Thoughtful Thursday #04 Inflation – The hidden enemy

Just the other day at lunch we all colleagues were discussing about our school / college days.. and one of my seniors said they had only doordarshan on tv while juniors discussed about nickelodean, hungama and so on.  Seniors were nostalgic about the Vada Pav they had in break time for Rs 5/- and juniors were boasting about burgers in Mc Donalds.

Just then it hit me that inflation as generally understood by people is the simple equation of change in the price of a commodity over the years viz.  Vada Pav costed Rs 5/- in 2005 and it costs Rs 15/- in 2018.

 

There is also concept of Lifestyle Inflation which most of us are unaware of. Simply, Lifestyle inflation means that the youth of yesterday were having Vada Pav for Rs 5/-, today we could get that for Rs 15/- but Today we do not want to have Vada Pav. We want to have Burger starting from Rs 50/-. This increase in cost due to jump from Vada Pav to Burger is termed as Lifestyle Inflation.

Here, simple inflation is only 8.82% (difference between Rs 5 and Rs 15 for 13 years) but for us inflation is way higher i.e. 19.38% (difference between Rs 5 and Rs 50 for 13 years).

Now, the concept to understand here is that when we plan our finances we have goals like Children Education, Children Marriage, Retirement, Foreign Holidays etc. Generally people recommend to consider inflation but tend to ignore Lifestyle Inflation. 

Statistics show that normally, Household expense doubles every 5 years due to CPI and Lifestyle Inflation. If you do not plan your finances well, you will have a huge gap in your income and expense.

Lets assume that you kept Rs 100 in your locker in 1990 and today you take that Rs 100 note and you want to spend it for your household needs. Do you know the purchasing power of that same Rs 100 note would only be Rs 15?

 

Now, Lets assume that your monthly household expense is Rs 25,000 and after understanding somewhat about savings and investments you keep Rs 25,000 in Fixed Deposit today in 2018 and you want to spend it for your household needs after 15 years in 2033. Do you know that you will have a huge gap of approx Rs 1,28,000 between your fund inflow and outflow (not considering Taxation).

 

So the thought to carry this week is that Planning your finances is very important.

And while planning the most crucial point to consider is Inflation.

Please share this article and help us spreading Financial Literacy.

We will be back with another interesting topic on Personal Finance and Investments next Thursday.

If you have missed earlier articles of this Thoughtful Thursday series then click here to read those articles.

 

CA Nitesh Buddhadev

CA Mitsu Buddhadev

NIMIT Wealth Management

You may reach out to us at info@nimitwealthmanagement.com for any queries, suggestions or feedback.

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Thoughtful Thursday #03 – Health is Wealth and You Must Protect it..

As Promised, Every Thursday we will write an article (Thoughtful Thursday) on Personal Finance & Investments and help India in achieving Financial Literacy to the maximum.

Recently, My Father in law was hospitalised and had a surgery. Strangely, all visitors asked “Do you hold a Health Insurance? Expenses are covered nah?”

Listening to this I had decided that my next article had to be on Health Insurance. So  in this ‘Thoughtful Thursday’ we are covering everything you want to know about health Insurance

Health Insurance

Health insurance is a type of insurance coverage that pays for medical and surgical expenses incurred by the insured. Health insurance can reimburse the insured for expenses incurred from illness or injury, or pay the care provider directly.

Need for Health Insurance

(Health Insurance Coverage in India:Stats from NSSO survey)

“Health is not valued till sickness comes”

Amidst the emotional turmoil and chaos, money flows like water. Firstly, the patient is suffering and secondly there is huge outflow of cash. At such times, one would want the patient be in a relaxed state of mind. However, this is not possible due to multiple stresses including emotional, physcial, financial, etc. One of the factor giving some relief to the patient is Health Insurance so that at least the financial burden is taken care of.

Actually the problem with Insurance is that you need it the most when you don’t have it..

Health Insurance or Mediclaim as it is referred to is available in various variants. Below is a quick summary of items to look at before buying a Health Insurance.

a) Amount of cover

Considering medical and hospitalisation costs I believe at the minimum Rs 20-25 lakhs of health insurance is required for a family of 2 adults and 2 children living in metro cities.

Myth – Some people believe that right now a Cover of Rs 5 lakhs is sufficient and later on we will increase it.

(In survey conducted by Nimit Wealth Management in our seminar, we found more than 50% have cover less than 5 lac and almost 35% people don’t have Health Insurance policy)

This is my personal experience, when my parents wanted to increase the Health Insurance cover the premium at their age was so high it was not financially feasible. Its my personal request and advise to each one reading this blog that keep a buffer at the beginning . If you believe Rs 5 – 10 lakhs is sufficient then you are overlooking the fact that inflation in medical industry is rising very fast.

Right now the additional premium of Rs 2,000 to 5,000 won’t matter but family will not suffer cash shortage at the time of Medical Emergencies.

b) Existing diseases

Myth – Some people believe that they are still young and medically fit and will not use the Health Insurance so they would purchase Health Insurance only when its required.

This is not true, we have heard of multiple events where young people were identified with some diseases out of the blue and what about accidents, it can cost you a bomb.

God forbid, if you are identified with some disease even as common as BP or Diabetes and then if you buy a Private Insurance those diseases will not be covered for the Gestation Period (generally, three years) and the Health Insurance Premium Amount will be higher.

We buy a protective case and cover for our Rs 20,000 mobile but we think twice before buying a Health Insurance for ourselves. Think Again..!

c) Employer provided Insurance

Myth – Some people believe that the Health Insurance provided by Employer is enough and they would not need any additional Health Insurance cover.

Well, that would be true ‘Only if’ you have decided that you are going to work for the same Employer for life!

Point to note is that (a) the amount of cover provided by Employers is generally not sufficient and (b) as discussed above, if you buy policy after diagnosis of any disease those diseases will not be covered for the Gestation Period (generally, three years) and the Health Insurance Premium Amount will be higher.

d) Other covenants

Check all the covenants and fine print. Especially the sub limits, room rent capping clause, maternity expenses coverage clause which may reduce your claim significantly. Go for policies which do not have such capping clauses.

 

Always Remember, buying a Health Insurance is like buying a Fire Extinguisher.

1. You wish that you will Never have to use it.
2. You don’t ask for a refund when it expires. You refill (renew) it.
3. If need be it will help you and your family in time of difficulty.

In this Literate India, Financial Literacy is very less..

Share this article and Thoughtful Thursday Series and help us in our mission to spread Financial Literacy in India.

P.S. – You can read other articles of this Series on http://www.nimitwealthmanagement.com/blog/

CA Nitesh Buddhadev

CA Mitsu Buddhadev

Nimit Wealth Management

For feedback or suggestions, you may reach out to us at info@nimitwealthmanagement.com

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Thoughtful Thursday #02 The Other Side of Nomination – You Must Know..

In the last blog we discussed about Insurance. But generating assets and buying Insurance won’t be sufficient to protect your loved ones. One of the most important part is here is “Estate Planning“.

Estate Planning

Your estate is the combination of everything you own — your home and other real estate, current and savings accounts, investments, life insurance, car, furniture, personal possessions and so on. Estate planning fulfills your wishes by making a detailed plan of the division of your estate in advance (who, what, when, how and how much), amongst the ones you want to give after your demise.

  • It protects your assets from going into the hands of unintended beneficiaries like your relatives
  • Protects families with young children who are not ready to take the ownership
  • Eliminates the family mess after your demise.

However, estate planning is much more than just physical assets and also includes:

  • Name of the guardian and inheritance manager for minor children
  • Instructions for your care if you become disabled before you die
  • Protection of the loved ones during unexpected and unfortunate events of their lives
  • Minimize taxes, court costs and unnecessary legal fees

Most Indian Families don’t believe in Estate Planning. A few people also have a myth that doing a nomination would suffice. However, that is not true.

Nominee

A nominee acts like a Trustee. The Insurance company, Mutual fund or your Shares will be passed on to the Nominee, someone you trust, who can further help, in process of passing it to your legal heirs.

Otherwise, the legal heirs will have to go through the process of producing all kind of certificates like death certificate, proof of relation etc., The whole process is really cumbersome! So, to simplify, if a nominee exists, these hassles do not happen, since the company is bound to transfer all your money or assets to the nominee.

The company then goes out of scene & then, it is between nominee and legal heirs.

  • Generally, people have a notion that my spouse is a nominee and hence all assets will flow to him/her and I do not need to worry. Unfortunately, this is not true. As discussed above a Nominee is trustee. Though all assets will be transferred to your spouse, as per Hindu Succession Act – your siblings, parents, children can claim their share of assets from your pool of assets.
  • According to law, a nominee is a trustee, not the owner of the assets and will be legally bound to transfer it to the legal heirs.

 

Importance of Will

For most investments, a legal heir is entitled to the deceased’s assets.

A legal heir will be the one who is mentioned in the Will.

However, if a will is not made, then the legal heirs of the assets are decided according to the succession laws, where the structure is predefined on who gets how much. The succession laws are quite complicated and no one would want their families to go through lawyers and courts for the assets of their beloved deceased family members.

  • Nominee can also be one of the legal heirs. Nominee can be changed at anytime by informing the company concerned.
  • If the nominee is a minor, appoint adult as an appointee giving his full name, age, address and relationship to the nominee.
  • An investor has the option to register more than one nominee & specify the percentage of amount for each nominee. However, if the percentage is not specified, equal shares will go to each nominee.

 

General Rules of Nomination

  1. Nomination in Life Insurance

Nomination is a right conferred on the holder of a Policy of Life Assurance on his own life to appoint a person/s to receive policy moneys in the event of the policy becoming a claim by the assured’s death. The Nominee does not get any other benefit except to receive the policy moneys on the death of the Policy Holder.

Insurance (Amendment) Act 2015 has created a ‘beneficial nominee’ category which includes only close relatives of policyholders. Now if policyholder nominates his father, mother, spouse or children in an insurance policy, they become beneficial owners of claim proceeds.

2. Nomination in Employees Provident Fund (EPF)

In case of EPF also nominee is the person who will inherit the fund and not legal heir. As per rules, in EPF account one has to appoint his family member as nominee.

3. Nomination in Shares

Under the provisions of the Companies Act and the Depositories Act, Acts which govern the transfer of shares, the role of a nominee was different.

Reading of Section 109(A) of the Companies Act and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights there under in the nominee upon nomination validly made as per the procedure prescribed.

It means that if you have not written a will, anyone who has been nominated by you for your shares will be the ultimate owner of those stocks. The succession laws on inheritance will not be applicable but, in case, you have made a will, that will be the source of truth.

4. Nomination in Mutual Funds

Here nominee is a Trustee. While filling in the application form, there is a provision to fill in the nomination details.

You can also change nomination later by filling up a form which is available on the mutual fund company website.

Nomination in mutual funds is at folio level and all units in the folio will be transferred to the nominee(s).

If an investor makes a further investment in the same folio, the nomination is applicable to the new units also.

5. Nomination in Bank accounts and other investments

Section 45-ZA (2) (Banking Regulation Act) merely puts the nominee in the shoes of the depositor after his death and clothes him with the exclusive right to receive the money lying in the Account.

 

So next time, you get a mail from bank/ financial institution for updating Nominee.. Take Action.

 

CA Mitsu Buddhadev

CA Nitesh Buddhadev

Nimit Wealth Management

For feedback or suggestions, you may reach out to us at info@nimitwealthmanagement.com

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Akshaya Tritiya – A GOLDen Opportunity for Investment

Everyone of us has seen our parents buy Gold on Akshay Tritiya, and we as the next generation are carrying forward this ritual of buying Gold on Akshay Tritiya as it is auspicious.

All rituals in Indian culture were based on some or the other logic or scientific reason.

Back in the olden days, Gold used to be the best form of savings. It could be used in difficult times of the family, in the wedding of the son/ daughter.

These rituals of buying Gold on auspicious days inculcated habit of savings.

Today, the best form of savings may or may not be Gold. Let’s evaluate the returns from investing in Gold in the past 20 years.

(Photo courtesy : Economic Times) 

If the same amount was invested in Sensex

And, if the same amount was invested in Equity Fund (say for illustrative purposes, Franklin India Bluechip)

From the above, it’s very clear that the best form of savings today is ‘Investing’ in ‘Equity’.

So, this AKSHAY TRITIYA, Invest in Equity..!

Still if you believe that you want to buy Gold, you may prefer to invest in Gold Bonds instead of Physical Gold. The Sovereign Gold Bonds issued by RBI are linked to the price of Gold and offer an additional 2.5% interest to investors. SGB have tenure of 8 years with an exit option from 5th year, Investors can also exit by selling on stock exchange.

The final decision of what to do with your hard earned Money is Only Yours.

Be Wise! Happy Investing..!

 

CA Mitsu Nitesh Buddhadev

CA Nitesh Buddhadev

NIMIT Wealth Management

For feedback or suggestions, you may reach out to us at info@nimitwealthmanagement.com

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Thoughtful Thursday #01 – Your Life is Priceless, Really…?

When we say Our life is Priceless, Do we really mean it? But for our loved ones it is Truly Priceless..

 

A few days ago I was at a bank for some work and while I was waiting for my turn, a lady in her mid twenties came up to the bank personnel and asked if her late father had any life insurance policies. Since this lady was sitting adjacent to me, I naturally happened to hear the conversation between her and the bank person (say, Mr. B). Mr. B requested the lady to look up the documents in her house and find out if there were any insurance policies in the name of her father as the bank would not have that record. The lady helplessly told Mr. B she was not aware of where such documents would be and the bank help her..

 

While this conversation was going on.. A whirl wind of thoughts started in my mind.

We plan for everything in life but there is something which only the Almighty can plan. Can we ever be prepared for it..? NO, but we can follow 4 key steps to ensure our families are least stressed at such times :

  1. Evaluate if our Life Insurance is adequate to give the same lifestyle to our families which they are enjoying now.

More about Understanding your Life Insurance needs:

  • As a general rule, one required 10-12 times of his/her income as Life Insurance Cover. Please note the important word here is Income. Any non-earning member does not require Life Insurance. Non earning members would include housewife, student, retired persons.

  • NEVER Mix INSURANCE and INVESTMENTS

When we first started our journey as financial planners, we noted that many Indians were lacking on the first step of financial planning i. e. INSURE. Before we plan our finances, we need INSURE events which are not in our control. Most of our clients would argue that they held traditional life insurance plans or ULIP.

 

The most important concept to understand here is that INSURANCE and INVESTMENTS should be separate.

The need arose for analysis of customised reports for giving the clients an understanding that neither the traditional life insurance provided sufficient LIFE COVER nor RETURN on investments. Hence LIAR 😉 (Life Insurance Analysis Report)

2. Keep all medical and life insurance papers in one file and each member of family should be aware about it.

3. Keep all asset documents in some cabinet and update the family members periodically about the same.

4. In this world of internet most of our insurance and other assets details are in our email accounts. Use Inactive account feature  (available in gmail) which will notify and give access to another pre-decided email id after a certain period of inactivity. This way our family can access important data from the email account.

 

For customised LIAR report,

Leave a message on our website

http://nimitwealthmanagement.com/contact-us.html

info@nimitwealthmanagement.com

 

CA Nitesh Buddhadev

CA Mitsu Nitesh Buddhadev

NIMIT Wealth Management

For feedback or suggestions, you may reach out to us at info@nimitwealthmanagement.com

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Busted! 7 Personal Finance Myths That Have No Truth to Them

“Humans live through their myths and only endure their realities..”

WHAT IS MYTH..?
A traditional story, especially one concerning the early history of a people or explaining a natural or social phenomenon, and typically involving supernatural beings or events (This is what Dictionary speaks)
In short MYTH means a widely held but false Belief or Idea..
 
Many MYTHS prevail in society and the topic of “Personal Finance” is no exception.
Below are a few MYTHS on Personal Finance and the REALITY..

 

Myth 1 :
Financial Planning or investment planning means less spending i.e. becoming miser and hence less enjoying our life.
Reality :
Following a financial plan or investment plan means making guilt free spending and hence enjoying our life more.
[ When we first make necessary investments and then spend… then that is called ‘guilt free spending’.]

 

Myth 2 :
Paying premium for term insurance (a life insurance policy where if nothing happens to policy holder, nominee gets nothing) is a wasteful spending.
Reality :
If we live up to the age of 65 years, then Investment [MF, Shares etc] will take care of our family’s financial future. And if not, then TERM PLAN will.
Insurance is not an investment product; it is a protection instrument.
Buying a Term Insurance is like buying a Fire Extinguisher.
1. You wish that you will Never have to use it.
2. You don’t ask for a refund when it expires.
3. If need be it will save you and your family in time of difficulty.

 

Myth 3 :
There are many investment products available in the market – some are good and some are bad. We should always invest in good products.
Reality :
An investment product can never be good or bad, it can only be suitable or not.
Some investment products can be suitable for short-term goals, but not for long term. The opposite is also true – a product which is perfectly suitable for long term goals, can be a horrible choice for short term goals.
Hence we must always look for ‘suitability match’ when deciding on a product.
Myth 4 :
Like shares, fixed deposit, property or gold – mutual fund is also an asset class.
Reality :
Mutual fund is not a separate asset class as such. It is actually a ‘well-managed container’ which can contain different asset classes in it.
There are mutual funds which only invests into certificates of deposit. Then there are funds which are known as real estate fund or gold fund. And of course there are equity funds as well and mix of Equity and debt i.e Balanced Fund.
So, mutual fund gives you the facility to invest into different asset classes through it.

 

Myth 5 :
If I want to secure my retirement, I should invest in a Retirement Plan or Pension Scheme. Similarly if I want to secure my child’s future, I should invest in a Child Plan.
Reality :
While investing for a goal, name of the goal is never important. Instead nature of the goal is important – like after how many years the goal is due etc. This is because –  mathematics only understand numbers, not names.
Never go for attractively named investment products. Instead always go for simple, generic, all-purpose products and tag it or link it to a goal by yourself.
Packaged investment products are often found costly, illiquid and restrictive..

 

Myth 6 :
If I come to know of someone who has earned good return by investing in a particular product – my job becomes easier. I should simply invest in that product.
Reality :
Unfortunately it is not that simple. Many things (in regards to finance) of the other person may not be same as yours. Such as – financial background, current assets and liabilities, dependents and their age, income – expense, nature of job / business, liquidity needs, insurance and so on. It is almost impossible that your situation will be exactly same as of the other person.
Investment should always be made keeping every aspects in mind. It should never be made in isolation or adhoc. Personal finance is after all – ‘personal’.

 

Myth 7 :
I have made investments as required. Taken adequate insurance also. I have done my part. Now I am feeling happy and relaxed.
Reality :
Congratulations for whatever you have done so far! But sorry to say – that is not enough. If your answers to all the below 3 questions are not ‘Yes’, then you have reasons to worry:
1) Have you kept all your policy documents, statements, certificates – physical or digital – systematically  in one place so that your spouse or children can find those quickly without your help?
2) Have you kept right holding patterns in all your investments, made nominations or prepared a Will?
3) Are you reviewing your investments and insurance at regular interval..?

 

Compiled and Edited by
CA Nitesh Buddhadev – NB
Nimit Wealth Management
nitesh@nimitwealthmanagement.com
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You can still Save LTCG on equity by effective Planning Explained in detail with example

Since the time the FM has announced 10% Long Term Capital Gains (LTCG) without indexation benefit on Equity investments, there is continuous debate and discussion on the same.

You must have read multiple articles on how the LTCG will be determined, the rules, grandfathering provision and so on.

Here we show you how to use these rules to get maximum benefit out of the same.

Let’s assume that you invested Rs 6 lakhs in equity investments as on 31.01.2017. You require this amount for your Goals in 2024.

(Rs in lakhs)

Year Date of Investment Investment amount Date of Sale Market Value* Capital Gains Action Remarks
2024 31-01-2017 6.00 06-04-2024 13.26 7.26 Book profit and withdraw amount Assuming that the highest value of this investment was Rs 6.50 lakhs as on January 31, 2018.
Pay tax on [Rs 13.26-Rs 6.50] i.e. 10% of Rs 6.76 lakhs plus 4% surcharge i.e. Rs 70,347

* Assumed 12% return                                                                                        

 

You may plan your investments as illustrated below and save tax amounting to approx. Rs 65,000 [94% of your original tax liability]

(Rs in lakhs)

Year Date of Investment Investment amount Date of Sale Market Value* Capital Gains Action Remarks
2018 31-01-2017 6.00 After Jan 31, 2018 but before Mar 31, 2018 6.72 0.72 Book profit and re-invest amount again No tax as Budget comes into effect only on April 01, 2018
2019 31-03-2018 6.72 01-04-2019 7.53 0.81 Book profit and re-invest amount again No tax as LTCG is below 1 lakh
2020 01-04-2019 7.53 02-04-2020 8.43$ 0.90 Book profit and re-invest amount again No tax as LTCG is below 1 lakh
2021 02-04-2020 8.00$ 03-04-2021 8.96# 0.96 Book partial profit and re-invest amount again such that gain does not exceed 1 lakh No tax as LTCG is below 1 lakh
0.43$ 0.48  – Carry forward investment
2022 02-04-2020 0.48 0.54  – Book partial profit and re-invest amount again such that gain does not exceed 1 lakh Carry forward investment
03-04-2021 0.96# 1.08  – Carry forward investment
8.00# 04-04-2022 8.96## 0.96 No tax as LTCG is below 1 lakh
2023 02-04-2020 0.54 0.60  – Book partial profit and re-invest amount again such that gain does not exceed 1 lakh Carry forward
03-04-2021 1.08 1.20  – Carry forward
04-04-2022 0.96## 1.08  – Carry forward
8.00## 05-04-2023 8.96 0.96 No tax as LTCG is below 1 lakh
2024 02-04-2020 0.60 0.68 0.07 Book profit and withdraw amount Pay 10% tax on 0.42 lakhs plus 4% surcharge i.e. Rs 4,380
03-04-2021 1.20 1.35 0.14
04-04-2022 1.08 1.20 0.13
05-04-2023 8.96 06-04-2024 10.04 1.08

*(Assumed 12% return                                                                                           

$ Out of amount invested as on 02-04-2020 of Rs 8.43 lakhs. Book profit on investment of Rs 8 lakhs and carry forward investment of Rs 0.43 lakhs

# Out of amount invested as on 03-04-2021 of Rs 8.96 lakhs. Book profit on investment of Rs 8 lakhs and carry forward investment of Rs 0.96 lakhs

## Out of amount invested as on 04-04-2022 of Rs 8.96 lakhs. Book profit on investment of Rs 8 lakhs and carry forward investment of Rs 0.96 lakhs

 

Simply, by churning your portfolio at the appropriate time returns can be maximised and tax can be minimised. This would require in-depth research and analysis.

This is one of the simplest examples and yet so complicated.

There are many such ways to minimize your tax liability viz. investments through Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP).

Paying 10% tax on asset generating 12% to 15% return is better than paying 20% (or 30%) tax on asset generating 6% to 7% return.

Always remember Compounding is the 8th wonder of the World and this 10% LTCG will be non-event in a few days. Believe in India’s long term Growth Story.

Planning is integral to achieving your Goals. Plan your finances and taxes to be in a WIN – WIN situation.

 

Regards,

Nitesh Buddhadev

Originally posted on Feb 02, 2018 on our Facebook page

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