Your daughter – have you planned for her goals?

Having a girl child is a moment of great joy for parents! But planning for the darling daughter’s future is also something that is always top of the minds of Indian parents. Early and sound planning can go a long way in ensuring the future of your daughter. Following are some ideas that as a parent you could consider when planning for your daughter’s future:

Ensuring Medical Cover is in place:In an ever changing environment and the growing threats of lifestyle related health problems, children are no more immune to major health concerns. As such, having them medically insured should be on high priority. While a stand alone health policy might be excessive, including them in your family floater is a practical option. Depending on the policy you chose, the minimum age requirements can range from 91 days to 3 years old.

Investing for your Daughter’s Future:Indian parents today are still actively looking to fund for their child’s future. Additionally parents of the daughter are still largely expected to fund for the “Big Fat Indian Wedding”. Following are some of the investment options out there which parents could consider and evaluate basis their requirements:

 

 

• Sukanya SamriddhiYojana: A government initiative to encourage Indian parents to invest specifically for their daughter’s future. It provides the highest guaranteed returns of all government investment schemes and is currently providing 8.4% p.a. tax free. Furthermore, contributions to it are eligible for tax deductions upto Rs. 1.5 lakhs under Sec 80C. While some might criticise its lock in policy, the other way to look at this that it is a significant tool to partially, if not fully fund, the most important requirements of the daughter i.e. Her Education and Marriage

 

• PPF: Another popular government scheme. Similar to Sukanya SamriddhiYojana in providing tax benefits under Sec 80C. However the current tax free returns are 7.9%. With a 15 year fixed lock in policy, its highly advisable that the parents open the account during the daughter’s early childhood and invest regularly in it to achieve a sizable corpus.

 

• Mutual Funds: A combination of Equity and Debt Mutual Funds are a great way to ensure both short and long term goals of the daughter are met. One needs to identify which type of mutual fund and subsequently which scheme under that type would be most appropriate to invest into basis the requirements.

 

• Gold: An all time favorite for Indians. While traditionally Indians have always bought and kept physical gold, there are more convenient options now available. Gold ETFs and Sovereign Gold Bonds are becoming increasingly popular among Indian investors.Both track gold prices and have the added advantage of no storage/making costs and no risks of theft/tampering.

 

• Child Plans: Various Mutual Funds and Insurance Companies provide plans that are specific for children. Most of these options have a stringent lock in period and take exposure in equity and debt markets.The lock ins on these plans may work in favor when parents are looking to match the lock-in with the daughter’s goals.

Estate Planning:As a minor, two aspects become critical in ensuring that whatever hard work that went into planning for the child does not go to waste in case of a sudden demise of one/both parents. A will helps to confirm who will be the legal guardian of the child in case of an unfortunate event. It will also ensure that the money meant to go towards the requirements of the daughter actually is received by her at an appropriate time and the wishes of the parents as regards their monies for the daughter are honored.

Parents are always concerned with providing for their children. As such, it is always advisable to start planning early on in the child’s life. Understanding the child’s near and long term needs is a good way to start planning. And the correct planning can ensure peace of mind and happiness for both the parents and the daughter.

 

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How effective Treasury Management can ensure stability for HR Consultancy firms

As the owner and /or CEO of your HR Consultancy firm, cash flow management is a constant topic of discussions with the finance and accounts team.

What do with the excess cash in hand? Where should it be deployed so that it works a little bit more and grows whilst being highly liquid and safe? How does one ensure that enough reserves are maintained to fund working capital expenses during the low business cycles?

What makes cashflow management critical is that it helps the firm maintain the business flow and also balance better returns for idle money. This in turn goes a long way in ensuring operational functioning and continuity. The question is how is this achieved?

First things first, when you talk about treasury management, you are indirectly referring to constant flow of money in very short time periods. And as most boutique/SME’s face volatile business turnovers, money can be required on priority basis at any point. Hence the priority in Treasury Management primarily lies in ensuring liquidity and safety of capital invested rather than high returns.

Secondly, while significant growth in short term investments should not be expected; it should not necessarily be considered that there are no better options other than the company current account. While Fixed Deposits and Recurring Deposits have been traditional avenues for company owners to park extra monies, they remain inefficient from a taxation perspective. Tax Deducted at Source (TDS) is a definite thorn as tax incidence is occurring even though there are no capital gains received in hand.  Furthermore, falling interest rate scenarios are making them an even less attractive option.

An alternative that should be considered is liquid/ultra short Term/ short term debt mutual funds. Two aspects they score over traditional avenues is (A) they usually do not have any exit penalties  as compared to bank FDs and (B) they are more tax efficient due to tax deferment, as tax incidence only occurs at the time of realised capital gains at the hands of the investor, and they are eligible for indexation benefits as gains from any debt mutual fund investment held for 3 years or longer are taxed at 20% after indexation, thereby improving post tax returns.

In addition, often companies decide to park certain monies with a longer term view. This could be to prepare for possible expansion/acquisition as envisaged in their business plans. But as the requirement of funds is not in the immediate future, short term investment options might not work out in the best interest. Hence separate planning should be considered for such investment purposes.

Last but not least, understanding past company cashflows and extrapolating the data to approximate future cashflows is essential to determine the kind of investment strategy would be ideal. This analysis, while including business growth projections, should also include current liability repayments and expected abnormal gains in the future.

While managing cashflows will indeed be a constant objective, through efficient planning and proper advisory it need not become a source of constant headaches.

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Why Risk Management is critical for HR Consultancy firms!!

Insurance is still a highly misunderstood concept in India. People often look at insurance plans as an investment option. Yet the golden rule of insurance is that it should always be separated from your investments. For a HR Consultancy Owner, a combination of various types of insurance policies can insulate the business as well as themselves and their family from potential risks. Insurance policies such as:

• Vanilla Term Life Insurance: This is a primary insurance that one should procure for pure life cover. The sole objective of such a policy is to ensure continued financial stability for your family in the eventuality of your sudden demise.
• An Individual/Family Health Insurance: This type of policy is meant to cover for standard hospitalization expenses in case of an illness. Depending on the requirements, such policies can cover just a single individual to a family of four and even more.

However, one must now look beyond these basic necessities. Someone who is constantly on the move and if he/she is the sole bread earner of the family needs to have other risks covered. Risks such as:

• 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. This phase of “no cash inflow” could be extended if recovery periods take longer than expected due to a serious illness. As such a substitute income source has to be provided for such situations, either to pay, at least partially, for basic household expenses or fund the significant expenses that are part of any big medical procedure. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lumpsum payment to tide over the finances needed in case of being diagnosed with a critical illness.
• Personal Accident Policy: Another source of risks associated with most professionals is loss of income/job due to an accident. In such cases, temporary or permanent disability caused due to any accident can force the individual to stop or totally cease his work. On top of that the costs related to recovery are usually on the higher side. Hence, 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 which can be used to either pay off medical expenses or help in taking care of household expenses.

But insurance should not have to be curtailed to insure just the individual. Founders of HR consultancy firms are usually the most valued personnel in the organization. After all, they are ones that drive the image and the growth of the firm forward, eventually becoming indispensable to the firm. The firm therefore must look to protect itself from possible fall in revenue/image from unforeseen events related to such individuals. Policies such as:

• Keyman Insurance Policy: this is a policy that a firm takes for a key employee such as the CEO/Founder, through whom a lot of business is generated. Losing such a valuable individual due to his/her demise can lead to significant financial loss. Hence in addition to being tax efficient from the company standpoint, such a policy also helps the firm deal with such loss in case of an unfortunate event.
•  Directors and Officers Liability Policy: This is a little more unconventional type of a policy. It is specifically applicable only when to provide cover for the personal liability of Directors arising due to mistaken actions carried out by directors in pursuance of their managerial duties. Such policies covers paying for legal costs incurred while defending the individual director in a court of law. Such policies provide protection for claims brought against directors and officers for actual or alleged breach of duty.

A combination of such policies may be crucial for HR Consultancy Firm owners to cover risks. Uncertainties are the only certainty in life. And while you can never rule them out completely, you can soften the hardships that come with such hard times if you have the necessary insurances in place. In the end, that is the singular function of any Risk Management Plan.

 

 

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Why HR Consultancy Owners should plan their finances!

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. From striving to improve one’s lifestyle to providing for your family and their requirements, money forms a critical element to ensure such objectives are met. 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 any regular employee.

Being the owner/ partner of an HR Consultancy firm can bring about such financial challenges. Challenges such as:

• Separating Personal and Business Finances/Assets: Like any SME industry, HR Consultancy firm owners/partners often have their personal and business finances completely intertwined. Usually the business demands all the attention and inputs, often forcing the owner to align and every sacrifice to a certain extent on the personal financial needs. This often leads to personal assets being exposed to business risks. Professional advice can go a long way in separating both sides while ensuring requirements for both are met.
• Treasury Management: In the cut throat environment of HR Consultancy, business can have highly volatile periods resulting in fluctuating cash flows. The owner/partner generally does not have the time or expertise to better handle his company’s liquidity requirements or the expertise. A professional view might help you better manage such difficulties.
• Contingency Planning: With complete commitment to business requirements, owners/partners often forget to provision for personal emergencies. This more often than not results in these individuals turning to overdraft facilities and/or soft loans from members of close circles. Also, people consider their Bank Savings Account as an avenue that fulfils this purpose. While it does check on the liquidity parameter, it falls short on possible returns and taxation. A suitable alternative could be Liquid Mutual Funds. They provide the same liquidity, but also provide superior returns. And lastly, if these funds are held for 3 years or more, they are given preferential tax treatments due to indexation.
• Risk Planning: for very specific events, or in lay man term, Insurance Planning. 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.

While more types of insurances, 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 financial planning and investments.

• 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’s financial needs can be the one of the biggest mistakes you could make and more often than not, people realise 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.
• Financial Goal Planning: With the pressure of handling both a business as well as personal priorities, identifying/planning/prioritizing for certain personal duties sometimes takes a back seat. It is in such moments that Financial Planning through a professional can make significant difference in how to navigate through such critical decisions.

For the owner/partner with volatile income, planning can become easier if you can channelize your savings in to the above mentioned order. Prioritizing can make all the difference! It is essentially in this area where the difference between financial planning for a self employed individual versus that for an employed individual lies.

 

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Do NRIs need a Financial Plan

From our experience of interactions with nonresident investors, we have found that a significant number of investments by NRIs tend to be made during their short visits to India.

During that period, when they visit their bank or speak to relatives/ friends, they get a broad view on what is happening to various asset classes – be it real estate, stock markets, or bank deposit interest rates. Between the various social obligations, time with family, and other things to do in their action packed agenda, quick investment decisions tend to be made, a large number of which tend to be long term commitments through investments in long term insurance policies/ real estate investments. Unfortunately, a large number of these investment decisions are not necessarily aligned to long term financial goals of the NRI and his family. Once NRIs return back to their home overseas, they then tend to wonder if it was the right investment decision or whether haste made waste, especially as they now get time to think about it. They wonder whether these investments fit in case they wish to return to India at a latter point in their lives or in case they wish to use these investments for children’s education or their own retirement, or to support their family members back in India.

In addition to the alignment to financial goals for self and family, it is critical to ensure that the investment products chosen allow non residents to invest in them, the repatriation restrictions (if any) on the principal amount and the gains, as well as the taxation of the gains in both India as well as the overseas location of the NRI. A lot of these answers can only be obtained when there is clarity in terms of what role the investment is expected to play for the NRI in his portfolio.

It is therefore critical to ensure that the focus on working to a financial plan is given the same degree of importance, irrespective of whether the individual is a resident or a non resident. In fact, working to a plan tends to be even more critical for a non resident than a resident, due to a legacy holdings and finances that they may have from their days in India.

A very large number of NRIs tend to leave India during a phase of their life when they have already begun their financial life – they have probably opened regular savings bank accounts in their names, bought investment products like stocks/mutual funds/insurance products/PPF accounts, or even made a real estate investment. Since there is a tendency to leave India on an overseas assignment/project, a higher education and then decide to settle down overseas, the starting point for a financial plan is to get your existing portfolio of investments in order.

 

The following steps need to be taken to ensure that the existing finances are aligned to the needs of a non resident

1. Close all resident bank accounts or convert them to nonresident ordinary (NRO) accounts. These NRO accounts can be used to credit amounts from investments that may have been made earlier, for example, dividends from stocks, rental income, amongst others.

2. Ensure that the tax returns in India have been filed. Whilst filing a tax return is not mandatory if the income is less than the taxable limit, it is important to be sure that the total income is less than the taxable limit.

3. Review your demat accounts so that they can be converted to nonresident demat accounts.

4. Change your mutual fund portfolios (if any) to a non resident status and link your NRO bank accounts to these investments.

Once the legacy portfolio of investments have been put into order, it is crucial to begin the process of setting up your financial goals through a financial plan. Whilst a financial plan may sound rather complex, it is simply a roadmap that allows you to think about what you want to achieve with your life goals and how your finances will allow you to get there.

Let me illustrate this with an example. Let’s say one of your life goals is to have your child study at a particular post graduate program. How would you design your financial plan towards this life goal?

1. Establish the current cost of the education that you want to plan for – The costs for higher education vary significantly depending on the type of college, country of education, type of program and number of years of education. The total costs of education should be established including the costs of living and travel and not just education costs.

2. Understand the impact of inflation on current costs – Inflation rates on education may vary significantly depending on whether you wish to plan an education in India or overseas. You need to establish the corpus required for the education after adjusting for inflation.

3. Choose the appropriate asset mix to achieve your target – It is critical to establish the right balance of stocks and fixed income exposure so that you understand the returns and associated risks that you will take on the portfolio in order to reach your target.

4. Choose the appropriate product/products to achieve this targeted amount – Once the above steps have been undertaken, you can move to the product selection stage where you can look at the merits/demerits of using deposits, mutual funds, insurance plans , stocks or other options to achieve your target.

5. Evaluate the progress towards your goal at regular intervals – It is important to review the progress of your financial plan to ensure that you are on track to achieve your financial goals. However, it is important that you give your products adequate time to deliver as per their designed objectives. A review once a year should be adequate.

A financial plan can be developed for all your life goals accordingly. You may need to take the help of a financial planner to integrate all your goals into a plan so that your overall finances can be aligned to all your goals. For example, your retirement plan could vary depending on whether you wish to finally settle down in India or continue to live overseas once you retire.

In addition to each of planning for your financial goals, you need your financial plan to cover:

1. Taxation of these investments in your home country – Tax treatment of investment products in the home country may be different from those in India. For example whilst there is no long term capital gains tax on equities or equity mutual funds in India, capital gains tax may be chargeable on these investments in the country that you live in. It is therefore critical to understand the tax implications at both levels as a part of your financial plan. You may need to seek the help of a tax advisor in both India and your home country, so that there is complete clarity on the same. In addition, there may be double tax avoidance treaties in place that allow you to set off the taxes you pay at in one country against taxes due in India, so that you are not taxed twice on the same amount. Your tax advisor should be able to help you on this.

2. Succession planning – Inheritance laws tend to vary from country to country. In addition, whilst India does not currently have any estate duties and taxes, a large number of countries have an inheritance tax. Since you could end up inheriting assets from your parents/ other family members and also having your assets transferred to your family members on death, it is critical to ensure that succession planning documents like wills are created keeping the inheritance laws of both countries in mind.

Once you are clear about your financial goals, taxation and succession laws, you will be in a position to pick your investment products far more easily and can focus on tracking how your investment products are taking you closer to your financial goals.

 

This article was written by Vishal Dhawan, CFP^CM 

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A 12 step guide to managing your money in 2012 – IV

We are now in the final quarter of addressing one of the biggest myths about managing money that is, managing money is all about returns on your investment. Whilst returns are no doubt an important component of managing money, we believe it is critical to take a more holistic view on finances. A quick recap on what we have already covered as to do items for quarter 1, 2 and 3

January – Put it all together

February – Question what you really want your money to do for you

March –  Keep what matters, let the rest go

April – Plan for emergencies and contingencies

May – Put your risk control mechanisms in place

June – File your taxes correctly and diligently

July – Use technology to improve the management of your finances

August – Build a team of trusted advisors

September – Build your succession plan

October –   Invest in yourself – There is a tendency to go into a comfort zone with respect to our professions and careers, especially as we become masters at doing the same thing over and over again. Macolm Gladwell in “ The Outliers” has shared a 10000 hour rule which I’m sure a lot of you already know about. For those who don’t, the 10000 hour rule indicates that mastery in a field is driven by spending 10000 hours in it. So what happens after you have spent 20 hours a week doing the same thing for 10 years? Maybe its time to move your cheese before someone else does that for you. Just like companies spend a significant portion of their revenue on research, how many of us have a financial plan that includes spending a portion of our income( or our wealth) on improving ourselves. As Warren Buffett says “ Investing in yourself is the best thing you can do.”

November – Accept that you are an investor – Whilst most of us start off as investors, there is a high risk of becoming a speculator along the way. The difference between an investor and a speculator is two fold in our opinion – firstly, an investor thinks more with his brain and less with his eyes,  and secondly, an investor knows what he owns, why he owns it and can explain that clearly. Avoid buying an investment just because it has done well in the recent past or because it excites you. As George Soros says” If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” In case you cannot avoid speculating, restrict it to a very small portion of your portfolio and understand that you are speculating, not investing with that portion of your wealth.

December  – Review your plan and rebalance your portfolio – Whilst its great to have a plan and even better to implement it, its important to ensure that it is on track to deliver what was expected from it. Whilst different types of investments deliver results over different time frames, it is critical to evaluate that the overall plan is moving in the direction that you wanted it to. Whilst it is good to spend some time on the specific products that you have invested in, the overall allocation across different asset classes is ideally where the focus should be, so that assets that have become cheaper can be added to in the portfolio, and more expensive assets can be reduced. This simple strategy of rebalancing , at least once a year, can make a significant difference to your overall portfolio returns.

Whilst we are already at the end of February now, it is never too late to start in case you have not started implementing this calendar already.

This article was written by Vishal Dhawan, CFP^CM 

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A 12 step guide to managing your money in 2012

We are now at that critical time of the year, where new year resolutions could be in different stages of action or inaction. Whilst I’m sure that not all of you make new year resolutions ( why should making a resolution in the new year be any different from making a resolution on your birthday, or your wife’s birthday, or in fact any other day), there are probably a large number of you who do. Since losing weight and quitting smoking/drinking are probably the top two resolutions for the year globally, we are simply attempting to create a monthly calendar to simplify the process of managing your money. One of the biggest myths about managing money is that it is all about returns on your investment. Whilst returns are no doubt a critical component of managing money, we believe it is critical to take a more holistic view on finances.

January – Put it all together – There is no point in having made a large number of investments because of the potential for above average returns or tax savings or putting away excess savings and not knowing where the documents for these are or how they are doing. Create an inventory of all your savings and investments – bank accounts, insurance policies, mutual funds, shares, demat statements, real estate agreements, credit card statements, loan documents, amongst others. Whilst this may sound simple, it can be much more challenging than it seems. Whether you wish to maintain a set of files with all these or use software for tracking, it is critical that all the records are well documented and stored so that you or your dependents have easy access to it. Treat it like an ISO certification for yourself whereby you or your dependents can retrieve any document within a maximum of 15 minutes after you realize you need it.

February –  Question what you really want your money to do for you – This could vary from person to person, for some it is retiring at 45, for another sending a child to study overseas, or for someone else, visiting 100 places before he or she dies. As you think deeply about these life goals, you will find monies would have an important role to play in a large number of these. Try to put numbers to each of these goals and estimate how your finances are currently designed to get you to these goals. In case you find this process difficult,you may need to seek the help of a certified financial planner.

March –  Keep what matters, let the rest go – This is one of the most challenging parts of managing money, since you may have to admit to mistakes that you made in the past. Past performance should not be the only factor driving this decision. For example, if you have a large number of small value insurance policies that do not give you substantial life cover, it may be better to surrender these policies and buy a term insurance cover that will allow you to cover the risk to your life meaningfully for your dependents. Or equity investments made in the past that have not delivered for more than 7 years, may need to be substituted with better equity investments. Remember to separate underperformance of equity markets from underperformance of specific stocks or equity mutual funds in your portfolio.

I will endeavour to continue with this calendar over the next few columns as well. I look forward to hearing from you on what you believe is an ideal calendar for the second quarter of 2012. You can write to me with your wishlist on vishal@planaheadindia.com or by leaving your comments.

This article was written by Vishal Dhawan, CFP^CM 

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