Restructure Your Liabilities
You may have liabilities like Personal Loan, Home Loan, Credit Card borrowings etc. costing you anywhere from 9% p.a. to 36% p.a. On the other hand, you may have investments or ideal cash earning you either low or no returns. It makes lot of sense to check every rupee of your Financial Asset and see if that’s earning you a decent return beating inflation and earning you higher than what you pay for your liabilities. Please do consider tax effect in your calculations. Sometimes you may just find that you are earning more or less same return after tax compared to the cost of your liability. In such a scenario it may be a good idea to use such assets and pay off the liability as it will result in two important benefits. One, your investible surplus from now will go up, giving you higher flexibility to manage your Financial Goals. Secondly, you will feel much better having taken off a liability J
Optimize Your Cash
We recommend an emergency corpus equal to 6 months of your household expenses. We observe most of our clients using normal Saving Bank account for this purpose. Problem is that it earns you about 4% p.a.. With inflation at 7%+, you are actually loosing from your corpus. You can consider various options:
Open a Saving Bank Account with higher interest options. Consider Yes Bank or Kotak Bank. They give you 7% and 6% respectively for balances above Rs. 1 Lakh. Keep in mind that interest above Rs. 10,000 is taxable.
Use Auto Sweep and move surplus funds to Fixed Deposits. Please keep in mind that short term FDs are tax inefficient. Tax Saving FDs locks you in for 5 Year.
Through SIP Route, invest in Good funds of Short Term Debt Category. If you stay invested here for more than a year, the Long Term Capital Gain Tax is applicable which is currently 10% without Indexation and 20% with Indexation.
Term Insurance + MF
This is a popular suggestion that you are likely to have observed earlier. We are surprised that most of the investors do not realize the benefit of this simple approach and instead stay invested in traditional policies, expensive in most cases.
Just to give you an example, Let’s say you are having 3-4 LIC Money Back Policies giving you a sum assured of Rs. 4-5 Lakhs and you are currently paying a premium of Rs. 40,000 a year. In this scenario, you may be under insured, compared to your Financial responsibilities and are not getting adequate return on your investment, having combined Life Insurance & Investment.
You can consider going in for a combination of an Online Term Insurance & MF. Even if you go in for a Sum Assured of Rs. 1 Crore, the premium is likely to be around Rs. 15,000 p.a. for a person of age 35 Years. The rest Rs. 25,000 can be invested in good schemes of Mutual Fund. It is very likely that this combination will give superior returns.
Kindly note that numbers given above are ball park estimates and given for the illustration purpose only. Also, please note that your Life Insurance need depends on your Critical Financial Goals and your Current Networth.