DV-Mint – Page 27

October 18, 2021

The Era Of Cheap And Easy Term Insurance Plans May Be Over

Life insurers are expected to increase premiums for term plans as claims spiked during the Covid-19 pandemic.

Reinsurers are becoming stricter about underwriting and the documentation required from customers, said Vighnesh Shahane, managing director and chief executive of Ageas Federal Life Insurance. “It will not be so easy or cheap to get a term product in India.”

The quantum of the hike, he said, will vary depending on the insurer, the reinsurer, and the volume of business between the two.

The revenue and profit of listed life insurers tumbled in the quarter ended June as they set aside more provisions against anticipated claims from the deadlier second Covid-19 wave. ICICI Prudential Life Insurance Co. saw the biggest sequential decline in new business premium at 50%, followed by SBI Life Insurance Co. and HDFC Life Insurance Co.’s 46% and 43% fall, respectively.

The companies have yet to report their earnings for the quarter ended September.

Term plans are likely to turn costlier because of three mains reasons:

Risks Of Higher Penetration

Since the original target group for term or protection products was the affluent category with better medical facilities, a lower risk was associated with a lower premium, according to Prithvish Uppal, the analyst at IDBI Capital Ltd. But as penetration for protection products rose, lower-income groups susceptible to higher risk merit higher premium, he said.

Cheaper Than Developed Countries

While India has a lower life expectancy, pricing has been on a par with the developed nations where people live longer on an average, according to Uppal. Annual premiums in Hong Kong, with a life expectancy of 84 years, are around Rs 12,000, about the same in India where the mortality age is 69 years, he said.

Covid-Induced Expenditure

An upsurge in claims due to the pandemic, especially the second wave, prompted reinsurers to hike rates, according to Mohit Mangal, the analyst at Anand Rathi Financial Services Ltd. “In Q1 FY22, HDFC Life’s gross claims were Rs 1,600 crore and net claims were Rs 960 crore,” Mangal said. “Thus, the reinsurers had to bear the burden of Rs 640 crore.”

Premiums declined in the 10 years through 2019. But just prior to the pandemic, reinsurers—companies that provide financial protection to insurance firms—raised prices ranging between 15% and 40%, according to Uppal.

ICICI Prudential Life Insurance passed on the entire hike to customers in July 2020, Mangal said. Others didn’t.

“HDFC Life and SBI Life chose to retain some portion of this hike on their books while others, in a bid to expand their protection business, absorbed the entire hike,” Uppal said.

HDFC Life, SBI Life, and ICICI Prudential Life refused to respond to queries from BloombergQuint citing the silent period ahead of their earnings.

Shahane said insurers may take a decision “depending on their expectations and predictions of the future and how the pandemic is likely to play out”.

According to Uppal, the companies will pass on the increase in reinsurance costs based on their historic mortality experience and follow a cautious underwriting approach to avoid pandemic-related uncertainties.

“ICICI Prudential is most likely to continue passing on the entire hike to customers due to its management policy,” he said. “[But] HDFC Life and SBI Life may also follow suit, unlike in the past.”

Unlikely Gainer: LIC

As term plans of private insurers turn costlier, Uppal expects one company to gain: state-run Life Insurance Corp.

The hikes will narrow the pricing gap with LIC. Currently, private firms charge around Rs 10,000 to Rs 15,000 a year for a plan worth Rs 1 crore, while LIC which sells similar policies at Rs 20,000-25,000, Uppal said.

“LIC is most likely to benefit from the price hike as brand recognition will enable it to gain market share in the protection business.”

Uppal also expects volume growth in the third quarter before the reinsurers increase prices by December-end.

Source: Bloomberg

October 15, 2021

5 Key financial lessons to learn from Dussehra

Dussehra is celebrated to honor the victory of good over evil with much pomp and fervor. While Dussehra is a time when eternal hope rises in the good that exists in humanity,

it also brings with itself some important lessons you can implement to your financial plans to have a better grip on your finances and plan for a better future. Read 5 Key financial lessons to learn from Dussehra here;

Destroy the evils on your wealth creation journey

The festival of Dussehra marks the victory of good over evil. During the Lanka war, Lord Rama and his army encountered various hardships to attain victory. Looking at the festival from a finance and investment perspective; the festival offers the vital lesson of ridding away all the causes that pose as a hurdle on our financial planning and wealth creation journey. Surmounting credit card debts, reckless expenditure, timing the market, booking losses amongst many other hurdles are the real enemies on our wealth creation journey.

Live a disciplined life

The advocacy of ‘Dharma’ or righteousness by Lord Rama emphasized the significance of being upright, responsible, and disciplined in life. While in exile or during the Lanka war, Lord Rama did not deter living a life of frugality. You too can learn to live in less than what you earn. By saving wisely, spending cautiously, and investing smartly; you can apply financial discipline to cater to your current and future needs as well as your family’s needs. One way of inculcating and nurturing financial discipline within you is by firmly following a financial plan, avoiding binge-spending at all costs, and investing in a regular pattern; possibly in Mutual Funds via Systematic Investment Plan (SIP).

Lead a life of patience and perseverance

When Lord Rama along with Lakshmana and Sita were exiled to the woods for 14 years and was asked to live a simple life as opposed to the luxurious lifestyle of the royal palace; he accepted his fate and maintained composure. When Ravana abducted Sita and the Lanka war broke out; Lord Rama fought the war with patience and perseverance and never thought of giving up or looking for shortcuts. These two incidents in the Ramayana signify the importance of being patient and perseverant in the hardest of times. In your life too, you may face financial hardships or you may find it difficult to avoid unnecessary expenditure. As an investor, you may get impatient while watching your money grow or market ups and downs can test your patience to its extreme forcing you to quit investing any further and derail you from achieving your financial goals. Irrespective of the above-mentioned incidents; you must be patient and perseverant at all times.

Protecting your finances

The festival of Dussehra symbolizes the faith in defeating all forms of evil to protect humanity on Earth. By protecting or securing your finances, the message is to create a financially sound future and shun all evils that affect your financial wellbeing. You could protect your hard-earned money from going to waste by putting it to good use; in the form of investments or insurance plans. Also, maintaining a contingency fund that helps battle your emergency needs can prevent you from using up your savings or taking loans.

Cheers to new beginnings

The Lanka war of 14 days marked the defeat of evil and paved the way to newer paths. Upon returning to Ayodhya with Lakshamana and Sita, Lord Rama was crowned as the King of Ayodhya, and Vibhishana was crowned as the new king of Lanka. The events during the Lanka war and the subsequent victory of Lord Rama brought a new lease of life by starting afresh. Taking a cue from this; it’s never too late to tread on a path of financial freedom. You can start by chalking out a financial plan that suits you the best. If you wish to achieve your financial goals, you can always invest in a Mutual Fund scheme that is aligned with your financial goals and matches your risk appetite.

Source: Mtilal Oswal

October 12, 2021

How to Invest at A MARKET HIGH

It is that point of the year…the stock market is at its all-time high. All this while you waited for this opportune moment to begin investing. But wait! Don’t lose yourself in the exuberance all around. You never know where the market is heading the next moment.

The questions remain unanswered:

* Is the market going to rise further or is it going to fall?
* Should you be a skeptic and wait for a correction or cheer up and invest right away?

Waiting for a market correction to start investing would result in a loss of opportunity. This is exactly why you should get going immediately. If you keep waiting for a market correction, you will stay stuck. This is why you should invest, even at a market high, as the markets are only going to go higher. Sure, there will be a few hiccups on the way, but the general market trajectory is going to be largely upward-looking.

In case you are a novice investor, this time demands higher levels of composure from your end. Instead of placing impulsive bets and repenting later, sit down and formulate an investment strategy.

Review the entire portfolio

When you initially constructed a portfolio at the beginning of the cycle, markets must have been quite different. Now that so much time has elapsed in between, chances are the valuations might have changed.

The reasons which made you buy that bunch of stocks might no longer be existing. The market leaders might have changed ranks. In such a situation, sticking to laggards might end you in losses. So, use this time to review your entire portfolio. Weed out the stocks which don’t seem valuable anymore.

Re-balance the portfolio

You need to know that market volatility affects your portfolio’s asset allocation. Your original asset allocation might have been in a ratio of say 50:50 (equity: debt). But the steadily rising markets might have skewed the original allocations.

It means that now the ratio must have become say 70:30 (equity: debt). On one hand, it may seem like a lucrative opportunity to accumulate more wealth. But if it is not in line with your risk preferences, you may land in trouble.

You got it right! Your portfolio has now become riskier than you actually can digest. If you don’t want to carry a riskier portfolio, then it is better to re-balance it. Re-balancing involves bringing the skewed allocation to its original asset allocation of say 50:50 in this case.

Diversify your portfolio

Your portfolio might be composed only of small-cap or mid-cap stocks. In a rising market, a concentrated portfolio might increase your chances of losing money. When markets are high, you need to diversify. In diversification, you need to include stocks of different market capitalization. You can invest in large-cap stocks which tend to be stable during such volatility.

Start SIP in mutual funds

For first-time investors, trading in the stock market can be tricky. If that is not your ball game, then go for equity mutual funds. Equity mutual funds give a similar kind of investment experience; although with greater diversification and professional fund management.

You may think of starting a Systematic Investment Plan (SIP) in equity funds. In this, you will be consistently placing smaller bets. Over a period, it will give you the advantage of rupee-cost averaging.

Never invest in something you don’t understand

One mistake you shouldn’t commit is investing in a complicated financial product. Market highs are usually accompanied by fund houses launching sophisticated offerings. You might come across a lot of New Fund Offer (NFO) during this time.

These offerings might promise sky-high returns. However, you shouldn’t get enticed by the lucre, especially when the product offering is not transparent. Ensure that you understand what you are getting into before investing.

Moreover, invest in a financial product that has an investment history of 5 to 10 years. Even if you want to take the risk, don’t invest a lump sum in a single stock or fund.

Goal-based investing

Mapping specific mutual funds to specific goals will help you not only choose mutual funds correctly but also keep track of them in a better way. You can choose mutual funds depending upon the term and the risk profile of the goal.

All said and done, market highs and market lows will come and go. The volatility shouldn’t bother long-term investors. You should keep an eye on your goals and invest systematically.

Source: ClearTax

September 23, 2021

Why Investing in NFOs is not a good idea?

Whenever a fund house launches an NFO, there is a lot of buzz in the market. You see ads everywhere; there are fund manager interviews where they extol the virtues of the new fund’s investment strategy, you see newspapers carrying articles detailing what the new fund is, and a whole lot more.

With so much happening around you, it is quite natural to get carried away and invest. But is it a good idea to invest in an NFO? Before we get into this debate, let’s first understand what an NFO is?

So, what exactly are NFOs?

When an asset management company launches a new fund, it first opens it up for a subscription for select days. The aim is to raise money for buying stocks for the fund’s portfolio and get it off the ground. This entire process is called NFO or New Fund Offer.

In a lot of ways, it looks like an IPO, and that pushes people to buy in the NFO period. But there is no advantage like IPO. We will come to that later.

Now, as per regulation, in India, the NFO duration cannot be more than 15 days for any mutual fund.

After the NFO period, if the fund is open-ended, it starts accepting new investments within a few days. So, you can invest in a fund after the NFO period as well.

If it is a close-ended fund, then an investor can subscribe to the fund unit only during the NFO period and will have to hold it until the end of the duration.

Now you know what NFOs are, let’s look at reasons we believe you should avoid investing in them.

1) No Track Record

The fund being launched is new and therefore has no track record. In the absence of a history, people tend to rely on a fund house’s past performance, which might not be the best approach.

That’s because a new investing strategy comes with its challenges, and you don’t know whether the fund house has the expertise to overcome those challenges.

Also, you only know the broad mandate of the fund. You don’t know what will constitute the portfolio or if it will be able to execute its mandate as intended.

So, if a fund is being launched in a category where funds already exist, picking a fund with a track record makes a lot more sense. You will know what you are getting into as you can evaluate it on various parameters like past performance, risk it takes amongst other things.

Always pick a fund with history and a proven track record over a new fund.

2) NFOs are not like IPOs – There is no benefit of investing in the NFO period

As we said in the beginning, people look at NFOs as they look at IPOs. They think they will get benefitted if the demand for funds increases, just like it happens in stocks. This notion can’t be farther from the truth.

That’s because a mutual fund’s NAV doesn’t get affected by demand and supply.

Here’s why – the number of units available in case of a stock is limited, so their price goes up if there is more demand. On the contrary, there is no limit to how many units a mutual fund can have. Units get created as and when required.

3) Higher cost

Every fund charges a fee to manage your money. This fee is a percentage of the portfolio and gets deducted from the returns generated. In technical terms, it is called the expense ratio.

A higher expense ratio means you pay a higher fee and it affects the returns you get

As per regulations in India, a fund with a smaller Asset Under Management (AUM) can charge a higher expense ratio as compared to a fund with a higher AUM.

Now, since the fund size, when launched is small, the AMC has the flexibility to keep the expense ratio on the higher side.

4) Launch Timing

AMCs launch new funds because they want to complete or increase their product basket, other times it could be because there is a demand in the market for a particular kind of fund. The reason could be any.

So, just because a fund is launched doesn’t necessarily mean it is the right time to invest in that fund category. Especially if the trigger is market demand (you can figure it out by seeing how many similar funds have come in the recent past), it is best to stay away.

But there are a couple of exceptions though:

If the NFO is for a close-ended fund and it fills a gap in your portfolio, you can consider investing. However, you need to be aware of the investing strategy the fund will follow as you will be committing for a specified duration.
When you are getting a discount during the NFO, like the 5% discount Bharat CPSE ETF NFO offered, it might be worthwhile considering them. In the Bharat CPSE ETF, you knew in which companies’ money will get invested (as it is an index fund) and you got a discount as well.

Conclusion

Investing in NFOs is like a shot in the dark. It will be wise to opt for an existing scheme that has a proven track record instead of going for something new or unpredictable.

Even if it is something unique and can be a good fit in your portfolio, wait for some time to see if the theme or investment strategy plays out as intended.

Source: ET MONEY

September 22, 2021

Is PMS investment the right way to invest for you?

1. One way of investing a large amount

Portfolio management services (PMS) is a customized solution for high net-worth individuals (HNIs), it offers greater flexibility with an investor’s money and higher returns too.

So if you have a substantial amount you want to invest, such as say a crore, this service can prove beneficial. But is it the right product for you? Read to find out.

2. How PMS works for an investor

Portfolio management service (PMS) is provided by professional money managers to informed investors and can be tailored to meet specific investment objectives. PMS providers invest directly in securities through focused portfolios.

So one’s account will be kept separate and operated according to his/her investment mandate in a discretionary PMS, where an investment manager takes all decisions in sync with the investor’s goals.

3. How it is different from MFs

Unlike mutual funds, the investors’ assets here are not pooled into one large fund. Portfolio Management Service (PMS) uses a separate bank account and Demat account for each client.

The minimum investment amount is Rs 50 lakh for PMS. You can see the portfolio daily through your Demat account.

4. Higher risk-reward aspect

This structure allows the fund managers to take concentrated calls on their high-conviction stocks without too many regulatory and operational constraints prevalent in a mutual fund portfolio.

It may generate a higher return as the fund manager will have greater flexibility to choose or hold stocks and capitalize on the market opportunities in the smaller and newer companies that may have the potential for high growth. This may lead to a higher risk, which may be best mitigated through a long-term investment horizon.

5. It is a good option if…

If you wish to set this corpus aside for your retirement or in other words, for the long-term, this makes sense. The higher transparency and regular reporting as compared to a mutual fund are also plus points.

Stocks are bought and sold in your name, with the help of a power of attorney, which means you can monitor all investment activities in real-time. As a PMS investor, you may also hold direct interactions with fund managers, should you feel the need.

Source: – The Economic Times

September 14, 2021

5 Most Popular Ways to Save Tax

1. Equity Linked Saving Scheme (ELSS)

As the name suggests, Equity Linked Saving Scheme or ELSS is a type of mutual fund scheme that primarily invests in the stock market or Equity.

Investments of up to 1.5 Lac done in ELSS Mutual Funds are eligible for tax deduction under section 80C of the Income Tax Act. The advantage ELSS has over other tax-saving instruments is the shortest lock-in period of 3 years.

This means you can sell your investment only after 3 years, from the date of purchase! However, to maximize returns from ELSS funds, it is recommended to keep your investments intact for the maximum duration possible.

If you have an ELSS SIP (Systematic Investment Plan), each installment has a lock-in period of three years, which means each of your installments will have a different maturity date.

2. Life Insurance

Life insurance policies can be useful tax planning tools because the policyholder is eligible for tax benefits under the Income Tax Act 1961 (Act).

Though there are multiple modes for saving tax, life insurance is one of the most effective tax planning instruments. Plans from Life Insurance can be used for protection, long-term savings, and tax planning.

3. Health Insurance

Health care plans provide tax benefits. Premiums paid towards your health care policy are eligible for tax deductions under Section 80D of the Income Tax Act, 1961. The quantum of the deduction is as under:

A) In the case of the individual, Rs. 25,000 for himself and his family
B) If an individual or spouse is 60 years old or more the deduction available is Rs 50,000
C) An additional deduction for insurance of parents (father or mother or both, whether dependent or not) is available to the extent of Rs. 25,000 if less than 60 years old and Rs 50,000 if parents are 60 years old or more.
D) For uninsured super senior citizens (80 years old or more) medical expenditure incurred up to Rs 50,000 shall be allowed

4. National Pension Scheme (NPS)

A tax exemption of Rs.1.5 lakh can be claimed on the employee’s and employer’s contribution towards the National Pension System (NPS). Tax benefits can be claimed under Section 80CCD(1), 80CCD(2), and 80CCD(1B) of the Income Tax Act.

A) 80CCD(1), which comes under Section 80C, covers self-contribution. Salaried employees can claim a maximum deduction of 10% of their salary, while self-employed individuals can claim up to 20% of their gross income.

B) 80CCD(2), which is also a part of Section 80C, covers the employer’s contribution towards NPS. This benefit cannot be claimed by self-employed individuals. The maximum amount that an individual is eligible for deduction is either the employer’s NPS contribution or 10% of basic salary plus Dearness Allowance (DA).

C) Under Section 80CCD(1B), individuals can claim an additional amount of Rs.50,000 for any other self-contributions as an NPS tax benefit.

Therefore, individuals can claim up to Rs.2 lakh as tax benefits under NPS.

5. Home Loans

A) Under Section 80C, you can claim a deduction up to ₹ 1.50 Lakh for the principal repayment done in the financial year.

B) Under Section 24B, you can claim a deduction for up to ₹ 2 Lakh for the accrual and payment of interest on the home loan.

C) Under Section 80EEA, you can claim a deduction for up to ₹ 1.50 Lakh for the interest payment of a home loan availed during the financial year.

D) Under Section 80EE, you can claim an additional deduction of up to ₹ 50,000 for the interest payment of the home loan, if you have availed home loan for an amount less than ₹ 35 Lakh and the value of the property is within ₹ 25 Lakh.

E) In the case of a joint home loan, each borrower can claim a deduction of principal repayment (section 80C) and interest payment (section 24b) if they are also the co-owners of the property.

August 31, 2021

Pros and Cons of Health Insurance Portability

The common reasons that force most people to switch health insurance providers, let’s discuss the pros and cons of health insurance portability.

Pros:

1.There is a customization option that comes with portability through which you can easily modify the policy as per your requirements and lifestyle.
2.The existing amount will be clubbed with no claim bonus to calculate a new sum insured.
3.All the benefits of your existing plan will remain in force, even after you opt for portability.
4.Because of the high competition, insurance companies provide existing benefits at lower premiums.

Cons:

1.You can opt for portability only when the renewal date is approaching.
2.You can choose only similar kinds of products.
3.Usually, additional benefits can result in higher premiums.
4.If you want to move from group plans to individual plans, then you might have to lose some advantages that you enjoy with your existing plans.

Health Insurance Portability Rules

Permitted Policy Types

An insured can port only similar policies. For example, if a policyholder is entitled to a reimbursement policy, then he can only port to another reimbursement policy or from one top-up plan to another. However, a family or an individual health plan can also be ported into a similar policy.

Permitted Company Type

A policyholder can port his/her insurance plan from any general or specialized insurance company to the other.

Permitted Renewal

Health Insurance Portability is allowed only at the time of renewal. Also, it is important to renew your health plan on time without any breaks to take advantage of the same.

Permitted Intimation

Those who wish to port their health insurance first need to inform the existing insurance company in writing, which should be provided 45 days before the renewal date of the current insurance policy.

Sum Insured

Policyholders are allowed to ask for an increase in the minimum sum insured at the time of portability. However, its approval depends upon the insurance company.

Acknowledgment

Within three days of the application, the company will inform you regarding your portability request.

Premiums And Bonuses

As per the insurer’s specific underwriting norms, they are free to levy premiums. Therefore, the premiums may vary. However, those who come under the high-risk category may have to pay a higher premium on porting.

Grace Period

In case the application of porting is under-process, then the applicants are eligible for a grace period of 30 days. During this time, the insured has to pay the premium on a pro-rata basis to avail of this feature. As per the IRDA guidelines, the insured cannot be forced to pay the premium for the whole year.

Porting Charges

There are no charges for Health insurance portability.

August 20, 2021

Arbitrage Funds vs Liquid Funds, Which fund suits you best?

While choosing the right investment option most suited to meet your short-term investment need most of you tend to invest in Bank FD or savings account.

However, there are other short-term investment avenues that you can and should explore for your short-term investments. Arbitrage funds and liquid funds are two such investment options that can be considered to meet your short-term investment needs.

Arbitrage funds

These are mutual fund schemes that leverage the price differences in two different markets and thereby earn profits. As arbitrage funds are involved in simultaneous buying and selling of shares and making profits from market inefficiencies, they are considered to be low-risk investments and a safe option to park funds.

The returns generated by these funds depend on the volatility of the underlying asset. As these funds primarily invest in equities, they are categorized as equity mutual funds and taxed like any other equity mutual fund.

Liquid funds

Liquid funds, on the other hand, are open-ended debt schemes, that invest money in debt instruments such as treasury bills, commercial papers, certificates of deposits, and even term deposits, etc. Liquid funds are extremely liquid and have no exit load. The redemptions are processed within 24 hours.

Which fund to choose- Arbitrage Fund or Liquid Fund?

Arbitrage funds gained a lot of popularity after the Union Budget of 2014 when the minimum holding time for long-term capital gains on all debt investments was increased from 1 year to 3 years and long-term tax on equities was nil.

However, now under the new budget, even gains from arbitrage funds would be taxed; 10% if sold after a year and 15% if the holding period is less than a year.

While both arbitrage funds and liquid funds are low-risk, low-return types of investments, there are few things you must compare and choose the investment option most suited to meet your needs.

Time Horizon of Investment

One of the most important things to consider before choosing between the two is the time horizon for which you are looking to invest. If you are looking to invest for a few days or weeks, then you should invest in liquid funds.

Returns from arbitrage funds are dependent on arbitrage opportunities available, which are few.

Thus, for such a short time you may not be able to generate any returns from such funds and hence more suited for investors who are looking to invest for at least 3 months or more.

Tax efficiency

Before you choose to invest in either of the two options, understand the tax implications on your returns. Short-term capital gains on arbitrage funds are taxed at a flat rate of 15% and those from liquid funds are clubbed with your total taxable income and taxed as per your income tax slab.

Thus, the tax efficiency of the investment will primarily depend upon the tax bracket that you fall under. For low-income investors, liquid funds are more tax-efficient as compared to investors in the highest tax bracket.

Similarly, arbitrage funds are more tax-efficient than liquid funds for investors who are in the tax brackets of 20% and above as the short-term capital gains tax is 15% which is lower.

Liquidity of investment

Liquid funds score over arbitrage funds when it comes to liquidity. Redemptions in liquid funds are processed within 24 working hours but in the case of arbitrage funds, the redemption is made within 3 to 5 working days.

Returns

The returns generated by arbitrage funds are slightly higher than liquid funds, especially in volatile market conditions when ample arbitrage opportunities exist.

Exit Charges

The exit charges in case of liquid funds are nil, but there is usually a pre-mature withdrawal charge in arbitrage funds if the withdrawals are in the first few months.

Risk

Liquid funds and arbitrage funds are both low-risk investment options but arbitrage funds are slightly more risky than liquid funds.

While returns on liquid funds are similar to those of bank FDs, returns in the case of arbitrage funds are dependent on the arbitrage opportunities available in the market, which are erratic.

Conclusion

The choice of investment most suited for you will depend on your investment objective. Ideally, investors looking to invest for 6 months or more, especially those in the highest tax bracket should opt for arbitrage funds for better returns and higher tax efficiency

And those investors looking to invest for a shorter time frame or those in lower-income brackets can look at investing in liquid funds to make the most from their investment.

August 16, 2021

What is the Reinstatement Clause in Fire Insurance?

Fire insurance policies often come with a reinstatement value clause, which determines the methodology of claim settlement. Under the reinstatement value clause, the damaged property is replaced by a new property of the same type.

This clause is also called the ‘New for old’ clause as the insurance company is liable to pay for reinstating the damaged asset with a new asset.

Though the reinstatement value clause pays for a new asset or property, the principle of indemnity is followed.

The asset or property replaced would be of the same specifications as the one which is damaged.

In the case of plant and machinery, if the new asset is technologically better than the older one, the insured would have to bear a portion of the cost of reinstating the damaged asset with the new asset because the old asset did not possess the same advanced technology as the new asset.

Thus, the insured is liable to cover the cost of the new technology which comes in the new machine or equipment.

The important provisions of the reinstatement value clause include the following –

A) Reinstatement of the damaged asset must be done by the insured within 12 months from the date of damage or destruction of the asset.

The insured can also apply for an extension in the time for reinstating the asset and if the insurance company allows an additional time, reinstatement should be completed within the extended time. If the timeline is not followed, the claim would be settled on an indemnity basis only.

B) The pro-rata average method would be applied by comparing the sum insured of the fire insurance policy with the reinstatement cost of the entire property on the reinstatement date

C) Reinstatement value clause would not apply if the insured does not inform the insurance company of his/her intention to replace the damaged asset within 6 months of loss. If an extended time is availed, information should be given within the extended period to avail reinstatement value basis of claim settlement.

Moreover, if the insured is not willing to replace the damaged property, the reinstatement value clause would not apply. In that case, the claim would be settled on an indemnity basis

D) Reinstatement of the damaged property or asset can be done at any alternate location as desired by the insured. However, this would be allowed only if the liability under the fire insurance policy does not increase due to a change in location

E) Reinstatement value clauses in fire insurance policies are applied on building, plant and machinery, equipment, etc. which are in a new condition. The clause is not applicable on stocks even when the stock is covered under a fire insurance policy.

F) The sum insured of the policy would depend on the reinstatement value of the asset or property which is damaged

G) Till the time that reinstatement is not done, the liability under the fire insurance policy would be determined on an indemnity basis which is the market value basis.

The concept of the reinstatement value clause should be properly understood when buying a fire insurance policy so that you know how a claim would be paid.

Source:- SecureNow

August 9, 2021

Is this the Right Time to Invest in Balanced Advantage Fund?

Are you looking for a dynamically managed investment? Do you want an investment in both equity and debt securities? You may consider putting your money in balanced advantage funds. It is a mutual fund that dynamically shifts between equity, derivatives, and debt instruments based on market conditions.

AMFI data shows net inflows of Rs 2,711 crore in balanced advantage funds in March 2021 compared to Rs 2,005 crore in February.

You could diversify your portfolio with balanced advantage funds if you are a first-time investor in the stock market. Should you invest in balanced advantage funds?

What are balanced advantage funds?

You have balanced advantage funds, also called dynamic asset allocation funds, as a category of mutual funds introduced by SEBI, the capital market regulator, in October 2017. It is a dynamically managed investment that puts your money in a mix of stocks and fixed income instruments.

You have the fund manager changing the asset allocation depending on market conditions to generate an optimum return with minimum risk for the investors.

For instance, the fund manager of the balanced advantage fund will reduce exposure to equities when stock markets peak and shift funds into debt securities. You would find the profits remaining intact, even if the stock markets correct or crash in a short time.

Should you invest in balanced advantage funds?

You may consider investing in balanced advantage funds only if you have a time horizon of at least three years. It balances holdings between equity and debt securities depending on market conditions to earn reasonable returns with low volatility as compared to pure equity funds. You can invest in balanced advantage funds if this is your first time in the stock market.

You must invest in balanced advantage funds if you want to diversify your portfolio against the pandemic-induced volatility of the stock market. The fund manager uses model-based triggers to adjust allocations depending on market conditions, without an upper or lower cap on the exposure to equity and debt instruments. It helps you earn risk-adjusted returns and attain long-term financial goals.

You can invest in balanced advantage funds if you want to avoid timing the stock market. For instance, balanced advantage funds increased exposure to equity instruments when the stock markets crashed in March 2020 due to the coronavirus lockdown.

However, it earned high returns on investment when the markets bounced back due to the economic recovery post-lockdown. You find automatic asset allocation protecting you from the volatility of the stock market.

You may consider investing in balanced advantage funds through the systematic investment plan or the SIP. It is a facility offered by AMCs that helps you invest small amounts of money regularly in a mutual fund scheme. You get the rupee cost averaging benefit, which helps you average out the investment cost over time.

You can invest in balanced advantage funds if you seek a higher return than fixed income instruments. For instance, lower interest rates in the economy mean you could struggle to get an inflation-beating return from bank fixed deposits.

It would help if you invested in balanced advantage funds as the equity allocation may ensure an inflation-beating return over some time. However, you must invest in balanced advantage funds only if it matches your investment objectives and risk tolerance.

Are balanced advantage funds better than balanced funds?

You have balanced advantage funds as a multi-dimensional investment when compared to balanced funds. For instance, balanced advantage funds may reduce equity allocation to around 30% when stock markets peak.

Balanced funds have a narrow allocation band and don’t offer sufficient protection to your portfolio during overvalued stock markets.

You may find balanced advantage funds as a better investment option than balanced funds for undervalued stock markets.

For example, it can increase equity exposure to around 80% when stock markets correct and generate significant returns over some time. However, a balanced fund cannot match the equity exposure of a balanced advantage fund during undervalued stock markets.

You have balanced advantage funds performing even when stock markets are flat. An arbitrage component takes advantage of the price difference in equity shares between the spot and the futures market. However, balanced funds cannot match this performance as they invest mainly in equity and debt securities.

You may invest in balanced advantage funds if you seek a higher return than a bank fixed deposit. It is a tax-efficient investment for those in the highest income tax brackets. It is suitable for first-time investors in stocks and can be a part of your core portfolio.

In a nutshell, you must invest in balanced advantage funds if you seek reasonable returns to achieve long-term financial goals.

Source:- ClearTax Chronicles