Market Technicals

What is Nifty and how trading is done?

1. Nifty (S&P CNX Nifty) is the Index of Indian share market on NSE (National Stock exchange) like Sensex on BSE (Bombay Stock Exchange)
2. Trading is done on Nifty contract which is also called as Nifty future derivative.Nifty derivative movement is based on Nifty index.In stock market language it is called as “underlying of Nifty future contract is S&P CNX NIFTY Index.”
3. Nifty Lot Size - Nifty derivative consist of a lot of 50 quantities of Nifty. So if you want to buy Nifty contract then you have to buy at least one lot.The trading in Nifty contract is done in lots.
4. Nifty Expiry - The Nifty derivative expires every last Thursday of the month. In India we have three month future derivatives for trading.For example - In the month of October, we have October, November and December month Nifty derivative for trading. Current month derivative will have more liquidity (more volumes) as compared to other two months derivatives. A new contract is introduced on the trading day following the expiry of the current month contract. If the last Thursday is a holiday then contracts expire on the previous trading day.

Advantages of trading in Nifty

1. Trader get margin to trade on Nifty. For example - Nifty derivative consist of 50 quantity of Nifty index so the cost of one lot will become Rs 2,63,000 [50 qty of Nifty multiple by the closing price of Nifty index, which is 5260 current closing (15 Jan 2010)]. Please note - You need to have 15% amount of the entire cost to trade in Nifty future contract. Approximately it comes to Rs 35,000. b) Small traders can even buy Mini lot of Nifty contract which consist of 20 quantities of Nifty. To buy one lot of Nifty mini lot, you need approximately Rs 11,000.
2. You can do day trading (Intraday trading) as well as carry forward (hold your nifty positions) till the expiry period of your contract (minimum one month expiry and maximum three month expiry)
3. You can trade both sides of the Nifty means if you feel market is going up then you can buy Nifty contract and if you feel market is going to fall then you can short sell Nifty and later buy it to cover up your positions.
4. Very Low brokerage rates. Low brokerage rates increases your profit percentage. We are offering 0.01% for buying and 0.01% for selling. If you are interested to open the Demat account with us then please Contact us.
5. High liquidity - Very high volumes are traded in Nifty future contract which will make the trader to square off at any time and at any price. ie.Based on your trading position your account will get adjusted on daily basis as per the closing price of Nifty derivative contract.
   For Example - If you buy one lot of Nifty at 5200 and Nifty closes at 5250 then Rs 50 as profit (total profit will become 50 qty x Rs 50 = Rs 2500) will get credited in your account. On the other hand if Nifty went down Rs 50 then Rs 2500 will be debited from your account.
   If you do not have balance in your trading account then very next day your position will be squared off by your broker. Some brokers provides some extra days to transfer money in your trading account.
6. If you buy and sell on a same day then the profit and loss will be adjusted in your trading account accordingly.
7. Trader has to square off the positions before or on expiry. If you does not square off then the contract expires on the expiry date and the money gets adjusted in your account.
8. You can buy and sell Nifty derivative contract in your trading account/terminal. Separate account is not required.

Risk Involved in Nifty trading

Trading in Nifty future is a risky, heavy loss can occur. Basically trading involves big risk either you trade in Nifty future or in any other future contract or in stocks. Trading requires lot of experience and market knowledge. Investing and trading are two different factors in share market. Investing is not as risky as trading.

Technical Analysis

Technical Analysis is the study of prices and volume, for forecasting of future stock price or financial price movements. Technical analysis can help investors anticipate what is "likely" to happen to prices over time.
Technical analysis is not an exact science. It's an art and takes considerable experience. But don't worry everyone with each knowledge can learn it.
Technical Analysis is based on these three basic principles:

1 - Price Discounts Everything

Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, and …
Stock Market Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.

2 - Prices Move in Trends

Technical analysts or chartists believe that profits can be made by following the trends. In other words if the price has risen, they expect it to continue rising; if the price has fallen, they expect it to continue falling. However, most technicians also acknowledge that there are periods when prices do not trend.

3- History Repeats Itself

Technical analysts believe that investors en masse repeat their behavior and they assume that there is useful information hidden within price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions.
Technical Analysis Tools
Every technical analyst needs charts and indicators to study market. Three common types of charts are used by investors: Line Chart, Bar Chart and Candlestick Chart.
Line Chart is formed by plotting one price point, usually the close, of a security over a period of time. Connecting the dots, or price points, over a period of time, creates the line.
Bar Chart is drawn by high, low and closing price. Sometimes, bar charts are drawn by opening price. In this case, bearish bars are drawn with another color.
Candlestick Chart A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close.

Technical Indicators

Technical indicators are the basis of technical analysis. There are dozens of technical indicators, how to choose good stock indicators? Technical indicators are used to know when to enter or exit a trade. If you know how to enter and exit a trade, you can easily make profits. That is why choosing good stock indicators are important.
Some of stock indicators are more common and useful than others. Also you need a few of them to know when to enter or exit a trade not all off them.
Technical indicators can be divided into four major categorizes:
1- Price Indicators: Oscillators, Bollinger Bands
2- Trends
3- Number Theories: Fibonacci numbers, Gann numbers
4- Waves: Elliott's wave theory
Price Indicators are computed by prices data. A subcategory of Price Indicators is oscillators. Oscillators are indicators that are usually computed from prices and tend to cycle or oscillate within a fixed or limited range.
Common oscillators are: Momentum and Rate of Change (ROC), Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), and Stochastic Oscillator.

Momentum and Rate of Change (ROC)

Momentum is an oscillator designed to measure the rate of price change, not the actual price level. This oscillator consists of the net difference between the current closing price and the oldest closing price from predetermined period.
The formula is:
Momentum (M) = CCP OCP
Where: CCP is Current Closing Price and OCP is Old Closing Price
Momentum is simply the difference, and the ROC is a ratio expressed in percentage. Momentum and Rate of Change (ROC) are simple indicators showing the difference between today's price and the close N days ago. Momentum in general term means strongly movement of prices in a given direction.

Moving Average Convergence/Divergence (MACD)

MACD is computed by subtracting a longer moving average from a shorter moving average. MACD is used with a signal or trigger line, which is a moving average of MACD. If MACD and trigger line cross, then this indicate that a change in the trend is likely. MACD developed by Gerald Appel.
The MACD smoothes data, as does a moving average; but it also removes some of the trend, highlighting cycles and sometimes moving in coincidence with the market.

Relative Strength Index (RSI)

RSI measures the relative changes between up-moves or down-moves and scales its output to a fixed range, 0 to 100. RSI is an oscillator and Welles Wilder devised it.
The formula for calculating RSI is:
RSI = 100 [100/ (1+RS)]
Where: RS is average of N days up closes, divided by average of N days down closes and N is predetermined number of days that usually chosen 14.
RSI can use as an overbought/oversold indicator. A buy signal is when the RSI moves below a threshold, into oversold territory, and then crosses back above that threshold, usually 30 is taken for oversold threshold. A sell is signaled when the RSI moves above another threshold, into overbought territory, and then crosses below that threshold, usually 70 is taken for overbought threshold.

Technical Indicators - part 2

In this page you will be familiar with two indicators: an oscillator that is Stochastic Oscillator and Bollinger Bands indicator.
As I mentioned before, Oscillators are technical indicators that tend to cycle or oscillate within a fixed or limited range, and Momentum in general term means strongly movement of prices in a given direction.

Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator, it indicates whether the market is moving to new highs or new lows or is just meandering in the middle. This indicator is based on George Lane’s observations.
The Stochastic Oscillator is plotted in two lines Fast %k and Fast %D.
The formula is:
Fast %k = 100 * [( C L (n) ) / ( H (n) L (n) )]
Where:
C is the most recent closing price.
L (n) is the low of n previous trading day (or bar).
H (n) is the high price of the same n previous day (or bar).

Usually n is chosen 14.

A 3-period (day or bar) moving average is taken from Fast %k and called Fast %D. Fast %D is used as a signal line in the same way that the moving average of the MACD is used as a signal line for the MACD.
Stochastic Oscillator is plotted in two lines but, usually these lines cross each other many times. Now to smooth the chart, a 3-period moving average is taken from Fast %D and called Slow %D (Also, Fast %D is called Slow %K), so the smoothed chart is plotted with Slow %K and Slow %D.

Using of Stochastic Oscillator

1- Oscillators are used as an overbought/oversold indicator. A buy is signaled when the oscillator moves below 20, and then crosses back above 20. A sell is signaled when the oscillator moves above 80, and then crosses below 80.
2- Also, when %K crosses above or below %D, Buy and sell signals can be given. But, may be crossover occurs frequently in short periods and causes bad results. This using isn't very common.

Bollinger Bands

John Bollinger created Bollinger Bands in the 1960s; Bollinger Bands are used to determine support and resistance levels. This indicator consists of three lines; the middle line is an exponential moving average of price data and the two outside bands are equal to the moving average plus or minus standard deviation.
Standard Deviation is a statistical measure that indicates volatility of price. The bands will expand when price becomes volatile and they will contract during less volatile periods.

Using of Bollinger Bands

1- Bollinger Bands are used to determine the boundaries of market movements. If a market moved to the upper band or lower band, then there was a good chance that the market would move back to its average. In the other words, when price closes to upper band, market is overbought and when price closes to lower band, market is oversold.
2- Another using of Bollinger bands is that to indicate up-trends and down-trends. If price deflects off the lower band and crosses above moving average then price fluctuate between upper band and moving average, it comes to indicate upper price target. It is visa versa to indicate lower price.

Investment Portfolio for Retired Clients – FDs Vs. SCSS

Building up a retirement corpus portfolio for retired clients is a tough job. There are several challenges a planner will come across while dealing with such clients and we have to be very sensitive while structuring an investment portfolio of retirement corpus. Even a small mistake in asset allocation or choosing a wrong product can jeopardise financial lives of our clients.
Recently I wrote an article in Business Standard on choosing between Fixed Deposits Vs. Senior Citizens Savings Scheme in the current scenario. I thought it will make an interesting reading to you while dealing with your retired clients.
The article was the result of a brainstorming telecon between Santosh Salunke, a CFP Practitioner in Mumbai & me. I would like thank all those who call me to seek inputs (it makes me research & think) and those whom I regularly disturb with calls to take inputs for writing assignments & client cases
I request you to put across your thoughts on this subject and also share what investment products and asset allocation you recommend to retired clients.

Start of Article

People approaching retirement usually get a fabulous send off party and a respectful acknowledgement of their services to the company after completing 30-35 years of active working life. On one side retirement may be about shedding off responsibilities and living a relaxed life. But on the other hand it also dawns a great responsibility of managing retirement benefits received to lead the remaining part of your life which can sometimes be as long as the working life itself!
Retirees receive a considerable amount from provident fund accumulation, superannuation benefits and gratuity benefits. And many of the prudent investors will have accumulated corpus through disciplined investing in mutual funds, stocks and fixed deposits
Retirement brings in a different set of investment options and investment objectives mixed with various apprehensions. You will be required to take many investment decisions to channelize the retirement corpus all by yourself or with the guidance of a financial planner.
The first and the foremost decision will be to determine the asset allocation mainly between equity and debt. A 70:30 debt:equity ratio suits for many of the retirees but a proper analysis of your current investments and passive income streams needs to evaluated before finalizing.
Debt gives a lot of stability to the portfolio and also can be used to generate regular income streams to meet monthly expenses. Whereas equity boosts your long term returns and help you beat the inflation. A well-thought asset allocation is half the job done fund your retirement life.
Fixed Deposits (FDs), Corporate Deposits, Senior Citizens Savings Scheme (SCSS) , Post Office Monthly Income Scheme, Debt Mutual Funds, Pension Plans by Life Insurance Companies are the various options available today investing your retirement corpus in debt.
You have to compare the different features of the investment avenues like risk, returns, liquidity, term, mode etc before taking a decision on which is the best suitable avenue for you. Out of all these FDs & SCSS are best placed to be in your debt portfolio in the current scenario.
SCSS has been a huge hit since the time it was launched in 2004 by the Government of India to address the regular income requirement of senior citizens. Its popularity has been purely due its attractive interest rate of 9% and also it’s backing by the sovereign.
FDs have been unattractive for many years with post tax interest rates not even beating the economic inflation. But times have changed and for good. Of late FD interest rates have gone up considerably and should be seriously considered as an alternative to SCSS which had practically no competition in its category till recently.
Most of the banks – be it national or private are offering FD rates for Senior Citizens above 9% and some of them are even giving upto 10%. Some of the cooperative banks do offer rate higher than 10%, but are comparatively not safe to park a large sum of retirement corpus.

Feature	Fixed Deposits (Sr. Citizens)	Senior Citizens Savings Scheme
Qualifying Age	60	60 (55 for VRS or retired)
Term	Differs	5 Years (extendable by 3 years)
Returns	Current average 9.5%	9%
Prematurity withdrawal	Generally around 1% penalty with most of the banks	penalty of 1.5% between 1-2 years and 1% above 2 years
Taxation	Interest gets added to income for taxation purpose.	Interest gets added to income. Investment qualifies for 80C benefit

Retirees should analyze both these options under their specific circumstances. Let us look at the factors which you need to consider before taking a decision on whether to go with FDs or SCSS;

Interest Rate

Comparing the interest rates is probably the first step but not really a deciding factor. FDs are offering 0.5-1% higher rates than SCSS, which essentially converts into a higher monthly income for you. Rs. 15 lakhs parked in SCSS will fetch you a monthly income (payout is actually quarterly) of Rs. 11250 whereas a FD with 9.5% rate with give you Rs. 11875. Rs. 625 of higher income because of choosing the FDs over SCSS and this doubles if you can get rates upto 10%.

Term & Withdrawal

This can be a big deciding factor. SCSS carries a term of 5 years and can extendable by another 3 years with interest rates prevailing at that time. Any prematurity withdrawal will attract a penalty of 1.5% between 1-2 years and 1% above 2 years. Whereas the FDs offer the flexibility of deciding the term as per your convenience, what if you want to use the money for daughter or grandchild’s marriage after 3.5 years or 6 years? Banks also give loans on FDs for emergency purposes.

Income Vs. Accumulation

SCSS offers regular payout of interest rates on a quarterly basis whereas FDs offer interest payouts as well as the depositor can choose for cumulative option. If you have a decent income stream from house rentals, pension or some other income streams, you may really not be requiring a regular income from investments in the initial years soon after retirement.
In this case it makes sense to grow your investment corpus by investing in FDs and opting for cumulative option. The compounding works great even with debt investments.

Taxation

The returns from both the instruments are taxable and get added to your income while calculating the tax. However investments in SCSS are eligible for 80C tax benefits where regular senior citizen FDs don’t qualify. So if you are falling in the taxable bracket and wish to avail of this tax benefit, you should consider investing through SCSS. But check out if you are already investing in other similar investments which qualify for 80 C tax benefits like Life Insurance, PPF and even Tax Saver FDs

Conclusion

Considering all the above factors, in the current scenario it does make sense to invest your retirement corpus in Fixed Deposits to build your debt portfolio. And we don’t know for how long will these high rates prevail, so make use of this opportunity to invest in Fixed Deposits after evaluating all the factors mentioned above.

Use FP Pyramid to prioritize goals for confused souls

Individuals & families have dreams, goals & aspirations and thats why we Financial Planners exist. The problem is they have too many goals but limited financial resources to fulfill them and some clients just fail to understand this equation, whom I call the “confused souls”. This is common and nothing unusual about this, even you and me can be one of them. Its our duty to interrogate, educate and help clients to set goals and prioritize them during the data gathering meeting.  
Financial Planning Pyramid is an approach used by many established FPs in the world (google the term to know more) to help clients understand their goals and needs so that the planner addresses them in their financial plan. Here is an article written by me and published in business standard, its my version of the approach based on my experiences. Go through it, I am sure it will help you in giving a proper direction to the many confused souls.
Start   
Many of you have a genuine interest in getting financially disciplined and some would even want to have a financial plan in place, but face difficulties in taking off, getting stuck with questions like “where to start?”, “what to include?”, “how to move ahead?” etc. In personal finance this happens because there are too many factors affecting which you don’t recognize and there is a lack of insight on understanding one’s own needs, goals & priorities.
Financial Planning Pyramid answers this confusion by showing where to begin, how to prioritize goals and how to move up when you are building a financial plan. It gives a clear picture of laying the foundations of a healthy financial life by addressing each of your goals step by step.

Healthy Financials

Income, Expenditure, Assets & Liabilities form the base of any individual’s or for that matter an institution’s finances. To start building a healthy financial life, one has to take stock of all these four elements in a holistic manner and establish proper ratios amongst them.
Only steady & higher income doesn’t mean all your financial goals will be addressed, one has to have a controlled expenditure and make it a habit to save a fixed percentage of income which ideally should be around 25-35% giving you a leeway for investing for future goals.
Your assets are formed overtime out of investments in stocks, mutual funds, fixed deposits, real estate etc and should be well diversified to counter asset related risks. The liabilities like home loan, car loan, and personal loan dig into your assets. It is best not to have a liability dancing over your head except for a home loan which is used to create a growth asset. Assets over liabilities give you the Networth which should be positive & commensurate with your age and income level.

Risk Management

Once you have put the pedal on healthy financials, you should move on to insure the uncertainties of life called “risks”. There are different kinds of risks one faces in life which have financial bearings like early death, health problems, accidents, job loss, house fire, theft etc.
All your calculations can go haywire if any of these events strike you. What will happen to the home loan EMIs and funding of children’s higher education if you meet with an accident leading to death? If you survive – great, but what about the hospital bill, savings will be wiped out. And what if you survive and are bedridden for a year or become handicapped. Insurance against all these perils is the second most aspect of any financial plan. It lays down a strong groundwork from where you can start building wealth which cannot be shaken easily.
One should also have a contingency fund in place amounting to around 6 months of monthly expenses & EMIs. This will come handy in case of a job loss / business loss or medical emergencies in the family. The money can be parked in flexi savings account or liquid funds.

Primary Goals

After healthy financials & adequate risk cover, you are all set to start saving and investing for your goals in life, start with primary goals which are your basic needs or for which you have very high emotional attachment. House Purchase, Independent Retirement & Children’s Education can be termed as the primary goals for most of us.
Buying or building a house is usually the first dream of every family! Well it’s worth pursuing the dream. The charm and pride of owning a house and making it into home where a happy family lives should be the primary objective of any individual. As parents, next on line would be children’s education which we would like to fund and burden them with an education loan. With education costs skyrocketing, an engineering degree and a post graduation in a reputed institute in India can cost up to Rs. 10 lakhs each. Independent Retirement should also figure high on your list, and if you are backing on your children or your employment’s pension benefits, think again.
Once you have figured out how much will these goals cost you today and in future, you can formalize an investment strategy. Many a time simply starting monthly SIPs in diversified equity mutual funds will make up the strategy if your goals are long term. Choosing the right investment product based on your time horizon and risk profile is important for successful wealth accumulation. Choosing a long term product for a short time horizon can be disastrous and vice versa. What if the money meant for your son’s college next year is invested in stock market and it plunges by 30%?

Secondary Goals

Sleek sedan, vacation with family to Europe, second home in a hill station, jewellery collection, second vehicle for family, hobbies… some are expensive and others not, but human desires are endless. While it is good to pursue them, it’s prudent to plan for them after having set into action a savings & investment plan for your primary goals.
Never get into a liability to chase these goals; they should be funded with investment assets and not with a loan or EMI. As far as the buying a vehicle goes, if it is helping you enhance your productivity or improve your business, you may take a loan else strictly delay it. Have a separate investment strategy for secondary goals based on time horizon, debt for short term & equity for long term.

Tax & Estate

Many a times tax saving happens effortlessly, but tax planning is what you should focus on which means utilizing tax saving instruments to address one of your goals above and not invest in them on an ad-hoc basis at tail-end of the year. And lastly look at estate planning; it is about passing on you assets to your heirs. An extremely popular way to do estate planning is do nothing and leave it to fate like Dhirubhai Ambani! Absence of a will can lead to conflict among family members; make a will before it’s too late.
Like they say “a good start is half the battle won”, a reference to Financial Planning Pyramid can be extremely beneficial when you get down to doing your financial plan either by yourself or through a professional financial planner. It gives you lot of clarity on what the plan should address and how to prioritize the various aspects of financial life.
End
Setting and prioritizing goals is a very critical step, client’s expectation from a financial planner depends on this step and helps you both to be on a common page. Usually clients talk about primary goals but when you expose them to this approach, they understand the bigger picture of financial planning and also differentiate you from other financial intermediaries.
What are the other ways and methods in which you make clients realize that FP is much more than investments and primary goals. Leave your comments below.

Easiest way to make tough clients pay FP fees

Most of us have one ‘huge complaint’ about getting started as financial planners i.e. ”people in India are still not ready to pay financial planning fees, there is no demand for financial planning services.” Tell this to any of the established financial planners, they will thrash your opinion and hold you responsible for not being able to make your clients pay. Though I am not established yet, personally I have been fairly successful in collecting fees in the range Rs. 15-25 K from around 25 clients during my stint with Sykes & Ray Financial Planners and I believe the onus of communicating the value of financial planning is on us. If we are passionate, knowledgable and have a strong belief that we can make a difference to clients’ lives, we dont have to wait for the market to mature and people to start calling us or walking into our offices.  
Clients pay us when they see some concrete value in our services, we need to quantify the value in some way. Here is one of the ways to show prospects the value that we bring to table. Most people have a habit of procastinating and they know it – show prospective clients what they might loose by not getting a financial plan done “now”. I have tried it selectively and it has worked well. Try it out yourself, communicate it through mailers, during first time meetings, in public speaking, in your media writings etc – make sure your communication is polished, firm and impactful. Below is a transcript of an article I had written in Business Standard  on similar lines with an example of a 30 year old Rajeev, quantifying what he could loose by not getting his plan done for the next 5 years.  
Trust me many people have miserably gone wrong with money management because of 2 things – one, they are just too lazy/busy to do it themself and second, they have heavily been misguided by their agents/disributors/brokers/bankers. If you are genuinely offering FP services and learn to communicate its value, you will emerge out with cheques!   
Start
‘Stop Procrastinating’ is the 3rd most popular goal on 43things.com which compiles & tracks what people want to achieve in their life. We aspire to achieve difficult things and taming ‘procrastination’ is definitely one of them. For success with money and investments ‘time’ is the most critical factor after proper asset allocation and right products.  
Do make a choice between “do it yourself” or “hire a professional” but not between “I will start now” and “I will start someday”. There is no day in a week called ‘someday’, it has to be ‘now’. Let me explain this to you with an example of 30 year old Rajeev Kumar who decided to have a financial plan in place. He is a typical clueless investor busy with his career; gets a good paycheck, but doesn’t know how to channelize it effectively.  
Imagine if Rajeev had got down to getting his financial plan done ‘someday’ instead of ‘now’. The opportunities lost because of wrong financial decisions are called the ‘opportunity costs’.  

Cost of delaying retirement planning

Rajeev’s current monthly expenses are Rs. 30,000 and needs to build a corpus of 4.25 crores to meet his 20 years of retirement expenses independently. To build up this corpus, Rajeev would have to invest only Rs. 7,700 p.m. in equity oriented investments over the next 30 years. The power of compounding would ensure he achieves his corpus requirement.  
But if he delays this action and starts after 5 years, he would have to shell out Rs. 15,800 p.m. for the remaining 25 years. Rs. 20 L is the additional outflows and the cost of delaying your retirement planning for only 5 years! Why not spend it on a super holiday soon after retiring?  

Cost of choosing a wrong asset class

 The simplest & most effective asset allocation strategy one can follow is ‘debt for short term goals & equity for long term goals’, but it can be the most difficult thing to do if you do not have a plan in place. Rajeev wants to accumulate Rs. 20 lakhs in today’s value to fund his son’s education which would be Rs. 65 lakhs by the time child is 18 and ready for higher studies.  
Rajeev would have to invest Rs. 7,000 pm for the next 18 years in equity oriented investments like mutual funds, blue-chip stocks or ETFs which are likely to give a return of around 14% CAGR. Like most people if Rajeev had invested in Fixed Deposits or lousy traditional insurance products yielding around 8% for this long term goal, he would have to invest Rs. 14,000 p.m. The additional outflows would be Rs. 15 lakhs which is the cost of choosing a wrong asset class! Why not gift it to your son or spend it on his marriage?

Cost of keeping your money idle in savings account

Thanks to lethargic behaviour, hectic life & a lack of clarity on future goals, monthly savings get accumulated over time and stay there safely…cheers to your bank! One fine day, you wake up to realize there is too much money lying idle in account; either you buy a car or a life-size LCD TV. And if you are mindful, fall prey to those touchy advertisements by financial institutions. 
Rajeev had been maintaining a balance of around 3-5 lakhs in his savings account yielding 3.5% which had accumulated over last 6 years since he started earning. Now with a no-brainer if he keeps aside Rs. 1 lakh as emergency fund in SB a/c and invests the remaining 4 lakhs in a Fixed/Corporate Deposit at 8%, he can easily earn an additional Rs. 1.2 lakhs in 5 years. Why not hire a professional financial planner with this extra money?  

Cost of buying wrong insurance products

Rajeev is happy that he has 6 insurance policies and he pays the premiums regularly, but the total cover is only Rs. 15 lakhs and premium outgo is Rs. 75,000. Needless to say all of them are traditional policies with abysmal yields or ULIPs with higher charges. And on other hand his need-based insurance requirement was 75 lakhs. One will know the cost of being under-insured by 60 lakhs only when the ultimate uncertainty strikes and the family faces the heat.  

Cost of getting into bad debt/loans

Borrowing is “spending future uncertain unearned income today”. Many of the debts can simply be avoided by delaying the buying decision. Say you want to go on a vacation to Europe which will cost Rs. 3 lakhs. Now if you can’t hold back your craving for instant gratification you may end up opting for a 3 year Rs. 10,700 EMI option by the tour operator which will eventuality lead to Rs. 3.85 lakhs outflow. Instead if you had delayed this trip by 3 years and invested Rs.8,800 pm @ 10% to build up a corpus your net outflow would have been only Rs. 3-15 lakhs. Why not utilize the savings to fund domestic vacations for first 2 years?  
A ‘financial plan’ gives you a roadmap which helps you take the right decisions and avoid expensive blunders. Act now and start working on your financial plan, there are many better things you can do with the extra money saved or earned. Start somewhere, you will find the next steps automatically. ‘Stop procrastinating’ and take the first steps. By the way first & second most popular goals on 43things.com are “losing weight” and “writing a book”!  
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Let’s not wait for consumers to come to us, let us go to them. This is just one of the ways to communicate value of financial planning. What are the other ways in which you think we can do it and get our practices rolling? How to show the value of 15-30 K fees? Leave a comment below and share your ideas.

56% think FP will be an established profession in 3 years

Majority of those who took the poll “When do you think financial planning profession will be recognized in India?” on this website said this profession will be recognized within 3 years. The poll has received 255 votes – I think it’s a considerable number to represent the collective opinion of financial planning fraternity in India (which is really small).

Of the total votes polled – 11% said financial planning is already a recognized profession and a massive 45% of voters had faith that it will be recognized within 3 years.  So we can say that majority of this community i.e. 56% believe that within 3 years this noble profession will get its due recognition.
And the remaining 44% think it will take more than 3 years for the recognition with 26% voting for 3-6 years and 18% voting for more than 6 years. And I am a part of this minority as I voted for 3-6 years.
Here I put across my thinking on why I voted for 3-6 years and what the question means to me. And I request each one of you who took this poll, to leave a comment on this post justifying your stand. I think it can bring to the forefront a lot of valuable inputs for the evolution of this profession and how each one of us relate to it.
To be precise I think it will take around 5 years before we can call ourselves ‘professional financial planner’ and majority of our prospective clients actually understand what we mean by that term without much efforts & explaining. In simple terms that’s recognition for me at this juncture. Although a regulatory stamping to perform professional duties and a strict disciplinary procedure for violating ethical standards can be of highest recognition, I do not want to bet on it given the pace of regulatory reforms in this sector.
My statement is ambiguous till I don’t clarify what “professional financial planner” and “prospective clients” mean to me;

Who is a professional financial planner?

I would call someone a professional financial planner if s/he exhibits the following characteristics;

1. Has knowledge of all general concepts, strategies and products of personal finance
2. Has the skills & aptitude to make comprehensive financial plan for clients.
3. Has a fee-based practice model which can include both fee-only or fee-offset
4. Is ethical in his/her conduct and offers client-centric advice

 

Who is a prospective financial planning client?

Okay, everyone needs financial planning in some way, no debating on this. But not everyone can be a prospective client of a professional financial planner for the simple reason that we need to make a living out of this job, therefore someone who has the ability to pay our fees can be considered as a prospective client.
In today’s scenario I would call a prospective client who;

1. Has the ability to pay at least Rs. 10,000 p.a. as fees for professional advice. My practical experience says if someone (family) is earning Rs. 4-6 lakhs and more p.a., s/he should be able to pay up this kind of a fee.
2. And who doesn’t want to manage money matters on their own (Do-it-yourselfers) due to various reasons like inadequate knowledge, too busy or lazy, complex financials or simply respect for professionalism.   

 

And why I think it will take 3-6 years?

In the first place even if we as a fraternity achieve this recognition in next 6 years, it will be no small feat. And my take of 3-6 years is really being optimistic. I am 30 and if I start getting complete recognition even when I am 35, I would still have around 25 years to make a good living out of this recognition. No complaints if this happens!
And in quick pointers, allow me tell you why it will happen in the next 3-6 years (will write a eloborate article sometime later);

• Changing regulatory framework
• Move towards no-load structures
• Complexity of financial products & services
• Dismal experience with financial intermediaries
• Increasing income levels
• Exposure of Indians to global markets
• Higher goals & aspirations
• Willingness and ability to pay fees
• Higher savings level
• Availability of competent professionals
• Support from Media

The above mentioned logics and opinions are completely personal and I am not forcing them on anyone here.

Take a New Poll (Use the form on right sidebar)

How much should be the professional fees for making a comprehensive financial plan?

• Less than Rs. 5,000
• Rs. 5,000 - Rs. 10,000
• Rs. 10,000 - Rs. 15,000
• Rs. 15,000 - Rs. 20,000
• More than Rs. 20,000

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Do it Yourself Vs. Hiring a Financial Planner

Through this article I made a case for individuals to manage their money themselves. Yes, I know we are Financial Planners and will need to earn our living from charging a fee to clients. But that does not mean we can stop the way this profession is bound to evolve. There would be enough people in this world who think and would like to be “Do it Yourselfers”. Take for example living a healthy life. If a proper diet, a routine exercise and an adequate relaxation is part of your daily lifestyle, it can keep you away from doctor for most part of your life.
Now there are two things to be considered here. One, all of us know these simple mantras of living a healthy life, but how many of us follow it? Second, can a doctor stop encouraging this kind of a disciplined lifestyle to patients and public in general fearing he will be out of business?
I feel consumers should be given a fair chance by financial planners, media and the regulators to manage their money themselves. The idea is to get them started, let them subscribe to the concept of financial planning and start appreciating the importance of money management.
Having said that, I think the same people will approach you for professional help either when they feel they can afford your services or need a second opinion and most importantly refer people around them who are not doing it themselves.
Also please carefully read the situations under which I am in favour of “Do it Yourself”. They look easy to fulfil but practically are very hard to follow. But if someone is disciplined enough, works hard and has an inclination to get things moving, it should actually be no rocket science.
I am not trying to underestimate the existence of this profession, but I am trying to highlight the importance of embracing the financial planning process by consumers - either ways.
looking at this from another angle, I also think there can be many business models built by financial planners (maybe in collaboration) to cater to Do it Yourselfers. Like blogging, conducting trainings & workshops, robust & transparent distribution of financial products, writing in media, publishing ‘how to’ books, developing calcultors, money management softwares, portfolio trackers etc.
These are not times to conclude, but times to start discussions on important topics, so I request the fraternity to take this in the right spirit.
Below is the transcript of article along with the comparison chart. I am publishing the comments and replies from LinkedIn and Mint Money, they make a good reading too.

Start

Be it gymming, dieting, curing simple health problems, building a house, tax filing or money management – there are two ways of getting them done, either hire a professional for guidance or do it yourself.  In each case, the decision to hire a professional is based on many factors which vary for every individual. Like for example if you are building a house on a plot, you may decide to hire an architect based on the size of the project, what kind of interiors you want, your budget, etc. Else you may simply give briefing to a local contractor and supervise the construction yourself.  
Financial Planning is no rocket science; it is combination of simple financial strategies, few calculations and most importantly discipline. You may not have written plan and a second opinion given by a professional financial planner, but can still do fine doing it yourself if the following five factors are in your favour and you are disciplined & self-motivated to take charge of your money.

Time

You have to commit ‘time’ if you want to manage money successfully. You will first need to start by educating yourself with personal finance matters and products. The best way to do this is by reading money magazines or money sections of your daily newspaper. You may also spend time watching TV shows or surf the internet. There is too much of information floating around, you need to get used to terminologies and products on insurance, investments, banking, taxation etc.
You will also need ‘time’ to understand your needs, set financial goals, learn to use financial calculators (most of them are available on internet), compare products, take a decision and execute it. Getting a grip over your money is a continuous affair and doesn’t happen overnight; it will take at least 2-3 years. Spending 6-9 hours a month over weekends should serve this purpose.
If you are not able to make this commitment, it’s a good idea to hire financial planner who will do the handholding, advice and maybe even execute the plan. Even in this case you will have to spend 2-3 hours month in meeting the planner, understanding the plan, executing and reviewing the plan.

Affordability

Hiring experienced & professional financial planner costs money. In India currently, CFP practitioners charge anywhere between Rs. 10,000 to 30,000 to make plan, execute & monitor it. It’s no point having a plan done from self-proclaimed planners who are actually insurance agents or mutual fund distributors doing it for free and in the end recommending the products they want to sell.
‘Willingness to pay’ is best left to you. But ‘ability to pay’ can be quantified to some extent. In general if you are earning more than Rs. 6 lakhs a month or have an investment portfolio of Rs. 5 lakhs and above, you should be in a comfortable position to pay up the fees. You can use this as a benchmark for deciding whether to hire a FP or DIY. It’s a simple tradeoff – you pay fee to save your time, efforts and get professional advice, but let this not be the only deciding factor.

Availability

This may be a non-factor after some years, but as of now it is huge factor. Currently more than 1,500 are qualified as Certified Financial Planners in India out which not more than 200 are practicing. And even these handfuls are seen in bigger metros. With growth in demand from consumers, this situation is changing fast. So if a qualified and practicing FP is available in your city and is offering the services which you require, you may think of hiring one. Also check on the background, fee structure, references etc. It’s better to DIY if planner’s offering doesn’t suit your requirement.  

Knowledge

There are a number of questions which you should be able to answer by yourself. How much corpus do I need for a comfortable retirement? What are various tax benefits available? Am I saving enough or spending too much? Should I be taking home on loan or is it better to rent for some more time? How to invest in equity markets? How will be impact of inflation on my finances? You should also be able understand present value and future value of money.
This knowledge is currently made available by print, TV and web media in abundance. So it’s not difficult to find answers to these questions. You just need to take time out from your busy schedule and have an inclination to go through it.

Complications

And finally the decision can depend on the complications in your financial affairs. Is your income from single source or multiple sources like double salary, rent, investments etc? How is your current portfolio spread out – if you have been investing in mutual funds, stocks and insurance policies on an ad-hoc basis the chances are your portfolio is widely scattered and needs to be consolidated. If you are in such a situation a professional can give you a holistic view and help bring harmony in your investments and map them to future goals. If things are simple, take charge of it yourself.
After evaluating all the above factors, you may decide and try o do it yourself or seek a planners help. Alternatively you may try yourself for sometime before turning on for external help. But, start somewhere & take the first step towards having a plan in place!

Grill your clients hard for a super effective data gathering

Out of the six steps we follow in Financial Planning process, data gathering which provides the input for making a Financial Plan is the most critical one. Fundamental science says that the output of any process is only as good as the input. Going a step further and beyond the conventional practice of Financial Planning, the data gathering meeting with clients can be utilized to fulfill multiple objectives, collecting numbers being just one of them. This article is about using the opportunity of data gathering meeting in a much more effective way than just filling a boring 10-20 pager data gathering form.
The article is written based on the assumption that you offer a no-obligation/complimentary data gathering meeting to anyone who has even remotely shown interest in subscribing to your FP services. The article is a comprehensive guide to getting the best out of data gathering meeting and the strategies followed have worked well for me in higher conversion.

  

1. Taking Initial Commitment from Client

While offering complimentary first meeting/data gathering meeting without any obligations from the prospective clients so that they are open to explore our services, you can request a few things from their end to rope in the initial commitment towards subscribing to our services. Irrespective of source of lead and chances of conversion, it is good to put forward the following requests;

• Involve spouse in the meeting.
• Meeting will be at their residence not office
• 2-3 hours of undisturbed time
• Keep the required documents handy
• Read (Not fill) the Data Gathering Form before meeting

The above commitments from cleints will not only push the clients to take the meeting seriously but will also help us during the actual meeting. Kindly note its just not fees that clients have to give us but also their time, data and efforts. A good start, isn’t it?

2. Establish Goals & Financial Objectives

It’s always good to start the meeting with personal goals and financial objectives so that we are able to connect to the client’s aspirations for the rest of the meeting time. The section can be started of by asking simple open ended questions like “what are your goals and dreams in life?” or “what are the concerns that made you sit with me?” Remember its listening time, let both husband and wife speak up and probe on their statements if they try to keep it short. This will set the mood for the rest of the meeting. Invariably you are making a statement “I am here to help you achieve your goals.”
After the initial free talk, its time to get into details. Get on to the list of various goals and financial objectives an individual/family can have. People have very vague thoughts about what they want in life and that is why their personal finances are managed in a very haphazard way. It is our duty as Financial Planners to help them articulate and quantify their goals. This is where our experience and commonsense will matter the most. There are 3 major goals that any normal middle class or mass affluent family wants to fulfill;

• Children’s Future (Education & Marriage)
• Retirement (Normal or Early)
• Buying a House (First or Upgrade)

Clients need help here and you need to be prepared for it. Like you should know what are the usual graduation and post graduation education costs, the pros and cons of early retirement and even the housing rates in your city. This will also give them confidence that you are not theoretical but practical. Once you are done with the above 3, its time to get on with other goals like annual vacations, inheritance of wealth, charity, new member in the family, buying a car etc.

3. Understanding Current Financial Situation

Financial Planning is all about drawing a roadmap which will connect current situation to future aspirations. To understand the current situation you will need four basic data i.e. Inflows & Outflows, Assets & Liabilities. These also are basic elements of all personal financial statements like net-worth statement, income expenditure statement and cash-flow statement.
Never tell a client to fill this either before or during the meeting. Fill this yourself by way of interviewing, you can establish a lot of qualitative aspects of his financial situation. Like say what were reasons to invest in particular assets, what has been his experience with the investments avenues he has chosen before, is he comfortable taking loans or he prefers being debt-free?, his current lifestyle and flexibility to alter the same if required, income pattern over the years, his concerns/confidence over current employment and future prospects, his experience with previous financial advisors etc.
You as a Financial Planner have to decide what finer points you want to draw out of the meeting and then go about making them speak on it. The deeper you get into qualitative aspects, the better you will be able to service your client at the later stages. Also it will help you to gain his trust as you are not just asking about how much money he has got to invest today.
After above data, enquire about life and general insurance policies, employment and retirement benefits from his company. Its good to use this time to ponder upon qualitative information and retrieve the quantitative information from the supporting documents back at your work desk. So ask them to give you photocopies of the following documents;

• Latest Mutual Fund Statements
• Equity Portfolio Statements
• Insurance policy documents
• Certificates of Post office schemes & deposits
• Salary slip and latest income tax return

 

4. Ascertaining Assumptions

Let’s understand that the whole Financial Plan is based on numerous assumptions. It’s important that you communicate and educate your client and take his concurrence for some of assumptions like;

• Economic and lifestyle inflation
• Income Growth in future
• Life Expectancy of family members
• Retirement Age and lifestyle

Even here they will require your help and expertise. You should try and explain the assumptions affecting his Financial Plan with examples and personal experiences or better applying them on one of their goals.
It good to share the general norms and give a range by sharing your logic for assumption and then throw the ball in the client’s court by asking “So what do want us to assume?”. You may even want to discuss the assumptions on returns from different asset classes like liquid, debt, equity, gold and real estate that. A little bit of debate and sharing of experiences will bring both of you on the same page.

5. Financial Education & Literacy

Clients need to be empowered to take decisions and act upon them and Financial Planners play a very big role in this. This empowerment can happen through Financial Literacy. Financial literacy is the ability to understand the various components of personal finance like investment assets, economic scenario, inflation, employment benefits, mortgages, investment returns and many more. As Financial Planners we should remember that the more we educate our clients the better we will be able to help them take decisions, which is the essence of Financial Planning.
Educate the client during your 2-3 hours of interaction in small doses on various aspects whenever you are talking about a particular component. This will also help fulfill other objectives like getting accurate information from the cleint and showcasing your command on Financial Planning. Encourage cleint to ask questions right at the beginning of the meeting and also as and how you complete each sections of the data gathering form. Also be sure not educate so much that it will eliminate the need to hire you as a Financial Planner!

6. Making a mark & closing

The onus of proving that it is worth paying you 10-30 thousand fees is on the ‘You’. You have to make a positive impact in 2-3 hours to enthuse him to hire you and write the cheque for your fees. Your communication, body language, opinions, knowledge sharing, questions etc during the course of the meeting have to ensure your prospective client understands that;

• Financial Planning is a profession and you are a professional
• You are qualified/certified to do what you are doing
• You have the necessary knowledge and expertise
• You are client-centric and you are there to help them fulfill goals
• You are different from the numerous financial advisors they have met before

It is worth mentioning that apart from your knowledge, soft skills will play a very important role in driving the above points. Don’t hurry into the meeting and give space to the other party to judge and evaluate you and your services. Clients may have more concerns like confidentiality issue, reference from existing clients, legal agreement, guarantee of returns etc., you need to be prepared to answer these questions.
They above mentioned process may be quite grilling for your clients, but they will appreciate it as will be able to see through your real intentions. So, dont be apprehensive about upsetting your prospective clients, just do your job… just be a financial planner who is genuinely interested in helping his/her clients! Do comment below your views, we are here to evolve by sharing each other’s experiences.

Benefits of Financial Planning for Students

When you are a student you are relieved from many responsibilities. Your focus is entirely on studies and you enjoy the memorable time with your friends. In most cases, all your education expenses are taken care by your parents and you do not have to worry much about the cash flows. Although there are students from economically weak families who have to care for each single penny they are spending.

Adopting a financial planning approach when you are a student helps in building your financial future. Bringing  financial  discipline early in life ensures that you avoid making mistakes which leads to straining your finances and stressful professional career.

Here are few tips to increase your awareness on personal finance which ensure your financial well- being in the future:

1.  Have Awareness on your Expenses

Till you are a student, you are dependent on parents for your needs. Your tuition fees, admission fees, expenses on accommodation etc. all are taken care by them. Your concern is the least on knowing about how expenses are being met, unless your family financial situation is not healthy. Unfortunately, in most cases parents stretch out to ensure their children get  the desired education. Awareness on your expenses helps in keeping you informed and take sound decision when you start your family. You can use money management tools available online to create a budget which gives you an estimate on what you received form your parents and how it was spend. Awareness on your fees and accommodation expenses makes you realise what is the amount of money that is spent on your education.  It helps in planning at later stage of life when you start a family. Also, you keep a check on your spending habits which eventually will decide how you manage your finances when you start earning.

2.  Search for the Help Yourself

Many parents do not have enough funds to meet the high cost of education. Hence, they either look for some scholarship or rely on education loan. Generally, they do not involve children’s in such decisions. But as the need to become financially savvy along with the flow of information is increasing it will be a wiser approach to analyze the options yourself. Search colleges for scholarship which you desire to join and analyze education loan options online or visiting various institutions. This will also help you to prepare for any loan liability you might have to shoulder when you start working.

3.  Understand Terms & Conditions

Credit Card and Debit Cards usage is increasing right form the age you land up in college. I have seen many parents whose children study abroad. They transfer fund to the child account in India as per the need. In some cases credit card is issued to the child name which they utilize it and parents repay. Although, parents keep a check on all these usages it is helpful if you as a student understand the terms and conditions in detail since credit cards has been the biggest contributor in bad credit history. Education loan also has details terms and condition which if you are aware you can make the best out of it in your repayment days. Thus, understanding terms and conditions in financial instruments helps you in increasing awareness and avoiding any mistakes which can lead to unhealthy financial situation.

4.  Ensure your Credit History Remains Sound

This is very important since your borrowing in future will be dependent on how your credit history evolves. By making yourself aware on the various aspect discussed above, you will be able to manage your debts more efficiently thus keeping your credit history good. You have organizations like CIBIL for keeping a check on your repayment habits.

5.  Take help of Professionals

Although most individuals prefer taking help of professionals at later stage of life, there are many resources open to students now where information is available or you can post your queries. There are personal finance blogs, print media query sections, training programs by professionals to students and many other resources which can be utilized by students to resolve their queries. With time and inclination to learn, you can reap maximum benefit as a student. If required, use paid services to understand about your personal finance.

Being a student is always a memorable time. You try to nurture your career ahead and make new friends some of which remains for life. But with a little focus and awareness on personal finance, you can ensure sound financial decisions and secure your financial future.

When you are a student you are relieved from many responsibilities. Your focus is entirely on studies and you enjoy the memorable time with your friends. In most cases, all your education expenses are taken care by your parents and you do not have to worry much about the cash flows. Although there are students from economically weak families who have to care for each single penny they are spending.

Adopting a financial planning approach when you are a student helps in building your financial future. Bringing  financial  discipline early in life ensures that you avoid making mistakes which leads to straining your finances and stressful professional career.

Here are few tips to increase your awareness on personal finance which ensure your financial well- being in the future:

1.  Have Awareness on your Expenses

Till you are a student, you are dependent on parents for your needs. Your tuition fees, admission fees, expenses on accommodation etc. all are taken care by them. Your concern is the least on knowing about how expenses are being met, unless your family financial situation is not healthy. Unfortunately, in most cases parents stretch out to ensure their children get  the desired education. Awareness on your expenses helps in keeping you informed and take sound decision when you start your family. You can use money management tools available online to create a budget which gives you an estimate on what you received form your parents and how it was spend. Awareness on your fees and accommodation expenses makes you realise what is the amount of money that is spent on your education.  It helps in planning at later stage of life when you start a family. Also, you keep a check on your spending habits which eventually will decide how you manage your finances when you start earning.

2.  Search for the Help Yourself

Many parents do not have enough funds to meet the high cost of education. Hence, they either look for some scholarship or rely on education loan. Generally, they do not involve children’s in such decisions. But as the need to become financially savvy along with the flow of information is increasing it will be a wiser approach to analyze the options yourself. Search colleges for scholarship which you desire to join and analyze education loan options online or visiting various institutions. This will also help you to prepare for any loan liability you might have to shoulder when you start working.

3.  Understand Terms & Conditions

Credit Card and Debit Cards usage is increasing right form the age you land up in college. I have seen many parents whose children study abroad. They transfer fund to the child account in India as per the need. In some cases credit card is issued to the child name which they utilize it and parents repay. Although, parents keep a check on all these usages it is helpful if you as a student understand the terms and conditions in detail since credit cards has been the biggest contributor in bad credit history. Education loan also has details terms and condition which if you are aware you can make the best out of it in your repayment days. Thus, understanding terms and conditions in financial instruments helps you in increasing awareness and avoiding any mistakes which can lead to unhealthy financial situation.

4.  Ensure your Credit History Remains Sound

This is very important since your borrowing in future will be dependent on how your credit history evolves. By making yourself aware on the various aspect discussed above, you will be able to manage your debts more efficiently thus keeping your credit history good. You have organizations like CIBIL for keeping a check on your repayment habits.

5.  Take help of Professionals

Although most individuals prefer taking help of professionals at later stage of life, there are many resources open to students now where information is available or you can post your queries. There are personal finance blogs, print media query sections, training programs by professionals to students and many other resources which can be utilized by students to resolve their queries. With time and inclination to learn, you can reap maximum benefit as a student. If required, use paid services to understand about your personal finance.

Being a student is always a memorable time. You try to nurture your career ahead and make new friends some of which remains for life. But with a little focus and awareness on personal finance, you can ensure sound financial decisions and secure your financial future.

- See more at: http://www.fpgindia.org/2013/06/benefits-of-financial-planning-for-students.html#sthash.B3vvQF8o.dpuf