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Who says you can’t retire at 40?
If you are in your 20 something and if retirement seems like a faraway dream, then there is a dramatic change needed. And no, this is not some exaggerated statement. This is very much possible. Are you wondering what the secret sauce is? Here, is the list.
- The magic is not in tackling the expenditure but to invest wise. Saving is a habit that you got to develop as early as possible. Clarity of how you spend money and where you can alter the ways to save more is crucial. Once you retire, this religious practice will take care of the mathematics of your finances automatically.
- No compromise on the happiness quotient. It is necessary for you to firstly define your retirement. What does that mean to you? Whether you want to break away from the 9-5 routine, or want to take up a different stream of work or want to pursue the passion that you have hid behind. Defining this will be the key to like the early retirement and what follows suit.
- The number game is what you have to play. Now it is time for you to replace 80% of your pre-retirement income and the remaining part of it is the taxes or the other savings. It simply indicates that you have to be saving more, at least half of what you are earning right now, to retire early.
- Plan it all. It is tough to go big on saving especially if you are used to lavish spending. Prioritise your expenditure and know how much of it is irrelevant. It is time to be tough on yourself if you want to relax later.
- Seek help. If at any point in time, you feel stuck, ask for the expert’s advice. In fact, you can connect with a financial advisor who will help you manage your wealth accordingly and guide you with the right set of investments. Go for it.
So, by now if you still think that early retirement is a myth, then allow us to burst it. Go ahead, spend right, save more and follow your dreams as early as possible.
Equity Shares
The capital of a company is divided into shares.
Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company.
The holders of shares are called shareholders.
Shares are of two types- ordinary or equity shares and preference shares
What are ordinary/equity shares?
- They are the legal owners of the company.
- Ordinary shares are source of permanent capital since they don’t have maturity date.
- Shareholders are entitled to receive dividends by the company.
- The amount or rate of dividend is not fixed. It is decided by the company’s board of directors.
- Ordinary share is also known as a variable income security.
What are the features of equity shares?
Claim on income
Ordinary shareholders have a residual ownership claim.
Residual income is earnings available after paying expenses, interest charges, taxes, preference dividend, if any.
This residual income is either directly distributed to shareholders in the form of dividends or indirectly in the form of retained earnings which are reinvested in the business.
Retained earnings help in growth of the company, which is beneficial for the shareholders.
Claim on assets
On liquidation of the company, dues are paid to debt holders, preference shareholders and the remaining is paid to ordinary shareholders.
Right to control
Ordinary shareholders have the legal power to elect directors on board.
Board of directors approve major policies of the company and appoint managers to carry out day to day operations.
Thus, ordinary shareholders can control the management of company by choosing board of directors.
Voting rights
Ordinary shareholders have the right to vote on major decisions of the company eg. Change in memorandum of association, election of board of directors, etc.
An ordinary shareholder has votes equal to the number of shares held by him.
Limited liability
Liability of ordinary shareholders is limited to the amount of their investment in shares. In case of liquidation or any financial problem, ordinary shareholders are not liable to pay.
What are the advantages of equity shares?
Shareholders’ Point of View
- Liquidity and easily traded in capital market
- Higher dividends when company has increased profit
- Voting rights to control management of the company
- Appreciation in the value of shares when company performs well
Company’s Point of View:
- Least repayment liability
- Permanent source of capital
- No obligation to pay dividend
What are the disadvantages of equity shares?
Shareholders’ Point of View:
- Uncertainty of receiving dividend
- Fluctuations in value of shares
- Issue of fresh shares reduces the earnings of existing shareholders
Company’s Point of View:
- High cost to source equity shares as compared to other sources of finance
- Payment of dividend is not tax deductible
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Types of debentures
Debentures can be classified on the basis of:
- Transferability/ Registration
- Registered Debentures- Name, address, and other holding details are registered with the issuing company.
The amount of registered debentures is payable only to those debenture holders whose name is mentioned in the register of the company.
If the debenture is transferred by the holder, it is necessary to inform the issuing company for updating its records.
- Unregistered/ Bearer Debentures- these debentures are not recorded in a register of the company.
Bearer debentures can be transferred by mere delivery to the new holder.
The interest and principal are paid to the person who produces the coupons attached to the debenture certificate.
- Security
- Secured/ Mortgage Debentures- these debentures are secured by a charge on the asset or set of assets of the company.
The holders of secured debentures can recover the principal and unpaid interest amount out of the assets mortgaged by the company.
These debentures are further classified into– first and second mortgaged debentures.
At the time of liquidation of the company, first mortgaged debentures have the first charge over the assets of the company whereas second mortgaged debentures have secondary charge.
- Unsecured/ Simple Debentures- these debentures are not secured by any asset and are issued solely on the credibility of the company.
- Redemption
- Redeemable Debentures- these debentures are issued for a fixed period. The principal amount is repaid to the holders on the specified date.
- Non-redeemable/ Perpetual Debentures- these debentures do not have any date of redemption.
These debentures are redeemed either when the company chooses to pay back or at the time of liquidation.
The company may pay back to reduce its liability and notifies the debenture holder by issuing due notice for it.
- Convertibility
- Convertible Debentures- these debentures can be converted, fully or partly, into shares after a specified period of time.
Convertible debentures are further classified into:
- Fully convertible debentures can be completely converted into equity shares.
- Partly convertible debentures have two parts- Convertible part which is converted into shares as per the agreement. Non-convertible part is repaid after the expiry of the agreed period.
- Non-convertible Debentures- these debentures do not have the feature of conversion and are repaid on maturity.
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Debentures
What is a debenture?
Debenture is one of the financial securities traded in capital markets.
It is defined as a long-term promissory note for raising loan capital where the company promises to pay interest and principal as stipulated.
Who can issue debentures?
Debenture can be issued by both corporations and governments.
An alternative form of debenture is a bond, mostly issued by public sector companies.
What are the features of debentures?
- Debenture is a form of loan capital for the company.
- The purchaser of debenture is called debenture holder. So, a debenture holder is a creditor of the company.
- The par value of a debenture is the face value mentioned on the debenture certificate.
- The interest rate on a debenture is fixed and known at the time of purchase. Interest is a percentage of this par value.
- The legal agreement between company and debenture holder is called indenture or debenture trust deed. It includes the specific terms of the agreement, description of debenture, rights of debentures holder, etc.
- Debenture can either be secured or unsecured. Secured debenture is secured by lien on the company’s specific asset. However, unsecured debenture is not protected by any security.
- The credit rating of debenture indicates the degree of its safety. Credit ratings are provided by Credit Rating and Information Services of India (CRISIL) and few other rating companies like CARE and ICRA in India.
- Companies issue debenture in different denominations. But, public sector companies issue bonds in the denomination of Rs. 1000.
- Debenture is issued for a specific period of time.
- The maturity of debenture is the time period until the company returns the par value to debenture holder and terminates the debenture. Usually, a debenture is redeemed after 7 to 10 years of payment.
What are the advantages of debentures?
- Fixed and stable interest income.
- Definite maturity period
- Ease of trading and liquidity
- Comparatively safer investment as debenture holder has specific or a floating charge on the secured asset of the company
- Preferential right of payment at the time of liquidation of the company
- Interest is protected as per indenture provisions and SEBI guidelines
What are the disadvantages of debentures?
- No voting rights
- Returns limited to the extent of interest, irrespective to higher or lower earnings of the company
- No share in profits
- Debenture holder is only creditor to the company, has no ownership of company
- Interest on debentures is fully taxable
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Understanding Capital market
Capital market facilitates buying and selling of financial securities such as shares, bonds or debentures.
Capital market channels savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals.
It has two mutually supporting and indivisible segments: the primary market and the secondary market.
Intermediaries such as investment bankers, merchant bankers, stock brokers, etc. play an important role in trading of securities in both the markets.
Primary market
In the primary market companies issue new securities to raise funds. Hence, this market is also known as the new issues market.
New or listed companies make public issue of shares which implies that the securities are sold to public including all individuals and institutional investors.
Public issue by new companies for the first time is called the initial public offering (IPO).
In this market, companies interact directly with investors.
Secondary market
The secondary market deals with second-hand securities ie. securities which have already been issued by companies that are listed in stock exchange.
These securities are listed and traded in the stock exchange. Hence this market is also known as the stock market.
In this market, investors interact with themselves.
Secondary market may also include over the counter (OTC) market and derivatives market.
The secondary market determines the price and risk of the securities issued.
This is helpful for both listed companies and investors to act in primary market.
The operations of primary and secondary markets in India are regulated by Security Exchange Board of India (SEBI).
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Types of Mutual Fund schemes
Mutual Fund schemes available are specific to investor needs such as financial position, risk tolerance and return expectations etc.
These can be classified by:
Structure
- Open-end Funds
Open-ended funds are MFs which can issue and redeem their shares at any time.
Investors can conveniently buy and sell units at the existing NAV of the scheme.
There is no fixed maturity of these funds.
Key feature: liquidity of funds.
- Close-ended Funds
Close-ended schemes are MFs with a fixed no. of shares (or units) which are issued through a New Fund Offer (NFO).
The fund is open for subscription only during this specified period.
The fund is then structured, listed and traded on stock exchange. Investors can buy or sell the units on this stock exchange.
Some close-ended funds also give an option of selling back the units to the MF through periodic repurchase at NAV related prices.
They have stipulated maturity period (usually 3 to 15 years).
Key features: fixed no. of units, limited availability.
- Interval Schemes
Interval schemes combine features of both open-ended and close-ended schemes.
The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV-related prices.
Key features: features of both open-ended and close-ended schemes.
Investment Objective
- Growth or Equity-Oriented Schemes
The aim of growth funds is to provide capital appreciation over the medium to long-term.
These schemes usually invest majority of their portfolio in equities and so have comparatively high risks.
Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Key features: capital appreciation over the medium to long-term.
It can be further classified into following depending upon objective:
- Large-Cap Funds: invest in companies from different sectors largely in BSE 100 and BSE 200 Stocks.
- Mid-Cap Funds: invest in companies from different sectors largely in BSE Mid Cap Stocks.
- Sector Specific Funds: invest in a particular sector eg. IT.
- Thematic: invest in various sectors but restricted to specific theme e.g., services, exports, consumerism, infrastructure, etc.
- Diversified Equity Funds: all non-theme and non-sector funds.
- Tax Savings Funds (ELSS): investments in these funds are exempt from income tax at the time of investment.
- Income or Debt oriented Schemes
The aim of Income Funds is to provide regular and steady income to investors.
These funds generally invest in fixed income securities such as bonds, corporate debentures and Government securities and money-market instruments. So, the opportunities of capital appreciation get restricted.
These funds do not participate into markets. Hence, there is no market risk or volatility and are less risky compared to equity schemes.
Key features: regular and steady income to investors.
- Balanced Funds
The aim of Balanced Funds is to provide both growth and regular income.
These schemes invest both in equities and fixed income instruments in the proportion indicated in their offer documents.
Balanced funds are ideal for investors looking for income as well as moderate growth.
Key features: capital appreciation and regular income to investors.
- Money Market Funds or Liquid Funds
The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income.
These funds exclusively invest in safer short-term instruments such as Treasury Bills, Certificates of Deposits, Commercial Paper and inter-bank call money, Government Securities, etc.
Fluctuations in returns of these schemes are much less than other funds.
These are appropriate for investors who wish to invest for short periods.
Key features: easy liquidity, preservation of capital and moderate income.
- Gilt Funds
These funds invest exclusively in Government Securities.
- Fund of Funds Schemes
Fund of Funds invests in other MF schemes.
Such schemes can help investors reduce their chances of selecting a wrong MF.
- Gold Exchange Traded Funds
It is an open-ended Exchange Traded Fund which provides return that is in line with the return on investment in physical gold.
- Floating Rate Funds
These are open-ended income schemes which invest equally in floating rate debt instruments and fixed rate debt instruments.
Other Schemes
- Tax Saving Schemes or Equity linked Savings Schemes (ELSS)
Investments in these funds are exempt from income tax at the time of investment upto Rs. 1,50,000 per annum under Section 80C.
ELSS have a lock in period of 3 years.
- Index Schemes
Index schemes replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc.
- Sectoral Schemes
Sectoral Funds are those which invest exclusively in a specified sector(s) such as FMCG, IT, Pharmaceuticals, Infrastructure, petroleum stocks, etc.
While these funds may give higher returns, they are more risky compared to diversified funds as their portfolio is restricted to the specific sectors.
- Load or No-Load Funds
A load fund is one that charges a percentage of NAV for exit ie.
A charge is payable each time one sells units in the fund.
This charge is used by the MF for marketing and distribution expenses.
- Dividend Payout Schemes
As and when MF companies make profits, part of the money is distributed to the investors by way of dividends.
- Dividend Reinvestment Schemes
This is similar to the previous scheme.
However, the dividend declared is re-invested in the same fund on the same day’s NAV.
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Mutual fund basics
What is a Mutual Fund (MF)?
A mutual fund is a trust that pools money of like-minded investors with similar investment objective.
These MF schemes are managed by respective Asset Management Companies (AMC).
The AMC hires a professional money manager, who buys and sells securities in line with the fund’s stated objective.
The pooled money is invested in a diversified portfolio of securities including equity shares, debentures, convertibles, bonds, money market instruments or other securities.
Each unit of any scheme represents the proportion of pool owned by the investor (unit holder).
How do I get returns on a MF?
Returns on a MF are earned in the form of:
- Dividends- Unit holders earn dividends on MFs, which are distributed from the income generated through dividends on stocks and interest on other instruments.
- Capital gains- If the fund sells securities that have appreciated in value, it earns capital gains. These capital gains are usually distributed to investors.
- Profit from higher NAV- Increase in value of fund’s asset increases the NAV of the fund. An investor can make profit by selling back their units to the fund house.
What is Net asset value (NAV)?
NAV is the appreciation or reduction in value of investments which is regularly declared by the fund.
NAV per unit is calculated as:
What are the benefits of MFs?
- Diversification- MF portfolio includes a wide variety of investments in order to mitigate risks.
- Flexibility- MFs offer a variety of plans such as regular investment, regular withdrawal and dividend reinvestment plans. Depending upon your preferences and convenience, you can invest or withdraw funds, accordingly.
- Liquidity- Investors can buy or sell an open-ended scheme from the fund house anytime. Close-ended schemes too can be sold on the stock exchange. Few close-ended and interval schemes allow direct repurchase of units from time to time.
- Cost Effective- MFs are less expensive as compared to direct investment in the capital markets.
- Professional Management- MFs are managed by experienced and skilled professionals who research and analyse the performance and prospects of various instruments before selecting a particular investment.
- Transparency- MF fact sheets, offer documents, annual reports and promotional materials provide high degree of transparency.
- Return Potential- Depending on the investment portfolio, the MFs offer a chance of higher potential of returns.
- Choice of Schemes- There are wide variety of MF schemes available to suit each investor.
- Well Regulated- MFs in India are regulated and monitored by the Securities and Exchange Board of India (SEBI), which strives to protect the interests of investors.
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Max life: Success story of Madhusudan P Gad
Do I need critical illness insurance?
Critical illness (CI) insurance is a long-term insurance policy to cover specific serious illnesses listed within a policy.
If diagnosed with a serious illness, the insurance company will provide single lump-sum payment.
The payment is made when you survive a certain period (typically a month) after confirmation of the diagnosis.
You can buy a CI cover either for yourself or jointly with your spouse.
What is covered?
The number of critical illnesses varies from insurer to insurer. Most insurance companies cover:
- Cancer of specified severity
- Angioplasty
- Heart attack of specified severity
- Open heart replacement or Heart valve surgery
- Surgery to aorta
- Cardiomyopathy
- Primary Pulmonary hypertension
- Open chest CABG
- Blindness
- Chronic Lung Disease
- Chronic Liver Disease
- Kidney failure
- Major organ/ bone marrow transplant
- Apallic Syndrome
- Benign Brain Tumour
- Brain Surgery
- Coma of specified severity
- Major Head Trauma
- Permanent paralysis of limbs
- Stroke resulting in permanent symptoms
- Alzheimer’s Disease
- Motor neurone disease with permanent symptoms
- Multiple Sclerosis with persisting symptoms
- Muscular Dystrophy
- Parkinson’s Disease
- Poliomyelitis
- Deafness
- Loss of Speech
- Medullary Cystic Disease
- Systematic lupus Eryth. w. Renal Involvement
- Major Burns
- Aplastic Anaemia
What is excluded?
- Death within 30 days of diagnosis of CI or surgery.
- CI diagnosed within first 90. days from the inception of policy.
- HIV/AIDS infection
- Illness due to smoking, tobacco, alcohol or drug intake.
- Any dental care or cosmetic surgery
- Illness occurring due to internal or external congenital disorder.
- Critical conditions or consequences due to pregnancy or childbirth, including caesarean.
- Infertility treatment
- Hormone replacement treatment
- Treatment done outside India
- War, terrorism, civil war, navy or military operations
What are the benefits of CI plan?
CI benefit irrespective of hospitalization
Hospitalization is not required because diagnosis is enough to get CI benefits.
On submitting medical documents confirming diagnosis, you will receive a single lump sum amount.
Financial support
You can spend the money to pay for cost of your treatment, recuperation expense, clear any debts, pay your rent or mortgage, pay for medical bills or to adapt your home to your particular needs.
Tax-free payout
The one time lump sum amount paid on diagnosis of a serious illness is tax-free.
Protection against untimely death
In case of an untimely death, your nominee will receive the lump sum payout. However, this amount is paid only when you survive the 30 day period after diagnosis of an illness.
What to consider before you buy a CI plan?
CI plan does not cover hospitalization costs. The lump sum paid is as per your policy amount.
So you will still require a health insurance plan to meet these expenses.
Also, the policy has well-defined terms and conditions for diagnosis of an illness.
For instance, you need to undergo specific tests, by specific physician to confirm diagnosis of the illness.
Payout is made only for the specific illness (as per the severity mentioned in the policy). There are many illnesses which are excluded.
Do consult your financial advisor to help you understand the policy details before buying a critical illness plan.
For more information please visit http://www.fortunawealth.in
Pension plans
While retirement may seem distant for many, retirement security is as important as any of your other financial goals.
Due to rising cost of living, inflation and increased life expectancy, financial planning is essential to live a happy and comfortable life after retirement.
Pension plans or retirement plans are one of the tools available to build a retirement corpus.
Pension plan provides regular fixed monthly pension at the end of the period for lifetime. Investment is made by paying premiums to build a corpus which is invested in various funds.
Insurance companies, Mutual fund companies and Government provide pension plans with unique benefits.
For instance, Insurance companies provide pension plans with the waiver of premium rider or partner care rider.
In the event of an unforeseen calamity like death, the future premiums will be waived off.
The Insurance company will pay the future premiums on your behalf. This will ensure that your nominee receives the same pension till the end of the period.
Do consult your financial advisor to choose the appropriate plan as per your requirements.
Types of pension plans:
Immediate Annuity
In immediate annuity, the pension begins immediately. You have to pay a lump sum amount and your pension will start instantly.
The pension you receive will be based on the lump sum you have invested.
Deferred Annuity
In deferred annuity, pension does not commence immediately. It is ‘deferred’ up to a time, which is decided upon by you.
This implies that you have to pay the premiums till the policy term, after which you will start receiving your pension.
Premiums can be paid as single premium or as regular premium.
With cover pension plan
‘With cover’ plan provides life coverage which implies that in case of death, a lump sum amount is paid to your family.
However, the cover amount is not very high as major part of the premium is invested to build the retirement corpus.
Deferred annuity plans are available with cover.
Without cover pension plan
‘Without cover’ implies that you do not get any life cover.
In case of death, your family will receive the accumulated corpus till the date of your death.
Immediate annuity plans are available without cover.
Annuity Certain
The annuity is paid for a specific period as chosen by you.
In case of death before this period, your beneficiary would receive the annuity.
Guaranteed Period Annuity
Annuity is paid for certain periods whether or not you survive that duration.
Life Annuity
In a life annuity plan pension is paid until death.
If you choose ‘with spouse’ option, then in case of death, the pension is paid to your spouse.
National Pension Scheme (NPS)
NPS has been introduced by the government. The amount you save in NPS will be invested in equity and debt.
You have the option of withdrawing 60% of the amount at retirement and the remaining 40% has to be used to purchase annuity.
The maturity amount is not tax free though.
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