Q. I am 26M, Single and recently started working with an MNC after completion of my post-graduation. My company is providing me with 5 lacs of health insurance. They also cover 5 lacs of health insurance for my parents, and my parents are also healthy. My friend is insisting that I should take personal health insurance for myself, and health insurance for my family. However, I feel that it is not required as I am young and my company already covers my health insurance. What should I do?
A. Your friend is a wise person! Let’s talk about health insurance provided by employers or group health insurance. Since health insurance is the least of our worries, we feel that the health insurance coverage provided by the employer is sufficient and we do not need additional coverage. However, that is not true. Let’s look at why health insurance provided by employers is not sufficient.
Firstly, group insurance policies provided by most employers’ is applicable only till the time you are a part of the organization. If you are transitioning – in between changing jobs or on a sabbatical or even post retirement, unless the company provides you the continuation benefit, you cannot enjoy benefits of such health insurance.
Group Insurance policies are tailor made which means the company decides on the terms and conditions and the benefits to be offered to the employees. Sometimes the policy terms may not match with the employees’ requirements.
Advanced and Modern treatments are generally not covered in most of the Group insurance policies.
Customization is not possible in group health insurance policies. Features such as No-Claim Bonus and Sum Insured Restoration are not available in most Group Insurance policies.
Adding on, an Increase or decrease in cover/sum insured would not be under your control in Group Insurances, as it is the employer who would decide it.
You may miss out on Features like OPD and Annual Medical Check-up which are generally not a part of most Group Insurance policies.
Taxation benefits under Section 80D cannot be availed with group health insurance unless you are paying the premium.
It is important to have appropriately covered yourself and your family through personal health insurance which should be over and above your corporate cover. A personal health cover while you are young and healthy will ensure you maintain a robust health coverage in times of switching of jobs and also post retirement and also ensure limited medical exclusions are applied.
It is also important to take as much cover as early as possible as medical inflation is high and most policies do have a waiting period for pre-existing illnesses for at least 3-4 years.
We strongly recommend you to have a health insurance coverage over and above what your employer is providing for you and your parents. This will ensure that you don’t have to break your savings to meet medical expenses, and can plan your finances better and stress-free.
Q. I am in my early 40s, working with a private company. My current pay package is 60 LPA and I get a bonus of 5-10% every year. On an average, I have been getting promoted at every 3 years, and currently I live a very comfortable life. My wife is a home maker and my daughter is 10 years old. One of my friends who is the same age as me, recently mentioned that their financial advisor has been insisting upon retirement planning. I feel we still have many years to retire and there is no hurry to plan retirement. What do you suggest?
A. You have worked hard to build a comfortable life for your family, and yourself. As you are growing older, there will be new dreams, new goals. With a good retirement plan in place, you can have peace of mind and power to fulfil all your wishes, while also maintaining the financial freedom.
Retirement planning in simple words can be described as preparing for tomorrow, today. It involves identifying income sources, preparing for post-retirement goals, planning for expenses till life expectancy, managing risk-return tradeoff, and saving accordingly during the active working phase of your life to make sure that you do not have to be dependent on anyone.
You are in your early 40s currently, and your child is also young. You may feel at this point in time that retirement is far off. It is easier to save when you have fewer responsibilities. By preparing for retirement early in life, you are preparing yourself to deal with medical emergencies, have a stress-free retired life by maintaining and even leaving a legacy for your child. When you plan your retirement in advance, you also grow your money to beat inflation. The average life expectancy has gone up in recent times, and we can make all arrangements for a comfortable future life. It is imperative to do retirement planning as with proper planning, one can deal with any type of emergencies and uncertainties. What more, it also helps to secure financial future of your near and dear ones.
Though there are no hard rules about when to start retirement planning, it is advisable to start planning at an early stage of life. When one starts saving early in life, the quantum of savings is smaller than saving later in life. The earlier you start; your investments have more time and potential to grow. As the time slips by, building a sizeable corpus may become difficult. Also, compounding effect on investments is also a reason to start investing early for retirement.
My suggestion is, start retirement planning now. When you are planning for retirement, there are certain important factors that you need to keep in mind, like current and expected inflows and regular outflows, assets and liabilities, affordability, medical history of yourself and your family, financial goals and plans for self and family etc. While there are a few online tools that could help you with determining the corpus but it would be best to reach out to a financial advisor, and get a detailed retirement plan prepared with assumptions that are best suited for your situation and thus taking the first steps towards a happy retirement.
Q. I am turning 60 in next 3 months. Where should I invest – in Senior Citizen Savings Scheme or Pradhan Mantri Vaya Vandana Yojana? What is the difference between the two as both are offering 7.40% interest rate currently?
Currently, two of the best investment options available for senior citizens are Senior Citizens Savings Scheme – SCSS and Pradhan Mantri Vaya Vandana Yojana – PMVVY. For both the schemes, the minimum entry age is 60 years, and maximum permissible investment limit is ₹15 lacs. While both the schemes are pension schemes specially designed for senior citizens, there are some key differences that one needs to look at before investing.
Maturity Period: In PMVVY, the maturity period is 10 years, whereas in SCSS, the maturity period is 5 years.
Extension: While SCSS can be extended for 3 years post completion of 5 years, there is no extension available in PMVVY.
Rate of Return: For both, PMVVY and SCSS – currently, the interest rate is same as 7.4%. However, in SCSS, the interest rates vary quarterly.
Annuity Payout: In SCSS, the annuity payout takes place every quarter. In PMVVY, the annuity payouts can be yearly, half-yearly, quarterly or even monthly.
Premature Withdrawal: PMVVY does not have a flexibility of premature withdrawals – full or partial. Whereas, in SCSS, one can exercise a withdrawal by paying some penalties.
Taxation Benefits: In SCSS, a contribution upto ₹1.5 lacs is exempted under Section 80(C) of Income Tax Act, whereas no such exemption is available on investments under PMVVY. However, in both the cases, the proceeds at maturity are taxable.
Looking at the above-mentioned key differences, considering liquidity and taxation point of view, SCSS seems better than PMVVY. However, while making an investment, one should remember that PMVVY gives the same return for the entire tenure of 10 years, whereas the rate of return may vary as per the rates set by the government on quarterly basis. Investments in these instruments should be basis one’s financial goals or their purpose of investment.
However, while taking investment decisions for the post retirement period it is important to keep in mind that the corpus you have created not only beats inflation but also helps you sustain your standard of living and covers for any emergencies that may arise. Life expectancy has been increasing and while crafting your portfolio you must look at the corpus to sustain for the next 35-40 years at the least. It is advisable to hold some equity exposure for long term even in the post retirement phase. The 2 schemes above would form a part of the fixed income investments in your portfolio and thus to bring in diversity you could look at other investment options also.
Q. Why is risk profiling important before making investments?
Risk profiling is the first and most important step in the process of financial planning and investing. SEBI has made risk profiling a compulsory, regulatory requirement. It is the process of evaluating the ability and the willingness of an individual to take risks. It is important to note that each investor has different tolerance to market volatility. The quantification of such risk tolerance is known as risk profiling. Risk profiling is important to determine investment asset allocation for any portfolio/ investments.
Every asset class, be it debt or equity or commodity or currency or even alternates, has a different risk – return mix. Risk profiling is done to ensure proper asset allocation in a portfolio and the right allocation helps to generate better returns, reduce risk and align the investments to meet financial goals of the investor. It also helps the financial advisor to ascertain the suitability of product or asset class for investor. Risk profiling also helps in defining the potential threats an investor shall get exposed to, and in taking corrective measures to minimize or avert impending losses.
One usually invests in various instruments, keeping in mind a certain financial goal. Risk profiling helps in understanding how much risk an investor is willing to and able to take. Risk tolerance levels are evaluated through a review of an investor’s assets and liabilities. For example, the risk bearing capacity of an individual with more assets and lesser liabilities would be higher than an individual with more liabilities. However, an advisor also needs to look at the willingness of the investor.
As an investor, a risk profile can help you plan your investments as per your risk bearing capacity and help ascertain that you do not lose your sleep over your investments. When the risk profiling is done, it helps you to identify the correct and most suitable investment avenues or opportunities which are aligned with your financial goals and risk appetite. This in turn ensures that you have the right product mix as well as balance between risk and rewards in the portfolio.
Risk profiles are broadly divided into three categories: Conservative, Moderate and Aggressive.
Conservative: Investors that fall into this category have a very low risk appetite. Their investments should be oriented more towards capital protection with minimum risk. The portfolio would be skewed towards stable assets.
Moderate: Investors falling into Moderate category have an average risk appetite They are willing to take extra risk to generate an alpha on their returns. The portfolio could have a good balance of stable as well as growth assets.
Aggressive: These investors have the highest risk appetite as compared to the other two categories. They are comfortable with market volatility and are willing to take higher risk in order to generate potentially high returns. The portfolio is more oriented towards growth assets.
However, it is very important to note that the risk profile for an investor may change over a period of time. Even major transitions in one’s life could change an investor’s risk profile. Hence, it becomes important to assess one’s risk bearing capacity at regular intervals. In case of any major events of life also the risk profile needs to be evaluated and asset allocation should be re-assessed.
Q. How do I decide where I should invest? Especially with so many options being available in the market, how should I pick my investments?
It is common and obvious to have this question when there are so many investment avenues available for one to invest in, like mutual funds, PMS, AIFs, direct equities, fixed deposits, government schemes, and alternates. When making a decision on investments, one should focus on some important factors.
Financial Goals/Objectives: Every investment is usually done with certain financial goal/s. If your goal is long term wealth creation, invest a portion of available funds in growth assets. If the goal is near term, better to invest in a stable asset.
Risk: What is the quantum of risk involved? Does that fall in line with your risk profile? Usually, it is seen that higher the risk, higher the ‘expected’ returns. Always assess your risk tolerance and invest accordingly.
Return on Investment: The returns could be in form of interest, capital appreciation or dividend. One should check pre-tax and post-tax returns on investments. However, please remember that historic returns are no guarantee of future earnings.
Time Horizon: For how long the funds are available to invest? Or, when am I going to need these funds? Depending upon horizon, one can decide between available investments options. Investments can be divided into long term, medium term and short-term investments.
Liquidity: How soon an asset can be converted into cash also is an important factor. Especially in case of emergencies, one should have certain corpus that can be easily converted into cash.
Inflation: Ideally, a good investment should be able to beat inflation. Increasing inflation rates result into decrease in purchasing power.
Volatility: Remember that no market is flat or stable. There will be rise and fall in the market. Volatility has a direct impact on the returns generated by the investments. Hence, it becomes necessary to see how volatile the market is.
Diversification: Never invest all your funds in one asset class. Diversify the funds available for investments. This helps in mitigating the risk and also in generating higher potential returns in the portfolio. However, overdiversification should be avoided.
Taxation: Different asset classes attract different tax rates. Some investments also offer tax exemptions. While making investments, do look at the tax benefits and implications for both short term and long term.
One needs to keep in mind that though we look at the historical returns, they are never a guarantee of future performance of the asset. Also, always make sure that you have created an emergency corpus or at the least have some investments which can be liquidated immediately for unforeseen contingencies. Always invest in well-regulated markets and products. The investments you choose should be aligned with your goals, time horizon and risk appetite. Do not forget to review and rebalance your portfolio at regular intervals.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
International Money Matters Pvt Ltd is a SEBI registered personal finance firm.