It is time to plan your taxes for the year. There are many things that you can do to claim the tax benefits you are entitled to. Here are nine income tax deductions that can be made from the gross taxable income. These will lead to the net income on which tax is calculated to be reduced leading to lesser tax payable.
Happy New Year! The festivities and celebrations are done and it is time to work on making 2019 a worthwhile year. Let us make resolutions for our personal finances and stick to them so that we have a successful financial year.
Executive Summary: The Government has approved some changes in the NPS such as increased Government contribution, tax benefits, better withdrawal conditions and compensation for delayed payouts towards contribution by the Government. These changes are beneficial to NPS subscribers.
National Pension Scheme (NPS) is a retirement scheme. It is a defined contribution based pension fund. It is compulsory for Central and State Government employees and optional for other employees.
Employees and employers contribute to their account and the collective fun is invested in equity, government securities, corporate bonds, fixed deposits etc and managed by fund managers. Employees can then withdraw part of their corpus and invest the rest in an annuity product.
Recently, there were some changes approved and announced for NPS. The image below shows these amendments and their implications -
The government is trying to make NPS an attractive product which is useful for investors. For more information about NPS, click here.
Executive Summary: Liquid funds are considered to be a good investment option due low risk, high liquidity and optimum returns. You should consider factors such as credit quality, investment portfolio, fund performance, expenses, your financial goals and average holding period to decide where to invest.
Liquid Mutual funds invest in short-term money market instruments and other debt securities. They key features of liquid funds are -
Liquid funds may not give returns as high as equity funds but are a good option to park idle cash or to meet short term financial goals. Here are some parameters that you should focus to zero in on which liquid fund to invest in -
1) Average Credit Quality
Check the type of securities that the fund is invested in. Its better if the fund has most of its investments in instruments with credit rating AA and above and some holding in the form of cash holdings.
2) Investment Portfolio
Liquid funds invest in treasury bills, certificates of deposits (CDs), commercial papers (CPs) etc. If a scheme is overweight in commercial papers, you need to evaluate the risks. If the extent of CP investment is more and in lesser known companies, it might be a good idea to avoid the fund.
If the investments are across many securities, the risk is less. For example, when the IL&FS bonds were downgraded, mutual funds that held those bonds but had a a diverse investment portfolio were not affected as much as those schemes that had a high exposure to these bonds.
3) Fund Performance
Check the fund performance. Here is a list of few liquid funds and the returns they have generated.
As on December 5, 2018
It is better to go for funds that have good returns for the longer duration as it indicates consistency.
4) Average Holding Period
Liquid funds can invest in securities that have maturity periods ranging from 1 day to 90 days. If the holding period is on the lower side, it means percentage of cash is more. The more holdings in cash, the lower the returns. So select those funds that have the average holding period on the higher side.
5) Expense Ratio
Though SEBI has a cap on the expense ratio which is the annual management fee, it is important to check the value for the scheme you want to invest in as the expenses are paid from the returns which means the higher the expenses the lower the returns. Here is an indication of the expense ratio of some liquid mutual funds.
6) Your Financial Goals
Liquid funds are better than cash or bank accounts to create an emergency fund. If you have short-term goals like buying a car or funding an exotic trip, you can invest in liquid funds. You will generate better returns and you will not have easy access to the amount to spend it irrationally.
Investing in liquid funds is not risk-free. Use the above mentioned criteria to select funds that have the potential to give good returns.
Executive Summary: 'The Science of Getting Rich' written by Wallace D. Wattles tries to show how to get rich using a scientifically proven method. The book talks about how the right thoughts and right actions can increase our income and wealth.
The core concept of the book - The Science of Getting Rich, written by Wallace D. Wattles is that to become rich we must have a combination of the right thought and right action.
A summary of the book -
The author believes that you have to do your part in the right manner continuously to become successful. You will become rich in proportion to the firmness of your vision, steadfastness in purpose, extent of faith and gratitude and the creative action you put in towards reaching your goals.
The book does not talk about financial concepts but is a self-help guide on your right to be rich. Some of us probably know most of the things in it but it is a good reminder that a certain way of thinking and living will help us become successful.
Executive Summary: Banks are launching credit cards designed for the e-shopper. We compare three e-commerce co branded cards – ICICI's Amazon Pay Credit Card, Snapdeal HDFC Bank Card and Axis Bank Buzz Credit Card.
Co-branded credit cards have been around for quite some time. Online shopping is on a boom in India and has transformed the way we shop. Therefore companies launch products catering to customer wants. Let us look at some credit cards that have been launched to take advantage of the online shopping boom and increase customer base.
ICICI Bank's Amazon Pay Credit Card
ICICI and Amazon have joined hands to launch the Amazon Pay Credit Card.
Regular Amazon customers who are ICICI account holders will be able to apply for the card on the Amazon app. After a certain period, regular Amazon shoppers will be able to apply for the card.
It is a good credit card for Amazon shoppers. Amazon offers a variety of products so there is a chance of earning a lot of reward points. You will get the digital card immediately after applying for it which means you can start shopping and earning points immediately. Your phsyical card will arrive later. There is no expiry of earnings and no limit on the Amazon pay points that you can earn.
Do note that there are no reward points for EMI transactions and purchase og gold. Moreover rewards can be used only on the Amazon portal.
Snapdeal HDFC Bank Card
It is launched by HDFC and Snapdeal together.
If you are a regular Snapdeal shopper, it might make sense. But reward points expire within two years. The scheme of 20 reward points given for every Rs. 150 is applicable only till March 2019. Moreover there is a payment to be made for redemption of rewards. There are better credit cards that can be considered as this does not offer airpot lounge access or dining benefits if you prefer those kind of benefits.
Axis Bank Buzz Credit Card
Axis Bank has launched the Buzz credit card in collaboration with Flipkart.
If you are an avid shopper on Flipkart, you might like this card as there are many Flipkart vocuhers given. You can also convert your purchase to EMI. The interest charge is reasonable at 1.5% per month. The joining fees and renewal fees are high. The cashback points are not so attractive.
A credit card is like a double edged sword. Smart usage of a credit card improves credit score, make large payments and earn attractive rewards and discounts. At the same time, some may over spend or lose track of payments and end up paying interest. Be a disciplined credit card user who does not spend beyond the credit limit, pays dues on time and makes the best of the perks and rewards associated with the card.
Executive Summary: Getting a home loan is a long and stringent process. There are many reasons for banks to reject applications for home loans. These include unapproved builder/property, incomplete documentation, unstable income, other loans etc. You have to ensure that you satisfy the acceptance criteria so that your home loan is not rejected and you get the amount required on the best interest rates.
Buying a home is a big financial decision. We spend a lot of time and effort on selecting our dream house and then apply for a home loan. Banks have a formal process to approve a loan. If all steps of the process are not completed, the application can rejected. Here are some reasons for rejection of home loans -
Builder/Property not approved – If the builder or the property in which you want to buy a house does not meet the requirements of the lender, the home loan can get rejected. Reasons like builder not following necessary guidelines or the property being in some dispute or being old can lead to rejection of home loan.
If the address of the property is in the defaulters' list due to illegal activities or no clean titles, then the home loan application can get rejected.
Previous Loan Records – If you have many outstanding loans or have missed monthly instalments, your application may not be accepted. If your credit score is low, your application will not be accepted.
High FOIR, Financial Eligibility – FOIR stands for Fixed obligations to income ratio. It is the ratio of your total loans (including the home loan applied for) to your total income. Most lenders prefer the ratio to be within 40–50%. If you have more loans that that, your application could be rejected. Your earning capacity would also be checked. If you have been switching jobs too often or have long tenure of unemployment in recent times, your application can be rejected.
Co-applicant's track record – If you have a co-applicant for the home loan who has a bad credit score or has defaulted on loans, then the home loan application can get rejected.
Incomplete Documentation – If you do not have relevant salary slips, IT returns documents and 'No dues' certificate from previous lenders, your application may not be accepted.
Let us look at some steps to take that can ensure that the home loan application gets accepted -
Do remember, that it is not the end of the world if your home loan application is rejected. You might have to wait for some time before reapplying and analysing the reasons for rejection and rectifying them. But of course, if you follow the process properly you can get the loan approved in the first go and acquire your dream house.
Executive Summary: It is important to read the fine details and all terms and conditions mentioned in the health insurance policy before you make the decision to buy one so that you know about the policy exclusions and conditions that have to be met for making a claim.
Health and Medical insurance plans protect us financially when we face medical emergencies. But they do not provide comprehensive cover. They have some exclusions which means some events, some illnesses and/or diseases cannot be considered for making claims. Let us look at the common permanent exclusions -
Medical issues due to External Events
Intentional injuries and injuries due to war, nuclear attacks and terrorism are usually excluded from health insurance. Diseases or health conditions due to HIV, congenital diseases and usage of drugs and alcohol are not covered.
Health issues or medical conditions that arise from diseases that were existing prior to purchase of insurance policy are not covered by the policy with immediate effect. These are called pre-existing diseases. They are usually covered after 2-4 years of the policy being in force continuously. There might be some other terms and conditions as well.
For example, ICICI Lombard's iHealth insurance policy covers pre-existing diseases after 24 months of continuous coverage for the sum assured of Rs. 2,00,000 and above and after 48 months of continuous coverage for sum assured less than Rs. 2,00,000.
In Apollo Munich's Optima Plus plan, pre-existing diseases are covered after 48 months of policy coverage.
Most policies do not cover illnesses or diseases within 30 days of purchase of policy. This clause is waived for accident.s Some illnesses or diseases have a specific waiting period which might be more than 30 days. It could extend from 12-24 months.
For example, ICICI Lombard's iHealth insurance policy has a waiting period of 2 years for claims arising from conditions such as cataract, hernia, arthritis, sinusitis etc. Bajaj Allianz's policy – HealthGuard – Silver plan has a waiting period of 24 months for claims that arise due to gastric ulcers, sinuses, cataracts, hernia and haemorrhoids.
Many insurance policies do not cover pregnancy and related conditions. If you are thinking of starting a family, you should consider this clause. Some policies cover pregnancy related claims after continuous coverage for a certain duration. For example, Bajaj Allianz's HealthGuard – Gold plan covers pregnancy and related conditions and treatments after 72 months of continuous coverage. ICICI's iHealth plan dies not cover expenses related to pregnancy, abortion miscarriage and other related conditions.
Some insurance companies offer specific maternity plans.
Surgeries like cosmetic surgery, dental surgery, joint replacement, skin related surgeries are usually in the list of permanent exclusions of health insurance policies.
Alternative treatments include the AYUSH treatments - Ayurveda, Unani, Siddha and Homeopathy Many insurers do not cover them. Some insurers do offer some amount of cover. For example, Royal Sundaram LifeLine Health Insurance Plan covers Ayush treatment up to Rs. 50,000 if the treatment is done in a government hospital. Max Bupa Health Companion Plan covers AYUSH treatment in case of inpatient hospitalization. If the treatment is done in a government hospital, one can claim up to the sum assured but can only claim up to Rs. 20,000 in case of inpatient treatment in a private hospital.
It will be frustrating to know that you cannot make a claim when you face a particular medical condition and then find out that you are not covered by the insurance policy that you have. Therefore, do remember the following tips -
Executive Summary: HDFC Ergo's E@Secure and Bajaj Allianz's Cyber Safe Insurance Policy are policies offering financial cover against cyber crimes and cyber liabilities. We provide an overview of these policies.
Today business and personal transactions are carried out increasingly on the web. This is convenient but at the same time brings in more risks to the business. Just as we protect our life financially with term insurance and our factories with fire insurance, we need to insure ourselves against financial losses arising from cyber attacks. Cyber attacks can be in the form of phishing, e-mail spoof, identity theft, malware attacks, cyber stalking etc.
How do we protect ourselves from these cyber liabilities and cyber crimes? Insurance companies have come up with cyber protection products. These insurance policies provide financial cover for cyber threats. We compare two such products – HDFC Ergo's E@Secure and Bajaj Allianz's Cyber Safe Insurance Policy.
Once you take the insurance does not mean you can do away with responsibilities. You are still responsible for safe and secure Internet transactions and online interactions. Maintain the latest anti-virus updates, up-to-date software patches and have backups else the insurance company might hold you as an irresponsible e-citizen and reject your claim. Moreover losses due to government authority transactions are not covered. Even if you are insured agains e-threats, ensure that you conduct online transactions in a safe and secure way.
Executive Summary: Sovereign Gold Bonds are issued by the Government of India. In the next few months, these bonds will be available for investors to buy during certain periods. The interest rate is 2.5% per annum and the tenure is 8 years. You can redeem in the 6th and 7th year too. You can sell them in the secondary market as well. The capital gains on sale and the interest earned are taxable.
Sovereign Gold Bonds are bonds with the underlying asset as gold. They are issued by the Government. An investor can buy these bonds for allocation towards gold in his or her investment portfolio. There is returns potential in the form of capital appreciation and interest receivable.
Key Features of Sovereign Gold Bonds
Tenure and Interest Rates
Tenure - 8 years with an exit option from the 5th year onwards.
Interest - 2.5% per year payable semi-annually on the initial value of investment
KYC documentation is a must. You will receive a holding certificate when you invest in these bonds.
Nomination and Transferability
You can appoint a nominee when you invest in these bonds. An NRI can also be a nominee.
You can transfer the bond to another person using the Instrument of Transfer.
At the end of 8 years, the principal amount and the interest will be credited to the investor's bank account. In case of redemption, in the 6th or 7th year, the investor should approach the institution from where the bonds were purchased before the coupon payment date assigned.
If you are looking for high returns in the long run or quick short term gains, gold bonds are not the best investment option. If you want to diversify your investment portfolio and hedge against market risks, you can allocate some part of your investment to these Gold bonds. If you have a goal of safe gold accumulation for child's marriage, you can invest in these bonds over a period of time to get a sizeable amount in the future.
Executive Summary: SEBI has banned upfront commission payable to distributors and lowered the total expense ratio limit that can be charged by Mutual Fund houses to the MF investors. This will ensure that there will be less mis-selling and more transparency.
Mutual funds are regulated by SEBI. One of the main functions of SEBI is to protect the interests of retail investors. On account of that, SEBI has made some amendments in its guidelines for the MF Industry.
Ban On Upfront Commission
Upfront commission is defined the commission paid to the mutual fund distributor when the retail investor buys units of a mutual fund scheme. Upfront commission can be misused as retail investors can be asked to sell their units and buy other scheme units multiple times even when it is not in their best interests. The churn in investments is beneficial to the MF house and the distributors. SEBI has disallowed payment of this upfront commission. This will ensure that the retail investors' investment interests are given priority.
As an exception, upfront commission is only allowed in MF SIP investments. But SEBI will be closely monitoring these transactions for irregularities.
The distributors will be paid trail commission. Trail commission cannot paid upfront.
Reduction in Investment Costs
Expense ratio is the cost of investing in a mutual fund. The investor has to bear this cost proportionate to the investment made. It consists of the administrative and operating expenses. SEBI has put a cap on the maximum expense ratio that an MF can charge -
For other MF Schemes -
Performance Disclosure on AMFI Website
A few months back, SEBI directed the Mutual Fund houses to compare their returns to Total Returns Index (TRI) of the benchmark as compared to the Price Return Index (PRI) of the benchmark. The PRI captures the changes in movements of prices of securities which constitute the benchmark. But the TRI goes a step ahead and captures the movement of prices and dividend/interest paid. The TRI is a better value to use as NAVs are based on capital gains/losses and dividends received in the portfolio. The investor will get a more accurate picture of the performance of his MF investments and how it compares to the benchmark. Fund managers have to ensure that they take this into consideration while making the investments.
These SEBI rulings for the MF Industry will ensure that investors' interests are protected and there is less mis-selling and better transparency.
Executive Summary: Cognitive bias is erroneous thinking and behaviour. It prevents us from thinking objectively. There are many cognitive biases that affect our financial life. We have discussed four of them here – Anchoring, Decoy Effect, Bandwagon Effect and Status Quo Effect.
Cognitive biases affect our daily financial decisions too. They affect our spends, savings and investments. We must be aware of them and avoid being influenced by them -
Anchoring – You get fixated on the first price you saw for a product. Your buying decision gets affected by this price (less than expected or more than expected). For example, you are shopping for a television set and the first one you saw and liked was for Rs. 25,000. You will tend to look for TVs around that price. There might be TVs with the same features for Rs. 15,000 or TVs that offer better value and more suited to your needs for Rs. 35,0000. But you will try to buy one in the Rs. 25,000 range. This can lead you to a wrong buying decision.
AVOID IT by setting a budget and sticking to it. Buy a product or service that suits your requirements.
Decoy Effect – This is a popular method used by retailers to increase the sales of expensive products. There are two models of a phone brand – A and B. A costs Rs. 9000 and B costs Rs. 13,000. Many might go for A. But if the company introduces a third model , C costing Rs. 11,500 with fewer features than those in B, people would tend to buy C as they assume a balance in terms of price and features.
AVOID IT by researching on the different variants available and buying as per your need and budget.
Bandwagon Effect – Many of your colleagues are buying a new car or the new iPhone, so you decide to take a loan and buy one too or even though you may not need it or your financial situation is such that you should not be taking a loan. The “experts” on TV are sure that the agricultural sector will do well and so we buy stocks of companies in that sector without any research on the stocks on on your portfolio.
AVOID IT by filtering information, looking at things objectively, doing your research. Act according to your financial situation.
Status Quo Bias - We think the present state is the best state. We do not prefer change in our job or food. We are hesitant to switch from our current doctor, financial planner or job even if there are reasons to change. We are hesitant to change the Internet service or gym membership even if there are better offers and better service elsewhere. We do not invest in alternative investment modes but invest in known options like FDs and gold. This bias increases spending and reduces income earning capacity which hurts our finances in the long run. We lose out on good opportunities too.
AVOID IT by starting small. Make small changes. Analyse each scenario objectively. Look at the advantages and disadvantages and then take the optimum decision.
Do you think you have any of these cognitive biases? Let us know how they have affected you.
Executive Summary: SBI Arogya Premier Policy is a policy with higher sum assured aimed at HNIs. We look at the key features, benefits, disadvantages and share our analysis of the policy here.
SBI's Arogya Premier policy is a medical policy targeted at the high net worth individuals. It aims to provide a wide health coverage for individuals as well as families.
Features and Benefits
A 30 year old male with an annual income of Rs. 10,00,000 will pay an annual premium of Rs. 10,547 (with taxes) for a policy with sum assured of Rs. 10,00,000.
Treatments taken abroad, cosmetic procedures, vaccination, congenital disorders, AIDS and related diseases are not covered. Treatments for illnesses or injuries due to war, nuclear attacks etc. are not covered.
Comparison with Similar Policies
SBI Arogya Premier Policy is cost effective and has significant medical coverage. It has many advantages over other medical insurance plans. But the sum assured starts at a high amount which means the premium payable will be higher. If you wish to get medical treatment abroad, the policy will not help as treatments abroad are not covered.
But if you are a person looking for higher coverage, wider coverage and want non-allopathic treatments covered, it is a good insurance plan to go for.
Executive Summary: Warren Buffet reads for about 5 to 6 hours a week. Bill Gates reads a new book every week. Most successful people list out reading as one of the factors for their success. Here is a summary of four books that you can read to make your financial life better.
There are scores of books on the topics of finance, investment and getting rich. Here is a summary of four books that I find relevant and interesting -
Think and Grow Rich By Napoleon Hill
Book Quote - “There are no limitations to the mind except those that we acknowledge.”
This book, though written in 1937 is relevant even today. Napoleon Hill talks less about financial planning, budgeting or investing but more about the power of thoughts and action. He has interviewed more than 500 people successful in different walks of life and compiled their views, ideas, thoughts and actions into 13 principles to be followed for success. The book talks about how one must control one's thoughts and subconsciousness and have faith in one's decisions. This mental transformation will lead us to take actions to achieve our desires.
Rich Dad Poor Dad by Robert Kiyosaki
Book Quote - “Most people fail to realise that in life, it’s not how much money you make, it’s how much money you keep.”
The book tells the story of two people – Robert Kiyosaki's dad and his best friend's dad and their way of dealing with finances. Though there are controversies around the book that the story is made up, it nevertheless is a good book with solid financial advice. He considers the main difference between the rich and poor is financial literacy. The rich make their money work for them by being entrepreneurial, financially literate and fearless. They are also generous and at the same time always ask the question – “What is in it for me?”
To become rich, one should formulate a plan for acquiring assets, reducing liabilities, paying oneself first in terms of investments and savings.
I Will Teach You To Be Rich by Ramit Sethi
Book Quote - “The single most important factor to getting rich is getting started, not being the smartest person in the room.”
Ramit Sethi's book is an easy and witty read. He asks you to take charge of your financial life today. The book lists out the essential things to do like reducing debt, building an emergency fund and investing. Formulate a conscious spending plan to take care of necessities, savings, investing and then spend the rest on non-essential items or luxuries. You can become an expert in finances with some quality research and learning and take care of your investments using the Internet. The book has many examples to simplify concepts and has actionable steps to improve your financial life. The book is more geared towards readers in United States but still is a good book to understand personal finance.
You Can Be Rich Too : With Goal Based Investing by P V Subramanyam and M Pattabiraman
Quote – Returns are not the sole deciding factor of how much money you are going to make from your investments.
The book aims to make investing logical and simple. It caters to beginners by describing money management in simple terms as well as to experts by having sections on portfolio allocation, links to online calculators such as life insurance calculator, monthly investment tracker, time value of money calculator etc.
The book covers topics such as evaluation of current networth, goal setting, risk management, mutual funds, insurance and portfolio management. It is a good guide for people who have just started earning money. It lists strategies to fine tune financial portfolio which will help people who already have a financial plan.
Let us know if you have read any of these books and if they helped you in your financial life.
Executive Summary: The rising fuel price affects all aspects of our life - Basic Necessities, Travel, Government policies on economy etc. We can attempt to do a few things to reduce the impact of it on our financial life.
The spiralling petrol prices have left everyone in a frenzy. There are economic and political repercussions of the same. But the layman is affected by a rise in prices of goods and services and increase in commute/travel costs. In Mumbai, the price of petrol has risen by about Rs. 11 as compared to the price in January, 2018. So if you drive 600 kms a month, your fuel bill would have gone up by Rs. 500- Rs. 1000.
Let us look at some ways to reduce the effect of rising fuel prices -
Use Alternate Modes of Transport - Do you use your car daily for your commute to work? You should try out alternate modes of transport. You can use the public transport system at least for a couple of days if possible. Can you use your motorbike/ scooter? It will reduce the commute time and also trim the fuel bill. If the traffic and roads permit it, maybe you can take a bicycle to work. It is eco-friendly and cheap. Moreover it will keep you fit.
Telecommute - In today’s age of technology, it is not really necessary to be at your office desk every single day in many jobs. You can get a respite from your daily commute hassle and fare even if you work from home once a week. Check your company policies about telecommuting or if you are the decision maker, see if you can incorporate a work-from-home policy.
Change working hours - If you have a typical 9 am to 7 pm job, you will be stuck in traffic, which will increase your fuel consumption and at the same time cause health issues. You can adopt a flexible hours strategy wherein you go to office a couple of hours earlier or later and/or leave a couple of hours earlier or later. If your work involves collaborating with people in the Far East or Australia, you can start work earlier. If you work closely with people in Europe, you can consider going to work a little later in the day.
Carpooling - You can carpool with colleagues who live in your vicinity or neighbours who work in the similar vicinity as your place of work. Many companies have adopted a carpooling process, where people can connect with others in their office and commute together. This helps save costs and also network with employees across departments which can be beneficial to your career.
Change your Job - Experts say that the commute should not be more than one hour one way. But many of us spend much more time in our daily commute. Consider changing your job. If you wanted to start something different but have been holding back, maybe it is time to get started on it.
Buy Fuel Efficient Vehicles - Do you own a gas guzzling machine? Replace it with a fuel efficient car. If you are just one person commuting to work in an SUV, maybe you should look for a different car. This will definitely save some money and also reduce your carbon footprint.
Better Driving Habits - Here are some good driving habits will help to increase the fuel efficiency and increase safety -
Let us know if you have taken any steps to to deal with rising fuel prices.
Executive Summary: A financial crisis can give you a stressful time. Understand the reasons of the financial crisis, take steps such as reducing expenses and adding sources of income to reduce its impact and plan your finances such that you are prepared better if another crisis hits you.
A financial crisis is the last thing one wants. It can happen due to many reasons like job loss, unexpected losses in your business or investments that have gone horribly wrong or emergencies that have made a big dent in your financial status.
Financial crises can cause stressful times that can extend to long periods. It is easier said than done but you have to keep calm and take steps to reduce the effects of the financial crisis -
Evaluate the situation
Evaluate the financial crisis. Ask yourself what caused the crisis so that you will know the root cause of the problem and deal with it appropriately. Then understand and accept the financial hit that you have taken in numbers and how it will affect your lifestyle, your budget, your dependents, investments and liabilities. The extent of loss depends on the type of financial crisis. If you have gone through a divorce and do not earn an income, it will be a tough road ahead. If you have lost your job, you might still be able to get back quicker even if you take a lower paying job or part time assignments.
Take Steps to Curtail the crisis
There are many ways to reduce the impact of the crisis or curtail its effects.
1) Prioritize and Reduce Expenses – You have many items of expenditure and you may not need to pay for all of them. Make a list of the expenses and arrange them in order of importance. Expenditure on food, rent and medicines are required. Arrangements can be made to made to postpone payments on cable bills, gym membership etc.
2) Sell Things – If you look around your house, there might be things that you do not need or use. Is your treadmill being used for hanging clothes? Do you have antiques or some furniture that you can sell? You can use online markets to sell these items.
3) Communicate with Lenders – Do you have loans like a home loan, educational loan etc.? If you cannot pay the EMIs, renegotiate with the bank and try to increase the tenure so that the monthly EMI goes down or ask for a grace period. Do remember, this will come with a cost – higher interest rate, penalty etc. On the other hand, if you have a car loan, sell the car and use that money to pay off the debt. It will bring down your monthly expenses as well.
4) Reduce Debt Burden – Liquidate your FDs, mutual funds and pay off at least part of your debt, credit card dues so that you save on some interest.
5) Find Alternative Sources of Income – Find out additional/ other sources of income. Take tuitions, freelancing assignments or part-time jobs. You can try to monetise your hobbies if you have any.
Plan for future Financial Emergencies
Once you have overcome the financial crisis, analyse the methods you used to get over the crisis. There might be some steps that you can continue to follow like reducing some of the expenses or debts. Analyse the situation that put you in the financial crisis and make a plan to be ready to face something similar. The plan can include -
1) Increased savings and investments – You will be able to sustain better with more wealth or avoid a crisis in the future.
2) An emergency fund – Set up a financial buffer to take care of unforeseen circumstances like an accident, illness of a dependent etc.
3) Adequate insurance coverage - Do you have adequate medical insurance? If not, this is the right time to increase the coverage. Ensure you have enough life insurance so that dependents do not have to face a financial crisis in case of unexpected circumstances.
4) Better Budgeting – Revisit your budget and check whether you can reduce your expenses. If possible, continue with the second source of income even after things have stabilised so that your income will increase and you will be financially better off.
Life is unpredictable. You might have to face tough situations. If you take the right steps and have a proper plan in place, the financial aspect of the crisis will not affect you severely.
By Vidya Kumar
Executive Summary: Health Insurance Providers have started offering insurance cover for medical treatment abroad. We compare three plans here - Max Bupa Heartbeat Individual - Platinum, New India Global Mediclaim Policy and Apollo Munich's Health Wallet.
Medical facilities in India are quite good and cost effective as compared to many countries. Many people from abroad come to India for their treatment or surgery. But many Indians are interested to get treatment abroad. The health insurance companies have realised this and started offering policies to cover medical treatments abroad. Let us look at some of the policies -
There is increasing mobility among Indians and we want to be medically covered all across the world. Moreover many people prefer treatment abroad for a range of reasons be it privacy or advanced medical treatment. Therefore it is good that insurers are waking up to the call of coverage of medical treatment in other countries as well.
Executive Summary: Minimalism aims at reducing excesses in life. You can simplify your financial life by adopting even some aspects of minimalism. It will help you lead a content life and control your financial life better.
Minimalism is a way of life that focuses on living with less. It aims at reducing the excesses in life so that you can be free of burden and possessions. It aims to find a more fulfilling life. Jainism has a concept called Aparigraha. It is a key virtue in the religion. Aparigraha means restraint from greed and possessiveness. The key principle of Aparigraha is that one should stay away from material gains or happiness that is derived from hurting, killing or destroying others' lives or even nature.
Though we need not live the life of an ascetic, we can extend these concepts to Personal Finance to bring contentment to our lives and at the same time bring a balance in our personal finances -
Less Greed and Less Wants leads to Less Expenses – Many people are not content with that they have. They want the latest smartphone, yet another luxury car, more food, more wine and one more vacation house. It leads to many problems like overspending, health problems and lack of mental peace.
With minimalism, you will spend less and therefore have more money. The money can be used in different ways – investment, charity etc. You will also have lesser things to manage and organize which means more time, effort and money in your hands to do what you really want to do.
Less Materialism leads to Less Work – Our grandparents had a good life. They had fixed hours at work. Working from home and checking mails from home were alien concepts. They had a good work-life balance. You are probably spending many hours at work and commute. You will spend even more time and effort at work if you have more wants. This leads to health problems, overspending etc.
With fewer wants, you need not spend every minute of your life earning money. You can use the time to nurture yourself and be with loved ones. This will surely enrich your life.
Reduced Debt leads to Better Finances – How many loans do you service? How much of credit card payments are overdue? Debt leads to increased expenditure in terms of interest and penalty payable. If you buy less, you will spend less and borrow less. A debt free life improves your financial portfolio. You will not have too many monthly payments and can use that money in better ways like monthly SIPs. More so, if you have no debt, the decision of taking a break from your job or trying out a new venture is easier.
Earlier Achievement of Financial Goals – Leading a minimalist life means you will have less of consumerist financial goals. It also means you have less of expenditure and debt. In this simple life, you will achieve your financial goals smoothly. You will have your retirement fund or children’s education fund much earlier in life than if you lived a non-minimalist life.
More Generosity and Charity – We can all do our bit in giving back to the society. We can use our time and/or money to help the underprivileged. With a minimalist lifestyle, you will have more to give and more time to utilise on charity work. You will not cling on to your possessions and donate them whenever required. Apart from helping those in need, generosity makes you feel better and brings more meaning to your life. You might even motivate your children and friends to give back to the society. At the same time, it gives you tax breaks and reduces clutter in your life.
A minimalist lifestyle reduced physical stress, emotional stress and even reduces your carbon footprint. Thus it helps you and Mother Earth.
Let us know if you can implement some changes to bring some amount of minimalism and if it has helped you improve your lifestyle and financial portfolio.
Executive Summary: Inattention blindness is caused when our brain filters out a large amount of information so that the conscious mind can process information properly. The Monkey Business illusion video shows how the brain filters out information that is not considered important.
Take a look at this video - https://www.youtube.com/watch?v=IGQmdoK_ZfY (Monkey Business Illusion By Daniel J Simons).
Did you spot the gorilla? Did you notice that the curtains changed colour? Did you see the person in the black t-shirt leave?
The phenomenon of missing out certain pieces of information is called as inattention blindness. Some information is filtered out by our brain because there is too much infrmation all around. But many a times, useful information or critical information is filtered out which can lead to problems. Sometimes obvious information is missed because the brain is trying too hard to find out information. Let us look at its effect on personal finance -
It is important to perceive things that we read, see and hear properly so that we do not make mistakes. In case of personal finance, we should analyse the information that we get appropriately so that our financial plan does not get derailed. We can take the help of financial advisors too who can guide us in an unbiased manner to reach our financial goals.
Executive Summary: The sum assured in an increasing term insurance plan can be periodically increased during the policy term. The premium also increases appropriately. We have compared two policies - SBI Life Smart Shield and Birla Sun Life Protector Plus Plan that provide increasing term insurance.
An increasing term life insurance plan is an insurance policy in which the sum assured can be increased by a specific amount each year.
It caters to the requirements based on the premise that cost of living changes, our lifestyle changes and inflation increases the financial requirements over the years.
The premium of course will increase accordingly each year.
Many companies offer increasing term insurance plans. Let us compare two of them -
An incremental term insurance plan offers the advantage of hedging against inflation. The value of the policy remains more or less intact. The premium payable also increases but if you are earning income, it usually is on an upward curve. When you are younger and have no liability or zero dependents, you may not want a huge sum assured. But as you grow older, your liabilities may increase and you may have dependents. In this case, such a plan is useful as you can continue with the same plan but with increased sum assured. On the other hand, if you have a spouse who earns well and you have a big corpus, you could skip this option.
Executive Summary: We tend to base our decisions on information that is recent or easily available or on recent events or those retained in our memory. This is known as availability bias. It is not an optimum way to make decisions as different aspects of a news item or event are not considered. This can affect our finances as we might invest in products based on misinformation or misjudgement. We might buy or sell products based on limited information that can distort our finances. It is important to have a balanced view before making ay financial decision.
Many of us are influenced due to particular information being present everywhere or we remembering some information. We base our perceptions based on personal experiences or some dramatic news or events. For example, when one sees layoffs in his company, he thinks the sector is on a downtrend without checking the scenario in other companies. But maybe it was just his company that had to take this difficult decision. He believes so as the information is available readily to him. Information about other companies is not easily available. This behaviour of being influenced by readily available information or information that is recent or memorable is called availability bias.
Availability Bias in Personal Finance
How does availability bias affect personal finance?
Ways to Avoid Availability Bias in Personal Finance
Do not get swayed by emotions and biases. Stay on track by reviewing your portfolio regularly, analysing news and views on your investments and checking with your financial advisor (if you have one) before deciding on financial matters.
Executive Summary: We tend to overestimate our capacity and benefits of our tasks and underestimate costs, efforts and time to do those tasks. This is called planning fallacy and it can affect our financial plan. We can avoid planning fallacy by setting realistic goals, getting professional advice, doing our homework and planning comprehensively.
How many times has your friend told you that he would meet you in 10 minutes and lands up 30 minutes later? Your employees submit their deliverables later than the time they promised numerous times. Line I of the Mumbai Metro was supposed to be operational by 2010 as per initial 'plans'. But the deadline was shifted numerous times and it finally opened up to the public in June 2014 after many cost and time overruns! The initial estimate was around Rs. 2000 crore. The actual cost was more than Rs. 4000 crore! We land in such situations due to our planning fallacy.
Planning Fallacy as a concept is defined by Nobel Prize winning psychologist Daniel Kahneman and Amos Tversky as the tendency to underestimate the time, costs and resources and the overestimation of the benefits of our tasks.
We tend to the same when it comes to our finances -
Of course, you should make a financial plan. There is no doubt there. A financial plan will help you
Ensure that you make a comprehensive financial plan either yourself or with the help of professional advice or using financial tools so that you avoid being taken by surprise
How can we avoid the planning fallacy?
Set Realistic Goals – It is good to aim for the stars but you have to be realistic about it. You should assess your investment skills, saving capacity and expenditure and then set financial targets. Look at your actions and decisions in the past and use them as reference to set future goals. For example, if you save Rs. 5000 monthly, you cannot set a target of savings Rs. 15000 overnight. You might be better off setting a target of Rs. 7000. There is a higher probability of reaching the target which will make you self-confident too.
Plan for unexpected scenarios – Your child will need money for an unexpected trip in school. An investment that you thought will beat the market might give you negative returns. You might win a cash prize. It is difficult to think of all such scenarios but you should draft your financial plan such that there is flexibility to tweak it to adapt to different scenarios.
Do Your Homework – Research well. Think of different scenarios – optimistic and pessimistic. Many times you might have made mistakes earlier. Understand where you went wrong and ensure that you are taking care of that in your future plans. Review your financial plan regularly so that you might catch mistakes early on. If you see that your SIPs in equity funds will lead you to be over-invested in equity, reduce the SIPs in those funds or increase the SIPs in debt funds. If you had gone over the budget by 20% while decorating your house a couple of years back, think what line of thought you should avoid while buying and accessorising a new car.
Get Professional Advice – We all may not be investment experts. Some of us may not have time or the inclination to manage our finances. In such cases, it is best to get a professional financial planner who can manage our financial plan.
It is important to avoid such biases so that your financial plan is effective.
Executive Summary: As humans, we have the instinct to take some action all the time. It feels satisfying. But taking action is not always in the best interests of your investment portfolio. Sometimes it is better to wait till the complex situation passes by, understand the scenario, weigh the pros and cons of various decisions including the one of inaction and then act upon the most optimum decision.
When we wait for someone in a restaurant, we check our phone. When we see that we have to wait in traffic, we tend to use a different route. We cannot wait patiently even though it might be the best course of action rather than expend effort, time and money. As humans, we feel that we should constantly be doing some task or act upon something. We cannot bear to sit and stare as events unfold around us. This is called Action Bias.
In a paper, 'Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks' published by a team of Israeli scientists, they concluded that even though the best course of action for a goalkeeper during a penalty kick is to stay in the middle, most of them dive either to the right or left. This is mainly because the goalkeepers want to be seen as doing something. Most people would criticise a goalkeeper who stood in the middle and allowed the goal. Similarly in case of personal finance, we want to take some action considering all the news, views and events around us. We feel that we should take some investment decision to improve our portfolio or reduce risk in it even though the best course of action might be to stay put. This behaviour can affect our portfolio in a negative manner -
How is Inaction Better Than Action
Saving – When you are saving money, you are actually doing nothing. You are not using the money but letting it lie in your bank account. Regular savings add up to a sizeable kitty further aided by compounding.
Long Term Investments – If you invest in the right products, the benefits of long-term investing outweigh the benefits of short-term investing.
We are NOT saying that inaction is the best course of action always. But one should act only after gathering information, understanding the data, analysing it and selecting the best course of action.
Doing SOMETHING feels better than doing NOTHING but that does NOT mean it is BETTER.
How Can I Avoid Action Bias
1) Think Before You Act – If you are tempted to take action on your portfolio, ask yourself why you have made this decision. Think through the pros and cons and then decide the best course of action.
2) Analyse Success Stories – We all know investment experts who made a fortune and get tempted. But before you make a random investment decision, remember that there are many people who lost money making the wrong investment decisions. These stories are not circulated as much.
3) Invest As Per Your Requirements – Invest based on your financial goals, your risk profile, your current financial capacity and prevailing market conditions. If you have a financial planner, check with her before deciding on a course of action.
Protect your financial portfolio from your action bias by being patient and investing smartly.
Executive Summary: Behavioural biases affect people's capability to make the right investment decisions. It is important to not let emotions rule over the rational mind when it comes to money matters. Here we talk about Confirmation Bias, Familiarity Bias, Hindsight Bias and Endowment Effect. In the second part of the post we talk about Loss Aversion, Herd Mentality, Sunk Fallacy and Self Attribution.
There is a lot involved in our investments - efforts, money, research, analysis and decision making and we like to be right always. It is therefore difficult to prevent emotions coming into play. Emotions can lead to behavioural biases that can prove detrimental to investment success. They can jeopardise our finances if not controlled. Let us look at some behavioural biases that affect investment decisions -
Confirmation Bias -
A tendency to look for information that supports your belief or conclusion. For example, if you support a political party, you will choose to look for information that supports that party or upholds its beliefs and actions . Similarly, in case of confirmation bias in the investment world, if you get a message from your 'investment expert' friend that 'XYZ' mutual fund scheme will perform very well as it invests in the mid-cap industries, you will look for news and information about mid-caps doing well or positive performance of XYZ MF scheme. If you have decided that a particular stock is going to do well, you tend to search for confirmation on your belief from more than one source. Once your decision is validated by multiple sources, you do not want to process information that says otherwise. You may also find it easier to find and understand data that conforms to the existing belief.
How can it affect your Portfolio –
Wrong choice of investment products leading to imbalance in investment portfolio.
Information that opposes the belief is seen in negative light which means it is not acted upon rationally.
How can you overcome it -
Be open minded to facts and analyse them properly before reaching to a conclusion.
As a prudent investor, you should seek contrarian opinions and evaluate all pieces of information logically.
Familiarity Bias -
Once we are used to certain shops or brands, we stick to them. Even though there might be better or newer products. This is familiarity bias. It is a common bias in investing too. Some people buy stocks of their own company or sector they work for just because they are part of it. When there is too much information or news about the performance of some investment product, we believe that it is a good product without really understanding it properly.
How can it affect your Portfolio -
The tendency of a person to overestimate the accuracy of their ability to predict an outcome. A person believes that he or she predicted the outcome once the event occurs even though they may not have predicted it based on facts. It might have been a guess. Hindsight bias also occurs when they had two or three outcomes in their mind but once one of the outcomes occur, they start believing that they predicted it. For example, in an IPL cricket match there can be three outcomes. You might be rooting for your team to win and when they win, you declare you knew it would happen which may not be entirely correct. You were just wishing that they win.
How can it affect your Portfolio?
The tendency of a person to value what he owns more than its real value. Economist Richard Thaler demonstrated this by giving the example of a man who bought a bottle of wine for $5 from a wine merchant. The same wine merchant offered him $100 for the same bottle a few years down the line. He refused to sell. When people sell what they own, they feel that they are losing something which is theirs.
Some people do not sell shares/mutual funds that they have inherited even though they may not fit in their investment portfolio as they get a sense of belonging. A person might buy an investment product at Rs. 300 expecting to sell it at Rs. 500 within a certain timeframe. If the product reaches the price of Rs. 480 but stays there for some time threatening to go upward or downward, the person may not sell it even though the price is pretty close to his target. The endowment effect kicks in and he feels that he will lose Rs. 20.
How can it affect your Portfolio -
Have you faced any of these dilemmas? Have you overcome these biases?
In the next post, we look at some more behavioural biases – Loss Aversion, Herd Mentality, Sunk Fallacy and Self Attribution.
Executive Summary: SBI has made the Systematic Withdrawal Plan (SWP) more attractive by allowing to credit the amount withdrawn to a family member. This is helpful if you want to support a parent, spouse, sibling or child financially. You can transfer a minimum of Rs. 5,000 per month under this facility to a family member once you sign up for it.
What is SWP? I see a lot of information on Bandhan SWP. Is it a new product ?
SWP stands for Systematic Withdrawal Plan. It is a facility that allows a mutual fund investor to withdraw from the scheme invested in at regular intervals. You can either decide on a fixed amount or withdraw to the extent your capital has appreciated in the timeframe. SWP is allowed in all open ended mutual fund schemes.
SBI has repackaged the Systematic Withdrawal Plan (SWP) as a solution called Bandhan SWP. Bandhan SWP allows the investors in iSBI MF schemes to credit the withdrawal amount to the account of any family member like mother, father, spouse, sibling or child. It is not a new product but an added feature.
What are the requirements for to facilitate Bandhan SWP in my SBI MF investment?
What are the key features?
What are the advantages of this facility?
Are there any disadvantages?
Investments in MF schemes are subject to risk. If the scheme does not perform well, the returns will be less or you will incur a loss. This means the amount to be given out may not be available.
Should I avail of the Bandhan SWP facility?
If you have investments in open ended SBI MF schemes and you want to give financial security to your parents, you can opt for Bandhan SWP.
If you need to support your sibling or spouse or children financially, you can opt for Bandhan SWP.
But it is important to invest in the right schemes so that your capital investment remains safe and you earn optimum returns.