Jagoinvestor
September 24, 2009
Top 10 doubts and answers in Financial Planning which every beginner investor has
Most of the newcomers and even some experienced people struggle with basic questions and concepts of Financial planning. I hear most of the readers on this blog and even over the chat with them asking the same kind of questions over and over again.
So here are top 10 questions and their answers. Read them and find out if it contains some of your doubts too…
Question 1# I want to Buy a Life Insurance for my Financial dependents. What Should I buy?
Answer: Term Insurance, split the Insurance between 2 Insurance providers, better to take 5% increasing Cover option.
Question 2# I have to save for my retirement and Children Education and Marriage. It’s more than 15 years away. I can take small risk to moderate risk, where should I invest?
Answer: Invest in Equity Diversified Mutual funds via SIP. Keep reviewing the funds every 2-3 yrs. For now, choose the funds from this list of Best Mutual funds in 2009.
Question 3# I have no Idea about Stock Market and How it works and I am not even Interested to know how it works! Is there any way I can invest in Equity and Enjoy high returns?
Answer: Yes, The answer is same as #2. Invest in Equity Diversified Mutual funds via SIP method. Keep reviewing the funds every 2-3 yrs. For now, choose the funds from this list of Best Mutual funds in 2009. If you are not a big risk taken and have some heart problem then Invest in Balanced funds.
Question 4# I have recently got very excited by the idea of doing Stock Trading and make some consistent money from it. Any Tips?
Answer: Better do what you are doing right now… Trading is not everyone’s cup of tea. Unless you are very determined of making it as a career or a semi-career, don’t even try Trading unless you have no hobbies to keep your self-busy with. Read How a newcomer should start in Stock Markets first.
Question 5# I want to invest in FD or Endowment Policies for my child Education or Retirement which is more than 10 yrs away, Shall I?
Answer: No!! FD and Endowment Policies provide very bad “post tax post inflation” returns… most of the times… it’s Negative return after adjusting inflation and tax. The purchasing power of your money will decrease drastically in these kinds of Endowment policies.
Always remember
Short term = Debt
Long term = Equity
That’s the RULE NO 1. Look at how to choose the best FD for yourself.
Question 6# I need some money for my Sister’s Education or Marriage in 2 yrs, shall I Invest in Stocks or Mutual funds. I can see markets are rising now and I am sure that it will give me great Returns.
Answer: No!! It’s an Important goal and you can’t risk with that. Stay Away from Equity…The first thing you have to ask yourself is “Is Direct Equity for you”? And what do you mean you are “sure” about the markets moving up?
There is no such thing.. Markets didn’t even like Einstein and Newton who tried Predicting the movements, who are you !! Even though markets look easy, it’s too tough to make such calls…
Question 7#I have invested in some Endowment and money back policies. What can I do now?
Answer: Better make it a paid-up policy and take a term policy. You will save a lot of premium and hence you can invest it for long-term in Equity which you provide you much better returns. See the Review of Jeevan Tarang Policy from LIC.
Question 8# Should I hire a Financial Planner? I can read about Financial planning on blogs, through newspapers. I have increased my knowledge to an extent I can take care of myself. What to do?
Answer: It’s great that you have learnt it yourself, you should be able to take care of most of the things by yourself, but most of them will be day to day decisions when it comes to Financial Planning. It takes much more than just that!
Financial Planning is more than “Taking term insurance” or “Choosing some great mutual fund” or “good attitude about saving”
It requires
- Time
- Analysis of Current Situation in detail and linking each component with other for best results.
- In-depth knowledge or at least basic level of knowledge of overall Financial Planning …
- An attitude of thinking in terms of Financial planning.
It’s not everyone’s job. We all have expertise in some or the other field, we may be okay or good at Financial planning. If your Home electric wires have issues… better call an electrician even though you have learnt some basic Electronics in college and know what needs to be done.
It’s always better to hire an expert and pay him what it deserves. We all are in this world for some reason, better do your own part and let others do theirs.
Note: I am talking about overall Financial Planning and expert advice… taking basic advice can /should be done by yourself.
Question 9# How is an Insurance agent or Wealth/Portfolio Manager different than a Financial planner?
Answer: From decades, Agents and petty advisers with some basic knowledge in a single field claim to be a financial planner. Financial planning is a very different thing than just Insurance Planning or Investment planning.
They are part of Financial Planning and much much more than that. Its like surgery of current situation, trying to find the issues in the current situation, the defective parts of overall Financial life and then correcting those mistakes by linking different parts.
CFP is the standard certification accepted all over the world for Financial Planning; So if you are looking for your Financial planning. Only look for people who are some way related to CFP certifications.
They can either be pursuing it, completed it or have been given CFP certificate. You can also look for any trustworthy person you think have required Skills.
Question 10# But Why to do Financial Planning at all .. I have never done it and I think I am in a good shape .. I don’t see any financial issues with my life.
Answer: It’s an innocent belief. There is time for everything.. wait for 20-30 more years and you will be amazed to see you are so much short of your Retirement corpus. You are still alive, hence you can’t imagine your family Financial situation once you are gone …
Everything shows up later… There are people claiming to be “healthy” and then dying of “Heart Attacks” 2 yrs later .. and young people complaining for “Backaches” in Early 20’s … These are the people who don’t believe in regular checkups…
Just to save few hundreds these people take risk with there health and let it deteriorate to an extent when it’s too late…
There are people who have decided to do their Financial Planning, but they are already in too much mess now… because they have taken those junk Endowment policies long back thinking it will make them rich… once you analyse your Financial Situation by your Future eyes.
You will be amazed to find out how much of restructuring you are doing…
Comments please .. Do you know of any more common question which can find a place here. Which one of these was one of your doubts? Please leave a comment …
Is it ok if I register in CAMS and ask for service in the MF schemes servised by CAMS across all AMC’s. Will ther be any issue. Reply ‘ spguptahyd@ yahoo.com’
Yes , its fine!
Thanks Manish!! This clears some of our doubts on financial planning.
Welcome !
Hi Manish,
I am planning to purchase a flat and I will be opting for a housing loan. I am a salaried employee, and I recently switched to another company from Infosys. The bank requires “Form 16”, of past 3 years to provide the loan, which I do not have. Please confirm if there is an alternate document that can be submitted to the bank or can will I get “Form 16”, of past 3 years from my previous employer.
Thanks,
Vinay
That only the bank can tell because its on them to decide . they generally need the tax returns copy and the form 16 , give them all the proofs which can show the income stablity and income proof , thats what they want ultimately !
Hello Sir,
First of all I thank u so much as i learnt so many good things from ur articles, which i dont know before.
I have one question, please help me if possible.
I am 30 n my hubby is 31. At this stage we can invest 20k individually per year. I am confused where to invest. Can u please help me out. I am a salaried and he has Real Estate Biz.
Warm Regards….
It will depend on your situation , how much risk you want to take, how long can you leave this investment and all ?
Hi Manish,
I am an NRI, I want to rent my house in India which would fetch me Rs.39,000/- per month. My monthy EMI (NRI loan from LIC, India) comes to around 41,000/-. I was plannnig to pay off major chunk of loan and leave say Rs.5 lac for EMI payment in future. This would considerably bring down my monthly EMI and excess interest paid in long run for the house.(which adds upto the total cost of house).
My question is…
1)Do I have to file and pay tax on this as the rent income for Rs.39,000/- when the EMI payment is Rs.41000/-.
2)Is it advisable to I pay off major amount and keep my loan amount to 5 lacs as of now. In that senario, will I have to pay more amount as taxable income. Will I be eligable for Standard deduction of Rs.2 Lacs per financial year but how do we reflect the expenses for the same house that I am paying as EMI + house maintenance once in a while. What are my options to enjoy major chunk of rent income legally.
3) Since I am NRI, do we have any website, where I can fill in and pay the taxes in appropriate way or its a norm to go thru CA only in India as I have no other transactions happening back home.
Your clarification would help me and many of my friends with the same doubt.
Murali.
1. Its more of an accounting thing .. Your EMI will be allowed only upto 1.5 lacs per year .. not more ..
However your income will be high .. so you need to report it .. I assume you will anyways get in touch with some CA
2. You can do that, because your tax outgo can still be same .. because anywyas you were able to claim upto 1.5 lacs in interest part
3. You can make the payment online to tax department on their website
Hi Manish,
In your book, it was written that if we start investing early keeping a target with 25 years time frame but stops investing in MF after say 15 years and wait for remaining 10 years without further investing, we’ll still be able to create 80-85% of wealth by leaving it to grow by its own. I didn’t understand this.
For example if I invest in equity MF for 15 years, how would it grow by its own in next 10 years? Since the no of units is going to be same in the 15th and 25th year, how would it grow in the last 10 years?
the NAV will go up right .. when you buy 1 share , the price goes up , right !
In the same way, your NAV will keep going up or down !
Agree but on the 25th year it may be less than what it was on the 15th year.
Also since we are not averaging in the last 10 years, isn’t my money on greater risk?
Shouldn’t I move the money in Debt in the last 10 years using Systematic Withdrawal Plan?
Yes .. but only in last 10 yrs .. I would say last 3-5 yrs is better.. depends on your risk appetite !
Hi Manish,
Is it true that from AY 2013-2014 additional tax benefit of Rs 20,000.00 available on the infrastructure bonds is no longer available. If yes then, what other instruments should an individual invest .
Yes, not just 2013-2014 , it was not there last year also 2012-2013
Thanks Manish,
I appreciate your resonse and advise.
Jayanti
Thanks Jayanti
Hi Manish,
I cann’t thank you enough for the prompt reply. Sounds great, as I was looking for absolute no risk care for her. Here I have few doubts..shall be grateful if you can help with those too.
1. Complete 20 Lac in one FD or is it advisable to divide it into smaller chunks for FD just in case of contingency withdrawal,to reduce penalties.
2. There are different interest rates in different banks varying from 7.5 % to 10%. Though some cooperative banks and private banks do have good repute….the interest rates also differ in each nationalised bank by 1/2 to 1 %. Are there any hidden points , to check for. Which bank FD seems more suitable for this specific situation.
3. Again long tenure shows lesser interest rate…so do we need to spread the said amt in different tennure.
4. Roughly when I calculate 8% quarterly interest for one year on 20 L, its more than 1.2 L needed for the 1st year (@RS.10,000/- pm). How should that surplus amount be utilised? Should it be reinvested in FD amount or used in other types of savings.
5. Whats the formula to calculate how long the principal amount will fetch us the interest amount with desired 6% raise every year and last for n number of years.
Last but not the least your articles are eye openers. The info you share were always floating around, but laymens never bother to understand it, no matter how educated they are. I congratulate you on this efforts.
Thanks again,
Jayanti
Jayanti
Let me give you that information this way
Out of 20 lacs, better take 1 lacs and mark it as emergency fund , so that incase you need money for some emergency you have it . Then put 4 lacs in another FD and 15 lacs as seperate , This 15 lacs can be treated as the main income generator . Whatever suggestions I gave you , take it as raw info .. you cant exactly achieve it like that ..
Regarding formula . I used a calculator which we created for our wealth club members.
Hi Manish,
I want to invest Rs.20 Lac for my widow mom in such a way that she gets Monthly income of 10 thousand + considering inflation of 6% min. every year for next 15-20 years. Can you help me with a guidelines to invest for her, she is 65 years. Your advice would be highly appreciated. I want to make her self- dependent financially. She has her own house and no other investments.
Thanks,
Jayanti.
Jayanti
Great .. all you need to do is Put that money in a Fixed Deposit with a quarterly interest option back in the account , and ask your mother to withdraw the money on a yearly basis and then use it monthly . Assuming a 6% inflation and 8% return on FD , this should last around 20 yrs , given she withdraws 10,000 per month for 1st year and then increases it by 6% each year ! .
Hope it helps
Hi Manish,
I am a resident of Hyderabad. Infosys Technologies has started its second campus in an area of 450 acres in the outskirts of Hyderabad, with a plan of employing around 50,000 employees in next 10 years. Already 6,000 employees are working in that campus. All the open lands around 15 kms of this campus are turning into residential plots from various builders. I bought a north-east corner plot in a venture approved by HMDA(Hyderabad Metro Development Authority), ensuring clear title and basic amenities of road, drainage, electricity and water piping lines, fencing etc., prepared by venture developers. It costed me Rs. 7,50,000. The plot is 14 kms from Infosys Campus. Looking at the pace with which the entire area is turning into a real estate bubble, and the prices going high almost every month, i started doubting the amount of return i would get in the long run.
1. Will there be good returns on investments in land, for a long term investments of 15 to 20 years?
2. The price has almost grown 1.5 times in 2 years, which looks very good now. But once most of the plots in the area are sold, will the appreciation be good?
3. I am planning to invest another 10 lakhs in that area, as there is a rush in prices and people are also buying it at any cost. Is that a good idea?
4. I have closed my FDs for this purpose and good lands are available(seem promising on rents or resale), but i am worried on fluctuating market prices, due to Telangana issues in Hyderabad.
5. Every rupee is hard earned, and losing it might become heart sinking. That is stopping me from taking a bold decision.
Please advise.
Thanks and Regards,
Deepak N
Deepak
Given the trend , I think this kind of calculated risk will work . I would strongly suggest invest in it just make sure the titles are clear . A good idea would be to invest in one more plot which you are planning and keep one for short term like 5-6 yrs and one for a long run like 10-15 yrs . Sell of the first one to realise the minimum profit you expect ! .
Thanks for your prompt reply..
Hi Manish,
Thanks for you valuable suggestions.
I have an LIC endowment policy(Jeevan Anand) which has a premium 26K.I have paid 4 premiums(4 years) till now.Now I am planning to make this policy paid-up and invest the same amount in others like Mutual/debt funds.
Can you please suggest which funds are better.
Thanks
You can invest in long term mutual funds like HDFC Equity or DSPBR top 100
i want to invest 40,000 per month. what should be my portfolio. i currently have icici pinnacle pru life insurance program and an icici pru life insurance which invest in government security.
Gurudev
Better you tell us your goals and expectations in your financial life , only then some one can suggest you something .
I neighbor is a policy holder under Sudarshan Plan B, Policy No.- 06027573610, in the name of Abdur Rashid. But unfortunately he could not continue his premium after 9 consecutive premium paid. In this regards, is he entitled to get the money which is deposited in this plan in future or after maturity.
Sanjib
Ask him to refer to policy document !
hi all ..can any one explain about canara bank robecco equity saver …I dont know anything about mutual fund,share market etc…I heard that my friend invested in this fund on 2009 for 3 years with one time investment 25000 Rs. After that 4 month once he was getting 4000 rs..for 3 years. recently he closed that scheme and got 39000 Rs as market value of 25000 Rs finally..Is this true scheme..Is this still available in market .. how to apply this ..can any one address me …..
Thanks for the reply Manish. Could you pls also let me know if we have tax saving scheme if in investing in HDFC Top200?
Hi Manish,
I would like to some investments (3000-4000) per month for 10 years.I have a saving of 15Kper month.Currently I have 2 LIC policies, Jeevan Saral(premium-15K for 25 years) and Jeevan surabhi(premium-9K per month for 20 years) . Could you pls suggest if SIP, FD or VPF is the best?
Ammu
You should start your investments in SIP’s like HDFC Top 200 , DSPBR top 100 etc .. Better make your policies paid up and free up more money on per month basis
Manish
Hey Manish,
I was looking for some secure short term (about 6months) investment options.
While browsing I came across the following sbi scheme:
http://www.sbi.co.in/user.htm?action=viewsection_opennew2&lang=0&id=0,16,384,594
Can you tell something more about this – like eligibility, any conditions, what/how much tax can be saved etc.
Thanks,
Srinivas
Srinivas
Thats a Tax saving FD with 5 yrs of lock in , for a small period like 6 months , you really dont benefit greatly compared to FD , may be .5 or 1% extra , that too not guaranteed , what if things go wrong and you get that much less ..
With Taxation , your chances of making extra return than a FD reduces more .. Also if its a small ticket investment like 20k or 50k , you hardly get few fundreds more than FD .. Some saving bank like Kotak and YES are not giving 6% on plain SAVING bank 🙂 . So i would suggest not to worry to much for this short period . Do a FD
Manish
Thanks Manish!
“Some saving bank like Kotak and YES are not giving 6% on plain SAVING bank”
I am sure you meant ‘…are NOW giving…’
Yea .. i meant “are NOW Giving”
Manish,
Nice article!
In case of endowment policy what is mean by “paid up”. In your Question 7 you suggested to “paid up” the policy. In my case, I am paying premium of Rs. 31000 per year for SBI Life insurance endowment policy(SBI Sudarshan PLAN B). I already paid 5 premiums and thinking to quit it now. What is paid up in this case ? Quitting the policy ?
Please guide
Deepak
Making a policy paid up means , not quiting the policy , but stopping the paymnts from now on , in which case you get your paid premiums + Bonus till date at the maturity of policy .
Manish
Manish,
Thanks for your quick reply!
Got the point of “paid-up” policy. Getting back Rs. 155000(5 premium)+bonus at the time of maturity value(which is 25 years from now) seems like a carrot at the end considering the inflation over the next 25 years. I am planning to take good coverage pure Term Insurance(credit goes to you). I had a little idea about term insurance but you know this * cheaters * (agents) who finally convince you to buy endowment plan. I really regret for that.
I think I should quit the policy.
anyways, thanks again
Deepak
Sounds good 🙂
Manish