Humans have a natural tendency to follow the crowd, but when it comes to stock market investing, following the crowd can often result in losses. Why replicate the mediocrity of the masses when you can clone the success of the World’s Greatest Investor?
The investment secrets of warren buffet have got unveiled here.
1) Look at quality businesses; not just the stocks
Warren Buffett said, “When I buy a stock, I think of it in terms of buying a whole company, just as if I were buying a store down the street.” Most investors don't analyse the businesses they invest in. They simply follow the symbols or brands of successful corporate houses.
If you are buying a shop, you will analyse about the products dealt by the shop, overall sales, consistency of sales, competition for the shop, competition strength of the shop, how the shop will manage the change in customer trends and so on. We need to apply a similar logic before choosing a stock. Don’t think that you are only buying a few shares of that company. Will you buy the whole company if you had enough money?
2) Are you willing to own a stock for 10 years? If no, then don’t own it even for 10 minutes.
Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years. In the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company. Looking at the short term opportunities in the stock market will not be a long term successful strategy. If you don't feel comfortable owning something for 10 years, then don't own it even for 10 minutes.
3) Check thousands of stocks and look for very high bargains
Avoid investing based on the stock tips or recommendation. Do your own research. Analyse thousands of stocks before choosing the right stock to invest. Once you have chosen a right stock, wait till the share is available at a very high bargain price. Buying a right stock at the right price is the key to investment success. Investors have the luxury of waiting for the “fat pitch”.
It is really difficult for an individual investor to analyse thousands of stocks and finding out the right time to buy a stock. If this is the case, you can outsource this Portfolio Management Scheme to a professional financial planner or wealth manager. But you need to be careful in choosing a professional financial planners who is capable and at the same time customer centric.
4) Scrutinize how well management is using the resources.
Check how efficiently the management is using its resources like money, manpower and material. This management efficiency will in turn reflect in Return on Equity and Return on Capital.
5) Always stay away from “THE HOT STOCKS”
The hot stocks are those stocks which have some attention catching activity such as severe volatility in share prices, high trading volume or when the stock is in news. Stay away from these hot stocks.
Warren Buffett once said, “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
6) How much money you will make?
Before investing in a stock calculate ‘how much money you will make’ in this investment. Of course, you need to make a few assumptions to do this calculation. But do calculate. Most often investors tend to ask the share is undervalued or overvalued. Identifying the intrinsic value of the stock is difficult and the various models available to calculate the intrinsic value are faulty. Warren Buffett wrote in a report “Unless we see a very high probability of at least 10% pre-tax returns, we will sit on the sidelines.”
7) Get rid of the weeds and water the flowers — not the other way around
People have this tendency of loss-aversion. That is when the share price has fallen down by 50%, they choose to wait. They convince themselves and others by saying “It will definitely come back”.
Also people will rush to book profit when their shares go up just by 10%. In effect investors tend to keep the loss making shares with themselves and they offload their profitable shares. Actually it needs to be the other way around.
These seven secrets properly applied in the stock market would be your roadmap to riches.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
May 17, 2013
May 13, 2013
Why you’ll never become RICH so long as you don’t follow this? A very obvious but much neglected money management code
It’s a fact of life that, if you don’t follow this simple and very obvious money management code, you will never ever become rich. Don’t let the negligence to follow this, keep you from becoming rich.
To become profitable and stay profitable, the bigger organizations always look at cost cutting methods. They cut a part from the salaries, reduce expenses on travel, in serious situations, go to an extend of laying off some employees. They do this to increase the net worth of the company year after year.
Likewise, to become rich and stay as rich, you need to increase your personal net worth year after year. Cutting on your unnecessary spending is the most important aspect of increasing your personal net worth and saving for a rainy day and keeping away from the fire.
How come a cut on spending save you from disasters? How can one determine what to buy or what not to spend on? What happens when we buy more? Read on.
The biggest threat to your savings:
I have a credit card, just scratch it whenever I want to buy something and pay it off every month, where is the problem here when I don’t pay any extra cash?
Keeping a credit limit and paying off every month doesn’t help at all in the long run. Have you ever returned empty handed when you go for window shopping at the malls? Need it or not, considering the monthly limit one has set, they tend to buy more unwanted things. If you buy things you do not need, soon you have to sell things you need.
Your credit card limit need not be your monthly expenses limit. Your monthly expenses should be based on the monthly budget you have prepared. Remember Warren Buffet’s quote here. "Do not save what is left after spending, but spend what is left after saving".
Do you track your expenses periodically?
We all make budgets periodically, but how many of you are tracking the expenses? Tracking your expenses will help you to identify the areas where you need to implement the cost cutting measures. Do not think about spending all the money on vacation while getting a bonus. Add a percentage from the bonus on the amount you have kept for vacation. Keep the rest for other necessary expenses or add it on your investment. It is important to remember the ancient story of learning from ants saving for rainy days.
How to transform your savings into wealth?
Robert Kiyosaki: "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."
The biggest challenge to transform your savings into wealth is inflation. Inflation reduces the purchasing power of your savings. How can you beat inflation?
Imagine an escalator which is coming down. If you have to use that escalator to go up, what you need to do? You need to climb up the escalator at much faster speed than the speed at which it is coming down.
So as to beat the inflation, you need to invest in avenues which can generate more rate of return than the inflation rate. It is your hard earned money. Now you make it work hard for you and generate more returns for you by investing in prudent investment avenues.
Why should one aim at having a passive income?
With the fluctuating job market, have you made any plans for the unexpected expenses if you sit without a salary for few months? How long you can survive just with the money from your savings? Think about it. Having an additional income will help in need. When you have an additional income, you can run your family without any worries and use the money from savings only for emergencies.
The speaker and the finance expert, Dave Ramsey quotes beautifully here. "Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this."
How can we retrieve a passive income? Your investments can generate a passive income. Stop unnecessary spending and start saving and investing for your rainy days. Creating a corpus of investments to the extent the passive income generated from those investments should take care of your living. Once you reach that point then you can stop going to work and start thinking of retiring.
✓ What do you want to achieve?
✓ Add more things at home and compress your savings?
✓ How do you want to spend your time after retirement? Relaxing or running around in a new job?
✓ Do you want to save some for the generations to come?
Answer these questions and start cutting on your unnecessary spending right now.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
To become profitable and stay profitable, the bigger organizations always look at cost cutting methods. They cut a part from the salaries, reduce expenses on travel, in serious situations, go to an extend of laying off some employees. They do this to increase the net worth of the company year after year.
Likewise, to become rich and stay as rich, you need to increase your personal net worth year after year. Cutting on your unnecessary spending is the most important aspect of increasing your personal net worth and saving for a rainy day and keeping away from the fire.
How come a cut on spending save you from disasters? How can one determine what to buy or what not to spend on? What happens when we buy more? Read on.
The biggest threat to your savings:
I have a credit card, just scratch it whenever I want to buy something and pay it off every month, where is the problem here when I don’t pay any extra cash?
Keeping a credit limit and paying off every month doesn’t help at all in the long run. Have you ever returned empty handed when you go for window shopping at the malls? Need it or not, considering the monthly limit one has set, they tend to buy more unwanted things. If you buy things you do not need, soon you have to sell things you need.
Your credit card limit need not be your monthly expenses limit. Your monthly expenses should be based on the monthly budget you have prepared. Remember Warren Buffet’s quote here. "Do not save what is left after spending, but spend what is left after saving".
Do you track your expenses periodically?
We all make budgets periodically, but how many of you are tracking the expenses? Tracking your expenses will help you to identify the areas where you need to implement the cost cutting measures. Do not think about spending all the money on vacation while getting a bonus. Add a percentage from the bonus on the amount you have kept for vacation. Keep the rest for other necessary expenses or add it on your investment. It is important to remember the ancient story of learning from ants saving for rainy days.
How to transform your savings into wealth?
Robert Kiyosaki: "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."
The biggest challenge to transform your savings into wealth is inflation. Inflation reduces the purchasing power of your savings. How can you beat inflation?
Imagine an escalator which is coming down. If you have to use that escalator to go up, what you need to do? You need to climb up the escalator at much faster speed than the speed at which it is coming down.
So as to beat the inflation, you need to invest in avenues which can generate more rate of return than the inflation rate. It is your hard earned money. Now you make it work hard for you and generate more returns for you by investing in prudent investment avenues.
Why should one aim at having a passive income?
With the fluctuating job market, have you made any plans for the unexpected expenses if you sit without a salary for few months? How long you can survive just with the money from your savings? Think about it. Having an additional income will help in need. When you have an additional income, you can run your family without any worries and use the money from savings only for emergencies.
The speaker and the finance expert, Dave Ramsey quotes beautifully here. "Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this."
How can we retrieve a passive income? Your investments can generate a passive income. Stop unnecessary spending and start saving and investing for your rainy days. Creating a corpus of investments to the extent the passive income generated from those investments should take care of your living. Once you reach that point then you can stop going to work and start thinking of retiring.
✓ What do you want to achieve?
✓ Add more things at home and compress your savings?
✓ How do you want to spend your time after retirement? Relaxing or running around in a new job?
✓ Do you want to save some for the generations to come?
Answer these questions and start cutting on your unnecessary spending right now.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
May 11, 2013
A small mistake that could ruin your investments completely and what to do about it?
Do you remember what you did before buying your first bike? Made a research on various brands, looked at the trend of each brand & the product on how they worked and chose the best one you liked, right? Even though, your bike helps you to travel places, no matter what, the resale value will be lesser than the buying price. Isn’t it?
You are investing your time and energy in an object which you will not get any money in return few years down the lane. Think about the amount of time and effort you need to spend on something which is going to bring in more returns. Enough knowledge and informed decision making will help you to become a great investor. Go ahead and read to know how you can become an expert in stock market investing.
Look before you leap: Foremost among all, have a goal set in. For example, ‘I am 25 now and want to earn ‘X’ amount when I am 45, it is going to be ‘Y’ amount when I am 58 or 60 while retiring’. Focus on choosing the fundamental investment models which can bring in returns as you have planned. Understand the business, company, market fluctuations before stepping into the market.
The ugly truth about investing with ‘gut feeling’:
Investing on stocks with a gut feeling may be successful in one time, but not a right strategy in the long run. All that glitters are not gold. Remember the retirees, middle class and lower middle class workers coming to road crying for their money back when finance companies offered FD with 18% interest rates but defaulted. Most of them didn’t know the intricacies of how these finance companies were running and where exactly they invested the money received from the public. Same think is what happened to the investors in Emu farming business in the recent times.
Insurance agents, mutual fund brokers, and stock brokers have got a bundle of schemes to sell you. They have got their monthly business targets to meet. Listen to them and learn about various options available to invest on stock market. Do your homework well before getting in. Investing without doing any homework to understand, how the investment model works will be very risky. Knife is a useful tool but need to be careful while using it. Even a slight mistake can cut your fingers. Investing on stock market without enough knowledge is like giving a knife to a 2 year old. He can seriously hurt himself or the others.
Why you’ll never be a successful investor so long as you invest without understanding the product?
It is true that investing on stocks is risky as in running any business. One needs to take a calculated risk. The blindly taken risk and uninformed decision making will lead your investment to go into pieces.
Mutual fund NFOs that joined the IPO club in 2008 will be the best example here. The pure equity NFOs from the mutual fund companies raised Rs. 32,309 crores in 2006 and this NFO collection went up to Rs. 55,000 crores in 2007. About 71%of these schemes were trying to cope up with less than Rs. 10 per unit in 2008.
An analysis done by ETIG brought out the truth about these equity NFOs. Without realizing that the mutual fund is different from the stock market IPOs, there were huge losses reported from the investors. Those who learnt well and understood the wrong projection of mutual fund as IPO escaped from a huge loss. This had even led to banning the word ‘IPO’ when new offers were made on mutual funds.
A Deep Danger to your investments and how to avoid it:
Be careful about the structured investment products that come under many names like capital protection schemes, Highest NAV guaranteed Schemes, Nifty linked structured products and more.
Most of the times, the banks, mutual funds or insurance companies offer such products. They commonly offer these products with the ‘unwritten’ guarantee to secure your capital investment. These products are not easy to understand and they invest in shares, derivatives and debt instruments. They will use risky asset class, but will claim they have combined different asset classes in a way the risk is nullified.
Few Simple Questions that could make you a successful investor:
Don’t invest in anything which you are not able to understand. One of the main reasons why investors loose money in the stock market is they don’t understand completely the product in which they are investing and they don’t know what is the level of risk they take with those investments.
If you are on the verge of investing in mutual fund or other stock market, based investment options, ask yourself the below questions before leaping into the market.
Is this investment scheme registered with SEBI or other regulating authorities?
Is this investment suitable to me? Is this matching with my financial goals?
What is the risk involved and am I comfortable taking that risk?
How is this investment going to make money? (By way of dividend, interest, capital appreciation…)
What must happen for this investment to appreciate in value? (Stock market should go up, interest rate should come down, midcap should do well…)
What are all the charges in the scheme?
How liquid the scheme or investment is?
Most importantly, learn through the history to know how the market fluctuations have impacted any particular stock or a mutual fund. You can help yourself by remembering a quote of Warren Buffet, "The markets like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do." Swimming in the ocean is not the same as you swim in your own pool. You need to check on the wind, waves, and the pattern of the tide before getting into the water. A slight mistake here will drown the person.
Doing mistakes and then blaming the market will not help to save even a penny. Estimate the risks involved in each model and the ways to save your money in such scenarios. Do your homework and understand before investing. An ounce of prevention is worth a pound of cure. By failing to prepare, you are preparing to fail.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
You are investing your time and energy in an object which you will not get any money in return few years down the lane. Think about the amount of time and effort you need to spend on something which is going to bring in more returns. Enough knowledge and informed decision making will help you to become a great investor. Go ahead and read to know how you can become an expert in stock market investing.
Look before you leap: Foremost among all, have a goal set in. For example, ‘I am 25 now and want to earn ‘X’ amount when I am 45, it is going to be ‘Y’ amount when I am 58 or 60 while retiring’. Focus on choosing the fundamental investment models which can bring in returns as you have planned. Understand the business, company, market fluctuations before stepping into the market.
The ugly truth about investing with ‘gut feeling’:
Investing on stocks with a gut feeling may be successful in one time, but not a right strategy in the long run. All that glitters are not gold. Remember the retirees, middle class and lower middle class workers coming to road crying for their money back when finance companies offered FD with 18% interest rates but defaulted. Most of them didn’t know the intricacies of how these finance companies were running and where exactly they invested the money received from the public. Same think is what happened to the investors in Emu farming business in the recent times.
Insurance agents, mutual fund brokers, and stock brokers have got a bundle of schemes to sell you. They have got their monthly business targets to meet. Listen to them and learn about various options available to invest on stock market. Do your homework well before getting in. Investing without doing any homework to understand, how the investment model works will be very risky. Knife is a useful tool but need to be careful while using it. Even a slight mistake can cut your fingers. Investing on stock market without enough knowledge is like giving a knife to a 2 year old. He can seriously hurt himself or the others.
Why you’ll never be a successful investor so long as you invest without understanding the product?
It is true that investing on stocks is risky as in running any business. One needs to take a calculated risk. The blindly taken risk and uninformed decision making will lead your investment to go into pieces.
Mutual fund NFOs that joined the IPO club in 2008 will be the best example here. The pure equity NFOs from the mutual fund companies raised Rs. 32,309 crores in 2006 and this NFO collection went up to Rs. 55,000 crores in 2007. About 71%of these schemes were trying to cope up with less than Rs. 10 per unit in 2008.
An analysis done by ETIG brought out the truth about these equity NFOs. Without realizing that the mutual fund is different from the stock market IPOs, there were huge losses reported from the investors. Those who learnt well and understood the wrong projection of mutual fund as IPO escaped from a huge loss. This had even led to banning the word ‘IPO’ when new offers were made on mutual funds.
A Deep Danger to your investments and how to avoid it:
Be careful about the structured investment products that come under many names like capital protection schemes, Highest NAV guaranteed Schemes, Nifty linked structured products and more.
Most of the times, the banks, mutual funds or insurance companies offer such products. They commonly offer these products with the ‘unwritten’ guarantee to secure your capital investment. These products are not easy to understand and they invest in shares, derivatives and debt instruments. They will use risky asset class, but will claim they have combined different asset classes in a way the risk is nullified.
Few Simple Questions that could make you a successful investor:
Don’t invest in anything which you are not able to understand. One of the main reasons why investors loose money in the stock market is they don’t understand completely the product in which they are investing and they don’t know what is the level of risk they take with those investments.
If you are on the verge of investing in mutual fund or other stock market, based investment options, ask yourself the below questions before leaping into the market.
Most importantly, learn through the history to know how the market fluctuations have impacted any particular stock or a mutual fund. You can help yourself by remembering a quote of Warren Buffet, "The markets like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do." Swimming in the ocean is not the same as you swim in your own pool. You need to check on the wind, waves, and the pattern of the tide before getting into the water. A slight mistake here will drown the person.
Doing mistakes and then blaming the market will not help to save even a penny. Estimate the risks involved in each model and the ways to save your money in such scenarios. Do your homework and understand before investing. An ounce of prevention is worth a pound of cure. By failing to prepare, you are preparing to fail.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
May 6, 2013
Four Golden Rules of Money Management
Personal finance is of important to all of us and we all need to know, understand and follow the Rules of Personal Finance to be financially successful in life. Many may feel that one could learn the rules by experimentation; however in my opinion it could prove very costly. We all need finances as far as we live, so it is best to know, understand and follow these rules to lead a financially healthy life.
a) Don't You Work For Money…? Does Money Works For You?
"Every penny saved leads to a penny earned", and I am sure we would never like to just depend on our salary for a lifetime. Similarly saving and investing money would mean that the earnings can be utilized for a better lifestyle and a comfortable retired life. It could also mean that we could retire early and do the things that we always wanted out of the profits of our investment.
This is not to suggest that we should not enjoy once in a while probably in a restaurant or to watch a movie. It only means that we need to use our common sense and look at few major expenses in the earlier month and look for ways to reduce it. One such expense could be personal debt or other unwanted expenses.
We may think that it is easier to pay off personal debt in easy monthly installments; however I would say that it is better to save money and then buy anything. Look out for gimmicks like 0% interest; it is mostly on those goods that are overpriced, so ask the retailer how much you would have to pay if you paid in full and you would be surprised to know you would be paying a much lower price.
b) Be selective and keep the company of those that care for personal finance:
It has been rightly said that we are influenced by the company we keep and this applies to your personal finance too. We need to keep the company of relatives, friends or co-workers who use their money and savings to make money and also to keep their finances in control. If they do not, then it is best to look for others who follow the rules of personal finance as their attitude could influence you too.
Our neighbors also play a role on whether you follow the rules of personal finance. Our neighbors influence the size of the house, cost of furniture and size of TV that we have. Having costly neighbors' means we could go to a more amicable locality where they follow the rules of keeping finances in control and also to invest money to make more money.
It is always best not to mix with those that have extremes of income and it is advisable to spend more time with those who are following the successful financial rules.
c) Make it a rule to keep finances under control:
None of us can enjoy become financially independent and enjoy a higher lifestyle just by being casual about personal finances rules; we need to keep finances in our control.
The best rule to personal finances means being prepared for financial contingencies. This means being prepared and taking life insurance, disability insurance, auto insurance and health insurance. Purchases of any item are also to be planned well in advance.
It is advisable that one makes a balance sheet for his family on an annual basis to judge how well one is financially progressing.
Keeping finances in control also means paying bills on time and your inability means that you should find someone trustworthy that could help. Financial trouble in most people's life is caused by trauma like a health problem, an emotional problem like loss of a near and dear one or divorce or financial problem like losing a job, some unexpected expenses and cut in pay.
Being prepared for all these eventualities with sufficient emergency reserve will help you sail the boat safely in any climate.
d) The last rule is trying to accelerate all these rules for personal finance:
These first 3 rules can be fulfilled only by taking steps to fulfill and accelerate these rules. Savings can be increased by taking steps to advance and progress in one’s career that means fulfilling the first rule of making more savings to become financially independent and enjoy a better standard of life. One could increase the money one saves by lowering the amount one spends on few of the highest expenses. Next it is best to spend time with those that are financially shrewd and systematically building their wealth in their lifetime.
Surely all this could definitely bring about healthy personal finance planning.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner.He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management.He can be reached at ramalingam@holisticinvestment.in.
a) Don't You Work For Money…? Does Money Works For You?
"Every penny saved leads to a penny earned", and I am sure we would never like to just depend on our salary for a lifetime. Similarly saving and investing money would mean that the earnings can be utilized for a better lifestyle and a comfortable retired life. It could also mean that we could retire early and do the things that we always wanted out of the profits of our investment.
This is not to suggest that we should not enjoy once in a while probably in a restaurant or to watch a movie. It only means that we need to use our common sense and look at few major expenses in the earlier month and look for ways to reduce it. One such expense could be personal debt or other unwanted expenses.
We may think that it is easier to pay off personal debt in easy monthly installments; however I would say that it is better to save money and then buy anything. Look out for gimmicks like 0% interest; it is mostly on those goods that are overpriced, so ask the retailer how much you would have to pay if you paid in full and you would be surprised to know you would be paying a much lower price.
b) Be selective and keep the company of those that care for personal finance:
It has been rightly said that we are influenced by the company we keep and this applies to your personal finance too. We need to keep the company of relatives, friends or co-workers who use their money and savings to make money and also to keep their finances in control. If they do not, then it is best to look for others who follow the rules of personal finance as their attitude could influence you too.
Our neighbors also play a role on whether you follow the rules of personal finance. Our neighbors influence the size of the house, cost of furniture and size of TV that we have. Having costly neighbors' means we could go to a more amicable locality where they follow the rules of keeping finances in control and also to invest money to make more money.
It is always best not to mix with those that have extremes of income and it is advisable to spend more time with those who are following the successful financial rules.
c) Make it a rule to keep finances under control:
None of us can enjoy become financially independent and enjoy a higher lifestyle just by being casual about personal finances rules; we need to keep finances in our control.
The best rule to personal finances means being prepared for financial contingencies. This means being prepared and taking life insurance, disability insurance, auto insurance and health insurance. Purchases of any item are also to be planned well in advance.
It is advisable that one makes a balance sheet for his family on an annual basis to judge how well one is financially progressing.
Keeping finances in control also means paying bills on time and your inability means that you should find someone trustworthy that could help. Financial trouble in most people's life is caused by trauma like a health problem, an emotional problem like loss of a near and dear one or divorce or financial problem like losing a job, some unexpected expenses and cut in pay.
Being prepared for all these eventualities with sufficient emergency reserve will help you sail the boat safely in any climate.
d) The last rule is trying to accelerate all these rules for personal finance:
These first 3 rules can be fulfilled only by taking steps to fulfill and accelerate these rules. Savings can be increased by taking steps to advance and progress in one’s career that means fulfilling the first rule of making more savings to become financially independent and enjoy a better standard of life. One could increase the money one saves by lowering the amount one spends on few of the highest expenses. Next it is best to spend time with those that are financially shrewd and systematically building their wealth in their lifetime.
Surely all this could definitely bring about healthy personal finance planning.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner.He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management.He can be reached at ramalingam@holisticinvestment.in.
What to expect from a Financial Planning Report?
Life is largely a matter of expectation. We never live; we are always in the expectation of living. It is said that “Expectation is the mother of all frustration”.
What you are expecting in a financial planning report and what your financial planner offers in his report should match. If it is not matching, then it may lead to frustration. To have a long lasting relationship with your financial planner, what you expect from the financial planning report is more important.
Let us discuss it in detail here. You can clarify your expectation and start having an acceptable expectation.
1) Current status:
This section deals with the current financial status of the individual and his family. The information what you have given in the financial planning questionnaire / factfinder will be re-arranged in a tabular column for easy reference.
This will contain the details like income, expenses, structured liabilities with EMI, unstructured liabilities, list of fixed assets and financial assets.
2) Net worth:
Net worth is generally calculated by deducting your liabilities from your assets. Generally self occupied house is not considered as an asset. This net worth statement tells you what your current net worth is.
Every year when you are reviewing your financial plan, you can check how year after year net worth is getting increased.
3) Financial Goals with Values:
The list of financial goals with its expected present value will be mentioned. Also the financial planner will project the present value of the goals and will find out the approximate future value of the goals.
‘Do you need to take loans to achieve any of the goals?’ will be mentioned separately in this section.
4) Achievability of the Goals:
The financial planner checks, with your current savings and future savings potential, are it possible to achieve all your financial goals or not. If there is a gap or shortfall, he comes out with some alternative scenario like retiring at the age of 58 instead of 55, buying car at the end of 5 years instead of 3 years, buying property worth 70 lakhs instead of 80 lakhs.
5) Inflation Assumption:
Inflation rate needs to be assumed for the coming years. ‘What is the pre-retirement inflation, what is the post retirement inflation, what are all the different rates of inflation for different financial goals?’ will be mentioned in this section.
6) Suggested Asset Allocation:
To meet your goals, with your current savings and future savings potential, what is the rate of return required? The financial planner will find out this rate of return and also find out to achieve this rate of return what is the required asset allocation.
7) Report on Risk Management Plan:
Additional life insurance & health insurance cover required will be mentioned. Also the need for property insurance will be shown. This section additionally covers the amount of emergency reserve needs to be created.
8) Suggestion for Portfolio Revamp:
The financial planner makes suggestions for restructuring your existing investments in sync with the financial plan and goals. ‘What are all the investments to be withdrawn? Where the subsequent investments to be stopped?’ will be answered here.
9) Cash Flow Statement:
Cash flow statement explains what your total income is and how that income is utilised towards expenses, loan repayment and investments.
10) Investment Plan & Tax Plan:
This section covers, ‘Where the savings from the current year income needs to be invested to meet the short term financial goals as well as long term financial goals?’ and “What are all the tax saving investments to be made to reduce the tax liability?”.
11) Analysis and Recommendation:
Any other specific point to be suggested will be mentioned here. Thinks like where the fd maturity proceeds which you will receive after 2 years will be utilised, updating the residential status in some of the investments…
12) Next Review:
When is the next financial plan review scheduled?
Probability is expectation founded upon partial knowledge. A perfect acquaintance with all the circumstances affecting the occurrence of an event would change expectation into certainty, and leave neither room nor demand for a theory of probabilities.
Hope the above points clarify what to expect from a financial planning report.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
What you are expecting in a financial planning report and what your financial planner offers in his report should match. If it is not matching, then it may lead to frustration. To have a long lasting relationship with your financial planner, what you expect from the financial planning report is more important.
Let us discuss it in detail here. You can clarify your expectation and start having an acceptable expectation.
1) Current status:
This section deals with the current financial status of the individual and his family. The information what you have given in the financial planning questionnaire / factfinder will be re-arranged in a tabular column for easy reference.
This will contain the details like income, expenses, structured liabilities with EMI, unstructured liabilities, list of fixed assets and financial assets.
2) Net worth:
Net worth is generally calculated by deducting your liabilities from your assets. Generally self occupied house is not considered as an asset. This net worth statement tells you what your current net worth is.
Every year when you are reviewing your financial plan, you can check how year after year net worth is getting increased.
3) Financial Goals with Values:
The list of financial goals with its expected present value will be mentioned. Also the financial planner will project the present value of the goals and will find out the approximate future value of the goals.
‘Do you need to take loans to achieve any of the goals?’ will be mentioned separately in this section.
4) Achievability of the Goals:
The financial planner checks, with your current savings and future savings potential, are it possible to achieve all your financial goals or not. If there is a gap or shortfall, he comes out with some alternative scenario like retiring at the age of 58 instead of 55, buying car at the end of 5 years instead of 3 years, buying property worth 70 lakhs instead of 80 lakhs.
5) Inflation Assumption:
Inflation rate needs to be assumed for the coming years. ‘What is the pre-retirement inflation, what is the post retirement inflation, what are all the different rates of inflation for different financial goals?’ will be mentioned in this section.
6) Suggested Asset Allocation:
To meet your goals, with your current savings and future savings potential, what is the rate of return required? The financial planner will find out this rate of return and also find out to achieve this rate of return what is the required asset allocation.
7) Report on Risk Management Plan:
Additional life insurance & health insurance cover required will be mentioned. Also the need for property insurance will be shown. This section additionally covers the amount of emergency reserve needs to be created.
8) Suggestion for Portfolio Revamp:
The financial planner makes suggestions for restructuring your existing investments in sync with the financial plan and goals. ‘What are all the investments to be withdrawn? Where the subsequent investments to be stopped?’ will be answered here.
9) Cash Flow Statement:
Cash flow statement explains what your total income is and how that income is utilised towards expenses, loan repayment and investments.
10) Investment Plan & Tax Plan:
This section covers, ‘Where the savings from the current year income needs to be invested to meet the short term financial goals as well as long term financial goals?’ and “What are all the tax saving investments to be made to reduce the tax liability?”.
11) Analysis and Recommendation:
Any other specific point to be suggested will be mentioned here. Thinks like where the fd maturity proceeds which you will receive after 2 years will be utilised, updating the residential status in some of the investments…
12) Next Review:
When is the next financial plan review scheduled?
Probability is expectation founded upon partial knowledge. A perfect acquaintance with all the circumstances affecting the occurrence of an event would change expectation into certainty, and leave neither room nor demand for a theory of probabilities.
Hope the above points clarify what to expect from a financial planning report.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
Who Else Wants More Returns and a Simple, Hassle-free Investment Method?
What is the best investment strategy to earn more return on investments? Is there a simple, hassle-free, proven, sure-fire investment method available? Having a routine on investing, yield more rewards. Is this a true statement? How can we set a routine, that too, on investments? Is it really possible? Confused with lots of things spinning in your mind? Read ahead to get all your doubts clarified.
Have you noticed the way the women work at home, especially in the workday mornings? There will be many seeking their care for one thing or another, cooking sounds and aroma needing their attention every minute, they multitask at ease. If you keenly notice, you will be amazed at the pace and efficiency in everything they do. How is this possible, without having a degree or diploma in ‘home management’? Having a routine set in every action they do, they are able to effectively keep up with their work.
What everybody ought to know about setting up a routine investment?
You can fix a percentage from your monthly salary as an investment. Saving 10% every month from your monthly earning will be a good start. A challenge in having a routine is to keeping up with it. Whatever happens, you should never compromise on investing a fixed percentage as you have decided. How can we escape from an unexpected additional expense in a particular month? For emergencies, you can spend from your savings but never to miss adding 10% on your savings for that month.
For example, a lower middle class bank clerk starts investing 10-20% every month from his salary, when he is about 25-30 years of age. In 15-20 years down the lane, he could easily use the returns from his investments, on his family health, children’s higher education and marriage. He can set aside funds to solve each purpose and live an independent life even after retirement. The pensioners can still continue with the routine of investing from their earnings. Isn’t it a hassle-free mode of investing? Don’t ever skip; stick to the routine.
Warning: Not setting up a routine for investment may destroy your wealth…?
Not having a routine will leave you in a dependent mode or in a disaster state at a later point. You will be running around to earn at an old age when you should be living at peace. Look at Michael Jackson who earned more than 100 times compared to the bank clerk. What did he leave when he died? Michael Jackson had $400 million worth of debts hanging over him when he died.
With lack of knowledge in investments, even the once rich and famous personalities have lived in a poor state at their old age, especially when they need to have a relaxed life.
The biggest threat to your stock market investments and what you can do about it:
Investors who were very active during a bull run will not be active during the bear run. Investors who committed a mutual fund SIP will hesitate to renew when the market falls down. This is a biggest threat.
Do not stop your routine of investing on stocks, even while the market crashes. There will be less number of buyers when the investors are scared to sell. Keep going with your routine and utilize this time to buy more stocks and mutual funds, of course, for less money. Look at the history, Sensex was at its peak in 2007, but crashed and bottomed out in Mar 2009, again up in the end of 2010. If someone had invested by buying more stocks in mar 2009, he would have rewarded substantially at the end of 2010.
Instead of having and following the routine people look for short cuts and quick money or they will stay in their comfort zones by not investing. So they skip the routine and loose the returns. Routine brings more discipline.
Invest like you do shopping:
As quoted by the bestselling author of ‘Beating the Street’, Peter Lynch, "There are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more when most investors are scared into selling".
Why do people buy and shop more during Diwali or New Year? The reason is there will be a Big Sale happening in the malls because of that you will get things for discounted rate. If the price discount is more the crowd will be more.
Do we do the same thing with stock market? When the market comes down (discounted price for shares and mutual fund units) do we invest more? Instead of investing more investors will mindlessly sell. If we do invest more during the market fall, we will get compensated well for taking this audacious valiant decision.
Time to Take Action:
Now take your investment diary and write down the answers for the below questions.
What percentage of your income you are able to save regularly?
Under what situation, you may skip this regular savings?
Do you invest in stock market or mutual funds regularly?
Do you skip or discontinue your routine investments in stock market or mutual funds?
If you could have continued your routine investments (regardless of your personal situation or market situation), how much additional money you could have made?
The answers will prompt you to set a routine and follow the routine investment irrespective any adverse condition. You are on the way to the simple, hassle-free and more profitable investment method.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
Have you noticed the way the women work at home, especially in the workday mornings? There will be many seeking their care for one thing or another, cooking sounds and aroma needing their attention every minute, they multitask at ease. If you keenly notice, you will be amazed at the pace and efficiency in everything they do. How is this possible, without having a degree or diploma in ‘home management’? Having a routine set in every action they do, they are able to effectively keep up with their work.
What everybody ought to know about setting up a routine investment?
You can fix a percentage from your monthly salary as an investment. Saving 10% every month from your monthly earning will be a good start. A challenge in having a routine is to keeping up with it. Whatever happens, you should never compromise on investing a fixed percentage as you have decided. How can we escape from an unexpected additional expense in a particular month? For emergencies, you can spend from your savings but never to miss adding 10% on your savings for that month.
For example, a lower middle class bank clerk starts investing 10-20% every month from his salary, when he is about 25-30 years of age. In 15-20 years down the lane, he could easily use the returns from his investments, on his family health, children’s higher education and marriage. He can set aside funds to solve each purpose and live an independent life even after retirement. The pensioners can still continue with the routine of investing from their earnings. Isn’t it a hassle-free mode of investing? Don’t ever skip; stick to the routine.
Warning: Not setting up a routine for investment may destroy your wealth…?
Not having a routine will leave you in a dependent mode or in a disaster state at a later point. You will be running around to earn at an old age when you should be living at peace. Look at Michael Jackson who earned more than 100 times compared to the bank clerk. What did he leave when he died? Michael Jackson had $400 million worth of debts hanging over him when he died.
With lack of knowledge in investments, even the once rich and famous personalities have lived in a poor state at their old age, especially when they need to have a relaxed life.
The biggest threat to your stock market investments and what you can do about it:
Investors who were very active during a bull run will not be active during the bear run. Investors who committed a mutual fund SIP will hesitate to renew when the market falls down. This is a biggest threat.
Do not stop your routine of investing on stocks, even while the market crashes. There will be less number of buyers when the investors are scared to sell. Keep going with your routine and utilize this time to buy more stocks and mutual funds, of course, for less money. Look at the history, Sensex was at its peak in 2007, but crashed and bottomed out in Mar 2009, again up in the end of 2010. If someone had invested by buying more stocks in mar 2009, he would have rewarded substantially at the end of 2010.
Instead of having and following the routine people look for short cuts and quick money or they will stay in their comfort zones by not investing. So they skip the routine and loose the returns. Routine brings more discipline.
Invest like you do shopping:
As quoted by the bestselling author of ‘Beating the Street’, Peter Lynch, "There are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more when most investors are scared into selling".
Why do people buy and shop more during Diwali or New Year? The reason is there will be a Big Sale happening in the malls because of that you will get things for discounted rate. If the price discount is more the crowd will be more.
Do we do the same thing with stock market? When the market comes down (discounted price for shares and mutual fund units) do we invest more? Instead of investing more investors will mindlessly sell. If we do invest more during the market fall, we will get compensated well for taking this audacious valiant decision.
Time to Take Action:
Now take your investment diary and write down the answers for the below questions.
What percentage of your income you are able to save regularly?
Under what situation, you may skip this regular savings?
Do you invest in stock market or mutual funds regularly?
Do you skip or discontinue your routine investments in stock market or mutual funds?
If you could have continued your routine investments (regardless of your personal situation or market situation), how much additional money you could have made?
The answers will prompt you to set a routine and follow the routine investment irrespective any adverse condition. You are on the way to the simple, hassle-free and more profitable investment method.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
May 2, 2013
How to Invest in Stock Market - Long Term and Short Term?
Investing long term in stocks looks like a conservative mode of managing money. Is this a right statement? Will I lose my money by investing short term on the stock market? Do I reap the ‘real’ benefits with short term stock investments? Do you have such questions running in your mind all the time and in turn you move away from investing in the stock market? If so, you are reading a right material here.
How to determine whether to invest long term or short term?
Have you ever watched the reality shows happen on Indian television? Once the finalists are selected, they go public seeking votes. The artist who is popular among the public gets the most number of votes and announced as a winner, and the least becomes the loser. At times, the loser seems to be much more talented than the winner. This is how the stock market works in the short term. If you look at a person who sustains in the industry as a performer for a long time is the one who has got talent in spite of winning or losing a contest. This is how the stock market works in the short term. Not only the price of a stock, this short term popularity also creates an impact on the market effectiveness.
How the short term popularity does affect the market efficiency?
In 2008, Reliance power came with a share IPO. The issue prices of shares were Rs.450. People were anticipating because of artificially created hype, the share will re-open at Rs.900 per share when it was listed. With this expectation, this IPO got oversubscribed by 69 times. 69 times oversubscription was record breaking because of the over expectation. When the hype disappeared, popularity subsided, market realized the stock’s real worth by weighing it fairly. On the very first day of listing, these shares closed at Rs.372 which is at a loss of 17% from the issue price.
History repeats. Yes. What happened in 2008 in Indian stock market got repeated again in 2012 in NASDAQ.
Did you know the familiarity of Facebook(FB) made a chaotic situation when Mark Zuckerberg, the chairman and the CEO of FB, announced it going public in May, 2012? Nasdaq was crowded by the investors wanting to invest on Facebook. Everyone wanted to put their money on Facebook stocks, there was a huge confusion occurred with opening a trading account among individual traders, agencies and other investors. An half an hour delay occurred to begin the trading process causing a huge loss of approximately US$500 million to the banks and it took several hours to clear the situation. This particular period is now quoted as ‘it looked eternal in the whole era of high frequency trading’. As per the latest news on Mar 26, 2013, the SEC(Securities and Exchange Commission) has approved Nasdaq to pay out US$62 million to those invested on Facebook stocks.
Are you going behind the short term popularity?
The efficiency of the market can be figured out only over a long period of time. Remember what happened in 1999 when dot.com was a word uttered by all techies and non-techies. People were rushing to invest on the tech companies as if they were on a treasure hunt. Stock market created an illusion on the minds of investors that Technology sector is going to be the only future. When tech bubble burst stock market fell down heavily. Many medium sized software companies which have been hyped in the market like silverline, DSQ need to close their operations.
The hype or popularity artificially created for IT sector vanished in 2000 and investors realized the popularity was just an illusion and the stock prices of those IT stocks which have been over valued because of popularity has come down drastically and weighed by the market fairly.
Investing for long-term:
As a quote by Warren Buffet explains, “In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”
Let us take an example of a company called Balmer Lawrie & Co. This company exists in India since 1867 and LPG cylinders being used in your households are manufactured by them. They are listed in NSE as well in BSE. Do you know the compound annual growth rate(CAGR) they have achieved in the last 10 years? It is 15.4%. How many of you have invested in this company? How many of you even know this company existed?
In the financial year 2002-03 sensex closed at 3048. After 10 years, in this financial year 2012-13, sensex closed at 18835. In the last 10 years, the sensex has grown more than 5 times with a CAGR of 19.97% p.a. If you could have invested Rs.1 lac 10 years back, it should have grown to Rs.6.18 lakhs. This is the benefit of investing for long term. How many investors who make short term transactions have reaped these kinds of returns?
Going behind a popular stock as a short term trader and not looking at the intrinsic value to harvest the long term benefits will make you a substandard investor. Which group do you want to be in? Do you want to increase the risk by aggressively investing on short term stocks? Want to be in a safe place by brilliantly planning on long term stock investments and increasing your overall return? Take a right choice now.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
How to determine whether to invest long term or short term?
Have you ever watched the reality shows happen on Indian television? Once the finalists are selected, they go public seeking votes. The artist who is popular among the public gets the most number of votes and announced as a winner, and the least becomes the loser. At times, the loser seems to be much more talented than the winner. This is how the stock market works in the short term. If you look at a person who sustains in the industry as a performer for a long time is the one who has got talent in spite of winning or losing a contest. This is how the stock market works in the short term. Not only the price of a stock, this short term popularity also creates an impact on the market effectiveness.
How the short term popularity does affect the market efficiency?
In 2008, Reliance power came with a share IPO. The issue prices of shares were Rs.450. People were anticipating because of artificially created hype, the share will re-open at Rs.900 per share when it was listed. With this expectation, this IPO got oversubscribed by 69 times. 69 times oversubscription was record breaking because of the over expectation. When the hype disappeared, popularity subsided, market realized the stock’s real worth by weighing it fairly. On the very first day of listing, these shares closed at Rs.372 which is at a loss of 17% from the issue price.
History repeats. Yes. What happened in 2008 in Indian stock market got repeated again in 2012 in NASDAQ.
Did you know the familiarity of Facebook(FB) made a chaotic situation when Mark Zuckerberg, the chairman and the CEO of FB, announced it going public in May, 2012? Nasdaq was crowded by the investors wanting to invest on Facebook. Everyone wanted to put their money on Facebook stocks, there was a huge confusion occurred with opening a trading account among individual traders, agencies and other investors. An half an hour delay occurred to begin the trading process causing a huge loss of approximately US$500 million to the banks and it took several hours to clear the situation. This particular period is now quoted as ‘it looked eternal in the whole era of high frequency trading’. As per the latest news on Mar 26, 2013, the SEC(Securities and Exchange Commission) has approved Nasdaq to pay out US$62 million to those invested on Facebook stocks.
Are you going behind the short term popularity?
The efficiency of the market can be figured out only over a long period of time. Remember what happened in 1999 when dot.com was a word uttered by all techies and non-techies. People were rushing to invest on the tech companies as if they were on a treasure hunt. Stock market created an illusion on the minds of investors that Technology sector is going to be the only future. When tech bubble burst stock market fell down heavily. Many medium sized software companies which have been hyped in the market like silverline, DSQ need to close their operations.
The hype or popularity artificially created for IT sector vanished in 2000 and investors realized the popularity was just an illusion and the stock prices of those IT stocks which have been over valued because of popularity has come down drastically and weighed by the market fairly.
Investing for long-term:
As a quote by Warren Buffet explains, “In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”
Let us take an example of a company called Balmer Lawrie & Co. This company exists in India since 1867 and LPG cylinders being used in your households are manufactured by them. They are listed in NSE as well in BSE. Do you know the compound annual growth rate(CAGR) they have achieved in the last 10 years? It is 15.4%. How many of you have invested in this company? How many of you even know this company existed?
In the financial year 2002-03 sensex closed at 3048. After 10 years, in this financial year 2012-13, sensex closed at 18835. In the last 10 years, the sensex has grown more than 5 times with a CAGR of 19.97% p.a. If you could have invested Rs.1 lac 10 years back, it should have grown to Rs.6.18 lakhs. This is the benefit of investing for long term. How many investors who make short term transactions have reaped these kinds of returns?
Going behind a popular stock as a short term trader and not looking at the intrinsic value to harvest the long term benefits will make you a substandard investor. Which group do you want to be in? Do you want to increase the risk by aggressively investing on short term stocks? Want to be in a safe place by brilliantly planning on long term stock investments and increasing your overall return? Take a right choice now.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
Apr 17, 2013
Who is an “Independent” Financial Advisor?
What do investors expect from a Financial Advisor?
The straight forward answer for the above question will be “unbiased advice”. Investors expect the advice given by the financial advisor to be unbiased, neutral and independent.
What do they really get from Financial Advisors?
Most of the investors get only “misselling” in the form of financial advice. Most of the financial advisors or investment agents/brokers are following the commission based model. That is, they will recommend (sugar coated misselling) an investment scheme and you need to invest in that scheme through them. The investment company will give them commission.
As an investor if you invest in a mutual fund or any insurance scheme through the financial advisor, the advisor will get commission from Mutual Fund Company or insurance company.
The origin of Misselling or Biased Advice:
If the income of the financial advisor is based on the commission which he gets by selling investment products, then there is a possibility that he will ‘recommend’ schemes where he gets more commission. The scheme which is giving him more commission will not be really suitable to you. The scheme which is really suitable to you will not be giving him more commission. There is a conflict of interest.
That’s why you will see more agents or financial advisors try to sell you ulips, in which they make around 25% to 60% commission. For the same reason the financial advisor will not recommend you term insurance, that too no one will even talk about online term insurance. Term insurance is the cheapest form of taking insurance. Online term insurance is cheaper by 50% to 65% when compared to the term insurance distributed through agents.
Offlate, have you seen anyone recommending you PPF? Why? You will get to know the answer if you check, is there any commission for selling PPF.
Attachment Vs Independency:
If your financial advisor is an LIC agent he will be telling you ‘East or west, LIC schemes are the best’. If he is a mutual fund agent, then he may be telling you the mutual fund schemes are the best. If he is a stock broker, then he will claim ‘insurance and mutual fund will not give you better returns; share trading is the best way to make money’.
Your financial advisor should not be attached to a company or product for getting his income by way of commission. If you hire a fee based financial advisor, he will be attached to you as you are the person who is giving him fees. So he will not recommend you schemes with hidden charges. He will REALLY recommend you schemes with low charges or no charges.
Fee Based Advice and Optional Execution:
For the advice the fee based financial advisor offers, he will charge you a fee and he will give you an option for executing the investment transactions. That is he will not force you to invest through him. You can get advice from him and invest directly or invest through an investment agent or broker. If you want and feel comfortable then you may invest through your fee based financial advisor also.
In the fee based model, as an investor you are directly paying him fees. So the financial advisor will really act in your best interest.
Which group are you in?
There are two kinds of investors. One is who really want independent financial advice and ready to pay fees. The other one is who also want independent financial advice but not ready to pay fees. So they look for a commission based agent to give them unbiased advice.
Fee based advice will make money for you. The commission based advice will make money for the broker. Do you want your investments to make money for yourself or your broker?
Investors, who want to save the fees, end up paying more than the fees in the form of hidden charges in the investment schemes.
Last but not the least:
Independent financial advice will reduce your overall cost, though you pay fees. Remember, if you don’t pay a fee, you don’t get advice; you will get only ‘misselling’.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
The straight forward answer for the above question will be “unbiased advice”. Investors expect the advice given by the financial advisor to be unbiased, neutral and independent.
What do they really get from Financial Advisors?
Most of the investors get only “misselling” in the form of financial advice. Most of the financial advisors or investment agents/brokers are following the commission based model. That is, they will recommend (sugar coated misselling) an investment scheme and you need to invest in that scheme through them. The investment company will give them commission.
As an investor if you invest in a mutual fund or any insurance scheme through the financial advisor, the advisor will get commission from Mutual Fund Company or insurance company.
The origin of Misselling or Biased Advice:
If the income of the financial advisor is based on the commission which he gets by selling investment products, then there is a possibility that he will ‘recommend’ schemes where he gets more commission. The scheme which is giving him more commission will not be really suitable to you. The scheme which is really suitable to you will not be giving him more commission. There is a conflict of interest.
That’s why you will see more agents or financial advisors try to sell you ulips, in which they make around 25% to 60% commission. For the same reason the financial advisor will not recommend you term insurance, that too no one will even talk about online term insurance. Term insurance is the cheapest form of taking insurance. Online term insurance is cheaper by 50% to 65% when compared to the term insurance distributed through agents.
Offlate, have you seen anyone recommending you PPF? Why? You will get to know the answer if you check, is there any commission for selling PPF.
Attachment Vs Independency:
If your financial advisor is an LIC agent he will be telling you ‘East or west, LIC schemes are the best’. If he is a mutual fund agent, then he may be telling you the mutual fund schemes are the best. If he is a stock broker, then he will claim ‘insurance and mutual fund will not give you better returns; share trading is the best way to make money’.
Your financial advisor should not be attached to a company or product for getting his income by way of commission. If you hire a fee based financial advisor, he will be attached to you as you are the person who is giving him fees. So he will not recommend you schemes with hidden charges. He will REALLY recommend you schemes with low charges or no charges.
Fee Based Advice and Optional Execution:
For the advice the fee based financial advisor offers, he will charge you a fee and he will give you an option for executing the investment transactions. That is he will not force you to invest through him. You can get advice from him and invest directly or invest through an investment agent or broker. If you want and feel comfortable then you may invest through your fee based financial advisor also.
In the fee based model, as an investor you are directly paying him fees. So the financial advisor will really act in your best interest.
Which group are you in?
There are two kinds of investors. One is who really want independent financial advice and ready to pay fees. The other one is who also want independent financial advice but not ready to pay fees. So they look for a commission based agent to give them unbiased advice.
Fee based advice will make money for you. The commission based advice will make money for the broker. Do you want your investments to make money for yourself or your broker?
Investors, who want to save the fees, end up paying more than the fees in the form of hidden charges in the investment schemes.
Last but not the least:
Independent financial advice will reduce your overall cost, though you pay fees. Remember, if you don’t pay a fee, you don’t get advice; you will get only ‘misselling’.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
Apr 16, 2013
10 Things you may not know about PPF
One of the popular, preferred, and preeminent tax saving investments is PPF – Public Provident Fund. We all know about PPF. Do we know all about PPF? Let us discuss in detail about PPF in this article and understand it comprehensively and completely.
1) Where to open the PPF account?
PPF accounts can be opened in a post office or in selected bank branches. The regular KYC documents need to be submitted for opening a PPF account with a minimum investment of Rs.500.
2) What is the interest rate?
The current interest rate for PPF is 8.8% p.a. The interest rate will change every financial year in accordance with the average bond yield of the previous year. The interest rate will be fixed 0.25% above the 10 year government bond yield.
3) How is the interest calculated?
For the balance amount in your PPF account the interest is compounded annually. However, the interest calculation will be done each and every month.
If your contribution to the PPF account is credited on or before 5th of that month, then that contribution will bear interest for that month too. If it is credited after 5th of that month, you will get interest only from the subsequent month. Therefore, if you make sure your contribution is getting credited in your account on or before 5th of that month, and then you will not miss the interest for that month as well.
4) What is the tax benefit?
Under Section 80 C, whatever the contribution you make in PPF is eligible for tax deduction. Also the interest from PPF is also tax free.
These tax benefits are available as of now. If DTC is implemented, then the tax benefits will change prospectively and not retrospectively.
5) What is the minimum and maximum investment?
The minimum amount needed to be invested every year is Rs.500. The maximum amount of investment allowed every year is Rs.1 lac. You can make investments through a maximum of 12 installments per year. If your minor child also holds a PPF account then the combined limit of both the PPF account is limited to Rs. 1 lac.
Not making the minimum investment in a year will attract a penalty of Rs50.
6) When does it mature?
A PPF account will mature at the end of the 15th year. This can be extended for one or more blocks of 5 years thereafter.
7) Can I withdraw in between?
Yes. You can withdraw after the 6th year. However, you can withdraw only up to 50% of the balance at the end of 4th year or at the end of immediate preceding year whichever is lower. You will be allowed to withdraw only once in a year.
8) Can I get a loan against my PPF account?
Yes. You can avail the loan facility only from the 3rd year. You will be allowed to take a loan to the extent of 25% of the balance in the previous year.
9) Can an NRI open a PPF account?
NRI can’t open a PPF account. If you open a PPF account as a resident and subsequently you become an NRI, you will be allowed to continue and contribute till its maturity on a non-repatriable basis.
10) What happens if the PPF account holder dies?
In the event of the death of the PPF account holder, the balance amount in the PPF account will be paid even before the completion of 15 years, to the nominee or legal heir of the deceased person. The nominee or the legal heir is not allowed to continue the PPF account by making fresh contributions to it.
PPF is an excellent tax saving option. It needs to be part of your tax saving investment or not, depends upon your overall tax plan and asset allocation for the current year. Do your tax plan and check PPF fits into your tax plan or not in the current year.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
1) Where to open the PPF account?
PPF accounts can be opened in a post office or in selected bank branches. The regular KYC documents need to be submitted for opening a PPF account with a minimum investment of Rs.500.
2) What is the interest rate?
The current interest rate for PPF is 8.8% p.a. The interest rate will change every financial year in accordance with the average bond yield of the previous year. The interest rate will be fixed 0.25% above the 10 year government bond yield.
3) How is the interest calculated?
For the balance amount in your PPF account the interest is compounded annually. However, the interest calculation will be done each and every month.
If your contribution to the PPF account is credited on or before 5th of that month, then that contribution will bear interest for that month too. If it is credited after 5th of that month, you will get interest only from the subsequent month. Therefore, if you make sure your contribution is getting credited in your account on or before 5th of that month, and then you will not miss the interest for that month as well.
4) What is the tax benefit?
Under Section 80 C, whatever the contribution you make in PPF is eligible for tax deduction. Also the interest from PPF is also tax free.
These tax benefits are available as of now. If DTC is implemented, then the tax benefits will change prospectively and not retrospectively.
5) What is the minimum and maximum investment?
The minimum amount needed to be invested every year is Rs.500. The maximum amount of investment allowed every year is Rs.1 lac. You can make investments through a maximum of 12 installments per year. If your minor child also holds a PPF account then the combined limit of both the PPF account is limited to Rs. 1 lac.
Not making the minimum investment in a year will attract a penalty of Rs50.
6) When does it mature?
A PPF account will mature at the end of the 15th year. This can be extended for one or more blocks of 5 years thereafter.
7) Can I withdraw in between?
Yes. You can withdraw after the 6th year. However, you can withdraw only up to 50% of the balance at the end of 4th year or at the end of immediate preceding year whichever is lower. You will be allowed to withdraw only once in a year.
8) Can I get a loan against my PPF account?
Yes. You can avail the loan facility only from the 3rd year. You will be allowed to take a loan to the extent of 25% of the balance in the previous year.
9) Can an NRI open a PPF account?
NRI can’t open a PPF account. If you open a PPF account as a resident and subsequently you become an NRI, you will be allowed to continue and contribute till its maturity on a non-repatriable basis.
10) What happens if the PPF account holder dies?
In the event of the death of the PPF account holder, the balance amount in the PPF account will be paid even before the completion of 15 years, to the nominee or legal heir of the deceased person. The nominee or the legal heir is not allowed to continue the PPF account by making fresh contributions to it.
PPF is an excellent tax saving option. It needs to be part of your tax saving investment or not, depends upon your overall tax plan and asset allocation for the current year. Do your tax plan and check PPF fits into your tax plan or not in the current year.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
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