Note: While reading a book whenever I come across something interesting, I highlight it on my Kindle. Later I turn those highlights into a blogpost. It is not a complete summary of the book. These are my notes which I intend to go back to later. Let’s start!

  • You can avail of loans against a fixed deposit in case of financial difficulties. According to RBI regulations, the banks can allow up to 75 to 90% of the fixed deposit as a loan amount. The interest rate you have to pay for taking such loans will be just 2% higher than what you get from the investment

  • If you are in the higher income bracket, and you get 30% of your FD returns wiped out in taxes, it no longer leaves FD as a very good investment option. Assuming you earn even a 9% return on a 1 year fixed deposit, then after tax deduction, the returns are likely to be less than 6%, (which is definitely less than the running inflation of around 7%). This essentially means you are still losing money even if it continues to be kept in a fixed deposit created for a long period. Let us take an example. You can create a stream of 5-6 FDs each year (one FD every 2 months interval), and do this for 5 years and after the 6th year, when they start maturing, you can re-invest them at the prevalent market deposit rates. This makes sure that your rate of return from FDs is reasonably consistent over a period of time.As a long term investment, Laddering will give you an average return and help prevent your corpus from maturing at the lowest interest rate cycle. This concept of laddering applied to FDs is very similar to the concept of SIP (Systematic Investment Plans) applied to mutual funds or stocks

  • Non Resident Indians (NRIs) earning an income in India can also operate a PPF account. Contributions, however, have to be made from a Non Resident Ordinary (NRO) account

  • There is a minimum lock in period29 of 5 years and none of the invested money can be withdrawn prior to that. Even after the 5th year, a maximum of 50% of the amount invested in Year 1 can be withdrawn. You cannot make more than one withdrawal in a financial year. This does impose constraints on your liquidity if you are a mature investor but in the initial stages of your financial freedom journey, I feel this constraint is in fact a very critical aid because it gets you into the habit of letting your money grow and multiply using tools like time leverage and compounding

  • An EPF fund has been designed to help employees with some financial benefits upon his or her retirement or freedom. A contributing employee can withdraw the deposited amount completely, once he/she retires from service at the age of 55 years or when he or she gets financially free and decides to quit working.However, there are a few other options and ways that the employee can withdraw EPF funds even before retirement. Though the withdrawal is highly discouraged, one can withdraw any amount of up to 90% of the accrued amount if he or she is more than 54 years old.On the other hand, one member is entitled to withdraw the full amount if:He or she leaves India and settles abroad.He/She becomes financially free and retires from the job before reaching the 55 year age limit.The person retires because of mental infirmity or in case of individual or mass retrenchment.If EPF is good – safe returns, tax exempt, with employer also contributing – then it might just sound a great idea to increase your monthly contribution to your EPF account. Yes, that is possible

  • We have just seen that a provident fund is a mandatory arrangement by which you contribute 12% of your basic salary and the employer contributes an equal amount. On this total amount, you get a secure annual return of 8 to 10%.However, it is possible to invest more than the mandatory 12% into your PF account and get great returns on it. Not many have heard about this. If you haven’t, then welcome to the relatively unknown world of Voluntary Provident Fund (VPF).VPF is a safe option wherein you can contribute an amount over and above the EPF ceiling of 12% that has been mandated by the government. This additional amount enjoys all the benefits of a PF except that the employer is not liable to contribute any extra amount apart from the mandated 12%.An added advantage of investing through VPF is that the interest rate is equal to the interest rate of a PF and the withdrawal is tax free. The money invested in a VPF is also subject to tax relief under Section 80C, as in the case of 12% EPF money. The interest rate that you receive for the VPF amount is the same as what you get from the government for the EPF amount (normally 8%). The withdrawal on retirement is also tax-free.The maximum contribution you can make towards EPF+ VPF together is 100% of your basic salary and Dearness Allowance (DA).If you would like to invest in such a scheme, you need to instruct the payroll department of your organization to deduct a pre-decided rate over the mandatory 12%, every month. This will go into your VPF. It is left to you as the employee to decide whether you would want to go in for a VPF and how much over 12% (which can be up to 100% of your basic salary and DA), you want to invest. But your organization will contribute an amount matching only the 12%.However, the downside is that while you get good risk-free returns, you should be prepared to have your money locked in, till the time of your freedom. This can be a disadvantage for a mature investor, but a blessing for someone who is just starting to learn to invest and stay invested.In case you make a premature withdrawal from your PF account, (which holds both your EPF and VPF contributions) you will have to pay taxes on this withdrawal amount.Many PF accounts are managed by EPFO, but if your PF is managed through a company trust, it may not sound like a very attractive idea for your company trust to pay about 9% to 9.5% on your VPF, more so, if you do not have an upper ceiling to it. Therefore, many organizations underplay the idea of VPF. Companies usually do not encourage their employees because it would mean a higher interest cost for the trust

  • If the employer contributes in excess of 12% towards your provident fund (which the employer rarely does), then the employee will have to pay tax on that amount.You should be prepared to have your money locked in, till the time of your retirement, or emergency needs as described earlier

  • Both EPF and VPF are designed in a way so as to offer you good (approx. 9%) returns with safety and lock in. But things are slowly changing. 9% does not seem to be ‘good enough’ return now a days for a long term investment like Provident Fund. As of writing of this revision of the book, there are discussions and proposal going on from the government to dilute this model of Provident Fund. It is now being proposed by the government to invest a portion of the PF corpus to equity based investments. This allocation could be 1% of the existing corpus or 5% of the incoming corpus in PF every year. The decision of contributing a part of your EPF and VPF corpus to equity based investments has far reaching consequences in the long term. This change in the long held stand by the government demonstrates a few clear points:For a long term investment (10+ years), nothing can beat the returns of equity investments.Equity Investments are not “that” risky, especially in the long run. It tends to offer an extremely efficient risk-reward ratio.Having seen the positives of your PF portfolio being invested in equity, it may come as a breach of freedom for the reluctant investor, who wants to be 100% safe with his / her investments by investing only in debt based investments. A portion of your salary will mandatorily be invested in equity market now

  • Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. This relationship is important to understand. Those of you who have invested actively in stocks might have realized the inverse relationship between gold and the stock market. So, when you know that markets are doing well, it is time to start taking out money at a handsome profit and invest it in gold, because gold would typically go down at that stage. The opposite is also true.When the markets drop, investors typically lose trust in stocks and economies of the world and turn back to the most trusted and traditional investment i.e., gold

  • Although the price of gold can be volatile in the short-term, it has always maintained its value in the long-term. Over the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering. In fact, we saw it earlier that Gold is true money and rest everything is a derivative of gold

  • Gold Exchange Traded Funds (ETFs) are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold. In other words, investing in gold ETFs is investing in gold in dematerialized (demat) form.Gold ETFs are designed to provide returns that closely correspond to the returns provided by physical gold. Each ETF unit is approximately equal to the price of 1 gm of gold (or may be 10 grams of gold in some ETFs).Some of the clear merits of investing in gold ETFs over traditional investment techniques are as follows:ETFs are potentially cheaper as compared to other available avenues, like jewellery. In the latter, there is too much overhead in the cutting, polishing and other labour costs. These do not apply to gold ETFs.ETFs are quick and convenient to deal through your demat account. You do not have to go to the bank or the jeweler to buy or sell gold. It is as easy as buying or selling any stock. You can buy and sell at will.There are no storage or security issues with ETFs. Since you do not possess any physical gold, you eliminate all the risks associated with the up keep of the same.The pricing is transparent. The same prices are available to everybody. You do not have to worry about the price of the gold or its purity.Gold ETFs are listed and traded just like any other stock. You can buy or sell them through demat and trading online account or through the stock broker that you normally deal with for transaction of your other stocks. So, you do not need any additional setup to start investing in gold ETFs.They are ideal for a retail investor as the minimum size is 1 unit. This is the real booster for beginners and retail investors who want to make systematic monthly investments in gold. Imagine how difficult it would be to go to a jeweller and buy 1 gm of gold every month.Overall, gold ETFs are the best avenue from an investment and liquidity perspective as compared to other gold investment avenues

  • A balanced portfolio should have anywhere between 5 to 10% of the money invested in gold

  • Bonds trade in the open market, just like stocks. If you buy bonds with the intention of keeping them till maturity, then you may not be concerned how bonds trade in the market place. But if you intend to sell bonds before the maturity period, it is better to understand how bond trading takes place.Let us say that after 6 months of purchasing the bond, the interest rates go up in the market, for some reason. If you have to sell your bond in the market under such circumstances, you would have to obviously bring the price of the bond down to cover for the lower interest rate that you are getting on your bond (which was fixed at the time of purchase of the bond) as compared to the market interest rate. The same logic holds good if the interest rates in the market go down. Thus the bond prices flow inversely with the market interest rates

  • National Savings Certificates (NSC) are like government bonds of specified period which pay interest. These certificates are bought from post office. These can be bought by individuals or jointly by 2 adults and not by Companies, trusts and HUF. However, it cannot be bought by minors.The minimum investment is 500 and there is no maximum limit for investment. These certificates are accepted as collateral for taking loan. The certificate has a holding period of 3 years after which it can be encashed.Depending on the scheme of the bond you invest in, the rate of interest varies from 8.5% to 8.8% respectively. Investments up to 1,50,000 per annum in such government bonds are eligible tax benefits under Section 80C. However, the accrued interests are taxable as per the tax bracket the person falls into

  • Important factor to consider when it comes to real estate is the location. Unlike other investments, real estate is dramatically affected by the condition of the immediate area surrounding the property and other local factors.Several factors need to be considered when assessing the value of real estate. This includes the age and condition of the property, improvements that have been made, recent sales in the neighbourhood, changes to zoning regulations, etc. You have to look at the potential income a house can produce and how it compares to other houses in the area.Investment in real estate makes very logical sense because it is not only your invested money that goes up, but also the money invested by the bank on your behalf from which you can profit. Let us consider the following example to illustrate the above point.Let us say that you purchase a home for 50 lacs. You make a down payment of around 20% and obtain the remaining 80% on loan from a bank. This essentially means that you invested approximately 10 lacs and the bank has invested 40 lacs. Now, let us assume that the property you bought appreciated by approximately 10% in a year. If you have timed your purchase perfectly, the appreciation may be much higher. Considering even this conservative increase, in rupee terms, the appreciation in one year was 5 lacs.Let us also assume that you pay an EMI with annual rate of interest of around 10% to the bank. If you bought property that could be rented out, you can easily cover at least 50-75% of your EMI from Day 1. That leaves us with the bank EMI interest rate of approx 2-3%, which has not been covered by the rent. In rupee terms, this comes to around R1 lac in Year 1.So the picture after Year 1 is as follows: You invested 10 lacs and if you decide to sell after Year 1, you can sell the property at 55 lacs. If you return the principle amount of 40 lacs and Year1 EMI interest of 1 lac, to the bank, you are left with 14 lacs. Now, that is a return of 40%. The appreciation that you received was not only on your amount but also on the investment of the bank’s part. This amount can be much larger if you time the investment and the location. Remember that the rent and the appreciation in the price of the property are larger in locations where there are more job opportunities.When I invested in real estate around 12 years back, I never had this strategy in mind. It was just by sheer chance that I timed a good investment, which has grown more than 7 times in the last 12 years. I have not even considered the returns it is going to give me once I decide to sell the same.This kind of mortgage or loan or debt that creates an asset for you is also termed as “good debt” by many financial planners. This debt is good because this debt acts like an asset since it pays you more than it takes from you

  • Typically life insurance should be purchased with the intent of a secure future for the family and never with the intent of high returns on the invested amount. In case your goal of buying life insurance is to put some money aside for investment, there are far better ways to do so without having to pay such high commissions to the insurance company.There is only one kind of life insurance that makes sense for the vast majority of us and that is term life insurance policy. This typically takes the minimum insurance premium to provide maximum security but does not give you any returns. My wife has been a registered insurance provider with one of the leading life insurance provider companies and we know the ‘ins and outs’ of the types of insurance policies. Term Insurance is the best “value for money” as far as financial security is concerned

  • After you have secured your wealth from the risks to your own life (by taking a life insurance policy), the next worst thing that can happen to you is loss of your health. We all know the kind of expenses that we may have to part with, over and above the mental trauma, if you or one of your family members suffer from any health related issues and needs hospitalization. Thus, it becomes prudent to insure your and your family’s health by taking a health insurance policy.For those who are working in jobs, please do check with your employer. There are high chances that you already have an existing health insurance policy for which the premiums are either being paid by the company or being deducted from your salary.There is a growing buzz around health insurance and there are many insurance providers you can approach. One of the primary criteria that you must keep in mind before selecting your health insurer is its claim settlement track record, over and above the premium, hospital network etc. Get around, talk to your network of friends and family and get to know ‘on the ground’ facts about the insurer before getting into this health agreement

  • The next big threat, after life and health, to you and your financial nest egg is the risk to your home via thefts or natural disasters like earthquakes, floods, lightening, etc.Rebuilding the house or its contents is an expensive affair and without a good home insurance, it might get extremely difficult to cope up. Apart from this, there are other benefits of having a home insurance, namely:To recover from natural and man-made hazards–Home insurance covers your house against damages done due to natural hazards such as earthquakes, floods, lightning etc., or by human acts such as vandalism/ thefts. It also equips you financially to recover from the loss and rebuild your home.Covers temporary living expenses–The Home insurance company will pay your expenses if you need to rent another apartment or move into a hotel temporarily, until your home is repaired/ rebuilt.Make up for the loss/damage to your assets and personal belongings–This covers not just the structure of your home but also your personal belongings including jewellery, clothing, appliances, furniture and much more.Protect against liability–Liability coverage in such policies provides coverage for personal injuries or property damage to others for which you or members of your family living with you may be legally responsible. For instance, your dog bites a neighbor or your tree falls on a neighbor’s fence, if you have liability coverage then your insurer will pay for the expenses, thus protecting you from any possible legal problems.To avail house loan from banks – Many banks lend out a home loan on a pre-condition that the loan will only be approved if your home is insured. Home insurance, in fact, is a preliminary requirement to be eligible for a home loan in many cases.There are enough reasons to go and insure your home. You are buying peace of mind when you cover such risks in life. A peaceful mind can focus better on building wealth and creating income generating assets

  • For those of you who travel often or even if only during holidays, it is important that you cover multiple ‘financially heavy’ risks associated with it. Some of the risks that Travel Insurance will cover for you at an extremely affordable premium would be:Accident and medical treatment need in a foreign land, which can otherwise be extremely draining on your financial nest eggLuggage with valuables lost during transitTrip cancellation in case of emergenciesNatural calamities in a foreign land forcing you to short close your trip or cancel it altogetherThere is a famous saying that if you cannot afford travel insurance, you cannot afford to travel. So, get insured before you proceed.Of course, you can get a little prudent before signing up for your travel insurance deal by considering facts like your health insurance might have already covered you for your treatment abroad or your home insurance may have covered you for your belongings while travelling, and the fact that you may already have a personal accident cover or a rider in your existing life or health insurance policy.Understanding the details of your existing insurance policies will help you take an informed and wise decision.We covered most of the important insurance needs. Keep in mind that it is as important to protect your wealth, as it is to build it, if not more. If you cannot protect it, you may as well not build it

  • Eight Steps to Financial Freedom Planning
    • Step 1: Establish your Cash FlowCalculate your cash inflow (what you get every month) and outflow (what you spend every month)
    • Step 2 : Identify your Assets, Liabilities and Net Worth. Calculate your Net Worth as of now, counting all possible assets and liabilities
    • Step 3 : Create a High Level Financial Freedom PlanIdentify your Special Life Events, estimate and assess the size of your nest egg, which will be adequate to sustain your expenses and taxes, as well as take care of inflation for the rest of your life. Establish the time needed to build this nest egg, starting today
    • Step 4 : Create a Detailed Financial Freedom PlanCreate a month on month portfolio plan that ties up with your high level financial freedom plan in Step 3. This should allow you to track your journey month on month
    • Step 5 : Execute your Financial Freedom PlanOnce you have a monthly plan in place, it is time to execute it. For each asset class in your portfolio, execute your plan considering vital tips from me, based on my experience in this journey
    • Step 6 : Track your Financial Freedom Plan monthlyTrack the monthly nest egg target against the actual nest egg value on a regular basis and make sure that you stay on track
    • Step 7 : Tune / Rebalance your Portfolio every yearUse trends based on the last year and previous years to see which part of the portfolio is giving best returns, and make your next year’s investment decisions based on that
    • Step 8 : Celebrate milestones with your familyCelebrate each milestone during your journey with your family and friends and give yourself a pat on the back
  • Please keep a note of the following points while listing down your assets:Count only those assets which you can liquidate in your lifetime to fund your expenses or to earn better returns on your investments. Therefore, the house where you live, the car that you drive are not considered under your Assets list (though they do have resale value).Gold becomes a very debatable point as an asset. You should count only that portion of Gold under your assets list, which you are ready to liquidate in this lifetime. If you want to leave Gold for your next generation, then it is not counted as your asset. Rather, it will be the asset for your next generation.Expected assured returns from your life insurance policies can be counted under your assets after suitable adjustment for Time Value of Money. Take care that you only count the ‘assured’ returns on ‘maturity’ of policy as your asset amount rather than expected bonuses or the risk cover. Policy premiums will be counted as Liabilities.Possible future inheritable real estate / other assets can be counted as your Assets. However, ensure that you count only ‘your’ share of such assets

  • Please keep a note of the following points while making a list of your liabilities:Any liabilities like pending loan EMIs, life insurance premiums are all counted under Step 1 (Expenses) unless the remaining tenure for these EMIs or premiums is short term (less than equal to 5 years). In such cases of short term time limited expenses, you should include them under ‘Liabilities’ and NOT under Step 1(Expenses).Take care that your outgo should appear ONLY under ONE of the heads – either under Step 1/Expenses or under Step 2/Liabilities, depending upon whether it is a long term ongoing expense or a short term expense respectively. In no case, should your money outgo appear under both heads.As an example, if you have a pending loan EMI of 10,000/- per month and the remaining loan tenure is 3 years, then this EMI will NOT be counted in Step 1/Expenses, rather a total liability of 3.6 Lacs will be added in Step 2/Liabilities

  • Assets minus liabilities give you your financial net worth

  • While choosing the FD maturity option, look for a cumulative deposit option rather than an interest payout option. It is important to leverage the benefit of compound interest. In an interest payout option, interest keeps coming back to you in quarterly or half yearly periods. This leads to interest not participating in cumulative growth and you have a higher probability of using the interest on “other unwanted expenses”

  • You need to purchase gold ETFs or the new government backed gold bonds. For this, as you have already seen, you will need to open a Demat account.Once you have a demat account, start buying 1 or 2 units of any of the gold ETFs at regular intervals or at dips. I have personally invested in HDFC gold ETFs and Goldman Sachs Gold Funds.Keep investing in gold at regular intervals and then stay invested because gold in your portfolio is a hedge against inflation. Its price will keep you at par with the depreciated value of money based on inflation.After about 40 months on my journey, I could relate rough patterns in gold price trends. Gold prices also have their own significant peaks and troughs if you ignore the day today price fluctuations. In the long run (spanning 3–4 years), gold has always stayed at par with inflation, but careful study of short-term patterns i.e., over a few months, is very interesting. Once you understand those patterns, you can utilize them to your advantage to maximize your returns from gold

  • A few real estate tips from my experience:Do not wait for an ideal price. Just like the stock market, don’t try too much to time the real estate market. Get into it as and when you are comfortable.Do not expect quick gains. Similar to stock market, you need to spend time in the real estate market. In fact, the real estate cycle has a much wider wave length than the stock market cycle. Liquifying your investment is also not a child’s play here. So, be ready to block your money for 10–15 years before you plan to invest in this segment.Do not factor in tax gains before hand. There have been many cases of delayed possessions, which makes it impossible to claim tax benefits.Opt for term insurance rather than home loan insurance to cover your loan paying back risk

  • As your wealth grows, you need less of Life Insurance. Reason is simple. With increasing wealth, your family’s financial security is less dependent on you and more on the accumulated wealth. Of course, this assumes that your family’s monthly expenses do not increase multiple folds during this time. Therefore, it is important to keep assessing your Life Insurance needs from time to time – say after every 3 years.Do not just rely on low premiums. Choose plans with maximum term and age coverageBuy online term plans only. They are at least 25% cheaper

  • Short-term capital losses can be set off against both short-term capital gains as well as taxable long-term capital gains.This can be especially useful for someone who has booked profits on gold ETFs and physical gold. Suppose you have sold some property and made a long-term capital gain of 30 lacs after indexation.At 20%, the tax payable on this long-term capital gain is 6 lacs. However, if you have also sold some junk stocks during the year and made a short-term loss of 3 lacs, you can set this off against the gains from the property. Then the gain from the property will be reduced to only 27 lacs and the tax payable will be 5.4 lacs. Looking at it from another angle, you can use this opportunity of LTCG to sell off some junk stocks that you may be carrying.However, the law makes a distinction here. One cannot set off short-term gains from stocks against long-term capital losses from the other assets. Long-term capital losses can only be set off against taxable long-term capital gains

  • The principle repayment of a home loan qualifies for deduction under section 80C; the interest payable on the home loan is allowed as deduction under section 24 of the act.The deduction in respect of the interest is available in full for properties that are treated as let-out, but in case of a property treated as self-occupied, the amount cannot exceed Rs 2.0 lacs per financial year, subject to certain conditions.However, you cannot claim interest deduction when the flat is under construction. The interest paid during the pre-construction period can be claimed as a deduction in five equal installments starting from the financial year in which the construction is completed. Where the property is jointly owned, with the share of each owner being definite, the net taxable annual value of the property is apportioned to each of the joint owners in the ratio of their share in the property. And, as the shares are definite, each holder is eligible to claim a separate deduction in case the property is jointly owned

  • Routine health checkups are tax exempt upto 5,000 per financial year. Make sure you don’t miss out on this. Study Section 80D of Income Tax Act to understand it in depth

  • Most of us do take out time for at least one vacation in a year with our family. While this is good, so many times we just fail to take the tax benefits provided to us by the government. There can be various reasons for not availing tax benefits like these. Either we are afraid of the paper work, or we are too busy otherwise, or we do not realize the importance of saving taxes or it may be just that we are not fully aware of the rules pertaining to Leave Travel Concession (LTC)/Leave Travel Assistance (LTA).LTA can be claimed twice in the block of four years. That means you can claim two times in the specified block. This window of 4 year blocks are predefined by the government. These are:2002 – 20052006 – 20092010 – 20132014 – 2017 And so on. The current block is 2014 – 2017.The maximum eligible amount for LTA is 50,000 for each journey. So, do plan out the next vacation but do not forget to take the tax benefits available under the governments LTA / LTC policy

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