How to control unnecessary spending?

This article is a part of [Personal Finance Tips to master your own Finances]

Are you up for these 3 Financial Challenges?

Let’s begin learning:
The safest way to double your money is to fold it over once and put it in your pocket. ~ Kin Hubbard

Kin Hubbard is right in saying that if we do not spend money unnecessarily we would be able to save money and double it. However most of us like to spend and would find it difficult to not spend at all. We feel that it could stress us further.

Accepting the 3 financial challenges could help you in controlling unnecessary spending. Once you control and avoid unnecessary spending you can save more and invest more. So you can achieve your financial goals easier and earlier.


Here are the challenges:

A Day Away from spending:

The challenge of not spending for a day could be difficult, but could help save and render some important life lessons. It is true as most of us have regular daily expenses on coffee, tea, lunch, and snack at regular intervals and fuel to travel to and from work.

Effective planning with implementation of this challenge involves ensuring that your fuel tank is full on the earlier day. Then setting the coffee vending machine the night before could ensure you refreshing brewed coffee to enjoy before you leave for work. Similarly, carrying homemade lunch and healthy snacks like salads, nuts, seed and snack bars could help you eat healthy and save money.

It is not as difficult as it appears. Once you start practicing it, it becomes part of your habit like fasting. It opens new ideas to you on saving on daily routine expenses.

A Week Away from Credit Cards:

We all tend to spend a lot on small and big purchases with using the credit card. Credit card tends to make us spend excessively on unwanted purchases.

Buying things on cash would only make us spend on things that we absolutely consider necessary. It is found that sometimes postponing the purchase and preferring to pay cash could make us realize that the need was just momentary.

During the week away from credit card, you will be able to understand some of your spending pattern. You will come to know on what items you make impulsive buying and on what items you make need based buying.

As you are using cash to buy and not plastic money, you may want to negotiate the price. This develops your negotiation skills.

It is also true that buying unnecessary things with credit cards causes financial stress and spoiling of important life relationships. So avoiding credit card for a week could make you a need based buyer and better negotiator.

A Month Away from Eating Out:

The last challenge of not dining out for a month could be difficult for many today. This is difficult but you would realize on implementation that it saves you a lot of money that is usually spent eating out in restaurants and cafeterias.

Avoiding eating in restaurants would not only create huge savings, but also would help you avoid excesses in foods. In addition eating out only on special occasions as a family would help you enjoy the food. It would make the family realize the value of spending money lavishly.

When we have a kid around one year old, we won’t offer any outside food. We will pack the home made food or snacks for the kid. You can follow the same for the grownups.

Again this is not as difficult as you think. Think of having a homemade food as a family in a park or beach. This will bring a different experience and enjoyment to your family. This will give you new ideas on having more fun with lesser money.

A Final Note:

All these challenges do not mean that you should not spend at all on dining out or on getting good things of life. It only means you should spend the right amount of money for the right reasons. This self-control would not only help you save more but also in preparing you psychologically for a consumerism.

I am sure you would learn a lot with these spending challenges once you try them.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Instruction Manual for Investing

This article is a part of [Personal Finance Tips to master your own Finances]

Let’s open the manual:

Every gadget you buy in the market comes with an instruction manual or user’s manual. But your salary, savings...retirement don’t come with an instruction manual. So we don’t know how to handle these and we end up mishandling. The result is poor investment choices and unhappy retirement. This article is an effort to draft an instruction manual for our investments.

Investment forms an integral part of our work life, with many wanting to save and invest to meet our long-term financial needs. We would all agree that just living from paycheque to paycheque would leave us in a bad financial state making us incapable of meeting our family’s financial commitments and our expenses after retirement.

Don’t Fly Blind: Have a Financial Plan:

It is vital to chalk out a financial plan at the very beginning of our career. This plan would tell us how much we should save and invest. This plan also ensures that our long-term financial needs are met. It may prove difficult and sometimes costly in the long run if we chalk out a financial plan on our own. So it is better to engage a professional financial planner, who would be in the right position to advice us on the investments to meet our long-term objectives in life.

Generally investment advisors or financial planners ensure that we invest in the right type of investments that are relatively safe and tax efficient. They ensure that our investments do not divert away from the set financial goal. The advisors or planners who charge a fee, can be expected to act in the best interest of us; their clients. But we will not be in a position to trust those who live out of the commissions earned from selling insurance policies or mutual funds or stock broking.

However, it is best for you also to be cautious and not allowed to be fooled by flattery. Since it is your money you need to be cautious and vigilant.

Do control what you can:

The first thing that we can control is unnecessary expense on investment. It is in our interest to try to minimize or avoid investment expenses like entry load, exit load, fund management fees, commissions for buying and selling stocks, account maintenance fees, allocation charges, administration charges, surrender charges, and other overheads. Small drops make a mighty ocean. Similarly these small amounts of cost cutting will definitely pay us in the long run.

The second control is over the diversification of your investment. You also need to ensure that at all times your investments are done over a wider variety of assets. This will ensure that you do not suffer large losses in one type of investment. The losses in one would then be offset by the gains in the other and you will be financially safe at all times.

The third control is the maintenance of our asset allocation to reach our financial goal. We need to keep a check over the asset allocation or ratio of equity to debt and to other things in your portfolio with the help of a professional financial planner. This will help us ensure that we are not taking more risk than what we want or can possibly handle.

Do pay as little attention as possible to the financial media:

It is best not to be influenced too much by the media to buy and sell investments. Investing is not a competitive sport. Buying and selling stock frantically by being influenced by the media is counter productive to your financial objectives.

It is best to understand that our conscious investment is for long-term wealth appreciation. So we should not be distracted by the investment shows that run 24 hrs a day, investment column they publish 365 days a year. Media doesn’t understand your requirements. So it is difficult to get a customized solution for your personal finance.

Don’t fall into "Invest and Ignore":

We have invested your precious savings, so do not be careless and sleep over it. Though our investment advisor would make sure that our investment grows, it is better that we too are vigilant and keep track of market conditions. It is our precious savings that we have invested. So if we lose it, we would be losing not only money but also our peace of mind.

Don’t fall into "HNI Trap":

Being a high net worth person exposes us to being influenced to invest in dubious projects that may bring down your financial status. This is true because the financial industry are on the look out for people that have a lot of money and are of a high status. They try to influence them to invest in dubious projects appealing to their status and vanity.

Being a HNI doesn’t mean that you need a completely different set of investments. They try to pack something and will say “This is a HNI product”, just to massage your ego and get business. Many HNIs would be lot richer, if they could have bypassed their private banking department and just invested in an index and a very few diversified equity funds.

A final thought:

The instructions in the user’s manual need to be used to get the maximum benefit and long life of the gadget. Similarly, having read the set of instructions to make wise investment decisions, it is up to you to follow them strictly or leave it and go back to your routine life.

If you decide to follow these instructions, you will definitely see a lot of positive changes and financial prosperity in the long run. So today is going to be the first day for rest of your life.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

ALL you wanted to know about Company Deposits

This article is a part of [Personal Finance Tips to master your own Finances]

Company Deposits are simply nothing but fixed deposits in companies that earn a fixed rate of return over a period of time. Company deposits are really down-to-earth products. The influential advantage of the company deposits is its plain simplicity. Company deposit is understood even by the most novices among the investors community.

Have you ever wondered the logic behind why pure vanilla flavored ice cream sells more than any other flavor? Similar logic is just as true when it comes to the company deposits vis-a-vis many other modern investment options.

With the meltdown of NBFCs almost a decade ago, company deposit market had a major slow down, but volumes still remain significant and there are loyal investors who prefer company deposits to other investment products.

Advantages of Company deposits:

* Assured return.
* Higher interest when compared to bank deposits.
* Low risk when compared to stock market investments.
* Service at your doorstep.
* Lock in period in most of the cases is 6 months only.
* If the interest income is less than Rs.5000 in one financial year, then NO TDS.

Risk in Company Deposits:

Company deposits are basically unsecured. That is if the company defaults in repaying the interest or principal, the investor will not be able to recover his capital. As a company deposit holder, you don’t have any lien on any asset of the company, in case it goes into financial difficulties. This makes the company deposits a risky investment option.

Identifying Risky Company Deposits:

One of the important tasks in investment planning in company deposits is to identify the risky company deposits and avoiding them. If you find any of the below symptoms in any of the company deposit scheme, then it is better to avoid such company deposit schemes.

* Poor credit ratings like A or lesser ratings.
* Companies making losses.
* Companies that skip dividends.
* Companies that offer higher than 3% to 4% of bank deposit rates.

Checklist for choosing right company deposits:

There are some good investment options in company deposits. Also there are some bad investment options. If you know how to select the right company deposit then company deposits can be really an interesting investment option in your portfolio.

* You need to ignore all the unrated companies and need to choose companies with the rating of AA or higher.
* Choose the company with better reputation within a given rating grade. If you read business papers and magazines periodically, it is not difficult for you to check the credentials of the company.
* Take the help of the qualified financial advisor in choosing the right company deposit. But mind you, there are very few reputed and qualified financial advisers.
* Company deposits need to be spread over a large number of companies in different industries. By this, you can diversify your risk. Irrespective of the rating and reputation of the company, don’t invest all your investments in a single company deposit scheme.
* You need to check on the servicing level and standard of the company. You need to ignore companies that don’t care or care little about issues like sending interest warrants and principal cheques.
* After investing in a company deposit, you need to constantly track the company’s credit rating. The times are uncertain and downgrades are rampant.
* Check the company’s balance sheet for its asset back up, profitability, reserves, existing borrowings and loans.

Every investment has its distinct features and benefits. Likewise each investor has specific risk taking ability and personal needs. Professional investment planning needs matching of the product benefits and features with the financial objectives of the investors. So one need to weigh the various alternative investment options like bank deposits, debt funds vis-a-vis company deposits before making a choice.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Mutual Fund SIP: for Short term or Long term?

This article is a part of [Personal Finance Tips to master your own Finances]

It may look very strange when everyone is advocating Mutual Fund Sip for long term, what is the necessity for this debate on ‘Is Mutual Fund SIP for Short term or long term?’.

Theoretically doing a Mutual fund SIP for long term will work for investors. But for practical reasons we need to commit a Mutual Fund SIP for short term. That is we need to break that long term into many 6 months or 1 year periods and commit your Mutual Fund SIP for first 6 month or 1 year.

Then at the end of 6 month or 1 year renew your SIP for another 6 month or 1 year. You need to renew like this till you complete your predetermined long term period.

You may think it is an unnecessary paperwork and waste of time. But you will be completely convinced when you have finished reading this article.

Contribution towards Mutual Fund SIP Changes:

How much you are contributing towards Mutual Fund SIP changes over a period of time.

1. At the beginning of a career a person will be able to commit Mutual Fund SIP for small sum of amount. As he progresses in his career, he or she will be able to increase his contribution towards Mutual Fund SIP.
2. Similarly, when someone reaches a stage where he need to spend more on kid’s higher education, daughter’s wedding, buying a house or meeting a major financial commitment, it is difficult for him to continue the same amount of Mutual Fund SIP contribution.
3. So whenever you renew your Mutual Fund SIP at the end of 6 month or 1 year, you can look at your cash flow position and based on that you can renew the Mutual Fund SIP for the increased amount or the same amount or the reduced amount.

Portfolio Review:

Also it gives you a chance to review your portfolio with your advisor once in 6 months or 1 year.

1. The scheme which you have chosen for Mutual Fund SIP is performing well when compared to its peers or not? You need to review this periodically. The scheme may turn out to be a laggard.
2. The scheme may be performing well when you have chosen for doing SIP. But over a period of time, it could have derailed from its performance. This is something like our cricket players. They will be in a good form in the game for some period of time. Then they will lose their form after sometime. So you need to periodically check up whether the fund is performing NOW or not.
3. If you are committing a Mutual Fund SIP for 10 years, then the advisor may not be coming back to you whenever you call him for reviewing your portfolio. If you commit for 6 months or 1 year he or she will be definitely coming to you for renewing the Mutual Fund SIP. You can have a review with him or her at that time.

When you commit Mutual fund SIP for long term, generally we ignore to review it. It may generate poor returns. You can avoid this by periodic review.

Equity Exposure in Overall Portfolio:

How much equity exposure you can give to your overall portfolio can change the amount of Mutual Fund SIP in equity and debt.

1. As the age goes up, your ability to take risk comes down. So you need to change your equity mutual fund SIP contribution periodically.
2. How close or distant you are to achieve your financial goals will also decide your equity exposure. If you have got long period to achieve your financial goal then you can have more equity exposure. When you have short period to achieve your financial goal, then you need to reduce your equity exposure.
3. Rebalancing your portfolio based on your predetermined asset allocation will also decide your equity exposure.

All this can change your Mutual Fund SIP amount in equity funds.

So committing a Mutual Fund SIP for long term looks good on paper. For practical reasons we need to commit for short term and renew it at the end of every short term till achieving our financial goals.

In this regard, instead of committing a Mutual Fund SIP just like that, having a long term financial plan and committing Mutual Fund SIP based on that plan will be really fruitful. This will make a solid difference in achieving your financial goals.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

10 Things To Do Before You Retire

This article is a part of [Personal Finance Tips to master your own Finances]

Don’t put off today what you can’t afford to do tomorrow. 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. Here are a few tips on things to do before you retire so that your retired life is more comfortable and enjoyable.

Get Rid of All Your Debts:

If you are taking a housing loan, personal loan, car loan or any other loan make sure that you will be repaying them on or before your retirement. You need to choose the term of the loan in accordance with your retirement age. You can enjoy your retired life when you have 100% financial freedom, not when you have to repay your loans.

Protect Your Emergency fund:

Emergency expenses can happen any time. But the possibility goes up during the old age. So we need to enhance the emergency reserve year on year based on the inflation and change in your expense levels. Emergency fund will give you a sense of security and also you need not touch your other investments during emergency where you need to pay pre-closure penalty. Also don’t forget to refill the emergency fund once you met an expense out of emergency fund.

Establish a Retirement Budget:

You need to visualize your retired life well in advance and need to create a budget for your retirement. That is you will not be going to office. So the expenses on transport and clothes may come down. Also you will have more time to spend. You may need to spend more on leisure travel and health care.

Examine Your Cash Flow:

Take a close look at your cash inflow as well as outflow. Is there going to be any income after retirement? Like rent, royalty…. Would there be any unwanted outflow during retired life? Like paying life insurance, or SIP. At times during your beginning of the career , you could have taken a policy where you need to pay premium up to the age of 60. But now you may plan to retire at 55 itself. So you need to realign your existing policy and other investments in sync with your retirement age.

Grow Your Retirement Corpus:

Find out how much corpus you need to have when you retire so that you will be having complete financial freedom. A professional financial planner will of great assistance to you in this regard.

Develop a withdrawal strategy:

How are you planning to withdraw your cash outflow during retirement from the retirement corpus? Monthly, quarterly, half yearly or annually? Through Sytematic Withdrawal plan in mutual funds or by way of dividend or interest. All these will have a great impact on the corpus you need to accumulate. So you need to decide in advance.

Minimize taxes:

Your retirement corpus and retirement income need to be tax efficient. 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 interest only when you withdraw from the mutual funds. Careful selection of investment vehicle can reduce your tax during the retired life.

Get Sufficient Mediclaim coverage:

The moment you retire, your employer will stop covering you under the group mediclaim. So you need to plan for your individual medical cover well in advance. At old age the medical expenses are inevitable. If you have not planned it properly the all your retirement plan will become a mess.

Consider Inflation adjusted annuities:

The monthly income you need when you retire is not going to be the same even after 5 years of your retirement. Inflation will increase your retirement expenses year after year. So year after year your retirement income needs to go up.

Oversee estate planning:

How your fixed assets and financial assets need to be distributed to your legal heirs? Create a WILL. You can avoid creating relationship problems to your next generation because of your left out wealth.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

All you wanted to know about Mutual fund ELSS

This article is a part of [Personal Finance Tips to master your own Finances]

There are so many tax saving investment options; how Mutual fund ELSS Schemes stand out from all other options?

A Mutual Fund ELSS is similar to diversified equity funds. That means the fund manager can invest in shares of various companies across various industries. The difference is ELSS has got the added tax benefit, something a diversified equity fund does not offer.

ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction from income up to Rs.1 Lakh. This gives the tax payers benefits from 10 per cent to 30 per cent (excluding the educational cess) based on their current tax slab.
The other tax saving investments like NSC, PPF will give only 8% return p.a whereas the Mutual Fund ELSS has got the potential to deliver more than 12% return p.a. Also the lock-in period in Mutual Fund ELSS is 3 years and with NSC it is 6 yrs lock-in and with PPF it is 15 years. Among the various tax saving investment option, Mutual fund ELSS has got the least lock-in period.

Ulips are also one of the tax saving investment options. But now everyone has realized that Ulips has got heavy front loaded charges. Moreover smart investors want to separate their insurance from their investments. They no longer see insurance as an investment; they see insurance as a protection plan. So the smart investors go only for pure term insurance and reject ulips.

This is how Mutual Fund ELSS stands out of the crowd.

Before deciding to go for Mutual fund ELSS, here are some points to ponder over. First check your overall portfolio. Does it need more equity exposure? If yes then you can go for ELSS; if no then you can go for PPF or NSC.

Second thing is to keep in mind, the equity investments are for long term, say 5 years or more. Though the lock-in period in ELSS is 3 years it is better to invest with a time horizon of 5 yrs or more.

Also investors need to keep in mind, SIP is the best form of investing in mutual funds and ELSS is not an exception. So doing an SIP in ELSS is a good strategy to be followed.

The poor performing ELSS has given around 10% annualized return in the last 5 years whereas the best performing ELSS has delivered around 25% annualized return in the last 5 years. So investors need to be careful in choosing the right ELSS scheme. Past performance, risk adjusted return, consistency are a few parameters to be evaluated in selecting a best performing ELSS scheme. Investors also can approach financial advisors for selecting the right scheme.

There are two groups of ELSS investors. Majority of investors belong to the first group. They will wake up late to these tax saving investments. For salaried individuals, it is typical that they will be informed by their accounts department somewhere around end of January to provide proof of tax saving investment immediately or else extra tax will be deducted from their February salary. At the neck of the moment, the choice ends up being guided by convenience alone. They tend to think about tax first and investments later. As long as something saves tax, its real benefits and features as an investment are paid less attention to. That means the investments will be chosen more for convenience than for suitability.

There is another group of investors. Though this group is a very small group, it is a very smart group. They will not rush for tax saving scheme at the last minute. They will plan in advance. That means they will have more time to choose the right product. They will save tax as well as choose a good investment option. They will also check whether this particular tax saving scheme will suit their overall portfolio or not; will this tax saving investment is going to fit into their comprehensive financial plan. That means they will consciously choose an investment which saves tax as well as helps them in achieving their financial goals like children’s higher education, buying a house, retirement plans.

So…now just check up which group you are in.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Eight Simple Ways to Plan your Taxes

This article is a part of [Personal Finance Tips to master your own Finances]

You have got only a few more months to complete this financial year. Very soon you will get a call from your company to submit the proofs for tax saving investments. So why don’t you spend some time on organizing your tax plan?

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. The interest paid on a housing loan is eligible for a deduction up to Rs.150000. 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.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

How Should you invest in stock market after your retirement

This article is a part of [Personal Finance Tips to master your own Finances]

How and Why Should you invest in Stock Markets Even After Your Retirement?

Inflation and Retirement:

Most Retirees feel great getting a bulk sum as provident fund and gratuity, and wish they knew a magician, who could spin their money 2 to 3 times in just 5 years, in addition to ensuring a regular return for their day to day expenses. It is true we all want it to keep up with the inflation rate in the market. I know of no such magicians, and it is practically not possible to multiply your money 2 to 3 times in just 5 years. But I definitely know of smart investment planning and investment advisors that could help you to beat inflation.

A step by step look at your considerations to come out with smart calculated investment decisions:

• Post-retirement, you know that you would no longer earn a regular income and would have to stay on your savings, provident fund, gratuity, and other benefits that have been given to you. You would definitely want more good returns on your investments, but your appetite for risk is low, for you would not want to lose your precious savings. So you would prefer to shift your portfolio of investment from risky ones to safer ones like fixed deposits in banks and good rated companies.

• However, your need for more income, capital gains to keep up with inflation, and rates of interest on fixed deposits decreasing each year may make you puzzled about coping up with the increased financial needs. You, as a senior citizen are lucky to be getting additional interest, however taxes leave you with not much more. However you are not prepared to subject your savings to the volatile bullish and bearish trends of the share market of over-confidence and pessimism.


• You retire at 60, considering 5% is the rate of inflation annually, with life span as 85, and spending Rs.20000 per month, you would require a retirement corpus of Rs.42,00,000 if the return rate was 8%, while you would require Rs.47,00,000 if the return rate was only 7%. I am sure you would invest smart, reducing your retirement corpus by 10.5% by just investing for 1% more return.

• It is true that stocks and shares gave an annual compounded return of 17 to 18% in the last 15 years, with long term stocks giving a compounded returns of about 15 to 18% annually. However, you have not appetite for risky and volatile investments, and may want to play safe with low or moderate risk to capital and in not putting all your eggs in one basket or to divide your risk.

• After your retirement you would do best to follow the advice of financial experts and invest no more than 10 to 20% of your retirement corpus in shares and stocks. A novice to the share market, or lack of time, inclination or shrewdness may not prove right to deal in the share market, and most financial advisors advice senior citizens to invest in mutual funds. These companies have experienced fund managers and researchers with in-depth knowledge of various industries and valuation principles and also offer diversified investment options in shares in companies, debt instruments and government securities.

• The choice of retirees should be to invest in big cap funds, funds investing in huge paid-up capital companies, while mid cap funds suit those who do not mind medium risk-taking. However small cap funds, invested mostly in start-up companies are to be avoided, being highly volatile in nature.

• Time plays a vital role in investment in mutual funds, and a good investment advisor would advice you appropriately. The best option for senior citizens would be to first invest a lump sum in a debt based funds that promise good, safe and regular return. This could be followed up by a systematic investment/transfer plan of investing or transferring through ECS regularly a fixed amount for units of a mutual fund. This definitely proves beneficial to take advantage of the volatility of the market, as buying different number of units each month helps to spread the risk also.

A Final Thought:

However your smart calculated investment choice of mutual funds requires evaluating every 3 to 6 months. This would help switching between mutual funds at the right time. My last but most important advice again especially to senior citizens is never go in for stock trading in a big way without proper knowledge and inclination and lose due to volatility of stock and share market.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Personal finance and Investment Tips

Here are some nice articles on Personal finance and Investment Tips. Here you will learn to manage your personal finance in a better way. You will learn budgeting, smart spending methods etc. Also, you will learn about stock market, mutual funds and other investment tips.

• 9 Ways to Be Credit Card Smart
• 8 Investment Myths To Be Avoided
• Smart way to achieve Financial Goals
• 5 Blunders To Avoid With Stock Market Fall And Viable Solutions
• All About Investing & Not Investing In The Stock Market
• How to control unnecessary spending?
• Instruction Manual for Investing
• The 10 Financial Doctrines of Wise Retirement Planning
• ALL you wanted to know about Company Deposits
• All you wanted to know about Mediclaim Policy
• Mutual Fund SIP: for Short term or Long term?
• 10 Things To Do Before You Retire
• All you wanted to know about Mutual fund ELSS
• Eight Simple Ways to Plan your Taxes
• A Personal Finance Checklist for Newly weds
• How Should you invest in stock market after your retirement
• Real Estate Investments Made Simple
• How to create a workable budget that gives you money and life?
• Mutual Funds Mythbuster
• Your Spouse has a Key Role in your Personal Finance and Money Management
• Fear and Greed - Avoid them to Become a successful Investor
• Mental Accounting: Get Richer by avoiding this Money Mistake
• 5 Signs when you should sell your mutual funds
• 8 Family Budgeting Misconceptions demystified
• How to save more by spending smarter?
• 11 ways to get out of debt and stay out of debt

Real Estate Investments Made Simple

This article is a part of [Personal Finance Tips to master your own Finances]

Gold and Real estate are very traditional investment avenues. Gold has evolved from its traditional investing and found its place in the modern sophisticated investment world via Gold ETFs. Similarly Real estate is also emerging as an investor friendly avenue with less hassle via PMS route or private equity route. Have you ever thought of investing in real estate will one day be as simple as investing in mutual funds? If no please read on.

Real Estate as an Investment:

Buying a dream house or flat to reside ourselves is basically not a real estate investment. Buying real estate with a view to generate income and capital appreciation is considered as Real Estate investments. Real Estate investments can be further classified into residential, farm house, commercial, retail, leisure. Leisure is a relaxation place where one can spend their free time or vacation.

Depends upon his/her risk tolerance and time horizon one can invest in real estate at different risk levels. It can be at the time of converting a rural land to urban land, or at the time of building development stage or in already developed city area.

Real Estate and Risk:

Most often investors assume real estate prices will not fall down and they only go up year after year. It is not so. During the mid 2009 some of the real estate investments were quoting below 30% to 40% from their 2007 prices. Real Estate investments are also prone for price fluctuations.

Real estate Vs Stock market:

Real Estate is a complex and complicated investment when compared to stock market.
Non-transparent: There is no transparency in the price. It is not easy for a buyer or seller of real estate to identify the last transacted price in the same locality. There is no price discovery mechanism.
Illiquid Asset: Selling a real estate is a time consuming process. It is not liquidable easily. There is no organized market for the buyers and sellers to meet.
Impact Cost: Stamp duty and registration charges are really very heavy when compared to the other investment products.
No Regulator: There is no regulator for the real estate participants and intermediaries. Anyone can become a builder. Technical qualification is not mandatory. Also anyone can become a real estate intermediary or advisor. There is no certification or training to be completed before practicing. As there is no qualification requirement for participants as well as the intermediaries, it is very difficult to see best business practices.

Real Estate hassles:

The other hassles with reference to real estate investment are documentation, maintaining the asset without any encumbrances, and genuineness of the title deed.
There are some practical problems with diversification. Normally an investor invests in a real estate in his own locality. It is very rare to find someone in Chennai investing in the real estate properties located at Mumbai, Delhi or Kolkata. Affordability also limits diversification. An investor may not be able to diversify his investments across various cities with Rs.25 lacs or 50 lacs.

It may not be possible for an individual investor to buy a land and develop a viable project in that land and sell it in the market. Managing the project development need some kind of expertise. Even if an individual is able to do it, he will be doing it in his limited ways and means.

Is there a solution for this? Of late yes.

There are some collective investment vehicles. These investment vehicles will be promoted by an investment management company. The investment management companies collect money from investors. Being professionals, they will identify good projects and do joint venture with the project developers. They will be able to diversify across various cities as well as various types of real estate investments such as housing, commercial, hospitality and the like. These investment management companies charge a reasonable management fees.

At times they collect money via PMS route and at times via private equity route. The minimum investment ranges from 10 lacs to 25 lacs. This amount needs to be invested over a period of 3 years. That is they will collect money from investors in 4 or 5 installments. After 3rd year whenever they exit from a project they will repay the principal employed in the project as well as the profit generated out of that project. End of 6th year or 7th year, the investment management company will exit from all the projects.

The advantages of this collective investment vehicle are
• One can invest into real estate without any hassles. All the hassles will be managed by the professional investment management companies.
• One can invest in various real estate projects at a time.
• One can geographically diversify his investments across India.
• One will be able to apportion his total investment into small sums in large projects like township development, Technology Park, industrial estate, health city…
• Cost advantage because of economies of large scale operation

This is really an investor friendly investment vehicle. Apart from the regular stocks, mutual funds and fixed deposit investments investors can consider investing in these real estate products also. This will give better diversification to your overall portfolio. Also Investors need to be careful in choosing such investment options. Background of the investment management company and their transparency levels are more important. Investors can seek the advice of the professional financial planners before investing.

This investment vehicle is in its primitive form only. It still needs to go a long way. As of now there are only a very few companies in India which specializes in promoting collective real estate investment products. But in a few years time these kinds of products will be available from various investment management companies and in different varieties like our present mutual fund schemes.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

How to create a workable budget that gives you money and life?

This article is a part of [Personal Finance Tips to master your own Finances]

"Modern man drives a mortgaged car over a bond-financed highway on credit-card petrol."

Taking control of your cash inflow and outflow is the base for financial planning. Budgeting is important to gain control over your financial life, be prepared and avoid surprises, save for a major purchase, get out of debt and stay out of debt, expand your lifestyle, and to retire early.

Thiruvalluvar, a much celebrated Tamil poet emphasizes budgeting through his following lines:

Incomings may be scant; but yet, no failure there,
If in expenditure you rightly learn to spare. (Kural: 478)

Who prosperous lives and of enjoyment knows no bound,
His seeming wealth, departing, nowhere shall be found. (Kural: 479)

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.

Making Budget: A step by step guide

There is a saying, “God is in the details”. Detail every bit of your financials while creating a budget.

1) Check your financial statements:

It could be your utility bills, d’mat account statement, other investment receipts, ITR, Form 16A, Form 16, bank statement, credit card statement etc. The idea is to make out the monthly average of income and expenses. Therefore the more details you can get the more relevant and accurate will the budget be.

2) Listing out income from all sources:

It is very easy for us to list down the income from employment or self employment. Normally we will lose track of income from investments, rental income and other miscellaneous income. Also check is there any annual income. Don’t forget to record the incomes received by way of cash equivalents like meal voucher and credit card reward points.

3) Finding out your total expenses:

We can easily list down the major expenses. But listing out the miscellaneous and petty expenses would be difficult. This is where the collected financial statements would help. Don’t forget the annual expenses like car insurance and property tax. Once you have recorded all the expenses then split them into fixed expenses and variable expenses. This classification will provide much more clarity.

Most people are surprised to learn that it may go for things that we do not need at all. Writing your expenditures down provides us with the unique opportunity to visualize and find out if any money goes for things that we do not need or want.

4) Are you saving or over spending?

Now you have your total income as well as total expenses. Deduct the total expenses from the total income. You will know whether you are saving some money or doing over spending. If you are saving some money channelize that money into the priority areas such as clearing your credit card outstanding or any other loan to become debt free or retirement savings or children’s future plan. If you are on over spending, then you need to make some adjustments to expenses.

5) Review your spending pattern:

On your expenses list, pay close attention to the variable expenses. This is where you can cut short a few expenses.

Every month we need to keep aside appropriate amount for the proportionate annual expenses.

You can find out the reasons for over spending. Most of the cases it would be emotional buying or unplanned shopping. Once you have pointed out the reasons for overspending, then find out the steps or precautions to be taken to rectify the same.

6) Are you on the track? Check monthly:

Every month set aside an hour to compare the actual expenses with the budgeted expenses. If there is a negative deviation, find out the measures to control them.

Why your earlier budgeting attempts failed?

Budgeting is not a onetime activity. It is a continuous process. Normally we start budgeting with a genuine motive. But after a few months it may get off-tracked like our attempts on dieting or exercising. Therefore one needs to understand the behavioural aspects of budgeting.

1) Positive Approach:

Never focus on the negative aspects. Focus on the benefits of successful budgeting. What will you accomplish by creating a budget? It could be becoming debt free, some money for vacation, planning for retirement or children’s future.

2) Keep your enthusiasm alive:

Budgeting may over a period of time become routine and hence boring. Set a few short term goals like trying to repay the personal loan in 18 months instead of 36 months. If you achieve it reward yourself. Recognition could be a good motivating factor. Inform all your family members, friends and well wishers about your progress on budgeting. You can also join in some of the forums related to money management.

3) Have a realistic expectation:

One needs to keep realistic expectation on the outcome of the budget. Over expectation may demotivate you. Budgeting is not a magic. It is an art like singing and dancing. You will be able to progress it only over a period of time with constant practice.
If you have not done budgeting for yourself and family so far, then now is the right time to take action. The fact that you are reading this article shows you have decided to stop procrastinating, and have answered the ancient question, “If not now, when?” with “NOW!”.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Mutual Funds Mythbuster

This article is a part of [Personal Finance Tips to master your own Finances]

Rahul is working for a mutual fund house. They have recently came out with an NFO (new fund offer). The day on which the fund house announced its maiden NAV (net asset value), he received lot of calls from investors asking why the NAV is at below par. They thought something was wrong.
Then Rahul went on clarifying them that though both an equity fund and a stock extend market-related returns, there are some key differences between the two. If you have similar misconceptions about equity funds and stocks, this article will demystify all those misconceptions.

New Fund Offerings:

A new fund offer is not likely to generate amazing returns as can be the case with an initial public offering from a company.
This is because the NAV reflects the market value of the stocks held by the fund on any day. Because a fund holds several stocks in its portfolio, the NAV can only reflect the combined returns on the portfolio between the NFO date and the date of first NAV.
The first NAV declared by a fund can, at times, be lower than the par value of investment. A lower NAV does not mean a cheaper fund: Just because a New Fund is issued at Rs 10, it does not mean it has a chance of giving better returns than an existing fund that has a higher NAV.
Whether the scheme in which you are planning to invest has an NAV of Rs.15 or Rs.150 does not matter at all.

There is a difference between the price of a listed security and the NAV of a mutual fund scheme. Listed security has a price, determined by the demand and supply of the security. Whereas the unit's NAV of the scheme has a value determined mathematically, by the prices of the securities in the portfolio. If the portfolio appreciates by 10% Rs.15 NAV will become RS.16.5 and Rs.150 AV will become Rs.165. So in whatever the NAV you invest your investment will fetch you 10% return.
So instead of concentrating on LOW NAV and more number of units, it is worthwhile to consider other factors (performance track record, fund management, volatility) that determine the portfolio return.
A fund with higher NAV may give higher returns than a lower NAV fund, if its stocks did better in the markets.

Funds Vs Stocks

Point of distinction	Equity Fund	Stocks
Level of Risk	High	Highest
Entry/Exit cost	No Entry Load; But there will be Exit load. Advisory fee may be applicable.	Demat a\c and Brokerage charges
Options	Options available like dividend payout, dividend reinvestment, growth.	No such options
Minimum Investment	Min investment is usually Rs.5000.	Even one share can be bought.
Measuring Performance	Returns Vs Benchmark	Net Profit margins/EPS
Sub-division	Classified based on stocks in which it invests. (Diversified, Midcap, sectoral, thematic)	Classified as per the industry in which it operates.(FMCG, IT, PSU, METAL)
Pricing	Based on the price of the underlying securities	Based on the demand and supply of the particular stock

Dividends are not extra returns:

Immediately, after the dividend payment of dividend the NAV of the fund will fall to the extent of the dividend payment. Let us illustrate.

Fund’s cum dividend NAV is Rs.25. Proposed dividend is 50%. You are investing Rs.1 Lac and you will not get Rs.50000 as dividend. It is only Rs.20000 (50% on the face value Rs.10 is Rs.5 per unit) as the unit price is Rs.25 you will get 4000 units. Rs.5 dividend * 4000 units=Rs.20000.

And this dividend is not an additional gain or income. After payment of dividend the NAV of the scheme will fall to the extent of the payment and distribution taxes (if applicable). Now your nav will become Rs.20 and your investment value will be Rs.80000 (4000 units * Rs.20 NAV).

In a nutshell,

Investment amount Rs.1,00,000
Dividend amount Rs. 20,000
Present Value Rs. 80,000

It is nothing but investing Rs.80000 after dividend distribution at NAV Rs.20.

So investing in a scheme because it is declaring dividend in the near future is meaningless.
Usually a company with a liberal dividend policy may enjoy greater investor interest in the stock market. The same is not applicable to an equity-oriented mutual fund.

Investing more number of funds is not actual diversification. It may reduce your return.

Owning several mutual funds doesn’t necessarily broaden your holdings. It will be a mistake to buy the same securities over and over again in different funds with different names. You tend to believe they're diversified. But it is not real diversification.

There are only very few funds which are performing consistently. Instead of investing in few funds, if someone chooses to invest in more number of funds (because he intends to diversify) he may be forced to choose some average performing schemes also. As a result his returns will be diluted. The step taken by the investor to diversify his investment is not leading to diversification but to dilution of return.

Thus ideally your portfolio should not have more than four-five funds.

NO tax for churning:

When we buy shares and sell them within a year we are accountable for short term capital gain tax at the rate of 15%.
But mutual funds provide the benefit of churning of stocks with no tax implications. A fund which churns its portfolio within a year is exempt from tax because it only redistributes these profits to investors.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Your Spouse has a Key Role in your Personal Finance and Money Management

This article is a part of [Personal Finance Tips to master your own Finances]

In most of the Indian families, the personal finance is something which is not managed by the couples together. It is only one person who manages the personal finance and money management of the whole family. In most of the cases the male partners and in a very few cases the female partners mange personal finance. Only very rarely both of the partners together manage their personal finance aspects.

What would be the outcome in an organisation where the purchase department works totally independent and without any understanding with the finance department of the organisation? Purchase dept may overspend; finance dept will lose control; misunderstanding and conflicts between both the depts; the result is the organization’s growth gets destroyed.

Similarly, if the personal finance is handled by only one partner, then there could be a lot of mismatch between you and your partner in saving and spending pattern. This will lead to misunderstanding and marital stress. Instead of having independent saving and spending plan, having an interdependent plan will help you in managing your money effectively and achieving your financial goals.

You go out for dinner together. You go to the movie together. Why don’t you manage your personal finance together? This will build money compatibility for you and your spouse. Both of you can have a better relationship and understanding with each other.

Why it is so important?

You may wonder why personal finance should be managed by both of the partners. Here are some points to ponder over;

1) In case of Emergency:

Suppose the partner, who is managing personal finance, met with an accident and need to be hospitalized for one month or so, then how does the spouse will run the show?

During the accident, if the partner has missed his wallet which had all the credit cards and debit cards then how does the spouse block those cards before it is misused? Where does she or he find that information?

In case of emergency, nothing will help except the practice of managing the personal finance together.

2) Real Workable Budget:

When you alone prepare the budget for your family, then you can’t expect your spouse to spend according to the budget. If you prepare the budget along with your spouse, he or she will come forward to help you in saving more.

You just try this. Involve your spouse in budgeting and monitoring the spending. You will see the spending coming down day by day and both of you will start spending consciously.

3) Combined Financial Goals:

It is better to identify the goals of your spouse as well as yours and check that is there any goal which is contradictory to the goal of your spouse.

You may want to retire and settle in the same work city. But your spouse may want to settle in the native place.

You may plan to buy a farm house to spend your leisure. But your spouse may be interested in spending her/his leisure at different places like hill stations and other tourism places. For this goal a time share slot with a resort provider may be suitable.

So identifying and settling your difference of opinion regarding the financial goals at the blueprint level is much easier and cheaper, instead of doing it at the execution level.

Overcoming the barriers:

There are some barriers or objections in involving their spouse in managing personal finance. How to overcome that?

1) No Time:

My spouse is not having enough time to look at these things. ‘No time’ is a false excuse. If it is one of your priorities, then definitely it will somehow find its time. Only thing is you have not realized it as one of your priority. Personal finance is definitely a priority item for each and every family because it is going to secure your future.

2) Not interested:

My spouse is not interested in personal finance. Everyone is interested in their own future and their kid’s future. So logically everyone needs to be interested in personal finance. You need to motivate them and make them understand, how this personal finance management is important in achieving their life goals.

3) Doesn’t know:

My spouse doesn’t know about personal finance. No one has born in this world with the skills of money management. We all learned it here. So why don’t you educate him/her on personal finance. Money management is an important life skill. Everyone should know. You want your kids to manage the money better and wiser. Why don’t we educate our spouse first?

Overcoming the barriers in getting your spouse involved in personal finance management and getting them involved will be a life transforming exercise. Don’t miss it. Together you will be able to achieve your life goals easier and sooner.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Fear and Greed - Avoid them to Become a successful Investor

This article is a part of [Personal Finance Tips to master your own Finances]

Avoid these two emotions and Be a successful Investor:

Let’s start having a look:

An experienced long-term investor once told me that when he looked at his face after a share market fall he found despair and fear, while the same face showed enthusiasm and happiness with a share market appreciation. This made him realize that greed and fear were the 2 magnetic forces that caused confusion in investment goals. A balanced and objective approach would help him achieve his long-term financial goals.

Hindrances to positive and objective approach to investment decisions:

My close look at investment behavior has made me realize that fear and greed is not separate but complimentary emotions in an investor. Greed is merely a mental state born out of fear, with investors feeling the fear to lose money and then being unable to meet their family financial obligations. In addition, social pressures to earn in line with close relatives and friends and provide for benefits like higher education in a prestigious college, a grand marriage for children and a house with all modern amenities and furnishings leads to greed.

It is interesting to observe our brains dwell in the middle of negative emotions like fear, disappointment and greed, and these emotions influence our investment decisions, creating confusion in investment decisions. So we as investors start looking for security and confidence in our investments.

This makes me highlight 2 powerful influences on investor behavior namely 1) An investment portfolio based on ones personality
2) The follow the flock policy.

Basing investment portfolios on ones personal likes and dislikes are the first of the powerful influences, it is like investing in cars and fancy gadgets just because you love them. Investing on shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run. It is true; our investment fancies make us pay a heavy price.

The follow the flock for fear of being the black sheep policy makes you as an investor to believe in following others in the share markets. You would then be playing a vital role when the going is good and exiting never to return when the share market goes down. The pitfalls of group behavior lead us to buying high and selling less.

It is also true that follow the flock behavior leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. In addition, group behavior leads to extreme situations of profit or loss and price swings in the share market that is highly undesirable. Buying high and selling low has made many investors suffer heavy losses in the long run.

A look at positive investment behavior:

Aim at lower returns for market forces play a very vital role in deciding the price. It is good to be investment smart with humility and lower aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks.

Patience over a lifetime and being able to assume stress helps in aiming for long term positive returns and contributes to assuming less financial stress after retirement.

Positive investment behavior requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction of extreme financial prosperity, both can destroy a lifetime of healthy investment. A long-term investor needs to realize that neither despairing nor elation of situations in civilization proves worthy for long term financial portfolios.

Let’s just sum up:

I am sure you would be congratulating yourself with all the knowledge gained and would neither allow emotions, group behavior nor your personal likes and dislikes to influence your long term financial goals. It is true you would have also realized that patience, humility and appetite for stress could contribute to long-term achievement of your financial goals.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Mental Accounting: Get Richer by avoiding this Money Mistake

This article is a part of [Personal Finance Tips to master your own Finances]

Get Richer by avoiding this Money Mistake

Mental Accounting is one such money mistake even smart people are committing. Understanding this mistake and avoiding this could make us richer.

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?

Behavioral 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.

a. 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.
b. You are most likely to spend more with credit cards than with cash.
c. 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.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

5 Signs when you should sell your mutual funds

This article is a part of [Personal Finance Tips to master your own Finances]

When To Sell A Mutual Fund?

Start making the decision:

It is vital for an investor, to have long-term investment plans. But he needs to constantly verify if these funds are helping him to achieve his financial objectives. You, as an investor need to keep track of how your investments in mutual funds are growing. Also you need to make sure that you do not suffer huge losses due to non-performance.

As an investor you need to learn not only when to buy but also when to sell a mutual fund. Learning the principles of when to sell a mutual fund helps weed off investment in unprofitable mutual funds and build up a desirable and profitable portfolio of mutual fund investments.

Look at situations to sell mutual funds:

1. Chronic Under-performer:

Investor should stay invested for long tern in a risky asset class like equity. You should wait patiently for a minimum period of 5 years to watch your investments grow. Making comparisons between similar funds proves futile.

However you should make a note if your fund is continuously under performing. Comparing each of your funds with the respective fund benchmark index for various periods like 2 years, 3years and 5 years helps. You may need to move out of a continuous under performer and move in to a continuous performer.

2. Changes in objectives of your mutual fund:

Next, an investor like you, investing with definite financial objectives with allocation to different sectors and market capitalization may feel uneasy and suspicious with the change in the fund’s objectives that exposed you to greater risk or risk in other sectors also.

Fund takeovers, change of ownership and mergers change the level of risk in a mutual fund portfolio. So you as an investor may find your need, not met and may want to sell the fund. This was the reason why many investors, who invested in UTI Mastergrowth Fund, sold their funds when it changed to UTI Top 100 Fund.

3. Repositioning of a fund:

Though the fund has got an investment objective to invest in various market caps, so far the fund may be investing only in midcaps and positioned in the market as a large cap fund. But later, the fund may reposition the same fund as a multi cap fund and start investing in large cap stocks also. This change may not be a suitable one for an aggressive investor.

So as an investor, you need to be careful in watching the funds after investing. That too when a fund changes its positioning, you need to keep a close track of the same to prevent your investments from any adverse effect.

4. Appreciation in investment attained:

It is quite possible that your investment could have been shrewd and calculated and achieved the targeted appreciation ahead of time. I congratulate you, but would like to tell you that greediness may also make you lose on that foresighted gain. Selling off your fund in full or part and investing in safer avenues like debt funds, fixed maturity plans and fixed deposits of companies and in banks would safeguard your money yet give you some small return.

Say you wanted to accumulate Rs.10 lacs for the higher education of your daughter/son in 5 years time. Your investments have appreciated to 10 lacs at the end of 4 year itself. It is better to change it immediately to safe and non-risky investments. If you leave the investments in the same fund, it may come down in value because of the subsequent market fall.

So when the goal value has been reached, one needs to protect the appreciation by moving out from the existing risky investments and moving in to a safer investment.

5. Rebalancing based on the asset allocation:

As an investor you need to maintain an overall asset allocation ratio and you need to stick to it to gain more. Sometimes your investments have appreciated and this has increased the percentage of your portfolio in equity and maybe reduced the percentage on debt and other safe avenues.

You need to realize this means that you are exposing more of your investment to the volatile equity market that was risky. This could surely be remedied with rebalancing. That is selling a portion of the over appreciated asset and reinvesting the same in the lesser appreciated asset.

Selling funds to Achieve:

I am sure you would have understood these principles of when to sell a mutual fund. This will assist you in taking better investment decisions and achieving your financial goals.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

8 Family Budgeting Misconceptions demystified

This article is a part of [Personal Finance Tips to master your own Finances]

Let’s put on our thinking cap:

Depositing our pay cheques in bank and using the credit and ATM card for spending seems easy. However keeping the track of your income and expenses, to get full value for your money is possible only with budgeting. Budgeting helps most of us to keep track of our income and spending and not overspend.

In practice 8 budgeting myths retard the savings of a lifetime. They are:

1) I earn a lot and need not budget:

This requires a change of perspective. Michel Jackson lived like a king but died awash in $400 million debt. Budgeting by watching your spending pattern helps trace unnecessary expenses on clothes or eating out, and help you save for a future or for a much wanted dream holiday. So how much you earn has got less relevance. What is more important is budgeting. Proper budgeting can make a low income earner to retire richer and overspending can make a high income earner a pauper.

2) I hold a secure job and see no reason to save:

This does not hold well today with large corporations going in for labor layoff to save costs during recession. Small corporations also put you at a risk with the death of the owner or the company going into losses.

This insecurity demands caution to save for spending during such periods when you are caught unaware, with an emergency fund coming handy.

3) I am poor in calculations and cannot budget:

With useful tools like spreadsheet that help account for expenses and income earned make the budgeting much easier. A look at the spending helps avoid unnecessary expenses to budget and save in future. If you are interested one can easily learn budgeting. So if you say ‘I don’t know how to make a budget’, it shows your level of interest and willingness to save for a secured future.

4) I am lucky; I will never be short of money:

However your ability in meeting high bills and other unpredictable expensive events like life threatening accidents, or a major surgery without experiencing shortage of money may not be always true.

So better save and be prepared to face unpredicted contingencies and then use the savings for something else that you may consider desirable.

5) I pay my bills promptly and do not need budgeting:

Congratulations I appreciate your credit worthiness, but going into negative balance is also quite easy. You may be self disciplined. It doesn’t mean that you need not make a budget. Preparing a budget makes you much more disciplined and spend consciously. So budgeting with saving helps avoid going into negative balance or overdraft.

6) Budgeting could lead to deprivation:

Budgeting is not frugal living and foregoing all pleasures like a movie a month and an eat out once a week, but it just not allowing your earnings to be not overtaken by your expense. Everyone is planning to save, planning to invest, but do we have a well thought out plan for spending. A smart spending plan only can lead you to save more.

There is no need to feel deprived with budgeting; it just means saving a percentage of your income spent unnecessarily to have a secured future.

7) I have small wants and find no need to save:

This need not be a stable attitude in human nature, with you wanting to take advantage of certain financial trends in the market like buying house or land at cheaper rates, or investing at higher rates towards building a bigger retirement corpus. Hence budgeting helps to save when you do not want money for a time when you could profitably use it.

Your wants may be small but basic needs like food, shelter, and clothing are becoming costlier with inflation. Also you need to take into account your health care needs of the future.

8) I get rises, bonus and tax refunds and find no need to budget:

I think you have been lucky all these years, however these benefits are highly unpredictable and placing ones hopes fully on them is futile. It is better to budget and save than depend on unpredictable benefits like bonus, raise and tax refunds. The recent recession has taught us a lesson to all of us which we should not forget easily.

Budgeting and your future:

Take charge of your future now. Budgeting is the first step towards controlling your financial destiny. Don’t let your unconscious spending habits decide your financial destiny.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

How to save more by spending smarter?

This article is a part of [Personal Finance Tips to master your own Finances]

The willingness and the ability to save money is the secret of building wealth. So as to save money, you need to spend less than you actually earn. Though it looks very simple when you say, it is really difficult to implement. There are plenty of ways to help you start saving money even on the very tight budget. Saving money or spending less is all about the personality, belief system, values of a family.

Spending less and saving more are lifelong living skills that need time to develop. Unless and otherwise, you have a written financial goals, 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 will be able to find out what influences your spending pattern.

Spending money has got so many influencing factors. But all these influencers can be classified into five broad spending influencers.

1) Emotions:

Your emotions play an important role in your spending pattern. The positive feelings like happy, fun, joy can influence you to spend more on entertainments and gifts. The negative feelings like envy, jealous, shame, stress, depression, frustration can influence you to spend more on smoking, drinking, buying things you actually don’t need, relaxation and healthcare.

2) Traditional Thought:

This is because of your belief system and your thought process. I need to buy a silk saree every year for my wedding anniversary. I have to burst crackers for diwali. These are all the classic examples of how your traditional thoughts will influence your spending pattern.

3) Society:

Society in which you live will have more influence on your spending. You have to buy a car as all your colleagues are coming to office in their own car. On the occasion of your kid’s birthday, you need to arrange gifts for all the classmates of your kid. You should be watching this movie, on a first day first show.

This influencer is caused by friends, colleagues, neighbours, relatives, and club members. Even at times, the advertisements and promotional offers like a discount sale can make you to spend more.

4) Habits:

Habits formed when you are growing up can make us spend impulsively. Generally this will be for our sensual pleasures. Spending on movies, music, eating out, smoking, drinking are the best examples for this influencer.

5) Commitments:

This includes paying off your debts and loans, commitments towards family like school fees, buying groceries and other provisions, paying rent, paying for medical insurance. You are committed to pay these expenses earlier.

By tracking and analyzing your each and every expense, you will be able to identify the influencers which made you to spend. Here are some strategies to overcome these influencers and spend smarter:

Control Your Emotions:

Instead of spending money, you can control your emotions by doing something else like doing yoga or meditation, watching comedy shows on TV, going to temple or beach. You need to solve the root of the emotion. You have to do introspection and need to keep a balanced mind always. Balanced mind is a key for spending smarter.

Self Talk:

You need to consciously change your thought patterns to come out of traditional thinking. “I don’t really need a saree for every wedding anniversary”. “I am not a kid; so I need not burst crackers on diwali”. These kinds of auto suggestions will change your thought process and you will be able to really prioritize things on which you spend.

You are unique:

You were born original. Please don’t die a copy. There is no need to feel bad if you don’t get to spend or buy things like your friends or people around you. You are unique and special in your own way. You need to discuss with your family and friends about “How to live happily by achieving compromised spending patterns?”

Learn and unlearn Habits:

The unwanted habits which make you spend more can be unlearned. Good habits which make you spend smarter can be learned. Habits can be learned and unlearned. But you need to know it is not a quick fix. It involves a process and a commitment.

A habit is an intersection of knowledge, skill, and desire. Knowledge is ‘what to do and the why’. That is we need to spend less to save more and become richer. Skill is ‘How to do’. That is ‘how we spend less and what are all the strategies to be applied for spending less’. Desire is the motivation, the want to do. What are we trying to achieve by spending less? How that is more important to us than spending more. In order to make something a habit in our lives, we have to have all three.

Unwanted Commitments:

You can’t avoid certain commitments like groceries, schools fees. But definitely you can discontinue unwanted commitments like the club membership in which you are not actively participating and not getting any actual use out of it; the chits impulsively you have enrolled with a jewelry shop.

Money not spent is saved. These above strategies will only work if you truly have a desire for future financial success. You need to be disciplined and persistent in the course of implementing these strategies. The more you practice smart spending, wealthier you become.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.