StreetSmart@Work

Investment Advisor Vs Financial Planner

2012-01-02T08:00:00.000-08:00

A few decades ago, there was confusion with what sales and marketing are. People thought they are one and the same. But it is to be understood that sales is just an important ingredient of the functions of marketing. Sales lies in persuading and convincing a person to buy a product that is suitable. Marketing involves all the activities right from the conception of the product, to branding, advertising and retailing. It is an all pervasive function from the product being ready to reach the market and ultimately to being sold to the customer.

Today here prevails a similar confusion with who is an investment advisor and who is the financial planner. It is quite common to find these terms used interchangeably, but it is necessary to understand that an investment advisor and a financial planner have the similar and vast differences as between sales and marketing.

Why is this confusion?

There is a real confusion among the investors regarding who a financial planner is and who is an investment advisor. These terms are used very loosely, so it is necessary that one understands the function of each of these professionals and approach the right people.

The main confusion in these terminologies arises out of a person’s own perception. This arises due to most professionals offering financial services like insurance advisors, mutual fund distributors and stock brokers calling themselves financial planners. This term has been used very loosely by many to suit their own convenience and image. This is more like a compounder professing to be a doctor, when he/she knows purely only about the medicine that one has to dispense. A compounder will not have the expertise to diagnose the disease that needs to be treated.

Who is the Financial Planner?

Financial planner is involved in planning all the finances of a person. His job includes drawing up an appropriate plan that covers all financial needs and goals in the short, medium and long run. Such a planner is like an architect of a building and helps to analyze and draw a complete map of how his or her client’s finances need to be planned. It includes considering the need for liquidity, cash management for various needs, goals planning and feasibility, long term cash flow, estate planning and risk management.

Who is an Investment Advisor?

In contrast an investment advisory/advisor is a person or group that helps his client to decide on the financial products that he or she should invest in. Such an advisor understands what his or her client actually wants after communicating with him or her and understanding the need. An investment advisor makes a thorough analysis of the various securities before doing so.

Hence investment advisory is just one of the ingredients of financial planning.

Goal Achievability:

A financial planner will be able to tell you, is it possible to achieve all your financial dreams with your current and projected earning capacity. If it is not possible, then the financial planner will be able to tell you what could be achieved with your earning capacity and to achieve all your dreams what kind of earning capacity you should have.

Risk Management Plan:

A financial Plan also covers creating a risk management plan. A risk management plan includes creating an emergency reserve, assessing the human life value and suggesting a term insurance; identifying medical insurance cover required and suggesting a health insurance plan; and also suggesting a general insurance policy to cover the natural perils like fire, flood, earthquake … against your properties.

Investment Plan:

A financial plan that suggests investments comes only after all the aspects have been analyzed fully. The best investment advice can only flow out after a deep analysis of a client’s need and after the preparation of a financial plan. Financial Planning should precede the investment planning.

Existing Portfolio Revamp:

It is also necessary to understand that a financial planner also looks at past investments. He then makes necessary changes to make them amicable to achieve a client’s financial goals over a period of time. Also he will assist you in restructuring your existing outstanding loans. If necessary he will create a debt pay-off plan also.

Tax Planning:

A financial planner should assist you in creating a tax plan also. This tax plan will be in sync with your overall financial plan.

Review:

A financial planner will do a periodic review on your financial plan and investment plan. If you are preponing or postponing one of your goal or if you have got a job promotion, then you may need a financial plan review. If direct tax code has got implemented or one of your investment schemes underperforming, then you may need an investment review.

In a nutshell a financial planner will not only give you an investment advice he assists you in managing your personal finance in a complete, comprehensive and a holistic way.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Principles and Decision-Making for Wealth Creation

2011-12-30T03:30:00.000-08:00

Whenever people have surplus money, they want to invest. When they invest, they just want to act or execute. They don’t want to spend time on understanding the product and various investment strategies. They would like to take investment decisions without doing any homework. There is no plan of action. Their attitude is “I have surplus money; just tell me where to invest”.

Misselling:

These kinds of investment decision making will make you fall prey for misselling. As you are not interested in doing the homework and if someone comes with a long chart and calculations for 20 years, then you may find it interesting and end up buying products like ULIPs. When you realize that you have invested in a mediocre product, you will blame the agent or broker and not yourself and your wrong decision making approach.

Market Moods:

When you just want to act, your investment decisions will swing based on the market moods. If the stock markets are highly volatile and it is comes down day by day then you may think that instead of investing in stock market investing in debt funds are fixed deposits are safe and wise. If the stock market goes up and everyone is investing in the market including your driver, then you may think it is opt to invest in shares or equity funds. So in this case you will never buy low and sell high. In fact you end up buying at peak and avoiding the market when the share prices are low.

Aggressive Trading:

Blindly, some investors believe that by doing aggressive trades in shares and derivatives are the quick way to make money in the stock market. They enjoy their higher degree of involvement with the stock market. They feel very happy about the few successes in the stock market which give them comfort in accepting many losses. They don’t go back and calculate how much they have made or lost in a trade; what is the total profit or loss they have made in a particular year. These investors will learn very old lessons of investment after losing a huge amount of their hard earned money.

Wealth Creation Secret:

The mistake investors do is they don’t understand the basic investment principles. They simply try to make some investment decisions. How can these investment decisions be right? Very difficult. As an investor, you need to understand the investment principles. Then based on the investment principles, you need to take the investment decisions. These investment decisions will be right for sure. Without right investment principles, right investment decisions become impossible. Without right investment decisions, long term wealth creation is just a day dream.

Sound Investment Principles:

Asset Allocation:

Depending upon your financial goals, you need to arrive at the required rate of return from your investments. You need to decide what kind of allocation needs to be given to different kind of investment avenues (like Fd, Debt funds, Equity Funds, Gold ETF..) in order to achieve the required rate of return. Once decided, don’t change this asset allocation ratio depending upon the market movement.

Risk Vs Safety:

Whatever the long term savings you have got you can invest in risky assets like equity funds. You will be adequately rewarded for taking risk in the long run. Whatever the short term savings you have got you can park it in FDs or debt funds.

Investing your long term money in safe avenues will be a destruction to create long term wealth. You will not be able to beat inflation. Similarly investing your short term money in risky investments is also dangerous.

Fundamental Factors:

The returns an investment generates will be based on its fundamental factors. Analysing fundamental factors only will lead to a long term success. There is a lot of difference between taking one right investment decision by fluke and taking right investment decisions regularly by analyzing the fundamental factors.

These investment principles are very simple and straight forward. At the same time these principles are very authentic and profound. The magic formula for creating long term wealth is “Sound Investment Principles + Right Investment Decisions = Long Term Wealth”.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

Financial Lessons to Keep in 2012

2011-12-29T02:30:00.000-08:00

As we are coming to an end of 2011, this is the time to reflect on the year gone by and the time to look forward for the New Year. You may use this chance to review your financial scorecard for the last year and need to make necessary changes and create an action plan to improvise the score for 2012.

Here’s the list of financial resolution for 2012. You may pick and choose a few among these and implement to improvise your personal finance management system.

1) 1) Would you like to prepare a workable budget for the year 2012?

You may choose to create a workable budget for 2012 by projecting your income and expenses. Also consider investments committed earlier like insurance premiums, SIPs and other commitments like EMIs. Is there any other financial goal you are going to meet this year like buying a car or buying a property? Have you made the provision for down payments?

2) 2) Would you like to do a portfolio rebalance?

2010 ended with a sensex of 20509. This year it is trading around 16000 levels. So definitely there will be a requirement to balance your portfolio to restore your predetermined debt equity ratio. Probably you may need to increase your equity exposure. You can make this market fall as an opportunity.

3) 3) Would you like to resist the temptation to make quick profits?

Temptation to make quick profits is the biggest enemy of wealth creation. This temptation leads to speculation and gambling which in turn will lead to a huge loss. If you could take a resolution to resist this temptation you will not fall prey for bogus schemes that seem to offer huge returns.

4) 4) Would you like to repay your high cost loans?

Do you have credit card debt, personal loan, or car loan? These are all definitely high cost loans. Why don’t you chalk out a plan to repay these debts well in advance? This will reduce your debt burden. You can become debt free earlier. You will have more investible surplus if you are debt free.

5)Would you like to review your insurance?

You may decide to check the life insurance and health insurance already taken is sufficient or any additional coverage is required. If you have taken a term insurance policy through an agent, now compare the premium with an online term insurance plan. By changing to an online term insurance plan you will definitely save up to 60% of your offline premium.

6) Would you like to do an early tax plan?

If you have not done your tax saving investments for the current financial year, you may decide to do it now without any further delay. As soon as the budget session is over create a tax plan for the next financial year. Doing tax saving investments in the last minute may force you to think only on saving tax and not on your financial goals and choosing a best scheme in sync with your goals.

7) 7) Would you like to prepare a retirement plan?

Don’t put off today what you can’t afford to do tomorrow. In spite of the world wide pension crisis and a growing acceptance that we must plan and save for our retirement, the harsh reality is we are actually not saving enough. Research reports reveal that only 15% of the individuals are saving sufficiently for their retired life.

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.

8) 8)Would you like to avoid resolution pollution?

You need to be very cautious about setting too many financial resolutions and also need to avoid setting unrealistic financial goals. You need to set resolution which is workable. You need to keep realistic expectation on the outcome of the resolution. Over expectation may demotivate you. New Year resolution is not a magic. You will be able to progress it only over a period of time with constant practice.

Now you have all the information needed to create the New Year financial resolution. So go ahead and create one for you and your family.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Have You Done Your Financial Spring Cleaning?

2011-12-28T21:13:00.000-08:00

A Financial Planning Experience with a Client:

It was just another day that a new client came to us for financial planning. He wanted to know if he had planned well for his family financial goals. As a general procedure, I suggested that a study would help me come out with a comprehensive financial planning to meet his goals.

Explaining the Financial Planning Concept:

I told him that financial planning lies in addressing 4 important areas namely, risk management, wealth creation, wealth preservation and wealth transfer. It is an ongoing process throughout life. Financial spring cleaning done regularly helped to stay focused and keep track of your finances.

It is best to understand that financial spring cleaning involves collecting and assimilating data. This included various investments, present financial situation of the client. Then an appropriate plan was prepared and reviewed regularly considering changes. It is best to get a financial plan prepared by a certified financial planner or advisor that has the expertise, education and ethics and believes the plan would work for you.

Analyzing Life Insurance:

My collection of data told me that my client had more insurance coverage on his wife and dependent children than on him. In addition he had been sold certain unit linked plans by his investment consultant. These ULIP’s were disguised like profitable part of his overall portfolio.

So the first thing that I emphasized to him was to increase the term insurance coverage on him, so that his family was secure in his absence caused by sudden death. This was essential considering that he was the sole earning member of his family and still had various financial commitments before his children settled down.

Online term policies with nominal premium rates would be best for the purpose. I then told him that buying ULIPs are not good investments because of its heavy front loaded charges and under performance. As a part of portfolio revamp, i suggested to the client that he surrender certain policies and take up more of online term coverage on him.

Evaluating Health Insurance Requirements:

Client already had a general health insurance policy for him and his family. I also suggested that he should take additional health insurance coverage in the form of critical insurance. An additional critical insurance coverage would provide for income in case of critical illness eventualities.

Examining other Investments:

Stocks and MFs: A closer review of his investments in stocks, mutual funds and other portfolios convinced me that my client had gone wrong in many of his investments. I was surprised to find that he had been misguided to invest in penny stock and closed ended NFOs of mutual funds. These stocks and mutual funds were not just risky but also lacked adequate liquidity and profitability to cater to long term inflation.

PMS: His portfolio management that was done by 2 portfolio managers lacked consistency that was vital for growth. They had repeatedly bought and sold stocks of big stocks like Larsen & Toubro, Tech Mahindra and Siemens just to book minimal profit and paid high costs on entry, taxes, brokerage and exit.

It was also seen that my client had an unwieldy portfolio that consisted of certain stocks that were bought on momentary emotions. In addition both his portfolio managers were buying similar stocks and mutual funds that made for laying all eggs in a basket. In addition to lack of diversity in stocks, they had sold off more profitable funds to invest in least known. I suggested that he invest more in diversified large cap and mid cap funds.

Fixed Income Investments:

We suggested moving of fixed deposits that earned just 6.5% post tax to fixed maturity plans that yielded 8.75% post tax. We also suggested that he increase his contribution to Public Provident Fund and in the senior citizen account of his parents.

Client Reaction:

My client understood very well that his broker had not suggested investments taking into consideration his financial goals, risk tolerance and return expectations. We also rendered the service was to help our client create a cash flow management strategy. This would help him ensure surplus funds were appropriately invested in a diversified way.

To conclude once the first step was taken to embark on his new journey to a strong financial backing, we advised him to keep himself well informed about financial planning with knowledge from various sources. Finally he understood that it was worth taking help in financial spring cleaning due to the rich long term gains that would accrue to him.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner at Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

A Step by Step Guide for Buying Resale Property

2011-12-02T19:21:00.000-08:00

A resale property:

Who does not wish to live in a house of their own? Buying a new flat will take a long time, so some of us may wish to settle for buying a resale property. However buying a resale property could involve many legal and other procedural requirements. It is prudent to first understand the various procedures and safety measures for buying resale property to avoid hassles in future.

Buying Resale Property –A Guide

Consult Experts:

It may be ideal to engage a good real estate agent to locate a resale property. He would be in a position to locate sellers as well as guide you regarding the price of such properties in different localities. They would also be in a position to tell you about the seller of the property. Most real estate agents charge a fee and also help with registration, payment of stamp duty and other paper work involved in the purchase of resale property. In addition, taking the help of a good lawyer would also help to make sure that things are clear legally also.

Title of the property:

It will help engaging experts like real estate agents and lawyers to help you, but it is always better to be well-informed yourself when entering into deals for buying resale property. The first step in this regard would be to establish the title of the seller; whether he is the real owner of the property or has been given the power of attorney to transact the deal. All the documents with regard to the property need to be clear. In addition you need to make sure that all the original documents with regard to the property that were given by the builder or original developer are in order.

Documents:

Buying resale property seems great, but it could become a big problem if the documents regarding the original purchase and subsequent transfer of title are not properly stamped. Firstly it could pose great problems especially if you want to apply for a loan for purchase of the resale property. Subsequently it could prove to be unacceptable in case you wish to transact further on the property.

Existing Loan:

It is also necessary to make sure that the property documents are not lying mortgaged in the bank’s custody against a loan taken by the seller. The bank will consider a loan only once the loan taken by the seller is repaid and the documents released.

Loan Eligibility:

Buying a resale property would definitely provide you with a bigger space in case of older properties. However it is best to note that some banks may not lend money on buildings older than 10 years. This may be due to the reason that they may not want to take the risk of the price of the property going down. Banks also make sure to ensure that the bank’s outstanding loan should always be lower than the value of the property in the market.

Property Valuation:

Next it is imperative to note that the loan amount is highly dependent on the cost of the property. Technical experts would evaluate the property. However it would be useful to yourself avail the services of a property valuator at a small fee before approaching the banks. The bank’s property valuator may valuate the property at a much lower rate. They would also like to safeguard their interests against the fall in the price of the property in future.

More Down Payment:

Most banks wish to make sure that you be responsible for the maintenance and good upkeep of the resale property. So banks would expect you as the purchaser of the resale property to pay a certain percentage of the price as down payment. You may have to pay about 20% of the price as down payment; property of 50 lakhs requires 10 lakh as down payment.

Age of the property:

This down payment could be more in case of older properties. In addition, banks usually lend only on properties that are unto 50 years old. The tenure of the loan also decreases with the age of the property.

Flat Society:

The bank may grant the loan and you may make the down payment, but there could be another problem. It arises out of the need for some Flat societies that require the payment of a heavy price for change of ownership. It is best to consider this cost also when coming to a conclusion while purchasing resale property in cooperative and other societies.

Conclusion:

Buying resale property would give you a chance to settle in your own house fast and save you of high rents paid and the need to frequently shift your place of living. Taking a loan from the bank could give you tax deductions on the interest paid soon. You would not have to wait till the possession as in the case of new flats. It is always prudent to be well informed about the various details of the resale property.

A Layman’s Guide To Reverse Mortgage

2011-11-29T21:28:00.000-08:00

What is Reverse Mortgage?

Increased life expectancy has lead to the increase in the costs of living and medical expenses. This makes it difficult for many senior citizens that lack a regular income to live a life of dignity. Reverse mortgage is the solution introduced by the Union Government of India in 2007 helps senior citizens.

Understanding the concept of reverse mortgage better:

Reverse mortgage is the opposite of a conventional housing loan that needs to be paid back with interest over a period of time. Reverse mortgage helps senior citizens having a residential property to receive a regular income against its mortgage. The borrower and his/her spouse are allowed to stay in the place of residence until both die, aiding the living of a dignified life by senior citizens.

Workings of reverse mortgage:

A senior citizen couple should necessarily own a flat or house. Then they can pledge the property for a monetary value agreed upon by the bank. The value is generally fixed considering the present property values, demand and also the condition of the property. The bank starts periodic payment as a loan that is decided after consideration of margin of interest costs and price fluctuations in the property. It is an ideal solution for senior citizens that have residential property, but no finances for regular day to day expenses and medical aid. The borrower’s interest in the property decreases once the reverse mortgage EMI begin.

Guidelines for reverse mortgage:

The guidelines set by the Reserve Bank of India state:

Ø The maximum amount of the loan given generally as EMIs cannot exceed 60% of the property value. In addition the minimum period of the mortgage is 10 years, and maximum 15 years. However some banks have been recently offering tenure of about 20 years.

Ø The borrower can avail of the loan in parts every month, every quarter, every year or in a lump sum.

Ø The lender/bank would revaluate the property once in 5 years. If the value of the property has increased, the borrower has the option to ask for an increase in the amount of loan. He can also ask for the additional amount to be given in a lump sum.

Ø The installments or lump sum received in a reverse mortgage is a loan and not an income. Hence no tax is payable on it. However he has to pay capital gains tax when the property is taken for the borrower for the repayment of the loan on the mortgage.

Ø The interest paid on the reverse mortgage could be floating (fluctuating) or fixed, with this rate depending largely on the interest rates prevailing in the market.

Eligibility for reverse mortgage:

A senior citizen can avail of reverse mortgage on his/her house or property when:

Ø He/she is above the age of 60 and his spouse that is a co-applicant is above 58 years of age.

Ø The property is the permanent residence of the individuals and is self-occupied. The property should be self-acquired and located in India. The title should be clear of the borrower’s ownership.

Ø It is mandatory for the property to be free of encumbrances and it should have a minimum life of about 20 years.

Settlement of reverse mortgage:

Ø The reverse mortgage loan is payable on the death of the last surviving life partner. It could also become payable when the borrower sells off his/her property. In such cases the bank gives the choice to the heirs to settle the loan with accumulated interest. Otherwise the bank arranges to recover the same with the sale of the residential property.

Ø Any extra amount that remains after the loan with interest and expenses has been settled is passed on to the legal heirs. If the sales proceeds are much less than the loan, the bank. In case of losses that could occur due to wrong estimation by the bank is borne by them.

Ø The loan could be foreclosed when the borrower has not continuously stayed in the house for a year or has failed to pay property taxes or insure the house. The loan is also foreclosed when the borrower turning bankrupt, donates or abandons his property. In addition renting a part of the house, adding an extra name to the ownership could all affect the lender’s interests and lead to foreclosure of the mortgage. Government statutory provisions could also require it.

Some other highlights of reverse mortgage include the borrower’s option to prepay the loan with interest. Also one or both spouses could outlive the period of the tenure. Then the bank will stop payment of monthly installment. They will however wait for the both the borrowers to die before settlement. Reverse mortgage involve long, tedious, difficult and complicated procedures. In addition they have no provisions for increase in monthly payouts.

Lastly reverse mortgage has failed to gain much popularity in India, with marketing strategies being inadequate. The reason is also that many banks are fixing the maximum limit of loan. The resentment among the heirs and family sentiments are also some of the other reasons. It is true however that reverse mortgage is the solution for financial sufficiency in lives of most senior citizens.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the r and Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

7 Insurance Myths Debunked

2011-11-29T02:19:00.000-08:00

Planning for contingencies like death and hospitalization also forms an important part of financial planning. Buying life insurance provides for the living expenses of bread earners family in his absence on death. Let me debunk a few insurance myths today so that you will be able to take better financial and investment decisions.

Myths about Insurance:

Myth 1: Life insurance is a waste of money. But it is good to understand that it is bought to protect ourselves from the contingency of untimely death. It would give finances for living expenses of your family if you die young. Life insurance is an investment that is more a safety mechanism; it is to provide financial security on death. Term policies that cover the risk of untimely death only are cheap and most ideal for providing life coverage alone.

Myth 2: Life insurance is taken to save taxes. This could probably be a selling point for agents. But far from the truth tax savings is one of the benefits arising from life insurance. The main benefit is the provision of finances in the case of the death of the policy holder. Saving taxes alone can be done by other tax saving instruments like mutual funds, tax saving bonds and Government bonds, post-office savings schemes and PPF. So paying premium to cover the full financial needs of the family in case of the death of the bread-earner is very important. This is about 7 to 10 times the annual income.

Myth 3: There is no need for life insurance in case of very young people. This is a wrong notion for death is something that could happen to anyone at anytime and in any way. The common notion that people die when they are old may be true to a large extent. But covering of risk of death is definitely better than to be left financial bereft in case of an untimely death. In addition it is smart to take benefit of the lower premium rates offered to the young. Also you may find it difficult to take life insurance when you are old due to higher premium rates or being refused because of ill-health.

Myth 4: Life and medical insurance is provided by employers, so we need no life insurance. This benefit is available only until you are in a particular company or till retirement. Also life insurance provided by employers may not adequately cover the living expenses of your family in case of your untimely death. It is smart to buy medical insurance young, as fresh medical insurance taken just prior to retirement could be refused on medical grounds. Critical illness policies help meet additional living expenses of the family in case of critical illness.

Myth 5: Unit linked plans for a limited period seem attractive. I would say that this is more of a sales gimmick in many cases. Most insurance products are so designed that the major costs are incurred in the first few years and deducted from premium. There are charges that the company wishes to recover over the entire tenure of the policy. So very less is actually invested in units. So it is best to look at unit-linked insurance plans with an open mind and consider a commitment of periodic investment for the whole tenure of the insurance policy. Paying for a longer tenure could result in a more profitable proposition.

Myth 6: Buying a policy in the name of a minor child is best. This emotional sentiment selling point has helped many to sell insurance. Also the premium paid on child policies may be much less than an adult wanting the same coverage. A life insurance policy is taken to replace loss of income to the family, so taking a policy where the child is a beneficiary or nominee may be smarter.

Myth 7: Pleasing your friends/relatives/associates is very important.

Kindly avoid taking policies just for the sake of satisfying your friends and relatives who are insurance agents. Also you need to avoid taking policies just to maintain the relationship with business associates like bankers.

Insurance policies need to be taken to based on the need. Now a days online term insurance are 50% cheaper when compared to the term policies taken through agents or brokers.

Having understood these myths I am sure dear friends you would make insurance a very valuable and useful proposition for you.

A Guide to Choose the right Mutual Fund Scheme

2011-11-23T21:58:00.000-08:00

“Models work when they are appropriate for the particular circumstance, but some of the best investment judgments over time have come when people recognized that models derived in other periods were broken or not directly relevant.” Abby Joseph Cohen

Investing in mutual funds seems interesting, with number of websites, TV and other finance and wealth magazines publishing various information. However it is a challenging task and involves knowledge regarding the shares and securities market and various laws that govern mutual funds is necessary before investing in them. Understanding the principle of mutual funds; the investment of the money of a large number of investors in stocks, bonds and money market instruments that are managed by managers makes one feel relieved. However it is best for you as an investor to make a right choice of the mutual fund that suits your need.

Choosing right MF:

Investment Objective & Time Horizon

The objective of the fund or the use to which the funds would be put to would be a vital deciding factor. Mutual funds investing in stocks would suit those that are ready to take more risks; stocks means more exposure to the volatile market though higher returns. The length of time that one has to wait to get reasonable returns also plays a vital role. So it is best to read the offer document or fund brochure carefully before making the decision.

Liquidity:

In addition whether a fund is an open-ended or close ended one points out to how liquid your investment is. Open-ended funds are preferable to close ended ones as they can be converted to cash more easily than close ended ones that involve waiting for a period of time. Historically open ended funds have performed better than closed ended funds.

Diversification:

It pays to check for diversification in mutual funds, for an optimum diversification makes for a good choice. Opting for a diversification over 8 to 10 securities would be more risky than going in for diversification of 20 to 30 stocks. The diversification of stocks over 80 to 100 securities may mean difficulty of management to the fund manager. In addition making sure to ensure that there is a balanced diversification helps.

Fund Performance:

After getting comfortable with the fund’s objective, it becomes equally important to know and analyze the fund’s performance. This involves looking at the fund’s short term and long term performance and comparing it with larger market indices or benchmarks like BSE Sensex and NSE Nifty. A higher market index over a longer period indicates better funds, however past performances in case of mutual funds can never be a guarantee of future returns and can serve only as an indicator.

Level of Risk:

The level of risk involved would be another important indicator, with higher returns available only at higher risk levels. Would you like to go for a low risk debt fund or to go for a moderate risk balanced fund or a high risk equity fund? Look before you leap.

Volatility & Consistency:

Next it is to be understood that any 2 funds giving the same return are not necessarily the same, as one fund could be more subject to market ups and downs than the other. Volatile nature of funds is more a standard deviation meaning more risk involved. In the same category of funds, an investor needs to choose funds performing consistently.

Fund management:

The management of the fund plays an important role in deciding the best mutual fund for you, with professionalism being very important. The experience of the fund manager and the number of years he/she has been associated with the fund matters. With a new manager and frequent turnover are not good for investors.

Charges:

Things seem pleasant in mutual funds; however the charges like entry load, exit load, administrative charges and fund management charges on an annual basis are to be carefully looked into. It is significant to note that these charges cannot exceed 2.5% of the fund’s assets. Most funds have uniform charges, however hidden charges need to be looked into and carefully analyzed

To conclude mutual funds may be the best investments as they can be done in small amounts as compared to other types of investment and carry a comparatively lower risk. But your ultimate success in the form of good returns can only be assured with following these steps of smart mutual investment planning.

Financial Lessons from the Festival of Lights - Diwali

2011-11-19T18:02:00.000-08:00

Happy Diwali; let us discuss fireworks, Diwali and great financial planning.

As we wind up our festivities of Diwali 2011, my mind went to the powerful lessons that Diwali taught us all. These thoughts gathered momentum when I started thinking about the similarities of Diwali and financial planning. It made me realize that financial planning lessons were so simple, yet enlightening that even a 12-year-old could master its principles and start financial planning for a lifetime.

Fireworks and Diwali

I have always enjoyed fireworks, both as a child as well as a parent and found that mine as well as my children’s safety and comfort lay in obeyed certain rules while handling fireworks. This included avoiding loose and flowing clothes and wearing appropriate footwear, goggles and protection for the ears. Next noisy crackers caused hearing, ENT and nervous problems, with smoke causing ENT and allergic problems. This made me come to the conclusion that we need to enjoy crackers and fireworks, but were excesses were to be avoided.

Safety applies to all Diwali, as it does to other aspects of life with our requiring reading and following instructions on the boxes. Next keeping of a bucket of water handy to put off fires and keeping numbers of fire stations proves handy. In addition vigilance and safety of children while using fireworks is to be adhered to, with keeping fireworks out of reach from children when not in use. My dear friends now is the right time to view the great co-relation between crackers/fireworks and financial planning.

Grasp the financial planning lessons Diwali teaches us:

Ø Modern science with its developments have been able to render us some very useful lessons like noise pollution that could affect not only infants, the old, and those with nervous, heart and psychiatric problems, but also cause slow declining abilities in many others.

This applies to noisy stocks also; this noise pollution in the form of everyone talking about hot stocks and best next issue. This information could also affect us with its full impact. This inside information may at times prove very dangerous if acted upon. We have observed many investors not only being be charged with fines and/jail, but it has been harmful to financial professionals as well. Next if they are rumors the financial harm could be too large to recoup and rejuvenate easily and quickly. It is worth understanding also that some information could be stale and if acted upon cause indigestions of the worst order.

Ø The next most close and interesting co-relation of fireworks and the colorful nature of the festival Diwali are being prepared for emergencies, with this meaning keeping water and the numbers of the nearby fire stations handy. This applies to also using long sparklers and incense sticks, avoiding the use of metal and glass containers and using fireworks in open grounds.

It is true that emergencies and contingencies are a part of everyone’s life and being a wise and smart financial planner requires not only planning for emergencies, but also for contingencies in the form of death. Finances in the form of term insurance could provide for the stable lifestyle of your loving family on death. Health insurance and critical health insurance plans would provide for health and critical illness coverage and stable lifestyle in such contingencies. The youth could benefit also with investing surplus funds on land in remote places and allow it to appreciate. Creating contingency funds could act as emergency fire extinguishers.

Ø I appreciate those who have listened to the experienced regarding wearing appropriate clothing, footwear and other safety accessories while enjoying fireworks. Financial planning for a lifetime also requires certain measures.

Understand that investing is different from financial planning for a lifetime. Financial planning requires clear understanding of the risks and returns available on the different investments like shares, mutual funds and fixed deposits in companies and banks So you need to draft a clear risk management strategies in while constructing your portfolio.

Ø Storing of fireworks out of reach of children properly requires as much innovation as children are very smart to fool parents now-a-days and get into accidents and dangers. Parents need to be smart and creative to find out what works and what doesn’t. The same thing dear chums apply to safety and security of our investments.

Safety and appropriate storage of our precious investments in the form of shares, mutual funds, land and flat documents, gold and gold ETF, insurance and other investments lies in storing them in separate places in lockers at home/banks and other places.

In addition to storage, the information regarding where we have stored these documents should be a family information and secret for safety.

Finally, we were taught by wise parents to not make our own fireworks, as it is not our expertise. Similarly a financial expert is the best person to advice us on financial planning for a lifetime. Finding and engaging a financial planner would be best to create and make changes in your financial planning according to your life’s changing circumstances.

Nuggets from Social Media Summit 2011

2011-11-09T22:42:00.000-08:00

The Social Media Summit organized by Echome and MOP Vaishnav college was very interesting and informative. I'm sharing few key points jotted down at the summit.

Infographics is the new Link Bait.
Nobody advertised with Paul the Octopus during FIFA World Cup 2010. We need to be flexible and create new marketing campaigns in a jiffy.
Avoid cyber squatting. Block your domain names quickly.
Your marketing budget is inversely proportional to your marketing IQ. Savita Bhabhi is the best example of zero budget marketing.
Deep commenting will have more visibility. The comment size will be longer than a Tweet but shorter than a blog post.
Listen. It is very important. Listen to keywords, brand names and any other data related to your field. Broadcasting is not Social Media.
DELL has a 2000 strong center called "Social Media Listening Command Center." The centre listens to 22,000 DELL-related keywords.
Placement (4Ps) of Philip Kotler is no longer valid. Geography is now History. People in India buy more books from Amazon in UK rather than Flipkart in Bangalore.
40% of consumers who Like a brand later Unlike it.
The audience has moved from captive to active, deference to reference, herd to swarm.
You need to create an emotional connection with the audience. The Knorr Sidekicks advt with Salty created an emotional context with a creative video and song.Salty had 6000 Facebook fans and 3,75,000 video views.
Consumers research Online and purchase Offline.
Buffer App can be used to time your Tweets. You can time 10 tweets per day for free.
Be a knowledge repository in your field. The award winning Cafe Coffe Day Facebook page has all details about coffee.
Edge Rank is driven by relevance and engagement. no of fans is irrelevant.
Passive engagement > Prompted Engagement > Unprompted engagement
Digital is the most trusted media. Shattered reputations can cost millions.
Even though social media is more popular with B2C, we should not forget that people run organizations and people make decisions in a B2B scenario.
But B2B market will focus on getting 20 contracts from G2000 companies. So, the question of the need for social media in B2B arises.
Video will rule the Social Media market. However, YouTube is only 30% to 40% of video market. There are are video sites like Vimeo and more.
Keep a watch on Buyer Touch Points (BTP) and Influencer Touch Points(ITP)
Bad customer feedback/comments about your company/service can spread virally. Hotel Fortel has quite a few bad comments on a web page.
When a person on a bicycle was denied entry to Hotel Leela Palace in Bangalore, the issue became viral on the Web.
You need content writers and not BPO staff for writing media savvy content.
CTS Outreach evolved from internal blogs and is now developing with an internal tweet platform C-weets
Blogologues is a concept of drama/theatre made from blog posts.
Even if companies block Facebook with firewalls, employees access social media using their smartphones.
Celebrity endorsement in Social Media is in. When actor Trisha retweeted about puppy adoption the number of adopters doubled in no time.
Use Linkedin for low involvement, low engagement, e.g selling network servers .
Use Facebook, Twitter for high involvement, high engagement, e.g like selling cars.
The general route is Facebook to company website to sales.
In 2012, Social media will be greater than TV.
The Ubiquitous Social wall that allows you to access Facebook even in your bedroom wall is the most awaited.
Marketing management is going to become like air traffic control.
A good Social Media Policy for your company helps.
Business Intelligence comes from customers. Crowdsourcing is in.
Clients have to be clear about what they want in e-marketing.
Great brands don't advertise. Their product itself is an advertisement. There is no brand selling but just word of mouth. e.g Google, Ferrari, Twitter, FB
A Feedback in Facebook: I always dreamed abt a professor who is very tech-savvy, who will giv attendance if v attend classes thru online, who will publish his all lectures thru blog, who'll correct assignments online n all........and last week, i met my DREAM PROFESSOR at Social Media Summit,Chennai! He s Prof.Ravindra Dastikop frm B'lore. He used to give attendance to his students [evn if dey r not present in class]. The only thing d student shud do is dat dey need to send the summary of his class within 24 hrs via FB or other social medias......!!!!!!!! His blog is ON 24/7 :-) [ Don forget to chk out his blog: http://dastikop.blogspot.com/ ]

Mahesh Murthy at SMSin2011

How Parents Can Raise Financially Smart Children?

2011-11-02T22:52:00.000-07:00

"Someone's sitting in the shade today because someone planted a tree a long time ago." Warren Buffet

This quotation, it made me think that this is what children that were taught to be financially smart turned out as adults. This next made me feel that it was just not important to send children to school to learn how to count and write, but as parents to teach them about the value of certain aspects in life. With consumerism overtaking the economy even in developing countries of the world like India, many youngsters are having easy accessibility to credit cards and EMI’s, making our children realize the difference between a real want and need would make them financially smart for a lifetime.

Hence smart parents should assume a vital role to render useful lessons of financial management to their children. Smart parents would not only render useful finance lessons, but would also be a prominent example and take effective feedback by making their children a partner in their financial decisions.

Let’s look at how we can make parenting to raise children, who are financially smart, an interesting and enjoyable experience.

Have a look at these aspects in inculcating learning about personal finance:

Ø Simple living: My grandfather has always been a part of my learning principles of smart financial management and I respect him for what he always told us as children, “Simple living and high thinking are the essence of life. We should be able to live with minimum wants if we wish to have an umbrella over us for a lifetime.” He was a standing example or what he preached, making me feel we could make our children lead better lives if we rendered these lessons to our children and practiced it ourselves to set an example.

Ø Setting Financial Priorities: Setting priorities in our children such as ‘having basic necessities of life like food, clothing, and shelter were more essential than fancy and fashionable articles’ would surely help. The habits built at the cradle carry on to the death bed. This applies in educating our children about the clear demarcation between wants versus needs.

Setting up financial priorities in children could start off with teaching them budgeting that is appropriate to their age. Inculcating the habit of budgeting in our children would start off with working together with them and making a child friendly budget. Young children are very happy to have budgets prepared with bright colors, graphs and other visuals. A joint effort would make them feel a part of it and be ready to cooperate and learn.

Ø Goal Oriented: My observation of financially smart adults made me understand that they believed in saving for a goal. So we need to involve our older children by involving them in budgeting for costlier possessions like car, a house, new furniture or probably saving for a sound education or marriage. It is true that even younger children need to be encouraged to save for small fancy needs like probably going for a movie, an evening having pizza or that remote control toy or Barbie doll. Their achievement would give them a sense of fulfillment that could make them feel motivated and focused to save for bigger goals.

Ø Rewards: Motivation has always been the keyword to progress, so praise and rewards could also make a great impact on children learning and implementing financially smart objectives. In addition teaching our children of how to survive and earn would help. So suggesting alternative ways to earn, like helping in the cleaning of the car, helping younger siblings with homework, running errands like shopping for essential or helping in small household chores in an age appropriate manner would surely help.

Ø Banking: “Putting your savings in the bank would help you earn more money to meet your financial goals,” is what most financially smart parents would have instilled in their children right from childhood. A savings bank account started with parents being a guardian would help overlook their children’s spending habits and guide them.

Ø Financial Learning: In addition instilling a habit of reading articles and reviews on finance have helped many financially smart children to save for their future once they started earning.

Stocks, shares and other financially appreciating instruments are best taught to older children, with involving them in real life examples of your investments helping a lot. Next is to introduce them to credit cards and loans. When they should be taken and when they should be avoided need to be taught well in advance.

Experience makes principles of smart financial planning more deep. So allowing our children to borrow money from us and repay it back with/without interest makes them realize the impact of loans.

Lastly do realize that each child is made in a different way with different spending and savings traits. Identifying each child’s financial habits early in life would help us to guide them tactfully without being imposing on them. I have known of children who have learnt better by their falls in financial decisions, so just rest assured that experience sometimes renders the best lessons for a healthy financial life.

(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.)

A Comprehensive Checklist for Buying Term Life Insurance

2011-10-29T18:58:00.000-07:00

Buying insurance for protection and wealth creation has always been a very complicated task involving careful analyzes. The analysis involves the amount of coverage, reason for coverage and the term/time that the cover is required. Term policies taken for a specified period of time like 5, 10, 15, 20, or even 30 years helps to look after family’s financial commitments like education and marriage of our children and the day to day expenses for a reasonable standard of living.

Term insurance policies that resemble motor/house insurance are not subject to the law of indemnity as damage due to human life cannot be measured. Taken for a specified period when financial obligations have to be met, no money is generally paid back if death does not occur in the period.

A bird’s eye view of term insurance policies would tell you:

· Term policies are cheaper as they cover only the risk of death happening within a specified period. In addition the premium charged depending on the age of the person insured and time of coverage required with medical examination being compulsory in most of the cases.

· With very competitive premium rates being the present scenario of the insurance sector, it is found that most companies encourage insurers to take a much higher coverage for extended period of time even up to 35 years or 65 years of age. This accounts for popularity of these policies for people with long term financial commitments.

· Term life policies can be bought very easily either online or through life advisors that market and service these policies. You would benefit buying term insurance policies online as this does away with the expenses of agents/life advisors commission. This accounts for discount in premium.

· In addition a check of the insurer’s 'claim settlement' ratio or the percentage of claims settled by the insurer of the total received would help, with this available on the IRDA website.

· Once death occurs and claim is to be settled this is done in a lump-sum to the nominees or beneficiaries. This depends on the terms of the policy that the insured has taken, with the settlement free of tax payments.

· Term plans suit young earning members with dependents, with the low premium allowing them with additional funds to invest in lucrative equity-linked savings schemes that provide tax breaks

Deciding different factors about term life insurance:

Term insurance serves as the best life cover for large amounts and extended terms to meet your family’s financial commitments if you are not there. Insurance experts suggest about 12 times your annual income added to your total liability less investment in various assets.
It is important to note that liabilities include loans taken for house/ personal/ vehicles/and other obligations.
You should also consider amounts required for the education and marriage of your children, healthcare needs for your spouse and dependents and other amounts that would be required to maintain a reasonable lifestyle.
Term life insurance policies are mainly meant for earning members of the family, whose financial commitments have to be meant on his/her death. It is however not meant for the young, unmarried working people that have no dependents or financial commitments.
Term plans are best taken for amounts that consider not only the present financial needs, but also inflation, increase in salaries and lifestyle needs. The premium could rise with age and with increase in the amount of insurance taken and with riders/ additional benefits like personal accident insurance and critical illness coverage.

Insurance contracts being contracts of utmost good faith require revealing of material facts that would influence its acceptance. This could include your existing health conditions, family history and details of other insurance contracts that have been rejected in past. Undergoing a medical examination if necessary may help reduce chances of claims being rejected in future.

Term policies are best taken in blocks and increased or decreased according to need. Reviewing insurance needs every 3 to 5 years is ideal to adjust insurance needs. Taking insurance in blocks provides for flexibility to discontinue some in case of decreased financial obligations with time.

Finally take care to ensure that you have read and understood all the information to the best of your knowledge and disclosed the correct material facts like age, income and present health status. In addition carefully go through the signed proposal form and policy document and inform the insurance company in case of discrepancies within 15 days of issue of policy.

Factors to Consider Before Investing in IPOs

2011-10-21T23:54:00.000-07:00

IPOs or Initial Public Offering is best understood as the first public offering of shares by a private limited company before listing in a stock market. Looking down IPOs history of success and failure stories, you would be smart to first fully understand the various aspects behind such offerings and makes the right choice to invest or not in IPOs.

It is advisable to understand that

investing in IPOs could prove risky with unfavorable market situations and sentiments and when the fundamentals of the company and industry are weak. It is best to go by facts, avoid being influenced by rumors and have a closer look at the past performances also.

Understanding the concept of investing in IPO does require a clear look into these factors:

v It is not wise to believe rumors and success stories of IPO’s at face value, for investing in IPO’s is not easily learnt and there could be some misconceptions. So it is best to venture into IPO’s only after you have learnt the art of investing your hard earned money in them.

v It is wrong to be overwhelmed with hearing general statements that some IPO’s are attractively priced. You would be smarter comparing the price earnings ratio that helps get the relationship between the stock price and the company’s earnings and comparing it with those of competitive companies.

v Beware of being under the misconception that investing in IPO’s could give you great gains on listing. It has been noticed by both amateur as well as experienced investors that sometimes high losses are also made. It would be safer and secure not gambling in the shares of new issues.

v It is good to experiment with new products in the market. But I would say that it is not smart to have this attitude with shares and invest in IPO’s. Investing is about getting effective and safe returns on the hard earned money that you put into shares, so it would be smarter putting your money to work in index stocks that have been in the market for a long time and have survived the volatile economic market for long.

v Beware of being influenced by the favorable feeling and trend in the investment market to borrow money from financial institutions of brokerage companies for getting higher allotment of shares. It is sometimes very difficult to judge the trend of the market especially as an amateur and this could make you end up in huge losses coupled with the repayment of the loan with interest.

v Some assume that investing in IPO’s would surely bring about gains in the long run. However I would suggest that you would definitely be much better off investing in good listed shares that have a proven record, though they sell at a higher price. However you may invest with sufficient information of the IPO’s, but could not always be sure that the listing will not bring down the issue price.

So it is best to be prudent and informative before investing in IPO’s.

Factors that have a bearing on analyzing investments in IPO’s:

v It is first important to know that companies are required to file their draft red herring prospectus (DRHP) with SEBI while floating an IPO. Analyzing this document would give you financial and other information about the company. The highest percentage of shares held by institutional investors, banks and financial institutions could be a positive indicator to invest in IPO’s.

v The draft red herring prospectus (DRHP) would also provide other important information and indicators like the quality of management. The quality of management like their work experience, their past history or work experience, qualifications and projects handled would help in the decision to analyze IPO’s.

v Another factor having a bearing is strong promoter backing. Big companies like Tata and Birla bring about credibility and also add a premium to the price of IPO’s. The ownership by the government and public sector undertakings are also an indicator of high level of safety of returns.

v The other major, though not the only indicator though is grading, with a higher grading being good. However also could be false as seen with the IPO of Vasvani Industries that had a 2/5 grading. Similarly high graded companies like Galaxy Surfactants with a CRISIL rating of 4/5 withdrew its IPO. So it is best to understand that even some good companies withdraw their IPO’s due to poor public sentiments and difficulty experienced in raising funds in the market.

v The objective for raising funds would prove to be an important indicator to its profitability and time for return. Finding out this objective looking at various factors like the businesses past performance, future growth prospects, potential rate of return and profitability. In addition it is best to avoid investing in businesses that you cannot understand.

v Last, but most important a periodic review would help you understand how your investment in IPO’s are fairing and help effect follow-up. However it is advisable to avoid taking hasty decisions to sell, as some IPO’s have underperformed initially but has given consistent returns in the long run. But prompt follow-up action would be required in case of IPO’s that lose very badly or are fundamentally wrongly invested.

To conclude investing in IPO’s is best kept to the minimum as they involve a high level of research and uncertainty. However if they are selectively chosen they would help avoid investments with bad performance.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Investment Behaviours and Returns

2011-10-18T06:00:00.000-07:00

Why investors are not making returns in the stock market?

In the last 10 years, sensex gas grown at 17.79% CAGR. That means, if someone could have invested Rs. 1 lac 10 years back, it could have grown to 5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds Rs.1lac, it could have grown to Rs.9.31 Lacs.

But how many investors have REALLY got these kinds of returns…?

In this context knowing about the study conducted by Dalbar to determine how the investment behavior and decisions impacted the overall investment performance would be advisable. Dalbar, Inc. is a US based leading financial services market research firm. They have done comparative study on the returns of S&P 500 Index and the returns of the investors for a 20 year period ending 31-12-10.

The study revealed the following two important facts.

· The average return of the S&P 500 during this 20 year period is 9.14%.

· The average return of the equity investor during the same period is only 3.27%

When the market is delivering so much, why is that the investor is making out less? What are all the factors contributing for this gap in the market returns and the investor returns?
Though the market is delivering returns, investors were not able to benefit. Why is it so? What went wrong? It is because of the nature or character of the investor.
Agriculture is getting affected by nature, either because of excess rain or no rain. But we found out a system to fight against this nature. We built dams. So whenever there is excess rain, dams retain water to save agriculture and whenever there is no rain, it releases water to help agriculture.

Similarly investors are supposed to find and build a dam against their nature and behaviour towards stock market investing in order to get better returns.
What are the natures or behaviours of an investor that blocks him from getting the market return?

Fear:

When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. At that point in time everyone will come with their own logic, reasoning, and statistical evidence on the chances of further losses. Fear stands for “False Evidence Appearing Real”.

Greed:

Most of us have a desire to acquire as much wealth as possible in the shortest amount of time. This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term.

An investment portfolio based on ones personality

Basing investment portfolios on one’s personal likes and dislikes are the first of the powerful influences. It is like investing in cars and fancy gadgets just because you love them. Investing on shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run. It is true; our investment fancies make us pay a heavy price.

Follow the flock policy

The follow the flock for fear of being the black sheep policy makes you as an investor to believe in following others in the share markets. The pitfalls of group behavior lead us to buying high and selling less.

It also leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. Buying high and selling low has made many investors suffer heavy losses in the long run.

A look at positive investment behavior:

It is good to be investment smart with humility and reasonable aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks.

Patience over a lifetime and being able to assume stress helps in aiming for long term positive returns and contributes to assuming less financial stress after retirement.

Positive investment behavior requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction of extreme financial prosperity, both can destroy a lifetime of healthy investment. A long-term investor needs to realize that neither despairing nor elation of situations in civilization proves worthy for long term financial portfolios.

(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.)

Gold Exchange-Traded Fund (ETF)

2011-10-14T05:59:00.000-07:00

A Study on Physical Gold and Gold ETF

Stock Market has lead to tendency of many to go in for much safer investments that gives a reasonable return. This is the reason for gold gaining popularity as one of the safest avenues for investment.

Gold has always held importance as a good investment proposition since the days of our ancestors. But the recent trends of daylight robbery, murders and greed for the precious yellow metal with the difficulty of storage and safety of physical gold had made gold a cumbersome proposition. In addition, fraudulent and not uniform practices followed by jewelers and difficulty in establishing the purity of gold contributed to the popularity and desirability of gold ETF’s.

Gold ETF’s or gold exchange-traded funds are instruments investing in gold of 99.5% purity. Investing and maintaining these funds just required demat account and a trading account with a registered stockbroker. Gold ETF’s are more ideal than physical gold due the following reasons:

¨ Gold ETF’s are investments in gold of 99.5% purity only. It prevents one from falling into the clutches of some jewelers that fool customers with smooth and artistic talk. This avoids chances of misplacement of trust, as only a goldsmith could find out the exact purity.

¨ Owning something virtual like gold ETF’s does away with the difficulty of storage and security experienced in possessing physical gold. The units of gold ETF’s can easily be stored in both demat and trading account without being known to the greedy, cheaters, robbers and looters. A word of caution here, you could be sure of it all when you keep your units in accounts with privacy of user name and password.

¨ Gold ETF’s are most ideal for small investors as they can be purchased in small denominations sometimes of even 1 gram or ½ a gram. So ETF’s can be bought easily in small installments regularly and increased in the virtual form. This advantage is not available when investing in physical gold.

¨ Low cost, with affordability in dealing with gold ETF’s contributes to their desirability over physical gold. These instruments are listed in exchanges; the exchange traded mechanism helping to reduce processing charges, disbursements and collection charges. Gold ETF’s also help do away with the carry charges in gold futures.

¨ The ease to convert gold ETF’s into liquid cash easily at real time prices on the stock exchange avoiding charges like commission, and unnecessary fuss over quality and price by jewelers make them a desirable investment. This makes buying and selling these units easy.

¨ Right and uniform pricing in Gold ETF’s offered no scope for price discrimination that is experienced in encasing physical gold at the jewelers. One lacking knowledge and experience in dealing in gold would do best to invest in good gold ETF’s.

¨ Gold ETF’s offer protection from the liability of taxes. The taxation system for gold ETF’s is similar to non-equity mutual funds. One only needs to pay the lower of the two, long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation on profits made.

¨ Gold GTF’s are likely to show lesser tracking errors as compared to normal funds as the creation and redemption of units are done with units of the same type. This accounts for lesser liquid cash being required and the short time interval between buying and selling of units.

However some may disagree with me and say that the psychological satisfaction of seeing and feeling physical gold in the physical form is important and gold ETF’s are a fictitious concept. It is purely a question of ones own perception, but I would strongly contest gold ETFs if investment, safety and security is ones objective.

If you keep gold in the form of ETF, you will not have any emotional attachment towards that. You will really consider it as an investment. If you need money for buying a property or kid’s higher education you will feel free to encash it. But in the case of physical gold, we will not be prepared to sell it because we will have emotional attachment towards physical gold.

So, Gold ETFs are the better way to invest in gold.

Know all about Form 16 - Be an informed taxpayer

2011-10-12T21:39:00.000-07:00

Most of us are aware of Form 16 given by our employers before April 30^th each year that give details of the income earned, and tax deducted at source and paid to the government. This certificate proves useful in filing income tax returns. In addition banks also issuing Form 16 and Form16A to pension holders and those that earn interest income, with no Form 16 required when TDS is not deducted from salary. Knowing about Form 16 helps us to be a well-informed taxpayer and do better tax planning.

The 13 components of Form 16 are:

PAN that stands for Permanent Account Number, a 10 digit alpha-numeric code that is generated by the Income Tax Department of India. It is mandatory for everyone- NRI, PIO & companies that wishes to conduct business, file and pay taxes, invest, buy and sell property, open a demat or bank account to have this number in India. The need

TAN is best known as Tax Deduction and Collection Account Number is another mandatory 10 digit alpha-numeric number that is very necessary for all persons and companies that are responsible for collecting taxes. It proves useful to note that this number is unique in case of different companies.

Gross salary, the common term used in practice includes all regular incomes in an employee’s remuneration. It would include allowances, overtime pay, commissions, and bonuses, with all other amounts before the deductions are made.

It is best to know that perquisites are just additional benefits in addition to the fixed salaries. Known popularly as perks this term could include rent free accommodation, loans at subsidized rates and others.

Profits in lieu of salary are just payments given instead of salary that is given by at or in connection with retrenchment or termination of employment. This item forms a part of taxable income and includes gratuity, commuted value of pension, retrenchment compensation. However the contribution made by the employee or interest thereon is not taxed.

Next allowances in Form 16 are certain payments made or allotted to employees for bearing of certain expenses. It could include allowances like medical allowances, and travel allowances that are generally taxable in the hands of the employees.

House rent allowance or HRA In Form 16 refers to a special allowance paid to employees to meet the cost of housing. There is tax exemption on HRA and it is limited to the least of either the HRA received from employer, or rent paid in excess of 10% of the salary, or 50% of salary in metropolitan cities and 40% in other cities. The term salary here includes basic, dearness allowance and other commissions put together, this exemption not available to those that do not pay rent.

It is best to understand conveyance allowance as an allowance paid to an employee to meet commuting expenses between his/her home and place of work. There is a maximum exemption of Rs.800, with a special provision for an orthopedically handicapped employee until Rs.1600.

The term medical allowance paid for medical treatments and medicines is fully taxable. However reimbursement of medical expenses against submission of bills could get you a maximum exemption of Rs.15000 annually.

The allowance received to employees for entertainment services or entertainment allowance is allowed as a deduction for government employees. However in other cases one can avail of deduction as a least of actual allowance received, or 1/5^th of salary excluding all other allowances and perquisites or Rs.5000.

Deductions as in Form 16 is given as an incentive given by the government to invest in certain long term savings schemes. This includes long term savings for retirement, insurance schemes and others that give tax breaks.

All taxes in India are subject to an education cess that is 3% of total tax payable. This contribution is made towards the Secondary and Higher Education development in the Indian economy.

It is lastly important to understand the relief granted to employees when salary is paid in arrears in a lump sum best known as Relief u/s 89. This includes salaries received in arrears/advance, family pension received in arrears, retirement benefits such as gratuity, commuted pension, VRS and retrenchment compensation.

Understanding your form 16 helps you in many ways like planning for taxes, filing your income tax and so on.

Annual Bonuses Is The Time For Wise Money Management

2011-10-08T21:05:00.000-07:00

The month of annual bonuses seems like paradise when we start planning in advance on how to spend it. This excitement will get us into impulses of spending on things that give momentary pleasure only. This leaves us regretting for our decisions later. Wise money management and productively using annual bonuses will help us to take care of not just present needs but also of future needs and contingencies.

My idea of being a financially prudent and smart person would involve wise money management of bonus according to the life’s priorities and expenses. It is true worldwide that living in uncertain economic times after the global economic turndown, we all need to learn powerful lessons on wise money management. Every individual has his/her own peculiar set of priorities, but I believe that some suggestions would be well appreciated by all.

Ways that have helped in wise money management of annual bonuses include:

Ø Tax planning has and will always play a role in saving taxes and making meaningful investments for the future such as investing in mutual funds, fixed deposits and insurance related investments to save taxes under Section 80C. However I would suggest investing in mutual funds is best done through Systematic Investment Plans (SIP) or Systematic Transfer Plans (STP) that is best accomplished with opting for systematic transfer of funds kept in a savings bank account spread over a year. This helps to take advantage of market fluctuations and get good returns.

Ø I am sure we all realize the great benefit of living a life free of debt, than having to worry about expensive loans taken like credit card debts, personal loans, and low priced loans like education loans, home loans and vehicle loans. The priority should be on utilizing annual bonuses to first pay off loans carrying a high rate of interest, with it giving the advantage of saving on higher amount of money being paid towards interest on such loans.

Ø Life has never been certain and it is futile to expect it to be certain at any time, so wise money management needs to take care of unexpected and expected contingencies that could arise at any time. Being financial smart requires every person to set aside at least 3 to 4 months of one’s monthly income for contingencies like loss of job, illness, and accidents that could leave you in a financial crunch for a few months. This is best accomplished with setting aside some portion of the annual productivity bonus towards the maintenance of a contingency fund in the form of liquid and semi liquid funds like mutual funds and bank deposits.

Ø “Live in the present” is what many psychologists would tell you, but I would say it is best to take lessons from our past mistakes and set the stage to meet some of our future expenses and financial goals. The past is gone and would never come back again, but it is never too late to start saving for future goals like retirement, higher education of children, their marriage or maybe your goal to start a consultancy business based on your experiences. This requires carefully planning the period that you would not need the money and setting aside a portion of your annual productivity bonus in bonds and mutual funds with the correct allocation between equity and debt to meet your needs.

However I do not mean to say that enjoying life or luxuries like a dream vacation, an LCD TV or home theater should not be your cup of tea, because all of us earn and perform well at work to live life and not just to exist as some suppose. Enjoy your annual bonus king size with planning your financial priorities with the advice of your financial planner.

Financial Steps before becoming an NRI

2011-10-04T02:19:00.000-07:00

Are you planning to go abroad and become am NRI? Today you are a Resident Indian. Tomorrow you may become an NRI if your employer provides an opportunity. When an opportunity like this knocks at our door, are we ready to face the change? Are we prepared?

Creating a Checklist or ‘to-do list’ helps to ensure consistency and completeness in carrying out a task. Becoming an NRI is a major transition which definitely needs a checklist. Here is a personal finance check list to be taken care before departing from India.

NRO & NRE ACCOUNT:

The first thing to do is to convert your savings bank account to an NRO or NRE account. An NRO or non-resident ordinary account is like an ordinary savings bank account that gives a domestic rate of interest. This account can be used for depositing your domestic earnings like rent, interest and dividends and remittances from abroad into this account. Cheques can be issued for EMI and investment, but there are restrictions for transferring money to the country of residence. Money in this account is non-repatriable.

You can transfer current income earned in India, but transfer of sales proceeds of property and investments can be only to the extent of 1 million $’s a year. A certificate from a chartered accountant, declaring that all taxes have been paid has to be furnished. It is important noting that an NRO account invites a tax of about 30.9% at source.

An NRE or non-resident external account can be opened with foreign currency when you wish to transfer substantial money to the country of your residence. There is neither restriction to remittance nor any taxes in this account, but you would only get a low rate of interest. This account offers no facility to receive incomes in the shape of rent, interest and dividends, but you can make local payment in rupees, invest money and receive proceeds from sale of investments and property.

It is much easier to open both these accounts in India, and you need to give 2 passport size photographs along with a copy of your passport and visa. In case you are already abroad, it is mandatory to get an attestation from the Indian Embassy or Notary before sending it to the bank branch.

DEMAT ACCOUNT

The next step is to close your domestic demat account and open a non-resident ordinary (NRO) demat account under the Portfolio Investment Scheme (PINS). This is mandatory, as there are restrictions to the amount of investment that an NRI can make in the shares and stocks in Indian companies; it should not exceed 5% of the paid–up capital of any Indian company. You need to transfer your existing share holdings also into this account.

You have the option of 2 types of separate demat accounts namely for repatriable and non-repatriable shares and this account is to be separate from other bank accounts. Your demat service provider would help you on submission of copies of passport and visa. Once you return back to your country you can close the PINS demat account.

Power Of Attorney:

The third step is to give the power of attorney to someone you trust in India to manage financial transactions in bank accounts, buying and selling real estate, renting out property and signing up tax forms. The power of attorney could be general, where the authority entrusted holds good for banking as well as real estate transactions or could be specific, where the authority is restrictive to only certain transactions. Consulting a lawyer and submitting attested copies to the concerned people like banks and mutual funds proves essential.

Update your NRI status in Various KYCs:

The last step is inform the mutual fund, bank and insurance companies by submitting the updated Know Your Customer forms stating your change of status as a non-resident Indian. Your Financial Planner, Insurance agent, and bank branch could help you best regarding the different formalities that are required.

Now you are all set to assume your NRI status.

Is it necessary to have Insurance for Home Makers?

2011-09-29T08:23:00.000-07:00

It has always been a question of common belief that the male member or the bread winner of the family only needs to be insured. This belief has emerged due to the fact that the financial interests of the other dependent family members had to be protected in case of death of the bread winner. However changes of lifestyles and with more women being employed in lucrative professions both in big cities and towns the perception of insurance has changed.

In addition the entry of many MNC-Indian insurance joint ventures, and their bringing out unique solutions and products, it is time that we all looked into taking insurance policies for home makers too. Home mekaers have been neglected all these years with regard to insurance.

It would be interesting to study why home makers too need insurance:

Ø It is significant to note that in a country like India, homemakers contribute to households in the form of cooking, education of children and other menial work. But their importance and value of services evaluated in monetary terms is greatly neglected. It is true that the absence of these services on the death of the homemaker a big financial impact on lower and middle income families.

Ø Another noteworthy factor that places a value on insurance of homemakers is that they provide great counsel to their spouse and children. So losing them would mean that lots of money would have to be spent on counseling services proving that loss of love and companionship is priceless.

Ø It is also true that no one could replace a home maker mother and her loss could make it difficult to get competent and loving people to look after the family and children. It is also significant to note that the cost of competent daycare centers could be high and the cost of not insuring a home maker in lower and middle income families could be pretty high.

Ø There is a money value behind each and every household work performed by the home maker. In case of any eventuality to the home maker, one need to shell out more money to upkeep the house in order.

Considering various aspects like paying expenses out of the pocket, remarriage and insurance, insurance proves to be the most reliable and safest solution. The insurance cover should be proportional to the amount of financial loss that would be suffered or through a need based cost replacement analysis.

In addition to insurance to guard against financial liabilities in case of death of a home maker it is vital to also plan for a dream retirement home and college education funds through various insurance linked plans.

Health insurance:

It is also true that insurance needs to be taken for critical illness, prolonged illness, accident or a major hospitalisation for all family members. It would also be beneficial to take health insurance policies early in life to gain benefits like full cover of all ailments and lower premium.

However each family could have their own unique insurance needs, so taking the advice of a trusted financial planner in the form of an insurance advisor or trusted bank would help. They would render you correct information, best skills and advice based on your family’s financial circumstances, priorities and risk profile.

Insurance for the whole family also requires that all the adult family members be fully aware of all the insurance policies taken, their benefits and exclusions and where they are kept. Having an open discussion about long term savings and insurance plans both for the bread earner and home maker and for children build a better family understanding and bond. They also convey the message that proper life insurance coverage should form an integral part of financial planning in families.

Critical Illness: What a Disaster?

2011-09-27T05:50:00.000-07:00

Ursula K. LeGuin quotes “The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next.”

I agree with Ursula K. LeGuin for critical illness could strike anyone at anytime and in any place with the modern trend of rise in lifestyle diseases that call for prompt and costly medical care. The necessity of critical insurance or health insurance with critical illness riders was strengthened with my friend Mr. Karthik being diagnosed with multiple blocks in his heart that involved a treatment of 3lac. Then one more friend told us all about the necessity of critical illness insurance and health insurance with critical illness.

Understanding all about critical insurance and health insurance with critical insurance riders would tell us that most such health insurance policies would cover 12 critical illness besides others. They could include heart attack, coronary artery bypass surgery (CABG), cancer, kidney failure, stroke, coma, liver failure, primary pulmonary arterial hypertension, multiple sclerosis, major organ transplant, aorta graft surgery and total blindness.

These diseases and surgical procedures could be wanted by anyone, at any time and anywhere and hence cannot be neglected at all. Health insurance companies generally undertake to pay a lump sum for the treatment of these diseases irrespective of the amount spent. Some companies may include such coverage on payment of additional premium every year. This could vary from company to company and also between companies dealing in life and general insurance.

Features of Critical Illness Insurance

Ø It is quite possible to take up critical insurance policies or health insurance with critical insurance riders. When a critical insurance policy is taken the entire amount of the sum assured is paid on treatment of the critical insurance irrespective of the amount actually spent. Such a policy is a benefit plan.

Ø The benefit payment under the Policy will generally be paid to you on survival for more than 30 days on post diagnosis of the critical illness.

Ø However critical illness insurance will not cover ordinary hospitalization and medical expenses. While health insurance policies with critical illness riders would offer extra protection against critical illnesses with payment of additional premium. They would also pay the lump sum on the treatment of the critical illness.

Ø However one needs to understand that critical illness insurance does not have any maturity value and just offer cover in case of critical illness. Such amounts may lapse on their not occurring. Life insurance policies offering critical insurance riders have a maturity value but no maturity value is allotted for riders. Riders merely cover the risk of critical insurance. However this need not deter one from taking up critical illness insurance, as it is well worth to cover risk of high expenses with critical illness.

Ø Having a look into the premium on these policies would give us information that the amount of premium on critical illness insurance and riders for critical illness would vary depending on the age of the insured and the illnesses that are covered.

Ø Critical illness insurance could have exclusive coverage for all critical diseases or for only some, the terms and conditions varying from company to company. A check would prove useful before taking up a critical illness insurance or life insurance with critical illness riders.

Ø Tax benefits under Sec 80D or Sec 80C of the Income Tax Act are available.

Get Critical Insurance Today

“Caution is a most valuable asset in fishing, especially if you are the fish.”

I am sure you would not prefer to be the fish that is not cautious, for life is so sweet and short. Mr. Karthik and his family are now out to advice families like them, for they believe their experience could educate others too.

What are you waiting for to take protection today? Information is nothing more than mental garbage if it doesn’t transfer an individual. Unimplemented knowledge is a burden. Our problem is not ignorance; but inaction. Don’t fall into this trap.

One of these days is none of these days; today is the day to start the big job. Just browse the net, discuss with financial planners for better understanding of the coverage required and product clarity, and get quotes and rest in peace with the best critical illness insurance for you.

Child Plan: Is that REALLY Worth for your Kids?

2011-09-26T02:50:00.000-07:00

I am reminded of a Tamil saying, “Experience what it is to build a house, and get a child married”, probably that is the reason why wise parents invest to meet the long term financial obligations like education and marriage cost of their children. In addition the rising inflation rate also calls for starting savings early in a child’s life. However it would be advisable to know, evaluate and compare various means of savings. This could also enlighten you about how “child plans” need not be the only method.

Disadvantages of a Readymade “Child Plan”

“Child plans” with insurance resemble unit linked insurance plans, starting early in a child’s life and ending only when the child attains maturity. The amount of money invested in these plans is insignificant considering an in-built insurance component, and other charges like premium allocation charges that are the commission paid to distributors. This could lead to low return in the initial stages and additional losses on leaving before completion of the tenure.

Most of the “Child plans” in the industry comes with a catchy name to capitalize the “Child sentiment” in us.

We need a different medicine for a kid and adult. But do we necessarily need a different type of investment options for securing a kid’s future. Think.

Alternatives for Child Plan:

It is to be noted that other investment products like Public Provident Fund, National Savings Certificate, National Savings Scheme, RBI bonds, post office deposits and instruments and mutual funds that serve the purpose of savings and increasing of capital value apply equally well to investment for a child’s future.

Mutual funds are available in a wide range to satisfy all appetites for risks. In addition there are mutual funds that are designed for meeting long term financial obligations of children. One could also invest in funds with a right balance between debt and equity that promise better capital growth than child plans. It is also possible to go in for systematic investment plan that offers the opportunities of taking advantages of price differences and gaining in the long run.

It is true that systematic investment plans or SIP help save entry cost and build a habit of regular savings for capital growth to meet children’s financial obligations. It is also possible to avail of tax benefits as such funds are taxed only on maturity and a major child’s income would be taxed separately. I am sure you would agree that this would help saving unnecessary expenses and cuts in investing in child plans.

PPF or Public Provident Fund is also good as mutual funds, with opening a PPF account for a 20-year period in a child’s name helping to meet long time financial obligations of children. It has been stipulated that an annual investment of just Rs.70000 would leave you with almost Rs.32lac as a result of the compounding effect. It is difficult for a “child plan” with insurance component and upfront charges to offer you such a great return without taking much of risk.

An Ideal Mix:

Instead of going for a “Readymade Child Plan”, one can customize their Investment Plan for their child with a combination of Term insurance, PPF and equity diversified funds.
If tax saving is your motive one can consider ELSS funds instead of a regular equity fund.
It gives you similar tax benefit like a child plan. You get 80 C benefits for your investments. Also the returns are also tax free.
At the same time, the charges are very very minimum and negligible when compared to “readymade child plans”.
You can increase or decrease your contribution every year depending upon your financial situation.

So whenever, you think of child plan think of a customized investment plan for your kid’s future with a mix of 2 or 3 investment options instead of readymade product with a tag “Child Plan”. I am sure you would agree that readymade child plans prove to be not ideal instruments to save. The wisest line of thought would be a mix of diversified investments that gives good return with low charges.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

A Financial Checklist While Switching Jobs

2011-09-19T05:41:00.000-07:00

“Careful planning is the key to safe and swift travel." ULYSSES

This very much applies to the many especially young executives who look for lucrative and better job opportunities. But careful planning and following a financial checklist before one change a job can give them all the benefits of the change and more.

For the smooth transition from one job to the other you need to carefully attend to the points discussed in the below checklist.

1) Old Salary Account

Opening of a new salary account and the non-maintenance of the old accounts should be carefully considered. Most companies would require one to open a new salary account in the bank advised by them. This would leave one with an extra account to be maintained. The old account, which you have opened when you were in your earlier company, would after 3 months lose the benefit of zero balance of a salary account.

It would also seem unmanageable since regular operation of the account and maintenance of minimum balance may be difficult. Lack of regular maintenance and minimum balance could also invite penalty charges. In case of a non-operation for over 2 years the account could become dormant or inoperative, inviting additional yearly charges as a penalty and extra charges if average quarterly balance goes below the minimum amount that is set by the bank.

If your old salary account is linked to various investments (like Mutual funds, shares…) and loans, you may want to update the new salary account with the respective investment company and financial institutions.

2) EPF

A careful consideration has to be made regarding how to deal with Employees Provident Fund Corpus. Switching jobs suggests 2 ways of dealing with Employees Provident Fund Corpus. You could either transfer your existing account to the new employer or close the old account and open a new account.

However withdrawing the corpus and opening a new account could be time consuming taking between 3-6 months. In addition, you would be left with a smaller retirement corpus because you would lose on the advantages of the corpus compounding. You would also have to pay taxes if it is withdrawn before 5 years. So just transferring the corpus would give you better tax benefit and retirement benefit. This task is best left to the human resources department of both the old and new employers.

3) Health Insurance

You need to check up the features and benefits of the health insurance provided by your new employer. You need to compare these with the health insurance provided by your previous employer.

Especially you need to look into the features like the coverage amount, whether the coverage is on floating basis or individual basis, the total number of dependents covered, the list of hospitals for cash less facility.

One more important point to check is the availability of the health cover during the notification period. Notification period is the period between one submits the resignation letter and one gets actually relieved from the job. Normally it is 3 months period. Some employers don’t provide health cover to employees who are in the notification period. So before entering into the notification period, one needs to make alternative arrangement before entering into the notification period.

4) Tax Computation

Tax liability and exemptions form an important consideration while switching jobs. Most employers would be computing employees’ tax liability after taking into consideration the basic exemption limit of Rs.1.8lac and also the exemption availed under Section 80C.

So there is a possibility that your previous employer and present employer may give you these exemptions for the same financial year. Making a job switch in the middle of the year involves making sure that the deductions and exemptions regarding tax liability are made only once.

Always report the income earned from your previous employer for that financial year to your new employer. This would avoid duplication; thereby making sure one is not taxed twice or given twice the benefit and having to pay the lump sum taxes later.

If you are not intimating your income from the previous employment to the current employer, then you may need to pay some penalty for non-payment of advance tax or TDS.

It proves essential to collect the Form 16 from ones past employer as a proof that one has received the tax benefits and paid the tax liabilities.

5) Retirals:

If you have worked for more than 5 years, then depends on the terms of your employment you will be eligible for gratuity, superannuation and other similar retirement benefits. Some schemes can be carried over to the next company and some other schemes need to be encashed when exiting a company. You need to pay attention to the details of these schemes before quitting your job.

How very true it is, “Planning is bringing the future into the present so that you can do something about it now” Hence following all the steps of the financial checklist while switching jobs would make sure your journey from one job to another is smooth and trouble-free.