How to take that early retirement and achieve financial freedom?

How to take that early retirement and achieve financial freedom?

Gone are those days when people were retiring at the age of 60-65 after working for 40 years in the same company. Today we want to work on our own terms. We want to travel, explore, have our own business or not. Most of us are not looking for stability but for growth and excitement. This is considered as a lack of loyalty by a few of the baby boomers, but, we millennials believe in making the most of the opportunities and get maximum returns. We are looking for ways in which we can connect with various people, share our resources and become bigger - faster.

We are able to achieve all of this as we are able to gain from the changes in the business environment, fair trade, and opportunities through social media. Exchange of ideas and opportunities are just a message away. We don’t even have to type long emails explaining what we do, just a tweet will do it for us.

Hence, most of us don’t want to be a part of a boring monotonous 9 to 5 job but explore more options and work on them. In spite of all of this, we too desire to have financial stability and freedom financially to be able to get what we want to do.

Through this article and working, you will find a path for retirement:

The total amount you need to retire/financially free
Monthly investments that you will have to make to achieve the retirement amount.
Investment options are available to achieve the same.

Regular goal based investing gives you the choice to do what you want to do with life, rather than continue to do what you should do.

How to compute the amount you need for retiring at an age of your choice?

We have attached an excel in this article with the pre-set formula which will help you to compute the amount of your choice. Please note the following points before going ahead:

Be able to compute your amount, you will have to edit the columns, which are highlighted in ‘blue’.
The explanation to each number is written in wealth cafe notes
There could be some specific requirements which are peculiar to you, you can email us about the same
this table is a general example of computing your way to financial freedom.

Before doing that, we have described the working of the table to help you understand this better.

Table 1 – How much would you need to spend after you retire based on your expenses today.

Table 2 – What is the total corpus (amount) you need to retire.

Table 3 – How much you should start saving today in order to achieve your amount in Table 2.

Ways to Invest to achieve your retirement corpus.

The monthly contribution amount that you have computed from table 3 can be invested in the following ways.

Employee Provident Fund/ Public Provident Fund – Monthly contributions to EPF from your salary (where you are employed), and PPF (where you are not employed) should be made for your early retirement goal. EPF/PPF are long term debt investments which give a tax-free; risk-free return of 12% on average after considering the tax benefit. These investments are made to the government of India and are considered as one of the best debt products. All these factors give makes them a good and safe option for retirement investing.
Equity Mutual Funds – Equity Mutual funds are HR-HR (High Risk – High Return) rated financial products. The only way to beat the high risk associated with these investments is to stay invested for a long period of time (i.e. above 10 years). Given that retirement is a long term goal (20 years and above), equity investments is a good option with good returns. Where you are investing in equity – which is an HR - HR product, it is important to know that there is a risk which can be triggered when you reach closer to your retirement. To manage this risk, it is important that you should transfer funds from your equity investments to safer debt investment options, a few years before you reach your goal.

For example: when you are 4 years away from your retirement, there is a possibility of a change in the market and hence, you must transfer your funds from the equity funds to debt funds. This will avoid any major last minute changes in your retirement fund. It is important to take some expert advice at that point to know how much, when and where you should transfer your funds at that time.

Investing to be financially free is the most important personal goal and only discipline and regular investing will help you achieve the same.

You must review your investments, requirements and the entire working in the excel sheet at least annually so that if there are any changes in your investments

Wealth Café advice – Primarily, you should keep your contribution towards EPF and PPF for your retirement as they are tax-free, risk-free. They are designed to be a retirement investment and hence, are tax-free and have a long term lock-in period. When these contributions are not enough, then you can look at equity mutual fund as an option for your retirement.

Investments - 04/26/2019

Income Tax Slab Rate & Deductions - FY 2017-18 (AY 2018-19)

What is Income Tax Slab?

Income tax is that percentage of income paid to the government by the taxpayers for the betterment of the public at large. This income is categorized into different groups on the basis of the amount of income. Each such group is known as a Tax Slab. Tax is charged at different rates on the range of income falling under different income tax slabs.
The Income Tax Act 1961 is the law that governs the provisions for our income tax in India.
The income tax slab rates are usually revised every year during the budget. Various deductions are allowed to a taxpayer under Section 80C, Section 80D, etc.

Income Tax Slab Rate Post Budget 2017

The tax is calculated according to the income tax slabs announced by the government every year in the Budget. The finance minister has announced the changes in the tax slab structure in union budget for 2017.
Following are the income tax slab rates and deductions in India for different categories of tax payers:

Income Tax Slab Rate For Men below 60 Years of Age

Income Tax Slab	Income Tax Rate	Education Cess	Secondary and Higher Education Cess
Income upto Rs. 2,50,000	Nil	Nil	Nil
Income between Rs. 2,50,001 - Rs. 500,000	5% of Income exceeding Rs. 2,50,000	2% of income tax	1% of income tax
Income between Rs. 500,001 - Rs. 10,00,000	20% of Income exceeding Rs. 5,00,000	2% of income tax	1% of income tax
Income above Rs. 10,00,000	30% of Income exceeding Rs. 10,00,000	2% of income tax	1% of income tax

Income Tax Slab Rate For Women below 60 Years of Age

Income Tax Slab	Income Tax Rate	Education Cess	Secondary and Higher Education Cess
Income upto Rs. 2,50,000	Nil	Nil	Nil
Income between Rs. 2,50,001 - Rs. 500,000	5% of Income exceeding Rs. 2,50,000	2% of income tax	1% of income tax
Income between Rs. 500,001 - Rs. 10,00,000	20% of Income exceeding Rs. 5,00,000	2% of income tax	1% of income tax
Income above Rs. 10,00,000	30% of Income exceeding Rs. 10,00,000	2% of income tax	1% of income tax

Income Tax Slab Rate For Senior Citizens (Age 60 years or more but less than 80 years)

Income Tax Slab	Income Tax Rate	Education Cess	Secondary and Higher Education Cess
Income upto Rs. 3,00,000	Nil	Nil	Nil
Income between Rs. 3,00,001 - Rs. 500,000	5% of Income exceeding Rs. 2,50,000	2% of income tax	1% of income tax
Income between Rs. 500,001 - Rs. 10,00,000	20% of Income exceeding Rs. 5,00,000	2% of income tax	1% of income tax
Income above Rs. 10,00,000	30% of Income exceeding Rs. 10,00,000	2% of income tax	1% of income tax

Income Tax Slab Rate For Senior Citizens (Age 80 years or more)

Income Tax Slab	Income Tax Rate	Education Cess	Secondary and Higher Education Cess
Income upto Rs. 5,00,000	Nil	Nil	Nil
Income between Rs. 500,001 - Rs. 10,00,000	20% of Income exceeding Rs. 5,00,000	2% of income tax	1% of income tax
Income above Rs. 10,00,000	30% of Income exceeding Rs. 10,00,000	2% of income tax	1% of income tax

Income Tax Slab Rate Hindu Undivided Families (HUF)

Income Tax Slab	Income Tax Slab Rate
Up to Rs.2,50,000	Nil
Rs.2,50,000 to Rs.5,00,000	10% Income exceeding Rs. 2,50,000
Rs.5,00,000 to Rs.10,00,000	20% Income exceeding Rs. 5,00,000
Over Rs.10,00,000	30% Income exceeding Rs. 10,00,000

Income Tax Slab Rate Legal Entities Registered as Associations of Persons

Income Tax Slab	Income Tax Slab Rate
Up to Rs.2,50,000	Nil
Rs.2,50,000 to Rs.5,00,000	10% Income exceeding Rs. 2,50,000
Rs.5,00,000 to Rs.10,00,000	20% Income exceeding Rs. 5,00,000
Over Rs.10,00,000	30% Income exceeding Rs. 10,00,000

Income Tax Slab Rate Legal Entities Registered as Bodies of Individuals

Income Tax Slab	Income Tax Slab Rate
Up to Rs.2,50,000	Nil
Rs.2,50,000 to Rs.5,00,000	10% Income exceeding Rs. 2,50,000
Rs.5,00,000 to Rs.10,00,000	20% Income exceeding Rs. 5,00,000
Over Rs.10,00,000	30% Income exceeding Rs. 10,00,000

Partnership Firms:

Partnership Firms and LLPs (Limited Liability Partnerships) are to be taxed at the rate of 30%

Local Authorities:

Local Authorities are to be taxed at the rate of 30%.

Domestic Companies:

Domestic Companies are to be taxed at the rate of 30%

Income Tax Slab RateCo-operative Societies

Income Tax Slab	Income Tax Slab Rate
Up to Rs.10,000	10% Income
Rs.10,000 to Rs 20,000	20% Income exceeding Rs. 10,000
Over Rs. 20,000	30% Income exceeding Rs. 20,000

Also,

Surcharge:

2% of the income tax amount (If income is greater than Rs.1,00,00,000/-)
5% of the income tax amount. Subject to marginal relief (If income is greater than Rs.10,00,00,000/-)

Education Cess: 2% extra (charged on the amount of income tax + surcharge being paid)

Secondary and Higher Education Cess: 1% extra (charged on the amount of income tax + surcharge being paid)

Comparison Of Income Tax Slabs For FY 2017-18 and FY 2016-17

Income Tax Slab	Income Tax For FY 2017-18	Income Tax For FY 2016-17
Income upto Rs. 2,50,000	Nil	Nil
Income between Rs. 2,50,001 - Rs. 500,000	5% of Income exceeding Rs. 2,50,000	10% of Income exceeding Rs. 2,50,000
Income between Rs. 500,001 - Rs. 10,00,000	20% of Income exceeding Rs. 5,00,000	20% of Income exceeding Rs. 5,00,000
Income above Rs. 10,00,000	30% of Income exceeding Rs. 10,00,000	30% of Income exceeding Rs. 10,00,000

Disclaimer: – The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Income Tax / Insurance / Investments / Uncategorized - 03/05/2019

Income Tax Rate FY 2016 - 17 (AY 2017-18)

What is Income Tax Slab?

The Income Tax Act 1961 is the law that governs the provisions for our income tax.

The income tax rates are usually revised every year during the budget. Various deductions that are allowed to a taxpayer under Section 80C, Section 80D etc.

Income Tax Slab Rate

Following are the income tax slab rates and deductions for different categories of tax payers:

For Individuals Below 60 Years Of Age

Income Level	Tax Rate
Rs. 2,50,000	Nil
Rs. 2,50,001 - Rs. 500,000	10%
Rs. 500,001 - Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

For Senior Citizens (Age 60 years or more but less than 80 years)

Income Level	Tax Rate
Upto Rs. 3,00,000	Nil
Rs. 3,00,001 - Rs. 500,000	10%
Rs. 500,001 - Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

For Senior Citizens (Age 80 years or more)

Income Level	Tax Rate
Upto Rs. 5,00,000	Nil
Rs. 500,001 - Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

Surcharge @ 15% of tax will be payable by individuals having total income exceeding Rs. 100,00,000.

Income Tax Deductions and Exemptions

Income Tax Section	Gross Annual Salary	How Much Tax Can You Save?	HDFC Standard Life Plans
Sec. 80C	Across all income slabs	Upto Rs. 46,350/-saved on investment of Rs. 1,50,000/-	All our Life Insurance Plans Buy Life Insurance and Save Tax
Sec. 80CCC	Across all income slabs	Upto Rs.30,900/-saved on Investment of Rs.1,50,000/-	All our Pension Plans Buy Pension Plans and Save Tax
Sec. 80 D*	Across all income slabs	Upto Rs. 10,815/-saved on investment of Rs.35,000/- (Inclusive of Rs. 20,000/- towards health insurance of parents who are senior citizens)	All our Health Insurance Plans All the health insurance riders available with our Conventional Plans Buy Health Insurance and Save Tax
Total Savings Possible **	Rs. 57,165/- Rs. 46,350/- under Sec. 80C and Sec. 80CCC and Rs. 10,815/- under Sec. 80D Above figures calculated for an individual with gross annual income exceeding Rs. 10,00,000/-
Sec. 10 (10)D	Under Sec. 10(10D), the benefits received by you are completely tax-free, subject to conditions specified therein

Income Tax / Insurance / Investments / Making Money / Uncategorized - 03/05/2019

Sukanya Samriddhi Scheme - points to note

Sukanya Samridhi scheme was launched in January 2015 to encourage savings for a girl child’s education. Till November 2017 more than 1.26 crore accounts have been opened across the country in the name of the girl child, securing an amount of Rs 19,183 crore.

Here are things to know about Sukanya Samriddhi account:

1) Under the new rules, known as Sukanya Samriddhi Account (Amendment) Rules, 2018, the minimum amount required for opening a Sukanya Samriddhi account has been brought down to Rs 250, from Rs 1,000 earlier.

2) The minimum annual deposit requirement, or the minimum amount required to be deposited in Sukanya Samriddhi account every year, has also been lowered to Rs 250, from Rs 1,000 earlier. These new rules came into effect from July 6, 2018.

3) The interest rate on Sukanya Samriddhi account is revised every quarter, like other small savings instrument such as public provident fund (PPF), and Senior Citizen Savings Scheme (SCSS). Currently, Sukanya Samriddhi account fetches an interest of 8.1% per annum, compounded yearly.

4) Tax exemption is also one of the greatest advantages of the Sukanya Samriddhi account.

5) Deposits in a Sukanya Samriddhi account may be made until the completion of 15 years, from the date of opening of the account. For example, if an account was opened on 10 April 2016, deposits can be made up to 9 April 2031. After this period the account will only earn interest as per applicable rates.

6) Contribution in to Sukanya Samriddhi account up to Rs. 1.50 lakh in a financial year qualifies for income tax deduction under Section 80C of Income Tax Act. The entire interest earned and maturity amount is also non-taxable. The maximum amount that can be deposited in a Sukanya Samriddhi account is Rs 1.5 lakh in a financial year.

7) Sukanya Samriddhi account will mature on completion of 21 years from the date of opening of the account.

8) A Sukanya Samriddhi account can be opened up to age of 10 years only from the date of birth of the girl child. A guardian can open only one Sukanya Samriddhi account in the name of one girl child and maximum of two accounts in the name of two different girl children in post offices and designated banks.

9) Partial withdrawal will be allowed on the account holder attaining the age of 18 to meet educational or marriage expenses. Withdrawal will be limited to 50% of the balance standing at the end of the preceding financial year.

10) Normal premature closure will be allowed for the purpose of the account holder’s marriage if she has attained the age of 18.

You can also check for other benefits provided by the government:

Investments - 03/03/2019

Impact of Compounding - Why should you start your SIP now.

Compounding is also one of the reasons why you must invest as early in your life as possible, even if the amount that you are planning to invest is small.

SIP (Systematic Investment Plan) is the best way to achieve the same too.

Many people keep waiting to have enough before they could start investing. In fact, the key to wealth creation lies in starting to invest immediately and staying at it for a long period of time. Let's understand this with the help of this example.

Bunny - A planned guy, started investing at the age of 25

Avi - A bit laid back, started to invest only at the age of 35.

Bunny Invested 10,000 per month for 30 years, investing a total of 36 lakhs, whereas Avi started late so he invested 15,000 per month for 20 years, totalling his investment of 36 lakhs and matching Bunny's Investment.

At the age of retirement at 55, Bunny makes 6.92 crores, 3 times more than Avi, who makes only 2.24 crores.

Bunny has the edge over Avi for starting 10 years early and continuously investing even if it is with smaller amounts.

Now what if Avi wants to achieve the corpus of 6.92 crores that Bunny did. How much will Avi have to invest to achieve that?

Well given that Bunny is making 3.5 times more than Avi at the age of 55, Avi will have to invest 3.5 times more than what she was investing originally. Avi will have to put aside INR 46, 240 per month from the age of 35 to 55 i.e. a total investment of 1.1 crores. Versus Priya invests only 36 lakhs to achieve the corpus of 6.92 crores.

Now one thing that is very clearly evident from the case is that the investing style is the difference in their portfolio and how Starting early can make all the difference in your returns. Bunny started 10 years earlier than Avi in his 20’s and he achieved a higher corpus by over 4.5 crores. Another best thing done by Bunny is he stayed invested for a long period of time. i.e. 30 years.

Tabular representation

Particulars	Bunny	Avi
SIP amount	10,000	15,000
Start Age	25	35
Invested Till	55	55
Maturity Date	At age 65	At age 65

Maturity Amount	6.92 crores	2.24 crores

Total Amount Invested	36,00,000	1.1 crores

So the 2 things that create magic for your investments are

1.Starting early

2. Investing for long……….. Long term.

When it comes to investing, the earlier you start the better, the compounding effect grows your money exponentially.

These can give you astonishing results, so what are you waiting for! Start today.

That is the power of compounding taking effect for the investor who started early.

Equity / Investments - 03/02/2019

Annualised Return and CAGR

Annualized return and CAGR are not technically the same thing. They refer to the returns on various investment options computed on per annum basis. All long term investments multiply by your wealth by compounding.

Where investment has grown at different rates over a few years, CAGR is the formula used to define the number at which the investment has grown year on year.

Compounded Annual Growth Rate (CAGR) shows how much a person’s investment grew in one year. In other words, it is the average returns an investor earns on his investments after one year. The bank or the financial institution calculates this rate in terms of annual percentage.

How to calculate CAGR?

To calculate CAGR, you must know the following:

The investment made in the initial year (the year of investment)
Amount invested in the current year and
Tenure of investments

CAGR = [(End value/beginning value)^(1/year)] – 1

Example:

For example, you bought a stock for ₹100 in 2015. It appreciated by 25% to ₹125 in the year 2016 and further appreciated to ₹150 in the year 2017. Therefore, the appreciation in the rate from 2015 to 2017 was 20%.

If you want to know the growth rate of your investments for the complete period of time, use CAGR. If we put the above values in the formula, Compound Annual Growth Rate for your investment between 2015 and 2017 will be 14.47%.

Mutual Funds/Equity and CAGR

Return on any investment is discussed in terms of CAGR. Especially, in case of equity and mutual fund investments. When you invest in mutual funds, the return that is shown in CAS statements and your Dmat statements are in CAGR.

This is because the actual return % on mutual funds is dependent on the movement in the stock market which keeps changing. It never grows or falls at a fixed rate.

Hence, it could be possible that an investment in mutual fund grew at the rate of 20% in year 1, 30% in year 2, 10% in year 3. In such a case, it becomes very difficult to discuss the actual gains. This is when and why CAGR is used in market-related variable returns investments.

In our Article, how to set goals, we have discussed the expected returns on various asset classes, we are always talking about CAGR.

Wealth Cafe Note:

CAGR is an average rate. Hence, if a CAGR is of 15% of an investment made for 4 years. It could be possible that the first 3 years have 30% gains and the next 2 years lower gains.
The gains are not distributed evenly over the period of investments. One must stay invested for the right time based on the asset class to benefit the most.
CAGR is different from absolute returns and year-on-year gains.
There is a chance that two investments may reflect the same CAGR, with one being more lucrative than the other. This could be because the growth was faster in the initial year for one, while the growth happened in the last year for the other.

Investments / Money tips - 03/01/2019

What is Absolute Returns ?

If you are making direct investments in various mutual funds or making the same through any portal/website. You could see in the mutual fund statements that a column states absolute return and a % is mentioned next to it.http://www.wealthcafe.in/understanding-a-mutual-fund/

Absolute return is the simplest return metric that is used to quantify how much gain or loss you have made from an investment. It simply tells you how much money you have made or lost as a percentage of the money you invested over a given period of time.

For example – you invested Rs. 100 in 2010 and it became 130 in 2012, your absolute return is 30% for 2 years. It is not a per annum return.

Absolute return is the actual return that you receive for the specific period i.e. from the start to the end.

If you invested INR 10,000 in October 2018 and currently, in Feb 2019, its value is 10,600. The absolute return is 6% on this investment.

Absolute Return = Current Saleable Value - Purchase Value / Purchase Value * 100

Absolute Returns are not used for mutual fund calculations until the investment period is less than one year. The returns can be very misleading. It is mostly used for real estate investments. You must have heard people say that they bought a house in 2000 for 30 lakhs and today in 2019 the value of that house is 1 crore. This is absolute returns of 235%

Why Absolute Returns are not favorable?

It is hard to compare 2 different investments return where the time periods vary: The scope of using absolute return metric to evaluate performance is limited as it does not take into account the time period of investment and its compounding effect. For example, if Fund A gave you 25% return over 2 years and Fund B gave you 25% returns over 1 year, both of them would rank the same if you take the absolute return metric when clearly, one fund has taken longer to deliver the same returns.

It does not allow comparison against various asset classes: Different asset classes returns are generally referred to differently. Real Estate and gold are generally discussed in absolute terms whereas fixed deposits and mutual funds are discussed in annualized returns.

Absolute Return gives a false impression of high worth: Further, because absolute figures are usually high, it gives a false impression of the worth of that investment compared to others. Take the real estate example. The investment in Bombay house which fetched a gain of Rs.70 lakhs does sound grand, and an absolute return of 235% sounds even better. But when we look at the same gains in CAGR terms, it works out to be a modest 6.54%.

Tip – Absolute returns are feel-good returns but they do not give the real gain scenario. In our view, you should always compute the annualized return or CAGR. Refer our Article on the same.

Investments / Money tips - 02/14/2019

What is XIRR in Mutual Funds and How to compute the same?

What is XIRR? How to compute the same?

Cash inflows and outflows may not always be evenly matched and instead, these could be at irregular intervals.

Specially, in a mutual fund SIP. In the case of SIP, there are investments made at regular intervals, some withdrawals, then investments and so on. There is no fixed pattern of such investments and it makes calculating the exact return on these investments a bit difficult.

XIRR or extended rate of return is a measure of return when multiple investments at different points of time are made in a financial instrument.

SIP Investments Method

In a SIP, you keep investing regularly over a long period and get back the maturity amount upon exit. SIP investments happen on a pre-decided date and even the amount is fixed and depending on the NAV of the scheme on that day, you get a certain number of units. You can read more about SIP in our Article http://www.wealthcafe.in/why-should-you-do-a-sip/

Hence, you keep accumulating units from the day your SIP starts. On the day you exit the scheme, i.e., redeem your total units, you get the maturity amount, which is NAV (of redemption day) multiplied by total units (on redemption day). You may also choose to redeem a part of your investments as and when you need them.

XIRR is used to calculate the return in the case above where various investments are made on different dates and the simple return formula is not applicable.

XIRR can be computed using an excel as excel has an inbuilt XIRR formula. To compute XIRR, we do not need the NAV amount or number of units.

The details required :

SIP Amount
SIP dates
Any lumpsum Investments
Date of such investments
Redemption Amounts
Date of Redemptions

Steps to Compute XIRR. (The steps are explained with reference to the image below)

Step 1 – Enter all the transactions in column B

Step 2 – In the next column (Column C), enter all the amounts of SIP and the lump sum investments. All the investments amount should be in negative. Also, any lump sum amount should be added to this column and the same should also be in negative.

Step 3 – In the case of redemption, add that amount in Column C in positive.

Step 4- In the next box, enter the XIRR formula which is = XIRR (select all dates, select all values)*100. This shall give you the XIRR amount.

You can see the extract of the excel in the photo below.

Investments / Money tips - 02/08/2019

How to do goal based investing

Setting up a goal is something that no one does these days. I am asking you all to set a financial goal.

Every time I ask someone – Why are you investing? What is the purpose of your investment? 90% people will answer to grow my surplus money.

I have money lying in my bank account. I am just spending too much. I thought it was time to start investing.

My next question is ‘for what do you want to grow your money?’ Their answer is to become rich or help in a financial need or to travel. Travel is a more focused goal but becoming rich? Isn’t everyone working to become richer than what they are today?

In cases, where your goal is more focused and clear, you will be in a better position to achieve it than your investments where it is not.

When you know where you are going, you are halfway there.

I know it is extremely difficult to sit with a pen and paper and jot down your financial goals. However, the difficulty of the process does not reduce the importance of the same.

I have listed below a step by step process of identifying your goals, requirements, money that you need and the products into which you must invest to achieve your goals.

What do you want to achieve in life?

I am sure you have been asked this question by various people ‘What do you want to be when you grow up? Where do you see yourself in 5 years? What do you want to do in life?’ These are all your various goals that people want to know.

What are the things that require money to be achieved – i.e. financial goals?

Yes. All goals need money but all goals are not financial goals. Wanting a promotion at work, Best in your field, learn a new hobby or activity are all personal and professional goals which does not require too much investment or any investment of money from your end.

Owning a house, traveling to Europe, buying that car, your child’s post-graduation are some examples of goals which require a huge investment of money from your end and are called financial goals.

Hence, make a list of all your goals and from that highlight your financial goals.

Prioritise your goals - difference between Need and Wants?

It is very important to prioritise your goals based on its importance and requirement.

Needs are such things that you cannot do without and cannot be canceled, such as your child’s education or your first house.

Wants are things which you desire but can do without them such as a vacation, your second home etc.

Segregating your goals into needs and wants will help you prioritise them better. All the needs can them be numbered based on their importance followed by your wants.

How much money do I need today to achieve these goals?

Once you have made an entire list of your goals and sequenced them, you must identify what is the cost of achieving those goals. For example, if your goal is to buy a car, you must identify which car you want and how much would it cost. 'I want to buy a car like I20 and it would cost me 7 lakhs INR today' - this a well-defined financial goal.

Where you are estimating the cost of goal because you do not have an exact basis to calculate it, always consider the amount on the higher side.

By when should I achieve these goals?

The fact that it is a goal, it means it is futuristic and you do not have sufficient means to achieve it today. Hence, you must identify and apportion a realistic timeline towards your goal.

For example, I want to buy a car in next 2 years.

Goals less than 5 years: Short-term goals
Goals between 5 years to 10 years: medium-term goals
Goals more than 10 years: long-term goals

Adjust the Inflation

Given that goals are a futuristic, the current cost that we have associated to our goals will obviously increase in the future because of inflation. Identify the inflation rate towards your goal. The inflation rate is not the same for all types of goals; it varies depending upon the market conditions and the goal.

After knowing the inflation rate and the current cost, you will be able to compute the future value of your goal.

It is very important to identify the correct inflation rate. If you take a lower inflation rate your goal will cost you more than what you estimate and if you take a higher inflation rate, the future cost may scare or reduce your confidence to be able to achieve the goal.

Asset allocation based on the goal, cost, and tenure

Once you know your goal and its value, it is time to identify the investment products.

The tenure of your goals will help you to identify what asset class you must invest in and in what ratio.

The term is less than 5 years – 100% Debt
The term is 5 years to 10 years – 40% Debt 60% Equity
The term is more than 10 years – 30% Debt 70% Equity

This is a very general method of asset allocation. It may vary depending on your risk taking capacity and ability. Hence, it is important to analyze the same for oneself.

Portfolio Return Expectations

Return expectation from each class of the asset is as follows:

Equity: 12%
Debt: 8%

You will have to invest money in your goals based on the tenure and asset allocation. Each goal will not have one investment but may consist of many investments some in equity and others in debt. Hence, it is important to compute the return expectations for the entire portfolio, to be able to compute the exact amount you must invest to achieve your goals.

For example, my goal of buying a car is a mid-term goal, my asset allocation will be 40:60.

My portfolio return will be (40% * 8%) + (60% *12%) = 11.2%

How much money to invest?

This is the most crucial part, the entire computation of the above working will lead to identifying how much money you need to invest to achieve your goals.

There are various ways of investing but it is better to do it in a systematic manner. You can invest as a monthly fixed investment amount or invest annually with a fixed percentage of investment increasing per annum.

SIP - 7900 per month invested for 7 years will give you a return of 10,14,000 @11.2 %.

Lumpsum-

This method can be a bit complicated when followed step by step especially the last step of computing the actual amount that one needs to invest to achieve their respective goals. However, it is the most defined way of achieving your goals. There are many software used by us - financial advisors where the software does the same calculation for us. When you will sit with an honest financial advisor, the first thing that they will ask you is to define the goal. There is no plan without a goal and hence, such a working is extremely important for your financial planning.

Investments / Money tips - 11/15/2018

Consolidation of MF folios

When my cousin, Rahul started investing around 5 years ago, he heard of mutual fund (MF) folio for the first time. The MF folio number is the unique code allocated for investments in MF which can be used as a reference for future investments too. However, he did not pay much attention to this and over the past 5 years, he now has investments in around 5 funds with 17 different folio numbers. This was because, in the case of same AMC, he had a debt fund under one folio, SIP in second, equity in third, fourth from one bank account then another from another. This led to huge mess in his holdings and its management. To avoid this mess, I advised him to consolidate his MF Folio. What is consolidation of MF folio numbers? While making investments in Mutual Funds, one may find that one has numerous folio numbers across Funds. At times investors forget what they hold and face difficulties when changes have to be made in folios or at the year-end while filing returns. It would be worthwhile for investors to take stock of their holdings, check if there are numerous folios in the same fund and get the same consolidated into one single folio number for the Fund. Mutual Funds and Registrars have given investors the option to consolidate all their folios in the same Mutual Fund into one single folio. Consolidation is the merger of two or more folios into one single folio. Requirements for consolidation of MF folios Basically the below details should be uniform in all the folios:

All Holders' names - should be in the same order in all folios
Address
Bank Details
Tax Status of the Investor
Holding nature - Joint or either or survivor
Nominee registered in the folios
Dividend option of the same scheme should be same i.e. either Re-invest or Payout

If the above details are the same in your folios, the same can be consolidated into one single folio called the 'Target folio'. Some Mutual Funds may have other guidelines and investors may contact the Mutual Fund or Registrar to get more information on these details. How is the consolidation confirmed to you? A Statement of Account of the consolidated (target) folio will be sent to investors along with covering letter confirming the processing of the request. If the folios are consolidated into one, will a statement reflect all transactions for all schemes of the folios? Yes! The statement of the 'Target' folio will contain all the details of all the transactions of schemes in all your previous folios. If you wish to make a transaction in the same Mutual Fund in future, please mention the folio number in future transaction slips and any new investment will be created in the same folio. How to consolidate MF Folios? The Process There is no standard format of consolidation of MF folios. You can use the facility available on the CAMs website for consolidation of 2 MF. Point to note: The name appears exactly the same in all folios The Target folio’s PAN, bank details and addresses will be considered If you want to update the same- give an application along with consolidation itself.

The form for consolidation of Mutual Fund Folio

Investments - 11/08/2018

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