Prajna Capital

---

• Asset Allocation Plan should not be disturbed despite high interest Rates
• Mutual Fund Review: ICICI Prudential DISCOVERY FUND
• Mutual Fund Review: Birla Sunlife Frontline Equity
• FUND Review: Magnum Emerging Businesses
• Inflation & Its effect on your Financial Goals
• Realistic goal is crucial for financial planning
• Tax saving options for Non-residents Indians
• Concepts about a credit card
• Tricks in Investing
• Mediclaim Alone May not Cover Your Health Needs

Asset Allocation Plan should not be disturbed despite high interest Rates Posted: 17 Sep 2011 12:39 AM PDT    The stock market has been volatile for a while now. At the same time, the interest rates have been moving up, making debt instruments more attractive. The recent Reserve Bank of India(RBI)policy review also under scores that the interest rates are likely to remain high for a while. So, is it time to rejig your portfolio and make fresh allocations to debt as many investors are tempted to do? You should not deviate from your target asset allocation. Move money from equity to debt only if you have decided to rejig your asset allocation on a strategic basis and not merely as a tactical measure. If the equity markets are weak, reflecting lower valuations, the proportion of debt in your portfolio would have proportionately increased. Therefore, a further increase in debt allocation may not always be optimal. However, one could tactically look at a modest increase in debt allocation to capture the current high rates. One should also evaluate the quality, duration and yield of one's existing debt portfolio to see if the current rates provide an additional opportunity to lock in investments in instruments offering higher yields. Simply put, you don't change your asset allocation plan due to changes in the stock market or in the interest rate regime. In fact, the fall in market already presents you an opportunity to increase your allocation into (no, you guessed it wrong – it is not debt) equity. This is because the recent fall in stock prices may have skewed your asset allocation towards debt. Now, you should add to the equity component to rebalance the portfolio. According to experts, such rebalancing can be done once a year or every time there is a material change either in your life's circumstances or your financial goals. As for your existing debt portfolio, you can consider parking a portion of your corpus in fixed maturity plans (FMPs) since they are offering good rates now. But, while doing so, ensure that you do not go overboard and lock the funds meant to meet your short term liquidity requirements. In other words, maintain a balance between your hunger for yield and liquidity. If there is a strong desire on the part of clients to migrate to a certain asset class merely because it is making the headlines owing to its strong outperformance, I usually try to dissuade them saying they should actually increase their allocation in the underperforming asset class so as to redress the balance rather than aggravate it. Sometimes, I suggest a compromise solution by utilising around 5% of the client's corpus for such tactical shifts. This is usually not large enough to cause any material impact and it assuages the client, too. DEBT TO EQUITY RATIO In fact, investors should better pay attention to their overall asset allocation rather than fret about the debt to equity ratio of their portfolio. This is because there is no "ideal" ratio for all investors. It is a combination of several factors like your investment objective, your risk-taking ability, your financial advisors' take on the asset class and so on. There is a thumb rule that states that the percentage of equity allocation should be 100 minus your age, but I often quote the John Bogle version of it which states '80 - your age'. FACTORS THAT DETERMINE THE CHANGE Ideally, an investor should consider rebalancing a portfolio only once a year. This period is neither too frequent nor infrequent. Investment objectives and time horizon should be the primary determinant for any change in the portfolio, though it is a good idea to review and rebalance during any significant market event that may cause volatility. You may, however, require an interim review under two circumstances. One, there is an adverse event – it could be either internal, such as a family issue, or external like, say, a dramatic change in the investment climate. For example, the implementation of the impending direct taxes code or the 'small savings' committee report may force you to alter your investment plan. The second scenario that would warrant a change in your asset allocation is if there is a sudden change in the timing of a financial goal. For example, a couple living in a rented house has decided to purchase a house within a year instead of the earlier target of three years. Typically, profits could be booked based on relative performance of an investment. That is, if there is a better investment opportunity than the one being reviewed, or when an objective has been achieved, or when a portfolio needs to be rebalanced in favour of another asset class. One must be cautious against booking profits too often, since there may be unnecessary transaction costs or taxation consideration with every transaction.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in HDFC Mutual Funds Online   Invest in Sundaram Mutual Funds Online   Invest in Birla Sunlife Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

Mutual Fund Review: ICICI Prudential DISCOVERY FUND Posted: 16 Sep 2011 10:08 PM PDT   With I-Pru Discovery upbeat about its performance despite volatility, existing investors have no reason to pull out. Given the fund's 'value investing strategy', it takes time to unlock value from stocks it buys. Hence, only new investors with a long-term outlook should consider it.   A laggard until 2007, ICICI Prudential Discovery got noticed in 2008, when it was able to relatively de-risk itself in a volatile market. The fund really took off in 2009 with the market recovery helping to justify its 'Value Investing'. A boom in healthcare that year provided a windfall for the fund, which had been stacking up pharmaceutical stocks since 2006-07. The fund bought telecom stocks last year when many others shunned the sector. It has made handsome gains from this bet too. The fund manager is now gradually reducing exposure and scouting for other value picks. For a country obsessed with 'growth' as an investment mantra, the fund has shown that its 'value' approach is a far more mature way to invest in equity.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in HDFC Mutual Funds Online   Invest in Sundaram Mutual Funds Online   Invest in Birla Sunlife Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

Mutual Fund Review: Birla Sunlife Frontline Equity Posted: 16 Sep 2011 08:47 PM PDT   Frontline Equity has beaten its benchmark consistently since the last five years. Its mandate ensures a healthy mix of safety with large caps and opportunity with mid-cap stocks. The scheme can be considered as an investment option by both existing as well as new investors • BENCHMARK: BSE 200 • NET ASSETS (Cr) 2,908.9 (Jun 2011) • EXPENSE RATIO 1.86% A multi-cap offering, Frontline Equity has done well in rising markets and has also been able to protect its NAV during downturns. While it returned 62% in 2007 against 60% for the BSE 200, in 2008 it's NAV declined by about 49% against a 57% drop in the index. A reduction in capital goods and infrastructure stocks, which were piled up in 2007, probably helped the scheme sail through the 2008 meltdown. Its strategy to pick up profit-making companies that have a reasonable return on equity, good management and which are sensibly valued helped the fund clock 91% gains in 2009 and about 19% in 2010 against the BSE 200's 89% and 16% returns, respectively. Today the scheme has cut exposure in commodities, especially metals. It appears bullish on healthcare and selective capital goods companies. It believes valuations of the cap goods sector are quite reasonable.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in HDFC Mutual Funds Online   Invest in Sundaram Mutual Funds Online   Invest in Birla Sunlife Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

FUND Review: Magnum Emerging Businesses Posted: 16 Sep 2011 07:05 PM PDT   Investors willing to take on some risk for higher returns can consider Magnum Emerging Businesses. A mid-cap scheme focussed on consumption stocks, it has proved its mettle over the last couple of years. Existing investors can stay put as they have no reason to exit.     Playing the consumption theme, Magnum Emerging Businesses has outperformed BSE 500 and its peers by good margins. Its portfolio is a mix of small and mid-cap counters, including multibaggers like Page Industries, Hawkins, Jublinat Foodworks among others. As many of its holdings have low trading volumes, the risk quotient of the scheme is high. What enhances the risk is the fact that the fund invests in a limited number of growth oriented companies — about 22-25 stocks, taking high exposure per stock. These traits make the fund suitable for risk takers and those willing to take the risk can look forward to being suitably rewarded. Invest with a horizon of at least 3-5 years.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in HDFC Mutual Funds Online   Invest in Sundaram Mutual Funds Online   Invest in Birla Sunlife Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

Inflation & Its effect on your Financial Goals Posted: 16 Sep 2011 11:33 AM PDT Each goal has two components — a time-frame over which it has to be achieved, and an amount of money that will be needed. From this point onwards, it seems like a simple matter to calculate what needs to be done. If you can assume a rate of return, and know some basic arithmetic, you can figure out how much needs to be invested and how much the returns must be for the target to be reached. However, there are some ifs and buts. Unless these are taken into account, the end-result may not be as happy as the calculations indicate. One of the common hurdles is inflation. This is surprising since inflation is so much in the news but most of us fail to appreciate the huge impact it can have over the very long-term. The problem is that assuming a likely rate of return and a likely rate of inflation introduces two independent compounding variables in the calculations. If your estimates are off the mark, your calculations could go haywire. And given that human beings (specially human beings who invest!) are inherently optimistic creatures, they are very likely to underestimate inflation and overestimate returns. But there's a neat way around this problem. The trick is to appreciate that inflation and investment returns are not independent variables. Generally speaking, most asset types can reasonably be expected to generate returns that are inflation + n%, and the range over which 'n' is likely to vary is much smaller than that of the total returns. Even for something as stable as bank fixed deposits, you'd be hard pressed to estimate returns over the next 10 years. However, you can pretty much be sure that the returns will be about the same as the inflation rate, perhaps a per cent lower. This makes it much easier to make an inflation-adjusted long term target estimate. Basically, you can just estimate that your returns from an FD will be zero and you will just get your money back. This works for equity too. It's not as precise, obviously, but you can assume that your real equity returns will be about 5% and you will be a lot less wrong in planning your target estimating inflation and returns separately. So much for inflation. However, do appreciate the fact that this is not a trick of calculation. All returns are, in a manner of speaking, indexed to inflation in some way or another, even in equity investing. Some companies grow faster and some grow slower, but inflation is built into all the numbers that make up that growth. It is genuinely a more accurate method to predict returns as something +/- inflation rather than make independent predictions for both returns and inflation. There are a number of other things that you need to take care of if you'd like to invest towards a target. Your approach would be different depending on whether the time frame is negotiable, and whether the amount is negotiable. You would also need to change the asset type in which you are investing depending on the time frame. I'll write about these in future.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in HDFC Mutual Funds Online   Invest in Sundaram Mutual Funds Online   Invest in Birla Sunlife Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

Realistic goal is crucial for financial planning Posted: 16 Sep 2011 10:58 AM PDT   In the recent mid-quarter money policy, RBI had raised key interest rates by 25 basis points each to rein in inflation. As a result the short-term lending rate stands at 8.5 per cent and the borrowing rate at 6.5 per cent. EACH one of us is working hard, day in and day out, in order to reach to desired goal. Every year millions of people make fresh resolutions, that are never achieved because they are goals, that sounds great at the time when they are made but turn out to be completely unrealistic. Talking about personal financial goals, life is full of choices. In this materialistic world of ours, more often than not, most of us have a list of financial goals that we wish to achieve in quick time. What is important here is to keep one's entire financial position into perspective while defining the relative importance of each of these objectives. These goals can be as basic as owning a house to live in or as fancy as a holiday in Europe or buying a luxurious convertible car. But, we need to find out the most important realistic goal among them which is not impossible to get. Goal, like buying a three bedroom apartment, might be realistic for one person and a distant dream for another. So, we need to prioritise our goal, that is to put them in an order according to their importance. When it comes to setting up of financial goals, one needs to resort to financial planning. According to Financial Planning Standards Board (FPSB) India, "Financial Planning is a common sense disciplined approach to managing your finances to reach life goals. It cannot change your situation overnight; it is a life long process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your planning results." Financial planners across the world follow the same six step process of financial planning. Setting realistic goals is the most important step in this process. After understanding properly factors such as your needs, your income level, your net worth, your liquidity situation and your risk appetite, your planner will use a structured approach to come up with not only a list of realistic financial goals but also a roadmap to achieve the same. This will also include the timeframe to achieve each goal. He will define each one of these goals in present as well as future money terms. For example, if you need to spend Rs 50 lakhs for your daughter's wedding in today's terms after about 15 years. After 15 years, assuming about 6 per cent inflation, the cost will be around Rs 1.2 crore. Now, if we are able to invest in a security yielding around 15 per cent for the next 10 years, we need to set aside about Rs 18,000 per month. There are various options like investing monthly, annually or in lump sum, through which you can save for your goal set by the financial planner according to your financial capabilities. It is fashionable for the pseudo-modernists to claim that they don't set goals and don't plan for the future and take life as it comes everyday. They do realise, often when it is too late, that deepest pockets can also turn empty with time, if not taken care of. The first step for setting your financial goals, is to formulate goals that you can envision yourself achieving with your current job and income. When you do set goals it is important to be realistic about those goals. Setting a goal that is obviously impossible to achieve is not only foolish, but will end up frustrating you to the point where you give up on your goals. Setting realistic goals may sound easy, at least to those of us who think logically, or at least feel that we do. But, there is a world of difference between the realistic and the impossible. It is the financial planners job to help you set realistic goals for yourself and also plan to achieve them under a stipulated code of ethics and clear guidelines of professional conduct. FPSB India advises people to realise hat they are in charge. If you're working with a financial planner, be sure you understand the financial planning process. Provide the planner with all of the relevant information about financial status. Ask questions about the recommendations offered to you and play an active role in decion making. Being realistic is probably he biggest key to setting goals that you'll e able to achieve. If you can do this, you stand a good chance of getting through life with as few disappointments as possible.

Tax saving options for Non-residents Indians Posted: 16 Sep 2011 10:29 AM PDT The Income Tax Act, 1961 defines a non-resident Indian as an individual, being a citizen of India or a person of Indian origin, who is not a resident. A person is of Indian origin if he or either of his Indian parents or any of his grandparents was born in undivided India. Over the years, the number of Indians moving abroad has been increasing steadily. People leave the country for better prospects of work or study, or even on business and holiday. Many of the people who go abroad maintain bank accounts in India to either invest here or save money here or just for ease of transactions to and fro. But if you are a Non Resident Indian (NRI) with a bank account in the country, it is advisable that you are aware of all the existing tax rules as far as NRIs are concerned. Even if you are a Non-Resident Indian, you are liable to pay tax for any income that is earned or accrued in India. This is irrespective of whether the income is directly or indirectly received by the Non-Resident Indian in India or is accrued or deemed to have been accrued in India as far as the laws are concerned. A Non-Resident Indian will have to pay tax for any income from business transactions and also income generated from assets and investments in India. The major difference between tax paid by a resident Indian and a Non-Resident Indian is that the latter only has to pay tax for his 'Indian Income' and his foreign income, that is income earned and accrued abroad, is completely exempted from tax in Income India. It is important to note that Indian Income is income that accrues /arises (or is deemed to accrue/ arise in India) or which is received (or deemed to have been received) in India, though it might have accrued/risen elsewhere. Foreign Income is that which accrues or arises (or deemed to accrue or arise) outside India AND received (or deemed to be received) outside India. Tax Free Income for Non-residents Indians Non-residents Indians are granted certain tax exemptions if they are defined as or fulfill the criteria of Non-Resident Indian under the Income Tax Act, 1961. These tax free incomes available to Non-Resident Indians are: Interest earned on Savings Certificate, Interest earned on Non Resident (Non Repatriable) [NRNR] Deposit, Interest earned on Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit, Overseas income of NRIs, Dividend income from Indian Public/Private Company, Indian Mutual Fund and from Unit Trust of India, Long-term capital gains arising on transfer of equity shares traded on recognized Stock Exchange and units of equity schemes of Mutual Fund is exempt from tax at par with residents, Remuneration or fee received by non-resident / non-citizen / citizen but not ordinarily resident 'consultants', for rending technical consultancy in India under approved programme including remuneration of their employees, and income of their family members which accrue or arise outside India, Interest on notified bonds. Various Deductions for Non-residents Indians There are several tax saving options available for Non-Resident Indians.  Non-Resident Indians are allowed the following deductions under Income Tax Act, 1961: a. Home Loan Interest Deduction: Non-residents Indians are eligible to avail deductions on home loan interest for the interest portion of the EMI paid towards the repayment of home loans. b. Savings Deduction: From the various tax saving avenues available to the general public - Equity instruments like ELSS, Debt instruments like PPF, National Savings Certificate, Bank FDs etc and Life Insurance and Pension Plans, Non-residents Indians are not allowed the following investments: i.) Non-residents Indians not allowed to open a PPF account. An existing PPF account can be continued till maturity. ii.) Non-residents Indians are also barred from investing in National Saving Certificates (NSC), Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits (POTD). Existing investments (i.e., those that were purchased before becoming an NRI) can be continued till maturity. c. Health Insurance Premium Deduction Non-residents Indians can also claim deduction for premium paid on mediclaim / health insurance policy of self and family (Rs 15,000 / Rs 20,000 as the case may be) and another Rs 15,000 (Rs 20,000 if either of parents is a senior citizen) premium paid to insure the health of parents. d. Other Deductions There are many other deductions available to resident Indians - Health Insurance Premium, Medical treatment of disabled dependent, Medical treatment of certain specified ailments,  Deduction for Handicapped person, Educational loan, Deduction for Donations and Rent paid. NRIs qualify for these deductions: i) Deduction for interest paid on educational loan ii) Deduction for certain specified donations Deduction for Medical treatment of disabled dependent, Deduction for Medical treatment of certain specified ailments, and Deduction for Handicapped person are not available for Non-residents Indians.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in HDFC Mutual Funds Online   Invest in Sundaram Mutual Funds Online   Invest in Birla Sunlife Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

Concepts about a credit card Posted: 16 Sep 2011 09:40 AM PDT If you have a credit card then there are some concepts and terms related to using these cards that you must familiarize yourself with. Better knowledge of these will help you save money, especially if you are a regular user of your credit card. Annual fee: Did you know that some types of cards might charge you an annual fee just to keep your card active? This is especially the case in you have some card that offers users special benefits and privileges, or a very friendly loyalty and rewards programme. If you are not an active user of credit cards, then the most basic or regular card will do for you. These entry levels cards do not charge any fee. In fact, given the competition in the Indian market, most of the basic cards don't charge annual fees. Nevertheless, some cards are marketed in a very savvy manner, such that they tempt with you some catchy benefits, and you get entrapped into paying an annual fee just to avail of those benefits. Credit limit: When a card is issued to you, the issuer decides a maximum limit up to which it is contractually agreeable to offer your credit. Over time, as you develop trust with the issuer and show a clean repayment history on your card, you might become eligible for an increased credit limit. If you are spending in excess of your credit limit, the transaction might get rejected, causing you inconvenience. If the transaction does go through, you might be charged a penalty. The credit limit is influenced by your income, repayment capacity and by your age as well. For instance, Shyam who is 23 years old just started working recently, and was approved for a monthly credit limit of Rs 10,000. If he were still in college and had no income, its likely that he might not have even been eligible for a credit card. On the other hand, Shyam's 51 year-old father who is a senior manager at an MNCalso applied for a card from the same issuer but was sanctioned a limit of Rs 1 lakh. The issuer is unsure of Shyam's repayment capacity for a higher amount of credit, so has capped his limit at Rs 10,000. Over time, as Shyam's career progresses and his income rises, and as long as Shyam is disciplined about paying his dues on time and in full, then he can expect that his limit will also be increased. Cash advance: Just like debit cards, you can use your credit card to withdraw cash from a bank or an ATM. This is possible as long as you are still within your authorised credit limit, but lenders will set a cash advance limit that can vary depending upon the customer's income profile. When you withdraw cash from a debit card, it comes from your own cash or savings account, and you are not charged a fee. But, when you withdraw using a credit card you are effectively taking a loan from the bank. As a result, the charges on withdrawing cash using credit cards are very high. You will be charged an interest on the cash amount that you withdraw using your credit card. This will start accumulating from the day of withdrawal itself till the day you pay back the amount in full. You might also be levied a transaction fee. Use the cash withdrawal facility on your credit card only if you have no other option of getting cash. Repayment period: When you spend on your credit card, you get a time period within which you are expected to repay this credit to the card issuer. Typically, this could be 3-4 weeks from the date of the card statement.  So, for all practical purposes, you are getting an interest free loan from the issuer from the date you spend on your card, up to the date you are expected to pay your dues.     Annual percentage rate (APR): If you are not able to pay off your credit card amount within the repayment date, you are levied an interest cost. APR is the rate at which you would be charged interest for any outstanding balance that is overdue after your due date. At the time of signing the credit card contract agreement with your card issuer, the issuer will inform you about the rate. However, the issuer can unilaterally change the rate at a later date, but only after informing you about the rate change. Typical monthly rates of interest charged on outstanding balances are 3% - 5%. As a result, the APR works out to be higher than 36% (12 months x 3% interest = 36%). The longer that you have an outstanding balance, the higher the actual interest that you will end up paying. So don't just pay the minimum balance, but pay off your dues on time and in full. Minimum due: Your monthly credit card statement will highlight the total amount that is due, the due date and the minimum balance that you are expected to by the due date. If you have the money to repay in full, you must do so. If you pay only the minimum balance, you will be charged interest on the pending balance. And, if you don't pay either then you will be charged some penalties as well. Even if your total balance is say Rs 5,000 but you fail to pay the minimum, the cumulative penalties and interest charge for late payment can be up to Rs 1,000 and can rise every month that you are delayed in paying the amount back in full. If you don't pay off the original Rs 5,000 outstanding and then this additional Rs 1,000, then you will continue to incur penalties and interest and there could be a scenario where within a few months your total due could be about Rs 10,000, which is twice the original Rs, 5,000 you had spent on the card.   Credit bureau: All the transactions that you conduct on your card and the amount and frequency of spend on your card are tracked and monitored. Additionally, the issuer also collects information on your repayment habits — do you pay on time or are you late, have you ever defaulted on a payment, do you pay in full or only partially. This builds your credit history. Credit bureaus are organizations that are a repository of your credit history. You can get a copy of your credit history for a small fee by applying to a bureau like the Credit Investigation Bureau of India Ltd (CIBIL) or Equifax India. Don't think that when you spend on a credit card, the sky is the limit and you don't have to pay it back because you can always close the card or move addresses where no one will be able to trace you. Your PAN card is used to identify your records, and if you have defaulted or acquired a bad credit history, it will be very difficult for you to get a car or home loan, or a credit from another issuer.

Tricks in Investing Posted: 16 Sep 2011 08:50 AM PDT Not everybody is born rich. And not everybody goes from rags to riches in a matter of weeks or months. A handful of people seem to turn everything they touch into gold. Most others are either barely comfortable or spend their lifetime struggling. Many want to become rich or financially free, but never achieve that state, although we all have the potential to do so. It is necessary to control and fulfill your financial destiny by planning well and executing the plan even better. As soon as you realise this, you must prepare an action plan that conforms to the tested mantras of the modern day. Broadly, only two mantras are needed to help us control our financial destiny. Diversification: Invest In All Asset Classes Investment in equities is meant to give a high-growth booster to your portfolio. The investor must realise that the equities market in the short run tends to be volatile, but its long-term return potential remains high. Thus, the equities asset class is considered as a viable medium for investors wishing to build a large corpus over the long term. For example, an equity investor who would have invested . 10,000 in January 1980 in the BSE Sensex at 100 points would have built a corpus of 16.45 lakh by the end of March 2011, at an average CAGR of 17.73% per annum. Gold investments are profitable in the long run and are the closest hedging tool to inflation. If you observe the price movement of gold over the past years, you will see a continuous uptrend. So, investors have benefited greatly by holding gold for a longer term. The price of gold was . 1, 607 per 10 gms in March 1981, and it has grown to . 20,800 in March 2011, at an average CAGR of 8.79% per annum. Debt investments mainly consist of fixed deposits, corporate bonds, government securities and bank certificates of deposit, etc. These generate stable returns and generally carry much lower price risk than equities and commodities like gold. Over the last 10 years, fixed income, on an average, has given a 7.5% return. During extreme market volatility, investing in only one of the above asset classes may not yield the best result. The best way to achieve an above-par, risk-adjusted return is to invest in a combination of correlated and inversely correlated products. Investors need to find out mutual fund schemes that have a judicious mix of all the three asset classes — debt, equity and gold — in varying proportions depending on their risk profiles. Strategy: Invest Systematically And Regularly The fact remains that whenever the western world sneezes, the world catches a cold. Investors seeking long-term aggressive returns and possessing the appetite to stomach volatility considered technology funds during 1990s. Funds from this sector emerged as a category to reckon with and enjoyed tremendous growth in the years that followed, but their subsequent decline in the year 2000-01 due to the IT bubble burst has kept the risk-averse investor away. The next biggest turmoil in the history of stock markets in the year 2008 was due to the subprime crisis. Equity and balanced mutual funds generated negative returns during both these turmoil periods. However, one could ride such turmoil periods also smoothly. Let's take an example that clearly shows that investing through systematic investment plans (SIP) by keeping a long-term perspective in any market conditions is fruitful, vis-a-vis investing in lump sum — even if the investment is in sectors badly affected during such market crisis. In the financial year 2000-01, the technology sector funds, on an average, returned about (-) 64.36%. The NAVs of some of these funds were ruling at around 60-80% below par levels. A lump-sum investment sometime before the technology bubble burst would have eroded its value by 60%-80% after the market crash in 2000-01. Most of us would have exited seeing the loss. Even for some of the bravehearts who stayed on, a lump sum investment would have yielded only 6% per annum till date. Whereas, the SIP option would have generated more than 10.4% per annum. Therefore, investing a fixed amount every month (popularly known as SIP) is a safer way of investment because nobody can afford to invest his/her entire savings one day and lose it the next (in the event of a crash). Investing all at once can be extremely profitable if the market moves up, but most people who don't want to spend much time studying the market should endeavor to enjoy the benefit of cost averaging by choosing the SIP option.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in HDFC Mutual Funds Online   Invest in Sundaram Mutual Funds Online   Invest in Birla Sunlife Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

Mediclaim Alone May not Cover Your Health Needs Posted: 16 Sep 2011 07:31 AM PDT   Top up your health insurance with fixed-benefit plans to take care of recovery expenses or make good loss of income      Over the past few days, many cell-phone users have been bombarded with calls or SMSes, urging them to buy a new 'three-in-one' plan from Life Insurance Corporation of India (LIC). The plan offers health, life as well as accident cover, not to mention tax benefits. LIC Jeevan Arogya, a defined benefit plan, is similar to schemes floated by private life insurers. Simply put, these plans hand out a lump-sump amount (a pre-decided amount) upon hospitalisation of the policyholder. Now the crucial question is: should one go for a defined benefit plan from life insurers? To find an answer, you would have to first educate yourself about the two options available to you to fund your healthcare-related expenses — indemnity-based health covers, usually offered by general insurers, and benefit policies like Jeevan Arogya, usually from life insurance companies. INDEMNITY-BASED HEALTH COVER The most popular form of health insurance in the country are the indemnity policies, often referred to as mediclaim. The policies mostly cover expenses related to hospitalisation. The claims are settled by the insurer either on a cashless basis through tie-ups with hospitals or by reimbursing expenses after the bills are submitted. Only hospitalisation-related expenses are admissible under such policies, which means various expenses, like commuting to the hospital, fall outside the purview of such health covers. DEFINED BENEFIT PLANS Earlier, health insurance plans were the sole preserve of general insurance companies. However, several life insurance companies have also now started offering health plans. A large number of these policies is in the nature of benefit covers, where the benefit is pre-decided. That is, the insurance company pays a particular amount to customers when they make a claim. The key advantage of benefit policies is that policyholders do not have to worry about claim settlement as they know beforehand the amount that would be disbursed. Also, the documentation procedure is simpler. Another advantage is that you can make a claim even if you have already been reimbursed by an indemnity policy for the same treatment. In a benefit policy, the sum insured for the eventuality is paid irrespective of what is spent. However, in an indemnity policy, one is only reimbursed the actual cost. Another advantage of fixed benefit products is that in case of any eventuality, you can claim both from an indemnity based cover and a fixed-benefit cover. The benefit plans do not insist on the original discharge documents to settle the claim. In that sense, a benefit policy can be used as a top-up cover to take care of recovery expenses or make good the loss of income due to temporary break in employment. The main difference between these two health covers is the tenure. Usually, indemnity plans have to be renewed annually whereas defined-benefit plans are renewable after three years or more, depending upon the cover. HOW TO CHOOSE As you can see, both these plans operate on different planes. An indemnity plan takes care of your hospital expenses either through a cashless facility or reimbursement, whereas your benefit plan pays you a particular sum irrespective of your actual expenses. So, what should you do? Ditch indemnity plan? Or the other way around? Ideally, one should opt for a fixed-benefit plan along with an indemnity-based cover to completely address his/her health needs. In a sense, a benefit policy can be used as a top-up cover. While the indemnity plan would pick up your hospitalisation bill, the benefit policy will take care of the recovery expenses or make good the loss of income due to temporary break in employment, if any. CAN YOU AFFORD A COVER? If you are already pushing 50s and are planning to buy a health policy, you may have to fork out a hefty premium for the cover. Also, the pre-existing disease clause will hit you very hard as reimbursement plans do not cover pre-existing diseases for three to four years. If you don't have any financial constraint and can afford the hefty premium, you can opt for a mediclaim. But you have to back it up with a contingency fund, which has to be built just for your healthcare expenses. This need gets stressed as you enter your 40s. Today's senior citizens are more comfortable funding their own expenses and don't want to depend on their children to avoid financial burden. Small and young savers can start off with an SIP and build a corpus over 20 years. That way they can benefit from the compounding effect even if the investment amount is very small. If you are not a systematic investor, invest the cash surplus over a period of four to five months and direct that money to building a healthcare fund. You can use your bonus or any additional savings to start of this corpus and make incremental contributions for a period of 4-5 months and freeze the money. This is a good proposition only and only if you are not servicing an expensive loan. Once you build the corpus, keep the asset allocations intact depending upon your age and risk appetite. You can afford to have a high exposure to equity in your late 20s and early 30s. But it has to accommodate more of debt instrument as you approach your 50s. Finally save the corpus in the form of fixed deposits and liquid funds, given their stability and safe nature. The money is intact and can be redeemed within 24 hours even in case of emergencies without any penalty   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Invest in DSP BlackRock Mutual Funds Online   Invest in Reliance Mutual Funds Online   Invest in HDFC Mutual Funds Online   Invest in Sundaram Mutual Funds Online   Invest in Birla Sunlife Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

You are subscribed to email updates from Prajna Capital - An Investment Guide To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google Inc., 20 West Kinzie, Chicago IL USA 60610