Financial Planning

Friday, June 05 2020
Source/Contribution by : NJ Publications

It may just take luck for a person to acquire or make wealth. However, it would take a lot more to keep holding on to that wealth. At the bottom of the things we do and the way we live life is money. Protecting wealth over a period of time, especially across generations is not easy. There are just too many factors that pose a risk to your wealth and one must be very well protected from all sides. In this article we take a birds eye view at picture of protecting wealth and explore a few strategies or ideas that you can apply in your lives.

Wealth Protection: The True Meaning
Wealth Protection may come with the question: What is wealth? The dictionary definition says it is an abundance of worldly possessions. With the uncertainties prevailing in our lives, it is very important to protect your wealth. Most people focus on growing their wealth but protecting your wealth is just as important. While you can’t always predict life’s changes, you can plan ahead to help protect your finances from being diminished. Without adequate protection, you will be vulnerable to the nasty effects of a chance misfortune which may cause financial losses. Hence protecting wealth must assume a very critical part. Below of the few simple connotations that we can derive for term 'protection':

Types of protection:

  • Protection of ownership:
  • Protection of value:

Risks to Wealth:

  • Protection from risks / uncertainty:
  • Protection from usage:

Protection of ownership:
Ownership protection means ensuring that you and/or your loved ones continue to own the wealth that belongs to you. Often protection of ownership is required to protect against the following risks:

  • risks that arise on ownership issues specially in case of property transfers and inheritance
  • risks to ownership of business assets and capital if legal fool-proof work is not done
  • risks to unattached / personal wealth in case you are suffering from huge losses or claims

The following are few ideas by which we can protect the ownership of our wealth & assets

  1. Legal Documentation: Proper legal documentation and ownership records of all family / personal assets. All the records / documents must be safeguarded and stored at a place which is known & accessible to you and your lawyers/ spouse, etc. in case of any eventuality. Due diligence and audit of title / ownership documents must be done in case of any purchase of assets or business stakes, especially property.
  2. Estate Planning: It is about declaring successors to your wealth and the proportion of distribution through proper estate planning and making your 'will'. One may also look at formation of trusts to oversee large properties or businesses. A non-existent or outdated will may mean passage of assets to unwanted persons and undue financial burdens to loved ones.
  3. Court Attachments: One might do well to keeping business entity distinct from self. This means protecting personal assets safe from payments due to creditors and other claims on business. One idea is limiting your civil liability through formation of Private Limited Company, subject to extant laws. In proprietorship & partnership firms, the personal wealth is not treated distinct from that of the owners or partners. Also from an individual's perspective, retirement benefits like pension, PPF, EPF and gratuity cannot be attached by authorities or under any decree of court.

Protection of value:
Protection of value means the protection of the purchasing value or worth of money. Due to inflation or price rise, the value of money decreases over time and the thus, in order to retain its purchasing power, the amount money has to rise. Thus, one must always keep in mind the 'real returns' or value of money while committing to any investment or other avenue. In addition to this, the following points should also be kept in mind.

  • Post Tax Real Returns: After having appreciated the concept of real returns, the next step is to look at post tax real returns, i.e., looking at the returns after tax, and then adjusting for inflation effect. Thus, if an instrument giving 8% returns, taxable at say 30%, the post tax returns will be (8%-2.4%) 5.6%. In an environment with an average inflation of say 7%, the real post tax returns would then be a negative of 1.4%.
  • Idle Money: In the above above case, if your money is kept idle, you will be depreciating your money at the rate of inflation. One should minimise idle money and put aside money into avenues that preserve capital. Though savings bank accounts with deregulated interest rates are a bit attractive, mutual fund liquid funds and other debt products are options that one should explore.

Protection from usage:
This is a very broader & general idea that highlights the need to have proper management and usage of wealth, especially the business ventures and investments.

  1. Avoiding Personal assets as collateral: Taking up business or other loans by putting your home or other personal property as collateral must be avoided as far as possible. A basic minimum wealth should be kept intact at all times and should strictly be used only as the last resort after exploiting every other opportunity.
  2. Unprofitable expenditures: Unwarranted spending on assets, businesses which is not required. Further spending money on assets that depreciate rather than appreciate over time or incur expenses to maintain rather than generate income are to be avoided. Excess spending on shopping, life-style, etc. is highly undesirable and further, buying unrequired assets on loan is a strict no.
  3. Avoiding aggressive risks, fictitious business venture, get-rich-quick schemes: There are no free lunches and never an easy money. It would be better if we can avoid shortcuts to creating wealth as almost certainly they can be disastrous. Never invest if you do not fully understand how the scheme/business works or if you are not sure of the management's credibility and expertise.
  4. Diversification of risks: The idea is to optimally spread your business risks and investment risks such that your capital and/or income is not jeopardised. It should work towards having investments in and earnings from multiple sources.
  5. Hedging against risks: Business risks or risks of exposure to say commodities, currency, metal prices, etc. can be safeguarded by hedging
  6. Investing in right asset classes for right duration: When it comes to investing, selecting the right asset class is a most important. An overexposure or underexposure to say equities can both be harmful for creating wealth. Matching the right asset class with the right desired duration of investment and your risk profile is what is required.

Protection from risks / uncertainties
After having taken all precautions and necessary planning in management of wealth, still life may throw up surprises or situations wherein all planning may come to fail. There are a lot of uncertainties in life and we should best avoid or reduce taking exposure to such risks and at the same time prepare ourselves for the worst, in case anything goes wrong.

  1. Risks to life & health: An unfortunate event can happen anytime and anywhere to anyone. Specifically, there can be death, disease or illness, disablement, etc. which can put severe financial pressure at the worst of the times. Taking 'adequate' insurance thus becomes very critical for continued financial security of your family. Life Insurance, Health Insurance, Personal Accident cover for self & family members are few very critical covers that one should take after consulting your advisors.
  2. Risks to property / assets: Similarly, protection of business property/ assets, factory, shop, home & home contents, goods in transit, etc. becomes very important and the loss therein may result in liability and financial losses. There are many general insurance products that can be explored. However, as a practice, we should take adequate safe precautions in construction, maintenance & storage of such property.
  3. Risks to reputation / profession / : Apart from the tangible risks, there are also other risks that businessmen and professionals or officers are exposed. Again products like Professional Indemnity, Directors & Officer's Liability, Public Liability, Commercial General Liability, Money Insurance, where one is protected against losses, suits, damages, claims, loss to customers, third parties, any many other risks.

Protection of wealth is a very vast subject. The idea cannot be justified in couple of pages, though a fair understanding can be built up. Wealth protection goes beyond protecting your investment and it extends to protection from the happenings in your lives and the risks that you are exposed to. After all, almost everything, directly or indirectly generally ends up in rupee terms. And when we realise this, our approach to life and everything that we may do will have an element of protection somewhere. Wealth protection is not an act or event but an attitude and philosophy to follow.

 

Friday, May 22 2020
Source/Contribution by : NJ Publications

Scope of financial planning and awareness about personal finance have gone up considerably in last one decade or so with well traveled average Indian and increasing earning/savings capacity. But the challenge that remains both for clients and planners is that we all prefer to plan something which we can foresee for our future or something which comes out of compulsion like planning for buying a car or house, savings for kid's higher education and marriage or even planning for a vacation abroad. Distribution of wealth is as important as creating of wealth and that is why despite complexity involved, one can not ignore the most important aspect of 'Estate Planning'.

Estate Planning is nothing but legal arrangement for transfer/distribution of one's assets when he/she is not around or simply to protect or preserve assets during their lives. Common misperception among individuals is that estate planning is only for rich people but this is not true. It is a fact that importance increases manifold for rich and successful people, but even for a common individual the need for estate planning can not be ignored. In fact I would like to put it in a way that if large corporate houses like Tatas, Birlas or Mahindras of the world require a well defined estate planning then a common individual who has limited wealth to distribute must have a well defined estate plan in place in order to avoid any conflict among his/her family members. Regardless of the amount of wealth you have generated, it is important to understand and prepare a estate plan in order to make sure that your financial & philanthropic goals are met even when you are not alive.

It is an accepted fact that the need and importance of estate planning depends on life stage and situation of every individual but it is also an accepted fact that this is something which should not be ignored.

The importance of 'Estate Planning' has gained momentum among corporates recently after much highlighted legal battle of Ambani brothers after the death of Reliance patriarch Shri Dhirubhai Ambani. Here we will try to understand how individual investor can benefit from estate planning.

Estate Planning For Everyone:
Estate Planning is required for everyone who has estate and who wants this estate to be distributed as per his/her wish rather than simply getting passed as per succession laws. Estate is nothing but the difference between your assets and liabilities, irrespective of its size or value.

The most common idea that comes to our mind when we talk about estate planning matters related to property and preparing a Will. But estate planning in totality is much beyond just making a legal will and matters involved beyond just property. The fact of the matter is, detailed estate planning includes every asset that an individual owns from property, investments, business, jewelery, bank accounts or any other asset that an individual owns.

Mode of Estate Planning:

Writing a Will:
This is the most common way estate planning is done in India. A Will is a legal document in which an individual can mention the way he/she wants his/her estate to be distributed after his/her death. Thus a Will comes into effect only after the death of testator/creator of the Will.

The Indian Succession Act, 1925 defines a will as : A will is a legal declaration of the intention of the testator, with respect to his property which he desires to be carried into effect after his death.

A Will can be made by any person who is above 18 years of age and is of sound mind. Registration of a Will is optional but has to be attested by two or more witnesses, each one of them should have seen the testator signing the Will. However it is always advisable to register the Will. However registration does not affect validity of the Will. Whether registered or not , a Will must be proved as duly and validly executed as required by the Indian Succession Act.

Validity of Will : A Will becomes 'Void' , becomes not enforceable in following situation:

  • If a person making a Will is of unsound mind or not capable to contract (below 18 years of age)
  • A Will, obtained by force, coercion or undue influence is void.
  • A Will made under influence of intoxication or in such a state of mind is a void will.

Traditionally creating a Will has been preferred way of estate planning in India. But a Will can be challenged on numerous grounds with more and more cases of Will being challenged in court or family disputes arising on validity/authenticity of Will, creating Trust is more preferred mode of estate planning.

Estate Planning through Trust:
The basic objective of estate planning is to protect interest of family members or beneficiaries. Due to possibility of legal dispute among family members with regard to legality of will and to protect interest of minor family members, creation of trust can prove to be a better and smoother way of estate planning.

Any person who is a major and capable of entering into a contract can create trust. A trust is a contract in which property/estate is managed by one person or persons (trustees) on behalf of beneficiaries. The main objective of estate planning is to take care of interest of spouse, children and objective of philanthropy. This can be taken care of best by creating a private trust.

Advantages of doing Estate Planning by Creating Trust:

  • In business there can be huge loss but assets that are put into trust remain safe because Trust is a bankruptcy remote structure.
  • The person who creates the Trust can put himself as one of the beneficiaries and hence can enjoy the benefits during his lifetime whereas a will comes into effect only after death of the creator.
  • A person can avoid family dispute as trust does not require probate.
  • The person can make provisions for philanthropic work or charitable purpose by creating charitable trust.
  • Administrator/Protector of the Trust can be appointed which ensures that activities of the trustee are conducted under supervision of administrator/protector.
  • The trustee has power and duty as assigned to him under trust deed for which he is accountable to perform his duty, manage Trust property as per the deed. There is a fiduciary relationship between trustees and beneficiaries. Best suited to protect interest of minor children in the family.

Creation of Trust or Will, both have their own advantages and disadvantages. But Trust scores over Will in a sense that Trust does not require probate and an individual can remain in control of his assets even after transferring them to Trust. Estate planning is best controlled and executed through trust because a Will gets executed only after one's death.

Whether to do estate planning through creation of Will or Trust is an individual's choice but what is important is to put a plan in order to avoid any kind of family dispute and to protect the interest of your spouse and child/children. Also to be considered is to consult a legal expert who can guide you with legality of creation of Will or Trust.

 

Friday, May 08 2020
Source/Contribution by : NJ Publications

There is something about women and money that doesn't seem to quite fit together in minds of most of us. We all generally have a tendency to stereotype people and make generalisations about a person,community, geography and gender. When it comes to finances too, we hold may notions and myths. In this article, we would be revisiting few of the long-held myths about women and money or finances. Going beyond the title, the article also attempts to look at the bigger picture behind these myths and the need for us all to change...

The myths about women and money...

Myth: Women are impulsive spenders and they spend a lot
Fact: Women are wise & careful spenders
We believe that those who purchase something on impulse do not have the self control to follow a budget and spend in an organised way. We also generalise women as more like to indulge in shopping on impulse.

The fact is women have regular spendings on small inexpensive things, mostly for utility or purpose. There is logic to assume that small impulsive spending within the overall budget means a person lacks discipline & control on financial matters. On spendings, a US Bureau of Labor Statistics report concluded that there is equal spending by both genders and the main difference is that single men spend more on electronics, entertainment, while single women spend more on apparel and services.

The clear this myth further, there are also studies that concludes that women share more feedback on 'what' and 'where' to shop within their circle. We also know that they more loyal and bank on trusted shopkeepers & portals and demonstrate eagerness to search for discounts & deals and also bargain harder than men. One interesting study found that 72% of women had reduced their retail spending in the recession compared to only 62% of men*1. All these observations and opinions point to the direction contrary to our myth...

Myth: Women are too emotional for financial decisions
Fact: Women have the 'right' emotions needed for financial decisions
Studies have found that emotions of men generally tend to be around 'greed', 'fear', 'chance' and 'certainty'. The emotions of women generally revolves around 'security' of investments, and some 'uncertainty' of their own decision as being unwise or risky. Hence, women are more likely to seek financial advice just like they are more likely to seek road directions compared to men. Men, in comparison, feel and act more confident in financial matters, whatever may be the reality! Being careful and seeking opinion is much better than being confident & not seeking advice when needed.

Myth: Women want men to manage finances while they focus non-financial household roles
Fact: Women are capable & want to participate & contribute in all household matters
This myth has roots in the ancient premise of the division of household responsibilities in a patriarchal society, which we are even today. We expect women to manage the household while men are to earn and provide for the necessities & safety of all. Well, the times have changed a lot and today more women are equally educated to their male spouses and are often also earning independently. The fact is, whether earning or not, women do have substantial responsibility for family finances. Most of the consumption decisions are driven and influenced by women. As household managers they have to handle the expenses to the budgeted money and needless to say, there is a very long list of expenses in any normal family. They are much more aware of inflation and market prices then men are.

Being more informed & educated, more women today desire to participate actively and contribute in financial matters of the family. If women can participate in financial decisions, it more likely that the outcomes would be more balanced and informed. It can also be very crucial at challenging times.

Myth: Women are not good with maths & financial skills
Fact: Women and men have equal ability to learn and apply maths & financial skills
Let me begin by recalling the most famous name in mathematics in recent history. Shakuntala Devi, was known as 'human computer' and was famous for mental calculations. She made to the The Guinness Book of World Records in 1982. The MD at International Monetary Fund (IMF) today is Christine Lagarde, a women. In India too, women hold top positions in many financial institutions like Chanda Kochhar - MD & CEO at ICICI Bank, Shikha Sharma – MD & CEO of Axis Bank, Vinita Bali – MD of Britani Industries, Naina Lal Kidwai - Group General Manager and Country Head of HSBC India, Renu Karnad – Director at HDFC, Chitra Ramkrishna – MD & CEO of National Stock Exchange (NSE), Roopa Kudva - MD and CEO and CRISIL and so on.

The list is unending and we can easily see that women hold key positions in some of the biggest names in the financial industry alone. Even in area of financial planning there is growing number of women advisers. As per the U.S. Bureau of Labor, in 2010 that over 30% of personal financial advisers were women. There are more than enough examples to dispel this myth. A study by University of California researchers, on two rural tribes (one with equal land & education & one male dominated) in India and concluded that environment, not gender, determines a person's math abilities*4. But on a different thought, we can even question the need for financial skills or maths in financial decisions. Isn't successful investing more about common sense and managing emotions rather than display of any technical expertise?

Looking at the bigger picture: State of women in India
Despite rapid economic growth, women have not been able to play a larger role in the Indian economy and the inequalities & prejudices remain as deep as ever. The 2011 United Nations Gender Inequality Index (GII), which considered factors like labour force participation, reproductive health and education, ranked India a depressing 134th out of 187 countries, behind countries like Saudi Arabia, Iran and Iraq.

There are strong cultural prejudices in India for women empowerment and financial independence. Women in India have always worked but there is undervalued. However, things have started changing and today more girls are getting higher education and we can see more women working in cities away from home. The government of India has also worked towards women rights and empowerment through various programmes & legislations.

Need for change in us:
The women in our lives are very special – mother, sister, daughter and wife. Unfortunately, these special persons do not often enjoy the same importance & participation in decision making, be it financial or otherwise. We all need to get out of our stereotyped image of women and work towards their financial literacy, empowerment and freedom. We need to shed our prejudices, and bust our myths. By opening our minds, we will not only bring a change in our lives but a change in the entire family, community and also for the entire country. Women are half of India's demographic dividend. If they are given the financial independence and the respect they deserve, it could boost the growth engines of our country.

 

Friday, Nov 01 2019
Source/Contribution by : NJ Publications

We all talk about it, know about it but rarely do we find anyone who is all set and ready for a peaceful and happy retirement. Retirement planning is one goal which is often at the bottom of our priority list. We often make excuses to avoid it. In this article, we will see the most common excuses made by people around us to avoid saving / planning for retirement.

1. It's too soon

This is an excuse which is often given by those who are in their 20s and 30s. At this stage of life, they are primarily concerned about creating assets and enjoying life. For them, 'retirement' is very far away to even start thinking. However, the reality is that the sooner you plan, the better chance you have for having a retirement you want. When it comes to retirement planning, it is frankly, never too soon.

2. It's too late

Retirement planning is a broad subject and is applicable to everyone. Even if you are near retirement or have already retired, it does not make any difference. The planning piece will surely take into consideration your existing age and status to make appropriate plans. Retirement planning is not just limited to saving for retirement but is also concerned with your post retirement planning.

3. My family will care for me

Do we really want to become as dependents on our family / children? No matter how faithful and caring your family members, especially children, are; you should let them worry about their own lives and their own children. Social and family structures are changing today and often children do not stay with parents. It would be strongly advised to not think of yourself living at the mercy of others.

4. I do not have enough money

No one ever has enough money. The important thing here is to make a start. Every rupee will count towards your retirement kitty. Initiating the process will mean that you are serious about retirement planning and you will be more likely to increase your savings in future.

5. I am in a bad financial situation

In a situation where you feel that your finances are in a mess, we would recommend that you get in touch with your financial advisor / planner. You need to sort out your mess and find ways to clear all debts / liabilities first. This though may also be a case of exaggeration. You need to really check if you are truly in trouble or choosing to believe so, so as to avoid saving.

6. I am not aware of retirement planning

This is another excuse people often make. However today, seldom can anyone claim that the awareness was absent. We must be at least aware that we may have to live about 20-30 years of our lives without regular income – post retirement. This simple knowledge is good enough to evoke a sense of urgency and the importance of retirement planning.

7. My advisor did not ask me about it

Those who make this excuse must be asked – do you never put forward any question or requirement to your advisor? Have you ever asked your advisor to plan for your life goals? Are you serious about getting the right advice from your advisor? A good advisor will always ensure that he/she discusses and plans for all your life goals with you. However, the onus of ensuring that your advisor covers all your needs and does not miss anything lies on you.

Why is retirement planning 'important' and 'urgent'?

Among all your life goals, retirement planning is perhaps the most critical life goal. It is much more important than children education or marriage goals. Once secured admission, your child can always find education loans. With an evolving society, traditional marriage expenses may not be applicable today. Also earning children can always save something for their own marriages. Also marriage is something which can be planned or delayed for few years if required. Hence, the only key goal left out is retirement which cannot be compromised.

Here are the reasons why it is very important and urgent.

1. Lack of social security in India forcing everyone to save for retirement

2. Question of living at least 15-20 years without income in old age, with potential health issues & expenses

3. Need to be self dependent for all expenses – for self respect and freedom

4. Can't rely on family members or children for sure

5. Retirement planning is one of the most neglected life goals – other goals get higher preference

6. The amount of savings needed is huge compared to any other goal, especially at later ages

7. You and your spouse deserve a good, peaceful, happy life in your golden ages

Conclusion:

Retirement planning deserves your immediate attention. If you have been delaying retirement planning or making excuses to avoid it, we would suggest that you do so at your own peril. Retirement planning is the most important thing that you need to do for yourself. You deserve a life of comfort and care without worries after spending a lifetime working hard and living for others. Rest of the things will happen at their own pace but retirement is something more personal which only you have to think about.

Friday, April 19 2019
Source/Contribution by : NJ Publications

More often than not any surplus money left in savings bank account either gets spent on discretionary expenses or may be because of tiny amount, we do not give much attention to utilizing that surplus, left in savings bank account in a more efficient manner. As experts say, it is equally important for money to work for us as hard as we work to earn it. But investors have very little clue about finding an alternative to savings bank account to deploy that surplus.

Financial planners also emphasize on the importance of maintaining emergency funds. Securing your insurance portfolio and creating contingency fund are the two basic pillars of financial planning process. As any contingency fund is created for any unknown emergency, which we do not know when and how will strike, we can not commit that fund to any long term investment purpose. Leaving that money idle in savings bank account also does not serve any purpose.

So what exactly is the alternative to savings bank account, which can be as liquid and safe as bank account and yet prove more financially prudent ? The answer is liquid funds.

As the name suggests, this is the category of mutual funds, which offers highest level of safety and liquidity. The basic objective of liquid fund is to provide highest level of liquidity to investors so that entry and exit from this fund do not cost anything to investors.

Lets Try to Understand the Concept of Liquid Funds:
As individual investors we come across two scenarios at the end of every month. Either we end up having surplus money lying idle in bank account, which is left from monthly income after providing for all expenses, which is unintentional excess money or we consciously attempt to put aside or save some money to create contingency fund. In both the cases, if we leave this amount in bank account invariably we end up spending that amount on any discretionary expense or if we keep large amount idle in bank account that may not sound prudent financial decision. Sometimes you get lumpsum amount or unexpected largesse like winning a contest or selling any real estate or any other asset or receiving large sum of money in inheritance. It invariably takes few weeks to decide on how to deploy this large amount. Liquid funds can play an important role here. Liquid funds can work as an alternative to your bank account in all such cases.

Liquid funds invest in corporate deposits, inter bank call money market or any other debt instrument with less than 91 days maturity period. As it invests in very short term debt instruments, there is no interest rate risk involved.

Ease of Investing:

  • As the name suggests, this category of funds are the most liquid in nature.
  • Investors can enter or exit without any charges, as there is no entry and exit load.
  • Redemption gets processed in 24 hours time.
  • Better tax efficient returns.

Ease of Transactions:
As the basic objective of investing in this category of fund is parking additional savings, which may be required in any emergency. So ease of operation/transaction is another important factor for investors. With NJ Demat account platform you can hold units in demat format and transact online using multiple platforms of online transactions, investing through debit card as well as opt for call and transact facility. This allows investors error free, quick transactions where both investment and redemption can be done at the click of a button.

Liquid Funds/Money Market funds help you utilize your savings in a better way. With changing times it's time to look beyond traditional products as modern times require acceptance of new solutions to your old needs.

 

We offer our services through personal counsel with each of our clients after understanding their wealth distribution needs. Our approach is to enable our client's to understand their investments, have knowledge of investment products and that they make proper progress towards achieving their financial goals in life.

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