Saturday, April 28, 2007

Financial Planning Calculator (Part I: Children's Needs) - INDIA

I am sharing a financial planning calculator to help you get started in planning for your children's needs.
  1. How much money do I need for my child's education?
  2. How much money do I need for my child's marriage?
  3. How much money do I need to save on a monthly basis towards my child's education?
  4. How much money do I need to save on a monthly basis towards my child's marriage?

Children's Planning Calculator

How to use this calculator

  1. Click on the above link to access the calculator. Once the spreadsheet opens, click on "Power Edit Read Only" to be able to enter values relevant to you.
  2. Cost of college education today: Enter the amount that it would have cost you for sending your kid to college today. (Eg. 5,00,000)
  3. Time to College: Enter the number of years your kid will be ready to go to college. (Eg. 13 years)
  4. Expected inflation rate: Enter what you think will be inflation rate. I suggest 8% though the actual inflation rate today is around 6%.
  5. (Optional) You can also input the returns percentage to calculate how much you need to invest assuming a certian returns.


The calculator will give you the cost of education and marriage based on inflation.

The calculator will give you the amount you need to invest based on your risk profile

  1. Aggressive (high risk) Investments: How much money you need to invest if you choose aggressive investment instruments like equity mutual funds and ulips(equity).
  2. Safe (very low risk) Investments: How much money you need to invest if you invest in safe avenues like government schemes.
  3. Moderate (medium risk) Investments: How much money you need to invest if you take medium risk. (Having investments in equity and also safe avenues).

If you found this calculator useful, please share it with your friends so they can also benefit from it and start planning for their kids education and marriage.

PS: Calculator for planning your retirement will be posted sometime in the future.

Saturday, April 21, 2007

Tips to avoid becoming a victim of financial advisors

I have come across many people who have been victims of misselling. I also fall into this category many years back when I was a novice to investing. I have come up with some simple rules which if followed will greatly reduce the chances of you becoming a victim to many of the financial predators out their who will always try to con you out of your money.

Understand the PRODUCT
Prior to investing anywhere, I always advise everyone to first understand the PRODUCT. Be it mutual funds, ULIPS, traditional endowment plans, shares, futures and options, post office Small Saving Schemes, one needs to understand how these products work. Spend as much time as possible in understanding the product. Do your home work, research on the internet and use any other source that is available to you.

Understand RETURNS and RISK
Once you have narrowed down on the product, evaluate the returns that can be expected from the product. Next understand the RISK associated with the product. Evaluate if your stomach can digest the risk associated with the investment product.

Understand the CHARGES and BENEFITS
Once you have decided on the product to invest, the next step is to evaluate the benefits and charges of the product. One needs to have the patience to read the product brochure to understand the benefits and charges. Evaluate if you are willing to pay the charges for the benefits provided. Not evaluating the charges is one major reason for discontent.

Not understanding either the product or the risk or the returns or the charges or a combination of all of the above is one major reason why one ends up buying the wrong product. Once they realize that they had bought the wrong product, they start to regret. Their emotions are heated, they get angry and upset. They start blaming their so called investment advisor (who is purely a salesman who is more interested in his commission than your interests). To avoid falling into this trap, every investor needs to do their home work.

Friday, April 20, 2007

ULIPS are a long term investment

I have recently come across agents selling ULIP's as three year plans. You might hear them ask you to invest for just three years and then reap the benefits. All this in my opinion is miselling. Investing in ULIP's work only if your investment horizon is more than 10 years.

Below is an illustration of returns from HDFC Unit Linked Endowment Plus based on term of the plan. These illustrations are for a 34 year male. Assuming returns of 10% per annum the following is what the figures look like.

Term Premium Sum Assured Fund Balance Net Returns
3 Years25,0001,25,00068,796LOSS
10 Years25,0001,25,0003,17,6577.17%
15 Years25,0001,25,0007,37,7908.07%
20 Years25,0001,25,00013,01,4478.43%
25 Years25,0001,25,00021,74,3108.62%

Clearly, if you look at the net returns, investment in ULIPs only work if you plan to stay invested for long term. If someone is selling you a ULIP for a time frame of 3 to 5 years, it will not work. All he is doing is mis-selling

Monday, February 12, 2007

Insurance and Taxes

Lot of people in India invest in insurance products to save taxes. Taxes also happens to be one of the biggest selling weapon used by insurance agents. But saving taxes should n't be the primary criteria for buying an insurance policy. The purpose of insurance is defeated if one is looking purely for tax breaks. The main purpose of insurance is to provide adequate financial security to your family. One should first ensure that the Sum Assured is adequate to meet all your liabilities and future obligations towards your family. Taxe breaks are only an added benefit.

If you are buying insurance purely for tax breaks, then you have choosen the wrong product. Equity Linked Saving Schemes are a better product to invest in for saving taxes.