Category: Insurance

17 Apr 2021
asset allocation

With markets so High, is it time to rebalance your portfolio? | Asset Allocation

The year 2020 was a depressing one for a large part. Thankfully, 2021 is looking significantly better financially though the covid scenario has turned grim again, though hopefully temporarily. The most important concern that most of us have right now is getting addressed as vaccination is picking up pace globally. On the economic front too, things are improving.

The Indian economy, for instance is expected to grow at a double-digit pace in 2021 after a long time. This is also reflected in the way the stock markets are behaving. The benchmark BSE Sensex has been buoyant. It is difficult to comprehend that the same market, which is around 49,000 points now was around 27,000 a year back, in March 2020.

However, the sharp rise in equity markets should also caution us a little. While being optimistic and hopeful for positive developments is good, it should not lead us in to hubris. When it comes to money, personal finance and financial planning, it is critical that we do not lose sight of the fundamentals. One such thing to revisit from time to time is asset allocation.

What is asset allocation?

While our regular readers must be aware about this terminology, we have also had many people who have joined us only in the last few months on their financial planning journey. With the sharp rise in markets, there has been a renewed interest among all the sections to tap in to equity investments. Many of our readers have also reached out to us for this and we are aware that many more are contemplating entering the markets right now. Hence, it is imperative that we revisit this time-tested concept of asset allocation.

In simple words, or as we like to refer it, as grandma’s wisdom, asset allocation is nothing but the strategy of not putting all your eggs in the same basket. The logic is simple. If all eggs are in the same basket and something hits the basket, it is likely that all the eggs will be damaged. On the other hand, if the eggs are spread across different baskets, the eggs in the other baskets will remain safe.

We should be aware for sure that no asset class ever performs consistently well for a very long period of time.

See the chart below (1990 till Jun 2020), made out for 30 years.

Now extrapolate this situation on your investments, where equity, debt, real estate, gold are the different baskets, or asset classes. Traditionally, if one asset class performs poorly, the other asset classes may not follow suit and may behave differently. For example, when the equity markets were in a downward spiral in early 2020, gold prices were firming up.

If we extend the above argument to Indian asset classes (various types of equity, safer investments, Gold, Real estate) etc and over a shorter 10-year period, even then the aspect of asset allocation holds good.

asset allocation

The idea is that even if a part of your investments performs poorly, there will be other investments that will balance out the negativity to some extent, thereby protecting your investment corpus if you have adequate diversification in your portfolio.

What needs to be understood is that asset allocation needs to be revisited and rebalanced from time to time as your life situation changes, your financial goals’ time horizon changes and also because of the changes in the market.

How to rebalance your portfolio?

To be sure, it is important to understand that asset allocation could be very different for two different people. So, for simplicity, we would only consider equity, debt and gold here. If someone has his ideal asset allocation of 60:30:10 for the three asset classes respectively, it is possible that it has skewed in favour of equity due to the sharp rise in valuation in recent months. Accordingly, that person would need to reduce exposure to equity to rebalance their allocation, by moving some money from investments in equity to debt or gold.

While this might appear to be an innocuous or simple adjustment to some, it can act as a major hedge for the value of your portfolio. The surging valuation of the equity bucket of your portfolio might appear exciting right now. However, you also need to take control of your emotions of greed, particularly in a bullish market environment.

29 Mar 2021

Beginning of a new financial year – a good time to review and plan your finances

We were hoping for life to be normal again. The roll out of Covid-19 vaccines sent some relief all across the world. However, the pandemic is raising its head again in India, with the number of daily cases as well as casualties going up again. While we are hopeful that things won’t reach the stage they did last year, one can never predict completely.

Last year, same time, people were caught off-guard with no room left to plan for an uncertain short-term and medium-term future. This time however, we will not have an excuse, if things go south, god forbid, from here again.

This is also a good time to revisit your personal finances in general, and your investment portfolio in particular, as we will soon be entering a new financial year. Let us understand why.

Salary Increases

This is probably the most plausible reason to revisit your financial planning at this stage. Most large corporate organisations schedule their annual increment and appraisal cycles around this time. If you are a lucky person getting a raise, don’t just spend all of it.

If you are in the armed forces, this is the time when your annual increment has either just happened or is about to happen.

Put some thought around how you plan to use it and whether that is the best possible option. Certainly, it is important to pamper yourself by some amount of indulgence for yourself and your family. But, make sure you put the raise to good use beyond the short-term.

Annual Tax Planning

As you must be observing right now or might have observed over the past few weeks, many people end up taking hasty decisions with respect to their tax planning towards the end of the financial year.

In spite of us harping on tax planning throughout the year, we still get numerous frantic calls in last 15 days of March on what to do to save tax under section 80C!

In fact, this should ideally be a good time to effectively plan for the next financial year. Not just that, if you plan efficiently, you will notice that tax planning for tax benefits for investments and insurance needs to be done only once in most cases. Let us explain.

Suppose you decide right now that in 2021-22, you will be disciplined with your annual tax planning. You will make the purchase of must-have financial products like health insurance and term life insurance, if so required by you, right in the beginning of the financial year, or in the initial few months. Then over the next few months you can invest the remainder of your 80C investments wisely in provident fund, public provident fund, or tax-saving mutual funds, as you choose.

Next year in March, you will then be worry free, unlike many of your peers. Then, a major part of your tax-saving investments for the year 2022-23 will automatically align with your payments in the early part of the financial year. This takes away the burden of last-minute planning and removes the errors that come in with last minute execution of hasty decisions.

Portfolio Rebalancing and Medium-Term Tax Planning

People who already have an investment portfolio might find this to be a good opportunity to analyse the performance of the portfolio and make adjustments to fine-tune it. While portfolio rebalancing should not wait for the change of a financial year, this time is helpful in a different way.

Suppose you have a financial goal coming up in the next year or two. You have been planning for this goal for a few years now and have been investing the savings for the same in equity mutual funds. This is the perfect time for you to evaluate the investment vis-à-vis the goal and start moving that amount from the equity funds to either debt funds or to your savings account. The reason being that if you make the withdrawal at the last minute without planning, your gains might be taxed at a higher rate for the long-term capital gains.

Instead, if you make withdrawals every year over the next couple of years, you can plan in a way that your returns are within the permitted range of tax-free capital gains. Not just tax efficiency, this will also shield your upcoming financial goals from market volatility.

Financial planning is not just about planning, but also calls for discipline in decision making as well as in implementation of those decisions. The beginning of the financial year is a good time to start with an efficient plan. The most crucial aspect of this journey is timely rebalancing of portfolio to ensure tax-efficiency as well as to meet financial goals timely.

13 Oct 2020
Should you buy corona specific insurance policies

Should you buy Corona-specific insurance policies?

The year 2020 has been overshadowed by the Coronavirus pandemic. While there can be some things about the handling of the entire situation by the government that you can be dissatisfied about, there are some other things that are praiseworthy. One such measure has been introducing Covid-19 specific health insurance policies by the Insurance Regulatory and Development Authority of India (IRDAI).

The regulator has come out with such two policies – Corona Kavach and Corona Rakshak. Let us understand what these insurance policies are and whether you should buy one.

What is Corona Kavach?

This is an indemnity-based health insurance plan. This means that operationally, this works like any other regular health insurance policy. In case of hospitalisation and treatment, the insurance company will pay for your hospital bills either as a reimbursement to you or directly to the hospital. The amount payable by the insurance company is subject to your sum assured in the policy. As per the IRDAI guidelines, the maximum sum assured available through this policy can be Rs 5 lakh.

What is Corona Rakshak?

This is a defined benefit health insurance. This means that the insurance company will pay the entire sum assured to you, the policyholder, in case the defined event takes place. In this case, if a policyholder contracts Covid-19, s/he will get a lump sum payment from the insurance company. This is irrespective of the hospitalisation and treatment expenses. The maximum sum assured available to you under this policy would be Rs 2.5 lakh.

This is akin to some other defined benefit insurance plans like a term life insurance or a critical illness health insurance. The amount you receive in such policies as a lump sum can be used as per your need without any restrictions, and there are no questions asked if the specified event takes place.

Things you must note

These policies are short-term policies in nature. This means that, unlike regular health or life insurance plans, these policies cannot be renewed year on year. As of now, the maximum tenure for these policies allowed is less than a year, the maximum typically being 9 ½ months.

Moreover, the insurance benefit will kick in only if the policyholder is tested positive for Covid-19 and is hospitalised for at least 24 hours. In the case of Corona Rakshak, the continuous hospitalisation needs to be for at least 72 hours to be eligible for the insurance benefit.

Should you buy Corona Kavach or Corona Rakshak?

Now here comes the tricky part. Just look around for anecdotal experiences of Covid-19 patients. The bill can easily run into several lakh rupees. There have been several instances that we know of, where the bill crossed even Rs 10 lakh. The better hospital you opt for, the higher will be the bill, and we all want to avail best healthcare in such a critical situation.

Hence, in our view, the maximum sum assured under these specific policies is not sufficient. However, if someone does not have a health insurance policy at all, then getting a Corona Kavach policy as the first line of financial defence for the short term could make sense. Here too, we would advise to go for a regular health insurance policy with an adequate sum assured for yourself and your family. While ‘adequate’ varies from one person to another, with the rising cost of quality healthcare, this should be a 7-digit figure.

If you already have good health insurance, like in the case of serving officers and most of the retired officers, it may not be required unless you are not happy with the armed forces medical facilities or are inadequate in your area. However, for your other near and dear ones who do not enjoy such a benefit, you can definitely think about the Corona Kavach or Rakshak policy. Even though the sum assured is low in such policies, the amount can act as an income replacement for the hospitalisation period or till the time one recovers fully.

All said, make sure your financial plan has adequate provisioning for health and life insurance so that any setback doesn’t derail your financial life.