportunity available in the stock market. What needed is the bull’s eye to catch the opportunity. Suppose ABC stock is trading in cash market at Rs.1000 and the same stock’s future price is 1010. Now, the fund manager can see the arbitrage opportunity and thus will sell the future contract in the derivative market and at the same time will buy the equivalent no. of shares in cash market. He will hold this position till the expiry. Now as it is definite that the cash price and future price will be same on expiry date, he will thus reverse the transactions. He will sell the shares in the cash market and will buy the future contract thus making the definite profit. Irrespective of the price, fund manager will make a profit out of this transaction.

It sounds very easy and simple but the problem lies in finding this kind of opportunities very frequently. Let’s understand it with an example.

Scenario 1 –

ABC Stock was bought in cash market at a price of 1000 and in future market a lot was sold at a price of 1010. Now, on expiry day, the price of stock in cash and future market becomes same at Rs.1015. So a profit of Rs.15 was made by selling it in cash market and a loss of Rs.5 was booked by buying the future lot. In the end making a final profit of Rs.10/-

Scenario 2 –

ABC Stock was bought in cash market at a price of 1000 and in future market a lot was sold at a price of 1010. Now, on expiry day, the price of stock in cash and future market becomes same at Rs.995/- So a loss of Rs.5 was booked by selling it in cash market and a profit of Rs.15 was made by buying the future lot. In the end making a final profit of Rs.10/-

Why Suddenly Arbitrage funds are in focus?

With the recent changes in the tax structure of debt funds, the arbitrage funds have become the flavour of the season. Now gain on debt funds will be taxed at 15% if redeemed before 36 month and on the other hand if redeemed after 3 years then Long term capital gain will be taxed at 20% after indexation.

Arbitrage funds enjoy an edge over debt funds only because of Tax benefits. Arbitrage funds are taxed at 15% if redeemed before 1 year and no tax on gain over 1 year. The risk free return which is almost same as debt fund for 1 year makes it an attractive bet.

Is Arbitrage an alternative of debt fund?

Debt funds are an alternative to the fixed deposit and are used to earn fixed income over a period of time. There should be a specific time period behind putting money into debt funds otherwise the desired result will vary. The risk associated with debt funds is the interest rate risk.

Arbitrage funds are for those who can bear mild risk on their investment and want to invest only for Medium - short term.  These funds are managed so professionally that the probability of getting loss is very little. But still one cannot ignore the risk of volatility in the market. So, it is always advised to invest into arbitrage with a horizon of medium to short term with a minimum period of 1 year.

Should you invest?

People who are looking for wealth creation should stay away from arbitrage funds as they will not generate good returns over long period. Instead a plain equity fund should be the way to create wealth.

If you are looking for an alternative of debt fund for less than 2 - 3 years and if you can’t bear any kind of risk then FD should your choice not arbitrage funds. If the goal is of 1-2 years then only arbitrage funds can be given a priority over debt funds.

These funds are to provide short term tax free gains, so their weightage should be around 10% in your portfolio and should not be used for wealth creation in long term. So before investing think about your goal, time period and then invest. Just by riding in the wave of flavour of the season will not help you in reaching your goal.


This article was originally published on Indianotes. The author can be reached at ayush@gettingyourich.com