NEW MONEY MANAGING PRACTICES - AN EYE OPENER !

30 Nov 2018

The change is continuous in every sphere of life. The one who adopts the changing trends leads a better life especially in the field of finance. The conventional financial rules our parents and grandparents followed are not beneficial in present time. We at Investocafe analyzed how the new money managing practices are more beneficial today.

INVESTING

Earlier Saving and Investments were synonymous to  PPF or FD’s to protect capital and earn a decent interest. Today, post tax returns of most such schemes can’t beat inflation. For long-term goals like retirement, higher education for children, children’s wedding etc, a large allocation to equity is necessary to build wealth that beats inflation in a tax-efficient manner. So the new trend is LOOK FOR HIGHER INFLATION BEATING RETURNS INSTEAD OF GUARANTEED RETURNS. Have a look for various investment instruments below

Diversified Equity Mutual Fund (@ 15% CAGR),Value of rs. 1 Lakh in 5 years will be: 2, 01,135

Balance Mutual Fund (@ 12% CAGR) ,Value of rs. 1 Lakh in 5 years will be: 1, 76,234

PPF (@ 8.5%),Value of rs. 1 Lakh in 5 years will be: 1,50,365

FD (@ 8 %),Value of rs. 1 Lakh in 5 years will be: 1,46,932

HOUSING

Earlier, a house meant financial security and a good long-term investment but today, buying a house implies a huge EMI burden. Paying off a home loan early in your career compromises your other financial goals. So the new trend is RENT A HOUSE INSTEAD OF BUYING. The renting a house is more affordable than buying a house as per the Artha Yantra Buy vs Rent Report 2017. Have a look that in present scenario in different cities what is the rental cost and what will be the monthly cost to buy :

Mumbai : Avg Monthly Rental Cost : 42,084 : Avg Monthly Cost to buy: 1,56,887

Kolkata : Avg Monthly Rental Cost : 18,174 : Avg Monthly Cost to buy: 47,737

Bengaluru : Avg Monthly Rental Cost : 19,176 : Avg Monthly Cost to buy: 52,280

Chennai : Avg Monthly Rental Cost : 17,911 : Avg Monthly Cost to buy: 68,908

Delhi NCR: Avg Monthly Rental Cost : 21,094 : Avg Monthly Cost to buy: 70,115

Hyderabad: Avg Monthly Rental Cost : 13,706 : Avg Monthly Cost to buy: 30,955

Kochi : Avg Monthly Rental Cost : 12,347 : Avg Monthly Cost to buy: 41,670

Jaipur : Avg Monthly Rental Cost : 12,150 : Avg Monthly Cost to buy: 36,488

Indore : Avg Monthly Rental Cost : 11,677 : Avg Monthly Cost to buy: 29,965

TRANSPORT

Earlier, owning a car was seen as a status symbol. Fuel was cheaper too. Today, an efficient public transport system and app-based taxi services made owning a car superfluous. You are also spared the trouble of high fuel bills, vehicle maintenance, driving in traffic or looking for parking space. So the new trend is RENT A CAR INSTEAD OF BUYING ONE. Have a look at the calculation below for average per day cost of possession of a car:

Average Cost of a hatchback car in India : Rs 6,00,000

Scrap value of car after six year: Rs1,00,000

Net amount goes in effective life of six year : Rs.5,00,000

Cost of car possession (5,00,000/2192 (6 years)) : Rs.229/day

Approximated Car insurance (Averaged at 10,000 yearly) : Rs.27/day

After every 3 year tyre & battery replacement charge : Rs.23/day

Car Maintenance (@ Rs 9000 yearly) : Rs.24.5/day

Interest on car buying amount(@8% on Rs 6,00,000) : Rs.160/day

Average per day cost of car possession (excluding the fuel expenditure and driver) is Rs 463.5

Cost of renting a car with driver generally available in India is Rs 12/km to Rs 20/km (Uber )

Renting a car is much cheaper than actually owning a car.

GOLD

Lack of awareness and traditional inclination towards gold made earlier generation invest heavily in physical gold. Today, gold bonds/ gold ETFs or mutual funds prove to be more beneficial over physical gold, on many fronts. So now the new trend is BUY GOLD BONDS INSTEAD OF GOLD JEWELLERY OR PHYSICAL GOLD. Have a look:

Liquidity;

Gold Bonds: Low

Physical Gold: High

Gold FTE : High

Interest;

Gold Bonds: 2.75%

Physical Gold: Nil

Gold FTE: Nil

Charges;

Gold Bonds: Nil

Physical Gold: Locker, Making Charges, Insurance Premium:

Gold FTE: 1% on Expense Ratio

Taxation;

Gold Bonds: Tax on Interest

Physical Gold: Nil:

Gold FTE : Taxes if sold before 1 year

Risk;

Gold Bonds: Nil

Physical Gold: High

Gold FTE : High

INSURANCE

The conventional or conservative approach towards insurance is a mix of insurance and investment. Insurance is a bad investment and investments don’t provide insurance. They don’t actually provide the best of either. Insurance should be taken to cover your liabilities and Term insurance is low-cost insurance that comes with higher cover for a lower premium. It does not provide returns and is treated as an expense. But a comparison between endowment policy and term insurance clearly emerge Term insurance as winner. Have a look at the comparison between Endowment plan and mix of Term Plan with SIP below.

LIC Endowment Vs Term Insurance Plan with MF investment:

LIC new endowment plan for Rs. 50 lakh cover:
At 30 years age for a period of 30 years or 60 years age
Monthly premium is Rs. 13293 for 360 months (30 years)
Total maturity amount at the age of 60 years would be Rs.1.77 crore
Term Insurance plan of ICICI Pru for Rs. 50 lakh cover and SIP in ICICI value discovery fund
From 1 st to …… 360 months
Term Plan Premium:  426……..426 :  Total (@ 12% CAGR)
SIP Amount:  12867……………12867  : Total Rs.4.54 Crore

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Happy Investing!!!

Written by: Anvesh Pandey, SEBI Registered Investment Advisor
To get in touch, write on anvesh.pandey@investocafe.com or reach through www.investocafe.com

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