Here come the 4 maxims to wealth creation as jacks out of the box: 

When young be a youngster, when old be mature

“Don’t let the opinions of the average man sway you. Dream and he thinks you’re crazy. Succeed, and he thinks you’re lucky. Acquire wealth, and he thinks you’re greedy. Pay no attention. He simply doesn’t understand.” By Robert Allen 

Some youngsters are easily influenced by the ideas, advice and experiences of others, like Vijay, 27 years old, believed in safe and secure investments in fixed deposits in banks and companies, just because his father lost heavily in the share market. However Rahul invested in mutual funds and created more wealth.

Youngsters in their 20’s should invest in stocks and shares as they can afford to wait and benefit with compounding effect and lower taxes. Likewise an old person should play mature and responsible and invest in safe and secure investments like debt instruments and big cap mutual funds.

Know the depth of ocean before stepping in, and your investment risk

Investment risk calculation of each portfolio helps judge risk. Your age, appetite for risk, and length of investment decides your investment portfolio. M.R. Kopmeyer said, The great road to wealth is to learn useful facts”, how true it is that many investors had lost heavily in future stock selling in a bull market without much knowledge. A safer investment would have been multi cap mutual funds with wealth creation period of 10-15 years. However senior citizens should invest in big cap mutual funds with much lower allocation.

Wealth creation decisions should be long term, for it is futile to be swayed to sell units/shares in a rising market and miss on opportunities for further wealth creation. Follow the market trend and do as J. Paul Getty quotes, “Buy when everyone else is selling and hold until everyone else is buying” 

An optimum leverage b/w debt for wealth creation and lifestyle assets

Abundance is not something we acquire. It is something we tune into,  by Wayne Dyer

There is an urgent need for quick wealth creation to meet inflation demands, but we need lifestyle assets like car, TV, furniture and a house to live in. Unplanned debt can be a barrier to your wealth accumulation process. It is true with easy debt options available, there is a choice to borrow for lifestyle assets alone or for also for wealth creation investments like real estate. In addition, payment of EMI leaves youngsters with less capital to invest in wealth creation assets.

In addition, leverage requires not investing in same type of assets like land and house, as price fluctuations could adversely affect all in that type of asset. Also investing on lifestyle comforts pay nothing in the long run.

No one created wealth by laying all eggs in one basket

Variety is the spice of investment decisions too, helping in diversifying risks, and making it possible to offset the fall in value of one asset by profits in another. So having a diversified portfolio of real estate, gold, shares, mutual funds and house, and avoiding investment just in one asset class helps. In addition, portfolio diversification proves effective in tax saving, and better wealth creation.

Now finally you too are on the path to being a high networth person. How do you view yourself?

Do you quote George Claso, “Wealth is power. With wealth many things are possible.” and end on a final note,with John Emmerling, “Study well what the billionaire does. It may make you a millionaire.”

Earlier, STA flashed couple of ads in daily newspaper questioning the banning of Gutkha in 14 states in India to be unfair as they have not banned cigarettes which according to them is more harmful then chew able tobacco products.

First of all, Cigarettes being more harmful doesn’t mean people should be allowed to chew gutkha. This is a daring step on Governments part to ban gutkha products from 14 states, although they are still easily available at much higher price in black market.

We might agree, to an extent, to their claim that Government has been lobbied heavily by cigarette makers to not ban them but even than lifting the ban from gutkhas is no way justifiable.

Ministry of Health, Govt. of India, carried a counter advertisement in daily newspaper and made people aware of the facts about chewing tobacco taking more lives than cigarettes.

This is for people to think themselves and decided what is good for them and what is not.

You know, he is allowed to check-in at any Indian airport without frisking which is only permitted to VVIPs and highest dignitaries of the country.

The best part is, if you notice the list closely that you can find at any airport in India, you will see he is the only proper noun in the list. Except him, rest are positions and people holding those positions are exempted.

We would not have really mind if his position (instead of his name) was mentioned in the list i.e. son-in-laws of Gandhi family Another funny thing is, in an RTI reply, Indian Home Ministry said he is indeed exempted but did not answer why !!

He is really whole India’s son-in-law whom we should treat like from GOD’s family.

Disadvantages of a Readymade “Child Plan”

“Child plans” with insurance resemble unit linked insurance plans, starting early in a child’s life and ending only when the child attains maturity.  The amount of money invested in these plans is insignificant considering an in-built insurance component, and other charges like premium allocation charges that are the commission paid to distributors. This could lead to low return in the initial stages and additional losses on leaving before completion of the tenure.

Most of the “Child plans” in the industry comes with a catchy name to capitalize the Child sentiment in us.

We need a different medicine for a kid and adult. But do we necessarily need a different type of investment options for securing a kid’s future. Think.

Alternatives for Child Plan

It is to be noted that other investment products like Public Provident Fund, National Savings Certificate, National Savings Scheme, RBI bonds, post office deposits and instruments and mutual funds that serve the purpose of savings and increasing of capital value apply equally well to investment for a child’s future.

Mutual funds are available in a wide range to satisfy all appetites for risks. In addition there are mutual funds that are designed for meeting long term financial obligations of children.  One could also invest in funds with a right balance between debt and equity that promise better capital growth than child plans. It is also possible to go in for systematic investment plan that offers the opportunities of taking advantages of price differences and gaining in the long run.

It is true that systematic investment plans or SIP help save entry cost and build a habit of regular savings for capital growth to meet children’s financial obligations. It is also possible to avail of tax benefits as such funds are taxed only on maturity and a major child’s income would be taxed separately. I am sure you would agree that this would help saving unnecessary expenses and cuts in investing in child plans.

PPF or Public Provident Fund is also good as mutual funds, with opening a PPF account for a 20-year period in a child’s name helping to meet long time financial obligations of children.  It has been stipulated that an annual investment of just Rs.70000 would leave you with almost Rs.32lac as a result of the compounding effect. It is difficult for a “child plan” with insurance component and upfront charges to offer you such a great return without taking much of risk.

An Ideal Mix

• Instead of going for a Readymade Child Plan, one can customize their Investment Plan for their child with a combination of Term insurance, PPF and equity diversified funds.
• If tax saving is your motive one can consider ELSS funds instead of a regular equity fund.
• It gives you similar tax benefit like a child plan. You get 80 C benefits for your investments. Also the returns are also tax free.
• At the same time, the charges are very very minimum and negligible when compared to readymade child plans.
• You can increase or decrease your contribution every year depending upon your financial situation.

So whenever, you think of child plan think of a customized investment plan for your kid’s future with a mix of 2 or 3 investment options instead of  readymade product with a tag Child Plan.  I am sure you would agree that readymade child plans prove to be not ideal instruments to save. The wisest line of thought would be a mix of diversified investments that gives good return with low charges.

]]> http://www.covermiles.com/investment/child-plan-is-that-really-worth-for-your-kids/feed/ 0 http://www.covermiles.com/investment/child-plan-is-that-really-worth-for-your-kids/ http://feeds.argham.org/~r/CoverMiles/~3/Jg3CToFiCHM/ http://www.covermiles.com/investment/do-you-do-your-regular-financial-check-ups/#comments Thu, 14 Jun 2012 11:38:13 +0000 Ramalingam K http://www.covermiles.com/?p=851

Noel Whittaker said, “Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing.. those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it”.

This meaningful quotation made me realize that we need to make regular financial check-ups to ensure that we have enough to meet our financial goals in life. Planning for financial goals require taking into consideration the present rates of earnings on investments, future earnings and rate of inflation that would affect our lifestyle and financial goals. It is vital that we all realize that regular reviewing our finances according to our changing dreams, needs and aspirations and making necessary changes would help meet our financial goals.

Marriage and a merger of personal finance

Marriage could be the first circumstance that calls for reviewing financial needs. Getting married means not just end of bachelorhood/spinsterhood, but additional expenses of managing household and financial needs of one’s spouse. Likewise 2-paypackets calls for necessity to review the fruitful investment of excess income.  I would say that marriage brings along with it future goals like buying a house, planning for children and so on and additional expenses involved in this planning.

Kids and their Future

The innocent face of kids brings joys to the couple’s life, with the added responsibility to plan for additional finances required for their upbringing, education, medical expenses and marriage. In addition, don’t we as parents feel that we have to leave behind an inheritance that our children would love to treasure?

Health is Wealth

Regular financial check-ups is required not just after marriage and kids, but God forbid, death, long term sickness and accidents are eventualities that can change everything for a family; these unforeseen contingencies can lead to major turmoil and depletion in finances.

Switching your job or transition to a business

Regular financial check-ups are also required considering the change of employment or business activity. Regular jobs bring regular income and regular investments, while increases would mean more of investments. Also irregular and cyclical income means saving and investing more in times of high income; as in surgeons, artists, consultants investment and insurance advisors for times of income crisis.

In addition, can anyone of us afford to miss on the effects that inflation plays on our financial planning? Periodic financial check-ups ensure we are self-sufficient in old age. Other factors like windfall gains could also make differences in our finances. So it is very true to say that regular financial check-ups or reviews would help make adjustments in financial plans in the most optimum way.

What do regular financial check-ups give me?

Expecting the Unexpected

Deepak Chopra aptly said, “Even when you think you have your life all mapped out, things happen that shape your destiny in ways you might never have imagined”.

It is right that budgeting regularly would help all of us to pin-point where we are overspending and need to economize to fulfill goals. It is true that this would help increase savings for investments. It would be right to say here that regular financial check-ups help to review financial needs and also set up sufficient contingent or emergency fund that come in handy in emergencies; sickness, accident and unemployment. Ideally it should be 3 to 6 months of your family expenses. This would come in handy in case of emergency.

How very true it is that insurance forms an important part of financial planning as it provides for not just financial protection on death, but also for illness and future needs. Constant and regular financial check-ups is necessary here also to provide for increased insurance needs, with planning early in life helping reduce premium costs and refusal for insurance.

Net worth Tracking

It has been well said by Noel Whittaker, “Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do, it is a matter of managing your money properly”.

We would be smart in preparing a balance sheet of our family finances. Like a business balance sheet, this could enlist assets like contingency fund, various investments, interest earnings, pension, provident fund, insurance and other immovable assets we have and also enlist the liabilities like expenditure on children’s education, marriage, medical expenses, retirement expenses and cost of inflation on financial reserves. Constant updating would not only give an idea of your exact financial standing, but would also help to make appropriate financial planning changes.

Other Review Triggers

• A special mention needs to be made regarding regular financial check-up with regard to mutual funds; the change of fund manager and other changes in investment portfolio need to be considered.
• How very true it is that regular financial check-ups help in maintaining excellent financial health. Budgets need to be reviewed every month, with financial consultants advising their clients to review their investments every 3 months and make the necessary changes.
• There may however not be a need to make changes if the portfolio is as planned, though in certain cases like big change in financial goals or with new guidelines of investment necessary changes may have to be made in the investment plans.

To conclude how very true it is that uncertainty is an important ingredient of life, but managing your money properly could give you the stability and peace of mind to face your financial goals confidently.

1.   Create a budget

Most of us hesitate to make a budget because we think it is about cutting all the fun in life. Budgeting is not about cutting all the fun; it is about conscious allocation of funds. Once we start spending consciously, our mind will find out a whole new way of having fun within the budget. You need to create a workable budget that gives you extra money and life.

2.   Spend smarter and save more

Spending less and saving more are lifelong living skills that need time to develop. Unless and otherwise, you have a clear written budget, you will lose your focus and go after consumerism and materialism.

To save more, obviously you need to spend smarter. To spend smarter, you need to understand your own spending patterns. Consciously you need to track all your expenses on a daily or weekly basis. So that you can find out what influences your spending pattern and you can stay away from those influencers.

3.  Family protection

As a bread winner, you provide a lifestyle to your family. This life style need to be protected with sufficient life insurance cover. Otherwise your family may not be able to continue the same lifestyle in case of any mishappening to you. A word of caution here, don’t fall prey to ULIP schemes. Opt instead for a pure term insurance policy. These policies give you high coverage with low premium.

Also cover yourself and your family members with adequate health insurance coverage. The coverage amount of the health insurance policy needs to be decided based on your health consciousness, your family health history, and the class of hospital you choose for treatments.

4. Asset protection

Before starting to build fresh wealth, it is our duty to protect our existing assets. Assets like house, flat, or car can be insured against accident and natural perils. The event of earthquake or terrorist attack to our flat/house seems to be remote. But the impact of such things could change our financial stability upside down. So protect your house and other major assets with proper insurance.

5.  Emergency reserve

You need to accrue savings for some surprise situations like loss of job, break in job or sudden expenses like a major repair to your car or house. Generally, the emergency fund needs to be in the range of three to six months’ family expenses. If you have created this contingency fund, in the event of an emergency you need not pre-close your other investments and thus you avoid paying penalty or booking losses.

6.  Debt payoff plan

If you are in debt, you need to create a debt payoff plan with different scenarios. So that you can find out how some more savings or a different repayment order will help you get out of debt faster. When creating a plan, you need to choose one which fits your attitude.

7.  Setout goals & layout plan

If you don’t know where you are going, you may end up somewhere you don’t want to be. Decide your financial goals first. It may be buying a home, buying a car, or children’s higher education.

To get where you want to go in life, it is important to decide in advance how you will get there. What you need is a roadmap, a financial plan to achieve your financial goals.

So create a financial plan for you and your family.

8.  Retirement plan

In spite of the world wide pension crisis and a growing acceptance that we must plan and save for our retirement, the harsh reality is we are actually not saving enough. Research reports reveal that only 15% of the individuals are saving sufficiently for their retired life. Don’t put off today what you can’t afford to do tomorrow. Do your retirement plan TODAY to have a comfortable and enjoyable retired life.

9.   Review

You need to check up your financial plan and investments semi-annually so that when there is any deviation from our original plan, you can take corrective measures to control the deviation.

10.  Work together with a professional financial planner

There is a lot of help available for you online to create a financial plan in various websites with financial calculators. But if you want to create a complete, comprehensive, customized and workable financial plan, you may seek assistance from professional financial planners.

You really need a professional assistance when you want to review your financial plan and investments, when you want to add a new goal, or when you want to pre pone or postpone one of your goals.

If you follow these simple but authentic 10 commandments, by next year you will be richer than what you are this year. Celebrate the New Year with much more confidence and peace of mind by following these simple steps for financial success.

Rahul completed his graduation and looking for a job. Before appearing for the interview he wanted to know the best tips for attending the interview. He collected some tips from his friends; some from his seniors; and some more from his relatives. One day he met a placement consultant and asked him for some more interview tips.

The placement consultant looked into the eyes of Rahul and gave him a form and also asked him to fill up the details. Rahul was wondering what for this form is. The form has got some questions to identify and analyse the strength and weakness of the candidate. While filling up the form Rahul got the whole idea. That is “the interview tip is not somewhere outside; It is within him”. Identifying his strengths i.e his skill sets, his knowledge, his interest, his aspiration and applying for a job which demands those strengths. Rahul was moved. Rahul was transformed. Thereafter he never asked for any interview tip from anyone.

Similar to job search, making investments is also an inside-out approach. “Inside-Out” means to start first with self; even more fundamentally, to start with the most inside part of self — with your financial goals, your ability and appetite to take risk, your other existing investments ……

So an investment suitable for one person need not be suitable for another. Because they may have different goals, and risk levels. As there is no common investment for each and everyone, obviously there can’t be an investment tip which is common to all.

Then how do these investment tips exist? There are lots of people, who don’t want to follow the regular investment process and looking for a short cut. So there is a demand or market is available for investment tips. It is difficult to sell an investment by following the correct process. But it is too easy to sell an investment by giving something in the name of a hot tip.

Where from these investment tips come? Media, stock brokers, or other investors. Primarily, it comes from the stock brokers. Even in media, these stock brokers only provide these tips. The other investor could have received the tip from his broker.

If you are going for shopping, you decide what to buy or seek the advice of shop keeper for what are all you need to buy. Can anyone rely on that advice? Similarly can anyone rely on the common advice by a stock broker?

Stock brokers provide tips mainly for trading; not for investments. Investment is entirely different from trading. Trading is for short term. Investment is for long term say 5 years and above. Stock broker earns commission out of your transactions. A trader will do frequent transaction so frequent commission. An investor will buy and hold and will not do regular transactions. So no regular commission.

That is why Benjamin Graham, the investment guru of Warren Buffet, says “the investors make money for themselves and the stock traders make money for his broker”.

Investment tips are all mere traps. So in reality there is no such thing as INVESTMENT TIPS.

I also have many younger friends, people still in their prime and just starting their careers. They’re many decades away from retirement, and they’ve fallen victim to the mindset of those with whose career horizon stretches out far into the distance. Although they “Talk” about investing for the long term, their actions…lavish spending…living paycheque to paycheque, ignores the future that will soon become their reality. 

Here are “5 what not to dos” on retirement planning that could seriously damage your retired life.

1) I can start saving later

The decision to postpone savings and investment can’t be a good decision as time will not wait for you to start saving to become a millionaire and have a comfortable retired life.

Savings and investments should start when young, giving you enough time to reach the goal you have set for yourself. It is interesting to note that the value of money saved in earlier years appreciates much more than what is saved in later years just before retirement due to accumulation of interest and the compounding effect. In addition, starting to save bigger amounts in middle age poses problems with other family responsibilities.

2) I am too old to save and plan retirement goals

I do not agree with you. It is never late to start saving and plan your retirement. “It is too late and I can’t do my retirement plan now. I will try to face my retirement as and when it comes” is not the right attitude.

Anyway you need to face your retirement. You can’t skip or escape. So why don’t you prepare yourself now itself. However just procrastinating only further complicates your retired life and you may need to meet a lot of disappointments.

Professional Financial Planners will be of immense help to you in this regard with financial computations for the amount of money required for retirement and how you can cut on unnecessary expenses to build the retirement corpus. 

3) Need for medical aid after retirement overlooked

This could be an overlooked fact, as old age meant more medical expenses and expenses on annual check-ups. In addition, there could be a need for long term care in hospitals and homes that could drain off a huge sum from your retirement corpus. A family history of disorders like diabetes, hypertension and cancer could increase your risk for these disorders further.

Your employer may not provide medical aid after retirement. So instead of relying only on your employer provided mediclaim policy, it is advisable to take an independent mediclaim policy when you are young and healthy. 

4) Lack of balance in spending after retirement

I would always consider extremes in spending habits as unadvisable; being neither frugal in expenses after retirement nor too lavish to deplete all your savings within the first few years is advised. You have a right to enjoy a relaxed and comfortable time after retirement, but spending lavishly would only upset the amount of retirement corpus making you give up on even necessities in later years. It seems sensible thinking that old age could deter ones health to enjoy in later years and so enjoying in the first few years is sensible.

Careful financial planning with projected living expenses and other considerations like savings, other social security benefits and pension would help. 

5) Missing on opportunities to save on taxes and other benefits

Your retirement corpus and retirement income need to be tax efficient. Suppose of you are choosing Fixed deposit as an investment vehicle for accumulating your retirement corpus, then, you need to pay taxes as and when the fixed deposits matures irrespective of that you withdraw interest or reinvest under a cumulative option. But you need to pay tax only when you withdraw from the mutual funds. Careful selection of investment vehicle can reduce your tax during the accumulation phase as well as during your retired life. 

Here are the 5 common blunders to avoid in stock market fall

Being influenced with short term share market losses

I have always advised young investors investing for long term capital gains to not panic if the value of their shares came down rapidly in just a year. It is not advisable to sell them to avoid further dips. A strong unchangable fact about the share market is that it is subject to ups and downs. The price of the shares would rise all of a sudden, and selling would only make it difficult to recoup your portfolio to meet your long term financial goals. The share market is like a voting machine in the short run and weighing machine in the long run, hence long term capital creation requires buying shares in an advantageous share market.

Short selling to make profits

Short selling shares at a higher price, in the hopes to replace them by buying at a lower price proved risky for many investors. They all have soon realized that it was always better to have a cotton shirt on their back rather than aspire and fail in getting a silk shirt and have no shirt at all.

People believe that investment experts and large stock broking houses will be able to predict the market. If we watch and follow them we will be able to make quick bucks in short selling and F&O trading. Is that so? If there are investment experts who will be able to correctly predict the market they will not be writing or giving interviews about it in the media. They will be silently investing and making money without revealing their secret.

Most of the big names in the stock broking sector were opening more new branches in the upcountry side during the second half of 2007 (when the market was moving closer to 20,000 levels), expecting the market to go up further and hence their businesses will grow. But within six months, market had collapsed.

In the second half of the 2008 these companies decided to wind up their newer branches in the upcountry as they were expecting further downside. But again within next six months market started their recovery.

Never enter into shorting deals during a share market fall, but to hold on and invest more if you can make good returns in future.

Buying Penny Stocks of unknown companies in place of shares of reputed companies

Market has fallen. You can invest now. Many investors fall prey for the idea of investing in penny stocks. You may think that you will get more number of shares when you buy penny stocks. Because you will get a very few stocks for the same amount if you choose to invest in large or midcap companies.

It is a universal advice that investing in thriving longstanding companies rather than, a less known company would guarantee you a good return in the long run. You should avoid investing a large sum in unknown penny stocks. It is always advisable to take calculated risks and not blind risks. By investing in a penny stock you are taking a blind risk which all successful investors avoid consciously.

Waiting for shares prices to fall further before buying

When the market falls, that is a perfect time to start investing. Don’t wait for the markets to bottom out. It is difficult to identify the bottom and invest. By the time you recognize, that is the bottom level, the market could have bounced back.

Share market commentaries in the media always confuse us. When the market was at 20000 levels during Dec 2007, everyone in the media is predicting and analyzing the possibility of the market reaching 30,000 levels.  But markets crashed subsequently. When they came down to 8600 level during Nov 2008 , everyone in the media is predicting analyzing the possibility of market going down further to 3,000 levels. But markets bounced back.

The prudent and smart investors understood this and started investing when the markets started falling. They have staggered their investments over a period of time. They followed simple strategies like systematic investment plan and systematic transfer plan.

I wanted high returns, but cannot see my capital fluctuating

Some young and middle aged investors invest in high return portfolios with a lot of midcap exposure, and realize that their portfolios have fallen 15 to 20% with a share market fall in just 3 to 4 months. Their panic and decision to sell their shares for reinvesting the same in fixed return investments like Bank deposits or company deposits is wrong, and I would have advised them to just wait. Their present loss and reinvesting in fixed deposits would take them longer to recoup the capital and make sizable returns. The solution lies in sticking on to the share portfolio and be intelligent to buy more shares for long term wealth creation.

The final word

My final word of advice for long term investors is to never allow emotions or short term fluctuations to alter their investment decision, and to always buy in a falling share market. I am sure a rational decision accompanied by safe dealings can make your long term financial goals a reality.

]]> http://www.covermiles.com/investment/5-mistakesto-avoid-with-stock-market-fall-and-viable-solutions/feed/ 0 http://www.covermiles.com/investment/5-mistakesto-avoid-with-stock-market-fall-and-viable-solutions/ http://feeds.argham.org/~r/CoverMiles/~3/sPPekk5tzkg/ http://www.covermiles.com/investment/8-financial-blunders-and-their-fixes/#comments Wed, 09 May 2012 13:56:03 +0000 Ramalingam K http://www.covermiles.com/?p=841 How to become better at managing money? The best way to start is to avoid making costly mistakes that will be pulling you down and taking months or even years to recover. Many financial blunders are easy enough to avoid once you know what to watch out for.

1. Decision Paralysis

Today there are so many choices, so many financial products and so many offers. It all bundled with financial jargons. It becomes really difficult for one to understand. Also there is plenty of information available on the web, on the media and on the neighbourhood.  This makes decision making much more complex. All these things coupled with the fear of making a wrong financial decision lead us to the DECISION PARALYSIS. We don’t take any decision and start postponing it.

2. Ignoring Personal Finance

Most of us think that we need to work hard to make money and build wealth. I agree that you need to work hard but that is not enough. You work hard for money. How the hard earned money can be left idle? If you could focus on your personal finance, your money will start generating passive income with which you can achieve your financial goals with comparatively less effort.

3. Peer Pressure

Peer pressure plays a notorious role in taking wrong investment decision. One feels very safe when he takes the decision, which everyone around him/her has taken. But a product suitable for your colleague or your cousin need not be suitable for you.

4. Too early to plan retirement

You may be saying ‘who me? I am too young to be thinking about retirement”. It is not so! Rethink. You should have started thinking about it yesterday. Because time flies quickly. If you were smart, and planned for retirement when you are young, your retirement years will be really those “Golden years”. If not you need to compromise and you need to work longer and retire later than others.

5. Trying to make quick buck

Risk-Return Tradeoff Principle is a very basic and profound investment principle. Low level of risk is associated with low potential returns, whereas high level of risk is associated with high potential returns. So as to generate high returns one need to tolerate high risks. If you are comfortable only with low risks, you can expect only low returns.

No one can defy this basic principle. A scheme cannot deliver high returns with low risk. There were no such schemes in the past. There are no such schemes in the present. There will not be such schemes in the future too.

Finance company deposits which assured high interest rates have defaulted. One of the latest examples would be the ponzi scheme by Madoff.

Whenever you hear about such schemes with low risks and high returns, you understand it is an illusion. It is better to ask more questions and get it clarified, instead of making assumptions.

6. Investing in things you don’t understand

If you are choosing to invest in a scheme which you don’t understand then you will also not understand what type of returns to expect.

Do you understand the Highest NAV Guaranteed Schemes? Who gives the guarantee and what is guaranteed?

Do you understand Futures and options completely? Ultimately from where does money come if you are profiting and where does the money go if you lose?

7. Investing in what is hot

If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting. You will not get anything more. You need to be fearful when others are greedy and you need to be greedy when others are fearful. So don’t go by the market trend or the hot pick of the month. Think like a contrarian and follow value investing.

8. Too many cooks

If you have different agents or advisors for different investment products (insurance, mutual funds, stocks…….), then none of them will know your complete picture. Their advice will be very limited and biased towards their products only. Too many cooks spoil the soup.

How to fix these financial blunders?

• Give priority to your personal finance and spend some quality time on that. We all work for money. So we need to efficiently manage our money to secure our future.

• Set your financial goals like kid’s higher education, buying a home or retirement with more details. Work out a personalised comprehensive financial plan to achieve the goals. Then create an action plan for the year in sync with the comprehensive financial plan. Be committed to your financial plan.

• Obtain assistance from a professional financial planner who has knowledge and access to all financial products in the market. Ask the right questions and understand the plan and products before proceeding on the same.

These tips will refrain yourself from making those financial blunders and managing your money better.

]]> http://www.covermiles.com/investment/8-financial-blunders-and-their-fixes/feed/ 0 http://www.covermiles.com/investment/8-financial-blunders-and-their-fixes/ http://feeds.argham.org/~r/CoverMiles/~3/7wHvbasUn8Y/ http://www.covermiles.com/investment/the-10-financial-doctrines-of-wise-retirement-planning/#comments Tue, 08 May 2012 06:53:33 +0000 Ramalingam K http://www.covermiles.com/?p=839 Let’s begin on planning finance for retirement:

It is usual for many of us to aspire for a financially secure and happy retired life. However being financially prepared to meet the demands of retired life by saving and investing requires considering and following the 10 doctrines of wise retirement planning. 

A look at the 10 doctrines to wise retirement planning

1) Provide for contingencies

Most of us tend to underestimate our retirement needs. Provision for medical emergencies with inadequacy of medical insurance in old age requires financial provision. Lack of government social security schemes and retirement benefits to self-employed and private sector employees creates requirement for more provision for contingencies after retirement.

2) Think that you will live long

This is true with increased life expectancy. Now you will have more years of life after retirement. Thanks to medical advancements. So it is better to plan for the additional years and avoid living frugally in old age.

3) Plan that you will retire early

It is wise to provide for contingencies arising that require you to retire early. You could suffer ill health, lose your job, or need to care for a sick or elderly member of the family. Women may have to opt voluntarily to look after the family needs.  All this requires more savings for retirement needs.

4) Beat the inflation before it beats you

Inflation affects the personal finance needs of the working class, but pay rises could help them resolve it to a certain extent. However the retired have to save more to reduce the impact of inflation. Investing in modes that give you extra returns could help greatly.

Investors come to me and say “I would like to accumulate 2 crores and retire”. But when we really work out the inflation adjusted retirement corpus, the 2 crores would not be sufficient for him to have comfortable retirement. 2 crores may feed you enough in the first year after your retirement. The returns from the same 2 crores will not be sufficient for you take care of all your needs on the 10th year after your retirement because of the skyrocketing inflation figures.

5) Provision for increased medical expenses after retirement

Most of us underestimate medical expenses after retirement, with these expenses being inevitable in old age. Hence more provision for medical insurance helps. A consideration of your family’s general health, family history of certain genetic disorders, and the class of hospital you get treated would help in proper estimation for medical insurance.

6) Provide for your spouse and dependents who may outlive you

It is inevitable that this need should not be overlooked. Your spouse and dependents need to live a secure financial life after your lifetime. Taking up insurance policies during your working life and well thought out retirement planning will take care of your dependents and spouse financially.

7) Realize you need to be vigilant about sources of retirement income

Sometimes we may be ignorant of benefits on retirement like provident fund, gratuity and other benefits. In India the lack of social security schemes after retirement makes it necessary to invest more in good income generating sources for steady flow of retirement income. The advice of investment consultants, along with financial education and information contributes to good financial standing after retirement.

8 ) Educate yourself about retirement savings plan management

When the majority is relying on the pension schemes in the form of ulips offered by various public and private insurance companies, as a smart investor you need to understand the hidden charges of these pension policies. These policies are all heavily front loaded.

So you need to evaluate various investment options available for retirement. You need to accumulate sufficient knowledge in this regard. In addition learning to keep track of them with professional help makes these saving plans work for you.

9) Plan for an income for life

Your retirement plans need to be financial plans to make income last you a lifetime. Pensions or annuities providing best income need to be safeguarded, as withdrawing large sums from them could end you in financial insufficiency in the final years of your life.

10) Take professional investment advice that works

Many do realize the importance of financial advice from professional financial advisors, but in practice seek it from family, friends and colleagues. A right financial advisor could give you good investment advice to have financially secured retirement ife.

A Final Note

I am sure you want to emerge financially secure for your retired life and will follow these 10 financial tenets to wise retirement planning.

Most of us have our own perception of investment based on our experiences, but also tend to be confused with the opinions given by others. Knowing the do’s and don’ts of the stock market would help us turn really as a smart investor.

Here are the do’s and don’ts:

Slow, steady, and boring wins the race

It is best not to panic over information about stocks on the media. Being slow and steady with looking at the activities that your money is to be used for would ensure that you invest in ventures that are good, useful and profitable.

Reading good books on personal finance will help you in taking right financial and investment decision. In addition, finding good financial advisors would help you get advice regarding stocks and mutual funds, along with entrusting the custody and management of your funds to them.

All this may seem too boring and time consuming, but it is better to be cautious than bitten too hard.

Don’t give any weight to market forecasts. All opinion pro and con is already built into the price of equities today:

Market forecasts on the media has got good entertainment value but doesn’t have any investment value. It is just enough for long-term investors to invest in good stocks, and mutual funds that would appreciate in the long run.

It is best to understand that market forecasts only show you the expected direction in which the market is heading based on the available information. This forecast is only a forecast and need not become reality.

In addition, market fluctuations are the very nature of share markets and should mean nothing to long them investors. Making accurate market forecasts is tough, as they are influenced by various factors like the outcome of political elections, the direction of the economy, interest rates and world events. It is also wise to know that these fluctuations are incorporated in the price of the share, stock or mutual fund.

Do make your own analysis of the stocks, shares and mutual funds

It is inadvisable to place your full faith on analysis of others regarding stock, shares and mutual funds. No wise man would always tell you all about his market beating strategy. Making ones own analysis keeping your financial goals in view and framing a strategy would help.

This involves studying the performance of top performing stocks and mutual funds over 5 years and existing mutual funds over a period of 3 months to decide on which stock to maintain and which to dispose off. All this would ensure that you are investment smart.

Don’t think you can successfully engage in short-term market timing

As a long- term investor you should never contemplate taking advantage of short-term market dealings and speculations. Playing with shares and mutual funds in the short-term market may give you a profit in a few transactions but will not give you profits forever. So you can’t have an investment strategy which gives profit inconsistently. We need a strategy which can bring profits consistently so as to be a successful investor in the long run.

It is true that playing in the share market is neither entertainment nor fun. It is also futile to borrow or work on short-term margins to make money.

Don’t assume that if anyone were genius enough to devise a market-beating strategy he would be stupid enough to share it with anyone:

Stock tips are good to learn, but not to act on for speculations. It could prove dangerous to act on speculation tips given by one and all, as they may not be correct.  In addition, everyone has his or her own perception of investment, with other not having full knowledge or skills.

You need to take time to think over each tip and analyze if it contributes to your long-term objective of capital appreciation. Similarly it is not advisable to subject your money to risk with investing in investment fads that may or may not earn you huge profits.

The final advice

You need to make a calculated decision considering the pros and cons whenever you make an investment. In addition abstain from trading often in the stock and mutual funds market. Always think in terms of long term investing.

Your friend could have told you index funds are safe and cost effective. Your colleague could have told you, infrastructure is going to be the next big theme. So invest in infra funds. As an investor you are confused with the information overload and would like to choose the right type of fund for you. I will unveil this to you today.

Index funds vs Diversified Funds

Index funds are just index trackers. They aim to replicate the movements of an index. Index funds will hold all of the securities in the index in the same proportion as the index. There is no research and analysis on which stock to invest. There is no human input. They just track and replicate the index. There is no active management and there is no fund manager. So they enjoy the low cost advantage.

On the other hand, diversified equity funds will invest in non-index stocks also. The fund manager and his team will do an in-depth research before investing in each and every share. The aim of the fund manager is to outperform the index. Most of the diversified funds have outperformed the index with a huge margin. You can see this below. 

Diversified funds

Index funds

*returns as on 12.01.2011 

As these funds are actively managed, the expense ratio of these funds is relatively higher. But you are well compensated for the extra fees you pay. The returns you see in the above table are the net returns after adjusting all the expenses.

If that is so, then how come the concept of the index fund is so popular and accepted? In the developed countries, matured markets, grown up economy it is REALLY difficult to beat the index. So the extra expense on the active management will reduce the return. So index funds are better and popular there.

But in a country like India, where the economy is fast growing, market is still not matured and the country is in the transition phase of moving from a developing country to a developed country there are lot of better opportunities with the non-index stocks. That is why in all emerging markets including India, it is possible for the fund managers to outperform the index.

So, diversified equity funds in the long run (5 years and above) will outperform the index funds in all the emerging markets like India. That is why you need to choose diversified equity funds when compared to index funds.

Diversified Funds vs Sectoral/Thematic Funds

Sectoral fund invests in a particular sector. There could be a “Pharma Fund” which invests only in the pharmaceuticals sector. You can also see the funds like banking fund, IT sector fund, FMCG fund. The performances of these funds are restricted to the opportunities available in those particular sectors.

Thematic fund invests based on a particular theme. There could be an infrastructure fund which invests only in infrastructure based stocks. There are thematic funds available in the other themes like capex opportunities, energy opportunities, rural India, PSU opportunities. The performances of these funds are based on the success of those themes. Thematic funds can invest only in those sectors favored by its theme.

On the other hand, the diversified equity funds can invest across various sectors and they can follow many themes. There is no restriction. The fund manager can invest a sizable portion in any particular sector or any theme if he thinks that sector/theme can do better in the future. Also he can move from one sector to the other sector and change his theme intermittently based on the changes in the market outlook.

This flexibility of moving from one sector/theme to the other sector/theme is not available with sectoral/thematic funds. Even if the fund manager of the sectoral/thematic fund thinks that, this particular sector/theme will not do well for the next couple of years, he is forced to remain invested in the same sector/theme. Whereas the diversified fund manager can change to another sector/theme if the outlook for a sector/theme changes.

Most often, the market creates hype on a particular sector or theme. Then investors get a feeling that this is going to be the next big sector/theme which is going to drive the market. This is only an illusion.

“Technology is the next big sector” – This is the hype created by the market in the year 1999. Everyone around you could have talked about technology stocks. Mutual funds have launched so many technology sector funds like ecom funds, internet opportunities funds. Most of the investors believed this illusion as real and invested their hard earned money in these funds. Technology sector as a whole has got crashed during the year 2000 and all the technology funds have taken years to recover from their losses. But the diversified equity funds which had sizable exposure in technology stocks have revived faster than the standalone technology funds.

“Infrastructure is the next big theme”- This is the hype created by the market in the year 2007. Everyone around you could have talked about infrastructure stocks. Most of the mutual fund houses launched schemes based on the infrastructure theme. Market crashed in 2008 and infrastructure stocks were the worst affected. Investors learned that, the prospect which they have perceived for infrastructure in 2007 was only an illusion.

Sectoral/thematic funds are potential to deliver superior returns, but it is almost impossible to predict when they will do so. Also there is an inherent danger of getting inferior returns. But market will play with your greed and make you believe the illusion as true and take action. Beware.

So it is better to leave the choice to the fund manager regarding in which sector/theme to invest. He knows when to invest in a particular sector /theme and when to move out of a particular sector or theme.

Therefore, east or west the diversified funds are safe and best.

1) Proper Allocation of Annual compensation

Restructuring your salary with some additional components can reduce your tax liability. This restructuring doesn’t require any additional cash outflow. The following components can be efficiently used to reduce your income tax liability.

Transport allowance to the extend of Rs.800 is exempt

Medical expenses which are reimbursed by the employer are exempt to the tune of Rs.15000

Food coupons like sodexo or ticket restaurant are exempt from tax up to Rs.60000

Individuals who are all living in a rented accommodation can include House Rent Allowance ( HRA ) as a part of their salary

Leave Travel Allowance (LTA) can be part of your salary as this can be claimed twice in a block of 4 years.

2) Effective Utilization of Tax Exemption

As far as possible utilize the maximum exemptions available under section 80 C, 80 CCF and 80 D. The maximum exemption available under section 80 C is Rs. 100000.

Under this section Rs.100000 investment or contribution can be made in PPF, NSC, Life insurance premium, 5 year FD with banks and Post offices, Mutual Fund ELSS, Principal Repayment of housing loan, and the tuition fees paid for children’s education.

Under Section 80 CCF, you can invest up to Rs.20000 in infrastructure bonds.

Under Sec 80 D, the premium paid towards the mediclaim policies are exempt. The maximum limit of exemption is Rs.15000 and for senior citizens the limit is Rs.20000 and for covering senior citizen parents there is an additional exemption to the extend of Rs.15000.

3) Properly Structure your Housing Loan

The Principal repayment of a housing loan is eligible for a deduction up to Rs.100000 u/s 80C. The interest paid on a housing loan is eligible for a deduction up to Rs.150000 u/s 24B. If the housing loan is for a sizeable amount, then it is possible that the principal repayment and interest may exceed the specified tax exemption limit. To utilise the maximum tax benefit, an individual can consider going for a joint home loan with his/her spouse or parent or sibling. This will make sure that both the co-owners can claim tax deductions in the proportion of their holding in the loan.

4) Tax Plan in Sync with Overall Financial Plan

You should not do your tax plan in isolation. You need to do it in sync with your overall financial plan. So a tax plan is not only to just save taxes and also it should assist you in achieving your other financial goals like children’s higher education, buying a home or retirement.

5) Avoid Last Minute Rush

In fact the right time to do the tax plan is the beginning of the financial year. If you postpone your tax planning even now and do it in the last minute, then you will not be able to choose the right investment. In the last minute rush, you will be forced to choose a scheme which gives the proof immediately. Is the investment sound and profitable? Is there any other better options? You will not be able to choose the best scheme and you may settle with a mediocre one.

6) Invest Some Quality Time

Before investing your money, you need to invest your time. You need to take some quality time to understand the various tax saving options and compare their benefits and limitations.

7) Check for Future Commitments

Some tax saving options like NSC or ELSS need only onetime investment. Some other tax saving options like PPF, Ulips need periodical investments year after year. You need to be careful in choosing a tax saving scheme where you need to commit for periodical future payments. You need to check on a few things like; do you need such a future commitment? Will you be able to meet the future commitments at ease? The law may change and you may not get any tax exemption for your future payments. Would you consider the scheme irrespective of tax benefit for the future payments?

8 ) Changed Your Job; Redo your Tax Plan

Did you switch your job in the middle of the financial year? Then you need to redo your tax plan with consolidating the income from both the companies. It is advisable to inform the new company about the income during the particular financial year from the old company. So that your new company will deduct the right amount of TDS. Otherwise you may need to pay extra tax at the end of the financial year.

Whenever you change your job, you need to have a sitting with your financial planner or tax advisor. So that the required changes in your tax plan can be done proactively.

With proper tax planning you can reduce your tax liability; save more; invest better and become wealthier.

Would you like to know the financial secret behind moving from where you are and where you want to be? Try to answer this question. “Where will you be financially five years from now? 10 years from now…? 20 years from now…?”

You may get answers like “I will be financially stronger”, “I want to be financially better”. Are these answers specific? If you don’t know where you want to go exactly, there is no focus. When there is no focus; there will be lot of distraction. Distraction either leads to mediocrity or destruction.

How to refrain yourself heading towards mediocrity or destruction? You need to set Specific, Measurable, Achievable, Realistic and Time bound Financial Goals. That is S.M.A.R.T. Financial goals.

Let me take you through step by step to set SMART Financial goals. 

1)  List down Financial Goals:

Write down all your financial goals like buying a house, kid’s education, Vacation, Retirement and so on. You may wonder why this mechanical act of writing financial goals is so important. You can be thinking something without actually realizing what that something is. It is intangible and so it is not clearly defined in your mind.

When you start putting that thought into words and you try expressing it, an amazing thing begins to happen. By creating it in words, that abstract thought now takes on body, shape, form, substance. It is no longer just a thought. It becomes something which motivates you, or creates a gut feeling inside.

Your dream becomes a goal the moment you write it down. Say one of your dreams is to buy a house. You dream about it a lot. But the moment you started writing it down, your mind will ask yourself “when, where, how many square feet, how many bedrooms?”  This writing gives clarity to your goal and it forces your mind to find out the ways and means to achieve the goal.

2)  Categorize and Prioritize:

You need to categorize your financial goals based on the timeframe. Generally the financial goals less than 3 years are short term financial goals. The goals to be achieved in the next 4 to 7 years are medium term goals and the financial goals to be achieved after 7 years are long term goals. This categorization will help you in building a roadmap to achieve your goals and also in selecting the right investment products.

Your daughter’s wedding would be more important to you than the international vacation.  Buying a house is more important than buying a farm house. This prioritization will help you in creating a better financial plan. Suppose if you are in deficit, you know which financial goal need to be compromised and which are all the financial goals you want o achieve irrespective of the deficit.

3)  Fixing a target date:

Fixing a target date for your financial goals may look like a dump idea. How do I know in advance the date of buying my house, the date of my daughter’s wedding? But if you are not fixing it, then you will not be financially prepared for that. If you are financially prepared and the goal event is not taking place at that time and getting postponed for some reasons, you will not have any financial worries. You will be financially ready from thereafter with on enough money to meet that goal.

Fixing a target date will psychologically influence your thought process to work on that goal. Also the moment you fix the target date your mind starts running a countdown. Only when you know that after how many years from now you want to achieve the goal, you will be able to make a financial plan.

4)  Estimating the cost:

First you need to estimate the cost as of today. If you are planning to save for your daughter’s wedding which is expected to take place after 10 years, first you need to calculate the cost of the wedding in today’s prices. Then you need to adjust it for inflation of 10 years. Now you will have the future value of your target.

5)  How much to save?

Once you have found out the future value of the goal, you can easily decide on how much you need to invest in order to reach the targeted future value. Initially you may only be able to contribute less. But year after year you can increase this contribution based on your increment/promotion/income growth.

So you need to take into account the expected growth rate on your salary or business/professional income in calculating how much to save towards each and every financial goal.

6)  Budget the savings:

As you know by now exactly how much to save towards each and every goal, you need to accommodate these savings in your budget. If you do this year after year, then you can see all your financial goals becoming reality.

The difference between a goal and a dream is the written word. I am confident that you will come to find that financial goal setting works and that it will soon become a way of life for you.

Start setting your financial goals today.

Today here prevails a similar confusion with who is an investment advisor and who is the financial planner.  It is quite common to find these terms used interchangeably, but it is necessary to understand that an investment advisor and a financial planner have the similar and vast differences as between sales and marketing.

Why is this confusion? 

There is a real confusion among the investors regarding who a financial planner is and who is an investment advisor. These terms are used very loosely, so it is necessary that one understands the function of each of these professionals and approach the right people.

The main confusion in these terminologies arises out of a person’s own perception. This arises due to most professionals offering financial services like insurance advisors, mutual fund distributors and stock brokers calling themselves financial planners. This term has been used very loosely by many to suit their own convenience and image.  This is more like a compounder professing to be a doctor, when he/she knows purely only about the medicine that one has to dispense. A compounder will not have the expertise to diagnose the disease that needs to be treated.

Who is the Financial Planner?

Financial planner is involved in planning all the finances of a person. His job includes drawing up an appropriate plan that covers all financial needs and goals in the short, medium and long run. Such a planner is like an architect of a building and helps to analyze and draw a complete map of how his or her client’s finances need to be planned. It includes considering the need for liquidity, cash management for various needs, goals planning and feasibility, long term cash flow, estate planning and risk management.

Who is an Investment Advisor?

In contrast an investment advisory/advisor is a person or group that helps his client to decide on the financial products that he or she should invest in. Such an advisor understands what his or her client actually wants after communicating with him or her and understanding the need. An investment advisor makes a thorough analysis of the various securities before doing so.

Hence investment advisory is just one of the ingredients of financial planning.

Goal Achievability:

A financial planner will be able to tell you, is it possible to achieve all your financial dreams with your current and projected earning capacity. If it is not possible, then the financial planner will be able to tell you what could be achieved with your earning capacity and to achieve all your dreams what kind of earning capacity you should have.

Risk Management Plan:

A financial Plan also covers creating a risk management plan. A risk management plan includes creating an emergency reserve, assessing the human life value and suggesting a term insurance; identifying medical insurance cover required and suggesting a health insurance plan; and also suggesting a general insurance policy to cover the natural perils like fire, flood, earthquake … against your properties.

Investment Plan:

A financial plan that suggests investments comes only after all the aspects have been analyzed fully. The best investment advice can only flow out after a deep analysis of a client’s need and after the preparation of a financial plan. Financial Planning should precede the investment planning.

Existing Portfolio Revamp:

It is also necessary to understand that a financial planner also looks at past investments. He then makes necessary changes to make them amicable to achieve a client’s financial goals over a period of time. Also he will assist you in restructuring your existing outstanding loans. If necessary he will create a debt pay-off plan also.

Tax Planning:

A financial planner should assist you in creating a tax plan also. This tax plan will be in sync with your overall financial plan.

Review:

A financial planner will do a periodic review on your financial plan and investment plan. If you are preponing or postponing one of your goal or if you have got a job promotion, then you may need a financial plan review. If direct tax code has got implemented or one of your investment schemes underperforming, then you may need an investment review.

In a nutshell a financial planner will not only give you an investment advice he assists you in managing your personal finance in a complete, comprehensive and a holistic way.

Behavioral Finance experts say that mental accounting works this way: Let us say you have bought a Rs.200 ticket to a movie. When you show up at the entrance of the theatre and realize you have lost your ticket, do you buy another ticket?

If you are like most people, you would probably think twice. You may still drop down the money, but you will now feel that you paid Rs.400 for a Rs.200 movie.

But let’s construct the scenario differently. Let’s say you hadn’t bought the ticket yet, and you show up at the entrance to buy your ticket. Unfortunately, you realized you’ve lost Rs200 in cash since you walked from the parking place. But fortunately, you still have enough in your wallet to cover the cost of the ticket. Do you buy the ticket? Again, if you are like most people, you may feel upset about the lost money, but it probably won’t affect your decision to buy the ticket. Why?

Behavioural Finance experts conducted similar experiments. They found that 46% of those who lost the ticket were willing to buy a replacement ticket. On the other side 88% of those who lost an equivalent amount of cash were willing to buy a ticket.

Both scenarios are a loss of Rs.200. However, in the second scenario you separate the loss of the Rs. 200 from the purchasing of the ticket. In the first you consider the cost of the movie as a total of Rs.400 and suffer at the high cost.

It is because of the psychological phenomenon known as mental accounting. One of the fundamental concepts in Economics says that wealth in general and money in particular, should be fungible. Fungibility, in a nutshell, means that Rs.100 in lottery winning, Rs.100 in salary and Rs.100 tax refund should have the same significance and value to you since each Rs.100 has the same purchasing power at the market. But do you treat them in a similar way?

Mental accounting has enormous consequences in your daily life. It affects how you spend money and how you save. It influences how you deal with losses and windfall gains.

How Does Mental Accounting Affect You?

1)  The source of the money affects how it is spent.

• You tend to dine lavishly with the “gift meal vouchers” given by your company. But you will be dining consciously if you are paying out of your salary.
• You are most likely to spend more with credit cards than with cash.
• You may consider Tax refund as“free money”. In actual terms it is your own money. You will not spend tax refunds, birthday gift money or lottery winnings on essential things like utility bills, school fees, paying off your credit card debt. But you will be more than happy to spend the same money on discretionary items such as vacations or a trendy mobile phone.

2)  Don’t be a victim of ‘Relative cost’.

Assume you are going to a super market to buy a laptop. The price is Rs.40000. But you get to know that there is another branch of the supermarket, a ten minutes walk away, in which the same laptop is sold for Rs.39950. Will you walk down to the other branch?

Let us say instead of buying a laptop you have planned to buy a memory card. The price at the supermarket is Rs.100 and at the other branch is Rs.50. Where will you buy the card?

Most of us will make a trip to the other branch for the memory card but not for the laptop. Because we think that the Rs.50 saved on a Rs.100 item is better than the same amount saved on a Rs.40000 item.

But both the situation is same. You save Rs.50 by making 10 minutes walk to the other branch.

Remember that money is money. Rs.50 saved on Rs.40000 laptop is not less money than Rs. 50 saved on Rs.100 memory card.

How to face Mental Accounting and spend consciously?

• You can use mental accounting to your advantage by spending money out of your salary. Immediately invest the “free money” like Tax refunds, gifted money or any other windfall gains.
• Imagine that all income is earned income.
• Use the free meal vouchers and other gift vouchers to buy essential items.
• Pretend you don’t have a credit card. I am not telling you not to use credit cards. I am saying you should stop and think: would I buy this if I was using cash?

A Successful Practical Strategy:

You can have two bank accounts. One for the purpose of savings and the other one for spending.

Every month you need to set aside some amount for expenses as per your budget or previous experience. That amount you need to transfer to your spending account. Balance amount you need to keep it in savings account.

You need to meet all your expenses including your credit card payment from the spending account. You should not spend from your savings account.

In between, if you receive any cash gifts or windfall gains, deposit them in your savings account. If you receive gift vouchers, then transfer the money equivalent of that voucher from your spending account to your saving account. That is your spending limit will not go up by just receiving the gift voucher. So that you will not use it lavishly and use it only on pre-planned things.

When it comes to money your mind unconsciously plays this trick of mental accounting. You have understood that today. So hereafter, you can avoid this mistake and you become richer day by day.

]]> http://www.covermiles.com/investment/get-richer-by-avoiding-money-mistakes/feed/ 2 http://www.covermiles.com/investment/get-richer-by-avoiding-money-mistakes/ http://feeds.argham.org/~r/CoverMiles/~3/xiWyXqB7Orw/ http://www.covermiles.com/current-affairs/sonia-gandhi-worlds-richest-political-lady/#comments Wed, 14 Mar 2012 11:37:14 +0000 NitiN Kumar Jain http://www.covermiles.com/?p=904 Believe it or not but Sonia Gandhi, Chairperson Indian National Congress and UPA, is the richest political lady in the world. Her net worth ranges from $2-19 billion.

Business Insider in their recent revelation released 23 richest politicians in the world in which Sonia Gandhi featured at number 4 over all but on top among ladies. Another Indian in the list is Savitri Jindal, who is a member of Haryana Legislative Assembly.

Abdullah Bin Abdul Aziz, King of Saudi Arabia tops the list.

It is seriously endangering the largest democracy where politicians are getting richer and so called “aam aadmi” is getting poorer day by day. Hail to our politicians.

But there was a difference. One of the men’s kid has completed M.S from a reputed university in USA and the other kid has completed a graduation from a local university. What made the difference?

Have you ever wondered, as I have, what makes this kind of difference in our kid’s career? It is a carefully thought out long-term planning for kid’s future.

As a responsible parent, you would not like to compromise on your child’s career, regardless of rising cost of education. You need a well developed investment plan that will allow you to meet all expenses for your child’s future.

Provision of Medical Expenses

Health care for mother and child will be a potentially handsome expense for new parents. New babies require regular checkups and immunizations even though if your child is in good health. So you need to make provision for these expenses well in advance even before the arrival of the baby.

Adding the newborn to your Mediclaim Policy

If you have an individual mediclaim policy, add the newborn as a member in that policy and get coverage. Do you have an employer provided mediclaim policy? Then, check if the terms and conditions allow you to add the newborn for coverage. If it allows, then add the newborn to that policy. If it doesn’t allow then take an individual mediclaim policy for your kid.

Increasing your Term insurance coverage

You need to check whether the existing insurance coverage is sufficient to support your child’s future or not in case of any mishappening to you.  If it is not sufficient then take term insurance policy for the gap.

Ongoing educational expenses

The educational expenses are skyrocketing year on year.  What your father has spent for your college education, is now you need to spend for your kid’s primary school education. So adequate provision in your monthly budget and a projection for cash flow with reference to school education expenses will be an important exercise for you

Financial Planning for Higher Education

It is going to be a biggest financial shock for you, if you have not properly planned for your kid’s higher education. Don’t delay this plan, start this plan as soon as the arrival of the newborn. Then you will have time on your side.

Assume your kid has completed today his/her schooling. Imagine how much you may need to spend for higher education at today’s costs. This cost is going to go up year on year because of inflation. So project this cost with inflation rate for the future. Now you will know how much exactly you may need for higher education in future when you kid is actually completed its schooling.

Other dreams for your child

Apart from the higher education, you may have some other dreams like buying a home for your kid, corpus setup for your kid’s future profession or business or corpus creation for wedding expenses. You need to follow the similar steps as mentioned in ‘Financial Planning for Higher education’ for these dreams also.

In case you don’t have time or knowledge to do this financial planning you can seek assistance from professional financial planners. They will save your time and make sure that you are achieving these financial goals for your kid.

Savings account for your child

You can open a savings account in the name of the minor. Whatever gifts, the kid receives by way of cheque or cash on the occasions like birthday can be saved there. Also this account can be used to motivate the kid to save from its pocket money.

The other investments which you make for your children’s future like mutual funds or shares need not be invested in the kid’s name. Banks, generally, will not give loans against shares or mutual funds held in the name of a minor. So, it can be invested in your name. As and when required it can be encashed to meet the necessary expenses for the kid. Banks, generally, will not give loans against shares or mutual funds held in the name of a minor.

]]> http://www.covermiles.com/investment/financially-plan-and-make-a-difference-in-your-childs-future/feed/ 0 http://www.covermiles.com/investment/financially-plan-and-make-a-difference-in-your-childs-future/ http://feeds.argham.org/~r/CoverMiles/~3/BJGKX6eSSQ0/ http://www.covermiles.com/investment/8-investment-myths-to-be-avoided/#comments Mon, 12 Mar 2012 14:05:39 +0000 Ramalingam K http://www.covermiles.com/?p=827 Today I am going to debunk a few investment myths. You will know ‘why individual investors are failing miserably and how you can avoid being one of them’.

1. I am too young to plan for retirement

Have you started planning for your retirement? You may be saying ‘who me? I am too young to be thinking about retirement”. It is not so! Rethink. You should have started thinking about it yesterday. Because time flies quickly.

If you were smart, and planned for retirement when you are young, your retirement years will be really those “Golden years”. If not you need to compromise and you need to work longer and retire later than others.

2. East or west FDs are safe and best

Nothing wrong in investing in FDs. FDs are really safe and it gives us fixed return. But there is no meaning in investing all your money in FD. The post tax return of an FD will hardly beat inflation. If your investments are not beating inflation, then your money is losing its purchasing power. FDs are safe but not always the best option.

3. I can never be as good as Warren Buffet or Rakesh Jhunjhunwala so why try?

In the words of Warren Buffet “Success in investing doesn’t correlate with IQ once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” You don’t need a super brain for making investment decisions. You only need common sense and discipline. If you don’t have enough time and expertise, then you can get assistance from professional financial planners.

4. Stock markets can earn me quick bucks

This is a common myth among investors. Stock market will reward the long term investors. Stock market is a system which transfers money from investors who are fearful and greedy to the investors who are balanced and rational.

You need to be calm, patient, disciplined, and rational. You don’t have to be smarter than the rest; you have to be more disciplined than the rest.

5. Timing the market is important

Investors often spend a lot of their time in trying to identify when the market is very low or high, and timing the purchase and sale of investments accordingly.

In other words, they want to time their exit when the market has reached its top and to time their entry when the market has reached a bottom. This not a practical idea because there are so many influencing factors to the stock market. Predicting all the factors and making investments is practically not possible.  Instead of that stagger your investments through SIP, STP and stay invested for long term.

6. There is no such thing as too much diversification

Diversification is needed. A well diversified portfolio can be created with 10 stocks or 3 mutual funds. Having more than 20 stocks or 6 mutual funds can dilute your returns. The reason is you are not only investing in best stocks and funds, you are investing in above average and average stocks and funds. So your returns will come down. Instead of over diversification, you need to concentrate on a few stocks. It is possible to achieve the required diversification with a few stocks or funds.

7. The best way to make money is investing in what is hot

If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting. You will not get anything more. You need to be fearful when others are greedy and you need to be greedy when others are fearful. So don’t go by the market trend or the hot pick of the month. Think like a contrarian and follow value investing.

8. Saving tax is the only objective for me to Invest

Which group you are in? There is a group of people who invest just to save taxes. They will not bother to invest anything more than that. They will meet their objective of saving tax. There is another group which invests to save tax as well as to save for their other life goals like retirement, children’s future. They will meet the objective of saving tax and achieving other life goals. Kindly check you belong to which group.

You can be an assured successful investor if you could avoid these investment myths.