Golden concepts of Financial Planning
“A penny saved is penny earned” let’s see how to use this proverb in our day to day life. Saving is very important part of life and existence. Over last couple of years, we have come across many individuals and families who ask for magic formula of wealth creation, who seek maximum returns because they didn’t start early and have less time to give time to their idle money to create huge corpus. No one really needs the answer, everyone already knows, it is right in front of our eyes but we tend to procrastinate. The secret key to wealth creation is “GIVING TIME”. Giving time is all you need to do to create magic till your age of retirement or for huge expenses on the way of your life like wedding, Children education, their marriage and higher studies and ultimately your retirement.
In this particular piece of article we would like to take you through some very basic yet golden concepts of financial planning and as we shall come out with more articles we will throw light on varied topics of Financial planning, Mutual funds investment in India, taxation rules for investments, legal implications for NRI’s whilst investing, and many more topics.
- Saving v/s Investing
It is very important to understand the difference between saving and investing. Many of us believe that money saved in hand or kept in bank are going to be lasting forever. Whereas in reality money in hand is only going to depreciate in future.
The biggest difference between saving and investing is Inflation. Inflation reduces the holding power of your money. We will see later in point (3) what is inflation and why there is this difference between – to save and to invest.
- Understand Power of compounding (Giving time to your saving to grow)
He who understands it, earns it literally means one who saves and invests early will get benefit of this power of compounding.
Everyone saves hard earned money in some or other way but what is more important is not merely saving but also investing and investing as much early as possible in right asset class. Let’s look at this example:
In this example: Mr Gupta started saving at the age of 25, Rs 10,000 per month till age of 60 years. His total investment amount is Rs 42 Lakhs but he earns at the age of 60 a whopping sum of Rs 11.41 Crores.Meanwhile Mr Saxena started saving Rs. 20,000 till age of 60 but he started at 45 years. Despite of his total invested amount of Rs. 36 lakhs which is higher than Mr Gupta’s total investment of Rs. 42 lakhs, He earned at the age of 60 only Rs. 1.23 Crores.
(Above example is merely an illustration to explain the benefitt of investing at an early age. Returns are assumed at 15%
CAGR. Assumed that SIP investment are done regularly every month. No guarantee or assurance of return is being offered by any mutual fund. The actual result may vary from depicted results depending on scheme selected.
Surprised? Why this big difference in earning of Mr. Gupta and Mr. Saxena?
Simple answer is, power of compounding effect. Mr. Gupta started small but regularly much before time than Mr. Saxena and hence got the benefit of compounding. A lot of investors miss this part and never act on “STARTING EARLY AND SAVING REGULARLY”.
So now can you tell what makes money grow? The answer is – Money itself!!!
We have 30 years of working life and all we can save is only when we are earning, so if you want to make rest of life smooth one should start investing as soon as you get your first salary. Like the above example clearly shows that if an Investor starts early, even with smaller amounts he can create huge corpus with time in hand. But even if you have turned 40 and you are now done with taking care of buying house on EMI and children education on loan, etc its still not late to begin investing for your retirement. Again the KEY IS – IT’S NEVER TOO LATE, JUST ENSURE TO START NOW from the time you are enlightened about investing concepts.
Inflation is “Mahangai (महँगाई) or Expensiveness”. It decreases the value of money over a period of time. Let us understand this with relationship between Dosa, Toothpaste and Inflation…
The cost of a masala dosa in 1987 was Rs 3.50. In 1997, it costed Rs 14 and in 2017 Rs 80 and if the rise in prices continues at the same rate, the dosa would cost Rs 157 in 2027. (Assuming the rates of normal Udupi hotel)
Similarly, the cost of a toothpaste in 1987 was Rs 8.05. It was Rs 18.90 in 1997 and Rs 108 in 2017. At the same rate of progression, we will have to pay Rs 212 in 2027
In right hand side image, time gap taken is ten years so you may feel oh! It almost doubled in a decade. But as you are living day to day life, the price keeps increasing slowly and steadily and inflation eats up the money in hand.
We need to beat inflation through investment in products which can fetch us higher returns than the current inflation rate. As per RBI estimates WPI inflation has grown by 6.5% in the last 30 years
This are the consolidated estimates but the chart 1 above shows how much inflation is impacting us in actual in day to day life
How to beat this and what is the relationship of inflation with saving and Investment?
- Selection of Right asset class
It is very important to select RIGHT ASSET CLASS to beat the inflation and allow the power of compounding help you earn money from money faster.
Have look at this exhaustive chart for Growth in different Asset Classes from March 1981 – March 2018. It compares traditional products from Gold and silver to Bank FD’s to investing in sensex.
The chart in left depicts that in the long term, equity investments have outperformed other investment avenues and has beaten inflation by a huge margin.
- Rule of 72 Theory
Let us relate power of compounding and inflation here, this time let’s apply rule of “72”. The “Rule of 72” is a basic way to see how long an investment will take to double, given a fixed annual rate of interest. Let’s compare the illustration of investment in traditional investment like FD, in debt mutual funds and in equity mutual funds. (The interest rate considered is just for illustration and it doesn’t mean assured returns)
The outcome shows us, results of Money earned post 36 years of being invested in FD, in debt mutual fund and in equity mutual fund. One may observe that between FD and debt mutual fund the difference of interest is just 2% but when the amount starts compounding at the end of 36 years, the difference in returns is almost close to 100%. So basic understanding here should be that even small parentage difference can bring big % change in returns over a period of time due to compounding effect. So one has to be very clear about selection of right class.
Disclaimer: Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces, affecting the capital markets. Investors are requested to also read the Scheme Information Document, Statement of Additional Information and Key Information Memorandum for Scheme specific relevant details & risk factors. The Scheme name does not in any manner indicate either its quality or its future prospects & returns. Past performance of the Sponsor/ Mutual Fund/ Investment Manager are not indicative of the future performance of the Scheme(s). Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
- Basic queries for NRI / PIO/ OCI for investing in India
Can NRI invest in Mutual funds in India?
Yes, NRIs can invest in mutual funds in India – as long as Foreign Exchange Management Act (FEMA) regulations are adhered with. Mutual Fund in India is growing and widening the horizon of its existence. NRI can now freely participate, and also help getting desired mix of debt and equity securities. Even if you want to take less risk and want a fixed income investment, the Indian debt market comes with higher interest rates. Mutual funds can broadly be classified into equity funds, debt funds and hybrid funds or balanced funds in which NRI can invest.
How easy / difficult is it to invest in India from abroad?
It’s very easy, in fact our platform help you to do all the transactions paperless. It’s just one account opening process and then all the investments happen online.
What is pre-requisite for starting investment in India?
Asset Management companies in India cannot accept investment in foreign currency. For this, the first step is to open an NRO account or NRE account with an Indian bank. Once the NRO and NRE account is opened, we help with the process of CKYC and opening Demat account to begin the investment.
To conclude this piece of article I would like the readers to do small homework for themselves and come up with essay on their financial life. In a book called “Think Everest” written by Atul Karwal, a man climbs rather conquers Mount Everest. It takes 76 days of pain since its too high, too far, too steep, too rocky, and too difficult, indeed it is extremely difficult task. But the thing that was driving his passion and dream was not Mount Everest but his personal commitment. “I WILL CLIMB IT”.
Building your financial plan to huge wealth requires similar passion and strong commitment. Wealth is created brick by brick as plant grows inch by inch. That’s how Investment grow in your life.
If you lack time for this efforts, hire a financial advisor / planner who takes care of this task for you. But Do it. Because that is the Right way which is also simple, smart and time tested formula of achieving goal.
START EARLY + INVEST IN RIGHT ASSET CLASS + SAVE REGULARLY = GOAL ACHIEVEMENT