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Financial lessons for small investors
from tumultuous year of 2011 |
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Eight key financial lessons for the small investors from the year 2011:
1. Diversification really works:
The biggest lesson of 2011 is also the oldest. It found a forceful reinforcement as the investors, whose portfolios had a wide spread across asset classes, sectors, or even geographies, reaped benefits. |
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In equity funds, diversified plans (down 23.5%) fared better than some sectoral funds (infra, banks down 31.5%). "India is considered to be among the top performing markets, but in rupee terms, it was among the worst performers in 2011," says Arindam Ghosh, VP and head of retail, JP Morgan Mutual Fund.
2. Insure against natural disasters:
Most of the damage in Japan was paid for by insurance. "This stresses the need to cover life, property and health," says Suresh Agarwal, executive vice president and head of distribution, Kotak Mahindra Old Mutual Life Insurance.
Even though the cost of insuring a house for Rs24 lakh is only Rs5 a day, not many Indians have covered their houses against disasters. Covering the contents of the house is a little costlier but equally important. The cost far outweighes the benefits of insuring your valuables.
3. Stay away from easy money plans:
Those who had flocked to SpeakAsia to fulfil their dreams are today ruing their decision to join the company. The online survey company has not paid them any money and there is no telling whether it will be allowed to resume its operations in India.
ET Wealth saw this coming much before the authorities clamped down on SpeakAsia for being a pyramid scheme. For small investors, the lesson is simple: stay away from schemes that offer easy money. Remember, there is no short-cut to riches. Only diligent saving and intelligent investing can get you there.
4. Shun stocks with too much debt:
There's nothing wrong with promoters pledging their stake as collateral. The trouble is if they pledge a large chunk of the equity. Bear cartels are forever on the prowl for such firms, for even a good stock can go into a tailspin if a big portion of the stake is pledged, triggering a sell-off.
The GTL stock has fallen over 90%, from Rs 407 to Rs 35, since June 15 when rumours of pledging first surfaced. KS Oils is another horror story. In November, Parsvnath shares crashed 50% as panicky financiers off-loaded.
5. Even approved projects are risky:
For property buyers, government approval for a project is practically a touchstone. The imbroglio over Noida Extension has changed this perception forever.
After the Allahabad High Court struck down the acquisition of land at Chak-Sahberi village in Greater Noida, government projects will no longer be seen as risk-free.
Fire Capital CEO Om Chaudhry advises buyers to invest in projects that have an institutional participation. "It's safer as banks and financial institutions exercise due diligence for the project," he says.
6. Look beyond FDs for debt investing:
At the beginning of the year, banks were luring deposits with rates of 8-8.5%. Anybody who locked in at that rate would have lost out when the rates touched 9-9.5%, even 10% for certain durations.
On the other hand, investors in short-term debt funds gained from the rise in interest rates. Debt funds are liquid and more tax-efficient than FDs. Now that the interest rate cycle has peaked, long-term debt funds look promising. "Investors need to look beyond FDs for debt investments," says Ghosh of JP Morgan.
7. Factor in inflation in your returns:
How much did you earn from your FD this year? Even for someone in the zero tax bracket, the return would not have been more than 1-2%. This is because the high inflation that raged in 2011 would have pared the real returns.
"Investors should not get carried away by the rate being offered," says PV Subramanyam, financial trainer with Iris. While a small investor can't control the rise in prices, he can control his expenses. "If you have a financial plan, it tells you when you overspend or under invest," says Sumeet Vaid, a financial planner.
8. Asset allocation is the key:
Diversification has limited utility if you don't rebalance your portfolio. 2011 was a year of divergent returns from different asset classes. Stocks fell but fixed income options gave good returns and gold shot up.
If one asset class runs ahead or lags, the investor must periodically reset the balance. This disciplined approach holds the key to successful investing. "The investors who maintained their asset allocation emerged relatively unscathed," says Jayant Pai, vice-president of Parag Parikh Financial Advisory Services.
With inputs from ET |
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| Why health insurance? |
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The most neglected is health insurance. Most often this tax saving instrument is brushed aside with the logic that after all it’s an expense (no monetary gains) and well we all save for the “rainy day”. So why incur an additional expense? The moot point – Is it truly an additional expense?
It’s soon going to be time for filing income tax returns. Most of us will be in a hurry to make the most of the tax deductions available. It’s done in haste to meet the deadlines. How many of us look at tax planning from a holistic perspective? How many of us have discussions on what would be the best tax |
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saving instrument to utilise from a variety of perspectives- returns, coverage, benefits among others. The most neglected is Health Insurance. Most often this tax saving instrument is brushed aside with the logic that after all it’s an expense (no monetary gains) and well we all save for the “rainy day”. So why incur an additional expense? The moot point – Is it truly an additional expense?
Why should Health Insurance be given due consideration?
- Medical Inflation: Prices of medicines and treatment are constantly on the rise making it difficult to rely on savings.
- Lifestyle related issues: Increase in incidence of medical problems due to
- The stressful environment we work in
- Change in the eating habits – fast food and meals at irregular hours
- Irregular sleep patterns
- Dependents: If you have dependents and are overwhelmed with responsibility, the health insurance coverage can come to your rescue.
- Health insurance coverage will release you from the burden of worrying how much to save for the rainy day. After all how much is enough?
Case Study
Imagine a situation where due to a medical emergency Mr. X had to be admitted to a hospital for an operation and the bill comes to a whopping Rs. 1 lakh- Guess what? Mr.X does have health coverage which covers this medical emergency and is within the overall limit. Mr. X would not have to shell out a penny. Neither Mr. X nor his family will have to undergo any financial strain. Isn’t the premium more of an investment than an expense? So what if there is no claim every single year. Didn’t it help Mr. X reduce the burden of worrying on an important parameter- saving for health related emergencies? Besides, most insurance companies provide some incentive for every claim free year (5% is added to the sum assured).
Your work does not end at making the decision of buying a health insurance product, choosing the right one is equally important. There is a bouquet of products in the market offered by several public and private insurance players. Earlier only general insurance companies and pure-play health insurance companies offered health related products but now even life insurance companies have entered this domain. So in all you have almost 30 players in the market offering health insurance products- A wide basket to choose from.
Types of Health Insurance Plans: A Brief Snapshot
Individual Health Plan: These are commonly known as mediclaim policies. They mainly cover hospitalisation expenses provided it is for at least 24 hours. Usually pre-existing diseases are not covered. Claims for specific ailments may not be allowed in the first or second year. For every claim-free year, most plans add 5 per cent to the sum insured.
Family Floater Policy: As the word suggests, this is a plan that will cover members of the family. Single premium is to be paid for the entire family. The benefits of the policy are similar to the individual health plan except for the fact that the sum insured can be availed by any or all members of the family and not a single person. Thus it has an advantage over an individual plan if more than one plan is required in a family. E.g. If a one lakh policy is required person, your family will need two individual policies if there are two people. Instead, if one family floater policy is taken for the two of them, for two lakhs, the coverage for each member will be Rs. 2 lakhs unlike the individual plan where the coverage per person is one lakh.
Critical Illness Plan- Add on: This product is not a substitute for any mediclaim plan (simple traditional product); instead it is a rider that could be added to it. This rider provides coverage if the insured develops a list of ailments spelt out by the company, generally of a serious nature such as cancer, coronary heart disease, stroke among others. If critical illness occurs, the company pays the entire sum insured.
Senior Citizen Health Plan: These plans are available for people between the age of 60 and 80 years. The coverage is generally fixed and the policy can be renewed lifelong or in some instance up to the age of 90 years. Read the fine print carefully on illness covered. An add-on in the form of a critical illness plan may be required.
Unit Linked Health Plan: This is a plan that serves dual purpose- coverage and returns. Part of the premium goes towards coverage and the balance is invested in a fund that functions like a mutual fund (a mix of debt and equity instruments can be chosen)
Things that may matter
Read the fine print carefully: The devil usually lies in the details. So a careful reading would help.
Product Details: Make sure you have carefully read about the exclusion of diseases such as pre-existing illness etc. Be aware of the sub-limits in the policy for specific expense heads.
Claim Settlement: There are two ways in which settlements are made. Reimbursements and Cashless settlements. In order to avail of the cashless settlement facility, the network hospitals should be utilised. Make sure you have details on the same. Take note of the time you have at hand to notify the required party for claim. Third party administrators (TPA) handle claim settlement on most occasions. At this point, claims on health insurance are very high in India, so if you want your claim to pass through smoothly, kindly follow the rules outlined.
Documentation: For any claim settlement, proper documentation is a must. Please ensure that documents are kept safely and also keep a tab on the premium payments (monthly, quarterly, semi-annually or annually) else the policy will lapse.
Tax Advantage- An incentive
In order to encourage individuals to invest in health insurance, Section 80 D of the Income tax Act provides a deduction on health insurance premium paid
- Up to Rs. 15,000 for self, spouse and dependent children and
- Additional Rs. 15,000 for parents (Rs. 20,000 in case of senior citizens)
So pick up the phone or surf the net and set the ball rolling. Remember “Health is Wealth”. We all believe in it. It’s now time to act. |
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| Why Invest in Mutual Funds |
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* Convenience: Investors who have the time and the money can build their portfolio by buying one security at a time. But identifying, researching and monitoring securities can be a full-time job that requires a lot of commitment. Alternatively, investors can simply buy a mutual fund in the market that will save them a lot of time and regular monitoring of the performance of the individual securities that make up the fund.
* Diversification: A single fund can hold securities from 100s of different issuers or companies, far more than what an individual investor can realistically manage to hold in their individual portfolios. |
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This diversification reduces the risk of a loss due to problems in one particular company or industry.
* Professional management: A mutual fund is managed by professional investors who do this full time. The resources available to them like traders who have practical experience in when to buy and sell securities, research team and access to company management is far more than what an individual investors can achieve on his own.
* Liquidity: Like shares, mutual funds are also liquid investments that can be bought or sold freely so that investors have access to their money when needed. However, certain shares might not trade freely because there is not market for them, and then the investor is stuck. Mutual funds do not face this problem of liquidity.
Role of funds in a consumer's portfolio
* Growth and Inflation Hedge:
Traditional savings instruments cannot keep pace with inflation and the rising cost of living. They give only 3.5% in a savings accounts. You can use a mixture of mutual funds to achieve a better return than what you can get in a savings account
* Source of Income:
Can provide you with income if you invest in an income or dividend paying fund, along with giving you a modest capital appreciation
* How does it differ from Life Insurance Savings Product:
A mutual fund is a capital market investment product that gives you a return based on the amount of risk taken by you.
Life insurance on the other hand is not an insurance product, but rather a protection product that will compensate your family or survivors in case something happens to you.
There are some types of life insurance that have an investment feature attached to them. Please understand that such type of hybrids can be recreated by you by simply combining a pure life insurance product along with a mutual fund. And, you will pay lesser in fees if you do this on your own, because these hybrids have much higher fees.
These hybrids have a purpose in your portfolio if you are looking for some capital appreciation along with life/risk cover. Ultimately, you need to decide what your needs are and whether the product you are looking at meets your needs or not. |
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| The home maker and finances! |
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Once while chatting up with a friend over tea and hot pakodas, the talk moved towards how expenses have shot up and how difficult it was getting to manage our family budgets. My friend just shrugged and said, “Well, those are concerns of my wife. After all, she is the finance minister of the house”.
Yeah, most women don the role of the finance minister of the house apart from the cook, housekeeper, the errand girl and more! However, just like every government’s finance minister, the home based finance minister comes in different types too. Some are functional, some are innovative, some are aggressive and |
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and some are just nodding dolls. What type is the finance minister of your house?
All families can do well with an efficient and innovative finance minister and this is how you can become one:
- First things first – by being organized
Four types of expenses happen in the household.
» Compulsory, non-negotiable expenses like the rent, school fees, groceries, electricity bill etc.
» Discretionary, variable expenses like eat outs, holidays, clothing and grooming, religious etc.
» Loan repayments
» Savings and investments
An organised finance minister has an almost clear idea of how much goes into each of these categories and allocates separately. For example: EMIs are paid out of the husband’s salary account because he has to claim tax deduction for the same. Savings and investments happen out of a common savings account jointly held by husband and finance minister to give better control and flexibility. Compulsory expenses are settled at a specific time of the month always and paid using cash, debit card or in a disciplined manner the credit card. Discretionary expenses have a predetermined budget and are usually only handled in cash.
- A creative finance minister will find scope to improvise in each of the above heads. Most compulsory expenses can be planned for. Like, the school fee comes in the month of April/May and so it does every year. A bit of pre – planning can help tide over this big-ticket expenditure with ease. For regular compulsory expenses, the brown cover technique (where money required for every expense is neatly put away in their respective envelopes) is most useful. There are ways to optimise interest payments on loans. Good bargaining and searching for the best deals can help keep discretionary expenses also in control and many more…
- Apart from the above, a smart finance minister keeps books of accounts, knows for sure how much the vegetable vendor owes her or how much advance the maid has taken that should be deducted from her monthly salary. Not from her memory which can be disputed, but in her books – clearly written with date, amount and if possible signatures.
- A ready reckoner list with all payments to be made, to whom, how much, when, how long etc. should remain handy in the top most draw of her closet. Not a payment missed, not a day delayed, not a cheque dishonored can mean a lot of saving in terms of interest, late payment fee, charges, penalties etc. And of course, an impeccable credit record too for the family and all those living in the house. (Btw, did you know if a bank’s database shows up your address if a defaulter lives in the same house as you do – this cannot augur well for you – when you opt for a loan?)
- How many instances have we seen that one person worries about the daughter’s wedding while the spouse fancies the latest model mobile phone / car? An instinctive clarity on what is important and what is not a great asset is crucial for the family’s finance minister. A focus on the family’s financial needs both short term and long term will help in prioritizing savings and investments over impulsive, indulgent spending.
- Just like how the country’s FM has to work together with the RBI governor, SEBI Chairman and others in the finance industry, the lady of the house needs to be friends with the banker, should invite the insurance agent for tea and network with the different people who are instrumental in carrying out the family’s investments, loans, insurances etc. This comes easily to most women and will turn out to be very helpful in getting the best deals and come good during the most unexpected moments
Overall, a well-informed, organized, diligent woman with clarity of goals and networking skills would make an amazing finance minister of the home. If you are reading this, you are on the way to becoming one.
Good luck!
With inputs from Bankbazaar |
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