Sunday, July 27, 2014

Whats next

Recently, on Ashal's FB group (Soon, Ashal will start charging me for using his name :P ), somebody asked a query. The person has taken care of all his goals (from investment per se) and now was thinking to close the home loan so that his wife can opt out of job to take care of their child. 

This made me think. First thing first, we must congratulate the guy (and his wife too) for making it. It is very difficult to achieve such a feat. Just imagine a person who has calculated all his needs and has been making regular investments to fulfill those goals. Awesome.

My guess is, he must be in late thirties or early forties. I started wondering, what should a person with such an ability should do with his excess money. Below are my thoughts on the same matter:

1. If he chooses to close his home loan with his excess money, he loses the tax benefit. Big deal? Nah.. The financial reason why he must choose to run the HL as is: the decreasing power of the money which is used as EMI. The 20k EMI (just a example) that he pays today does not have same purchasing power 5 years later. Hence, if he chose to pay 20k extra today, he is losing much more than just tax benefit. 
Some people would argue that closing HL will give him peace of sleep, they can read my previous post "Personal Finance". However, his case is little different. He does not want peace of sleep or he does not intents to purchase second house. His point is, if he closes HL, his wife can opt out of job. So in this case, IMHO, he must close his HL and stop worrying about tax benefits.

2. If he chooses not to close the HL then, he has few more options. The person must focus on building a good corpus for medical costs. Read Pattu's this post.

3. JD Roth suggested some time back to build an opportunity fund. Now what this means? Let us see this with an example. Suppose a friend of yours is going to settle in some other country and is looking to sell his house. Now, since he is in a hurry to sell it and have cash, he is selling it at 50% market rate. He circulates this news among his friends and gives them 3 days to respond. Can you take advantage of this opportunity? Depends on how much liquid money you have. If you have 20% of the selling price in money market MFs or liquid funds, zoommmmmm, you got it. Make no mistake. Do not (repeat do not) dip in your Emergency Fund for this opportunity. That would be bad financial decision. Hence, JD suggests to build another fund and call it as opportunity fund.

4. Sundaramjee (from same FB group) donates good amount of his money to needy people. Sometime back, he donated hefty amount to a girl, whose marriage was in jeopardy due to some money problem. You can also get tax benefit for donation in 80G. Read more about it here.

5. You can increase contribution to your child's education fund. This can be very helpful for your child. Today you are planning to send you child in one of the top ten colleges in India and you are investing from that point of view. Suppose, tomorrow your child decides to study from some abroad university and for that he may have to avail a education loan. Hence, by increasing your contribution to the education fund, you can save him from starting his career with some burden of debt. Offcourse, this can be contested as pampering your child.

Big note: All these points are assuming that you have enough emergency fund and you are contributing enough to your retirement corpus.

Sunday, July 20, 2014

Personal Finance

Ashal hits the target with 100% accuracy when he says that personal finance is personal.

To some people, this may sound like some marketing line "Personal finance is personal" or some may say that "even we understand english words, whats next?" 

This line has more in-depth meaning, than it looks on the face.

What it actually means is that: copy-paste rarely works in personal finance. What may be a brilliant advice to a person X would not necessarily be brilliant (even, good advice) to a person Y. Irritated? Let me explain with few examples.

1. Few days back, my friend told me to compare various online term plans. I gave him "this post" and compared on the basis of parameters that I thought were important. He told me that, I did not compare on other factors like customer satisfaction, number of outlets in city, etc. Although, his factors are good enough to consider, they are not the one which I thought would influence the decision. Here, you can understand that the personal choice matters. 
For me LIC premium of 13k would be a turn-off however, some person may be eager to ink with LIC for their 97% CSR. So again, it is personal.

2. By nature, I am a frugal person. Like, I don't mind walking 15 minutes instead of taking an auto or bus (given that, I have time in my hand). Co-incidentally, I rubbed this frugality on my friend (I never intended to do anything). He started doing less shopping on ebay, myntra and other online websites. All this unknowingly to both of us. He went for a holiday to his sister's place for 1 week. After returning, he started giving me advice on living life. As any other human, I was not really very interested in listening to other's uncalled advice. 
When I heard the whole story, I got amused and little angry too (angry, because I was being blamed for his money saving habits. WTF). And amused because his sister gave him an awesome advice to living a happy life. To cut the story short, he went to his sister's place and his sister noticed his frugality. The lady scolded him for being cheap and advised him to live life king size. She told that instead of living within our means, we should focus on increasing our means. 
Brilliant advice but to a wrong person and at wrong time. This advice would have been wonderful for a person who is already living within his means and now you are encouraging him to increase his means. No, I am not yet mad, there is a fine line here. This advice to a person who saves say 50% of his income would mean he increases his income by say x% and sub-subsequently, increases his saving by around x%. The lady in the story did exactly the opposite. Now, my friend is  hell bent on spending everything and advises me to leave my cheap habits and live my life.
Do I care? Off-course not.

3. "Suggest me one best mutual fund", is the line that we can see on all the financial portals. This question is incomplete. The real question could be: "Suggest me a mutual fund to invest considering, my equity to debt ratio is X and my current investments are into this fund with their percentages (or even actual values) are Y". Unless and until someone discloses his current investment funds, it is almost next to impossible to give any advice. This is personal finance and it varies person to person. I may have enough large cap exposure and may think that mid-cap is what I need. However, telling others to invest in some mid-cap without knowing his current investments will not be a good thing to do.

4. One of my friend is crazy on bikes. He has one bullet for daily commute and other spare bike when his bullet is in service center. To some this may sound foolish. This is not. He spends money on things which gives him happiness and cuts spending mercilessly on the things which are not important. Please do not get this point in contradiction with #2. The guy in #2 was spending everything. This chap earns good, saves lot, is frugal and spends only on things which makes him happy and that too in a limit.

The whole point of this post is when I answer your question on best MF as "I do not know", I really mean that I do not know which is the best MF for you. I can only point you to the websites or posts which can help you decide the fund which is suitable for you. If you insist, I may give names of few good funds in random. Does that suit you? Yes and No, both. Happy investing.