Q1. New year is soon approaching and as one of my resolutions, I want to keep my financial health on track. How do I go about doing the same?
We are a few weeks away from the new year, happy to know that you are focused on bringing about a change for yourself by taking stock of your financial situation. Below five money moves would give you a head start on improving your financial health in 2023 and beyond.
Do an expense check-up: It’s important to keep a tab on your spending patterns. If you tend to overspend, then that should be your first step in creating a financial strategy. Keep an eye on your expenses so that you are aware of how much money is going into surplus expenses and take the necessary action as per that.
Create a budget for the new year: Budget for that car repair or home repair you know is on the horizon, prepare for birthdays and holidays, and consider how your income might change throughout the year. This will help you in accomplishing your goals.
Maximise your savings: High rates of inflation continue to drive up the cost of essentials like gas and food but could also be eating away at your savings. We need to make sure that we are saving over and above the inflation rate. Having money deposited directly from your paycheck into your savings account, investing in high yield savings options, earning through interest are some of the ways to increase our savings.
Make a plan to repay debts: It is important to make a debt repaying plan depending on the type of debt you have (if any). High-interest debt like credit card debt should be prioritised, as this sort of debt is the most expensive. You can combine debts into a single account, pay the largest or highest interest rate debt as fast as possible or pay the smallest debt as fast as possible. You can choose the plan as per your convenience and repay it.
Get on track with your retirement savings: Small increases in savings can lead to significant results with the power of compounding. Consider bumping up your retirement savings rate by 1% at least, this year, and compare your savings rate to benchmarks for your age range. If you're not quite hitting your retirement savings goal yet, save what you can and consider ways to adjust your spending to accommodate a higher savings rate.
There are plenty of smart money moves you can make that aren’t listed here, and not all of these are going to apply to everyone. But in this uncertain economic time, it is important to take a pause and assess how you can maximise your financial well-being, both now and in the future.
Q2. Mr. Singh wants to start his investment journey and heard about financial planning from his friend. He wants to understand, what are the basics of a financial plan?
A financial plan helps you to understand your financial status and shows the way to reach your financial goals, also covering your insurance requirement. It also takes care of the uncertain events which can happen in one’s life. Having a plan and sticking to it brings discipline over the long term. It creates a greater impact on your life which would be beyond returns.
Risk assessment: Financial plan starts with the risk profiling. A Risk profile helps to understand the risk/return expectations, and how important factors like liquidity, stability, volatility, the long term, short term, etc. in the way you handle your finances.
Financial position: This is your balance sheet which shows your financial position. This includes every detail while listing your financial position. This includes every component of income, expenses, assets, liabilities, net worth, and insurance. After getting an understanding of your financial position you should then work on your asset allocation across various assets.
Income, expenditure, savings: Think of this as your profit and loss account. This statement will give you a clear idea of how much you are currently saving and, more importantly, understand where your expenditure is going. For example, look closely at your credit card statements to understand the difference between what necessary expenses are and what are not necessary expenses.
Insurance and emergency corpus: Having adequate insurance for both health and life with an emergency corpus are a critical aspect of your financial planning process. These should be factored into your plan before you define your goals as it takes care of the uncertainty in life. Emergency corpus helps you to meet your expenses which are on short notice, in this scenario if you have an adequate emergency fund you won’t redeem from the portfolio which is already linked to your goal and generate a better return.
Goal planning: This step helps you to understand the goals in your life. You should include short–term and long–term goals and everything that has a meaningful impact on your cash flows. Longer–term and major goals could be retirement, buying a home, educating your children, etc. Short–term goals include vacations, buying a vehicle, etc.
Investment planning: Once you go through all the above processes, it becomes easier to plan your investments. This should be planned according to your risk profile.
Progress and review: After the implementation of a financial plan, you should track your portfolio every three to six months. There is no need to check the plan daily as market ups and downs may make you take decisions that will not create a positive impact on your plan. While reviewing please take care of your risk profile and asset allocation.
Thus, following the above few steps can help you to achieve your goals at the right point in time.
Q3. Anusha has a health insurance policy of 30L and has dependent parents. Is there a need for taking a critical illness policy?
Both health insurance policy and critical illness policy are different insurance plans which keeps an individual and his/her family safe and secure when an unforeseen incident takes place. However, both these policies have different ways of insuring the person and his/her family.
The basic difference between both the policies is given below:
A health insurance policy is a basic policy that reimburses an individual’s hospitalisation charges and medical expenses. On the other hand, a critical illness policy is specifically for life-threatening illnesses like heart attack, cancer, kidney failure, stroke, etc.
The former policy works on indemnity basis, i.e., covers only the hospitalisation expenses of the person insured up to the specified sum insured amount, while the latter policy works as an income replacement/fixed benefit plan for the person insured and his/her family, as the plan pays the lump-sum amount to the person diagnosed with the illness.
Out of the total sum insured amount, an individual gets the amount required in treating a disease in a health insurance policy, while the total sum insured amount is given to an individual if he/she gets critically ill.
The health insurance policy is a standalone policy, i.e., it can be taken individually but cannot be added to life insurance policy as a rider. On the other hand, critical illness policy is available as a stand-alone policy and as an add on rider policy either with life insurance or with health insurance.
There are different types of policies available in the market as per the needs of an individual and his/her family. Some of the general insurance policies that should be a part of your insurance basket are mentioned and discussed below:
Types of health insurance policy
Individual health insurance plan - It is a plan that works on indemnity basis and provides health cover to an individual only. It can be taken by people between 18 to 65 years of age.
Family floater health insurance plan - It provides health cover to a family on indemnity basis. Under this policy, all the family members share the sum insured amount equally. The premium for this policy could be lower in comparison to taking individual health insurance covers for all the family members.
Critical illness insurance plan - It provides an insurance cover to an individual who is diagnosed with a critical illness or condition like heart attack, cancer, kidney failure, etc. It plays the role of income replacement for the insured as the person might not be able to work due to the critical condition.
Super top-up health insurance plan - It is a plan that increases the health cover of an individual or a family. It gets activated once the base health insurance plan is exhausted and generally has very low premiums.
Personal accident insurance plan - It provides a cover to all the medical expenses of an individual if he/she meets an accident. It covers both the accidental death and partial/permanent disability caused by an accident.
In the case of Anusha, she has dependent parents who need to be taken care of in case something happens to her. If God forbid, Anusha gets critically ill and is unable to work, then the critical illness policy is going to help her and her parents in ensuring that they live a proper life as they will receive the sum assured as a lump sum benefit. Apart from this, Anusha should check if she has any genetic disease that runs through her family or not, if yes, then she should consider the option of taking a specific critical illness policy too rather than a generic policy.
She can look to consult a financial advisor who could suggest the best suitable plan for herself and her parents as per their health, financial, and medical situation.
Q4. Mr. Menon has been investing in mutual funds for more than 2 years and he now wants to explore some of the options in gold that can give him the best returns. What would you suggest?
Generally, people consider gold as a precious asset. It is also considered as a sign of power and wealth. However, gold can also form a part of your investment portfolio and is different from jewellery which is mainly for consumption purposes.
You can invest in gold in 4 ways:
- Physical Gold
- ETFs or Mutual Funds
- Digital Gold
- Sovereign Gold Bonds (SGBs)
Buying physical gold has emotional value. But for investments, other options can be better. Let’s understand the costs of investing in different forms of gold.
|Physical Gold||Digital Gold||Sovereign Gold Bonds||ETFs and Mutual Funds|
|Making charges, storage, GST and seller’s margin.||GST and seller’s margin.||Nil||For ETFs, there are demat account charges, brokerage and expense ratio. For MFs as well there will be an expense ratio.|
Now let’s go one step ahead and understand the returns.
- Due to the high costs involved in physical gold, it can give low returns.
- Digital gold also involves high costs. Thus, it can give low returns too.
- In the above options, you pay GST and the seller charges a profit margin. So, when buying and selling, if the price remains the same, your loss could be around 3-6%.
- ETFs and gold funds give you returns at par with the rise and fall in gold prices.
- When it comes to SGBs, you get the market price of gold on maturity and an annual 2.5% interest pay-out. So, SGBs gives you the best returns.
We shall further deep dive into the taxation of all these products:
|Physical Gold||Digital Gold||ETFs and Mutual Funds||Sovereign Gold Bonds|
1. Short-term capital gains tax – if sold within three years of purchase – gain is taxed according to the tax slab.
2. Long-term capital gains tax – if sold after three years of purchase – 20% with indexation benefit.
|The maturity period is 8 years. If you hold till maturity then they are tax free. Long-term capital gains tax is applicable at the rate of 20% with indexation if the SGB is sold after the lock-in period of 5 years. Interest earned on SGBs is taxable as income from other sources.|
Do not forget that all these four options have a risk in some or the other way. physical gold is very prone to theft and purity issues.
If it gets difficult for you to take a final decision on which option to go ahead and invest in; then please feel free to reach out to a financial planner or a financial advisor who can analyse your requirement, understand your risk appetite, and create a personalized portfolio for you.
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Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.