Impact of Business News channels on Investors

by Steven Fernandes on October 7, 2010

The very mention of stock market is enough to infuriate my friend Ashish, 35, who lost big time during the stock market crash in early 2008. For someone who followed the stock market news and views on a particular business channel, it was the very feeling of being left out in the Euphoria that propelled him to invest all his savings in a few real estate and capital goods stocks during the period from October to December 2007. Ashish had been following the stock market news almost everyday, sneaking time out from his work and spending time in front of the television screen in his office cafeteria to catch up with the latest buzz. In March 2008 when Ashish could not bear to see the huge losses that he had incurred in his short stint with the markets, he decided to sell all his holdings at more than 50% loss and promised himself never to invest again in stocks. The analysts who had earlier given buy signals were now recommending selling the holdings to pare the losses. It is human tendency to expect more and in pursuit of higher returns we are ready to take the plunge even in the absence of proper knowledge of the subject matter. With the advent of so many business channels people are constantly being bombarded with so much information that they are getting confused because each analyst has got different views of the same subject matter. Secondly, it is has been observed that a lot many people have opened online trading accounts so they can trade online on a daily basis and try and earn that elusive extra rupee which seems to be so easy to earn while watching the analysts give you a range of the stocks movement. In order to avoid being in the situation of Ashish there are a few recommendations that one can follow. 1. Watch the business channels to gain a better understanding and knowledge of sectors, companies and the general economy but dont use that knowledge to trade in stocks. Remember if it was so easy to make money in the stock market by just following the analysts, then we would have a lot more millionaire investors today and everybody would be doing the same thing which is practically not possible. 2. Please dont follow the so called Stop loss and Book profits mantra of the analysts blindly. Set up a proper asset allocation strategy with the help of a good financial planner and everything will fall in place. You will realize that now you have

more time for other things than follow the stocks on a daily basis and most importantly- peace of mind. 3. Shun the short term trading strategy as advocated by stock analysts as it will only lead to pain and desperation. Please keep in mind that Rome was not built in a day. Equity investments deliver superior returns over other asset classes over a longer period of time. Trust your financial planner and work towards long term wealth creation, instead of gambling your money away.

Financial Planning Case Study

by Steven Fernandes on March 24, 2011

Prashant and Srividya Nair are a salaried couple staying in the central suburbs of Mumbai. Prashant works as a programmer for an IT firm, while Srividya works in the administration department of an FMCG company. The family comprises of 6 members, Prashant & Srividya, their 2 kids and Prashants parents. Name Prashant Nair Srividya Dinesh Nair Lakshmi Nair Asha Vineet Age 38 35 74 70 7 5 Relationship Self Wife Father Mother Daughter Son Health History Healthy Healthy High BP. High BP, Diabetes Healthy Healthy

Their inflows, outflows & Networth details are given below. Inflows Prashant Srividya Outflows Household expenses Life insurance Total Outflow Monthly 64500 21000 85500 Yearly 774000 252000 1026000

27500 330000 5333.33 64000 32833.3 394000

Investments PPF Surplus Networth Self Occupied home Savings Account PPF (both accounts) EPF (both accounts) Stocks & Mutual funds Loans Networth

5833.33 70000 46833.3 562000 4200000 550000 400000 445000 200000 -0 5795000

Srividya has decided to discontinue working after 1 year to concentrate on her childrens education. Both the kids are going to school and grand parents take the responsibility of looking after them during the day, in the absence of Prashant & Srividya. Prashant would like to continue working in the IT industry and the familys financial goals are enumerated below. INSURANCE Inspite of paying an annual premium of Rs. 64000, Prashant is covered for a sum assured of Rs. 12 lakhs while Srividya is covered for Rs. 400000. Prashants Employer provides group floater mediclaim cover of Rs. 300000 for the family of 4, excluding the parents. Parents are not covered by any form of medical insurance. FINANCIAL GOALS The following are the financial goals as enumerated by Prashant and Srividya in present value terms. 1. Educational funding of Asha Rs. 1 lakh each year from age 17 to 20 and Rs. 3 lakhs at her age of 21 years 2. Educational funding of Vineet Rs. 1 lakh each year from age 17 to 20 and Rs. 3 lakhs at his age of 21 years 3. Marriage funding of Asha Rs. 4 lakhs at her age of 26 years 4. Marriage funding of Vineet at his age of 27 years 5. Retirement in the year 2031 when Prashant turns 58 years old. Sr. No. 1 1.2 1.3 1.4 1.5 1.6 2 2.2 2.3 Financial Goal Category:- Responsibilities Daughters Education Required at Age 17 Years Required at Age 18 years Required at Age 19 years Required at Age 20 years Required at Age 21 years Sons Education Required at Age 17 Years Required at Age 18 years Todays cost Rs. Rs.100,000.00 Rs.100,000.00 Rs.100,000.00 Rs.100,000.00 Rs.300,000.00 Rs.700,000.00 Rs.100,000.00 Rs.100,000.00 Approximate Year No. of Years to Goal 10 11 12 13 14 2021 2022 2023 2024 2025 Inflation Adjusted Cost Rs. Rs.259,374 Rs.285,312 Rs.313,843 Rs.345,227 Rs.1,139,250 Rs.2,343,005 Rs.345,227 Rs.379,750

13 14

2024 2025

2.4 2.5 2.6 3 4 5

Required at Age 19 years Required at Age 20 years Required at Age 21 years Marriage of Daughter Marriage of son Retirement at Age 58years Expenses considered Corpus required

Rs.100,000.00 Rs.100,000.00 Rs.300,000.00 Rs.700,000.00 Rs.400,000.00 Rs.400,000.00 Rs.252,000.00

15 16 17 19 22 20 20

2026 2027 2028 2029 2032 2027

Rs.417,725 Rs.459,497 Rs.1,516,341 Rs.3,118,540 Rs.2,446,364 Rs.3,256,110 Rs.1,070,458 Rs.22,953,250

Assumptions
y y y y y y y

General inflation (retirement) 7.5% Educational & Marriage inflation 10% Expected annual increase in salary 5% Returns on Equity & Equity mutual funds 12% Returns on PPF 8% Returns on EPF 8.5% Retirement corpus growth 1.87% (adjusted to inflation)

PROJECTIONS AND RECOMMENDATIONS. A. CONTINGENCY FUND: 1. The family should maintain a contingency fund of Rs. 83000 (rounded off). Rs. 15000 to maintained as cash at home and the rest in his savings account linked with FD. 2. Considering Prashants parents health status and the fact that they dont have any medical cover, Rs. 300000 to be maintained in a bank FD as a back up for their unforeseen medical expenses. The above allocation can be managed from the savings account balance B. INSURANCE 1. Accident: Prashant should take an accident policy of 25 lakhs with a TTD (Total temporary benefit) of 7.5 lakhs. The premium will come to around Rs. 3500. 2. Health: Prashant and Srividya should take an individual cover of Rs. 5 lakhs each and Rs. 2 lakhs for their daughters, the premium for which will be approximately Rs. 15500. 3. Life: As per the expense replacement method there is a shortfall of Rs. 80 lakhs of life insurance cover which should be covered by Term plan for a period of 25 years at an approximate cost of Rs. 20000 p.a. C. FINANCIAL GOALS 1. For Daughters educational requirement starting from 17th to 21st year of her age, SIP in Equity Diversified Mutual fund to be started for an amount of Rs. 6750

2. For Sons educational requirement starting from his 17th to 21st year an sip of Rs. 5750 to be started in a Diversified Equity mutual fund. 3. Daughters Marriage requirement can be funded by starting an SIP of Rs. 3000 in a diversified MF. 4. Sons marriage can be funded by an SIP of Rs. 2500 in a Nifty Index MF. 5. The retirement expenses at age 58 will be Rs. 10, 70,458 per year for which a corpus of Rs. 2, 29, 53,250 is required which can sustain till the age of 85 years. A major part of the corpus can be easily funded by PF, PPF & Gratuity benefits which will altogether fetch Rs. 1, 59, 15,000 at retirement. The shortfall of Rs. 70, 38,000 can be achieved by starting an SIP of Rs. 7250 in an Index Mutual fund. D. RECOMMENDED CASH FLOW Total inflow Outflows Household expenses Life insurance Accident & Mediclaim PPF SIPS Total Outflow Surplus 85500 27500 7000 1583.33 5833.33 25250 67166.7 18333.3 1026000 330000 84000 19000 70000 303000 806000 220000

The surpluses can be maintained in savings bank and can be used to fund the SIPs for next year when Srividya wont be working.