Financial planning is as important as family planning

This post is specially to all my newly married friends. You should recite this every morning and night - "I will give financial planning equal importance if not more than family planning"

A financial plan like any other plan is prepared to make the path to meet his/her goals clear. Goals can be short term, medium term and long term, also their priority may vary. At the very onset of a financial planning one needs to make a list of all the goal that s/he wants to achieve in their lifetime. Since it is not possible to achieve each one of them at one go, they need to be defined on the basis of their priority. Also important for preparing an apt financial plan one needs to understand the various financial product available to him/her, their features like tenure of investment, risk, liquidity, returns, etc.

Now that you have done your home-work on financial products that caters your different needs, you can start with the financial plan preparation. The first step is to ensure that you have enough money to meet next 3-6 months expenses this helps in meeting any unforeseen expenses like medical expenses. One can open a saving a/c with linked fixed deposit thus earning interest higher than saving a/c on amount transferred to FD a/c and liquidity on the complete amount deposited. Once you have made adequate provision for such unforeseen expenses, basis your monthly household saving amount you need to bifurcate the savings into various short-term and long-term goals on the basis of their priority. Keep in mind that for any short-term goal always look for product with high liquidity and fixed return. This may change as the duration of the goal increase.

Tax planning is an integral part of your financial planning as every single rupee you save on tax forms part of your household saving. I have seen many friends running after tax-experts or calling up friends or scanning through various portals on internet to understand what all options they have to save maximum tax. Though they are within deadline to complete the formalities, the only problem is since they did not do it periodically from day 1 now they may not have enough cash in hand to deal with all the investments requirement.

Friends, I am no expert but can help you in making your financial plan or you can opt for an expert financial planner (choose one with cautious) but start with a clear path as far as investments are concerned. I am open to answer all your queries to the best of my ability via phone, email or any other means you find appropriate to contact me. 

Impact of De-Regulation of Interest Rate on Saving Account

On 25th October 2011, RBI announced deregulating of interest rate on saving account. It came as a pinch of salt on existing wound for the Banking industry.  Immediately we hear Yes Bank with almost negligible retail customer base announcing rate hike to 6%, this was followed by Indusind Bank and Kotak Bank. We have not seen any large bank even giving hint of any change in rate as of now.

How many times in your life have you changed your bank account & what was the reason for the change? Change in city of residence, relocation within the city making accessibility to your bank difficult, bad service consistently. In how many bank do you operate saving accounts? Maximum 2-3.

There is a cost involved in changing of bank account – you have your demat / trading account linked with your saving account, your utility bills / credit card bills, ecs linked; so a change in saving account means lots of paperwork. For those looking for opening another saving account, it would mean more files and records.

Most large bank with high CASA ratio would postpone the idea of hiking interest rate on saving account, but I would not be surprised to see 6months down the line some of this large banks reducing rate on saving account for account with average balance let say Rs. 25000/- or Rs.50000/-. I see a rationalization of saving account interest moving up or down basis account type (higher minimum balance – higher rate).   We already have banks offering saving account where balance above a said amount (let say Rs.10,000/-) would immediately earn FD return.

The next 6 months will bring a lot of changes in saving account offering, but its impact on the banks margin is questionable. We may also see no interest on saving account with zero balance, salary account. This will also impact the short term FD market.

Investment Options

What comes to your mind when one asks you options for investment? The most common that most of us would suggest, broadly are as follows – Equity, Bond, Gold, Real Estate. But I am sure rarely people will suggest you to invest into your goals – Short term / Medium term / Long term.

Let us see one investment option which if done with proper homework would not only turn out to be investment decision to cherish, but also can provide regular income. Many have tried the simpler product of the option – Real Estate. People buy land / constructed house / Flat and rent them. This is nice way of regular income and a good way of growing your wealth with the property value appreciating over medium to long term.

So if everyone is aware of it, why am I talking about it? Because there is one option that people have not explored – Holiday Home. There are lots of places within India, in and around us that have not been explored. So if you have got cash in hand (you can also look for 60% - 70% of the amount from Bank loan) and looking for investment options – Keep this in mind while evaluating other options.

Today people are looking for large space where they can go in groups with family / friends at affordable price. So if you have space at place with beautiful scenery, good space for outdoor spots, with all the amenities that one finds at his/her home. With the increase in the customer base of the likes Mahindra Holidays, Country Club; you should not be surprised if they pay handsome for your property.

With the increase in online purchase of holidays and the advent of website like snapdeal.com, dealsandyou.com, marketing the property has become much easier and less costly.

I am exploring more details and data on the topic, would update you all ASAP!!!

Portfolio Management - Part 2

After my first blog, readers or rather friends asked me to explain the concept of ‘Right Investment at Right Time’. I thought of explaining this with an example of a friend of mine (Sagar) and his family.

Sagar is just completed his MBA and his currently working with a private sector. His family consist of his father (businessman), mother (housewife), and a young sister (student). Over dinner we were discussing his investment plan. His family’s current investments would be life insurance, equity, PPF, gold, property. Now his dilemma is, where should he invest?

Let us first take life insurance policy; who should buy it and when should it be brought. One should keep a regular investment in insurance policy in that age bracket of 25-40. What should be the amount? It will all depend on lifestyle that you wish to offer your family in your absence from this world. Now the most important question, “Who should buy or on whose name should it be brought?” It should be brought for the person who’s lost of life would impact the most, financially. If we take Sagar’s family, today it would be his father on whose name the policy should be, but he is well insured, so Sagar should now start looking for some good policy for himself.

Equity is one investment that would over a longer period outperform other form of investments. One should start investing in equity early in his life, either directly or through the mutual fund route. With the SIP format you need not worry to time the market and just invest in good funds and enjoy the benefits in those late 40’s and early 50’s, where you may even think of taking up retirement.

Public Provident Fund, something that gives you a steady return, tax benefits. But do keep in mind that the real return would be somewhere in the range of 3-4%, after taking the inflation into account. One should keep it to the minimum that is required for tax benefits in the early stage of work life and increase gradually as you get older. They say (don’t ask me who), that one should keep the bond: equity ratio of their investment according to their age, for e.g. Sagar is 24 now, so he should keep 24% in bonds (fixed rate instruments) and rest in equity (or the so called risky instrument).

Gold has traditionally been the most favourite investment option for Indians. It is something that is used in all our occasion, festivals, marriages; so one need not bother about any profit/loss on this investment (unless you sell). Sagar’s father is no different to other Indians and has invested a good sum in gold and he has to, after all he has a daughter. Gold ETFs is the new buzz word in the Indian market. It is safer, easier to buy, more reliable than those gold bars and definitely more cost effective (the storage charges).

Property or real estate is something not very hot favourite investment avenue. It is capital intensive and also time consuming, so most people avoid it. Sagar’s father is also not very keen on property it is just that his fore-fathers had this Havelli in Rajasthan which now belongs to him. Also he has a 1BHK that was his first owned property when he moved to Bombay (now Mumbai) and it is given on rent as they have moved to a 2BHK.

The question still remain unanswered, "Where should Sagar invest?”

Sagar is young, just started his career and his take home salary is about 35 thousand per month. His father manages to get something in the range of 50 to 60 thousand per month. Their monthly expenditure would be in the range of 30-35 thousand and contribution to PPF and insurance would be 2.5 lakh per annum. So what is left as saving with the family is around 3.5 to 5 lakh per annum.

Firstly, Sagar is not insured and in case something wrong happens to him it would put a lot of financial burden on his father, who is already 49 and thinking to shrink his business and devote more time to God. So get insured. They have taken a mediclaim for his mother, I would advise the same for his father; medical expenses these days are huge and you don’t want your love one’s to be suffering in those shady government hospitals. Investment in investment would help him save some tax, 20% of premium. PF and pension scheme should be the other tax saving instrument. Pension scheme would help him leave a better retired life without compromising on the lifestyle.

Sagar’s sister is 21 and probably in a period of 2-3 years they would start looking for a groom for him. That is the time when even Sagar would be looking to settle down in his life. So they would need a good sum of money to meet the marriage expenses. Sagar’s father has a good investment of gold to meet both his son and daughter’s marriage requirement. But there are other expenses also, so it would be appropriate for Sagar to put money aside to meet those expenses, the investment could be either in equity or fixed deposit instrument, fixed deposit would be more appropriate.

Sagar’s father has taken most of his son’s burden, so Sagar has now to focus on insurance, pension plan and if required, some tax saving instruments like NSC. Than based on his risk appetite he can choose from a bunch of investment options like FDs, mutual funds, gold, etc., for his sister and his own marriage. Also would be advisable to keep some 35-40 thousand in very liquid fixed rate instrument at any time to meet those unforeseen needs as stated in the earlier blog.

Portfolio Management

It is quite important for each one of us to have a portfolio of investment for ourself and our families future security. The portfolio should have a mix of various instruments available in the market, for e.g. equity, fixed deposit, provident fund, commodities (gold/silver), insurance, etc., the proportion may differ from individual to individual based on their risk appetite. Now, the question is how does one decide what is a better investment option currently for him/her and what proportion of their saving should go in each of the instruments.

There are various things one need to think before making the choice of the instrument.

• Firstly, the purpose of the investment, for e.g. if you are looking to invest so that you could have enough for you little princess marriage, one instrument for sure should be Gold ETFs.
• Secondly, time frame, when do you require the money back? Instruments like provident funds would offer a better return as compare to other fixed return instruments, but the investment period out here is 15yrs, that's too long.
• Thirdly, flavour of the market, one need to understand what is doing good and what not, in the current scenario, for e.g., if one looks at the equity market in India, there are stocks that are undervalued and this gives us an opportunity to make the most for ourself. With interest rate going down an undervalued stock would always give a better return for let say a period of 1yr.

One need to understand that there could be an immediate requirement of cash for an unforeseen event. I would therefore advice to keep 10% of their saving in bank account, this is not a standard requirement and hence one can tweak it according to once requirement.

Wealth creation is not an difficult task, but it is something that can be achieved by applying common sense and basic understanding of various markets. Lastly, for your benefit, if you don't understand the world of investment or don't have enough time to study the market, don't hesitate, take help of people with expertise knowledge, look for CFPs, it's their business they will do it better.