How to plan your finances if you have an irregular income?

Listen up professionals and start-up owners!

Every individual has a passion and a dream. Many wish to break free from their mundane work life to pursue their passions. However, it can be difficult to break the shackles of comfort and security that a well paying job offers and venture into unchartered territory that your dream might lead you to. For those who manage to do so, we tip our hats to you and offer these words of advice.

 

Being a business ourselves, we understand the trials and tribulations that a professional or a start-up founder goes through. The fact is that it can take a while before you break even and start drawing an income. Even the revenues generated can be irregular so how do you manage your personal finances and ensure neither your nor your family’s dreams are compromised.

 

1. Know your expenses– With a job that gives you a fat paycheck your lifestyle expenses are bound to be high. Now with an irregular salary keeping up with the same expenses will get challenging. You and your family should be prepared to adapt to your new financial situation and trim down your expenses wherever possible. It might make sense to set up a SWP (Systematic Withdrawal Plan) that provides the necessary income and help you stick to a budget without going bust.
2. Keep those SIPS going through the good and the bad days-As the case is with most businesses, the revenues are not steady. There will be times when the business would have done well and the receivables have also come in and then there would be not such great times. With such irregular and unsteady income how do you manage to keep your family’s dreams alive. The Key is to invest the surplus in a liquid fund which will then systematically transfer the money on a regular basis in an equity fund. This will ensure that you keep saving and investing towards your future goals unhindered by the ups and downs of your business.
3. Insurance, your protection shield– The job of a life insurance policy is to not only provide for your family in case of an unforeseen event, it is supposed to also cover your outstanding loans and the financial goals such as kid’s higher education, comfortable life for your dependents etc. So ensure you have taken a cover large enough to meet your family’s needs. A simple term plan will do the needful.
4. Health is wealth– With the medical inflation rising at 10-15% annually, the importance of a medical insurance can not be stressed enough. Health is indeed wealth but you don’t want to lose your wealth due to any illness or accidents. You might also want to consider taking an accidental and critical illness policy as a safe guard measure along with a regular medical cover.
5. Contingency fund- This fund should be large enough to cover your 6-8 months expenses. Since you do not have a regular income, it is optimum to consider expenses over a longer period. You could even consider including your SIPs amounts for those many months, this will ensure your goals are right on track and are not hampered by the volatility in your income.
6. Keep personal and business expenses separate– This is the most important advice as it is very easy for the business expenses to spill over and be paid for from your family kitty. This is especially possible if you use the same credit card for both personal and business use. This can further stress your family budget over time.

With an irregular income it becomes essential to plan and channelize your money to ensure your family is well secured financially and their goals and dreams have wings. You might want to consult a financial planner to see how to fund your family goals if you choose to launch your start-up.

 

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Being Truly there for your Sister!

Rakshabandhan is an auspicious day in India. The festival signifies love and affection between brothers and sisters. It is a time where brothers reaffirm their duty to protect and care for their sisters during their entire life.

Usually brothers gift cash and or gifts to their sisters as a sign of their love. But what if you could give them something that will truly be there in their life? A sound piece of contribution could end being a much more significant gesture in the long run, both personally as well as her financial future.

Sounds to good to be true? Well here are some options you can consider:

Systematic Investment Plan (SIP) Investments: An easy option, but not not many know it can be gifted or that it can be started with an amount as low as Rs 500 per month. Also, one can not only do SIPs into mutual funds (either equity or debt) but certain blue chip equity stocks as well. So forget those fancy gifts for once and gift your sister that will truly be there for her in the future

Systematic Withdrawal Plans (SWP): A rather new feature in the Indian Mutual Fund environment. Certain AMCs now allow you to initiate an SWP, which essentially is the opposite of SIP such that money flows from the mutual fund to your bank account at pre – specified periods and at specific amounts; but with the added benefit that you can chose your relatives to be the beneficiary of this inflow rather than yourself. Another benefit of such a SWP is that because this inflow would be considered a gift in the hands of your relative, there is no tax applicable to the receiver of this SWP. Perfect way to support your sister with cash flow needs!

Insurance Cover: Few things may convey that you truly care for your sister’s health than an adequate health insurance cover. Now more than ever, health insurance is the need of the hour with parallel rise in not only health costs but also increase in reports of lifestyle diseases and ailments. A health insurance cover will insure that your sister is never financially affected by these hurdles.

On the other hand, providing a term cover for your sister who may have her own financial dependants is a warm way of showing that you are there to share her responsibilities

Estate Planning: This almost always is a personal and complicated topic. But having a solid estate plan is as important as any other life decision. And as a brother you could be the trusted guide to helping her make this important decision.

Furthermore, you yourself can be a part of Estate Planning as a potential guardian to her underage children. Or possibly a trustee in case she needs to make a trust. Ensuring one’s hard earned assets are bequeathed as they intended to is a huge responsibility and who better than a brother to take this up

Gold: The yellow metal will protect her from any economic crisis and will act as hedge during volatile times.But not the cumbersome physical gold that comes with its own headaches and costs. Rather you should consider paper gold i.e. instruments that invest into gold themselves or track their prices. These instruments range from Gold ETFs to the Sovereign Gold Bonds

On this day brothers take a pledge to protect and take care of their sisters under all circumstances. We at Plan Ahead Wealth Advisors understand the enormity of this pledge. And through our experience of understanding the complexities of money and human emotions, we also pledge to help you ensure that your sister stays financially secure in her lifetime.

 

 

 

 

 

 

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Simple strategies to meet your cash flow needs after retirement

India is a saver’s economy. During the working years sacrifices are made for the benefit of the  family and retirement is keenly looked forward to. Advertisements of retirement products paint a picture of a comfortable retirement by the sea and that your life could be one happy vacation. However, in our experience as and when individuals start approaching their retirement they start to dread it. Questions such as are they well prepared for retirement, have they saved enough, and biggest dilemma faced is  where to invest this large sum of money in order to get a regular cash flow to become financially independent. What do you do to actually turn your retirement into one big happy vacation?

Effective cash flow management is the key to a successful retirement. The magic lies in creating a strategy that generates a regular inflation adjusted income for you and your surviving spouse, lasts you a life time and offers liquidity.

Strategy 1: Create a regular income stream

Every individual wants to be financially self sufficient. In the absence of a joint family, being financially independent is not a desire but a must have in your golden years. If you need money for your day to day expenses, then getting a payout once in 3 or 6 months doesn’t help. A lot of retirees rely on dividend income either from stocks or their mutual funds. This is a huge mistake which becomes evident with time when the steady income from salary has stopped completely. Receiving a dividend from your investments when you have a  salary feels great because it provides an additional income. What most people don’t realize is that the dividend is actually paid out at irregular intervals and the amount is also inconsistent. Similarly, the interest payout from your corporate FD might be on a quarterly basis or twice a year and now locked in until maturity.

How to execute this strategy?

To be financially independent at all times you have to ensure you have created multiple income streams and timed the out flow to suit your requirement. If you need to pay salaries and bills towards the start of the month, then set the payout around that time. Opt for monthly interest payout from FDs and set up a Systematic Withdrawal Plan (SWP) from your Mutual Fund investments on a monthly or bimonthly basis. This way you will know exactly when your next payout will happen and manage your expenses and bill settlements better. You will also be more in control of your finances rather than being helpless because of a bad strategy which can now not be easily changed.

Strategy 2: Generate an inflation adjusted income

Thanks to the increase in programs aimed towards investor education, many individuals understand and are aware of the impact of inflation on their income and wealth. The income that you receive should be able to beat inflation and help you live your life comfortably and on your terms. The current consumer inflation rate is at 4.17% however, it is essential to consider your lifestyle inflation which rises faster than food inflation. It would be wise to adjust your income against an inflation of 7-8%. The income that would have sufficed today will not manage to cover the same expenses next year due to inflation. On a yearly basis, you will notice that your bills are rising, so will the salary of your staff.

How to execute this strategy?

The interest income coming from your Fixed Deposits will not be able to implement this strategy since the returns are fixed and the amount is locked until maturity. You would not have the option to choose a higher payout even at the cost of wealth depletion.

This strategy can only to executed through a Systematic withdrawal Plan (SWP). With an SWP you have the option to increase or decrease the amount that is withdrawn from the investment. For eg. If your cash flow requirement is Rs 25000/month for the 1^st year, then with a Systematic withdrawal Plan you have the flexibility to adjust the payout by increasing it to Rs 27000/month which would be inflation adjusted. This way you can increase the payout from your debt funds using SWP strategy.

Strategy 3: Avoid excess liquidity as a part of contingency planning

Most senior citizens seek comfort in keeping large amounts of cash lying in their bank accounts. This they say is for emergencies and contingencies in case they need a lot of cash all of a sudden. Assume you have Rs 50 lakhs for your retirement corpus out of which if  5-10 lakhs are kept in your bank account for comfort then this is a very expensive way to deal with emergencies. With high inflation and increasing life expectancy, one can not afford to keep 10-20% of their wealth idle. At your age you will need every cent and penny to work as hard as it can.

How to manage liquidity?

If you have parked a large sum in your bank account, the reason has  less to do with emergencies and more to do with liquidity. With most of your money parked in illiquid assets like bonds, fixed deposits or real estate how do you get your money if a need arises. Liquid debt mutual funds are a perfect option since they provide both higher returns and offer liquidity. Liquid funds can generate a return of up to 6.5% and are highly liquid as the name suggests. You can redeem your units from a liquid any time and encash your money. You will receive your money in your bank account the next day.

Strategy 4: Plan your cash flow to avoid wealth depletion during your lifetime

With the advancement in medical sciences the average life expectancy in India has risen to be around 85 years. There is also a risk that both you and your spouse might outlive your life expectancy and live longer than what you had accounted for. This poses a threat to your financial independence as there is a possibility of your wealth getting depleted while you both are still alive. It therefore becomes important to invest your money in such a way that your portfolio can provide a steady cash flow not just for you but for your surviving spouse too and a little over your assumed life expectancy.

How to make this strategy work without compromising on your dreams?

As a retired person wealth preservation is of utmost importance however, if inflation and longevity poses a threat to your wealth and goals then you have to go beyond your comfort zone and add more growth assets in your portfolio. However, if there is a gap between the income that your portfolio can generate and your needs, then instead of taking excess equity exposure it is advisable to taper your expenses instead.

An expert financial planner will be able to execute and implement this strategy for you by creating a realistic portfolio which meets your income expectation and risk profile. A combination of debt and equity mutual funds should do the magic.

The secret to a successful retirement is a little bit of planning which can go a long way to turn your retirement into a happy vacation.

 

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How Much is Enough for Retirement?

It is one of the biggest, if not biggest, money question that often keeps people awake at night. The uncertainty of whether what you have earned and saved is enough for that dreamy retirement life can be quite stressful. And it is this ambiguity that often leads to making incorrect assumptions which, in a vicious cycle, leads to misguided money decisions.

Through this blog, we hope to focus of some items that need to be looked at to better judge just how much preparations you need for your Golden Years.

1. Goals:

First of all, it is important to accept that your retirement will not mean doing absolutely nothing for the remainder of your life. Chances are you would still be at least partially responsible for your child’s post graduation/ marriage. If not those, then planning for those holidays and long travel plans, or having a dedicated medical corpus or even starting philanthropy or your own consultancy would need financial planning and funds.

There even might be recurring goals to consider such as cars. If you drive a Honda City today, chances are you would want similar car throughout your life. Assuming a Honda City costs Rs 13.75 lakhs as of today, you would need Rs 65.8 lakhs at the start of retirement just to fund purchasing the same car every 5 years (accounting for 7.7% inflation)

 

2. Your Current Expenses:

While we usually have approximate amounts in our heads, rarely do we know our exact expenses for a year. If you think you may know, even so the detailed expenses are not known. If you do track and compare average expenses of the year versus that of two years ago, you would probably see higher than expected changes. This is due to inflation and lifestyle changes. It is critical to keep tabs on your expenses, as discretionary expenses tend to creep up and inflate your overall expenses.

3. Changing Expenses during Retirement:

It is common notion that expenses will reduce once you retire. But data and experience shows otherwise. For example: Travelling and Medical costs tend rise whilst dependent cost tend to go down and groceries tend to remain the same.

Also, how expenses change depend on the stage retirement you are at. Early on during retirement sees uptick in expenses due to higher travel and entertainment costs. Then they slowly start coming down in the intermittent phase of retirement. Towards your super senior years, they tend to same constant.

4. Medical Costs:

As per Willis Tower Watson Global Medical Trends Survey Report 2018, medical inflation in India is currently at 11.3% p.a. In other words, the cost of the same surgery will double every 6.5 years! Your retirement needs to plan for this.

5. Lifestyle Expenses:

Urban inflation is around 7.7% p.a. on an average in the past 20 years. But that does not account for everything. We aspire for better things during our retirement. For example, you would have a Sony Home Theatre System which would cost approximately Rs 35,000. But aspirations would strive for a Bose System which is closer to Rs 90,000. That is a 181% jump! It is crucial to have both sets of inflation accounted for during retirement.

6. Life Expectancy:

An incorrect assumption of life expectancy can have significant consequence. Data shows the life expectancy of Indians is closer towards 70 years and above. Furthermore, it is a fact that women have higher life expectancy than men. So planning for your spouse’s life expectancy is something which is not given adequate thought.

Life expectancy in developed countries are much higher. And as India steadily progresses to that status, it can be reasonably assumed that our life expectancy will only increase.

These are just some items, amongst others, that need to be carefully looked at to ensure you are planning for a good enough retirement corpus and are financially well placed to live your retirement years in peace.

To provide an even deeper understanding, Plan Ahead Wealth Advisors is conducting a seminar on Planning for Retirement on the 7^th of July 2018.

For a complimentary invite do write in to us or leave us a comment to this blog.

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How to utilise that Annual Bonus

Anxious times lie ahead for employees across India as the season for the annual bonus starts in full swing. People often consider bonuses as “money found” rather than “money gained” and therefore almost always consider using these pots of income for discretionary expenses such as gadgets and treats and vacations. While there’s nothing wrong in indulging oneself, it is also equally important to have the big financial picture in mind.

And whilst the list of to-do items can be endless, we at Plan Ahead Wealth Advisors have distilled that list into a few essential options.

1. Payoff those Debts: As crucial as it can get, reducing those crushing debts can go a long way to ensuring long term financial happiness. With that thought in mind, one should ideally those pay the ballooning credit card and personal loans which have very high interest cost. This could be followed by any car or educational loans, though do remember that an educational Loan has certain tax benefits. If nothing else, prepaying your home loan should also be considered though the pros and cons of prepaying the loan might be best arrived at after consulting with a registered investment advisor.

2. Replenish Emergency Funds: Keeping funds aside for unforeseen events is a handy tool. And ensuring that tool is always at optimal levels is critical. Therefore, if you had dipped in those funds previously, the bonus is a good opportunity to return them to their originally intended levels. Ideally, anywhere between 3-6 months of expenses, including any EMI or insurance premiums, should be available in such funds.

3. Revisit your Insurance Needs: Speaking of insurance premiums, it is common knowledge that with age, insurance requirements change. Chances are high that as you age, your health insurance premium might be bumped up or that you realize that your life cover is inadequate and needs an increase. Using your bonus for such needs is a prudent way to utilize the same.

4. Pay attention to your unfunded Financial Goals: There may be certain milestones that may not have been attended to by you earlier. Some may be upcoming in the next year, while others could be years away. Earning a bonus is always a great time to re look at those goals and use the bonus to bridge any gaps that may be there to fund such items. This could also be, but not limited to, ensuring adequate investments into tax saving instruments as appropriate.

5. Invest in yourself: They say the biggest asset anyone can have is himself/herself. Therefore, using the bonus to upgrade your skills/knowledge can be a rewarding decision for the future either by increasing your prospects for that next big professional leap or even increasing your earning capabilities.

While the above are some of the “to-do” items with bonuses, there are also certain “do nots” that one should look out for, such as:

1. Although quite common, never over spend beforehand, especially with credit cards, with the assumption that you will receive adequate bonuses in time to cover for the same.

2. Money in savings accounts usually vanishes quicker than one expects. So, don’t wait too long on deciding what to do with that bonus. You may find out that by the time you decide what to do with it, it has already been spent somewhere unknowingly.

Bonuses are the result of your hard work throughout the year, so ensuring that your bonus works as hard as you have, can go a long way to a financially secure future. By considering the items listed above, you are more likely to arrive at the right choice of what to do with your bonus. And if you are still confused, it is always advisable to bring on board professional advice to ensure that you are on the correct path.

 

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Your money matters – Simple steps to take charge of your money matters

In today’s world, women are equal to men in most ways. Women have achieved high accolades and are doing very well in modern Indian, sometimes even better than their male counterparts!

However, when it comes to financial planning for their family, most times they take the back seat, leaving the details for the husband to handle. Financial planners are unanimous in saying that when it comes to making investment decisions, women rarely take an initiative. A study commissioned by DSP BlackRock Investment Managers Pvt. Ltd and conducted by global research agency Nielsen across 14 cities in India in July 2013, found that only 23% of working women make their own investment decisions.The reason often is that the complexity of products and the mathematics involved in financial planning makes it seem puzzling.

However, women should take control of their finances. Here’s what the empowered women should do when it comes to financial planning for herself and her family.

Create Self Awareness and Get Involved:The first step would be to involve oneself and start discussing these aspects actively with family. Women face different changes in life which affects their finances – be it marriage, child birth, divorce or death of spouse. If you are a single mother, the financial responsibility of raising a child needs to be planned. If you are just married, understanding the outlook of the spouse and jointly planning the future finances should be a top priority. Therefore, it is important to increase the financial awareness when all is well and to be prepared for adversities. Things to do:

• Read articles / blogs / personal finance books
• Discussing and take active interest along with spouse
• Take the help of a financial planner or advisor
• Attending personal finance sessions

Take advantage of various incentives provided for women:Both the private and public sector institutions provide financial incentives for women, most of which go under the radar. (1) Banks offer customized savings accounts with cash backs and rewards for women who spend using bank’s debit card on shopping, food, etc. Some banks also offer discounts on medical tests required by women like thyroid tests, etc. To save for their kid’s education, mothers can open a ‘Junior/Kid Account’ with the waiver of monthly account balance requirement if it is linked to a Recurring Deposit (RD) Account or a Systematic Investment Plan (SIP). (2) While buying an insurance policy, women receive a benefit on the premium paid as compared to their male counterparts. Traditionally, women pay less premium than men for the same sum insured when it comes to buying a life insurance policy. (3) Many banks offer lower interest rates on home loans if a woman is applying for it or if she is the first applicant for a joint loan. The same goes for car loans too. (4) Some state governments provide certain exemptions with respect to stamp duty and transfer duty in case of sale deeds, conveyance deeds and gift deeds if the property is in the name of a woman.

• Learn and know the available benefits available for women when buying products / availing loans

Cover Risk and Contingency:All the planning you do could be ruined in case of any emergency. Therefore, contingency planning comes before any investment planning. Such contingencies could be risk to life, health, hospitalisation or any unforseen emergency which may require her to step in financially. If you are a working couple or a single earning member family with a loan, having adequate life insurance ensures that dependants will not have to compromise on their finances in the income earner’s In regards to health, various medical research reports say that women live longer and may have more health issues compared to men. Therefore the need for health cover for women.

• Have a contingency fund for your family
• Understand and create enough life cover and health coverfor spouse and you

 Plan for Retirement/ Sabbaticals: For you, retirement can either mean retiring at the end of your working age, usually 60; or when you have children and decide to not work anymore. Various studies show that as women usually live much longer than men, therefore they may outlive their spouses. So, in order to have a secure retirement, it is essential to plan for it well in advance. Factors such as inflation, lifestyle, providing for dependants need to be synced together efficiently.

• Understand the funds that you may need in retirement (with spouse and without spouse) and invest towards it
• In case of sabbatical / pause in work, understand the income loss you may face from such a decision and work towards providing a buffer for it

 Investing: While women are known to be great savers, saving in itself becomes futile if savings are not deployed to grow. Women need to get involved in such aspects and contribute actively. Working women should also understand these nuances rather than letting the husband or father decide about her money and investments.

• Involve yourself in investment decisions, slowly and steadily, to grow confidence and understanding of the subject

 Legacy Planning:– In case of wills, the voice for women to register their own wills is growing louder. Now, more than ever, women have assets in their names which if left without proper will/nominations, can inadvertently end up in the hands of a person for whom the asset was not envisaged. Women may also inherit their parents’ assets. Even in the case of the husband’s will, the wife needs to be informed of the existence and details of such a w Dealing with the loss of a loved one is challenging but can become easy if there is awareness and the lady of the family is prepared and informed.

• Understand and be part of the will making process

 

From the above, you would have gathered how important it is for women to get started on money awareness. Getting women to manage money requires a mindset shift and the above steps, we hope, will give you some pointers on how to start managing your money matters. After all it is your money and it matters.

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The Best Financial Resolutions for 2018

 

The New Year is a great time to overhaul your life for the better. And what better way to do it is make those kind of resolutions that will act as a constant guide in that endeavor. For this, Resolutions, like goals, are best when they’re specific.

Financial resolutions made during beginning of the New Year can determine the shape of your short and long term financial objectives whether is it increasing your savings for retirement or putting aside a little extra for this year’s down payment of that property.

If getting your financial life in order is a resolution for you this year, here are some ideas that may help you get there faster:

1. Save Smartly!:It is common knowledge that

• Income -Expenses = Savings

We suggest change that equation from this year, make it

• Income – Savings = Expenses

This new equation will help create an automatic budget, and will ensure you only spend after saving.

Use automatic investment ideas like SIPs and STPs to transfer your monthly savings to dedicated investments for your goals.

 2. Have Contingencies, for everything!:

Dangers and risks are ever present. They can have sudden and significant impact on your finances if they are realized. So it’s better to be safe that sorry.

• Having a highly liquid corpus (available to you in 48 hrs or less) is one way of doing it.
• Another useful and highly critical step is getting adequately insured. While a variety of insurances are up for grab, focus on the basics first. Sufficient health cover for your family and yourself should top the list.
• Followed by insurance for specific risks such as critical illnesses, accidents and even insurance for your home.
• Another smart thing you should do is take a insurance for any big ticket loan you may be servicing, such as a home loan. You do not want to burden your dependents in the event of you passing away, do you? 

3. Have a Strong Debt Strategy:

• Home Loans / Education Loans

Not all debts/loans are equal. It is essential for you to know which loan is drawing the most interest from you. Also some loans are useful, such as home loan as you have access to an appreciating physical asset or a educational loan from which you stand to appreciate the biggest asset of them all, yourself! Plus it does not hurt that they have tax deduction benefits.

• Personal / Credit Card Loans

Personal/Credit Card loans should be ticked off at the first available opportunity, simply because they have high interest rates. If you had to choose between investing into a fixed income product or pay off a high interest loan, you should ideally opt for repayment. Interest saved is interest earned after all! 

4. Know what you want:

It is said “If you don’t know where you are going, well then, any road will take you there”. It is better to have well defined goals. A goal helps you focus because the end objective is clear. For example, it is probably not enough to say, “I will save some money for that amazing Europe vacation that I always dreamed of.” It needs a lot of planning and finances. You not only need to know the destinations you will visit, you also need to the travel routes you will need to take, how much funds you will need, where all do you intend to spend and so on so forth. The more crisp your goal is, the better actionables you will be able to achieve.

 

5. Invest in yourself:

In today’s highly dynamic world, the word of the day is “reskilling”. As a professional, now more than ever, you have to stay on top in your industry by constantly upgrading your skill sets. Therefore always ensure you have enough kitty set aside so that you can opt for those special courses which will give you that edge in your profession.

While not all resolutions can be worked on simultaneously, it is important that you start with some and even more importantly that you stick to them. Give your resolutions time lines so you know what to prioritize. And work towards strong finances and a worry free New Year 2018!

 

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Power of SIP

Mutual Funds have surely caught the fancy of the Indian Investor community with net flows crossing one lakh crores in 2017! Unlike in the past years, almost everyone we speak with has probably heard of mutual funds. The strong rise in awareness of this investment vehicle has even prompted the Association of Mutual Funds India (AMFI) to cash in on it, with their recent on going advertisement campaign, “Mutual Funds Sahi Hai”.

But what caused this sudden optimism and acceptance of mutual funds as an investment option? It clearly is not a “new trendy option”, for mutual funds have been around for over two decades. While a lot of its features and advantages may contribute to its overall success, one key factor that really has drawn the Indian investor to mutual funds is its ability to create long term wealth, not only for those who invest big lump sums in it, but more decisively, for the salaried class.

The most commonly availed route to invest in mutual funds for the a salaried investor has been Systematic Investment Plan (SIP). It has become synonymous with mutual fund investing. So how does an SIP work? And how does it help in long term wealth creation?

A SIP is simply an investment process to invest systematically every week or month or quarter into a mutual fund scheme at a periodic chosen date. The intent behind this process is that by investing small amounts over a medium or long term tenure, you are sidestepping the issue of market timing. Market timing being the decision to invest based on your view of market movement. As investments will be done over a period of time, such installments would get both the highs and lows of the underlying market, thereby averaging out the purchase cost. This concept is called Rupee Cost Averaging. But for the salaried class a SIP has been looked as a convenient method of investing, as investing monthly from the salary income is a easily achievable goal.

And what about the question of wealth creation? How can a SIP help with wealth creation?

A SIP is a great example of the Compounding Effect, referred to as the Eight Wonder of the World by Albert Einstein. Compounding, or Compound Interest, is the phenomenon where alongside the principal, the interest earned is also reinvested at the same rate of return. So if in Year 1 the principal invested was Rs, 10,000 at 10% rate of interest, the interest to be received at the end of the year would be Rs, 1000. Now because of compounding, the interest is added to the principal in the second year, making principal amount to Rs 11,000 on which 10% returns are gained, resulting in Rs 1,100 as interest in second year and so on so forth. This interest reinvestment is crucial because with passage of time, the increase in principal results in disproportional returns during the latter periods of the investment tenure.

The following table shows how certain equity mutual funds have grown a modest SIP amount of Rs 10,000 per month in the past 10 years:

Fund Name	10 year CAGR (rolling returns)	Total SIP Amount	Market Value
A diversified equity fund	24.72%	Rs. 12 lakhs	Rs. 51 lakhs
A large cap fund	22.98%	Rs. 12 lakhs	Rs 45 lakhs
A flexi cap fund	22.96%	Rs. 12 lakhs	Rs 45 lakhs
A large cap fund	18.96%	Rs. 12 lakhs	Rs 35 lakhs

(Source: Value Express as on 30^th Sept 2017) (Note: All fund data taken for regular plans with growth option)

The following chart shows the value of the investment accelerate due to compounding over time.

(Note: Fund data used is of Diversified Equity Fund from the above table)

Another factor to consider when thinking of compounding is time. The longer you invest and hold the investment, the better results it will provide. The following table is a clear example of the same. Taking the same funds as in the above table, if an investor started late and had to invest for the second half i.e. 5 years and even if he invested at double the SIP amount i.e. Rs 20,000 per month, he/she would not achieve the same end result:

Fund Name	5 year CAGR (rolling returns)	Total SIP Amount	Market Value
A diversified equity fund	19.36%	Rs. 12 lakhs	Rs 36 lakhs
A large cap fund	16.07%	Rs. 12 lakhs	Rs 29 lakhs
A flexi cap fund	19.05%	Rs. 12 lakhs	Rs 35 lakhs
A large cap fund	18.92%	Rs. 12 lakhs	Rs 35 lakhs

(Source: Value Express as on 30^th Sept 2017)

(Note: All fund data taken for regular plans with growth option)

As you may have noticed, barring the last large cap equity fund, all other funds performed significantly better over 10 year tenures, resulting in higher gains, even though in both cases the principal invested was the same.

As an investor you may have noticed various advertisements where mutual Funds are showcasing how much an SIP into their best performing star fund may have grown into, in a certain number of years. While the growth story in many such funds has been substantial, the key note all investors must keep in mind is that this is the result of staying invested into the fund for the long haul, including the times when the fund may have under performed. Compounding and a SIP will only go hand in hand when the investor has the horizon and patience to continue the SIP for a long tenure.

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Mr. Pilot – Are you prepared in case of rough weather ?

This 7^th of December is the International Civil Aviation Day and marks the 50^th Anniversary of the signing of the Convention on International Civil Aviation.The purpose of this day, as pilots all over might be well aware of, is to recognize the importance of aviation to the overall development of the world.

And while pilots draw great confidence from being able to manage the process of reaching passengers to their destinations safely and comfortably, a more pressing question can be that are they confident when it comes to management of their finances?

The profession of a pilot demands almost all their time all year round. Hence they are left with limited personal time which they wish to live to the fullest. And like most busy professionals,more often than not money management seems to come at the end of this wish list. Pilots go through meticulous preparation and planning for their flights daily but sometimes are unable to do so for their finances.

While money is not the end, it is definitely a means to achieve certain objectives. Proper planning and structure to a pilot’s personal finances can result in he/she being prepared for all kinds of life events and responsibilities. Events such as:

1. Sudden Illness:The requirement for pilots to be medically fit is of prime importance as they are responsible for the lives of hundreds of passengers daily. Every pilot needs to ensure a good health cover to cover sudden illness and hospitalisation. A pilot may wonder why would he need insurance when he is already covered. But if one actually things about, it might be prudent to have a separate health insurance cover for times when you may not be employed or between jobs or in cases where employer insurance is inadequate.
2. Need for upgradation of Skill Sets:Like all professions, skill updation is a critical requirement that must be met by all pilots on periodic basis. But these do not come at a cheap cost. Ensuring enough provision and funds are kept aside and is available at the time of requirement can go a long way in avoiding last minute stress.
3. Contingency Needs: A major issue plaguing the aviation industry is the availability of opportunities. The last few years have clearly demonstrated that problems are plenty in the Indian aviation sectors. For eg. Airlines have closed down, pay cuts are becoming common, or there have been significant delays in salary payments. Such events can have huge financial implications on pilots and their families. Having contingency funds parked in highly liquid assets can help bring some normalcy in such difficult times.
4. Retirement and Sunset Years:Insufficient planning for your golden years i.e. Retirement can cause stress. In case of pilots, who are among the top earners amongst professionals, this only magnifies the problem. Why so? Pilots more often than not tend to have busy lifestyles with high discretionary expenses. As such they are accustomed to a lifestyle that will only get more and more expensive as years pass This year on year rise in prices is called Inflation and it is an important factor that more often that not, is grossly underestimated. Furthermore, like any other busy professional, even pilots like to keep themselves occupied during retirement years. The interests or activities that they might pursue would also usually have financial implications. Activities such as investing into various ventures, pursuing hobbies or dream goals, continuing leisure flying by enrolling in the local flying club can be just some of the examples. To be able to fund these without affecting retirement corpus requires careful planning early on.

Take the case of pilot Mr. Sharma. Currently aged 30, the household expenses for him and his family is Rs. 12 lakhs per annum. Even if we assume a general inflation of 8%, the same Rs. 12 lakh will become Rs. 1.75 crores at the age of retirement at 65. ( Rules permit pilots to fly till the age of 65 ). In other words, Mr. Sharma would need to have a big enough corpus at retirement that will provide them atleast Rs 1.75 crores every year that will help them maintain current lifestyles.

Pilots are aware of the importance of planning. Each flight requires hours of pre flight preparation which means going through weather reports, system checks among other items to ensure that the flight goes by without any hitch. Similarly having a strategic plan in place for one’s finances can also help prepare for any “rough weather” that could come along in a pilot’s financial life.

 

 

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Financial Wellness – Is it Important

The traditional thoughts on wellness usually revolves around health and nutrition. However, in our current lifestyle, achieving a good health and having decent nutrition involves regular check ups and having healthy eating habits; which may be kind of difficult if we are stressed about our money. If you ask a group of working people who are having difficulties sleeping at night the reason for this, chances are high that a good number of them will cite financial stress as the cause. The impact of such stress is not unknown to us, with impact on health and loss of productivity just two of the effects.

Here are just a few reasons why Financial Wellness should be giving due consideration in today’s time:

Financial Concerns can be a major source of stress

According to the 2017 PWC Employee Wellness Survey (a survey done for employees in the United States), more than Fifty Percent of the employees surveyed are facing some sort of financial stress.

The Global Benefits Attitudes Survey conducted by Willis Tower Watson further showed that Fifty Three Percent of Indian Employee respondents claimed to have some sort of financial worry i.e. either long or short term, or maybe even both. Furthermore Seventy Three Percent of these respondents claimed that these worries have caused them above average stress. Following is a chart depicting the data collected by the Willis Tower Watson survey:

One in two survey participants have some kind of financial worry!

It can be a major reason for loss of productivity

According to the PWC survey, distractions due to financial stress is a real thing and it can lead to wastage of working hours. The survey indicated that on average, financially stressed people spend up to 3 working hours per week on dealing with financial matters and they are also twice as likely to miss work due to personal financial matters

Improves Physical Well being

The American Psychological Association’s 2016 Stress in America report stated that Sixty Seven Percent of those surveyed revealed that money was a form of stress. And that rise in stress can lead to stress related health concerns.

While these are certain aspects that may be more applicable to an employee, employers should also look at this as a prime employee engagement tool for the following reasons:

Financial Planning take Time

As mentioned above, the stress caused by financial worries forces employees to bring these to the work place. As such they devote working hours to such matters and also altogether take leaves to attend to various financial concerns/emergencies. This only increases the burden of the employer ultimately.

Increases Employee Productivity and builds Loyalty

We have already read how financial worries leads to a loss of productivity in the office. An efficient manner in which employers can counter such trends is to increase financial awareness among its employees. Thus not only will employees worry less and reduce work hours wastage, they are also more likely to use their well deserved breaks better and therefore not be absent from work. Providing financial wellness initiatives can make them confident of planning better for major events like Retirement. This ultimately leads to trust between the organization and its employees, a great source of encouragement for all employers. 

Employees want Support and improve their Financial Literacy

Financially burdened employees would like their employers to help them in achieving wellness. Employees who stress from money issues are looking for help to improve their financial situation.

Financial Well Being is steadily gaining acceptance as an important factor of consideration for one’s overall well being. As such it it becomes critical for an individual to ensure that his/her’s financial situation does not lead to issues that has negative impacts on different aspects of life. And as an employer, Financial Wellness initiatives can be a source of efficient employee engagement and possible retention strategy.

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