Invest In India » Personal Finance

Say No to Readymade Pension Plans; Say Yes to Customized Retirement Planner for India

Malvika — Mon, 13 Feb 2012 09:05:04 +0000

Readymade Pension Plans/ Retirement Plans:

The existing pension plans/ retirement plans in India are from the insurance companies. They are available in the form of traditional products or in the form of ULIP schemes.

Indian Traditional Retirement Plan:

The traditional pension plan/retirement plan schemes from Indian insurance companies are expected to deliver only 6% to 7% CAGR as they are allowed to invest only in conservative avenues.

This 6% or 7% is not sufficient to beat inflation.

Indian ULIP Retirement Plan:

The ulip pension/retirement plans have huge front loaded charges. They also have higher regular running expenses and fund management expenses which pulls down the net return. That’s why market has rejected these products and they have become failures.

Customized Retirement Planner for India:

As a prudent investor, you should not rely on a single product or scheme for your retirement planning. A comprehensive and customized Indian retirement plan should consist of a bundle of schemes and not a single scheme.

Also you need to avoid schemes which deliver lesser return and schemes with huge charges. You need to select a combination of schemes which as a combination can deliver a decent inflation adjusted returns with low charges.

Schemes for Pre-Retirement Planner in India:

A combination of Term Insurance, Mutual Funds, and PPF will help you in creating a better pre-retirement planner in India.

Term Insurance:

In case of any mishappening to you, your spouse’s retired life needs to be secured. This can be protected with adequate term insurance. Online term insurance policies are cheaper by 50% to 60%. So opt for online term insurance instead of an offline term insurance.

Mutual Funds:

Equity mutual funds play a vital role in delivering positive inflation adjusted returns. Short term and Medium term debt funds are better alternatives to fixed deposits as they can deliver better post tax return.

PPF:

PPF delivers 8.6% tax free return. It has got a lock in of 15 years. One can save upto Rs.1 lac p.a. Safety and its tax free status makes this product a compelling option for an Indian pre-retirement planner.

Schemes for Post-Retirement Planner in India:

A combination of schemes like POMIS, Senior Citizen’s Savings Scheme, Bank FD, Mutual Fund MIPs and Debt funds could be considered for creating a post-retirement planner in India.

Creating an Indian Retirement planner

We have discussed enough about why should we have a Customised Indian Retirement Planner in the place of a readymade pension/retirement plan. Let us think about how to create a comprehensive and customized retirement planner for India.

Lifestage:

In this step, as an Indian retirement planner, you need to answer two questions. One is “How many years from now you are planning to retire?” and the other one is “ Your Estimation of Post-retirement years”. Studies reveal that the average life expectancy of an Indian is 75 years. But it is advisable to assume 85 years as your life expectancy so as to make sure that you will be covered enough during your post retirement.

Expected Retirement Expenses:

Again in this step you need to have an answer or 2 questions. The first one is “what will be retirement expenses in today’s cost of living”. Research reports show that approximately 70% of your current expenses will be your retirement expenses. The second question is “what would be the expected rate of inflation on these expenses”.

Expected Retirement Income:

The first question to be answered is “What is the expected amount to be received at the time of retirement from schemes like EPF, superannuation, pension commutation, gratuity?”. The second question to be answered would be is “What is the annual income you expect from the sources like pension schemes, rent, royalty?”.

Existing Investments:

“What is the current value of the investments made towards retirement?” and “What is the expected return from these investments?” are the questions to be answered in this step.

Working out the Retirement Planner:

We are going to work out the retirement planner in this step with the answers from the earlier steps.

a) You need to find out the future value of the retirement expenses with the present value of retirement expenses, number of years to retire, and the inflation assumed.

b) The expected retirement income by way of rent, pension, royalty need to be deducted from the retirement expenses (calculated in the point (a)) to arrive at the net retirement income to be generated from the retirement corpus.

c) Then the retirement corpus needs to be calculated by taking into account the net retirement income (calculated in the point above point), number of retirement years, inflation assumed post-retirement.

d) The retirement benefits like pension commutation, gratuity, superannuation, EPF needs to be deducted from the retirement corpus (calculated in the point (c)) to arrive the net retirement corpus required.

e) The monthly investment required to accumulate this net retirement corpus needs to be calculated taking into account the existing investments, and the rate of return from the investments.

The detailed approach for creating a comprehensive and customized Indian Retirement Planner is well explained in the above five steps.

Role of a Financial Planner in Creating an Indian Retirement Planner

A professional financial planner will be able to take into account ‘the rate at which your income grows’ to decide the monthly investment towards the retirement corpus.
Also the financial planner will be able to decide the asset allocation for your portfolio based on the required rate of income to accumulate the net retirement corpus.
The financial planner will be suggesting you the right mix of schemes for your pre-retirement planner and post retirement planner.
Also the professional financial planner will be able to tell you the required life insurance coverage and the health insurance coverage and when you need to opt for health insurance coverage.
Periodical review on the retirement planner has been conducted by the financial planner so as to accommodate the changes and deviation from the original retirement planner.

You can be a “do it yourself” Indian retirement planner or “seeking professional assistance” Indian retirement planner, the above points will help you in having a happy and peaceful retired life.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

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Understanding taxes on rental income and property sale

Malvika — Mon, 13 Feb 2012 05:48:07 +0000

Any information educating on the tax format and system is welcome; well, this article below will educate you about the thick and thins of the tax system on properties rented and the possible profit after the sale of a property.

You have rented your second house, you receive a monthly income called as a rent for which the you need to pay tax. In such a case, the taxable income from the total rent income received by you for that particular financial year will be computed in your tax returns.

Computing Rental Income

For properties let out, the gross rent needs to be the greatest of the three values below:

* Municipal valuation of the property: The rental value fixed by the corporation based on your locality and property value.

* Actual rent received during the financial year: The rent received by you from your tenant for that particular financial year.

* Fair rent: The rent of a similar property in the same or similar locality.

From this gross rent, the property tax is deducted to arrive at the net annual value of the rental income.

Permissible Deductions:

* 30 per cent of the net annual value for repair, maintenance and rent collection expenses for the property.

* Interest paid towards any type of home loan on this particular property.

* Any property insurance premium you have paid for the financial year.

Here is a simple example:

Actual rent received from property say

R 15,000 x 12 = R 1.8 lakh

Less: Municipal Tax/Property Tax paid by you say R 5,000

Net Annual Value: R 1.75 lakh

Less:

(1) 30 per cent of the net annual value: R 52,500

(2) Interest paid on a renovation loan for the house, say R 30,000

Taxable rental income = R 92,500

The taxable rent income will be included by your auditor under income from other sources, along with other such incomes as well as your salary income and deductions you are eligible for, to calculate your final tax outgo.

Capital Gains From Sale

Let us now look at what happens if you decide to sell your property.

Any profit that you receive by selling any asset at a price higher than at which it was acquired by you is classified as capital gains and clubbed under income from other sources.

Short term and long term capital gains: If you sell your house within three years from the date of purchase you will incur a short term capital gain or loss which is included under other sources of income.

In case you sell your house beyond three years then it is considered as a long term capital gain/loss.

Exemptions from capital gains tax: If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of three years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

In case you do not choose to make any investments and opt to pay tax, the income is calculated using the indexation method which is nothing but accounting for the effects of inflation.

For example, if you had purchased a house for R 5 lakh and then sold it for R 9 lakh, the capital gains would be R 4 lakh. However, for the sake of income tax calculation a number called indexation number is used, which is a percentage of the gain that is assumed as value addition due to inflation.

Thus if indexation is 20 per cent then Rs 9 lakh minus (20 per cent of R 5 lakh) minus R 5 lakh, that is R 3 lakh would be taken as capital gains.

A capital gain is usually charged at 20 per cent in most cases where the calculation is based on indexation.

A better understanding of the tax rules can make your life easier and help you file your tax returns with clarity.

Source – Financial Express, Courtesy – Adhil Shetty, CEO bankbazaar.com

©2009 Copyright by Invest In India

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Say No to Readymade Pension Plans; Say Yes to Customized Retirement Planner for India

Malvika — Fri, 10 Feb 2012 07:39:32 +0000

Readymade Pension Plans/ Retirement Plans:

The existing pension plans/ retirement plans in India are from the insurance companies. They are available in the form of traditional products or in the form of ULIP schemes.

Indian Traditional Retirement Plan:

The traditional pension plan/retirement plan schemes from Indian insurance companies are expected to deliver only 6% to 7% CAGR as they are allowed to invest only in conservative avenues.

This 6% or 7% is not sufficient to beat inflation.

Indian ULIP Retirement Plan:

The ulip pension/retirement plans have huge front loaded charges. They also have higher regular running expenses and fund management expenses which pulls down the net return. That’s why market has rejected these products and they have become failures.

Customized Retirement Planner for India:

As a prudent investor, you should not rely on a single product or scheme for your retirement planning. A comprehensive and customized Indian retirement plan should consist of a bundle of schemes and not a single scheme.

Also you need to avoid schemes which deliver lesser return and schemes with huge charges. You need to select a combination of schemes which as a combination can deliver a decent inflation adjusted returns with low charges.

Schemes for Pre-Retirement Planner in India:

A combination of Term Insurance, Mutual Funds, and PPF will help you in creating a better pre-retirement planner in India.

Term Insurance:

In case of any mishappening to you, your spouse’s retired life needs to be secured. This can be protected with adequate term insurance. Online term insurance policies are cheaper by 50% to 60%. So opt for online term insurance instead of an offline term insurance.

Mutual Funds:

Equity mutual funds play a vital role in delivering positive inflation adjusted returns. Short term and Medium term debt funds are better alternatives to fixed deposits as they can deliver better post tax return.

PPF:

PPF delivers 8.6% tax free return. It has got a lock in of 15 years. One can save upto Rs.1 lac p.a. Safety and its tax free status makes this product a compelling option for an Indian pre-retirement planner.

Schemes for Post-Retirement Planner in India:

A combination of schemes like POMIS, Senior Citizen’s Savings Scheme, Bank FD, Mutual Fund MIPs and Debt funds could be considered for creating a post-retirement planner in India.

Creating an Indian Retirement planner

We have discussed enough about why should we have a Customised Indian Retirement Planner in the place of a readymade pension/retirement plan. Let us think about how to create a comprehensive and customized retirement planner for India.

Lifestage:

In this step, as an Indian retirement planner, you need to answer two questions. One is “How many years from now you are planning to retire?” and the other one is “ Your Estimation of Post-retirement years”. Studies reveal that the average life expectancy of an Indian is 75 years. But it is advisable to assume 85 years as your life expectancy so as to make sure that you will be covered enough during your post retirement.

Expected Retirement Expenses:

Again in this step you need to have an answer or 2 questions. The first one is “what will be retirement expenses in today’s cost of living”. Research reports show that approximately 70% of your current expenses will be your retirement expenses. The second question is “what would be the expected rate of inflation on these expenses”.

Expected Retirement Income:

The first question to be answered is “What is the expected amount to be received at the time of retirement from schemes like EPF, superannuation, pension commutation, gratuity?”. The second question to be answered would be is “What is the annual income you expect from the sources like pension schemes, rent, royalty?”.

Existing Investments:

“What is the current value of the investments made towards retirement?” and “What is the expected return from these investments?” are the questions to be answered in this step.

Working out the Retirement Planner:

We are going to work out the retirement planner in this step with the answers from the earlier steps.

a)      You need to find out the future value of the retirement expenses with the present value of retirement expenses, number of years to retire, and the inflation assumed.

b)      The expected retirement income by way of rent, pension, royalty need to be deducted from the retirement expenses (calculated in the point (a)) to arrive at the net retirement income to be generated from the retirement corpus.

c)       Then the retirement corpus needs to be calculated by taking into account the net retirement income (calculated in the point above point), number of retirement years, inflation assumed post-retirement.

d)      The retirement benefits like pension commutation, gratuity, superannuation, EPF needs to be deducted from the retirement corpus (calculated in the point (c)) to arrive the net retirement corpus required.

e)      The monthly investment required to accumulate this net retirement corpus needs to be calculated taking into account the existing investments, and the rate of return from the investments.

The detailed approach for creating a comprehensive and customized Indian Retirement Planner is well explained in the above five steps.

Role of a Financial Planner in Creating an Indian Retirement Planner

A professional financial planner will be able to take into account ‘the rate at which your income grows’ to decide the monthly investment towards the retirement corpus.

Also the financial planner will be able to decide the asset allocation for your portfolio based on the required rate of income to accumulate the net retirement corpus.

The financial planner will be suggesting you the right mix of schemes for your pre-retirement planner and post retirement planner.

Also the professional financial planner will be able to tell you the required life insurance coverage and the health insurance coverage and when you need to opt for health insurance coverage.

Periodical review on the retirement planner has been conducted by the financial planner so as to accommodate the changes and deviation from the original retirement planner.

You can be a “do it yourself” Indian retirement planner or “seeking professional assistance” Indian retirement planner, the above points will help you in having a happy and peaceful retired life.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

©2009 Copyright by Invest In India

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Are ‘freebies’ free?

Ziaulla Namani — Fri, 10 Feb 2012 06:04:38 +0000

Freebies offers are pullers, but think twice before subscribing to any of the freebies offers, as they almost like a cobweb. One should keep into account that nothing is for free and hence should save her/himself from falling prey into the web of unwritten “promises”, it may become a difficult task to recover one’s money in the present world of complex financial products and increasing competition among financial firms.

Kartik Jhaveri, a Mumbai based wealth manager, said, “Most of the agents tend to mislead and promise moon to the customer to sell financial products as that is their bread and butter. It is a customer’s responsibility to be aware of the charges and read documents before signing.” The sales department of financial institutions, be it insurance companies, asset management firms, or banks, are under tremendous pressure to get new business. The sales department of these companies, in turn, puts pressure on their agents to sell more products. The agents are offered lucrative gifts and compensation including commissions based on their performance slab. This highly increases the chances of mis-selling of a product.

Most banks and other financial institutions work on thin margins and largely play on the volume of the business. While there are always some or the other promotional offers run by these companies, mostly there are costs built in the product which one understands only at a much later date.

CEO, Ladder7 Financial Services, said “Check whether the offer is relevant/ useful for you or not. What is the point of buying a product or opening an account which may turn out to be unnecessarily costly for you. Never trust the executive/ manager blindly.”

The credit card users should be smart enough to read the documentation that comes with it. The interest charged on its outstanding is one of the most expensive.

Source – Financial Express.

Courtesy – Ritukant Ojha

©2009 Copyright by Invest In India

Leak Proofing your Personal Finance to build Wealth

Malvika — Mon, 06 Feb 2012 09:53:57 +0000

Financial plumbing

Many have a tendency to complain about inflation, taxes and EMI’s as deterrents to saving and investments. But the question is are we making a conscious effort to save and control spending? Do we have any financial leak and are we ignoring them?

My intention is not to confuse, but to emphasize that you need to fix these leaks. So that you can create and build wealth that can last for a lifetime.

Arun, a marketing professional earning Rs. 24lacs per annum post tax was surprised how his friend Girish who earned just Rs. 18lakh per annum and having similar family conditions could save and invest. Taking Girish into confidence he explained his problems. Girish gave him a patient and empathic hearing. Girish explained where Arun spent unnecessarily or created financial leaks and how these leaks could be plumbed. This could make Arun feel financiallt fulfilled in his life.

The financial leaks:

In addition to his necessary expenses, Arun spent a lot on things that were unnecessary and unhealthy. Some of the financial leaks or avoidable expenses included his smoking and drinking expenses. Since he belonged to the upper status of society Arun believed that drinking and entertaining his friends and colleagues with foreign liquor at least once a month was essential. This even took up about Rs.1.5laks to 2lakhs of his annual income.

In addition Arun dined in star hotels at least once a month, with dining out in other restaurants at least twice a week. This took up about Rs.1.5laks annually. The family believed in shopping in expensive malls and watching movies in multiplex that cost him about Rs.300000 per annum. In addition there was the yearly recreation and other lifestyle expenses.

Method of financial plumbing:

Girish emphasized to Arun to cut down on his cigarettes and alcohol to not only save money and invest, but also to care for his health. In addition Girish suggested that he find other healthy ways to relax like doing deep breathing, meditation and relaxation exercises daily. Next he suggested that he entertained his friends in more healthy ways and minimized his visits to star hotels and restaurants for a meal.

He told Arun that dining at home, experimenting on their new favorite recipes. Cooking together as a family provided the togetherness and helped to get the family’s cooperation in meeting the savings goals. Shopping just for essential needs, with entertainment in theaters or watching videos at home instead of visiting multiplex theaters saved money on tickets and in travelling to these theaters that were on the outskirts of the city.

I am sure we all could relate and find some that could identify with our spending habit patterns.

Your excellent life balance sheet:

Just have a look at how fixing financial leaks could help:

v Your monthly unhealthy expenditure of Rs10000 on alcohol, if invested at 12% would give you a corpus of Rs. 23, 00, 386 in 10 years and Rs. 98,92,553, in 20 years.

v Next your unhealthy monthly expenditure of Rs.2000 on cigarettes will grow to

Rs.4, 60, 077 in 10years and Rs. 19, 78, 511 in 20 years at the same rate of growth!

v Similarly, your extra unwarranted expenditure of watching movies at multiplex and shopping in malls of Rs.5000 each month would grow to Rs.11,50,193, in 10 years and to get Rs. 49,46,277 in 20 years at the same growth rate!

v Cutting on extra dining out expenses of just Rs.5000 per month could accumulate Rs. 11, 50,193 and Rs. 49, 46, 277 in 10 years and 20 years at the same interest rate!

v Aren’t you surprised this amounts to 50 lakhs in 10 years and 2.17crores in 20 years with a mere cutting Rs.22,000 a month? You are more healthy and financially sufficient all your life!

v Plumbing some other financial leaks switching off fans, heaters, air-conditioners and other electric and electronic appliances when not in use would help make savings and the energy crisis!

v Avoiding financial leaks with avoiding the use of credit card unless very necessary would help avoid payment of high interest. Detesting the idea of just making payment of minimum amount on credit card outstanding balances is one of the worst financial leaks. This applies also to giving priority to paying off low interest loans in favor of high interest loans.

v Next avoiding the financial leak of paying high interests paid on loans, with earning lower interests in savings accounts and fixed deposits is important.

Conclusion:

Hope you are set ready to fix your financial leaks and to channellise the extra savings in a fruitful investment option. Here’s the road map to riches. Fix your financial leaks; get extra savings; invest the extra savings properly; become wealthier.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

©2009 Copyright by Invest In India

To be or not to be in equity

Malvika — Mon, 06 Feb 2012 09:52:48 +0000

Are You a Lender?

A study revealed that only 47% of Indian households had bank account. In addition every 3 out of 4 households had a quarterly bank balance of only Rs.5000. With the recent savings bank account de-regulation many banks have raised their interest rate by 1%. But households would not benefit much, as banks could charge increased transaction fees to offset increased cost, and also the additional interest income from savings account is negligible.

A further study has revealed many other interesting facts. Most Indians prefer to be lenders and not owners that have enterprise.

We tend to play safe and prefer to be lenders by investing in fixed deposits and debentures of banks and companies. Investing in fixed deposit or debentures gives us a fixed interest. The bank in turn lends money to others for interest and makes a profit on the difference between the borrowing rate and lending rate.

Do you want to be an owner?

You can be a lender by investing in fixed deposits of SBI. Also you can be a part owner of SBI by investing in its shares.

As a part owner you would not get a fixed return in the form of interest. Since you own the company partly, you would share in profits or losses. You would get a part of the profits in proportion of the shares owned by you. Owning means risk-taking with the chance to get higher returns than lending to the bank or companies by making fixed deposit with them.

Suppose, Tomorrow Tata motors comes out with 12%interest paying debenture, what will be the response? There will be a huge response. It will definitely be oversubscribed. All investors will not get the allotment.

For a moment, just think. If TATA motors was to pay 12% interest to debenture holders, then it need make more than 12% with the borrowed money. Will you benefit more by being a lender (debentureholder) or part owner (Shareholder) of TATA Motors?

Lending or owning?

We as Indians should be proud to be a part of a developing country. Owning would give us an opportunity for long term capital appreciation and growth. However it is best to understand that the Sensex may fluctuate, but an increase is definite over a period of time.

In the last 10 years, sensex gas grown at 17.79% CAGR. That means, if someone could have invested Rs. 1 lac 10 years back, it could have grown to 5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds Rs.1lac, it could have grown to Rs.9.31 Lacs.

So the coming decade post 2011 is the golden period for owning. This period would help the so called middle-class people to build wealth. With the middleclass aspiring for quality education for children,   quality healthcare for their family and a decent lifestyle after retirement, owning equity is the only time-tested means to get a decent inflation adjusted returns. So we need to get our long term perspective right and start owning equities.

Asset allocation:

Owning and investing in shares means creating wealth with a long term perspective. But balancing the way we invest matters.

First, we need to allocate some amount of money for risk coverage. This could include money set aside for insurance, medical insurance and critical illness coverage. Next we all need to set aside money in liquid sources as savings accounts / bank deposit / liquid funds that would come handy in contingencies like loss of job and sudden illness. Then money required for short and medium term needs has to be set aside in debt investments.

Once this is done you are free to buy equities and build wealth. Equities can beat out all other investment categories in the long run. Equity is one of the few investments which can give you a positive return after adjusting for inflation.

Last but most important, feeling motivated that you are an owner would make a significant impact on the way you multiply your wealth. It would also give you the positive spirit and affirmation to stand by your decisions during the downs of the economic market.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

©2009 Copyright by Invest In India

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Housing finance a priority sector for weaker sections

Malvika — Mon, 30 Jan 2012 14:10:42 +0000

The apex bank of India, Reserve Bank said it is considering categorizing housing finance for weaker sections as priority sector lending by early next month to ensure adequate flow of credit.

“We are trying to put housing finance for weaker section as a part of priority sector. There is a committee which is looking into it. Hopefully, by the first week of February this report will come,” RBI Deputy Governor H R Khan told reporters.

The committee is headed by Union Bank of India Chairman and Managing Director M V Nair, was constituted by the RBI to look into various issues related to priority sector lending, including review of loan limits under the segment.

The committee has sought to address issues like desirability of simplifying the approach to direct lending, inconsistencies or ambiguities in the existing guidelines, nature of activities, presently classified as priority sector, that need relook and new areas, which should be incorporated.

The terms of reference of the Nair committee is to revisit the current eligibility criteria for classification of bank loans as priority sector with reference to nature of activities and types of borrowers (individuals versus institutions, corporate and partnership firms) of loans.

It will review nature of activities and types of borrowers (individuals versus institutions, corporate and partnership firms) of loans which can be brought under priority sector segment.

The terms of reference of the panel include review of limits on loan amounts.

It will also review appropriate documentation and due diligence thresholds to ensure that loans extended by banks are for the eligible categories of purposes and borrowers, which need special attention and treatment, the terms of the report state.

As much as 40 per cent of the bank’s total lending is for priority sector including agriculture and small sector industry.

Source – Agencies

©2009 Copyright by Invest In India

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How to choose the best available Mutual Fund?

Ziaulla Namani — Mon, 30 Jan 2012 13:36:08 +0000

If you want to invest in mutual funds, you will be required to flip over 1,000 mutual fund schemes that are offered by all the fund houses put together. In this scenario, how do you go about choosing the best available Mutual Fund?

In order to dig the answer you need to answer simple questions like:

* What is it that I am trying to achieve from my investment? – Am I looking at generating X amount of returns or do I want a steady appreciation on the capital invested or is it my objective to generate some wealth from the investment which will help me achieve a particular financial goal.

* For how long do I want to stay invested – is my investment for a short period or am I willing to stay invested for long, say 10 years?

* How much risk am I willing to take on the investment – Will I be able to cope up with momentary loss or would I prefer selling off the investment instead of taking any loss

* Am I in a position to invest one time or will I be more comfortable investing in bits over a period of time.

If you diligently answer the above questions, the long list of available options would automatically get curtailed to a far more manageable number. Answering the above questions would also allow you to pursue those schemes which are more relevant instead of trying your luck purely on the basis of past performance or other ad hoc factors. As Ralph Seger, an Investment Guru once said

“An investor without investment objectives is like a traveller without a destination.”

Having zeroed down on your investment goals and preferences, you need to dovetail these with the investment objective of the scheme. Every mutual fund scheme has a clearly defined area of investment which it focuses on. You need to make sure that your investment goals are in line with the investment objective of the scheme.

Another important aspect that you need to consider is the risk profile of the scheme. There could be a situation wherein the scheme’s investment mandate matches your requirements however its risk profile may not be in line with yours. For example, you may be someone who avoids highly risky situations but the scheme which you have chosen may be investing in say small and mid-sized companies which are relatively more risky. In this case, you would be better off staying away from it as you may not be able to cope up with its volatile performance. To quote Warren Buffet, “The most important quality for an investor is temperament, not intellect.”

The third factor that you need to consider is the investment horizon. While most equity mutual fund schemes are open ended i.e. without a specific investment time frame, debt schemes generally have a specific investment horizon which is reflected in the instruments that they invest in. Even in case of equity, you need to be clear that you are willing to wait for a reasonable period of time, say 3 — 5 years to allow your investment to fructify and generate returns instead of bothering about the day to day variations in terms of its performance.

Courtsey Indian Express and GIRISH KALRA ( Head, Marketing and Corporate Communication,Mirae Asset Global Investments)

©2009 Copyright by Invest In India

Indian tycoons put Dubai in Billionaires list

Ziaulla Namani — Fri, 27 Jan 2012 07:32:42 +0000

Superrich business tycoons from India has strengthen Dubai’s position as the city with the most billionaires in the Middle East, according to a latest index that ranks Mumbai fifth largest hub of billionaires.

The emirate is now home to the highest concentration of billionaires in the region – there are 14 of them — and ranks 18th globally, fresh data from WealthInsight, which analysed more than 1,300 billionaires, showed.

New York was ranked as the city with highest number of billionaires, followed by Moscow, London and Hong Kong.

“In terms of competition with Dubai, it has more to do with the Indian business,” Stephen Gross, a senior analyst in WealthInsight, was quoted as saying by The National newspaper.

The UAE has a number of foreign national billionaires in the country, coming from countries including Bahrain, India, New Zealand, Pakistan and Saudi Arabia.

“There’s a lot of Indians who are not residents in India, and those are the ones that Dubai and Singapore are both competing for. Both locations are also courting billionaires seeking a haven from having to pay taxes, particularly after scrutiny increased over accounts in Switzerland.”

“Dubai could benefit from wealthier individuals coming into the emirate following the Arab Spring, and if more unrest in the region continues — but there had not been such an effect among billionaires as of yet,” Gross said.

Since 2007, the average per-capita wealth of billionaires residing in the UAE has dropped 10 per cent, though the number of billionaires has doubled, WealthInsight said.

Source – Agencies

©2009 Copyright by Invest In India

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Financial Planning Lessons from Republic Day

Malvika — Tue, 24 Jan 2012 13:10:27 +0000

Independence Day

India obtained its independence from British Rule on 15^th August 1947. India became independent and wants to develop and prosper with its own decisions.

Constitution

Though we are independent, we were not having our own constitution. Without constitution it is difficult to take the right decisions for growth. So we needed our own constitution which will be the principles and guidelines, based on which we will be able to take the right decisions at the right time. Constitution also deals with the procedures and methodology of taking decisions.

Republic Day

The Constitution of India came into effect on 26^th Jan 1950 which we call it as Republic Day. Since 1950 we were able to continuously grow with the guidance from our Constitution. Without an effective constitution, this exponential growth could have become impossible.

Amendments

So far we have made 96 amendments in our constitution in the last 62 years. Amendments make the constitution more dynamic and implementable in the changing times.

Financially Independent

You will be financially dependent on your parents till you complete education. Once you get a job you will become financially independent. You can take your own financial and investment decisions. You may want to financially grow and achieve financial goals like buying a car, buying a property, children education and marriage, and having a comfortable retirement.

Financial Constitution

Do you have your own financial constitution? That is you need to have a set of financial principles guiding you to take the right financial and investment decisions. Without these guiding principles it is difficult for one to financially grow and achieve financial goals. This financial constitution or financial plan details the step by step procedures and methodologies of taking sound financial and investment decisions.

Illustrating a case:

Rahul would like to retire in 25 years. He would like to have (when retiring) investments which can generate lifelong, the equivalent of Rs.50000 per month and additional Rs. 2 lacs per annum at today’s costs.

A Mediocre Approach:

Rahul may choose invest now and then. He may contribute Rs.3000 in one month, Rs.15000 in another month. He may skip investments at times. So his financial picture will not be very clear. He will not know how much he will be accumulating when retiring. He will have insecurity throughout.

Financial Planning Approach:

Financial planning approach has got some principles and guidelines. These principles and guidelines are like a light house for a ship. They give you the right direction at any point in time.

Investment Principles and Guidelines in Financial Planning Approach:

1)      A good investment need to generate a decent inflation adjusted return.

2)      Not investing in risky avenues like stock market is also riskier.

3)      When doing trading, you are not investing.

4)      Asset allocation is a proven strategy to reduce the overall risk of the portfolio. Periodically rebalancing the assets will enhance the potential of wealth creation.

In the financial planning approach, the situation will be detailed with more facts. As you have well established procedures and methodologies in financial planning, you will be able to do a sound plan and course of action to be taken to achieve the financial goals.

Present Age
30

Retirement age
55

Life expectancy
85

Expected Annual Income

(Post Retirement in today’s value)

800000

Inflation
6%

Pre-retirement return
12%

Post-retirement return
8%

FV Expected Annual Income
3433497

Retirement Corpus
79582501

Required Annual Investment
596866

Required Monthly Investment
49738

If Rahul is able to invest Rs.49738 per month, he will be able to accumulate the retirement corpus easily.

Alternatively Rahul can start with Rs.22000.per month, and increase the contribution every year by 10%. Even in this method he will be able to accumulate enough towards his retirement.

Amendments Vs Review:

Financial planning reviews are what amendments to a constitution. When there is a change or deviation from our original plan, we need to do a review to control the change. The reviews of financial plan accommodate the changes and deviations and make the whole plan achievable.

When celebrating the Republic Day of our country, why don’t you create your own financial constitution /financial plan for a better prosperity?

Long live Republic.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

©2009 Copyright by Invest In India

Indian Inc optimistic about growth

Ziaulla Namani — Wed, 18 Jan 2012 14:40:30 +0000

The business outlook of Indian entrepreneurs for 2012 is resilient despite economic turmoil the world-over, with “unreserved optimism” for the growth prospects of the Indian economy this year, says a survey by global consulting major Grant Thornton.

“Amidst widespread gloom, India appears to be the sole provider of cheer, where the outlook on human resources is concerned, as all six cities that was covered under our survey showed almost unreserved optimism for the growth prospects of the Indian economy in 2012,” the Grant Thornton report said.

In the year 2011, India retained its position as one of the fastest growing economies of the world and even though the growth was toned down by the global slowdown, the scenario continues to be bright in comparison to the global outlook.

Barring Kolkata, where 31 per cent of the respondents expressed pessimism, cities such as Bangalore, Pune, Delhi, and Chennai remain optimistic about the Indian economy.

India’s financial capital, Mumbai, was the most optimistic, with 95 per cent of the respondents expecting a positive economic environment over the next 12 months, the report, titled, ‘India Ahead: A Quarterly Snapshot of India’s Economic and Business Outlook’, said.

However, Indian businesses are struggling with a shortage of right people with the right skills and needs a thorough overhaul of its education and training system, Grant Thornton Partner Vinamra Shastri said.

“The extent to which India can derive economic gains by increasing its workforce will be only be constrained by the lack of integration between education and skilling. India still lags far behind the developed economies and many other emerging economies in terms of education and training,” the report said.

As per the survey results, Mumbai and Chennai had the highest availability, while Kolkata seemed to display the most acute shortage of a skilled workforce.

This report by Grant Thornton India draws on survey results from Grant Thornton’s International Business Report, which is an international survey of the opinions of medium to large privately held businesses

Source – Financial Express

©2009 Copyright by Invest In India

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Guide to NRIs taxation.

Ziaulla Namani — Wed, 18 Jan 2012 13:19:18 +0000

Here are some exemptions and tax-saving tips that non-resident Indians can avail of

Taxes applicable:

Income which is earned outside India by an NRI is not taxed here. An NRI doesn’t have to pay tax on the interest income in a non-resident external (NRE) account or foreign currency nonresident (FCNR) account. But you must be careful about taxes you pay in your new home country as some income that is exempt in India is taxed abroad.

Filing returns:

There is no need to file income tax return if you don’t have any income here. However, if the income accruing in India through capital gains, rent, dividend or interest is beyond the threshold limit, you will have to file tax returns. Here, too, you can claim certain deductions. So, for 2011-12 , an NRI (male, below 60 years) whose income exceeds 1.8 lakh and a person above 60 years who earns more than 2.5 lakh should file returns in India.

Investments

If, as a resident, you made some investments and redeemed them after becoming an NRI, these will be treated differently . For instance, NRIs cannot extend the tenure of their PPF account. Capital gainslong-term or short-term-will be applicable when you redeem/sell your past investments. If you sell shares that are listed on a recognised stock exchange in India after holding them for more than a year, you will not have
to pay tax on the capital gain provided the
securities transaction tax has
been paid.

Tax-saving tips

NRIs can save on these taxes by investing in pension plans, life insurance policies and tax-saving mutual funds. The repayment by an NRI towards principal amount of home loan is eligible for deduction up to 1 lakh, while the interest payment is also allowed as a deduction. NRIs can also buy a health insurance policy here for themselves, their family and dependent parents , and claim deduction up to 35,000 for the annual premium paid.

If you have been repaying an education loan, the interest paid can be claimed for deduction . NRIs can put their money in tax-saving bonds too. Capital gains up to 50 lakh earned from selling a capital asset can be invested in bonds of NHAI or REC. Investment income foreign currency bonds, are subject to tax at 20% as against the maximum rate of 30%. NRIs can invest in such assets and benefit from the lower rate. Also, an NRI can avail of lower tax rates on interest income through beneficial treaty provisions.

Source – Economics Times

©2009 Copyright by Invest In India

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Principles and Decision-making for wealth creation

Malvika — Fri, 30 Dec 2011 10:29:22 +0000

Whenever people have surplus money, they want to invest. When they invest, they just want to act or execute. They don’t want to spend time on understanding the product and various investment strategies. They would like to take investment decisions without doing any homework. There is no plan of action. Their attitude is “I have surplus money; just tell me where to invest”.

Misselling:

These kinds of investment decision making will make you fall prey for misselling. As you are not interested in doing the homework and if someone comes with a long chart and calculations for 20 years, then you may find it interesting and end up buying products like ULIPs. When you realize that you have invested in a mediocre product, you will blame the agent or broker and not yourself and your wrong decision making approach.

Market Moods:

When you just want to act, your investment decisions will swing based on the market moods. If the stock markets are highly volatile and it is comes down day by day then you may think that instead of investing in stock market investing in debt funds are fixed deposits are safe and wise. If the stock market goes up and everyone is investing in the market including your driver, then you may think it is opt to invest in shares or equity funds. So in this case you will never buy low and sell high. In fact you end up buying at peak and avoiding the market when the share prices are low.

Aggressive Trading:

Blindly, some investors believe that by doing aggressive trades in shares and derivatives are the quick way to make money in the stock market. They enjoy their higher degree of involvement with the stock market. They feel very happy about the few successes in the stock market which give them comfort in accepting many losses. They don’t go back and calculate how much they have made or lost in a trade; what is the total profit or loss they have made in a particular year. These investors will learn very old lessons of investment after losing a huge amount of their hard earned money.

Wealth Creation Secret:

The mistake investors do is they don’t understand the basic investment principles. They simply try to make some investment decisions. How can these investment decisions be right? Very difficult. As an investor, you need to understand the investment principles. Then based on the investment principles, you need to take the investment decisions. These investment decisions will be right for sure. Without right investment principles, right investment decisions become impossible. Without right investment decisions, long term wealth creation is just a day dream.

Sound Investment Principles:

Asset Allocation:

Depending upon your financial goals, you need to arrive at the required rate of return from your investments. You need to decide what kind of allocation needs to be given to different kind of investment avenues (like Fd, Debt funds, Equity Funds, Gold ETF..) in order to achieve the required rate of return. Once decided, don’t change this asset allocation ratio depending upon the market movement.

Risk Vs Safety:

Whatever the long term savings you have got you can invest in risky assets like equity funds. You will be adequately rewarded for taking risk in the long run. Whatever the short term savings you have got you can park it in FDs or debt funds.

Investing your long term money in safe avenues will be a destruction to create long term wealth. You will not be able to beat inflation. Similarly investing your short term money in risky investments is also dangerous.

Fundamental Factors:

The returns an investment generates will be based on its fundamental factors. Analysing fundamental factors only will lead to a long term success. There is a lot of difference between taking one right investment decision by fluke and taking right investment decisions regularly by analyzing the fundamental factors.

These investment principles are very simple and straight forward. At the same time these principles are very authentic and profound. The magic formula for creating long term wealth is “Sound Investment Principles + Right Investment Decisions = Long Term Wealth”.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

©2009 Copyright by Invest In India

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How to be proactive on your potential financial problems?

Malvika — Fri, 30 Dec 2011 08:52:31 +0000

Most of today’s problems are yesterday’s challenges overlooked. It is always considered a wise thing to perceive problems before they arise and attend to them at the earliest. By doing so, you will be spared from the trouble you may have to undergo in the later stages. Here are few pointers to assist you in identifying the problems related to your spending and saving patterns.

Potential problems related to your spending habits

You are finding it difficult to repay your debts.

Potential Problem: You decided to splurge in on your salary and went ahead purchasing everything you ever wanted on monthly installments and did rest of the shopping on your credit card. A few months later, you come to terms with reality not being able to service all your debts.

Possible Solution: You must take into consideration the fact that all your loans combined should not go beyond 30-40% of your salary. It is imperative that you bore this fact in your mind before taking any new debt.

You find yourself in a tight financial corner every next month.

Potential Problem: You spent a little too much on your vacation and are now feeling the pinch for not being able to pay up for the insurance premiums that you are required to pay the next month.

Possible Solution: In order to deal with such a situation, you need to monitor your accounting constantly on a monthly as well as annual basis to see how the cash flow is. This will help you to manage your cash flow in an effective manner.

You are unable to determine what you really need and whether you can afford it.

Potential Problem: You probably got a little too excited when received your bonus amount and made up your mind to purchase a big and brand new refrigerator or an advanced split air-conditioner to tackle the summer heat or a car to swing along the countryside. But, what you failed to assess initially was whether you would be able to meet up with the increased electricity or petrol bills generated in your monthly budget.

Possible Solution: You can deal with such problems by planning well-ahead and deciding firmly on entities you regard as relevant to your needs. You need to assess before you buy whether the recurring expenses of the equipment you’re going to buy in fits into your monthly budget.

Potential Problems related to your investment habits

You are unable to contemplate or relate to the product you’re in possession with.

Potential Problem: You have decided to invest in the real estate sector after seeing your peers make good returns, especially when the prices were rising. However, nobody explained to you the fact that your money could get bottled-up in there in the absence of a good deal. In the same way, you may have five insurance policies but not enough life insurance coverage.

Possible Solution: It is important that you know the purpose of buying a financial product is it will help you solve your financial problem. Not all products in the market will solve your required needs. By setting yourself goals, you will be able to zero in on the perfect asset choice.

When you need money, your portfolio is in negative:

Potential Problem: You worked hard and even managed to save up regularly cutting away all your unwarranted costs. Yet, when you come close to meet your goal (say buying a property), you realize that your portfolio doesn’t support your need.

Possible Solution: Before deciding to go in for the kill, you need to choose your assets wisely keeping your goals in mind. For example, it is quite risky to keep all you money in equity in case you are aiming for a short-term goal. As a result, your capital may get exposed in the event of the market falling.

You focus your investments in only one asset category:

Potential Problem: You made huge returns from the stock market last year. So you decide to concentrate your investments only in stock market. You have suffered in the 2008 crisis or 2000 technology bubble burst and incurred major losses and are quite suspicious if things would work out; and decide to stick just to debt investments. It must be noted that neither of the strategies will pay off.

Possible Solution: You may decide to go by your insticnt, but it is not always advisable to blindly invest everything you’ve got in a single asset class. In order to reduce the risk factor and still be on the charts, you are required to broaden your time horizon of investment. Also you need to diversify across various asset classes to reduce risk.

You have understood how to be proactive on your financial problems. Unimplemented knowledge is a burden. Our problem is not ignorance but inaction. You can be different from other by being alert to your financial problems well in advance.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

©2009 Copyright by Invest In India

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Have You Done Your Financial Spring Cleaning?

Malvika — Thu, 29 Dec 2011 16:04:37 +0000

A Financial Planning experience with a client:

It was just another day that a new client came to us for financial planning. He wanted to know if he had planned well for his family financial goals. As a general procedure, I suggested that a study would help me come out with a comprehensive financial planning to meet his goals.

Explaining the Financial Planning Concept:

I told him that financial planning lies in addressing 4 important areas namely, risk management, wealth creation, wealth preservation and wealth transfer. It is an ongoing process throughout life. Financial spring cleaning done regularly helped to stay focused and keep track of your finances.

It is best to understand that financial spring cleaning involves collecting and assimilating data. This included various investments, present financial situation of the client. Then an appropriate plan was prepared and reviewed regularly considering changes. It is best to get a financial plan prepared by a certified financial planner or advisor that has the expertise, education and ethics and believes the plan would work for you.

Analyzing Life Insurance:

My collection of data told me that my client had more insurance coverage on his wife and dependent children than on him. In addition he had been sold certain unit linked plans by his investment consultant. These ULIP’s were disguised like profitable part of his overall portfolio.

So the first thing that I emphasized to him was to increase the term insurance coverage on him, so that his family was secure in his absence caused by sudden death. This was essential considering that he was the sole earning member of his family and still had various financial commitments before his children settled down.

Online term policies with nominal premium rates would be best for the purpose. I then told him that buying ULIPs are not good investments because of its heavy front loaded charges and under performance. As a part of portfolio revamp, i suggested to the client that he surrender certain policies and take up more of online term coverage on him.

Evaluating Health Insurance Requirements:

Client already had a general health insurance policy for him and his family. I also suggested that he should take additional health insurance coverage in the form of critical insurance. An additional critical insurance coverage would provide for income in case of critical illness eventualities.

Examining other investments:

Stocks and MFs: A closer review of his investments in stocks, mutual funds and other portfolios convinced me that my client had gone wrong in many of his investments. I was surprised to find that he had been misguided to invest in penny stock and closed ended NFOs of mutual funds. These stocks and mutual funds were not just risky but also lacked adequate liquidity and profitability to cater to long term inflation.

PMS: His portfolio management that was done by 2 portfolio managers lacked consistency that was vital for growth. They had repeatedly bought and sold stocks of big stocks like Larsen & Toubro, Tech Mahindra and Siemens just to book minimal profit and paid high costs on entry, taxes, brokerage and exit.

It was also seen that my client had an unwieldy portfolio that consisted of certain stocks that were bought on momentary emotions. In addition both his portfolio managers were buying similar stocks and mutual funds that made for laying all eggs in a basket. In addition to lack of diversity in stocks, they had sold off more profitable funds to invest in least known. I suggested that he invest more in diversified large cap and mid cap funds.

Fixed Income investments: We suggested moving of fixed deposits that earned just 6.5% post tax to fixed maturity plans that yielded 8.75% post tax. We also suggested that he increase his contribution to Public Provident Fund and in the senior citizen account of his parents.

Client Reaction

My client understood very well that his broker had not suggested investments taking into consideration his financial goals, risk tolerance and return expectations. We also rendered the service was to help our client create a cash flow management strategy. This would help him ensure surplus funds were appropriately invested in a diversified way.

To conclude once the first step was taken to embark on his new journey to a strong financial backing, we advised him to keep himself well informed about financial planning with knowledge from various sources. Finally he understood that it was worth taking help in financial spring cleaning due to the rich long term gains that would accrue to him.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner at Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

©2009 Copyright by Invest In India

Present Age	30
Retirement age	55
Life expectancy	85
Expected Annual Income (Post Retirement in today’s value)	800000
Inflation	6%
Pre-retirement return	12%
Post-retirement return	8%
FV Expected Annual Income	3433497
Retirement Corpus	79582501
Required Annual Investment	596866
Required Monthly Investment	49738