Big Question – How to utilise available Funds?

In Last two weeks I came across two incidents. This incidents compel me to think from some different aspect about how Indian public looking at their financial life.

1^st Incident – One of my colleagues purchased a brand new Mobile Phone – Samsung S4 at whopping price of Rs. 41000 (which is actually more than his monthly take home).  He is not that techno savvy.  Still he purchased such gadget. Asking about why such expensive mobile phone? He given very interesting answer –

   1. 0% EMI scheme with 15% money back offer (thanks to consumer finance & marketing strategies of MNC’s)

       2. Due to his girlfriend. She insisted him to purchase a stylish mobile to suite his status!!! OMG!

2^nd Incident – I visited my childhood friend last Sunday. He is just married. He is busy buying home appliances & required stuff for his Ghar Grihasti. He showed me recently bought new LED television. As a typical middle class person, I asked him about the price. To my utter surprise, he purchased it at Rs. 70000. This time I was bit serious and ask why such expensive LED? He also had his set of reasoning –

      1. 0% EMI scheme

      2. His Brother in law (Jijaji) insisted him.

      3. You don’t buy such stuff every now and then. So buy the good things only once.

As a Financial Planner I was completely disappointed by such kind of crazy consumerism. In second incident I was equally surprised & disappointed by Friends decision. But then I try to decode this consumerism.

Below are my findings –

     1.  Increase in Income level – After the Liberalisation, Privatisation & Globalisation (LPG) in 1991 all of us witnessed phenomenal growth in Indian Economy. India is a young country. Number of earning members in Indian household increased thereby increasing General Income level. 

     2.  Availability of Easy Finance – As India become a part of free economy, many MNC’s set up there shops. In order to grow the business various marketing strategies were implemented by this MNC’s.  0% EMI scheme is one of those strategies. This strategy works very well in todays Indian Market context. 

      3. Plenty of Option to Purchase from – Indian consumer is exposed to consumer goods & other services like never before.  There are plenty of things to lure you. 

      4. Me too approach – Everybody is spending & buying various so called necessary goods and Status symbols. In such social scenario person with a good income get into the rat race in order to show case his financial well being. 

      5.  Influence from near & dear one’s - This is another consumer psychology related aspect. As per marketing concepts, consumer mostly influenced by his near & dear one’s while making any buying decision.  In above both the incidents – My Colleague & Childhood friend both were influenced by there near & dear ones while making buying decision but they fail to understand that they were spending form there own pockets. 

      6.  Quality Purchases – As I mentioned in 2^nd Incident, a typical middle class mind set compel to buy expensive stuff.

 “Bar Bar to lena nahi hain to ek bar hi acchi Cheez kharidhate hain! “ While this reasoning holds the ground but in above both the incidents this is irrelevant at given price points.  You want to buy a gadget which comes with its own technological expiry. So when you are spending 70000 for a Smart TV, no one can assure that they are going to use such an expensive TV for next 15 years same like our parents did! (go to flash back) I think this “Ek hi baar lena hain” attitude means you are not going to upgrade. But if at first point you know that you need to upgrade your TV or phone sometime in future, try to purchase stuff which is relevant to you as per today’s requirement. With the purchase of such expensive gadget, you are setting up a benchmark for your next upgrade. So think & spend wisely!!!

As Financial Planner I also want to add some more thoughts –

In Above incidents – Both of the person are in there late 20’s belongs to very moderate background. Both of them are salaried and earning average salary (35000).

Both of them recently bought an Apartment & servicing the home loan EMI.

For such profile – I think purchasing any Premium or high end Gadget should be big NO!

Now let me explain you concept of Opportunity Cost - With Every rupee that we hold we can do many things but one at a time. E.g. If I have 10 rupees – I can Buy a Snacks or Drink or chocolate! So when I spend 10 rupees buying Snacks for me, I am sacrificing another option of Drink or chocolate. 

This is called as Opportunity cost.

For person with above profile – buying a phone worth Rs. 41000 or Buying a Smart TV worth Rs. 70000 means scarifying many things. 

So If I want to discuss case of my Friend – He don’t have required furniture required by a married couple. So how he should have wisely spent hard earn Rs. 70000?

Following were his requirements –

1.    Color TV

2.    Sofa set for Living Room

3.    Double Bed

4.    Wardrobe

Now following chart will illustrate Opportunity Cost based spending –

Particulars	His Spending Attitude	Opportunity cost based model
Color TV (LED)	70000	32000
Sofa Set	Nil	14000
Double Bed	Nil	10000
Wardrobe	Nil	14000
Total	70000	70000

As a Financial Planner – I supposed to be act as Advisor and not as a Broker or agent. In above illustration, No where I talked about investments. As my friend started his married life so few necessary things need to be purchased. I understand in such phase of life. Investments take a back seat. But as per his spending attitude he is no where starting saving & investing in near future. His necessary wish list will not be completed due to premium spending on TV set.

Feel Free to comment on my blog. Your comments are appreciated.

Regards,

Prateek Patani

prateekpatani@yahoo.co.in

+91 95 95 41 77 38

Child Education Planning

Another blog after very long time. This time I want to write about Child Education Planning. 

Few Days back one of my old friend called me and share a one of the most beautiful event of his life. He has become father of baby girl. After sharing this Good News, as responsible father he told me to suggest some Child Education Policy for his daughter!

This is very common problem with Indian Households. After arrival of a new member to the family next big thing family wants for the newly born child is - POLICY!!!

Now why I say it is problem?  There are basically few questions one need to answer before arriving at any investment decision -

1. Why I am investing (Goal)?
2. When I want Money?
3. How much I can invest?

I think in euphoria of becoming a father or mother, there is good sense of responsibility develops among new parents. They want to give best possible things to there child which is very natural. And here Financial Marketers ready to en cash upon Emotional high of a parent. 

Parents tend to forget to answer the above three questions. Luring Policy names and offers works as add on. At the end as a mature parent they make the investment decision. Now whether it is righr or wrong let see by illustrative example -

For illustration purpose I have taken a case of Jeevan Chhaya - a popular child education plan from LIC . 

Let me explain you in brief about this plan.

This is an Endowment Assurance plan that provides financial protection against death throughout the term of the plan. Besides payment of Sum Assured immediately on death, one-fourth of Sum Assured is payable at the end of each of last four years of policy term whether the life assured dies or survives the term of the policy.

Illustration
 Age at Entry – 35

Policy Term – 25 Years

Sum Assured – 1,00,000

Annual Premium – 4653

  

End of year	Total premiums paid till end of year	Benefit on death during the year
		Guaranteed	Variable		Total
			Scenario 1	Scenario 2	Scenario 1	Scenario 2
1	4653	100000	0	0	100000	100000
2	9306	100000	0	0	100000	100000
3	13959	100000	0	0	100000	100000
4	18612	100000	0	0	100000	100000
5	23265	100000	0	0	100000	100000
6	27918	100000	0	0	100000	100000
7	32571	100000	0	0	100000	100000
8	37224	100000	0	0	100000	100000
9	41877	100000	0	0	100000	100000
10	46530	100000	0	0	100000	100000
15	69795	100000	0	0	100000	100000
20	93060	100000	0	0	100000	100000
25	116325	100000	0	0	100000	100000

In addition,

Year	Total Premiums paid till end of year	Benefit payable on death/survival upto the end of policy term
		Guaranteed	Variable		Total
			Scenario 1	Scenario 2	Scenario 1	Scenario 2
22	102366	25,000	0	0	25,000	25,000
23	107019	25,000	0	0	25,000	25,000
24	111672	25,000	0	0	25,000	25,000
25	116325	25,000	69,500	182,500	94,500	207,500

Let me explain in Nutshell-

If you buy this policy, Parents life will be insured. In Your Case Mr. Fathers life is insured to the tune of Sum assured you have taken. 

Scenario 1 - 

If Life insured die during the term of the policy then –

1. Nominee will get Sum Insured. In above illustration Nominee will get Rs. 1,00,000.
2. Along with that during the last four policy years – Nominee will get 25% each year along with Loyalty bonus in the last year. In Above illustration Rs. 25,000 per year from 22^nd year till 25^th year has been provided to the nominees. In 25^th year bonus is also provided.

 (25000 + 69500 = 94500)

  Scenario 2 - 

 If life insured survive during the term of the policy then –

during the last four policy years – Nominee will get 25% each year along with Loyalty bonus in the last year. In Above illustration Rs. 25,000 per year from 22^nd year till 25^th year has been provided to the nominees. In 25^th year bonus is also provided.

(25000 + 69500 = 94500).

Now Let me tell you my approach –

Separating Insurance and Investments makes life more easy!!! – 

1. Insurance – Sole purpose of insurance to compensate for a financial loss arise due to any uncertain event like death.

So in case of child’s education one need to insure themselves to the tune of Future value of the education cost in the future. 

If you take todays case any normal graduation requires Rs. 6 Lac in total.

If you take inflation at 10% in education field then you will require after 17 years when you Son will be completing his 12^th – Rs. 30, 32,682.

So you will require atleast 30 Lacs Insurance.

For this you need to take pure insurance policy i.e. term Insurance. 

For your age you have to pay Rs.8100 Per year as a premium for 20 years. After 20 years your Son will be graduate. So once objective is achieved there is no need for insurance. 

There is no maturity benefit in above insurance. In case of death only nominee will get Sum assured.

Now for achieving Education Fund target you have to keep aside some money per month.

So for achieving this goal you have to invest per month Rs. 3200 at the rate of 15% CAGR.

So yearly you have to shell our Rs. 8100 + (3200*12) = Rs. 46500.

By paying Rs. 46500 per year you can achieve your goal of child education.

If you feel that amount is too big then initially you might find it is difficult but after few years it will not be a big amount for you.

Or else buy pure insurance and invest some less amount monthly in Mutual Fund. Every year you can add some more money to this investment.

Last but not least – Starting early is the key while investing for long term goal. 

In Case of any queries feel free to contact me -

prateekpatani@yahoo.co.in
Cell no - 9595417738

Till then Keep Planning & Keep Investing!