Things to know before buying professional indemnity policy

In an interview to CNBC-TV18, Gaurav Mashruwala, Certified Financial Planner spoke about the benefits of professional indemnity policy and few things to keep in mind while buying such policy.

Below is the verbatim transcript of Mashruwala's interview with CNBC-TV18.

Q: How exactly do professional indemnity policies work and how beneficial are they. When would companies or individuals resort to them and what to keep in mind while buying such a policy?

A: Professional indemnity is mainly for professionals like doctors, chartered accountants. These are the two prominent professions where people have been taking these policies. It could be for engineers, architects etc.

While conducting their profession on routine basis if there is any negligence, any mistake or if there is any lapse, which is not fraudulence; intention should not be fraudulent, but there is a lapse and if the client suffers and if there is some loss that has to be made good then the insurance company steps in and makes good that loss.

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Mainly doctors have been taking it in this country because while treating their patients if there is any negligence or any mistake omission and if there is any loss to the life or any other kind of ailment that comes up, side effects or whatever then the insurance company steps in and makes good at loss. That is what professional indemnity is, loss occurs during performing your professional duties.   

Q: Does it apply to financial market as well?

A: There are two kinds of risks that are there. One is a risk where there could be either status quo or loss. Therefore, if a doctor is treating a patient either patient is status quo or there is loss. The second is an investment risk where there can be gain, there can be status quo or there can be loss; the moment these three situations are there, insurance is not a viable solution. However, insurance company will not insure professionals where there is a possibility of gain happening.

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So, to answer the question, there can be gain, there can be loss and there can be status quo, in such a situation insurance policies are not given. It is only given when there could be status quo or loss. Therefore, to doctors, lawyers who have such kind of situations that is why these policies are issued.

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Caller Q: What are the benefits of investing in mutual funds online? Are there any vices that come along with them? Also is it safe to assume that online portals where one can compare policies are totally unbiased?

A: There are two things, while you are purchasing online either you are purchasing online on a mutual fund website directly or you are purchasing online on some distributor or broker or some of the banks have their website where you are purchasing.

So, first is that if you are purchasing online on mutual fund website directly then it is treated as direct. The net asset value (NAV) would be different, the NAV would be slightly higher because whatever distribution and brokerage commissions are paid that will not be paid from your investment and hence to that extent over a longer period, your returns are better.

Having said that, if you require any kind of services, which means if you want any kind of redemption, switch request, if you want your bank details to be changed then you will have to deal with the mutual fund company directly.

The second is that, if you are purchasing online on a bank's website then you would be liable to pay those expenses and hence your returns get compromised.

Having said that, those banks or those institutions or their national level distributors, would help you with different kind of services that you require, so online purchasing is safe.

If you want a situation where you do not want to spend for brokerage or any kind of commission then you should go on to mutual fund website. If you are fine with that and you are saying that I want to purchase online for my convenience, but I also want services then you look at online purchase on these large distributors.

Regarding your second question as to how reliable is the information that online portals give? Here the thing is that. It is a great one stop shop to get all the data however, you must have a basic knowledge of how to utilise it. So, do not just blindly take the data and the interpretation and the interferences that are drawn while they are not wrong, it is just that there is an information overload. So, unless you are not qualified or if you do not have the skills then be little careful on using inferences directly otherwise it is perfectly fine, all these portals do a wonderful job of at least doing the ground work and compiling the entire data, which investor can then use.