The risk of losing your money

The risk of losing your money

You can also lose money if you invest your savings in an unplanned manner or without understanding the risks associated with investing in different kinds of products.

Let’s first look at the different areas (or asset classes) you can invest your money in.

There are 4 primary asset classes most individuals can invest their money in:

1.) Equity – This also refers to stocks, which are traded in the stock market.

2.) Debt – This refers to products like Fixed Deposits, Govt. bonds, Public Provident Fund (PPF), National Saving Certificates (NSC) etc.

3.) Real Estate – Residential and commercial property or land.

4.) Commodities – Stuff like Gold, Silver, etc.

In financial terms, the risk of an asset is defined as volatility in the price of that asset.

What this means is that if you buy a high-risk product, the probability of its price going up (or down) in the short term is high.

Similarly, if you buy a low-risk product, its price will probably not fluctuate too much (either up or down in the short term).

The risk is usually directly related to return – i.e. the higher the risk, higher the expected return. Let’s look at each of the asset classes.

EQUITY

This is a high risk / high growth asset class. Your money can grow significantly but it can also lose value significantly. These products have given average annual returns of around 12% to 15% per annum over the last 20 years.

DEBT

These are low risk and low return products. Your FDs or PPF give you an annual return, which is pretty much assured. Over the last couple of years, they have given a return of 7 to 9% p.a.

REAL ESTATE

These are again high-risk products, which give high returns over a long term. They are also very illiquid because it’s difficult to sell real estate quickly if you need money urgently.

GOLD

Rise or fall in prices of gold is based on demand and supply in the international market and its prices can see volatility at times.

To understand the risk of losing money better, you need to understand the difference between a ‘paper loss’ v/s a ‘real loss’.

Let’s say you have Rs 1 lakh today, which you want to grow aggressively and decide to invest in stocks (also known as shares) via the stock market.

You identify a good company ‘X’ whose share price is currently Rs 100 and buy 1000 shares of the company for Rs 1 lakh.

In 2 months time, the price of the share goes up to Rs 120. You are very happy, as your investment has grown to Rs 1.2 lakhs.

You have made a profit of Rs 20,000 – However this profit is on paper only and until you sell your shares, you will not have a real profit.

Let’s say you decide to hold on to the shares assuming the price will go up more.

However, 1 month later the price of the share falls to Rs 110.

Your investment is now worth Rs 1.1 lakhs and compared to 1 month earlier, you now have a paper loss of Rs 10,000.

After another month, the stock price falls to Rs 90. Your new paper loss is Rs 20,000 compared to the previous month.

However, if you look at the total scenario, 4 months ago, you bought 1000 shares at Rs 1 lakh. They are now worth Rs 90,000 – So your net loss is only Rs 10,000.

However, this is still on paper as the no of shares you own is still 1000. Your loss will become real if you decide to sell those shares now at Rs 90.

If you continue to hold them for the longer term, the price might increase to Rs 150 or 200 and you will again make a profit.

This difference in the stock price on a daily or monthly basis is what is usually known as volatility. Most individual investors are unable to handle this volatility and sometimes end up making irrational decisions.

If a share’s price is rising, they will continue to hold it on the assumption that it will rise further. However, once the price starts to fall they sell to reduce their losses. If the price falls further (below their purchase price), they will lose more money.

Your money may go up and down in the short term, but over a long term, it’s most likely to go up.

Real Estate is also a growth asset class and has given great returns in selected pockets of the country. It’s a myth that property prices only go up and up every year. They are also subject to price fluctuations and more importantly illiquidity.

To ensure that you don’t lose money, it’s recommended that you invest it in a mix of asset classes (also known as portfolio diversification) based on the duration you want to stay invested.

If you are 25 years old and earn Rs 50,000 and save Rs 20,000. Out of which you want to save Rs 10,000 per month towards retirement. Then almost 60 to 70% of Rs 10,000 should be in equity for the next 20 to 25 years so that your money grows fantastically (the risks are usually averaged because of the long-term duration of investment).

However, if you are 55 years old and nearing retirement, then your exposure to equity should be reduced and your portfolio should be heavier on the debt side as you will require stable income.

Don’t fall prey to relationship managers?

Don’t fall prey to relationship managers?

It’s pretty simple – Don’t be ignorant or greedy.

And don’t invest in products you don’t understand or those that may not be suitable for your investment needs and timelines.

It is human nature to want the highest return possible and most people think they can beat the stock market in the short term. However, a return is just one of the factors you need to consider while selecting an investment portfolio.

Equally important is how comfortable you are with the fluctuations in the market values, your requirements for regular income versus capital growth and your investment time frame.

Before investing, first, determine your objectives for investing money. Here are some of them:

Regular income

If you want to get income on a regular basis from your investments, you should consider investing more in assets that have low volatility. The returns may be lower, but your capital will be safe and you will get an assured regular income and thus, it will meet your objective.

Capital growth

Capital can grow significantly if you invest for a long-term duration. Therefore, investing in growth assets like equity or real estate is recommended. These assets can deliver high returns if you hold them for a long term.

Income and growth

In case you require income but want to grow your wealth as well (usually a requirement of retired people) then a combination of income and growth assets is recommended.

You should decide the asset category only when you know your financial objectives.

It may not be appropriate to select only debt products to fund your retirement corpus. The returns will be lower and might not be able to beat inflation. That’s why you should use a combination of equity, debt and real estate investments.

Here are some additional ways to not lose money:

  • Don’t buy any products you don’t understand.
  • Don’t buy something just because your friend bought it.
  • Don’t invest based on tips from TV anchors blindly.
  • Never buy insurance as a form of investment.
  • Have a diversified portfolio.

Most importantly, don’t buy something without understanding it completely and doing your research. Get a second opinion.

Think about it – If you have chest pain and you visit a doctor who tells you that you need to undergo a bypass surgery, will you get it done instantly?

Probably not. You will likely do some more research, get a second (or maybe third) opinion and then take a call accordingly.

Similarly, don’t invest your hard earned money just because an insurance agent or a bank’s relationship manager tells you that it’s a great ‘scheme’ or ‘policy’ – You may not know it, but it’s probably good for them, which is why they are recommending the policy to you in the first place!

Unit Linked Insurance Plans (ULIPs)

Unit Linked Insurance Plans (ULIPs)

Insurance is one of the most popular forms of investment in India. The pitch from insurance agents or a bank relationship manager usually goes like this: 

“Sir, Invest Rs 50,000 per year into this product for 5 or 10 years. You will get insurance cover of Rs 5 lakhs plus your money back with a bonus. Not only are you protected but your money also grows”

Sounds like a win-win proposition right?

Not really. Let’s first understand what is a ULIP and then we will explain why you should probably not buy it.

A ULIP is an insurance product that combines protection and investment by allowing the policyholder to earn market-linked returns by investing a portion of the premium money in various proportions in the equity or debt markets.

The money you pay is split into two parts – one part is for providing the life cover and the rest is invested in different assets based on the risk profile preferred by the user. E.g. If you pay Rs 4000 per month, you might think your entire savings are getting invested. In reality, only a portion of your premium is invested. The allocation rate refers to the portion of the premium that is invested. This rate tends to be low in an initial couple of years when the charges are high and subsequently rises.

At the time of maturity of the plan, the policyholder will receive the value of the ULIP as on that date. In the event the policyholder dies during the term of the policy, the beneficiary will receive the sum assured and the value of the ULIP, depending on the terms of the policy.

Since the ULIP has an underlying investment – either in equity or bond or a combination of the two – the value of the ULIP will reflect the performance of the underlying asset classes. The returns on ULIPs are linked to the performances of the markets – What this means is that the verbally promised sum at the tenure is not guaranteed and depends on the performance of the market.

So why is buying a ULIP not a great idea?

1.) Low insurance cover:

When you buy ULIPs, you may get a false sense of security that you are adequately insured. However, your life insurance requirements may be much higher.

Think about it: You get 10 times your premium paid as life cover. Even if you have a ULIP of Rs 1 lakh, you will have a cover of only 10 lakhs – which will probably not be enough for your family if you were to die.

2.) High charges and low returns:

Unlike mutual funds, which have a lower cost, ULIPs have different cost structures. A large chunk of your first premium is usually paid as a commission to the agent who sold the product to you which means only a small portion of your money is invested. Secondly, there are mortality and other charges, which are deducted every month, which further diminish your returns.

All these charges act as a drag on your return. Even when the market performs well, most of the ULIPs struggle to deliver a decent return.

3.) Lock in period

Most ULIPs are locked in for a minimum of 5 years and you cannot withdraw your money in an emergency.

Many insurance agents and banks position ULIPs as risk-free and make a verbal commitment assuring people that they will get a certain amount after a few years. This is not true.

If you would like to test this theory, ask the agent to send you an email and promise in writing whatever they have just verbally committed. You will most likely not hear back from them.

Life Insurance is an expense and it is for the benefit of your loved ones, not for yourself.

Investments are for growing your money so that you can directly enjoy the benefits.

It’s not a good idea to mix the two – I recommend not buying ULIPs as an investment option.

Investing in Real Estate

Investing in Real Estate

Have you heard this piece of advice before, “Buy land. It’s the only thing which God or man is not making any more, hence its supply will diminish over time as the population rises and hence increase in value”.

If only things were that simple.

Real estate is a great asset class. It has delivered great returns for astute and early investors. Any Indian who wants to grow their money, cannot ignore real estate as an asset class. Indian real estate history is often used as a proof to demonstrate phenomenal returns that real estate can offer. However, like any other growth asset, real estate investment should not be made to meet short-term goals.

People often carry this notion that real estate prices cannot fall. This is a myth as real estate prices also fluctuate and the decline is usually gradual. Therefore real estate should be considered at par with any other growth asset class. Typically should not be more than 20% of your investment portfolio.

Risks associated with real estate as an investment option.

Economic Downturn

Real estate growth is aligned to economic cycles. As it has a high dependence on money supply and credit availability. Over valuation in bullish markets is a common feature as prices rise rapidly in a bull run and hence, is a big risk. Therefore, the sector tends to suffer steep corrections when the bubble bursts.

If the economy is not doing well and companies are laying off people, they will require lesser office space, which in turn will further drive down rentals and capital values of commercial properties.

This, in turn, will impact the residential market as lesser employees mean lesser demand for rental residential properties thereby driving down rents.

Interest cost

This applies to under-construction property. Project delays are a reality and very few projects are completed as promised on schedule. Most people look at the per sq. ft. rate and forget to factor in the cost of money that is required to hold that property while construction is going on.

To put it simply, if you have bought a property on loan while it is undergoing construction, your EMIs will primarily consist of interest repayments, which add to the total price of the property.

Liquidity

A lot of people end up buying real estate as an investment. However, if you have ever bought or sold real estate, you will have realized that it’s far easier to buy real estate than to sell it.

That’s because you would like to sell it at a particular value, which maybe higher than the market value. Apart from this, finding the right buyer and closing negotiations can sometimes take a couple of months.

Another constraint is that you cannot use a part of your real estate investment to fund a goal.

E.g. Let’s assume that you bought a house for Rs 1 crore which has grown in value to 5 crores after 20 years. Your child is now ready to go to college abroad for which Rs 1 crore is needed.

If you don’t have liquid savings, it will be very difficult to monetize your real estate, as you cannot sell a part of the house to raise Rs 1 crore.

One idea, which is slowly gaining ground in India for investments in real estate, is REITs.

Instead of investing a large amount into a real estate project, a better way of getting real estate exposure is through a Real Estate Investment Trust (REIT).

REITs are entities that buy and manage rent-producing assets such as offices and retail outlets. Professional managers handle operational issues such as building maintenance and managing tenants. Property held by REITs may also be sold and reinvested in other assets.

If you are a safe player, REITs — with their diversified portfolio — can fit your bill better than land or mega-projects. Recently, Government of India has provided tax benefits to boost real estate investment trusts (REITs).

Once REITs become a reality in India, they can be used as an option for those who want to diversify their portfolios to include real estate as an asset class.

Should you invest in Exchange Traded Funds (ETF)

Should you invest in Exchange Traded Funds (ETFs)

Exchange traded funds or ETFs as they are popularly known, are a special type of low-cost funds that invest in stocks of companies that are part of an index like the Sensex or Nifty 50.

The Sensex is short for sensitive index and comprises the top 30 stocks of all the companies listed on the Bombay Stock Exchange. Similarly, NIFTY comprises of the top 50 stocks listed on the national stock exchange. A Nifty ETF will invest in only those stocks, which are part of the Nifty 50.

Since the selection and weight is decided by the index itself, there is no active manager to manage your investments, hence management fees of ETFs are very low.

However, the returns are also directly linked to the stock market – If the market rises by 10%, the ETFs will rise by little less than 10% and if the markets fall by 20%, the ETFs will also fall by a similar percentage.

So, what’s the difference between an ETF and a mutual fund?

A mutual fund has a fund manager who actively manages the fund (i.e. buying and selling selected stocks based on their individual assumptions and the fund objective).

An ETF, on the other hand, is passive. It buys all the shares that comprise an Index. E.g. the Sensex or Nifty and does not require active management.

So when you buy a Sensex or Nifty ETF, you are actually buying small portions of the top stocks listed on these exchanges.

Since they don’t buy or sell stocks actively unlike the mutual funds, they are known as passive funds.

In developed countries, ETFs are very popular and are gradually even taking over mutual funds. In the years to come as the capital market in India matures, ETFs may turn out to be a better equity investment option.

ETFs are better options in comparison with mutual funds because of the expense ratio. If you were to invest in a large-cap mutual fund, the cost would range between 1.25%-2.50% p.a. However, if you select SBI Nifty ETF, the cost is 0.07%. Mutual funds may claim to beat the market but that claim is debatable.

Investing in an ETF and not worrying about the ‘best’ mutual fund is a good option for the first-time investor.

Investing in Gold

Investing in Gold

Indians are among the largest retail buyers of gold in the world. And the biggest hoarders too.

We just love to get more of the yellow stuff and stuff them into our bank lockers.

Investment in gold has the potential to beat inflation over a long period. It is a safe haven when economic growth is slow and traditional asset classes such as equity and debt are under-performing.

There are various ways how you can get exposure to gold as an investment asset.

Gold Jewellery

Buying gold in the form of jewellery has its own costs involved. The primary one is the making charge, which can be as high as 10 to 15%. There are costs associated even when you sell jewellery, especially when it is to a different jeweller. If you are looking at holding the asset for a very long term, other options will be more cost effective and liquid.

Gold Bars

If you buy gold bar/coins, you will have to sell it to a jeweller who will deduct charges again during a sale/repurchase. With these costs and security concerns involved, holding gold physically may not be cost-effective.

Gold Exchange Traded Fund  

This fund is a passively managed open-ended ETF, which invests in gold bullion and instruments with gold as an underlying asset, to provide investment returns that, closely track the performance of domestic prices of gold in the bullion market. When an investor invests in gold ETFs, the investment is done in physical gold of 99.5% purity. Gold ETF allows investors to buy gold in quantities as low as 1gm.

Gold mutual funds  

A gold fund of fund invests in gold ETFs. Although the gold mutual fund is an easy option to invest in gold, it is generally is more expensive than Gold ETFs.

E-Gold

They are similar to gold ETF. It’s the only option where units can be converted to physical gold. You need to open a separate demat and trading account.

Sovereign Gold Fund (SGB)

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India. The Bonds bear interest at the rate of 2.75 percent (fixed rate) per annum on the amount of initial investment. Capital gain tax arising on redemption of SGB to an individual has been exempted.

The best way to invest in gold is Sovereign Gold Fund (SGB). This route of investment in gold decreases the cost and taxation, provides you with safety against theft and an interest of 2.75% p.a.

The allocation of gold in a portfolio should not be over 5-10%. It may be used primarily to take advantage of its low correlation with other assets, and the ability to accumulate in small lots compared to other alternative assets.

How to plan for buying your first home ?

How to plan for buying your first home?

Owning your own home is an exciting life milestone and sets you free from the monthly expense of paying rent. However, with soaring real estate prices in India, buying a home is almost out of reach for a lot of people.

That’s why I recommend you start planning and growing your savings from the day you start earning in case you plan to buy a home in the near future.

Here are a couple of things you need to keep in mind about how much your home will cost you:

  • Cost of the property.
  • Agent commissions (1 to 2%).
  • Registrations (5 to 7% – this varies from state to state).
  • Interior decorations and furniture (5 to 20% based on your taste).

So whatever is the base cost of your home, keep in mind that it would cost you about 10 to 15% extra.

For example, if you want to buy a house worth Rs 1 crore. Your total cost of ownership will be about Rs 1 crore 15 lakhs. If you have planned for just the property price of Rs 1 crore, the extra expense can be challenging for your financial health.

Let’s say you are 27 years old, just married with a double income of Rs 2.5 lakhs a month and want to ‘settle down’ in your home in the next few years. The reason for the timeline of few years is because you don’t have the money right now for a down payment.

Here is how you can plan for it.

  • Cost of your dream home today – Rs 1 crore.
  • A number of years after which you plan to buy it – 8 yrs.
  • Cost of your home after 8 years – Rs 1.48 crores (assuming 5% appreciation every year).

The total cost of ownership of your home after 8 years will be about Rs 1.70 crores. (adding 15% extra costs towards registration, decoration etc).

To buy it on loan, you will need 20% or Rs 30 lakhs for the down payment and you will be paying ~Rs 1.2 lakhs EMI per month for the balance loan amount for a period of 30 years.

So what should you be doing today?

Start investing Rs 25,000 per month from your savings – after 8 years, at a balanced rate of 12.5% p.a, you will have about Rs 42 lakhs which will be sufficient for making the down payment + other costs including registration and interior decoration.

If you have additional surplus savings you can invest more so that you can make a larger down payment and have reduced EMIs.

However, make sure that the additional savings are not at the cost of your other priorities like retirement, emergency fund etc.

Owning your home also comes with several advantages like:

  • Emotional satisfaction of living in your own house.
  • No hassles of shifting every couple of years.
  • Expressing your individuality and decorating it as you please.

So while you should plan on buying your own home, weigh both the financial and emotional angles before you put down your hard-earned money.

How to prioritize your financial goals?

How to prioritize your financial goals?

Some financial goals will continually collide with one another.

E.g. paying for a child’s school fee may reduce the money that would otherwise go into their higher education fund. Or save effectively for your child’s higher education can reduce a part of the contribution for your own retirement fund.

That’s why to get what you want most, you should try doing the following:

Decide which goals will take priority first.

This can get slightly tricky as most people get serious about financial planning only when they hit a milestone in life e.g. getting married, having a baby etc.

In India, it’s a cultural thing to prioritize your children’s needs over everything else in life. Making sure they get the best schooling, saving enough for their higher education, then setting them up in business if possible, paying for their marriage, gifting them your house etc.

Times are changing and kids are more independent these days and will get more self-reliant in the future.

Your first priority goal should be your own financial security.

Listed below are some recommended goals, which you should start saving for immediately if you haven’t already started doing so.

Your Retirement Fund

You need to have a sufficiently large retirement fund so that you can lead a financially secure life with self-respect during your golden years and without being dependent on anyone else for your financial needs. Plus your kids will automatically inherit your assets (if you wish so!) so they will also be taken care off after you leave for your next journey.

Buying a Home

Your first home is not an investment. It’s an expense till you can afford to buy a second one. That’s because you will always need a place to live. You should start planning to buy a house from the day you start earning. Unless of course your parents own a home and you will continue to live in it. In that case, you can look at alternate real estate investments as a diversification option after you have a significant financial portfolio.

Emergency Fund

You should have a liquid emergency fund equivalent to approximately 3 to 6 months of your living expenses. These funds you can access immediately for any unforeseen or unplanned expenses. This will not only give you peace of mind but will also allow you the freedom from taking on an expensive debt in an emergency situation.

Being Debt Free

We live in the age of excessive consumption with multiple EMI’s. You should try and reduce as many EMI’s as possible. Not all EMI’s are made equal. An EMI for a house loan is not really an expense as it goes towards building an asset. However, an EMI for a high-end smartphone is an expense because your iPhone will start losing value the moment it’s bought – and continue to do so till it becomes worthless after a few years.

Are You an Exception to the Rule?

While these are broad guidelines that will apply to most people, every individual has specific requirements, which means you should allocate money based on your personal requirements and priorities.

Life Insurance – How much cover should you have ?

Life Insurance – How much cover should you have?

Insurance plans are one of the most popular forms of investment in India after fixed deposits. Almost every family has at least one money back or endowment policy.

However, Indians are also among the least insured in the world.

Huh, how is that even possible, you might be wondering if almost everyone has multiple plans?

Let’s first understand what is insurance and it’s true purpose.

If you have a car, you also probably have car insurance. Every year you pay a premium for the policy.

What happens if a year goes by and nothing happens to your car?

Nothing -life goes on and you renew your policy and pay a premium again next year.

You do this every year for two primary reasons:

  1. You are required by the law to do it (3rd party insurance)
  2. To protect yourself so that in case your car is damaged in an accident, you will get compensation to either repair or replace it.

Your car insurance premium varies on a couple of factors including the type and age of the car, and whether you want comprehensive full coverage or just the basic minimum 3rd party coverage. Similar to the car insurance policy, which compensates you if something happens to your car, there is a policy for humans too, which compensates your family with a large lump sum of money if you die unexpectedly.

It’s called life or term insurance plan and it has one sole function – If you were to die tomorrow, your family will be paid a lump sum amount equal to the cover you have taken.

It’s as simple as that and its purpose is not to benefit you but your family and dependents.

For this safety and security, you pay premiums for a period ranging from 25 to 35 years during your earning life.

So how many terms or life cover should you have?

It depends on your age, number of dependents, liabilities and a couple of other factors. HCV or human capital value is the term used to determine the exact amount and you should ideally work with your financial planner to arrive at the optimal amount.

A good ballpark is to multiply your current annual income x 20.

So if you earn Rs 10 lakhs per annum, the amount of life insurance cover you should have is around Rs 2 crores at a minimum.

Now you may think it’s a huge amount but look at this scenario – If you are the sole breadwinner for your family and suddenly die, your family will have no other source of income.

If they get Rs 2 crores, by investing it in a safe asset, they can receive approximately 7 to 8% interest or Rs 15 to 16 lakhs per year. This can be used to meet expenses for the next couple of years till the financial situation stabilizes. While the emotional impact of your loss will be high, your loved ones will at least be financially protected.

A lot of folks are not aware of term insurance. If you have dependents (spouse, children, elderly parents) you should have it. It can be easily bought online and you don’t even need to contact an agent.

If it’s so good, why isn’t it more popular?

There are 2 reasons, which I can think of:

1.) Individuals

The first is the individuals themselves who have been used to investing small amounts of money every year. Getting some cover and receiving a lump sum at the end of the premium policy.

Since you don’t get any money in a term insurance if you don’t die during the cover period, most people think of the premium paid as a waste of money.

2.) Insurance Agents

Term plans are much cheaper than traditional money back or ULIP insurance plans and the commissions paid on such plans are also lower, hence agents don’t have too much of an incentive to sell these plans.

The insurance premium is an expense, and you should treat it accordingly. Think of it as paying for a service to protect your family.

Think about it – if you own a car for 5 years and don’t meet with an accident and sell the car afterwards. Do you expect or demand a return from the insurance company for the premiums paid?

Life or term insurance is exactly similar.

How much does a term or life insurance cost?

If you are a healthy 25-year-old, a term insurance of 2 crores can roughly cost you about Rs 15,000 per annum.

In comparison, if you buy money back or ulip policy at a premium of Rs 50,000 per annum, you will get insurance cover of only Rs 5 lakhs (or 10 times the premium)

Will your family be better off with Rs 2 crores or 5 lakhs in the event of your untimely death?

At the risk of sounding repetitive, please don’t mix your insurance requirements with your investments.

Don’t fall for the insurance agent’s pitch:

Sir buy this insurance policy. You only have to save Rs 4000 per month. You will get about Rs 17 lakhs after 25 years + bonus and you will also covered for Rs 5 lakhs

You will be better off if you pay Rs 15000 as a premium for a term policy. Invest the balance Rs 35,000 in long-term equity assets to get annualized returns ranging from 15 to 20 %.

Insurance is a safe product but money back plans are not guaranteed in writing. This is because the insurance companies also invest in direct equity and stock markets over a long-term period. They earn great returns but pass on only about 3 to 4% in returns to the customer.

What is estate planning?

What is estate planning?

We plan for our household and medical expenses, buying a house, plan for retirement, children’s education etc. One area that gets the least focus is estate planning.

Most people believe that the only option available for estate planning to them is ‘writing of Will’. Estate planning is not just writing of Will and getting it probated.

With our growing income, the lower middle class is now becoming the upper middle class, and upper middle class is becoming upper class. This decade will see a rise in population of millionaires and billionaires. People today realize the need to preserve the wealth built and pass it down judiciously. Thus, the need for estate planning is increasing.

We would like to pass down our hard earned saving in a judicious manner to next generation. Whatever we accumulate during our life (earning minus expense + growth) forms our estate that we pass on to our next generations.

The estate includes immovable like home (real estate), agricultural land, etc, as well as immovable assets like gold jewellery (commodity), our bank balance & fixed deposits (cash).

Why plan

The objective of estate planning is that you decide who will receive and control your assets. If you desire that every penny of your hard money should go to your next generation, you should be doing estate planning.

When to plan

Most of us defer estate planning for later date or time. Not that we do not want to plan distribution of our assets, but we avoid for various reasons such as—to avoid discussion on demise, avoid difference of opinion with better half on the distribution of asset, lack of knowledge etc.

You can plan for assets acquired and also for assets that you may acquire in future. We must put this on our priority list and not postpone it, thinking it to be irrelevant.

So what are your options for estate planning:

Write a Will

Advantages

  • It avoids family dispute (though not a sure method)
  • Distribute assets according to your wish

Disadvantages

Needs to be probated to avoid legal conflict. (Probate means a copy of the Will certified under the seal of a court of a competent jurisdiction). Expensive process.

  • Can be challenged in court.
  • Only control assets that are in one’s name.
  • Not helpful when one becomes incapacitated.
  • In case of a minor child, need to depend on the executor or court-appointed guardian.

Giving away / beneficiary transfer: Distribute the property (estate) when one is alive.

Advantages

  • Avoid family disputes

Disadvantages

  • In case the person is not earning, he/she would become dependent on children.
  • Once distributed, it cannot be claimed back

The classic example is movie Baghban wherein the hero (Amitabh Bachchan) upon retirement distributes his retirement kitty amongst his sons, and in turn becomes dependent upon then for his own survival.

Joint ownership

Advantages

  • Least bothersome

Disadvantages

  • Unintentional disinheritance
  • Difficult to remove co-owner

Revocable trust: Create a living trust and transfer assets to trust.

Advantages

  • Control is in hand of the creator.
  • Can change/revoke any time.
  • Instruction is carried out when one is incapacitated or dies.
  • Saves the trouble of probation.

Disadvantages

  • Costly

Grantor creates the trust by writing trust deed and funds the trust by transferring the assets (movable as well as immovable). The trust deed specifies grantor’s instruction for distribution of wealth. While grantor is alive, he has full control over the activities as well as asset transferred.

Trust can be created by the writing of trust deed. This requires a person to specify the purpose of the deed and how will it function. He needs to identify the trustees and give the instruction of appointing successor trustees. He also needs to specify when trust has achieved its objective and how (and when) trust can be dissolved and assets liquidated.

Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

Out of all the available options, will writing is the bare minimum and setting up a Living Trust is the most robust way of estate planning.