Planning for the year ahead

It was dark.  Bala got out of bed to go to the bathroom. On his way, he  saw light streaming out of the hall. How many times I have asked Pranay to switch off the TV before going to bed -  he was cursing under his breath. When he reached the hall, he was able to see that the TV was off and a blinding light was coming from the far-end, near the sofa. 

Bala was thoroughly perplexed. For a moment he thought something was afire. The light was however a powerful white light and there were no flames or smoke.

He was confused. He heard a voice call him. For a moment, fear paralysed him. The light was now subsiding and he was able to make out the silhouette of someone seated on the sofa. He panicked, thinking that it might be a burglar.

Sensing his panic, the figure addressed in a soothing voice, ”Don’t worry Bala. Don’t you recognize me? ”. Bala’s panic subsided; but he was questioning his sanity now. He slowly moved forward and found a  saintly figure seated on the sofa, with a flowing beard – much like Bhisma pithamaha.

Somehow the benign countenance comforted Bala.  He felt a surge of reverence well within him. “No Sir, I’m not able to recognize…”, he trailed. Then it dawned on him that this could be the Lord himself. He immediately fell to his feet and when he looked up, he saw the Lord, as he imagined him. Then he was back to being the Bishma pithamaha.

Words failed Bala. The great one gave tongue. “We are almost upon the new year.  You people make resolutions and then promptly break them. Why don’t you keep them for a change?”.

Bala’s tongue still was in knots. The Grand Sire intoned –“Let’s see what you can do in the next year – Finances is an area which you have mismanaged, all along. Why not take a few resolutions in that area and keep them?”

Bala’s heart was in his mouth. Finances were his nemesis. He could hardly manage two plus two – forget about managing finances. For a moment he was angry. Then he realized that he was dealing with The Almighty. Bala felt privileged, for God had chosen to talk to him, though it was on finances.

Invest before spending, said the Sire. Now this was a new paradigm for Bala. He normally spent almost everything and invested if he had anything left behind. The Lord knew what was going on in his mind. “You always have to think about the future. Future is not always as rosy as we think & hence the need to save”, cautioned the Lord. This got Bala a bit worried… was God hinting at an upcoming problem… a job loss perhaps?

“No, that is not what I’m getting at”, said the Sage, reading Bala’s mind. “I was just being cautionary and meant that one should put aside money to meet future goals. But many of you cash out your future income itself, by taking loans and buying what you cannot afford.  So, that’s the next one you should not do”, the Lord said.

Was he talking about him, wondered Bala again.  Bala had been in the habit of taking loans at the drop of the hat. He has a home loan, car loan, personal loan & a small loan for the washing machine.  Yes, he could have postponed some of it – like the washing machine. He had replaced a perfectly working washing machine with a new one, since he liked the technical wizardry,the bells and whistles the new machine had.

The-cashing-in-your-future-bit now hit him. He realized at once that he was recklessly spending his future earnings and is also jeopardizing achievement of major future goals, like retirement and education for his children, by throwing money on unnecessary thingies.

Bala resolved then and there that he will put a stop to such impulsive purchases and giving wing to flights of fancy.

The Sage was smiling. “That’s good”, he said.  That will ensure that you don’t have to keep looking for a new job, every couple of years. Bala was speechless. He had just that idea the previous evening, but he had dismissed it. He was doing well in his position. The thought had come in the first place, as he was struggling to make ends meet, inspite of his good income.

“Be realistic in your expectations. Be willing to take some risk. Give your investments time. Don’t worry too much after investing. You should have done that before”, the Lord said.

Sage counsel – Bala thought.  We all invest in something and start worrying. We pick up the paper and check the quotes and get palpitation. We don’t give the investments time. And in those cases where we cannot check, like property, we don’t worry, we retain it for long and tend to make money. Bala instantly understood that risk reduces with time – risk is inversely proportional.

“And finally, don’t chase fads. Don’t invest because everyone else is investing. Invest only if it makes sense in your portfolio. Invest as per the asset allocation required in your case for meeting the goals. What is good for one, need not be good for another”, held forth the Lord.

Bala was deep in thought. Yes. All these are good advice, which I should incorporate, he thought. There was a blinding light and the Lord was gone. Bala was in an uplifted mood now. He cannot go back to sleep now. He saw that the clock and it said it was five in the morning. He resolved to go for an early walk. The weather was great. When he hit the road, there was a cycle passing by with a man gaily pedaling and waving to him. “All will be well”, he said while he passed and then pedaled away in a jiffy. Bala saw the beard and he thought he caught a glimpse of the Bhisma pithamaha!

Article by Suresh Sadagopan ; Published in Moneycontrol.com on 29/12/2011     

Planning Holidays – How viable are club memberships?

Holidays for most people used to be a trip to hometown and back, twenty years back. But, that was then. These days, trips to hometown, do not count as holidays. Holidays are separately planned, often to far-off and exotic locations. That can cost quite a packet, as we can attest as Financial Planners, being privy to what our clients spend on their vacations.

The spends can range from Rs.25,000 to several lakhs of rupees. This means that, for some of them, this is a major expenditure item in a year and careful planning needs to be done. 

This is where time share resorts come in. RCI, Mahindra Holidays, Country Club, Sterling Holidays are some of the popular ones.  The concept in a timeshare is that one can avail of a holiday, for seven days in a year ( normal scenario ), in one of the many locations of the service provider, for a specified period, like, say, 25 years. For that, one needs to pay a certain sum of money in advance, say Rs.3.5 Lakhs. This money is either paid in a lump-sum or as part lump-sums & part EMIs. Apart from this, one also needs to pay an annual maintenance fee, which may be Rs.7,000 – Rs.20,000 pa. 

So, is that cost effective? The answer is not straight forward. These club memberships are not cheap, for sure.  The main reason why many want to go for such memberships is 1. Hassle free holidays – the rooms and the resort are good  2. Once there is a club membership, one may take a good holiday every year, instead of skipping it 3. Peer pressure & keeping up with the Sharmas. 

Now, everything depends on the kind of resort, facilities and services available.  Some of the resorts do have excellent facilities and the experience is entirely positive.  In some other cases, the experience is not so good and one feels cheated. Many of the resorts claim to offer five star quality rooms. My personal experience is that the rooms are pretty good, but the claim that they are five star quality, is a stretch. But, over all it had been good. Again my personal experience with another service provider was substandard. The room was OK; but the resort was like a housing colony in Mumbai. I definitely felt cheated. 

So, that’s the problem. The quality of the resorts & the rooms may not be uniform, especially for a provider like RCI, who depends on various resorts coming under it’s banner. Ofcourse, one can pick and choose and go to specific resorts, based on the feedback one has received from others who have used & hope for the best. But, that beats the purpose of choosing a club membership, which was for hassle-free holidays.

From a purely financial standpoint too, it is not a easy decision to make. Again, the cost is high or low depending on various factors – what kind of accommodation would you normally stay in and what you would pay, your willingness to evaluate various potential resort options each time you want to go for a holiday and other factors. If you want a uniformly good experience, you are better off with a good club / resorts chain, where you are confident of the resort and room quality and you would want a hassle free holiday. In this case, one would pay about Rs.44,000/- (Rs.35,000/- interest on the amount paid + about Rs.9,000/- as Annual maintenance charges , based on the example ), which works out to  Rs.6,285 per day for the people covered. That is not exactly cheap. Also, the amount paid does not come back to you, which adds to the cost too. 

There are alternatives available from various other travel agencies these days, which could give very competitive options. For those who do not commit for the very longterm, one can take advantage of the offers available. This ofcourse means more homework before zeroing on the holiday, but there is the benefit of not paying a huge sum upfront and the choice of going to any destination of one’s choice, over the years, instead of restricting to what the club/ resort chain has on offer.  It could also be cheaper.

On the whole, Club/ resort chain option would be a great idea for those who want to go on a holiday year-on-year, want hassle free holidays in quality resorts.  The downside is that the price can be  high, they get stuck to that chain, the holidays can be accumulated only till a point, after which it will lapse. Also, this is a very long term commitment that they are making and there is an inherent risk in it. In the other option, the advantage is that you don’t have to commit for the longterm, you are not chained to the resorts available with the club and your holidays may be of much lower cost. The downside here is that you may have to spend time & effort evaluating options for holidays each time, the experience will be good sometimes and not so at others.  

Choose the one that suits you best, based on what you are actually looking for.

Article by Suresh Sadagopan ; Published in Financial Chronicle on 17/11/2011

Small Saving schemes – Are they attractive in the new Avatar?

Small savings schemes used to be a major attraction, with investors. But, small savings schemes returns used to be static. With rising interest rates, other assets had adjusted their payouts – but that did not happen in the case of small savings. Due to this, small savings schemes lost out to Bank FDs, NCDs, Company FDs, FMPs and the like.

Now, that has been corrected to some extent. Is this going to excite people and make them go for these?

Unlikely, in most cases. The changes are there, but small. Time deposit in post office have gone up from the 6.25 – 7.5% range to 7.7 – 8.3% range. NSC has gone from 8% - 8.4%, but the 5% bonus at maturity has been discontinued. Hence, there is not much change in the returns. Now, NSC has a tenure of five years, down from six years. There is also a 10 year NSC which has been introduced now, offering a 8.7% return. All these instruments are currently offering returns lower than what a bank FD offers and may not sit well with most people. Those not in the tax bracket or in the 10% tax bracket and want government guarantees, may find these useful. An NSC offering 8.4% translates to a measly 5.8% post tax, for someone in the highest tax slab. That’s not much, isn’t it? Especially, when inflation is hovering between 9-10%.

The other change now is that, the rates have been linked to the government securities of similar maturities, with a 25 basis point spread ( 50 basis point spread in case of the 10 year NSC ). So, expect these rates to go up and down every year in line with the prevailing rates then. The rate for Senior Citizen Savings Scheme ( SCSS ), has been kept at the same level of 9%. The spread has been kept at 1% compared to the prevailing government security rates, keeping in mind the fact that Senior Citizens may depend on this income, for their sustenance.

However, the interest rate for PPF has gone up to 8.6%. This makes it attractive as this is a post-tax return. The post -tax return comes to 11.3% ( assuming Sec 80C benefit is being availed ), which is fantastic. An instrument yielding north of 16% pre-tax returns only, can give you such returns. Hence, this becomes a very good longterm wealth creation tool, in your hand. Also, the investment limit per year has been enhanced to Rs.1 Lakh. PPF comes under Sec 80C and helps you to save tax, in the year of investment where you can take advantage of the enhanced limits. All in all, PPF has become a very attractive long-term savings instrument. It always was a weapon of choice for meeting longterm goals, especially Retirement and Child Education. Now, that weapon has become far more potent!

Make the most of this new opportunity in PPF, that has come up. Otherwise, the other optione mentioned earlier – Bank & Company FDs, NCDs, Bonds, FMPs – score over other small savings instruments. Another one that could offer excellent return possibilities over the next 2 – 3 year period could be a debt MF scheme, especially with medium and long maturities.

Choose wisely, depending on your horizon and risk return expectations.  

Article authored by Suresh Sadagopan; Published in Moneycontrol on 16/11/2011

Financial Planning is not Investment Advisory

These are terms which are used synonymously – but they actually mean two different things. You might have heard of many. Sales & Marketing is one such pair. They are often used interchangeably. Sales is the art of persuading a client to buy a product or service. Whereas, Marketing is the sum-total of all activities from product conception, branding, retailing, communications and beyond, whose overall purpose is to ensure product sales. But these two areas are entirely different. There is another funny indian-ism which I have heard – I’m going to the bazaar for marketing ( which is their way of saying that they are going to the market to buy stuff !). A similar confusion surrounds Financial Planning & Investment Advisory. Financial Planning refers to drawing up a blueprint to achieve the goals one may have, through appropriate use of the finances at one’s disposal. Investment advisory however generally refers to understanding client requirements and advising appropriate products to invest in. An Investment Advisor ( as per Investment Advisors Act 1940 of US SEC ) is a person or a group that makes investment recommendations or conducts securities analysis for a fee. This clearly establishes the limited nature of engagement in case of an investment advisor as compared to a Financial Planner. A Financial Planner is like an Architect, in the sense that an FP draws up a blueprint of what needs to be done on various fronts like liquidity & cash management, goals feasibility & planning, Risk management, Long-term cashflow planning, estate planning… Investment advice comes at the end in a financial plan, after all aspects have been analysed. It is a by-product of comprehensive analysis of one’s situation. In that sense, the investment advice will simply flow out of the analysis done. For instance, if the risk assessment shows that Rs.1 Crore of insurance is required, then that will automatically come in the recommendation. Also, unlike in the case of an investment advisor, a financial planner will also look at past investments and offer advice on these, to dovetail with their overall plan. In a nutshell, a Financial Planner looks at one’s finances holistically, in the light of all the goals/ finances overtime. However, since almost everyone in the Financial Services space – from an insurance agent to a MF distributor to a stock broker – all use the term Financial Planning in a way that is convenient to them, there is lot of confusion in the minds of the public, at large. A chemist cannot call himself a Doctor. Similarly, agents/ distributors should not be allowed to call themselves Financial Planners. Such legislation is the need of the hour. However, SEBI through it’s Concept Paper on regulation of Investment Advisors is proposing to call an Investment Advisor, anyone who is offering Financial Advice, Financial Planning Services or any action that would influence an investment decision. This is extremely curious, as, financial advice, financial planning & something that influences an investment decision are three different things and cannot be clubbed under the single head of Investment Advice. Financial Planning is not Investment Advisory, though it is a small part of the overall plan. An Investment Advisor indicates a far more limited role than what a Financial Planner performs. More confusion will result if this concept paper sees the light of the day. Again, many use the appellation “Financial Planner” just because they have completed a Financial Planning course, but continue to be an insurance agent. This again confuses the normal investor as they see a person who is an agent, use the tag - Financial Planner. The need of the hour is for the investing public to know, who is a Financial Planner, who is an agent and who is an Investment Advisor. Only then they would know as to whom to contact for what. Simply calling a whole lot of people investment advisors would only confuse issues for the public and result in them approaching the wrong kind of advisors, which is precisely what SEBI may want to prevent. A simple rule applies as always for you – Keep your eyes and ears open. Understand what a particular person can do for you irrespective of what they call themselves. Check out past work they have done; talk to a few references; check whether they have appropriate qualifications, standing & experience in the field. Finally find out what they are charging and evaluate for yourself, if that offers a good value proposition or not. There is just no alternative for keeping one’s eyes open and ears to the ground. A healthy dose of common sense additionally helps! Authored by Suresh Sadagopan ; Published in The Economic Times on 17/11/2011

Understand the taxation on various products and benefit from them

There are advertisements these days for FDs, advertising 12-13% returns. But these are misleading as they just calculate the yield for the tenure of the investment and divide it by the tenure. For instance, if the yield is 10.75%pa for a five year deposit, the cumulative yield for the 5 year period is 66.62%. Dividing this by the tenure ( 5 years ) , one gets 13.32% as the annual return. But this is not correct and the annual return as we have seen in the beginning, is only 10.75%pa. But, people get misled by these numbers all the time. Also, these yields are just pre-tax returns. Now, if one calculates post tax returns, it will be even less impressive. For a person in the highest tax bracket ( 30.9% ), a 10.75% annual return turns out to be just 7.43%. That is not very impressive, is it? It obviously isn’t, with inflation itself hovering between 9-10%. One is actually getting a negative real return, this way. It would be better if this haircut called tax is not there, would’nt it? Unfortunately, it is going to be there. Is there a way out? There is, but not in FDs. In case of investments in Mutual Funds, the gains from the investment are taxed in a different manner. For investments upto 12 months, gains from them are treated Short-term and beyond that, gains made are treated as Long-term gains. In case of Equity oriented funds ( funds investing atleast 65% of the assets in indian equity ), the tax on short-term capital gains are at 15%. This is irrespective of one’s tax slab. Tax on long-term capital gains for Equity-oriented funds is nil, currently. For debt funds, the Short-term capital gains is taxed at one’s income tax slab and long-term capital gains are taxed at 10% without indexation and 20% with indexation. In case of dividends that are paid out, there is a dividend distribution tax, which is applicable. It is 13.51% for individuals, for most debt funds. This is paid by the fund house, but the investor is indirectly bearing the same. The amount coming into the hands of the investor is hence tax-free. This would be useful in cases where the investment is for less than 12 months and the investor is in the 20-30% tax slabs. The Long-term capital gains tax of 10% without indexation or 20% with indexation is applicable only for financial assets. For other assets, the gains are treated as long-term only after a period of 36 months. In case of property, gold or other assets, the tax on long-term gains are 20% with indexation. For this reason, Gold ETF would be a good bet ( instead of Gold ), as the capital gains are treated as long-term after 12 months. The tax treatment for long-term capital gains are like debt mutual funds. There are several other advantages of investing through ETFs like low transaction charges, no storage, no worry about purity etc. This has hence become very popular and Gold ETFs have been mopping very good sums in the recent months. It is important for an investor to hence understand where they are investing and the tax treatment for that instrument. This simple knowledge will assist them to maximize their post-tax returns and enable them not to fall for any advertising gimmicks offering 12 & 13% returns. Article by Suresh Sadagopan ; Published in moneycontrol.com on 30/11/2011