CENTRE FOR INVESTMENTEDUCATION & LEARNING
Financial HealthTAKE CHARGE OF YOUR
UTI Mutual FundUTI Mutual Fund
IS YOUR INCOMEAT RISK?
The first principle in financial planning is to cushion a household's future by creating an
investment portfolio that can generate additional income. Mutual funds offer a range
of investment products to meet this need.
Last month, the
newspapers reported her
tragic death - alone,
penniless and abandoned
at her old age.
Our income may also be at risk. Even a salaried person with steady income faces the risk of the retirement income
being lower. The reduction in income at any time in future is a risk. We need to use our current income to create assets
that will generate future income for us. When we save, we set aside money; when we
invest in assets, we put that money to work. SAVING AND
INVESTING ARE
OUR TOOLS TO
PROTECTING
OUR INCOMES
FROM RISK.
Sitara did not see that her stardom would not last forever. Her income was high, but carried
a high risk of her going out of jobs. But her expenses were driven by her habits. She took too
long to curb her expenses. She survived by selling her assets, reducing herself to the penniless situation at death.
Sitara was a hugely successful
film star and earned an eye-
popping income. She had an
impressive fleet of cars,
expensive clothes and
jewellery and lived in a palatial
mansion. That was during her
peak of popularity.
ARE YOU READY TO RETIRE?
The purpose of creating wealth is to ensure we have cushioned our income. To plan for
retirement, early as in Amit's case or even later, we need to have built enough wealth. This
accumulated wealth can then generate income for us. We need to get to a point where our
investment income equals or surpasses our regular income.
INCOME IS
WHAT WE EARN,
WEALTH IS
WHAT WE KEEP.
Amit began as a bank officer
when he was 23 years old.
Not a career he chose, but
took up to earn a steady
income. He loved travel and
touring. He dreamt of being
a tour operator taking people
to exotic places and regaling
them with stories.
Amit was determined to
chase his dream.
He worked very hard in his
early years, when he had the
time and energy. He acquired
new skills that enhanced his
employability and income. He
sincerely set aside a chunk of
his earnings. This he invested
wisely to build himself a
corpus.Now at 48, Amit is
ready to retire and chase his
dream career.
Our skills are our biggest assets which earn us income in our early years. We need to
save and accumulate wealth choosing growth products, so that the financial asset
makes up lesser earnings in the future.
ARE YOUR ASSETSFLEXIBLE ENOUGH?
Tarun has always been ambitious and hard working. He has to pay EMIs for his
house and car, care for his elderly parents and provide for his wife and kids. He
is a regular saver. Everything seemed fine, until he suffered an unexpected
heart attack at an early age of 42 .
The income of Tarun's household which looked stable and adequate is now under risk,
until he gets well and resumes work. The family needs support to get back on its feet. They may also have to
manage with a lower income, should Tarun have to take it easy because of health reasons.
Tarun fell back on his investment portfolio, built through his careful savings. He partly liquidated his stocks and
mutual funds and repaid the loans, so the family is not burdened with the EMI. The lower
income would not affect the household, since there are no EMIs to pay. Tarun is confident
of building back his portfolio through savings.
UNEXPECTED
EVENTS
DEMAND
HIGHER
FLEXIBILIT Y
FROM OUR
INVESTMENTS
Every household should ensure that a good portion of the investments are in assets that can
be easily utilized to reduce loans and liabiltiies. Most mutual fund products are highly liquid
and readily convertible into cash.
Saurabh's pension seemed to get
smaller and smaller over time, with
inflation. The interest income from
his saving was not enough and
Saurabh could not find any part-time
occupation to increase his income.
Saurabh worries about outliving his savings.
He also has to make life style changes to fit his
reducing purchasing power.
Saurabh cannot work back the clock to increase his accumulated savings, nor can he risk his savings by chasing high
return investments. He can rebalance his assets, selling off what he does not need to realise some value. He can also
drawdown his capital carefully. Pension income that does not outpace inflation is a big risk for retired investors.
INFLATION CAN DRAMATICALLY
REDUCE THE PURCHASING POWER
OF FIXED INCOMES OVER TIME.
ARE YOUPROTECTEDFROMINFLATIONRISKS?
Saurabh retired after a long stint as
a senior government official. He
enjoyed a relaxed and laid back
retired life, travelling, and indulging
his hobbies. He has accumulated a
decent amount of assets and
savings and has his monthly
pension. The comfort however
began to wear off when he crossed
70 years of age.
Our need for income and our ability to generate what we need changes
over time. If retirement depends on income from accumulated wealth, we
need to build it using growth products such as diversified equity funds.
By using her credit card, Mythili was spending accomplished as there is no money left after
tomorrow's income today. Most of us cannot match expenses. Expenses need thought and planning.
expenses to income efficiently. Some expenses are Loans and credit cards have to be repaid, after adding
routine (utility bills); some are ad-hoc (school fees). interest charges. They can be used to make
Some expenses are small (movies); some are large temporary adjustments in income and expense, but
and need planning (replacing the fridge). Some not as a tool to spending more than we can afford.
expenses can be expected (monsoon illness); and
some are unexpected (critical illness.)
Many households find that they run out of their
income too soon. Saving is intended but seldom
WHEN WE SAVE,WE SPEND ON OURSELVES.
WHEN WE SPEND,WE ENHANCE SOMEONE
ELSE'S INCOME.
TOMORROW'S INCOME TODAY?
Mythili never made a monthly budget, like most of us,
knowing that her income level is comfortable. When there
were unplanned expenses, she used her credit card.
She had not worried about this until her credit card bills
mounted up. She could either pay the dues or have
enough money to spend, but not both.
ARE YOU SPENDING
The more we spend, the less we save, and higher the risk to our future income. Mutual funds foster saving by
offering a simple folio that can be opened for a small investment amount, into which we can invest whenever we
can, how much ever we can .
Salim is keen to buy a house. He is tired of the increasing rents he
pays every month and the bother of shifting addresses. Buying a
house in his city requires about eight times Salim's current annual
income.The expense is too large to fit into a routine income and
needs a large lump sum amount. Salim chooses to take a home loan.
WHEN DOES MAKE SENSE?A LOAN
When Salim takes a loan, he allocates some of his future income to pay for it. In the process he acquires a house
which is an appreciating asset over the long run. Salim will be a happy owner of the house once his loan is repaid.
But the same is not true for his car, which only depreciates in value. He needs to understand that the loan he takes
for the car is only for the benefit of paying off in installments.
We need to recognise the problem when we overdo the facility of spending using a loan. Personal loans that are
taken for large expenses and holidays; credit card loans taken for excessive expenses; and loans from friends and
others for routinely overshooting income, are all loans that have to be checked.
They carry the danger of eating up a large part of our income leaving too little to
spend or save.
A LOAN THAT
HELPS US FUND A
LONG TERM ASSET
HOLDS THE
APPEAL OF A
FORCED SAVING.
A loan helps us incur large expenses within the confines of our limited income.
We can build appreciating assets with loans, over the long run. Mutual funds are
accepted by lenders as a collateral and can enable us get a better rate on the loan.
However, he is unable to save
regularly, because of some
unexpected expense or the other
coming in his way. As a young
household, Fernandes' family has
higher aspirations for a better lifestyle,
and he ends up paying for family
outings, gadgets, holidays and gifts,
leaving little for savings.
Fernandes thinks that the only way he will be able to save is by ensuring that some of his
income is set aside for saving, even before it is available to spend. He decides to enroll into a systematic investment
plan, that will debit his bank account and directly convert it into an investment.
DO YOU GENERATEREGULAR SURPLUSES?
Fernandes has been a
disciplined spender.
He ensures that his
loans do not take up
too much of his salary.
IT IS SMARTER
TO SAVE FIRST,
EVEN BEFORE WE
BEGIN TO SPEND
OUR INCOME.
Many households do not generate a regular saving, even with the best intentions.
Without saving, investments for the future are a non-starter. Cutting back on spending
is desirable but somewhat painful to most. The simplest way to ensure disciplined
saving, when expenses are tough to control, is a systematic investment.
If we think we lack the discipline to save regularly, it is easier to create a system that automatically allocates some of
our income to saving, even before we begin to spend. Systematic investment plans of mutual funds are tools to
achieving this discipline .
Arun earns well and lives
comfortably, but has no savings.
Somehow he ends up spending
all that he earns. His friend
offers an advice - buy a nice
plot of land with a bank loan.
When the repayment goes out
of your salary, it is a forced
saving. When the loan is
repaid, the land is yours.
Arun likes the idea. He stretches his
repayment capability and buys a
large piece of land. All was well
until Arun needed a large amount
for a family ceremony. Arun did
not want to disappoint his wife,
but how could he find the
money? The bank was unwilling
to make a further personal
loan over and above his large
land loan.
Many of us overdo the forced saving bit. We lock up a large part of
our income into an asset that cannot be sold easily, let alone in parts
as our need for money arises. We do not realise that we need to have
liquidity to support a sudden expense. We then end up with a large
home and a household that runs on rolled-over credit card debt.
HAVE YOU UNKNOWINGLY LOCKED YOUR MONEY UP?
OUR BASIC INVESTMENT
CHOICES SHOULD BE LIQUID
ENOUGH TO SUPPORT OUR
UNEXPECTED NEEDS FOR CASH.
Our choice of investments must support our need for liquid cash. Our investment in illiquid assets like property should be
made only after we have a cushion of liquid investments such as mutual funds to fall back on.
NET WORTH?DO YOU KNOW YOUR
Mumtaz was stuck. The house, her car and jewellery had lost value and were worth
lesser than what she had to pay the bank.
Our financial transactions have to consider our net worth. The total of what we own as
ours has to be higher than what we owe to others. Balancing the two such that assets
have a higher value than loans is important. Higher net worth cushions us and
ensures that we do not fall into a debt trap and end up borrowing more to repay loans.
TAKING LOANS
REDUCES NET
WORTH, BUILDING
ASSETS
INCREASES IT.
Mumtaz has just moved into her new home. Her new car is
parked at her porch and her lockers are brimming with jewellery.
She had inherited the ancesteral home from her father. She sold
it off and bought herself things that she always wanted. Except
that the wish list went a bit too far.
She bought a large new house and then mortgaged it and bought the
car and the jewels with a loan. She could pay the EMIs with her salary
easily, she thought. The downturn brought the value of her house
down, and she also lost her job.
Funding an asset completely with a loan is risky. We need some of our own money invested in it, so that even if the
asset loses value, we are not forced to sell off to repay a loan. Buying investment products with borrowed money is a
risky proposition.
When her son decides to
go abroad to study, she
decides to dip into her
savings. And she is in
for a shock.
HAVE YOU DEFINED YOUR FINANCIAL GOALS?
Fatima has been working for the last twenty years and
has been putting money aside in her provident fund.
Every year she also buys some insurance to save tax.
She thinks that saving regularly is a good habit and it
must help her family have a secure future.
Every investment decision must have a clearly defined objective. It is like choosing the correct train after deciding
what our destination is. We should spend time trying to see the uses to which we will put our savings. If Fatima had
estimated many years ago that she may need money for her son's education, she could have chosen her
investments with that goal in mind.
She can withdraw some money from her PF, but that is not enough. Her insurance agent tells her that she needs to
wait for a few more years to realize the money; and the policies that she likes to surrender are leaving her with a big
loss. Fatima has made a mistake that many of us do - saving and investing without a proper definition of the goals.
TO SET
FINANCIAL GOALS
IS TO PROVIDE
A PURPOSE
TO OUR SAVING
AND INVESTMENTS.
The return we have to earn on our investment depends on how much we will need and
when; how big the investment should grow into will depend on the purpose it has to
serve. Choosing a product based on our objective is a good way to choose from
multiple investment options.
HAVE YOU ESTIMATED YOUR
GOAL GOALPOST(YEARS FROM NOW)
VALUE INTODAY’S MONEY
ASSUMED INFLATION RATE
APPROX. VALUE ATGOALPOST
Car
Holiday
House
Education
2 years
3 years
4 years
8 years
400000
500000
2000000
500000
6.5%
6.5%
6.5%
6.5%
450000
600000
2500000
825000
Alex is keen to build
his investments with a
target in mind.
If Alex can list some of the large expenses he needs to fund, those are his goals.
financial goals.
Financial goals are defined in terms of time and amount. Alex needs to
know when will the money be needed, how much will be needed. To
decide on 'how much' Alex has to factor in an assumed rate for
inflation. For example, if he needs Rs.20000 to run his home
today, if inflation is 6.5% he will need about Rs.50000, 15
years from now. Similar workings for some of the other goals
of Alex will yield these results:
Buying a new car, taking the family on a holiday, buying a house, planning for
the kids' education and marriage, ensuring adequate retirement income
are all
FUTURE GOALS?
FINANCIAL GOALS
HAVE TO BE DEFINED IN
TERMS OF FUTURE
DATE AND AMOUNT.
If we are able to define our future needs, even approximately, we know how
much we need to save and invest the savings to grow over time. Starting a
systematic investment plan to regularly save for the goal, is an easy route to
executing our plans.
DOES YOUR ENOUGH?
INVESTMENT WORK HARD
SHORT TERM
GOALS
NEED PROTECTION
OF CAPITAL AND
LONG TERM GOALS
NEED GROW TH.
Your investment choice needs to work for you. First, it has to cover the inflation
risk. Second, if your money runs fast, or earns a higher rate of return, you can
save a smaller sum to get the same end result. Third, investments need time to
even out the risks. Investing for a financial goal is about making these three
Maria knows the approximate future amount she needs. But she has been investing her savings at 6%, scared to
take risks. She cannot save more than she currently does, given household budgets. Maria needs to get her money
to work harder. She has time on her side and should choose a long term, higher return investment.
Maria and her husband have worked hard to get where they are today.
They have earned and saved well. Their daughter's wedding is one secret
desire for them, an opportunity to assert their social status in their
community. Maria's daughter is only 15, but planning ahead is
what appeals to Maria.
It is important to tune our investments to what we want to go, how long we have to
get there, and how fast we therefore have to run. Choosing funds based on our
needs, rather than where the stock markets are going, is a good approach.
A laptop, a cell phone, or a better car, have been on
his wish-list. But he thought he could not afford them,
until he met his friend Shankar.
ARE YOU READY FOR RISK?
Sitaram was happily retired, content with his pension and
tuition classes. He and his wife lived a simple life in their
own home.
Shankar had joined the newly opened finance Fantastic it turned out to be, soon after Sitaram had
company in town. His job was to collect deposits and deposited a hard-earned chunk of his life's savings.
pay out interest cheques. He earned a nice 4% The finance company folded up, taking away the
commission on deposits that he mobilized. Since his money of hapless depositors and leaving Shankar and
company was paying 18% on the deposits, and paying Sitaram in the lurch. If something is too good to be
depositors always on time, it was easy money for true, it cannot be true after all. Sitaram wanted his
Shankar. Sitaram's jaws dropped at the possibility of money to grow at a rate that satisfied his need, but
having his money growing at such a fantastic rate. failed to see that higher return meant higher risk.
RETURN IS ONLY HALF
THE STORY.
RISK IS THE
SIGNIFICANT OTHER.
Investment need to be chosen carefully after understanding the risks
involved. Some risks can be taken and managed, some are best avoided.
Mutual fund products offer a high level of transparency and information to
enable us to manage risks well.
IS RISK-TAKING AN ATTITUDE?
Albert is fun-loving and
adventure seeking. His
attitude seeped into his
investments, as he indulged in
on-line trading and speculating
with stock prices. When the
equity markets were moving
up, Albert made a lot of money.
But as the markets
crashed unexpectedly, he
lost so much that his
savings were wiped out.
Albert is a 27-year old graduate and knows very little about markets and investing.
Albert hardly has any savings, reducing his ability to bear losses. His income is hardly
stable with his limited educational background. Albert may like risk, but may not be well equipped to take it.
Risk is not just about attitude. It is about the ability to take on short term monetary losses. The amount of risk one can
take depends on the accumulated wealth, stability of income, ability to make informed decisions and ability to wait for
the long term. Our investments should reflect our goals and objectives as well as our realistic appetite for risk.
RISK TAKING IS ABOUT
ABILIT Y, RATHER THAN
MERE WILLINGNESS
TO ASSUME RISKS.
Wealthy investors tend to like high risk investments. The incremental risk may not
hurt their accumulated wealth. Investors beginning to build wealth should move
from low risk to high risk choices, only gradually, over time. Not every product suits
every investor.
HAVE YOU CONSIDEREDA FRIEND IN TIME?
Anita knows that she cannot earn a higher return without taking on a higher risk. She is
keen to save for the long term, for her children and for her retirement. She has chosen her
investment objective as growth. She has her salary for her income needs. What can she do
about risk that high return investments carry?
Anita can get time to work in her favour. An investment in returns that beat inflation, and enable every rupee to go
equity markets has the potential to grow at a higher rate over further. In finance we call such growth as compounding.
a long period of time. If her investment moves up and down This means, the habit of allowing returns to stay re-invested,
in the interim, but gets her long term growth, she would have without being pulled out, allows returns to compound over
achieved her goal. time. Anita can use this insight to choose risky assets that
help her build a better corpus for her financial goals.Given the time to grow, equity investments can generate
GIVEN TIME, OUR SAVING AND INVESTMENTS
CAN PLEASANTLY SURPRISE US.
When we invest for the short term, we focus on income and protection of our capital. When we invest for the long term, we
decide to take short-term risks in the interest of long-term growth. Open ended mutual fund products help us choose the
time period of our investment, with high flexibility.
LOOKING FOR THEBEST INVESTMENT CHOICE?
Solomon is in search of the right investment opportunity to finance his goals.
Holding bank deposits may be a safe idea, but the returns may not be the
highest; investing in equity may get a higher return, but with higher risk; and
investing in PPF is safe, but it can be locked-in for too long.
Solomon should know that different investment investment in deposits hold up; when deposit rates are
avenues offer different combinations of risk, return, not large enough, equity returns make that up. A
liquidity and time horizon. There is nothing that is best portfolio that holds various types of investments
for all times and all purposes. A better approach is enables managing risks sensibly. This strategy of
diversification. This means having a combination of earmarking our money into various investments in a
various investment options and balancing the benefits portfolio is called asset allocation. It is the most
and risk. important investment
dec i s ion tha t we The additional benefit of diversification is that it
could make.reduces risk. When the equity markets go down, the DIFFERENT
INVESTMENT
CHOICES SERVE
DIFFERENT
NEEDS.
TO DIVERSIFY IS
TO COMBINE
THEM SENSIBLY.
However good an investment opportunity looks, staking everything into it may be
risky. Just as a balanced meal helps nutrition and balance, diversification helps
investors manage risk and balance their returns. Mutual funds offer the simplest
route to holding diversified investment products.
YES
NO
Does your current household income represent the best possible under your circumstances?
Are you confident that your income will keep pace with inflation?
Have your estimated your family's income needs in good and bad times?
Are you building an investment corpus that can generate future income for you?
Do you always set aside money to save, before you spend?
Do you ensure that your expenses are within your current income?
If you have taken loans, are the EMIs less than 50% of your monthly income?
Can at least 50%of your investments be converted to cash if needed?
Have you put at least 20% of your own money, before taking a home loan?
Do you know if your net worth is positive?
Do you ensure that your saving is invested and not left idle?
Do you have a list of your future financial goals?
Do you have an investment plan to meet your financial goals?
Do you know that high return can be accompanied by high risk?
Do you choose an investment based on its return alone?
Do you hold a basket of investments spread across various choices?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
If your answers to more than half the above questions is “No” you need to see a financial advisor to plan for your investments and your financial future.
ANSWER
THESE
QUESTIONS
UTI Mutual Fund is among the largest mutual funds in India serving
over 1 crore investors. It offers over 70 products across asset classes
to enable investors to deploy their savings for wealth creation, into
professionally managed portfolios.
UTI Mutual Fund's investment philosophy is to deliver consistent and
stable returns in the medium to long term with a fairly lower volatility
of fund returns compared to the broad market.
UTI Mutual Fund is committed to adopt and maintain good fund
management practices and a process based investment
management.
www.utimf.com
Centre for Investment Education and Learning (CIEL)
was set up in 2007. CIEL addresses the educational needs of the
investment industry through e-learning modules, web-based
assessments, classroom training and certification programmes.
Several leading banks, mutual funds and investment distribution
companies are among CIEL's clients.
To know more about CIEL's certifications and training programmes,
email [email protected].
www.ciel.co.in
This booklet is being distributed as part of UTI Mutual Fund's Investor
Education Program for promotion of investors' awareness and
protection of the interests of investors.
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