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The Finwise Take on Budget 2020-21

Prathiba Girish & Girish Ganaraj Budget, Financial Planning, Personal Finance, Tax Savings February 7, 2020February 6, 2020budget 2020, financial planning, personal finance, personal taxation 0 Comment

Over the years, the significance of the Union Budget has come down and doesn’t have such an impact on our everyday lives, and hence doesn’t interest too many of us anymore. That said, there are still some, especially those in the finance businesses, for whom listening to the Budget is a yearly ritual.

Budget 2020 and its impact on your personal financial plan

But given the negative news as well as poor economy numbers over the last couple of quarters, we would dare say that the FY21 Budget presented last week had more than a usual number of people waiting for it. For most, last week would have been one of anticipation for Saturday to arrive and hope that the finance minister has something up her sleeve to magically move the economy into 4^th gear, trigger consumption, improve rural incomes, increase investment, ease credit flows and banking woes and overall reverse the prevailing sentiment, while of course ensuring that the fiscal deficit doesn’t scarily worsen.

Many articles have already dissected the Budget presentation as well as the detailed document post that, so we will not attempt a repeat of that. But even for the most disinterested observers, the least they would have expected is how the budget will put more money into our pocket or at least ease our difficulties in dealing with taxes. So, we have looked at how this year’s budget has panned out for your personal finances and identified 6 changes which could affect you personally.

Changes in Income Tax structure

Who doesn’t love choices? Whether its plain simple breakfast or choosing your next outfit we love it when we have choice, don’t we? However, that doesn’t seem to apply to Taxation structures. This year’s budget has changed the tax slabs but left the choice of sticking to the previous tax slabs or switching to the new ones to you. The catch is if you switch to the new tax slabs, you cannot avail of any of the deductions & exemptions currently available. Here is a quick look at the tax slabs that are currently in existence and the new ones which you can choose to switch to.

How do you decide which of the two options you should choose? What you need to look at is the deductions and exemptions you are currently availing of. The most popular ones being

Rs 1.5 lakh under 80 C, the default option for most being EPF (ELSS, PPF, Life Insurance, School fees, Principal repayment of home-loan etc)
Medical insurance premium under section 80D of Rs 25,000 for self and Rs 50,000 for senior citizen parents (total of Rs 1,00,000 if both self and parents are senior citizens)
Additional deduction of Rs 50,000 for investments in NPS
Deduction of 2L on interested paid on a home loan under section 24(b)

Prevailing & Proposed Optional Income Tax Slabs proposed in Budget 2020

Broadly, if you are claiming home loan interest deduction apart from 80C, you are better off with the previous tax slabs. But if you are not and do not have default investments like EPF for claiming deductions under section 80C and you are currently investing in products especially for the deductions, you can opt for the new slabs.

Finwise Take → While there is a choice being given currently, the intention clearly articulated has been to move away in the coming future from the exemption and deductions being offered currently. Given this scenario, if you are buying a house or starting a new NPS account primarily to avail of the exemption you may want to rethink your decision.

Currently, a large number of investment decisions are made (and products are sold) at the last moment, primarily on their tax-saving features. We think this is a good step since the products thus bought will pass the tests of suitability towards risk profile and time horizon, and will help investors create substantially more wealth than now. You would be better off seeking the help of a financial advisor to help you make the right decisions customised to your needs, especially given the above.

Increased insurance cover for FDs

Currently each depositor in a bank is insured upto Rs 1,00,000 inclusive of both principal and interest. This budget has increased this insurance limit to Rs 5,00,000, and this would help increase coverage and bring a greater number of impacted people under the insurance fold in case of bank defaults. This will give a lot of comfort, especially to senior citizens, for whom this is the investment of choice.

Finwise Take → While increased insurance cover is a welcome step, it can give investors, especially senior citizens who look for that extra percentage point to prop up their meagre savings, a false sense of security about otherwise “dangerous” investment options in this space.

Our belief is that this insurance benefit is a “perceived” comfort. This insurance is payable by the Deposit Insurance and Credit Guarantee Corporation of India, a subsidiary of the RBI. DICGC will wait for the “defaulter” bank to be liquidated and de-registered, post which the DICGC receives claims from the banks and then pays out the claims, post necessary validations. The wait can be many years for impacted customers, and this risk is definitely not worth taking for extra percentage point of interest.

Our advice to our customers has always been to be safe with debt investments and not take any kind of risk with debt. Credit risk while investing in banks like PMC was ignored and has now come to the forefront. Insurance or no insurance, it is important not be lured by a few percentage points higher return. We often tell our customers to beware of higher interest rates, which some banks or institutions are offering, since higher-then-prevailing interest rate means higher than intended risk, which is opaque to the retail investor and our stance holds going forward too.

TDS introduced for FDs in cooperative banks

Now, cooperative banks will also need to deduct tax at source on fixed deposits and recurring deposits if the interest exceeds 40K (50K for Senior citizens).

Finwise Take → Earlier this was another big draw for investors to invest in co-operative bank FDs, apart from the higher interest rates. This welcome move will encourage people to think beyond tax and interest rate, while choosing their bank for FDs.

Cap of 7.5L on exemption to retirement contribution by employer

As of now employer contributes 12% of basic towards EPF, Rs. 1,50,000 towards super annuation and 10% of basic towards NPS, and any amount of contribution to retirement benefits is exempt from income tax ie. is deducted from your gross income to calculate taxable income. The new budget has introduced a cap to this exemption, from the next FY, only contributions upto Rs 7,50,000 put together towards all retirement benefits will be exempt and any contribution over and above that will be taxed at your slab rate.

Finwise Take → This is a big change and has a significant impact on high net-worth individuals having corporate careers. Senior corporate professionals earning approx. Rs 1 cr or above are likely to be impacted by this while, of course, actual impacts will be dependent on individual salary structures. For eg. someone earning a basic of Rs 2,50,000 per month, will have an annual retirement benefit contribution of Rs 8.1 lakh (assuming contributions to all 3 benefits – EPF, Super-annuation & NPS), and will cross this tax-exempt threshold. For people with such high salaries, this will mean rejigging compensation structures to reduce institutionalized retirement benefits, which in turn will have the negative impact of also reducing the retirement corpuses that these benefits create, requiring such individuals to plan better individually for their retirement.

No more Dividend Distribution Tax

Currently, dividends received from shares and mutual funds are not taxed in your hands, they are paid post payment of DDT. DDT for shares is 20.56%, equity mutual funds is 11.64% and debt mutual funds is 29.12% before paying out the dividends. With new budget provision the dividend will be added to your income and taxed as per your income slab.

Finwise Take → While this is a welcome step for corporates, especially MNCs, since dividend income to MNC shareholders was earlier taxed and is now free, it not such good news for retail investors, especially those in the higher tax brackets.

If you have a largely direct-equity portfolio, the dividend yield will fall substantially. You should consider shifting to equity mutual funds under the growth option where the tax outflow is capped at 10% long-term capital gain, that too on redemption, for investments over one year.

If you have invested in equity mutual funds (both pure equity & equity hybrid) in the dividend option, you should shift to the growth option immediately, for reasons similar to above, since the differential impacts here are even higher than in direct equity.

For debt mutual funds, the approach was dual. For people either in lower tax brackets or for long-term debt allocations (> 3 years), it always made sense to remain in growth, since both tax slab rate and LTCG on debt is lower. Whereas only for investors in the highest tax slab for short term investments (< 3 years), dividend option was better, since the STCG on debt is as per tax slab. With this change now, across the board, growth is the option to go with in debt mutual funds.

Also, one needs to remember that this has made tax-returns filing a bit more cumbersome, since dividend incomes now need to be added to overall incomes to calculate taxes, which earlier was not the case, with DDT.

Just in case an investor in the lower tax bracket is holding on to debt funds under the dividend scheme (due to poor advice or ignorant purchase), they will be hugely benefited as they would need to pay tax as per slab which is lower than the 29.12% being paid by the debt funds.

Key changes for NRIs

Announcements in this section set the cat among the pigeons for NRIs, before clarifications led to clarity and calm. Some key changes

Taxation of global incomes of NRIs who are not tax-resident in any other country
Definition of Resident-tax – 120 or more days in India (reduced from earlier 182 days)
Definition of Resident but not ordinarily-resident – transition period increased to 4 years (from earlier 2 years)

Finwise Take → After giving a big scare to NRIs based out of the Middle East regarding taxing global income, there has been clarity that global income of residents of any country will not be taxed. While this doesn’t impact people resident in tax-free countries, people working in the merchant navy etc. may be impacted, since their long-period travels across the world may lead them to fall into this category of Non-Resident Indian but not resident of any other country.

In addition, such people will be doubly impacted by the second clause above, since they need to ensure they live in India for less than 120 days to classify as non-resident, as against 182 days earlier.

The last clause above is beneficial for NRI’s returning to India after living abroad for many years since it will give them more time without taxing their global income.

Do note that these are broad-based observations and not necessarily one-size-fits-all, do consult your financial planner / advisor for customized advice on your particular situation.

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Protect your loved ones from lifelong guilt – have the conversation

Prathiba Girish Estate Planning, Financial Planning, Retirement January 23, 2020January 23, 2020Estate Planning, financial planning, living will 0 Comment

The last couple of weeks has seen a couple of friends go through unimaginable trauma. Can you imagine helplessly watching your parent slip away bit by bit? One would think what a terrible thing, there can be nothing worse than going through this. But there is! What if the decision of continuing further aggressive medication and lifesaving treatment (albeit with highly degraded quality of life) or letting your loved one go with basic treatment rests with you? Suddenly the situation is many times worse!

Huge dilemma, right? It is natural to wonder what the sick person would have wanted in such a situation. Why then, is it so difficult to have a conversation about death and disease with our loved ones? Somehow our culture forbids us from talking about these unpleasant situations. Even if you broach the topic, you are likely to the shooed away saying “yeh kya apshakun bol rahe ho?”. It is almost as if you are inviting death and disease just by talking about it.

A small minority does think of what happens to their material wealth post death and manages to make a will. While this is a very important step, and everyone must do so, is it not our responsibility to ease the guilt and emotional trauma for our loved ones? All one needs to do is to have a conversation on what you would like them to do in case you are to be put on life support or given aggressive treatment which will reduce the quality of life.

When you are sick, they may choose not to follow your wishes. If they do, they will live guilt-free that this is something you would have wanted for yourself had you had your mental faculties intact to decide. As against not knowing and doubting if they should pursue all means possible to keep you alive and living with the guilt of ‘not trying enough’ if they choose to relieve you of your suffering.

While we are on this topic, it would be good to dwell upon a document called “living will”. A living will is a document that sets out a patient’s wishes regarding how they want to be treated if they are seriously ill. It allows a person the right to die with dignity.

In March 2018, the Supreme Court of India passed a landmark judgement, where it recognised that a terminally ill patient or a person in a persistent vegetative state has the right to die with dignity, and to do this the person will have to have executed a living will.

The difference between having a conversation with your loved ones on what you would like them to do if you are seriously ill and have no scope of recovery and any treatment that would prolong your life is likely to compromise heavily on the quality of life versus making a living will is stark. In the first case, all that the loved ones can do is decide not to pursue aggressive treatment and let time take its course. Whereas in the case of a living will, subject to a lot of conditions, including having a board of doctors granting permission, among others, it is possible to end one’s life immediately without any suffering.

The concept of a living will is new to India, and while being a step in the right direction, it remains to be seen how it practically pans out. It is for you to evaluate whether it makes sense or not to go for a living will. However, having the crucial conversation with your immediate family (spouse, children, siblings, parents) is non-negotiable. Let’s put aside our inhibitions to do just that, this week.

Image Credit: Gerd Altmann, Pixabay

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.
To receive our articles through email, pl/ subscribe here.
For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

“What problem of mine can you help me solve?”

Girish Ganaraj Financial Freedom, Financial Planning, Personal Finance January 16, 2020January 16, 2020financial independence, financial planning, investing 0 Comment

It is that time of the year, when everyone seems to be in a bit of a party mode. It is also that time of the year, when increasingly, school/college friends are meeting up for reunions! I was at one such reunion a couple of weeks back, and, as is oft the case, was meeting some friends after many many years. After many hugs and a few jugs of beer, during which time we reminisced about old times, discussions veered towards the serious stuff, including politics, the economy as well as catching up on each of us, both on the personal and professional front.

With everyone’s kids around similar age bands, there was some serious collective letting-off of steam about the pressures involved in being parents to children who preparing for their Std X or XII exams (Eg. don’t ever remember studying so much even for an engineering paper in our 3^rd year as compared to what kids nowadays have to do for a Std X paper, OR how the current standard of Maths and Science in Std X is akin to what was done in 1^st or 2^nd year graduate courses in our generation!)

Things then moved on to what we were doing on the professional front and how we were coping with the pressures on the job, the state of the economy, and so on. I had left my corporate career to join my spouse in our small personal financial planning and advisory business and when I explained that I was a financial planner, there were the usual reactions – how exciting it must be to be on our own, how courageous we were to have taken such a step, some questions on how I was liking it, etc.

Of course, there were some who also wanted to know what exactly financial planning was, and what exactly it was that I do, which again is something that I am (by now) used to. I then (as usual, passionately) launched into a description of what we do as financial planners, how it helps people, and what our typical assignments are. Things took an interesting twist, when one of them asked a very interesting question – “What problem of mine can you help me solve?”

While I of course answered the question and the follow-ups that came post that, it set me thinking. As I have discovered over the past many months, over various interactions with customers and others, financial planning means different things to different people. Importantly, it actually is “solving different problems” for different people, as long as the problems related to money. In fact, it actually doesn’t matter what I say I do as a financial planner, as long as people, including my customers see that I am helping them solve some money problem of theirs, which for them becomes “their understanding” of financial planning.

So, what “money problems” can a good financial planner-adviser help you solve?

The “LIVING BEYOND MEANS” problem

A few people we meet are earning well and spending even better. No, it doesn’t mean that they don’t have any savings or assets, just that they underestimate the needs of the future while getting hooked onto today’s pleasures. For such a person, a financial planner acts as a quick wake-up call, who puts things in perspective, and is a catalyst for habit changes.

The “TOO BUSY TO GIVE TIME” problem

Quite a few people we see are financially prudent, but are successful individuals, so caught up in their day-to-day work and life that they are simply are unable to spend quality time on growing their money. Their investment decisions therefore are impulsive, driven by products that get sold to them or event-driven eg. taxation insurance. They end up collecting a disparate set of investments, lacking purpose and inefficient in performance. In such cases, a good financial planner can help become both the filter to weed out wrongly-sold or ill-intended products as well as the channel to invest their money in vehicles that are both risk-appropriate and goal-appropriate.

The “INCORRECT ASSET MIX” problem

Many customers in the middle years bracket (age 40-50, double incomes, good jobs) are reasonably secure on the wealth creation and savings front. Like most of their generation, they own multiple houses, and while these were popular investment avenues, they are not necessarily the right asset-mix for future goals like children’s education and retirement, due to their illiquidity, as well as the current question-mark on long-term appreciation prospects. For such customers, a good financial planner helps them restructure their portfolio, keeping their risk profile and goal horizons in mind.

The “WHERE TO INVEST” problem

Some customers we meet are both personal finance savvy and investment-aware, meaning they have a good handle on their financial position as well as understand most investment asset classes and their risk features. That said, they lack the time as well as inclination to identify the right products, which will give them the right performance metrics while keeping in mind their interests and their risk appetite. In such situations, a good financial advisor helps provide the right mix of adequately diversified high-quality products to meet their needs.

The “NEED PEACE OF MIND” problem

Lastly, a few are completely sorted and only need a bouncing board to help validate their approach as well as decisions. Some may be good on the financial investments front but are inadequately prepared to face unplanned challenges in their life in case of unforeseen events. For such people, a good financial planner provides peace of mind and a tangible improvement in quality of life by allowing them to outsource their worrying nature as well as the outside chances of having uncovered risks.

Whichever it is, suffice it to say that a good financial planner/advisor’s primary role is to “solve money problems”. So, rather than try and understand from prospective financial advisors what they do, ask them – “What problem of mine can you help solve?”

Credit: M, a good friend from college whose pertinent question not only made me pen this, but also helped hone our customer propositions.

Image credit: Mohd. Hasan, Pxhere

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

3 ways to quickly check if you need a financial planner

Girish Ganaraj Financial Freedom, Financial Planning, Personal Finance December 20, 2019December 21, 2019financial freedom, financial planning, Personal Finance thumb rules 0 Comment

Personal finance and investments related advice is omnipresent today. Open any regular newspaper and they have a daily page devoted to personal finance. Surf the TV and even normal entertainment and mainline news channels have programs which “help” customers on their personal finances and give product-related advice. On most infotainment portals, Personal Finance is a separate section and every few articles, one on personal finance advice pops up.

This surfeit of information has created a not-so-desirable impact for us though – easy access and availability of so much information makes us think that we now “know enough” and can even “do it ourselves”. That said, there is an information overdose even on the products side, so how does one be sure? That’s where financial planners and advisors come in. In our experience, hiring a financial planner is usually a big decision for people to make, and hence they end up delaying both this decision as well as their investment decisions, doing themselves more financial harm in the process.

So, how can you decide if you need a financial planner to help you with your personal finances? I am sharing below 3 simple thumb-rules which can help you decide. If your answer to even one of these is a NO, then you surely need one.

RULE 1 – THE SAVINGS RULE – Save at least “your Age %” of post-tax income

What – At age 25, you should be saving at least 25% of your post-tax income, and as you grow older, this % should increase beyond your age. Eg. at age 35 should be 40-45% and at age 45 should be 50-60%.

Why – Remember, for every year you work, you will live a year, possibly even more, post-retirement. Now, even assuming that your needs in retirement are more spartan than when you are young, unless you save an average of 40% of your income across your working life span, you may end up not having enough to fund your retirement.

RULE 2 – THE NET WORTH RULE – Your NW should be at least “(your Age * Pre-tax annual Income) / 10”

What – Your Net Worth is defined as your Assets minus your Liabilities. Do not include the house that you stay in, unless you are willing to liquidate it and move into a smaller one.

Why – This rule helps you assess 2 things – how much your savings have transformed into assets and how over-leveraged you are in terms of liabilities. Also, this is a “minimum” rule, to check whether you have “enough”. To understand whether you are “wealthy”, multiply this by 2 (or more). Eg. If you are 40 and your pre-tax income is Rs. 50 lakhs per year, then your minimum Net Worth should be (40 * 50 lakh) / 10 = Rs 2 Cr. Remember this is net of your liabilities and the house you are staying in.

RULE 3 – THE ROI (RETURN ON INVESTMENTS) RULE – Your investments should grow at minimum your country’s nominal GDP rate

What – Return on Investments is the rate at which your investments are growing on an annualized basis. Nominal GDP is Inflation + Real GDP. Your investments include both real and financial assets (excluding the house where you stay).

(NOTE: An easy rule to calculate your current ROI is the Rule of 72 – Divide 72 by the number of years it took you to double the value of your investments. Eg. If your investments were Rs 2 Cr in 2012 and today their value is Rs 4 Cr, ie. took approx. 7 years to double in value, the approx. ROI you have generated is 72/7 ~ 10%).

Why – In an Indian context, the nominal GDP over the next couple of decades can be conservatively estimated to be around 10% (4% Inflation + 6% real GDP growth). Preferably, add 1-2% to this, since lifestyle inflation is usually higher, and investment returns can be much more volatile than national Inflation/GDP, hence some buffers are needed so that you don’t fall short as you near financial goal horizons. So, a good number to plan for is 12%.

BONUS RULE – THE “PEACE OF MIND, NOT PIECE OF MIND” RULE

Benjamin Graham once said “The investor’s chief problem – and even his worst enemy – is likely to be himself”. And as if on cue, Jack Bogle said “An advisor serves as an emotional circuit-breaker, so you don’t abandon a well-thought-out plan”.

Frequent, sometimes even addictive perusal of “information” ends up making us over-reactive and take wrong decisions in the short-term, apart from stressing us out. A good financial planner allows you to forget about your money worries and gives you peace of mind, while also acting as a safety-net to prevent you from taking wrong money decisions.

So, use the above 3 rules to quickly check whether you need a financial planner to help you manage your finances. And use the bonus rule to assess whether your money is worrying you, rather than working for you.

Image Credit: TheDigitalWay, Pixabay

Rule 2 Credit: While the other 2 rules are commonly used thumb rule, Rule 2 is formulated by the authors of the book “The Millionaire Next Door”

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

To receive our articles through email, pl subscribe here.

For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Saving for kids’ goals, no child’s play!

Prathiba Girish Financial Freedom, Financial Planning, Finwise Woman, Investing for Children, Moneycontrol.com November 29, 2019November 29, 2019Childrens goals, financial planning 0 Comment

For a parent, if there is one thing that is paramount in her life and gives her the utmost happiness, it is ensuring that her children are given every opportunity to blossom into well rounded human beings, confident and capable of taking on the world. Sadly, there is usually a gap between desire and action, and most parents wake up to the task of planning for their children’s basic and higher education when there is not much time left.

Schools don’t prepare the children to handle finances and most families do not discuss money matters with their children, even in tehir teens. As a result, in many cases, they grow up with a large sense of entitlement, never realising the effort, planning and sacrifices which went into building enough wealth to fulfil their dreams.

So, apart from investing mindfully for them , it is a great idea to involve your children early in the personal finance journey. When we interact with customers, we often see how one could have benefitted by avoiding a few traps or being more conscious of the decisions made and we enumerate them here.

Pl read more in our latest article, published on Moneycontrol.com

https://www.moneycontrol.com/news/business/personal-finance/saving-for-kids-goals-no-childs-play-4683281.html

Image credit: Moneycontrol

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

To receive our articles through email, pl subscribe here.

For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

How women should plan for their parents’ financial and other needs

Prathiba Girish Financial Planning, Finwise Woman, Moneycontrol.com, Retirement October 31, 2019October 31, 2019financial planning, finwise woman, Retirement planning 0 Comment

Somehow in our society, while it is an understood thing that a man needs to take care of his parents, it is not such a given for the woman. It is strange when you think of it, since equal share in property post demise of parents is accepted by all, while equal share in responsibilities not so easily so.

However, a woman has the same instinct as a man’s and would like to be there for her parents, financially or otherwise. So how can you plan for such debts, which in a way, can never be fully repaid?

Read our latest article, published on Moneycontrol.com

https://www.moneycontrol.com/news/business/personal-finance/how-women-should-plan-for-their-parents-financial-and-medical-needs-4579881.html

Image credit: Benjamin Elliott, Unsplash.com

What role does your Financial Advisor play in your life?

Girish Ganaraj Financial Freedom, Financial Planning, Personal Finance October 17, 2019October 16, 2019financial independence, financial planning 0 Comment

If you were asked to describe a good financial advisor, what would your response be? Based on our experiences over the years, let me go out on a limb here and say that the most popular responses are likely to be from among the below.

Someone who is trust-worthy, whom I can trust with my money
Someone who is available to me for advice when I need and has my interests at heart
Someone who will make my money grow at a decent pace while also ensuring that it is safe

Of course, there could be other responses, do add them in the comments section below. That said, if I am right till here, let me turn around and tell you that these expectations are rather basic and should describe any financial advisor worth his or her salt. I fact, these above “virtues” should be basic minimum expectations for anyone to qualify as a financial advisor. After all, why would you even consider using the services of someone who is not trustworthy or not available when you need or not competent?

So, what then actually makes a good, rather “really good” financial advisor? In my view, a truly good financial advisor will have the qualities of these professionals as well!

Doctor

A doctor diagnoses ailments basis visible symptoms, necessary reports and probing, identifies them as chronic, acute or placebic (imaginary), and treats accordingly.

Similarly, a good financial advisor should be able to unpeel your personal finance onion layer by layer to identify your money problems so that the right approaches can be used to put them in order.

Accountant

Just as an accountant helps you put and keep your books in order, as well as plan and stick to a budget, a financial advisor helps you understand your personal financial balance sheet and profit-loss statement, co-creates a plan with you to nurse them back to health and helps you execute a budget for your household.

Designer-Architect

A designer-architect understands your personal desires and aspirations and helps you accordingly build a home that feels like yours and only yours.

In the same way, a financial advisor understands your personal financial goals, helps you prioritize them and works with you to construct your own castles.

Policeman

A financial advisor is your personal money police and helps you stay on the right side of your plan and budget, while also reading you the riot act once in a while when you step out of line!

A financial advisor also is the person who you will run to in case of any doubtful or poor experience with your money, to seek advice on damage control as well as salvage.

Lawyer

A lawyer helps you interpret the rules or the laws specific to your problem and finds a way to solve your problem for you within the available space to your best advantage.

Just like a good lawyer, a financial advisor always has your interests as paramount and protects them at all costs, even if you are at times being criminal with your money! Though at times she (or he) may not be civil about it!

Psychologist

A psychologist studies people, their thoughts, feelings and behaviors, in an effort to understand the “why” behind people’s actions so that they can help plan appropriate corrective measures.

Likewise, a financial advisor understands you as a person, your relationship with money and your deeper motivations so that his advice is tailored to suit you as a person. At times he also gently corrects you when you are making common behavioral mistakes with your money.

Teacher

Last but never the least, a teacher is someone who imparts knowledge and wisdom to her students, feels pride at their successes and then selflessly moves on to the next batch, ready to start the journey all over again.

A financial advisor too helps you move along the path of “personal financial wisdom” from safety to security to freedom, is there with you to celebrate your small wins at every step and when finally, your financial goals get achieved, feels proud to have helped make it happen.

So, if you have a financial advisor, how many of the above qualities does he or she have? And if you don’t have one as yet, use the above as benchmarks to set your expectations so that you select the right one!

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

To receive our articles through email, pl subscribe here.

For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Image credit: foreside.com

Many a times, the battle is lost for the want of a horseshoe!

Prathiba Girish Financial Freedom, Financial Planning, Personal Finance September 19, 2019September 19, 2019fee-based advice, financial independence, financial planning 0 Comment

For the want of a nail the shoe was lost,

For the want of a shoe the horse was lost,

For the want of a horse the rider was lost,

For the want of a rider the battle was lost,

For the want of a battle the kingdom was lost,

And all for the want of a horseshoe-nail.”

― Benjamin Franklin

It may not sound nice to the ear, but as Indians, we are, in general, poor at DIY (Do It Yourself). As such, we are not brought up in a DIY culture and this perpetuates. Even now, we are used to having help at home for the smallest of things, and as a result, an average middle-class Indian is hugely lacking in basic life-skills as compared to his counterparts in most developed economies.

To make things worse, we place a premium on DIY when it comes to knowledge-skills. It could be that it gives bragging rights that you could manage something by yourself, when many others found the need to engage with a professional to get ahead.

For example, we resort to self-medication because the symptoms seem “similar to what she had” or worse, we googled it up. Similarly, planning and managing your personal finances often is a DIY activity. While this may work at times, what many people don’t see is the many risks that one may encounter due to this.

In the hundreds of interactions with numerous customers over the past few years in my financial planning practice, I have seen many such mistakes committed. I have tried to list a few commonly encountered ones to help you avoid the DIY trap.

Investing too little

This is something we see often. There is a lot of media noise around mutual funds, and listening to the ‘mutual fund sahi hai’ campaign on a constant basis, people feel the need to be a part of the success story. They decide that setting aside some money is required and start with some small amount. A person whose monthly expenditure is Rs 1 lakh starts saving Rs 10000 per month in MFs and is very happy that he is putting something away for the future. For a low-income family, whose monthly expenses are Rs 25000, being able to save Rs 10000 per month consistently truly deserves a pat on the back, since the family is saving a substantial part of their income and may well on its way to financial freedom. But in the above example the Rs 10000 investment in mutual funds is not going to help you save anything substantial and is a mere tick-mark activity which lulls you into believing you are saving, thereby allowing you to indulge guilt free.

Not assigning any goals

In almost all cases when money is invested there is never a purpose to it. When you invest without a purpose it is mentally extremely easy to redeem. The next iPhone upgrade or the long-dreamt-of trip to New Zealand seems like an emergency, when you have sufficient money invested. Imagine if the savings were given a name, say Child Higher Education Fund. What are the chances that you would withdraw from it, to fund your trip to New Zealand?

Trying to time the market

When you are sitting on the fence, it never seems like the right time to start investing. One month you are worried that the markets are creating new highs every day, second month you are worried that the political situation may spell dooms day to your investments and the third month you are worried about recession. If you are investing with a horizon of 7 to 10 years what happens in this month or the next is not going to have much of an impact on the outcome. What is important is to get off the fence and get into the field of play.

Investing in schemes based purely on recent performance

Most investments are based on past performance, and even star ratings of Mutual Funds are largely based on past performance. One should keep in mind the recent performance has a huge bearing on the 1-year, 3-year and even 5-year returns. It is also important to understand the reasons for the outperformance or underperformance before deciding. Make sure that your investment advisor has a proper framework for selection is important.

Discontinuing investments during down times

Markets are by nature turbulent, and you are going to have to accept your share of this, if you are in for the long haul. It is important to have conviction in your choices and stay put. However, there is a lot of noise in the media and Whatsapp forwards from well-meaning friends proclaiming that doomsday is around the corner. The immediate instinct in such situations is to stop any further investments. However, that would be a very bad strategy since you are getting an opportunity to accumulate at lower prices. Unfortunately, this awakening will come in hindsight.

Not bothering to understand tax implication

Many a times we see people have invested without understanding the tax implications. Just because the dividend which is given to you is tax free does not mean there is no tax applicable on it. It is paid out after tax is paid by the AMC. There have been cases were people have invested in dividend pay-out option for years when they had no use for the dividend and had no clue what they did with dividends. They would have been better of in growth option where the capital would have appreciated substantially given the long tenure of investment. In other cases, we have seen people in 10% slab investing in dividend option of Debt fund where the tax is much higher. Investing in NPS without checking the taxability on exit. Buying ULIPs purely for the taxability. The list is very long and exhaustive but I guess the point is made.

Have a laundry list of investments in the name of diversification

The intention is right, one should not put all eggs in one basket. However, having 25 schemes in the name of diversification is no good. Further there is no thought given to overlap. It would be a good idea to start investing only after you clearly decide how much goes into debt, equity and other assets. Within equity you need to decide percentage allocation to MF, stock, PMS etc and have optimum stocks /schemes and not go over-board with it.

Taking your RM at face value

For many clients, the trust they have on the RM is a transfer of the trust they have in the Bank. They truly believe that products suggested by him/her is totally in their interest. I wish this were true, but its not! We encounter customers who have been sold the wrong products – eg. bad performers, high lock-in products with little or no exit options, complete laggards, etc. so often. Remember, there is no free lunch, if someone is giving you a “free” recommendation in your interest, it may make sense to understand how he is compensated for his time and effort.

Herd Mentality

Last but not the least is following the crowd. The crowd is always excited when markets are touching new highs every day. They don’t want to be left behind and hence jump in when markets have already gone up. However as soon as they see some down side they want to jump the boat. Where-as caution is in order when markets are going up and one should invest more if possible when markets are going down. However, to do this you require conviction and belief.

As the title says, it makes little sense to learn by making mistakes with your own money rather than engaging with a professional at a fraction of that sum. They could guide you to take better decisions and keep you safe from your impulses.

After all, Benjamin Graham did say ‘The investor’s chief problem – and even his worst enemy – is likely to be himself.” Think about it!

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

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My Equity Portfolio is down 20%! Have I made a mistake? What should I do now?

Girish Ganaraj Equity Investing, Financial Freedom, Personal Finance August 14, 2019August 13, 2019Equity investing, financial freedom, financial planning, Goal-based investing 0 Comment

The last 18 months have not been kind to investors in the stock markets. Depending on which period you are looking at, there have been severe corrections, across all market-caps. When mid and small-cap indices fell severely from their Jan 2018 highs, large-cap indices still held on and posted marginal gains. But post the budget presented in July 2019, they too have thrown in the towel.

So, how badly has equities done, and how much has it actually impacted investors? To put things in perspective, a diversified multi-cap index portfolio has fallen approximately 12%, both from the market peak in January 2018 (approx. 18 months back) as well as from the recovery peak in August 2018 (approx. 12 months back). The below table gives the details.

Of course, this varies across market capitalizations, with large-caps still managing to hold on, losing only between 4-9%, mid-caps dropping 18-22% and small-caps plummeting as much as 28-40%.

So, in such a situation, what should one do? Is the market likely to drop further, and if yes, should one exit one’s portfolios? Are equities not the right asset class to invest now?

There are enough and more market news and views answering the above questions, with necessarily no improvement in clarity post reading them. I do not intend to add more to this confusion by also pitching in. Rather, in my view, the best thing to do in such situations is to go back to the “wise men” and learn from them on how to handle such situations. So, let’s see what five such wise men have to say.

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you are not ready, you won’t do well in the markets – Peter Lynch

The first lesson is about having the right attitude to invest in equity. Be prepared to travel the roller-coaster ride that it will take in the short term and to be unpleasantly surprised despite precautions. Building the temperament needed to invest in the stock markets takes time, so invest only what you can bear and slowly increase it over time as you get comfortable.

The stock market is filled with individuals who know the price of everything but the value of nothing – Benjamin Graham

Markets gyrate excessively, basis the laws of demand and supply, which in turn are driven by sentiment, fueled by a continuous dose of “news”. If you have the temperament and the knowledge, volatility can be an opportunity. That said, timing the market is tough and not advised and for the average retail investor, these are the times when your SIPs and STPs MUST continue, and if possible, topped-up, to take advantage of rupee-cost averaging.

Only when the tide goes out do you discover who has been swimming naked – Warren Buffett

When markets take a dive, the natural response from a retail investor, even some of the experienced ones, is to sell the stocks (or funds) that are holding on while retaining the stocks that have crashed, since they want to “wait for it come back up”.

It is pertinent though to remember that in good markets, even the mediocre performers get “swept up by the tide”. It is when markets go down that these average performers get called out. Also remember, every growth cycle has a different set of dominant contributors. So, use downturns to get rid of your not-so-good stocks while retaining the ones that are still good, thereby building a future-ready portfolio. While the urge to wait for markets to come back up is high, remember, that the good stocks by then would have run up even more.

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent – Charlie Munger

Building a good, long-term, high-quality portfolio takes time and requires pain-staking effort. Make sure you are taking advice from a qualified investment advisor, whose interests are aligned to yours. But once done, sit back and enjoy the view. The key to benefiting from good equity investments is allowing them time to grow and compound. So, stay the course, and don’t take recourse to stupidity, such as exiting perfectly good portfolios just because the prices are down.

If you don’t know who you are, the stock market is an expensive place to find out – George J W Goodman

Lastly, investing in equity without having sight of what you are hoping to achieve, and over what time-frame, is fraught with risk. The danger is that since you do not know either, you will tend to over-track and get impacted by short-term volatility and performance. Anchor your investments to a goal, and you will suddenly see the big picture, and will not get swayed by what happens during the journey. A good financial planner will help you identify the right investments for your goals and will also help you course-correct over time, and ensure that your portfolio is always future-prepared, thereby allowing you to have peace-of-mind and enjoy the present.

In summary, use the below 5 inferences as guard-rails to both smoothen as well as make safe your equity investing ride.

1. Build the temperament to invest in equity, by gradually increasing your investments

2. Volatility is good. Ride it out, and if anything, use it in your favour through your SIPs

3. Use downturns to clean up your portfolio and make it future-prepared

4. Once you have a future-ready portfolio, stay the course, and avoid short-term decisions

5. Finally, know why you are investing. Anchor your investments to your goals

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

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Millennials – 7 mistakes to avoid in your wealth creation journey

Girish Ganaraj Financial Freedom, Financial Planning, Personal Finance July 4, 2019July 25, 2019financial independence, financial mistakes, financial planning, financial security 0 Comment

For people in their middle-years, what would have been their biggest or deepest aspiration during their early working years? If I were to hazard a guess, I would think that for most people it would be “being wealthy”. The reasons for wanting to become wealthy may vary, since every person’s needs and wants are different, but it would be fair to say that for most people, their significant aspirations in life would be around money and what they could do with it.

A lot of young people think that wealth creation is something that requires tremendous smarts. That it requires access to knowledge not easily available to most, as well as huge skills that help apply the knowledge and convert it successfully into wealth. And that it requires some “big ideas” that will help one break out of the rat-pack. It may gladden you to know that not having access to all of the above can still make you wealthy.

Actually, the fail-safe way to having enough wealth to take care of all your (including your family’s) aspirations for your entire lifetime is in not doing a few basic things in life wrong, and in case you already have, correcting them as soon as you can. So, let me put down 7 mistakes that you should not make in order to build adequate wealth in your lifetime.

Not having a check on your discretionary spending

For most young people, the first few years earnings are spent fulfilling their pent-up aspirations, without necessarily caring about keeping something aside. While some of it is understandable, the danger is if it continues without a check. The first principle of building wealth is to save first and then spend. So, keep aside something as soon as you start earning, and then spend on your material needs.

Over-leveraging yourself early in life to buy “assets”

Another thing many people do early in life is take “big decisions”, the most common of which is buying a house. The power of money compounding over long periods of time is magical and early savings can multiply manifold if invested effectively. Unfortunately, these savings instead get locked into EMIs for repaying loans that leave a young earner barely any space to save or invest for most of his early years. In an “uberized” world, having a home as a personal asset is no longer a necessity. And even if it is, you should consider it much later, when it is a smaller part of a diversified portfolio.

Upgrading ever so often to “keep up with the Joneses”

Nearly every device that comes into the house (or driveway) turns old, if not obsolete, in a couple of years. And getting into a constant upgrade cycle, whether it is your mobile phone, cars, smart TV or household appliance, can be quite draining on your finances. It is important to have aspirations and fulfil them, but just make sure that you aren’t doing to it to “keep up” and importantly, that your finances can afford it.

Investing based on “tips from friends” or even worse, your “private banking RM”

This is the easiest way to lose money, and at an early stage in life, can form experiences which impact decisions throughout your life. A basic principle behind taking investment advice is making sure that the person who gives the advice has incentives that are aligned to your needs. If you lack the discipline (most fall in this category), find an adviser who you can trust, and who represents you, not the products on offer.

Confusing investments with tax-planning

For many young people, investing equals tax planning. And hence their quest for investments begins in tax season. And in the hurry, wrong decisions are taken basis faulty advice. Remember, the tax you pay is a miniscule part of the overall wealth you have today and in the future, and hence basing your investment decisions on your tax needs is plain wrong. A good adviser will also help you take care of your tax-related investments.

Not having goals and time horizons for your investments

An investment by itself is incomplete, if it doesn’t have a goal. And depending on the nature or priority of the goal and it’s time horizon, the savings need to be channelized into the right investment. Not having goals in place means that your investments don’t have direction and hence decisions regarding them will get made ad-hoc, basis the vagaries of the market. So, while you deploy your savings into investments, make sure you have a goal in mind, and the investment is appropriate to the goal, basis its time-horizon and your risk appetite.

Not planning adequately for the unexpected

Lastly, while the going is good, not making the above mistakes can put you on the right path to financial security. But over a lifetime of a few decades, there will be a few mishaps. Making sure that you have the resilience (both financial and otherwise) to overcome them will mean the difference between being wealthy and not, at the end of it. Hence, make sure that the unexpected is not unplanned. Take care of not only your insurances (life, health, assets) and contingencies, make sure you are nurturing your biggest source of wealth – your skills, by upskilling yourself periodically, and in time.

So, as I said before, building wealth over a lifetime, is more about not making big mistakes, rather than about getting everything right. For those who are already on the path, use the above rules to review your financial health and for those who are just setting out, make these your cornerstones for your wealth creation journey. As Charlie Munger said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

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