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LIFE INSURANCE
SPARK YOUR NEW FINANCIAL YEAR INTO ACTION:
Lock Your Guaranteed Tax Free High Interest Rate Today – Seize the Opportunity!
We’ve witnessed a remarkable decline in interest rates over the years, plummeting from 13% in the 90s to a mere 6% in the 20s. This downward trend signals a compelling need to act now to secure your financial future. With rates expected to continue diminishing, there’s no better time than the present to take action.
HOW INTEREST RATE DECLINE IMPACT YOUR LIFE INSURANCE GUARANTEED PLAN INCOME
ARE YOU READY TO TAKE A LOSS OF 45.51 LAC IN CASE INTEREST RATE IS OWN BY 1% AS SHOWN IN THE ABOVE EXAMPLE ?
Presenting HDFC Life Guaranteed Wealth Plus Plan, a Non- Linked, Non-Participating Individual Life Insurance Savings Plan which is a symbol of financial security and prosperity. Not only this but it also gives an astonishing tax free Return of upto 7.15% p.a.
KEY FEATURES OF THE PLAN
PLAN BENEFITS IN DETAILS
LET’S CHECK OUT THE “HOW THE PLAN WORKS’
Raj, a 35-year-old working professional, invests a sum of Rs. 5 Lakhs per annum for 12 years. After waiting for 1 year, he receives a guaranteed regular income of Rs. 7,85,500 per annum for a period of 30 years, along with a maturity benefit of Rs. 60 Lakhs at the end of the 30th year. This return on his investment gives him an Internal Rate of Return of 7.15% per annum.
ELIGIBILITY CRITERIA
“Navigate the challenges of declining interest rates with strategic financial decisions to optimize your returns and safeguard your financial future.”
YOUR FUTURE STARTS NOW!
FIXED INCOME
We take a closer look at fixed income performance and risk for five main types of strategies: money market, government bond, investment grade credit, high yield credit and relative value.
THE ROLE OF FIXED INCOME AND RISK/RETURN DRIVERS
Fixed income investments play an important role in most portfolios and are generally implemented to meet some combination of the following goals:
These aims give rise to a wide range of fixed income portfolio construction possibilities, ranging from aggressive to defensive in terms of overall risk profile. While risk can be assessed with broad measures like performance volatility, a more accurate assessment involves understanding the underlying investment drivers. In this note, we take a closer look at common fixed income strategies and assess risk and return across market environments.
THERE ARE FOUR MAIN RISK FACTORS TARGETED BY FIXED INCOME INVESTORS TO GENERATE RETURNS:
1. Interest Rate or Duration Risk: Movements in yield levels are normally the largest driver of performance in fixed income portfolios where government bonds are the dominant investment and credit risk allocation is low. Bond prices are inversely related to the level of yields, so for an investor with a long position in bonds (net of offsetting short positions in related interest rate derivatives), falling yields mean higher prices and profits and rising yields mean lower prices and profits.
2. Credit Risk: Credit is a major source of global fixed income return and risk. The spectrum of credit is very wide and captures many forms of issuing entities but is commonly targeted at private companies. In the same way that companies can borrow money via loans from banks, they can also borrow money from investors by issuing bonds in corporate bond markets. The interest rate that companies pay is typically higher than what a government borrower would pay, which means corporate bonds usually offer higher yields than government bonds.
That additional yield is called a ‘credit spread’. In this case, the term ‘spread’ refers to the difference in yield between a corporate and government bond. Credit spreads represent additional compensation (i.e. higher yields) that investors demand in return for taking credit risk.
Credit spreads directly impact corporate bond prices because they reflect market perception of credit risk. When credit spreads decrease, corporate bond yields decline (assuming interest rates are unchanged) and bond prices rise.
The most obvious component of credit risk is ‘default risk’, which is the risk that a bond issuer fails to repay investors according to the terms of a bond. Corporates typically (but not always) have higher default risk than governments and therefore investors demand additional compensation to invest in corporate bonds.
3. Liquidity Risk: Liquid securities are those that can be readily bought or sold in sufficient volumes, at reliably transparent prices and without incurring punitive transaction costs. Illiquid securities are those that fail to meet these criteria to varying degrees.
Illiquid securities may carry more risk, not just because they are harder to sell but also because there may be less confidence about their market valuation.
Even long-term investors value liquidity in order to maintain flexibility of asset allocation or access to cash and those needs are often greatest at times of market stress, when liquidity is most tested. For these reasons liquidity risk always needs to be accounted for when comparing investments.
The additional return an illiquid asset offers above a comparable investment that’s very similar in all aspects other than liquidity is referred to as the illiquidity risk premium. This is what investors earn explicitly for giving up liquidity
The types of less liquid fixed income investments that offer an illiquidity risk premium includes loans, high yield bonds, securitised credit products and emerging market bonds. A fixed income portfolio can therefore take more liquidity risk by holding a larger proportion of these types of less liquid investments, and thereby harvest the illiquidity risk premium to increase returns.
4. Idiosyncratic Risk: These are risk factors specific to a fixed income security or group of securities that are not explained by broader market factors such as duration, credit or liquidity risk. The idiosyncratic forms of risk exposures can be captured through explicit actions to hedge out the systematic or broader market risk or can be used in conjunction with these other risk factors. Manager skill is typically a bigger driver of this form of risk.
Relative value (RV) investing is one form of idiosyncratic risk. RV strategies target groups of securities which have similar risk characteristics, but which trade at different prices and usually involve a combination of long and short positions. The resulting RV premium is less correlated with other asset classes and risk factors in a portfolio (see here for more detail on pure RV investing). The use of RV strategies spans the entire fixed income asset class and can be implemented across government bond, interest rate derivative and credit markets.
Idiosyncratic credit risk is also a feature of many fixed income funds. These risks are often featured in the financial media when there has been significant negative event impacting a particular company (such as regulatory fines or a financial scandal), which then pushes up the default risk on that issuer’s bonds. However, this form of risk can also be a source of alpha, where bottom-up credit analysis reveals attractive risk reward attributes in a particular issuer.
BROAD TYPES OF FIXED INCOME INVESTMENT STRATEGIES
We outline five fixed income strategies that target these main types of risk factors to generate returns. The following table summarizes the qualitative risk and return characteristics of each type of strategy.
FIXED INCOME STRATEGY CHARACTERISTCS
1. Money Market: These funds invest in money market securities, typically issued by governments and financial institutions. The investment universe is often constrained to invest in short maturity discount securities (<12 months), which limits the exposure of these funds to both duration and credit risk. Some money market funds also have the capacity to invest in asset-backed securities. High liquidity and low performance volatility are typically the main objectives of money market funds.
2. Government Bonds: These funds target returns in government bonds and avoid corporate credit spread risk. While traditionally considered “risk-free’ from a credit perspective and with high liquidity, government bond funds are typically the most exposed to duration risk. That risk means these funds benefit significantly from an environment of falling interest rates but are exposed to losses from rising interest rates. For developed market government bond funds, there may also be scope to invest in regional government or supranational issuers. These issuers typically have very low or negligible credit risk.
3. Investment Grade Credit: Investment grade credit funds target returns through investing in corporate credit and other non-government securities. These funds generate returns through coupon income streams and capital gains from compression in credit spreads and changes in market yield levels. Investment grade funds may also be exposed to duration risk, although the average maturity of a corporate credit security is typically shorter than for governments. These funds normally have exposure limits to entities with a minimum rating level, mostly investment grade, which is normally considered to be BBB or higher.
4. High Yield Credit: These funds invest in higher yielding securities issued by entities with lower credit ratings than investment grade or in unrated entities. These credit securities may be traded in public or private markets (arranged by banks or directly by a fund manager). Some high yield funds may also have the capacity to invest in distressed credit securities, whereby an issuer is close to or in the process of defaulting on obligations and bonds of the issuer are trading at a deep discount. As the highest risk form of fixed income investing, these funds typically have a higher average return level to compensate for both higher credit and liquidity risk. Manager skill is often a greater determinant of returns than for investment grade credit, given the higher credit risk exposures in these funds. However, liquidity is lower in high yield, so these funds may set tighter limits on how quickly funds can be redeemed, such as monthly, as opposed to daily with government or money market funds. Duration risk is typically lower with high yield than investment grade credit.
4. Interest Rate Relative Value (RV): These funds generate returns in interest rate markets, which encompasses both government bonds and related interest rate derivatives. These strategies do not rely on credit, duration or liquidity risk factors. Instead, returns are generated by taking both long and short positions in these markets to target relative pricing differentials, as opposed to buying and holding securities for income and capital gain. The resulting risk profile is more idiosyncratic and less correlated with the direction of government bond yields and risk assets. For example, RV funds may position for changes in yield curve shape or in the basis between government bonds and derivatives such as swaps and futures. The risk and return profile of these funds can vary depending on whether the investment process targets “pure RV” alpha only, what volatility objectives are targeted and whether the RV fund avoids material duration or credit risk exposure (and other macro oriented risks such as cross market yield and FX). For this note, we assume a pure RV process with a low volatility objective.
MUTUAL FUNDS
We all dream of buying a car, dream house, gadgets, etc. This can all come to reality if we have strong financial planning. One of the best options is to start investing in mutual funds through a SIP (Systematic Investment Plan).
WHAT IS SIP?
A Systematic Investment Plan (SIP) is a mode of investment for mutual funds in which investors make regular, automated contributions periodically. With SIPs, you can plan your investments to achieve your financial goals over the long term. You can do this by determining the target amount and the amount you’d like to invest at periodic intervals in a mutual fund scheme you’ve chosen.
For instance, say you’d like to invest ?500 each month for five years. You can set up a SIP with a mutual fund and automate your contributions for the said period. You can also choose to contribute more or less frequently. Typically, SIP mutual funds allow investing weekly, monthly, quarterly, semi-annually, and so on.
It’s also important to understand the SIP meaning in mutual funds because it’s not an asset in itself but only a mode of investing in mutual funds. Any contributions you make towards your SIP will be invested in a mutual fund scheme that you choose.
BENEFITS OF SIP
SIPs offer a broad basket of benefits to investors across age groups and risk profiles. Following are some of the most prominent benefits of SIP plans:
Rupee-cost averaging: It is one of the most prominent benefits of SIPs because it eliminates the need to time the market. Investors often try to time the market by investing money based on momentary market movements, and due to a lack of expertise, they can end up losing money in the process. SIPs take out the guesswork since they involve investing a fixed amount at predetermined intervals, regardless of the market’s position.
When the markets, and consequently a mutual fund’s NAV, are low, you’re allotted a greater number of units for the amount you invest; on the other hand, you’re allotted fewer units when the markets are at a peak. Over the long term, this reduces your average cost per allotted unit. For instance, say you’ve decided to invest ?5,000 via SIP each month for the next 5 months. Here’s how rupee-cost averaging will work in your favor for this investment:
Your average NAV cost per unit comes to 98.2 [491 ÷ 5], thanks to rupee-cost averaging. If you had invested a lump sum of ?25,000 in January, your NAV cost per unit would have been ?100. You’d also have been able to purchase only 250 units (2.11 fewer units, i.e., 25,000 ÷ 100 = 250 units) if you had invested a lump sum amount.
The value of the investment would also have been different. If you had invested ?25,000 in January, your investment’s value in May would have been ?25,000. However, because of rupee-cost averaging, your investment’s value in May with SIPs would be ?25,211 [i.e., 252.11 units x ?100 NAV].
Professional management: Mutual funds are managed by experts who have a proven track record as portfolio managers. They also have a team of research analysts at their disposal to monitor the markets and gauge investment opportunities. Since your SIP investments are in mutual funds, you benefit from the fund manager’s expertise. This is especially important for someone who doesn’t understand financial jargon or the markets. Instead of risking your capital, let an expert manage your money. In essence, SIPs allow you to outsource investment expertise to a fund manager who manages the mutual fund’s assets to optimize returns for its investors. It’s a win-win.
Financial Discipline: A growth in income may trigger some to spend on upgrading their lifestyle. The wiser ones tend to do the reverse; they spend what’s left after investing. SIPs can help inculcate this discipline because you’re committing to investing a fixed amount each month. You don’t need to make an extra effort for monthly contributions either. The money is automatically debited from your registered account each month. Over time, the small contributions grow into a substantial amount because of compounding.
Power of compounding: The returns on your SIP investment, just like other mutual funds, benefit from compounding. To get some context on how powerful compounding can be, think of the returns in absolute terms. Here’s an example to illustrate the power of compounding. Say you invest ?100,000 per annum. Assuming a 12% rate of return, here’s how much you’ll earn based on how long you continue investing:
TYPES OF SIP
Fixed SIP: Fixed SIPs are the plain-vanilla version of SIPs. You choose an amount and a date until which you wish to contribute, and the rest of the process is automated. This has been discussed so far in the previous examples, but you should also know that unless you set an end date yourself, these SIPs will terminate by default in the year 2099. Given that 2099 is in the distant future, it’s not something you should worry about. Though fixed SIPs are also the most popular choice among investors, there are other types that could potentially suit your investment style better.
Top-up SIP: Top-up SIPs are great for investors who want to increase their SIP contributions periodically. An example of where top-up SIPs make a lot of sense is when your income continues to increase every year. The investor could choose to contribute the entire increment or a part thereof to the SIP by opting for a top-up SIP. For instance, if you currently invest ?20,000 a month, and your income increases by 10% each year, you could choose to increase your contribution by the entire incremental income, a part of it, or take a simple approach and just increase your contributions by 10%.
Perpetual SIP: Perpetual SIPs are just fixed SIPs sans tenure. Once registered, your bank account will be debited with the amount of the SIP contribution unless you instruct the fund house to stop withdrawals. If you don’t want your investments to be limited to a certain number of years, perpetual SIPs are an ideal option that eliminates the need for repeated renewals. You can redeem your investments anytime you choose, of course.
Flexible SIP: A flexible SIP offers you the flexibility to change the amount per contribution or skip a few contributions if you so choose. There are two possible reasons an investor may want to change the contribution amount or skip a contribution. First, your contributions through SIP are adjusted based on the market’s overall outlook. If the market is valued higher, your monthly contributions through SIP would be reduced and increased again once markets are correct and valuations look attractive. Fund houses do this based on a pre-decided valuation matrix. You will get to decide the minimum and maximum SIP investment amounts. Please note that you must inform the fund house about these changes a week before your SIP installment is due.
DIFFERENCE BETWEEN LUMPSUM AND SIP
SIPs involve periodic contributions towards a mutual fund scheme, while a lumpsum investment is when you make a one time investment in a mutual fund.
For instance, if you have ?50,000 that you want to invest, you could either make a lumpsum investment of ?50,000 or choose to invest ?5,000 every month over the next 10 months by setting up a systematic investment plan.
When faced with SIP vs lumpsum confusion, most investors will typically do better with SIPs. This is because being able to time the market is key to generating better returns from your lumpsum investment. If you make a lumpsum investment when the markets have peaked, you could end up with negative returns. However, with SIPs, you make contributions during the peak as well as when markets hit rock bottom, which eliminates the need to time the market. There are several other benefits to investing via SIPs as well.
THINGS TO CONSIDER WHILE STARTING SIP
Before you initiate your first SIP investment plan, there are a few things you should consider about the mutual fund scheme for which you start the SIP.
1. Investment goals: It’s best not to begin investing by calling “growing wealth” your goal. Tie your investments to important milestones in your life that may require a large amount of money — for instance, a bigger home, your child’s college, or your retirement. This will help you keep tabs on your objectives and the performance of how each of your investments is performing, making it easier to take corrective action when required.
2. Time horizon and risk appetite: Once you have a goal in mind, you know how many years you’d want to achieve it. If you have a long time horizon, you could take on more risk than if you had a short time horizon. If you’re closer to retirement and don’t want to take on a lot of risks, you could stick to short-term mutual fund investments.
In addition to the time horizon, your risk appetite is also a factor of your income and psychological fortitude. For instance, if you have a consistent income, you may have more appetite for risk because you have a steady cash flow coming in each month. Some investors also find it difficult to hold their investments through a sell-off. If they panic and sell while the markets drop, they may end up eroding their capital. If you believe you can’t handle the volatility of equity markets, consider sticking to debt or arbitrage funds.
3. Mutual fund category? This is a key consideration because there is an overwhelming number of choices here. You should consider the time horizon and your risk appetite when determining a mutual fund category.
A longer time horizon and greater risk-taking ability could give you the opportunity to earn higher returns by investing in categories like focused funds or small-cap funds. If you’re on the other end of the risk spectrum or have a short time horizon, opt for debt funds. If you’re right in between, perhaps hybrid funds would be a good choice. We have a detailed guide on how to pick mutual funds that you can read to get more help with your choice.
GENERAL INSURANCE
Presenting the All-New Manipal Cigna Lifetime Health Plan - This plan comes with two variants: Lifetime Health India Plan and Lifetime Health Global Plan that offer a high level of protection, with a Sum Insured ranging from Rs. 50 lakhs to Rs. 3 crores, providing financial access to cover advanced treatments and procedures globally for up to 27 major illnesses. Most importantly, it looks after unique healthcare requirements for a lifetime.
Every stage of a lifetime is laden with different health needs and priorities. Thus, through the new Lifetime Health plan, we want to give customers much more flexibility of choice. The new plan lets you customize the cover you need for your family using optional packages like Health+, Women+, Global+, Maternity Expenses, along with Infertility cover, Surrogacy Cover, Oocyte Donor Expenses, along with a Critical Illness rider that provides extensive coverage like screenings, vaccinations, and many more healthcare benefits, thus keeping you and your family clear of financial burden for a lifetime.
HIGHLIGHTS OF THE LIFETIME HEALTH INDIA PLAN:
*Inpatient Hospitalization - Covered up to Sum Insured
*Day Care Treatment - All Day Care Covered
*Pre & Post Hospitalization- 60 Days & 180 Days
*Ayush inpatient Treatment - Covered up to Sum Insured
*Road Ambulance - Covered up to Sum Insured
*Cover Donor Expenses - Covered up to Sum Insured
*Domiciliary Expenses - Covered up to 10% Sum Insured
*Adult Health Checkup - Once in Policy Year
*Robotic & Cyber Knife Surgery - Covered up to Sum Insured
*Modern Advanced Treatments - Covered up to Sum Insured
*HIV/AIDS & STD Cover - Covered up to Sum Insured
*Mental Care Cover - Covered up to Sum Insured
*Restoration of Sum Insured - Multiple Restoration is Available
*Premium Waiver Benefit - For one policy year, upon occurrence of any of the covered contingencies
*Loyalty Discount- On the applicable renewal premium from 4th policy year onwards till lifetime
*Guaranteed Cumulative Bonus- 15% of LTH India sum insured each year, irrespective of claims, Truly unlimited- No maximum caping on accumulation, continues till lifetime.
* 25 Lacs Worldwide Medical Emergency Hospitalization - Choice to upgrade to 50L/100L
HIGHLIGHTS OF THE LIFETIME HEALTH GLOBAL PLAN WITH INDIA COVER:
*Global Hospitalization for 27 Major Illness- Covered up to Sum Insured
*Global Pre & Post Hospitalization- 60 Days & 180 Days
*Global Ambulance- Covered up to Sum Insured
*Medical Evacuation- Covered up to Sum Insured
*Medical Repatriation- Covered up to Sum Insured
*Repatriation of Mortal Remains- Covered up to Sum Insured
*Global Robotic & Cyber Knife Surgery- Covered up to Sum Insured
*Global Modern Advanced Treatments- Covered up to Sum Insured
*Global Travel Vaccination- Covered up to Sum Insured
WHO CAN BUY & COVER TYPES:
Minimum Age- Child - 91 Days, Adult - 18 Years
Maximum Age of Entry- Child 25 Years (in a family floater Policy), Adult – 65 Years
Cover Types- Multi – Individual & Floater plan
WHAT MORE IN STORE : ENHANCE YOUR PLAN WITH OPTIONAL COVERS
HOW MUCH DOES IT COST?
Mr. Ranjan Verma is 35 years old and lives in Delhi with his wife. He decides to buy the Manipal Cigna Lifetime India & Global Plan with a Sum Insured of 1 Crore for the India Cover and a Sum Insured of 3 Crores for the Global Cover. Here are the Premiums available for Mr. Ranjan Verma:
PREMIUM IS INR 36393/- FOR 1 CRORE INDIA COVER & 3 CRORES GLOBAL COVER.
Note: All premium shown are for Delhi (Zone 1), Including Tax. T&C Applies
Disclaimer: Bajaj Capital Limited (‘BCL’) has taken due care and caution in presenting factually correct data contained herein above. While BCL has made every effort to ensure that the information/data being provided is accurate. BCL does not guarantee the accuracy, adequacy or completeness of any data/information in the publication and the same is meant for the use of the recipient and not for circulation. Readers are advised to satisfy themselves about the merits and details of each investment scheme, before taking any investment decision. BCL shall not be held liable for any consequences, legal or otherwise, arising out of use of any such information/ data and further states that it has no financial liability whatsoever to the recipient/ readers of this publication. Neither BCL nor any of its directors/ employees/ representatives accept any liability for any direct or consequential loss arising from the use of data/ information contained in the publication or any information/ data generated from the publication. Nothing contained in this publication shall constitute or be deemed to constitute a recommendation or an invitation or solicitation for any product or services. Any dispute arising in future shall be, subject to the Court(S) at Delhi. Views given in the articles are the personal views of the contributors and not that of the company. Readers are advised to go through the respective product brochure/ offer documents before making any investment decisions. Disclaimer: The rates of interest are applicable as on the data mentioned herein above. The rate may be revised at the sole discretion of the respective companies inviting the Fixed Deposits without further notice. Printed by, Rajiv Wadehra, Published By, Raji Wadehra on behalf of Bajaj Capital Investment Centre Limited, Bajaj House, 97 Nehru Place, New Delhi - 110019, and Printed at Sundeep press C-105/2, Naraina, Industrial Area Phase - New Delhi - 110028, and Published at Bajaj House,97 Nehru Place, New Delhi - 110019, Editor-Rajiv Wadehra (CIN: U0000DL1988PLC039417))
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