Money In The Right Pocket

As the new fiscal year kicks off, money is likely to be the last thing on your mind. What with the mad scramble to put together funds to funnel into tax saving instruments, and the seemingly interminable string of e-mails from HR reminding you to submit your investment proofs! And yet, it rings true that the new financial year is a remarkably opportune time to rejig, rebalance, and fine tune some aspects of your personal finances. Here are four ‘money things’ that you might want to consider doing at the start of FY 2019.

Investments: Start a SIP in an ELSS
The tidal wave of post-demonetisation liquidity, coupled with buoyant sentiment, came together to augment stock prices in 2017. Plus, the widespread proliferation of DIY investment platforms, and AMFI’s ubiquitous message that “Mutual Funds Sahi Hai”, sparked off interest levels in equity mutual funds like never before. In fact, equity mutual fund AUM (assets under management) surged 60 per cent from Rs 6.37 lakh crore to Rs 10.21 lakh crore in the 12-month period between February 2017 and February 2018 alone! Collaterally, tax saving investments into ELSS (equity-linked savings schemes) received a shot in the arm as well.

However, with a lot of the tailwinds that supported linear equity market growth starting to taper off now, we may be headed for volatile times — and the all too common act of lumping together all your ELSS investments at the end of the fiscal may prove unprofitable in the short run; and could potentially end up souring your investment experience, particularly if you are new to mutual funds.

This financial year, make the wise move of guesstimating your Section 80C shortfall from the ceiling limit of Rs 1.5 lakh (after accounting for your recurring life insurance premiums, home loans, children’s tuition fees, and the like) right at the beginning. Then, start a monthly SIP to the tune of your shortfall amount, divided by 12. By putting your tax saving investments on autopilot, you will be able to ride out volatile markets – as the price of your ELSS units will get averaged out over the course of the year.

“Traditionally, tax saving was a March phenomenon.  But a lot has changed since then. Starting an ELSS from April is great way of lightening the burden of cash, and also inculcating the great practice of disciplined, regular investing”, says Swarup Mohanty, CEO, Mirae Asset AMC.


Life Insurance: Nix those money-draining ‘traditional plans’
“One needs to separate life insurance and investments as a cardinal rule. Normally, due to low awareness levels, we see many policies being purchased without an adequate degree of pre-purchase evaluation,” says Tarun Birani, Founder & CEO, TBNG Capital Advisors.

Birani’s sage advice notwithstanding; it is an uncomfortable truth that low return generating, opaque and illiquid “traditional” life insurance plans remain a pervasive element of the investment portfolios of most retail investors.

The lure of these traditional plans (also known as ‘non-linked’ plans) mainly stems from the fact that they have no market-linked risk, and this appeals to the natural risk-aversion of most Indian investors. Since these plans possess very poor surrender values for the first few years, they lock you into the vicious cycle of throwing good money after bad. To make matters worse, the small death benefit amounts attached to these traditional plans tend to be ineffectual, and far lower than the human life value (HLV) of the insured person.

“One can look at the new financial year to exit such policies that are not relevant, and therefore do not serve one’s broad financial objectives,” advises Birani.

You will need to put in some work, though. Cleaning up your life insurance portfolio will entail trawling through your minutely-worded policy documents; not an enviable task, to say the least.

Specifically, you will want to scrutinise the table that shows you the year-wise surrender values associated with your plan. If you are eligible for anything more than 70 per cent of your total premiums paid, it certainly makes sense to take what’s on offer and invest the proceeds into higher return generating assets for the long term. Lower surrender value scenarios tend to be trickier and may require the advice of a professional financial advisor, on a case to case basis.

Health Insurance: Re-visit your sum insured value
Medical costs in India are escalating an eye-popping 11.3 per cent per annum, according to the recently released 2018 Global Medical Willis Towers Watson Trends Pulse Survey. The same survey also hypothesizes that “private practitioners in India are prone to using unnecessary surgery and related procedures when treatment occurs”. Put these two facts together, and you have a potential “perfect storm” on your hands, in the event of a health-related contingency.
To put the problem in financial planning terms — your goal-based savings can be rendered null and void overnight if you or your family members meet with a medical emergency that warrants immediate and expensive treatment. Your company provided mediclaim, likely capped at Rs 3 lakh-5 lakh per annum, will do little to ride you through a truly catastrophic situation.

Here is an interesting fact: The annual premium for most comprehensive medical insurance plans do not increase linearly with an increase in the sum insured value, especially in case of younger policyholders. Consider, for instance, the variance in annual premiums for ICICI Lombard’s iHealth Plan for a two-member family floater plan, with the eldest member being in the 26-35 age bracket. While the annual prem-ium for a Rs 10 lakh sum insured works out to Rs 11,117; the cost of procuring a whopping Rs 50 lakh sum insured works out to be just Rs 16,135 — barely Rs 5,000-odd more! That is an incremental cost worth bearing, when you consider the ramifications of the risk actually materialising.

Senior citizens should re-evaluate their health insurance coverages too, with the recent Union Budget raising their deduction limit under Section 80D to Rs 50,000 from Rs 30,000.

“In order to cash on this additional tax benefit, senior citizens should upgrade their sum insured under the existing policy in the new fiscal year—there-by addressing the issue of underinsurance and also getting access to greater benefits,” says Rakesh Jain, ED & CEO, Reliance General Insurance.

Tax Saving: Open an NPS Account
Opening an NPS (National Pension Scheme) account,  once an unwieldy and tiresome process, is now easy as pie. The account opening process no longer entails a physical visit to a bank branch — all you need to do is visit enps.nsdl.com and complete the formalities on the portal, which will take you 20-30 minutes and no more. If you have got an Aadhaar card, the process becomes even simpler — however, you may apply for an NPS account basis your PAN card alone (in which case you will need to have a bank account with one of the 25 empanelled banks).

For those who aren’t aware — the NPS is a voluntary, “defined contribution” scheme wherein your investments are channelized into market-linked schemes that are operated by professional fund managers. The structure of the NPS funds themselves are very similar to mutual Funds. The architecture is two-tiered, with the tier 1 account enforcing a hard lock in till your retirement date (counterintuitively, the illiquidity really serves as a plus point), and a more flexible tier 2 account which allows access to capital. All tax benefits accrue only to tier 1 account contributions.

“The NPS comes with many positive points as well as some challenges, which investors need to be well aware of,” says Birani.

The NPS has been criticized for reasons well known by now. The equity allocation is restricted to the detriment of the long-term retirement saver. The final withdrawal isn’t tax-free either.

Having said that, the returns from many NPS funds have been benchmark-beating over a five-year period now, and a whole lot better than the returns generated by traditional instruments that soak in the lion’s share of India Inc.’s tax-savings-led investments every year. Additionally, with an expense ratio of just 10 basis points or 0.1 per cent per annum, the NPS is one of the most inexpensive investment schemes on offer today.

This fiscal year, open an NPS account and contribute Rs 50,000 into it — you will receive a tax deduction for your entire contribution under Section 80CCD(1B), and this will be over and above your Section 80C deduction. Keep two things in mind, though: First, opt for the most aggressive asset allocation available to you, basis your age. Second, invest in no more than six tranches of Rs 8,000 each. Since the NPS levies an upfront charge of 0.25 per cent per purchase subject to a minimum of Rs 20, investing in tranches smaller than Rs 8,000 will increase your upfront ‘load’ to more than 0.25 per cent per transaction — an unreasonably high entry cost to bear.