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The quarter of January – March (popularly known in financial circles as the JFM quarter) is full of panic and anxiety for tax payers. Last minute investments need to be done,

investment proofs need to compiled in one folder, PPF passbooks need to be updated etc. In our haste to organize everything, at times we forget that tax planning is a part of the overall financial planning for our goals and dreams. As a result, we end up investing in products which may help us claim tax benefits upto Rs. 1.50 Lac, but give us returns less than inflation.

Through this article, we would like to suggest how you can invest wisely to save taxes and yet not go off track on your financial planning.

LIFE INSURANCE :
If you are married, with or without kids or have retired parents, a life insurance policy is an absolute necessity. The premium payable on the policy qualifies for a tax benefit subject to it being not more than 1/10th of the sum assured or cover. For example, if the sum assured is 10 Lacs, the premium cannnot exceed Rs. 1 Lac. Term plan is the best option to consider as the premium paid is to cover the cost of insurance with no returns attached. The biggest USP of a term plan is that it can offer a high sum assured for a very low cost. An amount of Rs. 1200 p.m. can get you a 25 year term plan for Rs. 1 crore. This is less than what a movie outing will cost a family with 2 children. On the death of the life insured, the nominee gets a lump sum amount of Rs. 1 crore. There have been some innovations on the payment of the death benefit also. Companies have started offering the option of splitting the death benefit into a lump sum and regular monthly / quarterly payments or entirely regular payments as per the frequency defined. These payments can be taken into account while preparing retirement cash flow planning in case of death of the life insured.

EQUITY-LINKED TAX SAVING SCHEMES (ELSS) :
If you looking to create long term wealth for yourself and family, then equity is a must have in your portfolio. If you can also get tax benefits, then the overall benefit is magnified. As the name suggests, an ELSS is a mutual fund scheme that invests your money into equities across sectors and industries with the help of a professional fund manager. It comes with a lockin of 3 years which is one of the shortest tenures among all the options discussed here.

EMPLOYEES’ PROVIDENT FUND (EPF) :
EPF is available to salaried individuals only and is good vehicle for retirement planning due to limited withdrawal options. On a monthly basis, 12% of your salary alongwith an equal contribtion from the employer is deposited in your EPF a/c which earns interest as declared by the Employees Provident Fund Organisation (EPFO). The interest rate for FY 2014-15 is 8.75% p.a. Your 12% monthly contribtion qualifies for a deduction of Rs. 1.50 Lac from your gross total income. Your EPF contribtions and interest earned on it are totally tax free if it withdrawn after 5 years.

As per income tax rules, EPF is an exempt-exempt-exempt (EEE) product. EEE means that the investment made qualifies for a tax deduction so no tax is to be paid on that amount. The interest earned on the investment is also tax free and the final corpus amount that you withdraw on maturity is also tax free.

PUBLIC PROVIDENT FUND (PPF) :
Unlike EPF, PPF is available to the general public – whether salaried or not. It is a 15 year lock-in product with an option to renew in blocks of 5 years. Minimum investment is Rs. 500 and maximum is Rs. 1.50 lakh in a financial year. PPF a/c can also be opened for a minor but the combined investments in both accounts (parent + minor) cannot exceed Rs. 1.50 Lac. Interest on the PPF a/c is declared every year in April by the government and is calculated as 0.25% above the 10 year G-Sec yield. The interest rate for F.Y. 2014-15 is 8.70%. The interest is compounded annually but calculation is done on a monthly basis. A withdrawal option is available after the 6th year. Loan can also be taken against the PPF a/c. PPF is also a EEE product.

NATIONAL PENSION SCHEME (NPS) :
NPS is a defined contribution based pension scheme that was launched by the government in January 2004. It is mandatory for central government employees (except armed forces) appointed after January 1st, 2004. It is open to all Indian citizens between the ages of 18 and 55. The launch of NPS was a precursor to instituting pension reforms in India as earlier the government offered assured benefits. The scheme is structured into 2 tiers:

• Tier 1: No premature withdrawals allowed before the age of 60
• Tier 2: Withdrawals allowed

Minimum investment is Rs. 6,000 in a financial year. The investment pattern is split into 3 asset classes:

• Equities with maximum cap of 50%
• Government Securities with minimum cap of 20%
• Fixed Income Securities with minimum cap of 10%

The fund management cost of NPS is 0.25%, which is one of the lowest in the industry. The contribution qualifies for a tax deduction upto Rs. 1.50 Lac. On maturity, 60% of the corpus can be withdrawn as a lumpsum and the balance 40% has to go towards buying an annuity. NPS is currently an EET product but this may soon change soon to EEE as per the recommendations of the Pension Fund Regulatory and Development Authority Act, 2013.

FIVE-YEAR FIXED DEPOSITS (FDs) WITH BANKS :
If you are looking for guaranteed returns or are in the lower tax bracket, this could be a good option to consider. Interest earned on the fixed deposit is subject to TDS.

AT A GLANCE :

While selecting these tax saving options, it is important to keep in mind the following things:

• Your Age
• Time Horizon for Investment
• Your Goals

A thumb rule usually followed for equity investments is 100 minus your age should be the allocation to equities. Those who are in the 20s and 30s, can afford to have equity allocation of as high a 80%-90%. As you grow older, your allocation to equities should decrease and allocation to safer investments should increase. When you retire at the age of 55 or 60, your allocation to equities will still bea respectable 40% – 45%.

Though the JFM quarter is full of deadlines, this is no reason to make hasty investments for saving taxes and derailing your financial planning goals.

We hope this article will help you to make more prudent investment choices.

Inflation in simple terms means general price rise of goods & services in a country. Inflation monster reduces purchasing power of money, rupee loses value with inflation as the same amount of money buys

lesser goods/services with time or to buy same quantity of goods/services you need more money due to inflation. In India inflation trend is broadly measured by Wholesale Price Index popularly known as WPI, tracking wholesale prices of basket of goods. This tracks prices at wholesale level and not the prices at which consumers buy goods. RBI mainly tracks WPI to take decisions regarding interest rates & money supply. In recent times too much fuzz is created around inflation numbers as it remains at elevated level of around 9 – 10% range which is not desirable for a growing economy like India. But why so much attention is given to WPI numbers and what is their significance in context of Indian economy?

WPI in India has very wide implications as many nodal agencies use WPI number to arrive at many important policy decisions. RBI uses this number to decide on interest rate & money supply measures, movement in WPI indicates price trend of essential commodities.

What causes inflation in a country ? 
As said earlier, inflation is nothing but general trend of price rise in a country. There can be multiple factors responsible for this trend of price rise:

Excess Money Supply: If money supply is increased due to loose monetary policy & low interest rates, prices go up as too much money chase too few goods. That is the reason why central banks increase interest rates in inflationary environment to reduce money supply.

High Level of Economic Growth With Low Investment: If economy is growing at healthy rate then income level of working population goes up and people start buying more goods and services which result in higher demand. To match this higher demand country needs to invest heavily in manufacturing sector to increase supply to match increased demand. If country fails to increase supply of goods & services against rising demand then it results in inflationary trend. Classic example is India where economy grew at a healthy pace of 9% in 2006-08 but manufacturing growth failed to keep pace with economy growth, and this resulted in higher inflation during the period between 2008 to 2012.

Deficit Financing : Emerging economies like India always remain in need of capital to finance various growth projects. As their imports remain higher than exports many a times governments of these countries lean towards deficit financing as a tool to fill the gap and narrow down the deficits. Deficit Financing means printing more currency to fill the deficit. This results in increase in money supply.

Impact of Inflationary Trend on You & Me (As Consumer – As Investor)
With rising prices from food to vegetables to petrol, common man like you and me always remain at the receiving end during high inflation environment. As discussed earlier in high inflationary environment on one end RBI keeps raising interest rates in an attempt to control inflation & on other end rising prices pinch common man’s household budget. CPI (Consumer Price Inflation), the inflation number that impacts common man more than WPI as it is the measure of price rise at end user level has remained at around 9 to 10% level in last few months.

Higher inflation, rising interest rates, higher input cost & lowering demand affects corporate profitability and results in lower production, eventually affecting the economic growth of the country. If inflation remains at the elevated levels for longer period of time it affects investors as investment in fixed income instruments end up generating negative real return. With CPI hovering around 9 to 10% and your investment in Bank F.D., PPF or any other Postal instruments generate 8 to 9% return, as an investor you end up generating negative return.

The logical alternative for investor is to explore investment avenue with possible inflation beating returns like equity & gold. Investing systematically & in a staggered manner help investors in yielding inflation beating returns.

Financial Planning & Inflation:
Inflation is the single most important factor to be considered while planning for all your future goals. Considering an appropriate inflation number while estimating future cost of your financial goal determine your asset allocation & return expectation.

e.g. If higher education costs Rs.5 lacs today with inflation expectation of 7% this can grow to Rs.9.8 lacs in 10 years time if your kid is of 7 years of age and higher education age assuming at 17 years.

With ever rising cost of living due to inflation it is very important for investors to look at investment class which can consistently generate inflation beating returns. Time & again it is proved that equity can consistently beat inflation over a long period of time and so it is imperative to have equity allocation in your portfolio to keep your investment portfolio floating above inflation level.

Because of the negative cascading effect that high inflation can have on overall economy, high rate of inflation is not favorable specially for a growing economy like India. High growth rate with reasonable inflation of between 4 to 6% could be an ideal scenario for the economy and that is the reason why RBI is desperately trying to bring inflation level down to around 5 – 6% range.

Due to widespread implications of high inflation, it is mandatory for any emerging market economy to keep inflation under tight control. Controlling inflation is of course beyond control of you & me, but we can definitely add equity flavor in our portfolio and follow asset allocation to keep our investment floating above inflation.

A lot of tax payers and investors today a feel a sense of contentment post budget presented by the Modi government. The Finance Minister managed to address various issues and challenges facing the economy.

He also managed to touch the long-unfulfilled wishes of the tax payers. One of the most eagerly awaited part of the budget is the one on taxation and this year there have been multiple good news for the average tax payer on the streets. One of the positive changes has been the increase on the section 80C limit. In this article we would talk about how you can make full use of this section to save the maximum tax possible using one of the most popular products under it – ELSS.

Section 80C:
Before we start talking on ELSS, let us know more on section 80C. The section 80C is a section that offers permissible deductions from Gross Total Income of the assessee as part of Chapter VI-A, i.e., sections 80C to 80U. The total amount in this cannot exceed gross total income of an assessee excluding short term & long term capital gains. Deduction under section 80C is available only to an individual or an HUF. It allows certain investments and expenditure to be deducted from total income up to the maximum of Rs. 1,50,000. The limit is on your own discretion and it is not mandatory to invest full Rs. 1,50,000. The amount was recently increased from 1 lakh in the last budget. The additional amount of 50,000 will give more money in hands of investors who have been hit by high prices. Looking at it as how much you will stand to lose if you are able to meet only Rs. 1lac instead of Rs. 1.5 lacs, if we assume that you are in tax bracket of 20%, then the loss will come to Rs. 50,000 * 20.60% = Rs. 10,300. If you are in 30% tax bracket, loss will be Rs. 15,450.

ELSS :
The ELSS is acronym for Equity Linked Savings Scheme – a diversified equity fund with tax savings feature. ELSS invests primarily in equity stocks spread across different sectors and different market caps i.e, large cap, small cap, etc. It is thus a less risky way to invest into the market especially with the lock-in period which ensures that investments are made for long term. ELSS has been included in 80C section with lock-in to encourage people to participate in the equity markets and benefit from it over a long-term horizon. Within all the options available under section 80C, it is the only one that offers a pure equity exposure. If you can take some equity risk as part of your overall portfolio, the ELSS is the most attractive tax-saving instrument today.

Salient features of ELSS:
Only pure equity instrument that offers the highest return potential in long-term. Least period of lock-in of 3 years compared to other avenues under 80C. Compare this with PPF which is a 15 year savings plan and NSC which has a 6 year lock-in. Less risky way to invest in equities in markets compared to direct buying. Enjoy advantages / benefits of it being a mutual fund scheme Flexibility to invest small amounts through an SIP.

How is Tax saved?
Under Section 80C, only Rs. 1.5 lakhs of investments qualifies for tax benefits though you are free to invest any amount you desire in ELSS. Your gross income is reduced by the amount you invest in the scheme. The amount of savings made under section 80C is dependent on two factors:

• The amount you invest / spend for instruments / heads covered
• The tax-slab applicable to you

The following table best enumerates the amount of tax that can be saved if one invests in ELSS

Tax Bracket Amount of Investment in ELSS 50000 75000 100000 125000 150000 10.00% 5150 7725 10300 12875 15400 20.00% 10300 15450 20600 25750 30900 30.00% 15450 23175 30990 38625 46350

If you are paying a tax of 30.9% you can save upto Rs. 46,350/- on an investment of Rs. 1.5 lakhs or more in ELSS. With additional 50,000, investors can now save additional 15,450 of tax outflow in FY 2014-15.

Why ELSS:
The minimum investment amount is very low – mostly only Rs. 500. Historically, provided better returns compared to other instruments like NSC, PPF and ULIPs. In the last 3 years, about 47 schemes had delivered an average category return of about 16.5%*. Earnings /profits earned after the lock-in period is completely Tax-Free as there are no long term capital gains on equities Investors in ELSS under Dividend Payout Option have the advantage of getting Tax Free gains even during the lock-in period of 3 years. 3 year lock-in period brings discipline in investments. It also gives the Fund Manager the freedom to invest in strong companies with long term growth potential. Thus, ELSS schemes can potentially deliver better performance (in terms of returns) than even diversified equity schemes. How much to invest? Typically, you should aim to make the most of the section 80C limited of-course to the amount of taxable income that you have. A maximum of 1.5 lac of deduction can be sought. The full investment in ELSS can help you save about 46,350% of taxes if you are falling in the highest tax bracket and 15,450 if you are in the lowest tax bracket.

If you are already having home loan, life insurance policies, there would be some amount already eligible for deduction. Work out how much amount has already qualified for deduction before making any new investment decision. Deduct this amount from 150,000 and the balance amount can be invested in ELSS at your discretion. In case you need to know more about tax planning, you may always consult your financial advisor. ELSS Investment can be made in form of lump-sum or even SIP, given the sufficient number of months remaining in the financial year till March 2015.

Conclusion:
The ELSS is without doubt the most attractive tax saving avenue available to investors who can carry some degree of risk in their portfolio. With the additional 50,000 being provided under section 80C, it becomes even more attractive. Investors can do well to calculate how much amount remains available for deduction. Now is also the right time to start planning for ELSS either with lump-sum or SIP or both. It won’t be smart that loose money by paying taxes with the 80C section under-utilised or wait till end of the year to start the process.

All of us have big dreams like going on a annual foreign holiday, buying a large house in a posh locality, sending our child to the best school / college and retiring in comfort at the age of 50 and we work hard and save harder toachieve them. Irrespective of our financial status in life, certain basic goals like child’s education and marriage, purchase of house and our own retirement are non-negotiable and unavoidable. The sooner we plan and save for these goals, the better is the utilization of the power of compounding in our favour.

For the salaried employee, the 15 years of his life starting from 35 years going up to 50 years is the best phase of his life as he is at the peak of his career and income. If we apply the 80/20 rule here, then 80% of his lifetime investments in done in this phase of his life. Therefore, he needs to be prudent while allocating his money and not go overboard on any particular investment.

Let us examine some of life’s critical goals in order of importance:

PROTECTING YOUR LOVED ONES :
This is the single most important goal. As our lifestyles get more hectic and stressful, it is important for the earning member(s) of the family to be protected against any unfortunate events. Buying a term insurance plan is the best available option to protect your loved ones. Today, a Rs. 1 crore cover for a 30 year old non-smoking male for a 30 year term costs approx. Rs. 8,000 p.a. The same cover for a female will cost approx. Rs. 7,000 p.a.

PROTECTING YOUR HEALTH :
As countries get more developed and our cities more urbanized, people have developed sedentary lifestyles with greater rates of obesity and consume more processed foods, alcoholic beverages and tobacco. The result is lifestyle related diseases like Alzheimer’s, cancer, diabetes, heart disease, stroke, depression etc. are on the increase and account for majority of deaths in metros and cities. While this has resulted in a range of medical institutions and professionals on call to help people with these diseases, the costs of availing these services is escalating on a daily basis and is on the verge of becoming unaffordable for an average middle class person. Therefore, buying a health insurance policy either on a individual or family basis is critical to cover the family against any future health related emergencies. Today, a Rs. 4 lacs health cover for a 30 year old married person covering spouse and child will cost approx. Rs. 7,000 – 9,000 p.a.

PROTECTING YOUR OLD AGE : 
According to a recent study titled “The Future of Retirement” published by Bloomberg which covered 20 highly developed and rapidly developing nations, India has the highest percentage of men 60 years or older in the labour force at 55%. Similarly, India also has the highest percent of elderly living in households with their adult children at 82.8%. The second highest is China at 64%. India is also among the top 10 countries in terms of percentage of elderly living in poverty at 21.8%. Retirement planning is clearly the most overlooked and avoided subject in any conversation among 30 year old salaried individuals. But as responsible and mature individuals, we have to take ownership of the fact that one day our salaries will stop and we will have to depend on our investments to fund our daily expenses. The sooner we accept this fact and start planning for our retirement, the more peaceful and stress free will be our retired lives. The cost of delaying retirement planning is best explained in the following example:

Even though Rakesh and Rajesh invest more money than Rajeev, their final retirement corpus is significantly lesser compared to Rajeev. This is the benefit of starting early and allowing the power of compounding to work in your favour.

CHILD’S EDUCATION :
The greatest gift that a parent can give the child is good and quality education. It is one of the toughest goals to plan for due to the competitive environment and high costs involved. Planning for your child’s education involves determining when the child will be ready for higher education which is usually at the age of 21 or 22 years, followed by estimating the cost of the higher education today and on the target date when the child is 21 years. Cost of higher education has been increasing at approx. 10% p.a. Once we know the future cost of higher education, we need to work backwards to calculate how much to save on a monthly / quarterly basis and and in what investment avenues. Equities is the preferred investment for goals where the time horizon is more than 5 years.

BUYING A HOUSE : 
For the average salaried person, this is a big budget goal due to the high prices of houses pan India. Home loans help to bridge the gap between the person’s current savings and the cost of the house. Ideally, a house should be bought in the early part of a person’s career as it typically takes 15 – 20 years to pay off the home loan. It is important to create a corpus which is approx. 20% of the cost of the house as this is the down payment that has to be provided by the home buyer. The rest of the amount will be funded by the bank. Balanced and income funds can be good investment options for creating the corpus for the down payment.

We need to classify all our goals into 3 buckets, namely short term, medium term and long term. Investments made for short term goals need to be more liquid in nature and less volatile as compared to investments made for medium and long term goals. A ready reckoner is given below to help you plan your investments in a systematic manner:

Whatever be our goals or dreams in life, it is important that we write them down, classify them as either short, medium or long term and accordingly select the appropriate investment options to help fulfill those goals.

“A goal that is not planned is a wish; a dream that is not chased is a fantasy.” – Dr. Steve Maraboli

As informed investors, we should be familiar with the different investment routes or facility of investing offered by mutual funds. You may already be aware of SIP but likewise, there are also other facilities offered by mutual funds to invest, redeem or switch between investments, which are relatively unknown. We have explored the SWP in one of our previous issues. This month, we would be exploring the STP or Systematic Transfer Plan in detail.

What is a STP?
STP is the facility that allows an investor to regularly transfer (i.e. switch) a pre-defined amount from one mutual fund scheme into another scheme. Every month on a specified date an amount you choose is transfered from one mutual fund scheme, called as the Transferor scheme, to another mutual fund scheme, called as the Transferee scheme, of your choice. The STP is similar to a Switch transaction with the difference that it is regularly done at the predefined frequency. The STPs are generally used by investors to create regular cash flows between different schemes for meeting portfolio management objectives or as part of financial planning for certain objectives /goals. The following graph clearly depicts what an STP looks like.

Options available under STP:
There are certain additional options offered by mutual funds within STP. As far as time intervals are concerned, the options generally available to withdraw are on monthly, quarterly or annual period basis. In terms of the nature/type of withdrawal possible, investors normally have two options to choose from… Fixed Plan: Wherein specific fixed amount of money can be transferred.

Capital Appreciation Plan: Wherein only the amount of capital appreciation only can be transferred and the initial investment stays protected. This option is available only under growth option and not dividend plan. One thing that investors need to keep in mind is the amount of load applicable would generally be similar as if there is a redemption from the Transferor scheme and a new investment in the transferee scheme. The tax treatment would also be on same lines.

Ways how you can use STP in your lives:
STP can help meet your portfolio management needs for achieving any temporary or long term investment objective. It is one of the many ways available for planning regular cash flows between different schemes, different asset class or scheme types. The following real life situations can help you realise the ways in which STP can be planned

1. Mr. Vikramsingh has received good bonus and he plans to invest same into equity mutual funds instead of keeping money in bank but is cautious of investing lump-sum into equity schemes.
2. Mr. Imran has just retired from his private job and he plans to invest in debt schemes. However, he desires to set aside some money regularly into equities to also create some wealth.
3. Mrs. Ramakant has a sizable investment in equity. He however wants ensure that the appreciation on this equity investment be set aside into debt to also slowly build a debt portfolio while keeping the equity portion intact.
4. The wedding of Mr. Suraj’s daughter is due in the next 2 years. He already has adequate equity investment but he feels the need to protect the investment from market risk.
5. Mrs. Desai wants to keep maintain a fixed asset allocation on her mutual fund portfolio and is looking for a way to do that periodically. In each of these multiple scenarios, STP can be effectively used to meet your investment objectives. The STP can be a very powerful facility if we can smartly use it and incorporate it as per our portfolio and investment needs. It can potentially play a very critical role as part of a holistic financial planning for your family.

STP: Tool for Investment Strategy
As a tool, the STP facility can be effectively used to meet diverse investment objectives, financial planning needs. Some of the ways it can be used is:

A Portfolio Rebalancing and/or Asset Allocation Management tool To minimise risk of investing lump-sum in equity schemes Create debt or equity investment portfolio with time where your primary investment is in the opposite asset class To meet financial goal planning objectives like emergency funds, provisioning for maturing goal, creating wealth, reducing portfolio risks, etc.

The STP option works wonderfully when we have an STP from a Debt scheme > to a Equity Scheme. This option can be exercised when your risk appetite for equity is low or markets are volatile or the market valuations appear fair or overvalued wherein there might be some risk in the short-term. In all such situations, lump-sum investment can be confidently made in debt portfolio with a STP into equity scheme. This will work like an SIP into equity scheme while ensuring that your money is invested into a more productive instrument than bank deposit. While planning for maturing financial /life goals, STP can also be used to slowly transfer money from equity schemes to debt schemes. For eg. If you need say Rs. 25 lakh in say 2 years time, you may start an STP from an equity scheme of say Rs.1 lakh today. The idea behind this is to ensure that at the time of maturity you do not carry any risk on the amount that you need by keeping same exposed to equity market volatility.

Way forward:
These are times when as investors we should be adequately informed and aware of the options & facilities available to us. We also need to take efforts to understand these options /facilities and how they can help us in achieving our financial objectives in a better way. The STP is one such important facility. A single STP can be seen as a combination of SIP, SWP or Switch. It is upto you and your financial advisor to explore the full potential of this valuable feature available exclusively in mutual funds schemes. We should be open incorporate this to manage our wealth and thus our lives in a better way. We hope, the next time you are thinking of managing your portfolio, the idea of STP shall definitely cross your mind.

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.

We sometimes get sizable cash inflow as windfall gains or bonus for salaried employees. The first question arises in our mind whenever we have a big cash inflow is whether to invest that amount for future

or pay off existing debt to reduce EMI burden. We always feel like being caught between the devil and the deep blue sea.

Paying off debt and investing for future, both are important financial aspects of life. Paying off debt will help to reduce EMI burden and therefore improve your cash flow condition, and investing for future is beneficial for obvious reasons. Any rational human being will think about getting rid of debt as soon as possible, being debt free leads to healthy financial life.

But not always. Two important things to consider is potential cost of your debt and expected earning from your investment.

Compare Earning Against Cost:
One of the most common approaches to tackling the question of debt repayment versus investment, is to compare the interest rate of your debt to the returns on your investments. In general, high-interest loans that exceed your investment earnings should be paid off first. Likewise, if you have low-interest debt, greater benefit might come from making the minimum payments and putting more money into your investment accounts. Let me put it this way. e.g. If you have an outstanding loan on which you are paying 15% interest and you have an option to invest in a product which has the potential to generate 15% return, which one is better? Paying off debt will ensure you saving of 15% while investment has the possibility of generating 15% or even lower or higher return. There is an element of uncertainty here. This is something that you have to decide as an individual.

Consider the Type of Debt:
All debt is not equal. The type of debt you have, can play a role in the decision as to whether to pay it off as soon as possible or put your money towards investments. High-interest loans that are not tax deductible, such as credit cards, car loans or personal loans, should be paid off as quickly as possible. Other type of loans like mortgage loan taken to buy house or education loan for which you get tax benefits are in fact good to carry on as typically they come with lower interest rates and real cost comes down even further after taking tax advantage into account. Typically, a 15 year home loan costs you around 9.5 to 10%, this rate further comes down after considering tax advantage on that.

Determine Your Goals:
Everyone’s financial situation is unique so it only stands to reason that your personal financial intentions will play a part in your decision. For many people, being debt-free offers a sense of relief that can’t be quantified. For others, having an emergency fund that will cover eight months of expenses helps them to sleep at night. Emotions can sometimes overrule logic when it comes to financial decisions.

Depends on Human Psychology:
Human psychology also plays an important role in financial decision making. Certain class of people who are typically risk takers prefer to continue with debt and like to utilize funds available for investment to generate better return, even if it comes with risk. e.g. entrepreneurs, businessmen. They will always love to put that money in their business or in an investment product, which has potential to generate return over and above the interest paid on outstanding debt.

Strike a Balance:
You can also choose to make part payment of outstanding loan and bring the EMI down, as most loans are charged on reducing balance basis. So if you make part payment of outstanding loan, your EMI can come down to that extent. The remaining amount you can use to make investment.

e.g. You have 2 lakh outstanding in car loan and you get 2 lakh as some cash inflow. Should you use entire 2 lakh to pay off outstanding loan. Rather you can use 50% of the amount to pay off debt and bring down you car loan EMI and remaining 1 lakh can be invested for future.

The Bottom Line
There is no ‘one size fits all’ solution to the question of whether it is more important to pay off debt or invest. Every individual has his/her unique financial situation, which needs to be considered before taking any decision. e.g. if you have not created any emergency funds, utilize available money to put aside in short term bank FD or money market mutual funds so that can be used anytime if emergency arises rather than paying off debt.

If you find it really confusing to decide, try tackling both at the same time by making part payment and part investment or put your focus on financial goal to gain peace of mind.

Over the last few years, the term “financial planning” has been very often used and heard by many of us. In this article we explore as to what this term really means and why it is important for us all.

Simply put, financial planning is the process of meeting your life goals through proper management of your finances. The life (read financial) goals can include buying a home, saving for your child’s education & marriage or planning for your retirement or protecting your family. It is a process whereby a qualified financial advisor will consider your entire financial situation and goals and provide you with appropriate action steps to fulfill your goals and better manage your finances. It is not a one-time process but is continuous in nature as your life situations and finances change over time. You also need to regularly review your financial plans & your investments to ensure that you are well on track to meeting your financial goals / objectives.

Given the nature of today’s life, with growing uncertainty, rising aspirations and increasing costs of living, doing a thorough financial planning has become a must for each of us. It is also better to plan and be ready for any situation rather than be passive and wait for things to happen before doing anything about it. A special case to mention is of Retirement planning, which has become very critical since the average life expectancy has increased and appropriate planning is needed to ensure that your 20-30 years of your life after retirement is dignified, peaceful and self reliant.

An important point to understand is that financial planning should be done through a qualified financial planner, preferably a CFP (Certified Financial Planner), or an expert who can advise you holistically on your entire financial situation. Typically financial advisors give advice on areas of insurance or Risk Planning, portfolio or Investment Planning and pension or Retirement Planning. There are also other important areas like Tax Planning, Estate Planning (wills & related aspects), Cash Flow planning, etc. which can be covered in your comprehensive financial plans. Remember that the advice you receive from an insurance broker or a mutual fund distributor or your Accountant will typically be limited to their own area of expertise with chances that they will recommend their own products, independent of your actual financial need.

A financial planner is like your Financial Doctor of your personal finance, who will closely study each aspect of your financial life and accordingly give recommendations. Nothing is free and a financial planner would typically charge you ‘fees’ for the advice since this is his/her profession. This is something that we should learn and value just like we do it for almost every other service that we enjoy. If we are hesitant in paying fees, we risk getting free but biased advice from people who would seek income from other source, namely – product commission. A good, unbiased advice can help us save a lot of money and give peace of mind in long run.

We should understand that making our financial and investment decisions without a proper financial plan is like buying and eating medicine without any doctor’s prescription and medical test. Typically after you receive recommendations for asset classes or actual products from your financial planner, you are free to purchase such products from any source or distributor.

To summarise, the following are the key reasons or benefits that you would get upon undergoing proper financial planning

• To look at your complete financial situation, including your assets, liabilities, cash flows, financial goals, risk appetite, life situation, family background, etc.
• To plan systematically for your financial goals and objectives, including life insurance, health insurance, retirement, child planning – education & marriage, house purchase, estate planning, investment planning, etc.
• To make your financial life better and secured for yourself and your family and ensuring that all financial goals are achieved.
• To better understand and learn about your financial situation and understand the reasoning and logic behind all recommendations made. Also to better understand the different asset classes and financial products and their suitability to you.
• To regularly review the progress of financial plans and/or to revise the financial plans to accommodate any major change in personal life or financial situation.

Most of us do not have adequate information about financial planning and only in recent years has there been some growing awareness about it. Most of us though still believe that they are knowledgeable and smart enough to decide upon their finances on their own ignoring the fact that this is a very broad subject that requires professional expertise. We are ready to visit and pay an accountant, doctor, lawyer or any other professional but are shy when it comes to financial planners. A better, secured financial life is a dream for all of us which, with proper financial planning, can become a reality. The need is to be understand this crucial part of our life and give it the importance and priority it deserves.

Asset Class is a often used word in finance, especially investment & portfolio management. We also used the term many times in our articles. In this article a take a academic look at the various asset classes.

Information sharing and transparency with advisors is a touchy matter. Often the investors are not very sure of the level of transparency and openness to keep with their advisors.

The following are the likely questions in the minds of any investor…

• How much information should I share?
• When should I share the information?
• In what way should I share the information?
• With how many advisors should I share the same information?

The question of information sharing with any particular advisor can be answered by adopting the following 3 step approach where decisions would need to be undertaken in an environment of openness and mutual trust…

• Scope of advisory: Clearly define the scope of our relationship with the advisor and match your expectations with services / solutions/ products provided by the advisor.
• Scope of information: Ask your advisor of the required scope / nature of information to be provided in order to make proper recommendations / plans to you. In case you feel unsure of any information asked from you, feel free to ask your advisor for the reason why such information is needed and/or how it will be used by him.
• Information sharing practices: Finalise the methodology, format and frequency of information sharing to be done. You may also ask the advisor as to how he plans to record / document the information provided and the confidentiality practices that he would undertake to safeguard same.

Need to share information:
There exists a strong reason for fair & full disclosures to be made to the ‘right financial advisor’. The reason is to get comprehensive, proper and timely advice from your financial advisor. Often, in absence appropriate information, you are likely to get wrong advice or no advice at all, which may be more harmful to you. Acting secretive and unwillingness to share information asked by advisors can often also discourage your advisors to work hard for you. After few attempts, they may even stop asking for information that is necessary for the advice that they give. This can potentially become a self-defeating cause to you and you may end up incurring unforeseen monetary losses or opportunity costs. As a principle thus, we should try to be transparent with financial advisors, just like you are with your doctors and lawyers.

Apart from sharing information from your end, your advisor also has certain responsibilities regarding your information. These responsibilities are largely about keeping information confidential and safe, making sure that the information is not used for any other purpose. You should refrain from sharing important information in case you feel that these responsibilities would be compromised upon.

The following can be the scope of information, both present & future, that you may provide to your financial advisors, subject to scope of advice. For comprehensive financial planning, all of the following data would be important to be shared

• Financial goals
• Financial situation, including assets, liabilities
• Earnings & expenses
• Information that can have financial impact. Consider special cases related to health, marital status, family planning, etc.
• Above details for spouse, as well

Confidential data:
Apart from taking of the data that you should share with financial advisors, there also exists some information that you should not share with anyone, except say your spouse. Such highly confidential information would be related to your bank accounts, trading accounts, etc. where financial transactions can be executed. Further more sensitive details of your bank accounts, credit card, debit card, is also something that has to be kept confidential since, there is a risk that it can be misused. Next in line is login details / subscriptions of online accounts / finance portals where you are likely to store your financial / investment portfolio information. Lastly, with growing appeal and usage of social media, access details of online social media portals can also be treated as confidential since it is likely to contain all your personal information.

In brief:
Data or information is the basic element on which the foundation of any financial plan or decision is made. Sharing such information openly with your trusted advisor is important. Also important is the respect to confidentiality on part of the advisor. Strong mutual trust, understanding and transparency are the ingredients for a successfully relationship.

India is a country where traditionally people are not oriented for retirement planning in finances. There is a prevalent culture of joint family and the older generation expects the next generation to take care of them in the old age.

Surely there is some form of retirement savings being done. But it falls far short of the actual need in absence of any proper planning with 100% financial independence. However, today there is an increasing need felt for retirement planning especially among those in the middle age group.

What is the need to plan/save for retirement:
Here are some of the reasons why the growing need for retirement planning is felt.

• Post-Retirement Life: Over the years, the average life expectancy has increased to almost 70 yrs. However, it also likely for one to live almost for 85-90 years since today. For a person, retiring at say age 60, it is likely that 30 years of his would be in retirement. This thought itself arouses a shock and concern, and any sane person would feel the need to plan wisely for the future. Post retirement, one would need to provide additionally for medical care, costs for any operations of surgeries, for any passion or hobby to pursue, etc. With rising costs of living, urbanisation & growing needs, factored with inflation for 30 years: the need for starting to save immediately for retirement assumes great significance.
• Self-Dependence: Earlier after retirement, children were supposed to assume the role of financial care-taker in times of personal/medical emergencies but off late people realize the importance of planning for retirement during their working life only. This has also to do a lot with growing complexity of life with multiplicity of needs, increasing importance to money, ambitions of the younger generation coupled with the desire for total freedom in decision making, etc. To put it in simple terms, the working generation today wish to have a dignified & independent retired life without taking any chances on the next generation for financial support & care.
• Urbanisation & Migration: The rapid urbanisation is reshaping how we live our lives. Trends show that there is a change from the joint family system to nuclear family system due to many factors. The houses are becoming more expensive yet smaller. A large number of the working population is also migrating to the bigger cities for better work opportunities, largely giving rise to the culture staying away from the parents.
• Uncertainty of pension benefits: Although you may get pension benefits and the amount compulsorily saved in public provident fund can provide some support, yet it may not be sufficient enough. Moreover, in India, the states do not provide any social security for the retired people, so it becomes even more important to plan for retirement.

What is Retirement Planning?
Retirement planning is the process of arranging finances to meet expenses during retirement period. The idea is to collect enough retirement kitty so that you get financial independence in managing your personal expenses. The important considerations that go into planning for retirement are…

• Financial assessment: What is the current income, expenses and savings and what amount needs to be saved to sustain the kind of lifestyle he/she wants at present and after retirement. Other inputs to consider are the kind of disposable assets & liabilities would exist after retirement and any business, hobby or other post retirement expenditure or income is foreseen.
• Goal Setting: It involves realistic goals about the standard of living that one wants post retirement and what should be the retirement income. Often, fixing the retirement age is also dicey as people may wish to retire early but may not be financially viable decision.
• Financial Planning: It involves ascertaining the retirement kitty requirement and managing resources to build the retirement kitty. It also involves managing the retirement kitty smartly after post retirement so as to comfortably provide for expenses during the retirement period.

Building Retirement Kitty:
Key inputs like retirement age, expected household expenses, retirement period, inflation, returns on retirement kitty, returns on existing or new investments to build retirement kitty, existing assets & liabilities and the savings potential are used will arriving at the retirement kitty. Each of the input stated above can impact the retirement kitty need drastically. While some of the inputs are in control of the person concerned, some, like inflation & retirement age are out of control. Building a retirement kitty is about taking smart decisions from today itself before it becomes too late. Some important factors that can be effectively managed and would help in retirement planning are:

• Create a retirement plan: Identifying your retirement kitty need, is very crucial. You may approach your financial advisor for the same. You may also try some of the online tools for same but it may match your exact needs.
• Save and invest regularly: Saving regularly, beginning now, is most important, even if you haven’t yet prepared your retirement plan. Chances are that you would have saved only a fraction of the retirement kitty need when you do the retirement planning in future. There is perhaps no option than to save the most that you can in appropriate asset class depending upon the years remaining to retirement.
• Diversification and Asset Allocation: One should diversify the existing investments and divide the savings into equity and debt asset classes. We must remember that equity asset class in long term can significantly contribute to your retirement kitty, if adequate savings are done in early years of one’s life. In many cases, debt investments done for retirement would never be sufficient for your true retirement need. Deciding the right asset allocation is very critical to the success of your retirement plan.
• Disposal of assets: When retirement actually arrives, there can be other possibiliites explored like disposal of assets (property) by sale or rent to meet retirement kitty need. There is also a trend of reverse mortgage wherein you receive payments from financial institution against your existing house which you mortgage to them but continue to keep possession for your retired life.

Conclusion:
Retirement kitty is something which is doesn’t easily figure on top of your ‘list of goals’. Observations show that the more you delay planning for your retirement, increasingly, the dream of having an independent, dignified retired life becomes blur. Retirement planning can be easy when you are in the initial 5-10 years of your working life and is perhaps the best years to start planning for retirement. Quite often people are shocked to hear the retirement kitty requirement and mostly it is too late to do anything tangible. As investors we strongly recommend that you start planning & for your retirement at the earliest.