Please find below a good article in Advisorkhoj on "How much life insurance is adequate?"

http://www.advisorkhoj.com/articles/Life-insurance/How-much-life-insurance-is-adequate?utm_medium=email&utm_source=MailDirect&utm_campaign=Advisor11_03_2014#.UyWNB6iSzs4

How much life insurance is adequate

Mar 11, 2014 by Dwaipayan Bose | Life insurance

97 Downloaded

The basic concept of life insurance is fairly simple. Most of us are familiar with insurance and own one or more life insurance policies. Yet there are several misconceptions and lack of understanding of various considerations in life insurance that we will aim to address in a series of articles. The most question as far as life insurance is concerned, is how much life insurance do you need? There are several factors that are relevant in determining the amount of insurance cover. We will examine those factors in this article, but before that we should touch upon some important points.

Do you need life insurance?

There is a misconception that everybody needs life insurance. If you have dependants you definitely need life insurance. However, buying life insurance does not make sense for everyone.

• If you have no dependants and do not plan to have in the foreseeable future, you do not need life insurance.


• If you are working and your spouse does not work, she does not need life insurance. The premiums that you will pay for her life insurance, is better invested in products that give much better returns


• If you have children, you do need to buy risk cover on the life of the child. You should buy adequate risk cover for your own life and invest systematically in child plan mutual fund or even in a diversified equity fund, to secure the future of your child


• If you are debt free and you have assets that generate enough income to meet all the financial needs of your family, then you do not need life insurance. We have to be careful here, of the definition of assets. If you own a house and are occupying it, it is not asset for this purpose, since you are not generating any income for your family. Let us illustrate with an example. Let us assume your annual income is Rs 10 lakhs and you have assets of Rs 1.5 crores. Assuming a post tax annual return of 8%, the income from your asset will be sufficient to meet your needs even after factoring 5-6% inflation. In that case, you do not need insurance. You are better off growing your assets by investing in products that give better returns.

However, if your family depends on your income or if you are carrying debt, then you will need life insurance. Now that you know whether you need insurance or not, and most probably you do, let us move to the next point.

Will you get life insurance?

A second misconception regarding life insurance is that, as you grow older it is harder to get insurance. Young policyholders are more profitable customers to the insurance companies because the mortality odds are low and some insurance agents deliberately create this misconception to get young people to buy insurance. But in reality it is not difficult to get life insurance as you grow older. As you grow older, your premiums are definitely higher than when you are young, and therefore it is definitely advantageous to buy life insurance when you are young. But if you need to buy insurance at any point of time, it is not difficult to qualify for insurance.

Now that you know that you will be able to get insurance, the next question is how much life insurance should you buy? Is it a good investment?

Life Insurance will help in meeting your retirement needs

The third misconception about life insurance is that, it is seen as retirement planning solution. If you compare returns from life insurance to other investment options, it simply does not make sense as an investment. If you are a young investor with a long time horizon, equity is the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is at least three or four times the maturity amount of life insurance plan with a 20 year term, with the same investment. Life insurance should always been seen as protection for your family, in the event of untimely death. Investment should be a completely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you should separate the insurance component and investment component and pay careful attention to what portion of your premium actually gets allocated to investments.

How much insurance cover should I take?

A large part of choosing a life insurance policy is determining how much money your dependents will need. You need to consider several factors in deciding how much insurance cover is adequate for you.

• How much debt do you have: If you are the single earning member of your family, your family will not be able to service the debt obligation, in the event of your untimely death. Home loan, car loan, credit cards and personal loans must be paid off in full. For example, if the outstanding principal balance on your home loan is Rs 25 lakhs and your car loan is Rs 5 lakhs, you need a minimum insurance cover of Rs 30 lakhs plus a little extra for accrued interest (not paid). If your spouse is also working, you should determine how much loan can he or she service, the balance must be paid off in full.


• Income needs of your family: This is the biggest determinant of how much life cover you need. In the event of death, the income earned from the investment of the policy pay-out (also known as sum assured) should replace your current income. For example if your current income is Rs 20 lakhs, assuming a post tax annual return of 8%, you will need an insurance cover of Rs 2.5 crores. You should always add an additional amount, as a guard against inflation. As a thumb rule you may add your annual salary as the additional inflation guard. Your total cover, including inflation guard, in the example above should be Rs 2.7 crores. So if you have loans of Rs 30 lakhs and an income of Rs 10 lakhs, you total insurance cover or sum assured should be Rs 3 crores.


• Future obligations: You also need to factor in your future obligations, like children’s education, marriage etc. For example, if you need Rs 5 lakhs for your child’s higher education, you should include that when you are calculating how much cover you require. So, carrying on the above example, if you have loans of Rs 30 lakhs, income of Rs 20 lakhs and you need Rs 5 lakhs for your child’s education, then your total sum assured should be Rs 3.05 crores

You can see the above method of calculating insurance cover factors in how much funds you will require immediately, how much funds you will require on an ongoing basis and how much will you require at a future point of time, in the event of an untimely death. To summarize, please see the chart below on how much insurance cover is needed in the above example (all amounts in Rs Lakhs)

Insuring other members of your family

If your spouse is working, he or she should also take life insurance cover based on the above considerations. As a rule, you should insure only people whose death means a financial loss to your family. The death of a child though emotionally devastating, does not imply a financial loss, and therefore as discussed earlier in the article, it does not make sense to get life insurance for your children, as long as they are dependent on you. There are better investment options to secure their future.

Conclusion

Getting adequate life insurance is one of the most critical requirements in your financial plan. It is very important that you understand how much cover you will require. Unfortunately, on an average most people in India are under-insured. It may seem to you, based on the premium rates of some insurance plans, that you cannot afford the premium. Fortunately there are lots of good options available for life insurance, like term plans, where premium rates are low. We will discuss more on various insurance choices in subsequent articles in this series. You can also discuss with your financial advisors, the various options available in the market for you to buy the cover that you need. As with investing, educating yourself is essential to making the right choice.

mangaing personal finance at 40

Please find below a very good writeup as published in advisorkhoj:

http://www.advisorkhoj.com/articles/Personal-Finance/Few-tips-about-managing-Personal-Finance-in-your-40s?utm_medium=email&utm_source=MailDirect&utm_campaign=Advisor+28_01_2014_2#.UuixgNK6Y2w

Few tips about managing Personal Finance in your 40's

Jan 28, 2014 by Dwaipayan Bose | Personal Finance

For those who have entered their forties, life in itself is now a very enriching experience. There is now a certain kind of stability in your personal and professional life. Since you have obtained a wealth of experience in your chosen career by this time, you are more confident and successful in your career than ever before. As your kids are growing up, there is always a lot of excitement in your personal life. There is a saying that life begins at forty. This a time to learn new skills for the next stage of your professional development, pick up or renew hobby, get in to a healthier lifestyle, maybe even get a whole new perspective of life. This is also a great time to pause and see how you are doing financially. Certain goals are more relevant in this particular stage of life. Here are some important financial considerations in your forties:-

1. Eliminate debt including home loan: By the time you reach your forties, the only debt that you should have is your home loan. If you have any other kind of debt, like auto mobile loans, prioritize and pay them off with a high sense of urgency. Next focus on your home loan. As your savings increase with a rise in income, you should try to prepay your principal. Set yourself a prepayment target every year and prepay your principal at a regular frequency through-out the year or at least on an annual basis. The RBI today, said that the interest rate cycle is now peaking in India and we will see a gradual lowering of rates over the moderate term. This is a great time to prepay your principal, so that you can take the double advantage of lower interest rates and lower loan balance.


2. Ramp up your savings: You should set yourself a target monthly savings rate. With your income rising, saving a greater percentage of your income is really not that difficult. Look at your monthly subscriptions, memberships, cable TV services, phone services and credit card finance charges, among others. Evaluate, if you can cut down on some of these expenses, take advantage of more economical plans or negotiate a better deal with your service provider. Spending less is often about breaking bad habits. Irrespective of what you were doing in the past, now is the time to save at a highest possible rate, since this is the most lucrative period of your life from a savings standpoint. Once you are able to eliminate debt, you should be able to save even more.


3. Get your retirement planning goal on track: You have now reached almost the half way stage in your career. Though you still have some distance to go before your retirement, this is time when retirement planning should be one of your top financial goals. You should have set yourself a retirement planning goal and started executing on it in your thirties. If you have not, you should now approach the task with all the urgency it deserves. Retirement planning begins with a clear vision of your retired life. Would you like to travel, start a business, do charitable social work, and even replicate your current income in your retirement? Once you articulate your vision, your financial planner can work with you to put together a framework to know what it is going to take to get you there. Your employee provident fund savings will most likely be not enough to meet your retirement plans. You should target maximum contribution under public provident fund. A systematic investment plan is a great way, to invest for your retirement. At this stage of life, it is very important that you choose the right investment option. You need the superior equity returns to have a shot at success for your retirement planning. You should consult with your financial advisor to identify systematic investment plans that suit your risk profile.


4. Get adequate insurance: The forties are the time, when the first warning signs on the health front come up on the radar. The cost of health care is ever increasing, and even if your employer provides for health coverage for you and your family, you must ensure that the coverage is adequate. A very serious illness or accident may also impair your ability to work at a time when your earning power is at its peak. You should consult with your financial planner and take up additional medical, disability and life insurance, if required. While insurance premiums will be more expensive compared to when you were younger, the financial stakes for you and your family are also higher now, and so you must be adequately insured


5. Focus on building "assets": With excess funds available, as a result of your rising income, it makes sense that you invest in assets. However, we need to get the definition of "assets" very clear. From a finance perspective, assets are items that generate current or future cash flows. If it does not generate current or future cash flows, it is not an asset. For example, car owners may be tempted to buy a second or third car for your families, but you should apply careful consideration. At the end of 5 years, a car depreciates to less than 50% of its purchase price, the same money invested even in a high yielding debt fund is likely appreciate more than 50%, over the same period of time. If you are a current home owner, you may consider, buying a second house to get you rental income and capital appreciation over a period of time. When making investments in assets, you should consider the trade-offs income versus capital growth, risk versus liquidity, tax efficiency versus short term capital gains, and make appropriate investment choices based on the requirements of your financial plans. Certain assets, like commercial real estate, requires special expertise in managing, and you should avoid such assets, if you do not have the required expertise


6. Asset Allocation is important: With retirement approaching in a few more years, understanding your risk profile is very important, so that you can make wise investment decisions. Generally, as one grows older, one should rebalance their portfolio mix, towards less risky assets like fixed income. However, careful analysis is required in your forties. With your retirement still 10 – 20 years away, it may not be wise to give up on equity investments altogether. At the same time, it is not prudent to put all your eggs in the equity basket, especially if you have some short term goals like house purchase, paying for your child’s higher education etc. That is why, it is extremely important that you have a robust financial plan. There are a wide variety of investment options available in India today, to suit most of the needs in your financial plan. You should consider fee based financial advisors, who do not restrict their advice only to products where he or she earns commissions, but advise on the entire spectrum of products available in the market.


7. Focus on tax saving: As your income rises, so does your tax liability. You should explore all tax saving opportunities available within the provision of Income Tax Act, to save every rupee possible in tax obligations. As far as your investments choices are concerned, make sure you choose the most tax efficient option. Investment returns from instruments like VPF, PPF, ELSS, Infrastructure bonds etc. are exempt from taxes. Short term investments are generally subject to income tax, so you should be prudent about the tenure of your investments. The final point on taxes is that, you should always resist the temptation of understating your total income to save on taxes. Ethics aside, the risk of ignominy and potential penalties, is simply not worth it.


8. Invest for your child's education: College and professional education is getting more expensive every year. In your forties, your children’s college education is only a few years away. If you want to support your children’s college education, you need to start investing towards that objective. There are child plans offered by insurance companies, designed to meet the educational needs of your children. You may also consider a systematic investment plan, depending upon your time horizon and risk profile. But you should never compromise your retirement planning goals to invest for your children's education. There are scholarships and educational loans that your child can take advantage of, but there are no loans to be availed for your retirement


9. Live Simply: This is a recurring theme in the articles in this series. Simple lifestyle is the mantra for saving more. A simple lifestyle is also, very often, a healthy lifestyle. Involving your entire family, including children if they are teenagers, in the financial planning and decision making process is a wise approach. With the entire family working together towards your financial plan, not only will it ensure greater success, but more importantly it will get your children interested in personal finance and financial discipline at a very early age.


10. Calculate and track your net worth on an ongoing basis: Building financial security is a long-term process. Tracking your net worth is how you measure your progress. Celebrating each milestone in your financial plan, along the way is critical to keeping yourself motivated and moving ahead with a sense of purpose. Your net worth is the value of your assets (everything you own) less your liabilities (everything you owe). Awareness is half the battle won. The other half of the battle is the discipline of tracking to a plan to meet your financial objectives

VOLATALITY INDEX SIMPLIFIED

DEAR ALL

Investors can use the market volatility index to gauge risks

February 2, 2014:  

VIX is a trademarked symbol for the Chicago Board Options Exchange (CBOE) Market Volatility Index. It represents the market’s expectation of volatility over a pre-defined period.

India VIX is a volatility index based on the Nifty index option prices. From the best bid-ask prices of Nifty options, a volatility figure (in per cent) is calculated, indicating the expected market volatility over the next 30 days.

India VIX uses the computation methodology of CBOE, with suitable amendments to adapt to the Nifty options order book.

The current value of India VIX is 25, which means people envisage that, over the next 30 days, markets can move up or down by 7.21 per cent (25 divided by square root of 12 or 3.46).

So, India VIX divided by 3.46 gives you the range over which the market is expected to move over the next 30 days. India VIX is computed using the best bid/ask quotes from out-of-the-money, near and mid-month Nifty option contracts, which are traded on the futures and options (F&O) segment of NSE.

Several factors are used in the calculation of the volatility index. Here are some important ones:

Please read further on:

http://www.thehindubusinessline.com/features/investment-world/market-watch/volatility-index-simplified/article5645721.ece

TEN COMMANDMENTS FOR EQUITY INVESTORS

Dear All,

Please find below a good article as appeared in Economic Times recently:

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/ten-commandments-for-equity-investors/articleshow/32487561.cms

Ten commandments for equity investors 

Some of the worst investing mistakes are made when the markets are at an all-time high. So, before you are taken in by the exuberance sweeping Dalal Street, go through these time-tested tenets of prudent investing.

1. Thou shall not expect the markets to rise evenly. 

About five weeks before the Sensex touched an all-time high on 10 March, it had suffered a steep 5 per cent decline. From 21,373 on 23 January, it slipped to 20,209 on 3 February. Last summer, it had crashed 12 per cent, falling from 20,302 on 23 July to 17,905 on 21 August. This volatility is inherent in stocks. Enter only if you can stomach the risk.

2. Thou shall not buy derivatives for speculation. 

Warren Buffett calls the futures and options segment 'weapons of mass financial destruction'. Derivatives are meant for hedging by institutional investors and high net worth individuals. They can spell disaster for retail investors who use these for speculation. Stay away from F&O if you are serious about building wealth.

3. Thou shall not invest borrowed money.

While F&O can be disastrous for small investors, margin trading is no less dangerous. It is a leveraged position that involves putting at risk more money than you can spare. Some people also make the mistake of borrowing money to invest in stocks. If the markets decline, it is a double whammy for them—they have to pay interest and suffer a loss.

4. Thou shall not ignore your asset allocation. 

As you rush to buy stocks, don't lose sight of your overall asset allocation. Maybe you already have too much equity in your portfolio. In fact, the current market rally should be a reason for you to get out of stocks rather than buy more. Rebalance your portfolio so that the original asset allocation is restored.

5. Thou shall buy stocks after checking the fundamentals. 

A bad stock is a bad investment even if you buy it at a great price. Even a good stock can be a bad investment if the price is too high. Sooner or later, the fundamentals catch up with the price and your investment can suffer. Don't be swayed by momentum when you go shopping. Study the fundamentals, and if they aren't good, avoid the stock.

6. Thou shall not buy obscure penny stocks for big gains. 

Why buy one share of InfosysBSE -0.21 % for Rs 3,400 when you can buy 1,000 shares of ICSA India(Rs 3.37 per share) or 2,000 shares of Vaishnavi GoldBSE 2.99 % (Rs 1.57 per share) with the same money? But while Infosys is a globally recognised name, the two penny stocks are marginal players in the software sector. The chances of Infosys rising to Rs 4,000 are greater than ICSA Indiareaching Rs 4. 

Read more at:
http://economictimes.indiatimes.com/articleshow/32487561.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Dear All,

Kindly find below a good article as appeared in Morning Star for your reading:

3 Mistakes Regarding Retirement

Unfortunately, no buzzer goes off when you're doing something that's going to harm your long-term financial goals.

John Wasik is an author and a freelance columnist for Morningstar.com. He wrote this piece for Morningstar’s U.S. website. It has been reproduced here but edited for an Indian audience.

Once you've hit retirement age, it's often too late to make up for inadequate savings and bad portfolio allocation. But even if you got those key tasks right, a whole new raft of bad behaviors may be in play. Are you withdrawing too much money? Are you beating inflation? Are you underestimating your life expectancy?

There's often no reliable way of avoiding mistakes because you have no benchmark of best practices to model. Few have any education in portfolio management or long-term financial planning. There's no buzzer that goes off when you're doing something that's going to harm your long-term goals.

Thanks to the burgeoning field of behavioral economics, though, you can at least identity what you're doing wrong and take corrective action. Here are some common errors and how to approach them from a behavioral perspective.

1. Underestimating life expectancy

No one is really good at this. A common error is to underestimate how long you're going to live, which brings up the specter of outliving your money.

The Center for Retirement Research, or CRR, at Boston College, found that there is often no correlation between retirees’ longevity estimate and how long they actually live. They often underestimate based on recent information such as illness or job history. It's better to take a longer view than a shorter one.

Statistics released by India's Union Ministry of Health and Family Welfare show that life expectancy in India has gone up by five years, from 62.3 years for males and 63.9 years for females in 2001-2005 to 67.3 years and 69.6 years respectively in 2011-2015. But do note, this is an average across the nation. There is a significant life expectancy gap between the affluent and deprived communities. If you are in reasonably good health, have access to good medical facilities, and not suffering from chronic or acute diseases, you could live well into your eighth decade, way higher than the average.

Look at your family history. How long did your parents live? Be rational about your chances to live decades past retirement age. You also may need to re-evaluate any decision to leave the workforce completely.

Americans who often (incorrectly) predict that they won't live very long take Social Security at 62. That has the permanent effect of locking in a low benefit for the remainder of one's life compared with taking benefits at 70. So being more realistic about lifespan can have a direct financial consequence. The longer you wait, the greater the benefit. A person who would normally receive $1,000 a month at age 66, for example, would receive $1,320 monthly if he waited four years. The math tells the story, and it's much more positive than a pessimistic prediction about how long you think you'll live.

2. Spending too much money in retirement 

Once you stop working, other than dividends and capital gains in your portfolio, the cash flowing into your retirement kitty also comes to a halt. Those who want to spend heavily earlier in their retirement are prone to what economists call "hyberbolic discounting."

This phenomenon could also be called the "spend it while I have it" syndrome--that is, you spend money in the present thinking it won't be around in the future. Many tend to think that consumption now is better than savings or investment.

How do you short-circuit hyberbolic discounting? It's pretty simple. Look at the time value of money and build a graph using a basic savings calculator. See how it can grow over time versus taking a payment now. Once you see the magic of compounding at work, it should easily outweigh most other uses for that money today.

3. Going it alone

If you haven't been working with third parties, then maybe now is the time. There are a host of professionals from retirement planners to certified financial planners who can help you create a rational plan.

It's often said by many retirees that "I've gotten this far without help, why do I need someone now?" There's no shame in hiring a professional who can either craft or guide a plan. They can spot some common errors in investment allocations, withdrawals, spending, taxes, and longevity risk. They can also keep you (or put you back) on course so that you don't outlive your money.

A key element in bringing in some outside advice is trust. You need to know whether the people you involve in correcting retirement planning mistakes have done it before and have the expertise to guide you.

Use advisors who are not focused on selling you products. Pay for their time and expertise and avoid those working exclusively on commission.

"The most powerful and least-studied factor is trust," notes Russell Yazdipour, professor of finance at California State University. "It's the glue that holds the system together." Once broken, trust is difficult to regain. That's why it's important to get references for advisors--and check them out. They can facilitate learning and keep you focused on your goals. But you have to make sure they are fiduciaries, that is, they have a stated legal obligation to put your interests above those of the firm. Fiduciaries include most financial planners, registered investment advisers, chartered financial analysts, and lawyers.

By combining an environment of trust with a focused, fact-based approach to retirement, you may not be able to completely overcome your worst tendencies, but you could at least build a new knowledge base. That, in itself, could lead to some positive changes.

Dear All,

Please find below a very good article by Mr. Narendra Kondajji for your reading:

http://procyonfp.com/blog/financial-literacy-a-revolution-waiting-to-happen/

FINANCIAL LITERACY – A REVOLUTION WAITING TO HAPPEN

Author’s Note:  This article was originally published in the Special Annual Edition of “FP Pulse” Ezine for Council of Financial Planners, Bengaluru, launched in their Annual Convention 2014, on 05/04/2014.  This article is mainly focussed to professionals and other people involved in financial services industry.

Introduction

The regulator of Capital Markets in India, Securities and Exchange Board ofIndia (SEBI), in its 2011 “Concept Paper On Regulation Of Investment Advisors” made a grave assertion that:

“(…) in a country like India where levels of literacy are low and financial literacy even lower, disclosures have a limited effect”.

India is traditionally a country of enthusiastic savers.  Report published by the Reserve Bank of India (RBI)[i] indicates that household average savings (per cent of GDP at current market prices) has steadily increased over time.  It was 11.8% in 1970s and 23.5% in 2005-11 period. RBI’s projections show an increasing trend in the savings rate, from 23.2% in 2011-12 to 25.2% in 2016-17[ii], giving an average of 24.4% during the Twelfth Plan.

According to the India Census 2001 data[iii], as many as 560 million people in the country are literate. While the overall literacy rate works out to be 64.8%, the male literacy rate is 75.3% and that for women is 53.7%.

What is literacy ?

United Nations Educational, Scientific and Cultural Organization (UNESCO) defines literacy as under:

“Literacy is the ability to identify, understand, interpret, create, communicate and compute, using printed and written materials associated with varying contexts. Literacy involves a continuum of learning in enabling individuals to achieve their goals, to develop their knowledge and potential, and to participate fully in their community and wider society.”[iv]

India’s The National Literacy Mission defines literacy as

“acquiring the skills of reading, writing and arithmetic and the ability to apply them to one’s day-to-day life.”[v]

There are good reasons for the market regulator SEBI to worry about lack of financial literacy in spite of high household savings rate and increasing levels of literacy. Hindustan Times reported[vi] that:

“India is at the bottom among 16 countries in the Asia-pacific region with 59 index points, according to the annual MasterCard’s index for financial literacy”.

People may recite Shakespeare’s Sonnet 116 exact, yet not know how money and the financial world function.

Regulatory approach to financial literacy

To tackle the larger issue of financial inclusion, literacy itself has to be defined in many ways, financial literacy being one. A real concern to the regulators is the fact that disclaimers and disclosures are not very effective in the absence of financial literacy.  Let us see world over how the regulators are directing their efforts to tackle the issue of lack of financial literacy.

National Strategy for Financial Education

The Organisation for Economic Co-operation and Development (OECD) is directing the efforts to carry out a national strategy to increase the levels of financial literacy. OECD defines financial literacy as

“a combination of financial awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions and ultimately achieve financial well-being [vii]”.

OECD recommends the following high-level principles on National Strategies for Financial Education (NSFE)[viii]:

• Recognise the importance of financial education – including possibly through legislation – and define its meaning and scope at the national level in relation to identified national needs and gaps;
• Involve the co-operation of different stakeholders as well as the identification of a national leader or co-ordinating body/council;
• Establish a roadmap to achieve specific and predetermined objectives within a set period of time; and
• Provide guidance to be applied by individual programmes in order to efficiently and appropriately contribute to the National strategy.

In line with OECD’s recommendations, India created a top-level institutional structure in 2011 under the aegis of the Financial Stability and Development Council (FSDC). The FSDC is chaired by the Finance Minister, with heads of all financial sector regulators as members. The Technical Group on Financial Inclusion and Financial Literacy (TGFIFL) is headed by the Deputy Governor of the Reserve Bank of India (RBI) and includes representatives from all financial sector regulatory authorities. FSDC also established a national-level specialised institute named The National Centre for Financial Education (NCFE) to carry out the national strategy.  One of the important goals of the national strategy is to set up first contact with 500 million adults and educate them on key savings, protection and investment-related products.  The timeframe envisaged by RBI[ix] to meet this task is five years, a daunting one by any reckoning.

Financial literacy and women

If you educate a man you educate an individual, but if you educate a woman you educate a family.

- The old African proverb

Visa’s International Barometer of Women’s Financial Literacy ranked India 19th (of 27) with a score of 36.8 on a 0-100 index, with Saudi Arabia in our front and Serbia right behind us[x]. Lack of financial literacy among women is mainly because of lack of acquaintance. Women play a passive role in the financial affairs in a male dominated family and have limited or no opportunity to learn about money and finance.  The process of urbanisation and increasing employment opportunities are slowly bridging the gap but yet more needs to be achieved in this area.  Financial illiteracy in women can create many problems in the long run because,

(a)    Women live longer than men and they have to fend for themselves at the end of their life when learning is not an option.

(b)   When a large sum is received because of unfortunate event of disability or death of male bread-winner, female spouse finds herself helpless to handle money matters.

(c)    Young women who otherwise are independent, may have to depend on others to do even simple tasks such as understanding a statement of account or being ‘Know Your Client’ compliant.  Such basic skills, if left unlearned, lead to financial exclusion.

Women are generally more risk averse[xi] and prefer stable and steady returns in comparison to more adventurous and risk seeking men.  This maladjustment is a cause of friction when male spouse decides the investment options for both.  Financial literacy can help in removing such frictions.

Control over money and social status go together.  A financially literate woman who has control over her money can also decide her and her children’s future better.

Financial literacy and consumer protection

While financial literacy is an enabling and empowering model, lack of it has serious consequences on people’s financial well-being.  Inability to align risk tolerance and financial products, becoming victim of mis-selling, contracting unsuitable financial products, and falling victim to the machinations of fly-by-night or Ponzi scheme operators are some of the avoidable yet persisting maladies of lack of financial literacy which may also lead to exploitation and indebtedness.

Financial illiteracy impedes communication between the planner and the investor.  Most of the regulations insist that an advisor should give advices in writing.  In the absence of financial literacy, investors may have trouble in understanding or correctly interpreting the advices they receive.  They may also start distrusting their advisor assuming that the process is made unnecessarily complex because the planner might be just meeting the regulatory requirements. Financial illiteracy may hinder future-oriented thinking which in turn may lead to under-funding of retirement income.

What can a financial planner do to change the situation?

There is an overloaded information today and the investor has no alternative but to be financially literate. A financially literate client is an ideal client by any measure.  However, such a client is not born but made.  Financial planners can play a major role in the making of such clients.   Planners regularly conduct seminars, workshops and write articles and blogs.  In addition, few other suggested actions are:

1. Financial coaching – even before a financial plan is created, the planner should don the role of a financial coach and impart the desired financial education to the client, taking care to involve both the life partners in the process.
2. Remembering the fundamentals of personal finance – planners are many a times accused, rightly or wrongly, of making things more complicated than necessary.  To the uninitiated clients, who would have thought of an easily workable solution from a planner, it may be difficult to get suddenly exposed to many high-level financial planning concepts.  Initial year of clients’ engagement could be the ideal period to educate them about the myriad aspects of personal finance in a simple and easily digestible way.
3. Putting language skills to good use – Women are more comfortable in asking questions in their native tongue.  A planner can communicate more successfully if she is conversant similarly.
4. Serving all – Planners are also accused of serving the élite and the rich.  It is often the excluded people who need a professional opinion to make things happen with their limited resources.  Planners may have a pro-bono or social responsibility programme to reach-out to less literate.
5. Catching them young – It is fine to conduct seminars to the white collared eager audience.  What about catching them young when their minds are most impressionable?  Planners can develop and execute financial literacy programmes to client’s children and sow the early seeds of good financial behaviour.
6. Identifying the behavioural anomalies –Planners are increasingly adopting the principles of behavioural finance and economics.  Explaining hyperbolic discounting may be more useful and fruitful even before they explain the power of compounding.
7. Connecting to the network – Today’s net savvy people use social media tools such as Facebook and Twitter to interact and socialize with people in their network.  People are possibly spending more time in the social network than meeting up in person.  Planners are well advised to have a scientific and sustainable strategy to use social media tools to spread financial literacy.
8. Approaching retirement plan differently – Lack of financial literacy is one of the reasons why people are always under-prepared to face their retirement.  With the removal of defined benefit retirement schemes, it becomes imperative that planners have to make concerted efforts to create awareness among their clients about the importance of planning for retirement.
9. Protecting the client – Consumer protection and financial literacy are inalienable.  Planners can put in place a robust customer grievance redressal mechanism and make financial literacy the core of it.  It is a protection to the planner against probable mis-selling allegations as well.

Conclusion

There is a need and opportunity for the members of Council of Financial Planners (COFP) or for that matter any financial planner to be actively involved in spreading financial literacy and thus help the stakeholders to meet the goals of national strategy. This is a good business strategy as well. National strategy provides specific guidelines to industry associations and commercial financial institutions for channeling their efforts.  Increasing the levels of financial literacy, similar to that of literacy itself, is a challenging and time taking task.  It requires persistent and prolonged efforts by all the stakeholders to yield perceptible results.  It is hoped that in the coming days COFP and its members would play a stellar role to make the national strategy a success.  An educated and financially literate client is the one to aspire for.  It could be the financial revolution that is waiting to happen.

Please find below a good article as appeared in AdvisorKhoj:

http://www.advisorkhoj.com/articles/Mutual-Fund/Which-is-a-better-mutual-fund-investment-option:-Lump-Sum-or-SIP?utm_medium=email&utm_source=MailDirect&utm_campaign=Advisor08_04_2014#.U0PZnKiSzs4

Which is a better mutual fund investment option: Lump Sum or SIP

Apr 8, 2014 by Dwaipayan Bose | Mutual Fund

28 Downloaded

Is Systematic Investment Plan (SIP) a better investment option than Lump Sum? This is an old debate and has been going on ever since SIPs were introduced in India. Most financial advisors argue in favour of SIPs and a large number of investors prefer SIPs. But some investors still prefer lump sum investment. Financial advisers and investors, who prefer SIP, argue that monthly SIPs help investors to average the cost of a unit and thereby the return is higher. Investors who prefer lump sum reject that argument on the premise that, while some units are a purchased at a lower cost in SIP, other units are purchased at a higher cost. Both arguments are true. In my opinion, comparing SIPs and lump sum investment is like comparing apples and oranges. In this article, we will try to address the debate of SIP versus lump sum investment objectively.

Lump Sum investments versus SIPs

Let us examine this with the help of an example. Mr Prasad started a monthly SIP of Rs 5000 in ICICI Prudential Focused Bluechip Equity Growth Plan on April 1, 2009. His friend, Mr Parikh invested Rs 3 lakhs lump sum in the same scheme on the same day. Till date, both of them have invested Rs 3 lakhs. Before we examine how Mr Prasad and Mr Parikh’s investments have done, let us how the fund has performed in the last 5 years. Please see the NAV chart of the ICICI Prudential Focused Bluechip Equity Growth Plan from Apr 1 2009 to Mar 31 2014.

As you can see in the chart, over the five year period the NAV of the scheme has increased almost 3 times.The annualized compounded return over the 5 year period between Apr-1-2009 to Mar-31-2014 was 23.3%. However, the rise was not smooth. There were periods of choppiness especially in 2011 and also in 2013. Units bought in the choppy periods enabled Mr Prasad to improve his returns.

Now let us see, how the investments of the Mr Prasad and Mr Parikh have performed. Please see the chart below, to see the returns on Mr Prasad’s monthly SIP investments over the 5 period. The SIP date has been assumed to be the first working day of each month. The blue line shows the SIP investments made by Mr Prasad and the red line shows value of his units. As on March 31 2014, the value of Mr Prasad’s investment isRs 4.22 lakhs, while he invested only Rs 3 lakhs. The XIRR of Mr Prasad’s investment is 14%.

Let us now see how Mr Parikh’s investment has done. Mr Parikh invested Rs 3 lakhs in Lump Sum in the scheme on Apr 1 2009. The NAV of Apr 1 2009 was 7.6. Mr Parikh bought 39,474 units of the scheme. Please see the chart below, to see the returns on Mr Parikh’s lump sum investments over the 5 period. The blue line shows the lump sum investment made by Mr Parikh and the red line shows value of his units. The NAV of the scheme as on Mar 31 2014 was 21.6. The value of Mr Parikh’s units is Rs 8.54 lakhs.

In terms of absolute returns, Mr Parikh’s returns are almost double that of Mr Prasad’s. The reason is quite obvious. Mr. Parikh’s Rs 5 lakhs investment was invested for the entire period of 5 years. However, Mr. Prasad’s total investment was not completely invested for the entire period, since the money was getting invested in small monthly instalments of Rs 5,000.

However, the comparison of SIP versus lump sum is not a like to like comparison. Such comparisons should not be the basis of deciding between lump sum and SIP investments. The option of investing in SIPs versus lump sum totally depends on the source of investment.

• If the investor depends on regular savings for his or her investments, it makes sense to invest through the systematic investment plan route. The investor should not wait, till he or she has saved a sufficient corpus to invest in mutual funds
• If the investor has lump sum funds as a result of an one-time income then he or she should invest in lump sum in mutual funds. The investor should not put his funds in a bank account and invest it over a period of time through SIPs

The underlying principle of wealth creation is that, the longer you remain invested, higher are your returns. Please refer to our article, How Compound interest works, to understand this in greater details. Whether you invest in lump sum or through SIP depend on your personal financial situation. Either ways, you need to ensure that your investible funds remain invested for a sufficiently long period so that you can take advantage of the power of compounding.

Investing in SIPs versus trying to time the market?

For a person with invests in mutual funds from his or her regular savings, investing through SIPs makes more sense than trying to time the market and investing in Lump Sum. Let us examine this through an example. The chart below shows the returns of Mr Prasad’s Rs 5000 monthly SIP in ICICI Prudential Focused Bluechip Equity fund in 2013. Mr Prasad invested Rs 60,000 through monthly SIPs in 2013, and the value of his investment as on Dec-31-2013 is Rs 65,873.

Can Mr Prasad get better returns than Rs 65,873 by trying to time the market? Let us examine. At first, Mr Prasad needs to accumulate Rs 60,000 investible funds. Since Mr Prasad relies on regular savings to make mutual fund investments, he needs to wait till he accumulates the investible corpus from his savings. Let us assume, Mr Prasad saves 50% more every month and accumulates Rs 60,000 by the beginning of September. He now has a 4 month window to put his lump sum Rs 60,000 investment to work. Please see the chart below to see the returns on Dec 31 2013, for Rs 60,000 lump sum investment, made any time between Sep 1 to Dec 31. The orange line shows the Dec 31value of investments made on days shown on the horizontal axis. For example, the value of Rs 60,000 lump sum investment made on Sep 3 will be Rs 71,000 on Dec 31. The value of Rs 60,000 lump sum investment made on Oct 8will be Rs 64,380 on Dec 31. The blue line shows the lump sum investment made by Mr Prasad and the red line shows the value of monthly SIPs on Dec 31 (Rs 65,873 shown in the chart above). Is it possible to beat the red line by timing the market? Let us see.

From the chart above, we can that it is possible to beat SIP returns. But Mr Prasad had to make the lump sum investment before Sep 7, to make this strategy work. After Sep 7, Mr Prasad would get very few opportunities to match SIP returns. This clearly shows that timing the market is very difficult, because equity market by its very nature is unpredictable. Even investment experts with many years of experience, find it very difficult to time the markets. Therefore, in this situation it makes more sense to invest via SIPs. In fact, for long term financial objectives like retirement planning for which you need to save and invest on a regular basis, investing in equity funds through SIPs is the best option. You can refer to our article,Retirement Planning through Mutual Fund Systematic Investment Plans, to see how investing through SIPs can create wealth for retirement planning.

Conclusion

As discussed in this article, the debate of SIP versus Lump Sum is meaningless. The decision to invest in lump sum or through SIP completely depends on your personal financial situation. If you have sufficient investible funds from a one-time income, you should invest in lump sum. A portion of your regular savings should be allocated to SIPs. Both lump sum investments and SIPs will create wealth for you, if you remain invested for a sufficiently long time.

( Mutual Fund investments are subject to market risks, read all scheme related documents carefully.)

Tags - Mutual Fund, Systematic Investing, Personal Finance, Wealth Creation, Retirement Planning