Insurance

AEGON Religare Term Insurance Plan offers double death benefit

**AEGON Religare Term Insurance Plan is a new product with inbuilt accidental death cover and optional double death benefit at an additional premium. Does the insured really need both these features? Understand pros and cons**

AEGON Religare Life Insurance (ARLI) launched a term plan called the “Term Insurance Plan”. The product is touted as “innovative term plan”, but its name is unimaginative. It is worth exploring the new product features of inbuilt Accidental Death (AD) and optional double death benefit at an additional premium. How does the product compare with the existing ARLI iTerm, which was recently revised for pricing?

ARLI Term Insurance Plan is a term plan which provides a choice of two death benefit options: Option-1 pays out the entire Sum Assured (SA) on death of the insured. Option-2 pays out half of the SA on death of the insured. Thereafter, it pays out 3% of the SA, every month, for a period of five years, making a total payout of 230% of the SA. Both options have an in-built AD cover, equal to that of the SA.

The minimum age of entry is 20 years and the maximum is 65 years. The maximum age at maturity is 75 years and the minimum SA is Rs10 lakh. The policy term options are 10, 15, 20, 25, 30, 35, 40 years or cover up to 75 years of age. The premium payment term is equal to the policy term.

1. Policy term up to 75 years minus entry age is a good feature. E.g. For a person of age 25 years, the policy term can be 50 years. It helps to ensure that the policy does not get over at a time when it is difficult to get another policy.

2. Option-2 is good for someone wanting regular flow of money instead of getting lump-sum of full SA on death of the insured. It ensures that the insurance money is not misused after a big payout. Getting 230% of the SA is an excellent option if you need high insurance cover even though salary is limited. E.g. A person earning Rs5 lakh usually gets term plan of Rs50 lakh SA. With option-2, the insured will be assured of 230% = Rs1.15 crore cover. It is to be seen how much cover one can really get in this policy based on their salary. It depends on ARLI underwriting.

3. It gives an option to add three riders:

a. Critical Illness rider that covers nine illnesses.

b. Woman Care rider that covers illnesses pertaining to women.

c. Total and Permanent Disability rider that covers permanent disability.

Enforcing the inbuilt AD cover does come at a price. It also forces the AD cover along with the life insurance cover. You may not want such an arrangement or such high AD cover. E.g. For a 27 year old, non-smoker from Mumbai buying ARLI iTerm for policy term of 48 years and SA of Rs50 lakh, the premium (including taxes) is Rs4,663.

The premium for ARLI Term Insurance Plan is Rs10,169. It means Rs5,506 (10,169 minus 4,663) may be going toward AD cover of Rs50 lakh. It is high considering that Personal Accident covering AD as well as Permanent Total and Partial Disability for Rs50 lakh will cost Rs5,000 or less. The difference could also be due to iTerm being a pure online plan while Term Insurance Plan is an offline plan.

1. Option-2 payout of 230% comes at a price. The Term Insurance Plan premium for above example will be Rs16,854. It is on higher side. Again, it could be due to offline nature of the plan.

Three reasons why S&P-CRISIL’s rating of mutual funds based on fixed period is flawed

**The majority of actively managed equity schemes for 1-year, 3-year and 5-year periods ending June 2012, have underperformed their benchmarks over the last five years, says a study. But does it make sense to do a fixed period analysis of a product that is not fixed income in nature? Here are three reasons why the study is flawed**

S&P Indices Versus Active Funds (SPIVA) scorecard, produced by S&P Dow Jones Indices in partnership with CRISIL, highlights that the majority of actively managed Indian equity mutual funds have underperformed their respective benchmark indices over the last five years’ period ending June 2012. According to the research report, majority of large-cap equity schemes failed to beat the S&P CNX Nifty benchmark index for large-cap companies, 53.33% underperformed their benchmark over the last five years, 57.14% over the last three years and 52.63% over the last year.

Over 53.10% of diversified schemes outperformed the benchmark S&P CNX 500 in the one year period ending June 2012. This number increased to 61.6% in the three year period but again dropped to 49.5% in the five year period.

This has becomes headlines everywhere leading confirming to fence-sitters and believers of bank fixed deposits that equity mutual funds are best avoided.

However, this kind of analysis and conclusion carries a few fundamental flaws. Nobody has suggested that equities have to make money no matter when they are bought.

One, it is pertinent to note that the returns taken are for just a fixed period from June 2007 to June 2012. So which investor would have underperformed by buying mutual funds? Exactly those who had bought in June 2007. If their investment was made in June 2006, the results would have been different. Take June 2003 and it would have been different still. Returns vary, depending on the start and end date. This is natural because equity funds are not fixed income products. It is obvious that to come to any conclusion, one will have to take into account different periods. This is simply done by calculating what is called rolling returns.

According to our analysis over the last five rolling periods with a quarterly frequency, the average returns of 63% of the schemes were better than that of the Nifty index. The large-cap oriented equity schemes averaged a return of 7.59% compared to the Nifty which returned 6.62%. The headline should have read “A majority of schemes beat the market index”.

Two, no investor jumps into a scheme with all his money at one go. He is consistently advised to invest systematically.

Three, no investor invests in all the schemes. He is advised to invest in the better ones. There is no shortage of good schemes to choose from. In the rolling periods taken for our analysis, the top 10 schemes returned an average of 13.13%. While one can always argue that we know which of the schemes are better only with the benefit of hindsight, the fact is choosing good quality and index-beating schemes in India has been surprisingly easy compared to the US market.

COMMENTS

1)Although the figures are factually correct, people draw wrong conclusions from these figures by extrapolating them into the future. But, what works most of times is reversion to mean, although the mean may shift slightly upwards to adjust for inflation & normal growth.

2) Even though some schemes, fund houses, fund managers have consistently outperformed the benchmark, it would be a mistake to presume that they would continue to do so.

3) Because data is numerically expressed and mathematical or statistical formulas can be applied it still cannot be a pointer to the future performance. We simply do not know. (same is with ratings too) For most, volatility is a measure of risk . . . but risk is the probability of being right and the consequences that you may suffer if you are wrong.

A mutual fund investor will do well to disregard such ratings and focus on the basics; long term investing, asset allocation, diversification & periodic re-balancing. If he saves enough and invests for the long haul he will do well. Investing in mutual funds is never a race, between funds.

Even if the fund manager's poll is conducted they (the fund managers themselves) may not be able to predict which of their schemes will outperform the rest & over what period of time.

The database is purchased from moody's rating agency - mutual funds india and Madam Megha vora published how old funds are bad.

I that time also pointed out that Mastershare generated 18% cagr since 1986..but till on date u have not confirmed..

How reliable your research is when u claim that mastershare generated only 7% cagr since launch..

You have also based your article on rating agency data.. Whereas lessed aware news paper & other media has taken crisil data reseach and published..whats the difference?

The database is purchased from moody's rating agency - mutual funds india and Madam Megha vora published how old funds are bad.

I that time also pointed out that Mastershare generated 18% cagr since 1986..but till on date u have not confirmed..

How reliable your research is when u claim that mastershare generated only 7% cagr since launch..

You have also based your article on rating agency data.. Whereas lessed aware news paper & other media has taken crisil data reseach and published..whats the difference?

I have been planning to tell Dhirendra Kumar and his Mutual Fund analysis to change their valuation methodology.

1. They don't take rolling returns.

2. They take 1-year, 3-year and 5-year returns. However, these include the latest year's returns thrice and the last 3 years' returns twice. That is called Double Counting.

If you did badly in the last year, you did badly in all the 3 numbers. That is why funds that betted on infra and cap goods in the last year have languished at the bottom. Recency Bias is not only wrong, it is downright dangerous, if you believe in 'reversal to the mean'. If the market bounces back in the next year, the funds that will outperform are exactly the ones at the bottom of the list that Dhirendra Kumar posts. And the reason is the mathematical lacunae in calculating the outperformers.

3. Mathematically, they should take only 1-year rolling returns for the full period of existence and take Geometric mean of those returns. That is because gains are compounding in nature and multiply over a period of time.

In fact, to be really rigorous, they should calculate 1 - Geometric Mean of (1 + %Gain) for all one year rolling-periods the fund has been existing.

After all, an average (which is also the arithmatic mean) is a lousy way to treat gains. If I gain 60% one year and gain -60% next year, the average is not 0% (If you put Rs 100, at the end of the first year, you have Rs 160. And at the end of the second year, you have Rs 160 x (1-60%) = Rs 160 x 40% = Rs 64 in hand. You are actually down 36% in two years or a loss of 20% per year (100 to 80 and 80 to 64).

The only way to get this picture cleared is if you take the geometric mean of (1+60%) and (1-60%)

= square root of 1.6 x 0.4

= square root of 0.64

= 0.8

= (1-20%)

Or on an 'average', 20% loss a year.

Now, it will be interesting to see which funds outperform after this new criterion for evaluation. :-)

REPLY
### Pravesh Pandya

In Reply to Madhur Kotharay 5 years ago
### I have been thinking about this over the weekend. And I guess the theory behind this is bit like this.

If we want to calculate the real rate of return of an investment over a period of time, then the final value of the investments is PRINCIPAL*(1 + RATE_OF_RETURN/100)^(NO_OF_YEARS). This is derived from the formula of compound interest. First year you earn PRINCIPAL * (1 + RATE/ 100), second year you earn PRINCIPAL * (1 + RATE / 100)^2 and likewise. The NO_OF_YEARS parameters explains the reason why we have to take the geometric mean here. So instead of multiplying the returns on a yearly basis and then doing the geometric mean, one may just do ((FINAL_VALUE / PRINCIPAL)^(1/NUMBER_OF_YEARS) -1).

An example might make more sense. In the above case, an investment of 100 is 64 after 2 years. So the real return is square root of (64/100) -1.

Actually this formula can also be applied to SIP. Only thing is that we have to thinking of it a bit like a recurring account where we have a fixed rate of return. Some websites have their own formula for dollar cost averaging which relies on the average cost - which I think is not the right way to calculate the returns on SIP.

In order to apply the above formula for an SIP, you will have to think of this like a series of investments growing gradually over time.

The final formula is bit length but it is bit like this

P*(1+R/100/12)^(NUMBER_OF_MONTHS) + P*(1+R/100/12)^(NUMBER_OF_MONTHS -1) + P* (1 + R/100/12)^(NUMBER_OF_MONTHS-2) and so on for the entire period. What you are doing here is for every monthly investment you are calculating the return and then adding the returns for all the months. Also note that the rate of return is divided by 12 to cater to monthly investments. If you observe this sequence, it is a geometric progression and it can be shortened easily.

While doing all these calculations, I have assumed a constant return on investment - which is of course not the case in equities. My intention was here to calculate what return I would have earned had I invested the same amount in a fixed income product which would have given me the same return.

Welcome any suggestions or comments.

### Debashis Basu

In Reply to Madhur Kotharay 5 years ago
### Excellent points. Will try to do an article based on this approach

### Madhur Kotharay

In Reply to Madhur Kotharay 5 years ago
### OK, some more points:

1. Coming to theoretical nitty-gritty, you actually want geometrical mean of DAILY gains over the entire period of the fund's existence (adjusted for holidays in between, i.e. Friday to Monday gains are to be taken as over 3 days and so adjusted to CDGR, Compound Daily Growth Rate).

Thus, even the geometric mean of rolling 1 year periods is not right (as it gives less weightage to the boundary values of performance, i.e. the first 11 months and the last 11 months of the fund's performance).

2. For the sake of simplicity, you can take monthly gains over the entire period and take their geometric mean to get the monthly returns.

3. I used the rolling 1-year returns because people understand returns in terms of annual gains.

4. The starting point of the fund can bias the comparison. The funds that started at 2003 will do better than the funds that started in 2000 or Jan 2008, even after taking averages the way mentioned earlier. I have no answer to that challenge.

5. A great addition would be to plot monthly gains above or below benchmark gains over a period of time. That would tell how the fund performs overall. Is the outperformance due to one big 'matka', like Kwality Dairy or is it a regular small outperformance, adding into big gains. Of course, the risk is that some funds don't adhere to their mandate (some infra funds invest in Apollo Hospitals & Lupin calling them 'Healthcare Infrastructure' stocks and in ICICI Bank calling it 'financial infrastructure' stock).

6. One could compare performance over a business cycle. But that would exclude many of the new funds.

7. Probably, nothing to substitute proper detailed checkup and your judgement.

### Pravesh Pandya

In Reply to Madhur Kotharay 5 years ago
### Hi Madhur,

I think we don't need to do a daily or monthly or yearly comaprison to get the actual numbers. You can just take two points in time and still get the same value as rate of return whether you use monthly gain or daily gain. Perhaps my comment posted above might shed some light.

### Debashis Basu

In Reply to Madhur Kotharay 5 years ago
### The start and end date issue is solved by comparing like and like. We do not analyse funds that are in existence for less than five years. We also do not compare a 7 yr performance with a five year one. One international study found that more than 5 years, performance data stops being meaningful. Strangely, more data is not better for funds. One reason is managers change and even styles change. I think 5 yr rolling with monthly geomean should be a good approximation. It should of course be tested whether it has any predictive value

### Milind Chitnis

In Reply to Madhur Kotharay 5 years ago
### Very good analysis sir, do pass this on to Valueresarch people, if the do incorporate this model, it would help general public & followers of the site greatly.

It would be interesting to see "top rated" funds with your methedology.

### Debashis Basu

In Reply to Milind Chitnis 5 years ago
### Shouldnt Value Research be doing its own "research." :)

### Jayant

In Reply to Madhur Kotharay 5 years ago
### I don't know what you do Mr Kotharay but you've hit the nail on the head. All these so called analysts just rate funds based on this absurd calculation and SEBI wants that direct investors follow these raitngs and invest in funds by bypassing the distributor. Distributors have to pass an exam and go through a refresher every few years. Apart from that, being their full time jobe they stay in touch with informed articles and opinions like the one you have expressed. So called analysts like Mr. Dhirendra Kumar have nothing to lose and have a free hand in saying anything they want since most of their audience is relatively ignorant. It's high time SEBI did something to stem this and had in place a rational and standard rating system for Mutual Funds.

If we want to calculate the real rate of return of an investment over a period of time, then the final value of the investments is PRINCIPAL*(1 + RATE_OF_RETURN/100)^(NO_OF_YEARS). This is derived from the formula of compound interest. First year you earn PRINCIPAL * (1 + RATE/ 100), second year you earn PRINCIPAL * (1 + RATE / 100)^2 and likewise. The NO_OF_YEARS parameters explains the reason why we have to take the geometric mean here. So instead of multiplying the returns on a yearly basis and then doing the geometric mean, one may just do ((FINAL_VALUE / PRINCIPAL)^(1/NUMBER_OF_YEARS) -1).

An example might make more sense. In the above case, an investment of 100 is 64 after 2 years. So the real return is square root of (64/100) -1.

Actually this formula can also be applied to SIP. Only thing is that we have to thinking of it a bit like a recurring account where we have a fixed rate of return. Some websites have their own formula for dollar cost averaging which relies on the average cost - which I think is not the right way to calculate the returns on SIP.

In order to apply the above formula for an SIP, you will have to think of this like a series of investments growing gradually over time.

The final formula is bit length but it is bit like this

P*(1+R/100/12)^(NUMBER_OF_MONTHS) + P*(1+R/100/12)^(NUMBER_OF_MONTHS -1) + P* (1 + R/100/12)^(NUMBER_OF_MONTHS-2) and so on for the entire period. What you are doing here is for every monthly investment you are calculating the return and then adding the returns for all the months. Also note that the rate of return is divided by 12 to cater to monthly investments. If you observe this sequence, it is a geometric progression and it can be shortened easily.

While doing all these calculations, I have assumed a constant return on investment - which is of course not the case in equities. My intention was here to calculate what return I would have earned had I invested the same amount in a fixed income product which would have given me the same return.

Welcome any suggestions or comments.

1. Coming to theoretical nitty-gritty, you actually want geometrical mean of DAILY gains over the entire period of the fund's existence (adjusted for holidays in between, i.e. Friday to Monday gains are to be taken as over 3 days and so adjusted to CDGR, Compound Daily Growth Rate).

Thus, even the geometric mean of rolling 1 year periods is not right (as it gives less weightage to the boundary values of performance, i.e. the first 11 months and the last 11 months of the fund's performance).

2. For the sake of simplicity, you can take monthly gains over the entire period and take their geometric mean to get the monthly returns.

3. I used the rolling 1-year returns because people understand returns in terms of annual gains.

4. The starting point of the fund can bias the comparison. The funds that started at 2003 will do better than the funds that started in 2000 or Jan 2008, even after taking averages the way mentioned earlier. I have no answer to that challenge.

5. A great addition would be to plot monthly gains above or below benchmark gains over a period of time. That would tell how the fund performs overall. Is the outperformance due to one big 'matka', like Kwality Dairy or is it a regular small outperformance, adding into big gains. Of course, the risk is that some funds don't adhere to their mandate (some infra funds invest in Apollo Hospitals & Lupin calling them 'Healthcare Infrastructure' stocks and in ICICI Bank calling it 'financial infrastructure' stock).

6. One could compare performance over a business cycle. But that would exclude many of the new funds.

7. Probably, nothing to substitute proper detailed checkup and your judgement.

I think we don't need to do a daily or monthly or yearly comaprison to get the actual numbers. You can just take two points in time and still get the same value as rate of return whether you use monthly gain or daily gain. Perhaps my comment posted above might shed some light.

It would be interesting to see "top rated" funds with your methedology.

Coal block allocation: Indian ‘elGordo’!

**Essar Power’s acquisition of Navabharat Power is one of the many facets of the Indian ‘elGordo’ where the windfall gain will run for decades, unlike its Spanish counterpart!**

Since 1812, the Spanish Public Administration has carried on a national lottery system, which eventually became popularly known as the Christmas Lottery, also called, as “elGordo”—the fat one! This is the biggest lottery world wide.

The top prize money amounts to 540 million euros and 180 series of tickets sold at 200 euros apiece. As the cost is rather high, and in order to facilitate everyone to afford a purchase, the ticket is further divided into one-tenth or also known as the ‘decimos’. The Spaniards look forward to getting a piece of the action by buying the tickets.

Looks like the Indian version of the ‘elGordo’ is in getting a coal block allotment and actually commencing the mining operation after overcoming all the hurdles put up by the state and MOEF (ministry of environment and forests), and cap it by discovering millions of tonnes of high grade thermal coal!

In reality, however, the 58 allottees that are under the CBI (Central Bureau of Investigation) scanner and also answering the various queries raised by the Inter Ministerial Group may have many different things to say in their defence. It will be a while before the final outcome of these investigations, FIRs, etc are made public!

The enthusiastic press have gone deep into the bowels of the earth and have discovered much more muck than coal. For example, a report that has appeared in the Times of India gives an in-depth detail of the several transactions that have taken place.

In the case of Navabharat Power, it was registered with a capital base of just Rs1 lakh, which signed an MOU (Memorandum of Undertaking) with the Orissa government to invest Rs9,675 crore in two—1,060 MW and 1,200 MW—power plants in Dhenkanal. It got a 4.7 million tonne (MT) of coal linkage in May 2006. Two years later, in January 2008, it got an additional 112 MT allotment from Orissa’s Rampia and Dipside coal block. Although 108 applications were received for this block, only two were invited (why?) to make a presentation and the final allotment went to Navabharat, although there were some real heavy-weights in the fray. Anyway, by 2011, the stakes were sold to Essar Power, for an enormous sum of money.

This is one of the many facets of the Indian ‘elGordo’ where the windfall gain will run for decades, unlike its Spanish counterpart!

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