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SIPs help your money grow, safely
Outlook Money
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January 12, 2007

Outlook Money answers readers' question on insurance and mutual funds.

Which is the best ELSS in the market? How do I judge an ELSS's performance?
-- Debarshi Dasgupta

Among the better performing ELSSs are those from HDFC, SBI and PruICICI. It is important that the ELSS you choose is from a fund house that shows consistent overall performance. Since ELSS is a scheme with a three-year lock-in period, the quality of the managers is more important than the current performance ranking.

The three-year lock in provides the ELSS the opportunity to use mid- and small-cap stocks, which have good growth potential, but limited liquidity. You will find that many better performing ELSS schemes have this bias. This may cause some short-term risks, but the long-term returns are worthwhile.

I have decided to invest Rs 2,000 each in SIP in HDFC Top 200, Franklin India Prima Plus, Reliance Vision, Sundaram Select Midcap and SBI Magnum Contra. Is my selection correct, or do I need to get rid of one of them and add another fund?
-- Paritosh Uttam

Your choice of funds is quite good and complete. You also have the right combination of large and mid-cap, growth, value and momentum.

You may like to replace Contra with Global because you will get the benefits of mid- and small-cap value from Prima Plus. You will also reduce the mid-cap bias a bit by doing so.

How long should one remain invested in an SIP? Is it better to shift to another SIP after receiving around 500 units from the earlier one?
-- Amit

SIP is a facility to invest regularly in a disciplined manner. Given the fluctuations in the market, an SIP enables the investor to continue to invest without seeking to time the market.

If one were to take conscious decisions to invest at certain points of time, such decisions can be difficult to implement either because of emotional considerations (who but the SIP investor would have been in the market through May-August 2006?) or simply due to inertia (how many of us have money lying unused in a saving bank account?). SIP enables you to put your investments on auto mode.

Therefore, there is no need to make a further timing decision in an SIP, wondering about the time to be in it and the time to shift. Choose from schemes with good track records, and go for a one-year SIP. End of the year, you can review your scheme and continue with the same or shift to another.

I am an Indian working in Dubai. Can I invest in Indian mutual funds, or should look for options here?
-- Sadaf Shahbaz

Since you will have a NRI status, you can invest in Indian MFs. You will earn better returns than what you can in most of the investment options available in Dubai.

Though you can invest in many of the developed and emerging markets from Dubai, make sure you have a good allocation to India as the markets hold promise. The added advantage is that dividend from Indian mutual funds is exempt from tax, and your investment in equity funds is also not subject to long-term capital gains.

You can invest through the Indian and multi-national banks present in Dubai, and also monitor your investments by choosing to have Internet access to your mutual fund investments.

I want to get a monthly income of Rs 10,000 by investing once. Which plan should I go for and what should be the investment amount?
-- Veenu Sandhu

If your need is for income, you should choose a monthly income plan with equity exposure so that you are able to gain some growth as well as income. The returns on these products range from five per cent for the last fund in the category to 15 per cent for the top-performing fund.

MIPs from SBI, HDFC, PruICICI (choose the option with higher equity allocation) should be able to give a 10-15 per cent distribution. You will have to invest Rs 10 lakh to be able to generate the money you have on mind, month after month.

Insurance queries

I have bought a house in Delhi. What kind of insurance should I look at?
-- Shreeta Shekhar

You need to ensure the building and the contents of the house. For the building, you can take a separate policy, covering the risks of fire and allied perils. You can also add a cover for earthquake. Alternatively, you may buy a comprehensive householders' policy.

This covers the building and also its contents against various risks. You can also cover your electrical equipment against the risk of breakdown. Jewellery and other valuables can be covered against all risks, including loss within the geographical territory of India.

I am 40-year-old diabetic. My wife is 37 and child seven. Am I eligible to take a family mediclaim policy?
-- Uma Shankar

You can certainly secure a family mediclaim policy for your family. Since you are already suffering from diabetes, it will be excluded from the scope of the policy. Your wife and child can have a normal cover according to the terms and conditions of the policy, which you choose.

I bought a house in June 2006. The fire insurance policy on the building acquired by the previous owner is valid till March 2007. Can the insurance company decline to pay a small loss, which occurred in July 2006, on the pretext of change of ownership?
-- Atul Shukla

As per the conditions of the fire insurance policy, the interest of the insured in the insured property must exist at the time of buying the policy and also at the time of occurrence of loss. Typically, the policy gets cancelled on the sale, or transfer of property. Therefore, in your case, since you were not the owner at the time of the inception of the policy, you would not be eligible to prefer claim under the fire insurance policy.

Can the proceeds of a policy be protected against creditor's claims in the event of the insolvency of a policyholder?
-- Ragini Malhotra

The proceeds of a life insurance policy can be protected against the claims of creditors under specific circumstances. One, if the policy is issued under the Married Women's Property Act and, second, if the policy is legally assigned in favour of a third party. The option of taking a policy under the MWPA has to be exercised at the time of taking the policy. It cannot be done later.

A policy that has been legally assigned in favour of somebody becomes that person's or assignee's property and, therefore, cannot be attached by the creditors of the policyholder.

I had taken a loan from my existing life insurance policy, which I repaid along with my quarterly premiums. Will my final returns from the policy be affected in any way?
-- Meenal Dubey

Once you take a loan on a life insurance policy, it is independent of the returns under the policy. Insurance companies charge interest on the amount of loan advanced against the policy. Once the principal amount, along with the interest, is repaid, it does not have any affect the final returns from the policy.

What are 'with profit' and 'without profit' insurance plans?
-- M.R. Rao

Policies that participate in the profit of an insurance company are called 'with profit' policies, while the policies on which the amount of bonus is fixed at the time of issue itself are called 'without profit' policies. This means that irrespective of the profit earned by the insurers, the policyholders of without-profit policies will get fixed returns on the amount they have invested.

Whereas, in the case of with-profit policies the amount of bonus payable is based on the net surplus earned by the insurers. Therefore, returns on these varies from year to year and can be more or less than the returns on without-profit policies.

My pension plan is maturing next month, but I am already getting a government pension. Is it possible to get the returns in bulk so that I can invest the amount somewhere else?
-- Mridul Srivastava

To get a lump sum amount you can always withdraw a portion, though not the whole amount, of your pension receivable under the policy. This type of withdrawal is called commutation.

This amount would be tax-free and can be invested elsewhere by you. Normally, it is possible to commute up to one third of your pension amount. You can receive a lump sum amount against the commuted portion and the balance amount will come in the form of monthly pension. The exact amount available for commutation, however, depends on the terms and conditions of your pension plan.

Four years back, I bought a money-back endowment plan. The first money-back instalment is due next year. Now, I am finding the annual premium of Rs 10,000 too expensive, and don't want to continue with the policy. Should I surrender the policy at this stage and switch to a term insurance policy, which is cheaper?
-- Anjum Jah

If you surrender the policy at this stage, you will get only the surrender value, which will be just about 50 per cent of what you have already paid. Therefore, in my view it is not advisable to surrender the policy at this stage. It would be best to continue. You can meet some of your premium obligations from the periodic money-back instalments that you will get under the present plan.

Does railways give cover to its passengers? If yes, what kind of cover is it?
-- Meeta Sen

Yes, the railways does provide personal accident insurance cover to the passengers. The cover is provided to bone fide passenger ticket-holders, platform ticket-holders and season ticket-holders. Children up to the age of five years, who are not required to buy tickets, are also covered, provided they are travelling with ticket-holders.

The compensation for injuries sustained varies between Rs 32,000 and Rs 4 lakh (Rs 400,000) as defined in the schedule of injuries under the Railways Act, 1989. The policy covers all the passengers in the railway premises.

For any unscheduled injuries, the compensation of up to Rs 80,000 may also be given. The compensation amount is decided by the Railways Claims Tribunal. Once the claim is decided by the tribunal, the insurance company reimburses the claim amount to the railways.

What does a professional indemnity policy for lawyers include?
-- Sohan Aggarwal

Professional Indemnity policy issued to lawyers, advocates, solicitors and counsels is basically meant to cover liability falling on them as a result of errors and omissions committed by them while rendering professional service.

The policy covers all sums, which the insured professional becomes legally liable to pay as damages to a third party in respect of any error and/or omission on his/her part committed while rendering professional services. Legal cost and expenses incurred in defence of the case, with the prior consent of the insurance company, are also payable, subject to the overall limit of indemnity selected.

The policy, however, covers only the civil liability claims. Any liability arising out of any criminal act, or act committed in violation of any law, is not covered. The sum insured under the policy is referred to as the limit of liability in a professional indemnity policy. This limit is fixed per accident and per policy period, which is called any one accident limit and any one year limit, respectively.

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