Fenil's Library

Is it just me or did 2008 whiz us all by?

Just the other day, the market was at 20000 levels. Oil was around $150 a barrel, pushing us into what seemed like an irreversible journey towards mounting inflation.

And today, most economists are predicting near-zero inflation by June. Interest rates, which were threatening to sky-rocket to the high double digits, have softened significantly. And the world economies that seemed to be generally thriving are into a recession — all in a year.

There is a vital lesson in the unfolding of these events —- nothing is permanent, take nothing for granted. This also means that even the current tumultuous environment is transient; this cycle too will change. 

As an investor, therefore, you would do well to ignore the ambient noise and stick to a goal-based financial plan. Towards this end, today's column offers readers the basic building blocks of a sound financial profile. Though each individual's life situation is different, the following principles of financial planning are universally applicable.

Medical insurance: Medical insurance is a non-compromisable expense especially in a country like ours, where the state does not cover medical costs. Everyone, young or old, male or female, salaried or a business person, should without exception get a medical cover for himself. Else, if and when the emergency strikes, apart from health consequences, the repercussions on your finances could be disastrous. Of course, if you are salaried, more often than not the employer arranges for medical insurance. Only here, too, most aren't aware of the exact amount of coverage. Ideally, have a family floater policy for a minimum amount of Rs 5 lakh. The premium for a family of four comprising husband, wife and two kids would be around Rs 8,000 - 8,500 per annum. 

Life insurance: The basic financial tenet regarding insurance is that it's a cost and not an investment. Combining insurance and investment almost always leads to sub-optimal returns. Buy insurance only if your family needs it and always opt for a term insurance policy, which is the cheapest and the purest form of insurance. A 30-year-old can purchase a Rs 10 lakh cover for a premium in the region of Rs 3,500 to Rs 4,000 per annum. If you have bought expensive insurance, consider surrendering the policy. 

Public Provident Fund (PPF): PPF is the best fixed income investment that you can make. An annual contribution of Rs 70,000 will get you around Rs 32 lakh in 20 years. Look at it as a fund for the education needs of your children. If you are married, get your spouse to invest, too, and you would have a retirement fund ready.

Buy a house: There is never a good time to buy a house. The sooner you do it, the better. With supply limited and a billion people and counting, housing in India is never going to be cheap. Opt for housing finance, even if you have your own funds. Home loans are the cheapest loans on offer. 

Avoid credit cards: A credit card is perhaps the most dangerous enemy of a good savings habit. The reason has to do with human psychology. Whenever you spend money, there is a trade-off. Buying something gives you pleasure, but putting up the cash for it is unpleasant. What if you could only retain the positive payoff without experiencing the negative emotion? Credit cards allow you to do precisely this.

However, if you have to do something wrong, at least do it right. Use a credit card if you must, but under no circumstance revolve the credit. India has one of the highest credit card interest rates in the world.

A good habit is to pay off the amount spent on the card the very next day, without waiting for the payment due date. Better still, use a debit card or cold cash.

Equity: By now, all of us would know that making money in the equity market is easy; losing it is easier. However, always know what you buy and buy what you know. If you invest on tips and recommendations, you are literally kissing your money goodbye. If you buy a stock directly, it has to be something that you have done your homework on. A better policy would be to use mutual funds. The flavour of choice should be plain vanilla with a minimum track record of over three years. Don't time the market. It's never worked; it never will. Invest for the long term. If you follow these simple steps, you can't lose. Yes, there will be intermittent dips and falls, but over time, you will not lose.

Emergency fund: Money lying idle in the bank is all too common. At the same time, investing the last penny that you have is also not desirable. Have no more than three months' expense requirement available at any time. Out of this, cash equivalent to a month's expense could be kept in the savings account and the rest invested in a money market scheme.

Last but not the least, be persistent. The secret of success is constancy of purpose. It's really not that difficult to achieve financial freedom. Trust me, if you follow these principles diligently, success is yours. 

The author is an investment and tax advisor and can be reached at sandeep.shanbhag@gmail.com