Tag: personal finance

Why you need to know yourself to succeed at stock investing

Personal Finance

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With friends and colleagues minting money in stocks, many investors write to us today asking how they should make a start on equity investing. I’d like to do SIPs in a dozen high-dividend yield stocks to become rich, can you suggest some? What are the books or blogs to learn technical and fundamental analysis? Should I buy smallcases instead of SIPs in mutual funds? These questions show that, while the person asking them is keen to invest in stocks, he or she isn’t quite sure why they’re doing it. It’s hard to succeed at equity investing without being crystal-clear about your objectives. Before taking the plunge, here are the questions to ask yourself.

Holding period

How much time are you willing to give for your stock holdings to deliver? In a trending bull market, it is easy to believe that a year or two is all you need to double or treble your money in stocks. But stocks that double or treble in a few months when the momentum is strong can fall 50-60 per cent equally quickly if the sentiment turns. To create durable wealth from stock investing, you need to view it as owning a piece of a business. If you own companies that compound their earnings over long periods of 5 to 10 years and markets recognise this, that’s when you have multi-baggers on your hands.

To know whether a company is capable of compounding its profits, you need to understand its business (fundamental) drivers.

A fundamental investor must be willing to commit to a 7-10 year holding period to earn good returns.

If your intention is just to make the most of market momentum over a 2-3 year period, knowing how to read technical charts and momentum indicators is a must. If you’re doing the latter, allocate only a small portion of your net worth to equities and don’t carry too many open positions at a time.

Return expectations

Are you happy with a FD-plus return from equities or are shooting for a 20 per cent plus CAGR? This will decide whether you should attempt direct stock investing or go for a diversified portfolio via mutual funds. If you are investing in equities to get a 9-10 per cent CAGR and beat inflation, there’s no need for you to invest time or effort in stock picking.

Index funds that mimic bellwether indices at low costs are good enough to get you to that return over the long run. If your return aspirations are at 20-25 per cent, then diversified portfolios such as mutual funds may not deliver it and you may need to acquire skills for direct stock picking.

If you have in-between expectations, actively managed flexicap/midcap/small equity funds or smallcases can be your choice.

Risk appetite, mode of returns

Equity investing brings with it the risk of losing your principal, so how much of your capital are you willing to lose? If you can be philosophical about losing half of your investment value in a trice, you are cut out for short-term trading investing.

Your appetite for risk will also decide if you should invest directly in stocks or bet on a diversified equity fund.

In a correction, a portfolio of direct stocks is likely to fall much more than the NAV of a diversified equity fund.

Are you looking for your equity portfolio to deliver sizeable dividend income to supplement your earnings over time? Or are you a growth investor, seeking capital appreciation first and foremost?

This will decide the kind of filters you use to pick stocks. Stocks offering high dividends often hail from slow-growing sectors and mature businesses that can afford to pay out a large part of their profits and don’t need it in the business. For this reason, high dividend yield stocks seldom deliver bumper capital appreciation in the long run.

If capital appreciation is your primary objective and you aren’t looking to dividends, you should identify companies in sectors with high growth potential, high profit margins and the ability to deliver high return on equity without frequent recourse to equity or debt fund-raising.

Companies in growth businesses like to plough back their profits into the business rather than pay out high dividends to their shareholders.

Time and skill

Building a good direct stock portfolio that can make a difference to your net worth is a highly time-consuming exercise.

It requires you to study sectors and companies, identify their key drivers of success, track stock prices closely and identify good entry and exit points based on valuation.

As most of your time in building a sound stock portfolio is spent in patiently holding stocks, you’ll need to remain on top of corporate actions, quarterly results and regulatory developments that affect the company’s earnings to decide whether to hold or bail out.

Investing in readymade portfolios such as smallcases also requires a fair degree of knowledge about businesses, market themes and sectors, as these portfolios can be quite concentrated. Being a short-term investor/trader requires even more intensive tracking of price action, corporate actions and macro and other drivers that can affect the liquidity in a stock.

Most successful stock traders are full-time. If you don’t have the time, knowledge or passion to devote to such tracking, you should prefer mutual funds for your equity investing.

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Planning for son’s education, own retirement

Personal Finance

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Nishant is 36 and works with an IT company in Pune. He has a 5-year-old son. Until now, he has focussed his energies on repaying the home loan, which he repaid completely 2 months back. Thus, he does not have many investments. In addition to this house, he has Rs ₹ 5 lakh in fixed deposits and ₹13 lakh in employees’ provident fund.

His net take-home monthly salary is ₹80,000. He can invest about ₹35,000 per month. Besides, his monthly contribution to EPF account, including employer contribution, is ₹11,500.

He wants to invest for his son’s higher education, for which he thinks he will need about ₹20 lakh (present cost) after 12 years. Besides, he wants to save for this retirement. He has not bought any insurance plan yet.

Buying insurance

Insurance is the first pillar of financial planning. In his case, getting insurance portfolio right is even more critical since he is the sole earning member in the family. There are three broad types of insurance plans that every earning member must buy: Life, Health and Accidental Disability Insurance.

While there are many ways to calculate life insurance cover requirement, a simple thumb rule is to buy a cover for 10-15 times the annual income. With his level of income, he can go for a life cover of ₹ 1.25-1.5 crore.

A term insurance plan is the best way to purchase a life insurance. This will cost him about ₹18,000-20,000 per annum. He can choose to pay annual premium in monthly installments too.

He has a health cover of ₹3 lakh from his employer. The coverage is clearly not sufficient for a family of three. He must buy a family floater health insurance plan of ₹10 lakh. That will cost him about ₹15,000 per annum.

He can buy accidental disability cover as a rider with a term plan or as a standalone plan. A rider with the term plan is cheaper because the scope of coverage is limited to total and permanent disability.

A standalone plan is more expensive, but it covers both partial and total permanent disability, temporary disability, and accidental death.

These insurance plans (life, health and accidental cover) will cost about ₹5,000 per month or Rs 60,000 per annum.

He has a fixed deposit of ₹5 lakh that can be considered towards medical and emergency fund.

Son’s education

For son’s education, he needs ₹20 lakh (present cost) in 12 years. At the inflation rate of 6 per cent per annum, the target nominal corpus will be ₹40 lakh in 12 years.

Assuming a return of 10 per cent on the portfolio over 12 years, he needs to invest ₹15,000 per month.

He can put this money into a hybrid fund or a multicap fund by way of SIP. He must gradually shift this money to debt as he moves closer to the goal.

For his retirement, he mentions that only 2/3rd of his current expenses will continue into retirement.

His current expense is ₹45,000 per month but that includes conveyance and school and tuition fee for his son.

His expected expenses during retirement will be ~ ₹30,000 per month (cost). Assuming a post retirement life of 30 years, inflation of 6 per cent per annum and that he can earn inflation matching returns during retirement, he needs to accumulate ₹4.3 crore in 24 years.

His current EPF corpus will grow to ₹80 lakh in 24 years . At assumed pre-retirement return of 10 per cent per annum, he needs to invest ₹32,000 per month.

He is already putting ₹11,500 per month by way of EPF. After accounting for regular expenses, insurance payments and investment for son’s education, he can invest an additional ₹15,000 per month (35,000 – 5,000 – 15,000).

His retirement portfolio is already debt heavy. He can split this amount between a largecap fund and a midcap fund, with heavier allocation to the former. He is investing less than he should. He must invest more when his cashflows permit. This should not be a problem since his best earning years are ahead of him.

He must understand all the goal calculations above are based on heavy assumptions about inflation and expected returns.

He must keep revisiting these assumptions and portfolio growth and make adjustments accordingly.

The writer is a SEBI-registered investment advisor and founder of personal financeplan.in

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‘We must seek good investing behaviour’: Kalpen Parekh of DSP MF

Personal Finance

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Investor behaviour is one of the most crucial aspects to a good investment experience, believes Kalpen Parekh who is the President at DSP Mutual Fund that manages an AUM of more than one lakh crore. So, BL Portfolio caught up with him to understand his financial journey and for his advice on the mutual fund investments in the ongoing phase of Indian stockmarkets.

What does money mean to you?

Money to me is comfort and responsibility to my family. It allows me the freedom to take the right decisions and confidence. It means gratitude and blessings to be able to have enough money to lead a good life. It also means responsibility to help others with money.

How does your portfolio look like now?

I invest all my money in DSP Mutual Fund schemes. The split looks something like this – 43 per cent in Indian funds , 17 per cent oin international equity funds, 16 per cent in dynamic asset allocation fund, and 21 per cent in short term debt fund. Apart from this, 5 per cent is in sovereign Gold bonds.

Everyone should decide their asset allocation with their own personalization, and not assume that this is the most optimal or ideal asset allocation.

I have recently shifted a bit of equity into debt under an asset allocation fund, which is conservative. I’m likely to buy a house in the next month and will require a certain amount of lumpy cash requirement, which is why 40 per cent component is in fixed income or asset allocation fund and not in an equity portfolio.

What is your most successful investment?

I haven’t invested in stocks since the last 13 years. My best investments are the ones that I made in 2008 -2010 phase of low or no returns and held on since then. They have compounded very well. These are simple flexi cap equity funds. Another investment that did well in hindsight is an equity fund which invests in US stocks.

What is your biggest money mistake and what did it teach you?

I used to invest in best performing funds of last year and when they would see reversal in their returns I would get out. It was a classic case of buy high and sell low and destroy your hard earned capital. It took me many years to realise this mistake. It taught me that performance has cycles and cycles mean what rises fast comes down too.

What’s your view on the market?

I have always been for the last few years, generally feeling a bit of anxiety that stock prices are running ahead of reality and fundamentals. Economic growth, world over or in India has been slower than what we tend to speak about. Some points in time, markets will be ahead of economy, some points in time they will behind the economy. Currently, they are ahead. Trying to make any prediction of the market has rarely worked for me.

Also, focusing on market is an external variable outside my control. With time and experience, I have learnt to focus more on what’s in my control – how much do I invest across asset classes, that is asset allocation.

Are investors better off pausing SIPs in the heated markets and instead investing in safer avenues?

By pausing SIPs now, you attempt to optimise the last drop of market cycles, but we’re also making a big assumption that we know that markets are going to come down, but we don’t really know. I think if we start with this belief that we know, then your choice of action will be very different versus if you start with the assumption that probably we don’t know, as much as we think we know. I come from the second camp.

Your concern is valid that what if the next one your markets go nowhere. It’s okay, who says that you have to make money every month? The reality of the markets is 1/3rd of the times they go down, one third of the time, they go nowhere – for long periods of time, it means zero returns for three, four or five years – and 1/3 of the times they go up violently in a very large quantum. The challenge is we don’t know which 1/3rd of the time you are going to encounter it in the next five years.

Typically, what happens is when prices fall, we find 10 more reasons to say why they should fall further. So it is very easy to stop an SIP. Will you be confident that you will start back at the right time? If you’re confident go ahead and do it. But if you’re not confident, avoid.

If you are concerned about volatility, or probably lower returns, I would say take one step lower. So instead of stopping SIP from an equity fund, do SIP in the next category – dynamic asset allocation fund, which has a slightly lower risk profile.

It is important to ask this question, “How we can become good investors?” rather than only saying that markets should be good. We always seek good markets, we seek good funds, we seek good returns, we should also add one more layer here, which is seeking good investing behaviour ourselves, what are the characteristics of good investing, being more disciplined being more long term and not getting afraid of volatility.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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This Father’s Day, organise your dad’s finances

Personal Finance

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Our fathers have been our backbones since the time we hadn’t even entered the world. From meeting our smallest needs like our favourite toy still perched in our childhood room to help us get through our college tuition in most cases, our dads have always been there for us. With father’s day right around the corner, give your father the best gift that you can by helping him organise his finances and help him live a comfortable life further by helping him put the resources at his disposal to the best possible use.

Now, why should you organise your dad’s finances? He has been doing a great job at this himself. Well, the simple reason is that your father, having met all his financial obligations, may not have the time, resources or will to sit down and create a financial plan. However, it is now even more crucial for him to plan his finances for a smooth retirement and invest his time and money in streams that would generate steady income.

There are several steps that have to be taken when it comes to helping your dad organise his finances. Here’s all that you need to know:

Having the Talk

The first step is having the talk. Having an open conversation about your father’s existing liabilities and assets is a good way to start. This includes having full knowledge of the debts he has incurred, deposits and investments he has made and the estates that he owns.

This further includes taking into account his monthly expenses, health fund to be made, life insurance plan, the amount he would like to set aside for his retirement and how much more he needs to earn to be able to meet all this.

Clearing previous investment portfolio

Your father might have an existing investment portfolio consisting of mutual funds and stocks of various companies. As goals change, so do the investment avenues that are ideal for you. Going by this, for example, you might consider investing in large-cap companies which are more reliable when planning to generate steady revenue streams.

Thus, the existing portfolio should be cleared of irrelevant or underperforming investments as per the life stage your father is at and what are his goals behind financial planning. Also, reducing the number of investments in your portfolio to around 10-15 might be considered for easier handling.

Planning for contingency

The move towards the 40+ age bracket calls for keeping aside a contingency fund for any age-related health issues that may arise or even for the unlikely event of early retirement due to various reasons. Planning for a contingency fund may require him to keep aside a portion of his monthly income which needs to be determined based on his existing expenses and liabilities.

Ideally, an amount equal to the total 6 months of expenses that your dad incurs should be kept in the contingency fund however, it might differ depending upon the people he has to support.

Finding the best investments

After having a clear picture of the current financial situation of your dad and defining clear goals, the next step is finding the best investments for the money he has left after meeting his monthly expenses and keeping aside his monthly share for the contingency funds. Investment here doesn’t just mean investing in the market to generate profits but also investing in a life insurance policy or even investing in a diligent retirement plan.

All this forms a part of the retirement plan as well which basically has 2 aspects including keeping aside a lump sum amount of money and generating steady income streams for when you don’t have a fixed monthly salary to look up to.

Estate planning

One thing that your dad might forget easily while organising his finances may be estate planning. Estate planning includes planning for when your dad is not around and what he would want to do with his estate, investments, savings in the unfortunate event of his demise.

While this might not seem important especially if your father is in his early 40s, it is important to at least start estate planning so that there is no scope of confusion or conflict in case of unfortunate events. Having a rough will that can be refined later and a power of attorney should be considered.

Organising his paperwork

Having determined the investments that might best suit your father’s goals and financial needs and started planning his estate for retirement, one important step is to help him organise his paperwork which could really be huge and quite tedious. Keeping in mind this, your job is to make it easier for him to keep track of his investments and organise his paperwork throughout the year.

This involves assembling all his documents pertaining to health reports, financial reports, bank statements, investment certificates, insurance policy plan. Using digital file holders like DigiLocker or even simply maintaining separate folders in one computer may be convenient.

The most important thing that you need to keep in mind while organising your dad’s finances is that all your life you have been his priority but it is high time that he makes himself the priority when it comes to his financial plans.

Your dad has been working hard for years to provide for you in the best way possible, make sure as you organise his finances that his hard-earned money works harder for him than he has to.

The author is co-founder & CEO of STOCKEDGE and ELEARNMARKETS

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‘Managing wealth is managing yourself’, says Ashish Shanker of MOPWM

Personal Finance

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A veteran in financial services industry, Ashish Shanker as managing director and chief executive of Motilal Oswal Private Wealth Management (MOPWM) leads a team that advises top corporates/institutions and over 3,000 HNI families. He has played a key role in building the investment, research and advisory platform and creating the proprietary ‘4C fund manager’ framework at the firm. As a captain of ship that advises client assets worth ₹25,000 crore, here is a sneak-peek of how the much sought-after wealth manager tends to his own personal finances.

What does money mean to you?

Money is a means to fulfill needs and desires for self, family and parents. It is a means to an end. You should have enough of it but then the greed for it also can end up destroying us.

What are your top financial goals as an individual?

For any parent, the kid comes first. Providing for my kid is at the top of my mind, so that he has a decent education and he has a decent lifestyle. Then, of course, providing for a high-quality retirement where I don’t have to compromise on lifestyle once I retire. I’m a little bit of a gourmet connoisseur, I like to have my malt as well. There are intermittent goals, such as travel and, at some point, may be housing. I do own a house, but it’s in my hometown (Pune). At some point, if price and wallet permit, buying a house in a Mumbai suburb of my choice is also a goal.

What does your portfolio look like?

Close to 85-90% of my money is invested in equities. All my incremental money also goes in equities. I do not count my PF (provident fund) in this.

My first job was as an equity analyst with a local brokerage firm. Even before that, I fell in love with equities in probably 12th standard. I used to interact with people in my family who were related to stock markets. I’ve been in private wealth firms now for 16 years. Hence, from day one, it’s been equities. Equity investments for me are a combination of stocks and mutual funds. I also hold a lot of my portfolio in ESOPs.

What was your most successful investment? What are the mistakes you’ve made?

All the investments that I made in the late 90s, and mind you I have not sold a single share, have been the most successful in terms of IRR (internal rate of return ). I bought Nestle, ITC etc., but on a very small capital.

I also do remember that I bought a lot of the dot-com stocks which went to zero. My experience has shown that if you buy 20-30 stocks and hold them, the better quality companies more than make up for the duds. So, the lesson I’ve learned is that in equities, patience and longevity beats everything else. It is 90 per cent temperament and 10 per cent skill.

How much emergency funds do you have and where do you keep it?

I’ve always had this principle that you should have at least six months of your expenses as emergency funds. You may call it very inefficient to keep that amount of money idle, but I always have that amount lying in my savings account. Now, there are even savings banks accounts, which give you 6-7 per cent. I tell people that maybe you should have one year’s worth money but six months is good enough for me.

What kind of amount would you require for your retirement?

Ten years back, if you’d asked me, I could have put a number of ₹5 crore. But today, that number doesn’t excite me because my lifestyle has gone up. I have figured it’s a moving target. Today, the target I am looking at is 200-250 times my monthly expenses.

As a private wealth veteran, what is the most important message to people on managing wealth?

As philosophical as it may sound, managing wealth, I believe, is predominantly about managing yourself. If you know your own temperament, you will be a better investor. Also, keeping it simple, and thinking long term is the crux of what I’ve learned in 24 odd years of my career. Ultimately, you are your biggest cash-generating machine. So, invest in yourself as in your career or your training, picking up skills.

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Paytm launches ‘Wealth Community’ for young investors

Banking & Finance

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Home-grown digital financial services platform Paytm has launched a new video-based wealth community called the Paytm Wealth Community.

Paytm Wealth Community is an investing community based on video, and “will enable users to attend live sessions conducted by subject matter experts across an array of wealth topics like Stocks, F&O, IPO, ETFs, Mutual Funds, Gold, Fixed Income, and Personal Finance,” the company said in an official release.

“Users will be able to learn from experts, interact with them to clarify doubts, and also chat with other users on the platform to discuss various wealth-related topics,” it said.

The community is meant to tap young users and has been designed for the needs of the “new Indian investor.”

Artificial Intelligence: Financial services industry behind the curve in meeting customer expectations

In beta mode first

“The next 100mn capital market investors in India are expected to originate from social groups and investment communities. Paytm Wealth Community intends to be the leader in helping users save, invest & trade better,” the company said.

The “intuitive” platform will offer live video content on an interactive chat platform. Creators can conduct 30 to 60-minute sessions in multiple languages like Hindi, English, Gujarati and others.

The Paytm Wealth community is owned and operated by OCL Ltd (Paytm) and is initially being offered in beta mode on the Paytm Money platform. It will be offered in beta for select users for the next two months, followed by open access for all.

A limited set of creators have been onboarded by Paytm in beta. In a bid to ensure the safety of retail investors, all creators go through a comprehensive KYC onboarding and all content is recorded/checked, the company said. Over time, users will be able to create custom discussion rooms, set up their creator accounts and chat.

Paytm Money opens new Technology Development Centre in Pune

Community calendar

Varun Sridhar, CEO of Paytm Money, said, “Paytm Money was a natural choice for the Beta launch of Paytm Wealth Community, given our direct access to the broad investment community and reach across India. The Paytm team has implemented cutting edge video & community technology ensuring the platform is seamless, and the user communication is safe and secure. We are very excited by the potential positive impact it will have on how users engage, learn and invest.”

Users who have received access to the Paytm Wealth Community can explore the community calendar, which lists out all upcoming sessions and their details on the Paytm Money app. They can also share sessions on various social media platforms. Other interested users can download or update their Paytm Money app to the latest version and follow Paytm Money on social media platforms to get access to the live session links.

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Three smart money moves you can make this financial year

Personal Finance

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A new financial year is upon us. Yet, 2021-22 gives that deja vu feeling. The Covid pandemic refuses to go, financial markets remain volatile, and hopes remain high that the good ol’ times will be back. The new fiscal requires you to be smart and have a handle on savings, investment, taxes, expenses and much more. Here is a blue-print on the key moves you need to take so that money matters are always under control.

Be investment wise

A new financial year requires a fresh assessment to check whether your investments are on track to meet your long-term goals. You must check if there is a need to change or rebalance the asset-allocation mix for optimal results, in the light of developments on the personal front.

Also, a new financial year is a good time to do a check on the health of your portfolio. Financial markets, especially stocks, have done very well in the last one year or so. If even in this situation, some market-linked investments have not well, find out for reasons. If you find a pattern of continued poor performance, weed out under-performers.

Be a regular: If you are in the old tax regime and among those who struggle to meet the deadline for tax-saving investments every financial year, now is the time to get smart. Instead of doing tax-saving investments at the end of February/March 2022, start them from April 2021 for ELSS, NPS, PPF, etc.

Just like your EMIs, you have the option to spread out your investments regularly over the next 12 months in most of these products. This will work well if sometimes, you don’t have enough funds to do the investments at one go.

Besides, delaying the investment process to the end of the year will make you prone to mistakes in the form of choosing the wrong products. Also, if you do equity-linked investments through SIPs, you can average your costs better and avoid risk of timing your investment.

Use tactical opportunities: Instead of frittering away the annual bonus , ex gratia or other one time payments that some employers give during this time, this new financial year offers you the chance to stock up on small-saving schemes and voluntary provident fund. If the circular on the new small savings rates issued on March 31 (withdrawn later) is any indication, interest rates may go down further, before moving up.

Hence, for conservative investors to whom the sovereign guarantee offered by the small-saving schemes is important, schemes such as NSC is a good bet (offers 6.8 per cent) compared to similar tenure bank deposits.

As per the new PF rules, interest on cumulative annual employee contributions above ₹2.5 lakh shall attract income tax at the applicable tax slab, wherever employer is also contributing. Nevertheless, despite the tax, the returns on the VPF continue to be attractive when compared to the interest rates being offered on other debt instruments and it will be a smart move to use this window to your advantage in the new financial year.

Contributions to both the NSC as well as the VPF is eligible for deduction up to to ₹1.5 lakh under Section 80C.

Prep for taxes

The end of FY2020-21 and the start of FY2021-22 have different implications from tax filing point of view.

To do tax return filing for the previous fiscal, you will be required to collect all the necessary documents including details of any foreign asset/income.

Though one may argue the tax filing deadline is some months away, it will not hurt to check Form 26AS online to check whether tax deductions for FY2021 are properly credited. Remember to cross check the Form 16 that will be sent by your employer soon. Start collecting capital gains statements for investments and account statements for bank accounts. Dividends are taxable so keep a note on them too.

For the new financial year, there is a tax-related task you can do right away.

Submit a pragmatic investment declaration, basis on which your employer will deduct taxes each month. Avoid a casual approach towards submission of investment declaration such as mentioning maximum contribution for Section 80C, Section 80D when you very well know you can’t invest so much.

While it may lead to a higher take-home salary now due to lower tax deduction, what matters is actually doing those investments at the end of year. Failure to submit investment proofs to your employer could lead to substantial tax outgo in the last 2-3 months of the year and pinch your disposable cash.

Rainy day plans

A new financial year is also a good time to do a check on your emergency funds and insurance cover.

The Covid pandemic has shown the need to have a contingency fund. With salaries cut and expenses rising, many had to break their piggybank to survive last year. This underlines the need to stash away money in the savings pool so that 6-12 months of zero/low income does not impact household finances.

Also, take a re-look at life as well as health insurance needs at the beginning of the financial year. Over time, the needs and lifestyle of your family change. Hence, your insurance cover should also change accordingly. Significant life-changing events such as marriage, the birth of a child, home loans, income change etc. increase your responsibilities. Raise your life coverage amount when renewal comes up this fiscal.

Similarly, medical costs for elderly parents, newborn children and hospitalisation can pinch your pocket. To tide over inflation in medical costs, widen your health cover if necessary.

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Financial planning for a family of 4

Personal Finance

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Sankaran (42) and his wife Revathi (39), parents of 2 children, work in the IT industry. They want a financial plan to achieve their goals in future. They had prioritised their key goals as follows.

1. Education fund for kids, aged 9 and 4.

2. House at the earliest, preferably a 3-BHK in Chennai at a cost of ₹1.2 crore

3. Investing for retirement

4. New car at an additional cost of ₹8 lakh in 2022

5. Protection of family from unfortunate events

The family’s cash flow and assets are as follows:

 

All the investments in real estate were made based on third party compulsion in the last 4 to 5 years. They had not seen their assets appreciate considerably. They had sought unit-linked insurance policies on the assumption that they were investing in mutual funds. They had started to invest in mutual funds two to three years ago. With home loan interest rates at attractive levels and surplus cash available in hand, the couple wanted to buy a house.

Sankaran did not exhibit confidence of getting any substantial increase in his salary in the coming years. Revathi was comfortable continuing with her employment.

 

We reviewed their investments and recommended the following.

a) Build up ₹ 6 lakh towards an emergency fund

b) Set up protection by buying term insurance for Sankaran for a sum assured of ₹1 crore and Revathi for ₹1 crore without riders.

c) Buying health insurance for the family for a sum insured of ₹10 lakh. Though the family is covered for medical emergencies through employer-provided group insurance, these covers had many restrictions along with low sum insured. The health cover was also insufficient considering their life style

d) Keep track of spending for the next one year to ascertain their actual monthly expenses. The expenses may have come down because of the Covid lockdown and that they could go back to their old spending habits once life returned to normal.

e) Restructure their holdings in unit-linked insurance plans within the next one year, mainly to reduce the annual commitment. This would reduce the premium commitments from ₹ 6 lakh per annum to ₹1 lakh per annum

f) Sell two of their plots of land to partially fund the house purchase, so that their leverage could be restricted and an unproductive asset monetised. This would help them to buy a house for ₹1.2 crore while also restricting the loan component to ₹60-70 lakh.

With adequate contingency measures in place, reduced premium commitments and surplus available as cash, they were better placed to service the housing loan without additional financial burden. They were also advised to reduce expenses wherever possible to foreclose the loan in the next 8 to 10 years.

Education goal

Towards elder son’s education, they would require about ₹35 lakh in the next nine years. They would also require ₹57 lakh for the younger son’s education. (Current cost for education is presumed at ₹15 lakh with inflation assumed at 10 per cent).

At 11 per cent expected return, they would need to invest ₹14,000 and ₹16,000 per month in large-cap mutual funds to fund these two education goals.

Retirement goal

We recommended that they invest ₹25,000 in large-cap mutual funds towards their retirement corpus. With an expected return of 11 per cent over the next 20 years, they would be able to achieve a corpus of ₹2.16 crore. Along with regular PF and NPS accumulations that they were making, they should be able to reach a sizeable corpus towards retirement.

Other facets

To become successful investors, we encouraged them to keep an ‘Investing Behaviour Journal’ to keep a record of their emotions as and when there were wild swings in the markets either up or down.

The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

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Money talks to have before saying ‘I do’

Personal Finance

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This time around every year, couples try to take the plunge. But money matters often get relegated to the back seat when such life-changing decisions are made. Not discussing financial affairs beforehand can, however, spark fights eventually.

Also, if you have plans to ask someone out, know the few financial aspects you should decide on before you get hitched.

Liability check

Firstly, be sure of each other’s existing financial liabilities. Next, decide on whether you would want to divide the EMI from here on or continue to bear the burden solely. Besides, you can set the tone for your debt preferences going forward. While some may be willing to break the bank for certain experiences, for their money-pinching partners this might seem like a nightmare.

This is where it would be ideal to set goals as a couple. Deciding about the kind of purchases you would want to take on debt for can help avoid conflicts.

Sharing expenses

With financial independence gaining popularity, the question no longer hinges around whether or not to share the expenses. The new-age strife is now more often around how well to split the bills. It would be unjust to divide the bills equally in circumstances where you two earn unequal incomes.

Having an equitable divide in such cases may be more ideal. That is, household expenses can, for instance, be split in proportion to the income of each partner.

Else, you can each pay off certain bills and save the rest for the other partner.

It is also fine if either partner wants to chip in only a certain amount into the household kitty and retain the rest of their income for other personal needs as the case may be.

Coming to a consensus on all of these pain points upfront can keep the two of you away from a lot of unpleasantness later. Whatever your ideal way of splitting the bills is, opening a joint bank account, might come in handy for both of you.

For this, you can continue maintaining your individual bank accounts and transfer (through an auto-sweep facility) only the agreed amounts to the joint account. In this way you can continue to enjoy your financial independence in true letter and spirit.

Also, you must try to set clear boundaries on what expenses would be split among the two of you. This is a smart strategy, which will help keep sore points at bay. in the future.

It would be wise to be open and state clearly one’s choice about financially supporting their family. While one need not seek permission from the other partner for spending on their own family’s needs, it would be wise to not let your couple financial goals take a toll either. Each partner can hence be explicit about the funds they wish to earmark regularly for one’s own family-.

Savings

In most cases, since opposites often attract, couples do not often have the same spending habits. Their economic backgrounds, current level of income and the lifestyle they choose to settle-in for, all play important roles in deciding their saving habits.

It would hence be pragmatic to keep each other in the know of your current spending and saving practices and goals you foresee for the two of you. Asking and sharing your financial goals with your partners also has its benefits. Not only do you get a helping hand by way of extra funds, but you also get to have someone to keep a check on your frivolous spending— just so you can stick to your financial resolutions better.

Insurance

Another important aspect to enquire upfront would be about your partner’s existing insurance cover. If you take loans, you need to provide for them in case of your absence and also not burden your spouse unnecessarily. Ditto if you plan to raise a family. If either partner does not have an existing life cover, you can consider buying a joint policy. The premium amount is usually lower in joint life plans compared to individuals taking two separate plans, though benefits remain the same under both cases.

You must increase your cover as and when your income levels, liabilities and expenses rise. You can also consider a family floater policy instead of individual health plans.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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Leave a comment , , , , , , ,

Money talks to have before saying ‘I do’

Personal Finance

[ad_1]

Read More/Less


This time around every year, couples try to take the plunge. But money matters often get relegated to the back seat when such life-changing decisions are made. Not discussing financial affairs beforehand can, however, spark fights eventually.

Also, if you have plans to ask someone out, know the few financial aspects you should decide on before you get hitched.

Liability check

Firstly, be sure of each other’s existing financial liabilities. Next, decide on whether you would want to divide the EMI from here on or continue to bear the burden solely. Besides, you can set the tone for your debt preferences going forward. While some may be willing to break the bank for certain experiences, for their money-pinching partners this might seem like a nightmare.

This is where it would be ideal to set goals as a couple. Deciding about the kind of purchases you would want to take on debt for can help avoid conflicts.

Sharing expenses

With financial independence gaining popularity, the question no longer hinges around whether or not to share the expenses. The new-age strife is now more often around how well to split the bills. It would be unjust to divide the bills equally in circumstances where you two earn unequal incomes.

Having an equitable divide in such cases may be more ideal. That is, household expenses can, for instance, be split in proportion to the income of each partner.

Else, you can each pay off certain bills and save the rest for the other partner.

It is also fine if either partner wants to chip in only a certain amount into the household kitty and retain the rest of their income for other personal needs as the case may be.

Coming to a consensus on all of these pain points upfront can keep the two of you away from a lot of unpleasantness later. Whatever your ideal way of splitting the bills is, opening a joint bank account, might come in handy for both of you.

For this, you can continue maintaining your individual bank accounts and transfer (through an auto-sweep facility) only the agreed amounts to the joint account. In this way you can continue to enjoy your financial independence in true letter and spirit.

Also, you must try to set clear boundaries on what expenses would be split among the two of you. This is a smart strategy, which will help keep sore points at bay. in the future.

It would be wise to be open and state clearly one’s choice about financially supporting their family. While one need not seek permission from the other partner for spending on their own family’s needs, it would be wise to not let your couple financial goals take a toll either. Each partner can hence be explicit about the funds they wish to earmark regularly for one’s own family-.

Savings

In most cases, since opposites often attract, couples do not often have the same spending habits. Their economic backgrounds, current level of income and the lifestyle they choose to settle-in for, all play important roles in deciding their saving habits.

It would hence be pragmatic to keep each other in the know of your current spending and saving practices and goals you foresee for the two of you. Asking and sharing your financial goals with your partners also has its benefits. Not only do you get a helping hand by way of extra funds, but you also get to have someone to keep a check on your frivolous spending— just so you can stick to your financial resolutions better.

Insurance

Another important aspect to enquire upfront would be about your partner’s existing insurance cover. If you take loans, you need to provide for them in case of your absence and also not burden your spouse unnecessarily. Ditto if you plan to raise a family. If either partner does not have an existing life cover, you can consider buying a joint policy. The premium amount is usually lower in joint life plans compared to individuals taking two separate plans, though benefits remain the same under both cases.

You must increase your cover as and when your income levels, liabilities and expenses rise. You can also consider a family floater policy instead of individual health plans.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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