Financial Planning in the Indian Scenario

chakky's picture

We do financial planning for three reasons:
a) To grow our wealth
b) Securing our lives and lives of our loved ones
c) To save tax

Our priorities while doing this should always focus on making money for that dry summer that will come some time in our lives.Remember life is a sine wave, with ups and even downs.And a point to note is when we try to make money, we automatically do maximum tax planning too.

A few suggestions:

A) First and foremost get yourself a "Pension Plan."
Intend this for long term with what you feel is the amount you need to have in your booty by the time you retire from life. Remember in today's world where there is no more government pensions, you have to make your own for your old age, you can never be sure if your children will want to take care of you, with the changing cultures.

B) Life Insurance plans
Insure your life for what you are worth. When you take a insurance plan to cover your life, ask this to yourself...
How much is your life worth to your family in terms of monetary value?
Life is precious and mastercard tries to make sure we remember that but end of the day when you are gone, for everything else money is needed. So would you want to provide just enough to cover for your tax savings or would you want to ensure your family is comfortable atleast monetary wise on what you would have earned in the next 5 years?

Choose wisely here. If you feel your death will cause no financial implication to your family or loved ones, then choose the minimum required to save tax. Else plan for supporting your family for atleast 4-5 years. (4-5 years your CTC is what should come as insurance money)

i) Unit Linked Insurance - Insurance agents will try to sell you insurance policies with ULIP, which will mean, more than covering your life, it will try to generate money for you. (Everyone assumes we will never die !!)
A ULIP is a Unit Linked Plan- What they do here is creates three portfolio. In simple terms your money is categorized and valued as three currencies. Currency A which puts 75% of your money in shares and your money gets x units. Currency B which puts not more than 30% of your money in shares & your money gets another y units. Currency C which puts all your money in government bonds & fixed deposits. It gets you z units. (typically 6% which just beats inflation).Currency C is safest and gives you lowest returns and Currency A is riskiest and gives you least returns. x+y+z = net money you have made from your investment.

Now why they do it is because here you get abut 20-25 % returns lies. They get maximum processing fees here and its the easiest option for people who dont need to worry about how to plan for their investments to grow.( ULIP's charge about 30% of first year fees as service charge).

ii)TERM INSURANCE : There is a little known stuff called Term insurances where you have option of using say 13000 rupees annually to give you a life insurance of 20 lakhs for the next 20 years. The only glitch is the 13000 rupees you wont get back. But if you look at it, add the 1.3lakhs you would add to ULIP for covering the same amount, your life is being actually insured. It is the purest form of Insurance and is used by people who feel their life is very valuable for their family's existence if something happens to them.

With the remainder 1.3lakhs even if you invest in mutual funds it will give you much higher returns. 30% odd

C) Medical Insurance :

This is again something which one needs to take for ensuring proper medical care when in illness. An illness can happen anytime and its the costliest and most unexpected expense that comes. Get yourself a medical insurance and for your family if need be as it will always be useful.
Upto 15000 Rupees as premium annually is maximum you can deduct for tax savings.

D) Investments

Investing money is a systematic process of saving. Do you save any money? Usually not. There are two types of goods a person can purchase,Perishable and Non- perishable. Food is a example of perishable goods. Car is an example of non-perishable goods.
Non-perishable goods can be further classified as : Essential, Appreciating & Depreciating goods.

Now essential goods are your clothes, shoes etc. These things you cannot live without. What you invest here, is investing in your personality and presentation.Depreciating goods are purchasing high value things which lose their value each year. A car, a computer, a mobile are all essential but depreciating goods whose values lose anywhere between 20 to 50% of its purchase value due to becoming obsolete or due to its life cycle. Purchasing such goods is not investment, but only spending for a better lifestyle.

Appreciating Investments are usually:

1) Shares in Equity Markets : These are highly appreciating but can fluctuate a lot and there are people who have lost money. But in reality its the largest wealth creating investments. (Upwards of 45%, I have seen people lose it too..)

2) Mutual Funds : Investment experts pool in to create a corpus fund which is used to invest the money of people ignorant in handling the stock markets. This is the largest and most systematic method to invest for wealth creation with limited risks. (25-45%)

3) ELSS (Equity Linked Savings Scheme) : There is a special class of mutual funds which are used to build the infrastructure of the country. They are brought under the taxation exempt category and can also be used as a better product than fixed deposits as they usually return over 15% annually with similar stability levels. They have a three year lock in period though.

4) Fixed Deposits, NSC's, Bonds etc : Investments in these areas gives you a limited returns of not more than 6-10% annually and this is just 2-6% more than inflation. So though it does appreciate, its very negligible. But it is secured and assured returns. People generally invest maximum in this category when they reach ages of 50 and above.

Inflation means the devaluation of your currency due to which something that costs 10 rupees this year costs 15 rupees next. It means lessening the value of your savings year on year. So having this very high is not a good thing as it reduces your richness every year, every month. This is why companies give hikes in salaries to over run this inflation along with their growth.

5) Purchasing Houses: A house is essential if you build it to live for your self and its a tax saving instrument when we use it to purchase a house for its future resale value or else to generate additional income in the form of rent. The interest you pay annually is deducted from your taxes up to 1.5 lakhs limit every year. So this is a good instrument to make money and save taxes too. Some people get 10 to 20 times their investment if somehow the place they live becomes developed. So its one of a kind investment..

6) Derivatives & Futures, Commodity Exchanges: This is a high advanced form of trading in bulk shares or in items like spices etc which returns a lot of profit but needs a lot of investment too. This is something you experiment with when you have a minimum of one lakh rupees to invest in this ...

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