Tag: Financial Planning

29 Jun 2017
Kitna Mileage deti hai- Financial Planning, humfauji.in

Kitna Mileage deti hai?

Sir, I’ve told him that he has a 80% Debt and 20% Equity portfolio where safety has been given more importance as this is his retirement corpus, but he insists that he won’t accept anything less than 15% annualized returns since the markets are now booming!” -I could make out my hapless young financial planner was at her wits end.

“Sanjeev, what is this yaar? My overall portfolio returns are 25% CAGR (Compounded Annualized Growth Rate) but this one stupid fund is stuck at 17% and my planner is just doing nothing about it!”, ranted one of our aggressive customer.

One of our bigger investor has moved almost 50% of his life’s savings to a well-known Portfolio Management Service (PMS) because his initial ‘test-drive’with their 100% equity portfolio produced great results in these rising markets.

We routinely get calls from prospective clients who ‘haggle’ with us on ‘returns’ – if they invest with us, will we surely get them 15-20-25% returns? If not, then why not? During such conversations, sometimes we feel as if we’re in the business of manufacturing returns rather than managing portfolios, helping meet customers’ future financial goals and keeping them away from harm’s way!

So, what am I trying to bring out here by these examples? ‘Safety’ and ‘Returns’ are two ends of the investment scale. The twain shall never meet!! Your own personal investment slider has to be placed on that scale in such a manner that it meets your risk comfort level, takes you solidly towards meeting your future requirements (‘financial goals’) comfortably and of course, takes care of the market conditions – now and in anticipated future. If you want more safety, you have to move away from returns expectations while desire for more returns will always compromise safety. This is a universal rule and never gets flouted.

The way we do not buy a car just because it gives high mileage disregarding all other factors, we do not need to only look at best returns all the time disregarding its suitability to us, risks taken by it and whether it enables us to get the money when we actually need it.

Most of us know this but we still keep hoping to hit upon that magic formula, that magic investment avenue, which will get us the ‘highest returns with highest safety’. Many unscrupulous elements, sensing this innate human desire, have made their fast bucks on it – the Hofflands, Sterling Tree Magnums, Ponzis and sms-stock-tipping schemes know this weakness and routinely surface to earn their millions and billions. We all hear and read about them, sympathize with the conned ones, bless ourselves that we’ve not fallen for such schemes and then go about looking for such quick returns schemes ourselves! Somewhere we assume that ‘high risk, high returns’ actually implies that if you take high returns, you get assured high returns!!

Herein comes a very basic question – What is the actual aim of investing? Is it to get highest possible returns at any cost and risk, Or is it to make our money grow so that we can meet our future requirements of life, give our children the best education, give our families a great standard of living, and have the money available in the right quantity when we need it? We can already sense you nodding to the latter. If that actually were so, why not make that as the start and end point of our investment process? Why not plan out how much we need for our future big-ticket expenses, what are the best investment avenues to accomplish each one of those ‘financial goals’, how to go about it so that we reach that end point without much risks and how to remain tax-efficient during the whole journey? Believe us, the investment journey will be more pleasurable, more sure-footed, and lead to far less sleepless nights if you change your focus from ‘Kitna Mileage Deti Hai’ to ‘Meeting my financial goals in life’.

And that’s where the concept of financial planning comes in – but then that’s a separate topic by itself, of which a large amount of knowledge is available on our Blog humfauji.in.

And for heaven’s sake, do not fall for those predictions of Sensex or stock levels – such predictions keep coming all the time and they sometimes even turn out to be true. But then, even a dead clock shows correct time twice a day!

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26 Apr 2017
Are you helping your Earning Child manage the money Wisely

Are you helping your Earning Child manage the money Wisely?

There is no doubt that accumulation of substantial wealth generally occurs only over a sustained period of time. The best way to do it is the slow and steady manner in which your earning child needs to go the disciplined way and accumulate the drops that will make the mighty ocean. All this is, however, common knowledge – no points for guessing the same. But the point where the script differs is what financial instruments to save in? Believe it or not, it has been statistically proven time and again that it is not the timing of investments but the asset allocation – ie, what all do you invest in and in what proportion – which matters over a long period of time. Wrong choice of instruments will do irreparable damage to the wealth creation efforts while incorrect timings can easily be handled by regular investments in a disciplined manner over a long period of time to achieve rupee-cost averaging. Fixed interest instruments like bank / company FDs achieve this averaging by the method of ‘laddering’ where new FDs are bought every year and maturing older FDs are re-invested to create the ‘ladder’ effect. In case of equity instruments like the equity-diversified mutual funds, Systematic Investment Plans (SIPs) achieve the same effect of riding out the market fluctuations in the same manner as a flywheel rides out the engine torque variations in an automobile.

However, still the original question of correct asset allocation remains unanswered.

Generally it is seen that, at least in the initial earning years of an earning child, he/she is heavily dependent and influenced by his/her parents’ (generally father’s) pattern of investment. If the influencing parent is conservative and only goes in for safety of capital like in provident fund, bank FDs, insurance policies and NSCs, the child also thinks on similar lines. The fact that these fixed interest instruments are almost never able to keep up with the monster of inflation, and consequently provide negative inflation-adjusted real rates of return, is lost sight of. Thus, while the money may seem to be growing in these instruments in absolute terms, its purchasing power (or effective worth) is being lost at a rate equal to the difference between inflation and tax-adjusted returns of the investment instrument. To take an example – if a bank FD gives 9% rate of interest and the child is in 20% tax-bracket (ie earning between Rs 5 – 10 Lakhs a year), his/her actual returns on the FD are 9% minus 1.8% tax (20% of 9%), that is only 7.2% per year. With the consumer inflation stubbornly at around 9.5% today, the child’s money’s worth is being lost at the rate of 2.3% per year on a cumulative basis! The returns are likely to get further pruned in the current era of high-inflation and falling-interest-rates as this 2.3% gap widens. If the same money was to be invested in SIPs of equity-diversified mutual funds, the long-term returns of the same would be 12% per annum on a conservative basis while being fully tax-exempt as per the current tax laws. Adjusted against inflation, it is likely to give 3% positive cumulative yearly returns on a conservative basis. Of course, one has to keep faith in the long-term returns potential of equity while not getting unnerved by the short-term equity-typical fluctuations.

So finally, how should you, as a financially savvy parent, guide your earning child who has many years of savings potential with him/her? He/she should:-

  1. Save a small amount regularly in fixed-income instruments (like PPF or EPF) for safety and certainty of returns.
  2. Take a term insurance plan for getting a substantial amount of insurance (say, typically Rs 1 Crore or so) at a premium which will be meagre at his/her young age.
  3. Take a medical insurance preferably with life-time renewability, for an adequate amount unless he/she has the surety of employer-provided medical cover like in a Govt job.
  4. Go in for maximum amount of SIPs in equity-diversified mutual funds (MFs) on a monthly basis with long-term in mind. Investment in MFs should made through a carefully constructed balanced portfolio with regular monitoring rather than as stand-alone MFs bought just because they are individually performing the best today.
  5. At some point in future, typically 5-10 years after the child starts earning, you can tell him/her to go in for a house/flat using a home loan with EMIs on a regular step-up basis so that the loan repayment increases as the child’s income increases.

An investment pattern as above is likely to provide the child a substantial accumulation of wealth for future while still giving enough liquidity for any requirements in between.

And what should you tell him/her to avoid? Insurance as an investment vehicle; more than 20% of the regular savings potential into fixed income financial instruments; short-term trading in equity, commodities, futures & options etc unless the son/daughter really understands the same; and lastly, credit card debts which are not repayable in the very next payment cycle.

I am sure your son/daughter will be ever-grateful to you for this intelligent hand-holding and on your part, you would also not have to worry whether you guided him/her well on the financial front as well as you did on other aspects of life.


With regards,

Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM

CEO, Hum Fauji InitiativesTM,
Your Long-term Partner for Wealth Creation
E-511, 2nd Floor, Ramphal Chowk, Palam Extn, Sector 7, Dwarka, New Delhi-110077    |   Tele: 9999 022 033, 011 – 4054 5977, 011 – 4214 7236  |  humfauji.in

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02 Apr 2015
Failing to Plan is Planning to Fail

Failing to Plan is Planning to Fail

To say that we should plan our finances well is just to state the obvious. However, in spite of this knowledge, most of us do not put in the small amount of effort required to plan for the financial future of self and our families – how many people do you know who have bought a house without a home loan or sent their children for expensive studies without education loan by simply saving in advance? We would plan a weekend recreational trip much more than most of our major financial events of life.

Probably it is the anticipated drudgery of planning or the fear of confronting requirement of large financial sums that make us postpone any sort of long-term planning, till it is right in front of us and can no longer be postponed. However, if we put in just a little bit of effort on a couple of lazy Sundays, we would be able to see the merits of planning for our life events in advance. See the table below which illustrates that if we plan in advance, we would not only save a lot of money but be more confident to face the big event:-

Financial Goal When to occur Present cost Future cost SIP required to fund the amount Alternate funding if not saved regularly Money saved vis-a-vis loan, even after tax benefits if any (30% tax bracket assumed)
Child’s Post Graduation 10 years later 10 Lakhs (5 Lakhs per year for 2 years) Rs 25.93 Lakhs @ 10% per year  of education inflation Rs 12,977 per month for 10 years Education loan of Rs 25.93 Lakhs @ 12% with EMI Rs 36,288 for 10 years Rs 8.75 Lakhs (Education loan of Rs 25.93 Lakhs @ 12% with EMI Rs 36,288 for 10 years)
Own house 10 years later Rs 70 Lakhs (Rs 20 Lakhs available now) 181.56 Lakhs @ 10% per year  of property inflation Rs 59,762 per month for 10 years Home loan of balance @ 9% with EMI of Rs 1.21 Lakhs for 15 years Rs 69.03 Lakhs (Home loan of balance @ 9% with EMI of Rs 1.21 Lakhs for 15 years)
Daughter’s Marriage 10 years later Rs 20 Lakhs Rs 35.81 Lakhs @ 6% per year of marriage inflation Rs 16,138 per month for 10 years Personal loan of Rs 35.81 Lakhs @13% with EMI of Rs 53,468 for 10 years Rs 28.35 Lakhs(Personal loan of Rs 35.81 Lakhs @13% with EMI of Rs 53,468 for 10 years)

 

In the table above, we have assumed that your money in equity mutual fund Systematic Investment Plan (SIP) will grow at 12% per annum. Remember that in equity MFs, such returns beyond just one year of investment are fully tax-free. Thus, by a very preliminary planning in advance, choosing the right course of action and executing it, you save on large amount of interest. In addition, by systematically planning it, you see the amount getting accumulated and gradually gain confidence about meeting the commitment, thus reducing your anxiety and stress about the financial need.

Inherent in our above analysis is the need for a change of attitude. Over a period of time, we have taken it as a fait accompli that on occurrence of a big financial event, we will go ahead and take a loan and pay EMIs for a long period. Thus we commit ourselves to a stressful life leading up to the event as we do not have the money ready and thereafter, the stress of the EMIs for a long period due to the loan taken. It is time we reversed the cycle by planning in advance and accumulating money through a financial instrument we are comfortable with. Do you know that if you take a home loan of Rs 50 Lakhs for 15 years at 10.15% rate of interest, you pay a total interest of Rs 47.26 Lakhs, thus actually paying back Rs 97.26 Lakhs? This inflates the real cost of your house. Even if you get the highest tax benefit (of 30%) on this loanon interest, you still pay Rs 33.08 Lakh as net interest on this loan. Probably, it is time you changed your way of meeting your financial goals by planning in advance so that you plan to succeed rather than plan to fail.

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06 Feb 2014
Involving your better half in the financial planning- humfauji initiative

Involving your better half in the financial planning.

When Wing Commander AK Singh (name changed), a serving Air Force officer, approached us for preparing his financial plan, it was clear to us that his expectations of sending two children to an expensive boarding school in the next three years while still in the process of acquiring a flat for his family, two office spaces for investment, paying for eight insurance policies with yearly premium of Rs 2.22 Lakhs and still planning to take VRS four years later, all from his Govt salary earnings, were not realistic. Fortunately, his wife was associated with the financial planning process right from the beginning and was instrumental in moderating the expectations. She had her reservations about many of the goals they were pursuing but was keen herself too about the boarding school for children.

Their financials did not support their requirements. Their household expenses were high, there was large outgo into insurance products not suitable for them, monthly savings were almost entirely into fixed income products which were not tax and inflation beating, and net monthly cashflow was negative. However, since both of them were deeply committed to getting an implementable roadmap made for their lifetime, it was much easier for us to tone down their expectations, get them to offload unsuitable products they had subscribed to, and rework correct priorities for their financial goals. In fact, making their financial plan was much easier for us than for many other families with better financials due to the active involvement of both the husband and the wife in the process.

It is a common experience of all the Financial Planners that the first data inputs for preparing a financial plan for a family come almost entirely from the husband. Somehow, it is taken for granted that the wife should not involve herself in financial matters in a family. However, after we insist in involving the wife too, the results almost always are pleasantly surprising. Inputs like household expenses, listing out of the goals and their inter-se priorities, timeframes of financial goals, etc are more realistic. Many lofty goals listed earlier may go out of the window and new practical ones edge in.

Generally speaking, wives can provide many inputs that the husband would miss out on or just gloss over. While men are better at costing and long-term visualising, women know the preferences and requirements of children, and the family as a whole, much better. Thus, the two combined can vastly improve the financial plan inputs and planning process. Another advantage is that when both the partners become stake-holders in the plan, its execution and longevity is almost assured. Conversely, a financial plan made in isolation may face resistance from the spouse and have limited chances of success. When the plan is a team effort, both would ensure that there is healthy spending, savings goals are adhered to, financial products are jointly analysed before being subscribed to and uncalled for diversions are minimised. In fact, if the grown up children are also involved in such financial planning, they make the goal-achievement task of their parents much easier, apart from learning valuable financial lessons for their lifetime. There is another angle to it too. If unfortunately something happens to one of the spouse, the surviving members of the family would try and stick to the plan as far as possible not only because they are aware of its nitty-gritty and logic, but also due to emotional reasons. Thus the adage, that team effort is always better than a lone effort, holds true in financial planning in a family too very well.

 

Col (Retd) Sanjeev Govila, CFPCM,

CEO, Hum Fauji Initiatives

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10 Dec 2013
Early Start, Good Planning will result in Good Future Ahead- humfauji.in

Early Start, Good Planning will result in Good Future Ahead

Lt Col Jit Bahadur Chettri, a 39 year old Indian Army officer, is posted in a remote area in North-East India. His wife Ritu is also an officer in the Army Education Corps. They have two sons, Sparsh and Utkarsh, aged 9 and 7 years respectively. He represents that rare breed of officers who are financially well-aware of the need to meet their financial goals comfortably.

When he approached us for financial planning this year, they already had a well-diversified investment portfolio. With a gross monthly pay of around Rs 1.8 Lakhs and the family spread over two locations, they had kept their monthly expenses well under control at 48,000pm, including Rs 15,000pm support to their parents. Since they had already accumulated more than Rs 10 Lakhs combined in their DSOPF (Defence Services Officers’ Provident Fund), they had sensibly pared their further monthly contributions to Rs 12,000pm. They had Rs 8000pm of SIPs in equity mutual funds where they had accumulated Rs 5 Lakhs. They had a good real-estate portfolio worth Rs 180 Lakhs consisting of four residential houses and land, including a house where they finally wish to settle down. For this, they had home loans totalling Rs 68 Lakhs, with EMIs of Rs 66,000pm, which were being comfortably paid. We found his net worth to be a healthy Rs 130 Lakhs after considering all assets and liabilities. However, they had a multitude of insurance policies where they were paying premium of Rs 60,000 per year. There were some policies taken by their parents for them over a period of time of which they had no details.

In their SWOT analysis, we found their balanced exposure to debt, maintenance of some (though less) contingency funds, high net worth and investing in real estate at an early age, to be their Strengths. In Weaknesses, we listed purchase of expensive traditional insurance policies, over-exposure to real-estate, low exposure to equity instruments, non-monitoring of equity mutual funds and no structured planning for financial goals.

We listed Twelve life-time financial goals for them, relating to their children, retirement expenses (exceeding their projected Govt pensions), regular replacement of their two cars, regular vacations, purchase of commercial property and home renovation. As per our calculations, they were likely to meet almost all their goals except the last two. However, there was no cushion in these calculations and there were plenty of wastages, which if controlled, could easily give them a better financial life within the same resources. After extensive interaction with them, we prepared their financial plan with the following major course corrections:-

  • Comprehensive Will to be made for both at the earliest.
  • Three months worth of monthly expenses as contingency funds at all times.
  • Making two traditional insurance policies paid-up while surrendering a ULIP.
  • Taking online term insurance plan for Rs 30 Lakh for himself and Rs 10 Lakhs for wife.
  • After undertaking his Risk Profiling, suggestion to invest Rs 34,000pm through SIPs in a good mutual fund portfolio and to increase the contribution by 10% each year.
  • Purchase Gold upto 5% of his portfolio regularly.
  • Contribute regular amount to charity, online or offline.

Lt Col Chettri has started implementing all our suggestions very earnestly. He has already got a fresh mutual fund portfolio made, started the SIPs, and is in the process of sorting out his insurance policies. Other actions are also in various stages of implementations.

Col (Retd) Sanjeev Govila

CFPCM, CEO, Hum Fauji Initiatives

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