Teach MONEY LESSONS to your KIDS in Early Years

What is the most difficult thing for a parent? 

To say a “NO” to their child, especially when they make a sad face because you deny them from purchasing a new toy. 

As Kamlesh Pandey, a chartered accountant confesses, “I always took my daughter to buy her toys and I realised that my urge to splurge went beyond control as she tricked me into making impulsive gift purchases for her.”

One fine day, Kamlesh decided to take things in his hands and introduced his 4-year-old daughter to the “tried and tested technique”– a piggy bank. “My wife and I made regular contributions to the piggy bank,” he added.

His daughter was very excited about accumulating money in her piggy bank. Recently she asked Kamlesh to buy some pencils and he used her piggy bank money to buy it. His daughter’s face shrunk when the money in her kitty reduced. So she naturally started reducing her ad hoc demands for gifts since it ultimately ate into her piggy bank money.

It’s not that Kamlesh can’t afford to pamper his daughter with surprise gifts. His concern was that his daughter would never learn the value of money, which will impact her future financial health. 

Finance and kids don’t exactly go together. But as a parent the onus lies on you to teach mechanics of money-the fun way to your kids. Here’s how you can make a start:

1) Play Money

Buy a board game or there are several online games, which teach the art of money management. You can interact with children your children over a game of Monopoly, which mainly deals with rent payments, buying and selling of property. There are also sever online money games such as Financial Football-a financial quiz game, Countdown to Retirement and Ed's Bank-Managing your pocket money. They simplify the mechanics of money and impart financial wisdom to children in a lighter way.

2) Make them save for their gifts

If your kid asks for a bicycle make the kid save some pocket money every month and at least pay 5% of the purchase. What counts is the fact that you gave a goal to your kid and made him/her save for it. Then you can make your kid maintain an excel chart and show them how their savings grew over months to purchase that cycle.

3) Prioritising expenses

As mentioned in the above example, if the kid is saving to partly purchase his/her bicycle, it will inculcate a financial discipline in the kid and make him/her prioritise expenses. If the kid gets tempted and buys a game or a movie CD, he/she has to just wait longer till they save the necessary cash. 

4) Financial rewards for maintaining discipline

If you set a saving target for your kid and she reaches that target at the defined time then you can reward your child with a one-time cash bonus or a favourite gift. This will incentivise the kid to save even more. 

Habits learnt in childhood are seldom forgotten. If your kid masters these games and techniques in childhood, it’s unlikely that they will live beyond their means in their adulthood. 

So what are you going to teach your child today? 

Keep the RISK at BAY by DIVERSIFYING your PORTFOLIO

Diversification

“Don’t put all your eggs in one basket.” This is a well-known proverb, which best explains the concept of diversification in a financial portfolio. 

In simple words, diversification is a practice in which your money is spread among different investment options such as stocks, mutual funds, FDs, bonds, debt funds, real estate and gold. This doesn't refer to an exposure to different products but across different asset classes based on your risk appetite and future goals.

The process of diversification of portfolio to different asset classes significantly reduces the risk quotient of your portfolio.

For instance, if the stock market falls, the debt, gold and real-state component will cushion the impact of its losses. At the same time, you don’t avoid any potential gains from the stock market in future.

Thus your portfolio is well poised to absorb any fluctuations on your investment returns.

Hence even if you buy blue chip stocks, ensure you invest in different sectors. Large cap diversified mutual funds are another good example of diversification in which a fund manager picks up a basket of stocks of different large cap companies.

Benefit from "Rupee Cost Averaging" in volatile markets

Timing the market is the trickiest thing to do for any investor. It is virtually impossible for any investor or even a fund manager to buy a stock at the lowest price and sell the same at the highest price. This is why most financial advisors recommend investing in mutual funds through Systematic Investment Plan (SIP) to benefit from rupee cost averaging (RCA).

Through RCA, a fund manager uses your fixed amounts to buy mutual fund units at fixed points in time irrespective of the prevailing price. The frequency of purchase could be on a daily, monthly or even a quarterly basis. This approach ensures you buy more units when the price is lower and fewer units at higher prices. As a result, the cost per unit over a period of time averages out. Moreover, the risk of investing a lump sum amount in a mutual fund at a wrong time reduces significantly.

RCA works to your advantage if you hold the investment for a long period of time. It is also the best way to beat volatility in the stock market.

What is Lifestyle Inflation?

Lifestyle inflation indicates the rise in your lifestyle expenses, which is a function of rising costs and your rising disposable income. As your disposable income increases, you may develop some tastes and desire, which come at a cost. Eating at fine dine restaurants, playing golf, a foreign holiday, watching movies at multiplexes are some examples. This inflation is also triggered by plethora of options available for individuals especially in urban areas. For example, you would have been content to watch movies in an ordinary movie hall a few years ago. Cost of a movie ticket has jumped from Rs 50 in 1990’s to Rs 250. Now, the wholesale price index, from where the headline inflation is derived, does not include these costs. This is what you spend on maintaining a lifestyle that you desire; hence it is termed lifestyle inflation. Lifestyle inflation is not a published figure and it varies from individual to individual. 

Provide financially for Lifestyle Inflation

You have to financially provide for this inflation while planning for your future. One of the ways of doing it is by evaluating your expenses in the past 2-3 years. Identify a pattern by seeing how much more are you spending for a similar service today as compared to 2-3 years ago. It could be dining, salon, gym or even club memberships. Identify the lifestyle needs, which you can’t forgo and put a rough futuristic estimate against those expenses by adding an annual inflation of 8%. 

How does a "WEAK" GDP impact YOU?

Everybody is talking about a declining Gross Domestic Product (GDP) and its impact on the economy. In simple words, GDP indicates the financial health of a country. So if a GDP is declining, it means the financial health of the economy is deteriorating. 
GDP as a figure, encompasses agriculture, industrial output and services. 
The recent RBI policy stated that India’s GDP growth in the third quarter of 2012-13 was 4.5%, which was the weakest in the last 15 quarters. Moreover, the overall growth, has also decelerated to its slowest pace in a decade.
How does it impact you?
GDP is a strong indicator of future jobs prospects and salary hikes. Whenever GDP increases, the per capita income of the individual rises. Higher the GDP, better are the job prospects and salary hikes.
For example, in 2005-09, for example, he per capita income rose by 32% to Rs 26,000 as GDP was hovering at 8-9%.
With the dipping of GDP figures, it is time to safeguard your jobs, save money, curtail expenses and build a contingency fund. Never know when any emergency comes knocking!
Better Safe than Worry.

Its Tax Saving Time: Claim lesser known Deductions

Have you invested money under Section 80 CCG and saved more tax? This is the latest addition to the bouquet of tax saving products which is eligible for tax exemption effective this financial year. If you are earning an annual income of up to Rs 10 lakh and you are a "new retail investor",you have further scope to reduce tax by Rs 2500 to Rs 5000 by investing in the Rajiv Gandhi Equity Savings Scheme (RGESS) under this Section.

RGESS was launched at the union budget 2012-13. Under this scheme, you can avail a one-time tax deduction of 50% of the investment amount subject to certain conditions. Firstly, your annual income should be equal or lesser than Rs 10 lakh. Secondly you should a new retail investor. To qualify as a new retail investor, you should have opened a demat account on or after November 23, 2012. If your demat account was opened earlier, you should not have invested in stocks until the purchase of RGESS. This tax saving is over and above the Rs 1 lakh limit under Section 80 C. The maximum investment amount is capped at Rs 50,000.  If you fall in the 10% tax bracket (annual income of Rs 2 lakh to Rs 5 lakh) you can save up to Rs 2,500 on investing Rs 50,000. If you fall in the tax bracket of 20%, (Rs 5 lakh-10 lakh), the tax saving will be Rs 5,000. You can invest in stocks and securities, which are RGESS compliant, or in RGESS mutual fund schemes launched by various asset management companies (AMCs). It is better to opt for a RGESS mutual fund than buying a single stock from a risk perspective. If something goes wrong with an individual stock investor may lose some part of capital.  In case of a mutual fund, a fund manager chooses a variety of stock/securities on behalf of the investor after adequate research and analysis. Hence the risk gets diversified.

Gain from your health
The medical bills and healthcare expenses have gone through the roof. The health inflation which is hovering around 15%, is increasing faster than the headline inflation. However, you can combat the impact of the rising healthcare costs by buying a health insurance policy. You can claim a tax deduction of up to Rs 15,000 under Section 80 D. This tax benefit is available even if you cover your family members such as spouse, children and parents under the health policy. In fact, if either of your parents are 60 years and above,the tax deduction increases to Rs 20,000. If the premium amount is lower than Rs 15,000/Rs 20,000, you can use the balance  for a preventive health check up, which enjoys a tax deduction of Rs 5,000. If  you undergo a health check-up with any hospital or even a pathology lab, submit a photocopy of the bill along with other tax investment receipts to the employer. However, this tax deduction is available within the overall cap of Rs 15,000/20,000.  If you are already claiming full tax deduction under section 80D then you cannot claim additional tax benefit.
Similarly, if you or your family member incur an expenditure on treatment of specified disease such as AIDS, cancer, neurological diseases, etc, you can claim a tax deduction of up to Rs 40,000 or the actual expense whichever is lower. The limit is higher at Rs 60,000 in case of a senior citizen. The tax payer has to obtain a certificate from the doctor to claim the tax deduction. Also, if you have incurred expenditure for medical treatment of a disabled dependant, you can seek a tax deduction of up to Rs 50,000.
Lastly most companies offer a medical allowance of up to Rs 15,000 as a part of your salary, which is not taxable if you submit medical bills of that amount. You can submit medical bills and seek this allowance on a monthly/annual basis.


Cash in on your house
Most of us know that housing loan gives us a tax deduction of Rs 1.5 lakh per annum on interest repayments. Now, as per the Union Budget 2014 proposal, housing loan amount up to Rs 25 lakh can seek an additional tax deduction of Rs 1 lakh per annum.
However, the current tax deduction of Rs 1 5 lakh can double (to Rs 3 lakh per annum) if you have taken a joint housing loan with your spouse or parent subject to certain conditions. This is definitely not a bad considering that real estate prices are soaring throughout the country. Firstly you have to ensure that both of you are the co-owners of the property. Then the couple should ascertain their share of the loan. For example, if their share of the loan is in the ratio of 60:40 or 70:30, the tax benefits would be shared in that proportion. Ideally an individual in the higher tax bracket should opt for a higher ratio of the loan to save on more taxes. The repayment of principal component qualifies for tax deduction under the Rs 1 lakh limit of Section 80 C. Similarly, you can seek tax benefits up to Rs 1.5 lakh only on the interest repayments of second housing loan. However, the rental value of the second house will get added to your taxable income even if the house is lying vacant.
Similarly, not may of you know that any interest paid on home loan for reconstruction or repair of the self occupied "house property" qualifies for deduction of up to 30,000. This is subjected to the overall limit of Rs1,50,000.

Give charity and save taxes  
It pays to grow a heart. You can donate money by cash or cheque to any of pre-approved charitable institution and claim tax deduction of 50% or 100% under Section 80 G. Donations to certain charitable institutions such as Prime Minister's Relief Fund or National Defence Fund enjoy 100% deduction.

Ensure you claim every single deduction you are eligible and save maximum taxes. If you have already submitted your investment declaration with the employer, you still have not missed the bus. You can make these additional investments now and claim a refund.

Navigate the choppy markets in a disciplined manner

Don’t let the recent volatility in the stock market affect your equity investments. You should invest in stocks and mutual funds with a long-term goal of at least 5 years or more. Secondly you should adopt a disciplined approach such as a SIP especially since the equity markets have been volatile. A systematic investment will save you the effort of timing the market. SIP also ensures that you will buy the stocks/MF units at high prices as well as low prices, thereby lowering the average purchase price of the investment. Investors who discontinued their SIPs in the past 2 years would definitely feel the pinch as they missed an opportunity to gain from the last rally. Lastly equity investments beat inflation on a long-term basis.

Invest in FDs now before rates fall in future



As expected, the RBI has cut the repo rate by 0.25% in the policy review announced today. However, the cash reserve ratio (CRR) is kept unchanged.

Bankers have clearly said that the interest rates will not come down immediately despite the “widely expected” rate cut by the RBI. But that does not mean the rates will not come down in future. 

In yesterday's post we spoke about the Reserve Bank of India's monetary policy and it's impact on your money. And we mentioned that depositors also have a chance to mitigate the impact of a likely rate cut on deposits. Here is how you can save yourself from a likely dip in FD rates.

1) Factor in the re-investment risk
Even as the bankers don’t expect an immediate fall in interest rates, all macro economic factors indicate that the rates will go down in future. Hence, you should opt for a longer tenure fixed deposit if you are not clear about the time horizon for the investment. This will help you avert the “reinvestment risk”.

The term re-investment risk describes a situation in which an investor will have to settle for lower interest rates on FDs when their deposits come up for renewal.
For example, you may opt for a one year fixed deposit since the rates are 25 basis points higher than a fixed deposit of 1-3 years. But when you reinvest the money after 1 year, the deposit rates then may be much lower than the rates offered by banks and companies now.

Hence it certainly makes sense to invest in a long-term FD with a tenure of five years or more.

2) Split the money in multiple FDs
If breaking a FD in case of an emergency is a concern, you can split the money into 2-3 FDs of different tenures. You can keep a smaller amount in a 1 year FD and higher amounts in 3-5 year FDs. The logic is, in an event of emergency you can break one FD and pay a penalty or lose interest only on that amount. The other amount will be intact. That way you can combat the reinvestment risk and accumulate interest on a long tenure FD.

RBI Rate cut: How it affects you?

The Reserve Bank of India (RBI) will be announcing the monetary policy review on March 19th, Tuesday. It is widely expected that the central bank may cut the repo rate by 25 basis points as core inflation dropped below 4% in February. However, RBI has its own concerns about lowering the repo rates.

Every time the RBI cuts CRR or repo rates, there is a buzz in the system that lending rates and deposit rates will come down. In other words, these key rates, which are managed by the RBI have a direct impact on borrowers as well as depositors.

This is how these measures impact you.

What is Cash Reserve Ratio (CRR)?

Cash reserve ratio is a portion of deposits every bank has to keep with the RBI. This is a stipulation as per the section 42 (1) of the RBI Act 1934.

CRR cut and its impact

A cut in CRR infuses liquidity in the system. The last CRR cut injected around Rs 18,000 crore (Rs 180 billion) in the banking system. As a result, the bank has more money to lend out as against every rupee deposit they accept. The objective of CRR cut is to lower the interest rates. However, the downside is a CRR cut may trigger inflation. The current CRR is pegged at 4%.


What is Repo Rate?

Repo rate is the rate at which the RBI lends money to commercial banks. It is an overnight rate of interest that a bank pays for borrowing from the RBI.

Repo rate cut and its impact

A repo rate cut means the banks will be able to borrow at lower rates from RBI. As a result, the benefit of rate cut is likely to be passed on to the borrower. If the repo rate cut is coupled with CRR cut, it means the banks will have more money and cheaper money at their disposal.

This dual action of RBI is definitely a positive for borrowers as it is a strong signal for interest rates to come down further. So they can benefit from lower EMIs. However, it is not the best news for investors, as they have to brace lower rates on deposits.

What can depositors do to mitigate the impact of rate cuts? 

Read the blog tomorrow for further details…

Keep your financial portfolio in shipshape

A car has a long run when you review its mileage and service it every 3000 miles. The same logic applies to your financial portfolio.

Just investing your hard earned money in an instrument is not sufficient. You have to keep a track of its performance, compare it with its peers to ensure your portfolio is in good shape.

Need to review the portfolio

The need to review your portfolio can be triggered by personal or external circumstances.
For example, if there is a crash in any asset class where you have parked substantial funds, there may be a need to review it. Other reasons can be performance bonus, windfall gain or an increase in surplus funds because of a salary increment.

On the personal front, it can be marriage, parenthood or change in asset allocation because of a change in goals and age.

For example, you may have a high exposure to equity at an early age, as it helps you save for financial goals. You also have the risk appetite to deal with a portfolio that is skewed towards equity. The same strategy doesn’t apply when you touch 40. Your needs change and your responsibilities are bigger. Hence you have to balance the equity component with FDs, bonds, NCDs and insurance.

As a regular exercise, you should review your portfolio once in every quarter for investments of 1-3 years. For long-term investments, which can span from 5-10 years, an annual exercise will suffice.

Don’t act in haste

A review in portfolio doesn’t give you the leeway to make quick buy and sell decisions. For examples in your 20s and early 30s, asset allocation in your portfolio could be in the ratio of 70:30. You have to broadly maintain this ratio. However, you can alter the strategy for fresh incremental money.  This is because, investment strategy especially for long-term instruments is tailored to meet your milestones.

Secondly you should have some ballpark figure on how much you want to save by the end of a year and work towards it through your investments. Moreover, you should evaluate the performance of your entire financial portfolio, not just debt or equity. Lastly, don’t read too much into the daily movements of individual stocks or mutual funds and its impact on your portfolio. Getting the big picture right in terms of right asset allocation matters the most.

Invest the Right Way and Beat the inflation

The Reserve Bank of India is in a dilemma to whether to cut key rates when inflation is on the rise.

As per the recent data by the Central Statistics Office (CSO), the CPI (consumer price index) for February was 10.91% as against 10.79% a month ago. The spurt in CPI was fuelled by an annual rise in cereal prices (by 17.04%) in February. The pulses and products also shot up year-on year by 12.39. The spurt in CPI was imminent as food accounts for a larger share in the basket.

Inflation is a double-edged sword, as it pushes up the costs of essential products and services on one hand. On the other hand, it eats into the returns earned on your investments.

In simple words, inflation reflects the actual value of your money when compared between two periods of time. A movie ticket in the 1990s may have cost you Rs 50. Today a movie ticket will cost you at least Rs 200, this rise in price is partly because of inflation.

Inflation and Investments

On the saving side, inflation eats into the value of idle cash lying in your bank account.

Secondly you have to compute the real rate of return to assess the impact of inflation. To analyse the impact of inflation on your investments, you have to compute the future value after factoring in an inflation of 8-10%. This will give your accurate results on the actual return earned on investments.

Investments such as fixed deposits, PPF or NSC assure safe and fixed returns. At the same time, they are not capable of beating the inflation. For instance, the annual return on PPF is 8.8%. However, if the inflation rises at 9%, the real rate of return is negative. Hence you have to invest in real estate, gold, and equity, which are considered good hedges against inflation on a long-term basis.

Impact of inflation on retirement planning

In case of retirement planning, you should provide a certain mark-up at the planning phase itself. You have to do a certain loading on the numbers today to understand if the future value is sufficient to maintain your lifestyle.

If you spend around Rs 30,000 for monthly discretionary expenses, you will require a monthly pension of Rs 3 lakhs just to maintain your current lifestyle. Hence you have to factor in inflation at least 8-10% so that you save enough for your golden years.

To be or not to be......

The Indian stock markets seem to be in a dilemma. Should they follow the mood of the global markets which seem to be gushing with liquidity and chasing new highs or should they look at the not very rosy numbers and outlook coming out of corporate and government offices in India.
So we oscillate till we find direction and conviction. 

Take the SIP route to invest in Gold


Gold always glitters irrespective of its price levels. After a dip in gold prices, it has once again begun to look up now.

In India, gold prices depend on three factors. They are the demand- supply situation, global economic outlook and the foreign exchange rates.

In 2012, gold prices soared to Rs 3100 per gram in India as the rupee depreciated sharply against the dollar.

However, the high cost of gold has not deterred the demand for the yellow metal, as there are not too many investment options, which act as a good hedge against rising inflation. Hence you have hold at least 10% of your portfolio in gold investments.

The more important question, however, is which is the best form of investing in gold?

Go for Virtual Gold

Gold jewellery cannot be considered as an investment. It has a certain emotional quotient and people seldom sell jewellery to earn a return on their investment. Alternatively, you can consider coins and bars but they too come with certain disadvantages.

Coins and bars require storage, which comes at an extra cost. There is also a cause of concern because of theft and loss of gold. Lastly, physical gold runs the risk of impurity unless you buy it from a reputed jeweller or a bank. There is no impurity risk involved in gold ETF. You just need to open a demat account for buying Gold ETF.

Gold ETFs invest in 99.5 per cent purity gold and you have the option of buying small units of gold ETF. In terms of value, one unit equals 1 gram of physical gold. These ETFs are listed and traded on stock exchanges like any scrip of the company. This makes it very convenient to buy and sell ETF unlike physical gold.

Although Gold ETFs charge an annual fee, they are more tax efficient than physical gold, as they don’t get added to the taxable wealth of the investor.

Take the SIP Route

If you don’t have any allocation in gold, then you should build it over a period of time.
For this, you can enter the market through SIP route. This will lower the average purchase price of investment.

For example, if you had bought 2 grams of gold per month from 1991-2011, you would have accumulated around 504 grams of gold by investing around Rs 3.9 lakh. But the value of the accumulated gold holdings is around Rs 13.30 lakh at prevailing price.

Apart from benefiting from lower average price, you will not encounter any cash flow issues if you invest in gold in a staggered manner.

SECURE YOUR FAMILY IN EVERY WAY ::

Protecting the loved ones has always been a priority for a woman. Be it cooking the right food, keeping the house spic and span or keeping a first aid box handy, the protective maternal instinct keeps ticking all the time. But increasingly protection of family members is also gaining a financial dimension as more and more women are shouldering financial responsibilities either with their spouse or parents. And the best form of financial protection is Insurance.

Insurance becomes a must as you plunge into big commitments such as purchase of a house, marriage, parenthood or supporting dependent parents. However, these responsibilities shouldn’t stop you from continuing your investments, which is a life-long exercise. Hence the strategy is to accumulate wealth with a hint of protection. This will take care of your family’s needs in your absence.


WHAT YOU CAN CONSIDER::
Your portfolio should have the right balance of debt and equity investments along with the right protection plan to safeguard any unforeseen eventualities.
Buy an online term insurance, which is at least 40% cheaper than offline policies. It is the best way to secure your family’s financial needs. A 30-year term cover of Rs 1 crore costs around Rs 11,000 for a 30-year-old individual.
This term cover should at least partly cover your family’s financial needs and loan repayments in your absence.

You can buy an individual health cover or a family floater health insurance to cover unexpected medical emergencies. A group medical cover with employer may not be sufficient as health inflation continues to grow and is now around 15%.

Visit www.hdfcsec.com for more information