Market Update: Markets in the new year have continued to be volatile, with FIIs (Foreign Institutional Investors) exiting with over Rs. 17,000 crores, domestic investors have kept momentum by investing over Rs. 12,000 crores, buying on dips in the market.
Inflation eased to 5.72% in December. Q3 results have started to roll out for listed companies. HUL (Hindustan Unilever) published their earnings yesterday, and it was indicated that there are positives in rural demand, but there is still a long way from where it was pre-pandemic.
On 1st Feb, our Finance Minister (FM) will present the budget, which will be followed with keen interest, it attempts to keep GDP growth high, while attempting to increase private consumption, attract investments, fight off inflation, push for manufacturing and balance the level of govt. debt and narrow fiscal deficit.
There are a lot of expectations and it certainly isn’t an easy job for the FM to please one and all.
We cover two main points on making an effective financial plan. Get in touch with us for making a plan for you. Do visit us at jrswealth.org for information on our products and services.
Jan 2023
‘He who fails to plan is planning to fail’
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PREPARING YOURSELF FOR RAINY DAYS
Even though the COVID-19 global pandemic began more than two years ago, we are still feeling the effects and disruptions in our lives. If we've learned anything from COVID-19, it's that the only thing certain in life is uncertainty.
It is a fact that unexpected events occur. You can sit down and make all sorts of financial plans and budgets but life, on the other hand, has its way of striking. Whether it's a medical emergency, a major home or vehicle repair, a death in the family, or any other unexpected event, your finances are thrown out of the window. These situations can be emotionally as well as financially draining. Even the most meticulous planners can be caught off guard by an unplanned or unprepared event.
There is no way to predict the future, but the best way to deal with them is to be prepared for the unexpected ahead of time. Just as you should adjust your plans to accommodate unexpected weather, you should also have a financial backup to accommodate unexpected expenses. Here are five tips to help you deal with unexpected expenses and be better prepared for a rainy day.
1. Tighten your financial belt
As a general rule, for wealth creation and financial freedom, we need to save aggressively over a short period of time. People looking to retire early, need to cut expenses and save more in a short time. Cutting down on your expenses becomes avoidable if you feel that your financial situation is not good and if you feel that there are tough times ahead. To stay prepared for such a situation, one needs to cut back on non-essential and discretionary expenses. Examine your spending habits and make a note of any such expenses you could forego. It will make you save more and make your cash last longer during a crisis. Frugality, minimalism and short-term sacrifices, to the extent you feel comfortable, will surely pay off in the long run and save you in your rainy days.
2. Set up an emergency fund
The primary step in preparing for a rainy day is to set aside a sufficient emergency fund. When unexpected expenses exceed your monthly budget, an emergency fund can help you stay afloat.
There is no universal measure for emergency funds. As a general rule, save at least three months' worth of your regular expenses. This amount of money cannot be saved overnight. The trick is to start saving small amounts regularly and consistently so that you can accumulate your desired amount over time. Even if you can only save a small amount, it will give you a sense of security if you need money right away. To avoid being tempted to spend your emergency fund, keep it in a separate savings account.
3. Get adequate insurance coverage
It is easier said than done to protect your loved ones and prepare for the worst-case scenario, but it is critical in today's world to be prepared for the unexpected. It is vital to ensure that you have sufficient insurance coverage for all possible scenarios. To help mitigate the financial impact of any unexpected event, people of all ages and income levels should purchase insurance policies as required, covering the different risks that they are exposed to. This includes the risks of the 4 Ds' - death, disease, disability and damages.
Apart from life insurance and health insurance, one must also explore other insurance covers like personal accident, critical illness, travel insurance, global health insurance, etc for personal coverage. In addition, vehicle insurance with comprehensive coverage, home insurance, shop-keepers insurance, fire & marine insurance, professional indemnity, etc can also be explored on a need basis.
4. Have a passive or secondary income
Sometimes, the salary from your primary job is not enough to make ends meet. So, having a side hustle or a passive source of income pays off. As a result, you can save and invest the money you earn from them to create wealth, an emergency fund or to fund your discretionary expenses, without affecting your monthly budget. It is an excellent way of improving your financial security and hedging against your primary income source. Having multiple income sources can be a boon in times of crisis and it is something everyone should aspire for.
5. Have low liabilities
It is always better to have low liabilities and debt, regardless of your financial situation. As a general principle, your monthly debt repayments, or EMIs, should ideally be lower than 30% and never more than 50% of your net income. Having too much debt can lead to a cycle of overwhelming stress and the inability to save for future financial security. With credit easily available, most of us would be tempted to fall into the debt trap, spending more on non-asset creating, personal and consumer loans, at the cost of future wealth creation. In times of financial difficulties, your debt burden will be the primary cause of high stress on you and your finances.
Summing Up
You don't require any crystal ball to be prepared for unexpected events you couldn't have predicted. You don't need to know where they will occur, or even what they do, to protect your personal finances and safeguard your financial goals. The above things can help you not just tide over bad times and situations of financial stress but also prepare you to face uncertainties in life with confidence. As the new year starts, let us step up our finances and indeed our financial objectives and behaviour and set the right tone for the rest of the year.
UNDERSTANDING & USING SWP EFFECTIVELY
Saving and investing is a big part of financial planning. Sometimes, even planning for your spending and cash inflows becomes a vital component of financial planning. If you are looking for regular and predictable cash flow from your investments then the automatic choice for most of us would be bank fixed deposits and postal deposits. However, lower interest rates on these schemes have made people worry about their future income needs.
Against this backdrop, Systematic Withdrawal Plans (SWPs) offered by mutual funds can be a great choice for investors looking to generate cash flow from their investments at a regular frequency.
Now, let us delve deeper to know more about SWP.
What is SWP?
Most of us are aware of SIP (Systematic Investment Plan) for creating long-term wealth. The SWP (Systematic Withdrawal Plan) is like the reverse of SIP wherein instead of investing money at regular intervals, investors withdraw/redeem a fixed amount from a scheme in an automated way.
Planning for a phase of life wherein you are dependent on cash inflows, for whatever purpose is an important element of financial planning. The SWP serves as a perfect tool in such a scenario. Usually, the investor would make the initial investment in the chosen fund (fresh) and then plan for SWP, either immediately or starting at a later date. The investor has the flexibility to customize the amount and the frequency of withdrawal and the period of withdrawal - fixed instalments or till the balance is available in the fund. The underlying fund would continue to grow, generating wealth for the investor, helping beat inflation and making sure that the fund lasts longer and the SWP continues for a longer period of time. The SWP is also a smarter and more tax-friendly way of withdrawing money and financing your needs.
When can SWP be used?
1. Retirement planning /creating own pension
A very common scenario and purpose of SWP would be retirement planning. Here, the investment would be normally made in a hybrid scheme which has a mix of both primary asset classes - equity and debt. While equity is for the long-term and debt is usually for the short term, the hybrid fund provides the ideal combo for financing retirement needs. The equity portfolio of portfolio will give that extra boost to the fund to grow and last longer. However, the choice of the fund category and scheme would depend on how much risk you want to take and how soon you wish your SWP to start (investment horizon). Regardless of where you invest, an SWP can be smartly used as your own pension /annuity product.
2. Creating a secondary source of income
A SWP can also be started in financial situations where there is a temporary need to supplement your monthly income. The recent pandemic saw people losing jobs and having a cut in their regular income. If you have adequate investments already with you, an SWP could be used as a tool to tide over your unplanned financial stress. Note that in times when you have surplus cash inflows, aggressive savings should be done using SIP instead of withdrawing with SWP.
3. Meeting specific cashflow needs for someone
Another smart use of SWP would be in scenarios where you invest and dedicate a corpus for a specific objective/regular expense and an SWP is created to finance the same. The corpus would keep growing slowly while small withdrawal amounts would be credited to the bank account and from this, the intended expenses would be met. Even these expenses can be automated to ease your life. As an investor, you would only need to keep track of the fund balance from time to time and replenish it, if required. There can be many scenarios where such an approach can be used in financial planning. A few examples are cited below.
- Investing on behalf of children and then having SWP for education fees and pocket money.
- Investing on behalf of the wife and then having SWP for monthly household expenses, utility bill payments, etc.
- Investing on behalf of dependent parents and then having SWP for meeting their expenses.
The right withdrawal rate
This is an interesting question. What should be your sustainable or safe rate of withdrawal in order to make sure that your fund lasts for the required period of time and even longer? A complementary question would be, what should be my investment corpus to have the desired stream of money last for the required period of time? This is in fact at the heart of everyone trying to retire early and for those who are reaching retirement soon.
The withdrawal rate is the percentage of corpus you intend to withdraw every year. So, a 4% rate would mean that you are withdrawing Rs.1,00,000 every year (Rs.8,333 monthly) on a corpus of Rs.25 lakhs. Obviously, the lower the withdrawal rate and the higher the investment corpus, the better. Also, the expected returns from the fund also matter in replenishing itself and growing to finance withdrawals for a longer period of time. Usually, experts have pointed out that a 3-4% rate is safe but there are also critics who say that it should be lower to account for uncertainties and living standard improvements. The rate of withdrawal on your SWP should be such that it makes sense and is as per your needs, else a higher rate would mean that your corpus gets exhausted too early, living you stranded.
Benefits of SWP
A] Rupee Cost Averaging
Just like SIP bring discipline in investing, SWP brings discipline in withdrawals. You also benefit from rupee cost averaging with SWP, since a fixed amount is redeemed on a regular basis and one is not too concerned about market volatility. When market conditions are favorable, fewer units will be redeemed and when conditions are adverse, more units will be redeemed. With SWP, redemptions will be spread out evenly and it will protect you when redeeming a large amount at a time when markets are low.
B] Tax Benefits
The amount withdrawn in an SWP consists of both the original investment (on the earliest date) and the capital gains on it. The liability to pay tax is only applicable to the capital gains component and not to the entire amount on First-In-First-Out (FIFO) basis. Moreover, no TDS deduction is applicable for investors on SWP withdrawals, unlike FDs. However, based on the type of scheme and withdrawal amount, capital gains tax will be applicable. Capital gains are subject to flat tax rates and not based on your tax slab.
To Conclude
SWP in mutual funds is an efficient way to have a regular source of income. However, SWP must be carefully planned with your financial goals and objectives in mind. Unplanned SWP implementation may jeopardize your financial wealth and objectives.
To plan your investments, seek the advice of experts whose wealth management strategy will benefit you in the long run. They provide investment in a variety of asset classes and manage your investment portfolio so that you can enjoy the returns without having to worry about anything.
