Prajna Capital

Mutual Funds have alert-based or action-based trigger options
Need should decide your insurance plan
What is a Home Insurance?
Loss incurred in mutual fund investment is Not Taxable

Mutual Funds have alert-based or action-based trigger options

Posted: 03 Oct 2011 08:56 PM PDT

The markets have been on a roller coaster ride for some time now. The S&P CNX Nifty went below the 4,800 level just a week ago, only to make a u-turn to settle at 5,000. Since most experts were unclear about the Nifty's future direction, most investors have lost an opportunity to invest at lower levels. In fact, there are innumerable occasions when investors fail to take advantage of the situation in a falling market. The reasons may vary from a long day in office or inability to get the broker on time. Or it could be a classic case where fear sets in, thereby making investors rethink their investment plans. However, there are certain ways to tackle such situations. Here are a few tips.

Trigger

These are simple options provided to mutual fund investors to enable automatic switch of investments, depending on an event in the market. These are two types of triggers – alert-based triggers and action- based triggers. An alert-based trigger is one where an investor is alerted using SMS or e-mail by the fund house or distributor if an event takes place. Once the investor gets information about the occurrence of an event, it is up to him to decide if he wants to act upon it. This can best be understood with an example. Investor A is of the opinion that if the Nifty reaches 4,800, it is a good level to make an investment. He sets an alert-based trigger accordingly by filling up the trigger form. The day Nifty closes at or below the 4,800 mark, the investor gets an alert by SMS and email. At this moment, he may decide to invest more. But what if he does not have time on hand on that particular day?

In that case select an action based trigger. An action-based trigger facilitates a switch from liquid fund to equity fund after occurrence of an event, which can be used for lumpsum investments when markets fall. This can be understood with an example. Investor B is of the opinion that the Nifty at 4,700 is a good level for investing. He wants to invest . 1 lakh at that level. He invests . 1 lakh in a liquid fund and fills up the trigger form. If he chooses to transfer all his units at that level into an equity fund in the trigger form, all his money gets switched to an equity fund if the Nifty closes at or below 4,700. The investor gets to invest at the desired level of market.

You may choose to set triggers using various parameters, such as movement in the Nifty or the Sensex, appreciation of a certain percentage, unit NAV reaching a particular level or even choose to switch from one scheme to another on a particular date. You can also choose to set recurring triggers. For example, you may choose to switch your gains in liquid fund to equity fund, if your gains reach a particular amount. This ensures that your profits of certain size are transferred to equity funds as and when they accrue.

There are investors who use triggers as 'stop-loss' mechanism. For example, an investor may seek an alert if his portfolio value falls 15%. If such an event occurs, he is alerted accordingly and he may withdraw his money to limit his losses. But it is suggested not to become a too 'information-savvy' investor. Equity investments are of long-term nature and acting on short-term volatility may not be good for investors. If an investor decides to redeem his equity investments just because the market goes below a certain level, he may lose wealth creation in long term if markets start upward journey after such a dip.

So far so good. But what if you sign for an action trigger and later you think that you will find a better opportunity? Just cancel the trigger and submit a fresh trigger request with new condition, before the original trigger set by you is acted on. But what if there is a fund that helps you invest more in equity when markets fall and vice versa.

Mutual Fund

Take the example of Franklin Templeton Dynamic P/E ratio fund of funds. This fund invests in Franklin India Bluechip Fund and Templeton India Income Fund. The asset allocation to equity goes up when price-earning ratio of the Nifty at month-end falls. If the market rises and price-earning ratio goes up too, fund manager moves money from equity to a debt fund, thus capturing profits. At lower levels, you invest in equities and at higher levels you get to exit equities in a disciplined manner. Investors can simply invest and let the fund tweak asset allocation with changing market trends. Such funds are good investment vehicles for value-conscious investors. If the markets remain valued at high price earning ratio for long, investors run the risk of remaining invested in fixed income.

Dividend Transfer Plan

There are instances where you come across situations where markets are falling and you do not want to risk your capital. We are facing a similar downtrend since January. "Dividend transfer plan makes a lot of sense if you have invested large sums in liquid fund and want to get exposure to an equity fund without risking your capital. Let us understand with an example. You invest . 10 lakh in a liquid fund with a monthly dividend plan. You may choose to transfer your monthly dividends to equity fund. Though these are small amounts, over a long period of time you get to invest in equities and, more important, without risking your capital.

Capital Protection-Oriented Fund

These funds can be looked at by risk-averse investors. But do not expect too much from them. Capital protection-oriented funds though offer capital protection, but also limit upside. These funds have higher component of debt which ensures an investor gets his capital back and money invested in equities earn some capital appreciation for him.

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Need should decide your insurance plan

Posted: 03 Oct 2011 08:04 PM PDT

AS INDIANS, we are naturally very cost conscious and this holds true even for financial products we buy. Premium, the actual amount of money charged by insurance companies for active coverage, is often measured as the cost of an insurance product.

An insurance premium for the same service can vary widely among insurance providers. As in the case of consumer durables, the lowest quoted price on an insurance premium may seem like the better bargain, but the level of coverage may also be lower.

Having said that, a cheaper premium is an apt comparison for pure term plans alone, since the benefit offered by all insurers is standard.

For all other types of plans, including health plans, one needs to consider the features and benefits of a product. Customers can review the following guidelines when deciding on subscribing to a particular policy: Is the life cover offered sufficient? One must definitely ensure whether the life insurance cover is adequate to cover the family in case of an eventuality.

While opting for a life cover, one must ensure that the cover is sufficient to cover dependants not only today, but also over the life stage.

Are the features/benefits offered suited to your life stage needs?

You must check whether the benefits offered by the policy are suited to your individual needs. A policy providing benefits to customers towards the end of the policy term may be suitable for younger customers, but not for older customers. Similarly, a money-back product may be offering a money-back every three years. However, the amount may be miniscule, compared with the customer's need. In that case, one is better off choosing an endowment product.

Term of the policy: If you require a term policy to cover dependants during your working years, then the term of the policy must coincide with your planned retirement age. If the policy term is shorter than the desired term, then you may not realise the full potential of the benefits.

Additional protection: In addition to life cover, policies also provide additional protection against critical illnesses, accidental death and permanent disability. It is important to check whether your policy offers such options or inbuilt riders to protect you for various eventualities.

Monetary factors: For traditional plans, an important factor to consider is the quantum of bonus declared by the company in the past. For unit-linked insurance plans (Ulips), you must also consider the fund's performance history and its risk-return profile.

It is important to note that new Irda regulations have made most life insurance products more or less similar. Therefore, a key differentiator would be `service delivery' of the insurer. You could look at the company's records in managing the entire customer life cycle. The other important service differentiator is `claims'. A claim is a moment of truth when the family of the policyholder is in distress due to an unfortunate incident in their lives and it is important that the company you choose has a good record in claim settlements.

Therefore, price should not be the only factor for choosing an insurance plan, where benefits are realised in the long term and quite often, not directly by the person investing.

What is a Home Insurance?

Posted: 03 Oct 2011 10:23 AM PDT

Home insurance policies are offered by general insurance companies to cover your home against risks from natural calamities such as fire, floods, earthquakes, or landslides. Besides, there are various sections of the policy that broadly covers the structure of the house alone, or your belongings, such as jewellery, furniture, electronic appliances, etc, or even both. Some policies also cover your rent expenses if you have to move out to another house because your actual house has been damaged due to any of the covered perils listed by your insurer.

Calculating The Sum Assured

Sum insured is calculated by multiplying the builtup area of your home with the construction rate per square foot. For example, if the built-up area of your house is 800 sq foot and the construction rate is . 800 per sq foot, then the sum insured for your home structure should be . 6,40,000. Most insurers give details of construction costs on their websites.

Premium Costs

The premiums fall in a wide range depending on a variety of factors related to the size of the home, geographical location, type of construction, jewellery and other valuable possessions in the house. For example, if the cost of your house is . 60,00,000 and the cost and the market value of other possessions such as furniture, appliances, gadgets, jewellery add up to . 12 lakh, the premium will be about . 5,000.

Claim Process

Inform the insurance company or your agent immediately in case you need a claim. Submit a written claim document to the insurance company within the period stipulated.

This claim document should contain a detailed account of the articles lost/damaged and the actual value of each article. Then your claim request will be sent to the company's claims department. The insurer appoints a surveyor who will submit the final survey report (FSR) along with the documents submitted by you. On receipt of the documents, the claims department processes the claim.
On approval of the claim, a letter is sent to the insured stating the approved amount of settlement along with the discharge voucher.

Loss incurred in mutual fund investment is Not Taxable

Posted: 03 Oct 2011 08:44 AM PDT

In case of equity mutual fund investments, you pay tax only on short-term capital gains. The current tax rate is 15 per cent on the amount of gain if the fund is sold within one year. If the instrument is held for a year, there is no tax liability. In case of a loss (irrespective of the period of holding), you are not liable to any tax.