Porting is good for your health insurance

All soaps are for cleaning us up but we pay more for Dove because it offers many more features than say a Dettol soap (like creaminess, moisturizing, gentle on the skin etc). Dettol soap stands for one thing – it cleans up germs. Like soap, health insurance is a commoditized product today. And just like soap there are many health insurance products. The insurance product that gives you more features will charge a higher premium. So if you want higher number of days of pre & post hospitalisation coverage or coverage of a pre-existing disease from Day 1, you will have to pay more.

When you are buying health insurance for the first time, the premium is not the only aspect to consider. It is important to assess the features, understand the waiting periods & exclusions. But what if you already have an existing policy? The good news is you can move your policy from one insurance provider to another (much like mobile connection porting).

I can think of only two scenarios where one should port their existing insurance. The first is if you are covered by a nationalized insurance company. Generally, you will find that their policies have a lot of ‘sub-limits’ or restrictions. The usual restrictions are

A. room rent limit up to 1% of coverage

B. ICU room rent limit up to 2% of coverage

For example, if your coverage is Rs 5.00 lakhs and you are admitted to a hospital, they will pay a maximum of Rs 5,000 per day as room rent. If ICU admission happens, they will pay a maximum of Rs 10,000 per day

C. Each procedure is also likely to have a sub-limit.

For example, a cataract removal procedure may cost Rs 50,000 but the insurance company will have a sub-limit of Rs 35,000 i.e. they will pay only up to Rs 35,000. Any cost above that is payable by you. But if you are with a private sector insurer and choose coverage of Rs 5.00 lakhs or higher, typically such restrictions won’t apply. So the first advantage of porting is that you will get better features.

The second advantage of porting is waiver of waiting period for pre-existing diseases. What does this mean? When you apply for health insurance, you have to declare pre-existing diseases if any. The insurance company is not liable to cover you for any expense arising due to that condition for the next 2 to 4 years. For example, if you have sinusitis, related medical expenses will not be covered for 2 years. But if you’ve completed 2 years and are then porting your policy, the new provider will take this into account and waive off the condition. See how it paid off that you were already covered.

The other scenario where you are likely to port the existing policy is when you've made a claim and found the servicing processes poor. In this case too, you should consider porting your health insurance.

As I mentioned earlier, health insurance policies have a lot of features but they also have a lot of clauses and exclusions. The important thing about porting is to clearly understand the benefits / waiting periods / exclusions / premium offered by your existing insurer and compare it with what the new insurer is promising. If you want to assess your existing policy, reach out to me at mathewpravin@yahoo.com and I can help you compare and select a suitable policy.

How to plan a child education fund

To tell you the truth, when I got married, it never crossed my mind that I should be saving for the education of a child that would probably arrive one day. When the babies did arrive, we were too busy taking care of them or catching up on sleep. It was only when they started going to school did we think – “Oh, one day these kids will go to college (hopefully), we need to plan and save for that cost”.

But for a long time, this thought never translated into action. The kids seem capable of becoming anything from the next Michael Phelps to Michelangelo to Ramanujam. The possibilities are endless. Even sending kids abroad for education is more achievable these days. So what do we plan for financially? We were stumped by so many options.

Finally we realized we couldn’t really predict what kind of education the children would eventually select. So, we decided to benchmark our future costs on a course that is not cheap and looks set to remain popular in 10 years time. This way, we wouldn’t be too off the mark in terms of cost. Yes, you guessed it - B.E. (Bachelor of Engineering). The only courses which are more expensive than this are medicine or flying.

The next question that popped up was how much to save? Put in a different way, what would a B.E. course cost when my child completes 12th std? I had to rely on past data of fee increases to predict the future cost.

How did I do that? My starting point was the fees for a BE course today (easily available thanks to collegedunia / shiksha). I found that a fee of 3 lakhs per year would cover most colleges. I then spoke to friends and acquaintances who had completed B.E. over a range of past years to get the fee cost then. From there, it was easy to calculate the likely rate of escalation. For example, B.E. at IIT Madras cost Rs 25,000 a year in 2008. The current fees are 2 lakhs a year. So the annual cost increase rate is 23% (you can use this calculator https://cagrcalculator.net/result/).

IIT had the highest escalation rate from the data I got. The range of escalation varied from 4.2% to 23.1% (depending where the friend studied - govt college, aided or private).

As an example, my child is now 7 so I have time till my child turns 17. Assuming a 20% escalation every year (on the higher side), the fees would have moved from 3 lakhs per annum to 18 lakhs per annum. So, 4 years of BE fees means a total of 72 lakhs. Well, that’s a birth control ad for you right there ;)

No need to panic, let’s just focus on the numbers. We’ve arrived at a cost of Rs 72 lakhs, now it becomes easy to calculate the amount to be saved every month. I opened an SIP calculator (https://cleartax.in/s/mutual-fund-calculator) and calculated that a monthly investment of Rs 20,000 invested with an expected rate of return of 8% in 14 years (even when the child is studying we will be still be working and saving) would yield me Rs 61 lakhs. Phew that’s a relief.

You are thinking – “I need only 8%!! Then I’m going with PPF or Sukanya Samridhi which will give me a guaranteed return and tax-free too”. Wait, I’ve not included incidental costs like hostel fees, exam fees, pocket money, project work, why even preparatory courses. Let me assume that if I double the amount of fees, it should cover all these expenses. So now I need to save Rs 40,000 per month.

So now I'm putting a sizeable amount of money aside for a long investment period. Why shouldn’t I get more bang for my buck? This is where it makes sense to invest in equity mutual funds. The returns here are likely to be higher and the downside risk becomes much less. In my earlier calculation I was reaping 61 lakhs with an 8% return, so if I could get a 10% return with EMF, the corpus would grow to Rs 72 lakhs and a 12% return would translate to Rs 86 lakhs.

A few things to remember

• It is important to have term life insurance covering this amount (as well as living expenses and liabilities) so that your plans continue even in your absence.
• You also probably need to plan for a Masters course. You can use the same methodology, just take care to increase the tenure by 3 or 4 years
• The amounts may seem huge but don't panic. If there is a shortfall, education loans are a viable albeit cumbersome alternative
• Your income will increase over time so ensure you increase the amount of savings, this will increase the corpus

There are many variables that will increase or decrease education costs. Your child may get a merit seat in a government college or study in a college close by, thus reducing hostel and other costs. You may have two children and so the costs double. The important thing is to start now. Once you get the investments going, you can relax  knowing your money is working as hard as you are, to give your child a good education and the springboard to a good life.

If you found this article useful and wish to chart a plan for your child, drop me a line at mathewpravin@yahoo.com and we can set up a convenient time to discuss. All the best to us and the next generation.

Apna Time Aayega! (gold vs mutual funds)

When I see the meteoric rise in gold prices and compare it with the recent fall in mutual fund NAVs, the first line of the Gully Boy song starts off in my head. Then people start off that old litany – “See, gold is a safe investment. I knew mutual funds would never be able to sustain”. Once again, I want to shake them and point out that if they are just looking at absolute returns, their assessment is wrong. To truly understand the returns and to compare asset classes, you have to look at the compound annual growth rate.

Date	Gold Price per 10 grams	1Y Return	3Y CAGR	5Y CAGR
16-Sep-14	28,010
16-Sep-15	26,345	-5.9%
16-Sep-16	30,916	17.3%
15-Sep-17	30,855	-0.2%
17-Sep-18	31,680	2.6%	6.3%
16-Sep-19	39,120	23.4%	8.1%	6.9%

From this chart, we can see that gold prices have been flattish for the previous four years and then there has been a sharp rise over the last year. This means if you bought gold 1 year back, you would have got a whopping 23.48% return. However, if you bought gold 3 years back, your year on year return would be 8.16% and if it was 5 years back, it would be just 6.91%.

In my earlier article, I had written about physical gold and its attributes as an investment. To briefly summarise it

• I would encourage people to buy gold as it is good to diversify investments across asset classes (I believe in diversification, that’s why I promote mutual funds
• It’s difficult to store and safe guard physical gold so one cannot buy large quantities
• Jewellers offer 11-month instalment schemes to buy gold. These are convenient but there is no real recourse if the jeweller fails so choose the jeweller carefully

Now, if you don’t want the hassles of storing physical gold, gold exchange-traded funds (ETF) may be the perfect solution. In 2002, the idea of a gold ETF was conceptualised. Their features are

• these are funds that buy physical gold (of 99.5 per cent purity)
• the units of gold ETFs are traded in exchanges

Simply put, you can log onto your demat account and buy units of a gold ETF. The fund uses your money (and of other investors) to buy physical gold. Your advantages are

• invest in gold without storage hassles
• guaranteed purity (each unit is backed by physical gold of high purity)
• listed and traded on stock exchanges
• one can purchase as low as one unit (which is roughly 1 gram)
• transparent and real time gold prices.
• tax efficient if you hold for more than three years
• no fear of theft, units are held in demat form
• no entry and exit load

For those of you who are wondering if this actually works, take a look at the performance of SBI Exchange Traded Gold Fund (data from valueresearcholine.com)

SBI Exchange Traded Gold Fund

Performance

	YTD	1-Month	3-Month	1-Year	3-Year	5-Year	10-Year
Fund	22.02	-0.13	16.99	25.43	6.06	6.67	8.16
Domestic Price of Gold	22.72	-0.07	17.21	26.59	7.19	7.78	9.25

You can see that the returns are mirroring the year on year returns you get from gold (returns mentioned against gold are not factoring in any charges and hence they are slightly higher).

At this point either you’ve had enough of this gobbledegook or you’ve asked the pertinent question – how does this compare with a mutual fund? Let’s look at the performance data of SBI Blue Chip (large cap) fund (data from valueresearcholine.com)

Performance

	YTD	1-Month	3-Month	1-Year	3-Year	5-Year	10-Year
Fund	0.83	-0.45	-6.11	-2.18	5.10	8.54	10.81

Compared to gold, the fund has fared badly in the last 1 year. It has returned slightly lesser in 3 year comparison. However, across 5 year and 10 year comparison, it has done better. Remember when the markets had peaked in May 2019? At that time, the mutual fund returns would have looked much better. In the coming months, you can expect the returns to go down.

So you see why it is important to diversify. Now gold is up and equity mutual funds are down. FDs and ultra short term debt funds give consistent but low returns. Allocate your funds wisely and you will see that ‘apna time aata rahega’ J If you want to know more about personal fund allocation, gold ETF details or just have a chat on financial planning, drop me a line at mathewpravin@yahoo.com and I'll get back to you.

You have only 5 months left.....

….. to plan your tax saving and execute it. Yes, that’s true. By the time you read this article, get down to planning and deciding which instruments to invest in and start off, it will be September. Then you have time till January to make those investments because come February, the HR folks are going to get behind you for producing proofs. 

You already know what the the toughest part is. Not the planning or execution but actually getting down to it. It used to happen to me too. When I started working, I found the tax declaration form very intimidating. Not only was it long and complicated, it made me feel as though there were many avenues of saving but all I was doing was spending. It took me a couple of years to figure out that I didn’t have to put money into each of those investments and again a couple of years to figure out that only some investment avenues were suitable for me. So I’m going to highlight the sections applicable to most people to help you get started.

Sec 80C
Let’s look at Sec 80C first. Grab a pen and paper and answer these questions (Financial Year FY 19-20 refers to the period between April 1, 2019 and Mar 31, 2020)

A. Do you have children? If yes, do you pay school fees? If yes, note down the amount payable for FY 19-20
B. Do you have a home loan? If yes, ask your bank for a provisional principal repayment certificate for FY 19-20 and note that amount down.
C. Ask your HR for the EPF (Employee provident fund) amount that will be paid on your behalf for FY 19-20.
D. Do you already pay life insurance premium / tax saver mutual fund / any other tax saving investment? If yes, note the annual payment. 

The maximum saving you can do under Sec 80C is Rs 1.50 lakhs. If you’ve put in money in any of the above, they are eligible for tax saving. Now total these amounts and deduct from Rs 1.50 lakhs. The derived amount is the maximum you can save under this section. Divide it by 5 (because you have 5 month left), choose an instrument you wish to invest in. stay away from ULIPs) and pay the amount every month from Sep to Jan.

Sec 80D
From here on, things get simple. Have you availed health insurance? If yes, note the premium amount. If any of your parents are covered under the policy and if one of their ages is above 60 years, you can claim up to Rs 50,000 premium paid for tax deduction. If the eldest member is less than 60 years of age, you can claim up to Rs 25,000. 
Also note the cost of any preventive health check-up can be submitted for tax deduction up to Rs 5,000 total.

Sec 80E - Do you have an education loan? If yes, you can offset the interest cost for tax benefit.

Sec 24(B) - If you do have a housing loan, ask your bank for a provisional interest payment certificate for the FY. You can claim up to Rs 2.00 lakhs interest payment as tax deduction.

The above sections are the ones which are applicable to most people. Apart from these, if your answer is yes to any of the following, then you can claim tax benefits
Do you donate money?
Is anyone in your family including you) handicapped or availing medical treatment?

If you need a more detailed explanation, this article by Basavaraj Tonagatti  is really goodhttps://www.basunivesh.com/2019/04/30/best-tax-saving-options-for-2019-20/  

That’s it folks. Remember that investments need to be made for investment sake and not for tax saving. So choose the best instruments to invest, check for diversification and then see how it fits into your tax planning. If you want to discuss this further, drop us a line at mathewpravin@yahoo.com and we can have a chat to fine-tune your planning.

All that returns is not gold

I’ve never explored gold as an investment vehicle as (fortunately or unfortunately) my wife doesn’t like gold too much. Whenever someone asked me if gold was a safe investment, I wouldn’t discourage them. After all, one can’t advocate mutual funds without believing in diversification. Gold had been a lot on my mind, especially after I heard about the 11 month scheme that jewellery stores offer. So I decided to do some research by talking to a few people and going to jewellery stores. Here are a few things I learnt (do note this article is about physical gold not e-gold, that will follow)

What is this 11 month scheme offered by jewellery stores?

It is a simple scheme. You make payments every month for a specified number of months and then buy jewellery for the accumulated amount. The store offers you something extra if you participate in this scheme (like discounts, no wastage or value addition charges). Below are the typical features of these schemes

• The schemes run for a minimum of 11 months
• You have to pay the committed amount every month else the scheme benefits will be withdrawn, partially or fully
• You have to buy jewellery within a specified few weeks after the payment period gets over
• If you do not buy jewellery in the specified time or if you violate the terms of the scheme, the store will refund your money without interest

Is the 11 month scheme useful?

I have a personal discomfort on these schemes. It is the risk of the jeweller facing business issues and not being able to fulfil the terms. Unlike a bank or a mutual fund which is highly regulated and transparent, we cannot obtain any insights into the financials of the jeweller or avail any recourse if the jeweller does not deliver. There are a few safeguards one can adopt

• Instead of paying the jeweller every month, place the instalment amount into a recurring deposit or start an SIP into liquid funds. Withdraw that amount when you are ready to buy gold. However this will require some discipline and effort
• You may be better off choosing Tanishq from Tata Group as you can be sure of product quality and their ability to uphold the terms of the scheme
• If your intention is to hold gold as an investment, you can purchase gold coins. They can be redeemed for practically full value as there will be minimum wastage or making charges

How much gold should you buy? Where can you store it?

There is no constraint on buying gold. What will be good to have is a target. From what I can gather, most folks have two targets when it comes to purchasing gold

1. Enough jewellery for the ladies in the family to wear on occasions

2. Accumulating a decent quantity and number of ornaments for their daughter(s) wedding. So you can buy any amount, it could be half kg or 1 kg or what your bank locker can hold

As for storage, you can read this article and decide what the best route is

https://www.indiatoday.in/magazine/from-india-today-magazine/story/20180101-bank-lockers-rbi-robbery-jewellery-cash-insurance-1112597-2017-12-24

What are the returns on gold as an investment?

I don’t normally like to put up charts with a lot of data on it but this one has interesting insights when you look at the annualised rate of return.

Source - RBI archives

Returns are annualised returns

The way to read this chart is that if you bought gold, held it for 1 year and sold it after that, you can expect a return falling between -3% to 34% based on historical returns. Similarly, 

3 year returns range from -4% to 26%

5 year returns range from -1% to 25%

10 year returns range from 11% to 19%

So you can see it is a myth that gold never loses its value. Gold behaves like other investments i.e. risky in the short term but the longer you stay invested the lesser are the chance of losing money. Don't panic, just follow the advice applicable for mutual fund investors. Stay invested for the long term, time your sale properly and the probability of making a negative return on investment comes down drastically. 

My recommendation is that you can invest in gold but given the lack of regulation and other risks, you must restrict your exposure. So design a conservative yardstick and invest accordingly. For example, if you have Rs 5.00 lakhs in FD, you can invest half of that i.e. Rs 2.50 lakhs in gold. Another yardstick could be investing up to 20% of your mutual fund holdings.

To understand the workings of gold movement and what drives its prices, please check these super articles by my friend Arun

https://eightytwentyinvestor.com/2016/04/13/gold-returns-making-sense-of-history/

https://eightytwentyinvestor.com/2016/04/15/gold-a-futile-attempt-at-predicting-the-future/

Do send in your queries, feedback or counter-points on this article, it will really help. To discuss this or your financial planning and portfolio in detail, reach out to us at mathewpravin@yahoo.com or +91 7619593111.

Budget 2019

Start small, learn Big!

The other day,  a client called about planning an SIP (systematic investment plan) for his sister. He was a recent client so I was happy to hear that. I asked him what his motivation was and he said “She has just started work. I think this is an ideal time for her to see the value of savings”. What made it  special was that he was considering mutual funds to start her off. Despite all the false notions out there, one more customer had gained confidence in mutual funds and I was happy to play a part in it. 

Yes, there are so many false notions about mutual funds that it deters people from participating. This is despite AMFI (Association of Mutual Funds of India) doing so much to educate people about mutual funds. It’s also sad because people readily flock to buy real estate or gold because it has an image of being ‘safe investment that doesn’t ever lose value'. So this is me busting a few myths so you can take an informed decision about investing in mutual funds. 

Myth - Mutual funds require BIG investments

Not really, Mutual funds cater to both small and big investors. You can

-    start an SIP with as low as Rs 500 per month

-    do a one time (lump-sum) investment for as low as Rs 5,000

Let's say you started an SIP of Rs 3,000 and after 3 months, you have second thoughts. You can stop the SIP and you wouldn’t have put in a sizeable amount. Want to redeem it? It will take only about 1 -  5 days. 

Myth - Mutual fund investments can’t be stopped or redeemed easily

Mutual funds are of two types – open ended and close ended. If you are new to mutual funds or don’t have sizeable exposure, start off with open-ended funds because they

-    can be stopped at any time (takes 2 to 4 weeks to cancel the instruction)

-    can be redeemed at any time

Remember that mutual funds are your savings; you choose to start and stop them. However, do take care to check these points

- some funds come with exit loads if redeemed within short periods

- tax saver of equity linked savings schemes are open ended but have a three year lock-in period

Myth - Mutual funds are the most risky investments out there

Yes, all mutual funds carry elements of risk. However one must learn to look at it this way – all investments carry risk. The more risk you are willing to bear, the more likelihood of higher return. That is why bank deposits don’t give high returns.

Different types of investments carry different types of risks

-    Gold is difficult to store and comes under scrutiny at the time of selling

-    Properties carry legal risk in the ownership sense and cannot be sold quickly

-    Mutual fund investments run the risk of losing value in case some investments within the portfolio go bad. It is also important to time your exit to get the expected return.

The idea is to try and choose an investment vehicle which suits your profile and risk appetite.

Myth - ULIPs are better as they bundle both insurance and investment into mutual funds

Ever notice that Endowment / money-back / ULIPs (unit linked insurance plans) never talk about the rate of return? It only talks about the ‘guaranteed’ amount you will get back after a certain time period. Great sales pitch but it is highly likely that you’ll get returns lesser than a fixed deposit…. and the insurance cover is pathetic. You are far better off taking a term life insurance which gives you high coverage at cheap premiums and separately investing in mutual funds. You’ll then see that your financial planning is like the Sprite tagline – clear hai (sorry, bad one :)

Myth - An adviser is not necessary, Paytm Money or its equivalent will see me through

I know of a first time investor who had heard mutual funds were giving great returns so decided to invest with an idea of exiting after 6 months. Unfortunately, he invested in ELSS (equity linked savings scheme) which as I mentioned earlier cannot be redeemed for three years. 

- an adviser would have been ideal here because they would have pointed this out immediately

- a good adviser would also inform that equity mutual funds attract short term capital gains if redeemed within 1 year

- a great adviser would tell the investor to not consider mutual funds if he doesn’t have an investment time period of minimum 3 – 5 years. 

If you wish to invest directly or (later) if you think your adviser is no-responsive or incompetent, you can directly deal with a fund house. You can do this via app, website and call centre or drop into the nearest branch. Be wary of your bank relationship manager as they are under tremendous pressure to sell the highest commission generating products so you are most likely going to get terrible advice or worse, a ULIP.

Financial planning requires detailed understanding of a person’s financial goals and then translation into a tailor-made, executable plan. It also needs periodic monitoring and (if required) tweaking investments. If you are ready to start planning your finances or want us to look at your current portfolio or just chat about what’s going on, you can reach us at +91 7619593111 or mathewpravin@yahoo.com.

Invest in debt funds, add stability to your portfolio

Hello, 

A key step of managing your investment portfolio is diversification. We all have Fixed Deposit investments (thanks to our parents influence) and many of us have an exposure to equity mutual funds. What is often ignored is investment into debt funds.

What is a debt fund?
A debt fund is an investment pool, which may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. Simply put, it means that they lend money and earn interest. The interest they earn forms the basis for the returns they generate for investors. Click here to read a more detailed article on debt funds.

The advantages of investing in an open ended debt fund are 

• Ideal for a conservative investor
• Adds stability to investment portfolio, not affected by equity market volatility
• Far more tax efficient than fixed deposits in the long term, due to indexation benefit for funds held longer than 36 months
• No TDS in debt funds for resident individuals / HUFs / domestic corporates, (there is a dividend distribution tax if you choose dividend payout option).
• Allows you to redeem your units at any time

This illustration will explain how debt funds are tax efficient

Amount invested in October 2018 (FY 2018-19) and redeemed in April 2022 (FY 2022-23) the investor is eligible to take four indexation benefits over 5 financial years viz. 2018-19, 2019-20, 2020-21, 2021-22, and 2022-23.

Particulars	Fixed Cost		Taxation on debt fund (with indexation)
Amt Invested in Rs	Rs 1.00 lakhs		Rs 1.00 lakhs
Assumed Annualised Rate of Interest	7%	9%	7%	9%
Gross Value at Maturity	1,26,309	1,34,648	1,26,309	1,34,648
Indexed cost of acquisition	NA	NA	1,16,986	1,16,986
Capital Gains / Interest on investments	26,309	34,648	9,323	17,662
Applicable tax rate	35.88%	35.88%	23.92%	23.92%
Taxable Income	26,309	34,648	9,323	17,662
Tax Liability	9,440	12,432	2,230	4,225
Post tax value at Maturity	1,16,869	1,22,216	1,24,079	1,30,423
Post Tax Gain	16,869	22,216	24,079	30,423
Post Tax Gain CAGR	4.62%	5.98%	6.45%	8.00%

- Indexed Cost of acquisition is computed assuming an inflation rate of 4% p.a.
- Tax rate assumed is highest rate based on the current tax slabs for Individuals/HUFs with income above Rs. 1 crore. For domestic corporates, corresponding tax rate applicable would be 34.94% for interest on term deposits and 23.30% for long term capital gain on FMP investments.

Personal Investment
I have personally invested in a debt fund called Franklin India Low Duration Fund. What made it attractive is the historical performance of 8.69% 3 year return and 9.05% 5 year return. The average maturity of the portfolio is 1.03 years (generally shorter the maturity, greater the funds stability. The portfolio consists of high rated papers. For details, you can click here 

Phew! I know it's been a long mail but I hope it gave a fair and easy understanding of debt funds. Please feel free to reach out for any clarification or queries at mathewpravin@yahoo.com / 9900335853.

Regards,
Pravin