04 October, 2014

People are like lemmings when it comes to property

This time, I’m dealing with a subject people love and would hate me for this piece – especially the ladies. We are talking about properties.

Apart from apparel & jewellery, another area which holds their fancy is properties. Women crave to have a home of their own. I have not understood that feeling, though. I have not even been able to convince my wife. But the craving for a home is overdone.

Since I have anyway embarked on a perilious mission, let me start lobbing the stink bombs! I’m going to bust some myths which have been used as props to buy properties.

1.       Good houses are very expensive to rent -   Have you tried buying good houses? Are they cheap? If they are unaffordable to the extent that you need to sell the family silver and take a king’s ransom as a loan, why don’t you just rent the house?

Most people can afford to rent decent houses rather than only living in the houses they can just about afford. Read this statement again. Therein lies the irony. Most people buy a matchbox like house as that is all they can afford. They pay EMIs most of their lives. And compromise on living in a decent house today.  They live their entire life in a dungeon when they could have rented out a good home, in a place of their choice, with a view they would have liked; they can even change the house, the area, the view when they get fed up with it!

Pic Courtesysairaajyamrealty.wordpress.com
But since they think it is expensive, they do not explore that option.  Let us take an example and check out. I have my office in Nerul, Navi Mumbai.  A 2 BHK ( with pitiably small rooms ) would cost about Rs.90 Lakhs here ( not including brokerage, registration, stampduty etc.).   That should see the final figure ballooning to about Rs.96-97 Lakhs.  However, the same flat is  available on rent for about Rs.16,000/-pm ( Rs.1.92 Lakhs pa ), all inclusive.  So, you are paying just 2% of the flat value as rent. The owner does not get even 2% return, as he needs to pay society maintenance, property tax & income tax on the rent received. He would probably get a net return of 1.2% on his property. When someone is subsidizing you like this, why not take advantage?!

2.       Rent will go up astronomically in future -  Rents do go up by about 10% in most cases, so as to cover inflation. But so does one’s income in most cases, to cover inflation. Income increase is a lot more in many cases. So, this does not wash.

3.       Rent paid by us goes down the drain, without creating as asset, unlike EMI  -  Let us again look at the facts… let us take the same example of the Rs.90 Lakhs property… rent paid would be Rs.16,000/- pm but the EMI would be Rs.67,400 pm ( assuming he is eligible for a loan, has the capacity to repay it & takes a loan of Rs.67.5 Lakhs amounting to 75% of property price @10.5% ). Also, he would have liquidated his personal savings of Rs.23.5 Lakhs ( for 25% upfront payment ). He would also have spent between Rs.6-9 Lakhs on stamp duty, registration, brokerage … The interest loss ( at 8% pa ) on these amounts paid by him interest, would be about Rs.2.65 Lakhs or about Rs.22,000/- pm. By booking the property, he is infact losing Rs.89,400/- pm, when he could have just paid Rs.16,000/- as rent today and invested/ reinvested  the other Rs.73,400 pm. The net result is infact astoundingly good if one were to invest these sums diligently!

4.       I will have to keep moving every year -  No landlord in his senses would want a good tenant to move. This is mostly an unfounded fear. Mostly one is able to stay for three terms atleast. Even if one needs to move, you can get the next house without any hassle through a broker. And moving is no problem as packers and movers are always there. The cost of brokers and packers is miniscule in the overall scheme of things.

5.       My children are studying in this area hence we need a home -  Whichever area one is residing, one can always get another house in the same area. Lots of times, one can get a house in the adjacent road, adjacent building and sometimes, within the same building!  A broker can ensure that.

6.       I have to change the address often -  Now, that is a genuine reason for once. This is a hassle. Changing the address once every 3-4 years is irritating- but can be managed. If you would like to buy a house only to take care of this, you can count yourself among the brightest chimps!

7.       I want a house so that I can save taxes -  This looks logical, but does not have much merit. On the first/ residential property one can deduct the loan interest upto a maximum of Rs.1.5 Lakhs pa, from the taxable income. That means a tax saving of about Rs.46,500/-pa, in all. But, even if you stay in a rented house, you can claim deduction for it which would be the lower of –
·         Actual HRA received
·         Actual House rent paid less 10% of basic
·         50% of basic in a metro, 40% otherwise
Rough estimates suggest that the amount saved here would be of a similar amount as a loan situation. Hence the argument that I want to buy a house to save taxes is totally flawed.

8.       Properties give best returns-  Buying a house for investments is fine, if you have sufficient investments in financial assets and your asset allocation indicates that diversification into other asset classes like property is desirable. Please note that, in this case we would not be investing in property because it gives the best returns, but because of diversification needs.

But, when you do buy a property, please understand that it is locked up for a longtime, has ST capital gains tax implications even if you are able to sell in the near term ( within three years )

 , has longterm capital gains tax implication irrespective of when it is sold, earns very little in the time the property is with you, has to be maintained and need to go through the hassles of putting it on rent ( if it is a house/ shop ), repairs etc.

Longterm returns of property is in high single digits at best, taking into account all costs involved.  Properties also depreciate. A house in a 20 year old building will command 70-75% of the price of a house in a new building.

Equities have given over 17% compounded returns from 1980! Equity oriented assets in addition are liquid, are not subject to taxes ( after 12 months ), are hassle free, portfolio can be refreshed from time to time & also give annual dividends ( the annual quantum of returns is at a similar level as properties ). 

Where people make a mistake in terms of properties is that they get carried away when they see the gross returns in rupee terms ( like Rs.1.1 Crores ) instead of a compounded annualized return of say 9% ( which is what it would have amounted to ).

9.       I can leverage and create an asset by taking a loan in case of property -  One could create an asset by leverage-agreed. But, when you leverage you are exposing yourself to risk. Also, you need to pay interest on the loans taken, which comes to a huge amount.

Let’s take an example. In a loan of Rs.50 Lakhs at 10.5%pa interest for 20 years, one will pay an interest of Rs.70 Lakhs! How cool is that?! If you can afford to service the EMI ( about Rs.50,000 pm ) for a Rs.50 Lakh loan, you could also invest that amount in say an equity fund yielding 12% pa returns and get to a corpus of Rs.4.9 Crores!!!  If you have been sleeping till now, this should wake you up!

Properties are good to invest if they are a part of an overall investment basket.  If one has only property investments & that too with leverage, it can be dangerous.  Property investments are being made for all the wrong reasons.  It is emotionally appealing but infact is a plain Jane, in terms of real investment appeal.  Invest only if it passes all tests of a good investment. If you mix emotions with investments, you are bound to end up on a sticky wicket. We would like to avoid that, won’t we?

Author : Suresh Sadagopan   |   Founder    |   Ladder7 Financial Advisories  |  www.ladder7.co.in

How can you know if you are saving enough for retirement?

You see him often these days…  there is this genial gentleman on a recliner, who has welcomed the summer, five dozen times … these days he greets the sunsets with a martini in hand, garnished with a lemon slice.  He is laughing at something and is raising his glass to someone. How we wish we were in that position!

That is the powerful imagery one gets to see in ads for retirement homes and the pension plans.  But to be in that position, one would need to do some serious planning. Most people depend on PF, PPF, Pension plans, investments in FDs, Equities, MFs, bonds, NCDs etc., to accumulate a corpus for retirement. The corpus so accumulated needs to last for the entire lifetime, after retirement.

How much is required -  The individual/ couple will need to have an amount which will enable them to live comfortably for the next 25- 30 years.  The couple after retirement would require money for regular living expenses, medical expenses, travel & other expenses.  They need to have an amount that will take care of all these, taking inflation into account in this period.

When does one start saving -  There is a simple thumb-rule here.  One needs to save an amount equivalent to expenses one incurs now for as many years in the working period, as one is expected to live after retirement. Confusing, isn’t it? 

Let us consider an example – Raghav is 30 now. His expenses are Rs.25,000/-pm. He is earning Rs.59,000/-pm. He saves Rs.29,000/-pm ( including statutory savings like PF ). What is required for him to have a comfortable retired life is to save the amount he is spending today, which is Rs.25,000/-pm. He would continue to save an amount equivalent to his spending in that year, till he is sixty. This will ensure that he will be reasonably well funded till he is 90.

 In this simplistic rule of thumb, what we are assuming is that the expense amount today would grow by a factor equal to or higher than inflation. Assuming that the amount saved today is required after 30 years, the amount saved now will grow at a rate higher than inflation for 30 years and help in meeting the expense in the first month in the 61st year. Every investment, every month will have 30 years for compounding, in this example.

We are assuming that the expenses today would be similar to expenses in future ( adjusted for inflation ) though the expense heads can change. For instance, in the earlier years, one may spend more by way of entertainment, vacation & apparel. Also one will be spending on education. In the retirement period, medical expenses could go up. Expenses pertaining to travel, gifting etc. can be high.  

What is not accounted here is the fact that in retirement, there are expected to be just two people and not four or more people like in the early years.  Hence, the expenses are expected to be less. Also, lifestyle & consumption expenses are expected to come down in the retirement period, which has not been accounted for in this rule of thumb. With all the limitations, this is still a reasonably good thumb rule to use.

Savings to expenses ratio – In the accumulation phase, one needs to look at savings to expense ratio. If one has as many years of working life as the lifetime after retirement, this ratio can be 1. If one starts early, say at age 25, then this ratio can be less than 1 as there are more years for saving. If the number of years to retirement is less than the survival years in retirement, the ratio needs to be more than 1.  This is just a rule of thumb to assist a person to estimate whether (s)he is saving enough or not.

Earnings to expense ratio – In the retired phase, one needs to focus on what one is earning after tax in the year from the corpus and whether the earnings are good enough to meet the current expenses for the year or not. If this ratio is one or more, it is a good sign – the higher the better. A figure of one or more would indicate that a person is able to live off their income alone and not touch the corpus.  If the figure is less than one, they would start eating into the corpus, which is a danger sign.

What has been discussed are general indications of what needs to be saved for retirement, which ratios to focus in the accumulation phase and which ones to look at in the retirement phase.  Retirement is a period for enjoyment only if one has planned properly.  All of us deserve to spend our evenings in the assurance only a good corpus can assure. Otherwise, the martinis will be in someone else’s hand and one would end up wistfully looking at it!

Author - Suresh Sadagopan

Discipline and consistency helps in achieving goals

Slow and steady wins the race , they say. But the tortoise, which vanquished the hare in breasting the tape, in Aesop’s fables, is not everybody’s idea of  a winner.  Like the hare, many sleep through their working lives. They wake up one day and decide to do something about the lost moons. When they meet us ( Financial Planners ), they give the impression of a tornado & typhoon rolled into one – they want to make up for the lost time and want to start their investments, here and now.

These people get impatient and disappointed when the financial planner tells them that the plan is apt to take a month, before they can shovel their cash into appropriate instruments. But, are these people consistent? Not in our experience.

Hares abound. We get our share of hares, who  come to us with empty coffers and sackfuls of hope. To their credit, many of these hares have good surpluses and are willing to lay them thick, to achieve their future goals. These hares can get a bit pushy while doing the plan. They are in a hurry to see the last of it and start investing. Investments happen immediately after the plan is done. Now, comes the pain part. The hares want to follow-up on their investments, like a  bulldog. The financial planner can expect a call from the hares on the status of their investments on the third day after investments and another call four days later, asking for a performance report. A week later, they would want a review of their investments and would fret if they hear from the planner, that it is hardly a fortnight since they invested.   

This pattern continues for a couple of months and the hares retreat. There may be no signs of them for months on end, after that. They may not even pick up the calls in this period. Suddenly after several months, you will recognize the same hare, who is again in a tizzy. He wants a review & wants to know what he should do with the investments. The hare will also probably tell you that he had invested in a plot, put some money in a super-duper scheme his friend had suggested and has also been buying some stocks.

The planner would probably be tearing his hair by now – for all these were never a part of the plan. The tortoise in contrast is not flashy, is consistent in approach & sticks to the plan. The sedate tortoise would be willing to be a part of boring SIPs for 10 years, be willing to invest in Equity assets and wait, be consistent in keeping their commitments on making investments from time to time… in short, they would pretty much follow the plan to the T.

Like Aesop’s fables, the tortoises seldom lose. The hares lower their chances of winning by running without an aim, in all directions.

Nothing happens in a jiffy. It takes nine months for a child to fully develop and present itself with a squeal.  Even fast growing rice needs three months to grow to maturity.  There is no sense in hurrying them up – firstly, it can’t be. But, even if it were possible, it would not give the best results. A good biryani is cooked over coal fire, for hours on end. The one that is churned out in half an hour, seldom tastes as good.

When goals are long-term and one has time on one’s side, why fret and worry?  Isn’t it a good idea to just commit the investments in appropriate instruments and relax? It actually is. But this eludes lots of people. All investments have to be reviewed, periodically. However, frequent changes to the portfolio is undesirable and ends up disrupting the potential for performance, in times to come. Financial planners suggest changes only when it is absolutely called for.

Asset allocation suggested is to be honoured.  To take advantage of  short-term movements, some tactical allocation can be done. But this allocation should not end up majorly  disrupting the overall asset allocation. There is not much sense in chasing fads.  This is where the hares differ. They specialize in it. They keep looking for the next rainbow in the horizon and zoom towards it. Chasing these rainbows ensures that their portfolio looks like a patchwork quilt.  The portfolio would not meet the goal criteria, liquidity requirements, time frames, risk profile etc.  They end up blaming everyone for it, but themselves.

Meeting life goals requires consistent, committed, disciplined approach towards one’s finances. Contrary to popular wisdom, modest savings build a huge cash-pile and helps meet goals, which seems impossible, at first glance. The plodding of the tortoise is least exciting. The hares seem to have the decisive edge. Yet the hares win much less than tortoises.

If you are looking for excitement, you should go to horse races. For achieving goals however, old fashioned consistent investments with a long-term orientation, helps you romp home.

The Yoga Saga

We are all very busy, aren’t we?  We are so busy that we don’t have time for many important things, including our own health...  We run after money thinking that it will be able to give us happiness. While money can buy things which can make us happy, we all know that money cannot bring happiness by itself.  Money can bring worries. If we neglect our health and pursue what is supposedly the most important pursuit for us all – our careers – we could be in for serious trouble!

Look at the irony… we run after money, neglecting health and manage to accumulate money. Somewhere in between our body threatens to do a tool-down-strike. We then spend that money to get our health back!  

Would it not have been better if we had spent some time on our health, right from the beginning? It would have solved everything, right? So, what can we do now?

That is the question I was forced to consider when the body started creaking & groaning under my sustained abuse. My friends -  Sadique Neelgund  of Network FP and Gaurav Mashruwala, a fellow financial planner, introduced me to Kaivalyadhama. Thanks guys.

Kaivalyadhama  ( www.kdham.com ) is a yoga institution that was started in 1924 that is laid out on 180 acres ( most of it not yet developed ). They teach Yoga & meditation and also do research in these fields. Apart from these they use Naturopathy and Ayurveda for therapies for the easing the stress and giving relief to the tired multitudes who throng there. We booked for a Sunday to Sunday course between 21- 28th September, 2014.

Reaching there – The institution is headquartered in Lonavla ( they have branches in Mumbai, France & US ). That took us a flat 2 hours to reach there. It is just about a kilometer from the main market.  You need to take a turn just after Kailash Parbat.  Gaurav  had joked that after the course, the food weary make a stop at Kailash Parbat and imbibe the nourishing butter Pav-bhaji, before proceeding! But, that’s your call. We did not do that ( Gaurav, please note… ).

Lodgings – Once there, we were allotted the rooms. We had opted for simple twin sharing rooms, without AC.  They have AC rooms, Deluxe cottages etc. too. The rooms were comfy, clean & had a tidy bathroom! They call this the Gupta Yogic Hospital & healthcare center. Once we had settled in we had to consult the doctor there. He would understand your case and suggest the therapies needed. Our family opted for Naturotherapy sessions, en masse.

The routine – The typical routine was like this… you get up at about 5.30AM and complete you morning ablutions and at about 6.15AM, go for a morning cuppa… except that this cuppa would neither be tea/ coffee. You had a choice between herbal tea or herb laced diluted milk. Herbal tea is not tea at all. It has lemon grass, elaichi, tulsi etc., in it. I was not allowed to have even this. My naturopathist suggested hot water with lemon & honey!

After that, we head for Kriya Suddhi. This is to clean the nostrils of the muck that we have accumulated due to the “pristine” air quality in most of our cities L

We need to pass water through one nostril and get it out of the other nostril.  There was another… you need to insert a rubber tube through one nostril and get that out through your mouth! Viva!!! I did it!

In this process you will retch and will have a NDE ( Near Death Experience)! I always want to be encouraging!!!  Along with hang gliding, para sailing & sky diving, pencil this as something you should do before you leave behind your mortal coils!

After that, there is a Yoga session at 7 AM.   It will take some doing for all of us, with our super rigid frames. But, you can come out in one piece as the benevolent Yoga Sir keeps asking you to do the postures, “within your limitations”. Some people were so limited that they simply slept through – just kidding!

Breakfast is at 8.30AM. I’m reserving a separate section for food – it deserves one! After that we went for Naturopathy sessions anywhere between 9.30 to 11 AM. It could be leg massage and steam, full body massage, mud bath, mud packs in abdomen and eyes, magnetotherapy etc.  These therapies take out the weariness & stress in our bodies. 12 noon is lunch time. Again, there are therapies starting at 2PM- 3.30 PM. Once we complete that, one could choose to get those forty winks. You could imbibe the herbal tea if you care for it at 4 PM. I missed it most days. At 5 PM, there is a Yoga session, with the same benevolent teacher!

At 6.30PM is the Pranayam session ( first three days ) . This goes till 7.15 PM.  The next two days we had Tratak session, which was to practice concentration, eminently conducted by Mrs.Jyothi Soni ( Jyothis abounded in this place; so you need to remember the surnames if you don’t want to get Jyothis mixed up !). Her claim to fame was a “Soham, soham” song, which she rendered in a haunting voice which we savoured, lying down on the mats in darkness, during the session! We recorded her song. She tells me that this happens every week! I helpfully suggested that she should release an album!

The last day was a meditation session by Pro.Bhogal who kept saying that you may feel something, something, which I first thought was hunger and later dismissed!

Dinner follows at 7.30 PM. You can keep going back for more and finish atleast by 8.15 PM in time to attend a lecture by one of the inhouse experts. I consistently gave it the skip, inspite of rave reviews by attendees. I wanted my “me-time”. I would go for a walk at this time. At around 9.15 – 9.30PM, it’s lights off and a deep, dreamless slumber.

Culinary delights – This should probably bring the memories of Thai, Lebanese, Mediterranean, French & creole cooking to you… Sorry guys, they have hitherto evolved a style that defies a name… I call it kdham cuisine, for lack of a better appellation ( I’m no bard like Shakespeare!). Michelin three star stuff, no less!

So, let’s start with the morning breakfast to understand the gastronomic delights… It could be upma or one of the other name-defying goodies which could be washed down with… you guessed right, herbal tea or diluted milk! My naturopathist recommended carrot juice & dahlia kichidi to me. I did not mind it one bit, for it was certainly no worse than what the others were subjected to!

Lunch was a more elaborate affair. You get a plate, a wati & spoon.  You ladle out a vegetable into your plate and dal into your wati. Vegetables were just boiled with a dash of salt. According to naturopathy you should not use chilli or pepper in your food.

You could have roti and /or Rice. You also get salad.  My naturopathist helpfully suggested that I cut our rice and dal, from this elaborate spread! I was not to be thwarted – I used to have lots of chappaties & veggies/ salads. Dinner was similar, only that there was a soup instead of salad.
Though I might have scared you, the food was bland, but wholesome. It was Frugal with a capital F. But that was intentional and is to do us a whole world of good. No real complaints on that front. Foreigners  ( 30-40% ) loved it. It seems that the place will be filled with them for the next 4-5 months. Kdham may consider opening KFC like eateries across the western world based on the response!

Call to Action - The place was idyllic. It was a serene island, away from the hustle and bustle that we all are used to. The campus was green & welcoming, persuading one to take long walks.

The doctors, therapists, workers & interns at Kaivaladham were truly helpful and committed. You could see that they care by the way they talk to you. I would highly recommend Kdham to all of you. Don’t you worry about the food. It is minimalistic, but wholesome. I used a bit more sarcasm & leg-pulling than was required.

The cost with naturopathy was coming to about Rs.9,000/-pp for one week course, in our case. This includes stay, food & naturopathy therapies ( two per day for six days ). The place has a good library for those interested to read a bit.

For the city dwellers like us, a weeks’ relaxation is absolutely necessary. You can book online. Call them if you need to know something more. This would be one of the best decisions you will be making. Go for it!

Here are some photos of the place...


Author :  Suresh Sadagopan    |   Ladder7 Financial Advisories   | www.ladder7.co.in

01 October, 2014

Three Random acts of kindness

Empathy is one quality a Financial Planner has to have in large measure. This is emphasized even more in Life Planning, who rightly consider empathy to be integral to the Financial Planning process. Only through genuine understanding of the clients can the planner help clients discover their real goals and actually assist them in their journey.

Clients are not coming to us for our dexterity with numbers.  That ofcourse is expected of a financial planner. The client is actually expecting a confidante, a sounding board for all they want to do… for they may not have someone in their family or in their association, who has the knowledge/ experience to advice on financial matters. Even more important, they would not have someone who stands apart and offers the advice dispassionately, without emotional tangles.  

When I had been to the US for attending the FPA Experience 2012, I encountered what can only be called random acts of kindness. What’s more, I encountered three of them in completely different settings. I’m recounting them here as this is the kind of spirit we need to bring to our dealings with our fellow human beings, our clients. I found the experience poignant and had since got etched in my mind.

An officer and a gentleman :  The time spent in San Antonio was fantastic; I had encountered lots of friendly Americans in and outside the conference. But it was in Austin, when I went to visit my cousin, that I really got a signal lesson in the fine art of dealing with empathy, treating people fairly & giving another individual the respect they deserve.

I had gone out with my cousin and we were driving home. It was a nice stretch of road and my cousin was driving steadily. Midway, we heard the wail of the sirens and my cousin figured that it was for us. He took the next turn away from the main road and waited for the police car to catch up.

The officer came up to the window and started talking. He wanted to know why we had the right indicator on, while we were proceeding straight on the highway. My cousin apprised him that we had a signal malfunction. The officer then talked about the danger to the traffic behind  us, more as a concerned cop rather than in moralistic, preachy tones. He checked the driving license and my cousin joked with him about how long his name is. It broke the ice. The officer checked his PDA-like-device and apparently figured that my cousin had a squeaky-clean record. He returned the license and said,” I’m not going to fine you; I’m not even giving you a warning on this; but just get this fixed immediately… you realize the danger on the road to you and to others, I suppose…”, he said. We told him, we will fix it and in a pleasant frame of mind reached home. Quite a contrast to how it would have panned out back home.

The guardian angel : On my way back, I was to fly to New York from Austin on my way back to India. There was a one-day stopover in Newyork. When I went for the boarding pass in Austin Bergstorm Airport, I was directed to a terminal where I was to scan my passport and enter some details before making my boarding pass. But the terminal had some issues and I needed help.

I located a person from Delta, to whom I explained my predicament. He had been noticing me – with my three pieces of luggage. He asked me where I was flying to. I said – Newyork. He told me that I would be charged for the luggage, as I could only carry cabin luggage on local flights. I told him I would be happy to pay the charge, as per their policy.  Then he saw my ticket and came to know that I was eventually flying to India. He glanced at me once over. I asked him, if there was something wrong. He said, ”You are a very noble guy. I’ll try to help you”. I was taken aback. I asked him why he said that. He said, ”Almost everyone tries to avoid paying the charge under one pre-text or the other. You being an international traveller, having a legitimate reason for the luggage still said you will pay as per company policy. That is very rare”, he said. He went to the counter himself, talked to them and ensured that the charge was waived-off for me. I thanked him and was on my way.  It was a fantastic demonstration of empathy and going out of the way to help clients.

The kind hearted driver… : I was in Newyork for a day of sight-seeing. After I was finished and wanted to return to my hotel room, I had to take Q6 route bus. Firstly, I had lots of trouble locating the bus stop. Then I finally located it and confirmed with another fellow commuter- Edwin. Edwin was an American and was originally from Dominican Republic. We started talking about each other’s country and had a pleasant time till the bus pulled up.

I had bought a pass in the morning, which I was told can be used on the return journey. I tried to use that to validate. But it did not work. I learnt that it needs to be used within 2 hours. I told the driver, I would pay the fare. The driver just looked at me, took my card and said “Go”. I was confused - why was he not accepting the fare… Edwin explained that they do understand genuine cases and some are kind, like the one I encountered and would refuse to charge.

I would certainly say that I learned more about client handling from these three encounters than from the conference. They had all helped me without much ado. They had all gone out of their way to ensure good outcomes for me. The people in these situations could have easily skewered me – but chose to rise above, empathise & help, rather than blame and harass. It was a rousing demonstration about treating clients with respect, giving them the benefit of doubt where due, understanding their situation before passing judgements and genuinely trying to help them in their hour of need. No lecture could have put this across more convincingly.

Clients are people, like you and me, who have various dreams about life. They are not sure if or how they can achieve it. They are wracked by doubt & uncertainty about whether their dreams. Going through life, they are tormented by various challenges which fan the fears about their ability to achieve their goals. It is in this maelstrom of uncertainty, that they see their financial planner as a refuge, who will help them navigate the rough seas of life and get to the destination, safe and sound. That looks eerily similar to what gurus are supposed to do for their Chelas or those who have sought their refuge.

Religion talks about the virtues of total surrender, where the person performs every act, as offerings to the Lord. Lord Krishna talks about performing every act as an offering to the Lord, without ever worrying about the fruits of one’s actions. This will ensure that the person maintains equanimity - is neither elated when the outcome of action is positive or despairs about the actions produce negative results.

Ofcourse, that is not exactly the kind of relationship we can expect between the planner and client. A good dose of trust between the planner and the client is what will make the relationship tick and bring home the results. Trust can be built overtime. But, it is one of the important ingredients that is essential for the success of the relationship. But trust can be engendered only by being above board in all dealings, by acting consistently in the client’s interests, by displaying integrity & ethics and by being there for them, when the client’s need the planner.

In my three encounters, the qualities displayed – understanding, empathy, going out of the way to assist - struck me as qualities that work universally, in all situations. It works wonderfully well for us – planners.         

US is down now. But, their heart is in the right place, their spirit unflagging, their ethos right. I saw in my brief visit, three acts of kindness which showcases their caring attitude. There is a lot to learn here. Maybe, the next time I should travel a lot more to learn about the art of client handling.  

Author - Suresh Sadagopan   www.ladder7.co.in   Published in Financial Planning Journal Nov-Dec 2012

11 February, 2014

What couples need to know about managing finances

Marriages are made in heaven, they say. It is certainly one of life’s most intimate relationships. Hence, it is natural to trust the partner implicitly and be a bit relaxed and laid back on many fronts, including finance. Trust is important in a marriage. And for that very reason, spouses don’t raise too many questions when one spouse takes financial decisions concerning money of the other.

All these should not pose problems normally. But, there are situations when it can. It is important to understand certain basics in marriage as regards money to protect the interests of both spouses. Also, money can become the rock on which the tender institution of marriage could break.

The risk tolerance of the spouses can differ :  This is an area which is overlooked, if there is a dominant spouse taking all financial decisions. Let us say the husband is someone looking for high returns & is willing to assume high risks in the process. Let us suppose that the wife is a very risk averse person. In this situation, if the husband takes all financial decisions according to his risk appetite, it will make the wife quite queasy, due to the high risks involved. This can cause friction between the couple, which could have been avoided if their individual risk appetites have been factored and then the investments were done.

The best way to handle this kind of situation is to invest one portion of the money as per the risk tolerance of the husband & the other as per the risk tolerance of the wife. For the plan to work, the asset allocation cannot afford to compromise on the correct allocation in growth, debt and other assets. The overall allocation should be such that the majority of the risk assets are with the husband and the predominant portion of the wife’s investments are in safe assets. Such an allocation would meet the overall requirements of the family as well as the aspirations/ fears of the parties concerned.

Spouses should bear expenses proportionately :  Many times we find that one of the spouses takes care of all expenses and the other does all investments. Sometimes, one of them pays all EMI and the other takes care of other expenses and investments. In these situations, the spouses are laying the ground for future discord as one person may feel he/she has only been spending and the other spouse has been able to make the investments.

This problem can get compounded in case of a discord in marital relationship. In fact, this can be a fertile ground for marital discord. What can be done?

In the interest of fairness, the family expenses should be borne in the same proportion as income they are earning. For instance, if the husband is earning Rs.1 Lakhs pm and the wife brings in Rs.50,000 pm, then two-thirds of the expenses should be borne by the husband and one-third by the wife as this is the same proportion in which they earn. After this, they should make investments from the surpluses left.

Joint accounts : Joint bank accounts are fine when it comes to expenses. Each spouse can transfer a predetermined amount into that account for expenses. But from an income tax point of view, it is better to maintain separate accounts from where the investments are made. This account can either be one’s salary account or an account into which the amounts to be invested is transferred.  This will ensure that investments and their sources are clearly demarcated.

It is better to show clean transfers to this account which will ensure that there are no problems with Income Tax department, if one were to explain the source of various investments. Also, it is a good practice to have the investments separate. Each spouse will have some investment and in the event of a dispute, this would prove to be really useful. Like they say in armed forces – Trust in God, but keep the power dry.

Investments : It is not that the investments cannot be made jointly… but the primary investor should be the first applicant and the spouse should be the second applicant. And like it has been mentioned before, it should be invested from an account which can clearly be mapped to the first applicant. All investments should be done in both the names; wherever that is not done, atleast the spouse should be the nominee.

Insurance :  Insurance would be required to protect the family, incase the income earner is no more. But many times the husband has insurance but the lady of the house does not have insurance or has insignificant sums. This will create problems, if at all there is a separation. In such an event, suppose the children are with the mother and the mother were to pass away without sufficient assets to back them up, it will be a problem. The insurance should ideally be a sufficient amount that could cover the expenses of children till they reach adulthood & can also take care of their goals like education.  Term insurance is inexpensive today and should be considered by spouses with dependents, especially if the marriage is going through a rocky patch.

Knowledge :  It is important to know where the money is being invested. Ladies do not show much interest in financial matters. Their spouses do investments on their behalf which means they are completely ceding control to their husbands, which could be dangerous especially if the relationship is turbulent and separation is a possibility. Women have to show more interest in their finances and need to understand where the investments are being done, whether they are being done in their names, if they are in the proper assets and instruments etc. For lot of women who have not paid attention to their finances, a separation comes as a rude financial shock as they are completely at sea regarding their investments.

Prudence should be the watchword for couples. Marriage is a relationship of trust. Trust your spouse; but be aware of what they are doing with your money. Involve a trusted advisor, where required. Have enough knowledge of the financial domain to be able to manage on your own, if you may need to do that. Review or get your portfolio reviewed, from time to time. That way providence will not find you wanting even when the going gets really rough!  

Athor : Suresh Sadagopan  ; published in Money control.com  ;  www.ladder7.co.in

10 February, 2014

Why you need to focus on your spending for your financial wellness?

A friend of mine was elated that he was saving Rs.25,000 a month.  He swelled with pride at being able to put aside a quarter of a lakh towards savings.  But somehow, when I ran the numbers to find if he can achieve his goals, they showed that he is woefully short of the amounts required.

It is infact true that Rs.25,000 savings per month is a good figure. But this has to be looked at within the context of what is needed for achieving the goals and fulfilling other needs. Also, one needs to look at the savings in the context of one’s expenses. 

Expansive Expenses are a problem :  In our practice, we find lots of cases where expenses are the undoing element in the plan.  Our client Vidyasagar, is a senior level manager in a multinational firm. He earns about Rs.2 Lakhs as income and he is indeed able to save about Rs.30,000 pm.  This means he is spending about Rs.1.7 Lakhs pm., which includes Rs.46,000 as EMI for his home and another Rs.7,000 as EMI for the car. This still means that he is spending Rs.1.17 Lakhs pm.

We found this to be high and went through various items of expenditure. We found the expenses in some items like entertainment & personal expenses to be pretty high at about Rs.10,000 each. On further discussion, it emerged that they do go out for dining, movies and on some weekends, they drive out to nearby places on a daylong picnic. Similarly, the personal expenses included his wife Bhanu’s parlour & her personal expenses as well as some personal expenses of Vidyasagar. We found some other items as well which were high, which were impacting the buildup of savings.

Normally, we do not overstep our limit when doing financial planning for our clients. Our philosophy has been that the clients should be allowed to lead the lives that they choose, rather than we standing in judgement on what they could do. But, we have found that in some cases expenses completely overwhelm future planning itself, cutting off the funds desperately needed for a well-funded future. It is in such cases that we point out the problems encountered in building the required corpus and get them to tone down their expenses, for their own sake. Incidentally, Vidyasagar was able to tighten the belt and release another Rs.15,000 towards savings.

The ratio that that mirrors your health :  Savings per se is not something that can be termed high or low.  Savings need to be seen in the context of one’s spends. Infact, even low level of savings can work if the expenses are in check. For instance someone spending Rs.40,000 a month and saving Rs.30,000 a month is actually doing quite well.  That is because the saving being done will cover 75% of the expenses for a month. In Vidyasagar’s case discussed before, his saving of Rs.30,000 can cover only 26% of expenses without EMI and under 18% of expenses including EMI. This measure shows the even though both are saving the same amount, the former is better off than Vidyasagar.

Savings to Expense ratio is hence a very important indicator of how well someone is managing their finances. A high ratio is good and would indicate that their savings are healthy enough.  But, the regular expenses may not pose problems for some, but the future goals can.

Some have pretty ambitious goals. For instance, some parents want a lavish wedding for their children which would be an expensive proposition. Goals are future expenses. If these future expenses are very high then the savings required in the run up to the goal will also be high. It is hence important to do a reality check on the future goals too and see if they are in line with what one can reasonably expect to save.

Spending Ignorance is not bliss :  Many do not really know what they are spending.  And that could be a big problem. Since they earn a good amount, they keep withdrawing money from time to time, till the money gets exhausted.  This problem needs to be tackled in two ways. Estimate the amount of savings required and put that away before starting to spend. That way even if they were to spend the entire balance amount, they would have done that only after putting aside the required savings amount.

The second aspect is to really seriously look at the expenses themselves. Unwittingly, one may be overspending in some areas. Only when they get down to it and calculate how much they are spending would they become aware of the problem. This knowledge is necessary to tailor the necessary course correction.

Havoc of Inflation :  The other problem faced by people today is inflation. Expenses are ballooning even though they are essentially consuming what they used to consume before.  Consumer Price index has been in double digits in three out of five years, since 2009. But investments have not kept pace. The investment returns post-tax, are lower than the inflation figures, which means that one needs to spend much more for the same value. This is even more reason to be aware about one’s expenses and see how to keep it in check.

It is important for people to hence first understand what they are spending, what they are spending on and whether it is possible to pare it down, what their future goals are and whether they are realistic & whether they are saving enough in relation to the expenses . Also, they need to understand the inflation monster and it’s pernicious effect on them. So, while planning ones finances expenses are an area which one needs to looked at carefully more than even savings – for that can make or mar one’s future. 

Author - Suresh Sadagopan  ;       A version of this was published in Business Standard on 9/2/14

30 January, 2014

How to plan your retirement funding

Retirement Planning
All of us have seen brochures for pension plans showing old couples laughing and playing in the park with their grand children; or an old couple walking in the beach, hand in hand; or enjoying with their friends at a party.  Pension plans are sold that way. Most people have the morbid fear of having not enough money in old age and depend on their children for money. Today, no one wants to be in that situation.

That is why “Sar uthake jio” was such a hit campaign.  It talked to the innate desire in every one of us to be independent, self-reliant and respected. But, unlike what the advt. was trying to sell, there are several ways of accumulating a retirement corpus, than just going for random pension plans.

Understanding the importance of retirement funding :  Most people do not give retirement the importance it deserves.   Infact, this does not figure as a priority item at all in a lot of cases till they are in mid forties.

Today, the retirement corpus required would be quite huge. Inflation in the past four years have been alarming. The latest Consumer Price Inflation (CPI) figure for Nov 2013 is above 11%. We need to bear the effect of inflation in mind as this an ever pervasive demon which undermines one’s spending power. If one wants to maintain the same standard of living in future.

The figures are daunting.  Assuming that a person is spending just Rs.20,000 pm now, his expenses at the time of retirement in about 20 years would be Rs.77,300+ pm, assuming 7% inflation throughout.  Normally expenses come down in retirement.  Assuming a 25% reduction in expenses in retirement, the expenses would still beRs.58,000+ pm, in the first month after retirement. 

Assuming that 7% inflation prevails throughout and he is able to generate a real return of 1% above inflation in the retirement phase, the corpus requirement assuming a survival period of 25 years in retirement, is Rs.1.5 Crores. Mind you, this corpus will be entirely used up in these 25 years, with nothing left. For other tenures & expense levels, please refer to the table.

This shows the amounts involved are fairly large and one needs to save for it, for a longtime. If not, the amounts to be saved at the end would be rather huge. For instance, for  Rs.2.5 Crores corpus, one needs to save in excess of Rs.60,000pm, if one has just a 15 year period. If one has 30 years to do the same, the amount to be saved per month becomes a far more manageable Rs.11,000 per month! Hence, starting to save early for retirement is imperative, if one wants to pace it properly and not be overwhelmed in the later years.

Basic principles to keep in mind :  Firstly, we need to understand that  retirement funding is a very important goal, which cannot be compromised.  Since retirement is a long way off in most cases, the seriousness of disciplined funding for retirement is not realized in lot of cases.  Normally, retirement funding is subservient to various goals like children’s education, marriage, vacation and the like.  This is completely wrong. Secondly, some of the goals can be funded with loans. For instance, education can be funded with loans, which can be paid back by the student himself/ herself instead of using a part of the retirement kitty for that. Retirement on the other hand cannot be funded by any other means. Thirdly, regular funding for retirement starts much later in life, say when a person is in his/her forties. As seen earlier, the longer the tenure of  contribution, the lower the amount required. For instance, if a person is going to contribute to the retirement corpus for 35 years for a target amount of Rs.2.5 Crores, s/he needs to contribute just Rs.6,500/-pm!

Strategy for saving for retirement  :  For someone in their twenties and early thirties, they should contribute aggressively into equity / equity funds as these assets have good potential for long-term returns. For instance, people in this age group can have as high as 75% in equity assets. Apart from this, they could invest in PPF. If they are employed and there is a EPF contribution, so much the better. Only that, they should not withdraw it and use it up when they move jobs. They should instead transfer the kitty into the new account.  

The other good investment option for them would be National Pension Scheme. For those between 35-50 years of age, their equity assets should be anywhere between 55-70%, depending on the years to retirement. They could also contribute in PPF, NPS & long-term Debt funds.  Those above 50 years are nearing retirement. Their asset allocation should be rebalanced to between 40-50% in equity assets. They should now have substantial amount of assets in debt instruments of all types. They should have a good PPF kitty, EPF in case they are employed,  FDs, debts funds, NCDs etc.

Strategy for income in retirement :  Nearer retirement, their kitty should be about 40% in equity. Also nearer retirement, one should set up avenues to get regular monthly, quarterly, half yearly cash-flows. Depending on whether one is coming into the tax slab or not, the investments need to be structured. For instance, Senior Citizens Savings Scheme (SCSS) would be a good instrument for someone who is not going to pay tax. For someone in the 30% tax bracket, getting 6% plus after tax, is not very exciting. 

Debt funds could be another instrument that could work very well for those in the higher tax brackets. One could invest in the growth mode and set up systematic withdrawal plan for the amount required, looking at the sustainability, based on the corpus size and the returns the debt fund is giving. This could be a wise strategy as the effective tax on debt funds could amount to just 5-6%, due to capital gains tax treatment, after a year. Depending on the tax slab one is in, one could also look at the desirability of setting up an immediate annuity for a part of the corpus. This will ensure sustained income, though that income is taxable as on date. This is however expected to change in future.  Tax-free bonds also offer annual income on a sustained basis, for 10-20 years and could be a good income planning tool.

In conclusion, retirement is a goal which needs to be addressed on priority.  It is important that everyone takes this seriously and start saving up for their comfortable retirement.  

Article published in December 2013 in Business Standard;
Author : Suresh Sadagopan;