How to Make Money Work Efficiently

Some people are better investors and financially more secure because they know how to extract more from every rupee. The consequences of right and wrong financial decisions.

Investing for retirement
The simple act of starting to save early can be the difference between a comfortable and constrained life. Mr Right harnesses the power of compounding and after investing Rs 36 lakh in 30 years, he gets a corpus of Rs 3.05 crore. Mr Wrong puts in Rs 45 lakh in 25 years and still gets a lower corpus of Rs 2.5 crore.

Mr Right
Decision: Started investing at 30 years
Calculation:
Amount invested as SIP in an equity fund earning 12% return Rs 10,000 a month
Period of investment: 30 years
Total amount invested: Rs 36 lakh
Corpus amassed: Rs 3.05 crore

Mr Wrong
Decision: Started investing at 35 years
Calculation:
Amount invested as SIP in an equity fund earning 12% return Rs 15,000 a month
Period of investment: 25 years
Total amount invested: Rs 45 lakh
Corpus amassed: Rs 2.52 crore

Investing for child's goal
Most people confuse investment with insurance, buying traditional insurance plans to fund kids' goals. An endowment plan does not make your money work hard, since you pay a higher premium but get a lower corpus due to low returns of 6-7%, while an equity fund offers over 12% returns over the long term.

Mr Right
Decision: Investing in equity mutual funds
Calculation:
SIP amount: Rs 8,000 a month
Term: 20 years
Assumed return: 12%
Corpus amassed: Rs 72.9 lakh

Mr Wrong
Decision: Buying a traditional insurance (endowment) plan
Calculation:
Monthly premium: Rs 8,000
Sum assured: Rs 9.6 lakh
Total premium: Rs 19.2 lakh
Policy term: 20 years
Assumed return: 6%
Corpus amassed: Rs 28.8 lakh

Tax-efficient investments
Make your money work harder by not allowing tax to eat into investment returns. If you pick fixed deposit, the interest is considered as income and subjected to tax as per your tax slab. However, debt fund returns are capital gains, which invite a lower tax of 20% after indexation, if held for over three years.

Mr Right
Decision: Investing in debt funds
Calculation:
Amount invested in debt funds Rs 2 lakh
Amount after 3 years Rs 2.52 lakh @ 8% return
Capital gain after indexation Rs 31,470
Taxed at 20% after indexation
Total tax: Rs 6,293

Mr Wrong
Decision: Investing in fixed deposit
Calculation:
Amount invested in fixed deposit Rs 2 lakh
Amount after 3 years Rs 2.49 lakh @ 7.5% (compounded quarterly)
Avg interest each year Rs 16,648
Taxed in 30% bracket Rs 4,994 per year
Total tax: Rs 14,983

Taking a home loan
The term of a home loan depends on the EMI one can furnish, which is why some home buyers opt for an extended tenure. They will, however, end up repaying a bigger loan because the longer the term, the higher the interest. So, Mr Wrong will end up buying the same house for a higher price, compared with Mr Right.

Mr Right
Decision: Taking a home loan for 20 years
Calculation:
Loan amount: Rs 30 lakh
Interest rate: 9%
Term: 20 years
EMI: Rs 26,992

Total amount repaid: Rs 64.78 lakh
Total interest paid: Rs 34.78 lakh

Mr Wrong
Decision: Taking a home loan for 25 years
Calculation:
Loan amount: Rs 30 lakh
Interest rate: 9%
Term: 25 years
EMI: Rs 25,176

Total amount repaid: Rs 75.53 lakh
Total interest paid: Rs 45.53 lakh

Dealing with volatility
In a fluctuating market, maintain your asset allocation by rebalancing the portfolio because a skewed allocation is bound to affect your returns. So while Mr Right may seem to work against his own interests by paring down his equity holding after a bull run, he will not suffer as serious a loss were the market to take a tumble.

Mr Right
Decision: Rebalancing the portfolio
Calculation:
Worth of portfolio (80% equity, 20% debt) Rs 1 lakh
Rebalancing when market rises 50% equity, 50% debt
Worth of portfolio @13.6% growth (15% equity, 8% debt) Rs 1.13 lakh
Return during market fall (-5% equity, 8% debt) 1.5%
Portfolio value: Rs 1.01 lakh

Mr Wrong
Decision: Not rebalancing the portfolio
Calculation:
Worth of portfolio (80% equity, 20% debt) Rs 1 lakh
When market rises, no rebalancing done
Worth of portfolio @13.6% growth (15% equity, 8% debt) Rs 1.13 lakh
Return during market fall (-5% equity, 8% debt) -2.4%
Portfolio value: Rs 97,600

Buying life cover
The purpose of buying pure life insurance, or term plan, is to secure the finances of your dependants if you were to die. It is not an investment vehicle to get returns. This is why Mr Right secures a Rs 70 lakh term plan at an annual cost of Rs 7,000, while Mr Wrong is paying a high premium of Rs 96,000 to get an inadequate cover of Rs 9.6 lakh.

Mr Right
Decision: Buying a term plan
Calculation:
For a 30-year-old non-smoker earning Rs 7 lakh a year with three dependants.
Sum assured: Rs 70 lakh
Annual premium: Rs 7,000
Term: 30 years
Total premium paid: Rs 2.1 lakh
Benefits: Lump sum to dependants on death of insured

Mr Wrong
Decision: Buying a traditional (endowment) plan
Calculation:
For a 30-year-old non-smoker earning Rs 7 lakh a year with three dependants.
Sum assured: Rs 9.6 lakh
Annual premium: Rs 96,000
Term: 20 years
Total premium paid: Rs 19.2 lakh
Maturity amount: Rs 28.8 lakh

 

 

 

 

 

 

 

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