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Ask us: on financial savings, investments and medical health insurance

Q. I had been investing via SIP since November 2018. The duration of my investment is one year. What should I do with my capital when the duration gets completed so that I can earn or save more?

A. We suppose you are viewing your systematic investment plans (SIPs) in mutual funds (MFs) like FDs (fixed deposits). In FDs there is a capital component and there is interest. The capital will remain fixed and your interest will accrue based on the fixed rate promised. However, with MFs, even the capital may fall when the market falls. This is because MF performance is linked to the stock or debt market. However, in the long term, you can expect return on capital, which is called capital gains.

Unlike FDs that have a fixed tenure, SIPs do not mandate a fixed tenure. You may choose SIPs for any time frame. The important thing is for you to choose the goal for which you are investing through a SIP and keep your SIP running until you are closer to your goal. For example, if you are running this SIP for retirement, then continue running it until six months to one year ahead of your goal and then shift the money to safer avenues.

Do an annual review of the performance of the funds and make sure you are invested with steady performers. Do not worry much about short-term falls in your fund. SIPs, especially in equity funds, need at least a 3-5 year time frame to average your costs (that is buying through ups and downs in the market) and deliver returns. Do not enter SIPs in equity funds with a time frame of less than five years of holding.

Now, to answer your question, unless you need the money for a specific purpose, continue with your SIPs, make sure you have invested in the right funds. Increase your savings over time. Else, stop the SIP and start investing in another fund. If you are savvy, choose your funds; else take the help of a financial advisor, outside of your bank relationship manager.

Q. I’m 24 years old. I am working in a company. I get ₹60,000 a month in my home town. Naturally, this obviates my rental expense. I want to invest in real estate to increase my passive income. Please advise.

A. Our suggestion would be that you save to build wealth for long term and not lock yourself at this juncture into paying EMIs.

About a third of your income will go away even if you have to repay a ₹20-lakh loan in 10 years. Also, when you are talking of passive income, a plot will not generate income. It can only generate profit when you sell, depending on the location of such plot, other legal issues being clean. Hence, in our opinion, for passive income generation, property will not be an option.

However, unless you are going to buy a house in top cities, the rental yield in most tier II and tier III cities and the peripherals of large cities will be around 1.5-3%. That is, this will be the return on the investment you will make. As you know, this is much lower than even an FD return.

Hence, our suggestion would be that you use your early years to save and invest well in good fixed income products like deposits, PPF and combine them with market-linked products such as MFs, NPS and equities. This will give you a very good head start when you get into other commitments and responsibilities later in your life. As your income increases and you are settled and know which city to settle in, you can consider buying a property.

Complete your coverage

Q. I am a Central government employee aged 56 years. I am planning to take health insurance. Please suggest a suitable health insurance policy and the premium to be paid monthly. I am prepared to pay ₹1,000 every month towards such insurance.

A. Central government employees have the Central Government Health Scheme (CGHS) that bears certain defined medical expenses, mostly in government health care facilities and to a certain extent, at private sector facilities.

If you buy a separate health insurance policy you can claim under it in case of hospitalisation in a non-CGHS facility. For expenses over and above what the policy covers, you can approach CGHS. After your retirement, too, you can maintain your CGHS cover by making the requisite payments for coverage.

A basic hospitalisation policy to suit your budget premium would bring you a coverage of only ₹3 lakh or less, depending on your health status. You may be better off with a top-up or super top-up policy with a threshold designed to suit the limits of your CGHS entitlement level and this policy would cost relatively less by way of premium.

You can check various permutations and combinations for coverage, threshold and premium on insurance company websites which usually have a premium calculator.

Insurance for your family should also be a factor of the extent of CGHS coverage available to them.

If they are not sufficiently covered, then please take a basic hospitalisation policy for them, or else, top-up/ super top-up policies would work better. In the basic policy, you can opt for a floater cover where the premium would be less than individual covers, as the same SI is shared by all the insured.

Q. My son is currently two years old. I would like to know whether there are any specific investment plans in LIC where I could make monthly investments and earn a lump sum amount by the time he reaches 16/20 years of age, so that I could use the same for his educational needs.

A. You should look at a range of children’s plans offered by life insurance companies for your requirement. They would typically bear a name similar to ‘Child Plan’ and would be endowment, money-back or unit-linked insurance policies in nature.

These plans offer a lump sum or income stream at defined intervals and/or a defined maturity date of your choosing. This would be when your son is 16 to 20 years of age, in your case.

These policies would include a life cover for the parent/s so that the child is financially secure should the unfortunate happen before the maturity of the policy. A premium waiver would also be available from then until the maturity date. At that point, the lump sum or income stream will materialise as planned which can be used for college admissions and related expenses.

All these are insurance plus investment plans, so a part of your premium goes towards a life cover and a part towards investment for a return.

If it is an endowment or money-back plan, usually the returns are modest but secure and the investment plan is internal to the life insurance company. The quantum of these returns may or may not be defined.

In a ULIP policy, the investments made using your funds are transparent and you have a certain flexibility in choosing the risk level you are comfortable with. However, you bear the entire risk of the investment and the maturity value depends on the capital market situation on the maturity date.

(Vidya Bala is a personal finance research expert and K. Nitya Kalyani is a business journalist specialising in insurance and corporate history)


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