The First Step Towards Financial Independence

– Meghashyam Sinkar

The group of retirees was interviewed once in Boca Raton , one of the Florida’s wealthiest retirement communities . Interviewer asked the people – mostly in their seventies – If they had beaten the market over their investing lifetimes .  Some said yes, some said no , most were not sure . Then one man said “Who cares? All I know is , my investments earned enough for me to end up in Boca .

Could there be a more perfect answer ? After all , the whole point of investing is not to earn more money than average or others  , but to earn enough money to meet your own needs . The best way to measure your investing success is not by whether you are beating the market but by whether you have put in place a financial plan and a behavioural discipline that are likely to get you where you want to go . If you have made enough money and met your goals then you are a successful investor.

Carl Richard – A financial planner from New Zealand in his book ” The Behaviour Gap” nicely given below sketch which is reality .

Carl richard - Money vs Income

Ask yourself these questions ” Why money is important to you? What does money do for you ?  What is the purpose of doing the investment? Take a time and write down the answers .

No doubt, money is an important part of life.  But it is easy to fall into trap of money to worry endlessly about how to make more .How much is enough ? And the more you have the more you need . It is better to think about what do you need money for ? What is your goal? But goals should not be influenced by external forces like peer or social pressure . Find out what gives you a happiness . What makes you to jump out of bed ? what gives you  peace ? So , it is important to have money but not more than the goal it serves. Make your financial plan , prepare cash flow , know yourself in terms of where are you now and where you wish to go ? And finally get into action accordingly . It does not matter whether Rakesh Jhunjhunwala, Warren Buffett, a fund manager, your friend, bunch of other strangers have beaten the market and you don’t . No one’s gravestone reads ” HE BEAT THE MARKET. 

“Financial Planning is not about the markets , not about the products . Its about you & your journey.”

Benjamin Graham in his book “The Intelligent Investor” quoted that Investing isn’t about beating others at their game . It’s about controlling yourself at your own game.” 

Happy Independence Day and Happy Investing !!

All About NPS – National Pension System

– By Meghashyam Sinkar

NPS has been evolving continuously over last decade . Recently , Government has proposed to make the eligible withdrawal amount at the age of 60 completely tax free which makes it worth considering as a tax saving option . There has been lot of changes in investment choices as well which makes it suitable option for creating retirement corpus specially for investors who are below 50 yrs age .
  • About NPS
• Voluntary defined contribution pension system regulated by PFRDA .
• The Central Government has introduced the National Pension System (NPS)   with effect from January 01, 2004
• NPS was made available to All Citizens of India from May 01, 2009
• Similar to USA 401(K)
  • Type of accounts

•Tier I &
•Tier II

  • Investment Asset Classes and Choices
There are 4 asset classes

1)Asset class E – Equity and related instruments – Max 75% exposure one can take  – Only equities with market cap of 5000 cr and above
2)Asset class C – Corporate debt and related instruments – only in AA (PSU) and above at least by two rating agencies with maturity of 3 yrs and above.
3)􏰀Asset class G – Government Bonds and related instruments ( 90% in G sec must , 10 % across securities guaranteed by centre & states and gilt MF .
4)Asset Class A – Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invltsetc. – restricted to 5% only

There are two choices

Active Max 75 % upto 50 yrs age and then further reduced by 2.5 % every year till 60  age .

AutoAggressive (75%), moderate(50%) and conservative (25%) life cycle fund.

  • Pension Fund Manager (PFM) choices

1. Birla Sunlife Pension Management Limited
2. HDFC Pension Management Company Limited
3. ICICI Prudential Pension Funds Management Company Limited
4. Kotak Mahindra Pension Fund Limited
5. LIC Pension Fund Limited
6. Reliance Capital Pension Fund Limited
7. SBI Pension Funds Private Limited
8. UTI Retirement Solutions Limited

Note : These managers can change any time . Bidding process happen once in very 5 years.

  • Taxation

  • Charges and costing

• Initial Subscription – one time registration fee – Rs 125/- ,
• Annual maintenance cost – Rs 95/-
• Contribution charges – 0.1% of amount invested – Min Rs 10/- and max Rs 10,000/-
• Non financial request – Rs 20/- per request
• Custodian charges – 0.0032% p.a
• NPS Trust charges – 0.005% p.a.
• FMC – 0.01% p.a. which is the big plus point of this instrument .

  • Nature of NPS
  1. Minimum Contribution – Rs 1000/- p.a. ( If not done , the account gets frozen and can be reactivated with Rs 500/-)
  2. Active and Auto mode can be changed twice in a year  & PFM can be changed once in a year ( Such switches are not treated as withdrawal and hence will not be taxed)
  3. But one fund to another fund is taxed as it attracts capital gain
  4. No early exit , can do so only after completing 10 yrs .
  5. After 10 yrs and before 60 yrs , you get only 20% of the corpus and rest 80% will be converted to annuity.
  6. Partial withdrawal is allowed but with certain conditions which are    (a) You should have completed 3 yrs  (b) you can withdraw maximum 25% of your contribution amount and (3) only in below situations with requisite declaration – illness, building house , kids education and marriage , disability or starting your own venture .
  7. You get only 3 such partial withdrawals through your lifetime.This partial withdrawal are not taxed
  8. If you wish , you can defer maturity till your age of 70 yrs
  9. 60% lumps withdrawal- tax free and 40% annuity is always taxable
  • Others

• You can check the returns of NPS on  Or for different choices and PFM.
• You can open the NPS account with nationalised bank or online on NSDL website.
• Once the account is activated , you can mobile app for contribution , statements , valuation etc .

Please write back to us for any query or additional information.

Happy Investing !!!!

Learn from it or Run from it….

By Nikhil Shah

People often think they can’t change their past, but I disagree. Perhaps we can’t change every mistake in our past, but we have to remember that the past is a moving target. Every day that goes by us becomes a part of our past history. Whatever we do today will become a part of our past tomorrow, which means we do have the power to change our past by doing the right things today.
This lesson is taught best in the Disney movie “The Lion King.” There is a point in the movie when the young lion Simba is feeling sorry for himself for his past mistakes. The wise baboon Rafiki takes a stick  and hits Simba on the back of the head. Simba yells, “Geez, what was that for” and Rafiki replies, “It doesn’t matter, it’s in the past.” Simba says, “Yeah, but it still hurts.” Rafiki then says “Oh yes, the past can hurt. But the way I see it, you can either learn from it, or run from it.Rafiki then swings the stick again to hit Simba on the head and Simba ducks down in time to avoid the stick. Rafiki says, “You see.”  I love that example! It’s the perfect reminder that this principle should not be a difficult one for us to grasp. Yes, it hurts to mess up, but it’s in the past, so learn from it and move on.

Loss-Aversion Bias in Investment Behaviour.

It explains why despite deciding you’ll hate a movie ten minutes in, you’ll stick it out for the whole two hours in misery. You’ve already paid for the ticket, so you don’t want to waste money by not seeing the movie. But you won’t get that money back if you stay, so why do you feel like you have to? The reason we’re inclined to throw good money after bad (which economists call the sunk cost fallacy) is a perfect example of loss aversion in action. If we’ve spent resources on something—whether it’s as small as a ticket to a bad movie or as large as the billions of dollars spent in a war or social program that’s not working out—we’re inclined to stay the course so as not to waste what we’ve already spent. In other words, we want to avoid feeling the loss of what’s been spent, so we stick with our plan, hoping for a gain, even when sometimes that just leads to a bigger loss in the long run.

Similarly, in investment products many times how it is beneficial by correcting mistakes.

Let’s understand by example case of Mr. Swami. who bought Traditional Endowment Insurance Plan.

Mr. Swami is dynamic Software engineer, at the age of 30, he decided to save for his Retirement Goal AND TAKEN Traditional Endowment Insurance Plan for 20 years premium paying term with 1 Lakh Annual Premium.

Mr. Swami was upset after seen 5 year returns of only 6.5% p.a.(CAGR) , Now, today at the age of 35 when he got his Financial Health Checkup done from an Advisor.

Advisor recommended him below “CHANGE”:

  • He asked him to stop paying further premium and get the policy paid-up first.
  • Get term plan for self which will cost very less in annual premium and high in life cover.
  • Start investing in Hybrid Equity MF or Diversified Equity MF for next 15 years period.

** Note: Above calculation is considered without taxation.

What have you done if you are at the place of Mr. Swami ?

There is no question that making mistakes is a necessary part of our growing process, but I do believe there is a way we can still learn and grow without making quite so many mistakes and in a way that can be far less painful. And when you do make your next mistake, which all of us most certainly will – own it, fix it, and for heaven’s sake when that stick comes swinging toward the back of your head, hopefully you have learned enough to duck like Simba !!

Happy Investing !!

Retirement Plan or Plan for Retirement ….Think over it

Recently , a small get together of old buddies thrown a serious concern on their retirement understanding  . Being an investment advisor , i was bombarded with number of questions like 

I have taken this pension plan 

Which retirement plan should i buy 

Which is the best retirement plan in the market 

Insurance companies have successfully able to capture these concerns through their punchlines , their advertisements ( the best one – Sir Utha Ke Jiyo ) and pulled the investors to invest into such pension policies . It is an excellent emotional trap for today’s young investors . 

No doubt , Investing for retirement is very important in today’s life due to change in lifestyle , no support of pension due to private jobs, costly medical expenses,  nuclear families concept etc .

Generally, people earn between 25 to 55 years of age. Now, one has to consider the living after 55 till 80-85 yrs seriously due to increasing living expectancy ratio. It is like working for 30 yrs and then taking care of next 30 yrs from those assets which are created during earning(accumulation) phase. It is popularly called as Rule of 30 : 30

Today’s Rs 30,000-/ monthly expenses will shoot up closely to Rs 3 Lakhs in 30 years with an inflation@ 8 % p.a. . Remember , it is just the basic requirement . One has to replace his car , household appliances at least 2-3 times in his/her retirement life .  Therefore , choosing the right asset class and mix is very important .

Why you shouldn’t go for retirement/pension plan 

In a pension plans , you have an accumulation period in which you keep contributing it through premiums and then vesting age , the age from where you would like to receive the annuity /pension either monthly or quarterly or annually . 

However ,

  1. Tax-inefficient :The yearly payout known as annuity is taxable at the hands of investor. 
  2. Low Annuity Rate : Once your annuity rate is fixed , then you can not change your annuity provider even if you know the bank/insurance company opposite to your house offers higher interest rate or annuity rate. 
  3. Rigidity : It is One way. once you enter in it , there is no way out . There is no provision of surrendering the policy. You can not change the annuity option once selected.
  4. Cost : The expense structure is very complex and costly ,which impacts the yield over a period of time .

One should holistically plan for retirement by proper financial planning and asset allocation. 

The simplest and easiest way to plan for retirement is to accumulate the corpus through Systematic Investment Plan (SIP) ( Regular Investment ) and then consume it through Systematic Withdrawal Plan ( SWP ) ( Regular Withdrawal )

After all “Retirement is when you do what you want , not what you must”.