Equity, debt, gold - How to get the benefit by

investing in a single product

“Do not keep all your eggs in one basket" is often said when it comes
to talking about the need for diversification in one’s investments.
However, the moot point to understand here is why one needs to
diversify investments across asset classes. 
In calendar year 2008, a time of global financial crisis, gold delivered
28.61% return whereas both Indian and global equities were deep in
red, down 56.54 % and 30.27% respectively.  However, in 2009,
equities across the globe rebounded and delivered returns to the tune
of 90.96% (domestic) and 25.72% (global). Gold too delivered
positive returns of 22.42%. Similarly, in 2012, while equities in
general delivered 17% plus returns, gold was at 12.92%. One year
hence, gold generated negative return of 7.90% and equities too
diverged with global equity generating 35.76% while Indian equity
was languishing at 4.82%. This clearly shows that winners in terms of
asset classes keep on changing every other year and the co-relation
between all these asset classes too is minimal. So, the optimal
approach to make the most is through prudent asset allocation and
rebalancing as and when required.
Asset Class Mix
The major investment asset classes under consideration is equity, debt,
gold and real estate. Real estate is not relevant for an average investor
as it requires huge one-time investment. Along with these, over the
past few years, a fourth asset class in the form of global equity has
taken shape. Indian investors have been increasingly taking exposure
to innovative global companies such as Apple, Meta, Netflix,
Microsoft etc. through international funds or ETFs offered by
domestic fund houses. 
How to go about Asset Allocation?
To optimally diversify a portfolio, you can consider investing across
all the four asset classes. However, owing to limited understanding
about the nuances of various asset classes, we tend to stick to those
asset classes the asset classes we understand well. The other
alternative is that we invest in a mutual fund scheme which does this
for us. Within each asset class, there are a variety of offerings one can
choose from. For example: Within domestic equities, there are market
capitalization based funds, thematic or sectoral funds and even smart
beta funds. 
In case one invests either directly or through mutual fund schemes in
different asset classes, one has to periodically review and take a call to
increase or decrease exposure in specific asset category based on its
likely future performance. There are two problems with this strategy.
One, it is difficult for an average investor to correctly anticipate future
performance of specific asset category and two, even if one is able to
do it correctly every time, one has to bear capital gains tax while
rebalancing. Over long term, the tax incurred is likely to cause a dent
in the overall investment experience. 
Optimal Solution 
There are two ways one can address these challenges. First, invest in a
mutual fund scheme which invests in all of these asset classes directly
or second, invest in a fund of fund which invest in schemes available
across these asset classes.  The second option has better potential to
get you better returns as this will help you reap the benefit of focused
expertise of the respective fund managers of the underlying scheme. 
For addressing the challenges related to optimal asset allocation,
ICICI Prudential has launched Passive Multi- Asset Fund of Funds, a
scheme which is designed to invest in all four asset categories
discussed earlier with some limits assigned to each of the asset
classes. As a result, the overall volatility is expected to much lower
than investing in a single asset class. Moreover, tactical calls taken by
the fund manager from time to time is likely to help generate better
risk adjusted returns with lower volatility in the long run. Since this is
a fund of fund, the expenses will be capped at 1%. 
Taxation
For taxation purpose, fund of fund is treated as a debt fund. Any
profits on sale/redemption of units will qualify as long term if held for
more than 36 months. The long term capital gains will be taxed at flat
20% after indexation whereas short term capital gains will be included
in your regular income and will get taxed at the slab rate applicable to
you.

For a happier financial life in 2022, face your

money fears
Improving your financial life can sometimes feel like a Catch-22: The
same money issue you need to unsnarl creates so much anxiety that
you end up turning away from it altogether.
Seeking more insight on money issues such as debt management,
building emergency savings and risk diversification could increase
overall happiness. A study published earlier this year by Finra and the
Global Financial Literacy Excellence Center found that even before
the pandemic, a low level of financial literacy was a top contributor to
financial stress and anxiety. The report analyzed the survey responses
of 19,000 Americans.
“Fear is quite literally paralyzing," said Sonya Lutter, a financial
therapist and director of institutional research and education at
Herbers & Co., a management consulting firm. Mismanagement or
bad decisions could happen if money issues that feel overwhelming—
such as the need to figure out your total debt and how you’ll pay it off
—are ignored.
Another study, published earlier this month, which Dr. Lutter
oversaw, found that top-earning Americans who had sought out a
financial adviser were nearly three times happier than those who
managed their own finances—and those who went solo became
statistically unhappier as they made more money, which could
highlight how difficult it can be to manage large sums of money on
your own.
Here are some steps toward facing your financial fears:
Learn what you’re afraid of
The most daunting part of facing your financial fears might be
figuring out exactly what you’re afraid of and why.
When working with first-time clients, financial planners often ask
them to recall their very first experiences with money, which can
provide clues to their approaches to money in adulthood.
How someone handles finances might vary widely depending on the
person’s first money-related memory. For example, someone who
earned an allowance might have a very different experience with
money compared with someone whose earliest memory is of a single
parent struggling to make ends meet, said Mark Reyes, a certified
financial planner and financial advice manager at Albert, a money-
management app.
Dr. Lutter points beginners toward a tool she helped develop, the
Klontz Money Script Inventory, which aims to surface a user’s beliefs
about money.
“Is the fear running out of money? Is it a fear of embarrassment?" she
asked. “It really gets back to some of those observations we made as
children, whether our parents taught us or not."
Experts advise journaling or talking to friends and family about
memories to get a better understanding of the fear, which can offer
more direction on how to move forward.
Find targeted information
As with health information, details of just about any money topic are
just a Google search away.
“Decide that you are going to read the books, watch the videos, take
an online course," said Brittney Castro, certified financial planner at
Mint, another money-management app. “Money is around for the rest
of your life, so the sooner you learn to invest time, energy and
sometimes money in learning, the easier it’s going to be."
Chelsea Ransom-Cooper, managing partner and financial planner at
Zenith Wealth Partners, recommends a pair of recent books to help
allay financial fears: “Get Good with Money: 10 Simple Steps to
Becoming Financially Whole," by Tiffany Aliche, a basics-focused
approach by the personal-finance educator known as “The
Budgetnista," and “The Psychology of Money: Timeless Lessons on
Wealth, Greed, and Happiness," by Morgan Housel. It presents
financial takeaways through short stories.

People should also peruse the blogs and frequently asked questions on
the pages of official agencies such as the big three credit bureaus and
the Consumer Financial Protection Bureau, said Angela Holliday,
president of Frost Brokerage Services and Frost Investment Services.
For people who might be intimidated by the journey of cleaning up
their credit, she suggested, those are good starting points for basic
guidance.
Ms. Castro said that consumers can access free financial deep-dives by
following prominent YouTube influencers. While social-media
platforms abound with money influencers dispensing advice and basic
tips, Ms. Ransom-Cooper warns that influencers’ backgrounds might
be hazy. Some might be sponsored by financial firms pushing certain
products or services.
“It’s just hard to filter through what’s real, what’s not and who
actually has the education to put this out," she said.
Consider a financial planner—or affordable alternative
Hiring a financial planner or adviser can provide an objective view of
your spending, help untangle why you’re avoiding some things, such
as paying off credit cards or student debt, and provide a degree of
accountability.
Many people tap family, friends and peer networks for referrals or free
financial-planning association databases, such as the National
Association of Personal Financial Advisors (or Napfa) or the XY
Planning Network.
Planners are often out of reach for those who most need them, said Dr.
Lutter. Many larger cities have centers for free financial counseling,
she said, and certified planners—who tend to work with higher-
income clients—often participate in pro-bono days, when planners
provide free one-on-one advice to consumers. If you’re interested in
attending sessions, such as those hosted by the Foundation for
Financial Planning, you can check the event calendars of the sponsor
organizations.
If you have a therapist, consider broaching your financial anxieties in
your next session, Ms. Ransom-Cooper said. If you have friends in
similar situations, bring up your concerns and compare notes.
“Hiring a financial planner is a little expensive and a lot uncertain,"
Dr. Lutter said. “So I don’t want to get people discouraged. There are
tons of options out there."

Pros and cons of having multiple term

insurance plans
Term insurance is a long tenure-led insurance policy that
ensures that the dependents and family members of a
policyholder remain financially intact even after the demise of
the policyholder.
As important it is to buy term insurance, it is equally significant
to sign up for a term insurance policy with the right sum assured
. The sum assured should be sufficient enough to ensure that the
regular needs and long-term goals of the family are fulfilled in
sync with future inflation. However, it is quite common that one
can’t assess the corpus needed at the time of purchase 20-30
years early and may end up purchasing a term insurance plan
with a sub-optimal sum assured amount.
Since there is no top-up facility in term insurance like in health
insurance, the policyholder can add multiple term insurance
plans depending upon his / her needs. It is legitimate in India to
have multiple term insurance plans as it comes with various
benefits such as bigger claim amount, different benefits and
safety for the future.
While you plan to go for another term insurance plan, the
applicant can look for a different company to buy their second
plan. Different companies have different features, benefits,
inclusions and exclusions. . Thus, it is beneficial to select
separate companies for separate plans. However, it is always
mandatory for the policyholder to disclose about an existing
term insurance plans at the time of taking a new one.
Why multiple plans
While multiple term insurance plans adding to a big cover may
become a little expensive than a single term insurance plan, they
come with a bouquet of advantages. Diversifying term insurance
between multiple insurers is also a better idea when the cover is
large. Because, at times, a higher coverage of say ₹1 crore may
get delayed in getting settled at the time of claim whereas a claim for
an amount lesser than ₹1 crore may get easily settled. Moreover,
based on the different underwriting policies of each company, the
permitted sum assured amount may vary. For instance if the
underwriting doesn’t permit ₹1 crore of sum assured amount due to
health conditions, in such a scenario, a person can opt for multiple
term insurance plans to get the desired amount.
Additionally, if a person, having multiple insurance policies, feels
any burden in paying for term insurance or he doesn’t need the
high corpus amount by the age of 50 years due to completion of
family duties, then he/she can surrender a few plans out of the
multiple plans without losing the entire term insurance support.
Also, the insurance industry is constantly evolving and so are the
products being offered. A term insurance product conceived and
purchased 20,10 or even 5 years earlier may be a simpler
product compared to products with new features currently
available. This includes covers for spouse, accelerated payments
on critical illness, conditional premium waiver, additional pay out
in accidental death, and children benefit riders all available
within term insurance plans. Depending on the evolution of
one’s financial/personal needs one can choose a term plan
which complements them and reinforces the existing term plan.
Loans are another reason to consider buying a new term
insurance. Home, business or other long-term loans may have
been accrued after the initial term plan purchase. Relying on
original term insurance alone may rob the dependents of
eventual benefits if an additional term loan is not purchased that
is equivalent to home or business loan that are unhedged.
The term insurance sum assured amount can’t exceed more than
the Human Life Value (HLV) of the policyholder. It is the
monetary value of the person based on income, savings and
liabilities. These days, life term insurance companies offer
insurance coverage depending upon the age of the insured. For
instance, 18-35 years old person can get 25times of their annual
income, 36-40 years old person is eligible for 20 times of their
annual income and 40-50 years old can get 10-15 times of their
annual income. The policyholder, however, has to provide proof
of annual income to avail multiple policies.
How much to save for kids’ education
after adjusting for inflation – Know the
calculation
When you start saving for your kid’s education, it is always
better to factor-in the inflation to arrive at the cost of the goal.
As the cost of education is rising, the cost of the courses that
are prevalent today may not remain the same 15-20 years down
the road. You, therefore, should calculate the inflated cost of the
goal to invest the right amount to reach the goal comfortably.

An engineering course that may cost about Rs 7 lakh today will

cost you anything upwards Rs 20 lakh after 16 years, post
factoring an inflation of 7 per cent. Similarly, a post graduate
degree or any other course for higher studies that cost Rs 20 in
today’s cost may become Rs 60 lakh after adjusting for inflation.

Therefore, before starting to invest use the below formula to find

the actual impact of inflation.

Inflated Cost (IC)= Present Cost (PC) (1+r/100)n

where;

IC= Inflated cost of your goal

PV= Present cost of your goal
r = Inflation rate
n = Years left to reach your goal

Now, assuming the following:

PV = Present cost of your goal = Rs 5 lakh
r = Inflation rate = 7 per ccent
n = Years left to reach your goal = 16 years

IC = Inflated cost of your goal = 5*(1+.07)^16 = Rs 14.70 lakh

It shows that at an inflation rate of 7 per cent, the cost of the

goal which was Rs 5 lakh balloons to almost Rs 14.70 lakh after
16 years!

The reason to calculate inflated cost is because it will help you

save the right amount. If you do not take into account the
impact of inflation, you will end up saving less than what is
actually required. This means, there could be a shortfall in
maturity amount after reaching the goal.

By saving Rs 850 per month, at an assumed annual growth rate

of 12 per cent, you can get Rs 5 lakh after 16 years but after
factoring in inflation, you need Rs 14.70 lakh. So, you need to
actually invest Rs 2500 every month to get Rs 14.7 lakh after 16
years.

To get Rs 1 crore after 15 years, at an assumed growth rate of

12 per cent, you need to invest Rs 20000 each month. You can
use inflation calculation and SIP calculator to plan your
investments and reach the long term goals with ease.