Is NPS worth investing, now that withdrawal rules are relaxed for NPS

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

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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Are ETFs a worthy investment option

With the recent launch of the ICICI Bharat 22 ETF, a lot of buzz around Exchange Traded Funds or ETF’s has been doing the rounds. Most investors may be wondering whether it is worth investing in ETF’s?

So what is an Exchange Traded Fund?

An ETF is a passive investment instrument whose value is based on a particular index and such a scheme mirrors the index and invests in securities in the same proportion as the underlying index. For example, a Nifty ETF will invest in the 50 stocks compromising the Nifty index. ETF’s are freely marketable securities which are traded on the stock exchange.

Since ETF’s trade on the exchange, their value fluctuates all the time during the market trading hours. This is different from the working of a mutual fund scheme which has a single Net Asset Value (NAV) per day that is determined after the trading hours are over.

Theoretically, ETF’s are structured to provide a variety of advantages to investors. The most prominent among them are as follows:

• Diversification: ETF’s can provide a variety of diversification based on following themes:

1. Asset classes such as equities, gold, fixed income
2. Sectors such as financial services, consumption, infrastructure
3. Based on market cap i.e. large, mid and small cap

• Low Cost: One of the biggest attraction of ETF’s has been it’s very low cost structure, especially in comparison to Indian mutual funds. The low costs is primarily due to the fact that an ETF is a passive investment i.e. there is no active intervention in stock selection, re balancing based on a certain view. Therefore the costs associated with hiring professionals and the required infrastructure is avoided, resulting in a significantly cheaper product. Furthermore, most ETF’s have kept the expense ratios low to induce significant inflows from institutional investors. Following are examples of some commonly known ETF’s and their respective Expense Ratios

ETF	Expense Ratio
CPSE ETF	0.07%
Motilat Oswal MOSt Shares M100 ETF	1.50%
Kotak Banking ETF	0.20%
ICICI Prudential Nifty iWIN ETF Fund	0.05%
SBI – ETF Nifty 50	0.07%
Average	0.38%

(Source: Value Research, mutual fund websites)

• Suited to Efficient Markets: it is a global observation that passively managed funds have performed significantly better over actively managed funds where markets are more efficient. This is because in developed markets, all related information that should be priced into the equity market already happens, leaving very little space for the fund managers to beat their respective benchmarks.
• Reduced Risks: Due to its passive structure, the risk arising due to stock selections by a fund manager are reduced. Furthermore, as an ETF comprises the same stocks in the same allocation as in the underlying index, tracking error is significantly reduced to the point of it being almost negligible. Tracking Error is the standard deviation between the returns of the fund and the underlying index. A lower tracking error indicates the fund is that the ETF will mirror the index more closely and therefore its performance will be more consistent with the same index.

Despite many advantages that ETF’s can bring to the table, in India they so far have been primarily avoided for the following reasons:

• Liquidity: One of the major disadvantages plaguing ETF’s currently is liquidity. As ETF’s are traded on the exchange like any stock, its not always you will have to opportunity to either buy or sell at the desired quantity or price, depending on the type of ETF involved. However an alternative to this problem is the use of a market maker. A market maker is appointed by fund houses. They, on behalf of fund houses, provide quotes for buying or selling an ETF based on the current NAV of that ETF. This helps ensure liquidity for investors. Any investor can approach a market maker for transaction. The difference in their quote and the NAV of the ETF is called “spread”, is the cost for the services. –
• Lack of awareness: Distributors receive negligible commission for recommending and executing an investment into an ETF. Because of these low margins not much efforts have gone into promoting ETF’s. Thus, most investors are unaware of what an ETF is and how it can add value to their portfolio.
• Relative Underperformance over long term: While in theory ETF’s should out perform active managed funds in an efficient market, the point to note is that India is still some time from achieving that status. Hence actively managed equity funds, especially in the top quartile, are able to beat the underlying index, and ETF’s over long term horizons. This currently results in alpha creation which ETF’s may take time to match up to. The following table is a comparison between a random mix of actively managed equity funds and equity oriented ETF’s:

	1yr	3yr	5yr	10yr
Aditya Birla Sun Life Frontline Equity	26.62	10.21	16.89	10.61
Franklin Templeton Franklin India Prima Plus	24.86	11.17	18.22	10.87
HDFC Top 200	28.42	8.39	14.99	10.65
IDFC Premier Equity	30.35	11.72	18.68	14.08
ICICI Prudential Nifty 100 iWIN ETF	27.54	8.44
Kotak Sensex ETF	23.88	5.36	10.7
Reliance ETF Nifty BeES	26.78	6.7	11.91	5.75
S&P BSE Sensex	25.58	5.01	11.15	5.14
NSE Nifty 100	26.97	7.55	12.71	6.08
source: value express , date (07 Dec 17), returns data CAGR

As in the Indian economy continues its march towards being recognized as a developed nation, there is fair certainty that ETF’s will have a far larger role to play. However in current scenarios, practical hurdles continue to keep them out of favor among investors. We believe that assigning a small allocation towards ETF’s, after due diligence, is sufficient basis investor’s risk appetite and investment horizon. As Indian Equity markets evolve, so will the ETF space and this will increase investors interest towards them.

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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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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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Why You need a Long Term Investment horizon?

In today’s volatile environment which largely stems from economic uncertainties from global markets, be it the Yuan devaluation some time back or Brazil being downgraded to junk or the September Fed meet on which everyone had an eye which resulted in no rate hike at the moment. The thing which most investors lose focus on is something that is called as long term investment perspective. By investing for the long term one will not try to time the market. Nobody can. We all know the simple rule of investment – buy at low and sell at high but invariably we tend to do it the other way round.

While focusing on short term we tend to buy stocks which have all the positive news around it and little do we realize the half of the time that news has already been priced in. If we focus on the short term our investments are bound to react to events in the short term both positive and negative. Whereas if we focus on the long term the returns will be impacted less by volatility and more by the performance of the investment instrument.

As per tax laws holding stocks beyond one year is categorized as long term but when it comes to investment an investment horizon of 3 – 4 years or more can be considered as long term. On the other hand when it comes to real estate it is far beyond that. Gold is another asset class but again it depends in which form it is held, whether in physical form as ornaments or in the form of ETFs.

Historical data also shows SENSEX had jumped 250% from April 1991 to March 1992 on the back of Harshad Mehta scam. He took crores of rupees from the banking system and pumped it in the market. The scam came to light when the State Bank of India reported a shortfall in government securities. That led to an investigation which later showed that Mehta had manipulated around Rs 3,500 crore in the system. On August 6, 1992, after the scam was exposed, the markets crashed by 72 percent leading to one of the biggest fall and a bearish phase that lasted for two years.

Similarly, from April 1999 to March 2000 SENSEX rallied 35% on the back of improving macroeconomic scenario – improved GDP numbers from growth in manufacturing, infrastructure and construction sector, falling inflation, healthy forex reserves and good industrial production numbers as against the year before and also the technology bubble was engulfing the rest of the world.

Again SENSEX fell 27% in March 2001 when the Ketan Parekh scam took place. A chartered accountant by training, Parekh came from a family of brokers, which helped him create a trading ring of his own. Be it investment firms, mostly controlled by promoters of listed companies, overseas corporate bodies or cooperative banks, all were ready to hand the money to Parekh, which he used to rig up stock prices by making his interest apparent.

Again in Feb 2008 SENSEX corrected by 8% approx on the day Reliance power Ltd. got listed. It closed 17% below its cost. Sensex witnessed a fall of approx 36% from 2008 to 2009 on the back of US Subprime crisis.

Following that there was a sharp pull back in equities between March 2009 to November 2010 led by global (Quantitative Easing announcement by US) and domestic (general elections) news flow. Putting all the pieces together the message to take away is that events will keep on happening but if one keeps a long term investment horizon it will be a safer bet.

The two main factors to consider before taking an investment decision for one self are ability and willingness. It is very important to know the difference between the two. Willingness is more about the attitude towards risk irrespective of the financial ability to do so. Ability on the other hand is financial capacity to bear the risk. It depends on income of the individual, his savings and expense pattern. It depends on the amount of money which one can keep aside purely for investment and not dip into it time and again for personal needs and can hold on to it even if they are not doing good at a particular point in time.

But again the point to note here is that if a particular investment is consistently a poor performer, one should plan an exit from the same and reinvest it in another suitable option. If one is not very good at deciding which stock to invest in and what the best time to do so is, then there are professionally managed mutual funds with different investment objectives from which one can choose.

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#AddMeaningToFinances Tax Planning tips for Big Savings for the year 2015 – Vishal Dhawan in TOI

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

At the outset, thanks for all the responses to our last column on managing money in 2012.  You would recollect that the objective of this column was to address one of the biggest myths about managing money which is that 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

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 – From all of my experience, I have never seen the need for emergency funds come up in a manner where there is a knock on your front door, followed by a polite request to make the money available after 2 months because there will be a need for the funds. Emergencies are exactly what they are ie emergencies and come up when least expected. It could be a medical emergency for yourself or your family, a sudden job loss or the urgent need for money to help a dear friend. It is imperative that these funds are kept away separately for use in an emergency – the amount could vary depending on individual circumstances but typically 3-6 months of contingency expenses are a good idea. These should ideally be kept in a combination of cash at home, a credit card that has a decent credit limit and which has been recently used, savings account linked to fixed deposits which can give you the dual benefit of higher returns and liquidity, and liquid funds that tend to outperform bank fixed deposits especially due to their higher tax efficiency. You could consider using liquid funds with recent innovations in liquid funds that allow you to withdraw cash through ATM cards or redemptions through SMS due to their superior ability to provide access in case of an emergency.

May – Put your risk control mechanisms in place – Ever wondered why cricket teams travel with two wicketkeepers or why they have a captain and a vice captain? Its fairly obvious , isn’t it. So why is it that a large number of us do not have adequate life cover for ourselves, or that our houses are not insured, or that our medical insurance covers are for Rs 2 lakhs when we know that the last acquaintance that got admitted to hospital spent 7 lakhs on his illness. It is therefore critical to evaluate the right amount of life insurance coverage required for oneself and medical cover for your family. Ensure that your house is neither overinsured nor underinsured, and if you are a professional, business owner or key decision maker in your organization, you have insurance covers to protect risks that you are exposed to as a result of your vocation. Since risk mitigation tools are constantly evolving, you may need to seek professional help for this. Also remember that this is not a cost but your Plan B, so treat it like one instead of looking at it as an expense.

June – File your taxes correctly and diligently –  Depending on your country of residence and occupation, the dates for filing your tax returns may vary. However, it is critical that you collect all of your data and reports , be it income, investments, interest statements, capital gains, or any others and compile it carefully so that you do not miss out on anything critical. One of the common things that we hear from investors is that we don’t remember whom we issued this cheque to, or I only have a small amount of interest earned on my savings account so why bother filing my returns as my employer is already deducting tax at source. Whilst you are probably correct that a large portion of your taxes are already taken care of, 100% accuracy is critical in this exercise. Just like you dedicate time to other important aspects of your life, you need to make time for this as well, so that it does not come back to haunt you later.

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 third 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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Play the Balancing Act

There has been a sea change in the expectations that we have from our lives today—whilst we were once happy visiting friends and family at our native place during vacations, today we want holidays to exotic locations overseas.

From the option of having to pick between a Fiat and an Ambassador, we now have 30 new car launches in the next few months to choose from, not to forget the hundreds of models already available, with variants of all kinds. Whilst this explosion of choice has obviously been beneficial, it has also resulted in an increased focus on short term gratification.

Anything that gives us instant pleasure is given precedence over benefits that are likely to accrue over the long term. For example, we have seen a declined focus on saving for retirement because it is so far away amongst people who are younger. In this environment, it is critical to focus on achieving a balance between long-term and short-term financial goals.

So how does one go about achieving this balance?

1. Make a list—Just like a grocery list is recommended when you go to a supermarket to ensure that you don’t overspend, you should list out your financial goals—education for your children, their marriages, asset purchases like homes, and cars, parental support, annual holidays, and, of course, regular day-to-day expenses. List each of your goals clearly.

2. Quantify your goals—A goal without a number is unlikely to get you anywhere.

Different financial goals have different values and can also differ from individual to individual. For example, a retirement in Mumbai could come with very different costs vis-à-vis retirement in Kolkata. It is, therefore, critical to put a number to each of these goals based on your own expectations. Do not forget the impact of inflation on these goals—Rs 40,000 per month that you spend today could be in excess of Rs 2,50,000 in the next 25 years. You may need to seek the help of a financial planner to do this exercise.

3. Rank the goals in order of importance—Remember, your neighbour’s financial goals are not yours. Your neighbour’s shining new car should not suddenly result in a situation where your most important financial goal is a new car purchase. You will probably find that achieving all your goals may not be possible, so a process of prioritisation may need to be undertaken. Try to achieve a balance between short-term and long-term goals. Too often excessive focus on short-term goals or any one of the goals tends to compromise your overall financial wellbeing. For example, overstretching yourself on your residential home purchase could result in a compromise of your child’s education or your own retirement.

4. Manage the risks—Current lifestyles could expose you to health risks, life-threatening or otherwise. Ensure that you have adequate life and health cover to insure your risks. Buying them early increases the chances of getting them cheaper as well as when you are in a good state of health. The gap between needs and funds can always be funded by insurance.

5. Diversify your portfolio—Use a combination of financial instruments—stocks/equity, mutual funds, bonds, precious metals, real estate and bank deposits in line with your financial goal requirements and risk appetite. The products that you buy should be aligned to deliver to your financial goals; for e.g., avoid buying equity for a short-term financial goal where you are likely to need the money in a year as equities can be very volatile over short periods. Similarly, using a 100 per cent fixed income portfolio, though very safe, can result in your portfolio value not being able to match up with inflation.

6. Put the plan into action—Ensure that you start saving towards your financial goals diligently. There is a tendency to put off the implementation of the plans and then try to make up lost time by investing too aggressively. This may not be an appropriate strategy.

7. Monitor your portfolio regularly—It is extremely critical to monitor your portfolio and financial plan annually. There is a high probability that some of the financial goals change along the way and your financial plan may need mid-course correction. However, be careful that you don’t check your portfolio each day, as that could do you more harm than good.

“The trick to juggling is determining which balls are made of rubber and which ones are made of glass.”

This article was written by Vishal Dhawan, CFP^CM and appeared in theEXIM INDIA newsletter  on 15^th July 2011 .

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