This is a Financial Awareness Series that is regularly posted on my facebook group and a few other groups to create awareness on various financial aspects. You can be a part of various discussions and updates by joining:
Financial Awareness Series 1:
How many of you (earning or non-earning) are aware of where all your investments are? Are you a part of financial decisions at home?
Start by talking to your spouse and knowing about your insurances, bank accounts, fixed deposits, other investments etc. In most cases you would be the nominee and it is highly essential that you know how to get the money in case of an emergency.
Financial Awareness Series 2:
Next step: Did you come across any investment that did not have a nominee like mutual funds, bank accounts, etc? You can do it any time by submitting a simple form. If you have saved all your hard-earned money for your family, you do not want your family to run around to get it, in your absence.
Nomination is very Important!
Financial Awareness Series 3:
Now that you know where you stand, here’s the further plan of action:
Budget: Take a pen and paper. Start making a master list of grocery essentials like rice, dal etc. Now list the non-essentials. Here is the scope of improvement. Look at your list very closely and strike out the ones that you buy only because it was looking good on the shelf or there was an offer.
Shop ONCE in a month. Follow your list strictly.
Then list other expenses in the same way: Essentials like EMI, School fees, medicines, etc, and non-essential like shopping, ordering food etc. Ask your spouse or family members and don’t leave out anything.
After this activity itself you will (in most cases) find enough money to start an investment. You should be proud of yourself even if you find ₹2000 per month.
Financial Awareness Series 4:
Emergency Fund: You must have at least 3 to 6 months of expenses handy in case of emergency like if you did not receive your salary, or some unexpected medical expense came up. The total of your essential expenses as listed in the earlier post into 3 months min. and up to 6 months for an ideal safety net.
If your total monthly expenses are ₹50,000 (including EMIs), you should keep a minimum of ₹1,50,000 either in your savings account or flexi-fixed deposit. The idea is to be able to withdraw this money easily at any time when you need.
In case your income is not regular, this is highly essential. You can start saving a small amount every month and build this up.
Financial Awareness Series 5:
How much Life insurance should I have?
There are various ways of calculating this. I will discuss the simplest one to begin with. Replacing your income in your absence for your family is the most basic way of calculating Life Insurance requirement.
Annual Income * Number of years left for retirement
If your annual income is Rs 5 lakh, you are 40 years old and plan to retire at 60 yea₹ You must have an Insurance cover of at least Rs 1 crore (5,00,000*20).
Financial Awareness Series 6:
Why do I need Life Insurance?
Life Insurance is needed to take care of family expenses if something happens to the earner of the family. There are many calculators available online (ask me if you can’t find) to determine how much insurance you should have so do not waste your sleep on the calculations, if you are not the ‘I love maths’ type of person.
After calculating if my need for insurance is 1 crore, this means my family needs 1 crore rupees to take care of their expenses in my absence. If I do not have this money saved as investments, I go buy insurance (Term Plan). I pay premium (let’s say ₹ 12,000 annual) to the insurance company who will pay 1 crore to my family if I die.
Term Plan is NOT an investment. It is a safety measure.
Note: You can buy a term plan online very easily.
Financial Awareness Series 7:
Did you know you can loan school fees? Though it's not advisable, here are some examples if you were thinking about it.
You can get school fee loans upto ₹ 3 lakhs that can be paid in 3 to 6 months through Avanse.
Bank of Baroda also offers such loans with a max. Of ₹ 4 lakhs and is payable in 12 installments.
There are other options as well that have similar products.
Note: I am not affiliated with any of these institutions.
Financial Awareness Series 8:
Cost of Education Loans
The interest rate ranges from approx.10% to 15% floating for a collateral free loan. Lowest rates provided by SBI.
There are other banks as well providing collateral free education loans. You can get a loan up to approx. ₹ 20 lakhs for higher education in India and upto ₹ 30 lakhs for higher education outside the country.
Collateral meaning: Something pledged as security for repayment of a loan like a property, fixed deposit etc.
Note: I am not affiliated with any of these institutions.
Financial Awareness Series 9:
SIP or Systematic Investment Plan is a method of investing into a mutual fund regularly.
It lets you invest as low as ₹500 monthly which can help you easily save for your goals regularly.
You can start a SIP online directly with the mutual fund house and get 1% higher returns than if you do it through an advisor, broker or distributor.
Financial Awareness Series 10:
If you think you will save the remaining amount at the end of the month, after all other expenses, there are very high chances of not being left with enough or no money to save.
Save first. Then spend the remaining amount as per budget. This way you would not overspend and miss your goal of saving.
Financial Awareness Series 11:
Deciding the education goal amount for a 2-year-old child.
You need the money after 16 years, when he/she turns 18 years
If cost of higher education is ₹10 lakhs (in today's value), assuming the cost will increase @7% for 16 years, you will need ₹30 lakhs at the time of your child's higher education.
The monthly SIP required assuming 9% returns would be ₹7,000 per month to achieve your goal.
Financial Awareness Series 12:
Education Planning for girl/boy
You can invest in Public Provident Fund (PPF) and equity mutual funds together towards your child’s education. Equity mutual fund is needed for growth because PPF alone will not be able to help you achieve your goal. You can invest 40% of your money in PPF and remaining 60% in Equity mutual fund.
Let’s say you need to save ₹ 5,000 per month, ₹2,000 will go towards PPF and ₹3,000 towards a SIP in equity Mutual Fund. Both these amounts can deduct from your account every month automatically.
PPF is for 15 years and you can deposit any amount from ₹500 to ₹1.5 lakh per financial year.
Interest rate: 8% (changes as per Govt.)
Note: This is only if your child is less than 3 years PPF will mature after 15 years that is when your child turns 18 or enters college. If your child is older and you invest in this, you will not get the money before starting college and you will have to arrange it from somewhere else.
Financial Awareness Series 13:
Sukanya Samriddhi Yojana
If you have invested in this scheme or thinking about it for your girl’s education, please note that you can withdraw only 50% of the amount for education when she turns 18. Remaining amount can be withdrawn at 21 yea₹
You will have to invest in probably an equity mutual fund as well to make up for the shortfall. If you need all the money at 18 years, you can skip this and invest as per my previous post.
Financial Awareness Series 14:
Why investing in Insurance is not as great as it sounds.
Did you know traditional policies can give you less than 5% returns? If someone tells you that you need to pay ₹10,000 for 8 years and from 10th year to 17th year you will get ₹ 15,000 guaranteed, do you think it’s a good deal?
How will you decide?
You need to know the Internal Rate of Return (IRR), to figure out if it’s a profitable investment. Ask the advisor to do this and show you the return %.
OR You can do it on excel, write all the amount you will pay and the amounts you will get as shown in the pic and then use IRR function.
Note: The above example shows return of 3% only. Now will you buy this plan??
Financial Awareness Series 15:
Types of Life Insurance
Term Plans: These are pure insurance plans where you pay a premium and sum assured is paid to your family in case of death only. Since there is no other benefit, premium is very less, for example ₹7,700/ year for a 1 crore policy for 30 year old female for 30 year. Note: You must have a TERM insurance policy if you have children or any dependents.
Endowment Plans: These are plans that cover your life + investment benefit. Avoid these plans because returns are quite low.
ULIP: These are plans that cover your life + invest in market. There are many charges that are deducted from your premium before investing. Do a quick google (ULIP charges) and you will find a big list. Avoid this one also.
Note: Since 2 and 3 have higher commission for agents you are most likely to be sold into them. Please make an informed decision.
Financial Awareness Series 16:
Term Insurance with return of premium (TROP)
For those of you who think, buying a term plan is not useful because you don’t get anything back if you are alive. Let’s analyze return of premium plans.
Example a 1 crore policy for 20 years for a 30 year old female: Basic term plan will cost around ₹5,700 per year whereas TROP will cost around ₹20,700/year. Your premiums are returned MINUS tax. This is what you will get after 20 years, if you are alive: ₹17,000 X 20 = ₹3,40,000
Is it a good deal? Of course not. You could’ve taken a simple Term plan and saved ₹15,000/yr. Then start equity SIP of let’s say ₹1,000 per month. You could get ₹10 lakhs.
Hope this helps you decide!
Financial Awareness Series 17:
Have you realized that your EPF (Employee Provident Fund) is not enough to cover your expenses during your retirement? The amount that is accumulated, even if you have not withdrawn until you retired, is hardly going to beat the rising cost of everything and will most probably last around 10 years or so. Medical expenses during your old age are the biggest cost that you will have to provide for. (We will discuss health insurance in a separate post)
You need to start saving for retirement as early as possible. Start investing through PPF and mutual funds (debt and equity). You do not really need any retirement specific plan for this.
Financial Awareness Series 18:
You don’t need a child plan to save for your child. Most child insurance plans in the market are either traditional plans or ULIPs. Both these products have been discussed earlier in my posts and having a different name doesn’t make it any better or different.
Financial Awareness Series 19:
Let’s analyze a popular child plan: SBI Life Smart Scholar (ULIP)
Sum Assured: ₹3 lakhs, Premium: ₹35,400, Equity fund: 100%, Policy & premium paying term: 15 yrs
Maturity benefit is approx. ₹7 lakhs. This is 4% return on your investments.
This is a ULIP, returns are not guaranteed and if you are willing to take market risk then why not look at other investments instead of paying such high charges.
The same amount invested through a SIP will give approx. ₹15 lakhs @12% or PPF will give approx. ₹10 lakhs @8%
Do not fall for ‘Child Insurance Plans’!
Financial Awareness Series 20:
Ways of buying Gold
Physical gold like jewellery and coins. You may buy gold whenever the prices are low, if you want to accumulate it for probably your child’s marriage and give them as it is. If you think jewellery will go out of fashion, you may buy hallmarked Indian Gold coin and bars and convert them into jewellery as and when required.
Gold ETFs: These are mutual funds that let you invest online in gold. These may not give you very high returns in the long run.
Sovereign Gold Bond: These are government bonds that pay 2.5% interest (fixed) per annum on the invested amount. You can buy a minimum of 1 gram and maximum of 4 kg gold. On maturity you can redeem them at the prevailing gold price. The bonds are for 8 years however you can cash them after 5th year. They can be bought through most banks or post-offices and are also traded through exchanges.
If the purpose of buying gold is for your child’s marriage or any future consumption, Option 1 is the best. If you are only interested in returns in the long term, you may invest in other products.
Financial Awareness Series 21:
This is buying and selling of gold online through various service providers like Paytm, PhonePe, Google Pay and others. It lets you buy even small quantities of gold and then either sell them or redeem at a gold shop for jewellery. It is highly convenient and has no storage cost. These can be kept for a maximum of 5 years
This is still a new concept and Government is yet to come up with a regulatory framework for digital gold. If you’re about to buy gold in the near term you may consider this at your own risk.
Financial Awareness Series 22:
SIP with Insurance
A few Systematic Investment Plans provide insurance cover. The life cover is discontinued if you make any withdrawal. The SIP must be continued for at least 3 years however you may exit with a charge. If you are investing ₹2,000 monthly in SIP, the insurance cover is usually calculated as below:
Year 1: 10 times your monthly SIP amount = ₹20,000
Year 2: 50 times your monthly SIP amount = ₹1,00,000
Year 3: Up to 120 times your monthly SIP amount = ₹2,40,000
The maximum cover you can get is around 20 to 25 lakhs.
This free Insurance cover is not provided with all SIPs, it is available with a few plans only. So, while deciding if you want to go with these you would also need to see if these SIPs have good performance. Choosing them only for the free cover does not make sense at all since the cover amount is quite less.
Financial Awareness Series 23:
It is the increase in prices of goods and services over time. If you plan to save for a goal after let’s say 5 or 10 years, you must estimate the cost of the goal at that time (future value).
This will help you calculate your savings required to reach that goal. Most importantly, your investments should give you returns that are higher than inflation over the years that you save. Since this rate keeps changing, it is advisable to estimate the goal amount using a higher rate. It is always better to have saved more at the end of the day than realizing you can’t meet the goal.
Financial Awareness Series 24:
Why Health Insurance
A very important basic requirement in everyone’s life. You must have a separate health insurance policy other than the one provided by your life insurer. Here’s why:
Once you leave your job or retire, buying a health Insurance at that age would be costly
Mostly our health deteriorates with age making it difficult to get a policy at a later age.
The earlier you start, lower the premium and you can increase your sum assured every year.
You can renew your policy up to a higher age than if you are trying to get a new policy.
Due to high medical cost, employer provided policy is mostly inadequate.
Financial Awareness Series 25:
Choosing Health Insurance
Premium is based on the oldest member. You may want individual policies or a family floater depending on the age your family members to be insured.
Any existing medical conditions
Exclusions: Illnesses that are not covered.
Sub-limit (Limit on room rent etc)
Co-pay (If you must pay any amount out of your pocket)
No Claim bonus
Hospitals network that provide cashless facility
You will have to do a bit of a research to figure out what suits you and your family. Look at your family history of diseases and find a cover accordingly.
Financial Awareness Series 26:
Super Top up Health Insurance
If you have taken a basic health insurance policy and the total of all your bills exceed your limit, then a super top up plan would reimburse it. Let’s say you have taken a basic health insurance of 5 lakhs and a super top up plan of 10 lakhs with a threshold limit of 5 lakhs. If you have multiple hospital bills with a total of 8 lakhs, your basic plan would pay you 5 lakhs and remaining 3 lakhs paid from the super top up plan.
Super Top up plans are cheaper and a similar plan like mentioned above for a 36-year-old husband and 34-year-old wife and a daughter would cost approximately ₹200 per month. You can use this if you have a basic health insurance from employer and can’t spend on another policy immediately. Some super top up plans can be converted to a basic plan after 3 or 4 years.
Financial Awareness Series 27:
Health Insurance Co-pay meaning
A co-pay is a fixed amount that you must pay in case of a claim. It is usually mentioned in percentage form. Higher co-pay means less premium. However, you need to be ready to be able to pay the co-pay amount in case of a claim so you’re probably not really saving anything. Many health insurance providers may not have co-pay. So, you need to check before purchasing a policy.
Financial Awareness Series 28:
CIBIL Score: A CIBIL score reflects your repayment history. Anyone considering giving you loan will hence make sure they are able to recover it by checking your history. Hence, always settling your loans on time and making your credit card payments on time will help you maintain a good score. Also make sure to take your ‘no dues certificate’ from your banker after paying off your loan. A cibil score of 750 and above is believed to be a good score. If you are planning to take a big loan, it is good to check your score and make improvements beforehand to avoid loan rejection.
You can check your CIBIL score for free on their website.
Financial Awareness Series 29:
Overnight Mutual Funds as the name suggests are for parking your money for as less as one day. They are safer than debt funds or liquid funds and do not have interest rate or credit risk. They invest in bonds with maturity of one day.
If you are happy with parking your money in Savings account for immediate needs, and part of your money parked in Fixed deposits for short term needs, you really don’t have to bother about doing anything else. You are doing just great.
If you are an investor and want to hold on to your money before investing for a short time, you may consider this.
Financial Awareness Series 30:
P2P Lending means people borrowing money from other people because they may not have received loans through traditional ways. Small businesses or individuals may borrow money through these platforms. Anyone who is willing to lend money, gets higher interest due to high risk. There is a limit for a single lender or borrower of ₹10 lakh across platforms. Also, a single lender cannot lend more than ₹50,000 to the same borrower according to RBI guidelines.
If you are an investor, please take time to understand how this works and the risks involved in it. This can be a very small portion of your portfolio, if you are keen on it. However, you must have a proper asset allocation in place before you venture into it with your hard-earned money. There are many P2P platforms that have come up in the last 2 years, most importantly they must be registered with RBI. Well, that does not guarantee your money, if you’re thinking about it.
Financial Awareness Series 31:
Pradhan Mantri Vaya Vandana Yojana (Open for Sale until 31st March 2020)
This a pension plan for senior citizens 60 years and above. You must pay a lump sum amount and you can get pension payments for 10 years, the lump sum purchase amount will be returned at the end of 10 years. You can get interest payments @8% per year payable monthly. Maximum limit of investment is 15 lakhs per person and the returns are taxable.
For example, if you pay maximum purchase amount of ₹15 lakhs, you can get a monthly pension of ₹10,000. This looks like a decent fixed income for retirees that can keep pace with inflation.
Financial Awareness Series 32:
Senior Citizen Savings Scheme
Retirees looking for fixed income may invest in this scheme. This scheme is for senior citizens above 60 years. Here is a quick look:
The tenure of this scheme is 5 years and it can be extended to 3 more years.
Maximum investment amount is 15 lakhs.
Premature withdrawals are allowed after one year.
Tax benefits are available under Section 80C upto ₹1.5 lakh.
The interest rate is 8.7% currently and the rate is fixed at the time of account opening.
Example: If you invest ₹10 lakhs in this scheme, you will get ₹21,750 every quarter; it will be credited to your account on Apr 1, July 1, Oct 1 and Jan 1. The deposit amount being returned after 5 years.
Financial Awareness Series 33:
National Pension Scheme (NPS)
Tax deduction being the biggest reason why most of us have fallen for it. Let us evaluate and see what makes this an unfavourable choice for your retirement corpus.
You must buy an annuity with the accumulated amount to get regular pension.
You cannot withdraw the entire amount after retirement. It is mandatory to buy an annuity with at least 40% of the total amount.
Returns are not guaranteed.
Income from annuity is taxable. So post-tax returns are much lesser than you imagine.
In case you retire or stop working earlier than age 60, you must be ready with other arrangements to meet your expenses.
Stringent partial withdrawal rules.
If you want to invest in a fixed return product, PPF is a better option. However, if you have more than 15 years to save for retirement you need to have a good mix of equity and debt for higher returns.
Financial Awareness Series 34:
Hybrid Funds (Balanced Fund)
These can be a good option if you are saving for a long-term goal and want a single fund to suit your asset allocation. They invest in both equity and debt. The only drawback being you will not be able to re balance your allocation while you are closer to your goal. You can still use them if your goal is really far. The various types of hybrid funds in a snapshot are:
1. Aggressive Hybrid - 65% to 80% in equity and 20% to 35% in debt.
2. Balanced Advantage – Allocation depends on market situation.
3. Equity Savings – Minimum 65% equity mostly arbitrage.
4. Conservative Hybrid (Monthly Income Plan) – 10 to 25% in equity and remaining in debt.
5. Arbitrage Funds – 25% to 30% in debt remaining arbitrage.
6. Multi Asset Allocation – They invest in at least 3 asset classes with minimum 10% in each.
7. Balanced Hybrid - 40% to 60% in equity. (currently no funds in this category).
Financial Awareness Series 35:
Aggressive Hybrid Funds: 65% to 80% in equity and 20% to 35% in debt.
This is treated as an equity fund for taxation purpose. It frequently re balances the portfolio between its equity and debt allocation. This a good way to save for any long-term goal. These are fairly low risk compared to an all equity fund. The debt portion of the fund is aimed at minimising market volatility. A good fund to have in any portfolio.
Financial Awareness Series 36:
Balanced Advantage Funds (Or Dynamic Asset Allocation) are schemes that manage the equity and debt part of the corpus based on the market conditions. These schemes have no set allocation limits so they may have their entire corpus in equity or debt or any combination in between. It entirely depends on the fund manager and the strategy followed by the fund house.