Monday, May 28, 2012

Way Forward

Legendary investment guru Peter Lynch once said “ I've found that when market’s going down and you buy funds wisely, at some point in future, you will be happy. You won’t get there by reading “Now is the time to buy. These things never go off that way.”

The atmosphere is one of gloom and doom. No one you meet today at gatherings ever gets to talk about the markets.  Just like equities have become pariahs for investors. Inflation does not come down, high interest rates hurting businesses, fiscal imbalance of Eurozone (and in India) does not improve etc. are some news reports which do not alarm anybody.
Now is possibly the most stressful situation that Indian equity investors have ever faced. Not only is the equity faring badly, but the overall business environment is also not too encouraging. The pessimistic outlook about the market is overplaying itself. The period 2008-2011 is the most forgettable period and everyone who has some market related investment knows very well what they have lost and would like to put that behind them as soon as possible. Our effort at representing the pain through some numbers will be neither interesting nor useful.

Unfortunately many people including those so called experts who dish out market strategy on a daily basis---see as many problems looking forward as they do when they look backward. This is not the first crash that we are witnessing right now. Sensex has seen several bear phases since 1986. The current scenario appears depressing since we look at it through the narrow sphere of 1, 2, 5 years. Apply the concept of rolling returns to the economic conditions of India. Take any 10 year period over the last 60 years and compare the situation in the beginning with that at the end. Were things better in 1990 or 2000? The answer is obvious—the latter. 2000 or 2010? The answer is the same every time. When you stand back and take a 10-year perspective the growth in the economy will be apparent. For example between 2005-2010 the Indian economy doubled in size. This growth has trickle-down effect on every constituent of the economy. This is also evident from the demand for real estate and cars that is seen at the ground level. In short the economy never regresses during any 10 year period.

I think it’s now time to be a little contrarian and give a re-look to equity. For long term investors the market slump like the present one (though not the first one) is an opportunity to buy. The India story is too strong to be crippled by external turbulence or incompetent political leadership (ironically though headed by a person who ushered economic liberalization) internally—but that’s a different story altogether.
Just as a high tide lifts all the boats, the reverse is also true in investments. If a booming market lifts all boats, then a receding tide sinks all boats. The atmosphere of gloom and doom has been around for quite a long time now. An economy growing at 6%+ rate is bound to reflect in stock prices sooner rather than later. So the worst thing an investor can do at this juncture is to focus on the short term volatility and not buy into the reasonably cheap valuations—because you are not going to receive a “tip” to go out and buy. For the long-term investor, equity is not good despite the occasional crash. It's good precisely because it crashes!

Health Insurance--A Necessity

Watched Satyamev Jayate episode on state of healthcare in India today (27/05/2012). One of the issues which attracted lot of sound bites was high cost incurred on medical treatment today. One study estimates demand for healthcare to be increasing at a rate of 25% a year. This demand coupled with growing middle class and rise in cost of medical treatment raises the costs of medical treatment even further.

With a rise in lifestyle diseases and high healthcare costs, lack of adequate health insurance coverage can severely impact not only your finances, but can also derail achievement of your financial goals.

However, it is sad that the concept of adequate health insurance is still missing in India. Cost of medical insurance is usually treated as sunk costs and hence low priority is accorded to it. Further we usually do not want to believe that we will be facing a medical emergency ever—until we face it.

The most popular personal medical insurance—Mediclaim-- are-imbursement medical insurance policy offered by private & public sector insurance companies. While the maximum coverage offered by public sector mediclaim insurance companies is Rs. 5 lacs, private companies offer a higher coverage.  Health insurance is a hospitalization cover where the actual medical expenses are reimbursed subject to overall limits as set by companies. This is termed as individual health insurance.

Where the entire family is covered under a single insurance policy is called Family Floater Policy. The logic of such a policy—which is cheaper than individual cover-- is that all the family members are less likely to fall sick together. This results in higher coverage for the family member who may need the coverage in any eventuality.

Another type of medical insurance (it is a rider benefit) which is available is called Critical Care Insurance. This is a replacement type of insurance rather than re-imbursement. Under such a policy the entire sum assured is paid on diagnosis of a specified disease---irrespective of actual expenses incurred. Critical illness like
·         Kidney Failure
·         Cancer
·         Stroke
·         Heart Attack
·         Major organ transplant (as a recipient)
·         Coronary Artery Bypass Graft Surgery

The above is not exhaustive and the list of critical illness may vary from company to company.

For salaried individuals, where employer normally subscribes to a group insurance plan for the benefit of employees, and non-salaried people the critical care policies—if subscribed by them-- can be a blessing in disguise. In such cases, while mediclaim takes care of actual medical expenses, payment of the guaranteed sum assured ensures that the family finances are not disturbed and the person can meet his life’s goals.

However, one of the basic flaws in medical insurance policies is that your cover mostly expires at age 65—the period when you are most likely to fall ill.

So does it mean that post retirement, meeting medical expenses should be left to chance, or should it be met out of your retirement fund?

The answer is big no! You can make your own health insurance by investing a small sum every month till you retire. (Goal based planning)The fund so accumulated can fund your medical treatment even when you do not have the security of medical insurance. For example if you invest Rs. 1000 per month(less than the cost of a movie at multiplex) in a Monthly Income Plan(MIP) of a mutual fund religiously for say 40 years (typical working life) @ 8%, then you would have accumulated close to Rs.35,14,280—a decent fund to meet medical exigencies.

Medical emergencies do not announce their arrival. Make sure you are prepared for it--TODAY!