Health Insurance, Top-Up and Super Top-Up

Recently, I met a couple in their mid 30 s. They posed an interesting question to me?What should they do to increase their medical cover without paying much of a premium over and above their already running medical floater plan?

A reason for them being so worried was quite obvious……their parents recently had to undergo a huge medical bill due to their prolonged illness and they were managing it somehow for themselves through their savings!!!

Now, what about these couples as they were employed in Private sector jobs with a very low coverage of 2.5 Lakhs!! The second problem was they were not earning a handsome salary package – despite all odds they had still managed to taken a 3 lakh floater plan for their family.

Now that’s where a where a Top Up or a Super Top Cover comes into picture. Today I shall discuss the same in detail.

Health top-up plan, it might be a new term for most of you but then knowing it well will really help you in multiple ways. Basically, a health top-up plan is a type of additional coverage for those people who already have a health insurance policy. It enhances sum insured amount at a very reasonable premium. It improves your existing health insurance policy by providing additional health coverage. A Top-up cover gets triggered once the deductible in the existing policy is worn-out. It is not compulsory to have a health insurance plan to buy top-up plan, but it is advisable to take a health insurance plan before choosing any top-up plan.

Let us take an example to understand this in a better way.
Suppose you have a health cover of Rs 3 lakh and you now realized that it’s not enough to meet the needs of a medical emergency. Buying an extra cover of let’s say 5 Lakhs means you have to pay a big amount as a premium. This is where a health top-up plan makes sense. With a health top up policy, you can get additional cover at a low premium and it can save you a lot of money.

Consider the example of Mr. Akbar who has a health insurance policy of Rs 3 lakh. He is paying an annual premium of Rs 8000/-. Unfortunately for Mr. A, he is hospitalized due to a heart attack, the treatment for which goes up to Rs 7 lakh. Now under normal circumstances, his policy would pay only upto Rs 3 lakh and he would have to pay the additional amount from his own savings or investments. Now, if Mr. A had opted for a Top-up policy of Rs 10 lakh with a deductible limit of Rs 3 lakh, this additional amount of 4 lakhs would be paid by his new policy, ensuring that he stays financially protected.

In simple words, a Top-up health insurance policy provides protection after the basic threshold limit under a normal policy is breached or I should say it gets exhausted.

A Top-up insurance policy has certain drawbacks when it comes to its implementation, which can be resolved by opting for a Super Top-Up policy. Unlike a Top-up plan which pays only if the threshold limit on a regular policy is exceeded on a single hospitalization, a Super Top-up provides cover over the threshold limit in multiple cases.

Let us take the example of Mr. Akbar again. Post treatment for his disease he suffers another one after 6 months, with the bill coming up to Rs 7 lakh, which comes outside the ambit of his top-up plan since only one claim can be entertained under its provisions. Now, if Mr. Akbar had opted for a Super Top-up plan with a cover of Rs 10 lakh and a threshold of Rs 3 lakh, this plan would pay the additional sum of 4 lakh.
In simple terms, a Super Top-up Health Insurance policy has provisions for multiple claims, which are not offered by a regular top-up plan.

So next time when you think of increasing your health cover why not think about such plans. Till then Happy Investing

How do you react in a falling market?

First Lesson – Don’t panic…….. please don’t panic. That’s the winning mantra to sail through such testing times. Remember the crash of 2008 and if one tries to correlate to the falling market of 2008 the severity and magnitude of market fall was very great. But scenarios have changes drastically this time around. The participation of the common investors has increased significantly and so does the market overall economic indicators and global market scenarios. The factors are many however I won’t deal them here in detail or else it will dilute the very point of discussion.

Few things one must realize – in a bullish market (as we have seen in the last 4 years) ultimately your cost price followed an upward trend you kept buying at high prices. Here comes the “Onion Theory” in fact that how I have coined it over the years. Let’s say the intrinsic price of onions in the market is 25 per kg and then comes a market scenario wherein you start buying them at the rate of 40 per kg or even 60 rupees per kg because of demand and supply gap and other variable factors. What do you do when you buy onions at the rate of 60 you are basically paying more per kg Right!!! In fact this is what really happens in a rising market. People are really happy over excited in such a rising market and they get overconfident. But don’t forget markets by their very nature are cyclical in nature and it fluctuates!!

So what if the investors saw a more than 30 percent annualized returns or even 50 percent in the mid and small cap fund segment in the last 1 to 2 years. Don’t forget the onion theory the market are cyclical in nature and it will fall (why not buy cheap and sell later at high price) and so will your overall portfolio valuation. In fact those new entrants in the last 3 to 4 years (who got overconfident) may not have even witnessed a falling market and are now experiencing the same and seems to be a worried lot. When market collapses every fund will replicate it except for fixed income funds though. In fact the fall will be huge for mid and small cap. So now what do you do as an investor?

Point Number 1: – For those of you who have been a regular investor with the market and have chosen funds appropriately do nothing and feel happy that you will get to buy the funds at a cheaper value. Secondly, it also considers the fact that you don’t need the money for let’s say – for the next 5 to 7 years and you have a long term vision with your goals sorted out and aligned properly. Don’t look at the market valuations every day. Psychology and temperament plays a major role in ones investment . Stick to your game plan because that is the most important thing for you. If you exit at this time you will miss the opportunity. Dealing with such market adversity is important. Ability to withstand to such a market scenario will go a long way to your final success of achieving your goals.

Point Number 2: – New Entrant in the last 1 year in the market who accidentally entered the market to reap the market rewards would see their portfolio gains withering away in a very dramatic manner. What do you do then? Should I sell? Well it is high time you plan out your goals. Once a market starts falling freely all the windfall gains will be gone in a matter of days ! This very experience will scare you so much that you may never invest in to equities ever again. Make sure you have chosen the right mix of funds. For example if you invested 100 rupees at least 25 to 30 percent of it should be put into fixed income funds this way it will protect your capital to an extent. For those who have made money though riding high on the mid and small cap funds move towards a balanced fund so as to minimize your returns and catch hold of the falling losses. Remember even though you get a far more lower returns still this way you will be able to minimize the risk to an extent. After all it’s your money right and you would also want to protect it from a far greater fall. For those of you who are in to the market for let’s say 2 to 4 years try to move to multi cap funds.

So now Let’s sum it up : –

  1. Be in a diversified fund at all times. Don’t buy too many funds.
  2. Invest regularly (as you brush your teeth regularly). Investment is a healthy habit.
  3. Keep a long term approach and invest your money which is quite aligned with your goals. This way no matter what you will be able to sail through the testing times ….

Till then…. Happy investing

By Keeping Things Simple and Easy You Can Make Money.

Simple and easy is it? No ways that would be your first reaction. In fact, many investors make the mistake of doing too much to their investment portfolio. Why can’t we do it the more simple way –you will probably ask me how? Well, you can do it provided you stick to some basic principles of personal finance management lessons.

Invest in the minimum possible number of financial instruments. It also means taking the fewest possible actions.

In the last decades or so, the investment culture and methodology has undergone a sea change. People have somehow gradually shifted towards being a worshiper of complexity. As I had mentioned earlier in my previous article “simple seems quite complicated” for most of the people holds quite true in today’s times also. More and more investors assume that any investment methodology that doesn’t involve any sort of mysterious formulae,complicated complex products and elaborate charts can’t possibly deliver them the goods. The truth, perhaps, is quite the opposite. Today I will talk about the same through simple time box. Why time box because each of your investments should be centered around investment time period only.

Time Box Number 1: – Keep all the money that you might possibly need for at least the next 1 to 5 years in safe fixed-income investments .Like investing in to a liquid fund to ultra short bond funds and other debt products. The idea is simple safety is the key while taking minimal risks with your money.

Time Box Number 2: – Long-term investments which exceeds a time period ranging from 5 to 7 years should be allocated to a balanced or conservatively run equity funds with a good track record.

Time Box Number 3:- Very Long term goals (like retirement planning goals) exceeding say 7 years to 20 years should be allocated to a mix of multi cap/a mix of small and mid cap too. This will diversify your portfolio and help you compound your returns with times.

Always note investments in equity should be gradual—moving lump sum money received through annual bonuses into equity-backed investments in one shot when the market is on a high can lead to disaster! Instead learn to park your money gradually form a liquid fund to an equity based mutual fund stretching over a period of 18 to 24 months. This way you will minimize the volatility risk.

Apart from these 3 time boxes there’s insurance to think of however insurance is not an investment at all. It’s an instrument that buys you peace of mind. In the Indian context though we end up buying this product as an investment tool often missold to millions !!! Make a liberal estimate of how much money your family will need if you fail to wake up tomorrow morning and buy the cheapest term insurance you can find. Buy an appropriate life cover based on your liabilities.

In a nutshell keeping things simple can help you go a long way – it can help you pick the right investments provided you choose your appropriate time box and helps you understand your requirements before putting your money in to the “BEST” of the products. Simplicity is needed not just in the types of investments that you choose but in your investment portfolio as a whole. Today every 9 out of 10 people should have basic emergency fund/a huge term plan and not more then 3 to 4 mutual funds that’s all. Everything should be centered on reaching your life goals after all that’s what you want in the life right…….. Till then happy Investing

Making Money, Staying Calm and Carrying On

Few days back I attended a wealth management session on “Making Money”. Though the idea was quite lucrative and the attendance was good, it just turned out to be just another dead rubber for many since by the mid-session many left and realized it was just another marketing gimmick endorsing a financial product. The obvious reason why most of them were disappointed – they were looking for a ready-made solution or a product that could offer them RETURNS. If this task of making huge/decent returns on ones investment was so easy everyone would have been a millionaire by now, right?

Let’s talk further – so what happened when the recent annual budget introduced taxes on long term capital gains on Equity investment – the retail investor pushed the panic button for sell. Was it really required at that time? The obvious answer is No. But since the basic fundamentals of investment is not known to most of us – we never realize the power of “STAYING CALM and CARRYING ON” .

This ad was as an instant hit (Keep Calm and Carry On – I have just simply changed few words here to make more sense) among most of the office goers in the Delhi NCR region few years back. They could relate to it quite well when they were stuck in traffic jams for long hours and they would often get into heated arguments with fellow passengers to reach office in time. Was avoiding the traffic jams under their control? No.

Why can’t we simply apply the same methodology to our investments? Why can’t we as investors understand the way the market cycle functions? Why can’t this mad rush for achieving greater returns be toned down? And we start looking for ways by STAYING CALM. It is possible quite possible provided you have a vision in sight and believe on setting your goals (with a definite number in mind) and then aligning your investments with a definite time frame.

That’s the way your investment needs to be. You need to stay calm and carry on with your investments. Since, the 2008 financial crisis when the prospect of the equity markets looked bleak. The common investor either stopped investing or pushed the sell button. Looking back over the last decade or so that would be the worst thing to do to stop your investments/SIPs in such times.

Remember in the end you have a goal in life for which you are working relentlessly. No matter what these market cycles will keep happening and you just cannot escape it just like your traffic jam situation.

The simple fact is that there no better time to create the foundations of a solid portfolio than when everyone is running and looking to sell. Eventually over a long term horizon it’s that kind of dips that will actually produce profits for you. Remember the onion price theory I talked about in my previous write up. Keep buying low and when the market tide changes directions you are there to reap rich dividends of staying invested.

Persisting through such times is what sets the tone for much higher returns over a complete market cycle. If you end up trying to time the market you will go nowhere. So it does pay to STAY CALM and STILL STAYING INVESTED when you have a goal in sight. Till then happy investing.

Asset Allocation: Fancy Jargon Used by Professionals to Confuse

Some time back I went on a trip to the nearby hill station along with college friends. College memories were relived and sudden nostalgia crept in yearning to be college goers once again rather than being part of the cruel corporate world. As usual my friends discussed their personal finance related issues and at one point one of them asked what Asset Allocation is? They had read it at so many times but never knew how to practice it in their day to day money management.

Well , once you begin your investment journey – there were will be 2 major set of things that will plague your mind.
First – making an investment decision without thinking enough (as most of us do, refer a website/ refer ratings and buying a product without any proper understanding). Second thing that would bother you is thinking too much about your investments.

Let me give an example of today’s times. There are many people who continuously think or rather suspect they suffer from disease 1 or disease 2 and would rather go to a doctor’s clinic quite frequently. The doctor would chuckle on your story and by providing you few pills for your mental satisfaction he would be done. That’s it.

Quite the same thing happens with your investments also. In fact many people also suffer from the same disease that their portfolio is diseased. One of the the most popular type of disease in this field is a faulty asset allocation. Many people often wonder whether their investment portfolio has the correct amount of allocation to both EQUITY and DEBT. Well, there is no perfect solution to it.

Asset allocation is just an exotic/fancy jargons used by professionals to confuse the commons. Rather It simply means investing your money in a manner that suits your needs. That’s it. My friends asked is it that simple to do asset allocation? Answer is Yes.

It is easy provided you are clear about your goals in life – The key to really figuring out your asset allocation is to make a rough work sheet or you may even use an excel sheet –

  • List down all the things that you would want to do in life (which involves money)
  • Prioritize your goals one by one (strike off which are unnecessary)
  • Define when you will need the money and how much for each of your goals one after the other.

Half your job is already done!

What you need to do is to match your investment time horizon to the asset class. Asset classes such as FDs/RDs, then you have the short term liquid/ultra short bond funds and so on in the debt category (if your investment period is really short term in nature ranging from 1 to 12 months). Then you would create a stock portfolio or choose a well diversified equity fund provided your investment horizon is long term in nature (Period ranging from 7 to 10 years and onward)

Let me admit that the example cited above is just a simplified version but what I have been trying here is to make you understand and demonstrate the principals on which individual should choose their asset allocation. There are no set formulae though for right asset allocation but then until and unless you begin the exercise how will you make it simpler for yourself?………..Till then Happy Investing

Investment Myth: NFO fund is better than an already running equity fund

In a short conversation with a small town investor, I discovered how they are pitched such mutual funds in the NFO category (New fund offers). The basic premise that the investor is made aware of is that you buy a fund in “units” and the price of each unit is called the NAV (Net Asset Value). You are therefore conditioned to believe that a fund with a lower NAV is far better and cheaper. So an NFO is better than an already running equity fund.

Please note if someone is asking you to choose a fund simply because it has a lower NAV he is simply misguiding you. In fact, what should really matters more for you is that –

  1. What sort of a fund your are putting your money into?
  2. What was its past performance during the different market cycles?
  3. How the fund manager manages the fund?

So a fund “X” with an NAV of let’s say 20/- and another fund “Y” with an NAV of 200/- will generate the same returns if the underlying assets (stocks) and the overall portfolio is the same. So comparing the NAV of fund “X” with fund “Y” is quite a futile activity and this can actually lead you to make random investment decisions.

Second point of discussion is the “Dividends” that the mutual fund scheme generates. The problems with MF dividends are – they are practically not at all any dividend or surpluses of any sort!! Let’s take an example – say the value of your mutual fund folio is 2 lakhs and the fund house declares a dividend of 10,000/- the value of that investment would be 1.9 Lakhs (2Lakh minus 10,000). It’s that simple. There is no such additional benefit that you have garnered but a common investor is always conditioned to believe that a dividend generating fund is better than a growth fund and so on and so forth.

This dividend option is convenient if you would like to withdraw money from the fund on a regular basis. Please note you don’t get anything extra by opting for a dividend plan. Please note that dividend declaration by a fund is not guaranteed at any point in time, it depends solely on the fund house discretion to declare dividends for the investors.

So next time if someone tries to convince by stating that a lower NAV plans are better off than a high NAV plan & a dividend plan is better than a growth plan be cautious. What’s really unfortunate is that both these misconceptions are widespread. So make sure the next time if someone pitches you such a thing please think for a while before taking a decision. Till then Happy Investing.