A small video explaining what is financial planning.

By Karim Lakhani - CFP CM Chief Financial Planner & Managing Partner 3rd EYE Financial Planners

Is buying car a sensible decision?

Buying a Car has become one of the goal of most of the individuals. It has become a matter of pride to maintain a car. For this either you accumulate funds for few years or borrow funds and pay EMI’s for years, or a combination of both. Now the question is, is it really worth to spend so much money in a car?

Let’s do analysis on few parameters.

COST: The most important factor to consider will be cost. Let us assume you buy a mid-range petrol car of around 6L or diesel car of 7L for comparison purpose. A comparison between buying a car and not buying a car, but getting the same comfort of riding in a car through rental cars like Ola, Uber, etc.

When you buy a car completely on loan

	PETROL	DIESEL
Loan	6,00,000	7,00,000
Term of loan	5 YRS	5 YRS
ROI	11%	11%
EMI	13,045	15,220

Further monthly running expenses

		PETROL	DIESEL
	Daily Running (kms)	50	50
	Days (active days in a month)	25	25
	Total running (kms)	1250	1250
	Mileage (km/lt)	12	15
	Total fuel (mthly required in lts)	104	83
	Cost of fuel (per lt)	70	60
	Monthly fuel expense	7292	5000
ADD	Insurance (avg pm 7000 p.a for petrol and 8000 for diesel vehicle)	583	667
ADD	Servicing (2 times servicing every year with total cost of 10000 for petrol & 12000 for diesel vehicle)	833	1000
ADD	Washing & Cleaning	300	300
ADD	Repairs	500	600
ADD	Chauffeur/Driver	10000	10000
ADD	Parking fees (Home and Out)	1000	1000
ADD	MISC	300	300
	Total running cost per month	20808	18867

    * You may think why am I considering cost of a Chauffeur, as most of us drive by self, but I am comparing it with cab service which comes with a driver. In order to get the same comfort of a Cab service, I have added salary of a Chauffeur.

At the same time looking at the cost of travel using cab services

Monthly run	1250
Cost per km	10
Total cost per month	12500

     * 10/km is the average cost considered, although some of the cab service providers promote it as 5/km but considering the charges they levy as fixed, per minute cost, etc will add up to around Rs.10/km.

With the above two tables you can see a clear cost difference of Rs.8308 per month (20808-12500) for petrol cars and 6367 per month (18867-12500) for diesel cars. This monthly savings along with saved EMI amount can be invested in any other asset class giving a return of 12% p.a.

Regular SIP	21,354 (13045+8308)	20586 (15220+6367)
Term	5 YRS	5 YRS
ROI p.a.	12%	12%
Fund Value	17,43,957	17,62,951

The difference in the networth of an individual after five years will be

		PETROL	DIESEL
	Investment Value	17,43,957	17,62,951
LESS	Car resale value	3,54,294	3,10,593
	Difference in networth	13,89,663	14,52,357

(Depreciation for petrol car is considered to be 10% p.a. WDV and for diesel vehicle 15% p.a. WDV)

This shows the person not buying a car becomes richer by more than 14 lakhs by the end of 5 years even after enjoying rides in cabs. The cost of commuting via cabs are going to become further cheap in future when auto driven cabs will be introduced, here driver’s salary will be saved. Already few companies like Tesla & Google have started test run of their auto driven cars and very soon will be launching in the markets.

COMFORT: When you ride in your own car, either you drive yourself or hire a chauffeur. Driving yourself may reduce your cost but increases frustration driving in ever increasing traffic, where in when you use cab facility, you have a driver on his duty and you don’t need to worry about driving. This also increases your productivity in your work, as while in transit you can study or do your office work, which was never possible when you are driving. Also the frustration of driving in heavy traffic can be carried to office or work place affecting your performance.

There are instance where you meet even with a small accident while driving may lead to a big fight on the road resulting in waste of time, money and further irritation.

Morning when you get ready for office and see car tyre is puncture, either you spend extra in auto rikshaw or hire a cab for that day or for days till you replace your stepney which is again a time consuming process.

FLEXIBILITY: If you happen to be the only driver in the house, then dependency on you increases and you need to do an extra job of a driver whenever or where ever your family has to go, you are always there even places where you are not invited and required. Loosing self dignity flexibility at times.

CONVENIENT: To drive a car you need a valid driving licence, which further adds to the cost. At times not carrying proper documents may lead to further hassles of dealing with traffic authority, paying unnecessary challans and further waste of time. Apart spend considerable time in maintaining all documents properly, remembering insurance renewal dates, pollution expiry date, etc.

Wherein using cab services will save you from all the above issues, no need of licence, no need to maintain documents, no need to deal with traffic authority, and so on. Whenever you need a cab, you can book it over the phone and travel, all other hassles are handled by the cab provider.

Also in case of maintaining your own vehicle, you are always scared of taking the car out due to heavy traffic and the first question comes to your mind before going to any new or unknown place is, whether I will get parking space or no. If you get parking space in the city then the parking fees can be as high as Rs.100 per hour at Airports or Big Malls. If you do not get the parking space then you spend hours in finding the space which might be too far from the place you actually wanted to visit, leading to unwanted walk and waste of time. I have seen people unable to spend time with family as they are always busy searching parking space.

Even to park your vehicle in your apartment you need to pay separate rents or to avoid rents you buy the space which may cost you in the range of 50 thousand to 2 lakh, which again adds to the cost.

Conclusion: Overall buying a car does not make commercial and mental sense. But this debate is valid if you buy a new car of middle or higher segment. But if you buy a car costing as low as 2-3L like  Nano or Alto or any other vehicle in that range that to some extent you can justify the cost, or alternately if there are solar or electric cars with heavy subsidy by government may make some sense. Till such time enjoying cab rides will be more sensible. In today’s world with lots of uncertainty, one should never miss opportunity to create wealth. We should always try and invest in such assets which appreciate and not in one which depreciates.

Although we have concluded that buying a car may not make commercial sense, but this is very subjective as in life you may not look at cost and finances in every matter. If you feel that maintaining the car is a matter of pride and a certain requirement to maintain status then this debate may not make sense to you. Buying a car may make more sense if you stay in a city or town where such public transport or cab facilities are not available.  

  

 

   

By Karim Lakhani - CFP CM Chief Financial Planner & Managing Partner 3rd EYE Financial Planners LLP

Money: A Blessing or Curse?

Who is happier, someone with abundant wealth or someone with scarce?

Person with less or no wealth will opine that the wealthy are happier, and the wealthy will opine that people with less or no wealth are happier. In this case who is right?

To answer this lets understand the reasons behind such opinions. People with less or no wealth have lots of unaccomplished and unachievable goals and desires. They are worried because they do not have enough money. They may not have sufficient liquidity and contingency fund in case of medical or other emergencies. Due to job insecurity, in-case they lose their source of income, the family’s monthly survival could be at risk. They might not have a shelter of their own and need to depend on rented apartments. People with low income have many more such issues. Hence, they believe the wealthy are happier as they have abundance of wealth for survival as well as to enjoy life.

The less wealthy think that money solves all problems, whereas the wealthy believe that more wealth brings more problems along. It is true to an extent that if you have something valuable then its security is a major concern. Having wealth today doesn’t guarantee equal or more wealth in the future. The wealthy have concerns like; what will happen if my house or shop is looted or damaged due to a major fire; how do I save on taxes as a considerable part of the income goes towards tax; how can I grow my wealth to beat inflation, or at least maintain its value post inflation; will I be able to maintain the same standard of living in the future? They may have sleepless nights due to the worries and they believe that the poor get sound sleep. The poor, of course, have worries of their own. Both are correct in their own place.

No one in the world is worry-free, particularly financially. Let’s take the example of physical health where you may not see any one who is worry-free. The fittest is worried about how to stay fit, and someone unwell is worried about how to improve his/her health. A fit person tries to remain fit by maintaining good habits such as a healthy diet, regular exercise etc. On the other hand someone who is unwell may try to recover using medication and other treatment.

Whether one needs to stay fit or needs to get some treatment, it is always a good idea to approach a Professional. To maintain fitness one might consult a professional like a Dietician or a sports coach or a yoga instructor. If someone is unwell they would want to consult a Doctor. If someone has fever, for instance, what are his options? First option is to do nothing, second is to take a Paracetamol, third is to ask the chemist who has little knowledge of diagnosis but may advise you, and the forth option is to consult a Doctor. Which option would you like to choose? If you are prudent enough I am sure you would prefer consulting a Doctor rather than self medication or experimentation. Diagnosing the problem is very important before prescribing any treatment. And that can only be done by a professional who is certified, namely a Doctor. The other three options may prove to be rather disastrous.

Just like physical health should you take a chance with your financial health? You may be facing various challenges with your finance. Every problem has a solution. One has to devise a unique solution as every problem is unique. There are a lot of questions people have related to finance, which can be answered by a Professional Financial Planner.

Questions like-

·         I have money but I don’t know how and where to invest it.

·         How much balance I should maintain between risk and return?

·         What should be my right asset allocation?

·         How do I save on taxes to the maximum possible limit?

·         I have life insurance cover for myself, but is it sufficient?

·         What will happen to my family if I happen to become disabled?

·         Will I be able to accumulate sufficient funds for my children’s future?

·         Will I have a comfortable retirement life?

·         Can I buy a house for myself now or later?

·         Should I go for loans & liabilities?

·         How is my current financial health? & many more

There is no problem without a solution. All the above queries have a solution. The question is, are people consulting a professional or doing it themselves. Most people manage their finances on their own, or with tips from friends and family. Some may even take advice from product sellers like investment brokers, stockbrokers or banks. This is just like taking advice from a chemist for a fever. So, who do you turn to for advice? There is a general lack of awareness about who this Financial Doctor is.

CFP^CM (Certified Financial Planner^CM) is the professional who is certified to advise individuals on their personal finance. In other words you can say CFP’s are Financial Doctors. These professionals will guide you throughout your life and answer all your questions about finance. It is the most reputed designation across the world as 24 countries recognize CFP^CM giving it global recognition. It is one of the most respectable professions in the western world. People in the West have understood the value of a Financial Planner for their financial wellbeing. Unfortunately, India has only 1800+ CFP^CM whereas we need more than 50000 CFP^CM as per market analysis. Due to the less numbers and ever increasing demand, CFP’s are gaining utmost importance.

It is important and very interesting to note that a CFP works for the client and not for any company to sell any product. Since they do not earn any commission, their advice is completely genuine and unbiased. CFPs generally charge fees for their services. A few things which distinguish a CFP from other so-called advisors in the industry are, firstly they are well qualified and oriented in Financial Planning, passed a very competitive exam conducted at NSE centres across India through FPSB India (Financial Planning Standards India) affiliated to (FPSB USA). A CFP has to undergo intensive training, needs to acquire required experience and abide by Code of Ethics and Professional Conduct. This ensures continuous professional development and the highest quality.

I would recommend and encourage you to be prudent and make your hard-earned money work and secure your future. A professional financial planner can help you achieve your goals. Lastly, if you feel you have the acumen and aptitude for finance, consider a rewarding career as a CFP.   

               

By Karim Lakhani - CFP CM Chief Financial Planner & Managing Partner 3rd EYE Financial Planners LLP

Pension Plans from Insurance companies, understand it before investing..

By Karim Lakhani - CFP CM
Chief Financial Planner & Managing Partner 3rd EYE Financial Planners LLP
Academic Head 3rd EYE Academy for Financial Studies

Pension plans! Very popular amongst people who are not having privileges of pension from Employer if they are Employees of Private Sector or Self Employed people. And when time comes when employees have to plan for their taxes and declare investments under section 80C (80CCC), Pension plans are one of the favourite instruments where people think that they can save on taxes at the same time secure their retirement income, and they end up buying such pension policies/plans from Insurance Companies.

The understanding about the objective of such products is very right but they are designed in such a way that the objective is generally never fulfilled and they do not prove to be the best in class, reasons are many starting from designing to operational to regulatory to statutory.

Below are few of the drawbacks of pension plans that one has to understand before investing in it....

Liquidity: In pension policies you have 2 phases, 1^st is accumulation phase i.e. pre retirement period when you are earning and paying premiums and 2^nd is withdrawal phase i.e. post retirement period wherein you expect regular income in the form of pension also known as annuity. The policies are designed in such a way that they allow withdrawal only after retirement i.e. withdrawal phase. But if you try to withdraw money or surrender policy before maturity date or vesting age (retirement age), this will attract hefty penalty or surrender charges resulting in you receiving very less amount back, at times it is so low that you don’t even get what you have paid through premiums.  Before annuity starts i.e. pre retirement period you do have an option to withdraw or surrender the policy though with charges but once annuity starts it takes away even the little possibility of liquidity or withdrawal for life i.e. after retirement once annuity starts there is no option to surrender policy and withdraw the funds.

Flexibility: Another problem with such plans is you do not get flexibility to invest your money in alternate instrument if the former is not performing well, once you have started a policy, you have to stick to the same company & fund for the whole term, then whether you are happy with the performance or no, you have to continue without much of options. Flexibility is very important as pre retirement period is very long period and many opportunities will knock the door in between, there might be many better funds or options which can be introduced in between and having funds available at such time will help you take benefit, locking money in one instrument is like losing opportunities.

Charges: These policies charges are at a higher side spread across multiple heads, i.e. Allocation Charges, Admin Charges, Fund Management Charges & above that Service Tax. All these charges generally eat away all the returns generated by the fund and leave very less for you. Other than the above charges, such policies also attract surrender charges as discussed in the previous points.

Returns pre retirement: There are 2 variants of pension plans, 1^st is Traditional & 2^nd is Unconventional plan. Traditional policies invest in Government Securities and other secured Debt Securities and as a fact that everyone knows the yield is too low and after charges they end up giving returns between 5-7% which is even lower than inflation. The second one being unconventional i.e. ULIP’s, over here the investor though have an option to park their funds in Equities but due to high charges the net returns to the investor/policy holder is too low compared to what an Equity fund should generate.  

Returns Post Retirement: Once a person retires and opts for Pension/Annuity, all the accumulated funds are then transferred in to an annuity fund which is a pure Debt fund, again resulting much lower yields i.e. around (7-7.5% aprox) then other debt securities in the markets. And more over they are fixed in nature depriving you from interest rate benefits in future if the rates happens to go up.

Annuity options: Once a person retires and wants to start Annuity, has to select options out selected few available with Insurance Companies, some of them which is more popular and opted by many are

1)   Life Annuity: Under this option you get annuity for the whole life as long as you live and after death no money comes back to family. This is not a good option if death occurs in a very short duration after annuity starts.

2)   Joint Life Annuity: Under this option annuity continues throughout the life of couple, it continues even after the main annuitant (policy holder) expires. In this option Annuity reduces after the death of the main Annuitant which at times may not be sufficient for the surviving Annuitant and over here same as Life annuity, no money is received by the family members after the death of both the partners.

3)   Annuity with return of purchase price: In this option all the investments made i.e. purchase price to buy the annuity at the time of retirement will be returned to the family after the death of the Annuitant, but in such case the annuity received is so less that it proves to be insufficient at times to take care of even basic expenses.

There are many other annuity options but none of them prove to be better.   

Taxability: Insurance plans generally comes under EEE category i.e. Exempt at Entry, Exempt on Earning & Exempt at Exit but pensions plans are exception to this as it falls under EET i.e. Exempt-Exempt-Taxed. Pension plans get Tax benefit under section 80CCC at the time of Entry i.e. Premiums get exempt from Tax to the extent of 1L pa, all the gains, interest or profits earned out of Funds invested is also Exempt from Tax but the bitter part is Exit which is all Taxable, tax benefits at the time of exit is equally important or say more important at times when you have no other source of income other than Annuity. At the time of retirement you get 2 options, 1^st is convert all the funds into annuity & the monthly annuity will all be taxed as Income from Other Source as per your individual Tax Slab. 2^nd option being little beneficial than the 1^st which allows you to withdraw 1/3^rd of the Fund value as Lump Sum one time which is all tax free and the remaining 2/3^rd can be used to purchase annuity and the reduced Annuity will be taxed. But in this case also if the 1/3^rd part is reinvested in such instrument which is taxable on returns part then this option will add no value. If you try to withdraw all fund or surrender the policy before retirement or say Vesting age then all withdrawal will become Taxable in the year of withdrawal and will be added to that years income possibly at times pushing you in a higher tax bracket for that particular year. This is more dangerous and calls for double taxation for those people who had not taken 80CCC benefit at the time of investing/paying premiums as with their other investments 1L limit might have got exhausted, this purely being a retirement plan in such case the premiums paid were also taxed as 80C/80CCC limits were already exhausted resulting in tax on such investment in the year of payment of premium and again taxed at the time of withdrawal as in such case all amount withdrawn is Taxed without discriminating or considering Capital Gains (returns) & Principal (premiums paid).       

Overall I can say there are much better options available than pension plans which prove to be better in terms of returns, liquidity, flexibility, charge-ability & tax benefits.  

How to Evaluate Performance of a Financial Planner?

By Karim Lakhani - CFP CM Chief Financial Planner & Managing Partner 3rd EYE Financial Planners LLP

              How to Evaluate Performance of a Financial Planner?

A lot of people these days are seeking professional Financial Planners advice as the benefits and importance of a Financial Planner’s advice over the traditional set of advisors has been realized. For all such people whether before they avail the service, or during or even at the conclusion of the service period the question arises as to “How to evaluate the performance of the financial planner”.

Most of the people try to evaluate the performance of a Financial Planner by comparing the returns generated by the planner on their portfolio. It is just like evaluating the quality of a 5 start hotel just on the basis of the taste of the food they cook, neglecting the hygiene they maintain, ambience, amenities and overall experience. One may even find the food cooked in a 5 star hotel tasteless or less tasty than compared to the road side food but one must not forget that a 5 star hotel’s food is cooked based on quality and their food is healthy as the Chefs are trained to cook healthy food. The fact is tasty food may not be healthy and healthy food may not be tasty always.    

                                   

Evaluating the performance of a Financial Planner is very different from investment portfolio. A portfolio can certainly be compared with the market returns, but a Financial Planner has a very wide range of service to offer, investment planning & portfolio management is a small part of the whole service offering.

A Financial Planners service includes many such qualitative benefits apart from quantitative benefits which at times becomes difficult to compare and evaluate.

To evaluate the performance of a Financial Planner, one has to first understand his roles and responsibilities and his involvement in shaping your finance. Let us discuss some of the important areas where a Financial Planner gives his/her inputs.

Budgeting:  A financial Planner helps in bringing discipline in ones expenses. A very famous quote I remember which says “A rupee saved is a rupee earned”. We strive hard to generate an extra percentage of return on investment but on the other hand we spend so much towards unnecessary expenses which has much bigger and negative impact on our finances. Once Financial Planner understand the need and scope of spending less, will help you do budgeting by reducing spend on discretionary and impulsive expenses.

Here the Financial Planner helps you spend less and save more resulting in more investments and high wealth creation.

Emergency Funding: It is been observed that people keep major junk of their money in cash and a  partial amount they invest from which they need the highest returns, but they don’t realize that the money kept in cash either at home or savings account can earn much higher returns if parked in proper instruments. At the same time there are cases where some people don’t maintain minimum required cash balance, this can cause liquidity issues at times of emergencies even leading them to use credit cards or borrow funds at very high interest rates.

Here the Financial Planner helps in optimum utilization of your funds and properly channelizing them in right instrument not allowing them sit ideal resulting in increased profits and returns on investment portfolio.

Debt Management: Loans can be good and can also be bad. Loans are suppose to reflect in Liability side of a Balance Sheet but some loans are such which are as good as Asset, in other words they help you create wealth or Assets for you. A Financial Planner helps one to decide which loan to go for, which type of loans to avoid, what is the maximum limit of loan he/she can afford to take, etc. This helps the clients shy from bad loans which could had proved to be disastrous had they opted for the same, because of high interest outflows, resulting in financial loss.

Here the Financial Planner helps you save your money from paying high interest and get rid of unwanted and unsuitable borrowings.

Goal Funding: A Financial Planner helps one identify all their life goals and also in understanding which goals are practically achievable and which are not. With this, one can very clearly understand his/her limitations and never over expect or under expect from life. Without the help a Financial Planner one would never be able to understand which goals are realistic and to be focused. Many a times a person may try to run behind such goals which looks achievable but may adversely affect any other future goals which may be more important and obligatory.

Here the Financial Planner will give a clear vision of future possibilities, saving your money from getting spend elsewhere.

Asset Allocation: A proper Financial Planning base is laid on the ground of investment and for investment a proper Asset Allocation is required. There is no such ideal Asset Allocation available which works for everyone. Also no thumb rule works in real life. How much Risk one should take in his investment portfolio and how secure the portfolio should be, this question can be answered by a Financial Planner. A Financial Planner does not run behind returns but try to design a portfolio as per the clients risk appetite so that the returns generated out of the portfolio are in line with the risk appetite and goals and in case there is a loss should be in range of your capacity to bare loss.

Here the Financial Planner guides you understand your risk exposure and saves your money to get over exposed or under exposed to any one particular asset class.

Tax Planning:  A Financial Planner helps you to save on tax by proper Tax Planning. Saving on tax does not only mean asking to invest under section 80C, there are many other avenues where tax can be saved. They not only try to save tax on current income, but also try to reduce future tax liabilities.

Here Financial Planner saves your money by reducing your tax liabilities, which is again a profit to you.

Estate Planning: Making sure that your wealth passes in the right hands after you, is something that a Financial Planner always works on. If a proper estate planning is not done then the diseased family may incur lot of cost to acquire assets which is deemed to be their own.

Here the Financial Planner prepares you, prevents your family from any such future litigation and saves lot of your families spending towards exhaustive process of estate transfer.

Investment: A Financial Planner has in dept knowledge of Financial Instrument and products, they help you select the right product. It is not about selecting the investment instruments which can give you the highest return when you compare it with other products in the market, but it is about selecting the best suitable product suiting your risk appetite and competent enough to help you achieve your goals.

Here the Financial Planner helps you in identify the right products and protects you from buying or investing in wrong products, which saves your money big time.

Review: Once you invest, there can be lot of ups and downs in the market and your portfolio may go heyvaya particularly when you have a good component of Equity or Equity related instruments in your portfolio. For this, on regular basis corrective steps has to be taken to make sure whether we are in line with the expectations and targets. At times without a Financial Planners advice you can take wrong decisions on your investments which may prove to be disastrous for you in future. A Financial Planner is one who will guide you even at times when you are unable to judge the situation, foresees the danger or an opportunity.

Here the Financial Planner helps you create an opportunity to increase your investment returns or saves you from danger reducing heavy losses and makes sure you achieve your investment objectives with peace of mind.   

Like wise there are many other Quantifiable and Unquantifiable benefits that a Financial Planner provides, all such benefits may not come at once but these are the benefits which is enjoyed by clients over a period of time. If you have benefited out of any of the above mentioned benefits, then the Financial Planner has done his job and is creating value in his/her services to you.

If you have already engaged a Financial Planner will now realize many such unquantifiable benefits that you must have got till date. For those who do not have engaged a Financial Planner will be able to understand the benefits only after engaging a Financial Planner.