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Why financial planning is important for a peaceful living

Mahesh Kapasi 
on 16 August 2018


1. Hard day for Pensioners and fixed income earners. The present interest rates are too low as compared to sixties and seventies. It is very difficult to save a sizable amount for old age without risk as interest rates on small savings are cut drastically. Inflation is too high. Compare the prices about four-five decades ago. Earlier it was true that it is difficult to make first Million of Rupees. Then one could relax as one was getting the adequate returns on investments of a million of Rupees for one’s livelihood. But, this theory is no more valid. As interest rates on investments are reduced to almost nothing. The millionaires are in fact, poor people! To be called rich one must have few Crores of Rupees or at least a Billion of Rupees! Even at old age (senior citizens) must be physically and mentally fit to earn a livelihood!

2. Savings are still important: The inflation is eating all our savings. But that does not mean one should not save for rainy day. As the earning capacity of a person reduces with age factor. By savings one keeps a sizable amount of money for rainy day but if there are no savings –there shall be no money for rainy day.

Now the moot question is -Where to invest?

Safe Investments:

Schemes with Post Offices:

3. Post Office Monthly Scheme: A person can invest up to Rs. 4.5 Lakhs individually and up to Rs. 9 Lakhs in a joint account under this scheme. The rate of return is 7.3% p.a. –payable monthly. The term is 5 years.  This is a very good scheme for those who need a monthly amount to meet day to day expenses and are solely dependent on their savings like senior citizens. There is no tax benefit available.

4. National Savings Certificates: The rate of return is compounded at 7.6% p.a. The period of holding is 5/10 years. There is no ceiling amount for investment. There is a facility to encash National Savings Certificates before maturity too. There is a Tax benefit under section 80C -i.e. Up to Rs. 150000 deductions allowed along with other specified investments under this section from gross total income of an assessee.

5. Kisan Vikas Patra:  The rate of interest for Kisan Vikas Patra is 8%pa. The period of holding is 9 years 10 months. On maturity the amount is doubled. (Rate of interest is 7.3%).  There is a facility to encash Kisan Vikas Patra before maturity too i.e., after two and a half years. There is no tax benefit available.

6. Public Provident Fund: The maximum of Rs. 150000 during a year can be deposited by an individual including that of minor children.  The duration of PPF account is 15 years. The rate of interest is 7.8% p.a.  Loan / withdrawals are permitted as per Rules. There is a double tax benefit i.e., under section 80C -i.e. Up to Rs. 150000 (since this is maximum permissible under PPF) deduction allowed along with other specified investments under this section from gross total income of an assessee. And interest earned on it is totally tax free-not to be added in the total taxable income.

Every individual must open a PPF account for each member of the family.

This account can be opened in some of Nationalised Banks also.

7. R.B.I. Bonds: The rate of return is 7.75% p.a. No tax benefit is available. Interest is payable at half yearly / cumulative i.e., on maturity too. These Bonds can be purchased from some of Nationalised banks also.

Risky ventures:

8. Shares: Share Market is very risky. In business – there is a principle that the more the risk more is the profit or loss. Those who wish to work on this principle can opt for the Share market. For a safe investor –share market is a distant dream.

Stock market is in fact being manipulated by stock brokers and who plays “Satta” in shares. Quite often one can see that shares of a company are quoted at extra ordinary price whereas it Balance Sheet analysis –Earnings per Share (EPS) or Profit-volume Ratio (PV Ratio), or dividend track is quite otherwise.

No doubt few make good money in it but most of ordinary persons lose money it. It is not place for ordinary investors to put their hard-earned money. Or be prepared to lose your investments.

However, some selected shares of reputed companies-blue chips- (MNCs) etc. can be bought for long term investment-buy them when their market price is lowest and keep it in the locker-sell them when there a heavy need of finances-rainy day. Otherwise enjoy dividend very year

For common investors, shares are not their cup of tea!

9. Properties:

One house to live in: Just for security reasons one must own a house and invest in a house property too but for that one should have surplus funds to invest. For this purpose, a portion of investments can be liquidated, and one should go for a loan for the same-which is now a day easily available. Even otherwise investment in house properties is a good investment. One can let it out and can get fixed monthly income too. Many senior citizens live on rental incomes only.

Remember when one is not paying rent even then there is annual cost of owning a house like property tax, besides repairs and maintenance like white washing and major repairs –which are most met by landlord (owner) in case of rented premises too .So there is some annual cost of owning a house too .The only plus point is that permanently you live-in your own house unlike rented premises wherein either you have to vacate it after some years even if you increase the rent after few years regularly at certain intervals –as practically market rent shoots that much as no tenant wish to pay practically the market rent.  So, one keeps on changing rented houses –otherwise live with un-cordial (bad) relations with landlord.

Precautions on purchasing a house: Property prices are very high and an investment in properties requires huge sums of money. There are thousands of cases of cheating and forgery in property cases too. One should be extra cautious in investments in properties.

Either apply through original government offers / initial membership of a Co-operative Group Hosing Societies or through some known person or choose a well reputed builder and enquire its genuineness.

Plan for Convenience and taxes: Even if you have your own savings –money-do buy house by taking a loan-as there are tax benefits for the same. But remember that there are always interest implications. One must plan for repayment of loan and interest too. Consider the future, which is uncertain -if one is required to pay installments over a long period, there may be changes in job, more financial responsibilities etc.

Plan to buy your own house at a young age-say at the initial years of career. Start savings for it.

Purely for Investments purposes: If one has extra huge sums for investments one can go for it. Though not as a business but surplus huge funds can be invested in buying and selling of properties –quite often –just to make good money out it. For tax implications consult a Chartered Accountant.

10. Mutual Funds not a cup of orthodox investors!

Equity Funds:

These funds invest in stock market. Many persons invest in Mutual Funds even those people who wish to have a fixed income per month like old people or conservative investors. But in Mutual Funds there is no guaranteed income per month -as its income distribution depends on Net Assets Value (NAV), which is depended on share market as investments of mutual funds in shares and if share market falls their NAV too fall (if there is fall in those shares in which mutual funds have invested their money).

Generally, these mutual funds declare and guarantee fixed monthly income only for first year and in small prints they mention that subsequent declaration of monthly incomes shall depend on NAV. Therefore, strictly speaking it is a misnomer that there is fixed monthly income from of the Equity mutual funds.

There are also Debt Funds –which invest funds in debt securities and Balanced Funds-which invest in stock market and debt securities. The objective here is to preserve the capital and to have growth with lesser risks as compared to Equity Fund.  

Like shares mutual funds too are risky as return is based on NAV.

11. Fixed Deposits with Banks / reputed Companies:  A little portion of investment can be made for fixed deposits with Banks (for easy liquidity) and / well-reputed companies like Government / public sector or Housing Finance Companies –just to keep investments at different places.

12. Jewellery: Though Jewellery is not a good investment. But Indian traditions and customs require some portion of investments in Jewellery too as on marriages it is a must for women to wear it and gift to the couple. Most women love to wear jewelry otherwise too.

13. Life Insurance (LIC). The objective here should not that of an investment for immediate returns but to have a financial security. Since in life insurance there is no return as much as in other investments but to have sum sizeable amount at a future date (future is most uncertain) one should invest in Life Insurance too. It is better to get life insured at young age so that premium is less. More is the age more is the premium. There are different types of policies. The choice depends on an individual’s needs of funds in the long term. Those who wish to have some fixed amount of return-repayment at a certain fixed period can opt for money back policies.  

Now days life insurance too has started on NAV based policies.   Consult LIC agent for details.

Some Special   thought for Senior Citizens:

14. Who is a Senior citizen: At present Senior Citizen age is 60 years. Now in the present jet age, people work in for 12 to 18 hours since they wish to have everything in life and most things earlier considered being luxuries have become necessaries. Comfort is the aim of life. Movement of body is minimum-all machines; computers and other electronic gadgets for each and everything are available. So, life span of an individual person is reducing. The present oldies are much stronger but slowly new generation shall be exhausted at an early age. Their earning capacities shall be much less after just few years of life span. They shall become senior citizen at an early age say at 50 years!

15. Senior Citizen’s Schemes:  A senior citizen of more than 60 years can deposit up to Rs. 15 Lakhs maximum @8.39 per annum. The government has lowered the age limit for investment in seniors’ Citizens Savings Scheme to 55 years for those parking their retirement benefits in it. But there is a clause that deposits shall be restricted to their retirement benefits or Rs. 15 Lakhs, whichever is lower.

This account can be opened in Post Office and some of Nationalised Banks also. There are no tax benefits.

16. Settlement of family disputes on Financial Matters: Because of stamp duty family settlements during the life time of elders in a family are not settled, which make family unhappy and cordial relations among family members are just not there. But it is better to pay duties and taxes (now a days stamp duty is quite low and there are further lower rates for women owners) and settle the family disputes, during the life span of elders, especially that of immoveable properties. So that cordial and harmonious relationship may subsist among all siblings.

Plan for convenience and taxes: One should plan wisely for immoveable properties. It can be purchased in joint names especially with spouse and or children as joint owner. It results in tax benefits too. For an ancestral house or properties, one should go for a “Family Settlement” / “Family Arrangements” / “Family Agreement” which does not attract duties and taxes. Consult a lawyer for it.  

17. WILL: WILL is a good instrument to transfer property without attracting taxes and duties. Otherwise too every person must have a WILL. Death keeps no calendar. All properties –moveable or immoveable must be bequeathed to spouse only. Both parents must make such a WILL. The surviving spouse can later bequeath the properties as he / she desires through another WILL. By doing so, children shall have more respect for parents too. And there shall be lesser problems during old age for the parents too.

Other Important Tips:

18. NOMINEE: Nominee must be appointed for all financial transactions. Otherwise after the death of an investor it becomes difficult for legal heirs to get money back of the investments of a deceased person, unless there a “Will” One should understand that Nominee has a right to receive money after the death of an investor, but it still belongs to legal heirs. The nominee has no right to retain and utilize the money in his own name. Nomination only facilitates the encashment of investments in his own name. Actual beneficiaries of such money are only legal heirs of deceased person. Nominee is a trustee for the legal heirs of the deceased person.

19. Credit Cards: Credit is really traps as once you take a loan you pay interest on it and naturally principal amount is also to be repaid. There is a famous saying “Jitni chadar ho utne pair pasaro” (Spend as per your income). Credit is now as easily available as is evident from telephone advertising calls (telemarketing) for credit from various banks and for credit card. The trap is laid by saying it is free of cost but there are always interest implications and some hidden charges etc. So before one is lured by freebees one must read the terms and conditions –in between lines-in small prints as charges etc. are mentioned there. Remember nothing is free. One must pay for the services or credit. With proper planning one can save interest and one-time charges etc., unless that commodity is immediately required. The necessity depends upon the individual’s requirement. But with credit facilities and credit card one is easily tempted to buy unnecessary goods too. Don’t be extravagant. Unless one has strong will power to postpone unnecessary purchases one should not go for credit facilities.

In personal life at least, one should avoid credit card and credit limits. In business credit to some extent is permissible. The future is uncertain if one is required to pay installments over a long period, there may be changes in job, more financial responsibilities and it may find extremely difficult to pay the installments and by credit one works for others and not for self-just to pay the installments.

In extreme cases credit has resulted in fatal consequences-suicides etc. too.  Some people cannot sleep well when there is a debt on their head-money due to some and the same is not paid in time. So spiritually limit your desires and needs - live within financial means - capacity to earn and die in peace!

20. Tip for filing Income Tax Return: I suggest getting a photocopy of Bank Statement of Account or Pass Book –and then write details of each debit and credit entries’ details. It shall be a permanent record for tax or otherwise too. And furthermore, then one is not required to keep pay in slips and cheque book counterfoils.

21. Choose a job with a Pension: Every profession has become purely a business! In practice one is required to work till his last breath unless one has enough monthly regular income to live on in old age. Therefore, a professional must choose a job if possible with pension facilities. That ensures regular monthly income in the old age as otherwise because of low interest regime investments do not yield a sizeable income unless one earns through speculation in Shares or lucky in immoveable properties transactions. But every man’s acumen is not for such income.

For new professional entrants it is advisable to search for a job abroad-to have worldly experience and earn enough to make comfortable living in the old age - returning to home country –to live peacefully after retirement if do not wish to settle abroad.

22. Conclusion: The best course for a prudent investor is to invest in different kind of species so that even if some money is lost it will be a small amount. The safest are Reserve Bank of India Bonds, Public Provident Fund (PPF), Senior Citizens’ Scheme (in which maximum Rs. 15 Lakhs can be invested) Post office saving schemes like National Savings Certificates, Kisan Vikas Patra, and those who wish regular monthly income Post office monthly interest scheme (MIS) and for quick and easy liquidity, some amount as fixed deposits with Banks.

The order of preference can be: 1.PPF 2.  Post Office Monthly Scheme. 3. Senior Citizens’ Scheme (in which maximum Rs. 15 Lakhs can be invested). 4. Other Post office schemes like NSC/ KVP .5. RBI Bonds. For extra surplus funds 6. Banks / Companies Fixed Deposits 7 Jewellery 8.LIC 9. Shares / Mutual Funds–a very limited amount.10. Properties.

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