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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

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.

You must have heard this line in all mutual fund advertisements. “Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.” Then you may wonder why you should invest in mutual funds. The reason you are investing in mutual funds is that they invest in a diversified portfolio of shares and securities. Moreover, professional fund managers are managing your money, and you bear the fund management charges for that. Then, where does the risk come in?

Yes, investment in mutual funds is less risky than investing in direct stocks, but that doesn’t mean that mutual funds entail no risk. The very nature of investment instruments that your pool of money gets invested in is subject to periodic movements. Share prices change each minute, debentures are dependent on the yields and the papers available during a particular period and deposit rates change with the company and time. As a result, no mutual fund can promise returns that it will deliver. Nobody can precisely predict the market movements. So when share prices across the board are plunging, your equity-mutual-fund performance will be bleak, and when companies are faltering on deposit payments, the mutual fund scheme will suffer too. Though professional fund management ensures the reduction of stock-specific risk, there are several other risks that mutual fund schemes still have to deal with and here are three different ratios, which will help you measure the risk quotient of your portfolio.

1) Beta

It measures the volatility of a particular mutual fund in comparison to the market as a whole. A beta of 1.0 indicates that the NAV of the mutual fund will move in the same direction as that of the benchmark index. If the Nifty goes up, so will the NAV of the mutual fund that has the Nifty as its benchmark. Similarly, if the markets go into a tailspin, the NAV of the fund will also fall. If the beta is less than 1.0 indicates that the fund’s NAV will be less volatile than the benchmark index. On the other hand, a beta of more than 1.0 indicates that the investment style of the mutual fund is aggressive and more volatile than the benchmark index. If you are an aggressive investor, you can opt for these funds as they move up more than the benchmark, but the fall will also be steeper. If you are a conservative investor and prefer low-risk investments, you should consider mutual fund schemes with low beta.

2) R-Squared

Beta cannot be considered as a standalone measure; it needs to be considered along with ‘R-squared’, which measures the correlation between beta and its benchmark index. The combination of these two statistical measures helps you understand the risk of a mutual fund more accurately. Typically, ‘R-squared’ values fall in the range between 0 and 1, where 0 represents no correlation, and 1 represents full correlation. The lower the R-squared, the less reliable the beta, and vice versa. In other words, the beta of a fund has to be trusted only if the R-squared value is between 0.75 and 1. If the R-squared value is less than 0.75, it indicates the beta is not particularly useful as the fund is being compared against an inappropriate benchmark index. This fund will not mirror the returns of its benchmark index.

R-squared of an index fund, which invests in the same securities and in the same weightage as the underlying benchmark index, will be one. Given that Beta and R-squared are calculated based on historical data, it makes sense to consider Beta and R-squared before investing.

3) Standard Deviation (SD)

Standard deviation measures the volatility of a mutual fund by showing how much the return on a fund deviates from the expected returns based on its historical performance. It computes the total risk, which includes market risk, security-specific risk and portfolio risk of a mutual fund.

In simple words, standard deviation tells you how consistent the performance of your mutual fund is over a period of time. The higher the SD, the higher the volatility of the net asset value (NAV) of the mutual fund and the riskier your investment. However, you should use SD only when you compare a mutual fund with its peer group mutual funds. For instance, you should compare the SD of a large-cap fund with another large-cap fund and not with a mid-cap or a small-cap fund.

Top up health plans: Are they worth the buck?

How to measure the risk of your mutual fund portfolio