Lights Camera Action Steps on Money Management

Ranjan Varma

a Lights, Camera & Action Steps on Money Management How
to grow your Money Tree Ranjan Varma

Ranjan Varma Copyright © With Ranjan Varma, Founder, RupeeManager Self
Published by Ranjan Varma Printed @ Pothi.com ISBN: Applied for. Feedback and suggestions invited to improve the book by email @ [email protected], [email protected] or [email protected] Address for communication: A-502, Jai Ganesh CHS, Plot no.31, Sector 20, Kharghar, Navi Mumbai, Pin 410210 Website: http://personalfinance201.com http://rupeemanager.com http://rupeecamp.com, http://ranjanvarma.com

i Book Preview by Readers Ranjan‘s personal finance advice is
clear and free of jargon. If you haven‘t really thought about managing your money yet, start reading now – Ranjan‘s book boils down several action steps you can take to start planning your financial future right away. Highly recommended.  Shankar Ganesh, Blogger & Engineering Student Ranjan writes for non finance guys in a way that doesn‘t scare them off. Great stuff  Melody Laila, http://melodylaila.com Personal Finance might sound like a jargon to many of us, however with a book like this, Mr. Ranjan Varma has given us not only a wonderful tool to gain easy understanding of the concepts but also ways and means to plan and put things to action.  Ashutosh Tewari, Supply Chain Professional Ranjan Varma has been doing a great job to his blog followers with his timely and relevant post of how to manage money. Now with 'Lights, Camera and Action' he has done a fantastic job of putting together a complete guide to his readers on not just understanding the nitty gritties of personal finance but also helping them take decisions and actions to ensure one lives a healthy financial life.  Sadique Neelgund, Founder, NetworkFP.com

Ranjan Varma Ranjan has the knack of explaining finance to
the common man. Bereft of jargon and technicalities, his practical tips and ideas can help one adopt prudent practices for personal finance. It‘s a must read for those who want to start today for a better tomorrow. I wish Ranjan all the very best for the success of his book—  Ajit Chouhan, HR Professional, Blogger Preface This book has been written because of the readers of my blog on personal finance. The readers gave me the idea as well as the confidence to create this book that is aimed at helping people take the starter steps on getting their financial decisions right. I will be thankful to hear from you about suggestions on how to improve the book and remove errors. Dedicated to: All those, especially Swasty and Shashwat, who had enormous patience with me, just like God. Ranjan Varma

Lights, Camera ActionSteps on Money Management iii Table of Contents
What is the book all about? 1- 10 Do you need to read the book? 11 - 16 Lights! 1. Cost of Free Advice 17-33 2. Psychology of Money 34-53 3. Playing with Numbers 54-78 Time Value Compounding Asset Allocation Financial Plan Camera!! 4. Financial Management Tools 79-87 Action!!! 5. Tax Planning 88-109 6. Taking Insurance Cover 110-128 7. Selecting Investments 129-141 8. Recommendations 142-150

Ranjan Varma Appendix Monday is Money Day 151-153 Insurance Products
154-160 Term Insurance Plans Endowment Plans Moneyback Plans Educational Endowment Plan Whole Life Plans Unit Linked Plans Investment Rules & Products 161-192 Three Rules of Investing Risk Tolerance Inflation Interest rates Steps of Investing Real Estate Deposits Annuities Mutual Funds Stocks The Financial System 193-200 Functions of Financial Markets Primary & Secondary Markets Pricing & Capital Issues Stock Exchanges

1 What is the book all about? We all know
about our financial responsibilities in life. Yes, you all know the importance of money management. Another proof of that is you are reading this book. But are you sure about having taken the right financial decisions in your life? Answer the following questions to yourself: 1. Are you aware of the cost of free advice? 2. Do you know how to get better, professional, independent and honest financial advice? (Too much to ask?) 3. Do you know that buying online financial products can save you a lot of money? 4. Are you aware of how your subconscious mind is taking automatic decisions that may not be in your interests & need? 5. Are you able to evaluate the financial products that are being sold? 6. Are you buying products that you don‘t really understand or suit your investor profile? 7. Have you taken corrective action about

Ranjan Varma the above if your answer was ―no‖? Or
do you know how to take action, even when your answer was ―yes‖? The bad news is that most young people don‘t have answers to all the above questions. The good news is that it‘s not hard to find the answers. This book will enable you to find the answers. Even though you know about the importance of managing money, you get bogged down by the ―perceived‖ complexities of the task. So here‘s a promise. Once you reach the end of this book, you will know that managing your money is really very simple. But the challenge is to take that journey of personal finance and read to the end of this book! Because most people tend to avoid personal finance and secondly reading a book is fast becoming out of fashion. So, let me promise again. Reading this book would be a breeze of simplicity and personal finance- made-easy. Provided you read through. A question that follows would be, ―Why don‘t you just take me to the end? And give me specific product recommendations. Why bother me with the journey?‖

Lights, Camera ActionSteps on Money Management 3 Even though there
are clearcut recommendations at the end of the book, spending time on other chapters would reveal a lot of insights. Moreover, the truth is that spoon feeding is costly. You can get such spoon feeders in the financial services industry waiting to pounce on you. And most of them have their own hidden agenda. The Agents, Advisors and Relationship Managers, who assure you that ―Main Hoon Na!‖, and dole out free advice are essentially giving you recommendations based on the commissions that they would get. These commission based recommendations are given to maximize their earnings and may have little to do with your needs. And this can hurt your financial health in the long run in a way that you may not really understand. This book starts with understanding the dangers of commission based, free advice. Lights, Camera and Action! A movie takes you just two-three hours to see. But the making of the movie comprises of thousands of hours going into story writing, screenplay, actors‘ selection, and the shooting itself, scene by scene.

Ranjan Varma The structure of this book is similar to
the making of a movie. Lights, Camera and Action is their buzz word and we‘ll use them for setting up our own finances. Let‘s understand what we mean by the three words in the context of money management. Lights In the financial services industry, the information that the seller has is much more than the buyer. In fact this is a huge information gap that leads to poor financial decisions. To start any change, we need to be aware of what‘s right and what‘s wrong and bridge that information gap. So we will enlighten ourselves with some essential money management concepts like asset allocation, financial planning, etc. We will understand the cost of free advice; learn the psychology & math behind financial management. Moreover, each chapter of the book will focus on enlightening you with critical money issues and concepts related to that chapter. For example, in the chapter about taking insurance, we cover some concepts like human life value and the types of insurance that are available to us. That‘s Light!

Lights, Camera ActionSteps on Money Management 5 Camera After you
get the knowledge, you need to translate it into action. But not before you start understanding the tools of the trade and how to use them. To get the camera rolling, we need to understand to use the tools and resources available in the personal finance space. The financial tools and resources include financial planning tools, tracking tools, investing platforms and portfolio management tools. Chapter 4 covers various such softwares and tools available in India. Also, each chapter of the book will focus on providing you the tools to manage your money, in the context of that chapter. For example, when we talk of selecting insurance products, we discuss various resources on how to calculate our insurance needs. Action Once you get the knowledge and the tools, it‘ll be of little use unless you act upon it. This book will help you arrive at clear cut decisions about your insurance cover, tax planning and investment planning to achieve your financial goals. Also, each chapter of the book will help you setup a few action steps, in the context of that chapter.

Ranjan Varma For example, even we talk about concepts under
section ―Lights‖, we have clear cut action steps to help assimilate that knowledge. To set up our financial management, let us take a journey through ―Lights, Camera and Action‖. How to grow your Money Tree: The best time to plant a tree was 5-10 years ago. The second best time is NOW. I come across young people who want to know about investment products where their money would ―multiply‖. Ask them how much they knew about financial products? Often, the answer is Zilch, nothing. But frequently their only interest is in the investment product where their money would multiply. Now, this happens all the time. Though we don‘t have time or interest to learn about building our ―Money Tree‖, we want instant solutions. We just want the big money tree. Even though we know that it takes years for a tree to grow. The only thing that can be done instantly with the tree is to cut it, which can be done quite quickly! Moreover, this is a dangerous mistake we make. When young people wanted instant solutions

Lights, Camera ActionSteps on Money Management 7 without learning more
about financial products, they make themselves vulnerable to financial advisors who sell products that suit their requirements and not their client‘s. These financial advisors come to know that their client/prospect is an ill informed person & greedy and they make the best use of this information to sell products that maximize their commissions and not their client‘s! Money grows like a tree: not on it! So by looking for instant solutions, we end up hurting ourselves. Instead of building a money tree, we end up cutting the tree. As with a tree, nothing happens instantly. To be successful in any field, we need to constantly increase our knowledge and skills in that field. Also just focusing on the fruits and leaves of a tree is not enough. We have to water the roots and save the growing tree from external attacks. There‘s a starter 4 steps that can help you grow your money tree and become a smart investor. Learn: Becoming a smart investor is not rocket science that will take years to comprehend. You need common sense and you just need to freshen up what you learnt in

Ranjan Varma school. For example, a bit of math that
would tell you about the power of compounding and therefore starting as early as possible. Or why you should use the power of cost averaging by investing regularly. And understanding the psychology of money that takes automatic decisions about your personal finance. The chapters under the ―Lights!‖ section i.e. chapter 1,2 & 3 of this book is taking that first step. Track: If you want to manage something, you need to measure it first. You need to know, for example, what is the percentage of your income that you should save and invest. Or, what are your expenses in various categories like grocery, eating out, etc. This book has pointers on the best tools available in chapter 4. Plan: Most people put their money in a financial product as and when some advisor gets them to do it. It‘s not based on any goals; it does not take care of your risk appetite and your asset allocation policy. In chapter 3, we will take a deeper look at the financial planning process.

Lights, Camera ActionSteps on Money Management 9 Implement: Once you
start taking your money matters seriously, learn, track and plan your personal finance, it‘s important that you actually implement decisions. Chapters 5 to 7 are about taking action steps on taxes, insurance and investments. The whole book is divided into three parts that are 1. Lights 2. Camera and 3. Action. In the Lights! part, we have three chapters. We will start with learning about the cost of free advice. That‘s chapter 1. Remember, there are no free lunches out there. And just for a pointer, a hypothetical example in the book shows that it can cost you more than Rs 1 crore over a period of 30 years! In chapter 2, we will understand our own money behavior. I am convinced that personal finance is about psychology, more than mathematics or strategy. In chapter 3, we explore the math behind financial management. We understand concepts about the time value of money, power of compounding and some rules of asset allocation and financial planning.

Ranjan Varma Moving on to the Camera! Section, chapter 4
covers the tools available to do your financial planning, portfolio management and tracking your personal finances. In the third part (Action!!!), we cover taxes in chapter 5, insurance in chapter 6 and investments in chapter 7. These chapters are real action items. It‘s about taking the right insurance, doing your tax planning and selecting investment products. Finally, in chapter 8, I stick my neck out with my recommendations and list out some of the financial products that you can choose from. We have an appendix that is about scheduling a Money Day and info on Financial Products & the Financial System. Money Management is something which each of us has to deal with and there is no dearth of resources. Unfortunately this is not about knowing the rules of the game, but rather it‘s about making behavioral changes and bringing self discipline. In this context, I found Ranjan‘s book and the approach really refreshing and helpful. It can be used by just about anybody as there are no jargon, just simple common sense approach presented in easy to understand manner. It‘s a must read-- Suryadeep Agrawal, Ex Marketing Head, InvestmentYogi

Lights, Camera ActionSteps on Money Management 11 Do you need
this book? No one will ever care about your money as much as you should do-- J D Roth I respect people who are smart and know much more than me. They don‘t need to read this book. But then there are over smart people who need this book all the more! The following few pages is about the reasons, assumptions and the philosophy behind writing this book. Take the decision to buy this book only after reading the next few pages. (I talk about making an informed decision in my book, so why not start with the buying decision for this book itself!) All of us manage our money in our own ways. And we think our way is the right way. But have we stopped to think whether we can do this in a better way? This book is your pause button. It is not a book that brings new breakthrough discoveries to you. It‘s about re-jogging your mind about matters revolving money. This book will bring to you what is buried in your own mind. You know it all, but this book will help you use the rational brain with your money management.

Ranjan Varma ―Learning is finding out what you already know.
Doing is demonstrating that you know it. Teaching is reminding others that they know just as well as you‖- Richard Bach Managing wealth is like managing your health. As a matter of fact it is like managing anything else. Let‘s imagine that you want to reduce your weight. All those who have to lose weight already know that: They need to lose weight. They need to check why they are overweight and take remedial action Remedial action involves the right exercises. Remedial action involves eating the right food. Quick fixes are dangerous. Tell me about one obese person who does not know all the above. My point is that even after knowing all this, there‘s a lot of difficulty in implementing the remedial action. This is because of the subconscious mind working beneath!

Lights, Camera ActionSteps on Money Management 13 The mind is
constantly sabotaging or supporting the implementation process. Similarly, managing money is more about inculcating the right behaviour patterns than taking informed rational choices. That‘s why we need to understand our own minds working behind the scenes but directing all your decisions. So we have an entire chapter in this book about understanding the psychology of money. Have you ever considered driving a car blindfolded? Okay, let‘s make this a crazier question. After driving blindfolded and then getting into a traffic jam or an accident, do you blame the traffic police, or the roads or the car? Nobody does that. But I am sure you‘re wondering why I am asking such crazy questions. The point I want to make is this: Most of us are driving our ―Money Car‖ blindfolded. And then we blame the Regulator (aka Traffic Police), the Car (aka Financial Products/Institutions) and the roads (aka Agent/Advisor)

Ranjan Varma This book is about taking back the responsibility
of a healthy financial life to you, yourself. Warning Signals: Having argued in favour of learning to manage money, here are a few warnings. Some ―educational‖ seminars, articles and blogs sell financial products or advertising space. Some efforts talking about educating people about finances are written and administered with a hidden agenda. They are conducted by fake experts and know alls and actually mislead people. I don‘t think a financial literacy can be done in a townhall seminar with one way speeches or in TV shows as the lack of interactivity can be a big limiting factor. When it comes to articles and blogs, they can only provide piecemeal information or opinions. And the more you read, the more confused you can get about different opinions and recommendations. Information overload and paralysis by analysis. The internet and the print media have abundant information. But finding the relevant information is not easy. Taking information from the internet is like drinking from a fire hydrant?

Lights, Camera ActionSteps on Money Management 15 Moreover taking in
more and more information does not really translate into better decisions and there comes a time when information can paralyze you into taking no action! Learning is not enough; it has to be translated into action. Two friends were traveling in a ship and one of the friends was quite learned about oceanography, ship engineering and deep sea flora and fauna. He made fun of the other friend and said his life had gone half waste since he had no knowledge of these important things even while traveling on a ship. Suddenly there was a storm and there was a shipwreck. The only way to survive was to swim across. Unfortunately, the friend with so much knowledge about ocean did not know how to swim. In this case, his life was a ―full‖ waste! Let me assume that you have an open mind and willing to spend a few hours to setup your financial independence. Do you agree with my basic assumptions in writing this book? If yes, let‘s take the journey of a better financial life together. Welcome aboard.

Ranjan Varma More Previews by Readers After reading just the
intro of book, I was sure its going to be another very valuable addition to my selective library. The sheer competency of Ranjan to explore even complicated concepts in easy to understand, layman terms makes the book worthy enough. In India, where financial literacy is in infancy stage, I wholeheartedly welcome the launching of such book and hope it will help common person not only understand the concepts but also implement it to make their life even better, wealthier. --Jagbir Singh, http://www.investorshine.com Having followed his blog over the years, I can confidently say that his book has simple easy to implement suggestions on personal finance. Ranjan book is a collection of his ideas shaped with years of experience and insight from the world of finance and investment. - Ajit Chouhan, http://blissfulbihar.com & HR Professional

Lights, Camera ActionSteps on Money Management 17 I. The Cost
of Free Advice Lights Camera Action To pay or not to pay for advice, Reasons of bad advice Examples of cost of free advice Finding answers, selecting advisors. Even though we pay for advice from a Chartered Accountant, Advocate or a Doctor, we are also used to ―free‖ advice when it comes to buying a financial product. Probably the reason we pay the professionals like Doctors, CAs and Advocates is because they have spent years in learning and refining their professional expertise. They provide answers, solve your problems and you benefit from consulting with them. Advice is free; the right answer will cost plenty – Mary Worley Montagu But even though the financial advisors can or should add a lot of value to your finances, paying your financial advisor has never occurred to you. This is probably because a majority of them do not really merit a fee. Anyone can become an insurance agent or a mutual fund advisor or a

Ranjan Varma stock advisor. Most of them seem to be
saying: Take my advice; I don‘t use it anyway – Author untraceable A Doctor spends atleast 8-10 years studying and getting a degree and license to practice. A financial advisor does not need even 8-10 days. Let us take a look at what is happening in the Insurance industry in India. The key strategy of insurance companies for increasing their business is to recruit more and more agents. But while there are additions in the agency workforce, due to lack of professional standards, huge numbers fall off the system too. In the two financial years (2009-10 & 2010- 11), the number of agents terminated were 19.38 lakh. 16.39 new agents were recruited in the same period of two years. The life insurance industry has 26.39 lakh agents on roll as on 31.3.2011. The two years have been bad for insurance companies when it comes to recruitment of agents as the terminations have outnumbered additions. This is reflecting in the growth of

Lights, Camera ActionSteps on Money Management 19 business. But generally
the recruitment of new agents is more than the terminations. So, 10 years ago, there were around 15 lakh agents and it has grown to 26 lakh today. In the process of recruiting new agents, a guess estimate of the number of agents terminated in the last 10 years would be more than 60 lakh! The business done by these 60 lakh agents would be of their near and dear ones who took policies out of friendship or relationship. Today the policies done by these 60+ lakh agents would be orphan apart from not being need-based. IRDA report 2009-10: Such high turnover in the agency force is a matter of concern, as it could have negative consequences for the life insurance industry as a whole. The policies procured by these agents are rendered ―orphan‖ upon termination of the respective agent, and thereafter often result in lapsation due to absence of servicing support. The image of the profession of agents too suffers a setback since the public in general, and prospective agents in particular, perceive it as lacking in stability, thus making it more difficult for insurers to enroll committed agents.

Ranjan Varma There‘s one more reason why there‘s lack of
professionalism in the financial services industry. It‘s because of the customers of financial services. Yes, that‘s you and me! Most people are too busy with other things when it comes to taking decisions on money, even though it‘s one of the important aspects of their lives. They will spend endless hours debating the political issues, watching TV, in social gatherings and / or researching the cool gadgets they want to buy. And when it comes to money, a lot of people appear to have a brain freeze. It‘s not my cup of tea, they whine. They don‘t take the trouble of researching the right advisor and analyzing financial products. Even when we know that money is important! So there are two major reasons that explain the present quality of financial advice. One, becoming an advisor is easy and profitable. Anyone with an eye on commissions can become an advisor and make money. Two, there are a lot of busy, unsuspecting clients available for the new and hungry advisors! These unsuspecting clients don‘t bother about making informed financial decisions and become easy preys to the advisors.

Lights, Camera ActionSteps on Money Management 21 Commonly available advice:
Good or Bad or shades of grey? Mr. Deepak Kumar is a software engineer and is a very busy person. He is a methodical person and is very careful with his finances. He is being regularly approached by insurance agents and he takes time out of his busy schedule to compare all the product recommendations before settling for a policy. The policy that he buys combines risk coverage, maturity benefits and also additional benefit to the family when he will pass away. Mr. Kumar selects the company which is the most trusted brand instead of paying lesser premium from lesser brands. The yearly premium for the 25 lakh coverage amounted to Rs. 1.80 lakh and he could easily afford Rs 15000 every month. The maturity amount and the death benefit illustrations shown by the agents also looked attractive. The agent suggested that he open an account where he transfers Rs 15000/- every month and pays the premium annually. This arrangement would entail discounts from the

Ranjan Varma Insurance Company and also get him some interest
from the Bank. Mr. Kumar agreed and was quite happy with the advice of the agent. He was happier when the agent offered to pay one month‘s premium on his behalf. The agent had an office and was providing professional services. The agent promised that he will collect the renewal premium cheques on time and will provide all service for the policy. So Mr. Kumar puts Rs 15000 every month in an account and pays an annual premium of around Rs 1.80 lakh in a policy that will ensure insurance protection for his family, give him decent returns when he retires and also ensures that the family gets good money when he finally passes away. Mr. Kumar is happy. He got great advice and that too free. The fact is, he got paid a bribe for taking the policy. The agent is happy and the Insurance Company is happy too. A win-win- win situation, one should say. But let‘s dig a bit deeper.

Lights, Camera ActionSteps on Money Management 23 The insurance coverage
of Rs 25 lakh is not really adequate for Mr. Kumar. Mr. Kumar earns around Rs 10 lakh per annum and the insurance coverage will not be enough to manage expenses beyond three – four years. Moreover, his responsibilities towards his children‘s education & wedding would not be taken care of by the insurance coverage. Plus, his home loans would also not been taken care of by the insurance protection. The agent is happy because he got around 25% commissions for the first year. That amounts to Rs 45000/- So even after paying Rs 15000/- to Mr. Kumar (as rebate aka bribe aka illegal) for taking the policy, he makes a cool Rs 30K for the free advice. The agent will continue to earn commissions till the premiums are paid, i.e. for another 20 years. The returns of the Insurance Company are based out of their own investment yields and by and large Insurance Companies invest in safe Government securities and bonds. After deducting the Companies management and administrative expenses, the returns to the policyholders generally will hover around the returns generated by bonds, i.e., not more than 8% in the current scenario. In any case, the returns offered by Insurance

Ranjan Varma companies do not beat inflation. Now there are
financial products available that beat inflation handsomely. Over a period of 20 years, the index has given a return of more than 15%. There are Mutual Fund schemes that have over - performed the index. But they need to be researched and found out of 1000s of Mutual Fund schemes available in the market. What's the cost of having free lunch parties or free beer? Nothing, but a pot belly!! Did Mr. Kumar get the right advice? Was the advice that Mr. Kumar got really free? What was the cost of the free advice? Let‘s find out! See Deven Shah‘s (Founder, Wikipaisa ) video on Free or Fee Advice at http://wikipaisa.com/right- to-credible-financial-advice/your-vote-counts/ Camera!: Cost of Free Advice is more than One Crore! Why pay for financial advice when you can get it for free? You get it free from friends, colleagues, relatives, bank executives and insurance agents, right?

Lights, Camera ActionSteps on Money Management 25 But have you
ever wondered that the free advice might cost you a lot of money? For example, if you buy costly insurance plan that you don‘t need or a mutual fund that does not suit your investment profile, you will lose money that you could have got from more useful investments. You lose much more than the annual fee of a financial planner. True Financial Planners are not Advisors or Product Sellers and they prepare a Financial Plan that is based on your need, your situation, your goals and your risk appetite. Let's take a hypothetical example to find out the cost of free advice. Let us assume that a paid financial plan where the recommendations are not based on commission considerations will fetch you a better return. Ofcourse it is a hypothetical example but bear me with an open mind. Here are the assumptions. Imagine you invest Rs 15000 every month and that adds up to Rs 1,80,000/-. We have assumed the returns for 8% and 10%. Though the commission from insurance products are higher, generally the commissions work out to just 2% of your investments and the difference between the returns @ 8% and 10% would be the cost of free financial advice. Initially the difference looks too small. It is only

Ranjan Varma Rs 3600 in the first year and approximately
Rs 68000/- for an investment of Rs 9 lakhs after 5 years. But the difference continues to compound and the difference of Rs 1,05,47,560 happens at the end of 30 years! Here's the table that calculates the cost as Rs 1 crore, 5 lakhs, 47 thousand and more!(Rs 1,05,47,560/-) Ye ar Invest ment Growth @8% Invest ment Growth @10% Differ ence All figures in lakhs 1 1.80 1.94 1.80 1.98 0.04 2 3.74 4.04 3.78 4.16 0.12 3 5.84 6.31 5.96 6.55 0.24 4 8.11 8.76 8.35 9.19 0.43 5 10.56 11.40 10.99 12.09 0.69 6 13.20 14.26 13.89 15.28 1.02 7 16.06 17.35 17.08 18.78 1.43 8 19.15 20.68 20.58 22.64 1.96 9 22.48 24.28 24.44 26.89 2.61 10 26.08 28.16 28.69 31.56 3.40 11 29.96 32.36 33.36 36.69 4.33

Lights, Camera ActionSteps on Money Management 27 12 34.16 36.89
38.49 42.34 5.45 13 38.69 41.79 44.14 48.55 6.76 14 43.59 47.07 50.35 55.39 8.32 15 48.87 52.78 57.19 62.91 10.13 16 54.58 58.95 64.71 71.18 12.23 17 60.75 65.61 72.98 80.28 14.67 18 67.41 72.80 82.08 90.29 17.49 19 74.60 80.57 92.09 101.29 20.72 20 82.37 88.96 103.09 113.40 24.44 21 90.76 98.02 115.20 126.72 28.70 22 99.82 107.81 128.52 141.38 33.57 23 109.61 118.38 143.18 157.50 39.12 24 120.18 129.79 159.30 175.22 45.43 25 131.59 142.12 177.02 194.73 52.61 26 143.92 155.43 196.53 216.18 60.75 27 157.23 169.81 217.98 239.78 69.97 28 171.61 185.34 241.58 265.74 80.40 29 187.14 202.11 267.54 294.29 92.18 30 203.91 220.22 296.09 325.70 105.48

Ranjan Varma Now, there would be some limitations of this
calculation by way of the assumptions we have made. But that‘s not the point. The bigger point is that there is a huge cost of free advice that we don‘t see but piles up big time over a period of years. Let‘s move from the hypothetical case to some real case studies. Rs 2 crore portfolio wiped out Viveka Kumari, princess of erstwhile state of Jamnagar, entrusted her friends with Rs 2 crore of her money. The entire Rs 2 crore has been wiped out while her ―friends‖ allegedly earned commissions worth Rs 54 lakh for doing unauthorized trades. (Economic Offence Wing EOW case) Research says that 67% Americans acknowledge making a bad financial decision, while 47% Americans acknowledge making more than one bad financial decision. The average response in terms of lost dollars was $23000 (Rs 11 lacs+) while roughly 15% Americans said that the loss was more than $50000 (Rs 25 lakh+) (Source: consumerfed.org/news/594)

Lights, Camera ActionSteps on Money Management 29 No time for
Money, Take me for a ride! Here‘s a real case of a busy Doctor taken for a ride by the sweet talks of Relationship Managers of a reputed Bank. Dr. Kumar De (name changed) is a renowned Doctor in Kolkata. Despite being an expert in his field and being a man of intelligence and maturity, he‘s at the receiving end of the mis-selling agents and Relationship Managers of big brand companies. And worst of all, these advisors were not the regular, uninformed salesman agents, but the Relationship Managers of a reputed private Bank. They wore ties and spoke fluently and confidently. He was sold a single premium policy where the same fund was being used repeatedly by weekly withdrawals and reinvestment. And when Dr De asked for the statement of account, he was furnished a spreadsheet on MS Excel and not on the company letterhead!! Dr De was flabbergasted. He found out that he had been taken for a big ride by the Relationship Manager at a leading private Bank. The amount debited to his account as Advisory fee was around

Ranjan Varma Rs 2.50 lakh!! His woes included Portfolio mismanagement
/ Mis-selling of ULIPs/ rampant churning/ forged signatures and ULIPs sold, even though existing policies were in lapsed state. His mutual funds churned every day, even with forged signatures Even when Dr De was out of India, switch/redemption was done. 11 SIPs, monthly 1lac installment, purchased for 3 years, redeemed after 3weeks, all at a loss Dr De was sold ULIPs with 50% premium allocation charges which means that only 50% was invested and the rest 50% was charged as expense and shared by the insurance company and the advisor. This means that Dr De, whose job is to heal people, suffered himself from: Rampant churning of portfolio resulting in huge financial losses Submissions of transactions without his knowledge.

Lights, Camera ActionSteps on Money Management 31 Forging of signature/s
and attesting them to ensure transactions are processed by Asset Management Companies (AMCs) Breach of Contract: Charging advisory fees without ensuring portfolio performance Breach of Trust: Deceiving the investor by not revealing the true state of his portfolio at regular intervals. Mis-selling: advised to invest in 25 ulips policies against the investor's financial need for such investments. Misadvised to invest majority of funds in ulips, annual premium of 60lacs Surrendering running policies to mis-sell new ones, even drawing funds from policies, damaging the existing ones. Mis-sold ULIPs, when existing policies are in lapsed state. Advisory fee of Rs 2.47 Lakh in mere three months Wrong advisory to buy 10 SIPs, 1 lakh monthly installment for 3yrs, to cancel them after 3weeks, just to pay loads, transaction charges. All redeemed at a loss. Can we figure out the cost of free advice by the

Ranjan Varma Relationship Managers to Dr. De? It would be
big, right? I would describe it as a daylight robbery by suit clad men! HSBC Bank allegedly took Ms Suchitra Krishnamoorthi, a well-known singer and actor, for a ride over a five year period by promising an extravagant assured return of 24% from mutual funds as well as insurance. Each time the customer complained about losses in her account, the standard reply was that the relationship manager has been fired and that the bank will make up for the losses with judicious investments. Needless to say, the losses were never made good. The one-way road for the customer was downhill. If a well- known celebrity could be cheated with such impunity, it is surely happening routinely with others.---MoneyLife Digital Team (April 13, 2012) Action Steps Here are some action steps for you to choose the right advisor. Ask friends and look out for 4-5 advisors/agents who get commissions from the product they sell.

Lights, Camera ActionSteps on Money Management 33 Search for Financial
Planners. Here: http://www.fpsb.co.in/scripts/CFPCertificant Profiles.aspx Ask the following questions and see if you have the answers yourself: Am I able to check my financial health? How do I ensure that my family is protected from all financial risks? How much do I need for retirement? Is my tax planning efficient? How can I protect and grow my assets? How will I pay for my child‘s education? How can I set and achieve my financial goals? How do I efficiently manage my liabilities? What is diversification and asset allocation? Now, select an advisor/ agents and planners who can help best with the answers. Most importantly, Read this book till the end!

Ranjan Varma II. The Psychology of Money Lights Camera Action
The Money Story, the Yaksha Story, Psychological Barriers How to change behavior Writing our own money story, action plan. Managing your personal finance is not just about information and knowledge to take those financial decisions. It‘s also about understanding our own automated responses that work in the background. These responses are behind a curtain, it‘s in our subconscious mind. Knowledge is no guarantee of good behavior; but ignorance is a virtual guarantee of bad behavior. –Martha Nussbaum Knowledge & information is just a small part of the solution. To my mind, it is just 10% of the solution. The 90% solution lies with our financial attitude. Your attitude is greater than your knowledge. Because there are many situations where your knowledge may fail but your attitude can handle that very well. —Renuuka Bhaskar We all know that a morning walk and exercise is good for health. But to most of us, there‘s a psychological barrier in doing simple things like

Lights, Camera ActionSteps on Money Management 35 exercising and taking
a morning walk. To break that barrier, we need to understand how our mind works. Let‘s take an example of driving a car. All of us think that the person at the wheel drives the car. Take a deeper look and the driver is just handling the wheel, alert on the brakes and gears and steps on the accelerator when the roads are clear. Beneath the chassis, there‘s a complex engine that is doing all the hard work. Look at it another way. Can you drive a car which has flat or square tyres? Can you drive a car with no engine? In personal finance, what we do is play the role of the driver. The engine, in personal finance, is our mind. In this chapter of the book, we‘ll try to look at the complex engine that automates our financial decisions. The purpose of this chapter of the book is to make you aware of the engine that is firing the cylinders of your money car. Yes, it‘s your mind, dear! Let‘s start with the money story that our mind tells us.

Ranjan Varma Your Own Money Story Personal Finance Management is
not about setting some rules that everyone can follow. This is because everybody needs and situations are different. For example, two people of the same age and with same income levels would invest differently. If we dig deeper, we see that everybody has his/her own money story. Let‘s start with answering the following: Do you think money is evil? Do you think money is a bad master but a good servant? Do you fear that you will never have enough money? Do you take money for granted? More questions! What value did your family give to money? Do you think you could do with more money? What‘s the money gap between where you are and where you want to be with money and wealth?

Lights, Camera ActionSteps on Money Management 37 Which do you
think are the most important stories and memories you have about money? Do you realize that there is no right or wrong answers? The answers depend on your belief system. So what‘s the story that you tell yourself about love, health and money? If our internal story about love is that ―I‘m unlovable‖ then we choose relationships with people who don‘t love us. If our story about money is ―it‘s hard to get‖ then we‘ll always be struggling to get it. Every person has a mindset related to money. Some of our minds believe in spending freely, while others have a mindset where you are very tight fisted on money. Some can take risks to get good returns on their investments while others feel that it is better to be safe than sorry. A lot of your attitude towards money is shaped by the families that you were raised in. If you grew up in a home where there was a lot of conflict and fighting about money, then money could become linked at an unconscious level to conflict. Your Money Myth could become ―money equals conflict.‖ And every time you thought about

Ranjan Varma money, you‘d feel anxiety - the same feeling
you had when your parents fought about money. Each of us has an underlying story - what you might call a belief system or ―guiding fiction‖ - about each key area of our lives. We have one story for love, one story for health, one story for success... and, of course, we each have our own personal story about money. These stories that we have about each of the key areas of our lives were laid down mostly in childhood, before we can even remember. So here‘s the most important question: What is your Money Story? The Yaksha Story In Mahabharata, the great Indian epic, there‘s a story of a Yaksha asking some intriguing questions to Yudhisthira. The story goes like this: One day while living in exile in the forest, Yudhisthira finds that while attempting to drink water from a lake, all his brothers have been killed by a mysterious Yaksha (a celestial entity). When Yudhishthira arrives the Yaksha challenges him to answer all his questions or else face the same

Lights, Camera ActionSteps on Money Management 39 consequences as his
brothers. One of the questions was ―what is the most wonderful/surprising thing in the world?‖ Yudhishthira answers that the most amazing thing is that even though every day one sees countless living entities getting old and/or dying but no one can imagine him/herself getting old and/or taking that last journey! That‘s why even though Insurance is an important financial product or financial planning is a useful exercise, people have a natural tendency to avoid it. In fact most of us cite the agents pestering and tax issues for taking insurance! Psychological Barriers You cannot change the truth; but knowing the truth can change your life Let us take a look at some barriers to rational financial decisions. We will cover: Mental Accounting Fear and Greed Loss aversion

Ranjan Varma Decision paralysis Mental decision making process. Human behavior
flows from three main sources: desire, emotions and knowledge. - Plato Mental Accounting: Understanding Mental accounting is very useful when want to be able to handle our personal finances effectively. Mental accounting reflects some deep rooted behavioral patterns and it‘s very useful and interesting to be able to understand our own behaviors. Talking to a relative about real estate investments helped me understand mental accounting in a better way. Let me share it with you. My relatives bought a flat in 1999 for Rs 11 lakhs and they were about to sell it for Rs 30 lakhs. Three times in 10 years is good enough for me, he said. Fine enough, but I asked him a few more questions. Did he spend on getting some interiors/woodwork done? Yes it cost him around Rs 2.5 lakhs.

Lights, Camera ActionSteps on Money Management 41 Any maintenance costs?
Yes, it added up-to another Rs 1.5 lakhs. Did he get some rent? No, he did not get a good tenant as he was very choosy. What we saw was a mental accounting that he got three times in 10 years. If we get real, the costs added upto Rs 15 lakhs and the money doubled in 11-12 years. If we actually calculate the CAGR, the return would hover around 6%. (See the rule of 72 in Chapter III) Each one of us has some automated thoughts about investing in real estate. Most of us think that it is an investment that gives good returns. Would you like to revisit that notion? It‘s up to you to have an open or an unshakable mind! Fear and Greed When it comes to our money, fear and greed are the two most critical emotions that affect our decisions. Even when we don‘t know or realize the fear and the greed in our subconscious mind

Ranjan Varma that is taking decisions automatically. Fear is a
natural survival stimulus when in an uncertain, strange situation or when you perceive danger. Money will naturally stimulate the feeling of fear since it is strange as well as dangerous to people who don‘t understand money. FEAR is “False Evidence Appearing Real.‖ We all know that being afraid of the future is just as silly as being afraid of our own shadows, and yet we fear it all the same. But Fear is not a sign of weakness. It‘s all right to be fearful of money, people, animals until you understand them well. For example, it‘s all right to be fearful of poisonous snakes. But then you see people handling poisonous snakes and once you learn and understand, the fear vanishes. Greed: The famous 1987 movie, Wall Street, has a line on greed that you must have heard about. It goes like this: Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed,

Lights, Camera ActionSteps on Money Management 43 in all of
its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind Source: http://en.wikipedia.org/wiki/Greed But too much of greed and fear is not good for our health as well as wealth. Greed may lead to a desire of having more and more and therefore ruining our balance. For example, greed for sweets or beer can add a pot belly that harms us in the long term! Greed for too much money can lead you to do illegal things. And being too fearful leads to a paralytic situation where you can die out of panic. For example, there are many deaths from snake bites even when the snakes were not very poisonous. People can die due to panic. The effect of Fear and Greed on our investment decisions often trumps more controlled or rational responses. A study goes on to say that those emotional reactions ―short-circuit" more complex decision making faculties. For example, those involved in the management of portfolio of stocks/ securities, the result of emotional reactions is poorer trading performance. Source:

Ranjan Varma web.mit.edu/alo/www/Papers/lorepsteen4.pdf The Takeaway: Fear and Greed are two
natural automatic responses and they cannot be labeled as good or bad. What‘s important is to be aware of the fear and/or the greed that lurks within us. And then keep them in control as we do with our children! Loss aversion Here are some questions for you: When it comes to investing, does your primary goal is to minimize the risk of losing money? Even when inflation is eating into any growth that you get? Are you uncomfortable with the volatility of the markets? Your stomach churns when there‘s a big market downfall? Do you believe that the stock market is not for you as people have got their investments wiped out?

Lights, Camera ActionSteps on Money Management 45 If you answered
yes to the questions above, you have a fear of losing and you have a psychological condition called ―Loss Aversion‖. I am not saying that loss aversion is a good or a bad thing to have. In fact, we must be careful not to rush into investments. As they say, ―Fools rush in where Angels fear to tread‖. But we must make a distinction between avoiding risk and managing risk. Here are a few pointers that seek your attention: You invest Rs 1.0 lakh in fixed deposits yielding 9%. So after 1 year you get Rs 1.09 lakh. However, the inflation has hovered above 10%. So assuming a 10% inflation, the value of your money is Rs 1.09 lakh x 90% = Rs 98,100/-. So essentially the value of your investment of Rs 1.0 lakh has reduced to Rs 98100/-. Equities have returned 19.67% per annum over a period from 1979 to 2007 while the returns on PPF have been just 10.4% per annum. (Source: Parag Parikh‘s Book, Value Investing and Behavioral Finance) While Rs 1.0 lakh invested in stocks in January 2003 has reached a value of Rs 5.24 lakh in January, 2010. The same amount

Ranjan Varma invested (Rs 1.0 lakh) in both KVP and
Bank‘s deposits reached the value of Rs 1.71 lakh and Rs 1.44 lakh respectively. (Source: NSE) Investments with a long term view in stocks like Infosys, Wipro has turned into big fortunes. Intelligent investors have used the crash of 2008 to buy more stocks that were then available at a low price and have given handsome returns. The idea is not to avoid risks but to manage them rationally. And also to be aware of our thought process and not let any psychological barriers to interfere with our investments. Decision paralysis The term "analysis paralysis" or "paralysis by analysis" refers to over-analyzing (or over- thinking) a situation, so that a decision or action is never taken, in effect paralyzing the outcome. A decision can be treated as over-complicated, with too many detailed options, so that a choice is never made, rather than try something and change if a major problem arises. A person might be seeking the optimal or "perfect" solution upfront, and fear making any decision which could lead to erroneous results, when on the way

Lights, Camera ActionSteps on Money Management 47 to a better
solution. The phrase applies to any situation where analysis may be applied to help make a decision. For example if you have to buy a house and you start tracking hundreds of projects, projecting your future income & relocations and compare the advantages and disadvantages of buying versus renting. This detailed analysis can result in a brain freeze. This is often phrased as paralysis by analysis, in contrast to extinct by instinct (making a fatal decision based on hasty judgment or a gut- reaction). When it comes to financial decisions, there can be many consequences of decision paralysis: You want to buy a house and have one good option available. However you want to look at more options to choose from. Nothing wrong about that, but I have personally met a lot of persons whose range of options do not come to an end. They are still looking at options to choose from, many years later! You do not buy a stock when it was available for a cheaper price. Or don‘t sell even when there is a professional advice to sell. With over 8000 stocks, 1000 Mutual Fund schemes, 1000+ insurance policies, 100+

Ranjan Varma bonds/securities to choose from, we are often paralyzed
to take any decision. Research says that as you get more and more information, the decision making process become more and more difficult. Mental Heuristics (decision making process) We have our own automated mental processes to reach every conclusion. But it‘s not worthwhile to jump to conclusions. Because the conclusions can jump at you too! Let‘s find out a bit more about our mental heuristics and biases. A heuristic is a mental shortcut used to solve a particular problem; it is a quick, informal, and intuitive algorithm your brain uses to generate an approximate answer to a reasoning question. For the most part, heuristics are helpful, because they allow us to quickly make sense of a complex environment, but there are times when they fail at making a correct assessment of the world. When our heuristics fail to produce a correct judgment, it can sometimes result in a cognitive bias, which is the tendency to draw an incorrect conclusion in a certain circumstance based on cognitive factors. For example, people tend to use

Lights, Camera ActionSteps on Money Management 49 the availability heuristic
to assess the frequency of a class or the probability of an event by the ease with which instances or occurrences can be brought to mind. The following four statements define heuristic bias (Source :Parag Parikh‘s book , Stocks to Riches) People develop general principles as they find out things for themselves. People rely on heuristics to draw inferences from available information. People are susceptible to certain errors because the heuristics they use are imperfect. People actually commit errors in particular situations. Camera After having understood our own behavioral patterns, we might like to change a few things. Changing behaviour isn‘t that simple. No? Let me share some tools and perspectives on behavioral change. Guy Kawasaki tried an experiment where he

Ranjan Varma placed two rubbish cans next to each other.
One had no cover, so people could throw anything into it. The other had a cover with a six-inch round hole—the perfect size to drop cans and bottles. There were no oral or written requests to segregate and recycle the trash. The results of the experiment: the trash can with the round hole was filled with bottles and cans. There wasn‘t anything other than bottles and cans in it. This illustrates how you can change behavior if you create paths or flows of the smoothest kind. (Source: http://www.openforum.com/idea- hub/topics/the-world/article/how-to-influence- behavior-guy-kawasaki) Here‘s a starter teaser test for you! Do you have the belief: Change is difficult and takes a long time?‖ If you answer yes, you have that belief and any change would really take time! If you answer No, changing course is just a click of a button! What belief do you choose?

Lights, Camera ActionSteps on Money Management 51 It looks like
you can teach behavior when you make it simple. We overcomplicate so many things in the workplace. It also shows that people will do the right thing when you make it easy to do so. Let‘s take one money behaviour example: If you need to change your investing behaviour, simply automate your SIP. Or mark fixed days on your calendar to buy ETF/ Select stocks. Ordering the bank to simply cut an amount from your account means that you don‘t have to think about it every month. This also means you cut out the emotion out of your investing. And it‘s definitely a change for the better! Top 10 Mistakes in Behavior Change http://www.slideshare.net/captology/stanford- 6401325 Stop Your Brain to Take Quick Investment Decisions That‘s what the book, Your Money & Your Brain by Jason Zweig says! Zweig simply points out that making investment decisions is one area where intuition and snap judgments simply don‘t work

Ranjan Varma and where our first reaction is usually the
wrong one. Read the review of the book here: neurosciencemarketing.com/blog/articles/money -brain-zweig.htm Excerpts: Zweig‘s basic premise is that the function of our brains evolved to serve early humans in their quest to survive in a sometimes hostile world. We still react to investment news and make decisions with the same mental firmware that allowed our forebears to avoid getting eaten by large carnivores, and that often leads us to poor investment choices. Zweig points out the weaknesses of our investing brains, which are programmed to find patterns in the world around us. That may be good for coping with the natural world, but it is less useful for investing. For one, we leap to conclusions. If something happens twice in a row, we automatically project a third occurrence. We do this automatically and unconsciously. Our ―prediction‖ circuits are driven by the release of dopamine, a powerful brain chemical related to pleasure and rewards. This is one reason why people are drawn to stocks that keep going up; unfortunately, this neural extrapolation is usually

Lights, Camera ActionSteps on Money Management 53 setting us up
for a fall. Action: After learning about a few behavioral patterns related to money (Lights) and then knowing more about some tools to change behavior (Camera), it‘s time to translate our learnings into some action steps. Answer the following questions: Question #1: What is your personal ―Money Story‖ about money and wealth - the programming you got when you were young – that affects everything you think and do with money? Question #2: Imagine that you have all the financial resources to do anything you want to do in life. Now, what is ―The Gap‖ between where you are with money and wealth - and where you‘d like to be in the future? Question #3: What are the behavioral areas where you would like to change? What is your Action Plan taking control of this critical area of your life?

Ranjan Varma III. Playing with Numbers Lights Camera Action Time
Value of Money, Magic of Compounding, Rupee Cost Averaging Asset Allocation, Financial Planning Create a Financial Plan Once we are aware of our money story, Personal Finance is simply about managing four components of our income, expenses, savings and investments. Managing your money is about moving them forward/backward in time. Let me explain. You maximize your income and optimize your expenses in the present time to plan for your retirement expenses in the future. You make efforts to maximize your savings and investments of the present time to plan for your future goals. What we just discussed can be represented in a personal finance equation, which is: Income (t) – Expenses (t) = Savings (t) + Investments (t) where time t signifies moving money, or purchasing power, forward in time. Much of financial planning is based on mathematics. But fortunately the mathematics is

Lights, Camera ActionSteps on Money Management 55 not really complicated.
You probably learned the basic principles in school. For example, one of the concepts is that principal multiplied by interest rate over time equals interest earned. Interest = Principal × Interest Rate × Time. You read about that in class 5! Mathematical reasoning is necessary all through life. This ability also affects decisions we make in personal finance. So it is a good idea to understand/revisit the basic principles of math that you need to understand in order to manage your finances. And these concepts can help you with all your financial decisions like retirement planning and planning for your investments. So this chapter on numbers takes you through time value, compounding, cost averaging and rule of 72. Then we will understand the numbers of asset allocation. Financial planning is a roadmap where we use a lot of numbers too and so we cover the financial planning concept in this chapter. Let us start with some understanding of the time value of numbers. Let‘s play with numbers! The Time Value of Money Let me take a simplistic example to understand

Ranjan Varma the time value of money. Imagine you have
Rs 1,00,000 with you and you have the following options (inflation rate is 5%): Give it to a friend who will return Rs 1,00,000 after one year. Put it in a Savings account which gives you 5% annualized return. Invest in Mutual Fund/Stocks which can give you a return ranging from -50% to +50% In option 1, The present value of the Rs 1 lakh that you get after one year is actually (1- 5/100)(1,00,000) = Rs 95, 000. Do you realize that you have actually lost money? In option 2, the money grows by 5% to Rs 1,05,000 but once you factor the inflation (5%), you are back to the square one. Better to spend the money today rather than wait for one year. In option 3, your future value can be higher or lower than the present value. All of the standard calculations for time value of money derive from the most basic algebraic expression for the present value of a future sum, "discounted" to the present by an amount equal to the time value of money.

Lights, Camera ActionSteps on Money Management 57 For example, a
sum of Future Value amount to be received in one year is discounted (at the rate of interest r) to give a sum of Present Value amount at present. Some standard calculations based on the time value of money are: Present value: The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations. Present value of an annuity: An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due. Present value of perpetuity is an infinite and constant stream of identical cash flows. Future value is the value of an asset or cash at a specified date in the future that is

Ranjan Varma equivalent in value to a specified sum today.
Future value of an annuity (FVA) is the future value of a stream of payments (annuity), assuming the payments are invested at a given rate of interest. There are ready made spreadsheets that can do all the calculations at a click of a mouse/button. Email [email protected] to get them. The Magic of Compounding If we could appreciate the ―Magic of Compounding‖ we would understand the benefits of starting early and discipline! Let us understand the power of compounding with the famous story of the Persian emperor who was so enchanted with a new ‗chess‘ game that he wanted to fulfill any wish the inventor of the game had. This inventor, a mathematician, decided to ask for one seed of grain on the first square of the chessboard doubling the amounts on each of the following squares. The emperor, at first happy about such modesty, was soon to discover that the total yield of his entire empire would not be sufficient to fulfill the ‗modest‘ wish. Just try converting into money in any currency

Lights, Camera ActionSteps on Money Management 59 and you will
realize the importance of compounding. Start with Rs 1000 and by investing Rs 1000 every month compounded at 10% amounts works out to Rs 78171 after 5 years. In 10 years it more than doubles to Rs 202457. The figures at the end of 15, 20, 25, 30 40, 50 years are Rs 402621, 724986, 1244159, 2080292, 5595607, 1,47,13,428!! It is one thing to know theoretically about the difference between simple and compounding interest. It‘s another thing to see an example. Option I: Age 25, Invest Rs 2000 p.m. till age 60 Asset @ 10% growth is Rs 65 lacs Option II: Age 30, Invest Rs 2000 p.m. till age 60 Asset @ 10% growth is Rs 39.5 lacs Difference between the two options at age 60: Rs 25.5 lacs while the difference in the amount invested is only Rs 1.2 lacs Does it tell something about the power of compounding? The goal of compound interest is to make your money work hard for you. The alternative, of course, is to work hard for your

Ranjan Varma money. Which would you prefer? The key step
in using compound interest is to actually start saving. You don't have to save a lot – just save what you can. Compound interest will do the rest of the work for you. Compound interest is so fascinating that Albert Einstein referred to it as "magic" and called it "The most powerful force in the universe". Rupee Cost Averaging Cost averaging sounds like a complicated concept, but it‘s a very simple thing to understand. It essentially tells us not to worry about market fluctuations and not ever try to time your market entry or exit. Let‘s dig in to understand the concept. Kumar wants to invest in mutual fund schemes or the stock market, but is worried that the market will fall after he invests as the market has run up too much too fast. But at the same time he is worried that the market may continue to rise and he might miss the rally and the potential gains that he would make with it. Kumar is in a dilemma whether he should jump into the market immediately at the current level or continue waiting for the correction which refuses to come.

Lights, Camera ActionSteps on Money Management 61 In short, Kumar
is trying to time the market which lots of common investors do. Many a times common investors get it wrong when they try to time their market entry and have burnt their fingers due to the market fall post their investment. Or many a times many investors have been left on the sidelines watching the markets go up, waiting for the correction endlessly which never comes through when required. Concept of Rupee Cost Averaging If Kumar knew about Rupee Cost Averaging, he would not have worried. It is impossible for a common man to predict the movement of the markets. Hence it is best to start investing on a staggered basis by making regular monthly investments. This helps the investor to spread out his investments evenly over a period of time. This process of making regular monthly investments over a period of time at various market levels is known as Rupee Cost Averaging. Let‘s understand with the help of an example: Kumar decides to invest Rs 100 every month in a SIP for 12 months. When Kumar starts the investment the NAV is Rs 10 and he gets 10 units. During the course of the year the NAV keeps moving up and down. So Kumar get units as per

Ranjan Varma the movement in the NAV price. Month Monthly
Amount Invested NAV (Price Per Unit) Units Bought 1 100 10 10.00 2 100 10.5 9.52 3 100 12 8.33 4 100 11 9.09 5 100 9.8 10.20 6 100 9 11.11 7 100 8.7 11.49 8 100 9.5 10.53 9 100 10.2 9.80 10 100 11 9.09 11 100 12.3 8.13 12 100 13.2 7.58 Total 1200 114.88 Total Amount Invested 1200 Actual Average NAV 10.60 Average NAV for Kumar 10.44

Lights, Camera ActionSteps on Money Management 63 We can see
from the table, Kumar invests Rs 1200 in the entire year and he gets 114.88 units for it. Kumar‘s average cost per unit is Rs 10.44 whereas the actual average NAV is Rs 10.60. It is not always possible for an investor to buy at the lowest point and sell at the highest point. Rupee cost averaging helps the investor to reduce this risk of timing the market to a great extent. Benefits of Rupee Cost Averaging From the above discussion, the benefits of rupee cost averaging can be summarized as follows: Inculcates the habit of regular disciplined investing Helps to ride out market volatility Protects the investor from incurring huge losses when the market falls drastically by averaging the purchase price at lower levels. Rupee cost averaging works at the time of buying securities as well as at the time of selling the securities. It frees the investor from the tension of trying to time the market or predicting the direction of the market and hence the problem of buying low and selling high.

Ranjan Varma It helps the investor to buy more units
when the market is down and buy fewer units when the market is high. Rupee Cost Averaging helps the investor to buy more units of the mutual fund when the NAV is low and buy less units of the mutual fund when the NAV is high. But eventually the price gets averaged out over the long term. Thus rupee cost averaging helps in lowering the average acquisition price of the units but for this to happen the investor has to be disciplined enough to invest on a regular basis. How long does it take to double your Money? The Rule of 72: Please study the compound-interest table for any rate of interest, you will find that by multiplying the number of years at which Rs. 1.00 becomes Rs. 2.00 by that rate of interest, the result is always approximately 72. (If you were to calculate the point mathematically using years and fractions of years, it would be precisely 72.) This is called the Rule of 72. This is a trick by which you can quickly estimate the number of years it will take to double an investment -- or the rate at which your

Lights, Camera ActionSteps on Money Management 65 investment must grow
in order to double within a stated number of years. Or, to find the rate at which your principal must grow in order to double in a specified number of years, divide 72 by the number of years. Other way round, to find the number of years, simply divide 72 by the rate. Thus, if an investment is growing at a rate of 6% a year, it will double in value in 12 years. At a 10% rate, it will double in 7.2 years. Similarly, if you want to double your money in 4 years, you must invest it at 18%. It is important to keep in mind that most investments, including mutual funds, do not grow at a steady rate and hence actual performance cannot be ensured, and past performance of a fund is no guarantee of future results. Please remember that the Rule of 72 should only be used as a guide in setting long- term investment goals. Let us now use our understanding of numbers in

Ranjan Varma using tools where numbers are important: asset allocation
and financial planning Camera Asset Allocation Asset allocation is based on the idea that in different years a different asset is the best performing one. It is difficult to predict which asset will perform best in a given year. Thus, although it is appealing to try to predict the ―best‖ asset, proponents of asset allocation consider it risky. They say that someone who ―jumps‖ from the one asset to another may easily end up with worse results than any consistent plan. Studies have pointed out that replacing active choices with simple asset classes worked just as well as, if not even better than, professional fund managers. The study also pointed out that a small number of asset classes were sufficient for financial planning. This study supports the idea that asset allocation is more important than all other concerns like market timing, finding the right asset class every year, stock selection, etc. Let‘s begin with a few snapshot data. In 2000, the Sensex gave you a -26.1% return, Gold -3.33% while Debt Funds gave a +10.19% growth. But in

Lights, Camera ActionSteps on Money Management 67 2006, it was
+46.7 for Sensex, +5.28% for Debts and 35.0% for Gold. Every year, there‘s a different growth story for the three asset classes. And nobody knows for sure what 2013 or 2014 or 2020 will give returns on the three asset class. If the papers tell you that Debt funds are doing well and you take out your equity investments and put them into Debt, chances are that the equity is back to performing well and the debt funds nosedive. If nobody knows when and what returns will an asset class give, jumping from one asset class to the other is really a bad idea, right? How to set up your Asset Allocation? Essentially Asset Allocation is your Investment policy. Depending on your own understanding of your risk profile, you need to finalize the best fitting pie for your debt, equity and other investments. To start off, the thumb rule of asset allocation is based on your age. So if your age is X, invest X% in debt and 100-X% in equity. If you are a 25 year old guy, invest 25% in debt and 75% in equity. Always remember, it‘s just the thumb rule. What are the takeaways from this knowledge of

Ranjan Varma asset allocation? Let‘s take it in steps. Step
1: Understand Yourself There‘s always a risk-return trade off. You must know whether you can absorb the shocks of short term losses when you aim at higher returns. It‘s not possible that you want attractive returns and you are not exposed to a few shocks here and there. So be aware of your risk profile to start with. The three broad categories of risk profile are: Aggressive, Moderate and Conservative. Which one is your risk profile? Step 2: Understand the Asset Classes We must invest in assets we understand. Blindly investing in any of them could be disastrous especially equity. So one should know what options are available under equity and debt assets (see details of debt and equity classes in chapter VII) and then take a reality check on our comfort level with them. Step 3: Decide your allocation ratio Now you knew the thumb rule that if you are a 25 year old guy, invest 25% in debt and 75% in equity. But after going through steps 1 & 2, it‘s time you set a allocation ratio for yourself. You

Lights, Camera ActionSteps on Money Management 69 should allocate according
to your risk appetite and not because of some thumb rule. Moreover, you can also allocate funds for equity classes like gold and real estate too. Step 4: Balance the Portfolio We need to monitor the portfolio and rebalance it to the original allocation ratio. Why? Well, once you have invested (for example) Rs 1,00,000 , Rs 50,000 in equity and Rs 50,000 in debt funds the portfolio will change it‘s ratio over time. In a few months, the equity portfolio may be valued at Rs 75,000 and debt portfolio at Rs 55,000 , total Rs 1,30,000. (just an example). So if you want to maintain your asset allocation ratio of 50% each, you may have to sell Rs10000 from your equity and invest the same in debt to make them valued at Rs 65,000 each. By maintaining this asset allocation ratio, you are booking profits when the equity markets rise. Similarly, you are buying more equity when the stocks go down, thereby reducing your cost of your stocks acquisition. This is what asset allocation can do for your financial health. After time value, compounding, cost averaging and asset allocation, the final section on numbers is about the financial planning.

Ranjan Varma Financial Planning Plans are worthless, but planning is
everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of ‗emergency‘ is that it is unexpected, therefore it is not going to happen the way you are planning. (Dwight Eisenhower) Here‘s an interesting study on delaying the financial planning process by 5 years and the opportunity cost of that delay. (Source: NetworkFP.com)

Lights, Camera ActionSteps on Money Management 71 Financial planning is
a critical exercise in ensuring long-term financial security. A financial plan is a road map to help you achieve your life‘s financial goals. Here are three basic questions that you will answer during financial planning: Where are you today? What is your current financial situation? Where do you want to get to? What is your vision of your future financial situation? Will you be able to get there? How do you plan to achieve your vision? During the financial planning process you analyze what your financial needs and goals are. Then, you quantify in money terms what resources you need to meet those goals, and quantify the time period during which you want to achieve these goals. Finally, you write an action plan on what you need to fulfill your plan in terms of what products to buy and what types of savings to make. Can you do Financial Planning yourself? Of course you can, but without the right financial knowledge/skills and tools for financial planning,

Ranjan Varma you may end up hurting your finances instead
of helping it. The following section will give you the knowledge about financial planning and the process to be adopted. The book also refers to a DIY Financial Planner that is covered in chapter IV. The Process The personal financial planning process is a six- step process as followed by the CFPs (Certified Financial Planners): Step 1: Setting goals with the client. This step (that is usually performed in conjunction with Step 2) is meant to identify where the client wants to go in terms of his finances and life. Step 2: Gathering relevant information on the client. This would include the qualitative and quantitative aspects of the client's financial and relevant non-financial situation. Step 3: Analyzing the information

Lights, Camera ActionSteps on Money Management 73 The information gathered
is analyzed so that the client's situation is properly understood. This includes determining whether there are sufficient resources to reach the client's goals and what those resources are. Step 4: Constructing a financial plan. Based on the understanding of what the client wants in the future and his current financial status, a roadmap to the client goals is drawn to facilitate the achievements of those goals. Step 5: Implementing the strategies in the plan. Guided by the financial plan, the strategies outlined in the plan are implemented using the resources allocated for the purpose. Step 6: Monitoring implementation and reviewing the plan. The implementation process is closely monitored to ensure it stays in alignment to the client's goals. Periodic reviews are undertaken to check for misalignment and changes in the client's situation. Action

Ranjan Varma Before we list out the action steps, here‘s
a draft of the Financial Planning Service provided by RupeeManager. This will give you an idea of comparing and evaluating a financial planner. You will know what to expect in a financial planning service and thereby demand the same from your financial planner. Financial Planning Schedule of Advice The Process: Step 1: Free Consultation, No Sales Obligation Explore areas where Advisor can solve a problem and add value Review of existing investments Introduce the tools for financial management. Step 2: Financial Planning & Advisory Review of current financial situation Goal Setting Financial Plan& Recommendations Step 3: Implementation Services Selection of Insurance covers Selection of Investment products Documentation Step 4: Review Services Goal tracking Portfolio Tracking & Management

Lights, Camera ActionSteps on Money Management 75 2. Analysis: The
Advisor will prepare a financial plan to document the action steps necessary to attain the financial goals and objectives of wealth management & capital protection. Specific financial planning issues to be addressed by Advisor are indicated below by Client‘s initials. Please indicate requirements by ticking the boxes below. Risk profile analysis _____ Insurance analysis _____ Investment management _____ Income tax planning _____ Retirement planning _____ Estate planning/Home Loans _____ Other: _____ Since financial planning is a holistic exercise, limiting Advisor‘s analysis to the specific areas indicated above, may have a direct impact on Client‘s overall financial picture and well-being. Advisor will meet or communicate with Client as

Ranjan Varma frequently as determined mutually by the adviser and
Client. 3. Confidentiality: All information and advice furnished by either party to the other, including their agents and employees, shall be treated as confidential and not disclosed to third parties. 4. Responsibilities of Advisor & Client: The Advisor will continue to upgrade his knowledge of the financial products and the financial market. The advisor will provide recommendations that are independent, unbiased and not on the basis of commission to be earned. The Advisor will disclose commissions for the implementation services. The formulation of financial planning objectives and the implementation of plans to attain those objectives is a joint responsibility. Client recognizes that the value and usefulness of the financial planning services will be dependent upon information that he/she provides and upon his/her active participation. Client also agrees to keep Advisor informed of changes in Client‘s needs, and goals. Client acknowledges that Advisor‘s analysis and recommendations are based on the information

Lights, Camera ActionSteps on Money Management 77 provided by Client.
Implementation of any portion of the financial plan recommended by the Advisor is entirely at Client's discretion and that he/she is under no obligation to follow 5. Compensation. a. Financial Planning Client shall pay Advisor for financial planning services provided, a fee of Rs xxxx/-. Half of this fee is payable upon signing of this Agreement and the balance upon delivery of the written plan. If services include implementation, monitoring and investment management, other compensation methods such as commission or a fee based structure will be discussed. b. Implementation of Recommendations The advisor can arrange to provide investment solutions from various financial institutions and is paid commission by them. The Advisor undertakes to disclose commissions earned. c. Periodic Review & Control: Financial management is a continuous process. For periodic review and control, a fee of Rs xxxx/- shall be paid

Ranjan Varma annually. (Client Signature) (Advisor Signature) Action Steps: Decide
your asset allocation policy. Spend time on analyzing your networth and cash flow. Spend time on setting up your financial goals. Spend time in constructing a financial plan. Write to us if you have any queries.

Lights, Camera ActionSteps on Money Management 79 Camera: IV. Financial
Management Tools Lights Camera Action Why & How to measure Software & Tools Create your portfolio To get started on financial management, it is a good idea to start measuring your financial situation first. Because once you start measuring things, managing them becomes clearer and easier. In other words, measuring is the first step towards managing money. Managing Money is one of the top New Year resolutions. The fact that we need those resolutions every New Year, makes it obvious that we don‘t keep those resolutions for long! The reason we are not good with managing our money is not hard to find. Fear of numbers, information overload in the media, financial jargons and the complexity of financial products adds to our inertia. But the biggest reason, to my mind, why people do not manage their money is that they don‘t know anything about their money. How it is coming, where it is going, whether it is lying idle, etc.

Ranjan Varma Smart people would be setting up a detailed
system and software that tracks expenses, optimizes income and tracks savings and investment. They know that there are several downsides for not maintaining any records or just maintaining a manual notebook for all your financial transactions. Notebook records don‘t give you the options of retrieval of data in any desired format other than the one you are using. For example, a list of fixed deposits will not give you another list which is sorted in a way that shows in an order when you will get the redemption or maturity of those FDs. Excel is a powerful spreadsheet and can be used by trained users in a very effective way. But the caveat here is that you need to be a trained user to make use of the spreadsheet software. Even with trained users, getting reports in charts, tables, etc will not be easy. Record keeping is a simple, easily implemented, and cost effective management tool. Complete, well organized records can help ensure proper management of your money. But it is also important to be aware of the limitations of good record keeping. We need to take care of the following:

Lights, Camera ActionSteps on Money Management 81 Records must be
updated regularly. You must update records correctly. The records need to be readily accessible. Records containing any confidential information must be secured. The guiding principles to manage your money should be: 1. Know Yourself 2. Know how your money is doing 3. Make Your Money Work: (And not just you work for Money!) 1. Know Yourself: We have a very vague idea about our money. Like, have you figured out your risk profile/appetite? Are we conservative or aggressive investors? Do we know about our income and expenses, networth? Do we know that our portfolio follows the optimum asset allocation principles? The idea is that, if we had a way to measure income, expenses, portfolio, risk profile, etc, we could have a discussion on how to improve them. No records, no improvements.

Ranjan Varma Once you are aware, other things follow. 2.
Know how your money is doing: Now that you have numbers ready, the improvements follow naturally. For example, you see that your percentage spend on ―eating out‖ is 2-3 times the monthly grocery bill or it forms 25+% of your expenses. Also, you will get an idea how to balance your portfolio according to your risk profile. You will match the portfolio with your risk appetite and see if you can take more risk or go more conservative. In other words, you get to decide your asset allocation strategy. 3. Make your Money Work: Other than tracking your earnings and your expenses, it is important to see if your money is working for your future. How about allocating your income among fixed expenses, discretionary expenses, short term savings and long term investments? It‘s like assigning goals for your money. Technology can help create an efficient system to manage your money. But they also need to be easy to use. It should not be like a Jet‘s dashboard which has hundreds of powerful utilities and

Lights, Camera ActionSteps on Money Management 83 features but very
complicated to understand. There are some desktop softwares that promise loads of features. And there are online options that you can access your information from any computer connected to the Internet, including Smart Phones. Some websites offer a low monthly fee to use the software and other sites are free and entirely advertising supported. Some people prefer this method for its convenience and other people stay away from these programs due to security fears. Using online financial tools is not free from some disadvantages. Even though there are efficient security systems that take care of your data privacy, you never know when it would be hacked into. What are your preferences of using financial software, tools and calculators? Are you comfortable using online tools or desktop software? Here‘s a list of the available software: Camera Desktop Software:

Ranjan Varma MProfit & InvestPlus: For those who are not
comfortable with keeping their data online, MProfit & InvestPlus are two desktop portfolio management systems where all your financial data is saved locally on your computer. Both the desktop systems helps manage all your assets such as stocks, MFs, FDs, ULIPs, PPF, property, gold, etc. The software helps you to manage multiple individual and group portfolios. It also imports data from digital contract notes, Excel and online portals. The software offers reports for annualized returns, capital gains (with or without indexation), asset allocation and auto price updates for stocks and ETFs , and daily mutual fund NAVs The web site is http://mprofit.in/ and http://investplus.in/ Online Software Perfios, Intuit MoneyManager & ArthaMoney The online money management applications boast of very high security locks and features while also providing real time price and tracking updates.

Lights, Camera ActionSteps on Money Management 85 The online application
also helps you track your income, expenses and provides budgeting tools. It syncs with your banking accounts and provides an integrated approach to money management. Online Portfolio Trackers There are two popular online portfolio trackers and they are provided by the leading financial portals of the country. They are: moneycontrol.com and valueresearchonline.com. :http://www.moneycontrol.com/portfolio_plus/s so/portfolio_signup.php and http://www.valueresearchonline.com/port/defaul t.asp They provide live price updates. Moneycontrol supports more asset classes than valueresearchonline.com which is focused primarily on stocks and mutual funds. Both of them show transaction history, gains & losses and fund performance on a daily, monthly and yearly basis. Your portfolio data resides on the server of these portals, so be discreet. You may enter only 10-20% of each stockholding and calculate the profit or loss by multiplying with 10 or 5, the gains/losses calculated on the portfolio management site. Online Banking & Investment Platforms

Ranjan Varma Your bank provides you with netbanking facilities that
can be your online platform for your banking needs as well as help pay bills and invest in mutual funds. Opening a 3-in-1 account (bank account, demat account & trading account) facilitates investing in corporate deposits, mutual funds, stocks and commodities. A useful investing platform has been built at http://fundsindia.com that provides one login id for investments in mutual funds, stocks, deposits, NPS and insurance. DIY Financial Planner While there are number of portfolio trackers and transaction based money managers, tools to create a financial plan all by yourself are hard to come by. Now, a DIY (Do It Yourself) financial plan suffers from the disadvantage that you are on your own and not dependent on an expert Financial Planner. But then, it‘s not that difficult like solving equations of rocket science. It‘s easy! The "Do It Yourself" (DIY) planner helps you understand your current financial situation, set financial goals and analyzes your risk profile before recommending a financial plan

Lights, Camera ActionSteps on Money Management 87 We give you
free access to the DIY Financial Planner. Please email us at [email protected] for the link. Action The action steps for this chapter are: Take the ―Planner‖ for a spin. Start with the data about your current situation, where you enter data about your income and expenses, assets and liabilities. Spend time on your targets/ financial goals. Answer questions about your risk profile and check out the recommendations given in the financial plan. Create your Portfolio Tracker file & reports. Open a 3-in-1 bank account or an account with fundsindia.com.

Ranjan Varma Chapter V: Tax Planning Lights! Camera! Action! Taxable
Income, Tax Slabs, Tax Products Case Study, Do‘s & Don‘ts Select Tax Products, File Taxes In this world nothing can be said to be certain, except death and taxes -- (Benjamin Franklin). So let's get over the taxes, before we select the right insurance and investment products. For most people, financial planning and tax planning are two mutually exclusive exercises. But when it comes to planning our investments from a tax-saving perspective, we must not ignore tenure of investment, our investment objectives and risk appetite. And just tax planning is not enough. Even after you select tax products and pay your taxes according to what the government dictates, you still need to file your tax returns. Taxable Income The Income Tax Act stipulates that the taxable income is the sum total of income from salary, house property, capital gains, business and any

Lights, Camera ActionSteps on Money Management 89 other source that
is outlined below. The Income-Tax Act has stipulated that salary includes: 1. Salary, including advance salary and arrears of salary; Wages, Fees; Commission; Pension or Annuity; Perquisite or Profits in lieu of Salary; etc 2. Under the Income-tax Act, the owner of a house property is taxed on the income in the form of its annual value under the head ―Income from house property‖. 3. Any profit or gain arising from sale or transfer of a Capital Asset is chargeable to tax under the head ‗‗Capital Gains‘‘. The income under this head is deemed to be the income of the year in which the transfer takes place. Capital gains are chargeable to tax on accrual basis whether the consideration is received or not, especially in the case of gains from sale of shares and securities. Capital gains are of two kinds, namely: Short term Capital gains, if the assets like shares and securities, are held by the assessee for a period not exceeding 12 months or 36

Ranjan Varma months in the case of other assets. Long
term Capital gains, if the assets like shares and securities, are held by the assessee for a period exceeding 12 months or 36 months in the case of other assets. 4. Income from business, profession or vocation includes the Profits or gains of a business; any compensation or such payment due/received by any person in connection with modification/termination of his management; etc. 5. Additionally, tax is also computed on income from other sources if the income is NOT exempt under the IT Act 1961; and this income is not chargeable to tax under the other heads of income viz. ‗‗Salary‘‘, ‗‗House property‘‘, ‗‗Business or Profession‘‘ and ‗‗Capital Gains‘‘. Some examples of such income from other sources are: Interest on bank deposits, loans or company deposits, Dividend; Family pension (received by legal heirs), Income from sub-letting of house property by a tenant and Insurance commission, etc. Tax Slabs

Lights, Camera ActionSteps on Money Management 91 Tax Man Women
Senior Citizen Rate (In Rupees) (In Rupees) (In Rupees) 1 0.00% Upto 2,00,000 Upto 2,00,000 Upto 2,50,000 2 10.00 % 2,00,001 to 5,00,000 2,00,001 to 5,00,000 2,50,001 to 5,00,000 3 20.00 % 5,00,001 to 10,00,000 5,00,001 to 10,00,000 5,00,001 to 10,00,000 4 30.00 % Above 10,00,000 Above 10,00,000 Above 10,00,000 Note :- 1) Surcharge is Nil and 3% Cess will be charged on Above Tax 2) Age of Senior Citizen is = 65 Years 3) Corporate Tax will be 30% and surcharge and cess will be Nil. 4) Benefit of Rs. 1.50 Lakh for Interest on Housing Loan will be continued Above Tax Slab will be applicable w.e.f. 01.04.2012 Popular Tax Exemptions

Ranjan Varma Exemptions are available under section 80 C, 80
CCF and 80 D. The maximum exemption available under section 80 C is Rs. 100000. Under this section Rs.100000 investment or contribution can be made in PPF, NSC, Life insurance premium, 5 year FD with banks and Post offices, Mutual Fund ELSS, Principal Repayment of housing loan, and the tuition fees paid for children‘s education. Under Section 80 CCF, you can invest up to Rs.20000 in infrastructure bonds. Under Sec 80 D, the premium paid towards the mediclaim policies are exempt. The maximum limit of exemption is Rs.15000 and for senior citizens the limit is Rs.20000 and for covering senior citizen parents there is an additional exemption to the extent of Rs.15000. Tax Saving Investment Products: 1. Bank Deposits Some bonds have a special provision that allows the investor to save on tax. These are termed as Tax-Saving Deposits, and are widely used by individual investors as a tax-saving tool.

Lights, Camera ActionSteps on Money Management 93 A tax saving
term deposit has tenure of 5 years, and a lot of banks offer these. They save tax under Section 80C. The interest earned from these fixed deposits is taxable, and tax will deducted at source as applicable. A list of Banks offering tax saving deposits along with the rate of interest can be found on this link: http://www.onemint.com/2011/01/19/tax-saver- fixed-deposits-with-high-interest-rates/ 2. Public Provident Fund (PPF) This is an ideal investment option for both salaried as well as self employed classes. However, Non-Resident Indians (NRIs) are not eligible. Also, an individual cannot invest on behalf of HUF (Hindu Undivided Family) or Association of persons. Investments in PPF currently earn a return of 8.80% pa. The duration of a PPF account is 15 years, i.e., 15 complete financial years. If a person opens a PPF account on January 2, 2000, the account will mature on April 1, 2016. Even after the expiry of 15 years, the PPF Account can be extended for duration of five years at a time. Investors are required to make annual

Ranjan Varma contributions to keep their PPF accounts active. The
minimum and maximum investment amounts per annum have been pegged at Rs 500 and Rs 1 lakh respectively. One can make maximum investment up to Rs. 1 lakh per annum. This qualifies for IT Rebate under section 80 C of IT Act & further the interest earned is tax exempt under Section 10 of the Income Tax Act. After completion of five financial years from the end of the financial year in which the initial subscription was made, there is a facility of one withdrawal every year. The maximum amount available for withdrawal is 50 per cent of the balance at the end of the year immediately preceding the year of withdrawal or the fourth year immediately preceding the year of withdrawal, whichever is lower. For e.g. suppose you have Rs 1,00,000 at the end of the fifth financial year, and Rs 2,00,000 at the end of the eighth financial year, you can withdraw upto Rs 50,000 (50 per cent of Rs 1,00,000). Importantly, there are no charges for availing of the withdrawal facility. Secondly, although the scheme offers assured returns, the interest rate on PPF can be changed (the rate is reviewed every year). Hence there is always possibility that interest rate on scheme

Lights, Camera ActionSteps on Money Management 95 may get reduced.
The interest rates would be aligned with G-Sec rates of similar maturity with a spread of 0.25% However the scheme is one of the best in terms of tax benefits. Investments upto Rs 1 lakh in a financial year are eligible for deduction under Section 80C of the IT act. PPF can be an ideal tool while planning for long-term objectives like one's retirement or children's education and marriage. Postal Savings Schemes : 3. National Savings Certificate (NSC) National Savings Certificates (NSC) are an assured return scheme with attractive tax deduction under Section 80C of the Income Tax Act, 1961. NSC investments offer rate of interest (coupon) of 8.6% pa for 5 year term and 8.9% for a 10 year term. The rate of return is determined at the time of investment and will be notified before April 1 of that year. The interest rates would be aligned with G-Sec rates of similar maturity with a spread of 0.25% on the 5 year option and o.50% on the 10 year option; the minimum investment amount is Rs. 100, and Rs 100,000 pa is the maximum.

Ranjan Varma Interest earnings from investments in NSC are now
fully taxable at the respective slab rate of the individual. Interest on NSC is taxable under the head 'Income from other sources'. To avoid paying a huge sum towards income tax at maturity one could declare accrued interest on NSC on a yearly basis for all the six years. If you avoid declaring the interest on an accrual basis, then the entire interest earned i.e. (the maturity value - the amount deposited) would accumulate in the year of maturity. You could then claim it under Section 80C, but it would be a substantial amount and would be taxable at the current applicable tax rate. Investor who have short term objectives and would like to get assured interest rate at the time of investment will prefer NSC vis-à-vis PPF Comparison of NSC & PPF – Post Tax Returns NSC PPF Rate of Interest (pa) 8.60- 8.90%% 8.80% Interest receipt On maturity On maturity

Lights, Camera ActionSteps on Money Management 97 Tax benefit on
investment Deduction under Section 80C Deduction under Section 80C Tax benefit on interest earned Nil Exempt under Section 10 4. Tax Saving Mutual Fund Schemes These schemes known as ELSS (Equity Linked Savings Scheme) invest all their money in the stock market and have a lock-in of three years. This means that the units purchased cannot be assigned / transferred/ pledged / redeemed / switched – out until completion of 3 years from the date of allotment of the respective Units. The top 7 Open Ended Schemes on the basis of corpus (AUM) as on 28-10-2012 1. SBI Magnum Tax Gain (1993): 4648 crore 2. HDFC Taxsaver (1996): 3413 crore 3. Reliance Tax Saver (2005): 1994 crore 4. Birla SL Taxplan (2008): 1411 crore 5. Sundaram Tax saver (2005): 1392 crore 6. ICICI Pru Taxplan (1999): 1363 crore 7. Fidelity Tax Advantage(2006): 1153 crore

Ranjan Varma PPF versus ELSS: In case of PPF, you
are invested for 15-Yrs with liquidity being limited. If you need the money 10- Yrs from now by when your account will not mature (only partial withdrawal will be permitted). So, you have a situation where the tenure may not suit you. But the one big advantage is that you get an assured return of 8% pa. This return is of course assured but not fixed; the rate of return can change from year to year. On the other hand, let‘s say you opt for tax-saving mutual funds (also known as ELSS). These schemes invest all their money in the stock market and have a lock-in of three years. Post that you are free to withdraw your money. So, you have a chance of earning a much better, but not assured, return and also liquidity when you need it. So if you have an appetite for risk, you should surely put some money, or maybe even most of this money, into tax-saving funds. Tax Plan in Sync with Overall Financial Plan You should not do your tax plan in isolation. You need to do it in sync with your overall financial plan. So a tax plan is not only to just save taxes

Lights, Camera ActionSteps on Money Management 99 and also it
should assist you in achieving your other financial goals like children‘s higher education, buying a home or retirement. Here‘s a very useful infographic by Manshu: (Source: onemint.com/2011/10/17/section-80c- tax-saving-intruments-infographic/) Structure your Housing Loan The Principal repayment of a housing loan is eligible for a deduction up to Rs.100000 under section 80C. The interest paid on a housing loan is eligible for a deduction up to Rs.150000 under Section 24. If the housing loan is for a sizeable amount, then it is possible that the principal repayment and interest may exceed the specified tax exemption limit. To utilize the maximum tax benefit, an individual can consider going for a joint home loan with his/her spouse or parent or sibling. This will make sure that both the co-owners can claim tax deductions in the proportion of their holding in the loan. It‘s important to learn a bit of fine print when you

Ranjan Varma are dealing with home loans. For example, if
the property for which loan is taken, is not fully constructed within 3 years, the amount of deduction will not exceed Rs 30,000/- instead of the Rs 1,50,000/- that‘s covered under Section 24. A Primer on Direct Tax Code (DTC, 2012) It's good to be aware of the tax implications that the new bill would bring when it's applicable. Tax Slabs: The original DTC bill had proposed to impose extremely liberal tax slabs. For income between `1.6 lakh and as much as `10 lakh, the tax rate was just 10%. The 20% rate was applicable for the `10 lakh to `25 lakh slab and only those earning above `25 lakh were to pay 30%. Capital Gains The retention of the zero tax rates on long-term equity gains is probably the fundamental difference between the DTC as it was proposed originally and the shape it has finally taken. However, on a relative basis, long-term capital gains are now more attractive by a smaller margin than earlier. Since short-term gains are now taxed at half the

Lights, Camera ActionSteps on Money Management 101 rate of the
income tax slab the investor is in, they can be no more than 15 per cent and potentially as low as 5 per cent. The basic bias of the tax laws for shorter-term gains remains intact. Equity linked saving schemes (ELSS) will be history after the act comes into force. What used to be the Section 80 C deductions are now applicable to much smaller range of investments. This is unfortunate -ELSS is a useful financial product which brings the twin benefits of equity returns & tax-saving. Under the DTC, 80 C-type benefits are limited only to term insurance, PF, PPF and the New Pension System. Of these, only the NPS offers some equity exposure but only up to 50 per cent and with a lock-in to retirement age. Tax deductions under DTC On the deductions front, the DTC is a mixed bag. While the currently available interest deduction of `1.50 lakh on home loan on self- occupied property has been retained, the deduction on principal repayment, covered under Sec 80C has been dropped. In place of the existing Sec 80C, the bill proposes a two-tiered deduction. The first tier is a `1 lakh deduction for savings in

Ranjan Varma respect of contributions to the employee provident fund,
PPF, pension fund etc. The second tier is a deduction with a ceiling of `50,000 reserved for deduction in respect of life insurance and health insurance premium as well as for tuition fees. Camera!! Investing to save tax is a part of financial planning. And understanding this holds the key to achieving more with your money. A Real Life Example of Tax Planning Kumar Rakesh is a 35-Yr old salaried person, married and blessed with two children, a daughter and a son. The elder one, the 8 year old daughter goes to college in 10-Yrs from now. The 4 year old son would go to college in 14 years. Kumar Rakesh is a busy man as his job takes him all over the country. To help him with taxes, he has a brother-in-law who has a LIC agency in the name of his wife. So obviously, he has 5 LIC endowment policies that take care of his tax planning. Kumar Rakesh has successfully warded off his

Lights, Camera ActionSteps on Money Management 103 brother-in-law in taking
more LIC policies and using the entire Rs 100000 quota for life insurance. He has also opened a PPF account. So while Rs 60000 goes as life insurance premium, he puts Rs 40000 in his PPF account. Sometimes if he doesn‘t manage to put the entire Rs 40000 in PPF, he buys NSC of smaller denominations to cover the quota for Rs 100000 exemption under Sec 80C. This happens in last minute rush to complete the tax formalities. While on a flight Kumar Rakesh chanced upon an article on tax planning in the in-flight magazine of that airline. He had the option of taking a nap or reading that article on taxes. Luckily, he chose to read the article carefully. Rakesh realized that he had more options to choose from than he was told by his brother-in- law. And even though he disliked his pestering brother-in-law, he could not do much about it, thanks to his wife. Now he had some proof of how his wife‘s brother was fooling him all the time. Perhaps that was the motivation of reading the tax article carefully!! The article on investing under Section 80C to save tax primarily focused on PPF and Mutual Fund

Ranjan Varma schemes. The article recommended that the life insurance
premium for tax purpose should be limited to paying for term insurance which can be very cheap. Rakesh also realized that the Rs 60000/- that he was spending on insurance covered him for a Sum Assured of Rs 12 lakh which was not adequate to last for more than 4 years in his absence. So, Kumar Rakesh chalks out a plan for his taxes as below: Rs 5000 for a online term insurance for Rs 50 lakh Rs 50000 for the PPF account. Rs 45ooo in a tax saving mutual fund scheme that is known as ELSS (Equity Linked Savings Scheme). He can invest in a ELSS via a SIP too, so it can be spread over 12 months and not one time burden. What about you? Do you agree with what Kumar Rakesh decided to do with his tax planning? Would you fine tune your own tax planning depending on your risk profile? Think for a moment what benefits you could have gained if you had the option to invest in more rewarding tax-saving avenue.

Lights, Camera ActionSteps on Money Management 105 And you also
need to align these investments to your financial goals, like saving to fund your child‘s education 10-14 years from now. A few things more: Avoid Last Minute Rush In fact the right time to do the tax plan is the beginning of the financial year. If you postpone your tax planning even now and do it in the last minute, then you will not be able to choose the right investment. In the last minute rush, you will be forced to choose a scheme which gives the proof immediately. Is the investment sound and profitable? Is there any other better options? You will not be able to choose the best scheme and you may settle with a mediocre one. Check for Future Commitments Some tax saving options like NSC or ELSS need only onetime investment. Some other tax saving options like PPF, Ulips need periodical investments year after year. You need to be careful in choosing a tax saving scheme where you need to commit for periodical future payments. You need to check on a few things like; do you need such a future commitment? Will you be able to meet the future commitments at ease? The law

Ranjan Varma may change and you may not get any
tax exemption for your future payments. Would you consider the scheme irrespective of tax benefit for the future payments? With proper tax planning you can reduce your tax liability; save more; invest better and become wealthier. But that‘s for the next section, i.e. Action steps on tax planning. Tax Returns Filing Today it is possible to file income tax returns online and is popularly known as e filing. To file Income tax returns one needs to fill different Income Tax returns form which are : ITR-1 (Sahaj) ,ITR-2 ,ITR-3, ITR-4 and ITR-4S( Sugam). ITR-5 and ITR-6 can only be filed through e filing mode. Forms for the year 2012-13 can be downloaded from http://law.incometaxindia.gov.in/DITTaxmann/I ncomeTaxRules/PDF/Ay-2012-2013/itr62Form1- 9New2012-13.htm The e-filing process is as follows

Lights, Camera ActionSteps on Money Management 107 Select appropriate type
of Return Form . Download Return Preparation Software for selected Return Form. Fill your return offline and generate a XML file. Register and create a user id/password . Login and click on relevant form on left panel and select "Submit Return". Browse to select XML file and click on "Upload" button . On successful upload acknowledgement details would be displayed. Click on "Print" to generate printout of acknowledgement/ITR-V Form. In case the return is digitally signed , on generation of "Acknowledgement" the Return Filing process gets completed. Assessee may take a printout of the Acknowledgement for his record. In case the return is not digitally signed , on successful uploading of e-Return, the ITR-V Form would be generated which needs to be printed by the tax payers. This is an acknowledgement cum verification form. The tax payer has to fill-up the verification part and verify the same. A duly verified ITR-V

Ranjan Varma form should be submitted to CPC Benagaluru using
Ordinary Post or Speed Post within 120 days of transmitting the data electronically. This completes the Return filing process for non-digitally signed Returns. Now there are very intuitive tax applications helping you to file your taxes online. It also gives you an opportunity to learn a bit of your finances yourself. I mean by doing it by yourself, you learn a lot about your finances and how you can improve upon it. Resources National Website of Income Tax Department: http://www.incometaxindia.gov.in/home.asp Income Tax E-filing: https://incometaxindiaefiling.gov.in/portal/in dex.jsp http://personalfinance201.com/Tax http://taxyogi.com http://taxsmile.com http://cleartax.com

Lights, Camera ActionSteps on Money Management 109 Action Steps You
need to spend some time answering the following questions for yourself: Calculate your tax liability by using tax calculator tools given in the resources section. Evaluate and select the tax saving products available on the basis of returns, safety and liquidity. File your Tax returns Email us with doubts and questions at [email protected] .

Ranjan Varma VI. Taking Insurance Cover Life insurance is like
a parachute, if you ever need it and don‘t have it, you‘ll never need it again. We discussed this yaksha question in detail in Chapter II, Psychology of Money. (Page 38) The question is, ―What is the greatest mystery on earth?‖ Yudhisthira answers, "Everyone has to die. But no one thinks that for himself. This is the greatest mystery." That is the paradox that makes people avoid life insurance! Even when we know that insurance is important, we rarely take the initiative to buy insurance on our own That also makes agents take the line of selling Insurance as a tax saving and/or Investment product. Indian consumers have bought life insurance for reasons of tax saving rather than the core need of providing for one's family in case of death of breadwinner. Lights Camera Action Basics of Insurance Insurance Calculators Calculate your insurance requirements, Select Products

Lights, Camera ActionSteps on Money Management 111 Often, we mix
investments with insurance as most Agents selling insurance policies highlight the investment angle of the product. In the process of buying insurance, investment and tax planning together, we don‘t get adequate insurance and can lose out on better investments and tax efficient products. It could be like travelling in 2-3 boats together, all of them going in different directions!! However, the combination of insurance, tax planning and investment can be a great product if it suits your profile and needs. Here is an actual data of insurance policies with their return on the basis of tax saved: Endowment Plan for a 35 year old Term (yrs.) Premium (Annual) Maturity (Amount) Ret urn Return post tax 10% 20% 30% 5 21127 117000 3.4 7.0 11.0 15.7 10 10495 137100 4.8 6.7 8.7 11.1 15 6950 177300 6.4 7.6 9.0 10.5 20 5126 221700 6.9 7.8 8.7 9.8 The returns, apart from the insurance angle, is good enough if the tax saving is also taken into consideration.

Ranjan Varma But if there is no tax savings, the
returns falls down considerably but justifiably because it covers the risks of death too. Also, the bonuses have been decreasing as the return from short term policies are lower. But before you go shopping around for an insurance policy, let‘s make sure you know the types of insurance available. Broadly, there are the following areas of insurance that we will discuss: 1. General Insurance: that covers for losses of car, homes, travel, etc 2. Life Insurance, 3. Health Insurance and 4. Pension, that covers the risk of living too long General Insurance All non life insurance, and typically automobiles, homes, travel and Mediclaim policies are serviced by General Insurance Companies. The market for general insurance products has become very competitive and online portals do a good job of comparing insurance quotes.

Lights, Camera ActionSteps on Money Management 113 Compared to life
insurance products, they are simpler to evaluate and that‘s why we will discuss life insurance in more details in this chapter. Life Insurance In the good old days, Life insurance allowed individuals very few options and they were to opt for cover through two plans namely term and endowment plans. With competition to LIC, in the last decade, new products combining the investment angle with insurance became a popular choice too. It was called ULIPs. However a good thing to happen in the insurance industry was the beginning of sale of online policies giving a huge cost advantage to the online buyers, besides giving them a hassle free service without going through an Agent. The distribution cost of approximately 40%-60% was passed on to the customer. Let‘s take a brief overview of the types of life insurance policies available: (Details of the plans available in the Appendix of this book) Term Plans Provide only life cover

Ranjan Varma Pay out sum only if individual doesn't survive
the term Required to pay an annual premium for a predetermined tenure till you encounter an eventuality Long term and premium stays the same during the tenor Lower premiums Endowment Plans Pay out the sum assured under both scenarios - death and survival, as long as premiums have been paid regularly Good avenue for investment for those with low to medium risk appetite For investors seeking a combination of insurance and savings Downside is low and premium is higher Whole Life Plans: A combination of Endowment Plan and Term insurance where the death benefit is paid only to the heirs of the policyholder.

Lights, Camera ActionSteps on Money Management 115 ULIPs Invest in
stock/debt market (you have the option to choose allocation) Combination of long term savings and insurance in that order; if objective is life cover, then term plan better than ULIP ULIPs have higher expenses; Pay out the sum assured on maturity Let‘s take an example of a 30 year old person taking out a policy of Rs 25 lakh for a 20 year period. This will give you a fair idea of the difference in the above types of Insurance. Type SA (lakh) Premium Company/Policy Online Term 25.0 3420/- Religare/iTerm Term 25.0 6425/- LIC/ Amulya Jeevan Whole Life 25.0 61,762/- LIC/ Whole Life Endowment 25.0 1,22,388/ - LIC/ Endowment ULIPs In Ulips, you get to choose the premium as well as the Sum Assured

Ranjan Varma Term Plans are the cheapest form of life
insurance and are a must have for all individuals, especially at a young age. Online v/s Offline Buying of Insurance The sale of online term insurance has been the most customer friendly thing to happen to the customers of financial services in the last few years. The online sale versus the sale through Agents gives the informed customers a choice as well as power. Now the informed customer can search, compare and get the cheap insurance online, sitting comfortable at their homes/office. They just need to be connected securely to the internet, which they anyway are! To put it in perspective, let‘s take the example of Mutual Funds. To buy Mutual Fund schemes, you need to go through a Mutual Fund Advisor or a platform that charges the commissions even though you may have made the choice of the mutual fund scheme yourself. Breaking News: From January, 2013, SEBI has asked Mutual Funds to start a direct plan for direct investors.

Lights, Camera ActionSteps on Money Management 117 There are a
few issues that you should be careful about when buying insurance online. They are robustness of the buying platform, data security and privacy, service channels, grievance redressal channel. Most online buying platform of Life Insurance Companies are certified on vulnerability based testing for SQL injections. They have enabled SSL (Security Sockets Layer), which ensures that data is encrypted and is safe and secure. The service and grievance redressal channels of the insurance companies should be easily accessible. Moreover, you need to be comfortable with them yourself before you transact with them. Health Insurance According to recent research by Indicus Analytics, Health Insurance has been bought by just 26% of the urban households. Being young and healthy is no excuse for not buying Health Insurance. With the issues of: escalating pollution, health care that makes you live longer and Escalating cost of health care,

Ranjan Varma It makes sense that you get Health Insurance
on priority. When you are buying health insurance, here are the issues that you need to be aware of: Types of Health Insurance Costs, Duration of the cover, Location of services Types of Health Insurance You can start with asking your advisor about the difference between plans being sold by General Insurance companies and the Life Insurance companies. The General Insurance people sell Mediclaim policies where they reimburse the hospital expenses according to the policy you have bought. The Life Insurance people sell a health insurance plan where they cover hospitalization expenses while also providing some maturity/death benefits. The Mediclaim sold by General Insurance companies can be either Individual or Family Floater. The difference: Mediclaim policies issued by General Insurers are reimbursement policies

Lights, Camera ActionSteps on Money Management 119 while the Health
Insurance plan issued by a Life Insurer combine health risk with savings. This means that if there is no health risk, you still get some maturity/death benefits which is not available in the Mediclaim policy. However, the Mediclaim policies benefit from the large network of hospitals and TPAs (Third Party Administrators) which service your hospitalization needs more efficiently than the policies being serviced by the Life Insurers. Costs, Duration & Location For health insurance, we must look for the service that takes care of your needs rather than focus on the costs. For example, let us compare two plans on the basis of duration of cover and costs. Let‘s say you get a plan which covers you till age 65 and costs Rs 10000 annually. While the other plan costs Rs 15000 and assures lifelong cover. We would recommend the costlier plan as the need of Mediclaim grows with age and it‘s a good idea to get life long cover. Similarly, you need to assess whether the health insurance provider has an empaneled hospital/TPA in your area. There‘s no point

Ranjan Varma buying cheap health insurance which does not service
your locality. In health insurance, cheap is no good. Pension: Covering the risk of living too long With improving life expectancy comes the risk of living too long. You may have made financial arrangements for life up-to 80 but you may live till 90. In India, if you have a Government job, you are lucky to have the best pension arrangements for your retirement. Even in the Government, if you have joined the job after 2004, you have been registered with the new NPS (National Pension Scheme) that will accumulate your annuity funds according to your contribution to the fund and the pension is no longer a pre-defined benefit. Let‘s start by understanding that Pension plans can be on defined benefit or on defined contribution. In the defined benefit plan, the pension is paid irrespective of the contribution made by the employee and depends on the wage and inflation. This pension scheme is funded by the

Lights, Camera ActionSteps on Money Management 121 Government and is
becoming a huge burden for the exchequer. In the defined contribution pension plan, the employee contributes to accumulating the fund for annuity payment and bears the investment risk too. There is no promise by the employer about the benefits and it depends on the markets, not on wages and inflation. The New Pension Scheme (NPS) is a defined contribution plan. New Pension Scheme The NPS is perhaps world‘s cheapest financial product with a investment management fee of 0.0009% per annum. But despite being launched with fanfare in 2003-04, the scheme has not found many takers. One reason of the slow uptake of the NPS is that there is no intermediary/advisor/agent for this plan and only informed people can buy this scheme. To make intermediaries to push this product, the investment management fee has been raised to 0.25% recently, which is still low. To enroll in the NPS, download the application form from pfrda.org.in website and submit the

Ranjan Varma form (UOS-S1) to a Point of Presence Service
Provider (POP-SP). The nearest POP-SP can be located with the help of the PFRDA website. Remember, you have to be 18+ and ofcourse be an Indian citizen. You can‘t enroll after 60. It‘s a good idea to enroll with NPS and take advantage of the power of compounding for your retirement. Earlier, the better. The NPS offers you two approaches to investing. One, is an active choice where you actively decide on how your contributions are invested. Two, for people who know nothing about funds, you can opt for the auto approach where the Fund Manager will take decisions for you. There are two stages of retirement planning. In the first stage, you accumulate a retirement corpus. In the second stage you buy an annuity from that corpus that will take care of your retirement needs. Let‘s begin with the assessment of the retirement corpus you need. How much retirement corpus do you need? If one started working in 1990, he/she could manage my monthly expenses in approximately

Lights, Camera ActionSteps on Money Management 123 Rs 3000/-. Today
the bare minimum would not be less than Rs 40000/-. For a 30 year old who is spending Rs 50000/- a month today, the monthly expenses when he turns 60 would be more than Rs 5 lakh assuming 8% inflation rate. The retirement corpus required to meet this expense would be more than Rs 7.50 crore assuming you get an annuity rate of 8%. Assuming a 6% annuity, your retirement corpus requirement would exceed Rs 10 crore. Though these numbers look scary at the moment, investing regularly and early would make the journey a smooth one. To toggle with the numbers, you may like to revisit the Financial Planner tool that we talked about in Chapter IV and play with the numbers. Stage II: Buying an Annuity Annuity is a series of payments made at successive periods (intervals) of time and is generally bought at the time of retirement. Today, annuities are being issued by Life Insurance companies. The Annuity Service Providers empaneled by PFRDA for subscribers of NPS are as under:

Ranjan Varma 1. Life Insurance Corporation of India 2. SBI
Life Insurance Co. Ltd. 3. ICICI Prudential Life Insurance Co. Ltd. 4. Bajaj Allianz Life Insurance Co. Ltd. 5. Star Union Dai-ichi Life Insurance Co. Ltd. 6. Reliance Life Insurance Co. Ltd. There‘s no point comparing and discussing the annuity plans right now because we would be selecting an annuity only when we retire! An Annuity is an amazing financial product. It ensures a steady cash flow for a person in retirement. It also takes care of the salaries of the people working in the Insurance Company too! –P V Subramanyam, http://subramoney.com Camera!! Calculate your human life value (HLV) You are worth more than you think. Let‘s determine your number of income-earning years from now until you retire. The following data is required to calculate your HLV (Human Life Value): Current age, retirement age, annual income and the expected increase, other benefits, monthly expenses on self and family, your assets and your liabilities.

Lights, Camera ActionSteps on Money Management 125 But a simpler
way would be to assess your monthly expenses and what it would suffice to take care of the expenses even when you and your income go away. Assuming your family‘s monthly expenses are Rs 50,000, the lump-sum amount that will ensure that Rs 50K comes every month would be Rs 60 lakhs. This figure is on the assumption that Rs 60 lakh will give you a return of 10% every year. Take the Financial Planner tool for a spin and figure out the exact amount you need depending upon your family situation. Setting Up Your Insurance One needs to do a certain amount of spade work before purchasing a policy, to ensure the best possible coverage at the right price. Here are some action steps to set up your insurance cover. Explore As premiums vary widely from company to company and cover to cover, it‘s important to look around. One can try internet sites to get instant quotes. Plot your value The key to purchasing the right amount of life insurance is to have just enough coverage to meet your needs. If you have more life

Ranjan Varma insurance than you need, you'll be paying unnecessarily
for higher premiums. On the other hand, it's important not to have too little coverage, resulting in you being underinsured. Health matters the most: Healthy people get better rates on life insurance. Higher premiums are quoted for anything that poses a risk for longer life expectancy (smoking, on regular medication, etc). Sooner the better As premium rise with increasing age, the younger you are when you purchase life insurance, the lower premiums you will be required to pay. Review your cover periodically Any life change indicates the need for an overall review of the financial plans. Make sure you have enough cover for all important events of life. Focus on annual installments You may not realize it, but you may be paying more for your life insurance if you pay your premium in monthly installments. Many insurance companies charge extra fees if you make monthly premium payments instead of paying the annual premium. Never conceal facts Though, age and negative health related conditions attract higher premium, don‘t think about lying on the insurance application. If your insurance company gets the

Lights, Camera ActionSteps on Money Management 127 knowledge of concealed
facts they can terminate the cover. Grievance Redressal in Insurance The business of Insurance is such that an Insurer looks at every claim with suspicion. It‘s the job of the Insurer to be cautious and ensure proper scrutiny. However, sometime they overdo it and this leads to lack of service to innocent customers too. It may happen that you have a complaint against the services of an insurance company and the agent/advisor or the local representative is not helping you. In this case you need to escalate matters. The escalation steps you need to follow will be as under: 1. Register a complaint with the Toll free numbers or the helpline 2. Complaint to the Grievance Officer 3. Complaint to the Ombudsman/ IRDA The website http://personalfinance201.com/Insurance/ is a handy resource on insurance problems.

Ranjan Varma Action!!! Identify the top 3 online term insurance
on the basis of cost and service comfort. Identify the top 3 offline term insurance on the basis of cost and agents profile. Analyze 3 products that are being advertised by the insurers in the media. Email us with doubts and questions at [email protected] .

Lights, Camera ActionSteps on Money Management 129 VII. Selecting Investments
Lights Camera Action Debt & Equity, The 4 parameters Journey of picking stocks Selecting Investment Products If people have to ask just one question on personal finance, they‘ll ask, ―Where to invest my money?‖ So you have come to the most eagerly awaited chapter of this book. During the course of this book, you have learnt the principles of investing, like starting early and using the power of compounding. And you have learnt to invest regularly by using the power of Rupee Cost Averaging. (Chapter III on Playing with numbers) You have also learnt asset allocation and risk profiling that could be the basis of your investment decisions. You now also know about the financial planning process that could help you with your investments. But before we jump on to pick financial products, there are a few more things to understand. Remember, don‘t jump to conclusions or conclusions will jump at you!!

Ranjan Varma And also remember, chapter 8 gives you clearcut
choices. So, don‘t hurry. Let‘s start with an understanding of debt and equity. Debt and Equity Before we learn more about selecting investment products, we also need to understand the difference between the two broad classifications of investment products: Debt and Equity. The basic difference between debt and equity would be the ownership level. Let‘s take an example where you invest in me. If you give out some money to me and expect that I return the money along with interest that I pre promise that would be a debt investment. I‘m indebted to you and promise you a return with fixed interest and on a fixed time. In another case, you give me money at your own risk. But you trust me/hope that I‘ll be a billionaire in the future and I‘ll payback from my profits. The more profits I make, the more you do. If I am bankrupt, you don‘t get anything back. And so you have invested in my equity. By evaluating & trusting me, you own me in a way!

Lights, Camera ActionSteps on Money Management 131 In other words,
by investing in a debt instrument such as a bond, you are guaranteed the principal of the bond, plus any interest that owes. However, for equity investors, you become an owner. As such, you also take on the risk of the company not being a success. Just as a small business owner has no guarantee of success with each new venture, neither is a shareholder. As a shareholder, if the company is successful, you stand to make a lot of money. On the flipside, you stand to lose a lot of money if the company is less than successful. Now debt and equity is just a classification of financial products and not a product by itself. So let me share the products available within the two classifications: Equity: You can own any stock on the Stock Exchanges and you have invested in an equity product. If you invest through Mutual Funds who have schemes for equity. Even ULIPs invest in equity and so part of your Insurance buy goes to equity. The NPS also invests in equity. Shares come in different sizes and categories. There are large, mid and small caps and there are penny stocks. As a beginner, you can invest in large and mid cap companies and only after you

Ranjan Varma gain experience, you can consider investing a small
portion in small caps and hot penny stocks. These are the riskiest but if handled well, give good returns. However, it needs expertise and nerves of steel. Debt: Mutual Funds also have debt funds where you can invest. Some people may find investing in bonds simpler than investing in stocks. Your friendly neighborhood financial advisors can provide you with government bonds like NSC. Your banker provides you with Fixed Deposits and PPF accounts. You can also pick up some highly rated corporate bonds. Then there are hybrid funds where the Mutual Funds invest a part in equity and a part in debt. For a moment, imagine Debt and Equity to be the Tortoise and Hare respectively! Debt instruments give you slow and steady returns and let‘s imagine the tortoise to be a Debt instrument. The Hare runs fast but can go to sleep (like the Sensex was 20000+ in January, 2008 and is still at 19000, i.e., sleeping) and so be an Equity instrument. We all know about the story where the tortoise wins the race by being slow and steady while the hare went to sleep.

Lights, Camera ActionSteps on Money Management 133 But there are
three more episodes of the story. In the second episode, the hare challenges the tortoise again for a race and this time he does not sleep. No prizes for guessing the winner in the second race. Fast and disciplined always wins the race. Now the tortoise again challenged the hare for a third race and this time he changed the route. The route had a river in between and the hare was left stranded while the tortoise swam across and won the race. I compare this situation to unforeseen risks that can be covered by insurance. The river denotes the importance of planning for risks and taking adequate insurance. There was a fourth race too. By this time the hare and tortoise do not compete but cooperate. They race together and win together. In financial planning, this could be a powerful vote for doing asset allocation (see chapter III, page 66-70 for more details)! To compare debt and equity, you need to consider the risk and the reward tradeoff. Risk and Return Tradeoff When a batsman wants to hit sixes (and maximizing your returns per ball), he has to take

Ranjan Varma the risk of getting caught on the boundary.
Hitting sixes is not everybody‘s cup of tea. It needs some talent and loads of practice. Some experts tell us that the more risk you take, the better returns you get. Let‘s take an example that shows that this formula may land you in trouble. Imagine a No.11 batsman taking risk every ball and trying to hit sixes every ball. He will get out soon and the returns will be, in all probability, zero!! So risk taking does not maximize returns. It‘s more about managing risks and maximizing returns.Bat like Sachin Tendulkar or Virat Kohli in the field of investments. They bat sensibly and not take risks just for the sake of taking risks. The Four Parameters Some of the popular options available for investments are Real Estate, Mutual Funds (MFs), Bonds, Stocks, Unit Linked Insurance Policies (ULIP) and (not at all popular option) Exchange Traded Funds (ETF).

Lights, Camera ActionSteps on Money Management 135 And let‘s try
to rate them on four parameters of investing. i.e. 1) Growth, 2) Liquidity, 3) Security and 4) Expenses Growth: Stocks, MFs and ETFs top the rankings here. Over a period of over 15-20 years, the Compounded Annual Growth Rate (CAGR) is above 15% in comparison to 8% in Bonds. ULIPs begin to give a good growth only after 5 years or so because initially they are very expensive. Real estate is on a good run these days too Liquidity: Again, Stocks, MFs and ETFs score heavily while Bonds and ULIPs have a lock-in period or have substantial surrender charges. Real estate scores low here (You have to be lucky to get good buyers at the right time). Security: Most financial products that we are discussing are secure over a long-term of over 5 years. But you may get into a bad stock or real estate which is unsecured. Otherwise also, stocks and real estate are very volatile and can affect your blood pressure too! Expenses: ETF is the least expensive with charges of around 0.5% compared to 2% from MFs and much more in ULIPs (especially in the initial years). Stocks too, are the least expensive,

Ranjan Varma provided you get into the right stocks at
the right time. One man's meat could be another man's poison. Moreover, the diversification rule says that one should not keep all our eggs/ apples (for the vegetarians) in one basket. So let us take a briefly look at the various options, one at a time. Shares: Investing in the equity market directly is exciting and sexy. You are in the thick of things and learn a lot in the process. Though the volatility and the information overload makes it a daunting task, investing in stocks is not rocket science. One should start with identifying a list of 10-15 companies out of 3-5 sectors which you know about and interests you. You can then keep a tab on their management team, financials, and future outlook and over a period of time, and will be able to take a call on them. Real Estate: I feel that one has to be plain lucky to get into a good deal and be able to get the right buyer at the right price and time. I can't think of any other factor other than luck. So if you feel you are blessed and have the right tip, go for it. Also, a lot of black money has been invested in real estate, which really scares the good guys.

Lights, Camera ActionSteps on Money Management 137 Mutual Funds: One
should allocate their time to investment decisions in proportion to their income generation goals. Also, convenience and hassle free investing should be a major factor. Mutual Funds fit the bill where Fund Managers are into it full time. If you can identify fund managers who have consistently performed over last 3-5 years, nothing like it. The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially. MFs continuously churn their portfolio. When MFs buy and sell stocks, they don't have to pay capital gains as you would do when you churn. With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month. But MFs have its own loading and administrative charges and the fund managers make merry on your hard earned money. Breaking News: From January, 2013, SEBI has asked Mutual Funds to start a direct plan for direct investors which will entail lower expense ratios and therefore better return over a long term. Exchange Traded Funds: More than 70% of the mutual fund schemes underperform the markets returns. Also, diversified equity funds usually have larger expense ratios compared to index funds. For example, the expense ratio of

Ranjan Varma IDFC Nifty Fund, an index fund, is only
0.25%, while it is anywhere between 2-2.50% for diversified equity schemes. This means that while you pay extra for active fund management, more often than not, it does not give you a better return. ULIPs: Unit linked insurance policies combine two products, i.e. Insurance and Mutual Funds. In the initial few years, ULIPs are very expensive. But only in case you don't want any hassles of investing, and you have a tried and tested Insurance agent who is almost part of your family, then ULIPs are for you. Bonds: Bonds are for those of you who are risk averse and want fixed returns. Camera! Journey of Picking Stocks Investing in stocks is very rewarding but comes with a caveat. It is not for the faint hearted and you need to have a disciplined and informed approach to stock investing. A friend was boasting about his Stock picks and how he has discovered a whole lot of money making stocks. To be fair to him, he had a good sense of stocks which were selling below their

Lights, Camera ActionSteps on Money Management 139 value in the
crashes. And he helped himself with those stocks ―On Sale‖. But he also admitted that some of his stocks happened to be the ―falling knife‖. (Falling knife stocks look like undervalued stocks, but continue to go downhill, thereby killing the buyer) Becoming a self proclaimed stock guru can be easy but dangerous! And we need to beware of a lot of ―noise‖ in the media giving out ―hot tips‖ and ―get rich quick‖ schemes. That‘s why learning all about shares is a good idea before you begin. You need to take a journey around shares and understand the jargons like Earning per share (EPS), Price Earning Ratio (P/E) to be a successful stocks investor. Deepak Shenoy‘s CapitalMind has a lucid explanation: http://capitalmind.in/2007/05/of-shares-ipos- and-stock-markets/ To start your journey, you may like to join the tribe created by Vishal Khandelwal, Founder, Safal Niveshak (http://safalniveshak.com ) Vishal looked through the BSE-500 list and screened businesses based on the following criteria:

Ranjan Varma Annual sales above Rs 100 crore Last 10
years‘ average annual growth in sales > 10% + Consistency in sales growth Last 10 years‘ average annual growth in net profit > 15% + Consistency in net profit growth Last 10 years‘ average return on equity > 15% Zero to negligible debt Positive free cash flow in 8 out of 10 years Pays dividend Good quality management – One that does not plays around with excess cash, and instead puts it to good use P/E based on 3-year average EPS < 20x (looking at P/E this way just adds to the margin of safety) Here are 15 businesses that meet those criteria and that you can research further: Balmer Lawrie & Co., BHEL, Crompton Greaves, Tata Investment Corp., Engineers India, Concor, Bajaj Electricals, NIIT Tech, Elgi Equipments, Hero Motocorp, Maruti Suzuki, Wipro, Gateway Distriparks, eClerx Services and Infosys Action!

Lights, Camera ActionSteps on Money Management 141 Identify what find
of financial products suit your risk profile. In other words, decide your asset allocation policy, i.e., the %age you need to invest in equity products and the %age you want to invest in debt products, gold, real estate, etc Identify top 3 Mutual Funds Scheme in the following category: Equity, Balanced/ Hybrid, Debt. Create your own research report on an individual stock like ITC, Asian paints, L&T, etc. This can be of your choice Identify top 3 Bank‘s Fixed Deposits Identify top 3 Corporate Deposits Identify top 3 Non Convertible Debentures Identify top 3 government securities

Ranjan Varma VIII. Recommendations Now is the time of ―Action‖
on my part of the book. We have finished with Lights & Camera and personal finance management is about taking real action. So I provide all the answers and recommendations for you to simply choose and act. You don‘t get such recommendations easily. (You do get hot trading tips on TV but this book is talking about different financial products and wants to stay away from such trading.) Giving recommendations has a number of risks. The first risk is of challenging the existing system of commission based advice. So even when I do not get any money for listing the financial products, there would be people who would suspect that there‘s some money changing hands. In my defence, I swear that I have not taken any money for the recommendations. The second risk is of the recommendations being labeled too simplistic and straight jacketed to suit everybody‘s needs. However, the recommendations are to get you started and not the 100% solution. (I call it the 88% solution)

Lights, Camera ActionSteps on Money Management 143 The third risk
is that the recommendations can change from time to time. But though they are not timeless and we will update our recommendations every year, the financial products that I recommend are time tested. So I am willing to stick my neck out, take the risks and give out my recommendations now. The 88% solution Setting up Your Financial System There are more than 1000 Mutual Fund schemes, 2500+ stock scrips to choose from. Then there are 100+ deposit schemes with Banks, Corporates and the Government itself. To set up your investments, we have shortlisted a set of 20 odd products out of 5000+ financial products. Does it help you get started? This group of 20 products is the best in class and stands validated through a reasonable thought process. Advantages of the recommendations It tunes out the noise of the market place which is worse than the fish market. It takes care of Diversification, Rupee Cost Averaging, Asset Allocation principles, Magic of

Ranjan Varma Compounding and all principles and theory of investing.
It also gets you real bang for every Rupee at a very low cost. Disadvantages: It is not 100% right. It‘s the 88% solution. It‘s boring and non-happening. More like a Cricket Test match when it‘s the age of Twenty-20. But the question is, do you need an audience for your finances? Or do you need to perform in front/for the benefit of others? Remember, its ―personal‖ finance. And once you set it up, you can forget about it and focus your life on more happening things! The following points give you a set of 20 products to choose from for your investments. Before we go on to investing our money, it‘s a good idea to take a bit of cover. Let‘s start with the emergency fund. 1. Emergency Fund: Keep an amount of three times your monthly expenses in your Bank in a Savings Account. 2. New Pension Scheme (NPS): NPS is THE best & effective tool that covers capital protection

Lights, Camera ActionSteps on Money Management 145 and also provides
growth for your retirement plans. With its lowest charges, it also is the cheapest way to get an exposure to the market. Despite being such a fabulous product, there‘s not much sales to boast. This is because there‘s no commission for an agent there. In fact getting a PRAN (Permanent Retirement Account Number) under NPS is not investor friendly. 3. ETFs: Nifty Index ETFs which benchmark the Nifty that are available in India are NiftyBEES, KotakNifty, UTISunder, Nifty 4. Equity Diversified/ Balanced Mutual Funds At a young age, you can take more risks and I will not ask you to invest in debt funds. A few Equity funds that I like are Quantum Long term equity fund, Franklin India BlueChip, Sundaram Select and SBI Magnum Global fund. But to get a bit of diversification in your portfolio, I will recommend investing in a few balanced funds. Balanced funds have exposure to both equity and debt and their fund managers take a call on when to focus on equity or debt. HDFC Prudence, DSP Blackrock Balanced, Birla Sunlife 96 (G), Tata Balanced are balanced funds which have done well. In fact some of them are at par with Equity Funds!

Ranjan Varma 5. Gold ETF: Gold has been outperforming the
equities for the last decade! For diversification purpose, investing 5-10% of your money in Gold ETF isn‘t a bad idea. Gold ETF is seeing the highest turnover these days and there are 11 (as on date) players which are offering Gold ETF these days. All Gold ETFs that are in the market give similar returns since all of them depend on the same gold prices. The popular Gold ETFs in the market are SBI Gold ETF, Religare Gold, Kotak Gold, Quantum Gold and UTI Gold ETF. Online Platforms: http://FundsIndia.com Instead of finding the right advisor and/or taking help of an uninformed advisor, there are very useful online platforms that can help you with advisory, portfolio management, online purchase and redemption of mutual funds, stocks and New Pension Schemes. Financial Products The recommendations given below are on Life Insurance, Health Insurance and Investment products.

Lights, Camera ActionSteps on Money Management 147 The recommendations depend
on your risk profile and the risk profile is classified under 4 categories, i.e Conservative, Balanced, Growth and Aggressive. You have to choose between the recommendations given below and not put your money in all of them. Finally, before I list out the products, I have to inform you that I am not a certified advisor empanelled with any financial institution, even though I have cleared the SEBI/IRDA tests. The recommendations are based on my experience in the industry, the experiences of my blog/ website readers and acquaintances with numerous financial products. For a detailed and customized recommendation, it‘s a good idea to contact a professional and independent advisor/planner. Life Insurance: iTerm (online) from Aegon Religare Life Insurance iLife (online) from Aviva Life Insurance . Amulya Jeevan from LIC

Ranjan Varma Health Insurance: Max Bupa Apollo Munich Star or
United India Conservative Investor Templeton India Index fund. HDFC Prudence LIC Bond Fund Axis Triple Advantage Fund Franklin India Bluechip, Quantum Long term Equity fund. Balanced Investor HDFC Prudence Axis Triple Advantage Franklin India Bluechip, ICICI Prudential Discovery Quantum Long term Equity fund. Growth Investor:

Lights, Camera ActionSteps on Money Management 149 Sundaram Select Midcap
Franklin India Bluechip, ICICI Prudential Discovery HDFC Midcap. SBI Magnum Emerging Business Quantum Long term Equity fund. Aggressive Investor: Portfolio Management by PPFAS (http://ppfas.com) SBI Magnum Emerging Business Fund Sundaram Select Midcap ICICI Prudential Discovery Reliance Equity Opportunities Tax Saving ELSS: Top Open Ended Schemes on October 2012 1. Canara Robeco Equity Tax Saver 2. Fidelity Tax Advantage 3. HDFC Tax Saver 4. Franklin India Taxshield

Ranjan Varma A few more important financial products: Open a
NPS Account (PRAN) and open a PPF account for tax purpose as well as a retirement plan Gold ETFs; SBI Gold ETF, Kotak Gold, Quantum Gold and UTI Gold ETF Index funds: NiftyBEES, KotakNifty, UTISunder, Start a SIP: It was found that the return over 3 years for a SIP investment was 21.88% while for lump sum non SIP investment, it was just 8.78%. Source: http://www.investmentyogi.com/ SIP helps you with the power of compounding, rupee cost averaging, instilling discipline and the comfort of an automated investment plan.

Lights, Camera ActionSteps on Money Management 151 Monday is Money
Day The surefire way of getting your personal finance in order is Getting Started. Start with a Money day. Mark your calendar for a money day every month. Choose a Monday (any day will do when banks and business are open) and get your finances organized. Don‘t think/worry that you‘re using a day for ―nothing‖ important, this day will repay you many times over! Gather all the account information you can find. Eliminate distractions. Commit to spending the day taking control of your personal finances. It‘s time to do all the things you‘ve been putting off! Here are some tasks you might consider for your Money Day. These may sound dull, but the money you‘ll save by taking the time to do these can be very rewarding: Review & Optimize your Financial accounts: Financial accounts would include your Bank accounts, fixed deposits, Demat accounts, Online trading accounts, Credit Cards, Mutual funds portfolio, Insurance policies and other

Ranjan Varma investments. Begin tracking every Rupee you spend: This
sounds very boring but once you get started, it will throw up very interesting insights on how you spend and what you can save. The fact is that you can't change your finance habits unless you know where your money is going! You can set up your budget in your diary or on a sample spreadsheet which you can create on MS Excel/ Zoho Sheet/ Google Docs that will eventually help you take better decisions with your money. Have you paid up the bills: Personal finance is also about your expenses and not just your investments and delay in paying the bills can cost you money. Check out with the best offers and deals: Stay in touch with your current service providers and ask around for better deals they can offer. Do some research and ask them if they can match the best offer. You are an important customer to them and they have a slogan in their office that says, "Customer is God". Give them a reason to please you!

Lights, Camera ActionSteps on Money Management 153 Brush up your
knowledge of personal finance: Read, Discuss, Research and Ask. It's as simple as that! Plan your financial goals: Most young people putter through life with no idea what they‘re supposed to be doing. You don‘t need to be one of them. Are you carrying credit card debt? Do you have an emergency fund? Would you like to buy a house? A car? Would you like to start a business? Take some time to decide where you want to be ten years from now. Create some money goals to act as a road map to your future. Goals keep you on course. They give you something to work toward. Create a money file. This can be an actual paper file, or it can be on your desktop/laptop using the tools mentioned in chapter 4. It simply needs to be an easy-to-access location in which you keep all of your important financial information. By financial information, I mean your account numbers, folio/policy numbers, service providers, phone numbers, email ids, etc. This final step ties together all the work you‘ve done on Money Day.

Ranjan Varma Appendix Life Insurance Products: Life insurance products are
unique, complex and contractual financial products. Insurance is unique because while all the financial products pay only at the time of maturity, life insurance also pays in the event of death of insured. They are complex because they pay only in the event of contingency covered under the contract, offer different premium payment modes and also embedded options like loan, surrender, conversion etc. Life Insurance products can be classified as traditional insurance products viz. Term Insurance, Endowment Insurance, Whole life Insurance Policy and Modern Insurance products viz. Unit Linked Plans. Two basic plans of Life Insurance are Pure Term Assurance Plan and Pure Endowment Assurance Plan. Pure term insurance plan pays only if insured dies during the term of the policy and pure endowment assurance plan pays only if insured survives throughout the term of the policy.

Lights, Camera ActionSteps on Money Management 155 Variations in Term
Assurance Plan: Increasing Term Assurance Plan: Under this plan the insurance coverage goes on increasing periodically over the term. It can increase at a predetermined rate. Decreasing Term Insurance Plan: In the circumstances when extra risk is undergone for a restricted period like mortgage protection where term assurance plan will provide money to pay off mortgage in the event of life assured dies within the term. Normally decreasing term assurance plan is utilized to protect mortgage so that as mortgage amount, i.e, outstanding loan amount decreases with the passage of time so also the sum assured. Renewable Term Assurance Plan: This feature grants the insured the right to renew the policy for a limited number of additional periods, each usually of the same length as the original length of the policy subject to an age limit. Convertible Term Assurance Plan: This feature permits policyholder to exchange the term policy for whole life policy or endowment insurance contract without evidence of insurability. This serves need of those who want permanent protection but are presently unable to

Ranjan Varma pay the higher premiums for whole life or
endowment plans. Conversion must take place within specified number of years after issuance. This facility increases flexibility of term plan. The age of the insured must be generally between 18 and 50. The cover can be renewed until the inured reaches to 65 years of age. Some of the private insurance companies in India allow the age limit between 10 & 50 with the authorization of parent for a minor life assured. Endowment Assurance Plan Endowment assurance plans are extremely popular plans in India. Term insurance plan is risk oriented plan pays only in the event of death during the policy period whereas endowment assurance plan is investment oriented plan which pays not only in the event of death during the term of the policy but also in the event of survival at the end of the policy period. In case of with profit policies, insured gets bonus every year on the sum assured and if death occurs during the policy period sum assured with accrued bonuses are payable to policyholder and if he survives sum assured with accrued bonuses are paid as a maturity benefit. Endowment Assurance plan, moneyback plans, whole life policies contain a big investment element in them. Premium consists of

Lights, Camera ActionSteps on Money Management 157 mortality element and
investment element. Hence their premium is higher than term assurance plan. Endowment assurance plan offers option of loan and surrender value. These options increase liquidity of the endowment assurance plans. Variations in Endowment Assurance Plan Money Back Plan: When endowment assurance plan is sold with periodical liquidity advantage is called as money back plan. Under this policy a certain proportion of sum assured is returned periodically to the insured in the event of his survival and if death occurs anytime during the policy period a full sum assured along with accrued bonuses are payable to his spouse/legal heir irrespective of the survival benefits received by the insured. Alternatively if he dies any time during the policy period he will receive sum assured with accrued bonuses. Educational Endowment Assurance Plan: These are the policies specially designed to meet the school fees of children at a future time. Generally the policy is purchased when a child is young. If insured parent dies before maturity, the installments may be paid in lump sum or commence immediately. Alternatively premium may be ceased and the installment payment of sum assured may be deferred to the date of

Ranjan Varma original maturity. Whole Life Policy Whole life policies
are of following types: Ordinary Whole Life Policy It is called as continuous premium whole life. Insured has to pay the premium throughout his life. It performs dual function of protection and savings. The policy offers loan and surrender facilities to the insured. Limited Payment Whole Life Policy It is the same contract like whole life policy but differ only in premium payment pattern. For limited payment policy the premiums are sufficiently high to prepay the policy premiums in advance. Premiums have been paid for limited period yet enjoy the cover equal to the sum assured of the policy for remaining life. Anticipated Whole Life Insurance Policies This is a variation of Whole Life Assurance Contracts that provides for payment after a periodical interval for a fixed sum of money on survival of the Life Insured from commencement

Lights, Camera ActionSteps on Money Management 159 of the policy.
A typical policy provides for payment of say 10% of the original Sum Insured on the Life Insured surviving every 5 years from commencement. On death of the Life Insured any time, the policy provides for payment of full Sum Insured without deduction of the survival benefit installments. Such type of policies take care of 2 different needs that an individual may face, viz., providing for the dependents of the insured in case of death and at the same time taking care of the intermittent financial needs of the client himself. This provides for family protection as well as liquidity for the breadwinner. Unit Linked Plans: Unit-linked products offer is a long-term investment option where returns are far more real and there is no compromise in the protection that the policy offers. Unit-linked plans are a combination of mutual fund units and an insurance policy. A major part of the premium amount received on such policies is invested in the stock market by the insurer in select funds depending on the risk level chosen by the customer. The investment risk is in borne by the customer. The returns that these products offer can be relatively higher than as compared to traditional plans.

Ranjan Varma Unit-linked life insurance products are those where the
benefits are expressed in terms of number of units and unit price. The daily unit price is based on the market value of the underlying assets (equities, bonds, government securities etc.) and computed from the net asset value. ULIPs come with charges that are important to understand. The charges come in the name of (jargons?) like premium allocation charge, policy administration charge, and fund management charge. The premium paid by the client, less any charges to be deducted, is used to buy units in the fund selected by the client at that day's unit price. In order to pay the regular monthly costs an equivalent numbers of units are cancelled and are computed as cost to be deducted divided by unit price on that day. The value of the fund depends on the unit price, which in turn is determined from the market value of the underlying assets as seen earlier. Thus, Fund Value = Unit Price x Number of Units

Lights, Camera ActionSteps on Money Management 161 Investment Rules &
Investment Products An investment is anything you purchase for future income or benefit. In other words, anything not consumed today and saved for future use can be considered an investment. Income earned from your investments and any appreciation in the value of your investments increases your wealth. The prime motive behind investing is that we want to maintain and improve our future financial situation. Regardless of why we invest we should all seek to manage our wealth effectively, obtaining the most from it. This includes protecting our assets from inflation, taxes and other factors. The sooner one starts investing the better. Your investments get more time to grow, whereby the concept of compounding (as we have seen in Chapter III) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. Three rules of investment: Invest early

Ranjan Varma Invest regularly Invest for long term and not
short term Invest Early: The sooner you start the better. Start investing in small amounts, continuously for a long time, money grows due to the power of compounding. If you start investing when you are single you will be able to save maximum. The best policy is to start saving from the moment you begin earning. Invest Regularly: Develop the habit of adding to your recurring deposit / systematic investment plan of mutual fund / deferred annuity account on a regular basis, perhaps monthly or quarterly. By investing regularly with SIP of mutual funds you take advantage of a strategy called rupee-cost averaging. Regular investing, however, does not ensure a profit or protect against loss in declining market scenario. Invest for Long Term and Not Short Term: If you decide that your money can work for you over a long period of time, then better compounding works. Consider this: Rs 1,000 invested at 8% earns Rs. 80. Left to compound, the original Rs.1,000, plus accumulated interest, will earn Rs.160 in the

Lights, Camera ActionSteps on Money Management 163 10th year, Rs.507
in the 25th year, and Rs.1,609 in the 40th year -- returns of 16%, 51%, and 161%, respectively, on the initial Rs.1,000. Preferences and Risk Tolerance As Investor, you should want to maximize your returns and minimize risk. There is always a trade-off between risk and return. Risk appetite of investors differs from investor to investor. Investors who are unwilling to assume risk are satisfied with instruments that give risk-free rate of return. These investors invest in government bonds, fixed deposits, debt funds offered by mutual funds, etc. On the other hand when they expect high rate of return, they assume a larger risk. They are risk takers i.e. they are willing to take more risk for getting their expected rate of return. More importantly they manage risk and not just blindly take risks. They invest generally in stocks and equity. There is a wide range of financial assets available to investors, like stocks, futures/options, real estate, and commodities, etc. Inflation

Ranjan Varma A simple & commonly used definition of inflation
is simply "an increase in the price you pay or a decline in the purchasing power of money". Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. Inflation affects savings of an individual hence one needs to invest wisely to meet the cost of Inflation. In other words, For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment's 'actual' rate of return, which is the return after inflation. Increase in inflation reduces the purchasing power of money, i.e., when the prices are rising the return on investments should also rise with the same rate. The returns on fixed deposit or company deposits or annuities are fixed; and would not increase with rapid inflation. On the other hand, in case of deflation in the economy, which is the opposite of inflation, i.e.

Lights, Camera ActionSteps on Money Management 165 the same amount
of money can buy more goods/services than what was possible earlier, these returns become very attractive. The returns on real estate & shares are very sensitive to inflation or deflation. For example, suppose the annual inflation rate is 7%, then the investment must earn more than 7% to ensure it increases in value. When the actual return on your investment is less than the inflation rate, then your assets have actually devalued. Interest A simple definition of interest is an amount charged to the borrower for the privilege of using the lender‘s money. When we take a loan of some amount, we are expected to pay for using it – this is known as Interest. Interest is Interest is usually calculated as a percentage of the amount of money borrowed. The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan. When interest rate in the economy falls, the value of investment in instruments of fixed interest rate and fixed maturity date like fixed deposits, company deposits, annuities rise and

Ranjan Varma investments of long term gives good rate of
return. One year maturity investment will give lower return than fifteen year maturity investment in the falling interest rate scenario. For example, suppose an investor has invested in fixed deposit @ 10.5% for a period of 5 years, he will get return @10.5% for next five years though the interest rate falls to 8% during the year. Or suppose immediate annuity contract pays to the annuitant @11% it will pay the same rate of return though the interest rate declines to 8%. Steps of Investing: When you decide to make investments in any financial asset, you may follow the following steps. These are called the Twelve Important Steps to Investing: obtain written documents explaining the investment read and understand such documents verify the legitimacy of the investment find out the costs and benefits associated with the investment assess the risk-return profile of the

Lights, Camera ActionSteps on Money Management 167 investment know the
liquidity and safety aspects of the investment ascertain if it is appropriate for your specific goals compare these details with other investment opportunities available examine if it fits in with other investments you are considering or you have already made deal only through an authorized intermediary seek all clarifications about the intermediary and the investment Explore the options available to you if something were to go wrong, and then, if satisfied, make the investment. Following are some of the assets available to individual for investments: 1. Real Estate: Real estate has been, and continues to be, the most popular investment option for both income and capital gains. However, you need to

Ranjan Varma make sure that you invest in the right
locations since the prices of real estates appreciate at developing locations more rapidly. Before you invest, you need to analyze the potential value appreciation in the different parts of the city or the commercial vs. residential real estate markets. Also real estate is highly illiquid (not easily encashable) and a long term investment. If your investment horizon is long term then real estate may give good returns. As regards safety, an apartment is safe, as compared to a plot of land where there is danger of encroachment. Real Estate investments can be made directly, with a purchase in your own name or though investments in partnerships. Other types of real estate, such as residential and commercial rental property, can create income streams as well as potential long-term capital gains. 2. Bank deposits and Cash Equivalents Nationalized banks, private and cooperative banks and other institutions viz. corporates offer a variety of savings certificates known as certificates of deposit (CDs). These certificates

Lights, Camera ActionSteps on Money Management 169 are available for
various maturities (duration of deposit), with higher rates offered as maturity increases. Deposits of large amounts may also attract higher rates, holding maturity constant. When you deposit a certain sum in a bank with a fixed rate of interest and a specified time period, it is called a bank Fixed Deposit (FD). Fixed deposits with banks are the most popular choice for parking of funds by senior citizens as well as salaried employees. That bank deposits continue to be an attractive avenue for investment for people is mainly due to the fact that the investor can remain in close contact with the bankers, which gives them a sense of security. The minimum period is 46 days and the maximum (varying from institution to institution) could be five years or beyond. The rate of interest for Bank Fixed Deposits varies, depending on the maturity period of the FD and the amount invested. The interest can be calculated monthly, quarterly, half-yearly, or annually, and varies from bank to bank. Private banks/ Cooperative Banks may offer slightly high rate of interest than nationalized banks. The main advantages of fixed deposit are Fixed deposits are very safe investment. Up

Ranjan Varma to Rs. 1 lakh, these deposits are insured
under Guaranteed Deposit Insurance Scheme (Deposit Insurance Guarantee Corporation Ltd.). Immediate loans can be raised against FDs with no margins (100%) on deposits. The rate of interest is 2% above the rate that fixed deposits for the specific period carry. The biggest advantage is that of liquidity as the amount can be withdrawn at short notice. In case of premature encashment the rate of interest is the one applicable to the slab next below the period for which deposit is made. Penalties for early withdrawal of funds can be, and often are, imposed by the institutions. However, some CD issuers have now reduced the stated penalties for early withdrawal, and even waived them. The disadvantages of fixed deposits are that the yield is not very attractive and even when a smaller amount is required prematurely; the entire fixed deposit has to be encashed. Tax: Income Tax exemption on interest on bank deposits has now been withdrawn. The amount invested in fixed deposits with a maturity term of 5 years in a scheduled bank is eligible for exemption under Sec 80C.

Lights, Camera ActionSteps on Money Management 171 3. Company Fixed
Deposits The current interest rate scenario of commercial banks coupled with ever rising inflation makes company fixed deposits a very good investment for non tax payers or for tax payers who have exhausted the available tax concessions. While investing in Company Fixed Deposits the investor should take care that the company has a very good credit rating. This may be ascertained by referring to the rating given out by institutions such as CRISIL & which the company is bound to publish along with the prospectus for seeking such deposits. The interest on Company deposits can be paid at maximum rate of 12.5% per annum (vide notification GSR No. 77(E) dt. 4.2.2002). If a deposit is prematurely repaid, the company can pay interest at a rate 2% less than that which the company would have paid had the deposit been accepted for the period for which the deposit had run. A depositor may make a nomination at any time and the provisions of Sec. 109A and 109 B of the Companies Act would apply accordingly. The risk in this investment is not as high as it was earlier, due to regulatory measures being well in

Ranjan Varma place. Tax : If the interest earnings from
all deposits during a year exceed Rs. 5000/- tax will be deducted @10.2% at source u/s 194(A) of IT Act, unless the necessary declaration in the prescribed form ‗15 H‘ is furnished to the company sufficiently in advance. 4. Post Office Monthly Income Scheme The post-office monthly income scheme (MIS) is the most suitable scheme for senior citizens and for those who need regular monthly income. MIS provides for monthly payment of interest income to investors. The interest rate is guaranteed and is currently 8.30% per annum is payable monthly. The interest rates on this scheme will be notified before April 1 of that year and would be aligned with Government Securities (G-Sec) with a spread of 0.25%. Please note that interest not with-drawn does not carry any interest, but maturity proceeds not drawn are eligible to saving account interest rate for a maximum period of two years. Account can be opened by an individual, two/three adults jointly and a minor through a

Lights, Camera ActionSteps on Money Management 173 guardian. A minor
having attained 10 years of age can open an account in his/her own name directly. However, Non-Resident Indian / HUF cannot open the Account. Minimum investment amount is Rs.1000/- or in multiple thereof but the maximum amount is Rs. 3 lacs for single account and Rs. 6 lacs for a joint account. Minor has a separate limit of investment of Rs. 3 lacs and the same is not clubbed with the limit of the guardian. A separate account is opened for each deposit. Any number of accounts can be opened subject to the maximum prescribed limit. This scheme provides following facilities to the account holder viz. Automatic credit of monthly interest to saving account if accounts are at the same post office, It allows premature closure of account after one year @ 3.50% discount but if account is closed after completion of three years deduction of 3.5% is not done. It also offers reinvestment option on maturity of an account.

Ranjan Varma Account is transferable to any Post office in
India free of cost. Nomination facility available. Tax: Interest income on MIS is taxable, but no TDS. The scheme is not eligible for rebate under section 80C of Income Tax Act. Deposits in MIS are exempt from Wealth Tax. 5. Post-Office Recurring Deposit Account (RDA) A Post-Office Recurring Deposit Account (RDA) is a banking service offered by Department of Post, Government of India at all post office counters in the country. The scheme is meant for investors who want to deposit a fixed amount every month, in order to get a lump sum after five years. The scheme, a systematic way for long term savings, is one of the best investment options for the low income groups. The interest rate is guaranteed and is currently 8.40% per annum is payable monthly. The interest rates on this scheme will be notified

Lights, Camera ActionSteps on Money Management 175 before April 1
of that year and would be aligned with Government Securities (G-Sec) with a spread of 0.25%. As the post office is a department of the government of India, it is a safe investment. Return of the principal amount in the Recurring Deposit Account is guaranteed by the Government of India. The minimum investment in a post-office RDA is Rs 10 and then in multiples of Rs. 5/- for a period of 5 years. There is no prescribed upper limit on your investment. The deposit can be made personally at the particular post office every month or can be made through an appointed agent, who would collect the money from you and enter the same in your passbook. The deposit shall be paid as fixed monthly installments and each subsequent monthly installment shall be made before the end of the calendar month. In case of default in payment, a default fee is chargeable for delayed deposit at 0.20 Paise per month of delay, for every10 rupees. Maximum four defaults are permissible after which the account shall be treated as discontinued provided the account is not revived within two

Ranjan Varma months from the fifth default. Under this scheme
there is provision of accepting advance deposits for 6 months or 12 months for which a rebate is allowed at the prescribed rate (For Rs 10 denomination:- Rs.1/- for 6 advance deposits, Rs.4/- for 12 advance deposits. One withdrawal is allowed after one year of opening a post-office RDA on meeting certain conditions. You can withdraw up to half the balance lying to your credit at an interest charged at 15%. The withdrawal or the loan may be repaid in single lumpsum or in equal monthly installments. Premature closure is allowed on completion of three years from the date of opening and in such case, interest is payable as per the rate applicable for the Post Office Savings Bank Account. After maturity of the account, there is an option to continue the account for a further period of 5 years with or without further deposits. During this extended period, the account can be closed at any time. A post-office RDA can be opened at any post

Lights, Camera ActionSteps on Money Management 177 office in the
country by filling up the appropriate forms. The account can be opened as a single person account or two adults in a joint mode, or by a guardian on behalf of the minor who has attained the age of 10 years in his own name. At the time of opening the account a passbook will be issued. In the event of a loss, theft or if the passbook is mutilated, a duplicate is issued at a charge. Tax: Interest earned on this account is not exempted under Income Tax Act. 6. Post Office Term Deposit A Post-Office Term Deposit Account (RDA) is similar to a Bank Fixed Deposit offered by Department of Post, Government of India at all post office counters in the country. The interest rate is guaranteed and is currently 8.20% for a 1 year term and 8.50% for a 5 year deposit. The interest rates on this scheme will be notified before April 1 of that year and would be aligned with Government Securities (G-Sec) with a spread of 0.25%. The scheme is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of one year to

Ranjan Varma two years or three years and a maximum
period of five years. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Time Deposits scheme return a lower, but safer, growth in investment. Time Deposits can be made for the periods of 1 year, 2 years, 3 years and 5 years. The minimum investment is Rs 200 and then its multiples and there is no prescribed upper limit on your investment. Account may be opened by an individual, Trust, Regimental Fund and Welfare Fund. If the account is closed after 6 months but before one year of opening the account then the amount invested is returned without interest. Similarly two, three and five year accounts may be closed after one year at a discount. Foreclosure of account involves a loss in the interest accrued for the time the account has been in operation. Interest is payable annually but is calculated on a quarterly basis at the prescribed rates. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account.

Lights, Camera ActionSteps on Money Management 179 A loan may
be raised against a time deposit with the balance in the account pledged as security for the loan. This investment is default risk free and grows at a pre-determined rate. Principal as well as the interest accrued is assured under the scheme. The rate of interest is relatively high compared to the 4.5% annual interest rates provided by banks. 7. Senior Citizens Savings Scheme ‗Senior Citizens Savings Scheme‘ has been introduced with effect from August 2, 2004. The Scheme is of five year duration, extendable by another three years, specifically designed for the benefit of senior citizens Initially the scheme will be available through designated post offices throughout the country. The interest rate is currently 9.30% per annum compounded quarterly. The interest rates on this scheme will be notified before April 1 of that year and would be aligned with Government Securities (G-Sec) with a spread of 1%. Therefore the scheme is most beneficial to

Ranjan Varma Senior citizens and provides a high rate of
interest as compared to bank interest. Although the interest on the deposit is taxable, the deposits themselves are tax-free. As the post office is a department of the government of India, it is a safe investment. The principal amount is assured. The minimum investment is Rs.1000 and in multiples of Rs.1000 subject to a maximum of Rs.15 lakh. The maturity period of the deposit will be five years, extendable by another three years. Premature withdrawal after a period of one year will be allowed, subject to some deductions. The investments in the scheme will be non-tradable and non-transferable. However, nomination facility will be available. Citizens of 60 years of age and above are eligible to invest. Single or joint account (with spouse only) can be opened. Citizens who have retired under a voluntary or a special voluntary retirement scheme and have attained the age of 55 years are also eligible, subject to specified conditions. Non-Resident Indians and Hindu Undivided Families are not eligible to invest in the scheme. A Senior Citizen Account can be opened through any designated post office throughout the

Lights, Camera ActionSteps on Money Management 181 country. The account
can be opened by any individual 60 years of age and above either individually or jointly (with spouse only). 8. Annuities A series of payments made at successive periods (intervals) of time is called an annuity. If all the payments are equal then it is called level annuity otherwise called as variable annuity. Annuities are generally paid on a regular basis. Usually the purchaser purchases annuity with lump sum payment, invariably with retirement proceeds or maturity of another investment, but if the payments are not to start immediately one may purchase the annuity by paying premiums every year. Annuity Rates The amount of installment for a purchase and type of annuity is called an Annuity rate. It is decided by issuer from time to time on the basis of period of payment; life expectancy, going rates of interest of medium to long-term deposits and administrative expenses. Contribution rates for annuity vary quite frequently because one of the main indicators is prevailing fixed interest rates. A quotation

Ranjan Varma obtained from a life office is typically valid
for short period of time. Annuities are of two types: Immediate Annuity & Deferred Annuity. Immediate Annuity Certain: This annuity starts immediately after one month from the date of purchase and continues for a specified period of time i.e. payment of this annuity does not depend upon the death of annuitant during that period. Deferred Annuity Certain: It is an annuity certain postponed for a given period called deferment period. Deferred annuity can again be either a deferred immediate annuity or a deferred annuity due. Life Time Immediate Annuity: A lifetime immediate annuity dependent upon human life is a unique investment vehicle, because the income stream continues till the annuitant is alive. Life-time immediate annuities can usually be regarded as highly secured investments. One major drawback of lifetime immediate annuities is that it is not possible to utilize the capital once invested. It is only accessible through the income stream. Many companies do allow for the commutation or

Lights, Camera ActionSteps on Money Management 183 partial commutation of
an annuity providing it is within the term certain or the guaranteed period of a lifetime annuity. But the amount payable on commutation may be adversely affected by current interest rates being higher than those at the time of purchase (in much the same way as fixed interest bonds lose their value when interest rates rise). In many cases the purchaser will be over 45 years of age. This annuity gives good return but there is no provision of return of purchase price in the event of death. Payment of Annuities Although the name ‗annuity‘ implies that the income stream is paid annually, most annuity issuers can make payments more frequently i.e. monthly, quarterly and half-yearly payments are common. Each payment made costs the issuing institution money hence more frequent the payment the lower the income level for a given purchase price. Generally the issuer will arrange to pay each installment into a specified bank. 10. Mutual Funds A mutual fund is an entity that pools the money of many investors -- its unit-holders -- to invest in different securities. Investments may be in

Ranjan Varma shares, debt securities, money market securities or a
combination of these. Those securities are professionally managed on behalf of the unit- holders, and each investor holds a pro-rata share of the portfolio i.e. entitled to any profits when the securities are sold, but subject to any losses in value as well. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit- holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities. A mutual fund let's you participate in a diversified portfolio for as little as Rs.500/-, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them. In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself. Mutual funds investments are managed by investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute

Lights, Camera ActionSteps on Money Management 185 trades on the
largest and most cost-effective scale. Before investing in a mutual fund, learn about its investment objectives, past performance, the companies it invests in, how it is managed and the fees investors are charged. Learn what the experts say about the fund and its competitors. Investment Objective Mutual funds schemes can be classified on the basis of their stated investment objective (income, capital appreciation, balance of both). They may also be classified in terms of their tax advantage (tax deductible investment, tax free dividends, tax favored status on capital gains). Some of the popular schemes are as follows. Equity Oriented Schemes These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.

Ranjan Varma Equity schemes are hence not suitable for investors
seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic. General Purpose The investment objectives of general-purpose equity schemes do not restrict them to invest in specific industries or sectors. They thus have a diversified portfolio of companies across a large spectrum of industries. While they are exposed to equity price risks, diversified general-purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure. Sector Specific These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. Since they depend upon the performance of select sectors only, these schemes are inherently more risky than general-purpose schemes. They are suited for informed investors who wish to

Lights, Camera ActionSteps on Money Management 187 take a view
and risk on the concerned sector. Special Schemes Index schemes The primary purpose of an Index is to serve as a measure of the performance of the market as a whole, or a specific sector of the market. Many investors are not interested in investing in specific fund, such investors are happy to receive the returns posted by the markets. Also for individual investor it is impossible to invest in each and every stock in the market in proportion to its size, hence these investors are interested in investing index funds which they believe is a good representative of the entire market. Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The fund management charge is also lower than the actively managed equity funds. Real Estate Schemes Specialized real estate schemes would invest in real estates directly, or may fund real estate developers or lend to them directly or buy shares of housing finance companies or may even buy their securitized assets.

Ranjan Varma Debt Based Schemes These schemes, invest in debt
securities such as corporate bonds, debentures and government securities. They are commonly called Income Schemes The prices of these schemes likely to be steadier than the equity schemes. The returns are paid to the investors through dividends or capital appreciation. These schemes are ideal for investors with low risk appetite or retired individuals. These funds have higher price fluctuation risk as compared to the money market schemes and have a higher credit risk as compared to a Gilt fund they. Income Schemes These schemes invest in money markets, bonds and debentures of corporates with medium and long-term maturities. These schemes primarily target current income instead of capital appreciation. They therefore distribute a substantial part of their distributable surplus to the investor by way of dividend distribution. Such schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long term investment horizon and are looking for regular income through dividend or steady capital appreciation.

Lights, Camera ActionSteps on Money Management 189 Liquid Income Schemes
These schemes are similar to the Income scheme but with a shorter maturity than Income schemes. Money Market Schemes Money market mutual fund aims at maintaining capital preservation, i.e., that gain will not be an option even though the interest rates given on money market mutual funds could be higher than that of bank deposits. These schemes invest in short term instruments such as commercial paper (―CP‖), certificates of deposit (―CD‖), treasury bills (―T-Bill‖) and overnight money (―Call‖). The schemes are the least volatile of all the types of schemes because of their investments in money market instrument with short-term maturities. Due to highly liquid nature investor would always be able to alter your investment strategy. These schemes have become popular with institutional investors and high net worth individuals having short-term surplus funds. Gilt Funds This scheme primarily invests in Government Debt. Hence the investor usually does not have

Ranjan Varma to worry about credit risk since Government Debt
is generally credit risk free. Hybrid Schemes These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. Duration Schemes can be classified as Closed-ended or Open-ended depending upon whether they give the investor the option to redeem at any time (open-ended) or whether the investor has to wait till maturity of the scheme. Closed-End Schemes A closed-end Scheme has a fixed number of shares outstanding and operates for a fixed duration (generally ranging from 3 to 15 years). The fund would be open for subscription only during a specified period and there is an even balance of buyers and sellers, so someone would have to be selling in order for you to be able to buy it. Closed-

Lights, Camera ActionSteps on Money Management 191 end funds are
also listed on the stock exchange so it is traded just like other stocks on an exchange or over the counter. Usually the redemption is also specified which means that they terminate on specified dates when the investors can redeem their units. Open End Schemes The units offered by these schemes are available for sale and repurchase on any business day at NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such schemes thus offer very high liquidity to investors and are becoming increasingly popular in India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units at all times, and may start issuing further subscription to new investors. On the other hand, an open-ended fund rarely denies to its investor the facility to redeem existing units. 11. Stocks A stock, also known as a share, is ownership of the business. So even though your shareholding may be tiny and you do not have any say in the management of the company, you share the profits of a well managed company.

Ranjan Varma To invest in stocks, you need to have
a demat account. A demat account is like a bank account which, instead of money, holds your shares. There are two depositories in India, National Securities Depository Ltd. and Central Depository Services Ltd. Value Trading (Source: Rohit Chauhan‘s blog , Intelligent Investing: www.blog.rcfunds.com ) Value trading is buying a stock with the expectation of selling the same (hopefully with a gain) in a short period of time based on the realization of a single of multiple triggers. The trigger can be fundamental as well as technical in nature. Fundamental triggers could be profit margins, business event like a launch or capacity increase and the business environment. Technical triggers could be poor results, temporary events Read more about stock exchanges and the financial markets in the next section.

Lights, Camera ActionSteps on Money Management 193 The Financial System
The Financial market is made up of Individuals like us, the Corporates and the Government. When we talk of the Government finance, we talk of the fiscal and monetary policies and the budget. When we talk of corporate finance, it‘s about Capital Management, Cash Flow, Working Capital, etc and is studied under Business Finance. When we talk of the individual finance, we talk about income, expenses, savings and investment and is labeled under ―Personal Finance‖ Usually, the business entities and governments are fund deficit units and require funds to finance their capital and operational expenditure. We, the householders as a group are net savers and channelize our savings to the Government as well as Corporates through the mechanism of the financial markets. The financial system basically facilitates transfer of funds from Individuals (the cash surplus economic units) to those who need it, like the Government and the Corporate. This fund transfer from the surplus units to deficit units is done through financial intermediaries such as banks or insurance companies.

Ranjan Varma Financial intermediaries (FI) such as banks and insurance
companies help bring these two together. They pool funds from the investors, invest money on a large scale. FI are able to reap the benefits of Economies of Scale, Lower Transaction Costs, and Reduction in Information Costs due to their intimate knowledge of finance. Financial markets can be over the counter (OTC) or through exchanges. In case of an OTC market, the buyer and seller directly meet each other, may negotiate the price and strike the deal. In case of exchanges, buyers and sellers give their price quotes and the exchange facilitates matching of buy and sell orders based on compatibility of price quotes. In fact, the same instrument may be traded either way. For example, if an investor buys units of a mutual fund directly from the fund, it is OTC. However, units of certain mutual funds are also listed and traded on the securities exchange. The term `financial market‘ refers to the means through which buyers and sellers are brought together to transact the financial products. Functions of financial markets: The primary functions of the financial markets is price discovery, liquidity and lower transactions costs

Lights, Camera ActionSteps on Money Management 195 Price Discovery Financial
markets provide a centralized place for trading in financial products. This `place‘ need not be physical. It may be virtual such as the online trading system of the National Stock Exchange. This feature enables the prospective buyers and sellers to discover the going price and take appropriate decisions. Liquidity Financial markets also provide a mechanism for the investors to sell their financial assets. For example, if an investor wishes to sell his shares, the equity markets offer an easy exit. Lower Transaction Costs Financial markets save a market player the cost of locating counterparty to his transactions. The counterparty can be readily found by going to the appropriate market. Primary Market and Secondary Market Primary Market: In the primary market, new financial securities are sold to the financial players. This is also called the new issue market. The Initial Public Offering (IPO) of equity

Ranjan Varma shares of a company, and issue of new
debentures are some examples of transactions that take place in the primary market. There are two major types of players who sell securities in the primary markets – the government and the corporate sector. These transactions mobilize savings and supply fresh capital to corporates and other entities. In India, central, state and local governments raise finance by selling debt paper in the primary market. Typically, the Reserve Bank of India manages these debt issues. The corporate houses raise finance through issue of equity as well as debt. There are many ways in which funds can be raised from the primary markets. In an Initial Public Offering (IPO), a company sells its securities to the public for the first time. This again may involve issue of fresh capital or public offering of existing capital. If the same company again goes to the market to raise more funds, it is a further public offering. A Rights Issue means selling securities to the existing investors in proportion to their existing holdings. This is particularly used for issue of equity shares. This method is meant to ensure that after a fresh issue of capital, the stake of the existing equity holders is not diluted. In case of a

Lights, Camera ActionSteps on Money Management 197 Bonus Issue, fresh
shares are offered to the existing shareholders free of cost. This may be done when the company has a large amount of accumulated profits, which are utilized for the issue of bonus shares. In theory, the share price should adjust for the increase in the number of outstanding shares. Pricing of Capital Issues In a Fixed Price Issue, the issuer decides the price at which the securities will be sold, and the issue is open for a pre specified time period. During this time, prospective investors apply for purchase of securities, if they find the price acceptable. This may result in either under pricing (the issuer loses the benefit of a high price that the market would have been willing to pay), or overpricing (response to the issue is less than adequate). To overcome this difficulty, the concept of Book Building was introduced. In case of Book Building, the issue is again open for a specific period. During this time, the prospective investors submit their bids. Based on the bids received, the cut off price is determined, subject to the floor and cap price decided by the issuer in advance. The Stock Exchanges conducts online public offerings through the Book Building process. This method facilitates price discovery through the mechanism of bidding.

Ranjan Varma Secondary Market The secondary market is where existing
financial securities are traded. Trading of shares or debt instruments on the national stock exchange is one example. An active secondary market imparts liquidity to the financial securities. An investor need not hold on the securities to maturity. This also provides depth to the financial markets. People will be willing to buy financial securities if they are confident of being able to sell them in the secondary market. Stock Exchanges (SE) The stock exchanges provide a platform for the transaction of securities in the secondary markets. Trading on the SE helps investors get the best price for the deals. There is no counterparty risk as the clearing corporation assumes the role of the counterparty to both the buyer as well as the seller. The Bombay Stock Exchange (BSE) is the oldest SE in India. The National Stock Exchange (NSE) was set up in 1992. Both SE have now migrated to online, screen based trading systems. Equities, corporate debt paper, and government securities are all traded through these systems. Brokers access these systems through computer terminals. Orders are directly entered through these systems. Once the broker specifies the

Lights, Camera ActionSteps on Money Management 199 quantity and price,
the system automatically finds a matching buy / sells order. E trading permits the investors web based access to trade directly on the exchange. Client orders are routed to the computers of designated brokers from where they enter the trading systems of the SE. Screen based trading offers the flexibility of trading from any place. Two depositories – National Securities Depository Ltd (NSDL), and Central Securities Depository Ltd (CSDL) have been set up for electronic holding and transfer of securities. Investors can access their services through the Depository Participants. Settlement on the SE is now on a rolling (T+) basis. This means that the trades done on a particular day are settled after a given number of business days. (As of now, it is T+2 in India). Educational Resources RBI‘s Financial Education initiative webpage: http://www.rbi.org.in/financialeducation/home.a spx http://www.InvestorFirst.in is an initiative by NISM‘s school for Investor education and provides information on investing and financial

Ranjan Varma planning. NSE‘s Certification in Financial Markets (NCFM) aims
at developing the right human resources for the financial sector. NCFM is an online testing and certification program The program has over 35 modules on financial markets, mutual funds, insurance and stocks. http://www.nseindia.com/education/content/abo ut_ncfm.htm The BSE training and certification page is at http://bseindia.com/#training Warren Buffet‘s letter to shareholders of Berkshirehathaway: http://www.bershirehathaway.com/letters/letters .html

Lights, Camera ActionSteps on Money Management 201 Advance Reviews I
read the introduction and like the unique take on money management. I would highly recommend the book since the first step toward getting control of your personal finances is to understand what needs to be done. We get so busy with our lives that we tend to ignore things that we don't understand or find boring. Lights, Camera & Action takes you through the steps to understand your money and the management of it. -- Manish Jain, Mprofit, Mumbai The world of finance is crammed with too much magic but Ranjan Varma cuts through it all. He makes you aware of a wide variety of financial lies and myths. In brief, a liberating read for someone who always suspected that money don't grow on trees. --Ratnakar Tripathy, Editor, BiharDays.com, Patna Most of us work hard to earn money and create wealth, but do not really have a good idea about managing what we already have. Ranjan has made a laudable effort to educate average people on the importance of developing a sound strategy for managing our financial assets. His effortless style makes it easy for us to understand complex concepts and apply them for our financial management--Arvind Verma, President, Optimum-US, California, USA Feedback & suggestions invited from readers at [email protected]

Lights Camera Action Steps on Money Management

Lights Camera Action Steps on Money Management

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