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As it is said there are two unavoidable events of human being’s life cycle : Death & Retirement. Although we can not really predict the first, we can really foresee our retirement and plan for it.However, retirement, although the most important and unavoidable event of life, it mostly remains unplanned due to other priorities in life. We plan for all important events of life – be it buying a home, planning for kids marriage, but fail to plan for this most challenging part of our life-stage . We all need to retire in peace and when asked we all would like to have a happy retired life but without quantifying the same in financial terms definition of ‘HAPPY Retired Life’ remains very vague.

But before we go ahead and discuss about how to go about retirement planning and things to consider, lets try to understand at first as to why do we need retirement planning.

Compared to yesteryears during the period of high interest rate region planning for retirement was much easier with fixed income products offering interest rates as high as 12-13%, which have gradually come down now and expected to fall further in future. Against this, life expectancy of an average Indian has gone up with medical advancement. Now aspirational levels have gone up as people want to fulfill their dreams and hobbies during their retired life, which they were unable to do during their professional life. Let us summarize the Why factor of retirement planning as under:

• Falling interest rates (Interest rates on fixed income products have now become market linked and have come down considerably in last one decade or so).
• Aspirational levels are going up with more and more people wanting to pursue their hobbies/dreams during their retired life.
• Change in social structure with growing urbanisation, trend of nuclear families with children often staying away from parents.
• Higher life expectancy due to advancement of medical science.
• Ever increasing medical cost and 78% of total health expenditure is privately funded.
• The most important factor: Inflation

Among all, inflation can be considered as the most important factor affecting retirement planning with ever increasing cost of living for developing country like India. With an average inflation rate of around 7%, your monthly expense of around 25000 can grow to around 1 lakh in 20 years time and close to 2 lakhs in next 30 years.

(Inflation assumed @7%)
As can be seen from the above graph just to maintain the same standard of living for a family with monthly expense of .25000 one would require 1 lakh per month after 20 years. Again this is just with an assumed inflation of 7%.

This was about the importance of retirement planning. Now another important question to be answered is how much retirement kitty should one have? Although there are no simple answers to this as there is no single figure that can apply to all. Every individual has to calculate on his/her retirement corpus requirement after considering the following important factors:

• The age at which one needs to retire.
• His/her current life style. (Mainly monthly expense)
• Assume realistic rate of return during your working life as well as during the retired life.
• Rate of inflation
• Consider any of your current retirement savings plan (pension plans, insurance, provident funds etc)
• Any specific dream/hobby one likes to pursue during retired life.

(Note: Assume that the above list is not comprehensive and just for example purpose. One needs to consult his adviser to do know about retirement planning process)

After assigning specific numbers to all the above questions one can arrive at retirement corpus required and then arrive at investment required to be made with the assumed rate of return.

The idea of retirement fund is that the money should last for all of our retirement years, meeting our expenses. The income from kitty and withdrawals from later years should match the expenses (growing with inflation) in post retirement years.

This is very critical, since with better medical services, average retirement years have increased and it is possible that a person retiring at say age 60 would easily have nearly 30 years as retirement. Developed countries have higher life expectancy, something India will sure achieve in the next coming decades. The criticality can be very simply understood by acknowledging that we may normally have 35 working years (age 25 to 60 years) in which we have to save for the 30 retirement years (60 to say 90 years) when we will not be working. Thus it is very critical that we realize this requirement and start planning immediately. Ever increasing cost of living will only add to our misery during retirement years when we mainly have to rely on our savings without having any major source of additional income.

Be vigil and open for course correction:
To arrive at a retirement corpus is just first stage of planning process. As we all go through different phases in life it is very important to keep one self open to make necessary changes on a regular basis. Major life events which require modifications in retirement plan are:

• Change in employment status ( One can increase contribution with promotion/increment in job)
• Change in family status (Getting married, arrival of a child etc.)
• Change in tax laws
• Getting any lump sum financial benefit through inheritance

Retirement Planning Options Available:
There are different retirement benefit solutions available in the market like insurance products aimed retirement benefits, planning through SIP in equity mutual funds, pension plans, employer sponsored retirement benefits etc.

As retirement planning is mostly done with long term investment horizon of above 5 years it should ideally be done by getting maximum exposure to equity as an asset class as over long time horizon equity has the potential to outperform all other asset classes. Investing systematically on a monthly basis through SIP route in equity mutual funds can benefit investors by taking advantage of power of compounding. Although one is always advised to keep his/her asset allocation in check to make sure that one does not overboard on a single asset class.

Another idea is to create assets that will give returns post retirement, like property, which can be put on rent or land which can be farmed, etc.

Conclusion: Retirement planning is an ongoing, lifelong process which requires commitment, patience and consistency on part of investors to reap rich dividend of final payoff of retirement kitty. No matter how big retirement corpus requirement may look like, one needs to start at some stage no matter how small that start may be. So don’t wait for the right opportunity or the right time to come as the right time is NOW to make your retired life comfortable.

Everything gets measured. Thats’ how things work, information is collected, decisions are taken; all based on measurements. Every thing around us, whether it is physical or non-physical has a measure.In the field of finance & corporates, these measure assume a great significance. There are measures for evaluating stocks, valuations of companies, credit quality of lenders, returns potential for opportunities, and so on. Most of the measures are in form of ratios like for eg., Price to Earnings (PE) ratio, Dividend Yield ratio, etc.

Amidst all these measures, have you ever wondered about how can you evaluate your own financial health? What measures would be appropriate for you? Well in this article, we would be presenting few measures that you can use to assess your own financial health. We hope, our readers would take the effort of actually measuring their financial health after reading this article.

RATIOS FOR ASSESSING FINANCIAL HEALTH:

EMERGENCY FUND RATIO
Formula: (Cash + Bank Balance) / (Monthly Living Expenses)

Ideal Value: 3 to 6

This ratio measures your ability to pay for expenses with cash in hand.

This ratio indicates an individual’s ability to meet its’ monthly expenses in case of an emergency or a catastrophe. Typically, one should have enough cash + bank balance to cover for 3 to 6 months of living expenses. There is no exact measure but typically would be higher for those with high chances of unforeseen expenses, variable income, change in job or unemployed, start-ups, etc where risks are higher. Those with stable jobs and settled in life stage can follow the ratio at a lower end. It does not include voluntary expenses like those on entertainment, vacation or those that can be avoided, if needed.

LIQUIDITY RATIO
Formula: Liquid Assets / Net Worth

Ideal Value: 10% to 20%

This ratio helps a person to know his financial liquidity.

Typically any person would be investing in multiple avenues / asset classes and products – both financial and non-financial. Prudent personal finance planning requires us to maintain a certain level of liquidity in our holdings to face any unforeseen financial challenges. Investments in say property can be a good investment avenue but lack of liquidity is its’ biggest negative. Typically, we must have at least 10% to 20% of holdings into liquid assets/products which can be redeemed at a short notice. Anything less is not healthy.

Liquid assets can include all cash (near cash assets), equities, Equity Mutual Funds (except ELSS with lock-in period, FMPs & closed-ended funds), Debt Funds and other assets which can be redeemed within three to four working days.

SAVINGS RATIO
Formula: (Amount invested per month) / (Total Income per month)

Ideal Value: 20-30%

This ratio indicates the savings made from the total income earned for a given period, say month.

Every family must save some portion of their income to ensure some wealth creation over time. AThe extend of savings depends a lot on the income earned, life stage,expenses of the person and so on. A minimum 10% can be considered as a must while we must aim for at least 20-30% savings from our total income. The savings can be in form of cash, bank balance, mutual fund, etc. Total income includes income earned through business, profession or in the form of salary, bonus, EPF contribution, interest, dividend, rent/royalty and any other form of income.

DEBT SERVICE RATIO
Formula: (Total debt payments /EMIs) / (Family Gross Monthly Income)

Ideal Value: Below 40%

This ratio shows the ability of a person to pay the loan installments on a regular basis. It indicates how much percentage of your monthly income is used for paying loan EMIs. Typically, the disposable income of a family would be portion which remains after paying the EMIs as such payments cannot be avoided. The lower this ratio, the better it should be for you to manage your finances and save. Typically you will have to manage your investments and expenses with the remaining amount. The lower this ratio the better your debt management skills. It is advised that debt servicing should not take up more than 40% of your income.

SOLVENCY RATIO
Formula: (Financial Assets) / (Total Liabilities)

Ideal Value: >= 1.5

This ratio assesses the total assets and total liabilities to find if the person has the ability to pay off his debts.

The higher the ratio, the better is the person’s financial situation as the ratio indicates the debt carrying capacity of the person. Ideally, the total debt on a person should not exceed 50% of his disposable /financial assets. A ratio of less than 100% simply means that you are in a bad financial situation and you need to get rid of your debt soon. A higher ratio of over 150% would mean that you could easily sell of some of your assets and pay off the debt.

NET WORTH
Formula:Total Assets (less) Total Liabilities

This last measure ie., Net Worth, we are covering is not a ratio but an important direct measure of your financial strength. It is the amount left after deducting total liabilities from total assets. Your net worth is a snapshot of your financial life at one moment in time, a single number representing your financial health.

Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by losses /liabilities or a substantial decrease in asset values relative to liabilities. One can use the measure to set say yearly Net Worth targets or to track changes to find if you are getting wealthier or not.

CONCLUSION:
The personal finance ratios help you to evaluate your financial position and take next steps. The ideal ratios can be used as general targets and you can then plan your finances / portfolios accordingly. To keep a period record of your ratios and tracking them over time can reveal a lot of information / insights into your financial situation. Only with proper information and insights can you plan and take measures to improve your financial health.

Young adults are perhaps the richest amongst all of us. They have something more than all of us – “time”, they are at an age when the possibilities are unlimited. In case you are a young adult in 30s or a parent / guardian with children approaching or are in their 20s, this article is for you. The article tells us few things which perhaps we were never told when we were young. We bring to you six valuable investment guidelines that can literally make a huge impact in lives of young adults.

1. Learn about Personal Finance & Investing :
Knowledge about personal Finance topics and investing at an early age is a great asset. Young adults must know about different asset classes, investment products, insurance, loans & credit, time value of money, inflation, savings, taxation, ¬financial planning, etc. Such knowledge, especially during early years of your career can really help you take great decisions for future. If you are a guardian, be sure to involve the young adults in your own investment decisions. There are many ways in which young adults can gain financial knowledge. Some of the ways are reading good investment books, reading ¬finance magazines, interacting with financial advisors, accountants, successful investors in family/friends, and so on.

2. Control Your Spendings :
Young adults are perhaps the most valued consumers hunted by every big brand ranging from cars to shoes to laptops to even holiday packages. With the newly gained earning power and lack of big responsibilities, it is natural that spendings on entertainment, gadgets, accessories, hanging out / parties, etc. form a big chunk of the spendings. Surely it is the time to enjoy life but young adults are advised to control their urge to spurge and not make impulsive decisions. It would be great if one can budget such spendings and avoid taking big decisions like buying motorbikes, cars, laptops, etc. without adequate thinking and research.

3. Start Investing Immediately
We have often spoken on this topic. The benefits of saving early can never be under estimated. Even if the savings is small, due to the power of compounding, the wealth created by you can be enormous. This may easily surpass the wealth created even with increased savings but started after a few years. You may be surprised how much difference will be there in the end value just by starting early.

4. Get PAN & Start Filing Tax Returns:
Filling of ITR has many advantages as they are considered standard income proofs globally and they help you while applying for loans, visa applications for jobs abroad, requesting tax refunds, etc. The PAN issued by IT authority is a prerequisite for filling ITR and is also mandatory for many financial ¬transactions. There is a perception that if the taxes are paid, there is no need to file ITR. This is a misconception and it is essential to know that it is our obligation to file the ITR when you are required to do so. Further, still many believe that their incomes are too small to attract the attention of IT authorities and get tax scrutiny and hence may indulge in non filing of returns or understating income. You may note that IT authorities uses a system whereby cases are picked up randomly on certain criteria. You may never like to be the one to get short-listed and invite unnecessary hassles. Remember that you are permitted to save taxes, but not evade taxes.

5. Get Health & Life Cover:
Getting adequate protection at a young age, where people tend to be more adventurous, is highly advised, even if there aren’t any dependents on you. Buying health or life cover at a younger age is also considerably cheaper than buying the same after few years. Such protection can really help one in case there is any unforeseen emergency and financial burden on parents will be avoided.

6. Start Thinking About Home:
The average age of home & car buyers has decreased drastically in the last 20 years. Powered by easy availability of loans, fat pay packages & growing aspirations, the first time home buyer today is often around the age of 30. The first time car buyers are even younger. It would thus be best advised that young adults keep these goals in mind and start saving as much as possible for home & car goals, if any, from now onwards. It would really benefit you a lot when the time comes for purchase in near future. Often young adults delay saving for the goal and end up paying lesser down-payments and taking higher amount of loans which should be avoided. Lastly, even if you have a home of your own, it is advisable to think of buying a home as an investment for future and also enjoy tax benefits on same. Having time on your side is a great advantage and never to be missed. Few young adults may choose to ignore & not act on 6 guidelines shared above at their own peril. Experience has shown that wise decisions, actions and discipline in these formative years go a long way in securing a better ¬financial future down the line. Simple actions taken today can help you avoid taking tough decisions at times when you have family to support and lot of responsibilities on your hands. So go ahead and make the best that this time has be offer, smartly.

Prerna has been working for 5 years now. The reason behind her slender investments is saving some tax, and some, she is generous enough to give away to the government for the economic development of the country. As far as her economics are concerned, she believes travelling and shopping in the mall till her last breath, are the only possible avenues where her hard earned money should go.

Prerna’s investment summary:
2011 – Company EPF – Rs. 16,000 (She wasn’t falling under a tax slab)
2012 – Company EPF – Rs. 24,000 (She joined the 10% league and paid some tax after the EPF)
2013 – Rs. 25,000 Bank FD in XYZ bank; Company EPF Rs. 24,000 (She paid Rs 9,000 in taxes)
2014 – Rs. 40,000 Bank FD in XYZ bank; Company EPF Rs. 24,000(She still paid Rs 16,000 in taxes)
2015 – Company EPF Rs. 24,000 (Since she got married, she had nothing left to invest; She paid Rs. 37,000 in taxes, as she entered the 20% slab this year)

Prerna could have saved her entire tax liability over these five years by investing smartly. Prerna after 5 years of employment has negligible bank balance, Bank FD’s totaling Rs. 65,000 and EPF which she can’t withdraw. She has entered into a new phase of life and is witnessing responsibilities falling one after the other on her head. She has realized that it is high time, she must get her act together and do something about her savings and investment. In fact, she has been thinking about this since 2013, but never took the pains to plan her finances. Prerna must follow these basic steps to step out of her dilemma:

• Educate yourself: The first step to investing is learning. There are various websites and journals, which host a powerhouse of information. Subject books on finance and government websites can also be referred. Prerna should familiarize herself with the basics of importance of saving, various investment options available and pros and cons of each. The advantage of acquiring knowledge is she won’t be totally boggled when she takes the first step, there would be lesser chances of her falling into the trap of frauds, and her homework will be done when she seeks professional advice.
• Find your style: Though there are idol investment portfolios on the basis of age, income, family demographics, etc., but every individual has a different approach to life. Some may have the adventurous spirit and the aptitude to take risk, while others may be conservative and don’t want to risk their money at all. So, Prerna should analyse her style, whether she wants to experience the thrill of equities or want to first build a safe harbour and then start exploring other options.
• Ice Breaker: Prerna has to shake herself up, since she is too comfortable with not bothering much for her future. She has been wondering that she wants to invest but kept on postponing. Procrastinating investments is delaying her financial security, all she needs is a “Start” button, she needs to lay the first stone in her investment plan.
• Start early: If Prerna would have started saving in 2011, she would have saved Rs 62,000 of taxes, that she paid, she would have saved at least Rs 3 – 4 Lac by now for saving these Rs 62,000, and if she directed small portions in monthly SIP’s or RD’s, she would have saved another Rs 1 – 2 Lac. She would have had a strong financial cushion for her now. However, better late than never, she should immediately start investing and make up for what she never did.
• Don’t pay tax when you can save them: Prerna’s taxes are equivalent to her total savings. The government has given us the benefit to not pay tax by saving for us. It has two benefits; one, we can save money by not paying tax and two, we are saving for our future in order to not pay tax. Rs. 150,000 can totally be saved under Section 80 C by investing the same amount and there are other sections as well, which can be used if applicable.
• Advice: Since Prerna is an amateur, she can make mistakes. She tends to get carried away, she may start doing, what her smarter friends are doing. She may start following what the anchor of the business news channel is saying without any research. Since she lacks exposure, she must seek professional advice. She may look up to an experienced family member, who is into savings and investments, or she may seek help from a professional financial advisor.

The advisor will help Prerna choose the right fit according to her profile and requirements. And all she needs is dedication, a control over her emotions and keep her basic necessities and investment commitments at the top. Let’s bring a smile on Prerna’s cute face by assuring her that she can continue shopping and traveling after providing for the above.

Most of us have read the tale of “the rabbit and the turtle” in our schooldays. Let’s recall the tale and refresh our childhood.

Once upon a time, there was a rabbit, who was overconfident because of his abilities. The rabbit used to boast about his skills and he used to make fun of a turtle since the latter was very slow. The turtle got really annoyed with the rabbit’s behavior and one day, he challenged the rabbit for a race. The rabbit on hearing this, mocked the turtle believing that there is no chance that he can win, and they agreed to race.

The next morning, they reached the starting point and the rabbit pulled up his socks, still mocking at  the turtle. They started and the rabbit instantly picked up pace, while the turtle started the race taking baby steps, the rabbit leaped high and left the turtle far behind in no time.

Midway, the rabbit saw a restaurant, and he was feeling hungry too, he looked around and the turtle reached nowhere near him, so he decided to stop by and eat something. After the meal, the turtle was still out of his sight, and he felt lazy after the meal, so he decided to take a nap. The nap turned into a long careless sleep, and he did not realize when did the turtle ran past him.

The rabbit suddenly woke up, alarmed, and started running as fast as he could to catch up in the race. But when he reached the finish line, he saw the turtle waiting for him. His head hung in embarrassment.

Moral of the story: Slow and steady wins the race

Let’s try to relate this story to the life of an investor, how we manage our investments and understand its implications on our financial health. Let’s see why the rabbit, in spite of being better positioned lost to the turtle.

• The rabbit leaped very high initially, like the investors who have  money and are pumped up to make more out of it.  They do not think and start putting in their money, in order to reach the finish line earlier. You have a good start doesn’t mean you’ll experience same trend all throughout your investments in long term. Your strategy should have a balanced approach to meet your long term goals as per your risk profile. There should also be a differentiation between short-term and long-term goals and planning should be done accordingly of where you want to reach and when.
• Overconfidence: There is a thin line between confidence and overconfidence and once the line is crossed, it can cause only harm. There are investors, who are overconfident on their knowledge about the markets and products and often their views are biased between different asset classes. They go very aggressive in their preference of any particular asset class, often debt and equity, and then risk their money. One has to realise that both asset classes are for different time horizons and suitable as per differing risk profiles of the customers. Going overboard on any particular asset class will put your capital to risk, and this includes investments in Bank FDs which carry of risk of loosing ‘real value’ over time due to inflation.
• The turtle was slow but was steady at the same time; our mutual fund SIP’s are based on the same theme. SIP  investments are most suitable for small investors who can regularly invest irrespective of worrying about market levels. The turtle investor will be disciplined and will invest his regular SIP amount, no matter what comes his way, he will not get carried away by a restaurant (another hot investment opportunity) or need for a nap (other personal aspirations like desire to travel, or buying a car, etc). He will meet his other aspirations only after providing for his investment commitment. While a rabbit investor gets carried away by the restaurants and the need for nap falling in his way.
• The rabbit should have been vigilant even if he wanted to take a break. He got so overwhelmed with his hunger and nap, that he forgot his ultimate goal, and when the clock struck 12, he tried his level best to meet his goal, but to his dismay, the turtle was already there. Similarly, the investor who keeps his life goals ahead and religiously follows his investment plan, will meet his goals in time, while others who lose track for other things that come their way, end up repenting. At times, there is no way the investor can make up for his losing vigil, that he can’t achieve the goal, no matter how hard he tries.
• The rabbit shouldn’t have overlooked the power of patience that the turtle had. The rabbit investor invests and expect instant returns, he does not realize that it is not a magic wand, rather it is a seed which is just sown and will need time to turn into a tree and reap ripe fruits. The rabbit panics and sells at lower prices when the market falls and gets excited when the market rises, and buy more at higher prices. The turtle invests and then wait patiently, he too faces highs and lows but with patience, he keeps a control over his emotions and wins the race.

The story throws light on issues that we face when we become the rabbit and how we should adopt the virtues of patience, discipline, confidence, vigilance and balance of the tortoise in order to win the financial race.

Personal risk management is a subject very commonly related with insurance, though the scope of it goes far beyond life insurance or general insurance policies available to individuals. Insurance is but only an important part of your personal risk management. There are different approaches to managing risk and it is in our interests that we know and understand them.

Risk management is the identification, assessment, and prioritization of risks (de fined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events [1]or to maximize the realization of opportunities. Risk management’s objective is to assure uncertainty does not deflect the endeavor from the business goals.[2]

Risk Avoidance: 
Risk avoidance is the first important method of risk management. Risk avoidance is the elimination of hazards, activities and exposures that can negatively affect an our health, well-being and assets. In other words, it deals with eliminating any exposure of risk that poses a potential loss i.e. not doing something that carries risks.

Depending on the circumstances, we may have opportunity to completely or partially avoid risks or not to avoid it at all. A change in our behaviour and attitude by becoming more cautious, careful and diligent can help use avoid most of the risks in our lives. The following examples will make things more clear…

Avoiding Accidents:
Following traffic rules, not over-speeding, wearing seat belts /helmets, knowing your body limits, avoiding adventure sports, always using proper safety gear, etc.

Avoiding bad Health:
Not smoking or drinking, taking regular medical tests, exercising regularly, eating properly, etc.

Avoiding damage /loss of Assets:
Using safe lockers at home, keeping valuables in bank lockers, using strong locks in shops, keeping re extinguishers handy, installing CCTV cameras, etc.

Risk Reduction:
Risk reduction refers to the precautions you can take to reduce the amount of loss in the event of the risk materializing into one. Risk reduction is a step that logically comes after risk avoidance where you are not able to avoid the risk completely. There are different methods of reducing risk for eg. Reducing the risk exposure Spreading /diversifying the risk Making a contingency fund ready for an event Being prepared with proper post event situation/actions Reducing costs /expenses in treatment/ rehabilitation Hedging the risk by doing something that will pro t when event occurs

Risk Retention:
Risk retention involves accepting the loss from a risk when it occurs. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against like war, flood, etc. Risk retention normally would happen when …

• The risk cannot be transferred or insured.
• The risks are small and losses are nominal in nature.
• Cost of insuring against the risk would be greater over time than the total losses sustained.
• You have the capacity & willingness to bear losses easily

A very common example of risk retention can be found in insurance policies which is known as – Deductible. A deductible means the amount which the policy holder has to bear before the insurance company starts to repay the claim. For eg. In a health policy, of say 5 Lacs, R10,000 is the deductible meaning you will bear claim expenses up to R10,000.

Risk Sharing: 
Risk sharing is where you share your burden of risk or loss with others. The most common and effective form of doing so is to buy an insurance policy. Also known as “risk distribution” it works on the logic that the cumulative premium from a group of policyholders is more than enough to cover the losses from all the events happening in that group based on probability. This group of individuals typically carry similar characteristics and probability for the risk happening.

When you buy an insurance policy, the following things have to be kept in mind…

• Understand & compare the policy features & coverage properly
• Know the policy exclusions properly
• Disclose family & past history, habits, per-existing diseases, etc. honestly
• Fill ll the proposal form personally and do not sign an unfilled form

Adopting A Sound Risk Management Approach:
A question now arises as to how you will manage your risks? There is a suggested process to follow if you desire to do this yourself. No doubt, by following the below mentioned process, you will have a much better understanding and awareness of the risks that you carry with yourself while resulting into a situation where your risks are well covered at the least cost possible .

The risk management process is to Identify all the risks you are exposed to in your personal & work life Assess your vulnerability or probability of a risk event happening Estimate the financial loss /damage in case of each event happening Estimate the cost of transferring, reducing or retaining each type of risk Identify the right way to manage each risk type.

As an investor, one should have the basic understanding of asset allocation, irrespective of how literate or experienced you may be. It is at the heart of portfolio management for investors and as studies have indicated, it is also the primary determinant of portfolio returns over time. In this article, we take a closer look at this key element that we all must adopt, manage & track in our overall investment portfolio.

Why Asset Allocation?
As a definition, asset allocation means an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to individual needs & profile. There are three main asset classes – equities, ¬fixed-income and cash & equivalents.

A clear justification for asset allocation is the logic that different asset classes having different characteristics will offer returns that are less correlated to each other. Thus, essentially with asset allocation we are ‘diversifying’ and reducing the overall risks of the portfolio as one asset class may outperform the other and thereby reducing the volatility of returns for a given level of returns expectation. Asset allocation is based on the principle that different assets perform differently in different market and economic conditions.

Many ¬financial experts also argue that asset allocation is the most important factor in determining returns for an investment portfolio. Various studies done by expert point to the fact that asset allocation could explain over 90% of the returns from a portfolio in long term as opposed to superior product selection or market timing.

Determining Your Asset Allocation :
While there may be guiding lights, there is no standard rule or ratio of asset allocation which can easily ¬t everyone. Determining the asset allocation is a personal decision much like tailoring your own suit. There are many factors that play an important role in determining asset allocation but the following are the most important ones…

Investor Risk Profile: 
Your risk profile or tolerance level is your ability and willingness to absorb large fluctuations in the value of your investments. It is kind of an indicator that measures your comfort, patience and con¬confidence to not panic and sell at the wrong time while continuing to be ¬financially sound. There are a lot of things that impact your profile, including awareness, understanding of markets, your ¬financial soundness, earnings capacity and lastly the ability to keep your emotions under control.

Investment Horizon:
The investment horizon is an important determinant of asset allocation as different asset classes have different ideal investment horizons. They may be expected to behave in a certain manner with reasonable confidence based on their own characteristics & market cycles. For e.g., the equity asset class, being volatile in short term should only be looked at if investment horizons extend long enough in the future.

Investment Goals/Targets: 
Another determinant of asset allocation is the returns expectation or requirement you may have from your investment in order to achieve a financial/life goal or target. You may be end up up deciding an asset allocation solely from the point of view of achieving that goal. For e.g., a person in late 40s may suddenly realize that he needs to save for retirement in just 12 years. Now, the only way to maximize the retirement kitty would be to invest in equities which have the highest returns potential, irrespective of his risk profile but keeping in mind the horizon which is long enough for equity returns to be more realistic.

The Asset Classes : Asset classes can be seen as buckets of investment products /avenues which display similar risk-return characteristics. There is three basic ‘traditional’ asset classes as already highlighted earlier which you may look at for investing – depending your need & profile. For private circulation only

1. Equities:
   This includes direct equity stocks, equity mutual fund schemes, equity PMS and ETFs. Some experts also include private equity and business investments in this asset class. Equities are risky but also hold promise for higher returns. One may reduce the risk of direct equities by investing in equity mutual fund schemes which have diversified portfolios of stocks managed by experts.
   • Within equities, asset allocation may be done on basis of the size of the company or it’s market capitalization. Thus one can diversify into large-cap, mid-cap, small-cap stocks or funds. There are also diversified and blend (two or more market caps) funds available for investors to choose from.
   • One may even have diversification based on country with funds investing in domestic markets and in foreign markets. But with India, being the fastest growing economy globally, there is little sense to look for opportunities elsewhere.
2. Fixed Income:
   This asset class gives more assured form of returns that accrue in form of interest income and due to fluctuations in bond prices triggered by interest rate cycles. It covers instruments like time deposits, government small savings schemes, bonds, corporate deposits, government papers, etc. While it may not be easy for everyone to participate in bond markets in India just like they do in equity markets, mutual funds do present us with a very easy and familiar route to invest in such products.
   • Your total asset allocation should include the debt portion of your traditional investments into bank time deposits, PPF, EPF, small saving schemes, etc. along with investments into mutual fund debt schemes.
   • Mutual fund debt schemes offer lot of options with a wide range of fund types that offer different sets of risk-return horizon within debt asset class. One can do a deeper level asset allocation of debt into these broad category of funds. This will be meaningful only if you have debt, especially mutual fund debt schemes, as a significant part of your portfolio.
3. Cash & Equivalents:
   This asset class is the least riskiest but also one that gives the least /no returns. It broadly includes Cash and equivalents like deposit account with banks and money market mutual fund schemes. Some amount of investments should be made into this asset class to have liquidity for emergency purposes and for meeting maturing goals.
   • Alternative Asset Classes: Apart from the above three primary asset classes, many ¬financial planning experts also consider few other asset classes depending on the investors they advice.
   • Commodities: A popular avenue for Indians, this includes precious metals (like gold, silver), agriculture, energy, etc.
   • Real Estate: Again an important ‘investment’ avenue for us, it includes commercial or residential real estate and REITs or Real Estate Investment Trusts.
   • Collectibles: A slow emerging category for wealthy Indians, collectibles includes things like art, paintings, coins, stamps, wine, etc.
   • Others: Foreign currency, derivatives, etc. also can be considered as asset classes but which are not recommended or suitable for individual investors.

Managing Your Asset Allocation :

1. Do It Your-self
   If you had been investing and trying to manage your funds yourself, and want to keep it that way, you will need to take care of the following:
   • Maintain consolidated records for all investment classes. And remember not to skip anything as most of us ignore our traditional /realty investments and only consider stocks & mutual funds for asset allocation which gives us a very misleading picture.
   • Find the right asset allocation suitable for you and/or decide asset allocation for each of your -financial goals. This is not easy even though there many risk pro¬ling tools available on-line. Execute the asset allocation and regularly review the same over time. Again this may require a lot of your involvement and time commitment.
2. Do It Through Your Advisor
   Investing through your ¬financial advisor /planner or wealth manager seems to be a very logical and the right thing to do. Your ¬financial advisor who ideally would be experienced in assessing risk profile and determining asset allocation would easily guide you to knowing your ideal and existing asset allocation. He/she would also be in a position to monitor and recommend changes in your portfolio on a regular basis. Your ¬financial advisor also has access to more refined product like MARS which manage your asset allocation through an automated process making things much more easier for you.

   The value which a – financial advisor may add in terms of managing your asset allocation is immense. Here are a few things that he/she can offer..

   • Access to a much wider range of asset classes and product choices.
   • Timely /regular portfolio reporting & tracking services for all your assets.
   • Regular review and re-balancing of asset allocation.
   • Discipline & commitment to follow asset allocation for achieving life goals

   We believe, based on our experience, it is very difficult for individual investors to follow asset allocation with discipline without ¬financial advisors. With a good advisor on your side, your portfolio should too potentially outperform a portfolio which does not follow the asset allocation approach to managing investments.

Conclusion :
There is no doubt that asset allocation brings discipline and gives the answer to the big question – when to buy & sell at an asset class level. Following an asset allocation approach to managing investments can yield great results over time. Taking the active help of your ¬financial advisor in managing the asset allocation is the way to go forward.

It may be expected from the articles at this place, regardless of the topic, that it’ll revolve around the personal ­finance aspect of life. But when it comes to the growth of kids, and their ­financial security, with sufficient experience we ­figure out that regardless of our ­financial position, their personal ­financial success is dependent on the money management skills they understanding they develop in their formative years of life. Let us therefore, start with essential ­financial measures you must take as a parent to ensure a safe ­financial journey for your kids and also extend the text to include ways to ensure that your kid’s future is secure even without your money. First we start with the steps to provide for the minimum required ­financial security to your kids…

LIFE INSURANCE

Life insurance is the most basic of the tools, to start with once you have any dependent. Since for ­rest

20 – 25 years of life your kids are going to be ­financially dependent on you, it is important that this dependency is safeguarded and provided for even if you are not there to provide for it. Your next question may be about how much is needed, so there is a detailed analysis of future requirements that can be done by your wealth manager/ ­financial planner. In case you are yet to consult an advisor, and want some cover immediately, you may go for a term cover of at least 10 times of your annual income; i.e. if your income is Rs. 10,00,000 p.a. your pure life cover should be minimum of Rs. 1 crore.

HEALTH/ DISABILITY/ CRITICAL ILLNESS -C.I.- INSURANCE

Health insurance or disability insurance is more important than life insurance for you, as one must have a health insurance even if he/she does not have any dependents. Main reason being, disability or bad health may curtail your earning capacity and badly damage your long term ­financial scopes by digging into your existing savings. When you have kids to look after as well, their health also becomes an important factor. A reasonable amount for individual health policy given the level of costs today is Rs. 5,00,000; but again if you can afford you should go for higher cover. For any critical illness, expenses may be even higher and hence protection cover against same should be at least 2 times of the health cover. E.g. if you have a health cover of Rs. 5 Lakh you can go for a Rs. 10 lakh of minimum cover for critical illness.

EMERGENCY FUND

Emergency fund is that money, which ­fills the gap between income and expenses in case of emergencies like job loss or any other ­financial emergency, not covered by any insurance policy. Also sometimes you may have to bear some amount of expenses out of your pocket before you can get the insurer to cover the costs. Emergency fund comes in handy in such situations. Most of the money for emergency fund is kept in fairly liquid investments like, bank accounts, money market mutual fund schemes. The size of fund would depend on the nature of your job/business and extent of expenses. In general you may follow the rule of 4 to 6 months of expenses as emergency fund.

REGULAR GOAL BASED SAVING

After you have completed the contingency planning, it is time for planning the long term goals for your loved ones. Again it’s recommended that you take assistance of an advisor to plan your goals thoroughly and to arrive at the right amount for monthly /yearly savings and/or lumpsum savings. The investment avenue for your savings will depend on your required amount of savings in future and the time horizon remaining for the same. Often you may be required to save in market linked products like equity mutual funds for long term goals as traditional investment avenues may not potentially generate the wealth you need. Hence, it is advised that you sit with your ­financial advisor and discuss all your ­financial goals like child education, marriage, wealth creation etc. and save accordingly.

IMPORTANT THINGS TO DO OTHER THAN INVESTMENT & INSURANCE

Now that, you have ­financially prepared yourself to tackle almost every need of your kid, you need to think ahead and also prepare your child for the challenges of the future. Following steps can be taken to allow kids to develop their skills and understanding:

Engage Them In Your Budgeting Plans

For grown up kids, it is good that you also engage them in your family budgeting exercise and let them observe and understand how you go about planning savings and expenses. Let them also have say in few things based on costs and features like say appliances, etc. The learning to impart is that the income is limited and one has to manage all things within a set limit.

Have Them Prepare Their Own Budgets

You may give your kids a ­fixed pocket money for expenses on a weekly/monthly basis. Let them then decide how and where to spend. Be strict in not giving money beyond the budget. You may also show and encourage them to save regularly to buy valuable things after some time. The key learning would be to plan expenses, save money for future and to procrastinate non-essential expenses.

Teach Them About Personal Finance

It is good to slowly start teaching your children about all personal finance aspects early in life. You may start with opening their bank accounts. Letting them know about investment products, insurance, credit cards, loans, asset classes, etc is also a good idea. It is also important that you also show them documents, statements, etc. This will slowly let them be comfortable with these things in life and also give confidence when dealing with these things in future.

Letting Them Earn And Experiment

It is good that kids experiment and earn money in small ways. Grown up kids may earn by giving tuitions, selling things like collections, paintings, crafts, etc. One has to be careful in guiding children in small “business” ventures which they may show interest in. The idea is that they learn the basic skills of business, negotiation, etc. early in life.

Conclusion: Making your children ­financial secure for their future is the primary responsibility and also the wish of every parent. However, not everyone of us would have taken the necessary steps to do so. Personal ­financial ignorance, biasness and rigidity should not be allowed to come in way of planning the future of your children. Beyond this, one also has to make sure that you have imbibed the right money management skills and ­financial knowledge in children. Together, they would make sure that your dreams and your children’s dreams are realised in future.

“Frugality may be termed the daughter of prudence, the sister of temperance and the parent of liberty.” – Samuel Johnson

Saving is the predecessor of investments and building wealth. The minimum you spend, i.e. the maximum you save, i.e. the maximum you invest and grow. To be wealthy, we have to spend wisely. There are millionaires and billionaires, who are wise men, and they follow the lifestyles of a commoner, not because they are stingy, rather because of their morals, on the foundations of which they have built an empire worth billions.

Warren Buffet, the man behind Berkshire Hathaway, is always amongst top five richest people in the World list, he also tops the list of modest billionaires. He is often referred to as the “world’s best investor”. He has also quoted various mantras on investing, which are followed worldwide. Buffet still lives in the house which he bought for $31,500 in 1958. Buffet does not spend on electronics, he does not carry a cellphone, nor does he have a computer on his desk. He keeps his maintenance expense to the minimum and is always looking for a better deal, Coke and Cheetos are a part of his daily diet.

Wipro’s founder, Mr Azim Premji, one of the richest man of India, is famous for his frugal lifestyle. There are various anecdotes on Mr Premji’s life, which narrates his ideologies. He is known to drive a Toyota Corolla for over a decade, and on his senior executives’ advice, he upgraded to a pre-owned Mercedes Benz E Class, which he purchased from a Wipro employee. He prefers to fly in economy class, he has also been spotted in autorickshaws, public buses, and is seen walking on the roads. He would always prefer company guesthouses over 5 star hotels. And this is just one face of the coin. Mr Premji has given away half of his wealth for charity, he founded an NGO, Azim Premji Foundation, through which he contributes for spreading education and upliftment of the society.

Apart from the above, there are many big names, who believe in humility. Some of them are Mark Zuckerberg, the Jeans and T shirt CEO of Facebook, who drives a Wolkswagen Golf GTI to office; Carlos Slim, the owner of Telmex and America Movil; the owner of Zara, Amancio Ortega and many more.

On the contrary, we have our Indian tycoon, Mr Vijay Mallya, who is known for his exorbitant lifestyle, fancy cars and flamboyant parties. Mr Mallya owns a private megayacht, the Indian Empress, where he throws his VIP parties, he travels in private jets. He believes in ‘Living life king size’. He accumulated a lot of wealth over the last 3 decades, only to lose it all. His destroyed business now provides a lesson to the entrepreneurs, ‘Things that they should not be doing in their business’.

Everybody can’t be like these great mean, it is because of their extreme beliefs and practices, they are great. But we can at least imbibe a small degree of their basic values into our lives. We buy a lot of stuff which we can’t afford, we buy expensive clothes, eat at fancy restaurants. There are people whose value in terms of their assets is Rs 50 Lacs and they buy cars worth Rs 15 Lacs. This is absurdity which is not letting us grow.

This is an overheard a conversation of two young salesgirls in a Levis store in Mumbai, Girl one, “I am saving because I want to buy that designer handbag worth Rs 20,000”, Girl two,, “Are you out of your mind, why do you want to spend so much on a bag, you would get a good bag within Rs 1,000 in that store on the third floor” Girl one, “But I am in love with that piece, I’ll buy it anyway.” Clearly, she can’t afford to buy it, and there would not be any tangible difference between the designer’s bag and the one at the third floor, but her inclination towards the former is only on account of the brand value. We often make such mistakes, where we compare the brand and not the quality, or we buy something, not because we need it, but because our friends have it. We can save a lot of money if we bring some thrift and sense into our thought process, we can direct the money that we save today to our future and for the country’s future.

There are great men and if they can do it, you can do it too. It is for you to decide whether you want to be the Warren Buffet or the Vijay Mallya. If you want to be big and maintain the enormity, you must not waste what you have.

“If you don’t value money today, a day will come when money will no longer value you.”

 

Remember how your parents instilled the habits of thrift in you, how your mom used to help you save money from your pocket money to deposit in the piggy bank, and when you got bonus bucks for reciting a poem, how your dad played money games with you and you got rewarded when you saved, when your dad helped you open your first savings account, how they helped you make your first investment. Now its your turn, the tables have turned. It is difficult to imagine, but yes, your parents have become old. And it’s your responsibility to see that your parents are not going off track.

Your old mom and dad are not as tech advanced, they are not familiar with the latest investment options available. They tend to forget to pay bills and incur penalties. If both parents are alive, they divide their tasks, one handles the investments, the bills, the world outside the house and the other takes care of the domestic activities. But if either one is alive, it becomes difficult to handle everything, they get confused and end up messing things. Their health is deteriorating with time. There might be instances when they change their financial plan suddenly, or there is a change in the spending pattern. When you start noticing these traits in your parents, its time you should step in at this stage to take care of the financial health of your parents along with their physical health.

How to approach?

You must understand your wellspring’s psyche before proceeding, since they have been guiding you throughout your life, managing their incomes and expenses, providing for your expenses as well and a sudden exchange in roles should be soft. Your words and actions must not hurt your parent’s ego at any time. You need to take a few steps in order to effectively manage your parent’s wealth.

• Talk: The first step is to talk it out. You must acquaint yourself with the exact financial position of your parents, their assets and liabilities, their income and expenses, investment commitments, etc. It might be a little difficult to initiate the money talk with the ones who have taught you about money, there will be hesitation in asking directly or they may not be comfortable sharing such things with you but you have to break the ice. You may start by narrating anecdotes, say an example of a friend’s parents, who faced bad situations, because they could not manage their finances as a result of lack of awareness and your friend had no idea of what was going on.
• Health: Another major issue with old people is a constant narrowing down of health, and increasing medical expenses. You must review the medical insurance plans of your parents, and in case the policies do not have a sufficient cover or are not apt, you must immediately pay and upgrade or make the necessary modifications, since unexpected medical costs may become a burden.
• Associate with their advisors: Get in touch with your parents’ financial advisors, meet them often, so that you are familiar with their investments, and also you’ll be in a better position to understand and convey their specific requirements and goals.
• Keep a check: Be vigilant, keep an eye on their banking transactions. Monitor their payments, check if there are any outstanding bills or credit card payments, ensure that they are being paid in time, to avoid penalties, you may automate processes for them, authorize direct debit for regular payments. Educate them the benefit and usage of technology or try to do the tech stuff for them. You can become joint holders with your parents in their bank accounts, this will enable to monitor the transactions easily, you can also take decisions on their behalf, write cheques, etc.
• Estate planning: This is a very sensitive subject, but is equally important. Your parents have toiled throughout their life to build the assets that they have today. And they wish to transit the property to their loved ones. But in absence of a will, these assets will go as per the choice of law and not as per your parents’. So, in order to avoid such complications in future, you must make a move and ask your parent’s about their estate transfer plans. You should discuss their plans and accordingly you may arrange for a professional will writer for them. If things are clear from the beginning, you can escape from undesirable consequences later.
• Phishing attacks: Senior citizens are the soft targets of phishing attacks. If you hear your Mom giving out her personal details, like her bank account number, passwords, address, etc. on phone or going to the bank to deposit money in someone’s bank account because she won a lottery, you must intervene immediately. You must be vigilant and also educate and alert your parents about such misdeeds. Falling prey to such traps can be a huge setback for your parents and you may face severe financial loss.

You are the sandwich generation, you have take care of your kids as well your parents. It is better to prepare and plan. A little caution and effort on your part can have a productive impact on the financial health of your elders.