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Crisis 5

In today’s ever changing world, with all the geo-political, social, and technological dynamics, job surety is no more a luxury anyone can afford. Be it the CEO of a M.N.C. or a mid level manager, the changing landscape compels us now more than ever to be prepared for the worst.

Even pilots aren’t immune to such extremes. From domestic industry uncertainties to global events, pilots need to be equipped to face such an eventuality. One such recent example is the Qatar diplomatic crisis. With the neighbouring countries cutting diplomatic ties with Qatar and shutting down their airspace for any Qatar bound plane or vice versa, a sense of being besieged looms in the country.  Now while this does not directly result in job losses, such incidents raise the fear, specifically for businesses closely linked to Qatar.

Therefore prudence calls for having certain provisions in place that can help ease this fear. A sort of backup or cushion for facing an event you might have never fathomed.

A checklist of such provisions could possibly look as follows:

Self funded health insurance coverage is important – Most pilots would argue that the employer already provides for this. But that’s the point right? What happens if you get the golden handshake? Guess what, no more health cover. And even if you get a new one, they always come with a waiting period. This means you won’t be covered for a certain period from any pre existing illness. This would not be a situation that you would like to end up with.

 

Personal Accident Policy and Critical Illness Policy coverage – Extending the above point, it’s critical that pilots have a personal accident and a critical illness policy. In the months of no income, one needs to ensure that one is covered for all kinds of risk. In cases where families may have accident or critical illness exigencies during such a period, such types of policies are a godsend. Such personal accident policies, for example provide the insured with either weekly allowances or in some cases a lump sum payout depending on the terms and features of the policy. These payouts can be used for medical expenses that come along with treating such eventualities.

 

An Emergency Fund is a must have – A highly liquid investment is the preferred choice to host such a fund, as it’s meant for immediate use. While Bank FDs and saving accounts is the age old choice, research and time has proven they are better options out there. One such alternative is Liquid Mutual Funds. These typically provide the similar liquidity and safety – principal features that a bank savings account offers, but with the added incentive of significantly higher returns on the investment. These returns currently are in the range of 6-7% versus 4% on your savings account.

 

The objective of this corpus should be to provide enough to maintaining the essential household expenses + EMIs in case of sudden exigencies and or temporary absence of income. Thumb rule states this corpus should ideally support 6 months of household expenses, including EMI’s and Insurance Premiums.

 

Move towards conservative assets – If you feel the crisis period is going to be prolonged then you are better off cutting down on riskier investments and moving towards conservative assets. Why so? Because liquidity needs could crop up anytime. Hence capital protection and not capital appreciation must take the driver’s seat.

 

While in all probability this crisis might be short lived, planning for it should not be left unattended. Like the saying goes, “Better to be safe than sorry”! And checking off this list could just go a long way in maintaining that safety net at all times, even when you might feel down in the dumps financially.

 

Till then, happy flying!!!

 

 

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Retirement 1Retirement is usually something that is not considered by most of us till we are nearing it, so naturally we do not plan for it, until it is probably too late. This general ignorance or lack of attention to retirement planning can have far reaching consequences.

Retirement planning in the simplest sense means preparing for life after the tenure of paid work ends.  This does not only include the financial aspect, but other aspects such as what to do during retirement, the lifestyle choices that one can take and what dreams one might want to pursue during the remainder of the years.

While the concept of Retirement Planning applies to pilots just as it does to other individuals, there are certain unique points that are exclusive to retirement planning for commercial pilots. These unique points are crucial while developing a retirement plan for a pilot.

Firstly, under the current DGCA rules, the retirement age in India has been pushed up to 65. This is an entire 5 years longer than the mandated retirement age in most other industries. This translates to more income earning years, probably at the highest salary slab of the industry, since usually pilots around this age are most likely to have their designations as Captain. This extra income earning period is crucial in formulating and ironing out the retirement plan before the pilot ultimately retires. The significant income flowing could be the difference between living a compromised and a fulfilling retirement.

One of the most important things a commercial pilot has to consider is Lifestyle Inflation. Because commercial pilots have one of the best salary packages amongst all industries, they tend to have more lavish lifestyles. And they are comfortably able to match up the ever increasing expenses that come alongside their lifestyle choices. But on retirement, the salary stops. Yet expenses continue to stay, with inflation only adding to it. But more significantly no one would want to compromise on their lifestyle they have become accustomed to. As such it becomes imperative to plan much ahead so that lifestyle compromises don’t become the norm during your golden years.

Just to drive home the impact of inflation, let’s take an example. Consider a pilot Mr. A, currently 30 years of age and has a monthly expenditure of Rs 12 lakhs every year (not a very high amount, from what we hear from our pilot clientele). Assuming he will retire at age 65 and taking an average of 8% lifestyle inflation till retirement,  the same Rs. 12 lakhs expenditure will inflate to approx Rs. 1.75 crores. In other words, to maintain the lifestyle that costs Rs 12 lakhs as of today, Mr. A would require Rs 1.75 Crores annually to maintain the same expenditure choices, forget upgrading!

Furthermore, pilots are used to having extremely busy schedules. So when retirement hits, they are unprepared to handle the ample time in hand. Hence they always look for options to keep themselves engaged. This could mean, taking long leisure trips or finding, researching on and investing lump sums in “exciting investment avenues”, committing money to be part of a start up or just following their long drawn passions or enrol at the local flying clubs just so that they can regularly indulge their lifetime love of flying. All this comes at hefty financial expenditures.

All of the above means that Pilots would need to plan and develop customized retirement plans for themselves to ensure a smooth flight during retirement.

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As a passenger, getting from point A to B simply includes sitting on your assigned seat and enjoying the flight till the destination. You are completely unaware of the preparation and planning that goes behind every flight.  A smooth flight is an end result of the meticulous preparatory work including facing any emergency.

All sorts of emergencies can happen during a flight. Engine malfunctions, instrument failures and unanticipated weather issues are just some of the emergencies pilots can face at any time.  In such times the long hours of training, learning from past experiences and pre flight preparations comes to the front and saves the day. Sometimes passengers are blissfully unaware of the issue and continue to enjoy the flight. All this all possible because one aspect, planning! More specifically, planning for an emergency.

Yet, more often than not, pilots in the Indian aviation sector seem to be unprepared for one kind of emergency that is their own personal financial emergencies.

Personal financial emergencies can be broadly classified into two types based on nature of emergency i.e. (A) loss of job or life and (B) unexpected big ticket financial commitments.

While both can prove to be a heavy toll on one’s finances, if we look back to the last 5 years of the Indian Aviation Industry, job losses have been a major theme throughout.

Now as a pilot you earn a handsome salary starting from a young age. Hence your lifestyle tends to be on the more plentiful side.  And this only increases in significant jumps as you climb higher in your career. As such expenses are always on higher side. Luxury cars, high discretionary expenses, significant EMI’s and top notch education for children. All well within your reach. That is as long as you continue to earn that kind of money.

But what happens if you can’t? What if salaries are not paid for months or worse, you are given the golden handshake. What then? Take a step back and think about this for a minute. Ask yourself, will I be able to continue to live the life I have led so far under such circumstances; at least temporarily till I can get things back on track?

A majority of pilots will fail to have an answer to this. And that’s far from ideal!

So what should you do now? How do you start preparing for such unforeseen events? A thousand questions and ideas might run through your mind. Maybe you can get it right, maybe not. But with the help of a trusted financial advisor, who knows the intricacies of the aviation sector, you could stand a much better chance of confidently facing such troublesome periods, safe in the knowledge that you were geared up for it in advance. Exactly like handling an emergency while flying a plane.

As professionals specialized in planning for the worse, it definitely be worth your time for us to meet and discuss how to enrich your life.

Till then, happy flying!

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Plan Ahead has won the Outlook Money Best Investment Advisor of the year 2016

 

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Plan Ahead would like to express our heart felt gratitude to our clients for the unstinting support, basis which we continue to strive to be the best advisor in the country. 

Thank you and we look forward to your continued support and encouragement.

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Over the weekend there was news that RBI Governor Raghuram Rajan’s term is ending on 4th September 2016. The market clearly does not like surprises, and therefore the impact could be short term volatility in currency,equity  and bond markets. Thus, whilst this is clearly a short term impact to India’s image in the international community and financial investors, we believe there is a list of very eligible candidates who can be appointed. In fact, the events over the weekend are likely to get the government to move much faster on finding an approprite replacement, and thus we believer there is no need of changes in your investment portfolio as a result of this. Ultimately, we believe that institutions are typically bigger than their chief executive.

The event which is likely to have a much bigger impact is the probability of Britain moving out of the European Union.  Over the last couple of weeks, there has been significantly higher newsflow around Brexit and the importance of 23rd and 24th June for world markets, due to the Brexit. Let’s understand the possible impacts of Brexit on your personal finances.

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What is Brexit?

The European Union has 28 countries as its members. European policies currently aim to ensure free movement of people, goods, services and capital amongst its member states. Out of these, 19 members use Euro as its currency. Britain which is one of its members is evaluting whether it needs to stay in the EU or exit. That’s why it is termed as Brexit – ‘ Britain Exit’.

Bexit and your investments

There is a possibility of largely two scenarios in the referendum on the Brexit, that is,  either a leave or a stay. Let’s examine the impact of each of these on your investments separately. As indicated, this will be decided on the basis of a referendum which is going to be held on 23 June – a final decision will be taken on the basis of the votes.

Scenario 1– Leave

  • Depreciating Pound and Euro / Strengthening Dollar and Yen– Thus, if you have kids studying in the UK or planning to study there, you couldend up paying lesser.
  • Strengthening Dollar

The US dollar could then be expected to strengthen in the short term as investors will rush to Dollar as a safe investment vehicle. If you have any dollar denominated investments then those will increase in value.

  • Sell off in the emerging markets

In the short term emerging markets including India , as well as UK and European markets, could experience volatility due to flight of capital to safety . However, the expectation is that impact on India will be lesser compared to the other emerging markets due to its realtively stronger fundamentals. Thus, if you have investments in emerging markets then those might see temporary fall in returns. Do not panic and sell. Over the longer term, the performance of your emerging market funds will depend on the economic scenarios of the individual countries to which your fund is exposed to, apart from the temporary brexit effect.

  • Gold could become attractive

Gold is gaining importance as an  investment vehicle with rising global uncertainties. Therefore, Gold Exchange Traded funds, Gold funds and sovereign gold bonds could benefit from this price rise of gold, as well as strength of the US dollar.

Scenario 2- Stay

  • Equity markets could react positively

This will ideally mean increase in the value of your equity investments since world markets could do well, as the overhang of the Brexit has led to signficant market volatility over the last few weeks. A relief rally could follow, especially as multiple other EU countries are also at this point looking to see what the UK does with the Brexit.

  • Bond markets could be stable

If the brexit does not take place there may not be any selloff in the bond markets which means the yields could remain as is. The higher inflation ovehang on domestic bonds is likely to be the driver of bond prices going forward in that case.

  • Euro/Pound sterling could strengthen

There will be increased confidence in European markets and Euro could appreciate. Your Euro denominated investments could do well in this case.

All in all,

Since the outcome is hard to call currently, one may need to track this event carefully, and decide you investment strategy carefully basis the outcome of the referendum. In the short term volatility may be expected to be higher than normal, but do not take panic calls and stick to your asset allocationand overall financial goals and plans.

 

 

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For cricket enthusiasts, the last week saw two glorious innings and sixes galore at the World Cup from Chris Gayle and A B De Villiers. Indophiles were seeking the same from the first real budget of the Modi Jaitley duo – some big sixes out of the stadium or big bang reforms as it was more popularly known in the run up to the Budget.

So did Budget 2015 deliver on those expectations?
We thought there were a few sixes, but mostly a combination of singles, twos and boundaries, essentially an innings that is being built for the long term so that India is well prepared to hit many more sixes when it really matters.

  1. Inflation targeting agreement with RBI – Inflation and inflationary expectations have been a huge challenge for India, and we will now have both the Central Bank and the government willing to work together through a Monetary Policy committee to have coordinated action on the inflation front. Inflation is the single largest variable that influences your personal financial plan, so stability around inflation should be your biggest benefit as an investor.
  2. Roll out of the Goods and Services Tax (GST) by April 2016 – We finally have a clear date to look forward to, for a tax regime that is potentially much easier. Remember though, that GST will take a couple of years to settle down, and is not likely to change things overnight.
  3. Scrapping of the Direct Tax Code (DTC) – Stability of a tax regime is most critical and the DTC was trying to change too many things at once. It got a quiet burial in this budget.
  4. Focus on ease of doing business – Whether you run your own businesses or are salaried, the need to get rid of red tape and make it simpler and easier to move forward, will be of huge help. Plug and Play could be significant.
  5. Collaborative Centre State Relationships – The Big Daddy approach of the Central government, getting replaced by a collaborative approach and greater flexibility for states to spend their monies in areas where they think it is most relevant, is refreshing. After all, don’t we all think that it is critical to know what’s happening on the ground to finally decide.
  6. Focus on financial assets – With most Indian households having a significant portion of their wealth in physical assets like real estate and gold, there has been a significant effort to get savings towards financial assets. This focus is evident through the fact that even where the underlying asset could still be physical, products like Real Estate Investment Trusts ( REITs) and sovereign gold bonds get a fillip.

Union Budget 2015 and your financial life

Your income

  1. Additional 2% surcharge on annual taxable income – In case you earn more than Rs. 1 crore, you will need to pay a higher tax due to this enhanced surcharge.
  2. Transport allowance exemption doubled to Rs 19200 per annum – Most people will benefit, and expect your employer to restructure your salary so that this benefit is available for you.
  3. Additional tax saving of Rs 50000 per annum by investing in the New Pension Scheme (NPS) – Whilst the tax break is important, weigh this tax benefit vis a vis the fact that the returns from the NPS are taxable, and necessarily need to be annuitized to a significant extent. Ensure that your choice of a retirement product is not driven by the tax benefit alone.
  4. Higher deductions on health insurance – Limits raised to Rs. 25000 per annum for those below 60 and Rs. 30000 per annum for those above 60. In case of those over 80, even though they may not be covered by health insurance, medical expenses of upto Rs. 30000 will be permitted as a deduction.

Your expenses

  1. Increase in service tax – You will need to pay higher service tax for the services that you consume, as service tax has been raised to 14%. In addition, there is an enabling provision to charge 2% additionally as a cess, which may or may not be used. If introduced, service tax could then move to 16%.
  2. Better targeted subsidies – In the past, we may have all benefited due to the fact that subsidies were provided across the board. With significant focused on direct benefit transfers, expect these subsidies to be available only to those who truly need it. The JAM trinity (Jan Dhan, Aadhaar and Mobile numbers) could have this working quicker than anticipated.
  3. PAN mandatory for all expenses above Rs. 1 lakh – Whilst this will help in curbing unaccounted money, let’s hope that the process does not increase notices to people who are paying all their taxes anyways.

Your Overall portfolio

  1. Scrapping of wealth tax – making it easier for you to decide on which asset class to invest in rather than worrying about tax arbitrage on one asset class over another.
  2. Asset allocation continues to hold the key – Whilst Union Budgets can tactically create some short term opportunities, this budget was devoid of any such big opportunities, and is a more workman like budget , getting you to focus on how your investments are structured to benefit from the long term story of India.
  3. Your overseas holdings need to be fully reported and taxes paid – If you have ever worked overseas or have any monies, bank accounts, assets held overseas and have been too busy to declare them, please ensure you do so now as the penalties are very significant from now on.

Your investments in equity markets

  1. Capital gains tax benefits remain as is – India has one of the most advantageous tax regimes for long term capital gains taxes in equity markets through stocks and mutual funds. There has been no change in this regard.
  2. Corporate tax reduction from 30% to 25% over four years – With the effective tax rate in India being approximately 23% currently, this is unlikely to be a significant change. In fact, for FY 15-16, corporate  taxes will go up marginally.
  3. Multiple answers for foreign investors – Many unanswered questions for foreigners have been answered – no retrospective taxation, GAAR being deferred, a composite cap for foreign investments instead of FPI and FDI limits separately, amongst others.
  4. Infrastructure gets a big boost – The multiplier that infrastructure growth can create, can be significant if the challenges of the past can be addressed. Initiatives like plug and play, greater focus on roads and power, and some innovative financing tools like the National Investment and Infrastructure Fund, could move GDP up significantly, which could see India remain a favorite investment destination for foreigners to invest in through equity markets.
  5. High strategic disinvestment target – Whilst the companies that will be divested is unclear, there is an expectation that privatization could come back as details of this become clearer, ensuring the government stays in businesses only where it absolutely needs to.

As earnings continue to be sluggish, look to build your exposure to equities gradually over the six months to 1 year through systematic investment strategies, so that you can take advantage of volatility driven by news from overseas and domestic issues.

Your investments in fixed income

  1. Fiscal deficit at 3.9% of GDP– With the government sticking to its medium term target of 3% but moving it by a year, it seemed like a tight balancing act, trying to keep the foreigners and rating agencies controlled on one side, and people screaming for growth through higher spending quiet on the other.
  2. Net Market borrowing at Rs 4.56 lakh crores – There was a wide range of expectations on this number, and the fact that it has gone up only marginally vis a vis last year, will mean that supply of government paper will be controlled, thereby helping in controlling interest rates.
  3. TDS on recurring deposits and cooperative banks introduced – As a part of the widening of the tax net, recurring deposits will also be subject to TDS from June 2015 and deposits with cooperative banks will also be subject to TDS.
  4. Dividend distribution tax on debt funds hiked marginally – increased from 28.325% to 28.84 % is unlikely to have any significant impact.
  5. Tax free bonds make a comeback – With the focus on infrastructure, the government has announced issuance of tax free bonds, which should enable investors seeking to lock into interest rates for a longer duration, an option to do so.

Whilst the timing of the next interest rate cut is going to be challenging to guess, the expectation of lower interest rates in the economy over the next 12 -24 months should continue. Thus, having between one third to half of your portfolio to take advantage of falling interest rates through government securities, income funds and dynamic bond funds would be a suggested approach.

Your investments in gold

  1. Import duty on gold remains as is– There was a consensus view that import duties on gold would be reduced either partially or fully. They have been kept as is, keeping domestic gold prices elevated vis a vis international prices
  2. Introduction of sovereign gold bonds – Whilst gold ETFs and gold mutual funds already exist giving you access to the change in prices of gold without holding it physically, gold bonds are expected to also pay a fixed return, making gold a potential income generating instrument from only being dependent on capital gains for investors to generate returns. Details are awaited.
  3. Demonetisation of physical gold – With a significant amount of gold in India lying in cupboards and lockers, the gold monetization scheme that was announced is expected to get investors to deposit their gold and earn a rate of return on it. Similar schemes have not worked in the past, so we will have to see how it is structured to make it succeed this time.

Your investments in Real Estate

  1. Real Estate Investment Trusts ( REITs) and Infrastructure Investment Trust (InviTs) get tax clarity –  Whilst these are very popular overseas, the lack of tax clarity prevented them from taking off. With the pass through status of these vehicles getting clarity, expect these to be launched this year, and a potential new addition to your portfolio.
  2. Black money reduction – Multiple steps like making it mandatory for all payments and receipts for real estate transactions above Rs. 20000 to be in cheque and a benami transaction prohibition bill should result in reduction of black money reduction in real estate.

So whilst India continues on its journey to retain its World Cup Cricket title, let’s hope the implementation of this budget makes India retain its most favoured investment destination status in the years ahead.

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