Best time for Bank deposits

Interest rates have been going up for some time now, but how long would they keep going up. From the way things are shaping up, it looks like they would start coming down soon. We can easily assume that the interest rates are at their peak; this would be the right time to lock your investments as good interest rates.

But what if you do not have enough funds to invest, why don’t you start a recurring deposit. Make it a long term recurring deposit. Recurring deposits are similar to SIP’s of mutual funds, in mutual funds there is a risk involved, but in case of recurring deposit, you fix the interest rate the bank would pay you. You make a fixed investment every month, which earns a fixed rate of interest.

As with any investment with a bank, recurring deposits also have a fixed tenure. At the end of the tenure, you get a lump sum, which is equal to the total amount invested, along with the interest earned on it. The best part is the minimum amount can be as small at Rs.100/-. Recurring deposits become more attractive for senior citizens.

Most banks give a higher interest rate for senior citizens. So if you are a senior citizen and you have some extra money and don’t know what to do, instead of leaving it idle in the saving bank account, open a recurring deposit account. But remember, it is like an insurance premium, a commitment, so invest only as much as you can commit over time.

Don’t default on you payment of regular deposit, as this would lead to a penalty, which is like reducing the interest rate you would get. Unlike a SIP with a mutual fund, where you could stop the SIP at any time, you cannot do it with a recurring deposit. Nor can you change the terms mid way. It’s a fixed commitment from both the bank and you.

Creating your retirement plan

We know that one day we would retire. We first start saving money for house, marriage, car, kids then kid’s education and marriage. By the time its time to retire and you find that now you have to start saving for retirement. With the time left, you would not be able to save much. But even then we should try and save, knowing that it will not be enough.

So we can start by preparing ourselves to ensure we are able to fix a leaky tap, an electricity point, tighten a loose hinge or any such job that will help save money, instead of paying for a plumber or electrician. As after staying for so long in the house, most of the things have reached a stage that they will start failing.

As we have mentioned earlier we should start saving, one of the options is to invest in a retirement plan or fund from an insurance company or mutual fund. There is another option, the NPS, this is a good option as the costs are low. Other option is to start investing in diversified large-cap mutual fund and as you come closer to your retirement start shifting to debt funds. After all you want more assurance on returns with less risk as you come closer to retirement.

You have been disciplined till now to meet your goals, so lets get a little more stick with ourselves as we start preparing for our retirement. SIP is a must. Cut cost to ensure you meet your goal. This will help after retirement as well. You won’t have to start feeling bad at that time, since you have already started cutting costs.

SIP with ECS is good, since the saving would happen without your intervention, and since you have given a commitment, you will keep it. Hope you have a PPF account, which has completed 15 years. Continue with it, you can keep going 5 years at a time and you can withdraw a certain amount every year in case of an emergency. Remember the interest is still tax free.

I mentioned sometime back that you should invest in large-cap funds, but do not put everything in mutual funds. Make a plan and allocate certain percentage to each of the classes of funds. Check the value of each fund on a regular basis and ensure that it is as per your plan, if the percentage is high in any of the class, remove some of it to bring it to the plan and put it into the class which has less.

This process is called rebalancing of portfolio. When you do this, you indirectly start booking profits, which helps in increasing the value of your portfolio and reducing risk. The best timeframe would be once a year.

Chose your investments in such a way that you do not end, paying tax, instead of paying yourself. We spoke so much about investment, be we should also plan a withdrawal strategy, to ensure it lasts our lifetime and we do not have to depend on anyone. During investment, we let the corpus grow, after retirement we want this corpus to start giving us returns. This return could be in the form of interest or dividend or withdrawal from Corpus.

Ensure that withdrawal from corpus is minimal, since with every withdrawal the guarantee of return is reduced.

Happy planning!

Limited Liability Partnership

We always say why work for others when we can for work for ourselves. But then we are worried of losing everything. As on starting a sole proprietary firm or a partnership firm there is no limit to your liability. To avoid this you can go for a limited liability partnership, LLP in short.

LLP is a firm which enables persons to take initiative and also gives it operational flexibility like a sole proprietary or a partnership firm with the benefits of limited liability. It is a legal form, which was available worldwide and now this legal form is available on India as well. It is a combination of Partnership firm and a company with limited liability.

LLP is a separate legal entity separate from its partners, can own assets in its name, where the partners have the right to manage the business as they want to. Unlike a partnership where one partner is responsible for the acts done by another, in an LLP it is limited to the contribution done by the partner to the LLP.

A LLP is advantageous because of comparatively lower cost of formation, lesser compliance requirements, easy to manage and run and also easy to wind-up and dissolve and no requirement of minimum capital contributions unlike a company. But the restriction is an LLP cannot raise money from the public.

One of the biggest advantages is it can continue its existence irrespective of change of partners or succession unlike a partnership. Also a company can become a partner in a LLP, which is not possible in a partnership; there you have to form a joint venture for a limited objective.

So why not start looking at starting a business as a limited liability partnership?

Asset Allocation Funds

Financial Advisors always tell us stick to your investment plan. Keep investing regularly asyou’re your plan. The plan is usually dependent on your age and investment objective. So they will tell you put X% in Equity and Y% in Debt etc. But tell me is it possible to keep regular track and then when the market goes up or down, or when the interest rate goes up or down, rebalance your portfolio.

At the same time we do not want to employ a portfolio manager, since his cost would be high and s/he will not look at small amounts. Also SEBI has increased the minimum size of portfolio to Rs. 25 lakhs for portfolio management services. So for a small portfolio, you have to do it on your own. For such persons there is an option, take a look at asset allocation funds.

These are funds which invest in different mutual fund schemes and keep the allocation in different funds depending on the pre-determined asset allocation. The asset allocation is done by a fund manager; s/he would take care of asset allocation as well as buying and selling funds depending on how they are doing in the market.

Though it does not replace financial planning, it helps us in a way. The fund objective would always be known, so if it is close to your financial plan, then you should go for it. There are usually two types of asset allocation funds, single manage asset allocation funds and multi manager asset allocation funds. Single manager funds are those which invest in funds on the same mutual fund house, whereas multi manager funds invest across different fund houses.

Just going by the definition, it is obvious that multi manager funds should be better. The most important is the fund manager has a wider choice. He is not stuck to his own fund house, where he has to choose the best from the worst, if the schemes are not doing well. This reduces the risk of the portfolio. This is the best if you have long term objectives and do not have time.

As mentioned earlier, you chose the scheme which is close to your objective. The schemes objectives usually remain fixed, but for an individual, his/her objective keeps changing over time, so as your objective changes, move your money to a scheme which is much closer to your most recent objective.

Should one invest in property

Many people who had invested in the stock market in the last one or two years are still waiting to cash out. In fact some have even vowed that they will never invest in the stock market. So many events took place and prices just kept falling.

These persons are now looking for a safe investment but with return. One of the options available to them is property. Property prices in India have consistently being going up. People are waiting for prices to fall, but no such luck. In fact in the last year or two those who invested in property actually have had some appreciation in their investment. This is one asset that offers stability and good returns.

Other than appreciation, there is another source of income, rental income. Remember we are looking at property as investment and not for staying. If it is purchased for staying it is a non-productive asset. It gives you continuous flow of income. Also as time passes, the rental income also goes up, but remember that as the property gets older the expenses also keep rising. But as the property gets older the demand might decrease. This all depends on the location of the property.

Buying property is not easy, so if you are seriously planning to invest in property, you need to do your research first. Not only on the property, but also the funding, since investing in property involves much higher funds, compared to equity. You should not go in for this investment without planning, because if not planned properly you could go into serious debt.

So, start collecting funds for the down payments. Start keeping you’re your funds aside in safe investments. Some of the safe investments are debt funds. As with equity investment, you start keeping funds aside. Once you have the funds aside, start looking for a good property.

If the property identified costs more than amount set aside, you can go for a home loan. Property is one of the few investments where loans are easily available.  Care must be taken to ensure the EMIs are funded for the tenure of the loan. If your income is large enough to pay the EMIs, you will have a good comfort zone. Or else, the rental income can be diverted towards the EMIs. It can also be a combination of both.

When a property is purchased and tenant identified the time spent on the property is considerably reduced. As time goes by the EMIs have to be paid. If well planned in advance, this process can go on smoothly for many years.

Capital appreciation is huge. Some properties appreciate more than others and it's important that you identify such properties with proper research. As you keep investing you will get better. As you go property shopping you will find that there are many more people like you who just invest in property.

Once the loan is paid off, the rental income is just sort of free money. If you really need money at any point of time, just sell the property.  As you would have realized, property purchase involves a lot of running about. So when you get tired running about, just sell all those properties and invest the money in debt funds and enjoy life.

Insurance – Buy Online

With the spread of internet, Insurance companies find it cheaper to sell insurance online. Since they do not have to do lots of paperwork and get rid of the agents commission. Of course there is the option of going through the agent, but then costs will go up. Why? Because the agents give you service and you pay for that service. But if that is true, then if you buy online you don’t receive service? You will, but you have to ensure that you take care and ensure you do not have to worry later.

What do I mean by that? When you go through an agent, he helps in filling the form; he takes care of all the small matters. It is a time consuming process, since you have chosen to fill the form online, ensure you fill the form with care. No pain is no gain. So if you save on premium, there would be some pain in filling the form, but it would only be once. This you have to go through so that when there is a claim, it is not rejected because of wrong information.

Another thing the agent does other than filling your form, is reminding you to pay your premium on time. This is very important or else your policy will lapse. Now almost all banks have ECS payment option, so just fill that form and be free of this as well.

As we always say, go for term insurance only, because that is what insurance is all about. Now what would be the difference in a term policy from one company to another, you guessed it right; Premium. So the best thing to do is compare the premiums of different companies for your age and term online.

So have you decided what insurance amount is best for you? If yes, compare the premiums for that amount. Now just because the premium is low, do not go for higher insurance, you do not gain anything for having a higher insurance. In fact you are just increasing your liability. You could use the savings to build your assets. Some companies might give you a good deal if you go for a longer term policy. But here again, your policy should be only till you are earning.

It’s always cheaper to buy a policy when one is young, so buy early and ensure that the policy lasts till you retire.

Should one get rid of insurance taken as investments

We all say you should take an insurance policy for insurance purposes only and not as investment. But Insurance companies come with different types of policies. So that means every insurance policy must be there for some purpose. Money-back policies give out periodic payments. Endowment policies help build a tax-free amount. Ulips help in wealth creation. So the first thing to do is find out if the insurance policy will help you taking your targets into account.

As we grow and take risks, usually our income will keep rising, so in this case the Money-back policy would be of no use, since the amount received at the end of the period would be very small compared to the investment made. Same with endowment policy, if you want guaranteed returns, put it in a Fixed deposit, which would give better returns even after tax.

Ulip’s would help but then it should be at a younger age and as you grow you could use your switch option and move the money to debt.

An insurance policy should ideally cover a person till he is earning and the amount of insurance should ideally be enough to help the persons dependent on him/her. This is because if something happens to you the financial dependency will go away from the persons dependent on you. Therefore if there are policies which mature before your retirement age they should be removed or extended till retirement age.

If circumstances have changed and you cannot afford the premium, you should discontinue the policy, because instead of helping you the policy is hurting you financially. Since insurance premium is like a regular liability. If you have built enough assets then there is no need for insurance policy.

The easiest way of getting rid of an unsuitable insurance plan is to stop paying the premium. This should be the preferred option if the insurance policy was just taken. It is better to discontinuing the policy with a small loss instead of continuing with the mistake just because you might lose some money. This is similar to the stock market, do a stop loss.

If you have paid a premium for 3 years or more, you can surrender the policy and get some money back. When you surrender the policy you lose the insurance cover, so if you want to continue with the insurance cover you can convert the policy to a paid-up plan.

A better alternative to surrendering your insurance policy and losing the life cover is to turn it into a paid-up policy. As in the case of surrendering, this is possible only if three years' premium has been paid. But if only some years are left it would make more sense to continue with the policy.