Teaching kids the ABC of finance

When it comes to teaching kids the ABC of finance, parents often find themselves walking a tightrope.

And why not, raising money smart kids is no mean feat, especially in today’s world where money doesn’t come easy.

Inculcating good money habits leading to financial independence is what all parents wish for their children. Here’s an account of captains of different industries on how they made their kids financially aware.

Ritesh Kumar, CEO, HDFC ERGO General Insurance

Learning to manage money is an important part of growing up for every child. Inculcating in the little one the habit of saving is perhaps something every parent tries to impart. The initial lesson in the journey to financial literacy starts with teaching them to put small savings into their piggy bank.

My kids got their exposure to banking when I would stop at an ATM and they would be with me, watching with astonishment the machine churning out currency notes. The lure to operate the ATM with a card of their own triggered the opening of their very own saving bank account.

Getting a personalised cheque book with their names printed on it gave them a huge thrill besides instilling a great sense of ownership. They would happily deposit their pocket money and any other money that they would get into this account. With banks building enough safeguards today such as limiting the amount that can be withdrawn from an ATM in the case of kids savings account greatly helps.

Awareness comes early today given the huge exposure to what they see around them and the televisionwhether it is catching glimpses of the stock price on the ticker as they surf through the channels or hear those catchy jingles like sar utha ke jiyo in ads between their favourite TV shows, their initiation into the fascinating world of financial products is much more than what our generation was exposed to when we were their age.

Sonal Dave, MD & COO, HSBC Securities & Capital Mkts

In the current highly competitive and dynamic environment we live in, developing financial literacy and responsibility among children cannot be over emphasised. It is desirable to introduce them to the basics of banking at a young age so they grow up to be financially responsible citizens making informed financial decisions.

This is the reason why we wanted to help our son Karan understand the core financial principles of earning, spending, saving and investing. It started in the early years through games such as Monopoly and later Life but the dayto-day practical cases were the ones that had a long-lasting impact.

Being from the banking world, it was possible to organise visits for him and his classmates in his early years to the bank to understand and see what happens backstage. To instill the habit of saving money, we opened his bank account when he was seven where his first deposit was the prize money that he had received—small in value but huge in learning.

As he grew older, we involved him in our discussions on our personal financials which helped him develop an appreciation for earning, responsible spending, tax planning , saving for contingencies and making sound investments. During the global financial downturn in 2008, we noticed that our efforts paid off as Karan was thinking and questioning the causes of the crises and offering preventive solutions.

Atika Khaneja, CEO, Collage Management

No one likes restriction of any kind. Yet the checks and balances are necessary because anything in natural form is prone to evil. That’s why I have structured a limit on the pocket money I give to my daughter. Money lessons are best learned at a young age. As a kid, she would often ask why she wasn’t given access to money.

This was the time we explained to her that money is earned the hard way and every penny should be spent carefully. When we got her an insurance policy, we made her go through the process. This ensured she starting talking about money.

She was eager to know what’s the purpose of buying insurance, how much money she will get after 25 years when the policy matures. She is now 16 and has a supplementary card linked to my account.

I keep on increasing and decreasing the spending limit so that she learns to manage under different circumstances. It also sends a message that the value of money never remains static.

Sulajja Firodia Motwani, MD, Kinetic

Whichever school of thought you belong to it is important that our children understand money, and its value . It’s equally important that they grow up with the right values about money. They must learn to earn with hardwork, learn to spend wisely, learn to save and learn to invest!

May be because my 9 year old son is a Marwari (me) and Sindhi (my husband ) lethal combo, he is very comfortable with commercial concepts!

He learned very early how to do “hisaab” when you go shopping, and learned that he wants to put “his” money in the piggy bank and spend “our” money!

Over the years, we have made an effort to imbibe into him, that one can do three things with money—spend it, save it or invest it and he loves that if you invest money, it grows! So he insists that all money he gets as gifts from his relatives must be invested!

Children should be taught concept of budgets

I have also found that we must teach our children concept of budgets. When we go shopping for toys, we tell him what his budget is and he gets quite involved in choosing toys or books up to the budget. He also remembers that he had underspent the budget of last shopping trip and gets it topped up! My friend who took Sid (my son) shopping for his birthday gift was amazed when he asked her what his budget for the gift was! This way they understand that spending is not unlimited.

Another useful experience is taking your child shopping at local store and teaching them how to compare prices of products and also how to evaluate price parity. One day, Sid and I went shopping for eggs and I picked up a pack of eggs which was nicely packed but was more expensive that another equal pack of eggs which as not having printed packaging. My son quickly pointed out that I am making a mistake and only paying for “advertising” !

I must add that I also once encouraged Sid to put up an exhibition of his art where he could display his work and sell it to family members and he loved the idea, but when I proposed the idea of donating the proceeds, he lost interest in the project! So I guess I still have to teach him the value of “giving” ! That’s next on my list!

Different ways to make money

Sumved Sane (name changed), a lawyer, calls successful equity investing a gamble or a game of luck. He is not a reckless trader or a naïve investor. He has been an equity mutual fund investor for the past five years. However, though the BSE Sensex has almost trebled since January 2005, Sumved’s money has only doubled.

His obsession with new fund offers (NFOs) and best-performing funds based on short-term returns has landed him mostly in the company of underperforming funds.

Sumved is not alone. Innumerable investors fall for eye-popping short-term returns or follow a star fund manager or invest in hot sector funds or become victims of NFO campaigns.

Investors need to be frank with themselves — if they feel that they don’t have the expertise to choose the right fund, then they should avoid doing so. There are other ways to make decent returns that are definitely better than what underperformers will give them. Read on to discover more:

Index Funds: Around 64% of large-cap equity funds underperformed the S&P CNX Nifty over five years to June 2010, according to the second edition of S&P Crisil SPIVA fund scorecard. So, while star fund managers can go to town claiming that India remains a stock-picker’s paradise, there is growing evidence that active fund management is indeed facing problems.

This is where index schemes come in: They do away with the fund-manager risk and offer cost-efficient returns. All you have to do is to invest in a fund with the minimum tracking error — the difference between the performance of the scheme and that of the benchmark index.

If you are a long-term investor with no view on a particular sector, it is better to own a diversified benchmark index than a sectoral index. Stick to your asset allocation and keep rebalancing your portfolio at regular intervals. You must also book profits as the index fund will not book it for you.

But be prepared to face the advocates of actively-managed schemes. “Index funds weather the downturn in a market better than most of the diversified equity funds, but in the long run outperformance can be brought to the portfolio using good diversified equity funds with a good long-term track record,” says Abhinav Angirish, managing director, investonline.in, a mutual fund distributor.

But here, we are dealing with investors, who do not possess the necessary skills to spot the best diversified schemes. So, they shouldn’t mind a slightly weaker performance of an index scheme — if at all there is any, that is.

Fund Of Funds: You have two options here. One, you can choose Asset Allocation Funds offered by fund houses such as Birla Sun Life, ICICI Prudential, IDFC and Franklin Templeton. They invest in a judicious mix of debt and equity funds factoring in the risk profile of the investor. If you are conservative, go for conservative option in Asset Allocation Funds.

The second option is to go for schemes that invest into various equity funds. This option aims to bring the best of equity diversified funds into your portfolio. Schemes such as Kotak Equity Fund of Funds and ING Optimix 5 Star Multi Manager Fund invest in a portfolio of good diversified equity funds and generate good long-term returns. You will have to pay up to 0.75% of the total money invested by you in the FoF as annual fees.

Of course, the funds in which the money is invested have their own expenses, leading to duplication of costs. “Fund of funds is treated as a debt fund for taxation purposes and that reduces the post-tax returns offered by these funds compared to equity funds,” points out Dhruv Raj Chatterji, senior research analyst with Morningstar India. “Most of the fund of funds schemes that invest in Indian mutual fund schemes, have failed to offer top quartile returns consistently,” says Angirish.

But again, we are looking at this option only for the convenience of avoiding the task of choosing the best-performing schemes.

Research Services: When you don’t have the time or skills to identify the right schemes, why not hire the services of someone? In most cases, the research comes free. The service providers make their living on the ‘commissions’ they earn on your investments in various schemes. The commissions may push the investor’s interest to the backseat. In that case, you can always look for independent advisory services.

“Subscribing to independent research ensures that there is no conflict of interest and you get unbiased advice,” says Vipin Khandelwal, CEO, personalfn.com, an independent mutual fund research provider. Such services come out with recommendations on individual schemes and also offer ideal portfolios.

They keep their subscribers informed about updates in their recommended schemes. For example, a change of fund manager in a recommended scheme may not be noticed by an investor, but the research house may not only report it but also advise the future course of action that the investor should take. For independent opinion, you have to pay an annual fee and also take care of your transactions.

Portfolio Management Services: If you have more than Rs 5 lakh to invest and do not want to get into research and executing transactions, portfolio management services may be an option worth exploring. Broking firms invest your money in a judicious mix of equity and debt schemes, taking into account your risk profile and your return expectations. Some of them charge a fee of up to 1% of the money invested for offering these services.

Services include timely monitoring and monthly updates on your portfolio. You will get a pass-through statement that will tell you how many stocks you own on a consolidated basis. For example, if the broker has invested in five different schemes and out of these four have invested in Reliance Industries , the pass-through statement will tell you how much of your money is invested in Reliance Industries.

It gives a clearer picture to the investor of the risks involved.

“We book profits at regular intervals taking into account the asset allocation of the client,” says Hiren Dhakan, associate fund manager, Bonanza Portfolio. The power of attorney enables the brokerage to do this, which a fund distributor cannot do. But given little publicly available information about the performance of these services, investors have to choose their service providers with utmost care. Remember, you can again be in the company of an underperformer.

Source: Economic Times

Liquid Plus Funds of mutual funds

A few days ago, the Reserve Bank of India (RBI) announced the credit policy. Most of what is said seems like Greek and Latin, and we quickly scan the newsprint to see whether deposit rates are going up, or interest on loans could come down; and when we see the opposite, we are, of course, disappointed. But the RBI uses the credit policy to signal what it wants banks to do. In the recent policy, repo rate — the rate at which RBI lends overnight to banks — was raised 0.25% or by 25 basis points to 5.75% pa, and the reverse repo rate — the rate at which RBI absorbs the surplus overnight funds from banks — was hiked by 50 basis points to 4.50% p.a.

Overnight Funds with Banks

So, as you freely deposit and withdraw money on a daily basis, your bank needs to ensure that it earns money on your deposits, especially as they now pay you interest too on a daily basis. If no other bank wants to borrow money in the inter-bank call money market, your bank will invest these funds with the RBI and earn 4.5% p.a. Obviously they will lend to another bank at a higher rate than that as, for the other bank, that would be cheaper than borrowing from the RBI at 5.75% pa (repo rate). The reason why the bank needs to borrow funds overnight is that they need to maintain a statutory liquidity ratio of 25% and a cash reserve ratio of 6% of the bank’s net demand and time liabilities.

How does this impact you?

The money that you have in your savings bank account earns you 3.5% pa at present. Since the interest rate corridor, or the difference between repo and reverse repo rate, has been reduced, inter-bank and short-term interest will move in a narrow band between 4.5% and 5.75% pa, and these are returns that liquid plus funds could earn. By now, of course, you are well aware that mutual funds have a tax advantage over bank deposits for those in the higher tax bracket — 20% or upwards. So, do consider moving your idle funds in the bank to liquid plus funds, which normally carry no entry or exit load.

Longer term investments

Mutual funds also offer investment opportunities in fixed income products for the longer term such as government securities and corporate bonds. While these instruments carry a fixed rate of interest or coupon, the market rate of these fluctuates virtually on a daily basis. As a result, values of these schemes can fall in the short term: this happens funnily when interest rates are rising. However, if I do buy a bond which will mature in, say, 3 years, and hold on till maturity, I can be oblivious of these daily price movements.

Past track record

I did a study on the performance of a decent performing government securities fund, and found that, while it had fallen 0.08% in the past one month, appreciation in the past one year was over 11%, and the 3-year returns were a healthy 10.6% p.a. compounded annually. After long-term capital gains, this meant a very attractive post-tax return of 9.5% p.a. Similarly, a short-term debt fund has earned 7.3% in the past one year, or an equivalent of earning 10% on a 1-year bank deposit for someone in the highest tax bracket. Do consider debt mutual funds to increase the possibility of returns, but under supervision of a competent financial advisor.

Source: Economic Times

All about exchange traded funds (ETF)

Q: What would you set out as a basic definition of ETFs? What is it about?

Shah: The ETF basically is a fund which you can buy everyday in the market. In simple term, it’s a mutual fund which basically you have to buy, and you can easily buy in the stock exchange.

Q: You agree with that? Is that a fair and simple explanation of the product?

Laxmi: Yes absolutely. An ETF is nothing but a very passive form of investing into the underlying index or the constitution or the asset class and it broadly mimics the underlying index or what the underlying is. You can freely transact it on the exchange by the virtue of it being listed on the stock exchange. So in effect what you are getting is the convenience of transacting in a stock kind of a form in a mutual fund unit.

Q: If you had to set out the key three-four differences between a mutual fund and an ETF, what would you say are the primary differentiators?

Shah: The basic differentiator is that ETFs are usually on a passive fund. So what happens is typically the fund manager is not talking any active calls on the portfolio at all. You just go and buy the underlying asset be it an index, say a Nifty or a junior Nifty, or a bank or you just go and buy gold. In terms of the other funds typically, the fund manager is taking active calls as to what makes sense for him in the market.

The second difference would be that you can buy at real time prices. The biggest advantage of an ETF is that if the markets are down today say at 2% or 3% in a normal fund if you buy the fund on the same day you would get the end of the day NAV. So if the markets moved say since 10:00am in the morning to 3:00pm by 2-3% you would miss out on that movement and you will actually pay 2-3% higher or if you sell you lose out 2-3%.

Thirdly, the difference is all the units of the mutual fund go into a demat account. So it’s not a statement of account, so you can actually see those your units in your demat account and add upto your own portfolio. So these are the basic differences I would say from between an ETF and a normal open-ended fund.

Q: But there are also active ETFs versus passive ETFs. Is that not available in India, what is the difference there?

Shah: Active ETF is a very new concept. It’s just taking shape in the US market. The size is not really grown too much. We don’t have it in India at all at this point in time. What we have in terms of differentiation of a passive ETF is the whole idea of fundamentally weighted index and you weight the stocks in a very different manner and you create your own index and then invest in them.

It is a little different from the public indices which you have like S&P 500 or Nasdaq or Nifty—these are indices which everybody owns and themselves do it but again its investing in an index be it that you are investing in an index which is your own index. Active ETFs have just about started taking off in the US. We don’t have a lot of size in that—the total size as I understand is as about USD 2-3 billion and in India you don’t have it in this point in time at all.

What is the difference between PPF & EPF?

A young reader wrote in telling us he has just landed his first job and has begun investing. He had a very basic question: What is the difference between PPF and PF?

We attempt to clear his doubts.

1. What is PPF and PF?

EPF/ PF

The Employee Provident Fund, or provident fund as it is normally referred to, is a retirement benefit scheme that is available to salaried employees.

Under this scheme, a stipulated amount (currently 12%) is deducted from the employee's salary and contributed towards the fund. This amount is decided by the government.

The employer also contributes an equal amount to the fund.

However, an employee can contribute more than the stipulated amount if the scheme allows for it. So, let's say the employee decides 15% must be deducted towards the EPF. In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12%.

PPF

The Public Provident Fund has been established by the central government. You can voluntarily decide to open one. You need not be a salaried individual, you could be a consultant, a freelancer or even working on a contract basis. You can also open this account if you are not earning.

Any individual can open a PPF account in any nationalised bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices.

The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.

2. What is the return on this investment?

EPF: 8.5% per annum

PPF: 8% per annum

3. How long is the money blocked?

EPF

The amount accumulated in the PF is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes jobs.

In case of the death of the employee, the accumulated balance is paid to the legal heir.

PPF

The accumulated sum is repayable after 15 years.

The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.

It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits.

4. What is the tax impact?

EPF

The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C.

If you have worked continuously for a period of five years, the withdrawal of PF is not taxed.

If you have not worked for at least five years, but the PF has been transferred to the new employer, then too it is not taxed.

The tenure of employment with the new employer is included in computing the total of five years.

If you withdraw it before completion of five years, it is taxed.

But if your employment is terminated due to ill-health, the PF withdrawal is not taxed.

PPF

The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C.

On maturity, you pay absolutely no tax.

5. What if you need the money?

EPF

If you urgently need the money, you can take a loan on your PF.

You can also make a premature withdrawal on the condition that you are withdrawing the money for your daughter's wedding (not son or not even yours) or you are buying a home.

To find out the details, you will have to talk to your employer and then get in touch with the EPF office (your employer will help you out with this).

PPF

You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 1997-98, the first loan can be taken during financial year 1999-2000 (the financial year is from April 1 to March 31).

The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998.

You can make withdrawals during any one year from the sixth year. You are allowed to withdraw  50% of the balance at the end of the fourth year, preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.

For example, if the account was opened in 1993-94 and the first withdrawal was made during 1999-2000, the amount you can withdraw is limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower.

If the account extended beyond 15 years, partial withdrawal — up to 60% of the balance you have at the end of the 15 year period — is allowed.

The better option?

In both cases, contributions get a deduction under Section 80C and the interest earned is tax free.

Having said that, PF scores over PPF in two aspects.

In the case of PF, the employer also contributes to the fund. There is no such contribution in case of PPF.

The rate of interest on PF is also marginally higher (currently 8.50%) than interest on PPF (8%).
 

The best places to buy your gold from

Gold is a ‘must have’ in your investment portfolio. Frankly, there is no need to advocate investment in gold amongst Indian audiences.

Traditionally, it is a popular avenue of investment for Indians. However, buying jewelry is not as good an investment as buying pure 24 karat gold.  Hence, when we talk of gold as an investment, we mean gold coins, gold biscuits or gold bars – any piece of 24 karat gold.

Since gold is a popular investment, there are several avenues of buying it. Even banks and post offices sell gold. So, from where should you get your gold? Here are your choices:

Jewelers

All jewelers sell gold coins, gold biscuits and 24 karat gold rings. 24 karat gold rings are the most popular sellers. You can visit your trusted jeweler to purchase gold. You can resell a piece of 24 karat gold without any loss in value. It is important that you check that the gold coin / bar / ring etc has a 24 karat seal on it. The cases of fraud amongst jewelers are common; hence it is best to buy gold only from jewelers that you trust and that have a good reputation. It is a good idea to verify the purity of gold from another jeweler.

The advantage of buying gold from jewelers is that it is one of the cheapest sources plus it blends with consumer mindsets of buying gold from jewelry shops. Also, you can take it back to the same or any other jeweler and cash it at the current selling rate.

Banks

Banks too sell gold. State Bank of India, Axis Bank, Bank of India, ICICI Bank and HDFC Bank are amongst banking institutions selling gold coins. A bank is probably the most trusted source to buy gold. Since people trust their money to banks, buying gold from a bank is a viable idea. One can be sure of the purity of gold. Banks give certificates of purity for the gold coins they sell.

However, getting your gold from banks will be costlier as they charge a premium of 10 percent to 15 percent over the market rate. So, if your jeweler sells 1 gram of gold for Rs. 1853/- (as of June 06, 2010), you can get the same from a bank for an additional amount of Rs. 278/-. So, for 10 grams of gold, you will pay Rs. 2, 780/- more at the current rates.  This is a direct hit in your profits when you sell the gold. Also note that banks are not permitted to buy back the gold they sell. So, you will have to find another buyer for it.

Gold Exchange Traded Funds

If you are purchasing gold solely for investment purposes, you don’t really need to buy gold in its physical form. You can buy gold in demat form – gold exchange traded funds. A unit of an ETF fund approximates the value of 1 gram of gold. So, modest purchasers can also get into the gold market. ETFs can save you the cost of storage of gold coins and the time and effort to secure your purchase (such as bank locker charges). Further, you need not worry about the accuracy of weight or purity of the gold – Gold ETFs counter all the demerits involved in purchasing gold. Just one hitch – if you are buying gold coins for investment such that they can be converted to jewelry later on for any occasion like your child’s wedding – then this option does not work for you. The performance of Gold ETFs has been impressive.

Online over the Internet

As most of your other investments, gold can be purchased online too. Some jewelers also have started selling online. Security, accuracy of weight and purity of gold are major concerns here. So, you should buy from reliable sources only. Banks such as ICICI Bank also sell gold online. However, the same drawbacks related to buying from banks persist here.

Gold Retailers

Corporate giants also sell gold through their outlets spread across the nation. For example, TATA has a retail chain Tanishq. This is also a very reliable avenue and often used by companies to gift its employees.

Post offices

An extremely reliable source plus reasonable prices- Indian Postal Offices sell gold coins. Post offices of only a few cities extend this facility. However, this avenue has the potential of reaching out to remote areas. This is because, every village, however, small it may be, has a post office. It can be a very good alternative to local jewelers. Gold coins in lower denominations (0.5 grams, 1.0 grams, 5.0 grams and 8.0 grams) are also sold here so that most people can afford purchasing gold from post offices.

At present post offices in the following cities sell gold coins: Delhi, Ahmedabad, Surat, Baroda, Pune, Nashik, Nagpur, Mumbai, Chennai, Trichy, Coimbatore, Salem and Madurai.

Source: moneycontrol.com

Tips For Maximising Benefits And Returns in PPF

  • Invest by the 5th of the month
  • Tax rebate can be availed of by investing even in the 16th year
  • Post-Maturity continuation
  • Can be self-funding after year 7
  • Interest in your PPF account is calculated on the lowest balance between the close of the fifth day and the last day of every month and is credited to the account at the end of each financial year i.e., on 31st March. So if you invest by the 5th of the month, you will be eligible to interest for the full month in which you are investing.
  • Although, PPF is theoretically a 15-year scheme, you can make your last contribution to PPF till the last day of the 16th financial year. Your contribution to PPF on the last day of the 16th year may not get any interest, but you can claim a tax-rebate on the investment amount.
  • You could choose to extend your PPF account for a period of five years at a time, after the completion of its 15-year term. Such an extension is recommended for individuals who do not need this entire amount, nor have a better investment option.
  • If you choose to extend your account, you must submit Form H if you want to claim section 80C tax benefits on fresh contributions. If you merely retain the balance in your account, without submitting Form H, you will continue to earn 8% p.a. tax-free interest until it is withdrawn.
  • If you continue with fresh subscriptions, you are entitled to withdraw upto 60% of your balance at the beginning of each extended period in one or more installments, but not more than once a year.
  • If you merely retain the balance in your account, you can withdraw the entire sum in one, or more, installments, but again, but not more than once a year.
  • The partial withdrawal facility of the PPF scheme enables you to derive the benefits of section 80C without investing any fresh capital.
  • Assuming you have decided to invest a fixed amount in PPF every year, from the 7th year onwards you can withdraw an amount equivalent to your annual investment from your accrued PPF account, and deposit the same back as your contribution for that particular year.
     

How to reduce your motor insurance premium

You can plan to reduce the insurance premiums paid on your vehicles. According to the Motor Vehicle Act, a vehicle cannot be driven on the road unless and until it is insured. The insurance is renewable each year. Vehicle insurance is a pre-requisite to vehicle ownership.

If a vehicle's insurance policy is not renewed, driving that vehicle is illegal. Also, if the vehicle has an accident, the insurance company will not pay out any claims. All no claims bonuses will also be forfeited. You can renew your auto insurance with another insurer, including the bonus accrued at your earlier insurer.

The risks covered by a third party policy include death or injury to a third party and damage to third party property. Liability in the case of death or injury is unlimited.

A comprehensive motor insurance policy provides cover against damage caused to your vehicle due to man-made or natural calamities too.

A motor insurance policy covers your vehicle against:

Natural calamities
Man-made calamities
Personal accident
Third party legal liability
Any permanent injury /death of a person
Any damage caused to property

Previously, the premium was mainly based on geographical zone, engine capacity, price and age of the vehicle. Now, a number of other factors are also considered to arrive at the premium. One can avail a discount on the premium and reduce it by up to 25-30 percent.

Discount on premium

The most important discount is the no claim bonus. In case you haven't made a claim against your vehicle insurance in a given year, you get the benefit of no claims bonus in the form of a specific percentage reduction in your premium in the subsequent year.

No claim bonus increases with each claim-free year. It may go as high as 50 percent on the 'own damage premium' component of the vehicle insurance premium.

Voluntary deductible discount

In addition, the insurance companies also offer a discount on your vehicle premium if you bear a certain amount of loss associated with each claim.

Voluntary deductible is the amount that you agree to pay yourself towards a claim before the insurance company pays up the balance. The higher the voluntary deductible that you agree for, the lower your premium will be.

The discounts associated with this feature range between 20 and 35 percent of the premium, subject to a maximum of Rs 3,500. However, you need to review the amount of voluntary deductible against the discount to ensure the discount amount will actually be higher than the voluntary deductible.

Premium depends on make, model

Premiums depend on the make and model of the vehicle. Each model has its own claim record and the insurer prices the vehicle based on its claim experience.

Some models may be more claimprone because of their structure or usage, and the premium will factor in all these facets.

Some models have high repair costs and the premium is affected by this.

Source: EconomicTimes

Channels to resolve your grievances against insurance companies

Incidents of insurance companies trying to wriggle out of their commitment to the policyholders are not all that rare. In fact, Hollywood has many hits on the subject. Noted consumer activist Jehangir Gai also has a story to tell: “A person had undergone three surgeries simultaneously, with the total cost amounting to Rs 33,000. When the claim was lodged, the insurance company’s TPA held that though the surgeries pertained to three different body parts, they were conducted at the same time and hence, the eligible claim was only Rs 10,000.”Despite explaining that the company would have had to shell out a higher amount had the insured decided to go through the surgeries at different points in time, the company just wouldn’t budge. “Ultimately, we approached the Insurance Ombudsman who held that the eligible claim amount was Rs 30,000,” recounts Mr Gai, who remains indignant about the Rs 3,000 that was waived off.

This doesn’t mean that a policyholder is entirely at the mercy of insurance companies. During the past few months, the insurance sector has witnessed a slew of regulations framed by the Insurance Regulatory and Development Authority (Irda) aimed at protecting the interests of the policyholders. More recently, Irda chairman J Hari Narayan has indicated that the Insurance Ombudsman would be empowered further.

While the process of giving teeth to the ombudsmen may take a while, you can get acquainted with the intricacies of the existing grievance redressal infrastructure and the procedure to be followed to make yourself heard.

Round One: Most companies offer a host of channels – branches, phone call, e-mail as well as snail mail — to policyholders to register their complaints. Typically, you can approach the company’s grievance redressal officer, if you find that the customer service department is not of much help. The insurance companies are required to maintain a well-defined procedure for receiving and resolving grievances at their branches, too.

They have to specify a time frame within which various types of grievances must be resolved. While the companies can decide the time-limit, they are required to send a written acknowledgement within three working days of the receipt of the complaint. Any failure on the part of the companies to stick to the deadlines will make them liable to penalties.

If the complaint is resolved within three days, the insurance company will have to inform the individual along with the acknowledgement. If not, then the company will have to resolve it within two weeks of receiving the complaint and send a final letter of resolution.

If the insurance company decides to reject the complaint, it has to give a reason along with information on further redressal avenues that the complainant can pursue. Remember, if you do not react within eight weeks from the date of receiving the insurer’s response despite being dissatisfied with it, the company will assume that the complaint has been resolved.


Round Two:If the redressal officer wasn’t much of a help, then you can approach either Irda’s Grievance Redressal Cell or the Insurance Ombudsman, depending on the nature of your complaint. The offices of the ombudsman are authorised to mediate and, if necessary, award compensation to policyholders. They handle cases involving insurance contracts with a value of up to Rs 20 lakh.The Insurance Ombudsman can make recommendations within one month of the receipt of the complaint. Once you receive a copy of the recommendation, you have to send a written communication indicating your acceptance of the settlement within 15 days. If the ombudsman gives a verdict, which has to be delivered within three months, the insurance company has to comply with the order. If you are not satisfied with the verdict, you can take recourse to consumer forums or civil courts.

So what are the kinds of complaints that can be heard by the ombudsman? The key one relates to rejection (whether partial or total) of claims, in addition to disputes about premiums; policy wordings in case the disputes relate to claims; delay in settlement of claims and non-issuance of any insurance document after collecting the premium.

Irda’s Grievance Redressal Cell: Unlike the ombudsman, this redressal cell does not have the authority to pass orders. However, complaints addressed to the cell are taken up with the insurers. These could include delay or lack of response pertaining to policies or claims and complaints about agents’ conduct.

“Since the awareness about the ombudsman is low, Irda’s campaign (the toll-free number — 155255 — has been publicised widely) has been creating awareness about the recourses available to policyholders. You can approach the cell directly, and where required, you will be redirected to the ombudsman under whose jurisdiction the complaint falls,” informs an Insurance Ombudsman official . You can get in touch with the cell via mail (the e-mail IDs as well as the postal addresses are listed on the Irda website).

Also, ensure that you send your complaint yourself – the ones forwarded by third parties including lawyers or agents are not entertained by the cell. Similarly, complaints with incomplete information are also not heard. Therefore, it is imperative to disclose all the details in the complaints registration form available on the insurance regulator’s website.

So though the grievance redressal mechanisms are in place, you need to make sure that you are alert while dealing with insurance companies and follow the procedure laid down for an effective solution to your problem.

 
Source: economic times

What one shouldn’t expect from Mutual Fund Scheme

Look at Coal India investors . They have made a cool 40% on listing on Thursday and look at my mutual fund scheme; it has just given around 20% in the past on year. These are the kind of refrains you hear from some mutual fund investors. For them, mutual fund is one-stop shop, where the fund manager will do everything for them: asset allocation, profit-booking, rebalancing of the portfolio… the list just goes on. Sure, you can do most of these things with the help of mutual fund schemes, but still you have to do them. This is because your fund manager won’t offer you customised solutions – largely, he doesn’t have any clue about you at all, all he hopes is that you have understood the scheme and invested in it after that.

Flash In The Pan: You must have read about stocks hitting the upper circuit of 10% or 20% in a day in the stock market. But you may have seldom heard about mutual fund schemes doing the same. In fact, if it does, you should be worried, not the other way around. A mutual fund scheme’s portfolio comprises various stocks, ideally reputed companies with long-term track records. These stocks are unlikely to hit the upper or lower circuit, unless something extraordinary has happened to the company. “ mutual funds are meant to deliver over a long period of time, and not overnight. To make the best of the investments in mutual funds, its is better to invest in a diversified equity fund with a good long-term track record,” says Nikhil Naik, managing director of Naik Wealth, a mutual fund distributor. A classic example is HDFC Equity Fund that has multiplied the initial investments 30 times over the past 16 years since its inception.

This must be seen in the light of approximately five times growth in S& P CNX Nifty over the same period of time. Thematic funds may, in some cases, ride the booming sentiment and deliver well in a short period of one month to one year. But if you cannot time your entry and exit, you may land on the wrong side of the market, hurting yourself. It is advisable to let the fund manager of a diversified mutual fund take a call on sector allocations from time to time to enjoy growth across sectors and companies across market capitalisation.

Personalised Solutions: Don’t expect the fund to offer you customised investment options. A mutual funds work on the premise of pooling mechanism. Typically, a mutual fund scheme will have people with different needs. In certain case, it can be even contrasting. This factor becomes very crucial when it comes to booking profits. For example, redemption pressure during dull market conditions may force a fund manager to sell stocks that have huge potential. This can have an adverse impact on you as an existing customer in the scheme. You may also have some preferences when it comes to investments, but in most cases last-mile customisation is not possible in a mutual fund scheme. However, there are ways to handle this issue.

“Systematic withdrawal plan, where you can redeem a certain amount of money at regular interval say each month, can come to help for those with income needs,” says Nikhil Naik. Trigger options launched by mutual funds help investors to book profits at a pre-determined rise in NAV over the floor NAV. Products like ethical fund by Taurus AMC and shariah-compliant fund by Benchmark AMC offer investors investment opportunities in a socially responsible way to a certain extent. But, keep that in bold letters, you have to make these choices.

Asset Calls:Mutual funds go by the mandate of the scheme. For example, equity funds have to invest at least 65% of the money in equity and related instruments. This mandate offers the fund managers a limited scope to book profits and increases their exposure to short-term fixed income instruments at high levels in equities. The same holds true for sector funds, too. The fund manager doesn’t have the liberty to dump the sector despite knowing that the sector is not going to do well. That is why, it becomes imperative that the investor himself has an asset allocation plan and rebalances the portfolio at regular intervals. “Invest proportionate amount in a diversified equity and pure debt fund and keep a track of it,” says Abhishek Gupta, CEO of Moat Wealth advisors, a financial planning services provider.

Multi-Baggers: Does the term ring a bell? Well, it refers to stocks that deliver many times their purchase cost. They can also come in various denominations like 10-baggers and 20-baggers. A fund manager invests in stocks that are approved by the investment committee of the fund house. The process ensures risk management of the fund in which your money is invested. This benefit also brings in some disadvantages. Low market capitalisation and low liquidity in stocks of small companies is a hurdle the fund managers cannot jump over in ‘investment-process driven houses with strong risk management practices’. This means your fund manager won’t be featured along with the top guns in the market.

Though good diversified equity funds may not come with such stocks, they are still good candidates for your core portfolio holdings. Let the fund manager manage a ‘core portfolio’ for you. You can look separately at companies that do not fit into the mutual fund’s investment universe but look promising (you can use a small or micro scheme for the purpose). “Portfolios of companies with established track record offer you stability. If you combine them with small companies with growth potential, you can enjoy higher returns, though at a higher risk,” says Ganesh Shanbhag, managing director, SMS Financial Services. If you do not have skills to identify such opportunities, then better restrict yourself to equity mutual funds.

Assured Returns: Your mutual funds can’t offer guaranteed returns to you. Sebi has done away with the practice long time ago. So, make sure you understand the risk you are taking while investing in a particular mutual fund scheme. This is called investment risk. Simply put, investors have to accept both gains and losses after investing in a fund. There is little that an investor can do after he invests in a fund. So better ascertain why you want to invest in a mutual fund. If you are aware of your risk appetite, you can accordingly invest. Never invest in a fund with no or limited track record.

 
Source: Economic Times