Can an equity fund really make money in a flat market? (Wealth-Forum e-zine)

Kenneth Andrade, CIO, IDFC MF

In March 2008, the Sensex was hovering around the 17,000 levels. The next 12 months can only be described as a bloodbath, with the Sensex dipping to a sub-9000 level. We then saw a sharp recovery in the second half of 2009, with the Sensex clawing back to around 16,000 levels. Since then, we have had a flat market - and even today - the Sensex is still hovering around the 17,000 levels. The last 4-5 years has been quite a forgettable period for equity markets and most equity funds. 

Here is a story of one fund which bucked this trend - and has delivered significant alpha in a flat market. It was launched in March 2008 - just before mayhem hit the markets - and in what has been one of the most difficult periods for equity investing, has done a commendable job of actually delivering wealth creation over the last 4 + years of its existence. And, in its performance, lies an important story - about what really helps a fund manager deliver alpha even in tough times.

Large Caps , Mid Caps or Simply Good Businesses ?

Here is what Kenneth Andrade has to say on this key issue :

The investor today has this question: Which fund to buy Large Cap vs. Mid cap, and are midcaps such a relevant play in the entire environment, if the large caps tend to remain sticky?

Our answer to it has been that whenever we have put a portfolio together, our starting line has always been good businesses and good visibility.

Since 2008 there has been a fairly good cycle of market trenching into 2009, and post that moving up. Our Sterling Equity Fund has been around since the beginning of 2008. It's been through a cycle where valuations were extremely cheap, moved into a cycle where markets went flat and then moved to a cycle where some part of the markets have got very expensive and that essentially is the scenario we have been in, 2008 and till date markets have been virtually flat, 2008 we launched Sterling Equity at a 17k index and the market is still hovering a little below that no, though the fund has generated significant alpha. And in that entire context there has been a huge reshuffling of the environment around us, we moved away from the investment economy, we became a pretty large consumer economy. We moved from distressed corporate balance sheets to stressed balance sheets and we have got into a very interesting cycle of how consumer leverage has started to pick up. In context of that over the next couple of years we will see consumer leverage being one of the key driver to where the environment will essentially lead and consumers or any part of the market which will receive significant amount of money from the system will continue to tier upwards in terms of growth and that should reflect in the underlying market cap.

Sterling's positioning essentially is that we try to buy growth businesses in the mid cap space. The fund actively builds a portfolio of companies with proven business model. The focus is on identifying structural changes in the environment and align companies based on how their valuations stack up within their respective industries.

We try to buy good businesses. The way to effectively do that is to make sure that the companies we are buying are not financially leveraged. The underlying portfolio will be completely diversified, we have our fair share of every other business that forms part of the benchmark index. And we would like to participate over the next cycle.

So we are not really looking at, where in the entire system the environment is placed or whether the FIIs are putting money in the system or not. If the company grows profitability it will attract its entire market and capital into it all. That's the space we operate in, and that's how we would like to grow the entire opportunity.

Disclaimer:

The Disclosures of opinions/in house views incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. Neither the IDFC Mutual Fund / Board of Trustee/ IDFC Asset Management Co. Pvt. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

For any specific questions on the fund pls get in touch with local IDFC Relationship Manager or mail at gamechangers@idfc.com

BREAK FREE FROM MONEY MYTHS (ET Wealth 13th Aug 2012)

Investment decisions based on flawed assumptions could result in suboptimal returns. Here are some widely held misconceptions you should break free from.

Anybody who invests in a basket of blue-chip stocks and holds it for 29 years is bound to be a billionaire, right? Not in Japan. With the Nikkei index at the same level as it was in 1983, the value of the investment would be the same as it was 29 years ago. The Japanese aren’t alone. Stock indices of the European markets are down to 14-15-year lows. Investors in the US and India are a tad better with benchmark indices at their 2007 levels. 

With zero returns after all these years, the cult of long-term investing is almost dead. Yet, financial experts and investment advisers don’t tire of preaching that holding stocks for the long term will make you rich. They profer carefully selected data to show how stocks have made mounds of money for investors over different periods of time. 
Many more such money myths have been perpetuated by investment professionals. Stocks have the potential to earn high returns, but investors should not wait endlessly to book those profits. Over the next few pages, we have examined seven such money myths, which can work against you in certain situations. For instance, it is not always better to buy a house. A young investor should not allocate too much to an illiquid asset like a house too early in life. Also, if the property market is overheated and interest rates are high, it is better to live on rent. 
The mutual fund space is a minefield of myths. Read the reality behind these misconceptions. SIP investments are considered safe and almost a guarantee for better returns. But as we will illustrate, the SIP is just a mode of investment and does not hold out any guarantee of better returns. Buying too many funds with a similar investment mandate only clutters your portfolio without diversifying the risk. Top rated funds are not always the best performing funds. 
Another major misconception relates to the Indian investors’ obsession with assured returns and tax-free income. This makes them invest in tax-inefficient bank deposits and low-yield life insurance policies. We explain how debt mutual funds will be a better option even though you might have to pay a 10% tax on the income. 
Then there is the problem with interest rates on loans. A lay person will obviously choose a loan that comes at the lowest rate of interest, but this can be misleading if you don’t check how the rate has been computed. A flat rate of interest may seem low, but actually works out to be costlier than a reducing rate loan. 
As the country celebrates its 65th Independence day, it’s time for you to break free from the shackles of these ill-conceived notions. ET Wealth will give you all the support you need in your bid for financial emancipation.

MYTH 1 STOCKS GIVE GOOD RETURNS IN THE LONG TERM Indian markets have not generated any returns in the past five years. 
Financial planners like to parrot the widely held notion that stocks give high returns in the long term. The catch is that ‘long term’ is not defined. The Indian markets have not generated any returns in the past five years, but some developed markets are worse. Japan’s Nikkei, for instance, is at the same level as it was 29 years ago. British, German, French, Spanish and Italian markets are where they were 13-15 years ago. There has been some recovery in the US, but the Dow Jones is still at its 2007 level. So, ‘long term’ can be extended as per the convenience of the financial adviser. If his clients don’t get the desired result in three years, he extends the horizon to five years, or even further to 7-10 years. 
Does this mean investors should desert equities and concentrate their investments in the assurance of debt, gold and immoveable property? Certainly not. The journey for the Indian and most other markets has not been flat. There have been bullish phases and bearish periods, each bringing with it an opportunity to book fantastic profits or enter at unbelievably low prices. 
Most planners frown upon the small investor’s attempts to get in when the prices are low and exit when they are high. “Never try to time the market,” they tell him. We agree that you cannot always hope to buy low and sell high. We are not espousing intra-day trading and short-term punting. But booking profits periodically is perhaps the only way to make serious money from a volatile stock market. 
Markets tend to go through mood swings. There are periods of extreme pessimism, when market participants behave as if the stock market is going to close down. We witnessed this in 2008-9. Then there are periods of extreme euphoria, when they think stock prices can only go up. We saw this in 2007 and again in 2010. Smart investors who move against the crowd during these extreme situations, buying during a downturn and selling in a rally, make good money 
How does one spot these entry and exit points? One simple way is to look at the valuation of the broader market as defined by its PE. We examined the PE and Sensex movement in the past 15 years (see graph). On the few occasions that it moved below 12 (1998, 2002 and 2008), it offered great buying opportunities. Similarly, when it moved above 24 (2000, 2007 and 2010), these were signals for exiting. 
This strategy of buying only below a PE of 12 and selling when it is above 24 requires tons of patience. You may have to sit on cash for a very long time. Also, there is a possibility that you might miss some rallies in the interim. “Since we are the second fastest growing major economy in the world, India doesn’t deserve to go below a forward PE of 12,” says Chokkalingam C, group CIO, Centrum Wealth. 
Another strategy is for investors to keep building their positions when the PE is ruling at low levels and start exiting when they have reached higher levels. It should not matter whether this happens in a span of five months or five years.

MYTH 2 TAX-FREE OPTIONS ARE GOOD INVESTMENTS A tax-efficient option will yield higher returns than a tax-free one. 
Bank deposits and insurance policies are the two most popular investments in India. Almost 45% of the total financial savings of households go into bank deposits, while life insurance accounts for nearly 22%. The concern for most investors is the safety of capital offered by bank deposits and tax-free income offered by insurance policies. They don’t realise, however, that bank deposits are not very taxefficient because interest is fully taxable. In the 30% tax bracket, the post-tax return of a 9% fixed deposit is pared down to 6.3%. 
Insurance policies are no better. They offer taxfree income, but the buyer ends up sacrificing too much. The returns from a traditional endowment or moneyback plan is barely 5.5-6%. Instead, it’s better to invest in the PPF, which also offers tax-free income. The current interest rate is 8.8%, but this is linked to the market and could change in the coming years. Also, there is an annual ceiling of 1 lakh on investments in the PPF. 
Debt funds offer investor tax efficiency as well as higher returns. After one year, the income is treated as long-term capital gain and taxed at 10%. Yet, small investors account for barely 1-2% of the total investment in debt funds.

MYTH 3 
DIVERSIFICATION GUARDS AGAINST VOLATILITY Buying too many similar mutual funds does not really diversify your investments. 

One of the biggest advantages of a mutual fund is that it spreads the risk across a basket of stocks. With 30-40 stocks in the portfolio, an investor can be sure that his fund won’t suddenly crash. Though a large number of stocks in a fund’s portfolio diversifies the risk, the same cannot be said for an investor who packs his portfolio with too many funds. If he invests in 10 funds that have a similar investment mandate, he is not really diversifying his portfolio. Rather, he is buying the same basket of stocks through 10 different funds. 
Most diversified equity funds follow roughly the same pattern of investment. The portfolios of the two largest diversified equity funds, HDFC Top 200 and HDFC Equity, are almost photocopies of each other (see table). The pattern gets repeated with minor alterations in other funds as well. ICICI Bank, SBI, ITC and Infosys figure in the top 10 holdings of nearly all large-cap funds. The sectoral allocation is also similar, with the banking sector being the favourite of most diversified equity funds. So there is hardly any diversification if you invest in 5-6 different funds. 
To be fair, you cannot fault the funds for following the herd. A fund has to invest in certain stocks if they are in its benchmark index. The large-cap funds that track the Nifty or the Sensex will necessarily invest in index stocks. It’s only that the percentage allocation to individual stocks will depend on the fund manager’s reading of the market. It is for an investor to look up the fund’s investment mandate before he puts in his money. He should avoid duplicating his investments by buying too many similar funds. 
For instance, a well-diversified portfolio can be a mix of large-cap, mid-cap and multi-cap schemes. Add a dash of sectoral funds if you want a focused exposure to a particular sector or theme. You will have to do a lot more research than a cursory look at the fund’s category and its index. HDFC Equity is categorised as a multi-cap fund and tracks the S&P CNX 500, while HDFC Top 200 is a largeand mid-cap fund with the BSE-200 as its benchmark. But don’t invest in more than 6-8 equity funds, because monitoring them will be a challenge. As investment guru Peter Lynch said, too many funds will only ‘diworsify’ your portfolio.

MYTH 4 SIP INVESTMENTS ENSURE BETTER RETURNS SIPs are not a guarantee against loss and don’t always yield higher returns. 
    You will not lose money by investing through an SIP.’ Mutual fund investors have been sold this story for years. The systematic investment plan is packaged as a panacea to all their investing problems. Don’t fall for it. While SIP investors stand a better chance of getting average returns, it is hardly a fool-proof strategy. Neeraj Chauhan, CEO, Financial Mall, says, “SIP is only a mode of investing, a mechanism that helps you average out your costs over a period of time. They do not not guarantee anything.” 
    The stock indices are almost at the same level as they were five years ago. If you had invested 1.2 lakh as a lump sum in the HDFC Equity fund in August 2007, your investment would now be worth 1.8 lakh. But if you had invested 2,000 a month through SIPs, your total investment of 1.2 lakh would have grown to 1.58 lakh. Unfortunately, this comparison can only be made in hindsight and there is no way to tell the direction of the markets. 
    When the markets are in a downtrend (see case A), a lump-sum investment at the beginning of the period will lose more than the SIP investment. However, if there is a sustained rally in stock prices, the SIP investor will not gain as much as the lump-sum investor (see case B). The real benefit of the SIP investment kicks in when it is continued over a long period of time and across market cycles (see case C). 
    However, SIPs involve investing on a predetermined day of the month. This means you lose out if the market slips during the month, offering a good investment opportunity. They are useful because they match the cash flow of the small investor, especially the salaried individual. He allocates a predetermined sum from his monthly income to the investment. A lumpsum investment is not an option he can consider because he doesn’t have a large investible surplus. Therefore, the SIP route suits him best. 
    Another problem associated with SIP investing is that the small investor often loses his nerve when the markets go into a tailspin. Under the SIP route, by investing at different points of time, you get the benefit of cost averaging, wherein you purchase units in the scheme at different NAVs at each interval. This can theoretically allow you to reduce your purchase cost over time. If you stop investing when the markets are going down, you forego the advantage of buying low and averaging out your purchase price. This can be disastrous for your returns.

MYTH 5 FUNDS WITH HIGHER RATING PERFORM BETTER Ratings are based on past performance and don’t guarantee future returns as well.
Investors in mutual funds often use the fund ratings to decide which schemes to choose from among the hundreds available. Though the rankings are based on robust statistical analyses and widely used methods of assessment, many investors read too much into these. This can lead to suboptimal investment decisions. 
It’s important to note that ratings are based on the past performance of schemes. They do not serve to make a judgement about their future performance. Also, they are based on the percentile score of the schemes. A scheme’s performance is not seen in isolation but is rated on the basis of how it performed relative to the other funds in the category. For instance, the top 10% funds are assigned a five-star rating, while the bottom 10% funds are branded one starrers. 
Market regulator Sebi has acknowledged how the ratings can be used to misguide investors. In February this year, it banned fund houses from mentioning ratings in their advertisements. Only certain funds, including capital protection funds, which require Sebimandated ratings, are allowed to mention these in ads. 
Secondly, ratings can change over time. A five-star fund’s performance may decline, turning it into a four-star or even a threestar fund. An investor who goes strictly by the rating may then have to rejig his portfolio and shift to a five-star fund. Investors should also note that fund ratings work on a ‘one size fits all’ rule. They don’t tell whether the scheme is suitable for different types of investors. So a multi-cap equity fund with an aggressive mid-cap orientation may have a very high rating, but it will not suit a conservative investor seeking low but stable returns. 
A fund’s rating, by itself, does not tell you whether it is a good investment or not. So investing in a fund based solely on its rating would be inappropriate. At best, fund ratings can serve as a starting point, says Dhruva Raj Chatterji, senior analyst at Morningstar India. “These fund ratings can be used for initial screening to identify a broader set of funds, but the investor should also look at other factors before choosing a particular fund.” 
We looked up the performance of diversified equity funds between September 2007 and August 2011. The results were surprising as well as instructive. Four-star rated funds, on an average, were the best performers during this period. The bigger surprise was that even the average two-star and three-star funds did better than the average five-star fund. However, this is based on the ratings assigned in 2007. They may have changed over the years. A five-star fund in 2007 may not have retained such a high rating or a two-star fund might have risen in rank.

MYTH 6 BUYING A HOUSE IS BETTER THAN RENTING Not when real estate prices are overheated and interest rates are high. 
Almost everybody dreams of owning a house. No more pushy landlords, poor maintenance and annual rental hikes. Plus, there is always a feeling of uncertainty when the lease is due for renewal. Owning a house frees you from a lot of worries. 
Or so you think. Being a home owner has its own sets of problems. It might seem counterintuitive, but experts say that one should not invest in real estate too early in life. It’s a bigticket investment that ties you down to a location and prevents you from investing in other, perhaps more lucrative, avenues. If your career is on the fast track, anchoring yourself to a particular city might mean forgoing emerging job opportunities in other locations. A big EMI can become an albatross around your neck just when you are finding your feet in the corporate world. 
Even older and deep-pocketed buyers need to rethink before they take the plunge. Real estate is an illiquid investment that doesn’t allow partial withdrawals. The entry load is very high and disposing of the property can take several weeks, even months. If your job involves a lot of mobility, it may not be a good idea to block your money in immoveable property. If you choose not to sell the property, you will end up servicing an EMI as well as paying rent for the house in the new location. “If one doesn’t plan to stay in one location for 4-5 years, I will not suggest he buy a house. Leasing is a better option for him,” says Pankaj Kapoor, managing director of real estate research firm Liases Foras. 
Buying a house makes sense if property prices are low but are expected to rise soon and capital is cheap. Right now, all three conditions have crosses against them. Property prices are high, especially in some overheated pockets in the metros, and there are indications that the real estate market is likely to stagnate in the coming months. “If you are undecided about the location or the price, renting a property would probably be a better option,” says Badal Yagnik, managing director, Chennai & Coimbatore, Jones Lang LaSalle India. 
Many home buyers are encouraged by the prospect of not having to pay rent, but keep in mind that bidding rent payments goodbye also means saying hello to home loan EMIs. Home loan interest rates are ruling above 12% right now. Remember that unlike landlords, banks can’t be cajoled in case your rent is late. If you miss the EMI, there’s a double penalty slapped on you—from the lender as well as your bank. The rental market, on the other hand, offers a better deal. You can rent a house for a fraction of what you will have to shell out as an EMI. In Noida, a suburb of Delhi, a 2-BHK house can be rented for 15,000-20,000 a month. The price tag of the same property can be as high as 80-90 lakh. If you take a loan of 50 lakh at 12% for 20 years to buy a house, you have to pay an EMI of 55,000. 
The case against buying becomes even more compelling if you are an investor, not an end user. The rental yield, which is the annual rent of a property as a percentage of its market price, has steadily dipped in urban areas. In overheated markets, it works out to merely 1-1.25%. In other words, a 1 crore property will fetch a monthly rent of only 8,000-10,000. Experts say that if the rental yield is below 4%, the investment is not worthwhile. This is especially true if the cost of capital is high. What you pay as interest on the loan will neutralise any gain from the property.

MYTH 7 TAKE A LOAN WITH THE LOWEST INTEREST RATE Flat rate of interest may appear low but works out to be costlier than a normal loan. 
Planning to buy a car? When you take a loan, make sure you understand how the interest rate on the loan is calculated. Lenders offer loans with different terms and conditions and the lowest interest rate may not always be the best deal. 
The flat rate of interest is a widely used trick that creates a financial illusion in the mind of the borrower. The flat rate is arrived at by dividing the total interest paid on the loan by the number of years. It will obviously appear lower than the interest rate calculated on a reducing balance basis. What the borrower does not realise is that he is being charged for the entire loan amount even though the outstanding amount reduces progressively with every EMI. As the graphic shows, a flat rate of 10% is a lot more expensive than a normal reducing rate of 12%. 
Another trick is to ask for one or two EMIs in advance. This seemingly innocuous clause pushes up the effective interest cost for the borrower. This is because the actual loan disbursed is reduced by the amount of these advance payments even though the borrower is charged for the full amount. As the graphic shows, a loan at 9% with one advance EMI will actually cost the borrower more than 18%. Similarly, two advance EMIs will push up the effective cost of a three-year loan to a prohibitively high 20%. In a new trend, some banks are insisting on the borrower parking some money in a fixed deposit with them. The rate of interest offered on these deposits is not very attractive but some borrowers have no choice. They are forced to agree to the terms and conditions laid down by the lender. This also pushes up the effective interest on the borrowing, though the difference is not as significant as in the case of loans with advance EMIs. It’s best to stick to the normal reducing balance calculation when comparing interest rates. To avoid confusion, ask the agent to quote the EMI per 1 lakh. This normalisation of quotes will help you compare the offers of other lenders. Home loan borrowers should also watch out for certain misleading tactics used by lenders. They are enticing new borrowers with lower rates, but don’t get carried away by these special offers. The catch is that instead of bringing down the base rate, to which all home loans are linked, they just bring down the spread between the base rate and the rate charged to the customer. Turn to page 21 for a detailed story on how this could affect your home loan.

What You can Learn from a Slowdown and Profit from it (ET 16th Aug 2012)

Even in this era of gloom, an individual can create wealth by being prudent and investing in the right financial products, says Vidyalaxmi

Slowdown. The word features in every conversation these days. Stock market gurus advise you to tread with caution because of the slowdown. Your boss tells you to be patient for a better hike; again, because of the slowdown. The slowdown menace has even forced you to cut short your holiday abroad this year... In short, the uneasy presence of slowdown is a permanent feature in the lives of most common folks these days. 

KEY SIGNS “A slowdown is a situation in which GDP (Gross Domestic Product) growth slows down but does not decline,” says Dipen Shah, head of fundamental research at Kotak Securities. For example, if the GDP growth of any country goes down from 5% to 3%, the economy can be said to be experiencing a slowdown. “It is a period of slow economic growth, especially the one that follows a period of high growth.” A slowdown can be interpreted in several ways. “From an economist’s perspective, a slowdown means lower IIP growth, lower power generation, slowdown in automobile, lower growth in cement dispatches, etc,” says Rajesh Kothari, MD, AlfAccurate Advisors. 
For individuals, it could be a single-digit increase in wages or no pay hikes or even pay cuts. They would also notice that there are few or no new property launches, hiring freezes, sales and discounts in non-sale months, and downsizing in corporate travels and other perks. “For an individual, it means prices are shooting up without the corresponding increase in income. Investments may also not do too well, especially if it is related to equities,” says Suresh Sadagopan, certified financial planner, Ladder 7 Financial Advisories. However, typically an individual would notice the impact of a slowdown only when it is in an advanced stage and it starts pinching his wallet badly. “As an example, when Infosys employees came to know they are not going to get an increment, they knew they are in the middle of a slowdown,” says Suresh Sadagopan. 

INCOME AND FUTURE EARNINGS A slowdown reduces employment opportunities. “Further potential raises or pay hikes may be put on hold or become more modest than in the past. In some cases, it may even lead to job losses since managements’ focus may shift from growth to improving productivity,” says Vishal Kapoor, head (wealth management), Standard Chartered Bank. Since the bargaining power of the employees diminishes, they may have to endure salary cuts, increased working hours, tougher appraisals, and so on. “However, if one is able to build on one’s skills (say, through executive education courses or vocational training) during this period, they will surely be better positioned to take advantage of the next upswing,” says Jayant Pai, certified financial planner, Parag Parikh Financial Advisory Services (PPFAS). 

IMPACT ON CONSUMPTION “When people read these news, they tend to spend less as they are uncertain about their future and save somewhat more. In our case, saving more also is a bit of a problem due to the persistent high inflation,” says Suresh Sadagopan. Sure, one can’t cut down on spending on basic necessities, but discretionary spending, like on automobile and holidays, could take a back seat. “Since discretionary consumption (such as holidays, purchase of automobiles, etc.) may be put on hold, all sectors dependent on such expenditures are adversely affected. This in turn affects the economy overall,” says Jayant Pai. “In a high interest rate regime, consumers may also shy away from loans. Government policy measures can try to stimulate demand by encouraging consumption to move the economy out of recession in a primarily a consumption driven economy,” says Vishal Kapoor. 

IMPACT ON INVESTMENTS “Volatility can offer good opportunity for those who understand and have experience of investing in risky assets. There is often attractive value in many investments, presenting opportunities to lower average price or buy into afresh,” says Vishal Kapoor. “There may be a few sectors which are either not impacted by domestic economy (IT or other export oriented sectors) or are relatively less impacted. Also, in all sectors, there will always be companies which have strong balance sheets and managements,” says Dipen Shah of Kotak Securities. These companies will be able to tide over the slowdown. Such stocks should be identified for investments. “Investing through SIPs in a couple of diversified equity funds could be more effective over the entire economic cycle,” says Jayant Pai. “Capital protection often becomes a key requirement, and a mix of debt and equity strategies that provide capital protection based strategies have been relative outperformers as well,” adds Kapoor.

What to Do When Your Insurer Sets Caps on Group Health Plan - ET (8th Aug 2012)

Preeti Kulkarni & Vidyalaxmi offer some solutions to employees when insurers and cos shrink their group cover benefits

All good things, it is said, comes to an end. And the rule may hold true for group health policies, too. Soon, employees covered under these schemes could see their benefits shrink when their corporate policy comes up for renewal. For instance, there is talk about public sector insurers hiking premiums or bringing in a co-pay clause, where the policyholder has to share the burden with the company. This is due to the pressure from the finance ministry to stem losses in their group health portfolio. Industry-watchers say that the entire group space — including private sector insurers — is moving in this direction. Irrespective of whether your group cover is subjected to new terms or not, you would do well to treat the development as a wake-up call. “For instance, while deciding the sum insured, corporates normally offer same coverage for a certain scale or grade of employees as they try to limit their premium outgo per employee. As a result, the sum insured could be grossly insufficient,” points out Divya Gandhi, head, general insurance and principal officer, Emkay Insurance Brokers. “Or, they could even have ailment-wise sub-limits or capping.” Parental coverage is another key benefit that has taken a hit over the last couple of years. Many companies have withdrawn or scaled down the cover offered to employees’ parents. 
This means you need to proactively work towards ensuring comprehensive protection for yourself and your family. 

• BUY AN INDEPENDENT HEALTH COVER 

The best remedy for lack of group cover or its inadequacy is, undoubtedly, buying a standalone health cover. In addition to acting as a back-up, this arrangement has other benefits too. For instance, most group schemes cover pre-existing diseases (PED) right from inception, whereas independent covers usually prescribe a waiting period of 1-4 years. Therefore, being simultaneously covered under group and standalone policies will ensure continuous coverage for pre-existing illnesses. 
For your family’s health expenses, family floaters can be considered, as they are cost-effective. However, in case your parents have crossed the age of 65 years and have adverse health history, it would be wise to buy a separate policy for them. You can also look at purchasing a fixed benefit policy – offered by life insurers – to supplement your group cover. 
Fixed benefit policies undertake to disburse the pre-defined amount even if you have already made a claim under an indemnity-based policy (like group covers, or individual policies, where expenses actually incurred are reimbursed). “The key advantage of benefit policies is that policyholders do not have to worry about claim settlement as they know beforehand the amount that would be disbursed. Also, the documentation procedure is simpler,” says Gaurav Garg, CEO and MD, Tata-AIG General Insurance. You can use the lump sum pay-out under defined benefit policies to take care of your recuperation expenses. 

• SETTLE FOR A TOP-UP COVER 

The second-best option is to go for a top-up cover, as they are cheaper than individual policies. As the name suggests, it gets triggered when your base policy – in this case, your group cover – falls short of your requirement. “Some top-ups restrict their coverage to major ailments listed in the policy. Besides, they could specify that claims would be entertained only if the single claim is larger than your individual or family sum insured offered by the base policy,” says Gandhi of Emkay Insurance Brokers. Therefore, read the policy brochure carefully while signing up for a top-up scheme. 

• SIGN UP FOR TOP-UP OPTIONS WITHIN GROUP COVER 

“Several organisations are teaming up with their group insurance providers to offer their employees the choice to opt for a higher sum insured (top-up) covers which addresses the need for higher medical costs. The arrangement requires the employee to bear the premium for the additional sum insured,” informs Sanjay Kedia, CEO, Marsh India, an insurance broking firm. These add-ons score over independent top-ups in terms of the nature of benefits. Since group covers are customised offerings, their utility value tends to be higher. Don’t forget to keep an eye on the terms and conditions, though. While some schemes cease to exist once the employee quits the organisation, others continue to be in force, regardless of the employment status. 

• PAY FOR PARENTS’ PREMIUM IN GROUP POLICIES 

Increasingly, companies are leaving out employees’ parents from the group policy’s scope of coverage. However, some employers extend the cover to parents, provided the employee shells out the relevant premium cost. If your employer falls in this category, you should not hesitate to opt for the cover even if it means dipping into your pocket to fund the premium. For, not only do corporate policies cover pre-existing illnesses even in the initial years, but also, usually, offer additional benefits as they are customised for the organisation. Besides, the claim settlement process is also likely to be smoother. 

• OPT FOR LINKED STANDALONE COVER AFTER RETIREMENT 

Some general insurers are promoting schemes where the insured employee can move to an individual policy upon retirement or job switch. The key benefit is that it eliminates the need to serve the waiting period for PED (pre-existing diseases) cover all over again. Remember, even if the insurer providing your group cover does not market the scheme actively, you can always enquire about the same. As per the portability guidelines released by the Insurance and Regulatory Development Authority (Irda), porting from group to individual policies is permissible. So, you can convert your group cover into an independent policy while retaining all the continuity benefits. However, at the time of making the initial switch, you will have to stick to the existing insurer. Thereafter, you will be at liberty to shift to any other insurer.

All you need to know about 'rental agreements' - Outlook Money

By Pankaj Anup Toppo

Once you have zeroed in on the person, you wish to rent out your property to, you are expected to hand over possession of the property to him/her only after the mutually agreed terms and conditions under which the property is given on rent is put before each other. This document is called the ‘rent agreement’ or the ‘lease agreement’. Typically, the rent agreement is prepared by the real estate agent hired by you and your tenant. To validate the agreement, both you and your tenant ought to sign the agreement in the presence of two people who are non-beneficiaries of your property and will sign on the agreement as witnesses. In most cases the real estate agent doubles as one of the witnesses.

To give more teeth to the rent agreement, rather than just getting it notarised you should insist on getting the same registered by paying the necessary stamp duty. However, for that you will need to pay the necessary stamp duty and most real estate agents, who are well versed in the business are adept at making a registered agreement which is way simpler than a sale agreement running into two or three  pages. However, here are a few things to consider.

Duration of lease. Make sure that the duration of the lease is clearly mentioned in the agreement. It must have the start date and the end date of the rental term period. Typically, most rent agreements of the residential property market are for a period of 11 months. Also a clear mention of the terms and conditions under which the agreement can be renewed after it expires should be incorporated in it at the outset.
Further, you must include a clause clearly stating the process in which this agreement can be terminated before the mandatory 11 months. The clause should clearly state both your (lessor) rights as well as the rights of your tenant/lessee to avoid any confusion.

Date of rent payment. A clear mention of the date, on or before which the rent has to be paid must be mentioned in the agreement. However, a practice prevalent today is accepting post-dated cheques for the entire duration of the lease, but there must be a mention of the cheque numbers handed over to you in the agreement and the repercussions if the cheque/cheques bounced.

Regular maintenance. A clause clearly stating who will be responsible for regular repairs of the property must also be incorporated in your agreement. Typically, minor repairs of the property are taken care of by the tenant. But it is your responsibility to ensure that the property is handed over for possession in good shape. This would mean that all electrical and water connections are in working condition, the electricity meter and water motor are in running condition.

Previous bills. While utility bills like those for water, electricity and so on will be taken care of by the tenant, on your part you will need to ensure that all bills generated before the new tenant has moved in have been cleared. Most often, duration of the bill generation may not match with the occupancy period of your new tenant; so there must be a clear understanding of how that short duration bill will be cleared. 
Draft an agreement according to your needs. Remember, this is the single most important document that will protect not only your rights as a lessor but your property.

IN BRIEF
When accepting post-dated cheques for the entire duration of the lease, mention the cheque numbers 
handed over in the agreement and the repercussions if these are dishonoured.