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Be Your Own Investment Advisor

Be Your Own Investment Advisor

Nobody understands your situation better. So take charge of your finances, now

Illustration by Raj Verma Illustration by Raj Verma

Spend each day trying to be a little wise than you were when you wake up,” the quote by legendary investor Charlie Munger tells us the importance of knowledge and learning. While there is a need to seek professional expertise when it comes to investing, divorcing yourself from the process completely can be injurious for your money. You should be able to perform basic supportive tasks on your own. For instance, you need not call your financial advisor for an account statement of your mutual fund. Get more involved in the planning process itself. Do basic calculations such as the amount of insurance you will need. After all, it’s your money and nobody understands your financial situation better than you.

Further, concealing your financial information from your spouse or other family members might be a bad idea! According to data available till 2018/19, Rs 64,000 crore lay unclaimed with financial institutions. The number would have gone up by now. There are inactive accounts as well. So, to ensure your hard-earned money does not land up in the list of forgotten accounts after 15 or 20 years, take charge of your investments, now.

There are three ways to achieve financial independence — be active during the planning stage, implement your financial plan and make provisions to transfer assets to the next generation. The idea is not to remove financial advisors from the process, but to get more involved.

“People get so engrossed in making money and investing, but most of them do not care about succession planning,” says Suraj Malik, Partner, BDO India LLP. “I always tell them to be more involved in their financial planning to ensure their wealth creation efforts are not wasted and the plan is well structured to meet their family specific requirement,” he adds.

Why do you want to you invest, where do you want to invest, how much you want to invest, how much investment is needed to attain your goals, how long do you want to invest, what is your current financial status — in the first stage you should be able to answer all the questions. Prepare a roadmap with or without the help of a financial planner. He/she will ask you to fill a detailed questionnaire to ascertain your financial condition, risk tolerance and goals to develop a suitable investment plan. Some Do-It-Yourself (DIY) calculations might help as well.

Calculate Right

Doing basic calculations is no rocket science, but it will help you go miles in your investment journey. Most of these calculators are available online for free. Before you start playing with numbers, remember to work with actual numbers. Big ones such as a target corpus of Rs 50 lakh or Rs 1 crore might look impressive, but may not be enough to take care of your long-term goals. What seems a big number today may not be that big a deal in the future. Inflation is likely to make it difficult to buy the same amount of goods at the same price. A look at a few essential and basic calculations that will help you plan right:

Future Value (FV): What will be the value of your goal after 15 or 20 years? The future value calculator helps you understand the future value of a goal based on its current cost and inflation.

Assume that you want to save for your child’s higher education after 15 years. So, if a particular course is priced at Rs 5 lakh today, how much will it cost 15 years later? You will need to factor in the inflation number to reach the FV of your child’s education. Here’s a formula to help you do it:

FV= PV (1+r/100)^n

FV= Future value of your goal

PV= Present value or current cost of your goal

r= Annual rate of inflation

n= Time left to reach your goals (in years)

Assuming an education inflation of 10 per cent, the same course will cost Rs 20,88,600 after 15 years.

A small tweak in the above formula tells us how much you should invest today to reach your desired corpus. The formula becomes FV/(1+r/100)^n. In this case, ‘r’ is the rate of return. So, if you want to accumulate Rs 10 lakh to buy a car after seven years, assuming a 10 per cent rate of return on investment, you should invest Rs 5.14 lakh in lump sum to be able to buy a car at that time.

Future value of SIP: SIP AUM is at an all-time high and forms almost 15 per cent of the total industry AUM, according to AMFI data. SIP is the most-suitable technique to invest for your long-term goals. Here’s how you can find out how much your regular investments will grow over time.

S = R*(((1+i)^n)-1/i)*(1+i)

S = FV of investment

R = Regular investment per month

i = Interest rate assumed /12

n = Duration (number of years *12)

Suppose you are investing Rs 1,000 each month for the next 10 years at an expected return of 15 per cent. So,


i= 15 per cent per annum-15/12 = 1.25 per cent = 0.0125

n= 10*12 = 120 months

Now, if we put values in the formula,

S=1,000*[{((1+0.0125)^120)-1}/0.0125] *(1+ 0.0125)

So, a monthly investment of Rs 1,000 via SIP for 10 years will become Rs 2.78 lakh, at a rate of return of 15 per cent.

The above formula can be tweaked to find out how much monthly investment is required to accumulate your desired amount to fulfill a goal. The formula becomes: S/((((1+i)^n)-1/i) (1+i)).

Post-tax returns: Inflation and taxes eat into returns on investments. So, it becomes important to factor in both to avoid hiccups in achieving your goal later. Not all investments are taxed in a similar fashion. Find out how a particular investment is taxed and then apply this formula:

Post tax returns = Interest rate-(Interest rate*tax rate)

Assuming a bank FD offers an interest of 6 per cent, for a person falling in the 30 per cent tax bracket, the after-tax returns will be:

= 6-(6*30/100) = 4.2 per cent

So, you may consider a 4.2 per cent return, and not 6 per cent, on your FDs and invest accordingly to reach the required amount.

Rule of 72: It helps you to find out the time your investments would take to double your money.

Time to double money= 72/interest on investment

For instance, a bank FD offering an interest rate of 5 per cent per annum, will take over 14 years to double your money. Similarly, Kisan Vikas Patra (KVP), a post office savings scheme, will take 10 years and four months to double your investment at the current interest rate of 6.9 per cent.

Tweak the formula, and you can find out the returns required to double your money in a specific period.

Compounded Annual Growth Rate (CAGR): This formula helps in comparing performances of two or more investments. You may compare the long-term performance of gold vs equity funds or Stock A vs Stock B vs Stock C using CAGR. It ignores the volatility and considers an investment’s beginning value, ending value and number of years.

CAGR=((FV/PV)^(1/n) )- 1

FV = Investment's ending/maturity value

PV = Investment's beginning/opening value

n = Duration in years

An investment of Rs 10,000 grows to Rs 50,000 in 10 years. It’s CAGR is calculated as ((50,000/10,000)^(1/10)) - 1

This comes to 17.4 per cent, indicating that the investment grew at a CAGR of 17.4 per cent over the period.

Human life value: This will help you calculate the approximate amount required to take care of financial responsibilities after your death. Here’s the formula:

Inflation adjusted living expenses and financial goals in your lifetime– (savings and existing insurance cover, if any)

You may use the FV calculator to find out the ‘inflation adjusted price of your goals’.

Calculating your goals is a continuous activity. In the case of a new life event such as marriage or birth of a child your goals are likely to change.

Once your planning process is over, don’t try to avoid filling your investment application form yourself. It will help you in organising your investments better.

Stay Neat

“In a hurry to invest, investors end up registering different email ids for different investments. We recommend investors use a single email ID for all their investments to keep a track and ensure they do not miss critical reminders such as the premium payment of a life insurance policy,” says Saurabh Mittal, Founder Partner of Mumbai-based wealth management firm Circle Wealth Advisors. Similarly, investors should register the same phone number for all financial products to avoid confusion and for easy access.

While most financial products, including mutual funds, post office small saving schemes and provident fund, do not need you to keep any paperwork, it is different in the case of a health insurance policy, which is renewed every year. Last year’s policy document might not be of use next year, but you should not discard them anyway.

In case you wish to port your policy to some other company, says Mittal, the new insurance company requires last three years’ policy documents. Failure to submit them might lead to rejection of request. The other way is to convert your paper insurance policies to e-insurance. An e-insurance is an online storage facility where you can view all your insurances — life, health and motor policies — on a single screen at any point in time.

Experts say one should maintain his/her investment records in paper or electronic format.

Also, you must regularly update your personal details such as bank account, email ID, and residential address with registrars so that it automatically reflects in your financial investments.

Keep A Close Watch

After a few years, investors tend to forget some investments or their purpose. “In the case of insurance especially, most people remember the premium payment. Suppose an accident insurance was bought a few years ago, for which a small premium is being paid, the chances of forgetting it after sometime is high,” says Mittal. Review your financial plans regularly to stay updated and relevant. “An annual review can be done as a ritual,” he adds.

Account statements, too, help in keeping track of your investments and returns effortlessly. Mutual funds, provident funds and insurance companies send statements either to the email address or through their apps. You don’t need to ask your advisor to send you an account statement. It takes hardly few seconds to put a request for an online statement. In case of mutual funds or insurance policies, you can also visit their respective websites or chat with WhatsApp Bots to get the account statement.

“You can go to CAMS or KARVY website and get a consolidated statement for your mutual funds. An investor can himself pull out a statement whenever he wants,” says Rushabh Desai, an AMFI-registered distributor. You can also register on the Mutual Fund Utility (MFU) app, which gives you the list of all your investments across fund houses.

Transferring Assets

“Someone’s sitting in the shade today because someone planted a tree a long time ago,” the quote by billionaire investor Warren Buffet summarises the importance of passing on wealth to your successors. It takes years to build assets, but failure to pass it on to your successors ends all the hard work. According to data by the Reserve Bank of India (RBI), over Rs 18,000 crore was lying unclaimed in banks as on March 2019. The Employees’ Provident Fund Organisation (EPFO) had around Rs 27,000 crore in unclaimed amount. According to September 2018 data, insurers held unclaimed money worth Rs 18,000 crore.

“Your grandparents did not invest and leave the money with an intention that it will remain unclaimed due to the cumbersome process of claiming that money after so many years,” says BDO India’s Malik. Investors need to be more vocal about their investments with their family members to preserve the money and transfer it to descendants safely. Joint holding and nomination ensure the money is not trapped.

Invest in joint names: Always try and invest in joint names. “There is no tax implication on the second holder in mutual funds,” says Mittal of Circle Wealth Advisors. “If the first account holder is not in a position to sign, may be he is in a foreign country or there is some medical mishap, the second holder can sign and do the transaction,” he adds. Even for your bank accounts, it would make sense to have a joint name. Here again, the second holder will not have any tax implication. But make sure there are separate accounts for husband and wife being primary holders. The joint holding is only for operational purposes.

Nominate: A nominee is not the legal heir, but will receive and hold the property of the deceased until he/she is legally bound to transfer or distribute it to the legal heirs of the deceased. “At least the money is not stuck,” says Malik of BDO India. Nomination is important in insurance, as the nominee has an absolute right over the money.

Create a Will: Will is a basic thing where you put things you have and lay down the way those things should be distributed after you. A Will should be a written document, duly signed. “A Will should be written in a clear manner. If there is any ambiguity, it is a defective Will,” says Malik.

He recommends customised ones. Do not go by online templates, says Malik. “Online templates are useful, but every family and person is different, it needs customisation. A technology A technology platform may not fully understand your needs or helpful as an advisor in framing your Will.” Nomination along with a Will is a solid way to transfer your assets in a desirable manner. Trusts can bring in greater focus on governance and asset protection,” he adds.

In the absence of a Will, the money will be distributed according to the laws of the religion. It is referred to as forced heirship. For instance, according to Hindu Law, if a Hindu male dies without a Will, his property is distributed equally among his children, spouse and mother, irrespective of what his equation is with them, or if he wants to provide more for one child. That cannot be done.

Give access: If your spouse or child has access to your email ID, password and mobile, they would be able to do most financial transactions.

The digitisation of the investment process and mobile-friendly technologies have made it much easier to invest, understand and take full control of them. Plan to transfer your investments to your successors. Tell them in advance so that your hard-earned money comes to the aid of your family members in trying times.


Published on: Jul 22, 2021, 12:14 PM IST
Posted by: Vivek Dubey, Jul 21, 2021, 10:14 PM IST