Monthly Archives: July 2015

Thursday Trivia- Top Financial Actions for someone in 20’s

finance

Top financial actions for someone in 20s

There is a great amount of stuff to deal with if you are in your twenties, looking for a partner, or to giving a right direction to one’s career. If that’s not enough there is a huge amount of peer pressure to deal with in this dramatic age, flashing the latest gadget, visiting expensive restaurants and making holiday trips. Unfortunately savings and investments are not even in the list of priority. This simple do’s and don’ts can help someone set a right direction towards building a great financial portfolio.

Do’s

  • Understand inflation – This single most factor is the biggest wealth destroyer. At young age when time is on your side, not considering inflation can make time your biggest enemy. As definition inflation is the rate at which prices of general goods and services rise, which results in decrease of purchasing power of money. Simply put if you keep Rs 10000 in your bank today, after a year in spite of nominal interest accumulation the value of your money will go down because of inflation
After 15 years @10% simple interest After 15 years @10% compounding interest After 20 years @ 10% compounding interest
25 Lakhs 42 Lakhs 67 Lakhs
  • Understand the power of compounding – “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pays it.”― Albert Einstein. This is what works when someone has time on his side. Compounding interest simply means that every year you earn not only on your original investment, but also on the interest accumulated over a period of time. Look at what happens to an investment of Rs 10 Lakhs. It’s interesting to note that one makes a profit of Rs 32 lakhs in first 15 years, but additional 5 years of time results in an additional profit of Rs 25 lakhs.
  • Create Financial Goals – To make sure that your money works for you, create goals for it. You have your career goals and targets; why not create the same for your investments? Goals give you a strong vision for your investments. Rather than looking to satisfying your needs today, look at how your investments will help you in future. Ask questions like what I will do with this FD when it matures after 3 years. As counter intuitive it may sound, start investing for your retirement.
  • Take risk management measures – Buy a health Insurance and a term insurance policy. No matter how much cover your company is providing, it pays to own an insurance policy. Don’t buy investment based policy for tax saving, or whatever returns are promised. Keep your investment and insurance separate and buy a pure risk policy.
  • Appoint an investment Advisor – A good advisor to your wealth is like a good coach to your health. A good advisor will not only help you to achieve more discipline but will also help you save (earn) on various taxation issues and other financial transaction. A good advisor talks about you more and less about the products.

 

Don’ts

  • Don’t invest in tips – “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson. This quote says it all, take right investment decisions then only review and rebalance your portfolio. Too much churning and buying and selling on tips can only help you earn experience.
  • Don’t invest just to save tax – This in line with my above point, to invest with a goal in place. Generally people invest at the last moment in a product. All they care is if their colleagues have bought the same product and is it good enough to save some tax. But that will only help today, what happens when this investment matures. Other reasons people invest are – doing an FD just because money is lying in bank, buying an insurance policy due to pressure by a relative or bank RM. Create a goal before investing
  • Don’t follow the traditional mindset – India has traditionally seen high interest rates of more than 12% and a consistent return on gold due to rupee depreciation. Hence traditionally people start investing in deposits or buying gold. Once they reach a respectable corpus, they sell most of the portfolio and buy a property. 92% of India’s household saving is in deposits, currently which are yielding below inflation. Following these traditional methods are not relevant any more. The ideal way is to create an optimum asset allocation with higher portion allocated to equity and invest accordingly. It’s a proven fact that equity is the only asset class that can beat inflation.
  • Don’t take loans – Not all loans are bad, but if you are spending money on your credit cards and taking personal loans for buying gadgets or even a car, it is a big no. If you think taking an educational loan will help boost your career, surely go ahead. As legendary investor Warren Buffet said “If you buy things you don’t need, you will soon sell things you need.”
  • Don’t be lazy on your paperwork and taxes – If you are salaried then tax on your salary is deducted at source. But that paying tax is different from filing returns. Make sure you file your returns timely and accurately. You need to disclose any other income that you might have from interest or capital gains. Also make sure to keep your papers properly. Keep copies of all your insurance policies. Preserve health policy documents even after they have expired. Don’t keep your Pan card in wallet. Have a legitimate filing for every document and keep a soft copy in cloud storage for easy access.

 

 

 

Why and how to keep your financial documents safe online 

digilocker

Maintaining records in hard copies is always one of the major task in our “to do” list. There are always risk of loss or physical damage. It is safer to dematerialize and organize papers at one place for easier access. The government too recently launched a free digital vault service, DigiLocker, which lets you store such sensitive data safely. You need to have an Aadhaar card that is linked to your cell number to open an account.

How does the digilocker platform help

  1. You can access digital documents anytime , anywhere and share it online. Obviously, convenient and time saving.
  2. It reduces the administrative overhead use of departments by minimizing the use of paper.
  3. It easier to validate the authenticity of documents as they are issued directly by the registered issuers.
  4. Self uploaded documents can be eSigned which is similar to the process of self-attestation.

How it works

To open an account you’ll have to enter your UID number. The system will send a one-time password (OTP) to your registered mobile number and email ID to validate your identity. Once registered, you can start uploading documents under the ‘My certificates’ section (see box).
You can upload scanned copies, which, if required, can be digitally signed. The locker is also a repository of all your government issued e-documents. These e-documents are uploaded by issuers, government departments or agencies such as CBSE, registrar’s office, income tax department, etc., in a standard XML format that is compliant with digital locker technical specifications. Right now, you’ll only get 10MB of space, which will be later increased to 1GB.

While the documents you upload  can be shared via email, the e-documents from governments agencies can be viewed by an authorized list of requestors such as a bank, university, the passport office or the transport department. You can also digitally sign these documents using the eSign option.

Many options

Private e-locker services have been around for some time now. ICICI Bank has an e-locker service which allows customers to log in through their internet banking or ICICI Direct like Kleeto.in that provide secure online storage for a fee ranging from Rs 200 to Rs 2,000. For a basic yearly subscription package of Rs 200, Kleeto will securely store 15 documents of five account. Then there are private businesses pages each and an online storage capacity of up to 50MB. They will pick up, scan, upload and keep the papers safe.

In case you need the originals, it will be sent to you within two or three days. A drawback of DigiLocker is it doesn’t let you compartmentalize documents. The private services lets you create folders and categorize to make browsing easy. However, cyber laws and jurisdiction remain areas of concern.

Data security

The government has ensured that your documents are safe from hackers. The OTP that unlocks your DigiLocker account gets erased immediately after use. The government’s locker is more secure primarily because the data gets stored within India and you are protected under the Information Technology Act, 2000. The account and related data being linked to the Aadhaar card gives it additional protection. If you store anything in DropBox or Google Drive, you are governed by US regulations.

UPLOADING DOCUMENTS TO YOUR DIGITAL LOCKER

Once you have registered, you can start uploading documents in the My certificates section.

Step 1: Select a document type. You’ll have options such as SSC Certificate, HSC Certificate, PAN card, Voter ID card, etc. in a drop down list.

Step 2: You are allowed to provide a name for the document.

Step 3: Fill in some details related to the document being uploaded.

Step 4: Choose the file from your local machine. It should not be more than 1MB in size and only in pdf, jpg, jpeg, png, bmp or gif format.

Step 5: Provide a short description of the document in 50 characters.

Step 6: Click ‘upload’ button. The document should now appear under the ‘Uploaded Documents’ sub-section.

Source: ET Wealth,15 Jun,2015

 

 

 

 

 

Thursday Trivia – Understanding Mobile Wallets

1851345

Mobile wallet is a service which aims at increasing convenience when it comes to online payments and money transfer. This article helps in understanding various pros and cons of mobile wallet.

Mobile wallet also called as m wallet or e wallet services are means to make digital payments from your smart phones. Instead of paying with cash, cheque, or credit cards, a consumer can use a mobile phone to pay for a wide range of services and goods. It can also be used to transfer money to others.

Like internet banking and plastic money it gives all the flexibility to transact 24*7. One can make purchases online, make utility payments, transfer funds. Similarly it helps to reduce the need to carry “real” money, which has the disadvantage of theft or loss.

Which brings us to the main question WHY MOBILE WALLET? If all the advantages are already provided by other banking services what is the need for more additional payment mode. Here are a few advantages that can motivate one to start using mobile wallets.

Used as a one stop shop to do all the financial transactions from one interphase.

  • Providing excellent technology and ease of use. Most of the mobile wallets service providers have worked hard to make banking an easy experience. (one can recharge any mobile from any service provider within 7 seconds, claims Paytm)
  • Huge discount coupons and vouchers are provided to attract customers. (Number of mobile wallet users have surpassed the number of credit cards issued in India)
  • More secured and faster as you don’t need to feed your 16 digits card number every time you transact. Also no need to share bank details to pay and receive payments.
  • It is completely free. (some service providers have charges for utility payments, but can be avoided on some terms and conditions)
  • You can load your wallet by paying hard cash, apart from net banking or credit cards. No KYC or PAN is required to store or transact up to Rs 10000.
  • Can be used for micro payments like payment of cab services. (Uber has partnered with Paytm as a compulsory mode of payment in India)
  • You can issue a mobile wallet for your child to keep a track of their expenses while allowing them the freedom to spend.

Mobile wallets is a growing market and more and more players are entering the space. There are 2 major kinds of service providers. One is banking entity where the services are provided by the bank themselves for e.g.  Pockets by ICICI, Ping pay by Axis, Payzapp by HDFC. Others are non banking entities Paytm, Ypay-Cash, Oxigen and ITZCash are the prominent players. The only difference between these are that in non banking entities even after KYC you cannot store more than 1 lakh Rupees.

To summarise, it makes great sense to register and start using one of these ewallet services. You can register for free and even in services provided by banking entities you can use the same even if you are not banking with them. Paytm is the market leader in this space with over 10 million downloads on play store.

Image source DNA.

Thursday Trivia – Understanding Insurance Riders

rider

Insurance riders help to take additional cover against specific risk at low cost on a basic insurance plan. Here is a list of riders you need and those which can be done without.

HEALTH INSURANCE

Assuming base plan sum assured is Rs 5 lakh and base premium is Rs 5,500-7,000.

WHAT YOU MUST HAVE

  Description Premium
Hospital cash

 

This rider offers daily cash (Rs 500-3,000) to meet medical and nonmedical expenses in the event of hospitalization. Payout is more for ICU stay, but is for fewer days.

 

Rs 1,100 for a cover of Rs 2,500 per day for 30 days, and Rs 1,800 for a Rs 2,500 cover per day for 60 days over base premium.

 

Room rent waiver

 

Allows a higher sub-limit or rooms without sub-limits in case of hospitalisation. This rider helps you opt for a better room without it eating into your sum insured. The other option is to buy health policies that have no cap on room charges.

 

PREMIUM: Rs 700-1,000 more on the base plan premium.

 

 

WHAT YOU CAN SKIP

  Description Premium
Surgical benefit

 

Covers 500 different surgeries. Not required if you have a comprehensive health cover.

 

 Rs 3,000-4,000 for a Rs 5 lakh added cover.

 

OPD

 

Available as add-on with health insurance plans and pays for expenses incurred as an out-patient without hospitalisation.

 

Almost Rs 15,000 for a sum assured of Rs 5 lakh (inclusive of base plan premium as OPD is an add-on cover).

 

Maternity

 

An expensive add-on. Comes with a waiting period of four to six years. A better alternative is relying on employer-provided group cover or setting aside a corpus.

 

Rs 8,000-9,000 (inclusive of base premium) with add-on restricted to 10% for normal delivery and 20% for C-Section.

 

 

 

LIFE INSURANCE

WHAT YOU MUST HAVE

  DESCRIPTION PREMIUM
Critical illness

 

A one-time lump sum is paid to substitute loss of income due to a critical illness. Covers 10 to 15 illnesses, not including pre-existing diseases. Includes a 30-day survival clause.

 

Rs 5,500-6,500 for an assured benefit of Rs 5 lakh.

 

Accidental death benefit

 

An amount over and above the death benefit is paid in the event of death due to an accident. If death occurs in a hospital, the money takes care of hospitalisation expenses.

 

Rs 6,500 for a Rs 50 lakh cover.
Accidental disability benefit

 

The rider may pay 100% of the sum assured in case of permanent disability. Only a portion of the assured sum is paid in case of partial or temporary disability.

 

Rs 5,500-6,000 a year for a Rs 50 lakh cover.

 

Waiver of premium

 

This is helpful in a child plan. In the event of the parent’s or policy proposer’s death or disability, future premiums are waived. Rs 200-300 more on the base premium

 

 WHAT YOU CAN SKIP

  DESCRIPTION PREMIUM
Accelerated death benefit

 

Pays all or part of the benefit even before the insured’s death if certain conditions are met. It is beneficial for those who are terminally ill and want to use the money for treatment.

 

Rs 1,500-2,000 more over base plan premium.

 

Income protector

 

Provides death benefits and a monthly income (1% of sum assured per month) to beneficiary if insured dies before policy lapses.

 

Rs 1,000-1,500 more than base plan premium.

 

With Inputs from ET Wealth

Thursday Trivia – 7 behavioral biases that stops you from making money

So many things have been written and read about finances. Some people read it while majority of them ignore and refuse to learn about this important area of life. Some are so sure that they will not understand finance that they have developed a fear in this aspect. This article specifically is addressed to those majority and its only about you and nothing to do with numbers or finance jargon.

In 2001 Dalbar, a financial-services research firm, released a study entitled “Quantitative Analysis of Investor Behavior”, which concluded that average investors fail to achieve market-index returns. It found that in the 17-year period to December 2000, the S&P 500 returned an average of 16.29% per year, while the typical equity investor achieved only 5.32% for the same period – a startling 9% difference!

In my view knowledge, skills and information about finance is only secondary to your behavior for making money, for the very reason that all of it tend to be colored by your behavior. Hence read on and may be you can identify yourself with any of these biases, which have been big blocks in your path to prosperity

 

  1. Loss Aversion/ Regret Bias – It is estimated that losses are felt between two and two-and-a-half as strongly as gains. Thus the pain of losing Rs10000 is at least twice the pleasure of gaining Rs10000. This also explains why investors hold onto losing stocks: people often take more risks to avoid losses than to realize gains. That is why investors might choose to hold their losers and sell their winners: they may believe that today’s losers may soon outperform today’s winners. Real Life case – I met this person who claimed that in past one year of his history he has never lost money on equity trading. More than being impressed I was astonished only to find out that he had taken delivery of all the loss making trades and called them long term investments
  2. Confirmation Bias – We tend to suffer from confirmation bias and thus reach a conclusion first, only thereafter do we gather facts and then see those facts in such a way so as to support our pre-conceived conclusions. We like to think that we carefully gather and evaluate facts and data before coming to a conclusion. But we don’t. Real Life Case – Due to some astrological suggestion one of my client has concluded that he will make more money in real estate than in any other asset. Every time I speak to him about asset allocation he tends to support real estate with all the collected information and has a portfolio heavily skewed towards it.
  3. Choice Paralysis – Intuitively, the more choices we have the better. However, the sad truth is that too many choices can lead to decision paralysis due to information overload. In my view either ways it leads to inaction. Too many choices confuse us and not having too many choices lead us to “Aur dikhao” syndrome. Real Life Case – I wanted to buy a wallet and could not find too many options in a leading multibrand store. I decided to go online and was so puzzled with the amount of choices and information that ultimately I ended up not buying anything.
  4. Herd Mentality – This is the tendency to follow the crowd due to the strong desire among humans for peer approval. This makes it difficult for us to act based on our personal convictions or in a contrarian manner. Real Life Case – Reliance power IPO, is one of the best example of herd mentality. In 2007 ADAG group announced this IPO and everyone wanted to subscribe it. I remember people opening demat accounts just to apply for this IPO
  5. Availability Heuristic – This is simply our tendency to jump to conclusion based on easily available information. Perhaps most significantly, we inherently prefer narrative to data. Stories about how people have lost money in shares and stories about how a property bought for few lakhs years ago is now worth crores influence us strongly. This is probably one most dangerous short cut we tend to take while taking an investment decision. Real Life Case – This person I met invested in mutual funds. Since he did not wish to hire an advisor and nor had the time to research, he equally invested all his money in 5star rated funds.
  6. Recency Bias – It’s the tendency to extrapolate from the recent past and to think that a trend will continue in the future as well. This bias makes people plan things in a way that is completely detrimental to their finance. People tend to see a recent history of performance and assume that the trend will continue. Real Life Case – In 2007 many life insurance agents sold ULIP showing the returns in recent years. The most common pitch was that if the insured pays only for 3 years(regulatory requirement) returns generated will be enough to cover all the future premiums. This one person I met around same period was absolutely in love with ULIPS because he saw amazing returns on ULIP which he had never experienced on traditional plans and fixed deposit.
  7. Anchoring – In the absence of better or new information, investors often assume that the market price is the correct price. People tend to place too much credence in recent market views, opinions and events, and mistakenly extrapolate recent trends that differ from historical, long-term averages and probabilities. In bull markets, investment decisions are often influenced by price anchors, prices deemed significant because of their closeness to recent prices. This makes the more distant returns of the past irrelevant in investors’ decisions.

These cognitive biases plague us and make it difficult for us to make good choices. Knowing about them is imperative if we are going to deal with them.  We would always be wise to factor in these biases when performing analysis and making decisions. Unfortunately, we all tend to share a “bias blind spot” — the inability to recognize that we suffer from the same cognitive distortions that plague other people.