Jio, jee bhar ke!

I stood up when I saw this… there was this WA message - 45 minute speech by Mukesh Ambani at RIL AGM cost Bharti Airtel/ Idea a whopping Rs.11,950 crores ! 

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Jio is the cat among the pigeons. The pigeons were doing decently & knew about the cat all along. Now, the cat has pounced. Will the pigeons get caught – or will they be able to outsmart the cat? That’s a trillion rupee question.

It looks like it’s wonderful times ahead for consumers – what with subsidized handsets, low data costs & zero voice call costs – this is straight God stuff from heaven!  We are all justifiably excited. Mukesh is talking of a 100 million subscribers as soon as possible. That does not look like such a tall order with the dhamaka he has unleashed. But when will he make money ? That is a Quadrillion rupee poser!

But, I was intrigued as to why someone as smart as Mukesh has sunk in Rs.1,50,000 crores in a business that is notoriously difficult & keeps sucking capital like a vacuum cleaner!  He needs to make a profit of atleast Rs.15,000 crores pa or more, after all costs ) to make this investment viable. That certainly seems like a tall order, when he doing his Santaclaus-act of giving voice calls free & data at a fraction of current costs. Compounding that is the fact that people don’t have the handsets to operate 4G & he needs to subsidise that too, to ensure that people subscribe to his services.  In a nutshell, he is throwing too many sprats to catch that elusive whale!

Mukesh started off with a cash gusher & is expanding into all sorts of businesses that would absorb the stuff like a sponge – like Retail, Healthcare, Telecom. His brother started off shakily – power, radio FM, Big Cinemas, transportation/ Infra, finance etc., none of which had the potential to turn in any great money. Making amends, he is now getting into defence in a very big way, where there is potential to make it big. That’s a study in contrast.

These are really sharp businessmen whose calculations we may not understand. Only time will tell as to how successful these ventures are going to be & we may read their success stories in the pages of the pink papers, in times to come.

Now let me come to another aspect we think we understand a bit – finances. Even here there is one segment of clients who are considered to be uber difficult to understand. We have made an effort to address this segment and have given an advisor’s perspective on this.  

Check it out here –

http://www.networkfp.com/different-strokes/

You may give us a feedback as to whether we have cracked the code or if we are still in babes in the woods & need some growing up!

These are certainly interesting times. Change is everywhere. And that’s what makes life interesting, alive  & worth living - which is probably why Mukesh chose to call his offering Jio!

Suresh Sadagopan is the founder of Ladder7 Financial Advisories (www.ladder7.co.in)

The firestorm unleashed today...

Devotees are thronging all over, jostling for space. There is chanting, aarthi & abhishekam ( milk or other items poured over, bathing the deity ). It's still 4 o' clock in the morning & the horizon is turning a faint pink. So, if you thought it is some temple festival scene on an auspicious day, you are thinking on the right lines. But, you are wrong. It's not a temple scene at all. And it is not an auspicious day, in the religious sense.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

But, today is an auspicious day, a red letter day in Tamilnadu. It's the day when Kabali is being released!  The scene described was witnessed outside some movie theatres in TN! This happens only in TN, a land where Kushboo has a temple to herself & she presides over her people from her high seat in the Sanctum Santorum!

But, Kushboo, move over. Rajni Sir is different. He is a phenomenon in TN. He is that person, who will shoot a bullet and hold a blade which will slice the bullet into two & the sliced bullets will hit the two villans unerringly !  One bullet, two villans :) His prowess does not stop there either. It's where it all starts... reason why Rajni Sir creates a storm with his movie everytime !   Don't download Kabali - the whole Internet will stop! I was stopped at the nick of time, else you would all not have had internet today :)

Upshot -  I have not been able to see the movie yet. But, the story is all over the net. Kabali is the story of a worker in Malaysia, who is wronged, sent to prison & comes back, searches like hell for his family, strings them together again & in between annihilates sundry villans, . There is also the much hyped "Nerrupu da" staccato, to burnish his persona. 

Rajni & his screen wife ( Radhika Apte ) are supposed to have done a wonderful job. The inimitable Rajni style & panache is evident in the movie. Anu Vardhan has donned Rajni in dapper suits which adds polish to the Rajni Persona. Top notch cinematography too adds finesses to the Ouevre. 

However, independent reviews are not too flattering. Most of them are giving 2.5 -3 out of 5. You don't have to sport that long face after all, since you have not been able to see the first show. You may not have missed much!  

See some third party reviews here -

http://movies.ndtv.com/movie-reviews/kabali-movie-review-1290

http://www.sify.com/movies/kabali-review-rajini-carries-film-on-his-shoulders-review-tamil-qhvrSTbfciija.html

http://www.lmkmoviemaniac.com/2016/07/kabali-movie-review.html?m=1

So, if you are working today instead of taking the day off watching Kabali, you have  been unwittingly right. Probably, we can see the same movie after a month in a theatre or in three months on TV and decide whether the movie was worth paying upto Rs.5,000 to enter the sanctum.  

Until then, there is work to keep company... and many, many more worthwhile movies to watch. 

Nerrupu da...  Kabali da...  Ippa vendam da  ( not now man )   :)

Reviewed by Suresh Sadagopan, who was happy to have watched this movie!

Suresh Sadagopan is the founder of Ladder7 Financial Advisories

www.ladder7.co.in

A peek into the life of a genius

“Everything should be made as simple as possible, but not any simpler”, is a quote attributed to Albert Einstein, though it’s provenance is disputed. But the message it conveys is apt – wonderfully apt in the world of abstract mathematics, which, if it is not simplified, few of us will even understand what it remotely means.

Hence movies like The man who knew Infinity will have to be made accessible ( & dumbed down to make it simple ) & yet capture the essence of the top flight work they have done - is a daunting job.  There have been oeuvres like this before – like A Beautiful Mind which is about John Nash – a top notch mathematician.  The man who knew Infinity is about Srinivasan Ramanujan -  about our own Indian genius of a mathematician & has been told in a straight forward, simple manner, without unnecessarily lionizing the person, more than necessary.

This story starts in Chennai – a lad who is almost lost to the world, in the labyrinthine bureaucracy, as a Clerk in Madras presidency.  Fortunately for him he gets mentors who help him and assist him to get in touch with G.H.Hardy in London.  Hardy is impressed enough to bring him to London and is his friend , philosopher & mentor. Ramanujan’s genius is impressive in that he has proofs – without the necessary steps. But that confounds Hardy as it does others.

Hardy is played by Jeremy Irons, who has reprised the role with such finesse that he fits the role like a glove. Dev Patel has done a fine job too. Since the film is set in London, one gets a taste of fine English humour. The dialogues sparkle in their understated, subtle English humour - especially the ones between Bertrand Russel  ( essayed by Jeremy Northam ) & Hardy. The movie does not lag and one does not get a feeling that it could have been edited out. Mathew Brown has directed the movie & has certainly created one that he can put in his resume with pride.

The poverty from which Ramanujan comes is portrayed with dignity. The Chennai portions are fairly authentic. Ramanujan is a Vaishnavite & there are no gaffes when they show the Deity/ God or what shlokas their family intones or the feel of a Iyengar household…   Bollywood needs to learn here – I have seen countless movies where a  Vaishnavite sports a Tilak ( Namam ) and keeps uttering Muruga, Muruga ( a clear Shaivite God )!  But then Bollywood is not known for authenticity & is known more for their pot boilers - with their staple fare of fights, gory violence, whistle inducing dance sequences & midriff heaving song & dance routines.

Bollywood makes films on Dons, Politicians, business tycoons etc. But we needed an International producer to immortlise Ramanujam or for that matter Gandhiji on screen.  Struck me as odd really!

The emotional relationship between Ramanujan & his wife Janaki ( helmed competently by Devika Bhise ) has been handled with aplomb. The electric tension between the mother-in-law/  daughter-in-law duo has been captured well, which speaks well of the director who wants to tell the story from all viewpoints and wants to capture all the nuances in the protagonist’s life.

All in all, it was 135 minutes well spent. The mathematical content has been quite simplified to make it accessible to the audience. Prof.Einstein may not approve; but most of us may not otherwise follow it! 

Eminently watchable biopic.  Don’t seek thrills from this – it faithfully tells the story of a genius, without drama & unnecessary fluff.   If you would like to know him and get a peek into his mind, this movie does a good job.   Gets four star billing from me!

Reviewed by Suresh Sadagopan, who was happy to have watched this movie!

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

Getting goals right is important before jumping to investments

We work for 35-40 years of our life, spending most of our waking hours working for a living.  We do everything so that the cherished goals we have in life may be achieved.  Now what are the goals we have?  The typical ones are a house of our own, vehicle, travel, children’s education, retirement.  We also have a few which can be only called dreams. In that category comes a holiday home, a world tour, a hospital in one’s home town, children’s education abroad and the like.  We seldom stop to think in this whirl of life about which of these goals and which ones are dreams. Also we need to distinguish goals and understand really which of these are high priority goals and which are medium or low. Many of these are surface goals.

We all want to be happy, experience success & achieve our potential. The problem with the goals mentioned above is that they may not necessarily address the deeper needs of people.  Since we are going to spend the greatest years of our life working, it better be work where we derive pleasure, where we feel achievement & self-actualisation. But not many people think of life in these terms. Life for most is a fairly humdrum existence, where the base surface goals look like real ones and their entire effort goes in fulfilling them.  For such people, life is dreary & devoid of any true fulfilment, achievement.

Hence, it is first important to get clarity on what exactly we would want to do in life. What is it that can make us happy? What would mean success, achievement & fulfilment for us? What is our potential and what can we achieve if we were to unlock it? These are important questions which very few address. In most cases, people don’t even think about these. 

That is why we have problems in life. When we don’t get that sense of achievement, we look for external props to buoy us up. This in one of the reasons why people buy multiple cars, residences, indulge in conspicuous consumption, go on world tours etc . – to show the world that they have arrived and savour a sense of achievement. But this success, sense of achievement is external and the feeling is ephemeral. The feeling of something missing keeps coming back.

It is important for all of us to keep the regular goals that are important for us - like the home, children’s education, retirement etc., while at the same time including those that will make us happy & make our life worth living.  Such goals may mean pursuing a passion, doing a job that one truly enjoys, working towards a worthwhile goal like building a hospital in one’s hometown. Once the goals have been clarified, prioritised & ideally set on paper, the planning can start.

But before starting on the planning, we need to clarify when the goal would come up – the timelines involved.  We also need to come up with an estimate of how much money would be required for the goal today. If we know this and we have an estimate of inflation for the period for that goal, we can project the amount required when the goal would come up.

Now that we have the goals, the timelines and the estimate of how much is required for it, we need to come up with an appropriate portfolio which would help in achieving those goals. For short term goals – goals of less than 3 years, we would need to allocate in debt oriented instruments only, to ensure that there is no volatility, which can jeopardize goal achievement. There would be no tax advantage derived in any debt based instrument for less than a three year investment period. But investing in a debt fund would have two benefits:
One, it can be cashed out ( after the exit load period ), anytime without penalty, unlike in an FD.
Two, if the goals gets postponed & gets extended beyond three years, one would automatically get advantage of long-term capital gains taxation, which brings the effective tax rate to below 5%.

The other instrument to look at for short term goals is an arbitrage fund. It has the risk profile like a debt fund but is subject to equity taxation. Equity taxation for over one year is nil. Due to this, it would be an ideal instrument for a period above one year. However, it has the potential to offer about 6-7% returns only, which will be tax free beyond one year holding period.

For longer tenure goals, the options available are many. But before rushing to create a portfolio, we would need to assess the risk profile of a person. People inherently have a certain propensity to take risk and have a commensurate return expectation. On this basis, they can be classified as conservative, moderate or aggressive and various shades in between. It is important to take this into account as a portfolio that does not match the investor profile to the portfolio constructed, runs the risk of the investor panicking when the markets turn volatile and investor cashing out in panic, undoing an otherwise good portfolio.  

The other concept to understand is Risk capacity, which shows the recovery capacity of the client to emerge from any shock to the portfolio. Typically, young people would have more risk capacity as compared with older ones. Also, those who have a higher asset base would have higher risk bearing capacity.

The risk tolerance of an individual will decide the investment mix, also called asset allocation. Once that is decided, the amount in equity assets, debt, property, gold and other assets are decided. Appropriate review of an existing portfolio & rebalancing would be necessary, based on what is already there in one’s portfolio. 

New allocations would be based on the surpluses available. For salaried employees, the cashflows are predictable and monthly SIPs are an ideal way of investing in both equity & debt instruments. The instrument of choice for building a longterm corpus for meeting future goals would be mutual funds.  However, other instruments also come in handy. PPF is an useful instrument for accumulating money for any longterm goal like retirement/ children’s education. Sukanya Samruddhi Scheme is a wonderful scheme if one has girl children & want to accumulate for their education/ marriage. EPF & other retiral benefits are to be used for retirement funding. NPS is another low-cost tool that helps in accumulating for the retirement phase.

Equity oriented instruments are integral to any portfolio as it is these instruments which helps in getting excellent inflation adjusted, real returns.  No portfolio works well forever. To achieve good results from a portfolio, especially one which has equity components, regular monitoring & review of the portfolio is essential.  This regular monitoring will also help in finding out whether the portfolio is performing as well as it should & whether one is on course to achieve the goals, in the given timeframe.

Getting all these right is essential to achieve the goals. If all these appear a bit technical & looks like a lot of work, one could always approach a professional advisor, who could assist with these.

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

Trip to San Diego

Recently, I had gone to San Diego to attend a couple of conferences.  It was a nice pleasant experience. One of the places I stayed was iconic. Hotel Del Coronado is a heritage property that had hosted US presidents, celebrites & other worthies. 

Years ago, Adnan Sami had entreated the Lord to lift him out of his abysmal existence - Lift kara de, he had crooned with all the pathos he could muster! I felt God had done that to me now.

Here is a trip diary. This is the first part of my three part dispatch -

​

 To the land of motherhood & applepie.pdf

​

                                              

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

Distribution business is changing fast... they need to adapt fast... I have written this piece in Mint

The mutual fund (MF) industry has been living a life in a blender, or so it seems. There has been a steady stream of guidelines and directives over the past 8-9 years, and with no end in sight. The reforms are ostensibly for the purpose of protecting investors. While some of them do, others have been onerous for the industry and its distribution community. Costs have gone up as compliance and documentation requirements have increased. Regulatory activism in MFs is keeping the industry in a perpetually unsettled state. Reforms should be even-handed with investor protection on one hand, and the industry’s well-being on the other. This could contribute to a healthy industry, which would be good for the investors as well.

However, not all regulations are bad. Some are needed to give choice to investors (for instance, direct plans), and others to ensure that investor interests are taken care of. But some are just plain bizarre—like disclosing what a distributor is earning from each investment, all of which will be printed in a consolidated account statement (CAS).

There have been four pronouncements in the past three months that can alter the course of the industry.

Feeds to registered investment advisers (RIAs) for direct plans and their availability on the MF Utility portal (a transaction platform sponsored by the Association of Mutual Funds in India, or Amfi), is one such announcement. Direct plans are good for the informed investor, or for someone, who has a reliable adviser. Sharing feeds with RIAs is a step in the right direction. Allowing investments in direct plans via MF Utility is again positive. This gives investors the choice to do it themselves, or go to an RIA or continue with a distributor. It also allows clients to move away from those distributors who do not provide suitable services and advice—which is how it should be. This will keep distributors on their toes.

The second pronouncement is about bringing down the total expense ratio (TER), which is again good for investors and the industry as a whole. But persisting with quotas for sub-categories such as B15 (beyond top 15) cities, is negative. Overall, lower TER will bring down expenses for the investor. But the investor already has a choice to go the direct way and enjoy lower expenses. This can deliver a body blow to distributors whose earnings can be shaved off by a third. This would be in addition to the 14.5% service tax burden imposed on them last year. Also, there is a lot of paperwork, which has pushed up costs over the years. Fund houses and distributors will have no option but to learn to do more with less.

The third suggestion is to bring down the number of schemes, which has good and bad parts. The good part is that it will simplify the offerings into specific categories. However, it will also straitjacket fund houses into having undifferentiated schemes. No one is telling soap manufacturers how many varieties of soaps they can sell. As long as they are operating within the ambit of the law, they can have five or 500 variants. This overzealousness will kill the vibrancy in the MF industry, even though it may bring simplicity. It will not allow market forces to play out, and will curb innovation and differentiation.

What the Securities and Exchange Board of India (Sebi) could do is follow practices similar to what is in the pharmacuetical industry. Here, simplified products are available over-the-counter, which can be purchased by anyone, and complicated products require a doctor’s prescription.

Lastly, the one that has got the goat of distributors is the directive to disclose how much an adviser has earned (in rupee terms), irrespective of the amount earned from every fund, in a CAS. The TER is already disclosed. This additional disclosure does not in anyway aid the customer’s assessment of fund performance. It actually distracts them from the work that their distributor has done, and wrongly puts the focus on what the distributor earns. In no industry is remuneration sought to be disclosed across the board. This is aggressive targeting, something a regulator is not expected to do. This is not the correct way of nudging people into buying direct plans, which are not for everyone in the first place. Distributors are also worried that this will bring back passbacks—a practice that is illegal, and also harmful for the industry.

This will also create an uneven playing field, as other segments of the financial services industry are not handicapped like the MF industry. For instance, the insurance industry has been able to stay untouched. This may be due to its lobbying power, a regulator that is indulgent, and probably also because of government ownership of the main entity.

There are multiple headwinds that MF distributors are facing. The online distribution channels might wean away potential and existing customers. Doing business may turn difficult as the MF industry is fast becoming cumbersome and unremunerative for them and which will whittle down their numbers. However, smart distributors will use online platforms to lower their cost of operations and also get business, irrespective of the geography.

Online platforms might actually be a saviour for the MF industry since the target audience is in the age group of 25-45 years, who are Net savvy and most likely to embrace these channels. Also, every fund house has enabled investments via their websites, adding to ease of transactions. Mobile-based platforms and apps are becoming mainstream. All of this will lead to people doing their own research and investing directly, or seeking the advice of an RIA and then investing. Hence, the industry is expected to continue on its growth path even though the distributor may be a vanishing tribe.

Sebi, however, will have to stop its relentless tinkering for sometime, and allow the industry to settle down and find its level. The regulator should also lobby for a level playing field for MFs with the government. It will have to do this if it wants this industry to continue to serve investors.

The actual link of this article in Livemint is as below:

http://www.livemint.com/Money/HwdRvpxvVEPP6qh8j7z3VP/Whither-mutual-fund-distributors.html

Authored by Suresh Sadagopan of www.ladder7.co.in

How to Invest like a Pro?

To achieve your goals, you first need to spell them out clearly and then prioritise them. For instance, retirement planning is an important goal, and so is children's education. Buying a car would be classified as a medium-priority goal while a foreign vacation would be a low- to medium-priority goal. Based on the resources available, allocate them to your high- and medium-priority goals first. Only if resources are left over should you allocate them to low-priority goals.

Understand cash flows

Identifying goals is only the first step. Before investing you need to evaluate your personal situation. Your age, number of years to retirement, marital status, financial commitments, background and lifestyle, occupation - all of it should all be taken into account when deciding which products to invest in. In fact, these play a crucial role even in identifying goals. A businessman, for example, can consider working well into his sixties and even seventies, as it is much more feasible for him to do so. Hence, in his case, it may be possible to accommodate a few interim goals, which may not be possible in the case of salaried. On the other hand, a service class person may have a regular cash flow and can invest regularly via systematic investment plan (SIP) to achieve his goals. Doing the same may not be feasible in the case of a businessman whose cash flows tend to be irregular. Also, the risk inherent in business is higher than in service. All these factors need to be taken into account when choosing the appropriate investments.

How much risk can you take?

Evaluating your capacity to bear risk should be your next step. A person's level of 'risk tolerance' provides a clue to the level of risky assets he may have in his portfolio. Risky assets include equity-oriented assets and real estate. Someone who is conservative should have a low level of allocation, say 35 per cent, to risky assets. Risk is measured in terms of the amount of volatility one can stomach without going ballistic. However, risk tolerance alone should not decide your asset allocation. Your personal situation should also play a major role. Professionals use validated psychometric tools for assessing risk. Many risk assessment tools are available on the Internet. You may make use of them to check out your risk appetite. Some of these tools also provide a comfort range within which one can operate for different asset classes, which is useful.

Besides risk tolerance, you also need to take into account your 'risk capacity'. For instance, a person with decades to retirement would have a higher risk capacity than a person close to retirement. For the former, a sudden reversal in the markets would not be catastrophic as he would have time on his side which will allow his investments to recover.

In a sense, this also tells you how much risk you may have to take to achieve a goal. This is referred to as 'risk required'. If risk required is very high for some goals, one may have to operate away from one's comfort zone, which is not desirable. Doing so will work only in cases where risk capacity is very high too.

Allocate right

Next, you can arrive at an asset allocation by taking into account your personal situation and the risk metrics discussed above. For near term goals of up to two years, safeguarding the principal is the primary concern. Only by investing in less volatile debt instruments can you ensure that the amount you need will be available when needed. For medium to long-term goals, adhere to an asset allocation approach.

Run a check to find out if a certain level of asset allocation is suitable for achieving the goals you have. You may adjust your exposure to risky assets slightly higher or lower to ensure that your goals are achieved. Such adjustment should, however, be within your comfort zone, as discussed earlier. One need not invest separately for different goals as long as the corpus grows at a pace where the goals are achieved as they come. As you approach a goal, move the amount allocated for that goal into debt based instruments in advance of the event. This will ensure that turbulence in the markets close to the goal does not jeopardise its achievement.

Choosing products

Finally, having ensured that you will be able to achieve your goals with the asset allocation you have arrived at, finalise the products you will invest in. While doing so, take into account various aspects such as liquidity, taxation, and tenure. The portfolio should be made in such a way that it is simple, easy to manage and at the same time efficient in meeting overall objectives.

This is how a professional goes about constructing a portfolio. He tries to understand his clients' goals, how far away they are, takes his risk tolerance and personal situation into account, and then arrives at an appropriate asset allocation. Only then does he choose the products that he should invest in. Once you follow the right method, it should not find it difficult to replicate these steps.

The actual link of this article in Business Standard is as below:

http://wap.business-standard.com/article/pf/invest-like-a-professional-116043000872_1.html

Authored by Suresh Sadagopan of www.ladder7.co.in

How to realign investments after you retire…

Retirement is a bitter sweet experience. Many have been looking forward to it. But when it is round the corner, one does get jittery. If you have retired & want to know what you should now do, you are reading the right piece. Go on…

Questions loom…  Have they saved enough? Where is the regular income going to come in from? Are the current investments in the right places? Are there changes that need to be done now?

These questions may be keeping you awake at night more effectively than a double dose of caffeine! Also all these days there was fixed routine. Much as you may have hated it, it was there. After retirement, you now need to figure how to spend all that time, from morning to night.

At first flush, it seems easy. We all tend to think, we’ll go for a invigorating morning walk, have breakfast on the way in that tony joint, come home to a cup of coffee, read papers & magazines, catch up on music, watch TV, visit friends etc. All these may happen and still there will be huge chunks of time to fill. Plus, one may not be able to do all these everyday.

So, you need to think through what you would like to do after retirement and not just assume that you can read newspapers, do some social work & dreamily see the world go by. Most people find this surfeit of time – maddening!

Now, let’s confront the first problem, which lends itself to tackling more easily.  Let’s break it up & solve it in parts.

Estimate expenses - The first thing to do is estimate expenses in the retirement phase.  This includes the regular living expenses, medical, travel, insurance & other such expenses. Some people want to relocate to their home town or to another place.  This has to be factored as well & the probable expenses in the new place should be considered. A tip – travel expenses tend to be high in the first few years of retirement as one would want to visit relatives & friends, see places which somehow eluded during their working days as well as catch up more on family events, functions etc. This extra expense needs to be budgeted for.

Setup an income stream -  The comfort of the salary cheque ( for most people ) is now history & just a fond memory!  Surprisingly, the workplace which one went to work & sometimes hated, now looks like a wonderful place!  Many of those colleagues ( including the prickly accountant ) look like chums, in the rear view mirror.  You could hardly believe that you cursed your employer & even hated some colleagues while working!  That’s what nostalgia is all about.

But coming back to terra firma, a proper income stream on a regular basis is vital. One needs to check whether the expenses will be supported by the corpus or not after accounting for inflation. There are many calculators available online that can tell you that. That will soothe the jangling nerves a bit. 

Risk Assessment -  Before deciding on where to invest for that, you need to get the asset allocation right.  What I mean here is that you should get to the right mix of various assets to be invested. For doing that, you need to look at your Risk tolerance. Not all of us are risk takers. Some of us are aggressive & some of us ultra-conservative. A lot of us are in between. It is important to know where you fit in, on this continuum. Once this is known, assets can be allocated accordingly.  Risk assessment tools are available on the net which should give you an indication. We use validated tools in our Financial Planning practice, when we do the planning exercise.

Setting up an income stream -  Based on the results of the risk tolerance analysis, investment candidates can be chosen.  They should be chosen such that some of them would be useful to setup cashflows immediately, as a steady income stream needs to be setup.

The following is a list of products which will help here –

1. Tax Free Bonds – which can give steady, tax-free income for long periods – upto 20 years.
2. Systematic Withdrawal after investing first in debt funds – this also ensures steady stream of income & is very tax efficient.
3. Investing in Equity oriented MFs, which can give regular dividends, which are tax free
4. Investing in Senior Citizens Savings Scheme / PO MIS for steady income. However, the interest income derived from this is taxable as income, which may not be very useful for those in higher tax slabs.
5. Investing in FDs – both banks & corporate. Again fully taxable, but is a simple product that is relatively low risk
6. Debentures, Bonds etc. on merits
7. Annuity ( pension ) products to derive steady income. Again may not be very efficient on taxation front as annuity is taxed as income.
8. Rental income – for those who have properties. Again, rental income is taxable

Investments for the future -  Ideally, you should invest some portion of your retirement corpus for the longterm.  They would be needed some time in future. Equity oriented investments should be invested for the longterm as they tend to perform well over longer time horizons. Even debt investments, which are not required right away should be invested in the cumulative mode, so that it accumulates over time. Properties should be consolidated and only one or two properties should be kept aside for receiving rental income. Too many properties would be a hassle to manage. If there are many properties, they should be liquidated and invested in financial assets, which can offer uninterrupted returns.

Medical Insurance – It is ideal to have medical insurance in place well before one has retired. If  not, one should look at the possibility of getting a medical insurance cover, at least to cover to some extent. A cover of about Rupees three lakhs atleast is recommended, if one can get insurance at this stage. The other option is that seniors can be covered by their working children, under their employer given group medical insurance cover. Group medical insurance even covers preexisting illness and would be a boon, if available.

Contingencies -  It is ideal to set aside some money for contingencies. Medical contingencies are the obvious one. There could be other contingencies that may need to be provided for.  According to requirements, a contingency amount may be kept aside in a debt fund or fixed deposit.

Diaper check!  -  After doing all these, one needs to review one’s investments on a regular basis. Expenses also need to be monitored, from time to time.  Keep a tight leash on them. Discuss with spouse when expenses balloon & get a buy-in to keep it under check.

Any “amazing investment ideas” need to be thoroughly examined before investing.  Also, you need to look askance at any “fantastic returns” some scheme is offering – if the proposition looks too good to be true, it probably is. Give it the skip. 

Resist the temptation to pass on most of one’s assets to one’s children or other worthy beneficiaries. Small gifts are fine.  Also, one should not allow one’s properties to be pledged as this can shake the foundations of Retirement planning itself.

In a nutshell, allow your common sense to reign supreme. Stay within the plan. Play safe. And enjoy your retirement. It is a well-earned long holiday!

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Please also look at my earlier articles on Retirement...

Article on Retirement mistakes that people make. 

 http://ladder7fa.blogspot.in/2016/04/avoid-these-mistakes-to-ensure-well.html

Another piece on approach to take for a well funded retirement

http://ladder7fa.blogspot.in/2016/04/approach-to-take-for-well-funded.html

Hope you like these posts.

Article by Mr. Suresh Sadagopan, first published on Linkedin.

www.ladder7.co.in

Approach to take for a well funded retirement

This is the second instalment on Retirement. This piece talks about what you need to do for a well funded Retirement.

At every point in life, we are seized with what appears to be supremely important preoccupations to us.  During the twenties, the gadgets take centre stage. Living it up, partying & a bit of travel would seem like primetime activity, with quite a bit of money sapped in these. In the thirties, marriage, house, vehicle, white goods  etc., come under focus & suck up available cash. In the forties, children’s education, vacations & home loans would be some of the major expenses.

Most people have not thought about a thing called retirement till this point. Retirement seems far – beyond the horizon. And thinking about retirement, makes one feel old, almost ancient.

But, we all need to think about it – sooner, than later.  The sooner we think, lesser the money that needs to be saved per annum, till retirement.  That amount can be mind-numbingly large, if you start late.

An illustration - For instance, if one starts putting aside about Rs.4000 from age 25, till retirement at 60, the amount at retirement ( @10% returns ) would be Rs.1.5 Crore. To reach the same figure if one starts at 45 years, the saving per month would have to be Rs.36,200 – or over 9 times !

Let’s look at it another way – If one saves Rs.4,000 from age 35, one would reach Rs.52 Lakhs – one-third of what it would be had one started at 25!  That’s the power of compounding at work for you.  Rabbits can never hope to beat the tortoises that have started early – a signal lesson from Panchatantra!  Starting early is the first lesson.  Just because Retirement is Beyond Visual Range, it cannot be ignored.

Lock them up & forget them -  Choosing good instruments to invest in is important. Choosing those which are also difficult to dip into is even better – atleast from retirement planning standpoint.  Instruments like EPF, PPF & NPS come to mind.  All the three are notoriously difficult to access money from. One can dip into it ofcourse, under certain conditions; but it is not easy to just redeem them out like in the case of a FD or Mutual fund schemes. This inbuilt rigidity is a plus as it stays out of bounds!

Contribute well into these funds & forget that you have invested there. Even if you meet the conditions to draw out some money, resist it.  It’s money for your Golden years. You cannot take a loan for that. You may not be able to go back to work then – you may not get one & health may not permit. You need to do this for yourself.  Don’t dip into this cookie jar.

Take risks early on, think longterm -  Start off with equities/ equity oriented funds early in life.  They may be volatile. But they perform over time.  Start a monthly investment in a couple of good Equity Mutual Funds for the longterm. Review their performance, say once a year. Change only if absolutely necessary – if they have become laggards; or if you need to switch to another category, say Multicap funds ( from Largecap funds ). The allocation in equity & within equity is based on Risk tolerance levels of a person. Get that allocation right. Seek professional help, if necessary.

Equities have delivered over the longterm – Sensex has given 17%+ returns, over 35 years.  There have been periods when the returns from the stockmarket have been low – for 3, 5, 7 even 10 years. That’s precisely why you need to give it time. Investing early & staying invested for long periods really helps.

The much vaunted property investments work just for that reason. Just because price discovery is difficult, it is illiquid, there are taxation issues etc., people keep it for a longtime – and then they gloat that they have got great returns from property. Equities, if held for such long periods as properties, would beat the daylights out of them, 8 times out of 10.

Thinking beyond FDs -  For a lot of people, FD is the weapon of choice for all situations. For shortterm, they will invest there; for children’s education they will invest there; for retirement too, they will invest there.  The problem with FDs is that the interest rates are modest, made far more modest as it goes through a shredder called income taxes. Most FDs are offering just 7.5% pa now. A person in the 30% tax bracket would just end up with 5.18%.  That would not beat inflation.

Fixed Maturity Plans  - We need to somehow circumvent the shredder & limit that haircut, as much as possible.  Fixed Maturity Plans ( FMPs)  [these are debt mutual funds schemes with a tenure ] with three years or more maturity period, will be eligible for indexation benefits & long-term capital gains tax treatment.  In simple terms, suppose a FMP is offering 8% return, even post tax, it will be very near that figure! Also, in case of FMPs, they invest in instruments whose maturity coincides with the maturity period of the scheme and hence one is insulated from interest rate fluctuations that may happen in the next three years.

Debt funds & setting up SWPs -  Other Debt funds also enjoy the indexation & capital gains tax treatment after three years. Hence, it would be great to invest in them too. Debt funds are open ended & can be liquidated, if there is an urgency. Some of us are not comfortable with debt funds because the returns are not fixed. The reason is that there are many underlying debt investments, which are all traded and hence NAV can fluctuate. But, they will largely mirror the interest rate in the system. The advantage here is the beneficial taxation ( beyond three years ).

We can setup Systematic withdrawals from Debt funds in retirement. Systematic Withdrawals Plans ( SWP ) is drawing down a specific amount on a regular basis ( say monthly ), for a period of your choice. This is like setting up an annuity as per your convenience & drawdown requirements.  If we setup a withdrawal which would be less than the annual interest, it can be sustained in perpetuity! 

They are again super tax-efficient as withdrawals are treated as redemptions. One needs to pay taxes on the difference between the purchase price and sale price of the units – hence it is very low – as low as 2-3% effective tax!  SWP  is hence a very useful & effective retirement income setup tool

Read this - SWP as an effective tool for setting up cashflows

Tax-free Bonds -  The other tool of choice is a tax-free bond. Tax-free bonds were available for subscription this year ( and in some previous years ). This was available in some previous years too. This year it has offered between 7.2% – 7.65% pa returns. The good part is that there is no tax to be paid on this.

It will offer regular income for between a 10-20 year period, which is a major plus. Hence, with this instrument, one is insulated from the interest rate fluctuations & can hope to get consistent income for a long period. This is especially useful to take when one is nearing retirement or is retiring.

Immediate Annuity – One may consider purchasing a pension option ( called immediate annuity ) with a portion of the retirement corpus. This will offer sustained income. But the annuity is entirely taxable as income. So, if one is in the lower tax brackets or not in the tax bracket, this will work.

We have discussed the instruments one could invest in the runup to retirement as well as  near retirement.  One can use a combination of these instruments to come up with a bouquet that will suit them the most.

Just remember to rein in the excesses of the youth ( moneywise! ).  Remember that Retirement is somewhere beyond the horizon. You will get there one day. You can choose to be prepared for a fully funded retirement. 

Now, start counting the beans you can put aside for retirement!

Authored by Suresh Sadagopan |   published first in Linkedin |

www.ladder7.co.in

Avoid these mistakes to ensure well funded retirement

Retirement is one milestone people look at longingly & wistfully. For most people, the reason is that they are fed-up with the humdrum routine of going to office, yes-siring the bosses, the stress which comes with today’s high pressure jobs, the toll it takes on one’s health, office politics which are disempowering & other reasons. Hence, for some, retiring early is a priority. However, that is easier said than done.

The reason – If one retires early, the survival period is longer. Hence, one needs a bigger corpus to retire with. However, since one is retiring early, they need to build that bigger corpus much earlier in life, which is a tough ask.

Retirement Planning is serious business. Retiring early is a herculean task, which requires careful planning & adjustments. Read this - http://bit.ly/1OXiLdb

The more plausible solution is to retire at the usual superannuation age of 60 & have a good enough wealth accumulation so that it may see one comfortably through the retirement years.

In this article, I’m going to discuss retirement planning options which are avoidable if one is not to end up in penury in the golden years.

Annuity option - The latest budget has put the focus on annuity ( from one portion of the EPF ). But annuity is hardly a good solution. Annuity rates are around 5.5-7%. Also, annuities are taxable as income making them a poor choice.  The same is the case with all pension plans from Insurance companies. Traditional plans can offer 5.5-7% returns.  ULIP plans can offer potentially higher returns, but the risks are borne by the policy holder. But in all cases, annuities are taxable. Also, annuities remain the same throughout life, making them less meaningful as time goes by.

Hence, if your predominant vehicle for retirement funding is through annuities, you can never hope to hold your head high ( unlike the Sar uthake jiyo pitch of pension plans ).  Annuities are at best a secondary option – not the best.

Read this piece on the flaws in annuities as they exist today -  http://bit.ly/1TYN9f6

Laddering option – Insurance agents offer laddering as a solution. They may suggest 20 endowment policies which will mature every year in retirement, ensuring that there is income coming in every year. While that looks fine on the face of it, there are problems with that. Firstly, endowment policies tend to offer 5%-7% returns. The returns are tax free. But, as you can see the returns are low.

The problem is there from the start. One would be getting into low yielding insurance products & would invest continuously for a long period. Investing in a low yielding product for the longterm would actually create a much smaller corpus at the end. For instance, if one were contributing Rs.10,000 pm for 20 years & one product yields 6.5% & another 10%, the corpus at the end of 20 years would be – Rs.49 Lakhs & Rs.76 Lakhs respectively. The difference is Rs.27 Lakhs! The corpus in the latter case would be 55% more!

Also, when one is putting money into insurance, there is no flexibility. One needs to pay consistently for a very long period, which can be a positive too. But with life being as fluid as it is today, we need flexibility to invest more or less in a year – or even skip payments, if necessary. The other problem is that all investments here are in debt products. One may be better served by a bouquet, which we will change as per the unfolding future – in which case the investment would be better aligned to one’s needs.

Even in the decumulation phase, the life insurance policy will mature, as per the policy tenure. Suppose lumpsum money is required at around retirement, that is not possible in an insurance plan. To sum it up, it is better to avoid setting up an income stream through insurance plans for they are rigid, inflexible, low yielding & without possibility of diversification & hence a concentration risk.

Relying on Fixed Income products alone -  Many make this classic mistake. They want all their money in FDs, Bonds, Small savings and the like, which are low on risk. But, these instruments will offer returns which are all subject to tax. Post tax returns hardly are able to beat inflation. In future, inflation makes things very hard if one is relies on such instruments alone. These people wrongly believe that in retirement, they should not take any risk. The biggest risk in retirement is not taking the required level of risk, so that the corpus lasts the lifetime.

Real Estate -  Many people invest in real estate so that they may fund their retirement. There are many ideas here. Some people buy land, which they would like to sell for a handsome profit later to fund significant goals, including retirement. While this is fine on the face of it, there are problems here too.

Land appreciation is overhyped. While some land parcels have appreciated very well, it is not true across the board. Also, land is prone to encroachment, as many people do not keep tabs of their land closely.  Residential & commercial property are better in that respect. But again the appreciation is not good across the board and one could get caught on the wrong foot.  For instance, in the past five years, properties in Hyderabad have given a negative return, which would come as a surprise to many. Nor is this an isolated case. Several areas across India have offered anemic returns, making property investments not such a great option.

In case of properties, one may spend on interiors, upkeep, taxes, brokerage etc. which are generally not factored in the final returns. After factoring all these, the final returns may not be all that great when the property is sold. Further, there are taxes to be paid on sale. The other intractable problem is the illiquid nature of property. One may not be able to sell property when needed, making it a difficult asset class.

If one keeps the property for rental returns, residential property can offer about 2-3 % returns on the market price and Commercial property can offer 3-6 % on market price, all of which are taxable. Hence, the yields are nothing much to speak about.

Simple financial assets may work far better in terms of returns, liquidity, predictability, taxation etc. The first thing to do is to avoid making these mistakes. In the next dispatch, we’ll see where to invest to make retirement a period of enjoyment & not one of chronic stress.

Published first in Linkedin. 

Author - Suresh Sadagopan   www.ladder7.co.in