Financial Definitions, Concepts and Description of Various Investment Plans

 1.   Financial Planning:

Personal finance, as a term, covers the concepts of managing your money, saving, and investing. Identifying suitable asset classes for investment, and estimating individual’s financial road map based on current income & expenditure, and future goals is called Financial Planning.

When there is no clarity or we are not sure or we do not understand what to do, we leave it and take no action. Same thing happens with Financial Planning. Many are not aware what it is and why it is required, and how to commit on long term basis.

Ariely said: When it comes to physical world, we understand our limitations and build around them. We use steps, ramps and elevators and many other things that we create when we find a need in our day-to-day life. But for some reason when we design things like health care, retirement and stock markets, we somehow forget the idea that we are limited. Such things are not visible in your daily life, so you don’t address it immediately. If these things pose difficulties in your day-to-day life, you will certainly take an action and resolve it.

Ray Dalio said: If you know your limitations, you can adopt and succeed. If you don’t know, you are going to get hurt. Same way in real life, if you know what the things that you have to face are, you make a clear plan of action and follow it. They will not worry you and you will be at peace. If you know the things/challenges and not prepared for or not having any plan, they will always make you worried and you will not have peaceful living. They will always be working in the back of your mind as how and what to do.

When you take charge of your finances, it empowers you and excites you to take on other challenges. Success leaves clue. People who succeeded at the highest level are not lucky, they are doing something differently than everyone else does.

 

2.   Financial literacy:

It refers to the ability to understand and apply different financial skills effectively, including personal financial management, budgeting, Insurance, real estate, retirement, tax planning and saving. Financial literacy makes individuals become self-sufficient, so that financial stability can be accomplished.

It is a very important subject, which is not taught in the schools and colleges. It is the duty of the parents to create financial awareness among children like saving from early age, value for money, frugality, financial planning etc. Children should start saving and investing from early age, Warren Buffet started investing at the age of 11 years. At least, one should start investing from their first salary once they start earning.

Rat-Race: In the initial stage you should have frugal living – living below your means, to have higher savings rate, and later go for luxuries, once your Investments start generating additional cash flow. If you do not do this you, will be always chasing the money, what is called “Rate-Race”. The objective should be to achieve Financial Freedom as early as possible, so that you have control of your time and you can do whatever you like peacefully without worrying about finance. Also, you will be more productive and innovative.

Due to high pressure work life and lack of time, you don’t even think about your personal investments. Working for money to pay bills, taxes, mortgage, children education, lifestyle, then bigger house, increased expenses (inflation), further work hard and more to meet increased expenses, pay more taxes, more liabilities, no asset creation, financial struggle and life goes on.

 

3.   Build Your Savings:

You don’t need a specific reason to save. Goal based saving is fine, but saving for things that are impossible to predict or define is one of the best reason to save. Everyone’s life is a continuous chain of surprises. Savings that aren’t earmarked for anything in particular is a hedge against life’s inevitable ability to surprise you at the worst possible moment. It you can do this, it is having a peace of mind, like your future is pre-paid.

Rely more on a high savings rate, patience, and optimism that global economy will create value over the next several decades as has been done in the past. The first two are in your control. Always save more, minimum 25% of your income, and if husband and wife both are earning, save still more (may be wife’s full salary).

Emergency Fund: Life is unpredictable, and it’s important to be prepared. Saving for emergencies is one of the only goals that is a necessity. It should be the first one you should set, regardless of your situation. There are a lot of different situations that can fall into this category, including job loss, medical/accident expenses if not adequately insured. Statistically, it takes 9 months on an average to find a new job after a layoff. With this in mind, it is in your best interest to save roughly 9 months’ worth of income for emergencies.

 

4.   Life insurance:

In the long term, a good life insurance policy can provide your family with financial security if you’re no longer able to take care of them. As the name suggests, life insurance is insurance on your life. You buy life insurance to make sure your dependents are financially secured in the event of your untimely demise. Life insurance is particularly important if you are the sole breadwinner for your family or if your family is heavily reliant on your income. Under life insurance, the policyholder’s family is financially compensated in case the policyholder expires during the term of the policy. Apart from the safety and security benefits of buying insurance, there is also the income tax benefit that you can avail. Life insurance premium of up to ₹1.5 lakh can be claimed as a tax-saving deduction under Section 80C.

Pure Term Plans offer a lump sum (sum assured) to your nominee in case of your demise during the policy term. However, if you survive the policy term, there are no benefits. On the other hand, endowment plans have life insurance and savings weaved into a single product. It is always better to go for pure term plan. The cost of a term policy increases with age.

 

5.   Health Insurance:

Earning money doesn’t serve any purpose if you don’t have a life. Think about yourself and your family and the importance of life. Buying a health insurance policy for yourself and your family is important because medical care is expensive, especially in the private sector. Hospitalisation can burn a hole in your pocket and derail your finances. All this can be avoided by just paying a small annual premium which would lessen your stress in case of medical emergencies. A good health insurance policy would usually cover expenses made towards doctor consultation fees, costs towards medical tests, ambulance charges, hospitalization costs and even post-hospitalization recovery costs to a certain extent. It also supports cash less treatment in most of the hospitals.

The amount you pay towards health insurance premium is exempted from income tax under section 80D. You can claim ₹25,000 annually for a health insurance policy for yourself, and ₹30,000 if parents are also included.

How to Select the Right Insurance Policy: 

Some of the important points that any Person should look before purchasing any plans are:

• Sum Assured
• Minimum Entry Age and renewability clause
• Room Rent Capping
• Inclusion and Exclusion
• No Claim Bonus
• Other Benefits 

6.   Avoid Buying Liabilities:

The average middle class people work for the money. The rich have money work for them. The rich people acquire assets. The middle class people acquire liabilities, they think these are assets. An asset is something that puts money in your pocket. A liability is something that takes money out of your pocket. The rich are financially literate having full understanding of how to manage their money well and avoid financial instability.

Most people count their house, savings and retirement plan all under asset column, and not able to invest to create assets to meet increasing expenses, as the large sum is already spent in buying house and paying mortgage, and left with no extra cash. Over spending/buying liabilities like house – no extra cash – no investment – no asset creation – called Financial Illiteracy

A House: In the beginning of your career, it is not a good idea to buy a house. It is a big burden on you to pay a large portion of your saving as EMI, instead the money should be invested wisely to build income generating assets – a strong Portfolio. As you grow in age you have more and more responsibilities, bringing up children, their education etc., which cannot be compromised due to lack of money or any other constraint. Once the children grow up and your investment starts giving you good returns, you can think of buying a house if you feel it is necessary.

Even though there are tax benefits, still you pay property tax, insurance, maintenance etc. Houses do not always appreciate in value. However, based on the development of the area over a period of time, the land value may appreciate.

Even if the value of the house gets appreciated over a period of time due to increase in land value, it doesn’t help to add into your assets. You need a house to live, and cannot sell it. This appreciation is misunderstood by most of the people to consider it as an asset. This can be true for 2nd house, which could be sold if it got appreciated for generating cash flow.

As per experts, investing in real estate is no more profitable compared to investment in stock market and good quality mutual funds for the same time horizon. Also, liquidity in real estate is not immediate as in case of stock market. It does not mean, don’t buy a house. Understand the difference between an asset and liability. First buy assets that will generate the cash flow to pay for the house.

7.   Financial Freedom / Independence in Life

In order to fulfil your dreams in life, you have to be first financially independent. You may be rich, but whether it contributes towards your financial freedom. This means that you are able to support the life style you desire without having to work. You derive enough passive residual income from your assets to meet all your expenses for the lifestyle you choose. It enables you to work on your own terms if you want, to help others, your children, grandchildren and give to the society and charity. Passive income is money gained from sources other than your own time, things like shares, dividends, interest, rentals and capital gains. You don’t need to trade your time for money.

Achieving “Financial Independence” requires to keep your expectations limited in your initial days of wealth creation/accumulation phase, i.e. maintaining a lifestyle below your means. It is not required to show money power for your social status (keeping up with the Joneses), by having physical assets - big bungalow, fancy car, big celebrations etc. As a matter of fact, you command more respect and recognition by your kindness, humility loving attitude.

 

8.   Goal Setting:

The goal-setting process involves deciding what goals you intend to reach; estimating the amount of money needed and other resources required; and planning how long you expect to take to reach each of your goals.

When it comes to personal finance, everyone’s situation is unique. No one has the same bills, rent, debts, or lifestyle. When you’re ready to take control of your financial lifestyle, you need a plan that will answer your specific problems, not your neighbour’s.

A financial goal is a target to aim for when managing your money. It can involve saving, spending, earning or even investing. Creating a list of financial goals is vital to creating budget. When you have a clear picture of what you’re aiming for, working towards the target is easy. This means that your goals should be measurable, specific and time oriented.

Types of Financial Goals

There are several types of financial goals:

•  Short-term goals: These are smaller financial targets that can be reached within a year. This includes things like a new television, computer, or family vacation.

• Mid-term goals: Typically, midterm goals take about five years to achieve. A little more expensive than an everyday goal, they are still achievable with discipline and hard work. Paying off a credit card balance, a loan or saving for a down payment on a car are all mid-term goals.

• Long-term goals: This type of goal usually takes much more than 5 years to achieve. Some examples of long term goals are saving for a college education or a new home.

9.   Asset Allocation / Diversification/ Risk Tolerance:

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.

 

Risk tolerance is a measure of how much of a loss an investor is willing to endure within their portfolio. A person's age, investment goals, income, and comfort level all play into determining their risk tolerance. An aggressive investor, or someone with higher risk tolerance, is willing to risk more money for the possibility of better returns than a conservative investor, who has lower tolerance.

 

Asset allocation involves dividing an investment portfolio among different asset categories, such as three primary asset classes are fixed income, cash and its equivalents, and equities. The process of determining which mix of assets to hold in your portfolio is a very personal one. This is a process of balancing your portfolio against market fluctuations, interest rates etc.

 

By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can protect against significant losses. Historically, the returns of the three major asset categories have not moved up and down at the same time. Market conditions that cause one asset category to do well often cause another asset category to have average or poor returns. By investing in more than one asset category, you’ll reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride. If one asset category’s investment return falls, you’ll be in a position to counteract your losses in that asset category with better investment returns in another asset category.

 

The practice of spreading money among different investments to reduce risk is known as Diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain. Diversification is a strategy that can be neatly summed up as “don’t put all your eggs in one basket.” The strategy involves spreading your money among various investments. Diversification should be done at two levels: between asset categories and within asset categories.

 

In addition, asset allocation is important because it has a major impact on whether you will meet your financial goal. If you don’t include required risk in your portfolio, your investments may not earn a large enough return to meet your goal. For example, if you are saving for a long-term goal, such as retirement or college, most financial experts agree that you will likely need to include at least some stock or stock mutual funds in your portfolio. On the other hand, if you include too much risk in your portfolio, the money for your goal may not be there when you need it. A portfolio heavily weighted in stock or stock mutual funds, for instance, would be inappropriate for a short-term goal, such as saving for a family’s summer vacation.

 

Asset allocation is the most important decision that you’ll make with respect to your investments. If you understand your time horizon and risk tolerance - and have some investing experience - you may feel comfortable creating your own asset allocation model. Mutual funds make it easy for investors to own a small portion of many investments.

 

10.       Compounding

If little growth serves as the fuel for future growth – a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.  And so with money. Buffet is the richest investor of all time. His skill is investing, but his secret is time, that’s how compounding worked. The real key to his success is that he has been a phenomenal investor for three quarters of a century. He survived, and survival gave him longevity.

Good investing is not necessarily about the earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It is about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild. The opposite of this – earning huge returns that can’t be held onto – leads to some tragic stories. 

Time horizon: It is the most powerful thing in investment. It makes little things grow big and big mistakes fade away. It can’t neutralise Luck and risk, but it pushes results closer towards what people deserve.

Starting early is very important. The difference between starting at the age of 25 and the age of 35 can be huge. While calculating what you will need in the far future, savers often ignore the effect of inflation. You must start early, especially because you are likely to need much more than your estimates.

As per financial experts, longer the investment Time Horizon, early you reach your financial goals. One more factor that adds to your wealth creation is Compounding, which is a powerful tool to build wealth in long-term and it works only when you give longer time to your investments.

 

11.       Dollar Cost Averaging (SIP/STP):

The best opportunities hurt the most. Just because you have brought a cheap stock doesn’t mean it won’t become cheaper still? Good opportunities can become great after you have invested much of your spare cash in them. That’s the one way they hurt, the solution is to buy in parcels, popularly known as SIP (Systematic Investment Plan) in mutual funds.

 

12.       Investment Planning:

The conventional saving approach “low risk – fixed income” is no more relevant in the present scenario as things have changed. There are several new avenues available for investments which could generate much higher returns compared to conventional savings in bank deposits. It is also not true “equity is risky”. The idea is to grow the capital investment, beating the inflation with tax efficiency, so that it gradually builds-up to support your enhanced Lifestyle, children education and Corpus for your retired life in future.

Equity may look risky over short periods, but over ten, twenty or thirty years, it’s the only way to earn enough for a comfortable future. Unless you are willing to devote a lot of time and effort to research, the best way to invest in equity is to through Equity Mutual Funds.

Whether the investment strategy that we adopt will work, is always a question mark, irrespective of how much money you have. It is very difficult to generate high returns always, the reason is whatever stocks or sectors you choose, all have a cycle of their high and low at some point of time, you need to strike a balance between them to achieve an expected growth. The average returns are always what Sensex or Nifty provides over a long period of time. Therefore Mutual Funds are best for investment as they are mix of everything, in which some may rise and some may go down, but balance is maintained.

"Successful Investing is about managing risk, not avoiding it" - Benjamin Graham (Author of bestselling investment book "The Intelligent Investor")

 

13.       Mutual Fund Investing:

For the individual investor who doesn’t have much time to study and research investments himself, mutual funds are one of the best options for reaping the benefits of different types of investments with minimum effort and at a low entry point. Also, unlike many other investments, mutual fund investments are highly ‘liquid’.

Easy diversification: One of the basics of safe investing is to spread your money across different investments. Mutual funds are an easy way to do this. Each mutual fund spreads money across a large number of investments. Convenience: You can easily invest as well as withdraw from mutual funds any amount, Liquidity is possible at any time. You can invest in a diversified set of stocks for as little as a few thousand rupees. Choice: There are mutual funds available for every kind of return and risk level, and suitable for every kind of time horizon. The SEBI (Securities and Exchange Board of India) regulates the fund industry very tightly and is constantly refining the applicable rules to protect investors better. You can easily invest in foreign stocks through mutual fund route.

In reality, not much knowledge is required for investing in Mutual Funds as they are well organised and packaged for investors in terms of diversification, and well regulated to protect investors’ interest. The key point here is, never rely on others for your investments, learn it and do it yourself. It is not a rocket science, one can easily do it using established norms/guidelines, discipline and standard Online Platforms available freely to manage your investment. 

Pick 5 good funds if you are a first-time investor (Index Fund, Multi/Flexi cap, ELSS, Large cap, and balanced fund – one each). In balanced funds, stability of their debt portion saves you from the market volatility. ELSS funds have double benefits – tax saving and capital appreciation as per market trend. The debt allocation can be saved in liquid or ultra-short term funds instead of having it in FDs. Create a monthly SIP (Systematic Investment Plans) to start investing regularly in your chosen funds. You can put that on auto-pilot mode for regular investment. You should consider increasing your investment amount every year as your income level increases.

Review your investments annually. Before deciding to switch or redeem any investments consider the tax and exit load implications of doing so. ELSS funds are bound to be volatile and witness sharp declines. Your interests would be best served by not worrying too much about them or believing in the doomsday predictions that you hear aplenty during such times. Here is our simple advice for all times - DO NOT stop your SIPs or redeem your money on account of market swings.

 

14.       Index Funds:

A way for the average investor to match or mimic the markets, a way that anyone even with a small amount  can own a piece of the entire stock market and have true portfolio diversity instead of being stuck with the ability to buy only a small number of shares of stock in one or two companies. Index funds do not beat the market but matches it, this is called indexing or passive investing. Index funds are characterised by maximum diversification, minimum cost and maximum tax efficiency. It is said that it beats 96% of the world’s expert mutual fund managers.

Passive funds (Index Funds) are managed without fund managers, they are linked to the market and automated, hence low cost management funds. Active funds are managed by paid fund managers, the cost is borne by the investors. For these funds, you have to pay annually. These are two types, regular and direct. In Direct mode, investment is done by yourself without any distributor or agent, and in Regular mode, in which you have distributor/agent fee, which gets automatically deducted from your returns. This fee continues on annual basis as long as you hold those Mutual Funds. The regular options costs more by about 1 to 2 %, which further gets compounded over a period of time

As per Ray Dalio, you are not going to beat the market, no one does except a very few like him. As per the study from 2000 to 2012 when market was flat, index went up and down and ended flat, the index funds returned your capital investment without any gain, where high priced (fee) of about 3%, you would have lost 40% of your investment. You put up your capital, you took all the risk and they made money no matter what happened.

All mutual fund managers do trading on regular basis that costs short term taxes, which comes from your investment. Even if you do not sell your mutual fund, you are still subjected to short term capital gains on your investment, internally which you do not get to know. Therefore, invest in low cost tax-efficient Index Funds.

Warren Buffet: Index funds minimizes the cost and maximises upside.

 

15.       Active Funds:

Some percentage of saving may be invested in actively managed good Mutual Funds, which are leader in the market, through SIP route. The selection of funds should be 1 in each category - Large cap, Midcap, Small cap, Multi/Flexi cap. To maintain equity and debt allocation as applicable, and for liquidity, you need to have 2-3 debt funds. This investment could be optional based on availability of funds for further investment. The purpose is to get benefit of actively managed good funds also. After about 3 years, you may decide to continue or not based on the returns compared to Index funds.

 

16.       ELSS (Equity Linked Saving Scheme):

Along with Index funds, one should also use at least one ELSS fund when there is a long term approach. ELSS funds are diversified equity mutual funds and have a comparatively shorter lock-in period of three years. Nonetheless, it provides a better opportunity for long-term investment returns with tax exemption under section 80C (Maximum Rs. 1.5L). There is no maximum limit of investment.

It is preferred by those with a higher risk threshold. A large part of the money invested in an ELSS goes into equity investments (95-100%), and the returns are market-linked. As a result, the returns are affected by market fluctuations. In the long term, it has proven to be fruitful. The best ELSS funds have outperformed traditional instruments like NPS, PPF, and FDs in terms of returns. Also, after paying a 10% LTCG tax on income above 1 lakh, ELSS has the ability to outperform other tax-saving strategies in terms of returns. ELSS, on the other hand, is better for those who desire both wealth creation and tax gains in long term. Dividends received from these funds are taxable. They are added to your annual income and taxed as per the applicable income tax slabs.

 

17.       Fixed Income Investments:

In your investment plan, you should have some percentage of allocation to fixed income instruments like PPF (Public Provident Fund) for security. PPF gives good and assured returns over a period of time by virtue of compounding. The maximum limit of investment in PPF is Rs. 1, 50,000. Along with the PPF, SCSS (Senior Citizen Saving Scheme) is recommended for senior citizens as fixed and assured source of income. The maximum limit of investment in SCSS is Rs. 15, 00,000. If you have a daughter, invest Rs. 1, 50,000 (max limit) in SSY (Sukanya Samradhi Yojana), right from the year of her birth. It is a good scheme for a girl child, who gets the lump sum benefits at the age of 21 years, and the payment term is only for 14 years.

PPF (Public Provident Fund)

To mobilize small savings and help people build a corpus for their future, the Ministry of Finance (Govt. of India) had launched PPF in 1968. This is a fixed-return, long-term investment instrument that offers attractive interest rates and tax exemption additionally. One can voluntarily open an account with any nationalized bank, selected authorized private bank or post office. The account can be opened in the name of individuals including minor. The minimum amount is ₹500, which can be deposited every year, otherwise the account will become inactive, which can be activated by paying a penalty. The account can be extended further in blocks of 5 years after the maturity period of 15 years.

 Features:

• The rate of interest at present is 7.1% per annum (as of April 2020), it is revised by the govt. time-to-time.
• Interest received on deposit is tax free.
• The entire balance can be withdrawn on maturity (15 years).
• Pre-mature withdrawal and loan options are available
• The maximum amount which can be deposited in every financial year is ₹150,000 in an account, which is fully tax exempted under section 80C.
• The interest earned on the PPF subscription is compounded annually.
• All the balance that accumulates over time is exempted from wealth tax. There is an upper limit to the amount that you can invest in PPF – Rs.1.5 lakh per year. You can open a PPF account with an authorized bank or post office.

SCSS (Senior Citizen Saving Scheme)

Senior Citizen Savings Scheme (SCSS), introduced by Govt. of India in 2004, is a preferred fixed income investment option for people above the age of 60 years. The primary objective of this scheme is to help senior citizens ensure a steady and regular flow of income post retirement. Since SCSS is a government-backed investment scheme, it gives guaranteed returns on a quarterly basis. One can avail SCSS through certified banks and post offices in India. The current interest rate is 7.4% (June 2021). Tax benefits under Section 80C are available but interest is fully taxable. 

Key Features:

• Quarterly revision of interest rates by the Govt.
• Fixed income: The interest rate declared during the time of investment remains fixed throughout the maturity tenure and is not affected by alterations in a later quarter.
• Minimum and maximum deposit: Eligible individuals require making a minimum deposit of Rs. 1,000 to open an account under the Senior Citizen Scheme. At the same time, the deposit quantum is capped at Rs. 15 Lakh (max).
• Maturity tenure: The maturity period for the SCSS scheme is 5 years. It can be extended for another 3 years, effectively bringing up the period to 8 years. An extension is allowed only once. Upon extension, however, interest rates applicable at that quarter would apply.
• Premature withdrawals and account closure: An individual can withdraw prematurely from their account under Sr. Citizen Savings Scheme one year after account opening. If an individual closes their account before the completion of 2 years, 1.5% of the deposited amount will be deducted as penalty. If account closure takes place after completion of 2 years, 1% of the deposited amount is levied as a penalty. In the case of extended accounts, an individual can close their account after the first year without incurring any penalty.
• Quarterly disbursal: Quarterly interest payment will be credited to an individual’s account on the first date of April, July, October, and January.

SSY (Sukanya Samradhi Yojana):

Sukanya Samriddhi Yojana is a small deposit scheme of the Government of India meant exclusively for a girl child. The scheme was launched by Prime Minister Narendra Modi on 22 January 2015 as a part of Beti Bachao Beti Padhao Campaign. The scheme is meant to meet the education and marriage expenses of a girl child.

 Key Features:

• It offers a high interest rate of 7.6% and tax benefits under 80c.
• Minimum investment - Rs. 250; Maximum investment – Rs. 1, 50,000 in one financial year. If minimum contribution is not paid, a penalty of Rs. 50 is charged.
• Triple Tax Benefit - Principal invested, the interest earned as well as the maturity amount is tax free.
• Deposits in an account can be made till completion of 15 years, from the date of opening of the account
• The account shall mature on completion of 21 years from the date of opening of the account, provided that where the marriage of the account holder takes place before completion of such period of 21 years, the operation of the account shall not be permitted beyond the date of her marriage.
• Passbook will be issued to customers.
• Withdrawal Facility
• To meet the financial requirements of the account holder for the purpose of higher education and marriage, account holder can avail partial withdrawal facility after attaining 18 years of age.
• If the beneficiary is married before maturity of account, account has to be closed.

NPS (National Pension System) – Retirement Planning:

Though not a fixed return scheme, but gives much better returns after retirement as fixed pension. It is very good for younger generation people either employed or self-employed, who have no pension scheme. It gives very good returns having a longer time span, and additionally provides tax benefit for investment of upto Rs. 50,000. There is no maximum limit of investment.

NPS is being administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA) set up under PFRDA Act, 2013. It is a market linked defined contribution product. Under NPS, a unique Permanent Retirement Account Number (PRAN) is generated and maintained by the Central Recordkeeping Agency (CRA) for individual subscriber.

NPS offers two types of accounts, namely Tier-I and Tier-II. Tier-I account is the pension account having restricted withdrawals. Tier-II is a voluntary account which offers liquidity of investments and withdrawals. It is allowed only when there is an active Tier-I account in the name of the subscriber. The contributions accumulate over a period of time till retirement grows with market linked returns.

On exit/retirement/superannuation, a minimum of 40% of the corpus is mandatorily utilized to procure a pension for life by purchasing an annuity from a life insurance company and the balance corpus is paid as lumpsum.

 

The Government model for the Central and State Government Employees: NPS is mandatorily applicable on Central Government employees (except Armed Forces) recruited on or after 01.01.2004. Subsequently, all State Governments excluding West Bengal have also adopted NPS for their employees. Govt. employees make a monthly contribution at the rate of 10% of their salary and a matching contribution is paid by the Govt. For central Govt. employees, the employer’s contribution rate has been enhanced to 14% w.e.f. 01.04.2019.

The Corporate Model: Companies can adopt NPS for their employees with contribution rates as per the employment conditions.

The All Citizens Model: The All Citizens Model of the NPS allows all citizens of India aged between 18 - 70 years to join NPS on voluntary basis. If a person opts for NPS below the age of 60 years, he/she exits out at 65 years of age, and if one opts for NPS after the age of 60 years, he/she exits at the age of 75 years.

 Important features of NPS:

• Access and Portability is ensured through online access of the pension account to the NPS subscribers through web portal and mobile app, across all geographical locations and portability of employments.
• Partial withdrawal- Subscribers can withdraw up to 25% of their own contributions at any time before exit from NPS Tier-I for a maximum of three times during the entire tenure of subscription under NPS for certain purposes specified in the regulations. The partial withdrawals are allowed from NPS Tier-1 after contributing for at least ten years and there should be a gap of minimum five years between successive withdrawals.

 Tax Benefits available under NPS:

• Employee’s own Contribution towards NPS Tier-I is eligible for tax deduction under section 80 CCD (1) of the Income Tax Act within the overall ceiling of Rs. 1.50 lakh under section 80 C of the Income Tax Act. From FY 2015-16, the subscriber is also allowed tax deduction in addition to the deduction allowed under section 80CCD(1) for contribution to NPS Tier I account subject to a maximum of Rs. 50,000 under section 80CCD 1(B).
• Employer’s contribution towards NPS Tier-I is eligible for tax deduction under Section 80CCD (2) of the Income Tax Act (14% of salary for central government employees and 10% for others). This rebate is over and above the limit prescribed under Section 80C.
• Interim/ Partial withdrawal up to 25% of the contributions made by the subscriber from NPS Tier-I is tax free.
• With effect from 1.4.2019, lump sum withdrawal up to 60% of total pension wealth from NPS Tier-I at the time of superannuation is tax exempt.
• Minimum 40% of the amount utilized for purchasing an annuity from the Annuity registered Service Provider is also tax exempt.
• The fund manager of the NPS invests the corpus into different asset classes like equities, debt, etc. You receive returns based on the performance of the fund. NPS holders will only have a maximum of 75% equity in their NPS portfolio allocation, with the remainder being debt. However, a high degree of equity allocation is only open to people under the age of 35 who prefer the NPS Active option.

Relative Features:

Comparing NPS, PPF, ELSS is not fair as they are all different products with different objectives and time horizon. An investor should invest in them according to his needs. Here are some fundamental differences:

• PPF offers a lump sum amount along with interest upon maturity with longer lock-in period of 15 years. However it allows for a 50% withdrawal after the five-year lock-in duration. 
• The ELSS does not approve partial withdrawals before 3 years of lock-in period, still it is the least among all three.
• NPS provides a monthly pension after retirement, and lump sum corpus of 60% of the total value of the investment.
• PPF has the lowest risk exposure since the returns are assured. However, ELSS and NPS both offer market-linked returns, more riskier. 
• ELSS funds have more aggressive exposure to equity, up to 90-95%, while in NPS, the maximum allocation to equity is 75%, reducing as one grows older. So ELSS has the potential to give higher returns over a more extended period. 
• NPS offers you an additional option to make your own asset allocation and change fund manager/agency for investment, if required.

 

NPS - ELSS – PPF: Summary of Relative Merits

 

Features	NPS	ELSS	PPF
Tax Deduction on     the invested   amount	Up to INR 1,50,000 under Section 80C, Up to Rs. 50,000 under Section 80CCD(1B)	Up to INR 1,50,000 under Section 80C	Up to INR 1,50,000 under Section 80C
Taxability of the       Maturity Amount	Fully Tax Exempted: 60% corpus withdrawal (max limit)  on retirement Taxable – Annuity pension income (after retirement)	Taxable – Capital    Gain (10% LTCG)	Fully Tax Exempted
Pre-mature  Withdrawal	25% after 10 years (3 times  with minimum 5 yrs. gap)	Not Allowed, before maturity (3 years)	50% after 5 year lock-in period
Lock-in Period	Up to Retirement (60 Years     of age)	3 Years	15 Years
Risk Involvement	Risky as Market Linked (75%   in equity – maximum, reduces gradually with age)	Risky as Market Linked (90-95%   in equity – maximum)	Safe as Govt-backed
Minimum and   Maximum Amount  of Investment	Tier 1 Minimum Rs 1,000 and Tier 2 Rs 250 No Maximum Limit	Minimum Rs 500 (for most ELSS schemes) No Maximum Limit	Rs 500 Min and Rs 1,50,000 Maximum in one year

 

 18.       Direct Stocks/Shares:

As explained above, the mutual fund investing is the best way to start with compared to investing in stocks directly which requires your constant attention and full time efforts? However as an investor you should have some exposure to stock investing by allocating some percentage of your funds for stocks. You should go for those stocks, which are leader and proven over long term, particularly in well-known large cap companies, like Infosys, TCS, Reliance, Asian Paints etc. You should always invest in small amount during every dip in the market, and continue to hold them for long time. Such stocks always have good growth over a long period, and are wealth builder, never sale them, keep them as long as you do not have an emergency.

 

19.       IPOs (Initial Public Offering):

Always apply for good quality IPOs, accumulate those shares if allotted. Over a long period, these stocks give good returns as the valuation at the time of allotment is quite reasonable. I have practically seen it, good quality IPOs are doing very well. Getting allotment through IPOs is very competitive as it always gets oversubscribed multiple times if the company is good. So open a Demat account for every member in the family, and apply for minimum lot for all to have higher probability of allotment. Be selective for applying in IPOs.

 

20.       Sovereign Gold Bonds (SGB)

Since gold acts as a hedge against inflation and also affords liquidity during time of political and economic instability, one should have some portion of one’s portfolio in gold. Since the investment in gold through SGB earns you interest as well as the capital gains at redemption are tax-free, you should invest in these bonds to guard you against any inflation and for diversification of your portfolio. It also eliminates any kind of risk associated and the cost of storage applicable to physical gold.

 The Government of India introduced the Sovereign Gold Bond (SGB) Scheme in November 2015, to offer investors an alternative to physical gold. Any Indian resident – individuals, Trusts, HUFs, charitable institutions, and universities – can invest in SGB. You may also invest on behalf of a minor.

 Capital appreciation linked to gold prices. The current interest rate for SGB is 2.50% per annum on your initial investment. It is paid twice a year (semi-annually). Returns are usually linked to the current market price of gold. The maturity period of the sovereign gold bond is eight years. However, you can choose to exit the bond from the fifth year (only on interest pay-out dates).

 The interest on Sovereign Gold Bonds is taxable as per the provisions of the IT Act, 1961. Long term capital gains tax is exempted, if bonds are held till maturity. Long-term capital gains (after 5 years and before maturity) are offered indexation benefits or when transferring the bond from one person to another.

 The minimum initial investment is 1 gram of gold, and the upper limit is 4 Kg of gold per investor (individual and HUF). For entities such as trusts and universities, 20 Kg of gold is permissible.

 Sovereign Gold Bonds have none of the risks that are associated with physical gold. There are no hefty designing or wasting charges here. Moreover, SGBs earn interest, unlike physical gold which is an idle investment.

 You can trade gold sovereign bonds on stock exchanges within a specific date (at the discretion of the issuer). For instance, after completing five years of investment, you can trade them on the NSE and BSE, among others. You have convenience of investing online. Some banks accept SGB as collateral/security against loans pledged in Demat form.

SGB - Physical gold - Gold ETFs

Particulars	Physical Gold	Gold ETF	Sovereign Gold Bons
Returns/earnings	Lower than the real return on gold due to making charges	Less than actual return on gold	More than actual return on gold
Safety	Risk of theft, wear/tear	High	High
Purity	The purity of gold always remains a question	High as it is in electronic form	High as it is in electronic form
Gains	LTCG after three years	Long-term capital gain post after three years	LTCG post three years. (No capital gain tax if redeemed after maturity)
As loan collateral	Accepted	Not accepted	Accepted
Tradability or exit formalities	Restrictive	Tradable on Stock Exchange	Can be traded and redeemed from the 5th year
Storage expenditures	High	Minimal	Minimal

 

21.       Financial Support Services:

Broker:  

A broker, by definition works for a company that is not required by law to do what is your best interest. A broker who gets paid to funnel your money to the products that be the most profitable for him and/or his firm.

 Fees:

Most of the investors do not know how much they are paying in fees. The mutual fund companies have become master at either hiding the fees or making it appear negligible. The fee do matter. By lowering your fees, you can get back as much as 50-70% of your future potential nest egg. You might be willing to pay 3% to an extra ordinary hedge fund manager like Ray Dalio, who has a 21% annualised return (before fees) since launching his fund. But with most mutual funds, we are paying nearly 30 times or 3000% more in fees, and for what? Interior Performance!! You must lower your total annual fees and associated investment costs to 1.25% or lower.

A study showed that over a 30 years of investment horizon with same amount invested, having similar returns of about 7% in MF, having different portfolio of MFs, investor-1 pays 3% fee and investor-2 pays 1% fee. The investor-2 will have almost double the returns in 30 years compared to investor-1. The small difference in fee makes a big difference at the end due to its compounding effect.

Registered Investment Advisor - RIA (in India) / Fiduciary (in USA):

To receive conflict free advice, we must align ourselves with a fiduciary. A fiduciary is a legal standard adopted by a relatively small but growing segment of independent financial professionals who have abandoned their big-box firms, relinquished their broker status and made the decision to become a Registered Investment Advisor (RIA). These professionals get paid for financial advice, and by law, must remove any potential conflicts of interest (or at minimum disclose them) and put the client’s needs above their own.

 The cost of fiduciary is justifiable for adding value such as:

1. Tax efficient Management
2. Retirement Income Planning
3. Access to Alternate Investment beyond Index Funds

 In order to have better returns by about 1-2%, always go for direct mode of investing. If you have no time or you lack knowledge of investment, then initially go for RIA, who charges one time consultation fee. After sometime you can do on your own. Some people who are very busy, and cannot find time to do investment for them, then it is better to have a reliable RIA who can manage their funds. If you tie-up with PMS or any registered agency, there are high annual charges including additional profit sharing after certain limits, and govt. taxes etc., which get compounded over a period.

It requires a lot of reading, listening to experts and then apply your common sense - be a disciplined investor. Even if you get it done through others, have full understanding as why, how and what is being done.

Models, Mentors, Masterminds/Experts:

One of the best educational tools is to learn from others, people who have done before you what you want to do. This means you don’t need to start from the beginning and learn from your own mistakes. Self-experience is an expensive teacher in the beginning. However it comes by itself over a period of time. You should look at very best people in a field and study what they do, how they behave and how they think, then do the same. Learning by self through trial and error is slow and not very effective for the beginners. In the contrast, mentors can help raise your level of accomplishment dramatically and relatively in short period of time. Due to dynamic and random nature of some factors, there are unpredictable fluctuations in the market, but in long run it doesn’t have much impact. Though it is not guaranteed, a proven model built on the practices of people and various other factors driving the market, will maximise your chances of success.

The difference between mentors and advisors is that the mentors have done and accomplished in real life what you want to do, whereas advisors have not done or accomplished any success in building their wealth, however they know things theoretically and by observations of the market behaviour in the past based on the data statistics and trends.

How Mentors can help you:

• Importing Knowledge: A mentor having a wide range of experience offers you the opportunity to gain years of knowledge in short span of time.
• Sharing Experience: Learning from others mistakes is always better than learning from own costly mistakes or by trial and error. A good mentor will have thorough understanding of the dos and don’ts to help prevent you making your own mistakes.
• Fine tuning your Ideas: A mentor makes you present your ideas, discuss thoroughly, and make you think what is not correct, and fine tunes it and then implement.
• Providing right contacts to identify good opportunities you wouldn’t have found yourself. Having wide range of contacts will help enormously.
• Mentors can motivate you to find and explore different related areas, not known to you, where you are sure to get success.
• Mentors can save your time: They make you learn things faster, teach you short cuts, make you learn thumb rules and to avoid potholes for making your financial journey faster and smooth.
• Mentors are independent and won’t have vested interest in what you do, thus offer you genuine support correcting your weaknesses.

Important points to remember while investing:

• Invest in tax free options, if you have to pay tax, pay at the time selling.
• Hold any investment for more than a year to avoid short term capital gains, which is always higher than long term capital gain. Please check, the limit of one year for short term gains keeps changing time-to-time.
• All mutual fund managers do trading on regular basis that costs short term taxes, which comes from your investment. Even if you do not sell your mutual fund, you are still subjected to short term capital gains on your investment, internally which you do not get to know. Therefore, invest in low cost tax-efficient Index Funds.
• Diversification and asset allocation not only reduces your risk but also offers you the opportunity to maximise your returns.

Training/Seminar:

Seminars/Trainings organised by financial institutions or private individuals are good source of mentors.  You gain more and more knowledge by attending these seminars/trainings. Try to develop a network of professionals, as discussion with others and getting different opinion may sometime triggers a solution or provide clarity on the issue.

 

22.       Software Tools:

Zerodha: It works on an online discount brokerage model wherein only online trading services are offered to customers. It heavily uses technology to serve its customers and has very few branches & offices. Technology helps them to scale and reduce the operational cost which in-tern helps them to maintain huge profits despite offering low-cost trading. You can open an Instant Account online with Zerodha and start trading, complete paperless operations.

To trade or invest in India Stock Market, you need 3 accounts; trading, demat and bank account. Zerodha offers trading and demat accounts. The Zerodha trading account is required to place buy & sell orders. The Zerodha demat account is required to hold bought securities in electronic form. Both trading and demat accounts are linked to the bank account (with any bank). Zerodha offers brokerage free equity delivery trading and Mutual Fund investment. Brokerage for Intra-day and F&O trading charged at Rs 20 per executed order or 0.03% whichever is lower. Government taxes and demat charges apply to all trades that included equity delivery.

Zerodha charges a demat debit transaction fee of Rs 13.5 per debit transaction for equity delivery trades. There are no demat charges for mutual funds redemption.

Zerodha Broking Limited is an Indian financial services company offering retail and institutional brokerage, currencies and commodities trading, mutual funds, and bonds. Founded by two brothers Nithin Kamath and Nikhil Kamath in 2010, the company is headquartered in Bangalore. Valued over $1 billion, it is the largest brokerage firm in India by active client base. The name Zerodha is a portmanteau of words Zero and Rodha (Sanskrit word for barrier). With an active client base of 5 million users, Zerodha is the largest retail stockbroker in India, contributing more than 15% of daily retail volumes across all Indian stock exchanges.

23.       Lessons Learnt from Share Market:

• You will never stop losing money, it is a part of the game. Your aim should be to reduce your losses, not eliminate them entirely. It is the average that matters not the losses on individual stocks, learn the lesson and move on.
• The game is to stay in it. Never take a bet big enough to take you out of the game. Diversify your portfolio and fight over-confidence. The most successful strategy for you is not necessarily the highest returning or the most conservative but the most sustainable. Build the portfolio that lets you sleep.
• To achieve satisfactory investment results is easier than most people realise, but to achieve superior results is harder than it look. If you are happy with average, take the low cost easy option. Just don’t panic and sell in the next crash.
• You can’t beat the market by following it. If you want superior returns, you have to do something different from the market. That’s different and right, and not different and wrong. The business media and stuff like brokers’ 12 month price targets reflect the market. If everyone knows the same thing, copying it will get you the returns everyone else gets.
• If you are investing for the next 10-20 years, what happened today probably doesn’t matter. Don’t get sucked in. If you take a genuine long term view, shares are not as risky as bonds or cash because they keep pace with the real economy. Lose that long term view and you lose your edge.
• Value investing is only approach that makes sense. It helped successful people like Warren Buffet, Roy Dalio, and Kerr Neilson practiced it. Once you have found something makes sense to you, go ahead. Jumping one style to another only increases your opportunity to lose money.
• Market is mainly rational. Understand and act when it is not. Markets are largely efficient. Successful investing is all about spotting the inefficiency – a mispricing – and acting on it.
• The best opportunities hurt the most. Just because you have bought a cheap stock doesn’t mean it won’t become cheaper still? Good opportunities can become great after you have invested much of your spare cash in them. That’s the one way they hurt, the solution is to buy in parcels, popularly known as SIP (Systematic Investment Plan) in mutual funds. The other is growing suspicion that market is right and you may be wrong.
• Read widely. There are no secrets to successful investing waiting to be written. Everything you need to know is already available. Investing is both a science and an art, which is why basic understanding of disciplines like history, psychology and economics will make you a better investor.

24.       Top 10 Wealth Creator Stocks

 

25.       Value Investing:

Value investing is all about doing your homework to identify good quality shares of potential companies that are under-priced. For example, an investor would focus on the credentials of the company’s management team, are there any new products or innovations that can maintain its growth potential, a low price to equity ratio, strong balance sheet figures, and even dominance in the market?

An exit strategy is not always associated with a negative outcome. It is about cashing out and moving on to the better opportunities.

 

26.       Hedging in Finance:

Hedging against investment risk means strategically using financial instrument or market strategies to offset the risk of any adverse price movements. Put another way, investors hedge one investment by making a trade in another.

 

27.       Margin of Safety (Room for Error)

It is different from being conservative. Conservative is avoiding a certain level of risk. Margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival. Its magic is that the higher your margin of safety, the smaller your edge needs to be to have a favourable outcome. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline – anything that lets you live happily with a range of outcomes.

 

28.       GDP (Gross Domestic Product):

It is one of the most common indicators used to track the health of a nation’s economy - a measure of economic growth. It includes a number of different factors such as consumption and investment. Investors can use GDP to make investments decisions – a bad economy means lower earnings and lower stock prices. This measures the overall value of goods and services produced by a given country’s economy within a period of time. GDP is reported on quarterly basis and reflects the economic health of the country.

 

29.       Technical Analysis:

The market behaviour is represented by various charts and plots indicating a general trend of the market. Market generally trades in logical manner with sudden spikes intermittently, on similar patterns investors behave. Using these charts, to a large extend, market movement can be predicted over a long period.

 

30.       Portfolio:

It’s a collection of financial assets. It could include stocks, bonds, cash and cash equivalents, or alternative investments. These are called “asset classes”. You’ll want to have a mix of different asset classes in your portfolio to balance the potential for growth and the risk that you’ll lose money.

A TYPICAL ASSET ALLOCATION FOR MONTHLY INVESTIBLE AMOUNT Rs.= 20,000
Sln	Investment Product	Product  Type	% Alloc	Allocation (SIP/STP)		Remarks
				Monthly	Annual
1	PPF Contribution-Max 1.5L invest lump sum:    1-5 April	Fixed Returns with Tax benefit - 80C	12.5	2,500	30,000	Choose ELSS if fund shortage
2	NPS Contribution-Min 50k in April	Pension Fund - additional tax benefit of 50k	5	1,000	12,000	If not Applicable, add this to Index Fund or Stocks
3	Sukanya Samridhi Yojana-1.5L invest lump sum: 1-5 April	For Girl child - Education & Marriage	5	1,000	12,000	If not Applicable, add this to Index Fund or Stocks
4	Sovereign Gold Bond	Gold	10	2,000	24,000	for Portfolio Balancing
5	ELSS - Tax Saver	Equity-Tax	7.5	1,500	18,000	Best in the category
6	Nifty / Sensex Index F	Equity -Large Cap	10	2,000	24,000	Best in the category
7	Large Cap	Equity	10	2,000	24,000	Best in the category
8	Mid Cap	Equity	5	1,000	12,000	Best in the category
9	Small Cap	Equity	5	1,000	12,000	Best in the category
10	Multi / Flexi Cap	Equity	10	2,000	24,000	Best in the category
11	Debt Funds	Debt	10	2,000	24,000	Best in the category
12	Direct Stocks	Equity	10	2,000	24,000	Top Leader company shares
	Total Fund Allocation	20,000	100	20,000	2,40,000
	1. ELSS / PPF: Investment may be done in both or either based on funds availability, ELSS supirior with risk, PPF assured returns
	2. SCSS: One Time Investment  from Retirement benefits can be done for fixed income (Sr Citizen)
	3. If NPS and/or Sukanya Samradhi are not applicable, then these funds can be diverted to direct stocks or Index fund depending upon whichever is convenient to manage
	4. Direct Stocks:  If one is not comfertable with direct investment in stocks, then it can be diverted to Index fund or ELSS fund
	5. Gold:To balance the Portfolio, some gold in digital form can be acquired, particularly SGB by govt
	6. Best in the category to be chosen based on the 5 year consistent performance
	7. The Investible Amount can be changed based on one's "Savings Ability"

References:

• The Psychology of Money by Morgan Housel
• Money: Master the Game by Tony Robbins
• Guide to Getting Rich by Michael Yardney
• Personal Investing book by Edwin Lim, Kaiwen Leong and Edward H. Choi)
• Rich Dad Poor Dad by Robert T. Kiyosaki
• Money Magazine
• Value Research
• Dept. of Financial Services website
• Other credible online sources for financial information