Financial Planning – Page 5

May 26, 2023

How to understand your relationship with money

Let me start by sharing a real-life experience and the reaction on social media.

The story begins with an individual ordering a sandwich on Swiggy. Let’s call him Kiran.

Kiran was telling me how one has to budget for a higher amount when opting for the convenience of an online delivery. And yes, convenience comes at a steep cost. This is what Kiran showed me on his Swiggy account:

Sandwich: Rs 138.09
Packing: Rs 25
Delivery Partner Fee: Rs 51
Taxes: Rs 6.90
Tip: Rs 70

I posted this on Twitter with just one statement: A 138 sandwich is now Rs 291!

Well, the comments were brutal. Not surprising, as people love to outrage on social media. People questioned as to why the individual could not make a sandwich at home. Labelled the person as lazy. They wondered who would order a sandwich that costs so much. And I was even accused of spreading “fake news” and maligning Swiggy.

While I was flummoxed at the judgement received, I want to focus only on one aspect – the money angle. Majority had a huge problem with the Rs 70 tip. There were sarcastic remarks about it as well as Kiran being called stupid (for being so generous).

This incident reiterated how personal people get when the subject is money.

Money is a touchy subject filled with value judgements.

Now let me give you the other side of the story by telling you something about Kiran.

Kiran is a well-to-do senior citizen whose children reside elsewhere. Could not step out due to a sprained ankle and was in a fair bit of pain. He does not have a car or a driver who he could direct to go pick it up. The house help who comes during the day was ill. The cook only comes thrice a week and that was her day off.

Kiran really felt the urge to have a veg grilled sandwich and decided to order for it. I guess that demolishes the lazy accusation. But the bone of contention was about Kiran paying Rs 70 as a tip for a sandwich that costs Rs 138.

I know Kiran and I do know that he firmly believes in using money as a means to give back to society. Kiran is of the opinion that if he does not help the individuals who make his life more easy, he is being selfish and self-centred.

I have seen Kiran tip the Urban Clap staff lavishly. He is always sending food for the watchman. When the municipal workers were doing up the road, he ordered samosas for all of them. He pays the househelp well, and whatever is cooked for him, he often shares with them.

The default tip that is set on the Swiggy app is at Rs 70. The logic being, whether the dish costs Rs 1,000 or Rs 100, the individual had to make the same effort to go and pick it up and drive in the hot sun and traffic to come deliver it at your doorstep. He believes that they deserve at least Rs 70 as the tip.

Because our relationship with money is complex, it gets manifested in various ways.

This is why you have no right to judge someone else for their money choices, unless you are directly getting impacted by it. Go easy on your judgements!

It is not just about spending, it is also about investing. Have you realised how many of our investment decisions are justified by emotion, and not logic? Innumerable times I have seen individuals invest because they “have a good feel” about the stock. Or the next big theme has caught their attention and they get carried away by the frenzied narrative. Or, they sell in haste because they are afraid that they will lose all their money.

In Kiran’s case, there was something else that I noticed. “I think about these young men who deliver the food to my house, and they can’t afford to eat such food or even buy it for their children. How bad they must feel.”

When he told me that, I could see what a sensitive human being he is, but I also picked up something else. I believe there is some amount of guilt at his privilege that motivated the lavish spending on those lower down the economic ladder.

I have no intention of debating whether Kiran’s intentions are driven by ego or empathy or altruism. That is no concern of mine or yours. But I have every intention of pointing out that our relationship with money is deeply personal and has many layers and facets to it.

Our relationship with money brings out an intricate web of motives, interests, passions, desires, needs and compassion.

Because our relationship with money is personal, it is emotional. And hence, cannot be ignored or treated with disdain. If you are curious about your relationship with money, answer these questions with brutal honesty. They will help you obtain a better comprehension of the money dynamics in your behaviour patterns.

Why am I working so hard to accumulate money?

Money is a tool – like a hammer, like a chisel, like a scissors, like Zoom. It is there to serve a purpose.

Money is a transaction tool. Its purpose is to get you what you desire. It could be status, security, lifestyle, experiences, convenience, a home, a car, a holiday, an iPhone, mental peace… you get the gist.

Money is never an end in itself. If money is an end in itself, then you will never have enough. You will never be satisfied. The purpose of money is to support well-being and empower you. So ask yourself, what is it that you want from your money?

How do I feel when I spend money?

The way you spend and manage your money is individualistic. It is shaped by your experiences, upbringing, emotions, how you view society, as well as your religious beliefs. You may feel absolutely no guilt at buying a bag that sets you back by many thousands but will cringe at the cost of replacing the old and worn out upholstery at home. Ask yourself why. You may enjoy a lavish meal at a restaurant and run up a gigantic bill, but will not pay more than 10% as a tip, however large the bill or great the service. Dig deeper.

Where do I get the most satisfaction?

Don’t be swayed by what someone else is doing. You may get joy when you use your money to help others. Others may find fulfilment is spending on numerous outings and vacations in a year. A few may prefer just spending it on wining and dining.

I repeat; answer the above candidly. There is no judgement. Your life. Your money. Your choice.

Being aware of your relationship with money helps you get the best out of it. Knowing the source of your emotion and the drivers will help you get to the root of the issue and improve your relationship with money.

Source- Morningstar

May 22, 2023

What’s your Investment Personality?

Few investors neatly conform to a single description. The Standard Chartered Investor Personality Study 2020 surveyed 1,200 affluent and high net worth investors and founds that geographic and cultural differences shape behaviours and personalities. For example, Hong Kong has the highest proportion of “Enthusiastic” investors. Singaporean tended to fall into the “Comfortable” category, while Taiwan cornered the “Conservative” archetype.

John Rekenthaler, director of research for Morningstar, believes that most investors have blended traits. Here he explains how personalities affect investment behavior. After describing three personality types, he concludes by telling us (in a very amusing way) where he fits it.

Loners

Investors who belong to this group make their own decisions. They consume investment research neither for its counsel, nor to learn what others are doing, but instead as grist for the mill. Such investors ignore the actions of the crowd. Should they see a line snaking around a block, they will not try to learn what they are missing. They will instead go on their way while pitying the line’s occupants.

Strength: Buying Low

Loners are not the only investors who try to buy low. Equity mutual funds sometimes receive inflows after market declines because the overall marketplace believes that the dip presents a buying opportunity. Overall, though, loners are the likeliest investor type to sift among discounted securities, seeking bargains.

Strength: Early-Bird Gains

Besides receiving “dead cat bounces” from securities that are deeply depressed, loners may also profit from the opposite form of investment: highly expensive emerging-growth stocks. Before Tesla was mainstream, it was owned mainly by iconoclasts who discovered its story. The same holds for all winning startups.

Weakness: Self-Delusion

Unfortunately, not all that glitters is gold. For each dollar they stashed in Tesla or bitcoin, loners squandered thousands on investment dreams that never materialized. Sometimes, wisdom does in fact lurk within the crowd. Loners constantly face the possibility their “insight” is instead self-delusion—the mistaken impression that they have spotted what others missed.

Weakness: Bear Traps

A related problem is bear traps. This error has happily become less frequent, because market-timing has become unpopular, but loners nevertheless tend to exit the stock market, believing they have identified an upcoming bear. (A little knowledge can be a dangerous thing.) Once out of equities, they have trouble getting back in, because doing so before stock prices collapse would be a tacit admission of failure. Loners do not always benefit from having large egos.

Followers

More common than loners are followers, who derive comfort from crowds. Rather than walk past lines, they join them. Followers are strongly influenced by recommendations—from researchers, the media, friends and family, and internet boards. They seek investment allies.

Strength: Staying Informed

Followers listen to others. Doing so helps to keep them knowledgeable about investments, thereby reducing the chance of an unpleasant surprise. As with inflation, which causes the most damage when it is unanticipated, unforeseen investment losses carry the sharpest sting. Followers who listen to both side of the investment debates—which, it must be confessed, does not always occur—are well prepared for bad news.

Strength: Trading Opportunities

By the time that followers learn of an investment possibility, the loners have already found it. Word takes time to spread. Astute followers, however, may still reap ample profits by arriving before the rest of the marketplace. Discovering Tesla in winter 2020 was too late. But buying the stock two years before, when it was well known but not yet the investment rage, would have been a splendid trade.

Weakness: Tail Chasing

A fine line separates being guided by the collective from being controlled by it. Those who appropriately use investment information, by applying common sense and at least a modicum of their own judgments, can prosper. Not so those who become bewildered by the investment gossip, turned this way and that, like dogs distracted by a fluffle of rabbits. Such is the constant danger for followers.

Weakness: Mob Mentality

Followers are the most prone to being harmed by their emotions. As anybody who has participated in internet forums can attest, chat groups can quickly become mobs. (Whenever I receive an openly insulting email, I know that my column has been posted on a Reddit board.) Investors may benefit from hearing additional views, but rarely will they succeed by sharing others’ emotions.

Zombies

Most investors are zombies. The less they know about their portfolios, the happier they are. Consequently, they tune out the noise. Back in the day, that meant owning a portfolio that had been assembled by a stockbroker, and then leaving future decisions in the broker’s hands. These days, zombies are typically 401(k) participants or index-fund proponents. Either way, they stand aside.

Strength: Investment Discipline

This one is obvious. To the extent that investment success comes from staying the course—a hoary cliché, but not without truth—zombies are perfectly situated. They possess neither the faith to make their own adjustments, nor the interest to copy other investors’. Their portfolios therefore tend to remain unchanged.

Strength: Emotional Control

In the 1990s, many investment experts speculated that when the long-awaited bear market finally arrived, 401(k) participants would be the first to sell, given their inexperience. They were instead the last. During the technology stock crash of 2000-02, 401(k) assets were more stable than either retail investors’ taxable accounts, or the portfolios run by professional managers. There is an advantage to lacking an investment brain.

Weakness: Missing Out

Although zombies will neither become ensnared by bear traps nor chase their performance tails, neither will they spot investment opportunities. To return to our previous example, some people bought Tesla before the company joined the S&P 500 in late 2020. They might have been loners, or they might have been among the earlier followers. But they assuredly were not zombies.

Weakness: Structural Changes

Over the long haul, the markets are very stable. Roughly speaking, bond yields increased for 30 years, from 1950 through 1980, before subsiding over the next three decades. That made for one inflection point during the Depression generation’s investment lifetime. The long-run performance of equities has been equally predictable. Thus, structural changes rarely leave zombies behind. When such shifts do occur, though, zombies are the last investment type to know.

My investment type can best be described as “artificial zombie.” That is, while I am a loner by nature, I have learned through experience the difficulty of outguessing the crowd. Thus, I behave like a zombie, by making few trades and distancing myself emotionally, although of course I am much too informed to be among that breed.

And you?

Source- Morningstar

May 8, 2023

Who should opt for higher EPS pension, what could go wrong if you opt for it

Till some years ago, the pension that subscribers to the Employees’ Pension Scheme (EPS) received after retirement was not worth talking about. The cap on the annual contribution meant that the pension was too low. A person who contributed the maximum Rs.1,250 every month to the EPS for 30 years would get a monthly pension of Rs.6,857. Little wonder that three out of five respondents to an online survey by ET Wealth in 2013 were not even aware that they were eligible for pension after retirement. Fast forward to 2023, when a Supreme Court ruling has transformed the EPS pension from a peripheral benefit into potentially the principal source of income in retirement.

The apex court has removed the cap on contributions to the EPS, so subscribers can opt for a higher pension equal to 50% of the basic pay. ET Wealth looked at three subscribers from different stages of life to understand the impact of opting for a higher pension. On the face of it, the prospect of getting an assured pension equal to 50% of your basic pay for life seems very tempting. Someone with a basic pay of Rs.1 lakh will get Rs.50,000 every month for life. It can easily become the principal source of income in retirement. Of course, this enhanced pension will come for a price. If a subscriber wants to get a higher pension, the contribution to the EPS has to be 8.33% of the basic pay.

Till now, the contributions to the EPS were capped. Members were contributing as little as Rs.5,000 a year (`416 a month) till November 2001. This was raised to Rs.6,500 a year and currently stands at Rs.15,000 a year (Rs.1,250 a month). To get the higher pension, a person will have to increase his contribution to the EPS as well as deposit the deficit payments as well as the interest earned on that since the time of joining the EPS. A person who joined EPS at 28 in 1995 when his basic salary was Rs.10,000 per month will have to deposit Rs.20.5 lakh in the EPS if he opts for higher pension. His monthly contribution to the EPS will also increase more than five-fold from Rs.1,250 to Rs.8,200, which means the inflow into the EPF will be that much lower. The calculations assume that the salary increased by 8.5% every year. Interest deficit has been calculated using historical interest rates offered by the Provident Fund.

Should you go for it?

Financial planners are divided on whether one should opt for the enhanced pension. Some say the higher pension is a good opportunity for subscribers. “Retirement planning is the most neglected financial goal in India. The option to get an enhanced pension would help individuals get an assured income in retirement,” says Amol Joshi, founder of Plan Rupee Investment Services. “It will be especially useful for those who may not have been able to save enough for retirement,” says Dheeraj Sharma, a Delhi-based wealth adviser. As our calculations show, opting for the higher pension makes perfect sense for subscribers in almost all situations. “The lump sum amount that will shift from the Provident Fund to the EPS will come back within a few years. The return is much higher than what a regular annuity offers,” points out Sharma.

Boomer aged 56 who will retire soon

Opting for higher pension seems like a golden opportunity.

Note: If opting for higher pension, monthly contribution to EPS will increase from Rs.1,250 to roughly Rs.8,200

At the same time, some financial advisers say that EPS takes away flexibility from the individual. “A young person with a long-term investment horizon may be better off investing in more lucrative options where he has greater control over where and how much to invest,” contends Deepti Goel, Associate Partner of wealth advisory firm Alpha Capital. For instance, if someone aged 25 years with a basic salary of Rs.50,000 opts for higher pension, he will have to put Rs.4,165 in the EPS every month. Assuming his income increases by 8.5% every year, he would put some Rs.81 lakh into the EPS over the next 33 years and get a pension of Rs.3.4 lakh.

“The option to get higher pension from EPS would give individuals an assured income after retirement. Everybody should opt for it.”
AMOL JOSHI
FOUNDER, PLANRUPEE INVESTMENT SERVICES

Instead of putting in the EPS, if that money is put in a mutual fund to earn 10% returns, he would have a retirement corpus of almost Rs.3.2 crore in 33 years. But this 10% return is not assured while the pension from the EPS comes with government assurance. Another key difference is that the EPS guarantees pension even in case of early death of the member. If a member dies during service, his widow will get his pension for life or till she remarries. Two children will get an additional sum equal to 25% of the pension. If there is no widow, two children of the deceased will receive 75% of the pension till the age of 25. If there are more than two children, the benefit will continue till the youngest is over 25.

Gen X employee aged 46

Even more compelling reason to opt for higher pension.

Note: Monthly contribution to EPS will increase from Rs.1,250 to roughly Rs.7,200. This will increase 8.5% every year with rise in income.

Interestingly, the development would help individuals realise the advantage of compounding and patience. The EPS pension is linked to the number of years a member contributes to the scheme. People who withdrew their Provident Fund corpuses and pension contributions every time they changed jobs will not get as much as those who kept their retirement savings untouched. The withdrawn amount is often blown away on discretionary spending and disrupts the compounding. As the legendary investor Charlie Munger once said, “The first rule of compounding: Never interrupt it unnecessarily.” What’s more, if a member has contributed to EPS for 20 years or more, two bonus years are added to the calculation. So, if a person with a pensionable salary of `1 lakh has contributed for 19 years, he will get a monthly pension of Rs.27,142. But if he contributed for 22 years, the pension calculation will give him two bonus years and give him Rs.34,285 per month.

Rs.6,89,210 cr: was the corpus of the EPS as on 31 March 2022. The scheme receives inflows of roughly `4,200 crore every month.
Rs.37,327 cr: was the deficit projected in the EPS as on 31 March 2019. In November 2022, EPFO appointed actuaries for valuation of the scheme.
72.73 lakh: pensioners were drawing pension from EPS as on 31 March 2022. 66% of these were members, while 33% were spouse and children.

What could go wrong

But subscribers need to keep in mind a few things before they click on the option. First, the EPS pension will not be linked to the last drawn salary but to the average salary in the last 60 months. In most cases, this would be much lower than the last drawn salary. Secondly, there are concerns about the viability of the EPS scheme. In the past, various actuarial studies have projected very high deficits in the scheme. As on 31 March 2019, the deficit was projected to be Rs.37,327 crore. “With the increase in the number of pensioners, the amount disbursed as pension has also shown a steady increase over the years. However, the fund has not witnessed any cash flow problems till now, in spite of there being a projected actuarial deficit in the valuation of the fund,” notes the annual report of the EPFO for 2021-22.

“Pension equal to 50% of salary is tempting but the amount will remain constant. Inflation is one reason why EPS alone will not be enough.”
RAJ KHOSLA
MANAGING DIRECTOR, MYMONEYMANTRA

“A young person with a long-term horizon may be better off investing in more lucrative options where he has greater control and flexibility.”
DEEPTI GOEL
ASSOCIATE PARTNER, ALPHA CAPITAL

In November 2022, the EPFO appointed actuaries for the valuations of the pension scheme. The report is not out yet but it is not incorrect to assume that the higher pension option may further dent the sustainability of the scheme. The changing demographics of India only adds to the problem. Right now, there are more contributors than pensioners to the EPS. But as the population of the country ages and more contributors turn pensioners (with many of them drawing a higher pension), the scheme could face more difficulties in the years to come. This is already reflected in the decline in contributions to the scheme. Annual accounts for 2020-21 indicate a drop in contributions to Rs.50,562 crore from Rs.51,953 crore in the previous year.

Millennial worker who just joined

The long-term sustainability of the EPS is a major concern.

Note: The projected monthly pension looks enticing. But over 27 years, even 6% annual inflation will reduce its value to Rs. 51,400.

This is not to say that the EPS would default on pension payments. The scheme is managed by the government and will continue to pay the pension as promised. Even so, financial advisers ring a note of caution. “People who have retired or are just about to retire may not face any problem, but those who will retire 15-20 years from now should be wary,” warns Sharma. Another problem is that the EPS is for life but there is no option of return of principal to the nominee or the legal heir after the death of the subscriber. After the member dies, the spouse gets 50% of the pension for life. So the risk of early death, within a few years of retirement, would mean very low returns on the money that flowed into the EPS. On the flipside, living longer till the age of 85-90 or beyond would prove bountiful.

Don’t rely on EPS alone

Experts say while the EPS could provide a tidy income in retirement, one should not depend solely on this income. “Inflation is one key reason why even the enhanced EPS pension may not be enough in retirement,” says Raj Khosla, Managing Director of MyMoneyMantra.com. Unlike the pension for government employees, the EPS pension is not linked to inflation and will remain constant. This means its purchasing power will decline over time. Even a modest 6% inflation will reduce the value of Rs.1 lakh to less than Rs.54,000 in 10 years. In 20 years, it would be worth only Rs.29,000. “The EPS pension can be an important but not the only pillar of your retirement plan. The retirement savings should be spread across various instruments, including annuities, fixed income and equity based investments,” says Joshi.

Benefits offered under EPS
The Employee Pension Scheme offers the following benefits to private sector employees covered by the Employees’ Provident Fund.

Pension for life to member and spouse
Pension starts at the age of 58 and is based on the number of years of service and the basic salary.

Pension to widow
If a member dies during service, his widow will get his pension for life or till she remarries. Two children will get an additional sum equal to 25% of the pension.

Pension for orphans
If there is no widow, two children of the deceased will receive 75% of the pension till the age of 25. If there are more than two children, the benefit will continue till the youngest is over 25.

Disability benefit
If a member is permanently and totally disabled during service, he will get full pension for life.

Early pension
A member can opt for early pension after 50, but he will have to take a cut of 4% for every year before 58.

Bonus years for long-term contributors
If the member has contributed to EPS for 20 years, two bonus years are added to the calculation.

Source – Economictimes

April 19, 2023

6 money lessons Indian Premier League can teach us

If cricket is a religion in India, the Indian Premier League (IPL) is surely its Kumbh mela or Maha Kumbh. Millions of people in India and beyond will watch the cricket carnival that begins March 31.

Lots of talent to watch and cheer for; many current players and many more emerging cricketers who hope to crack the tournament and make it to the national team.

But what is in IPL to do with personal finance? There’s much in common; in fact here’s what IPL can teach us all about how we should manage our money.

1. Past success is past

Mumbai Indians, the winners of IPL 2021, did not qualify for the playoffs of 2022. Three-time champions Chennai Super Kings, have not played the final for two consecutive seasons.

What does this suggest? The fact that past performances count for nothing in IPL. It’s the same in personal finance. Many investment options may have performed well in the past. But that doesn’t necessarily mean they will perform as well in the future.

2. The best cut out the noise

There is a lot of glamour involved in IPL. It’s all about fame, money, endorsements, media, fans, cheerleaders and so much more.

A new player may be overwhelmed by all the hype. But have you noticed how the best players keep their cool and go about their job quietly and efficiently? The best players, often, perform by cutting out the noise around them.

That’s what wise investors do with their money. Often, we are overwhelmed by all the advice, tips and suggestions from our parents, friends, colleagues and the social media. For instance, our parents may recommend the age-old life insurance policy they’ve been investing in for generations to save tax. Never mind if such policies yield returns of only up to 4-5 percent. Or tons of money-making advice about the next best stock to buy or tips doled by social media influencers.

Turning a deaf ear to such noise and understanding our needs is important to achieve our goals.

3. Wait until the last bowl is bowled

IPL is a classic example of matches that go down to the wire. If there is one truth that cricket lovers have learned, it is that the game goes on until the last ball is bowled. IPL has its fair share of last-ball climaxes or even super overs where one over decides the fate of the match.

Similarly, in personal finance, it’s never too late to start. Just because you didn’t start investing in the first 10 years of your working life doesn’t mean all is lost. Just because your salary is low doesn’t mean you cannot build wealth.

Never give up on your financial planning until your objectives are achieved. Sticking to your plan and consistently implmenting it until you reach your destination is the only way to success.

4. Hard work pays off

Two years ago, very few people knew players like Ruturaj Gaikwad, Arshdeep Singh, Umran Malik and Rahul Tripathi. Today two of them have made it to the national team.

Every year, IPL introduces us to a new cricketing sensation who made it because of hard work, perseverance and patience. Be it IPL or personal finance, hard work is rewarded at some point of time.

Here’s a tip: If your salary is low, start a systematic investment plan with as little as Rs 500. Patient, regular and disciplined investing with small amounts to begin with can build a sizeable corpus; you’d be surprised to see how much money you’ve accumulated after a few years. Try it out.

5. Review your finances regularly

From winning the toss to setting your field and choosing the line-up, IPL is a game of strategy. Each match has two strategic time-outs wherein the captain and coaches combine to design a strategy — one at the beginning and one near the end.

In personal finance, with factors such as age, risk appetite, income source and dependents, each individuals needs to ascertain his or her needs and save and invest in different instruments.

Over a period of time and depending on personal milestones such as marriage and birth of a child, you will need to alter your strategy.

6. A good start is work half done

IPL being based on a T20 format, a good start to the game makes the win nearly certain. If it is batting and the batting team scores 200 runs without loss of any wicket or if it is bowling and if half of the batting team is sent to the pavilion within the first 10 overs, the spirit of the team soars and their supporters are jubilant.

Similarly, in personal finance, early financial planning not only ensures early achievement of your objectives but also results in greater returns.

We don’t know who will win this year’s IPL, but if you start saving early, plan your finances well and be disciplined, you will end up the winner in achieving your financial objectives.

Source: Moneycontrol

April 15, 2023

Wealth Creation: What is SIP step-up strategy and how you can use it to reach financial goals faster?

SIP step-up strategy: Systematic Investment Plan or SIP is one of the most convenient and effective methods to invest in mutual funds. This feature in mutual funds helps investors in planning their financial goals and slowly working towards them. There are various strategies used while investing through SIP — one of them being step-up strategy.

What is a SIP step-up strategy?

A step-up SIP entails automatically increasing monthly SIP contributions on a periodic basis. According to Tanvi Kanchan, Head Corporate Strategy at Anand Rathi Shares and Stock Brokers, with a ‘Step up SIP’ strategy or a ‘Top Up SIP’ plan, investors can gain the benefit of increasing their contribution in SIPs, either by a fixed percentage or a fixed amount.

She added that investors can do this in line with their current income, expected yearly increments, and financial goals. This lays down a set plan for the investor to reach the predetermined investing amount over a period of time and increase their investments in a systematic manner.

How does SIP step-up strategy work?

For example, if an investor starts with a monthly SIP of Rs 5000 with an annual step-up of 10 per cent, at an expected rate of return of 12 per cent and an investment horizon of 10 years:

That is the impact of systematic investments and gradual increase in the same.

According to Tanvi, investors can also put a cap on the maximum amount they wish to invest per month. For instance, if an investor’s current SIP is Rs 5000 per month, then they can define in the step-up SIP plan that they wish to step up the monthly investments in SIP to Rs 10,000 per month. So, as soon as the step-up plan reaches this amount, it stops adding any further and the normal SIP amount continues.

When is the right time to step up the SIP?

According to experts, these are the best times to step up the SIP:

-Post-appraisal time

-When there is an increase in compensation or reduction in expenses

-When markets are going through a bad phase

“Increasing your monthly SIP installment in proportion to investors’ income boost is wise, especially if their expenses are yet to increase correspondingly,” said Varun Girilal, Managing Partner at Scripbox.

How does SIP step-up strategy benefit investors?

Experts believe that following are the benefits of the SIP step-up strategy:

-Getting inflation-beating returns

-Building a more substantial investment corpus to achieve future financial objectives.

-Achieve your goals sooner than anticipated

-Helps in translating increased earnings into their already ongoing SIPs

He believes that increasing the SIP amount by 10 per cent for a 15-year investing period can help investors get a corpus that is 70 per cent higher for the same time frame of 15 years of SIP investing.

What are the drawbacks of SIP step-up strategy?

– Increased complexity: The SIP step-up strategy requires more planning and preparation than a standard SIP strategy because investors must periodically change the amount of their investment.

– Higher costs: Depending on the investment product used for the SIP, higher investment amounts may attract higher fees, leading to increased costs.

– Market timing risk: The SIP step-up strategy is dependent on the market continuing its upward trend; but, if the market experiences a downturn, then the investors may compound their losses by increasing their investment in a market slump.

– Behavioral biases: Investors may be tempted to stop or reduce their investments during market downturns, which could lead them to miss out on potential gains in the long run.

– Limited liquidity: The SIP step-up strategy typically involves committing to regular investments over a set period of time, which can limit liquidity and flexibility in the short term.

Source: Zeebiz

April 12, 2023

5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning

Do you wonder whether you need to make a financial plan with a financial planner to achieve your life goals? Some individuals believe that saving regularly through bank recurring deposits or investing in mutual funds through SIPs qualifies as financial planning. However, such ad hoc allocation of savings and investments is insufficient to accomplish your financial goals and may result in inefficient utilisation of financial resources. If you want to become wealthy or achieve various life goals such as purchasing a dream home, going on a foreign vacation, or funding a child’s higher education, solely relying on salary or business income may not be enough. This is where financial planning becomes valuable. With a financial plan, you can create a roadmap to fulfil all your financial goals, including building a contingency fund for unexpected expenses. This article elucidates why financial planning is necessary and why you should work with a financial planner for effective financial planning.

What is Financial Planning & Why it is Necessary?

Financial planning is a process that assesses your current and future financial situation, enabling you to systematically achieve all of your goals. This process includes creating a roadmap to cover all of your expenses; both anticipated and unforeseen. To achieve this, financial planning involves budgeting your expenses, setting S.M.A.R.T. goals, selecting the appropriate asset allocation, creating a retirement plan, and more.

Even if you have savings, you need to have a financial plan because inflation can significantly erode the value of your money over time. Inflation refers to a general increase in the prices of goods and services over a period, which can reduce the purchasing power of your savings. For instance, a chocolate bar that costs Rs. 100 today could cost Rs. 110 tomorrow, and the cost will continue to rise over time. A financial plan can help you combat inflation by developing a sound investment strategy.

Financial planning also involves setting and achieving specific life goals, such as retirement, children’s education and/or wedding, purchasing a house, buying a car, and family vacations. Your planner will assess your cash flow and quantify your goals, creating a plan to allocate your funds towards achieving them in a systematic manner. Finally, the plan will recommend suitable investments, which may also include tax-saving investments.

Why Do You Need a Financial Planner to Manage Your Finances?

Now that we know why financial planning is necessary to achieve your life goals and create wealth in the long term, the question arises, how to start financial planning? Well, if you have been reading our articles, you might have come across several articles we published that are about how you can start financial planning by yourself. However, the majority of investors either lack the required knowledge to make a such crucial financial decision or do not have sufficient time to do the intensive research necessary to make informed financial decisions.

By sticking to the fundamentals, you can achieve your life goals. You might assume that if this is true, then there is no need to hire a financial planner and that financial planning is just another task you can handle on your own. However, that’s not entirely true.

A competent and honest financial planner can play a crucial role in helping you reach your financial objectives sooner than expected. With their guidance, the financial planning process can become much easier and more manageable.

However, having a trustworthy financial planner who always meets high fiduciary standards is very important. They should handle your money with care and responsibility, just as they would handle their own personal finances. Their recommendations should be based on research, and their approach should be unbiased. Nevertheless, there is a fee associated with this service that you would need to pay.

In India, financial planners operate under one of three revenue models:

1. Pure commission model – Financial planners are compensated based on the commission they receive from the financial products in which you invest.

2. Pure fee-based model – Financial planners are compensated solely by the fees you pay for their advice and services. They do not earn any commissions on the financial products in which you invest.

3. Fee + Commission model – Financial planners are compensated by both the fees you pay for their advice and services, as well as the commissions they earn on the financial products in which you invest.

Here Are 5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning:

1. Managing finances can get increasingly complex:

With time, managing finances can become more complex, even without major life changes. It can become overwhelming to keep track of your income, investments, insurance policies, debts, etc. This is where a financial planner comes into the picture. A competent financial planner will aim at optimising your investment returns while reducing your investment risk.

Managing money can be like having a second job that you may not have the time or desire to handle on your own. If you do not have time to research and monitor your investment portfolio, you can hire a financial planner to do it for you. He/she will take care of the tedious work, and you can get involved when it is time to make decisions.

Furthermore, you might not feel comfortable making financial decisions due to the confusing nature of investing. A good financial advisor can support sound decision-making and help educate you on best practices for money management.

2. The one-size-fits-all approach does not work in financial management:

Personal finance advice is often presented in an oversimplified manner, especially by conventional agents and commission-based planners who give the same investment advice to each of their clients. However, you need to realise that a particular financial strategy or recommendation may not be suitable for everyone. This is because we all have our unique objectives, aspirations, and challenges that require personalised financial solutions. Additionally, after the emergence of COVID-19, there has been a lot of instability in the markets. With the abundance of financial information available, it is easy to react impulsively to the news and the fluctuations in the value of our investments. Unfortunately, this can lead to unfavourable outcomes. Engaging the services of a financial planner can help you manage your finances from the right perspective.

3. You will receive unbiased financial advice:

If a financial planner is charging a fee for creating a financial plan without any obligation for you to invest in it, the advice they provide will likely be impartial and unbiased. However, if an agent or advisor is offering a free financial plan, you may need to be wary. There may be underlying motives for this free service, such as a desire to earn commissions from recommending certain financial products. As a result, the recommendations provided may not align with your investment objectives and financial goals.

It is essential to understand that nothing comes for free, and a free financial plan may pose a risk to your financial well-being. It is possible that the planner offering this service is pushing unsuitable financial products that are in their interest to sell, resulting in a disadvantage for you.

To ensure that commission income does not influence the advice provided, it is advisable to choose a fee-based financial planner. This will guarantee that the recommendations made are solely in your best interest.

4. A financial planner will maintain a professional relationship:

Our emotions often influence how we handle our finances, thus, leading to unconscious biases. A financial planner can make informed decisions based on rationale and prioritise our financial well-being.

In addition, financial planners are experts in their field. They have the necessary qualifications to handle financial problems and unexpected situations. Financial planning goes beyond simply investing in a few products. It’s like a test match in cricket, where patience is key and finances must be managed for the long term. You need to navigate short-term volatility, economic downturns, and favourable periods to build your wealth. Working with a professional who can manage your assets under different circumstances and variables is the best approach.

Financial planners guide and support you in the journey towards building wealth and improving your financial health. They uphold strong ethical standards and professionalism, which helps to establish trust in a time when it can be difficult to trust others. When you work with a fee-based financial planner, you can ask important questions and they will be happy to answer to the best of their ability, always keeping your best interests in mind. This can be challenging to do with friends or relatives, and there is also no emotional bias when working with a financial planner.

5. You will need guidance even after investing your money:

It is important to remember that investing is only the beginning – it is crucial to evaluate whether your financial planner offers reliable and sensible support after the initial investment.

Typically, a financial guardian who is readily available and guides you throughout the process of achieving your life objectives with the necessary care and understanding is the most favourable choice.

To conclude:

Finding a competent, experienced, and trustworthy financial planner may seem like a difficult and nearly impossible task. However, it is not. You just need to be patient and willing to take responsibility in the financial planning process. Before hiring a financial planner, ask for references and verify their credentials. Ask relevant questions about how they plan to help you achieve your goals, question their recommendations, and ask for alternatives and backup plans in case their plan fails to meet your expectations.

Furthermore, it’s important to stay actively involved in the investment process. While it’s important to have confidence in your financial planner’s abilities, it’s crucial not to blindly trust them. Always stay within the realm of confidence and avoid crossing over into blind faith.

Source: Personalfn

April 1, 2023

Follow These 5Ps to Take Control of Your Finances in the New Financial Year 2023-24

It is critical to plan your finances and investments at the start of the fiscal year in order to avoid a last-minute scramble and to invest based on your needs and financial goals. Every year brings new challenges that we must overcome, learn from, and move forward. As a result, it is prudent to revisit our financial decisions from last year in light of our present financial status and market conditions. Learning from our mistakes in the past can help us make better financial decisions in the future.

Financial planning has evolved in recent years, and more people are recognising the importance of having a long-term financial plan. Today’s digitally-savvy generation prefers to manage their finances using digital platforms or apps. A one-stop solution that allows them to plan, manage, grow, and address their financial needs.

Financial planning plays a pivotal role in allocating funds to the best-suited investment vehicle to add value to your overall financial portfolio. The beginning of the new financial year 2023-24 is the perfect time to reflect on your financial practices or mistakes from the previous year 2023-22 and get started with smart financial planning.

Recently, on the occasion of Gudi Padwa, I met all my cousins. Rohit and Madhu were discussing ITR filing, their investments and how they are struggling with the finances due to last-minute hassle. While our youngest brother Rishi said, “All these financial planning swing like a bouncer over my head. I wish there were a simple concept or theory to understand this.”

To which Rohit replied, “These Gen Z’s want everything readymade and easily available at their fingertips. Rishi, the new financial year is approaching, and you must emphasise on financial planning rather than splurging on irrelevant gadgets online; the early you start the better it is.”

Rishi replied, “Yes, bhaiya, I too, intend to put my finances in place and have better control. But I don’t know where to start. The basic I understand about personal finance management is earning enough to manage one’s daily or monthly expenses and saving enough for the future.”

To which I responded, “Rishi, there is more to financial planning than simply saving from monthly expenses; however, it is one of the elements. The practice of financial planning should be considered as a scientific approach to achieve life’s milestones rather than seeing it as an ad hoc process only to save maximum tax at the end of the financial year. The goal of developing a financial plan is to understand your financial situation, prioritise your goals, and maintain stability even during challenging times.”

Let me help you understand financial planning with a unique approach. You need to follow these 5Ps to take control of your finances.

1. Planning

If you create a plan for any event in life, it is easier to manage; for instance, if you are going on a vacation, proper planning is required. Similarly, your personal finances require structured planning to stay in control and manageable. You can begin with 2 simple steps:

Step #1 – Goal Planning – You need to create S.M.A.R.T (Specific, Measurable, Achievable, Realistic, and Time-bound) goals. A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you, whether to buy a house or help you retire early, it will assist you in saving efficiently towards your goals.

Step #2 – Budgeting – Budgeting is an important aspect of financial planning; developing a budget helps you manage your cash flows, and you can cut back on non-discretionary costs to save more and meet your goals. An accurate picture of your finances is the key to creating a strong financial plan and can reveal ways to direct more to savings, investing, or debt pay-down. There are various budget planning apps available online that can assist you in prudent budgeting exercises.

2. Protection

A common goal that every individual holds is providing a secure financial future for our loved ones and protecting them from any financial challenges. You need to protect your financial worth, to maintain financial stability. An adequate insurance cover helps you do that and is thus considered a vital aspect of financial planning.

You have all seen the necessity of having life and health insurance during the pandemic. One must remember that as we age, the probability of getting insurance coverage at an affordable premium decreases. Therefore, if you already hold insurance coverage for life and health, take a close look at it, and enhance the coverage wherever needed. The best way to cover your life risk and provide financial security to your family in your absence is by getting appropriate health, term or life insurance.

Insurance has several aspects like protection, wealth generation, and a select few that offer the policyholder a combination of both. This is an essential element of your financial planning and should be of utmost importance to avoid having a dent in your savings due to unforeseen contingencies.

3. Provide

Many individuals are charged with the responsibility of managing finances and providing for household expenses and others. With this step of financial planning, you can ensure a better plan tailored for emergencies as well. A major component of financial planning is liquidity management to sustain unforeseen events.

You need to create a financial cushion or safety net to maintain your financial stability in times of emergencies. The future is uncertain; a sudden job loss or an unexpected medical emergency can shake up your finances considerably. Ideally, you need to keep an amount equal to 6-12 months of expenses, including loan EMIs, as a contingency fund. You can start small, and the money can be invested into liquid funds so that you can access the money quickly in case of an emergency.

4. Power

One of the benefits of taking control of your finances through financial planning is the sense of empowerment it brings to you. There are two aspects of financial planning that can strengthen your overall finances.

Investment Planning
Your finances are powerful once you indulge in prudent investment planning. Your savings are best utilised when they are invested in rewarding investment avenues like mutual funds. Starting investments at the beginning of the year through ELSS or SIP in the best suitable mutual funds is a convenient way for novice investors to start off.Do note you need to pick mutual fund investments that meet the risk-return expectations and, eventually, your investment objective. It is essential that you begin investing early so that you can take full advantage of the power of compounding, which has the potential to help multiply your returns exponentially over time. Investments in worthy mutual fund schemes will give you the power to beat the cost of inflation as well.Ideally, investors need to identify their financial goals and align their investments accordingly. I would recommend PersonalFN’s SMART Fund Explorer ; it is a tool that can help you plan your mutual fund investments smartly based on your risk profile to achieve your financial goals. It provides a list of the best suitable mutual fund schemes recommended by our research team that will help you reach your financial goals.

Debt Reduction
You may have debt that you created to fulfil various financial requirements; however, repaying your debt on time is crucial. You need to focus on clearing/paying off your debt burden to be in the pink of your financial health. Eliminating the debt burden gives you the power to have more disposable income to save and invest in rewarding avenues.You need to tackle a high interest debt that pulls out the major portion of your income, leaving you with a small amount to manage the rest of your financial needs. There are numerous approaches to dealing with high interest debt, including the well-known snowball method, which focuses on paying off your smaller bills first. The avalanche method, on the other hand, prioritises paying off your highest interest loans first. You should aim to maintain a debt-to-income ratio of below 40%.

5. Promote

To promote a financially secure life for yourself and your loved ones, you need to be financially literate. All the factors and processes of financial planning will only work for you if you are financially aware of how to implement them.

Financial literacy is the enhances your capability to use knowledge and skills to manage financial resources effectively for your financial wellbeing. Major financial decisions like opening suitable bank accounts, planning for retirement, paying off personal debt from loans or credit cards, and developing a strong investment portfolio for wealth creation are difficult to make when one lacks financial literacy.

Thus, it is vital to bolstering your financial knowledge, and I suggest you consider to enrol for PersonalFN’s latest special initiative, the “Certified Family Guardian,” that offers you an exclusive opportunity to learn the finer nuances of financial planning. Organised into eight modules with 24 extensive videos, the “Certified Family Guardian” will help you with all the relevant tools and learning modules needed to get better at money management.

To conclude…

Personal finance management is crucial for every person mainly to ensure that they have a comfortable present as well as a secure financial future. The beginning of the new year is a perfect time to reflect on the areas of improvement and get a head start on building strong financial health.

Source: Personalfn

November 18, 2022

Four smart ways to save on taxes

Proper tax planning can not only help you save on taxes, but also increase your income. We all want to know how and where to invest to maximise our return on the investments, but make some obvious mistakes such as keeping tax planning for the last minute. Experts say people make impulsive investment decisions last-minute. Here are a few smart strategies that help you maximise your investment returns.

Start tax planning at beginning of the financial year
This is a very crucial step to maximise the returns on your investment. Anup Bansal, chief investment officer, Scripbox says, “Tax planning is a crucial aspect when it comes to saving on returns. If one starts at the beginning of the financial year it provides more time to select instruments as per one’s goals and preferences.” Also, it helps you avoid last-minute impulsive investment decisions.

Additionally, if you are planning to make investments in tax-saving instruments like ELSS and PPF, experts say it is best to do it at the beginning of the year to give more time for growth. If there are changes in your personal situation, such as rental agreement changes (HRA) then take these into consideration and intimate your employer for accurate TDS.

Financial gifts to parents
To avoid income clubbing, you can make financial gifts to your parents, or even your grandparents. Bansal says, “If a parents are over the age of 65 and do not have a taxable income, the taxpayer can invest in their name to earn tax-free interest.” Senior citizens over the age of 60 are entitled to a Rs 3 lakh baseline exemption. And if you wish to take the help of a senior citizen above the age of 80, the exemption is even higher at Rs 5 lakh.

Investing in the name of your kids
Investing in the name of your kids is a great idea as they help you save tax like your parents and grandparents.

“After becoming an adult, the kid will be treated as a separate individual, for tax purposes and would even be eligible to open a Demat account and invest in stocks and mutual funds, with money gifted by the parent,” says Bansal.

Long-term capital gains of up to Rs 1 lakh will be tax-free every year, while short-term capital gains would be tax-free up to the standard exemption of Rs 2.5 lakh per year.

Invest in NPS for tax benefits
India has low annuity rates, and the scary thought of putting away your retirement money forever, has led to NPS being considered an unattractive investment option. However, Bansal points out that NPS’s withdrawal regulations have seen recent reforms which have reversed this to some extent, making the pension scheme more appealing to those in their 50s. “The new rule opens a few different tax-saving options for investors,” he says.

Benefit from the available tax deductions. It is important to know where you can benefit from the available tax deductions. You can claim certain deductions up to Rs 1.5 lakh under Section 80C. Even for investing in NPS, you get a deduction up to Rs 50,000 under Section 80CCD(1b).

Source: financialexpres

November 15, 2022

How to Reach Financial Freedom: 12 Habits to Get You There

Financial freedom—having enough savings, investments, and cash on hand to afford the lifestyle you want for yourself and your family— is an important goal for many people. It also means growing a nest egg that will allow you to retire or pursue any career you want—without being driven by the need to earn a certain amount each year.

Unfortunately, too many people fall far short of financial freedom. Even without occasional financial emergencies, escalating debt due to overspending is a constant burden that keeps them from reaching their goals. When a major crisis—such as a hurricane, an earthquake, or a pandemic—completely disrupts all plans, additional holes in safety nets are revealed.

Trouble happens to nearly everyone, but these 12 habits can put you on the right path.

1. Set Life Goals
What is financial freedom to you? Everyone has a general desire for it, but that’s too vague a goal. You need to get specific about amounts and deadlines. The more specific your goals, the higher the likelihood of achieving them.

Write down these three objectives:

1.What your lifestyle requires

2.How much you should have in your bank account to make that possible

3.What age is the deadline to save that amount

Next, count backward from your deadline age to your current age and establish financial mileposts at regular intervals between the two dates. Write all amounts and deadlines down carefully and put the goal sheet at the front of your financial binder.

2. Make a Monthly Budget
Making a monthly household budget—and sticking to it—is the best way to guarantee that all bills are paid and savings are on track. It’s also a regular routine that reinforces your goals and bolsters resolve against the temptation to splurge.

3. Pay off Credit Cards in Full
Credit cards and other high-interest consumer loans are toxic to wealth-building. Make it a point to pay off the full balance each month. Student loans, mortgages, and similar loans typically have much lower interest rates; paying them off is not an emergency. However, paying these lower-interest loans on time is still important—and on-time payments will build a good credit rating.

4. Create Automatic Savings
Pay yourself first. Enroll in your employer’s retirement plan and make full use of any matching contribution benefit, which is essentially free money. It’s also wise to have an automatic withdrawal into an emergency fund, which can be tapped for unexpected expenses, as well as an automatic contribution to a brokerage account or something similar.

Ideally, the money for the emergency fund and the retirement fund should be pulled out of your account the same day you receive your paycheck, so it never even touches your hands.

Keep in mind that the recommended amount to save in an emergency fund depends on your individual circumstances. Also, tax-advantaged retirement accounts come with rules that make it difficult to get your hands on your cash should you suddenly need it, so that account should not be your only emergency fund.

5. Start Investing Now
Bad stock markets—known as bear markets—can make people question the wisdom of investing, but historically there has been no better way to grow your money. The magic of compound interest alone will grow your money exponentially, but you do need a lot of time to achieve meaningful growth.

However, remember that—for everyone except professional investors—it would be a mistake to attempt the kind of stock picking made famous by billionaires like Warren Buffett. Instead, open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically. We’ve ranked the best online brokers for beginners to help you get started.

6. Watch Your Credit Score
Your credit score is a very important number that determines the interest rate you are offered when buying a new car or refinancing a home.
It also impacts the amount you pay for a range other essentials, from car insurance to life insurance premiums.

The reason credit scores have so much weight is that someone with reckless financial habits is considered likely to be reckless in other areas of life, such as not looking after their health—or even driving and drinking.

This is why it’s important to get a credit report at regular intervals to make sure that there are no erroneous black marks ruining your good name. It may also be worth looking into a reputable credit monitoring service to protect your information.

7. Negotiate for Goods and Services
Many Americans are hesitant to negotiate for goods and services, because they’re afraid that it makes them seem cheap. Conquer this fear and you could save thousands each year. Small businesses, in particular, tend to be open to negotiation, so buying in bulk or positioning yourself as a repeat customer can open the door to good discounts.

8. Stay Educated on Financial Issues
Review relevant changes in tax law to ensure that all adjustments and deductions are maximized each year. Keep up with financial news and developments in the stock market and do not hesitate to adjust your investment portfolio accordingly. Knowledge is also the best defense against fraudsters who prey on unsophisticated investors to turn a quick buck.

9. Maintain Your Property
Taking good care of property makes everything from cars and lawnmowers to shoes and clothes last longer. The cost of maintenance is a fraction of the cost of replacement, so it’s an investment not to be missed.

10. Live Below Your Means
Mastering a frugal lifestyle means developing a mindset focused on living a good life with less—and it’s easier than you think. In fact, before rising to affluence, many wealthy individuals developed the habit of living below their means.

This isn’t a challenge to adopt a minimalist lifestyle. It simply means learning to distinguish between the things you need and the things you want—and then making small adjustments that drive big gains for your financial health.

11. Get a Financial Advisor
Once you’ve gotten to a point where you’ve amassed a decent amount of wealth—either liquid assets (cash or anything easily converted to cash) or fixed assets (property or anything not easily converted to cash)—get a financial advisor to help you stay on the right path.

12. Take Care of Your Health
The principle of proper maintenance also applies to your body—and taking excellent care of your physical health has a significant positive impact on your financial health as well.

Investing in good health is not difficult. It means making regular visits to doctors and dentists, and following health advice about any problems you encounter. Many medical issues can be helped—or even prevented—with basic lifestyle changes, such as more exercise and a healthier diet.

Poor health maintenance, on the other hand, has both immediate and long-term negative consequences on your financial goals. Some companies have limited sick days, which means a loss of income once paid days are used up. Obesity and other dietary illnesses make insurance premiums skyrocket, and poor health may force early retirement with lower monthly income for the rest of your life.

What Is Financial Freedom?
Everyone defines financial freedom in terms of their own goals. For most people, it means having the financial cushion (savings, investments, and cash) to afford a certain lifestyle—plus a nest egg for retirement or the freedom to pursue any career without the need to earn a certain salary.

What Is the 50/30/20 Budget Rule?
The 50/30/20 budget rule, popularized by Senator Elizabeth Warren, is a guideline to achieve financial stability by dividing after-tax income into 3 categories of spending: 50% for needs, 30% for wants, and 20% for savings and paying down debt. We have built an easy-to-follow budgeting calculator to help you categorize and control your spending and saving—which is the essential first step toward financial freedom.

The Bottom Line
These 12 steps won’t solve all your money problems, but they will help you develop the good habits that get you on the path to financial freedom. Simply making a plan with specific target amounts and dates reinforces your resolve to reach your goal and guards you against the temptation to overspend. Once you start to make real progress, relief from the constant pressure of escalating debt and the promise of a nest egg for retirement kick in as powerful motivators—and financial freedom is in your sights.

Source: Investopedia

September 18, 2022

What is Commercial General Liability Insurance in India?

A Commercial General Liability (CGL) insurance policy is designed to protect businesses against any legal liability that involves paying compensation for damage or injuries incurred by a third party from your routine business operations. This unique policy offers financial protection to the companies against Public Liability and Product Liability claims. It is required for all the companies that involve manufacturing and developing of software and physical products for its clients and customers.

CGL also protects the policyholder against any monetary loss resulting from legal matters in case of death, bodily injuries, property damage, and personal injuries caused due to your business operations within your premises. For instance, it includes a Fell, Trip, or Slip claim filed by a client who sustained injuries on your business premises and by falling/ tripping/slipping.

It is important to keep your premises in good shape and manufacture good quality products that are safe to use and consume. The major concerns are the security and safety of premises and product reliability. The laws are nowadays stringent to maintain third-party interest and amendments are also being made in this regard that companies need to adhere to.

A general liability insurance policy offers compensation for claims arising due to bodily injuries, and property damages or for which your business is accountable.

This coverage is provided to the Owners of a company, or managing directors, operations heads, etc. who are involved in the business operations. It also covers sellers, manufacturers, and distributors.

CGL policy is extendible to both industrial activities like construction, manufacturing, and non-industrial activities like offices, multiplexes, and hotels.

Understanding Comprehensive Commercial General Liability Insurance

Comprehensive General Liability Insurance (CGL) is a combination of Product Liability and Public Liability. It provides full protection against third-party liabilities. Public liability covers third parties’ legal procedures for loss or damage incurred within the insured premises. Product liability offers protection against damages caused by the products that your company manufactures.

Basically, it is designed to recompense all the liabilities on behalf of the insured member. The insurance company shall pay off for third-party liabilities/ accidental death/ bodily injuries resulting due to:

• You can get compensation for an accident that took place in the insured premises or any other premises where you run your business operations

• It will also cover the operations, product, and premises hazards

• Medical expenses of the injured third-party as part of the public liability insurance cover

• You can opt for additional covers by paying an additional amount of premium

Why Should You Buy Comprehensive General Liability Insurance?

It is imperative to have to buy commercial general liability insurance for anyone whose:

• Business involves interaction with third-party sites

• Business involves person-to-person interaction with the vendors, clients, and customers

• Businesses that are based on contracts between two parties

• Businesses that represent their client’s business in any form

Some of the Hazards That May Lead to Financial Liability on a Company are as follows:

1. Third-party Property Damage/Bodily Injuries

If any injury is caused to a third person due to falling, slipping, or getting electrocuted then you might be held responsible for the same. A Commercial General Liability (CGL) insurance policy will bear the cost of medical expenses on our behalf. And if the injuries lead to the death of a third person then compensation will be provided as per the court of law.

It also compensates for third-party property expenses such as replacement, repair, and renovation costs if any damage is caused to a third-party laptop, phone, or any other belongings ( apart from your employees). It would also involve paying for the renovation of other building that is damaged due to an accidental fire on your premises.

2. Advertising Infringement

 A CGL policy will be of great help in case you indulge in intentional or unintentional copyright infringement of some other brand or product’s tagline or logo. This may include slander and libel for indirectly causing harm to a third party’s reputation. In such cases, the insurer shall compensate the settlement expenses, and legal expenses and will protect your business from closing down.

3. Product Quality Issues

It is always a priority for most manufacturers. And any claim is filed by a customer or client for the harm that is caused by using your product can land you in deep trouble. A CGL policy will protect your business from any such minor ignorance as well.

4. Invasion of Privacy

This involves intentional and unintentional invasion of a third party’s privacy. For instance, if a celebrity is using your product and you commit the mistake of endorsing it without permission then also you would need commercial general liability insurance coverage. For claims arising due to the invasion of privacy, the insurer shall help you out with the out-of-the-court and legal settlement costs.

Additional Coverage is also provided on Payment of Additional Premium:

Depending on your requirements you can opt for:

• Extension for the Act of God Perils

• Extension for Accidental and Sudden Pollution

• Lift, Escalator, and Elevator Liability Extension

• Transportation Liability cover

• Food and Beverages Liability Extension

• Fire Damage Cover

• Extension for Medical Expenses Cover

• Advertising and Personal Injury extension

• Limited Vendors Liability Cover

Why is it recommended to Have a Commercial General Liability Insurance Cover?

With CGL insurance, you can ensure seamless business operations and enjoy your peace of mind. And even a small disruption would mean a huge financial loss. So, here’s why you should have commercial general liability insurance coverage if you own a business:

• You don’t need to worry about third-party claims involving agitation, segregation, and discrimination

• The insurer pays off medical expenses for claims arising due to mental injuries, physical injuries, humiliation, and shock

• It would also reimburse advertising infringements such as trademark breaches etc.

You can easily buy commercial general liability insurance online. There are top insurance companies in India that offer CGL cover to a variety of business groups.

It is Quite Easy to Lodge Claim for Comprehensive General Liability Insurance Plans

So, the process is quick and hassle-free. All you need to do is furnish the required details, proofs, and documents along with a duly signed and filled claim form. The process may vary from one insurance provider to another and to check the details you can refer to your insurance company or refer to the policy documents.

Listed above are the features, benefits, and coverage under a commercial general liability insurance policy. But here’s a quick rundown of the limitations that follow:

Your claim would not be accepted under the following situations. However, this may also vary from one insurer to another:

• Any kind of deliberate attempt or intentional Injuries caused to a third party including clients, vendors, and customers are not covered

• Usually, compensation is not provided for damages resulting due to the pollution

• Contractual liabilities are not covered ( you can buy this as an add-on)

• Work and employee-related perils would not draw any compensation

• Claims lodged for war-related damages and injuries are not covered by any policy

• Criminal acts and dishonest claims would also not draw any compensation in a commercial general liability insurance policy

You must have understood by now that purchasing a general liability insurance policy is a smart and wise decision for all business owners. And before you zero down on a policy, it is suggested that you compare the plans first, do your preliminary research and get a policy that covers all the major concerns.

Source: Policy Bazaar