Main Aazaad Hoon

Like most of my blog, the title of this article is also inspired by Bollywood. Bollywood and Finance has always attracted me as there seems to be a lot of commonality in them. Both of them have lots of action, drama, hasi mazaak(Highs) and rona dhona (Lows) etc. Well as it is said that most of the stories of Bollywood movies are inspired from our day to day life, I thought of writing an article inspired by a famous movie title. Coming back to the point, through this article I would like to share how an individual can be free from financial trouble and that’s when they can say “Main Azaad Hoon”. Here we go:

The First thing one should do is to take a Life Insurance policy. This is the simplest and most economical way to ensure that your family future is secured and that they are free from any kind of financial trouble, even when you are not around. The number of policies don’t matter; what matters is the amount of insurance one has opted for. Well, there is no definite amount but as per thumb rule one should have at least 10-12 times of his/her annual income so that one’s family can continue to maintain the same life style. Having a life insurance becomes even more important when you have liabilities like a home loan or a business loan because here the money involved is very huge and can take away your lifetime savings. I won’t talk much about having a life insurance as I have already shared in my previous article the need and importance of it.

Second is to have a health insurance. Do you know that hospitalisation for ONLY 1 disease can take away our years of savings? Sharing few numbers as food for thought:

• One of the fastest growing illness in India is Cancer and the treatment cost can be anywhere between INR 8-10 lakhs
• In India, 1 out of 10 people suffer from some chronic kidney disorder. A kidney transplant costs around Rs. 7 lakhs whereas dialysis can cost you anywhere between INR 18,000-20,000 per session
• 25% of deaths in the age group of 25-69 are because of heart disease. The treatment cost here can be anywhere between INR 5-7 lakhs
• Hospitalisation cost in case of Covid is anywhere between INR 2-3 lakhs per person. The biggest problem here is that in case of Covid, multiple family members can get infected and may need hospitalisation. This will increase the cost highly.

Don’t think of the annual premium as expense but it is a small amount for peace of mind and safety of ourself and our family members.

In case you don’t have a health insurance, you should apply for one immediately and in case you have a health insurance, ensure that its good enough to cover the hospitalisation cost. If you already have insurance and the cover is not enough, you can opt for a “Top Up” plan instead of applying for new insurance policy. Top Up plans can provide a very high cover at a very low cost. A floater “Top Up” plan of INR 10 lakhs should not cost you more than INR 5000-6000 on an annual basis.

Third is to keep aside a sum of money which can take care of your day to day expense for next 3-4 months. This can be kept in bank Fixed deposit or in a Liquid fund / Arbitrage mutual fund.

It’s when one does all the above 3 actions i.e. Life Insurance, Health Insurance and creation of an Emergency Fund, that one is truly free and can proudly say “ Main Azaad hoon”. One can then start investing in which ever asset class suitable as per one’s risk profile. It can be Equity, Debt, Gold, Hybrid etc.

“A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.” – Suze Orman

Main Hoon Na!!

Yes! This is one of the famous movies in Bollywood but that is not what I am not referring to. I am referring to what we say, whenever our kids / friends /parents / siblings are in trouble. This is one of the things, I like about our culture and values. We go all out to help our friends and families even if its outside our reach. We provide them not only what they want but also what we feel they deserve. However, one thing that we often forget in the hustle and bustle all the hassles of life is, what will happen to our family when we are not around? We can and we do whatever possible to ensure that our family gets what ever they need and that no trouble comes to them. Many a times we so much love to live in the present that we forget about the future. Our family deserves not only our love, affection and trust but also financial freedom, especially when we are not around.

Apart from what ever we do for our family, our first and utmost responsibility should be to safeguard their future. Obviously, we can’t change the destiny but we can at least ensure that they don’t have to fight with destiny along with struggling for money and the simplest way to do this is to simplify your finances. A first step towards this financial freedom can be taking up a term plan. I am sure most of you have heard about term plans and I hope all of you have also bought it. For those who are not aware of term plans, this is an insurance product which is available at a very low cost and is the easiest way to ensure that your family has a contented future when you are not around. For example, term insurance is available at less than Rs 600 per month for a cover of Rs 1 Cr.

It provides not only financial stability to your family, but can also come in handy to repay any debt, home loans, etc. During your lifetime they can be helpful to cover disability or critical illnesses, too. Though I am not a big fan of recommending insurance for saving tax but ’yes’, it does give you tax benefit under section 80C.

It doesn’t matter even if you are covered under group insurance policy of your company; you should still ensure that you have taken an individual policy. Again, it doesn’t matter how many policies you have taken; what matters is the sum you are insured for. Once more, it doesn’t matter which company you choose; whether you buy an insurance policy or not matters.

We all know and understand that we need insurance cover but many of us postpone it for unknown reasons. Events like Corona only reiterate the fact that we all should be covered for any contingencies as life is uncertain.

When buying an insurance, there are few things that you should remember:

• Disclose everything about your lifestyle while applying for insurance (hiding facts to save few hundred rupees can be expensive for your family if your claim is rejected).
• Ensure that your life cover is minimum 10-12 times (ideally it should be 20 times) of your current annual income. This will ensure enough money for your family.
• Buy insurance from a company you trust.
• Your family should be aware about your insurance. This is “Very Important”. All the above actions and decisions will be of no use if they are not aware about it. (Do you know that the LIC of India alone has more than Rs. 11,000 Cr of unclaimed money ?)

Always remember It’s not about what you need. It’s about what your family needs if you aren’t there. You don’t buy life insurance because you are going to die, but because those you love are going to live

Savings v/s Investment

For many of us, it is may be difficult to differentiate between savings and investment. Seldom people realise the difference between the two. Well in the dictionary savings and investments are synonyms, but when it come to personal finance there is a huge difference.

So what are savings?? Savings are nothing but depositing money into risk free products, for example, savings bank account, bank fixed deposits,money back insurance etc. The returns generated by these products are generally in the range of 4% to 9%. These products are good for short term parking of money but when it comes to long term investment or wealth creation, they lose badly.

What is an investment?? Investment is placing your money into a product which not only beats inflation but also generates return over and above inflation. This is possible only when you invest into products which participate in the growth story of the economy, which is by way of investing into equities. This can be done either in form of direct equities or through mutual funds. Other avenues are investing into real estate or other alternate products like currency etc.

What difference does it make if someone invests into a bank FD or a mutual fund??

Well, rarely people realise that firstly, the income generated by most of these risk free products are taxable and secondly the average inflation for last 30 years is 7.5%. So when you put your money into a bank FD giving 9% return, the net return you get after deducting tax (30%, assuming you are in top slab) is 5.7%. Good for a risk free return. Now, here comes the twist. The average inflation in last 30 years is 7.5%. What does that mean?? It means that you have actually reduced your capital by 1.8% (7.5% – 5.7%). OMG!!!!

Let’s take the example of equities. In last 30 years Sensex has given an average return of 24.83% CAGR, so even after reducing inflation of 7.5%, the investor would have made a decent return of 17.31% CAGR. Now this is called investment or wealth creation.

The average return given by various asset classes in last 30 years are (these figures are before considering inflation):

Gold – 11.46%
Bank FD – 8.43%
Sensex – 24.83%
PPF – 10.21%
LIC Bonus Rate – 5.27%

Investment can’t be something which eats your capital. Your investments should have only one work, to create wealth for you.

So, STOP Saving and START Investing.

Dead or Alive

Do you know what differentiates between a dead person and an alive person?? Heart beats !!! If you have seen a Cardiac Monitor ( a machine in the ICU which indicates the heartbeat), heart beats are never straight. They go up and down, and that is the proof that the person is alive. A straight line means a dead person.

This is true for investments also. A straight line, means a product which gives a guaranteed return ( Bank Fixed Deposit or Insurance) can be considered as dead investments as they can hardly beat inflation. So for investments to beat inflation and generate good returns, it is important that they are not done in dead instruments. This is where equity or mutual funds come handy. They may be volatile but, they reflect that the investment is alive. The only way in which you can not only beat inflation but also create wealth is by investing into equity.

The worst mutual fund in the last 15 years has generated a return of 14% CAGR and the best fund has given a return of 28% CAGR. So even if you had invested in the worst fund, you would have not only beaten inflation with a good margin but would have also created some wealth for you.

The only secret to create wealth is to stay invested. Although it is important to save money in a bank or a fixed deposit, be clear that the purpose of this investment is arranging money during emergencies or for any expense that is expected in the near future. Any investment for long term has to be in Equity.

Stay healthy and stay invested 🙂