MoneyVedam

In the last issue, we explored 4 major leakages, which if prevented, could go a long way in saving your hard earned money. In this article, we are going to see 4 smaller but recurring leakages, which if left unnoticed, could deprive you of a significant contribution to your long term wealth. Leak 5 – Tax outgo EPF/PPF, children’s education fees & any home loan principal you pay takes care of your income tax rebate in section 80c. However, for those in the middle years of their career, who have completed their EMI liabilities, you may wonder if there are avenues beyond section 80c to save tax. This requires a fundamental shift in viewing assets as cash (or) capital assets. Cash assets such as bank FDs are draining on tax, so you may consider switching a part of them to tax efficient capital assets such as debt funds to plug the tax leakage. Lets say Guru has Rs.25Lacs in bank Fds and he falls in the 30% income tax bracket. At 7% interest, he earns Rs.1.75Lacs on whi...

So far we have seen how to measure the combined returns of one’s asset mix, called the portfolio, understand the difference between nominal & real returns and took a further step to examine the 3 different types in which assets are classified. In this issue, we are going to look at increasing your savings, while keeping income constant, by plugging the leaks on the expenditure side. Income – Savings = Expenditure Most of you may be familiar with this arithmetic, “Income – Expenditure = Savings”. The problem with this math is expenses being variable, savings too becomes variable. This is not good for your financial health in the long run. So, it is important to first select a certain fixed percentage (10% or 30%) of your income as savings and then spend the balance. Leak 1 – Insurance policies Insurance is required only to compensate you for any loss, other than term & medical policy, rest are not required for an individual. Insurance is not an investment, ther...

In this third classification of assets, we are going to understand assets based on whether they could be quickly converted to cash, a parameter more commonly known as liquidity. It is a key characteristic that ties an investor’s preference to a particular asset class. Assets that can be easily converted to cash form Movables and the rest form immovable assets. Movable Assets Most of the cash assets such as bank FD, RD & Post office schemes and capital market instruments such as open-ended mutual funds & stocks are liquid and form part of movable assets. There are 2 stages in one’s life when most people desire to have a higher percentage of the movable assets in their portfolio. They are: - Buying a dream home - Children’s Education/Marriage Lets take Robin who is building his dream home. Due to an unexpected rise in the cost of certain raw materials, say his budget overshoots by 20%. He now needs extra cash to meet this shortfall. Even if he has other properties...

In the previous article, we saw the classification of assets into cash & capital assets. In this issue, we’re going to classify assets based on the returns they generate, into appreciating assets and depreciating assets. All of you would like your money to work harder for you to provide financial security for you and your family in the future years. Hence, it is important to understand the difference, so that your hard earned money does not disappear in depreciating assets. Appreciating assets Appreciating means growing in value over time. And from experience, we understand property and even certain cash assets like recurring deposit & PPF are appreciating assets. Just as how land & property appreciates over time, mutual fund units too appreciate in value. Not only have their returns beaten inflation, in certain categories such as equity funds, they have offered the best returns among all asset classes over the last 10-20 years. Lets take the case of John, who ...