Most of the newcomers and even some experienced people struggle with basic questions in Financial planning .. I hear most of the readers on this blog and over chat with them asking same kind of questions over and over again . So here are top 10 questions and there answers . Read them and find out if it contains some of your doubts too ..
Question 1# I want to Buy a Life Insurance for my Financial dependents . What Should I buy ?
Ans : Term Insurance , Split the Insurance into 2 Insurance providers , better to take 5% increasing Cover option .
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Question 2# I have to save for my retirement and Children Education and Marriage , Its more than 15 years away ? I can take small risk to moderate risk . Where should I invest ?
Ans : Invest in Equity Diversified Mutual funds via SIP . Keep reviewing the funds every 2-3 yrs . For now choose the funds from this list of Best Mutual funds in 2009 .
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Question 3# I have no Idea about Stock Market and How it works and I am not even Interested to know how it works , Is there any way I can invest in Equity and Enjoy high returns ?
Ans : Yes , The answer is same as #2 . Invest in Equity Diversified Mutual funds via SIP . Keep reviewing the funds every 2-3 yrs . For now choose the funds from this list of Best Mutual funds in 2009 . If you are not a big risk taken and have some heart problem , Invest in Balanced funds .
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Question 4# I have recently got very excited by the idea of doing Stock Trading and make some consistent money from Stock Trading within some months . Any Tips ?
Ans : Better do what you are doing right now .. Trading is not every one’s cup of tea . Unless you are very determined of making it as a career or a semi career , Don’t even try Trading unless you have no hobbies to keep your self busy . Read How a new comer should start in Stock Markets first .
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Question 5# I want to invest in a FD or Endowment Policies for my child Education or Retirement which is more than 10 yrs away , Shall I ?
Ans : No !! . FD and Endowment Policies provide very bad “post tax post inflation” returns .. most of the times .. its Negative return after adjusting inflation and tax . the purchasing power of your money will decrease drastically in these kind of Endowment polices ..
Always remember
Short term = Debt
Long term = Equity
Thats the RULE NO 1 . Look at how to choose the best FD for yourself .
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Question 6# I need some money for my Sister’s Education or Marriage in 2 yrs , Shall I Invest in Stocks or Mutual funds , I can see markets are rising now and I am sure It will give me great Returns .
Ans : No !! .. Its an Important goal . you cant risk with that . Stay Away from Equity ..The first thing you have to ask yourself is “Is Direct Equity for you” ? And what do you mean you are “sure” . there is no such thing .. Markets didn’t even liked Einstein and Newton who tried Predicting the movements , who are you !! . Even though markets look easy , its too tough …
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Question 7# I have invested in some Endowment and money back polices . What can I do now ?
Ans : Better make it a paid up policy and take a term policy . You will save a lot of premium and hence you can invest it for long term in Equity which you provide you much better returns . See the Review of Jeevan Tarang Policy from LIC .
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Question 8# Should I hire a Financial Planner ? I can read about Financial planning on blogs , newspaper . I have increased my knowledge to an extent I can take care of myself . What to do ?
Ans : Its great that you have learnt it yourself , you should be able to take care of most of the things by yourself , but most of them will be day to day decisions , when it comes to Financial Planning , It takes much more .. Financial Planning is more than “Taking term insurance” or “Choosing some great mutual fund” or “good attitude about saving” ..
It requires
- Time
- Analysis of Current Situation in detail and linking each component with other for best results.
- In depth knowledge or at least basic level of knowledge of overall Financial Planning …
- An attitude of thinking in terms of Financial planning .
Its not every one’s job , we all have expertise in some or the other field , we may be ok or good at Financial planning . If your Home electric wires have issues .. better call an electrician , even though you have learnt some basic Electronics in college and know what needs to be done , Its always better to hire an expert and pay him what it deserves . We all are in this world for some reason , better do your own part and let other do theirs ..
Note : I am talking about over all Financial Planning and expert advice .. taking basic advice can /should be done by yourself .
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Question 9# How is an Insurance agent or Wealth/Portfolio Manager different than a Financial planner ?
Ans : From decades , Agents and petty advisers with some basic knowledge in single field claims to be a financial planner . Financial planning is a very different thing than just Insurance Planning or Investment planning . They are part of Financial Planning and much much more than that . Its like surgery of current situation , trying to find the issues in the current situation , the defective parts of over all Financial life and then correcting those mistakes by linking different parts .
CFP is the standard certification accepted all over the world for Financial Planning , So if you are looking for your Financial planning . Only look for people who are some way related to CFP certifications . They can either be pursuing it , completed it or have been given CFP certificate . You can also look for any trustworthy person you think have required Skills .
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Question 10# But Why to do Financial Planning at all .. I have never done it and I think I am in a good shape .. I don’t see any financial issues with my life .
Ans : Its an innocent belief .. There is time for everything .. wait for 20-30 more years and you will be amazed to see you are so much short of your Retirement corpus , You are still alive , hence you cant imagine your family Financial situation once you are gone .. Everything shows up later .. There are people claiming to be “healthy” and then dying of “Heart Attacks” 2 yrs later .. and young people complaining for “Backaches” in Early 20′s .. These are the people who don’t believe in regular checkups … Just to save few hundreds these people take risk with there health and let it deteriorate to an extent when its too late ..
There are people who have decided to do their Financial Planning , but they are already in too much mess now .. because they have have taken those junk Endowment polices long back thinking it will make them rich .. once you analyse your Financial Situation by your Future eyes , You will be amazed to find out how much of restructuring you are doing ..
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Comments please .. Do you know of any more common question which can find place here . Which one of these was one of your doubts ? Please leave a comment ..
Note : I have started doing Financial planning Projects on Hiring Basis , You can contact me on manish.pucsd@gmail.com for more details ..
{ 30 comments… read them below or add one }
I like the advice about equities being risky and no one able to predict the market.
I am surprised at how many people think they can beat the market and predict how it will behave, when probably not even a single person can do it in the whole world.
One reason people are a bit chary to enlist the services of a Financial Planner is the huge TRUST deficit.
As I read some where-"97% of Financial Planner give a bad name to the other 3%".
@Manshu
Yeah .. I think this happens because people hear other idiots who have made easy money handful of times by luck or some skills and they think they can replicate
@Gurdial
Yeah .. thats true .. this is the same issue i talked in article .. People whom you are calling FP are not actually FP , they are something but not FP atleast …
Manish
Why do you say FD is not effective way…
Ultimately You target 12-13% return by Equity over long term..
If FD is giving 12% (per year, effective yield will be 14.5%+) return over 3-5 years pre tax, And Person Can manage Tax Part (Either by TAX CHORI, or planning).. Then why not FD ??
Any answer ?
@Anonymous
What you should be interested in is Post tax return and not "pre-tax" returns .
FD post tax return is not more than 6.5% considering you come in 20% bracket . Mutual funds have a post-tax return of more than 12% on an average over long term (25% over last 5 yrs .) .
FD's are for short term investment only . Also which FD is providing 12% return . If they provide 12% return then they will be an excellent tool … I would then recommend FD to everyone .
Manish
@Anonymous
What you should be interested in is Post tax return and not "pre-tax" returns .
FD post tax return is not more than 6.5% considering you come in 20% bracket . Mutual funds have a post-tax return of more than 12% on an average over long term (25% over last 5 yrs .) .
FD's are for short term investment only . Also which FD is providing 12% return . If they provide 12% return then they will be an excellent tool … I would then recommend FD to everyone .
Manish
Ok,
Company FD is providing 12% return, I agree it comes over cost of safety, but that is true with Equity As well…
For detail, go over any financial service provider web
As I said, and saying again If assuming I am planning my FD investment in such a way, I don't need to pay any single penny on it… What is the problem.
If I am not wrong, it was one of your post, which talks about 12-13% return per annum over Long Term (10 year)(More you try harder to achieve, more risk you take and more drop in return), if you are able to recall fine, else I will post the link as well …
@Anonymous
OK , I was talking about normal Bank FD's which provide 9% interest .. Incase you are talking about Corporate FD . then here are the comments
- They carry default risk , so they might not be able to return your money when you really need it . Check the company because you take that FD .
- They are again taxable in investor hand . so if you come in 20% bracket , your post-tax return is 9.6% which is ok .
- Your upper limit for return is capped at 12% then .. Unlike Equity you cant get more than that , However it depends on your Risk appetite and preferences . So better go what you are comfortable with .
Regarding my comment about 12% from Equity in long run , The return of 12% is kind of minimum you can expect even after most of the things go wrong …
Historically it has returned 17%+ and if things go as they are going .. you can easily expect 15%+ . 12% is the worst case sceanerio .. (fingers crossed) .
Manish
Manish
thanks buddy,
Regarding .. If Company is defaulting FD .. then its equity will also default/down… hence Irrespective of direct equity/MF, Investment will be at loss…
It is not necessary that Historic return will be repeated, If it is prologued recession… then we will see ..
@Anonymous
If company is defaulting on its deposits , I would say yes , there are chances that its equity prices are also little nervous , but it may not always be the case because Deposits can default for totally different reasons and prices of shares move for different reasons , not totally different though .
Regarding returns from equity , yes you are true when you say that historical returns may not repeat . I truely agree there ..
But !! .. The thing is when we say it may not repeat means that it may not be able to give similar kind of returns , if not 17% .. may be 15% or 14% or 20% … or lesser than that ..
but we are mainly concerned about probability .. Equity is the best asset class in long term , this is not just 20-30 yrs old fact .. its centuries old fact .. it happening from decades .
So now when we say its not 100% sure that it will repeat .. we are acutally saying we are just 99.9% sure .. now its you take if you want to take that risk for .1% or not
Manish
agreed
Hello Manish,
You have advised to stay away from equity markets if the money is saved for sister's education/marriage which is 2 years away. Keeping the same example in mind, which is the best and safest way of investing the money with 2 years time horizon?
Thanks
@Ajay
You have to understand the tradeoff between safety and returns . 2 years is a small time frame and a big change can happen to someone's money in 2 yrs .. Imagine today was Dec 2007 and you wanted to invest in equity , In 1 yr , the value would have dropped to 50% or 40% and because of fear you will take it out so that you atleast save that part only to see it go back to 90% of original value in another 1 yr .
So this kind of volatility does not suit to a person who is saving for some important goal where safety of capital is of utmost importance .
In this case , you will have to compromise with small but secured returns. FD's , FMP or some Debt fund are probably 100% safe funds (except Debt funds) .
If you can take some amount of risk , then Debt oriented funds (which have small equity exposure) are recommended .
Manish
Thanks Manish for your suggestion.
I was unable to find posts regarding FMPs or Debt Funds in this blog. Will expect some eye-openers regarding FMPs and Debt funds very shortly.
Thanks,
Ajay
@Ajay GUpta
Most of the articles are here :
http://www.jagoinvestor.com/2009/05/archives.html
For FMP : http://www.jagoinvestor.com/2008/08/what-is-fmp-fixed-maturity-plans-fmps.html
For Debt funds : http://www.jagoinvestor.com/2008/11/difference-between-equity-debt-and.html
Manish
Shouldn't it be "…their answers" ? Just a nit
arunsg
What do you mean ?
manish
Dear Sir,
I have read your articles relating to Financial Planning / Investment etc. and all your artilces are throw lights on various aspect of life alongwith needs arise at various stage of life. Please advice me for following :
I have to make planning for childrens’ education, childrens’ marriage / dream home / dream vactation and peaceful retirement life. I can take moderate risk. My earning alongwith my wife earning is Rs.3.60 Lacs P.a. I want to secure my family and enjoy their current std. of living even incase of my absence.
Please help me and guide me to built up my wealth.
Chirag
You need to read on the topics and follow up on each topic . Read following
http://www.jagoinvestor.com/2010/01/5-easy-steps-to-do-your-childs-education-planning.html
http://www.jagoinvestor.com/2009/07/6-steps-of-doing-retirement-planning-by.html
Get back to me incase you have specific questions
Manish
Manish,
Nice article!
In case of endowment policy what is mean by “paid up”. In your Question 7 you suggested to “paid up” the policy. In my case, I am paying premium of Rs. 31000 per year for SBI Life insurance endowment policy(SBI Sudarshan PLAN B). I already paid 5 premiums and thinking to quit it now. What is paid up in this case ? Quitting the policy ?
Please guide
Deepak
Making a policy paid up means , not quiting the policy , but stopping the paymnts from now on , in which case you get your paid premiums + Bonus till date at the maturity of policy .
Manish
Manish,
Thanks for your quick reply!
Got the point of “paid-up” policy. Getting back Rs. 155000(5 premium)+bonus at the time of maturity value(which is 25 years from now) seems like a carrot at the end considering the inflation over the next 25 years. I am planning to take good coverage pure Term Insurance(credit goes to you). I had a little idea about term insurance but you know this * cheaters * (agents) who finally convince you to buy endowment plan. I really regret for that.
I think I should quit the policy.
anyways, thanks again
Deepak
Sounds good
Manish
Hey Manish,
I was looking for some secure short term (about 6months) investment options.
While browsing I came across the following sbi scheme:
http://www.sbi.co.in/user.htm?action=viewsection_opennew2&lang=0&id=0,16,384,594
Can you tell something more about this – like eligibility, any conditions, what/how much tax can be saved etc.
Thanks,
Srinivas
Srinivas
Thats a Tax saving FD with 5 yrs of lock in , for a small period like 6 months , you really dont benefit greatly compared to FD , may be .5 or 1% extra , that too not guaranteed , what if things go wrong and you get that much less ..
With Taxation , your chances of making extra return than a FD reduces more .. Also if its a small ticket investment like 20k or 50k , you hardly get few fundreds more than FD .. Some saving bank like Kotak and YES are not giving 6% on plain SAVING bank
. So i would suggest not to worry to much for this short period . Do a FD
Manish
Thanks Manish!
“Some saving bank like Kotak and YES are not giving 6% on plain SAVING bank”
I am sure you meant ‘…are NOW giving…’
Yea .. i meant “are NOW Giving”
Hi Manish,
I would like to some investments (3000-4000) per month for 10 years.I have a saving of 15Kper month.Currently I have 2 LIC policies, Jeevan Saral(premium-15K for 25 years) and Jeevan surabhi(premium-9K per month for 20 years) . Could you pls suggest if SIP, FD or VPF is the best?
Ammu
You should start your investments in SIP’s like HDFC Top 200 , DSPBR top 100 etc .. Better make your policies paid up and free up more money on per month basis
Manish
Thanks for the reply Manish. Could you pls also let me know if we have tax saving scheme if in investing in HDFC Top200?