Investors are lazy, busy or crazy.

One conclusion that we can draw from our many client meets is that investors are lazy, busy or crazy.

We at AIMS believe that most investors (though not all) don’t have the inclination or knowledge to manage money—their hard earned money—on their own and are victims of procrastination & impulsive decisions. Investors today are too busy with their work, family, personal and family obligations to take out time to manage money on their own and third there is too much information overload nowadays that makes them too hyperactive with managing money on their own while successful investing requires patience and consistency.

A.  Let’s see some of the actions by investors which will emphasize that investors are lazy

1. Investment preference for stocks: - Many investors swear by stocks despite being handicapped by factors like lack of research and proper & genuine information about the company they are investing in. They refuse to sell despite a change in fundamentals of the company. They strongly believe in self-healing properties of the stock and believe that everything’s going to turn out fine in the long run. For example there will still be stocks like IVRCL Infra, Pentamedia Graphics etc. in the portfolio of many investors.

2.   Lack of goal based planning: - Investors fail to map their investments to their life’s goals. As a result they fail to act rationally when markets move down. They ultimately end up buying high & selling low rather than doing the opposite. In the process they destroy wealth rather than creating it.

3.    Goals are either not set or are inadequately set: - Such investors either fail to work towards life’s goals or set unrealistic goals

 B.      Actions which will prove that investors are busy.

1.  I have no time. Such investors are too busy in their jobs to think about their life’s goals and investments. They are always on the move. We have even encountered investors who have not filed their income tax returns for last 4-5 years.

2. Investments are made with the sole objective of saving taxes. Investments are usually made towards the fag end of the financial year with the sole objective of saving taxes. They fail to realize that there’s more to investments than saving taxes.

C.      Investors’ actions which can be categorized as crazy

1.   Buying unsuitable products: - Classic example being insurance bought as investment products. Endowment policies of smaller denominations are readily bought rather than term insurance.

2.  Willingness to take credit risk rather than mark to market risk. A recent example of this is the fiasco at NSEL (National Spot Exchange Ltd). Investors are in the danger of losing approximately Rs. 5600 crores—more damning is the fact that nobody including the regulators, the income tax department, and various other government agencies have a clue as to where has the money gone. Till the scam broke out investors were sold commodities like jeera, castor seed etc. as risk free schemes with unrealistic returns.  No body questioned the proposition or the returns as long as the going was good. The entire investment is presently at risk. However, no one is willing to invest in debt or equity funds believing that the markets may go down even further.

3.  Return is the sole criteria for a good investment. Investors are solely guided by returns (which incidentally is nothing but past performance).They never care to look at the portfolio of the fund which is the talk of the town on return only parameter. Which of the two portfolios (not exhaustive) of short term funds of two fund houses of repute would you consider investing in? Fund House B may be generating a higher YTM on account of high risk investment in realty companies and that too with a low rating.

Fund A		Fund B
Portfolio(Rating)	%age of AUM	Portfolio(Rating)	%age of AUM
PFC(AAA)	11.99	HPCL Mittal Pipelines(ICRA AA-)	5.40
National Housing Bank(AAA)	11.22	Mahindra Life Space developers(Crisil A+)	2.36
IDFC(AAA)	11.15	Celica Developers (P) Ltd(BW AA-)	2.22
HDFC(AAA)	8.34	Mahindra World City(A)	1.53
NABARD(AAA)	7.48	Opelina Fin. & Inv (BWR A+)	1.41
LIC HOUSING FIN(AAA)	4.71	Edelweiss Housing (AA-)	1.26
1 year return	9.27%	1 year return	10.97%

*returns as provided by www.valueresearchonline.com

Hence there is a clear need for a professional advisor who can handhold and help investors with managing money. I think the biggest challenge for investors as on today is to find an advisor whom they can trust completely and give all their money to manage. The 'trust' element which is the biggest gap is what we need to work on as a fraternity.

Your search ends at www.investwithaims.com

Are you liable to Wealth Tax?

Wealth Tax!!

Very few tax payers’ in India have heard of it and still fewer pay it.

However, ignore it only at your own risk!

As per Indian Wealth Tax Act, 1957, wealth tax liability arises if market value of some assets (net of liabilities) exceeds Rs. 30 lacs.

The wealth tax act is supposed to bring into the tax net unproductive, non-essential & idle assets held by an assessee.  Two of the biggest obsessions of Indian investors—property & gold thus are naturally included in the definition of wealth and thus are subject to wealth tax. For example if you  own a second house which is not self-occupied nor is given out on rent, then the(market) value of such second house as on the valuation date(net of any liability to acquire such second house) will be subject to wealth tax. Gold, silver, whether bought, gifted or inherited forms part of computation of wealth.

Under Sec 2ea of wealth tax act, 1957 the following “assets” will be included in the definition of wealth:-

• any building or land appurtenant thereto (hereinafter referred to as "house"), whether used for residential or commercial purposes.
•  motor cars
•  jewelry, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum or any other precious metal
• urban land         
• yachts, boats and aircrafts (other than those used by the assessee for commercial purposes) ;
• cash in hand, in excess of fifty thousand rupees, of individuals and Hindu undivided families and in the case of other persons any amount not recorded in the books of account.

Exemptions:-

Following assets will be exempted from being included in the computation of net wealth chargeable to tax:-

• One house(at the option of the assessee where he owns more than one house) or part of the house belonging to the assessee

  

Net wealth to include certain assets (section 4)

In computing net wealth in the hands of an assessee as on the valuation date, following assets inter alia will also be included in the his hands:-

• assets held by spouse of such assessee to whom such assets have been transferred whether directly or indirectly otherwise than for adequate consideration or with an agreement to live apart.
• Assets held by a minor child(not being disable child)

Computation of wealth tax

Section 3(1) lays down that wealth tax shall be computed for every assessment year. Such wealth tax shall be computed on the net (of liabilities) wealth in excess of Rs. 30 lacs at the rate of 1% of such net wealth.

As wealth tax accounts for less than 0.25% of total direct taxes and is minuscule in the total revenue collection.(Last year, it contributed Rs 866 crore to the total revenue collection of Rs 1,038,036 crore). This may be one of the reasons why this tax is not taken very seriously by taxpayers & department alike because the Central Board of Direct Taxes is busy with other, more important, ones, such as corporate tax, income tax, service tax and excise.

However there is a stiff penalty for evading wealth tax. Incorrect declaration of wealth can invite a fine of up to 500% of the evaded tax.

                                               

Why Mutual Funds?

Somehow we always know what we should have done in the past with our investments. But when it comes to taking action now, we are clueless. We think for example that we must have booked some profits when the stock market was at its peak in January. We did not know it then, but know it surely now. We ignore that we have the benefit of hindsight, and almost believe that there has to be a way to figure out what seems so obvious. The truth is that there is no such nice little way to make money, and investors will quarrel with this known wisdom, as they use past data and show how money could have been made.

It is useful to think about ways and means of keeping the level of the market from swaying our investment decisions completely. If your favourite restaurant runs a discount on its Mexican menu, you may not choose to have it for breakfast, lunch and dinner, only because it is cheap, isn’t it? You would surely think that whether you are hungry, and whether you like Mexican cuisine are more important than the rock bottom price. Importantly, your choice of what you will eat will be driven by you, rather than what is on offer. We need to bring that common sense principle into investing as well. To an investor who hates any loss in the value of his portfolio, equity markets are a no-no even if the index is at a very attractive level. Just as my father will refuse to have pizzas for dinner, and my daughter will cringe at porridge. Therefore step one is to ask whether we like to be in the markets at all, and understand why we want to be there. If we figured that what we do with our investments has to stand on its own, driven by our needs and preferences, half the battle is won.

Sadly, just as we sneak in a samosa even as we are working out the fat, we find it so tough to actually implement what is good for us. There are well known behavioral traits that we have, which come in the way. Many of them bias our judgment and our decision. We may like to invest some money into equity at the current levels, having seen that corporate profits are healthy and fundamentals are good. But we will be worried about the fall in price that we have seen. It is so important to see some rise in price, before we buy, because we are led by our recent experiences. We are enthusiastic buyers when markets have moved up, and when everyone else seems to be buying. We seldom buy cheap. Somehow we think it has to be a good thing to do, if many people are doing so. Then, we like what we buy and refuse to accept that we could have a loser on hand. When we see prices falling, we convince ourselves that prices will somehow recover to our price. We are very much clued to our price, that it becomes some kind of mental benchmark. But the market does not know this and is unlikely to care. So we tend to keep losers, and refuse to reckon the loss. If we bought at Rs. 100 and the price fell to Rs. 20, we lost 80%. When we continue to hold what we bought, and hope it will go back to Rs. 100, we are expecting a 400% increase – not realistic isn’t it? At every decision to buy or sell, we need to fight the bias to implement what is good for us, and many of us find it tough to do so.

The moral of the story is, we may have a nice little strategy of investment, but if it is driven only by the level of the market, and not by our needs, there is a risk. That risk becomes higher, when our decisions about the markets are biased and our thinking about the market and the way we make our decisions are far from optimal. When we combine the craving for the right time to buy into the market, with the biases that we suffer, we could put our investments in danger.

There are two things we could do, if we accept that this is a problem, and that we need to do something about it:-

1.       We have a plan that we implement, without caring about where the market went.

2.       We let professionals manage our money, so the call on markets is not biased.

The mutual fund choice is sensible, because it enables us to implement disciplined investing in our own way, leaving the "market watch" to the fund managers. And having the fund managers to watch your money is a nice way to side step the bias. A fund manager is bound by investment processes and risk controls that take care of bias we will suffer when we deal with our own money. Have you noticed that your kids, who cringe about writing one-page of handwriting practice during the holidays, happily do 7 subjects a day in school? There is something about organization, process and discipline that makes a job which is complex for you, simple for others, and makes implementation a breeze.

Free your investments from bias. You will thank yourself.

Driving lessons apply to Investing also

 It was a year since we got the car. After a disastrous stint at the driving school, which made me feel as if the clutch was the most important part of the car, and driving lessons on Sunday, which disturbed the tranquility of my holiday, I took the simple decision - driving was not for me. I hated the thought of not being able to drive. I sat in the car and looked longingly at men who zipped past. My friends disbelieved that an otherwise confident me, was refusing to drive for the fear of the road. Sitting in the front seat of a car has the ability to increase the fears of people like me - every situation looks risky and every maneuver of fellow drivers very skillful, that I simply can’t get it.

Then came my dear friend Babaji, our new driver. Babaji was excellent behind the wheels and loved his job. He loved speed, but was safe to be with. After 6-months of being driven around by him, I asked tentatively, if he could teach me to drive. I told him that I am scared of the roads and worried about accidents. He talks very little, but on this issue, he went on a mini-lecture. He told me that I have to know few rules, exercise judgment and that’s it. Trust me; he got me to drive on the main roads, 2 days after our practice sessions in the deserted roads of Navi Mumbai. It is 3 years now, and I can’t thank Babaji enough, for making me confident to take the driver’s seat.

Now it was my turn to do something for Babaji. So I asked that I teach him what I know – investing. Babaji was not ready for this. He was not able to save much, and did not want to risk his small savings in markets. He reads a lot of newspapers, and told me that there it looks so complex and that he does not want to take any risk. We were on the way to office when I was convincing him, and there was big traffic jam in front of us. Babaji exercised patience as he switched from first gear to second and back. Soon as the road cleared, he sped to save time, overtaking vehicles and using every little space he got. I told him, investing is exactly like driving the road. You have to exercise judgment, you have to assess the scenario and decide, and that’s it. If I can drive, Babaji can surely invest!

The financial markets have many investment options, some are slow some are fast, just like vehicles on the road. There are regulators, licenses and signals in the markets, just as it is in the roads. Before anyone can collect money from investors, regulators have to approve the products and information given to the investors. Babaji quickly pointed out to me, that it does not always work. I told him that it does not always work on the roads either. There could be a truck driver without a license, who is learning to drive on the road. There could be vehicles that have not been serviced. The road itself may have potholes, or even be closed for repairs. Just as you cannot have a perfect road with perfect cars and drivers, you can’t have perfect markets; you have to figure out the way and exercise judgment.

To those who find this tough, there are buses and trains. Public transport that takes you at designated time, from one place to another for a fixed price. That’s what mutual funds do in the financial markets. They offer you specific products at specific prices. You can conveniently choose what you like, at the cost you can pay, and go to the destination you want. I told Babaji that investors tend to be confused on what they want. They get to the market not knowing where they want to go; they get into a bus and expect it to speed like a taxi, and they get off the bus if they find there is a jam, not realizing that they have to take another bus to go to their destination If investors used the same judgment Babaji used on roads, they will be safe in a market that has risks. The logic is the same. The financial markets also have rear view mirrors, maps and most importantly, brakes. So you only have to choose what you want to do and how. Babaji is not fully convinced and remains worried, but overtakes another truck. When I tell him that I find it so risky, he tells me that he knows what he is doing and I must not worry. That’s what it is, you need to find a trustworthy driver like Babaji (for your car and AIMS for your investments), who drives safely and skillfully, has a license and will reach you to your destination, every day, day after day. It is not even required that you learn to drive. If you do, it is an added skill you can use, when there is a need. But some choices ask that you hire and use the skills of others. After all you do not have to own a plane to be able to take a holiday!

Kitna milega?

No matter how much investors would like to know, for many financial products they should not be asking how much returns they will get...

Some time ago Maruti used to run an advertisement campaign where the person asks “kitna deti hai” (how much (mileage) does it give?).

The same question—in a  different context-- is asked by an investor too—how much return will I get or kitna milega?

While advisors try to answer it in their own way, we believe that there are no definite answers to the question if the investor intends to invest in stocks or mutual funds. Advisors idea more often than not is to quote a number that is likeliest to close the sale while not being a commitment.

Investors have to realize that equity does not carry a definitive return matrix. If the investor wants a definitive answer as to the %age return that he can expect, then we believe that the fault lies with him. If he does however expect a particular figure before writing out a cheque for investment, then he should restrict his investments to products that carry an enforceable commitment in black and white. This means bank fixed deposits, postal savings; PPF and so on.

Asking for an estimate or an informal promise on returns from any product that is inherently linked to a market-- be it stocks or anything else-- is inviting trouble. Either you won't get an answer or you'll get a dishonest answer, simply because no real answer exists. In fact, if a salesman is willing to give such an answer, then that itself indicates a problem.

If you are planning to invest in a mutual fund, or any other market-linked financial product then the process that is followed and the earlier track record is actually the best you have-- no matter how hard is it to get used to the idea.

You will not be reimbursed what you claim on your mediclaim policy

Many health insurance policies, specially the policies from PSU/Govt. Health Insurance Companies, and most of the Group Policies (The health insurance through your employer or Bank Policies) have limits on room rent (mostly @ 1% of Sum Inured). The limit basically puts a cap on the per day room rent you can claim, linked mostly to the sum insured (total coverage) you are entitled to. This may sound like an innocuous little restriction that will, at worst, shave off a few thousand rupees of your claim for hospitalization expenses.

But it is actually not so. Here is an example that will illustrate the huge impact of this clause. Let's say you have a mediclaim policy of Rs 3 lakh from a company that has a clause restricting room rents to 1% of the sum insured. This means the room rent limit applicable to you is Rs 3,000 per day.

Now, if you have to undergo a two-day stay in a hospital for a procedure (let's assume an angioplasty) that has the following costs:

• General Ward: Room rent Rs 1,000 per day plus all other eligible expenses - Rs 73,000 (total expenses are Rs 75,000 - room rent Rs 2,000 plus Rs 73,000 )
• Twin sharing room: Room rent Rs 3,500 per day plus all other eligible expenses - Rs 2,43,000 (total expenses are Rs 2,50,000 - room rent Rs 7,000 plus Rs 2,43,000)
• Single room: Room rent Rs 6,000 per day plus all other eligible expenses - Rs 3, 88,000 (total expenses are Rs 4,00,000 - room rent Rs 12,000 plus Rs 3,88,000 ).

What will be the amount you will be reimbursed if you decide to get the procedure done in a twin sharing room? It will cost you Rs 2, 50,000 (which is well within the policy limit of Rs 3 lakh) but how much will the insurance company reimburse you? If you are like most people, you would have answered Rs 2, 49,000 i.e. Costs of Rs 2, 43,000 incurred in the twin room combined with maximum room rent of Rs 6,000.

If this answer had been correct, then this restriction may not have such significant impact. Unfortunately the correct answer is Rs 79,000 only. A small fine print tucked away in the insurance policy states that the room rent restriction means that all expenses other than room rent will also be restricted based on what you would have incurred had you stayed in a room that you were entitled to. 

As per the article, here's how the claim will be paid.

Charge	Billed	Eligible	Total for 2 Days	Calculation
Room Rent	Rs. 3500	Rs. 3000	Rs. 6000	As per limit
Package	Rs. 243000	Rs. 208286	Rs. 73000	Nearest Eligible Room Charge
		Rs. 211286	Rs. 79000

In our opinion, here's how your health insurance company will pay claims, when you choose a hospital room, with rent higher than eligible under your health insurance policy.

1.   Where the Insurance Company or TPA has access to your hospital's tariff:

Most Hospitals have fixed tariffs or rate charts for all rooms. Bills generated are according to these tariffs. If the Insurance Company has access to the tariff chart, it will pay all charges as per the tariff for the eligible room rent category. In the above case, if there was a room of Rs. 3000 available, all charges would be paid as per the tariff. If there is no such eligible room in the limit available, the claim would be computed and paid proportionately (calculation below). So for instance, if in the above example, a room was available for Rs. 3000, the entire claim would be paid as per the tariff of the Rs. 3000 room. In case, where a Rs. 3000 room is unavailable, the charges under the claim would be paid proportionately as explained below.

2.   Where the Insurance Company or TPA does not have access to your hospital's tariff:

If Insurance companies do not have access to the hospital tariff, the insurance company would pay all other charges proportionate to the room rent eligible, as mentioned above. So if your room eligibility is Rs. 2000 and you opt for a Rs. 4000 room, you will pay 50% of all expenses. 

In short, if you look at it, in most cases, the claim would be paid proportionately, and not as per the nearest but lower available room rent tariff, which is fair for both parties (Insurance Companies and Customers)

To explain in the same example, here's how, in our opinion, the claim would actually be paid.

Charge	Billed	Eligible	Total for 2 days	Calculation
Room Rent	Rs. 3500	Rs. 3000	Rs. 7000	As per limit
Package	Rs. 243000	Rs. 208286	Rs. 208286	Rs. 243000 X 3000 / 3500
		Rs. 211286	Rs. 215286

An Exception

Now, there is an exception to this calculation only if it is explicitly mentioned in the policy wordings (terms and conditions) that the payment of claim for Room and other charges would be made as per the nearest eligible room.

What should you do?

But what about the general public, who are not looking at abusing such benefits, what should they do about this

• Go through the policy wordings of your health insurance policy, to check whether it has such a clause. Ask your health insurance advisor. If you have such a policy, you can look at porting the same to a better product. 
• If you are young family, and looking for a policy, go for a policy, which does not have room rent limits.
• If you have an existing policy, or don’t have a choice of a no room rent limit policy, go for a High Sum Insured. In the long term with Room Rents increasing and Room Rent limits remaining the same, one would witness deduction in claims due to the proportionate clause.
• If upgrade is not possible, create building a fund to bridge this gap in the cover you perceived and you really have.
• Finally, before deciding a room, in the hospital:  
• Go for packages, which are as per your room eligibility.
• If there are no suitable packages, negotiate with the hospital or treating doctor, explaining them how you would get proportionate deductions. In most cases, there would be a solution available.

Why the Corporate Health Insurance is not enough

Case Study:-

Raj has just graduated and was lucky to get placed in a top IT company. He was happy that his company was located near his home; he had a company sponsored health insurance policy, understanding colleagues and great work atmosphere! With a stable job, Raj soon got married. With everything going so well for him, Raj had no worries until his mother needed to be hospitalized for a hip surgery. But Raj wasn't perturbed as he had a health insurance policy which would pay for it. Soon his wife gave him the good news that they were expecting their first baby, Raj was ecstatic.

Within 6 months however, everything changed, global economy went through a recession and Raj’s company which was dependent on US market felt the consequences. His company soon started cutting costs and newer employees had to go.

Now Raj was no longer the confident young man that he used to be. He was depressed, with EMI to pay and more potential expenses to bear with the new child! It was after his wife’s delivery that he realized that had he had an independent health cover; he wouldn't be in such a financial mess. Realizing his mistake, Raj quickly got himself and his family a health insurance policy in spite of the money crunch at home.

 What does this story tell you? Other than the fickle nature of good fate, we understand that depending on the company’s health insurance policy alone is not a good idea. Like loss of jobs, there are many reasons—as below-- why you must buy an independent health cover.

You exceed your cover

A corporate health insurance plan looks attractive compared to individual health insurance plans but the corporate health insurance policy is not a complete solution. Like in case you have more than one claim in one year and you exceed your cover amount of your corporate health insurance policy; you would have to pay the residual amount with your own money which will affect your finances. Imagine if Raj had both his wife’s delivery and his mom’s surgery in one year, the sum assured wouldn't have sufficed and Raj would have had to arrange for a large amount from his own pocket, even assuming he had not lost his employment. But if you buy another health insurance policy, independent of your corporate health insurance policy, you wouldn't have to worry about the balance amount; between the two health insurance policies, your total outgo would mostly get covered.

You lose your job or are between jobs:

Like Raj, many of earning members of the families suddenly find themselves without jobs. With loans to pay and mouths to feed, a sudden medical emergency can topple the budget of the entire household. You cannot rely on your good luck or your friends and family to provide for you during such emergencies. Be self-reliant and get an independent health insurance policy which would be a great help during times like these.

Your company policy changes:

Your Company may suddenly decide to change or modify some of the conditions in your health insurance policy like not covering family members of the employees or not covering pre-existing diseases. In such cases you would suddenly discover that you are left uncovered and are vulnerable against the expenses and have to be subjected to the waiting period if you buy a new individual health insurance policy at that stage.

After Retirement:

Someone who has worked for a company for majority of his life will find that the company health insurance which had taken care of all the medical bills is no longer available post retirement. For them who have retired and now want to get a new independent health insurance policy, it would not be an easy ride ahead. Even though there are many senior citizen policies available, one may have to undergo medical tests, pay additional premium for pre-existing diseases, be subjected to compulsory co-payment features and then there is the waiting period for pre-existing diseases. It certainly would be difficult to get a new health insurance policy at 60 than say at 30. At a younger age, not only will you get the pre-existing diseases covered earlier but your premium may be lower because of ‘no claim’ discounts. So get an independent health insurance policy while you are working rather than suffer after retirement.

So now you know why you cannot just relax under the impression that all your health expenses will be taken care by your company’s health insurance policy, you need to create a safety net in the form of a separate health insurance policy for you and your family to fall back on in case of an emergency that your company’s health insurance policy will not pay for