Crazy about being fit? How about some financial fitness?

Ajay, my neighbor, was a regular “fitness freak” and never failed to capture my avid respect for his assiduous dedication to his fitness regimen. Three years ago, I was impressed enough to seek his friendship and invited him over for dinner. It was across the dinner table that I discovered his personal dilemma.

His passion for physical fitness was total and amply rewarded. However, he was nursing a deep regret in that he saw no way of realizing his abiding dream of starting a fitness center. In twenty years of working as a gym instructor, he had not managed to save any money.

As a financial planning aficionado, I immediately put on my “financial adviser” hat and apprised Ajay of “Financial Fitness” – how, by following a simple set of money management skills, a stress-free life of financial well-being can be ensured.

 1) Have predefined financial goals

The secret of financial stability begins with sorting and ordering priorities and with defining short term and long term goals. It is essential to achieve this clarity so that resources can be managed and plans laid out, to align with fine-tuned goals. If there is no sense of direction, the destination cannot be reached.

2) Calculate net worth

Once the goals and priorities are defined, assets and liabilities need to be assessed to determine the net worth of an individual. If a huge loan repayment is pending, an investor’s net worth may be negative, a situation that calls for urgent and concerted financial planning.

3) Manage Taxes

Taxes are often considered a necessary evil. While this may be true, there are numerous ways to harvest the benefit of government schemes and reduce taxable income, in the process. Filing tax returns before the stipulated deadlines and avoiding any direct or indirect course of tax evasion goes a long way towards inducing financial discipline.

4) Invest regularly

Simply depositing money in a bank cannot be the most productive way of capitalizing on savings. Investing is a wiser route to beating inflation and simultaneously building a corpus over a period of time. Align investments with pre-defined goals. It is possible that at all times sufficient funds for investments are not available; nonetheless, regular and disciplined investments should be maintained every month. Start small, but start early! Read more about this here

5) Earn as well as learn

Financial knowledge is not everyone’s forte. The lack of adequate information should not accrue as the stumbling block in financial decision making. There is no harm in consulting financial experts. Broadening the knowledge base in this domain can prove extremely rewarding. It is never too late to learn how to earn.

6) Maintain an emergency fund

If there is one thing that will remain constant, it is the ever changing scenarios that life will keep presenting as challenges. To deal with unexpected exigencies efficiently, an individual should have saved an emergency fund, which should ideally equal about 5 to 6 times of the monthly expenses. This will ensure the much needed cushion in times of emergency.

Are you making the best use of your bonus?

Ajay and Vijay are two IT professionals working for the same firm. Having completed one year in office, they are excited about the performance bonus that they are going to receive. Both of them worked really hard throughout the year and it is time they reap the benefits of their hard work.

On one such anxious day, they were hanging out in their break out zone and discussing the very obvious topic – their upcoming bonuses!

Ajay:  I just can’t wait for the year-end bonus. I have so many things planned once I receive it.

Vijay: Really? I have a couple of things in my list too. Seems like we share common interests. What is it that you have planned?

Ajay: I am going to buy a Macbook Air for myself. It has the most amazing features. I also planto  get my brother the new Play Station he has been craving for.

Vijay: Oh okay, so you intend to spend your entire bonus on these luxury items. Hmm. I was, however, planning on something different.

Ajay: (seemingly confused) what else can you possibly plan?

Vijay: I want to use my bonus to plan my finances better. My topmost priorities are:

1) Repay debts where interest is high

I have a personal loan on which I am paying 14% interest. It is leading to high interest expense and zero tax advantage. I cannot enjoy luxuries till I have such a high interest liability due. So, I would like to repay that first.

2) Build an Emergency Fund

Normally, an emergency fund is not something that should be made after receiving the bonus but since I have not built one so far, I will do it with a part of my bonus which will ideally be 4-5 times my monthly expenses. I will park this amount in a short term debt fund.

3) Invest for long term goals

I will park a portion of my bonus in a liquid fund and start a monthly investment into an equity fund from there. This will help me create wealth over the long run ad simultaneously earn modest returns in the liquid fund.

4) Spend on what’s needed, not on what’s wanted

I want to have a clear distinction between our needs and our wants. While everyone likes to spend money based on their interest, I want to be careful about not splurging it all away on unnecessary items.

Ajay: You seem to be very adept at money management my friend. I think I am having a change of mind now. How do I plan my bonus allocation better?

Vijay: Consult an expert financial advisor about how should you best allocate your bonus.  Everyone has different goals and preferences and a plan should be devised accordingly.

Ajay: Indeed. Thank you so much for delivering this mantra to me: spend wisely, save judiciously and invest smartly!!

How do we help?

At CAGRfunds, we help you devise a suitable investment plan for your bonus such that it contributes to your long term wealth creation.

If you have received your bonus and do not know how to make the best use of it, comment on this post or whatsapp us on +91 97693 56440. We shall be happy to help!

Everything that you wanted to know about an SIP

SIP or Systematic Investment Plan – A term which has off late been doing the rounds in the world of investing. Every financial advisor you meet will recommend a few SIPs to you. Do you often feel bogged down by the what(s), why(s) and how(s) of these SIPs? Read on to find out everything you need to know about SIPs before you move on to start one.

  1. Mode of investment and not a fund: SIPs are a mode of investment and not the fund or the instrument where you invest. Therefore SIPs don’t represent any asset class. They are a way of investing in any of the asset classes. In other words, they are more of an approach to investing.
  2. Defined periodic instalments: As the term indicates, SIPs are defined instalments which get invested on a pre decided date every month or quarter. For example, you can decide that Rs. 10,000 should get invested on the 10th of every month.
  3. ECS / Deducted directly from bank: Every SIP application is accompanied by a NACH mandate also known as an ECS mandate. By signing the mandate you authorize your bank to debit the pre decided amount on the specified date. This means that you do not need to put a separate transaction every month to make your investment. For example, when you sign the mandate, your bank automatically debits Rs. 10,000 on the 10th of every month and this gets invested without any action on your part. At CAGRfunds, we have introduced the concept of 1 mandate, which means you do not need to sign separate mandates for separate SIPs. One mandate for any number of SIPs across any number of mutual funds.
  1. Pre decided funds: When you make an application for registering a SIP, you also decide the funds where the investment shall happen every month or quarter. O every month, Rs. 10,000 gets automatically deducted from your bank account and gets invested in the fund you had selected.
  2. Start date and end date: You can choose the start date and end date of your SIP. Most funds have a criteria for minimum number of instalments (wither 6 or 12). However, having a perpetual SIP is beneficial for those who want to create wealth in the long run and want to follow a disciplined approach for the same.
  3. Any number of SIPs: You can have any number of SIPs. Each SIP is for a particular fund that you decide and hence you can have as many SIPs as the number of funds you decide to invest in.
  4. ELSS SIP: Taxation is a necessary evil and none of us should leave an opportunity to save our taxes. Section 80c of the IT Act gives us a benefit of Rs. 1,50,000 which we can deduct from our taxable income. Some of us who are more aware and believe in the potential of wealth creation through equity investment, choose to invest in ELSS funds (Tax saving mutual funds). However, very few of us choose the SIP route. ELSS investments if made through SIPs, helps reduce the risk arising out of market volatility to some extent. For example, you need to invest Rs. 60,000 to cover your 80C investments and you choose to invest in ELSS funds. You should invest Rs. 5,000 every month over a period of 12 months rather than invest Rs. 60,000 as a lump sum investment at one go.

How do we help?

At CAGRfunds, we help you with all your financial queries. Whether it is about a SIP or otherwise, we promise to give an answer to each one of them. For any query, post a comment to this article. Or whatsapp us on +91 9769356440

Look beyond the obvious

A few days back, I met an old school friend Rajeev on my flight from Mumbai to New Delhi. We started reminiscing about our old school days and the time just flew by. Rajeev has done well in his career and is working as a Management Consultant with a reputed consulting firm.

Somehow, the discussion shifted to financial planning and Rajeev told me, that he is quite happy seeing his investment grow at 8%. This got me interested, so I further enquired and discovered that he has invested his savings in long tenor bank fixed deposits.  I was surprised and explained to him that he is only looking at nominal returns and there is more to returns than what meets the eye.

This got me thinking, do we as investors really know the actual returns of our investment? No, it’s not because we don’t read the numbers, but because we don’t understand how to find the net returns of our investment. Most people only care about the raw returns on their investment and unfortunately this is not the return to actually care about.

The two most important factors which impact our investment are taxation and inflation. While, the impact of taxation is still comparatively easy to understand, as on paper it leads to reduction in earning, the impact of inflation is more insidious.

With regards to taxation, every investor should look at the “after tax” return of his investment, but we will discuss this at some other time. Today let’s try to delve into the impact of inflation on our investment return.

Let’s get back to Rajeev and his investment in bank FD earning 8% return. Is he actually earning 8%? No, he is not. This is his “before tax” and “nominal return”.  For the time being, let’s ignore the impact of taxation and discuss further on “nominal return”.

As investors, we have to factor in the bite of inflation and look at the “real return”. In the above case, if the current inflation is 7%, the real return for the investment this year is only 1%. Why is that? Inflation represents loss in purchasing power. Simply put, 10 years back you can buy much more with 100 rupees in your account, than you can buy today. Inflation can affect the risk/return profile of any asset, including cash.

Investments offering you miniscule or negative real returns will actually lead to loss in purchasing power and are actually making you poorer over time. For example, savings account seems to provide a sense of security and guarantees “nominal return” of 4%; it actually is making you poorer by 3% (considering inflation is 7%). Same is the case with bank fixed deposits; it mostly gives you either negative real return or at maximum gives miniscule real return.

Historically as per the chart above,  investment  in  equities  has  offered  higher  real  returns  compared  to  fixed  deposits.  Hence, it is seen as a good hedge against inflation. Investments done in fixed deposit have barely been able to beat the inflation over the years, while the investments in equity have given handsome returns over long period of times.

If you find it difficult to choose the right companies for investing, you could opt to invest through mutual fund schemes, preferably through the Systematic Investment Plan (SIP) route.