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Archive for the ‘Retirement Planning’ Category

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National Pension Scheme (NPS) which is a defined contributory savings scheme was introduced by the government with an intention to provide retirement solutions for Indian citizens.

Under the NPS there are two types of accounts – Tier I (pension account) and Tier II (investment account).

  • Tier I is the a mandatory account which allows limited withdrawal options until the person reaches the age of 60.
  • Tier II which is a voluntary savings/investment account is more flexible and allows the subscribers to withdraw as and when they wish without any restrictions.

In Jan 2018, the PFRDA (NPS regulator) relaxed the withdrawal norms and allowed the subscribers to withdraw up to 25% of the balance after the completion of 3 years. The purpose of withdrawal included treatment of specified illness of a family member, education of children, wedding expenses of children and purchase or construction of house.

Partial withdrawals – some more options now

The PFRDA has recently added two more events under which partial withdrawal from the NPS can be made before retirement. They are as follows:

  • Partial withdrawal towards meeting the expenses pertaining to employee’s self- development/ skill development/ re- skillingwill be allowed. This includes gaining higher education or professional qualification for which the employee might require in and out of India. However, if such activities on request of the employee are sponsored by the employer then these will not be considered as a class for withdrawal as in such cases the employer bears all the expenses.
  • Partial withdrawal towards meeting the expenses for the establishment of own venture or a start upshall be permitted. However, if an employer-employee relationship exists, then in that case the partial withdrawal will not be applicable.

There are certain limitations to the partial withdrawal clause which remain unchanged:

  • The subscriber should have been a member of NPS for a period of at least 3 years from the date of joining.
  • The subscriber shall be permitted to withdraw accumulations not exceeding 25% of the contributions made by him or her, standing in his/her credit in his or her individual pension account as on the date of application from the withdrawal without considering any returns thereon.

For instance, if you have Rs. 2 lakhs in your account out of which Rs 1 lakh was contributed by you and Rs 1 Lakh was contributed by your employer, then you will be able to withdraw only Rs. 25000 or 25% of your contributions.

  • The frequency of total partial withdrawals shall remain unchanged i.e. the subscriber shall be allowed to withdraw a maximum of 3 times throughout the entire tenure of the subscription of the NPS. For the withdrawal, the subscriber must make a request to the central record keeping agency or the Nodal office.


Adding equities to your retirement corpus

In addition to adding more withdrawal options, there have also been increases in the allowed equity percentage to the retirement corpus. The percentage of equity assets that a subscriber can choose under active choice have been increased. The percentage of equity assets allowed has been increased to 75% from 50% (applicable for non government employees).

All in all the PFRDA is trying to make the NPS more attractive as a retirement solution. Depending on your age, time horizon, risk profile and current retirement corpus investments, the NPS could still prove as one of the avenues that you could consider using for building a retirement corpus.

 

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

1In 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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SIP Plant

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 30th 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.

compounding effects in SIP

(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 30th 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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Landing airplane

This 7th of December is the International Civil Aviation Day and marks the 50th 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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1 (1) (1)In a world where access to internet is becoming more and more widespread, information on almost anything is subsequently becoming easier to find, simply by “Googling” it. Furthermore, free information quite often results in self proclaimed experts of the field, sometimes resulting in unfavorable outcomes for anyone who follows their views/advice without understanding how such individuals arrived at those outlooks.

As such it is important to separate a few facts from myths in terms of what data an individual should consider when faced with some common financial planning aspects rather than what is most commonly/easily available of the internet.

Sending children abroad for higher education is no more a matter of consideration for the upper class families. Nowadays, more and more middle class families aspire to send their children outside India for their education. As such, planning for such an major event requires careful attention. The common misconception is to take simple average rise of Indian education costs and apply the same data for education in a foreign country. However, two critical data points get missed out in such an exercise, (A) the rise in education costs in that particular country to which you plan to send your child. It is inappropriate to consider the inflation numbers would be identical or even similar to that of India. (B) the rise/fall in the currency exchange rate for the two countries in consideration. The following illustration should help clear this concept:

Particulars % Change
Rise in average education cost of  universities in the U.S. in last 10 years 5%
Rise in Currency Exchange rate in last 5 years 4%
Total Inflation to Consider 9%

Now In comparison the inflation rate for the Indian colleges is approximately 10%-11% p.a.

Talking about inflation, another topic of debate is if the Consumer Price Index (CPI) data is an adequate inflation benchmark, especially for higher middle class/ HNI families. To put things in perspective, following is a snapshot of items considered in the CPI basket and their respective weight-age:

Sr. No Particulars Weightage
1 Food and Beverages 45.86%
2 Pan, Tobacco and Intoxicants 2.38%
3 Clothing and Footwear 6.53%
4 Housing 10.07%
5 Fuel and Light 6.84%
6 Miscellaneous 28.32%

(Source: Ministry of Statistics Programme Implementation Circular Dated 14th March,2017)

As you can see, the weight age of expenses, while more suitable for the lower strata of income generating families, might not be appropriate for the higher end. Something like expenses on food/groceries would certainly not be half the expenses. As such, while current CPI numbers are around 3.5%, indicating that going forward inflation is to be expected around that range, it would be right to assume that a middle class family living in Mumbai would face the same inflation rates. A more appropriate method would be to calculate the individual inflation of major expense heads i.e. food, rent, education, lifestyle expenses and find the average of the same. You would more likely discover a very different inflation rate compared to the CPI.

Past returns is a favorite filter for most investors when choosing products of an asset class, especially stocks and mutual funds. However almost all online data provided by various service providers show Trailing Returns.. Trailing returns show how a fund has performed from date A to date B, by simply seeing the difference in NAV of those dates. But it does not show how consistently it performed in that period. A recent upswing in its performance can skew the average of say a 3 or 5 year performance. To adjust for this, Rolling Returns is considered. It does not take only one block of a 3year period but several blocks of such periods. Thus it allows you to see a range of performances across blocks of time. They therefore capture performance of funds over different market periods, giving a more reliable view of the fund’s performance

Similarly, another topic of debate is usage of Total Return Index v/s Simple Price Index as a benchmark when selecting a mutual fund. A Simple Price Index only captures the capital gains due to stock movements in the fund. But the Total Return Index considers the capital gains and dividend paid by the companies to the investors. Hence it shows a truer picture of the returns. Almost all mutual funds today benchmark their returns against the Simple Price Index. This can result in showing higher alpha generation by the fund which may not give the right picture to the investor. For example, Nifty 50 Price Index over past one year (as on 27th October 2017) was 18.63 percent and Nifty Total Return Index for the same period showed 19.75 percent. Hence a mutual fund will show different alpha based on the benchmark used.

Plan Ahead Wealth Advisors believes that Rolling Returns and the Total Price Index are the correct data points to consider.

Finally, the widespread use of the general rule of thumb when it comes purchasing a Term Insurance Plan i.e. the sum assured is to be 15-20 times the annual income. Procuring a term plan should be about covering financial risks that may befall on the dependants in case of an unfortunate event. Financial risk does not only include loss of income but also other factors such as pending liabilities, future financial goals, current assets that can be redeemed shortly to meet any obligations. Such factors also play a significant role in determining how much cover needs to be taken.

Using the right data is critical during the financial planning process. As you can see, wrong data can lead to significant errors/assumptions which can have detrimental impacts.

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uncertain inflowsI have uncertain inflows – how should I invest?

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. Therefore it becomes important how an individual plans to use his/her hard earned money. More so when the inflows are not necessarily streamlined and consistent like that of an employee. When your personal income is linked to the performance of your firm, a well thought out plan could be all the difference between financial stability or having to make huge compromises.

Being a HR firm owner can have its ups and downs. By following certain simple financial planning steps, you can have some peace of mind with regards to your personal financial situation even though you may not have a steady income:

  1. Contingency Fund: This is a basic yet most critical part of any financial planning for a self employed individual. You never know when your next pay check may come. So it pays to prepare for the worst. Thumb rule has always been 3-6 months worth of household expenses to be kept aside in highly liquid assets as an Emergency Fund. Yet we feel that when it comes to a owner/manager, it should be at least 6-9 months worth of basic expenses!  A handy tip, do not forget to count any committed payments such as EMIs and any insurance premiums when calculating the corpus. 
  1. Risk Planning: or in lay man terms, Insurance Planning. This could be a considered an extension of contingency planning, but for very specific events. Following are the types of insurance policies one must always have at all times: 
  • Term Life Insurance Plan: The plain vanilla term plan is exactly the only kind of life insurance anyone should purchase. Handy tip, to know the amount of cover you might need, start with at least 15 times your annual revenue/income. Don’t forget, insurance should never be mistaken for an investment!
  • Individual Health Insurance: If nothing else, an individual health cover to at least cover your own standard hospitalization expenses is a must. Financial independence means you should be able to fend for yourself at the very least, even if it paying for your own recovery. 
  • Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lump sum payment to tide over the finances needed, in case of being diagnosed with a critical illness.
  • Personal Accident Policy: Another source of financial risk associated with most professionals is loss of income/job due to an accident. Similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy. This can be used to either pay off medical expenses or help in taking care of household expenses during the recovery period.

While more types of insurances are available, it is essential that this set is acquired first. Having your Contingency funds and Risk Planning in place makes a strong base for you to venture into the world of investments.

  1. Planning for Retirement: Retirement, or as financial advisors put it, Financial Freedom, is something we all aspire for. The dream of not working for the sake of survival is a goal we all work towards. Yet having an uncertain income can make such a dream feel a little distant more often than not. And while retirement always seem likes a far off goal in comparison to what seem like more pressing concerns, it should ALWAYS be top priority! Underestimating your retirement financial needs can be the one of the biggest mistakes you could make and more often than not, people realize it far too late to make any significant course corrections. Even if you have to start with small amounts, it is the consistency and discipline that will ultimately help you reach your goal.
  1. Financial Goal Planning: Only after the first three steps are in place, is when you should really consider planning for the rest of the commitments/aspirations that you might have. As with any goal planning, the two critical aspects to consider are time horizon and future value of the goal, not current value. If you get these two right, the rest becomes clear.

For any individual with uncertain income flows, planning can become easier if you can channelize your savings, prioritizing in the above order! It is essentially in this area where the difference between financial planning for an owner of a firm/business versus that for an employed individual lies.

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