SEBI registered Investment advisor (RIA) with Registration number – INA 000000342.

One of my prospective clients Ajay asked me an innocent question – How much I can save by paying the annual fee to you?

Instead of giving him any rough estimate, I told him that it is up to him to decide after the initial discussion with his personal financial data and then he can decide whether the fee is justified in hiring a financial planner.

35 year old Ajay is working for a private bank and is earning 50,000 per month. His wife is a teacher earning 30,000 per month. Their only daughter is aged 3. Their average household expense is around 40,000 per month including rent of 20,000. They are planning to purchase a flat worth 40 lakhs in the next few months. He is having 8 lakhs in FD and 4 lakhs in SB account for the down payment.

I asked him, how he will plan his personal finance for the next 25 years? He told me that he will invest in tax savings instruments like insurance policies, and bank RDs and FDs. I have not invested in shares because I don’t know much about them. He heard that a fee only financial planner can guide him properly and that is why he contacted me.

Financial Planner in India

Savings through life insurance policies  

As of now, LIC is offering bonus of around 4800 per year for a 1 Lakh policy. If you calculate the rate of return on a 20 year policy, it translates to around 6 – 7 %. Of course there is an added attraction of life insurance cover and tax benefits along with it.

Ajay want to provide 10 lakhs in today’s cost for his daughter’s higher education. Assuming 6% inflation, it will be 24 lakhs after 15 years. Ajay want to take a 15 year endowment policy for this. If he wants to accumulate 24 lakhs after 15 years, he should purchase a policy of 14 lakhs with an annual premium of around 97,000. If he goes for equity mutual fund SIPs, he can reach this goal by investing around 5000 per month, assuming a 12% annual return. Ajay was eager to know more.

Is it possible to generate 12% return in today’s volatile markets?

To answer this question, I quoted the example of a 5000 SIP from 1st March 1999 to 1st February 2014 (15 years) in Franklin India Blue chip Fund. An investment of 5000 per month has generated around 49 Lakhs in 15 years. (Value as on 30th March. 2014)This is a return of 20%! Yes, SIPs are attractive in the long term. Please see the link from Value Research Online to see more details.

Value Research Online

How a financial planner can help you in this – Is the fee justified?

A fee only financial planner in India can recommend you ideal funds to invest. If you invest in mutual fund SIPs through direct plans, without any agents, you can earn better returns. In the above example, Ajay will get around 54 lakhs in direct plan investment. An addition of around 5 Lakhs!

Bank FDs– Are they tax efficient?

Bank fixed deposits are preferred investment choice for Ajay. Why? He feels that the bank is deducting only 10% tax on the interest income. But this is a wrong understanding. He is getting 72,000 as interest on his 8 lakhs FD. The bank is deducting 10% on this. But Ajay has to add the interest income of 72,000 to his salary income and pay the balance tax as per his income tax slab. Ajay is in 20% tax slab. So, while the bank deducts 7200 as TDS, he is supposed to pay another 7200 as tax. If he is not paying this tax, he may get an income tax notice. Tax authorities will get this information, because his PAN is linked to this deposit.   Ajay is shocked now.

Had Ajay invested this amount in short term debt mutual funds, he will get similar return almost tax free. This is because the income from debt funds are treated as capital gains and it is eligible for the benefit of indexation while calculating tax liability. In bank FDs, the tax is payable on interest every year on an accrual basis, while in debt funds it is payable only at the time of selling. This way, you can postpone your tax liability. I asked Ajay to read the below given article to know how he can get tax free returns from debt funds.

http://www.finvin.in/debt-mutual-funds-in-india-invest/

Recurring Deposits – No TDS

Ajay is investing 10,000 per month for the last 3 years in recurring deposit to accumulate down payment for the home loan.  He opted for this because there is no TDS in RDs. Yes, the bank will not deduct any tax from the interest income of RDs. But you are supposed to declare the interest income from RDs and are liable to pay the tax as per your slab. The interest is taxed at 20% for Ajay.

He could have invested this 10,000 in liquid mutual funds with tax efficiency, as explained above and got better returns!

Ajay is insured adequately with 14 lakhs?

The insurance cover of 14 lakhs is not sufficient for Ajay. In case of his unfortunate death, his wife will get 14 lakhs but it is not adequate to replace his income. The real purpose of life insurance is to compensate the nominee for the financial loss in case of the untimely death of the policy holder. As per the expense replacement method, he should have a life insurance cover of 1 Crore and his wife should have a cover of 50 lakhs because they are planning for a joint home loan. They can go for cost effective term policies for this. If they go for the online term policies, their annual premium outgo for this 1.5 Crore cover will be 15,000 only. Ajay was surprised to hear about this low cost option!

Health insurance options for the family after retirement

With lifestyle diseases etc. it will be difficult to get a health insurance if you wait and plan to buy at the time of retirement. It is better to go for a policy, when you are in perfect health. Go for a policy which offers you life time renewal, no sub limits and no claim based loading. Policies offered by PSU companies come with room rent sub limits and is better to avoid. Companies like Apollo Munich, Max Bupa and Religare are offering better policies. Ajay can go for a family floater policy covering all members of the family in one policy.

Home loan – things to consider while taking home loan

Home loan interest rates are linked either to the BPLR rate or to the Base Rate. The Base rate is more transparent and it is better to choose a lender giving loan linked to the base rate. You may prefer a floating rate loan which will charge you interest based on the interest rate in the country. Fixed rate loans, teaser loans etc are to be avoided.

Financial Planner in India – is the fee justified?

Ajay told me this is enough for now because he realized the areas where he was losing money. He is now clear that a fee only financial planner can help him as his personal CFO and will protect his interests.

2 Comments

  • Gautam Nandi Posted April 9, 2014 4:51 pm

    It is true that a good financial planner can help to guide youngsters in financial planning. Getting a good person is difficult.

  • Shrikant Posted April 22, 2014 5:31 pm

    Great Article Melvin,
    Your advice has helped many in reaching their short and long term goals efficiently!

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