1. Too many expenses and loans

Banking is a booming business in India as more and more people are continuously borrowing. At the same time, recovery agencies are also a booming business as more and more people default on their loans. Although India has traditionally had one of the best savings rates as compared to western nations, the same cannot be said of the next generation. Although most people today have a high and stable income as compared to the earlier generations, their expenses are equally high. One of the key reasons is that they have many expenses and loans. There are too many temptations today and all one needs to do is call a bank or financial institution for a personal loan. In this process of keeping up with the next iPad, gadget or car, many young people end up paying a substantial amount of their income towards EMIs.

Besides EMIs, insurance premiums and personal expenses eat into earnings quite quickly. I am sometimes surprised to see people with a seven-figure monthly salary finding it difficult to save. This is because they have major expenses such as penthouses, bungalows, yachts and so on. Since these are big-ticket items, servicing debt and maintaining these often result in a liquidity crunch even for affluent families with very high incomes.

Some people, especially business owners and professionals, take on loans because their accountants advise them to do so from a tax planning perspective. This is primarily to harness the advantages of depreciation and interest deduction. However, if taken ad-hoc without taking a holistic view of the family’s liquidity, present needs and future requirements, such decisions often put a family in cash flow problems.

2. Over-concentration in real estate

Although it sounds stereotypical, most people hoard real estate like there is no tomorrow. One reason is our love for real estate. Besides, there is an abundance of black money in the system and a lot of income in cash that can be comfortably cushioned in real estate investments. Additionally, people believe that not only is real estate insulated from market vagaries, but that it also gives stellar returns along with tax benefits. As a result, many people even borrow to invest in real estate and are leveraged [which means they take on debt].

Most Indians have completely forgotten the great Indian real estate crash of 1995 and the subsequent lull for several years until 2003 – 2004. This is a very dangerous strategy to adopt as it can prove to be lethal during real estate crashes, especially since real estate is an illiquid investment.

3. Inadequate insurance against death, disability, professional liability and loss of income

Most people buy life insurance as an investment. This is because there is a lot of emphasis on life insurance as a great tax saving tool and many people are enamoured with tax saving instruments. Besides most people are so busy with day-to-day activities, they often wake up between January and March every year to do something to save tax. Due to such ad-hoc purchases, they end up with a plethora of irrelevant policies.

What’s worse is that many pay high premiums for a very low cover. Despite paying high premiums, most people are under-insured when it comes to life insurance. There is no assessment of the actual financial risk their family will face, in case of their premature death, and most liabilities are not covered. At the same time, they have negligible or no critical illness cover, negligible disability cover, no income protection and no social security benefits. This area must be adequately addressed to ensure lifestyle maintenance, wealth creation and wealth protection.

4. Investments done in an ad-hoc fashion, due to time constraints

The portfolio of most people would probably look like this: more than 50 – 60 per cent in real estate investments, 30 – 40 per cent in debt [PPF, insurance policies, fixed deposits, bonds and post office], 5 – 10 per cent in cash [savings account, short term fixed deposits and cash], gold [primarily bought as jewellery] and very negligible equity.

Most people have just these investments: Real Estate, PPF, EPF [for employed people], gold and insurance policies.

Considering that people are getting busier by the day, financial planning takes a backseat. This is when people end up taking decisions based on advice of different sets of people [chartered accountant, colleagues, banks, real estate agents, family members, insurance agents and financial advisors]. There is no co-ordination between all the advice sought from these different sets of people and hence their actions are extremely haphazard in nature. Hence if you take a look at the finances of most people [even the most sophisticated], you will clearly see that it is a hodgepodge of products accumulated over time.

5. Lack of goal-setting and planning

“I take life as it comes. I don’t plan for it,” said a leading Bollywood actress. It’s very easy to say this but nothing meaningful can be achieved in life without setting goals and planning. Yes, life will happen as you plan and sometimes you will need to course-correct, but there are certainties in life that will happen. For e.g. death, retirement [everyone will grow old and will stop working or slow down at some point of time], paying taxes and so on.

I am appalled when people spend several months planning for their vacations or discuss as a family on the next car to be bought, but when it comes to financial planning and goal setting they say, “I will do it after a few months” or “I don’t have time right now.”

6. No written financial plan

Since there is no formal education in personal finance, most people do not understand the concepts of financial goal setting, cash-flow and debt management, insurance planning, asset allocation, maximisation of post-tax income, retirement and estate planning .

Their realisation of the importance of a financial plan is reactive rather than proactive, in that it is only when an event happens that they realise the need for a financial plan or the need to take a holistic view of their financial situation.

7. Myopic view of tax planning

Most people generally believe that the objective of tax planning is to minimise taxes and often do things that are not in their best interest. They take several loans, buy real estate and life insurance in an unplanned fashion and indulge in tricks to fool the taxmen such as showing limited income or a weak balance sheet with the only objective of not paying tax. However, the right goal of tax planning is to maximise post tax-income.

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When you combine these two factors, it means that women must save more of their take-home salary than men. So for men if the rule of thumb is that they must save at least 30 per cent of their take-home salary, for women this figure should be 50 per cent.

Women [by and large, according to experienced financial planners] also tend to be conservative in their investment approach. However, if they are to meet their retirement savings goal, then they must eschew the conservative approach and invest a large portion of their retirement corpus in equities [which are known to give higher returns over the long term]. In view of their longer life span, even after retirement women should not shift their entire corpus to debt. Some portion of their corpus must remain in equities so that it is able to fight inflation over 25 years or more of their retired lives.

If you anticipate an investment horizon of seven years, you could invest in balanced funds that invest 65 – 80 per cent of their corpus in equities

Before you begin investing

Prior to any savings to meet your long-term financial goals, you must pay off all your high-cost debts, such as personal loans and credit card debts. Having paid off your debts, get into the habit of paying credit card bills at the end of each month, instead of paying interest on revolving credit.

Establish a contingency fund. This should equal 3 – 6 months of your living expenses, including child’s education fee and cost of insurance premium. This fund is meant to take care of temporary layoffs, prolonged illness or an accident that leads to temporary disability. Keep the contingency money in a savings account or a liquid fund [from a mutual fund house] where it is easily accessible. Next, let us discuss how you can go about meeting some of your most important financial goals:

Starting a family

Now suppose that from the day a woman starts working, she starts saving for the time when she will take a break from her job to start a family. She believes that she has an investment horizon of five years. A risk-averse individual should put her savings for this goal in fixed deposits while a non-conservative investor might consider putting her money in debt mutual funds.

A woman who anticipates that she has an investment horizon of seven years could invest in balanced funds that invest 65 – 80 per cent of their corpus in equities. It has been seen that the probability of negative returns from equity declines dramatically if the investment horizon is at least seven years.

Avoid branded children’s products either from insurance companies or mutual funds

Investing for child’s education

Working women, especially single parents, should begin planning for their child’s future by buying term insurance. This will ensure that even in case of the parent’s untimely demise, the child’s education doesn’t suffer. Women, as mentioned earlier, at times tend to be over-cautious in their investments. Many of them invest 100 per cent in debt even for long-term goals such as child’s education [where the typical investment horizon is 18 – 21 years]. Remember that the cost of education in India has historically grown at a faster pace than a broad measure of inflation such as the Wholesale Price Index [WPI]. The only hope you have of meeting this goal is if you have a considerable portion of the education corpus invested in equities [75 – 80 per cent].

Conservative investors may opt for balanced funds with 65 per cent equity allocation. Remember that liquidity becomes a very important factor at the time your child starts college education: you will need money at the time of admission and then continuously for the next few years. It will not help if your money is locked up in illiquid instruments that will mature at a later date. Do keep this very important factor in mind when saving for your child’s education.

Avoid branded children’s products either from insurance companies or mutual funds. Instead invest in high-quality diversified equity funds from mutual fund houses [these typically get more attention from the fund manager than child plans because they have a larger corpus and hence earn the fund house more money].

Three years before you approach your goal, start shifting your savings from equities to debt, so that a sudden downturn in the markets does not affect your child’s prospects.

Investing for retirement

Investing for retirement is also a long-term goal where the investment horizon is of 25 years or more. Only by investing in equities will your portfolio be able to counter the ravages of inflation. Women who have an appetite for risk may opt for a 100 per cent equity portfolio. Those who are risk averse may opt for a mix of 75 per cent equities, 20 per cent debt and 5 per cent gold.

Active or passive funds

Those who use the services of a financial planner or know how to choose the right mutual funds may opt for active funds in their retirement portfolio. If you invest in them, monitor their performance. If a fund’s performance falters, switch to another with a sound long-term track record. If you don’t want the hassle of monitoring the performance of active funds, opt for an index fund which will give you returns in line with that of the benchmark index upon which it is based.

Allocation by market cap

Of the total equity portion of your retirement portfolio, allocate 70 – 75 per cent to large-cap or large- and mid-cap funds. 25 – 30 per cent may be allocated to mid- and small-cap funds.

Allocation to debt

In a long-term portfolio, such as for retirement, meet your debt allocation by investing in Employee Provident Fund [if you are employed] or Public Provident Fund [PPF, if you are self-employed] or both.

Allocation to gold

In a retirement portfolio 5 – 8 per cent may be allocated to gold. This will give greater stability to your portfolio and also enable it to fight inflation.

As your retirement approaches, shift your corpus from equity to debt, especially if the corpus is small-sized and a decline in the market will affect retirement income. Very large corpuses can weather market volatility [in the sense that if the corpus size declines from 80 crore to 60 crore, it will not affect the retiree’s lifestyle]. Even after retirement have at least 20 – 25 per cent of your retirement corpus in equities so that it can continue to fight inflation over the quarter century of your retired life.

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Here are a few traits of Dhoni that investors would do well to emulate.

Captain Cool

Dhoni is famously known as Captain Cool. There is an imperturbable quality about him. He doesn’t get worked up in tense match situations. These qualities of grace under pressure and not buckling under the weight of expectations have helped him achieve great heights in his career.

A calm temperament is a great asset in the field of investment as well. When the markets tank, most investors lose sleep as they see the value of their portfolios shrink. Warren Buffett has said that you should be greedy when others are fearful and fearful when others are greedy. In a bear market, investors should be able to coolly evaluate which high-quality stocks have become available at a bargain and snap them up. Instead, most of them are either unable to invest more in equities, or worse still, sell their equity holdings altogether.

A calm temperament is a great asset in the field of investment as well

Persistence

The game of investment requires similar tenacity. If most of your investments are in equities—as they need to be if you wish to build wealth over the long term for goals like retirement, children’s education and marriage—then the ride is not going to be smooth. Equities typically do well for one spell and then underperform thereafter. Sometimes the bear market can be prolonged. But the long-term course of equities is upward. Only investors who have the strength of character to stick to their asset allocation and persist with their systematic investment plans [SIPs] when the markets are doing badly will build wealth over the long term.

On the other hand, those who hop from one asset class to another, i.e., from the one that is doing badly to the one that is doing well, will always end up buying assets when they are expensive and selling them when they are cheap. This is the exact antithesis of the approach you need to adopt to build wealth.

Not buckling under the weight of expectations has helped dhoni achieve great achieve heights in his career

Calculated bets

Dhoni does take risks but they are well-calculated ones. He does not have a reckless, all-or-nothing approach. This is reflected in the composition of the teams that he fields. Depending on the sort of pitch that the team will play on, he may take an extra spinner or an extra pace bowler. But he rarely goes with an all-pace or all-spin attack.

An investor too should make calculated bets. Warren Buffett and his partner Charlie Munger often give the analogy that they have mastered the art of vaulting over small obstacles rather than very high ones. Mohnish Pabrai of Pabrai Funds also says that investors should make bets only when the odds are overwhelmingly in their favour.

As for an investor who follows the asset allocation approach, the strategic allocation of his portfolio should be determined by the nature of his goals. Within that he may make some tactical variations. For instance, a typical investor may have an 8 – 12 per cent or 5 – 10 per cent strategic allocation to gold in a long-term portfolio. He may tactically shift his weightage depending on the performance of the asset class, moving to the upper end of that range when the asset class is performing badly [buy low] and to the lower end when it is performing well [sell high].

Dhoni does take risks but they are well-calculated ones. He does not have a reckless, all-or-nothing approach

The Finisher

Dhoni is known to be one of the finest finishers in one-day cricket. Given his position lower down the batting order, he often comes in to bat in the wake of a collapse in the middle order. He has the art of being able to pace his innings well. For the greater part of his innings, he will steal singles and twos and hit the odd boundary. But he rarely goes for fireworks at the start of his innings. It’s only towards the end that he breaks the shackles and accelerates with towering hits.

The ordinary investor, too, needs to pace his investments well. But here things work in the opposite manner. When you are young and are many years away from your goal, you have the liberty to take higher risks. You can put a larger part of your corpus in risky assets like equities. The reason: even if the markets fall and stay down for a long time, you don’t need to worry as time is your ally. In a year or two, the equity market will recover and resume its upward journey.

As you get closer to your goal—say when you are five years away from retirement—you need to reduce the risk in your investment and move a larger portion to fixed-income assets, so that a downturn in the equity market does not affect your retirement plans.

When you are young and are many years away from your goal, you have the liberty to take higher risks

Know your limitations

Dhoni has stuck to his primary role of wicket—keeping throughout his career. Despite being regarded as a good batsman—he has an average of above 50 in his one—day career and nearly 40 in his Test career—he has stuck to the lower middle order and has not promoted himself up the order. This is the sign of a man who knows his strengths and weaknesses and works well within his limitations.

Investments too require you to have an acute awareness of one’s strengths and weaknesses. Buffett advises all stock market investors to invest within their circle of competence. He says that they should not invest in sectors or industries that they know very little about.

Often, investors over-estimate their abilities, oversimplify the investing process and adopt a do-it-yourself [DIY] approach. Investing is difficult and they would do well by having a competent financial advisor. Remember, it’s for a reason that even the best sportspersons have coaches.

A version of this article was first published in the November 2015 issue of Complete Wellbeing.

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Whatever the reason, when someone decides to take up entrepreneurship, the instinctive response is to give up the job and get started right away. However, a lot of meticulous planning must precede this decision, not just on the business front but also from the personal finance perspective. After all, the decision has a bearing on both you and your family. The basic thrust of your efforts should be to insulate your family finances from the vagaries of the business. Your family’s goals, such as your children’s education and their marriage, should not become hostage to how your business fares. Here are some steps you need to take before you venture out on your own.

Build an emergency corpus: First, the entrepreneur needs to set up a business emergency fund. This fund should be able to cater to the needs of his dependants for at least three to five years. Usually it takes at least three years for a business to stabilise and start yielding surplus cash flows. In the current slow state of the economy, it might be better if you make provision for five years.

This contingency fund should account for not only the daily expenses but also all the insurance premiums, utility bills, children’s education fees, and EMIs on home loans.

The business emergency fund may be put in a liquid fund from where it can be withdrawn via a systematic withdrawal plan, or it may be put into a sweep-in account provided by select banks [the funds you require are paid out to you and the surplus gets automatically swept into a fixed deposit].

This first step of setting up a business emergency fund is absolutely mandatory before you leave your job.

Keep family and business finances separate: A young business devours capital rapidly. As it expands, so will its needs for money. You may be tempted to redirect money from the business emergency fund to meet the working capital needs of the business. This should be avoided at all costs. You may think that you will replenish the fund once your business starts yielding a surplus. But if the venture fails, you will be in dire straits.

Similarly, money should not be withdrawn from business for funding needs on the home front.

It is also important to maintain accounts of expenses both on the home and business fronts. This will provide you with a good sense of where the money is going, and how you can curtail expenses.

Buy adequate life insurance: A term policy is absolutely essential to take care of all liabilities [such as a home loan] and the family’s needs in case of an unfortunate event. Hopefully, you have already bought one. But if you take out a loan for your business, then you should increase the sum assured on your term plan by a similar amount. This will ensure that in case of an unfortunate event, your family does not get saddled with extra liability.

Besides life insurance, you should also buy a personal accident cover.

Buy adequate health insurance: Now that you are leaving your job, you will no longer enjoy the benefit of health winsurance from your employer. Find out if your spouse’s cover will provide you with adequate healthcare protection. If not, buy adequate health insurance cover for all your dependants. In addition to your spouse and children, it should also cover your aged parents if they are dependent on you.

Once you have adequate health insurance, it is also prudent to supplement it with a critical illness cover.

Don’t touch the retirement or children’s education corpus: When you leave your job, you are likely to get a substantial sum of money from your Provident Fund [PF] account that would have accumulated over the last 12 – 15 years or so. This money in your PF account was working as your retirement corpus. Again, don’t use the PF corpus for your business. Put it in long-term growth-oriented investment instruments such as actively-managed equity funds or index funds so that it caters to your retirement needs. Do not use this money for funding your business, in the assumption that when the business does well you will put the money back.

Similarly, any funds that were saved in order to meet the children’s education needs should not be funnelled into the business. If you use the retirement corpus or education funds for business, and it does not succeed, all the hard work that you have put in to achieve certain life goals will get nullified.

Entertainment and travel allowance: When you are in a job, you are entitled to entertainment and travel allowances. All these will disappear once you quit. If you have lifestyle needs that you can’t do without, you need to put aside additional funds for these expenses. You can’t withdraw these expenses from the business. Remember that tax breaks in the form of entertainment and travel allowance only happen once the business turns profitable. If you can’t afford them, you will have to be prepared for a more frugal lifestyle in the first few years.

Alternative sources of income: In the initial years, it helps a great deal if you can tap into alternative sources of income. Rental from real estate can be a great source of help. The spouse’s salary can also provide sustenance in the early years.

Clear liabilities: Before you start your business, it is better if you clear off your major liabilities, such as home loan. Sometimes funding both the loan and the business can become difficult. If not, make sure that you have made provision for EMIs in your contingency fund.

Your foray into business must be a calculated risk. Without the daily stressors of whether will be able to make ends meet, you can plunge into the world of entrepreneurship wholeheartedly. And if any contingencies do arise, take heart in the fact that you have planned well for them.

This was first published in the August 2013 issue of Complete Wellbeing.

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Shared financial values and goals

Money is a touchy subject. Most couples tend to avoid discussing it transparently. This results in sub-optimal outcomes vis-à-vis achievement of financial goals and, in some cases, even becomes an impediment to marital bliss.

A lot of times, two people come into a marriage with different money-related values: one may be a cautious spender while the other may spend as if there is no tomorrow; one may be dedicated to saving and investing to meet financial goals, while the other might live just for the day and believe that the future will somehow take care of itself.

Shortly after marriage, once the couple has got to know each other fairly well, they should have an exchange regarding their money-related values. In due course, they should evolve a common minimum programme, comprising financial goals that they hope to achieve and a roadmap for achieving it.

Get reliable advice

Financial planning may seem like a rather simple thing to do. But in my career I have seen numerous couples who adopted the DIY [do it yourself] approach and paid a heavy price. Some of the common mistakes that couples commit are having excessive exposure to real estate [which weighs them down with debt and offers little liquidity in case of need], investment in insurance-cum-investment plans [which give inadequate life cover and produce poor returns due to high fees], and so on.

In my view, those who can afford to, should find a reputed financial planner in their neighbourhood, get a financial plan prepared, and go for regular reviews to ensure that they stay on the right track.

Get rid of high-cost debt

During your single days, you may have spent rather too freely and hence acquired high-cost debt such as personal loans and credit-card debts. Though this could be a touchy subject, after marriage it is best to pay off these debts first—either with the help of your spouse or without. You will not make any progress on the road to prosperity if you are simultaneously paying 16 – 30 per cent interest on high-cost debt while earning only 12 – 15 per cent on your investment portfolio.

Set up a contingency fund

Another prerequisite before you can begin investing to meet your goals is to set up a contingency fund. This fund could bail you out in case of loss of employment, an accident that leads to temporary disability, and so on. It will save you from dipping into your investment corpus.

The contingency fund should equal 6 – 10 months of personal expenditure, including EMIs, insurance premium and child’s tuition. The exact amount put in the contingency fund should be governed by stability of income and the risk profile of your jobs. Two months of savings may be kept in a savings account where it is accessible. The rest may be kept in the liquid fund of a mutual fund from where it can be withdrawn within a day.

Set a saving target

When cash flows are high, people walk on air. Anything that they desire appears within grasp and the tendency to splurge on high-cost purchases is high. But couples must remember that cash flows may not always remain high. Double incomes get whittled down to single income when the couple starts a family. A high-paying job can be lost for no fault of yours. So right from the start, couples must save to have a cushion for meeting contingencies. Moreover, only disciplined saving will help them meet their myriad financial goals.

At least 25 – 30 per cent of the couple’s combined gross income should be saved and invested each month.

Buy life insurance

As soon as there is a dependant within the family [non-working wife, elderly dependent parents or a child], the couple must ensure that they have adequate life insurance. A rough rule of thumb is that you must have life insurance worth at least 10 times your annual salary. If you go to a financial planner, she will calculate your assets, liabilities and future requirements [in case of death of the bread winner] and then calculate the sum assured. This is a much more scientific way of calculating your insurance needs.

If the husband works and the wife is dependent on him [or vice-versa], the policy should only be purchased by the breadwinner. If both the husband and wife work [and they have a dependent child or parents], both may purchase life policies, naming each other as the nominee.

Buy a term insurance policy [online policies are less expensive] to meet your life insurance needs. Avoid buying an insurance-cum-investment product where, despite paying a high premium every year, you may not have adequate life cover.

Buy health insurance

Even if your employers provide health insurance, buy individual health insurance policies for both partners [and child, if any]. That way you will still have insurance cover in case you give up your job or need medical treatment when you are between jobs. Once you have crossed the age of 40 [when your chances of falling ill grow], and to keep pace with rising healthcare costs, supplement these stand-alone policies with a floater policy. Keep in mind issues such as the insurer’s policy regarding pre-existing diseases, sub-limits, exclusions, renewability and claim loading to avoid unpleasant surprises at a later date.

Don’t go overboard with debt to create assets

Even when taking a loan to create assets, couples should stick to prudent limits. The total of their car and home loan EMIs should not exceed 30 per cent of their gross income, otherwise they could face cash-flow problems.

When buying a car, be prudent regarding its size. Similarly, buy a house only after your income has reached a reasonable level and you are in stable jobs. Buy a house of a size proportionate to your combined incomes.

Investing to meet your goals

Couples should divide their investment goals into short, medium and long-term goals. Saving and investing to collect the down payment for the purchase of a car [which can be met within two years] is a short-term goal. Investing to start a family [when wife stops working and household expenses grow] or to collect the down payment for purchasing a house is a medium-term goal [two to five years]. Saving for your child’s education and for retirement are long-term goals [above five years].

To meet short-term goals, it would be best to invest in a fixed deposit scheme, where the risk of loss is nil. For a medium-term goal you may go with a hybrid fund [equity and debt in the ratio of 60:40 or 70:30].

For long-term goals such as child’s education and retirement, you may invest primarily in equities if you have adequate risk appetite. Conservative couples should decide on an asset allocation that is in keeping with their risk appetite [more in equities for those with higher risk appetite] and current wealth [a less risky portfolio if you are already comfortably placed].

Once the asset allocation has been decided, divide the portfolio among diversified-equity funds for the equity portion and Public Provident Fund [PPF] and Employee Provident Fund [EPF] for the debt portion. About 8-10 per cent of your total portfolio may also be invested in gold.

The equity portion of your portfolio should be divided among large- and large-and mid-cap funds [70 – 75 per cent of total equity portfolio] and mid-cap and small-cap funds [25 – 30 per cent]. If you are financially savvy and will monitor your investment portfolio periodically, then invest in actively-managed funds with sound long-term track records. If the performance of a fund falters [it underperforms benchmark for three quarters], switch to another fund. On the other hand, if you don’t wish to keep close watch on your funds, go with passive funds [exchange traded funds and index funds] which will give you returns at par with that of their benchmark indexes.

Financial planning for couples is a detailed and meticulous exercise, difficult to capture in a short article. As said earlier, those keen on achieving financial success should use the services of a financial planner who can play the role of advisor and mentor and put the couple on the road to enduring financial freedom.

This article was first published in June 2013 issue of Complete Wellbeing.

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Most people today end up taking advice from several different people and hence end up with so many unnecessary and irrelevant products. Some people are completely fascinated or fixated by the gold or platinum tag their private bank allocates them. They believe that just because they are gold clients, they get the best and customised advice that is possible, and more importantly that their advice is free. I recently came across an intelligent person who said, “I am a Gold client of this bank. They have allocated a relationship manager specifically for my account. I am being taken care of on a regular basis. Besides, they don’t charge a fee and have given me a financial plan”.

When I saw the financial plan this gentleman had received, it was just a canned copy printed directly from a software. All the relationship manager had to do was sit for an hour with the person, tick off boxes spread over 6 – 8 pages and the financial plan was done. This gentleman was given a printout of this after 3 – 4 days to show some additional work was done and that was it.

There was no detailed analysis, no thought given to the overall financial goals and strategy, and no effort that was put in by the relationship manager to create a sound financial plan. There was nothing mentioned about what to do with existing insurance, investment and loans. There was no debt strategy, no estate planning exercise, and no real estate strategy. The ultimate objective was to sell some irrelevant unit-linked insurance plans and proprietary investments that were not required at all. I told him, “This is not a financial plan and this is not how you should be taking advice.”

What is then the correct way to get advice?

The correct approach is to create a comprehensive written strategy that would cover every aspect of personal finance for you. In short, there is a pressing need to take a holistic view of your overall situation. There should be one person or a team who takes stock of your cashflows, assets, liabilities, liquidity needs and helps you firm up your financial goals. What is the point of having several lakh earning 4 per cent when you are paying a loan with an interest cost of 16 per cent? What is the point of having several properties, if there are no inflows from them or there are severe negative cashflows for the properties? What is the point of having life insurance if you are severely under-insured despite paying huge premiums?

Just as an infection to your liver can spread across other key organs, similarly a decision in one area of finance impacts another and your overall financial situation. It is very important that people understand this and make prudent decisions.

The first and key decision that you must make is to select a good financial advisor. If you think you are capable enough of making money decisions on your own, great. Even then, a good financial advisor can prove effective and efficient in managing your overall finances. But, if you do strongly believe that you do not need any, then you should be able to spend enough time to understand several areas of personal finance, changing economic trends, products and options suitable for you. Finally, you should implement the strategies that you have devised for debt management, risk management and insurance, asset allocation and investments, tax planning, retirement planning and estate planning in a timely manner. For others who believe that they could benefit from sound financial advice, you must at least understand the basic parameters on how you would choose a financial advisor/planner.

How should you choose a Financial Advisor/Planner?

A lot of agents, financial distributors and banks try to call themselves financial advisors or planners. They generously also use the term financial planning/wealth management as and when it pleases them. Consumers are naturally confused about the various terminologies used and hence do not actually question what a particular designation means. If you ask a person whom he would go to advice for [of these two titles] given a choice, Certified Financial Advisor or Certified Senior Financial & Investment Specialist [CSFIS], 95 per cent of the time, he will opt for CSFIS. Incidentally, both these certifications are fake.

I was talking to a journalist friend the other day and he asked me what questions a person should ask a financial planner. I told him that more than the person asking the financial planner, what is far more important is the questions the financial planner asks you.

First: How detailed and comprehensive was the data-gathering interview?

This is one of the most important steps in the financial planning process and will drive all the advice to be given. Was the data gathering comprehensive enough? Did the financial planner make notes of the information that you did not have and ask you to get back with this information? Did he take in information about you, your family, your aspirations, dreams, goals, income, expenses, cashflows, assets, liabilities, insurance, investments, tax situation, wills, powers of attorneys and information that might be relevant? Did he ask about your behaviour towards risks and how you react in bullish and bearish situations? Did he understand the mistakes that you have committed in the past and how were they committed?

A good financial planner should take anywhere between 3 – 5 hours including a social chat over 1 or 2 sessions to complete this data gathering process. He will then review the data collected and revert to the client for more clarifications to make sure he has understood the overall scenario well.

This first step itself is the single biggest clue. I find that most people genuinely interested in financial planning are keen to understand how their financial decisions will affect their life, much more than how certain products work or how to get the highest returns. In fact, the biggest value-add of a good advisor is how he utilises his skills to better understand the client’s overall situation and emotional issues and how best he handles the overall picture.

A salesman on the other hand will ignore most of the issues like estate planning, debt and cashflow management and be only interested in how much money you have to invest and how much insurance can be sold. Another category of sales people will just focus on how their scheme will make you rich, save tax for you and give you the highest returns. This is the most dangerous category and should be avoided completely.

Second: Look closely at how the planner discusses risks and returns with you.

Does he promise you the moon and tells you how good he is and that he has provided the highest returns? No good financial planner in his sane mind will ever do so and this is the kind of person you should look at working with. Does he take you through a proper risk profiling exercise, and tell you that the long-term return of the stock market is around 12 –15 per cent and therefore one should not believe theories of 30 per cent returns?

Third: Don’t look at the bank brand and opt blindly for advice, as the bank is not going to advise, it is the advisor that does. Most relationship managers in banks are primarily sales people always on the lookout for selling more products to clients. They frequently change employers so a relationship manager at Bank A can tomorrow be at Bank B and then at Bank C.

Fourth: Does the financial planner take you through estate planning matters, retirement planning, different offerings, as might be suitable to you, and any other issues? He might not deal directly in any of those things but most good planners will at least give you an overview of what you need and refer you to someone competent. Finally, the composition and presentation of financial plans can vary immensely. The groups most notorious for doing rudimentary financial planning or misusing financial planning are banks and big distributor of financial products. I told a person, “If you ever want to insult a good financial planner tell him that his plan was as good as the one you got from your bank’s financial planner!”

Most of the private banks and distributors have a well-deserved reputation for first selling life insurance as investments and churning portfolios under the garb of financial planning.

As a popular business anchor says on television, “Would you go to a chef for a haircut, or a barber for food advice? Then why go to the wrong person for advice?” The problem today in the financial services industry is that you don’t know who the barber or chef is because everyone uses the same title or name. Make sure you understand the terms financial planner, financial planning, wealth management and wealth manager, and that you are not just getting a lemon in the name of financial planning.

Who should be on your team?

Several key members should be a part of your team.

Chartered Accountant [CA]: Having a good CA on your team is absolutely necessary. CAs today provide help on several areas such as bookkeeping [day-to-day accounting], preparing and filing returns; tax audit, tax planning advice, project finance and so on. Understand that they are professionals and expect to be compensated in a fair manner. Do not cut corners by just thinking about costs. In fact, most times the advice that you will receive will be a function of the fees that you pay.

Banker: People are likely to have a high amount of loans. Having a good relationship with a banker could mean preferential treatment and rates on loans and other deposit products. This is also a function of your account size with the bank. If you are unhappy with your bank or if your bank has not acted in your best interests, move on to some other bank.

Public Sector Banks are likely to give you loans at a much lower cost than private sector banks. Although the infrastructure might not be so great and documentation could take time, the savings that you will make over a period of 10 – 20 years is likely to compensate for the initial inconvenience.

Financial Advisor/Financial planner: We’ve already discussed this in detail above. This is again one of the key decisions a person should make. The key requirements here are someone acting in your best interests, his integrity and his skill in creating customised solutions for you.

Real Estate Agent: Considering that you are likely to own several pieces of real estate, make sure you have an ethical broker with you who does not just show you some properties but also objectively tells you appropriate prices and gets you the best deals. He should be conversant with the paperwork required, do appropriate due diligence and constantly keep abreast of real estate happenings in the area. You might also want to consider real estate consulting firms, if the ticket size of your real estate is sizeable [above ` 5 – 10 crore].

Insurance Agent: Most people think of life insurance as an investment and as a means to save tax. At the same time, they think of general insurance as a pure cost. Hence, most people are inadequately insured [low covers], have the wrong set of policies with them and are paying a huge premium. You must get the risk transfer piece of your financial planning process right. Your Financial Planner can help you arrive at the quantum of cover you must take for every financial risk that you are exposed to. A good insurance agent will help you implement action items as detailed out by the Financial planner and regularly service you with updates, premium collection, submission and receipts.

Lawyer: There are several areas, where most people, require legal help. Considering a person’s real estate exposure, it is very important that a real estate lawyer vets all your property-related documents right from title of the property to preparing the legal buy or sell document. Additionally, lawyers can create the leave and license document for you and other paperwork that could be needed. Many people bypass lawyers by letting the real estate agent handle the real estate paperwork. It would always be beneficial that you double-check all pieces of paperwork with a lawyer specialising in real estate. Another area where a lawyer will be of immense value will be is estate planning. A competent lawyer can handle creation of wills, power of attorney and trusts.

Excerpted with permission from The only Financial Planning Book that you will ever need, by Amar Pandit, Network 18 Publication Pvt. Ltd. INR 499

This was first published in the April 2013 issue of Complete Wellbeing.

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Implicit to say that besides the physical trauma, Patwardhan would have to suffer a severe financial setback, given the prohibitively high cost of healthcare in the U.S. What saved the day was his travel insurance policy that covered medical emergencies such as this!

As more and more people [including the elderly and those with prior medical problems] travel abroad for work, leisure and education, the probability of a mishap during the trip can’t be ruled out. Hence purchasing a travel insurance plan that offers adequate cover for a range of medical and non-medical problems is the ticket to a tension free holiday. It is crucial to note that the mediclaim policy that you own in India annuls when you are on foreign soil.

While travel insurance is becoming mandatory for trips to an increasing number of countries, you should purchase it for your own safety even when travelling to destinations that haven’t made it mandatory.

What is covered

All travel insurance policies offer protection against medical and dental emergencies and accidental death and dismemberment. Some may even have provision for a daily cash allowance in case of hospitalisation. Most travel insurance policies also provide you compensation in case of a host of non-medical mishaps—cancelled flight, missed connecting flight, loss of checked baggage, delays, loss of passport and cancellation of trip. Some also provide assistance in case you face a financial emergency abroad. Many policies these days go as far as providing facilities for evacuation in case of a medical emergency and repatriation of mortal remains.
To acquaint yourself with exactly what is covered, you should go through the fine print of the policy document, as the details vary from one policy to another. With the entry of private insurers, the plain-vanilla overseas travel insurance of the past is now being overhauled and several innovative features are being added. For instance, frequent business travellers now have the option of buying a year-long policy that covers several trips. Students going abroad for education can now, for a fee, get a cover that compensates them for their advance tuition fee in case their studies get interrupted due to an illness. Another feature they can avail of is the sponsor protection cover. Where the policy pays their remaining tuition fee if the student’s sponsor either dies or is permanently disabled.

Many insurers also offer what is called a compassionate visit cover. If a student falls ill during his tenure abroad and is hospitalised for more than a week, this cover will pay for the return ticket and boarding of one family member, so that someone is able to pay a visit to the ill. Students going abroad for pilot training can also buy in-flight insurance cover. Payment of an additional premium can, in addition, cover the student for mental and nervous disorders, alcoholism, drug dependency and sport injuries. Responding to demand from high net worth individuals, insurers have now also begun to provide cover for adventure sports. Some family covers also offer insurance for children below a certain age at zero cost.

[contd.]

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At the other end of town, Sumit Varma, a business owner in his late 40s had a similar worry. His sales were down 60 per cent, clients were delaying payments, his inventory was piling up and cash flows were in deep trouble. Having made good money in the last few years, Sumit felt that the party would last forever.

These are not isolated incidents and are slowly becoming the norm as Corporate India feels the pain of the global economic meltdown. Several Indian workers are laid off everyday, but these layoffs do not make headlines.

This will pass

Losing a job or suffering a major business loss can be very traumatic for people who haven’t experienced it earlier. There is a feeling of lost hope and often people start losing confidence in themselves. One can, however, certainly bounce back from such events just as many successful people have. These are temporary setbacks that can be overcome.

Damage control

The first step is to overcome the emotional imbalance and stress that you might be experiencing now. This is easier said than done and most people go through several phases of panic, fear, guilt and anger. Once you have accepted the reality as a challenge, the second step is to take stock of where you are financially.

You might have to survive the next several months without an income and hence must discuss your finances openly with your spouse. Evaluate your overall financial needs, current situation and then prioritise expenses. If your spouse is working, there is some respite because of his / her income. But remember that it could take more time for you to get a job in these economic challenging times than in boom times.

Some things you should do:

• Take an inventory of employer benefits you may have. This could be in the form of a provident gund, gratuity, pending reimbursements or any severance benefits.

• Calculate your net worth. Write down all your assets namely cash, savings account balance, fixed deposits, bonds, stocks, mutual funds, post office investments, real estate [excluding residence], gold and other investments. Write down all your liabilities. Then, subtract liabilities from your assets to arrive at your net worth. List all assets that can be liquidated. Once you are clear about how much you have and the assets you can liquidate, you can comfortably create a survival budget for the next 6 – 12 months.
• Understand your mandatory and variable expenses and reduce discretionary expenses by as much as you can. Some expenses such as food, insurance, school or college fees, house maintenance, and utilities cannot be minimised. However, you can curtail expenses such as dining out, entertainment, vacations and shopping until you achieve financial stability again.
• Review your medical, life insurance, disability and property insurances. Do not stop your medical insurance. One of the foolish things people do in such times is to let their policies lapse. Hospitalisation during such times is the last thing you want and you must have a solid medical cover in place in case that happens. Take a medical cover of at least Rs 5 lakh now if you have not taken it earlier. Buy a term plan, a pure risk cover plan, to cover all your liabilities and your family’s income need. Likewise, if you are paying very high premiums on investment-oriented policies, you should decide unemotionally whether you should continue them. Cut your losses, now [surrender the policies] or make the policies paid-up if they are low return and are causing a drain on your cash flows. At the same time, do not think of insurance as an expense but as something that you must adequately have during such uncertain times.
• Examine all sources of funding in case of shortfalls. Family [parents and siblings], friends, banks, and financial institutions are sources of emergency funding. If you do not have any loans, you might be in a position to tide the downturn better as you can always borrow against your home if not against other assets. If you have several loans and no savings, then it’s best to tap family members [if this is a choice] and banks to see if you can get sufficient firepower to last the next one year. Pay out a generous interest rate to your family, once you are out of this mess. See if you should be selling your second car or some jewellery to raise emergency funds. These are extreme steps, to be taken only in case you cannot resort to other options.
• Tap all sources for a job. There is no need to hide such facts from family and friends. In fact, if people know about this situation, they can help you find a job quickly or to start your own business [yes you read it right]. Starting a business, however, can be even tougher as you would now have to manage your personal expenses and your business expenses too. So evaluate this option carefully and do not be emotional about starting something in very uncertain times. This is also a time to introspect on the kind of career you want and it’s quite possible that you change tracks and get into a different field. If need be, start working part-time.

Don’t panic as this is only a temporary setback. Perseverance and a conscious effort to overcome this setback will guarantee success.

This was first published in the June 2009 issue of Complete Wellbeing

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Hence, I recommend that high net worth investors dedicate at least 10 – 20 per cent of their equity portfolio to foreign markets. Besides, the central bank too has now liberalised rules and allows individuals to invest up to $200,000 [INR1.11 crore] abroad, annually.

What to look for?

When investing in a foreign fund, make sure that the market you are investing in has low correlation with your domestic market [you can check out the correlation between the leading indices of the two markets].

Next, just as in the case of domestic funds, international funds too can be ranked as follows in increasing order of risk: large-cap value [lowest risk], large-cap- growth, mid and small cap-value and mid- and small-cap growth [highest risk]. Check out the style box of a fund: invest in one whose risk profile you are comfortable with.

Choosing from the Indian bouquet

When you look at the bouquet of international funds available in India, what strikes you right away is that the list is tilted heavily in favour of funds that invest in gold mining companies, metals, commodities, energy-related businesses, agri-businesses, and so on. All these funds belong to the genre of sector/thematic funds that have narrow investment mandates. You should at best have only a small exposure to these funds or avoid them altogether because they are risky [commodities as an asset class are more volatile with cycles that are longer and deeper than those of equities].

Give priority to diversified equity funds that have the mandate to invest globally. If you are going to invest in two international funds, it might be a good idea to go with one that invests in a developed world market and one that invests in an emerging market.

In India, there also exists a class of funds that invests partly in domestic equities [65 per cent or more] and partly in international equities. The advantage of these funds is that they get more favourable tax treatment. They are treated as equity funds [no tax on long-term capital gains].

Pure international funds, on the other hand, are treated at par with debt funds. The only thing to watch out for is that part of the portfolios of these funds will overlap with the portfolios of the domestic funds you already own. Another issue is whether they will give you adequate exposure to international stocks.

It is true that with many Indian companies venturing abroad, your investment portfolio already has some global exposure. Nonetheless, it has become important to consciously evaluate international funds in search of greater diversification and risk adjusted returns.

Know the risk

International investing is a dual bet. One, you invest on the international asset class [equities or commodities] that you have invested in at home. Two, it is also a bet on currency movement. If your domestic currency depreciates vis-a-vis the currency of the market that you have invested in, you will benefit. This is happening currently: most international funds have gained in recent months due to the rupee’s depreciation. On the other hand, if your domestic currency appreciates vis-a-vis the currency of the international fund you have invested in, your fund’s performance will suffer.

On currency fluctuation, Morningstar [the rating agency] advises that you should invest in a fund that follows a consistent policy on currency hedging. Either the fund should always hedge or it should never do so. The reason: academic studies have shown that over the long term, currency hedging has little impact on an international fund’s returns, though over the short term, it can have a considerable impact.

This was first published in the July 2012 issue of Complete Wellbeing.

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In May 2011 and again in June the same year, hackers broke into databases of a popular gaming company and stole millions of passwords of online gamers. In July this year, police in Sacramento, California, busted a gang that installed skimming devices at gas stations in the US. Whenever a customer swiped his card to purchase petrol, the vital details on the magnetic strip of his card would be captured by the skimming device. The gang would then use those details to create a clone of the original card and run up bills on the card owner’s accounts.

In a more benign instance, a student at a Delhi-based management school created a fake account of the Police Commissioner on a social networking site. He then used this account to offer advice to those who wrote to him. In another instance, an impostor created Nobel laureate and economist Amartya Sen’s account on Facebook which he then used to dispense political and economic views that were contrary to those held by the great man.

These are all instances of identity theft, where a criminal steals a victim’s critical information and then misuses it, either for financial gains or sometimes just for some frivolous thrill. This stolen information could include name, signature, phone numbers, address, bank account and credit card details, and more.

Identity thieves could also use your personal details to commit crimes and thus create a criminal record in your name. Thus, identity theft has emerged as a major threat to an individual’s financial as well as personal security.

Modus operandi

On the Internet there are legions of other ways employed to steal confidential information. Criminals could use trojans [a type of malware] that drop keyloggers on your computer. Keyloggers transfer to the hacker’s system your user names, passwords, credit card details, and bank account details as you enter them on your computer.

Another approach is email phishing. The victim receives an email whose header and design make it appear as if it has come from a bona fide organisation, for instance your bank. The email then directs you to a website that is also designed such as to appear similar to the design of the original organisation. At the site, you are encouraged to update critical information, such as your bank account number, password, and even credit card numbers. In reality, however, the site is fraudulent and has merely been set up to entice victims into surrendering information.

A similar approach to stealing information is also adopted over the phone. This is known as ‘vishing’. Here, the criminal may call you, posing as a bank [or any other organisation] employee and try to obtain information under the guise of performing verification on behalf of his organisation.

Does your child use your credit card to play video games online? That too renders you vulnerable to identity theft. Your child may visit sites that appear as gaming sites, but are mere fronts for stealing credit-card information.

Skimming,often happens at retail outlets. The salesperson under some pretext [most often citing that the machine is not working], takes your card out of your sight. He then swipes it in a skimmer, a hand-held device that can read the information on the magnetic strip of your credit card. Later that information could be used either at a place where the physical presence of your card is not required, say, for online purchases, or a clone of your card could be made. Thieves then apply for a change of address, and before you know it, run up vast bills in your name.

What can you do?

As the methods adopted by identity thieves grow more sophisticated, it might appear that victims are fighting a losing battle. To some extent, we are all susceptible to such crimes. Nonetheless, some of the precautions suggested below can keep you out of harm’s way.

Precautions you can take online

Invest in buying an original security software suite such as from Norton or Mcafee or QuickHeal. It has the ability to keep out malware, scan your emails and instant messages with anti-phishing tools, and warn you against mala fide websites and downloads. These software suites have firewalls that can detect trojans and worms and repel attacks by hackers. They can even encrypt data so that it doesn’t get stolen over a public wi-fi network.

Conduct all online transactions at well-known websites that offer data encryption facility [usually these sites state that they are protected by VeriSign or some other reputed firm that offers online security]. As far as possible, do not conduct transactions that require sensitive information while using public computers and public wi-fi networks.

Be wary of indiscriminately opening unsolicited emails. Most people have a large number of online accounts and passwords. A common mistake we all make is to use the same user name and password in all accounts. The problem with this is if one account gets hacked, it will render vulnerable all your other accounts as well.

As far as possible, avoid writing down your user names and passwords [or at least not at obvious places]. Instead commit them to memory. Also, avoid using common passwords such as names and birthdays of close relatives.

If you hold a number of credit cards and do a lot of online transacting, you could even consider buying an insurance policy from a general insurer. This will take care of liabilities arising from all your cards. Once you are covered, an alert sent to the insurance company [in case you feel your safety has been compromised] will block all your cards, thereby limiting your losses.

Register for mobile alerts with your bank and credit card issuer so that you are alerted at once if any transaction takes place in your bank account or card. If your address or mobile number changes, have this information updated. Make sure that you receive monthly statements both from your bank and credit card issuer. If these statements don’t arrive, follow up and make sure that they do. As soon as these statements arrive, scan them for transactions you may not have conducted.

Precautions you should take in the real world

Identity theft doesn’t just happen online; it takes place in the real world too. For instance, when you apply for a bank account, a mobile phone card, or a piped gas connection, you have to submit photo copies of documents as proof of identity and residence. Criminals, often in connivance with those in positions of authority, use these documents to gain benefits under a false name.

Not all identity thefts are high-tech. Many thieves use pretty old-fashioned approaches to steal vital information about the victim. They could lurk in and around public offices and look over your shoulder to steal personal information as you go about filling up an application form. Many go to garbage dumps and look for documents such as mailers from banks and credit card companies, ATM receipts and the like, to gather information about victims.

When you offer a photocopy of any documents, write the message, “This document is being submitted by … [your name] for the purchase of … [specify the purpose]” at a place within the document so that it can’t be reused by an impostor. Always shred all your vital papers before consigning them to the waste bin.

Over the telephone, never reveal vital information if you have not initiated the call and you do not know the person at the other end of the line.

While there are no guarantees, observing these simple precautions will, to a large extent, keep you safe against identity theft.

This article was first published in the September 2012 issue of Complete Wellbeing.

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