Tuesday, October 13, 2015

Are you saving regularly

We have all heard the famous quote “A penny saved is a penny earned” which actually indicates that saving some money is like earning it else it could have been used for spending. Typically in the younger age when one starts working, most don’t feel the need to start saving as there needs to be a strong reason to save. Most young and working individuals have parents who are still in their employment and they have a house and all amenities provided by their parents which doesn’t create the seriousness to save. It also depends on what money values one acquires in the younger age from their parents.
For buying anything today we require money. We live in a world full of uncertainties and our jobs also don’t provide us with any security. What if there is a lay off? What if someone in the family falls critically ill or needs to be hospitalised and there is no medical cover? One can be exposed to such contingent events and not having the money to see through those difficult times can push one into debts. Therefore one motivation of saving can be to create a contingency fund or maintain some surplus cash separately to face crisis situations. Satish (36) and Anil (31), who have been working in the oil rigs as technicians have lost their jobs recently. Even though both are tensed on the future of the oil industry and their careers, Satish is still better off than his younger colleague due to his good savings and investments that he has done over the last 10 years. Anil never felt the need to save regularly as his parents were independent and his income was good enough to take care of his wife and child’s regular expenses. Most of us wake up only when crisis reaches our doorstep. 
We also need to save if we intend to make purchases in the future like buying a car, house, etc. Retirement is also a reality which one needs to plan in advance and for which one needs to start saving early.
There is no standard rule which can apply to everyone. People in the early 20s can start with 20% as their income would be less initially and other expenses also need to be factored in. As income increases, this percentage should go up. Having a budget enables one to estimate the regular expenses and explore the savings potential. For example, Keshav(25) stays in his parents’ house and most of his household expenses are taken care of by parents regular income. He draws a monthly salary of Rs. 18000 and he is able to manage his travelling/ other expenses within Rs. 10000. So he has the potential to save around 45% of his income. For someone who has additional expenses like rent, parent’s medical expenses, etc, the savings could be lower. The important point is to save at least some amount regularly. For someone in the higher age brackets (30-40) the savings % should be higher than 30%. Saving enables one to invest that money as per their goals and also earn a better return.   
The early you start saving and investing, the better you are in terms of achieving your financial goals. The power of compounding comes in play when you give more number of years to your investments. For someone who starts late, the number of years available is less and the investment that one will need to achieve that goal also shoots up. For example, Ajay and Jai (both of 25 yrs) decided to save to create a down-payment of Rs. 25 lakhs in the next 10 years to buy a home. Ajay started in the first year itself by investing in balanced mutual funds. He invested Rs. 10900 per month to reach his goal assuming the returns were in the range of 12%. Jai started investing 3 years later in the same funds but since he is 3 years late, he needs to invest Rs.19150 to reach his goal. Starting early certainly helps.
Setting goals early can help in inculcating savings habit. For example when you are clear that you want to buy a car in next 5 years, you will certainly start saving the required amount every month. Whether it’s an RD or Sip in mutual funds, once you have decided the amounts, you only have to instruct for auto debit once and then it becomes part of a regular process. Technology has actually enabled ease of saving regularly. The best part could be to provide debit dates immediately after your salary credit dates so that you meet your targeting saving goal. 
(This was published in moneycontrol on 7th October 2015)

Friday, May 30, 2014



Very soon IRDA is going to make it mandatory for all Life insurance companies to issue policies in Dematerialized form. According to IRDA all Life Insurance companies should link their systems to insurance repositories with an option to hold policies in electronic form.

NSDL Database Management Limited, Central Insurance Repository Limited, SHCIL Projects Limited, CAMS Repository Serviced Limited and Karvy Insurance Repository Limited these are the five authorized insurance repository service providers.

Insurance repositories are the same like depositories in the capital markets. Investors needs to open only one time depository account, the repository requires policyholders to open an e-insurance account free of charge.

The service was incorporated from September but as on today only 1 lakh e-insurance accounts have been opened and some thousand policies have been dematerialized. The reason behind this performance is only 10 insurance companies have signed up to provide demat policies out of 24 companies. Soon many are expected to follow suit.

Demat policy is beneficial for both the customer as well as the insurance company. Since it is in demat form there is no requirement for submission of original policy at the time of maturity or death claim. The question of loss of policy documents will not arise. This can be a boon to many policy holders as it will do away with having to store the physical policy in a safe place. Being in a soft form, it can be accessed anytime.

The insurance companies would be benefited as most of the back office work sending reminders and maintaining records would be undertaken by the repository. This will be similar like Mutual Funds industry where most of the back office work is taken care by the registrar and transfer agents. It helps to save huge costs for companies.

Also a one time KYC has to be done.
(as reported in Economic times on 22nd May)

Monday, May 19, 2014

Post elections, Continue your regular investments systematically

With the NDA having got a comfortable majority in the just concluded elections, there is high level of confidence among foreign investors who have been buyers for most part of last week taking the BSE sensex to its highest levels achieved ever. Many brokerage houses and analysts have also started predicting the sensex figures for the next 1 year, indicating bullish trends. 
For the average investor there is every possibility of getting swayed by the positive scenario showcased by analysts and it is during such time that its very necessary to reflect on what your investment strategy should be. 

The famous Henry Ford once said " If you do not know where you want to go, any road will do". This means that firstly identify your financial goals and decide the time frame for those goals. If your financial goal is at least 5 to 10 years down the line, then you can think of allocating funds to equity. Many would be already having their SIP (Systematic Investment plans) investments going on. Continue with the same and don't go overboard to do lumpsum investments at present. Even though the new government is expected to boost investments and prop up the economy with the right policy decisions, the actual impact of those decisions will take time to percolate through the economy.  Don't expect any magic in the short term. Remember what the great Benjamin Graham said " In the short term the market is a voting machine while in the long term its a weighing machine".

As always, the markets will continue to remain volatile as we all know that international events also have an impact on our markets.

Investors planning to take short term bets need to be cautious as history has shown that you can never time the markets. In the end patience will prevail. 

Look at equity investing through mutual funds especially through diversified mutual funds and focus on long term wealth creation. In this race of earning good returns in the markets, its the tortoise that wins and not the hare.

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.