How to build a portfolio for your financial life?( part II of II)

Here's how you can build your financial portfolio.

The first step towards building a portfolio is to have a clear goal. Once you have that, then it's relatively easy to build the rest of the portfolio in a way that's suitable for meeting your goals.

Goals that need to be fulfilled in the short-term are fundamentally different from long-term goals. Short-term goals are best fulfilled using fixed-income products such as a bank or a post office deposit.

If you are saving gradually towards such a goal, then the post office or bank recurring deposit is a reasonable tool. It yields a return of 7.5 per cent per annum. However, this should only be used for savings targets that are no more than two to three years away. Any longer and the ill-effects of the low returns will start becoming more and more meaningful.

For fulfilling long-term financial goals, the best option is to use a portfolio comprising of equity mutual funds. As we have read, equity is the only type of asset that can ensure that your money grows faster than inflation and does not actually lose value in real terms. Fixed-income investing is safer, but generally cannot beat inflation.

However, equity mutual funds can be volatile and thus only suitable for long-term investments. Over the short-term, the ups and downs of the stock markets could very well lead to temporary losses. Because of this, it is not recommend to invest in equity mutual funds if your financial goal is nearer that about three to five years.

This point is beautifully illustrated in the accompanying graph. This graph traces the growth of an investment over ten years in three different types of investments. We have chosen three types of funds and calculated the average performance of all funds that are more than ten years old. What looks risky in the short-term can work very well in the long-term. What looks like volatility can actually bring great returns.

Two of these funds are equity oriented. Of them, one invests in large companies while the other invests in smaller companies. The third type is a very short-term fixed-income fund called liquid fund. These funds are heavily regulated to be closest to risk-free investments. For the purpose of understanding returns in this graph, they can be considered equivalent to bank and other deposits.

Each and every investment should be done because of a strong reason. I see people who take Insurance policies to save tax at the last rush hour

of the year !!!   Better loose the tax benefit and don’t take that policy. That kind of investment is nothing more than a waste or burden.

When someone asks you the reason for making a investment, you should know why you did it ?

“A good investment is one which has a purpose”

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

facebook

android

How to build a portfolio for your financial life?( part I of II)

To understand how to build a portfolio, we need to understand what the term means and what it implies. This is necessary to understand what role a portfolio plays. A portfolio is actually a type of briefcase. No, seriously, the original meaning of the word is simply a bag designed to carry documents in. It became associated with investments because in the early twentieth century, stockbrokers would keep each client's share certificates in a separate portfolio. From thereon, the word gradually came to mean any kind of collection of documents. In finance, it specifically means the investments held by an investor, generally all the investments that an investor has.

However, the word's meaning in personal finance has evolved a great deal. A portfolio is a lot more than a collection. For individuals, the best way to plan their investments is to have a separate portfolio for each financial goal.

Different mixes of funds, stocks and other assets lead to different risk levels and different gain expectations. Most people find it difficult to match these to what they want. If you're asked, "What is your risk level?" you'll probably give an answer of some sort but it will just be your gut feeling.

However, if you think of specific financial targets and think of the money needed for them, then you will be able to answer questions about risk and returns precisely. For example, you'll need money for your daughter's higher education after three years. You'd like to buy a house at least ten years before retirement. You'd like to go on a vacation to Europe after two years. You'd like `2 lakh to always be available for emergencies.

Each of these goals is very precise. The risk you can take with it, as well as the amount of money needed can be quantified quite precisely. Therefore, it is relatively easy to decide what kind investments should be made for each of them. Each individual must have many portfolios, one for each financial goal. The other important thing is that a portfolio is not simply a collection. It has different parts that fit together in specific roles and complement each other. 

With experience, you'll learn the basics of constructing a portfolio as well as learn about some model portfolios.Having a separate portfolio for each financial goal gives you the best chance of fulfilling them.

To be continued....

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

facebook

android

Sketch is sourced from Carl Richards of behaviourgap and is used with prior permission of the creator. They are subject to copyright.

Woww!!! SENSEX at 27k.... You still waiting on the sidelines??

I always wonder whether its the dynamic nature of Equity Markets or the high returns that has attracted me towards this asset class.  But when I dig a little deep I find that its actually both (frankly with a slight bias towards the nature). Having entered this personal finance profession(mid 2007) at the cusp of a recession, I can proudly say I am grateful enough to experience a complete cycle of equity market movement. Having said that, I also wonder about, how many investors benefited from this complete cycle. And the the only number that comes to my mind is, a very minuscule one - not more than 5% of Indian investors.

But why??

Is it the volatility of equity markets, the fear of loosing your hard earned money, or is it the Fear of Sensex Figure aka FSF (right now its 27000) that is keeping you away. While I have already covered the first two aspects of this question in my earlier blogs, I would like spend some time on (this stupid) FSF.

Timing the market

FSF is nothing but greed of timing the market. Back in September 2013, when everyone was bearish about the economy and the equity markets, did you ever think that the stock markets would zoom over the next nine months and that equity funds would deliver a 50 per cent-plus return? No, right. Nobody can say for sure when the next correction will come about, so that you can start your investments. Instead if you had simply started investing a small amount (via mutual funds) you would have generated returns in excess of 12%.

Converesely:

What this same FSF could also do to you is, as and when your financial goals are near it will deter you from withdrawing or shifting your Equity investments to a safer (debt) asset class if the markets are inching upwards, as greed would have overpowered your consciousnesses about financial goals and you will have made a strong attachment towards this high return instrument.

In fact, behavioral finance tells us that investors are emotionally wired to act at exactly the wrong times. Although the dynamic nature of Equity Markets makes it important for a investor to dedicate a lot of time towards research of individual stocks, thanks to Mutual funds this is not mandatory. We already have a good set of consistently performing mutual funds which you can choose and start your investments systematically without FSF.

For the first time I am sharing an example of my personal investments with you. I have purposely deleted the names of the funds as I feel that's the least important(for now). Its the time(no of days) that I would like to point out that my investments have spent in the market. In the first investment which is an SIP I made it a point to continue investing through the bad times as well as the good ones, whereas the second one was a gift by my father and I am still proudly holding it.

When I look at people still investing in boring traditional investments, I have mixed feelings of sadness & despair. Why do investors lack interest in Equities, rather what is so interesting about Fixed deposits/Real Estate/Gold that people flock to it. History is a great teacher, they say, and I hope it teaches us to make better decisions when it comes to our personal investments.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

facebook

android

Are you still Procrastinating......

Back in April I had written about how Inflation invisibly effects our Financial health. Today its time to focus on its evil twin - Procrastination - is the practice of carrying out less urgent tasks in preference to more urgent ones, or doing more pleasurable things in place of less pleasurable ones, and thus putting off impending tasks to a later time, sometimes to the "last minute" before the deadline. 

So consider this, we have a standard (hard) working life of about 30 yrs, and due to increase in longevity and advancement in science and medicine we need to consider an equal number for our post retirement life.

But here' what most of the young population feels:

As young and unmarried individuals who have just begun to earn and feel good about it, they do not engage seriously with money or investment decisions. There are several excuses—not enough money; too many choices; very complex; uncertain about where to start; too much paperwork. While you procrastinate about money and also allow your financial health to play out by default.

This lazy attitude of मागिर पलोया (procrastinating) with your money life is (quite irritating) causing unwanted troubles in the future. 

There are several youngsters who have not opened their bank statements, haven't deposited the dividend cheques, not filed the tax returns, or completed the KYC process with a mutual fund. They have a PAN card since the employer insists on it. The taxman would want to know if they can establish how they built their assets, and whether they paid the taxes on their income before doing so. Assuming you won't get caught is a bad idea. Keep empty shoe-boxes to store statements, bills, papers, and notices and take the time to sort them periodically. Form groups to know how to file your tax and do it on time. These habits, if developed early on, will help, as you move up in your career and your income rises.

Conclusion:

Over the past decade, India’s young brigade has increased exponentially, and though our schools and colleges have thought us about compounding in our mathematics syllabus, they have not really played their part of imparting the most basic and practical knowledge about its effects (and that of inflation either). 

After all, in this era of smart phones, I dont think it will be that difficult to learn and achieve much more with our money if we stop procrastinating.

PS: I had bought a second hand tablet in February this year and was planning to pen my ideas via sketches (inspired by Carl Richards of Behaviour Gap). Although it was only used to for amusement of my son(procrastinate) till sometime last week when Janki asked me "didn't you buy this for office work". So in all seriousness here is my 1st sketch. Hope I can improve upon this.

Ninad Kamat
CERTIFIED FINANCIAL PLANNER^{CMwww.letsmakeaplan.in}facebook

Google Play

Money Is not Everything...

After reading Wealth can only be created some time back you might think why I am saying - Money is not everything, now. Of course, money has its own role to play, but don't give too much power to money. It’s not just money that makes things work; people have power in their determination. Many of the big demonstrations that have happened in the world, big changes that have come through in the world, they didn't happen through money.

When Mahatma Gandhi started this big movement in India, he didn't do it because of money. It was a vision and it is this vision that takes you along. Money has its role to play, but don’t think money is everything.

Money can help us be more effective in our service and help it expand, needing to attract money to sustain yourself keeps you grounded and connected with meeting the true needs of society. Money creates relationships with those you share it with, and relationships can help your spiritual development. Money can be a wonderful mirror for you to see yourself more clearly.

"When our hearts are pure, our intention is clear and the work is good, resources will come. When it is needed, as much is needed, it will simply come." ~ Spiritual Guru

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

facebook

How to connect with the right Financial Planner(Part II)

The biggest issue one faces in hiring a Financial planner is “Trust”, so you need to build a great level of trust with the Financial planner and for that you need to interact with him, spend time with him, get references from family and friends and once you are satisfied you can then hire him/her. A financial planner at the end is someone who is also interested in educating you and not just making money from you. Just imagine a doctor who gives you medicine, but does not tell you the preventive measures to take, so that you are not ill next time. Would you like to visit him again? He should be interested in educating you up to a level where you can take informed decisions yourself. Only then you can call him a good doctor, the same applies to a financial planner.

Unmask the Poser Smart questions to ask a financial planner and the answers he should be giving you Q. What qualifies you to be a financial adviser? A. I am a certified financial planner (CFP) or I have a certificate from Irda/Amfi/National Institute of Securities Markets. (A CFP is better qualified to manage a portfolio). Q. Do you have relevant experience? A. Yes (Make sure you are not the guinea pig. The years do not matter so much as the kind of exposure and profiles he has handled in the past). Q.Can you give references from current clients? A. Yes (Speak to at least two existing clients to ensure you get quality service). Q. Will you draw up a service agreement? Will the advice be given in writing? A. Yes, and the advice will be recorded in writing. Q. Is my fee your only source of income? Do you get commissions for the products you recommend? A. Client fee is my only source of income. I do not earn commissions on the products I recommend.

Current Status of Financial Planning Practice in India

There are three ways a Financial Planner in India makes money:

1. By pure consulting and advising (by making the financial plan)
2. Through Commissions (from products sold to clients) 

3. Combination of 1 and 2


So what you have to look for while hiring a financial planner is that He/She should be an Independent Financial planner and  has no compulsion of executing the plan through him. There should be freedom in Clients hand that he/she can execute the plan from anywhere he/she wants. As an additional service the Financial planner can give an option to have financial plan executed through them, but it should never be compulsory, as otherwise there will always be some level of biased attitude while recommending products to you.

How much to Pay:
This is a debatable topic, still let’s try to understand and find out how much do Financial Planners deserve.
Financial Planners in US and Australia get as much as $150 to $200 per hour. (that’s close to 7.5k – 10k per hour). Financial Planners in India cannot and should not ask for that kind of money for two reasons:

 

1. They will not get it 

Financial Planning is new in India and there is still no standard procedure to create a financial plan. So what they can expect is not more than $30-$40 max per hour.

Now in India people will laugh if a Financial Planner asks money in per hour basis, it’s just not what Indians can imagine. We Indians like to pay one time fees or lump sum fees, that’s the model India runs on. A good financial plan takes around at least 10-12 working hours (strongly focused and distributed across several days). From that point of view a price range of 10k – 25k looks reasonable for a Financial plan. Anyone who is charging less than Rs 10,000 is undervaluing it and working more for less money. Other point is, you have to understand that all financial planners differ from each other and the amount of detail and care they take while creating it.

BE SMART

Certifications from Amfi and Irda are essentially a licence to sell a certain financial product, while a certified financial planner, or a CFP, is a qualified adviser. It is important to distinguish the two. Better to pay for good advice then act on free advice that is biased.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

facebook

How to connect with the right Financial Planner(Part I)

As a blogger, there is no specific time/date/place where you will get an idea to write about( I know I've said this before).

Like this: Ironing my office going clothes in the morning has been a ritual for the past 8 years. These 10-12 minutes are also where some of the ideas for this blog pop up. Here is one interesting topic that came up the other day I would like to share with you.

Are you looking for Financial Planner/Advisor? If you are, you should go through this post that talks about almost all the necessary information you need before hiring a financial advisor. Most investors are confused about simple things like, where to find a good financial planner/advisor, what they should expect from him and most importantly they do not understand the financial planning environment in India. There are lots of myths and misunderstandings around the financial planning field and this post will give you most of the basic information you need to be aware of, while hiring a Financial Advisor.

First things first:

Who is a Financial Planner:

A financial planner is a professional who helps his clients to deal with various personal finance issues through proper planning. Just like we have a doctor for our physical problems, we have Financial planners/advisors for our Financial problems. Just because you know “what is a Mutual fund” or some “Tax laws” or can buy and sell stocks on Stock market, it does not mean that you don’t need a Financial planner. Financial Planners are professionals who have got the requisite qualification, have learned strategies and have in-depth knowledge and experience to understand how to structure/restructure a common man’s financial mess and come up with a sound long term plan which will help a client achieve his/her financial goals in future.

Just like CA, MBA, CS and other professional certifications, there exist a certification for Financial Planning which is called CFP (Certified Financial Planner). Read more about CFP Here. CFP is regarded as the top most qualification in Financial Planning  and it is recognized worldwide.

Who is not a Financial Planner:

A lot of CA’s, CS’s, MBA (finance), CFA, ICWA and other Finance related professionals feel that they are the right professionals to do Financial planning for individuals. Just because “Financial Planning” or “Personal Finance” has “finance” word associated with it; does not mean that any one from different finance field can be a Financial Planner. Financial Planning is very different from what CA, CFA or a MBA Finance does.

Financial planning deals with individual personal finance, his future financial goals, the risk taking appetite. Having  CFA or MBA (finance) as qualification will definitely help at some level and may be some CA’s, CFA’s or MBA (Finance) have a great understanding of Financial Planning, but it’s not true for everyone in general. In the same way, any ULIP Agent, Insurance Adviser or Mutual funds agent, Wealth Manager, PMS guy is not a Financial Planner. These people are there to assist a Financial Planner to sell the products. In the analogy of Medicine field, Financial Planner is a Doctor and all these agents, Wealth managers etc. are like Pharmacists.

There are two ways of hiring a Financial Planner:

1. Hiring a Financial Planer

In case you want to hire a CFP (which is recommended) you can get a list of CFP’s in India at FPSB website link.  You can find out CFP based on

• Name/Company
• City/State
• Nature of Employment

Tip: You should search for CFP’s who are “Independent Financial Planners” or “Self Employed”. 

2. Hiring a non-CFP

You can also hire a non-CFP but you have to be very careful while doing that. Before CFP certification came to India, we had excellent planners in the Industry who understood the financial planning process subconsciously and still practice that but without having the CFP certification. They can be from various backgrounds but can have sound financial planning knowledge. They are a rare species.

To be continued....

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

facebook