Best Personal Finance Blog in India - The Financial Literates

Retirement Expectations vs. Reality 2022

Hemant Beniwal

-

March 19, 2022

Retirement Expectations vs. Reality 2022

If you have crossed your thirties or forties, then sometimes you must have probably found yourself dreaming about post-retirement life. You might have questions like:

Where will you live – same home/city or somewhere else?
How much are you going to travel?
How are you going to spend and enjoy the luxuries?

Whatever dreams or Retirement expectations you have from your retirement, the reality is going to be much different. Everyone will have a different retirement story – with ups and downs.

Read – 8 Facts About Retirement

There are many studies that can help foretell the retired life in general and its financial implications in particular. Though these surveys were carried out in OECD countries, however, middle-class retirees face similar contradictions and dilemmas around the world. So, it is reasonable that some of these findings are applicable to retirees in India as much as they are to western middle-class retirees.

Retirement: Expectations vs. Reality Click to Tweet

Statistical facts about retirement and retirees- this will you give an idea about Retirement Expectations vs reality

The research by Morningstar shows that as people near their retirement, their estimates for the retirement corpus tend to be very different from what they were when they were younger. At an early age, people tend to underestimate the size of their corpus requirements by 23% to 40%.

The Mercer survey points that most salaried retirees receive between 50 to 55-percent of their last drawn salary as pension – a gap of at least 13% from what they expected to get.

The survey from Pew Research Center estimates that more than three-fourths of the people working today (age group 45-55) expect to continue to work for pay even after retirement. However, the same survey among retirees found that only 12% percent of the retirees are currently working, full-time (5%) or part-time (7%), as most of them were not able to continue a job or did not get one.

Check – Best Retirement Plans in India

The “expected” mean age to retire is 60-64 years in most economies, but in reality, the “actual” mean age of retirement was between 56-60.

The report from MO Deferred Comp on OECD employees found that only 40% of them were able to calculate, the amount of money they would need as retirement corpus and as their post-retirement monthly expenditure. Unfortunately, even among these, 75% of younger employees (age < 35-years) and more than 55% of middle and higher age groups (36-55 years) could not save & invest enough to reach their goal.

All around the OECD countries, the Pew Research Centre report suggests, 35% to 40% of employees were forced into early retirement due to retrenchments or medical reasons.

Almost half of the retirees underestimate their life expectancy by more than 2 years, and a fourth of them by more than 6 years – putting all their calculations in disarray!

More than half of the retirees in OECD countries have their pensions followed by Social Security as their main sources of income. But remember, in India, there is no pension for more than 95% of the workforce and no social security benefits. It means you have to fend for yourself and your dependent spouse!

In order to ease the inflationary pressure, retirees either start working again, or severely reduce their spending to a basic minimum – rent, utilities, medical expenses, food, and essential transport.

How do you plan your retirement?

Living the life.

Retirees expect to enjoy at least the same standard of living as before. Many expect it to be better than earlier, as they would have more time on their hands. But health is one of the main concerns that restricts most seniors from pursuing their interests after retirement. So, keeping yourself in great shape must be on the top of your list if you want to live the life king- or queen-size after retirement.

Wish to leave an inheritance!

Many senior citizens continue to save throughout their retirement – even the retirees not earning anything, save by living frugally. Most retirees also tend to keep their monies in low-interest savings accounts, bank FDs, post-office deposits, and low-yield insurance products.

This has more to do with their life-long habit of saving and living for the future, rather than anything else. Only a few retirees – less than 20-percent – make a conscious effort to save to leave an inheritance for their family.

You may retire sooner than you wish for.

The Transamerica Retirement Survey indicated that a majority of employees above 50-year age assume that they would be working at least until 65-years of age. But the annual survey when done a few years later found that unforeseen events – a layoff, your own health, or the need for full-time care in the family – forced many of them to retire earlier.

Your spending patterns may change.

As you grow older, many familial responsibilities are now things of the past. There would be lesser expenditure on food and clothing but more on outings with family & friends and medical needs. The things that would be your most essential expenditures, will have a higher rate of inflation than those having a lesser priority.

Read – Steps for Happy Retirement

Medical insurance will not cover all your medical needs.

As you age there will be more medical attention that you will need. If you have continued your health insurance then it will cover all major procedures and hospital admissions, but there will be many attendant expenses that are not covered by it. For example, taxi fares each time you see a doctor or buy medicine.

Alternative healing systems and home care are also not admissible by most insurance plans. Plus, most of the health insurance plans have co-pay and deductibles as at the time of buying them we went with a plan with less premium rather than more features!

The longevity risk.

According to World Bank, At the time of independence, the life expectancy in India was around 31 years that has increased to close to 70 years in 2018. As life expectancy increases, your expenditure under every head – medical care, rent or property maintenance, transport, food, utilities, outings, etc. – would stretch your resources substantially. Many retirees have to start looking for work in the middle of their retirement so that can supplement their pensions!

Need for special care.

For some retirees, retirement is synonymous with assisted living and/or needing constant medical supervision. India now offers some great assisted living facilities and retirement communities, where you can move. But these retirement communities also come at a substantial cost.

Read – Retirement Thumb Rules

Retirement Planning

It is impossible to foretell how your retirement would turn out to be, but with a retire plan, you can control its broad direction. There are many myths around retirement, but you do not have to go completely blindfolded into this phase of your life. With open eyes, awareness, and financial planning moving into retirement can be an enjoyable experience rather than a leap of faith.

You must be flexible with your retirement plans to provide for contingencies and an experienced financial advisor and professional can help you with it. The key is to start early and to invest in a portfolio of investment options that are secure, diversified as well as have growth potential.

You can set up investments into different retirement plans such as those from insurance companies, NPS, or buy an annuity. You could also build a portfolio using debt and/or equity mutual funds for more diversification and growth.

A financial advisor works on many variables with you to arrive at a decent retirement corpus and monthly expense figures. These variables – like income-replacement Rate, anticipated retirement age, life expectancy, expected rate of return & inflation, and savings rate – can be intimidating without the handholding from a professional.

So, contact us for any of your retirement worries, bust myths, and creating a plan.

if you any question add into the comment section regarding Retirement Expectation or any other question you have.

8 Facts About Retirement Planning You May Not Have Known

Financial Planning

Hemant Beniwal

-

March 16, 2022

8

8 Facts About Retirement Planning You May Not Have Known

Retirement is an important phase in everyone’s life. There are sweeping changes that can overwhelm you if you are not prepared for it.

Before retirement, different aspects of life such as finances, health, time, and activities have to be planned for. Most people do not plan for retirement in the right way.

Here are a few facts about retirement planning that are forgotten to be considered in the financial plan –

Read- Retirement Planning Vs Child Future Planning

8 Facts About Retirement Planning You May Not Have Known

1. Forget Retirement – Target Financial Freedom

Retirement is not about age. If you have a decent amount to take care of your day-to-day needs & other goals you can be financially free. I will suggest you read this post-financial freedom tips

2. Health Insurance Vs Medical Corpus

When you are working, the employer might cover your health insurance needs.

But post–retirement, you have to take care of it yourself. It is more important as you grow older, but tougher to get.

Your insurance need gets rejected or you get it at a high premium. Most times, pre-existing illnesses are not covered or covered only after a few years of the policy issue. Buy a comprehensive health insurance product and remember to be consistent about the premiums.

8 Facts About Retirement Planning You May Not Have Known Click to Tweet

Few people think that they should create a medical corpus & that should be good enough. Not really if you encounter with a serious illness in the early years of your retirement. Medical corpus is required to cover things over & above your insurance.

Work on maintaining your health both physically and mentally so that you can have a peaceful life when you are retired.

Read – Steps of Happy Retirement

3. Life Insurance is Lottery Ticket after Retirement

When you are an earning member with dependents, it is imperative to have life insurance.

Once you have retired, there are other aspects to look at. If your family members are financially self-sufficient, it is not really required. If you have a huge debt (normally you should retire all your debts before retiring), then a policy may make sense. The proceeds can help to pay off the debt either in full or in part and your family members will not be burdened with it.

If your family depends on your pension (which will stop in case if you are not around), then some amount of life insurance is good. Some of us may have many insurance policies. It is a good idea to consolidate multiple insurance policies and continue with only those that are useful.

If you do not have debt and family members are financially independent, it does not make sense to have life insurance post-retirement. You can use that money elsewhere.

If you have sufficient assets to take care of your retirement need – life insurance is just a lottery ticket for your family members & should be avoided.

4. Products in Retirement are Different

When you are young, you invest in different kinds of products like PPF, EPF, Equity, Mutual Funds, Real estate, etc. You have many goals and a long future ahead. You want to create wealth, earn income and save taxes.

So you invest in more accumulation-oriented products than distribution-oriented investment options.

When you are retired, you would want regular income from your investments. You want more liquid assets. Therefore your portfolio should be skewed towards distribution-oriented products. These products include senior citizens’ savings schemes, lesser real estate & maybe annuity if you are ready to understand the complexities.

Liquidity in your investment products is a must in retirement – it gives a sense of confidence.

Check – Best Retirement Plans in India

5. Asset Allocation after my retirement

The portfolio composition has to be in tune with the changes in your life. When you are younger and have fewer financial commitments, you can have an aggressive portfolio where the risk-reward ratio is high.

At the same time, you have to invest such that you will have a corpus to fulfill your financial goals like buying a house or ensuring a comfortable retirement. Invest early on so that the money you earned in the form of interest and dividends also gets invested and earns more money.

Due to medical advances, life expectancy is on a rising trend and therefore you have to have a portfolio that provides you with income throughout your retirement years. You need to have equity-oriented investments in your portfolio to beat inflation and build a good corpus.

The equity portion will have to reduce over a period of time as your age increases. Do you have sufficient assets for retirement & want to leave a large estate for your children? If yes, then you have to invest suitably to get higher returns and more growth. Which means you may want to continue to invest a larger portion of your portfolio in equity-oriented assets.

Ask Yourself – Is 1 Crore Enough for Retirement?

6. Review of Portfolio

Many people have the same investments at 50 that they had when they were 30 years old. You are most likely to be in different stages of life at 30 and 50 and so your portfolio should suit the stage of life.

Review your portfolio regularly and tweak it to suit your goals and current financial situation.

7. Regrets in Retirement

Here are some regrets/wishes that people have shared about retirement –

I wish I had taken health insurance before. Now I have to buy at very high premiums.
I should have continued to work for some more years. I would have earned more and had a sense of purpose in life.
I should have planned my retirement better rather than thinking I would work till I am 58.

8. Goals after Retirement Age

What about a foreign trip or a long cruise to Alaska that you always wanted. What about the birthday celebration of your grandchild or gift to a needy in the family or charity to any organization.

So don’t think that you will not require additional money than the day-to-day expenses.

We have years of experience in Financial & Retirement Planning. We will help you get the most of your Retirement.

Don’t just Retire. Live a Happy and Healthy Retired Life.

Contact us Today

Plan your retirement properly. Changes in life keep happening. You have to ensure that you are financially independent in the golden age of your life.

Health Insurance Portability In India- All You Need To Know

Insurance Planning

Hemant Beniwal

-

March 10, 2022

30

Health Insurance Portability In India- All You Need To Know

These days Health Insurance is equally important as Good Health – IRDA has announced the Health Insurance Portability In India and accountability act of 1996 – HIPAA to make the product even better in India. In this article, You can read

What does the portability of health insurance mean for you?
What are the Benefits of health insurance portability?
How does health insurance portability work?
What is the process of health insurance portability?
What about pre-existing conditions?
Group insurance portability is possible or not?
And rules, requirements, reviews…

Read –How Much Health Insurance Do I Need?

Health Insurance Portability In India – Joy for People

Expenses are one of the biggest reasons but there is one more reason – What if funds of your insurance company are not performing. You have to stick to a single company as it is a long contract & keep losing on returns.

Similarly, in the case of health insurance, it was not a win-win situation if you moved to the new insurer – as gains were lower than losses you incurred on shifting. But from 1st October 2011, if the person is not satisfied with the services or product offering of the existing health insurer, he can change the company without losing policy benefits.

Must Read – What is Insurance?

Why Health Insurance is so important

My daughter was asked in her HKG class “How does car run?” – and you can guess what she answered in a single word. But let me ask it another way round to you “Why car will not run?” – and now there can be a number of reasons – no fuel, engine chocked, windshield got broke, puncture, the bumper is down, its night but headlamps not working & some external factors like strike, roadblock, lost keys of garage…. So when something cannot happen there are internal and external factors enabling (or not enabling) for this.

What is Health Insurance Portability in India and Their Process & Benefits? Click to Tweet

Now if I ask you a similar question “How Man Runs?” – again a single word answer but “Why Man will not Run?” and you will again have a long list from a small thing as a headache to a bigger one like a cardio stroke which is internal factors. And you have some external factors also attached to this question like an accident. Internal & external factors related to the human body can be covered financially through mediclaim. (to some extent) So if you are in good health that does not mean you don’t need Insurance – what about external factors on which you don’t have any control. insurance aims that one can access the best health care without fearing the financial strain, it helps people to have peace in mind rather than to have fear.

What is the Health Insurance Portability?

What does health insurance portability mean for you? Portability means transferring your existing health insurance policy to a new insurer – without losing any of the benefits that your current health insurer provides. Credit Gained that can be transferred from one insurer to another includes waiting periods; waiting periods of pre-existing diseases or time-bound exclusions. Portability is allowed to all individual and family floater health insurance policies issued by all general insurance & health insurance companies.

Check – Religare Care versus Apollo Optima Restore Health Insurance

Health Insurance Portability Benefits for existing policyholders

You can expect good services from all insurers.
Better claim settlements from all companies.
New upgraded insurance products.
Definitely lower or competitive premiums.
Portability will ensure that accrued benefits (including waiting periods; waiting period of pre-existing diseases or time-bound exclusions) are transferred at par to the new insurer at the time of porting and you do not lose on these benefits while switching insurers.
The direction is given by IRDA to insurers that it is essential to protect the policyholders against the discontinuity and consequential loss of pre-existing disease cover by making the insurance plans portable across the insurance companies.
Another benefit for the pre-existing disease is waiting period to be carried forward i.e. if a pre-existing disease is being covered by a company is three years and the policyholders are with the company for two years, then for the new insurance company, the waiting period will cover the pre-existing period within one year. (If New insurance company also cover the same disease in three years)
Earlier there was a compulsory waiting period of 30 days to get benefits from the insurance policy – which is gone now in case if you shift the policy.
A cumulative bonus can also be transferred in health insurance portability.
In group health insurance portability – after seeing the medical history & claims the insurer can provide the individual health insurance and this will be available for portability after one year. (Now you don’t have to worry much about – “Should you buy mediclaim even if your employer is covering you”)

Read- Best Medical Insurance for Parents

Process of Health Insurance Portability

You have to apply to a new insurance company at least 45 days before the policy renewal date of a current insurance policy.
You have to fill new insurance company proposal form along with the portability form.
New insurance company within 7 Days will ask the old health insurance company about the policyholder’s details that include medical history & claim Benefits.
New Insurance Company has the right to reject the proposal of a policyholder seeing the medical history & claim, but if in case of the health insurance company do not reject the proposal within 15 days it means that the proposal has been accepted.

Health Insurance Portability Requirements (differ from company to company)

Copy of the Last year’s Policy Schedule issued by the previous Insurer OR Renewal Notice.
Self-declaration by the customer regarding no claims made.
Question regarding previous and existing health insurance details in the Proposal Form should be mandatorily filled.
If there is a claim in the existing policy, then discharge summary, investigation, and follow-up report copies.
If there is past medical history, then consultation papers, prescription, investigation, treatment, and report copies.

Grey areas in Health Insurance Portability In India

Features of Insurance companies are very different.
There is a cooling-off period of 1 year.
You can shift to another company only at the time of renewal.
In case you want to shift your group mediclaim – you have to compulsorily move it to the same insurance company. After 1 year you can transfer it to any other insurance company.
For the preexisting disease, the new company can charge loading on the premiums.
Maternity benefits that are normally available in group health insurance policies may not be available if switched to an individual policy.
Loss of no claim bonus will be there for the policyholder who opts for portability – as some companies don’t provide any claim bonus or cumulative bonus.

What you should do now?

If you are not satisfied with the existing insurance policy or premiums – go & fire the existing company. Health insurance portability in India procedure is now smooth – take maximum benefit of it.

Please share if you have already decided to move to some other health insurance company. Where & Why?? If you have already done that add health insurance portability reviews in the comment section.

IT Notice- Top 7 Reasons You Can Get an Income Tax Notice

Tax Planning

Hemant Beniwal

-

March 9, 2022

6

IT Notice- Top 7 Reasons You Can Get an Income Tax Notice

You have paid all your taxes. You have filed your income tax returns diligently. Even then you get an income tax notice?! Before you cry foul, let us look at the reasons that you might have got one –

Learn: How to file Income tax – online

Top 7 Reasons you can get an Income Tax Notice

1. Incorrect details in the Income Tax Return

You should fill your income tax return document carefully entering correct details such as name, address, and PAN number. If there is any mistake in any of these details, you will be served a notice.

2. Mismatch in Actual Income and Declared Income

If there is a difference between the actual income you have earned and the income declared at the time of filing the returns, you can get a tax notice. You might not have done it on purpose. Since all financial transactions can be tracked and recorded, it is easy for income tax officials to spot discrepancies. (must share any interest you have earned even if TDS was deducted, capital gains even if that’s a small number, tax-free or dividend income)

Read: How Can Your Family Help You Reduce Tax Liability?

3. You have only paid the tax but not filed your returns

Are you sure you filed your returns? Paying taxes and filing returns are two different things. If you have only paid the tax but not filed the returns, the tax department might send you a notice. You have to file tax returns even for your company which has made losses during that financial year. Some people just file the return online. That is not the end of the process. You have to submit the ITRV within 120 days of uploading the returns. Some people file the returns after the due date. Delays may lead to penalties. In such cases, you can get a notice from the IT department.

7 reasons you can get an Income Tax Notice Click to Tweet

4. Sudden changes in income or investment levels or high-value transactions

If there is a sudden significant drop in income or a sudden sharp increase in income levels, the tax department will be on high alert. If you have purchased real estate property or assets of very high value or there are many high-value transactions in your bank account, the income tax department can get curious and send you a notice. High-value transactions can include cash deposits greater than Rs. 10,00,000 in a year or credit card purchases worth greater than Rs. 20,00,000 per year etc. If you make too many investments in your spouse’s name or child’s name, the income earned will be considered as your income and it should be included while assessing total income to be taxed. If this income is missing from your returns, you may get a notice.

Read: How to save capital gain tax on property

5. Discrepancies in TDS

TDS can be deposited by the employer, bank where you have fixed deposits, a bond issuer whose bonds you have invested in. If there are some mistakes in the TDS deducted and the incomes and interest that you have earned, you are likely to get a notice from the tax department. Sometimes the income in previous employment is not considered in the returns. If TDS is reflected in your Form 26AS, it can come to the notice of the department and they can question the same.

6. Unpaid tax on interest income

Unknowingly, you might have excluded certain interest income that you have received but since the interest is credited to your bank account or reinvested in your assets, it is easy for the department to trace it back to you and you can get a notice for non-payment on tax.

7. Investigation Purpose

The IT department is always looking at widening the tax net and wants to make sure all people earning income are assessed. They also want to ensure strict compliance. Therefore, they can send notices to random people. (If you were resident Indian in the last year & became NRI in the Current financial year – chances of getting noticed is very high)

We have shared the most common reasons, please share your experience –

I will update the post based on your input.

What Next

If you get an income tax notice, you need not panic. You should find the reason for the notice and take the appropriate step to satisfy the notice. You can either submit the necessary documentation or refile the returns after making the necessary corrections. If you have been asked to be present in front of a tax official while filing returns, you should do so or authorize a tax expert to handle the case. He/She should have a valid power of attorney. If you think the notice is erroneous, you should respond appropriately with the necessary proof. It is important to respond to notices else the penalty and interest keep increasing.

Incorrect filing of returns is an offense. You can be charged penalties or even face imprisonment. Ignoring income tax notices takes time, money, and effort in the long run. Therefore you should ensure that you file your returns correctly and respond to income tax notices if any, in the right manner.

What Are The Benefits of Mutual Fund In India?

Mutual Fund

Hemant Beniwal

-

March 7, 2022

11

What Are The Benefits of Mutual Fund In India?

We had earlier written that almost all financial Investments available today are in the from of Mutual Funds. Mutual Funds, as we described are basically on OUTSOURCING AGENCY where we give them our money to manage as they are more specialized and they charge a fee to manage it.

Check – Long Term and Short Term Investments

Now there are certain benefits of mutual fund in India:

1. Professional Management

Fund Managers handling your money are those people who have a thorough knowledge and immense experience in the field of the Financial Market. There is always a team of people who look after investments. There are processes and research-based investment is done both in the bond/ Debt and Equity market. If you were to look at the average return based on various Equity Funds and the return generated by the overall market, you will find that Fund Managers have done their job well and they have given a better return that the overall market in long run.

2. Diversification

Diversification is needed for the safety and stability of your investment portfolio. Since Mutual Fund is pool money and through this pool, a manager invests in various stock and securities, it gives the benefit of diversification to the common investor. He/ She just to invest in the common pool and thru this pool, diversification can be done. For Individual investors. it is not possible to have diversification in a real sense as the amount of investment is often too small to buy different securities.

3. Low Cost

Going by train is going to be always cheaper than going by your own vehicle. The same rule applies to Mutual Funds as well. Since they deal with a huge amount of money pooled by thousand of investors, their cost of handling comes down. Economies of Large scale pull the cost of handling money too much low levels.

Check- What are structured products

4. Systematic or one-time investment

When it comes to mutual fund investment, there are a variety of options to choose from depending on your budget and convenience. For example, if you have less money, starting a monthly or quarterly SIP in an equity fund may be a more suitable option. However, if you have a larger sum of money to invest, a one-time lumpsum investment in a debt fund may be more appropriate.

5. Flexibility

Since the investment in Mutual Funds is denominated in terms of UNITS, there is a lot of flexibility that you carry. You think of any permutation and combination of adjustment that you require, it can be done. For example, you can invest in parts, you can withdraw in parts, you can switch in parts to other schemes as well. In fact, there is no flexible investment tool other than Mutual Funds available for investors.

Must Read- 7 types of Indian investors which one are you

6. Liquidity

The investment done in Mutual Funds are always available for withdrawal except in the case of Tax Saving schemes and schemes that carry mandatory lock-in as its feature. the money can be withdrawn or redeemed just by singing a redemption and, money gets credited to your bank in 1-3 working days. In fact, we keep guiding investors that unless you require tax savings, don’t get into any schemes which lock your money. The fact of the matter is that manufacturers of financial products like insurance etc. come with lock-in products more for their benefits or for the benefits of agents.

7. Transparency

Transparency is the key benefit of investing in Mutual Funds. You as an investor would know where your money is invested, what is the value of their investment on the closure of each working day. The regulator SEBI has also mandated various other clauses which make mutual fund investment crystal clear. The charges levied are also clear which is the main concern for most of the investors.

8. Variety

There are plenty of options available for an investor to choose from. Depending on his time horizon, his needs, his return expectation, he can choose as per his objective. you have options in Debt, Equity, money market, Gold, ETF, International Market, and what not markets.

9. Tax Benefit

Tax benefits on Mutual Funds keep changing from time to time. According to taxation on mutual funds in the financial year, 2021-2022 few of the tax benefits are:

No long term gain tax on the sale of equity mutual fund (if your gains are below 1 lakh)
The benefit of indexation in the case of debt mutual fund
Lower long term gain tax in comparison to any other interest-bearing product

What are The Different Types of Financial Planning ?

Financial Planning

Hemant Beniwal

-

March 5, 2022

81

What are The Different Types of Financial Planning ?

What is Financial Planning?

Many times, you may have read the word What is Financial Planning? and you may have many complicated definitions as well. Hope you have watched “3 IDIOTS”. When Aamir was asked the definition of a machine, he said in simple language “Machine is anything that reduces human effort”. Similarly in simple language “Financial Planning is the process of meeting your life dreams/goals through the proper management of your finance.”

Check- Rules For Financial Planning

Dream of buying a new car, a dream house, getting your children married in style, or simply retiring early to Live Life King Size.

There are two ways you can deal with finance in your life:

1 Without Financial Planning wherein at some point time in future, you will have money and then you will decide how to use that for your goals.

2 With Financial planning, you decide well in advance what are your goals and how you will achieve them.

Financial Planning Gives you more clarity in life, it provides direction and meaning to your financial decision. It helps you to provide the right balance between your present and future lifestyle.

Financial Planning will answer three Important questions:

What are your financial goals?
Where you are today in relation to your goals?
How will you get from where you are today to your goals?

Why Financial Planning required?

No one plans to fail but people who don’t plan are surely making plans to fail.

Today, time is with you. But will you be able to continue at the same throughout your life? Will your income be the same forever? Will you be able to live on your own terms even after you retire? Answer these questions –

Understanding the Different Types of Financial Planning

Read about- How to Setting SMART Financial Goals – Complete Guide

Investment Planning:

Investment planning is one of the m major types of financial planning. Investment should be done in objectives and not products. If you are looking for long-term investments, then you may take high exposure of Equity and if your target is nearby, you should go for Debt. Investments are done in products which carry a name to itself like Smart Kid Plan, Jeevan Saathi Plan, Komal Jeevan, etc. are beneficial only for the agent or the manufacturer so that they can misguide you.

What is Financial Planning ? Click to Tweet

Retirement Planning:

Most people carry a myth that Retirement Planning is done if one has taken Pension Plan. Retirement Planning is a very vast subject and one has to evaluate factors like expected age, current lifestyle standard, Inflation, etc. It is the biggest component of Financial Planning as Your working period (Accumulation Phase) & Retirement period (Distribution Phase) are almost equal in the current context.

Child Future Planning:

It is done to secure your child’s future by arranging funds for his higher education and marriage. It should be started as soon as your child is born. The expenses for education and marriage are rising every day and you need to have a defined strategy to achieve these goals.

Tax Planning:

A fine is a tax for doing something wrong & a tax is a fine doing something right. Tax planning is integral part of financial planning and ignoring this can have a huge negative impact on your returns. With a Direct tax code in the picture, investors would need to plan not only at the time of making an investment but also at the time of maturity as well.

Must Check – Importance of Financial Planning in Your Life

Risk Management:

High Return comes with high risk. Most of the investors concentrate on returns whereas actually, we need to concentrate on Risk. Once you know how to manage risk, you automatically can increase the return with minimum risk.

Estate Planning:

Proper estate planning can help save unnecessary taxes and probate costs, providing peace of mind for you and your family.

Budget & Cash Flow Planning:

An analysis of your cash flow may help you uncover funds suitable for investment or other needs. As the saying goes, just when you’re about to make ends meet, someone moves the ends.

Insurance Planning:

You’ve worked hard to build a solid financial footing for you and your family, so it needs to be protected. Accidents and disasters can and do happen and if you aren’t adequately insured it could leave you in financial ruin. You need insurance to protect your life, your ability to earn income, your family’s hospitalization expense and to keep a roof over your head in troubling financial times.

FINANCIAL PLANNER

In India, the term ” Financial Planner” has been in vogue for quite some time now. In the absence of any local regulation or guidelines, anyone can call himself a “Financial Planner” Without having the necessary training, education, or certificates that certify their own people as Financial Planners. There are so many individuals who decide to start putting the term “Financial Planner” in their business cards leaving the public more confused.

The CERTIFIED FINANCIAL PLANNER marks are designed to readily identify CFP professionals to the public and to clearly distinguish between CFP professionals and other so-called Financial Planners. They are international marks owned outside the U.S. by Financial Planning Standards Board Ltd. Financial Planning Standards Board India is the marks licensing authority for the CFP marks in India, through agreement with FPSB.

Complete Guide – How Much Health Insurance Do I Need?

Insurance Planning

Hemant Beniwal

-

March 4, 2022

24

Complete Guide – How Much Health Insurance Do I Need?

With the substantial increase in medical cost & new developments in medical technology – it’s a very common question these days – How much Health Insurance do I need?

This question has become even more important after the launch of PMJAY – where the poor will get Rs 5 lakh health coverage.

With my 15 years experience of working with individuals on their financial plans – I am confident that most middle-class people are undercovered when it comes to health insurance In India.

Note – You can also get “How to choose health insurance – checklist” from the end of this post.

Read – Term Plan – the right way to take Life Insurance

How much Health Insurance do I need?

Unlike life insurance, there is no straight formula to assess how much insurance coverage you should have.

How much Health Insurance do I need in India? Click to Tweet

You need to understand the type of policies available and then match any of them with your perceived medical needs.

There are insurances plans tailored to meet various needs from those of a student to those of elderly people. Each of these is beneficial at different stages of your life cycle. So, you should evaluate plans according to the phase you are in.

4 Reasons to buy Health Insurance Do I Need?

Must Check – What is Insurance?

Identifying adequate health insurance coverage

Identifying health costs is the most difficult part of medical insurance as there is uncertainty regarding what type of illness may arise. But a reasonable assessment can be made based on the cost of medical treatment you might have to incur in the case of hospitalization.

Since the cost of medical treatment varies from city to city, the first level of assessment should be a hospital whose services you would avail in case hospitalization is required. So, think about the following before you decide how much health insurance you require:

Which hospital would be your first choice for treatment, if any medical emergency arises?
How much is the approximate cost of hospitalization there?

This will give you an estimate of your potential healthcare costs and should form the basis of your decision regarding how much health insurance coverage you need to purchase. There is always the chance that you will have to resort to bigger hospitals in case of a specific illness; so keep that in mind too.

While determining the quantum of health insurance you have to purchase, also consider the benefits already available to you through schemes like Group Insurance from your employer. All this will help you to reach the figure for the amount of coverage you will need while dealing with medical emergencies.

Watch This Video for Why you need health insurance?

Amount of health insurance required

Medical inflation is estimated at 15% in India. The prices of medical procedures and healthcare have been rising steadily. Therefore having health insurance is a basic requirement. The important point is to determine the amount of health insurance.

The following are factors to consider for health insurance –

Age – When you are in your 20s, you generally do not need a big cover. You can consider health insurance of Rs 2,00,000 to Rs. 3,00,000 for yourself and then increase it gradually as you enter your 30s and 40s. It is good to increase it by 10%-15% at intervals.

If you need to buy a health cover for your parents or spouse and children, then you should consider their age, lifestyle, and health. You can look for family floater plans.

Affordability – Health insurance premium is an important factor. You need to determine what how much you can afford. When you are in your 40s or 50s, it is important to have a substantial amount.

But if you cannot afford it is still better to buy a smaller cover as any financial assistance during a medical emergency is useful. Percentage of your income goes towards the premium.

Affordable Plans – Apollo Optima Super Top Up

Lifestyle – Do you have a healthy lifestyle or are you a person who has a high-stress life or has no time to exercise or follow a healthy diet? If your job entails traveling a lot, it might be difficult to have a regular exercise routine and you might have to eat unhealthy meals. In such cases, it is important to have a good amount of health coverage.

Family History – If your family has a history of obesity, diabetes, or any other such lifestyle disease, there are high chances of the next generations to get it. It is then important to have the right health cover.

Requirements – There are different types of policies other than simple health insurance. There are accident covers, senior citizens plans, critical illness insurance plans, etc. You have to determine your requirements and buy appropriately.

There are other factors too. If there have been high medical expenses in the past, it might make sense to take a substantial cover. If you want to ensure a certain hospital, a certain doctor or the type of patients facilities in hospitals, you need to make sure your health cover takes care of these requirements.

If you are employed, the employer might be offering you a group employment plan. Check its coverage and buy more insurance if required. It may not be very comprehensive and have limitations.

Read – Health Insurance for Parents

Minimum Health insurance required – thumb rule

If you are looking for a simple thumb rule –

You can consider that your sum assured should be sufficient to take care of artery bypass in a hospital of your standard. or
It can be 50% of your income – if you are earning Rs 15 Lakh, you can consider 7.5 Lakh Policy. or
It should be a minimum of Rs 5 Lakh.

Views of insurance experts on Health Insurance coverage

“A young family living in an urban area should be a floater cover of Rs10 Lakhs, supplemented with the maximum top-up available, taking the cover to around Rs 20-25 Lakhs.” Mahavir Chopra

“For a middle-class family, a minimum sum assured of Rs5 lakh is necessary. One can opt for a floater policy and if the parents are included the sum assured can be Rs 7.5 lakh. Over and above this a ‘top-up’ plan can be bought.” Nayan Shah

Here are a couple of health insurance plans and their premium amounts –

1) The Optima Restore Individual health insurance plan from HDFC Munich for a 35-year-old person living in Mumbai for a sum insured amount of Rs. 5,00,000 is Rs. 8,852 approx per annum including taxes.

2) SBI General has a family plan for 4 people living in Mumbai with the primary person of age 35 years and a sum insured amount of Rs. 5,00,000. The premium payable is Rs. 17265 approx.

Check – Apollo Restore Vs Religare Care Health Cover

It is important to assess the different factors and requirements before buying a plan as if you are unable to pay the premium, your plan will be discontinued.

Insurance is an important component of financial planning. It is best to treat it as financial protection rather than an expense to get the best benefits from it.

Hope this post gives you a good idea about how much medical insurance that you need.

Now answer my simple question and get “How to choose health insurance – checklist” that I published in my book Financial Life Planning.

How much health insurance (employer + separate policy) you have right now?

{If you can share the name of the plan, that will be great.}

Please, leave your answer below in the comment section. You will receive the free PDF with a checklist from my side.

If you have any other questions or suggestions regarding ‘How Much Health Insurance Do I Need’ – feel free to add them in the comment section.

7 Horrible Financial Planning Mistakes You’re Making

Financial Planning

Hemant Beniwal

-

March 4, 2022

0

7 Horrible Financial Planning Mistakes You’re Making

Financial planning is a long-term process. Additionally, many factors such as earning capacity, market conditions, family situations, mental framework play a key role in the financial plan and its execution.

Therefore, there is a chance that we make mistakes along the way. Let us look at some common but terrible mistakes and how to avoid them –

Check- Importance of Financial Planning

Common Financial Planning Mistakes

1) Meet every financial demand of the family

As the main income earner, it is difficult to refuse the financial needs of all family members – spouse, kids, parents. It seems rude to turn away a good friend’s request for a loan to set up their business or hospitalization. But you have to be practical. You have to keep your emotions at bay and evaluate how the expenditure or loan affects your financial plan. Even the little splurges on different needs of different family members on a regular basis amounts to a considerable sum.

Prioritize your financial goals and align your savings and expenses accordingly.

Must read- How to Choose Your Financial Advisor?

2) Procrastinate Financial Planning

Financial planning is not the most exciting task for most people. We try to wriggle out of it with reasons such as –

I have recently started earning.
I do not have much money. There is not much planning possible.
I have the plan in my head.

7 Horrible Mistakes You're Making With Financial Planning Click to Tweet

But the earlier you plan your finances, the better your financial life will be. It is imperative that you write down your financial plan. You will be able to estimate your expenditure and savings better. You will gear up to decide on your financial goals and also get an idea of how much money you need to achieve your financial goals. You will be prepared with steps to act upon to achieve your goals.

Must Read – 9 Little Ways to Save Money in India

3) Mix insurance and investment

Insurance is risk management. Investments are made to earn income and generate wealth. It is not smart to include premiums paid for health insurance and life insurance as part of your investments. Insurance policies support you financially during emergencies but do not add to your wealth. When you plan to buy insurance, the coverage and its applicability to you are more important than any other parameters insurers use to sell the product.

Moreover, it is unwise to skip on insurance and use that money for investments. For example, if you do not purchase health insurance but are hospitalized for some illness, you have to fork out a lot of money for medical treatment that will upset your finances. Remember to keep insurance and investment separate.

Check- What is Insurance- Investment or Expense?

4) Invest Without Planning

Many of us make ad hoc investments. We notice an advertisement in the newspaper or see colleagues investing in some instrument and go ahead and invest some money. It is not rational! It can cause losses or less than optimum returns.

We have to determine where to invest based on our needs, our risk capacity, and risk tolerance. We have to invest as per our asset allocation plan, as per returns expected and our investment timeline. Invest for your financial security as per the plan which has to be reviewed systematically.

5) Imitate Lifestyles of Others

Different people, different strokes! Some people lead extravagant life. Others save a lot of money. Your neighbor has the latest UHD TV. Your friend went on a luxury cruise. You are tempted to do the same. Ask yourself these questions

Do you need it?
Do you need to spend money just because of FOMO (Fear Of Missing Out)?
What do you truly want to be content?

Once you have answered these questions, you can decide if you want to spend money. Social pressure should not cause you to stretch your budget. Ensure that you have money conversations with your family, and you decide where to spend money as an integrated unit.

Check- The Biggest Problem with Financial Planning

6) Place Excessive Trust in Financial Experts

Financial experts know about planning finances, investment products, and market conditions. It is good to follow them to be aware of what is happening in the market.

It is great to have a financial planner to manage your finances and guide you towards financial freedom. But it is not prudent to follow experts blindly. Even if you have invested in the services of a financial planner, you should keep a track of your financial plan and engage in conversations with your financial planner so that you are aware of the plan and how your money is working for you.

Furthermore, the financial expert will also know about changes in your life and updates to your goals. He can use the information to plan your finances better.

7) Ignore Retirement Needs

People underestimate the amount needed for retirement or ignore the importance of planning for retirement. They think they have a lot of time to manage money for their retirement. They end up spending money on other goals and delay planning finances for retirement. But do remember that when you retire, you may not have a regular source of income but your expenses will relatively be the same. You will have to create a balance between today’s needs and your future requirements. For example, check out if a student loan makes sense for your child’s higher education rather than paying the fees upfront.

Moreover, the earlier you save and invest, the more you earn. The more you save and invest the more you earn. Do ensure to work towards a proper retirement plan so that your sunset years are enjoyable and comfortable.

Mistakes are a part of life. We learn a lot from mistakes but too many big financial missteps can jeopardize our financial life. Avoid these mistakes to get closer to achieving financial independence.

How Healthy Is Your Mutual Fund Portfolio?

Hemant Beniwal

-

March 3, 2022

0

How Healthy Is Your Mutual Fund Portfolio?

Do not put all your eggs in one basket.

~ Warren Buffet

The one thing that the COVID-19 pandemic has taught everyone is that HEALTH IS WEALTH. Health is not simply the absence of disease, though it is the necessary condition, it is a holistic approach towards life and a state of overall well-being…

With that goal in mind, we cannot restrict health to just a physiological aspect. For a dignified and healthy lifestyle, you need to be healthy physically, mentally, emotionally, socially, and economically!

Like your body needs regular visits to the doctor and medical check-ups, so does your portfolio of investments. The most important component of most portfolios, at least in the past two decades, is Mutual funds as they give an opportunity to diversify, expand, and still keep things simple.

Also Check: Portfolio Safety: Is Your Portfolio Risky?

Similarities in Medical check-up and Ideal Mutual Funds portfolio Health check-up

There are many similarities between a medical and an Ideal Mutual Fund portfolio India 2022 check-up:

Both need access to experts with training, experience, and specialized tool to run tests.
Both are required periodically and at intervals of 6 to 24 months, depending on age and previous conditions.
In emergency situations, both need immediate attention, any delay can cause more damage to their condition.
In both cases, the expert may recommend adjustments, rebalancing, and a plan to recover from the bad situation. Sometimes extreme measures like surgery are also suggested.

How Healthy Is Your Mutual Fund Portfolio? Click to Tweet

The Diagnostics

Asking the right questions will get you the right answers. Detailed Mutual Fund portfolio analysis will have the answer to these questions with clarity and objectivity:

Is your ideal Mutual fund portfolio in accordance with your risk profile?

People have a different risk profile that changes over time. The current risk profile is determined by an investor’s age, earnings, liabilities, investible surplus, and propensity to emotionally handle volatility.

As a thumb rule, for seniors above 50, it is better to have high-quality debt funds in their portfolio than more volatile equity funds. Even for a person in their 30s, a debt portfolio is recommended for a goal within a 2–3-year time horizon. Both cannot afford to lose to equity market fluctuations.

Is the Mutual fund portfolio en route to reach defined goals?

If you have equity MFs for a short-term goal, then you may very well see that you are about to reach the goal, and all of a sudden you may see a 30% drop in the fund NAV. This has happened very recently in March 2020. (and will happen every 3 years)

Or you may have a long-term goal with huge commitments, and you are taking the scooter of debt instead of taking the bullet train of equities to reach there. These and other anomalies can be found only by a periodic assessment.

Check –7 Things We All Hate About Mutual Funds

Does your portfolio protect you from the vagaries of the market?

Every asset class can be volatile or remain depressed for a prolonged period. Even the safest (perception) of the two asset classes – real estate and gold – have made movements in the range of ±10% and ±25%, respectively, in the past two decades. The yields on government debt have fluctuated like never before in the same period.

A risk-adjusted combination of multiple assets from different classes will make your overall portfolio less volatile and protect you against sudden losses.

Is my portfolio diversified or focused?

Diversification is your best bet against market volatility. But most of the schemes in a typical Mutual Fund portfolio may seem to be clones or at least twins of each other. One could not even call the portfolio focused; a focused portfolio should have not more than 20-25 securities. (when it comes to funds it should be 8-10 funds) Neither can it be called an index strategy – the high expense ratio does not allow that.

As you ‘collect’ MF schemes over the years, their sheer number may trick you into believing that it is fairly diversified when actually it is not.

Also Check: Risk in Mutual Fund that you may not Know

Incorrect way of diversifying

Having too many funds is not diversification, rather it means, when you start a new SIP or buy a fund, it should add sectors, asset classes, and securities to your portfolio that were earlier missing or underrepresented.

SEBI’s new categorization rules make this simple to understand. For long-term goals if you invest in a mid-cap fund, then their universe is fairly small – only 150. As all mid-cap funds must invest 65% of their AUM in these stocks, their portfolios will overlap. So multiple mid-cap funds will not likely add to your diversification.

If your asset mix is in-line with life?

Everything has a shelf-life, and the best Mutual Fund portfolio in India isn’t an exception. The portfolio of your 30s is most definitely not working in your favor now. A balanced asset mix will have real estate, gold, liquid assets, debt, and stocks.

If your portfolio does not adjust to changes in life, then what worked yesterday may not work tomorrow. Periodic rebalancing will also introduce you to Gold ETFs or SGB, and REITs, to give you the alpha with stability.

Must Read – Should I Invest in LIC IPO and Other IPOs

Is your Mutual Fund portfolio protected from elements?

Our bodies and portfolios both need constant protection from external elements. Financially, elements mean unpredictable external factors that have a bearing on our returns and sometimes on the capital.

COVID-19 pandemic was one such outlier and brought with it rounds of interest rate cuts. Senior citizens were found in a tight spot who had only their interest income to fall back upon. Financial frauds like those in DHFL, Sahara, or IL&FS could be catastrophic for their retail investors. And sudden stock market crash could wipe out your entire life savings.

Is your portfolio sitting on the landmine of hidden risks?

Warren Buffet famously said, “take care of your losers, the winners can take care of themselves.”

If your MF portfolio is secured against worst-case scenarios – a drop of 40% in equities, or a moratorium on interest payments on the debt you hold – then you have taken care of your losers. As time goes by, the risk-taking ability changes and requires periodic stress-testing. It’s like a treadmill test or TMT, to check endurance and stamina.

Investors may be color-blind towards some systemic risks for which financial advisors get special training. This happened again with Yes bank where almost 25% of its loan book consisted of toxic assets, according to reports. The biggest losers were the retail investors of debt MFs holding its AT1 bonds, which were (mis)sold to them as “superior FDs.”

Also Check: ESG Funds- The Change that is Going to Last

Is the fund churning for the sake of churning?

There are funds with churn ratio of 5% & there are few with even 100%.

If you have a well-researched list of securities to invest in beforehand with sufficient margins built into the price, then your portfolio churning is not needed. This is true for both retail investors and the largest MF houses. Buying into the fad, buying for the sake of it, and worst of all buying to justify added commissions and high expense ratios, are all the more reasons to avoid a fund.

Concluding Remarks and R_x

The common misconception about mutual funds is “fit-it, forget-it” – that once you buy or start investing in a scheme, there’s nothing more to be done. They will reach their financial goals in autopilot mode! But, if you continue to ignore your health – physical and financial – then it doesn’t matter, how well do you eat, there will be consequences.

If you want to discuss the health of your investment portfolio –talk to us.

Now you know about the healthy Mutual Fund portfolio. Next article we can discuss how to build an ideal Mutual Fund portfolio? If you have any questions – add them in the comment section.

10 Questions if you are on the Path of Do It Yourself Investing

Hemant Beniwal

-

March 3, 2022

21

10 Questions if you are on the Path of Do It Yourself Investing

Don’t “do it yourself” when it comes to Investing.

If you or anyone in the personal finance fraternity feel I am crossing the line, so be it… Shoot me…

When websites and pundits are all of a view that do-it-yourself investing is way ahead, I am totally against it. In my experience, attained in one and a half decades of managing personal finances for all kinds of investors – I again proclaim.

“DIY is not for managing finances and investments…

Simply, it doesn’t work.”

Check this list – why people avoid financial planning?

This time it’s different!!

In the age of the Internet and overload of information, we want to do everything ourselves – make our own furniture, learn guitar, medicate a pet or create a masterpiece. Do It Yourself or DIY Investments is the flavor of the world & India is not behind. Few people have already started or are thinking of following DIY investing. They feel they can manage their DIY investments by reading pages on financial websites or blogs and reach their financial goals. There are other reasons in favor too. Some people do not want to share their financial position with strangers. Some do not like to take the advice of others, as they think they cannot go wrong. Some think, they want to keep it simple and manage with a few investment products and do not want to get into a long-term agreement with professional advisors.

Few others just google how to invest, what is equity, invest money, best investment, best mutual fund, best sip, online investment, portfolio management tricks, mutual fund taxation, NPS, NRI tips, insurance reviews…. & think they are now experts. It’s good to learn but is it really good for your financial life to do it yourself??

You may see me as an interested party, which is true, so take this post with a pinch of salt, but read it with an open mind. It is going to be a bit long so have patience & read till the end – if you can’t, don’t even think of DIY.

It is good to learn to manage your investments but it may not be in your best financial interests to do it yourself when it comes to your money. Honestly answer my questions:

1. Do you understand the complete financial puzzle?

Personal Finance has different components to be managed – Personal finance planning is not just about choosing the top-performing products in different investment types and investing money in them. Financial planning consists of the identification of life goals, asset allocation, debt management, tax management, wealth management, estate management, retirement and health planning, etc, or in a simple word a complex puzzle. You have to look at all these aspects and manage your financial life using a holistic approach. It is a long story from beginning to end, and it needs to end on a happy note. It is like part one of Bahubali… Can you not see or ignore the upcoming part 2. It is not easy to do this on a regular basis in a long term. You take your car to a service center for servicing and maintenance or go to the doctor when you are unwell, so don’t you agree it may be better to get professional advice on financial planning.

2. How much is your time worth?

Investing & managing financial life involves a lot of time and effort – You need to spend the time to look at your investments, rebalance your portfolio, read up on investment products and analyze if they suit your financial needs. You need to be aware of the market, your investments, and how economic conditions can affect your investments. You have to be aware of changing taxation rules. Do you have plenty of time to read finance journals, DIY investments magazines, newsletters & books + doing independent research ignoring everything else?

10 Questions if you are on the Path of Do It Yourself Investing Click to Tweet

Changes in your personal life also affect financial planning and appropriate adjustments need to be made to the financial plan. You have to be on top of your DIY investments. Also, you need time to implement an investment decision. Will you be available 24/7 for your financial needs? Sometimes even if you want to invest time and effort, you will not be able to do it due to other commitments in life. If you do not focus on financial planning, then you might end up with a haphazard investment strategy that will not serve your best interests.

Too much focus on money and ignore other aspects of life – If we manage financial planning on our own, we spend up all our time on it. We might concentrate only on money. I have seen people thinking of money and reacting to money all the time. Money will become the driving factor in all life decisions which might not be the best way to make decisions. Quality of life can get affected. Don’t you think it might be better to have professional advice and follow up with the advisor on a regular basis?

3. Do you know who is your biggest enemy?

Will you be the same person when markets up and markets are down? when it comes to investing you are your biggest enemy – I am not saying this – Warren Buffett’s guru Benjamin Graham wrote this in his book (50 years back) Intelligent Investor “Indeed, the investor’s chief problem – and even his worst enemy – is likely to be himself.” When we are managing our own money or when it comes to reaching our financial goals, emotions come into play. We are afraid to take certain decisions. We are not ready to accept wrong decisions made. We might get greedy. Such emotions affect rational decision-making.

A few decades ago, no one talked about this. But the most important learning of studying financial cycles across the globe was found investors have not earned what markets delivered. What stopped them from making money?

Investing is not a Number Game, it is a “MIND GAME” – The behavioral aspect of investors – they got carried away and spoiled their investments. Some very basic mistakes that they made were:

They invested because a family member or a friend recommended it.
They bought without understanding the volatility the asset prices have.
They always watched the price first thing in the morning as they feared the rates will crash.
As soon as they saw promotions of some new thing they start selling existing assets to invest in the new one.
They earned a little bit in quick time so they sold to secure profits.
Any negative news created anxiety, and they are always ready to sell.
They had cash and when they heard NEW or safest, they just rushed to buy.
Job changed, so stopped investments for a while to start afresh later.
They just made up their mind every day to invest, but could not start.

The common emotional mistake is – Following GREED, FEAR & ANXIETY.

Common tendencies are to follow the herd (masses), being fearful and extra vigilant, resisting change, falling in love with bad assets, talking always about money, losing continuity, etc. In investing if you are part of any self-help group, you are just part of HERD – investing is an individual sport, played under the guidance of a coach. You can read about few cognitive errors here.

End result – Your finances take a bad shape.

4. How do you make DIY investment decisions?

What’s your investment policy or risk management & review process? – It’s true that wealth is built over a long time horizon but… Gardner plants a seed, he knows that it will take many years when this will become a tree. What he does all those years? It is not enough to invest in a few products and forget about them. It is important to regularly review the financial plan and DIY investments. There should be proper asset allocation at different stages of life. The investment portfolio may need rebalancing based on the performance of investment products and life situations.

Investment risk has to be managed properly as your risk profile might change in a few years. Regular monitoring with research and alerts is required. It may not be possible for you to undertake all these tasks on a regular basis.

Do you have an investment policy that can remain consistent in all kinds of weather?

5. What’s your qualification and experience to manage your financial life?

You may not like it but still, I have to ask what is your qualification & experience – because whenever I talk to a prospect that is one of the most common questions. An IQ of over 130 cannot help much in finance. Do you know- if you want to invest directly in mutual funds in Singapore you have to first qualify – based on your financial education, your experience, your knowledge? Finance is a complicated thing, a separate field. Let me ask can you work as an electrician at your home? Yes, you can think of changing a bulb but what about complete wiring or even regular stuff like repairing order appliances? So when we are talking about your complete life you think it’s simpler than that. In fact, DIY is just changing a bulb, a small-scale activity. But can you prosper just by small knick-knacks in personal finance? And most of the time DIY turns out to be “Destroy It Yourself”.

What will happen if your doctor tells you that your family member is suffering from Acute MI or Acute Myocardial Infection? Hmmm… So he simply says that “your patient got a heart attack” & he doesn’t tell you about n number of other things that he noticed. Why? because that’s not going to help you. Why you reach a doctor – why not search on the net & do it yourself?

Doctors are experts in the medical field but can they apply that in the investment world?

Even Chartered Accountants are not Financial Planner / Advisors.

Similarly, if financial advisor says end-of-quarter Hail Mary, window dressing, shirking, cold IPO buying, incubation, leaning for the tape kind of sneaky behaviors by few mutual funds can cost you 4% every year? Hmmm… but that doesn’t mean these things don’t exist. It’s part of the advisor’s education, knowledge & experience but he is dumbo he talks about your goals.

6. Do you know the difference between information and wisdom?

You may say YES! But do you know the distance between information & wisdom? When we are at the stage of information, we think that we know a lot but as we go up the ladder, we will realize that we know very little. And overconfidence at a lower level increases the chances of mistakes and those mistakes can be big enough to spoil a financial life. Famous Behavior Finance Author Jason Zweig ‏said “What you think you know could almost fill the universe. What you know is a few atoms of that.”

It’s important that we realize this today rather than when it is too late. Reading few articles in media or maybe a book or two or learning 5 quotes of Warren Buffett will not take you to the level of insight and wisdom. Some of us have a very good filing system – we read and file, but are the dots connected. Don’t you think an advisor who is in a position to discuss the financial lives of hundred people is in a better position to take decisions on your behalf or with you? His job is to connect the dots & show you the path.

7. Do you think media can be your financial advisor?

Let us try to judge media on a couple of points. First, do they really care about you or advertisers? And it’s not only about financial media or it’s not only about Indian media. You know, across the global media is biased towards a particular section. I don’t want to take names, but an India business newspaper clearly mentioned that if advertisers are not there you will be paying 25 rupees for the newspaper that you are getting for Rs 2.5/-. So they have no choice but to favor the guy who gives them 22.5 or 90% over the rest of the people.

Second, if you talk about their knowledge, be very frank most of them are not qualified. Most of them don’t have even basic knowledge of personal finance but they have good writing skills. Another important factor in knowledge is interactions with clients/investors – they have no clue about that. They write theory, which is far from practice.

In theory, 33% gain & 33% loss is one thing but in practice, it’s not. People hate to lose & in practice pain of losing 33% is like capital wipeout.

Ever wondered why news anchors on business channels just come in the morning hours and sit throughout the day trying to guide your trades? They speak to fund managers/analysts/traders and opinion-makers but still sit there and do not run to make money. The next day they follow the same routine again. So even the first-hand information doesn’t help much.

And the most important thing is, do they know you, do they know about your risk profile, do they know about your goals or resources – if not how can they advise? So it is really dangerous to depend on media for investment decisions.

Do you believe publications that depend on advertising revenue from manufacturers can render impartial and objective investment advice?

8. Do you think a good advisor can’t justify a 1% cost?

US research firm Dalbar yearly conducts a study where they compared investor returns with indices or funds. If you look at the numbers of last 30 years differences 3.79% vs 11.6% – more than 7%. I have seen many in Indian financial media who believe your advisor is useless – they show graphs if you are able to save 1% of the cost of advisor difference in 20-30 years will be few lakhs. Barron did a similar study from 1988 to 2008 – in 20 years US equity mutual funds generate 8.4% returns but investors got only 1.9%. If I plot this gap on the graph, the difference will be few crores or the biggest difference can be you will achieve your goals or not.

Vanguard: Working with an advisor can add about 3% in net returns – half of this contributed by behavior coaching.

What’s the total cost if you do it yourself? Compare it with if advisor charge 1% & help you in achieving just market return that will help you in achieving your goals. I am not saying finding a good advisor is an easy task but still it will be easier than doing it yourself.

Must Read – How much should an Indian Financial Planner charge?

9. Don’t you think a professional can make a difference?

One of the financial advisors Sapna Narang expressed this beautifully through her poetry:

What Do I Make?

What do I make asked the regulator

What do I make asked the press correspondent

What do I make, a percent or a half?

What do I make? oh! What do I make?

I make my clients believe in their dreams

I make the plans to achieve those dreams

I interpret their dreams as financial goals

I motivate & encourage them to reach those goals

I tell them stories to make them believe

I hold their hand when they disbelieve.

I show them how it can be done

SIP by SIP, year by year. Well begun is nearly done.

I walk with them through joys & grief

Plan for all and then give them a brief.

What do I make, they ask

And I proudly say, I make a difference !!

10. What’s the main role of any financial advisor?

If you think your financial Advisors main role is to identify the best funds, time the market or fill the form – I think you are wrong. Advisor’s main job is to stand between you and your mistakes. Recently I was talking to one of the prospects and he asked how you manage your money? I laughed, this is the first time somebody asked me this question – I told him that I have a financial planner. And now it was his turn to laugh. : )

Why I hire a financial planner? Because even I want to have a third person, who without involving emotions, can look at my financial situation and make suggestions. I am also doing financial planning and investment advice for two financial planners and a CA who is a Mutual Fund advisor. Recently one of my close friends won CNBC financial advisor award – he is after my life for many years that I manage his finance. (But it’s my policy that I will not manage money for my friends and family members but clients can become my friend)

So assuming that a financial planner does not need advice, is again a mistake. I think the role of financial Advisors should be understood in the right light.

Few more Questions

What else do you do to save some money? Do you grow your food? Stitch your own clothes? Build your own house? Do your own surgery? Fly a plane? Fight a lawsuit in court?

Who will save you from product manufacturers? Do you feel fund companies that sell to mass market care about you and understand your specific financial goals, time horizons, and risk tolerance?

Do you think 1408 points market fall on January 21, 2008, or almost 50% fall in 2008-09, didn’t concern you? Do you think 5-10 years’ bear markets will not pinch you?

Do you think Robots can advise humans? Do you know algorithms are logic-based not many investors are? Do you prefer being thought of as a computer entry rather than a person?

What if you go wrong in judgment – do you have an experienced auditor or someone who can cross-verify?

What should be the fees if someone helps you in achieving your retirement & child’s future goals?

I think the most important question is “WHY I am Investing?”

Knowing your WHY is not the only way to be financially successful,

but it is the only way to maintain lasting financial success.

So “START WITH WHY” & then talk about HOW & WHAT…

THINK

You might start enthusiastically, but the energy dies thereafter. After some time, personal finance planning tasks get ignored due to your job, family, travel, sickness, etc. In our office – we play TT & I was the unchallenged champion till a recent break. Due to small medical surgery, I was not able to play for 3-4 months. And when I rejoined, I realized that others are playing so well – I lost to most of them. WHY? You know the answer & you know the result…

We all know that we have to eat healthily, exercise regularly, etc. But most of us don’t follow these good habits regularly. Similarly, if we are not diligent with our investment strategy, there are chances of incurring losses. After all, you can always create a new painting if you do not like the one you made. But it is not possible to undo wrong investment & financial decisions without facing losses, you can’t use a time machine to go 5-10 years back. You can be involved with the professional financial advisor in the financial management process and take part in the decision-making. If you want to learn financial planning or are interested in investment strategies – learn & use that to collaborate with your advisor. THINK

I know you have a lot of counter questions to ask, arguments to make on do-it-yourself investing – the comment section is all yours…