Money is an integral part of our lives. Based on our circumstances, our experiences, our education etc., we develop certain attitudes and perceptions about money. Some of us may be reckless spenders and some too stingy. Some may be good investors and some not so good. Some may be highly money minded and some least concerned about it. Some of these perceptions may be good and some wrong.
And, money is also an important parameter in our relationship with our spouse, apart from the other aspects in life. Therefore, the attitudes and perceptions that both partners have about money, play a very significant role in how the ‘financial relationship’ between them pans out.
If the partners have ‘financial like-mindedness’ then this relationship can be very enjoyable. Else one can have a potent source of conflict, which can wreck relationships.
Therefore, just as with other issues, the partners need to ‘work’ on developing a healthy financial relationship.
Understand your partner’s financial behaviour
Have you have given a serious thought to your spouse’s outlook towards money? To his/her feelings, beliefs and attitudes? Or tried to understand the motivations and apprehensions behind his/her financial behaviour? In 8 out of 10 cases the answer would be ‘No’.
Therefore to start with, think - Is your spouse comfortable with money or is insecure about it? Is he/she a spendthrift or a miser? Does he/she keep detailed accounts or is careless about money? What are the saving patterns? Etc.
Having mapped your spouse’s financial conduct, match it with yours. And you shall have a fairly clear idea of the areas where you both generally tend to agree as also the points of differences. This becomes the starting point to developing a healthy and positive financial relationship with your partner.
Talk about money
Have an open and honest discussion. Express clearly your thoughts and perceptions about money. Listen patiently and objectively to your spouse’s beliefs, concerns, ideas.
Both need to appreciate each other’s good points about the financial behaviour, while the shortcomings & concerns should be handled maturely. The strong points should be strengthened and the differences ironed out.
It is the lack of communication, which usually aggravates the differences of opinion and can later lead to some serious problems. High-value purchases, important financial decisions, large investments etc. should be a joint effort. Consulting each other is necessary. Taking such decisions unilaterally can seriously undermine the relationship.
Budgeting and investing
Having understood each other’s financial outlook, we now need to go down to the actual business.
The first step is to jointly evaluate your financial situation – the incomes, the expenses, the liabilities, the assets etc.
Next, work out the financial plan
► How much you can allocate for household expenses? How will it be financed? Will you pool your incomes or keep it separate?
► What are the long-term goals – house, car, children’s education? What amount should be invested? Where? For what period?
► How much money should be kept aside for emergencies?
► What should be the retirement plan?
Having agreed upon an allocation plan, you need to put it in practice and then monitor it regularly. The short-term expenses could be reviewed say once a month. While the long-term investment say once a quarter.
One important point. Every member in the family will have some aspirations. We all love to possess the goodies in life. The man may desire the latest gizmo, the wife a new designer dress, the children a new toy or bike. You will need to priortize and make room for everyone’s desires in the budget.
These efforts will go a long way in making your financial future secure and happy. It will reduce arguments on what to buy and what is not affordable; what is wasteful expenditure and what is useful; which investment is good and which bad.
Give each other some ‘money’ space
We are all aware of the need for a personal space in any relationship, including marriage. The same holds true for money too.
Therefore, it is extremely important that the husband, the wife and the children should have some small amount to themselves, which they can use in any manner they feel good about – splurge, save, donate etc. - without feeling guilty or having to justify it.
There should be a so called ‘no questions asked’ amount allocated to each one in the budget, which one need not explain or account for.
Who will manage the money
Usually, the man considers himself as the boss of the house and more often than not, it is he who manages the money. This could be due to him being the bread-winner and the preconceived notion that he is better at finance than the woman.
There is need to break these stereotyped beliefs. It may be possible that the man has better bargaining skills. And the wife is more rational and objective when it comes to investing money. Hence, the man may be better suited to handle the day-to-day household expenses and the wife in managing wealth.
Examine each other’s expertise and then decide who will do what. Divide the work according to the skill. Keep each other informed about your decisions/actions. While the money management may be divided, the overall financial picture should be clear to both of you.
How wealthy you are is not important. Important is how you both manage whatever you have. Important is how you both enjoy spending it together. Important is how grow your wealth to fulfil your bigger dreams. Important is how both deal with financial emergencies. And for all this communication and building-up financial compatibility is a must. A financially happy and secure future is a team effort - not a one-man (or one-woman) show.
Friday, March 14, 2008
One of the best budget for individual taxpayers
For individuals
The positives
i. The special feature has obviously been the hike in basic exemption limit to Rs 1.5 lakh. For women the exemption limit has increased to Rs 1.8 lakh and for senior citizens to Rs 2.25 lakh. Moreover, even the slab rates have been changed and these new slab rates will bring in a lot of saving for the individual taxpayers. What you will save:The minimum income tax saving for an individual as a result of new budget proposal would be Rs 4,120, while the maximum saving for those earning income upto Rs 5 lakh, would be to the tune of Rs 45,320. Definitely, it is a big saving for an individual taxpayer. ii.Reverse mortgage rules have been clarified which will help senior citizens in particular to take advantage of the provisions concerning reverse mortgage.The negativesi. Individual taxpayers will not be happy about the provision relating to shot-term capital gain. Till no we have enjoyed tax of only 10% on STCG but now the STCG tax payable would be 15%.
ii. Also, another important feature which is missing in this year’s budget is the request of salaried employees for a standard deduction from their salary income. No standard deduction has been granted in the budget proposal.
iii. Also, in respect of perquisites, the difference between the tax treatment of government employees and private employees with respect to residential accommodation has not been done away with in this year’s budget.
For corporates
Although this budget has been good to the individual taxpayer, it has not been so for the corporate taxpayers because the fringe benefit tax provisions and other connected provisions have not been altered in the way the taxpayers wanted it.
The positives
i. The special feature has obviously been the hike in basic exemption limit to Rs 1.5 lakh. For women the exemption limit has increased to Rs 1.8 lakh and for senior citizens to Rs 2.25 lakh. Moreover, even the slab rates have been changed and these new slab rates will bring in a lot of saving for the individual taxpayers. What you will save:The minimum income tax saving for an individual as a result of new budget proposal would be Rs 4,120, while the maximum saving for those earning income upto Rs 5 lakh, would be to the tune of Rs 45,320. Definitely, it is a big saving for an individual taxpayer. ii.Reverse mortgage rules have been clarified which will help senior citizens in particular to take advantage of the provisions concerning reverse mortgage.The negativesi. Individual taxpayers will not be happy about the provision relating to shot-term capital gain. Till no we have enjoyed tax of only 10% on STCG but now the STCG tax payable would be 15%.
ii. Also, another important feature which is missing in this year’s budget is the request of salaried employees for a standard deduction from their salary income. No standard deduction has been granted in the budget proposal.
iii. Also, in respect of perquisites, the difference between the tax treatment of government employees and private employees with respect to residential accommodation has not been done away with in this year’s budget.
For corporates
Although this budget has been good to the individual taxpayer, it has not been so for the corporate taxpayers because the fringe benefit tax provisions and other connected provisions have not been altered in the way the taxpayers wanted it.
How about some gold for the volatile times?
The love for gold in India is legendary. Besides bank fixed deposits (FD), it has historically been one of the most preferred ways of investing money. This is especially true of the rural areas, where even the penetration of banks is low. So there has always been a good demand for gold in India.
Factors such as:
(a) The volatility in the equity markets worldwide,
(b) Concerns of the United States recession,
(c) Inflationary pressures due to high oil, commodities and food prices and
(d) Weakening dollar -- have generated a lot of interest in gold amongst the investors worldwide. So we have seen the prices of gold more than double from around Rs 6,000 in early 2006 to more than Rs 12,000 recently.
Traditionally, the only option available to buy gold was in the physical form. But with the launch of Gold Mutual Funds (ie, the Gold Exchange Traded Funds - ETF), you can now buy gold in the demat form. If you were interested in buying gold, you would need to broadly answer two questions:
(a) Should I invest in gold and
(b) If yes, then which is better – physical gold or gold ETF?
Since the answer to the second question is simpler, let’s look at that.
Physical gold or Gold ETF?
In case gold is being bought purely for investment purposes, then Gold ETF scores over physical gold.
1. Low cost: When you buy Gold ETF you have to pay only the brokerage charges, which is usually around 0.5%. Vis-à-vis, you may have to shell out between 10 and 20% as premium and/or making charges if you buy physical gold. To store physical gold, you have to incur locker/insurance charges, while in ETFs you pay the annual fund management charges of 0.5-1%.
2. Transparency: For ETFs, the rates are quite transparent as they are linked to the international prices. But there is no commonality in prices of gold across various jewellers/banks even within the same city.
3. Purity: You need not be concerned about the purity of gold in Gold ETF.
4. Security: No one can steal your Gold ETF units.
5. Capital Tax Gains: In case of physical gold, the long term capital gain tax becomes applicable only when the holding period exceeds 3 years. This limit is just 1 year in case of Gold ETFs.
6. Wealth Tax: Physical gold attracts wealth tax whereas Gold ETF is exempt from wealth tax.
7. Convenience: Just call up your broker and your job is done. You don’t need to visit the nearest jeweller with loads of cash.
Thus Gold ETF offers a convenient, safe and hassle-free way of investing in gold besides lower expenses as compared to buying physical gold. However, if the gold has to be used as jewellery also, then of course there is no choice.
As regards choosing between a jeweller and a bank, the next-door jeweller is usually a better option as presently the banks can only sell gold but cannot buy it back and the premium also could be higher.
There are both proponents and opponents to investing in gold. Gold is essentially a game of demand and supply. And it is not easy to predict the demand-supply scenario because of multiple factors – both national and international - affecting it.
But if you look at the past 15-20 years’ record, it is seen that gold is a hedge against inflation. Over the last 20 years, the average return from gold has been around 7% as against 16-17% from equity.
But if you were to look at ‘annual returns’ over the last 2 decades, you will find the returns to look like this:
Years Returns
First 3 years -2 to -17% (negative)
Following 11 years 1 - 7%
Following 3 years 11 - 17%
Following 3 years 26 - 33%
So, if the past trend continues, you can expect around say 6-9% returns from gold in the long-term. In the short-term the scenario can be quite volatile. There can be both high gains and high losses depending on how the short-term factors play out.
It could be said that you may invest a small portion of your corpus in gold as a means of portfolio diversification. But you should not expect high returns, especially the kind of returns you might have seen in the recent past. Equities and real estate would still be a better bet for wealth creation.
Factors such as:
(a) The volatility in the equity markets worldwide,
(b) Concerns of the United States recession,
(c) Inflationary pressures due to high oil, commodities and food prices and
(d) Weakening dollar -- have generated a lot of interest in gold amongst the investors worldwide. So we have seen the prices of gold more than double from around Rs 6,000 in early 2006 to more than Rs 12,000 recently.
Traditionally, the only option available to buy gold was in the physical form. But with the launch of Gold Mutual Funds (ie, the Gold Exchange Traded Funds - ETF), you can now buy gold in the demat form. If you were interested in buying gold, you would need to broadly answer two questions:
(a) Should I invest in gold and
(b) If yes, then which is better – physical gold or gold ETF?
Since the answer to the second question is simpler, let’s look at that.
Physical gold or Gold ETF?
In case gold is being bought purely for investment purposes, then Gold ETF scores over physical gold.
1. Low cost: When you buy Gold ETF you have to pay only the brokerage charges, which is usually around 0.5%. Vis-à-vis, you may have to shell out between 10 and 20% as premium and/or making charges if you buy physical gold. To store physical gold, you have to incur locker/insurance charges, while in ETFs you pay the annual fund management charges of 0.5-1%.
2. Transparency: For ETFs, the rates are quite transparent as they are linked to the international prices. But there is no commonality in prices of gold across various jewellers/banks even within the same city.
3. Purity: You need not be concerned about the purity of gold in Gold ETF.
4. Security: No one can steal your Gold ETF units.
5. Capital Tax Gains: In case of physical gold, the long term capital gain tax becomes applicable only when the holding period exceeds 3 years. This limit is just 1 year in case of Gold ETFs.
6. Wealth Tax: Physical gold attracts wealth tax whereas Gold ETF is exempt from wealth tax.
7. Convenience: Just call up your broker and your job is done. You don’t need to visit the nearest jeweller with loads of cash.
Thus Gold ETF offers a convenient, safe and hassle-free way of investing in gold besides lower expenses as compared to buying physical gold. However, if the gold has to be used as jewellery also, then of course there is no choice.
As regards choosing between a jeweller and a bank, the next-door jeweller is usually a better option as presently the banks can only sell gold but cannot buy it back and the premium also could be higher.
There are both proponents and opponents to investing in gold. Gold is essentially a game of demand and supply. And it is not easy to predict the demand-supply scenario because of multiple factors – both national and international - affecting it.
But if you look at the past 15-20 years’ record, it is seen that gold is a hedge against inflation. Over the last 20 years, the average return from gold has been around 7% as against 16-17% from equity.
But if you were to look at ‘annual returns’ over the last 2 decades, you will find the returns to look like this:
Years Returns
First 3 years -2 to -17% (negative)
Following 11 years 1 - 7%
Following 3 years 11 - 17%
Following 3 years 26 - 33%
So, if the past trend continues, you can expect around say 6-9% returns from gold in the long-term. In the short-term the scenario can be quite volatile. There can be both high gains and high losses depending on how the short-term factors play out.
It could be said that you may invest a small portion of your corpus in gold as a means of portfolio diversification. But you should not expect high returns, especially the kind of returns you might have seen in the recent past. Equities and real estate would still be a better bet for wealth creation.
Sunday, February 24, 2008
After instant noodles, instant insurance!
Some of us use microwaves. And for some of us junk food doubles up as a meal. Some of us seem to prefer broadband to dial-ups and T20 to a test match. Why? Because we want things to happen, fast!
Similarly in the world of personal finance, first there was Internet banking, then online trading and the latest in the bandwagon, OTC or over-the-counter insurance. Companies like Reliance Life Insurance and Birla Sun Life Insurance have already launched this product, while others like SBI Life Insurance are planning to come out with it soon.
How it works
The bottom-line: you get an insurance policy, instantly. All you need to do is fill up a one-page form and voila, you are the owner of an insurance policy. No long forms and medical tests. All it takes is a few minutes. Like microwave popcorn. But alas, haste makes waste.
Read the fine print
When you sign this one-page proposal form, you are actually signing a declaration of your good health. You are telling the insurance company that you are healthy, that you have no pre-existing illnesses and that you are worthy of being insured. In your haste, if you give incorrect details or conceal information, remember that the chances of a claim rejection are high.
In fact, numbers from IRDA’s grievance cell have an insightful story to tell. Of about 4,500 complaints it received a few years back, 15 to 17 per cent were related to rejection of claims, due to non-disclosure of pre-existing illness at the time of taking the policy. But this is not just a local phenomenon. According to studies recently conducted in the UK, almost 15 per cent of total claims made on critical illnesses were declined. Of these, 26 per cent had not made true and fair disclosures when they bought the policy.
OTC insurance, a good bet?
“It may seem like an alluring method to buy a policy. But buying it through the conventional mode is the best way,” says financial domain trainer PV Subramanyam. 47-year-old Milind had applied for a unit-linked insurance policy through the conventional mode. As mandatory, he had go for a medical test after which he received a letter saying that the insurance premium had been increased from Rs 4 per Rs 1,000 to Rs 12 per Rs 1,000 because his medical reports suggested that he had high blood sugar. Milind was not even aware of his medical health until he underwent the mandatory medical test. Had he applied under the OTC mode, he would have signed off claiming that he was medically fit. If a claim arose, it would have been rejected on grounds of non-disclosure.
What if you disclose your illness?
'If a person is already suffering from any illnesses mentioned in our health questionnaire, such case would be underwritten in normal course after conducting the required medical tests wherever necessary,' says P Nandagopal, President and Chief Executive Officer, Reliance Life Insurance Company Limited.
Subramanyam adds, “It is quite likely that premiums of these policies would be much higher compared to other insurance plans mainly because the company is taking a high risk in insuring your life without any medical check-up”.
A few questions you will be asked while buying OTC insurance:
Similarly in the world of personal finance, first there was Internet banking, then online trading and the latest in the bandwagon, OTC or over-the-counter insurance. Companies like Reliance Life Insurance and Birla Sun Life Insurance have already launched this product, while others like SBI Life Insurance are planning to come out with it soon.
How it works
The bottom-line: you get an insurance policy, instantly. All you need to do is fill up a one-page form and voila, you are the owner of an insurance policy. No long forms and medical tests. All it takes is a few minutes. Like microwave popcorn. But alas, haste makes waste.
Read the fine print
When you sign this one-page proposal form, you are actually signing a declaration of your good health. You are telling the insurance company that you are healthy, that you have no pre-existing illnesses and that you are worthy of being insured. In your haste, if you give incorrect details or conceal information, remember that the chances of a claim rejection are high.
In fact, numbers from IRDA’s grievance cell have an insightful story to tell. Of about 4,500 complaints it received a few years back, 15 to 17 per cent were related to rejection of claims, due to non-disclosure of pre-existing illness at the time of taking the policy. But this is not just a local phenomenon. According to studies recently conducted in the UK, almost 15 per cent of total claims made on critical illnesses were declined. Of these, 26 per cent had not made true and fair disclosures when they bought the policy.
OTC insurance, a good bet?
“It may seem like an alluring method to buy a policy. But buying it through the conventional mode is the best way,” says financial domain trainer PV Subramanyam. 47-year-old Milind had applied for a unit-linked insurance policy through the conventional mode. As mandatory, he had go for a medical test after which he received a letter saying that the insurance premium had been increased from Rs 4 per Rs 1,000 to Rs 12 per Rs 1,000 because his medical reports suggested that he had high blood sugar. Milind was not even aware of his medical health until he underwent the mandatory medical test. Had he applied under the OTC mode, he would have signed off claiming that he was medically fit. If a claim arose, it would have been rejected on grounds of non-disclosure.
What if you disclose your illness?
'If a person is already suffering from any illnesses mentioned in our health questionnaire, such case would be underwritten in normal course after conducting the required medical tests wherever necessary,' says P Nandagopal, President and Chief Executive Officer, Reliance Life Insurance Company Limited.
Subramanyam adds, “It is quite likely that premiums of these policies would be much higher compared to other insurance plans mainly because the company is taking a high risk in insuring your life without any medical check-up”.
A few questions you will be asked while buying OTC insurance:
- Are you currently taking any medication or drugs other than minor conditions (for example: colds and flu) either prescribed or not prescribed by a doctor or have you suffered from any illness, disorder, disability or injury during the past five years which has required any form of medical or specialised examination (including chest X-rays, gynecological investigations, pap smera or blood tests) consultation, hospitalisation or surgery?
- Do you suffer from any medical ailments e.g. diabetes, high blood pressure, cancer, respiratory disease (including asthma), kidney or liver disease, stroke, any blood disorder, heart problem, hepatitis B or C. tuberculosis, psychiatric disorder, paralysis and coma, HIV/AIDS or a related infection?
- Do you have any form of physical impairment, disability, handicap or defect?
- Is any surgery planned or are you currently aware that you need to seek medical advice within the near future? (Other than for medical examination that may arise from this application)?
Broke? How to raise emergency funds
Unfortunate events strike without notice. A sudden job loss, a medical emergency, natural or manmade disaster can leave a dent in your pocket. Have you made any provisions to fund such a situation? Your answer may be a 'yes' or a 'no'. But, as it generally happens, very few of us have sufficient liquid money for emergencies. More often than not, our money is invested for the long-term that comes with a penalty if you had to break it before completion of the tenure. So supposing, you don’t have an emergency corpus then what alternatives can you work out? A few options have been listed below.
Credit cards
Quite a few payments today can be made through credit cards, which is a convenient option. However, if you don’t clear the outstanding amount before the due date, this method will prove very expensive. Also, cash withdrawals on credit cards attract very high interest rates right from the day you withdraw. The charges in either case could work out to as anywhere between 36 to 50 per cent per annum (pa) .
Credit cards
Quite a few payments today can be made through credit cards, which is a convenient option. However, if you don’t clear the outstanding amount before the due date, this method will prove very expensive. Also, cash withdrawals on credit cards attract very high interest rates right from the day you withdraw. The charges in either case could work out to as anywhere between 36 to 50 per cent per annum (pa) .
Therefore, use your credit card only if you are sure to clear off the dues before due date. Ideally, don’t withdraw cash and don’t carry forward any outstanding balance.
Loan against securities
Banks will conveniently lend you money against your shares, mutual funds, insurance policies, gold, etc. So, if you have any such investments, use them to borrow cash. Because these loans are backed by a security, the interest rates on these are quite reasonable, that is between 12 to15 per cent pa.
Selling assets
You could also possibly sell some of your assets if you feel the interest cost is high on other options. For example, you can sell some shares, which you feel are a long-term story and hence are not likely to appreciate significantly in the short run. You could, therefore, always buy them back later within a reasonable price range.
But be careful. In the mad rush to raise money, don’t make a distress sale in a hurry. A good asset once sold may be very difficult to buyback.
Personal loans
If you don’t have any securities to offer to banks for mortgage or sell any assets outright, then you can opt for the more expensive -- personal Loans. These could cost you between 17 to 20 per cent pa. Being quite expensive vis-à-vis other options (apart from the credit card), personal loans should be availed only as a last resort.
Advance against salary
If the problem is a temporary one, you could also consider taking an advance against your salary from your employer. But make sure that the lower salary amount that you will receive later, should not affect your other payments in the future. It goes without saying that your company should haveg a policy to give in advance against the salary.
Borrow from friends or relatives
This may be a good option; in this case you could get money at a very reasonable rate of interest (maybe even interest-free) without any cumbersome procedure or paperwork. Further, you could also possibly get a lot more flexibility in repaying the amount. However, depending on the kind of relationship that you share with your friends and relatives, this could either be a very easy option or a difficult one.
There are quite a few options available to raise money, urgently. Hence it would be prudent if you could think calmly and analyse as to which options would give you the money both quickly and cheaply. If you act in a hurry, you may only be adding to your misery. If possible, seek proper guidance.
B-I-G salary, S-M-A-L-L bank balance!
.jpg)
Earning a six to seven digit salary has become a fairly common thing these days. In fact, today, what youngsters earn in one or two years is perhaps more than what their parents earned in decades. But if you talk about their bank balance, at the end of the month, it's zilch!Yes, people are spending lavishly. No harm in that. But it makes sense only if you don’t go overboard. We need to ask ourselves a very important question: are we wasting money?
Some expenses are a must, but wasting money, which eventually becomes a habit, is bad. In fact, there’s a thin line separating ‘spending’ and ‘splurging’. You admire Bill Gates, Warren Buffett, Narayana Murthy, Azim Premji, and so on and so forth. But do you follow their spending habits? Here are some examples of unscrupulous spending acts.
High-end gizmos
Flashing a trendy phone has become more of a status symbol than anything else. A simple phone does the same basic function as any other high-end, multiple features-enabled phone would.
And I can bet that most of you don't even use 25 per cent of the features available. As for the rest, you may use them occasionally or possibly, never. This means that you have wasted money on something which you don’t need or even use. Also, given the fast rate at which you change products, you may anyway have to replace it sooner than later. For example, when your parents bought a television or VCR, they used it for decades! But a phone you pay Rs 15,000 for, may not keep you interested for long.And when you intend to sell it, it wouldn't fetch more than Rs 2,000 or 3,000! It’s a huge loss. Had you bought a low-cost phone, not only would it have saved money but also served the same purpose. It's the same story with DVD players, laptops and iPods. So, the next time you decide to buy a gadget, you know what to do.
Brand-conscious?
A good pair of branded jeans would cost you anywhere between Rs 4,000 to 7,000. A pair of Nike shoes would cost you Rs 3,000 to 5,000.
If you only buy branded wear, think again. You can buy the same quality product for less than even half the price. Of course, you won’t get the label or designer packaging.
Fancy restaurants
Try and recollect how many times your parents used to go out for dinners. Maybe once a month? How many times do you go? Probably, once or twice a week! Cut out three to four such dinners and you save upto Rs 5,000 every month.
As the saying goes, too much of anything is bad, and this applies here as well. Not only does it mean that more money goes to waste, but in the long run your lavish spending can have a serious impact on your health, too!
Try these simple strategies, and you will be pleasantly surprised to see a huge bank balance very soon. And don't forget the additional savings, when cut down on using your credit cards!
Some expenses are a must, but wasting money, which eventually becomes a habit, is bad. In fact, there’s a thin line separating ‘spending’ and ‘splurging’. You admire Bill Gates, Warren Buffett, Narayana Murthy, Azim Premji, and so on and so forth. But do you follow their spending habits? Here are some examples of unscrupulous spending acts.
High-end gizmos
Flashing a trendy phone has become more of a status symbol than anything else. A simple phone does the same basic function as any other high-end, multiple features-enabled phone would.
And I can bet that most of you don't even use 25 per cent of the features available. As for the rest, you may use them occasionally or possibly, never. This means that you have wasted money on something which you don’t need or even use. Also, given the fast rate at which you change products, you may anyway have to replace it sooner than later. For example, when your parents bought a television or VCR, they used it for decades! But a phone you pay Rs 15,000 for, may not keep you interested for long.And when you intend to sell it, it wouldn't fetch more than Rs 2,000 or 3,000! It’s a huge loss. Had you bought a low-cost phone, not only would it have saved money but also served the same purpose. It's the same story with DVD players, laptops and iPods. So, the next time you decide to buy a gadget, you know what to do.
Brand-conscious?
A good pair of branded jeans would cost you anywhere between Rs 4,000 to 7,000. A pair of Nike shoes would cost you Rs 3,000 to 5,000.
If you only buy branded wear, think again. You can buy the same quality product for less than even half the price. Of course, you won’t get the label or designer packaging.
Fancy restaurants
Try and recollect how many times your parents used to go out for dinners. Maybe once a month? How many times do you go? Probably, once or twice a week! Cut out three to four such dinners and you save upto Rs 5,000 every month.
As the saying goes, too much of anything is bad, and this applies here as well. Not only does it mean that more money goes to waste, but in the long run your lavish spending can have a serious impact on your health, too!
Try these simple strategies, and you will be pleasantly surprised to see a huge bank balance very soon. And don't forget the additional savings, when cut down on using your credit cards!
Sunday, February 10, 2008
Marriage has Fringe Benefits too !!!
I find that generally investors fail to plan and structure their investments and taxes optimally, not because of negligence or a lack of inclination. It is more to do with the fact that one’s work keeps oneself so busy and preoccupied that financial planning becomes an exercise that is forever postponed to next week. Then before you blink March arrives….. cursing under your breath, you make an appointment with the CA. He is doing the same as he knows you are not going to provide him with all required paperwork. Some last minute, convenient tax saving investments are done and a solemn resolution is made that next year is going to be different.
Well, next year is indeed here and its time to act upon your resolution. The trick is to start early and take the necessary action step by step. Financial planning is at all times a process and not a one time, sporadic exercise. The following are some pointers to help you along the way.
Well begun is half doneThat you are reading this with interest (and intention hopefully) is in itself the big thing. Since you are starting early, you have time on your side. And believe me, time is a great ally. Slowly and surely, act upon these pointers (whichever is applicable to you) and you won’t need your CA’s appointment in March ’08.
The following, in my experience, is a list, of aspects largely neglected by most investors.
Use the Fringe Benefits of Marriage! In sickness and in health…..and in paying taxes too!The wedding vows are done, the honeymoon is over and reality has begun! I should know, I have been married ten years now. However, I did discover a silver lining! Marriage helps in reducing taxes substantially!But first some ground work has to be done. Have separate joint accounts, one for husband and wife and the other for wife and husband, even if one of them is not assessed for income tax. This may sound trivial but actually is of great importance for proper tax planning. This is especially important if you have or planning to buy a house on mortgage and benefit from the tax breaks.
Loan to Spouse
Did you know?
If your wife is a home maker, you can give her a loan to make investments. She earns interest on the investments and pays you interest on the loan. While you won't have to pay tax on the income, the money remains in the family!
You are in the highest tax bracket and she doesn’t have taxable income. (For all you ladies there, I am not chauvinistic, its just for writing convenience. The situation could be reverse too and the same principle would apply)
Anyway, it is vital to start a tax file in her name. The idea is that she starts earning income up to Rs. 1.45 lakh (Rs. 1.10 lakh for males). This income being below the tax threshold, will not be taxable. You ask how is a miracle possible that your wife starts earning so much overnight? She doesn’t. You transfer money to her which you would have otherwise invested in your name. If you earn it, you pay tax @33%. If she earns it, its gonna be tax-free!
But there is a glitch. You cannot transfer money by means of giving her a gift. The problem is that income on such gifted amount will be anyway clubbed in your hands for tax purposes. How do you work around this situation? Well, give her a loan! Though an interest free loan is technically possible, it is better to have an arm’s length contract by charging a nominal rate of interest (say savings bank rate). At a rate of 8% p.a., this way you can make income on over Rs. 15 lakhs of capital tax-free! Of course, the brownie points that you will score with her is an additional advantage!
Housing Finance
If you take a joint home loan, each of you gets the benefit of interest deduction of Rs 1.5 lakh
Marriage has benefits even when buying a house. Are you planning to buy a house anytime? Then, even if you are Mr. Deep Pocket, it is better to opt for housing finance. Tax breaks are available only on borrowed funds and not on the use of your own moolah. Moreover, in most cases, you will find that the direct cost of borrowing is much lesser than the tax saved especially now with the income tax laws offering tax breaks of Rs. 2.5 lakh on combined interest and principal payments.
Like I said, if you are buying a house, it helps if you are married. Real estate can be co-owned. Buy the property with both having an equal share. This way she cannot throw you out of the house (half of it is yours remember). But that’s not my point.
The loan should also be taken equally and the interest and principal payments for the same should be made separately by each from their respective bank account. If the above is carried out, each is entitled to an interest deduction of up to Rs. 1.5 lakh under Sec. 24 and a principal deduction of Rs. 1 lakh under Sec. 80C. So totally between the both of you, up to Rs. 5 lakh of income will escape tax!
Makes you wonder why can we marry only one?
Gift to Minor Children
The wife is taken care of, can kids be far behind? If you have any minor children --- congrats! You have just made some additional capital tax-free. See, you can earn an income of Rs. 1,500 for each child totally tax-free. So say, you have two children…that makes it Rs. 3,000. Capitalise this by say 7% and you have just made income on over Rs. 40,000 totally tax-free.
Mediclaim
Mediclaim is a must for all, taxpayers or otherwise, rich or poor, young or old, in view of the high cost of hospitalisation. If you haven’t bought a Mediclaim policy so far, do so NOW! There is a tax break of Rs. 10,000 available, but that is not the point. Mediclaim is for the good of you and your family members --- the tax cut is just an added benefit.
Public Provident Fund
In the absence of government social security, a regular PPF investment works like a safety net for the later years. This is especially true in the case of the self-employed who do not have a company provident fund to fall back upon. With the interest rates as they are currently, the 8% tax-free interest of PPF is super! I know, equity funds beckon left, right and center --- but hey, we are talking just Rs. 70,000 a year here. Just do it!
Create wealth --- not capital.
I may be addressing a minority here, but they are out there. I am referring to people who shy away from equity on account of the perceived risk. Do not reject equity-based schemes of MFs totally.
It is next to impossible to build wealth without equity exposure. Note that I use the word “wealth” and not capital. Wealth is when your capital brings a smile to your face. And believe me, saving a part of your salary in FDs is not going to do that.
However, with equity one can get very good rewards but the possibility of losing one’s shirt cannot be lost sight of. So do invest but with your shirt on!
If you are a trader, remember, Sec. 88E allows you a set-off of the Securities Transaction Tax against your trading profits. Arrive at your taxes only after claiming this set-off.
Tedious TDS
Last but not the least the most important thing to do is to collate your TDS receipts. Such TDS operates like advance tax already paid i.e. from your final tax liability, you have to pay only such amount that is over and above the tax already deducted. Do this as the year goes along. Most leave this exercise towards the end of the year leading to huge inconvenience and short counting.
To conclude.
You will appreciate that the above-mentioned points are really commonsensical and do not need much of one’s time and effort to put into practice. However, these baby steps have a way of adding up and sometimes make all the difference between financial health or the lack of it.
Well, next year is indeed here and its time to act upon your resolution. The trick is to start early and take the necessary action step by step. Financial planning is at all times a process and not a one time, sporadic exercise. The following are some pointers to help you along the way.
Well begun is half doneThat you are reading this with interest (and intention hopefully) is in itself the big thing. Since you are starting early, you have time on your side. And believe me, time is a great ally. Slowly and surely, act upon these pointers (whichever is applicable to you) and you won’t need your CA’s appointment in March ’08.
The following, in my experience, is a list, of aspects largely neglected by most investors.
Use the Fringe Benefits of Marriage! In sickness and in health…..and in paying taxes too!The wedding vows are done, the honeymoon is over and reality has begun! I should know, I have been married ten years now. However, I did discover a silver lining! Marriage helps in reducing taxes substantially!But first some ground work has to be done. Have separate joint accounts, one for husband and wife and the other for wife and husband, even if one of them is not assessed for income tax. This may sound trivial but actually is of great importance for proper tax planning. This is especially important if you have or planning to buy a house on mortgage and benefit from the tax breaks.
Loan to Spouse
Did you know?
If your wife is a home maker, you can give her a loan to make investments. She earns interest on the investments and pays you interest on the loan. While you won't have to pay tax on the income, the money remains in the family!
You are in the highest tax bracket and she doesn’t have taxable income. (For all you ladies there, I am not chauvinistic, its just for writing convenience. The situation could be reverse too and the same principle would apply)
Anyway, it is vital to start a tax file in her name. The idea is that she starts earning income up to Rs. 1.45 lakh (Rs. 1.10 lakh for males). This income being below the tax threshold, will not be taxable. You ask how is a miracle possible that your wife starts earning so much overnight? She doesn’t. You transfer money to her which you would have otherwise invested in your name. If you earn it, you pay tax @33%. If she earns it, its gonna be tax-free!
But there is a glitch. You cannot transfer money by means of giving her a gift. The problem is that income on such gifted amount will be anyway clubbed in your hands for tax purposes. How do you work around this situation? Well, give her a loan! Though an interest free loan is technically possible, it is better to have an arm’s length contract by charging a nominal rate of interest (say savings bank rate). At a rate of 8% p.a., this way you can make income on over Rs. 15 lakhs of capital tax-free! Of course, the brownie points that you will score with her is an additional advantage!
Housing Finance
If you take a joint home loan, each of you gets the benefit of interest deduction of Rs 1.5 lakh
Marriage has benefits even when buying a house. Are you planning to buy a house anytime? Then, even if you are Mr. Deep Pocket, it is better to opt for housing finance. Tax breaks are available only on borrowed funds and not on the use of your own moolah. Moreover, in most cases, you will find that the direct cost of borrowing is much lesser than the tax saved especially now with the income tax laws offering tax breaks of Rs. 2.5 lakh on combined interest and principal payments.
Like I said, if you are buying a house, it helps if you are married. Real estate can be co-owned. Buy the property with both having an equal share. This way she cannot throw you out of the house (half of it is yours remember). But that’s not my point.
The loan should also be taken equally and the interest and principal payments for the same should be made separately by each from their respective bank account. If the above is carried out, each is entitled to an interest deduction of up to Rs. 1.5 lakh under Sec. 24 and a principal deduction of Rs. 1 lakh under Sec. 80C. So totally between the both of you, up to Rs. 5 lakh of income will escape tax!
Makes you wonder why can we marry only one?
Gift to Minor Children
The wife is taken care of, can kids be far behind? If you have any minor children --- congrats! You have just made some additional capital tax-free. See, you can earn an income of Rs. 1,500 for each child totally tax-free. So say, you have two children…that makes it Rs. 3,000. Capitalise this by say 7% and you have just made income on over Rs. 40,000 totally tax-free.
Mediclaim
Mediclaim is a must for all, taxpayers or otherwise, rich or poor, young or old, in view of the high cost of hospitalisation. If you haven’t bought a Mediclaim policy so far, do so NOW! There is a tax break of Rs. 10,000 available, but that is not the point. Mediclaim is for the good of you and your family members --- the tax cut is just an added benefit.
Public Provident Fund
In the absence of government social security, a regular PPF investment works like a safety net for the later years. This is especially true in the case of the self-employed who do not have a company provident fund to fall back upon. With the interest rates as they are currently, the 8% tax-free interest of PPF is super! I know, equity funds beckon left, right and center --- but hey, we are talking just Rs. 70,000 a year here. Just do it!
Create wealth --- not capital.
I may be addressing a minority here, but they are out there. I am referring to people who shy away from equity on account of the perceived risk. Do not reject equity-based schemes of MFs totally.
It is next to impossible to build wealth without equity exposure. Note that I use the word “wealth” and not capital. Wealth is when your capital brings a smile to your face. And believe me, saving a part of your salary in FDs is not going to do that.
However, with equity one can get very good rewards but the possibility of losing one’s shirt cannot be lost sight of. So do invest but with your shirt on!
If you are a trader, remember, Sec. 88E allows you a set-off of the Securities Transaction Tax against your trading profits. Arrive at your taxes only after claiming this set-off.
Tedious TDS
Last but not the least the most important thing to do is to collate your TDS receipts. Such TDS operates like advance tax already paid i.e. from your final tax liability, you have to pay only such amount that is over and above the tax already deducted. Do this as the year goes along. Most leave this exercise towards the end of the year leading to huge inconvenience and short counting.
To conclude.
You will appreciate that the above-mentioned points are really commonsensical and do not need much of one’s time and effort to put into practice. However, these baby steps have a way of adding up and sometimes make all the difference between financial health or the lack of it.
Sunday, January 27, 2008
Cheaper mutual funds, a good thing?
Most equity mutual funds charge retail investors an entry load of 2.25%, on all investments. Investors have to pay the entry load mandatorily, irrespective of an his or her mode of entry (you may opt to invest in a lumpsum or through a Systematic Investment Plan (SIP).
The total amount collected as load for each scheme, as per the stipulations of the Securities and Exchange Board of India (SEBI), has to be maintained in a separate account by asset management companies (AMCs) and can be utilised towards meeting selling and distribution expenses. As per industry practice the load is normally utilised for paying the agent/distributor’s commission.
SEBI has scrapped this entry load for mutual fund investments made directly, ie submitted through the Internet or to the AMC/collection centre directly, and not routed through any distributor or broker.
First of all, it must be said that SEBI has been throughout the years, doing an excellent job of regulating the Indian mutual fund industry and making it adopt the best international practices as far as is possible. The waiver of load is a similar welcome step that will no doubt benefit the small but informed investor.
However, when I try and look beyond the obvious, I find certain creases that should have been ironed out before implementing this move, which essentially facilitates a small minority to access a cheaper product, that a vast majority has little knowledge of. Whilst providing the informed investor with choice is a desirable objective, protection of the interest of the uninformed investor is critical.
First and foremost, it is appropriate that the load waiver is made applicable to mutual funds in isolation. There are other investment products, which for all practical purposes are mutual funds, only not called so. For example, take Unit Linked Insurance Plans (ULIPs) of insurance companies that are governed by the Insurance Regulatory and Development Authority (IRDA).
These are basically mutual funds that charge far higher loads (from 15% to 75%.) Of course, the charges come down over the tenure of the investment, however, the point is that those charges clearly exist. Moreover, of late the way ULIPs are advertised and promoted, it is difficult for an uninformed investor to differentiate and tell apart a mutual fund from an ULIP product.
Then there are structured products issued by portfolio managers, which too, are nothing but mutual funds that offer substantially higher fees to distributors. Now, in such an environment where products with similar functions co-exist, however, with a vastly dissimilar incentive structure, clearly, there would be a wholesale shepherding and forced migration of uninformed investors to such products.
In other words, there is very much a clear and present danger that the mutual fund industry will end up subsidising competing investment products.
This is not to say that the load should not be waived. Definitely it should be.
However, it should not be done selectively but across the board. Admittedly, this is easier said than done as the regulators of both industries (SEBI and IRDA respectively) differ. However, if any practice is deemed desirable, it should be so, notwithstanding the industry concerned and efforts must be first made by the respective regulators to impose best practices in respect of their products uniformly.
Secondly, the three affected parties basically are mutual funds (AMCs), distributors and investors, informed and uninformed. Though the immediate interests of each of these constituents may differ, they do indeed have a common objective - that of growth and development of the mutual fund industry. The more the industry grows, better the technology and skilled manpower that AMCs can afford thereby engendering more competition and better returns to investors both uninformed as well as informed. However, if the pipe at the beginning is made narrower, other (quasi) mutual funds will take over the market to the detriment of the uniformed investor.
It is only in a perfect world that the uninformed investor will pay the load for the advice and service he is getting. More often than not, the uniformed investor is uninformed about the fact that he is uninformed. If a zero load is available he will want to avail of it and eventually it will lead to load shopping with distributors indulging in blatant rebating just to get additional business and the associated trail commission.
That being said, I cannot emphasize enough that it doesn’t mean that a knowledgeable investor is forced to pay someone for services that he doesn’t need. For such persons, dedicated no-load schemes could be offered - in fact it could be made mandatory for mutual funds to operate no load schemes for each category of its products. The only submission is that imputing zero loads across the board in existing schemes will confuse and corrupt the market. A scheme should be either with a load or without.
The bottom-line
As a consumer, I too look forward to cheaper financial products. However, I hope the authorities come to a decision after careful consideration of issues such as those laid out in this column. For, as an informed investor, I don’t want to end up saving two but paying twenty.
The total amount collected as load for each scheme, as per the stipulations of the Securities and Exchange Board of India (SEBI), has to be maintained in a separate account by asset management companies (AMCs) and can be utilised towards meeting selling and distribution expenses. As per industry practice the load is normally utilised for paying the agent/distributor’s commission.
SEBI has scrapped this entry load for mutual fund investments made directly, ie submitted through the Internet or to the AMC/collection centre directly, and not routed through any distributor or broker.
First of all, it must be said that SEBI has been throughout the years, doing an excellent job of regulating the Indian mutual fund industry and making it adopt the best international practices as far as is possible. The waiver of load is a similar welcome step that will no doubt benefit the small but informed investor.
However, when I try and look beyond the obvious, I find certain creases that should have been ironed out before implementing this move, which essentially facilitates a small minority to access a cheaper product, that a vast majority has little knowledge of. Whilst providing the informed investor with choice is a desirable objective, protection of the interest of the uninformed investor is critical.
First and foremost, it is appropriate that the load waiver is made applicable to mutual funds in isolation. There are other investment products, which for all practical purposes are mutual funds, only not called so. For example, take Unit Linked Insurance Plans (ULIPs) of insurance companies that are governed by the Insurance Regulatory and Development Authority (IRDA).
These are basically mutual funds that charge far higher loads (from 15% to 75%.) Of course, the charges come down over the tenure of the investment, however, the point is that those charges clearly exist. Moreover, of late the way ULIPs are advertised and promoted, it is difficult for an uninformed investor to differentiate and tell apart a mutual fund from an ULIP product.
Then there are structured products issued by portfolio managers, which too, are nothing but mutual funds that offer substantially higher fees to distributors. Now, in such an environment where products with similar functions co-exist, however, with a vastly dissimilar incentive structure, clearly, there would be a wholesale shepherding and forced migration of uninformed investors to such products.
In other words, there is very much a clear and present danger that the mutual fund industry will end up subsidising competing investment products.
This is not to say that the load should not be waived. Definitely it should be.
However, it should not be done selectively but across the board. Admittedly, this is easier said than done as the regulators of both industries (SEBI and IRDA respectively) differ. However, if any practice is deemed desirable, it should be so, notwithstanding the industry concerned and efforts must be first made by the respective regulators to impose best practices in respect of their products uniformly.
Secondly, the three affected parties basically are mutual funds (AMCs), distributors and investors, informed and uninformed. Though the immediate interests of each of these constituents may differ, they do indeed have a common objective - that of growth and development of the mutual fund industry. The more the industry grows, better the technology and skilled manpower that AMCs can afford thereby engendering more competition and better returns to investors both uninformed as well as informed. However, if the pipe at the beginning is made narrower, other (quasi) mutual funds will take over the market to the detriment of the uniformed investor.
It is only in a perfect world that the uninformed investor will pay the load for the advice and service he is getting. More often than not, the uniformed investor is uninformed about the fact that he is uninformed. If a zero load is available he will want to avail of it and eventually it will lead to load shopping with distributors indulging in blatant rebating just to get additional business and the associated trail commission.
That being said, I cannot emphasize enough that it doesn’t mean that a knowledgeable investor is forced to pay someone for services that he doesn’t need. For such persons, dedicated no-load schemes could be offered - in fact it could be made mandatory for mutual funds to operate no load schemes for each category of its products. The only submission is that imputing zero loads across the board in existing schemes will confuse and corrupt the market. A scheme should be either with a load or without.
The bottom-line
As a consumer, I too look forward to cheaper financial products. However, I hope the authorities come to a decision after careful consideration of issues such as those laid out in this column. For, as an informed investor, I don’t want to end up saving two but paying twenty.
The two mortal enemies of Mr Money
"Knock, Knock!
""Who’s there?"
"Mr Money!"
"Wait a minute. I am coming."(Door opens after some time)
"Where are you, Mr Money?"
"Gone...you took too long!"
If you had a conversation with money, would it run like this? Well, it happens to the best of us. With the click of a button Mr Money moves from one end of the world to another, and he moves fast! In fact if you follow the CNBC TV18 market action in the evening, the anchor is likely to say, “The turnover was a bit low today -- with only Rs 60,000 crores”. Can you imagine Rs 60,000 crores, being a low turnover! The bottom-line: how can you make Mr Money work for you? During a recent conversation I had with him, I realised that he is like a child and needs constant care and attention. Here are some excerpts from our chat:
Me: Tell me, Mr Money. How can I always have ample of you?
MM: Treat me properly!
Me: You will have to elaborate.
MM: I hate when people use me to gamble, treat me like a commodity. I don’t like it. They want me to multiply overnight. It’s crazy. They do nothing to help me to multiply but expect me to do it all by myself.
Me: I see. What else?
MM: They spend me like there is no tomorrow. Those who don’t spend lock me up in bank deposits. I lose value when I am locked up. People need to put me to better use but instead they abuse me. How can I stay with someone who abuses me?
Me: You're right! You don’t share an emotional bond with us anyways, and are not compelled to stay with us. How can we help you and in turn help ourselves?
MM: I have two enemies: inflation and taxation. If you help me fight them, the least I can do is protect you. And if you put me in a place that gives returns equal to or lesser than inflation, then I will get hurt and will bleed. But if you put me in a place that gives returns equal to inflation (after taxes) then I have breathing space. But if you want me to multiply, you have to do a lot of hard work to find avenues for me to reside in. Then I can function well.
Me: How do I find these good places for you?
MM: Very simple! If you look for a good avenue that equals double of inflation rate and park me there, then I shall be fine. Risk and tax management is your problem.
Me: The avenues you ask for may be risky and I don’t want to lose even if I have little of you.
MM: You have got to take some risks! Either you are happy with the little you have of me or you give me opportunity to grow. You can let me grow without interfering for a couple of years. I will be busy and may not give you my full attention. But, be assured that I will be there for you in the quantum that you will require in all the years to come.
Me: I see. And my other options?
MM: I have limited means and I can’t identify where to go. You need to identify the avenue, and I will work there. Then I will try to do my job.
Me: But I am worried about put you in just one place.
MM: That’s understandable. Divide me and place me in different avenues. That’s better for me as I have multiple places to reside but all said and done it is you who is in the driver’s seat.
Here is my inference from this conversation:
1. I have to work very hard to identify avenues for Mr Money. These include mutual funds, stock markets, etc, which might be a good place for Mr Money to grow. 2. I have to study trends and make my judgement. For example when interest rates fall, I need to put money into bonds as well. When the rates rise I need to prepay my home loan etc.
But the most important learning is this: I must treat Mr Money with respect and care.
""Who’s there?"
"Mr Money!"
"Wait a minute. I am coming."(Door opens after some time)
"Where are you, Mr Money?"
"Gone...you took too long!"
If you had a conversation with money, would it run like this? Well, it happens to the best of us. With the click of a button Mr Money moves from one end of the world to another, and he moves fast! In fact if you follow the CNBC TV18 market action in the evening, the anchor is likely to say, “The turnover was a bit low today -- with only Rs 60,000 crores”. Can you imagine Rs 60,000 crores, being a low turnover! The bottom-line: how can you make Mr Money work for you? During a recent conversation I had with him, I realised that he is like a child and needs constant care and attention. Here are some excerpts from our chat:
Me: Tell me, Mr Money. How can I always have ample of you?
MM: Treat me properly!
Me: You will have to elaborate.
MM: I hate when people use me to gamble, treat me like a commodity. I don’t like it. They want me to multiply overnight. It’s crazy. They do nothing to help me to multiply but expect me to do it all by myself.
Me: I see. What else?
MM: They spend me like there is no tomorrow. Those who don’t spend lock me up in bank deposits. I lose value when I am locked up. People need to put me to better use but instead they abuse me. How can I stay with someone who abuses me?
Me: You're right! You don’t share an emotional bond with us anyways, and are not compelled to stay with us. How can we help you and in turn help ourselves?
MM: I have two enemies: inflation and taxation. If you help me fight them, the least I can do is protect you. And if you put me in a place that gives returns equal to or lesser than inflation, then I will get hurt and will bleed. But if you put me in a place that gives returns equal to inflation (after taxes) then I have breathing space. But if you want me to multiply, you have to do a lot of hard work to find avenues for me to reside in. Then I can function well.
Me: How do I find these good places for you?
MM: Very simple! If you look for a good avenue that equals double of inflation rate and park me there, then I shall be fine. Risk and tax management is your problem.
Me: The avenues you ask for may be risky and I don’t want to lose even if I have little of you.
MM: You have got to take some risks! Either you are happy with the little you have of me or you give me opportunity to grow. You can let me grow without interfering for a couple of years. I will be busy and may not give you my full attention. But, be assured that I will be there for you in the quantum that you will require in all the years to come.
Me: I see. And my other options?
MM: I have limited means and I can’t identify where to go. You need to identify the avenue, and I will work there. Then I will try to do my job.
Me: But I am worried about put you in just one place.
MM: That’s understandable. Divide me and place me in different avenues. That’s better for me as I have multiple places to reside but all said and done it is you who is in the driver’s seat.
Here is my inference from this conversation:
1. I have to work very hard to identify avenues for Mr Money. These include mutual funds, stock markets, etc, which might be a good place for Mr Money to grow. 2. I have to study trends and make my judgement. For example when interest rates fall, I need to put money into bonds as well. When the rates rise I need to prepay my home loan etc.
But the most important learning is this: I must treat Mr Money with respect and care.
Wednesday, January 23, 2008
Beat the CRASH: Heed the 12 commandments
I have been inundated with calls from friends on what an investor should do when he or she is staring at blood in their portfolios.
It reminds me of the saying -- 'this too shall pass'. I do not know its origin, but am convinced that in investing, as in life, you should keep your cool.
This advice is, of course, meant only for long-term investors and not for traders. So, go ahead and use these tips:
1. Be conservative.
If you thought the Reliance Power issue was over-priced, do not apply 'hoping' it will open at a premium.
2. Learn from the best.
Classic investing books or conversations with trustworthy individuals will always prove to be useful. Devil take the Hindmost: A history of financial speculation by Edward Chancellor, a classic book about rising and falling markets, could help you understand the reason for the volatile market.
3. Don’t take advice from those who are not flexible.
The market is not for the dogmatic; you need to adapt to the information that is available to you.
4. Debt funds are useful for capital protection. And capital protection partially is a fantastic thing to seek.
5. Simple, dull, boring businesses give very good returns.
Banking is one such business. You need not invest in biotechnology, aerospace engineering, and the likes! Peter Lynch, a Wall Street stock market investor says, “Never invest in any idea you cannot illustrate with a crayon.”
6. Some businesses are good for you as a consumer; it may be a while before it is good for you as an investor. The airlines are a good example. And some businesses are good for you as an investor, terrible for you as a consumer -- tobacco for example!
7. Buy umbrellas in the summer.
8. Buy only the best of the breed during periods of economic or market uncertainty.
9. Be patient. Be grateful to God, start with a prayer. -- Sir John Templeton, stock investor, businessman and philanthropist.
10. Buy when you are panicking. Sell when you become overconfident.
11. Investing is about common sense.
12. Don't compound the mistake of buying high by selling low.
If you have bought high but believe it’s worth it, do not let the market bother you. If you have lost confidence in the company, sell. Price is just what the market thinks about that company on that day.
It reminds me of the saying -- 'this too shall pass'. I do not know its origin, but am convinced that in investing, as in life, you should keep your cool.
This advice is, of course, meant only for long-term investors and not for traders. So, go ahead and use these tips:
1. Be conservative.
If you thought the Reliance Power issue was over-priced, do not apply 'hoping' it will open at a premium.
2. Learn from the best.
Classic investing books or conversations with trustworthy individuals will always prove to be useful. Devil take the Hindmost: A history of financial speculation by Edward Chancellor, a classic book about rising and falling markets, could help you understand the reason for the volatile market.
3. Don’t take advice from those who are not flexible.
The market is not for the dogmatic; you need to adapt to the information that is available to you.
4. Debt funds are useful for capital protection. And capital protection partially is a fantastic thing to seek.
5. Simple, dull, boring businesses give very good returns.
Banking is one such business. You need not invest in biotechnology, aerospace engineering, and the likes! Peter Lynch, a Wall Street stock market investor says, “Never invest in any idea you cannot illustrate with a crayon.”
6. Some businesses are good for you as a consumer; it may be a while before it is good for you as an investor. The airlines are a good example. And some businesses are good for you as an investor, terrible for you as a consumer -- tobacco for example!
7. Buy umbrellas in the summer.
8. Buy only the best of the breed during periods of economic or market uncertainty.
9. Be patient. Be grateful to God, start with a prayer. -- Sir John Templeton, stock investor, businessman and philanthropist.
10. Buy when you are panicking. Sell when you become overconfident.
11. Investing is about common sense.
12. Don't compound the mistake of buying high by selling low.
If you have bought high but believe it’s worth it, do not let the market bother you. If you have lost confidence in the company, sell. Price is just what the market thinks about that company on that day.
Saturday, January 19, 2008
Power of Compounding !!!
In this article we discuss how, because of the power of compounding specially over a long period of time, the difference between starting to invest early versus starting late can have a significant impact on your wealth.
We’ll elaborate this with the help of an example.
Let's compare two friends – Sonia and Peter. Sonia starts saving Rs750 per year from the time she is 15. After 15 years, she stops investing money to her nest egg.
On the other hand, Peter starts investing Rs5,000 per year when he is 30 and continues investing this amount every year till he is 60.
If both earn 15% post-tax return per annum on their investments, who will have more wealth when they retire at age 60?
Sonia. Her Rs750 annual savings between age 15 and 30 will aggregate to Rs27.7 lakhs by age 60, whereas, Peter’s Rs5,000 annual savings between age 30 and 60 will aggregate Rs25 lakhs.
Both will have built up meaningful wealth (compared to their investments). BUT for Sonia to build her wealth, the difference in the annual investment amount and the fewer number of years required for making investments, highlight the importance of starting to invest early.
To summarise, the power of compounding is the single most important reason for you to start investing right now. Remember, every day that your money is invested, is a day that your money is working for you.
We’ll elaborate this with the help of an example.
Let's compare two friends – Sonia and Peter. Sonia starts saving Rs750 per year from the time she is 15. After 15 years, she stops investing money to her nest egg.
On the other hand, Peter starts investing Rs5,000 per year when he is 30 and continues investing this amount every year till he is 60.
If both earn 15% post-tax return per annum on their investments, who will have more wealth when they retire at age 60?
Sonia. Her Rs750 annual savings between age 15 and 30 will aggregate to Rs27.7 lakhs by age 60, whereas, Peter’s Rs5,000 annual savings between age 30 and 60 will aggregate Rs25 lakhs.
Both will have built up meaningful wealth (compared to their investments). BUT for Sonia to build her wealth, the difference in the annual investment amount and the fewer number of years required for making investments, highlight the importance of starting to invest early.
To summarise, the power of compounding is the single most important reason for you to start investing right now. Remember, every day that your money is invested, is a day that your money is working for you.
Tuesday, January 8, 2008
Have you made your Will?
The entire nation watched as the Ambani brothers split their father’s wealth. While speculation continues about what went wrong, there is no denying the fact that the late Dhirubhai Ambani would have done well to leave a will.
Making a will is sensible because it leaves you to decide how your wealth is used. But unfortunately, most Indians simply forget to make a will.
Why make a Will?
If you die intestate (that is without making a will), your family will have
to follow certain ‘laws of succession’, in deciding how to split your assets. It is a misconception to believe that all the estate is automatically passed on to the spouse. Children and relatives can also stake claim to the property. Laws of inheritance and succession are diverse and complicated.
This kind of division of assets is an expensive business as your family would have to hire the services of a lawyer and all the costs will be incurred out of your estate. So in effect, your family will get a diminished share.
Key points to remember while making a Will -
The process of making a will is very simple. It requires no stamp duty or registration, although most experts advice that a will must be registered, so that it is in safe custody.
However, there are certain traps that you should watch out for. Says chartered accountant Vinay Singh, “One common mistake that people make is failing to appoint witnesses and trustworthy executors younger than themselves. In case of Hindus, another common mistake is the failure to state if the property is inherited or not.”
The question of inheritance becomes important because no ancestral property can be assigned to any person. All rights on inherited property are acquired by birth.
A Will supercedes nominations -
But if you have made nominations, does a will become essential? Sanjay Sinha asks a valid question, “I have a number of investments in shares, bank deposits, mutual fund, insurance policies etc. For all these investments, I have assigned a nominee. So is it necessary to make a Will for the same?”
In the eyes of the law, a nominee is a trustee and he need not necessarily be a beneficiary to a will. Says Singh, “The nominee is merely a caretaker and the right to the property passes by will or if there is no will, under the personal law of the deceased.”
This means that if there is a will, the nominee will only hold the assets as a caretaker trustee for the beneficiary. The nominee will be legally bound to transfer the nominated property to the beneficiary of the will. If there is no will, he will have to transfer to the legal heirs. So ideally, if a will is made, it would be better to name the nominee as the beneficiary to ensure that the distribution is smooth and efficient
- Key points of laws of inheritance
- If there is no will, the property will devolve according to the personal law of the deceased.
- According to the Indian Succession Act if he was a Hindu, Buddhist, Sikh, Jains or Muhammadan, the legal heirs will have to make an application to the court.The legal heirs would have to prove their relationship with the deceased and comply with several documentation.
- The court may grant letters of administration to any person who, according to the rules for distribution of the estate, would be entitled to the whole or any part of such deceased's estate.
How to make a will?
-No prescribed form for a Will; only needs to be signed and attested
-Can be in any language; no technical words need to be used
-Two witnesses must attest a Will; one preferably a doctor
-They should sign in the presence of each other and the person making the Will-In India, the registration of Wills is not compulsory
-The Will should provide for the appointment of executors, though not mandatory
-No stamp duty is required to be paid for executing a Will.
Sunday, January 6, 2008
Disaster proof your retirement
Mr Batra is 56 today and will retire in two years. All his life he was invested in insurance and fixed interest instruments. Over the years, he became an expert and was acclaimed as the most knowledgeable amongst friends, colleagues, and the person to consult for “safe avenues”. His knowledge and skills were impeccable but over time they became inadequate and thereafter redundant. He has exposure to all kinds of policies including some unit linked as well. His overall asset allocation was 10% in equity and balance in debt.
He calculated that during his working life so far he has been able to invest about 15 lacs and is likely to have a retirement kitty of 40 lacs. He proposes to have a retirement income of about Rs. 20,000 on a pre tax basis by purchasing an annuity plan from LIC earning him a 6% annuity lifelong with return of capital to his heirs upon his death. This amount of Rs. 20,000 is much lower than his last drawn salary of Rs. 60,000 per month and he cannot imagine living his life and supporting his family in this amount. He seems to have no choice.
Something is not quite correct and something has significantly gone wrong somewhere, he feels. But the fact remains cast in stone. Had the same money been invested with an asset allocation of 50% equity and 50% debt he would have had more than 3 crores upon superannuation.
Some day like Mr. Batra we may turn back and realize that we don’t have enough, may be skills we not adequate and we completely lacked knowledge of generating wealth. It is then too late to realize what an OPPORTUNITY LOSS we have made. The future years will be a lot of compromise, things will be worse … just let inflation catch up.
However given the situation is let’s understand what is the best Mr. Batra can do with his Rs. 40 lacs in a situation like this;
1. Firstly, a very accurate assessment living expenses need to be done. Say this is Rs. 39,000 per month. His company shall provide a pension of Rs. 7000 so he needs to produce 32,000 per month from his 40 lacs.
2. Secondly, an appropriate rate of inflation needs to be worked out based on his lifestyle. This rate of inflation is a weighted average based on various expenditures constituting his lifestyle. (This needs expert help). Let’s say this rate is 6.85%, hence his retirement income needs to rise by 6.85% per annum.
3. The above amount is the amount required after payment of income tax.
4. Hence, he needs to generate a post tax rate of return of 12.47% to sustain himself for the balance of his retired life. He will be able to manage himself comfortably but without luxuries. The good news is that he can sustain his lifestyle.
5. As a result his plan of investing into LIC annuity plan goes out of the window. His funds needs to be engineered and monitored with great precision so that 12.47% return materialises and also provides him a lifestyle based increasing retirement income at the rate of 6.85% p.a.
6. The final good news is that this is possible with active monitoring of a prudent asset allocation strategy.
Having said the above one can see that there will be strain, which could have easily, be ironed out if we have time in hand i.e. if a proper retirement plan was initiated a few years in advance. In my experience I have seen that if a person is around the age of 50 with say 8-10 years left to retire all may not be lost.
He calculated that during his working life so far he has been able to invest about 15 lacs and is likely to have a retirement kitty of 40 lacs. He proposes to have a retirement income of about Rs. 20,000 on a pre tax basis by purchasing an annuity plan from LIC earning him a 6% annuity lifelong with return of capital to his heirs upon his death. This amount of Rs. 20,000 is much lower than his last drawn salary of Rs. 60,000 per month and he cannot imagine living his life and supporting his family in this amount. He seems to have no choice.
Something is not quite correct and something has significantly gone wrong somewhere, he feels. But the fact remains cast in stone. Had the same money been invested with an asset allocation of 50% equity and 50% debt he would have had more than 3 crores upon superannuation.
Some day like Mr. Batra we may turn back and realize that we don’t have enough, may be skills we not adequate and we completely lacked knowledge of generating wealth. It is then too late to realize what an OPPORTUNITY LOSS we have made. The future years will be a lot of compromise, things will be worse … just let inflation catch up.
However given the situation is let’s understand what is the best Mr. Batra can do with his Rs. 40 lacs in a situation like this;
1. Firstly, a very accurate assessment living expenses need to be done. Say this is Rs. 39,000 per month. His company shall provide a pension of Rs. 7000 so he needs to produce 32,000 per month from his 40 lacs.
2. Secondly, an appropriate rate of inflation needs to be worked out based on his lifestyle. This rate of inflation is a weighted average based on various expenditures constituting his lifestyle. (This needs expert help). Let’s say this rate is 6.85%, hence his retirement income needs to rise by 6.85% per annum.
3. The above amount is the amount required after payment of income tax.
4. Hence, he needs to generate a post tax rate of return of 12.47% to sustain himself for the balance of his retired life. He will be able to manage himself comfortably but without luxuries. The good news is that he can sustain his lifestyle.
5. As a result his plan of investing into LIC annuity plan goes out of the window. His funds needs to be engineered and monitored with great precision so that 12.47% return materialises and also provides him a lifestyle based increasing retirement income at the rate of 6.85% p.a.
6. The final good news is that this is possible with active monitoring of a prudent asset allocation strategy.
Having said the above one can see that there will be strain, which could have easily, be ironed out if we have time in hand i.e. if a proper retirement plan was initiated a few years in advance. In my experience I have seen that if a person is around the age of 50 with say 8-10 years left to retire all may not be lost.
Retirement planning: Start early, finish rich
"Aubrey de Grey of Cambridge University believes many more of us will live to be 122. In fact, he thinks the first person to live to be 1000 was born around 1959". (Times of India dated 3rd July 2006).
The report is at once joyous and frightening. Joyous because all of us can look forward to long long life and frightening because who will finance this long life, to make it a happy life. There was a time in not too distant a past, when age of 60 was considered almost the end of the life (51 to 58 years period was the dreaded one literally referred to as if 'in the woods').
Time span then mercifully between the end of our productivity and our death was very short and hence sweet. Stories of 'he died with his boots on'; 'in harness'; 'on his desk', were frequent because death came on early. Now, death comes only in the bed as late as at 90, largely because medical profession and scientists are working overtime to discover gene therapy, age reversal and more. Thus, old age is becoming the longest and often a painful period of our life.
Hence, we can no longer sit back after retiring from productive life waiting for the life to come to an early happy end. Retirement now calls for careful planning, in terms of money, finances, returns on investments, allocations, liquidity, safety etc.
Any financial planning for retirement obviously raises many questions like:
(i) How long will I live? ;
(ii) What will I earn on my savings? ;
(iii) What will be the inflation rate and its effect on my savings? ;
(iv) Whether I will outlive my savings? ; And finally,
(v) What, if I do outlive my savings?
Ironically, adding to our anxiety is the harsh reality that literally there are no answers to any of the above questions.
Inspite of the increased longitivity, government and private sector companies continue to retire its employees at 58 or 60 years rendering post retirement period painful to many who have not planned properly their finances and savings.
A survey conducted by AC Nielson – ORG Marg based on a sample of 300 white collared professionals and businessmen in Mumbai, Delhi and Bangalore, though not adequately representative but yet broadly indicative, revealed an unusually high preference (87%) for long term insurance plans as an instrument of financial planning for retirement and only 10% for shares [Outlook Money of July 06]. This low level in equity was well before the recent market fall from 12,600 in May 06 to 9600 in June 06, since the survey was carried out in early April 06. What is significant is that preference for life insurance is observed across all age groups and all three cities. Second preferred instrument was bank deposits (39%) followed by NSS/NSC/PPF (National Savings scheme/ National Savings Certifictae/ Public Provident Fund) that ranked 22%; mutual funds ranked 11%; 9% in pension plans; and 4% in company deposits.
This unduly high preference for life insurance plans throws up serious gap in awareness, even among urban centres, of availability of several other innovative financial instruments and should serve as an eye opener for the marketing departments of mutual funds and other players to tap the huge potential for garnering savings for providing attractive returns at low risks.
With great respect to insurance companies, life insurance premium can never be an investment instrument nor an attractive savings plan. At best, it has always been a 'cost' of insuring our life against accidental or premature death. Insurance companies have never claimed to provide great 'investment' option but only provision against death. With the entry of private players with foreign partners in the life insurance sector, new products more of 'savings' rather than 'investment' have no doubt recently been introduced.
Any investment instrument should yield returns to beat inflation. Since times immemorial, insurance companies including LIC (Life Insurance Corporation) have been known to be very generous at the cost of its policy holders in their rewards to their agents by offering as high as 50% commission for procuring the business thereby only the balance premium, after meeting the establishment costs, gets effectively invested and most of it in safe government securities, yielding nominal returns. Thus, a good financial retirement plan must go well beyond insurance.
Ideal insurance plan should be whole life policy without profit available at nominal cost to protect merely the life against premature death. Premium on such a policy should be treated as necessary 'cost' and not an 'investment' on lines of mediclaim policy for medical cost of hospitalization. Money so saved should go for investment among several diversified financial instruments as NSC, PPF, ELSS (Equity Linked Savings Schemes) of mutual funds, postal and bank Deposits and equity shares. Equity shares of listed companies is one instrument, which historically has yielded dividends and also capital appreciation. Now, that we are living in a borderless world, international events like wars, rising crude and gas prices, weakening US dollar, allocation of some of our savings in gold (not jewelry) or gold units is also suggested as a hedge against inflation and fall in value of paper currency including Indian Rupee.
Last thought for the retirees. Serious error that retirees make is to park their savings in debt instruments in the mistaken belief that these are safe compared to risky investment in equity shares. However, vagaries of inflation and taxation erode the value of and returns from debt investments rendering the plight of retirees pitiable. To quote an eminent retiree himself, Mr. S. S. Tarapore, former Dy. Governor, RBI who says "Not taking any risk by retirees by staying away from equity is itself, the biggest risk".
To conclude, I quote an eminent financial expert who asks his audience "By not doing anything about your investments, you are doing something; you are losing money… to inflation". 'How much' do I start with for investment? is not the question. 'When' is the question? Your time to save and invest starts 'now'…
The report is at once joyous and frightening. Joyous because all of us can look forward to long long life and frightening because who will finance this long life, to make it a happy life. There was a time in not too distant a past, when age of 60 was considered almost the end of the life (51 to 58 years period was the dreaded one literally referred to as if 'in the woods').
Time span then mercifully between the end of our productivity and our death was very short and hence sweet. Stories of 'he died with his boots on'; 'in harness'; 'on his desk', were frequent because death came on early. Now, death comes only in the bed as late as at 90, largely because medical profession and scientists are working overtime to discover gene therapy, age reversal and more. Thus, old age is becoming the longest and often a painful period of our life.
Hence, we can no longer sit back after retiring from productive life waiting for the life to come to an early happy end. Retirement now calls for careful planning, in terms of money, finances, returns on investments, allocations, liquidity, safety etc.
Any financial planning for retirement obviously raises many questions like:
(i) How long will I live? ;
(ii) What will I earn on my savings? ;
(iii) What will be the inflation rate and its effect on my savings? ;
(iv) Whether I will outlive my savings? ; And finally,
(v) What, if I do outlive my savings?
Ironically, adding to our anxiety is the harsh reality that literally there are no answers to any of the above questions.
Inspite of the increased longitivity, government and private sector companies continue to retire its employees at 58 or 60 years rendering post retirement period painful to many who have not planned properly their finances and savings.
A survey conducted by AC Nielson – ORG Marg based on a sample of 300 white collared professionals and businessmen in Mumbai, Delhi and Bangalore, though not adequately representative but yet broadly indicative, revealed an unusually high preference (87%) for long term insurance plans as an instrument of financial planning for retirement and only 10% for shares [Outlook Money of July 06]. This low level in equity was well before the recent market fall from 12,600 in May 06 to 9600 in June 06, since the survey was carried out in early April 06. What is significant is that preference for life insurance is observed across all age groups and all three cities. Second preferred instrument was bank deposits (39%) followed by NSS/NSC/PPF (National Savings scheme/ National Savings Certifictae/ Public Provident Fund) that ranked 22%; mutual funds ranked 11%; 9% in pension plans; and 4% in company deposits.
This unduly high preference for life insurance plans throws up serious gap in awareness, even among urban centres, of availability of several other innovative financial instruments and should serve as an eye opener for the marketing departments of mutual funds and other players to tap the huge potential for garnering savings for providing attractive returns at low risks.
With great respect to insurance companies, life insurance premium can never be an investment instrument nor an attractive savings plan. At best, it has always been a 'cost' of insuring our life against accidental or premature death. Insurance companies have never claimed to provide great 'investment' option but only provision against death. With the entry of private players with foreign partners in the life insurance sector, new products more of 'savings' rather than 'investment' have no doubt recently been introduced.
Any investment instrument should yield returns to beat inflation. Since times immemorial, insurance companies including LIC (Life Insurance Corporation) have been known to be very generous at the cost of its policy holders in their rewards to their agents by offering as high as 50% commission for procuring the business thereby only the balance premium, after meeting the establishment costs, gets effectively invested and most of it in safe government securities, yielding nominal returns. Thus, a good financial retirement plan must go well beyond insurance.
Ideal insurance plan should be whole life policy without profit available at nominal cost to protect merely the life against premature death. Premium on such a policy should be treated as necessary 'cost' and not an 'investment' on lines of mediclaim policy for medical cost of hospitalization. Money so saved should go for investment among several diversified financial instruments as NSC, PPF, ELSS (Equity Linked Savings Schemes) of mutual funds, postal and bank Deposits and equity shares. Equity shares of listed companies is one instrument, which historically has yielded dividends and also capital appreciation. Now, that we are living in a borderless world, international events like wars, rising crude and gas prices, weakening US dollar, allocation of some of our savings in gold (not jewelry) or gold units is also suggested as a hedge against inflation and fall in value of paper currency including Indian Rupee.
Last thought for the retirees. Serious error that retirees make is to park their savings in debt instruments in the mistaken belief that these are safe compared to risky investment in equity shares. However, vagaries of inflation and taxation erode the value of and returns from debt investments rendering the plight of retirees pitiable. To quote an eminent retiree himself, Mr. S. S. Tarapore, former Dy. Governor, RBI who says "Not taking any risk by retirees by staying away from equity is itself, the biggest risk".
To conclude, I quote an eminent financial expert who asks his audience "By not doing anything about your investments, you are doing something; you are losing money… to inflation". 'How much' do I start with for investment? is not the question. 'When' is the question? Your time to save and invest starts 'now'…
Thursday, January 3, 2008
I have no clue what to do with my savings!
Divya, a disciplined saver, never takes a risk with her money. But strangely, once the moolah accumulates, she has no clue what to do with it!
Well, according to our experts, saving without a purpose is not, necessarily, a good thing. They have some smart advice to offer this working professional:
Vital statistics
Name: Divya Mehta
Age: 30
Profession: Banker
Location: Mumbai
Saving strategy :
Divya has been working for the past nine years. A self-confessed, disciplined saver, she says, "I set aside a percentage of my income to invest in fixed deposit (FD) and provident fund (PF) every month."
That's indeed a great start to wealth creation. But probe a little further and one finds gaps in Divya's savings plan. In a freewheeling chat, Divya tells us how she goes about managing her money and we, in turn, tell her the bad money habits she should bury before the new year sets in.
Divya has no financial goals!
"I don't know what I want to do with my money. I don't even know my net worth is!" she says.
Divya saves 85% of her net income and spends the remaining 15% on routine and miscellaneous expenses. She stays in her own house and has no other major expense. If she earns Rs 40,000 a month, she saves Rs 34,000 and spends the remaining Rs 6,000.
According to financial advisor, Kartik Jhaveri, goal planning is very critical, when you are investing on your own, there are a couple of questions you need to answer:
a. How much to invest?
b. What do you need to buy?
"Having a tangible target gives you direction and it also pushes the probability of owning what you want higher. A goal helps you decide how much to compromise on what you want, " he adds.
So, first things first. Divya must draw up her financial plan and decide on the purpose of her saving. This will give her an estimate of how much time and money she would need to make sure her desires come true.
'I don't like to take risks'
Divya has been investing diligently in FDs and PF for over eight years, now. She says, "My money is not growing as much as I would like it to grow."
She invests less than 5% of her entire investment in stocks and mutual funds. And believe it or not, she makes no withdrawals.
What she does not realise is that she is stunting the growth of her money tree. Inflation is the worst enemy for debt products. If her FD or PF is giving her 8% returns, inflation has been 5% over the last 10 years on an average. Her effective returns: only 3%.
So, while she proudly says that her investments have grown 40 times over the last eight years, her expenses too would have grown thanks to inflation.Investment advisor Sanjay Matai says, "The focus, now, should shift towards newer products such as equity mutual funds." Since Divya is a long-term investor (remember: she doesn't make withdrawals), equity is the best vehicle for her. Equity will give her returns of 15% over a long period of over 10 years. Equities are also more tax-friendly than debt products like FDs.
Budgets are so boring
Divya confesses, "I am good at saving but I am not good at accounting for the balance money."
"The best way to deal with this", says Kartik Jhaveri, "is routing all your financial transaction to be made through credit cards. Allocate one specific credit card for a particular expense. This way, it is easier to track as it allows you to check your monthly statement online as and when you require."
Another way is to do a backward calculation. Out of your total income, 30% would go toward taxes. Thereafter, ensure that:
-Your debts (EMIs) don't exceed 30%.
- You set aside at least 4% for insurance.
- You invest at least 15%.
That leaves around 20% for expenses. Any expense over and above 20% should be flagged as over limit.
Emergency fund, er...what's that?
Think you don't need one? Well, the Mumbai floods (of July 26, 2005), were not anticipated either. Ill health and job loss are also common emergencies. So set aside some money for an emergency. Roughly three months' salary can be kept in a liquid mutual fund so that it is accessible in emergencies.
Retirement? I'm still 20 years away!
Divya admits, "I have not given a thought to my post-retirement financial needs." Well then, this is the best time to plan!
If Divya spends Rs 6,000 per month or Rs 72,000 per annum today, at an inflation rate of 5%, that would be Rs 3.11 lakh per annum after 30 years.
Post retirement, her regular income stream would stop and she would need to make sure her investment income can generate that amount. Of course, expenses like healthcare and medical would shoot up too by then.
Retirement planning is best done at an early age. By setting aside small sums every month and investing them in equities, Divya can meet her retirement needs.With this new strategy, Divya can easily keep a track of her money and she can also invest in products that will give her good returns.
It is time to bury your bad money habits and supplant them with effective and logical money habits.
Well, according to our experts, saving without a purpose is not, necessarily, a good thing. They have some smart advice to offer this working professional:
Vital statistics
Name: Divya Mehta
Age: 30
Profession: Banker
Location: Mumbai
Saving strategy :
Divya has been working for the past nine years. A self-confessed, disciplined saver, she says, "I set aside a percentage of my income to invest in fixed deposit (FD) and provident fund (PF) every month."
That's indeed a great start to wealth creation. But probe a little further and one finds gaps in Divya's savings plan. In a freewheeling chat, Divya tells us how she goes about managing her money and we, in turn, tell her the bad money habits she should bury before the new year sets in.
Divya has no financial goals!
"I don't know what I want to do with my money. I don't even know my net worth is!" she says.
Divya saves 85% of her net income and spends the remaining 15% on routine and miscellaneous expenses. She stays in her own house and has no other major expense. If she earns Rs 40,000 a month, she saves Rs 34,000 and spends the remaining Rs 6,000.
According to financial advisor, Kartik Jhaveri, goal planning is very critical, when you are investing on your own, there are a couple of questions you need to answer:
a. How much to invest?
b. What do you need to buy?
"Having a tangible target gives you direction and it also pushes the probability of owning what you want higher. A goal helps you decide how much to compromise on what you want, " he adds.
So, first things first. Divya must draw up her financial plan and decide on the purpose of her saving. This will give her an estimate of how much time and money she would need to make sure her desires come true.
'I don't like to take risks'
Divya has been investing diligently in FDs and PF for over eight years, now. She says, "My money is not growing as much as I would like it to grow."
She invests less than 5% of her entire investment in stocks and mutual funds. And believe it or not, she makes no withdrawals.
What she does not realise is that she is stunting the growth of her money tree. Inflation is the worst enemy for debt products. If her FD or PF is giving her 8% returns, inflation has been 5% over the last 10 years on an average. Her effective returns: only 3%.
So, while she proudly says that her investments have grown 40 times over the last eight years, her expenses too would have grown thanks to inflation.Investment advisor Sanjay Matai says, "The focus, now, should shift towards newer products such as equity mutual funds." Since Divya is a long-term investor (remember: she doesn't make withdrawals), equity is the best vehicle for her. Equity will give her returns of 15% over a long period of over 10 years. Equities are also more tax-friendly than debt products like FDs.
Budgets are so boring
Divya confesses, "I am good at saving but I am not good at accounting for the balance money."
"The best way to deal with this", says Kartik Jhaveri, "is routing all your financial transaction to be made through credit cards. Allocate one specific credit card for a particular expense. This way, it is easier to track as it allows you to check your monthly statement online as and when you require."
Another way is to do a backward calculation. Out of your total income, 30% would go toward taxes. Thereafter, ensure that:
-Your debts (EMIs) don't exceed 30%.
- You set aside at least 4% for insurance.
- You invest at least 15%.
That leaves around 20% for expenses. Any expense over and above 20% should be flagged as over limit.
Emergency fund, er...what's that?
Think you don't need one? Well, the Mumbai floods (of July 26, 2005), were not anticipated either. Ill health and job loss are also common emergencies. So set aside some money for an emergency. Roughly three months' salary can be kept in a liquid mutual fund so that it is accessible in emergencies.
Retirement? I'm still 20 years away!
Divya admits, "I have not given a thought to my post-retirement financial needs." Well then, this is the best time to plan!
If Divya spends Rs 6,000 per month or Rs 72,000 per annum today, at an inflation rate of 5%, that would be Rs 3.11 lakh per annum after 30 years.
Post retirement, her regular income stream would stop and she would need to make sure her investment income can generate that amount. Of course, expenses like healthcare and medical would shoot up too by then.
Retirement planning is best done at an early age. By setting aside small sums every month and investing them in equities, Divya can meet her retirement needs.With this new strategy, Divya can easily keep a track of her money and she can also invest in products that will give her good returns.
It is time to bury your bad money habits and supplant them with effective and logical money habits.
Tuesday, January 1, 2008
Under 25 and loaded? Time to start saving
Maya Kumar is another young turk from the IT sector, who is left with around Rs 17,000 every month after she meets all her living expenses. Maya’s investment comprises predominantly of PPF. She also regularly invests Rs 5,000 every month in a bank recurring deposit. She says, “This is just to ensure that I don’t keep all my investments for the year-end.” Her total investments work out to about Rs 1.5 lakh per year. “The rest,” she says with a smile, “remains in my bank account”.
Equity Rules -
Their example confirms what most financial planners believe - that most young earners invest their money in low yield instruments and hence are losing good returns on that amount. Deshmukh and Kumar, for instance, hold recurring deposits. Investment consultant Sandeep Shanbhag says, “While the recurring deposit is a good savings habit, the interest thereon may not be enough even to cover inflation.”
The year-end savings of such people are mostly a picture of neglect. Commenting on this, Investment Advisor, Ajay Bagga says, “Their year end planning is more a tax minimisation plan, rather than one that would meet their financial goals in the long term.”
Both Deshmukh and Kumar are significantly biased towards fixed income. The most prominent recommendation or the ideal portfolio that all experts have for this profile of people is to increase exposure to equity. Shanbhag says, “The only time when you can take advantage of equity without sweating the risk is when you are young. Fixed income will gradually follow along with age”.
Bagga also seems to agree. He says, “For someone with this profile, I would recommend a portfolio that has 90% in Equity Mutual Funds, and 10% in fixed return products like PPF, Recurring Deposits, Bank Deposits”.
“All investments must be made on three criteria, the investors risk appetite, time horizon and financial goals,” feels Bagga. “Both these ladies are young professionals, with a long time for retirement. This is the time for them to maximise their long term returns by investing in equity assets like mutual funds,” he adds.
On the recurring deposit, while both experts agree that it is a good habit, they feel that it can be looked at purely for the purpose of diversification. “A systematic investment plan (SIP) in a diversified mutual fund scheme, which is like an RD itself would prove more beneficial”, suggests Shanbhag.
Another interesting point is that both of them have parked a significantly large amount of money in their savings account. Shanbhag says, “While everybody has to keep some amount in the bank for day-to-day requirements and emergencies, the rest should be invested in short-term (money market) mutual fund schemes. In these, the returns are higher and the liquidity is great (you can get your money back in 3-4 days).”
Bagga suggests that around 6 times the monthly expenditure can be kept in a liquid asset like a bank deposit, as an emergency pool.Do you really need insurance?Bagga says, “I would recommend that Manasi relook her insurance coverage and see if she really has dependants whom she needs to cover, or did she buy the policy due to the agents push and to save tax only. She should try to switch to a low cost term insurance policy, which all companies offer, but which no agent sells, as the commissions are too low on these.”
Shanbhag seems to mirror these views, “Deshmukh’s insurance premium seems to suggest that she has bought an endowment or money back policy. If she has no dependents, then buying insurance, especially endowment, is sub optimal. In any event, she should not buy more insurance hereon.”
Save tax but don’t compromise on returnsMost people prefer investments by way of bonds, NSC, PPF, LIC, for tax saving. However, Equity Linked Saving Schemes (ELSS) appear to be the flavour of the moment. Says Bagga, “Stop contributing to NSC. The returns are not comparable to equity and the lock-in is long”
Shanbhag recommends, “You can invest in ELSS instruments. This way, you can kill two birds with one stone, up your exposure to equity and simultaneously save tax.” “Bonds yield very little interest and now that sectoral caps have been removed, one should invest in ELSS instruments,” he adds.
Bagga does not think that infrastructure bonds are very good investments too, “The returns on infrastructure bonds have fallen to the 5-5.5% levels. Their only attraction used to be the tax savings. With Sec 80 C now allowing investors the freedom to choose whichever investment they want to make freely up to Rs 1 lakh per annum, these are no longer an attractive option given the low returns and taxable interest nature of these bonds. Manasi should not invest in these in the future.”
INVEST SMART : TIPS AND TRICKS
Are you young, earning big and want to know how to invest right? Here are five smart ways to do so.
- Your ideal portfolio is one with 90% in Equity Mutual Funds, and 10% in fixed return products like PPF, Recurring Deposits, Bank Deposits
- If you want to save on a regular basis, you could go in for a systematic investment plan (SIP) in a diversified mutual fund scheme. It is like a recurring deposit itself but is more beneficial
- Invest in short term (money market) mutual fund schemes. The returns are higher and the liquidity is great
- Choose a low cost term insurance policy, which is the cheapest form of insurance. An endowment or money back policy is not required when you don’t have dependants
- Go in for Equity Linked Saving Schemes (ELSS) investments. This way, your exposure to equity goes up and it also helps in tax saving. Prefer them over NSC and infrastructure bonds whose returns are very low when compared to equity
8 worst things to do to your finances
Investing is an activity most of us either a or try to defer to a much later date. And those who do claim to ‘invest’ end up making all the mistakes that ultimately lead them to a messy financial situation. Here are 8 mistakes you should a while managing your money.
1. Delaying investment till later
The principal rule of investing is to ‘start early’. And you should do that to get the benefit of compounding. To explain with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, person A had built a corpus of Rs 12.23 lakh while person B’s corpus was Rs 7.89 lakh, assuming a return of 8% every year. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end corpus. That difference is due to the effect of compounding. The longer the compounding period, the better for you.
2. Ignoring the impact of inflation
Inflation is a devil that can stab you in the back. If you invest in an instrument like a bank fixed deposit, on the face of it, your money is safe. But what you won’t know is that the value of that money is actually depreciating with time. For example, if you have invested Rs 10,000 in a bank fixed deposit for a period of 3 years at an interest rate of 5.5%, you will be assured of a maturity amount of Rs 11,742. Suppose during this period of 3 years, average inflation was at 6%, the real value of your maturity amount would be Rs 9,859. In simple terms, if the rate of inflation is more than the rate of return, the real value of your investment is negative.
3. Being careless in market investments
The only way to beat inflation in the long run is to invest a part of your total portfolio in equity markets. But you can’t go overboard. A common mistake that people make is to invest too much in equity markets without diversifying risks. Equities give the much-needed kick to your portfolio in the long run, but too much of equity can cause harm. Depending on your profile you must allocate a right proportion in debt and equity. Another common mistake is to try and time the market. Only the likes of Warren Buffet have successfully timed the markets. Most others end up burning their fingers in trying to do so. Instead, adopt a method that will give you returns in equity without the need to time the market. Mutual fund systematic investment plan (SIP) is one such option.
4. Neglecting your retirement planning
Using your retirement funds to pay for your child’s school fees is the worst mistake you can make. Your retirement funds are meant to provide for your life after retirement. By cashing that to pay for your child’s fee is a disaster. Look for other means to pay for fees. There are loans aplenty. Create a separate corpus and name it ‘Child education fund’, if need be. But do not liquidate your retirement fund. You will never be able to build enough corpus if you do not let the money accumulate.
5. Cashing out your EPF when you switch jobs
This is another invitation to disaster. And laziness is the root cause. When you switch jobs, it’s easier to encash your Employee’s Provident Fund rather than go through the hassle of transferring it. But this doesn’t make sense because that money is like a windfall and you will end up spending it to meet ends that are not your needs.
6. Going overboard on your credit card
This is no new advice. With credit cards available for free these days, the temptation to spend is irresistible. But watch your wallet. Don’t spend beyond your means. If you are a spend thrift and yet must have plastic money, think about a debit card. Credit card is one of the first steps to a debt trap. So stay clear of it and keep it for emergencies.
7. Not making the most of your tax saving tools
Make the best of your tax saving investments like PPF, NSC and the like. While it is true that tax saving instruments must not be your only investments, make sure that you don’t end up paying taxes when you could have actually saved them by making fruitful investments. Even investing in a pension policy or an insurance policy can save you tax, but make sure you don’t do that just to save on tax.
8. Not buying enough insurance
This is something most of us are guilty of. We buy insurance to save tax and combine it with an investment option. After making all other tax saving investments, a 35 year old is willing to invest up to Rs 25,000 in an insurance policy. He opts for endowment insurance and thinks he has saved the best tax possible as well as got himself insurance and investment. But for that kind of premium, the maximum sum insured on an endowment policy that he will get will be around Rs 5 lakh. That by no standard would be enough to protect his family of 2 kids.
We are also almost always guilty of not buying enough medical insurance. This is a very very important cover and its best to buy it at a young age.
1. Delaying investment till later
The principal rule of investing is to ‘start early’. And you should do that to get the benefit of compounding. To explain with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, person A had built a corpus of Rs 12.23 lakh while person B’s corpus was Rs 7.89 lakh, assuming a return of 8% every year. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end corpus. That difference is due to the effect of compounding. The longer the compounding period, the better for you.
2. Ignoring the impact of inflation
Inflation is a devil that can stab you in the back. If you invest in an instrument like a bank fixed deposit, on the face of it, your money is safe. But what you won’t know is that the value of that money is actually depreciating with time. For example, if you have invested Rs 10,000 in a bank fixed deposit for a period of 3 years at an interest rate of 5.5%, you will be assured of a maturity amount of Rs 11,742. Suppose during this period of 3 years, average inflation was at 6%, the real value of your maturity amount would be Rs 9,859. In simple terms, if the rate of inflation is more than the rate of return, the real value of your investment is negative.
3. Being careless in market investments
The only way to beat inflation in the long run is to invest a part of your total portfolio in equity markets. But you can’t go overboard. A common mistake that people make is to invest too much in equity markets without diversifying risks. Equities give the much-needed kick to your portfolio in the long run, but too much of equity can cause harm. Depending on your profile you must allocate a right proportion in debt and equity. Another common mistake is to try and time the market. Only the likes of Warren Buffet have successfully timed the markets. Most others end up burning their fingers in trying to do so. Instead, adopt a method that will give you returns in equity without the need to time the market. Mutual fund systematic investment plan (SIP) is one such option.
4. Neglecting your retirement planning
Using your retirement funds to pay for your child’s school fees is the worst mistake you can make. Your retirement funds are meant to provide for your life after retirement. By cashing that to pay for your child’s fee is a disaster. Look for other means to pay for fees. There are loans aplenty. Create a separate corpus and name it ‘Child education fund’, if need be. But do not liquidate your retirement fund. You will never be able to build enough corpus if you do not let the money accumulate.
5. Cashing out your EPF when you switch jobs
This is another invitation to disaster. And laziness is the root cause. When you switch jobs, it’s easier to encash your Employee’s Provident Fund rather than go through the hassle of transferring it. But this doesn’t make sense because that money is like a windfall and you will end up spending it to meet ends that are not your needs.
6. Going overboard on your credit card
This is no new advice. With credit cards available for free these days, the temptation to spend is irresistible. But watch your wallet. Don’t spend beyond your means. If you are a spend thrift and yet must have plastic money, think about a debit card. Credit card is one of the first steps to a debt trap. So stay clear of it and keep it for emergencies.
7. Not making the most of your tax saving tools
Make the best of your tax saving investments like PPF, NSC and the like. While it is true that tax saving instruments must not be your only investments, make sure that you don’t end up paying taxes when you could have actually saved them by making fruitful investments. Even investing in a pension policy or an insurance policy can save you tax, but make sure you don’t do that just to save on tax.
8. Not buying enough insurance
This is something most of us are guilty of. We buy insurance to save tax and combine it with an investment option. After making all other tax saving investments, a 35 year old is willing to invest up to Rs 25,000 in an insurance policy. He opts for endowment insurance and thinks he has saved the best tax possible as well as got himself insurance and investment. But for that kind of premium, the maximum sum insured on an endowment policy that he will get will be around Rs 5 lakh. That by no standard would be enough to protect his family of 2 kids.
We are also almost always guilty of not buying enough medical insurance. This is a very very important cover and its best to buy it at a young age.
Subscribe to:
Posts (Atom)