Budget alone must not decide your investments
It is often a practice to start deciding on our investments for tax deductions at the time when investment declarations have to be submitted or at the fag end of the financial year. Our investments generally follow a similar pattern of deductions available to us. So, if tax deduction limit for an investment increases, we try to increase our investments in that scheme. For example, 80 CCF infra bonds have created quite a ripple in the market by giving extra tax benefits over and above the `1,00,000 deductions and there is a mad rush of people wanting to invest the additional amount.
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Why you need to revisit your financial plan
Goal-based financial plans are in vogue. However, getting a goal-based financial plan
prepared by a planner or an advisor alone won’t guarantee achieving all your financial
goals. “A financial plan is like an itinerary given by a travel agent to you. You have to
take care of some operational issues to ensure a great holiday for you,” says Lovaii
Navlakhi, managing director & chief financial planner, International Money Matters.
For example, you have to get a visa on time or the air-ticket at the right price if you want
to make the most of your holiday. A financial plan also needs such fine-tuning from your
side. Most financial planners list people’s failure to get their goals right and
implementation and review of the plan as the main reasons why most plans fail to deliver
the goals.
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Story of average Joe: Here’s how you can plan your finance
It was a Tuesday afternoon when Mr Joe (name changed) walked into my office. He was an extremely confident individual and was bubbling with optimism. Mr Joe is 37 years old, is married and has one child (8 year old). He currently has no liabilities and his total net worth as of today is Rs. 2 crores (excluding his self occupied property). The present was not as much as a surprise as the past. Joe hailed from a middle class family with not much of surplus money. The very fact that he could just about make ends meet was by itself an achievement.
One fine day about 20 years back Joe lost his parents, he was 17 years old then and the financial situation worsened. There were times where even buying basic food provisions for home was a very difficult task. He started working , doing odd jobs like delivering milk packets, newspapers or even working as a waiter in a hotel while completing his studies. If this was a situation 20 years back and today Joe is in a better financial situation than many 37 year old with fancier degrees ,what is the reason. What are the things he did right which probably many of us are not doing ?. I probed him further to find out and the secrets started unraveling slowly.
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How to invest that lump sum you received?
There are times when people witness a lump sum inflow in their bank account but they don’t know how to utilize that money wisely.
Some people go on a spending spree, some keep in their savings bank account while some invest it wisely so that the money works hard to get higher returns for the investor.
One such smart way of investing is done through a combination of systematic transfer plan (STP) and systematic investment plan (SIP) in mutual fund schemes.
STP is the method through which as a first step, the lump sum amount is invested in a liquid fund, which is a low-risk option. The next step is to set up a mechanism so that over a period of time a pre-set amount of money is transferred from the liquid fund and invested regularly in one or more funds for the long term. The second step works like an SIP and the funds are selected in a manner which has the potential to give superior returns over the long run.
For financial planners and advisors, one of the thumb rule of investing is that if you have regular salary income, you should settle for an SIP to meet your long term financial goals. And when you see a lumpsum inflow, settle for an STP – SIP combination.
There are some distinct advantages of this method of investing which combines STP and SIP, financial planners and advisors say. “Often salaried people witnessing large inflows, from bonuses or ESOPs (employee stock option plans). For them we use this method of investing,” said Mukund Seshadri, co-founder, MSVentures Financial Planner.
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5 Financial Planning Lessons From Demonetization We Should All Learn
When was the last time you roamed around with Rs 300-400 in your pocket with nothing else to fall back upon? Most of us are going through such a situation now. Addressing unexpected financial situations should be part of everyone’s financial plan but the question is how does one deal with such a situation. Here are some crucial aspects that one needs to incorporate in one’s financial plan to tide over unforeseen circumstances.
1. Have a contingency plan
To have a contingency plan is the first step in planning ones finances. We have often seen people not planning for their liquidity requirements. This happens because most of the investments done do not take into consideration one’s own requirement and it is done in a sporadic manner. We suggest that an individual maintain funds equivalent of cash flow requirements for at least six months in investments that are easily accessible in a day’s notice and also yields better returns compared to a savings bank account. We suggest people could look at fixed deposit or liquid funds of mutual funds after taking into consideration the tax implications of both.
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Emotional decisions lead to fin blunders
I will not sell this stock with a loss. I will wait till I get back my capital.’ `If I ever sell this gold, I will buy another jewellery set.’ `I cannot sell this property . It is where I grew up.’ `I love keeping so much money in savings account as it gives me a sense of security .’ These are common phrases we come across when planning people’s investments. A recent TV ad shows how a person is attached to his car and unwilling to sell it, though it has become old, as it is his first car. This shows that every logical decision needs to pass the test of emotions before it is finally taken. From an investor’s perspective, it is usually seen that he tends to develop an emotional connect with every asset class he has invested in. This makes him hold on to that investment whether or not it makes financial sense. Let us have a look at various asset classes and products and the investor’s emotional angle to each of them.
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Focus on real returns, not just gains
Anil Singh (namechanged), 44, works with a private company and believes in investing his entire savings in fixed deposits. His financials from the year 2000 till date is given in the table.
Anil’s savings in FDs gave him an average return of around 8%. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 49.80 lakh. The value of his investment today is around Rs 66.71 lakh. Naveen Singh (name changed), 44, works in a similar profile like Anil. However his expenses were on the higher side. His financials are as in the table.
Naveen invested only in equities. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 38.40 lakh. The value of his current savings is Rs 69.11 lakh. His average return is around 17.24%. The rate of return is based on the BSE sensex returns from the year 2000.
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Don’t go overboard while investing during a bull run
With the Lok Sabha elections just round the corner, the markets are expected to remain extremely volatile till the poll results are out in mid-May and probably a few days even after that. In such a situation, what should investors do? Should they sell out? Or just keep quiet till the markets stabilize? Or should they go with the flow and start buying stocks since the stock market is already at a new high and shift their investments mostly into stocks? The sensex crossed the 22k mark for the first time just two weeks ago.
According to Mukund Seshadri, founder, MSVentures Financial Planners, under the circumstances an average investor could do four things, in combination with each other, to have a relatively peaceful financial ride through these turbulent times. “During such volatile market phases, usually the portfolio structure also goes haywire,” said Seshadri.
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