It is that time of the year when the most mundane exercise of all - tax saving under Section 80C of the Income-Tax Act – needs to be undertaken. Most employees loathe the last four months of every financial year - December to March – when all employees get the ‘last reminder’ from the accounts department to submit proof of having invested in tax-saving instruments under Section 80C. There is a last minute scramble to meet the deadline.
People often confuse tax-saving with financial planning (or rather, saving for a financially secure future). In reality, the two are quite unrelated. Tax-saving should fit into your overall, larger scheme of ensuring a financially secure future for yourself and your family. Therefore, investments in tax-saving instruments should never be undertaken haphazardly. These investments need to fit into your overall financial plan. In order to accomplish that, we need to pick tax-saving instruments with care. People rarely share the same perspective on tax-saving.
Common mistakes
Here are some common perceptions and mistakes of investors:
I. 80C Limit - Current policy = New policy: The most common ‘mistake’ is to take the prescribed limit (Rs 1 lakh currently), subtract current investments and put the balance into another insurance policy.
II. Buying the product closest at hand: If there is an insurance agent at hand, then the ‘flavor-of-the-season’ insurance plan is purchased. If the bank is close by, then all the money goes into Public Provident Fund. The least ‘hassle’ product gets the maximum attention.
III. No investment required: If, for example, the annual PF deduction is more than the limit of Rs 1 lakh, then in most cases, no fresh investment/saving is made.
IV. Buying without a thought: In the rush to get over with this ritual, most people just pick up anything with little or no thought and move on.
V. Last minute stampede: This is where most of the investors are trapped. Instead of making the investment during the year, most choose or are reduced to making the investment at the fag-end or (even) on the ‘last day’.
Avoiding the mistakes
Have you ever asked yourself - ‘Why do I work?’ The answer to this question is likely to be one of the following:
i. To be gainfully employed
ii. In order to be economically stable and to provide yourself and your family a financially secure future
What is the point of working so hard and putting in such long hours if at the end of the day you can’t have a financially secure future? It is crucial that one spends some time with a financial planner to decide the way ahead in terms of the investments. What one sows now in terms of the kind of investment will one reap in future.
A careful and studied analysis needs to be done before making any investment. It is not sufficient to just buy a product for the sake of fulfilling a requirement. Tax saving has to fulfill your overall goal of ensuring a financially secure future for you and your family.
Some crucial questions that must be answered before making the investment:
a. Have you looked at what you have purchased? (Most people I know cannot even remember the name of the insurance company or mutual fund whose product they have bought; and yet others have no idea about the kind of policy that they have purchased.)
b. Is this what you really need? Or is this just another blind investment in the myriad investments that you have accumulated over the years?
c. Is the compulsory saving (within the limit of Rs 1 lakh) enough to meet your financial goals? Have you spoken to an (unbiased) financial planner (as opposed to an agent who is selling you a product) to figure out what kind of returns you may get after 10 to 20 years? Take a look at the table below to get an idea about what your investments would be like 15 years from now if all the saving you made are those under Section 80C:
i. Time horizon - 15 years
ii. Inflation @5% p.a.
iii. Annual investment - Rs 1,00,000
Type of investor Expected return End-corpus
Conservative @ 6% p.a. Rs 16.04 lakh
Aggressive @ 10% p.a. Rs 21.19 lakh
Assuming that your objective was to utilize the investments you made each year for your retirement, is 21 lakh enough for you to meet your post-retirement expenses? Do a quick back-of-the-envelope calculation and figure out how many months the money will last?
This clearly brings to the fore the fact that saving just the Rs 1,00,000 per annum cannot make you financially secure. It simply saves you some tax. In the above example, we have not taken any other milestone/event – such as your own marriage, buying a house, education of your children, their marriage, family contingencies, etc. into account. Setting aside Rs 1 lakh a year certainly cannot help you achieve all these goals.
Tax-saving vs. financial planning
Most people believe that buying a tax-saving product is equivalent to financial planning. Products are purchased by the name like ‘XYZ Children’s Plan’ or ‘ABC Retirement Plan’. The investor buys the product and thinks that all will be well in future. But there is much more to planning for the future than just buying a product. Just as in financial planning proper asset allocation and the dynamic management of the portfolio in tune with the changing of goals and objectives is a necessity, so it is in the case of tax-saving investments. In most cases, tax-saving products are haphazardly purchased every year or the entire limit is exhausted by putting the money in a single product. This is not a good approach since these are supposed to result in long-term benefits. But since the whole exercise is without any planning it is most likely not to give the desired results. Hence it is of utmost importance that there is a well-planned and analyzed decision before investments are made.
Where a Financial Planner can make a difference
Financial planning is still a nascent concept in India. Today most financial products – such as insurance, mutual funds, fixed deposits etc – are being bought and sold without the slightest of care and concern about the future. The presence of an agent with a glossy presentation and flashy numbers is enough to convince any investor, with scant regard for what these investments would actually fetch him/her 10-15 years from now.
This is where a financial planner can and should step in. He/she is there to sell a lifestyle and not a single product. His/her knowledge and acumen is bound to make a huge difference in approaching the subject of financial security and in providing an appropriate solution. His or her interest lies in providing proper long-term financial planning, thereby making the investor look at the ‘big picture’ instead of having a narrow and short-term outlook. A thorough analysis should be done of the current holdings and objectives that are to be met by making these investments. And based on these considerations, the financial planner must recommend a product that is suitable for his/her client.
In short, investments should be towards achieving a certain objective, with a tax-break thrown in. The goal should be to maximize your post-tax income since there is a limit to saving tax.
Showing posts with label financial planner. Show all posts
Showing posts with label financial planner. Show all posts
Wednesday, 25 February 2009
Thursday, 29 January 2009
Recession, slowdown or an opportunity?
The current slowdown offers a huge opportunity to investors who feel they missed the bus during the stock market boom. The slowdown is your opportunity to catch the lows and reap benefits when the markets turnaround.
2008 will be remembered as the year when the R-word became a reality in the developed world. In fact, the current recession is being compared to the Great Depression of 1929, though the world may still be refraining from using the word “depression”.
The developing world (or rather, India and China) has been impacted by the recession – but in a different way. In these economies, growth has slowed down. Therefore, it’s more appropriate to use the term slowdown, in the Indian context. Our economy is still growing!
We have entered 2009 with all sectors reeling under the slowdown (thanks primarily to the US and other developed nations). The developed world, on the other hand, continues to grapple with the consequences of excessive greed and lack of checks and balances, as also commonsense. It will be a while before we are able to pick ourselves and move on, hopefully learning from mistakes (or rather, blunders).
Well, so much for looking at it negatively. I choose to look at the slowdown in a more optimistic and pragmatic manner. Looking at it from a pure financial planning point of view, I see this as an OPPORTUNITY!
An opportunity to learn, an opportunity to explore other products, an opportunity to make investments at much lower levels (as compared to those that were made in 2006 and 2007).
For investments that have a horizon of 5 to 10 years or more, there couldn’t be a more opportune time than TODAY. For those who continue to think that they missed out on the bull-run or joined in late, this is one opportunity they should not miss. Just when you thought you had missed the bus, the bus comes back. It has stopped for you so that you can get on. And believe me, it will certainly take you to where you want to be – your personal financial goal – provided you show the right patience and are guided by the right financial planner.
A slowdown is an opportunity to learn. The first lesson is - don’t put all your eggs in one basket – an oft-spoken adage that is more preached than practiced. The slowdown teaches you how important it is to have a proper financial plan in place and work according to it, rather invest in a haphazard manner (based mostly on what others have to say). In short, common sense and understanding of the basics is more important that a glossy presentation and flashy returns!
Till 2007 the only product everyone noticed was equity and equity-related instruments. There was no ‘apparent’ need of a financial planner as no matter where you were invested, humongous returns of 30% plus were almost ‘certain’. There was so much that existed, but was swept under the carpet, thanks to the mind-boggling returns from equity. Since early 2008 a number of options have come to the fore - liquid funds, fixed maturity plans (FMPs), fixed deposits (FDs), arbitrage funds, Nifty-linked debentures, gilt funds, income funds etc.
Since September last, I have been advising slow and steady investments after doing a proper analysis of what you have, what you want and how you can achieve it. The how, when and why of each product has to be analyzed and investments have to be made in the right perspective.
I reiterate – there is no better time than today to start your financial planning with the ‘big picture’ in mind.
Recently, someone asked me: “How can you be optimistic when markets keep falling every day?” I have a simple logic for this. Globally the developed nations are in a recession with zero to negative GDP growth forecast for the next year or so. Indian businesses have also been hit by the slowdown and the high interest rates (thanks to the spurt in oil prices last year). Despite this, the GDP growth in India has been forecast at 6% in FY10. This is phenomenal compared to that of US and Europe.
In 2008-09, there was a huge outflow of money by FIIs and hedge funds to their parent companies, to prevent bankruptcies back home. Once that goal is achieved, they have to invest the monies of their clients / investors to give them reasonable returns. The only places where they will see some glimmer of hope is in developing markets, such as India and China. So money will flow back to India.
There are two other things I want to point out. One, the crisis is not over yet and two, you can never catch the bottom of the market. The latter is more a matter of luck, than skill. In short, take proper advice before you invest and if you have already started investing then ensure that this is the time to continue those investments. And if for any reason you have stopped investing, then don’t delay restarting those investments now. Don’t miss this OPPORTUNITY!
2008 will be remembered as the year when the R-word became a reality in the developed world. In fact, the current recession is being compared to the Great Depression of 1929, though the world may still be refraining from using the word “depression”.
The developing world (or rather, India and China) has been impacted by the recession – but in a different way. In these economies, growth has slowed down. Therefore, it’s more appropriate to use the term slowdown, in the Indian context. Our economy is still growing!
We have entered 2009 with all sectors reeling under the slowdown (thanks primarily to the US and other developed nations). The developed world, on the other hand, continues to grapple with the consequences of excessive greed and lack of checks and balances, as also commonsense. It will be a while before we are able to pick ourselves and move on, hopefully learning from mistakes (or rather, blunders).
Well, so much for looking at it negatively. I choose to look at the slowdown in a more optimistic and pragmatic manner. Looking at it from a pure financial planning point of view, I see this as an OPPORTUNITY!
An opportunity to learn, an opportunity to explore other products, an opportunity to make investments at much lower levels (as compared to those that were made in 2006 and 2007).
For investments that have a horizon of 5 to 10 years or more, there couldn’t be a more opportune time than TODAY. For those who continue to think that they missed out on the bull-run or joined in late, this is one opportunity they should not miss. Just when you thought you had missed the bus, the bus comes back. It has stopped for you so that you can get on. And believe me, it will certainly take you to where you want to be – your personal financial goal – provided you show the right patience and are guided by the right financial planner.
A slowdown is an opportunity to learn. The first lesson is - don’t put all your eggs in one basket – an oft-spoken adage that is more preached than practiced. The slowdown teaches you how important it is to have a proper financial plan in place and work according to it, rather invest in a haphazard manner (based mostly on what others have to say). In short, common sense and understanding of the basics is more important that a glossy presentation and flashy returns!
Till 2007 the only product everyone noticed was equity and equity-related instruments. There was no ‘apparent’ need of a financial planner as no matter where you were invested, humongous returns of 30% plus were almost ‘certain’. There was so much that existed, but was swept under the carpet, thanks to the mind-boggling returns from equity. Since early 2008 a number of options have come to the fore - liquid funds, fixed maturity plans (FMPs), fixed deposits (FDs), arbitrage funds, Nifty-linked debentures, gilt funds, income funds etc.
Since September last, I have been advising slow and steady investments after doing a proper analysis of what you have, what you want and how you can achieve it. The how, when and why of each product has to be analyzed and investments have to be made in the right perspective.
I reiterate – there is no better time than today to start your financial planning with the ‘big picture’ in mind.
Recently, someone asked me: “How can you be optimistic when markets keep falling every day?” I have a simple logic for this. Globally the developed nations are in a recession with zero to negative GDP growth forecast for the next year or so. Indian businesses have also been hit by the slowdown and the high interest rates (thanks to the spurt in oil prices last year). Despite this, the GDP growth in India has been forecast at 6% in FY10. This is phenomenal compared to that of US and Europe.
In 2008-09, there was a huge outflow of money by FIIs and hedge funds to their parent companies, to prevent bankruptcies back home. Once that goal is achieved, they have to invest the monies of their clients / investors to give them reasonable returns. The only places where they will see some glimmer of hope is in developing markets, such as India and China. So money will flow back to India.
There are two other things I want to point out. One, the crisis is not over yet and two, you can never catch the bottom of the market. The latter is more a matter of luck, than skill. In short, take proper advice before you invest and if you have already started investing then ensure that this is the time to continue those investments. And if for any reason you have stopped investing, then don’t delay restarting those investments now. Don’t miss this OPPORTUNITY!
Monday, 16 June 2008
To pay or not to pay – is that your question?
Fee-based financial planning service is still new to this country. Though there are firms and individuals who charge for their advice, the number is still very small. Investors often wonder, as to why they should pay a fee when they can get the same advice for ‘free’. Is that really so? Is that ‘free’ advice in your interest?
Let me explain this point through an incident. Some time back, a senior executive of a BPO firm had called me to discuss his financial plans. When I told him that I charge a fee for my services, his facial expression changed. “I’ll get back to you.” He curtly told me. I realized what that meant and why he had said that.
I decided to try and reason it out with him. I pointed out to the two insurance policies that he had taken a year back. Till we started the discussion, he did not even know the name of the policies he had bought nor what kind of policies those were - whether it was a term plan, an endowment policy or a ULIP.
During our discussion, he realized that one of the policies (a ULIP) was not going to be of any use to him in the long-run since he needed the money after 4 years. His ‘advisor’ had told him that he could pay for 3 years and redeem the policy in the 4th year. What he did not tell him was that in the first 3 years almost 40-50% of his premium paid would be charged as fees (for his advisor) and that out of the Rs 3 lakh that he was going to invest over 3 years only Rs 1.50-1.80 lakh was going to be actually invested. (Don’t read me wrong, I am not against ULIPs. ULIPs, as investment products, are suitable over long horizon -- of over 10 years -- but absolutely unsuitable if your investment tenure is going to be short.)
To cut a long story short, he was actually paying a fee of Rs 1.50 lakh over a three year period. Since he was unaware that he actually shelled out that kind of a fee, he didn’t seem to mind it. And just because I asked him for a fee upfront, he was upset about it. (Incidentally, he would be paying me a similar fee for almost 10 years of unbiased advice, for a host of financial products, not just insurance).
Isn’t it better to know upfront the fee you are paying for getting unbiased advice, as compared to paying a huge fee and not having a clue about it? The ‘free’ advice feeling is actually just a misconception. The reality is far divorced from that. As we all know – ‘there are no free lunches’ in life.
Why hesitate in paying up for financial advice? After all, the financial planner is spending considerable time with you to understand your needs, your lifestyle and a host of other parameters in trying to help achieve your financial dreams. He/she is sharing his/her knowledge and expertise.
It’s better to know what you are paying for. If you don’t, you too may get mislead and will have to pay for it quite dearly (both in terms of cash outflow and a wrong product). And you won’t even realize it…till it’s all too late.
Saturday, 14 June 2008
An introduction to financial planning
Here’s a lowdown on financial planning and how it can help you lead a life of your dreams.
Welcome to my first blog. Let me begin by introducing myself, my firm - Knowledge Partners - and our philosophy. I am an Associate Financial Planner and have also done my PGCBM from XLRI, Jamshedpur. In 2005, I moved to Gurgaon after spending 14 years in equity research, media and marketing at various firms in Bombay & Calcutta. Numbers always intrigued me. So did various financial instruments. But I also saw how people all around me were getting mislead by so-called ‘advisors’ and ‘agents’. While everyone wants a financially secure future, most people were either unaware or confused as to where and how to start. The result - decisions got indefinitely postponed; or wrong products were bought based on misinformation.
That’s what reinforced my decision to start my own financial advisory. And in 2006, Knowledge Partners took shape.
Financial Planning, as a concept, is still quite new to India. Traditionally, financial advice in Indian homes (invariably) comes from a family elder - who is, more often than not, heavily under influence of an insurance agent or a family friend.
Often, agents and advisors give you an improper advice so that they can make a quick buck. They often sell you a insurance policy or a mutual fund that gives them the highest commission or brokerage.
At Knowledge Partners, we believe in having a long-term relationship with all our clients and advise them to buy financial products they actually need. Our endeavor is to be a partner of our clients till the time they achieve their financial goals.
Have you planned your financial future?
You can get answers to this question by answering these simple questions:
· Have you started planning for your retirement?
· Have you wondering how to plan for retirement, children’s education and marriage in the face of rising inflation?
· Do numbers boggle you?
· Are your savings fetching you sufficient returns?
· Have you ever thought as to how many years you can maintain your current lifestyle if you were to take a sabbatical / retire?
· Is your money lying ‘idle’ in your savings/current bank account – would you not like to earn more than the meager 3.5%?
· Most of us limit our investments to tax saving instruments – or the amount that is to be covered under section 80C. But is that enough to meet all your future expenses? Will that create a sufficient corpus?
If these are some of the questions that are bogging you down, Knowledge Partners could be of help. We are a Gurgaon-based firm offering fee-based services in the area of financial planning having a clientèle in the Delhi-NCR region, primarily, and also in Bombay and Calcutta.
How do we go about it?
Our investment process begins with you. We perform a careful assessment of your individual needs and aspirations, and our evaluation is based on:
· Goals and objectives,
· Investment time horizon,
· Liquidity needs,
· Desired rate of return, and
· Tolerance for risk
The result is a complete understanding of your personal profile that will serve as the foundation for defining a long-term investment strategy tailored to your specific needs and preferences and not just catering to your ‘tax planning’ requirements u/s 80C.
Our philosophy is designed to achieve long-term investment goals, and is based on the following core principles:
1. Identify Your Unique Needs, Goals and Objectives
2. Build an Asset Allocation Roadmap
3. Formulate a Plan & Portfolio Selection
4. Continuous Portfolio Monitoring
We educate our clients so that with time they are more focused to achieve their goals and objectives with the help of their financial advisor, rather than by relying blindly on the latter.
Our fee-based approach is designed to eliminate conflicts of interest and results in unbiased and honest advice.
Money isn’t everything, but having control and confidence about how you are managing it can allow you to concentrate on other things like your family, your career, and your future. We believe that all your dreams are achievable and we look to partnering you so that you can live your dreams!
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