" Financial Planning "

Who requires Financial Planning?

It is useful to everyone. Very few can consider themselves too rich to engage in Financial Planning. There are many instances of highly paid employees who came to financial grief merely because they did not plan for their post-career years. Similarly even people earning small amounts of income should undertake this process, as it will help them in prioritizing their goals so that their limited income can be used more efficiently.

 

How is it different from Wealth Management?

 

Wealth management means taking care of the needs of affluent clients, their families and their businesses as part of a long-term, consultative relationship."

 

While this sounds similar to Financial Planning (FP), it differs in the sense that Financial Planning is for one and all while Wealth Management (WM) is only for a select few. WM relates more the management of plenty, while FP aims at getting the most out of limited resources.

 

Why should you make a financial plan?

 

Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you save adequately to finance your child's higher education or it may provide enough for a comfortable retirement. You can also adapt more easily to life changes and feel more secure that your goals are on track.

 

What should a financial plan include?

 

A financial plan should include a review of your net worth, goals and objectives, investment portfolio, cash flow, investments, retirement planning, tax planning and insurance needs, as well as a plan for implementing your goals.

 

After a plan is developed, what next?

 

The best plan is useless unless it is put into action. Your financial planner will assist you completely in implementing the plan.

 

How often should you update the plan?
 

It is good to review the plan when there is a lifestyle change such as marriage, birth, death or divorce. Any change in financial position should be evaluated as well. Most people have an annual update that reviews how the plan is being implemented. The review also considers changing goals and circumstances

How much should I be saving?

It is hard to apply a rule of thumb toward savings, because it varies with age and income level. About twenty to thirty percent of your income is a good start. If you find that is too high for you, don't let that deter you. You can start by putting a little aside each month and then slowly increasing it.

 

Who is a financial planner?

 

A financial planner is someone who uses the financial planning process to help you determine how to meet your life goals. The key function of a financial planner is to help people identify their financial planning needs, their present priorities and the products that are most suitable to meet their needs. The planner can take a 'big picture' view of your financial situation and make financial planning recommendations that are right for you.

 

Can you do your own financial planning?

 

Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, it is advisable for you to seek help from a professional financial planner if: You need expertise, which you don't possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio and revise your asset allocation; You don't feel you have the time to spare to do your own financial planning; You know that you need to improve your current financial situation but don't know where to start; you feel that a professional advisor could help you improve on how you are currently managing your finances.

 

Why do I have to provide so much personal information?

 

Consider a visit to your doctor. Without complete and fully accurate details, your doctor cannot prescribe the best course of action. The same applies to financial planning. In order to obtain the best service for your 'financial health' all details and specifics must be disclosed.

 

What type of information do I provide?

Typically, information regarding investments held, number of dependants, income and expenditure details, savings and financial planning needs, etc. The more accurate information you give, the better the quality of advice can be.

 

Do you have to meet your financial planner?

 

Face-to-face meeting is recommended but it is not a must. Comprehensive financial plan can be prepared from the detailed data gathered from you. We have provided a questionnaire for you to fill out, which requires details on various aspects of your financial status, goals etc. Based upon your responses, we will be able to prepare a financial plan customized for you.

 

How we can help you?

The areas where we as Financial Planners can help you are:

• Helping you in better understanding your present financial position
  The questions contained in the Financial Questionnaire require you to list down your assets, liabilities, incomes and expenditures. This is a process of virtually drawing up your own Balance Sheet and will help you gain a better grip on your present financial position.
  
   
• Cash Flow and Debt Management
  Incomes and expenditures can be better matched through the Plan. It also will assist you in identifying whether your borrowings are within prudent limits.
   
• Risk Management
  We can help you in identifying your life and property insurance requirements. Evaluating your insurance needs is part of personal financial planning. Insurance usually takes care of your unpredictable needs and as these needs can arise at anytime, insurance is extremely important.
  
   
• Achievement of Financial objectives
  Various financial objectives, whether it is financing our child's education, a house of our own or our post-retirement phase can be better met through systematic investing. A properly laid out investment plan, prepared after considering your risk appetite, time horizons etc. go a long way in helping face the future more confidently.
   
• Taxation
  Often investors invest with the sole objective of saving tax. We believe that this is not the most desirable method. Investments should be in sync with your requirements, the tax angle being secondary. However, we do not ignore the tax aspect. Optimum Post tax returns are what all investors should be concerned about and that is what we too strive for. It is important that financial plans are tax efficient. The financial plan should help you in minimizing your tax liability and also maximizing your after-tax returns from your investments.
   
• Inter-generational transfers
  Estate planning is arranging for the transfer of your property to your heirs and to other beneficiaries, in a way that will, as much as possible, achieve your objectives. The most common vehicles for this purpose are the drafting of Wills and setting up of Trusts.

The entire process can be summed up as follows:

- Initial meetings with you wherein we explain the Financial Planning process and answer your queries if any.

- Receiving the Letter of Engagement duly signed by you.

- Forwarding you a detailed questionnaire.

- Answers to the questions therein will form the basis of the Financial Plan.

- Plan preparation.

- Receiving the "Authority to Proceed" Letter enabling us to carry out the recommendations contained

therein.

- Plan Implementation

- Periodic Plan Review
 

How you can help us?

The quality of the Plan depends on the quality of information provided by you. You can help us by providing the requisite information in as detailed manner as is feasible and also sparing the time to meet us at least a couple of times for the same.

On our part, we will guarantee complete confidentiality of the information you will provide and also assure you of the requisite due diligence in plan preparation. We realize that no two clients' needs are the same and will take care to tailor our plans accordingly.

 

How an individual taxpayer can lower tax bill under the present Income tax act?

 

Taxes are said to be as inevitable in life as death and it is our social responsibility to pay them. Taxes are burdensome for all taxpayers. Saving money in taxes is high priority in Financial planning exercise. There are legally permissible ways to reduce taxes and retain more of your hard-earned money in your savings kitty. There are various tax deductions available under the present Income tax act and you should take advantage of them.

What are the common financial mistakes and how to avoid them?

 

There are many financial mistakes that we all make, which are quite common and perpetuated generation after generation. `Financial mistakes', which if avoided, can result in financial freedom and wealth creation. The most common of some of the financial mistakes are as under:

- Overspending

- Delaying or ignoring a Will

- Insurance follies

- Not creating Contingency fund

- Putting Off Financial Planning

- Not starting savings early and not realizing power of compounding

What should be adequate life cover and how it is computed?

 

While life insurance is critical to meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So having a cover is not enough - having adequate cover is critical. Life insurance has moved from protecting life to protecting lifestyle. Financial needs can be classified broadly into following two categories.

 

Protection: if anything happens to the breadwinner, the family continues to be financially protected and maintain the same life style.
 

Savings: one should be able to generate required corpus to meet milestones such as education / marriage expenses of children, buying a house etc.

What is the relevance of `Risk Profiling' in the financial planning process?

 

There are different life stages for an investor and at each life stage his risk profile could be different. Risk profiling helps investor to find appropriate asset allocation strategy at different stage of life. Like fingerprints, investment profiles of people are always unique. Age, Life stage, income, savings, dependents and mindsets are factors that define a person's attitude towards investments. Risk taking ability and mental frame of mind plays a key role in determining where the investor ultimately puts his money.

 

The first step in asset allocation is `Risk Profiling'. Risk Profiling combines two key areas:
 

1) Estimating financial risk-taking capacity and

2) Understanding the (psychological) risk tolerance level of an individual.

 

Risk profiling can unlock far more value for both investor and financial advisor. It provides advisor clear understanding of investor's mental frame of mind and his personal and financial circumstances. More...

What are the salient features of small saving schemes like PPF, NSC, KVP, RBI bonds, Senior Citizens Savings Scheme, Post office Monthly Income Scheme, and Post office Recurring Deposit?

With increased volatility in capital markets, there is a surge in demand for small saving schemes as a safe haven. Some of these options such as PPF and senior citizen schemes need to be part of asset allocation for investors. Although, it is good to keep some risk free investment in your portfolio as a part of overall asset allocation, there are certain pitfalls. More

What is Asset allocation?

 

Asset allocation refers to the process of allocating your investments between different asset classes. Asset allocation means diversifying your money among different types of investment categories, such as stocks, bonds, gold, property and cash. The goal is to help reduce risk and optimize returns. The goal of asset allocation is to create an optimum mix of asset classes that have the potential to appreciate while meeting your risk tolerance level and financial goals. What is Asset Re-balancing and how it is done?

 

The Process of rearranging assets to bring allocations to predetermined original level as per Financial Plan. Over time some of your investments may become out of alignment with your investment goals. You'll find that some of your investments will grow faster than others. By rebalancing, you'll ensure that your portfolio does not overemphasize one or more asset categories, and you'll return your portfolio to a comfortable level of risk. Asset Rebalancing forms part and parcel of every Financial Plan.

Which are the broad areas in which Financial Planning can be undertaken

We hardly take time out to find out what are our sources of income and what are our expenses. Cash flow planning refers to our inflows (income) and outflows (expenses) of money as mentioned below.

 

Sources of income may include the following:
 

• Salary, bonus or business income
• Interest, dividend from investments
• Rental income
• Pension

Outflows may include the following:
 

• Living expenses including food, clothing, travel & entertainment
• Utilities and taxes
• Insurance premium (life, car, health)
• Charity, Gift
• Contribution to retirement assets - Pension, gratuity, PPF, superannuation
• Loan EMIs (House, car, credit card, personal loan)

Cash flow planning is a regular exercise for companies but at an individual level we ignore the importance of the cash flow planning process. Companies need to have a positive cash flow for expansion, diversification, distribution of earnings etc. Similarly, at an individual level cash flow planning is required to identify the major income and expenditures in future (both short-term and long-term) and making planned investments so that the required amount is accumulated within the required time frame. Without having personal budget of income and expenditure, expenditure may exceed income and our investment plan and financial goals may go for a toss. Without proper cash flow planning one could easily get caught in the debt trap. Creating a plan is not enough. One also needs to implement the plan, besides bringing about a change in the spending habits.

 

Cash flow planning is the preliminary step and it lays foundation in the financial planning exercise. Cash flow planning is done prior to starting an investment exercise, because it gives projection of finances and what is it that you can invest without causing a strain on yourself. It also enables to understand if a particular investment matches with your flow requirement. Once the financial goals are set, the amount of investment required to realize the goal are set aside considering inflationary factor. Investment strategy can be worked out after cash flow planning and risk profiling.

 

Cash flow planning is power fool tool as it enables to:
 

• Identify areas where expenses can be reduced and allocate money towards achieving financial goals, reduce debt level.
• Assess your ability to meet your financial goals.
• Positive cash flow helps in planning paying off costly loans like credit card and personal loan
• Project your future cash flow needs
• Enables one to take tax efficient decision depending upon your tax bracket and personal situation (carrying housing debt which is tax deductible vs. consumer debt which is not tax deductible

Insurance

We do not think (or do not want to think) of what will happen to our family, if we are gone - especially when we have not met all of life's responsibilities. Though the family goes through emotional trauma, financial burden adds to the pain. One has no remedy for the emotional pain, but smart financial planning can certainly ease the financial pain.

If one is under insured, it could lead to a slip in family's lifestyle in case of an unfortunate death of the breadwinner. The family may have to compromise on various fronts to make the ends meet. These could include cutting down household expenses like food, medical, entertainment expenses, marriage expenses of children or moving to lower grade school for your children and many more expenses.

While life insurance is critical to meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So having a cover is not enough - having adequate cover is critical. Also, investment planning is not enough because plan could work only if funding the plan is regular and enough wealth is built up to take care of all life stages responsibilities. What happens if the funding suddenly stops?

Life insurance has moved from protecting life to protecting lifestyle. Financial needs can be classified broadly into following two categories.
 

• Protection: if anything happens to the breadwinner, the family continues to be financially protected and maintain the same life style.
• Savings: one should be able to generate required corpus to meet milestones such as education / marriage expenses of children, buying a house etc.

The first step in buying insurance cover (Life Protection cover) is to adequately assess your need and responsibilities. One should ask the following questions:

• What is my life stage? (Age, family etc.)
• What are my responsibilities? (Buying a house, children's education / marriage expenses, protecting my income etc.)
• How much corpus I require to meet the above financial responsibilities?
• What is my current corpus / net worth?
• What are my liabilities (like car loan / housing loan etc)
• How do I plan (including selection of insurance plan) so that even if I am not around, my family can still sail through milestones?

The above data can be compiled in the following Protection Cover Computation Table to assess whether you are adequately protected:

A. Expenses protection
» Household expenses of family members

B. Goal protection» Education expenses of children
» Marriage expenses of children

C. Liabilities protection
» Outstanding Housing Loan
» Outstanding Car Loan
» Any other Loan (Personal Loan)

Total funds needed to cover expenses: (A + B + C)

D. Less: Existing Cover (if any)
Insurance
 

E. Less: Current Assets / Investments (excluding assets for self consumption like house, car etc)

 

Additional cover required to be purchased = (A + B + C) - (D + E)

Note:
 

» If the result of the above computation is positive, one is under insured and needs additional protection. If the result is negative, one is sufficiently covered or over insured.

» Inflation needs to be considered while calculating expenses.

» Present value of future expenses to be discounted to compute protection required

Mediclaim Policies: Clearing Cobwebs

Mediclaim provides for reimbursement of expenses incurred for hospitalization for certain injuries, illnesses, and/or diseases. It not only covers the expenses incurred during hospitalization but also the pre and post-hospitalization expenses. Then there is facility of cashless settlement, which enables the individual to get admission in any hospital without any initial payment. However while choosing policies many individuals find comparisons of products difficult due to confusing terms and myths. I have tried to clarify a few.

 

Floater Policies

 

These cover two or more members of the family in a single policy while offering a discount on the combined premium .The family is covered for one single sum s with no upper limits per member. The discount in these is a great attraction but can leave you under insured. The risk in floaters comes when all family members fall ill at the same time. Floater policies give an impression of a high cover, but may not necessarily be a good product. It is preferable if each family member has a separate cover. To give you an example, Mr. Ramesh Rajan has a floating cover that covers self spouse and both parents for a sum of 5 lakhs. Looks like a decent cover on the face of it. Now the family meets with a road accident in which all four were injured. Ramesh's father has major fractures and his medical bill comes to over 4 lakhs. The other three incur an expense of 1 lakhs each. Total Medical bill comes to Rs.8 lakhs. Unfortunately the whole family will only get 5 lakhs of bills reimbursed. This would not have been the case if each were covered for a sum of Rs. 5 lakhs each. Even a lesser cover of Rs.3 lakhs each would have covered them better. (An out of pocket expense of only 1 lakh as compared to 3 lakhs with the floater scheme).

 

A case of mistaken identity: Hospitalization Covers

 

Hospitalization covers are not mediclaim policies. Hospitalization covers typically give you a lumpsum amount for every day of hospitalization. This means that if the cover offers Rs. 5000 per day up to 180 days will give you the sum of Rs. 5000 irrespective of actual medical bills for the number of days you are hospitalized subject to a limit of 180 days If you are hospitalized for 2 days you get Rs 10000 and so on . These covers are not a substitute to proper medical insurance policies.

 

Senior Citizens above 60 years

 

Yes, Senior Citizens above 60 can get medical insurance. The products offered are few but available. Even diabetes and hypertension can be covered and so are pre existing diseases subject to ' no claim' years ranging from one year to three years. Bajaj, Star Health, Oriental and National Insurance offer these covers.

 

Company offered Mediclaim covers

 

Consider these as bonuses only. You must have your own cover as a job change or a sudden stopping of premium payment by companies (due to rising costs of medical insurance) can leave you exposed. If the company insurance is large you can opt for a floater policy as a cheaper option.

 

Points to note will make comparisons

1. Pre hospitalization and post hospitalization expenses - Whether covered and for how many days?

2. Cashless facility and list of hospitals where available - If you have some preferred medical service providers check if they figure in the list

3. Whether no claim bonuses are provided - a no claim bonus ensure that your cover increase with the rate of inflation (if not entirely at least to some extent) during the initial years.

4. TPA (Third Party Administrators)-Run a check on the distribution network of the insurance company or it's TPA. It is preferable to have at least one of their offices in a location close to you for ease of payment receipts on claim. It will be good idea to check on the service record of such TPA too.

5. Certain Medical Expenses may not need a 24 hour hospitalization. Check if your policy covers such treatments.

6. Check for upper limits on expenses - For example limit on surgeons fee, limit on ambulance charges etc. A 'no limit ' cover is always preferable.

7. Try getting hold of policy document before you buy. Even after buying you can return the policy in 15 days without loss if you find anything in the policy document that does not suit your requirement.
 

Riders in Insurance Policy

Riders are an important and integral part of insurance policies. A policy rider in an insurance policy is a provision or modification to an existing insurance policy that provides additional coverage. Riders on the insurance contract provide additional protection against risk. You can buy a basic insurance policy and add riders to it to include extra protection. The riders provide low-cost pure risk cover to the insured. These add-ons or riders, as they are called are a special policy provision or group of provisions that can be added to a policy to supplement the cover provided. They allow you to increase your insurance coverage or limit the coverage set down by the policy.

The need of a rider with a life insurance policy depends on the insurance seeker's existing insurance, as well as additional medical and non-life covers available with him.

The choice of a particular rider depends upon the life insurance coverage needs of an individual, which depends upon various factors such as age, family responsibilities and income, among others. It is, therefore, critical for an individual to make a sound decision after ascertaining his needs.

Different types of rider:

• Accidental Death and Disability Rider: This rider ensures receipt of a sum over and above the basic sum assured.
• Term benefit Rider: it endeavors to provide an additional sum, equivalent to a maximum of the basic sum assured should the insured die during the tenure of the policy.
• Critical Illness Rider: Critical Illness Rider protects the insured in the event of a critical illness.
• Waiver of Premium Rider: the future premiums are waived off if the insured becomes permanently disabled or loses his or her income as a result of injury or illness prior to a specified age. "This rider is very useful in case of a child policy where the life assured is a minor and therefore does not have any paying capacity
• Income Benefit Rider: In case of death of the life assured during the term of the policy, certain percentage of the rider sum assured is paid to the beneficiary.
• Surgical Procedure and Hospitalization benefit Rider: The former entails a payout, depending on the surgical procedure, the later covers the expenses involved in hospitalization by paying room charges subject to certain ceilings on both the amount and the number of days in a year that the insured can avail of the benefit.

Key Takeaways:

• Riders are always attached to the basic policy, which a person takes. They cannot be bought separately or independently of a basic policy.
• Riders are optional additional benefits that you can opt for with your insurance plan for a nominal extra amount.
• One can also combine a set of riders and append it to the main policy.
• Riders also cover risks, which are not considered important by a common man.
• Riders also help one avoid owning excessive insurance, as one doesn't need to purchase separate policies for additional coverage.
• There is a flexibility to stop the rider benefit without terminating the basic cover, which is not possible in the case of a separate policy.

A word of caution..

The policyholders should avoid those riders to the policy, which are least useful to them and include those, which may be critically important to their needs. One needs to choose the riders that are suited to one's specific needs. One should evaluate whether a policy rider offers additional protection that is worth the extra expense. While riders are important, they are essentially add-ons to an insurance policy. The lifer insurance cover therefore should always take precedence and be treated as the core necessity. Only after having adequately insured yourself, you should opt for the riders.

 

Medical Insurance for the Elderly

 

Senior Citizens who have not had any medical insurance cover till 60 , or were covered by their employers and on retirement suddenly find themselves without a medical insurance net have the going tough for them, simply because many insurance companies do not take new policies after age 55 although they may renew policies till 75 years or even 80 years in many products. Also there is a myth that pre existing illness may not permit them to be covered.

 

We have tried to study the market for products that are available to senior citizens. There may be very few options but they are sufficient to provide a decent cover to those looking for medical insurance after 60 years of age. Some of the products we found are as follows -

 

1) The National Insurance Company offers the Varistha Mediclaim Policy upto 1 lakh only. Any person from above age 60 can avail of this policy .The premium of a 60 year old is about Rs.4180 which is expensive. A Critical Illness rider up to 2 lakhs is also available at extra premium

 

2) Oriental Insurance Company has a policy called HOPE - for Senior citizens. However there are too many exclusions and it covers only specified illnesses.

 

3) Star Insurance: This Company has two products
 

• Regular Medicare the Regular product allows entry till age 65 subject to medical check up and allows renewals till 70 years. Cover upto 5 lakhs is possible
• Senior Citizen Red Carpet - This product allows entry right upto age 69 and allows renewals till 80 years. However the Red carpet product allows a cover uptoRs.200000 only.

4) ICICI Prudential Medicare: A plain vanilla Mediclaim policy that allows entry till 65 and assures cover till 75 years. One can take a cover for upto 10 lakhs

 

5) Bajaj Allaince Silver Health - This is similar to the PRU ICICI product .Maximum cover is Rs.5 lakhs.

A policy cover of Rs. 4 lakhs will cost about Rs.12000 for a person of 60 years .Medical check up is a must except for the red carpet product offered by Star.Pre existing illness like Diabetes, Blood Pressure etc are covered after a certain number of years in all policies except that offered by Oriental.

 

Premium wise all policies offered by the private insurers seem to be on an equal footing. But look out of policy wordings for full list of exclusions and waiting period before inclusion of pre exiting illnesses so that you choose a product most suitable to you. You must take a look at the list of network hospitals should you have any preferred hospital for treatment.

 

You can also look at buying these policies for your parents if they have crossed the threshold limit of 55 years for new policies. Payment of insurance premium on behalf of parent entitles you for deduction upto Rs.20000 under section 80 D. This is over and above Rs.15000 for self.

 

Term Plan

It's an Insurance only product without the complexities and high costs associated with traditional permanent policies. Term plans have no investment component and provide insurance cover only. Term life insurance is the original form of life insurance and is considered to be pure insurance protection because it builds no cash value. This is in contrast to permanent life insurance such as whole life, ULIP, Endowement plan etc.

 

If you have a family or dependents, term insurance is a must. Term insurance provides death protection to the owner of the policy or to the beneficiary / beneficiaries named in it should the insured die within the term of the policy. No other policy will offer you as much value for money as this one.

 

Let's say your current age is 30 years and you bought a term insurance policy for Rs 25 lakh. The term of the policy is for 20 years. If you pass away during this period, your family will be richer by Rs 25 lakh. But, if you outlive your policy, all your premiums (money that you pay to the insurance company to maintain your policy) would have gone down the drain.

 

Term plans have many attractive features.

• Term plans provide life cover for different periods or terms at the lowest possible premium. For instance in the above illustration a person can get a Rs 25 lakh cover for an annual premium of Rs 5,505 for 20 years, a coverage that will cost him about Rs 1,12,850 and Rs 197,300 in endowment and money-back policies, respectively.
• Term plans are especially beneficial for young people with dependents. Low premiums set you free to invest in high-growth assets such as equity, equity mutual funds, real estate etc.
• Income and assets are generally not high in the early stages of one's career or marriage, but there may be dependents to care for. Later on, as assets build up, one can withdraw from this facility. As the premium is low, it is easier to keep the policy running even during career breaks.

The drawbacks of term plan are as under:

• Cover is for a fixed term.
• The cost of cover increases with the insured's age.
• There are no bonuses and no cash value to accumulate within the policy.
• The policy lapses unless the premiums are paid.

ULIP (Unit Linked Insurance Plan)

ULIP is a scheme, which in addition to a life cover gives you an opportunity to make investments. It's a two in one plan that offers benefits of life insurance plus savings. In ULIPs, a part of the investment goes towards providing you life cover. The residual portion of the ULIP is invested in a fund which in turn invests in stocks or bonds; the value of investments alters with the performance of the underlying fund opted by you.

 

It is critical to understand how money gets invested once you purchase a ULIP. When you decide the amount of premium to be paid and the amount of life cover you want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation charge, and varies from product to product. The rest of the premium is invested in the fund or mixture of funds chosen by you. Mortality charges, ULIP administration charges and ULIP fund management charges are thereafter deducted on a periodic basis.

 

Since the fund of your choice has an underlying investment - either in equity or debt or a combination of the two - your fund value will reflect the performance of the underlying asset classes. At the time of maturity of your plan, you are entitled to receive the fund value as at the time of maturity.

 

Why investment in ULIP makes sense?

 

Flexibility: You have an option to switch between the investment funds to suite the changing requirement in life. One can switch from high risk to low risk fund option. There is an added advantage of switching between funds, which offer different rations of equity, and debt, a few times without paying any extra fees. These options are designed to help you choose an option fitting your risk appetite, investment horizon, financial goals and life stage.

 

Multiple Investment options: If you are a risk adverse investor and believe in goal based investing, ULIP is an ideal financial product where you can park your funds. Depending on your life stage, you can decide on equity and debt mix in your plan.

 

Tax benefit: your investment is eligible for exemption under Section 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). Besides the premium, the maturity amount in ULIPs is also tax-free , irrespective of whether the investment was in a balanced or debt plan.

 

Goal based investment: ULIP gives you a platform to plan for your child's education or child's marriage or your retirement needs. Since there is a life cover, in case you are not alive to take care of your family, your family financial goals remain intact and on track.

 

The Flip side of ULIPs:

 

High cost product: ULIPs are quite expensive, as most of the charges are recovered at the start of the tenure-usually in the first three years when your money is locked in. Insurers levy enormous selling charges, averaging more than 20 to 40% of the first year's premium, and dropping to 10% and 7.5% in subsequent years. So very little is actually invested during those years. Most investors discontinue early, or sign up for five- to 10-year terms, thus suffering high costs and poor returns. ULIPs make sense only if investments are made for a long tenure-say , 15 or 20 years-thus defraying initial costs.

 

ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory and Development Authority (IRDA), ULIPs have a minimum term of five years and a minimum locking of three years. You can make partial withdrawals after three years. The surrender value of a ULIP is low in the initial years, since the insurer deducts a large part of your premium as marketing and distribution costs. ULIPs are essentially long-term products that make sense only if your time horizon is 10 to 20 years.

 

Death benefit: In case of ULIPs, policy holders gets either the sum assured or the value of the units one holds, whichever greater, in case of death. In case of mutual funds + term insurance, one avails the benefits of both; fund value and the sum assured in case of death.

 

ULIPS are subject to the vagaries of the market. Recently most of the ULIPs have under performed Nifty.

 

ULIPS does not fit into for investors with active fund management.

ULIPs are sold by agents promising very high return, which may not be achievable.

 

Conclusion:

 

It is always better to keep insurance and investment needs separate. A better alternative to a ULIP is a combination of low-cost term insurance and a direct exposure to equity / equity mutual fund. Term insurance provides coverage for a specified period and is amongst the cheapest insurance products. Its no-frills design only covers your life for a fixed period. Combining it with equity, balanced or debt mutual fund gives you the benefits of a ULIP at a much lower cost. In the end, your long-term returns are higher

Money Back Insurance Plan

Money-back plans can be defined as endowment plans that periodically return a certain percentage of the sum assured instead of waiting till the end of term. While in a pure term policy, the insurance company is liable to pay the sum assured only to the beneficiaries upon the death of the policyholder, the money back is insurance cum investment plan. The rider, however, is that the premium is significantly high in the latter compared to the former for the same sum assured.

 

Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money back policies provide for periodic payments of partial survival benefits during the term of the policy, of course so long as the policy holder is alive. An important feature of this type of policies is that in the event of death at any time within the policy term, the death claim comprises full sum assured without deducting any of the survival benefit amounts, which may have already been paid as money-back components. Similarly, the bonus is also calculated on the full sum assured. While the individual keeps getting a percentage of the sum assured during the lifetime of the policy, the percentage, the number of installments, and the intervening period between installments depend on the term and the policy opted for. If a policyholder outlives the term, he gets the remaining corpus with accrued additions like bonus. If he dies before the full term of the policy, his nominee or legal heirs get the insured sum, irrespective of the number of installments received, with the accrued benefits. Most insurance companies offer money-back polices and many package these as children's education plans to offer tailor-made solutions.

 

Money-back policies look expensive. For example: if a 30-year-old takes a policy of Rs 10 lakh sum assured for tenure of 15 years, the annual premium paid would be Rs 89,670 for a money-back policy, while it would be Rs 65,070 for an endowment policy. It gets worse if we look at buying a term policy of Rs 10 lakh and investing the difference of the premium in a risk-free PPF account that gives eight per cent return.

 

A money-back policy also takes a beating in terms of returns and performance. Look at it only as a forced saving tool and it works only if you reinvest the money returned at regular intervals. On the insurance front, you could be underinsuring yourself by opting for one.

 

Money back plans are ideal for those who are looking for a product that provides insurance cover and savings. You may also go in for this policy to utilize the tax-free sum of money receivable - to provide for certain financial goals like children's education, marriage expenses of daughter etc. It is a good safety net for individuals who are in their late 30s or early 40s and are looking at significant payouts after 10-15 years to fund certain expenses.

 

Before buying a money back plan, you should carefully check out the actual amount allocated towards the premium, how much of it is going to be accumulated and how much is the insurance company's charges. The most crucial aspect is reading the terms and conditions thoroughly and understanding each clause well. Also, you should make sure that the periodic payouts are sound enough to meet your anticipated needs. It is also beneficial to analyze the past performance in terms of declared bonuses. Though the past is not necessarily an indication of future performance, it gives a fair idea of the insurance company's commitment to its policy holders. An enquiry on the minimum number of years for which the premium is to be paid to keep the policy alive, is also a must check.

 

Also, while on the one hand, payout intervals are fixed and helpful for crucial life-stage planning, on the other, you don't have the flexibility to increase or decrease premiums and have a choice of sum assured to suit growing incomes and lifestyle. In case of surrender as well, it offers low paid-up value.

 

Protect your dream house

Household insurance, in its basic form, covers the building structure and its contents against unforeseen events. Home Insurance policy secures the structure as well as the contents of your home against natural and man-made disasters. You can choose to buy insurance for only the building (structure) of your home, or only the contents (belongings) or both.

Home insurance policy covers broadly two things:

 

Building structure - Insurance covers for a building structure includes compensations paid for losses due to fire, storm, tempest, flood, riot, strike, lightning, explosion & implosion, landslides and rockslides, earthquake and damages to the structure due to acts of terrorism.

 

Contents inside the home - This coverage is for the loss or damage of the valuables inside the home like the electronic and electrical goods, furniture, clothing, jewelry and any other precious contents inside the home. The contents are covered on the market value of the items and in case of a loss the insurance claim is paid on the value of purchasing a similar new item exempting the depreciation value.

 

Some of the leading insurance companies that provide home insurance cover are ICICI Lombard General Insurance Co. Ltd. , IFFCO TOKIO , National Insurance Company Ltd , The New India Assurance Company Limited , Tata AIG , United Insurance, General Insurance Corporation Of India.

 

Most of the general insurance products being offered in the market today have sufficient cover for all kinds of perils that arise out of natural calamities. So whether it's flood, earthquake, storm, cyclone, fire or riots, among others, there's cover for all. Thus, while individuals can protect their homes, self and vehicles by taking householder's insurance, personal accident policy and motor insurance, respectively, fire and project insurance with earthquake extension may be a suitable option for business houses.

 

Coverage for structures and buildings pays for all the expenses related to the insured house's rebuilding or repair, while coverage for home contents protects your personal belongings, household items and furniture in case they are destroyed or damaged by one of the disasters you've been insured against.

 

As a package policy, a householder's insurance covers a combination of risks spread over 10 heads such as fire & allied perils, burglary & house breaking, all risk, plate glass, machinery breakdown, electronic equipment, pedal cycle, baggage, personal accident and public liability. While fire, lightning, explosion & implosion, riots, storm, cyclone and flood & inundation, among others, are covered under the head fire & allied perils, for instance, loss of or damage to jewellery and valuables caused by accident or misfortune while anywhere in India is covered under the all risk section.

 

Thus, if you want, you can also take individual policies like fire and allied perils and others to get limited cover. However, it is advisable to take a package policy rather than managing so many individual policies as it is very difficult to predict which natural disaster will strike you first.

 

Another advantage of a package policy is that by mixing and matching the sections, you can get the best mix of covers you need. Also, by buying cover under more than six sections, you can even get a premium discount of up to 20%. However, it is advisable not to buy a cover which you don't need. For instance, getting cover for loss of your personal baggage doesn't make any sense if you are not a frequent traveller. Similarly, the pedal cycle cover is not needed by a majority of households today. Fire and allied perils policy covers the building and its contents, whether it belongs to the policyholder or his family members. It includes cover against fire, earthquake, flood, landslide, storms, riots and terrorist attacks among others. Anyone who seeks just a plain cover from events such as fire or floods could take such a policy.

 

Then there are the other covers to pick and choose from. From cover against burglary to third-party liability cover, the scope of the cover could be broadened to the extent one wants to. But then, the greater the cover you go for, the premium also increases.

 

Insurance companies generally offer discount on the overall premium if one goes for multiple covers. Depending on the requirement of an individual cover must be chosen. One must also read the fine print carefully to look for noticeable exclusions. This could be known from the policy documents put on the website of many insurance companies.

 

It is important to make claims in a proper way. In case of loss or damage, insurance experts suggest that one should take photos of the damaged property to ensure effective claim settlement. It is also necessary to get quotations of repairs from the repairers as soon as possible. Home insurers also need to inform the insurance company about the damage at the earliest to start the process of claims settlement.

 

Home insurance, or house-owner/householder insurance as it is also known, is important, and you should purchase one. Be it a flat or a bungalow, rented or owned, it is advisable to insure your house and belongings to guard against unforeseen risks. It goes without saying that the loss of human life can never be compensated, but the financial shocks from unforeseen eventualities can easily be absorbed just by taking adequate and the right insurance.

 

What is Asset allocation?

The five-year Bull Run from 2003 to 2008 had made concepts like debt, cash, asset allocation and financial planning quite unfashionable. The only investment destination one could think of was equity, thanks to the soaring stocks markets. The steep fall in equity market since January 2008 has left many equity investors licking wounds, leaving virtually no place to hide. Bull market or bear market, there is never a time to abandon asset allocation. Times have changed and so has the thinking. It is essential to recognize the power of asset allocation all times, including tough times. Investors are now giving more relevance to asset allocation and planning of investments keeping in mind the long-term financial goals.

 

Asset allocation refers to the process of allocating your investments between different asset classes. Asset allocation means diversifying your money among different types of investment categories, such as stocks, bonds, gold, property and cash. The goal is to help reduce risk and optimize returns. The goal of asset allocation is to create an optimum mix of asset classes that have the potential to appreciate while meeting your risk tolerance level and financial goals.

 

Most investors prefer equity for their core portfolio, adding bonds to reduce volatility and downside risk. With low real returns in debt instruments and rising inflation levels, there is a danger that investors may not meet some of their long-term financial goals. Goals for an individual could be meeting child's college education five years hence or buying a house ten years from now. Different asset categories behave differently in terms of risk - return profile. Stocks, for instance, offer potential for both growth and income, while fixed income instruments offer safety of capital and steady income. The benefits of different asset categories can be combined into a portfolio with a level of risk one finds acceptable. Establishing a well-diversified portfolio may allow you to avoid the risks associated with putting all your eggs in one basket.

 

What is the right asset allocation?

 

There is no simple formula that can find the right asset allocation for every individual. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. Your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.

 

Asset allocation decisions depends on the following factors:

 

- Time frame
 

- Risk tolerance
 

- Personal circumstances
 

- Liquidity needs
 

- Tax consideration
 

Depending on your age, lifestyle and family commitments, your financial goals will vary. You need to define your financial goals like buying a house, marriage of son/ daughter, paying for your children's education or retirement. Besides defining your objectives, you also need to consider the amount of risk you can tolerate.

 

For example, when you retire, you might want to earn steady income from bonds / deposits, financial advisor might recommend say 100% debt portfolio. On the other hand, for young investor, if he does not need money for 20 years and is comfortable with the volatility in the stock market, a financial advisor might recommend an asset allocation of 80% in stocks.

 

Once the asset allocation is done, it does not mean that you just set it and forget it. Reviewing your portfolio regularly with your financial advisor to monitor and rebalance your asset allocation can help make sure you stay on track to meet your goals.

Asset Rebalancing

 

Definition:
 

The Process of rearranging assets to bring allocations to predetermined original level as per Financial Plan.

 

Over time some of your investments may become out of alignment with your investment goals. You'll find that some of your investments will grow faster than others. By rebalancing, you'll ensure that your portfolio does not overemphasize one or more asset categories, and you'll return your portfolio to a comfortable level of risk.

 

Needless to say Asset Rebalancing forms part and parcel of every Financial Plan

 

While a lot has been written about asset allocation and about the virtues of having the correct asset mix , very little of an investors attention goes to asset rebalancing. Also as part of reviewing your portfolio it is necessary to periodically check your portfolio's asset allocation and ensure it's still in line with your goals.

 

Let us explain in detail with an example:

 

Mr .Suresh owns a 10 lakh portfolio as on June 2007 with 50:50 in debt and equity. He is has five years to retirement and needs to build on his debt portfolio . His aim is to maintain 5 lakhs in equity and all excess funds in debt. He rebalances his portfolio every six months. In Dec 2007 he checks valuations of his portfolio to find that during the market boom of 2007 his equity portfolio recorded a gain of 40%. Total portfolio value is Rs.12.3 lakhs in Dec 2007. He sells Rs. 2 lakhs worth of shares and invests the same in debt. Now his portfolio in equity is valued at 5 lakhs again while the debt portfolio is at Rs 720000 (520000+200000) accounting for a 8 % interest on debt.

 

Next Rebalancing is scheduled for June 2008. Equity portfolio has corrected by 30% to 3.5 lakh, while debt portfolio stands at 750000. Mr. Suresh switches back 150,000 into equities . He now holds 6 lakhs in debt plus 5 lakhs in equity . His annual return is 10 % despite market correction.

 

Mr. Ramesh too holds 5 lakhs in equity and 5 lakhs in debt as on June 2007. He does not rebalance his portfolio. By December 2007 he too sees a 40% jump in equity portfolio but does nothing. His Portfolio value in June 2008 would be 10.3 lakh - a mere return of 3% . The example above covers a very small period of time i.e one year .Also it gives an example of an investor wanting a fixed sum in equities. You could devise your own plan and criteria and there are many ways of doing it.

 

Some advisors recommend rebalancing only when the relative weight of an asset class increases or decreases more than a certain percentage that you've identified in advance. The advantage of this method is that your investments tell you when to rebalance (as against a timetable).

 

Over long periods of time asset rebalancing has proven to substantially contribute to better average return and hence to the success of your financial plan . The biggest advantage of this exercise is that it helps you sell overvalued assets and buy undervalued ones.

 

Assets mostly owned by investors are Cash/Debt, Equities, Bullion, Real Estate and Alternative investments like Art/ Private Equity etc. Except for the super HNI, lay investors would typically hold a portfolio of debt ,equity, and real estate. Rebalancing can be done with almost any asset class, depending on its weightage in an investors portfolio . However some assets are easier to transact in as compared to other. For example bullion is mostly held in the form of jewelery and sentiment value does not allow us take economical decisions when it comes to these investments. Real estate too has it drawbacks in terms of limited liquidity, difficulty in part selling (Can't sell half a flat can u?) and high transaction costs . Also most real estate held by the middle income and upper middle income investors will be for self consumption . Equities debt and cash become the best choices for an asset rebalancing exercise. Because Equities are prone to irrational ups as well as down , a mere mechanical asset rebalancing between the three asset classes can give superior returns.

 

Points to note :

 

• Taxes and Transaction costs can cut the extra returns accruing from asset rebalancing. You must weigh the impact of both before planning on a asset rebalancing schedule.
• This process has to be mechanical with no scope for opinion or emotional decisions. It also requires a certain degree of discipline to ensure that rebalancing takes place on schedule/change in weightage.
• How often should one rebalance: As an investor a half yearly/annual rebalancing if time based adequate. Where asset rebalancing is done based on change in weightage, the frequency should be kept at minimum by simply keeping the cut off levels on the higher side. Frequent rebalancing does not aid in increasing long term returns.