Articles

Are you part of this ₹ 24 trillion industry?


The Assets under Management (AUM) of the mutual fund industry in India at the end of June 2019 stood at ₹ 24.25 trillion.
The AUM on June 30, 2009 was ₹ 5.83 trillion and on June 30, 2014, it was ₹ 9.75 trillion. This means more than a 4 fold increase in ten years and almost 2.5 fold in 5 years.
There has been a positive movement in terms of total number of mutual fund accounts (known as Folios) and at the end of June 2019, the figure was 8.38 crores.
Even the share of individual investors holding mutual fund industry assets has been on the rise and was 54.3% in June 2019 as compared to 52% in June 2019. The rest 45.7% is held by Institutional investors.  

As of June 2019, individual investors held a total of ₹ 14.03 lakh crores in mutual funds, an increase of 14.38% over June 2018.

    (Source of data-AMFI website)

Although the markets have been volatile after budget this month, the long term story is intact and Indian economy is still projected to grow at a rate better than other developing economies.

As they say, ‘In markets, bad news is good news for investors’.

We are aware of the benefits of investing in mutual funds like- diversification, professional management, transparency, liquidity and convenience.

From a regulatory perspective, the Indian mutual funds regulator, Securities and Exchange Board of India (SEBI) is one of the most effective regulators the country has. It has a reputation of protecting investors’ interest, promote the securities market and efficiently regulate the industry by framing guidelines.

As investors, we should understand that risk is an inherent part of market related investments – we need to figure out our risk tolerance and the amount of risk we can afford to take. Money, even in a bank is unsafe above ₹ 1 lakh. (Deposit Insurance and Credit Guarantee Corporation or DICGC cover is available for a maximum of ₹ 1 Lakh, including interest)

Let’s look at certain compelling aspects:

  • SEBI has been consistently working towards safeguarding the interest of investors. Although there have been certain lapses recently (mostly in debt funds), mutual fund houses have a robust mechanism in place for identifying and fixing issues.
  • Fund houses have too much at stake and any wrongdoing purposely can be emphatically ruled out.
  • Most of the fund houses have automated systems and fund management teams in place – this ensures that there is continuity. It also does away with the problem of personal bias in cases where an individual Fund Manager is responsible for managing the fund’s assets.

For better transparency and ease of understanding from an individual investor’s perspective, mutual fund schemes have been segregated as:

a) Equity Funds         b) Debt Funds            c) Hybrid Funds        d) Solution oriented Funds e) Others

  • Schemes have been clearly defined as Large Cap, Mid Cap and Small Cap
  • Only one scheme per category is permitted now, except: Index Funds/ ETFs, Fund of Funds and Sectoral/ thematic funds

For those who haven’t yet, starting with an Index fund would be a step in the right direction, for developing an understanding of how mutual funds work.

This is not a recommendation

(Index fund is a very low cost, diversified portfolio of securities which requires minimum human intervention as it almost replicates a benchmark, like BSE Sensex or NIFTY 50)

Warren Buffett has aptly said, “Risk comes from not knowing what you’re doing.”

So, be a smart, educated and informed investor- become part of the ₹ 24 trillion (and growing) mutual fund industry – multiplying your money is ‘your’ responsibility after all.

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Are you surviving from paycheck to paycheck ?

“It’s 9th of the month and I have no money in the account. Can you imagine waiting for the next pay check only to make ends meet and for making bill and EMI payments? My mother asked for some money last month and I had to say no. It was embarrassing,” said Anshuman, my ex colleague.

“I can relate to this. The only difference is that I never compromised on ‘paying myself first’. Thus all my monthly savings and SIPs were there for my rescue”, I responded.

“When I was single, I used to live like a king! Look at my condition now”, he said.

I laughed at it but he was serious and asked for help. (not for money but for a solution!)

You are living from paycheck to paycheck when you are constantly asking for money from family & friends or when you are looking for personal loans to pay even your routine expenses and are using credit card for postponing payments.

Either you are not making enough money (which is a common excuse) or are overspending. In the first case, you will obviously have to look for a new job or for additional income sources. If your current financial condition is due to overspending, chances are that you don’t even know about the problem area.

This kind of existence can be quite damaging and detrimental to long term financial health.

THE SYMPTOMS

You start waiting for the next paycheck from 7th of this month                   majority of the cases can be attributed to overspending.”I don’t know where my money is going” is a common statement, because you never make an effort to find out the reason

Routine bills go unpaid                                 if this continues for 3-4 months; you are in trouble. The debt starts mounting- an immediate action becomes imminent

Credit Card usage goes up                           you know the situation is bad when you start using credit card even for a haircut! Excessive usage gets you into the minimum payment cesspool in no time

No second source of income                      the problem is more pronounced in single income households. Even otherwise, if salary is the only source of regular income, the problem gets aggravated

No emergency fund                                       you always know that this is a great step towards financial security but keep on postponing only to regret later

Debt burden at alarming levels                 you have exhausted all debt sources like personal loan, cash advances and loans from relatives or friends. Essentially the entire paycheck is being utilized for paying off these loans.

THE ROAD MAP

Budget                                                 creating a budget is easy – following it is what makes the difference. We generally find it difficult to stick to a budget because the list can be quite comprehensive.

Look for an online budgeting tool or download an app. Account for all current and future expenses-fixed as well as floating (Insurance premiums, AC bills during summers, upcoming family function etc). When you follow a budget, there is always room for adjustment under different heads.

Spending pattern                            track expenses for two-three months, go through your credit card statement (if you are still using one) carefully. You will get a fair idea about your spending pattern and would be amazed at the findings. Your focus should only be on things that really matter.

Forced savings                                  set up an auto debit for a specific amount every month. Initially you won’t notice the difference. Once it builds up to a considerable amount, you would be tempted to enhance the savings rate. This simple step gives you the much required peace of mind.

Cut your expenses                          you need to figure out what works for you and measure its impact. A friend moved last month from a big three bedroom flat to a two bedroom flat, saving INR 8000 per month, which was substantial even after taking into account the one time shifting cost. There are certain seemingly small monthly recurring expenses, which have a major overall impact.

Get out of Debt                                                easier said than done, right? But it is all about the choices we make. A personal loan for an international holiday, EMI on credit card for the latest phone, car loan for the latest launch-everyone thinks that instant gratification is the key to happiness. Do not fall for this trap as it will result in piling on more debt. Pay off all your expensive loans on priority.

Curb that spending habit                             the test that works for me is the one month challenge- If you think there is a requirement for the product on day 30, buy it. Another rule to follow is to have an equivalent amount in your savings account, even if you are making the purchase through credit card. Stop using cards just for earning reward points when you already have converted previous purchases into EMIs.

Behavioral Change                                       there is a difference between things you ‘need’ and things you ‘want’. Spending intelligently and less than what you earn is the right perspective. Sometimes you are using 2-3 credit cards just for transferring balance from one to the other considering it to be an intelligent choice. Your attitude towards money is a major game changer.

Discuss your finances                                    one of my friends had hidden his poor financial situation from his wife for a few months. She later paid all his credit card dues from her savings. Being open about your money mistakes helps, although this is one area where utmost secrecy, even from the spouse has become a norm. Identifying people you are comfortable with, about discussing financial matters proves to be very helpful.

Getting ahead financially is not possible if you are living from paycheck to paycheck. You will have nothing to save and thus wealth creation would remain a dream.

Financial prudence is not about paycheck to paycheck existence but about bringing rigor and discipline, applying controls and bringing a change in mindset.

Assess your current situation and work towards becoming financially savvy.

Millionaire’s Secret

“Sometimes I think that having ten million in my account will remain just a dream. I have been saving 40% of my take home salary for last couple of months. However, even at this rate, it will take another 14 years for reaching the magical figure. I should have started from my first day in job”, said my friend Aaditya.

“That’s a great savings rate! What would you need this money for? Is this target for your savings account?” I asked.

“Does it make a difference? It will still take 14-15 years, right? I am sure that by then this amount would not mean much. It would take another life to become wealthy”, he sounded a little disappointed.

“Do you know about compounding and that Albert Einstein called it the eighth wonder of the world?”, I asked and then our discussion continued.

When the greatest living investor says something, we need to pay attention. Warren Buffett has said:
My wealth has come from a combination of living in America, some lucky genes and compound interest
If you have not experienced the astounding power of compounding yet, check your PF balance. See for yourself how the interest gets added to the principal in the second year and earns interest. This amount (principal+interest) earns interest again next year and this goes over and over.

The best part is that you do not have a role to play-compounding is a waiting game. Longer the wait, the better it is.

I received my first real lesson in the power of compounding few years back when my ‘not a very big’ investment in Equity Linked Savings Scheme (ELSS) had given me a return of 126%, by the end of sixth year!

It is not difficult to understand, but is the most ignored and a rarely used concept in personal finance. We all have studied compound interest early in school, some happily, most others, with the objective of just passing through!
If you are reading this and happen to be a-
Teacher – if there is only one practical lesson (related to finance) that you want your students to part with, make them understand Compound Interest
Parent– teach your child the concept of Compound Interest but make sure you understand it first
Student– this one factor will solve most of your future money issues
Professional just starting a job– put your money in an investment which compounds it at a decent rate  and you will thank yourself for this action many years from now
We all know the formula, but let us go through it one more time:
A=P(1+r/n)t
P=Principal or the initial corpus invested
r= rate of interest
n=compounding frequency
t=number of years

A=Amount

Numbers look realistic when the calculation is easy. Open a sheet in MS Excel and input values as highlighted here:

P (Principal or initial value) 100000
r (Rate of interest) 12%
t (Term) 40
n(compounding frequency) 1
Future Value (FV) or Amount Rs. 9,305,097

An investment of INR 100,000 can become INR 9,305,097 at 12% in 40 years. This is for a single, non recurring investment. In case of regular periodic investments, the result will be quite different.

Here is another snapshot which demonstrates the impact of time and rate of return on a portfolio:

No of Years 4% 8% 10% 12% 16% 18%
10 148024 215893 259374 310585 441144 523384
20 219112 466096 672750 964629 1946076 2739303
30 324340 1006266 1744940 2995992 8584988 14337064
40 480102 2172452 4525926 9305097 37872116 75037834
50 710668 4690161 11739085 28900219 167070380 392735686

Note:

  • Just a onetime investment of INR 100,000 can grow to INR 11,739,085 in 50 years @ 10%. This is the impact of compounding.

The rate, at which Aaditya is saving, would make him a multi millionaire at a much faster clip. (Provided he stays disciplined and invests for the long term at a decent rate)

  • A sum of money compounding at low single digits would not make a huge difference even after 50 years. As per the rule of 72, at a rate of 4%, an investment doubles in 18 years. So money should be invested in avenues which offer a good rate of return.
  • The wondrous power of compounding is at display in the later years. Notice the difference in the amounts after 30 v/s 40 v/s 50 years at any given rate. This is the snowball effect.
  • A difference in rate of even 2% can make a marked difference to the corpus. Thus asset allocation for maximizing returns is very important.

The problem with any market related investment is that we cannot visualize our money going through ‘cycles’. If there is a down cycle, the fear of our investment going below the original value sets in. If there is an upward trajectory, we want to book the available profit in the first instance.

Compounding is like sowing a seed and then nurturing it, till it bears fruit. This takes time. We just need to protect it from extremes (volatility), water it regularly (discipline), add manure (step up the amount) in between and watch it grow.

Highlights:

1 Start investing early- nothing works better. But if you haven’t yet, start today-you will still be able to write your compounding story. Do not wait for accumulating a particular amount for lump sum investments. Any amount you are comfortable with every month should be the starting point.

2 The long term corpus should remain sacrosanct

3 There will be trends and fads- do not get swayed and move your investments from one fancy product to other (Bitcoin is the latest example)

4 If your retirement goal is years away, it would be the best area where the amazing magic of compounding can be put to use. A 25 year old would have 40 years to create a retirement corpus, which might outlast him/her. The next generation would appreciate such foresight and discipline!

5 Continuous buying and selling involves charges and taxes to be paid and thus long term compounding is compromised.

Charles T Munger  aptly said-“The big money is not in the buying and the selling, but in the waiting”

6 Compounding is a great equalizer, whether you invest INR 5,000 per month or INR 50,000. However, remember that 10% of INR 1,00,000 is INR 10,000 and 10% of INR  100, 00,000 is INR 10,00,000! So, higher the money invested, greater will be the corpus.

Your dislike for mathematics and formulas should not keep you away from multiplying your wealth!

Out of the comfort zone

During a casual discussion recently, my friend from college, Jiten informed me that he has deleted his FB account because it was driving him crazy. The reason, “Those who started working when I did, are doing far better than I am. They are taking two international holidays every year, are driving better cars and have a bigger house. I feel like I haven’t achieved anything in life”.

I was amazed because this was coming from a person who has been working for more than nine years and who has a job with a six figure monthly take home salary. His wife is working as well and they are supposedly ‘well settled’.

I started thinking about the first job-it is the culmination of a long cherished dream for most. The thrill that comes with the first salary, the perks, the freedom and above all the independence.

However, within a few years, the enthusiasm of making it big or rising through the ranks takes a hit. It becomes either a mundane routine or gives rise to thoughts about alternate career paths or an escape plan!

The trigger could be different for most of us – disillusionment from the corporate culture, skill/profile mismatch, non flexible environment, no involvement in the overall organisational goals and bad management at a professional level. At a personal level, the factors could be stress, burnout and low income, rewards and recognition.

At this stage comes the urge to learn and unlearn. Acquiring new skills for career enhancement, job change or rather for survival becomes important.

This also teaches us an important truth of life – we cannot dwell on what school or college education has not taught us. We need to pick the best of what is available around us and develop on that learning.

While most of our conversations, discussions and efforts go towards making more money and managing personal finance, these nine aspects would go a long way in ensuring a peaceful and satisfying existence.

Stay healthy                                          as you age, the realization sets in that fitness should be and should have been the top priority. Everything else can be put in place with available resources. Have a routine which is easy to follow and goes well with your daily work hours. It sounds mundane and repetitive but our physical and mental well being should be the primary objective.

Take some risks                                   not taking any risk at all does not make you smart. Take a job in a different city, state or even country. Take up a sport, join a mountaineering club or for that matter whatever you wanted to do but always avoided for the fear of unknown. Not all risks are rewarding, but at the end of it, you would be a better person and would not have too many regrets.

Avoid negativity                                   there would always be the new trends, revolutionary technologies and new age jobs in the so called hot sectors. Do not try to chase the trends- don’t worry about what your cousin or friend is doing. Give a cold shoulder to negative people-be it relatives, friends or colleagues. Your life should not be dependent on their thoughts, comments or advice.

The herd mentality                             you would never get ahead doing what everyone else is doing. So take your chances and try to do something that adds value, is interesting and at the same time gives you satisfaction. It is the unique skill that would sell in the kind of competitive and challenging times that we are living in.

Knowledge                                             gaining knowledge never hurts, especially if it is something that you like. Reading on a wide variety of topics gives you an edge. It definitely helps in developing an independent thought process, stimulates the mind and widens horizons.

Explore options and then settle for the best                      at the age of 12, not many of us know about goals or aspirations or our future vocation. So, we should give ourselves time – we are constantly thinking and ever evolving. There are certain realities we come to know about only when we start working. Explore the myriad of possibilities before finally arriving at a decision.

Savings–it is never too late to start                   a) even if it is just 15% of your earnings to start with, start today, if you haven’t already!    b) Keep on increasing the amount every year. Just follow these two rules and do not count the pennies. You would be amazed at what it amounts to, that too, at an age when you need it the most.

Prioritize and take charge                      get hold of your life, value systems, finances, learning and career. Don’t let anything drift away. Don’t get too jittery, don’t take yourself too seriously. Do not let your boss decide how your career should progress. Do not let your parents, spouse and even friends decide on your behalf. Weigh all the options, but prioritize and decide yourself.

Travel                               like reading, travelling opens avenues and broadens perspective. It instills confidence and helps you appreciate the wonderful world. It helps you know yourself better, enhances creativity and creates new opportunities. For almost all of us, it is a great stress buster.

We can never prepare ourselves for every eventuality. There is nothing like ‘perfect planning’. Life is all about maintaining a balance.

Our education system seldom makes us ‘job ready’ but still our ultimate aim is to get a job that pays well and enables us to lead a happily-ever-after life.

We need to realize that there is much more to life than just making money.

“Ah, but a man’s reach should exceed his grasp, or what’s a heaven for?” – Robert Browning

While it is good to go with the flow, we need to make sure that it is in a direction which holds something promising for our future. Focusing on some or all of these nine aspects might help in setting the direction of the flow for you!

A life without paychecks !

We were lazing around after the evening tea, when my uncle said, “I have been asking Mohit to start saving for his retirement but he thinks he is not old enough. What is your opinion?”
Before I could say something, Mohit interrupted, “See, he has started again. I have been working only for 6 years. I have at least another 30 years of work life. There are so many things to accomplish. I have plenty of time for thinking about retirement.”
Uncle retorted, “I am getting a pension that is substantially more than his monthly salary. He would not have this luxury. Besides, think about the inflation 30-35 years from now. He is staying with us. What if there is a job change that takes him to a different city? What happens to the expenses after marriage, kids? There is never a better day to start than today.”
Now it was my turn – “Mohit, you should thank him for his vision and advice. Parents usually pressurize their kids to put money in real estate or useless insurance plans.”       “I know there is a possibility of things not going as per plan, but I do not want to retire ever” said Mohit.
“That is obviously a very good thought. Can you give me a count of people in your office who are above 50 years of age?”
He thought for a while and then said,”Well, I do not recall coming across any person in that age bracket. But, ours is an organization that promotes the power of youth”. He smiled sheepishly.
“You are working with a more than a century old US based brand and I think your answer has given you some food for thought”, I said and left after promising to have a detailed discussion on the subject.

The Cambridge Dictionary defines retirement as:

a) the act of leaving your job and stopping working, usually because you are old

b) the period in someone’s life after they have stopped working because of having reached a particular age

Listed are certain points that I put together after this interaction:

1 How much                      this should form the foundation for any such decision for maintaining the same standard of life. Basically, you should get an idea about the amount of expenses to be incurred on an annual basis. If you are confused about how to check your expenses – go through your bank account and credit card statement. Add expected annual expenses like vacation, family functions, festivals etc. That’s it. It would give you the current annual expense amount.
You can use the age factor or the expense factor for calculating how much would you need and what should be your savings rate.

It is not very tough to calculate. There are calculators available online-enter the numbers and you are good to go.

Age factor– If you have not started earlier, then at age 30, you should be saving 15-20 %.

At age 40, the rate should be 25-30%.

At 50, it should be 40-50%.

Expense factor – This is a better way to arrive at an amount. Make an assessment of your current expenses. For example, if your annual expense today is INR 6 lakhs at age 30, in thirty years, at age 60, you would need approximately INR 34.5 lakhs annually. Is it unrealistic?

Make use of the Rule of 72 – if we assume an average inflation rate of 6%, divide 72 by 6. Thus, if your monthly spend today is INR 100000, in 12 years, you will be spending INR 200000.

In another 12 years, at the same rate (6%), the amount would be INR 4 lakhs and in another 12 years, it would be INR 8 lakhs a month.
Simply put, INR 100000 in 2019 will be INR 800000 in 2055!

If you want to carry loans into your retirement, the figure might be higher. As the children would have settled by then, that expense would no longer be a part of overall expense structure. However, new heads like medicine bills and vacations would form a part of the total expenses.

2 When and why                              it does not mean attaining a certain age and then quitting your job. Financial freedom apart, there are other questions to be answered. Some of my friends, in our casual discussions, have made statements like – ‘I will retire when I have 5 crores in the  bank’ or ‘When the kids are settled’, or ‘When I have worked as a CEO for 3 years’.
It should be a well thought out decision – how would you like to spend your life after you are out of the so called ‘rat race’? Would you sit at home doing nothing? For how long? Day trading looks like fashionable but does not work for most. Taking guest lecturers in a school or college at leisure, fishing, farming, growing fruits and vegetables at age 45- sounds interesting but do give it a thought. Would it be sustainable, workable, satisfying?
Consult your family members, if not friends- they would be the affected parties.

3 Insurance or pension for a fixed monthly payment                      you should not depend solely on monthly annuity payments. Most people I know have taken these plans from tax saving perspective and believe that a pension of INR 20000-30000 per month along with other investments would be sufficient. From the example above, you can well understand the implication of depending on such a small amount for a period ranging from 20-30 years.

4 Write your own ‘How to accumulate retirement funds plan                   like all things else, retirement plan is specific to an individual/family. So, even if there are certain rules of thumb which can be followed, a lot depends on your circumstances, family structure, future of kids, job of spouse etc. Writing about the plan will give a definite shape to your thoughts and also create a road map about what you have and what you want to achieve.

5 Health cover                  at the age of 30 we do not worry about health related expenses. Most of us get coverage under employer’s group policy. However, at age 60, when we would need it the most: 1) the cost would have sky rocketed and 2) No insurer would like to provide a comprehensive coverage owing to the risk. So, a reasonable cover for self and spouse is a must before taking a final call. This would also ensure that you do not eat into your retirement corpus.

6 Liabilities                         getting into retirement with any kind of loan is scary. Home or personal loan should be closed well before the target retirement date. Education loan for children’s higher education is a call that parents need to take, after considerable thought and also who should pay after the course is completed. Keeping emotions in check will help. Pay off all your liabilities before you take the final decision. The only workable scenario that could be considered would be one where the spouse is working, has a secure job and would continue in the job till the outstanding liabilities are paid off.

7 Different investments – consolidation                              there is no reason to panic if you have not yet figured out about what, how, when and how much. Take a consolidated view – assess all your savings and investments. For example bank FDs, PF, PPF, NSC, MFs, stocks, a second house and even gold. It will give you a sense of satisfaction that you have some form of corpus. Consolidation would give you a particular amount, meaning, target and direction.

8 Social grouping                             assessing this has its own importance. Imagine you have retired at age 50. As per target, in the first year, you have taken a domestic and an international holiday and are back now. You want to catch up with friends and cousins staying in the same city. All of them express their inability as they are still working and weekends are also occupied for the coming month. If this happens continuously, you will start calling into question your dream ‘retirement plan’.

9 Semi retirement                        Would it be a situation where you would be in a state of ‘enjoying the good things in life’ and ‘I will work no longer’ or would it be a situation where you would be: 1) Working once in a while for staying in touch with what is happening around 2) Working as a freelance consultant earning some money or 3) Working for a social cause or in a role of adviser for family, friends or with some NGO. This would give you a sense of freedom and belonging, allowing you to work for causes you have always cherished. Getting paid for such causes would be a conscious call you would need to take.

Even if  we would want to work till our last day, there has to be a corpus which makes us financially free. This freedom means we do not have to work to pay our monthly bills and that our assets can generate substantial income for us today and for the coming years.

Financial freedom is earned after a lot of labor and thus the thought of retirement itself is exhilarating. Start early, manage well and it would be a freedom worth achieving.

PS: By the way, Mohit is convinced now and we are meeting this weekend to chalk out a plan for him.

New to investing? – focus on these six simple but significant aspects

There is a fair chance that this statement is part of New Year resolution for many of us -‘I will start investing from the coming financial year’. For some, this statement might have been appearing continuously in the priority list for last few years but has not really been implemented upon, as yet.

There will be people who would impress you with their investing skills. But remember that fortunes are made more with time and patience than with taking risky bets over the short period of time.

Warren Buffett sums this up emphatically – “You only have to do a very few things right in your life so long as you don’t do too many things wrong”

A few things which appear simple yet are significant and can make a marked difference to your investment journey, are:

1 Understand and stick to asset allocation              this is the fundamental of portfolio construction. Simply put, we have to choose from broadly three categories – 1) Cash (savings & bank deposits), 2) Fixed income assets and 3) Equities. (Some include gold and real estate as well-which needs a separate discussion)

Asset allocation should be aligned with the investment goals and objectives. It takes care of primarily all aspects from an investor’s perspective- risk management, volatility, profit and loss and return expectation from individual asset classes as well as the overall portfolio.

2 Calculate returns/performance for investments                           I am yet to come across an investor who calculates annual performance of all of his/her investments. My standard is April 1-March 31 as it fits well with the annual taxation exercise. For some investments, even January 1- December 31 works fine. (I use it for some of the market related investments)

Periodical reviews are suggested. However, once in a year is definitely recommended. If you understand measuring a particular asset class against a benchmark, that will be all the more helpful.

3 Invest with a timeframe in mind            anything that we buy should be researched well. We should have clarity of purpose and a plan in mind. The plan should envisage the ups and downs and a strategy which would define “if this happens, then I will sell this” or ‘if this target is breached/achieved, I will sell or add more”.

As soon as we buy a product, we become increasingly irrational and emotionally attached. Thus, before buying a product, a minimum and maximum timeframe and a clear thought out strategy to sell versus staying invested helps. This becomes easier when, as mentioned above, investments are aligned with goals.

4 Enhance your savings rate        Inflation has been and will remain the greatest hindrance to wealth creation. We cannot wish it away. Tweaking and making changes to the asset allocation periodically, helps. However, a marked improvement to the portfolio returns can be effected upon by gradually increasing the year on year savings rate.

Let us take an example-suppose you started working in 2012 and were saving INR 3000 per month which was 10% of your monthly salary of INR 30,000. You would think that you have done a good job by continuing with it till date. However, today after a job switch and with INR 1, 20,000 as your monthly salary, INR 3000 means a savings rate of just 2.5%!

It is important to note that even a 10% addition in the yearly savings allocation can add a few basis points to the overall portfolio returns.

5 Say no to instant gratification   your future would be secure if you earn and invest well, today. Compounding works well when you start early and let your money grow. That means you have to let go of certain comforts today for future security and comfort. When you feel the urge for buying something, take the one month challenge. If on the 30th day, you still feel the need to buy the product, buy it.

Do not buy any financial product in the January – March season just for tax savings. In most cases, these turn out to be more of liabilities. Think long term and let go of short term traps. When it comes to money, remember that there is no return which is “here and now”.

The American business magnate Thomas Boon Pickens has saidThe older I get, the more I see a straight path where I want to go. If you’re going to hunt elephants, don’t get off the trail for a rabbit.”

6 Sphere of control                         Let us get this straight –there are certain factors which would never be under our control. Fiscal deficit, trade wars, oil and gold prices and central bank policies – these and the like are all beyond our control and would always remain so. Very few understand these terms and their implication on the economy, markets and trade.

The  focus should be on things that are under our control like starting early,  enhancing the savings rate, generating passive income sources, investing in compounding assets, etc.

Investing in developing financial knowledge is a sound investment that is under our control and can yield great returns in the long term.

Term Insurance: Key features

Insurance essentially provides a cushion against uncertainties which life is most associated with.

Term insurance is the simplest form of insurance which provides maximum coverage at a reasonable cost. Apart from the financial security it provides, it is essential if you have any loans or liabilities, outstanding financial commitments etc. In fact, a term insurance cover should be a priority as the cost of children’s education is exorbitant and even the routine monthly expenses are on the rise due to inflation. Thus to tide over all such eventualities, it makes sense for a person to take an appropriate term insurance cover.

Term insurance has certain inherent features which makes it an apt and powerful financial planning product.

1 Low cost             Term insurance is the most affordable form of insurance. This is because it is a win-win scenario for both the parties.

  1. For the customer – the policyholder is getting a cover for the said amount (sum assured) and the said tenure (policy term) on the occurrence of the event only. There is no payout at maturity and thus no savings or investment component is involved.
  2. For the Insurance provider – the insurance premium includes only the mortality charges and the nominal administration cost incurred towards policy issuance and maintenance.

2 Ease of buying – a term insurance plan is not a complicated product as is the case with some products like ULIPs, endowment plans etc. It is a cover which is based on your financial goals keeping in view your life stage, financial liabilities, etc. The right amount of cover can be calculated using a financial calculator, which is easily available online.

It can be bought in two ways:

Online    buying a term insurance plan is as easy as online shopping. For the customer, there is no hassle of filling up a physical form and providing copies of documents. The application is processed within minutes and in front of the buyer.

It is cheaper because the insurance company does not have to pay to an intermediary. It passes this cost saving to the customer. In most cases, online plans are cheaper than the offline plans by 5%-25%.

Also, it provides an option to the customer to choose and compare from 24 Insurance companies (LIC is government owned, rest are private companies) operational in India.

Offline    it is the traditional option of buying term insurance plan through an agent or any other channel partner/intermediary

3 Income Tax deductions   under the current tax regulations of the Income Tax Act 1961, three types of benefits are available:

1 Premiums paid under the policy are tax free under section 80 (C)

2 In case of critical illness rider option, an additional tax benefit under sec 80 (D) is available

3 Any claim amount received is tax free under Section 10 (10D)

Tax laws are subject to change from time to time. For details and help, please refer to your tax consultant

4 Payout options                 Primarily, term insurance policies provide for a lump sum payout to the nominee in case of death of the insured. However, apart from this option, there is another option available, known as staggered payout option. This is suitable for people who are not financially savvy and where the family would not be in a position to manage a huge, one time payout efficiently. Thus the insured in such cases, can opt for a certain amount to be paid as lump sum and rest of the amount to be paid at a regular frequency.

So, for a person who has just started working and is unmarried can have the option of taking a term insurance plan with a onetime lump sum payout. On the other hand, a person who has school going children can go for a term insurance plan with a lump sum payout in addition to a monthly income option.

5 Add on riders                                    Term insurance comes with additional option of riders like critical illness, permanent and total disability benefit, accidental death benefit, waiver of premium rider etc. These riders can be added to a term insurance plan for a comprehensive coverage at a reasonable cost. This also provides the policyholder the option for customization, as per his needs.

6 Flexible payment options               there is a greater flexibility in terms of premium payment. It can be monthly, quarterly, semi-annual or annual. Other options like single pay and limited pay (premiums to be paid for a limited period but coverage continues for the entire tenure) plans are also available. Thus flexible payment options help fit in all kinds of budgets and aspirations.

7 Rebate                for certain categories like non smokers and women, the insurance companies provide for discounted premium. This is because for the insurer, these are considered as “standard lives” in insurance parlance. This means that there is no specific adverse risk involved with people who do not smoke and with women.

8 Changes as per life stage                                many insurance companies allow the policyholder to increase or decrease the insurance cover as per the life stage. So, the needs of a person who is single and has just started working would be different at that stage when he is taking a term insurance plan. The same person, after getting married would have different financial goals and liabilities. Similarly, after having kids and after the kids start going to school, the goals would keep on changing as per different life stages of this person. This feature enables the policyholder to customize the cover keeping in mind all the future needs.

9 Tenure and entry age      the minimum entry age for most term insurance plans is 18 years. The tenure is a factor of the policyholder’s outstanding liabilities, expected retirement age and life goals. However, most of the insurance companies give an option of a minimum of 5 years and a maximum of 40 years of tenure. Though, this may vary for different insurance companies.

It is quite beneficial to go through the features of a term insurance plan. After a person has taken into account all the financial requirements and the budget, it is imperative to calculate a coverage amount (sum assured) that is adequate.

In the quest for attaining financial security, starting early is the key – a term insurance cover is the perfect way to start and definitely a step in the right direction.