Agents, Advisers or CFPs?

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

When I speak with my clients about CFPs, first question from them is what is CFP? So I thought to share how CFPs are differ from Agents, Advisers in a simple language.

Certified Financial Planner(CFP) is the professional certification for Financial Planners which is granted to individuals after completing desired education, examination, experience and ethics by candidate. Financial Planning Standards Board India is the only body in India which grant this certification mark after fulfilling all the above requirements. Presently around 108 CFPs in Bangalore as of today (From FPSB India Page). Now I will explain in detail how CFPs are differ from agents, advisers or the so called self proclaimed Financial Planners in detail.

AGENTS OR ADVISERS: All of us in our day to day life have met so many agents or advisers who represent specific Insurance company or Mutual Fund company or any firm. They usually not take any fee from you but they will get benefits after selling products which are under their kitty. They will not disclose the commission or remuneration they are  going to get by selling the products to you. Few of them are ready to share their profit with you if you purchase their recommended product. They usually recommend you to purchase ULIPS, Endowment Plans or Money Back Plans (If they are Insurance Agents), New Fund Offers of Mutual Funds or without analyzing fund performance they may recommend you to invest in their recommended Mutual Funds (If they are Mutual Fund Advisers)  or in RD, PPF or NSC (if they are Postal Agents). They mainly consider your investment surplus instead of your future financial goals.

So the conclusion is “Took a very narrow view, limiting the advice to investments. Basic intention was to sell. High probability of conflict of interest because of high commission structure for some products. Ready to woo clients with rebates.”

CFPs: They charge fee which is depend on clients profile. Fee is disclosed in the beginning. If invested through them then each products earnings are disclosed in Agreement note.  Their recommendations are mainly on goal based instead of product based. Few of their recommendations include Purchase of Term Insurance, maintain  contingency fund, goal based investment plans to reach individuals life stage goals like children education, children marriage, retirement planning and estate planning. They mainly consider Age of all family memebrs, investible surplus, risk profile, life and health insurance needs, short term, mid term and long term financial goals, retirement needs and past investments when recommending plan to clients.

So the conclusion is “Planner went beyond investments and looked at every aspect of the family finances. The plan laid down specific stratery for every financial goal. One should not see the upfront fees as an unnecessery expenses. It could help you save lakhs of rupees by guiding you in right direction.”

Now it is your turn to decide whom you want-Agents, Advisers or CFPs????

Hope my postings are enjoyable and knowledgeable. Need your unbiased comments also to grow my knowledge too. Happy New Year in advance.

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How to calculate returns on your investments?

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

Today I will show you, how to calculate returns from your investments and will also make you familiar with few financial terminologies which are used in calculating returns.

1) Absolute Return: This is mainly used when the investment period is less than one year. To calculate this, simple formula is:-

Absolute Return=[Dividends (Receivables)±(PE-PB)]/PE

Here PE-Price at the beginning of investments

PB-Price at the end of period.

2) CAGR-This is mainly used calculating your returns when holding period of your investment is more than one year and either you are investing lumpsum one time or investing same amount on same interval (either Mnthly, Qly, Hly or Yly). It is called Compounded Annual Growth Rate.  This is the same compound interest calculation which me and you did during our school day. It can also to be done using Excel. I will show you how to do this.

A)     Open Microsoft Excel

B)      Go to Formulas

C)      Click on “fx” or Insert Function

D)     Popp Up will appear, in that select category “Financial”

E)      From drop down Menu select the option “Rate”

F)      “NPER” means Total number of Payments. It should be of same frequency means, suppose your payment is monthly for around 15 Yrs then it should be 180 not 15. Suppose your investment is quarterly for 15 years then it should be 60 (15*4).

G)     “PMT” means what you are going to pay for each period of investments

H)     “PV” means present value I,e if you have any investments already, then you need to insert that value (current value) here.

I)        “FV” means Future Value of your investment which you can assume or you can calculate by inserting required rate

J)       “TYPE” means- is your payment will be at the beginning of the period or end? Suppose you are investing monthly and if your investment is on the beginning of the month then insert “1” and if it is at the end of the month then”0”

This is very important in calculating Because if you are investing in the beginning of each month interest calculation will start from the beginning only.

K)      “Guess” will give you the result from your investments.

With this function you can calculate any desired value by putting at least three values. Also remember that whatever going out of your pocket will be “-“ value and whatever you will receive will be “+”. Remember that, your all values like Payment, Period and Interest should be in same frequency. Means if your contribution is monthly then period and interest should be in monthly.

3) IRR- It is used to calculate your returns when your contributions are not same payments but with same intervals and also you may be receiving lumpsum in between. Suppose you are investing First month Rs.20,000 and next month Rs.25,000 and you are receiving Rs.2,00,000 in fourth month. For such type of transactions you can use IRR function but period must be same. It can be calculated again by selecting function and IRR. Remember to put outgoing as “-“ and receivable “+”. Here if the investment periods are beginning of the period then directly you can enter the amount. But your payment or receivable at the end of period then you need to enter into next year. Means if you are not investing at the beginning of the month then your first value should be “0” and 2nd value must be your first month contribution. Logic is, it will consider the period from the beginning, suppose your investment is not in the beginning then you need to put “0” and need to put your value to next month.

4) XIRR-This is used when your payments or withdrawals and periods are irregular. It is same as IRR but only difference is you need to key the dates of transactions. For Example-You are investing on 15th March 2011 Rs.30,000, on 24th April 2011 Rs.28,000, on 30th June 2011 Rs.45,000 and receiving Rs.1,30,000 on 25th Dec 2011.

I hope this will make you familiar with few of the Terminologies which are related to returns and also make you to calculate your returns

Endowment Plans or Term Insurance with Mutual Funds?

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

While buying life insurance have you ever thought why you are taking insurance? May be not many have done their home work before purchasing. It may be in a hurry to save few bucks of Tax or with the advice of your friend, uncle or neighbor who is agent of some particular insurance company.

But which is best-Term Insurance+Mutual Funds or Endowment Plans?

I will show you with example. Suppose Mr.X want to purchase Insurance plan and looking for the Insurance cover with return.  So, he will go with endowment plans which are the common investments in all persons portfolio (About ULIPs I will explain you elaborately in my future posts, how they are also bad product).

Here I will consider two plans of LIC’s-One is Amulya Jeevan (Pure Term Plan) and Endowment Plan of LIC (Plan No.14). Suppose his age is 30 and he is looking for the cover of 50 Lakh with term of 20 yrs. Then Amulya Jeevan premium is Rs.12,850 and Endowment Plan premium is Rs.2,49,750.

Now if Mr.X took Amulya Jeevan and started to invest the remaining balance i.e. Endowment Plan Premium-Amulya Jeevan premium which is Rs.2,36,900 (2,49,750-12,850) in any well diversified fund for the next 20 years then his investment at the end of 20 years will be 2,61,98,641 (Term-20 yrs monthly 19,741 which is 2,36,900/12=19,741, Interest considered 15% CAGR). But you may ask how I may consider 15% as return over 20 years investment. If you look at the returns of Sensex from Jan 1980 to Octo 2011 it gave around 18% CAGR return.

Suppose Mr.X invested in Endowment Plan and his return at the end will be around Rs.1,35,00,000 (SA-50,00,000+Bonus-60,00,000 60 per 1000 SA per year and Final Additional Bonus if any-25,00,000 at Rs.500 per thousand SA). Which will give you around 8.17% CAGR return (even after considering high values for future predictions like Bonus as 60 Per 1000 SA per year and final additional bonus at 500 per 1000 SA). But if you consider the returns of Private Insurers then it will again dip your return because Private insurers’ returns are less than LIC’s in traditional Endowment Plans as of current trend.

So, by purchasing Term Insurance and diverting the remaining money towards Equity, you can earn more than just investing in normal Endowment Plans. For your information there are so many Term insurance Plans which will cost you less in market today than what LIC’s Amulya Jeevan costs you. But I took LIC’s example because guarantee of return and faith attached with it. LIC proved that with it’s death claim settlement ratio compare to private insurers.

PPF-Loan and Withdrawal

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

Today I am going to make you familiar with rules and regulation of withdrawal and loan facilities of PPF. Why I felt this topic necessary is, while preparing my final module of CFP I didn’t get the clear information about this in my notes, also when I googled it. All have copied the same wordings which are somewhat confusing to common man. Hence today I will tell you with example.

Suppose you opened the account on 22/12/2011 and below table will give you simple example when you can withdraw and take loan. If you add 15 yrs (Term of PPF account) to your account opening date it will be 22/12/2026 which you think maturity date. But it will mature on 1st April 2027 (which is first working day of FY 2027-28). So, it is exactly not 15 years but in practical it is around 16 years.

Financial year Year End Balance in your PPF account (Assumptions for better  understanding) Is it eligible for loan? Is it eligible for withdrawal? How much eligible?
2011-12 Rs.75,600 -No- -No- NA
2012-13 Rs.1,58,000 -No- -No- NA
2013-14 Rs.2,20,000 Yes -No- Rs.18,900 (25% of 2011-12 year end balance)
2014-15 Rs.3,10,000 Yes -No- Rs.39,500 (25% of 2012-13 year end balance)
2015-16 Rs.4,50,000 Yes -No- Rs.55,000 (25% of 2013-14 year end balance)
2016-17 Rs.5,50,000 Yes -No- Rs.77,500 (25% of 2014-15 year end balance)
2017-18 Rs.6,80,000 -No- Yes Rs. 1,10,000 (Which is 50% of balance for the year preceding fourth year of withdrawal taking year and less than the preceding year i.e. 2016-17 yrs balance)

So, from above table you may have noticed that loan will be available from 3rd FY to 6th FY. That also 25% of the year end balance preceding 2 yrs of loan taking FY. Loan will have to be repaid within 36 months and interest is more than what you’re getting from PPF account. You will not get one more loan until you repay the existing loan. From 7th FY you are not eligible to take loan.

Withdrawal will be available from 7th FY onwards. Only one withdrawal is permissible. The amount of withdrawal will be lower of-immediately preceding 4th FY balance or immediately preceding FY balance.

Hope my effort given you the better picture of the topic what thought to share.

Portfolio Re-balancing- How it works?

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

Today I will show you how to re-balance your invested portfolio regularly and show you, how you can benefit from this activity. As the common saying “Dont put all your eggs in one basket, put it in different baskets and if one basket fails to generate the required return then the other will save your investments”. This is always true and you need to maintain this throughout your investment tenure.

But how to decide how much % of your investment should be towards equity and debt? Common theory to judge is, consider 100 as your life span and deduct the current age from this, the remaining should be the % of your investment towards equity. For Example, suppose your age is 35 then deduct your age from 100 i,e 100-35=65. So, 65% should be towards Equity and  35% should be towards Debt. As your age progress your equity exposure should decline in same proportion and Debt proportion should increase in same proportion. Also if your investment is for any specific goal then before 3-4 years of that goal, your whole investment should be towards Debt. This move will protect you from equity fluctuations which may be disaster like 2008 recession.

Now how you can benefit from from re-balancing of your portfolio?

Suppose Mr.Ajay is investing Rs.1,000 each in Equity Mutual Fund and Debt Mutual Fund for the tenure of 15 yrs. Aprox Returns from Equity Mutual Fund 15% and Debt 9%. He is re-balancing his portfolio for each 5 years by maintaining 50% in each category.  Then

1) At the end of 5th year his Equity returns will be Rs.87,342 and Debt Rs.75,271. Which he will add and re-balance it to 50:50 in Equity and Debt. Also continue to invest.

2) At the end of 10 year his Equity returns will be Rs.2,51,331 and Debt Rs.2,00,717. Again he will add and re-balance it to 50:50 in Equity and Debt. Also continue to invest.

3) At the end of 15 year his Equity returns will be Rs.5,41,957 and Debt Rs.4,23,037

So, even though his total return without re-balancing  is around 12.40% but this re-balancing will fetch you 12%. Hence in this case you will not notice any such difference.

But you can’t predict always that Equity will give the same expected 15% return for the whole 15 years. Again we will consider Mr.Ajay who is investing Rs.1,000 each in Equity Mutual Fund and Debt Fund for 15 years. But we will not predict Equity returns this time while predicting Debt returns as 9%.

1) Suppose in the first 5 years the Equity gave the expected returns of 15% then at the end of 5th year his Equity returns will be Rs.87,342 and Debt Rs.75,271. Which he will add and re-balance it to 50:50 in Equity and Debt. Also continue to invest.

2) But  in 6th to 10th year Equity market fell considerable and it gave only 8% returns then at the end of 10th year his Equity returns will be Rs.1,93,209 and Debt returns will be Rs.2,00,717 which he will add and re-balance it to 50:50 in Equity and Debt. Also continue to invest.

3) From 11th to 15th year suppose Equity market again fell and it gave only 7% returns then at the end of 15th year his Equity returns will be Rs.3,47,849 and Debt Rs.3,78,323.

At end if you calculate his total returns then it will be work out around 8.79% which is more than average last 10 years return of Equity (8% 6-10 yr and 7% 11-15 yr, hence average will be (8+7)/2 is 7.50%)

Hence by re-balancing activity you preserved your money and got higher returns than what Equity gave during that turbulent last 10 yrs of Mr.Ajay’s investment.

But is it possible to follow this re-balancing activity yourself? If you have time and little bit of knowledge then you can do it yourself. Else better to take help of any Certified Financial Planners.

PPF- When to contribute to get higher returns?

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

Today I am going to share with you one simple thing about PPF which you may noticed it or not during the opening of your PPF account.

As you know PPF interest rate is 8.6% Compounded Annually (Effective from Dec 1st 2011). The interest for a month is calculated on the lowest balance between the close of the fifth day and the end of the month and is credited to the account at the end of each year. It means, if you want to have this benefit you need to invest your contribution within 5th of each month. Else your contributed money will calculated as Principal for the next month. So one month that money will be idle.

To get clear picture how you will get good returns by just following the above rule i,e contributing each month before 5th, I will show you the calculation.

Suppose Mr.X and Mr.Y opened PPF account on same day and started to contribute Rs.8,000 each month but Mr.X is contributing before 5th and Mr.Y is contributing after 5th of each month then how much difference we can see.

Mr.X’s Accumulation after 15 years.

First Year Contribution Rs.8000 PM.

1st Month Contribution-8,000+688 (interest for 12 months)=8688

2nd month Contribution-8,000+630 (Interest for 11 months)=8630

Like this at the end of 1st year Principal is (8000*12)+(4465)=1,00,565. The same amount will be his contribution for the remaining 14 years. So, at the end of the 15th year his accumulated amount is Rs.28,61,481.

Mr.Y’s Accumulation after 15 years.

First Year Contribution Rs.8000 PM. (But after 5th of each month)

1st Month Contribution-8,000+630 (Interest for 11 Months)=8630

2nd Month Contribution-8,000+573 (Interest for 10 Months)=8,573

Like this at the end of 1st year Principal is (8000*12)+ (3777)=99,777. The same amount will be his contribution for the remaining 14 years. So, at the end of the 15th year his accumulated amount is Rs.28,39,059.

Difference of returns between Mr.X and Mr.Y is-Rs.22,422.

But you may say what is the time value of this difference after 15 years?

It may be your one month rent what you are paying now. How???

Suppose today you are paying Rs.9,00 PM as rent then the future value of that will be Rs.21,569. (Inflation-6% Tenure-15 yrs).

So what I mean to say is, it may not be that much big amount but with little care and little knowledge you can add more value to your money.

Calculation of Salary Income

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BasuNivesh now available in it’s own domain www.basunivesh.com from 22nd June 2012.

Hi,

Welcome to my world of financial planning. I want to start today’s journey with helping you how to calculate your own salary income. I selected this topic as these few months are hectic to all salaried persons to know how much they are tax liable.

Here I will start with basic things then daily I will update few things to this post and try to make you all familiar with calculation of your salary income by next week.

While calculating Salary Income their are mainly three components which are as follows

1) Salary Payments

2) Allowances

3) Perquisites

But today I will make you familiar with Salary Payments and allowances.

Salary Payments

Salary Payments again their are sub categories like taxable, partially taxable and exempt. The list of all those are as follows.

a) Basic-Always taxable

b) Advance Salary-Taxable

c) Arrears of salary-Taxable

d) Fee-Taxable

e) Commission-Taxable

f) Contractual Bonus-Taxable

g) Annuity (Pension)-Taxable

h) Remuneration for extra work-Taxable

i) Salary in lieu of notice period-Taxable

These above mentioned Salary payments are always Taxable. Below are the few payments which are partial taxable.

a) Gratuity (But Gratuity received during the period of service is fully taxable and any death cum retirement for Govt Employees is fully exempt)

b) Leave Salary (But Leave Salary received during the period of service is fully taxable and any death cum retirement for Govt Employees is fully exempt)

c) VRS-To calculate it few conditions are their which I will deal with them in my future posts.

d) Leave Travel Concession-Is partial but again few conditions are their to satisfy that.

Fully Exempt Salary Payments are as below

a) Any payment from Approved Superannuation Fund

b) Salary from UNO

c) Salary to NRI Techinicians

d) Remunerations to consultants and to employees of such consultants

e) Remuneration to foreign citizens.

But I hope that for maximum population these totally exempted Salary payments are not applicable.

Allowances

Again here also few are fully taxable, partial and fully exempt. Let us categorize them.

Taxable Allowences (Allways)

a) Dearness Allowences

b) overtime Allowences

c) Fixed Medical Allowences

d) City Compensatory Allowences

e) Interim Allowances (to meet increased cost of living in cities)

f) Servant Allowances

g) Project Allowances

h) Tiffin?Lunch/Dinner Allowances

i) Any type of Cash Allowances

j) Warden Allowances

k) Non Practicing Allowances

Partial Taxable Allowances

a) HRA-If you are residing in your own house or not paying any rent then it is fully taxable. But you are residing in rental then the calculation is as follows.

Salary for calculating this is Basic+DA (If it is provided in terms of employment for retirement benefit)+Commission as a % of turnover.

Least of the following is exempt.

1) Allowance actually received

2) Rent Paid-(minus) 10% of salary for the relevant period

3) 50% of salary for the relevant period (For residents of Delhi, Kolkata, Mumbai and Chennai) for others it is 40% of Salary

Their are few allowances which are exempt to the extent of amount received or the specified limit whichever is less.

a) Children Education Allowance-Rs.100 per child  per month and maximum for two children

b) Hostel Exp Allowance-Rs.300 per child per month and maximum for two children

c) Transport Allowance-Rs.800 per month and for handicapped Rs.1600 per month.

Still few more are their in this category but I think those are not that much relevant.

Last type of allowances are type of allowances which are exempted either the amount received or amount spent whichever is less.

a) Travelling Allowance-Expenses on tour or on transfer

b) Daily Allowance-Expenses which are allowed to meet while not on the place of work

c) Conveyance Allowance-Meet the expenses of conveyance in performing the duties of an office

d) Helper Allowance

e) Allowance granted to meet the academic, research and training pursuits in educational institutions.

f) Uniform Allowance.

I covered almost all part of it with my simple language. Will cover the remaining topic Perquisites in my next blog. Hope by this time you will have fair idea of basic things. If you have any doubts then you can raise the same and I will try to solve them to the best of my knowledge.

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