The survey found that 76 per cent of Indian adults do not adequately understand key financial concepts, including risk diversification, inflation and compounded interest.
By: PTI | New Delhi | December 15, 2015 3:23 PM | Financial Express
As much as 76 per cent of Indians do not understand key financial concepts like inflation and interest rate, lower than the worldwide average, a S&P Ratings Services survey said today.
Standard & Poor’s Ratings Services Global Financial Literacy Survey said in Asia, Singapore is home to the highest percentage of financially literate adults (59 per cent), followed by Hong Kong and Japan (both at 43 per cent). Less than a third of adults in China (28 per cent) are financially literate.
The survey found that 76 per cent of Indian adults do not adequately understand key financial concepts, including risk diversification, inflation and compounded interest.
“This is lower than the worldwide average of financial literacy, but roughly in line with other BRICS and South Asian nations,” it said. Also about 66 per cent of adults worldwide are not financially literate.
The material gap between men and women existed in almost every country. Worldwide, there is a five-point gender gap with 65 per cent of men not being financially literate compared with 70 per cent of women, the survey said.
In India, the gap was wider with 73 per cent of men and 80 per cent of women not being financially literate.
The survey also found out information about consumers’ familiarity with the financial products they utilise.
“While the array of financial products available in Asia continues to grow rapidly, the survey suggests that most consumers lack a general understanding of credit, compound interest and other key concepts,” the survey said.
Research increasingly shows that saving money is better for development than credit. Yet, just 14 per cent of adults in India save at a formal financial institution and their weak financial skills raise questions as to whether they’re getting the most out of their money, it added.
The survey interviewed more than 1.5 lakh adults across over 140 countries and tested individual’s knowledge on four basic financial concepts: numeracy, risk diversification, inflation, compound interest (saving and debt).
According to the survey, 75 per cent of Asian adults and in comparison, 57 per cent of adults in US and 67 per cent in UK are financially literate.
Only 14 per cent of Indian adults correctly answered the question on risk diversification. Conversely, 56 per cent answered the inflation question correctly.
About 39 per cent of adults who have a formal loan are financially literate, while more than a quarter (27 per cent) of formal borrowers were found to be not financially literate. Only about half of the participants (51 per cent) understood compound interest.
It said in India, 26 per cent of adults in the richest 60 per cent of households are financially literate compared to 20 per cent of adults in the poorest 40 per cent of households.
Worldwide, 36 per cent of adults in relatively richer households and 27 per cent of adults in relatively poorer households are financially literate.
Source : http://goo.gl/5mT4t7
AYUSH BHARGAVA Financial Planner | Jul 30, 2015, 08.44 PM | Source: Moneycontrol.com
Fixed deposits cannot offer a rate of return in excess of inflation. If you are planning for a long term goal, employ of a mix of both debt and equity
It was during March – April 2015 when due to second consecutive fall in repo rate, banks started reducing fixed deposit (FD) rates and as a result, conservative investors started locking their money in FD and other debt products. Those who were looking for more returns were also seen investing into corporate FD with poor ratings. FD is one of the most popular products in India. More than half of the total financial saving in India is in the form of FD. Investment in India is not done according to the asset allocation or risk profile of an investor; it is done according to the risk profile of the product. One can often find investors searching for a product wherein savings will be safe and they can earn the maximum rate of return. This usually happens when one is not an expert with different financial products and investors with very little risk taking capacity end up making investment in fixed deposits or other fixed investment products.
Why over exposure in fixed income securities can be risky for long term goals?
Conservative investors should understand that investing only in debt products can result in over exposure in a particular asset class which will not only imbalance the portfolio but will also impact the overall return on investment. Fixed income securities are not capable of beating inflation in long term. Inflation erodes the major part of returns offered by fixed income products and this is the reason why one may not become rich or wealthy. These instruments are also not tax friendly as equity investments are. Interest earned on most of these instruments is taxable. The returns in this product are lower than equity investments in the long term and thus to achieve a particular goal a conservative investor needs to invest more as compared to an aggressive investor.
Let’s understand this with the help of an example – Suppose there are three investors with different risk profile. All of them want to accumulate Rs. 40 Lakh for their children’s graduation which is due after 15 years. They earn Rs. 40,000 per month and save Rs. 6,000 for investment purpose. Let’s see who will be able to achieve the goal.
It is clear from the above example that considering a return of 8% yearly on portfolio, conservative investor will not be able to accumulate the target amount. On the other hand an investor with a balanced view where he invests equally into equity and debt products (12% CAGR) and aggressive investor (considering 15% CAGR) will achieve goals without worrying about inflation and other issues.
Here the right asset allocation is very important. An aggressive investor cannot continue with equity all his life due to volatility factor and in the same manner a conservative investor cannot solely depend upon debt products and should consider tax liability of the product and its implication on future goals. He should consider including equity investment as a part of the portfolio which will help in beating inflation and thus maintaining a proper balance.
During accumulation phase overexposure in any asset class will always result in failure to achieve future goals. Please remember the strategy of having a fixed income focused portfolio will work during distribution phase where security is more important than other things. Even if you are retired and running a fixed income portfolio, it is better to run a portfolio comprising more tax efficient options such as tax free bonds and income funds.
Source : http://goo.gl/8q4n29
Gaurav Mashruwala, TNN | Apr 25, 2015, 07.08AM IST | Times of India
Mohit Khullar (31) lives with his wife Manika (28) in Haryana. He was born and brought up in Punjab. They have a two-year-old daughter, Ashwika. Mohit is an electrical engineer and currently works in the private sector while Manika is a homemaker.
What is the couple saving for?
They want to purchase a house worth Rs 45 lakh two years later as an investment. Rs 50,000 for Ashwika’s education two years from now. A corpus of Rs 15 Lakh after 24 years for Ashwika’s marriage. For their retirement, the couple wants Rs 1 core after 30 years. Apart from these goals, they also wish to own a luxury car worth Rs 10 lakh after four years and go on foreign travel.
The costs will be revised based on inflation.
Where are they today?
Cash flow: The gross annual inflow from all sources is Rs 12.48 lakh against an outflow of Rs 8.05 lakh. The outflow includes routine household expenses, taxes, insurance premium and contribution to provident fund
Net worth: The market value of all assets owned by the couple is Rs 21.31 lakh. Out of this, Rs 3 lakh is for personal consumption in the form of car. The rest are investments. They do not have any liability as of now. The house that they are living in is owned by Mohit’s parents.
Contingency fund: Against the mandatory monthly expenses of Rs 44,000, balance in savings bank and FD together amounts to Rs 2.80 lakh. This is equivalent to 6 months’ reserve.
Health & life insurance: There is a Rs 3 lakh health cover provided by employer for the entire family. Total life insurance of Mohit is Rs 40 lakh, out of which Rs 30-lakh cover is provided by the employer.
Savings & investment: Assets for savings and investment include Rs 2 lakh in savings bank, Rs 80,000 in bank FD, Rs 4 lakh in direct equity, Rs 50,000 in bonds, Rs 86,000 in a provident fund and Rs 15,000 in post-office schemes.
The couple’s rate of savings is good. The balance in savings bank should be reduced and they must enhance health and life cover. Most assets are investment-oriented because they are living in their parental house.
The way ahead
Contingency fund: Their three months’ mandatory expense reserve should be around Rs 1.30 lakh. Of this, they should keep about Rs 30,000 in form of cash at home and the rest in savings bank account linked to a fixed deposit.
Health & life cover: Mohit and Manika should have a health cover of Rs 5 lakh each and Rs 3 lakh for their daughter. Considering Mohit is single earning member of the family, he should opt for a life cover of Rs 1 crore for now and increase to another Rs 1 crore in next four to five. All these policies should be in form of term plans.
Planning for financial goals
Home buying: Since they do not need a house for staying, they should defer this goal for another decade. This is keeping in mind the fact that there is lack of funds currently and overall portfolio will get skewed in favour of illiquid, immovable, indivisible asset if they purchase a new house now.
Daughter’s education: They should invest Rs 2,500 every month in recurring deposit.
Daughter’s marriage: The should start an SIP of Rs 3,000 in and equity based mutual fund and another Rs 2,000 in a gold fund and increase the amount by 15% every year.
Retirement planning: Invest Rs 7,500 each in three equity mutual fund schemes: Large-cap fund, mid-small cap fund and an international equity fund every month — increase the amount by 10% every year.
Foreign travel: Set aside funds from regular income to fund the trip.
Luxury Car: Defer this goal for a few years.
Young couples with clear goals, humble expenses, high savings rate and living with parents. For them these are golden wealth creation years. If they stay focused like this for another 5/7 years, they will be on massive wealth creation trajectory. Usually it just requires about a decade of frugality in entire career to create wealth. If that is done during initial period of life it is more beneficial.
Source : http://goo.gl/d3PWVT
Raj Talati | Sep 23, 2014, 06.34AM IST
It is said that the biggest risk to an investor’s returns is the investor himself. This is because, as investors, we take a lot of impulsive decisions and do not follow fundamental rules of investing. Here are some basic rules to get optimal returns on your investments and live a comfortable life:
Have a financial road map: Before you make a financial decision, sit down and take an honest look at your entire financial situation, especially if you have not made a financial plan before. The first step to successful investing is figuring out your goals and risk tolerance, either on your own or with the help of a financial planner.
Evaluate your comfort zone in taking risks: All investments involve some degree of risk. The reward of taking risk is the potential for higher investment returns. If you have a long-term financial goal, you are likely to get better returns by investing in equity funds rather than restricting your investments to less riskier assets like FDs.
Consider risk of inflation & taxes: The biggest concern with less riskier assets is their inherent habit of generating negative real returns. That is, returns after adjusting for inflation and taxes. For example, Rs 100 deducted from your salary towards PF in 2005 is worth just Rs 97 now, even though it is tax-free. The worth of your FDs, which are taxable, is even worse.h Consider appropriate mix of investments: A mix of asset classes like bonds & equity funds, along with cash can help you to optimize your returns and also insulate you from losses during different market conditions. Historically , the market that was poor for one asset class was good for another.h Diversification: Don’t put all your eggs in one basket. Remember to diversify your funds even within an asset class. That should help reduce your overall risk considerably.
Emergency fund: Always have an emergency fund that you can access in case of medical or job loss-related exigencies.h Pay off credit card debt: There is no asset class or investment strategy that can pay you a return that matches what is charged for credit card debt, which could be as high as 36% annually . So get rid of it..
Consider rupee cost averaging: Regular or periodic investments by way of SIP or STP will help you to invest in different market cycles and generate better returns.This strategy can be used especially if you are investing for the long term and in equity funds.
Rebalancing: This helps bring your portfolio back to your original asset allocation plan in case it deviates. This will help you book profit on the assets that have performed well and also buy assets cheap during slowdowns.h Avoid tips, assured and high returns: Every extra amount of return that is above the market return comes with some extra risk. So junk schemes which offer to double your money within a short span of time.Invest only in products from institutions regulated by the government.
Also remember while a financial planner might charge you a fee, heshe will help you avoid the common mistakes to creating wealth, and reach your goals comfortably .
The writer is with ABM Investment
Nandini Sen Gupta, TNN | Jun 8, 2013, 11.12AM IST| Times of India|
CHENNAI: The sliding rupee and creeping increase in input costs has already led to a number of car companies opting for price mark ups ranging from Rs 2000-10,000. However, the price hike season is definitely not over and companies that have either not taken a high enough hike or not gone in for a mark up yet are watching the situation and will take a call on future price increases depending on how badly the input costs bite.
Said Vinay Piparsania, head of marketing, Ford India: “We are monitoring the exchange rates as well as other factors that are pushing up costs. Should the situation continue to sustain, we would need to have a look at possible price increases.” Ford is not the only company that has a price hike on the agenda. Others like Toyota too told a similar view. According to a top Toyota Kirloskar official, the company is currently watching the situation and the extent to which its foreign exchange hedging can neutralise the rupee slide. “But if the situation continues and other factors like input costs also pinch, we will think about a price increase,” said the official.
A number of companies have already taken price hikes in April and May. Take Honda which took a price hike in two phases through April and May.
“We raised prices of the City (Rs 3000), Brio (Rs 2000-10,000) and Accord (Rs 5000) in April and followed it up with a Rs 3000-8000 increase in Amaze prices and Rs 6000-14,000 hike in CRV prices effective June 1,” said Janeshwar Sen, senior VP-marketing and sales, Honda.
Similarly General Motors India has taken a price increase of upto Rs 10,000 from this week and others like Hyundai Motor India are watching the situation closely. Most car companies take an “inflation call” in March-April for small price increases that neutralise some of the increase in input costs. But the rupee’s constant slide has come as a mid-year shock to the auto industry.
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Apr 3, 2013 | Ranjeet S Mudholkar| Firstpost.com |
Retirement refers to the end of working life or, in other words, end of regular source of income for an individual. It may happen either voluntarily or once one attains a certain age in the organised sector, often termed as superannuation. In this case, he will get some benefits which will take care of his needs during the post-retirement period.
Traditionally, in the organised sector, retirement benefits like gratuity or pension have been paid as defined benefit plans where the liability to pay the same lies on the employer. This system is increasingly being replaced by defined contribution system wherein both the employer and employee are expected to make a contribution towards the accumulation of a corpus as corporations and governments across the world are finding it difficult to manage the liability by defined benefit plans.
In India, the average lifespan has increased due to improved medical and healthcare facilities. Along side, there is also growing trend of breaking joint family structure, which leaves retired couples dependent on the strength of such accumulated corpus and little support from other sources. The average life expectancy is already in the region of 70 years. If the current trend continues, by 2050 of an estimated 1.6 billion population, over 9 percent, or about 150 million, will be ageing. For the economic strength that India has today, it would be unthinkable to secure the financial well being of a major chunk of this expected number.
The scenario above clearly calls for an approach wherein one should take informed decisions regarding planning for retirement to ensure the financial well being post the working years, whatever profession he/she may be in. Thus planning for retirement assumes critical importance in the financial life of an individual and despite it being a long-term financial goal, it is prudent to start early as it is easier at that stage owing to the benefits of compounding.
Retirement Planning is an exercise which requires investment discipline and regular monitoring. The following important points must be kept in mind while planning for retirement:
Start Early: It may be difficult to plan retirement at the beginning of the career, but it is practical to start at a younger age. A person has higher risk bearing capacity to enable him earn suitably higher returns. The effect of compounding helps accumulate a sizable retirement corpus with the small streams of savings invested. A later planning will require a bigger effort to accumulate the same corpus as one would if he starts early. Besides, at later stage usually people have reduced capacity to take risks, which may hamper the earning of optimum returns from investments made. As an illustration the following table explains this aspect, where a required corpus of Rs 1 crore at the age of 60 is sought to be accumulated through monthly investments in a mix of assets giving an overall return of 12 percent per annum.
It can be clearly seen that all other factors remaining the same, saving Rs 1,815 per month at the age of 25 would be far easier than saving 21,010 per month at the age of 45 when the financial liabilities are also expected to be more.
Set clear retirement goals: One should be clear about the expenses in relation to the income earned. The expenditure post-retirement and the lifestyle that one would like to maintain will give an idea on how much money is required as corpus on retirement and what quantum to be invested periodically at an expected rate of return.
Be disciplined: Since retirement is the most distant goal, the other short-term goals might take precedence and one has the tendency to dip into retirement savings for fulfilling other goals. Also, the investment discipline should be religiously maintained at a robust scale to achieve the designated retirement corpus.
Approach a financial planner: Many people do their retirement planning by themselves without a wholesome understanding of needs at the time of retirement and in the post-retirement period. Engaging a certified financial planner or CFP professional will help identify the goals and suggest strategies to achieve them. Such professionals are adept at taking all factors into account while crafting a wholesome Financial Plan, the retirement planning being an integral part of the same.
India’s population has an average age of over 25 years. The retirement planning principle as well applies to the state where the correct and prudent steps initiated would see through conveniently a period after 40 years when over 15 crore people would aspire to spend the next 30 years of their retired life in the peace of financial security. The state would also be absolved of a huge incumbent social obligation. The tenet therefore is to “start early, invest regularly and sleep peacefully”.
The author Ranjeet S Mudholkar is a Certified Financial Planner and Vice Chairman and Chief Executive Officer, Financial Planning Standards Board India (FPSB India). The views expressed here are personal, and do not necessarily represent that of the organization.
Ujjval Jauhari | Mumbai February 27, 2013 Last Updated at 22:38 IST | Business Standard
Interview with MD, Baroda Pioneer AMC
Jaideep Bhattacharya, managing director of Baroda Pioneer, the asset management company, talks to Ujjval Jauhari on why he sees good times for equity ahead and why individual savers need to give priority to the segment. Edited excerpts:
Redemption pressure in equity funds has continued, despite regular increase in assets under management. What is your take?
If we look at the last five-year trend, most of those who entered in 2006 or 2007 had made losses. Now, the fund values are at par and, therefore, people have opted for redemption. However, I think the redemption pressure has peaked. People who had to exit or book profits have already done so. I expect a steady flow of money coming into equity funds.
Further, if we look at the US data, there has been a substantial shift and people are moving into the equity markets. I think India will see a similar trend. Also, on the positive side, a lot of money is coming into the debt segment. Investors have merely moved out of equity into debt-oriented schemes. So, whereas equity folios have fallen, debt folios have increased.
How should investors approach equity funds and how important is it to invest in these?
People should understand that investment should be based on goals. Also, investments should be for a longer period of time. One cannot time the market but one’s time-frame and goals should be clear. Equity funds give returns, but, over a period of time. There is no choice beside investing in equity, looking at double-digit inflation.
Which segment, according to you, is seeing good traction?
I see good traction in the Systematic Investment Plan format. It is positive and also coming from other than the top 15 cities. People are coming with a matured way of regularly investing in a long-term goal such as children’s education, retirement plans, etc.
So, how should investors manage/build their portfolios in the current markets?
Every Indian should have investment in equity, as well as gold, based on their risk appetite. If one is around 25 years of age, 70 per cent of the investment should be in equity and the rest in fixed income products. As one reaches 60 years of age, 20 per cent in equity, 10 per cent in gold, and the rest in fixed income. Around 30 per cent should at anytime be invested in equity and gold. No fixed income product has been able to match the returns of equities. Today, you don’t have the choice of too many asset classes that can beat inflation.
How do you look at investment in other funds, such as gilt funds, etc?
Gilt funds as a category is seeing traction but retail investors are not so polished as to take interest rate calls or duration calls and, hence, they are a very small part of the portfolio. Also, as a category, they are not movers or shakers and investors are looking at simplified products.
Is the Rajiv Gandhi Equity Savings Scheme helping to drive investments?
It is a wonderful investment scheme and a great opportunity for retail investors to come into the market, particularly for first-time retail investors to come in with a tax benefit. This will help get a larger penetration. Tax has brought a lot of pull factor. And, it is over and above the benefit from ELSS schemes. This year, we are also seeing a lot of traction in ELSS.
How do you see the equity markets panning out?
The environment is becoming conducive. The first few weeks of February have seen $4 billion (Rs 21,600 crore) of foreign inflows. If we look at domestic institutions, mutual funds have become positive and are investing in the market. From the retail investor perspective, valuations are at a historical average. The Asian markets’ valuation is also nearing about 13.9 times and so, they are also in the attractive zone. I feel with the easing of interest rates across the world, India will continue to attract investments.
Some of the retail investors are also waiting on the sidelines. The concerns on inflation are also easing; core inflation is at a three-year low. The concentration has also shifted towards growth. All these should boost the market.
Source : http://goo.gl/P4ae8