Invest In India » Amount Of Money

Annual Bonuses Is The Time For Wise Money Management

Malvika — Tue, 04 Oct 2011 07:08:58 +0000

The month of annual bonuses seems like paradise when we start planning in advance on how to spend it. This excitement will get us into impulses of spending on things that give momentary pleasure only. This leaves us regretting for our decisions later. Wise money management and productively using annual bonuses will help us to take care of not just present needs but also of future needs and contingencies.

My idea of being a financially prudent and smart person would involve wise money management of bonus according to the life’s priorities and expenses. It is true worldwide that living in uncertain economic times after the global economic turndown, we all need to learn powerful lessons on wise money management. Every individual has his/her own peculiar set of priorities, but I believe that some suggestions would be well appreciated by all.

Ways that have helped in wise money management of annual bonuses include:

Tax planning has and will always play a role in saving taxes and making meaningful investments for the future such as investing in mutual funds, fixed deposits and insurance related investments to save taxes under Section 80C. However I would suggest investing in mutual funds is best done through Systematic Investment Plans (SIP) or Systematic Transfer Plans (STP) that is best accomplished with opting for systematic transfer of funds kept in a savings bank account spread over a year. This helps to take advantage of market fluctuations and get good returns.

I am sure we all realize the great benefit of living a life free of debt, than having to worry about expensive loans taken like credit card debts, personal loans, and low priced loans like education loans, home loans and vehicle loans. The priority should be on utilizing annual bonuses to first pay off loans carrying a high rate of interest, with it giving the advantage of saving on higher amount of money being paid towards interest on such loans.

Life has never been certain and it is futile to expect it to be certain at any time, so wise money management needs to take care of unexpected and expected contingencies that could arise at any time. Being financial smart requires every person to set aside at least 3 to 4 months of one’s monthly income for contingencies like loss of job, illness, and accidents that could leave you in a financial crunch for a few months. This is best accomplished with setting aside some portion of the annual productivity bonus towards the maintenance of a contingency fund in the form of liquid and semi liquid funds like mutual funds and bank deposits.

“Live in the present” is what many psychologists would tell you, but I would say it is best to take lessons from our past mistakes and set the stage to meet some of our future expenses and financial goals. The past is gone and would never come back again, but it is never too late to start saving for future goals like retirement, higher education of children, their marriage or maybe your goal to start a consultancy business based on your experiences. This requires carefully planning the period that you would not need the money and setting aside a portion of your annual productivity bonus in bonds and mutual funds with the correct allocation between equity and debt to meet your needs.

However I do not mean to say that enjoying life or luxuries like a dream vacation, an LCD TV or home theater should not be your cup of tea, because all of us earn and perform well at work to live life and not just to exist as some suppose. Enjoy your annual bonus king size with planning your financial priorities with the advice of your financial planner.

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

Child Plan: Is that REALLY worth for your kids?

Malvika — Thu, 15 Sep 2011 10:15:11 +0000

I am reminded of a Tamil saying, “Experience what it is to build a house, and get a child married”, probably that is the reason why wise parents invest to meet the long term financial obligations like education and marriage cost of their children. In addition the rising inflation rate also calls for starting savings early in a child’s life. However it would be advisable to know, evaluate and compare various means of savings. This could also enlighten you about how “child plans” need not be the only method.

Disadvantages of a Readymade “Child Plan”

v “Child plans” with insurance resemble unit linked insurance plans, starting early in a child’s life and ending only when the child attains maturity. The amount of money invested in these plans is insignificant considering an in-built insurance component, and other charges like premium allocation charges that are the commission paid to distributors. This could lead to low return in the initial stages and additional losses on leaving before completion of the tenure.

v Most of the “Child plans” in the industry comes with a catchy name to capitalize the “Child sentiment” in us.

v We need a different medicine for a kid and adult. But do we necessarily need a different type of investment options for securing a kid’s future. Think.

Alternatives for Child Plan:

v It is to be noted that other investment products like Public Provident Fund, National Savings Certificate, National Savings Scheme, RBI bonds, post office deposits and instruments and mutual funds that serve the purpose of savings and increasing of capital value apply equally well to investment for a child’s future.

v Mutual funds are available in a wide range to satisfy all appetites for risks. In addition there are mutual funds that are designed for meeting long term financial obligations of children. One could also invest in funds with a right balance between debt and equity that promise better capital growth than child plans. It is also possible to go in for systematic investment plan that offers the opportunities of taking advantages of price differences and gaining in the long run.

v It is true that systematic investment plans or SIP help save entry cost and build a habit of regular savings for capital growth to meet children’s financial obligations. It is also possible to avail of tax benefits as such funds are taxed only on maturity and a major child’s income would be taxed separately. I am sure you would agree that this would help saving unnecessary expenses and cuts in investing in child plans.

v PPF or Public Provident Fund is also good as mutual funds, with opening a PPF account for a 20-year period in a child’s name helping to meet long time financial obligations of children. It has been stipulated that an annual investment of just Rs.70000 would leave you with almost Rs.32lac as a result of the compounding effect. It is difficult for a “child plan” with insurance component and upfront charges to offer you such a great return without taking much of risk.

An Ideal Mix:

Instead of going for a “Readymade Child Plan”, one can customize their Investment Plan for their child with a combination of Term insurance, PPF and equity diversified funds.

If tax saving is your motive one can consider ELSS funds instead of a regular equity fund.

It gives you similar tax benefit like a child plan. You get 80 C benefits for your investments. Also the returns are also tax free.

At the same time, the charges are very very minimum and negligible when compared to “readymade child plans”.

You can increase or decrease your contribution every year depending upon your financial situation.

So whenever, you think of child plan think of a customized investment plan for your kid’s future with a mix of 2 or 3 investment options instead of readymade product with a tag “Child Plan”. I am sure you would agree that readymade child plans prove to be not ideal instruments to save. The wisest line of thought would be a mix of diversified investments that gives good return with low charges.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director 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

All you wanted to know about Mediclaim Policy

Malvika — Mon, 18 Jul 2011 06:34:14 +0000

Health care costs are sky rocketing day by day. Therefore the need for having a mediclaim policy for you and your dependents has grown. Suppose you have to undergo some medical treatment or need to be hospitalized for certain reason, then a mediclaim policy will be of immense help to you in covering your health care expenses. The reason is Mediclaim offers protection in case of unexpected medical and health care emergencies.

Hospitalization expenses in case of illness, disease or accident will impose a heavy financial burden on individuals and families. This is where the mediclaim policy comes in handy. The mediclaim policy can reimburse the hospitalization expenses or can pay the hospital directly on behalf of you.

A mediclaim policy provides a health cover of certain amount of money. This amount depends on the amount that the insured person was insured for.

The mediclaim policy can be taken for an individual or for an entire family. Some insurance companies allow a discount on the premium if the policy is taken for a family.

Insurance companies have fixed some age limit for medical test. If the individual is below that age, then he or she need not undergo medical test for taking mediclaim policy. If the individual is above that age limit then he needs to go for medical test.

If any pre-existing disease has been found out in the medical test, then those diseases will not be covered under the mediclaim policy for a waiting period of a first few years.

If you have a mediclaim policy from your employer, that may not be sufficient. Employer may cover the employee and not necessarily his entire family members. And moreover these policies are not portable and cannot be individualized if you leave the job. Employer provided policies cannot be transferred to another employer in case you switch your job. Also employer provided policies will give you coverage as long as you are employed. Once you retire you may not be having coverage.

It is really unfortunate that only after your retirement you need health insurance at the most. If you plan to take a fresh policy after retirement, insurance company will not cover the pre-existing diseases at that point in time. Though your employer provides a health insurance policy it is better for you to take a separate health insurance policy at least with a small amount of coverage.

The coverage amount of the health insurance policy need to be decided based on your health consciousness, your family health history, and the class of hospital you choose for treatments.

If you are not health conscious or you don’t do regular exercises or you don’t follow proper diet or you frequently take outside food or don’t go for annual health check-ups then it is advisable to go for more sum insured coverage in your mediclaim policy.

If your family has got any adverse health history like heart disease, high blood pressure, stroke, diabetes, kidney disease, cancer, any form of paralysis, or any hereditary disorder then you need to choose higher coverage amount in your health insurance.

If you will be choosing high class hospitals for your treatment then you need to go for higher sum assured. If you will be choosing medium level or low level hospitals then you can choose the coverage amount accordingly.

Also you need to revise your health insurance coverage amount based on the changes in the above factors and the changes in the medical cost. Also the increase in the age needs to be considered for deciding the coverage amount.

The icing on the cake is you get tax benefit under section 80D for the mediclaim premium paid. For senior citizen the limit under this section is Rs.20000 and for others it is 15000.

Most people don’t think about health insurance very often. But it comes to mind first when a loved one is sick. Mediclaim policy is one of those things everyone knows he or she should take but usually puts off until a more opportune time. Living without a mediclaim policy is like going out on a rainy day without an umbrella or a raincoat.

If you have not covered adequately yourself and your dependents with mediclaim policy so far, then now is the right time to take action. The fact that you are reading this article shows you have decided to stop procrastinating, delaying and have answered the ancient question, “If not now, when?” with “NOW!”.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director 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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Insurance cover that goes beyond paying hospital bills

Malvika — Mon, 12 Apr 2010 13:44:09 +0000

Would you mind if somebody pays you after your retirement or even before? If yes is the answer, then insurance is the best solution. Before investing in any insurance, get a brief idea of the plan you would like to invest upon. The insurance is broadly categorized as life or medical for people. There are also some insurance which have multiple benefits like medical insurance added with life insurances.

Studies reveal that there is a considerable risk for a person losing his job due to permanent disability. In that scenario, the person has to spend a considerable amount of money for his health as well as family needs. Disability insurance is still unreached for many people. The benefits from this insurance are good for people who are unable to continue his job due to permanent disability or illness.

The premium to be paid depends on many factors like age, sex, occupation, etc. The premium rates are comparatively high as the risk involved is also high. The insured person may get up to 60 percent of the salary drawn by him before he got disabled under log term scheme. Disability insurance is given in two options based on individual’s convenience as long-term and short-term. In short term, the insurance company pays almost seventy percent of the monthly income drawn by the person in a specific time period till his retirement.

In long term disability insurance, the person is eligible for coverage almost close to his salary drawn. The coverage period ranges from minimum of six months to maximum of his retirement period. While applying for disability insurance, the following things needed to be made clear. The first is that the amount invested or premium paid is taxable. The second is that there is minimum possibility of withdrawal before the maturity period.

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Some Common Mistakes Made While Investing in Real Estate

Malvika — Mon, 23 Nov 2009 04:17:39 +0000

Why is the Real Estate market so lucrative for the investors? The answer is quiet simple, because it has all the capability of doubling or even tripling up the invested amount of money in a short span of time. Like any other investment there are a few mistakes that people commonly make, while they invest in the Real Estates.

Think before you act

One most common mistake that normally people make is that they do not think before they invest. It’s really important that while investing in real estate you should think it over a few times especially about your budget, the amount of returns expected, the locality that you choose to invest in, its future prospects etc.

Keep impulse away

While investing in real estate, you should totally stay away from impulsive decisions. Its very common that people take loans to invest in real estate and what they plan is that they would make up for the same through the gains that they would be making out of the property but at times the whole game turns upside down due to some unforeseen circumstances. Therefore it’s important that you should consider your budget and finances properly before you have really signed the deal.

Market Research to be done

Before you fix up the property to be invested in, ensure that you have done some god amount of market research about the property. Take out time to confirm the actual price of the property from different brokers etc, take multiple opinions about the future prospects of the property as that would help you gage the actual prospects of the property.

Be flexible

Investing in real estate does not involve any hard and fast fixed rules and there could be situations where in you would have to deviate from your original plan. For example in case you had original plans to sell off the property in 2 years time and then you are not able to find a good enough buyer for the property then you ought to consider renting out the property as soon as possible, may be for sometime, or for the next couple of years. That would definitely decrease your burden of having to pay large amounts as installments for the property and might earn you some amount of equity for the property too.

These are only some of the suggestions that would keep you safe while you have invested in a property, or if you plan to do the same. There are another thousand things that you ought to take into consideration if you plan to invest in real estate, which of course we would discuss some other day.

©2009 Copyright by Invest In India

The Right Amount of Insurance

Malvika — Mon, 19 Oct 2009 10:53:00 +0000

There is never a right or a wrong amount of insurance. If an amount of
Rs. 5,00,000 is the right amount of insurance for your friend who has the same income, and is of the same age like you. Even then, it essentially might not apply in your case too. There are lots of things which need a consideration for choosing the right amount of Insurance for a person. A brief description of the same has been under mentioned to help you.

Annual Income of the person – For your family to continue living a comfortable life like they do, with you being around them. It’s a thumb rule that your Insurance amount should be atleast 6 to 8 times of your pay.

Your dependents – The number of dependents in your family is directly proportional to the amount of insurance you need for your family.

Compute your expenses – You need to sum up the total expense that you incur through out the month to maintain a certain living standard for your family. So that is the amount of money you would need from the insurance to keep things going, when the income from your end stops. Also do not forget to keep in mind the inflation rates.

Savings – Have you created any savings for your family, on which they could fall back. Just in case misfortune strikes.

Your current debts – In case you have purchased a house or a car recently with the help of a bank loan then it becomes all the more essential that you consider covering them all with insurance. Else if just in case some thing happens to you, then chances are your family would be in a soup, with those liabilities on the head and no income. Also chances are they would loose all that if the payments are not made for the same on time.

Needs of the Future – You ought to have a foresight to see the kind of needs those are going to arise in your family, in the near future or the distant future. Like higher educations, marriage of your daughter, illness in the family etc. So you ought to plan for all those expenses and then compute the insurance cover that you should ideally go for.

Tax cover – If you are buying insurance today just with the motive to cover your taxable income, probably that is being very unwise of you. You ought to consider the unpleasant situations and circumstances that your family might face and then buy them for the right amount. If tax benefits come along with it then the same is ought to be considered as a bonus received.

©2009 Copyright by Invest In India

Avoid these common mutual fund pitfalls

Tushar Mathur — Mon, 03 Aug 2009 11:54:00 +0000

Equity markets are on the rise. New fund offers (NFOs) are the rage once again. And again, you are receiving solicitations from your financial advisers to invest in mutual funds (MFs) so that you don’t miss the boat. At times such as these, it’s important to avoid the pitfalls of investing, so that you get the most out of your investments.

Invest in funds backed by experienced asset management companies (AMCs) and asset managers

If you had the choice, you’d probably go to an experienced doctor rather than someone fresh out of medical school. It is the same with MFs. It is always advisable to invest through an experienced asset management company and a fund manager, both of which boast an impressive operating and investment history in India.

Cheapest is not always best

This is probably the most common mistake investors make when investing in mutual funds. For some reason, they think that a Rs10 net asset value (Nav) is better than a Rs20 existing fund of the same category and type because the former is cheaper. What matters is the amount of money you are putting in. Rs1 lakh put into either fund will grow the same amount, assuming that both funds are invested in the same underlying securities. So, whether Rs10 grows to Rs12—a 20% increase—or Rs20 grows to Rs24, it’s the same thing.

Don’t invest in a new fund if a previous one of the same category exists

At the time of a new fund’s launch, there is a lot of hype created through advertising aimed at enticing you into investing. However, there might be a fund of this type already existing, which might be a better option because it has had an operating history for a while, as well as proven risk management experience in that category. You are better off avoiding the new fund at its launch and investing in the older fund of the same category.

Understand your risk appetite

Not all medicines are suited to all patients. Some can handle a higher dosage, depending upon their age, their size, the allergies they are prone to, etc. Similarly, not all mutual funds are meant for everyone. Before you invest blindly, understand the risks involved and evaluate whether you can handle the risks associated with the fund and its underlying exposure.

Build a strong foundation

Just as a house needs a strong foundation, so does your mutual fund portfolio. Make sure you have safe and stable exposure to index funds and large-cap diversified funds before you start exposing yourself to sector- and industry-specific funds, which are usually of a higher risk value.

Be realistic about returns

Be realistic about the returns you can expect. Your money is unlikely to double in the next two years through mutual funds—and don’t fall for the salesmanship of your adviser.

Give your money the chance to compound

By chopping and changing your portfolio and getting in and out of funds frequently, you are disturbing the process of compounding and not giving your money the chance to grow. Be patient, even if a fund might not be doing well in the short term.

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Senior citizens still prefer FDs to park the savings

Tushar Mathur — Sat, 22 Nov 2008 11:06:00 +0000

Today many options are available for parking the money then also the senior citizens prefer to invest their money in fixed deposits (FDs). While, the younger generation earning handsome income prefers to invest in mutual funds and equity capital.

One of the main reasons for FDs is being preferred because they are safe and risk-free method of investing. It is obvious in old age no one wants to take risk in financial matters and all one needs is decent amount of money to survive and enjoy life.

Apart from this the banks have special interest rates for senior citizens between 7.5 and 9.5%, depending upon the time period one wants to invest in.

Meghji Mehta, a Koparkhairane resident, said “After working all these years like a donkey, it is finally time of the life where I can relax and enjoy my life. I don’t want to depend on my son, until I can take care of my wife and myself. So I invest in fixed deposit, as there are a few banks who give high rate of interest for the senior citizens.”

Today, senior citizens are happy investing in FDs, because of security and surety as share market is unpredictable. An executive from a Vashi-based bank, on condition of anonymity said, “We provide special interest rates for the senior citizens, depending upon the time frame they are looking out for. There has been continuous growth in number of fixed deposits in the past 7-8 months. With stock market being so unpredictable, more senior citizens are opting for the FDs. Apart from senior citizens others have also started investing in FDs, too.”

©2009 Copyright by Invest In India

Advantages and Disadvantages of ETFs

Tushar Mathur — Sun, 24 Aug 2008 15:03:17 +0000

This is the 2nd installment of our 2 part series on ETFs. Please read the first part here: Investing in ETFs

Advantages of ETFs

1. ETFs tend to be more cost-effective vis-a-vis comparable mutual funds. For instance, while the expense ratio of a passively managed ETF (tracking a benchmark index) would normally be in the range of 0.50%-1.00%; for an index fund, it can be as high as 1.50%.

2. Another important advantage with ETFs is that they provide more flexibility to investors than regular mutual funds. Since they are traded on the stock exchange, they are available to investors any time during the trading hours. So investors can buy and sell units of an ETF on a real time basis, unlike regular mutual funds, which can be transacted only at end-of-day NAV.

3. Since ETFs witness most of the buying/selling on the exchange, the interests of the long-term investor are not compromised. Take a regular equity fund where units are bought and sold at the AMC’s end – when a significant amount of money enters and exits the fund rather quickly, the long-term investor could suffer as a result of the costs (trading costs, registrar costs and opportunity loss, if the fund manager is forced to sell his best stocks) associated with this quick inflow/outflow.

With an ETF, since the trading investor does not approach the AMC at all and only interacts with other investors over the exchange, his quick entry/exit does not compromise the interests of the long-term investor.

4. Given ETFs are traded on the stock exchange, and can be bought/sold on a real time basis; they tend to have low tracking error (deviation of ETF’s performance from that of the underlying index) as compared to index funds.

Disadvantages of ETF

1. Investors need to have a demat and a trading account, with a SEBI registered stockbroker, for investing in ETFs. For investors, who do not trade in stocks, this could be a bit of a deterrent. Also, maintaining a demat account entails paying annual fees (approximately Rs 500), however the same varies across stockbrokers. For investors, who invest in stocks, this will not pinch as the maintenance charge of the demat account will be spread across the stock and ETF investments.

2. While investors have to incur entry/exit loads at the time of making/redeeming investments in mutual funds, for ETFs they have to pay a brokerage (usually around 0.50%) to the stockbroker, along with other applicable charges (STT for instance), every time ETF units are bought or sold. For a trader who frequently trades, this can have a significant impact on the net returns. But for long-term investors, these expenses hold little relevance.

What investors must do
It is evident that ETFs offer a different investment proposition vis-à-vis conventional mutual funds. ETFs may appeal to investors who want to track the performance of a particular benchmark index (such as S&P CNX Nifty or BSE Sensex); Similarly, the ETF route can also appeal to investors who are desirous of investing in asset classes such as commodities (e.g., gold), or even REITs (e.g., international real estate and homes). The allure of ETFs will only grow given the expanding bouquet of offerings.

Investors on their part would do well to thoroughly understand the pros and cons of ETFs; this will help them make informed investment decisions. Also, investors must consult their investment advisors/financial planners to determine the suitability of an ETF in their investment portfolios.

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