Don't underestimate the FINANCIAL NEEDS of your child

Bringing up a child today is no child’s play especially when it comes to financillay planning for their secured future. The school fees are growing by at least 10% year-on-year because of rising Consumer Price Index (CPI). So much so that fee structures of some premier schools resemble that of B-schools.

This just refers to the tuition fees. Then, there are other expenses to be taken into account — books, uniforms, etc. The co-curricular activities and creative classes are additional top ups, which jack up the total fund requirement.

But as parent, you don’t want to leave any stone unturned when it comes to preparing for this Herculean task of fulfilling your child’s dreams and needs.

Here's how you can brace yourself to deal with the periodic outgo without straining your household finances.

Choose the right investment

If you require funds in the short-term (1-3 years), you can consider investing in fixed deposits or FMPs. Once you pay the fees for one or two years, you will get an indication of the actual required amount.

Then you can build a buffer is needed for back-up expenses.

For long-term needs, you can do SIPs in equity mutual funds and invest in stocks, derivatives. Diversified index fund is another good bet for funding your child's education.

Add on costs to education

All work, No Play makes Jack a dull boy. The schools have taken this proverb literally as they all treat extra curricular activities on par with academia. This only means you have to earmark some funds for such activities, which include music, dance, abacus, art, sport etc. Every school usually gives out a projected expenses statement, which can help you plan your finances better. Likewise, summer camps, too, entail substantial costs. All this should be factored in while estimating educational expense. You can look at setting aside their annual bonuses in a liquid fund to meet such expenses.

Build an Education fund for Higher Education

To start with, work out some projections based on the child's age, current cost of education and the likely inflation rate.

Once you arrive at the ballpark figure, you can start making small and steady contributions to this fund. This will add up to a sizeable corpus over a period of 18 years when you child steps into higher education.

You can start drawing funds from this kitty when the need arises. You don't have to resort to the conventional practice of breaking FDs or liquidating other investments made for a different purpose. Typically, financial planners encourage couples to financially provide till the child becomes financially independent.

Save Today to Secure a Happy & Comfortable Tomorrow

What is your idea of retirement?

Ideally retirement is all about getting to do things you have always wanted to. It could be going on a long holiday, pursuing a hobby/sport or just pampering your family with gifts.

The idea is to a live a comfortable life after 60 because at this age you neither have to report to work at 9 am or pay 50-60% of your salary towards housing and car loan.

You feel you have fulfilled all your responsibilities as a child, spouse and father. Hence this is your time to get more out of your life.

This only means your financial needs will not reduce even as you may not earn a pension post retirement. Even if you want to maintain the present standard of living, you have to start saving today for a comfortable tomorrow.

Need for Planning

This can be explained with a simple example. If you are spending Rs 30,000 for your monthly expenses, you will be spending around Rs 2.6 lakh per month assuming the inflation grows at 10%.

On one hand you will be spending more (in monetary terms) for your monthly expenses, on the other hand, you will not be earning a salary to foot these expenses. Many companies don’t even offer pension benefits post retirement. Hence the onus lies on you to build a retirement kitty to enjoy your golden years.

Start Early

The biggest challenge in retirement planning is to build a basket of investments that fights inflation, volatility and uncertainty. This can get tricky as the saving tenure for retirement planning is anywhere between 15 to 30 years depending on when you start saving.

Ideally an individual should start early to benefit from compounding effect. For example, if you save Rs 2000 per month for a period of 30 years, you will accumulate a corpus of over Rs 29 lakh at 8% yield. If the saving tenure reduced to 20 years, the size of the corpus will be Rs 11.78 lakhs and will further shrink to Rs 6.9 lakhs if the tenure is 15 years.

In case of compounding effect, the value multiplies because of the reinvestment of assets. At one stage, the returns are much higher more because of the reinvestment of the asset and not because of your monthly contribution.





Design a dynamic Plan

In early years, you also have the leeway to invest in high risk and high return products such as equity, which have the potential to beat inflation over a period of time. Asset classes such as Equity, Real Estate and Gold are known to offer good inflation adjusted returns.
The asset allocation is skewed towards equity in your 20s and early 30s because of higher risk appetite. At this stage you can buy stocks, mutual funds and derivatives and stay invested for the longest period of time. If you stay put for long term, temporary fluctuations in the equity market do not affect your portfolio, as it would see several such cycles over span of 15 years or more. As you grow older, less riskier instruments such as FDs, bonds, NCDs are added to your portfolio. Hence the investment mix of your portfolio has to change based on your age, goals and other financial responsibilities.

Reaping Rewards
A systematic draw down plan from your retirement kitty is as integral as your savings strategy. Giving the increase in longevity of life because of medical advancements, an individual is expected to live an average of 20-25 years of retired life. This means your retirement kitty has to be frugally utilised over a period of time.

Smart Tips:

1) Save 10% of your salary towards retirement kitty at least from the age of 30. Earlier the better.
2) Step up your contribution to retirement kitty. Allocate 40-50% of your annual hike towards savings.
3) Transfer your PF account if you switch jobs. Don’t dip into your PF kitty before retirement.
4) Like a systematic saving plan, have a systematic draw down plan from your retirement kitty

How does a High CAD IMPACT You?

Rising Current Account Deficit and its IMPACT

Recently, there have been a lot of news regarding bloating of India’s CAD (current account deficit) at 6.7% of GDP. This does not augur well for the Indian economy. A high CAD means that imports into India are far higher than its exports, making India a net debtor to the rest of the world.

How does a high CAD affect you?
A high CAD will weaken the rupee even more as compared to the US dollar. This means you pay much for studying abroad. If you are even partly funding yours or a family members degree in the US, you will realise you are paying at least 20% more on tuition fees and other living expenses since rupee as depreciated as against the US dollar.

Also, a foreign holiday will weigh much more on your pocket because of the currency conversion, as every dollar will require spending more rupee funds. A high CAD will also cast a bleak outlook on equities, which may lead to volatility in the stock market. Lastly, if a strong macro economic fundamental such as CAD is high, RBI cannot aggressively cut repo rates, which is not a good news for the borrower who is already reeling under the pressure of high EMIs and a higher cost of living.

5 Golden Rules of Portfolio Management for The New Year

The new financial year has begun followed by several regional new years such as Gudipadwa Ugadi and Cheti Chand, which was celebrated on April 11 and 12.

Over the weekend, people of Tamilnadu and Kerala will celebrate Puthandu and Vishu. On the same day-April 14-Punjabis also celebrate Vaisakhi, which is the New Year based on their regional calendar.

The New Year is all about starting out with optimism and positivity. This year, take a step forward and get your portfolio in order. Portfolio management is all about getting the right asset allocation, monitoring and rebalancing it.

Here are 5 golden rules you should adopt in managing your portfolio.

Take stock of your portfolio 
Get a complete idea of how your money trail-how much save and invest, and the returns from each of your investments. You can maintain an excel file of your financial statements which can come in handy if you lose any important document. Even many financial portfolios and leading brokerage houses have portfolio trackers which will give you a snapshot of your investment portfolio, it size and performance. This will be the first step to plan for your future financial goals.

Review your portfolio
The need to review your portfolio can be triggered by personal or external circumstances.
For example, if any asset class such as gold, equity or real estate witnesses volatility and you have parked substantial funds, there may be a need to review it. On the personal front, it can be marriage, parenthood or change in asset allocation because of a change in goals and age.
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.

The Balancing Act
Regular portfolio rebalancing ensures appropriate asset allocation across debt,  equity  and other asset classes so  that  investment objectives can be realised.
Based on the review of your portfolio may require to rebalance it to restore the equity-debt ratio in your portfolio. This can be a function of external circumstances or some change of events in your life.
As mentioned above, there is a constant need to rebalance the portfolio on the basis of your age.

Diversify
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.
The process of diversification of portfolio to different asset classes significantly reduces the risk quotient of your portfolio.
Hence even if you buy blue chip stocks, ensure you invest in different sectors to avoid any risk related to a specific sector.
In case of mutual funds, the components in a descending proportion would be large cap, mid cap, index funds and small cap funds. Financial advisors recommend 60-70% of an investor's mutual fund investment should comprise of large cap diversified equity schemes. 30% of the investment portfolio which can also be referred, as the satellite portfolio should constitute mid cap funds. "20-30% of your core portfolio should be index funds, 30% should comprise of actively diversified funds.

Keep a close family member in the loop 
Last but not the least; maintain a hand-over book either in physical or electronic form, which can come in handy in your absence. You should actively involve a close and trustworthy family member in your investments who can take over your investments if something were to happen to you.

Fuel and Cooking Gas prices got cheaper

Impact of Fall in Crude Oil Prices

Petrol price was recently cut by 85 paise per litre, the second reduction in two weeks. On March 16, 2013, petrol price was slashed by Rs 2 per litre.

After including VAT, price of petrol in Delhi was down by Rs 1.02 per litre to Rs 67.29.

In Mumbai, now petrol costs Rs 1.07 lesser at Rs 74.14 per litre, 74.72 at Kolkata and Rs 70.34 a litre in Chennai.

The price of non-subsidised cooking gas (LPG) is also cut by Rs 3 a cylinder.

All these price cuts have been attributed to fall in international crude oil prices.

Thus international crude oil price, as a macro-economic indicator, has a direct impact on you as the price of petrol is purely market-determined now. Hence whenever, crude oil price increases, it will increase the cost of petrol and cooking gas and vice versa.

Apart from this, India imports 70% of its crude oil requirement, which includes industrial use as well as personal consumption. Hence, any change in these prices could push up allied costs.

Hence whenever crude oil prices rise globally, it could also spur the inflationary pressures, which would push up overall cost of living.

            

5 Resolutions for this New Financial Year

The new financial year has begun and few states will gear up in the coming week to celebrate New Year based on their regional calendar.

The New Year is all about starting out with optimism and positivity. People buy gold, book a house by paying a token amount or purchase any asset as they consider this day to be auspicious.

This year, take a step forward and get your finances in shape. Keeping a healthy personal finance statement is all about sizeable saving, right investing and smart spending.

Here are some resolutions you can consider in this New Year.

1) Make your balance sheet
Get a complete idea of how your money trail-how much you earn, save, invest and spend. This should cover all your income sources such as salary, investments rental income etc. You also list down all the loans and interest payments to each of these loans. This will give an exact idea of where you stand financially. On the asset side, you should mention you investments in equities FDs, gold and insurance. This will be the first step to plan for your future financial goals.

2) Invest more 
More the better, especially when it comes to investments. When you lower your trivial expenses, you have more cash to invest. Ideally you should be investing at least 30% of your take home salary on a monthly basis. It can be higher at 60% in early years of your career especially if you don’t have a housing loan or other financial commitments. You will build a bigger corpus due to compounding effect.
To start with, set a savings goal this year. Then you can monitor your performance on a monthly basis to see if you can achieve it.

3) Plan your taxes
Tax planning cannot work in isolation and ideally should not be a last minute exercise. It has to be in line with your overall financial planning. While making any tax saving investment, you should compare options based on returns, liquidity, tenure of investment, risks and more importantly your requirement other than tax benefits. You can consider a SIP in ELSS or make monthly contributions to PPF, EPF or even NPS. Idea is to stagger your tax related investments so that you can avoid cashflow issues and make financially sensible investments.

4) Pay off expensive debt
It is always tempting to pay off the housing loan whenever you receive a windfall or some bonus especially with the abolition of pre-payment penalty. This will set you free from earmarking a large chunk of your salary to housing loan EMIs. But paying off other expensive debt such as credit card, which charges an annual interest rate of 40% makes better financial sense.

Even if you are paying 11% your effective rate is much lower as the interest rate is calculated on daily reducing balance and you get to save tax as well. Secondly if the you prepay in the last few years of the loan, the saving on interest outgo is not that high as the interest component of the EMI is repaid in the first few years of the home loan.

5) Build a contingency fund
Better save than worry. Unexpected hospitalisation or even financial emergencies come knocking at a time when you least expect it. Hence it is better to save 10% of your monthly income in investments such as Liquid funds, short-tem FDs, which can be easily liquidated. Or you just earmark a part of your bonus in any instrument, which comes with an easy exit clause.
Ideally the size of your contingency fund should be equal to 5 months of your take home salary.

It is time to walk the talk now. On account of the New Year, we wish you a financially healthy and wealthy life.

Growth vs Dividend: Which option to pick for Mutual Fund investments?

Should I choose growth option or dividend option in mutual funds is a question that always pops in every investor’s mind.

At the outset, it has to be clarified that the mutual fund, fund manager, objective of the scheme as well as the basket of stocks/securities remains the  same under both the options.

What varies is the the net asset value (NAV) of the mutual fund. Under dividend option, NAV of the mutual fund is usually lower than that of the growth option.

Secondly, in case of growth option, you will not realise any monetary gains until you sell the units. However, in case of dividend option, every asset management company (AMC) declares a dividend pay out based on the performance of the scheme. So you earn some monetary return even as you continue to hold the investment.

As an investor, what should be your pick? That depends on the time horizon of your investment.

Choose Growth Option for long-term investments

For equity mutual funds, financial advisors recommend growth option as you may benefit from the  compounding effect, assuming you stay invested for long-term.

The power of compounding refers to process of earning returns on reinvestment of assets, which have already generated returns. This means the asset will be generating returns on an asset’s reinvested earnings.

So, the earlier you start investing and longer you invest, the asset has a potential to generate a higher return on the investment amount. In fact at a stage, the growth in investment is higher, more because of the compounding effect than the size of the investment.

Hence you should opt for growth option for equity mutual funds for long term investments

Dividend options are tax friendly for short-term investments

If you invest in debt mutual funds for short term needs (less than a year), you can consider dividend option or dividend re-investment option as dividends are not taxable in your hands.

Under the growth option, the returns will be taxed as short term capital gains and you will be taxed as per your income tax slab rate.

Understand the stock's REAL VALUE before buying it

Book Value per Share:

Book value per share basically tells us the worth of each share. If you buy a share at Rs 100 and its book value is Rs 120, then the share is considered a value-buy. 

In financial jargon, book value per share is the value of total assets divided by total number of outstanding shares in the market 

Financial Analysts usually compare the book value per share with its market price for fundamental analysis of shares.

If the market price of the stock is lower than the book value, it implies that the share is undervalued. However, if you plan to invest in one such stock then you should understand why the market price of share is lesser than the book value. It could be external factors such as economic slowdown, weak global cues, sectoral issues or an issue with the company itself.

Get the RIGHT MIX of Investments in your Portfolio

Understand the Science of Asset allocation:-

Every financial advisor aims at getting the right asset allocation for his/her client. 

Asset allocation is a technique through which a financial advisor balances the risk and reward quotients of your investment portfolio. For this, a financial advisor allocates your money into different asset classes such as equity (stocks, mutual funds, derivatives), fixed income (bonds, FDs etc), real estate, gold etc.

The logic is each of this asset class has different levels of return and risk. If the value of one asset appreciates at a point of time, the value of another asset may be depreciating at the same time. The impact of these asset-related fluctuations can be mitigated if you include more assets in your financial portfolio.

There is no standard rule for asset allocation. The percentage allocation of funds to various assets varies from individual to individual based on their age, goals and risk appetite.

However, there are some basic thumb-rules in asset allocation. In your early years, you may be advised to invest more in equities as you may have a higher risk appetite because of lesser financial responsibilities.

As you age, exposure to less riskier instruments such as FDs and bonds increases because your risk appetite lowers with higher age.

Hence it is crucial to get the right mix of investments in your portfolio to meet your growing needs and requirements.