Managing Personal Finance

The global economy is in shambles, so is the state of our national finances.During my attempt to understand the current situation, what I could retrieve is that with so much money sloshing about in the economy, the net result is often higher inflation after a lag. So, the dramatic drop in inflation from nearly 13% in August to over 5% now will not be a reason to celebrate. The inflation dragon has presumably gone into hibernation and will return with an enormous thud.


At this juncture, the investment avenues for a salaried person have drastically reduced. The real estate companies have posted their worst quarterly results in December, 2008, with an aggregate 71% fall in net profit. The sector has declared that the old projects are not selling, new ones will bring cash only next year. This provides with us with limited returns in the infrastructure sector.


It is necessary to understand that money has a time value. This brings in the concept of “prudence”. The simplest tools in finance are often the most powerful. It is imperative for an individual to feel financially secure at any stage in his life. A simple question like, how perfect is your financial planning will raise eyebrows of many. Majority of the working youth don’t have investments, savings or planning on their priority list. The banking and finance sector, though suffering a sub-prime crisis offers a plethora of investment vehicles: Mutual Funds, Stocks and online Trade, Debt instruments, Fixed Deposits and Personal Insurance.


The basic purpose of investment is to ensure that your money grows at a rate greater than that of inflation, that’s how you can create wealth than just make money. An investment choice is made by taking into account the considerations on the basis of which is evaluated your risk profile:


If you belong to the age group of 25-30 years, your risk taking capability is relatively higher than the others. Your areas of investment can be Equity, Stocks and Mutual Funds. These sectors require taking a high risk but provide for higher return on your investments. In general, the formula governing an individual’s share of investment in the Equity sector is:
% Equity = (100- age of the investor)


It is advisable to get a Pension Plan in the very first year of you permanent job. This ensures accumulation of a corpus which will meet your monetary requirements post the retirement age. When you start investing early, the accumulation (or vesting period) phase of your money increases. The second phase of a Pension Plan is Annuity, wherein you start receiving the accumulated amount as per your choice i.e. in the form of monthly or annual installments.


If you are a novice in the investment market, refrain from stock trading without proper guidance. Mutual Funds can be a relatively safer alternative to predict the capricious stock market. A Systematic Investment Plan is the best choice to begin with. In the recent times, MFs come with an insurance cover and don’t charge any entry load (the fees to enter the trade). Hence, 100% of your investment goes into buying the units of the Company as per the NAV (Asset) which differs every month. MFs are generally open-ended i.e. an investor can enter the market any time. In the close-ended schemes, the Company declares the NAVs of the units and declares a deadline for the investors to file in their folios. The investor is granted a fixed number of shares / units as per the Company’s discretion. These schemes are also called as Initial Public Offerings. If you have a limited corpus, then opt for mid-cap fund as compared to small or large-cap.


For a person above 30 years of age, children’s education, family, health becomes a priority. Hence, the risk-taking capacity is substantially reduced. Insurance is now recommended at this stage. It is again of two types:


Traditional Plan: It assures guaranteed low returns and premium payment commitment for the entire tenure in which insurance cover is provided.
Unit Linked Insurance Plan: they are similar to Mutual Funds except that they come with an insurance benefit. They serve the dual purpose of security + investment. Yet, various charges (Allocation Charges, Fund Management Charges (FMC)) are something to watch out for. A company provides for various under funds under this scheme in which the investor can invest his annual premium. The funds vary in the percentage investment option of the investor in sectors like debt and equity. The premium payment term is generally for 3 years and the insurance cover can be sustained over a longer period as per the selected tenure on the payment of yearly charges.


It is important that you have an access to your money in the time of need. This brings in the concept of “Liquidity”, wherein assets are converted to cash. Gold is a preferred liquid asset for its time-value. MFs and ULIPs also offer you flexibility as far as withdrawals are considered.


To conclude, I would say that personal finance needs to personally undertaken by every individual. It takes efforts to understand the nuances of the market. Getting your investment principles right provides us the much needed security during crisis.


Priya Ganesh Amrute

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