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Social Media Reactions When Market Falls – Humor

By on May 24, 2016 in Behavioral Finance, Miscellaneous, Tips & Tricks | 0 comments

When the market falls it worries a lot of stakeholders… except the RIGHT PLANNERS. Those who know markets will fall and provide them the opportunity do not care. But, the majority still worry. And, in this internet age, falling markets also catch social media’s eye. The sellers of equity (direct or through MF) and investors receive a lot of advice and consoling messages. I was recently looking at my WhatsApp collection and found these hilarious pics. Just have a look at these with my comment. First, when markets go down a bit or after a massive intra-day fall: Then words of advice… “SEE ALL MARKETS HAVE FALLEN, SO NOTHING TO WORRY” After markets fall more… some prayers may help Then more advice by agent/broker justifying his creation … the hype Market goes a little more, Agents/Brokers vanish or do not pick phones Then you react somewhat like this… Media Guys mix up everything Finally, you revisit the basics and find a Real Financial Planner After a long discussion, the engagement takes place… But this time, you are well understood and looking to commit for LONG Well, this was the humorous side of a market fall and like this one, not all stories have a happy ending. That is why at TheWealthWisher (TW2) we keep taking you back to the behavioural part of investing and ignore the thrill. If you want to indulge in thrill you go to casinos. Investment is a serious business and we make it stress-free. Share your comments and views below. Till next post…See you in a...

Simplifying the Rule of 72

By on Apr 27, 2016 in Banking, Budgeting, Financial Planning, Tips & Tricks | 0 comments

  I am sure you know the thumb rule of 72. We all use it to know when we can double the money or what rate of returns we ought to earn to double our money. But do you know why 72 is used and not other numbers like 71 or 72? Well, it depends on the frequency of compounding. If the compounding is done annually (example calculating mutual funds returns across 5 years time horizon), the rule of 72 is best. But in case the compounding is done on a daily basis (your savings account), it is best to use the rule of 69. The integer 69 or 69.3 to be precise is most appropriate but it is not used since these are not “math-friendly”. It means it is not divisible easily, so the rule of 72 is used for its friendliness. 72 = 2 x 36 or  3 x 24 or   4 x 18 or   6 x 12 or   8 x 9 71 = ??? 70 = 2 x 3 or 5 x 14 or  7 x 10 69 = 3 x 23 This is the reason 72 is used most widely. The simplest way to use Rule of 72 : We all love to create mental goals and normally the  first one is to “how will I reach my first 1 Cr mark”. You can harness rule of 72 for this. It can help you plan and project your future.  Let’s say you’ve saved up Rs 25,00,000, but you want to be a crorepati. You simply need to double your money twice (25 lakh double is 50 lakhs and 50 lakhs double is 1 Cr).  With 6% interest, that will take 12 + 12 years, so 24 years. If you can somehow get 12%, you’ll have your billion in 6 + 6 years, so just 12 years. Twice the return earned, half the time killed.  Excellent. Suppose you cannot take the risk and will earn only 6%, then what? If you’re starting with Rs 25,00,000 and also investing Rs 500,000 a year, you can add  Rs 5000,000 in ten years, your original Rs 25,00,000 will have nearly doubled, and your earlier annual saving of Rs 500,000 investments will have had time to grow.  You can roughly estimate you could be a crorepati within 10 years, even at the 6% rate of return. Remember these are just approximate calculation and for exact numbers use a compounding calculator. Rule of 72 works best with a steady rate of return. How precise is Rule of 72? The below chart calculates the difference between the observations obtained from Rule of 72 and in Actual, at given Rate of Return: So it works precisely if the Return range is 6% to 18%… Isn’t this what we aim for! Share with me when and who taught you the rule of 72 first? Was I able to convey an extra bit which will help you? You’re views awaited in the comments...

The Negative People Who Know Nothing About Money

By on Apr 19, 2016 in Behavioral Finance, Miscellaneous | 0 comments

I usually refrain from writing about negative things, but the negative people around, who just complain and complain about money are really intolerable. They have given up to the fact that they cannot do much about the financial mess that they have created, so they just keep avoiding a real pep talk or a person who wishes to help them. And, from their negative approach person who wants to learn about money, wants to take decisions and take control of his financials, suffers a lot. We call them “negative money people.” As a financial product advisor, we encounter a lot of individuals who have own money theories. They sometimes take you to the past when they thought making money was easy (it never was, and it never will be). Sometimes they will narrate how globalisation paved the way to bribes and their theory on gold as the best investment as a father especially if you have a daughter. Sometimes their clock will be stuck on some present issue like “oh JNU episode, the government seems to go, withdraw all mutual funds”. As an investor, you are also surrounded by these people at home, office, neighbourhood or social friends. These people will make you uncomfortable and try to influence your financial life. And the first step is to recognise them before helping them. Let me elaborate what kind of negative money people we find around us.       1. The Whiners – Oh poor me… What could I have done when bank rejected my loan application… The whiners are the self-sorry people who will always wail their failures. They are not worried that people will think bad of them as they seek solace and sympathy. They want other to hand over handkerchief when they always whine about their failures. The fallout: They want you to learn from their fear. Is this even logical? They make you gloomy even if you want just to enquire about their experiences. If you are not confident about your financial decisions, they may confuse you. How to handle them: If you have identified a whiner, the best way is not to encourage them. Say a polite “thank you for sharing” and smile as you are unaffected. Take them to positive discussions and show them you are not interested in their repetitive grief stories.       2. The Blamers – I didn’t do it… It’s the PM The blamers are never at fault. It is the world who is against them. The mild versions of schizophrenics who think everyone is roaming around to stab them. They will put the blame for their failures on anyone but not themselves. They can blame economy, family, luck, timing anything, but will never find a fault in themselves. The fallout: They will make you hate the deserved people, the rich people, the successful people and people from you can learn. They will make you weak so that you will learn to disown your decisions and shift responsibilities. Remember successful people own responsibility. They control. How to handle them: These are the tough ones as the habit of blaming can be deep originating from their upbringing and family conditions. If you show them that it’s their fault, you may put the relationship in danger. The best way is to stay positive and calm.        3. The Complainers – “Oh the petrol is so expensive, so I switched from car to bike.” They will always have a reason for what they do, and the reason will be some negative thing. A complaint about everything. The world is indeed full of faults but is it their job to pinpoint it and bring it to the table when someone is talking about important things like money. They will complain about the way markets lose money and how ISIS is influencing dollar trade, but it does not mean that they will influence everyone with all this general negativity. The fallout: They waste time as they demand a lot of attentions and talk time. They are simply people who chose to ignore the positive side and then it becomes the duty of others to bring them back from the negative world. How to handle them: Complainers need help, and they can be helped. They just feel pleasure in complaining, and they can be molded to become positive articulators. One need to talk to them about this and with little counseling they can amend their communication. It’s a common saying that you are “average of 5 people, with whom you spend your time with,” so it is important to choose the company. But there are limitations. You can decide your friend but not relatives. Same way you cannot decide your neighbour but can decide what and what not to talk with them. So always try to identify people around you especially when you are dealing with money. In the end, I would like to say that money matters should be discussed only with positive minded people or professionals….. good luck…..!!!! Share your views and comments below if you have also encountered a person like this. Also, tell us what do you think about this article. Bye till the next...

Angelina Jolie & Household Budget

By on Apr 11, 2016 in Budgeting, Financial Planning | 2 comments

Won’t say Angelina Jolie is expert at budget, especially after hearing that her marriage ceremony with Brad Pitt cost millions, but this caught my eye when she said this in an interview with CNN in 2005- “Save one-third, live on one-third, and give away one-third.” – Angelina Jolie Now, I am a huge fan of her for her acting, direction, philanthropy and her works on cancer awareness and my respect towards her grew a bit when I saw this comment of hers on the internet. We all know how spoilt these celebrities are and especially when this week  I saw Rakhi Sawant addressing a press conference with a ceiling fan, calling PM Modi to ban ceiling fans. But here is a gem of a word from a fabulous personality praised, idolised and worshiped by millions across the countries. 11 If you analyse her comment, is this kind of budget possible and rational in real life? Maybe not, I agree but yes- ratios may differ but this how money should be spent… in real life. Few people may have crazy income figures that they can give one-third as charity and can live king size life on one-third but the middle class has to balance charity and living. The real take away is: Living on one-third Or maybe 40 % or maybe half of your income? It has really become a characteristic of being middle-class to spend 80-90% of income in first 15 days of the month. After 15th of the month, the vehicle gets petrol bought on the credit card as cash has evaporated and you live on salary to salary basis. “I will plan for retirement next year” or “I will start SIP when I get next increment is how people react”. It all shows a problem in your monthly budget. You need to learn to live on a fixed budget and should have a contingency fund to cover large and unexpected expenses. You should be aware and able to fix where your monthly budget is leaking. This is key to everything financial in life- to have money in your hand. Saving the one-third That’s the best part of your income that a financial planner loves. Saving means similar to “paying yourself” maybe after a few years. We have always advocated that savings should come first before expenses. You should save what is being agreed upon between you and your financial planner and then whatever remains is your budget for expenses. For this, you should have an Automated Savings Plan in place. My personal take is depending on liabilities and professional risks, a rate of 30% plus of savings over a long horizon is healthy. Charity I don’t think we Indians need knowledge on Philanthropy. All I can say all religions have prescribed how one should deal with his income when it comes giving away a part of back to the society. Be it anonymous or a loud one, make sure to donate to the needy ones and causes. So What’s the Ideal Budget I will just put some real budgets for you, but the best budget is one which you and your financial planner agree with. Some forms of budgets in real: The 50/30/20 Guideline — 50% towards fixed costs, 30% to financial goals (saving/investing/debt payoff), 20% to all other flexible spending (wants, likes, charity, leisure money). This is one of the most popular methods. The 50/20/10/10/10 Guideline — 50% towards expenses, 20% to retirement, 10% to long-term savings, 10% to short-term savings, 10% fun money. This is how secure job investors budget mostly. The 35/15/10/15/25 Guideline — 35% for housing EMIs, 15% for transportation, 10% for saving, 15% for other debts, 25% for life. A typical metro-living, living in house/flat (recently purchased) budget. And as per Dave Ramsey’s – The Total Money Makeover: Charity: 10-15% Savings: 5-10% Housing: 25-35% Utilities: 5-10% Food: 5-15% Transportation: 10-15% Clothing: 2-7% Medical/Health: 5-10% Personal: 5-10% Recreation: 5-10% Debts: 5-10% And before I end a small story on budgeting: A man was walking along a deserted beach at sunset. As he walked, he could see a young boy in the distance and noticed that the boy kept bending down, picking something up and throwing it into the water. Time and again he kept hurling things into the ocean. As the man approached closer, he was able to see that the boy was picking up starfish that had been washed up on the beach and, one at a time, he was throwing them back into the water. The man asked the boy what he was doing and he replied,”I am throwing these washed up starfish back into the ocean, or else they will eventually die.” “But”, said the man, “You can’t possibly save them all, there are thousands on this beach, and this must be happening on hundreds of beaches along the coast. You can’t possibly make a difference.” Without pause, the boy reaches down, picks up a starfish, and throws it into the ocean. As it hits the water, he says, “I made a difference for that one!” So, there are a lot of ideas on budgeting and it can be simple or complex as one wants. But final applaud to Angelina Jolie for being a money head. She has a beautiful mind. Share your comments and stories on budgeting...

All Questions Answered on Retirement Planning – Part 3

By on Mar 20, 2016 in Financial Planning, Retirement | 6 comments

The work of Retirement Planner is not juggling you in different asset classes and hope to see results. There are some time-tested theories, which are used by them to achieve desired results, by minimising the risk, choosing the asset properly and rebalancing these asset classes. No, it is not like your normal investments – it is more precise and advanced. Retirement Planning  some features of financial planning but the process is different as the goal is different. This post will help you understand this and will make you differentiate between other styles of investments. This is the third and last post on Retirement Planning Question and Answer Series. Let’s start answering few more questions: How is Retirement Planning different from Financial Planning? Financial planning is a process of setting objectives vis-à-vis your current income. It involves assessing your currents savings and assets, estimating future financial needs, and making plans to achieve monetary goals. Retirement Planning goes beyond financial planning or providing investment advice and is aimed at achieving financial security for retirement. It is a holistic solution aimed at enabling people to achieve their financial dreams both before and after retirement. How is a retirement advisor different from an insurance agent/wealth advisor/investment planner? While an Insurance Agent/Wealth Advisor/Investment Planner has a targeted audience with a specific objective either to cover life risks or ensure better returns on investments, the scope of a Retirement Planner is focused on advising solutions aimed at retirement security. This includes the entire gamut of services in terms of Advisory, Insurance, Asset Allocation, Retirement Pension Investments, Distribution of Estate (Will Planning) & Retirement Planning. What is wealth? Books have been written over this. But scientifically- Wealth is the difference of value between what you own (assets) and what you owe (liabilities). Wealth enables you to achieve your financial goals by increasing your assets and decreasing your liabilities. It is the overall reserve of assets (cash, fixed assets, savings etc.) which you have after meeting your liabilities. How does Retirement Planning help in accumulating wealth? A well-conceived retirement plan ensures you meet your expenses adequately at various stages of your life including your liabilities and contingencies. Wealth creation is a lifelong process and so is retirement planning. Accumulating wealth and simultaneously incurring cost for meeting your needs warrants that you have proper wealth creation and management strategies in place. Retirement Planning is one of the most important strategic exercises that you need to do to accumulate wealth. Can retirement planning beat inflation? The very first aim is to beat inflation. Inflation can erode your retirement corpus and diminish the purchasing power of your savings. It’s necessary to absorb the impact of inflation with a sound and prudent Retirement Planning strategy in place. It’s important to make realistic projections for the rising rate of inflation and adjusting your savings accordingly. Seek professional / expert advice to create an investment portfolio which gives you higher returns and helps you meet rising costs and inflation. Are regular / traditional savings like PFs, PPFs, EPFs etc. not enough to take care of life after Retirement? No, regular savings including PFs, PPFs, EPFs, bonds or any debt instrument are no longer enough to see you through your life after retirement.  The returns from these regular default investments are guaranteed but low in comparison and are not sufficient to beat inflation and market volatilities. Besides, the quantum of savings made in these instruments might not be enough if future requirements are not carefully considered and planned for. Today Retirement Planner uses Equity Investments coupled with your risk appetite to devise a plan which can lessen return volatility and beat inflation. What is asset allocation? Asset allocation is essentially an investment strategy to stabilize risks and returns by choosing investment instruments according to your financial goals, risk tolerance and time horizon. Asset classes have different levels of risk and return variability. Each asset class may perform differently over time. Successful asset allocation requires finding the proper mix of assets to balance reward with an acceptable level of risk. Why is asset allocation critical for retirement planning? Asset allocation is critical for long-term investing and retirement planning as it can help absorb the impact of market fluctuations and balance your tolerance for risk.  A downside of a specific asset class is usually neutralised by an upside of another asset class. This way you can enjoy the upside and de-risk the downside to a great extent. Asset allocation is one of the most important steps in retirement planning and research has shown that 90% of returns are on account of asset allocation decisions. How can asset allocation absorb the impact of market fluctuations? Prudent asset allocation can help you ride out the ups and downs of long-term market performance. No single asset class will outperform another consistently and no single asset allocation strategy may be right for everyone. Some investments may be up while others may be down helping minimize the overall potential impact of market decline and enable you to reach your retirement goals smoothly. How can I balance my risk tolerance? High-yield assets typically experience high volatility. You can balance these assets by investments with lower but guaranteed rates of return (like debt or sovereign instruments) to protect against large-scale decline in value. How do I go about my asset allocation? Prudent asset allocation can help you balance your appetite for risk within your timeframe and...

Budget 2016 : The New Things, Changes & Impact

By on Feb 29, 2016 in Budgeting, Tax | 0 comments

The extra day (29th Feb) of 2016, was well utilised as I love following important events. Well, I could not get more as both events belong to subjects close to my heart… movies and finance. I woke up to 88th Academy Awards (Oscars) and ended with decoding Budget 2016. This Oscars ended 20 years wait for Leonardo de Caprio and it was a proud moment when Priyanka Chopra was on the stage of the Dolby Theatres. The Budget wasn’t so glamorous, but it scaled high on “filmy” parameter. Market danced throughout the FM’s speech and lot of debate will  happen in coming days to find if this was an “aam aadmi budget” or the “corporate friendly”. My main interest was to decode what as investors we got .. directly or indirectly? So, here we go, highlighting and decoding the budget 2016. Just a bit of caution… Budget is just proposals and lot of details come out when fine prints are read and discussed. So these are not final things until the 2 Houses pass the bill and President puts his signature. What’s Not Changed The tax slabs are same: What’s New Dividend tax: Dividend receipt of over Rs.10 lakh per annum to be taxed at 10% which is over and above DDT. Do not confuse it with dividends from MFs. These are related to dividends received by way of shareholding in corporates. Service tax hike: Introduction of Krishi Kalyan Cess of 0.5% on service tax for the welfare of farmers. First it was Swach Bharat and now this one. Effective tax rate will be 15.1%. Be ready for more in coming years. Tax sop for NPS subscribers: No tax on lumpsum withdrawal of up to 40% from NPS corpus. The NPS proceeds were taxable and this was a drawback of this scheme. But now 40% of maturity becomes tax-free in hands. A reverse has happened with EPF proceeds. Earlier they were tax-free (if 5 years completed in service), but now only 40% amount will be tax exempt. Encouraging real estate investment: First time home buyers to get an additional deduction of Rs.50,000 on interest component of EMI.  So now Rs 2.5 lakhs can be deducted from interest on housing loan from the gross total income. Value of such houses should not exceed Rs 50 lakh. A VDS Scheme for people having black money. They can legitimise this by paying @ 30% + 7.5% surcharge + 7.5% penalty during 1st June to 30th September 2016. Amnesty provided from scrutiny. Infrastructure Cess of 1% on Petrol/LPG/CNG cars, 2.5% on Diesel Cars & 4% on SUVs and 1% on other vehicles above Rs 10 Lakhs. TDS of 1% on goods bought or services availed in excess of Rs 2 Lakhs. What’s Changed Health, Motor premium to go down: Service tax to be exempted on premium of general insurance policies. That means, health and motor insurance policies will get a bit cheaper. Service tax exemption: Service tax to be reduced from 3.5% to 1.5% on premium of single premium annuity policy. (I do not recommend these at all) STT hike: Security transaction tax (STT) to be increased from 0.017% to 0.5% in option trading (call option, put option) (I do not recommend these at all) LTCG tenure: Tenure of long-term capital gain (LTCG) on transfer of unlisted shares to be reduced from 3 years to 2 years. Relaxation for house owners: Deduction amount claimed against rent paid to be increased from 24,000 pa to 60,000 pa. So if employer is not paying HRA, you can get this deduction form gross total income. Relief to small taxpayers: Additional rebate of Rs.3,000 for an individual having annual income of up to Rs.5 lakh per annum. Now, such individuals can avail total rebate of Rs.5,000 in an assessment year. Extra Points to be more informed 25,000 crore for bank recapitalization in FY16-17. Banks are currently having a great pressure as their NPAs are mounting. They wanted a way out and they got a bit. But remember, this is tax payers money. Government to raise Rs. 15,000 crore through NHAI bonds in FY16-17. Overall 70K Crores for roads. Happy Driving. Four public sector general insurance companies to be listed. Government has option to reduce stake in IDBI below 50%. Government is going to get lots of money. Will they use it productively? GAAR to be implemented from 1 April 2017. FIIs will love it. Fiscal deficit target of 3.5% for FY16-17. Thumbs up… In fact I am waiting for a surplus Budget. Voluntary disclosure of income for black money. A bit boost to GDP. Department of Disinvestment to be renamed as Department of Investment and Public Asset Management. Hope the new name will evoke more ownership. Aadhaar Bill to be introduced in current session of parliament. It is almost giving statutory powers to this So until a formal Social Security System comes, this will get you government care/treatment/subsidies etc. No face to face scrutiny. The IT department will do away with calling individuals and CAs to answer. The electronic system will replace this. So corruption will be minimised. Also, enhanced interest on delayed refunds arising out of Appeal Only raised to 9% from 6%. Assessment Officer to be made responsible for additional SEBI to come up with new derivative products. (I do not recommend these at all) As I said more clarity will come when the parliament and experts...

All Questions Answered on Retirement Planning – Part 2

By on Feb 21, 2016 in Financial Planning, Retirement | 2 comments

This is the second part, where all your questions on Retirement Planning are being answered, we plan to dig deep in terms of planning the retirement. There are questions like what’s the correct age to retire, what time plan should be implemented, who can assist me in planning etc… here we start one by one: When is the right time to retire? There is no right time for retirement. Deciding whether or not to retire is a decision that only you can take. If your financial situation, health, age and feelings about your job all point towards retirement, it’s time to call it a day. Ideally, you should work as long as you can. Based on individual requirements, financial stability and liabilities, you should plan your retirement accordingly. Normally in India, we consider age factor as retirement. Well it was then when it was assumed that person would fulfill his responsibilities towards his kids (education and marriage), and then can settle. But things have changed now as careers, marriages, kids all have shifted little late in age. So a person can think differently if he is financially secured. Hence, planning has become more essential. Why do I start early with my Retirement Planning? It’s never too early to start. Wealth creation is a time-taking process and usually lasts throughout your lifetime. So the earlier you start the more time your money gets to multiply. By starting early with your retirement planning, you can benefit from the power of compounding, manage the longevity risk and maximise your returns from high-risk and aggressive investments options.  It’s always wise to start saving early. If I start late, can I still plan my retirement? The early bird catches the worm. Starting late with retirement planning poses many difficulties for creating a strong corpus and sufficient wealth to see you through retirement. However, the good news is that it’s never too late to start. If you are late, all is not lost and you can cover for lost ground. You can take the following measures to make up for starting late: Cut down expenses. Seek expert advice / professional help to create a roadmap for you to maximise your savings without compromising your standard of living. Choose investment options that give you higher returns. It is good to have a working spouse to generate an additional income stream. Look for additional income through another job / business simultaneously if possible. Start immediately. What should I look for in a retirement / financial planning advisor? Determine the quality and tenure of his / her work experience. What are his / her qualifications?21 What services does he/she offer? What is his / her approach to building a financial strategy for your financial goals & retirement? Will he/she be the only person working with you? Or engagement would mean other professionals to collaborate. What are the costs of working with him/her? An important consideration is whether you are comfortable with a prospective retirement planning professional. Consider the following: Does the person have time for you regardless of how much money you have to invest? Does he or she listen to you and respect your opinions? Does the person use financial jargon or explain investments to you in simple terms? Is he/she offering a personalized solution? Is he offering you advise or trying to sell products and solutions that are available to him? Does he have a long-term approach? How do I select a retirement advisor? Search the Internet for top retirement and financial advisors. Talk with friends, family, neighbours, or business associates to get recommendations. Look around your community for financial specialists with offices nearby. Talk to your accountant or any other professional about retirement advisors they know and respect. Specifically look for a Financial Planner and not an agent to look after your investments. What can I expect in my meeting with a retirement advisor? Your retirement advisor will need some time to ask you questions and understand your goals. Some questions he or she may ask include: What stage of life are you in and what are your current earnings and savings? What are your specific financial goals such as saving for a child’s education, marriage or planning for retirement? How much risk are you willing to take with your investments? Expect that he will ask you lot of questions on your income and expenses. He will not be free so expect that he will tell you his remuneration. In the next and the last post, we answer following queries: What is the difference between Retirement Planning and Financial What is wealth? How is it relevant for retirement planning? How does Retirement Planning help in accumulating wealth? Can retirement planning beat inflation? What is asset allocation? Why is asset allocation critical for retirement planning? How do I ensure that my retirement savings do not erode over time? Till then keep learning and asking your what comes to your...

All Questions Answered on Retirement Planning – Part 1

By on Feb 11, 2016 in Financial Planning, Retirement | 0 comments

At the edges, it all falls apart, is a common saying but with a deep meaning. When it comes to retirement, if you are not planned to face the real world, life can be hard for you and family. So this time, I have tried to play question and answer session with myself and have tried to ask and answer all queries on retirement planning. What lies in it? Is it relevant? When should I start? Where to invest? Etc. all questions answered in a single reading. So here I start with – What is retirement planning? Retirement planning is the process of planning and managing your short and long-term finances to help achieve your financial dreams both during your working years and retired life. It involves analyzing your financial objectives, current financial position and expected future cash flow to develop a comprehensive retirement roadmap. Why is retirement planning required? Without a judicious retirement plan in place, you run the risk of outliving your savings and not being able to maintain the desired lifestyle in your retirement years. You also run the risk of not being able to accumulate enough corpus for your dependents owing to unfortunate and uncertain events like death, disability etc. Retirement planning helps you determine how much to save today for retirement; how to invest your savings to get the desired returns; how to protect your assets  and provide for in case of unfortunate events and how to make judicious use of retirement income post retirement. What are the benefits of Retirement Planning? Retirement planning helps you maintain your desired lifestyle during old age. It helps you plan for key life stage events leading up to retirement. It provides financial security to you and your dependents by enabling you to make prudent investments during your working years. It also enables you to make the best use of your hard-earned money post-retirement. One of the key benefits of effective retirement planning is to cover for any contingencies arising from uncertain events which can compromise your ability to meet your financial goals. What are the types of needs and life-events to plan for? There are various kinds of needs and life events, some of which are listed below: Buying a Home Job Transition Parenthood Children’s Education Children’s Marriage Retirement Corpus Post Retirement payout Insurance Tax planning Is retirement planning relevant in India? With looming demographic challenges, India faces a swelling non-working elderly population. Further, as the life expectancy of Indians increases, the number of years in retirement is also expected to increase requiring you to fund a longer retired life. Also, with the joint-family system making way for the nuclear family system, self-support during non-working years is the new world order.  Rising costs for health care and other essentials means you need to save and invest that much more and with proper planning. Therefore, a planned approach to retirement is essential. How is retirement planning different in the Indian context? In the Indian context, retirement can only be achieved after a person has fulfilled his responsibilities towards his family (child’s education, marriage etc.). Therefore, retirement planning is not only about planning for a secure and financially independent retirement but also entails planning for key life-stage goals. It also necessitates providing protection against unforeseen events so that achieving these goals does not become a challenge. What is the process of Retirement Planning? Retirement planning is not an art but a definitive science which requires taking a 360-degree approach to studying one’s current financial health, long-term goals and risk appetite to design a plan that addresses the retirement and other long-term goals of an individual. It involves a step-by-step approach: Step 1: Identifying your financial and retirement goals Step 2: Analyzing your current financial situation Step 3: Risk Profiling Step 4: Asset Allocation Step 5: Investment Allocation Strategy Step 6: Periodic Monitoring and Rebalancing It is essential to seek expert / professional advice and create a comprehensive roadmap based on the different stages of your life to meet your financial requirements. Questions answered in next post: How is Retirement Planning different from Financial Planning? How is a retirement advisor different from an insurance agent/wealth advisor/investment planner? When is the right time to retire? Why do I start early with my Retirement Planning? If I start late, can I still plan my retirement? What should I look for in a retirement / financial planning advisor? How does Retirement Planning help in accumulating wealth? Few more questions… Including your...

Automated Savings Plan

By on Jan 26, 2016 in Behavioral Finance, Budgeting, Financial Planning | 0 comments

Aren’t these two words “Savings” & “Automatic” antonyms? Can savings happen automatically? My answer is with you – No. Savings do not happen automatic because of the very human nature of “pleasing yourself first”. One tries to dodge all hard functions first and tries to shift/delay the real painful measures. But we all know savings are must for present and future. So what if a mechanism is developed and implemented so that in the end a person is bound to save his chosen amount? This is called Automated Savings Plan, your very own ASP. “Automated Savings Plan” is an automated system where the contributor can transfer his savings moment he has a positive cash flow. This is done using various technological platforms, implemented with the help of Banks/Financial Institutions like Mutual Funds and deposit companies. A typical structure of can be like investing in the various combination of fixed deposit, recurring plans and mutual funds from the savings account in the first week of the month. So when a person receives his salary, a certain portion goes automatic to these savings instrument without writing cheques, filling forms and calling middleman every time. Why do you need an Automated Savings Plan (ASP) It is important to believe in the following equation: Income – Savings = Expenses If you are following the reverse one – Income – Expenses = Savings, then most likely the outcome will be “zero” or negative savings. So it is important to save for following reasons: To fund long-term goals like Retirement, Education, Vacations, Major Purchases like house or car or any other long term goal. To save for emergencies like career hiccups, medical problems and accidental events like robbery or disability. Get benefits/discounts offered when making full payments/cash payments. To show your kids/spouse that savings have advantages and help, they build this habit by showing that you are doing it too. Benefits of ASP No struggling with savings for long-term No delay/default payments for the loans. You will never say that “I don’t have enough to save”. Builds habit of being disciplined in personal financial matters. Keeps accounts separate for investments and expenses. The majority of it is automated, so no more juggling between different banks or remembering dates etc. Saves time and efforts. Just sit and let your money grow. How to set up an Automated Savings Plan The best way to set an ASP is from the bank account where you get earnings. The idea is to hold the bull by its horn. The moment you get an inflow, it should be directed to your savings instruments.   I have just put a snapshot of my ASP template which I use when I do my planning for the month. Do you have an ASP in place? If yes, share your learnings with us. If not, do you wish to plan it now? Share your views and concerns in the comments...

The Right Start for 2016

By on Jan 21, 2016 in Behavioral Finance, Financial Planning | 0 comments

After almost 20 days in 2016, I know most of you will already be haunting under guilt shadow of breaking most of the resolutions that you made for 2016. We take decisions in moments of spurts (like New Year) and wishfully think that lives would improve. But the old habits die hard and then we start breaking these resolutions as the reason fades. And, that is the reason resolutions fall flat at the end of the year. It’s better to make and follow rules and not decisions where the echo to break it sounds constantly in the second ear. However no studies have been done but my gut feeling says people are most guilty of breaking the resolutions related to – Health and Personal Finance. Health part I leave to professionals and pray someone helps me too): But in personal finance, I can help for sure. And to start with let’s put things straight – We will have no resolutions. The first month has still 10 days and let’s make most of these.  In the coming days before the year sets in fully, following things need to be taken care of, checked and planned. These are: (The list is for all so well done!!! From my side, if you have already satisfied any or all of the below pointers) My Goals Review: Not most but some goals may change or an alteration be needed for certain goals under fulfilment. You may addition (or demise) in family and the goals related to that person may require change. These need to be accounted and proper change must be discussed with your financial planner. Even modifications like change in vacation destination or car model need to be communicated. Year start is just the time to set the goals right. My Investment Options Evaluation: Although your financial planner must have done asset allocation and review as per schedule but you as a person have evolved during a year constantly in touch of the world and knowing new things. Is there any investment option or a venture you want to try, this is the time to communicate your financial planner. My Credit Worthiness Check: Each year we do small mistakes like bowing to calls to apply a new credit card, applying for consumer loans to avail benefits of a sale season or delaying some monthly payment. This is the time to evaluate what has been done wrong in past and making a mental note not to repeat these in new year to come. Credit worthiness is what makes you eligible for respect in eyes of people you deal your finances with. Protect this virtue with care. My Contingency Coverage Review: Have I made some use of my contingency fund? Or claimed any of my insurance policy? It’s the time to replenish the line of protection that you have used last year. Discuss with your financial planner, what needs to be done in case of insurance lapse or use of partial coverage. My Records Updating: This is the time to recheck if all your records are complete and all details are proper. All nominations are recorded and necessary changes have been made in will if required. If case of change in address, marital status, minor attaining majority or death in family member the changes in details have been made to necessary authorities. My New Rules related to Budget & Savings: The rules related to budget and savings are not exact science as people tend to learn and develop new ways when they start practicing. So if you wish to make changes to these, the New Year is perfect time start these. So in case you are planning to increase your savings by 10% or planning to increase savings by changing your cable plan or any other thing, just get started in January itself instead of procrastinating it. My Planning for Family & Society: It’s my personal experience that, successes in earning money or business has no real happiness if it is not shared with family and friends. Everyone needs time to relax, meditate for a while and laugh & play like a kid. These gateways need planning in advance. It’s time to put a calendar for 2016 in front and plan those escapes with the family. Plan the events that will benefit society like planting trees in your city or participating in city events. A bit of planning makes entire year a fun year. As I said no resolutions are required if you are following basic rules of financial planning. Just an overhaul and a tightening a screw here and there will make a great year ahead. Share your views in the comments section and your itinerary for the year...

How Assets Classes Behave in Real Life? A Pictorial Story

By on Jan 13, 2016 in Behavioral Finance | 2 comments

Recently I received a data how much returns assets classes gave for calendar years 2004-2014 – for a ten-year gap. And this was India specific data of assets we invest, advice and deal on daily basis. I also was eager to confirm what we get to hear from fund managers and finance gurus– Does investment yield in short horizons? Why Long Term horizon is prescribed in volatile assets like Equity, Gold and Gilt? Are safe assets like Government Securities safe in short horizon? Do you expect to get similar returns from FD or Liquid funds for 5 Years or more? Do your returns depend on year or month you choose to invest? Decking up the Assets (2004-2014) Decking is used as an analytical tool, where the subjects under study are decked up in ascending order or descending order. Here I decked each asset classified by a distinct color in descending order of returns that they gave in a  particular year. The decked image looked like this:   The first thing that comes to mind is that – Asset Class have very low correlation with each other. They can move in any direction based on the factors their price is determined, without any relationship to another asset. In fact if I tabulate the correlation it comes like this: Now a closer look at each asset class: Equity (Large Caps & Midcaps) Equity in its typical fashion either was on top or fishing bottom. That why to earn from equity one has to rely on time spent invested in the asset rather than time of investment. Debt (Short Term Debt & Long Term Debt) Typically they performed when equity funds did not like in year 2008 and 2013. Short term always had stiff competition with Bank FD, which is reasonable in a matured market. Bank Fixed Deposits Did not remain fixed in any year. Range for 10 year period is 5.5% to 10.3% with long lull periods of similar returns (2005 to 2007 & 2012 to 2014). When nothing works investor run for them (2013). Government Securities Although this asset is called “Risk-Free”, but gave very volatile returns in a range less than bank FDs. Money Market (Call/CBLO Market) Barring 1-2 years the range was 6%-7% without any major ups and down. Asset class that never topped means some other asset class outperformed every year. Hence you can invest here for short term and not look at fulfilling long term goals with this asset class.   Gold Is it shiny as it looks or sounds traditionally? Because out of 10 year 3 times it gave negative returns. But as it is a fact that commodities cycles are greater than normal equity cycles, the gold rallied from 2005 to 2011 and from then it has come down. And no signs of reversal are seen in present times.   Hope you like the study done on your favorite asset classes. I have not used more words and let pictures do the talking. Do share what you feel in the comments section....

Best Wishes for New Year 2016

By on Jan 1, 2016 in Miscellaneous | 0 comments

May the New Year brings joy, prosperity and happiness to You and Your Family.             From, WealthWisher    

Rules for Withdrawal of Employee Provident Fund (EPF) – All Scenarios

By on Dec 28, 2015 in Financial Planning, Fixed Income | 2 comments

EPF details are available on number of platforms, but rules related to withdrawal are still unclear. The subscribers especially one who are in private job, are not made aware by the employers about the rules of withdrawal. The EPFO allows number of opportunity wherein a subscriber may withdraw partially and based upon his needs can use the funds. These rules are summarised below: Hope its an eye opener and useful information. Share your views in the comments section....

When to Buy & When to Postpone? The Litmus Test

By on Dec 14, 2015 in Behavioral Finance, Budgeting, Financial Planning | 0 comments

You come home from office and wife starts the pep talk… Winters on the way … we need a room heater this time… you know last time you said “this is the last stretch and winters will be over soon”,… and it continued for another 15 days… not this time, please. And probably you are again thinking should you buy it or again postpone this year… This is just another classics of life when you have to commit a purchase or postpone it or completely reject it. And if it is a repeated demand of family (especially your wife) you need to explain the logic of your decision. But my point is how do you make a purchase? Do you purchase everything as per availability of money? Means you just say yes, when you have money and you reject when you are short of funds. Do you think this is the right way?… No for sure, if you don’t want to convert your house a warehouse of China made plastics and multiple obsolete equipments. The Decision Making Process How to take a decision to do or not to do something is actually a science. Several theories called by the name “Decision Making Theory” have been part of literature related to management and marketing. Remember the 8 steps of making a decision- identifying the decision, gather information, identify alternatives, gather facts for each alternative, list pros & cons, identify the alternative, take action & finally review the action. But is it really so complex… especially the buying/incurring expense decisions? The Layman’s Way to make Buy or Postpone Decision My family has always been a middle class as we were not made by economics policies started by Sh. PV Narasimha Rao in 1991. My grandparents were way ahead of time in terms of thinking as they were conversant with English, and read a lot especially my grandfather. And one of the learnings he gave me was – how not to be lured by the marketers. He said “don’t let them sell, you buy”. This means I had to be sure of what I want and what I wish to buy. And when I made mistake, he laid a simple process which I am going to tell you now. This was what he told me in year 1999, so he did not have guessed the Chinese invading our markets but still most of it is relevant: When you should be SURE of what you are BUYING The needy/priority one first- Are you sure you need this? If yes, is it the top priority? Are you happy you are buying it? Postponing is loss of opportunity- You are convinced that you will lose a great deal of time, money and effort if you don’t buy. Aware of impact cost of buying- You have limited money, so are you sure you are not sacrificing something else for this money. Feasibility of merchandise- is it for a fairly long time, hope you will not behave as it was a toy. Will it last long in terms of quality and changes in preference? You are sure this is the best price & time- Farmers waited for cattle fare to find the best livestock- is there an opportunity to save even if you have made mind to buy it. When you should be SURE to POSTPONE Yes vs. Stress Test– The stress accompanying the buying decision is not bearable you need to postpone or revisit the decision. When you make the payment the face turns gloomy, not a good sign health wise too. You do not have down payment– You need to have basic funds in hand, you have wings but you need air to push through. You already are in debt- You have exhausted the safe limit to repay or you have bad debt payment record, it is better to sober up first. You are not aware of usage- No point buying a car which will be garage since you do not know how to drive it. Postpone till you learn how to use what you are buying. Turmoil in present status– You are about to make a career transition or someone terminally ill in family or sentiments are volatile or atmosphere is dull or itchy- postpone. As I said, these are what a man read, experienced and gathered after a tough life. All reasons may not be scientific as they may have some spiritual indulgence. But, I see a great solution to a complex problem that we all face. Do you face such dilemmas? What’s your mantra? Did you find the above test interesting? Do share your views in the comments...

The Ratios: Your Financial Health Report- Part 2

By on Dec 7, 2015 in Financial Planning | 4 comments

In part one, we saw some of the basic ratios which can clearly see if a person’s finance is under stress or if he has the capability to plan for future. In this post we shall know more such ratios which look very simple to calculate. Once you have the numbers and you run the given below formulas, they will speak large volumes. The whole idea behind working on these numbers is to: See the current foundation strength (and weakness) in terms of current financial status. This gives a starting point to the financial planner to lay out a plan over the foundation. Picture the readiness of an individual to meet his future as per his goals and retirement. In investments, there are risks involved. The ratios identify the current and future responses to face these risks and counter them. Ratio related to Risk Coverage Life Insurance Coverage Ratio  The ratio shows whether a family is able to meet its living cost, other expenses and reach critical goals in event of untimely death of the principal wage earner of the family. The ratio is calculated as: Total Liabilities / Total Insurance Cover The ideal ratio should be 100%. And this can be achieved by taking a combination of Term Insurance policies and Personal Accident covers as specified by your financial planner. Many investors overlook this and leave their family unsecured in hands of creditors who never forgo their principal and interest. Ratio’s related to Liquidity 2. EMI Stress Ratio: also called as Debt Servicing Ratio Few goals, especially for salaried individuals can only be met by leveraging. For major purchases like House or Education involves taking loans and paying back for long-term. The ratio checks the outgoing towards loans vis-a-vis income. It’s calculated by: Total EMI / Total Income The Ideal Ratio should be less than 35%. The extent of EMIs also depends on the stability of job or business and age of the person. But an amount more than 35% can put pressure on accumulation for future goals and current family lifestyle. 3. Liquid Assets to Monthly Expenses Ratio – The Contingency Fund This ratio measures your ability to sustain a temporary halt in income. It measures numbers of months you can sustain if your income ceases due to any unforeseen event. It is calculated as: Liquid Assets / Monthly Expenses (Liquid Assets: Your savings in hand/bank and instruments which can be converted to cash to meet daily expenses.) The ideal ratio depends on your line of work and your family lifestyle. Ideally you should have cash for 3-6 months. Maintaining a contingency fund also help you to manage accidental expenses like replacing any household article in case of breakdown like a refrigerator, enjoying a trip with friends or medical requirements, without breaking your long-term investments or resorting to credit. However, you should really think before using the contingency fund and if you use it your first aim should be to replenish it. 4. Financial Assets Ratio Assets are classified as Financial Assets (like Shares, Bonds, Mutual funds, and Fixed Deposit etc.) and Physical Assets (Like Real Estate, Gold and other Precious Metals, Work of Art etc.). So if you plan to say start your own business, you shall try to ascertain what assets you have which can be disposed of quickly to generate capital. Financial Assets have better liquidity, flexibility, markets to exchange and easy to maintain. Financial Assets Ratio is calculated as: Financial Assets / Total Assets A higher proportion of financial assets is preferred especially when the person is advancing in age and closer to his goals. In total, we have discussed 8 kinds of ratios in this and previous post and their importance in financial life. I would urge that you run these calculations on your own finances and expect some interesting result. My experience has been that we all are aware of our financial situation but do not counter them as no such evidence is in front of our eyes. These ratio test help you see clearly your financial strengths and gaps which need your attention. Do share your views and interpretations in the comments...

The Ratios: Your Financial Health Report- Part 1

By on Nov 23, 2015 in Financial Planning | 0 comments

Before we start learning the important ratios or indicators of financial health, I promise I won’t bombard you with mathematical concepts or explain theorems. This will involve some basic calculations using addition, subtraction, multiplication and division and nothing more than that. If you have observed a pathological report, you will note the last column which says “Healthy Range”. This is the range where the test report observation should be of a healthy person. A reading above or below is an alarm for the doctor to decide your future medication. For us, as your financial health keepers the ratios are similar to the medical tests that doctor prescribes when you show symptoms of illness. We carry out these tests or calculate ratios to know your present condition and your future prospects. The figures used in these test are Income, Expenses, Assets and Liabilities. Each of the ratios is the interplay of these basic elements and when put to the test (when the ratios are derived and matched with what they should be), can open up a lot of hidden mysteries of one’s financial life. Let’s see how this is done applying some BASIC RATIO TESTS: So we start with The First Test– Savings Ratio or Expense Ratio Savings Ratio or Savings to Income Ratio determines what part of income a person is saving, as this saving can be invested for fulfilling his mid and long term goals. So if a Ram aged 40, is earning Rs 6 Lakhs a year and saves around Rs 60000/- his Savings Ratio is 10%.  (60000/6000000 multiply by 100). Savings=Retained income after expenses plus all money received from previous investments (eg savings bank interest or dividends from investments in mutual funds etc.). Alternatively, Expense Ratio or Expense to Income Ratio is the opposite of Savings Ratio. It determines what a person is incurring as recurring expenses for that year. So for above example the expense ratio is 90% (554000/600000 multiply by 100). Significance: These ratios measure the preparedness to meet long-term goals like retirement. The appropriate level of this ratio depends on the age of the person as in the early thirties and forties a person has more expenses and is likely to be servicing loans to accumulate assets like home or car. So to start from 20% from young age and going to 50% during early retirement days is a healthy sign. Clearly Ram in the above example will have a tough time ahead. The Second Test – Leverage Ratio In today’s scenario, it is likely that a person has acquired some assets through loans or savings and also he may be servicing some loans used to make large purchases like house or durables or he may be financing a larger expense like an education loan etc. So at a time a person should know if his assets are over his liabilities or he is in risk zone of servicing high liabilities. So Leverage Ratio = Total Liabilities/Total Assets. So Ram discloses that he owns real estate worth Rs 50 lakhs, which was bought for Rs 30 lakhs loan and still Rs 10 lakh of loan is pending. Also, he has investments and bank balance worth Rs 10 lakh and Rs 5 lakhs in PPF. He has credit card dues of Rs 1 lakhs and has to repay 1 lakh to his friend which he took as a loan. Ram’s Assets: Rs 50 lakhs + Rs 10 lakhs + Rs 5 lakhs = Rs 65 lakhs Ram’s Liabilities: Rs 10 lakhs + Rs 2 lakhs + Rs 1 lakhs = Rs 13 lakhs Leverage Ratio= Rs 13 lakhs/Rs 65 lakhs multiply by 100= 20% Significance: If your liabilities are more than assets it is alarming (Ratio above 100%). If the person is not adequately insured, in the case of death or incapacity, the person shall be in debt or the survivors will have to service the debts. This ratio is likely to be immediately high after a larger purchase. So it is a measure to see the debt servicing capability of a person. The Third Test – Net Worth Test A person may have assets of 1 Cr made from loans of 90 lakhs. This cannot be a good situation. It is important to check the Net worth of the person over a period of time. Also, all liabilities are not bad as they help to build assets which provide future revenues and valuation. So the financial position is measured using Net Worth Statement. This is not a ratio, but a figure to be compared over years. Net Worth = Total Assets – Total Liabilities So in case of Ram, his Net worth = Rs 65 lakhs – Rs 13 lakhs = Rs 52 lakhs The Fourth Test – Solvency Ratio A person can be insolvent despite having a good amount of assets. If the liabilities are high he will have a negative net worth. The extent of person’s can be calculated through his Solvency Ratio, Solvency Ratio = Net worth Divided By Total Assets Ram’s Solvency Ratio will be his Net worth / Total assets Rs 52 lakhs/Rs 65 lakhs multiply 100 = 80% Significance: The ratio measures the percentage of your Total assets to Net worth. As in the case of corporations, this ratio explains the quality of assets a person has and the cost, fixed or recurring, behind the accumulation of...

All you want to know about Gold Monetization Scheme 2015

By on Nov 2, 2015 in Banking, Fixed Income | 11 comments

This is Diwali time and as my family many of you will see your family gold that will be released from lockers and safes for LaxmiPuja. We Indians are classics when it comes to gold. All traditional investor fancy it, generations pass it, and everyone has it- You, me, your relatives, my relatives and above all the temples in our country. We do not wear it; we do not trade it, but we just accumulate it. Although people argue that no one wears gold these days, the import of gold shows a different story. India is a net importer, means- we need more gold than we produce domestically! And what does it yield? It is not a hidden fact that gold has not beaten the inflation. Hence, it is a negative asset. But still as a country we have it in tons… If you ask me I have stopped purchasing gold since last ten years as I don’t see any usage in future, but honestly admitting, I have a locker running to keep safe the family and gold received my wife at our wedding. But I think I will save the locker cost starting this year… Introducing the Gold Monetization Scheme 2015 The Government of India (GOI) is all set to solve this Gold Love Problem that we have. Very soon the Gold Monetization Scheme will be launched in which the investor will get interest on the gold that they wish to deposit with the bank or financial institution. It is very much like the savings bank deposit, but here you will get interest on gold in place of cash. The scheme was announced in Budget for 2015-16 and finally announced on September 15th and gained popularity when PM Modi introduced in his Mann Ki Bat Program. Features of the Gold Monetization Scheme The gold can be deposited by Resident Individuals, HUFs, Trusts, MF/ETF Companies. It can be in the form of bars, coins &jewelry excluding stones and other metals. The Lower limit is 30 Gms Gold with 995 fineness and no upper limit. Banks will accept the gold offered by investors. The gold has to be certified by Purity Testing Centers certified by Bureau of Indian Standards. They will issue the purity certificate. As on March 31st, 2015, 331 centers have been certified pan India. There are three terms prescribed: 1-3 Years as short duration deposit, 5-7 years medium term deposit and 12-15 years as long term deposits. The GOI will announce the rate of interest in coming 7-15 days possibly before Diwali. As estimated by market participants it will be in therange of 2 on the lower side for short duration deposit and can go high as 2.5% for long term deposit. Banks are free to decide the rate of interest. Bothe the principal and the interest will be ‘valued’ in gold. So if a customer deposits 100gms of gold at 1% interest for one year, he will get maturity credit of 101gms. The investor has to comply with KYC formalities of the bank. The clause for premature withdrawal and penalty will be announced by individual banks when the scheme is launched for subscription. The investor will have the option to take gold or equivalent rupees as per prevailing rate of the gold. The option will be decided while making the deposit. The rules regarding joint holders and nominations will be same as bank deposits/accounts. Since banks will offer the deposits, the grievances and complaints will be handled by RBI’s Banking Ombudsman. What happens to Gold that you deposited? The gold received by the bank will be melted down and can be used by banks to fulfill statutory liquidity deposit (CRR, SLR), may sell to generate foreign currency, convert to coins to sell, trade through exchanges and lend to jewelers and earn interest. Emotional Point to ponder: a lot of us have emotional linkages to jewelryespecially which is received through gifts or received from elders. So reactions are still awaited as the government is targeting the same gold reserve. Will we get practical enough to allow melting of a long time treasured gold? If not, the scheme may not be a hit. So this how the system will function under GMS 2015: So this is how you can open GMS account Step1– The investor goes to the bank to open a Gold deposit account with the physical gold. He is directed to the assigned Purity Testing Center for preliminary checking. Step 2– The center will conduct the preliminary test (XRF machine-test) and will intimate the investor of the approximate weight of gold. If he agrees, he will do the KYC and consent to melt the gold. If not, he can take back his gold. Step 3– The same collection center will clean the gold of dirt, other metals, meena, studs, etc. (these are handed to investor there itself) and net weight will told to the investor. The gold will be melted in front of him (viewing galleries will be provided) using the fire assay and purity of will be ascertained immediately Step 4– When the investor receives the result of fire assay test, here also he can refuse to deposit taking back his gold by paying nominal procedure charges. If he decides to invest, he receives a certificate of weight and purity of the gold. The center also reports to the bank. The investor approaches the bank with...

Type of Financial Planner – As Per Regulators Eye

By on Oct 27, 2015 in Financial Planning | 6 comments

You might ask, why I am endeavoring to differentiate between Financial Planners. This is because the type of Financial Planner you engage, has a direct bearing on SCOPE OF ADVICE you are bound to receive. Every day we hear about mis-selling happening at all levels, be it a bank or an individual advisor. How can you expect an industry to flourish if it suffers random attacks on the participating party? Hence regulator has clearly defined the types of financial planner and their scope of work which they can undertake for an investor. It is a known fact that different financial advisors have varying skills, capabilities, knowledge level and business model. So when a bank employee, a wealth manager, an insurance advisor or any financial intermediate, with whatever name it calls itself, sells a product and earns revenue from the product maker, their lies a conflict of interest. The seller may push the product which may be offering higher revenues and intermediary may choose to hide the risk involved. Hence regulator have intervened to define the intermediary or the person who is advising the product. The commission or the remuneration that an advisor earns on selling a particular product creates a push in the market. This sales push may not be aligned with the investor’s need. We are witnessing the same push that prevailed before 2008-09 in insurance industry and moment investors realized (read suffered) that, the sales have dropped now, even though the markets are soaring. But still we often meet people who burnt their hands with mis-sold insurance contracts. Hence regulators are very clear- There will be 2 intermediaries: Advisor: This person will not receive any commission or remuneration from the product manufacturer like mutual fund companies or insurance companies. He needs to be registered with SEBI and has to follow all regulations and duties as laid by the SEBI. Distributor: Will only execute the transaction and will earn revenue from the product maker. Shall not take the advisory role and shall confine itself to selling single financial product (if somebody dealing in multiple products he needs registration). They need not to get SEBI’s registration but require to fulfill the licensing requirements as required by the product, for eg to sell mutual funds the distributor needs to have mandatory AMFI Registration Number. A quick-chip here: These distinction is from the Regulator. But in reality market is mile away from what they think. I will very soon write a separate post on real financial advisors faced by the public at large. Traditionally there was no regulation, hence no differentiation. But since SEBI has clearly divided the roles- the new financial advisors and old ones are existing with following Business Models: Fee-Only Financial Planners or Advisors: This is like a practitioner aligning with you closely to work on your finances comprehensively. Like a planner they set up your budget, goals, investments and future reviews of portfolio based on the 6 steps of financial planning concept. They are capable of advising on all aspects of personal finance. They get compensated by one-time fee initially at the time of start and then as agreed upon for review of your plan and based on assets they are managing with you. They don’t get any revenue from the manufacturer i.e. any mutual fund company or insurance or a loan company. Hence they do not get any direct commissions from anyone and hence their advice is not influenced by revenue. Fee-Based Financial Planners or Advisors: These advisors offer both- Advisory and Execution. Hence they earn fees from clients and commissions from the companies for which they sell products. These are generally companies and regulation requires that they keep an arm length distance between the two function so that the bias of commission does not shadow advice. Both verticals need to function independently and full disclosure need to be provided to investors. Execution Only: They do not charge their investors and their sole remuneration is the commissions that they earn. The core function is distribution of multiple products. They sell almost everything like insurance, equity investment, loan products etc. They do their own short listing and promote products based on self-appraisal. They may second products with their own research and execution platforms like online services or dedicated relationship managers etc. Majority of Banks, Individual Agents and Companies with presence in multiple states fall under these. Which one will you choose? The answer to this question lies in just 1 question itself: Whose hands do you want to take care of your money? I will not dwell more on this subject as I leave it for future interaction between us. Yes I will provide you an answer to it after a while as this has been marked as an unfinished task for me. Till then keep sharing your...

Adopting Minimalism in Personal Finance

By on Oct 14, 2015 in Financial Planning | 4 comments

The festival season has started and get ready, as your monthly budget or some part of savings may go for a toss. Look at the newspaper in the morning, the number of papers have increased to accommodate advertisement to tempt you- to book a flat or change your vehicle or gifting jewelry to your spouse. The online retailers are all set to minimize their losses (yes majority are still in red) by throwing you never before prices by calling these by mouthwatering names like India Greatest Sale, The 80% Off Festival Sale and The Big Billion Day Sale… So howsoever hard nut (read miser) you are, the entire bunch of marketers including your family will be behind you to fall in a trap. Just read on social media: Snaping Deals Monday, Fliping Kart Tuesday, Amazoning Wednesday, Bankrupt By Thursday… What can you do? My answer to this will be- to stick to your long term planning and don’t deviate the long term investments. But in short term it’s a tradeoff between need/wants/family persuasions. Another aspect to it is Practicing Minimalism. What is Minimalism? It’s a concept where you stick to SIMPLE LIVING.Adopt frugality when you are purchasing a household article or consuming a service including financial services. You must have heard about “no to honking” or “no to plastic” campaigns, can you have “no to unwanted financial products” message running for you throughout your life. If you have heard the term Minimalism for the first time, here it is what it means. (Wikipedia) “Minimalism encompasses a number of different voluntary practices to simplify one’s lifestyle. These may include reducing one’s possessions, generally referred to as living simply, or increasing self-sufficiency, for example. Simple living may be characterized by individuals being satisfied with what they have rather than want. Although asceticism generally promotes living simply and refraining from luxury and indulgence, not all proponents of simple living are ascetics. Simple living is distinct from those living in forced poverty, as it is a voluntary lifestyle choice.” People practicing Minimalism, voluntary give up complex things, lifestyle and reduce possessions. I heard somewhere that a practicing minimalist is living on just 100 things which include his clothing, kitchen things and entertainment (I admit that my clothing including shoes and accessories are 100 plus ).   I don’t think we can do so, but minimum it is… the best it is… Adopting Minimalism in Personal Finance If you see carefully around, everyone forces youto buy or avail certain financial services or investments. The same LIC agents call you 5 time a year to sell any new launch product, the executives from banks will come with their sobbing story making you open one more bank account, your MF distributor wants you to invest at every market dip and telemarketers will be full of “zero processing fees/zero interest/zero documents” pitch (when will they launch zero EMI or zero payback scheme?.. just kidding) to make you fall again. Do you need all these? Where is the frugality in personal finance? Here are just few steps to start with: Avoid multiple bank accounts. If you are in private job and have changed it in past, you sure have multiple salary accounts in case you do not bother to close them. Do make a list and close all non-required or extra accounts. Soon it will be a problem from IT department too as things are going stringent.This year they had asked all bank account details in the name of the assesse. Next year they will ask balances and question transactions too. Why would you like to have more than one or maximum two credit cards, unless you are planning to go overboard your income and apply for settlement and screw your CIBIL score? Seriously my friend gone are those days when you could flaunt those golden or black cards with world like “privilege”, “platinum” or “titanium” written on them. Lot have been said and written about insurance but there is no doubt that you need to have just TERM INSURANCE with maximum two insurers. Rest is just insuring income of your agent and nothing else. One demat and trading account is all you need, if you want to buy some good stocks backed by full research (I encourage people to invest through MFs if they do not have expertise or knowledge to research equity markets). If you have multiple demat accounts, there is full possibility that you are paying annual charges to maintain all these for no reason. One is enough. Mutual Funds are the most scattered of all investments. 44 plus MF companies and multiple sellers. You need to fix some ground rules here: No duplication of schemes types or folios in the name of diversification. So if your financial planner suggest you a SIP in large cap fund for say 15 years, stick to 1 or 2 funds maximum in the category. If you are buying 2 schemes from one mutual fund company go for all investments in single folio only. There is lot of debate on Reality beating Equity. Recently I saw an advertisement for a property broker where he displayed a data where land gave 40 times return whereas equity gave just 27 times in last 35 years. He chose to hide the investment for which he claimed these returns and can he be sure of repeating the same returns? Probably not. The house you accommodate has no financial worth so how much reality you want...

RBI Repo Rate Cut: The Good, Bad and Worst

By on Oct 8, 2015 in Banking, Fixed Income | 6 comments

Dr Raghuram Rajan remind me of Harvey Specter from Suits… Not only both look dashing in their suits but also share similar trait of… Surprising the surroundings. So last week when Dr Rajan decreased the Repo Rate by 50 bps (.5% as 100 bps =1%) which was more than anticipated and asked, he was called Santa Clause and a Hawk. Media covered the event like cricket and confused political anchors tried to make understand the implication of this event making everyone more confused. Image courtesy of cooldesign at FreeDigitalPhotos.net Well our Harvey (Hemant) and Mike (Madhu) could not resist and sat in the morning to figure this comet which just passed the earth. Here is the transcript of their discussion: Hemant: Dr. Rajan has reduced Repo Rate by 50 basis points and everyone is saying that this is good for the market. Loan EMI may also come down. Howthis repo rate cut means actually? I want to understand this.  Madhu: To understand this you first need to know, how does a bank function. Because it is the interlinkages between the two very important function of bank viz source of fund and utilization of funds. Hemant: Than tell me – what does a bank do? My understanding is primarily a bank takes money from depositors in form of deposits (Savings and FDs) and gives loan to earn interest. That way they keep everyone happy and make a profit also.  Madhu: Correct, but there are more to it as bank has one more source of fund- RBI. Let me explain this in a very simplistic way. Bank needs money. Bank can get money from depositors like you and me and also from RBI. But bank also needs to pay certain interest to us and also to RBI.  Hemant: Ok.  Madhu: Let us try to understand first – what happens when we deposit, say, Rs. 100 with a bank.  Hemant: I know that. Bank gives that Rs. 100 to someone who needs a loan.  Madhu: No, it is not that simple. Remember, though bank can earn interest by giving away loans, but it is also very risky business. There are many cases of loan defaults in recent years and this increases banks NPA (Non-performing assets). This will make banks put all our money into high risk areas. It has to be protected.  Hemant: How?  Madhu: Ok, RBI has made it mandatory that upon receiving, say, Rs. 100 – banks first have to deposit Rs. 4 with RBI. RBI keeps this Rs. 4 in its current a/c and hence banks do not receive any interest on this money. This is known as Cash Reserve Ratio or CRR, which is currently at 4%.  Hemant: Hmmm, then?  Madhu: RBI has also made it mandatory that upon receiving, say, Rs. 100 – banks need to compulsorily buy central and state govt. securities of Rs. 21.50. Of course banks will earn some interest income here. This is known as Statutory Liquidity Ratio (SLR), which is currently at 21.50%.  Hemant: Ok, so you mean to say that upon receiving Rs. 100, banks can spend only Rs. 74.50 at its own will.  Madhu: Correct. 100 – (4 + 21.50) = 100 – 25.50 = 74.50  Hemant: But you were saying that banks can also borrow from RBI. What interest banks pay to RBI?  Madhu: Before 30th September, banks were paying 8.25% interest to RBI when it borrows money from RBI. Now this rate has been reduced by 50 basis points. So banks now need to pay interest to RBI, if it borrows from RBI, at the rate of 7.75%. This is known as Repo Rate.  Hemant: Can fixed deposit rate be affected by reduction of Repo Rate?  Madhu: Of course. If banks get money from RBI @7.75%, why will banks pay higher interest to you and me? One year FD rate is already revised by many banks and it is equal to or very close to 7.75%.  Hemant: But as now banks are getting money at a cheaper rate, then they should reduce the loan interest rate i.e. passing on the benefits it receives.  Madhu: Correct. They should. And on that hope market is cheering. If companies get loan at a cheaper rate, they will likely to expand their businesses. That will create more jobs, more income and boost the economy. However banks have not passed entire 50 bps to consumers.   Hemant: How is inflation linked to this?  Madhu: See, when loan becomes cheaper, people tends to borrow more. That means people will have more money to spend. This will increase the demand for goods, and if supply does not increase to match this demand, then prices will increase.  Hemant: So there is a chance, that inflation may rise also?  Madhu: Well, yes. That is why first RBI convinces itself that the demand will be catered by supply, than only they can reduce rates. Also this is the reason the rates are decreased or increased in tranches instead of one go decision. But inflation depends on many other factors as well, like production (industrial and agricultural), manufacturing, export – import, foreign currency movement etc. So inflation may increase or may not.  Hemant: One last question. Like we deposit our money with banks, can banks also deposit their money with someone?  Madhu: Yes, they can deposit with RBI and earn interest too. This interest is typically 1% less than the repo rate....

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