Model Tenant Act, 2021 is very soon going to be a reality in India and it’s mainly to set up the rules and protect the rights of tenants and property owners from each other.
The rental market of properties is a very vibrant and deep market in India and every year millions of people rent out properties (residential and non-residential) in India.
At one end, tenants think that property owners are bloodsuckers, who just want to withhold the security money at any cost and try to dominate them. On the other hand, property owners feel tenants are also horrible who do not care for properties and do a lot of damage which forces them to keep enough security deposit with them.
10 Important Rules under Model Tenancy Act 2021
Many times, though an agreement is made legally, on the ground level things don’t work out and there is a lack of professional relationships. This Model tenancy Act 2021 is trying to exactly solve this and wants to lay down enough guidelines, rules which will help both parties.
Here are some of the most important rules you should be aware of the model tenancy act, 2021
1. Heavy Penalty if the tenant does not vacate premises on time
Once the agreement is over, there is a maximum of 6 months of extension on the same conditions and rules which are mentioned in the agreement. But if even after this 6-month extension, (or if the tenancy is terminated by notice or order) the tenant does not leave the premises, then there are heavy penalties levied on them. They will have to pay double the rent for the first 2 months, and then 4 times rent for another 2 months and then 6 times the rent for another 2 months.
2. The security deposit can’t exceed more than 2 months’ rent
As per the law, the security deposit which homeowners take from tenants can’t be more than 2 months of rent. In cities like Bengaluru, one has to deposit the security deposit as high as 10-12 months of rent, which many tenants complain about. However, at the same time, a lot of homeowners feel, it’s too little money to cover the risk of having the premises damaged by the notorious tenants. Note that this limit of 2 months’ rent is only for residential properties. In the case of non-commercial premises, the security deposit can be a maximum of 6 months’ rent.
On Twitter, Krish gave his real-life example which shows us how 2 months of the deposit is not enough in real life for property owners
All wood work gone, taps broken, geysers gone, electrical wiring got burnt, dampness & cracks on the walls, painting peeled off, tiles broken in bathrooms, huge dust in lot of places.
I was abroad and couldn’t visit. Full interiors redone and sold off for peace of mind.
3. Separate Rent authorities, courts & tribunals set up in each district
A separate 3 tier system will be created in each district for handling the cases related to the rental market. A civil court will not have jurisdiction over these cases which come under Model Tenancy Act. At the first level, there will be rent authority, then a rent court and finally a rent tribunal will be set under each district. This will make sure that a separate resolution system will be set up for these things.
4. Written Agreement is mandatory
Now a written agreement is mandatory when any premise is given on rent. I guess anyways most of the people were making a proper agreement, but now it’s a law in itself. This agreement is also to be submitted to the concerned rent authority within 2 months of the agreement date. There will be some digital platform that will be set up for this as per the current wordings.
5. The landlord cannot stop the essential supplies of the premises
It mentioned that the property owner cannot stop the supply of any essential supply like water, electricity etc. just because there is some dispute with the tenant. In real life, it’s seen that if there is any dispute or argument, the homeowners take these steps to “teach a lesson” to the tenants. It is mainly to protect the rights of tenants as far as they have occupied the premises. If the homeowner still does this, the tenants can complain to the rent authority and order can be passed by them to restore the services and also put a penalty on the homeowner
6. No structural changes or sub-letting of property
The tenant cannot make any structural changes in the property, nor they can sub-let a portion of the property to someone else without the consent of the property owner. If sub-letting is to be allowed, a supplementary agreement has to be made and even that has to be submitted to the rent authority
7. Eviction of the tenant on certain grounds
If the tenant has to be evicted, then the property owner can’t just appear one day and order the eviction. It has to be done only by seeking eviction through the rent authority and it can be done on certain grounds like
refusal to pay the agreed rent ;
failure to pay rent for more than two months;
parting of possession of part or whole of premises without the written consent of landlord;
misuse of premises even after receiving written notices to desist from such misuse; and
structural change by the tenant without written consent.
8. Rent Revision can happen only as an agreement
The rents can’t be increased arbitrarily now, it has to happen only as per the agreement which was written and agreed on. This will help the unorganized rental market where many times, homeowners increase the rent many times just to make sure people leave the house on their own.
9. Respect of Privacy and Rights of Tenants
The law also tries to establish the fact that once the tenant has occupied the house, the property owner can’t treat them in the wrong way and can enter the premises anytime without notice just because of the fact that they are the owners. They have to inform that tenant about their visit 24 hrs. before the entry (through an electronic medium). No doubt that this is not applicable if your relationship with the other party is cordial and friendly. This point is mainly there to protect their rights and privacy.
10. Roles and Responsibilities of both parties
The law also defines the roles and responsibilities of landlords and tenants and tells what has to be fixed by whom. For example, It is the tenant responsibility to do most of the repairs and replacement of small components like Wash Basic Repair, Taps, switches and sockets. On the other hand, the landlord is responsible for the whitewashing of walls (hello Bengaluru). In the 2nd schedule of the act, all the details are given which I am putting below
Important Points
These rules will not be on a retrospective basis and will not impact the old agreements. It’s only for new one’s
These rules do not apply for premises like hotels, lodges, or any central or state govt owned properties, or even premises owned by corporates, universities or religious entities etc
Will Model Tenancy Act 2021 really work on the ground level?
Many people raised the point of this act will really work at ground level or not. One person said to me on Twitter that the Indian rental market is a seller’s market and all these laws won’t work, as property owners will also find some other way to get away.
I feel that over time, the law will get implemented, if not in short term. The country is huge and any law like this takes a lot of time to get into the system. But the good part is that at least govt is thinking about this issue and trying to fix things. The law may not be 100% perfect, but things get amended over time and that will happen with this one too.
One feeling which I was getting is that the law is trying to micro-manage many things and in real life, I think it should have not done that.
What do you think about this new law? Please share your opinion in the comments section below
Today I will tell you about loan against property (LAP)
If you have a property that is free from any loan, then you can take a loan by keeping that property as collateral
Loan Against Property (LAP)
A Loan against Property (LAP) is a secured loan availed against a commercial or residential property kept as collateral with the lender. As the funds come with no end usage restriction, borrowers can utilize the funds for various purposes such as business expansion, weddings, child’s education, etc.
Benefits of LAP –
Simple approval process
Attractive interest rates
Continuous ownership
Easy and hassle-free documentation
Optimum use of a property
Claiming the interest as expenses (only for business person)
Eligibility criteria for LAP
A loan against property is offered to the following individuals –
a) Salaried– An individual who is in permanent service in the government or a reputed company. Further, he/she should be above the age of 24 years at the time of loan commencement and up to the age of superannuation.
b) Self-employed Businessmen – Any individual filing Income Tax Return (ITR) and who is over 24 years of age at the time of loan commencement and up to 65 years at the time of maturity.
c) Self-employed Professionals – Professionals such as doctors, engineers, dentists, architects, chartered accountants, cost accountants, company secretaries, and management consultants can apply. The age criterion is similar to that of self-employed individuals.
Documents required for LAP
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Salaried Individuals
Self-Employed Professionals/Businessmen
Application form, photograph attached
Application form, photograph attached
Valid photo identity (such as Voter Id card, Passport, Aadhaar Card, Pan Card, Driving License)
Valid photo identity (such as Voter Id card, Passport, Aadhaar Card, Pan Card, Driving License)
Proof of current residence
Proof of current residence
Latest salary slips (minimum 3)
Proof of business existence, Certificates of educational qualifications
Form 16
For Professionals – Last 3 years IT returns (self and business), Last 3 years Balance Sheets and P&L statements.
For Businessmen – The business profile, Last 3 years IT returns (self and business), Last 3 years Balance Sheets and P&L statements.
List of Directors and Shareholders with their individual shareholding certified by a CA / CS in case of the business entity being a company.
Memorandum and Articles of Association of the Company.
A partnership deed in the case of the business entity is a partnership firm.
Bank statements of the last six months
Bank statements of the last six months – both business and personal in case of businessmen
A cheque for processing fee
A cheque for processing fee
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FAQs –
What are the types of properties against which LAP can be taken?
Self-Owned and Self-Occupied Residential Property
Self-Owned but Rented Residential Property
Self-Owned Piece of Land
Self-Owned Commercial Property
Self-Owned but Rented Commercial Property
Can I take a loan against the property for any reason?
Loans against the property can be taken for the following purposes. They are as follows –
For Business Expansion
Getting your son/daughter married
Sending your son/daughter for higher studies abroad
Funding your dream vacation
Funding medical treatments
What is the maximum loan amount a person can get in LAP?
The maximum loan amount a person can get against LAP is up to Rs 25 crore. However, the LAP should not exceed above 60% of the market value of the property. The maximum loan availed will vary from bank to bank.
What is the minimum credit score required to get a LAP?
What can be the maximum repayment tenure and interest rate of the LAP?
The maximum repayment tenure of LAP is 15 to 20 years. Whereas the interest rate will vary from bank to bank but the interest rate will range somewhat between 9.80% p.a to 16.60% p.a.
Conclusion –
This was all that I wanted to share in this article. You all can post queries in the comment section.
Today we are releasing a FREE, very exhaustive and detailed google sheet for everyone which can act as a single point of information for your family to access all your data and information related to your financial life.
In this COVID Pandemic, a lot of families lost a family member and in many cases, it was the main breadwinner of the family. This left them in a situation where they had no idea about the insurance and investments made. They had to literally find each and every small piece of information from scratch and it was a very frustrating experience.
A lot of this be avoided if one just creates a master document file (also called as BlackBox file) and save all the information in that and share that file with their family.
Can I request you to like the tweet and also retweet the same so that it can reach more and more people.
What all does this BlackBox file has?
Various Investments Details
Various Insurance Details
Various Contact Details
Various Important ID
Assets and Liabilities Section
Checklist of what to do after the death of account holder
Term Insurance Claim Process
Banking Claim Process
Mutual Funds Claim Process
PPF & EPF Claim Process
NPS Claim Process
Property Claim Process
Demat Claim Process
Video on 20 things to do post-death of a family member (English & Hindi)
Intro video on about this Sheet
Please copy the master file in your google account and fill it up and then share it with your spouse/family members. Do share this link in your office platform or other WhatsApp groups you are part of.
Also, do share your feedback about the sheet and if you liked it?
Do you exactly understand what the Claim Settlement Ratio in Insurance is?
A lot of people just look at the claim settlement ratio and make an opinion about an insurance company. In this article, let me break some myths and help you understand more about the claim settlement ratio.
What is Claim Settlement Ratio?
In simple words, the claim settlement ratio is the percentage of claims paid in a financial year.
Claim Settlement Ratio = (No of Claim Paid / No of Claims Received)
So if a company gets 1000 claims in a year and pays 985 of them, then its claim settlement ratio for that year will be 98.5%. An important point to note here is that it’s about the number of claims and not the number of claims.
What type of Claims is considered in the Claim Settlement Ratio?
Generally, most of the people willing to buy a term plan look for this ratio as they are concerned about the claim getting paid in case of their early death. But claim settlement ratio is not the same as the “death claim settlement ratio”
In the calculation of the claim settlement ratio (in the case of life insurers), all types of claims are considered like.
Death Claim: The claims once the policyholder dies
Maturity Claims: Policies that are maturing and needs to be settled
Surrender Claims: Policies that are closed prematurely and surrendered
Here is the breakup from the IRDA report of 2019-2020, where you can see the number of claims for LIC and private insurers
Is Claim Settlement Ratio a probability?
One of the biggest myths about CSR (Claim settlement ratio) is that it’s a probability of claim settlement. This is not true and often leads to misjudgment of an insurance company.
CSR is simply a way of representing the data and nothing else. It does not tell you about the intention of the company. Let me share this with an analogy
Imagine there are two VISA processing counters which are looking at documents of people and giving the VISA or rejecting it.
Now if the Visa will be approved or rejected depends mainly on how proper are the documents and the person and not depend on the person who is processing the Visa. If the documents and case fall into the rules set, then it will be approved, else it will not.
So imagine there are two counters A and B . Counter A rejects 5 people out of 100 and Counter B rejects 7 people out of 100.
Now, this simply means that counter A got 5 people who did not fit into the set rules or their documents had issues. In the same way counter, B got 7 people who had incomplete documents.
One cannot mistake these 93% (A) and 95% (B) as the probability of their visa getting rejected.
Hence, in the same way, the claim settlement ratio just tells you about what kind of claims did the insurance company received and how many of those claims were rejected. It’s not a probability.
Investors mostly have a very bad view of companies and attribute these rejections to their intentions, which is not a correct way to look at this ratio.
Does Claim Settlement Ratio depend on the policyholder?
Yes
A claim that will be rejected or accepted depends mostly on the policyholder itself. There are many people who file a claim which is bound to get rejected as it’s not valid as per the terms and conditions of the policy document.
Many policyholders also have a very vague and wrong impression of what is covered and what is not. They file claims based on flimsy assumptions and for things that are out of the scope of rules.
Let me give you an example.
Imagine a person who lied to the company while taking a term/health insurance, that he is a smoker and also went through some surgery in past. He lied to the company.
After some years the claim was filed (person died or got hospitalized) and now the company finds out the information provided by the insured person was false and hence the claim should not be paid in this case and it’s totally valid rejection.
So here it’s not the company who had the wrong intention but the customer who created a situation that led to claim rejection. Most of the policies which are rejected fall into this category.
From your end, you have to understand one thing. If you have bought your policy properly and revealed all the information properly, your claim will not be rejected. However, if you give reasons for the company to reject your claims, it will surely be rejected and there is nothing wrong with that.
What is Claim Intimation Ratio?
Claim Settlement Ratio tells you about “number of policies”, whereas Claim Intimation Ratio tells you about the “AMOUNT”
It tells you what percentage of the claim amount was paid out of the total claim amount which was claimed in a year.
Claim Intimation Ratio = (Amount Paid / Total Claim Amount)
Most people are not aware of this ratio, and this gives you better clarity about the claims paid by a company. It may happen that a company has a high claim settlement ratio, but its claim intimation ratio is lower than the other company.
Here is an example of how the Claim settlement ratio can be high despite a low intimation ratio
Company A and B receives 10 claims in a year as follows
9 claims of Rs 10 lacs each
1 claim of 1.1 crore
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Company A
Company B
Claim Rejected
1 claim of 1.1 crores is rejected
2 claims of 10 lacs are rejected
Claim Settlement Ratio
9/10 = 90%
8/10 = 80%
Claim Intimation Ratio
90 lacs / 2 crores = 45%
1.8 crore / 2 crore = 90%
Comment
Claim settlement ratio is high, but not the amount paid
Claim settlement ratio is low, but the higher amount paid
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Business Model of an insurance company
As a customer, you should be very clear about the business model of an insurance company. An insurance company is a for-profit organization whose intention is to stay profitable and work for its profitability and also serve its customers as well.
The insurance company collects a small premium from a large number of people, but that money eventually goes only to a handful number of people who file for a claim. So in a way, it’s a shared resource which is given to those who are valid claimants.
In order to stay in business and be profitable, an insurance company has to reject all the claims which are not valid. If they start paying each and every claim without proper verification, they just won’t survive and it’s not in the customer’s interest.
This simply means that a company with not the best claim settlement ratio, in reality, is a good company because knows how to protect itself and not let a fraudster make a wrong claim.
A very important point to note is that a new insurance company will mostly be getting death claims in the starting 8-10 yrs and not any maturity claims which means their claim settlement ratio may look on the lower side.
How to buy an insurance policy?
Basically here is a high-level step by step process
Look at a company whose name you trust
Choose a company which has been few years old (this depends on you)
Choose a company whose product you like (features etc)
Check out the experience of other investors online about the company
Buy a policy with full honesty and by disclosing all information
Don’t lose your sleep over Claim Settlement Ratio
In the end, I just want to say that the claim settlement ratio is not a useful metric for any purpose and you should not lose your sleep over it. Don’t worry too much.
Shall you buy a single big health insurance policy or divide it between two policies (Base cover + a super top-up policy) for a cheaper premium?
The whole insurance industry is busy promoting and selling super top-up policies as a “cheaper way of upgrading” your health insurance cover. But no one is educating investors on the limitations of such combo or exactly why they are cheaper compared to a single cover.
Today, I will do that to the best of my abilities.
Investors have bought various combinations of base plan + super topup plan
5 lacs + 5 lacs
5 lacs + 10 lacs
10 lacs + 10 lacs
3 lacs + 7 lacs
10 lacs + 20 lacs
and many more…
Recently, we also saw health insurance policies of “Rs 1 crore” sum assured for unbelievable premiums and many investors have also opted for those. Basically, they are simply a combo of Rs 5 lacs + 95 lacs cover (with 5 lacs deductible).
Was that a great choice?
Let’s dive deeper!
Let’s start with an example!
A family of three people (with age 37 yrs, 36 yrs and 6 yrs) wants to buy a 25 lacs health insurance cover. They can do two things
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Option
Policy
Premium
1st Option
Buy a single policy of 25 lacs sum assured (Max Bupa Reassure as an example)
Rs 28,091
2nd Option
Buy a base policy of 5 lacs (max Bupa reassure) with a premium of 15,104
And Buy a super topup policy of 20 lacs with 5 lacs deductible (Max Bupa Recharge Plan) with a premium of Rs 2,803
Rs 17,907
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In this case, the premiums of the combo (2nd option) is 37% cheaper.
Most of the investors think that both the policies are a “25 lacs cover policy” and the 2nd option is exactly the same as the 1st option but with a cheaper premium.
This is obviously not true!
How is it possible that you get the exact same thing, but with a cheaper premium?
If a combo is cheaper, surely it will also have its own limitations or will fall short of in some situations? That’s exactly what we are going to look at today.
Disclaimer – “Super Top-up” policies are a great choice
I don’t want to sound against super topup plans. They are a wonderful product and have a great role in health insurance, but problem is that people are buying them as a replacement for a strong base cover policy and living in the illusion that they are getting the exact same deal as a big cover.
Let’s start to get into details now.
1. Two Claims instead of a single claim
What does a person wish for at the time of a health insurance claim?
The answer is a smooth and hassle-free claim experience.
I have already made 3 different claims (2 in my own policy and 1 in my father in law policy) in the last few years and hence I can tell you that the claim process is something you dont want to complicate.
When you have a single policy, it means a single claim each time.
What happens when you have a combo plan? Let’s see!
If both policies are from the same insurer
If the base policy and super topup cover are from the same company, then it’s quite a smooth and seamless process, as they can internally cross-check things and coordination is much better. Basically, they have to technically anyways settle both claims, so they will combine them and process the whole thing faster and easily.
If both policies are from a different insurer
However, if both your policies are from different insurers, then it can get complicated and confusing. Don’t worry, you are not losing any money here, but surely it’s a bit of hassle and delay in follow-ups and coordination if the super topup plan gets triggered (which will happen when your base plan is not large enough). Also,
You will have to keep hold of 2 health insurance cards
Dealing with 2 claim forms especially for pre & post hospitalization claims (even in case of a cashless claim)
Communication for 2 policies (this may be easy when the insurer is the same)
And finally, in case of reimbursements, more documentation (hospital bills/prescriptions)
With 2 insurers, there may also be a wait time involved for getting the xerox of the bills/claim settlement letter
Also, imagine the scenario of how your family will be able to claim if you yourself will get hospitalized (due to any emergency). Will your spouse/family have enough understanding to follow the intimation and claim process from both the policies.
2. Lower Coverage due to NCB missing in Super topup
Contrary to popular belief, the combo (base + super top-up) gives you a lower coverage compared to a single large cover, simply because of the NCB component which many do not consider!
Surprised?
Almost all the policies come with the NCB feature (No Claim Bonus), where your sum assured keeps going up for every claim-free year. Here are some of the examples
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Policy
NCB
Care Insurance
10% increase in sum assured up to a maximum of 50% of sum assured
Max Bupa Companion
20% increase in sum assured per year up to a maximum of 100% of sum assured
HDFC Ergo Optima Restore
50% increase in sum assured per year up to a maximum of 100% of sum assured
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Now let’s see a case.
Assume a person wants to buy a policy with a sum assured of 20 lacs. He has two options
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Option
Option 1 – Single Cover
Option 2 – Combo
Combination!
The single policy of 20 lacs
The single policy of 5 lacs (base plan)
Super Topup cover of 15 lacs (with 5 lacs deductible)
NCB Benefit
20% each year (up to 100%)
20% each year (up to 100%) applies only on the base plan
NCB feature is NOT applicable in Super topup policies
Total Sum Assured at the start (when you buy policy)
20 Lacs
20 Lacs
Total Sum Assured after 5 yrs (claim-free years)
40 lacs
(base policy X 2)
25 lacs
(base policy X 2 + super topup)
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Now you understand why the premiums for super topup cover is less than the single large cover.
Here is the pictorial representation of the above example
So, you can see how after a few years there will be a gap of 15 lacs in sum assured in the combo plan. Now do the maths for a total cover of 10 lacs. What will happen if you divide it into a 5+5 combo?
3. Lower Coverage due to Recharge Benefit (2 large claims in a single year)
There is something called “Recharge benefit” in health insurance policies these days, which refills your policy again up to the sum assured when the sum assured reduces due to any claim. Like if you have a 10 lacs cover, and you claim for 4 lacs, then the policy will come down to 6 lacs, but then due to recharge benefit, the sum assured will again rise to 10 lacs (the added sum assured can not be used by the same person for same illness for which he/she claimed)
Now, let’s imagine a case
Assume, that in the worst case there are two big claims in the same financial year. Like what happened with few people in this Pandemic. Imagine one person getting hospitalized due to corona and then after 4-5 months, another person in the family also getting hospitalized. Or imagine someone in the family getting treated for a big illness and then after a few months, another family member getting hospitalized due to a severe accident also.
Very low chances of this happening. RIGHT?
Yes, but it can not be ruled out at all!. It’s the extreme end I know.
How will be the claim experience in both cases? Let’s compare the same example (forget NCB for the moment)
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Option
Option 1 – Single Cover
Option 2 – Combo
What?
Single cover of 10 lacs
Single Cover of 5 lacs (base plan)
Super Topup cover of 5 lacs (with 5 lacs deductible)
1st Claim by husband for Rs 8 lacs
The claim will be paid for 8 lacs
5 lacs claim paid by the 1st base policy
3 lacs claim will be paid by super topup policy
2nd claim by a spouse in the same year for Rs 10 lacs
Because of the recharge benefit, the spouse will be able to claim for a total of Rs 10 lacs
Because of the recharge benefit, the base policy will pay 5 lacs
But the super topup will pay the remaining 2 lacs only.
3 lacs will have to be paid by policy-holder
LOSS of Rs 3 lacs here compared to 1st option
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The point is that recharge benefit can also come into play in some very unlikely situations, but that feature is missing in super topup plans.
4. Difference in room rent limit
One major thing you have to consider is the difference between room rent limits in both base and super top-up.
Here is an example.
At the time of writing this article MaxBupa Reassure plan (recently launched) has no room rent limits.
However, its Health Recharge plan (the super topup policy) mentions that you only get a single private AC room in the plan.
Note that there are various types of single private AC rooms in a hospital. What you get from your insurance policies is the cheapest “Single Private AC room”.
Now let’s see 2 cases with an example
Total health cover: 20 lacs
The room category: A higher grade single AC room (higher quality and better facilities). Imagine the cheapest AC single room was not available or you wanted to go for the better facilities.
Final Bill amount: Rs 11 lacs
Case 1: You have a single policy of 20 lacs (Maxbupa Reassure, just for example)
In this case, because there is no room rent limit, your total claim amount is admissible and your claim process will happen smoothly.
Case 2 : Now imagine that you have a 20 lacs cover but in combo form.
You have a 5 lacs base plan (Reassure policy) + 15 lacs of super topup with a deductible of 5 lacs (Maxbupa Health Recharge)
Now the first policy will pay the claim of 5 lacs easily because there was no room rent limit in the policy.
However when you go to claim the additional 6 lacs in the super topup, here is what will happen.
If you had chosen the cheapest AC single room, your total claim of 6 lacs would have got admissible and processed. However, because you choose a higher category room, you will not be paid proportionately only.
If the room rent for the cheapest AC private room was Rs 8,000 per day whereas you choose the one whose rent was Rs 12,000 per day. You will be paid just 66.66% (2/3rd) of the claim amount, which is only Rs 4 lacs
This is called a Proportionate claim in health insurance. This may happen in reality if your base cover is a small amount and a big claim arises. If you choose the cheapest single private AC room, then there won’t be any issues, but otherwise, there can be issues and this can happen even if you bought the policies from the same insurer (like in this example I gave)
Another example is of Care Plan from “Care Insurance” formally known as Religare Care.
In Care Insurance the room rent for a 5 lacs base cover and 15 lacs of super topup cover is “Single Private AC Room”
Whereas if you take a larger single cover, the room rent is “Single Private AC room (upgradable to next level). This gives you enough flexibility and freedom to enjoy better quality health care and facilities. Sometimes, the single PVT AC room of the lowest category may not be what you wish for.
Imagine you need a bigger space and better facilities in the room, in that case, more deluxe rooms will be required by you. This is where you may lose in a big way (not today, but maybe in future or in case of large claims).
Old Policies – If someone has taken 3-5 lacs of sum assured a few years back (especially from PSU companies), there is a good chance that there is a room rent limit of 1% of sum assured (example – Oriental Happy family floater plan). Now if you are buying a super topup plan, there will surely be a difference in the room rent limit.
5. Different Cashless Network of Hospitals
If your base policy and super topup policies are from different companies, there may be a possibility that the hospitals in their cashless network are different to some extent. You may face some issues in future due to this.
Here is an example
I checked for network hospitals between HDFC Ergo and Care Insurance for Pincode 411005, which is Shivajinagar, Pune.
I found that HDFC Ergo has 7 hospitals and Care Insurance had only 5 hospitals in their network (in March 2021). Out of these 4 hospitals were common, the rest were different.
Now, what if your first policy is cashless but your sum assured in the first policy is small. In that case, the 2nd policy (super topup) will get triggered, but here you will first have to spend the money as it’s out of the network of the 2nd insurer)
You will then have to file a reimbursement claim later and do the documentation part too.
This will not be the case if you had a single large cover from the 1st company itself. You may argue that you will plan well before getting admitted to the hospital and try to match the one which is there in both policies, but trust me, in real life it will be tough.
When a doctor tells you or recommends that you get admitted to hospital XYZ (often he is also a practising doctor in that same hospital), it becomes quite tough to challenge that or counter his suggestion.
6. If policy tenures are different for both policies
In some cases, you can face issues in the claim, if you purchased both base and super topup policies in different months (same or different insurer, does not matter).
It may happen in some specific cases that your claim is not admissible under any policy.
This is explained very well by Mahavir Chopra of Beshak.org in his article here. I am just sharing what he wrote originally.
Say you have the following Combo plan.
Base plan of Rs. 2 Lakh (Plan year: January 2021 to December 2021)
Super Top-up of Rs. 5 Lakh with an annual deductible of Rs. 2 Lakhs (Plan year: April 2021 to March 2022). (This means for the Super Top-up to pay, the hospitalization expenses should cross Rs. 2 Lakhs in the policy period in question – which is April 2021 and March 2022.)
Now, say you undergo two hospitalizations in the year 2021.
The first one happens in January 2021, the bill amount is Rs. 2 Lakh. Now this is covered by your base-plan there is no confusion, and the claim amount is paid.
Next – you undergo a hospitalization in April 2021. And the bill comes to 1.5 Lakhs.
Now, take a guess on – who will pay for this?
A. Base-plan
B. Super Top-up
C. You
If you guessed A or B – then you’ll be up for a BIG surprise! Here’s how your two insurance plans will look at the second claim.
Your base plan will not pay: Because – you have already exhausted the cover amount available for the year (January 2021 – December 2021)
Your Super Top-up will not pay: Because the Super Top-up plan pays only when the hospitalization expenses during the policy period of April 2021 to March 2022 crosses the deductible of 2 Lakhs. In this case, the total hospitalization expenses during the period in question (Apr 21 to Mar 22) are only Rs. 1.5 Lakhs – hence the claim won’t be payable.
These were some limitations of the super top-up you should be aware of. It’s better to get educated about this aspect, rather than getting shocked and disappointed in future.
Some other small Differences
Apart from the major points discussed above, there are other minor but important points you should know
Annual Health Checkup Benefit: With a single large cover, you may get superior annual health checkup packages that cover more tests. But with combo plans, you may get normal test packages in both base policy and super topup, which is of less use as no one will do the test twice just for the sake of it. Some policies also offer health checkups only once in two years for smaller covers.
Hospital Cash Benefit – In many small base plans like 5-10 lacs, the hospital cash limit is Rs 1,000 per day. However for a bigger sum assured, the hospital cash will be in the range of 3000-4000. If you stay in the hospital for 10 days, this means getting 10k only in combo plan vs 40,000 in a single bigger cover.
Organ Donor Cover / Ambulance Charges – Again, a lower sum assured plan night have a lower benefit compared to a single big cover.
Waiting period – It might happen that the waiting period for pre-existing illness is different in both policies, just check that.
Pre & Post Hospitalization Tenure is different – It may also happen that both policies have different pre & post hospitalization tenure.
Other Minor Changes – Apart from the points above, there are many other minor differences in the bigger sum assured (single policy) which may be useful for you in some specific cases, which we are not covering here
How to look at Super Top-up policies? What is the right combination?
Everyone shall have a large enough cover with a single policy as the first step.
With NCB benefit, that large cover will also get ballooned to every large cover. And with recharge benefits, you will also get those edge cases covered. This will make sure that for many years to come, this single policy will be enough for you.
There are very low chances that in some worst cases, you may still have a very big claim when this single big large cover will not be enough, and that’s when super top-up cover shall come into the picture and that’s exactly why they were designed for.
To cover those extreme end cases!!!
But investors have just started using them with a small cover for the sake of saving some premiums. No doubt you will have a few thousand for many years to come, but there are also limitations which we talked about.
Considering the point above, the minimum base sum assured which I feel one shall take in 2021 is Rs 10 lacs. With NCB benefit, it may become a 15/20 lacs cover, which is good enough for the majority of claims. Anyways the average claim is quite small!
Does it mean you need to take a 50 lacs cover? NO 🙂
So what combination to buy?
Speaking for the majority, I think a Rs 10 lacs base policy with an NCB of 50%/100% and a super topup of 30-40 lacs with Rs 10 lacs deductible is a good enough choice right now. This will balance the premiums and coverage. If you want an even high single cover policy like 15-20 lacs, go ahead!
But also remember, that within the next 10-15 yrs, even the 10 lacs coverage may look like a small one and you may feel that the base policy should have been for at least 20-30 lacs. So take your decision after careful thought.
You can always upgrade your base cover sum assured at the time of renewal.
Do let me know if you have any queries or comments?
Credits – Thanks to Mahavir Chopra of Beshak.org to correct me on some points in this article and also give his valuable insights from time to time because of which I was able to bring depth to this article. Mahavir Chopra is a veteran and a well-known name in the insurance industry and they are doing some cool stuff on beshak.org in the area of insurance. Do check out their website!
This is a guest post by our reader Phani Kiran, who has tried to see personal finance from the software industry perspective. It will be more clear to software people but I think the way its written, everyone can understand it. Over to Phani Kiran
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Hi All
DevOps needs no introduction to people working in the Software industry.
It is a set of best practices where Developers (Dev) and IT Operations (Ops) work together in delivering Software faster, cheaper and with better quality. This article tries to explain how DevOps can be applied to the world of “Personal Finance”.
For those who are hearing the term ‘DevOps’ for the first time, a rough analogy can be made with the FIRE (Financial Independence, Retire Early) movement. Both are best practices where we need to change our thinking, behaviour and tools but at the same time there’s nothing cast in stone and no one size fits all approach.
DevOps is needed as old software methodologies are no more relevant in a world where innovation needs to happen faster. Same with personal finance habits and practices – we need change as we move towards a lower PPF, EPF and Savings rate regime.
DevOps is frequently explained by CAMS Model (not your CAMSOnline :)). CAMS stands for
Culture
Automation
Measurement
Sharing.
Let’s see how each of these can be applied to Personal Finance.
C – Culture
Investors need to start moving away from the culture of only investing in ‘fixed’ income investments. As Warren Buffet, mentioned in his recent annual letter – “fixed-income investors face bleak future”.
Culture of treating tax saving as a separate and as a year-end only activity needs to be done away with.
Need to stop combining insurance and investment needs and start saying ‘No’ when resorted to pressure tactics from a so-called relative or a well-wisher selling ULIPs.
Start focusing on goal setting, risk profiling and asset allocation.
A – Automation
SIP (Systematic Investment Plan) is the automation you can make to your personal finance. In her book – ‘Let’s Talk Money’, Monika Halan talks about keeping investments on an auto-pilot mode using 3 different bank accounts. (Salary, Investment & Spending accounts)
Automating SIP or RD instalments inculcate discipline and removes personal biases. This can be your first step towards ‘passive investing’ as you no longer will be focusing on – if Market is High or Low.
For those who are prone to more discretionary spending, SIPs can be scheduled in the first half of the month so that you will establish a ‘Culture’ of Saving before Spending.
M – Measurement
The portfolio needs a periodic (quarterly or half-yearly depending on one’s perspective) review of performance. This is possible only when you have a target goal – ie. ‘target corpus’.
As they say about your year-end KPI (Key Performance Indicator) goals, equally personal goals like retirement, child’s education need to be SMART – Specific, Measurable, Achievable, Realistic and Timely.
Investment deductions on Auto-Pilot mode need course-correction as and when required. This doesn’t mean too much ‘Action’ (churning) though.
Measuring and monitoring returns and tracking whether you are on the path to achieving the desired goal or not needs more emphasis as equity returns can be volatile.
As SIPs automate the corpus-building phase, you can use SWPs (Systematic Withdrawal Plan) to move accrued investments to safer avenues once you are nearing a target goal.
S – Sharing
Keep your family in the loop about your financial and insurance decisions and documents.
Be a life-long learner and don’t hesitate to learn and talk in ‘numbers’ (compounding, inflation etc)
Read good blogs and attend personal finance workshops (Even DIY (Do It Yourself) needs some framework and strategy).
Just like DevOps improved software delivery productivity and reliability, following these principles should lead to a ‘virtuous cycle’ of prosperity. Keep your corpus build-up ‘flow’ by following a CI (Continuous Investment) strategy and let your periodic portfolio reviews provide the required ‘feedback loop’.
Happy Coding. I mean Happy Investing 🙂
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So share if you liked this article or not in the comments section. And I thank Phani Kiran to give an attempt in writing this article.
Lots of people in India want to buy land, especially investors from big cities as land is a scarce commodity and it sounds amazing to build your own house on a piece of land instead of staying in apartments.
However, do remember that there are no specific loans available to buy agricultural land. The only loans available to buy the plot are for “residential plots”, which means that if you take these “plot loans”, you need to also construct a house within 2-3 yrs of buying the plot. You can’t just buy a residential plot and skip building the house.
However, many people do that. Some intentionally and some out of ignorance.
What exactly happens when you dont build the house on a plot taking on a loan?
Is there a penalty?
Can there be any actions against you?
What happens if you dont build the house on the plot?
When you take a plot loan, it comes at a lower interest rate because the assumption is that you will be building the house on that land within 2-3 yrs. But if you fail to do that and dont submit the required documents (completion certificate) to the lender on time, your loan will be converted to a normal loan and the interest rates will be increased by 2-3% with a retrospective starting date as per the agreement between you and the lender.
This means that your loan outstanding amount will go up by some amount due to this change and you will have to now pay that additional amount. At the end of 3 yrs, the bank will ask you for the proofs of construction, and if you fail to submit them, you will have to pay an additional amount.
Here is an example of a Rs 20 lacs plot loan which is taken for 10 yrs @7% interest rate. The interest to be paid in this case will be 7.87 lacs apart from the 20 lacs principal amount.
Now if the interest rates are revised to 9% (2% increase) the interest, in this case, will increase to 10.4 lacs, which is 2.53 lacs more than the original amount.
Is there a single loan for plot and house cost?
Some banks like SBI (as told to me by a representative) first issue a plot loan and then after 2-3 yrs issue another home loan for the purpose of constructing the house (two separate loan account numbers), whereas some banks may issue a single loan itself for both purposes and it will be mentioned in the agreement (for example 40% amount is for plot and 60% for house construction).
Note that you can avail of 80C benefits as these loans are issued as home loans (the part of the loan which will be used for house construction).
Wrong information was given by the bank representatives
Many times you may get wrong and misleading information from the bank representative. They may tell you that “Nothing will happen after 3 yrs, dont worry” or “These are all just formalities..” mainly because he is interested in getting the loan approved due to their targets. This is wrong and makes sure you dont believe them. Always rely on what is written in the agreement.
Note that the loans are given at a cheaper rate for plots because there is a bigger agenda of RBI and govt that everyone shall access to housing. If you are buying the residential plot simply because you can sell it off in future for profits then you cant get the benefit of the lower interest rates.
For you, the interest rates will be revised because you will have to construct a house on the plot after 2-3 yrs as per rules.
Up to 60% to 70% of the property price is given as a loan depending on the bank.
These loans are given for a maximum of 15 yrs tenure
Points to remember before going for the plot loan
Make sure you take these plot loans only in case you are really interested in building the house. You can also ask the bank to first disburse only the loan amount for the plot and later release more amount at the time of house construction. It’s really not worth playing around with bank and playing tricks as it will mostly waste your time and you won’t gain much in case you dont want to build the house.
Here are some more important points which were shared by our reader Jayaprakash Reddy
Generally, banks calculate plot value based on the sale deed value, most of the cases sale deed value is lesser than the market value. Also, as mentioned above, banks like SBI will only consider sale deed value but some private banks might also look at market value in that area and which will be derived through their certified valuers. SBI will give a loan on plot purchase (House construction in future is intended) up to 60% of the sale deed value and it is the same with even private banks but that will be on market value.
There is no clarity even with bankers about what happens if you sell the plot within a year or two without construction, most of the representatives told me that it will be like closing a home loan but I guess that’s a false statement and depends on the bank and agreement if mentioned specifically in it.
The total loan again depends on the construction value in that area. For example in the area where you are purchasing a plot, the construction cost could be 1500/sqft. Then based on the sqft you are planning to construct the total loan amount will be derived. Let me put it in numbers:
Plot Area: 300 sq yards. – SBI bank loan – Sale deed value is 10000/sqyd – 30 lacs. For plot purchase – 60% of 30lacs will be given to you as a loan. 18lacs loan will be provided by the bank, this is given as cheque payment directly to the seller. For the construction of the house, they will provide it based on the sqft permission you got. For example, in a 300sqyrd plot if you are constructing G+2, then you might get permission to build ~3000sft (not an exact number). So the construction value of the house will be 3000*1500 = 45lacs, out of this bank will give you up to 80% loan, which again depends on your credit rating.
In total, you can get a 63 lacs (18+45) loan, provided you are eligible for such a loan based on your income.
To prevent malpractices, in the case of a home loan, the bank keeps the sale deed of the plot. With documents not available, one can not legally sell the plot. There can be a word of mouth agreement whereby the buyer can give money to the seller to release the loan and documents and then purchase.
Do you know what happens when you are unable to repay back your home loan?
After how many missed EMI’s will the lender get hold of your property and throw you out of it? What are your rights as a consumer and what exactly are the steps involved in the foreclosure process?
When we buy a home with a home loan, there is lots of enthusiasm as we are becoming the owner of our dream home, and the future looks bright, but the reality of life is that there are many homeowners who face financial difficulties in their life due to job loss, accidents, medical problems that they are unable to pay back their Home loan EMI’s for many months and eventually get into a situation when they are not able to repay back.
Today I am going to tell you all you need to know about this topic. Let’s start
#1 – When you miss paying 3 months EMI
It may happen that you are miss 1-2 EMI payments due to some reason, in which case the bank will give you a reminder about it or give a small warning to pay back the missed EM next month. But if you miss paying the EMI for 3 consecutive months, that’s a big red signal and at this point, your loan account will be marked as NPA in the lender’s book.
This is a serious situation. The bank will mark you as a defaulter and the bank will send you a notice about it.
At this point make sure you do not ignore the bank notice and reply to them asap explaining to them about your situation and the reason why you missed paying the EMI’s. If your credit history is good and your reasons are very genuine, there is a possibility that the lender may give you some grace period for repayment.
If the bank is sure that they want to move ahead after you are marked as Defaulter, they will then send a full and final 60 days notice under a law called SARFESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act).
Sarfesi Act empowers banks and other financial institutions to directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers and lays down all the processes to be followed.
Before this act came into power in 2002, the lenders had to file a case against the homeowner and the matter went to court which was a lengthy process and very time-consuming. But after this act, now the lender can directly auction your property and evict you out of it. Even Co-operative banks are covered under the Sarfesi Act
This 60 days period is your final chance to repay your EMI’s, else the lender can take hold of the property and sell it off after 60 days’ notice. After this 60 days period, you are expected to settle down all the money you owe to the bank which is the outstanding loan amount. Either you pay it back to the lender on your own or the lender will auction the house and recover back their money.
During this 60 day notice period, you can put up your case in front of the assigned officer and share with them what best you can do to pay off the EMI soon. If they accept your explanation, then well and good, otherwise they need to give you a written letter of rejection within 7 days after which the next step starts.
During this 60 day period itself, you may also get recovery agents to your doors who may demand that you settle your dues. Note that as per the RBI rules you have certain rights when it comes to recovery agents like.
You can ask for the identity of the collection agents if you wish. They need to carry their ID Cards and an authorization letter from the bank
Recovery agent must be an authorized agent as per the Indian Institute of Banking and Finance
The recovery agent can visit only between 7 am to 7 pm and shall only talk to the defaulter and not family members (unless the defaulter is out of reach)
The loan recovery agent cannot be disrespectful or shall use any objectionable language or behaviour
In real life, the above rules are not followed properly and recovery agents are infamous to threaten and humiliate loan customers. If that happens, you shall complain to the bank and also take up the matter with the banking ombudsman
#3 – 30 days’ notice in the newspaper for Auction
As the next step, the lender will get the property valued from their valuer’s to find out the fair value of the property. Now starts the property auction process.
The lender will advertise the property details and mention all details like the reserve price (shall be around the fair value of the property), the date & time, address for the auction of the property.
If the property owner feels that the fair value of the property is too less or not correct, then they can object and talk to the lender.
#4 – Auction of property and refund of excess money
And as the final step, the property will be auctioned in the open market and the bank will recover back all its dues. Note that the bank is only liable to recover the dues and not the excess amount. If there is any balance left, it has to be paid back to the homeowner. So keep an eye on the auction amount. Nowadays most of the home auctions happen online (e-auctions) and you have the data online.
Sell off your house if you become a defaulter
Let me guide you a bit on what you should do if you are unable to repay back your home loan amount and are marked as a defaulter. Yes!, The best thing to do is to sell off your house on your own and pay back the dues to the bank.
Here are 2 reasons why you should sell off the house on your own
You will not get the best price in Auction – Home Auctions are distress sale from the bank side. Bank just wants to recover back their loan outstanding. Hence their focus is not on getting the best price for your house. If you sell the house on your own, you may get a much better price
It will take a lot of time as the property will be stuck at the bank hand – The auction process is lengthy and may take a lot of time which may not be suitable for your timeline. If you sell off the house yourself, you may do it faster as you may be open to negotiating and ready to give some great deals to potential buyers. You can also offer the brokers extra or double commission so they can also put all their energy into finding a buyer.
How to avoid getting into the defaulter list in future?
What are some of the best practices you should follow so that you do not get into the defaulter list? Here are some things
Try to keep your EMI amount less than 40% of your take-home – Always make sure that the EMI is not a big burden for you. Don’t go overboard and take a loan which is like a big burden for you.
Try to pay as much down payment as you can – If possible, do make sure you pay a big down payment so that your loan outstanding is a smaller amount that is manageable for you. I would suggest that you pay more than 40% in the down payment.
Restructure the loan – If the EMI is a big amount for you and each month you are on the edge of default, do try to bring down the EMI amount by increasing the tenure.
If you have any investments in debt assets like FD, Saving account, Insurance policies, PPF or even EPF. you can use that to pre-pay your loan to bring down the loan outstanding. This is only for those people who are overburdened with high EMI amounts each month
I hope this was helpful and you got some new information!. Do let us know if you have any questions!
Today we will discuss how you can convince your parents (assuming senior citizen) into mutual funds to get better returns on their investments with lower risk.
I am not saying that every parent needs to invest in mutual funds. But I have seen many parents retiring with insufficient corpus and investing that money in a very manner. It’s not tax-optimized and also earns the least return possible – all in the same of “Safety”
I understand that not all senior citizens want high returns, but in most of the cases, I have seen that there is some allocation which can be made in mutual funds.
We come across many investors, who are investing in mutual funds and they have a good understanding of the product. They have full confidence in mutual funds investments, but their own parents are stuck in the old traditional way of investments. And these children are not able to convince their parents to invest their money in mutual funds or anything closely linked to stock markets, simply because parents come with the baggage of old beliefs about equity markets and poor understanding of the concept of Risk!
Old habits never go!
Most of the parents have all their life invested in Fixed Deposits, LIC policies, PPF, NSC and postal schemes which were simple and guaranteed return products. Their focus was always on “peace of mind” and “safety”. They were not obsessed with returns like we do today!
Parents outright reject the idea of investing in mutual funds or stocks the moment they come to know that its not a guaranteed returns product and there is RISK involved in these things.
To get some idea on this subject, I asked on our telegram group how their parents react for the investments in stocks and mutual funds, and here are 2-3 responses I got!
I know it’s going to be very very tough to convince them for investing in mutual funds, and most of the people will fail in this!. However, this is my small attempt to give some pointers to you on how you can start the conversation with your parents on this issue. Maybe it will work for you.
So here are simple things we can do.
#1 – Introduce them to Debt Mutual Funds
The first thing you can do is to not introduce the word “Mutual funds” directly to your parents. Tell them that there is one investment product which is similar to Fixed deposits, and the returns it has given over last many years have been a little better than Fixed deposits and has very less taxation (we see tax part in point #2 soon)
Tell them how this new “investment product” works very much like bank deposits. It also lends money to others and gets returns. But unlike bank fixed deposits, it does not give a lower but fixed return.
Instead, it keeps a small-fees and returns all the returns to its investors (which means that its a market-linked returns). There is its own share of risks which needs to be well understood and handled.
The next step is to show them how these debt funds have performed over the last few years like 5/10 yrs.
Start with Banking and PSU Category
You can start with a debt fund which comes from “Banking and PSU Fund” category because I have seen many senior citizens are very comfortable with the portfolio of that kind of debt fund/
Its a debt fund from SBI Mutual fund which invests a big portion of its money in bonds issued by various banks & PSU companies in India. The definition itself will be worth attention and parents may listen because of the word SBI (maybe!!)
That fund has given 8.89% returns in the last 5 yrs. The Journey for a fund has not been as a straight line, but it’s not wild like an equity fund. To a senior citizen who is struggling to get a 6% return in FD may be interested in looking at the past returns of this fund.
Apart from Banking and PSU category, you can also tell them about short term debt fund in case they want to invest their money for short term like a few months to a few years.
The stability of returns for short term debt funds category is quite strong as they invest in short term debt papers (incase this is technical for you, dont worry, you need to learn about debt funds)
Here is an example of HDFC Short term debt fund which has given quite stable returns over many years. Its return in the last 10 yrs is around 8.85% cagr! . No doubt that the fund is little volatile in short term, but over long periods you can see the line going up and up!
One more category is of Medium to Long term funds which are suitable for 3-5 yrs investment period and one can expect an 8-8.5% returns based on historical performance only (past returns are not a guarantee for future returns)
Here is a table showing what has happened in the last many years (Some funds with very low AUM is removed from the table and only bigger brands are taken)
So as the first step just show them these returns and low volatility of debt funds. This will be the foundation step.
Disclaimer: Debt funds are not as simple as what you are seeing above. There is credit risk and interest rates risk because of which the returns can be fluctuating. However, I am not going into the details of how debt fund works as it’s out of the scope of this article. If you are not clear on how debt fund works or chosen, its recommended to look for an advisor.
#2 – Show them the impact of taxation
One of the most overlooked aspects of investments is Taxation.
People do not think much about optimizing their tax-outgo while making investments. Investors still talk in terms of “Returns” and not “Post-tax Returns”.
When you invest in Fixed Deposits, Senior Citizen Saving Scheme, Saving Bank etc, you pay the tax on the slab rate. Which means that for very high amounts the tax will be at 30% rate for investors in the highest tax bracket. The worst is with FD, where you pay the tax on the entire year Fixed Deposits interest, not on how much you have redeemed!.
Can you believe that this tax can be lowered to 10% or 5% and sometimes even 2-3% for longer tenure investments (some cases). This is because the returns you get from debt funds are not categorised as “Interest Income”, but capital gains.
Let me show you a simple example of what happens when a Rs 50 lacs of money is invested for 10 yrs in a fixed deposit vs a debt fund. I have taken FD rate as 5.5% and debt fund returns at 8% as per the current situation and I have taken the last 10 yrs inflation numbers from CII Index.
You can clearly see that your FD becomes 85 lacs and Debt fund becomes 1.07 crores (indicative, but historical returns), Still, you pay 5 times more tax in FD than debt funds simply because of Indexation benefit.
The debt funds are surely not as predictable as a fixed deposit, but over 10 yr period, you can surely create a very strong portfolio and also diversify your investments across some quality debt funds. I think it’s worth taking that extra risk for the sake of making 31 lacs more!.
It’s not a small amount, it can mean 5 yrs extra money for retirement.
Most of the poorly designed portfolios lag on taxation. If you can just fix that part, that itself can mean alpha of 2-3% sometimes.
Here is a tweet I did a few weeks back where I was sharing how someone who retired with a big corpus (let’s say with 10 crores) will pay taxes in equity/debt fund/ FD
However, note that a smaller corpus can be still divided between husband and wife and then the taxation may be NIL or less due to the income not reaching the taxable limits. What I am referring to is mainly for big corpus.
#3 – Educate them about mutual funds in general
In case you fail in the 1st and 2nd step mentioned above and if your parents are still adamant about not changing their mindset of sticking with Fixed deposits or LIC policies etc, I must say you can’t do much and you lost the game.
However, if you feel they are showing some interest and will hear more on this subject, then its time to sit with them and educate them first about mutual funds in general.
I think most of the people who just reject mutual funds dont have a good understanding of the product and how it works. Here are 33 myths about mutual funds incase you want to look at them. Is time to educate them a bit about mutual funds industry and how established it is.
I feel there has not been a good attempt to educate senior citizens about mutual funds in the right way. Tell them a few things like.
a) Mutual Funds does not always mean the stock market
Firstly, tell them that not all mutual funds invest in the stock market.
There exists something called “Debt mutual funds” which do not invest in stocks and only invests in the debt market (bonds of companies and govt securities). Use the word “Bond” and “Debentures” as they might have heard these words and can relate to these.
Tell them that there are GILT funds (which only invest in govt securities) and then there are Corporate Bond Funds (which invests in big corporates) and in a way, they are comparable to corporate fixed deposits
b) Tell them about mutual fund industry size
Do you yourself know that Indian Mutual fund industry is one-fourth size of the banking industry? Yes – we have around Rs 30 lakh crore of assets invested in mutual funds which is very very big in itself.
A lot of senior citizens still feel that mutual funds are some kind of scam or not a well-regulated product. It’s your job to tell them that it’s a 25 yr old industry (actually much older if you look in the US and other counties) and a very well designed and well-regulated industry. Crores of investors invest through mutual funds now in our country and its growing at a very good speed.
Over the next few decades, my guess is the mutual fund industry will be bigger than retain banking Industry.
Dont force your thoughts on them at this point and just hear them out. If they have any apprehensions or issues with any point, do find the answer and go back and share with them about it. It can take them a lot of time to digest all this. No rush!
#4 – Tell them their corpus may not be enough for future
Not many people are retiring with huge corpus these days. Most of the parents are retiring with a smaller corpus than what they actually need for their long retirement. (Read why one needs 30 times their expenses as retirement corpus)
In your own way, you need to convey to them that their money may not be enough for future, and some part of their portfolio (if not all) has to be invested in equity too.
A lot of senior citizens are investing money in a way that it’s giving them terrible post-tax returns because of high taxes and low returns. All this in the name of “safety”. I know people who have put all their money in pension plans or just kept it in FD. They dont think about things like the liquidity of money or low-post-tax returns.
One issue is that in our country people think that once they cross 60 yrs, they have to just move every bit of their money into 100% safe products. This is not true for most of the cases.
A 60 yr old person can live up to 100 yrs also and that means they may have 30-40 yrs of life ahead. IF they make bad investments decisions which are not taxed optimized and do not create a positive real return, the wealth may get consumed pretty soon then they realise due to inflation.
So, if a retired person has Rs 30,000 expenses per month at age of 60 yrs, then by the time they turn 70 yrs, it will increase to 65,000 per month. However, a human mind is not able to access the impact of inflation over long periods of time.
In short, you need to convey that they need to generate a higher return on their investment and need to have a balance between safety and returns. Yes, some expenses may go down, but many other expenses may come up too. This is more true for those whose children do not live with them and they may end up living all by themselves.
A lot of senior citizens may not be thinking about these points.
#5 – Get them started with a very small amount
The next step is to get them started with a very small amount.
If they have 50 lacs of wealth, maybe you can invest just Rs 1-2 lacs in a short term debt fund and let them see how it’s moving in next 1-2 yrs. Show them the statements every 3-6 months to reinforce the thought that mutual funds are one of the options and they can diversify some part of their portfolio in debt mutual funds too.
I did the same thing when my mother in law wanted to invest a very small amount. She told me that she wants to put a small sum in Fixed Deposit and I told her that I will choose something better for her. I invested it in dynamic bond funds as the money to be put for the long term. Right now the fund CAGR in last 4 yrs have been around 8.8% CAGR.
Why Children should Educate their parents?
I also want to convey two points to you (the children) on why you should educate your parents about mutual funds.
1. Parents money may not be adequate
If your parent’s money is not enough and invested in a wrong manner, then the money will finish off sooner than they imagine and that would mean that you will be dipping into your own corpus to fund their retirement needs after 10-15 yrs.
Nothing wrong in that, as our parents have raised us and we are all successful because of their blessings, but when its possible to do better than what they are doing currently, there is no harm in pushing a bit into right retirement planning. A robust and tax-optimized portfolio shall be created which also generates better pension for them.
We at Jagoinvestor has been helping many retired or close to retirement clients (with corpus in range of 1-5 crores) to design and manage their retirement money. You can check out our retirement services brochure to know more
2. Legacy will come back to you
A lot of people do not get inheritance as the wealth is mismanaged by parents and is not put to the right use. If you make sure that your parent’s wealth is properly invested, that also means that a part of it may come back to you as an inheritance. And this may mean your own retirement corpus may get a bump.
If you are in your 30’s or 40’s right now, then your parent’s wealth will come to you as an inheritance after another 30-40 yrs and those many years of compounding can do wonders to your own retirement planning.
Conclusion – It’s not easy, but worth a try!
I know this is a tough nut to crack and many people may not be successful, but still, you can give it a try.
You never know if parents may be ok to invest some part in mutual funds. Just avoid asking them to shift all their investments to high-risk funds. As and when they get comfortable with mutual funds concept
Do let me know what are your thoughts on this and if you can share any tip on how to convince your parents to try out mutual funds investments?
Today I want to share something interesting with you. I recently asked my team to share with me some very unconventional and “hatke” financial goals of our clients.
Generally, when we all talk of financial planning, we feel its just about the boring-sounding goals like Retirement, Children education, Children marriage, Buying House & Home Renovation etc. But its not true. We all have very special and unconventional dreams which we want to achieve. So I just compiled some unconventional goals of some of our clients.
Here are 10 unconventional finance goals of some of our clients which my team was able to recall.
1. Taking a 2 yr break from work
One of the clients has a goal of taking a 2-3 yrs long break from his work. He wants to explore what he is good at or not?
He is great at his current job and love doing it. But somewhere deep down he wants to know if there exist other areas of life he can make his profession and that is not possible unless he takes a very long break.
He was already working from last 11 yrs and within next 4-5 yrs he wanted to take a big break for 2 yrs, so that he can pursue his interests, like travelling, writing, research, volunteering or other activities and also take some quality rest. I know this sounds a bit risky, but its his life and we better not judge others decisions.
2. Send Parents on a World Tour
One of the clients wants to gift her parents a world tour (travelling to different destinations in 5 yr period) and wants to create a big corpus specifically earmarked for this goal. Her childhood was full of struggle and her parents almost never took vacations. But now she is earning well and she wants to pay back to her parents in whatever way she can.
She wants to now create a big corpus in a few years, which can be used for regular international tours. I think its a wonderful thought. Somewhere deep down we all want to do this for our parents (and many do), but she chose to make a financial goal and work towards it
3. Reach financial freedom by 45 yrs
Generally, every investor has “retirement planning” as a financial goal, but few of the investors also want to achieve financial freedom much earlier than retirement.
Some people want to get financially free at age of 50, but folks from IT background always mention the timeline as 45 yrs.
Financial Freedom is a situation where you have not yet retired from work, but you have enough investments which can generate “enough monthly income” to support from financial life for the next 20-30 yrs.
4. Dedicated Corpus for Skill Upgrade
We had this amazing client from Bangalore, who was very sure that if you want to excel and do amazing in your career, you have to deeply invest in the constant upgrade of your skills.
So he wants to create a dedicated corpus which he can dip in every 1-2 yrs and do some courses/workshops for skill upgrade. It can mean taking up online certifications, go for specialized weekend courses in IIM’s (you can pay a fee like 80k to 1 lac and take these courses).
I think this is a sign of high-quality people who think like this for their career enhancement.
5. Medical Expenses Corpus for self/parents
This is not very rare, but not very common too.
Off late we are seeing many investors who want to create a dedicated corpus for the health-related expenses of their ageing parents and even for themselves. In many cases, people do not get health insurance for their parents because of some illness history and these people want to be prepared for large expenses and creating a corpus solely for that.
Even if you have health insurance, many times it may happen that due to emergency you will first have to incur the costs from your own pocket and then you will apply for reimbursement. So this kind of emergency medical corpus can come handy at that time!
6. A road trip from India to London
Check out these 2 bikers from Bangalore who went to London on the bike and travelled 23,500 KM .. It was a dream come true for them. I watched their story and I also felt that someday I want to do it too.
But one of our clients actually has started planning for it, but not on bike!!. He will take a tour package and travel by bus.
There is a dedicated travel agency (https://bustolondon.in) which has started India to London Tour and it costs whooping 16 lacs (one side). However, its a 70 days journey and crosses 18 countries and I am sure this will be a trip of the lifetime!
7. Start Farming
Some investors are very sure that they want to get into farming after they reach the age of 50 in their corporate jobs and some have actually bought the land already and want to create a corpus to give their farming dream a serious shape.
They want to do the setup and also give it the of business. Most of these investors are clear that they don’t wont to be in jobs till 60th yrs and would like to move on to farming much before that. I am not sure if this will turn into reality for most of them or not. But there is no harm in trying out!
8. Legacy for future generations
Some clients also mentioned their strong desire to create a legacy which can be passed on to their next generation. They were not talking about the properties which will go by default to their family. Here they wanted to create a sum of money within a specified time which will be passed on to their children or grandchildren apart from the properties
9. Business Setup
A lot of investors who are in jobs also want to shift their careers at some point and want to move to business by the time they are in their mid 40’s or 50’s and they have already started accumulating money for the business setup.
A big chunk of these investors are from IT background and they often tell us that beyond 50 yrs they feel it’s going to get tough in the software industry and hence they want to plan out things for their future. Business is not a cakewalk either, but at least they are thinking of their plan B.
10. Charity / Social Work
Very less number of investors actually think about this, but some investors also show a strong desire to create a corpus which will be used for charity purpose itself. Many of our clients have shown deep interest in charity goals. Here are 2 of them
Example #1 – Create a pool of fund to do ongoing charity
One of our clients told us that since his college days, a close group of 5-6 friends had decided that in future they would like to keep doing various social work like for poor kids, senior citizens etc. Now, this clients wants to set up a 25 lacs corpus which will be used solely for this cause.
Example #2 – Create a Hospital in my village
One of our client comes from a very small village and now doing very well in life. His dream is to make a hospital in his village to serve his community and give back to society.
11. Buy a Harley Davidson (Fat Boy)
One of our client’s dream is to go on a long vacation and cover the whole coastal belt of India. He wants to do a solo trip but on a Harley Davidson bike (Fay Boy Model) which will cost around 18 lacs in today’s terms. He has already started saving for this.
What’s your “Hatke” financial goal?
Can you please share one unconventional financial goal for which you would like to plan out?
Also, I would like to hear how was this article and if you enjoyed it?
