Do you know what does financial planning mean? What are the essentials of a finacial planning? How can you use financial planning to achieve financial freedom?
Where and how should you invest your money to achieve financial freedom? Are mutual funds a good way of investing your money to achieve your aims?
In a chat with Get Ahead readers on March 5, financial planning expert Vetapalem Sridhar answered these and several other queries related to mutual fund investments, financial planning and how to achieve financial freedom for you and your family.
For those of you who missed the chat, here is the transcript.
Part II: How to invest money safely for the long term
jiten asked, Hello Sir My income pa after tax deduction and home loan is around 3.5 lacs. Out of which i manage to save around 1.5 lacs pa. Currently I am staying in a 1BHK flat. I am planning to buy a 2 BHK Flat. So is it rite time to invest in Home or at this time I should go for other Investments? If is it so then please guide me which other options are available for me? Thanks in Advance.
Vetapalem Sridhar answers, Hi Jiten, if the 2BHK is a place where u wish to stay then it definitely does make sense to buy it now. But then it would make more sense if u sell the existing 1 BHK and buy the 2 BHK. All ur money should not be in just real estate. If u r looking at it as a pure investment decision then will have to evaluate a number of factors like ur current financial state, ur objectives in life, etc.
Leena asked, hello sir, We are expecting child in june. What will be the best option for his/her future? Insurance plan from LIC, ULIP or combination of two. Pl help.
Vetapalem Sridhar answers, Hi Leena, congratulations on the expected new arrival. The first thing that needs to be done is that the earning member of the family should get adequate TERM Insurance cover to provide for enough Financial Support to the depandants in case something happens to him/ her. Once this is done it makes more sense to invest for a child in Mutual Funds.
Here too it would make a lot of sense for either of the parent to be the first holder and the child as a second holder with the spouse as guardian. This would ensure ease in operations and switching over from non performing funds. Plz read thro the following article where I have dealt in detail about investing for a Child. (A Slide Show, click NEXT to read thro.)
AS asked, Dear Sridhar, what is your opinion about the following funds selection for 5-8 years horizion, sbi magnum tax gain 5000/- pm, reliance vision 2000/- pm, franklin india prima plus 2000/- pm, reliance tax saver 2500/- pm, tata infr 1000/- pm, i am ivesting since aug.07.
Vetapalem Sridhar answers, The portf of funds seems OK. U should review the funds annually and weed out substantial underperformers with better funds. Remain invested in equities with a minimum 5 yrs horizon, even if u plan to switch funds in between.
Shravan asked, Hi Sridhar The invesment declaration for income tax procedure in my company is finished through a consultancy. Tell me if i could still invest and show for tax exemptions? What is the procedure?
Vetapalem Sridhar answers, Dear Shravan, u can still invest money under tax savings schemes and get the benefit. But then u will have to file returns later with the details of the investments made with the IT dept and then claim for refund of additional tax cut from ur salary.
Riya asked, Dear VS Can u please clarify what is the effect of new budget on the trading(stocks)? I want to know if there is any increase in service/transaction charges and such. Thankyou.
Vetapalem Sridhar answers, Hi Riya, the major change is the increase in Short Term Capital Gains tax from 10% to 15%. Other than this there is no change as far as trading in Stocks is concerned. This change has impacted sentiment negatively and in the short run would also be a negative for the amount of Volume of trading on the exchanges.
Mohamed Rifa asked, Hello Sir, This is mohamed. Right now working in BPO. I have started my carrier with the salary of Rs.500/month but now I am getting 2 lakh p.a. Till to date I dont have any savings. I have planned to get marry by 2010. How to invest in MF SIP and please advice? Thanks in advance.
Vetapalem Sridhar answers, U can contact ur bank or a Mutual Fund advisor to help u invest in Mutual Funds. SIP -- Systematic Investment Plan, is a method of investing money into a Mutual Fund. In an SIP a fixed amount (Minimum Rs.500 to Rs1500) is invested into a MF on a fixed date each month (or each quarter). Units r allocated on the basis of the NAV (price of one MF Unit) on the date of investment. Minimum installments are 6 for a monthly SIP or 4 for a Quarterly SIP. Advantage: 1. There is disciplined investing as money directly goes from bank (in case of Auto Debit instruction is given) or thro post dated cheques given to the MF. 2. Convenient for persons who can save small amounts every month and want to invest into equities. 3. Averaging of cost of units purchased as they are purchased at different points in time.
Chinmoy asked, Dear Sridhar, I am 34 years old, my son is 1.5 yrs old. Following are details of my finance, pls. advice if any change is required to this. 1. Insurance a. ULIP - 44000(Premium/yr) Cover- 3 lakh B.Term- 4500 (Premium/yr) Cover- 9.5 lakh c. Regular- 3500(Premium/yr) Cover - 1 lakh 2. Contingency fund - 1.5 lakh Fixed deposited 3. Investment- Rs. 8000 SIP in the following Magnum Sector Funds Umbrella Contra - Growth- Rs. 2000 Sundaram BNP Paribas Select Midcap - Dividend- Rs. 2000 Reliance Vision - Rs. 2000 HDFC Equity - Rs. 2000 ELSS- 40000 PPF etc. 40000 4. Loan - a. Home Loan - 12 lakh EMI 11000 b. Car Loan - 2 lakh EMI 4500 5. take home salary - 50000 6.Goals - Child Edu - 10 lakh time 15 yrs Retirement 1.5 Crore time 20 yrs. I have 1.5 lakh amounts for investment where should I invest? Also should I increase SIP from 8000 to 16000?
Vetapalem Sridhar answers, Dear Chinmoy, U seem to be underinsured. The Insurance cover should cover all liabilities and also provide Financial Support for ur depandants in case something happens to u. Would suggest that u have a relook at the amt of cover needed. U should look at increasing the SIP amount to around 15K to meet ur objectives. U seem to be managing things reasonably well!
utpal asked, Hi Sridhar, I would like to know if i take home loan in another city and show the rent as my income, then is there any provision to get more tax benefits (Apart from 1,00,000 principal + 1,50,000 taxes)?
Vetapalem Sridhar answers, Where ever u r showing rent as income, there is no upper limit of 1.5L on interest component of the housing loan. Entire Interest component can be used to claim tax benefit. The 1.5L limit is applicable only to self occupied property.
roomi asked, hi i am an NRI about 500000 to invest i want to invest in mutual funds what shd be your rcommendation? how shd i put this money in indian markets? shd i need some planner to do planning for me? how shd i knw which specific funds shd i buy?
Vetapalem Sridhar answers, It definitely does make sense to take the help of a GENUINE advisor to invest into Mutual funds in India. Also beware if NFOs are being recommended to u. U can split the money into 5 parts and build a diversified portf with it. U can pick a large cap fund, a value oriented fund, a completely diversifed fund, a mid cap fund and an aggressive opporunity/small cap fund.
brijesh asked, dear sir, my salary is 3.5 lacs p.a. Want to invest in mutual funds. Not in tax saving funds because they return less. For more returns, where should I invest?
Vetapalem Sridhar answers, Most Tax savings fund traditionally have been investing into Mid and Small cap stocks. The reason is that there is a 3 yr lock in in these funds and over longer horizons mid and small caps tend to outperform large caps. In the past Tax Saving MFs have outperformed regular MFs by a huge difference. The reason for the current underperformance is the mid and small caps have underperformed larges caps. It is not possible to know in advance which type of funds will be the best performers. Hence would suggest that u build a portf of 4-5 different mutual funds and remain invested in them with a 5 yrs plus horizon of investment.
mani asked, Hi vetapalem my income is 18k per month. I want to buy a luxurious house worth 1 crore and mercedes benz car in 5 yrs time. what should be my strategy? Should i invest heavily in stocks and mutual funds? Is there any other option? Help me out.
Vetapalem Sridhar answers, Just taking higher risk will not ensure higher returns. U need to have a capacity of bearing risk in case of volatility. This capacity depend on ur horizon of investing. The longer u can remain invested, the more the risk taking ability as volatility will not affect u in the long run. Secondly, ur expactations r not realistic. Even if u invest all ur earnings u may be able to invest around 11L in all during the 5 yrs. How do u think this money will grow to more than 1 crore in 5 years? It is gud to have dreams, but always have realistic expectations.
pun asked, sir what is the impact of service tax currently imposed in budget in ulips on my premium of around 80000. how much money will be deducted as service tax?
Vetapalem Sridhar answers, Previously entry load on MFs was 2%. Later on a service tax was imposed on this and then the entry load increased to 2.25%. Similarly in ULIPs on certain charges levied by the Insurance company in fund management, a service tax has been implemented. Its over all impact will lead to a marginal increase in costs for the investor. Will have to look at it more minutely to find the exact impact.
preeti asked, what is meaning financial planning?
Vetapalem Sridhar answers, Financial Planning is a comprehensive process. Let me put it down in points:
~ U list down ur future needs/ objectives in life.
~ The second step is creating a family budget and understanding what is the amount of savings that u r left with. It will also enable u to evaluate ur curent lifestyle and project what will be the future cost of living.
~ The needs/objective and budget would form the inputs which would help u make a good financial plan. Risk planning would help u estimate the amount of insurance cover required.
~ A financial plan is made which would help u undertsand what kind of return u need to make on ur investments so that u can meet ur objectives.
~ Once this is known then the question of product selection and execution arises.
~ And the last step is monitoring and evaluating how the things r going on.
Part II: How to invest money safely for the long term
Vetapalem Sridhar is a financial planning specialist based in Pune. He can be reached at vetapalems@rediffmail.com.
