How To Keep Your Money Safe
8 ways to protect your wealth and grow it
May you live in interesting times' is rumoured to be a Chinese curse. Whether or not it is, no one would disagree we live in such times. Consider the events that lead us to 2017 -- Britain voting to leave the European Union, Donald Trump taking over as President of the United States, repeated terrorist attacks across the world and, at home, demonetization and a slowing economy. All this leaves us with a gnawing sense of uncertainty. What next, we think with trepidation. And, is my money safe?
Should you clutch your treasure chest waiting for the tide to turn, then? "Risk and returns are two sides of the same coin," says Gaurav Mashruwala, Mumbai-based certified financial planner and author of Yogic Wealth. "Inflation, taxes, government policies, geo-political situations and economic cycles affect all investments. The day you part with your money, you have taken a risk. This does not mean you should not invest. In fact, not investing is a risk in itself. But an understanding of risk will help you protect your wealth and generate higher returns," he says.
So, take heart, dig in your heels and heed the advice of these financial planners. Here are eight ways to protect your wealth and grow it.
Don't Just Let It Sit There
When I started working I let my salary accumulate in my account, confident that it was a smart move. I was 22 and with no real expenses or financial obligations. I watched my bank balance grow and earn 4 per cent interest annually. Then, I learnt that my savings were losing value to inflation -- at around 8 per cent. I was missing out on the opportunity of earning better returns by investing wisely. In fact, the bank was making money off me! "While it is good to inculcate the habit of saving at the beginning of your career, saving alone is not enough," says Dhirendra Kumar, founder and CEO, of the New Delhi-based Value Research. "It is what you do with your savings that will help you stay ahead."
Stay Ahead of Inflation
You must save as much as you can, but inflation, which results in a sustained increase in the price of goods and services, will make any money you save today less valuable over a period of time. Imagine what things will cost when you are retired, 20 or 35 years from now (or what they were 20 years ago). Most people put their money in 'safe' bank fixed deposits (FDs). Yet, the 6 or 7 per cent interest you get from an FD will not help your wealth grow. Post demonetization, the banks are flush with money and reducing FD interest rates. So what do we do? One good thing about the financial world is that when one window closes another opens. Kumar suggests looking at debt mutual funds that invest in bonds or dynamic bond funds for short-term goals, "where your returns increase inversely as interest rates fall".
Interest rates have been falling for borrowers throughout 2016, even before November, and that is expected to continue. Last year, the best of such debt mutual funds returned over 17 per cent, according to Value Research. While that may not happen every year, the average returns of such funds over a long-term period of five years are around 12 per cent. Remember, FD interest is taxable. You can, however, save a lot of tax (or pay none at all) with debt mutual funds held for three years or longer, as you can adjust your gains against inflation, with a simple calculation known as 'indexation'. If, for any reason, your gains did not keep up with inflation, you are allowed to carry forward such differences as capital loss against capital gains you might make on other investments, like shares or property you may have sold. Your tax consultant can help you unravel this further.
Debt is not a bad thing, if used correctly. Almost the entire business world survives on debt. Banks run because they borrow money from you at 4 or 8 per cent (from savings accounts and FD). They then lend money to companies, and to you, at maybe 11-14 per cent, depending on the kind of loan it is. Distinguish between good and bad debt. So, an education or home loan is good, but credit card debt or a personal loan (to buy something you could live without) is expensive.
Bengaluru-based certified financial planner Dilshad Billimoria says newly graduated 20-somethings should focus on clearing their education loans and avoid lavish expenditure. That's what we did after taking an education loan for my brother's masters in the US. After his graduation, his earnings were aligned to the goal of paying off the education loan. Last October, he paid back the loan, before the five-year repayment tenure. This helped save on the 14 per cent interest he was paying, and the experience taught us the importance of working towards a financial goal.
'Share' Calculated Risk
What about the stock market? It is a scary proposition, especially when there are so many stories of people incurring huge losses. Gurgaon-based management consultant Nitin Upreti, who is turning 30 this year, made heavy losses in derivatives -- high-risk stock or commodities trading, especially for newbie or amateur traders -- that wiped off five years worth of his savings in a day.
But now, fixed-income returns are just as risky, says Dhirendra Kumar. "There is a certain legacy associated with fixed-income generating assets, as the earlier generation believes in it. But with changing policies, as the government tightens its grip on the finance and tax systems, people depending solely on fixed-income returns are going to be in deep trouble. Our personal inflation is not going to come down," he says.
So, it's always good to buy into good stocks when the markets are down, at a time when nobody is buying and everybody's selling. Hold on to them and see their value rise when the markets move up again. "If you're not sure of what stocks to buy or do not have the time to study individual companies, invest in long-term equity mutual funds (MFs)," says Mumbai-based Debashis Basu, chartered accountant and editor of Moneylife. "It is unfair to expect every individual to be interested in finance and know what to do with his money. What is lacking is a principled approach from market players where one would be told what would happen to his money if he invests in a particular product -- what the risks and returns are," Basu says. "People burn their fingers by investing in products they do not understand. They are often lured into these by those who earn commission selling them. The bad impression lingers and people become averse to market-linked products and continue to opt for those that give low, yet guaranteed returns."
Talk to those who invest for the long term in the stock market and you'll get a bright picture. The risk is high if you buy the best of companies only to hold them for a few weeks or months. But that risk reduces over a few market cycles over many years. "Overall, the Indian stock markets have returned a good 10-11 per cent compounded annually over a 10-year period, despite the ups and downs," Basu says. If you are unsure, he suggests investing in index funds that replicate the performance of a market index, as they give better returns than FDs.
You could also opt for a systematic investment plan (SIP) where you invest a fixed amount of money every month regardless of market fluctuations. You can sign up with an MF and make the purchases automatic. You may also stop when you like. This can be a disciplined approach for busy people, as you invest before spending every month -- definitely a wiser alternative.
However, be warned. People who lose money in stocks are usually those who buy high and sell low. So, if I bought stocks of, say, the technology giant Infosys for Rs 1,260 in June last year but sold it now for Rs 970, the price for it in January, I'm the loser. If I did not sell, the loss is notional and I have the option of buying it at a discount while looking at better days ahead. Yet, in 1993, anyone who bought just 100 shares of the then little-known Infosys at Rs 95 per share, as they first hit the market, would have -- thanks mainly to generous bonus shares issued by the company from time to time -- stocks worth almost Rs 2.5 crores. These investors would also have earned millions of rupees as dividends (Rs 6.46 lakhs in 2016 alone)! Long-term investing in a good company can pay that well.
Likewise, think long term with mutual fund SIPs. If you stop investing monthly when the market is down, you could lose money however, your gains get compounded if you continue investing. Chandigarh-based Gursimran Brar started investing in SIPs in 2007 when he was just 19, putting away Rs 1,000 every month. He had some money saved up while he was studying law and working part-time. "The 2008 recession actually worked for me. I was able to buy more units of the fund as the net asset value had dropped significantly," says Brar, now a legal counsel at the Asian Football Confederation, Kuala Lumpur.
Don't invest all your money in equity; if you are young, it helps to invest a larger percentage of your savings there, as you can give it more decades to grow. Kumar's advice is to be a little adventurous if you are in your 20s, 30s or even 40s and have years before you retire. "Take some risks and opt for more volatile investment that will potentially give you more returns in the long term," he says. However, if you are retiring in the next few years, depending on your circumstances, invest in a conservative manner, he adds.
Plan Your Goals
Always look at big-ticket expenses (child's education or marriage, retirement) that you could incur over the years. Keep aside money for contingencies and have a plan for a fixed monthly income after retirement (through pension, post office or mutual funds monthly income plans, senior citizen savings schemes, FDs and bonds).
"People often think they'll clear their loans by digging into their retirement corpus, but that's a bad idea," warns Mashruwala. "It is best to clear your loans while working, but leave the corpus untouched so that it lasts and grows. Ideally, it should be invested in products that generate inflation-beating returns."
The 2016 Global Benefits Attitudes Survey by global advisory, broking and solutions company Willis Towers Watson suggests that 56 per cent Indian employees anticipate their retirement will be less comfortable than their parents' generation. Almost 54 per cent worry about their future financial state. Prudent planning will keep fears at bay and the key is to set your goals and have strategies to achieve them.
Brar did start investing young, but did not have a plan in place when he and his wife were expecting their first baby last year. The 29-year-old was flabbergasted to see a hospital bill of Rs 2.73 lakh, and it did not even cover the cost of medication and vaccinations.
It is best to talk to new parents and look at hospitals to see the expenses you'll need to plan for, before the baby arrives, suggests Prerana Salaskar Apte, partner at The Tipping Point, an investment advisory firm based in Mumbai. Also plan for the baby's first year. These short-term requirements, Apte says, should include hospitalizations, sonographies, vaccines for the first five years and other costs.
"Since this is a short-term goal, the best option would be to start saving in recurring deposits. Look at long-term investments to plan a better future for the child," she says. Public Provident Fund (PPF) or the Sukanya Samriddhi Scheme for a girl child are low-risk options worth considering. They come with a lock-in period of 15 years with an interest of about 8 per cent compounded annually. Brar recently invested in an LIC policy that will not only give good returns when his daughter turns 25, but also offer him life cover during this period. "I realize that if I want to give my baby the best, I will have to start keeping aside money now," he says.
Dhirendra Kumar suggests having a systematic disinvestment plan as well. "Say, you have an SIP for your child's education. Start disinvesting three years before you actually need the money. Remember, if you do not withdraw money at the right time you may not have it when you need it the most," he says.
Mumbai-based Udayan Jain, 49, who works as a business head at an Indian corporate, planned something similar for his three daughters. He started putting away money for their education, starting with his eldest daughter after she turned three. He started with LIC plans, gradually moving to SIPs. "The investment helped and I will be able to pay the first instalment of my daughter's MBA fee without feeling the pinch," he says. He also has dedicated investments for their weddings and his retirement. Like most salaried individuals, he feels investing in a second home is a good idea. "After taking care of my responsibilities, I will have my provident fund, gratuity and superannuation savings to fall back on," he says, adding that renting out a house will help him gain a steady monthly income post retirement, especially since real estate prices appreciate in the long run. For now, he plans to wait a couple of years to allow the market to stabilize post demonetization before he invests in a second property.
Mashruwala has a different take on depending on rental income for day-to-day expenses. He says, "Usually people look at the rental returns and compare them with the purchase price of the property. But this is not prudent. Ideally, you should look at the market value of the property and only then look at the returns. In all probability, if you sold the property and put that money in an FD or even in a bank account, you would get more returns than what you would from rent."
Investing in real estate is not a bad thing, he says, as its value increases in the long run. But it is best to be careful, as liquidity is low and maintenance cumbersome. It is easy to get cheated with fake or vague documents that are difficult to verify, so it's best to seek the help of a property lawyer.
Insurance Isn't Investment
"Most people think insurance is investment, but this is a misconception," says D. M. Venkateswaran, Chennai-based certified personal finance advisor. "While it is important to take insurance that covers health, disability, accident, life and property, you should only buy the cover you really need." You may not need life cover if you do not have dependents, but if you do, it is best to opt for the cheapest -- term life insurance. In case of an unfortunate incident, the sum assured will be paid to the beneficiary and will protect the family against financial loss. Its premium is low and it's important to have a term plan if you are the sole breadwinner, more so if you have a running loan.
Jain opted for a health policy as well, despite his employer providing him with medical insurance. The personal policy is for him and his wife in their old age after his retirement. "Healthcare expenses are skyrocketing and the costs involved in treating an illness can drain all your hard-earned money," he explains.
A word of caution: Beware of insurance advisors and agents more concerned with commissions, who can trick you into taking plans that are good for them rather than you.
Spread the Risk
Don't put all your eggs in one basket. Research carefully and diversify your investments, placing pre-decided amounts in different asset classes: equity, mutual funds, bonds, FDs and property. Not all of them are likely to lose value at the same time, as you will be distributing the risks in a calculated manner. If you are investing in equity, the trick is to build a portfolio of stocks from at least six to 10 different sectors, as all of them will not crash at the same time. Do not invest in the same kind of mutual funds either. "Your portfolio should not have heavy investments in one particular asset class or sector," says Mashruwala. Rebalancing and realigning your portfolio at definite intervals, according to your goals and risk appetite, is Billimoria's advice.
"The moment you are a tax payer, investing regularly is crucial. The idea is to reduce your tax slab," Kumar says. So his advice is to invest in tax-saving funds such as Equity Linked Saving Schemes (ELSS) that offer better liquidity with a lock-in period of three years, as against the safer PPF, which locks your money for 15 years. Both offer the same tax benefits, but even the worst performing ELSS funds should give you twice the returns as compared to a PPF. Nitin Upreti first puts aside money to save taxes. "Once this is in place, I proportionately invest my savings in real estate, long-term equity, mutual funds and medium- to high-risk bonds," he says.
If you are investing in stocks, Kumar recommends studying the company first to see if they have been able to grow it, make money and if the sales have been rising. As a new investor, opt for balanced funds that invest 70 per cent in equity and 30 per cent in debt. They offer a certain kind of stability and will never crumble completely. Divide the financial investments into different groups depending on the time frame over which you need the money. But, Kumar says, always set aside an emergency fund. A part of it can be kept at home and the rest in a savings account so it can be easily withdrawn if needed.
Upreti's loss in derivatives trading made him wiser. So when he earned a bonus at work three years ago, he used it as down payment on land. He took a home loan for the rest of the amount needed. "I like to be in control of my investments," he says, "and now I invest my money only in the financial products I understand."
For many people, overspending is a bad habit. They buy things they can do without, often with credit cards so that they can delay payment and pay interest at over 3 per cent per month or over 40 per cent a year! Some own multiple credit cards. Always remember the words of the world's best-known investor, Warren Buffett: "If you buy things you don't need, soon you will have to sell things you need."
There are innumerable examples of people ending up with no savings or selling even inherited property or assets in order to survive. Financial experts will tell you that the small stuff adds up and acts like a leak. Says Moneylife's Basu, "While people are earning more, they are saving less and splurging more. Most of them do not estimate the huge requirement of money after they have crossed 60." But as lifespans lengthen, the need for money between the ages 70 and 85 increases because of medical expenses, he points out. At this time, people need house help and insurance doesn't cover everything. The costs involved in maintaining an older person, who is not fit, he says, is higher than the expenses of an average person. "It is much like a second round of major monthly expenditure. This is not budgeted. A vast majority of people don't do such basic calculations," he says.
So, before you buy anything ask yourself: Am I buying this because I want it or do I really need it? Can I live without it? And, can I really afford it?
As Kumar says: Whatever you decide to invest in, do it regularly. Do not watch your investment too often. Do not speculate. And most importantly, stay invested for the long term. Your money will not only be safe, it will grow many times over.
Hack-Proof Your Money
By Gagan Dhillon
Last year, a security breach compromised 3.2 million debit cards. With India headed towards a cashless economy, there is a need for caution. Rahul Tyagi, vice president, Lucideus, an IT Risk Assessment and Digital Security Services provider, shares six tips on keeping your money safe online.
Pad up your password
Use all the tricks -- capital letters, special characters and numbers -- but with a twist. Tyagi says, "Instead of coming up with a strong password, think of 'passphrases'. Such as, 'I got my first job at 22!' So your password would be the first letter of each word, i.e. Igmfja22!" Passphrases are safer and appear random to algorithms that are used for hacking. Never reuse passwords. Reusing a strong one on an unsecure site can compromise all your other accounts accessible by the password. Also, keep a strong lock code or pattern on your phone in case of theft.
Brush up the basics
While making a payment online, check the link of the website. A secure gateway will read 'https' where the 's' stands for secure. Https in red with a strikethrough means that the security certificates for the website have expired and the site is no longer secure. Always try to use your personal computer secured by a strong antivirus, for all financial transactions. Of course, always log out of your account. And never save your card information or passwords on a public computer. While logging in, look for a small a box that says 'Remember Me' or 'Keep Me Signed In' and ensure that you don't tick it. Be wary of links urging downloads from email accounts that you don't recognize.
Divide it up
If possible, keep a separate account with a limited amount of money for online transactions. You could also consider using a credit card over a debit card for this purpose as the former has stronger anti-fraud provisions. Bear in mind that a secure website always asks for the CVV number that's on the reverse of your card. So, never share images or photocopies of both sides of your credit or debit cards. "When using e-wallets, minimize your risk by transferring a limited amount of money as and when you need it. So even if you lose your phone, you don't have Rs 10,000 sitting in your Paytm account," Tyagi says.
Keep your eyes peeled
Always check your accounts for unusual transactions. If something's amiss, the sooner you catch it, the faster you can take action. In the case of the debit cards that were compromised because of hacked ATMs, the banks were liable for the loss, as long as the customer informed the bank about suspicious activity within three working days. Tyagi also warns against simply handing over one's card while paying restaurant bills. He suggests, "Always ask the server to bring the device to your table. There is a possibility that while you are not watching your card is swiped on a 'skimmer'. This device looks similar to the swipe machine but is smaller in size and records all your card information like name, number and expiry date."
Ride armoured digital horses
Download apps from the official stores -- Android Play Store and Apple App Store. "Often malicious links for apps are circulated online or on WhatsApp. Android phones are especially susceptible to malware that come with APK files from unknown sources. If you download these apps not only is the app layer compromised, so is all the data on your phone," says Tyagi. Also, prefer downloading applications from reputed developers and genuine downloading platforms. He adds that due to strong RBI regulations, government approved e-wallet apps like UPI (Unified Payments Interface) and BHIM (Bharat Interface for Money) are quite well protected as they follow a three-layer authentication mechanism.
Follow the bandwagon
All the big players in the online shopping space such as Amazon or Flipkart have updated Payment Card Industry Data Security Standard (PCI DSS) certificates. This ensures that your financial data is indeed in safe hands. "But there are new websites that open for a short while, offering big discounts. These don't have PCI DSS certification. They can use your financial data as they like. These are usually registered abroad so we don't have legal jurisdiction to take action in case of misuse," says Tyagi.