Consumers do not understand what financial planning is and, due to which, they don't value it

Interview: How financial planning is gaining importance in today's world April 10, 2012 Noel Maye, CEO, Financial Planning Standards Board, USA, talks to Tanvi Varma about the intricacies of financial planning in India and current standards of the advisory industry.

Source – Money Today

What are your views on the current state of awareness on financial planning in India? Do you see a rise in awareness levels with a rise in the wealth quotient? 

Awareness of financial planning in India is low, but this is pretty consistent with the state of awareness in a lot of other countries where we have our programs. Consumers do not understand what financial planning is and, due to which, they don't value it. 

The key element to a financial planning certification is financial literacy, which makes it important to improve overall literacy levels. As wealth increases it tends to change the mindset. When consumers are in a state of subsistence, wherein they live on a day-to-day basis, it is hard to plan your finances. As wealth increases you have something you need to protect or multiply.

While awareness levels are currently low, we are seeing an improvement globally, including in India. Consumers are living longer and in retirement than as part of the work force. Regulators and governments are pulling away from guaranteed pensions and employers are pulling away from offering lifetime employment. Consumers now need to take on the responsibility (of creating wealth).

Do you think that the need for financial planning in India is different compared with other countries, especially the developed world? 

Culturally, in India, the structure of a family is usually strong and extended. This means it is not uncommon for Indians to be involved in taking care of their parents, grandparents, their children's education or marriage and so on. 

To accomplish this, one needs to have an extended financial plan. This adds a measure of complexity and needs to be factored in by a financial planner, unlike in western culture or anywhere else where the planner only deals with a particular client's individual issues.

Typically, problems and approaches are common everywhere and markets tend to evolve. Markets that were focused on transaction or product selling, where individuals went to different people for different needs, are now seeing a shift to wanting a one-stop solution provider, someone who can plan your whole life and give you a solution in its entirety. Increased responsibility and complexity leads to this change.

Things are better when you have professional help. In 2008, people lost a lot of their wealth and realised they did not want to undertake this journey (of planning their finances) on their own. During this period, certified financial planners (CFPs) gave feedback that their clients stayed the course that had planned for them. 

Education and trust helps in developing this. Investors understand that volatility will come and that risk exists but they still want to stay invested, now more than ever. India was known to be a saving country. 

Earlier investors wanted tangibility, to be able to invest into things they could see and so they invested in gold, real estate etc. Now, there has been a shift in mindset to investing in stocks, bonds, mutual funds and so on.

Do you feel there is a need to strengthen long-term financial security of in India? 

Yes, it is very important to create retirement funds. Because India does not have social security in place yet, you are in a better position to understand financial planning (for retirement). 

Europe has a very solid social security system in place and yet, with governments going into debt, what has been telegraphed to consumers is that they may not be able to fulfill all obligations. The US has also indicated that while social security is there and the government will pay a small part of retirement income, they might need something more for financial security.

Even with such systems in place, these have not been designed to cover all your needs or designed to protect you from impoverishment. People want to maintain a lifestyle during retirement - commensurate or better than what they have had during their working life. Whatever the social security structure, it is never enough; you must take care of yourself.

If we look at the Australian model they have superannuation, while in America it is called the 401K. Individuals, while they are earning steadily, contribute to their retirement with pre-tax dollars and there is a matching investment made by their employers. The notion of letting people save pre tax for retirement is what motivates them. 

In the US and Australia, it is money that was never part of their salary that is being put into the retirement fund and so they won't miss it (while they are working). Given the opportunity to save pre tax and with access to financial advice, one can improve one's financial well being.

Since the primary role of the board is to raise standards of financial planning, how important do you think is the need for the board to work in tandem with financial regulators in India? 

There already is a relationship between FPSB and regulators. The whole of United Kingdom has one regulator, the Financial Services Authority, while India has five or six dominant regulators and the United States has about 200, which includes state securities regulators, state insurance regulators and federal regulators.

The regulator's function is straightforward, to set a barrier that people must pass to get into the financial advisory space, but it is set sufficiently low so that you don't deny people livelihood. 

FPSB sets professional standards for those who wish to practice at a higher level with more experience and qualification. Regulators are here to see that people follow the norms. We have seen a shift in approach by regulators globally. In the past it used to be a rule-based approach and then there was a shift to a principles-based approach, where they will give you general guidance but trust you to get it right. 

However, post the global financial crisis, the pendulum has swung. Regulators are back with consumer protection-whether consumers are protected, how they are protected, are advisors competent and assessed, is the remuneration adequately disclosed etc. So while we create standards for profession, regulators create barriers to entry and other norms.

Are certification standards different in different parts of the world? 

All our CFP certifications have the same standards and frameworks. FPSB India, for instance, takes global frameworks and localizes it so that it covers Indian products, laws and regulations and delivers financial planning within that context. So, we have global standards but local programmes.

Why do you think there is a greater need for financial planning for women, who are increasingly entering the workforce? 

Yes, (reports show that) women live longer than men and so statistically she will need retirement income for a longer time. This makes financial planning for retirement more important for women. Also, women usually have to leave the workforce to have children, which means they are bound to miss promotion opportunities. Hence, at the same age, they're earning comparatively lower than men. This means they are at a different position and have different pension benefits on retirement.

Do you feel that entry norms to act as independent financial advisors or brokers should be strengthened to reduce mis-selling? 

We have an exam for entry, which tests competency and also a registration process. Several of our affiliates have been approached by governments to manage the examination process and registration for the broad advisory community. 

We need to know who is in the field, whether they are qualified and if there is someone who can hold them accountable. We are one of the few organisations the CFP certification can be taken away.

There is a lot of contention on the appropriate pricing structure for providing financial planning services. What is your opinion? 

People have always paid for financial advice and products, they just didn't know it. Commissions and charges were built in. People will not pay for something they don't value and they will always pay for value. If consumers believe that the financial planner's advice will be useful in securing their finances, why wouldn't they pay for it? 

It is like going to a doctor for professional advice, you go to him because he is qualified to practice medicine and can give you a diagnosis that addresses your ailment. You are willing to pay for this advice as you see value in it.

Once investors start seeing financial planning as a professional engagement and an advisor as someone offering a service of value, they will pay. Of course, pricing will differ based on the advisor's experience, qualification, the levels of service and so on.

Low fee, limited service - ICICI into Financial Planning

ICICI Securities? financial advisory services may not be as customised as an individual advisor?s

Source – Business Standard

There is yet another option for those looking for help to plan their finances. ICICI Securities on Tuesday launched its bouquet of financial planning advisory services — including basic financial planning, portfolio evaluation services and estate planning.

ICICI Securities will offer its services through the offline and online routes. In case of the former, individuals can interact with their planner directly. The latter, though, is presently available only for ICICI Direct customers, as it operates on a login basis, according to Abhishake Mathur, senior vice president, financial planning services, ICICI Securities.

Here's how the online model works: Existing customers can log on to their account, choose the financial planning services option and fill details such as family income, expenses and savings, goals, etc. After this, they can proceed to seek an appointment with the financial planner for discussions. The planner would take seven to 10 days to formulate the plan.

AT A GLANCE

Services offered: Financial planning, portfolio evaluation and estate planning

Mode of interaction: Face-to-face or phone interaction

Fees: Rs 5,000 - 7,500 for a basic financial plan

USP:

No sale obligation clause to ensure that advice is unbiased

A three-month post-plan support offered

No minimum portfolio size or annual income required

Hitches:

Concerns about customisation and detailing of plan

No continual engagement opportunity

The unique selling proposition of the plan for many may be the 'no sale obligation' clause. That is, the customer isn’t obliged to purchase products from ICICI group companies and is free to route his investments via other intermediaries. Also, unlike the international financial planning major, Ameriprise, that started its India operations in January, ICICI is not targeting a specific income group. Ameriprise Financial is targeting those with a gross household income between Rs 20 lakh and Rs 1 crore.

ICICI Securities' introductory fee is Rs 5,000 (online) and Rs 7,500 (offline), with a three-month post-plan servicing period, where the client may approach the company for clarifications or tweaking his/her plan. "This is a one-time fee. It may be slashed at the time of plan renewal," says Mathur. He adds that currently these fees will be charged for individual services. Collective pricing, i.e. one for all services being opted together, is still being worked out.

Comparatively, Ameriprise's Envision (a comprehensive financial plan) costs Rs 12,500 a year. It entails a minimum of four sittings or quarterly updates. "The planner will prepare the plan after the first interaction and take stock of the investments and whether the client is reaching the goal(s) in subsequent sittings," says Kapil Narang, COO, Ameriprise Financial India.

Independent financial planners may be the costliest, charging between Rs 5,000 and Rs 20,000 or more. There is no standard pricing mechanism, according to Suresh Sadagopan, a certified financial planner.

The difference in the fees charged is attributed to the engagement level and the detailing of the plan. For instance, a financial planner points out that on account of the low fees charged, some portion of the recommendations may be software- or system-driven. Especially, reservations are voiced in case of the 'online' planning mechanism, where there is no interface between the planner and client. "Financial planning is all about customisation and studying the client's cash flows minutely. Like, the individual may be receiving an additional income as bonus or incentives during the festive season. This spike in the income inflow can be diverted towards investments or loan pre-payments. Such suggestions can be made only through an in-depth dialogue with the client. He would rarely do so voluntarily; he must be prodded for such details," says Sadagopan. Something that is not possible in an online model.

Another grouse one may harbour is the absence of managing and monitoring of the portfolio service in ICICI's bouquet, chiefly because a financial plan cannot be looked at in isolation. One must check regularly if the investments are faring in line with expectations. So, if you enlist an independent advisor's help, he may charge a percentage (0.5-1 per cent) of the portfolio under management and take stock each quarter, if it needs to be tweaked. In ICICI's case, you would have to be proactive. You can approach them for a portfolio evaluation service, a one-time health check for your investments.

Despite the limitations, financial planners welcome ICICI's foray. They say, given the low number of practising certified financial planners, ICICI's large presence may help take the service to a large number of retail investors.

7 personal finance lessons to learn from Katrina Kaif

7 personal finance lessons to learn from Katrina Kaif

Source - Moneycontrol

Inspirations come in all shapes and sizes. You would surely agree that Katrina Kaif as an inspiration is not only shapely but also quite beautiful.

Katrina was a total novice when she entered the Hindi film industry. She had no knowledge of films. Worse - she couldn't even speak the Hindi language properly. Yet within a short span of 5-7 years she has become one of the most successful actresses in the Hindi film industry.

Many amongst you too would have no knowledge of the personal finance industry. Worse - you wouldn't even understand the financial language. But if you are willing to work hard like Katrina, there is no reason why you too can't become a successful manager of your money.

Lesson 1: Background and past do not matter; what matters is what you do with your present.

Her first movie was called Boom, which ironically went totally bust (even though it also starred the legendary superstar Mr. Amitabh Bachchan). But she didn't let the super-flop discourage her. Instead of feeling sad or sorry about it, she turned the failure into a lesson. You too will experience many failures when you start investing. But don't let them deter you. No one can be 100% successful. All you have to aim for is to have more wins than losses.

Lesson 2: Don't be discouraged by failures, instead learn from them.

To guide her during the initial years, she found herself a mentor. He acted as her friend, philosopher and guide - educating her about the nuances of the films and film industry. More importantly, she was a willing student who worked very hard to absorb all the lessons. You too should find yourself a financial advisor who will pass on all the knowledge to you. More importantly, you should be a willing student. After all, you have to score your own goals. A coach cannot do it for you.

Lesson 3: Find yourself a mentor and be willing to learn.

The first few years of her career she worked with established and successful stars only. You too should begin your investments with large and established companies/mutual funds. There is no point in taking risks until you understand the game.

Lesson 4: To start with, invest only in top-rated and successful companies/mutual funds.

She found a certain comfort level with Akshay Kumar and gave many hits working with him. She didn't try to experiment too much or work with many stars. Identify a few investment options that you easily understand and are comfortable with. Don't buy too many different financial products in the initial years of your investment.

Lesson 5: Stick with a few simple investment products in the early years.

It was only when she started understanding the Hindi film industry and achieved reasonable success that she moved to younger upcoming stars such as Ranbir Kapoor, Imran Khan and Ali Zafar. She also took to doing items songs. Had she done item songs in early part of her career she would have remained an item-girl only. Only when you get a hang of the personal finance industry and have made some successful investments, should you consider investing in different products and upcoming companies. If you start with Futures/Options you will never become a successful investor.

Lesson 6: Move to riskier and specialized products only after you become a reasonably successful investor.

It would be wrong to attribute Katrina's success to only her face and contacts. Starlets with prettier faces and better connections didn't shine long enough. You won't even remember their names. Ultimately, it is her attitude and dedication towards her work that has given Katrina all the success, fame and money. Likewise, the likelihood of you too becoming a multi-millionaire would be determined by just how good you are at managing the resources you have.

Lesson 7: Only "attitude" matters; rest is just a matter of details.

Professions may differ, but the underlying rules to success remain the same. Pick up any person you admire - Sachin Tendulkar, A.R. Rahman, Narayana Murthy, Kiran Bedi, Sonia Gandhi, etc. - and make him/her your inspiration. Success is waiting for you. Are you ready to grab it?

Multiple Bank Accounts/Policies – A strict No

Team CrawFin/ Harshal Jawale, CFP^CM

Recently RBI deregulated savings deposit rate and several banks responded to it immediately. Today they offer higher interest rate up to 6% pa for the amount above INR 1Lakh. Anything below INR 1Lakh will receive 5-5.5% pa that is still higher than 3.5% we used to get for many years.

Most of us usually have several Bank accounts, multiple Dmat accounts, Mutual Fund Folios and Insurance policies for the sake of diversification. In this article I will try to cover what are positives and negatives of it.

Multiple Bank saving accounts –

There is minimum account balance with every bank account ranging from INR 1000 to INR 10000. We usually keep more than required money into each of such account. If we can consolidate these accounts into one or two, say one will have most of cash often parked as emergency fund might get 6% pa rate, while second account will have minimum possible cash for our daily usage. Multiple accounts with INR 20-30 thousand in each will get lower interest rate.

Multiple Dmat Accounts –

With every Dmat account there is account maintenance charge of INR 300-500 pa. I have seen people keep opening many Dmat accounts each with INR 20-50,000 because of lack of faith on broker. They simply fail to notice that they are actually paying yearly 3-4% of investment just for maintenance of accounts. Either they need to consolidate accounts or need to invest more, because such charge remains same for INR 1000 or INR 1Lakh or any higher amount.

Multiple Insurance Policies –

Any Insurance policy be it ULIP, Money Back, Endowment, Children’s future plan, Marriage plan or any other fancy name that an insurer may choose in future; if it contains your life cover then it charges you for mortality. Mortality charge is nothing but pure term insurance, but since we are obsessed with return of premium, returns onto it and higher tax saving benefit we are happy to pay higher charges to the insurer. Multiple insurance policies simply mean paying multiple times for ONE single life that you have. Of course it is not exactly 3 times if you have 3 policies but it would still be much higher than what you would have paid with single policy for total sum assured.

On top of it there are admin charges with ULIPs etc that would add substantial cost to your INR 20,000-30,000 premium for the year.

What about diversification? What if my bank/broker/insurer goes bust or falls into some malpractice or does not settle my claim?

Fortunately in Indian financial markets there are enough regulatory systems that control activities of all intermediaries. If you are right in claiming money from your insurer either A, B, or C then you would get it from all of them or else not from anyone. Please don’t fall into such misunderstanding that if insurer A rejects claim then at least insurer B would pay. Process of finding justice is tedious in our country but that remains same even with multiple insurers.

Similarly you cannot take FD with next door co-operative society for higher 1% and hope for RBI to come rescue you in case of any malpractice. You must put your money with large reputed bank for better protective services.

Keeping watch on broker’s activities will solve related issues. You as investor don’t pay attention to SMS/Email sent by BSE/NSE whenever transactions happen in your account, this allows person at lower level dealer to misconduct with your account. When SEBI makes it mandatory for all brokers to send SMS/Email within 24 hours of transaction it is also our responsibility to keep a check. Mere keeping check at times if not all will keep that lower level dealer to stay alert and he will not dare do anything wrong with your account. He just needs to know that you are watching him even if you really don’t. Still in case of any malpractice there are enough systems in place for investor protection.

Wealthy Investments need Healthy Methods!!!

Zero-interest need not be zero-cost

Source – Business Line

With Diwali just ten days away, marketers of all hues will soon step on the gas. Discount sales, easy repayment options and a host of special offers will be unleashed to entice customers to loosen their purse strings.

The time-tested (but frowned upon by the RBI) ‘zero per cent interest schemes' may also make a comeback. This sales promotion technique allows customers to pay for their big-ticket purchases in instalments, with no interest being charged for the staggered payments.

For instance, a customer buying a consumer durable costing Rs 24,000 may be allowed to settle dues in 6 instalments of Rs 4,000 each. Sounds good, right?

Pay easy with no additional interest cost. This unique selling proposition of zero-interest schemes has for long managed to draw crowds to the stores. At face value, such schemes do seem quite attractive from the perspective of potential customers. For one, there is no need to pay the entire amount upfront. This makes the purchase seem within reach of even those who otherwise can't afford it.

Besides, unlike normal financing schemes, there is (supposedly) no extra cost charged to the customer in ‘zero per cent' interest schemes. But should customers bite the bait, without testing the waters?

HIDDEN COSTS

As the cliché goes, if it's too good to be true, it probably is. And like many seemingly good things in life, ‘zero-interest schemes' too may have their stings in the tails. Sure, interest cost may be ‘zero'. However, there is often a ‘processing fee' to be borne by customers, which puts to naught the hard-sell of ‘no additional cost'.

Let's assume a processing fee of Rs 1,000 in the case above. This works out to 4.2 per cent on the financed amount of Rs 24,000 for 6 months and 8.4 per cent on an annualised basis. That's not all. Those choosing zero-interest schemes are often not allowed other discounts offered by sellers.

Suppose, in the case above, customers making an up-front payment are allowed a discount of Rs 1,500, which is not extended to those going in for zero-interest schemes. Foregoing the discount is in effect an additional cost, which on Rs 24,000 works out to 6.25 per cent for six months, and 12.5 per cent on an annualised basis. Combined, the processing fee and the discount foregone would have added a cost of around 21 per cent (annualised) for those choosing the zero-interest scheme. Not such a ‘great deal' anymore?

The picture could get even more discouraging, if customers are required to pay some instalments upfront. Say, in the case above, two instalments adding up to Rs 8,000 need to be paid at the time of signing up for the zero-interest scheme.

The customer is effectively being financed only for the balance amount (Rs 16,000). Now, the processing fee of Rs 1,000 and discount foregone of Rs 1,500 add up to a total cost of 15.6 per cent on a six-month basis and 31.3 per cent on an annualised basis.

DO THE MATH

Given that zero per cent interest schemes may lack transparency and may distort pricing, the RBI had, in as early as 2002, issued a circular advising banks to refrain from offering such schemes for consumer durables.

So, over the last few years, the incidence of banks offering zero-interest schemes has declined. However, many non-banking finance companies (NBFCs) continue to tie up with manufacturers and dealers to provide such offers, especially in the festival season.

Before signing up, customers would do well to read the fine print, and do the math (processing fees and their reasonableness, discounts foregone and effective amount of financing) to ensure that they are indeed getting a good deal.

Finally, it's advisable not give in to impulsive buying urges in the festival season, merely because there are ‘discounts' and ‘schemes' to boot.

Remember, you finally need to settle the bill, even under the best offer.

Financial Planning – A Journey

Team CrawFin/ Harshal Jawale, CFP^CM

Financial planning is about planning your money to achieve your goals within a given timeframe. Goals can be different for different people at different times, and you can't achieve these goals without financial planning.

The only problem is that many individuals do not take financial planning seriously and tend to act as they come. Once they know which fund or investment avenue to deposit their money into, they consider their financial planning is over. This indeed is a very big blunder. I wish financial planning was that simple by doing a few simple investments and your goals would be met. But the path towards our goal is never that easy, any goal for that matter.  There are steps to follow which help you achieve your goals.

Let us have a look at the broad steps of financial planning.

1.      Contingency planning

2.      Insurance planning

3.      Investment planning

4.      Retirement planning

The first two steps: contingency planning and insurance planning is known as risk management. Once your risk is managed, you can then safely move on to the higher levels to plan for your goals. The next two levels are investment planning and retirement planning collectively known as goal planning. 

Contingency planning

Emergencies can come anytime or anyplace, we cannot predict or at times even prevent it.  

All your mandatory monthly expenses which you have to meet anyhow should be considered. They are all types of loan, premiums of various insurance, Grocery, Utility bills and other miscellaneous expenses. It is always better to calculate them for yearly basis to arrive at appropriate average.

At least three months of your average monthly expenses have to be kept aside in the form of emergency funds. Higher age or higher number of dependant then you should keep cover for more months.

It is equally important to keep emergency funds into liquid and risk free investment vehicles. One may consider a combination of cash, fixed deposit or liquid funds for the same.

Insurance planning

You may think that you are adequately insured but please note your insurance planning is not only planning for your life but also for health and property.  I have seen many people buying ULIP at the age nearing to retirement, or agents approaching housewives to buy Life Insurance. They don’t even realise that they do not require life insurance anyways since their family members are not financially dependent on them.

Never buy insurance just because your agent advises you to buy. Try and understand the product, correlate it with your needs and requirements and only then go for it. It is very important to know that, Insurance is not investment. Insurance is for risk management and investments are for goal achievements.

So how much is adequate? A number of components go into the calculations in finding the adequate amount of life insurance. Age and Number of dependants form the most pie of consideration. Safely one can assume a cover of 10 years expenses or 4 years income whichever is higher is adequate cover enough. This ensures your dependant to have few years in hand to become independent.

In case of health insurance minimum amount of Rs 2 lakh is a must. For family floater cover should be increased appropriately. It is very important to pay your insurance premium on time and see that it does not lapse.

Especially for individuals who are nearing retirement must buy health insurance from outside. Today you are working and have health cover by company, but at 58 when you retire that cover will not be available; irony is this is the age when you need it the most. Most good health insurance policies allow entry till age 55. So it is very important to get yourself insured towards health before 55.

Your hard earned money has gone in setting up your house. If something were to happen to it then it is difficult to replace. So it is always advisable to have your property insured. The premium amount is low.

Investment planning

Save money and earn returns!

If the investments are not invested in right avenues then you would face either lock-in or low liquidity. Hence to achieve your goal it is not only important to grow your money but with appropriate risk level and withdrawal option.

One should be very clear about the goals and the time frame. Most important is goals should be realistic enough, neither too high nor too low. One may break down goals into 3 categories of –

Responsibility = Dependent Parents, Child’s Education/Marriage etc

Need = Buying a House, Saving for Retirement etc.

Dream = Buying a Car, Going on World Tour etc.

It is also critical to wrap it in timeframe. You cannot put aside equal amount of money for buying a house and saving for retirement at same timeframe. Buying house must be achieved much earlier and once achieved stretch must be given to retirement planning.

Then your investment products should be selected on the basis of the time frame within which you would like to achieve the goal. Once your goals and time frame is in place you need to be clear on amount that you would like to spend for that particular goal at today's value. After considering inflation, is the amount you will have to spend. Keep in mind that real inflation in case of our goal is much higher than total inflation declared by government every Thursday. It is safe to assume 8% inflation while calculating the amount required at any future date.

Future value = Present Value * (1 + inflation rate) ^ Number of years left to achieve your goals.

Retirement planning

Good news is because of medical advancement you are likely to live longer, bad news is you must make yourself independent for those extra non earning years. It should also be noted that unlike old times when families were living jointly, now is the era of nuclear family; hence one should not rely on children financially.

Inflation here too plays a spoilsport and increases cost day by day. Fortunately Government has been supportive by providing tax incentives for post retirement earning.

Retirement planning is not only about taking pension policy or contributing to PF account. Today when one jumps on better opportunities, it is also important to note that by job hoping you loses out with gratuity and superannuation.

While agents tell you that it is always better to start early for retirement planning, they forget to mention that retirement planning does not end at 58. In fact in my view retirement planning actually starts at age 58. When you have huge corpus accumulated over the life in hand and do not willing to take risks. It is difficult to deploy this huge amount without any risk and generate return at inflation pace. Remember investment should be safe enough because at this age you definitely not in a position to earn again if anything happen to it.

Keeping it Simple & Silly: Portfolio building using MF

Team CrawFin/ Harshal Jawale CFP^CM

All of us work hard to earn money, save a little by the end of day. Yet trouble doesn’t end here now we want someone specialist who can manage our savings for the future needs. Finding financial advisor itself is a task these days, we want the best money manager but without any charges.

Mutual Funds offer such facility at very little charge if not free. Fund manager is an appointed expert by AMC who manages money collected from thousands of investors like us and invests into asset classes like Equity/ Gold/ Bonds etc.

Large/Mid/Small cap funds =

Approx 50-60% of the money may be invested into these funds. A systematic investment on regular basis is the best approach advisable. Where large caps provide stability to portfolio small caps provide superior returns over longer period of time.

Tax saver MFs can be termed into large cap funds for allocation purpose.

Sectoral Funds =

Approx. 20% of the money may be invested into these funds. Banking/IT/Pharma/Media/FMCG/Infra etc options are available in the market. These funds are used to provide trading returns to the portfolio and hence are short term in nature, typically 6-12 months. It depends upon market condition and is risky in nature and hence require informed decision making.

Gold Funds =

If you are more worried about charges while investing then Gold fund is a must buy for you. According to my estimate it saves more than 5% of charges as against physical purchase of Jewellary/coins/bars. Buying Gold ETF into smaller quantities is preferred with time duration of more than one year. Approx 10-15% of the portfolio can be invested into Gold.

Debt Funds =

If you have idle money but don’t want to go for fix deposits in order to keep it liquid or worried about tax liability on interest on fixed deposit then debt funds/FMP are the best options for you. It may be short term/long term in nature. Allocation to these funds should be increased as the age increases.

One may follow following distribution of wealth into various assets using MFs

• Large Cap - 30%
• Mid Cap - 20%
• Small Cap - 10%
• Sector 1 - 10%
• Sector 2 - 10%
• Gold - 10%
• Debt - 10%

Allocation of funds may vary depending upon individual risk, earnings and needs. Above broad based allocation is given to provide general idea of how one can build portfolio and take exposure to various assets using MFs.

Trouble still doesn’t end here, there are 30+ Funds with 1000+ schemes to choose from, you may need financial advisor to take informed decision on selecting MF schemes and keep monitoring them. Do not forget to check his/her credentials to advise you, mere designation provided by broker/banks/MFs cannot be trusted when you put your money. Independent advisors too opt for higher commissions compromising on your needs and still require your verification of his/her credentials.

Simple ratios to make you money smart

Just as a company is analyzed using financial ratios based on revenue, expenses, and debt, the financial stability of individuals or families is done using income, savings, and loans. These ratios help individuals and families evaluate current financial status, identify the financial needs and plan cash flows over time.

Types of ratios

Financial ratios can be categorized as:

1. Reserves to Income
2. Debt to Income
3. Savings rate to Income
4. Liquidity
5. Debt
6. Risk Exposure
7. Net worth

Though there are no defined ideal values for these ratios, there is an accepted range for them. They are influenced by factors such as age, income, your family’s financial status, or general economic condition.

Calculation and Interpretation

Reserve to Income Ratio:

This ratio is calculated by dividing your current investment assets by your annual salary.

Example: A person has a total of Rs 24 lakh invested - Rs 10 lakh in his PF account, Rs 6 lakh in PPF, Rs 8 lakh in a well diversified debt-heavy mutual fund. His annual income is 12 lakh per annum. His reserve to income ratio will be Rs 24 lakh / Rs 12 lakh = 2. As a thumb rule, a person of 40 years and more should have this ratio at 3 to 5. For people below 40 it can range from 1 to 3.

Debt to Income:

Debt to income ratio tells you how stable your credit situation is. This is calculated by dividing debt by income.

Example: A person has Rs 30 lakh debt outstanding on his home and Rs 6 lakh on his car. His annual income is Rs 12 lakh. The debt to income ratio will be Rs 36 lakh / Rs 12 lakh = 3. Whether this is good or not will depend on your annual obligation. If you are paying 40-50 per cent of your income in servicing debt, you should reduce it.

Savings rate to Income:

This shows how much you save from your income every month.

Example: If the annual salary is Rs 12 lakh and contribution towards PF being Rs 1.40 lakh (including company’s contribution), Rs 60,000 towards PPF, Rs 1 lakh in a debt fund, and Rs 1 lakh in fixed deposit, totaling Rs 4 lakh. His savings rate will be Rs 4 lakh / Rs 12 lakh = 33.33 per cent. As a thumb rule, a person in his 30s should save at least 20 per cent of his salary.

Liquidity Ratio:

Liquidity ratio has two ratios, one basic liquidity ratio and second, expanded liquidity ratio.

Basic liquidity ratio:

This ratio tells you how many months you can survive without earning any income.

Example: A person has Rs 1 lakh in his savings account, Rs 60,000 in his current account, and Rs 2 lakh in his flexible account (part of savings account that is transferred to FD), totaling Rs 3.6 lakh His monthly expense is Rs 60,000. His basic liquidity ratio will; be Rs 3.6 lakh / Rs 60,000 = 6. This means the person can survive for 6 months without earning any money if these levels are not exceeded. Usually this ratio should be between 6 and 12 to meet emergencies such as job losses or long leave because of circumstances.

Expanded liquidity ratio:

In addition to basic liquidity, if you add other financial assets such as stock investments, FD, or bond investment to the liquid asset and divide by monthly income, you get expanded liquidity ratio.

Example: Let the basic liquidity be Rs 3.6 lakh and expenses be Rs 60,000 as in the previous example. If your other assets are Rs 1 lakh in equity, and Rs 1.4 lakh in FD, your expanded liquidity ratio will be (Rs 3.6 lakh + Rs 2.4 lakh)/ Rs 60,000 = 10. You can survive 10 months without earning anything.

Debt Ratio:

This includes two ratios, namely liquid asset coverage ratio and solvency ratio.

Liquid asset coverage ratio is your liquid assets divided by your debt. The solvency ratio is your all assets divided by total debt. These ratios tell you whether you have enough assets to pay off your loan.

Example: As shown in liquidity ratio example, your liquid asset is Rs 3.6 lakh and total asset is Rs 6 lakh. Suppose you have outstanding debt of Rs 36 lakh. The liquid asset coverage ratio will be Rs 3.6 lakh / Rs 36 lakh = 0.1 and solvency ratio will be Rs 6 lakh / Rs 36 lakh = 0.17. Solvency ratio should be at least 1 for people above 40 and between 0.3 to 1 for those below 40.

Risk exposure ratio:

It measures whether you have adequate insurance coverage and assets to help your family in case your earning is not available.

Example: A person has income Rs 12 lakh and has Rs 20 lakh worth assets and he has taken an insurance of Rs 1 crore. His life insurance coverage ratio will be Rs 1.2 crore / Rs 12 lakh = 10. This means his family can survive for 10 years without changing lifestyle. Of course the real number will be high as the expenses will be lower than the salary.

Net worth ratio:

Net worth is calculated by subtracting your liabilities from your assets. This tells you what your finances are worth.

Example: A person has Rs 20 lakh in government bonds, Rs 20 lakh in PPF, Rs 10 lakh in fixed deposits, Rs 2 lakh in savings account, and Rs 10 lakh in mutual funds. He has outstanding loan of Rs 20 lakh on his home. His net worth will be Rs 62 lakh - Rs 20 lakh = Rs 42 lakh

You also have to see what the growth rate of your net worth is. Suppose Rs 42 lakh is the net worth this year and your net worth last year was Rs 40 lakh. The rate of growth of net worth is Rs 2 lakh / Rs 40 lakh = 5 per cent. If the inflation is more than 5 per cent, your net worth is actually going down.

Financial ratios help you quantify the status of your financial standing utilizing simple numbers. Use these ratios to evaluate your financial situation and make it better.

Source - Financial Express