Category: Personal Finance

Top 5 Best Monthly Income Plan (MIP) Funds For Conservative Investors Looking For secondary Income

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Who should invest in MIP Mutual Funds?

Monthly Income Plans (MIPs) are recommended by investment professionals for retirees and ultra-conservative investors who want to invest a modest portion of their portfolio in stocks. MIPs put the majority of their money into debt and only 15-32% in stocks. The optimal debt-to-equity ratio is a portfolio manager’s art, and it enables retirees and traditional investors to make attractive returns on their investments (ROI) and maintain a consistent income. These types of savings strategies are designed to meet unexpected or urgent expenses. However, retirees should keep in mind that, despite their name, monthly income plans do not provide monthly income.

Types of Monthly Income Plans

Types of Monthly Income Plans

Investors are given the option of reinvesting or redeeming their shares. If you reinvest, you’ll be able to get more fund units at the current Net Asset Value (NAV). When the investor finally redeems the stock, the capital gains are inflated as a result of this method.

Growth Option

When the fund administrators operate in this way, the income earned is reinvested in the funds, inflating the Assets Under Management (AUM). Investors are paid the accrued amount in a lump payment upon maturity.

Dividend Option

These plans are similar to share capital in that they pay out dividends on earnings regularly. Dividends are given out of a distributable surplus regularly, bi-annually, or annually.

Baroda Pioneer Conservative Hybrid Fund

Baroda Pioneer Conservative Hybrid Fund

The Scheme’s principal goal is to provide consistent income by investing in debt and money market instruments, as well as long-term capital appreciation by investing in equity and equity-related products. The fund has a 21.8 percent stake in Indian stocks, with 8.3 percent in large-cap, 5.45 percent in mid-cap, and 4.32 percent in small-cap stocks. The fund has a debt investment of 63.72 percent, with 61 percent in government securities and 2.72 percent in funds with very low-risk securities.

The one-year absolute return is 9.86% and three years annualized return is 10.05%. The NAV is as of 24th June 2021 is Rs 29.54.

ICICI Prudential Regular Savings Fund - Growth

ICICI Prudential Regular Savings Fund – Growth

Indian stocks account for 16.35 percent of the fund’s holdings, with large-cap stocks accounting for 11.46 percent, mid-cap stocks for 1.65 percent, and small-cap stocks accounting for 1.13 percent. 70.4 percent of the fund’s assets are in debt, with 16.55 percent in government securities and 46.57 percent in funds that invest in very low-risk securities.

The one-year absolute return is 15.11 and three years annualized return is 9.38% The NAV is as of 24th June 2021 is Rs 52.41

Aditya Birla Sun Life Regular Savings Fund

Aditya Birla Sun Life Regular Savings Fund

The fund has a debt investment of 96.57 percent, with 23.28 percent in government securities and 71.92 percent in very low-risk securities. Ideal for investors searching for a short-term investment option other than bank accounts or deposits.

The three-year annualized return is 7.21 percent, with a one-year absolute return of 23.28 percent. The NAV is as of 24th June 2021 is Rs 426.

DSP BlackRock Regular Savings Fund

DSP BlackRock Regular Savings Fund

The scheme’s principal investment goal is to earn income from a portfolio that is primarily comprised of high-quality debt securities while maintaining a reasonable risk profile. The Scheme will also try to produce capital appreciation by investing a lesser amount of its assets in Indian issuers’ equity and equity-related instruments.

The three-year annualized return is 5.71 percent, with a one-year absolute return of 15.64 percent. The NAV is as of 24th June 2021 is Rs 42. 65.

SBI Debt Hybrid Fund

SBI Debt Hybrid Fund

It is a debt-oriented hybrid scheme that invests largely in debt and money market instruments to provide investors with a fixed income stream. It also invests in equity securities to boost the portfolio’s total results. The equity exposure, on the other hand, is limited at 25%.

The three-year annualized return is 9.60 percent, with a one-year absolute return of 20.57 percent. The NAV is as of 24th June 2021 is Rs 49.87

What are the Tax Implications of MIPs?

What are the Tax Implications of MIPs?

MIPs are taxable because they are debt-oriented funds. MIPs are subject to all short-term capital gains (STCG) and long-term capital gains (LTCG) tax legislation.

These funds may be of interest to those in higher tax brackets. In comparison to other traditional havens, they may be able to save money on taxes. Those in a lower tax bracket may prefer the growth option over the dividend option in order to earn larger returns and lessen their tax liability.

Disclaimer

Disclaimer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates.



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Best 10 Top-Ranked ULIPs To Invest In 2021 For Building Wealth

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Unit Linked Insurance Plans

ULIPs, or Unit Linked Insurance Plans, are insurance policies that combine the advantages of saving and protection into a single instrument. it also educates you on the different investment options available in liquid assets, fixed income instruments, and equities. There is a death benefit in a ULIP, which is the amount paid to the nominee if the policyholder dies during the policy period. If the policyholder lives to the end of the ULIP’s term, he or she will get a maturity benefit.

Best Top-Ranked ULIPS To Invest In 2021 For Building Wealth

Best Top-Ranked ULIPS To Invest In 2021 For Building Wealth

The CRISIL Unit Linked Insurance Plans (ULIP) rankings are based on two factors: cost and portfolio performance, which incorporate the two main characteristics of ULIPs: life protection and investment. The plans listed below are wealth plus type 1 online regular plans with ten-year tenure.

Name ULIP Cost Rank for @ 1 lakh premium Cost Rank for @ 5 lakh premium
Edelweiss Tokio Life Wealth Secure+ – Base 1 1
ICICI Prudential Life Signature – Premier 1 2
Bajaj Allianz Life Goal Assure 2 2
Future Generali India Life Big Dreams Plan – Wealth Creation 2 2
Reliance Nippon Life Prosperity Plus 2 1
Bharti AXA Life Grow Wealth 3 2
HDFC Life Click 2 Invest 3 3
Max Life Online Savings Plan – Variant 1 3 3
SBI Life eWealth 3 3

Why Should You Buy A Unit Linked Insurance Plan (ULIP)?

Why Should You Buy A Unit Linked Insurance Plan (ULIP)?

Future Goals

Savings are essential for achieving future goals such as purchasing a new home, funding a child’s education, and budgeting for retirement. It’s difficult to strike a balance between immediate necessities and long-term ambitions without long-term savings plans. ULIPs help you save in a systematic manner and plan for your future goals.

Investing options

You can choose from a variety of fund options and pick the one that best matches your risk tolerance. If you have a high-risk tolerance, you can choose to invest in equity. If you want to take a less risky approach, you can invest in debt or a hybrid fund.

Family's Protection

Family’s Protection

A ULIP is a life insurance and investment plan that provides the policyholder with life insurance. In the event of the policyholder’s untimely death, his or her dependent family will be financially secure.

Provides Tax Benefit

Section 80C allows for a tax deduction on all premiums. Section 10(10D) of the Income Tax Act of 1961 exempts the maturity amount received, subject to certain conditions.

ULIP: Must know charges before opting

ULIP: Must know charges before opting

Though the charge structures of ULIPs offered by different insurance providers fluctuate, the following are some of the most regularly applied charges:

Charge for Premium Allocation

Before allocating the units under the insurance, a percentage of the premium is allocated to charges. Aside from commission, expenses, this payment usually covers starting and renewal expenses.

Charges of Mortality

These are levied to cover the cost of the plan’s insurance coverage. The cost of mortality is determined by a number of factors, including age, the amount of coverage, and the status of one’s health.

Fees for Fund Management

These are management fees that are deducted from the Net Asset Value (NAV) before it is calculated.

ULIP: Must know charges before opting

ULIP: Must know charges before opting

Charges for policy and administration

These are the fees for plan administration that are assessed when units are cancelled. This could remain constant during the policy’s life or fluctuate at a set rate.

Surrender Charges

Wherever appropriate, a surrender charge may be deducted for premature partial or full encashment of units, as specified in the policy circumstances.

Fee for Changing Funds

In most cases, a limited number of fund swaps are permitted without charge each year, with subsequent moves incurring a fee.

Deductions for service taxes

The applicable service tax is withheld from the risk component of the premium prior to unit allotment.

Investors should be aware that the percentage of the premium remaining after all expenses and the risk cover premium is used to purchase units.

Disclaimer

Disclaimer

Market risk affects the Net Asset Values of unit-linked insurance policies, and the consumer is responsible for his or her decision. The quality of a company, a product, or a fund option is not determined by the name of the company, product, or fund option. Returns on funds are not guaranteed or secured.



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Analysts, BFSI News, ET BFSI

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New Delhi: Macroeconomic data, the pace of vaccination and global trends would be the major drivers for the domestic equity markets this week, analysts said. Besides, the progress of monsoon will also be monitored.

“This week marks the beginning of the new month also, so participants will be eyeing the high-frequency indicators like auto sales and manufacturing PMI during the week. Besides, the progress of monsoon will also remain on their radar.

“While the pace of vaccination drive is certainly encouraging as it gives hope of further unlocking by the states, the cases of new COVID variant might derail the plans,” said Ajit Mishra, VP Research, Religare Broking.

“This week, the market is expected to continue its focus on global events as the domestic market lacks key triggers. Manufacturing PMI data is the major domestic economic data awaiting its release this week.” Vinod Nair, Head of Research at Geojit Financial Services said.

Market participants would also monitor the movement of Brent crude, investment pattern of foreign institutional investors and the rupee.

Nirali Shah, Head of Equity Research, Samco Securities said, “Domestic indices are expected to mirror global equities. June auto sales numbers would give investors a fair idea around the revival of ground-level sentiment.”

“Investors will be watching the progress on daily caseload, vaccination ramp-up and monsoon progress in the near term,” said Binod Modi, Head Strategy at Reliance Securities.

During the last week, the 30-share BSE benchmark gained 580.59 points or 1.10 per cent.



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FPIs turn net buyers in Jun; invest Rs 12,714 cr in Indian markets, BFSI News, ET BFSI

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New Delhi: After remaining net sellers for two months in a row, foreign portfolio investors (FPIs) in June turned net buyers by pumping in a net Rs 12,714 crore into Indian markets. Prior to this, overseas investors had pulled out Rs 2,666 crore in May and Rs 9,435 crore in April.

According to depositories data, FPIs invested Rs 15,282 crore in equities between June 1 and 25.

At the same time, FPIs withdrew Rs 2,568 crore from the debt segment.

The total net inflow stood at Rs 12,714 crore during the period under review.

Bajaj Capital Joint Chairman and MD Sanjiv Bajaj said the inflow in June is on account of “favourable global cues and improving outlook for the Indian economy amidst a sharp fall in the number of COVID-19 cases easing of lockdown restrictions in some parts and a pick-up in vaccination.”

India can witness ‘V’-shaped growth revival amid forecast of a normal monsoon, supportive monetary policy, a deleverage balance sheet of the corporate sector and a well-capitalised banking system, he added.

Geojit Financial Services Chief Investment Strategist V K Vijayakumar said, “High delivery volumes in IT (information technology) and metal stocks indicate strong institutional buying.”

Kotak Securities Executive Vice-President (Equity Technical Research) Shrikant Chouhan said that overall, the MSCI Emerging Markets Index gained nearly 1.49 per cent this week.

Except for India and Indonesia, all key emerging and Asian markets have seen FPI outflows this month to date, he further noted.

Indonesia saw month-to-date FPI inflows of USD 363 million. On the flip side, Taiwan, South Korea, Thailand and Philippines saw month-to-date FPI outflows of USD 2,426 million, USD 1,218 million, USD 124 million and USD 64 million, respectively, he said.

Morningstar India Associate Director (Manager Research) Himanshu Srivastava said, “From the long-term perspective, India would attract foreign investments as the macroeconomic environment improves and the domestic economy starts treading on the recovery path.”

So far, the ultra-loose monetary policy stance by central banks globally to support the economy in the aftermath of the coronavirus pandemic had opened flood gates of foreign money into emerging markets like India, he added.

However, the US Federal Reserve‘s hawkish statement dented sentiments and prompted foreign investors to turn cautious, he said.



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Tax Query: How much money can father send to son working abroad?

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I am working with The Ramco Cements Limited. I am also an employee of a firm and I pay/ file my annual tax returns. My son is working in the US. How much amount can I send to him every year out of my annual savings? How does it affect him in terms of tax returns there?

Ravi Shankar

As per the provisions of Foreign Exchange Management Act, 1999 (‘FEMA’), under the Liberalised Remittance Scheme (LRS), all resident individuals are allowed to freely remit up to USD 250,000 per financial year (April-March) for permissible transactions under LRS.

Remittances outside India in the nature of gifts or for maintenance of close relatives abroad are permitted transactions under the LRS.

Hence, you may remit up to USD 250,000 under LRS for such purpose to your son who is living outside India. As per provisions of section 56 (2)(x) of the Income-tax Act, 1961 (‘the Act’) income tax is payable on any sum of money (if aggregate value exceeds ₹50,000) received by an individual without consideration.

However, any receipts from specified relatives (includes lineal ascendant or descendant of the individual) or on specified occasions such as marriage and inheritance would not be considered as taxable. Hence, a gift of money to your son will not be subject to tax in the hands of your son in India.

In relation to your US tax query, I am not a subject matter expert of US tax laws and therefore would not comment on the same.

Axis Direct has a reporting system for dividends paid. In that, dividend amounts are shown in March 2021 based on declaration date whereas the actual credit is made to savings bank account in April 2021. Please clarify for income tax purpose what should be considered. Is the dividend amount to be shown in the financial year of month in which declared or in the financial year based on the credit in bank account? Also, which is the document considered by the Income Tax department?

S R Subramani

As per the provisions of section 8 of the of the Income-tax Act, 1961 (‘the Act’) along with related clarifications provided by Income-tax Department (via tutorial uploaded in Income-tax website), final dividend, which is chargeable under the head Income from Other Sources, should be considered as taxable in the year in which it is declared, distributed or paid, whichever is earlier.

In the instant case, I understand that the subject dividend was declared in March 2021 (i.e. FY 2020-21) and was subsequently paid in April 2021 (i.e. FY 2021-22). As such, the dividend would be required to be offered to tax in the year in which it is declared i.e. FY 2020-21.

Further, it may be noted that at the time of filing of your income tax return, you are not required to submit any proofs / documents. However, the same should be kept on records for the purpose of assessment / revenue audit, if any. In that case, the dividend report can be submitted with the authorities.

The writer is a practising chartered accountant

Send your queries to taxtalk@thehindu.co.in

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‘We must seek good investing behaviour’: Kalpen Parekh of DSP MF

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Investor behaviour is one of the most crucial aspects to a good investment experience, believes Kalpen Parekh who is the President at DSP Mutual Fund that manages an AUM of more than one lakh crore. So, BL Portfolio caught up with him to understand his financial journey and for his advice on the mutual fund investments in the ongoing phase of Indian stockmarkets.

What does money mean to you?

Money to me is comfort and responsibility to my family. It allows me the freedom to take the right decisions and confidence. It means gratitude and blessings to be able to have enough money to lead a good life. It also means responsibility to help others with money.

How does your portfolio look like now?

I invest all my money in DSP Mutual Fund schemes. The split looks something like this – 43 per cent in Indian funds , 17 per cent oin international equity funds, 16 per cent in dynamic asset allocation fund, and 21 per cent in short term debt fund. Apart from this, 5 per cent is in sovereign Gold bonds.

Everyone should decide their asset allocation with their own personalization, and not assume that this is the most optimal or ideal asset allocation.

I have recently shifted a bit of equity into debt under an asset allocation fund, which is conservative. I’m likely to buy a house in the next month and will require a certain amount of lumpy cash requirement, which is why 40 per cent component is in fixed income or asset allocation fund and not in an equity portfolio.

What is your most successful investment?

I haven’t invested in stocks since the last 13 years. My best investments are the ones that I made in 2008 -2010 phase of low or no returns and held on since then. They have compounded very well. These are simple flexi cap equity funds. Another investment that did well in hindsight is an equity fund which invests in US stocks.

What is your biggest money mistake and what did it teach you?

I used to invest in best performing funds of last year and when they would see reversal in their returns I would get out. It was a classic case of buy high and sell low and destroy your hard earned capital. It took me many years to realise this mistake. It taught me that performance has cycles and cycles mean what rises fast comes down too.

What’s your view on the market?

I have always been for the last few years, generally feeling a bit of anxiety that stock prices are running ahead of reality and fundamentals. Economic growth, world over or in India has been slower than what we tend to speak about. Some points in time, markets will be ahead of economy, some points in time they will behind the economy. Currently, they are ahead. Trying to make any prediction of the market has rarely worked for me.

Also, focusing on market is an external variable outside my control. With time and experience, I have learnt to focus more on what’s in my control – how much do I invest across asset classes, that is asset allocation.

Are investors better off pausing SIPs in the heated markets and instead investing in safer avenues?

By pausing SIPs now, you attempt to optimise the last drop of market cycles, but we’re also making a big assumption that we know that markets are going to come down, but we don’t really know. I think if we start with this belief that we know, then your choice of action will be very different versus if you start with the assumption that probably we don’t know, as much as we think we know. I come from the second camp.

Your concern is valid that what if the next one your markets go nowhere. It’s okay, who says that you have to make money every month? The reality of the markets is 1/3rd of the times they go down, one third of the time, they go nowhere – for long periods of time, it means zero returns for three, four or five years – and 1/3 of the times they go up violently in a very large quantum. The challenge is we don’t know which 1/3rd of the time you are going to encounter it in the next five years.

Typically, what happens is when prices fall, we find 10 more reasons to say why they should fall further. So it is very easy to stop an SIP. Will you be confident that you will start back at the right time? If you’re confident go ahead and do it. But if you’re not confident, avoid.

If you are concerned about volatility, or probably lower returns, I would say take one step lower. So instead of stopping SIP from an equity fund, do SIP in the next category – dynamic asset allocation fund, which has a slightly lower risk profile.

It is important to ask this question, “How we can become good investors?” rather than only saying that markets should be good. We always seek good markets, we seek good funds, we seek good returns, we should also add one more layer here, which is seeking good investing behaviour ourselves, what are the characteristics of good investing, being more disciplined being more long term and not getting afraid of volatility.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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Why FD investors get the short end of the stick under waterfall mechanism

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Shivram, an FD investor in Dewan Housing Finance Limited (DHFL) talks to his chartered accountant cousin Janaki to understand the waterfall mechanism.

Shivram: Sorry to bore you with this when you’ve come for a fun visit Janu. I had DHFL fixed deposits when it went bust in 2019. I was happy to read somewhere that the Piramal group is going to take it over under IBC. I saw a resolution plan where FD holders will get back their money. But now I see the whole thing is going to drag on more, because creditors aren’t happy.

Janaki: Many of my clients hold not just FDs but also secured NCDs in DHFL.

Shivram: See, what irritates me is that these big lenders like banks and insurance companies are blocking FD holders from getting more money. They just voted out a proposal to give FD holders an additional ₹966 crore, over the ₹1241 crore proposed in the original plan. That would have meant my getting back over 40 per cent of the money, instead of 23 per cent. I’m already taking a 60 per cent ‘haircut’. Why can’t small investors get entire money back? Only big guys can afford costly haircuts!

Janaki: I see that you aren’t aware of the waterfall mechanism. When a company goes broke and has less assets than liabilities, this mechanism decides which lenders get priority over others.

Shivram: The only waterfall I know is in Kutralam! So Janu, tell me, why is this waterfall giving me a haircut?

Janaki: Haha, you see, haircuts and waterfalls come into play in the DHFL case because the Piramal group which is acquiring it is willing to pay only ₹37,250 crore for it. But DHFL has outstanding dues totalling to over ₹90,000 crore. So, lenders have to take haircuts.

Shivram: But how do they decide that pensioners like me take an 80 per cent haircut?

Janaki: That’s what the waterfall mechanism does. Imagine a mini-waterfall, not Kutralam, where the water pours down from a height and there are buckets placed below it at different levels. Water flows into the second bucket only when the first one overflows. The third bucket gets filled after the second. If there isn’t enough, the bottom buckets get only a trickle. Similarly, waterfall mechanism in debt resolution decides which creditors of a company are the top buckets when there isn’t enough money.

Shivram: Why does this waterfall mean FD holders get only 23 per cent of their money?

Janaki: Because FDs in a company/NBFC are unsecured borrowings. The IBC’s waterfall mechanism gives clear priority. With any money that comes in, the resolution costs are met first and any accumulated dues to workmen are paid off. Secured creditors get top priority. Salary dues to employees come after them and unsecured financial creditors like depositors only after that.

Shivram: You’re telling me people who invested in DHFL NCDs will not take haircuts?

Janaki: They too will but probably less than FD holders.

Shivram: So is nobody going to take a bigger haircut than me?

Janaki: Equity investors are, Shiv. They come last in the waterfall mechanism.

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Bond yields and equities – it takes two to tango

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In recent months inflation expectations have been on the rise both in India and the developed markets and its impact has been felt on bond yields globally, central bank QE (quantitative easing) notwithstanding. Since then a new narrative has been taking hold amongst some market bulls. This new narrative is that the long-term correlation between bond yields and equities is positive, and hence is not a cause for alarm among equity investors. If expectations of better growth is driving inflation upwards and results in a rise in yields, then it reflects optimism on the economy and equities are likely to do well in such a scenario, is their argument. Is there data to support these claims? Is increase in bond yield actually good or bad for equities?

Inconsistent narratives

When movement of bond yields in any direction is used as a justification for equities to go up, then you must become circumspect. Since the launch of monetary stimulus last year globally by central banks and the crash in bond yields and deposit rates, the narrative that was used to justify a bull case for equities (which played out since the lows of March 2020) was that there is no alternative to equities. Hence, when bond yields actually start moving up as they have since early part of this year, an alternative for equities is actually emerging. So, market bulls have now shifted the narrative to why increase in bond yields this time is positive for equities as in their view bond yields are rising in anticipation of better economic growth. Well actually by this logic, last year bond yields fell in anticipation of a recession, so ideally it should have been negative for equities, right? Logic is the casualty when goal posts are changed.

Economic theory vs reality

Theoretically, increase in bond yields is negative for equities. This is for four reasons.

One, increase in yields will make borrowing costs more expensive and will negatively impact the profits of corporates and the savings of individuals who have taken debt.

Two, increase in bond yields is on expectations of inflation and inflation erodes the value of savings. Lower value of savings, implies lower purchasing power, which will affect demand for companies.

Three, increase in bond yields makes them relatively more attractive as an investment option; and four, higher yields reduce the value of the net present value of future expected earnings of companies. The NPV is used to discount estimates of future corporate profits to determine the fundamental value of a stock. The discounting rate increases when bond yields increase, and this lowers the NPV and the fundamental value of the stock.

What does reality and data indicate to us? Well, it depends on the period to which you restrict or expand the analysis (see table). For example if you restrict the analysis to the time when India had its best bull market and rising bond yields (2004-07), the correlation between the 10-year G-Sec yield and Nifty 50 (based on quarterly data from Bloomberg) was 0.78. However if you extend your horizon and compare for the 20 year period from beginning of 2001 till now, the correlation is negative 0.15. The correlation for the last 10 years is also negative 0.75.

In the table, we have taken 4 year periods since 2000 and analysed the correlation, on the assumption that investors have a 3-5 year horizon. The correlation is not strong across any time period except 2004-07 . It appears unlikely we will see the kind of economic boom of that period right now. That was one of the best periods in global economy since World War 2, driven by Chinese spending and US housing boom as compared to current growth driven by monetary and fiscal stimulus, the sustainability of which is in doubt in the absence of stimuli. This apart, Nifty 50 was trading at the lower end of its historical valuation range then versus at around its highest levels ever now. Inflationary pressures too are higher now. In this backdrop, the case for a strong positive correlation between equities and bond yields is weak.

What it means to you

What this implies is that the data is not conclusive and claims that bond yields and equities are positively correlated cannot be used as basis for investment decisions. At best, one can analyse sectors and stocks and invest in those that may have a clear path to better profitability when interest rates increase for specific reasons. For example, a company having a stronger balance sheet can gain market share versus debt-laden competitors; market leaders with good pricing power can gain even when inflation is on the rise.

A final point to ponder upon is whether a market rally that has been built on the premise that there is no alternative to equities in ultra-low interest rate environment, can make a transition without tantrums to a new paradigm of higher interest rates even if that is driven by optimism around growth. An increase in Fed expectations for the first interest rate increase a full two years from now, caused temporary sell-offs across equites, bonds and emerging market currencies, till comments from Fed Governor calmed the markets. These may be indications of how fragile markets are to US interest rates and yields.

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Why you should opt for a super top-up health policy

Personal Finance

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During a medical emergency, additional sum insured (SI) or health cover always comes in handy. There are multiple ways in which an individual can enhance his/her health cover. One such is top-up plans.

There are two kinds of top-up plans — regular and super top-up. These are sold as separate policies by insurers such as ICICI Lombard, Bajaj Allianz and HDFC Ergo. As a policyholder you can buy this policy anytime over and above your existing health policy. Top-up plans are similar to a regular health cover where you get covered for hospitalisation and other medical expenses. They are different only in terms of coverage initiation. In other words, the policy will be applicable only if the expenses overshoot a certain limit known as deductible. Here is how they work.

How does it work

While both top-up and super top-up plans are usually considered over and above the existing health policy, super top-up plans are a better version. This is because super top-up plans come into effect as soon as the deductible limit is reached irrespective of the number of claims made in a year. Deductible is the limit beyond which the insurer will cover you. On the other hand, top-up plan covers kick in only when the deductible limit is reached for every claim individually. Let’s understand this with an example.

Joe has a health cover for ₹3 lakh. To enhance this, he takes a top-up plan for ₹7 lakh, with a deductible limit of ₹3 lakh. Now, during the policy year, Joe gets hospitalised for an illness and his medical bills come to₹1.5 lakh. Joe’s base policy will cover this and the top-up cover of ₹7 lakh remains intact. During the same year, he gets hospitalised again. This time, his bill comes to ₹2 lakh. His base policy takes care of his expenses up to ₹1.5 lakh (₹1.5 lakh has already been spent) and the balance of ₹50,000 must come from Joe’s pocket. The top-up plan will not come into effect as the deductible limit is ₹3 lakh.

In an alternative scenario, if Joe’s first hospital bill comes up to ₹4 lakh, then both his base policy and his top-up plan can cover his expenses. Upon his second hospitalisation, if the bill works out to ₹2 lakh, it has to be borne by Joe. The top-up plan cannot help him as the deductible limit of ₹3 lakh is not reached.

The super top-up plans also work in a similar fashion. The only difference lies in its applicability. So in Joe’s case, if he had opted for a super top-up plan of ₹7 lakh with the same deductible, then, upon his first medical bill of ₹4 lakh, his base and super top-up policy would have covered him. Now, on his second bill of ₹2 lakh, the super top-up plan will still cover him as the deductible limit on it had been reached upon the first claim itself.

Points to note

Most insurers offer super top-up plans given their advantages. But a few insurers still offer top-up plans as well. Further, it is the ‘deductible’ feature of top-up plans that makes them cheaper than regular health plans. Higher the deductible, lower would be your premium. Top-up plans are a cost-effective way of increasing your health expenses cover.

However, despite the attractiveness of these plans, there are a few points to keep in mind.

One, all the waiting periods — initial, pre-existing disease and disease-specific waiting period — will continue to apply on the top-up plans as well. Two, these plans can also come with conditions including co-pay and sub-limits. And lastly, top-up and super top-up plans are health policies, which means, they have to be renewed every year. In other words, be prepared to shell out premiums for both regular policies as well as your top-up policies.

You can also upgrade your existing health cover with higher SI at the time of renewal, if it works out cheaper than a top-up plan.

All waiting periods apply to top-up and super top-up plans too

The plans can also come with conditions such as co-pay and sub-limits

Being health policies, the plans have to be renewed every year

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