August 2018 - CAGRfunds

August 28, 2018

Company health insurance or Separate health insurance?

“At CAGRfunds, we do a weekly session of knowledge sharing within the team. Last week, we had a rather long discussion on whether a separate health cover is required if the employee is covered by his or her company health insurance (Mediclaim) policy.

So we started digging into the various critical reasons as to why we need health cover at all. We realized that depending solely on the health insurance provided by our companies can land us up in the following situations:

Corporate Health Insurance coverage is the same for all

The employer decides our coverage amount. So, if your coverage amount is 5 lacs and your hospital bills amount to 7 lacs, the balance comes out of your pocket. Therefore, you need to ascertain the adequacy of the coverage as per your own health conditions.

You may not be rewarded for being healthy

Most companies (especially the small and midsized ones) deduct insurance premiums from our salaries. For people having the same coverage amount, the premium is also the same year on year, irrespective of how healthy or unhealthy an individual might be. So, if you are a healthy non-smoker individual, you are perhaps paying the same premium as your colleague who is slightly unhealthier than you are.

Also, in an individual health insurance, a lot of policies give either “no claim bonuses” or discounts on subsequent premiums for claim free years. That means you have more security and you save more money if you take care of your health.

You do not have the flexibility to prioritize the features you want

Corporate Insurance is a general insurance that covers a group of employees. So, the features are generic and may not be completely in sync with what you prefer. For example, if there is a history of cancer or diabetes in your family (which puts you at risk for the same), there is a chance your corporate insurance will not cover it. Or, your corporate insurance may be capping your room rent to a small % of sum insured which is unlikely to cover even half of your actual room rent.

You will have zero health cover just when you need it the most

Corporate Insurance will only cover you till you are employed with the company. So, if you are currently depending on your corporate health cover, you will have none on retirement. If at that point in time, you decide to take a private health cover, it will cost you significantly higher than what it would cost if you take a policy when you are young.

You might face several issues on changing your employer

Drop in coverage amount

Your new employer may offer you a lower coverage than your previous employer. You might want to go for a separate health cover when that happens, but do take into consideration the increased premium that you will have to take at a higher age. Also, every new policy has a waiting period for pre-existing diseases. This means that the Insurance service provider will not sanction any claim arising out of any pre-existing disease during the tenure of the waiting period. In most cases, this period ranges between 2-4 years. The older you are, the longer it is.

Lesser Dependents

Many companies today offer health insurance for not only you but also your spouse, children, parents and (occasionally) your in-laws. But, not all companies offer the same protection. If you change your company, your new employer may only support you, your spouse and your children. Having your dependants not covered in future can lead to a considerable risk of an unforeseen medical expense.

But, what should you do if your corporate health cover seems to be adequate?

Well, it is certainly possible that your company adequately covers you and your family and also provides you with the features that you prefer to have. You can choose to adopt any of the following routes:

Secure your cover for post-retirement: You can take a small cover separately so that you do not have to shell out a huge premium for taking a new policy post-retirement. A new policy at retirement will also subject you to the long waiting periods for pre-existing diseases which of course defeat the purpose of the policy at that age.
Secure the possibility of a massive medical emergency: Corporate covers are at best, generally adequate for normal medical situations. In case of a massive unforeseen emergency, the chances of incurring a huge expense are quite likely. Therefore, you might want to secure that eventuality and take a large health cover separately to take care of the same.

Want to know more about health insurance? Contact us on +91 97693 56440 to know more about the suitable plan for you.

August 21, 2018February 1, 2019

The debate between Term Insurance and Endowment Plans is finally over!

Yesterday, I was scrolling through Facebook and chanced upon this really funny ad starring Akshay Kumar and Sumeet Vyas. While the deceased Sumeet pleads the new age Yamraaj (aka Akshay) to give him another life in lieu of “behen ki shaadi, beti ki padhai, ghar ka kharcha, gaadi ki EMI”, he is asked a very simple yet daunting question – “Term Insurance nahi liya tumne?” To which comes the aptest reply – “Bhul Gaya”.

See the ad here

I did some research and the statistics shocked me. Although the insurance industry in India is growing at a fast pace, only 4% of our population has insurance coverage. Which means that 96 out of every 100 people have not safeguarded their dependents in an unfortunate eventuality of their death. I shudder to think of a family where the father is the sole bread earner and should anything happen to him, what was to be the future of his wife and kids. Add to that, cases where several liabilities in the form of a home loan, vehicle loan etc. are ongoing. Indeed, our priorities are completely misplaced.

But let us not blame the tendency to procrastinate as the only driver behind the low penetration. While a lot of people understand the importance of Term Insurance, they often struggle to figure out which plan is apt for them.

So I decided to do a mini survey. I went around asking 22 of my neighbours as to what had they done about Life Insurance? Well, 6 of them had not thought about it, 8 of them had thought but

got confused between the available options, 7 of them were covered by Endowment Plans and ULIPs and only 1 person was covered by a Term Insurance Plan.

Let me try and focus on the people who are covered or the ones who are thinking about coverage but are not fully aware of all the alternatives. Therefore, let us first understand what Endowment Plans and Term Insurances are.

Endowment Plans

Endowment plans, a bulk of which are sold by LIC, are a mix of Insurance and Investment. This means that you get some life insurance coverage in exchange for an annual or quarterly premium and after a certain maturity period, you get your premiums back, and maybe some bonus amount. That sounds quite appealing. You get back what you pay for. So you get insurance for free!

That is the pitch that agents make to us and like 11 out of 10 people, we scamper for anything and everything that is marked as “FREE”. Let us analyze them in more details a little later.

Term Insurance

Term Insurance is pure insurance. You pay only what is required to pay for Insurance. In case of death, the nominees get the full insured value. But you get nothing for staying alive.

Why are we even talking about Term Insurance then?

Let us see a small comparison.

	Endowment Plan	Term Insurance
Insurance Cover	1,00,00,000	1,00,00,000
Policy Period	30 years	30 years
Annual Premium	3,24,734	8,279
Total Amount Paid	97.4 lacs	2.5 lacs

Note: The above details are for a 30 year old, male, non-smoker.

Term Insurance Benefit 1: You pay only for Insurance, the cost of which is quite low. When compared to an Endowment Plan, everything being paid over and above the cost of Insurance is either getting allocated towards charges or are being invested.

Now when you are paying for investment, you ideally should also expect some return on the money getting invested. Historically, Endowment Plans have not given more than 4-6% annual returns. And this is true for a period when Fixed Deposits in Bank were giving around 7-8% annual returns and equity surpassed 15-16% annual returns. So basically, had you taken a plain Term Insurance and left the remaining money as a fixed deposit every year, you would have still made more money than your Endowment Plan did.

Therefore, Term Insurance Benefit 2: You can separate your investment objective and get better returns by following the right investment strategy.

So what do people do?

In most cases, we do not witness people taking an endowment plan with an insurance coverage of more than 10-20 lacs. This is because, for a vast majority of the middle class, an annual premium of approximately 50-70K towards insurance is a big amount. And if this is true, then let us revisit our objective of Insurance. If something were to happen to the bread earner of the family today, will a Life Insurance coverage of 10-20 lacs be sufficient to safeguard the family? In most cases, that is highly unlikely.

So, Term insurance Benefit 3: Get adequate coverage for a low premium.

But if that is so straightforward, why don’t people take Term Insurance?

Comfort with familiarity: A lot of people have seen their parents and grandparents taking endowment plans. It feels like home to them. Change results in resistance.
Affinity for “FREE”: We seldom do the math to figure out how much are we giving up over a period of time to get something for free now. Endowment Plans demand much higher premiums as compared to term Insurance but at some point in time, we get it all back. However, what we do not take into account is the time value for money. A 4-6% return over premiums paid is essentially capital destroyed. With that kind of return, you really did not generate any additional wealth, thereby defeating the whole concept of investing.
Dislike for “Expense”: We don’t like anything that we don’t get back. Term Insurance premiums albeit low are an expense. If we don’t die, we don’t get back anything. And this is one of the most prevalent reasons why people stay away from Term Insurance. Even though it makes no logical sense for them to manage their hard earned money in this way. If you want to experience this in real, next time someone sells you an Endowment Policy, ask him or her the annual return that you will make.

Our Recommendation:

Insurance shouldn’t be used as an investment vehicle. One should always go for a plain vanilla Term Insurance Policy and plan out his investments separately. Mixing the two creates a lack of transparency towards allocation to charges and leads to lower potential returns.

If you have any further queries, feel free to call us on +91 9769356440 or email us at contact@cagrfunds.com .

August 14, 2018August 15, 2018

This Independence Day, check if you are financially independent

Independence Day and Financial independence

A few months ago, I was out taking an evening walk when I happened to run across my old school friend, Gaurav. We both were elated to see each other after more than a decade and decided to grab some coffee and dinner. We walked into a nearby café and started marvelling over how the past 10 years seem to have flown by.

After graduation, Gaurav got his pilot’s license and started working for a well-reputed airline. He was making a comfortable 30 lacs p.a. with no dependents. I was pretty impressed with how well his career had panned out so far.

We both finished our meal and decided to leave. He offered to pay the bill with his credit card and drop me home in his car. I obliged.

While on our way to my house, I saw him being very callous about his spending. He had unnecessary add-ons in his car, designer seats, expensive smartphones, etc. He was also too generous with his tipping to the Barista and the Petrol Pump Attendant. I asked him how he could afford all of this. He replied with a grin, ‘EMIs’.

I was shocked. On further enquiry, I found out he had EMIs for everything – Cars, Mobile, Laptops, and even his clothes! I asked him if he saved anything at the end of the month and he simply replied with a small ‘No’.

Worried, I asked him if he was investing any money in assets.

He replied, ‘Of course! Look at this expensive phone, my car, my house, these are all my assets!’

I frowned as I went on to explain to him how assets are those that generate income or appreciate in monetary value.

Being a finance graduate myself, I decided to help my friend organize his finances. We met over the weekend and decided to plan his journey towards financial independence.

Step 1. Budget and Analyze

We listed down some of his EMIs:

Expense	Loan Amount	Interest	Tenure	Monthly Cost
Home Loan	INR 10 lacs	9.00%	20 years	INR 90,000
Car Loan	INR 8 lacs	10.00%	10 years	INR 10,572
Laptop	INR 70K	12.00%	3 years	INR 2,325
Phones	INR 65K	12.00%	3 years	INR 2,159
Designer Suits	INR 50K	12.00%	3 years	INR 1,661
Home Renovation	INR 2 lacs	14.00%	5 years	INR 4,654

And his other monthly expenses:

Expense	Monthly Cost
Restaurants	INR 35K
Movies	INR 4.2K
Electricity	INR 2K
Water	INR 600
Fuel	INR 4K
Mobile Bill	INR 1.5K
Maintenance	INR 5K
Misc.	INR 15K

His total monthly expenses came to INR 178,671. His income being around INR 180,000.

We now decided to split his expenses into three categories:

A: Important and Unavoidable expenses. (Example: Rent, EMIs, Insurance, Investments)

B: Expenses that can be postponed. (Example: New clothes, new furniture)

C: Unnecessary expenses. (Example: Luxury Items, High-end dining)

I asked him to only spend money in categories A and B for a month and indulge in minimal wants (category C).

Gaurav managed to save INR 20,000 in just this one month!

Step 2. Emergency Fund

Many of us often end up taking personal loans to cover for unexpected expenses such as medical emergencies, car repair, home repair, etc. These increase our monthly expenses and leave us with lesser money to grow our assets. This problem can be solved by having an emergency fund. This money can be used during times of such unexpected emergencies and will not cost you any additional interest. Therefore, we decided to keep INR 5000 per month, in a Liquid Debt Scheme as an emergency fund.

Step 3. Insurance

With the rising costs of health care and other expenses, buying insurance is unavoidable. Gaurav had no insurance since he stopped being covered under his parents’ insurance. Insurances, although are being unwanted goods, are necessary for everyone to save you on rainy days. I asked him to get health insurance and car insurance that can help him out in times of crisis. It cost him INR 10,000 for both.

Step 4. Investing

The final part of handling personal finances is investing. Money saved will depreciate in value over time. Money invested, will grow and earn for you forever (thanks to the magic of compounding). We decided to start a small SIP of INR 2,000 and build from there. The leftover money was deposited in his Savings Account.

Soon, he started understanding the unnecessary expenses and callous attitude that was costing him all his money. He gradually increased his investments and savings to pay off his massive EMIs.

As of today, his investments have already reached INR 30,000 and continue to grow. Just the past few months, gave him enough incentive to save for his future, thus becoming completely financially independent in the coming 15 years.

August 1, 2018

Is SIP in tax saving funds useful?

At CAGRfunds, January to March quarter is perhaps the busiest for us. No special reason why it should be so, but it is. Why? Because, many of our investors wake up to the need for tax saving investments just then. And then they end up investing a lumpsum amount in tax saving funds (ELSS).

What is wrong with that?

Well, nothing. Except that a lumpsum investment in any equity oriented fund forces us to lock a single price. What most investors miss are the problems they would face when they invest lumpsum instead of SIP.

Let us see an example of a SIP and a Lumpsum investment in an ELSS fund. We have two comparisons:

SIP of 12,500 every month since 15^th Dec 2008 until 15^th July 2018, and
Lumpsum of 1,50,000 every year on 15^th December

Scenario 1: ABSL Tax Relief’96 (since 2008)

Scenario 2: Axis Long Term Equity Fund (since 2010)

Scenario 3: Franklin India Tax Shield (since 2006)

As we can see, an annual lumpsum investment in any of the above ELSS funds would have given significantly lower returns than SIP over the same period. This is because SIP enables the investor to invest every month at different prices. SIP thus averages out the cost of purchase. On the other hand, with a lumpsum investment, money gets locked in at one price and that can give lower returns if the pricing, unfortunately, is at a high level. This happened with a lot of our investors who had to compulsorily invest a lumpsum amount in ELSS in January 2018 since they were restricted by the last date of submitting tax proofs.

So if you have not yet planned your taxes and are still waiting for the last date to knock your doors, you need to think again. Feel free to post a comment if you have any questions!