The Khatkhatem of investment products

It's heartening to know, so many of you have visited my blog even though it's been a long time that I have written anything, but believe me, nothing interesting was happening that I would have liked to share with you all, till yesterday.

Case study

Yesterday, (yes I know it was a Holiday but I was working/helping) I was approached by a friend who had been advised by an "insurance adviser/consultant" on a certain investment cum pension product with added life cover from a well reputed insurance company.

In konkani cuisine, there is a very nutritious and ethnic dish called 'khatkhatem', which is essentially a curry of a variety of  vegetables. While the essence of this dish is to provide a nutritious meal to the consumer, the above combination of insurance, investment and pension is totally unhealthy and a recipe for disaster.

Now this (story) product (being from an insurance company) has three parts to it .

1. Pay an annual premium of  Rs.70,000/- for 27 years. After which my friend would get Rs, 68 lakhs at his age of 60.(graphic attached)

2. He was also going to get a life cover of 60 lakhs.

3. Invest the accumulated 68 lakhs in a pension product (of the same company) at the age of 60 to get Rs 5 lakh per anum for his lifetime. (approx 41000 pm in 27 years)

Here is what I had to say to my friend (for the sake of simplicity I advised him in 

1. Contribute the same amount of Rs.70,000/- for 27 years in a simple product like PPF, your gross returns stand at 81.6 lakhs.(graphic attached)

2. Buy a term life cover of Rs 1 crore costing Rs. 15,000 annualy. Your returns even after deducting the term life premia from the PPF investment are 0.55% more and additionally you are getting 9.6 lakhs.

3. Pension always needs to be linked with inflation. If we consider a yearly expense of Rs. 2,40,000 and inflate it by 6%, then in 27 years my friend would need about 11.57 lakhs per anum, what good will that 5 lakh pension for life do if his requirement is more than double of that?

Coming back to the pension requirement from age 60 yrs, if I trace back the retirement corpus my friend needs, based on a yearly expense of 2.4 lakh, a figure of nearly Rs. 2 crore pops up. Mind you this is the inflation adjusted figure unlike a fixed pension beneift.

This friend of mine is risk averse, (In India who isn't?)  Hence my advise to him was, don't invest in Equity Mutual funds, but stick to simple products and you are much better off than falling prey to a mis - seller. In the coming years you can increase your investment whenever your income increases.

Cost: 

The commissions that agents selling mutual funds, Reserve Bank of India and other bonds and Post Office deposits, as compared to that received by insurance agents are a scandal. The commissions are enormous, generally around 15 per cent of first year premiums and 7.5 per cent in the second and 5 per cent from the third year onwards. For a financial product that is supposed to be an investment, this is a shocking level.

The above incident was a clear case of buyer beware. If you buy insurance as investment then your fixation for Guaranteed returns will ultimately pinch you very hard in the pocket, not necessarily right away but surely in the years to come. More importantly, buying illiquid insurance products will only diminish your choice of savings.

So, don't invest in Mutual funds, but don't hit yourself in the foot by buying unhealthy investment products from insurance companies, Agreed that their job is to sell, but it is for you to decide whether that concoction suits your financial life.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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स्वच्छ भारत अभियान

Monday morning I received this forward from one of my friends on a popular messaging application platform on the mobile, it was about committing to the स्वच्छ भारत अभियान....

As a citizen of of India

I Commit that I will not throw

any garbage/waste on road/street

but only in dustbin or location

provided for the same.

I shall also spread this message

to my near and dear ones! 

This is an excellent initiative by our Honorable Prime Minister who himself symbolically wielded the broom on Thursday to launch a nationwide campaign that aims to clean up India in the next five years. The PM chose Valmiki colony in Delhi's heart - a place which was once home to Mahatma Gandhi - to do the sweeping in a small area for a minute, in the company of party colleagues and officials. He said that the स्वच्छ भारत अभियान should clean up the country by 2019, the 150th anniversary of Mahatma Gandhi.

He has further invited a set nine of popular celebrites and bureaucrats including Goa Governor Mridula Sinha, master blaster Sachin Tendulkar, Congress leader Shashi Tharoor, Bollywood actor Aamir Khan, Priyanka Chopra, Salman Khan, Yoga guru Ramdev baba and a team of 'Tarak Mehta ka Ooltah Chashmah'. 

While this mission is about the Gandhian principle of cleanliness, I feel the same applies to our financial life.

Here's how you can clean up your financial mess and streamline your finances by following the 3 simple steps given below:

1. Clean up your Insurance Portfolio:

Most of us have a number of traditional life insurance policies(sometimes only1). Its important to not mix insurance with investments and keep/buy only those Insurance policies which offer pure life cover and nothing in return at the end. This ensures that you are not earning negative real returns and actually utilising your money resources in the most effective manner. Now this does not necessarily mean you need to buy Term cover and go on "Hibernation", diverting surplus funds to better products like PPF, SIP's and taking sufficient Health Insurance is equally important.

2. Clean up your Investment Portfolio:

Over the years we all have "collected" investment products which have been either forced upon us by way of excellent sales and marketing techniques or because of our fixation and affection of fixed and guaranteed returns. This has led to accumulation of many junk investment products which have no defined purpose in our financial life. Take this opportunity to clear the mess and withdraw/redeem such investment products, start from ground zero if need be, by preparing a financial plan.

3. Prepare a Financial Plan

Financial Planning follows a well defined process, hence it can really help you streamline your financial life. In the first step itself it defines your current financial situation(starting from ground zero) followed by developing your financial goals.... (see image).Financial planning provides a road map for your financial life. It can make the journey less stressful, more fun, and more successful. And, you can start right now — even if its only a few steps at a time. If you do not have the time or expertise to prepare a financial plan connect with the right Financial Planner

If you go to see, it is not really necessary to find some or the other reason to start cleaning India or our financial portfolio's for that matter, but its always better to have a mission with a vision. You cannot embark on a journey without a destination. The स्वच्छ भारत अभियान is clearly a mission, and a clean India by 2019 a Vision of our Honorable PM. Although this looks like a herculean task, believe me, its very much achievable, after all you are going to spend 100 hours every year out of the available 8760 hours which is a little more than 1% of the total available time.

Don't forget to add a similar amount of time to clean and streamline your Financial Portfolio. After all this cleaning, I ensure you, you will have achieved peace of mind and increased your productivity multiple times.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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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

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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

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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

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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

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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

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