Inflation is a money eater that reduces your purchasing power. For instance if the average rate of inflation is 8%, you need to make sure that your investments are earning a minimum of 8% or more, post-tax. Let us assume an investment portfolio of Rs. 1, 00,000, earning returns at 10% and inflation at 8%. The returns in this case would be Rs. 10,000 gross annually, with the net after income tax Rs. 7000 (Assuming you are in the highest tax bracket of 30%). Now if you account for the 8% inflation specified (8000, or 8% of Rs. 100,000), you are left with Rs. -1000 (Return of 7000 minus inflation of 8000)! The best way to grow a retirement corpus is to have a diversified investment portfolio according to the asset allocation designed for your risk profile. An ideal one would be 40% equity (blue chip), 50% debt, 5% gold, and 5% cash. Equity would help appreciate the retirement corpus. Debt investments would provide for regular income and gold would act as a hedge to inflation and equity turmoil. The recent equity market downturn was the perfect example for gold to stand out as a surge. Selective equity investments made for the long term are more often than not investments with high returns.

Equity: Do not sell blue chip stocks when the value increases. This should not be done when you planning for retirement. These stocks provide for the regular incomes by the way of dividends. At the same time if the dividends paid by the companies increase, it will reflect positively on the stock price too. The most crucial aspect that we never consider in an investment is the dividend that companies pay. We always look at just the capital appreciation. Dividend income in India is tax-free. The dividend payouts by all good companies grow proportionate to the growth in the net profit. It means that if you stay invested, your equity dividend income will keep growing year after year, compounded. If you think that the return on your capital is tiny compared to your investments, just be patient and watch out for a few years. Lets assume that your company’s dividend payout grows 20% year on year, in 10 years your dividend income will jump by more than 6 times and in 20 years it will go up by nearly 40 times. And if you consider the occupational windfall gains like rights and bonus issues, your dividend income goes up in compounding multiples over a period of time.

Your Investments should perform better than the market: Is it easy? Yes quite possible. The Bombay Stock Exchange has approximately 3000 shares listed on it but its index, the Sensex, is a weighted average representation of just 30 stocks. So, if the Sensex falls it is an indication that the heavy weights from the 30 stocks fell; not all the 3000 stocks. If your investment portfolio is to beat the Sensex, they will need to have a Beta more than 1. The Beta is a measure of sensitivity of a scrip movement relative to the movement of the benchmark index (in this case, the Sensex). A Beta of 1 means that for every 1% change in the index, your scrip moves by 1%. The caution here is that when you have a Beta of more than 1, your investments will also fall faster than the Sensex fall. Investments in stocks can be very rewarding but with high risk.

If you lack knowledge let mutual funds take care of it: I believe most of you investors who lack knowledge should rely on mutual funds, not individual common stocks. This is not because I think your performance will not be better; rather I think it will be easier for you to operate and will allow less potential for a catastrophe. Investments in mutual funds are managed by professionals who understand and study all the critical aspects before investing your money. This will help in proper diversification, but be sure of you choosing the right scheme to invest in as per your risk profile and aspirations.

Let your debt investments comprise of Government securities and highly-rated bonds (AAA): The most important component in a diversified portfolio is investment-grade fixed income. High-grade bonds and full-faith-and-credit-pledge government securities are the most reliable fixed-income counter balancers.

The balance between debt and equities is a function of (1) your age - the younger you are, the larger your equities percentage; (2) your financial resources; and (3) your need for current income. No two investors have exactly the same risk/reward profile.

Once your debt investments are in place, you need to make adjustments and additions from time to time depending on your changing needs and available new cash for investment. But you should keep rebalancing the portfolio according to your asset allocation strategy once a year.

Biggest mistake is investing based on events: You should never make investment decisions reacting to short term economic indicators or performance. You should build long-term wealth by investing in good companies with strong balance sheets and a history of paying and increasing dividends, and then you remain patient. You don’t jump in and out of stocks based on quarterly earnings reports. Base your investment program on business cycle trends, not market noise created by events.

You should not make many changes to your portfolio in the course of an average year. You should add money to some positions and tinker with others. You should not run from one idea to the next each time the economic wind changes direction.

I would like to urge all the investors reading this to begin weeding out your portfolio’s deadwood. Simplify and organize your investing, and practice the basic rules. As you start to see the profits rolling your way, you’ll be glad that you took the time to read this article to lay a solid investment foundation.

Kirtan Shah is a partner at AmbestinQ Consultancy Services.

Microsoft Excel is a wonderful tool. Even a tech dummy like me recognizes this.
In the hands of a semi-educated financial planner/advisor the tool is lethal.
At the turn of the millennium, “analysts” used Excel to extol Infosys and its growth at over 100% compounded annually. I am an unabashed Infy fan, but I could not imagine Infosys being bigger than the rest of India, which it would have been at that growth rate. Logic and economics combined to tell me that that would be impossible. I now have no Infosys on my portfolio, but will surely buy when I like the price.
Planners use their financial calculators and Excel to drag columns and rows to tell you what you will earn, need at retirement, how much you can spend and the like. The parameters are extrapolated to show a fixed rate of increments, returns and inflation. This is stupid, because life and economics has little respect for the Excel drag function. Inflation and deflation can follow each other before one realizes it. One does not die as one plans, or hopes. Real life takes a break from Excel!
Magazines and papers are full of advice for government employees about to receive their increments and arrears. Of all the template material that masquerades as the best thing to do, I find the home loan pre-payment suggestion hardest to digest.

Should you pre-pay your home loan?

As I mentioned, a popular bit of advice I read on many papers and a few magazines is on handling your bonus and increments. They ask you to use most of the money to pre-pay your mortgage (home loan), considering the high and rising interest rates.
Let me use a personal and very real example - my mortgage has risen from 7.5% to 13.25% (mine is the costliest bank lender). This is terrifying. Still, if I ignored the 80C benefit on payment of the loan principal (I have nothing left of the Rs. 1 lakh after Life Insurance premia and PPF), my cost on the loan is 8.75% considering the tax at 33.99% being the top of the bracket, inclusive of surcharge and cess. The will be a lot higher for those who avail of the 80C on home loan EMIs paid and lower for those in a lower tax bracket. The principle does not change under either of these circumstances. My surplus invested in a 375-day FMP during March at 10.25% would be over 10% post-tax in the growth option, considering double indexation. The 6 month FMP I invested in last week at 11.75% will fetch me 10.08% post tax in the dividend option.
Simple commonsense, which makes up most economics, tells me that cash is a nice thing to have - I might use the FMP maturity or any surplus in more attractive investments, if I can get them, while a prepaid home loan is cash permanently with the bank. Vitally at times of turmoil and uncertainty it is good to increase the amount of liquidity one has for contingencies
I also make more money in the process; every Rs. 1 lakh not prepaid fetching me an annual surplus of at least Rs. 1,250.

Naveen Fernandes is a Certified Financial Planner and Vice-president, Orbis Financial Corporation Ltd, Mumbai. Orbis Financial is a SEBI-approved custodian.

Start organizing your money …… NOW!!!!

We are all familiar with the words “Money Attracts Money.” Let me relate a small incident in reference to the statement. There was a small boy working with a businessperson. He once overhead a conversation where his boss mentioned the above statement. The boy was very excited. The day he got his salary, he chose a five hundred rupee note, slipped it into the boss’s locker and pulled it out. The same note came out. Nothing more, nothing less. He tried for the second time, but the same result. The third time he tried, his note was stuck into the locker. The boss meanwhile was observing this entire scene unknown to the boy. As soon as the boy knew, he had been caught, he was very apologetic, and explained that he was only checking out the statement and now realized that it did not hold true. To this, his boss explained that it indeed was true, because, BIG MONEY, PULLS SMALL MONEY. His (the boss’s) big money had attracted the small money into the locker. Therefore, the question now arises- how does one create this BIG MONEY.

People can be broadly classified into three categories:

• Those that EARN and SAVE
• Those that EARN and CONSUME ALL
• Those that EARN and TAKE ON LIABILITIES TO CONSUME MORE THAN THEY EARN

While the going is good, no one wants to visualize or worry about the future, or rather, one can say, one does not want to think that the good times will ever end. The third category of the people is the ones in the most dangerous situation. One feels, that lifestyles have improved, economy has improved, but is it really so? It is most probably, we are spending today, what we would have earned over a period of 10-20 years. We are earning and clearing liabilities. Moreover, liabilities are taken but no insurance to cover the liabilities. THE QUESTION ONE NEEDS TO ASK HERE IS NOT ‘Who will clear the liability IF you die or are permanently disabled?’ This is a very important question but a glaring one that should be corrected. The ‘IF’ in the question should be ‘WHEN’. The ‘IF’ is majorly used as an excuse, for putting off the commitment towards buying a life cover, towards saving. Procrastination becomes a habit. How does one then save, for the future? For retirement? For the big money?

Retirement being the period when there will be no EARNINGS, but 365 days and many more of EXPENSES. Has one made a conscious effort to save for this golden period? Only money saved today and invested will grow and attract more money that can be used for this golden period of life. In fact, life insurance policies are sold, more for retirement provision than life insurance cover. Not that they provide one with inflation-adjusted returns, but they ensure that one is committed to saving a fixed amount every year to reach the target. No other instrument ensures compulsory saving. Surveys reveal that no one has ever consciously saved in a bank for 20 years at a continuous stretch!

Contradictory it may sound, but life insurance and retirement planning go hand in hand. The best thing to save for RETIREMENT is SELF RESPECT and the best way to SAVE is through LIFE INSURANCE. Investment planning is the tool that enables one to achieve one’s various financial goals including retirement. With each passing day, personal finances grow more complex, and with each passing day, an individual has less time to develop a personal financial plan. Therefore, the only way to do is to allow a Certified Financial Planner to handle it. It is only the CFP who can help to CREATE, CONSERVE, AND PROTECT financial resources.

Beware! Where is the market headed towards? No one can predict anything.

In such a scenario, What about my planning? Some people say, keep your insurance and investments separate. I do not agree with them. There are plans available today, like with Max New York Life, you have the “Life Invest” plan.

A wonderful plan that takes care of you from childhood to your age of 75 years. The first year deductions are nominal and very minimal in the following years. There are persistency units available from 9th year onwards and every 3 yrs from then on. This recovers all the first year as well as following year deductions. Actually, if you stay invested for a long tenure, your policy works deduction free.

A higher sum assured is recommended for younger age group, specially professionals, wherein the ideal payment term would be 10 years. From age 60 onwards, it can work like a retirement plan as well, till the age of 75. Thereafter, lump sum money is available to be utilized for the rest of your life.

When young, serves the purpose of insurance, giving high cover and later works as a retirement plan for old age. In between withdrawals are also possible even before age 60 is attained. So, take a look at this one before taking any decisions!!!!

Even with the falling markets of today, the NAV is around 21and about three years the fund is about to complete I.e. from NAV 10 to 21 today! Keep in mind the current market scenario!!!!

Mr. Patel retired after a very successful career in a private sector bank. He held his head high all through his career and now wants to do the same in future also. His only daughter Supriya got married to Anshul working with a leading American investment bank in Mumbai last year. Being the only child, the wedding was a very grand occasion. The entire cost of the wedding was around 40 lakhs which included his daughter’s jewelry, the car he gifted to Anshul, and other normal wedding expenses. He stays at Kandivali and the cost of his flat is around 60 lakhs.

Mr. Patel used up almost all his savings he had done till date in marrying Supriya off. Mrs. Patel, a house wife, also contributed around 6 lakhs that she had saved over the years. Now, the only money Mr. Patel has is around 5 lakhs in his bank fixed deposits and Rs. 10 lakhs in his PPF & EPF accounts. Added to this, he will get around Rs. 6 lakhs as gratuity from his company.

His worry now is how to arrange for his monthly expenses, somewhere between Rs. 25,000 to Rs. 30,000. He also wants to take his wife to Vaishno Devi and Haridwar - a promise he had made to his wife, to be kept once Supriya’s wedding was done.

The traditional option he would have had was to rent out his flat and move with his daughter or move into a smaller flat. Not any more.

Citizens such as Mr. Patel can now opt for a reverse mortgage. A reverse mortgage is where a senior citizen can mortgage his/her primary residence with a bank and receive the mortgage amount as periodic payments, be it monthly, quarterly, half-yearly, or yearly. So, Mr. Patel visited a few banks and found two options from most of the banks. In the first option, he would qualify for 90 per cent of the realizable value of his property at the end of his chosen tenure. This amount would be paid to him in monthly EMIs for the chosen tenure.

In the second option the loan amount would be 50 per cent of the present value of his property.

He went ahead and did a little calculation to find out which of these options would suit him better.

In the first option, he assumed the property rates to grow at rate of 8% per annum, which is the current risk-free rate. All other conditions remaining constant, he was getting an amount of Rs. 41,329. His calculations yielded only Rs. 38,686 on option 2. If he did the same calculation taking the rate of return on real estate at 12 per cent he got the EMI amount of Rs. 71,313, which is way above what he would get in Option 2. Choosing to go for the reverse mortgage helped Mr. Patel to live with his head held high for the rest of his life. With the amount of money he got from his gratuity, he took his wife on a pilgrimage of all dhams in India. He gifted all his fixed deposits to his daughter after the birth of her first child.

While those of you who are wondering what does F.D have to do with life insurance…Beware…you could be a victim of it.

As it happened with Mr. Mangesh Pai who went to the largest private sector bank to rollover his F.D maturity into another F.D; he landed up rolling over his maturity amount into a life insurance policy instead. He was told by a bank officer that this would be like a F.D with life insurance cover and 10% interest minimum. Mr. Mangesh found it attractive and signed the papers.

Being a busy heart surgeon, he didn’t get time to go through the papers he got after few days until to his surprise he got notice from insurance company intimating payment for renewal premium after a year. He started wondering “when did he buy this company’s insurance policy, that too with such a huge premium?” (his F.D maturity was huge). While digging through all his financial papers in his file, he found that he was cheated and been sold a life insurance policy instead of F.D which he wanted. Moreover the policy has annual premium paying term of 20 years. He further found out that it was a ULIP with 35% charges and very low life cover. He has filed complaint with RBI and is fighting against the bank.

With thirst of earning huge commissions, bank hire people mostly young who have inadequate knowledge and experience on insurance. These people with tag of “Financial Advisor” or “Relationship Officer” are given targets and incentives. On the verge of achieving those targets and earning incentives, they tend to mis-sell in a big way. Same is the case with “Relationship Managers” of most broking firms. They are trained for aggressive sales and thus have only one thing in mind…sell insurance to anyone anyhow and achieve targets. The ultimate losers? Consumers. Beware…

In another case, Mrs. Priya Arora got call from a MNC bank where she holds a credit card. Despite showing no interest in an insurance product being pitched to her, she found insurance premium being debited in her credit card bill. Mr. Ahmed who went to a public sector bank for opening a savings a/c was asked to take an insurance policy. “You need to take this product along with a/c opening,” said an officer at the bank.

While the advent of private life insurance companies have definitely increased insurance penetration in India which is still very low, it has also definitely increased mis-selling of insurance products. With increasing number of insurance companies so are increasing number is insurance agents. Companies are hiring agents very aggressively to boost sales as a result of which you will find many college students, housewives, doctors, teachers, and people with part time jobs as insurance agents who sells insurance part time merely to earn some extra buck. These people lack knowledge, skills and experience; result of which – wrong product being sold or mis-selling. Insurance agents merely push the product which is earning them higher commission irrespective of weather such product meets your needs and requirements or not. As is happened with Mr. Kamlesh the only earning member in the family who ended up paying 70000 p.a merely for 5 lakh of insurance cover, most of them are ULIPs with high charges. Being bread earner of the family he should have been given much higher life insurance coverage at a lower premium.

Most of the agents typically are trained on only two or three ULIP products and they sell only those products. If you ask such agents about an endowment or term plans most of them don’t know much about it and they will try to convince you that this or that ULIP product is better, that it has given 30% returns in last 5 years.

It is recommendable to avoid buying insurance from part time agents primarily because you may be victim of the wrong product which may not meet your needs, you would suffer from bad service from the agent and secondarily this is their part time work, they would be out of it anytime and then you would be all lost.

So shouldn’t we buy insurance at all? If we have to, where do we get it from?

While life insurance cover is one of the most important things to have for an earning member of the family, we need to determine goals, requirements and how much insurance do we need. Typically, when we think of buying insurance we ourselves don’t know how much cover we should take. Most of us decide it on the premium. We opt of whatever Insurance cover we get on lower premium. Some of us just opt for whatever cover the agent says. Most of us land up being underinsured. You need to look upon various aspects such as cost of living, expected cost of living, your income and increase in your earnings, your dependents etc. before taking a cover.

“It’s a complex process, I don’t have time, skills, and expertise to access all these factors and determine my insurance need!”

You need not - hire a Certified Financial Planner (CFP). The role of a qualified Financial Planner is to look at all aspects of your lifestyle, goals, and requirements and develop a financial strategy suitable for you. The recommended strategy should help you reach your goals effectively and efficiently. Insurance Planning is a part of it in which they would recommend you how much insurance you should have and what mix of products you should opt for viz. term plans, ULIPs etc which would make you financially secure and help you meet your requirements and goals. Once you have a plan designed by a CFP, you can buy various kind of insurance products as recommended by him/her. This will help you getting what you actually need and not what actually an insurance agent needs.

Do not fall in pit of aggressive insurance agents or bank officers who may sell you a ULIP with high charges and low cover. It would be very difficult for you to get out of it!!

Get a strategy and plan developed by a CFP and be financially secure.

Happy Financial Freedom!

Retirement planning is one of the most important components of financial planning. It is a process where financial planning is carried out to financially support for the period after retirement. An individual saves enough during his life when he is working, to invest in different assets to create a corpus when he retires. This corpus which is invested can generate income and fund an individual for his personal expenses after he retires.

As a matter of fact 80% of the individuals in India do not plan for their retirement. Very few individuals start retirement planning when they are young. People end up planning when they are nearing retirement. This makes it very difficult for them to maintain the same standard of living after retirement due to lack of planning from the beginning. Retirement planning must be done from the first day an individual starts earning until the last day. Thereafter it must be periodically reviewed.

The importance of retirement planning is increasing due to change in the financial situation of the country. Other reasons abound, like:

• Life expectancy: Due to advancement in science the average life expectancy of an individual has increased. People are living more than expected. They need additional funds to finance their expenses.
• Fixed Returns: It is difficult to get fixed returns on the money that is invested as the interest rate keeps fluctuating. Interest rates depend on the market situation. Hence planning is essential.
• Inflation: Inflation must be considered. It is very important that investments give returns more than the inflation.
• Decline in joint family system: Most families are now nuclear. So after retirement individuals have to take care for themselves.
• Increasing medical expenses: Old age brings on increased medical expenses.
• Lack of government support: Unlike other countries, the Indian government does not really support the retired individuals. Therefore each one has to plan for retirement.