Introduction
Welcome to the LGBTQ realm of FC, where connections go beyond the virtual. Every Wednesday from 9:00 PM - 10:00 PM, FC Financial Freeday (FFF) offers a unique space for absolutely important-for-life financial discussions. This blog compiles consolidating perspectives, possibilities, and experiences shared by finance professionals and practitioners during FFF. Some of these insights were shared while answering anonymously asked questions by the FC community. These insights are not advice; they're learnings that may or may not be helpful depending on individual financial goals. Each person's journey is a unique tapestry woven with personal experiences and aspirations. The conversation remains grounded in understanding different approaches to personal finance scenarios.
Before delving into community questions, financial guests start by answering: "What did you do last week or since we last met toward financial freedom?"
1. The Art of Personal Finance in India, especially for LGBTQ Folx
One of our speakers discussed his approach to managing his finances. Since our expenses have unique components not usually recognized, it's even more important for us to create our balance sheet to have a clear understanding. He explained that he was currently creating a balance sheet to determine his salary, fixed expenses, and potential areas for cost-cutting. He used a Google sheet to document these financial figures to help him plan investment strategies for the year. He mentioned that he received bonuses in the banks, which could lead to excessive investing earlier in the year, and he worried about overinvestment. Despite not having specific investment goals beyond savings for later life, he emphasized the importance of having a clear understanding of expenses to make informed investment decisions.
The speaker discussed personal finance and determined if expenses or investments were working for an individual. The key to knowing if an expense or investment was too much or too little lay in understanding how much one could save. To do this, one should have documented their enhanced salary, monthly inflow, fixed expenses, and discretionary expenses. A good metric to gauge savings was taking a ratio of expenses to salary, with a 40% ratio being considered adequate. The speaker had previously aimed to save 60-70% of his income but had then set a yearly savings goal. He also stayed informed about economic news and the stock market, specifically mutual funds and infrastructure stocks, to make any necessary adjustments to his strategies.
2. Market Insights and Infrastructure Investments: Decoding Financial Trends
Another speaker discussed the significance of infrastructure investments in India, as the government planned to increase allocation to this sector by around 40%. He cited examples of transportation stocks like BBL and IRFC and suggested investors consider infrastructure stocks or thematic mutual funds for long-term investment. The speaker also shared his recent stock transactions and mentioned his ongoing research on currency exchange markets, specifically ARCOM, and his interest in understanding how investors and global politics influenced this market.
3. Nominees for Mutual Funds
Another person revealed that he had recently updated the nominees for his mutual fund investments. A discussion ensued on updating nominees for mutual fund investments. The speaker clarified the optional nature of adding nominees and highlighted the MF Central portal for updates. If one doesn’t want to put a nominee, he mentioned, one can sign a declaration without which it is compulsory to put a nominee. These rules would have likely come into the picture in light of lot funds lying dormant with mutual fund houses with nobody to claim.
4. Unveiling the Art of Management Analysis in Investments: A Journey of Financial Discovery
Another FCer discussed his newfound knowledge of management analysis in companies. He explained that this qualitative analysis was not commonly taught but was essential for selecting companies for investment. He had taken a course on fundamental analysis by Finnovation Z, which had given him tips on evaluating a company's management.
Evaluating the quality of a company's management team and their strategic decisions can significantly impact the long-term performance of an investment. Factors such as leadership competence, corporate governance, and transparency in financial reporting play a pivotal role in assessing the potential of a company. Qualitative aspects such as management integrity, industry expertise, and long-term vision can provide a deeper understanding of a company's competitive advantage and its ability to navigate market challenges and capitalize on opportunities.
He also discussed the importance of aligning cash flows and profits in a company's financial statements which is a fundamental indicator of a comapy's financial health. A thorough analysis of cash flow statements alongside profit and loss statements can reveal the sustainability of a company's earnings and its ability to generate positive cash flows from its operating activities.
5. ELSS vs. PPF: Unveiling the Dynamics
One FCer shared that she had invested in ELSS to save some tax, which was discussed in our previous FFF. ELSS mutual funds are considered a great investment. Following this, one of our participants had a question regarding the lock-in period, to which one speaker explained that ELSS (Equity Linked Saving Scheme) mutual funds have a lock-in period of three years. Whether invested through a lump sum or SIP, each investment has its three-year lock-in period. This ensures that investors cannot withdraw the money before the completion of three years. He also clarified that this rule applies to each SIP installment separately to prevent system manipulation. In the subsequent months, it wouldn't have worked out, which is why each investment was considered separate, with its three-year lock-in period. ELSS offered benefits beyond tax advantages, primarily the forced long-term nature due to the lock-in period, enhancing returns over a minimum of four to five years.
ELSS provided two major benefits: maximized returns due to the enforced long-term commitment and tax benefits. On the other hand, PPF (Public Provident Funds) had a different logic and offered safe returns with a 15-year lock-in period, providing compounding interest benefits. Both ELSS and PPF had their unique advantages and risks. ELSS, directly invested in equities, carried more risk but potentially higher returns over the long term. PPF, guaranteed by the government, was considered less risky but offered comparatively lower returns. The choice between the two depended on one's risk tolerance and investment goals.
The speaker continued by saying that he has invested in PPF for at least 15 years to leverage the compounding of interest on interest, maximizing returns over time. The maturity amount in PPF was not taxable, providing an additional advantage. In contrast, ELSS had a different tax scenario.
For instance, if one invested one lakh rupees in ELSS and, after ten years, received a total of three lakh rupees, with a profit of two lakh rupees, a long-term capital gains tax of 10% on the exceeding one lakh rupees would be applicable, resulting in a tax of 10,000 rupees.
PPF, on the other hand, didn't incur any tax on maturity, making it more advantageous in such scenarios. PPF and ELSS were considered valuable additions to a portfolio, with PPF being favored for its long-term benefits, tax-free returns, and lower risk. The suggestion was to look at each for their benefit. ELSS and PPF both have 80-C benefits.
A podcast all about ELSS by Zerodha Educate: https://open.spotify.com/episode/557leb4V8KjkwgpxSoQIQF?si=0a97840a06534bf8
6. Diversification Strategies
A question was raised whether PPF's 15-year lock-in period could potentially be managed similarly to equity investments by keeping the money in equity for the long term. However, one speaker emphasized the importance of portfolio diversification. For instance, he mentioned that if one intended to invest one lakh rupees annually, the recommendation was to allocate 70-80% to the equity market through mutual funds and keep it there for an extended period, taking advantage of potentially high returns. The remaining 30% was advised to be diversified to manage risk.
To elaborate, the 30% allocation involved dividing it further: 20% in debt instruments or fixed deposits, which could be withdrawn in emergencies, and the remaining 10% in PPF. This allocation strategy aimed to balance the portfolio's risk and returns. PPF, with its tax advantages and no tax on maturity, was considered beneficial for the 10% allocation. The emphasis was on strategic allocation to different instruments to achieve a balance between risk and returns based on individual financial goals and risk tolerance.
Diversifying into different asset classes is crucial for achieving maximum returns. This approach was acknowledged and appreciated.
Community Questions
7. Profit Play
“There's this idea I follow where I book profits when my stock gives me twice the returns as my FD does; what are some of the ideas or rules you follow to book profits??”
One of the responses involved an example where the individual had received an allotment of shares and, upon witnessing a substantial increase, decided to sell a portion to recover the initial capital, the principal amount. The strategy was to let the remaining quantity run on profits while ensuring the principal was secured.
Another response highlighted the importance of having different strategies for different types of stocks, for example, different strategies for blue-chip companies compared to smaller-sized ones. The analogy of driving a car based on road conditions was used to emphasize that there cannot be a one-size-fits-all rule for profit booking. It was emphasized that decisions should be made based on the specific characteristics of each stock, considering factors like valuation and growth.
8. Bank Safety
“I came across this bank named DCB, which gives its customers an 8% interest rate for savings accounts. Is the bank safe? How do you know if a bank is safe or not?”
The response suggested studying the bank properly, considering factors like financial health, regulatory compliance, and reputation to assess its safety. The importance of thorough research before investing in stocks or banks was emphasized.
Continuing the discussion, the safety of banks was further explored, and the role of DICGC (Deposit Insurance and Credit Guarantee Corporation) was highlighted. The idea was to check whether a bank is insured by DICGC, which provides insurance for each depositor up to 5 Lakhs INR, ensuring the safety of the deposited money.
9. Choosing the Right Bank for Your Savings: Unlocking the Secrets to Optimal Returns!
“I am planning to open a Savings Bank account; which Bank should I go for? Which Bank will give me the highest rate of returns on my savings account?”
The conversation then shifted to the consideration of bank safety in the context of opening a savings account. The point was made that no bank is entirely safe, as any entity, including government banks, can face challenges or merge. The importance of research and due diligence before choosing a bank was emphasized. Additionally, the participant suggested not relying solely on the brand value or recommendations but also considering factors such as government insurance and the terms and conditions of the bank.
The final piece of advice given was not to invest or open a savings account solely based on the interest rate offered but to consider various factors like the bank's reputation, financial health, and regulatory compliance. The participant shared their practice of not considering any bank as entirely safe and emphasized the need for caution and research in financial decisions.
The Speaker then shared a practical approach of opening multiple bank accounts across different banks, maintaining a minimum balance in savings accounts, and allocating the major portion of money to fixed deposits. The suggestion was to diversify investments across banks to mitigate risks. The importance of checking whether DICGC insures a bank was reiterated.
Conclusion
The FC Financial Freeday provides a wealth of knowledge and diverse perspectives for the LGBTQ community in India seeking financial independence. This is the space for LGBTQ folx and allies to exchange practical finance knowledge. The insights shared are not personalized financial advice; individuals should consult a qualified financial advisor for their specific financial needs. As mentioned, these are personal perspectives, learnings, and experiences from the lives of finance professionals and practitioners from and outside the LGBTQ community in India. Take up and apply if an insight suits your context after your own due diligence.
Do you have more questions? Join us in FCverse - the metaverse for LGBTQ and allies to connect personally and professionally every Wednesday from 9:00 - 10:00 PM. Use the link and password given on the Come to FCverse page. You can also drop your questions anonymously via this Form. We will take up the question in the next FFF and give you the consolidated answer in our next FFF blog. While our blog captures valuable insights, there's nothing like the energy and real-time interaction at our Financial Freeday. It's impossible to encapsulate every detail in writing, so join us for an immersive session where you can ask questions, share experiences, and connect with like-minded individuals. Let's turn knowledge into action together!