Create a financial war chest

MONEY-MAKEOVER

Financial planner Gaurav Mashruwala says that the first investment should be one that protects you from any health or life contingencies

    Under any circumstances, don't develop bad habits." This is what Sagar's parents drilled into him throughout his childhood. Not only is it bad for character, but it is also bad for health and wealth. Sagar Naik (28) thanks his parents for being so forceful about this. His father is a teacher in a government school and his mother is a nurse. His only sister is married and lives in London.
Sagar, his wife Shamla, and his parents live in Mulund, Mumbai. This place was bought after Sagar got his job. The family has steadily progressed from a one-room kitchen house to a one-bedroom hall kitchen and now to a two-bedroom house. While he is a manager in private airline, Shamla works in the private sector. They are expecting their first child early next year.
    There will be a
change in the family income composition soon. With the arrival of the baby Shamala will remain home. Also Sagar's father is retiring in the next few months. The arrival of child will increase expenses. Managing the transition in family income and family size is the focus of this plan.
WHAT ARE THEY SAVING FOR?
(1) The arrival of a baby brings in thoughts of education and marriage. For both these responsibilities, the couple wants to start saving now --They want Rs 8 lakhs for higher education and Rs 4 lakhs for marriage after 18 and 25 years. (2) Further, they want to set aside Rs 3 lakhs to meet their parents' health eventualities. (3) For their retirement, they want a corpus of Rs 1 crore. All these are at today's rate of inflation. They also want a car of about Rs 3 lakhs and dream of foreign travel.
WHERE ARE THEY TODAY?
Cash flow: Total yearly inflow of the couple is Rs 9.46 lakhs. Against this, the outflow is Rs 7.62 lakhs, going towards mandatory savings routine expenses, insurance premium, taxes and EMI for home and personal loan. About 26% of the income is being used to service loans.
Statement of net worth: Total assets are worth Rs 44.84 lakhs. Of this, assets worth Rs 41 lakhs are in the form of house and jewelry. Total outstanding home loan is Rs 17 lakhs and personal loan about Rs 83,000. Liabilities constitute about 40% of assets.
Contingency fund: Mandatory monthly expenses are about Rs 50,000. Against this, the balance in savings bank and cash at home is Rs 68,000. Health & life insurance: There is Rs 1.50 lakhs health cover provided by the employer for the entire family. Life insurance cover in the form of a term plan is Rs 15 lakhs for Sagar. Shamala has money back policy of Rs 1.00 lakhs.
Savings & investments: Value of investments is Rs 3.84 lakhs. This includes savings bank balance of Rs 60,000, cash at home Rs 8,000, equity mutual fund Rs 1.27 lakhs, EPF/PPF Rs 1.35 lakhs and investment in post office schemes Rs 54,000. About 33% of the overall portfolio is in equity, the rest in debt.
FISCAL ANALYSIS: Decent income. The family is low on contingency funds, health insurance and life insurance. Borrowing is within permissible limits. Debt to equity ratio is reasonable. Overall, the family is ill prepared for the transition.
WAY AHEAD:
Contingency fund: Preferably, keep about four months' reserve for contingencies, ie Rs 2 lakhs, keeping in mind the baby. This seems a little difficult right now. However, from now on, for a few months, divert some regular savings towards creating this corpus.
Health & life insurance: Opt for health cover worth Rs 5 lakhs for each member of the family. Do not go for a family floater, as the family can afford dedicated policies.
Life insurance cover for Sagar should be increased to Rs 50 lakhs through term plans.
Planning for Financial Goals:
    Firstly, focus on creating the contingency reserve and purchase of health and life insurance. Child's education & marriage: Invest systematically in an index fund and an international fund. Parental responsibility: Consider balance in EPF for parents and build it up steadily Retirement: Continue systematic plans used for child's education and marriage further to create corpus for retirement.
PLANNER'S EYE
The contingency fund, health and life insurance are like the war chest against financial eventualities. Contingency fund helps withstanding situations where no formal insurance is available --like job loss, catastrophe etc. Health insurance helps us meet expenses due to illness, hospitalization, etc. Life insurance takes care of the financial loss created due to the death of an earning member.
    In the absence of these three, the family gets exposed to financial vagaries of life. The absence of this war chest would mean that the family will erode its wealth and/or get into debt.
    When any one asks me what should be their first investment, my standard answer without blinking an eye is, create contingency and ensure proper health and life insurance.

Sow young, reap the rewards

Financial planner Gaurav Mashruwala advises parents not to shelter their children from money matters

 Education and self-reliance usually go hand-in-hand. This is what Viral Harsora's parents believed in and practiced for him. While education was his primary focus, and Viral went on to do his BE, right through college, he also used to do small assignments to earn pocket money. His parents insisted on teaching him the value of being financially independent. Viral earned his first income when he was a teenager.
    Today, 33-year-old Viral lives with his parents, wife and son in Pune. The family has a residential property in Mumbai as well as Pune.
WHAT ARE THEIR GOALS?
    (1) Firstly they want a bigger house, which would cost about Rs 1 crore. (2) For his son's higher education after 15 years they need Rs 8 lakhs, and Rs 5 lakhs for his marriage after 20 years (3) The couple also wants a corpus of Rs 2 crore at the time of retirement after 25 years. All these costs are at today's rate of inflation. If wealth permits, they wish to purchase a luxury car worth Rs 15 lakhs.
WHERE ARE THEY TODAY?
Cash flow: Their total income from all sources is about Rs 10 lakhs. Against this, they spend Rs 5.62 lakhs on routine expenses, insurance premium, EMI towards the mortgage. About 14% of the income services their home loan.
Statement of net worth: The total value of their assets is Rs 53.30 lakhs. This includes cash, invested assets and assets for self-consumption. Noninvested assets are worth Rs 42 lakhs (house Rs 40 lakhs and jewelry Rs 2 lakhs). Outstanding liability on the home loan is Rs 2 lakhs.
Contingency fund: Mandatory expense per month is Rs 40,000. They have Rs 1 lakh in cash, which is 2.5 months' expenses.
Health & life insurance: Viral's employer provides health cover for the family so his parents are covered. In addition, he has independent health insurance of Rs 2 lakhs each for himself, his wife and child. Total life cover for Viral is about Rs 10 lakhs, all in investment-oriented policies.
Savings & investments:
Value of total assets is Rs 53.30 lakhs. The balance in the savings bank is Rs 1 lakh. The balance in EPF/PPF is Rs 7 lakhs. At current market rates, the equity portfolio is valued at Rs 2 lakhs and equity mutual fund, Rs 1 lakh. They have Rs 30,000 in post office schemes. Asset allocation between debt and equity is 64:36.
FISCAL ANALYSIS: The family is able to save more than 40% of inflow. This is great. The contingency fund is a little low. The health insurance is currently sufficient. However, in case Viral were to quit his job, his parents may not have coverage. Life insurance is very low and is in investment-oriented policies. Debt:equity allocation is not optimal. Since most goals are far-off, equity has to be higher. Borrowing is well within permissible limits.
WAY AHEAD:
Contingency funds: Since there are elderly parents, keep aside funds equivalent to about 4/5 months monthly expenses towards contingency.
Health insurance: Purchase maximum possible health cover for both parents.
Life insurance: Recommended life cover for Viral is Rs 1 crore--because the couple dreams of a bigger house for which they will have to borrow funds and they also need large retirement corpus. Cover should be bought in form of term plan. In case of any eventualities, use insurance proceeds to pay off loan and invest balance to create desired corpus.
Borrowing: After increasing contingency reserve, purchasing health cover for parents and life insurance for self, aggressively pay-off home loan. Try and complete loan within a year.
PLANNING FOR FINANCIAL GOALS.
Bigger house: After meeting recommended financial obligation, invest maximum possible amount every month in a mutual fund having 75% equity and 25% debt. When buying the bigger house, sell off the existing Pune residence. Also, liquidate mutual fund portfolio. Use proceeds to make a down payment. In case of shortfall, borrow the funds.
Son's education & marriage: After buying the house, invest Rs 40,000 in mutual funds every month. Allocate between an index fund, international equity fund and gold fund. Do not invest in sectorial, thematic or structured products.
Retirement: Continue the above investment strategy for retirement planning as well.

ADAG co to roll out health mgmt services

Mumbai: Medybiz, a disease management company of Reliance Health Venture, is set to unveil its integrated health management services. Part of the Anil Dhirubhai Ambani Group, the firm will attempt to cut healthcare costs by 40% by focusing on homecare programmes for chronic patients.
    The 22-city rollout, which begins in Mumbai early next month, will go national in a phased manner. In the long run, the company plans to offer these services across tier-1 and tier-2 cities, sources said.
    Five pilot projects are under way in Mumbai to understand the patient pool and set up chronic care infrastructure. The projects are on at Andheri (W), Khar, Nerul (Navi Mumbai), Bandra and Vile Parle, sources said.
    A Medybiz spokesperson declined to comment on the pilots, but said, "In a country like India where there are limited resources catering to health and competing demands, not all conditions can be treated and not every intervention provided at public expense. Here, disease management services will act as an effective healthcare delivery tool.''
    The concept, highly popular in the West where it was introduced by insurance companies as a preventive care measure, would aim to improve outcomes for chronically ill and high-risk patients. The programme is based on the module of a unique partnership between the physician and the patient and serviced by a panel of medical and paramedical professionals.
    Medybiz will focus on 12 chronic ailments as part of its portfolio, some of which will be diabetes, arthritis, asthma, chronic lung disease, cancers, heart diseases and Parkinson's.
    With fees starting from as low as Rs 1,200 to Rs 1,700 a month, the patient-centric service model will have all services practically provided at the patient's doorstep, including delivery of medication.
    The disease management service is an addition to Reliance's ambitious plans for its healthcare business, which already caters to medical insurance and the hospital business.
    To take this further, Medybiz is in talks for a strategic tie-up with insurance majors for specialised products. The company is also keen to launch a geriatric care vertical in addition to its chronic ailment business, and aims to tap a senior citizen population of 85 million.

FDI booster dose to rejuvenate health insurance cos

Premium Income Expected To Touch Rs 30k Cr In 7 Years; Half Of The Population May Get Cover

HEALTH insurance is poised to record a massive growth in India. Half of the country's population is expected to come under the health insurance umbrella in the next seven years, according to an Ernst & Young study. A mere 12% of the population is currently covered by healthcare.
    The health insurance premium income is likely to touch Rs 30,000 crore in 2015 from the existing Rs 4,000 crore, according to the study. The premium was Rs 670 crore in FY02. Experts say the government's proposal to scale up the foreign direct investment (FDI) in the insurance sector from 26% to 49% will boost the healthcare business. Ernst & Young National Leader-Financial Services, Ashvin Parekh says, "The health insurance report is yet to be tabled, but increased FDI investment will help the sector. The committee on health insurance has submitted its report recommending a reduction in capital, transformation of health providers into stakeholders in health insurance companies to prevent over-treatment and encouragement of regional health insurance companies vis-a-vis pan-Indian ones."
    Ideally, three years of health reforms should give rise to 16 regional health insurance companies. "It is important to create a pool of resources at the grassroots level and cover communities instead of individuals. Moreover, abuse needs to be checked, given the importance of data," Mr Parekh said.
    With rising income levels, changing lifestyles and dietary patterns, the healthcare consumption in India has increased by 8% in the past 20 years, compared to the overall consumption growth of 4.7%. The health expenditure across the country was Rs 180,000 crore last year. Given the escalating healthcare costs, rising demand for healthcare services and limited access of the low-income group to quality healthcare, health insurance is emerging as an alternative mechanism for financing healthcare. And with merely 12% of the population being covered, companies are looking at the health insurance space as a lucrative segment.
    The state-owned companies constitute nearly 70% of the health insurance market and private companies account for the remaining 30% As the out-of-pocket expenditure on healthcare is pegged at more than 70%, private insurers are treating this as an important target market. ICICI Prudential has started a division catering to health insurance, while Bupa-Max is awaiting the IRDA's approval to launch health insurance schemes. LIC recently unveiled its health insurance scheme to compete with players such as Apollo, Star and Bajaj Allianz.
    Bajaj Allianz head of health insurance Shreeraj Deshpande said, "We are going to the semiurban and rural areas. We are targeting the informal sector by having viable products and communicating through NGOs." The channels of reach are also seeing a change, with companies tapping banks' databases in an attempt to reach people. "Banks will play an important role in selling policies, given the difficult environment. The entry of additional companies into the health insurance sector will depend on regulations and companies' abilities to make profits," he said.
    "The growth in healthcare will be supported by standalone health insurance companies and new players. Moreover, domestic life insurance players are augmenting their product portfolios with innovative standalone health insurance products for catering to the growing health insurance segment," the report stated.
    nina.mehta@timesgroup.com