How to select your financial advisor

Selecting the right financial advisor is the key to successful investment. But the major problem facing everybody is how to select the right one. Well, here are the steps you can use to find the right financial advisor for yourself.

  • Check out different financial advisors. Visit different financial advisors
  • Get details about their experience, clientele, qualifications and the number of years in the industry.
  • Ask for references from all of them and talk to them
  • Find out the charges for the services
  • Find out how accessible he is.
  • Find out how frequently he plans to revaluate your financial plan. Once a year is better.

What budget 2011 means for you? – I

February 28th 2011 was the day when finance minister Pranab Mukherjee announced his budget for the financial year 2011-12. Here are some of the propositions announced and their impact on your personal finances.

  • Increase in tax exemption limits by mere Rs 20,000 and : This means you will be saving just Rs 2060 across all the income categories and a mere Rs 1030 for senior citizens.
  • Senior citizen age set at 60 years: This is good for you if your age is between 60-65, as previously the age limit for senior citizen was 65 years.
  • No tax for senior citizens whose income limit is Rs 5 lakhs above 80 years: Excellent news for senior citizens with annual income of Rs 5 lakhs and whose age is more than 80 years, as they don’t have to pay any tax on their income.
  • Insurance products become expensive: FM has increased tax on insurance products that are primarily meant for investment. While originally you paid 1% as tax on insurance premium, now it has gone up to 1.5%. This means you will get lower returns from your insurance products. Also if you have invested in ULIPs, be ready to shell out more. Till date, you paid tax only on the fund management and mortality charges. But now you will also end up paying tax on allocation charges as well as administration charges.
  • Tax benefits on infra bonds to continue: Till now, you could save extra Rs 20,000 in addition to Rs 1 lakh by investing infra bonds. You can continue to enjoy this benefit even further.
  • No need to file tax returns if your salary is up to Rs 5 lakhs: This will bring cheer to plenty of salaried people, whose income lies between Rs 1 lakh to Rs 5 lakh. But if you have income from other sources like dividends, rent, interest etc., you’ll have to inform about the same to your employer. He will then issue you with a Form 16, which the government will regard as IT return.
  • Introduction of Sugam: Sugam is the new form the government plans to introduce in order to simplify the procedure of filing your tax returns. It is being done to promote electronic filing of tax returns along with payment.  

 

This is all about the effect of budget on the direct taxes. Next time we’ll see its effect on indirect taxes.

Want to invest online in a mutual fund? Here’s how

We all know that investing in mutual funds is the key to getting rich. But with SEBI doing away with entry load charges, many mutual fund brokers have stopped dealing in mutual funds, as they would get their commissions from the entry loads. Instead now it has become mandatory for them to get their fees from their customers. But since they had never actually looked after their clients’ needs and since India never had the culture for paying for the investment advice, the brokers lost their source of their income.

So if you want to invest in the mutual funds, and don’t have time to make frequent trips to the fund house, you can opt for online option. Most mutual funds have tie-ups with many leading bans (except cooperative banks), to allow their customers to invest in their numerous schemes. In fact today, you can do all those things online for which you had availed of the broker’s services.

Now if you want to start investing online here’s how to go about it.

  • If you are an existing investor: Then in that you have already completed the formalities to open the account. You just need to apply for the PIN, to get online access. Most of the fund houses have a tie-up with CAMS to handle their customer service requirements. You can visit the CAMS site and get all the necessary details. Once you get the PIN, you can login on the fund’s site to do the transactions.
  • If you are a new customer: Then you need to open an account. You need to fill the account opening form, submit a cheque for the investment amount along with the PAN card and KYC. The cheque will vary from scheme to scheme, starting from Rs 500 for tax saving mutual funds to Rs 1 lakh and above for some liquid funds. With effect from 1st Jan 2011, it has become mandatory to submit the KYC. If you don’t have it, the fund house will do it for you, free of cost. Now when filling out the form, you can select for online option. In that case, you will get the PIN once your account is opened

 

After you get your PIN, you are all set to invest online.

Impact of regulatory changes on your investments

The last couple of years have seen a flurry of regulatory changes affecting the various Indian investment products. These changes are sure to impact all of us. So it is essential for you to understand what these regulatory changes mean for you. Here are some of the major changes impacting various investment products.

Regularization of ULIPs

  • Reduction of charges: Before the ULIP charges were capped, the insurers charged exorbitant charges on these products. Hence it took a long time for the  recovery of these charges. But now IRDA has put a limit on these charges. This means you can recover your charges more quickly.
  • Spreading out of charges over the policy term: Previously these charges were deducted during the initial 3-5 years of the product. As a result, your corpus decreased significantly. But now, the final amount goes up significantly, as more amount is invested initially.
  • Hike in lock-in period: The the lock-in period for these products has gone up to 5 years from the earlier 3 years. This is a very important change as equities tend to give better returns over a long period, and most ULIPs are equity-based products. So you tend to get higher returns.
  • Guaranteed return on pension scheme: The pension schemes from insurance companies are now set to offer you a guaranteed return of 4.5%.
  • Limitation on surrender charges: With this move, you will get higher amount, if you decide to surrender your policy prematurely.

 

Revised guidelines for PMS

  • Minimum investment for PMS to be fixed at 5 lakhs: Previously, PMS managers would accept clients even though they couldn’t invest Rs 5 lakhs. But with this new SEBI circular, the minimum amount for PMS account has been fixed at Rs 5 lakhs.
  • PMS Managers to charge fee only on the excess profit generated: SEBI has said that the PMS Manager can charge their fee only on the excess profit generated over the previous year. E.g. if you invest Rs 5 lakhs, which after a year becomes Rs 8 lakhs, then you pay fee only on Rs 3 lakhs and not on the entire corpus. This saves you money in the long run. Moreover this fee will be levied at interval exceeding a quarter. This will safeguard your returns.

 

Abolishment of entry loads in mutual funds

  • This means lesser churning, fewer NFOs and no mis-selling. It means investors gain.

Tips to select the right financial advisor

The key to investing successfully is to choose the right financial advisor. A good financial advisor can help save you a lot of money and get better returns with your money. Here are some tips to select the right financial advisor.

  • Trust: You and your financial advisor should have mutual trust. This is very important as different advisors tend to give different recommendations. So it can easily mislead you. It is only when you have mutual trust, that you can manage to get the best returns on our investment.
  • Willingness to serve: Your advisor should be available to you whenever you want. He should have entered into a service agreement with you. This will assure you are in safe hands.
  • Need assessment: The advisor should be able to understand your needs and your risk profile before making any recommendations. If you are a low risk client, and you are advised to invest in risky investments like equities, then you are better off avoiding the advisor.
  • Track record: Get references from your friends and relatives about the performance of your advisor. Talk to the advisor’s clients personally before actually hiring him.

 

These tips are common sense but are essential for your financial health.

Benefits of stock split for ordinary investors

With the stock markets reaching dizzying heights, stock prices of many top companies have become unaffordable for many small investors. In such a situation, these investors have just 2 options: either wait for the markets to crash, which can be a very long wait or buy when a company goes for a stock split.

What is a stock split? How does it benefit small investors? In a stock split, the total number of free shares of the company is divided into bigger number of shares, without impacting the shareholder’s equity or the stock’s overall market value. E.g. if the company announces 5-to1 stock split, it means that for one share of the company that each shareholder holds, he now gets 5 shares. He doesn’t have to pay anything to avail of these 5 shares.

Also the market value of the share will be divided by 5. E.g. if the market price of the share is Rs 1000, the new market price of the share now becomes Rs 200. Moreover the company’s market capitalization now becomes 5 times it original market capitalization. The company can achieve this without diluting its equity.

Normally companies take this step if they think that the price of their share has gone so high that many small investors are reluctant to pay the price. With this step, the company brings the stock price within the reach of ordinary investors. HDFC took this step some time back.

An investor gains by buying the shares of good companies at low prices, as stock split doesn’t  affect the company’s performance. However it is important not to get swayed by the stock split when making investment decisions. Instead it is crucial to focus on company performance, management reputation, company’s growth prospects, future plans and its position vis-à-vis its competitors.

Tips to get good returns safely

Think good returns and safety are a misnomer? Think both these words don’t go hand in hand? Then think again. It is possible to get good returns without taking undue exposure to risk. Here is how.

  • Company FDs: The FDs offered by the companies offer higher returns as compared to the bank FDs. However they are also riskier than bank FDs. So always select the FDs that carry at least A+ ratings or those offered by top corporates like Tata Motors, HDFC etc. It will ensure your capital is safe.
  • PPF: PPF is one of the best means of earning good returns safely. You not only get 8.5% interest on the corpus invested, it is also completely tax-free for you. Both the interest earned and capital withdrawals do not attract any tax, thus increasing your returns.
  • PO Monthly Income Scheme: Here you not only get an interest of 8% per annum, you also earn 1% bonus at the end of the term This interest will be credited to your bank account, every month, thus giving you a monthly income. It is ideal for retired people or people looking for additional income.
  • FMPs and short-term income funds: These are excellent alternatives for people eager to take slightly higher risk in order to earn higher returns. You can expect a return of 8-8.5% for a period of 1-3 years.

 

While all these means offer good returns, always remember that it is the ultimate combination of equities, gold and debt that will help you achieve the highest possible returns.

Benefits of SIP for long-term investors

Financial advisors are harping on the importance of Systematic Investment Plan (SIP). But what is SIP and how does it benefit you? Should you opt for it?

The term SIP stands  for Systematic Investment Plan. In this you invest a particular sum at regular intervals. This interval can be daily, monthly quarterly or half-yearly. This sum can be as low as Rs 100.

Why opt for SIP? SIP lets you balance out the no of share or mutual fund units that you purchase. E.g. if your Rs 100 lets you buy 2 units of a mutual fund when the markets are high, you can get 3 units when the markets fall. This means you even out your investments.

Studies have shown that those who opt for SIP earn far higher returns than those who make lump sum investments. Also since you are investing small sums, you are not taking a major risk if the markets crash.

However SIPs don’t work in rising markets. If the NAV or share price keeps on increasing, you will not get any substantial returns.

SIP is suitable for those who have a steady source of income. If your income flow is irregular, then go for lump sum option, to prevent being charged for SIP bounce.

Why emotional investing is dangerous for your wealth?

The markets are going up and you see all and sundry investing in stocks. Next day the markets crash and everybody panics and starts rushing out from the markets, thus aggravating the market conditions. US economy is down in dumps and the FIIs start pulling out their money, so even your neighborhood uncle withdraws his money from stock markets.

This type of investing is called as emotional investing where human emotions like euphoria, panic, greed and fear impact the decisions made by the investors. But not many know that emotional investing is bad for your wealth. Here is why.

When emotions take over he person’s rational thoughts, he cannot think clearly. He is easily swayed by the emotions and takes decisions that his emotions tell him to do. He doesn’t realize that markets work in cycles. What goes up comes down and vice versa. So if you manage to hold on though the tough times and avoid over exposure to stocks when the markets go up, you can easily make money in the stocks.

Unfortunately not many understand this principle. They lose focus when they get emotionally charged. They make wrong decisions and so don’t make money in the stock markets. So if you don’t get swayed by your emotions, you can rest assured that market movements will not affect the value of your investments in the long run.

Why avoid pension plans for retirement?

Today it has become common place for insurance companies to target unsuspecting customers with their pension plans. However not many of these gullible customers know that pension plans from insurance companies. Here is why.

  • While your investment fetches you tax deduction, you end up paying tax on the amount you receive as the pension.
  • High charges means just a small portion of your money actually invested.
  • You cannot withdraw the money even if your investment performs poorly.

 

So how should you invest your money to build a sizeable nest egg for retirement?

Here are some tips.

  • Diversify your investments across PPF, bank FDs, debt and equity mutual funds initially. Then as you near retirement age, transfer your equity investments to debt instruments for capital safety and to get regular income. Start by invesing 80% of your portfolio in equities, then make it 50% when you reach mid-40s and then keep 20% in equities when you are a couple of years away from retirement.
  • If possible, invest in a property to get a good rental income after retirement.
  • But under no circumstances should you touch these funds. This is particularly true for equity funds, which will give you compounded annual growth rate of at least 15%.
  • While safety of your capital, don’t shy away from taking some risks. Invest in companies like Tata companies, HDFC and Infy to get good returns on your capital without risking your capital.
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