Today, I am going to debunk a few investment myths that will help you know why individual investors are failing miserably and how you can avoid being one of them.

I am too young to plan for retirement

Have you started planning for your retirement? You may be saying ‘who me? I am too young to be thinking about retirement”. It is not so! Rethink. You should have started thinking about it yesterday. Because time flies quickly.

If you were smart, and planned for retirement when you are young, your retirement years will be really those “Golden years”. If not you need to compromise and you need to work longer and retire later than others.

East or west FDs are safe and best

Nothing wrong in investing in FDs. FDs are really safe and it gives us fixed return. But there is no meaning in investing all your money in FD. The post tax return of an FD will hardly beat inflation. If your investments are not beating inflation, then your money is losing its purchasing power. FDs are safe but not always the best option.

I can never be as good as Warren Buffet or Rakesh Jhunjhunwala so why try?

In the words of Warren Buffet “Success in investing doesn’t correlate with IQ once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” You don’t need a super brain for making investment decisions. You only need common sense and discipline. If you don’t have enough time and expertise, then you can get assistance from professional financial planners.

The best way to make money is investing in what is hot

If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting. You will not get anything more. You need to be fearful when others are greedy and you need to be greedy when others are fearful. So don’t go by the market trend or the hot pick of the month. Think like a contrarian and follow value investing.

Stock markets can earn me quick bucks

This is a common myth among investors. Stock market will reward the long term investors. Stock market is a system which transfers money from investors who are fearful and greedy to the investors who are balanced and rational.

You need to be calm, patient, disciplined, and rational. You don’t have to be smarter than the rest; you have to be more disciplined than the rest.

There is no such thing as too much diversification

Diversification is needed. A well diversified portfolio can be created with 10 stocks or 3 mutual funds. Having more than 20 stocks or 6 mutual funds can dilute your returns. The reason is you are not only investing in best stocks and funds, you are investing in above average and average stocks and funds. So your returns will come down. Instead of over diversification, you need to concentrate on a few stocks. It is possible to achieve the required diversification with a few stocks or funds.

Timing the market is important

Investors often spend a lot of their time in trying to identify when the market is very low or high, and timing the purchase and sale of investments accordingly.

In other words, they want to time their exit when the market has reached its top and to time their entry when the market has reached a bottom. This not a practical idea because there are so many influencing factors to the stock market. Predicting all the factors and making investments is practically not possible.  Instead of that stagger your investments through SIP, STP and stay invested for long term.

Saving tax is the only objective for me to Invest

Which group you are in? There is a group of people who invest just to save taxes. They will not bother to invest anything more than that. They will meet their objective of saving tax. There is another group which invests to save tax as well as to save for their other life goals like retirement, children’s future. They will meet the objective of saving tax and achieving other life goals. Kindly check you belong to which group.

You can be an assured successful investor if you could avoid these investment myths.

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The age-old way to make money in stocks is “buying low and selling high”. At first glance, it may sound very easy; but do you know how to implement it?. Well, only the smart investors know the answer of this  million dollar question. Investing with emotions is a serious error, but you can benefit from emotional extremes of others to pick out-of-favor gems for your portfolio. The key to identify profitable out-of-favor stock is to apply sentiment analysis and some simple stock picking techniques as explained below.

What is Sentimental Analysis?

Sentimental analysis is the process of measuring investor attitudes toward the securities markets. The goal is to determine if investors, or the crowd, are bullish or bearish toward the market.

History of Stock Market has repeatedly proved that investors are not always rational. Just as they can bid up the price of a growth stock too high because they are so enthusiastic about its prospects, they can also pummel a good stock that has momentarily slipped to unrealistically low prices. That’s where bargain hunters swoop in.

When studying market sentiment, the smart investor often takes a contrarian approach especially during extreme highs or lows in the Stock Market. That is, if others are predominantly bullish, the smart investor will be bearish (sell stocks). If, on the other hand, the crowd is bearish, the smart trader will turn bullish (buy stocks).

When everyone around you is bursting with enthusiasm, as is the case in a profitable bull market, smart investor may take contrarian view and get out to what their heart (and net worth) is saying. Conversely, buying when “blood is running in the street” takes nerves of steel. But it’s this contrarian way of thinking that can help you to avoid buying the tops and selling the bottoms.

How to identify Out-Of-Favor Stocks?

The easiest way to spot neglected stocks is by looking for low PE ratios. A PE ratio of less than 10 signals that investors do not have much hope for the future of the company, which may, in fact, be an incorrect perception of the situation. The moment the company reports better-than-expected results, perceptions can change quickly, and the stock price can shoot up. Do your research first. Don’t be tempted to buy any stock with a low PE ratio, however. Some companies deserve their lowly valuation and, in fact, will not recover. Moreover, in certain industries even a PE of 20 could be considered cheap.

For example, to provide you a good starting point; here is a list of Stocks that are available at less than half of their 3 year highs & less than 20 times PE & are experiencing on the ground recovery as apparent from their sales & profit growth, both on an annual as well as sequential basis.

In addition to a low PE ratio, bargain hunters usually look for industries that are currently out of favor. They also seek stocks with low price-book value ratios because such stocks are typically out of favor. Another sign of benign neglect is when few of the shares are held by institutional investors, such as FIIs, DIIs, or mutual funds, because it is not fashionable to own such depressed stocks. Finally, if brokerage analysts do not pay attention to a stock, it is probably out of favor.

What you should look for is a stock with a fair chance at turnaround. You may infer that a recovery is on the way if sales and earnings are no longer deteriorating or if the company has a new product or service that has the potential to restart its growth. Another way to check for signs of life is to determine whether company executives are buying the stock themselves and whether they are increasing capital expenditures. If the people who know the company best are investing in it heavily, that could be a tip-off that recovery is at hand.

However, you need to remember that not every ugly duckling turns into a swan. If your stock remains depressed after a year or more, you probably should turn it in for another one. It takes only one or two dramatic recoveries for this strategy to pay off.

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Investors often have many misconceptions about investing in mutual fund schemes. They think Mutual Fund NFOs and Company IPOs are alike,  consider mutual fund dividends as extra returns, or even feel investing that investing in Stocks and Mutual Funds are similar. This article will demystify all these misconceptions.

#1 Mutual Fund New Fund Offers (NFOs) can generate amazing returns

A new fund offer is not likely to generate amazing returns as can be the case with an initial public offering from a company. This is because the NAV reflects the market value of the stocks held by the fund on any day. Because a fund holds several stocks in its portfolio, the NAV can only reflect the combined returns on the portfolio between the NFO date and the date of first NAV.

The first NAV declared by a fund can, at times, be lower than the par value of investment. A lower NAV does not mean a cheaper fund: Just because a New Fund is issued at Rs 10, it does not mean it has a chance of giving better returns than an existing fund that has a higher NAV.

Whether the scheme in which you are planning to invest has an NAV of Rs.15 or Rs.150 does not matter at all.

There is a difference between the price of a listed security and the NAV of a mutual fund scheme. Listed security has a price, determined by the demand and supply of the security. Whereas the unit’s NAV of the scheme has a value determined mathematically, by the prices of the securities in the portfolio. If the portfolio appreciates by 10% Rs.15 NAV will become RS.16.5 and Rs.150 AV will become Rs.165. So in whatever the NAV you invest your investment will fetch you 10% return.

So instead of concentrating on LOW NAV and more number of units, it is worthwhile to consider other factors (performance track record, fund management, volatility) that determine the portfolio return.

A fund with higher NAV may give higher returns than a lower NAV fund, if its stocks did better in the markets.

#2 Equity Mutual Funds and Stocks are one and same

Though both an equity fund and a stock extend market-related returns, there are some key differences between the two.

#3 Dividends of Mutual Fund Scheme are extra returns

Immediately, after the dividend payment of dividend the NAV of the fund will fall to the extent of the dividend payment. Let us illustrate.

Fund’s cum dividend NAV is Rs.25. Proposed dividend is 50%. You are investing Rs.1 Lac and you will not get Rs.50000 as dividend. It is only Rs.20000 (50% on the face value Rs.10 is Rs.5 per unit) as the unit price is Rs.25 you will get 4000 units. Rs.5 dividend * 4000 units=Rs.20000.

And this dividend is not an additional gain or income. After payment of dividend the NAV of the scheme will fall to the extent of the payment and distribution taxes (if applicable). Now your NAV will become Rs.20 and your investment value will be Rs.80000 (4000 units * Rs.20 NAV).

In a nutshell,

• Investment amount : Rs. 1,00,000
• Dividend amount : Rs. 20,000
• Present Value : Rs. 80,000

It is no different than investing Rs.80000 after dividend distribution at NAV Rs.20. So investing in a scheme because it is declaring dividend in the near future is meaningless. Usually a company with a liberal dividend policy may enjoy greater investor interest in the stock market. The same is not applicable to an equity-oriented mutual fund.

#4 Investing more number of Mutual Fund Schemes will diversify your portfolio

Not exactly, it may actually reduce your return. Owning several mutual funds doesn’t necessarily broaden your holdings. It will be a mistake to buy the same securities over and over again in different funds with different names. You tend to believe they’re diversified. But it is not real diversification.

There are only very few funds which are performing consistently. Instead of investing in few funds, if someone chooses to invest in more number of funds (because he intends to diversify) he may be forced to choose some average performing schemes also. As a result his returns will be diluted. The step taken by the investor to diversify his investment is not leading to diversification but to dilution of return.

Thus ideally your portfolio should not have more than four-five top performing funds.

#5 Portfolio Churning will reduce scheme returns due to tax liability

When we buy shares and sell them within a year we are accountable for short term capital gain tax at the rate of 15%.

But mutual funds provide the benefit of churning of stocks with no tax implications. A fund which churns its portfolio within a year is exempt from tax because it only redistributes these profits to investors.

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Getting married may seem like the most natural progression in the world when you have found the person you want to spend the rest of your life with. However, while it should be the easiest decision in your life to make, it is the subsequent decision-making about how to merge and mange two lives together, which can take some time.

That is why there are some important steps you need to take in your personal finances both before and after you get married to make sure money matters are just as easy to deal with.

How to Establish Personal Finances Before You Get Married

When you first get engaged friends, family and even strangers will be wishing you well and while it is easy to get caught up in the excitement of planning your big day and your perfect married life, it will take more than good wishes to make those dreams a reality. Therefore, before you get married, make sure you discuss and manage your personal finances by:

1. Communicating

Communication is important for any relationship and is especially important for the success of your finances as a married couple. The first thing you should do when you decide to spend your lives together is to sit down and bare all. This means telling your fiancée everything about your personal finances, and hearing everything about theirs. You’ll want to know about debts, savings habits and plans for the future.

As part of this discussion you will also need to put plans in place for the day to day management of your joint finances. You may choose to appoint one person to manage all bills and accounts, or you may decide to set aside time each week to pay bills together.

The decision to have a joint account is different for each couple, and you need to find what works for you. To help you initially adjust to joint finances, you may choose to keep your individual transaction accounts and open a joint account where you transfer funds to cover bills and joint expenses like rent.

Whether you keep separate accounts or open joint accounts, you should always make sure the other person is consulted in purchasing decisions. The easiest way to do this is set a price limit for purchases which need to be discussed, this means you don’t have to ask about every $5 purchase, but at $100 for example, a quick consultation can avoid going over budget, or disrupting any plans for those funds as a couple.

2. Understanding and managing credit and debt

The debt and credit card conversation is not going to be an easy one for many couples because when you get married, debt repayments are eating into the joint funds which should be being used for your future together. Plus, you’re planning a wedding and so your spending is higher than normal too, but now is a good time to get your credit under control, and stop using your credit cards if you can’t repay them in full each month.

It is also important that you know each other’s credit scores because once you are married and go to buy a house together for example, one partner’s bad credit score can make it impossible to obtain a loan. You can obtain a copy of your credit report for free and you’ll be able to see the effect of your current debts and personal loans. You’ll also be able to check for any mistakes on your credit report which could be damaging in a loan application, and if these marks against you have been made in error, the sooner you know about them the sooner you can have them removed.

Next you’ll need to calculate your net worth, which is the difference between what you own and what you owe. This will tell you how much you are worth, and if your net worth is in the negative, then you will need to do something about getting rid of some debts, and building up your asset base. You should start by making bad debt your priority to repay and this includes personal loans, car loans and credit cards.

Create a debt repayment plan by setting a goal date you would like to repay one car loan and all of your credit cards for example, and work out what you need to do to get there. Do you need to channel your savings onto your debts, or do you need to make lifestyle changes to free up more funds in your budget for higher repayments?

It is also important to think of individual debts as joint debts, even before you are married. Even though debts incurred before the marriage an in only one person’s name remain theirs after marriage, remember that you are now a team, you’re on the same side and you should both be working towards a debt free future, together.

3. Budgeting

Now that you have discussed your finances you know what is coming in and what is going out – and where it’s going. It is now time to put all of that information into a budget so you can both stick to the spending limits, make sure all bills are paid on time, and continue to spend less than you earn to steer clear of new credit card debts.

You may want to use a piece of paper, the spreadsheet program already on your computer, or purchase dedicated money management software. Regardless of the method you use, you should both be able to see at a glance what has been spent, what needs to be paid, and how much is left for a little indulgence this month.

4. Saving

Before you get married there are a lot of milestones still ahead of you – wedding, honeymoon, house, children…and these will all cost money, more money than you’ve probably spent on anything in your life to date. Therefore, you need to start saving as a couple in earnest, and you’ll need to focus your savings on two things – the future and emergencies.

You can do this by opening an online savings account which allows you to create sub accounts. Online savings accounts won’t give you access to your funds through an ATM or EFTPOS card but will make it easy to deposit from your transaction account, and even directly from your wages. You can then allocate sub accounts so you can save for all of the big events coming up in your life, and you can also build an emergency fund so you can avoid having to resort to a credit card when an emergency expense arises.

5. Getting expert advice

You and your fiancée probably already have an accountant each, but now is the time to merge service providers too, and look at your financial needs as a couple, with a financial advisor. Not only can your advisor help you plan for your future based on your new financial circumstances, but they can also make sure you are getting all of the benefits you are entitled to as a couple for tax purposes for example.

6. Plan for the future

With all of these personal finance strategies in place, you can finally get excited about planning your future. Discuss where you want to go and when you want to get there, and the how will come from the savings and budgeting practices you have put in place before you’re married.

However, make sure you don’t get carried away with your planning when it comes to your wedding, because now that you have a clear understanding of your finances as a couple, you should plan your wedding on a corresponding budget. After all the work you’ve put in to organise your finances before you’re married, you don’t want to return from your honeymoon to a mountain of debt.

How to Manage Personal Finances After You’re Married

Once the honeymoon is over, it is time to settle into the reality of a marriage, and managing joint personal finances. While discussing and planning for this time before you were married may have seemed easy, sticking to a joint budget and discussing every large purchase can quickly take the shine off of wedded bliss. That is why you need to continue to communicate and work together, always remembering you are working towards the same goal. You can do this by:

• Communicating. As soon as you start avoiding talking about money with your spouse, or hiding new purchases then you are going to deviate from the plan, and it will be hard to get back on track.
• Having money discussions. Instead, of ignoring issues with your finances, talk about it with your partner and if something isn’t working, work out why. You’ll then be able to find a solution together, and that is what marriage is all about.
• Monitoring net worth. Your net worth is a good indicator of how well you are sticking to your budgets and financial plans, and as a couple you should revisit your net worth each month to make sure it is going up and not down.
• Revisiting your goals and plans. It is all very well to make plans for the future, but we all know that unexpected events can pop up and change these plans. Therefore, make sure you continue to track your progress towards your goals, and readjust your ideas for the future if necessary.

In this communication it is also important to work together in practice too, and this means knowing who is responsible for paying the bills and how the savings contributions are made for example. Also make sure you have a sufficient emergency fund for your current circumstances because as your liabilities and responsibilities change, you may need more money than before to cover monthly expenses in case you are unable to work or lose your job.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

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Financial planning is one of the most important aspects of your life and it is important for you to plan your finances in order to ensure financial success and have a stress free life. Personal financial planning involves various aspects that you have to consider in order to have a smooth financial life. These aspects include budget making, investing, saving, planning for your retirement, buying adequate insurance coverage, etc.

You must follow a few personal finance tips in order to ensure a healthy functioning of your finances. These tips are as follows.

1. Spending less than your earnings: It is important for you not to spend more than what you earn or more than what you can afford. Buy things that you need and not things that you would never even use. Try to cut costs in various areas so that you can save for difficult times. You do not need to make very big sacrifices; a little effort from your part can do wonders.

2. Formulating a budget: Make a budget for yourself that you must follow. Include all your expenses in the budget and subtract the total expenses from the total income that you get. What is left behind is the amount of money that you will be using to pay your debts. Making a budget helps you understand where you are spending your money. You get a clear picture of your financial situation and can decide how to plan your finances accordingly.

3. Insuring yourself adequately: Buying insurance is a very important part of financial planning. Insurance protects you financially from any unforeseen situation. Thus, it is essential to get adequately insured. Having life insurance is something that must be a part of your financial planning as you must protect those who are depending on your income.

4. Contributing towards a retirement plan: You must save for your retirement while you are still earning. This is because once you retire your income will be gone but your expenses will continue to rise. So find out from your employer if they are offering a 401(k) plan. If they are, then you must start contributing as much as you can towards it. In case your employer does not offer such plans you can consider alternative measures such as IRAs. If you are already contributing towards a retirement plan, then try and contribute a little more.

These are a few tips that can help you in leading a debt free and comfortable life. You must follow them to make sure that your finances are always in order.

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If you are looking for tips to access your home equity you have come to the right place. One of the biggest benefits of home ownership is that you can use the equity that you have built of to fund other ventures. For a great number of people their home is the biggest investment they will ever make. In turn it is also the biggest asset you will ever have so make sure that you leverage it effectively. By using your money in an effective manner you can build wealth and financial freedom.

Top Eight Tips To Access Your Equity

One – Get together lots of data about equity and lenders. Do not just settle for the first lender that knocks on your door, and trust that they will. Just as soon as you have built up equity there will be plenty of lenders looking to loan you cash. Make sure you get one that offers great rates and terms and is a member of SHIP.

Two – Get professional assistance. Financial advisers can help you a lot when you are looking at your entire financial life. Find a good one that is truly a financial adviser and not just looking to sell financial products. Their input can help you make better choices regarding cost, tax issues, and how using the tips to access your equity may affect other benefits.

Three – Always look at other options. When you access your equity you are also going to take out another stream of financing that will have to be repaid with interest. This is not always the best choice for every financial situation. If you are unsure do some research to make certain it is your very best option.

Four – Keep in mind that slow and steady often wins the race. It may take months or even years for you to research your choices and to make the best decision for your finances. Do not allow anyone to pressure you into making a decision before you are absolutely ready.

Five – Talk to your partner and family. If you are married or have children accessing your equity will directly affect them so be sure to talk to them about your plans and remain open to their input. Even if you decide to ignore their recommendations it is always good to get some second opinions and try to understand how your choices affect others.

Six – Get organised. Before you can approach a lender with a serious request to access your assets you will need to have proper documentation in order. This will include, but not be limited to, proof that you have home building insurance, proof of your identity, and proof of marriage if you are married. It is better to get all of this documentation together so that the process can move along swiftly and smoothly.

Seven – Be ready for the valuation. Your lender will want to have an independent assessment of the value of your home. This assessment might be less they your estate agent’s assessment. Try no to let this be discouraging and understand that from this your lender can get a better idea of how much money you can be loaned.

Eight – Use a professional solicitor. You can look on the National Solicitor’s Network to find one in your area. Their job is to protect the interests of both you and your lender by making sure you understand the terms and conditions of your agreement.

Of course, all of these tips to access your equity come with the caveat to be patient and use your money wisely. Whether you are investing it into your future or financing your dream holiday make sure that you use it in a way that makes you happy.

This article was written by William. William writes about saving money, property investment and real estate for a home loan comparison service Home Loan Finder. If your looking for a home equity loan, visit the Home Loan Finder website for great advice and to compare home loans today.

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Prosperity can only come by properly balancing the four key personal finance components i.e. earning, spending, saving and investing. If we avoid any one of these, we are bound to face consequences sooner or later.

A retirement plan is an assurance that we will continue to earn a satisfying income and enjoy a comfortable lifestyle, even when we are no longer working. Still we avoid planning for our retirement until we are almost there. These are the most common excuses people have for NOT planning for retirement.

Excuse #10: “I’m too busy”

So many people want to plan for a better retirement, but they don’t have time. They think they’ll take care of it tomorrow or the day after that… and before they know it, several years have gone by. The best advice to such people is to stop procrastinating and start a Systematic Investment Plan today.

Excuse #9: “It’s too soon”

This excuse is often given by people who are in their early 20s and 30s. To them Retirement is too distant and they want to enjoy their life today. This is totally incorrect. The truth is, the sooner you start planning, the better chance you stand of having the kind of retirement you want. It’s never too soon, start now, save more, retire rich.

Excuse #8: “It’s too late”

If you’re already near or past your retirement eligibility date, you may think that whatever you’ve got is what you’re stuck with and it’s too late to do anything about it. Think again. If you’re unsure of what your options are, speak to a professional. Even if you’ve already retired, it’s important to consider how you’re receiving income and how long it will last. It’s never too late to revise your income distribution strategy.

Excuse #7: “I don’t need to”

Many people think that because they’ve been diligent about contributing to a savings account, or have a retirement policy from an insurance company they’re all set. Are you certain that what you’re saving will be enough? What about taxes? What about inflation? And are you sure your money will be properly invested? While saving for retirement is good, there may be other, better options for you and it may prove worthwhile to look into them. You also need consider adequate investment in diversified investment avenues such as equities, bonds, real estate and gold as per your risk profile. A plan for income distribution once you enter retirement is very important.

Excuse #6: “I don’t have enough money to get started”

This excuse seems trivial at first glance, but there is some truth behind it. You need to have money to save or invest money. The biggest challenge many of us face about investments is finding enough surplus funds. Most of the time we are engrossed in balancing our income and expenses that we feel that we don’t have enough money to save or invest. However, you don’t need a million to start investing, you can start with a humble sum of Rs.500 per month and see it grow.

Excuse #5: “My finances are a mess”

This all the more reason to seek an advisor who can help you sort through and understand your assets. Consider speaking with an advisor who can look at your complete financial picture, help you to understand it, and help you to develop a plan to make your “financial mess” work for you. Remember, you can save some money even if a major portion of your income go in servicing various debts – EMIs for car loan, home loan, personal loan or for that matter credit card bills that you’ve accumulated. Draw up a personal budget and stick to it. As Warren Buffet advises, you need first set aside money for investments before thinking about spending it.

Excuse #4: “My family will take care of me”

While, this could have been a valid reason few decades back, but the Social Structure in India is fast changing. The joint family system is getting replaced by Cellular Families. An increasing number of young Indians especially in the urban area are staying away from their families due to employment. Hence people have to develop a corpus to last them through their retirement without any help from family. While your family may still take care of you post retirement, don’t bank on it alone, create a back-up plan at the very least.

Excuse #3: “I have investments provident fund and pension plan, I’ll be fine”

Provident fund is a good tool to save regularly for long term, however it alone can not cover your needs and requirements post retirement. Also, the pension plans (either self-contributed or provided by employer) may fall short of covering your expenses. Furthermore, life expectancy is increasing, so probably you will have to fend for more number of years post retirement. Will your assets last that long? If you outlive your income, what then? You need to have a diversified portfolio of investments for your retirement. It’s a good idea to look ahead and plan lifelong income.

Excuse #2: “I don’t want to think about it”

Many of us are simply afraid of taking financial responsibility or growing old. Well, whether you like it or not, you can not avoid either of the two. But consider this, if you overcome your fear and set a financial plan in motion, you may not have to think about it again for quite some time. It may also give you more confidence to overcome your fear once and for all.

Excuse #1: “I don’t know how”

You don’t need to be a computer engineer to work on a computer. Similarly, you don’t need any advanced knowledge of finance to do your retirement planning. While it is possible to do everything on your own, that generally involves a great deal of research and a huge ongoing time commitment. If you’re putting off retirement planning because you don’t know how, consider speaking to a professional who does and start investing.

Conclusion

Whatever may be your excuse, don’t wait any longer. Unless you start early, you might find that time has passed you by. You will get older, your children will have growing needs, your expenses will rise…..and, before you know it, you may be regretting not planning for the future. Don’t be complacent that you will be okay whatever happens. Plan for your Retirement, today!

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Each type of investment has distinct advantages and disadvantages, and because each tends to behave differently in different types of economic mood swings.  Your retirement portfolio should be broadly diversified and well balanced to last for your and your dependant’s life time. Your may have various financial assets viz. shares, debentures, gold, bonds, life insurance, annuities, mutual funds, fixed deposit, company deposits, PPF, monthly income schemes, national savings certificates, etc in your portfolio. In addition to this it may also contain tangible assets that can take the form of gold, silver jewellery, precious stones like diamonds, real estate, painting, carvings etc. and other collectibles. You may also have some insurance to cover risk.

But, how can you be sure that your portfolio has all the components adequate enough to cover all your retirement needs? Let’s review various factors that you should consider while building your Retirement Portfolio.

Your Attitude Towards Risk

Firstly, understanding your attitude towards investment risk is very important. Normally we come across two types of investors :

1. Risk takers: They are willing to take high risk to get high return on their investments. They have high-risk tolerance. Their portfolios consist of equities, growth schemes of mutual funds, unit linked plans, variable annuities, real estate and long term deposits. The proportion of risky assets in the portfolio is higher as compared to safe assets.

2. Risk averse: Generally, a large number of people are risk averse. They want to optimize the rate of return on their portfolio with minimum risk. They invest in diversified assets to minimize the risk of their portfolio. Their portfolio of assets varies from low return- low risk fixed deposits to high risk-high return shares. But a smaller proportion is devoted to equities and growth schemes of mutual funds and a large proportion is devoted to low and medium risk assets. Their investments include short-term deposits, fixed/variable annuities, government bonds, mutual fund units or monthly income scheme.

Both these investment strategies are good, however you need strike the right balance depending on your age, your investment time horizon and your current financial situation. Remember, the primary objective of retirement planning is to generate regular income after retirement.

Let us assume that the person gets a regular income of a fixed amount. This amount may be sufficient to start with. But inflation can result in increased financial needs over a period of time and the regular fixed income may become insufficient to meet the needs after a period of time. Hence, your portfolio should beat the inflation so as to generate a comfortable stream of income throughout your life. This is only possible, if you take balanced approach and review and adjust your portfolio frequently.

How to determine the right portfolio mix?

You can follow a general rule of thumb (i.e. 100 minus your Age) to determine the allocation to risky assets in your financial portfolio. So, when the retirement is long way off, it is desirable to take greater risk to accumulate wealth but as a person reaches the retirement date he/she should change his attitude towards risk and adopt a more risk-averse investment strategy.

For example, when you are in your 20’s you can have upto 80% of your investments in Equities, Equity Mutual Funds or Unit Linked investments and 20% in Fixed Deposits, Bonds, NSC, etc. As you grow older allocation to fixed rate investments avenues needs to go up and market linked investments should be reduced gradually.

Failure to reduce the market linked investments as you grow older can cause severe consequences. Imagine, what will be the return on your portfolio if the share market collapses? When such a situation arises, the portfolio return reduces to zero or may even some times become negative i.e. principal loss, and then you will have to wait till the markets rises again. If the situation does not turn around in a short period, it will be very difficult for you to maintain your standard of living post retirement. Never ignore your risk tolerance.

While it is important to take greater risk early in the accumulation phase, bring down the risk exposure as you approach closer to your retirement to preserve and nurture accumulated wealth.

Liquidity of your Retirement Portfolio

After risk and return, portfolio liquidity is the important factor, which you should think of while planning for post retirement. Liquidity refers to the ability to buy or sell an asset without inordinately influencing the price at which the transaction is consummated.

Often, to preserve tangible assets such as, gold, silver jewellery, precious stones like diamonds, real estate, painting, carvings etc. maintenance cost by way of insurance and storage would need to be incurred. During the post retirement period, if this maintenance cost is draining your retirement income, you might have to liquidate them and convert them into income producing assets. Assets like real estate, other than self-occupied house may be systematically liquidated over a short period of time to make the investments liquid. Alternatively, you may consider renting out such real estate to cover maintenance costs and generate some additional income stream.

Reviewing your Life Insurance

No matter how much you have saved or invested over the years, sudden eventualities, such as death or critical illness, always tend to affect your family financially apart from the huge emotional loss. Though one of the main objectives of taking insurance is to provide financial cushion to your family for times when you are not around, but it’s not the only objective. Insurance covers the risk of a person dying too soon or live too long. Insurance helps you to build a corpus for yourself; provides you with comfortable retired life and even takes care of your lengthy medical bills.

Even after you retire, you may need your life insurance for many reasons. One important reason is to make sure your spouse will have enough income, if you pass away first. Some pensions pay reduced amounts or even nothing at all, to surviving spouses. Life insurance can provide the funds to help offset that possible loss of income.

You need to review your insurance cover regularly and take additional cover to safeguard your family. When you retire, even though your original purpose for acquiring life insurance may have changed, as your children have grown up and your home mortgage is paid, you may still have a need for life insurance. Do not drop your life insurance without first consulting with a financial planner or insurance expert. Once you lose your insurance, it may be difficult or even impossible to get insured again.

Medical Emergency Cover

With age come health problems. With health problems, come medical expenditure which may make a huge dent in your income post retirement. Failure here could lead you to liquidate your assets in order to meet such expenses, which may adversely impact your retirement plan.

Your portfolio should contain health insurance i.e. Mediclaim, Personal Accident Insurance, Hospitalisation policy, Critical illness policy, etc so as to reduce the lump sum expenditure in the event of any medical emergency post retirement. It is worthwhile to take these medical cover as soon as possible as they tend to get costlier with your age.

It is true that medical insurance provides compensation for the medical expenses incurred, but there are several limitations. Depending only on medical insurance may not be enough to take care of all medical expenses. Therefore, individuals must aim at building a separate medical corpus to supplement the medical insurance and cater to emergency requirement post retirement.

Conclusion

Ultimately, the best asset allocation for your retirement portfolio will depend on your own circumstances and tolerance for risk. Knowing your retirement needs and planning for it while you still earning can take away lots of unpleasant surprises when you retire. With some care and discipline you can build a retirement portfolio suitable for a comfortable and peaceful retirement.

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Your children are your pride and joy and you would like them to have the best that money can buy. As discussed in our earlier article, with a sound financial plan, you can make sure that materializing of your child’s dreams is not hindered for want of funds. Children’s insurance policies and products are designed with this specific aim in mind.

What are Children’s Insurance Plans?

These plans set out to secure you financially against the back drop of constraints such as inflation and the rising cost of education. They help you to fund various aspirations like an overseas education, extra curricular activities, sports training, supplementary vocational education, marriage celebrations, etc. by providing a lump sum amount at a specified future date.

An additional feature offered by children’s plans is that they continue to offer financial protection even in the event of the loss of the premium paying parent. This ensures that the amount envisaged is actually delivered even in the event of unforeseen eventualities.

In a nutshell these plans offer financial security to children in the form of savings combined with life insurance by paying at regular intervals so that the money is made available to your child at pre-determined stages.

Benefits of Children’s Insurance Plans :

• Children’s insurance plans enable the parents to save money for child’s future without any disturbance to the family budget. This is because the premiums can be chosen to suit the parent’s convenience.
• There are a number of options and customized products to choose from for the child’s future.
• Reversionary bonuses are usually declared by the insurance company annually and once declared are guaranteed.
• Tax benefits under Section 80C are applicable on the premium paid.
• Certain plan options also allow the plan to continue after demise of insured parent and the insurance company continues paying the premium.

Types of Children’s Insurance Plans

There are two broad category of Children’s Insurance Plans available today. They are :

1. Traditional Children’s Plans

Insurance companies offer policies such as children’s money back or endowment, which give a defined payout at a defined period.

Besides, if something unfortunate happens to you as a parent, not only does the child still get the sum assured on maturity, but the interim premiums are also waived off.

However, the return from such policies is relatively quite low, barely covering the inflation.
2. Unit Linked Children’s Plans

These Children’s insurance plan are very similar to any ULIP plan the only difference is that the beneficiary in such plans is the child. Not to mention, these plans come with a charges similar to any ULIP. Make sure you know about all the charges applicable before you buy these plans.

How to choose a Children’s Insurance Policy?

Premium

Most insurance companies offer children plans with various features at various prices. Most of these plans have riders like waiver of premium and accidental death benefit rider inbuilt in them and in cases of others you have to buy them.

But, there’s no free lunch. You have to pay for these riders.

When considering which one to buy, you should add the cost of the riders with the basic premium for the policy. Then you compare it to the premium of the policy where the riders are in-built; and then make your final decision.

Riders

Most child plans available in the market have many of the riders in-built. In others you have to buy them at an extra cost. In case of child insurance the riders are the most important parts of a policy as it will take care of the child and your child education and his/her career doesn’t have to suffer due to anything unfortunate happening to you.

• Comprehensive Health Benefit Rider Sum Assured
• Waiver of all the future premiums
• Income Benefit Rider
• Accidental Death Benefit Rider

Comparing Traditional Children’s Plans

Compare children’s insurance plans offered by all life insurance companies to help you decide the plan which suits you the best.

1. LIC – Jeevan Kishore

• Death benefit: Before commencement of risk: Premiums paid excluding the premiums for the premium Waiver Benefit. After commencement of risk: Sum Assured + vested bonuses upon the death of the life assured.  
• Maturity benefit: Sum assured plus accrued bonus plus final additions  
• Comment: Can be bought by any parent for their child less than 12 years for their bright future

2. ICICI Pru – Smart Kid Plan – Option 1

• Death benefit: Sum assured is paid and all future premiums are waived
• Maturity benefit: 30 per cent of sum assured plus Guaranteed addition plus Vested Bonus
• Comment: Guaranteed 3.5% of SA compounded annually for first 7 years of the policy.

3. SBI Life – Scholar II

• Death benefit: Sum assured plus all vested bonus is paid and all future premiums are waived
• Maturity benefit: 25 % of Sum Assured plus Vested Bonus
• Comment: Attractive rebate on premiums for Female lives and High Sum Assured

4. Tata Life – Assure Career Builder

• Death benefit: Payout as per maturity
• Maturity benefit: 40% of sum assured plus vested bonus
• Comment: Guaranteed addition of 10% of Sum Assured in case of more than 10 policy years

5. Bajaj Life – ChildGain 21

• Death benefit: 1) Below 7 years – Premiums paid will be refund without interest, 2) Above 7 and below 18 years – Sum assured with accrued bonuses 3) Above 18 years – Outstanding payouts paid as lumpsum.
• Maturity benefit: 35 per cent of sum assured
• Comment: In case of death or accident of insured during policy term, 1% of SA maximum to Rs. 10,000 paid per month till end of term of policy

6. Reliance Life – Child Plan

• Death benefit: Sum assured is paid and all future premiums are waived
• Maturity benefit: 25 per cent of sum assured plus accrued bonus
• Comment: Attractive rebate on premiums for High Sum Assured

7. Max New York – Children Endowment to 24 (Single)

• Death benefit: Refund of Premiums plus Interests plus Accrue bonus (if any)
• Maturity benefit: Sum Assured plus accrued bonuses
• Comment: Gives your child a lumpsum amount at age of 18 to support his higher education/ marriage

8. ING Life – Creating Life Child Protection Plan

• Death benefit: Sum Assured and vested bonuses.
• Maturity benefit: Sum Assured plus accrued bonuses
• Comment: Gives your child a lumpsum at maturity to support his higher education/marriage

9. Shriram Life – Vivah

• Death benefit: Sum Assured and vested bonuses
• Maturity benefit: Sum Assured plus accrued bonuses
• Comment: In case of death or accident of insured during policy term, 1% of SA paid per month till end of term of policy

Comparing few Unit Linked Children’s Plans

Unit linked Children’s Insurance plan comes with various charges applicable to any ULIP. Before you decide to buy one for securing the future of your child, make sure you understand these charges and get a clear picture of how much it will cost you on your chosen plan. Here is a list of charges applicable on Unit linked Children’s Insurance plans:

• Premium allocation charge
• Fund management charge
• Surrender charges
• Mortality charges
• Fund switching charges

There are some other charges too, such as:

• Partial withdrawal charges
• Policy administration charges
• Revival charges
• Miscellaneous charges

Conclusion

All parents dream that their child gets the best possible childhood and a safe and secure future. Yet sometimes due to sheer negligence or laziness, parents are unable to offer their children a well laid out financial platform to pursue career ambitions. Plan ahead and secure your child’s future through Children’s Insurance Plan today!

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Most often we all wait till the last moment to do anything in life. Tax planning and contributing to tax saving investment is no different. During the last few weeks of any financial year we make hasty decisions to invest in tax saving instruments. In the process we end up buying products which are not right for us.

Tax planning should be done early and put in action over the entire year. This helps us in scheduling and planning our monetary outflows in tax saving investments over the entire year instead of contributing lumpsum in the last quarter. It also gives us ample time to understand and evaluate different options that are specific to your financial situation. Start your tax planning now for Assessment Year 2011-12.

Here are some simple tips for planning your taxes this financial year:

Know your tax liability

The first step is to know how much tax would you be paying in Financial Year 2010-11. If you are wondering, “how to do that?”, well you can refer our earlier post that provided a simple excel based tax calculator for FY-2010-11.

Once you know the tax liability you can start planning to optimizing your tax saving plans.

Utilize Income Tax Deductions under Section 80C

The most popular section in your tax planning is Section 80c. It provides up to Rs. 1 lacs in deductions (and another 20,000 for investments in infrastructure bonds). Investment options under this section include Employee Provident Fund (EPF), Public Provident Fund (PPF) contribution, National Savings Certificate (NSC), Long term Fixed Deposit (5-years), life insurance policies, Equity Linked Savings Schemes (ELSS), Unit Linked Insurance Plans (ULIPs), School Fees, Home Loan Principal repayment.

You can choose the best tax saving plan that suits your profile and risk appetite. Safe investors can go for assured returns Small Savings Plans while aggressive investors may look at ELSS schemes to invest.

Tip : Many of us a salaried employees and have contribution to Employee Provident Fund. For Jump starting your tax planning, deduct your contribution to EPF from 1 lac. This is the amount that you need to additionally invest under Section 80c.

This year Finance Minister has allowed a deduction of an additional amount of Rs.20,000 for investment in long-term infrastructure bonds as notified by the Central Government.  This would be over and above the existing limit of Rs.1 lakh on tax savings.

Tip : Provision for investing Rs. 20,000 in Infrastructure Bonds to maximize your tax savings in Financial Year 2010-11.

Claim deduction for Medical Insurance Premium (Section 80D)

Medical insurance is an imperative, especially in a country like ours, where the State does not cover medical costs. You should take a medical insurance cover for yourself as well as your family, irrespective of the tax deductions available.

Any premium that you pay for your, your spouse, or dependent children’s medical insurance is allowed as a deduction, subject to a ceiling of Rs 15,000. If you are a senior citizen (i.e. an individual resident in India who is of the age of sixty-five years or more), a higher deduction of Rs 20,000 is available.

If you pay for the medical insurance of your parents then you get an additional deduction of Rs. 15,000 or 20,000 in case any of your parent is a senior citizen.

If you are a senior citizen the enhanced deduction is allowed only if the premium is paid by cheque.

Tip : Irrespective of the tax benefits, medical insurance should be taken by every individual. It has a very important role in your overall financial plan and provides you cover against any unforeseen medical emergency.

Avail deduction of Interest paid on Housing Loan (Section 24)

It is smarter to take housing loan even if you have the money to buy a house outright. Home loans are one of the cheapest forms of loans available and also offer tax benefits. On the first house, interest up to Rs 1,50,000 is tax deductible.

For the second house, the entire interest without any limit is eligible for tax deduction. However, the annual value of building or land (i.e the potential of property to generate income) owned by you is chargeable under income from house property. This means, even if the property is vacant, the fair rent for that property is considered in your income and deduction of full interest on home loan is granted to you.

Tip : You will benefit if the annual value of the second house is less than the actual interest paid by you for the home loan during the year. To claim it you can specify the net amount in Income from House property taking into account, the Annual value, less 30% of annual value less any interest paid on borrowed capital to acquire, construct, repair, renew the said property.

Get HRA Exemption for Rent paid (Section 10)

Those who stay in rented house are provided relief through HRA exemption. House Rent Allowance (HRA), which falls under the head Salary, is a component that has a part of it exempt from tax liability. So, if you are getting HRA it should be ensured that a rent receipt is given to the employer to reduce the taxable portion of HRA.

The extent of exemption is calculated as the lowest of following three values :

• The excess of actual rent paid over 10% of the basic salary
• Actual HRA received
• If you live in a Metro i.e. Delhi, Chennai, Kolkata, or Mumbai then 50% otherwise 40% of basic salary received.

Tip : If you stay in rented house, provide your rent particulars to your employer so that you can get the relief of HRA exemption.

Many people have confusion on whether they can claim deduction of Interest paid on Housing Loan  as well as HRA Exemption for Rent paid. Yes, you can claim both these deductions together, provided your own property is not close to your place of work and due to which you have to stay in a rented accommodation. In such scenario you can specify your own property as self occupied and claim the deduction under Section 24. Otherwise, you can claim it by taking the annual value or the actual rent received from your own property as specified above.

Avail any other deductions allowed in Income Tax Act.

Interest on Education Loan (Section 80E)

Under section 80E, you can avail tax deduction with respect to the interest paid on repayment of education loan taken from a bank or any other financial institutions in India or worldwide, for higher education.

Charitable donations (Section 80G)

While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax. You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act. The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund.

Tip : There is no restriction on the amount given to charity. However, donations must be made only to specified trusts and also only donations of up to 10 per cent of your total income qualify for such a deduction. Remember to get receipts whenever you make any charitable donation.

Handicapped Dependent and Medical Treatment (Section 80DD)

Under section 80DD deduction can be claimed in respect of maintenance including medical treatment of handicapped dependents. In this case, deductions up to Rs. 50,000 or 75.000 can be claimed based on the severity.

Further deduction, in respect of medical treatment of specified life threatening diseases, is available under section 80DDB. Deduction is also available in case of a person with disability.

Conclusion

Making use of all these exemptions and deductions lowers taxable income and consequently minimizes your tax outgo.

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