fpgindia-blog

[fpgindia-blog]

Professional Indemnity Insurance

In present days courts are very consumer friendly and in lots of cases, they have given full right to patients to sue against the doctors for their carelessness & unethical practices. In many cases, court has passed orders for doctors & hospitals to pay for their mistakes. That is the power of Professional Indemnity Insurance.

If a professional is found guilty of providing wrong advice or cheated client, professional indemnity insurance helps in defending the claim by providing legal cost & expenses, also monetary benefits to their clients to rectify the mistake.

Professional Liability Insurance (PLI) is also known as Professional Indemnity Insurance. It’s very popular in theUS with thename of Error & Omission (E&O) and is a type of liability insurance which provides help in protecting professional service & advise.

Professional Liability Insurance Planning (PLI) can be taken in many forms depending upon the profession, mainly in medical & legal, and may become necessary under contract by other businesses that are the beneficiaries of the advice or service.

Every individual is different from the other & some individuals always take arisk in their profession that leads to liability if an error in service takes place. Lots of people work on theprevious experience of professions. If a professional person makes a mistake, the person who is following his advice will be impacted. People are very well educated nowadays& they know how to take benefit of court if some professional makes a mistake

What is Professional Indemnity Cover?

It’s very useful policy for the professionals. If the policy is continuously renewed from the date of inception, then it also provides the benefit of aclaim for the earlier period.

This policy can be issued to agroup of people also who are in thesame profession. Group discount benefit is also available depending upon the number of members.

Professional Indemnity Covers thewhole amount for which a professional is legally liable to pay to thethirdparty as a damage against any error and mistake by the insured professional while providing the professional service.

This cover also provides the legal cost & expenses of defense, but prior consent of insurance company is required subject to the overall cover provided by the company.

This policy will not cover any type of criminal act or violation of law by the professional while rendering the service to thethird party. It only covers civil liability claims.

In this cover, sum insured is called as Limit of Liability. The summust be countable. In most insurance policies normally, claim amount is known but in Professional Indemnity Cover, claim amount is unknown.

Insurance company sets the limit of liability, up to which they will bear the losses. Excess to that will

Professional Indemnity Cover starts from 0.30% to 1% of the insured amount. Amount of premium is depending on manyfactors i.e. Income, Limit, Professional Experience,and Jurisdiction.

Following are the professionals which are covered under this plan:

Ø Interior Decorators, Architects & Engineers.

Ø Advocates, Lawyers, Solicitors & Counselors.

Ø Doctors & Medical Practitioners like Surgeons, Cardiologist, Physician & Neurologist.

Ø Designers, Event Planners, Small Business.

Ø Chartered Accountants, Financial Accountants & Management Consultants.

Ø It also covers the legal liability of Medical Establishment, such as Hospitals & Nursing Homes as an error committed by any professional or experienced assistant appointed by the Medical Establishment.

  This plan does not cover professionals from the financialindustry, but financial advisors can take this policy under the category of consultants.

What is covered under the policy

Professional Indemnity Covers the financial losses due to error or omission by the professional while rendering the service for which he/she was hired.

There is one condition to this cover: that third party suffered bodily injury or property damage.

This plan provides safety against compensation arising  due to Negligence, Act, Error or Carelessness while rendering the professional service. Defense Cost is also covered for professionals like Chartered Accountants, Architects, Engineers, Advocates, Lawyers, Designers, Doctors and Medical Establishments to protect their business interest from the losses due to error or act by the appointed professionals.

Professional Indemnity Insurance covers professionals from the legal claims arising due to following covered threats:

Ø A business which is done by any person who is appointed by the insured professional, by or on behalf of said firm, any business conducted in their professional capacity.

Ø Payment of Fees, Expenses and Defense Cost as per Indian Jurisdiction.

Ø All professionals in thebusiness of a firm, if they are covered.

Ø Legal liability arising due to bodily injury or death due to abreach of professional duty by the insured professional.

How to select the sum insured

In this cover, sum insured is called as Limit of Indemnity. This limit is fixed per accident and per policy period which is called Any One Accident (AOA) LIMIT and ANY ONE YEAR (AOY) limit appropriately.

One can choose the ratio of AOA limit to AOY limit from the following:

        i.            1:1

     ii.            1:2

   iii.            1:3

   iv.            1:4

AOA limit is maximum amount payable for each accident. It should be fixed based on nature of the activity of the insured and the maximum persons that could be affected and maximum property damage that can occur, in the worst accident scenario. Any One Accident limit is cramped to 25% to Any One Year limit in Professional Indemnity Insurance for professionals like Interior Decorators, Lawyers, Advocates, Chartered Accountants, Solicitors, Management Consolers, Financial Accountants & Engineers.

In theoccurrence of any event where liability claim is arising, theinsurance company must be informed immediately. On receipt of any legal notice or summon, it should also be informed by theinsurance company. So that insurance company can arrange a defense option.

AOA limit selected considered as the maximum amount payable including the defense cost. AOY limit will get automatically reduced by the claim amount of any one accident. Any number of such claims made during the policy period will be covered subjects to the total indemnity not exceeding the AOY limit.

What does Professional Indemnity Insurance not cover

The insurance does not cover any claims made for the following acts:

Ø Deliberate, willful or intentional noncompliance withany statutory provision.

Ø Non-Compliance with technical standards commonly observed in professional practice laid down by law or regulated by official bodies.

Ø Fines, Penalties, Punitive or exemplary damages.

Ø Professional services rendered by the insured prior to the Retroactive Date in the Schedule. Deliberate conscious or intentional disregard of the insured’s technical or administrative management of the need to take all reasonable steps to prevent claims.

Ø Any dishonest, fraudulent criminal or malicious act or omission.

Ø Loss of pure financial nature such as loss of goodwill or loss of market.

Ø Arising out of all personal injuries such as Libel, Slander, False Arrest, Wrongful Eviction, Wrongful Detention, Defamation and Resultant Mental Injury.

Ø Injury to any person under the contract of employment or apprenticeship with the insured their contractor(s) and /or Sub –Contractor(s) when such injury arises out of the execution of such contract.

Ø War and Nuclear Threats.

Ø Infringement of Plans, Copyright, Patent, Trade Name, Trademark, Registered Design.

Ø Assumed by the insured by agreement and which would not have attached in the absence of such agreement.

Ø Any criminal act or any act committed in violation of any law or ordinance.

Ø Services rendered while under the influence of intoxicants or narcotics.

Ø Any third party public liability.

Ø Any condition caused by or associated with AIDS.

Apart from all mentioned above, this policy will also not cover the Penalties, Loss of Goodwill, Medical Treatment given for Weight Loss, Plastic Surgery, Genetic Damages and conditions associated with AIDS.

  Read More: SEBI Registered Investment Advisor l Planning for Early Retirement l Real Estate Planning

[fpgindia-blog]

Adapting Financial Planning Process For Couples With Changing Times

Ki & Ko decided to get married after a long 8 years of courtship. They had decided to respect each other’s space and individuality even after the marriage. As a part of this arrangement, they have a very one of a kind way of handling their personal finances. Their Financial Planning is quite unique. They have life goals as a family and they also have their individual financial goals.

They are contributing to the common goals as well as following their respective dreams. The household expenses including the rent of the house are shared equally between the two of them. The remaining surplus is then assigned to Investment Planning towards individual and common goals. Welcome to new India. Welcome to new Independent families of young India.

As financial planners, we have handled quite a few families in the age group of 35 and more which are following the societal norms of ‘One family One Plan’. They generally have family goals like child education, marriage and retirement. May be international vacation and a nice car. The couple together will work towards these goals. There will not be any goals specific to husband or wife alone. But there is a noticeable difference in the new age couples. They have individual viewpoint of their life.

They will have some common goals like children education, Retirement Planning etc. They will plan parental care for their respective parents. Additionally, they may have goals like starting one’s own business, taking a sabbatical to explore the world, starting a NGO for some cause, embarking on spiritual journey to find purpose of life, etc.

Financial Life planning is the solution to provide solutions to this generation. We have to blend seamlessly the togetherness with individuality. We first start with Cash flow analysis and asset -liabilities. It is followed by their income versus expenses assessment and individual networths. Budgeting of expenses for both the partners is very essential to ensure that they contribute towards day to day expenses in equal proportions. Example: If Ki is spending Rs 24000 on household expenses, Ko will take the responsibility to pay rent of Rs 23000 p.m.

The next step is creation of Emergency fund. Two Separate Emergency funds for individual needs (parental care etc) and one common for household. Then Life insurances are taken after assessing the financial dependency of partner as well as their respective families. So, Ki will take Life Insurance Planning to safeguard financial liability towards Ko as well as her own parents. Same will be done by Ko. Medical Insurances are generally taken as family floater and Premium is equally shared by Ki and Ko. They will take separate policies for their respective parents and pay premium for the same.Finally, before goal-based Investment Decisions are taken, the couple’s individual risk appetite are considered as each would be investing the surpluses proportionately and the type of investments will reflect their risk profile and goal.

The recommendations for their respective goals need to be given treating them as individuals. Since there are many individual goals, their prioritization becomes important from financial feasibility perspective. Lot of time is spent understanding the logic behind these goals. The scenario is changing and more and more such parallel lives enclosed in togetherness of marriage are being witnessed. We as planners have to accept this and design the plans to suit their requirements.

[fpgindia-blog]

Focus On Portfolio Returns, Not Individual Investments

For more than a decade now, we have met different types of clients; some conservative, moderate and aggressive investors. Some wish to focus on short term goals, while others have medium term and long-term goals to take care off.

In this diverse group of investors, when we looked at portfolios of our newly on-boarded clients, we noticed a common trait. Investors were concerned more with their equity portfolio rather than their entire portfolio. The rationale being, “Equities are risky; it can erode capital or/and enable wealth creation. The rest of the portfolio is fairly safe, so why worry about it.” That’s reasonable justification indeed, isn’t it?

This phenomenon is well explained in the Loss Aversion Theory, where for the same quantum of money, investors feel 2.5 times more psychological pain when losses are incurred compared to gains. Naive investors have designed home-made Risk management tools for this purpose. In most cases, they maintain very low allocation to equities ranging from nil to 5%. The balance portfolio is invested in safer instruments which include Fixed Deposits, Postal schemes, Insurance Policies Planning , gold, etc. This way, they ensure their downside is well protected, while expecting super normal returns from miniscule equity allocation.

With such actions, naive investors are shouting out loud, “We need investment advisors to guide us.” Think about it, an investor is excessively obsessed with performance of only 5% of the portfolio, taking 95% of the portfolio for granted. Is this behavior rational or irrational?

In such a portfolio, 95% of the portfolio will deliver approx. 7% returns, while return expectation from equities will be plus 12% to 15%. If projections meet reality such a portfolio will deliver meager 7.45% returns, which cannot beat inflation in the long term. Investors need to allocate their investments in different assets as per their goals and time horizon.

For example, if they have a Financial Planning goal which is 7 to 10 years away then the allocation to that goal should be in equity as over that period, equity volatility gets moderated and returns get enhanced. For short term horizon investors should look at fixed income assets which provide safety of capital. In the endeavor to earn huge returns in short term from equities, investors may take too much risk, relying purely on luck to get the desired results.

On the contrary, if investors focus on Asset Allocation whereby they invest as per their goals and risk profile from a long-term perspective, their investment journey will be way more pleasant. For example, if you have 40% equity and 60% debt, having reasonable return expectation of 15% from equities, the portfolio return is likely to be close to 12%. The major difference being, we are not betting in equities, but investing in it for the long run.

Conclusion

Investors, stop betting on equities with miniscule portfolio allocation, it is not going to help much in the long run. Use suitable Asset Allocation, which enables you to worry lessand reap the rewards in the long run. Simply put, when the whole portfolio works hard for you, the results are likely to be better than a portfolio where only a small portion works hard. The choice is yours!!!

Read More: SEBI Registered Investment Advisor l Planning for Early Retirement

[fpgindia-blog]

Look At Value Or Price Of Product?

In today’s financial world, a lot of products are made to appear as if they are amazing. The advertisement and promos make you feel that if you don’t buy or invest in them, you will miss an opportunity of a life time. The reason why this happens is because buyers or investors concentrate a lot on the price of a product, rather than on understanding its value.

The Paradox of Value

The law of value simply says your true worth is determined by how much more you get in value than you give in payment. What we really need to understand is simply the difference between price and value. See, price is a rupee amount, it's a rupees figure. Value, on the other hand, is the relative worth or desirability of a thing, to the end user. In other words, what is it about this thing, this product, this service, this concept, this idea that brings with it so much value, so much worth that someone will exchange their hard-earned money for it and be glad…be ecstatic that they did while you still make a very healthy profit?

Value is not the same thing as price or compensation. Your value is not necessarily equal to your salary. An accepted definition of value is, “The property or aggregate properties of a thing that renders it useful or desirable.” Your salary is simply the payment you take. Your value is the relative worth you add to the organization—both in the mind of the person who signs the checks and also in the experience of the people (both in the organization and outside it) with whom you interact.

We understand these in our daily Life, but we forget this simple rule when it comes to money and investing.

Let us now see some of the products which are of really High Value, Low price.

Term Insurance: Term Insurance is one of the best examples for this.

Millions of investors have discarded the possibility of buying term insurance as they don’t get any money back at maturity. You now realize what they all concerned on: The Price. They feel that they “lose” their money. They have concentrated only on what they don’t get and not on what they are getting. These investors do not think, for moment, about: The Value which term insurance provides to their family and dependents at the price they pay for it. They never look at it from the long term perspective and never question the value it provides in their financial life in the present or in the future. It cost way less than the expectations of people and what people are ready to pay for it. The value offered by Term Insurance is more than what it costs.

Paying Fees to Advisor

Almost everyone runs away from paid services. It’s because the focus is on fees and not the value. Why?  We are simply programmed to try to acquire anything we pay for at a lower or may be even free of cost. Fees are not seen as an investment. They are considered as an “expense”. People look at fees as money that must be spent on something which is for immediate consumption rather an investment which can provide them with growth in the value of their wealth in the very near future.

Let me give you an example of the difference between price and value would be a financial advisor who charges you Rs500 to do your file tax returns but saves you Rs2,000 as compared to what  you would have paid in taxes had you completed the return yourself. He also saves you twenty-five to thirty hours of time of doing it yourself. So we see in this case value in both concrete, with the two thousand rupees savings as four times that fee in cash terms and even may be the time because we can put time to money, and also conceptual with the good feeling that you have, the feeling of peace of mind of knowing it was done correctly. You can hardly put a price on that. At the same time, although his fee (price) was Rs500 for the work, it didn’t cost his nearly that much to do the work, so he made a significant profit, too—which he should, given the value he provided.

Similarly, financial planners ask for a fee of 15k and they can make a major change in your financial life by just sitting with you and counselling you on your financial life and the mistakes you should avoid. It might look expensive (if you look at price), but if you look at the value you get out of it, it would be a worthwhile product. In fact, if it delivers good results, it could even cover its cost and come to you free, because they can improve your financial life and enable you to reap benefits over the long term. Remember that free advice can turn out to be extremely expensive in the big picture.

The Value of Value

Every time you invest your money it’s important to understand the price of it and value of it. If you find that its cost is less than what you are ready to pay, consider it cheap and go for it and not in the other case. Price and Value depends on Situation, time, age and other factor, don’t forget it. The way this happens is through focus, focus on providing the value. You see, money is an echo of value. It's the thunder to value's lightening. Focus on the value and the money will come.

Read More: SEBI Registered Investment Advisor l Financial Planning l Planning for Early Retirement

[fpgindia-blog]

The Rising Factor

You should be aware about the impact of inflation on investment returns and savings?

Inflation is a silent killer. In the modern world, all of us have come to realize that inflation is a destruct or of our savings. An inflation free world is an impossible dream. Reality check is mandatory as inflation is here to stay.

While looking at a larger picture, we see India as a nation that is reeling under the impact of inflation. While economic and monetary reforms help in curtailing inflation, they are not enough to stop it. Nearly double digit inflation rate is bound to adversely affect every household. While loosening your purse strings is one way of absorbing that rising prices, it’s not a very feasible option in the long run.

You never know how and when inflation eats into your Investment Planning returns, as well as your savings. Pulled up by the food inflation, pulses which were available at Rs. 40 per kg have shot up to more than Rs. 100 per kg in the past year.

To understand the impact of inflation better, let’s consider an example. Ramesh wanted to generate RS. 10 lakh in 5 years. Considering an average return of 12%, the lumpsum investment required for this is Rs. 5.67 lakhs. But, if we factor in inflation at 6%, then Ramesh will have to aim for a corpus of Rs. 13.40 lakhs, instead of Rs. 10 lakhs, in 5 years.

In the above example, if we increase inflation rate at 1 % more ( i.e. make it 7%), then Ramesh would need to generate a corpus of around Rs. 14 lakh in 5 years. The risk of inflation, if not anticipated and factored in the savings plan and investment decision, can actually upset one’s Financial Planning goals and plans. It is now clear that your savings have to be safe guarded against inflation. Planning your finances accordingly is half the job done. All you need to do is ensure that you have a disciplined investment schedule to take care of your future financial need.

We often come across the term compounding – the ninth wonder. The time value for money increases your net worth in a very unassuming and simple manner. For this, you must plan for regular investments early in life - right from the day you starts earning.

The table below reflects how inflation changes the savings and investment outlook. Particulars Data

Corpus required ( in lakhs) 10 10 10

Investment period ( in years ) 5 5 5

Inflation ( in % ) 0 6 7

Future Value ( in lakhs ) 10 13.38 14.03

ROI ( %) 12 12 12

One time investment ( in lakhs ) 5.67 7.59 7.96

One way of looking the ill–effects of inflation on investment returns and savings in the long run is to look at how inflation has been affecting your lifestyle currently. While basic needs such as food, education and accommodation will always remain in top priority, you will surely take some measures to reduce expenditure in travel, electricity and fuel cost. Life style expenses such as purchase of expensive gifts, electronic items and upgrading consumer durables like mobile and cars will probably be put off for the moment.

Eating out, weekly getaways and impulsive purchases are certain other expenditure areas that will see severe cutting down. It is therefore logical to deduce that if inflation is seriously affecting your present life style, forcing you to make some tough decisions, it is bound to impinge on the way you live in the future. With retirement on decrease income, you will naturally rely on your savings and investments. Don’t let inflation eat into your hard–earned money and ensure well deserved future income.

You cannot do away with the inflation. However, you can invest in financial instruments based on the financial goals and risk profile and ensure that inflation does not become a road block in wealth creation and savings plan.

Read More: SEBI Registered Investment Advisor l Taxation Planning

[fpgindia-blog]

HDFC Capital Protection Oriented Fund

In the last few months HDFC Mf has launched series of Capital protection oriented How to Invest in Mutual Funds for the investors who are not comfortable with taking risk in equity market. When anybody hears capital protection, it looks lucrative on one hand; however when you go deep into the product information the reality comes out. This category of funds are not popular in the market, reason being the performance of this category is highly disappointing.

About HDFC Capital Protection Oriented fund

It is a close-ended capital protection oriented income scheme with tenure of 36 months. The scheme will have a portfolio mix of highest rated debt and money market instruments along with the exposure to equity. On one hand these kinds of funds are ideal for capital protection during a downturn; on the other hand, it does not help much in creating wealth for investors. One of the best features of capital-protection-oriented MFs is that it enables risk-averse investors to gain exposure to equities.

Investment objective / Strategy

The scheme is made to generate returns by investing in a portfolio of debt and money market instruments which mature on or before the date of maturity of the scheme. The scheme also seeks to invest a portion of the portfolio in equity and related instruments to achieve capital appreciation. By having a portion of equity in the portfolio, the fund will also generate returns in good times.

Debt portion – 83% - 88%

Equity portion – 12% -17%

The debt portion of 83% of the invested capital will grow over the tenure of the scheme to 100% thereby protecting your capital. Rest 17% will be invested in equities which will provide upside in the portfolio.

Assumed Situation over 3 years….

 Scenario 1

Scenario 2

Scenario 3

Scenario 4

Scenario 5

Scheme Corpus

100

100

100

100

100

Debt allocation

83

83

83

83

83

Equity allocation

17

17

17

17

17

CAGR on Equity

20%

10%

0-10%

-20%

Equity  value on maturity (A)

29.38

22.63

17

12.39

8.70

Debt value on maturity (B)

100

100

100

100

100

Scheme value at maturity (A+B)

129.38

122.63

117

112.39

108.70

Source: SID of The above scheme.

The above illustration clearly explains that what returns a portfolio can generate in any of the above 5 scenarios. The debt portion is clearly invested for capital protection and the equity returns generated by the scheme would depend on the portion of asset allocation of equity. The above allocation is just an example to show how this fund will work and actual allocation may be different.

Should anyone invest in this scheme?

As per the illustration, in case people invest in this scheme and get 0% returns on equity then the value of Rs.100 invested at the end of 3 years would be Rs.117/- Thus generating a CAGR of 5.37% only.

Now if you go by the name “Capital Protection”, the scheme must generate returns equal to the inflation rate prevailing in the economy. If in a scheme if you get back less than what inflation is then you have actually lost the value of your capital. Even if you keep Rs.100 in a bank FD for 3 years at prevailing risk free interest rate of 8.5% than also you will get back Rs.127. Today minimum expectation of an investor is to get bank fd interest rate and not less than that. So its better to form your own strategy and protect your capital rather than paying high management cost to MF company and getting back minimum out of that.

So to conclude, it’s better to avoid Capital Protection Funds as the features of the scheme are not very attractive and the same can be done with the help of your Investment Planning advisor or Financial Planner.

[fpgindia-blog]

Financial Planning for the Salaried

While the basic tenets of financial planning remain the same for everybody, the way in which one earns his money directly affects the way in which he needs to plan for his financial future.

Salaried people, especially the Government employees, have certain special characteristics with regard to Financial Planning due to the nature of their job. On the positive side are that the income flow is fairly certain and regular; there are likely to be many employer-provided benefits like medical, transportation, vacations and insurance; predictable salary increments; likelihood of a good retirement package to include Provident Fund, Superannuation corpus and Gratuity which can result in a decent life-long Pension Plans; and comparative stability of the job.

On the limitations side, large payouts other than yearly bonus and performance-linked commissions would be a rarity and there is less likelihood of large improvements in standard of living. These characteristics create special needs for the salaried people compared to the business class and self-employed professionals.

First is the protection to their families in case they meet with a calamity. Unlike the business class who are likely to have an earning inheritance to pass on to their dependents, salaried may not have such a luxury. Hence, the need to correctly assess the quantum and duration of Insurance Planning cover. They should preferably take a Term Plan early in their career. Second is medical insurance. In case of job change, the medical facilities being provided by an employer may not be available in the next employment. Hence the need for an independent medical insurance at individual or family level to avoid unpleasant surprises, especially at higher ages of 40+ when medical problems generally start.

Next is to cater adequately for own Retirement Planning India. Generally, there is a smug feeling amongst such employees, due to the employer-provided retirement corpus that they are likely to get, that they would be able to generate enough regular money to cater for their requirement in the entire post-retirement period. They forget the eroding effects of inflation and the long retirement period which may stretch up to even 30 years. Government employees tend to be even more complacent as they are likely to get pension too (for those who joined service before 2004).

Lastly, due to the regular salary, catering for emergency (or contingency) fund takes a backseat. This should not be lost sight of since any such emergency can wipe out a large part of planned savings, affecting other goals of life, and may even result in loans at high interest rates. Catering for about four months of living expenses for emergencies can be taken as a general thumb rule.

Selection of investment instruments by the salaried needs to cater for above peculiarities to have a comfortable living during the working as also retired phases of life. It is generally seen that, compared to business class and self-employed professionals, salaried persons tend to swing to the extremes as far as risk taking is concerned. They are either very conservative and stick to predominantly debt instruments like PF, bank fixed deposits and endowment-type insurance policies, or get headlong into very risky prepositions like direct equity including daily trading, forex and F&O instruments without adequate preparation and knowledge. A balanced mix of instruments, taking into account own risk aptitude, type of Financial Goals and their priority, availability of money and the time available to accumulate money for each goal are the guiding criterion which should decide selection of financial instruments.

[fpgindia-blog]

Financial Planners are not Magicians!

People are often sought for financial advice of Financial Planners and must have many reasons, but one of the most common reasons for hiring a financial planners that it is the solely duty of the Financial Planner to plan for all their financial goals and fulfil them like an Alladin’s Chiraag. Most of the people have tactical goals to buy or upgrade a big car like Honda City or a 2-3 BHK flat, even if they could afford only an Alto, and a 1 BHK flat because they have suffered from misconception that since they have hired a Financial Planner, they are entitled to have a wish list of unrealistic financial goals and expected that a financial planner would act like a ‘magician’.

Magician vs. Financial Planner

Let me allow defining the meaning of a ‘magician’ who is person skilled in mysterious and hidden art of magic where the illusionist asks Rs 10 note from you and turn it into Rs 50 bill. When a person can pull off that kind of trick, provided that it is real that Rs 10 note become Rs 50 note, he might make himself rich instead of entertaining others. The magician is often symbolic of having strength of will to create a great life for you. But financial planners are unable to make the magic real for you. It’s totally out of their control if you can’t compromise on your cash flow. It is important to know that financial planners are not magicians playing gimmicks and superhuman; they are in fact human beings who really attempt to do is to organize the scattered pieces of your financial life – putting things in order, aligning existing investments to your goals, channelizing the income surplus and making a road-map to achieve of those goals. They cannot create a new fountain of income out of nowhere, or invest your money in some magical products, which gives superlative returns.

Financial planners’ responsibility is to advice you on methods to maximize and re-allocate your existing wealth so that your financial goal can easily be achieved across the time frames. At the other end, it’s your onus to make more money, not theirs. All the financial goals in your mind need resources allocated for it. Everyone’s resources of finance are limited and the planners’ role is to properly plan your money resources to accomplish your goals. They are, akin to architects that design your financial house, not a genie who gives dream house as you wish. You want comfortable Retirement Planning. You want adequate education and marriage funds for your children. Financial planners only help by providing you the safest plan available within your limited resources. However, don’t always expect the plan to work if you can’t co-operate.

Be Crystal Clear With Planner

Some people are afraid to talk to financial planners. This is because they tend to think that planners take their money away. They ask you to buy more insurance and surrender endowment policies. They ask you to invest more in equity-oriented funds. They ask you to reallocate your money. They even tighten up your cash flow. But why fear from them? They are not magicians. They won’t make money out of thin air for you. They won’t make your money disappear either. They turn your ordinary income into long-term return. Magic happens in a split second. That’s what amazes the audience. The unreal become real just after a blink. A financial plan is a long term plan. This means it takes a long time to accomplish! Any plan that promises a high return in short term means simply a scam. Since the planner is no magician and can, at best, help you to understand the risks and probabilities involved in each financial instrument so that you can invest as per your risk appetite and understanding.

What Kind Of Advice You Want?

On the subject of advice, people want fair and non-bias financial advice but they are not ready to disclose anything about themselves or their financial needs and status, not even the basic details. Planners do not know what the person’s financial health is; about their motivations for investing; their other savings; or the kind of risks they can take, etc. They do not also know how much money they want to invest either. Of course, no one wants to even know whether there is a fee for the knowledge or skill; they do not even bother to think about why I should help them out. There is a great deal of responsibility in ‘giving’ advice, especially when it comes to matters of money.

Once you decide on a planner, make sure that you spend time sharing your financial data. It does not pay to hide stuff simply because a good planner can help you to rationalize your investment strategy. Do not ask the financial planner for specific goals. Let the planner tell you what is possible with the resources you can spare and the choices available.

For each recommendation, it is important for you to understand the risks involved. Once you take this approach, you will find fewer problems with your finances. However, if you tell him about your aspirations, there is a high possibility that high-risk and, often, unworkable strategies or asset allocation may be recommended. It is important for you to understand some basics about money and investments, since it is your money and involves your future. A rudimentary comprehension of various asset classes can be a good beginning.

How To Engage Professional Financial Planner?

The last point about choosing a planner is whether you are going to hire an imaginary financial magician who still recalls a popular magic trick or a professional financial planner who helps to deal with various personal finances issues through proper planning just akin to a doctor for our physical problems as Financial planners for our Financial problems.

Finally, ask yourself what kind of financial advice do you need? If you are beginners who cannot afford to pay for the advice, it is best that you stick to How to Invest in Mutual Funds or Insurance Planning advisors who do not charge a fee because they are paid by the fund house or insurance company in the form of their commission etc. I would recommend going to a professional planner only if your family income is more than Rs 5 lakh per annuam, you can definitely afford first-time & on-going financial planning fees. Even if your income is less than 5 lakhs, you should consider at least getting the financial plan done for the first time. You may implement, monitor and review the financial plan on your own.

Conclusion

Please bear in mind that a financial planner won’t create money for you out of nowhere. They are not magicians. But you are your own money magician if you desire to be the main role model of your money success story. Talk to your Financial Planning as if they are the architect, the designer, the planner, but definitely not the magician that turns your pennies into gold.

[fpgindia-blog]

Personal Finance for Freshers

Being a fresher you must be excited about your new job and carrier. You have lot of exciting dreams. You are looking for enough money so that you need not to worry while you spend. Once you have peace of mind, you can enjoy your life. You have goals and to achieve those goals you need money.

Did you learn about personal finance in your school or college? If it was not in your syllabus, how will you manage your personal finance in your daily life? Personal finance deals with the process of how effectively you can manage your personal and Investment Planning assets. It deals with the income which you generate for your house hold, life style, dependent expenses, insurance premium, loan servicing, savings and investments. Try to understand about your fixed and variable expenses. Your fixed expenses are like rent, loan repayment and variable expenses are food, monthly utility bills etc.

At the beginning you may have limited money but unlimited requirements and for which you must prioritize your goals. You try to differentiate needs and wants. The income we are considering your wages or salary from your job, if you have other income you can add.

Let your money work for you as you work hard to earn money. If you practice to implement the following tips into your personal finance, your Financial Planning for future will be smooth.

1. Start building a contingency fund. You keep 3-6 months’ salary in your savings bank for emergencies or unexpected expenses. The rationale is that 3-6 months may be enough time to recover from illness that you can recover, you may be temporarily unemployed for which you can make provision.

2. Insurance. Insure yourself adequately, for life you go for term plan/pure insurance for long term. Go for mediclaim insurance plan, personal accident plan, and critical illness Insurance Planning. Although your employer may cover health insurance but still you take by your own. If you have any dependent and if they don’t have any health insurance, take health insurance for them also.

3. Pay off your student loan. If you have student loan, repay it on priority basis. These kinds of loans shall eat up your income as the rate of interest is high.

4. Avoid using of Credit Cards. Being young adult you may be impulsive buyer. Your emotion and feeling play a role in purchasing, you are attracted by well crafted promotional message. Here you need to understand the difference between your needs and wants. Impulse purchasing of costly nonperforming assets (like Car, TV, Refrigerator, costly Gadgets, Holiday etc) create problem in your personal finance. Impulsive buyers use credit cards very frequently and they fall into debt traps. Don’t spend tomorrow’s income today. You pay for your purchase out of income or savings. Remember the quotes of Warren Buffet “If you buy things you don't need, you'll soon sell things you need.”

5. Buy low budget Car. If you need a car, buy low budget car with less maintenance cost which is good in the long run also. You have to make a big down payment and the rest in equated monthly installments. If you take loan, another debt burden will be on you and car loans are costly. Keep the EMI as low as possible.

6. For buying a house. Buy a house/flat while your life is more stable and you have a clear vision about your future direction. You may find cheap apartment for rent and may postpone buying a house until you are financially stable.

7. Start Retirement Plan. Although you have enough time but it’s never too early to start planning for your golden years. It’s a good habit and you enjoy the benefit of compound earnings. Since you have plenty of time it’ll not pinch your purse.

8. Develop a Cash Budget. The objective behind of budget is to generate surplus income. A cash budget helps to control cash inflows and outflows. Its purpose is to balance your income with your expenditures and savings.

I strongly recommend you to set your realistic goals and save between 30 percent and 40 percent of every rupee as soon as you join in your profession, after college. Hopefully these tips are helpful and you need clear vision, right plan and execution of plan.

Disclaimer: This article is written by me and is my own original creation. If there is any claim to the contrary, I am solely responsible and I indemnify The Financial Planner's Guild, India (FPGI) and any other publication that carries my article.

[fpgindia-blog]

Don’t Let Premium Decide Your Health Insurance

Just recently I came across with one of my old friend and while talking he has told me about the mediclaim policy he has purchased. He told me that it is very cheap and providing high coverage without knowing the other sub limits which is inbuilt in the policy. While talking I asked him about the various ifs and buts of the policy, I found that he is unaware about all the pros and cons. He has just bought it with an attraction of cheap premium. After that I told him that policies with lowest premium or with a basket of benefits will not be always the best option for you.

When it comes to selecting a health insurance policy, buyers often forget to keep the crucial facts in mind. So, here is the check list you need to tick before you buy health insurance.

Your Requirement: The type of your policy which you need may not be the same as of your neighbour or friend. Your policy should be determine by your family’s need. The number of family members and their age is very crucial in identifying a policy. For instance, a young family of four can do with a basic cover of Rs. 5 lakhs while a family with senior citizen should opt for a large floater cover. If the parents are too old then it is prudent to have a seperate cover for them an do not include them in a floater plan. Then you need to be careful while calculating premium which one is cheper viz a viz benefits. You also need to be careful while taking a maternity cover. If you are planning to have a baby within a year or two then you have to check the waiting period for enjoying the maternity benefit. Mostly the policy which provides the maternity cover with a long waiting period and almost doubles the policy premium.

Limitations and Exclusions: Once you have the short listed the policy base on your family, go through the fine print to understand the limitation and exclusion of plans. Most of the basic plans carry sub limits of room rent cover of 1% and specific treatment for the ailments which are now treated under package deal in the hospitals. For instance, bypass surgery of heart are done in a package model of normal, delux and super delux. So you have to find out that your chosen policy provides which package model for different ailments. However, if you prefer to high end hospitals with better rooms, then plans with room rent sub limit will not work for you. All other expenses are also linked with the room rent eligibility. If you prefer high end hospitals then other expenses which are linked with room rent may not be eligible for the claim. So you have to understand minutely the limitations and exclusion which are inbuilt in the policy.

Premiums and Plans: One should neither focus on buying the cheapest policy or a policy which offers a plethora of benefits. The emphasis should simply be on whether a policy fulfils your requirements. Several health insurance have come out with premium variants that offers services of doctor’s second opinion, vaccination cover for new born baby, wellness benefits etc. Paying higher premium for the other benefits which you may never use is not advisable. Some insurers have also come out with the international cover benefit also. So check the extention of international cover benefits they are providing . And it is not also advisable to buy high end coverage for availing tax benefits.

Cashless Hospital Network: According to the Insurance Regulatory and Development authority of India, the average claim payout in case of reimbursement settlement is just half that of cashless claim disbursal for the same ailment category. You must find out an insurer’s network hospitals that offer cashless claim settlement. The information is usually available on the insurer’s website. Taking the reimbursement route could strain your finance and in extreme case, even impact the quality of treatment you choose. Opting for the cashless facility also saves you the trouble of collating all the documents, submitting them to insurer and following it up.

Insurer’s Track Record: An insurer’s experience, financial strength and service erecord is also crucial. An insurer with lower claim settlement ratio may spell troble. If possible you also need to take account the solvency margins- an ionsurer’s ability to pay out claims- and premium growth registered by insurer The number of years an insurance company is in business is also worth considering. Its expertise in business will be reflected in the types of policies. An insurance with a wide range of products may be a better choice.

Know More: SEBI Registered Investment Advisor l Insurance Planning l Planning for Early Retirement

[fpgindia-blog]

Measuring Returns In Association With Risk

Risk means, the chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment.

Many investors first tell their advisor, to suggest an investment with lowest risk and highest return!

This cannot be far from the truth! How can one expect to reach a farther destination with the same amount of petrol that was filled for a destination that is closer?

The higher the return, the higher the probability of risk that is inherent in an investment.

Risk is measured by calculating the standard deviation of average returns in an instrument.

The higher the standard deviation, the higher is the risk associated with an investment.

When one measures the performance of say a How to Invest in Mutual Funds scheme return over last 1 year, 2 years and 3 years, it should be measured in relation to the risk or standard deviation taken by a fund manager, to deliver those returns to the investor.

Therefore, measuring returns in isolation to risk, is like eating only the sugar from a candy and not tasting the flavor of the candy.

Once the risks are measured in comparison with returns for a particular investment, then the customer will get a holistic picture on his investment.

He can then compare the variation of returns over different periods and see how volatile a stock or a portfolio is.

Again, if the market falls, to what extent does his stock or portfolio fall in relation to the market and in relation to other funds needs to be understood.

It is also good to set a benchmark or standard to every stock, scheme or portfolio, to see how much the scheme's return has deviated from the benchmark return and whether the scheme has fared above the average benchmark return, after considering the risk or volatility the scheme has taken to deliver the return. That is the true test of a fund manager and is often measured by a term called the Sharpe ratio.

To suggest an investment to a client will comprise of first understanding the risk profile of the client- Risk taking capacity, risk tolerance.

Risk profiling enables the advisor to find out the optimum level of risk based on

Risk required- this is the risk associated with the return to achieve the Financial Goals

Risk capacity will show the amount of risk the client is willing to take

Risk tolerance is the best measure, since it shows the level of risk the client is actually comfortable taking.

Next, the advisor should understand the time horizon for an investment.  This is normally linked to the goal of the client.

A longer duration goal, like Retirement Panning, has a longer time horizon to stay invested, before the funds are needed, and therefore, the investment that can be recommended is equities, since any interim fluctuation in the market, will get evened out.

It is scientifically proven that any investment held for more than 12 years, irrespective of market cycles and downturns will provide positive returns of 10% + to the client. So, the longer, one is willing to stay invested, the better is his/ her chance of meeting the target corpus required, and not be too bothered about market vagaries.

A stocks risk can be divided into systematic risk and unsystematic risk.

Systematic or non diversifiable risk- This refers to the risk that is beyond one's control and is based on market dynamics. More examples are economic and political vagaries, interest rate risk, and macro variables in the government.

Unsystematic and Diversifiable risk- This refers to the risk that is encountered due to known factors like business riks, financial risks where the company has control over factors affecting the risk.

The goal of any investment advisor is to help the client achieve high average returns in equity, while avoiding as much risk as possible.

The ways in this can be achieved is:

Asset Allocation- When a portfolio is apportioned across various asset classes, like equity, fixed income and cash according to an individual's goal, risk tolerance and time horizon, the investor will be protected from varation in any one particular asset class.

Diversification - by spreading the risk of securities in a wider basket so as to minimize the impact of loss of any one security.

By investing in negative correlated securities. This means, by investing in various asset classes that are negatively correlated so that the fall in one asset class does not hamper returns of the overall portfolio, since the other asset class will provide for returns in volatile markets. Eg, like global diversification helps reduce overall risk in a portfolio when there is domestic turmoil in indian markets, since the global market positive impact averages the returns on the portfolio or investing in gold, shares, and property in India. Each of these asset classes have very little co-relation to each other and this would reduce the overall exposure to risk of a particular asset class

Systematic Investment Planning - By investing a small portfolio of the total portfolio at a regular frequency, the average cost of purchase across is always lower than the current market selling price

Not falling prey to herd mentality and sticking to one's goals.

By identity’s the correct risk and return that an investor is comfortable to take or in other words the risk capacity of an investor.

In conclusion, it is important for an investor to seek the help of a qualified professional to understand the impact of investing in the numerous investment opportunities in comparison to the risk profile and to understand the meaning of volatility, time horizon and goal reliasation in the overall picture of the investment cycle.

 Dilshad Billimoria

Director and Certified Financial Planner

Dilzer Consultants Pvt Ltd- SEBI Registered Investment Advisor.

[fpgindia-blog]

Financial Freedom Always Comes With Discipline!!!

Mohit a technical guy, always used to think about the way he earns huge and not being able to save as per his goals. He use to invest into what others choose to, always uses his credit card for big purchases. This is the typical story of every individual who is either financially illiterate about saving/investing or who does not take his/her finances seriously. They will never take an advise from a professional and end up doing what their friends are. They don’t understand that every individual has a different kind of lifestyle and goals to achieve.

People need to understand that to achieve financial freedom every individual has to sit and decide his/her own path. Cut-Copy-Paste will never help achieve the financial freedom in the life.

So what actually is Financial Freedom??

A financial position whereby your wealth is optimized to match your optimum financial needs and wants. Financial freedom is much more than having money. It’s the freedom to be who you really are and do what you really want to in life.[By Kim Kiyosaki] Nobody can define your Financial Freedom. However once you have decided, you can take professional’s help to achieve it. For some people its about achieving goals in future without sacrificing current life, for some its about having lots of money so that they can do whatever they want and whenever they want.

In real scenario, just because you have money does not mean you have financial freedom. You have to plan out on how to manage your existing life and future life. And that what you can do when you choose to be disciplined with your finances.

Here are some points which can help you in achieving financial freedom.

Track your every expense – Everybody loves to do shopping, although it depends if it is monthly or weekly. But the important point is to track all the expenses. A recent study reveals that when you track all the expenses, month on month people have experienced that their expenses reduced. Reason because when you start writing every small expenditure you come to know where you are spending more or where you are spending without any reason. Always remember If you buy things you don’t need, you will soon end up selling things you need [Quote by Warren Buffett]

Start making your monthly or yearly budget - Making monthly budget should be your regular exercise. If you are making budget and following it then there is less chance of over spending and high chance of reaching your goal. The key to building a strong Financial Plan for the future is to understand how much you spend and save right now. This is called tracking your cash flow, and it can give you a sense of control and confidence that makes it easier to make financial changes in your life.

Spend Less than you earn – Are you spending more and earning less because it is only possible if you are Richie Rich or you have a big inherited wealth. It is very easy to spend less, yet many people never learn to do it. Only by spending less you can hope to build a wealth, which is very easy if you follow the above 2 points.

Start an emergency fund – Now this is interesting. People use to think that if they have health insurance, credit card, and balance in bank account then their emergency funding is done. They spend whatever they earn and live on edge. This works well till some emergency comes. It is always better to build up rainy day fund. Logic says to have 4-6 months of expenses as your emergency fund. It may take some time to build but the sooner the better.

Set Financial Goals – Imagine you are going on a trip without knowing the way to reach there. Is it possible? The same goes into personal finance. People have a tendency to save/invest, but they forget to link it up with the future goals. Financial goals don’t just happen. You have to sit and think about it and then prioritize it. Most people tend to have realistic goals, such as children’s education, marriage, another house, retirement. If you have not set, do it on a priority basis.

Start investing to support your goals – Remember only Financial Planning your future goals will not help you in achieving them until you act on. A financial plan gets completed only when the things are implemented according to it. So if you have set your goals and have prioritized them, then it’s the time to act upon. Look out for alternative Investment Planning products which can help you in achieving the result.

Clear your Credit card loan/debt – Today people are frequent user of Credit card. At almost every place you can use your CC. However, all those people who don’t know the right way to use it always end up with a huge debt. So remember before start investing for your goals or for emergency fund, try to get out of your debt burden. One should always remember that the best alternative to their CC is bank’s debit card. It always ensure that you cannot exceed your balance and hence do not get under debt burden.

Fund your retirement – I am still young and I don’t want to save for retirement currently. Will start saving once my primary goals are taken care off. If these are your words then you are forcing yourself in trouble. The early you start saving for your Planning for Early Retirement the bigger the amount will be. That’s because the sooner you begin saving, the more time your money has to grow. Start taking the advantage of compounding.

It’s a well known saying that "No Pain, No Gain". The above points prove a pain lot many times, but the pleasure and satisfaction you earn after religiously following them and seeing your money grow it a different feeling al-together, something which is hard to describe in words. So if you are out of debt, saving for goals, having emergency fund and most importantly saving for retirement then you are on your way to achieve Financial Freedom

[fpgindia-blog]

Onus of Investor!

Do you know that majority of problems in your financial life are purely because of psychological reasons? We are all human beings and are prone to think irrationally at times thereby taking wrong personal financial decisions. Behavioral Finance is the area of finance that combines psychology and finance together and gives you an insight on why a common investor makes mistakes in his decisions. Today, we are going to discuss on “What should an investor be responsible for?”

We buy an insurance policy arbitrarily because the agent was really persuasive or some uncle (or dad’s close friend) happened to be an agent and sold us a policy to secure our future. We buy mutual funds, because the poster on the road showed us a fortune and an opportunity not to be missed! Our decisions are based on our friends’ recommendations and what we see on television or read on the internet and newspapers. We keep buying or investing for all the wrong reasons - like pressure from an agent (who is personally related to us and want to cash on that personal touch), a perceived need to save tax etc. And at the end, we call it our “portfolio”. Now you could give excuses that the agent was so really persuasive, sold you the policy or you had to oblige your agent uncle. But, in fact the agent has not sold to you, you have bought it. The onus to buy or refuse lies with you.

Just revisit your portfolio and ask yourself how much of it is because of your purposeful planning and meticulous thought? How often you sat down, studied investment products, compared with other similar products available and then shortlisted the one that is the most suitable for you?

Let’s imagine a scenario,

Scenario 1: Ajay does not understand much about investment, but still without blinking an eye he invests Rs. 10,000, Rs. 50,000 or Rs. 1.00 lakh in Insurance or Mutual Fund.

Scenario 2: Now, Ajay goes to the vegetable Market and buys half-a-kg of tomatoes at Rs. 20 a kilogram and each tomato he selects with such care thinking that he has to buy a quality product and not what the seller selects.

If you look at both the scenarios, you will notice that the same person Ajay does not care at all when he is investing in Mutual Fund or Insurance.

Why does it happen?

Truly speaking, the investor doesn’t think much when investing in Mutual Fund, but he thinks a lot when he is buying tomatoes, because he understands tomatoes. He does not understand How to Invest in Mutual Funds at all. So investor devotes his time on things which he understands.

What is the Onus of Investor?

Onus of investor is very simple to understand. If you again draw a parallel with the doctors, the doctor doesn’t only give you the medicine for your ailments but also tells you that you must change your attitude towards life, you must go for a walk regularly, you must not worry so much, you must do this, and you must do that. It’s the responsibility of patient to follow the advice of the doctor rather than throwing the onus of treatment on the doctor.

The same way, the financial planner is like a financial doctor. He tries to influence the attitude of investor to bring in them the correct attitude. These attitudes can vary. They can be one extreme like there is no tomorrow, enjoy today “Kal Ho No Ho” kind of a person and on the other end there can be a person who thinks that money is too much below his dignity. Even that attitude is quite detrimental to the financial well-being of a person. So the investor should remain away from greed and negligence. He should follow a self-discipline balance approach towards his financial life.

You only have to do a very few things right in your life, so long as you don’t do too many things wrong.” – Warren Buffet

Remember, an investor who never takes risk will never gain anything. His goal of financial well-being will be very small. If you decide to keep liquidity and put all your money into Bank savings account, then definitely you have avoided all risks, but at the same time you have forgone all the upsides which are possible. So it will be the onus of the investor (You) to adopt a correct attitude towards risk, to weigh the risk against the rewards and then take a correct decision. So in all aspects, a financial planner would serve a very important role in assisting you in making right financial choices.

Financial Planner will Educate You

Financial Planners will make you understand reasoning behind every suggestion he offers. He will make sure that you agree and understand everything so that in future you can take similar decisions yourself. Has any Mutual funds advisor told you why SIP is better for you Or Why You should expect great returns in long term from Equity? Has Any Insurance Advisor or agent told you what are the important things you should be aware of before buying a ULIP? Or why you should avoid Endowment Polices for Long term wealth Creation? We doubt there are many of them giving any genuine information.

Financial Planner wants to make your Financial Life Better

Financial Planner's goal is not limited to Insurance Planning or Investment Planning. In fact a Financial Planner is trying to make your overall Financial Life better and paving a smooth financial path for you, on which you can start walking. Your overall financial life is made up of different components like Insurance Planning, Investment and Retirement planning, Child Future Planning, and Tax Planning etc. A Financial Planner will take care of all these avenues.

Most Indians are totally clueless about Guide to Financial Planning and only in recent years there has been some awareness about it. Most of the people try to fix their finances on their own without accepting that they are not competent enough to do it and they need a professional. Don’t you go to a Doctor or Lawyer or any other Professional and pay them? Then why not hire a Financial Planner? Go Get One!! So onus is on you to make the right choice.

[fpgindia-blog]

Investment is not Financial Planning!

People concentrate too much on Buying the Excellent Mutual Fund? May be people do not understand meaning of “How to Invest in Mutual Funds”. So let me declare what is meant by best Mutual fund: The best mutual fund for you is the Fund which suits your requirement and has ability to help you to achieve your Financial Goals without risking your money.

If you are planning for your Retirement and saving a decent amount of money every month then all you need to do is to see the ultimate return that is close to 12-15% CAGR, which is achievable in long term if you just invest in mutual funds through SIPs. In that case how does it matter if you invest in higher rating as “Five star″ Mutual fund or lower rating as “One star″ mutual fund? I am not saying that you should not try to find good Mutual funds but shift your focus from “buying the best mutual fund” to “Buying a Mutual fund which will help you achieve your goals”.

I have seen many people pinging me about their Investment Planning or decisions to take Term Insurance or Investment plan through mutual funds for next 10 yrs through SIP. Perhaps they've done a good job of building a portfolio of mutual funds. I would like to congratulate them on their decision and action. They are ahead of most of the other people.

But is it enough? Is that all? Is that the initial step everyone should take? The answer is NO!!  Though, they are investing regularly but without any objective and it leads to unplanned investment.

Unplanned Investment

Let’s take a scenario, Sunil starts a SIP with a mutual fund and now he is happy that he has been investing finally. He invests for 2 yrs and markets have gone up and down and at the end his investments are at same place where he started. So there is no appreciation in value. He decides to take half the money out of his investments and uses in buying a car which was his plan from many years. A market finally starts recovering, but as usual he realizes very late that this is the time to put money in markets (as all the general public realize this very late).

He starts his SIP again and now continues this for some years. He periodically takes money out of his investments on many occasions e.g. to meet unexpected expenses, for his vacation and his child education costs and so on…

What is wrong with this approach?

He started an investment which was a good idea but Sunil jumped on the second step of the ladder. He had no predefined goals and hence no clarity on investment plans- No idea of how investment should be divided for different financial commitments and not investment as per risk-appetite and goal’s importance.

Like Sunil, a lot of people have gone directly to the second level and skipped the very first basic level, which is planning!

What is planning?

Planning your finances can be boring, but it’s vital and most crucial part of financial planning. A person who gives much time to planning things has higher chances of achieving it. Make investment is second step. So, the first step was to plan for things. Investing is part of Financial Planning, but it’s not even the most important part.

Planning things in advance reduces doubts about certain things, provides clarity in financial life and hence reduces a lot of issues.

Financial planning is about helping you to figure out how to make all of the pieces of your financial life work together to meet your goals.  Knowing your goals is the first plan that why are you investing; what is the goal associated with your investment; Is it buying home?        Buying Car? Vacation after 3 years, Retirement, Child marriage? etc..

Planned Investment

This time, Sunil knows “Planning is everything” and has to plan how to make proportionate investments for his financial commitments. He identifies his goals and how much money he would need for each. If he needs to save 10 lacs for his Daughter’s Education in the next 20 yrs. He can invest Rs 2,000 every month through SIP in some good mutual funds which has good track record over long term. He can try PPF + Equity Diversified funds OR he can try Mixed of Balanced Funds if he is not big risk taker. In this case, he has to do just follow the Plan, Just invest 2k every month consistently and review his Fund performance once every year. If he starts getting bad, shift to some other good fund. Just imagine how easy and comfortable this situation is! If he can little more risk he can do that but not too much.

Now he exactly knows that, there will be no distraction in between by equity markets going up and down or any other factors because in the beginning itself he has factored in all the possibilities. In short, now he has a clear path and he knows how fast or slow he has to walk on it. At the end if he keeps on walking on it the way he planned Success is guaranteed.

Conclusion

It is evident that Guide to Financial Planning is not all about getting great returns and about finding the best Insurance and mutual fund for yourself. But in reality they are small components of financial planning and the core of it is something else. It’s a personal thing and totally relevant to you and to your needs and your Financial Goals. It’s about having a predetermined plan or strategy to make use of whatever money you have in a hassle free way. Getting great returns or doing just better than average and just investing are not a very significant part of Financial Planning but achieving goals while taken proper steps as envisaged under proper guidance of a Financial Planner.

[fpgindia-blog]

Why Color Code In MF Scheme Is Not Enough?

From 1st July 2013, the color code in mutual funds schemes will get implemented. This is a new mandate by SEBI wherein every mutual funds scheme has to be label in a specific color (from three mandated) to show the level of risk and objectives of that scheme.  Although this is done to ease the choice for investors, it is not the decision maker when you want to c any Mutual Funds scheme.

Let’s understand what these color code indicates and to what extent they will be helpful for the investors-

What Is the color code?

All mutual funds companies will have product label now where each scheme will be coded in some color to differentiate the level of risk, Investment Planning objective, the nature of scheme and kind of instruments it is. There are three colors –Blue, Yellow and Brown within which mutual schemes will be labeled. The label will include details of the schemes such as “to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term)”.Also mutual funds would have to state a brief about the investment objective in a single sentence followed by kind of product in which investor is investing (equity or debt). They also need to carry disclaimer that “investors should consult their financial advisers if they are not clear about the suitability of the product’. This product labeling will be carried in all common application forms, advertisement and product brochures companies come out with.

Colors

There are three colors which have been mandated for this purpose:

Brown- Any scheme with high risk will be labeled in brown color. So all equity oriented schemes will be carrying this color code. However, there is no demarcation between the category of equity schemes which means whether it is an index fund, large cap fund or a  mid-cap fund, all will have have brown color code against them.

Yellow- This will indicate that scheme have a medium risk associated with it. All hybrid funds i.e. balanced fund and monthly income plans will  be in this color code.

Blue: This will indicate the scheme carry lower risk. Debt Mutual Funds i.e. gilt funds, FMPs, Liquid funds or income fund will be categorized under this color code.

With this color code SEBI Registered Investment Advisor aims to ease the selection process for investors. Through color codes investors will be able to differentiate between the high and low risk schemes.

Does it Really benefit

A color code is only the first level of selection which does not require much of a research.  The more rigorous process is when one has to create an optimum portfolio with mix of these schemes. The color codes has put all equity or debt scheme under one risk proposition which is not enough and some of it not even viable. For e.g. A sector funds carry much higher risk then a large cap diversified fund. Similarly there is a great difference in the level of risk between a balanced fund and an MIP.

In fact a balanced fund is an equity oriented scheme where equity exposure can be as high as 75% while an MIP is a debt oriented scheme which can have a small 5% exposure in equity. Thus both of these categories are suited for different investors. The Similar holds in debt funds scheme where a liquid fund is a very low risk scheme while a gilt fund has higher risk associated. The second difficulty for investors is the objective statement as no MF scheme provides any fixed regular income. All options are through dividends or SWP which can vary and so it will not hold true for all of them.

The color code is just a starting point for any investor to differentiate between schemes. The actual research starts within these when you need to find one which can match your requirement. So make sure you embark on a proper research and do not make a decision based on the color codes only.

[fpgindia-blog]

Do You Know Your Own Financial Goals?

Three years ago, I got an opportunity to meet with a prospect. One of my existing clients referred him. He holds a very good managerial position in his organization. On the very first day of our meeting, he told me to suggest some good Mutual Fund Investment in which he will start sip on monthly basis. I asked him to answer why he wanted to start SIP in Mutual funds. He replied that his boss had recommended him to meet an advisor and start sips as he had benefited from such investments.

At this point, i asked him about his financial goals? He replied that he does not know much regarding his financial goals. He kept insisting about schemes, but I was trying to find the reason to invest from him. Suddenly, I saw something written on a whiteboard inside his office. I drew his attention towards that white board and asked, Sir what is this? He told that, this was his company’s annual target, which he along with his team had to achieve. I got the clue and told him that he knows his company's goals but was not aware of his family's goals.  Moreover, would he mind if I would help him to find out his own financial goals?  Suddenly he understood that there was something amiss in his personal financial life.

Again I asked,  when he would like to be retire, he answered that in his company , retirement age is 58 year, but he don’t know whether his company will keep him till his age 58 or he would have to leave before that. His answer was enough to make him understand the risk associated with his Planning for Early Retirement and need for retirement planning.

He kept his all work aside and started conversation with me to know more about his financial goals.

They were eagerly waiting for me to come. He introduced myself to his spouse and already briefed the discussion we had with him earlier in his office. After having a cup of tea together, she told me that she is having two well grown up sons who were reading in class seven and eight respectively, and they will be requiring huge amount for their higher education seven or eight years later. However, the money we are having is not sufficient to meet the requirement. So please suggest me the way to save and how much to invest so that we can accumulate the descent amount in near future.

This was the second financial goal I came to know from them. He was earning a handsome amount, but his savings was not proper. Even he did not have a single insurance policy running on his life. I suggested him to take an Compare Best Life Insurance Policy immediately and start sip in mutual funds.

From last three years, he never asks me about the NAV of his fund, he left everything on me and does according to plan. Now he is feeling more secured then what he was 3 years ago. He always refers his colleagues to do financial plan. Now he is very much concerned about fulfilling his goal rather than worrying himself from vicissitudes of stock market.

The story is common among many investors. They do know their financial goals. Even if some of us do, very few translate these into specific numbers. Defining a goal is essential as it has a direct impact on deciding the route you choose to achieve it. For instance, if your objective is to save for a house a year later, you will need to be more conservative in your approach due to paucity of time.

However, if you are planning for your Retirement Planning, which is 25 years away, you can afford to invest in asset classes like equity. I have seen so many people who had an insurance policy one his car, but didn’t have even a single life policy on his life.  Their car is more important than his own life to his dependents. People knows about the goal of their organization in which they are working, but never tries to find out their own goal which helps him rather motivates him to earn money. It is the investor’s goals, which helps planner to suggest instruments to invest into, do proper assets allocation and optimized the return from available resources. Remember

Dream + Date = Goal.

[fpgindia-blog]

Consider Few Things Before You Invest

Investment means to hold assets (Physical/Financial) over a longer period for appreciation or for receiving income from those assets or for regular income and appreciation both.Where as savings are made for short term goals.

All investments involve some risk. While someone invests with a hope of instant or short term gain, with or without proper analysis either they speculate or gamble.

A real investor always takes informed decision and you may consider the following important areas:

Draw Your Own Financial Map

While you make your Financial Planning you can easily understand your past and present financial situations. Now you honestly think about your future, where you want to go. But the problem is that your future may or may not resemble the past.

It’s obvious that before you invest, think about your risk tolerance, you may do it by your own or you may appoint a professional Guide to Financial Planning. It’s not guaranteed that you can make money from investments. While you understand about your savings and investments, you get financial security by managing your money prudently.

Consider your Risk Tolerance

Risk tolerance varies from investor to investor. There will be variability in investment return an individual is willing to take. If an investor takes too much risk may sell at a wrong time due to panic. An investor must be realistic.

If you invest in stocks, bonds or Mutual Fund Investment, you must consider entire or some of your money you may lose. It’s unlike Bank Fixed Deposits and P.P.F etc.  While you take risk, as a reward you may earn good return. If you know your financial goals and time horizon, you can invest carefully even by taking risk in stocks, bonds or mutual funds. You may not restrict yourself to less or no risk instruments, where you can’t avoid inflation risk, income tax, therefore, your principal will be eroded over time.

Portfolio Diversification

“Don’t put all your eggs in one basket”-Harry Markowitz. Diversification reduces risk if returns are not perfectly correlated with each other. But over diversification is also a problem. If you see history of equity, debt and gold all have not moved up or down at the same time. Market condition is the cause while one asset class do well the other may perform average or poor. Therefore by investing in more than one asset category you can reduce the risk of losing money and your portfolio will generate a smooth return. If one asset category generates negative return the other asset category may offset.

In addition, proper assert allocation is important. In case you are investing for long term, say, retirement or your child’s higher education, your financial planner will agree that you have to add at least some stock or equity related mutual funds in your portfolio. Otherwise it’ll be difficult to offset inflation.

Re-Balancing Your Portfolio

You re-balance your portfolio at a predetermined interval, may be every after 6 months or 1 year. Re-balancing will control risk. Your portfolio will perform according to market. As time goes on, your portfolio’s current value will drift away from your original target valuation as per your risk tolerance. If left without adjustment, your portfolio may be either too risky or too conservative.  It’s like wheel alignment checking and balancing act of your car.

Consider Rupee Cost Averaging 

As equity is related to market, how do you decide what is the good price to buy? SIP is a strategy that you can use. By making regular investments the same amount each time, you can buy more when its price is low and you can buy less when price is high. In a volatile market it works better. Instead of lump sum investment it would be wise for you ‘rupee cost averaging’ strategy. Don’t try to time the market but give time, i.e. keep a long-term perspective

Pay Off High Interest Debt

If there is no such investment where you earn more than what you pay as interest on your debt, then try to pay off the balance as early as possible. Interest of credit card loans is the best examples.

Avoid Sales Pitch

You may be victim of sales pitch if you don’t put your logic. Sales pitches like- guaranteed high return, income tax benefit, payment term is limited, limited time period offer, great investment opportunity etc. but there are catches which you may not notice.

Create And Maintain A Contingency Fund

Keep six months income in your bank savings account to meet your emergency expenses. If you are temporarily unemployed due to sickness, change of job etc. Although you may have other investments, but if you liquidate prematurely, it might be costly for you and not only that you have to go through certain time taking procedures.

Instead of Online Mutual Fund Investment, if you keep your money in your locker, it’ll not work for you when you need and you will outlive your savings. By investing your money, you generate more money. For very short term goals you can save but for long term you have to invest to generate inflation adjusted return.  As they say, "Money isn't everything, but happiness alone can't keep out the rain."

Disclaimer:

This article is written by me and is my own original creation. If there is any claim to the contrary, I am solely responsible and I indemnify The Financial Planner's Guild, India (FPGI) and any other publication that carries my article.

Read More: SEBI Registered Investment Advisor l Taxation Planning Services l   Financial Planning Workshop