The year 2012 is around the corner & we at Fpguru.com want to share with you twelve new year resolutions you should keep for the year. The resolutions are simple steps for your financial freedom!
1. Get Financially Literate- The first step is to get financially literate. This does not mean you need to be well-versed in finance, economics or mathematics. It just basically means that you have an idea of investment avenues, risk & return, nominations, insurance needs, saving, etc. Understanding personal finance is the key! The simplest way to achieve this is to read personal finance magazines & websites like Fpguru.com.
2. Start budgeting- Budgeting is like the first step to financial freedom. Having a budget will help you see a clear picture of your finances and equally help you make investments to achieve your future goals. To make a budget one needs to jot down their income-expenditure and know where exactly one stands financially and gets a better picture of their lifestyle. Unnecessary expenses can be avoided and surplus invested will help to achieve future goals.
3. Keep a contingency fund- Let’s begin the New Year by starting a recurring deposit for a contingency fund. This is nothing but an emergency fund in case of any loss of income, losing a job or loss in business etc. and should be used only during emergency. Most of the banks offer such accounts. If you have ample money in your savings bank A/c, shift an adequate amount to a contigency fund to be used only during a financial emergency. One should keep atleast 3-6 months expenses and EMIs in Savings’s bank ac/c, short term bank fixed deposits,ultra short term debt funds or in a Flexi-deposit bank a/c. Thus having a contingency fund helps you face financial emergency without disrupting your other finances.
4. Understand your financial situation- This is a very underrated action even by most financial planners & advisors. Do not compare yourself with others. Everyone has their own strengths & weaknesses financially. Calculate your net-worth & understand your own family background & situation. Do understand that financial advice can be generic till a certain level only. Beyond that it differs from person to person.
5. Adequate life cover- One resolution each one of us make is to keep our family safe and secure. So this New Year let us take a step to ensure they are financially secure in the event of our unfortunate demise. Let us buy adequate life insurance cover. Life insurance is a must for those who have dependents and must be ranked top on the priority list. An approximate cover of nearly 10 times your annual income should be bought in order to be sufficiently covered.
6. Mediclaim and other general insurance- With the ever rising cost of medical facilities, it may get difficult to provide the best care for yourself & family. Hence a mediclaim policy must be obtained to ensure we never fall short on funds to care for our family. Several other general insurance covers are also available to protect us from any financial loss that may incur to us. These include home insurance, motor insurance, fire insurance etc. These policies should also be purchased to ensure that you and your family are protected for the year to come.
7.Cut down on liabilities- Liabilities are nothing but debts, loans and obligations in one’s life. The sooner they are cleared the more stress free one’s financial future will be. It is important to understand which loans are actually required and the ones to be avoided. However cutting down liabilities should be one of the important financial resolutions as this will not only increase your net-worth but also make you lead a debt free future.
8.Chalk down your financial goals now!- With the New Year just around the corner, it is essential to first figure out the financial goals we wish to achieve in the coming year and in the years ahead. Having a financial goal makes it easier not only to achieve them but also know how realistic they are. Once the financial goals are jotted, list them as per their priority. This will enlighten you exactly which goal is required to be funded first, as only then can you start your investments. A financial goal is like planning an itinerary for your vacation.
9. Imagine your retirement and work for it- It is never too early to plan for your retirement. If you are earning, it is time to start now. Retirement is that phase of your life when your income stops and you live on your savings. Hence it is of grave importance that you have adequate funds when the time comes. As we move into a new year, it’s a year closer to your retirement age. Planning and saving for it early will give you the opportunity to benefit from the equity market and accumulate an adequate fund for the future.
10. Start saving and investing regularly- A man is not rich because of the money he earns but the money he saves. Saving a part of your money to achieve your future goals is a must. However, merely saving it is not going to make it grow. Investing this money into the right instruments while keeping in tune with your time period will ensure you have the adequate money when you need it.
11. Do your tax-planning- The government provides individuals with tax sops for investments & other social benefits. Medical insurance, retirement schemes, infrastructure bonds, etc, can all be invested in to reduce your tax liabilities. This is not tax evasion but tax planning. They do not only provide tax deductions but also help in your overall financial planning.
12. Make a will- Wouldn’t you like to transfer the financial freedom enjoyed by you to be transferred to your heirs post your demise? Well, then a will is what you should make. A will is a personal statement you make with regards to how your wealth should be distributed post your demise. It ensures that only those who you want to receive your legacy, get the same. You pass on your assets to your family members without any bad blood between them.
If you haven’t started your financial planning this year, do start it in the New Year. It’s never too late to start. You can avail of the services of a financial planner for the same too if you need more professional advice. We at Fpguru.com have started our Personalised Financial Coaching services for the same reason. We at Fpguru.com believe in ‘spreading financial enlightenment’ & it is with this idea that we have started this website. Do support us in the coming year as you have done in this year!
Wishing you a Happy & Prosperous New Year!! Let the wheels of financial nirvana roll!
Source - http://www.fpguru.com/cms/index.php?option=com_content&view=article&id=215:-12-personal-finance-resolutions-you-should-make-for-the-new-year&catid=54:articles&Itemid=54
Friday, December 30, 2011
Tuesday, December 20, 2011
Middle Path To Earning Better Returns
A little risk, distributed between bonds, equity & gold, can fetch you higher returns than just playing safe with FDs
Partha Sinha | TNN
As an investor, as you learn about investments, you go up the ladder of risk profiles, from low to medium to high. This would apply when you sit with your financial advisor or financial planner to build your portfolio.
Last week we told you about low-risk investment options and some of the dos and don’ts related to it. This week, we will take you through a similar tour but here the risks are slightly higher, that is chances of losing your money are higher, but at the same time your chances of having a better return than in low-risk investments are also higher.
Before we begin, the question you should ask is how will one tell if a portfolio carries medium risk? Usually a portfolio in which say about 25-40% of the corpus is invested in low-risk bonds, like government and ‘AAA’ rated ones, and the balance is invested in equities could be considered a portfolio with medium risks. However, this is not a strict classification and could differ from person to person, and also how your financial advisor plans your portfolio.
An investor who want a good return from her portfolio but is not ready to put too much at stake, medium-risk investments are the ones for her. Seen individually, bonds issued by corporates that have high ratings (but not the highest ratings), some balanced schemes of mutual funds and even stocks of large and reputed companies that are in stable businesses like fast moving consumer goods
(FMCG), are considered mediumrisk investments.
Balanced funds, however, are one of the best examples of moderate risk investment instruments which are available in the market today. As the name suggests, a balanced fund by its very nature aims to have a balance in its risk profile. Usually, these funds invest between 25% and 40% in debt instruments which carry lower risks. The balance is usually invested in stocks of frontline companies. There are some balanced funds which also have the mandate to invest in small and medium cap stocks. But it is important to remember that more exposure a balanced fund has in small and medium cap stocks, more risk is it taking with your money.
So while deciding to invest in a balanced funds, it is very important to look at its fund allocation structure. Once you know the fund allocation structure, sit along with your financial planner and find out if the risk that the fund manager would take with your money is aligned to the kind of risks you are willing to take. In case you find that the risks in such balanced funds are higher than what you can afford to, it is advisable to look for other balanced funds with lower risk profile.
One of the advantages of a balanced fund is that rather than you deciding to invest in one equity fund and another debt fund, you can combine the two to invest in a balanced fund. (The other medium risks MF investment options like MIPs, gold ETFs, etc are explained in detail in another article on this page.)
Bonds of stable companies that give high rate of interest are also considered moderate risk investments. These bonds do not carry the highest ‘AAA’ rating, but definitely have rating which is investment grade. Since these companies are rated slightly lower than the highest grade, they have to pay slightly higher interest than the ones which have ‘AAA’ rating. In terms of rating, as we come down from the ‘AAA’ rated bonds to ones with lower ratings, risks associated with such instruments also rise. So if one invests in bonds rated at least ‘BB’, such bonds are considered to have moderate risks. Some financial advisors also consider real estate investments as moderate risk investments. According to them, prices of real estates are sticky at the downside. Which means the rate of rise of real estate prices is much higher than the rate of fall of its prices, especially for residential properties. Although in recent times there were sharp drops in real estate prices, but such drops were limited to some of the big cities only. Outside the metros and some select big cities, the volatility in real estate prices is much lower, qualifying them as medium risk investments. And if you have an investment horizon of 10-15 years, and if the property is clean and in a good location, there is every chance your will get good appreciation on your investments.
However, a word of caution here: Real estate investments are not a very liquid investment. This means you cannot sell off your property quickly enough to get money in your bank account if you need it urgently. Usually, it takes more than two months to dispose of a real estate investment. Compared to this, you can sell gold within hours, while if you sell shares, you can get money in your account two working days after the day of trade. In mutual funds too, it does not take more than two days to get the money into your account.
Also, real estate investments need continuous expenditure: You need to pay your property tax and spend on regular maintenance to ensure that your property appreciates in value.
Gold is another investment option that is considered to a moderate risk option when the investment has a horizon of more than 10 years. Although recently the price of yellow metal has witnessed substantial volatility, if one looks at it over the last decade, the major appreciation in its price has come post 2008. Consider this: in eight years, between January 2001 and December 2008, the price of gold rose 2.3 times. But when we look at the rise in its price between 2001 and now, the rise is six times. Considered over a decade or more, gold is a safe investment, a hedge against inflation and bad economic situation. So when you build your moderate risk portfolio, you should consider having a flavour of gold in you portfolio.
A word of caution here: Holding physical gold is expensive and risky. So given the current developments in technology and offerings of investment products in electronic forms, when you are buying gold for investment purpose, you should consider holding it in electronic form. At present, spot exchanges offer holding of gold in electronic form and your financial advisor should be able to guide to the same.
Partha Sinha | TNN
Partha Sinha | TNN
As an investor, as you learn about investments, you go up the ladder of risk profiles, from low to medium to high. This would apply when you sit with your financial advisor or financial planner to build your portfolio.
Last week we told you about low-risk investment options and some of the dos and don’ts related to it. This week, we will take you through a similar tour but here the risks are slightly higher, that is chances of losing your money are higher, but at the same time your chances of having a better return than in low-risk investments are also higher.
Before we begin, the question you should ask is how will one tell if a portfolio carries medium risk? Usually a portfolio in which say about 25-40% of the corpus is invested in low-risk bonds, like government and ‘AAA’ rated ones, and the balance is invested in equities could be considered a portfolio with medium risks. However, this is not a strict classification and could differ from person to person, and also how your financial advisor plans your portfolio.
An investor who want a good return from her portfolio but is not ready to put too much at stake, medium-risk investments are the ones for her. Seen individually, bonds issued by corporates that have high ratings (but not the highest ratings), some balanced schemes of mutual funds and even stocks of large and reputed companies that are in stable businesses like fast moving consumer goods
(FMCG), are considered mediumrisk investments.
Balanced funds, however, are one of the best examples of moderate risk investment instruments which are available in the market today. As the name suggests, a balanced fund by its very nature aims to have a balance in its risk profile. Usually, these funds invest between 25% and 40% in debt instruments which carry lower risks. The balance is usually invested in stocks of frontline companies. There are some balanced funds which also have the mandate to invest in small and medium cap stocks. But it is important to remember that more exposure a balanced fund has in small and medium cap stocks, more risk is it taking with your money.
So while deciding to invest in a balanced funds, it is very important to look at its fund allocation structure. Once you know the fund allocation structure, sit along with your financial planner and find out if the risk that the fund manager would take with your money is aligned to the kind of risks you are willing to take. In case you find that the risks in such balanced funds are higher than what you can afford to, it is advisable to look for other balanced funds with lower risk profile.
One of the advantages of a balanced fund is that rather than you deciding to invest in one equity fund and another debt fund, you can combine the two to invest in a balanced fund. (The other medium risks MF investment options like MIPs, gold ETFs, etc are explained in detail in another article on this page.)
Bonds of stable companies that give high rate of interest are also considered moderate risk investments. These bonds do not carry the highest ‘AAA’ rating, but definitely have rating which is investment grade. Since these companies are rated slightly lower than the highest grade, they have to pay slightly higher interest than the ones which have ‘AAA’ rating. In terms of rating, as we come down from the ‘AAA’ rated bonds to ones with lower ratings, risks associated with such instruments also rise. So if one invests in bonds rated at least ‘BB’, such bonds are considered to have moderate risks. Some financial advisors also consider real estate investments as moderate risk investments. According to them, prices of real estates are sticky at the downside. Which means the rate of rise of real estate prices is much higher than the rate of fall of its prices, especially for residential properties. Although in recent times there were sharp drops in real estate prices, but such drops were limited to some of the big cities only. Outside the metros and some select big cities, the volatility in real estate prices is much lower, qualifying them as medium risk investments. And if you have an investment horizon of 10-15 years, and if the property is clean and in a good location, there is every chance your will get good appreciation on your investments.
However, a word of caution here: Real estate investments are not a very liquid investment. This means you cannot sell off your property quickly enough to get money in your bank account if you need it urgently. Usually, it takes more than two months to dispose of a real estate investment. Compared to this, you can sell gold within hours, while if you sell shares, you can get money in your account two working days after the day of trade. In mutual funds too, it does not take more than two days to get the money into your account.
Also, real estate investments need continuous expenditure: You need to pay your property tax and spend on regular maintenance to ensure that your property appreciates in value.
Gold is another investment option that is considered to a moderate risk option when the investment has a horizon of more than 10 years. Although recently the price of yellow metal has witnessed substantial volatility, if one looks at it over the last decade, the major appreciation in its price has come post 2008. Consider this: in eight years, between January 2001 and December 2008, the price of gold rose 2.3 times. But when we look at the rise in its price between 2001 and now, the rise is six times. Considered over a decade or more, gold is a safe investment, a hedge against inflation and bad economic situation. So when you build your moderate risk portfolio, you should consider having a flavour of gold in you portfolio.
A word of caution here: Holding physical gold is expensive and risky. So given the current developments in technology and offerings of investment products in electronic forms, when you are buying gold for investment purpose, you should consider holding it in electronic form. At present, spot exchanges offer holding of gold in electronic form and your financial advisor should be able to guide to the same.
Partha Sinha | TNN
Tuesday, December 13, 2011
FDs safest option as bank collapses are rare in India !!!!! - Partha Sinha | TNN
Low-risk investment options work on the idea that over the next few years, investments in most of the products that have historically given predictable returns will not deviate majorly from such a track record. For example, if one invested in a bank fixed deposit with a yearly return of 10%, then the investor will get the same amount at the end of the month. Here the risk lies in the bank collapsing and the investor not getting the interest and the full principal back. But for all practical purposes, such bank collapses are very rare in India. Seen from the other hand, there is no chance of the investor getting a return higher than the 10% rate agreed between the bank and the investor at the start of the fixed deposit.
On the other hand, equities are riskier investments. While blue chip companies are less riskier than smaller companies, even higher risk is associated with the so called ‘penny stocks’—the stocks which are trading at below Re 1. If one invests in penny stocks, there is no guarantee of any return, and there is a very high risk of losing money. On the other hand, in case there is some positive development in the company whose stock is trading below Re 1, the stock could double in no time.
This brings us to what is called the riskreturn trade-off. Usually, low-risk investments give lower return but higher chance of stability in return. On the other hand, high risk investments have higher returns, and thus lower stability in return. In this issue, we plan to give you some pointers to the investments that carry lower risks. So naturally the returns would also not be high.
We have already given you the example of bank FDs, which carry lower risks
but lower, fixed returns. The other options are small savings
schemes like National Savings Certificate, post office monthly income schemes, public provident funds, etc. Bonds and nonconvertible debentures (NCDs) of government-run companies and blue chip companies are also relatively safer investments. Often, you will find that some companies are paying a higher rate of return on FDs floated by them than other companies. Here more a company pays in their FDs, higher the risk the investor has. One way to find out which company has a lower risk than the other is to look at the ratings assigned to the company by ratings agencies like Crisil, ICRA, CARE, etc. Better the ratings (AAA is the highest, D is the lowest) of a company, lower would be the risks in its FDs, but at the same time lower would be the interest on such FDs.
Among the low risk investment options that investors can consider are the mutual funds schemes, especially the ones that have higher exposure to bonds, money market instruments etc and lower exposure to stocks. Among the several advantages of investing in mutual funds is that investors get professional fund management expertise but at a much lower cost than if they invest directly.
Among the lower risk fund options are fixed maturity plans, popularly FMPs. Compared to FDs,in which investors know how much they will earn at the end of the term, FMPs indicate a return that you can earn at the end of the plan, but do not assure it. So the actual return c o u l d deviate from the indicative return, but mostly such differences are minimal. However, in FMPs, the post-tax return is usually higher than FDs of comparable maturity. This is because tax treatments are favourable to FMPs over FDs. So wh i l e F D s are suitable for those who are satisfied with assured returns, if you are willing to take a slightly higher risk, you can consider FMPs for a slightly higher return.
There are some types of mutual fund schemes available in the market which offer even lower risks than FMPs. These are liquid funds, ultra short-term debt funds, capital protection oriented funds and short term income funds.
There is another category of funds called Gilt funds, which invest mainly in government securities. Since these are securities backed by government guarantees, a few years ago investors were of the idea that there were no risks in these funds. This is not true. While the principal and interest in these securities are fully guaranteed by the government,you should remember that the market price of these securities vary and so the NAVs, and hence the returns, on these schemes can also vary.So,these funds are not risk-free investment products. Monthly income plans (MIPs) are also considered lowrisk options, but before you invest in these schemes remember to check how much equity exposure the fund can take. Here again, the thumb rule
is higher the equity exposure, higher the risks associated with these funds. The same rule applies to balanced funds. So, if you are looking for low-risk investments, please have a look at the equity exposure and also consult with your financial planner before you take the plunge.
On the other hand, equities are riskier investments. While blue chip companies are less riskier than smaller companies, even higher risk is associated with the so called ‘penny stocks’—the stocks which are trading at below Re 1. If one invests in penny stocks, there is no guarantee of any return, and there is a very high risk of losing money. On the other hand, in case there is some positive development in the company whose stock is trading below Re 1, the stock could double in no time.
This brings us to what is called the riskreturn trade-off. Usually, low-risk investments give lower return but higher chance of stability in return. On the other hand, high risk investments have higher returns, and thus lower stability in return. In this issue, we plan to give you some pointers to the investments that carry lower risks. So naturally the returns would also not be high.
We have already given you the example of bank FDs, which carry lower risks
but lower, fixed returns. The other options are small savings
schemes like National Savings Certificate, post office monthly income schemes, public provident funds, etc. Bonds and nonconvertible debentures (NCDs) of government-run companies and blue chip companies are also relatively safer investments. Often, you will find that some companies are paying a higher rate of return on FDs floated by them than other companies. Here more a company pays in their FDs, higher the risk the investor has. One way to find out which company has a lower risk than the other is to look at the ratings assigned to the company by ratings agencies like Crisil, ICRA, CARE, etc. Better the ratings (AAA is the highest, D is the lowest) of a company, lower would be the risks in its FDs, but at the same time lower would be the interest on such FDs.
Among the low risk investment options that investors can consider are the mutual funds schemes, especially the ones that have higher exposure to bonds, money market instruments etc and lower exposure to stocks. Among the several advantages of investing in mutual funds is that investors get professional fund management expertise but at a much lower cost than if they invest directly.
Among the lower risk fund options are fixed maturity plans, popularly FMPs. Compared to FDs,in which investors know how much they will earn at the end of the term, FMPs indicate a return that you can earn at the end of the plan, but do not assure it. So the actual return c o u l d deviate from the indicative return, but mostly such differences are minimal. However, in FMPs, the post-tax return is usually higher than FDs of comparable maturity. This is because tax treatments are favourable to FMPs over FDs. So wh i l e F D s are suitable for those who are satisfied with assured returns, if you are willing to take a slightly higher risk, you can consider FMPs for a slightly higher return.
There are some types of mutual fund schemes available in the market which offer even lower risks than FMPs. These are liquid funds, ultra short-term debt funds, capital protection oriented funds and short term income funds.
There is another category of funds called Gilt funds, which invest mainly in government securities. Since these are securities backed by government guarantees, a few years ago investors were of the idea that there were no risks in these funds. This is not true. While the principal and interest in these securities are fully guaranteed by the government,you should remember that the market price of these securities vary and so the NAVs, and hence the returns, on these schemes can also vary.So,these funds are not risk-free investment products. Monthly income plans (MIPs) are also considered lowrisk options, but before you invest in these schemes remember to check how much equity exposure the fund can take. Here again, the thumb rule
is higher the equity exposure, higher the risks associated with these funds. The same rule applies to balanced funds. So, if you are looking for low-risk investments, please have a look at the equity exposure and also consult with your financial planner before you take the plunge.
Monday, November 28, 2011
Do you think by Having LIC policies you have planned well to achieve your goals and dreams? Think Again..!!! - Ram Valia
Being A financial planner I see that there are many mistakes my clients make with their money. Before you make a mistake I thought I should inform you on this. In case you have already committed this mistake then at least after reading this you will not make it again and help other avoid it too.
To start off with, Investing and insurance cannot go hand in hand. in fact using the words investing and insurance in the same sentence is 'Wrong English'.
Though it has been preached and practiced in our families that insurance is a very good way for saving for future financial requirements and that too through LIC only, It has been proved with substantial evidence that it's a big mistake to mix the two concepts of Insurance and Investing which have a completely different background, framework and application in your financial lives.
Insurance is only meant to cover the risk any unforeseen happening that can temporarily or permanently incapacitate a person from earning the expected income over his/her working life.
Insurance is an expense and not an investment, but due to the nature of humans that asks for returns on every penny that they spend, manufacturers make such products that portray to satisfy the persons need of getting returns. But these products don't come cheap, they have a high amount of admin expenses. Most of them have no guarantee of future returns too. Though the agent trying to sell you that product says that there is a guarantee, as there is on written evidence of the same it is not true.
The maximum capacity of that non guaranteed return is not even sufficient to beat baseline inflation. but only as it satisfies people's mindset of generating some return, even if its meaningless, it is largely sold to almost every urban household.
Being a planner I advice you not to buy any form of insurance except term insurance as it is the cheapest product in the market and does a fantastic job of reducing the financial risk on your family in case of an unfortunate event to the family's earner.
Term insurance can help you save money while not compromising on covering the risk on your family and also save enough money on your premiums so that they can be invested separately in a way that ensures the achievement of your goals and dreams
The following example should explain the difference very clearly
Mr. Narayan is 35 years
His annual expense is Rs. 10,00,000/-
His insurance requirement is Rs. 1,00,00,000/-
Term of life insured should be till retirement, which in this case is at age 60 years. so its 25 years of term
An Endowment will cost him Rs. 2,00,000/- and give him a return of Rs. 1,27,00,000/- assuming a rate of 7% return which is not guaranteed
On the other hand a term insurance cover of the same amount will cost him Rs. 20,000/- on an online term insurance from any leading insurer.
This saves him Rs. 1,80,000/- per year for 25 years. As the horizon is so long an Aggressive portfolio with an equity to Debt exposure of 80:20 should be created. Assuming the Equity and Debt to generate an after tax returns of 14% and 7% respectively. The return on this portfolio will be 12.6% p.a.
This portfolio will generate a value of Rs. 2,64,00,000/-
So now you need to decide whether you want to stay with the old, outdated and mundane endowment policies where your agent earns more than you and you get only Rs. 1,27,00,000/- or do you want to accept the new modern and planned ways of managing risks and generating wealth for you and your family by earning Rs. 2,64,00,000/- as in this example
The power is yours.
Happy Planning
Think before you Act
It's All in the Mind
To start off with, Investing and insurance cannot go hand in hand. in fact using the words investing and insurance in the same sentence is 'Wrong English'.
Though it has been preached and practiced in our families that insurance is a very good way for saving for future financial requirements and that too through LIC only, It has been proved with substantial evidence that it's a big mistake to mix the two concepts of Insurance and Investing which have a completely different background, framework and application in your financial lives.
Insurance is only meant to cover the risk any unforeseen happening that can temporarily or permanently incapacitate a person from earning the expected income over his/her working life.
Insurance is an expense and not an investment, but due to the nature of humans that asks for returns on every penny that they spend, manufacturers make such products that portray to satisfy the persons need of getting returns. But these products don't come cheap, they have a high amount of admin expenses. Most of them have no guarantee of future returns too. Though the agent trying to sell you that product says that there is a guarantee, as there is on written evidence of the same it is not true.
The maximum capacity of that non guaranteed return is not even sufficient to beat baseline inflation. but only as it satisfies people's mindset of generating some return, even if its meaningless, it is largely sold to almost every urban household.
Being a planner I advice you not to buy any form of insurance except term insurance as it is the cheapest product in the market and does a fantastic job of reducing the financial risk on your family in case of an unfortunate event to the family's earner.
Term insurance can help you save money while not compromising on covering the risk on your family and also save enough money on your premiums so that they can be invested separately in a way that ensures the achievement of your goals and dreams
The following example should explain the difference very clearly
Mr. Narayan is 35 years
His annual expense is Rs. 10,00,000/-
His insurance requirement is Rs. 1,00,00,000/-
Term of life insured should be till retirement, which in this case is at age 60 years. so its 25 years of term
An Endowment will cost him Rs. 2,00,000/- and give him a return of Rs. 1,27,00,000/- assuming a rate of 7% return which is not guaranteed
On the other hand a term insurance cover of the same amount will cost him Rs. 20,000/- on an online term insurance from any leading insurer.
This saves him Rs. 1,80,000/- per year for 25 years. As the horizon is so long an Aggressive portfolio with an equity to Debt exposure of 80:20 should be created. Assuming the Equity and Debt to generate an after tax returns of 14% and 7% respectively. The return on this portfolio will be 12.6% p.a.
This portfolio will generate a value of Rs. 2,64,00,000/-
So now you need to decide whether you want to stay with the old, outdated and mundane endowment policies where your agent earns more than you and you get only Rs. 1,27,00,000/- or do you want to accept the new modern and planned ways of managing risks and generating wealth for you and your family by earning Rs. 2,64,00,000/- as in this example
The power is yours.
Happy Planning
Think before you Act
It's All in the Mind
Saturday, November 19, 2011
Can't go far without the smarts- Anil Thakkar |
Rishad Premji's take on the primacy of hard work isn't surprising. Picture him coming out and saying that hard work isn't the be all and end all. You either have it or you don't. And if you don't, not all the hard work in the world can make up for it. Supremely demoti-vating for Wipro employees, isn't it? There is a fetishisation of hard work in our culture; to take an opposing point of view is seen as uncomfortably elitist. It isn't confined to Indian society either. The fabled Protestant work ethic in the US also condemns innate ability as frippery rather than necessity. It's a convenient but ultimately false position.
As Margaret Thatcher once said, everyone has the right to be unequal. And that is how it is. Some people are gifted with innate ability that enables them to succeed. No amount of toil by less gifted plodders can help them reach the same heights. Sports is a good arena to judge the truth of this. Take pace bowling in cricket. Today's bowlers live far more strictly regimented lives than bowlers of past decades; they put in hours in the gym as their predecessors never did. But for the most part, pace bowlers today are an embarrassment compared to the fearsomely talented West Indian quicks; to Lillee and Thomson, Imran Khan and Ian Botham - most of whom never saw the inside of a gym.
Or take intellectual achievement. This is a particular problem in India where the education system prizes numbing amounts of hard work over intellectual ability. But men who changed the world, like Albert Einstein and Steve Jobs, have had little time for these formal systems. Many of them have been rejected or rejected the system themselves. Hard work is much oversold. To go far, you need the inner spark.
As Margaret Thatcher once said, everyone has the right to be unequal. And that is how it is. Some people are gifted with innate ability that enables them to succeed. No amount of toil by less gifted plodders can help them reach the same heights. Sports is a good arena to judge the truth of this. Take pace bowling in cricket. Today's bowlers live far more strictly regimented lives than bowlers of past decades; they put in hours in the gym as their predecessors never did. But for the most part, pace bowlers today are an embarrassment compared to the fearsomely talented West Indian quicks; to Lillee and Thomson, Imran Khan and Ian Botham - most of whom never saw the inside of a gym.
Or take intellectual achievement. This is a particular problem in India where the education system prizes numbing amounts of hard work over intellectual ability. But men who changed the world, like Albert Einstein and Steve Jobs, have had little time for these formal systems. Many of them have been rejected or rejected the system themselves. Hard work is much oversold. To go far, you need the inner spark.
Wednesday, November 2, 2011
$1 million jackpot: Should Sushil Kumar rejoice or worry?-
Sushil Kumar from Bihar just won the Rs 5 crores jackpot (Rs. 50 Million) on the fifth season of Kaun Banega Crorepati. (For those who do not know KBC, this is the Indian version of Who wants to be a Millionaire)
Sushil Kumar will not receive the entire Rs. 5 crores, the tax department will eat up about one third of his jackpot leaving him with about Rs. 3.5 crores; that's still a sizeable amount.
Let us see how it can help Mr. Sushil Kumar - a post graduate in philosophy and an IAS aspirant - in his life. He is currently a school teacher earning a meager Rs. 6000 per month.
In an interview Sushil Kumar revealed that he has some obligations that need to met first before he invests the rest of his money
An elder brother who wants to set up his own business
A younger brother wanting to quit his 'piddly' Rs. 1500 per month job and also wants to start a new business.
His parents will want a nice big house - befitting the 'crorepati' son's status
Sushil Kumar himself plans to quit his job in order to concentrate on his IAS exam.
Sadly, along with a big amount of money God does not gift one with 'financial wisdom' - not even the wisdom of knowing that he needs unbiased financial advice. I can see a tomorrow and, therefore, find it difficult to rejoice in his success.
Why you ask? Here's why
Even in his small village there will be a lot of people chasing him — "investment consultants" There will be greedy hands pulling from all sides:
Namely, LIC agents, mutual fund agents, bank managers, other life insurance companies, pension providers, brokerage houses and bankers.
It would be really interesting to track his life over the next 10 years on a year to year basis to see how much this money is scaring him, helping him, torturing him and helping him to meet his goals.
by P V Subramanyam, On Tuesday 1 November 2011, 10:32 PM
Sushil Kumar will not receive the entire Rs. 5 crores, the tax department will eat up about one third of his jackpot leaving him with about Rs. 3.5 crores; that's still a sizeable amount.
Let us see how it can help Mr. Sushil Kumar - a post graduate in philosophy and an IAS aspirant - in his life. He is currently a school teacher earning a meager Rs. 6000 per month.
In an interview Sushil Kumar revealed that he has some obligations that need to met first before he invests the rest of his money
An elder brother who wants to set up his own business
A younger brother wanting to quit his 'piddly' Rs. 1500 per month job and also wants to start a new business.
His parents will want a nice big house - befitting the 'crorepati' son's status
Sushil Kumar himself plans to quit his job in order to concentrate on his IAS exam.
Sadly, along with a big amount of money God does not gift one with 'financial wisdom' - not even the wisdom of knowing that he needs unbiased financial advice. I can see a tomorrow and, therefore, find it difficult to rejoice in his success.
Why you ask? Here's why
Even in his small village there will be a lot of people chasing him — "investment consultants" There will be greedy hands pulling from all sides:
Namely, LIC agents, mutual fund agents, bank managers, other life insurance companies, pension providers, brokerage houses and bankers.
It would be really interesting to track his life over the next 10 years on a year to year basis to see how much this money is scaring him, helping him, torturing him and helping him to meet his goals.
by P V Subramanyam, On Tuesday 1 November 2011, 10:32 PM
Thursday, October 13, 2011
Diwali discount on home loans- TNN | Oct 13, 2011, 06.47AM IST
MUMBAI: Even as the central bank is expected to hike rates one more time, banks have started offering discounts on home loans. Lenders say that this development is an indicator that demand for home loans is easing.
On Wednesday, IDBI Bank announced special rate home loans and auto loans for the festive season. In terms of the scheme, borrowers can avail of home loans up to Rs 25 lakh at 10.75%, Rs 25 lakh to Rs 30 lakh at 11% and loans between Rs 30 to Rs 75 lakh at 11.25%. The bank has also decided to offer concession of 100 bps in rate of interest for all segment of loans as well as 100% waiver of processing fee for auto loans. The offers are applicable to the new loans sanctioned between October 15, 2011 to December 31, 2011.
Last week, Dena Bank reduced its lending rate on home loans and auto loans by 25 basis points. The bank also reduced the processing fees on these loans by 50%. With the concession loans up to Rs 25 lakh are available at 11.15%. The bank also offers loans up to 5 years at 10.7%. "If there is a further increase in interest rates the demand for home loans will drop. Already there are not many people seeking home loans" said Amitabh Chaturvedi, CEO, Dhanlaxmi Bank.
Last week, SBI chairman Pratip Chaudhuri said that the bank had decided to hold lending rates even after the Reserve Bank of India's rate hike last month. He said that the bank took the decision as margins were robust and an increase in rates would make the bank uncompetitive. Last month, the National Housing Bank said that home loan growth had eased but attributed the slowdown to high property prices.
On Wednesday, IDBI Bank announced special rate home loans and auto loans for the festive season. In terms of the scheme, borrowers can avail of home loans up to Rs 25 lakh at 10.75%, Rs 25 lakh to Rs 30 lakh at 11% and loans between Rs 30 to Rs 75 lakh at 11.25%. The bank has also decided to offer concession of 100 bps in rate of interest for all segment of loans as well as 100% waiver of processing fee for auto loans. The offers are applicable to the new loans sanctioned between October 15, 2011 to December 31, 2011.
Last week, Dena Bank reduced its lending rate on home loans and auto loans by 25 basis points. The bank also reduced the processing fees on these loans by 50%. With the concession loans up to Rs 25 lakh are available at 11.15%. The bank also offers loans up to 5 years at 10.7%. "If there is a further increase in interest rates the demand for home loans will drop. Already there are not many people seeking home loans" said Amitabh Chaturvedi, CEO, Dhanlaxmi Bank.
Last week, SBI chairman Pratip Chaudhuri said that the bank had decided to hold lending rates even after the Reserve Bank of India's rate hike last month. He said that the bank took the decision as margins were robust and an increase in rates would make the bank uncompetitive. Last month, the National Housing Bank said that home loan growth had eased but attributed the slowdown to high property prices.
Teach your kid value of money at an early age By Sumeet Vaid Oct 12 2011
On September 16, Malad resident and senior citizen, Sarla Patel, was found murdered at her residence. This time around, the perpetrators were not some drug addicts looking to steal money or thieves. In this case, it was the grandson, claim the police. The reason for this gruesome act was to get access to money to fund his lifestyle and buy a bike.
This is not the first solitary case of such a murder. In 2003, five teenage boys, all from well-to-do families were convicted of double murder of Leticia Mendes (52) and Dylan Lobo, her one-and-half-year old grandson. These five teenagers were tried in court and sentenced for this heinous act.
However, one common aspect between both these tragedies is the same — money. In both cases, the accused came from affluent families and yet resorted to taking innocent lives to steal money. These incidents got me thinking. Are we that desperate for money that we would resort to violence? Is the ‘new Gen-Y’ thinking to be blamed? Is there actually anyone to be blamed?
We can all start pointing fingers at their parents, society and even the mass media for creating this new lifestyle that the youth wants so badly. But, is that really the answer that we are looking for? Such incidents are bound to happen sometime. So where does the answer lie?
The answer lies in the fact that we need to create a stronger value system when it comes to wealth and resources. There is a dire to need not only to understand the value of money but also to know the importance of it.
So where does one start this process? Do you just start lecturing your kids about money or the value of it? Here are a few tips that can help:
Start young: There is no perfect time for parents to start teaching their kids about the value of wealth. The ideal time is to start when kids are young. Make it habit to teach them about money and provide them with basic information.
Help them differentiate between wants, needs and wishes: Children need to learn to differentiate between needs, wants and wishes. They need to understand that everything they wish for will not be turned into reality and every want is not a need. This will help them make informed and well thought out wealth-related decisions in the future.
Explain the concepts of borrowing and interest: I have seen parents fail miserably when it comes to explaining kids about the concept of borrowing. It is very important that they know the repercussion of borrowing money from lenders and how it could affect their financial standing in the future. These kinds of talks can get very technical for teenagers. Instead of giving a boring lecture, take them to someone like a certified financial planner who can explain these concepts better.
Have periodical talks and discussions about money: Open discussions about money will help in understanding a lot about money and spending patterns. One of the best possible times to have a talk is whenever there is a price hike by the government. Illustrate with examples how this will affect them and their dreams and wants. If you follow a financial plan, tell them how these changes will affect that plan and ask your planner to join in on the discussion.
Teach them how a credit card works: Most teenagers are still not sure how the credit system works and tend to abuse it. Small things like verification of charges, calculation of taxes will help them get a better idea of the system.
Make use of regular opportunities to teach kids value of money: To make kids understand the value of money and how you, as a parent, treat money. Take them along with you for grocery shopping. This opportunity can help you demonstrate how to work on a budget to not only fit your needs but also to save resources. Plan how to spend it and show them how you can waste money, if it is not handled with care.
Set an example: Kids will often imitate what their parents do. Set an example as to how you would budget and spend money and how you plan your finances. This will help them to understand the importance of it and create a value system when it comes to handling money.
(Sumeet Vaid is a CFPCM. The views expressed here are personal, and do
not necessarily represent that of the organisation. FPSB India is the sole marks licensing authority
for the CFPCM marks in India)
This is not the first solitary case of such a murder. In 2003, five teenage boys, all from well-to-do families were convicted of double murder of Leticia Mendes (52) and Dylan Lobo, her one-and-half-year old grandson. These five teenagers were tried in court and sentenced for this heinous act.
However, one common aspect between both these tragedies is the same — money. In both cases, the accused came from affluent families and yet resorted to taking innocent lives to steal money. These incidents got me thinking. Are we that desperate for money that we would resort to violence? Is the ‘new Gen-Y’ thinking to be blamed? Is there actually anyone to be blamed?
We can all start pointing fingers at their parents, society and even the mass media for creating this new lifestyle that the youth wants so badly. But, is that really the answer that we are looking for? Such incidents are bound to happen sometime. So where does the answer lie?
The answer lies in the fact that we need to create a stronger value system when it comes to wealth and resources. There is a dire to need not only to understand the value of money but also to know the importance of it.
So where does one start this process? Do you just start lecturing your kids about money or the value of it? Here are a few tips that can help:
Start young: There is no perfect time for parents to start teaching their kids about the value of wealth. The ideal time is to start when kids are young. Make it habit to teach them about money and provide them with basic information.
Help them differentiate between wants, needs and wishes: Children need to learn to differentiate between needs, wants and wishes. They need to understand that everything they wish for will not be turned into reality and every want is not a need. This will help them make informed and well thought out wealth-related decisions in the future.
Explain the concepts of borrowing and interest: I have seen parents fail miserably when it comes to explaining kids about the concept of borrowing. It is very important that they know the repercussion of borrowing money from lenders and how it could affect their financial standing in the future. These kinds of talks can get very technical for teenagers. Instead of giving a boring lecture, take them to someone like a certified financial planner who can explain these concepts better.
Have periodical talks and discussions about money: Open discussions about money will help in understanding a lot about money and spending patterns. One of the best possible times to have a talk is whenever there is a price hike by the government. Illustrate with examples how this will affect them and their dreams and wants. If you follow a financial plan, tell them how these changes will affect that plan and ask your planner to join in on the discussion.
Teach them how a credit card works: Most teenagers are still not sure how the credit system works and tend to abuse it. Small things like verification of charges, calculation of taxes will help them get a better idea of the system.
Make use of regular opportunities to teach kids value of money: To make kids understand the value of money and how you, as a parent, treat money. Take them along with you for grocery shopping. This opportunity can help you demonstrate how to work on a budget to not only fit your needs but also to save resources. Plan how to spend it and show them how you can waste money, if it is not handled with care.
Set an example: Kids will often imitate what their parents do. Set an example as to how you would budget and spend money and how you plan your finances. This will help them to understand the importance of it and create a value system when it comes to handling money.
(Sumeet Vaid is a CFPCM. The views expressed here are personal, and do
not necessarily represent that of the organisation. FPSB India is the sole marks licensing authority
for the CFPCM marks in India)
Tuesday, October 11, 2011
Floating or fixed: Choosing right loan option crucial- FE BUREAU
Raman was in a contemplative mood. He had identified a good flat, which was close to his place of work as well as his children’s school. He had picked up a good deal and it was a ready-to-move-in house.
Now, he had to decide on the loan provider and the type of loan — floating interest rate; fixed interest rate, reset at periodic intervals; or a fixed interest lifetime loan. With the market volatile and frequent revision in interest rates taking place , Raman was in a dilemma. Since he had a clean credit history, choosing the loan provider was easy, but deciding on the type of the home loan was another matter.
This is when he decided to check with his investment advisor, who asked him for details on the loan amount, period of the loan, possibility of prepaying it, either fully or partly (every year) and the prepayment penalty amount. The advisor also explained to Raman the current economic scenario and how the interest rates movement across different interest rate scenarios would affect his loan decision.
A floating rate interest loan would mean that, as the interest rates go up, the interest being charged also goes up. This would mean that either the monthly repayment is increased or the tenure of the loan goes up. The reverse is true for declining interest rates.
In a fixed interest loan, reset at periodic intervals, the interest rate is fixed for the first 3-5 years based on the economic situation prevailing at the end of the period. The interest rates are reset either upward or downward further as decided by the loan provider (teaser loans worked on this model). In a lifelong fixed interest rate scenario, your interest is fixed at the time of sanctioning the loan for the entire tenure of the loan.
There are periods of buoyant economic activity and those of a slowdown. Interest rates change accordingly. In a period of economic growth, loans are available at cheaper rates and vice verse. Taking the above logic, the third option— the lifelong fixed interest loan — works well if the interest rates are rising and the loan is for a shorter period, say, 3-5 years. However, the monthly repayment outflow will be higher if the quantum of loan is high, which would not be suitable to all.
Say, you need a loan for R13 lakh at 11% interest for a period of 20 years. The EMI works out to be R13,418 per month. At the end of the loan tenure, you would have repaid a total sum of R32.20 lakh, including interest of R19.20 lakh.
Now, let's say you go in for a floating rate loan wherein the interest rate for the first two years was 11%, for the next three years 8% and for the balance tenure, 10%. At the end of 20 years, you would have repaid a total sum of R29.81 lakh, including interest of R16.81 lakh. You notice that there is an overall saving of R2.40 lakh in a floating rate scenario, wherein, to begin with, you had a higher rate and, as the economic environment improved, you got lower rates. However, in a rising interest rate regime, the picture will be different and the outflow could be higher.
The obvious question is: Which option should you go for? It depends on your needs. Raman is a conservative super-saver, and he would prefer a fixed interest loan, reset at predetermined intervals, with loan prepayment option. This gives him the flexibility to settle his home loan at an earlier date and also ensures that his EMI outflow does not vary with the changing interest rate. The lifelong fixed rate interest loan would be most suitable for a shorter duration, as the economy goes through highs and the lows over a period of time. In a floating rate scenario, the EMI changes as per the prevailing rates. So, either your EMI goes up or down or the period of loan varies.
Ask your friends who had used this option in 2007 and how, now, the EMI or the loan period has changed, causing regular revisits on the monthly outflow. So, before choosing the option, know what you are comfortable with. Look at various scenarios and try to understand how it will impact your cash flow. Take your time and once you decide, act on it. Having one’s own nest is an exciting feeling.
The writer is founder and managing partner Zeus WealthWays LLP
Now, he had to decide on the loan provider and the type of loan — floating interest rate; fixed interest rate, reset at periodic intervals; or a fixed interest lifetime loan. With the market volatile and frequent revision in interest rates taking place , Raman was in a dilemma. Since he had a clean credit history, choosing the loan provider was easy, but deciding on the type of the home loan was another matter.
This is when he decided to check with his investment advisor, who asked him for details on the loan amount, period of the loan, possibility of prepaying it, either fully or partly (every year) and the prepayment penalty amount. The advisor also explained to Raman the current economic scenario and how the interest rates movement across different interest rate scenarios would affect his loan decision.
A floating rate interest loan would mean that, as the interest rates go up, the interest being charged also goes up. This would mean that either the monthly repayment is increased or the tenure of the loan goes up. The reverse is true for declining interest rates.
In a fixed interest loan, reset at periodic intervals, the interest rate is fixed for the first 3-5 years based on the economic situation prevailing at the end of the period. The interest rates are reset either upward or downward further as decided by the loan provider (teaser loans worked on this model). In a lifelong fixed interest rate scenario, your interest is fixed at the time of sanctioning the loan for the entire tenure of the loan.
There are periods of buoyant economic activity and those of a slowdown. Interest rates change accordingly. In a period of economic growth, loans are available at cheaper rates and vice verse. Taking the above logic, the third option— the lifelong fixed interest loan — works well if the interest rates are rising and the loan is for a shorter period, say, 3-5 years. However, the monthly repayment outflow will be higher if the quantum of loan is high, which would not be suitable to all.
Say, you need a loan for R13 lakh at 11% interest for a period of 20 years. The EMI works out to be R13,418 per month. At the end of the loan tenure, you would have repaid a total sum of R32.20 lakh, including interest of R19.20 lakh.
Now, let's say you go in for a floating rate loan wherein the interest rate for the first two years was 11%, for the next three years 8% and for the balance tenure, 10%. At the end of 20 years, you would have repaid a total sum of R29.81 lakh, including interest of R16.81 lakh. You notice that there is an overall saving of R2.40 lakh in a floating rate scenario, wherein, to begin with, you had a higher rate and, as the economic environment improved, you got lower rates. However, in a rising interest rate regime, the picture will be different and the outflow could be higher.
The obvious question is: Which option should you go for? It depends on your needs. Raman is a conservative super-saver, and he would prefer a fixed interest loan, reset at predetermined intervals, with loan prepayment option. This gives him the flexibility to settle his home loan at an earlier date and also ensures that his EMI outflow does not vary with the changing interest rate. The lifelong fixed rate interest loan would be most suitable for a shorter duration, as the economy goes through highs and the lows over a period of time. In a floating rate scenario, the EMI changes as per the prevailing rates. So, either your EMI goes up or down or the period of loan varies.
Ask your friends who had used this option in 2007 and how, now, the EMI or the loan period has changed, causing regular revisits on the monthly outflow. So, before choosing the option, know what you are comfortable with. Look at various scenarios and try to understand how it will impact your cash flow. Take your time and once you decide, act on it. Having one’s own nest is an exciting feeling.
The writer is founder and managing partner Zeus WealthWays LLP
MONTHLY INCOME - Insurance MIPs = high costs, poor returns B Y D EEPTI B HASKARAN
With uncertainty in the markets, investors are looking for avenues that can give them an as- surance of certainty. And the insurance industry seems to be catering to this sentiment.
With their focus already on traditional-cum-investment plans, life insurance compa- nies are increasingly getting innovative. A recent innova- tion in the stable of traditional products is monthly income insurance policies.
These are basically money- back policies that ride high on the element of guarantee, which is appealing in the present mar- ket environment. Says V. Viswa- nand, director and head (prod- ucts and persistency manage- ment), Max New York Life In- surance Co. Ltd: “We conducted a research in which a majority of customers preferred tradi- tional endowment and money- back plans because what they give and get are clearly spelt out. Customers don't under- stand the complicated features of a plan but can clearly under- stand the returns they get.
Hence, they prefer products with guaranteed returns.“
These monthly income plans (MIPs) offer a guaranteed monthly income for a fixed number of years along with a non-guaranteed topping of bo- nuses. All this packaged with an insurance cover looks an at- tractive proposition. But look beneath the layer of a guaran- tee and you will find poor re- turns and high costs. Read on to know why these MIPs may not work for you.
How do they work?
You go through two stages in these plans: the accumulation and the payout stages. During the accumulation stage, also known as the premium pay- ment term, you are required to pay an annual premium, which depends on the monthly in- come you choose. When the premium payment stage comes to an end, you start getting a monthly income, which is guar- anteed for a specified tenor.
Over and above these guaran- teed payouts, some insurers of- fer an additional income on maturity by way of bonuses.
For instance, MetLife India Insurance Co. Ltd's Met Monthly Income Plan, the policyholder gets a reversionary (accumulated) bonus on death or on maturity. Depending on the performance of the funds, every year the insurer declares a bonus, which gets credited to the account of the policyhold- er. A terminal bonus (declared when the tenor ends) is also paid on maturity or on death of the policyholder.
Max New York Life Insurance Co. Ltd's Max New York Life Guaranteed Monthly Income Plan has tailored its additional benefit differently. Instead of bunching up the bonuses at the end, this plan has spread the additional benefits over and above the monthly income. In- terestingly, the additional in- come is pegged to five-year government securities' (G- secs) yields. This is how it works: The policy has two pre- mium payment terms--six and 11 years. The premium that a policyholder pays gets pegged to G-sec rates to define the monthly top-up income during the payout stage. For instance, in case of an 11-year premium payment term, if in year two, the five-year G-sec yield is say 8%, then the policy will return an additional 53% of the monthly income in the first year of the payout term. Says Viswanand: “We have pegged the top-up benefit to G-sec rates to ensure transparency.
Bonuses are at the discretion of the insurers and since the his- f torical bonus rates or the per- formance of the funds are not readily available, it causes t some uncertainty. By pegging the top-up monthly income to G-sec rates, a policyholder will know what his monthly income will be 10 years from now.“
Star Union Dai-ichi Life In- surance Co. Ltd's Defined Ben- efit Endowment Plan, howev- er, has done away with bonus- t es. The plan returns a percent- age of the sum assured at the end of the policy term as addi- tional survival benefits. i t The insurance element Since these policies are pri- marily structured to provide a monthly income, the insurance component is not a lump sum benefit as is usually the case with insurance plans. These plans typically offer the guaran- tee of monthly income in the name of insurance.
For instance, Bharti AXA Life Insurance Co. Ltd's Bharti AXA Life Monthly Income Plan pays all the accrued bonuses as lump sum and starts the monthly pay- out immediately for the benefi- ciary if the policyholder dies during the premium payment stage. Star Union Dai-ichi's De- ined Endowment Plan, howev- er, offers a sum assured which is 180 times the monthly income hat you choose. But on death only 25% of the sum assured is paid and the monthly income starts immediately.
So if you are looking to pro- vide for a lump sum for your nominee, these plans won't work for you. Says Viswanand, “The insurance element in hese plans ensures that the monthly income is not inter- rupted in any way. MIPs are particularly good for customers n their late 40s because by the ime they retire they will ensure a guaranteed monthly income.“ The investment element The guaranteed monthly in- come that MIPs provide are nothing to write home about.
Sample this: A 30-year-old wanting a monthly income of `10,000 for a period of 15 years needs to pay a premium of about `90,432 for 15 years in Bharti AXA's Monthly Income Plan. At the end of the premium payment term, the policy- holder gets a monthly income of `10,000 for 15 years. This is a return of around 1.82%. How- ever, if you build in the non- guaranteed benefits or the re- versionary bonus, then assum- ing a gross return of 6%, your net return comes to 3.62%; on a 10% gross return, the net re- turn comes to 6.45%. The two gross rates of return have been permitted by the regulator for illustrative purposes only. Here the cost works out to around 2.38-3.55 percentage points.
And it is not the cost alone that hurts; the non-guaranteed bo- nuses are subject to the discre- tion of the insurer.
Max New York's MIP works differently, but even here the cost hurts. In this plan, the non-guaranteed benefit which is a monthly income over and above the guaranteed income is pegged to G-sec rates as ex- plained earlier in the story.
Sample this: A 35-year-old buying this plan for an 11-year premium paying period for a monthly income of `5,000 for 10 years needs to pay `52,560 per year for 11 years. The re- turn here works out to 1.71%.
Assuming the average rate of the G-sec yields is 6%, the policy would return 4.15% and 7.22% if the assumed G-sec yield is 10%.
But the death benefit in this plan is much better than other plans. Upon the death of the policyholder during the premi- um payment term, the policy will pay back all the premiums paid till then as lump sum. The monthly income will start im- mediately and continues to pay the guaranteed monthly income till the end of the premium pay- ing term. From the beginning of the payout period, the guaran- teed monthly income for the specified term along with the additional payout commences.
In the last year, it pays a termi- nal benefit equal to twice the annual premium.
What should you do?
For a young investor whose retirement is at least 20-30 years away, taking an MIP would make little sense. These plans come with a limited premium payment tenor and such inves- tors may not need periodic in- come so soon. Their financial goals would be staggered over the years and their focus should be on wealth accumulation rather than periodic income in the not-so-far future. However, these plans pro- vide a solution to customers looking for products struc- tured to save for retirement and to provide a guaranteed monthly income thereafter.
But the trade off for this guar- antee income is high costs and poor returns.
A better strategy would be to buy a pure term plan, the simpl- est and cheapest form of insur- ance, to provide a cover to your family during your working life.
Simultaneously, you can save regularly to build a retirement nest egg. At the time of retire- ment, you could look at fixed- income products such as Senior Citizens' Savings Scheme and fixed deposits to ensure a peri- odic flow of income. Says Pan- kaj Mathpal, a Mumbai-based financial planner: “Keep the two goals of accumulation and dis- tribution separate. Look at equi- ty products or long-term debt products such as the Public Provident Fund for the accumu- lation stage and structure your periodic income through fixed- income products.“
MIPs are revamped money- back plans that offer customi- zation at the cost of returns.
Invest only if customization appeals to you.
With their focus already on traditional-cum-investment plans, life insurance compa- nies are increasingly getting innovative. A recent innova- tion in the stable of traditional products is monthly income insurance policies.
These are basically money- back policies that ride high on the element of guarantee, which is appealing in the present mar- ket environment. Says V. Viswa- nand, director and head (prod- ucts and persistency manage- ment), Max New York Life In- surance Co. Ltd: “We conducted a research in which a majority of customers preferred tradi- tional endowment and money- back plans because what they give and get are clearly spelt out. Customers don't under- stand the complicated features of a plan but can clearly under- stand the returns they get.
Hence, they prefer products with guaranteed returns.“
These monthly income plans (MIPs) offer a guaranteed monthly income for a fixed number of years along with a non-guaranteed topping of bo- nuses. All this packaged with an insurance cover looks an at- tractive proposition. But look beneath the layer of a guaran- tee and you will find poor re- turns and high costs. Read on to know why these MIPs may not work for you.
How do they work?
You go through two stages in these plans: the accumulation and the payout stages. During the accumulation stage, also known as the premium pay- ment term, you are required to pay an annual premium, which depends on the monthly in- come you choose. When the premium payment stage comes to an end, you start getting a monthly income, which is guar- anteed for a specified tenor.
Over and above these guaran- teed payouts, some insurers of- fer an additional income on maturity by way of bonuses.
For instance, MetLife India Insurance Co. Ltd's Met Monthly Income Plan, the policyholder gets a reversionary (accumulated) bonus on death or on maturity. Depending on the performance of the funds, every year the insurer declares a bonus, which gets credited to the account of the policyhold- er. A terminal bonus (declared when the tenor ends) is also paid on maturity or on death of the policyholder.
Max New York Life Insurance Co. Ltd's Max New York Life Guaranteed Monthly Income Plan has tailored its additional benefit differently. Instead of bunching up the bonuses at the end, this plan has spread the additional benefits over and above the monthly income. In- terestingly, the additional in- come is pegged to five-year government securities' (G- secs) yields. This is how it works: The policy has two pre- mium payment terms--six and 11 years. The premium that a policyholder pays gets pegged to G-sec rates to define the monthly top-up income during the payout stage. For instance, in case of an 11-year premium payment term, if in year two, the five-year G-sec yield is say 8%, then the policy will return an additional 53% of the monthly income in the first year of the payout term. Says Viswanand: “We have pegged the top-up benefit to G-sec rates to ensure transparency.
Bonuses are at the discretion of the insurers and since the his- f torical bonus rates or the per- formance of the funds are not readily available, it causes t some uncertainty. By pegging the top-up monthly income to G-sec rates, a policyholder will know what his monthly income will be 10 years from now.“
Star Union Dai-ichi Life In- surance Co. Ltd's Defined Ben- efit Endowment Plan, howev- er, has done away with bonus- t es. The plan returns a percent- age of the sum assured at the end of the policy term as addi- tional survival benefits. i t The insurance element Since these policies are pri- marily structured to provide a monthly income, the insurance component is not a lump sum benefit as is usually the case with insurance plans. These plans typically offer the guaran- tee of monthly income in the name of insurance.
For instance, Bharti AXA Life Insurance Co. Ltd's Bharti AXA Life Monthly Income Plan pays all the accrued bonuses as lump sum and starts the monthly pay- out immediately for the benefi- ciary if the policyholder dies during the premium payment stage. Star Union Dai-ichi's De- ined Endowment Plan, howev- er, offers a sum assured which is 180 times the monthly income hat you choose. But on death only 25% of the sum assured is paid and the monthly income starts immediately.
So if you are looking to pro- vide for a lump sum for your nominee, these plans won't work for you. Says Viswanand, “The insurance element in hese plans ensures that the monthly income is not inter- rupted in any way. MIPs are particularly good for customers n their late 40s because by the ime they retire they will ensure a guaranteed monthly income.“ The investment element The guaranteed monthly in- come that MIPs provide are nothing to write home about.
Sample this: A 30-year-old wanting a monthly income of `10,000 for a period of 15 years needs to pay a premium of about `90,432 for 15 years in Bharti AXA's Monthly Income Plan. At the end of the premium payment term, the policy- holder gets a monthly income of `10,000 for 15 years. This is a return of around 1.82%. How- ever, if you build in the non- guaranteed benefits or the re- versionary bonus, then assum- ing a gross return of 6%, your net return comes to 3.62%; on a 10% gross return, the net re- turn comes to 6.45%. The two gross rates of return have been permitted by the regulator for illustrative purposes only. Here the cost works out to around 2.38-3.55 percentage points.
And it is not the cost alone that hurts; the non-guaranteed bo- nuses are subject to the discre- tion of the insurer.
Max New York's MIP works differently, but even here the cost hurts. In this plan, the non-guaranteed benefit which is a monthly income over and above the guaranteed income is pegged to G-sec rates as ex- plained earlier in the story.
Sample this: A 35-year-old buying this plan for an 11-year premium paying period for a monthly income of `5,000 for 10 years needs to pay `52,560 per year for 11 years. The re- turn here works out to 1.71%.
Assuming the average rate of the G-sec yields is 6%, the policy would return 4.15% and 7.22% if the assumed G-sec yield is 10%.
But the death benefit in this plan is much better than other plans. Upon the death of the policyholder during the premi- um payment term, the policy will pay back all the premiums paid till then as lump sum. The monthly income will start im- mediately and continues to pay the guaranteed monthly income till the end of the premium pay- ing term. From the beginning of the payout period, the guaran- teed monthly income for the specified term along with the additional payout commences.
In the last year, it pays a termi- nal benefit equal to twice the annual premium.
What should you do?
For a young investor whose retirement is at least 20-30 years away, taking an MIP would make little sense. These plans come with a limited premium payment tenor and such inves- tors may not need periodic in- come so soon. Their financial goals would be staggered over the years and their focus should be on wealth accumulation rather than periodic income in the not-so-far future. However, these plans pro- vide a solution to customers looking for products struc- tured to save for retirement and to provide a guaranteed monthly income thereafter.
But the trade off for this guar- antee income is high costs and poor returns.
A better strategy would be to buy a pure term plan, the simpl- est and cheapest form of insur- ance, to provide a cover to your family during your working life.
Simultaneously, you can save regularly to build a retirement nest egg. At the time of retire- ment, you could look at fixed- income products such as Senior Citizens' Savings Scheme and fixed deposits to ensure a peri- odic flow of income. Says Pan- kaj Mathpal, a Mumbai-based financial planner: “Keep the two goals of accumulation and dis- tribution separate. Look at equi- ty products or long-term debt products such as the Public Provident Fund for the accumu- lation stage and structure your periodic income through fixed- income products.“
MIPs are revamped money- back plans that offer customi- zation at the cost of returns.
Invest only if customization appeals to you.
Friday, October 7, 2011
Apple's Steve Jobs , visionary leader, dead at 56- On Thursday 6 October 2011, 7:13 AM By Poornima Gupta and Edwin Chan
SAN FRANCISCO (Reuters) - Steve Jobs , who transformed the worlds of personal computing, music and mobile phones, died on Wednesday at the age of 56 after a years-long battle with pancreatic cancer.
The co-founder of Apple Inc, one of the world's great entrepreneurs, was surrounded by his wife and immediate family when he died in Palo Alto, California. Other details were not immediately available.
His death was announced by Apple and sparked an immediate outpouring of sadness and sympathy from world leaders, competitors and other businessmen including Microsoft co-founder Bill Gates and Facebook CEO Mark Zuckerberg.
The Silicon Valley icon who gave the world the iPod , iPhone and iPad had stepped down as chief executive of the world's largest technology company in August, handing the reins to long-time lieutenant Tim Cook.
He was deemed the heart and soul of a company that rivals Exxon Mobil as the most valuable in America.
"Steve's brilliance, passion and energy were the source of countless innovations that enrich and improve all of our lives. The world is immeasurably better because of Steve," Apple said in a statement.
"His greatest love was for his wife, Laurene, and his family. Our hearts go out to them and to all who were touched by his extraordinary gifts."
Apple paid homage to their visionary leader by changing their website to a big black-and-white photograph of him with the caption " Steve Jobs : 1955-2011." The flags outside the company's headquarters at 1 Infinite Loop flew at half mast.
Jobs' health had been a controversial topic for years and his battle with a rare form of pancreatic cancer a deep concern to Apple fans and investors.
In past years, even board members have confided to friends their concern that Jobs, in his quest for privacy, was not being forthcoming enough with directors about the true condition of his health.
Now, despite much investor confidence in Cook, who has stood in for his boss during three leaves of absence, there remain concerns about whether Apple would stay a creative force to be reckoned with in the longer term without its visionary.
Jobs died one day after the consumer electronics powerhouse unveiled its latest iPhone , the gadget that transformed mobile communications and catapulted Apple to the highest echelons of the tech world.
His death triggered an immediate outpouring of sympathy.
"The world rarely sees someone who has had the profound impact Steve has had, the effects of which will be felt for many generations to come," Gates said. "For those of us lucky enough to get to work with him, it's been an insanely great honor. I will miss Steve immensely."
Outside an Apple store in New York, mourners laid candles, bouquets of flowers, an apple and an iPod Touch in a makeshift memorial.
"I think half the world found out about his death on an Apple device," said Robbie Sokolowsky, 32, an employee for an online marketing company, who lit a candle outside the store.
Cook said in a statement that Apple planned to hold a celebration of Jobs' life for employees "soon".
APPLE, NEXT, IPHONE
A college dropout, Buddhist and son of adoptive parents, Jobs started Apple Computer with friend Steve Wozniak in 1976. The company soon introduced the Apple 1 computer.
But it was the Apple II that became a huge success and gave Apple its position as a critical player in the then-nascent PC industry, culminating in a 1980 initial public offering that made Jobs a multimillionaire.
Despite the subsequent success of the Macintosh computer, Jobs' relationship with top management and the board soured. The company removed most of his powers and then in 1985 he was fired.
Apple's fortunes waned after that. However, its purchase of NeXT -- the computer company Jobs founded after leaving Apple -- in 1997 brought him back into the fold. Later that year, he became interim CEO and in 2000, the company dropped "interim" from his title.
Along the way Jobs also had managed to revolutionize computer animation with his other company, Pixar, but it was the iPhone in 2007 that secured his legacy in the annals of modern technology history.
Forbes estimates Jobs' net worth at $6.1 billion in 2010, placing him in 42nd place on the list of America's richest. It was not immediately known how his estate would be handled.
Six years ago, Jobs had talked about how a sense of his mortality was a major driver behind that vision.
"Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life," Jobs said during a Stanford commencement ceremony in 2005.
"Because almost everything -- all external expectations, all pride, all fear of embarrassment or failure -- these things just fall away in the face of death, leaving only what is truly important."
"Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart."
(Reporting by Poornima Gupta, Edwin Chan, Andrew Longstreith, Sarah McBride; Editing by Gary Hill and Tiffany Wu)
The co-founder of Apple Inc, one of the world's great entrepreneurs, was surrounded by his wife and immediate family when he died in Palo Alto, California. Other details were not immediately available.
His death was announced by Apple and sparked an immediate outpouring of sadness and sympathy from world leaders, competitors and other businessmen including Microsoft co-founder Bill Gates and Facebook CEO Mark Zuckerberg.
The Silicon Valley icon who gave the world the iPod , iPhone and iPad had stepped down as chief executive of the world's largest technology company in August, handing the reins to long-time lieutenant Tim Cook.
He was deemed the heart and soul of a company that rivals Exxon Mobil as the most valuable in America.
"Steve's brilliance, passion and energy were the source of countless innovations that enrich and improve all of our lives. The world is immeasurably better because of Steve," Apple said in a statement.
"His greatest love was for his wife, Laurene, and his family. Our hearts go out to them and to all who were touched by his extraordinary gifts."
Apple paid homage to their visionary leader by changing their website to a big black-and-white photograph of him with the caption " Steve Jobs : 1955-2011." The flags outside the company's headquarters at 1 Infinite Loop flew at half mast.
Jobs' health had been a controversial topic for years and his battle with a rare form of pancreatic cancer a deep concern to Apple fans and investors.
In past years, even board members have confided to friends their concern that Jobs, in his quest for privacy, was not being forthcoming enough with directors about the true condition of his health.
Now, despite much investor confidence in Cook, who has stood in for his boss during three leaves of absence, there remain concerns about whether Apple would stay a creative force to be reckoned with in the longer term without its visionary.
Jobs died one day after the consumer electronics powerhouse unveiled its latest iPhone , the gadget that transformed mobile communications and catapulted Apple to the highest echelons of the tech world.
His death triggered an immediate outpouring of sympathy.
"The world rarely sees someone who has had the profound impact Steve has had, the effects of which will be felt for many generations to come," Gates said. "For those of us lucky enough to get to work with him, it's been an insanely great honor. I will miss Steve immensely."
Outside an Apple store in New York, mourners laid candles, bouquets of flowers, an apple and an iPod Touch in a makeshift memorial.
"I think half the world found out about his death on an Apple device," said Robbie Sokolowsky, 32, an employee for an online marketing company, who lit a candle outside the store.
Cook said in a statement that Apple planned to hold a celebration of Jobs' life for employees "soon".
APPLE, NEXT, IPHONE
A college dropout, Buddhist and son of adoptive parents, Jobs started Apple Computer with friend Steve Wozniak in 1976. The company soon introduced the Apple 1 computer.
But it was the Apple II that became a huge success and gave Apple its position as a critical player in the then-nascent PC industry, culminating in a 1980 initial public offering that made Jobs a multimillionaire.
Despite the subsequent success of the Macintosh computer, Jobs' relationship with top management and the board soured. The company removed most of his powers and then in 1985 he was fired.
Apple's fortunes waned after that. However, its purchase of NeXT -- the computer company Jobs founded after leaving Apple -- in 1997 brought him back into the fold. Later that year, he became interim CEO and in 2000, the company dropped "interim" from his title.
Along the way Jobs also had managed to revolutionize computer animation with his other company, Pixar, but it was the iPhone in 2007 that secured his legacy in the annals of modern technology history.
Forbes estimates Jobs' net worth at $6.1 billion in 2010, placing him in 42nd place on the list of America's richest. It was not immediately known how his estate would be handled.
Six years ago, Jobs had talked about how a sense of his mortality was a major driver behind that vision.
"Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life," Jobs said during a Stanford commencement ceremony in 2005.
"Because almost everything -- all external expectations, all pride, all fear of embarrassment or failure -- these things just fall away in the face of death, leaving only what is truly important."
"Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart."
(Reporting by Poornima Gupta, Edwin Chan, Andrew Longstreith, Sarah McBride; Editing by Gary Hill and Tiffany Wu)
Thursday, September 22, 2011
Why Financial Planning isnt Popular - MADHU T
Rigour,discipline and time are needed to make a financial plan effective
Call it a professional hazard.Most of my meetings with friends start with a standard line: hey,I was thinking of calling you.Would you please give me numbers of some good financial planners or advisors Nothing wrong with the request per se,considering I write on the topic.But the trouble is that we have been through the same drill many times in the past.The same requests were made a few months,a few times earlier,the numbers were passed on and the gentlemen had spoken about meeting some advisors,too.But thats where it always ends.As they say,history repeats itself mostly as farce.By now I know what happens in those meetings.In the initial enthusiasm,an appointment was made with the advisor.After the initial meetings,the advisor asks for (sometimes in a form) financial details.Many bravehearts call it quits at this juncture because for most of them remembering or going through their financial records is a task similar to preparing for the board exam.They did it in school because they didnt have a choice,but wont do it ever again.Some people even filled up the necessary details,but failed to turn up for the proposed meeting at a future date.Now,they are embarrassed to go back to the same person.The story may have different ingredients,but the crux remains the same: many people fail to finalise their financial investment plan for a variety of reasons.
A FEW HOURS EXTRA,PLEASE
In our experience,the younger category within the age group of 25-45 often fails to go through the entire exercise.Its mainly because of the lack of awareness or enthusiasm.More importantly,they also cant find time to do it because they are extremely busy with their life and career, says D Sundararajan,investment consultant,Trendy Consultants.This is a familiar story shared by many planners and advisors.I dont know whether they actually cant find the time,or is it that famous chalta hai attitude at work, says an advisor.Many youngsters seem to think they dont have to worry about the future because they have a great life ahead. Sundararajan says he has found a unique solution to deal with the issue.We find that senior and elderly people are very diligent when it comes to financial aspects of their life.We impress upon them to convince the younger people in the family to be serious about their financial health.Since we have the tradition of listening to elders like parents or in-laws in the family,it seems to work, he says.
CANT SACRIFICE LIFES PLEASURES
For most people,planning for the future is equal to sacrificing the present happiness.Rightly or wrongly,the perception is deeprooted among the younger category.Blame parents for trying extra hard to ingrain financial discipline.For most people,spending has become a way of life.They dont think it is worthwhile to plan for a big purchase when they can do it with a credit card or a zero percent finance scheme in a matter of a few minutes, says Hemant Rustagi,CEO,Wiseinvest.Sundararajan also has an interesting experience to share: We were conducting a serious programme for young managers in a bank.When it came to investment and financial discipline,many of the younger manages had serious issues.They were categorical that they dont want to compromise on their current lives to be able to lead a better future life, he says.However,experts say,these people have got it completely wrong: financial planning doesnt mean living a hermitic life.You can definitely spend but it should be within your means.Thats all.
I KNOW IT ALL
A lot of people believe that since they read so much about personal finance on the net,newspapers and magazines,they are their best manager.Hiring a mutual fund advisor or an insurance advisor and making investment is their idea of a comprehensive financial plan, says Suresh Sadagopan,chief financial planner,Ladder7 Financial Advisories.Sure,one can do justice to it this way,but the sad truth is very few would be able to do that.Apart from the knowledge about investments and financial plans,the real problem is lack of time.Many people dont have the time to follow their plans continuously, he says.Sundararajan also says thanks to the internet and various online tools available,many people have become experts overnight.He doesnt find anything wrong with it,provided they can do a thorough job.I dont want to say that it is difficult to do it because it may sound serving my own interest.But the trouble is many people just accumulate various investments without understanding them, he says.
STARTING WITH VAGUE IDEAS
Building castles in the air is best left to special effects experts.You cant have fancy plans that cant be supported by numbers.Most people fail to finalise a plan because they dont have a clear idea about their objectives.For example,they cant decide when they want to own a house or a car.It is easier in the case of their retirement or childs marriage because they are certain when it will happen, says Rustagi.According to experts,fancy notions about ones future are a common problem among highearning category.They want everything in life,but the problem is that you should be able to support it financially.For example,there is nothing wrong with a holiday home in Goa.But the question is will you be able to save or invest for it along with your other goals like,say,childs education,a house to stay,or your own retirement, asks a financial advisor.When they face these real issues,most people have the tendency to vanish. Some people start investing as per the plan very earnestly,especially those who have started late in life.But the trouble is that they tend to be extremely aggressive.The moment they see their investments not doing well for a year or two,they lose all interest.They just abandon all their plans and run away, says Rustagi.He says this is a concrete example of not having a concrete plan.
I DONT WANT TO PAY FOR THE ADVICE
Your fee is a bit stiff.Thats something many experts are used to.In fact,many people even ask for a discount.I dont think they ask for a discount from their doctor, fumes a financial planner.The attitude is that I am coming to you only because I dont have the time.But I dont think your fee is justified, he adds.People dont understand that drawing up an entire financial plan or reviewing an entire plan is not an easy job and they should be prepared to pay for it.Even those who go through the initial plan think its for life and vanish because they dont want to pay for the review, says Suresh Sadagopan.It could be a costly mistake because any big change in your life would call for a proper review of your financial plan, he says.
10 Tips to Get Your Finances Right
Be clear about your objectives before starting to make a plan
1) A few mutual fund units and Ulips alone wont help you meet your future financial goals
2) Assess your financial situation and investments,do some calculations to find out the ground reality
3) If you think you cant do it alone,then its time to hire a professional planner or advisor
4) You can fix an appointment and meet the person for an introduction mostly free
5) Keep your bank statement,investments,loan details ready for the next meeting
6) Once you give the necessary details,the advisor will be able to draw up a financial plan for you
7) A financial plan would have details of all your future goals and investments to achieve them
8) You have the option to just buy the plan or ask the person to implement it for you for an extra fee
9) Always show up for periodic reviews and clear your doubts promptly;never try to second guess
10) The plan given by your advisor is never final.You have to review it periodically to fine tune it to the present situation
Written By Madhu T in economic Times of 22/09/2011
Call it a professional hazard.Most of my meetings with friends start with a standard line: hey,I was thinking of calling you.Would you please give me numbers of some good financial planners or advisors Nothing wrong with the request per se,considering I write on the topic.But the trouble is that we have been through the same drill many times in the past.The same requests were made a few months,a few times earlier,the numbers were passed on and the gentlemen had spoken about meeting some advisors,too.But thats where it always ends.As they say,history repeats itself mostly as farce.By now I know what happens in those meetings.In the initial enthusiasm,an appointment was made with the advisor.After the initial meetings,the advisor asks for (sometimes in a form) financial details.Many bravehearts call it quits at this juncture because for most of them remembering or going through their financial records is a task similar to preparing for the board exam.They did it in school because they didnt have a choice,but wont do it ever again.Some people even filled up the necessary details,but failed to turn up for the proposed meeting at a future date.Now,they are embarrassed to go back to the same person.The story may have different ingredients,but the crux remains the same: many people fail to finalise their financial investment plan for a variety of reasons.
A FEW HOURS EXTRA,PLEASE
In our experience,the younger category within the age group of 25-45 often fails to go through the entire exercise.Its mainly because of the lack of awareness or enthusiasm.More importantly,they also cant find time to do it because they are extremely busy with their life and career, says D Sundararajan,investment consultant,Trendy Consultants.This is a familiar story shared by many planners and advisors.I dont know whether they actually cant find the time,or is it that famous chalta hai attitude at work, says an advisor.Many youngsters seem to think they dont have to worry about the future because they have a great life ahead. Sundararajan says he has found a unique solution to deal with the issue.We find that senior and elderly people are very diligent when it comes to financial aspects of their life.We impress upon them to convince the younger people in the family to be serious about their financial health.Since we have the tradition of listening to elders like parents or in-laws in the family,it seems to work, he says.
CANT SACRIFICE LIFES PLEASURES
For most people,planning for the future is equal to sacrificing the present happiness.Rightly or wrongly,the perception is deeprooted among the younger category.Blame parents for trying extra hard to ingrain financial discipline.For most people,spending has become a way of life.They dont think it is worthwhile to plan for a big purchase when they can do it with a credit card or a zero percent finance scheme in a matter of a few minutes, says Hemant Rustagi,CEO,Wiseinvest.Sundararajan also has an interesting experience to share: We were conducting a serious programme for young managers in a bank.When it came to investment and financial discipline,many of the younger manages had serious issues.They were categorical that they dont want to compromise on their current lives to be able to lead a better future life, he says.However,experts say,these people have got it completely wrong: financial planning doesnt mean living a hermitic life.You can definitely spend but it should be within your means.Thats all.
I KNOW IT ALL
A lot of people believe that since they read so much about personal finance on the net,newspapers and magazines,they are their best manager.Hiring a mutual fund advisor or an insurance advisor and making investment is their idea of a comprehensive financial plan, says Suresh Sadagopan,chief financial planner,Ladder7 Financial Advisories.Sure,one can do justice to it this way,but the sad truth is very few would be able to do that.Apart from the knowledge about investments and financial plans,the real problem is lack of time.Many people dont have the time to follow their plans continuously, he says.Sundararajan also says thanks to the internet and various online tools available,many people have become experts overnight.He doesnt find anything wrong with it,provided they can do a thorough job.I dont want to say that it is difficult to do it because it may sound serving my own interest.But the trouble is many people just accumulate various investments without understanding them, he says.
STARTING WITH VAGUE IDEAS
Building castles in the air is best left to special effects experts.You cant have fancy plans that cant be supported by numbers.Most people fail to finalise a plan because they dont have a clear idea about their objectives.For example,they cant decide when they want to own a house or a car.It is easier in the case of their retirement or childs marriage because they are certain when it will happen, says Rustagi.According to experts,fancy notions about ones future are a common problem among highearning category.They want everything in life,but the problem is that you should be able to support it financially.For example,there is nothing wrong with a holiday home in Goa.But the question is will you be able to save or invest for it along with your other goals like,say,childs education,a house to stay,or your own retirement, asks a financial advisor.When they face these real issues,most people have the tendency to vanish. Some people start investing as per the plan very earnestly,especially those who have started late in life.But the trouble is that they tend to be extremely aggressive.The moment they see their investments not doing well for a year or two,they lose all interest.They just abandon all their plans and run away, says Rustagi.He says this is a concrete example of not having a concrete plan.
I DONT WANT TO PAY FOR THE ADVICE
Your fee is a bit stiff.Thats something many experts are used to.In fact,many people even ask for a discount.I dont think they ask for a discount from their doctor, fumes a financial planner.The attitude is that I am coming to you only because I dont have the time.But I dont think your fee is justified, he adds.People dont understand that drawing up an entire financial plan or reviewing an entire plan is not an easy job and they should be prepared to pay for it.Even those who go through the initial plan think its for life and vanish because they dont want to pay for the review, says Suresh Sadagopan.It could be a costly mistake because any big change in your life would call for a proper review of your financial plan, he says.
10 Tips to Get Your Finances Right
Be clear about your objectives before starting to make a plan
1) A few mutual fund units and Ulips alone wont help you meet your future financial goals
2) Assess your financial situation and investments,do some calculations to find out the ground reality
3) If you think you cant do it alone,then its time to hire a professional planner or advisor
4) You can fix an appointment and meet the person for an introduction mostly free
5) Keep your bank statement,investments,loan details ready for the next meeting
6) Once you give the necessary details,the advisor will be able to draw up a financial plan for you
7) A financial plan would have details of all your future goals and investments to achieve them
8) You have the option to just buy the plan or ask the person to implement it for you for an extra fee
9) Always show up for periodic reviews and clear your doubts promptly;never try to second guess
10) The plan given by your advisor is never final.You have to review it periodically to fine tune it to the present situation
Written By Madhu T in economic Times of 22/09/2011
Wednesday, September 21, 2011
Don't be surprised but India and social security do go hand in hand.- Ram Valia
When we talk about social security the attention primarily shifts to the country of stars and stripes. It is wrongly presumed that India does not care for its human capital and the largest contributor to its booming GDP. The truth is that India too has social security measures in place for its currently working and future aged workforce.
Though hard to believe now, but not so after the explanation that follows.
In India there are mainly two types of retirement plans which has several measures to ensure that the employees are eligible to getting several benefits after retirement or superannuating from a company.
1) Defined Benefit Plans
2) Defined Contribution Plans
1) Defined Benefit Plans
in Defined Benefit plans employee's post retirement benefits are ascertained and fixed based upon a formula, irrespective of their contributions. They are linked to the employee's age, service tenure and amount of salary. The benefits that are based on these variables which in turn are directly based on certain predefined formulae.
The employees prefers this type of benefit plan as they don't have to face any investment risk and neither do they have to make any specific contributions towards these future benefits.
Employers consider this deplorable as these benefits lead to the addition of a liability on their balance sheets, as and when these benefits get accrued. The contributions towards these benefits are solely made by the employer. The employer is not only left at that, even after the contributions that are made the investment risk is also Bourne by them.
The types of benefit schemes in the defined benefit plans are:-
Gratuity
It's the benefit paid to the employee for long term continuous service with the employer. It has a vesting period of 5 years and based upon the type of service rendered it normally pays 15 days salary for every completed year of service.
Retrenchment Compensation
A company cannot just fire its employees as and when it feels like. To protect the interests of the employees the employer has to pay a specified compensation to it's employees in times of a closure of a unit or downsizing. It also has tax benefits so that the maximum benefits are availed by the employee
Voluntary Retirement Scheme
To achieve optimum utilization of human capital certain companies offer a VRS option to it's employees to retire early and in return they are offered a range of benefits, they can be cash or shares or even an annuity amount for life. this ensures that even as the employee retires early his post retirement expenses can be taken care of.
Leave Encashment
When a person does not avail of the statutory leaves allocated to him over the year then they get accumulated over the working years. At retirement he can claim the salary for all the unavailed leaves over the years at the daily wage rate payable at retirement. Hence increasing the value of the leaves many folds over his working life.
2) Defined Contribution Plans
In these plans the employee's contributions are defined but his benefits are not certain. They are based on the investments made and the returns obtained on the same over the investment tenure. The employers responsibility ends after making the initial statutory contributions. Because of these reasons Defined Contribution Plan is preferred by the employers and not by the employees. But it also holds a very important benefit for the employees Portability of benefits. Unlike the defined benefit plans, the defined contribution plans being portable can be carried along with the employee if he changes his employer. So his benefits remain unchanged even when he changes his job. In Defined Benefit plans if the employee changes the job then his benefits are either completely diminished or substantially reduced..
Employee Provident Fund
This compulsory investment option offered by all employers can be a great retirement asset, It deducts 12% of an employee's basic salary and the same is matched by the employer. This entire investment is invested at a fixed rate of return of 8.5% p.a. Though Loans and Withdrawal options are available its not advisable to use this fund for anything else but retirement. To force employees not to foreclose this account before retirement there is a penalty for complete withdrawal of money from this account before retirement.
Public Provident Fund
Another long term investment option given to everyone is PPF. it is an investment for a period of 15 years which grows at a rate of 8% p.a. There is a minimum investment amount every year of Rs. 500 and a cap on the maximum amount of Rs. 70,000/-
New Pension Scheme
It's a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime. It will work almost the same way as Private Pension Schemes. The investment choice can is completely at the discretion at of the investor. the investment is not only by the investor but a part is also contributed by the employer and the Government.
Employee Deposit Linked Insurance Scheme
This scheme also provides individuals with a term life insurance at a miniscule cost. This helps protect the interests of the investor incase of an unfortuanate even which might cost his life.
Employee Stock Options
For companies with Shares issue attractive Esops to employees which enable them to buy a stake in the company at a discounted price. This increases their loyalty towards the company and motivates them to work towards the progress of the company
Though it is clear that the availability of retirement beneits and social security measures are in plenty in India but the the actual ability to avail this benefit is very tedious and cumbersome due to the highly bureaucratic nature of executing agencies involved in providing these services. If one finds a way too surpass and circumvent these processes and policies in place then the Indian social security measures can be of great vaue for everyone in the post retirement phase.
Happy Planning
Think before you act as
'It's all in the Mind'
Though hard to believe now, but not so after the explanation that follows.
In India there are mainly two types of retirement plans which has several measures to ensure that the employees are eligible to getting several benefits after retirement or superannuating from a company.
1) Defined Benefit Plans
2) Defined Contribution Plans
1) Defined Benefit Plans
in Defined Benefit plans employee's post retirement benefits are ascertained and fixed based upon a formula, irrespective of their contributions. They are linked to the employee's age, service tenure and amount of salary. The benefits that are based on these variables which in turn are directly based on certain predefined formulae.
The employees prefers this type of benefit plan as they don't have to face any investment risk and neither do they have to make any specific contributions towards these future benefits.
Employers consider this deplorable as these benefits lead to the addition of a liability on their balance sheets, as and when these benefits get accrued. The contributions towards these benefits are solely made by the employer. The employer is not only left at that, even after the contributions that are made the investment risk is also Bourne by them.
The types of benefit schemes in the defined benefit plans are:-
Gratuity
It's the benefit paid to the employee for long term continuous service with the employer. It has a vesting period of 5 years and based upon the type of service rendered it normally pays 15 days salary for every completed year of service.
Retrenchment Compensation
A company cannot just fire its employees as and when it feels like. To protect the interests of the employees the employer has to pay a specified compensation to it's employees in times of a closure of a unit or downsizing. It also has tax benefits so that the maximum benefits are availed by the employee
Voluntary Retirement Scheme
To achieve optimum utilization of human capital certain companies offer a VRS option to it's employees to retire early and in return they are offered a range of benefits, they can be cash or shares or even an annuity amount for life. this ensures that even as the employee retires early his post retirement expenses can be taken care of.
Leave Encashment
When a person does not avail of the statutory leaves allocated to him over the year then they get accumulated over the working years. At retirement he can claim the salary for all the unavailed leaves over the years at the daily wage rate payable at retirement. Hence increasing the value of the leaves many folds over his working life.
2) Defined Contribution Plans
In these plans the employee's contributions are defined but his benefits are not certain. They are based on the investments made and the returns obtained on the same over the investment tenure. The employers responsibility ends after making the initial statutory contributions. Because of these reasons Defined Contribution Plan is preferred by the employers and not by the employees. But it also holds a very important benefit for the employees Portability of benefits. Unlike the defined benefit plans, the defined contribution plans being portable can be carried along with the employee if he changes his employer. So his benefits remain unchanged even when he changes his job. In Defined Benefit plans if the employee changes the job then his benefits are either completely diminished or substantially reduced..
Employee Provident Fund
This compulsory investment option offered by all employers can be a great retirement asset, It deducts 12% of an employee's basic salary and the same is matched by the employer. This entire investment is invested at a fixed rate of return of 8.5% p.a. Though Loans and Withdrawal options are available its not advisable to use this fund for anything else but retirement. To force employees not to foreclose this account before retirement there is a penalty for complete withdrawal of money from this account before retirement.
Public Provident Fund
Another long term investment option given to everyone is PPF. it is an investment for a period of 15 years which grows at a rate of 8% p.a. There is a minimum investment amount every year of Rs. 500 and a cap on the maximum amount of Rs. 70,000/-
New Pension Scheme
It's a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime. It will work almost the same way as Private Pension Schemes. The investment choice can is completely at the discretion at of the investor. the investment is not only by the investor but a part is also contributed by the employer and the Government.
Employee Deposit Linked Insurance Scheme
This scheme also provides individuals with a term life insurance at a miniscule cost. This helps protect the interests of the investor incase of an unfortuanate even which might cost his life.
Employee Stock Options
For companies with Shares issue attractive Esops to employees which enable them to buy a stake in the company at a discounted price. This increases their loyalty towards the company and motivates them to work towards the progress of the company
Though it is clear that the availability of retirement beneits and social security measures are in plenty in India but the the actual ability to avail this benefit is very tedious and cumbersome due to the highly bureaucratic nature of executing agencies involved in providing these services. If one finds a way too surpass and circumvent these processes and policies in place then the Indian social security measures can be of great vaue for everyone in the post retirement phase.
Happy Planning
Think before you act as
'It's all in the Mind'
Tuesday, September 20, 2011
Have your Retirement Planned... The earlier the better - Ram Valia
A stage of life always considered too far into the future to be planned for, but it can be quite intimidating when you realise the amount of money you require to sail smoothly through the retired phase of your life.
Retirement as i define is the day from which you stop working for money, you can continue into any profession, business or service but the work is not motivated by the primary requirement for you to fun your family. so continuing to work for a cause or for a liking is not considered work and doing it irrespective of the monetary benefits is the time when retirement has started.
Retired phase of life makes up for almost 1/3rd part of most people's lives. This figure when revealed takes many people by surprise as they believe that like their ancestors and forefathers, their children will take on the responsibility of providing for the their living expenses. it is widely believed that once they are into retirement their expenses will drop down dramatically and the little unplanned savings which they have will suffice their every need. One aspect that is completely forgotten is the demon of inflation. This demon can have treacherous effect on the real value of money that has been saved over the years. Thr belief that everything is left to the almighty and they will get no hardships can really have them falling flat on their face. They completely sideline the fact that they will have illnesses as they age, they will have social obligations to cater to, they will have some hobbies in mind which they would like to pursue, and that they will not come cheap. Getting complaisant about their financial position based upon the mere adulation of their friends and colleagues whose base is a misconceived assumption about your financial situation can prove fatal in those critical later years of life.
Retirement should be Planned
Sit with your planner, and get a planner who has only your interests in mind. Discuss your current lifestyle, argue upon the inflation rates coupled with other assumptions like the growth rates of various asset classes, an appropriate asset allocation based upon your risk profile after a distilled understanding of the risk factors and the meaning of each risk factor
Setting the ground rules correct lay the plinth by discussing your expenses under various heads. Each head is important as it would grow at its specific inflation rate. An input of expense start and end year should be given prime importance so that precise expense calculations for the future years can be made.There could be certain expenses like medical expenses, socialising that can grow at different inflation rates , those need to be incorporated separately.
After this, deciding upon the retirement age is critical, there are two aspects to this. A desired retirement age, this is the age when you wish and aim to retire and an extendable retirement age which is the age upto which you can stretch your retirement if the plan cannot be made at the desired age. Also the most important input is the life expectancy. This is generally based upon the history of the family's life expectancy along with the person's health situation.
A buffer amount is needed
As the retirement plan has many assumed inputs used, there will be times that the actual situation can be different than what was assumed. Inflation can vary, so can the returns of each asset class over the planning period and the probability of humans to live longer than the horizon planned for forces a big threat to the sincerity of the plan. Though it is good to live more and backed with today's advancement in science and medical fields it is quite possible too. But it might not be that good for the plan. To protect against this risk called 'Longevity Risk' in which you might live longer than what is planned for you should have a buffer amount in your plan. This amount should at any point in time be able to suffice the next 5 years expenses adjusted for inflation.
Pay fees to your Planner
To get the best interests in mind you should pay a fee that is decided upon before entering the contract. This wil make him more accountable to you and force him to serve you better.
Plan your post Retirement Activities
In the time after retirement, though you have the finances planned, it is equally important to have your time planned too. This means engaging in activities that will keep you busy and your mind away from ill thinking. it can be either a hobby that you like, or following a sport that you adore, or even a cause that you stand strongly for. Knowing this will ensure that you are occupied towards productive thinking and action post retirement. Your expenses after retirement will be heavily based upon the type of activity chosen.
Plan Early, Plan Smart
If there are two people, Mr. A an Mr. B, both are currently 25 years old and have their current expenses at Rs. 50000/- p.m. and both plan to retire at 60. Mr. A starts planning for this from age 25 and Mr. B starts planning for retirement at age 40. With identical situation and risk profile assuming an inflation rate of 7% and a weighted average post tax return on investments of 12% and a life expectancy of 85 years Mr. A will only have to invest Rs. 18288/- p.m. and Mr. B will have to invest 109567/- p.m. which is almost 6 times Mr. A's required savings
So when it comes to retirement be planned, be ready and this will ensure that you can rest carefree in you hammock on the serene spot of your dreams
Happy planning
Think before you act as
'It's all in the Mind'
Retirement as i define is the day from which you stop working for money, you can continue into any profession, business or service but the work is not motivated by the primary requirement for you to fun your family. so continuing to work for a cause or for a liking is not considered work and doing it irrespective of the monetary benefits is the time when retirement has started.
Retired phase of life makes up for almost 1/3rd part of most people's lives. This figure when revealed takes many people by surprise as they believe that like their ancestors and forefathers, their children will take on the responsibility of providing for the their living expenses. it is widely believed that once they are into retirement their expenses will drop down dramatically and the little unplanned savings which they have will suffice their every need. One aspect that is completely forgotten is the demon of inflation. This demon can have treacherous effect on the real value of money that has been saved over the years. Thr belief that everything is left to the almighty and they will get no hardships can really have them falling flat on their face. They completely sideline the fact that they will have illnesses as they age, they will have social obligations to cater to, they will have some hobbies in mind which they would like to pursue, and that they will not come cheap. Getting complaisant about their financial position based upon the mere adulation of their friends and colleagues whose base is a misconceived assumption about your financial situation can prove fatal in those critical later years of life.
Retirement should be Planned
Sit with your planner, and get a planner who has only your interests in mind. Discuss your current lifestyle, argue upon the inflation rates coupled with other assumptions like the growth rates of various asset classes, an appropriate asset allocation based upon your risk profile after a distilled understanding of the risk factors and the meaning of each risk factor
Setting the ground rules correct lay the plinth by discussing your expenses under various heads. Each head is important as it would grow at its specific inflation rate. An input of expense start and end year should be given prime importance so that precise expense calculations for the future years can be made.There could be certain expenses like medical expenses, socialising that can grow at different inflation rates , those need to be incorporated separately.
After this, deciding upon the retirement age is critical, there are two aspects to this. A desired retirement age, this is the age when you wish and aim to retire and an extendable retirement age which is the age upto which you can stretch your retirement if the plan cannot be made at the desired age. Also the most important input is the life expectancy. This is generally based upon the history of the family's life expectancy along with the person's health situation.
A buffer amount is needed
As the retirement plan has many assumed inputs used, there will be times that the actual situation can be different than what was assumed. Inflation can vary, so can the returns of each asset class over the planning period and the probability of humans to live longer than the horizon planned for forces a big threat to the sincerity of the plan. Though it is good to live more and backed with today's advancement in science and medical fields it is quite possible too. But it might not be that good for the plan. To protect against this risk called 'Longevity Risk' in which you might live longer than what is planned for you should have a buffer amount in your plan. This amount should at any point in time be able to suffice the next 5 years expenses adjusted for inflation.
Pay fees to your Planner
To get the best interests in mind you should pay a fee that is decided upon before entering the contract. This wil make him more accountable to you and force him to serve you better.
Plan your post Retirement Activities
In the time after retirement, though you have the finances planned, it is equally important to have your time planned too. This means engaging in activities that will keep you busy and your mind away from ill thinking. it can be either a hobby that you like, or following a sport that you adore, or even a cause that you stand strongly for. Knowing this will ensure that you are occupied towards productive thinking and action post retirement. Your expenses after retirement will be heavily based upon the type of activity chosen.
Plan Early, Plan Smart
If there are two people, Mr. A an Mr. B, both are currently 25 years old and have their current expenses at Rs. 50000/- p.m. and both plan to retire at 60. Mr. A starts planning for this from age 25 and Mr. B starts planning for retirement at age 40. With identical situation and risk profile assuming an inflation rate of 7% and a weighted average post tax return on investments of 12% and a life expectancy of 85 years Mr. A will only have to invest Rs. 18288/- p.m. and Mr. B will have to invest 109567/- p.m. which is almost 6 times Mr. A's required savings
So when it comes to retirement be planned, be ready and this will ensure that you can rest carefree in you hammock on the serene spot of your dreams
Happy planning
Think before you act as
'It's all in the Mind'
Monday, September 19, 2011
WHAT IT TAKES TO BE A LANDLORD- Amit Shanbaug
It’s easy to buy property with a loan and use rental income to pay the EMI, but dealing with tenants and maintenance issues can be a problem. Find out what you should know before renting your house
Amit Shanbaug
The two-bedroom flat in the multi-storeyed complex at Vasundhara Enclave near the Delhi-Noida border is in a mess. The flooring has cracked, the pipes are leaking and the woodwork is in a bad shape. Still, Noidabased businessman Sudhir Makhija is interested in buying it. It’s because he wants to invest in property for rental income. Makhija estimates he will have to spend another 2 lakh to do up the house before he can find a tenant. “The high rental value of the locality will more than make up for the expense,” he chuckles.
There are many buyers like Makhija whose sole intention is to put up the property on rent. In fact, according to an online survey conducted by ET Wealth, the age of such investors is coming down, with almost 90% of the respondents being less than 45 years of age.
This unabashed focus on rent has many positives. Inflation is rent-friendly. Rents go up with inflation, while the home loan EMI for the property remains more or less steady. And, while the property earns a regular income for the owner, it continues to appreciate in value.
However, renting out property may not be everyone’s cup of tea. “My business gives me the flexibility to manage my five properties. Someone with a full-time job will find this difficult to handle,” says Makhija. Dealing with tenants can also be a nightmare. Besides the usual shenanigans over delay in rent, there is the fear of a tenant not vacating the property. This is why Mumbai-based Ravi Tiwari, who owns two properties, says, “I change my tenants every 2-3 years.” It means shelling out more to a property dealer, who finds a tenant for him, but Tiwari doesn’t mind. “If a tenant stays for long, he may refuse to vacate,” he says.
These are just two of the issues that can crop up. There are other aspects like income tax, wealth tax, the real cost of loan taken for the property and the soft skills required of a landlord. Here’s what you need to consider before you decide to wear the hat of a landlord.
LOCATION AND SIZE
If you want good rental income, buy a property that boasts a good location. It makes sense because what tenants spend extra on rent, they can save in transportation and in time.
The ideal neighbourhood should have a built-in tenant base. This can be a commercial or an institutional hub in close proximity, which will ensure a steady supply of working professionals and their families.
The smaller the property, the better is the rental yield. This is because the tenant base gets bigger as we move down the income pyramid. In Mumbai, smaller flats are more in demand as they are affordable for a larger number of people. They generally compare the rent with the EMI payout in case they own the house.
TAX IMPLICATIONS
If you own more than one house, the second house is deemed to be rented out and you are taxed for the notional rent received from the property. According to Sanjay Kapadia, chairman, Taxsum.com, this rent is calculated by accounting the municipal valuation and the fair rent of the property. If, however, a property is covered by the Rent Control Act, then the amount of rent expected cannot exceed the standard rent determined under that Act.
The good news is that the rent from the second home is not fully taxable. There is a 30% standard deduction. Besides, the interest paid on a home loan and municipal taxes paid can also be deducted from the income. Unlike in a self-occupied house, there is no annual limit for the home loan interest you can claim as a deduction. Some of these rules will change when the Direct Taxes Code comes into effect next year. Also, if a property has been given on rent, it is not taken into account while calculating wealth tax. But if it is lying vacant, its value is included while calculating the tax.
THE LAW & THE TENANT
A residential lease agreement is a legally binding contract between the landlord and all cotenants. Once an agreement is signed, it can’t be unilaterally changed by one party. It is, therefore, important for a landlord to ensure that this lease agreement is watertight.
SMART STRATEGIES TO FOLLOW
Mind the other costs: While sizing up a property, don’t just look at the potential rental income. Factor in other costs, such as maintenance charges, property tax and payment to the broker who gets the tenant. Also, keep in mind that there may be a gap of 1-2 months between two tenancies.
Think downmarket: Some of the properties most wanted by tenants may not be in upmarket locations but in downmarket areas. Locations close to colleges or work places or with direct access to public transport, but in a notso-prime location, will always be in demand for their lower rentals.
Additional facilities: New projects in suburbs offer facilities such as clubs and swimming pools. Most tenants don’t like to pay for common facilities they hardly use. Avoid buying such properties.
Stay clear of oversupply: Don’t buy a rental property in areas where many projects are coming up as the new supply may lower rentals. If the property prices are affordable, tenants may prefer to buy instead of rent.
Resale properties offer better rentals: Resale (or old) properties score over new as they are ready for possession and will most likely be in a more central location than a new one. The drawback, however, is that not everyone will be able to afford the high upfront payment sometimes required for a resale property.
Renovate sensibly: When you renovate to rent out a property, don’t go over the top. Stick to basic renovation, such as fixing electricity connections, checking the sanitaryware, polishing the woodwork and painting the house.
Don’t buy outside city or state: The farther you live from your rental property, the harder it will be to monitor it. Collecting rent or taking care of maintenance will be more difficult and costly if you live in another city.
Have a contract: It is always better to have the terms and conditions on which you lease out your property put down on paper. Also, review the contract when you renew a tenant. Collect rent on schedule: Being consistent with your tenants is imperative. If you are too lax one month, you may have a hard time collecting rent the next month.
EVICTING A TENANT
Sometimes evicting the tenant is the only feasible option. If you cannot get the tenant to pay or obey rules, it may be time to start the eviction process. The rules for evicting a tenant vary between states. It is, therefore, imperative you discuss your options with a lawyer. For security, you may want to conduct the eviction through your lawyer. Send all your requests in writing. The first step is to send a written notice for the tenant to pay rent, fix problem behaviour or move out. If the problem is not rectified despite the notices, file a suit. If you win this, the law enforcement personnel deliver the written notice, when the tenant may remove his items from the premises.
Read the full story in ET Wealth
(Sep 12-18 issue) or log on to
www.wealth.economictimes.com
Kiran Shetty
Owns a 1-& a 3.5-BHK house in Mumbai.
HIS STRATEGY: Let out a property only after it is debt-free. Shetty plans to rent his loan-free 1-BHK house to take care of the partial EMI for his bigger house. As the 1-BHK house is located at a prime location, he expects a hefty rental. He purchased the bigger house for 1.35 crore around a year ago. Of the total sum, about 45 lakh came from home loan, the rest from his savings. THE PROBLEM: Though his house is situated in a prime location, he would still need to renovate the 1-BHK house and bear the cost to attract good customers.
Ravi Tiwari
He owns two 2-BHK flats in Navi Mumbai and Thane.
HIS STRATEGY: Lease out one flat to pay the loan taken for the other house. When he purchased his second flat in Navi Mumbai, he leased out his earlier flat in Thane, which was in a better location, to reduce his loan burden as it fetched him a higher rent. THE PROBLEM: He is unable to visit Thane regularly and misses out on paying monthly maintenance bills, water charges and property taxes and ends up paying 300-400 as fines. He plans to pay the entire year’s maintenance in advance.
Amit Shanbaug
The two-bedroom flat in the multi-storeyed complex at Vasundhara Enclave near the Delhi-Noida border is in a mess. The flooring has cracked, the pipes are leaking and the woodwork is in a bad shape. Still, Noidabased businessman Sudhir Makhija is interested in buying it. It’s because he wants to invest in property for rental income. Makhija estimates he will have to spend another 2 lakh to do up the house before he can find a tenant. “The high rental value of the locality will more than make up for the expense,” he chuckles.
There are many buyers like Makhija whose sole intention is to put up the property on rent. In fact, according to an online survey conducted by ET Wealth, the age of such investors is coming down, with almost 90% of the respondents being less than 45 years of age.
This unabashed focus on rent has many positives. Inflation is rent-friendly. Rents go up with inflation, while the home loan EMI for the property remains more or less steady. And, while the property earns a regular income for the owner, it continues to appreciate in value.
However, renting out property may not be everyone’s cup of tea. “My business gives me the flexibility to manage my five properties. Someone with a full-time job will find this difficult to handle,” says Makhija. Dealing with tenants can also be a nightmare. Besides the usual shenanigans over delay in rent, there is the fear of a tenant not vacating the property. This is why Mumbai-based Ravi Tiwari, who owns two properties, says, “I change my tenants every 2-3 years.” It means shelling out more to a property dealer, who finds a tenant for him, but Tiwari doesn’t mind. “If a tenant stays for long, he may refuse to vacate,” he says.
These are just two of the issues that can crop up. There are other aspects like income tax, wealth tax, the real cost of loan taken for the property and the soft skills required of a landlord. Here’s what you need to consider before you decide to wear the hat of a landlord.
LOCATION AND SIZE
If you want good rental income, buy a property that boasts a good location. It makes sense because what tenants spend extra on rent, they can save in transportation and in time.
The ideal neighbourhood should have a built-in tenant base. This can be a commercial or an institutional hub in close proximity, which will ensure a steady supply of working professionals and their families.
The smaller the property, the better is the rental yield. This is because the tenant base gets bigger as we move down the income pyramid. In Mumbai, smaller flats are more in demand as they are affordable for a larger number of people. They generally compare the rent with the EMI payout in case they own the house.
TAX IMPLICATIONS
If you own more than one house, the second house is deemed to be rented out and you are taxed for the notional rent received from the property. According to Sanjay Kapadia, chairman, Taxsum.com, this rent is calculated by accounting the municipal valuation and the fair rent of the property. If, however, a property is covered by the Rent Control Act, then the amount of rent expected cannot exceed the standard rent determined under that Act.
The good news is that the rent from the second home is not fully taxable. There is a 30% standard deduction. Besides, the interest paid on a home loan and municipal taxes paid can also be deducted from the income. Unlike in a self-occupied house, there is no annual limit for the home loan interest you can claim as a deduction. Some of these rules will change when the Direct Taxes Code comes into effect next year. Also, if a property has been given on rent, it is not taken into account while calculating wealth tax. But if it is lying vacant, its value is included while calculating the tax.
THE LAW & THE TENANT
A residential lease agreement is a legally binding contract between the landlord and all cotenants. Once an agreement is signed, it can’t be unilaterally changed by one party. It is, therefore, important for a landlord to ensure that this lease agreement is watertight.
SMART STRATEGIES TO FOLLOW
Mind the other costs: While sizing up a property, don’t just look at the potential rental income. Factor in other costs, such as maintenance charges, property tax and payment to the broker who gets the tenant. Also, keep in mind that there may be a gap of 1-2 months between two tenancies.
Think downmarket: Some of the properties most wanted by tenants may not be in upmarket locations but in downmarket areas. Locations close to colleges or work places or with direct access to public transport, but in a notso-prime location, will always be in demand for their lower rentals.
Additional facilities: New projects in suburbs offer facilities such as clubs and swimming pools. Most tenants don’t like to pay for common facilities they hardly use. Avoid buying such properties.
Stay clear of oversupply: Don’t buy a rental property in areas where many projects are coming up as the new supply may lower rentals. If the property prices are affordable, tenants may prefer to buy instead of rent.
Resale properties offer better rentals: Resale (or old) properties score over new as they are ready for possession and will most likely be in a more central location than a new one. The drawback, however, is that not everyone will be able to afford the high upfront payment sometimes required for a resale property.
Renovate sensibly: When you renovate to rent out a property, don’t go over the top. Stick to basic renovation, such as fixing electricity connections, checking the sanitaryware, polishing the woodwork and painting the house.
Don’t buy outside city or state: The farther you live from your rental property, the harder it will be to monitor it. Collecting rent or taking care of maintenance will be more difficult and costly if you live in another city.
Have a contract: It is always better to have the terms and conditions on which you lease out your property put down on paper. Also, review the contract when you renew a tenant. Collect rent on schedule: Being consistent with your tenants is imperative. If you are too lax one month, you may have a hard time collecting rent the next month.
EVICTING A TENANT
Sometimes evicting the tenant is the only feasible option. If you cannot get the tenant to pay or obey rules, it may be time to start the eviction process. The rules for evicting a tenant vary between states. It is, therefore, imperative you discuss your options with a lawyer. For security, you may want to conduct the eviction through your lawyer. Send all your requests in writing. The first step is to send a written notice for the tenant to pay rent, fix problem behaviour or move out. If the problem is not rectified despite the notices, file a suit. If you win this, the law enforcement personnel deliver the written notice, when the tenant may remove his items from the premises.
Read the full story in ET Wealth
(Sep 12-18 issue) or log on to
www.wealth.economictimes.com
Kiran Shetty
Owns a 1-& a 3.5-BHK house in Mumbai.
HIS STRATEGY: Let out a property only after it is debt-free. Shetty plans to rent his loan-free 1-BHK house to take care of the partial EMI for his bigger house. As the 1-BHK house is located at a prime location, he expects a hefty rental. He purchased the bigger house for 1.35 crore around a year ago. Of the total sum, about 45 lakh came from home loan, the rest from his savings. THE PROBLEM: Though his house is situated in a prime location, he would still need to renovate the 1-BHK house and bear the cost to attract good customers.
Ravi Tiwari
He owns two 2-BHK flats in Navi Mumbai and Thane.
HIS STRATEGY: Lease out one flat to pay the loan taken for the other house. When he purchased his second flat in Navi Mumbai, he leased out his earlier flat in Thane, which was in a better location, to reduce his loan burden as it fetched him a higher rent. THE PROBLEM: He is unable to visit Thane regularly and misses out on paying monthly maintenance bills, water charges and property taxes and ends up paying 300-400 as fines. He plans to pay the entire year’s maintenance in advance.
Sunday, September 18, 2011
Victoria's Secret
Victoria's Secret certainly has a wonderful history, it all started when a graduate student from Stanford Graduate School Of Business felt rather embarassed when it came to purchasing beautiful lingerie for his wife from a department store. His name was Roy Raymond who was located in San Francisco, California. In 1977 Roy borrowed $40000 from his in-laws and another $40000 bank loan & decided to open his first store at Stanford Shopping Center, thus 'Victoria's Secret' was born.
It made $5,00,000/- in the first year of operations. After 5 years of operation Roy Raymond sold Victoria's Secret to ''The Limited'' for $4 Million, Happy ending , right?
But after just 2 years of operations under "The Limited" its worth was $500 million seeing which Roy plummeted to his death off of the Golden Gate Bridge
Moral of the story
"Never sell off anything till you find its True value"
It made $5,00,000/- in the first year of operations. After 5 years of operation Roy Raymond sold Victoria's Secret to ''The Limited'' for $4 Million, Happy ending , right?
But after just 2 years of operations under "The Limited" its worth was $500 million seeing which Roy plummeted to his death off of the Golden Gate Bridge
Moral of the story
"Never sell off anything till you find its True value"
Thursday, September 15, 2011
You might have a planner, but is he a true Financial Planner? - Ram Valia
There are many folks gallivanting in the financial markets professing a self proclaimed title of financial planners and Advisors. But are they true financial planners? Can they help you plan your finances better? Can they help you secure your financial future? These are the questions that you need to ask yourself. Unlike other services that one opts for, one can't say that he will buy it, try it and then judge and decide whether it is worth it or no. It's about your hard earned money, and even a small mistake can cost you dear and can set you back from your financial goals to quite a big extent.
So its of prime importance to judge and decide whether the planner that you are about to give the control of your money is a real financial planner and considers you above everything else..Your judgement and decision should be based on the following points..
- Is he Certified?
In India and more than 23 countries around the world the CFPcm mark is a symbol that is well connected with a good financial planner. This is because they follow a system of 4 E's
Ethics, Educstion, Examination and Experience. Ethical practices of conduct forms the basis for every CFP certified financial planner. They clear a set of 5 exams and need 3 years of experience in the financial services sector to receive their certification Before they can claim themselves as a CFPcm certified. Not only should the person only be certified but also a practising financial planner.
So being updated with the latest happenings in the financial services frame is also a predicament for maintaining the certification.. this is done by a requirement to be dedicated towards a process of continuous education.
Having a certification be a certifying agency like FPSB (Financial Planning Standards Standard Board) India is not enough. To ensure that the person is practising the learnt concepts of financial planning it should be checked that the person does not come from a specific company that sells products of any specific company. If he does that then the advise will be prejudiced and the aim will be selling the products to you without citing your best interests in mind. So he should be neutral from the company from where he comes.
- Is he a Client Representative?
Being a client representative is very important as it defines the basic role of a planner. He should solely have your best interests in mind. He should not be motivated merely by the commissions he gets from the products that he sells to you. He must evaluate all products and investment advice based upon the fact that how will it benefit you, up to what extent and how will it help you secure your financial future.
- Does he Charge a fee?
As nothing in this world comes free neither should financial advice. On charging a fee the planner is bound to see your interest above his own and also his company's interest. He is your guide and should not be motivated by anything else but your best interest in mind..
This can be tested by seeing if he discloses to you the ref\eral arrangements he has from all product sources. He should tell you all his sources of income so that you can judge the objectivity of his advice. He should list down the fees clearly stating if there are any additional taxes. Are there any commissions that he gets by referring you to any agency for any product that you need. This can enable the client to judge the true basis of your advice..
- Does he present a Contract of Undertaking?
There should be a contract which details out all the offerings of the service and the charges for the same, there should be no array of ambiguity in the terms and in case any arise then it should be cleared before entering an agreement. This contract should also state the serviceability tenure and the statement of client confidentiality. this statemtent of Confidentiality is required as the planner has access to alot of privileged and confidential information regarding the client.
The contract should clearly state the details of regular communications and plan updates modifications and reviews. The client should be communicated about his financial position on a regular basis so that he is aware about the actions taken by the planner and the results of the same.
- How good is his Financial Knowledge?
Not only should the planner be able to make a plan impeccable but he should also of knowledge about the financial markets, the way the equities markets works, the details of the bond markets, the factors that govern the functioning of the economy and how the global factors affect your investments, along with this his skills to work with excel and spreadsheets should be impeccable
- Is his Execution Team as good as he is?
What is a director without his team? What is a king without his countrymen? The phrase of 'A one man army is passé and lame. The planner should have the ability to make the plan and have the team and infrastructure in place with separate departments to execute each function of the plan separately with independent watertight responsibilities and actionable for each department. The departments can be
1) Plan writing
2) Client Acquisition
3) Operations.
4) Research
5) Execution
A well trained staff in each department and a good operations department with well tech-age technology base with ease the process of serving you and you will be highly content of the outcome of the service.
So keeping these points in mind find your true financial planner and be free of all your financial worries.
Happy Planning
Think before you act as
'It's All in the Mind'
So its of prime importance to judge and decide whether the planner that you are about to give the control of your money is a real financial planner and considers you above everything else..Your judgement and decision should be based on the following points..
- Is he Certified?
In India and more than 23 countries around the world the CFPcm mark is a symbol that is well connected with a good financial planner. This is because they follow a system of 4 E's
Ethics, Educstion, Examination and Experience. Ethical practices of conduct forms the basis for every CFP certified financial planner. They clear a set of 5 exams and need 3 years of experience in the financial services sector to receive their certification Before they can claim themselves as a CFPcm certified. Not only should the person only be certified but also a practising financial planner.
So being updated with the latest happenings in the financial services frame is also a predicament for maintaining the certification.. this is done by a requirement to be dedicated towards a process of continuous education.
Having a certification be a certifying agency like FPSB (Financial Planning Standards Standard Board) India is not enough. To ensure that the person is practising the learnt concepts of financial planning it should be checked that the person does not come from a specific company that sells products of any specific company. If he does that then the advise will be prejudiced and the aim will be selling the products to you without citing your best interests in mind. So he should be neutral from the company from where he comes.
- Is he a Client Representative?
Being a client representative is very important as it defines the basic role of a planner. He should solely have your best interests in mind. He should not be motivated merely by the commissions he gets from the products that he sells to you. He must evaluate all products and investment advice based upon the fact that how will it benefit you, up to what extent and how will it help you secure your financial future.
- Does he Charge a fee?
As nothing in this world comes free neither should financial advice. On charging a fee the planner is bound to see your interest above his own and also his company's interest. He is your guide and should not be motivated by anything else but your best interest in mind..
This can be tested by seeing if he discloses to you the ref\eral arrangements he has from all product sources. He should tell you all his sources of income so that you can judge the objectivity of his advice. He should list down the fees clearly stating if there are any additional taxes. Are there any commissions that he gets by referring you to any agency for any product that you need. This can enable the client to judge the true basis of your advice..
- Does he present a Contract of Undertaking?
There should be a contract which details out all the offerings of the service and the charges for the same, there should be no array of ambiguity in the terms and in case any arise then it should be cleared before entering an agreement. This contract should also state the serviceability tenure and the statement of client confidentiality. this statemtent of Confidentiality is required as the planner has access to alot of privileged and confidential information regarding the client.
The contract should clearly state the details of regular communications and plan updates modifications and reviews. The client should be communicated about his financial position on a regular basis so that he is aware about the actions taken by the planner and the results of the same.
- How good is his Financial Knowledge?
Not only should the planner be able to make a plan impeccable but he should also of knowledge about the financial markets, the way the equities markets works, the details of the bond markets, the factors that govern the functioning of the economy and how the global factors affect your investments, along with this his skills to work with excel and spreadsheets should be impeccable
- Is his Execution Team as good as he is?
What is a director without his team? What is a king without his countrymen? The phrase of 'A one man army is passé and lame. The planner should have the ability to make the plan and have the team and infrastructure in place with separate departments to execute each function of the plan separately with independent watertight responsibilities and actionable for each department. The departments can be
1) Plan writing
2) Client Acquisition
3) Operations.
4) Research
5) Execution
A well trained staff in each department and a good operations department with well tech-age technology base with ease the process of serving you and you will be highly content of the outcome of the service.
So keeping these points in mind find your true financial planner and be free of all your financial worries.
Happy Planning
Think before you act as
'It's All in the Mind'
Monday, September 12, 2011
Are you ready for your old age medical expenses? Think Again !!
Applying an analogy of a human body is a machine. it does get old and parts to loosen out. Unfortunately its not that simple to replace any part or buy a new body altogether, not only the trauma of a surgery but the quantum of medical expenses can literally be quite a pain.
If we are still in the same old frame of mind that once we have bought health insurance in the form of a mediclaim, we are safe from the financial impact of any illness or accident we need to be brought to face the reality.
The rate at which the costs of medication has been rising coupled with the ever increasing propensity of us to fall ill arouses the immediate need of an old age medical contingency fund to be into place.
Whenever I meet clients we discuss their current medial insurances' sum assured, I get a couple of similar answers either they are partly covered by their employer or they have some medical insurance bought on their own. Nor do they know the coverage factors and the exclusions of that insurance policy. neither do they understand that an adequate amount of sum assured along with a policy that covers maximum illnesses and has least exclusions and sub-limits is critical.
An employer sponsored insurance is a good option as no premiums need to be paid, but incase of a job loss or a shift of jobs that cover ceases to exist and then buying a new insurance can be relatively more expensive.
Though a floater policy that covers all the members of a family up to the amount of sum assured is an acceptable policy for the young earners but as we age each individual needs a separate policy so that they can benefit from the complete amount of sum assured. in an individual policy the premiums are applicable as per their individual ages rather than the age of the eldest member like in a the case of a floater policy.
Lets take an example of Mr. X who has a sum assured of Rs. 300000/- for himself. Though he might feel that he is adequately covered against medical contingencies he does not realise that moving on after 25 years this sum assured would cover for illness and treatment expenses of not more than a value equivalent of Rs. 30,000/- today. So speaking in terms of real value numbers to treat an illness that costs Rs. 3,00,000/- today he will have to pay Rs. 32,50,000/- after 25 years. This is by assuming an inflation rate of medical expenses at 10%. This is how bad is the impact of inflation on your medical bills. A cover of Rs. 3,00,000/- today becomes worth Rs. 30,000/- after 25 years and to get the same value of today's Rs. 3,00,000/- you will have to shell out Rs. 32,50,000/-. And as per my knowledge medical inflation costs can be quite higher than 10% too.
Not only does the value of your sum assured falls, your premiums also increase with age. Insurers have age bracket slabs which are used in calculating insurance premiums. Varying from insurer to insurer the slabs could be age 25-30, 30-35, 35-45
and so on . Every time you move on to a higher age bracket your insurance premium is increased by quite a bit.
So in all you as you get older you are paying more and more for a policy that is protecting you for a value that is decreasing every year. This is not a wise step in your financial plan.
Your planner should advise you on creating n old age medical fund . Its value should be an amount that is atleast equivalent to the value of today's Rs. 3,00,000/- at the time when you retire. The rate at which it increases would be based on your assumed medical inflation rate, which according to me should not be less than 10%. This value is called the future value of your Medical contingency fund.
Now as you know the value that you need to build over your working life your planner would guide you on the strategies needed for the deployment of your savings into an appropriate channel. If your retirement is at least 10 years into the future then a major portion of this should be equities and other risky assets, this is because we have the time horizon that is sufficient to manage the volatility congruent with the equity markets. This is because the return potential of equities is paramount in achieving our aim of beating the high rate of medical inflation.
This fund will need a regular revaluation and asset reallocation as the goal nears. This investment strategy can ensure that you are well prepared for the ultra high medical expenses that can arise as we age. This fund keeps you covered to the true value of today's medical expenses when you retire and also saves you from paying unnecessarily high premiums for a cover amount that doesn't cover you in the true sense.
Cheers & Happy Planning.
Think before you act as
'Its all in the Mind.'
If we are still in the same old frame of mind that once we have bought health insurance in the form of a mediclaim, we are safe from the financial impact of any illness or accident we need to be brought to face the reality.
The rate at which the costs of medication has been rising coupled with the ever increasing propensity of us to fall ill arouses the immediate need of an old age medical contingency fund to be into place.
Whenever I meet clients we discuss their current medial insurances' sum assured, I get a couple of similar answers either they are partly covered by their employer or they have some medical insurance bought on their own. Nor do they know the coverage factors and the exclusions of that insurance policy. neither do they understand that an adequate amount of sum assured along with a policy that covers maximum illnesses and has least exclusions and sub-limits is critical.
An employer sponsored insurance is a good option as no premiums need to be paid, but incase of a job loss or a shift of jobs that cover ceases to exist and then buying a new insurance can be relatively more expensive.
Though a floater policy that covers all the members of a family up to the amount of sum assured is an acceptable policy for the young earners but as we age each individual needs a separate policy so that they can benefit from the complete amount of sum assured. in an individual policy the premiums are applicable as per their individual ages rather than the age of the eldest member like in a the case of a floater policy.
Lets take an example of Mr. X who has a sum assured of Rs. 300000/- for himself. Though he might feel that he is adequately covered against medical contingencies he does not realise that moving on after 25 years this sum assured would cover for illness and treatment expenses of not more than a value equivalent of Rs. 30,000/- today. So speaking in terms of real value numbers to treat an illness that costs Rs. 3,00,000/- today he will have to pay Rs. 32,50,000/- after 25 years. This is by assuming an inflation rate of medical expenses at 10%. This is how bad is the impact of inflation on your medical bills. A cover of Rs. 3,00,000/- today becomes worth Rs. 30,000/- after 25 years and to get the same value of today's Rs. 3,00,000/- you will have to shell out Rs. 32,50,000/-. And as per my knowledge medical inflation costs can be quite higher than 10% too.
Not only does the value of your sum assured falls, your premiums also increase with age. Insurers have age bracket slabs which are used in calculating insurance premiums. Varying from insurer to insurer the slabs could be age 25-30, 30-35, 35-45
and so on . Every time you move on to a higher age bracket your insurance premium is increased by quite a bit.
So in all you as you get older you are paying more and more for a policy that is protecting you for a value that is decreasing every year. This is not a wise step in your financial plan.
Your planner should advise you on creating n old age medical fund . Its value should be an amount that is atleast equivalent to the value of today's Rs. 3,00,000/- at the time when you retire. The rate at which it increases would be based on your assumed medical inflation rate, which according to me should not be less than 10%. This value is called the future value of your Medical contingency fund.
Now as you know the value that you need to build over your working life your planner would guide you on the strategies needed for the deployment of your savings into an appropriate channel. If your retirement is at least 10 years into the future then a major portion of this should be equities and other risky assets, this is because we have the time horizon that is sufficient to manage the volatility congruent with the equity markets. This is because the return potential of equities is paramount in achieving our aim of beating the high rate of medical inflation.
This fund will need a regular revaluation and asset reallocation as the goal nears. This investment strategy can ensure that you are well prepared for the ultra high medical expenses that can arise as we age. This fund keeps you covered to the true value of today's medical expenses when you retire and also saves you from paying unnecessarily high premiums for a cover amount that doesn't cover you in the true sense.
Cheers & Happy Planning.
Think before you act as
'Its all in the Mind.'
Saturday, September 10, 2011
Dont wait for an emergency to make an Emergency Fund- Ram Valia
Dont wait for an emergency to make an emergency fund.
As our lives are surrounded by uncertainties and events that we might not have even dreamt about, an unfortunate event can be right around the corner ready to take a toll on you when you least expect it. The intent is not to scare the reader but make him aware that expecting the best and being ready for the worst can make him ride smoothly through all of life's fancies.
We never expect to lose our job as we might consider ourselves indispensible and there it is, one day, right in our faces the economy starts slipping, the company starts losing revenue, coupled with that exactly at this very point on time its struck by a clients claim or other natural calamity. all of this in a climate with the rates rising in such times debt payments become difficult. And to offload the heavy weights the company awards you with the one thing that you would be despondent to receive. The dreaded 'Pink Slip'
What do you do now.? As the time when you lose the job is exactly the time when all vacancy banners are hid in the dark room
With the stressful lifestyles, unhealthy eating habits and uncomfortably long hours of incorrect posture puts up a serious toll on our bodies. Accept it or not its a machine that can ware out and wither. Managing a medical emergency can shake up your entire financial plan and weaken your years of financial saving. Personally I haven't ever been to a medical store to find out that the medicine that I purchased the last time is still available at the same price. This throws the spot lights on the perennially rising costs of medication and treatment. Funding such an emergency on one's self or the dependant family member can send your finances for a toss. It can be an elective medical surgery . Illness or an accident, the treatment and rehabilitation costs are phenomenal
in any of these situations either taken together or considered separately, how would you fund your regular expenses, gone are the times when you would spend all your earnings as there are no earnings.
How do you pay for the loans taken?
How do you go for the vacation that you had planned for?
How do you pay for your children's school tuition?
How do you plan for the new car?
How would you be able to buy your spouse that diamond ring that you have paid the advance for?
Jumping onto your previous years savings which might not be that liquid and immediately available will force you to sell them at a price that is lower than its worth..
Taking up this advise simply means to keep aside a fund equivalent to your next 6 months expenses including EMI's and all other compulsory expenses into a highly liquid instruments.
These instruments range from 'Sweep-in Fixed Deposits' to 'Liquid debt funds' and Short Term Bond Funds. All of them have similar features of keeping your money safe and are immediately available when you need them.
The differences can be understood as follows. The Sweep-in FD empowers your savings account to be linked to the FD account so that your idle funds can earn you the FD rate of return and not a a mere savings account rate which is around 3.5%. Hence it makes your savings account act like your FD account. As and when you need the money you only have to issue a cheque from the savings account and the appropriate amount is only deducted keeping your FD maintained with the remaining funds. The amount that is withdrawn using a cheque will get the interest applicable for the slab for the time for which it was in the FD.
A liquid fund is offered by a mutual fund house, it falls under the debt category of funds. It invests into short term fixed income instruments with an average maturity of around 91 days that are issued by banks, NBFC and large corporate houses.This enables it to give you better returns than a savings bank account but not as high as an Sweep-in FD.
A Short Term Bond Fund invests in debt securities like Treasury bonds issued by Government of India and other Bonds and debentures floated by banks and corporate houses. This is a tax efficient instrument for the investors in a high tax bracket.. Due to its sensitivity to changing interest rates its return are accompanied by an element of risk but as they are short term in nature it is quite low.
So be it in any form but ensure that an emergency fund covering 6 months of all your required expenses is up and running for you way before any emergency catches up with you. For the very beginners start with an amount equivalent to Rs. 50000/- and gradually move upto your goal of 6 months expenses. And remember luxurious getaways, fancy shopping spree and an unthoughtful splurge does not count as an emergencies.
Cheers and happy planning.
Think before you act as
'Its all in the mind.'
As our lives are surrounded by uncertainties and events that we might not have even dreamt about, an unfortunate event can be right around the corner ready to take a toll on you when you least expect it. The intent is not to scare the reader but make him aware that expecting the best and being ready for the worst can make him ride smoothly through all of life's fancies.
We never expect to lose our job as we might consider ourselves indispensible and there it is, one day, right in our faces the economy starts slipping, the company starts losing revenue, coupled with that exactly at this very point on time its struck by a clients claim or other natural calamity. all of this in a climate with the rates rising in such times debt payments become difficult. And to offload the heavy weights the company awards you with the one thing that you would be despondent to receive. The dreaded 'Pink Slip'
What do you do now.? As the time when you lose the job is exactly the time when all vacancy banners are hid in the dark room
With the stressful lifestyles, unhealthy eating habits and uncomfortably long hours of incorrect posture puts up a serious toll on our bodies. Accept it or not its a machine that can ware out and wither. Managing a medical emergency can shake up your entire financial plan and weaken your years of financial saving. Personally I haven't ever been to a medical store to find out that the medicine that I purchased the last time is still available at the same price. This throws the spot lights on the perennially rising costs of medication and treatment. Funding such an emergency on one's self or the dependant family member can send your finances for a toss. It can be an elective medical surgery . Illness or an accident, the treatment and rehabilitation costs are phenomenal
in any of these situations either taken together or considered separately, how would you fund your regular expenses, gone are the times when you would spend all your earnings as there are no earnings.
How do you pay for the loans taken?
How do you go for the vacation that you had planned for?
How do you pay for your children's school tuition?
How do you plan for the new car?
How would you be able to buy your spouse that diamond ring that you have paid the advance for?
Jumping onto your previous years savings which might not be that liquid and immediately available will force you to sell them at a price that is lower than its worth..
Taking up this advise simply means to keep aside a fund equivalent to your next 6 months expenses including EMI's and all other compulsory expenses into a highly liquid instruments.
These instruments range from 'Sweep-in Fixed Deposits' to 'Liquid debt funds' and Short Term Bond Funds. All of them have similar features of keeping your money safe and are immediately available when you need them.
The differences can be understood as follows. The Sweep-in FD empowers your savings account to be linked to the FD account so that your idle funds can earn you the FD rate of return and not a a mere savings account rate which is around 3.5%. Hence it makes your savings account act like your FD account. As and when you need the money you only have to issue a cheque from the savings account and the appropriate amount is only deducted keeping your FD maintained with the remaining funds. The amount that is withdrawn using a cheque will get the interest applicable for the slab for the time for which it was in the FD.
A liquid fund is offered by a mutual fund house, it falls under the debt category of funds. It invests into short term fixed income instruments with an average maturity of around 91 days that are issued by banks, NBFC and large corporate houses.This enables it to give you better returns than a savings bank account but not as high as an Sweep-in FD.
A Short Term Bond Fund invests in debt securities like Treasury bonds issued by Government of India and other Bonds and debentures floated by banks and corporate houses. This is a tax efficient instrument for the investors in a high tax bracket.. Due to its sensitivity to changing interest rates its return are accompanied by an element of risk but as they are short term in nature it is quite low.
So be it in any form but ensure that an emergency fund covering 6 months of all your required expenses is up and running for you way before any emergency catches up with you. For the very beginners start with an amount equivalent to Rs. 50000/- and gradually move upto your goal of 6 months expenses. And remember luxurious getaways, fancy shopping spree and an unthoughtful splurge does not count as an emergencies.
Cheers and happy planning.
Think before you act as
'Its all in the mind.'
Friday, September 9, 2011
Zindagi Na Milegi Dobara' has useful lessons for financial planning Sumeet Vaid Sep 8, 2011, 04.59am IST
Zindagi Na Milegi Dobara has been enthralling audiences with its intriguing story, along with some good performances by the lead actors.
But, for me, the aspect that stands out the most is the core message of the movie – live for the moment and enjoy life because you only live once! And I could not stop drawing the obvious comparisons between the theme of the movie and the purpose of financial planning.
Like the movie, the aim of financial planning is also to enable each one of us to enjoy the things we have and want from our lives. The three protagonists of the movie, besides fighting their internal demons, also depict classical traits that I have found in several individuals, especially those who have not started with their financial plan.
Let us look at the three lead characters of the movie and see what we can learn from them.
Should i keep my life on hold?:
Hrithik Roshan's character, Arjun, is a financial trader working in London who wants to make enough money and retire at the age of 40.
He believes that since he faced hardship all through his childhood, he should have money when he retires. He believes future financial security is important and is willing to give up on his present to get there.
This may be a movie, but I have come across several people who believe that letting go of your desires of the present for attaining something in future is acceptable. While aiming to retire by 40 is good, one should not forget that life is made up of small and big pleasures, which cumulatively add to the quality of life.
The most optimum way is to create a financial plan that will help one balance both the current and future aspirations.
Learn to live with your fears:
The second protagonist of the movie, Imran, played by Farhan Akhtar, is a drifter by choice and a closet poet. His problem is not confronting his fears — he keeps putting off meeting his biological father.
For many of us, our relationship with money is similar. We are scared to accept reality. Fear associated with money may be based on not wanting to face hardships, but what one tends to forget is that the hardship is already present; it's only our acceptance which we can control.
Accepting your fears related to money is the first step to liberate you and start you on the path of financial freedom.
Kabir, the character essayed by Abhay Deol, has an unusual predicament. Everyone around him, including his fiance, thinks he wants to get married to her when in reality he is just not ready for marriage.
While Kabir does manage to find his way out towards the end of the movie, his role highlights the fact that one can never predict the kind of surprises life can throw up at any point of time, and some of these surprises may not be pleasant.
There is no way to stop such unforeseen events from happening, but what we can do is be prepared financially to handle such events in life. Investing in a financial plan can help you not only deal with unexpected events, but also make you financially strong, so that when the time arrives, you are not left counting your chickens.
A certified financial planner can not only advice you as to how you should go about this process, but also tell you how much you should invest to get to your goal. It is said that life inspires movies, and sometimes movies inspire life.
And when it comes to the inspiration quotient, Zindagi Na Milegi Dobara ranks high. The message is loud and clear – live for the moment and seize life. And make sure you do everything you need to do along the way to make yourself capable both mentally and financially.
Sumeet Vaid, Founder freedom financial planners
But, for me, the aspect that stands out the most is the core message of the movie – live for the moment and enjoy life because you only live once! And I could not stop drawing the obvious comparisons between the theme of the movie and the purpose of financial planning.
Like the movie, the aim of financial planning is also to enable each one of us to enjoy the things we have and want from our lives. The three protagonists of the movie, besides fighting their internal demons, also depict classical traits that I have found in several individuals, especially those who have not started with their financial plan.
Let us look at the three lead characters of the movie and see what we can learn from them.
Should i keep my life on hold?:
Hrithik Roshan's character, Arjun, is a financial trader working in London who wants to make enough money and retire at the age of 40.
He believes that since he faced hardship all through his childhood, he should have money when he retires. He believes future financial security is important and is willing to give up on his present to get there.
This may be a movie, but I have come across several people who believe that letting go of your desires of the present for attaining something in future is acceptable. While aiming to retire by 40 is good, one should not forget that life is made up of small and big pleasures, which cumulatively add to the quality of life.
The most optimum way is to create a financial plan that will help one balance both the current and future aspirations.
Learn to live with your fears:
The second protagonist of the movie, Imran, played by Farhan Akhtar, is a drifter by choice and a closet poet. His problem is not confronting his fears — he keeps putting off meeting his biological father.
For many of us, our relationship with money is similar. We are scared to accept reality. Fear associated with money may be based on not wanting to face hardships, but what one tends to forget is that the hardship is already present; it's only our acceptance which we can control.
Accepting your fears related to money is the first step to liberate you and start you on the path of financial freedom.
Kabir, the character essayed by Abhay Deol, has an unusual predicament. Everyone around him, including his fiance, thinks he wants to get married to her when in reality he is just not ready for marriage.
While Kabir does manage to find his way out towards the end of the movie, his role highlights the fact that one can never predict the kind of surprises life can throw up at any point of time, and some of these surprises may not be pleasant.
There is no way to stop such unforeseen events from happening, but what we can do is be prepared financially to handle such events in life. Investing in a financial plan can help you not only deal with unexpected events, but also make you financially strong, so that when the time arrives, you are not left counting your chickens.
A certified financial planner can not only advice you as to how you should go about this process, but also tell you how much you should invest to get to your goal. It is said that life inspires movies, and sometimes movies inspire life.
And when it comes to the inspiration quotient, Zindagi Na Milegi Dobara ranks high. The message is loud and clear – live for the moment and seize life. And make sure you do everything you need to do along the way to make yourself capable both mentally and financially.
Sumeet Vaid, Founder freedom financial planners
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