Financial Planning For Youth by mukeshvasan

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									       Preface                                                                                    Contents
                            The Indian youth has never had it so good. On the           Youth and Investing -----------------------------------------------------------3
  Money                     consumption side, the choice of goods and services          The importance of investing wisely cannot be overstated.
                            available is unprecedented. And as far as income is
Simplified                  concerned, given the booming economy and its ever           Investment avenues for youth-------------------------------------------8
    Financial Planning      improving prospects, opportunities have never been          Young investors have a wide range of options to choose from.
        for Youth           better! So, the youth is earning a lot and spending a
                            lot! It's definitely a happy situation to be in!
        Copyright:                                                                      Importance of life insurance ------------------------------------------- 12
                                                                                        It is important to get life insurance at an early age.
                            In times like these, when everything seems to be going
                            right for so many, there is a tendency to ignore that one
                            great habit - saving money. The rationale is simple -       The importance of tax-planning --------------------------------------- 18
                            since the future looks great from here, why set aside       Tax-planning can be a synonym for wealth creation.
    Quantum Information
                            money for future needs and contingencies. But, in our
     Services Pvt. Ltd.
                            view, this is an ideal time to save money as surplus        How much real estate must you own? ------------------------------ 21
                            monies are high. Rather than spending this money on a       Your real estate investments must not be governed by price.
                            product or service you do not really need, you would
                            do well to invest the same to provide for some future       Use your credit card smartly ------------------------------------------ 25
                            critical need.                                              A lot of the negatives about credit cards are related to expenses.
    Contact Information:
                            In this issue of Money Simplified we discuss this and a     How to spend wisely ----------------------------------------------------- 28
    Quantum Information
                            lot more, including the investment avenues available        Spending wisely is the key to financial well-being.
     Services Pvt. Ltd.,
                            to the youth. And yes, we also discuss the concept of
     404, Damji Shamji,
                            spending wisely and the very popular tool to fund
      Vidyavihar (W),
                            purchases - credit cards!
     Mumbai - 86, India
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                            31st October, 2007
      022 - 2202 8550                                                                   investment objective and financial position and using such independent advisors as he believes necessary. Information contained in this Report is
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                                                                                        This guide is for informative purposes only and under no circumstances it is to be used or considered as an investment advice. It does not have regard
          Content:                                                                      to specific investment objectives, investment strategies, financial situation and the particular needs of any specific person who may receive this
                                                                                        document. Investors should seek financial advice from their Financial Consultants regarding the appropriateness of investing in any plans/products
       Abhijit Shirke                                                                   that may have been discussed or recommended in this guide. HDFC Standard Life Insurance Company Limited (HDFC SL) does not guarantee
                                                                                        that any forecasts or opinion in this material will be realized. And the views expressed herein are not necessarily that of HDFC SL. Further, HDFC
    Dharmesh Chauhan                                                                    SL disclaims all the liability of content provided in this guide, and shall not be held liable for the accuracy, correctness, completeness, timelines or reliability
    Himanshu Srivastava                                                                 of any such information. The recipient shall accept all risks and responsibilities for losses, damages, costs and other consequences resulting directly
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    Irfan Husain Rupani                                                                 totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe,
                                                                                        any such restrictions. Unit Linked Plans are different from traditional insurance plans & are subject to different risk factors. In Unit Linked Plans, the
        Vicky Mehta                                                                     investment risk in your chosen investment portfolio is borne by you. Please acquaint yourself with the associated risks and the applicable charges from
         Rahul Goel                                                                     your Financial Consultant/product brochure/policy document before buying a Unit Linked Plan. Insurance is the subject matter of the solicitation.
                                                                                        Copyright: Quantum Information Services Private Limited.

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     Financial Planning                                                                                                            Financial Planning
Youth and Investing                                                                       Two, invest the surplus in Maturity value of Rs 1 m, 10-Yrs hence
                                                                                          instruments which are best suited Return                              Maturity Value (Rs)
Ideally, just how spending comes            You probably already got the point.           to your needs and profile. While 8%                                             2,158,925
naturally to you, the youth, so must        Maintaining one's standard of living is       in present times this appears to 15%                                            4,045,558
saving and investing. Think about it.       not a very challenging feat; all one needs    be the easy part, in reality, this is
                                            to do is be employed and do well. The         where a significant amount of time needs When investing monies for long-term
You are able to finance your spends in      annual increments will compensate for         to be invested. This is to ensure that the needs like children's education or
present times. But to ensure that you       inflation and more. But what is critical      monies you have saved and invested retirement or even a simple goal like
are able to at least maintain the same      here is how you deal with this "more", in     by making short-term sacrifices actually becoming a crorepati say 15-Yrs from
spends in the future, you need to earn,     other words the surplus, as this will         delivers the anticipated return over the now, it is necessary that you not only
                                                                                                                                                 understand which assets suit
save and invest today! The "spends"         decide whether your standard of living        To achieve Rs 1 m, 10-Yrs from now                     your risk profile the best; but also
here is the money you have to spend to      changes over time or not.                      Time to goal (Yrs)        Amount to be invested (Rs those assets which are suited
                                                                                           5                                          497,177 best for such tenures. Later in
maintain your standard of living.
                                            Let's step back a bit here. A rise in the      10                                         247,185 this guide we will discuss each
Why you must invest                         standard of living does not necessarily
                                                                                          Assumed Return - 15% pa                                asset class in some detail so that
When it comes to the standard of living     mean wasteful expenditure. It could mean                                                             you are able to understand them
there are some points to note.              among other things an annual foreign                                                         better.
                                            holiday instead of a domestic one;            period of holding. Here is another
One, if the basket of goods you consume     sending your children to the best             illustration to give you a sense of the
                                                                                          impact returns have over time. Suppose         Now, let's take the goal of becoming a
today costs Rs 100 per day, the same        colleges; or even a farmhouse for a                                                          crorepati 15-Yrs from now. Suppose
will cost you Rs 134 five years from now.   luxurious retirement! The aim is to           you invest Rs 1 m today for a period of
                                                                                          10-Yrs, in assets which yield either 8%        you are an investor who has never taken
This is basically the impact of inflation   accumulate wealth that will help you                                                         on much risk; the preferred investment
(assumed at 6% per annum here), a           accomplish most of what you wished for!       of 15%. The difference in the maturity
                                                                                          values is palpable!                            avenues for you have been the small
scenario in which there is too much                                                                                                      savings schemes (also called post office
money chasing too few goods; this           When it comes to the surplus, you need        Therefore, if you want to have a wealthy
                                                                                          future, you need to save as much as you        schemes) like Public Provident Fund
results in an erosion in the value of       to focus on two things at this early stage                                                   (PPF) and others like RBI Bonds and
money. So, to maintain the same standard    in your life.                                 can as early as possible and then, invest
                                                                                          the same wisely. The latter ofcourse is        fixed deposits. All these avenues are
of living, you need to spend more money                                                                                                  very safe, and therefore, the return they
in the future.                              One, maximise the surplus by cutting          easier said than done.
                                                                                                                                         offer tends to be on the lower side. In
                                            wasteful expenditure. Remember every                                                         present times such a portfolio would
Two, the standard of living itself is a     Rupee invested today is more valuable         Setting objectives
                                                                                          Before you begin to invest money, you          generate a return of about 8% per annum
moving target. You will aspire to improve   than a Rupee invested tomorrow. The                                                          (pa) pre-tax, and assuming you are in
your standard of living (for instance,      more money you put aside at the start of      need to have clear objectives. The lack
                                                                                          of clarity on this front can often lead        the highest income tax bracket, about
mode of transport over time will change     your investing cycle, the more                                                               6% post-tax (the return on PPF is tax-
from a bus, to a cab to even your own       disproportionate the benefit on maturity.     you to take decisions that are ultimately
                                                                                          not in your benefit. Spend as much time        free and hence the higher than expected
car). And over time as you have             Here's a simple illustration. Suppose you                                                    post-tax rate).
dependents, their spends too need to        need Rs 1 million (i.e. Rs 10 lakhs) 10-Yrs   as is necessary to think about the
be taken care of. So you will need to       from now to fund some expenditure. This       objectives you have and then prioritise
                                                                                          them. This will help you achieve your          To achieve the goal, you will need to set
spend a disproportionate amount of          is how different the scenario will look if                                                   aside Rs 34,854 every month for 15-Yrs;
money to improve your family's standard     you had to invest for that need today, or     objectives. Well thought out objectives
                                                                                          go a long way in contributing to the           or you could set aside Rs 429,628
of living.                                  five years down the line.                                                                    annually.
                                                                                          success of the plan itself!

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 Financial Planning                                                                                                                   Financial Planning
How to become a crorepati                                                                     appetite!                                     investing. Of course the risk that you
                                                Case 1        Case 2         Case 3                                                         take on should be well understood and
                                            Aggressive     Moderate Small Saving              And the benefit of being invested in          even in the worst-case scenario should
                                                                                              equities is palpable. Our long-term           not jeopardise the financial security of
    Amount you wish to accumulate (Rs)       10,000,000   10,000,000      10,000,000          expectation of return from this asset class   your family.
    Time to meet your target (Yrs)                  15            15              15          is 15% pa. So in the unlikely event that
    Solution                                                                                  you invest all your monies in the stock       To conclude, here are some must-dos
                                                                                              market in your quest to become a              for you:
    Assumed Return (Pre-tax) (%)                  15.0           12.0            8.0          crorepati, the comparable amount you
    Assumed Return (Post-tax)(%)                  15.0           11.5            6.0          will need to invest is only Rs 16,414 per     One, be clear about your objectives;
    Tenure (Yrs)                                    15            15              15          month for 15-Yrs; or you could set aside      think about what you want to achieve
                                                                                              Rs 210,171 annually! Broadly, your            in life and then prioritise. Once you are
    Annual Saving Reqd (Rs)                    210,171       279,244         429,628
                                                                                              contribution to the plan, as compared to      clear on this the financial planning
    Or simply, Monthly investment of (Rs)       16,414        22,127          34,854          the very low-risk option discussed            activity will be a lot simpler.
                                                                                              earlier, would halve! That's the power of
Now, since the return is assured, the            is often said, and rightfully, that they     equities.                                     Two, employ the services of an honest
chance of this plan not achieving its            are the best tools to beat inflation and                                                   financial planner to handhold you as
objective is very low. For a risk-averse         generate wealth over time.                   The solution is not always a 100% low-        you go about planning for the future.
investor this appears to be the best plan.                                                    risk portfolio or a 100% high-risk            You are likely to be busy with work and
                                                 Of course, people have lost money by         portfolio. In fact for most of you a          will not be able to devote the necessary
However, when one is investing for time          investing in equities. But that almost       blended asset allocation will work best.      time to this activity. An honest financial
frames as long as 15-Yrs, the ideal asset        always can be traced to their having         But even then, equities will and should       planner will help you fill in this gap and
classes to invest in are equities, real          either succumbed to a mania or a tip,        account for the largest chunk of this         ensure that you are on target to achieve
estate and maybe even precious metals.           surrounding either the entire market or a    portfolio. In the table, the moderate plan,   your goal.
Of these equities should probably                sector or a particular stock that promised   which is basically a mix of high-risk and
account for the largest chunk of the             stupendous returns in the shortest           low-risk assets, is something that will       Three, as early as possible in your
asset allocation.                                period of time. Later in this guide we       appeal to a lot of you.                       working career, take life insurance (the
                                                 discuss more on equities and mutual                                                        pure risk variety - term insurance) for a
Selecting from various investment                funds.                                       Now you know that for your own future         tenure of about 30-Yrs. Pure risk
avenues                                                                                       interest you need to start saving and         insurance is very affordable and will
Equities are assets which carry high risk.       If you are a disciplined investor, and are   investing wisely. And also that if you        protect your family's needs in case you
There is a possibility that not only you         not prone to succumbing to greed and         want a wealthy future you need to start       are not around.
may not earn a return, but, you may              fear depending on short-term movements       taking on some risk when it comes to
actually lose your capital! Well, all this       in the stock market, then you must
is undoubtedly true. The why should              educate yourself to take on this
you, someone with a moderate to low              additional risk of investing in the stock
risk appetite invest in equities?                markets. Of course, if you do not have
                                                 the skill to pick the best stock or fund,
The fact is that over long-tenures               you can always employ the services of
equities have consistently out-                  an honest financial planner; but what
performed other asset classes. In fact it        you cannot outsource is your risk

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Financial Planning                                                                 In estment Av
                                                                                 ITC ves tment Avenues

                                                                                Investment avenues for youth
    IN A NUTSHELL                                                               A basic principle of investing is that the     and sold by investors at the prevailing
     Investing is important as it can help provide for one's future needs.      investment avenue must match the               market price. Over shorter time frames
     The need to invest stems from two major factors i.e. inflation and         investor's risk profile. For example, a high   (say less than 3 years), equities can be
     lifestyle.                                                                 risk investment avenue would suit a risk-      volatile (read high risk) investments.
     Typically, a wide range of investment avenues is available to investors.   taking investor. Also the investment           Factors like market sentiment come into
     The investor's risk appetite should determine which investment avenue      should aid the investor in achieving his       play and contribute towards distorting
     is chosen.                                                                 financial goals and objectives. For            the price of shares. However, over
     Equities have the potential to deliver better than other avenues           example, if the investor wishes to save        longer time frames, the company's
     over longer time frames.                                                   money to buy a car in a stipulated period      valuation (its true worth) determines the
     Young investors have time on their side and should consider investing      of time, then his investments should help      market price of shares. Hence it is
     a significant portion of their portfolio in equities.                      him achieve that predetermined goal.           important that investments in equities
                                                                                                                               be made with a long-term perspective.
                                                                                Young investors have an edge over              Sadly, in most instances, you are likely
                                                                                others on account of their age. In other       to hear about people trying to make a
                                                                                words, a young investor has more time          quick buck by investing in equities. Rest
                                                                                on hand as compared to a middle-aged           assured, this is the wrong approach to
                                                                                investor or one who is closing on              equity investing.
                                                                                retirement. This in turns affords young
                                                                                investors greater flexibility while making     A common problem associated with
                                                                                investment decisions.                          equity investing is the method of
                                                                                                                               selection. Often, investors rely on 'tips'
                                                                                In this article, we discuss various            to decide which company to buy into.
                                                                                investment avenues available to young          They are essentially relying on hearsay
                                                                                investors and the various facets of each       and in a way, gambling and hoping to
                                                                                avenue.                                        get lucky. Equity investing in the true
                                                                                                                               sense requires research and in-depth
                                                                                1. Equities                                    study. The investor must understand the
                                                                                You must have heard your friends and           prospects of the company, the factors
                                                                                relatives mention investing in the 'share      that affect the same; he must have an
                                                                                bazaar' or 'stock markets'. Actually they      understanding of the economy, interest
                                                                                are referring to equity investing. Simply      rates, political and legal environment,
                                                                                put, equities represent a share in the         and a host of other factors. Clearly
                                                                                capital of a company i.e. ownership in         equity investing is like a full-time job
                                                                                the company. Hence an investor who             that is best left to experts.
                                                                                invests in a company is also referred to
                                                                                as a shareholder.                              Despite equities not offering assured
                                                                                                                               returns or safety of capital, they have
                                                                                When a company is listed on the stock          the potential to add value to the
                                                                                exchange, its shares can be freely bought      portfolio. Over longer time frames

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 In ves tment Avenues
 Investment Av                                                                                                                    In ves tment Avenues
                                                                                                                                  Investment Av
equities have historically delivered          However, the stability in fixed income       equipped to make more informed                expenses and therefore combine long
higher returns as compared to other           instruments comes at a price. Since the      investment decisions vis-à-vis retail         term savings and insurance. These
avenues like fixed income instruments,        returns are locked-in, you will not be       investors.                                    plans assure a corpus to the family either
gold and real estate. As a young              able to gain from any subsequent hike                                                      through the maturity benefit or in the
investor, given that you have age on          in interest rates. Also inflation (a         Of course, the opportunity to invest in a     case an unfortunate case of
your side, equity is a must-have in your      general rise in price levels) hits fixed     mutual fund and gain from the fund            policyholder’s demise. Hence you
portfolio. However, instead of directly       income instruments the worst. The real       manager's expertise comes at a cost.          should not let tax saving or just returns
investing in equities, it is recommended      return on investments (i.e. rate of return   Investors in mutual funds have to bear        influence your decision of buying an
that you invest in the same via the mutual    on investment less rate of inflation) that   costs in the form of loads and expenses.      insurance plan.
funds route or even, very selectively,        represents the actual earnings made by       Often mutual funds are wrongly equated
the unit linked insurance plan route          an investor, takes a hit when inflation      with chit funds. The two are about as         Having said that, unit linked insurance
(more on that later in the article).          rises.                                       similar as chalk and cheese. Mutual           plans (ULIPs) is one offering from the
                                                                                           funds are professionally managed and          insurance segment that combines
2. Fixed income instruments                   Ideally, fixed income instruments are        regulated by entities like SEBI (Securities   investment with insurance. In fact, it
As the name suggests, fixed income            best suited for investors with a low to      and Exchange Board of India) and AMFI         would be fair to state that ULIPs are
instruments offer assured returns. Hence      moderate risk appetite. If an investor       (Association of Mutual Funds in India).       more inclined towards investments
you, the investor are aware as to how         affords higher priority to stability of                                                    rather than insurance. ULIPs invest in
much return your investment will              income and capital protection, fixed         Apart from letting experts handle the         both the equity and debt markets. Hence
generate and over what time frame. Fixed      income instruments are his calling. As       investments, the mutual funds route           their performance is market-linked. A
deposits, small savings schemes (Public       a young investor, a smaller portion of       offers another advantage - a wide range       well-defined sum assured (i.e. the sum
Provident Fund - PPF and National             your portfolio should be invested in         of options to choose from. Equity funds       that your dependants will receive in the
Savings Certificate - NSC, among others)      fixed income instruments to impart a         (invest in equities), debt funds (invest      sad event of you meeting with an
and bonds are examples of fixed income        degree of stability to the portfolio.        in fixed income instruments), balanced        eventuality) takes care of the insurance
instruments.                                                                               funds (invest predominantly in equities       aspect. ULIPs have been dealt with in
                                              3. Mutual funds                              and a smaller portion in debt), monthly       greater detail in a separate article.
A differentiating factor between equities     While investing in equities and fixed        income plans (invest predominantly in
and fixed income instruments is the           income instruments, you (i.e. the            debt and a smaller portion in equities),      The importance of a sound investment
safety of capital. In an equity               investor) directly invest in the             sector funds (invest in equities from a       advisor
investment, the capital invested (i.e. the    aforementioned avenues. Mutual funds         single sector), index funds (invest in        Conventionally, the neighbourhood
money invested by you) is at risk. When       put a layer between you and the actual       stocks from a benchmark index) and fixed      agent was the individual that most relied
equity markets crash, forget earning a        investment. Mutual funds collect             maturity plans (mutual fund equivalent        on for making investments. This
return, you may even lose a part of the       monies from a large number of investors      of fixed deposits) are just some of the       gentleman armed with application forms
capital. Conversely, investments in fixed     and this common pool is then invested        offerings that investors can choose from.     and an agency from the local post office
income instruments from credible              in line with the fund's investment                                                         was like a one-stop shop for
institutions and companies offer safety       objective. Each fund has a                   Clearly, mutual funds have a lot to offer     investments. However, the present
of capital. For example, assume that you      predetermined investment objective           to you as an investor. And the same           investment scenario is a lot more
were to invest Rs 10,000 in a fixed deposit   that determines where and how the            should be the preferred vehicle for           complex and requires a different set of
that offers 10% return for a 1-Yr period.     monies will be invested. Also the            making investments.                           expertise on the investment advisor's
On maturity (a year hence), you will          investments are made by an expert i.e.                                                     part. Peddling forms and collecting/
receive Rs 1,000 as interest income and       the fund manager. The fund manager           4. Unit linked insurance plans                delivering cheques are of secondary
the original investment i.e. Rs 10,000.       with his expertise and experience is         Insurance products like endowment             importance. Now, an investment
                                                                                           plans are tools for taking care of future     advisor's primary role is to offer

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 In ves tment Avenues
 Investment Av                                                                         Interview
                                                                                         Life Insurance
unbiased and expert advice. More           On your part, you should ensure that        Importance of life insurance
importantly, the advice has to be right    you are associated with the right
for the investor in question i.e. the      investment advisor at all times. He could
                                                                                       A lot of people go through their entire          providing for the future in a way that
advice should be based on the latter's     well be the individual who plugs the gap
                                                                                       lives before understanding what life             your absence does not hurt your family
needs. In other words, a 'one-size-fits-   between you achieving or not achieving
                                                                                       insurance is all about. There are several        members financially. For this you must
all' approach won't work.                  your financial goals and objectives.
                                                                                       reasons for this - the most common is            first, as accurately as possible, estimate
                                                                                       that no one really informed them about           the value of your life. This is called the
                                                                                       it. Another equally common reason is             'Human Life Value'. One of the methods
                                                                                       that those who did inform them (read             of calculating your human life value is
                                                                                       insurance agents) gave them inadequate           to sum up all expenses along with your
     IN A NUTSHELL                                                                     information so that they could sell them         future liabilities that your family
      With time on their hand, young investors have a lot of flexibility               what they wanted rather than what was            members will have to pay off in the
      while investing.                                                                 best for clients.                                unfortunate event of your death. Once
      Equities can be risky over shorter time frames, but over longer time                                                              you have done that you must take a life
      frames they have the potential to reward investors.                              Anyone who has been reading the                  insurance policy to give you an
      Fixed income instruments are best suited for investors who afford                Money Simplified regularly (we are in            insurance cover equaling your human
      greater importance to stability of income and safety of capital.                 the fifth year now and there are plenty          life value.
      Mutual funds offer the opportunity to indirectly invest in equities              of regular readers) has no excuse. Life
      and fixed income instruments.
                                                                                       insurance is one of the only tools where         Let's understand how the Human Life
      Investors in mutual funds can gain from the fund manager's expertise.
                                                                                       you create an asset at the start (life           Value (HLV) is calculated with the help
      The mutual funds segment has a number of offerings, each suited to
                                                                                       cover) as compared to other options              of an illustration. Vivek is a 32-Yr old
      a varied need.
                                                                                       where your savings build up over a               software professional. He is married; at
      ULIPs combined investing and insurance in the same avenue.
                                                                                       period of time.For the benefit of the first-     present he does not have any children.
      The complex investment scenario necessitates the presence of a
                                                                                       timers; life insurance is all about              He has some liabilities mainly in the form
      competent investment advisor.

                                                                                       Vivek’s Human Life Value
                                                                                       Vivek's age                                                      Yrs                 32
                                                                                       His wife's age                                                   Yrs                 28
                                                                                       Life expectancy of Vivek's wife                                  Yrs                 70
                                                                                       Number of children                                                                    -
                                                                                       Household expenditure                                             Rs             40,000
                                                                                       Of the above, how much is spent on Vivek                          Rs             15,000
                                                                                       Expected inflation in household expenditure                       %                   5
                                                                                       Outstanding loans                                                 Rs          3,000,000
                                                                                       Other liabilitiesRs                                                -
                                                                                       Medical expenditure                                               Rs            500,000
                                                                                       Rate of return on low-risk securities/deposits                    %                   8
                                                                                       Human Life Value                                                  Rs         10,999,917

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 Life Insurance                                                                                                                               Life Insurance
of loans as also regular household           To draw a parallel between term plans         Endowment plans differ from term plans        give you the sum assured with
expenses. This is how his HLV is             and other forms of life insurance,            in one very critical aspect i.e. maturity     accumulated profits under both
calculated:                                  consider the premiums paid out on             benefit. Term plans do not pay out the        scenarios - death and maturity. And they
                                             medical insurance or a vehicle. The           sum assured if you survive the term; you      are a good avenue of investment for
It is important to note that calculating     premiums are paid out regularly with the      receive the sum assured only if you meet      those with a low or medium risk appetite
the HLV is not a one-time process. It        explicit intention of being compensated       with an eventuality over the tenure.          and seeking a combination of insurance
must be reviewed regularly. For instance,    in the event of any loss (to health or        Endowment plans, on the other hand,           and savings.
in Vivek's case, if things were to change    vehicle). If there is no loss to health/      pay out the sum assured under both
over the years - for instance, more loans,   vehicle in a particular year, then there is   scenarios - death and survival, so long       Unit-linked Insurance Plans (ULIPs)
higher expenses, children, then he would     no compensation. However, you must            as you have paid the premiums regularly.      The ULIP, a variant of the endowment
have to revisit his HLV calculation.         keep on paying the annual premium                                                           plan, is another insurance product that
                                             because you don't know when your              Instinctively endowment plans appear          is much misunderstood. Unlike term
As we explained before, life insurance is    health/vehicle will deteriorate.              more worthwhile because they pay out          plans and traditional endowment plans,
all about providing for your HLV so that                                                   the sum assured regardless of whether         ULIPs invest in stock/debt markets (you
your family members are not left to fend     If you have understood how medical            you survive the term. You get a sense         have the option to choose the
for themselves in your absence. Life         insurance or vehicle insurance works,         that paying those premiums worked out         allocation). Since equity/debt markets
insurance allows individuals to opt for a    you will appreciate how term plans            for you.                                      fluctuate on a daily basis, the
life cover broadly through two plans,        work. When you opt for a term plan you                                                      performance of your ULIP gets linked
viz. term plans and endowment plans.         are required to pay an annual premium         Before endowment plans get your               to the markets. The value is captured by
                                             over a pre-determined tenure, till you        thumbs up, it's important to consider a       the NAV (net asset value) of the ULIP. If
A point to note is that the way life         encounter an eventuality (put bluntly,        few points. Endowment plans do pay out        you find that ULIPs are similar to mutual
insurance premiums are structured,           till you pass away). On death, your           the sum assured (along with profits) but      funds, then you are right, at least to the
opting for life insurance policy at an       survivors will receive the sum assured        this comes at a cost to you. Since            extent that both are market-linked.
earlier stage of your life works out         that has been promised to them. On            endowment plans have to pay out the
cheaper.                                     survival, you will receive nothing.           sum assured regardless of whether you         ULIPs unfortunately, have been sold as
                                                                                           survive the tenure or not, the insurance      pure investment when they are actually
Term Plans                                   However, term plans differ from medical/      company builds this into the cost of your     a combination of long-term savings and
Term plans simply provide a life cover,      vehicle insurance in one important            insurance plan i.e. the premiums you pay.     insurance in that order. This is because
nothing more, nothing less. To               aspect. While medical/vehicle                 So a part of your endowment plan              if getting a life cover is really critical then
understand this better, consider the two     insurance are annual contracts and must       premium is apportioned towards savings        subjecting your insurance monies to the
likely scenarios while opting for a life     be renewed every year, a typical term         while the other part is towards a life        fluctuations of stock markets is not a
insurance plan; the individual either        plan tenure is usually much longer (the       cover. What the insurance company             very prudent thing. For instance,
survives the tenure or does not survive      number of years varies across life            provides you (either on death or on           imagine how Vivek's family will be placed
it. Term plans and endowment plans           insurance companies). However, once           maturity of the tenure) is not just the sum   if the value of his ULIP falls sharply to
(explained later in the article) differ in   you have taken a term plan, the premium       assured, rather it also provides you a        coincide with his death. Hence, if your
the way they tackle both these scenarios.    stays the same till the end of the term.      return/profit on the sum assured. It does     objective for taking insurance is life
                                                                                           this by investing the premiums in assets      cover only then a term plan would suit
Term plans are relatively straightforward;   Endowment Plans                               (stock and debt) and paying out the           best as compared to an ULIP.
they pay-out the sum assured only if         If you have understood how term plans         return to you on death/maturity.              Another reason for the mis-selling is
the individual does not survive the term.    work, you have already got a fairly good
                                                                                                                                         rooted in the fact that many a times,
If he survives the term, he gets nothing.    idea of how endowment plans work.             Like we mentioned, endowment plans do         either on account of insufficient due

13                         visit us at                                                         visit us at                                    14
Life Insurance
diligence on part of the individual or lack   your frontline life cover policy. Rather,     Money Simplified: Get your own copy!
of communication by the insurance             that is a role most suited for a term plan.
agent, the expense structure of the ULIP                                                    We are delighted to have you benefit from the Money
is not understood by the individual.          We have compared term plans to
                                                                                            Simplified, which is arguably India's most popular financial
Having said that, the expense structure       endowment plans and ULIPs. Term plans
of certain ULIPs could make their             work out the cheapest and it is
                                                                                            planning guide!
expenses comparable to mutual funds           something that all individuals must
over the long-term.                           consider taking, especially at a younger      Over 160,000 users have registered for the Money Simplified
                                              age. A ULIP can play the role of              so far. And here's the best part, each one of them likes it so
While ULIPs can add value to the              enhancing your investment portfolio           much that on an average, they share their copy with atleast
individual's portfolio, in our view it        and bridging the shortfall, if any, in your   four of their friends. Given the scale of this distribution
would be a mistake to opt for ULIPs as        life cover.                                   undertaken by our subscribers (!), there is a fair chance that
                                                                                            you have received this copy from a friend.

                                                                                            Did you know that Money Simplified is published
                                                                                            Yes, it is a monthly guide. And, it is absolutely free!

                                                                                            Here's how you can get your own copy?
                                                                                            We will be delighted to inform you of the release of
                                                                                            future issues of the Money Simplified. All you need to do is
       Before opting for a life insurance plan, calculate your Human Life
       Value.                                                                               click on the link below and provide us with your email ID.
       The Human Life Value can be calculated by adding up your liabilities                 We do not require any further information as of now.
       along with all expenses that need to be paid off.
       Life insurance is all about providing for the future in a way that your              Click here:
       absence does not hurt your family members financially.                     
       Opting for life insurance at a younger age is cheaper.
       Term plans are the cheapest form of life insurance. They do not pay
                                                                                            Your Privacy
       out the sum assured on maturity.
       Endowment plans and ULIPs pay out the sum assured on maturity.
                                                                                            We respect your privacy and will take all measures to protect
       While generally ULIPs have higher expenses, the expenses on certain                  the same. Your email will never be shared with any third
       ULIPs are competitive vis-à-vis mutual funds.                                        party.
       Term plans are a must-have for all individuals looking at taking life
       insurance. A ULIP can be considered from an investment perspective.                  Welcome to the world of smart investing!

                                                                                            Money Simplified - The smart way to plan your finances

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     Personalised Services from Personalfn
                                                                        The importance of tax-planning
     Who are we? We are                                                 For most individuals tax is a four-letter     80C for a variety of investments - for is one of India's leading finan-                word. How many individuals willingly          example investments in tax-saving
     cial planning initiatives.                                         part with their hard-earned money for         funds (ELSS), Public Provident Fund
     We are a part of Quantum Information Services Pvt.                 taxes? Not many! Mention paying taxes         (PPF), National Savings Certificate
     Ltd., which is one of India's most experienced                     and all those age-old arguments about -       (NSC), infrastructure bonds and tax-
     research houses (set up in 1990). Quantum also offers              "what do we get that we should pay            saving fixed deposits. Similarly,
     equity research via its online initiative,                         taxes?" surface. While that is a topic        contributions towards provident fund,                                              which can be debated for eons, few would      life insurance premium, repayment of
                                                                        dispute the utility that tax-planning can     the principal amount on a home loan,
     Our offerings                                                      offer.                                        payment of tuition fees are also eligible
     • Personalfn helps individuals plan their investments                                                            for Section 80C deductions.
       so that they can meet their financial commitments                What is tax-planning?
       (like retirement, marriage and child's education)                Tax-planning amounts to making                How tax-planning can lead to wealth
                                                                        investments or contributions in line with     creation
     • Research on mutual funds and debt instruments                    prescribed guidelines that lead to            The Section 80C limit has been set at
     • Tools like the Asset Allocator and MyPlanner which               reduction in tax liability. Simply put, the   Rs 100,000 in a financial year. This
       empower individuals to plan and track their fi-                  tax liability is computed as a percentage     means you can invest upto Rs 100,000
       nances                                                           of the income. As per prevailing tax laws,    every year in the stipulated investment
                                                                        certain investments and contributions         avenues or utilise the sum for paying
     Our publication                                                    have been earmarked for claiming tax          life insurance premium, repaying a
     • Personalfn also publishes the Money Simplified, a                benefits. When these investments and/         home loan and claim tax benefits. Now
       free-to-download monthly guide to help you plan                  or contributions are made, the same are       the same has a two-pronged effect.
       your finances better.                                            reduced from the income while                 First, you save tax at present, and
                                                                        computing the tax liability. As a result,     second, by investing the monies, you
     Contact information                                                the tax liability is reduced. No marks for    are creating an asset/income for the
     To benefit from Personalfn's services, please call us at           guessing that lower taxes are a welcome       future. For example, investments in tax-
                                                                        break.                                        saving funds, PPF and NSC will yield
     Ahmedabad - 6450 5215 / 5216 Bangalore - 6535 9899 / 9900
                                                                                                                      returns in the future. Life insurance
     Chandigarh - 653 5304 / 5305     Chennai   - 6526 2621 / 2622      Section 80C                                   premium repayment will mean that your
                                                                        Now that we have discussed what tax-          dependents will be provided for in your
     Hyderabad - 6591 8423 / 8435 Jaipur        - 650 1396 / 650 1397   planning is, the next step is to discuss      absence. Finally, home loan repayment
     Mumbai      - 6799 1234 / 7536 New Delhi - 6450 5302/5303          how the same should be conducted.             will lead to creation of an asset (a
                                                                        Before that, an introduction to Section       housing property).
     Pune        - 6602 9448 / 9732                                     80C is necessary. While there are a
     Alternatively, write to us at or visit         number of sections in the Income Tax Act      Let's not forget that we are talking                                                 that offer opportunities for tax-planning,    about investing Rs 100,000 (which is a
                                                                        the most popular and pervasive one is         significant sum) every year. Simple
                                                                        Section 80C.                                  maths tell us that Rs 100,000 invested
                                                                        You can claim deductions under Section        every year at 8.0% per annum (pa) over

17                   visit us at www.personalfn .com                                          visit us at www.personalfn .com                               18
 Tax-Planning                                                                                                                                    Tax-Planning
a 15-Yr period will amount to a              Yr period. The scheme requires recurring      insulated from any subsequent rate           tax-saving fixed deposits is chargeable
substantial Rs 2,715,200.                    investments i.e. annual investments are       change.                                      to tax and subject to TDS (tax deduction
                                             necessary to keep the PPF account                                                          at source).
How to create wealth                         active. The minimum and maximum               You can make investments in NSC for a
Now that we have discussed tax-              investment amounts are Rs 500 and Rs          6-Yr period to gainfully invest one-time     Tax-saving fixed deposits can be utilised
planning, its benefits and how it can help   70,000 respectively pa. Investments in        surpluses and to provide for needs that      like NSC, to meet future needs that will
create wealth, let's come to the             PPF are eligible for Section 80C              will arise over a corresponding time         arise over a predictable period.
interesting part - how to create wealth.     deductions. Also the interest income          frame.
We discuss some of the major investment      from PPF is tax-free.                                                                      5. Unit linked insurance plans
avenues that offer Section 80C benefits                                                    4. Tax-saving fixed deposits                 Unit linked insurance plans (ULIPs) are
and should form a part of your tax-          At present investments in PPF offer a         You must be aware of fixed deposits          the most "happening" offerings from the
planning portfolio.                          return of 8.0% pa, compounded                 offered by banks. Tax-saving fixed           life insurance segment. Simply put,
                                             annually. However, this rate is subject       deposits aren't very different. These are    ULIPs are market-linked avenues that
1. Tax-saving mutual funds                   to revision; hence, investments in PPF        fixed deposits, wherein investments          combine insurance and investment.
Tax-saving mutual funds (also called         may yield a higher or lower return going      upto Rs 100,000 are eligible for deduction   Premiums paid on ULIPs are eligible for
equity linked savings schemes - ELSS)        forward, depending on how rates are           under Section 80C. Generally, Rs 100 is      deduction under Section 80C. ULIPs
are equity funds that offer tax benefits     revised.                                      the minimum investment amount. Tax-          have been dealt with in detail in another
under Section 80C. Essentially, like                                                       saving fixed deposits have a 5-Yr            article in this guide.
equity funds, these funds also invest        You can make smaller contributions to         investment tenure and no premature
their corpus in equities. However, the       the PPF account. The same will help you       withdrawals are permitted.                   In conclusion, remember that tax-
differentiating factor is the 3-Yr lock-in   build a risk-free corpus for the future.                                                   planning is not just another dreary chore
and the tax benefits. While in a regular                                                   At present, most banks offer a rate of       that has to be conducted annually. On
equity fund, the investor is free to sell    3. National Savings Certificate               return in the range of 8.0%-8.5% pa. A       the contrary, it's an opportunity for
his investment whenever he wishes to,        National Savings Certificate (NSC) is         higher rate of return (additional 0.5%) is   wealth creation. Give the tax-planning
in a tax-saving fund, the investor must      another assured return scheme.                offered on investments made by senior        exercise its fair attention and time.
stay invested at least for a 3-Yr period.    However unlike PPF, it isn't recurring in     citizens. Also the interest income from
Also, investments in a regular equity        nature. Hence, an investor is required
fund aren't eligible for any tax benefits,   to make a lumpsum investment that
but investments in tax-saving funds are      matures after 6 years. The minimum                IN A NUTSHELL
eligible for Section 80C tax benefits.       investment amount is Rs 100, while there          n   Tax-planning helps in rationalising the tax liability.
                                             is no upper limit for investing in NSC.           n   More importantly, if properly conducted, it can help in wealth
For a young investor like you who has        Interest income from NSC is paid on                   creation.
time on his side, tax-saving funds should    maturity; the same is also taxable.               n   Investments and contributions of upto Rs 100,000 under Section 80C
be the preferred tax-planning                Interest accrued on NSC is considered                 are eligible for tax benefits.
destination. They will aptly match your      to be reinvested; hence, it is eligible for       n   Tax-saving funds are market-linked avenues that can make an apt fit
risk appetite.                               reinvestment under Section 80C.                       in young investors' portfolios.
                                                                                               n   PPF offers the opportunity to build a corpus over a 15-Yr period in a
                                                                                                   risk-free manner.
2. Public Provident Fund                     Investments in NSC offer a return of
                                             8.0% pa, compounded half-yearly. This             n   NSC runs over a 6-Yr period and can be used to invest short-term
Public Provident Fund (PPF) is an
assured return scheme (i.e. it offers        rate is locked-in at the time of making
                                                                                               n   Tax-saving fixed deposits from banks are also eligible for tax-benefits.
guaranteed returns) that runs over a 15-     the investment. Hence investment is
                                                                                               n   ULIPs combine insurance and investment in a single avenue.

19                        visit us at www.personalfn .com                                                        visit us at www.personalfn .com                              20
   Real Estate                                                                                                                                          Real Estate

How much real estate must you own?                                                          the change is adverse, it will lead to a       based on the asset cycles; this rarely
                                                                                            downturn. Since there are several              works and in any case is too time
For a lot of investors, at least in the       clear why owning real estate is important     factors at play at the same time, various      consuming (you also need very accurate
Indian context, physical assets like real     but owning it alongside other assets is       assets are under different stages in their     research to tell you beforehand which
estate and gold have traditionally held       even more so.                                 cycles.                                        asset will see a downturn and which one
much significance. And the sharp run                                                                                                       will witness an upturn). It is more
up in their prices has further ignited        Every asset, like equity/debt, is governed    This explains why at times equities are        preferable to be invested in several
interest in these avenues. While having       by different factors, which have an           on a high, but gold isn't or why being         assets in a pre-determined allocation so
real estate and gold (among other assets)     impact on its price performance over the      invested in debt is more profitable than       that no matter which asset is in which
in your investment portfolio is critical,     long-term. To understand this better          being invested in equities or why real         stage of its cycle, as an investor you are
this must not be dictated only by the         consider debt (like corporate bonds,          estate prices are on upswing but equity        well-placed to clock a return in line with
prospects of making a gain. Rather, how       government securities, debt funds),           markets are depressed. While in theory         your risk profile and in tune with your
much real estate you must own (which          which is closely linked to interest rates,    at least, it is possible that all asset        long-term investment objectives. This
is the subject of this note) must be          inflation and the economic health of the      classes are witnessing the same cycle          is like placing your eggs in various
governed by factors that are unrelated        country among other factors. Then             at the same time, in practice this is a rare   baskets or as it is referred to in investing
to its price.                                 consider equities, which are governed         phenomenon (surprisingly, that rare            parlance - diversification
                                              by, apart from the abovementioned             phenomenon is what we have been
So why and when should you buy real           factors, performance of corporates/           witnessing over the last few years!).          As an investor if you have a preference
estate? Before we answer these very           companies.                                                                                   for real estate then its time to 'change'
critical questions let's first understand                                                   Why asset allocation helps                     your bias in light of this note. Rather,
some very basic points about investing.       Notice that although there is an overlap      Now consider an investor who does not          you should remove all biases for any
                                              to some extent between the factors that       understand how asset cycles work,              asset. On the contrary invest in various
Asset allocation                              govern the performances of debt and           which is why he is invested heavily in         assets according to a pre-determined
Any discussion on investing must begin        equities, there are also factors that are     real estate with only limited investments      plan/allocation.
with what is known as a portfolio. An         exclusive to each asset. On the same          in other assets. At a time when real
investment portfolio (since it's related      lines, real estate has factors that are       estate prices are on an upturn and other       At Personalfn, we maintain that you
to your investments) is a list of assets      exclusive to its performance. Over the        assets are on a downturn, the investor         must have enough real estate/property
that you own in a certain proportion          long-term, the exclusive factors set apart    will benefit. But when the trend reverses      for:
(referred to as allocation). So all assets    the performance of one asset from             (i.e. real estate prices decline and prices    1) your own residence and business, if
put together in a particular allocation are   another.                                      of some of the other assets rise), he will     any, and,
referred to as asset allocation.                                                            not only part with the gains he made on        2) to give away as inheritance (which
                                              What is an asset cycle and how it works       his real estate investments but will also      for someone of your age is quite some
A typical portfolio must include equities,    The domestic and global economies are         forfeit the opportunity to earn returns        time away)
debt, real estate, gold and cash in a         dynamic and are constantly witnessing         on other assets.                               Typically, for most individuals property
particular proportion. Notice that real       changes. These changes trigger a factor,                                                     must account for roughly 50% of assets.
estate does form part of the asset            which in turn impacts the price               That is why it pays to be invested across      Owning anything significantly higher
allocation, but it features alongside other   performance of a particular asset. If this    various assets in a defined allocation to      than that can prove self-defeating, as it
assets like equities, debt, gold and cash.    impact is sustained, it will give rise to a   benefit from the various asset cycles.         will expose you to the uncertainties of
There are reasons why there are several       cycle in that asset. If the change is         Since you do not know beforehand               real estate without adequate backup (in
assets in your portfolio. Once you            positive it will lead to an upturn in the     which asset is going to be in which            the form of other assets like equities,
appreciate these reasons, it will become      price of the asset; on the other hand if      stage of its cycle, it is futile trying to     debt and gold).
                                                                                            time your entry from one asset to another

21                         visit us at www.personalfn .com                                                         visit us at www.personalfn .com                                   22
 Real Estate                                                                                                                                         Real Estate
Real estate: A case study                      It is however important to note that in        in a reputed company are just two of       can help you with the details particularly
To give you an idea, let us consider           present times when one buys a property,        them. Various banks have various           while filing returns when your home loan
Kumar, a 26-Yr male, unmarried, who is         it is very likely that it will account for a   parameters with varying importance         breakup (in interest and principal) must
in his first job. According to the             lot more than 50% of the total value of        accorded to each parameter. It's best to   be defined.
Personalfn's Asset Allocation Review,          one's assets. In such instances it does        check with the banks while applying for
this is how his asset allocation should        not mean that you do not buy your first        the loan.                                  So while it is pertinent to invest in real
appear:                                        residential property because you will                                                     estate, individuals must curb their
                                               exceed the 50% mark; what the Allocator        Individuals who are looking at buying      enthusiasm for it to ensure that their
       Kumar's Asset Allocation                tells you is the ideal allocation for you is   property on a home loan have another       investments in real estate are always
                                               this and that over time you must reach         reason to be pleased. Home loans are       aligned to a well-defined and well-
                       Cash                    it. So, when you buy a property in             eligible for tax benefits:                 balanced asset allocation plan.
                Gold    5%
  FD/Bond       5%                             Mumbai, probably property will account,
    10%                                        for let's say, 80% of your assets. In such     a) Interest on home loans is deductible    Of course, drawing up an asset allocation
                                               instances the incremental monies you           from income upto Rs 150,000 under          plan is not that simple. This is where an
                                               invest should be in other assets (equity,      Section 24 (b).                            honest and competent financial planner
                                               debt, gold) so that over time their share      b) Principal amount of upto Rs 100,000     comes into the picture. At Personalfn,
      30%                             50%      increases and you reach your ideal             is eligible for deduction under Section    we always urge investors to hire the
                                               allocation.                                    80C.                                       services of a professional financial
Kumar is unmarried now, but in time                                                                                                      planner who can help them devise a well-
plans to get married, he must therefore        Buying property on a home loan                 If all this sounds very confusing,         balanced asset allocation plan with a
consider buying a property on priority.        Since it's likely that you are in an early     consider taking advice from your           defined allocation for real estate across
Personalfn's Asset Allocation Review           stage of your career, your salary is           chartered accountant or tax advisor. He    various life stages.
recommends that Kumar must aim at              probably not enough (add to this the
having 50% of his money in real estate.        prohibitive property prices) for you to
He should invest in stocks/equity funds        purchase a property outright.
(30% of assets) as equities can add            Fortunately you do not have to rule out
                                                                                                 IN A NUTSHELL
considerable value to a portfolio over         buying a property for this reason. For
                                                                                                 n   Do not opt for property because prices are higher and it is easy to
the long-term. He must invest in fixed         salaried individuals in particular there is
                                                                                                     make gains on property.
deposits/bonds (10%) for stability; in         help in the form of home loans.
                                                                                                 n   Owning any asset including property in unduly high proportions can
gold (5%) mainly for diversification (and                                                            be self-defeating especially when prices fall.
not for generating above-average               Many banks offer home loans and                   n   Investment in property and other assets must be in line with a pre-
returns as many investors are tempted          salaried individuals stand a good chance              determined plan referred to as asset allocation.
to do now when gold is at a high). He          of qualifying for one. This is because            n   All assets have a cycle and trying to enter and exit an asset based on
must maintain 5% in a savings bank             most banks prefer the steady income of                its cycle is time-consuming and often volatile.
account for emergencies.                       a salaried individual to the irregular cash       n   Property must be held primarily for your own residence and to give
                                               flow of a businessman, for instance. And              away as inheritance.
While this is our estimate for Kumar, it is    if you are working in a reputed company           n   Those who can't buy property outright, can consider taking a
not too different for other individuals.       (as defined by the bank) then your                    home loan.
For instance an individual (in the 45-55       chances of getting the loan are                   n   The principal and interest amounts on the home loan are eligible for
year old age group) who is married with        enhanced. Of course, there are various                tax benefits
children must also aim to have no more         parameters on which home loans are
than 50% of his assets in property.            approved, being salaried and working
23                            visit us at www.personalfn .com                                                       visit us at www.personalfn .com                             24
   Credit Cards                                                                                                                                    Credit Cards

Use your credit card smartly                                                                 to find out is to check with the bank in     interest on the unpaid amount along
                                                                                             the second year. It is possible that the     with taxes. In the final analysis this turns
Traditionally, Indians have been quite         about credit cards are related to             bank may waive off the fees based on         out to be very expensive.
averse to buying on credit. Don't look         expenses, hidden or otherwise, that the       your track record of making timely
too far; just ask your dad if he purchased     user did not know (or was not informed)       payments. If the bank does not waive         5. Payment by EMI
as much on credit, as you probably are         at the time of opting for the card. To        off the fees in the second year, you can     On the same lines, whenever you make
now, thanks to your credit card. Your          avoid distress at a later date, we have       cancel the card. However, if you wish to     a large purchase (usually over Rs 10,000,
dad probably never owned a credit card         listed down some points that you must         cancel the card in the second year ensure    although the amount varies across
and if he did, he probably preferred to        note while using the card:                    you do so before using it, because using     banks) you may get an offer from the
use it only in emergencies. But that was                                                     the card indicates that you have agreed      bank to opt for the EMI (equated
in the past; among the many customs            1. Term and conditions                        to pay the fees/charges for the second       monthly installment) facility to make the
and trends that have undergone a               How many times have you read this             year's subscription.                         payment. This facility does not come
change over the last few years in the          before - read the terms and conditions                                                     cheap and the interest on the EMI is
country, credit card usage probably            carefully before signing up for anything.     3. Lifetime free cards                       prohibitive. Again to the extent possible,
ranks very high.                               For every product you purchase or             Offering 'lifetime free credit cards' is a   we recommend that you make the
                                               service you opt for, always read the          relatively new trend in the credit card      payment before the due date in one go
Technically speaking, a credit card is an      terms and conditions and that includes        industry. While there was a time when        and give the EMI facility a miss.
unsecured loan. This means that unlike         credit cards. If you find anything in the     most banks charged annual fees on their
a secured loan, which is advanced by a         terms and conditions of the credit card       credit cards, the industry is graduating     6. Borrowing cash is expensive
bank/financial institution against a           that was not conveyed to you or is            to a level where annual fees are being       Credit cards can be used for making
security like property for instance, a         contrary to what was conveyed to you,         phased out. In effect, clients are being     purchases on credit as also for
credit card is offered without any             then seek a clarification from the bank.      given lifetime free cards i.e. no annual     borrowing cash. While making
security. In a secured loan, if the            If you are not satisfied with the             fees are charged. However, its best to       purchases on your credit card (so long
borrower fails to make good on his             clarification, dump the card.                 double-check with the bank what the          as you pay on time) is okay, borrowing
principal/interest commitment, the bank/                                                     executive has promised you about all         cash on your credit card is a very
institution can seize the security as          It's important that you read up on the        annual fees being waived off.                expensive affair. Avoid borrowing cash
compensation. In an unsecured loan like        terms and conditions before you use the                                                    on your card; use the card to the extent
a credit card that is not possible. Hence      card and not after. Once you use the card,    4. Minimum payment                           possible for making purchases.
banks take necessary steps to ensure           it is assumed that you have read the          One detail you will find relatively well
that only those meeting certain                terms and conditions and have accepted        highlighted in your monthly account          7. Insurance benefit
parameters are qualified to use their credit   the same.                                     statement is the Minimum Payment Due.        Many credit cards are known to offer an
card.                                                                                        This is the minimum amount that you          insurance cover. We recommend that
                                               2. Annual fees                                must pay for the purchases done in that      you ignore this benefit and go for the
Without getting into how you can               It is common for banks to waive off the       month so as to not attract a penalty for     core offering - credit card. If the card
qualify for the credit card, let's             annual fees/membership fees in the first      default on payment of card dues. We          has features that suit you, then you can
understand how you must use your card          year (cards are usually issued for at least   would recommend that you pay the entire      opt for it even if there is no insurance
once you have qualified for one. Credit        two years). The second year fees are          sum to the extent possible. Buying on a      cover. On the other hand, if the card
cards have their pros and cons, which          usually charged. It is possible that you      credit card is okay till the time you pay    features are not to your liking then reject
explains the good and bad that get             are promised that the second year's fees      your bills religiously. The moment you       it regardless of the insurance cover. In
reported about them. Not surprisingly,         will be waived off as well. The only way      carry forward your payment to the next       any case, on most occasions the
many of the negatives that get written                                                       monthly cycle, you will have to pay          insurance cover is usually linked with

25                         visit us at www.personalfn .com                                                         visit us at www.personalfn .com                                 26
 Credit Cards                                                                      Spending
so many terms and conditions that it is   insurance cover is unlikely to be
very difficult to claim the same. It is   sufficient for you.
                                                                                How to spend wisely
altogether another thing that the
                                                                                In a guide targeted at the youth, to ignore   idea of abiding by a budget for spending
                                                                                spending would be akin to committing a        may seem "uncool", it is nonetheless,
                                                                                cardinal sin. Today's youth have higher       the right thing to do.
                                                                                disposable incomes as compared to their
     n   Credit cards have their pros and cons. A major negative with credit
         cards is related to the expenses.                                      counterparts in earlier generations. The      2. Track expenses
     n   To have a better idea of the card expenses, read the terms and         same has resulted in a significant change     Again, tracking where you have spent
         conditions carefully before accepting the card.                        in lifestyles. Objects that were              your money may not qualify as an
     n   Check with the bank everything that is promised to you by the          considered luxury goods say a decade          interesting way to spend time, but it is
         executive who sells you the card. If you are not satisfied, dump the   ago have become necessities for the           important nonetheless. It will provide
         card.                                                                  present generation. In fact, the young        you an unambiguous picture of your
     n   To the extent possible use the card only to make purchases; avoid      population has been a major contributor       cash flows; this will put you in better
         withdrawing cash and other facilities like the EMI option because it   to the India growth story. It is widely       control of your finances. More
         is very expensive.                                                     believed that spending habits of the          importantly, it will provide you an
     n   Make your entire card payment before the due date.                     youth will play a major role in vitalising    insight into your spending habits. This
                                                                                the economic cycle, going forward.            in turn can help you understand the
                                                                                                                              areas that account for a significant
                                                                                However, there is a need to understand        portion of your expenses and give you
                                                                                that spending in an unrestrained and          the opportunity to do a reality check on
                                                                                haphazard manner could spell disaster         their utility.
                                                                                for your finances. Spending should be
                                                                                done with a degree of discipline and          3. Don't succumb to impulse spending
                                                                                planning. We present four tips which          It is now considered trendy to hangout
                                                                                will help you master the art of spending.     at malls, coffee shops and lounges. And
                                                                                                                              window displays and latest
                                                                                1. Spend in line with a budget                blockbusters are known to test the
                                                                                Remember the longstanding method of           resolve of even the strongest. A young
                                                                                making a budget and then spending in          individual with access to disposable
                                                                                line with the same. That is still the right   funds can be rather vulnerable in such
                                                                                way to go about spending. Having a            a situation. Resist the temptations and
                                                                                clearly laid-out budget will help you         don't succumb to impulse spending.
                                                                                prioritise your spending. For example,        This is especially pertinent if the
                                                                                the highest priority must be accorded to      spending will come at the cost of your
                                                                                investments that have to be made in line      monthly investment towards your
                                                                                with investment plans and commitments         retirement/home building corpus.
                                                                                like life insurance premiums. Only when       Always try to spend in line with your
                                                                                the high priority needs have been taken       budget.
                                                                                care of, should the balance funds be
                                                                                used for other expenses. Although the         For example, while it’s good to take your

27                        visit us at www.personalfn .com                                              visit us at www.personalfn .com                              28
 Spending                                                                                                                 Notes
friends to the movies or for a dinner once   4. Beware of credit cards
in a while, we recommend that it not be      Easy availability of credit cards has
overdone. Movies/dinners can be very         provided a major boost to spending. A
expensive propositions these days,           credit card gives you access to high
which means that you stand to gain           spending limits; also it liberates you of
significantly if you cut down these          the worry about handling cash. But
outings even by say 20%.                     credit cards have their downsides as
                                             well. For example, making the "minimum
For example, even if Rs 1,000 were to be     payment due" could get you entangled
saved on these outings and invested in       in a debt trap and force you to make
a diversified equity fund over 20 years      interest payments at obscenely high
as a one-time investment, it would           rates. In fact, credit cards are so
mature into Rs 16,366 (assuming 15%          pervasive in the present day context that
compounded growth).                          we have chosen to dedicate an article to
                                             the same in this guide.

       Today's youth have higher disposable incomes as compared to their
       counterparts in earlier generations.
       Spending in an unrestrained and haphazard manner could spell disaster
       for one's finances.
       Always spend in line with a clearly laid-out budget.
       It helps to track expenses regularly.
       Resist various temptations and don't succumb to impulse spending.
       Use the credit card sparingly and for the right purpose.

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