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.
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