Archive for Uncategorized

You must ask questions

December 12, 2009 at 5:46 pm · Filed under Financial Planning Process, certified financial planner, financial planning

Dear Reader

At Procyon Financial Planners, of late, we are seeing a distinct and welcome change in the attitude of the investors. It appears, all of a sudden, that there is a surge of interest amongst the investors about financial planning.  Invariably, investors are keen to know about qualification and experience of financial planners, number of clients they serve and so on.

Since the time we began our financial planning practice in Bengaluru (then Bangalore) in 2006, we are providing information to our clients and investors about the need for financial planning. So much so that some of our clients started complaining that we were much focused on financial planning! This change of questioning attitude augurs well for investors in general and young earners in particular.

Some times, we receive funny queries that are actually very long winding and seem to have been directly influenced by the literature available on the net in developed countries. I do not see anything wrong in this and in fact welcome this information seeking process before hiring your financial planner. At the same time, may I remind the general investor that India is almost three decades behind in adopting financial planning principles in the area of personal finance and very much at the lower end of the learning curve? You will find that a Certified Financial Planner in India can boast of only 4 year’s experience because it is only in 2005 the first batch of CFPs obtained their certification.  It is only now in circa 2009 that one of regulator has fleetingly mentioned that advisors should adopt financial planning process. Funnily, the same regulator has forgotten to define what he means by ‘financial planning’.  Investor seems to be ahead of both the financial planning profession and finacial regulation.  No wonder this is happening because we live in the age of seemless flow of information.

Investors must also keep it in mind that in India there are regulations pertaining to selling financial products but not enough about financial planning services. One regulator, with a recent regulatory intervention has in one stroke converted a class of product sellers to financial advisors. Does it serve any one’s interest that a product seller has to work as financial advisor with rudimentary regulatory frame work, without any specialised training and such necessities?  Dé·jà vu all over again? 

That aside, I urge investors in India to exercise the same diligence and questioning attitude when buying financial products as well. I am raising this particular issue here because I see a huge gap between the way an investor,

(a) queries a financial planner about the costs, services, past experience and so on, and

(b) goes through the process of buying a financial product.

Is it because the questions one should ask when it comes to hiring a financial planner are well documented in the World Wide Web and questions one should ask when buying a financial product are not so well documented?

If you apply the same principle of ‘question your financial planners thoroughly before hiring’ when you buy a financial product as well, you may probably not end up facing the huge gap between what is said and what is delivered.

This issue is particularly relevant if the reader understands the fact that there are millions of financial product sellers in India where as the number of financial planners are a miniscule part of that number.

It would be interesting to know how you as investor failed by not asking right questions or benefitted by asking the right questions when buying a financial product.

Regards,

Narendra

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A primer on tax planning (for salaried employees) and financial planning

November 8, 2009 at 3:27 pm · Filed under Financial Planning Process, Tax Planning, financial planning

Dear Reader from India,

Have recently uploaded a A primer on tax planning (for salaried employees) and financial planning (pdf format).  You can download the same at http://www.procyonfp.com/knowledge_base_articles.

Hope you will find the contents useful.  You are welcome to send your comments.

Regards,

Narendra

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It is difficult to stop the water once the dam is breached

September 20, 2009 at 5:05 am · Filed under Insurance, Life Insurance, No entry load, mutual funds

Dear reader,

In the past few months the regulators related financial services such as SEBI, IRDA are in overdrive mode.  Several path breaking initiatives have been anounced.  SEBI has removed entry load on all mutual funds.  IRDA is initiating several proposals to reduce the cost of buying insurance products.  Already the New Pension Scheme under PFRDA is without any selling intermediaries.  A proposal is being made by a Committee set by Govt of India to do away with commission payable to the agents.

In all these initiatives, the objective is to make advisors answerable to their clients and bring in more transperancy for the process of selling financial products and services.

Are these initiatives going to help the investor?  I think yes.  It will take some time before the agents and investors get used to the new regime.  Ultimately, transperancy is going bring more order to the existing chaos and allegations of mis-selling should decrease.

Part of the people are resisting the changes.  This is a natural reaction by the people who have stopped learning.  The Govt. should not be brow beaten by the no-sayers and carry on with these bold reforms which are in the interest of the common investor.

Regards,

Narendra

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How to inflation proof your savings and investments?

April 5, 2009 at 2:33 am · Filed under Uncategorized

Before we look at the options available to you to make your investments inflation proof, let us understand the costs of inflation.

Suppose you earn a return of 10% per annum on your bank deposits and rate of inflation is 8% in the economy. A lunch that used to cost Rs.100 would cost Rs.108 at the end of the year. This means, you must earn a return of at least 8% per annum to be able to buy that lunch. Since your bank gives you a return of 10%, you are happy because even after you buy your lunch, you are left with Rs.2.

Wait a minute. Is something wrong with our assumption? Have we forgotten anything? Yes, what about TAX? Tax is levied on nominal interest rate. So we need to rework our above assumptions.

Suppose you earn a return of 10% per annum on your bank deposits and tax rate is 33.99%, the net of tax return is 6.6%. You have to make this adjustment first, because spending on lunch will not give you any tax exemption. Now if you want to buy the lunch you can’t. Because, lunch costs Rs.108/- and after paying your tax you have only Rs.106.60.

In reality, if inflation is 8%, price of lunch will increase by more than 8% because of what economists refer to as ‘shoe leather costs’ and ‘menu costs’. ‘Shoe leather cost’ literally means the wear and tear of your shoes to run around to manage the effect of inflation and ‘menu cost’ is the cost businesses incur to physically change the prices – printing new menu or catalog, replacing labels and advertisements in stores and so on. It is estimated that when inflation is 5%, ‘shoe leather cost’ can exceed 0.3% of GDP. You also know that indices adopted by the Government to measure inflation may be outdated and may not include all the products and services you consume. So a ‘practical rate’ of inflation could be much higher than 8%.
Now let’s look at options available to you in order to earn a ‘real’ return so that you can buy a full lunch at Rs.108/-

Earn a higher return – this may not be possible as rates of return are market driven. You must be cautious if someone promises a return much higher than market rate of return. It is a clear indication that your capital is at risk.

Earn tax free return – there are few conventional savings products that are safe and yet provide you tax free return such as Provident Fund, PPF accounts. But they are not liquid and have upper limits . Debt funds and fixed maturity plans are a good alternative to bank fixed deposits to earn tax free returns in your hands. If you are worried about safety of mutual funds, it is as safe as the overall environment is and regulated by SEBI. Safety net provided on your bank fixed deposits is only Rs.1 Lakh per bank under Deposit Insurance & Credit Guarantee Scheme of India.

Asset allocation – with a good marriage of risk management and asset allocation strategy, you can aim to generate positive ‘real’ return in the long term. Consult your financial planner so that he can device a suitable strategy that can help you keep buying that lunch without worrying about tax and inflation.

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Could Information Technology help us to reduce energy cost?

May 21, 2008 at 5:55 pm · Filed under Uncategorized ·Tagged

I travel nearly 60 Km every day commuting between my office and home.  Several lakh people will be doing the same in a city like Bangalore – people travelling from suburbs to central district or one part of the city to the other to reach their offices or tech parks.

Is work from home a solution?  If work can be shipped out of one continent to the other for cost benefit, why not from the office to the home?  There are many a types of work which can be done from home without compromising on data security and other confidentiality related issues.  Technology is already available.  Corporate entities and goverments through proper regulation and tax breaks should enable this and accelerate the process.

 

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Ten Reasons Why People Buy Life Insurance?

October 21, 2006 at 11:28 am · Filed under Insurance, Life Insurance, financial planning, investment planning

In the places where I worked, during my interaction with employees while helping them to plan their taxes, I used to quiz them the reason why they bought a life insurance policy for themselves. I have compiled below some ten reasons (in the order of their popularity) why they did so. This is not a broad based scientific survey, but gives an indication where people go wrong when they buy their life insurance cover.

Reason No.01 – I want to save tax

It’s true that Section 80 of Income Tax Act provides deduction of the amount paid as insurance premium (with some exceptions) from the assessee’s taxable income subject to limits. If the sole purpose of buying insurance is to save on tax, then it’s the costliest way to do so. If someone does this early in his/her life with policies like endowment or money back or even ULIP, their ability to create wealth diminishes by a very high degree.

Reason No.02 – I want to save/invest

In my opinion, this is the worst reason for someone to buy insurance. Savings is generally understood as the amount remaining with a person after he/she meets all his/her expenses and other cash needs. If one has to build wealth, savings need to be channelised into an investment with specific time horizon and goal. But purchasing an insurance policy is neither savings nor investment. It’s simply effort going waste.

Reason No.03 – My agent asked (forced) me to buy this policy

This is one of the commonest reasons you hear if you ask some one why he/she bought insurance policy. Insurance advisors are drilled to think that “insurance is always sold and never bought” and this results in an advisor selling insurance for all wrong reasons. Survival of the insurance advisor is the sole driver here and not the need of the buyer.

Reason No.04 – I want to plan for my retirement

Insurance companies have devised these products keeping in view the tax exemption available under the Income Tax Act. The same reasoning that insurance is not an investment product applies here as well. Gone are days when the returns were assured by the insurance company. True retirement planning may be achieved more effectively and economically using other financial products.

Reason No.05 – I want to provide security for my children for their education

This is one of legitimate reason for which insurance is to be bought. However, the risk to be covered is not of the child but of the parents. So called children policies do not provide this option by default and the parent has to pay an additional premium to cover his/her risk.

Reason No.06 – My Bank asked to purchase insurance policy

This means it’s only due to the pressure exerted by bank (it could be other types of lenders also like housing finance companies, car finance companies etc to safeguard the loan) that one will buy insurance. Otherwise, he/she will not get the loan. In this situation, the purpose is fine but it’s not bought with the awareness of one’s total risk exposure. Again, it will be a double whammy if products like ULIP/Endowment/Money back are forced up on the borrower. On one hand he has to repay the EMI and on the other hand, he also need to pay hefty premium towards such ‘with profit’ insurance polices. There could be indirect coercion because of the business association between the lender and the insurance company. Many banks today have either become corporate agents of insurance companies. 
 

Reason No.07 – My Uncle/Aunt recommended to buy insurance

This is one of the standard scenarios in many households, especially if your uncle/aunt is retired and/or has taken up selling insurance as second innings. It’s no secrete that insurance advisors, at least in their initial years, will be asked to target their ‘natural market’ meaning their own household members, relatives, friends etc. to sell the minimum number of policies to keep their licence alive. Here again insurance is bought for reasons other than the one it’s meant for.

Reason No.08 – My friends told me to buy insurance

Here’s another young person who has some awareness about insurance. But the purpose of insurance has not become very clear.
 

Reason No.09 – My parents told me to buy insurance

This is not surprising, given the fact that including people who graduate from the college have not much idea about the concept of insurance. So if one is not in to jobs, it’s very unlikely that he/she will have any idea of what insurance is other than the advertisements one sees in TV/Newspaper which again does not say much how insurance works. Even if parents tell their children to avail themselves insurance, it’s for reasons other than for what insurance is meant for.
 

Reason No.10 – I want to cover my life risk
I have come across very few people giving me this reason for buying a life insurance policy. Actually, this is the right reason for which insurance is to be bought. The very purpose life insurance products came into existence was to provide economic security to the dependents of the breadwinner in his/her absence. 

If you are a young earner without any health problem a term insurance is the right kind of cover for you. It costs less and because of level premium, you will feel less and less burdened as time progresses and your earnings increase. The money saved (by not buying life insurance for any other reason) can be channelised to an investment plan.

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