Naren, Author at fisdom - Page 9 of 9

NPS – Should you invest in national pension scheme ?

NPS (National Pension Scheme) – Is it worth the hype?

What is NPS?

This is a government supported pension scheme. As with other such schemes, the idea is that you contribute regular sums of money in your working years. This continues to earn returns, and is finally made available to you to take a pension / annuity when you retire. Unlike the so-called defined benefit schemes that government employees enjoyed earlier (where the pension was funded by government and was linked to seniority, last drawn pay, etc), the NPS is funded solely by your own contributions.

The genesis of the this scheme was a realisation that the Provident Fund (PF) was woefully inadequate to meet the retirement / pension needs of a vast majority of people. Two major welcome departures of the NPS from the PF are:

  • It allows you the option of investing your contributions into market-linked schemes, which can earn a much higher return over the long term, compared to the government-pegged PF
  • The scheme has a wider distribution network through banks

In the equity segment, NPS has given a return of 9.20% since its inception in 2009

 

Who can enrol for the for the National Pension Scheme?

You can enrol if you are

  • A citizen of India (resident or non-resident)
  • Between 18 to 60 years of age at enrolment

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Tax optimisation and load planning methodology

Tax optimisation and taking care of the exit load is crucial to your portfolio. Read on to understand more.
In India, tax rules vary by type and tenure of investment products. They are also often tweaked and modified from year to year in Union budgets. As things stand currently, stocks / equity is taxed leniently: 15% if sold within a year and 0% if sold thereafter. All types of bonds (barring a few identified tax free bonds) are taxed at 30% if sold within 3 years or 10% if sold thereafter. This makes tax optimisation an important concern.

To minimise your load and ensure tax optimisation, our investment philosophy usually works as follows:

  1. Money you need for emergencies or within a few weeks / months is invested into what are called liquid funds. These often yield as much or better than fixed deposits, but are easily breakable without load.
  2. Money needed within a year is put into shorter term bond (debt) funds. Most of these do not have loads if you exit more than a month after investing.
  3. Money needed over the longer term is put into stocks / equity or longer term debt funds to maximise their returns potential.
  4. If you need some money urgently, our algorithms work to sell those products that minimize your tax / load outflow.3

Research Criteria & Methodology : Synopsis

Research Criteria and Methodology. Read to know more about how we select the best funds for you.

We have a robust and tested research methodology to recommend the best set to you. We cover a range of factors:

  1. Minimum 3-5 year track record
  2. Performance and returns over multiple time horizons: 1yr, 3yr and 5yr (additionally 6m for debt)
  3. Performance in bull and bear markets, and during upward and downward movement of interest rates
  4. Performance of fund manager in other schemes, and over time
  5. In case of equity, diversified portfolio with limited exposure to mid and small cap stocks (which are inherently more risky)
  6. In case of debt, funds with limited or no exposure to private sector corporate debt (especially real estate and construction, but also other sectors like paper, logistics, FMCG, NBFC, etc). Other than sovereign debt, we usually only consider funds with banking and / or PSU debt in the portfolio
  7. In case of debt, less or more exposure to the yield curve, based on the tenure of the investment

 

We usually exclude products like Unit Linked Insurance Plans (ULIPs), stock trading, derivatives, post office schemes, etc. These products only enrich the broker and not the investor. The products that are generally most suited to long-term investing are mutual funds, PSU bonds (e.g. NABARD, Indian Railways, Power Finance Corporation), blue-chip stocks held long term, PPF and New Pension Scheme.

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Goal-Based Investing – How Does It Work?

Investing with a goal is very important. Read to know why.

Your goal / objective form the starting point for all our research and algorithms to rally behind.

Through a couple of simple questions, we learn from you the timing and amount of the goal. This allows us to compute what investments would make most sense, to minimize your monthly investment towards the goal.

Having said that, it is perfectly legitimate for you to not know the exact timing of a goal – for e.g. overall ‘wealth building’ is a goal. We use heuristics to determine the best allocations in such situations.

A couple of guiding principles enable us to determine the best products:

  1. The farther away the goal, the more risk you can take to try and earn a higher return. Conversely, a goal that is near requires investing in safe instruments
  2. Goals that are far away are affected by inflation – for e.g. it would be difficult for you to estimate what your toddler’s higher education would cost 15 years from today. We again use heuristics to estimate what the goal could look like in today’s terms (i.e. after adjusting for inflation)

We then help you invest one-time or monthly amounts towards this goal in the best instruments chosen. Our reporting then helps you monitor progress towards achieving the goal.

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Fixed Deposit : Choose the Best Option

Fixed Deposit schemes are offered by various institutions. It is very important for you to choose the best. Read on to know how.

Which fixed deposit should you go for?

In fixed deposits, safety is paramount – not half or 0.75 percent of extra interest.

The slightly higher rate of interest doesn’t really matter in the larger scheme of things, while an unsafe FD can give you sleepless nights later.Convenience and good service would be the second factor to look for.

We therefore advise going for a nationalized bank or one of the larger private banks – ICICI, HDFC, Axis or Kotak. Slightly less safe are deposits in cooperative banks.

Corporate fixed deposits can be quite unsafe– it really depends on the company you are investing in. Many companies tend to advertise their deposits and lure you with higher interest rates, so beware!

What term should you choose?

Fixed deposits longer than three years are not useful. The returns they give are poor, and often lower than inflation. For long term investments, you would rather go for equities, which can give better and inflation beating returns over the long term. On the debt side, PPF and public sector bonds (like NABARD or Indian Railways) are better for long term investments.

Below three years, the tenure you should go for really depends on when you think you need the money. Since there is a penalty for premature withdrawal, you might as well choose the tenure so that you are unlikely to break the deposit midway.

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Family Budget : It Is More Important Than You Think

Creating a  family budget is very crucial and doing it right is even more.

We need to have a family budget. How many of us will like to travel in a train without knowing where it’s heading?  Not having a family budget is like riding your financial life without a destination. Many of us have a hard time finding enough surplus funds. Most of the time is spent balancing income and expenses.

Preparing a budget is fairly a simple activity and may be done once or twice a year. A budget is nothing but a statement of your expected income and anticipated expenses.  Most of us will have a good idea of the income we may have during the year and similarly we know where the money is going under heads like food, housing, utilities, transportation, clothing, insurance, EMIs, entertainment and so on. This statement shows at the end of the year how you are placed financially; what kind of surplus or shortfall you may have at the end of the year. This will then give you a good status on your financial state and how well or bad you are faring.

The personal budget helps in plan our income and expenses better and create scope for that little something that we can save or invest. All you need to do is to record them on a regular basis. This will not only help you monitor your expenses but will also help you in identifying your wasteful expenditure creating the much needed surplus for investing.
Discipline yourself to live within your budget plan.

If you do not prepare a personal budget, you would not be in a position to meet your long term financial goals. Even if your incomes rise in future, it is likely that your expenses will outpace your income. This way you will always be on your toes to manage your income and expenses. That surplus money for investment will always remain an illusion.
If you are struggling to meet your expenses from your sources of income, the objective of your budget is to find ways to generate enough surpluses for investment. For this try to fix a cap for each type of expenditure that you incur. Cut down your incidental expenditure and find ways to minimize others. This will be a difficult task at the beginning but your efforts will start giving fruits by generating a surplus out of the fixed corpus. Set yourself a target to save 10-15 per cent of your monthly income every month.

If you already have surplus income after meeting your monthly and annual financial commitments, you may still want to minimize your unnecessary expenditure and start generating a larger surplus.Your target now should be increasing your monthly saving potential to 20-35 per cent of your monthly income. Here is when you can start allocating your surplus funds to work for your long term goals.

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Savings : Why is it important to maintain an appropriate ratio?

Savings, though of immense importance, is often neglected to a great degree. Read on to know why it is so important.

When we save we store up for our future. Saved money when invested earns for itself. Take the farmer for example. Out of the bountiful yield he receives from months of hard work he keeps aside some seeds for sowing in the next season. What would happen if he and his family merrily ate up all the harvest? What he could have afforded out his own produce now he would be forced to buy for a cost.

Saving is akin to that. But we need to save much more than seeds! In fact due to the eroding effect of inflation a sizeable chunk of earnings might have to go to your savings kitty every month.

However a quick reminder of why maintaining a healthy savings rate is important, might change your outlook of savings from probably being an imposition activity to be avoided or minimized to one that you will be glad to do.

Need for adequate savings

There are only two reasons why you need to have enough savings. The first is that someday, years down the line, your monthly cash inflows will stop as you retire from work. You would require funds from a different source to keep you and your spouse going for the decades to come.

Second, certain needs that are expected to come up along the way are too bulky to manage with just monthly or even annual income. Unless you planned and saved for them you would be forced to resort to loans.

For instance you cannot buy a house or a vehicle like you’d buy things from the grocery store. Or you cannot enroll your child in a college unless you have arranged the funds. Sure you can borrow without saving and repay from your monthly inflows but this would leave you with less money in hands to spend for your regular needs.

How much savings is enough?

Your ideal savings rate depends on how much money you require in future for lifestyle needs as well as for fulfilling the big liabilities. Of course nobody knows the future and it might not be possible to accurately plan for every single rupee of your future goals but you can estimate the amount based on your current lifestyle.

Thus your ideal savings rate depends on your 1. Life-stage, that is whether you are single, married or have kids to support etc and 2. Financial liabilities, that is if you are paying off loans, paying rent etc. Going from a merry single to being married, having kids and paying home loan EMIs, your savings rate would lay between 15% and 50%.

How much you earn is not important; if you just somehow manage to save at the appropriate rate your future needs will be met comfortably. The earlier you start, lesser will be the monthly amounts you’d have to keep aside for future goals because you have more years to save and get there! Budgeting and tracking of expenses is one simple yet effective tool to achieve your targeted savings rate.

How do I achieve my monthly savings target?

Now this is the million dollar question. Being able to maintain a healthy savings rate does not mean you would be pushed to live a miser’s life. But depending on your current lifestyle you might have to cut down a bit here and there. Since we are talking long term, say 15-20 years away, even small cut-downs can add a lot more than you would imagine.

If you happen to be one of those who think that in your situation getting to the ideal savings rate is next to impossible, think again. There are many practical ways of cutting down on spending without losing the fun of spending.

For instance buying groceries and other provisions in bulk can make much difference. Making use of public transport or better still walking (depending on distance, of course) instead of private vehicle will be good for your purse, health and the atmosphere as well!

You might find it useful to remember the distinction between saving and spending- though it might sound like a silly thing. But sometimes it’s difficult to distinguish – what is buying a house? What about buying a car? The latest model LED TV?

 

It is important to distinguish between needs and wants. It a useful habit you need to cultivate to have a balanced financial life in the long term. Needs are the basic necessities you can’t do without. When you have identified your needs like rent, telephone, utilities you will know how much you have left to spend on wants. Wants are basically desires you’d like to spend on.

 

It is not wrong to satisfy your wants but just remember not to do it at the cost of your needs or the likely consequence is – you will fall in debt. If you want to succeed in living happily within your means don’t dress up your wants as needs.

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Marriage – About The Couple, Family and Finance

While a marriage is said to bring two individuals and their family closer, there’s much more to it. Marriage also calls for tying the financial know as well.

When planning your wedding, you may think of the flowers, the invitations, and finding the perfect outfits for your big day. However, some couples make the mistake of thinking more about the wedding than they do about the marriage. A wedding lasts one day and a marriage is supposed to last a lifetime. Marriage introduces changes in a new couple’s financial situation that will affect all aspects of their life together. Everything from personal financial goals to credit card debt could bring challenges to the relationship. Finance is one of the most critical key components of a marriage.

Tying the Financial Knot

For your marriage to succeed, you have to agree about the role money will play in your marriage. Open communication about money is the key. Once you’ve decided to tie the knot, discussions about money shouldn’t be far behind.  Finance questions before marriage may help you and your future spouse understand where you both stand financially in the relationship.  It can be hard, but it is important to discuss marriage and money before you decide that you want to spend your lives together. It may seem like a silly reason to not get married, but if you start out on the wrong foot, things are going to be so much harder than they have to be.  When you get married, you take on not only your loved one’s emotional baggage, but all his or her financial baggage as well. You need to know just how heavy that baggage is.

Talking about Money

Once you’re married, your partner’s finances will be your finances, for better or for worse. After you’ve had a few initial discussions about money in general, initiate a discussion about your respective financial situations. Figure out whether either of you have any of the following:

  • Large debts
  • Student loans
  • Credit card debt
  • Investments
  • An inheritance

Maintaining separate and common accounts

The first rule of personal finance is to avoid ceding total control of your finances. They are your responsibility and if you let go off the reins you may find yourself with a number of extra problems. The best and wisest thing that a married couple can do is to have three different types of finances; two for each individual person and one as a unit. As two unique individuals you have needs; and by maintaining your own personal finance, you take responsibility for your needs.

Combining marriage and money cannot be avoided either. Although you may keep separate accounts and may both have jobs of your own, you are always going to have to work together on money issues.  You may share responsibilities of paying for bills, utilities and other necessities.

Spender v/s  Saver

Tension can develop to the breaking point in a marriage when one person wants to spend and the other wants to save. Spenders often marry savers, so this is a common issue. If you’re a saver and you open the credit card statement to find that your spouse has bought several thousand rupees worth of home accessories when you were planning to use that money for some much needed auto repairs, an argument is almost inevitable. When there’s a saver and a spender in a relationship, you have to come to a compromise you can both live with if you want to avoid constant arguments or unspoken resentments over money.

Plan an Affordable Wedding

How can you keep your wedding costs under control? First of all, do a budget. Make a list of everything you can think of that you’ll need for the engagement ceremony, wedding ceremony and reception and your estimate of what each item will cost. Refine your budget as you get price quotes, and identify the things that are most important to you. Small compromises can often add up to big savings.

The biggest factor influencing your costs is the number of guests that attend. Calculate average cost for food, drink, transport and other things you have to rent. Inviting just the people who really matter can save you ten thousands of rupees but for many people weddings are the occasion to flaunt wealth.

As a young and single man/woman you have a unique chance to bless your future spouse by setting aside just a little money every month to enable you to provide some much-needed security at the outset of your marriage.

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Retirement Money : It is never too early to start

Retirement is a phase where usually the income tub reduces to droplets. Build a reservoir to stay financially hydrated.

Picturing yourself with sparse hairs, in a rocking chair, newspaper in hand and toddlers at feet is a task next to impossible, when your career ball has just got rolling. But as much as you hate to think about finances for your grey days (or golden days, if you prefer) you should remember that the only way there is, is to walk through it.

If you are adequately prepared financially, there are more chances of your retirement being jolly and stress free. However the best thing is if you start now, your retirement finances will be neatly done, without having to sacrifice your present little joys!

Tell me how to start

If you are a 25-something you have 3 cool decades to stack up resources.  In case your knowledge of personal finance products begin and ends with FDs and RDs, no worry, we will help you identify the right products. But even before you begin you must resolve to use these funds only after your pack up and not dig into them to buy the next trendy smartphone, bike or anything else.

The first step towards your goal is the most challenging one- save enough. The next question logically is how much is enough? If you observe in your Ideal Single Lifestage Report, you should manage savings of about 40%. This is assuming you are debt-free. More on savings is covered in Do Not Spend All Your Salary.

Best products for retirement

Since retirement is such a long term goal, your retirement funds should go in growth assets. Of the growth assets, equity mutual funds are an excellent tool for retirement planning. If you invest in a good diversified equity mutual fund, your money will grow along with the markets, well beyond inflation’s reach. This is something that cannot be achieved with income assets like FD, bonds etc.

So pick up one of the best long term funds and start a monthly SIP in it. For instance if you plan to save and invest Rs 10,000 every month, about Rs 6,000 can go to one of the large cap equity funds.

Don’t succumb to the temptation of withdrawing funds at market fluctuation, just keep to your SIP, as long as the fund you have chosen continues to be among the best ones. Only move them to less risky products systematically by the time your approach retirement (read on this after 2 decades). And remember to pump up your investments as and when income rises. When retirement dawns on you, there will be enough funds at your disposal.

Earlier the better- Albert Einstein

If you’re still not motivated to start retirement investment from now, here is a classic illustration of why those who start earlier turn out to be smart.

Take the case of 2 buddies Lazy Lakshman and Smart Sanjay who start off career at age 25 yrs. Lazy Lakshman is the squandering type and never took investments serious in the early days. Smart Sanjay had his share of fun but was more disciplined from the start, so he invests Rs 6,000 every month in a good long term mutual fund for 30 years. Assuming 15% returns from the fund, at the end of 30 years he’d have a nice Rs 3 crores corpus to live on.
Suppose on turning 35 yrs, Lazy Lakshman starts investing a similar Rs.6,000 per month at a 15% assumed rate. By the end of 20 years- at the age same as Smart Sanjay, Lazy Lakshman will have a corpus close to only Rs.74 Lakhs, which is a clear loss of 75% or almost Rs.2 crores plus!

Delay in SIP

Now, what if Lazy Lakshman also aims at creating a corpus of Rs 3 crore in 20 years for his retirement? Guess how much would he have to invest, assuming the same return rate? Hold your breath- Rs 25,000 every month! Okay let’s assume he got disciplined at about 30 yrs and wishes to create the same corpus in 25 years. In this case his job would be done with an investment of Rs 12,000 a month.

Being the person that he is, do you think Smart Sanjay would not have increased with investment amount with time? Assume he added 10% to his investments every year. Not only would he have a king sized corpus for retirement, he would also be in a position to meet all his other financial goals- buying home, kids’ education,  marriage, etc without taking loans!

Do the numbers look astounding? Credit it to the power of compounding. Albert Einstein called it the ‘Eighth Wonder’.  He also observed that ‘he who understands it, earns it; he who does not, pays it’.

So go, make use of the power of compounding through SIP and without pinching your pockets create a decent retirement corpus.

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