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Friday, April 29, 2011

Knowing and Managing stock market risks

Outlines some risks investors face and how you can manage them


   The quantum of risk in investing in stocks is somewhere between investing in high-risk commodity derivatives and low risk debt instruments. The unpredictability associated with stock price movement claws into investor returns. While the element of risk varies from stock to stock, you must ensure your overall stock portfolio risk is in sync with your risk tolerance level.


   Common risks associated with investing in the stock markets:

Developments in the markets    

Sometimes, a development affects stocks of a particular company and not the market as a whole. An interesting piece of information doing the rounds in the market circles can impact investor decisions. This risk springs from the relationship between news and updates pertaining to a company, and the resultant price movements of that particular stock.


   Company-specific news like strike by the workforce, legal tangle or even a fall in earnings can wane investor enthusiasm and result in a decline in the stock value. Ample diversification is the only way to eliminate this risk. It is impossible to forecast stock price fluctuations in the event of both good and bad news.

Systematic risk    

Economic crisis, interest rates, political turmoil, recession and a host of other factors can cause systematic risk. Systematic risk affects the market as a whole. A broad range of securities in an investor's portfolio are exposed to systematic risk.


   This risk impacts the entire markets and cannot be mitigated through diversification. Often investors try to reduce systematic risk by hedging.

Correlation risk    

Correlation risk is the risk that two assets will not move up or down in value as predicted. Take a scenario where an investor invests some amount in an oil company's stock and the same amount in oil. The result of both investments in oil stock and oil is predicted to be same. As oil price moves upwards, oil stocks also go upwards. However, the correlation between the two may not be as predicted.


   Correlation between stock price movements can also compound uncertainties. News pertaining to some stock can trigger fluctuations in some other stock with a high correlation.

Liquidity risk    

It is the risk of a security unable to be sold in a time bound manner to prevent significant loss or reap desired profits. Stocks that are traded in low volumes are referred to as illiquid and are difficult to sell.

Sector risk    

Investors who concentrate heavily on building a narrow sector-specific portfolio face the sector risk. If a government decision or news adversely impacts the sector, all the stocks in your portfolio will be impacted badly.

Market risk    

This is a type of systematic risk where the investor is exposed to the burden of bearing losses from fluctuations in securities' prices.

Managing risk    

Diversification: It holds the key to ironing out unsystematic risks in a portfolio. This risk management technique involves investing in a wide variety of instruments held in a portfolio. Such a well diversified portfolio will yield higher returns and be exposed to lower risk levels compared to a poorly-diversified portfolio.


   You can benefit from diversification if the securities in your portfolio are not perfectly correlated. In such a scenario, even if one asset or sector is faring poorly, the gains on other assets can make up for this loss.


   Match risk tolerance level: You must invest in stocks that suit your risk tolerance level and financial goals. A person with a high risk appetite can buy mid-cap stocks and growth stocks. Large-cap stocks are more reliable though their pace of growth may not be phenomenal.

 

How to access your credit information report?

Your credit information report (CIR) contains details of your credit history and track record in taking and repaying loans from banks and finance companies. A loan applicant with a good credit record will find access to loans easier, faster and on favourable terms.

The Credit Information Bureau of India Ltd (Cibil) consolidates the information on individual borrowers' credit history, sourced from different member credit institutions such as banks, credit card companies and NBFCs, into a single report called the CIR. This is then made available to its members (banks, finance companies) to facilitate their lending decisions.

You can access your own CIR for a fee. You can also check and correct errors in the report and to initiate action to improve your credit record. It is a good idea to keep your CIR updated and correct, so it is easier and faster for you to apply and get loans at competitive rates.

1) Fill up a CIR request form. It can be downloaded from www.cibil.com/accesscredit.htm

2) Also submit self-attested copies of address proof (bank statement, utility bill) and identify proof (PAN card, passport or voter's ID.)

3) Make demand draft Rs 142 in favour of 'Credit Information Bureau (India) Ltd', payable at Mumbai.

4) Send documents and draft to Cibil at:

Hoechst House, 6th Floor,

193 Backbay Reclamation,

Nariman Point, Mumbai 400 021

Points to note

Restricted Access: Your CIR is accessible only to you and to members of Cibil who may want to cross check the credentials of a prospective borrower. A third person cannot see your CIR.

Corrections: If you find errors in your CIR, you have to approach your lender. Cibil will alter the CIR only when members report changes.

Rating: CIR only provides factual information on your repayment record. It does not classify, rank or rate you based on your credit history.

 

Stock Buy Back

BUYBACK

A stock buyback, also known as a 'share repurchase', is a company buying back its shares from its shareholders. The repurchased shares are cancelled, thereby bringing down the number of outstanding shares. As a result, value of each remaining share goes up, thanks to higher per share earnings. Shareholders not participating in buyback also see their stake in the company's ownership rising post buyback. A company buying back its shares is generally viewed as a positive thing.

Typically, buybacks are carried out in one of two ways:

(A) Tender offer
The company will send an offer to its shareholders to sell all or a portion of their shares within a stipulated time frame and the offer price. The company could be out to buy only a part or all of its outstanding shares and delist itself. In the case the company is planning to delist its shares under the reverse book-building method, only the floor


(B) Open market
price is given. The company can also buyback its shares from the open market, just like any other investor. It has to announce its intent of the buyback, the duration, maximum price and the total amount that it will utilise for this purpose. Such offers can remain open for a long period of time or until the amount earmarked by the company's is fully utilised.

Silver: Price Movement

SILVER has been on steroids for the last one month. It has risen 24 per cent from `58,820 in just one month, prompting retailers to offer advance booking to investors before

Akshay Tritiya . Though prices of the white metal have been rising all through the past one year, the frenzy has been visible in the last one month. Typically, gold and silver move in tandem and the ratio between them is 55. Essentially, it means how much silver one can buy for the price of an ounce of gold. The ratio has been narrowing in the last few months as silver has run ahead of gold. While there is no denying that prices of precious metals are linked to the strength of the dollar, the unprecedented spike has stunned the market. So, few commodity analysts are willing to speak on the rally's sustainability, but most say the spurt has less to do with demand, and more with abnormal positions taken by some large players.

One popular theory doing the rounds on the internet and among banking circles is the huge build-up in short positions by a US-based global investment bank. It is alleged that the bank has been shorting silver for some time now — totalling nearly three billion ounces. If this is true, it's a matter of concern as this accounts for nearly onethird of the world's silver reserves. Interestingly, these positions, analysts claim, are not backed by physical assets! Some even go to the extent of suggesting that the bank is doing this to prop up the dollar, which has been falling against a basket of other currencies in recent times.

Short positions typically help drive down prices of the underlying asset, but if the price of the asset rises, either the investor has to bear mark-to-market losses or cover short position by buying more contracts. This drives up the price of the asset in the short-term. Short-covering has driven silver price further in the last few months. Analysts say since the position is huge, unwinding cannot be simple, as physical supplies have been disappearing from the market for a number of reasons. Commodity experts believe these positions will have to be squared of in off-market deals, which will drive down the prices of precious metal. Jayant Manglik, president, Religare Commodities, says the sharp movements indicate factors other than fundamentals influencing silver price. Therefore, he sees some near-term correction, following which silver will again be an attractive proposition.

Provident Fund (PF) status on mobile, web for all subscribers soon

 

Over 4.72 crore subscribers of Employees Provident Fund Organisation (EPFO) will soon be able to track status of their claim settlement and account transfer online and also get updates on their mobile phones.

 

This will be possible as the entire data of the retirement fund manager EPFO will be digitalised by March end.

 

"We have already completed the digitalisation of data at our 113 offices and the work in the remaining seven offices would be completed by t

 

he end of next month," Samirendra Chatterjee, commissioner, Central Provident Fund said.

 

"Once the digitalisation process is completed, the account transfer and money withdrawal claims' status could be done and tracked online by EPFO subscribers on the mobile phone," he said.

 

Besides, the subscribers would be intimated via short mobile messages (SMS) about the status of their request for account transfer and claim settlement.

 

In case of account transfer, the subscribers would get two messages on his or her mobile - first stating that the account is closed followed by one about the amount of money transfered from old to new one, an EPFO official involved in the project said.

 

Similarly, in claim settlement requests, first SMS message would be for intimating that the EPFO has received their application.

 

When the claim is settled, applicant would get another message stating the amount is credited in the specified bank account.

 

However, the official said, this facility could only be possible when the subscribers provide their mobile phone numbers in their application forms.

 

There are people who hesitate to provide mobile numbers, Chatterjee said.

 

Asked about applying online for account transfer and claim settlement, he replied, "That would be possible in the next phase. But through digitalisation we would try to adhere to the norm of settlement of claims and account transfer in a month's time."

 

At present, it takes months to settle claims and transfer of accounts because everything is done manually

The I-T Act - Lower liability with losses with adjustment of capital loss

The I-T Act allows taxpayers to adjust capital lost with any income or gains made in another year

One very important aspect of filing returns is the adjustment of losses. The Income Tax (I-T) Act allows taxpayers, under certain conditions, to set-off loss against income or gains, reducing the net tax liability. If such loss is not fully set-off in one year, it can be carried forward. It is necessary for every taxpayer to understand and take advantage of this facility.

INTER-SOURCE ADJUSTMENT

You can earn income from salary, house property, business or profession, capital gains and residuary income from other sources. There cannot be a loss from salary and income from other sources. But, you could suffer losses under other heads of income.

Loss under one head has to be adjusted against any gain under the same head. This is known as Inter-Source Adjustment. Say, you have two businesses, one is making a loss and the other is profit-making. Then, the loss from the first one can be set-off against profit from the second one. Similarly, if you have two house properties, one self occupied and the other on rent. Loss from the first property can be adjusted against the income from the second property.

INTER-HEAD ADJUSTMENT

If there is some loss leftover, even after setting it off as above. This can then be adjusted against income from other heads. This is called Inter-Head Adjustment. For instance, if you have a single self-occupied house property bought on mortgage, it will show loss. Reason: The annual value of a single self-occupied property is taken to be nil and the adjustment of any interest will result in a negative value. Such a loss may be adjusted with salary or business income, if any.

There are two exceptions to this rule. One, losses under capital gains cannot be set-off with income from any other head. Two, loss from business cannot be setoff against salary income.

CARRY FORWARD THE LOSS

Any loss that cannot be set-off against the same or other heads because of inadequacy of income may be carried forward to the subsequent year. Such a carry-forward exercise can be done for eight years. After eight years, if the loss has still not been adjusted fully, it has to be written off.

Importantly, for carry-forward losses, only Inter Source Adjustment is available in the subsequent years and not InterHead. (See Table)

CAPITAL GAINS

Losses under capital gains have a boundary. This means, these have to be adjusted against other capital gain only and not against other incomes. Long-term capital loss (LTCL) can be adjusted only with longterm capital gains (LTCG), not short-term one. But, short-term capital loss (STCL)can be set-off either with long- or shortterm capital gain (STCG).

If the income from some source is exempted from tax, loss from such a source cannot be set-off. Any long-term loss on sale of shares or equity funds cannot be set-off at all, as the long-term gain from the sale of these instruments is exempted. Example: LTCL (shares) `20,000 LTCG (equity funds) `60,000 STCL (shares) `40,000 LTCL (debt funds) `25,000 STCG (shares) `50,000 LTCG (gold) `15,000 The LTCL from shares ( `20,000) cannot be set-off, since the LTCG from it ( `15,000) is exempted. LTCL from nonequity funds ( `25,000) can be adjusted only with LTCG from gold ( `15,000). Therefore, only `15,000 can be adjusted, the balance `10,000 cannot be. Lastly, the STCL from shares ( `40,000) can be setoff against the STCG from it ( `50,000) and only the balance `10,000 would be taxed.

For being eligible to carry forward and set-off any loss against profits, it is important to file tax returns. If the loss return is filed after the due date, the I-T department may condone the delay only if it is satisfied with the reason behind you not being able to filing the returns on time .

The writer is Director, Wonderland Consultants

TAXATION

Loss carried forward                                                           Adjust Against

House Property Loss                                                           House property income

Business Loss                                                                      Business gain

Capital Loss

a) Short-term                                                                       Capital gains

b) Long-term                                                                       Only long-term capital gains

*Losses can be carried forward for the next 8 yrs

Thursday, April 28, 2011

Mutual Fund Review: DSP BLACKROCK MICRO CAP

The fund will invest primarily in stocks of small companies, which would mean currently investing predominantly in stocks with market cap of less than 3,000 crore. The selection will be based on businesses with scalability as micro-caps are generally varied, not correlated to broader markets and not sector-specific. The fund may also use various derivative and hedging products and techniques to generate better returns.

It started off as a close-ended offer and was converted into an open-ended one in June 2010. Investors here are a happy lot, though they had some tense moments in 2008 as the fund got hit. However, it did not face much redemption pressure. And has rewarded its investors well since then. It steamrolled ahead in 2009 and in 2010 was the best performing one in its category.

Despite five fund managers in a little over three years, the fund house's strong core management team has done a good job. The fund sticks to its mandate and holds close to 70 per cent in the less-than `3,000 crore market cap segment and none in the above `7,000 crore category. The fund remains fully invested, with well over 90 per cent equity exposure at any given time.

The fund manager very wisely ensures that individual stock bets are not high. Currently, none crosses four per cent of the assets. Nevertheless, the fund is arisky bet. It invests only in mid- and small-caps and avoids large-caps. More, it does not flee to cash during market downturns. This makes it volatile. Yet, it has outperformed other mid- and small cap funds by a huge margin, mainly due to its good stock picking techniques.

Personal Loans



As life becomes complex, there are financial needs that one cannot anticipate in totality.


Be it a medical emergency or some unexpected expenses at a wedding, one needs a lifeline in terms of quick access to money. Personal loans do just that. It is a loan where the borrower need not disclose the end use of the money borrowed.


There is no restriction or compliance with specific conditions of usage for the borrower.


It is a loan which can be used to raise money at a comparatively short notice for any purpose, making it a rather convenient option for the borrower. These are relatively small-tenure loans, typically for less than five years.


Personal loans also come with a whole host of charges. The borrower has to pay the processing fee while applying for the personal loan in the range of 1-2% of the entire loan amount. Then, there are late payment charges (1-2%) and pre-payment penalties (2-5%) along with any other charges applicable from bank to bank.


This makes the personal loan a costly bet for the borrower.


Since these loans are unsecured in nature, there is no need to offer any asset as collateral. The borrower's identity and address proof along with documents establishing repayment ability (salary slips, income-tax returns) are enough to apply for a personal loan.


These are primarily unsecured loans where the borrower need not offer any collateral while borrowing, thus making it a risky bet for the lender.


The lender, in turn, seeks to compensate for the higher risk he takes by charging higher interest rates on such loans. In most cases, a personal loan is the costliest access to money after credit cards in India.


The rate of interest payable on personal loans is in the range of 14-23% and arrived at by taking into account the loan amount, tenure and borrower's credit profile.


This is the reason why one should stay away from personal loans.


Personal loans come in handy only for those who have already exhausted their borrowing limits under the comparatively low cost asset-backed options such as home loans, home renovation loans, loan against property and car loans.
Borrowers trapped in high cost debts such as credit card outstanding, can also consider personal loans to refinance their liabilities.

 

Avenues to plan retirement corpus

Retirement planning need not hinge on a single option. A basket of instruments can do the job


   As you read reports of surging inflation, you begin to wonder if you have enough in your kitty. With many people not used to the habit of retirement planning, the concept is still the last item in the list of things to do. So, if someone gets worried and starts thinking about postretirement life, it is not completely out of place.


   Technically, post-retirement life begins any time after the age of 50 and it is also reflected in the vesting period fixed by many insurance companies. In recent years, however, many individuals have begun to advance this figure by a couple of years due to a number of factors. It could be the dream to start an enterprise or the comfort of a kitty at disposal. While the former may still provide some regular source of income, the latter is technically a zero income period and hence requires greater planning.


   The retirement planning in itself can be divided into a number of components as the general assumption is that an individual has at least a couple of decades to plan for this eventually. While the sum needed for the rest of life is not an easy figure to arrive at, one can take up the process as early as possible. Since income levels too change over a period of time, the allocation can vary for the better over a period of time. Hence, a plan or scheme signed up at the age of 30 need not be the end of all when the investor turns 50.


   One of the good things about retirement planning is that it lets you do the investment over a long period of time. For instance, a parent does not have the luxury of building a corpus for a car purchase beyond 3-5 years and so is the case with planning for a child's future. For instance, a parent cannot think of setting aside a sum for a child's education beyond 20 years. On the contrary, an investor can build a corpus over a period of 30-35 years for his retirement kitty if he thinks about it early.


   There are plenty of options for retirement planning and some may not carry the tag too. For instance, an investment in land or property can take care of retirement needs through their sale. On the other hand, there are also flexible products like stocks, systematic investment plans (SIPs) and pension plans which can come in handy after retirement. The choice of products and allocation has to be according to the comfort of the investor and his financial position. More importantly, one has to keep in mind the flexibility and tax implications of each product as they can have a greater impact over a period of time.


   Among some of the options mentioned, the pension plan has lost flexibility because of restrictions imposed by the regulator, Insurance Regulatory and Development Authority. Now, pension plans come with guaranteed returns. This is a big plus but they have lost flexibility. More importantly, they also carry life cover and hence may not be suitable for all. Earlier, even a 50-year-old could think of a pension plan with a high premium paying term of five years. Now it is not the case as they have a minimum paying period of 10 years and because of life cover, can prove expensive. In a number of products, the premium is directly correlated to the life cover and hence an investor cannot call the shots.


   But the positive aspect of the new pension plan is that it forces the investor to think long-term and is particularly advantageous for young investors. For instance, a 30-year-old gets the advantage of life cover and pension with a single product and because of his age, the mortality rates too aren't high.


   While no single product can do the job of pension planning, a combination of products can definitely do the job. Investors can have a basket of products for their retirement portfolio by opting for equity, debt, pension plan and property among others. More importantly, they have to monitor the performances and shuffle the portfolio at regular intervals.

 

Tax exemption on gratuity

Gratuity up to Rs 10 lakhs is exempt from income tax


   The government has hiked the limits of gratuity payment from Rs 3.5 lakhs to Rs 10 lakhs. This enhanced limit is applicable to employees who retire, become incapacitated before retirement, expire or whose services were terminated on or after May 24, 2010.


   As per Section 10(10) of Income Tax Act, gratuity is paid when an employee completes five or more years of full-time service with the employer. In respect of government employees, any death-cum-retirement gratuity received under the pension rules or scheme of the central or state government, or regulations applicable to the members of defence services, is not taxable.


   In case of gratuity received under the Gratuity Act, 1972, any gratuity received to the extent that it does not exceed an amount calculated in accordance with the provisions of the Gratuity Act is not taxable. For employees receiving gratuity other than under the government pension or gratuity scheme and also other than under the Payment of Gratuity Act, the computation mechanism in respect of exemption limits has been specified in the IT Act. The Central Board of Direct Taxes (CBDT) has issued a notification increasing the overall tax exemption to Rs 10 lakhs.


   The gratuity received by an employee is not taxable if it is received on his retirement, his becoming incapacitated prior to such retirement, termination of employment or if such gratuity is received by his widow, children or dependants on his death. Further, such gratuity does not exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for 10 months immediately preceding the month in which such retirement or death takes place, subject to the limits prescribed by the central government.


   Salary for this purpose includes dearness allowance, but excludes all other allowances and perquisites. Also, as per some judicial precedents, completed service would mean a total period of service whether under one employer or more.


   In case any such gratuities are received by an employee from more than one employer in the same financial year, the aggregate amount so exempt should not exceed the overall exemption limit. Similarly, if gratuities were received in one or more financial years, the exempt amount claimed earlier has to be taken into account while computing the exemption at present.

What is gratuity?    

Gratuity is a retirement benefit. An employer may offer gratuity out of his own funds or may purchase a group gratuity plan from a life insurer. In case the employer chooses a life insurer, annual contributions as decided by the insurer have to be paid. The gratuity paid by the insurer will depend on the terms of the group gratuity scheme.

 

Have home loan? Avoid default to escape hassles

If you fail to pay an EMI, priority should be to clear it quickly

Most people believe a home loan can power an easy ride to a dream home, but they forget that repayment obligations can be long and burdensome. Most borrowers are also oblivious of the legal hassles that may follow if one fails to repay a loan.

This holds true for other borrowings, such as car loans and personal loans, too.
But home loans being bigger in size and longer in tenure, the risk of going into default is much higher.

Debt Recovery Tribunal is the governing body for recovery of unpaid secured and unsecured loans. Under the DRT, banks and other lenders can declare an account a non-performing asset and the loanee a `defaulter' in case the borrower has missed three installments.

Under the DRT-enforced Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, lenders can take action against the borrower in case of a default.

As per the Act, a demand notice needs to be delivered to the borrower by registered post or courier, which, if not possible, needs to be affixed on the property and the photos published in at least two national dailies.

Often, issuance of a demand notice may catch the borrower unawares when a loan account goes into default for no fault of hers/his or because s/he is not aware that s/he has been declared a defaulter by the bank.

Once a borrower is declared a defaulter, the lender hires recovery agents for a pre-determined fees to recover the loan. To safeguard borrowers from intimidating measures adopted by recovery agents, the Reserve Bank of India has fixed strict guidelines to govern the process. These guidelines require the lender to furnish details of the recovery agent, including names and phone numbers, to the borrower as and when a case is forwarded for recovery. The guidelines prohibit manhandling, public humiliation or any other action that may tarnish the image of the bank.

A borrower has the right to object in writing to any notice in DRT or directly to the bank if s/he feels that the total due amount mentioned in the notice is not correct.
The bank is obliged to reply within seven days.

In home loans, a bank may take possession of the property if the borrower fails to clear the stated dues after the demand notice. Howev er, the bank must obtain a legal order from a chief metropolitan magistrate or the district magistrate to physically take possession.

In case the borrower does not allow the bank to take possession of the property, the bank may take help of local police to get the property vacated. The bank-appointed recovery agent has no legal right to get the occupant to vacate the property.

Default on a loan account can happen in many ways.
For instance, if you had taken a loan on January 30, 2010, and after paying regular installments till July 30, if you failed to pay your installments for August, September and October, the bank can declare the case as NPA and send notices for the total amount along with interest.

An account can be declared NPA even if the un paid installments are not in chronological order and scattered over a period of time. Hence, it is important to clear off any prior debt along with interest first in order to avoid being categorised as a defaulter. In fact, clearing of old debt should be a priority even if that requires you to hold up the current installment in case of a fund shortage.

The appeal process in such cases is not as easy as it may appear. In order to file an appeal with DRAT, the borrower must pay the application fee along with 25 per cent of the total amount demanded by bank, which is difficult for borrowers at times because of their poor financial condition.

 

Mutual Fund Review: BIRLA SUN LIFE DIVIDEND YIELD PLUS

The fund invests in fundamentally sound companies with a dividend yield at least twice that of Sensex. Dividend paying companies usually have healthy free cash flows, steady earnings growth and a strong balance sheet. This results in steady stock returns over the long-term, while providing relatively better downside protection in times of market correction. The fund also has the flexibility to invest up to 35 per cent in companies facing special situations like de-mergers, buy-backs and open offers, which are used very selectively, with a focus on minimising the downside risk.

It has substantial exposure to mid-cap stocks, but this has not translated into fabulous out-performance, even in bull runs led by smaller market cap stocks. But it did put up a good show in 2009 and had held its ground in 2008. Even in the current market turbulence, it has fallen less than the average of its peers. During periods of volatility, the fund increases its debt allocation.

The top sectors in its portfolio are banking, consumer non-durable, software and pharmaceuticals. The fund maintains around 50 per cent exposure to midcaps and about 20 per cent to small-caps. The large-cap exposure is limited to a few stocks. It limits exposure to individual stocks to less than five per cent of the portfolio.

Its downside protection capabilities have proved the fund gains ground by not losing it in the first place. One would expect this trait from a dividend yield fund, but its surprising when one considers the high mid- and small-cap allocation. The risky bent is balanced by avoiding aggressive bets and increasing the number of stocks over time. Over the long-term, it proves a worthy bet.

Wednesday, April 27, 2011

Why You Should Take a Cover for Your Home


   YOU work hard and save money to buy a house and household appliances. You take utmost care to secure your dream house, yet there is the risk of a natural or man-made catastrophe. If you cannot prevent it, transfer the risk. Consider buying a householders- or home-insurance policy.

Scope Of Cover:

A package householders policy provides cover to the structure of the building as well as the contents of the house, that belong to the proposer and his family permanently residing with him or her. In case you are living in a rented house or in an apartment where the building is insured by your society, you can buy a customised plan which covers only your household articles and not the building. Some common risks covered under the policy are fire, earthquake, flood, burglary, bursting and overflowing of water tanks, breakdown of domestic appliances and loss or damage of jewellery and valuables by accident or misfortune. Sum insured for certain items under contents, such as works of art, jewellery or other valuables, may be subject to a limit. A householder policy also provides cover against the insured's legal liability for bodily injury or damage to property of third party. Some policies also cover rent for alternative accommodation during reconstruction of a building that has been damaged by fire or other disasters. Risks covered in the policy and premium may vary slightly from one insurer to another.

Guide To Choose The Sum Insured:

The purpose of insuring the building is that, in case the building is damaged due to any disaster like fire, earthquake or flood you should get financial support to reinstate it. So the sum insured for the building should neither be the cost of acquisition nor the current market value of the house but the current construction cost because market value of the building includes cost of land on which the house is built. Don't include the cost of land in the sum insured but don't forget to add costs for removal of debris. On the other hand, for the insurance of household items sum insured should be the market value of these items i.e. the value for which these used items could be bought or sold in the market.


   If you want to insure the breakdown of domestic appliances, then the sum insured should represent the current replacement value of a similar item. For instance, if you want to insure your two-year-old, 42-inch Sony LCD TV, the sum insured should be equivalent to the current cost price of a new 42-inch Sony LCD TV. However, the claim amount payable would be the amount required to bring the damaged item to the same condition as it was prior to the damage subject to the adequacy of the sum insured.

Points To Remember:

Unlike a life insurance policy, householder insurance policies are contracts of indemnity, which means it is a cover that only restores the insured to his original financial position but the insured cannot gain from the policy. It is very important that the sum insured is adequate because if you are under-insured, claim payments will be reduced by applying the average clause where your claim will be reduced in proportion to the level of under-insurance. For instance, if your property is worth Rs 1 crore but it is insured for Rs 75 lakh and the loss is Rs 50 lakh, claim will be settled to the extent of 75% of Rs 50 lakh i.e. Rs 37.5 lakh and you will have to bear the balance. You must ensure that your house is adequately insured at all times taking into account the renovation, enhancement made to your house or some addition to your household items. Do not just send the renewal cheque when it is due; take the time to review your cover. Read your policy carefully. Some risks are not covered in certain conditions like if the house is left unoccupied for more than a specified period of time. It does not make sense to leave any scope to lose what you have invested in your home. After all, homes are not built every day.

 

Traditional child plans are back, but look unattractive

Plain maths show PPF investment plus term policy may work better

FEBRUARY marked the revival of traditional children's plans of life insurance companies with the launch of three education schemes; Bharti Axa Life launched Future Champs on February 2, Aviva floated Young Scholar Secure on February 15 and Max New York Life unveiled College Plan on February 17.

Till then, ICICI Prudential's Smart Kid regular premium plan, which was launched in 2002, and Life Insurance Corporation's Jeevan Anurag, launched on November 2004, were the only options available.

One common feature about education plans is that the maturity benefit is disbursed in a phased manner, synchronising cash flows with different stages of education.

Here is how it works. Say your child is five-year-old. In Max New York Life's College Plan, you will need to pay a regular yearly premium till the child is 18 years. In the year the child turns 18, you will receive 40 per cent of the total sum assured.

The insurance company will disburse 20 per cent of the sum assured over the next two years and the remaining 40 per cent along with non-guaranteed bonuses at the age of 21.

In Bharti Axa Life's Future Champs, the premium payment term is 15 years and the insurer provides you with two options.

The first allows disbursal of 20 per cent of the sum assured in the 12th and 13th policy years and

30 per cent and 35 per cent along with 4 per cent guaranteed addition in the 14th and 15th years.

Under the second option, 10 per cent of the sum assured is provided in 10th policy year and then 20 per cent, 35 per cent and 40 per cent along with 4 per cent guaranteed addition in 12th, 14th and 15th policy years, respectively.

In Aviva Young Scholar Secure plan, the premium payment term and the sum assured depend on the age of the parent and the children and the premium option chosen.

Rising cost of education has become a major concern for parents, and they now want additional funds for their children not only for higher education, but during the schooling years as well.

Child education plans are like moneyback policies and have an investment portion as well as a life cover portion.

An analysis suggests the estimated return on these policies make them less attractive investment options.

For instance, if a 32-yearold parent has a five-year-old child and the time horizon is 17 years, for a life cover of Rs 10,00,000, he will need to pay yearly premium of Rs 65,000 for LIC Jeevan Anurag and Rs 68,000 for ICICI Pru Smart Kid.

Assuming that the interim payments that these policies accrue in the later years are to be re-invested, at the end of the tenure of 17 years, LIC Jeevan Anurag and ICICI Pru Smart Kid will generate an approximate annual return of 5.75 per cent and 5.10 per cent. respectively.

This is after factoring in an accumulated bonus of Rs 8,04,000 in LIC Jeevan Anurag and Rs 4,84,443 in ICICI Pru Smart Kid, as estimated by the two companies.

These amounts are to be paid on maturity along with the final installment of the sum assured. However, it is not guaranteed by the insurance company and depends on future investment performance.

If the same parent takes a life cover of Rs 10,00,000 by buying a pure-term life policy that entails a yearly premium of Rs 3,000 and invests the balance Rs 65,000 in public provident fund (PPF), it can fetch him an annual return of 7.23 per cent, which will be more or less assured as PPF is considered a sovereign and safe investment.

 

Short term Interest rate trend

With interest rates likely to go up in the future, staying with liquid or liquid-plus funds will mean better returns and flexibility

Today, when the Reserve Bank of India (RBI) raised key rates —repo and reverse repo —by 25 basis points, debt fund investors would have wondered if this was the time to get locked into medium or long-term schemes. The answer, however, is still no.

Financial experts feel with inflation still not under control, the apex bank could raise rates in the future. It is advisable to go for liquid and liquid plus or ultra short-term schemes because more rate rise is likely in the future.

Staying short will also mean provide flexibility, in terms of moving money from one kind of scheme to another, if there is a change in the interest rate cycle. Also, short-term debt funds will give better returns because the constant churn that fund managers have to do.

Ultra short and liquid debt funds have returned 6.09 per cent and 6.02 per cent annually. While gilt, medium and long-term debt funds gave 5.63 per cent. This clearly indicates that short-term funds were able to stay ahead from longer-term funds, in terms of returns.

However, there is a word of caution. If one were to move their money too much in one year, there would be a tax on short-term capital gains. The capital gains will be added to your income and taxed, according to the income tax slab.

Another reason why fund managers are advising against locking-in money in medium or long-term debt schemes is because of the inability to take advantage of any rise in the rates in the future. Also, rise in yields will impact returns of long-term funds adversely because of the inverse relationship with price of bonds .

By June, when early indications are available for monsoon, a clear trend on long-term rates will emerge.

However, if you want to lock-in money in existing rates, look at fixed maturity plans (FMPs). FMPs are offering 9.9 per cent to 10 per cent for a oneyear term. And despite being riskier than other debt schemes because of their exposure to corporate paper, these schemes get double indexation benefits for tenures that are slightly more than one year.

Say, if one invests in an FMP in March 2011 which is maturing in say, May 2012, there will inflation indexation benefits for years 2010-11 and 201213. This would mean higher post-tax returns for the investor.

Irda May allow Insurers Invest in ETFs

 

The Insurance Regulatory and Development Authority (Irda) is vetting a proposal to allow life insurance companies to invest in gold and exchange-traded funds, or ETFs. The move will provide greater flexibility to local insurers to invest in various asset classes.


A senior Irda official said the regulator is weighing the two options. We may allow insurance companies to invest in gold and equity ETFs with a cap of 5-10%. There are proposals from various companies to let them invest in ETFs of commodities and equities. An exchange-traded fund is an investment fund traded on stock exchanges just like stocks. Gold ETFs invest directly in gold and hence track its prices closely, eliminating the hassles of stocking up on physical gold. Equity ETF mirrors a basket of stocks such as S&P CNX Nifty or BSE Sensex, which reflects the composition of an index.


The Irda official said the regulator would, however, like to restrict the exposure of insurers to any single commodity. After the regulatory changes in the Ulip space, insurance companies are not able to innovate products. The charges are capped. There is not much innovation that we can bring. One product is replicating another.


Insurance companies are looking forward to new options for investment flexibility. This will improve our investment choice. Whenever there is an inflow in Ulips, we can quickly allocate funds in ETFs and then take a call on where to invest.


There are 16 ETFs in India, including gold and equity. According to the current regulations, insurance companies cannot invest in commodities. These changes will, however, require amendments in regulations. After the Insurance Act is amended, Irda will have the power to introduce changes in the investment norms.

 

Income tax returns filling myths

Many investors seem to be under the impression that having a permanent account number (PAN) makes it mandatory to file the tax return. The issue has especially come up ever since PAN was made compulsory for investing in mutual funds. There are many who feel that now that they have been allotted a PAN, return filing would also be a must, no matter that they don't have any taxable income.

On the other hand, there are those, especially the salaried class, who feel that as long as their monthly take home salary has been subject to TDS, they have no further obligation as far as the taxman is concerned. In other words, they feel that since their income is already subjected to tax, there is no further action needed on their part.

Both are misconceptions. Though a taxpayer needs to have a PAN to file the tax return, the reverse is not true. And similarly, even though TDS has been deducted on one's income, filing a tax return could be obligatory.

Basically, the rule is that if one earns an income above the basic exemption limit, it is obligatory on such a person to file his or her tax return.

For FY 09-10, the basic exemption limits are Rs 1.60 lakh, Rs 1.90 lakh and Rs 2.40 lakh for men, ladies and senior citizens, respectively. So, if your income is lower, irrespective of whether you have been allotted a PAN or not, you need not file a tax return. And if your income is higher, then irrespective of the tax deducted at source, you have to file your tax return. Note that income in this context is your gross income i.e. before claiming any deduction.

Belated return
As we all know, the last date for filing the tax return is July 31. So what happens, if for any reason, you are unable to file your return in time? Even then, there is no cause to worry as such — the law allows you to file a belated return at any time before the end of one year from the end of the relevant assessment year. In other words, if you file a return after July 31, it will be termed as a belated return and the same can be submitted anytime up to March 31, 2012.

In terms of repercussions, an interest of 1% per month will be levied on any tax due. Also, the tax official has the option of imposing a penalty of Rs 5,000 on account of the late submission. So say you are a salaried employee who has not filed his or her return in time, however, the tax due from you has already been deducted at source in the usual course. In this case, the maximum downside even for a late filing would be the Rs 5,000 penalty amount. Since the tax due from you has already been paid (by way of the TDS), there would be no liability on account of interest. Remember, interest is levied only if you owe any tax to the government.

However, there is yet another drawback of not filing the tax return in time. If you have any business loss or capital loss (short-term or long-term), the same cannot be carried forward for set-off against future income, if the tax return is not filed in time.

So all in all, it is always advisable to submit your tax return in time — however, if you cannot do so due to unavoidable circumstances, then the consequences are as detailed above.

Revised return
There is yet another concept known as 'revised return'. As the name suggests, if you were to discover any omission or wrong treatment of any income or deduction or a wrong statement in your originally filed return, then within one year from the end of the relevant assessment year, you may file a revised return.

Therefore, just like in the case of a belated return, you have time till March 31, 2012 for filing the revised return.

In terms of a real life example, DU Desai (name changed upon request) had originally filed his return for FY 08-09 well within the time limit of July 31, 2009. However, later on, somewhere around December 2009, while making his advance tax calculations, he realised that he had erroneously claimed an amount of Rs 2 lakh as tax exempt. What he thought was the maturity amount from an equity mutual fund was in fact, interest income from an old bond investment. After paying the requisite amount of tax with interest due thereon, Desai went on to file a revised return correcting the error in the previously filed return.

Again, note that a revised return can be filed if and only if the original return has been submitted in time.

To sum

Whether you pay in time or belated, if you owe it to the government, you have to pay the tax. There is no escaping this law. Ironical, especially when you consider the fact that a fine is a tax you pay for doing something wrong whereas a tax is a fine you pay for doing something right.

 

Fixed Maturity Plans (FMP) Investments

Fixed Maturity Plans (FMPs) have been attracting investors simply because the Certificate of Deposit rates are high. If fund managers buy 1-year CDs at attractive rates, naturally the returns would be reflected in FMPs.

 

FMPs are closed-end debt funds where investments can only be made during the offer period. They have a fixed maturity horizon which is declared at the outset. Depending on the maturity of the scheme, the fund manager selects debt instruments with identical maturity. They are passively managed with low turnover and transaction costs. However, liquidity is a problem. Though these schemes are compulsorily listed on the stock exchange, it's not easy to exit a scheme before maturity as there are few buyers. So ensure that you are pretty certain you will not need the money for the duration of the FMP.

Like any market-related product, there is no guarantee of principal or return. In the case of a bank fixed deposit, you know exactly how much you are getting.

 

Where FMPs score over bank deposits is in the nature of the tax treatment since long-term capital gain is taxed at 10 per cent without the benefit of indexation, or 20 per cent with the benefit of indexation.

 

The Securities and Exchange Board of India (SEBI) no longer permits mutual funds to announce indicative returns.

 

Tuesday, April 26, 2011

Gold May Soar on Increased Demand

Gold May Soar on Increased Demand

 

Investors opt for yellow metal amid Libyan unrest & inflation worries

 


   Gold may gain in New York, narrowing the first weekly loss since January as demand for the metal as an alternative asset increases.


European equities slipped for a third day and commodities including crude oil and copper fell as an 8.9-magnitude earthquake in Japan, the world's strongest in more than a century, shook buildings across Tokyo and triggered a 33-feet-high tsunami. Muammar Qaddafi's son said Libyan government forces are mounting a fullscale attack on rebels.


Gold futures retreated 1.2% on Thursday, the most in a week.
"It is the demand for safety that is driving the buying of precious metals as geopolitical tensions in the Middle East and North Africa region escalate," Marc Ground, an analyst at Standard Bank Plc in Johannesburg, said in a report. Sovereign credit-rating downgrades have "seen market fears surrounding the euro zone debt crisis resurface" and the earthquake may also support gold, he said. Gold futures for April delivery rose $1.30, or 0.1%, to $1,413.80 an ounce at 8:05 am on the Comex in New York. Prices are down 1% this week, after reaching a record $1,445.70 on March 7. The metal for immediate delivery in London was 0.1% higher at $1,413.85. Gold declined to $1,409.75 an ounce in the morning "fixing" in London, used by some mining companies to sell output, from $1,413.25 at Thursday's afternoon fixing. Concern about rising inflation and currency debasement drove gold prices up 30% last year for a 10th annual gain. Chinese consumer prices rose at an annual 4.9% pace in February.
The pace of inflation was unchanged from January and compared with the 4.8% median forecast in a Bloomberg News survey of economists. Increasing food and commodity prices have contributed to unrest in North Africa and the Middle East that toppled leaders in Tunisia and Egypt. Saudi security forces on Thursday broke up a rally in the eastern city of al-Qatif before a "Day of Rage" protest, a local activist said.


European Union leaders meet are expected to meet to discuss tackling the region's debt crisis after Moody's Investors Service this week cut credit ratings for Spain and Greece.


"Given the mix of inflation concerns and the situation in the Middle East and North Africa and European Union debt, we expect dips will continue to be viewed as bargain hunting opportunities," James Moore, an analyst at TheBullionDesk.com in London, said in a report.


Ten of 16 traders, investors and analysts surveyed by Bloomberg, or 63%, said bullion will rise next week. Four predicted lower prices and two were neutral. Silver for May delivery in New York declined 1.4% to $34.57 an ounce. It climbed to $36.745 on March 7, the highest level since March 1980. That year futures reached a record $50.35.


Palladium for June delivery was down 1.2% at $757 an ounce after earlier on Friday falling to $742, the lowest level since January 7. Platinum for April delivery was 0.6% higher at $1,776.40 an ounce.

Gold Surges on Uncertainties


• The demand for safety is driving the buying of gold as geopolitical tensions in the Middle East region escalate

• Sovereign credit-rating downgrades have seen fears surrounding the euro zone debt crisis resurface

• Concern about rising inflation and currency debasement drove gold prices up 30% last year for a 10th annual gain

 

Commodity Funds

These funds give you an opportunity to make some money whenever commodity prices flare up


   It's been ages since consumers have been crying themselves hoarse over the stubbornly high prices of commodities. The unacceptable level of inflation has blown their financial planning strategies off course as soaring expenses burn a huge hole in their pockets. So how would you like it if you were given an opportunity to make the culprits — commodities in this case — contribute to your kitty instead of eroding it?

Enter Commodity Funds

This is where some financial advisors say commodity mutual funds come into the picture. Although, the option of commodity futures exists, it involves big money and you may not want to risk such a huge sum in a volatile market. Instead, you can consider commodity funds. These funds invest in commodities-related companies such as metals and oil, in India or abroad. The logic is that these companies will clock profits whenever commodity prices see a spike. As an investor, you stand to indirectly benefit from this price rise by opting for a commodity fund, which invest in several such companies.


Most of these funds relate to international commodity stocks either through the direct or feeder fund route. The one-year performance of most of such funds has ranged between 15% and 36%. The current buzz for international investing, coupled with the rather insipid one-year performance of the broad Indian indices (around 7%) is inducing funds to market such schemes more aggressively. Even within these, it is primarily gold feeder funds which are more prominent.

A Case For Commodity Funds

Commodity prices are expected to harden across the world, given the outlook on inflation. Indian investors can take advantage of rising commodity prices by investing in select feeder funds which invest in a basket of commodity-oriented stocks internationally. Commodity funds help an investor participate in commodity-led inflation. India is a net importer of commodities, so in general, Indian assets are negatively correlated with inflation. When the investor allocates a part of the portfolio to commodity funds, he partly hedges his portfolio. If commodity prices go up, inflation would in-crease. Increase in commodity prices would result in positive returns on commodity funds. Increase in inflation would result in fall in Indian equity and Indian fixed portfolio. In the past one year, commodity funds have outperformed Indian equities and fixed income as an increase in commodity prices have resulted in 20%-plus returns from diversified commodity funds while Indian equities/fixed income have give single-digit returns. Since commodity-led inflation would continue to be high in the medium term, an investor should allocate part of his portfolio to commodity funds.

Agro Funds & Commodity Funds

There are certain mutual funds which do not invest in just commodities but the entire supply chain, which helps you diversify the risk, say experts. Commodity prices have risen significantly in past eight months ended February 2011. Cotton prices have gone up by 146%, sugar by 84% and wheat by 54.


There have been weather-related supply shocks in 2008 and 2010 which caused price spikes. Furthermore, according to the Food and Agriculture Organisation (FAO), food prices have risen to an all-time high following the severe flooding in Australia this year.


With food and soft commodity prices at or near record highs, caution is required from retail investors who are considering entering into a fund which concentrates only on commodities as it could be a risky proposition given that they may be entering at the wrong point of the cycle.


Hence, an investor should ideally consider a fund which focuses on the entire agricultural business, which includes fertilisers, pesticides and the entire supply chain. Agriculture is highly undervalued today and it is way cheaper than metals.
Despite the Green Revolution in 1965, India has not undertaken any major investment in agriculture. China is the only exception to the global trend.

 

Therefore, agriculture, as a sector, has a huge potential and investors must tap this resource. Investors can look at a time horizon of 2-3 years.

Get The Right Mix

While the concept seems exciting, you need to look carefully before jumping at the seemingly foolproof opportunity. Since most of these involve international commodity stocks, an investor has to grapple with price fluctuations at two levels: the underlying commodity as well as the stock market scenario in that particular country. In addition, there are currency fluctuations and unfavourable tax treatment to deal with. Investing in these funds calls for very good sense of market timing. In fact, I think the best time to buy these is when they are totally ignored and not being marketed at all. Of course, it would help if you are clued in to the underlying commodity's fundamentals too. Even if you are convinced about their utility, remember, they should be used to supplement your basic investment plan which should comprise diversified, large-cap equity funds.


Thematic funds are a very broad asset class comprising sector funds, market-cap specific funds, international diversified funds, international commodity funds etc. If we club all of these into the 'satellite category' investors could hold up to 20-25% in such funds. However, as a general rule, you must not invest in something you are not able to comprehend.


Especially, beware of any hard-selling indulged in by funds or distributors because such practices increase at the most inopportune time for the investor i.e. when the particular theme outperforms over a short period of time.


Commodity funds have a definite advantage of diversification — you are exposed to a wide range of companies in different commodities rather than volatility of individual commodities.


However, weigh your options carefully and do keep a sharp eye on the costs involved. For this reason alone it may be prudent to avoid Fund-of-Funds and opt for funds directly managed from India itself. However, it must be seen in conjunction with the ability of the fund manager or the fund house too

 

Reinsurance Rates to Rise because of Japan earthquake

 

Indian insurance market will feel the jitters of the Japan earthquake with reinsurace rates expected to harden in the international market. The quake and tsunami struck Japan at a time when most Indian insurers are renewing their treaties with global reinsurance players who take over a large part of the risk from the books of underwritters. The extent of damage is yet to be ascertained but industry officials fear large claims from Japan. The reinsurance market was largely unaffected by recent catastrophes like flood in Australia and earthquake in New Zealand but the disaster in Japan could push up rates.


Dhananjay Date, MD, Swiss Re Services said: "Swiss Re has a loss of $800 million for the New Zealand quakes. Munich Re has also suffered substantial loss. Although loss data for Japan is yet to come, initial aerial view of casualties make us believe it will be substantial. We will get a fair view of the losses once the stock markets open and it will definitely have a hardening effect on global reinsurance rates."

 


While it will also have its effect on India, the rise in rates may not be as high as in countries where catastrophes have hit. "I believe, rates will harden by about 10% in India which has a major loss for the last five years," he said.
Earthquake risk is inbuilt in most life and non-life policies unless these are specifically excluded. Non-life covers provide for insurance against accidental death or injury and hospitalisation benefit for treatment of accidental injury under mediclaim.


"This is one of the biggest catastrophic hit. Treaties, which are under negotiations, will see impact as markets will harden," said Gaurav Garg MD and CEO Tata AIG General Insurance Company.

 

Health insurers upgrading services before portability Companies

 

"ONCE health insurance portability comes into force, service is going to play a major role" Shreeraj Deshpande Head health insurance, Future Generali Insurance Company

HEALTH insurance companies are gearing up their service offerings to keep their flock of customers together with the onset of health insurance portability from July 1, 2011. With service being the prime differentiator between the health insurance providers, companies want to ensure that situations like the mobile number portability launch, where customers left one service provider in droves to the other, who offered better services, does not arise.

The launch of portability will see a huge movement of customers across the board initially, industry experts point out.

However, the companies are gearing up for the new regime. "Once health insurance portability comes into force, service is going to play a major role. We have set up an in-house service centre and would start providing service all by ourselves instead of directing the customers to third party administrators (TPA)," says Shreeraj Deshpande, head health insurance, Future Generali Insurance Company.

"There will definitely be a shake-up in the industry once portability is launched. It is not expected to be severe though. Health insurance being one of the fastest growing segment, insurers will have to pull up their socks and offer better their service to ensure that they do not lose their customers to the other players in the business," says Meena Nair, vice president, India Insure Risk Management and Broking Services.

The increased competition would be good not just for customers in the long run but also for the insurance companies themselves to look inwards into their operations and set things right, industry representatives say.

However with the launch still a few months away, many players preferred to keep their cards close to their chest, on their game plan for the new scenario.

"For those companies that believe in customer service, the ease of transition is always an opportunity. However, one needs to set the systems and processes to take care of a possible adverse selection creeping into the system," says Sanjay Datta head customer service, ICICI Lombard General Insurance Company.

Many like Shreeraj Deshpande also foresee a potential increase in premium amounts of health insurance products in the years to come.

"Each company would have specific underwriting principles that would form the basis for the different products that it launches.


Shifting the product from one company to another with different underwriting principles carries a cost. So there could be an increase in premium amount of health insurance policies," he says.

The increased competition will be good for the customers as they will have the option to shift without any losses. Health insurance portability will also create a level playing field in the industry in the long run, is the common belief among industry players.

 

Monday, April 25, 2011

Health Cover Portability

Here are some of the things that you should know before you move your health cover to another insurance company


   Last year, several customers of a private general insurer were up in arms against its decision to increase health premiums. They went to town crying themselves hoarse over the disproportionate hike, but many could not switch to another insurer. This was because they would have had to forgo critical continuity benefits. However, cases like these could become a thing of past once health insurance portability becomes a reality from July 1, provided it is implemented by insurers in its true spirit.


MORE POWER TO POLICYHOLDERS


The key issue that prevents policyholders from insurer-hopping at will lies in the pre-existing disease (PED) cover offered by health insurers. In most cases, claims arising out of such pre-existing illnesses are reimbursed only after a waiting period of 3-4 years. A pre-existing disease is defined as any ailment or condition that the policyholder was suffering from, within 48 months prior to buying the policy. And, the period during which the insurer will exclude coverage to such illnesses – typically around 3-4 years – is referred to as the waiting period. So far, policyholders who switched loyalties to another company were treated by it as new customers, thus requiring them to go through the waiting period all over again. Suppose, you want to shift to another insurer after three years of paying premiums under a policy with a waiting period of four years. Now, if the new policy too prescribes a fouryear-waiting period, you would be at a considerable disadvantage. This is because, instead of waiting for just one more year for the pre-existing illness coverage, you would be forced to bide your time for another four years. With portability coming through, the odds are now stacked in your favour as you can carry forward the PED cover 'credit'. Under the changed circumstances, the waiting period in the new policy would be reduced to merely one year in the above example. There are some limitations though. Irda has directed that the credit in terms of waiting period will be restricted to the sum insured (including bonus) under the existing policy. Say a policyholder has an existing policy with a sum insured of 2 lakh with an accumulated bonus of 40,000 and now, he wishes to go in for a higher sum insured, say 4 lakh. Here, the credit for the waiting period shall be only in respect of 2.4 lakh (existing sum insured & bonus) and not for 4.4 lakh (new sum insured & bonus).


MAKING THE SWITCH


No specific procedure as such has been laid out by Irda. The policyholder will have to go through the usual process of applying to the new insurance company. The forms are likely to have a section to capture information regarding previous continuously renewed policies to enable portability. Details on previous coverage would also be noted. Customers may have to attach proof regarding previous continuous coverage. The insurer will have to acknowledge the receipt of your application for portability within three working days. Likewise, the companies have to communicate their decision within 15 days. If the policy lapses due to delay in processing the switching request, this insurer will have to accept it.


IMPACT ON THE SUM INSURED...


According to Irda, those wishing to switch will be assured of health cover equal to at least the sum insured in the previous policy. But, this may not always be the case. There is no obligation on the part of the new insurer to match the sum insured if it has not filed such a product with Irda. If your current cover is 5 lakh and your proposed new insurer has filed a product with Irda with maximum sum insured of 3 lakh, you cannot force the new insurer to offer a 5-lakh-cover.


…AND THE FRINGE BENEFITS


There are other continuity benefits like no-claim bonuses and free medical check-ups too, but some confusion on how portabilitywill affect these persists. "The circular issued by Irda is vague. It appears that the new insurer would have to match the sum insured. But the terms and conditions governing the policy would be in accordance with what the insuring company offers. So, my interpretation would be that on migration, if the insuring company offers no-claim bonus, the consumer would get that benefit; otherwise not. However, ICICI Lombard's Datta is of the opinion that the new cover would include the no-claim bonus. "If the policyholder has earned a no-claim bonus in terms of additional sum insured, then the new insurer providing portability has to offer a product with minimum sum insured equivalent to the base sum insured plus bonus (i.e. additional sum insured), as available with the policyholder in the expiring policy.


THE FLIP SIDE


The intention of the regulator in allowing portability may be honourable, but it still leaves much to be desired, causing some industry watchers to be sceptical about its success. Unless regulations are framed for enforcing the portability of the policies, it is not going to help at all. Moreover, the 15-day time is given for communicating the insurance company's decision of a proposal submitted by a consumer for portability, which would mean that the discretion vests in the insurance company whether or not to accept the proposal for portability. All that is required is that the decision must be communicated within 15 days from the date of receipt of the proposal. Also, while increased competition, post implementation of portability, could benefit young and healthy individuals, those in the higher age brackets may not be so lucky. "It is not likely to help policyholders in the older age bands (say, 50 and above) and those who suffer from pre-existing ailments. Such proposals are likely to be rejected by the new insurance company.


LACK OF CLARITY


Then, there are some grey areas. Clarity is required on whether underwriting would be allowed for portability proposals; if portability will be offered from group to retail health products and similarly from benefit products like hospital daily cash to indemnity health products; and whether portability has to be provided for first one/two year exclusions too. We expect more clarity on binding the insurance company of the expiring policy to provide the required information to the new insurer in specified time limits, so that smooth portability can operate. Any mischief here could result in major hiccups in porting the policy.


EXERCISE CAUTION


Loopholes abound, but it is a step in the right direction. However, for it to work in your favour, you need to plug all the gaps at your end. You need to ensure that you submit the request for portability to the insurer of your choice well before the renewal date. Any consequent delay in processing and rejection by the new insurer could leave you unprotected.


Since 15-days' time is given for processing the proposal of portability, the application should be made around one to two months prior to the expiry of the existing policy. Also, you need to make efforts to continuously renew your policy by regularly paying the premiums so that it remains eligible for portability. Finally, study the policy offered by the new insurer and take a call on the trade-off between the existing benefits and any likely increase or decrease in premiums in the new policy.

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