Insurance

Invest in hybrid funds to beat market volatility

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Hybrid fund

Equity markets have been volatile for the last few months. Markets move up one day and correct the next day, causing anxiety for some investors. In the absence of clear direction retail investors find it difficult to enter the equity market. If current volatility in equity markets is a cause of concern for you then consider hybrid funds in your portfolio. These funds seek to offer the benefit of both worlds in a single investment structure, as equity has the potential to deliver attractive returns in the long term while debt provides relative stability to the portfolio. Hybrid funds can be further classified as equity-oriented or debt-oriented hybrid funds. Equity-oriented hybrid funds are generally known as balanced funds, while the debt-oriented hybrid funds are better known as Monthly Income Plans or MIPs. Usually, balanced funds are allocated in the ratio of 65% equity and 35% debt, including some cash. Monthly income plans, on the other hand, generally allocate 5% to 25% in equity and balance in debt securities. Unlike a pure equity fund, the growth potential as well as risk of volatility is limited to the equity allocation in these funds.

Funds with dynamic asset allocation

Within hybrid funds, there are low-volatility equity funds or balanced advantage funds. These funds tend to have portfolios with a mix of stocks and debt securities that respond to market conditions as perceived by the fund manager. Equity exposure may go as high as 80% in these funds when markets are favourable for investment. Stock selection in these funds is based on the valuation yardstick, such as price-to-book value. These funds are structured to invest in equities when markets are cheap and book profits when markets are rising, thus minimising risk and aiming to provide good long-term returns. The objective of these funds is not only to beat the volatility but to provide long-term growth. Several studies have confirmed that the performance of a portfolio is majorly determined by asset allocation and, therefore, getting the right asset allocation that works well with the market conditions is a must for creating long-term wealth. Tax efficiency is another advantage of these funds. Due to their minimum 65% allocation in equity, these funds offer taxation like equity funds. If the holding period is longer than a year, returns are tax-exempt; otherwise, they are subject to short-term capital gains tax.

Suitable for all investors

Due to limited exposure in equity, these funds are less aggressive compared to pure equity funds and hence possess less risk. These funds are suitable for investors who are looking for a lower risk without compromising on the long-term growth potential of equity. It can be a preferred solution for investors looking for dynamic asset allocation but find it difficult to rebalance the portfolio according to market conditions. These funds can also be considered by first-time equity investors who want to enjoy the benefits of equity investment but worried about volatility as a nature of equity market.

Top up health plans: Are they worth the buck?

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TOP UP Health Plan umbrella1

What is the size of your health cover? Rs 2 lakhs, Rs 3 lakhs or Rs 5 lakhs? This sum assured, as it is called in insurance parlance, could cover minor hospitalisation costs. However, life-threatening ailments such as heart surgery and cancer come with a heavy price tag, and your health insurance may really fall short of medical expenses.

With medical inflation growing in double digits, year after year, inevitably, hospitalisation expenses are also on the rise. In such an event, your health cover could fall short of medical expenses and burn a hole in your pocket. Hence, there is a need to review your health insurance and cover any shortfall. In such a scenario, it makes sense to go for a top-up plan as they are at least 20% cheaper than going for a new health cover altogether.

What is a top-up plan?

It is a regular indemnity plan that covers hospitalisation costs only after a certain threshold limit, which is called a deductible in insurance parlance. One portion of the claim is borne either by the policyholder or the other insurer. Once the policyholder pays off that component, the top-up health cover kicks in.

Let’s assume you have taken a top-up plan of Rs 10 lakhs and it has a deductible limit of Rs 4 lakhs. If the total hospital bill comes to Rs 7 lakhs, you need to pay Rs 4 lakhs and the balance (Rs 3 lakhs) is paid from the top-up plan.

Why are top-up plans cheaper?

No, there are no caveats here. These plans are at least 20% cheaper than individual health covers, mainly on account of deductibles. These deductibles protect top-up plans from frequent claims. Hence, the insurers are able to keep the pricing of such plans lower.

When does it make sense to opt for a top-up plan?

Given the spiralling medical costs, a basic health cover of Rs 3 lakh to 5 lakh is not enough. A top-up plan is definitely a good way to bridge this shortfall. However, it’s not always the best option

  • If your base cover is high, say Rs 5 lakh or more, it makes sense to opt for a top-up plan
  • If your base cover is low, say Rs 3 lakhs or less, it’s better to opt for another individual health plan since top-up plans are mostly reimbursement plans

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Top-up plans: What’s available in the market?

There are two kinds of top-up plans available: a basic top-up plan and a floater plan.

Basic top-up plan:

The policyholder will get the benefit of a top-up plan only if the bill exceeds the deductible limit in a single event of hospitalisation. For instance, if an individual’s hospitalisation bill is Rs. 5 lakh and the top-up plan has a Rs. 3 lakh deductible, and the individual gets hospitalised twice in the year, the first time it costs Rs. 2.5 lakh and the second time Rs. 2 lakh, the top-up plan will not get triggered at all. The total bill overshoots the limit of Rs. 3 lakh; however, each event of hospitalisation is well within the deductible limit.

Floater plan:

With a floater plan where two members get hospitalised with bills of Rs. 2.5 lakh each, the top-up plan will not get triggered at all. Even though the total amount is more than Rs. 3 lakh, individually, they are within the deductible limit.

Aggregate claim:

This is an improvised version of the above-mentioned plans. This plan puts together several cases of hospitalisation to calculate the deductible limit. So if the total bill of all the events of hospitalisation crosses the deductible limit, the top-up plan will get activated.