Insure assets to their actual value

Insure assets to their actual value
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First Published: Sun, Jul 20 2008. 11 38 PM IST

Illustration by Jayachandran / MINT
Illustration by Jayachandran / MINT
Updated: Sun, Jul 20 2008. 11 38 PM IST
Mutual Funds
I have Rs1 lakh in a mutual fund. Can I get a loan against this MF for further investment in mutual funds?
--MANOJ
You can borrow against your mutual fund (MF) holdings by pledging your units. Banks, NBFCs and other lending institutions accept MFs as security for a loan. They usually maintain a margin on the value of the holding. This varies from lender to lender. To mark a lien on the units, the registrars of MF have to be informed through a letter giving the folio, scheme and plan details and the number of units pledged. Once a lien is marked, the investor cannot transact on the units till it is revoked. However, borrowing against your MF holdings to invest is not a wise action. If you are unable to repay the loan, the lending institution will invoke the lien and the units get redeemed and credited to the lender’s account.
Illustration by Jayachandran / MINT
Which are the best equity growth schemes? My investment horizon is five years.
--PRANAB BISWAS
You have the minimum time frame for equity investment. Create a portfolio of diversified equity funds. Avoid taking any thematic, sectoral funds or exposure to the less liquid segment of the market till the inflation and related microeconomic and macroeconomic factors settle down. Select schemes from the OLM 50 (23 April) basket and invest using a systematic investment plan to take advantage of market volatility.
What should I keep in mind while making a long-term investment in mutual funds?
--DHAWAN RAVI
Select the type of schemes depending upon your risk profile. Periodic systematic investing will help you lower average cost in volatile markets. You need to rebalance your portfolio periodically to make sure that the allocation in your portfolio to different types of schemes continues to meet your requirements. Track the performance of the schemes that you have invested in in relation to their benchmark as well as other similar schemes and consider exiting a scheme if there is sustained underperformance, or if the funds’ investment strategy changes.
I bought additional units of a scheme on 28 January using a downloaded form that didn’t have a broker code. I submitted this directly to the fund house branch. They misinterpreted it as being through a distributor because “direct” submission was not mentioned on it. Is it right for the fund house to charge me an entry load?
--ASOKA
Mutual funds usually prescribe certain procedures for accepting direct application, such as mentioning “direct” in the column “key partner/agent” or “broker code” in the application form. In the absence of that, they would have charged a load on your investment. You can ask the fund to reverse this error. There may be certain formalities, such as getting a no-objection certificate from the distributor.
INSURANCE
How is term premium set? I am 36 years old. What would the premium be for a Rs10 lakh sum insured?
--H. KANNAN
Term insurance is the most basic life insurance policy providing life cover, normally for a period of one year. The premium of a term insurance policy basically depends on two factors—the person’s age and basic health condition (which means a person should be healthy with no medical history of any major disease such as cancer, heart attack or diabetes). Also, premiums are slightly more for males who are regular smokers. Premiums increase with the person’s age. The premium for a healthy (non-smoking) 36-year-old male for a term policy of Rs10 lakh would be around Rs4,200 (based on average of premium rates of various life insurance companies).
What is an automatic Ulip?
--NAGESH
Some insurance companies have floated automatic unit-linked insurance plans in which the insurer automatically moves you into portfolios of decreasing risk as you grow older. The underlying assumption is that risk appetite decreases with age.
An automatic Ulip allocates funds to instruments of differing risk-return profiles depending on the age of the policyholder, without any intervention from the investor. For example, your funds would be in Fund A till you turn 40, after which they would be moved to Fund B. When you turn 60, the funds would be moved to Fund C. Fund A is heavy on growth and, hence, equity-oriented. Fund B increases the debt component, but still has a fair bit of equity. Fund C is heavy on debt, but has some equity to get growth along with steady returns.
What is underinsurance and what is its effect?
--RAHUL
If an asset is insured for less than its actual value, it is said to be underinsured in insurance parlance. The principle of underinsurance comes into play in the event of a partial loss to an asset. Typically, it means that the insured is considered to be the self-insurer to the extent of underinsurance and, therefore, becomes liable to bear a portion of the loss.
For example, if you buy a washing machine for Rs20,000 and insure it for Rs15,000, you will be considered to be the self-insurer to the extent of Rs5,000. In case there is a loss of Rs4,000, the insurers will pay only Rs3,000, that is, in the same ratio that the sum insured has with the cost of the washing machine. Also, because of underinsurance, you will be required to bear Rs1,000, which is the amount in the proportion of the risk retained by you. Therefore, it is always advisable to get an asset adequately insured.
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First Published: Sun, Jul 20 2008. 11 38 PM IST
More Topics: Mutual Funds | Equity | Investments | Insurance | Ulip |