Emergence of banks in India as Financial Planning Outfits
Till about a decade ago most banks in India offered only traditional banking products-opening savings /current accounts and fixed deposits, loans, credit lines etc. Major part of the revenue was from the spread between the rate of interest offered on deposits from customers (funds borrowed) and the rate of interest charged on loans (funds lent).
Going beyond just transaction oriented banking –
Greater competition in the form of new private sector banks being formed, foreign banks opening branches in India, dwindling interest income and increased customer expectations made it necessary for banks to go beyond just transaction oriented banking and look at other sources of revenue .This resulted in banking foraying in to selling third party products like mutual funds ,insurance , bonds etc and slowly graduating to relationship oriented banking to private banking to wealth management and then to financial planning.
Today most of the private and foreign sector banks, and even the public sector ones are setting up dedicated financial planning outfits complete with qualified professional planners, a strong research team, customer service staff, and the other infrastructure. Banks are also focusing on training their existing manpower for developing the required skills in financial planning. One such initiative has been the IIBF (Indian Institute of Banking and Finance) collaborating with FPSB (Financial Planning Standards Board) in India to develop a specialized postgraduate diploma course in financial advising aimed at bankers.
The future potential-
The world wealth report 2011 by Capgemini and Merrill Lynch Global Wealth Management says –
- Globally, HNWIs’ financial wealth grew 9.7% in 2010 to reach US$42.7 trillion, surpassing the 2007 pre-crisis peak.
- The population of HNWIs in Asia-Pacific, at 3.3 million individuals, is now the second-largest in the world.
- India’s HNWI population entered the Top 12 for the first time.
Inspite of the growing population of high net worth individuals, the market for investment products in India is unorganized and largely broker driven, with a large chunk of the wealth in the country being managed by hundreds of small time agents and brokers. This puts the banks, with their wide branch networks and huge existing customer base, in a very favourable position to go out and tap this wealth.
Understanding the ‘Rupee Cost Averaging’ concept
Rupee Cost averaging is a term often used by mutual fund agents and financial planners to explain the benefits of systematic investment plans of equity mutual funds or investing a small sum regularly in a disciplined manner.
Let us see how this actually works with a simple illustration.
| Month | Investment Amount | NAV | No. of Units |
|
1 |
2000 |
10 |
200.00 |
|
2 |
2000 |
9.95 |
201.01 |
|
3 |
2000 |
9.73 |
205.55 |
|
4 |
2000 |
9.65 |
207.25 |
|
5 |
2000 |
9.5 |
210.53 |
|
6 |
2000 |
9.47 |
211.19 |
|
7 |
2000 |
10.05 |
199.00 |
|
8 |
2000 |
10.53 |
189.93 |
|
9 |
2000 |
10.21 |
195.89 |
|
10 |
2000 |
10.73 |
186.39 |
|
11 |
2000 |
11.07 |
180.67 |
|
12 |
2000 |
11.66 |
171.53 |
|
TOTAL |
24000 |
|
2358.94 |
Mr. Gupta invests Rs 2000/- per month for a year in a systematic investment plan of a new equity mutual fund by a leading fund house. The NAV (Net Asset Value or price per unit) is Rs 10 at the time of entry.
During the year the markets fluctuate as a result of which the NAV falls a little below the entry price for the first 6 months and then recovers in the second half of the year. The NAV at the end of the one year period is 11.80.
Current value of Mr. Gupta’s investment = No. of units * current NAV = 2358.94*11.80 = Rs. 27835.50
Average NAV or sale price per unit over the 12 months = 10.21
Average cost per unit = 24000/2358.94 = Rs. 10.17
How this approach benefited Mr. Gupta –
Though the market fluctuated during the 12 month investment period, Mr. Gupta accumulated more units when the prices were low and less units when the prices were high due to which the average cost per unit is lesser than the sale price per unit resulting in a profit.
This is Rupee Cost Averaging. Mr. Gupta made the market fluctuation work for him by eliminating guesswork and the risk of timing the markets by following the disciplined approach of investing a fixed amount periodically.
Common mistakes people make while investing
Starting late
The earlier you start, the better off you are. The advantages of starting early have been discussed in an earlier article last week. ( See “importance of starting early” Dt. 19th March 2012)
Starting your investments when you have substantial outstanding loans to pay
We tend to hold on to home loans, educational loans etc. because of the tax rebates they offer, but the high interest charged on these more nullify the effect of these rebates . It is advisable to keep part paying your loans whenever you have any surplus money. I have also come across people who regularly invest their income surplus, yet never pay their credit card dues in full and always have a revolving credit.
Thinking “Short Term”
Most people are reluctant to lock-in their savings for a long term and prefer lesser yielding short term investment avenues where they have the flexibility of withdrawing their capital at will.
Stagger your investments- money which you are likely to require in the near future should go in short term fixed income or debt schemes. The rest of it which you probably do not require for the next 3-5 years or more should be invested in riskier avenues where the longer term mitigates the risk and enhances the returns.
Playing it too safe
Many of us are risk averse and are happy keeping all our money invested in Fixed Income and Govt. bonds where we are reassured that our principal is safe , even though the rate of return is not very attractive. The consequence- after accounting for the high inflation and income taxes, the real rate of return is actually close to NIL or even negative!!
Depending upon what your age is, take exposure to the stock markets-either directly or through the mutual fund route. The lesser your age, higher the exposure should be, since you have the time to face all the market fluctuations and get rewarded over the long term.
Not investing anywhere
There is a small segment of people who are happy letting their surpluses lying in savings or linked fixed deposits and do not believe in complicating their life by first investing and then tracking their investments. After all, why take unnecessary risks when the returns are not even guaranteed??
A piece of advice for them…
Yes, there is no guarantee that the investments will do as well as expected. But one thing is guaranteed. If you choose to do NOTHING, you are not going to achieve your financial goals for sure!
Why women should take active interest in their families’ finances
Mr. and Mrs. Sharma are senior citizens leading a peaceful retired life. Their children are all well settled with families of their own. Mr. Sharma, being a Chartered Accountant takes full care of the family’s finances. Then, all of a sudden he passes away after a brief illness. This leaves Mrs. Sharma in a very difficult situation. Not only does she have to deal with the emotional trauma of losing her life partner at this stage of life, she also has to deal with all their investments and finances. Mr. Sharma being an investment savvy person, has a diversified portfolio consisting of stocks, Mutual Funds, Pension Plans, Insurance, Bonds etc. Knowing her husband to be professionally more qualified, Mrs. Sharma left all the investment decisions to her husband and now has no clue how to go about handling these herself.
Such situations are not uncommon in occurrence. Most of us would have seen it happening to either our friends, acquaintances, relatives and few of us would have even gone through it personally.
Isn’t it ironical that women today are educated and handle almost all the day to day finances of the family including paying the regular household bills, kids’ school fees and other household expenses ; yet very few of them participate in the key investment decisions or are even aware of them ?
Why this happens –
Finance and investments in India traditionally has been a male dominated field. Men still prefer to take the major investment decisions themselves, either because they feel the woman will not understand, or they do not want to burden their spouses who already have their hands full taking care of the house and children. Sometimes, this is also supported by the woman who is more than happy to let her husband handle it.
To stress upon the need for women to be in the know of the families’ finances, here are some statistics:
- Women live longer than men. One out of every four women are on their own by the age of 65, either by widowhood or legal separation from their spouses.
- Eight out of every ten women are forced to manage their own finances at some point in their lives.
- Women are either home makers or they earn less that their husbands and have to rely on their husbands’ pension or their children during their retirement years.
- Women face equal risk of health related illnesses as men, which have to be provided for.
What should be done –
Apart from taking active interest in the families’ investment decisions, women should save a small sum regularly every month from their monthly surplus in a disciplined manner. This applies as much for home makers as it does for working women. This helps them create a nest egg for themselves and secure their financial future.
In conclusion , a happy and successful marriage is one where the husband and wife work together as a team in perfect co-ordination sharing all the responsibilities and jointly taking all decisions right from going on a holiday to raising their children . The same should hold true for the investment decisions too, right ?
Budget 2012-Impact on your personal finances
Budget 2012 presented by Pranab Mukherjee though largely perceived to be a non-event, has some sops for the individual investor.
- More disposable income in the hands of the individual investor through favourable revision of the income tax slabs.
The basic exemption limit has been increased from Rs 1.8 lakh to Rs 2 lakh for all individuals under age 60.
Taxable income between Rs 8 lakh – Rs 10 lakh earlier taxed at 30 % will now be taxed at 20% which means extra savings of Rs 20,000/- for those in this income bracket.
Earlier Revised
Income Tax Rate Income Tax Rate
Upto Rs 1.8 lakh NIL Upto Rs 2 lakh NIL
Rs 1.8- Rs 5 lakh 10 % Rs 2 – Rs 5 lakh 10 %
Rs 5 – Rs 8 lakh 20 % Rs 5 – Rs 10 lakh 20 %
Above Rs 8 lakh 30 % Above Rs 10 lakh 30 %
- Senior citizens (above age 60) are now exempted from paying advance tax if they do not earn any income from business or profession.
- A new scheme called the Rajiv Gandhi Equity Savings Scheme to be introduced where individuals with an income below Rs 10 lakh can get 50 % tax deduction on direct equity investments up to Rs 50,000.
- Savings Bank interest up to Rs 10,000 to be exempt from income tax for individuals and HUF.
- Rs 5000 tax deduction ( included in overall limit of Rs 15000 u/s 80 D ) for individuals who go for preventive health check up.
Now for the bad part !!!
- Increase in service tax rate from 10% to 12%.
- Beginning October 2012, sale of residential properties in urban areas over Rs 50 lakh will attract 1 % tax deduction at source.
Investment Basics : Importance of starting early
” The early bird catches the worm”.
All of us would have heard this famous proverb.When it comes to our personal investments,it cannot be more relevant.Let us see with an example, how important it is to start saving early.
Ram and Shyam are childhood friends aged 25.They have just finished their studies and started working.
Ram is conservative,thoughtful and meticulous by nature.On being advised by a professional financial planner,he starts investing Rs 1000 per month in a recommended Systematic Investment Plan.
Shyam too is keen on saving,but he decides to enjoy his new found financial independence for now and like most of us tend to do,decides to postpone his savings plans for sometime, till he settles down in his job and gets some financial stability.
At age 35 , he is impressed with the steady growth in Ram’s portfolio and starts investing Rs 2000/- per month (to make up for the lost time) in the same plan.
Let us see where both of them are at age 55.
Ram has saved Rs 1000/- per month for 30 years.Total amount invested is Rs 3.6 Lakhs
Shyam starts 10 years later, and has invested Rs 2000/- for 20 years.Total amount invested is Rs 4.8 Lakhs.
Assuming a conservative growth rate of 8 % p.a , this is how they have fared:
Ram : Current Investment Value : Rs 15.03 Lakhs
Shyam : Current Investment Value : Rs 11.84 Lakhs
Even after starting with the double the amount per month and investing 33 % more over time, Shyam’s investments are still 27 % lesser in value !! This is the power of compounding,which Ram benefited from due to an early start.
Conclusion : Remember the three mantras of investing :
Start early
Save regularly
Invest wisely
Why do I need a Financial Plan ??
Since this is my first post on my blog, I’ll start with the basics..Why does one need a financial plan ?? Most of us save on a regular basis anyway!
What is the difference between saving and financial planning??
Saving is regularly investing the surplus accumulated from the regular household income after meeting all the expenses in to various investment avenues.But this may not ensure that you will be able to meet all your future financial goals.
Financial Planning is nothing but PLANNED savings .The process starts with identifying specific financial goals like buying a new house, childrens’ education and marriage, providing for retirement etc.This is followed by an estimation of the amount required in future to meet each of these goals.Finally suitable investment schemes are identified and regular investments are done to accumulate this amount.
Why is it so necessary to have a financial plan??
1. Higher salaries due to the economic boom and globalization – Higher disposable income and investible surplus which requires prudent planning.
2. Availability of a vast (and ever increasing ) number of investment options today – choosing the right and suitable investment avenues is not an easy job!
3. High income taxes significantly reduce the post tax earnings – need for identifying tax efficient options.
4. High inflation – eroding the purchasing power of the rupee- need to take calculated risks to earn a positive real rate of return.
5. Rising cost of education and medical facilities.
6. Increased life expectancy and the lack of a social security net in the country- saving enough for retirement becomes essential.
7. The nuclear family trend – people prefer to be independent rather than depend on children during their retirement years.
Sriraksha Financial Planning Services 