Category: How to-Guide

A short guide to Hire a Good Financial Planner in India

Posted on by Jagoinvestor

Are you looking for Financial Planner? If you are, you should go through this article that talks about almost all the necessary information you need before hiring a financial planner. Most of the clients are confused on simple things like, where to find a good financial planner, what they should expect from financial planner and most importantly they do not understand the financial planning environment in India and how it operates. There are lots of myths and misunderstanding around the financial planning field and this article will give you most of the basic information you need to be aware of while hiring a Financial Planner.

What is a Financial Planner and what is the Certification for Financial Planning

A financial planner is a professional who helps his clients to deal with various personal finance issues through proper planning. Just like we have a doctor for our physical problems, we have Financial planners for our Financial problems. Just because you know “what is a Mutual fund” or some “Tax laws” or can buy and sell stocks on Stock market, it does not mean that you don’t need a Financial planner. Financial Planners are professionals who have done the certification, have learned strategies and have gone through in-depth knowledge to understand how to restructure a common man’s financial mess and come up with a sound long term plan which will help a client achieve his/her financial goals in future.

Just like CA, MBA, CS and other professional certifications, there exist a certification course for Financial Planning which is called CFP (Certified Financial Planner). Read more about CFP Here. CFP is regarded as the top most certification in Financial Planning and it is recognized worldwide in majority of the countries.

The 6 steps of Financial Planning which every Financial Planner has to go through are

  • Step 1: Setting goals with the client
  • Step 2: Gathering relevant information on the client
  • Step 3: Analyzing the information
  • Step 4: Constructing a financial plan
  • Step 5: Implementing the strategies in the plan
  • Step 6: Monitoring implementation and reviewing the plan

Who is not a Financial Planner:

A lot of CA’s, CS’s, MBA (finance), CFA, ICWA and other Finance related professionals feel that they are the right professionals to do Financial planning for individuals. Just because “Financial Planning” or “Personal Finance” has “finance” word associated with it; does not mean that any one from different finance field can be a Financial Planner. Financial Planning is very different from what CA, CFA or a MBA Finance does.

Financial planning deals with individual personal finance, his future financial goals, the risk taking appetite. Having  CFA or MBA (finance) as qualification will definitely help at some level and may be some CA’s, CFA’s or MBA (Finance) have a great understanding of Financial Planning, but it’s not true for everyone in general. In the same way, any ULIP Agent, Insurance Adviser or Mutual funds agent, Wealth Manager, PMS guy is not a Financial Planner. These people are there to assist a Financial Planner to sell the products. In the analogy of Medicine field, Financial Planner is a Doctor and all these agents, Wealth managers etc. are like Compounders.

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Where to find a Financial Planner (Important)

There are two ways of hiring a Financial Planner for your self:

1. Hiring a CFP

In case you want to hire a CFP (which is recommended) you can get a list of CFP’s in India at FPSB website link, Click here.  You can find out CFP based on

  • Name/Company
  • City/State
  • Nature of Employment

Tip: You should search for CFP’s who are “Independent Financial Planners” or “Self Employed”. Read further to understand the reason.

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2. Hiring a non-CFP

You can also Hire a non-CFP but you have to be very careful while doing that. Before CFP certification came to India, we had excellent planners in the Industry who understood the financial planning process subconsciously and still practice that but without having the CFP certification. These people can be from various backgrounds but can have sound financial planning knowledge. They are rare species. Some of them who I can think of are people like P V Subramanyam.

The biggest problem one faces in hiring a Financial planner is the “Trust”. So you need to have some level of trust with Financial planner and for that you need to interact with him, spend time with him, get references from family and friends and once you are satisfied you can then hire him/her. A financial planner at the end is someone who is also interested in educating you and not just making money from you. Just imagine a doctor who gives you medicine, but does not tell you the preventive measures to take, so that you are not ill next time. Would you like to visit him again and again?  He should be interested in educating you up to a level where you can take informed decisions yourself. Only then you can call him a good doctor, the same applies to a financial planner.

Current Status of Financial Planning Practice in India

There are two ways a Financial Planner makes money

  1. By pure consulting and advising (by making the financial plan)
  2. Through Commissions (from products sold to clients)
  3. Combination of 1 and 2

In India people dont value consulting and hence Financial planners are having a hard time getting clients whom they can charge on pure consulting basis. Therefore what has happened is most of them make money through commissions from selling the products. Based on this fact most of the agents, wealth managers etc have completed CFP certification just because they can get the tag of “Financial planner” and then make a financial plan and finally sell products to them and make good commissions, hence at present the current status is that 8 out of 10 CFP’s in India are associated with some mutual funds or Insurance company as  either of

  • Analyst
  • Asset manager
  • Branch manager
  • Accountant
  • Vice president
  • Adviser
  • Senior manager
  • Wealth manager

They are still doing the same old work with a new certification in hand called “CFP” because they know that in coming days  CFP’s is what everyone will prefer to hire for their Financial planning and similar services. These so called just for name sake CFP’s make the financial plan and when you buy the products, they will make majority of their money through commissions.

So what you have to look for while hiring a financial planner is that He/She should be independent Financial planner and should not be associated with some Mutual funds or Insurance company and has no compulsion of executing the plan through him. There should be freedom in Clients hand that he/she can execute the plan from anywhere he/she wants. As an additional service Financial planner can give an option to have financial plan executed through them, but it should never be compulsory because otherwise there will always be some level of biased attitude while recommending products to you.

The biggest problem with Financial Planning is that still “Financial Planning” is confused with “Investment Planning”. The moment I tell someone I am a Financial Planning writer, they start asking me stupid questions like

  • What do you think Market will do tomorrow?
  • Which is the best mutual fund?
  • I have 5 lacs spare cash, how should I invest it so that I get maximum returns?

No one talks anything other than investment. Financial Planning is more than just investment planning, it’s much more than that. Read more to understand what is the goal of Financial planning.

Why to Hire an Independent Financial Planner

Do you know how a Financial Plan is made? No you don’t! Here are the problems with the Financial Plans:

1  No Personal Touch

What most of the Financial planning company or professionals do is that they have automated Financial Planning software in which they just stuff your data and create a Financial Plan automatically with a single click. This can take just minutes. While there is nothing wrong in creating the basic template of Financial Plan with help of a software but what really matters is how much of that is customized to a client’s needs personally? So a financial planner should give enough time to tweak the financial plan to suit a clients need, which is more though for Financial planners working for big organisations especially mutual funds and Insurance companies because they have to stick too much to the template they use and not to much of customization is done or recommended.

An Independent Financial Planner has more liberty and flexibility to make a financial plan which will be more suitable for you. So if he wants to add some extra part to financial plan or want to restructure something totally, it’s possible with independent financial planner but it’s rigid with non-independent financial planners.

2. Lack of quality

Everyone like beautiful pictures, we are attracted to beautiful people no matter what crap they are from inside. Some of the best looking things in the world are totally shit. Same is true for Financial Plans, that most of the financial plans I have seen has beautiful pictures, amazing color schemes, beautifully designed tables and great back ground but when it comes to content and the quality of Financial plan they suck big time! There is nothing great about them. But clients like them because we are visual animals and we assume a clean and beautiful thing literally at face value. I do not say that all clean and beautiful financial plans are crap but most of them really are. A simple analogy is a dish you get at 5 star hotels and some authentic but not so well known eating place, the food you get at 5 star hotel will look great and there will be too much time spent on making it beautiful but at the end it can taste very average or some time even foul, but the food you get at home or some less known place may taste better and may be more healthier but then it might just look okay and not “beautiful”.

A financial planner who is independent and takes limited clients does not have time and energy to work on beautification of financial plan, he mainly works on making financial plan better and not the looks of financial plan. So if you watch a financial plan from an Independent financial planner, it might not look as beautiful as from other planners.

What to Look into a Financial Planner

You should watch out for following things in Preference

  • Competence or Knowledge
  • Confidence
  • Your level of Trust and comfort with Financial Planner
  • Frankness

What to not look into a Financial Planner

  • Promise of Returns
  • Magic (financial planner is not some magician who will fix all your problems and will make a financial plan which will try to achieve all you want)
  • Instant Performance

How much to Pay to a Financial Planner

This is a debatable topic, still let’s try to understand and find out how much do Financial Planners deserve.

Financial Planners in US and Australia gets as much as $150 to $200 per hour. (that’s close to 7.5k – 10k per hour). Financial Planners in India cannot and should not ask for that kind of money for two reasons:

  1. They will not get it 🙂
  2. FP is new in India and there is still not standard procedure or standards to create a financial plan. So what they can expect is not more than $30-$40 max per hour.

Now in India people will literally laugh if a Financial planner asks money in per hour basis, it’s just not what Indians can imagine. Imagine doctors asking per hour fees here or lawyers or anyone. We Indians like to pay one time fees or lump sum fees, that’s the model India runs on. A good financial plan takes around at least 10-12 working hours (strongly focused and distributed across several days). From that stand point a price in range of 10k – 25k looks reasonable for a Financial plan. Anyone who is charging less than Rs 10,000 is undervaluing it and working more for less money. Other point is, you have to understand that all financial planners differ from each other and the amount of detail and care they take while creating it.

Comments, Please share your views on what are the other issues you guys face/ will face while choosing a financial planner. In case you know of a good Financial Planner, feel free to share here.

Check my latest trip Pictures at Netrani Islands . I did Scubadiving , snorkeling and Tent Camping .

How to Miss your Income Tax Returns (ITR) Deadline

Posted on by Jagoinvestor

Did you miss your deadline for filing the tax return by 31st July? Most of us pay the taxes before the deadline of 31st Mar, but when it comes to filing the return we are lazy people and many times we make mistakes in hurry. However very less people know that even if you have missed the deadline to file your Income Tax Returns, there is no need to panic, as when it comes to filing of your income tax returns, tax laws are not so stringent. In this article, tax implication will be explained considering all the scenarios. You being a salaried person may have missed the filing of your tax returns if you have an income on which all the taxes have been deducted or have been deposited by way of advance tax, no need to panic. There should be no additional penalty or interest for not filing the return by July 31, 2009, provided you act now. You still have the time to file your return of income for the assessment year 2009-10 till March 31-2011.
See the basics of how tax is calculated.

Rules

  • However, persons who have any Business or Capital loss to be carried forward may have a cause to worry as the said loss would not be allowed to be carried forward to next year if the return of income is not filed before the due date.
  • If you still have any outstanding taxes to be paid (after deducting TDS and Advance taxes paid, if any) you would be liable to pay simple interest @ 1% per month or part of the month, on the tax payable commencing from the date following the due date till the date of filing the return.

 

Some Basics

  • TDS: TDS is tax deducted at Source, Generally Employers deduct our taxes in advance and pay to govt in advance. TDS in detail
  • Previous Year: Previous Year means the year when we earn Income.
  • Assessment Year: Assessment year is the year when we actually pay tax for the income earned for previous year.
  • Example: So if we earn income in year Apr-2008 to Mar-2009,  2008-09 is our Previous Year and 2009-10 is our assessment year.

In case you have still not planned your taxes, here is a small guide for quick tax planning.

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The Implications of not filing the income tax return on time and the steps to correct the situation

Scenario 1#  You do not have outstanding tax liability

In case you have already paid your taxes before 31 March, 2009, but could not file the return within the due date, you may file a return at any time before the end of one year from the relevant assessment year, simply put; for the financial year 2008-09 return can be filed at any time before 31st March 2011, however you may invite a tax penalty of Rs 5,000 u/s 271F of income tax act even if all your taxes have been paid if the same return is furnished after 31st March, 2010.

Scenario 2#  You do have some Outstanding Tax liability

If you do need to pay any balance tax, there is some financial implication. The basic principle remains the same: The income tax return for a given assessment year can be filed any time till the end of that assessment year without any penalty. If it is filed after the end of the assessment year, there may be a lump-sum penalty of Rs. 5,000. On top of this, there is a penalty of 1% per month on the net tax payable u/s 234A.

Example:

Say, your income tax liability for the year is Rs. 40,000. You have TDS (Tax Deducted at Source) of Rs. 20,000, and you have paid an advance tax of Rs. 6,000. Thus, the remaining tax payable by you is:

Net Tax Payable = Income tax liability for the year – TDS – Advance tax paid

= Rs. 40,000 – Rs. 20,000 – Rs. 6,000
= Rs. 14,000.

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Now there are two cases, which we have to consider

Case 1:  File income tax return before the end of assessment year

Say you file your income tax return on 17th September, 2009. In this case, you would be filing your return 2 months late (partial months are considered as full months).

Final Amount = Net Tax Payable + Interest for 2 months at the rate of 1% per month Amount payable ,

= Rs. 14,000 + (2% of Rs. 14,000)
= Rs. 14,000 + Rs. 280
= Rs. 14,280

Case 2:  File income tax return after the end of assessment year

Say you file your income tax return on 4th June, 2010. In this case, you would be filing your return 11 months late (partial months are considered as full months). On top of this, you would be filing the income tax return after the end of the assessment year for which you are filing the return. So, in this case,

Final Amount = Net Tax Payable + Interest for 11 months at the rate of 1% per month + Lump sum penalty of Rs. 5,000

= Rs. 14,000 + (11% of Rs. 14,000) + Rs. 5,000
= Rs. 14,000 + Rs. 1540 + Rs. 5,000
= Rs. 20540

Save some tax by understanding Income clubbing provisions of Income tax

Additional Scenario

You have losses that you need to carry forward. This applies irrespective of whether you have any net tax payable or not. If you do not file the income tax return for a year by the due date, a loss for that year can not be carried forward. The only exception to this rule is loss from house property– this loss can be carried forward even if the IT return is not filed in time. Thus, if you have a loss from any of the heads of income (except for the head “Income from house property”) and you file your income tax return late, you would not be able to carry forward your losses. Thus, you would lose the benefit of set off of these losses against the income of the next year.

Conclusion

Not filing a return on time does have financial implications, especially if you have a net income tax payable and/or if you have losses to be carried forward. This can really hurt especially if the losses to be carried forward are significant. Therefore, your best option is to ensure that you file the income tax return by the deadline.”Better late than never” is the best policy when it comes to income tax return filing.

Notes from Manish:

Disadvantages of filing a late return

As per Income Tax Department of India : “Aa tax return may be furnished any time before the expiry of two years from the end of the financial year in which the income was earned’. This means that if you earned your income during FY 2009-10, you may file a belated return anytime before 31st March, 2012 ” . But there are some disadvantages if you dont file your returns on time .   They are

  • You will not be able to carry forward your Business loss (Speculation or otherwise) , capital loss , loss due to owning and maintaining of race horses.
  • Loss of Interest on refund : You may loose interest on refund u/s 244A specially in case if you are claiming a Major amount as refund.
  • You cannot revise your return.

NOTE: Dear Friends, the above article does not mean to encourage people for filing late return but only to make taxpayers aware about the provision of IT act and help them taking informed decision.

This is a guest article written by Mr. Rishabh Parakh who is a Chartered Accountant and Director at  Money Plant Consulting

How to save and invest money for your Child’s Education? – Ready 5 easy steps.

Posted on by Jagoinvestor

Child Education is one of the biggest goals of parents these days because of the tough environment and high expenses involved.

Most of the parents start saving for Child Education right from the birth of Child, which is a great! In this post we learn how you should evaluate the target cost of Children Education and how you can achieve the targets within expected deadline. We are mainly talking about Higher education in this article.

Many Companies come up with Child plans and other products which are nothing more than ULIP’s bundled with special features like Wavier of Premium option and some other features. However Planning for Child Education is not a big task and you can do it yourself, given you have some interest and eagerness to do it.

So following are the 5 steps you can do yourself to plan for your Child Education:

 

Step 1: Set a Target Date

The first step is to find out the target date for the child education goal. I feel the that average age when a child goes for Higher education can be taken as 21 or 22. You can take your own target tenure depending on your expectations and situation.

If you are not yet married then find out the estimated time left for your marriage and when you want to start your family (i mean children) and add target years to that number. For me personally it would be 4 + 21 = 25 yrs. what about you?

Step 2: Set a target amount in today’s term

The next step is to determine how much does it cost in today’s value for giving education to your child.  All of us have different aspirations when it comes to our child education, courses like  MBA, Engineering, MBBS, Software related courses are on our minds.

So let’s say for example you determine that Rs 10 lacs is good enough to provide a good education to your child in today’s value. Now you can jump to next step, but before that make sure you understand the effect of inflation on our Money. Here is another good article on Inflation

Step 3: Find out the amount you need on target date

Next step is to find out how much amount you actually need in the end. For this you first need to determine the rise in education cost per year. As per the recent year numbers, Education costs are increasing at 10% per annum.

A decade ago you could have done an MBA at 1.25 or 1.5 lacs, but today it costs more than 4 lacs. That’s more than the average inflation. Education cost in our country has been increasing at higher speed than other things. so you need to consider some figure. I would like to take this as 10%.

Now, you can just inflate the today’s cost using simple compound interest formula. Understand Compound Interest and other important Formulas.

Target Amount = Amount today X (1 + rate) ^ Tenure

Example: Considering myself, the amount I would require today is around 8 lacs. My tenure is 25 yrs and rise in education cost I would like to take as 10%. So

Target Amount I need after 25 yrs = 8,00,000 X ( 1 + .10) ^25 = 86 lacs (approx)

So, I can see that I need to make around 86 lacs in 25 yrs. Please note that this figure is based on your assumptions. The actual Figure you might need may be more or less to this amount. But still this is good enough, as we have a plan at least and we are near the goal.

Step 4: Estimated the return which you can generate over your investments

This is an important step where each investor has a different level of risk appetite and knowledge. Depending on those factors one can choose different products for investments and can generate some return through it.

One who is not much interested in finances and has lesser risk appetite can choose Balanced Funds or Debt Funds and can generate around 10-11% returns. On the other hand a person who can take more risk and have more interest in finances can invest in products like Equity Mutual funds, ETF’s, Direct Equities etc and can target close to 14-15% returns.

Getting more or less return is fine. All it matters is, does it suit your risk appetite? 

There is no point in investing in risky products if you are not a risk taker. As a rule of thumb, a person who is investing for long-term like 10+ yrs should take Equity route because over that kind of time frame Equity has performed the best with maximum returns and with small risk.

So for long-term, Equity is what you should invest in and for short-term prefer equity only if you are great risk taker. Your range of return expectation should be from 8% – 15%. Anything above that is a bonus but getting more than 15% is tough for general investors like us.

Anything like 20-25% should be the target of more professional investors who have advanced knowledge and who are full-time into stock market and related fields. So better be satisfied with suitable returns which will be able to achieve your goals.

Understand Equity and Debt here

Step 5: Calculate per month contribution

The next step is to find out what is the monthly contribution you need to do. For this you have to use this scary formula.

C = [FV * r] / [(1+r) * { (1+r) ^ t – 1 }]

Where

  • C = contribution per month
  • r =Rate of return you expect to generate on your returns .
  • t = tenure (It would be multiplied by 12 if payments are monthly)
  • FV = Future value of your goal (this is calculated in step 3 .

You can Use this Calculator to calculate these figures. Just fill in your details and get the output. Now you can invest this money in product you have chosen.

Important Points to Remember

  • Apart from these 5 points, there are other points you have to consider which will make your Child Education planning more strong and successful.
  • Make sure you are Insured Properly  because in between if you die prematurely the amount of insurance your dependents get should be good enough to achieve your Child Education. Make sure you buy a good term insurance plan to cover this risk.
  • When you are near the end of the goal, when still 4-5 yrs are left then you should better start withdrawing your money from riskier products to more safer products, so that you do not get surprise drop in your Corpus. If another subprime crisis happens at the same time when your kid is ready to go to college, it will be a tough situation. So better start withdrawing your money every month from Riskier products to safer products.
  • Make sure you review the performance of your Child Education plan every year and make sure that things are going as expected. If not, find out why? See if you need to change your numbers, if you do it’s fine. No one can plan for things in advance with accuracy and it’s totally find if things go little off track. Just be ready to adopt the changes.
  • At the end, sticking to this plan is the deciding factor of whether you are successful or not. The consistency in Investing for this goal is the main thing. Returns will follow when you follow the plan.
  • Make sure the Asset Allocation is right and make sure you stick to same asset Allocation.
  • Make sure you do not force your Child to adapt as per your Plan. Make sure you don’t have anything rigid for Child. Let him/her decide what they want to do, You are mainly a motivational parent who are paying for cost of what your child wants to do in their life. A successful Child Education plan won’t make any sense if he/she is not able to pursue what they are passionate of and love doing.

Conclusion

You have several products in market which claim to be Child Plans. They are costly and complicated for most of the general investors. The simple funda for successful financial planning is “Dont buy if you dont understand it”. Planning for Child Education can be a step by step designed simple plan which we can do ourselves.

Please leave your Comments to let me know how did you like the article? Which one of these steps is the most challenging part? What do you suggest is the rough estimate of Child Education expenses today?

17 tips to tell you how to manage your Personal Finance and save money

Posted on by Jagoinvestor

Personal finance is not only about your saving and investment, it includes tax planning, savings, expenses, debts, retirement plans, investment products and all the insurance and other policies. It is an understanding of how these tools works together and also affects each other.

In this article I will tell some tips which will be helpful for your personal finance.

Personal Finance Tips

Image source: Wealthfit.com

1. Split your Term Insurance

You should split your Term Insurance for two reason:

1) Top most reason is flexibility in Decreasing the cover later. So in case you need cover of 60 lacs now, you can divide the cover into 30:30 or 20:40 and then in future whenever you need that your insurance requirement has gone down you can just stop one of the policy.

2) The second reason is that your risk of claim decline from insurance company goes down, but this is a secondary reason.

2. Invest in Tax Saving Products for long term goals

Most of the people still invest in Tax saving funds for their shot term financial Goals. The fact that the money invested will get locked for long term should be taken in positive way and hence you should invest in these for your Long term goal, so that you don’t feel bad about the lock in period because you anyways need money after many years.

For example – Child Education, Retirement, Holidays abroad after many years. For short term goals like Buying car, paying fees, saving for some short term commitment should not be taken care by Tax saving Instruments.

You should use Fixed Deposits, Fixed Maturity Plans, Debt Funds, Balanced funds and Non Tax saving Equity Funds (Risky) for Short term goals. Once you think like this the lock in period will not matter to you at all 🙂

Watch this video given below to know about the tax saving investment tools in detail.

3. Use Top up’s in ULIP’s to minimize Cost

For investors who are going to buy ULIP’s or using ULIP’s for their long term goals, they should use Top up facility in ULIP to minimize the cost. The Allocation charges are generally linked to the  regular premium you pay and not the Top up’s. So if you are investing 60,000 per year as premium, you should rather take a 20,000 policy and top up your policy with 40,000.

This way your will save charges on top up money. You can decrease your cost (charges) by anywhere from 50% – 75% using Top ups.

4. Investing in GOLD ETF’s instead of physical GOLD

Why do you want to invest in Physical Gold? The biggest reason is for Daughter’s Marriage and Jewellery required for the same. But the underlying reason always is capital appreciation.

So why not always invest in Gold ETF’s [ Understand what is ETF ] and whenever you need Physical gold, sell the ETF’s, take the money and Buy the Physical Gold at that time. Most of the people invest in Gold physically for Daughters marriage, but the better way would be to invest in ETF’s and when time comes you buy the physical gold by selling the ETF’s.

That is a better way because its more flexible, safe and easy route.

5. Use your LTA, HRA and Medical Reimbursement

I am amazed to see that many Salaried Employees especially youngsters do not care to take the benefit of LTA, Medical reimbursements and HRA just because of  their laziness.

So make sure you take advantages of these even if you partly use these things you will save couple of thousands in Tax. All you have to do is save the bills, take the xerox and walk couple of steps to your Finance department and submit them, don’t you think its worth if its can save you couple of thousands in tax saving?

6. Control your Credit taking Habit

good credit habits

Image source: freecreditreport.com

Most of the people take Debt more than they can afford or deserve. Criteria for giving credit is mainly how much you earn. The company never knows your expenses and your future goals, your risk appetite, your future plans etc.

People earning 5 lacs per annam take debt of 30 lacs for Home, unnecessary personal loans for buying LCD’s, going for vacation and other non-priorities in life. This can have ill-effects later on.

Also companies are now keeping an eye on your credit taking behavior and it affects your credit score through which companies in India have started using as a decision making variable. So watch out your credit taking behavior. Don’t over-do it.

7. Dont Over monitor your Portfolio

Keeping an eye over your portfolio is great. You should look at your shares, mutual funds, ULIP’s etc. but overdoing it can be fatal sometimes. Some of us have this obsession of watching shares, mutual funds NAV and ULIP’s NAV on daily or may be weekly basis. See How much time you should invest in Personal Finance.

This is not a good sign for long term investing especially for people like us who are into regular jobs and have no much time to contribute in your Finances.

When you are a long term investor, why keep track of short term movements, these moves will have not much value in your all growth and short term movements will affect you mentally and tempt you take take decisions in short term because your money is either going up or down fast.

More of anything is bad and same things is true for your over involvement. Couple of hours per month or every quarter is good enough. Don’t get a feeling that successful financial life means more action.

8. Share your Financials with Family

If you are dead in another 1 hour, do you think your Family will be able to find out all your investments and Insurance documents and successfully claim them?

Are they unaware of the fact that you took a huge Insurance cover for them or you invested 50,000 in a ULIP last month?

Most of us graduate from novice investors to a good investor but still are left behind in taking care of this extremely critical point of sharing each and every details of our finances and making sure that the documents are within reach.

Let your wife, children have a good idea of where the documents are and where your investments are, have xerox copies of every document and have them at 2-3 different places and make sure people know about them. Emotional pain of losing some one and no idea of the finances which will take care of them is a kind of  situation you never want you loved ones to be into 🙂

9. Don’t compare your returns with others

Comparing personal finance with others

Image source: i.ytimg.com

You are different, be proud of this fact. If your returns are less than your friend’s mutual funds that’s fine. Don’t compare your self with others, there are many things which determines what you get in life like knowledge, luck, skills, timing etc.

So just make sure that you are getting what you try for. Don’t lose focus from your goals, your main aim in life is to achieve your financial goals easily and smoothly. Financial Planning is a race where everyone who reaches their personal target is a winner.

Make sure you don’t hurt yourself by competing with others.

10. Investigate everything before you Buy it

When you buy something, make sure you try to get information on Internet, ask on forums at different websites and make sure you find out maximum about thing product you are buying. Spending 30 minutes investigating your product can save you from lot of trouble.

One person I know recently took a home loan from HDFC and went for additional Life over from same bank for 30 lacs. He didn’t investigate much about the cost. It was around 8k per year for the term Insurance. When some days back we saw quotes from other company, the cheapest quote was around 6,000 from ICICI Prudential.

He was paying 2,000 more for the same thing because he didn’t spend 5 min extra investigating about the product. Just think what is the loss of spending some time investigating your product. How many of you took an ULIP after agent explained it to you and didn’t inspect much about it.

Email This to your Friend:

11. Invest and Spend, not vice Versa

You receive your salary -> then you spend all your money -> then save or invest  if you are left with something. This is not a right attitude.

You should change it to Get Salary -> Invest your money as per your future goals -> Spend the rest.

Once you are saving some part of your salary, somehow you will find ways to spend on things which are of first priority and would refrain from spending on things which can be avoided but if you spend first and try to save later, you will end up spending on unnecessary things.

So better change the order of spending and saving. You can definitely live with your 90% salary , so at least save 10%. There is no harm in trying out this. If it does not work, you can go back to spend and save.

12. Build your Emergency Fund now

Make sure you have emergency fund. If you are listening about this from long time and haven’t done it yet, the best thing would be to take a pen and paper right now and plan for it.

This is the money with the aim to provide you immediate access, not growth of money. Don’t concentrate on getting great returns from this part of your portfolio. The aim of this part is just to give you high liquidity in case of emergency. That’s all.

So simple rule is 2 months of expenses in Cash which you can access in minutes from ATM and 3-4 months of expenses in Liquid funds, which you can get back in 3-4 days.

This is preparation for a situation like if you lose your job and need time to search for something you really like, or get a long term illness and cannot earn money in short term or special emergencies. You can always reach out to close friends and Family for money, but why to depend when you can be self-dependent.

Its’ all about strong planning.

13. Equity for Long term, Debt for Short term

I say this again and again, this is the golden rule, one of the fundamentals of Strong financial planning. Long term goals whose target date is more than 7-8 yrs like Child Education and Retirement should always be linked with  Equity products like Equity Mutual funds, Direct Stocks, ULIP’s, Index ETF’s, Index Funds.

That’s because you can get great returns in long run from these things with lesser risk. On the other hand short term goals should be achieved by debt products like FD’s, Debt Funds, Recurring Deposit, Short term bonds. You can also use Balanced funds if you have moderate risk appetite and time horizon is 3-4 yrs.

14. If you dont understand, Don’t take it

How many investors understand how their ULIP works and what are different costs and how to use it efficiently? Not more than 3-4 % I believe.

How many people know why they have invested in Mutual funds which had a fancy name and which makes you feel like you have invested in something great and how many Endowment Policy holders know the overall final return they would get from their Policies?

Investors get into products which they do not understand well and then they can’t make best use of it which defeats the purpose. In reality the best products are least complicated one’s like Mutual funds, FD’s, Term Insurance, ETF’s, Gold ETF’s etc.

So if you don’t invest in something which looks fancy, you are privileged and should be thankful to god. Companies come up with complicated things which makes general investors feel that they are dumb and these companies are some big shot high class super knowledgeable in field of finance.

Read features of a good Portfolio

Just ask yourself  if you want to eat the best, tasty and healthy food in this world then where will you go? 5 star hotels? I don’t think so 😉

15. Try new products now

There was a time when LIC policies, FD’s, NSC and PPF were the only thing in one’s portfolio. There was not much choice and people were risk averse. That was a different time.

Things have changed today and Finance world is different now and it’s more complicated now compared to olden days because of lots of choices in Financial products for us today. Don’t hesitate by trying out new stuff.

There are different products these days like Index ETF’s, Index Funds, GOLD ETF’s, SIP in Mutual funds, Reverse Mortgage etc. Don’t be stuck in same products like our Fathers and grand fathers have done.

16. Take Personal Loan to pay off your Credit Card Debt

In case you have any Credit card debt and you have converted it to EMI, it would be a better option to take a personal loan and pay off your Credit card debt as soon as possible.

Credit card interest charges are anywhere from 36% to 48% per annum which you don’t realise because it sucks your money slowly and it’s not significant per month so you don’t feel it. So taking a personal loan is a better choice and pay 15-20% interest on that.

You should always try to stay away from Credit card debt at the first place anyways.

17. Educate your self more

At the end, you have to learn stuff. No need to become a pro ,but you should keep updating yourself every month with basic things. Read Personal Finance Magazines like Outlook Money (Link to online issue) and Money Today (Link to online issue) and other blogs on Financial Planning .

Also if you are new to this blog, Subscribe to Email Updates to get fresh content in your Inbox twice a week. .

Readers Contribution

18.  If appears to good to be true then probably it is not: So better if something looks great, then make sure you investigate well because there are more chances that it’s not that good as it sounds .There is no free lunch 🙂 – Amit Kumar

19. Learn simple maths : This is very nice point . Learning basic formula’s can help you a lot , you should know CAGR , IRR and Future Value formula ..  – Amit Kumar

20. Find a right Financial Advisor : Find some one whom you trustand he is within your budget and you are comfortable with . – Guru

21. Plan for retirement Early in Life : See important of Early Investing and How to plan for your Retirement in 6 steps . – Swathi

Want to add yours…., please leave a comment 🙂

You are a valuable reader and your participation is needed , Please share any tip here like the one I have discussed , even 1 sentence is worth listening to. Also let me know which was your Favorite Point among these 16 points

What happens if you stop your ULIPs before 3 years

Posted on by Jagoinvestor

Lets Discuss quickly what happens when you stop paying your premiums in ULIPs before 3 yrs. So here is an interesting question and very bad answer. Its already there in your ULIP Brochure, but you never had the time to look at it.

ULIP - Unit Linked Insurance Plan

Read What are the Most Important questions you should ask from a ULIP agent ?

One of the readers on this blog asks me

“I started investing in a sip of Lic Plan Money Plus T-193.I was assured of atleast 20% returns, but I Found  out recently that my surrender value is much lesser than what I have invested.

So I want to stop freeze this policy.But the agent says that the value of units will also freeze and I will not get the amt. as per the value of units at the time of lock in period. So when the lock in period is over(3 years), I will get amount as per the current rates of the units.

How far is it true?

Now This is True, in LIC Money Plus and some other ULIPs, If you stop paying your Premiums but then your Units will be sold that time and your money will be Kept in Money Terms which you will get back after the lock in period is over .

So for an example:

If you take policy in Jan 2008 and Stop your premiums before 3 yrs of lock in period, you will get back the amount after 3 yrs are over, but the amount will not be as per the NAV after 3 yrs, but at the time when you stopped your ULIP payments.

Note that you will get back your money only if you have paid full 1 yrs premium, If you have paid anything less than 1 yrs, then you wont get back your money if you stop it. All this information is generally never passed to Investors because of Heavy misselling in ULIPS

Now this is the rule from some of the ULIP’s, not all .. Some Ulips give you a choice of surrendering the Policy when you want, so you can tell them that you want them to sell your units or not . If you want, they will sell those and Keep it with them and then give you back after Lock in period of 3 yrs are over.

You need to check your ULIP if its a choice or a forced rule. Check your Policy Documents and Find out whats written there.. Before Buying a Product make sure if a product suits your Requirement

Other Important Rules applicable when you Stop Paying premiums before 3 yrs

  • Your Insurance Cover will immediately be Ceased, so you are not covered for any amount once you stop the Policy
  • The Death Benefit is just your Fund Value
  • Other Charges like Fund Management Charges and Yearly Expenses will still be Deducted.
  • You can revive the Policy after 3 or 5 yrs depending on the Company rule

Question : So it means that If I stop My policy (means Premium Payments) before 3 yrs, I will still get back my money after 3 years?

Answer : Yes, Many people think that They have to pay the premiums for at least 3 yrs other wise they will not get their money back, That’s not true.

Conclusion

Who is to blame here? Company or the Agent, my vote goes for the Investor Himself, Agent or Company are to be blamed, but for very less part. If you stop your Premiums before 3 yrs Its a costly Affair. So better buy your products before much thought and planning. ULIP’s are only to be bought for long term and you should be able to manage it well.

* Dont forget to check out the New Forums added in this blog

What to do with your Junk Insurance Policies?

Posted on by Jagoinvestor

Do you hold any Endowment or Money back plans sold to you by any of your relative, Neighbor or were it bought by your Father for you for your “Secure future”.

Junk insurance policies

Most of the people hold Junk Insurance Policies which are of no much use to them . Policies like Endowment or Money Back Policies hardly bear Inflation and have no ability to meet your long term goals like Child Education, Child Marriage or Retirement.

Note: All the points I have mentioned are generic and might be little different for different policies, but overall it would be similar. Also, points I am going to discuss are for people who are not happy with their policies and want to get rid of them. People who are very happy with their policies are advised to continue the policy.

I will discuss different scenarios and you can see which category you belong to. Before that lets understand some basic things which you might not know.

Top Reasons Why you hold some Endowment Policies

  • You were mis-sold that policy by an agent who promised moons and stars to you
  • You bought that incredible policy because you wanted to save tax in some particular year and you were in a hurry
  • Your Father bought it for you
  • You bought yourself without understanding what it is

what is meant by making a policy Paid up?

It means that you will stop your further premium payments, but your Insurance cover will come down by the same ratio. So if you policy tenure was 20 yrs and cover was 10 lacs , and you have paid your premiums for 4 yrs and then make it paid up , then your cover comes down to 2 lacs , because you have paid for just 20% of tenure.

When you make the policy paid up then you receive all your premiums paid and Bonus accrued till that time (only if your policy has run for more than 5 yrs) at maturity.

What is Surrender value?

Surrender Value is the amount which a policy will pay to policy holder if it’s terminated before the maturity period. Most of the Endowment and Money back plans don’t have any surrender value. Even after 3 yrs, the policy surrender value is very less, Generally it’s the “Net present value” of the amount you are supposed to receive at maturity.

Read why Endowment Policy should be avoided

I have paid Premiums for less than 3 yrs

In this case you don’t have much option, It’s great if you have paid for 1 yrs or less , You can/should just forget the money you have paid and start deploying your hard earned money in something better .

In case you ULIP;s you can continue paying because after 3 yrs the money you can get is equivalent to what is actual worth that time and you have much better control over how your money is invested . But anyways you have done a big mistake . See the list of top mutual funds you can invest in for long term .

It’s like cutting your infected finger and save your whole body to stink later

I have paid premiums for more than 3 yrs but Policy has more than half the tenure to run .

The best thing you can do is to make your policy paid up or take the surrender value and from now onwards put your money in something which you really understand and which can give you better inflation adjusted and post-tax returns .

I have paid premiums for more than 3 yrs but Policy is close to maturity now.

Now it’s too late and you can let it run its whole tenure , You also have the option of making it paid up .

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Important Points

Point 1 # Paying 3rd Premium

In case you have paid the premiums for 2 yrs and thinking of surrendering your policy after that, then it makes no sense, because the amount you pay for 3rd year and what you get back after surrendering will be almost same.

For example : If your yearly premium is 30k, and you have paid 60k in 2 yrs and now want to surrender the policy, but you are afraid that you will not get anything back if you close the policy before 3 yrs and thinking of making 3rd payment, then it makes no much sense.

Because even after paying 3rd premium and then surrendering it, the surrender value will be close to 30-35k only. (surrender value after 3 yrs is around 30-35% of total premiums paid).

Point 2# Getting Stuck

Most of the people just continue their policies because they think “It’s very safe return and let’s not take risk”. You are taking very big risk by continuing, its called risk of “losing all the purchasing power”, agreed that it’s damn safe !!

What you like to get 1 extra day in your old life, by sacrificing 1 hr every day for a year. See how much your policy scores on Gfactor analysis

Point 3# Abandon those “Friendly Uncle” agent

Throw out those emotions, save them for your spouse and parents. Get rid of those agents from whom you bought those policies just because he is your uncle or papa’s friend.

Comments please – Are you one of them who are stuck in those kinds of policies and what is your next step, any other recommendation from your side?

Top 10 doubts and answers in Financial Planning which every beginner investor has

Posted on by Jagoinvestor

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…

Financial Planning

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 …

What is Top-up facility and how to make use of this facility in ULIPS?

Posted on by Jagoinvestor

I got a query from one reader on ULIP’s top-up facility. The question was

“I have a ICICI pension plan, recently, when thinking about topping it up, ‘i was told that top up attracts only 1%charge, as usual, I didn’t believe the agent n called up call-centre. they also confirmed the same, any idea? whats the catch?

Say, for example, I wanna invest 1 lakh yearly, so I incur 30%charge or 30000rs first year. now instead of that I just take the least possible amount that is,10000/year policy, and later top it up with 90000 every year, this way I end up saving as much as 90%, well, what do you say”. Top-ups are a good way of managing ULIP’s, Read further

ULIP's Top-up facility

Do you know is the most important element in Wealth Creation ? Click here

What are Top-ups facility in ULIPS?

A top up premium is something that a policyholder can invest in his ULIP on top of the existing premium payment. The charges on Top-up premiums are generally very low in the range of 1-3%.

At any time during the policy term, as long as the total of top-up premiums does not cross 25% of the total regular premiums paid till then, you do not need to buy an insurance cover with the top-up premium. So if your ULIP is performing very well, you can top it up with extra premium. See this article to read about ULIP misselling

How to make the best use of TTop-upFacility?

When you buy a Policy, make sure you take the policy for the minimum premium available and then once the policy shows good performance, you can then top it up with extra premiums, there will be some advantage of doing so. Go through This Article by Deepak Shenoy on Top Up facility.

  • Low Charges in initial years (note this will go away after new ULIP rules by IRDA).
  • If your ULIP is performing well, only then you put extra money
  • You pay less charges on premium which is top up

Go through This Article by Deepak Shenoy on Top Up facility.
This is another article you can look for more details on Top up.

Conclusion

Top ups are a tricky tool to make your investments in ULIPs better. Take advantage of ULIPs Top up facility if you are going to take any ULIP product, but make sure you first understand if ULIP is right for you or not?

6 Steps of doing Retirement Planning by yourself

Posted on by Jagoinvestor

In this post I will teach on how to plan for retirement. We will use simple tools like Mutual Funds and PPF for building Retirement Corpus.

We will also see what factors you should take into account when you plan for retirement. There can be other ways of doing this and it can be very complex with very advanced calculation. But in this post we will look at it in a very simple way which a common man can understand.

Retirement Planning

So you are finally deciding to plan for your Retirement. You need to understand following steps:

  • How much is your Current Yearly Expenses
  • How much will be average Inflation figure for the coming years
  • How much would you need at your Retirement
  • Finally coming up with the corpus you would need at the retirement
  • Calculating how much you should save per month
  • Understanding where to invest the money

We will see all the above points in detail and go through some examples side by side to understand the process in well. Let say we are taking an example of Ajay who is married and has 2 kids below the age of 6 yrs. He has a monthly salary of Rs 40,000 per month. His age is 32 yrs and he wants to retire at age 60.

Step 1: Calculating you Current Yearly Expenses

Take a piece of paper (do it now as you read this) and make a note of your expenses, things like Rent, House hold expenses, Children fees etc etc. You should have a rough idea of what is the minimum amount you require per month for living a good life. You should also try to save a part of your salary every month, Ask your self Can you live with 90% of your Salary ?

Ajay calculates his expenses:

Rent – Rs.10,000
House hold expenses – Rs.11,000
Medical Expenses : Rs.1,000
Entertainment and outing : Rs.3,000

Total Monthly Expenses : Rs.25,000
Yearly living Expenses : Rs.3,00,000 (12 * 25,000)

Other Expenses like Vacations and Surprise Expenses : Rs.50,000

Total Yearly Expenses : Rs.3,50,000

Step 2 : Understanding how much Inflation would be there in coming years

This is the inflation you expect in coming years till your retirement. I calculated the average inflation from last 28 yrs (1990-2008). The CAGR inflation was 7.3% Source.

Considering a better economy in future I expect the inflation over next 20-30 years to be 6-6.5%. Lets take 6.5% for our calculations here. However you can assume your own rate as it depends on your understanding.

Step 3 : How much amount would you require in your Retirement

By this we mean how much money will provide you same standard of living as of today. This will depend on the Current Yearly Expenses, inflation expected over the years and years left for retirement. Just like we require Rs 105 to buy something of cost Rs.100 in 1 yr at 5% inflation. The same way we can cost how much is is needed after X yrs.

So formula would be

Retirement yearly Expenses = Current Yearly Expenses * (1 + inflation)^(number of years left)

Ajay has already calculated his yearly expenses as Rs 3,50,000. He has 28 more years at hand. He calculates his retirement yearly expenses.

Retirement Expenses = 3,50,000 * (1+ .065)^28
= 20,40,000 (20.4 lacs approx)

Now one can tweak this figure depending on whether you want to have higher standard of lifestyle than now (earning years) or more simpler life. You can decrease it or increase it to the quantum of your compromise. You won’t have to compromise on your Retirement if you are a Early Investor.

Step 4 : Finally coming up with the corpus you would need at the retirement

Here you may want to receive the monthly income for whole of your life and preserve the capital for your Children or any nominee. So you need a corpus which if you put in Bank or invest in some “guaranteed return fund”, you should get an amount per year which is equal to your Expected Expenses per year.

So suppose you expect to get a return of 7% per year. Then you need X amount at the end where 7% of X is = your yearly expenses.

Corpus needed = (Monthly Expenses)/(interest expected )

So in the case of Ajay the yearly expenses expected was Rs.20,40,000 and return expected is 7%. So we calculated the amount required for Retirement that is 20,40,000 / .07 = 2,91,00,000 (2.91 crores).

Note:

You can also buy an Annuity for a fixed number of years till when you want to receive the income (which also means you should have an idea of when will you die, which is not easy). So for example if you want to receive the the monthly Income till you are Age 80 (for 20 yrs).

The following formula will be used. See this Video or this article on Net Present Value to understand the calculations and Concept.

PVA = A * [ {(1+r)^n -1} / { r * (1+r)^n } ]

Where

PVA = Present value of Annuity (Amount you need to have at your retirement)
r= Rate of interest you expect to get
n = Number of years you want the Yearly Income .

So at the end of this, you will have the Amount you need for your Retirement.
Do you calculations online just now Here OR download the excel sheet Here.

Watch this video to learn how to do your own retirement planning :

Step 5: Calculating how much you should save per month

Here comes the interesting part, here there are two things

  • How much Return you expect to earn in long term
  • How much you can afford to invest per month

Both are related to each other. If you expect more return, then you need to invest less every month and if you can afford to invest more every month, you need to generate less returns for your investments.

So which is the better way? What should you decide first? The returns expected or monthly contribution you can make? I would recommend the other way, better we first decide how much we can invest per month, because that is what we can control better way. We cant control returns !!

I have this monthly contribution calculator to calculate how much you need to put every month to generate Rs X after Y years if you expect R returns, please feed these inputs there and get your numbers. To understand how its calculated you can see this video which explains some important formula’s in Financial Planning.

So here is the process

  • You figure out how much you can save
  • Then you find out how much return you need to generate
  • Then you decide where to invest to generate that return

You can also go the other way deciding how much return you can generate and based on that how much you need to save. But I prefer the first way because then you control things in your hand but you can go the other way too.

So our friend Ajay has a saving of Rs 15,000 at the moment (40,000 – 25,000) And he thinks that he can easily invest 10,000 per month at least over a long term. So the return he needs to generate per year CAGR for 28 yrs to generate his retirement corpus of 2,91,000,00 comes out to be 12.25%, see the calculator mentioned above.

So now you got to know how much you need to get per year in returns.

Step 6 : Understanding Where to invest it

This is the last step as per our article. So you got the CAGR return number which you need to generate over a long term. This number will decide how much risk can you take and where can you invest depending on your time frame. See below to understand which are the suitable products you can invest to get your returns.

Understand the ground Rules

  • Higher the return expected, higher the risk you need to take
  • More the Tenure, Lower the risk

Above 15% : Direct Stocks, Sectoral Mutual Funds, Equity Diversified Mutual Funds
10-15% : Equity Diversified Mutual funds, Balanced Funds
8-10% : Mix of Balanced Funds Debt Funds
Less than 8% : FDs, PPF, Debt Funds, Balanced Funds [ find out which FD is best ]

However, if the tenure is more than 10 yrs you should always go for Equity Funds. Never go for FDs or Debt funds if your tenure is long enough. Understand the Chemistry of Equity and Debt please.

So in our Example of Ajay, he requires a return of 12.3% CAGR in 28 yrs, so for this, he can invest in Equity Mutual funds through SIP he has different ways to achieve this like Doing a SIP in 3 Equity mutual funds OR combination of PPF (25%) and SIP in mutual funds (75%) OR Direct Equity (5-10%) + PPF + Some Balanced Funds. You got to be creative in this :), there are endless ways of doing it.

Conclusion :

Here you go!!, you just did your Retirement Planning 🙂 . You can do your retirement planning yourself easily. A financial planner will look into more details and will do perfect planning for you which would be best but this is pretty much great way you can adopt your self.

Involve yourself in this journey of Financial planning and you will be amazed to find how much Fun it is.

Understanding the art of Asset Allocation and Portfolio Rebalancing

Posted on by Jagoinvestor

What is better? Equity or Equity + Debt In this article I will show you how always maintaining your Asset Allocation with Discipline helps you in long term.

We will see examples of Asset Allocation with Portfolio Rebalancing with Charts and a small Presentation. At the end we will conclude that Having A small part of Debt in your portfolio is better than having no debt.

Note: Make sure you read this article in one go, not in parts.

Data Collection and Making the Case Study

I gathered the NAV of SBI magnum Taxgain ELSS fund (click here to see which is the better fund that SBI Magnum) for last 10 yrs for each quarter. NAV are for 1 Jan 2000, 1 Apr 2000 and so on for each quarter (getting them each one by one from moneycontrol was really time consuming). So we have 38 NAV values from Jan 1 2000 to July 1 2009.

Scenario

  • Total Capital Invested : 1,00,000
  • Debt Return : 8% per/year , 2% per quarter (for simplicity) .
  • Equity Return : Calculated for per quarter (if Nav rose from 10 to 12 , return was 20%) .

Now I am comparing Two cases with and Without Asset Allocation and Portfolio Rebalancing .

Case 1 : Money was Invested One time in Equity and then it was left for Growing.
Case 2 : Money was Invested and Principles of Asset Allocation and Rebalancing was also used.

We are trying to Study which one of Case 1 and Case 2 is better. I did a Small Study and calculated the returns on different values of Asset Allocation like 20:80, 50:50 and 80:20 etc. Here are the findings:

Let us first look at the chart with Asset Allocation 80% Equity and 20% Debt which personally suits me and almost anyone in below 35 yrs age. (click to enlarge)


The Green Line is growth of investments with Asset allocation and Re-balancing (case 2), and Blue line is Growth of investments with no asset allocation (just equity, case 1). See how After 2 quarters, the Green line always was above Blue Line. Also see that final Value of Investments was higher in case 2 than case 1.

Also see, Magic of SIP , why SIP in mutual funds is best for long term.

The final Value of Investment kept increasing when Equity Allocation was raised from 0 to 70-80 and then started reducing when further increased it above 80.

See the Graph Below, this is a small presentation with each slide of separate Equity Allocation starting at 0% in equity and then increase by 10% every time. So first slide is 0% equity 100% debt, second slide is 10% equity and 90% debt and so on, it goes up to 100% equity and 0% debt.

It beautifully demonstrates the shift and change in value of Investment caused by Equity Allocation. To view it in the best way just have a look at each slide in one go and it will appear as a small video ;). Guys I worked hard on this.

Asset Allocation Effect (make fullscreen if you want)

Asset Allocation Effect

View more documents from manish.pucsd.

In a time span of 38 quarters (10 yrs approx), Case 2 consistently outperformed Case 1 i.e. if you see, in how many quarters Value of Investment was higher in Case 2 compared to Case 1, Case 2 beats case 1.

Below is the chart which shows in how many quarters Value of Investment was higher in Case 2 than case 1 i.e. for each quarter the case (case 1 or case 2) which has higher value of investment will get 1 point. You should also look at IV Ratio.

It was found that Case 2 always had higher points than Case 1 and Case 2 points kept increasing with higher Equity Allocation. The minimum Case 2 had was 19 points, when the asset allocation was 0% equity and 100% Debt. See the chart Below


Returns Were going up with higher Equity Allocation (around 70-80) and then fell further.

The final value of Investment was increasing for higher Equity Exposure till it was 80:20, and then it started Decreasing. See the chart below (click to enlarge)


To go deeper, I calculated some other returns.

Case 1 (Only Equity) returned

  • 13.2% CAGR in 9.5 yrs, see this video to learn how to calculate CAGR and other important formula’s
  • Value of 1,00,000 became 3,24,946 .

Case 2(Asset Allocation) returned

  • 13.1 % with 30:70
  • 15.11 % with 50:50
  • 15.67 with 70:30

In case you are new to Stock Markets, Download this Ebook on “How a Newcomer should Start in Stock Markets”, check out the Download Page for more.

What Does This Teach us

There are some important Learning’s here which we must understand well and have it deep rooted within us for our entire Life. This will help us in long term. Following are the Learning’s:

Learning 1# Equity Returns 12-15% over long term:

We can expect better returns from Equity in Long term, also average return over long term from Equity is around 12-15% as we saw in our case. So don’t expect returns like 30% or 40% every year. Once in a while you can get it but if you try harder and harder for it you tend to take unnecessary risk and hence screw yourself.

So better follow a disciplined approach and peacefully get 12-15% over long term. This does not apply to Traders and whole time participants in Stock Markets. They can/should/deserve to make more than 25-30% a year from stock markets.

Learning 2# Debt is extremely Important!!

Debt is an Important and vital component of Financial planning and your Investments. Love equity, Adore Equity and Worship Equity, but *don’t* forget Debt. Debt has eternal powers!!

Equity Combined with Debt can produce far superior returns over long term. In our examples above the best returns we got were for Equity and Debt ratio of 70-30 or 80-20 range.

Learning 3# Have a long term view to get results:

People who have recently started investing through SIP, ULIP or Direct Stock Investing need to understand that it takes time for the investment to grow!!

If you are doing right things like following specific Asset Allocation, Portfolio Re-balancing, Diversification, Investing with Discipline and control over yourself to avoid making stupid mistakes you need not worry at all. At the end you are the winner for sure. It will take time but things will show up.

You might see some person making 30% this or other year minting money from markets or from other investments and this can make you feel that you are left out but don’t feel bad, what you forget is that the other person is also exposed to extra risk which will kill him someday while you will be safe.

Learning 4# Returns is not Everything in Investments (my Favorite)

This is very important and you need to get this into your head and heart. Just like Money is not everything in life and there are other things like love, good health, Nature etc. etc. The same way in your financial life, you should have peace of mind. For which your investments value variation should not be wild enough to drive you crazy.

You should “aim for” and get “stable and good” returns which meet your financial goals, that’s it. Anything more than that will be a “treat” for you and should come to you without compromising your Needs in Life.

Suppose your money invested gives you return of 30%, -20%, 50%, -40%…. With these kinds of unstable and wild returns what will happen to your state of mind?

It will always be worrying over it and you will make mistakes in your financial decisions.

On the other hand if you get returns like 12%, -5%, 9%, 20%, -10% etc. It will not bother you much because there are no wild swings in your Investments value. At the end both will give you same kind of returns. The average returns would be same but the former case has higher variance of returns which “may be” good for your account, but it’s “not good” for your Mind and soul.

You will also notice in the charts above that with 70:30 equity : debt allocation, in 36 out of 38 quarters, the investments in case 2 were more than investments in case 1 which means that 95% it outperformed.

Learning 5# You should Start Early In Life

Ramit Sethi writes an excellent article on Why NOW is the best time for you to do anything , Be it early Investingg, Travelling, Meeting new people, whatever!! If you start early, you give enough time to your investments to grow and work for you. It also less risky if you start early because then the volatility is erased out in many years.

Partha shares a link for a study done on Similar subject at Accretus Solutions, Looks great link to me :).

** What do you think about This article, please leave your comment and suggest how did you like this article and what are your suggestions on making the investments in a much better way.

With this I will end this article, and dedicate this article to all the readers of this blog. I was working on this article for last 2-3 days, gathering data, doing calculations, creating charts, writing this article etc. etc.

It has come from hard work for some days, but the motivation behind it is my wonderful readers. Believe me or not, The person who has/will learned most from this article is ME, Thanks to you all – Manish

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