2013 has brought with it new regulations, opportunities and challenges in the domain of personal finance. On one hand, regulators are doing their best to protect investors’ interests, while on the other, new regulations and options are creating more confusion.
Below are a few basic investment strategies, which are a result of regulatory changes and market conditions, and a few practical tips on financial planning. A word of caution: before you take any step, understand the product first and consult your advisor.
This is a great investment opportunity, if you want to invest for a period of two to three years, in a safe avenue. The most popular product in this category is Fixed Deposit (FD), but chances are very high that Income Funds will deliver better return than a FD. Income funds are debt funds and do not invest in equity. Generally, Income Funds would invest in highly rated and safe bonds and deposits. So let us understand why they are better than a FD.
One reason is that Income Funds are tax efficient as compared to a FD. Where interest from FD is added to income and may be subjected to a tax of 30 per cent, the gains derived from Income Fund is treated as capital gains. If one redeems the investment after one year, the gain is considered as long term capital gain and tax out flow may be negligible, because of indexation benefit on these gains.
Secondly, the interest rates are believed to be at their peak. This is the opportunity one has to cash in on. If interest rates fall, price of the bonds will go up and vice versa. It is advisable to invest in long term Income Funds when interest rates are high and to avoid the same when interest rates are low.
If you are considering buying a life insurance policy for yourself, then remember not to mix investments and insurance. Buying a term insurance is always advisable. If at all you want to buy investment-based insurance, it is highly advisable to invest in ULIP rather than a traditional endowment plan. ULIPs are far more transparent and are subjected to very less charges. Investment-based insurance is advisable if your goal is to secure your child’s education. But make sure it is a ULIP and you (father/ mother) are the life assured.
Maintaining an emergency fund is the most important yet most ignored aspect of financial planning. It is advisable to maintain an emergency fund equal to three to five months of your expenses to tackle unforeseen events such as an accident or loss of job. It is now easy to maintain your emergency fund even in your savings bank account for two reasons. The first is that due to new regulations allowing banks to decide the interest to be given on your savings bank account, you get a higher interest rate not only on your savings bank account but also on the average balance held in the account. Secondly, from this year, there is tax exemption on bank interest of up to R10,000 earned on savings bank account.
Gold has given a return of more than 25 per cent compounded annually in the last five years, but the reason is not only the increase in price of gold it is also because of weakening of Rupee in dollar terms. In 2012, gold gave a return of around 7 per cent in rupee terms, but in dollar terms, the return was less than 3 per cent.
This also implies that in the future, gold prices may stabilise, but an investor might still get negative returns if the rupee starts strengthening against the dollar. Hence it is advisable not to be very bullish on gold. Let it be a part of your investment portfolio, for the purpose of diversification.
Also if you have been holding gold for a long time now, and the purpose was investment, maybe it is time to book some profit and rebalance the portfolio. Different people investing in the same asset class like equity will have different returns. Hence investor management is as critical as investment management. That’s why, below are a few important resolutions you can make this new year to help you create wealth.
Know where your money is going: Start writing budgets. It is the most important resolution. Keeping track of your expenses allows you to take stock of how much is spent on basic items and how much on luxuries.
Manage credit card and utility dues: Paying late fees and interest on your credit card not only affects your wealth but also your credit history. If you have any outstanding credit card or personal loan, your most important resolution should be to clear them off and never be stuck in that situation again.
Create financial goals: A majority of people look only at their current needs while investing. But they don’t know what to do with that money after it matures and comes back. It makes sense to have your financial goals in place and to know what is the specific amount you require after a specific time limit. Let the goal be your guide to deciding whether the product you are investing in will fulfill your goals.
Manage risk, buy insurance: You are the breadwinner of your family and losing you can overthrow your family’s financial planning. It is necessary to manage this risk by buying term insurance. Almost all the products in this category are similar, so look at the various premium rates and go for the maximum term available. It is also important to get health insurance, with a minimum cover of R2 lakh, because of increasing costs of hospitalization.
Start saving: Start investing in products that help you reach your goal. Don’t wait for market conditions; design your portfolio and diversify in various asset classes.
Review: Whether you are handling your own investments or have hired professional help, do a periodic review of your investments. Look at how they are doing. Are they in sync with your goals? Review your goals and their priority every year.
Saurabh Mittal is an investment advisor.