Is PMS for you?

Want to invest in equities? Then you can invest in them either directly or indirectly. When it comes to indirect investment, you have two options: mutual funds and portfolio management service (PMS). Let us understand more about PMS and see if it right for you.

What is PMS? PMS is a customized investment service offered to big investors, who have a lot of money to invest. There is a fund manager to look after each PMS account. You give him a restricted power of attorney to invest money on your behalf. The investment is made on your behalf after taking into account your investment objectives, time frame and risk appetite. So a portfolio of a 28 year old with a small child, looking to build corpus for his child’s education is quite different from the portfolio of a 55 year old man looking to build retirement corpus.

Pros: Here are some of the advantages of PMS.

• Customized asset allocation: The portfolio each investor gets is determined by his risk tolerance level, duration for which you intend to remain invested and why you want to invest. E.g. if you want to invest your money in order to purchase a house within 2 years, your asset allocation will comprise mostly of debt instruments. But if you are planning to invest for your 2 year daughter’s marriage, you are most likely to get equity recommendations.
• 24×7 access: Most PMS service providers let you view your account online. You can analyze the performance of your investments and get information on your capital gains, booked/un-booked gains, updated value of your investments etc.
• Tax efficiency: The fund managers manage your investments in such a way so as to reduce your tax liability.
• Qualified fund managers: Most PMS services are run by professional fund managers who are experts. Thus you can rest assured that your money is in safe hands.
• Reduces your responsibility: You don’t have to spend time looking after your portfolio. Your fund manager is there to look after it and take decisions that will benefit you.

Cons: PMS also has its own share of drawbacks.

• Inability to compare the performance of fund manager: As most of the PMS services are not regulated, it is difficult for you to tell which fund manager has given you the best performance.
• Expensive: PMS managers charge a flat fee + a certain percentage of profits made by your investments. Usually it is the profits that make up the larger portion of the fund manager’s charges. This can work out to be expensive for you in long run.
• Not suitable for expert investors: If you have time and have good investment experience, then PMS are not for you. However for that you need to be emotionally detached. If not, then PMS is your best bet.

Is it for me?: Yes, if you have lot of money and not able to detach yourself emotionally from your investments and have no time to research before investing.

Why insurance is not a good investment option?

“Invest Rs. 2000 a month and get Rs 5 lakhs after 5 years.” “Give a better future to your child by investing in our insurance plans.” These and other similar advertisements bombard us everyday. The basic aim of these ads is to market insurance plans as investment vehicles. But is it true? Do insurance plans really make good investment options?

To answer this question, first let us understand the main objective of insurance. The primary aim of insurance is to protect you and your near and dear ones against any unforeseen calamities. Let’s say, you have met with an accident, due to which you are unable to work. It will affect your income and you and your family will suffer financial hardships. But if you have an insurance cover, you can claim compensation, that will help you ride through the tough time.

Now when you look at insurance as an investment option, a portion of the premium you pay towards your life cover is invested. Depending on your risk profile, you can choose to invest in equities or debt. As a result, the life cover you get is significantly reduced. Also to manage your investments, the insurance company has to hire expert fund managers, which cost money. The fees for their charges are deducted from the value of your investment. Consequently, the value of your investment decreases.

Moreover the charges and the portfolios of these plans differ vastly amongst different insurance companies. This makes it difficult to compare the returns of these plans. Hence insurance + investment combo doesn’t make smart investment decision. Instead, it is better to take both of them separately. Remember the key to successful investment is disciplined and consistent approach.

Your credit card statement demystified

You use your credit card to pay for your purchases, pay the bills and various other purposes. Your card issuer then sends you the card statement for the transactions that have taken place in your account. Do you know how to read it? What do all the terms in the statement stand for? Here we explain the most important terms in simple terms.

  • Payment due date: Payment due date is the last date by which the card issuer expects to receive your payment. If you pay after this date, you are charged penalty.
  • Minimum amount due: This is the smallest amount you must pay. However it is advisable to pay more than this amount in order to avoid paying interest on the outstanding amount. Normally the rate charged on the unpaid balance is very high. You can very easily fall in debt, if you continue to pay only the minimum amount due.
  • Total amount due: This is the actual amount you are expected to pay. It includes any previous outstanding amount, transactions that have taken place in your account and any payments you have made.
  • Total amount due = Outstanding amount + New Transactions – Payments/Credits
  • Finance charges: If you have paid your previous bill late or have paid only the minimum amount due or your cheque has been returned, then your card issuer will charge penalty for you. These penalties are listed under finance charges
  • Credit limit: This is the highest spending limit available for you to spend.
  • Cash limit: This is the highest limit available for you to withdraw cash by using your credit card. However you must remember that you will be charged for this withdrawal unlike the withdrawal done by using a debit card.

These are the most common terms that you will see on your card statement. If your card offers reward points, then you can see the reward point summary at the bottom of the statement. Similarly, if the bank wants to send any important messages to its customers, it may be printed at the bottom of the statement. So it is very important you read your card statement very thoroughly.

Common Credit Card Mistakes

It is becoming a fashion in India to have more credit cards. Unfortunately, the more credit cards you have, the more trouble you will land in. It is not uncommon to see thugs going to credit card holders’ houses to collect the payments. It is alleged that some banks in India use violence in collecting the payments. In Western countries, you won’t see thugs visiting your house to collect credit card payments. The violent method practiced by some banks in India show that it is not only financially prudent to limit the number of credit cards you have, but it is also good for your personal health!

Following are the common mistakes consumers make when they deal with credit cards:

Not paying the bill

This will definitely invite local goondas to your house. Your blood pressure will rise along with the interest rates charged by banks. You will also see more fees and penalties. So if you cannot afford to pay their credit card bill, do not use the credit card.

Paying Late

Credit card companies are notoriously prickly about late payments. These will result in additional fees, interest charges and other penalties.

cut-the-excess-credit-cardsPaying Only the Minimum on Your Card

It’s the fastest way to become a pauper. If you pay only the minimum payment required per month, it is very unlikely that you will ever pay off the debt. It is wise to pay the entire balance by the deadline. If you cannot do that, at least try to pay 25% of the balance by the due date.

Having Too Many Cards

If you’re getting credit cards just for the sake of showing off to friends and family, you will suffer sooner or later. I know, that’s a strong statement, but that’s a fact. For starters, having too many cards will make it easy for you to miss the payment. If you have only one or two credit cards it’s easier to check the statements every month and pay the bills on time. If you have 10+ credit cards, checking the statements alone is a big hassle; you will likely procrastinate until you miss the due date. Lesser number of credit cards will help you organize your spending; it will also help you to pay the bills in time.

How credit card works?

Credit cards have seen widespread use, due to the convenience they offer. No need to carry cash, buy now pay later, facility to avail EMI facility etc. have made this mode of payment very popular amongst shoppers. But do you know it works? What happens from the time you hand over your card at the cash counter to make the payment to when you actually get your card bill?

Credit CardsWhen the cashier swipes your card in the store’s point-of-sale (POS) system, your transaction details are immediately transferred to the merchant’s bank through the communication link. Here your details like card limit, availability of adequate balance and card expiry date are captured and transmitted to your card issuing bank. These details are present in the magnetic strip, found at the back of the card.

Your bank will check all the details and authorize the transaction, if everything is in order and generate an approval code. The authorization is sent to the merchant’s bank, which blocks the purchase amount from your credit limit, so as to pay the merchant later on. The approval code is transferred to the merchant and is fed in by the cashier. It generates two copies of charge slip, which is actually an agreement that makes you responsible for paying your bank.

You sign one copy and hand it over to the cashier and keep the other copy with you. The merchant collects all the other charge slips, prepares batches from them and deposits them in his bank account. His bank sends these batches for clearing and settlement to the credit card association. This purchase amount is charged to your bank, which in turn charges the amount to your card account. 

Though you may think credit card transaction is simple, in reality it is not. There are many steps involved in processing the transaction. You need to be aware of these steps in order to understand how credit card actually works.

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