Are returns the only thing one should look at?

For most of us every rupee earned is important. Therefore getting a good return on the amount invested is also important.

If you are young your risk taking capacity is good, but at that point of time we are not sure how to go about investing. So most of the investing happens with the advice of friends and family.

But the ones who are giving advice base it on their experience and age and not as per your age and risk taking capacity. So typically happens is either the investment is in very safe investments like bank fixed deposits or into shares without understanding the risks.

So the important thing is understanding what you are saving for and how much time you have for achieving it. This will give you a head start instead of just focusing on returns.

How will higher returns help you if you do not know what to do with the money? This obsession of returns will just take your focus away from life. Stay away from anyone who just talks about returns instead of your needs and wants. You would notice many advertisements as well as bank relation managers of wealth managers just talking to you about returns without understanding your requirements.

Your focus should be to invest in such a way that there is capital protection as well as returns, but they never go hand in hand. Hence some amount of risk is always necessary and the amount of risk depends on your current status of life and where you want to be. So the focus should be on optimizing returns with the right level of risk, taxation, liquidity and income needs. Please note I have said optimizing and maximizing.

Also ensure that the portfolio is easy to understand and manage.

Most young people I meet, mostly the successful ones assume that they know everything about investing, they feel that because they have been successful in one area, they can be successful in all areas, especially investing. The reason is there is so much matter available on the subject of investing in newspapers, TV channels and over the web, that it looks very simple. This leads them to invest based only on returns without understanding the risks.

So if you really want to achieve your goals, contact a financial advisor who will first understand your requirement, suggest a strategy and then and only then suggest the product.

Success and Finances

What is success? For different people, success means different things. But we usually see similar traits or measurement of success in a particular age group. What I have seen, is for people in their 40’s success means having a good position in his/her job and earning is good. So here the focus in mostly on making money. Taking the current working environment, earnings growth peaks in your mid 40’s (this is average). This is the time to invest so that your wealth also grows aggressively.

Most of the couples, I have met (who are in their 40’s) have very good income streams, but their finances are in shambles. The reason is simple, they have been totally concentrating on their earnings, then add to it, home and car loans, Children’s education and holidays to beat the pressure and the worst peer pressure. In all this they did not get time to look at their investments. Most of them are professionals, but have not even thought of employing a professional to look after their investments, even when they do not have the time. Some are so burnt out by the time they reach 50, they just give up, if they do not reach the board room.

One of the things they could do is start investing wisely with the help of a professional, so that even if they plan to quit, they do not have to worry. As your earnings increase, increase your savings percentage. Most of them have savings, but in Fixed Deposits and PPF. This is good, but this investment will not beat inflation and your rising lifestyle expenses. When I talk about SIP’s they say let’s start with Rs.5000/-, it’s like only 1% of your regular expense is lifestyle expense. Rs.5000/- is small at the age of 40, it should be a minimum of Rs.40000/- pm. After 10 years when you look back and see the corpus, this Rs. 40000/- will look like a small amount.

The other think I have seen most of them do is go for a second house as investment. Do not do this till your goals are met. If you need a bigger house depending on your status, go for it. As with most capital intensive purchases, all you will do is build up your liabilities and your savings will come down. As this is the time to let your money grow. This is the time to work on your dreams and let a professional work on your finances to help you reach your long term dreams. It should not happen that you meet your current dreams and then when you reach your sunset years, you will spend your time dreaming, instead of living your dreams.

How to make your money grow

We start investing in a small way and slowly and steadily we build a good corpus, but all this was not easy. We might have burnt our fingers on the way. If you had taken the help of a financial advisor the journey would have been less painful. Never the less, we have to learn and that is the only way to grow.

First thing to remember is always invest in an asset class based on your goal and time horizon. Many people I have met, just invest based on the past returns of a particular asset class. All asset classes have their own ups and downs and nobody can say for sure, when is the right time to invest in a particular class of asset. Some like gold, others like fixed deposits and others like equity. But investment in a particular class of asset should always be based on goal and time horizon. It should not happen that when you actually need the money, the market for that particular class of asset in which you invested is down.

Next to remember is when it comes to investment you need to have discipline. Do not go by rumors or market movements. If you have invested with a particular time horizon and nothing has fundamentally changed, stick to your course.

For those who are risk averse and prefer FD’s, please check the credit rating before investing. Many companies give interest which is higher than the market rate of interest. They are ready to give those rates as nobody else is ready to give them money. Go for AAA rated fixed deposits only.

Always have a plan for your investments. If you do not have a plan you will find it difficult. Before you start your investment plan, make a contingency plan, basically your investments plan should not be derailed just because of some untoward incident. So get your insurances in place, be it health or life or even house. Any plan made should take into account taxes. What is the point of making money and giving most of it away in taxes.

Last but not the least, monitor your investments on a regular basis.

Hesitating to invest

Let me start with the story of Edwin C Aldarin, also called as Buzz Aldarin. Do you know that he was chosen to be the first person to step on the moon as he was the pilot of Apollo mission? The story goes like this, when the spacecraft landed on the moon, they received a command from NASA center “Pilot first” Aldarin hesitated and not for long but a few seconds, but in the meantime NASA sent the next command “co-pilot next” and rest is history. Neil Armstrong become the first person to step on the moon. This happens to us in everyday life. Nobody remembers the person who comes second. Go through history, it is always first person to …. Etc. All of us the potential, but we hesitate. The only thing that stops us is our fear.

All of us know that equity gives us the best returns, but then we have heard so many stories of failures or have the fear of the unknown like Aldarin. We are even scared to ask for help. Is there any player who has succeeded without a coach? The reason they go to a coach is to bring out the best in them. Every person has the talent, but then the coach gets the best out of them. In investing also, we also fear or hesitate, because of the fear of losing money, but this fear will get us the next best think. Aldarin had all the qualifications and training, but he hesitated. Why are you hesitating, if you are not sure, get hold of a financial advisor, who will help you remove the fear? With the current market volatility there are a lot of opportunities, do not hesitate go out and invest. There is money to be made, be the first.

Invest in the stock market

I spoke to a young girl the other day, who had just started working her first job and she very proudly mentioned that she has opened a demat account. I said well, now what. She was looking for tips to invest. This is what most of us do, we want to excel in something which we are not good at. Investing directly into the stock market requires time, effort and money. Now if you are working or in business, you do not have the time to do this. So then just pay an expert and let him do the job for you. Whenever there is a leaking pipe in the house, you too can repair the leak, but you still call a plumber and pay him. But when it come to your own finances, you start being penny wise pound foolish. Instead of opening a demat account and trying to become a financial expect, let a financial expert guide you. This way you can spend more time on doing your best at what you are good at, be it your job or business.

One of the best things a financial advisor would suggest is Mutual Funds depending on your goal and time frame. Why Mutual funds? The main reason is diversification, no other fund will help you diversify your risk other than a mutual fund. The Fund manager’s job is to identify sectors and company’s which are doing well and will keep doing well. Whenever there is a downturn he knows when to get out. This helps you maximize your returns. If you look at most of the good funds, the fund manager would have beaten the benchmark. But to identify a good mutual fund is the job of the financial advisor. You can go by so many rating sites but all of them do the rating based on past performance. A good advisor would be meeting the fund managers and then making up his list of funds which he advises to his clients.

The advantage of mutual funds is that it is not just shares, but also bonds or debt funds. So you do not become a good investor by just opening a demat account and buys shares based on tips, It is a lot more, you need to beat the benchmark and be able to reach your goals in the defined timeframe. As I told the girl, your time starts now, you need to decide if you want to make or lose money or want to work towards achieving your goals, and the choice is yours.

Financially secure marriage

Marriage season is round the corner and most of those whose marriage date has been fixed and eagerly making arrangements. All these arrangements do not come free, there is a cost involved for every action you take. When I speak to newlyweds, most of the time they are happy because they have gone into a new life or relationship from being single to being responsible for each other. On speaking on finances, most of them are starting their lives with zero or negative balance. Would you like to be one of those? I’m sure you would not, so it is better to make a positive beginning in your married life. First is be open on where each of you stand financially and how your expenses would be after marriage. This will give you an idea on what money you would have to spend for your marriage. This will set expectations right and you can keep any extravagant expenses at bay. Elders are important, but do not let them dictate your expenditure plans. Any major expenditure decision should be taken jointly, there will be a lot of emotions involved, in such cases, involve a sound elder who can give an impartial judgement.

Once married, keep your accounts separate, but add the other ones name, this is beneficial from tax point of view. For household expenses, keep a joint account where each would put in their contribution for joint household expenses. For all other personal expenses, savings and investments use your separate accounts. Even on account of credit card, try to keep them separate and one have one from household expenses, this will help in making payment to credit card companies as well. After marriage in most of the cases, there will be a change of address, ensure that this change of address is informed to all financial entities. In case of female, there is a possibility of name change, so keep your paperwork in order.

Get insurance into place, one is health, take a family floater and other is house. If you have taken a home loan then a term policy to cover the home loan. Marriage is a long term relationship so start thinking long term and start planning long term immediately. Though your responsibilities have increased, they will start increasing more and years pass, but on home front as well as job, so start your financial planning immediately. This will ease your financial burden in the years to come. Have a happy married life.

The need for insurance

When I talk to anyone about insurance, most of the time I get a question is what I will get back. This question really gets me thinking, because even after literacy increasing, people still do not understand the meaning of Insurance. Insurance is an indemnity is the event of something happening or not happening. So when you look at insurance, you should not look at return but look at what is the eventuality or outcome you are trying to cover. The following are some major insurance covers available:

Life – This cover kicks in only on the death of the policy holder. So while taking a life cover ensure that you cover only death and do not ask for a return of premium in case you survive the period. This cover is to be taken only if people are dependent on you for their living. So if there is nobody dependent on you, you do not need this insurance. How much cover is needed, depends on the assets and liabilities you will leave behind, so preferably contact your financial advisor to calculate the amount of cover you would require.

Personal Accident – As the name suggests, this cover comes into picture only in case of death or disability in case of an accident. You could take this as a separate policy or as an add on to the life policy.

Home – This policy covers the damage caused to your home and its contents.. Most of us are not even aware of this policy.

Health – With increased awareness, many of us have started taking this policy, but still I know of many people who avoid it, saying my employer has got me covered, but what if you fall ill in between jobs or you lose your job. Think, your whole life savings would go in a flash.

Travel – Most of us take this policy only when we are on official travel, but ignore it when we go on personal trips. We should never ignore this policy.

There are many other types of policies, some of which you buy, just because it has been mandated by the government or your loan provider. Most of these policies do not cover terror attacks, as you know the world has become a very dangerous place, so my suggestion is as the insurance company if terror attacks are covered, if not then ask them to add it. A little extra money, but you would have peace of mind.

The Entrepreneurship bug

Had enough of working or have a great idea and want to start out on your own? Man, the entrepreneurship bug has bitten you. Now that the virus is there, start treating it and allow it to grow for your benefit. If you do not work on it you will regret it throughout your life. I keep hearing many persons saying, I too had the same idea, but…. But what? Why did you not work on it, some felt people would laugh, some felt, they did not have the money, while others, just kept giving excuses or reasons to cover their failure to nurture their idea or dream. You do not know when an idea would come to your mind, but if you definitely have a dream to start off on your own, start preparing for it now. As it is always, finance plays a very big role in such decisions.  

Start by planning your contingency funds i.e.health insurance, term plan and expenses for around 2 years. Ensure that you do not have any outstanding loans or have provided for them. Once this is ready, next would be funding for your idea or business. You would need some money ready to rent a place, phone and other expenses. Once money is there, half your battle is won. An entrepreneur needs to work with a clear mind and money should not the first and only tension. Entrepreneurship is a very rewarding, as you are your own boss and you can keep the benefits of all you hard work. Also remember that 90% of all businesses started fail in the first 2 to 3 years of starting, so you would really need to have researched your business idea and worked out a through business plan. From those which have failed, 50% have failed because of lack of financial resources. So as you can see, finance plays a very important role. Don’t assume that funding is easy, that is the most difficult part.

Give yourself atleast 2 years planning both from business as well as finance point of view, before you start on your entrepreneurship journey. It would be best if you could start your business on a part time basis along with your job, this way, finances would not come in your way. The reason is simple, income will take time to come when you are on your own. So why not start planning your finances now and start planning for your entrepreneur journey now, don’t wait till the bug bites you.

I want to buy a car

These days everyone wants a car with no parking space. But the question to ask is do you need a car or do you want a car. A car is convenient and useful, but if you do not have frequent travel then car is just a want. Car is both an asset as well as a liability. Asset if you need to travel frequently, liability from the point of loss of value from the date of taking possession itself. What does it mean? The value of the car goes down the moment it is on the road, add to that maintenance and fuel cost. Whether you run the vehicle or not, maintenance cost will always be there. Car is convenient, but with so many car hailing apps, do you really want a car, just for convenience and because all your friends and relatives have one?

It is good to have aspirations, but these aspirations should not come at the cost of your other goals. So check, if the car is really as important as your other goals. After taking everything into account, if you feel it is a need, then check if you have at least 25% of the cost for down payment and enough surplus to pay monthly EMI. These EMI’s are not tax deductible, so try to keep the repayment period as short as possible, as the interest would be eating into your other goals. Check if a new car is really necessary, these days you get good second hand cars, you can upgrade when your finances are comfortable. If you want to upgrade, do not do so, unless the maintenance cost have really gone up and the car is giving frequent trouble.

Planning to start a family

Just married, what next? Start a family. Starting a family is not just an event but a life changing event. Though there is excitement, there would be a lot of pressures. The pressures would not only be psychological, but also financial. We need to be ready to take care of both, the physical and psychological part would be taken care with guidance from your medical practitioner, but what about financial, and you need to take care of that. Are you ready? Have saved enough for this event and after that. Remember your expenses will start mounting. Now you will have to take care of 3 persons and the third person will need a lots more care both in terms of time and money. Have you take a health insurance policy? If yes, or you have one provided by your office find out if it covers maternity expenses.

On the contingency front, you would have to recalculate your life insurance requirement, as now you would have many more aspects to take care of in your absence. This life changing event can become less stressful, if you have planned properly as the event is just not one time but it will change the rest of your life. If your wife is working, you would also have to consider the possibility of her quitting her job. This means lower income. Though we usually recommend 3 to 6 months of contingency expenses, during this time we recommend to increase it to at least a year’s expenses, that too the increased expenses. Plan early and enjoy the joys of starting your family.

Becoming rich by buying right and sitting tight

We keep hearing that if you want to make good money equity is the best. You would have heard many stories of people becoming rich by buying a stock and sitting over it. This sounds too good to be true, because whenever you have invested you have lost money. Does this sound familiar? These days you would have heard, when the market is down buy and when it is up sell, but how do we know if the market is a falling market or a rising market. This is difficult to tell. It is not easy to time the market, you just need to be lucky to have brought a stock at its lowest value. There would be numerous instances of the stock falling soon after you purchased it, the only reason is nobody knows when a stock or market would stop falling.

You just cannot become rich without taking risks. Equity investing is risk taking and you need to have a risk taking appetite, but not all of us want to take risks. Most of the people I talk to say, I do not have money to invest, but at the same time ask for tips. All want to make it rich soon, not ready to put in efforts or understand the risks. The first thing you need to do is think long term. Next treat the investment like your child, keep track of it, and if you find something is going wrong, take corrective action. Now when your child makes a mistake, you first analyse if it was really a mistake and only then take corrective action, same way, find out if what is happening is natural or the management is not taking corrective action and then decide. Do not regret if you made an error of judgement, this happens to all of us. Next check if the company you are investing has been creating value over a long time and is capable of creating value over the next 3 to 5 years. If it is a new company, would it be creating value over the next 3 to 5 years? Because markets change daily, our lives are also changing daily.

Do not go for IPO’s as they give you a very short term view as their intention is to get the IPO through, take a long term view. Understand that what is good today may not be good tomorrow, so try and take a long term view of any investment. Last whole market keeps following the index, which is a good indicator, you also should track, but track which stocks are part of it and which are not. Remember the index stocks are ever changing and usually only the good stocks remain in the index, so if a particular stock you are holding is removed from the index, it is time you too exited from it. If you do not have the ability or time to do all the above, go for the next best option i.e. invest in Mutual Funds, the fund managers are trained to do all the above and that is their full time job. Here you can just buy the units and sit tight.

Contingency Funds

In today’s world anything can happen and if you have cash in hand you do not have to worry, but if you keep too much in cash there could be a loss of earning. Therefore it is very important to have contingency funds to meet unexpected expenses. These days there is no guarantee of a job and people get laid-off overnight leading to months of unemployment or there could be an accident or major illness. In all these circumstances contingency funds come hand. How much money should be kept aside for such contingencies is a big question. Though you would have planned for your major goals, it is very important that you plan for your contingencies as well. You might have credit cards to meet some major expenses, but in case of loss of job or accident or major illness, how would you repay these expenses?

Hence a financial plan should include a plan for contingencies, this includes a health and accident insurance plan. Now health and accident could take care of a part of the contingency, what would happen if you lose your job. You still have to fend for yourself and your family till you get a new job. Some people might say keep 3 months expenses while others might say 6 months, all this depends on the type of job you hold and how long you would take to find another job. If you have Hugh EMI’s or Insurance premiums needed to be paid I would suggest that you keep aside 6 months expenses including EMI’s and premiums. Now that you have decided how much you need to keep aside as contingency funds the next question would be where should I keep it?

Remember that these are contingency funds and you should be able to access them when you need them. The nor mal suggestion would be to keep one month’s expenses in a saving bank account, another months expense in a liquid fund and the balance in short term debt fund. This way when you need the funds you will be able to access them fast and you would also earn some income out of it. The best part would be that this would automatically grow over a period of time. My suggestion is that you review you contingency requirements every quarter and if you find that the amount required is increased, check if the increased funds are available, if not keep additional money aside.

Short of money? Borrow

How easy it sounds, at some time in our life we have always felt the need to borrow, but then when it comes to repayment, we get stuck. One of the golden rules for borrowing is, borrow only if you are going to create a long term asset or the asset is going to increase your earning capacity. This sounds good, but then banks make some good offers for borrowing, some give low interest rates, some give loans with less paper work others pass the loan in a jiffy, all this is very tempting. We are bombarded with phone calls, SMS’s and emails from banks. Now we also have loan aggregators, who would allow you to compare loans for different purposes with interest rates and give you the best offers. HDFC Bank offers loan through net banking. Whatever the options, ultimately you have to repay. So take care and follow the following rules

Borrow only as much as you can repay. Ensure that your monthly outgo towards loan repayments (all loans taken into account) does not exceed 50% of your net income. Keep the repayment schedule as short as possible. The sooner you repay your loan, you will have surplus available to build other assets. If the loan period is longer, you end up paying interest for this longer period. We know it is tempting to increase the loan period, as the EMI would be lower. Remember that interest rates keep varying, today it might be low, but rates will go up as well and when they go up your tenure would go up. Ensure that you repay your debts on time, all lenders charge a penalty for delayed payment and add to it compound interest i.e. interest on the interest due and this is calculated monthly. If you delay, it also affects your credit profile. Making it difficult to get loans later when you would need it again.

Buy a term insurance equivalent to the amount of loan, so that if anything happens to you, your family members are not burdened with the loan repayment. Usually lenders would try to sell you a reducing loan insurance plan, but it is better to take a term plan and let it continue till your earning life. Whenever interest rates fall, search for better interest rates, because lenders do not offer better rates to existing borrowers. Last but not the least, read through every paragraph before signing the dotted line. Banks might say they are standard terms, but if you are not comfortable, do not sign.

Steps to achieve financial security

All of us want financial security, but are we disciplined enough to achieve this goal? If we are ready, then financial security can be achieved in a jiffy. First thing to do is save at least 10% of your income, it would be best to save around 40%, but first start with 10%, that is easy, right? Set goals and amounts to which this saving would be allocated and keep increasing this amount every year, with the same percentage as your income increases. These savings are to be used only for the purpose for which they are saved. So in case you want to go for a holiday and you had not saved enough for it, increase your savings for this purpose, but do not use the money from other goals unless it is an emergency.

Next for Emergencies create an emergency fund. Also buy a health insurance cover for yourself and your family, in addition to a term plan. This will take care of your emergencies, so that your savings for your goals remain intact. Next book profits regularly, one of the ways to do this is asset allocation and rebalancing, with every rebalancing of your asset allocation you would be booking profits and buying cheap the asset which has dipped. Ensure that the investment is in line with your goal horizon. Do not take extra risks, because if the markets fall as in the last few days, your goal will be difficult to reach.

Loans should be used to tide over temporary requirements and to build an asset only. Do not use loans for every small thing. If the loan does not create value in terms of increased income in future or an asset which will increase in value, do not take it. Every want is not a need, so stay away from loans. Even if you do take loans (for the purpose mentioned earlier) ensure that you repay them on time as per the schedule. Last, do not invest in instruments which promise extra ordinary returns, many persons (some your friends) would give testimony, but do not fall for this. Follow these steps and you should be on your way to financial security.

Planning for your child’s future

Now a days every person concentrates on their career and while concentrating on one’s career, marriage takes a back seat. So what happens is marriages are late and therefore by the time the child is born, the couple is already in their late 30’s or early 40’s. What happens is late 30’s or early 40’s is the time when one starts having major expenses of one’s life and as one was concentrating on his or her career, investments had taken a back seat. Now with a child on the way, pressure starts building. Instead of being in a happy state of mind, you start getting tense, as expenses will start putting more pressure on you. This is why financial planning becomes important at any stage of one’s life. If you are one of these parents who married late, start planning now.

Education expenses are rising and will keep rising all in the name of better education and giving your child a better future. Giving your child a better future comes at a cost and this cost should not cost you your health. So start now, first thing is make a list of your expenses and see which expenses can be dispensed with. Now save this amount. Cutting down costs will increase your savings, which you can invest. Plan your investments as per your goals. What I mean here is, plan when you would have major expenses on your child’s education e.g. after 12^th standard i.e. at the child’s age of around 18. So if you have enough time go for SIP in long term equity mutual fund, but if the period is small, go for safe returns, as you would not want to lose money. As the returns would be low, your savings would have to increase to reach your short term goals.

Take a term plan to cover your child’s future aspirations. So if anything happens to you, your child will be taken care of. Now comes the tricky part, since you married late, your expenditure for child education would be there even when you retire, so you need to plan for a second career, even after retirement. This will make a big economical difference to your life, after spending so much time on your career in the early stage of your life. Last but not the least make nominations or write a will, since your child will still be very young if something happens to you, even after retirement. You would not like your child to spend his/her life being conned or fighting a legal battle, when he/she should be concentrating for his/her career.

You brought your child into this world, now it’s time for you to make him/her happy. Plan now.

Clean your Portfolio

Prime Minister had started the Clean India Campaign with a lot of fanfare. We are coming to close to a year of this campaign, some things changed, but most of it remained the same. At that time I had mentioned about cleaning of Portfolio. For those who did not do it then, this is the time. Rains is a time when our pressure is a bit less, as appointments are reduced. Weekends, which are usually packed are a bit relaxed and if its raining, then you get some free time. Use this time to clean your portfolio.

First look at what are the typical investments one has in his / her portfolio. Life Insurance Policies, ULIP’s, FD’s, MIS, RD’s and NSC/KVP. Then there would be some Company FD’s or NCD’s. Some enterprising persons would have some investments in a few equity shares, which were purchased on tips from friends, neighbours, newspapers or TV. Some had invested through IPO’s. Some made money, some lost, but all of us have held on to our investments. This is our hard earned money, so what if it is losing money. A few of us would have invested in NFO’s of Mutual funds, here again, some schemes are doing well, and others are not. Now a days I meet a lot of people who do not know what to do as companies are not returning the money they had invested in Fixed Deposits.

This shows that we just kept investing without a purpose. The only aim was to invest and make your money grow fast and in the bargain lose money. Now that you have time do a clean you do the following:

-       Make a list of all your investments, so that you have a snapshot of your portfolio, include investment date, maturity date, and maturity value.

-       If shares are in physical form, demat them immediately.

-       Check if nominations are in place for all your investments.

-       Now review and see if these investments are really helping you make money.

If you are not sure how to review, get in touch with a financial planner. Now is the time Clean your portfolio.

How good are you at planning?

Failing to plan is planning to fail. This saying we have heard so many times, yet most of do not even put the little effort required to plan. We are ready to plan for everything, but when it comes to our financial future we leave it to fate. We plan for buying a house, but have we worked on a plan for it, think…. Most of us just work on the minimum sum required and then depend on a bank loan and then only keep hoping you have your job intact so that you would be able to keep paying. Even for your children’s education, you will start collecting all your certificates to pledge or break to collect the money or go for the loan and then keep hoping things fall in place. Why don’t we start planning in advance? We plan for everything, so why not some long term financial planning.

When we have to go for a holiday, we plan months in advance, foreign exchange, visa, tickets, hotels, places to visit etc. but for basic things like home, child education or even marriage we do not plan our finances. We plan everything around it. I know of a few friends of mine, who on meeting me or even over phone, say good article, we have to start planning, but let some money come first. I know these persons find planning a drudgery, so they keep procrastinating. A little effort and everything would look simple. This happens with most things. How many of us plan to start doing exercises daily. Almost all of us, but only a few do it, since it requires effort. Same is the case with financial planning. If we plan in advance, the amount you need to keep aside a month would be very small.

You could start a SIP in a good mutual fund and watch your money do the work for you month after month, but you need to start. All it needs is a change in attitude. We just follow the advertisements, almost all banks advertise easy money and we start believing. But do you realize that after the loan, you are under so much stress, month after month. All this is just because of lack of planning. Most of us have gone through this phase and how relieved we were when the loan was repaid. The relief was not because you repaid the loan, but because you were able to get away from the forced commitment, which you had walked into because of lack of planning.

I think its high time you took financial planning a bit more seriously.

Should one trade frequently?

One of my friends called me asking for a tip, so that he could make some money in the stock market in the short run. The next question I asked him is, how much does he plan to invest and he proudly said Rs.20,000/- to 30,000/- to really make big money, you actually need to invest big and your bets should always go right. There are many more costs involved, which most of us do not consider when we talk of trading frequently in the stock market. Let us look at some of them. For every purchase and sale of a stock you have to pay brokerage costs. Why do you think brokers happily keep giving you tips? The tips are so that you trade and with every trade they make money. Remember that whatever profit you make from that a certain portion has to be paid as brokerage costs, both at the time of purchase and sale. So this brings down your profit. In addition to this brokerage fee, you also have to pay a transaction fee to stock exchange and depository charges, add to this the service tax. Now look at your profit. It would be quite miniscule.

The next thing to consider is taxation. Frequent trading means capital gains. Short term capital gains is taxed at 15%. So from whatever you made after paying the broker, stock exchange and government, the Income tax department would be standing at your doors for their share of 15%. Short term capital gains has to be paid for any stock sold before one year from the date of purchase. But if you had held it for at least a year, there is no capital gains tax. From the tax angle, frequent traders are sometimes treated as doing business of buying and selling of shares, in such a case, if you are in a higher tax bracket, you might not get the benefit of capital gains tax.

You might make some money in the short run by doing frequent trading, but with so much volatility, it is better to be careful. In the past few days you would have seen the sharp volatility in the prices of stocks. So go stop looking for short term gains and make money by investing in good stocks for the long haul.

Steps to wealth creation

All of us want to have wealth, but we find it very difficult to create wealth. It’s not that difficult if you just follow some rules. First of all, when we speak of wealth, we should know what it means. Wealth is the amount of assets in surplus. What we earn is not wealth, but the amount we set aside, is wealth. This wealth might be small when we start, but as we invest it properly, it starts growing. Whatever we intend doing with this wealth, it should grow big enough to make a difference. Now that we know what wealth is, let us try creating an asset out of it, so that it grows. We are no magicians to know which class of asset would give us good returns, in such a situation it is best to spread our wealth over all class of assets. This way there will be growth. You could start with equity, gold or real estate and then build them. Ensure that all your money is not in only one asset class.

As I said earlier, amount kept aside is wealth, but if you do not keep anything aside, wealth will never be created. So make it a point to keep aside some amount. Wealth creation takes time, so do not expect the money to grow overnight. Give it time, longer you keep the money invested, the faster it will grow. Now that we know we have to diversify, and be invested for a long time, the next step would be to take care of contingencies. Keep money aside for contingencies and also get yourself insured for health and home insurance. So that in case of an contingency, your wealth is not touched. Last but not the least, do a financial review on a yearly basis. Check if you are being paid as per the market, check if your investments are giving the expected returns, check if your expenses are in line with your income.

As your wealth is growing, ensure your health is intact to help you create your wealth. As they always say Health is wealth. Do your yearly medical checkup, prevention is better than cure. Follow the steps above and grow your wealth.

Investing for your child's future

The birth of a child is a cause of joy for the whole family, especially for the parents. However along with this joy comes responsibility. For the joy, we have celebrations, but for responsibility we let things happen. When it came to a celebration, we sat down and planned, whom to call, where to call, what is our budget etc. But for the responsibility, we say we have time. Yes, you have the time, so utilize it. Plan for your child’s education, marriage and secure future. If you have planned well, not only your child’s future, but even your future would be smooth. So what do we need to do? First create a fund or an account and contribute to it, in such a way that there is not too much pressure on the family. Next plan for uncertainties i.e. in case something happens to the bread winner or to the house you stay in or to someone in the family. In such circumstances, your child’s future should not be jeopardized.

For the first part estimate the costs, inflation and expected returns after tax and start contributing to the fund. For the second part, you would need a good term policy, home insurance and a health insurance. With this most of your major risks would be taken care of.  So do not waste time, start early and see the power of compounding work for you, while creating a corpus and good insurance policies would ensure financial security in for your family and child’s future.