Let's Talk Money: You've Worked Hard for It, Now Make It Work for You

by Monika Halan

Monika recommends three different bank accounts: Income, Spend-it and Invest-it. Today, that’s a total of three minutes, versus three trips to the bank earlier.

This is not easy work and your unique money box will take six months to construct. But once done, you have a grid that works on its own and needs a minor tweak just once in a while.

My salary account I label ‘Income Account’. The second account I call ‘Spend-it Account’. The third is called ‘Invest-it Account’.

ensure that you have a policy that does not have something called a ‘co-pay’ clause. This is called ‘co-pay’ because you agree to pay a certain percentage of a bill to share the costs with the insurance company.

check for a ‘pre-existing’ disease clause. Insurance companies will not cover diseases that you already have when you take the policy.

check if your policy has a ‘disease waiting period’. Many companies have a cool-off period of thirty to ninety days during which they will not pay any claim.

check if your policy has ‘sub-limits’. A

Her policy had a sub-limit of 1 per cent, which is the portion of the cover that can be spent on room rent. Her cover was Rs 4 lakhs, so her room rent over Rs 8,000 a day was not paid by the policy.

check for exclusions. A policy will list out diseases, conditions and medical services that the policy does not cover.

ask how much of the costs before and after hospitalization the policy will cover. You can claim expenditure made on doctor’s fees, medicines and diagnostic tests done before a planned hospitalization and for three months afterwards.

ask for a list of ‘day-care’ procedures that don’t need you to stay for twenty-four hours in a hospital any more.

look at the ‘no-claims bonus’ feature. When you don’t make a claim in a year, you get rewarded by the insurance company. It does this by giving a ‘no-claims bonus’ (NCB).

You need a life insurance cover for only one reason: to protect your family’s financial health if you die an untimely death.

Over what time does my money double? Then divide 72 by that number. Suppose the agent says: Your Rs 1 lakh will grow to Rs 2 lakhs in fifteen years, divide 72 by 15. Your return per year is 4.8 per cent,

The day you realize that it is in your best interest to separate your investment and insurance products, is the day you move solidly towards building your financial security.

Pull out your mental money box and look at it again. Remember that the first cell has your cash flows, the second is the emergency fund, the third your medical cover, and the fourth has the life cover.

The calculators will ‘inflation-index’ the present cost of your future goals.

When you now think of a financial product, learn to ask the question: Over what holding time period does this work the best?

These are products where two things are fixed – how much you will get back and when you will get it back.

Debt products need to give you a degree of certainty that the money will be there when you want it. This is unlike equity which is much more volatile – prices go up and down almost on a daily basis. They also make up the core of your long-term investments. For example, your EPF (employees’ provident fund) and PPF

your debt allocation is equal to your age; at age thirty, no more than 30 per cent of your portfolio is in debt products; at age seventy no more than 70 per cent in debt products; the rest is equity.

If the firm has 100 shares in the market and they currently sell at Rs 50 per share, then the market cap is Rs 5,000.

Large market-cap companies are usually the mature, established firms in the market. They are known for giving dividends rather than rapid growth. SEBI defines a large-cap company as one that features within the first 100 companies by market cap on the stock market. A mid-cap is a company that ranks between 101 to 250 by market cap, and small-caps are 251 and below.

don’t want to take the risk of choosing a fund manager, go with an exchange-traded fund (ETF) or an index fund linked to a broad market index or a mid-cap index. This is the safest way to get the average market returns without taking the risk of having a fund manager.

When you think of a debt fund, ask yourself these two questions. Does the ‘average maturity’ of the debt fund match my holding period? If I want the money next week, should the average maturity of the fund be three years? Obviously, the answer is no.

Question two is – what quality of debt paper does the scheme hold? The better the quality, the lower will be the potential return.

The bonds that a liquid fund buys are short-maturity bonds, or bonds that will mature within an average of three months.

Liquid funds buy short-term bonds. Therefore, the money you have to put in a liquid fund must be money you need in the short term. I keep money in a liquid fund if I know there is an expense coming up in the next three to six months.

If you have liquid funds with more than one fund house, you can instantly access Rs 50,000 multiplied by the number of liquid funds you hold, no matter whether markets are open or not.

Ultra-short-term fund As the name says, you can invest in these if you need the money anytime in the next nine months to a year. These funds invest in bonds that have an average maturity of about nine months – they buy debt papers that mature in a week to eighteen months.

Repeat after me. I need a short-term product for my short-term needs. I need a medium-term product for my medium-term needs. I need a long-term product for my long-term needs.

Diversification reduces the negative impact of an imploding stock. And conversely, it reduces the positive impact of an exploding stock. A bit like yoga – you are more balanced, the highs are not that high, the lows not that low. Quite a good place to be in. And not just for money.

An active fund is like the taxi – you are choosing a mutual fund where the fund manager has a view on the market, chooses his stocks to fit the investment mandate, and then manages the money by trading every day. Just as your experience of the taxi ride depends a lot on your driver, so also the performance of an active fund depends a lot on the fund manager. Just as the taxi driver works in the overall corporate environment of a taxi firm – Uber, for instance – so also the fund manager according to the rules set up by the fund.

We met Mr Sensex in the last chapter and wanted a way to buy him. The way to do that is through a passive fund. There are two kinds of passive funds – an index fund and an exchange-traded fund. They both choose an index and mimic it.

Today there are three kinds of balanced funds – conservative, balanced and aggressive. Conservative funds have between 10 and 25 per cent in equity, balanced have between 40 and 60 per cent in equity and aggressive about 65–80 per cent in equity. Conservative balanced funds are also called monthly income plans (MIPs).

To take care of the running costs and profits of investment managers each year, some fees are deducted from your money. The cost to you of handing over your money to professionals is captured in a number called the ‘expense ratio’.

Each product you allow into your money box must answer this question: How long do I need to hold it for it to work for me?

The thumb rule for equity is 100 minus your age. If you are thirty years old, you should have 70 per cent of your money in equity.

Use either FDs, if you don’t understand funds and are not willing to take on a higher risk for your short-term needs, or an ultra-short-term debt fund or conservative hybrid mutual fund that have a maximum equity exposure of 25 per cent, and keep the rest in bonds.

For a goal that is three years away you can use a mix of ultra-short-term debt funds and conservative hybrid mutual funds, with the mix tilted towards the debt funds. For a goal closer to seven years, go fully into aggressive hybrid mutual funds and diversified equity funds. I would do a mix of aggressive hybrid funds and diversified equity funds for a goal that is seven years away.

If your goals are around the seven- to ten-year mark, go with more of aggressive hybrid mutual funds, diversified equity and multi-cap mutual funds, and have a smaller proportion of mid-cap, small-cap and sector funds. For goals beyond ten years, you can hike the proportion of mid- and small-cap funds.

The further away from retirement you are, the more risk you can take. For people in their thirties, a larger allocation to mid- , small-cap and sector funds would not hurt if chosen well. But if you are already in your late forties or early fifties, stay conservative with large-cap, diversified equity and multi-cap funds.

Gold has its own cell. But it is tiny. No more than 5–10 per cent of your total portfolio is in gold, and that too paper gold, not jewellery. The government’s sovereign bond issue is very good and if you don’t need the money for the next seven years, you can begin to build a gold laddering system. It is useful for inflation protection at short notice and for use in marriages of the kids. I

For example, if your current annual expense is Rs 6 lakhs at age thirty, and we assume an inflation of 6 per cent, in thirty years, at age sixty, you will need Rs 34.46 lakhs a year.

For example, if we think inflation will be 6 per cent in the future, divide 72 by 6. This means you will spend twice of today’s expenditure in twelve years. If you spend Rs 1 lakh a month, in twelve years you will spend Rs 2 lakhs a month. In another twelve years, you will be spending Rs 4 lakhs a month;

At age forty, you should have three times your annual income as your retirement corpus already. If you earn Rs 15 lakhs a year at age forty, you should have Rs 45 lakhs in your retirement corpus. At fifty, you should have six times your annual income. If you have an annual income of Rs 40 lakhs at age fifty, you should already have Rs 2.4 crores in your corpus. At age sixty, or at retirement, you should have eight times your annual salary. Earning a crore at sixty, you must have Rs 8 crores as corpus.

assets? Look at the nominee as a caretaker of the asset, somebody to whom the money flows to for safekeeping till the legal heirs can stake a claim. In your head the nominee and the legal heir is the same person, but in the eyes of the law, the two could be different.