Investment details and analysis of Mr. Richard Smith's case

Investment details of Mr. Smith

The investment portfolio of Mr Smith covers the following avenues:

►  Investment in bank FDs – Rs. 1,00,000/-

►  Investment in stock and shares – Rs. 2,00,000/-

►  Investment in post office savings schemes EPF / PPF / NSC totaling Rs. 1,82,000/-

Asset classification of Mr. Smith

Mr. Smith’s asset portfolio includes :

►  A residential house property costing Rs. 26,00,000/-

►  Purchase of a car whose current market value Rs. 7,00,000/-

►  Jewellery for his wife costing Rs. 2,50,000/-

►  He is maintaining a bank balance of nearly Rs. 1,00,000/- in his account. The collective outstanding liability on his car loan and housing loan is Rs. 18,00,000/-

Insurance details of Mr Smith

►  He had taken an Insurance plan with a 20 year money back plan worth Rs. 2,00,000/- when he was 30 years. The annual premium is Rs. 18,059/-

Analysis of Mr. Smith’s position

►  Mr. Smith’s annual expenses are Rs. 14,30,059/- and after meeting his annual savings Rs. 2 lakhs, he is left with a cash of Rs. 1,19,941/- per annum. 

[Rs. 17,50,000 – (Rs. 14,30,059/ +Rs. 2,00,000/-)]

►  Mr Smith pays Rs. 60,000/- per month as EMI towards his loans. Hence, his current liquidity position is not in a very good shape as any event that temporarily hampers his monthly earnings can prove disastrous.

►  Though he has invested in many long term assets, he is having only Rs. 1,00,000/- as balance in his bank account.

►  He has only taken an insurance policy for Rs. 2,00,000/-. Under the present circumstances he is underinsured and needs to revise his insurance plan.


Recommendations for him follows here.

Investment Case Study

Mr. Richard Smith (36 years) is working with a multinational company for the last 6 years. His family includes his wife - Mrs. Annie Smith and son ( Justin ) aged 3 years. He has approached a financial planner for comprehensive financial planning assistance so that he is able to achieve his financial goals.

The client's stated financial goals :

•  To have adequate savings worth Rs. 20 lakhs for building his son's career after approximately 20 years.
•  To accumulate Rs. 30 lakhs ( approximately ) to maintain decent lifestyle after retirement. He wants to retire after 12-15 years when he would have attained an age of 50 years nearly.

Client's Information  : 

Mr. Smith's annual income is :Rs. 17.5 lakhs. A statement of his annual cash outflows is given below :

Details	Amt ( Rs. )
Mortgage payments ( EMI )	4,20,000
Car loan payments ( EMI )	3,00,000
Insurance Premium	18,059
House maintenance and water	18,000
Tax	1,50,000
Food & Grocery	30,000
Transportation ( 2 cars )	1,50,000
Clothing / Personal care	50,000
Medical / Dental Care	30,000
Utilities ( telephone + electricity )	78,000
Misc. (maids etc.)	36,000
Entertainment / Gift	50,000
Vacation	1,00,000
Total	14,30,059

In addition to the above expenses, he also contributes nearly Rs. 2,00,000 towards his savings in provident funds and fixed deposits annually.

His investment details and analysis of his case follows here.

Plan to accomplish

Any kind of financial planning exercise essentially begins and ends with the user. It is a systematic process of identifying and recommending various investments avenues which will help realize his / her goals.

All of us work for money. But how many of us make money work for us? Making money work for us is perhaps one of the most important pillars of the personal financial planning process. Actually, making money work for you is not that hard task, provided sound financial and investment advice is taken. A blend of the different investment avenues can actually provide the right investment mix which can play an important role in providing a suitable financial buffer for later years. However, there can be no tailor made approach to get this benefit. The so called investment mix will differ from person to person and is actually function of a number of variables like income levels, marital status, investment outlook, levels of expenses, standard of living etc. Hence, it is very difficult to evolve a standard doctrine to effective financial and investment planning. At the most, a few standard gospels may be given.

To put the process of financial planning into the right perspective, we will have discussion on the same in later posts following with the help of a case. This case will highlight yet another dimension to the personal financial planning process.

The Case Study follows here. 

Double your income - Advice on how to double your income.

More Guiding Principles

The third principle should be consistency and time value. A critical and an assured need like a child’s education cannot be matched with high risk investments. The assumptions of the plan need to be based on a lower but more secured rate of compounding to create wealth. To leverage on the time value benefits, an individual needs to commence the process of planning for the child future preferably the moment the child is born.

So you have to focus on all critical aspects of planning your child’s future. Today the biggest investment that a parent needs to make on their children is a high quality of education. There is no escaping the fact that costs have risen sharply and the days of subsidized education is history. The best way to give your child a secured future is to invest in their education by following the basic guiding principles discussed earlier. Let us put our best foot forward.

Guiding principles for your children’s future

The first guiding principle should be that of adequate insurance. Any long-term plan needs to necessarily leverage on future resources. At the same time it needs to ensure that the process of planning your children’s future does not get endangered in the event of any exigency. This necessitates that the person whose resources are being leveraged in the plan, is adequately insured so that the plan continues smoothly even in his / her absence. It needs to be remembered that the overall resources net of liabilities should be sufficient to fund the plan. 

The second guiding principle revolves around structuring of the plan. With the rising costs of education, the requirement of funds not only arises earlier but also arises more periodically. The cash flows from the children’s plan should be structured in a way that either there are a series of regular cash flow from the investments or the plan has an inbuilt borrowing facility which can be drawn upon.

It’s all about a bright future

There has been a subtle shift as far as financial planning is considered. As early as a decade back, long-term financial planning revolved around building a house and and conducting a daughter’s marriage. Retirement was normally taken care of by pensions and provident funds while children’s education was more of a peripheral expenditure. So what has changed in the last one decade? We will have a detailed discussion on it in some future posts.

Planning your child’s future has become more critical in the light of the rising costs and higher education. According to conservative estimates, a parent would be spending anywhere in the region of Rs. 25 lakhs to Rs. 30 lakhs by the time the child completes professional graduation degree. The expenditure on a Master’s or a Doctorate degree, in your home country or abroad, could take your total cost anywhere in the region of Rs. 50 lakhs to Rs. 1 crore.

Any plan for your child’s future should be broadly based on a few key guiding principles. Let me reiterate here that consistency, security and discipline need to take precedence when you embark upon the journey of planning the children’s future.

Asset Allocation for Married & have kid ►►► Age above 60 yrs

At this stage in your life you are in the verge of retirement and your children are well settled. You just need to enjoy your retirement. Your asset should be allocated as follows : 

► You have probably fulfilled all your major responsibilities. You can go in for accumulation of property for your children by investing your money to the extent of 40%. If you think this is too much, then you can think of keeping a lesser amount in property for your children. It can be 30% or 25% then.

► You don’t need to have more than 20% of your money in savings accounts.

► Keep 20% in fixed interest bearing securities like debentures and bonds. If you have put 30% in property for your children then consider putting 30% in debentures and bonds too. And if you have put 25% in property for your children then consider putting 35% in debentures and bonds.

► Keep a small amount of money nearly 15% in equity.

► Keep 5% in Gold too.

Asset allocation for Married & have kid ►►► Age between 40-60 years

At this stage in your life you need to build wealth and property for your children. You may not be willing to take risk because at present you have major responsibilities. Your asset should be allocated as follows :

► You need to plan for your children. And may be you should begin to focus on money for your children’s marriage. Keep 30% of your money in property.

► Invest around 30% in equity market. If you think this is too much, then you can rethink and make this portion to be little less, say 25%.

► You should have around 15% of your money in savings accounts. If you have invested 25% of your money in equity market, you can think of putting 20% of your money in your savings accounts.

► Keep 15% of your savings in debentures and bonds to earn fixed income.

► And keep 10% in Gold too.

Asset allocation for Married & have kid ►►► Age between 25-40 years

At this stage in your life you need to plan for your children’s future. You may not be willing to take risk because at present you have major responsibilities. Your asset should be allocated as follows :

►  You need to plan for the days ahead, not only for yourselves, but also for your children. And may be you should begin to focus on money for children’s education. Keep 35% of your money in property.

►  Invest around 35% in equity market. If you think this is too much, then you can rethink and make this portion to be little less, say 30%.

►  You need to have more than 10% of your money in savings accounts. If you have invested 30% of your money in equity market, you can think of putting 15% of your money in your savings accounts.

►  Keep 10% of your savings in debentures and bonds to earn fixed income.

►  And keep 10% in Gold too.

Asset allocation for Married & Have Kid ►►► Age less than 25 years

At this stage, your main concern is to have a property as well as to plan for your children future. Here, you may afford to take risk. Your asset should be allocated as follows :

►  You need to plan for the days ahead – not only for yourselves, but also for your children. But a property of your own is your top priority at this stage. Keep 40% of your money in property. If you think this is too much,  make this percentage to 35%.

►  Keep a decent amount of money around 40% in equities. If you think this is too much, make this percentage to 35%.

►  You need to have around 10% of your money in savings accounts. Here, if you have put 35% each in property and equity, then put 20% in savings accounts.

►  Invest 5% of your savings in debentures and bonds to generate fixed income.

►  And keep 5% in Gold also.

Asset allocation for Married & No Kid ►►► Age between 40-60 years

At this stage in your life you just want to plan for your retirement so that later you and your spouse may have a healthy post retirement life. A relaxed and tension-free life is always advisable at this age. Your asset should be allocated as follows :

►  Keep a decent amount of money around 35% in equity. Or if you want less risk, you can think of keeping 30% to equity.

►  Hopefully, you have already made your investment in a property. Keep not more than 25% of your money in property. If you have put 30% in equity make this portion to 30% too.

►  You need to have around 15% of yor money in savings accounts. If you still need some more liquidity, set aside more percentage.

►  Keep 15% in debentures and bonds to generate fixed income. If you have put 20% in savings accounts, then make this portion to be 10%.  

►  And keep nearly 10% in Gold.

Asset Allocation for Married & No kid ►►► Age between 25-40 yrs

At this stage in your life you can build your wealth, you may take plenty of risk because at present you do not have any responsibility of kids. Your asset should be allocated as follows –

►  Keep a decent amount of money nearly 40% in equity. Or if you want less risk, you can think of keeping 35% to equity.

►  You need to now start planning for the days when you may have a family. Hopefully, you have already made your investment in a property. Keep no more than 30% of your money in property. If you have put 35% in equity make this portion to 35% too.

►  You don’t need to have more than 10% of your money in savings accounts. If you still need some more liquidity, set aside more percentage.

►  Keep 10% of your savings in debentures ad bongs being fixed income instruments.

►  And keep 10% in Gold.

Asset allocation for Married & No Kid ►►► Age less than 25 years

At his stage, your main priority is to have a property considering your age and absence of responsibilities of kids. You may afford to take risk. Your asset should be allocated as follows :

►  Invest a decent amount of savings, nearly 45%, in equity. You should now have relationship with a professional stock broker and a mutual fund adviser too.

►  You need to plan for the days when you may have a family. Invest 35% of your savings in property. You ca also think of keeping 40% in property and another 40% in equity.

►  In order to have liquidity, you need to have around 10% of your savings in bank accounts. Depending on your day to day needs, you can also reduce the percentage of allocation.

►  It is necessary to keep some money around 5% in fixed income instruments.

►  And keep 5% in Gold also. Please don’t jump on buying gold at today’s market price – the rate is bit high now. Just wait when the rate of 10gm Gold bar is available at around rupees 12K. Insist on buying Gold bar from reputed banks.

Asset allocation for Single ►►► Age between 25-40 years

Typically you are at the stage of building wealth with no immediate family to support. So you may be willing to take high risk. Your portfolio should be as follows :

► You may have already started acquiring your own real estate so keep on contributing 40% of your investment in property. If you feel this is bit high you can switch some portions to equity too.

► Keep a good amount of money nearly 40% in equity. Hoping you do have a professional stock broker to maintain your capital.

► And keep around 10% in bullion. We will have a detail discussion on bullion later on.

► You don’t need to have more than 5% of your money in savings accounts.

► Keep around 5% fixed income instruments like debentures and bonds.

Asset allocation for a Single ►►► Age < 25 years

Typically you are a person with no liability. So you can afford to take high risk.

Your portfolio should be as follows :

► Keep a significant portion of your savings, around 45%, in equities. This is bit risky, but looking at your age, it's somewhat feasible.

► You should start investing in a real estate. Nearly 40% of your savings should be for the purpose of buying the real estate. You should always consult an expert real estate broker for this.

► You don’t need to have more than 5% of your money in savings accounts. If you need to keep something for any emergency purpose you can think of keeping aside some more percentage.

► You may also keep some money in fixed income instruments, may be to the extent of 5%. Say in Post Office or Bank fixed deposits.

► And keep some nearly 5% in bullion. We will have a detail discussion on bullion later on.

Asset Allocation : Some basic things

Each one of you must remember that investing is a continuous process, based on certain scientific methods, which would enrich the quality of your lifestyle and help you in achieving your personal goals and aspirations. Designing of portfolio for most of the individuals is a lifetime activity and not an ad-hoc process. You should ensure that you are taking a right decision to invest your heard earned funds in safe place.


First of all, before investing you should have an adequate knowledge of financial market and the various options available for investment then, then only you can plan you portfolio. Your investment strategy should be such that it fulfills your real life need like purchasing a house, receiving regular income, children education & marriage and future financial security.


The whole article is somewhat bigger and I need some more posts to cover every approaches of allocation for different age groups. In a nutshell, we would throw some light, on how you should allocate your savings at different stages in your life to gain maximum advantage. However, the asset allocation depends upon various other factors also, so you should also consider those factors before finally putting your money.


Just see the table below and find out the category in which you fall. [In the table, column depicts the age and rows show the status in which the person falls presently.] You may go to cell number in which you fall and find out what should be your asset allocation. Just click on the category number on the cell and you will be navigated to the corresponding post.

Status / Age	< 25 years	25-40 years	40 – 60 years	> 60 years
Single	I	II	-	-
Married with no kid	III	IV	V	-
Married with kid	VI	VII	VIII	IX

In the next posts we will suggest you an appropriate asset allocation depending upon the category in which you fall.

ALTERNATE CREDIT SCORE

Alternative Credit Score acts as one of the prime criterion for loan disbursement for an individual. Credit Score has positive co- relation with income.

Many individuals have thin or non-existent credit files. It indicates that giant U.S. credit bureaus don't have enough information about finances of many individuals and hence they are not assigned any credit score, a figure generated via statistical models that examine outstanding borrowing, history of payments and debt loads. Banks use credit scores to determine eligibility and pricing for mortgages, auto and other loans.

However, this group of people having proper income but devoid of necessary credit score is increasing in number which is no less significant and opportunities are opening up for them with extensive effort from the financial institutions who are developing credit values of these people on the basis of what is today popularly termed Alternate Credit Score. It runs parallel to regular credit scores, risk profiles are updated on the basis of diversified data like rent, utility, child care, medical, and other payments. Banks are also coming up in hurried pace to tap this un-trodden territory and it may see a sea change when lot of people will shift more towards banks and move away from high interest bearing payday lenders.

However due to lack of collective data and information of either parties with each other, there remains a vide gap of co-ordination and it may happen that many among the credit seekers fall in hands of several pay day lenders or may end up consuming several products that otherwise wont have a valid presence in their port-folio. One necessary point to remember is the appropriate data should be with the banks and the degree of authenticity is worth mentionable in this Alternate credit Score method.

Thanks

Pamela

USA Insurance Sector - Slow Down

Recession in Global Economy has definitely created a huge impact on world market and insurance sector has also been hit by the financial slow down.

The catastrophic impact has become prominent with several millions being wiped out from the industry and many insurance giants witnessing sluggish growth and even negative return since last year as compared to returns booked and revenue generation analysis on quarterly basis.

Let us brush through a few points to carry forward the analysis.

Several millions were invested in financial institutions according to the portfolio set up which had badly affected the insurance sector on a whole.

Going by the available data, Hartford’s financial erosion reached around $2 billion during third quarter of 2008 as compared to $850 million gain during the same period the year before. MetLife’s accounts witnessed shooting up of costs in leaps and bounds with more than $ 1 Billion draining out to meet the claims and benefits. With rising cost and dampening effect on profit margin Insurance companies coughed large sum of money with little margin to fall back on.

Analyzing the problem from economic point of view, the gross approach of portfolio build up and direction of monetary flow boomeranged in many ways fuelling the problem. The portfolio had major exposure in fixed maturity investments like bonds mainly corporate bonds and with lesser credit liability; the insurance companies are witnessing fast erosion of asset value.

With the fall of value of the bonds, the claims and benefit payments are getting hard for the companies, drawing them to the verge of facing the problem of survival.

The most likely effect of this scenario may be total government assistance to sail through the tough period as well as several mergers and acquisitions may occur.

The question of survival now hovers around for most of the insurance companies.

Thanks

Pamela

US CREDIT CRUNCH

A credit crunch is an economic condition, in which loans and investment capital become dearer and difficult to obtain. In such a period, banks and other lenders become wary of issuing loans, so the price of borrowing rises, often to the point where deals simply do not get done. Credit crunch is a modern day economic problem which may occur at micro level (individual level) or even at macro level (country / region). Statistics reveal that USA, though one of the biggest consumer country has been in rough patch due to this credit related problem. Year 2007 has witnessed that employment news of Americans were not good and there has been lesser faith in cash market, panic prevailed all over, that fueled the credit crunch even more.

The credit crunch has become a difficult situation in USA especially for the finance corporate as well as retails investors. In the earlier phase, banks and financial institutions have been giving requisite loans to the buyout firms as the banks were able to re sell the loans to the investors. However the problem increased from mid 2007 when things dried up for several new investors as well as existing clients. Several investors who had previously taken loans could not sell their loans from their portfolio at any price, loaners were losing out the opportunity cost of money, the situation was acute with total disappearance of buyer, banks were hurled into tremendous liquidity problem.

Direct financial field saw backing out of several commercial papers which promises to pay that wide variety of companies issue to acquire short-term funding , $1.2 trillion asset-backed commercial paper evaporated from market.

Going by statistics, we see that housing / real estate boom started from late 90’s, more precisely from 2000 onwards. Fresh from Dotcom bubble burst, real estate became a safer bet for many Americans, especially when the rates of interest were quite low. It created an opportunity for many lenders who became proactive and drew many home buyers alluring them with apparently lucrative deals to buy houses. Increasingly low credit worthy home buyers entered the market and lenders provided them with basket of options like exotic mortgages, such as interest only loans or flexible rate mortgages other wise termed option ARMS. These loans had characteristics of initial low payments and later came with sky rocketing interest rates. Banks had written nearly 15 % ARMS by mid 2006. One important characteristic in this whole process are the brokers who don’t hold the loan nor they maintain a life time relationship with customers rather they are motivated by the commission structure which acts as driving force for them and hence Misselling occurred frequently. Securitization of mortgages became a problem which crawled into several financial tools like Futures and Option trading (Financial Derivatives), high leverage taking hedge fund became more vulnerable being more exposed to risk. However when defaulting eventually took place the situation worsened and Financial institutions and banks faced the heat of credit crunch which became more and more complex leading to many big shots succumbing to the credit crunch pressure .

Thanks

Pamela