Source/Contribution by : NJ Publications
1. An Emotional Guide: In investing, emotions play the devil's role. If left unchecked, they can easily ruin one's entire financial life. Hence, there is so much talk of taking emotions out of financial decision making. A financial advisor does just that by playing the role of an emotional anchor in your financial journey. He will help you stick to your goals and financial plans, irrespective of whether markets are riding waves or are in dire straits. He/she will help in managing your emotions of greed, hope and fear in different market times. These are aspects most important when we consider a life-time of investments.
2. Helps you in Understanding Self: You often don't know what you don't know. A true financial advisor attempts to draw a full picture of you in financial terms. He aspires to see not only the present but also the future. Perhaps, he knows more about you than you know about yourself, if you have been honest with him. It is with the help of a financial advisor that you can dissect your financial life to minute details and plan for every small and big financial goal. He will be able to help you find and fill your weaknesses and build on your strengths as you progress in your life. He will even warn you of dangers and risks which you do not see. While undergoing a proper financial planning, the advisor will also help you spell out your financial goals and priorities them as per your needs and risk profile. The entire process and experience can unravel new things for you.
3. Ensures Continuity in your Plans: It is one thing to make a plan and another to stick to it. Paul Samuelson once said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” However, it is not easy as short term, immediate concerns often overshadow our long term commitments. A financial adviser is one who can help you maintain continuity in investing. More than anything else, it is the time in market rather than superior products or market timing that dictates returns in the long run. The financial advisor helps you to be patient and reap the full benefits of time and continuity in investments.
4. Source of Experience & Knowledge: A financial advisor often carries with him knowledge and wisdom that he has gained from being in the industry full time, for many years and his constant learning in the business. Financial services is an industry that requires regular studies and being updated of all new developments, be it regulations, market situations or product features. As individual investors, this may be too much & may come at the cost of your time, energy and money. Knowledge and wisdom is difficult to gather and should not be mistaken for information, which is readily available. Whenever you are lost or are facing any doubts or need any help in a financial decision, your financial advisor will be there for you.
5. Motivation to Excel: No one dives into a swimming pool eagerly for the first time, often it is either an instructor or a friend or a parent behind you who pushes you. Like any parent or teacher, a financial advisor has one hidden desire from each of his clients. He wants them to outgrow themselves and become bigger and better investors, in all aspects. Driven by this desire, a financial advisor would push you to do things you may not be fully prepared with. Whether it is controlling spending, forcing you to avoid unverified investments out of greed, making you save for your goals or forcing you to invest more, behind every decision is the desire for your long term well-being. Perhaps, most of the investors would not be even half of their portfolio worth today, had it not been for their financial advisors. He sets newer, higher goals and aspirations for you which you never thought were possible. The constant nagging, motivation, control and aspirational attitude bridges the gap between what you already are and what you can possibly be.
6. Life long Partner: A financial advisor sees you not just a single transaction driven customer, but as a potential, life long partner in your financial journey. The long term relationship is something that he values and expects from every good investor. For him you are never an individual, but a family that can extend into different generations. Hence, it is important for you to have a trust worthy financial advisor. This is a journey where he will be there in all ups and downs in your personal life (and markets) and will help you avoid and face various challenges in life. As the ultimate aim is financial well-being, a financial advisor will seek not only grow but also protect your wealth, always keeping the bigger picture in mind. As a mutually beneficial relationship, the financial advisor sees his well-being only conditional upon your well-being, to its fullest extent.
7. The obvious reasons: Well, the obvious reasons for which you think a financial advisor is required, actually comes last in our list. Reasons like operational support, saving time, consolidation of entire investment portfolio, keeping regular track of investments, regular portfolio review, timely communication of portfolio and transaction information, resolving any queries or issues in investments, keeping abreast with regulatory requirements, etc., are the many additional reasons why a financial advisor is needed. He helps you do all this which in turn helps you save a lot of time, hassles, efforts and worries. With the advent of technology and digital processes, a financial advisor uses them as his tools as a master, keeping control and managing them smartly to bring greater convenience for clients.
Conclusion
A financial advisor is more than the sum of all investment decisions that he can help you make in your life-time. How about starting with a simple question – Can you add the value of all decisions that you have 'not' taken because of your advisor? Can you value the portfolio he suggested against a portfolio you would have created in his absence? How about valuing the time you have remained invested or the additional investments you made, courtesy your advisor? The fact is, it is easier to think about making isolated investment decisions but difficult to imagine and create the bigger picture and keeping it relevant for years and years. A financial advisor not only helps you in deciding, but also helps you in deciding what to decide. Simply being with you, assuring you and helping you as you may 'need' and a promise for a life-time of same, goes a very long way in you being confident in your investment journey today. This new year, it is time to put a word of heartfelt thanks out to your financial advisor too in response to his new year wishes for your well-being.
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Source/Contribution by : NJ Publications
Mr. Jaitley had remarked in his budget speech that we are a tax non-compliant country and that not paying taxes and filing returns has become a culture. The government has been working overtime to ensure that there is greater tax compliance by widening the tax net in order to change this culture. Adopting the carrot & stick approach, the government has gone ahead with this agenda in full earnest. One thing is clear, doing business in cash, hiding income and spending that black money is going to be increasingly difficult going ahead. For the tax payers, the government has doled out many good incentives and relaxations in procedures in this budget to motivate them to disclose their income and pay taxes. At the starting line for those intending to file returns, there is incentive for the person filing returns for the first time as there will be no scrutiny of same. Tax returns form is also being simplified for the person filing in the first tax slab of income upto R5 lakhs. Thus, if there is anything one must do - it is to file tax returns with full honesty, in the service of this nation. For those worrying about tax outgo, it can always be reduced legally and with full legitimacy by making proper use of the tax saving provisions already provided. This exercise of reducing your tax liability legally is called tax planning. If you are new to filing returns or one who has done it earlier, only few weeks remain till 31st March, which is the deadline for making any tax planning related investments or spendings. In this hurry, this article presents a brief introduction to the process of tax planning and also puts forth a few tips on things to avoid in the exercise.
HOW TO DO TAX PLANNING?
For proper tax planning exercise, it is always recommended that you approach your tax or financial advisor asap and sit with him for the same. Experienced persons who have done this many times would find tax planning easier. Even then, there is no harm in consulting your advisor for the same. For those intending to brush up their knowledge, you can always look out for tax planning related articles and list of avenues to save taxes. The following three step process is generally understood to be a universal tax planning process. Please note that this is a simplistic approach for individual clients which essentially covers the important aspects of tax planning.
1. Calculate Your Taxable Income: The tax is levied on your taxable income, so the first step is to ascertain how much your taxable income will be for the year. There are different heads of income and income in each of it is calculated and treated differently, so it is not going to be very simple. As the first step, you need to sit down and calculate your income from all these heads to arrive at your taxable income. There is no need to arrive at a perfect figure at this moment as this exercise is only to approximately arrive at the taxable income to know the extent of the tax savings you need to do.
2. Calculate spendings & savings eligible for tax breaks: During the year you may have, knowingly or unknowingly, done some expenses and investments which qualify for tax breaks. The most common sections to look for are 80C/80CCC/80CCD (for eligible investments), 80D (medical insurance premium), Section 24 (home loan interest) and 80G (donations). These are just examples and there could be many other sections applicable to you. An important thing to remember is that your spending /savings must have been done by you and the necessary supporting documents or proofs for the same is available with you. The idea here is to calculate the limits provided by IT rules which you have already exhausted under different sections and the balance still available for you to make use of.
3. Planning For Tax Savings: After knowing your taxable income, how much you will need to save and the avenues still available for you to exploit, the final step is to decide what further needs to be done to
save taxes. Frankly, it is your decision and many, at the lower end of tax liabilities, may choose to pay nominal taxes. But if you intend to save as much as you can in taxes, then you will need to plan making further investments. Explore all available avenues and plan your investments as per your preferences.
WHAT NOT TO DO?
In tax planning it is also important to not do few things which will defeat or dilute the whole exercise of tax planning. Any financial decision we make may have huge financial repercussions. Your decisions should be well-thought of, well researched and should be done carefully with patience. Here are few things which you should not be doing...
1. Postpone tax planning decisions further: We have been saving it for long. Tax planning is not a year-end exercise but a year beginning exercise. But if you are late or if you feel there is more scope to save taxes, your available time window is still open, but only for a few weeks. Remember, that tax planning, consultations have to be done now so that you have time to execute your decisions well in advance before 31st March.
2. Focus only on Tax Savings: In India, tax planning in itself is considered as a stand alone financial objective and activity by many. Frankly, nothing can be farther from truth. No investment or expenses should be done purely for the purpose of tax savings. Tax saving can be an additional incentive and objective for another primary objective or need which you should look to fulfill. Think about it, it can be better health protection, social service and so on or simply wealth creation.
3. Buy insurance for tax saving purposes: The idea here is already covered in point above but frankly it needs special mention as most insurance products are sold in these last couple of months purely in the name of tax savings. Please note that insurance is a good avenue and everyone should buy proper insurance policies but they should be driven by your insurance need. If the insurance policy fits the bill for proper insurance coverage which you 'actually need', then only think of buying that policy as you never know when you may need that coverage. Buying insurance, which is like long-term contract with low returns, for tax savings is not a good idea and there are better products for that purpose.
4. Investing more than needed: You can always go overboard after exhausting your limits available for tax planning and there is no downside in doing it. The idea behind this point is that do not make the mistake of a forced financial decision just to save taxes when you don't actually need it. Since the tax saving avenues come with certain restrictions and/or limitations, it is better that we do not go overboard with them. Exceeding your tax saving limits is welcome when those financial decisions are driven by your financial objectives and other needs and not by tax savings.
Take Away:
A nation becomes great when its people fulfill their duties and responsibilities with honesty. Taxes is not something which we give as charity or is stolen from us. It is the fair and deserving price for the opportunities, liberties and well-being we enjoy as citizens of this nation. If all of us share the burden of empowering our nation, together we and our future generations will enjoy its fruits for times to come. Tax planning is not just about saving taxes alone, but also about showing,declaring and paying your taxes. Let us do what is not only in our best interests, but also what is expected from us in the best interests of our nation.
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1. There is not just one finish line, there are multiple goals to be achieved during a lifetime, and you'll be simultaneously running for all of them.
And 2. The life goals, unlike the finish line, they aren't constant, as you move towards them they'll drift a little further, not necessary in the north.
So, resting on the above attributes, we arrive at: Goal Setting is not a once in a lifetime process. It is an ongoing affair, you need to revisit and review them time and again.
Having said this, why aren't our goals fixed? why do we need to revisit them repeatedly?, often comes into the investor's mind. So the following paragraphs will explain the reasoning behind the constant motion in your goals.
Firstly, your lifestyle exercises a significant impact on your goals. Let's assume, you are working in a junior management grade in a company, and you feel Rs 1 crore will be enough to meet your lifestyle needs post your retirement, and you invest accordingly. After some time, you get promoted to a middle management grade, so now with an increase in your income your lifestyle will also upgrade, and to maintain this upgraded lifestyle after your retirement, Rs 1 crore may not suffice. This concept is not just applicable to an increase in your daily living expenses, it is also applicable to the size of your other dreams, they will also move in conjunction with your income. The dream of owning a basic hatchback will transform into a dream of owning a comforting sedan, the dream of a Kashmir vacation will translate to a Dubai vacation, and the like.
Secondly, there can be a change in your footing which may require you to modify your goals. There may be goals which were paramount for you earlier, but now they've lost their meaning, so they need to be put off the table. For example, five years ago, your sole aim in life was to own a Harley Davidson and you were passionately saving for actualizing your dream. But recently you had to undergo a major knee replacement surgery, and you have to take the back seat now. So, the goal has lost its significance. Conversely, a variation in your position may require you to elevate or alter your goals too. Let's say you wanted to stay ahead in the race and you started planning for your kid's education while your wife was pregnant, but things didn't move as planned, and she delivered twins, so now you need to account for the second kid too while planning for the kids' education.
Thirdly, Inflation is the villain which pushes your goals away, away from your reach. It is because of inflation, that you have to run faster and sweat extra to reach your target. In our previous example, Rs 1 crore was enough for the investor to enable him meet his post retirement needs “today”, but not 10 years ahead when his retirement approaches. Assuming an average rate of inflation of 6%, his retirement corpus requirement to maintain his “present standard of living” will be Rs 1.8 crores after 10 years.
The fluctuations in our life goals are a product of the above factors. These changes are inevitable, and hence we need to keep on incorporating these changes into our goals and make the necessary modifications in our financial plan. If you do not keep revisiting and modifying your goals, you would be moving in a random direction which may or may not be leading you towards your targets.
To conclude, this marathon called life is really long, the number of laps are endless, the targets are many and are constantly evolving. So if you want to win the race, you have to be fast, run at a speed higher than the speed of the goals, you have to be flexible, align your direction with the direction of the targets, and you need to be attentive to the change throughout the run.
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Date : 28 April 2017
Whenever the subject of discussion is planning for your future, the hot topics are "Buying a car in the next five years or upgrading the car in 3 years","Buying a house in the next 10 years", "Funding for kids' education after 15 years", "Planning for Retirement after 25 years", etc. And then we save and invest for each goal. The agenda is to organize your finances by following the plan, and live a peaceful life. Our investment planning revolve around these long term goals. And that is what Financial Planning all about.
But then while planning for your goals in the "years to come", what is often ignored is the "months to come". We seldom plan for the near term goals. We are so organized with our child's higher education expenses, that we somehow forget about his quarterly school fee. We care for upgrading our car four years down the line but forget about the annual insurance of our car which is due six months hence. And then when these expenses suddenly arise, you strain your brain, you drain your accounts, you look for money kept at home, at times go to the length of even asking a friend, and after all this physical and mental labour, you pay off the dues.
And after all this exercise, when your energy is completely sucked out of your body, two days later, your wife comes to you and says, "Our anniversary is coming, Kahin ghumne chalte hain". You just can't control your temper and the RDX comes out, "Pura budget bigad gya hai" "Monu ki fee bhi deni thi, upar se chacha ji ke bete ki shadi ka kharcha, aur tumko anniversary manani hai". Your wife goes away without saying a word. This is "Toofan ke pehle ki shanti", and you know your wife well. So, now you have two more expenses coming up: One, the cost of taking your wife for dinner that very night, or else you are not getting dinner for time immemorial. And Two, the anniversary trip expense.
The purpose of this fable was not to scare you off, "Beware of your wife", rather it's about don't leave the short term expenses to luck. At times, near term expenses all bump in together, and sums up to a huge amount, which can disturb your finances and peace.
So how to plan for short term expenses?
Planning for short term expenses is also an important part of your overall financial planning. Many near term expenses are known, like you know you have your anniversary coming, and many of them are unexpected, like you may not know at the start of the year that your kid has to go for an educational trip next month for which you'll need an extra 10k.
1. Provide for the expected: Look at the brighter side, you know beforehand that you will need an X amount of money on an X date. So, you can set aside the required amount for these expenses. After all, celebrating birthdays and anniversaries are also a part and parcel of life, they give you the small doses of happiness which, may be unknowingly, but keep you going.
2. Provide for the unexpected: Like you plan for long term emergencies, be prepared for the short term urgencies as well. Keep aside a small amount for these expenses, so that whenever something pops up, you can close it by paying the requisite amount from your short term piggy bank, without turning your happy life topsy-turvy.
3. Don't stretch your investments to the extent that you cannot afford to buy milk: We do advise you to save and invest. Yes you do need to stretch a bit and invest to have a secure financial future, but don't stretch to the extent that you break your bones. If your monthly income is Rs 30,000 and your fixed expenses are Rs 15,000, so you cannot afford to invest the entire remaining Rs 15,000 for your long term goals. You need to keep a buffer to meet your upcoming near term non-discretionary as well as discretionary expenses.
4. Invest in Liquid Funds for Liquid Expenses: Do not invest in bank fixed deposits or PPF for short term expenses, because you may not be able to access the money, when you need it, or even if you do, you may incur a penalty on withdrawal. Do not keep your money at home or in your bank saving account either, as they will give you zero or meagre returns which will not even cover the cost of inflation. Invest these funds in Liquid Funds, so that you can withdraw the money whenever you need plus you get the benefit of yielding higher returns as compared with the above mentioned options.
5. Do not take Risk for short term goals: When it is about short term goals, it is advisable to stay away from volatile asset classes. For short term goals, the factors to consider are Liquidity, Safety of principal and Taxation. So there are two options which can provide you liquidity, safety and returns that are better than the traditional bank saving deposits. One is Liquid Fund in the Debt category and the other one is Arbitrage Fund in the Equity category. Arbitrage Funds, though are Equity funds, but they are least volatile and their returns are comparable with Liquid Funds, and they may offer certain tax benefits. The choice between Arbitrage funds and Liquid Funds should be made depending on your income profile after consulting with your financial advisor.
So, the bottomline is, Financial Planning is very important to keep your finances organized and lead a peaceful life. But peace can come only when you plan for both short and long term term. Planning only for the long term and ignoring the short term can break the constant of your life every now and then.
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Asset Class is a often used word in finance, especially investment & portfolio management. We also used the term many times in our articles. In this article a take a academic look at the various asset classes.
