Worried about investing in debt funds? Debt funds are now safer

In the last few months, there has been a lot of volatility in the debt market. For many investors, investing in debt mutual funds was riskier than equity funds. It all started with the IL&FS fiasco in September 2018 when the group companies defaulted on their payments. Many mutual fund houses had invested in these companies. Essel Group and other similar episodes followed. In short, it has been a wild ride for debt fund investors who had invested in liquid funds and other debt funds with the notion that debt funds are completely safe.

To safeguard the interest of the mutual fund investors, the market regulator, the Securities and Exchange Board of India (SEBI) has laid down guidelines that will govern debt funds.

Here are some of the changes laid down by SEBI are as follows:

Liquid funds to hold at least 20 percent of assets in liquid assets

This move aims to enhance the liquidity of liquid funds. Mutual funds have to keep 20% of their assets in liquid and safe instruments such as cash, government securities, treasury bills and repo instruments. It will make sure that the fund houses will be able to manage large-scale redemption requests without adversely affecting the unit price (net asset value) of the liquid funds.

Cap on the maximum exposure to one sector

Liquid funds will now not be able to invest more than 20% in a single sector. The earlier limit was at 25%. This aims to reduce the risks associated with a single sector. Also, the exposure of liquid funds in housing finance companies cannot be more than 10%, down from 15% earlier. This is over and above the 20% limit on each sector.

Penalty for withdrawing before seven days

Liquid funds do not have any exit loads, and as a result, many large investors used to redeem from the funds within a day or so. As large investors such as institutions have the lion's share in liquid funds compared to retail investors, the question of the stability of liquid funds had sprung up. Now, mutual funds can impose a graded exit load on investors withdrawing before seven days. It means investors who redeem after a day will have to pay a higher exit load than the investors who redeem later, say on the sixth day.

All papers to be valued on mark-to-market:

Securities that mature over 30 days will now have to be marked according to the market rate, i.e. on a mark-to-market basis. Earlier, securities that matured after 60 days had to be mark-to-market. With this new change, NAVs of liquid funds will reflect a realistic value of the fund. However, it is also likely that the rate of fluctuation in NAV may also go up.

Debt funds to invest only in listed NCDs and CPs

Many companies raise nonconvertible debentures (corporate bonds) and commercial papers through private placements. Now, funds can only invest in listed securities, and no private placements will be allowed. As a result, it will increase the transparency of the quality of the papers, as listed securities have to adhere to the regulations and disclose accordingly. 

Tighter lending norms:

Mutual funds can now only lend to corporate against pledged equity shares with a cover of at least four times. Simply put, if a mutual fund lends Rs. 100 to a group company, the company would have to pledge shares worth Rs.400 with the mutual fund. If the share prices fall, the company would have to make up for the loss by paying cash to the fund. If that does not take place, the fund house can sell the shares to recover the money and to protect itself against a further fall in the share prices of the borrower company. With this new regulation in place, fund houses have no choice but to sell the pledged shares if the company’s share price falls to recover the money from promoters.

These were some of the crucial steps taken by SEBI to make debt funds safer for investors like you and me. So, leave your worries behind and start investing in debt funds. Understanding debt funds may be hard, and this is where a mutual fund advisor comes into the picture. He will be able to guide you better and clarify all your doubts regarding debt funds.

Why you should get term insurance right now

We all love our families and want the best for them. We try to fulfill their wishes to the best of our abilities. One easy and simple way to show your love for your family and to make sure that they continue to live a dignified life even in your absence is to take a term insurance.

Life is unpredictable, and there will be times when things don’t go according to the plan. Term insurance is one of the simplest financial products which can safeguard your family in times of an unfortunate event.

Getting insurance is the first and most crucial aspect of financial planning. In term insurance, the beneficiary receives the sum insured after the death of the insured person. However, one needs to remember that the term plan does not pay back any amount if the insured person survives the tenure of the policy. You can avail of higher life cover by paying a lesser premium.

Who should take term insurance?

If you have dependents whether it is your spouse, young children or elderly parents, taking insurance is necessary. However, even if you have no dependents, but have outstanding loans like home loan or vehicle loans, taking term insurance is also essential in this scenario.  

It is beneficial to take term insurance at the earliest because the premium paid and the age of the insurer is directly proportional. This means that the longer you wait to get term insurance, the higher will be your premium. The premium is likely to increase as the number of responsibilities and health issues may crop up. Also, unlike health insurance, where the premium covered keeps on growing, the premium for term insurance remains the same throughout the tenure.

What should be the ideal insurance cover?

Figuring out the ideal insurance cover is one of the most important things to consider when taking a term insurance cover.

A cover of Rs.50 lakh may be sufficient if you don’t have dependents. But it will not be enough after you have a family. You will have to increase your cover after every significant event like marriage, the birth of the first child and second child etc.

As a thumb rule, life cover should be equivalent to 10 times of your annual income. However, that is just the tip of the iceberg. Loans and debts, future expenses, savings and investments, are some of the other factors that should be kept in mind while calculating the insurance cover. The outstanding dues on your home loans and vehicle loans should be considered in the term insurance. However, you don’t have to calculate your credit card debt in this scenario.

The other important part is providing for future expenses such as children’s education, marriage and day to day expenses. Consider a reasonable inflation rate while calculating future costs. You may also be investing in these goals through systematic plans in mutual funds, but it is essential to consider these goals as accumulating for these goals may come to an abrupt to end in your absence. Having adequate term insurance will make sure that your children don’t have to compromise with their education.  You can use a ‘Human Life Value’ calculator available on the websites of insurance companies to find out the ideal life cover for you. Don’t make the mistake of rounding of the amount to the nearest round figure.  It is better to take higher insurance cover than to take less insurance cover.

You can take the help of a financial advisor to calculate and find out the right amount necessary for you.

Another essential aspect of term insurance is tenure. Many people make the mistake of taking the term insurance to 75 or more. Typically, you should consider term insurance till your retirement age of 60 as the family’s dependency after your retirement will come down drastically.  

Term insurance is one of the vital steps in financial planning. Take one now and relax. 

Investing as a newbie

After one lands in a job, the first thing that most parents will tell is to save money.  Saving money, especially for someone who is in their first job and living alone in a big city, may not be easy. But it is also not difficult. Saving is necessary as it will help you to tide over emergencies and fulfil your financial goals. Here are a few essential steps that you can take as a beginner.

Your salary is less than what you get

We always think that we will start investing once we have enough money. But it is never going to work out this way. One way to change this habit is to imagine that you get less than your take-home salary. For, e.g., You can imagine that your salary is Rs.30,000 if your actual salary is Rs.35,000. Thinking in this manner will help you to save a little amount of money every month.

How much should I save/invest?

Knowing how much to save is on everyone’s mind, but there is no easy answer to this question. It is because the lifestyle and needs of different individuals varies. While it may be easy for someone who stays with their parents to save 95% of their income, it may not be the same for someone living alone in a city.  As a rule of thumb, it is advised to save at least 20% of your income for your future goals. If you can’t start at 20%, start at 10% and gradually increase your allocation. The main point is to start somewhere.

What to do with the savings?

The next question that must have automatically come to your mind would be what to do with the savings. It is better to invest in your financial goals. However, it is most likely that you still haven’t figured out a financial goal. If you don’t have a financial goal in sight, the easiest way to save money would be to set up a one-year recurring deposit. Investing in an RD is extremely safe and very easy to open. Nowadays you don’t have to fill documents or visit the bank branch. You can create an RD in just two minutes through your bank app. All you have to do is add the tenure, the date on which money will be debited from your savings account, and the sum of money that you want to save every month. Remember to set the date within the first week of the month. 

Instead of RD you may also look at Liquid Mutual funds where you get the convenience of withdrawing at anytime just like you saving bank account and also get a chance to earn better return than savings account.

Once your financial goals are decided you can channelize your RD money or Liquid fund money into Mutual funds.

How to invest in mutual funds?

Mutual funds are an effortless and popular way of investing. Mutual funds invest in a pool of stocks and securities, and a dedicated fund manager manages it. It is especially useful for individuals who do not have the time and expertise to select stocks. To invest in mutual funds, every investor needs to complete the KYC process. The KYC is a one-time procedure. Your financial advisor will be able to help with the process. After the required processes are in place, it is time to select mutual funds. There are many categories of mutual funds for different goals and different types of investors. You should discuss your financial goas and requirements in detail with your financial advisor so that he/she can help you to choose the right product for you.

For e.g., if you want to save money for a vacation that is six months away, taking high risk and investing in equities won’t be the right way to go forward. A liquid fund can help you to save for your vacation. Similarly, for your financial goals that are 15 years away, a small-cap fund may be a good investment option. Ultimately, you financial advisor analyses your requirement, your risk appetite and your financial goals to ensure that you get right schemes in your portfolio suitable to your profile.

There are two ways to invest in mutual funds: lumpsum and through Systematic Investment Plan(SIP). SIP is one of the easiest and convenient to start investing in mutual funds, especially for salaried individuals. In a SIP, a fixed sum of money is deducted every month automatically from your savings account. SIP helps form financial discipline, which allows you to achieve your financial goals. If you have lumpsum amount at hand, you can invest lumpsum in the mutual fund of your choice. You can also invest lumpsum in the fund where you have set up a SIP. This will help you to reach your financial goals faster.

While it is reasonable to have the temptation to spend, it is crucial to save and invest money for the future as well. Investing should be appropriately planned, and mutual funds are one of the best ways to invest your hard-earned money and achieve your financial goals. If you are confused about which mutual funds to invest or how to go about it, a financial advisor can help you in your journey.

By now your organisation must have handed out the bonus and increment. If you are one of the few lucky people to receive an increment and bonus or at least one of the two, it is crucial that you use it wisely and don’t squander it. Planning your increment and bonus money can help you to achieve your financial goals and be debt free.

You may have got a single digit percentage hike or double digit, but the percentage of your hike is not of much significance. The essential part is that you plan your finances according to your bonus and salary hike. There is no wrong in splurging once in a while but planning for it will help you to avoid burning a hole in your pocket or regretting about your decision later.

Choosing the right way to handle your bonus and increment is comfortable with these simple steps.

Build an emergency fund: If you haven’t yet built an emergency fund, now will be the right time to do so. It is recommended that you keep at least three months’ worth of expenses in your emergency fund. The emergency fund can help you to tide over any unfortunate scenarios such as job loss or minor accidents. You can use your bonus to create an emergency fund. It is essential to have funds earmarked for emergencies as with an emergency fund in place; you will not be tempted to dip into your long term investments.

While building an emergency fund, it is essential to park it in a product with the highest liquidity. Savings account and the liquid fund have the highest liquidity and individuals can redeem money within minutes. You can keep one-third of the emergency fund in a savings account for easy access and the rest in a liquid fund. Liquid fund is a category of debt mutual fund with the lowest risk. Also, liquid funds give a higher rate of returns than savings accounts.  

Start Investing or Increase your SIP amount:

If you always waited for the right time to start investing or have enough money to start investing, this is the right time for you. If you don’t have the technical knowledge of investing directly in stocks, mutual funds would be the best option for you. There are different types and categories of mutual funds to suit and cater to the various kinds of investors. No matter how many days or years you want to invest, or what kind of risk-taking capability you have, there is at least one mutual fund for you.

Typically, before investing, you need to list your financial goals and time horizon. Your financial advisor can help you through this investment journey. You can invest the bonus amount as a lump sum investment, and you can set up a systematic investment plan(SIP) with your monthly increment. It is advisable that at least 20% of your take home salary should be invested.

If you already have SIPs running, you can step up your SIP as per your increment percentage. Stepping up your SIP amount regularly can help you to reach your financial goals faster. If you invested Rs.5,000 per month for ten years at a 12% rate of return, your corpus at the end of the ten years would be RS. 11.6 lakh. On the other hand, if you had increased your SIP by 10% per year, your corpus would be grown to Rs.15.36 lakh.

You can also invest your bonus in that fund. You can segregate the bonus equally between the different funds, or you can invest in a financial goal that you want to achieve at the earliest. 

Lessen your debt obligations:

No one likes to live in debt, especially when the loan attracts a high-interest rate. If you are on a journey to cut your debts, repaying your loans with your bonus can be a move in the right direction. You can start by paying off your credit card debts and personal loans as it carries a high interest rate and gives you no tax benefit. Once you pay off these debt obligations, you can move to the vehicle and home loans.

You can also invest a portion of your increment towards repaying of the loan. However, before you do that, it is vital to check the prepayment charges as many banks charge prepayment charges for foreclosing the loans.

To summarise, knowing how to maximise your increment and bonus can go a long way in helping you achieve your financial goals. Thanks to technology, various facilities such as step up SIP among others can automatically increase your SIP amount every year by a certain predetermined percentage. Use your increment and bonus wisely so that your future will thank you.

From our childhood, we are taught not to waste money and always go for the cheapest available option. But not all things that appear to be expensive are bad for your pocket. Some of the things have far fetching positive impacts, help us save us a ton of money in the future and boost our wellness.     

You can say that these are necessary expenses. Here we would like to talk about three areas of our lives where we should not think about saving a few pennies. These areas are physical, mental and financial aspects of our life. After all, you should not be ‘penny wise and pound foolish’.

Physical aspect:

In today’s mad rush of earning more money, we tend to ignore our body. We only pay attention when we are diagnosed with a particular health disease. The best way to keep lifestyle-related conditions at bay (and save thousands of rupees) would be to do any form of physical activity regularly. Studies have shown that physical activity is not just good for your physical health; it is also essential for your mental health. But before you take that annual membership in your nearest gym, it is crucial to understand what kind of physical activity would you like to do. If you love to dance, then Zumba or other dance classes can be the best fit for you. If you want to run in a marathon, you can join a marathon-training group.

It is also essential to go for regular health checkups along with your other family members as it can help to diagnose early signs of any disease. You can preventive measures and control the disease from blowing out of proportion. 

Mental aspect

Mental wellbeing is as important as physical well being. When you are happy, you can give your best in your work life and increase your productivity leading to higher increment, bonus and more profits. A contented mind is essential not just for your work life but your personal life as well. There will be less emotional stress between the family members. Being stressed can lead to improper decision making, which can have serious consequences, especially in your financial life.

One of the best ways to have a calm and happy mind is through mediation. Meditation can help lower your stress level and clear your negative thoughts. Doing the things that you love can also lower your stress levels. Many activities and workshops on various art forms, outdoor activities are held every other weekend or make plans with your friends and family members. It will also strengthen the bond.

"People who are more socially connected to family, friends, and community are happier, healthier, and live longer than people who are less well connected," says Dr Waldinger, a psychiatrist with Harvard-affiliated Massachusetts General Hospital. Hence, it is a win-win situation in every aspect.

Investing in yourself through attending workshops, training programs, and reading is very vital in today’s world of cutthroat competition. Don’t rely solely on the training programs provided by your organisation and take initiatives to attend some of the best events within your industry. It will give you an edge over your colleagues who have not participated. Staying up to date with the latest happening in your industry and taking courses to upgrade your skills can go a long way in increasing your income potential. Books, workshops and courses are just one-time investments, and you can reap the benefits for many more years.

Financial aspect   

We have seen how investing your money in your physical and mental aspects can help you increase your income. But everything will come crumbling down if you don’t manage your money wisely. A financial advisor can help you do that. We may think that we can handle our finances, but when we are faced with not-so-good scenarios, we fail to make the right decisions. Such decisions may be investing in ULIPs to save tax at the last moment, investing in five ELSS funds, withdrawing money from your provident fund after the 15-year lock-in and shuffling between the high performing funds. All these financial mistakes can hurt your finances. A financial advisor will hand hold you and help you make the right financial decisions. With the right financial advisor, your life goals are within your reach.

These are the three aspects of life where being a miser can backfire. Remember to plan your budget properly so that you can have the best of both worlds. 

Emergencies come unannounced. No one can predict when it is going to strike. The only thing that we can do is to prepare ourselves for any unforeseen circumstance. Having an emergency fund will help you to tide over emergencies like accidents, job loss etc.  Hence, building an emergency fund should be the first thing on your mind before you start investing for your financial goals. 

So, here’s everything you need to know about emergency funds.

What are emergency funds?

An emergency fund is like a cushion that helps you to sleep soundly at night. It is money that you put aside against life’s unexpected events. It is not to be used for planned purchases such as buying a house or new car or your child’s higher education.

An emergency fund helps you to be prepared for anything that life throws at you. These emergencies can be accidents, immediate house repairs and job loss as well. Sorry, the late night pizza craving is an emergency.

Ideally, an emergency fund should be in liquid investments such as liquid funds or savings account. Liquidity is the essential feature when it comes to emergency funds, as you would need the money at short notice. You should park two-thirds of your emergency corpus in liquid funds and the rest in a savings account. In case of short-term emergencies such as house repairs, you can withdraw money from your savings accounts. The liquid fund can help you save for significant emergencies like job loss.

How much should you have and how to build your emergency fund?

You should have at least three to six months of expenses in the emergency fund. E.g., if you are earning Rs.50,000 per month and around Rs.30,000 goes in meeting your expenses, then you should have at least Rs.1 lakh in your emergency fund.

This amount is likely to cover most unpleasant surprises like a big car repair or house repair. Keeping aside three months worth of expenses is the bare minimum. The more you can save in your emergency fund, the better. However, you may want to consider what would happen in case of your job loss or non-payment of salary. It is because job loss is a big emergency. If you are in a field or position where finding a new job is tough, it is advisable that you save up to a year’s expenses. 

Let us take the Jet Airways fiasco to highlight the importance of saving money in case of a job loss. Jet Airways employees were not paid salary for a couple of months, and now many of them are staring at a bleak future. An emergency fund can help you to overcome such challenging scenarios.

The amount in your emergency fund also depends on your responsibilities. A person in their forties with kids and elderly parents will have higher responsibilities than someone in their 25s who recently joined the workforce and does not have any financial obligations.

There are two ways to calculate your expenses. The first way is to figure out the essentials that are utmost necessary such as bills, groceries, and in the second way, you also take the luxuries such as eating out and movies into account. It is always better to have a conversation with your spouse before considering the total amount that you need to save for your emergencies. 

Once you know how much you need to save for your emergency fund, the next step would be to build the emergency fund. Just like investing for any financial goal, building an emergency corpus also takes time. Keep aside a specific sum of money every month in a different bank account or a liquid fund. Building an emergency fund should be your priority. Hence, it is okay if you have to cut your investments. You can also do so by cutting back your expenses on luxury items or selling things that you do not use.

To summarise, emergency funds are the first step in financial planning. Use an emergency fund calculator or talk to your financial advisor to know how much you have to save in your emergency fund. Your financial advisor will be able to help in this entire process. So, start saving for your emergencies today.