InvestmentYogi

Dynamic Bond funds

Yogi — Tue, 21 May 2013 09:58:00 GMT

RBI has started reducing key policy rates, but there is no certainty regarding aggressive rate cuts. Going ahead, while there are expectations of a rate cut, quantum of rate cut is still anybody’s guess, since inflationary pressure has not dwindled. Investment in dynamic bond funds in such a scenario (clear direction but unclear quantum) can be a smart decision from retail investor’s perspective. In this article, we will discuss what dynamic bond funds are, how to analyse them and about the best time to invest in them.

What are Dynamic Bond Funds?

Dynamic bond funds are like normal debt funds from asset allocation perspective, as investment is primarily done in government and corporate bonds. They differ from normal bond funds in management style and proportion of investment in government and corporate bonds at a given point in time. Normal bond funds have fixed proportion of investment in corporate and government bonds where as investment proportion varies from time to time in case of dynamic bond funds as per the discretion of the fund manager. Fund manager actively manages the fund and plays with the duration and maturity of the bonds based on future interest rate scenario, so as to maximise returns. He has the flexibility to shift completely into short term debt securities from long term securities and vice versa in a very short span of time based on expectations regarding the yield curve.

Why to invest in Dynamic Bond Funds?

Prediction is the key word here. The one who predicts the interest rate direction early and correctly will be rewarded the most. Dynamic bond funds provide the opportunity to capitalize on this knowledge. Fund manager can take a directional call at the right moment and churn the maturity and duration of the portfolio to generate appreciable capital gains in a short span. Bond prices are inversely proportional to yield and hence portfolio maturity and duration increase in case of falling interest rate scenario and vice versa. This capital appreciation opportunity is lost in the case of normal bond funds as portfolio churning is not a norm there. As a common investor, we do not possess the right tools and resources to predict the direction of yields but good fund managers can do the same in their capacity.

Fund managers with appreciable track record watch RBI’s open market operations, prevailing inflation, credit growth rate, etc to predict interest rate scenario. Based on their analysis they shift the portfolio towards long term or short term debt securities such as CD’s, CP’s, corporate bonds and government securities. If their insight is correct, this active management results in handsome capital gains for investors.

Word of caution

Investment in dynamic fund should be done keeping capital appreciation/depreciation aspect in mind. Past performance of fund manager in predicting the interest rate scenario should be analysed properly as this is a skill of paramount importance in case of dynamic bond funds. Even though this is a high capital appreciation potential investment, dynamic bond funds are risky compared to normal bond funds. Risk element comes in the form of capital depreciation if the prediction of fund manager goes wrong. Hence, you should invest in dynamic bond funds only if your risk appetite is on the higher side. All said and done, it is important to continuously monitor your portfolio and realign it to reduce the risk element.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com

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Un-Fixed Deposits

Yogi — Mon, 20 May 2013 06:35:00 GMT

We live in an era where we run against money but can’t find time to manage money. We ask for simple but effective solutions for money management. Thankfully, our dear banks have heard us. They have come up with a simple solution to help us generate decent returns on our savings bank accounts.

Lot of times, we just let our money sit idle in the savings bank accounts just to know that it has only been a dud there. This has made some of the major banks to introduce an innovative concept called Flexi-Deposit.

What is it?

It is just a mix of Savings account and Fixed Deposit. It gives you an option to set a limit and the money which exceeds this limit automatically goes into a fixed deposit.

Let’s take an example:

Mohit has a balance of Rs. 75,000 in his savings account. He sets a limit of Rs. 25,000 for the flexi-deposit. Now, Rs. 25,000 remains in the savings account and the rest (Rs. 50,000) goes into an FD earning the interest prevailing on that particular date (depending on the tenure).

What are the benefits?

This facility gives us the following benefits:

1) Liquidity

2) Better returns than savings account

3) Hassle free investment

Suppose Mohit (in the above example) issues a cheque of Rs. 30,000. Under normal circumstances, if the account does not have sufficient balance, there would be a cheque bounce. However, in this case, the amount which exceeds the limit (Rs. 5,000 in this case) is taken from the fixed deposit account. The rest of the balance keeps earning the interest for the tenure, as usual.

Who needs it?

As specified before, if you are someone looking to stay away from the complicated products in this market and are too busy, this is just tailor made for you. However, if you have enough time to do research on different financial instruments and would like to build a long term portfolio, you might consider it as just another option. The current rates of FD’s hover around 8-9% (expected to fall further) and may not be sufficient to beat inflation in the long run.

Final Word

Carefully evaluate your options while choosing any financial product. There might be an opportunity cost involved in missing a better product while choosing the current one. This product is worth taking a shot. But, if you miss out on other ingredients in your portfolio, you might have to blame yourself in the long run.

About the Author:

A.V.Suresh is our in-house Financial Planner and a personal finance enthusiast. He is a Certified Financial Planner (CFP) and also has an MBA in Finance. He can be reached at expert@investmentyogi.com

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Just Dial IPO Outlook (20th May to 22nd May 2013)

Yogi — Fri, 17 May 2013 09:38:00 GMT

The Indian telephonic search giant is sizzling to go ahead with its Rs 950 Cr. IPO offer opening on 20^th May 2013 and ending on 22^nd May 2013. After a long draught in the IPO market, this issue is expected to bring in some charm back into the primary market.

About Just Dial Operations

Just Dial is operating in the telephonic search services and it enjoys the advantage of early entrant in this business segment. It has approximately 9 million business listings along with a strong relationship with the advertisers. It provides services through the internet, voice channel (Mobile and Telephone) and mobile internet platforms. It is operating in a distinctive domain with very less competition.

The Issue description is as given below:

Issue Details	COMPANY : JUST DIAL LIMITED
Issue	Public offer of 17,497,458 equity shares of Rs. 10 each, being made through 100% book-building process.
Issue Period	20^th May to 22^nd May 2013
Price Band	Rs 470 to Rs 543 (10% discount to Retail Investors)
Bid Lot	25 Equity Shares & in multiple of 25 Equity Shares thereafter
Discount	10% Discount to Retail Investors
Issue Size	Rs 950.11 crore (approx.)
Safety Net Arrangement	A safety net to resident in India in accordance with Regulation 44 of the SEBI Regulations and as set out in the section Safety Net Arrangement on page 372 of RHP.
Registrar	Karvy Computershare Private Limited
Book Running Lead Manager	Citigroup Global Markets India Pvt. Ltd.; Morgan Stanley India Company Pvt. Ltd.
Listing	Proposed to be listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
Issue Break up	Total 17,497,458 Equity Shares
QIB	75% of Net Issue Size
HNI	15% of Net Issue Size
Retail	10% of Net Issue Size
IPO Grading	IPO Grade 5/5 by CRISIL CRISIL’s IPO Grade 5 to Just Dial Ltd is bassed on its 'Strong Fundamentals'. The IPO grading with Grade 5 indicates a strong fundamentals whereas Grade 1 indicates poor fundamentals when evaluated on a grade point between 5 to 1.

Should You Apply?

Investors can look forward to apply for this IPO in a positive note. Following are the reasons that make IPO outlook to be positive for investment:

Strong Market Presence: Just Dial services are available all around with ease of free inquiry and it has laid down a strong presence in the voice search domain. It had started the telephonic search for the first time in the country and therefore it also takes advantage of being the first mover in this business segment.

Big Expansion Plan: The company plans to venture into new geographical areas and expand its business reach. The experience and strength supports the plan well.

Phenomenal Valuation: Just dial earns most of its revenue from the paid advertisers. It receives most of the fees in advance, therefore the working capital cycle is almost negative. The company’s balance sheet looks more attractive due to a debt free and cash rich position. The company is diluting a part of its equity and it can further take use of the debt instrument to leverage its financial position for further expansion in the future.

Apart from the positive side, there are a few negative notes for Just dial IPO. The company’s maximum business comes through google search engine. At present, google is not operating in telephonic search business, but in future if it plans to step into such services, then it can create a threat to Just Dial business. The appropriate use of fund is important, but business diversification is also required to reduce the risks.

Finally

Looking at the niche business, good valuation and big expansion plan of Just Dial, investors can take take a chance to apply for this IPO, the probability of shares being allocated will improve if multiple applications are used i.e. through the Demat of relatives, spouse etc.

About the Author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at expert@investmentyogi.com

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Financial Planning Lessons I Learned From My Mother

Yogi — Fri, 17 May 2013 09:05:00 GMT

I believe, “mother of all children across the universe is an amazing woman with multitalented qualities.” The definition of mom says, “A loving and adorable mother is a woman who takes on the selfless and unconditional responsibility to nurture the emotional and physical well-being of her kids.” She is a helping hand whenever we need her guidance. She loves her children unconditionally forever, no matter how old we will get. For me, a word “Mother” stands for:

M = Multitalented personality,

O = Organiser / Planner in right direction,

T = Teacher educating kids about moral values and ethics,

H = Helping hand to kids,

E = Endearing (lending a solution to the problems in family),

R = Radical (takes fundamental effective decisions).

I would like to share 5 financial planning lessons I have learnt from my Mother in 28 years of my life span:

1. Work hard for money and learn to value it

Until I passed out from junior college, (i.e. 12^th Std) I used to get pocket money from my father and managed my monthly expense through it. After joining first year of Graduation, my dad stopped giving me pocket money, as per instructions of my mother. She wanted me to take up a part time job in a field of my interest or take tuitions during free time so that I start learning the importance of hard earned money from an early age and value it wisely while incurring any expense. Earlier, I used to be upset on this decision of my mother, but after few months, I started enjoying my part time work of giving tuitions for few hours in a week. I started earning well to take care of my monthly expenses and managed to save some money from it.

2. Invest your savings regularly for future consumption

Mom recommended conservative investment products like recurring deposits with bank / post office, fixed deposit schemes, etc during my teenage to start investing regularly from my savings. These investments gave returns on maturity / completion of investment term. Maturity amount was useful to pay my fees for classes and books during higher education. Now, each month I keep the amount for investment aside from monthly income. This savings will now be helpful to fulfill my future goals.

3. Maintain record of expenses and use money wisely

In my childhood days, I have seen mom keeping record of daily expenses. Then periodically, mom would discuss this expense record with dad in detail. Together, they plan out budget for next month expense and follow it rigorously, so that there is no short fall of money by end of month. I also learnt to maintain record of my personal expenses and discuss with mother. She would help to identify unnecessary expenses during the month, places I have overspent, etc. Mom also taught me to create a budget of my expenses and maintain a cash flow of expense + income, which helps to analyse expenses by end of the month.

4. Have a contingency fund for any kind of emergencies

Every month Mom keeps aside partial amount from monthly savings as liquid fund. This amount was useful whenever there was an emergency, such as hospitalization of grandfather and my father, unplanned travelling to native place due to sickness of grandparents, to manage everyday expenditure during a month when expenses have crossed the budget. Mom explained me the importance of contingency funds and how to maintain this fund to take care of my expenses for at least 4 to 6 months due to job loss or during emergencies.

5. Set financial goals and work towards them by taking steps in right direction

From childhood days, I have seen mom planning the goals by consulting with dad. Together, they have fulfilled many goals in our family, such as giving education to me and elder brother, time-to-time they purchased valuable assets and electronic appliances for home, purchased new home on loan + savings, renovated the house, we had outdoor tours during summer / winter vacations, etc. Now, I also consult my mom and take her inputs to achieve my financial goals in life. She recommends me to set a time frame for each goal and stay invested in products which give calculated returns when time to achieve this goal is nearby.

“InvestmentYogi recommends three gifts for lifelong financial security of your super mom as discussed below:”

Get adequate medical and health insurance, which offers coverage up to 75 years of age and above. These products are popular as senior citizens’ insurance schemes.

Help your mom create a savings/investment plan for her retirement and advice to invest in some calculated risk assets besides conservative products. It’s important to have a balanced portfolio.

Enroll your mom to some training which gives knowledge in financial planning and investment / insurance products. She will learn additional skills and take corrective decisions time to time at home by giving advice to family members.

About the Author:

Hiral Thanawala is a PGDM (Finance) graduate and Certified Financial Planner with an experience of over 5 years in equity market and personal finance domain. The views explained by him are personal. He can be reached at expert@investmentyogi.com

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It's a Good Time to Invest in Debt Funds

Yogi — Thu, 16 May 2013 09:38:00 GMT

When equity markets deject an investor, he has very limited options left to maximize his returns. This was the story of the past, the conditions have changed and the outperformance of a portfolio is now measured on various parameters. You will not want your investment to dwindle 50 percent of its value before recovering and giving you a return close to 10 percent. The time of recovery is sometimes long and equally frustrating for a person. In such cases an investor has an option to invest in Debt Mutual Funds. Equity linked schemes are often volatile and with global markets intersecting, the moves of domestic bourses are difficult to predict. In such cases, it is advised that you start searching for some alternatives that diversify your portfolio.

Now investing in mutual funds can be through two modes. Either you allocate 100 percent of the money in debt funds or otherwise you can distribute it between equity and debt portion. The company’s policy provides you a choice to allocate your money in Equity and Debt. This can give you dual advantage of high returns from equities and stability from debt. A full fledged debt fund is welcome in case of you are unaware of the functioning of the markets. Retail investors often get surprised to see the options they get from a debt fund. The debt products are generally of three types:

Hybrid Fund: This fund gives the solution to the customer based on his needs and capacity to invest. Hybrid funds include monthly income plans (MIP) as well as multiple asset allocation funds. This includes a high percentage of funds invested in debt that saves money from unnecessary volatility. Another advantage of this scheme is that it can be invested as a Systematic Investment Plan (SIP) and the money can be withdrawn through a Systematic Withdrawal Plan (SWP).

Accrual Fund: This fund is based on the fact that the investor wants a fund of less to medium risk. It harness on the volatility in interest rates and earns income based on the interest rates. This is similar to fixed deposits in banks. SIP can also be used in accrual fund and the benefits of compounding are possible through SIP in such funds.

Cash Management Solution: Apart from these two types of funds, there is a cash management solution for those who don’t want their investments to be exposed to medium or high risks. This fund is therefore less risky than Hybrid and Accrual fund.

Debt funds invest in Government Securities, and Gilts in the current scenario seem ideal. The investments in bonds and G-Sec tend to grow in value as the interest rates are reduced. This is due to the inversely related nature of bond prices and coupon rates. On the other hand, Gilt funds invest in bullions. Considering the attractiveness of Gold among Indians, demand wise Gilt funds have become a hit.

Some of the debt funds and their returns generated are given in the table below:

Scheme Name	Type	One year return	Three Year Return
IDFC DBF Plan A-Growth	Debt	13.63	10.04
ICICI Prudential LTP-Cumulative	Debt	9.05	7.07
SBI Magnum Gilt STP	Gilt	9.47	7.91
Baroda Pioneer Treasury Advantage	Debt	9.77	8.9
ICICI Prudential Income Opportunity Fund	Debt	13.79	8.62

Source: Website of Mutualfundindia

Investors with a long term horizon should always put some of the money in bonds through debt funds. The biggest advantage to Indian investors is the end of the rise in benchmark rates. A decline in interest rates in the coming days will be beneficial for the bond markets and investors can hope for much better returns in debt funds.

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Money Laundering and its Economic Effect

Yogi — Thu, 16 May 2013 05:56:00 GMT

Money laundering in one of the most debated topics in our country right now. Cobra post revelations regarding involvement of the whole banking sector in laundering activities has pressurised the regulator to implement stringent rules and regulations to curb these practices. Money Laundering in a global problem and has serious socioeconomic impact. Let’s try to figure out what money laundering is and why it is a global problem. We will also discuss the economic impacts which force the regulators to be on tenterhooks.

What is money laundering?

Have you ever washed clothes (Laundering, I mean)? Laundering of cloths makes dirty cloth appear clean. Money laundering has the same effect – It makes dirty money appear clean. Dirty money (basically cash) here means the money earned from illegitimate sources like embezzlement, bribes, crime, frauds etc. You do not pay taxes on dirty money and there is a fear of seizure once it comes to the knowledge of regulators. So, basically, you cannot use dirty money until it’s cleaned via money laundering process.

How money laundering is carried out?

There are ‘n’ number of discovered and yet to be discovered ways of money laundering. We will discuss the most commonly used method which has three steps.

Bringing the money into financial system – As the dirty money is purely in the form of cash, the very first step is to bring it into the legitimate financial system. Here, banks play a major role either willingly or unwillingly. If they are willing, (as is the case in cobra post revelations) they will guide you how to do that. Otherwise, dirty money is deposited in different anonymous bank accounts in small chunks so as to make it appear a low value transaction. As low value transaction is not reported, dirty money enters the banking system safely. This process is technically termed as placement.
Hiding the source – In this step, money is made to move in such a way that it get’s untraceable. It is hopped through many accounts (local/overseas), changing the currency, buying financial products or costly items like gold, etc. Basic objective is to make the transactions complex so that reverse engineering gets difficult. Technically, this process is called layering.
Receiving the money back in legitimate form – The money hopped and invested in previous step is recovered via sell transaction or overseas transfer into local accounts which is now invested in some local company. This local company is supposed to have full involvement in the whole process and more often than not promoted by the launderers themselves. This step is the final one and is termed as integration. Now, the dirty money is clean enough to be used with confidence and without fear of getting caught.

Economic Impact of Money Laundering

As regulators internationally are so worried about laundering, it must have far reaching effect on the economy. No tax is paid on the laundered money and it’s made to enter the legitimate system but there must be someone who is paying the cost. It’s basically the whole country which bears the cost. Shell companies which are promoted for laundering process go bankrupt when launderers are caught. The invested money in these companies is wasted without any economic profitability in case of bankruptcy. Banks that finance such companies too, are in a financial mess post the revelation. Money laundering also creates false demand and supply scenarios in sectors they operate leading to skewed economic policy announcements at times which are bound to fail once false demand dwindles. Money laundering has some social effects leading to increase in corruption, crimes and frauds. People who are not involved see money launderer racing ahead which motivates them to choose this path.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com

Calculators:

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Retire With Free Mind, Take Action Before Hand

Yogi — Wed, 15 May 2013 11:59:00 GMT

The decisions taken years before your retirement pave way to how your life would be after retirement. It has been seen that sound financial decisions before retirement bring cheer and peace after retirement when the finances are all the more important. Nobody can doubt the shortage of funds after a person has retreated from the job. The money for day to day expenses gets filtered, as post retirement, a person will be getting pension which is way less than the salary he used to receive during work. Indians mindset is changing day by day and now even young employees are trying to mitigate the risks of future. This is a good idea considering the uncertainties and contingencies that can occur in the future.

Burden in a Recessionary Environment:

The approach of investors before subprime housing and debt crisis in the US and Europe has moved strides away from the approach after the debacle. A future retiree must consider the fact that after recession, the interest rates are pretty low. In a domestic environment, the deposit rates have come down and they are not matching the high inflation levels. In a few countries, the interest rates are close to zero. Lower interest rates make life difficult as the savings need to be increased. A high interest rate means that you could have saved less but had generated returns on your principal. The saving should be more in case of lower interest rates. Therefore, you must save more so that your retirement will not be mourned. The person who retires with lesser savings finds it hard to meet his living expenses. You should plan your retirement particularly in a lower interest rate and higher inflation scenario.

Provident Fund:

Although there is a fixed percentage set that gets deducted from your salary every month, you should look to increase the percentage of money deducted from your account. This is between employer and employee. It will ensure that at the time of retirement, you will have more funds in your Provident Fund account. These savings become a habit once you start following them and you get used to them. In other cases, you will be spending the money not saved, for other expenses; you will have the PF fund but even that will be lesser. If you want the retirement corpus to look more handsome, then ask your employer to deduct more in PF. That will be the employee’s contribution. Employers have no liability to contribute more, they will only contribute in your PF funds as per normal set limit.

Plan extra income after retirement:

At the time of retirement, few people are fit to continue with the job. In such cases, the employee can apply for part time jobs. In case of private companies, this option is possible in some cases. A retired employee can work part time in the same company or he / she can work in a different organization. You must be aware that experience has a high value. The employer’s stance has changed over the years and they want seasoned personnel. Part time job gets you extra income apart from the pension.

Risk Averse:

You should be risk averse well before retirement. The decisions you took at the time of starting your career are not the decisions you should continue at the time of retirement. A new employee with lower liabilities is more a risk taker. Your priorities should change as your liabilities increase. Make fixed income investments and try and put your hand in Mutual Funds that are more safe rather than investing in Equities. Avoid punters call on specific companies and try and make an investment in good schemes and areas like PPF, NSC and Fixed income bonds. Investment in properties is a risky venture which you should avoid. But, don’t be too conservative, you can look into this area provided you have done due diligence.

Retire at a Later Date:

Unless you got attracted towards lump sum at the time of Voluntary Retirement Scheme (VRS), it is advised that you take retirement at the official date if your health allows you to do so. Having said that VRS schemes are launched by company to company basis and there is a possibility that you don’t have such scheme in your bag. Whatever the case may be, it is better that you retire on the date that is officially set to; this will give you time to save more before retirement. You may also have a chance of higher pension and pay scale revision under the Indian Pay Commission. Whether you are a government employee or not, the chances of annual pay hikes or appraisals are always higher.

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Measuring Investment Returns

Yogi — Wed, 15 May 2013 10:10:00 GMT

Suitability of an investment product for investment in financial market is parameterised by the return it generates over a period of time. As return is one of the primary factors which influence investment decisions, it’s important to understand how investment returns are calculated and estimated in real life scenario. We will discuss three simple but effective concepts for measuring investment returns together with the advantages/disadvantages of using them.

What are the various ways of measuring returns?

There are basically three simple ways of measuring investment returns. If you fear maths, it’s time to rethink as doing little maths might make you a winner in the investment fraternity. Proper understanding of return measure requires basic math skills. Do not worry as we will be discussing the concept through examples. Coming back to the return measures, the popular ones are:

1. Simple Return/Annualised Return

2. Compounded Return

3. Compounded Annual growth rate (CAGR)

We will discuss the three methods taking example of a stock investment, but these are general concepts which can be applied to any type of investment.

Simple Return/Annualised Return

Simple return is calculated using the following formula:

Let’s say you buy a stock at Rs 100 and sell it after some time at Rs 112. If we put these two values in the above formula, we will get a simple return of 12%.

In calculation of simple return, we are not concerned about the holding period of your investment. This makes return comparison of two products with different holding period difficult. For example, how will you differentiate between two stocks which have given return of 5% (Stock A) and 6% (Stock B) if you do not know the holding period? To make return parameter more informative, we add holding period variable to it and compute the return with respect to one year of holding period. The formula now become annualised return formula, which is

In the two stocks example above, let’s say the holding period of first stock was 6 months and the holding period of second stock was 8 months. Putting all this data into annualised return formula will give annualised return of A as 10% and annualised return of B as 9%. Now we can say that stock A was a better investment as compared to B, which was not clear earlier without holding period data.

Compounded Return

Compounded return formula has an underlying assumption that whatever you get at the end of compounding period will be reinvested at the compounding rate for the next period. Hence, in this method, your principal amount increases at the end of each compounding period. This results in returns which are superior to the simple return as reinvestment concept is not applicable in case of simple return calculation. The formula for calculating compounded return is given as

Where i = Compounded return

FV = Future value of investment

PV = Present value of investment

n = Holding period in years

Let’s say we buy a stock today at Rs 100 and sell it after 6 years at 165. If we use the above formulae to calculate compounded return we will get compounded return = 8.7%. If we use the formula of simple return, it will be a return of 65% which is highly misleading. Based on this comparison, we can say that compounded return gives a more realistic picture as compared to simple returns.

Compounded Annual Growth Rate (CAGR)

CAGR calculation and assumptions are similar to compounded return calculation with one addition. CAGR also takes into consideration the intermediate cash flows during the holding period. In compounded return calculation, we have no term for intermediate cash flows. Let’s say stock A pays dividend of Rs 5 in the second year. Our compounded return formula will still produce a result of 8.7% return. But, if we use CAGR, we would do the calculation assuming additional cash flow will be reinvested in the stock at current price resulting in enhancement of returns at the end of holding period if there is further price appreciation. So, CAGR gives more realistic picture as compared to simple and annualised returns as it takes cash flow and return volatility into consideration. This is the reason why it is a popular return measure and is used for comparative analysis of investment products.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com

Calculators:

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Bonds: Are they Really a Risk – Free Investment Avenue?

Yogi — Wed, 15 May 2013 09:33:00 GMT

Every portfolio benefits from bonds; they provide a cushion when the stock market hits a rough patch. But avoiding stocks completely could mean your investment won't grow any faster than the rate of inflation.
- Suze Orman

I am sure most of you would agree with this and you are right. Bonds are a much safer investment option than equities. However, many of you would be under the impression that investing in bonds protects your money from any kind of risk and there I’ll take the liberty to correct you.

Despite being safer than equities and commodities, bonds too carry some risks with them. Let me throw light on a few of them for you!

A bond is a debt security in which the issuer acknowledges debt to the purchaser. Thus, if you are buying a bond, you are lending your money to the issuer of the bond. And, when you are lending your money to somebody, there is a risk that you do not receive it back. In other terms, bonds carry credit risk (risk of default) with them. To avoid such risk you should look at the credit rating of the bond instrument and only then make a decision to invest in it.

Organisations such as CRISIL, ICRA issue ratings for most bond issues.

Another big risk associated with bonds is interest rate risk. You must be wondering, when the interest rate which I get on my bond is fixed, then how can this be a risk? It is not, if you are prepared to hold the bond until its maturity. If you intend to trade it in secondary market, then this is a big risk for you as the price of bond (in the secondary market) has an inverse relation with the prevailing interest rate. Let us assume a scenario. You purchased a bond for Rs. 990 that promises to pay 10% semi – annual interest on face value.

There is now a new bond issue in the market, which offers 12% semi – annual interest on face value. Considering the change in the interest rate, very few people will be ready to purchase the bond, you are holding, that too at a low price as they have now an option to buy a bond that has a higher coupon rate.

Liquidity is another risk faced by bond instruments. If you want to sell your bond in the market, and liquidity is low, then you may find it very difficult to get buyers. As a result, price of your bond will fall. However, this risk does not generally apply to government bonds, as there is always a demand for them.

Bonds are definitely the most suitable investment option for risk – averse or moderate investors. Still, do not ever invest in any bond without looking at all the risks associated with it. For those who do not possess much knowledge regarding bond market, mutual fund is the key.

About the Author:

Sapna Tiwari is a Certified Financial Planner and Masters in Financial Management with over half a decade’s experience in the field of personal finance. The views expressed are personal. She can be reached at expert@investmentyogi.com

Calculators:

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All You Wanted To Know About Supplementary Credit Cards

Yogi — Wed, 15 May 2013 06:43:00 GMT

In India, now-a-days millions of people swipe their credit cards for online / retail shopping, to pay monthly bills, insurance premiums, etc. There are people in our society, who use multiple credit cards and consider it a status symbol. However, not many people have heard of supplementary credit cards which can be applied by primary credit cardholders for family members, parents and children just above 18 years of age.

What is a supplementary credit card?

Supplementary credit cards are issued by banks to family members we authorize to use. These cards have additional credit which you are eligible to get on your credit card but passed on to other family members by applying for these supplementary cards. Ideally, you can apply for 3 to 5 supplementary cards which vary from bank to bank. These supplementary credit cards can be used in India and abroad as stated on credit card. It will be accepted by all merchants while shopping online and in retail markets.

Advantages of supplementary credit card

Withdraw cash from automated teller machines (ATMs).
Get reward points equivalent to primary card holders and rights to redeem anytime in future.
You can monitor spending habits of your adult child when he/she swipes.
Gives financial freedom to your elderly parents for their shopping. Also, helpful in some emergencies.
Single monthly statement for all transactions done by primary and supplementary card holders. This helps to keep a record of all expenses at one place and verify.

Setting the credit limit on supplementary credit cards

Supplementary credit cardholders will get a credit limit equivalent to primary cardholder or lower limit as set by primary cardholder.

For example: Mr. Shrikant is a primary card holder with credit limit of Rs 3 lakhs. Now, when he applies for supplementary card, he has rights to set a credit limit of Rs 3 lakhs or lower on each card. Assume, he has applied for 3 supplementary cards to distribute among family members. He will set credit limit of Rs 1 lakh on each card.

Primary card holder can set a maximum limit even on cash withdrawals from ATM for supplementary card users. Please note, supplementary cardholders don’t have rights to increase the credit limit or make purchases over-the-limit.

Cost to incur for applying supplementary card

The costs to apply for supplementary cards vary from bank to bank. However, few banks offer 2 to 3 supplementary cards initially, based on your credit worthiness or offer as complementary after completing few years of service and analyzing regularity while paying due payments. Some banks charge joining fees of around Rs 500 on each supplementary card.

Pay the dues on time

It’s the responsibility of primary cardholder to pay the dues on time since it’s a single account. Secondary cardholders have no liability to pay the charges while they use the card. Credit bureau keeps a track of your credit worthiness with credit scores. In case your payment gets delayed on a regular basis, it reflects in their database affecting your overall credit score.

Conclusion

To have supplementary credit cards requires careful consideration. It’s important to have a person who’s trustworthy and uses card for right usage. It shouldn’t happen that you keep paying dues on things which you don’t require. At the end, your expenses will rise and your efficiency to save / invest will be diluted. It’s your hard earned money, so think twice before you give the power to someone to incur expenses on your behalf.

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Education Loan: Timely Repayment is Important! (Concluding Part)

Yogi — Wed, 15 May 2013 04:56:00 GMT

Education Loan has become a way to help one getting proper education and settle comfortably in life. Getting an Education Loan has become an easy task as one can get the same by qualifying in a recognized institution for admission. Loan up to Rs.4 lac doesn’t need any kind of security and margin. The applicants in this segment are more and a large number of defaulters come from this segment only. Once anyone takes a loan, he should have a thorough plan ready, as to how he would pay back the same without delay. Normally, Banks give time up to 5-10 years for repayment of education loan but the recent data of banks have shown heavy percentage of defaults in repayment and the reason behind this is easy financing of loans up to Rs.4 lacs. Following tips can help one in planning the repayment of loan effectively:-

Interest Payment: - When one gets education loan, the bank charges simple interest on the loan amount till the completion of the course or commencement of repayment. So, its important to keep paying interest during the course as he would need to pay back just the original loan amount when he completes the course.
Discount on Interest: - 1% interest discount is offered by banks if the interest is continuously paid during the study period and till the commencement of repayment. So, this can allow you to take the benefit of a lower interest amount.
Don’t wait for the right job: - Many students wait for their dream job after completion of the course. In the process of doing so, they ignore initial job offers which are not so attractive or which have a lower salary than expected. Accepting such jobs at the time of campus placement is always better than sitting idle in the expectation of an ideal job. Once you get a job, you can start paying small amounts till the time you get a better job. This will keep your loan amount within original limits i.e. interest will not be due and repayment will never be tough.
Prepay or Not? : - Many consultants suggest that one should prepay the loan if possible as the interest rate is like a burden and one might have to pay more amount in such scenario. But, the student gets an unlimited deduction u/s 80E of Income Tax on the interest paid under education loan. If prepayment is done, one may get a reduced benefit under Sec 80E. So, proper calculation is required to be done before prepayment and if the benefit of prepayment is less than deduction under 80E, then it should be avoided.
Try small savings: - Once the student gets the job, he should make a habit of doing small savings which could be of great help in case of any uncertainties like job discontinuation, inflation, interest rate hike etc.

Repayment of loan should be made within the stipulated time given by bank, otherwise this could lead to many problems like:-

Penalties: - Most of the banks have a schedule of charges on delay of repayment of the loan amount. Normally, a delay in payment up to 1-2 months is ok, but after this, the bank sends you a notice ignoring which they levy heavy penal charges on you which have to be paid along with the loan installment. If the repayment is done through post-dated cheque, then it should not bounce because banks put heavy charges upon cheque bounce and it can take you to legal proceedings also.
Insult on social media: - Trend of social media like Facebook. Linkedin, Twitter etc. is very popular these days. If anyone is a defaulter of education loan, the financial institution can embrace him through this social media. Recently, some cases of similar nature have been admitted. Some banks had found the details of the defaulter on social media from where they got the details of his employer where he was working. They publicly notified the defaulter on social media to repay his loan amount which caused a loss of his image in society. Further, the current employer also can pull your legs in such a scenario.
Attachment of property: - If the amount of loan is more than Rs.4 lac, then some asset can be held as a security. In case of any default, the bank can attach the property so mortgaged.
Loss of Credibility: - The banks check CIBIL’S credibility report before lending amount to the applicant. This credit report is also your history which can reveal all the details like- the loans you have taken, the outstanding amount of loan till date, the EMIs paid by you and the EMIs defaulted by you, etc. The details related to the number of inquiries made by you with the credit card companies for loan are also flashed in the report. If one thinks that banks can’t do anything with such report, then he is mistaken. These days, when you apply for a job, the employer can ask for such credit report. So, if you are a defaulter anywhere, it would be tough for you to get the job.

To conclude, we can say that understanding the responsibility of loan repayment is very important. The start of repayment is the start of your career too, and a small mistake can easily spoil your bright future. So try to build a good reputation with the banks and repay the loan on time!

Also read: Education loan part1, Education loan part2

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Ways To Avoid Financial Crunches

Yogi — Tue, 14 May 2013 12:15:00 GMT

Financial management is not an easy task. For fund managers, entrepreneurs, businessmen and individuals, the chances of cash crunch arising are pretty common. Having said that, individual cash crunch is difficult to mitigate as the resources are limited and the expenses are ever increasing. Consider the Indian scenario where a person is facing the double digits (10%) inflationary heat and the salary is static, or in case of business, the slowdown is eating the consumer demand. Under all such cases, it is necessary that you are mature enough to sense the financial liabilities and cash straps emerging from time to time. It is also essential that you prepare yourself early and plan for any contingency in case of cash shortages. Here are a few tips by which you can increase the flow of cash:

Set Aside Money for Countable Expenses: This is a usual housewife sort of saving habit that you can adopt to shield yourself from rainy days. Always count the expenses that you have to shred every month. These expenses are known as fixed expenses but chop a large pie from your income. The expenses may be EMIs, electricity bills, water bills, tuition fees, society maintenance charges, mobile recharge/ top ups, rents etc. A sum total of all this gobbles a large percentage of your salary or business income. You might not want to include petty expenses like watchman charges and newspaper bills as it sounds weird. But this can happen if the planning is imperfect. So count these expenses beforehand and separate that portion.
Cut Unnecessary Expenses: Although some expenses are unavoidable, cutting down expenses is saving in indirect manner. Avoid purchasing things you might not find relevant. Or, rather, purchase things that are most relevant as per your needs. The problem with most of us is that we never think this way when the money is available to spend. It is only when one is cash strapped that these unnecessary spending comes to haunt us. Better be more realistic and spend based on needs.
Deferment of Expenses: Some expenses can be deferred for the future. For example: your Air Conditioner might need servicing, you can defer the same to winter in case you have spending issues. You might want woodwork in the house, defer it if you are struggling to generate cash for the same. The other way is to save a small small amount for a particular purpose and utilize it afterwards.
Privately Generate Funds: If the liability is not bigger and you are certain you can repay it afterwards it is better to search for avenues within family and friends. If they pay the sum it is nothing like it. You can repay afterwards and in most cases you will be saved from personal loan interest or any sort of short term loan from the bank or financial institution.
Don’t Liquidate Your Long Term Investments: Until absolutely required, it is always advised that you don’t liquidate your long term investments like fixed deposits, PPF, NSC or insurance premium. Liquidate these only when you have used all your cards. These investments are meant for long term and can bring decent returns to you, so ideally they should not be used to set off short term claims.
Monetize Your Gold Holdings: This is a great scheme if launched by RBI that can be a savior for persons stuck with their finances. One will be able to deposit his gold holdings with the commercial banks for which they will get cash certificates. These certificates will carry a fixed interest that is given based on Gold holdings. It will induce additional source of income for cash appreciation.

Disciplined approach should be followed in dealing with finances. Instinctive rush to purchase something or to spend heavily on unnecessary items will slash your money and you might face a crisis situation at the end of the month. Better to spend smartly and keep the savings habit intact.

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Monetary Policy Tools and its Effects

Yogi — Tue, 14 May 2013 06:14:00 GMT

Monetary policy refers to attempts by a central bank like RBI to control inflation and increase growth rate of economy by employing tools which changes the money supply and interest rates. Let’s try to understand how use of monetary policy tools effects inflation and economic growth in the Indian context. We will also try to understand the trader’s mentality regarding the monetary policy announcements.

Objectives of Monetary Policy

There are two primary goals which an effective monetary policy aims to achieve. First, by monetary policy tools, RBI wants to maintain price level stability and, second broader objective is to maintain a strong and growing economy. RBI tries to maintain price level stability by controlling the inflation rate. By maintaining a stable inflation rate, RBI can also maximize potential GDP and the growth rate of GDP. While maintaining price level stability, the central bank achieves its secondary goals of increasing the incomes and the living standard of common people.

Common investors and Monetary Policy

Since taxation is based on nominal returns and not real returns, high inflation decreases real after-tax return. High inflation rate decreases the tendency of saving and investment as greater uncertainty about future returns increases the risk. This risk element pushes current consumption rather than saving and investment. Lack of savings and investment slows the growth rate of country's economy over time.

Monetary policy tools

Most tracked and talked about tools used by RBI for implementation of monetary policy are Repo Rate, Reverse Repo Rate and Cash Reserve Ratio (CRR). Repo is the rate at which banks borrow money from the RBI. Reverse Repo is the rate at which banks lend money to RBI and cash reserve ratio (CRR) is the portion of saving deposits that banks are mandated to park with RBI.

Following the traders

The announcements regarding key policy rates like repo, reverse repo and cash reserve ratio are tracked by the traders in stock and bond market. They utilize these announcements to make some short term but substantial profit. This profit potential lies in understanding some basic after effects of the policy rate changes. By cutting rates, RBI gives room to banks to lower the cost of loans for their customer’s. The whole business model is heavily dependent on interest costs. This list includes companies from sectors like Auto, Housing Finance, Real Estate and Banks themselves. This whole lot is termed as interest rate sensitive as prevailing policy rates have a huge impact on their profit margins. Similarly bond prices are also rate sensitive and are inversely proportional to the prevailing interest rate. If the interest rates are high, bond prices will be low and vice versa.

When there is an announcement regarding policy rate cut, all the interest rate sensitive sectors react positively providing a short term profit opportunity. However, you need to plan your investment prior to these announcements. The price adjustment is relatively fast and there is very limited scope of profits in the short run post announcement. Hence, to benefit the most you will have to act quickly.

Normally, policy rate revision rumours start popping up one month in advance. Carefully track the news and once convinced that the rumours are not baseless, you can take long position in interest rate sensitives.

Word of Caution

This strategy is of short term nature and you should book your profits before actual announcements are made, as rumours might actually be rumours only and if there is no policy rate cut, your profits might get wiped out. I am reiterating, treat this investment as a short term investment and book your profits before the actual announcement. Better be safe than feel sorry.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com.

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Should You Invest in Gold on this Akshaya Tritiya?

Yogi — Fri, 10 May 2013 09:11:00 GMT

Akshaya Tritiya is one of the most auspicious days in the Hindu calendar. The word “Akshaya” means imperishable and eternal prosperity which never diminishes. So, new ventures made and valuables purchased on this day would be fruitful and believed to bring luck and success. Traditionally, in India, on this day people purchase gold as it is the symbol of wealth, prosperity and fortune. This year, it will be celebrated on 13^th May, 2013.

Every year, to attract buyers; jewellers and banking institutions offer various attractive schemes such as offering a free silver coin on purchase of gold, discount in making charges on gold jewellery and discounts on gold coins.

Let’s analyse the performance of gold as an investment avenue from Jan-2008 to May-2013 (up to 8^th May, 2013) and 1^st Apr, 2013 to 8^th May, 2013.

Graph 1: Price of gold (per 10 gram) increased by 18% CAGR during Jan-2008 to May-2013

Source: Bloomberg

We saw “Bull Run” of gold price in last 5 years which we can analyse from the above chart. There were various reasons and many investors followed the herd to gain profits by investing in gold. However, investors who invested in gold when prices were at peak would be in loss or nominal profits since there was a drop in price of gold in last one and half months, which is shown in graph 2.

Graph 2: Gold price dropped by 9% in last one and half month

Source: Bloomberg

Analyzing recent correction in prices of gold and with no other positive trigger except for Akshaya Tritiya festival, analysts are expecting prices to stay in the range of Rs 25,000 to 28,000 per 10 gram in near term.

I know various people among family, friends and society who would do not look at co-relation of economy with gold price. They simply have 10 general or superstitious reasons to invest in gold. However, I would like to share 5 reasons why you should not invest in gold on this Akshaya Tritiya:

Buying gold on this auspicious day only due to superstitious belief of growing wealth.
Investing in gold due to speculation of gold price will continuously increase for next 2 – 3 years.
Simply buying gold since your financial advisor told to invest in this yellow metal.
If your portfolio already consist of 10% investment in gold.
Considering gold can help to grow your wealth. However, fact is, in long term investment in gold helps to preserve wealth, not grow it.

Stating reasons you should not invest in gold doesn’t mean I have negative view on gold but there should be timing to enter as investor. Portfolio should be well balanced with various asset classes, speculating in the future of gold price will diminish your wealth instead of growing it….!!!

Most readers would have already made their mindset to invest in gold on the day of Akshaya Tritiya. So, here are various investment options available to invest in gold:

Gold Jewellery
Gold bar / coins
E-gold (National Spot Exchange Limited)
Exchange traded fund (Gold ETF)
Gold funds

This year, we recommend you to invest in gold ETF / E-gold / gold funds instead of buying physical delivery of gold jewellery from showroom or gold coins from banks.

Reasons:

There is additional cost to purchase gold from showroom or banks. These additional costs involved will be making charges, VAT on purchase of gold and premium charged by banks on purchase of gold coins. On other hand buying paper gold will involve brokerage, maintenance charge and transaction charge which will be much lower than physical gold.
There are holding charges (locker) in the range of Rs 1000 to Rs 2500 per annum on delivery of gold products. In paper gold, you will pay maintenance / demat charges in the range of Rs 150 to Rs 300 per annum.
The price of physical gold is lowered when we go to sell in shops (impurity of gold and making charges are deducted). In paper gold, you will incur brokerage charges in ETF and in E-gold, if taking delivery of gold, then 1% VAT and 1% as making charges of gold coin.
Most importantly, paper gold products are considered highly liquid, so, in an emergency they can be sold off quickly.
Investing in gold saving funds with a systematic investment plan is also one of the best alternative ways to invest regularly in gold. This will help you ride though volatility in gold prices without taking on the risk of bad timing.

Conclusion

Now, after analyzing and discussing the current scenario of gold prices, whether you should invest or not in gold on this auspicious day is a personal choice. It’s recommended to first analyse one’s needs to invest in this yellow glittering metal. If you have decided to invest, then don’t run for attractive schemes offered by showrooms or banks to invest in physical gold. Instead, opt to invest in gold funds with systematic investment plan / gold ETFs / E-gold option which will save additional costs, lower the risk and also offer liquidity.

InvestmentYogi wishes all its subscribers, “A new beginning of greater prosperity, success and happiness on this auspicious day of Akshaya Trithiya. Wishing you all Happy Akshaya Trithiya.”

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Tax Implications on Retirement Benefits

Yogi — Fri, 10 May 2013 07:05:00 GMT

The life of a person steps towards a great uncertainty after retirement. At this stage, people tend to become reliant on the savings and investments made during the time of regular employment. Since the cash flows are generally low compared to the earning during employment, people want full retirement money in hand without any deductions. One of the important factors that can reduce the retirement corpus is the tax implication on such receivables. Income – Tax Act, 1961 has already provided relaxation by increasing tax slabs for senior citizens. The tax slab now starts from Rs.2,50,000. Here, senior citizen means an individual who is 60 years of age or more and an individual comes under the category of very senior citizen when his/her age is 80 years or more. In addition to the deduction available in slabs, a retired person can do proper investment planning to reduce his tax liability.

Sources of income after retirement and respective tax implications:-

Pension Receivables

Pension is the most common source of income after retirement. It refers to the retirement plan or superannuation which may be set up by government, employers, insurance companies, employer association and trade union, etc.

Pension is generally received on a periodic basis i.e. monthly, quarterly, etc. This type of receivable is called commuted pension, and a non-commuted pension is received by an individual in the form of a lump sum amount.

A non-commuted pension is fully taxable in the hands of all categories of employees, however some exemptions are available for a commuted pension receiver.

Tax implications on commuted pension:

It is tax free in the hands of government servants, whereas in the case of other employees:-

Situation1 – where an individual also receives a gratuity along with pension, then one-third of his pension is exempt from tax.

Situation 2- where an individual does not receive a gratuity along with pension, then half of his pension is exempt from tax.

Pension received by spouse upon death of a senior citizen is eligible for deduction up to Rs.15, 000 or one-third of the receivable, whichever is less.

Gratuity Income

A gratuity is a part of salary received in a lump sum as a gratitude for the services offered by the employee in the company.

Tax treatment of gratuity received:

For this purpose, employees are divided into two categories-

Government employees- they are fully exempt from receipt of gratuity.
Non-government employees covered under Payment of Gratuity act, 1972

The least of the following is exempt from tax for Non-govt. employees covered under the act:

Actual gratuity received;

Rs. 10,00,000;

15 days’ salary for each completed year of service or part thereof

Note: Here, the number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as-

Salary * 15/26

For Non-government employees not covered under the Payment of Gratuity act, 1972-

The least of the following is exempt from tax:

Actual gratuity received;or,

Rs. 10,00,000;

Half-month’s average salary for each completed year of service

Note: Average salary =10 months’ salary (immediately preceding the month of leaving the job)/ 10

Leave Salary

Earned leaves which remain unutilized at the time of retirement and the amount received in lieu of this, is called leave encashment or leave salary.

Tax treatment:

The leave salary received by government employees is fully exempt from tax.

The amount received towards leave encashment in the hands of a non-government employee is exempt to the extent of least of the following:

The Cash equivalent of earned leave to the employee’s credit only at the time of retirement (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service one has retired);

Ten months’ salary, which is calculated on the basis of average salary drawn during the period of 10 months immediately preceding retirement;

Leave encashment actually received at the time of retirement.

Note: The exemption is not more than Rs.3 lacs.

Provident Fund

It is a fund in which both employee and employer make contribution and the entire amount with accumulated interest is payable to the employee on superannuation. The government employees participate in statutory provident fund and non-government employees participate in a recognized provident fund. The amount received with interest from both types of funds is fully exempt from tax, subject to some conditions.

Compensation received at Voluntary Retirement

Any compensation received for taking voluntary retirement by an individual is eligible for an exemption up to least of the following:

Last drawn salary * 3 * completed year of service or last drawn salary * remaining months of service, whichever is higher;

Actual compensation received;

Rs. 5,00,000.

Conclusion

To conclude we can say that various tax benefits are available for a retired person, especially for a retired government employee. A non-government employee may also reduce his tax liability through proper investment and planning. He can choose the option of commuted pension instead of non-commuted one. It is always better to opt a recognized provident fund.

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Products Traded In Indian Security Market

Yogi — Thu, 09 May 2013 11:09:00 GMT

Indian security market is basically divided into two categories i.e. debt and equity. This simple categorization in no way puts a restriction on the number of products traded in the security market. The products are aplenty and their complex structure at the best confuses individual investors. Through this article, I will try to give a brief idea about the available products and their suitability from the individual investor’s perspective. You can use it for quick reference when ever in doubt regarding a particular product.

Categorization based on Debt and Equity Instruments

Investment in equity products makes investor a proportionate owner of the company. By buying equity products, you lend money to the companies but with an ownership interest and you make money when the company is profitable. Similarly, you lose money if the company is in loss.

Investment in debt products on the other hand make you eligible for receiving a fixed payment, usually with interest. Profitability of company is not a mandatory condition for receiving the payment.

Based on the above characteristics various debt and equity products available in Indian market are shown in the figure below:

Brief Introduction of Equity Products

Stocks

Stocks basically represent direct ownership of the company. You are eligible for dividend payments from the company and you can also benefit from capital appreciation (selling stock at higher price as compared to buying price). This instrument is most famous among retail investors.

Mutual Funds

These are products where money is pooled from investors with a common objective and invested in other equity or debt products to generate returns. As stocks, return can be in the form of dividends or capital appreciation. Mutual funds are suitable for investors who have lesser knowledge on stocks. It is one of the biggest mis-sold products in financial market, so caution is warranted while taking investment decision.

Debentures

Debentures have features of both debt and equity depending upon their nature. They come in three flavours i.e. convertible, partially convertible and non convertible debentures. These products are sold by companies for raising long term debt. Convertible debentures are converted to stocks under specified circumstances. Partially convertible are partly converted to common shares and NCD’s are not converted to shares. Payments are in the form of interest at regular intervals or payment at maturity. For convertible debentures, there is a scope of capital appreciation gains too. Debentures are not very popular among retail investors.

Warrants

Warrants basically empower the investor to buy shares of issuing company at a pre determined price on some future date. Returns are in the form of dividends and capital appreciation as they are similar to common shares. These instruments are not famous in retail fraternity and are basically meant for corporate sector.

ETF (Exchange Traded Fund)

ETF’s are open ended funds whose units are traded on the stock exchange. You get an exposure to whole basket of equity (or gold or debt instruments) by just buying one unit of the ETF. The income is in the form of dividend and capital appreciation. This instrument is gaining popularity among common investors in the form of gold ETF’s, but others still have a long way to go.

Derivatives

There are a number of derivative products in market. They are basically classified into Futures and Options and they derive their value from the underlying asset they are based on. Return is in the form of capital appreciation (no dividends). They fall into the category of very risky instruments as leverage is very high. Derivatives are famous among retail investors with high risk appetite.

Brief Introduction of Debt Products

G Sec (Government Securities)

Government needs funds for running the country and arranges part of it by issuing government backed debt products called G Sec. These are basically government backed bonds which promises interest and principle payment on fixed intervals. The return is in the form of interest payments and capital appreciation as bonds are tradable security. G Sec’s are famous among big banks and financial institutions. Retail investors take exposure through debt oriented mutual funds which are quite famous and attract a lot of participation.

Corporate Bonds

Corporate bonds are similar to G Sec’s and the only difference is, they are not issued and backed by government. These bonds are issued and serviced by corporate houses that raise capital by selling these products. Similar to G Sec’s, these products are famous with financial institutions and banks. Retail investors take exposure through debt oriented mutual funds.

Money Market Products

Money market products are used for short term borrowing/lending by banks and corporate. Popular products are T bills, CD’s, commercial paper etc. Retail investors cannot participate directly in Money market as investment amount needed is huge. Returns are slightly better than savings deposit rates. Retail investors take exposure through money market oriented mutual funds.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com.

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Investment Dilemma: NPS Vs EPF

Yogi — Thu, 09 May 2013 08:59:00 GMT

National Pension Scheme (NPS) is slowly getting more popular among employees. Even some big conglomerates are offering their employee's option to apply for NPS apart from the usual Employee Provident Fund (EPF) scheme, which is generally a part of the salary structure. Now, here are some points which are making NPS a popular and more accepted option. Firstly, the scheme of NPS is for all individuals and not just restricted to a salaried class person. Secondly, this scheme is more feasible in terms of returns. The idea behind the scheme is to invest the corpus in equities, which is a high risk generating alternative compared to the fixed income option of interest in Provident funds.

Sameer Sethi’s age is 30 years and he is working for an FMCG company in Delhi. He is shifting his focus from a PF scheme in which he was till now investing towards the NPS scheme which his company is offering from current financial year. Talk to him and he will say that it will help him in building sound corpus at the time of his retirement. He said that he is investing in the India growth story considering that the portion of funds i.e. 50 percent of the corpus is invested in equity bureaus under NPS schemes.

Choices Available Under NPS:

There are generally two options that are given to employees by companies offering pension schemes. One option is to invest at a subscriber’s level and the other option is to invest on a company level. Under subscriber level, the employee has the option to choose his fund manager and even the asset allocation. In another option, the company will opt for the fund manager and even the asset is allocated based on company’s choice. In the latter case, companies generally opt for investment options of Central government employees. The company managed funds have also delivered better in terms of returns to employees that range from 9 to 12 percent, much more than the set 8.5 percent limit in case of EPF.

How the scheme works?

Not a rocket science by any sense of imagination. It is a simple procedure where the employee subscribes for the NPS scheme if available in his company. The amount that needs to be deducted under the scheme is also mentioned by the employee. Companies on the other hand can take benefit from Sec 80 CCE by claiming the contribution made by them under business expenditure in P&L account.

Difference of opinion:

Major difference of opinion emerges on the nature of the NPS and EPF scheme. NPS is generally an equity product, as 50 percent of the total funds are invested in equities and on the contrary, EPF is a debt scheme. If the products are different, so is the risk. Risk averse investors need stable returns and safety, for them it is better to continue with the primal provident fund scheme. For those who are early in their career and can take risks should always go for NPS as the returns generated can be far more in the long run compared to EPF. Some of you might be aware that EPF invests in government securities or debt products.

Withdrawal limit:

In case of EPF, one can withdraw the complete amount before his retirement for specified reasons. However, in case of NPS, if the withdrawal limit is more than 20 percent of the total invested before the age of 60, it leads to foreclosure of account.

Demerits of Scheme:

Having scored on other points over EPF, NPS drags on the tax front. The most important criteria for a middle class salaried employee is to save tax, but NPS gets beaten on that portion by EPF. First and foremost the withdrawal from NPS is taxable under the Income Tax Act. The annuity which is earned after the retirement also attracts tax.

This product needs to be improved on that front, otherwise it lacks the appeal for retirees. Further, an Employee contribution of 10 percent of Basic and Dearness Allowance is deductible under Section 80CCD.

Costs involved in NPS are also a danger. These scheme charges fund management fees which increase the cost of investment which in EPF is NIL.

Looking at both the products from various angles, Employee Provident Fund scores over and above National Pension Scheme. NPS scheme gets limited only to the returns front as it invests in Equities but under EPF one is getting the benefit of taxation, stable returns, withdrawal limits, security and no costs.

Conclusion:

If you are looking for decent returns, liquidity and also to save tax, EPF should be your choice. If you are willing to take risk to get better returns through some exposure to equities, NPS is just for you.

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EPF Transfer and Withdrawal could be One Click Away

Yogi — Wed, 08 May 2013 07:21:00 GMT

In India, many employees switch their jobs during the year for better opportunities and for a hike in annual salary. But, while switching jobs, a common problem faced by employees is with transferring their Employee Provident Fund (EPF) account from one company to another. Currently, you need to give physical application to transfer your EPF account from one company to another while switching job, which lacks transparency in process and takes years or months to complete the transfer. In the past, there were cases of people getting frustrated and they didn’t have any clue on which desk their application was lying and the waiting period to complete this transfer of account. Now, to make the process smooth and simple, EPFO has announced launch of online facility of EPF transfer and withdrawal from 1^st July, 2013.

Benefits of Online EPF Facility

Online facility will reduce the hassle; there will be transparency in the process.
You will get a facility to track your request by just one click online and also be able to see which stage your application has reached.
Application process will be quick as employees at EPFO office will not be required to data feed physical application in the system, saving their time. Employees at EPFO now will work directly on more constructive areas such as verifying the details and then complete the procedure smoothly.

How verification process will work after request is placed online?

You need to apply for transfer or withdrawal on the website of www.epfindia.com with all the personal details, PF account number, old and new employers EPF code.
An MIS will be generated with the tracking code, which will help in locating the status of application.
Your application request of transfer will go to the old employer and EPFO, online. Then, the EPFO department takes charge of verifying the details, contacting old and new companies of an employee for verification and complete transfer.
EPFO staff will be working on stiff deadlines to complete the procedure for transfer of EPF account.

Unsuccessful technology initiatives in the past

EPFO has planned to launch online EPF transfer and withdrawal facility from 1^st July, 2013 onwards. But, in the past, the various measures taken to improve the services and process were not productive. There have been delays in launching services; also earlier initiative for an e-passbook has not tasted success.

EPFO had also made an announcement on account number portability, which should make transfer much easier. In this, each employee will be allotted a single PF number. Also, there will not be any requirement to transfer the EPF account from one employer to another while switching jobs. However, this project has been delayed and expected to be launched after 2 years. Now, focus is on launching these online services.

Conclusion

We advice to wait for 2 months if you can, for this online system to go live or else follow the usual physical process to transfer the account. It’s not recommended to withdraw the money from EPF account after changing the job, so transfer it to the new employer. These are retirement savings which should be preserved for your future consumption.

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What is Gratuity

Yogi — Tue, 07 May 2013 12:10:00 GMT

Gratuity is one of the least understood components of salary. InvestmentYogi explains everything about Gratuity and the tax implications for you.

Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.

Eligibility

As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year).

How does it work?

An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.

Tax treatment of gratuity

The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. This tax treatment varies for different categories of individual assessees. We shall discuss the tax treatment of gratuity for each assessee in detail.

For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories –

(a) Government employees and

(b) Non-government employees covered under the Payment of Gratuity Act, 1972

In case of government employees – they are fully exempt from receipt of gratuity.

In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:

(i) Actual gratuity received;

(ii) Rs 10,00,000;

(iii) 15 days’ salary for each completed year of service or part thereof

Note:

Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover).
‘Completed year of service or part thereof’ means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored.
Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26

In case of non-government employees not covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:

(i) Actual gratuity received;

(ii) Rs 10,00,000;

(iii) Half-month’s average salary for each completed year of service (no part thereof)

Note:

Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover).
Completed year of service (no part thereof) means: full time service of > 1 year is considered as 1 completed year of service. < 1 year is ignored.
Average salary =10 months’ salary (immediately preceding the month of leaving the job)/10

Illustration

Let’s understand the above math clearly with an example:

Varun had been working with an IT company since past 10 years, 7 months. He is retiring on 15^thApril, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: Varun’s basic and DA have been the same since past 1 year.

Lets consider 2 situations here – (a) Varun’s employer is covered under Payment of Gratuity Act, 1972; and (b) Varun’s employer is not covered under Payment of Gratuity Act, 1972.

Salary = Basic + DA = Rs 40,000 pm + Rs 5,000 pm = Rs 45,000 pm
Average salary = 10 months’ salary (immediately preceding the month of leaving the job)/10 = (Rs 45,000 pm * 10)/10 = Rs 45,000 pm. Therefore, half-month’s average salary is = Rs 45,000/2

Important points to remember

Generally, only government employers give DA to their employees. Above example is only for illustrative purpose.
The salary of the employee may differ over a period of time on account of change in basic, DA and/or other factors.
In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 10,00,000.
Where employee has already claimed gratuity exemption in any previous year (s), the maximum exemption amount allowed for the current previous year i.e. Rs 10,00,000 will be reduced by the amount of deduction already claimed in the previous years.
In case of an employee who is employed in a seasonal establishment ( not employed throughout the year), the gratuity exemption shall be for seven days wages for each season.

About the Author:

Priya Rao is our in-house Financial Planner and a personal finance enthusiast. She is a Certified Financial Planner(CFP) and can be reached at expert@investmentyogi.com

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Impact of Falling Gold Prices on Gold Loan Borrowers and Investors

Yogi — Tue, 07 May 2013 06:15:00 GMT

Falling gold loan prices bring broad smile on the face of Indians as they love buying gold and jewellery. It’s also a reason to cheer for the government as the price fall will contribute towards reducing the current account deficit. Reduction in current account deficit will be an indicator of strengthening economy and will boost the overall investor sentiments towards investment in stocks. It seems falling gold prices is good news for everyone. But there is a group of investors and borrowers who might not be happy. Which is that lot, and what’s the reason of their concern? We will discuss the impact of falling gold prices on investors and gold loan borrowers in this article.

Gold Loan Borrowers

Crashing gold price is putting pressure on cash flow and balance sheets of gold loan companies as their business model is tightly coupled with gold prices. If we try to understand the business of gold loan companies, in simple words, it can be said that they generate profit out of the interest payment they receive from borrowers.

These borrowers put gold/jewellery as collateral with the companies against which they receive loan. Once the collateral (Gold) price starts falling, there happens to be devaluation of the assets which the companies hold. In case of any default from the borrowers, the companies will have to sell gold which they hold in open market. As the prices in open market are less as compared to the price when the loan was originally sanctioned, it hampers the profitability of the company.

To avoid such situations, companies start pressurising the customers for prepayment or to increase the collateral. Both these situations are not borrower friendly as the borrower might not be in a position to make full payment or deposit extra collateral.

Investors in Gold Loan Companies’ NCD’s

Gold loan companies raise capital by issuing NCD’s and use the capital in expanding branch network and visibility to maintain market leadership position. They use the capital to target new customer segments and use the capital to strengthen operating processes and risk management systems. Post employment of the raised capital, they pay the investors from the profit they generate from the new customer base.

The interest rate which is promised against these NCD’s is in the range of 12%. Now let’s figure out what happens in a falling gold price scenario to the new business they are planning to acquire. As the gold prices will be low, new customers who are planning to take gold loan will try to defer their requirement as loan to value ratio will be low. They will wait for the gold prices to rise. If this turns out to be a mass behaviour, gold loan companies will face difficulty in acquiring new customers. Lack of new business will put a question mark of their potential to service the NCD’s. This will lead to fall in value of the NCD’s till the gold prices resume their uptrend.

If this scenario persists for long, there might be rating downgrades for the issue. So, as an NCD investor, you face capital loss if you sell the issue in the open market. If you hold on, you face credit risk.

Conclusion

Falling gold price puts gold loan borrowers and lenders at risk. Situation is grimmer for the NCD holders, as, if the situation persists for longer period; they are subject to both capital loss and credit risk. Before taking any investment decision, do a careful analysis of the future price outlook and timeframe you have in mind, as prices are bound to reverse the course some day.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com.

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Child Plans – Don’t be Childish

Yogi — Fri, 03 May 2013 10:00:00 GMT

Do you want to secure your child’s future? If your answer is yes, one thing you should do immediately is to buy a ‘Child Plan’. Well, if you are a sales agent trying to sell a child plan, this would be the perfect pitch for you. Emotions rule in India. And this is exactly where insurance companies monetize. They will first remind you that nothing is forever and then they will tell you how their product is the ‘Best’ for you. Let’s dig deeper into this very interesting topic and see whether you need a child plan or not!

What is a child plan?

The major difference between a child plan and any other insurance/investment product is the word ‘Child’. Trust me, if you remove this emotional word from the name of the plan, most policies would sound similar. I doubt if even the sales agents would recognize what is what without the policy name.

Child plan as Insurance

A child plan provides the much needed security for your child in case of an unforeseen event. But, I thought there is something called “Term Insurance” specifically designed for that. All you need to do is to just add you child’s future education requirement, marriage costs, etc to your total insurance requirement. Now, you would ask me; why not purchase insurance through a child plan? Good question. I wouldn’t mind doing it, but for the costs involved in doing so. There are mortality costs, administration costs, allocation costs and the list goes on. Why would I pay all these and get insurance only worth peanuts?

Child plan as Investment

The next emotional word that the sales agent would throw at you is ‘Investment’. He would tell you that this will act as a safe investment (only he would know what safe means) and secure your child’s future needs. And you would probably agree with him because you know well about rising inflation and education costs. Does a child plan invest in financial instruments offered out of this planet? I would invest in one right now, if it does. Rather, you could do well to pick 4-5 mutual funds with decent track record and invest in different financial instruments. With everything becoming online, you can do it on the click of a button, unless you are too lazy to do so.

Child plan for Financial Planning

The sales agent will definitely tell you that this would be a part of your overall ‘Financial plan’. The last thing that I would do is to include this ‘Na ghar ka na ghat ka’ policy in my financial plan. In fact, if you have covered yourself with adequate insurance and planned proper investments, all you need to do is to teach your children financial literacy. This will enable them to protect and build the existing assets.

Final Word

Remember, there’s nothing in a name. You need to first know your goals before taking any financial decision. Do your own homework on a product you want to purchase. The agents will only talk about the positives of the specific policy. They will never know your financial situation in detail. If you do not have sufficient time for research on financial instruments you need, better approach a good financial planner. He will take into account your present financial situation and then help you plan ahead.

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Personal Accident Insurance – Should you opt for it?

Yogi — Fri, 03 May 2013 05:46:00 GMT

“Risk comes from not knowing what you're doing”
― Warren Buffett

True……but not always.

In our lives, there are thousands of situations, where we know what we are doing, however we cannot avoid risks. Imagine someone crossing the road on a pedestrian signal, and a drunkard hits him. The pedestrian could not avoid the risk despite following the traffic rules.

Risk is inherent in all our activities. In our last interaction, we had discussed how you could select a life insurance policy to cover the risk of death and a mediclaim policy as a safeguard against hospitalisation expenses. However, most of you must be familiar with these risk covers; but very few would have heard about personal accident insurance cover. Let us discuss this today!

Personal Accident Insurance denotes an insurance cover, which proposes compensation in case of death, bodily injuries, total/ partial disability or mutilation resulting from an accident. The types of events that are covered under personal accident insurance are rail, road and air accident, injury due to collision or fall, burn injury etc.

Your insurance portfolio would be incomplete without a personal accident policy. This type of policy provides financial support to the policyholder if he is disabled after an accident. Even minor accidents are covered by the policy such as breaking a leg or arm, falling from a cycle etc.

Where to buy?

All general insurance companies (ICICI Lombard, HDFC Ergo, Royal Sundaram, Apollo Munich, Tata AIG etc.) offer these policies. The agents, however, don’t try to pitch these policies much as these are quite low priced policies with lesser commissions.

Premiums

These policies cost you a low amount of premium for a decent cover. It costs you around INR 100 – INR 200 per lac of sum assured.

Coverage

The situations covered by personal accident policies are:

Death - In case of a death due to accident, the policy pays 100% of sum Assured to the nominee. Some companies also pay “Children’s Education Bonus” of 5000 or 10000 for a maximum of two children.

Permanent Total Disablement (PTD) – In a situation when the insured is disabled for life, the entire sum assured is paid. Some policies also pay 125% or 110% of SA depending on terms and conditions of the policy.

PTD includes loss of –

both hands or both feet
one hand and one feet
one (hand or foot) and an eye
loss of sight of both eyes OR speech OR Hearing of both ears

Permanent Partial Disablement (PPD) - In this case, a small percentage of SA is paid on weekly or monthly basis, i.e. 1% of sum insured is paid every week up to 100 weeks.

Includes –

Loss of Index Finger or thumb
Loss of hearing in one ear
Loss of one eye
Loss of one limb

Temporary Total Disablement (TTD) – In case the insured is not able to work due to the accident, for some weeks or months, the company will pay a part of SA.

Group and family accident policies are also available in the market where cover is available for the whole family / group under a single policy.

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Prepaid Gift Cards – Modern Way to Gift

Yogi — Thu, 02 May 2013 11:39:00 GMT

Rakhi, Diwali, Christmas, Eid, Birthday, Wedding, Anniversary, Valentine’s Day, Friendship Day and the list goes on. In our society, there is no dearth of occasions for gifting. And let’s accept it; we all love to get gifts. But do we like every gift that we get? The answer is no. Then what is the use of gifting something that the person at the receiving end may not like. This is the one of the many reasons that led to Gift Cards.

Gift card or a Prepaid card is a stored value magnetic strip based card in which a monetary value can be stored and can be used for spending on purchases in pre-specified outlets. Unlike credit cards, in Gift card the payment is made before the transaction.

Who issues Gift Cards

Gift cards are issued by almost all banks such as ICICI Bank, HDFC Bank, State Bank of India, Bank of Baroda etc. and payment service providers like American Express in India.

How to get a Gift Card

If you are not a customer of the bank, then the following steps are required to purchase a gift card:

Walk in to a branch of the bank
Fill application form for Gift Card
Undergo KYC check, i.e. provide proof of identity and address proof
Pay the issuance fee, which is generally Rs 50–100 and amount to be loaded in the card

An existing customer of the bank can also apply for gift card from the branch in which case, KYC check is not performed. Existing customers can also apply for gift cards through internet banking.

Value and Validity

A Gift Card’s denomination needs to be minimum Rs 500 and maximum Rs 50,000 and it is valid for one year. Gift cards can either be recharged/reloaded or are non re-loadable. Majority of the banks issue cards which cannot be reloaded.

Key Benefits

The following are the benefits of gift cards:

Buying Discretion – As already discussed, gift cards allow the person receiving the gift the discretion to select the gift.
Free use by anyone – Gift card is not necessarily made by any name, i.e. anyone can redeem a gift card, irrespective of who has paid for it. This means that one can order any number of prepaid cards and fill it with certain amount and gift them to anyone.
Safe – Gift cards are better option than giving cash as gift cards are safer and easier to carry. Gift cards can also be replaced if lost or stolen
Widely accepted – Unlike gift vouchers, which are issued by retailers like Shoppers Stop, Lifestyle etc., gift cards can be used for shopping, in restaurants, movie theatres etc. A gift card powered by Visa /MasterCard/American Express is accepted at all retail outlets accepting Visa /MasterCard/American Express debit and credit cards.
Clear Accounting – Large corporations prefer issuing gift cards to employees than money transfer to employees account because it is easier to account for in company books.

For retail buyers, gift cards can be preferred if the amount to be loaded is substantial so that the issuance fee ends up being a small percentage of the value loaded. It is hard to think why a person wanting to gift Rs 500 would pay Rs 100, i.e., 20% extra for gifting through a gift card. Despite this, gift cards are fast growing as the preferred gifting solution and the convenience provided by gift cards is sure to make it a premium choice for gifting in times to come.

(Also read: Tax on Gifts)

About the Author:

Uma N Goel is an MBA (Finance) from SJMSOM, IIT Bombay and has worked for 5 years in financial advisory. She can be reached at expert@investmentyogi.com.

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Just Married – Tips for Good Financial Health

Yogi — Thu, 02 May 2013 10:35:00 GMT

The pheras done, honeymoon over, now comes the harder part, the dreaded ‘F’ word – Finances.

As our elders rightly said, marriage is never with a person, it means embracing a new family, an additional set of parents, sisters, brothers, uncles, aunts etc.

Now along with the extended family come extended responsibilities. With the assumption that you have the basics figured out, the objective of this article is to give you a list of items which you should do now to win brownie points in ‘sasural’ and of course ensure that you are not financially drained, come a situation like this.

Life cover (Term plans)

If you already have a term plan, you are a smart step ahead, but it is time to evaluate whether or not the amount is sufficient. Now that you have two families, your parents and your spouses’, both need to be assured of a financial support even if you are not there.

You can choose to take two separate term plans with different nominees (parents on one and spouse on another) or you can choose to use the same term policy and nominate a percentage of amounts to your parents and spouse respectively.

If you don’t have a term cover, it is essential you take one as early as today. With age, the premium you pay also increases and it is easier to get a term plan without hassles at a younger age.

Medical Check-ups (Annually)

Ensure both set of parents undergo an annual comprehensive medical check-up. This will help you detect onset of ailments at an early age and attend to them before it blows up into significance. This is also a good way to earn brownie points from spouse and in-laws and somewhere deep down you will have the satisfaction that you have averted a major outflow in your Cash reserves which may have come in the future, by being proactive.

Medical Insurance

While one can be proactive, with age parents (both sides) are susceptible to injuries and ailments, hence a good medical insurance backing is of utmost importance. You may have been proactive in taking medical insurance for you and your parents, but now that you have embraced another set of parents, it is essential you cover them under a good health insurance plan. If they already have one, assess if it is good enough or an additional cover is needed. As they grow older, it will become difficult to get an additional cover. With medical costs rising, a minimum of Rs. 5 Lakhs should be the amount that they need to be covered for.

Critical Illness Plans

You and your spouse are the pillars of your parents’ world. And should anything happen to either of you they will be shattered. Also, financially it will be a big drain, with our lifestyles changing; incidences of lifestyle ailments are on the rise. A critical illness policy will give you that lump sum amount when you need it for your treatment expenses.

Cover your Asset backed loans

If you have a home loan or plan to take a home loan, ensure that you take a credit shield policy along with it. You want to leave back to your kin an asset, if you are no longer alive that very asset becomes a liability with the EMI payments every month. A credit shield policy will pay any of your outstanding loans, should anything happen to you and you can safely leave behind an asset for your family.

Budget your Credit Card expenditure

Keep a threshold beyond which you will not spend (except in case of emergencies). This will help you control your credit card expenditure to a certain extent. A monthly investment tracker will also help you trace where all the money going, and what you know you can any day control.

Small steps go a long way in ensuring happiness in the long run. Marriage is all about planning the future as “WE”, and the financial planning therefore must also include the “WE”.

So, good luck to a secure financial future together!

About the Author:

The author, Daisy Fernandes has a Masters in Management from SP Jain, a Banker by profession and currently pursuing CFP certification. She can be reached at expert@investmentyogi.com.

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NRI accounts – Assigning a Mandate holder

Yogi — Thu, 02 May 2013 09:06:00 GMT

The whole point of being a Non Resident Indian is to be staying overseas and the whole point of having an NRI account in India is to be able to operate that account remotely. It is a given that you will never be physically present in India always to operate your account, hence there is a facility to authorize a person in India whom you trust to manage your financial matters. Hence, to take care of your finances in India, you can appoint a resident Indian you trust – a friend, family member, etc....(read more)