Monday, October 14, 2013

Understand Asset class behavior before investing


Sanjay (29) has been investing in the form of sips in diversified equity funds for the last 3 years as advised by his financial planner for his son’s post graduation funding which is nearly 15 years away. Of late his patience seems to have run out after seeing his equity funds portfolio in the red for quite some time now. He is thinking of stopping his sips as he now believes that the equity markets will fall more in the coming days which will further reduce his portfolio value. Mr. Rao (45) had invested a lumpsum amount in a gold savings plan a few months ago and is now ruing his decision as that fund has fallen by nearly 10% reflecting the correction in gold prices.

Many investors like Sanjay invest in equity without understanding the behavior of that asset. The very fact that unlike fixed deposits and postal savings, the returns on equity, gold or real estate are not assured which makes it vulnerable to price volatility in the short term. Each asset class is different and so is its behavior during different situations.


An understanding of the past performance of equity markets or equity diversified funds can give an indication of the volatility that’s associated with equity. Warren Buffet has famously said that Only buy something that you'd be perfectly happy to hold if the market shut down for ten years”. This gives an indication of the long periods of uncertainty that can affect equity markets but only those who stay put with their investments are suitable rewarded. So if you do not have the risk appetite nor want to see any risk associated with your investments, then equity investments are not for you. Secondly invest in equity only if your goals are of fairly long term after having understood that you may see long periods of negative return especially in times such as the one that we are currently going through.

Real Estate

We have seen real estate prices going through the roof in the last 10 years. Many have forgotten the decade before 2003, when the real estate asset prices had collapsed and many investors who had invested at the peak in the 1990’s lost out big time when they sold out at a discount. Real estate as an asset class is good but again if the investment is done as a long term asset associated with your goal.


Gold has had a dream run for several years now. Many investors who invested in gold as an asset class a few years back have gained handsomely but at present gold prices have been correcting for the last few months. Therefore one need to understand that even gold prices are volatile and therefore investing in a staggered manner can be beneficial if gold has been suggested as a part of your portfolio.

Debt funds

This category offers a huge variety of funds to choose from depending on the time horizon. While one is at least aware that equity funds can give negative returns during certain periods, not many know that there are certain debt funds which display a cyclical pattern in terms of returns and are very sensitive to interest rate changes. Most Gilt funds and some income funds typically invest predominantly in government bonds which are vulnerable to interest rate changes. At the moment the interest rate is showing a declining trend going ahead which bodes well for gilt funds as the government bond prices increase resulting in higher nav for the funds which in turn results in higher returns. A reverse situation can pan out during the interest rate cycle going up, which can result in lower or negative returns in gilt funds.

The intention of a well diversified portfolio is to reduce risk and allocate assets as per your goals and time horizon. Secondly diversified portfolio is relevant because during different time periods, there could be one asset class which will perform better than the other. Therefore understanding each asset class before making it part of your portfolio is important in order to avoid any knee jerk reactions at extreme situations which might nullify the entire objective of building the diversified portfolio. 





Check sub limit conditions before you buy health insurance

When Mrs. Radhika sheth was diagnosed with Kidney stone ailment, she was advised laser treatment by her doctor and she promptly took an appointment with the referred hospital for undergoing the procedure. Just 2 days prior to the admission, Radhika gave details of her health insurance policy to the TPA desk for availing cashless treatment at the hospital. A day later she was told that the treatment would cost around Rs. 25000 and the hospital had received the approval from the TPA for that amount. The laser treatment was able to break the stone but the same could not be removed due to complications and a stent was placed subsequently. A few weeks later Radha was again suggested to get admitted to the hospital for removal of the stone and the stent. This time the estimated cost of the surgery was given at around 75000. This time the TPA desk told her that since her health insurance cover was for a sum assured of Rs. 2 lakhs, as per the policy conditions, only 25% of the sum assured or Rs. 50000 can be approved for this type of treatment. Since she had already claimed Rs. 25000 earlier, the TPA gave approval for only Rs. 25000. Apart from the pain of suffering from the ailment, Radha had to suffer the pain of paying up Rs. 50000 from her own pocket inspite of having an insurance cover of Rs. 2 lakhs.

Radha suffered because of the sub-limit clause in the policy which stated that for specific common illnesses there will be a limit in terms of treatment costs. There are hundreds of such cases where people have bought health insurance policies without understanding or reading the policy conditions or sub limits. Sub-limits clause is employed by some insurance companies to reduce their claims outgo and is restricted to some common ailments such as Cataract, Piles, Tonsils, sinus, Hernia, kidney stones, etc. The list of ailments under sub-limits and restriction in treatment costs varies from company to company.

Before buying a health insurance policy one needs to understand these sub limits clause to avoid paying from your own sources and thereby defeating the very purpose of buying health insurance. The explanation of some of these sub-limits is given below.

1.      Sub –limits on room rent: Many health insurance companies specifically mention that per day room rent should not exceed 1 or 1.5% of the sum assured. For example, if the policy sum assured is Rs. 2 lakhs then the room rent cannot exceed Rs. 2000 per day if the applicable sub limit is 1%. Several hospitals have standard surgery/treatment packages which are defined in terms of the room that is selected. For example the surgery package for a hernia operation may cost Rs. 15000 in a standard room but the same can cost Rs. 25000 in an AC single room. So for a Rs. 2 lakh policy with 1% sub limit for room rent, any room with maximum Rs. 2000 per day rent can be selected and accordingly the package offered for that room will be approved by the insurance company.

General ward (Rs)
Twin sharing (Rs)
Single room (Rs)
Room rent
Hernia operation  package
For policy cover of 2 lakhs with 1% limit
Not Applicable


2.      Sub limits on specific treatment:  One needs to check the list of ailments which come under the sub limits clause and the amounts specified against each of them. Even though your sum assured may be high, but the sub limit clause will ensure that you won’t be able to claim your entire hospitalization expenses. For example, if there is a sub limit clause of 50% of sum assured for cardiac ailments or cancer, then even if your sum assured is Rs. 5 lakhs, you cannot claim more than Rs. 2.5 lakhs due to the 50% sublimit clause.

3.      Post hospitalization clause : Some of the policies specifically mention that after discharge from hospital, any additional costs related to that ailment will be paid subject to a ceiling. This ceiling can be in terms of 5% of sum assured or Rs. 5000 in some cases.

If you don’t want any nasty surprises at the time of claim, it makes sense to go through the above mentioned sub limit clause and select only those policies which does not contain those clauses. Ideally the premium for policies without sub limits may be slightly higher than those which contain those limits, but the benefits far outweigh the costs. Also do not forget to review your insurance cover and increase it if required to take care of increasing healthcare costs.






Good Money habits we can learn from our parents


Mr.Rajesh Iyer(37) has fond memories of his childhood days when his father was the only earning member in his family of 4 siblings. His mother was a homemaker and was supposed to take care of the children and the kitchen. Rajesh still doesn’t know how much his father used to earn but he vividly remembers that the first thing he used to do on getting his salary was to give a part of it to his mother and the rest was deposited into his father’ bank account. His mother was supposed to take care of the monthly expenses from that amount. A couple of times, Rajesh used to accompany his father to his bank only to stand in the serpentine queue to deposit his money. He never understood that time why the money was deposited there in the first place. Secondly even though the bank was nearly 2 kms away from their chawl where they stayed, his father never took the bus but preferred walking in order to save some  money.

Inspite of having 4 children, Rajesh’s sole earning father was able to provide good education to these children, all of whom are well placed in good organizations today. Even today his father takes care of his daily expenses and medical bills from his own sources which have been invested diligently in fixed income instruments. Rajesh is now used to hearing from his father on how he saved Rs. 2 the other day by walking 2 stops and boarding the bus from that stop.

Today one may argue that circumstances were different at that point of time and certain money traits of our parents are not relevant in today’s world. For example, things which were luxuries earlier have become necessities. Today, time is of the essence and everything has to be acquired pretty fast otherwise we may suffer from inferiority complex. But on taking a closer look, we come across some traits or habits of our parents which are still relevant in today’s world like…

1.      Save for a rainy day: Even without any formal insurance arrangements that time, most working parents thought that it was necessary to save some money regularly which could be utilized for any requirements in the family. Inspite of not having a plethora of products available that time, the humble fixed and postal deposits fulfilled the requirement of safety and guaranteed returns. It was a simple product which could be understood by the masses. Today inspite of having good income, most are too lazy to save, forget investing. Some are not even able to save as high lifestyle expenses ensure that they end up splurging more than they earn. Today we are spoilt for choice to invest in a plethora of products and asset classes, but end up keeping our money idle in savings account due to lack of time to invest.

2.      A penny saved is a penny earned: Most mothers don’t buy anything unless they see a bargain or unless the seller reduces the price. Today due to paucity of time, we end up paying an inflated price to avoid any arguments and waste of time. Secondly eating out on several times even without any occasion has become the norm with most people.  We even end up buying more than we need at times just because there was a so called “discount sale”. Like our parents, we can avoid or begin cutting down on unnecessary expenses which in turn can boost our savings.

3.      Stay away from debt:  Most people would vouch for the fact that their parents never dared to take a loan to buy a house or any utility item as they believed that it would only be right to earn, save and then buy. Sometimes debt is good especially when we want to buy our self occupied property, but not at the cost of taking a very big loan where you end up paying a major amount of your monthly income. Avoid multiple loans as too many loans can also push you into the debt trap. Our parents did not believe in instant gratification and therefore they steered clear of most troubles.

4.      Create a good support system by maintaining  good relations: Our parents who lived in the joint family system ensured that the entire family lived and shared their good and bad times together. Today with nuclear family system being prevalent and add to it our busy working schedules, the social touch and our relations has taken a severe beating. We live in times when there is too much of economic uncertainty. Under such difficult times, only your near and dear ones can be a great deal of financial and emotional support. Even during medical emergencies, those close to you can provide great support only if you have been able to maintain good relations.

Wednesday, February 20, 2013

Do you have enough to retire ?

At the age of 53 years, when most people start thinking about planning for retirement, Pankaj Kumar quit his banking job and professional life for good. Over the next one year he indulged in his passion – travel and trekking. Kumar travelled across north India, visiting places, which he had always wanted to, but could not due to work and family responsibilities.

Today at the age of 58, nearly five years after retirement, Pankaj has covered a lot of places and is planning to travel more in the days to come. When asked about how he is able to manage his routine and travel expenses, Pankaj casually mentions that he has planned for his retirement in advance and has created adequate income streams to fund his retirement.

Gopal Rao’s case is exactly the opposite that of Kumar’s. Having retired from private service at the age of 58 years, Rao utilised most of his provident fund corpus for the lavish weddings of his two children. He is now left with only Rs 10 lakh, which he has invested in a bank fixed deposit at 9 per cent interest, which earns him only Rs 7,500 per month. With the present level of inflation hovering at around 9 per cent. it is a challenge for Rao to manage his expenses with this money.

Of the two cases mentioned above, Kumar definitely seems to be better placed. He is living a dignified life, having planned adequately for his retirement expenses. Let us look into the steps he took to retire early.

Start investing early: The moment, Kumar got his first salary at the age of 21 years; he opened a Public Provident Fund (PPF) account and starting investing 10 per cent of his salary in it every month. He knew that if he kept surplus money in his bank account he would spend most of it. So, he saved first and then spent whatever remained for his basic needs and requirements. He initially opted for bank recurring deposits and postal schemes.

PF should be exclusively for your retirement: For the salaried, Provident Fund (PF) is like a blessing in disguise as a fixed amount (usually 12 per cent of your basic) gets deducted from your salary along with an equal contribution from your employer. This contribution increases as and when your basic salary increases. It earns you compounding returns of 8.5 per cent.

Just to give an idea, if the basic salary of an individual at 21 years is Rs 10,000 per month and he is expected to retire at age 58 years with a modest 5 per cent annual increase in his basic salary, he would be able to create a PF corpus of Rs 1.42 crore.

Plan your retirement age in advance: Kumar had his family responsibilities, but since he had planned all of them in advance he was able to focus on each of them. Having clear goals helped him to start allocating funds to his various goals.

Calculating the retirement corpus: Once you have decided to retire at a particular age, the next thing to do is to find out how much your expenses will be at the time of retirement. For this, the present expenses can be considered as the base. After deducting children’s educational expenses and other financial liabilities, the future value should be calculated at an appropriate inflation rate. For example if the basic monthly expenses at age 35 is Rs 25,000, then at the present inflation rate of 8 per cent, the future value of this expense at age 58 will be Rs 1,47,000. Then if one is expected to survive (life expectancy) till age 80 years, assuming that you can earn 9 per cent returns on your retirement funds and the inflation that time to be 7 per cent, you will require a corpus of Rs 3.17 crore.

Investing in equity: Understanding the power of equity over longer period of investment helped Kumar to create wealth over a 20-year period. He started investing in equities and slowly and gradually built a portfolio only of bluechip and large companies. He followed a strategy of identifying the top 20 companies of the Sensex and kept investing a small amount every month irrespective of the market situation.

These investments provided him with an annualised return of around 16 per cent over the 20-year period and helped him retire early. Today, he retains around 25 per cent of his corpus in stocks and enjoys a regular stream of tax-free dividend income, which is an additional source of income. Fixed deposits and PPF provide stability, but are not enough to beat inflation.

Planning activities post retirement: After leading an active life for more than 25 years before retirement, it is difficult to suddenly find yourself without work.

After a few days of retirement, the inactivity and loneliness will begin to haunt those who do not have any activity planned after retirement. One way out would be to develop your hobbies in your younger days or plan activities which can keep you busy such as teaching, part time consultancy, and so on. Not only will these keep you active - mentally and physically, they can also provide you with a source of additional income.

Don’t let your retirement turn into a curse. With a little bit of planning and starting early, you can life a dignified life even after retirement.

Credits for - Business Standard 

Sensex has returned 18% a year in the last decade

A majority of the households are a worried lot these days. Monthly budgets are getting stretched and even after consciously making efforts to avoid any additional expenditure, the outflows are exceeding set targets. For the last few years, retail inflation in India has remained within the 8 to 10 per cent range and is not showing any signs of reducing in the near term. Thus, with shrinking surpluses, saving for long term goals like retirement continues to be a challenge.

Even, today, for most investors, Fixed Deposits (FD) seem to be the most preferred avenue to park the funds for short and medium term. Most of these deposits get continuously renewed for long term goals, thereby, getting exposed to the reinvestment risk. At current rates, fixed deposits are not in a position to beat inflation and, therefore, there is a dire need to look at other avenues. Secondly, the income on FDs is taxable, thereby further reducing post tax returns.

Equity is one asset class which can beat inflation in the long run provided one stays invested. But the volatile nature and irregular returns keep a lot of investors away. But just to give you an indication of the kind of returns that have come in this category, one can consider the Sensex, an index representing 30 large companies across various sectors, which has provided a return of nearly 18 per cent in the last 10 years.

But to begin with, investors need to shed their inhibitions and anxieties about equity and try and understand how it works, rather than live with the pre-conceived notion that equity is very risky and equated with gambling. A few guidelines for beginners can help.

First time investors: For those who are keen to add equity in their long term investment portfolio, it is suggested to consider the mutual funds route and invest in large cap diversified equity funds. These funds invest in a portfolio of stocks of large and bluechip companies, diversified across sectors in order to provide lower risk than direct equity. Always remember to look at the past performance of the fund and compare it with similar funds before investing.

The best method of investing is the SIP or Systematic Investment Plan route where you allocate fixed amounts of money regularly every month. The results will not come in immediately and you will need to stay invested and be patient enough to see good returns. Resolve not to stop investing or withdraw if the going in

the market gets tough or if negativity persists regarding the state of the economy. If you stay invested during such dark times, you will see better returns when the market sentiment improves.

Investing in direct equity: Today, we have a plethora of information available online on the past performance of equity shares of all listed companies. Since the data is enormous, it is suggested to focus initially only on the index stocks for which you can look up to either the Sensex (30 stocks) or Nifty (50 stocks).

Once you have zeroed down on the index, the next step is to find the leaders within the sectors comprising the index. For example, it does not require rocket science to identify, say an SBI or HDFC from the banking and financial sector or an ITC in the FMCG sector.

After you have identified these stocks, start investing a small amount of money initially and gradually increase the allocation as you go along. Please remember that individual stocks carry more risk than a diversified mutual fund, but at the same time can outperform the mutual fund during good times. Stocks also provide dividend income which is tax free for the investor. In fact, some of the large companies in the FMCG and pharma sectors, including many public sector giants like ONGC, dole out huge dividends which act as an additional income.

Equity aids long term wealth creation and is one of the best asset classes which reward the patient investor. The earlier you begin investing, you will have more time to let equity perform and deliver. If you decide late in life to enter into equity, the time factor may not support you since your goal may be very near. Monitor your portfolio on a periodic basis and avoid checking the values on a daily basis as wealth creation is a long term process and nothing will change in a matter of a few days.

So, take an informed decision and consciously try to include equity in your asset allocation to achieve your long term goals.