“You need to die to get your money”- Why are ULIPs so easy to sell?

A vast majority of Indian middle class has some or other ULIP/Endowment life insurance policy. Why is that so?

When a layman goes to the insurance company/agent to buy a term insurance policy. The insurance agent speaks 2 simple sentences-

“If you buy term insurance, you will need to die to get money”

Paisa waste ho jaayega if you buy term insurance”- your money will get wasted if you don’t die. So, sir, please buy endowment/ULIP- where you will get your money back after 5/10/15 years. Return of premium + bonus, guaranteed by the xxx of India!

Easy to sell. Do you agree?

Happy Investing


What are the different levels of wealth?

Three levels of Wealth

First: Out of debt.

Second: Don’t have to look at the cost of a restaurant before entering it.

Third: Don’t have to look at the price of an air ticket before planning a vacation.

After that, it really doesn’t matter!

Nanga hee to aaya hai, Kya ghanta le ke jaayega?

Happy Investing


Why Indian stock market likes Modi?

Modi in last 5 years has led to the following –

  • Very low corruption at centre.
  • Lot more people paying taxes.
  • Less ways of hiding income due to GST, reverse charge etc.

All this has led to low inflation. (inflation was 9-10% in UPA-2, when there were huge number of scams and corruption at centre)

Low inflation means lower borrowing costs for the businesses eventually.
Lower interest rates also means higher equity valuation as equity valuation is a function of interest rates.

Will Modi win again?

Happy Investing


Why Health insurance is a scam in India?

This weekend, health insurance was a hot topic on a 100+ doctors group discussion. This article is a summary of that discussion. Some of the doctors were advisors to the insurance companies.

Health insurance is of 3 types-

  1. CGHS, ECHS etc- where life long OPD+IPD cover is provided by the employer.
  2. Health insurance coverage as part of corporate job- covered by pvt medical insurance companies. Valid as long as one is in the job.
  3. Health insurance bought by individuals directly from the private medical insurance companies.

The first kind (CGHS, ECHS) is one of the best medical cover one can have. It covers both OPD and IPD expenses and there is no out of pocket expenditure.

The second type is also decent, though it covers only IPD but the claims are easily paid by the insurance company as it is provided through the corporate company. However, it is valid as long as one has the job.

Since most people today work in the private sector, and the jobs are no longer the permanent type, many people have started buying the 3rd type of insurance- directly from the private medical insurance companies.

Why does one buy insurance?

To cover risk which is unforseen expenditure in the future.

Some examples of real life medical expenditure-

  1. Chronic diseases in old age- e.g.- Diabetes + Atrial Fib, or an auto-immune disease (e.g. RA)+thyroid+hypertension. Annual medical bill of pharmacy, diagnostics, consultation, physiotherapy- 2 lakh as of today. Including inflation, next 10 yrs bill = 30 lakhs. This is just the OPD bill- which is not covered by medical insurance. (only diabetes or only thyroid will have much lower bill)
  2. Cancer or chronic debilitating diseases starting with an acute onset eg. stroke followed by paralysis, or an organ failure followed by organ transplant and chronic care etc- immediate IPD bill of 50 lakhs followed by annual bill of 3-4 lakhs in OPD expenses. Next 10 years medical bill would be 1 crore including the acute IPD tratment.
  3. Organ failure due to a pre-existing disease that you did not know to exist earlier- for example a congenital kidney abnormality or a polycystic kidney (which you may be having without your knowledge) can lead to kidney failure in old age. However, this will not be covered by insurance.

The Indian medical insurance fails to provide risk cover in all 3 instances-

  1. Chronic diseases– As people are ageing and newer and expensive treatments are coming up, the biggest expenses in healthcare in coming decades will be OPD (pharmacy, diagnostics, consultation) expenses and not IPD expenses. This will be true for majority of the population.
  2. Sudden very big IPD expenses– cancer, organ transplant, prolonged ICU- where bill is 30-50 Lakhs+. Since, most people buy insurance for 3-10 lakhs, here again it is pretty much useless.
  3. Pre-existing conditions- Many people have pre-existing condition but they themselves don’t know it. You can have a cyst in the brain or polycystic kidney and many other conditions without any symptom. It may manifest 10 years later.

In the west, either the health coverage is provided by the govt or the health insurance covers OPD expenses and all big expenses including organ transplants and cancer.

However, in India, the healthcare insurance companies are not covering OPD expenses. As mentioned in the first example above, the OPD expenses for chronic diseases over 10 years would be 20-30 Lakhs compared to 5-7 lakhs of likely IPD expenses.

Even for IPD, the insurance companies have a long list of exclusion, pre-existing clauses where they would not pay. They will do their best to deny the claim unless you are working in a corporate job. (wherein they pay easily as it is a large group policy).

Also, if you start claiming your healthcare insurance or you get a chronic disease, they will raise their annual premium substantially. The majority of healthcare expenditure occurs after you cross 60 years of age. Just call any insurance company and try getting an insurance for a 65 yrs old.

It is funny that only in India health insurance means only IPD coverage and not OPD, though the majority of actual healthcare expenses happen in the OPD. A patient with 3 lakh expenditure in OPD/year doesn’t deserve reimbursement from an insurance company but a patient with 1 lakh IPD expenditure deserves it. What is this logic?

Happy Investing!


Small & mid caps market cap is down by a whopping 55%

Well, most of usually look at the index number to look at index gains or losses. There is another metric which one can use and that is total market cap of B group stocks listed on BSE.

Here is a graph of market capitalisation of all B group stocks listed on BSE.

This is the monthly picture-

Monthly chart- Market cap of all B group shares on BSE

Here is the yearly picture-

Yearly chart- Market cap of all B group shares on BSE

Monthly data is only available from April 2013, while annual data is available from 2001.

The B group market cap reached 24.3 lakh crores in Decemeber 2017 and is now at a mere 11.1 lakh crore market cap. This is a drop of 55%. 

In Feb 2016, when Nifty touched 6800, B group market cap was at 10.2 lakh crore. Today, while Nifty is up 60% since then, the B group market cap is only 9% up at 11.1 lakh crores.

Infact the gain in market cap of B group shares since 2010 is a negative 10%.

Well, this explains the condition of the broader market much better than just the small cap index! Does it?

Money is the top priority in middle age, but not in other stages for a man!

Research by an American university has uncovered top priorities by life stages of a man/woman. Unfortunately, I could not find the original source though I broadly remember what I read. Here are those stages and top priorities-

  1. Infant- good potty.
  2. Childhood- Video games.
  3. Early adolescence- Looking good.
  4. Late adolescence and early youth- Sex.
  5. Late youth and early middle age- education, career.
  6. Middle Age- Money.
  7. Old age- good potty.

This may not be universally applicable, but is true for a vast majority. Do you feel this has been true for you as well?

Interestingly, top priotity in infancy and old age is the same 🙂

Our take on NBFC crisis in the markets!

Cash is the raw material for NBFCs. They buy this raw material from the wholesale market, convert it into different kinds of products, and then sell these products to different kind of customers.

What will happen to tyre companies if rubber prices suddenly double, or to airline stocks if the crude prices suddenly double. Also, if their raw material becomes scarce in addition to the double price. The stocks of those companies will tank because the market will assume that higher rubber prices will dent the tyre companies margin, reduce return on capital and and hence, also lower return on equity.

The same is happening in the market right now. Due to liquidity crunch, the raw material cost for these NBFC borrowing from the wholesale market has gone up. It has also become pretty scarce. The higher cost of cash/raw material has affected their growth and also margins to some extent (though lending rates have also gone up).

However, the markets are pricing them as if the liquidity crunch is permanent. Crude went to 100 USD but it did not sustain there for a long period of time. Liquidity crunch has come many times in Indian markets before as well. However, it has never been for more than 12-13 months. Even 2008 crisis of epic proportions got resolved and was followed by a mega liquidity led rally.

Liquidity is known to suddenly vanish and suddenly return as well. Right now, it has completely disappeared from the Indian markets.

In addition, there are quite a bit of rumors of rise in NPAs, real estate loans becoming NPAs etc. Irrespective of liquidity crunch, companies with poor lending practices have high NPA. For example, PSU banks, ICICI, Axis vs HDFC/IndusInd etc. Liquidity crunch doesn’t make a good loan into a bad loan. Poor quality NBFC always had higher NPAs despite normal liquidity.

Similar panic played out in PSU banks in Feb 2016. SBI, the largest PSU bank went to a price level of 150 at that time. Panics leads to unbelievable prices in stocks. In 2008 panic, so called blue chip stocks like Kotak bank fell 80%. Dividend yield in large caps went to 10%. People were shell shocked by what was happening and many people sold whole or part of their portfolio in that shock.

So, are you shocked by now or not?