23 May, 2015

What women need to learn about money?

Women today have made inroads into every field or sector of human endeavor  – be it a pilot, banker, police officer, explorer, astronaut, scientist etc.  They are also present across hierarchies – from the lower rungs to the rarefied echelons of top management. Many of them even call the shots as CEOs in major corporations. And yet, women seem to have a pathological dislike towards money.

The upshot – their money lies around in their bank accounts, in fixed deposits (FD), post office deposits, insurance policies and the like. All these so called “safe assets” are actually low yielding traditional investments – which tend to be poor choices whichever way one looks at it.

Why women’s choices are conservative?

PC: www.huffingtonpost.com
It may be something to do with the societal conditioning.  The subtle messages that they receive from childhood ensures that they develop interest in everything, except finance. Finance is supposed to be the preserve of men.  Hence, most women just clam-up when it comes to finances. They are not willing to educate themselves on financial matters due to this pathological aversion and hence their choices tend to be simplistic – FDs or recurring deposits (RD) etc. 

Also, women inherently tend to be less of risk takers as compared to men, in general.  We find this from the risk tolerance tests we administer.  This aspect is important and needs to be factored into the advice. However, even factoring this, they would still need some exposure to assets other than FDs and post office investments, if they are to achieve their financial goals. Too much conservatism actually increases the risk of not being able to achieve goals & ending up with an insufficient corpus for the retirement years.

How do they manage their finances ?

For most part, they do not seem to be managing their finances! Their father, brother, husband etc.,  tend to manage their finances. Many times,  women don’t even know where their money is being invested.  Often times, they sign any form put before them, unquestioningly!  Even accounting for the fact that their father or husband would have their best interests at heart, it is supremely naïve to sign off forms and issue cheques without knowing what it is for. Many times women sign entire cheque books – to be used in future.

This brings about peculiar situations… their money gets invested in assets which they themselves would not approve.  Their risk tolerance vis-à-vis investments 
are not taken into account at all.  Since they have ceded control, they can’t do much about it.

Also, this brings in a level of vulnerability, which could have been avoided in the first place. There are so many stories of how their money have been mismanaged, swindled.

Also, from observation, we find that we get far less women clients than men. Women need good financial advisers even more than men, due to their aversion to finances. Yet, they are the ones who seek advice the least.
The way forward

There is just no replacement to some enlightened self-help.  Saas bahu serials & other weepies may be interesting. But then a bit of time devoted towards educating themselves on finances would reward them hand over fist. This is what will ensure their financial freedom - which eventually is a passport for them to a better life, everywhere.

With financial freedom, they enjoy better status in the family, are able to pursue their interests and also ensure that they are not being pushed around.  They tend to have far more choices when they are financially secure. With so much at stake, how come women are not equipping themselves on money matters? Things are changing – but only just. More women need to take up the onus of educating themselves. They need to ask the right questions while forms are put before them to sign. Simple questions are all that are required - what are the features & benefits of this product?  How is it suitable to me? What are the alternatives? How tax effective they are?

It is not a sign of lack of trust when women want to know what they are investing into. They need to understand that first.  Then they need to convey it to those people who assumed their passive assent in the past.  Where they are not sure, they should seek professional advice.  It is after all their future which is at stake.  It makes sense to secure it, doesn’t it?

Also Read: Teach your child to be financially savvy

Author : Suresh Sadagopan   |   Article published in MoneyControl on 19/5/2015

19 May, 2015

Baroda Trip diary

A trip to the land which Gaekwads ruled!

When you are going to your close relatives place, you experience a warm, cosy glow inside. That was the kind of warmth which I was experiencing when I sat in the taxi taking us to Bandra Terminus, to go to my sister’s home. The ride upto Bandra station was fine. Bandra station to the terminus was unspeakable misery – garbage & debris piled up on one side of the road along with a partly constructed bridge. There was no road nor road rules here. Vehicles, birds, animals & humans were jostling in this chaos, with edge-of-the-seat thrills!

Relief loomed large once we reached the platform. One had to of course stay clear of luggage carts pushed noisily by the coolies, who seemed to be in a tearing hurry. Once the train was in, we found to our chagrin that we were in a chaircar – facing each other. We were stepping on each other’s toes, literally! There was a small sliver of wood fitted in between, which was to serve as our table. We made full use of this scarce real estate!

Baroda arrived at night. We had finished dinner in the train itself and retired for the night!

The next day was warm or should I say hot! It was hot by all standards, though inside the home, it was still comfortable. Venturing outside during daytime was strictly on a need basis. My sister was talking very highly about a eaterie on the periphery of Baroda called Plazo, which we decided to patronize that night.

We decided to seek some thrills before dinner and went to the inviting Inorbit mall. They seem to have sprouted all across the country! This was a commodious affair, as Inorbit malls usually are. We headed for the gaming area and tried a hand at bowling and pool. After lightening the purse somewhat, we decided to dash for Plazo.

It was more of a circumambulation of Baroda itself, that halfway down we despaired why we embarked on it at all! Then we were at the portals of Plazo and the hunger pangs started asserting itself! We had a good meal there & returned to the home and hearth of my sister.

Since Vadodara was so hot, it was only in the evenings that we slinked out. The exception was our trip to Lakshmi Vilas Palace, the erstwhile seat of the Gaekwads, which had to be in the morning. I was not a great fan of looking at the relics from the past, but kept and open mind and went anyway.

I’m happy I did.

Lakshmi Vilas Palace is grand by any standards. It is supposedly the largest private dwelling today – four times larger than Buckingham palace! The grand & imposing palace is set in 700 acres of land, has hundreds of rooms and the palace- itself an eclectic mix of Indian & European influences. The royal family stays in the palace till date, in it’s upper reaches.

The current royal descendant also talks in the audio tour… he talks of how the palace has always been his home and how they used to drive their bicycles in the corridors as children, bouncing them off the walls! He described his house as a big house! Enviable…

 It occurred that we have atleast one advantage over the Maharaja - we will never have any confusion about the number of rooms in our home!

We were given an audio tour of the palace and thanks to that, we got to know many details which we would have otherwise missed – like the peacock urn. Or the statue of the maharani in marble, where the pearl necklace was showing through from under the saree!

The European masters were tasked with many installations – Michaelangelo & Fellici had done work for the Gaekwads! So was the celebrated Indian painter - Raja Ravi Varma. His famous paintings of Godesses – Saraswati & Lakshmi, were there at the Durbar hall. Hithertoo, I had only seen the reproductions on calendars & lithographs!

There was the Armoury with their collection of swords, scabbards, knives, shields etc., in profusion. Interestingly, there was a contraption which could deliver chakras at opponents, a la Lord Vishnu!

The grandest was the last – Durbar hall. This hall had the crest of the Rajah – SRG – set on the floor. The floor was inlaid with semi-precious stones. The ornate ceiling was beautifully crafted with exquisite floral work. There were 15 feet stained glasses with Indian Motifs, which looked grand with the light streaming from behind. This palace is supposed to have the maximum number of stained glasses of any palace!

There was a courtyard with fountains with a couple of installations of Michaelangelo. The Mosaic painting ( made fully of small tiles ) on the outerwall of the Durbar Hall was awesome. See for yourself.

The palace was awesome. After some lunch we went home. 

One of the evenings we went to Sayaji Bagh, a sprawling garden, which houses a museum, zoo, amphitheatre, planetarium etc. That day the park was super crowded. We spent sometime there.

After dinner we went to a famous joint that sells the best sodas in Baroda – I had a Green apple soda. Nice!

End of the trip now. Mumbai beckons… we boarded the Swaraj Express, which offloaded us at Bandra Terminus. We were home in another 30 minutes. Holidays over… but we were happy to be back in Mumbai. Home , sweet home!

- A roundup of the trip to Baroda a week ago – Suresh Sadagopan 

Basics of Wills

People often put off drafting their wills as they take it to be a complicated document that’s difficult to write, involving lawyers and courts. But that’s not really the case. Here are practical tips on how to draft a will.

The need

A will is a document which states what a person would like to do with his/her assets, after death. If a person passes away without a will, the assets will be distributed according to the applicable laws, which may not be in accordance with what he or she wishes. If the person is a Hindu, for instance, the Hindu Succession Act applies; there are different rules for males and females. So for a male, assets will be divided equally between his mother, spouse and children. If he had intended any other distribution, it wouldn’t have been possible.

The procedure and contents

A will must be unambiguous and convey clearly how one intends to distribute his or her assets; it’s fine if it is in simple language. Priyamvada Birla’s will was less than two pages! No reason why our wills should be anything more. Every will requires two witnesses. The will can be registered, but it is not mandatory. A handwritten will is best as there is much less chance of its authenticity being questioned compared to one that is printed. It is also a good idea to get a doctor’s certificate on the date of writing the will, stating that the person is mentally fit and fine, so that this aspect is not questioned in future.
The will should be broad-based. Financial assets can keep changing over a person’s lifetime and so it may be better to mention the percentage of assets that would go to a beneficiary rather than specifically mentioning the folio number/certificate number of an investment.
Even in the case of properties, it may be a good idea to keep it broad-based, unless you are specific about the beneficiary. For other assets like collectibles, art, movable properties and so on, it is again a good idea to mention percentages rather than get down to enumerating them one by one.

Author : Suresh Sadagopan   |   Article published in BusinessLine on 3/5/2015

Considerations while investing in Debt Instruments

It is not surprising that bank fixed deposits (FDs) are investors' favourite instruments. Well-defined tenure, pre-determined rate of return and low-risk make these very simple instruments to understand. But they have weaknesses. Interest rates are moderate and taxable. Since tenures are fixed, premature withdrawals mean penalties. To choose any debt instrument, investors need to consider various factors.

The risk-return game: Any investor would have a returns' expectation and a risk he is comfortable with. As a rule, the higher the risk one is willing to take, greater the returns. For instance, a lower-rated FD would offer more returns as compared to another with the highest rating level. Hence, the investor needs to be clear about the level of risk he is comfortable with before investing. People are searching for low-risk products which offer high returns - that is as elusive as a unicorn!

 Liquidity: An important element. Many times, the investment is done by looking at the interest rates alone. But when one's situation changes and money is needed suddenly, some instruments either cannot give the entire amount (Public Provident Fund, company FDs) or impose a penalty or reduce the rate of return (company FDs/bank FDs). Look at the fine print carefully before investing.

Tenure: The purpose should be considered before investing. That will dictate, among other things, tenure of the investment. For instance, if saving for a child's graduation expenses, four years away, invest a lumpsum amount in an FD or any other debt instrument for that period.

Investing in an instrument like an FD or Fixed Maturity Plan insulates a person from interest rate risk for the tenure of the investment. However, at the end of tenure, there is a reinvestment risk. That is, one might end up with a lumpsum amount without having an instrument which will give similar returns. So, it might end up lying idle in the bank and earn a paltry rate of four per cent to six per cent. But if it is invested in a manner that the instrument matures just before the goal, then the reinvestment risk is avoided.

For really long-term goals like retirement, investments like New Pension System, Public Provident Fund and Employee Provident Fund are suitable. These, more or less, lock-in one's investment for a long time. And, the returns can be higher because of the compounding effect over a longer period.

Tax savings: For some, tax benefit is another reason to invest. They may be looking forward to investing under Sec 80C or Sec 80 CCD and others to claim deduction from the taxable income. Other instruments like PPF, tax savings mutual funds, NPS, bank FDs for five years or more also come under one of these sections.

Tax-efficient investing: This is an area where investors stumble. Most tend to look at pre-tax as opposed to post-tax return. For instance, investors look at the interest offered by banks or company FDs and assume this is the real rate of return they are earning.

However for someone in the 30 per cent tax slab, investing in a bank FD giving 9.25 per cent annual returns means the post-tax rate is only 6.38 per cent. Also, many banks and companies, publicise their rates in a misleading manner. They show the returns by dividing the final return after several years, by the number of years. For instance, if an FD is earning 9.25 per cent annually, it is the compounding annual rate whether you invest for one year or five years. However, if one invests in such an FD for five years, the returns would be 55.63 per cent. They would divide this by five and show the returns as 11.13 per cent, whereas the actual annual returns still stand at 9.25 per cent.

For people in the higher income brackets, the need to look at tax treatment of income coming from their investments is extremely important. Some of the income generated may be considered taxable income and others may be treated as capital gains. Depending on these, there can be a significant difference in the returns that one may end up getting. It is important to understand all factors that impact a debt product. One's choice of the instrument should be based on the various factors which can impact them, not just returns alone.

Author : Suresh Sadagopan   |   Article published in Business Standard on 1/5/2015

Who do you think is rich?

Someone who has over Rs.5 Crores of investments can be called rich. Says who? That’s the opinion formed by your’s truly. But, if you ask a Wealth manager, they may say that this person is mass-affluent, not rich.  According to some wealth managers, the rich category starts at about Rs.25 Crores or thereabouts.  The really rich would have salted away Rs.100 Crores or more.  The super-rich club would start somewhere at Rs.1,000 Crores or so.
If you were to ask the man on the street – the Aam Aadmi ( not to be confused with the party which professes to represent him ), he would probably call most of us rich. Why?
Pic Courtesynepaliaustralian.com
Simply because we have our dwellings, gad around in our vehicles, send our children to decent enough schools, take vacations… to them, it seems like we are living it up!
Ask yourself – Are you rich?
Most reply with – Not me; no way! I’m just a middle class guy.
This middle class however is a super-elastic bracket which takes within it’s ambit someone who earns Rs.15,000 to Rs.1 Crore a month! We have come up with terms like lower-middle class, middle-middle class ,upper-middle class and upper class!
Here there is competition. People want to believe they are in the upper-middle class or at least middle- middle class – else they will feel miserable and poor!
If you were to ask our government, they would call everyone earning more than Rs.30 a day as middle class!!!  If you are paying taxes, you must be rich – that’s why they are taxing you, remember?
You would then agree that defining who is rich is really confounding, right?
It is. But we have come up with a different methodology for identifying the rich. In our methodology, even how much one earns or even how much does S/he have, does not matter. What matters is the staying power. I have confused more than I have clarified, I agree. But stay with me.
As financial planners/ advisors we come across people from various walks of life, earning piffling sums to the motherlode paycheque. Spends are different too – for some they are modest & for others it reaches the stratosphere!  When there is so much variance, how can we come up with a reasonable definition of who can be classified as rich?

Let’s first understand what does not classify a person as rich. For starters, multiple cars, a home with all the trappings of luxury including the latest gadgets, regular vacations, enviable jobs – do not mark out a person as rich...  nor does the fact that their children are studying in those snooty schools.
Even multiple properties & a seemingly good cash-stash does not make a person rich.
There are a few markers which would help us separate the ones with pelf from others who have small change, in a manner of speaking.
  • Spend ratio – If someone is spending over 70% of their income, they may be spending too much. This would be true for virtually any income band. Would be truer for those who do not have too many years to retirement. They should be saving more, in fact.
For instance, a person at 50, would potentially have another 10 years to retirement. His income would be pretty good, at that point. Expenses should have plateaued. If loans are still there, the EMIs as a percentage of earnings, should be a meager number.  College education may be underway for their children –but they would have squirrelled away separately for that, anyway. So, they should be saving much more than 30%... say 40-50% or even more!
This is going to mark out rich from the poor. Those saving too little during their earning years are setting themselves up for penury, in the years ahead – however grand their present looks!
  • Expenses – It is rarely the grocery or regular home expense that spells trouble for most. It is the discretionary lifestyle expense that breaks the piggy bank. Many of them have a busload of goals, that guzzle cash – like second homes, foreign vacations, multiple cars with frequent changes, children education abroad etc.  This ensures that much of their earning goes towards servicing loans - for a longtime.  
A very high watermark for expenses is a red flag. Family members get comfortable with a high-flying lifestyle. And they keep upgrading it. Expenses hence tend to be high throughout and savings commensurately lower.
The corpus would hence be small at retirement. With expense high and a low corpus, they could support themselves only for a few years after retirement.  They may have to cut their lifestyle drastically, just to survive, making them decidedly poor.
  • Big Corpus myth – Many clients think that they have a big enough corpus and will be able to sail through retirement, easily enough. A seemingly big corpus is no guarantee for a fully funded, comfortable retirement. Inflation & medical expense nibble away at the corpus. Also, increased longevity can deplete even a gargantuan corpus.
Penny pinching – a preserve of the poor – will then have to take center stage.
  • The float that sinks people! - Good money flow in the bank and a comfortable float lulls people into a false sense of security. People tend to take it for granted that life will always be like that – getting their jolt when the pay cheque stops. That is when they start experiencing the privations of the poor!
To summarize, one’s earnings or corpus does not make a person rich. A blizzard of expenses & a false sense of security can actually make one poor! 
A person is hence rich when there is enough money for various needs – now and in future – and does not need more nor is craving for more.  They are the ones who can be at peace & live a contented life. Sounds philosophical, but true. The rest are poor and they need to think hard about it – for their own good!
Author : Suresh Sadagopan   |   Article published in LinkedIn on 26/4/2015

Using debt funds to generate a stable income

Most retired people dip into their or turn to to meet their regular income needs. At a time when interest rates are coming off, turning to bank FDs can expose you to significant risk. There is also the taxation angle to worry about, especially if you fall in the highest tax bracket.

Also refer to Considerations while investing in Debt Funds

can be a better option for retirees. By opting for a systematic withdrawal plan, or SWP, in a debt MF, investors can withdraw a pre-fixed amount from a scheme at regular intervals. SWPs are flexible and can be stopped whenever required. The primary benefit of using SWPs is significant tax savings vis-a-vis bank FDs. Not just bank FDs, SWPs in can be a far superior alternative to pension plans of insurance firms. And it's not just the retirees who stand to benefit. Anyone who wants a regular stream of income - be it those on a sabbatical, those looking to start their own business, or even those simply wanting to augment their cash flows - can benefit from this option.

Let's say one invests Rs 1 lakh in a debt fund and wants Rs 2,000 every quarter. The amount can be arranged for by setting up an SWP. As long as the fund is growing at a rate above the level, it can sustain these regular payments for an indefinite period.

Tax advantage
In SWPs, the units are cashed out based on the amount of money required in each installment. In the above example, the amount cashed out is not interest income. It is just the number of units which would offer Rs 2,000. For tax purposes, short-term capital gains is calculated by taking the difference in net asset value (NAV) from the time of investment to the time it is withdrawn and multiplying it by the number of units cashed out. The gains are added to the income and taxed at slab rates.

Remember that the gains from debt MF schemes are considered long-term after 36 months. Long-term capital gains are taxed at 20 per cent with indexation, while short-term capital gains are taxed at individual slab rates. SWPs would lead to short-term capital gains. But even for a person in the highest tax bracket of 30 per cent (30.9 per cent with surcharge), the gains would be minuscule.

Let us take the example of someone who invests Rs 1 lakh in a debt MF and in a bank FD. For an apple-to-apple comparison, the returns from both the debt fund and the FD are taken to be 8.8 per cent. Assume the withdrawal from the debt fund is at the rate of 2.2 per cent per quarter, which is approximately what one would expect as interest income per quarter from the bank FD. Also assume that the person falls under the highest tax bracket and no exit loads are paid. (If there are exit loads, the SWP can be set up after the exit load period.)

The tax to be paid in the case of the FD on an interest income of Rs 8,800 comes to Rs 2,719. In contrast, the short-term capital gains tax for debt mutual funds on a withdrawal of Rs 8,987 comes to just Rs 146. So, for FDs, the incidence of effective tax turns out to be 30.9 per cent, while for debt MFs the effective tax paid amounts to just 1.6 per cent (see table).

Current interest rate scenario

An FD would offer a fixed return for the tenure of investment. When interest rates go down, FD rates would also decline. While reinvesting the FD, the new rate will apply. This is called the reinvestment risk in financial parlance.

In case of debt funds, the underlying debt instruments go up or down in value based on the rates at which they are traded. The uncertainty in returns is something that unnerves people but it is not as bad as it sounds. And the volatility will not be anything like investing in equities. The rates at which the debt instruments are traded depend on the interest rate cycle, among other things. In a falling interest rate scenario which is unfolding now, debt funds will be positively impacted depending on the kind of debt instruments the underlying scheme holds.

Scoring over annuity plans

An SWP in a debt fund is a far superior alternative to a pension plan. Most people invest in pension plans of insurance companies for a stable income stream. But annuity payments are taxed as income, just like FDs. Annuity payments also have other disadvantages - for instance, the disbursal rate in an annuity plan is typically 5.5-6.5 per cent per annum, which is very low. The returns are even lower when you account for taxation. What's more, annuities once started cannot be stopped, which can be a big handicap when a person wants to access their principal for some exigency. In contrast, SWPs in debt MFs can be started and stopped any time. Also, there are a variety of debt funds to choose from, so the underlying corpus can be invested in funds that have a potential to offer much higher returns as compared to annuity plans. That's not all. The amount required from SWPs can be adjusted over time to suit one's individual needs.

Author : Suresh Sadagopan   |  Article published in Business Standard on 11/4/2015