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.