Where does your money workout?

In the previous blogs we have learnt about various must-have insurance covers. Today we will explore various classes of investments. Everyone might be aware about some or all of them. But we will look at those through a different perspective – the workout way.

So does your money workout? That seems to be a weird question. We sweat out in the gyms and not our money. But I believe that money is like a body muscle and needs some serious workout in order to grow in size. So how can the money workout? I have drawn some parallels between the various investment options and the types of workout.

1) Idling away: Now this is really not a type of workout. As the word suggests it means doing nothing with your money. When you hoard money at home, in lockers or just in savings account (earning at 4% p.a.) the money does not workout at all. It is similar to lying on sofa thinking about all the gyms you can join. So the money muscle does not grow in this case.

Everyone knows the benefits of a regular workout. But only a few take the sincere efforts to actually learn the workout techniques and practise them regularly. The reasons might be pure lethargy, procrastination, lack of time, ‘I am fit’ (dis)belief. In similar way, everyone knows the importance of investments. But very few really take the effort to give the right kind of workout to their investments. The reasons here are quite similar.

2) Yoga: Doing regular Yogasanas and Pranayaam is definitely helpful. It relieves the stress, corrects posture, enhances blood circulation and calms our mind. But this does not build big muscles. Yoga resembles the debt category of investments. Debt is when you lend money to someone and earn nearly fixed interest income. The debt workout (FDs, RDs, Company deposits, Debt Mutual Funds, PPF etc) calms down your money. It does better than just idling away but still lacks in building the big muscles.

3) Daily chores: These are the part and parcel of our daily routines. This may be walking to the railway station, washing your vehicle, climbing the stairs, mopping the floor etc. But these have limitations. They exhaust you. People opine that this is better than doing no exercises. Many use only these ways to workout. Even if the muscles grow, their growth is anything but stupendous.

We can relate daily chores to investors' love for real estate and gold. These form the major chunk of most Indian investors’ portfolio. Some believe that gold and real estate are the only ways to make your money workout harder. You will find many of them boasting how this way of workout grew bigger money muscles. You would often find someone telling you that the value of property bought in 1960's has grown 100 times. But if calculated rationally the growth is just about 10% per year.

4) Weight training: This involves lifting, pulling and pushing heavy weights to build the biceps, triceps, chest, back, shoulders, legs. This is quite draining and if done without proper guidance can lead to injuries and strains. Most youngsters hit the gyms because it looks cool. But sooner the excitement fizzles out and attrition rate increases.

Now this can be compared to equity investments. Equity is your ownership in a business. The business may or may not be listed on a stock exchange. The equity workout of money seems to be cool and something which can be boasted off. Extraordinary money muscle growth is expected in shorter duration. But without proper guidance the strains (read losses) increase and drive away the money from the equity gyms.

Funny enough is the way, a gym goer checks his muscles in the mirrors to actually feel satisfied with the growth. Similar to this, money looks into the mirror (market rise) to check the growth. Few are satisfied but most are dejected. And so the attrition rates are high here. But this grows really big muscles over time. And if continued under proper guidance, it can be highly effective. To cite an example, HDFC Bank has multiplied 30 times in the last 15 years delivering yearly return of 25%. So Rs. 10,000 invested in the year 2000 would have grown to around Rs.2,84,000 today.

But one cannot always hit the gym. Gloomy environment during the rainy season or some sprains may keep you away from gym just like the unfavourable market conditions keep money away from the equity markets. Nonetheless one should continue with the workout.

Also sometimes we feel that the muscle growth has stopped. We then massage our body to relieve the stresses and pave way for further growth. So when the money workout doesn't yield good results over a prolonged period of time, it should be given a massage too. Massage given to money is known as re-balancing where you give the debt work out or engage the money in daily chores or just keep the money idle.

Ideally the money should workout in all the possible ways. So let your money workout vigorously even if you prefer the Yogasanas & daily chores.

Some more Insurances

Hello Friends. In the previous blog we read about the importance of term insurance. Today we would explore about some other types of insurance.

These insurance covers are important for every individual. There is awareness about these but there are misconceptions too. Also the insurance penetration of these is very less as compared to life insurance. So let us explore more.

1) Health insurance: This is commonly known as ‘mediclaim’. This is very popular among salaried employees as it is usually provided as a group cover by the employer. A health insurance cover pays for your medical expenses, if you are hospitalized for more than 24 hours. If you opt for a network hospital the claims are usually settled as cashless claims. But if you opt for a non-network hospital, the expenses are reimbursed by the insurer.

Due to the push given by the central government with launch of schemes, the insurance penetration has increased. But with nearly 70% of the medical expenses being paid out of the pocket, the situation still looks grave.

Usually people covered by employer do not buy personal health insurance. But with one big hospitalization of an insured family member, the other family members are left high and dry. Also the corporate cover would not take care of your expenses if you leave the job or in case of unfortunate loss of job. For the self employed people with irregular cash flows, hospitalization would put pressure on the finances.

So it is always better to buy health insurance even if you are covered by the employer. One can buy an individual cover or a family floater depending on the family size and age. The extent of cover should depend on the city you live in. So someone staying in a metro city should opt for a higher cover than someone staying in a tier 2 city. The more evolved investors might also want to look at critical illness cover which would cover expenses related to cancer treatments, kidney failure, paralysis etc.

2) Personal accident insurance: This is popular among the vehicle owners. This is usually bought along with the motor insurance as a comprehensive package. But should it be restricted to the vehicle owners? I believe it is as important as life & health insurance. While the term insurance pays your dependents on your death, the health insurance pays for your hospitalization. But what if your meet with an accident and are rendered jobless due to loss of a limb? The term insurance would not pay you as you are alive. The health insurance would have paid for your hospital stay and up to 60 days after being discharged. Who would compensate you for the loss of income in this case?

A personal accident policy takes care of you in this situation. It pays for accidental death, permanent total disablement, permanent partial disablement, temporary total disablement, broken bones. The accident does not necessarily mean being hit by car or a bike. You can claim even if you trip down the stairs, fall off from the bicycle etc.

The good part is the premium is not linked to your age; rather it is a function of your occupation. The premium for personal accident cover of 10 lakhs for a person with administrative type of job is well below Rs.1000 per annum. With low yearly premiums this cover is a must-have even if you do not have financial dependents.

3) Home Insurance: This is usually sold along with the home loan. The home loan lender insures the mortgaged asset (your home) from fire and natural calamities. What if the home loan is cleared? What if you are staying in a rented accommodation? Should not you insure your home and/or its contents? The answer is a plain ‘Yes’.

A home insurance covers the structure and its contents from fire and natural calamities. If only the structure is covered, the insurer will pay for the cost of reconstruction. If the contents (domestic appliances, furniture etc) are covered, the insurer will pay for those too. You can also choose to cover your home from burglary too. It is always better to opt for ‘reinstatement’ type of cover instead of ‘depreciated cost’ type of cover.

With the portfolio of Indian investors being heavily tilted towards real estate, one major calamity can pose serious threat to the savings. So it is prudent to insure your home and its contents. If you are staying in a rented accommodation at least insure the contents. Do not wait for the next floods, landslides, earthquake to wake up to an uninsured home.

Finally insurance is a subject matter of solicitation. An insurance product is not a packaged item like soap. It can be suited to the requirements of the buyer. So the obligation of understanding the terms and conditions of the insurance policy lies with the buyer i.e. you.

So these are the basic insurance requirements before you begin the investment planning process.