JAGOINVESTOR

Apply compounding to your life – Secret of creating a great financial life

Posted on September 5, 2016November 14, 2019 by Nandish Desai

To create wealth, you have to first get in touch with the power of compounding. I am not just talking about the mathematical concept here but making the “compounding” your way of life. You will understand what I am talking about as you move forward.

Today’s write-up is close to my heart.

It is not just an article, it is about someone experiencing a breakthrough in his overall life. I thought of sharing some of the conversations we exchanged with one of our clients because there is something important to learn from it and it has the power to strengthen your journey as an investor.

Power of Compounding in your life

What happens if you just improve by 1%?

Nothing!

Yes, nothing will happen to you if you improve your skills, attitude, salary, net worth, relationship by 1%, but when you improve it constantly by a small margin for a very long time? What happens if you do that for 365 days?

Then?

Here is what happens!

You bring a drastic change in any area because you are allowing the compounding to work there. See the image below …

Let me share an incident with a client where he emailed me about himself and how he wanted to improve. Below is the conversation. Please go through the full conversation until the end.

Here is the first email, which hit my mailbox

Dear Nandish,

I am one of your financial planning clients and I would like you to coach me in the area of money. I am a competent person, have a solid work experience and also earn decent money each month but still my financial life is a mess”. Can you please help me find the solution to my problem?

I tried hard to get the answer but failed to crack this issue.

Thanks

XXXXXXX

And here was my Reply

Dear Client,

Thanks for writing to me and for showing trust in me. I may not have a readymade solution for your problem but I can surely help you to see your situation under a different light.

Before I suggest you anything I have a simple question to ask:

Question: Tell me how many areas in your life you have you been consistent with from last 5-10 years time?

In Service,

Nandish

To this, the client replies back …

Dear Nandish,

I really can’t figure out any such area from my life where I have been consistent from last 5 – 7 years.

Let me know what I need to do now.

XXXXX

My Reply

Dear Client,

I invite you to look into your life and check for yourself, maybe what is missing in your life is the power of compounding, compounding as a way of life and not just mere as a concept. The majority of people know compounding only as a concept. There are very few who experience the real power of it.

The Situation you are into may sound like a mystery to you but in reality it is not.

Now, getting this insight is not enough and so I have an assignment for you for the Next 1 year.

Assignment:

If you really want to experience the power of compounding you will have to take-up 3 more areas along with the area of money. Compounding is all about expanding your capacity as a person and so it is important to pick some more areas. Pick any four areas in your life which are new to you and engaging with them will help you to practice the power of compounding for the Next 1 year.

I would like to hear back from your experience exactly after a year from now and not before that.

If you are game for this assignment let me know.

I want you to just not have amazing ideas but also focus on the action part and execute what you are thinking because only that action will bring the compounding into action, Check the image below and you will get what I am trying to say.

Reply from client

Dear Nandish,

Thank you, coach. I am a game for this assignment.

My 4 areas

Health: Will join gym and work with my trainer

Music: I always wanted to learn Guitar but never started

Quit Smoking: I would like to get rid of my smoking habit

Money Management: Complete actions as per the plan and start my sip of 25k pm for next 1 year

Thanks, Nandish. Thanks for coaching me and for giving a sense of direction to my life. I will let you know my experience exactly after a year.

Thanks once again. Thanks a lot.

Excited Client

XXXXX

I then received his reply, exactly after a year.

Dear Nandish,

I am one of your most excited and enlightened Financial planning clients, remember you gave me an assignment 1 year back to practice the power of compounding.

Here is the assignment you gave me

Assignment:

If you really want to experience the power of compounding you will have to take-up 3 more areas along with the area of money. Compounding is all about expanding your capacity. Pick any four areas in your life which are new to you and engaging with them will help you to practice power of compounding for the Next 1 year

My Life has completely changed the day I started doing the assignment. I created a journal for all four areas and started to capture my experiences. Before I share about my assignment I just want to say I am extremely happy as an investor and in each and every area of my life.

Here are some of the highlights from each area:

Health: I joined the gym the very next day and the first thing I did was hired a personal trainer. I shared with him about my assignment and he chalked out a well designed 1-year exercise plan for me. We decided to exercise 5 Days a week along with a specific diet plan. The first month was tough to follow but I slowly daily exercise started to become an integral part of my life. My strength , stamina, and overall fitness have gone to a whole level in last 1 year. I would like to thank you and my personal trainer for getting me started.

Music: I joined the music school; again the first month was difficult. In the start, I could not even hold the guitar. I was not comfortable with the guitar and even the guitar was not comfortable with me. My Music sir always emphasizes on one word “PRACTICE”. My sir kept reminding me that practice leads to compounding and eventually it leads to mastery. I slowly started playing songs and now music really relaxes me from all the noise out in the world. I am so happy I got connected to music, it has taught me many things in last 1 year.

Quit Smoking: This was the hardest of the all. Initially, it looked impossible for me to quit smoking but I really wanted to get rid of my smoking habit and I started putting efforts. I decided not to hold the cigarette between my two fingers, no matter what. I also shared about my project with my friends and family members and they really supported me a lot in this area. My commitment to fitness and music also helped me a lot to get rid of my habit. I can now call myself a non-smoker. I am free, completely free from my habit of smoking and it feels great.

Personal finance: Happy to share all the personal finance actions that you suggested in the plan are complete. I took help of your team and completed all the required actions. I also started my sip as per the commitment I made. Today, my financial life is in sync with my dreams, goals, and aspirations. Thanks to you and your team for all the support and guidance. I realized that personal finance is all about actions; it is not about worrying about future or regretting about the past. I can say in this area things have shifted and things are moving in the right direction. I am happy in the area of money.

Thank you for assigning a wonderful project to me, I keep sharing with my team and other about the power of compounding and I keep getting people coming and sharing their results with me. Thank you for bringing the magic back into my life.

Conclusion

Can you see the real power that resides in the word “compounding”? It is not about how your money grows but how you grow as a person. Pick any 4 areas in your life and start engaging with them. The more you engage, the more you will grow in those areas. Don’t take only one area because one single area takes a back seat very easily.

Now tell me which area you want to improve and start working on improving it by 1% each day or even a week. Watch out this video below to get a more detailed idea on this

Many of you may be new to investing or equities do not get scared try out this assignment and see what happens after 1 year. Make the power of compounding your way of life and don’t just know it as a concept. Do share your views in the comment section; most importantly I would like to hear about your 1-year project which will help you to practice the power of compounding.

This article is written by Nandish Desai…

5 Asset Classes Explained – A simple guide for beginner Investors

Posted on June 17, 2016November 20, 2019 by Jagoinvestor

Today I am going to teach you about “asset classes”, which is the most primary lesson every investor should go through. Understanding asset classes is very important for an investor because when you invest your money in any financial product, then in the background, it goes to a certain asset class only.

The world of personal finance has hundreds of financial products, which makes everything confusing for an investor, but if you understand which asset class it belongs to, then this whole world of personal finance will sound easy to you.

So if you are confused about whether to invest your money in a fixed deposit or a mutual fund? Or into gold ETF’s or PPF? How do you decide?

Just ask – “Which asset class does it belong to?”

Is a fixed deposit in the bank better or a PPF would be the right thing for you, this all questions might seem to be confusing to you if you do not understand which asset class they come from? So in this article, we will go deeper into the basics of investing and help you to get stronger into the primary level information.

What is the meaning of Asset Classes?

Asset classes can be seen as a big basket where all the financial products belonging to that asset class share common characteristics. Things like risk, returns, liquidity, and various other parameters are similar.

For example, a Fixed Deposit and PPF are different financial instruments, but at the deeper level they both are secure products, you do not lose money in these products, their returns are also predefined and there is predictability in their returns.

Can you see that both FD’s and PPF share some common characteristics? It’s because they both belong to the asset class “Fixed Income”.

Here is a video which gives an introduction to asset classes

In the same way, an equity mutual fund or direct stocks, both are different financial instruments from high level, but inside they both are high volatility instruments and have potential to multiply your investment amount many times in short period of time, this is because they both belong to same asset class called “Equity”.

Below is a snapshot from the Karvy website which shows you the wealth distribution of Indian investors in the year 2015.

There are 5 asset classes

While there is no standard list or category of asset classes, widely it’s accepted that there are 5 types of asset classes namely

Fixed Income
Equity
Real Estate
Commodities
Cash

Every financial product you come across will fall into any of these 5 asset classes only. Each of these asset classes has their own set of behavior and they represent something unique about them. The chart below shows you financial products belonging to these asset classes and what these asset classes denote

Asset Class #1 – FIXED INCOME

Let’s start with the most famous and favorite asset class in India, which is “Fixed Income”. Fixed Income asset class refers to the class of financial products where your investment amount is more or less protected and the returns are either fixed or predictable to a great extent. There is almost no/less risk in these products which are from the fixed income asset class.

Investing in fixed income asset class is like lending your money to someone with the assurance of return with predefined returns. So when you make a fixed deposit in a bank, you are not exactly “investing”, but lending your money to the bank with a promise that they will return back your principle amount along with a pre-defined interest.

Fixed Deposits do not beat inflation

Even if you are getting an 8-9% return on your fixed deposits, many people do not realize that it’s the pre-tax return. As Fixed deposits are taxable (and every other debt instrument), once you pay the tax on the returns, the post-tax returns are only in the range of 6-7% and if you adjust the inflation of 8-10%, you are actually getting a negative return on your fixed-income investments.

Livemint has done a story on this topic in a detailed manner which you should read.

Risk is less in Fixed Income Asset class

All those who want to get a fixed return and do not want to take any risk should choose this asset class. It’s a human nature to seek assurity, and given that fact, fixed income instruments are a big hit. No wonder Fixed Deposits rule the world of investments, It’s simple and easy to understand the financial product.

Same goes for PPF, NSC, recurring Deposits and various govt bonds or debt mutual funds. However note that this asset class does not beat inflation or nearly matches it, hence over the long term, while the amount of your investment will become bigger in number, the purchasing power will remain stagnant or might drop. So this asset class is to only protect your money, not grow it.

Asset Class #2 – Equity

The equity asset class is an interesting asset class and slowly getting more and more acceptance from the last 1-2 decades.

Equity means ownership

So when you invest in equity, it means that you have bought ownership into a business. For example, when you buy stocks of Infosys or Reliance, you become a small owner of that business.

Even the RSU and ESPP which you get from your company makes you a small investor in the company and that’s “equity investment”

Now obviously when you invest in the business, you get a % ownership. And if that company becomes big someday in the future, your overall worth also goes up. But there is a problem, the business grows only over time and in between, there are ups and downs and that reflects in the stock price of the business/company.

If you look at all the rich people today (really filthy rich), it all happened with equity investors. Someone either opened their own company or invested in some company which was growing and held it over the long term.

Equity Investing works in the long run

Below is the 10 yrs return chart for various years for Sensex. You can see that most of the time sensex has given more than 12% return (much more than that actually) every 4/5 times. This is since the time Sensex has been into existence.

Because the equity returns are very volatile, most of the people refrain from mutual funds investment or investing in direct stocks, but they are the real wealth builders for any investors. There are mutual funds from various Asset management companies that have a proven track record for building wealth for its investors.

Asset Class #3 – Real Estate

Real estate, as we all know refers to physical space, or physical structure like land, residential flats, commercial spaces, etc. These spaces are either used for living purpose or for doing the business and generate income. Should one invest in real estate or not is a topic of debate and I am not getting into that right now.

Over the last 2 decades, the real estate asset class has got tremendous interest from investors. Everyone wants to now own a home and real estate is very sought after asset class. As the country develops and expands, we see many upcoming areas in all cities and a location which was considered outskirt of the city becomes a very important location in the city and we see some amazing returns.

However, the fact is that we always hear the “good” stories and never the bad stories where one got bad returns from real estate or lost their money.

Returns from Real Estate

The real estate market has cycles of ups and downs and returns from real estate can be very volatile and can depend on various factors like city future, govt policies, political situations and many more. For example, if you look at Hyderabad, the returns in real estate have not moved anywhere in the last 7-8 years and we are talking about average returns here.

Bigdecisions.com has done a study based on NHB Residex to compute the real estate returns in various Indian cities from 2007-2014 and below were the results.

I am in on way saying if real estate is good or bad. All I am trying to do is make you aware of the characteristics of real estate as an asset class. You need a high ticket size for investment, the market is not regulated at all (only recently the regulation has been made) and it’s more or less one side market with a lot of opaqueness.

Asset Class #4 – Commodities

Commodities refer to various types of physical goods or products which we all can buy and sell for various uses. Gold, Silver, Copper, Rice, and Oil etc will be counted under this asset class. The price of these products depend on demand and supply in the market.

Commodities are for “Trading” and not investing

With my limited understanding, I came to the conclusion that commodities are not for investing for the long term, but mainly for trading, where you can benefit from the market cycles and predict demand and supply moves and get a profit or loss.

Returns from the commodities can be very volatile and each commodity has its own market and dynamics.

Only a handful of commodities like Gold or Silver can be invested in for a very long time because they can be stored without losing their usage. A common man can’t store other commodities in the same way, hence trading them for short term is a feasible option.

Asset Class #5 – Cash

When I say “cash”, I don’t just mean the hard cash bundles, but also the money lying in your saving bank account, or liquid mutual funds. I will refer all of these things as “Cash”.

The best thing about cash is that it gives you the freedom to “buy” anything you want instantly. You can buy a car, a house or a phone or invest your money in other asset classes.

The freedom you get with cash is very high and that’s one reason why most of the people prefer to hold a lot of cash. Also the cash cannot be tracked (unless it’s several multi-crore rupees) and many people keep their black money in form of cash.

(Image Source)

It’s not uncommon to see many lakhs lying in a savings bank account just because the investor thinks “What if something goes wrong?”

However cash has one problem, it does not fight inflation at all or very little. The money lying in saving bank account just earns 4% and that does not help you as an investor.

Which asset class you should invest into?

Where should you invest your money? This question can only be answered if you are clear about your requirements like how much risk can you take and how much return do you expect out of your investment?

Are you ok with locking your money for several years or not? I have made a simple table that compares all asset classes on various parameters.

I hope this article gave you a high-level understanding of all asset classes and cleared your basics. Please share which is your favorite asset class and why?

10 taxes we pay in India – The layman’s guide

Posted on April 5, 2016November 15, 2019 by Jagoinvestor

There are many different kinds of tax paid by us in India; however, we don’t have a lot of clarity on each kind of tax and what it means. Hence I thought I will give a brief overview of the overall India taxation system. So in this post I will explain various kind of taxes one by one and their categories.

taxes in India

Direct Tax vs. Indirect Tax

Before explaining each kind of taxes, first understand that there are two categories of taxes, which are called direct tax and indirect tax.

Direct Tax – As the name suggests, Direct taxes are those taxes that are directly paid by the person/entity to the government. The best example for this is – Income Tax, where we have to pay the income tax on our earned income to the govt directly at the end of the financial year.

The direct taxes are the one that pinches the investor’s maximum because they clearly see it going out of their pocket.

Indirect Tax – Indirect taxes are those kinds of taxes, which are collected by govt from the intermediary or manufacturer, but eventually which is passed to the users only. So we pay these taxes also from our pocket, however, it’s taken from us in a very indirect way by including it in the price of the product itself. So we always hear the final price (price + tax) and it does not pinch us a lot because most of the time we don’t even realize that we are paying that tax.

A good example of this is “Service tax”. So when you go to a restaurant, you can see that the service tax is added to the bill and you make the payment for it. The hotel then pays this service tax to the govt only.

direct vs. indirect tax in India

Jurisdiction of Taxes – Central, State and Local

You already know that India has federal structure and there are governments at center and different states and they have to arrange for their own income from various sources. So taxes fall under 3 jurisdictions, which is

Central Govt
State Govt
Local Govt

So some taxes go to the central govt and some go to state govt and few goes to the local city municipality. The below chart gives you a crisp idea about it.

taxes in India

10 types of Taxes we pay in India

We will now see various kinds of taxes we pay in India. I will explain each of them. We will first see the major taxes which impact us in a big way and which are the major taxes from which govt gets the revenue, then we will see the other taxes in brief

1. Income Tax

The tax which everybody is aware of is Income tax. This is levied on the income earned in a year by an individual or a business body. The 12 month period considered for the taxation is from Apr 1st to Mar 31. The incomes is categorized under 5 heads namely

Salaries
House property
Business Income
Capital Gains
Others

A person has to hence, find out all their income and see which heads they are falling into. For most of the people who are salaried class, it’s only one head “Salary” and a bit on the “Others” section like interest income from FD, saving bank account or dividend incomes.

The income tax for Individuals is calculated based on the different slabs, which are as follows

Income Tax Slab rate

So if a person salary is 8 lacs per year, there will be no tax on the first 2.5 lacs, Then 10% tax will be applicable on the income from 2.5 lacs to 5 lacs, which will be 25,000 and 20% on the income from 5 lacs to 8 lacs, which is Rs 60,000, totaling his income tax to Rs 85,000 for the year.

Below is a snapshot of income categories and number of people who fall under them along with the % share of their income tax as of 2012

income-tax-distribution-India

Income tax is something that almost everyone is aware of because one has to deal with it directly.

2. VAT (Value Added Tax)

The VAT is an indirect tax levied by a state when some good is sold within the state. So if some goods are sold within Karnataka (Bangalore -> Mysore), the Karnataka Govt will levy VAT on the goods sold.

The VAT is a tax that is not very visible to a common man in their day to day life, but it’s presence in almost every sector and goods. Each small thing which we consume today has gone through multiple stages of production and VAT is paid at each stage by the manufacturer and eventually, the final consumer pays for it (Bundled within MRP)

For example, when you buy a mobile phone, you also pay the VAT, which goes to the govt but paid by the seller. The seller actually gets a lesser amount. For example in the below example, you can see the invoice of an Asus Zenfone mobile bought online by my wife. You can see that out of Rs 10790 which was paid, Rs 1325 (14%) was the VAT which went to the govt.

vat on mobile

Note that VAT rates are subject to states, hence the rates change from one state to another. This is the reason why some goods are cheaper in one state and expensive in another.

CST (Central Sales Tax)

Note that VAT is a state-level tax, however when a good is sold from one state to another, then the tax is called CST or Central Sales Tax which goes to the central govt.

So when a seller in Maharashtra sells some goods to a consumer in any other state (like Tamil Nadu), then it’s not the VAT, but CST which applies and it goes to the central govt wallet 🙂

3. Service Tax

Service tax is another very important tax which was introduced in the year 1994. It’s a tax charge for providing services. Like in the case of restaurants, when they serve us for food, they are providing us a service, hence we are charged service tax on a certain portion of bill amount.

In the same way, when you hire the services of a consultant, they will charge you a service tax and pay it to govt. It depends if they have charged you the service tax on top of the fees or they have included the service tax in the price itself and tell you the final amount. In any case, the service tax is to be paid to govt if the revenue of the service provider is more than 10 lacs in a financial year.

Increase in service tax revenue in India

Over the last decade, service tax has become of the major tax collected by govt and it has been increasing year on year. It’s mainly because the number of services on which service tax is applicable has been increasing year on year in the last decade and even the rate has increased. At this point in time, the service tax applicable is 15% (including the Swachh Bharat cess of 0.5% and Krishi Kalyan cess of 0.5%).

Below you can see how the service tax revenue has increased in the last 20 yrs.

service tax revenue growth india

Negative List concept in Service tax

A few years back, there was a list of services that were issued by govt, on which service tax was applicable, and if a service is not on that list, it was not applicable. However a few years back, it’s changed and now a “negative list” concept in introduced, which means that service tax is now applicable to every service which exists.

Only on a few services which are part of the negative list will be exempted from service tax.

Some of the services on which service tax is not applicable are

Services by Govt
Admission to entertainment events
Metered cabs, radio taxis or auto-rickshaws

Service tax is now part of our day to day life. We eat in restaurants, stay in hotels, and take various kinds of services every month/year and if you calculate the total amount of service tax you pay, you will be amazed to see the number.

4. Excise Duty

A few years back, when I used to see the budget speech, I eagerly waited for the income tax-related announcements and wanted to know is 80C limits have been raised or if tax limits are changed. I happily ignored “excise duty” related announcements because frankly speaking, it made no sense to me.

How does it matter if to me if the excise duty on mobile handsets was increased? I never understood what all that means. However now I know how important excise duty is for the govt and what is it related to common man.

Excise duty (also called CENVAT) is the tax which is levied by govt at the time of manufacturing of the goods. It’s as simple as that. It does not matter if you hire someone to manufacture the goods or you do it yourself, but if you manufacture some goods, you will have to pay the excise duty if your turnover exceeds Rs 1.5 crore.

Now obviously, the excise duty is a cost for the manufacturer and it’s eventually passed on to the consumer. If excise duty didn’t exist, the prices of the goods would come down by that much margin.

So assume you start manufacturing some goods at mass scale, and if it’s in the list of the “excisable goods”, which means goods on which excise duty applies, one has to pay the excise duty to the govt. So if we take an example of cars, as it’s a big-ticket item, even a slight change in excise duty means the prices go up by a big amount.

See the example below

excise duty on cars

Excise Duty on Petrol & diesel

Let’s understand this better with petrol & diesel prices. The raw petroleum which is bought by the oil companies is the base price. After that when they refine it and convert it to the usable petrol and diesel, VAT and Excise duty is applied which increase the final price of the petrol, add to that the dealer commissions and we get the final price which we pay.

The chart below shows the breakup of petrol prices (for the year 2014).

excise duty on petrol

Source: Livemint

Excise duty is one of the biggest revenue generators for the govt because the amount of manufacturing which takes place all over the country is huge.

5. Customs Duty

Customs duty is the tax levied on the items imported from other countries to India or exported out of India. So when you buy something from Amazon US and want it to be shipped to India, you are actually importing it, and hence a custom duty will be charged separately.

Below is a duty rate for various products categories which is taken from this website

Category / Product to Import	Total Duty Rate
Laptops, Notebooks, Computers	14.712%
Tablets, iPad	28.852%
Laptop Battery	23.852%
iPod, Music Players	28.852%
Software CDs and DVDs	10.300%
Computer Printers	14.712%
Electronics	28.852%
Hard Disk (internal)	6.300%
Hard Disk (external)	14.712%
Web Cameras	28.852%
Computer Processor	6.300%
Internet Modem	14.712%
Other Computer Peripherals	14.712%
Cables and Wires	23.852%
Television Sets (TV)	28.852%
Movie CDs, DVDs, and Blue Ray	28.852%
Video Games and Game Consoles	28.852%
Mobile Phones	~18%
Phone Accessories	28.852%
Digital Cameras and Video Camcorder	28.852%
Camera Lens (Photography)	28.852%
Sports Equipment	14.712%
Books (Educational)	Free (No duty)
Car Parts	28.852%
Toys and Games	28.852%
Stationery Items	28.852%
Cosmetic Goods	28.852%
Hand Watches (Wrist Watches)	28.852%
Sun Glasses	28.852%
Apparel (Clothes)	28.852%
Fashion Accessories	28.852%
Artificial Jewellery	28.852%
Shoes (Retail Price < 1k INR)	21.782%
Shoes (Retail Price > 1k INR)	28.852%
Kitchen and Dining	28.852%
Food Supplements, Body Building	28.852%
Medicine	28.852%

No Custom duty up to Rs 25,000 while travelling back to India

Note that if you are coming back to India, then up to Rs 25,000 worth of goods can be brought back without any customs duty, but beyond that, you will have to pay the duty. This is applicable to most of the items. You can read more about this below in an answer given by Jai Veer on Quora

custom duty India rules

We have now covered major 5 taxes which needed more detailing and explanation, now we are going to see other taxes, but we will now see them in a crisp manner and not go too much into detail

6. Professional Tax

Professional tax is levied by the state govt for all the salaried employees and some professionals like CA, Lawyers, etc. If you see your salary slip, you can see the amount of professional tax deducted. Note that the tax slab depends on the state in which you are working and the amount of salary you have per month.

Every state has different slab rates. Below is an example of a few states.

professional tax slab

Many states do not have professional tax, for example – Punjab, Uttar Pradesh, Rajasthan, Haryana and many more.

7. Capital Gains tax

Capital gains tax is the tax which is levied on the gains which are raised by the sale of a capital asset like property, vehicle, jewellery, bonds, land or machinery.

This tax is not applicable each year, but only in the year when the capital asset is sold or transferred to some other party. The gains are categorized as either short term capital gains or long term capital gains depending on the duration you hold the property.

Here is a very good video on this topic which explains capital gains.

The calculation for this tax is not very straightforward and involves a bit of work, hence we are not covering it here. As of now, just understand that if you purchase a property at cost C , and sell if after some years at sale price S. Then your capital gains will be calculated and you will have to pay tax on that.

Cleartax has a very good tutorial on capital gain, which is worth reading if you want to learn in detail.

8. Entertainment Tax

Entertainment tax is the state-level tax levied on the tickets for the cinema and other entertainment shows. It’s also levied on the stage shows, amusement parks, and many sports activities. Most of us can relate the entertainment tax with the movie tickets. If you see your movie ticket closely, you will see that a good chunk of the cost goes into the entertainment tax.

Maharashtra charges one of the highest entertainment tax at 45% and I am not very happy with that because I am a movie buff. However, some relief for me, because I see a lot of Marathi movies too (which are exceptionally well most of the time) and which does have entertainment tax (regional movies generally don’t have entertainment tax in the home state).

Below you can see the slab rates for all the states in India for entertainment tax.

Entertainment tax slab in India

9. Stamp Duty

Stamp duty is a kind of tax which is levied when a legal document is executed. Most of us can understand it in real estate terms. So when we buy a property and we execute the agreement to sale, the stamp duty is charged as a percentage of the property value which is mentioned in the agreement or the govt ready reckoner rates whichever is higher.

Most of the time this stamp duty is in range of 4-6% depending on the state. This stamp duty is paid every time a sale is made in property, which means if the same property exchanges hand 5 times in 10 yrs period, the govt will get the stamp duty 5 times. Below is the slab rate for stamp duty in various Indian states.

Note that this data is a bit old and there might be slight changes at present, so please consider the chart below only as a reference point.

stamp duty rates India

Hence, this way stamp duty becomes a revenue source for the state government.

10. Property Tax

Property tax is the tax paid by property owner every year. This tax is a local municipal level tax and the rate is decided by the local municipality. The amount of tax depends on various factors like the size of the property, kind of property (residential or commercial), age of the property and many more.

Just for reference, in a city like Pune, I know that the property tax for a 2 BHK flat comes around Rs 8,000 to Rs 15,000 approx.

Conclusion

Apart from the taxes above, there are various other small taxes that are paid from time to time like toll tax, dividend distribution tax, securities transaction tax, luxury tax, and Octroi. We have not covered them in this article, but you can read about them separately

Let us know what do you think about the tax system in India and if you feel you are over burdened with taxes?

How mutual funds operate internally and have strong structure ?

Posted on February 15, 2016November 15, 2019 by Jagoinvestor

Today, I want to help you understand how a mutual fund operates in layman language and how its structure looks like. How various entities come together to create a mutual fund.

There are a lot of investors who are new to mutual funds concept and they have just heard about the mutual funds. All they know about it is that some investors pool in their money in mutual funds, which invests in markets by a fund manager and they get very good returns. While that’s a simple explanation, I today want to inform you about the details and how things actually are structured, which makes mutual funds one of the safest instruments and highly professional, and leaves almost no chance of fraud in mutual funds

So let’s get into the entities which comprise of a mutual fund.

1. Sponsor

The first entity is the “sponsor” of a mutual fund. It’s a person or the corporate body which initiates the launch of a mutual fund. You can see this person as the promotor of the company, who is the first one to think about the company. As per SEBI, the sponsor should have a good reputation, great professional competence and they should be financially sound to become a sponsor.

They also need to have at least 5 yrs of experience in the financial services industry and should contribute 40% of the AMC net worth (we will soon see what is AMC). The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the schemes beyond the initial contribution made by it towards setting up of the mutual fund

2. Trustees

The next thing you should know is that a mutual fund is created as a public trust and registered with SEBI. The sponsor appoints the trustees which look after the trust and they are the owners of the mutual fund property and assets.

However, the role of the trustees is not to manage the day to day affairs of the mutual fund, but only to regulate the mutual fund. They make sure that everything is happening as per regulations and the money invested is managed as per the objectives set by the mutual fund. The trustees act as a protector of unitholders’ interests.

As per the SEBI rules, At least 2/3rd of the directors of the trustees have to be independent directors who are not associated with the sponsor in any manner.

3. AMC (Asset Management Company)

Now comes the main thing.

AMC means the Asset Management company which actually manages the investor’s money and takes the decision of investing the money. The AMC is appointed by Trustees. AMC does the fund management and charges a fee for their services which is borne out of the investor’s money (that’s why expense ratio is there)

The AMC has to be approved by the SEBI and the Board of Directors in AMC must have at least 50% of Directors who are independent directors. So an AMC functions under the supervision of SEBI, Trustees and the board of directors.

Some rules set by SEBI

As per rules set by SEBI, An AMC (also referred to as fund house) can’t use the same broker to buy more than 5% of the securities. Just like we use a trading account to buy and sell securities, in the same way, an AMC uses a broker to buy and sell securities in large quantities, but they can’t buy a bulk quantity with the same broker, which makes sure they can’t have any “arrangements” with one of them.

So when you say HDFC Mutual Fund, you are referring to the Trust. The AMC for HDFC Mutual Fund is “HDFC Asset Management Company Limited”. So all the investment decisions of buying and selling the securities are taken by the AMC and not HDFC Mutual Fund (the trust)

Below you can see the details of trustees, sponsor, and AMC which I took from the HDFC Mutual Fund website

AMC is responsible for floating a new mutual fund scheme, and inorder to do that, they have to follow rules prescribed by SEBI and require the signature of the trustee.

So the HDFC Top 200 fund was floated by HDFC Asset Management Company Limited (AMC), but owned by HDFC mutual fund (the trust). It is the AMC that hires all the fund managers, IFA (agents) who helps in sales, and all the employees who work at the AMC offices.

4. Custodian and Depository

Here comes the interesting part.

The securities which are bought and sold by the fund manager, it’s actually not in the custody of AMC, but another entity called custodian or the depository participant. It is registered with SEBI and has the access to the securities.

A custodian keeps the physical securities (like GOLD and any physical certificates) and any Demat stocks/units are stored at Depository level.

A custodian is also responsible for keeping an eye on all the corporate actions like when is a stock declaring dividend, bonus issue etc in the stocks where fund has invested. So an AMC just focuses on the decisions like buying and selling and all the task of managing, storing of actual securities happens at the custodian level

Note that an AMC can have more than one custodian for various kinds of securities, like in case of HDFC AMC, the securities are with HDFC Bank LTD (one of the custodians), but for their HDFC Gold ETF, the custodian is Deutsche Bank A.G which stores physical gold.

As per regulations, Sponsor and the Custodian must be separate entities which make the mutual funds a very safe instrument and fraud is almost impossible.

5. Registrar and transfer agents (RTA)

Finally, comes to a very important entity called as Registrar and Transfer agents(RTA), which are appointed by AMC

These RTA are the entities that carry out all the clerical work like processing of applications, processing KYC of investors, issuing unit certificates, sending refunds, processing redemption orders etc. So you must have heard about CAMS and Karvy, which are the RTA agencies for mutual funds. So some AMC’s give contract to CAMS and other AMC’s have given it to Karvy. The RTA charges a service fee for the work they do.

So for example, HDFC, Birla, ICICI, SBI are serviced by CAMS, whereas Reliance, UTI, Axis mutual funds have chosen Karvy as their RTA. Note that all the AMC offices also carry out the clerical tasks like if you want to change the address in your mutual funds or add a nominee, you can go to AMC office directly or their RTA

Below is a snapshot of what all mutual fund companies servicing is done at CAMS at the time of writing this article

This completes the high-level structure of mutual funds. There are various other small entities that are sub-parts of these bigger entities but let’s not get into that as of now.

By looking at the above structure you can understand that a lot of care has been taken to design the mutual funds and at various points, the conflict of interest does not arise.

Are you investing in mutual funds?

Mutual Funds are wonderful products and especially for long term goals. You can now start your mutual fund’s journey with Jagoinvestor if are planning to invest in mutual funds.

Why is ICICI bank charging redemption fees on Payback points usage?

Posted on January 10, 2016November 15, 2019 by Jagoinvestor

This is a guest post by a reader Prithvi, who wanted to share his views on the redemption charges by ICICI bank on the payback points. Here goes the article which was sent by Prithvi to me over email. We would like to have a discussion on this topic and see what everyone else has to say about this.

–
Hi Fellow Investor

This is Prithvi. I wanted to share few thoughts I have about the ICICI bank and its redemption charges on usage of Payback points.

ICICI Bank is probably the best private sector bank in this country, it is because of them that the banking scene in this country has progressed so much.

PAYBACK is probably the best loyalty program in India, before PAYBACK, people never even thought that reward points meant anything and PAYBACK was the reason that this changed in India.

Now, there is one thing that this bank is doing that is not ethical. ICICI Bank is looting its account holders with the name of PAYBACK.

PAYBACK is a loyalty reward program with ties to several major brands in the country. You can earn PAYBACK points when you shop online or offline with many outlets, Future group outlets are one of them, Brand Factory, Pantaloons, Home Town, Central. Online you can earn and spend PAYBACK points at eBay.in, MakeMyTrip.com etc, to name a few. You can also earn PAYBACK points with your ICICI Bank Debit/Credit Cards and also ICICI Internet Banking. Note that PAYBACK and ICICI Bank are different entities

American Express also offers a card with which you can earn PAYBACK points.

Now, what’s unethical here? Let’s look at how you can earn and spend points.

Ways to earn PAYBACK points

Swipe your PAYBACK card at partner outlets
Enter your PAYBACK number at partner websites
Use ICICI Bank Credit/Debit Cards/Internet Banking for Purchases
Use American Express Cards for Purchases

Ways to spend PAYBACK points

Swipe your PAYBACK card at partner outlets
Enter your PAYBACK number at partner websites and confirm spending with a PIN.

Now, there are 2 categories here

Non-ICICI Bank Account Holders
ICICI Bank Account Holders

Steps For Non-ICICI Bank Account Holders

Enter your PAYBACK number/Mobile Number on the website(e.g eBay).
Enter your PAYBACK PIN to confirm. (4 PAYBACK points = INR 1)
If you are purchasing an item that costs INR 1000, you have 2000 PAYBACK points, you will get INR 500 discount and you have to pay only the remaining 500.
The transaction completes for free

Steps For ICICI Bank Account Holders

Enter your PAYBACK number/Mobile Number on the website(e.g eBay).
Enter your PAYBACK PIN to confirm. (4 PAYBACK points = INR 1)
If you are purchasing an item that costs INR 1000, you have 2000 PAYBACK points, you will get INR 500 discount and you have to pay only the remaining 500.
The transaction completes, but you are charged a redemption fee in your ICICI account.

Here is the problem.

PAYBACK confirms that its redemptions are free of charge and also confirms that PAYBACK does not charge for redemptions.

ICICI says that they have a right to charge for redemptions because they have a tie-up with PAYBACK.

ICICI PAYBACK potential Scam

Now let’s look at a scenario where it gets a little complicated, if you have a PAYBACK card from Brand Factory and you also have an ICICI Bank account and both of them are linked, this is when ICICI begins to loot you.

If you earn points at Brand Factory, the points get credited to your PAYBACK account and now when you spend those PAYBACK points, ICICI charges you a redemption fee.

ICICI PAYBACK scam points

This is blatant robbery. ICICI has no right to charge PAYBACK users for redemptions. Please listen to this audio which was created by me to explain my views on this topic.

ICICI Bank says that it has the right to charge users for PAYBACK redemptions when contacted by email.

PAYBACK confirms that it DOES NOT charge its users for redemption.

Please share what are your views about this?

Why your credit report remarks matter more than high credit score?

Posted on December 31, 2015November 20, 2019 by Jagoinvestor

So, you have been reading a lot about CIBIL these days and you have got the impression that having a high credit score like 800 or 850 is a key to get your kind of loan?

If that’s the case, let me break your myth that having a high credit score is not a guarantee that you will get a loan from a company. Look at the following comment and you will understand what I am talking about

Dear Sir,

I have taken the PL of Rs.1.5 L from HDFC and get settled of amount Rs.15 k in 2013. In March 2015, I checked my CBIL score, it is 813 however loan status is settled.

Recently I applied for PL of Rs.5 L in ICICI but it gets rejected based on previous settled loan. I don’t get this, when my CBIL score is 813 then how its get rejected. Kindly guide me how could I get PL as its v.urgent for me.

Regards

What is CIBIL remark and score?

In case you are new to this CIBIL concept. I suggest you read this article or watch this video below from the Cibil team.

It will help you understand the concept of the credit bureau and credit report. Once you view the video, then you can move ahead.

Your credit report remarks matter more than your Credit Score

Let me share with you a personal experience. My brother had taken a bike on loan a few years back and I was with him in the Bajaj showroom where I asked the executive if they really looked at CIBIL score (CIBIL was new around that time). The executive shared with me that they don’t look at a credit score, instead, they look at the remarks on the report and that is what matters most along with your other factors.

It was really a new thing for me to know that a credit report does not have that much Importance compared to the credit score in your loan approval process.

Credit remarks vs. Credit Score

Let’s understand both the concepts and the meaning of these two things

What are Credit Remarks on your report?

If you have 3 different kinds of loan accounts (1 home loan, 1 car loan, 1 credit card). In that case, you will have the remarks for each of these loan accounts and the current status. Imagining you have closed the loan accounts, the remarks may say “Settled” , “Written Off” or “Closed”, out of which the first two are bad remarks. At times, if you are not able to pay off the loan, the loan guys will try to persuade you to settle the loan with a lesser amount and close the chapter.

However note that it’s a short term solution to just get away with the problem. Eventually, the remark will be marked as “Settled” or “Written Off” and in future when another lender looks at your report, he will come to know that you didn’t pay the full/partial amount of loan outstanding.

written-off-status-cibil

At this point in time, even if you have great salary or a good credit score (we will look at it below), they are going to reject your loan application.

What is a Credit Score?

Credit score is a number between 300 and 900, which signifies your credit worthiness and how likely are you to default on paying your loan installments. A low credit score means that there are higher chances of you defaulting on the loan payments. This credit score calculation is a trade secret and no one knows the algorithm of how it’s calculated, but there are various factors that are considered by the credit bureau which its calculation.

So one can still have a high credit score (the chances of paying their future EMI’s regularly), but still their past remarks will have a greater impact on their loan evaluation process. While a score of 750+ is desirable (as per CIBIL around 79% loans were given to those with CIBIL score of more than 750), don’t think that just because your score is higher than 750 means that you will surely get a loan.

cibil score 750

In the same way, if yours is less than 750 (like 600 or 720), but if your credit remarks are clean, you will most probably still get the loan, considering you qualify on other parameters like (salary, other EMI etc)

So while credit score gives a future insight, the credit remarks gives insight into the history.

4 other factors because of which loan application rejection can happen?

If you are a guarantor for a loan which is already defaulted. Though you have not taken the loan directly, your application might get rejected if you have become the guarantor of a loan by your friend/relative and they have defaulted.
If you are too dependent on credit already (means if you are over-leveraged). Imagine if you are already paying 50% of your income on EMI’s and have many different kinds of loans running. Even then your application might be rejected.
You don’t have enough tax payment history. If you have not been paying your taxes regularly, then it’s tough for the company to ascertain your paying capacity, hence, make sure you file your returns regularly and properly
Too many unsecured loans, if your loan portfolio has too many unsecured loans (credit card, personal loans) then it’s not a good sign and makes you look a credit hungry customer. This might lead to rejection.

So what’s the learning?

So what’s the learning out of this?

The main thing you should focus on is to make sure that your credit report does not contain any bad remarks and if there are any, then you should take actions to rectify it. It will by default help you in improving your credit score. Don’t get obsessed with increasing the credit score. If your credit score is above 700 and your report is clean, you are 95% good to go. Beyond that, if your score is higher, it’s a great thing. But don’t over-focus on it.

Before applying for any kind of loan, make sure you apply for your credit report and score before few months and analyze it to find out if you need to fix it or not. Over the long run, just keep paying your dues on time and do not abuse your credit utilization and you should be good in the long run.

Let me know if you have any queries about this.

ICICI launches “Smart Vault” – Robotic technology in bank lockers

Posted on December 21, 2015July 20, 2019 by Jagoinvestor

ICICI Bank has recently launched “Smart Vault” which is a cutting edge robot managed locker service. There is almost no intervention with the bank staff and the security is very high. Watch the video below to understand how it works.

Here is how the “Smart Vault” is operated

Locker owner will swipe their debit card and enter their ATM PIN
There is a biometric authentication required
You will then enter a private room where a robot will bring the locker in front of you
You can open your locker with a unique key, provided by the bank. For added safety, you may also choose to have an additional personal lock on your locker.
Once you are done, you can keep your belongings back in the locker and robotic technology will take it back
You may leave the locker room once the “Thank You” message flashes on the kiosk screen

The vault uses robotic technology to access the lockers from the safe vault and enables customers to access their lockers at any time of their preference,” the statement issued by ICICI Bank, country’s largest private sector lender, said.

In case a customer has more than one locker, the interface allows customers to choose which locker they want to operate.

The lockers will come in different sizes and the cost will depend on the size of the locker and the city location where the locker is located (linked to real estate prices) icici smart vault size

As of now this smart vault is launched in Delhi, but soon it will replicate in other cities as well. Its a great thing because its a new innovation from ICICI bank on the locker service.

What do you think about Smart Vault service and the robotic technology used? Would like to avail such kind of lockers by paying a higher premium rents?

No claim rejection for life insurance policies older than 3 yrs – IRDA

Posted on December 6, 2015November 25, 2019 by Jagoinvestor

There is very good news for those who have bought life insurance policies (especially term plans). From now on, life insurance companies will not be able to reject claims for any policy which is 3 yrs old.

Yes, you read it correctly.

no claim rejection for life insurance policies older than 3 yrs

No Claim rejection after 3 yrs

If your policy is 3 yrs old, no matter what happens, the life insurance company will not be able to deny the claims. There was an amendment in the sec 45 of the Insurance Act 1938, and due to that now onwards a policy can’t be denied a claim because the policy-holder gave some wrong information.

As per IRDA, the company has 3 yrs in hand to detect any misrepresentation or misstatement from the customer side and reject the policy. However, once this period is over, the insurer will have to settle the claims.

What this means is that those investors who were highly suspicious of insurer’s intention and always kept looking at the claim settlement ratio numbers don’t need to worry now.

While this seems to be great news, one should think of what kind of implications will arise out of this change. I can think of a few of them

1. It will not be easy to buy life insurance

The major impact of this change will be that now the medical tests might get more details checking a lot of things. Till now insurers were bearing all the costs, and I think it will happen in future also, however, I think this will result in higher premium amount, which I think investors will not mind because now there is a guarantee of claim settlement

2. Chances of Fraud in the life insurance space

Already, there are many frauds that happen in life insurance space from the customer’s side. I remember an episode of Crime Petrol, where a man planned his death so that his family can get the life insurance money, however, he didn’t get the money because he was not able to execute the plan.

However, with this new change – the chances of fraud and misrepresentation can increase. Imagine a smoker or a person involved in risky activities. A lot of people like these to not disclose these facts because their application might get rejected or the premium might rise. So a lot of people suppress disclosing this fact and it’s going to be a hard time for companies to figure out these things. There will always be few cases which will not come under their radar.

What do you think about this latest development? If you hold a life insurance policy already, how do you see this new change?

Sovereign Gold Bond Scheme Launched – Here are 6 important Facts

Posted on November 5, 2015November 25, 2019 by Jagoinvestor

Today I want to share some quick facts regarding Sovereign Gold Bonds which was announced in budget session and recently mentioned by our Prime minister.

RBI is going to issue something called Sovereign Gold Bonds for investors who want to benefit from the movement from Gold prices. It’s an alternative way to invest in gold apart from buying physical gold or through gold ETF or gold Mutual fund.

These bonds issue is part of the market borrowing program of govt of India, where it tries to borrow money from the public for the long term. So to understand it in brief, govt wants to borrow money from those who want to invest in gold and they would return back the money after X number of years which will be linked to the price of gold apart from a small interest.

Sovereign Gold Bond Scheme 2015

10 FACTS about Sovereign Gold Bond Scheme you should know

Now let’s understand quickly what Sovereign Gold Bond Scheme is all about and some high-level important points every investor would want to know.

1. Issued by RBI and hence it’s safe and secure

These bonds are issued by Reserve bank of India and hence it carries a sovereign guarantee by Govt of India.

So in a way its 100% safe and secure and there are no chances of fraud or any issues happening in the future.

However, you need to know that the bond value is linked with the gold prices and hence the value of the bond can increase and decrease in the future depending on the gold price movement.

However, whatever is the maturity value will be paid to you and the guarantee is only for that. There is no assurity for any minimum value payment or any promise of return. One can hold the bonds in a single name or joint name as per preference.

2. First Batch of bonds available from Nov 5-20

As per a report, out of Rs 15,000 crore of bonds, the first batch of Rs 1,000 crore bonds are available from Nov 5 and the last date for application is Nov 20. The bonds are available for only residents Indian and NRI’s cant buys it. The bonds will be available at selected banks and post offices designated under the scheme.

I was not able to find exact locations, but I think all the major PSU banks in every city and some big post offices will be the contact point if one wants to purchase these bonds.

Below you can see a sample form and how it has to be filled. You can also download the form from his link

Sovereign Gold Bond Scheme form sample

3. Amount of investment and Tenure

The minimum one has to buy 2 gms worth of gold bonds and the maximum can be 500 gms. So every normal middle-class person who wants some exposure in gold can buy it. The initial issue price is fixed at Rs 2,684 per gram. Which means a minimum initial investment would be Rs 5,400-5,500 at least.

Note that price fixed is a simple average of the closing price of the 999 purity gold, published by India Bullion and Jewellers Association Ltd (IBJA).

The bonds will be issued with an 8 yr tenure, however, an exit option will be available after 5th year onwards. The bonds can also be traded on stock exchanges if you have it in Demat form. However, I think it’s not going to work for most of the investors because that will get too complicated.

Also, you will be able to trade the bonds on markets only if the volumes are very good, otherwise it will be locked away and you will be able to get back the money only after the 5/8 yrs of time. You can read detailed FAQ’s on this scheme here

Also note that these bonds can be provided as collateral incase, you need any loans.

4. You will get interest of 2.75%

You will get interest of 2.75% interest on the initial value of investment (not the market price) every 6 months. I have not gone in details, but I think the way it will work is that if you invest Rs 1,00,000 in these bonds, then every 6 months you will get 50% of 2.75% of Rs 1 lac as interest, which would be Rs 1,375

5. Taxation on returns and maturity

Note that the interest you earn every 6 months will be taxable in your hands. Also at the time of maturity, the long-term capital gains will be applicable, which means that after applying indexation, you will have to pay 20% tax on the returns. Note that because KYC is done properly, you cant escape this.

6. KYC requirement

You will be able to buy these gold bonds only after the KYC is done for you. In simple terms, at the time of application, you will have to provide your identity and provide your PAN or Aadhar card etc and the payment can be done electronically, with cheque/DD or even CASH.

However, you will not be able to hide your identity. This will surely discourage those investors who want to convert their unaccounted money (CASH) into white money.

7. Investment in Paper or Demat Form

You can purchase the bonds in paper format or Demat holding as per your preference. Means if you want the bond in paper format, you will get a receipt and a bond that you can keep in your locker or at home and at the time of maturity you can give it back. Or you can hold it in Demat form and not worry about keeping the bond safely.

Who should not invest in these gold bonds?

I think that 5-8 yrs tenure is a long tenure and you can earn much better returns in this long term. Equity mutual funds would deliver better returns compared to this scheme. Hence if you are a young person below age 40, and are looking at wealth creation as your main goal, then you can give a miss to this scheme.

The return on the scheme (2.75%) is not to be considered and the gold returns historically have been around inflation only.

If you look at the below chart, you can see 5 yrs CAGR return of the gold investment. Note that for the tenure of 2000-2010 the returns have been very very good, but then if you look at someone who invested in the year 2010, they have just got a 7% CAGR return, which is very much in tune with long term gold returns.

gold 5 yr cagr return

So if we look at the optimal use of your investment to generate a decent return, I personally dont consider this as a great investment product. You can skip this.

Who can think of buying these bonds?

Now if we look at the other side, There are many investors who are very attached to gold and really want to invest in that. No logic will move them and no conversation of CAGR will make sense to them. So for those investors who were anyways going to buy physical gold or Gold ETF, can look at this scheme as a good alternative.

Anyways your investment value will move as per gold prices and on top of it, you will get 2.75% interest which you do not get in case of physical gold or gold ETF/funds. The best part of this scheme is that you don’t have to worry about the quality of the gold or where to store it as its all in paper format and no one is going to steal it from you.

The money will only come back to your bank account only which you have provided at the time of investment.

However, note that the investment in these bonds is going to be mainly illiquid in the very short term. If you buy physical gold, you get that liquidity in your hand and if you need money urgently you can sell off the gold. You will not get it here.

So overall, you are the right person to pick if this scheme is for you or not.

Please share what are your views on this scheme. Do you think it’s going to be a hit among investors?

9 ultimate checklist to know if your financial life is on track or not?

Posted on September 21, 2015January 10, 2020 by Jagoinvestor

Let’s quickly see today what I call as a good checklist to find out if your financial life is on track? Are you doing well? When can you say that your financial life is an ideal financial life?

What are those parameters?

Is high income good?
Is having low expenses great?
Is having 50 lacs in saving’s great?

A lot of investors do not even know if they are doing good, bad or just average.

checklist of good financial life

I know its very subjective to say if someone is doing well or not and no one other than you should make the final judgement, but still lets look at some high level points which should be present in a good financial life. Atleast you can get a sense of how you are doing on few parameters.

Lets see how many of these are true for you.

1. You have positive surplus each month

The first indicator I think is very simple and very important – “Are you left with a positive surplus by the end of the month or not?”. Its as simple as that. Unless you are left with some surplus (income – expenses), it makes no sense just to brag about your salary itself. What will matter is if you are having a good positive surplus each month or not.

And I am talking about a decent surplus, like 20-30% at least. So if you are earning Rs 80,000 a month, but you are left with just 2-3k by the end of the month, please don’t say you are left with surplus. It should be at least 15-20k, because this is what will help you in building your wealth. If can surely say that you earn a lot and spend like a king and enjoy life like anything. Well that’s great and its surely a great thing. But not having a surplus is surely a big negative point.

Did you pass this check or not?

2. Your net worth is going up on yearly basis

Is your net worth increasing on yearly basis? Are you getting wealthier over years or not?

Are you wealthier as compared to 5 yrs back?
Are you wealthier as compared to 3 yrs back?
Are you wealthier as compared to 1 yr back?

I am not saying that be highly rigid about 1 yr. It’s totally fine if your graph is a bit down for few months or last 1 yr, but as a general rule, it should be moving up over the years (especially if you are young and moving towards your retirement)

If the answer is YES, then fine – you are doing great, else there is something you need to fix. Your net worth would keep going up and up in two cases. First is when your investments are doing well and the interests and returns you earn on it add up, this happens mostly in later part of your life, when money already have reached to a level and now the compounding.

The other case is when you keep investing out of your surplus each month and its very important in initial years of your life, because only when your net worth reaches a respectable level, you will be able to feel the power of compounding and its effect on your net worth.

Did you pass this check ?

3. You are not heavily dependent on loans to pay your bills?

If I take away your credit cards with the condition that it will be returned to you only after 3 months, will you panic?

I am sure many investors will panic and start wondering how they will manage now. Note that said “heavily dependent” and not “heavily using”. Personally I use credit card a lot and frequently, but you can take away my credit card and never return to me and I will not even care for a minute (after I block it).

However, some people are so dependent on credit card, like its oxygen for them. Apart from credit card, a lot of people get into this cycle of

Need money for some purpose
Take personal loan
Keep paying the EMI to clear off the loan
Need money for some purpose
REPEAT !

This is a very unhealthy sign in your financial life and you should just not be doing this because its messing up your credit report and it will cause you insane amount of trouble getting future loans

Did you pass this check?

4. Are you protected by external risks which will destroy your wealth

In technical language, I mean to ask if you have taken life insurance, health insurance, added life insurance if you have home loan or not.

Imagine, that you are saving money for your down payment of your dream house, but you don’t have a health insurance (here is a checklist on how to buy health insurance) and suddenly some accident occurs which requires hospitalization, what is going to happen?

All your money which you have accumulated over the years for your dream home will just disappear and you will be back to square one, wondering how will you achieve your goal now?

If you didn’t take sufficient life insurance and you have a home loan EMI, then you are completely gone!, then your family will either have to pay the money from somewhere or vacate the house.

As per a rough calculation, if a male aged 30-35 yrs earning 10 lacs a year, wants to take sufficient life and health insurance, he can get a 1 crore worth of term plan and a 5 lac health insurance for around Rs 20,000 a year easily. Thats just 2% of his yearly salary. I think you should calculate, and judge if its worth covering these risks or not. By the way taking your life and health insurance is a one time task.

Do you pass this check or not?

5. You will be able to handle sudden surprise expenses without external help

Do you have enough resources to handle surprise expenses or any unplanned expenses? Imagine following scenario’s

Your father needs 75,000 by tomorrow
You spouse needs Rs 1 lac which will come back after a 1 month.

Are you in a situation to arrange this money instantly (at least 2 months of salary) or not?

By instantly, I didn’t mean that it should be lying in your saving bank account, but can you at least arrange for this amount yourself without any external support or not is the main question.

Many people I know will have NO as the answer, because they either have locked the money in financial products because of tax saving or they just don’t have it. So this point actually tests how you have managed liquidity in your financial life.

Are you able to pass this check or not?

6. You are investing a minimum of 10% of your income consistently

This is related to the first point. But still lets give a better framework to it. Are you investing at least 10% of your income consistently or not? Ideally it should be maximum but can you afford to invest, lets give a number which looks possible for everyone.

So if you earn Rs 50,000 per month, you should at least be saving Rs 5,000 a month, that too consistently.

Please don’t say you started a recurring deposit of Rs 5,000 few months back, BUT later stopped it because your kids school fees had to be arranged. That does not qualify!

I think any investor has to first learn and experience what it feels to regularly invest and next comes the conversation of mutual funds, generating high returns and all that.

That’s why, I think once you start your career, you should atleast open a recurring deposit and let it run for a year. First see how the wealth accumulation looks like, and how does it feel your wealth growing.

This will give a good base to start your wealth creation journey.

Anyways, Did you pass this check or not ?

7. You are not over-leveraged beyond the danger levels

What percentage of your income goes into paying EMI’s?

The higher it is, higher is the leverage. And beyond a level, its highly dangerous. Imagine a family whose total income is Rs 1 lac a month, but they are paying an EMI of Rs 72,000 and managing everything else in the rest amount.

Imagine what all can go wrong with this situation?

A lot of people commit themselves to too much debt which looks manageable in that moment, but in long term they are a big pain.

Double Income, No kids families with too much debt

The best example I can give are double income couples, who take the loan considering that both husband and wife will keep earning and the incomes will keep rising.

However few years down the line, if wife stops working due to the new born kid (most of the cases), it becomes very tough for them to manage the EMI, and other expenses.

What is the problem here?

They planned for the “best case” and not the “worst care”. So when you plan your loans, the future looks rosy, everything looks perfect – but life is not like that. You have to consider all angles possible and in advance think about all things which can happen in general and then position yourself towards it.

As a thumb rule (which obviously does not make sense in every situation) is that one should not be paying more than 40% of their income in EMI. Keep a lot of breathing space in between. This is not applicable to you, if you are highly adventurous.

Did you pass this check or not?

8. You are earning real return in positive number

Are you earning positive real return on your investments? Which means that your post tax returns are beating inflation.

It makes no sense to earn 8% in a fixed deposit, out of which 30% will be deducted as tax (if you are in 30% tax bracket), and left with 5.5-6% return at the end of the day, whereas prices of all things are going up by 9% inflation.

So when you tell yourself – “I have invested in FD”, in reality you have only earned a positive absolute return, but a negative real return.

Its exactly like, you can buy apples for Rs 150/KG near your home, but you went to that favorite shop 5 km away here you get it cheaper at Rs 135, only to realise later, that you spend Rs 40 in petrol.

So as a good practice, keep limited amount in saving bank, fixed deposits (especially if you are in higher tax bracket) and more and more in asset classes which will give you higher return (with high volatility, not risk) like Equity mutual funds, stocks or real estate.

Did you pass this check or not?

9. You are on a high level clear what you want from your financial life

This is one parameter which I like and its not related to numbers.

So here is my question to you – “Do you have clarity on where you are headed in your financial life?”

You have been working from last many years, and you are saving money properly and everything is in place, but what is your game? Where are you headed towards?

Let me explain you with an example

When I called one of our clients from Bangalore, just few days back – he told me he is headed towards creating his ONE crore networth in next 4-5 yrs and he is already 40% done.

I loved this, because what he has done for himself is that he is kept all the clutter out and he is highly focused on what is wants out of his money. He knows his game !

So are you headed towards becoming “Debt free” and working towards it?
Are you headed towards buying a house in next 5 yr?
Are you headed towards building a regular income of Rs 40,000 per month in next few years?
Are you headed towards spending 50% of your income each month and enjoy your life to fullest without worrying for future?
Are you headed towards setting up a business along with your job?

So whatever it is, it has to be very clear. Don’t go in silence when I ask you where are you headed? A lot of investors face this problem of not knowing what are they doing, why are they doing it, what they want to achieve ultimately, everything is vague and very unclear. Don’t be like that.

Are you able to pass this check?

How much did you score?

Out of these 9 points, I would like to know how much did you score and if you are happy with it? Where can you improve and whats your plan towards it? Do you think this is a good checklist which you should look each year once and ask yourself about it.

Please share your views about this article in comments section.