Not long ago, I asked the WBC team to tell me what some of the issues members were facing were. I wanted to find out if readers were struggling with debt and credit problems.

A large number of members, I was stunned to hear, were struggling with debt.

Thinking over this result I came to this conclusion: WBC readers aren't immune to the debt and credit problems most of the world faces.

And that led me back to a thought I had after reading several letters from debt-strapped readers over a year ago: We have an opportunity to create added value to our business by developing a program to assist people with getting out of debt and repairing their credit ratings.

Debt Is a Serious Issue

Not all debt is bad, but all debt is serious.

In prior essays, I've explained that debt is a useful tool for building wealth when (a) it is not expensive and (b) you have a near-certain chance of using it to increase personal income and equity and/or business cash flow and long-term profits.

In future essays, I'll expand on this subject: the proper use of debt. But right now we are talking about how most people use debt - to finance lifestyles and purchase depreciating assets. Credit cards are a big part of that.

This sort of debt is bad. It is expensive. It erodes your wealth. But it also makes you poorer psychologically because it causes stress and anxiety, depletes your energy, and distracts you from profitable pursuits. This sort of debt is also the most common factor in marital problems.

Credit is related to, but different than, debt. Debt is what you owe, credit is what you can borrow.

You can be in debt and have good credit. You can also have zero debt and have bad credit.

Your creditworthiness is the measure of how likely you are to repay future debts. This is a valuable asset. You may believe you are creditworthy - and you may well be. But there are outside agencies that rate your creditworthiness… and banks and other financial institutions go to them-not to you-to determine whether they will lend you money and how much they will charge you for any loans.

Whether you know it or not, credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch your credit behaviour quite closely and provide for a credit score which denotes our credit worthiness.

We may think this is not an issue in India yet, but it is becoming one. Lately, the Reserve Bank of India (RBI) has addressed this issue by specifically suggesting banks to use credit scores even to price loans optimally.

Credit rating agencies assess your debt and payment history and give you credit scores. A high credit score is good. A low credit score is bad.

The higher your credit score, the better. It will make it easier and quicker to borrow money if and when you want. And those loans will be cheaper.

The lower your credit score, the more difficult your financial life will be. It will mean higher monthly charges and less ability to take care of routine bills. Ultimately it may mean a downward spiral in the quality of your life.

What We Can Do to Help

I started the Wealth Builders Club to help “not-yet-wealthy” people achieve financial independence in seven years or less. Knowing that so many of our readers have debt and credit issues, we have committed to developing a comprehensive and effective coaching program to eradicate debt while simultaneously building good credit. As you know, one of my top rules for creating wealth is to become a little bit richer every year.

It's hard to do that if you have significant debt and/or credit problems. But you can do it. And you need to do three things simultaneously.

First, you must increase your income. I talk about increasing your income in my Creating Wealth essays, it gives you practical ways to make more money in the club's Extra Income Project series.

Second, you must use a good portion of that extra income to reduce your debt.

Third, you must decrease the amount of money you are spending on your current lifestyle (what we call your lifestyle burn rate).

Those will be the three key behaviors to remember while you go through our debt - and credit-coaching program.

The Benefits of Taking This Course

Here's what you can expect from this course…

We will help you address and resolve your debt problems - this is serious work. It will require some sacrifice, but it will be worth it. In the beginning, you will make progress in small degrees.

But things will speed up over time. This will be especially true if you are able to generate more income, as we will be urging you to do.

We will also talk to you to improve your credit scores… Not so you can rush out and borrow more money. But because increasing your credit scores will reduce the amount of money you need to spend on debt service every month.

The goal of this part of our coaching program is to gradually but steadily help you understand and raise your credit scores so as to qualify you for the best interest rates on your house, cars, investment real estate, and even business loans.

And you'll breathe easier anytime a situation arises for which you need good credit.

Our program will then show you how to maintain good credit scores going forward.

Know this: Reducing your debt and increasing your credit scores have similar results. They both lower the amount of money you send to other people every month. This keeps more money in your pocket. This money is what you'll use for saving, investing, and starting your own business. And that's how you're going to get richer every year.

How We've Structured the Course

This program will have two focal points.

One is a focus on debt. That's because debt is the root cause of many financial worries. By correcting your debt situation, we'll fix several financial problems at once (low credit scores and low savings rates are just two of them).

To start, we'll look at the role of debt in your life and where you are today. Then we'll give you a roadmap to help you get out of debt as quickly as possible.

We'll end our analysis of debt by covering a few instances in which debt can actually be helpful. I'll say no more about that now.

The second focus of this program will deal with credit; specifically, how to improve your credit scores… no matter what they look like today.

A company like Credit Information Bureau of India Limited (aka CIBIL) keeps all record of your borrower behaviour and will give you your credit score.

We'll work with our partners at PersonalFN to tell you the best places to get your credit reports and scores - without getting scammed or paying a fortune.

Finally, to complete the credit section, we'll give you a plan to maintain your good credit. It's important to keep scores high so that you receive the best credit rates and terms in the future. This alone can save you thousands of rupees each year.

If you follow the advice we lay out for you in this course, you'll be on your journey to getting (and staying) out of debt. And you'll be armed with the knowledge of how to achieve and maintain high credit scores.

But we realize it doesn't end there. Keeping your debts low and your credit scores high is a lifelong process.

That's why I want you to view this course as a reference manual. Come back to it and review the material over and over again as your circumstances change. This repetition will help cement the lessons.

Commit to taking action on everything we send you. Before long, you'll feel (and be) richer.

Best, Mark

P.S. I hope you're ready to commit to the action steps we'll give you. Many people think they are ready, only to find that they become discouraged and quit early in the process. After all, facing the reality of your debts can be difficult.

That's why, before you even get started, I'd like you to do a realistic assessment of your current situation: Where are you financially… and emotionally? That means thinking about your current state of indebtedness. Most people avoid thinking or talking about their debts at all, which is a major problem-it means, most likely, that they will never take the actionable steps that are required for getting out of debt.

Tell us about your issues with debt. Your responses will help us arrange this series to better meet our readers' needs.

Dear Wealth Builders Club Member,

Back in the day, Indians used to give each other blessings, 'may you always live happy,' 'may you live for a hundred years.' One of these blessings was interesting - 'may you never fall into debt'… never become a 'karzdaar'.

We were right to hate debt. Moneylenders would squeeze the lives out of us for the smallest of loans, with the cruellest of terms. It was a sure-fire way into financial hell.

Today, however, we have forgotten how evil it can be. We cavalierly pull out the little plastic moneylender from our pockets to charge every little thing in sight. But even though the credit card is more sophisticated than the local moneylender, it is as capable of gouging our eyes out.

According to a report of Dec 2014 on the National Sample Survey Organization (NSSO) survey of debt in India, nearly a third of rural households and a quarter of urban ones are indebted. The scale of indebtedness revealed is astonishing: between 2002 and 2012, the average amount owed by each family has jumped seven times in cities and more than four times in rural areas. About 22% of urban households were indebted and the average debt per family was Rs 84,625, up from Rs 11,771 in 2002.*

That's a lot of debt for us to be carrying around at any given time. That's why, before you even get started, Mark would like you to do a realistic assessment of your current situation: Where are you financially… and emotionally?

In today's essay of our new Debt and Credit Solutions series, our Partners at PersonalFN write to us about the rules to follow for healthy credit card use… and tips for maintaining a healthy credit score.

To your wealth, Anisa Virji Managing Editor, Wealth Builders Club

A couple of years ago, one of the readers of our website, Shyam, reached out to us. He wanted to meet with one of our investment consultants.

Since it was the first meeting, our investment consultant was eager to find out what his concerns were and see how we could help him deal with his finances.

The meeting started out well, the consultant started to understand Shyam's current situation, and his expectations from us. But in the course of the meeting, the consultant realised he had learned the root of Shyam's problems.

The 3 core mistakes of Shyam's financial life:

Mistake# 1: He relied too much on borrowed money

Mistake# 2: He often missed paying his dues on time

Mistake# 3: He had accumulated interest on interest, which in turn left him with a huge credit card debt

This all part of the same problem - he had borrowed too much money.

Yes, he had huge credit card debt. He received several intimations from the bank to clear his dues. The recovery team of the bank often called him for money.

The credit card is a two-faced friend - while it gives you a certain amount of freedom with your finances, and you can certainly enjoy the benefit of holding a credit card, it can easily turn around on you and put you in a financial hell.

If you choose to go down the dreaded card route, you must ensure that your increased spending is not stretching beyond your means; which, as in the case of Shyam, can jeopardize your long term financial wellbeing. He used his credit card wherever possible even if he needed to make a tiny payment at a grocery store. And things just got out of hand.

While we guided him on how he can settle his dues, we also told him about 6 rules that should be followed while using credit cards.

Rule# 1: Read all terms and conditions carefully before you opt for a credit card.

If you find anything in the terms and conditions of the credit card that was not conveyed to you, or is contrary to what was conveyed to you; seek a clarification from the bank. If you are not satisfied with the clarification, do not hesitate to cancel the card.

Rule# 2: It is important to be aware of the amount of annual fees that the bank is going to charge you each year.

This is one issue which credit card users often come across. Some banks also issue 'life time free cards' i.e. no annual fees are charged on usage of such card. However, it is best to double-check with the bank what the executive has promised. Don't go by his tall claims, which in most cases is - annual fees will be waived off, cash back offers, more reward points, etc. This will help you from any surprise in future. Do not forget, the annual fee will be levied even if you do not do a single card transaction in a year.

Rule# 3: Do not fall for minimum payment due.

Minimum amount is the amount that you need to pay for the purchases done in that month so as to not attract a penalty for default on payment of card dues. Our suggestion is that you should pay the entire sum on the due date, as carrying forward your payment to the next monthly cycle will lead to a higher amount due in your next bill due to high interest rates plus taxes levied on the credit card.

Rule# 4: Avoid payment by EMI.

Whenever you make a large purchase (usually over Rs 10,000, although the amount varies across banks) you may get an offer from your credit card issuing bank to opt for the EMI (equated monthly instalment) facility to spread your payment across several months. You should ideally give the EMI facility a miss as the interest on the EMI can be exorbitant. To put it simply, pay your credit card bill in totality before the due date in one go.

Rule# 5: Do not borrow cash.

You might have received calls from a tele-calling executive of your bank, making you aware that your credit card can not only be used for making purchases on credit but also for borrowing cash. While making purchases on your credit card (so long as you pay on time) is okay, borrowing cash on your credit card is a very expensive affair and hence must be avoided. It is a strict No-No! While the annual interest on cash borrowings may vary from bank to bank, it can be as high as 30% to 36% per annum.

Rule# 6: Miss the Insurance benefit.

Many credit cards are known to offer an insurance cover. You should ideally ignore this benefit and go for the core offering - credit card. If the card has features that suit you, then you can opt for it even if there is no insurance cover. This insurance cover is unlikely to be sufficient for you and more often than not is linked with many terms and conditions and may even be difficult to claim. Do you know, using your credit card imprudently may have a big impact on your credit score?

If you are one of the many people making use of your credit card to fund your shopping, entertainment, holiday spending, and not worrying about repayment; here are some facts to bear in mind that will keep your credit score healthy.

We will tell you how to be a smart borrower i.e. how to know your credit score, how to keep it high, or make it higher than it is, and give you 3 top tips to get out of too much debt and keep your credit score healthy.

Let's start…

But first, what is a Credit Score?

Your Credit Score is a score provided by a credit information company (for example companies such as CIBIL, Experian, Equifax, HighMark) to a prospective lending institution, that will tell the lender how good or bad a borrower you have been.

The clear indication is that the higher your credit score, the better a borrower you are. This means that you probably make your payments on time. Hence the lender who is ready to lend you money knows that he will face a lower risk of you defaulting on your payment schedules and vice versa. The lower your credit score, higher the risk that you will default.

Hence you should aim to always keep your credit score high. A lower score means that if you want a credit card or want to take a loan in future, you are probably going to face a difficult time. As the situation stands today, lenders will restrict you if your score is poor by possibly charging you a higher rate of interest on a loan, but sadly they are yet to reward those borrowers who have a high credit score.

Now how do you find out your Credit Score?

A company like Credit Information Bureau of India Limited (aka CIBIL) keeps all record of your borrower behaviour and will give you your credit score. You just have to follow the simple steps given on the CIBIL website.

There is a nominal fee of around Rs 470, which is non-refundable and you can have access to your credit report within 3 business days.

If your Credit Score is low, how do you fix it?

There's no shortcut here.

If you have a low credit score due to poor borrower behaviour in the past, you can still improve your credit score by paying your dues on time. Repay any pending dues and ensure that you do not default on any payments in the future. While this will take time, but your small steps will definitely help raise your credit score.

If you come across your credit report and find that your credit score is low, not due to past indiscipline but due to an error on the part of the lending institution or on the part of CIBIL, you should immediately notify both - the institution as well as the CIBIL.

Who can help you get out of debt and fix your Credit Score?

Some of you may not have even realised when you built up too much debt and now you don't know how to handle it. Your credit score is certainly suffering. Repaying your debt and emerging from the debt trap should be your first priority. Doing so will automatically improve your score.

You can even approach a good credit counselling organisation that can help you fix your debt situation. These organisations are typically non-profit organisations, so fees are minimal, if there are fees at all. Such credit counselling organisation can help create a debt management plan for you, help negotiate with the lender on your behalf, and even try and get you a lower rate of interest to repay your pending debt. Simply knowing that you are not alone in your struggle of repayment of debt, you will also receive some peace of mind.

You can contact a credit counselling agency you deem fit, to help you out for both situations i.e. correcting an error or getting out of a debt trap.

Now let us help you with 3 top tips we promised …

Your 3 Top Tips to Keep You Out Of Debt Trouble And Keep Your Credit Score Healthy

Tip# 1: Make your debt payments regularly and on time. This will have the most significant impact on your credit score.

Tip# 2: Try and avoid having more than two credit cards. This will ensure that you don't keep credit limits that you don't really require. Even multiple loans should be avoided.

Tip# 3: If you are planning to apply for a new credit card or a new loan, do it in a short span of time - don't drag out the process. If you stretch the process over months, it will look like you have spent a lot of your time seeking credit, which will reflect negatively in your credit report. Do your research quickly, and take the loan.

'Rather go to bed without dinner than to rise in debt.' - Benjamin Franklin

It is better to cut down on your expenses as far as possible rather than borrowing in order to pay for a kind of lifestyle that is well beyond your means. Make sure you don't take more debt than you can handle. You should have a proper financial plan in place. One of the many benefits of planning your finances is that it will show you how your cash flows are structured year on year, and accordingly you will know how much EMI you can afford to pay in the coming years.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

The Times They Are a-Changin'

Bob Dylan called it. Things are very different today than they were a generation ago. For one, today's generation spends a lot more than what our parents and grandparents did.

The cost of living has gone up, but a culture of credit-backed consumerism has played a vital role. Walk into a mall and the picture is evident: everyone swiping credit cards and opting for easy finance options - all the fancies of life without a second thought.

Along with rise in income, our aspirations have stretched bounds. We want to live in our dream homes, drive the latest fully-loaded sedan, take exotic vacations abroad, avail the plethora of lifestyle choices… We want it all, and we want it now.

However, without much cash available in the bank account, we fund it all with loans and access to easy credit… at the risk, of course, of personal finances going awry, very awry.

We're often unaware that credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch our credit behaviour quite closely and provide for a credit score that denotes our credit-worthiness.

Here are some of factors they take into account when assigning a credit score:

Payment history Credit usage Duration of the account Type of loans (consumer, home, etc.) Number of enquiries to avail credit

Based on these factors, they assign you a score ranging between 300 and 900.

The higher the credit score, the better a borrower you are. As a responsible individual, you should try to keep your credit score healthy. This means you should make your payments on time. This tells lenders that there is a low risk that you will default.

If you maintain a low credit score, here are a few problems you may encounter:

You may find it difficult to get a loan in future Lenders may charge you a higher rate of interest Lenders may charge a higher loan processing fee

Why? Because a low credit score means lenders are exposed to a high risk of default.

So, how do you improve your credit score?

If your credit score is low, here's what you need to do…

Pay your credit card bills on time, and ensure that the outstanding amount is paid in full
Avoid payments by Equated Monthly Instalments (EMIs) on credit cards
Avoid withdrawing cash using a credit card
Do not opt for multiple credit cards or apply for multiple loans
Use your credit cards in moderation - set a monthly limit for yourself
Do not rely too much on borrowed funds
Pay your EMIs on time for all kinds of loans

Remember, when you close your loan account(s) in full, do not forget to obtain from your lender a closure letter or No Due Certificate (NDC), statement of account(s), original documents that you may have submitted to the lender, and remove lien on assets… all this would act as evidence for you and help you elevate your credit score in the future.

Once your loan accounts are closed, enquire with your lend to ensure they inform the same to the credit bureaus. If the lender has not intimated the closure of your loan account to the credit bureau, do it yourself (by writing to them and submitting the requisite documents as proof).

If you notice that your credit score is low due to an error on the part of the lending institution or the credit bureau, you should immediately notify both, the institution as well as the credit bureau.

By maintaining a good credit score now, you keep yourself eligible for cheap finance in future, when you might really need it.

Today, barring few large banks, most of the other banks are using flat loan pricing model wherein good credit behaviour is not incentivised and neither the bad ones are penalised. In India, credit scores have so far been used only to determine whether to accept or decline the credit application of the borrower. But lately, the Reserve Bank of India (RBI) has addressed this issue by specifically suggesting banks to use credit scores even to price loans optimally.

If banks start following this practice widely, bargaining with banks for cheaper loans based on your credit score might soon become possible for borrowers.

When negotiating a loan, in addition to your credit score, banks may also consider:

Your income and occupation Your saving account history Even your income tax returns for the past few years

It may seem invasive, but banks need a fair idea of your financial behaviour to determine their lending risk.

What if you are unable to fix your credit score by yourself…

If you’ve fallen victim to the debt trap, a host of credit counselling organisations can help. They may be able to help you with a debt management plan and even negotiate a lower rate of interest with the lender on your behalf. These agencies are typically non-profit organizations, so don’t worry about fees. They are minimal. Simply knowing that you are not alone in your struggle is a great relief.

Concluding points…

Taking calculated risk can be a good way to build wealth and meet certain life goals, but overindulging in credit and debt can be hazardous to your wealth and health.
Stretch within your means, and do not take leaps so long that they could jeopardise the financial well-being of your family.
To ensure you don't take on more debt than you can handle, have a prudent financial plan in place.
Remember: if you are a safe borrower, you will score well on your credit worthiness.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Ask Nobel Laureate Muhammad Yunus about the positive role that credit can play in the world and he'd hasten to tell you that credit can transform lives. A Bangladeshi scholar, entrepreneur, social leader, economist, and the founder of the Grameen Bank, Yunus believes that credit is a fundamental, universal right.

Yunus pioneered the concept of micro-credit in his country and around the world. He made eradicating poverty look simple. How? Empowering the poor through credit.

But what about creditworthiness?

As Mr Yunus teaches, we must prepare even the poorest person to handle debt confidently. Let's not forget so-called creditworthy companies have caused Indian banks trouble.

State of today's banking system: Those who need loans can't get them. Lenders chase those who don't need loans. The debt-averse eschew debt-creating opportunities. The debt-addicted ruin their finances and put the entire banking system at risk.

So how does one act sensibly and build wealth with borrowed money?

Moderation is the key. Too much of anything can be bad.

Greece is bankrupt because of high levels of debt at every stage of society. People borrowed beyond their capacities. Banks lent beyond their capacities, sometimes even leveraging their own positions. The introduction of the euro suddenly raised Greek purchasing power and supported unrestrained consumerism. Productivity and export competitiveness died slowly. Easy and borrowed money created asset bubbles only to get pricked badly.

If you only considered the state of Greece, you might conclude that all debt is bad. But Mr Yunus proves that even the poorest of the poor can use moderate debt to create wealth.

Greece's bad example teaches two important lessons about debt…

#1 Don't borrow beyond your capacity to repay.

You must ensure that you don't over-borrow and put a strain on your finances. Just as countries track their debt-to-GDP ratio, there is a similar way you can check whether you are over-leveraged – your debt-to-income ratio.

Debt to income ratio = Total monthly outgoings on liabilities (EMIs) Total monthly income from fixed sources

This ratio tells you the proportion of your monthly income you spend on servicing your debts. Ideally, it should not be more than 0.35 (or 35%). The more you exceed this number, the more strain you put on your income.

So, before taking a loan, assess your monthly income and expenses to see how much additional outflow you can afford. This will help you decide how much loan you can comfortably handle.

#2 Don't borrow to fund luxuries or speculation.

Never borrow to buy luxuries such as posh cars, iPhones, or holidays. And never borrow to play a horse race or gamble in a casino or even to speculate in stock markets. If you lose money in betting, you have to service your liability without having made a single rupee.

But do not shy away from borrowing for productive purposes or to create productive assets. This is the single most important factor you must consider while borrowing: Will this debt fund productivity?

If you borrow to start a business, your business should generate cash flows and help you service your debt.

If you purchase a house with borrowed money, besides earning rents, you may also enjoy capital appreciation, which you use to pay down the debt.

Mind the cost of borrowing

Loans that don't require collateral for approval are usually costly. This is why personal loans cost 14%-16% per annum, whereas home loans, although floating, charge interest of about 10%-11% per annum.

If you are buying a house to live in, you may only bother considering the affordability of the house and your capacity to repay the loan on time. But if you want to create an asset, such as a business or a second home, you must make sure that your expected cash inflows from the asset exceeds the cost of the loan. If you can manage this, a loan becomes a powerful tool of wealth creation.

For example, if you want start a business, you must assess not only how much capital (that is, debt) you need to fund the venture but also how long it will take you to break even with the cash you generate from the business. If the gestation period of the business is short and your risk capacity is high, borrowed money may help you create wealth. On the other hand, if your potential business is going to take a long time before it pays off, borrowing too much up front may be a bad idea.

Similarly, when you buy a property with borrowed money, you must factor the scope for further appreciation in that locality and how long before tenants can occupy the space. If demand outpaces supply, your property will appreciate. And completed, ready-for-possession properties carry less risk and can generate cash inflows through rents immediately, helping you service your loans comfortably.

Now…if you have concluded that borrowing to invest in stocks to make higher gains than the interest on your debt, you are mistaken. Equities are far more volatile than the real estate, and Indian markets are largely driven by foreign investors, who aren't much different than Flamingos: They come in search of food, and when they have enough, they return home. Or a crisis back home may force them to flock back immediately.

Don't assume that just because you are borrowing in the hope of asset creation (rather than luxury) it's a good idea. Borrowing to play the stock markets is more like borrowing to bet on the horses. We're not saying you shouldn't invest in the markets or that the Indian markets don't offer great wealth creation potential. However, they are far too volatile and carry far too much risk to merit borrowing to fund your stock investments.

Are you prepared to borrow and become rich?

Mohammad Yunus and Grameen Bank changed the fate of thousands of beggars in Bangladesh by providing moderate loans to fund genuine wealth creation. Creating wealth with borrowed money is certainly possible. You won't build wealth if you borrow to fund luxury or speculation. However, moderate, mindful debt used to fund productive purposes has the power to transform the world.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

'My life is an EMI,' said Mr Desai as he began a consultation with one of our investment advisors.

'Could you elaborate?' asked the advisor.

'Well, practically whatever I've bought for this house [where we are seated], including the house itself, I've bought on credit. This 50 inch 3D LED TV, the home theatre and sofa sets, my iPad, and many other things for my family, I've bought on instalments,' he told us as he pointed around to the various comforts he and his family enjoyed.

Our advisor looked concerned. But then Mr Desai said…

'But now I want to get my house in order for the financial well-being of my family. I have two little daughters studying in a good school, and I want to provide for their higher education in whichever stream they choose and get them married in style. I want to fulfil all my responsibilities wisely and eventually live a blissful retired life.'

Our investment consultant then provided a few wise words on financial planning, and Mr Desai decided to enrol in our personalised financial planning service to correct course before it was too late.

In our era of consumerism and competition, we all have aspirations. But we do not all realise that we might be aspiring, consuming, and competing beyond our means.

Home theatres, huge TVs, tablets, laptops, mobile phones, lavish interior decor…perhaps all of it was bought on credit. Finance options are readily available in the form of easy EMIs and credit, and they are designed to lure us into the debt trap.

It's one reason malls and electronic shops are seeing a good footfall. Customers gush over discounts, and the shops are eager to promote them. This, of course, is just another lure. The offers make us think we're saving money, but they are merely another lure designed to encourage us to exchange our long-term financial well-being for items we don't need.

'If you buy things you don't need, you will soon sell things you need.' - Warren Buffett

Credit has a way of becoming a habit, and spending can easily turn reckless. It's easy to get caught in the debt trap. But indulging in the occasional shopping spree can harm your long-term financial health. And it can derail your most important financial goals, such as your children's education, their marriage, and even your own retirement. And sadly, unlike Mr Desai, not every one realises they need to correct course before it's too late.

It is vital to ensure your spending habits do not affect your priorities. Here are some tips to avoid reckless spending…

Determine you monthly budget

To do this, you must first list your financial goals. Then determine when you want to achieve these goals and how much money it will take. Don't forget about inflation! The next step is to calculate the amount you'll need to save every month, taking into account the rate of return on investments. These figures will help you determine your monthly budget.

Plan for personal expenses

To avoid indulgent purchases, you need to account in advance for your family's personal expenses such as clothes, accessories, etc. Include these expenses in your budget, and make sure all family members stick to it. It is smart to purchase items that are on sale, but don't let these marketing strategies entice you into buying unnecessary items you didn't plan to buy. If you are having trouble saving for your financial goals, explain the situation to your family. Only when they too recognise the situation will you be able work together towards reducing your overall family expenses.

Plan for household expenses

Apart from personal expenses, your budget should also plan for all household expenditures. All shopping trips must be well planned so as to save on transportation costs. When grocery shopping, account for spoilage…and make sure your family doesn't waste food. Likewise, ensure that fans and air-conditioners are used thoughtfully. Same for mobile phones and data plans.

'Don't save what is left after spending; spend what is left after saving' - Warren Buffett

Find an alternate source of income

Sometimes reducing expenses may not be enough to correct course after years of particularly damaging spending. And so you might also need to find an additional source of income. Even if you are already working full time, you might need to take on a part-time job to make up for past recklessness. Perhaps you will need to become a dual income household with both spouses earning an income.

The idea here isn't complicated: reduce expenses and increase savings. But correcting course does require discipline. Just remember that it's all in the interest of you and your family's long-term financial well-being.

Now, if your bad spending habits have led to deep credit card debt, here is a five-point approach you could follow…

Assess all your credit card dues: The first step to eliminate your credit card debt is to evaluate all your obligations. Take note of all the credit cards you own, analyse your online accounts and paper bills, and the interest rates applicable on each card. This will help you to determine the total amount you owe and the cards that bear the highest rate of interest, which are the ones you should pay off first so as to save on interest payments.

Renegotiate the rate of interest on your credit card: You can try to reduce the interest rate you are paying on your credit card by contacting each credit card company. Even if you manage to reduce the rate by a small percentage, it can help you save a huge amount on interest payments. Your credit card companies may or may not renegotiate interest rates, but there is no harm in asking.

Create a budget to pay off your credit card dues: In addition to your budget for household and personal expenses, you will need to account for credit card debt repayments. Include in your budget the exact amounts you will pay off each month. You might need to prioritise these payments over your personal and household expenses. Meaning you may need to eliminate outings or ration your 'essentials' such as electricity and mobile use. It goes without saying, but don't add to your debt with unnecessarily credit-fuelled shopping sprees. If you have extra credit, don't give in to the temptation to use it. It will only lead to unnecessary purchases and put you back where you started.

Utilise windfall income to repay your debts: Any windfall gains, such as lawsuit judgments, inheritances, divorce settlements, insurance settlements, or retirement packages, should be used to pay down your debts. Even if you had other plans for this money, it is wise to repay your debts first if you want to boost your financial health and meet your longer-term financial goals.

Implement your debt repayment strategy: Once you have determined a method to budget your expenses and pay off your dues, you must start to implement it. Do not delay or procrastinate these payments, as the interest will only mount higher with every passing day. It is also prudent to keep a track of your progress. Revisit your finances regularly to ensure that you have not deviated from the plan.

A debt-free life is achievable. But it takes practical planning and a bit of discipline. As Dave Ramsey, a personal money management expert, likes to say, 'Live like no one else now…so that you can live like no one else later!'

If you feel yourself slipping into the debt trap, don't hesitate to seek the guidance of a financial expert or credit counsellor. Typically non-profit organisations, their fees are minimal…if any at all. And a good credit counselling agency will create a personalised debt management plan, negotiate with the credit card companies on your behalf to get you a lower rate of interest, and perhaps best of all, provide you with peace of mind knowing that you are not in it alone.

At PersonalFN, we hope that you will keep all this in mind the next time you go on that credit-fuelled shopping spree.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Ask your dad if, before your time, he used credit for everyday purchases and I'm sure the answer will be no. Traditionally, Indian consumers have been averse to buying on credit. But that was the past.

Today is the golden age of plastic…'plastic money'!

Now, thanks to credit, the fancies of life are available before we even earn an income. Gadgets, appliances, accessories, bikes, and more! But, as American humourist Evan Esar said, 'A batch of credit cards fattens a wallet before it thins it.' It's all fun until you have to foot the bill.

Credit cards aren't inherently bad, though. It's about how you use them. If not prudently, it's all too easy to fall into the credit card trap and ruin your financial health.

Here are some points to keep in mind when selecting the right credit card for you:

Credit limit

Your credit limit is the maximum amount you can spend on a credit card. If you are a first-time card user or an avid spender, it's better to opt for a card with a low limit, say Rs 15-20,000.

Be aware that sales personnel from banks may try to push a higher limit on you. While you may indeed deserve one, just remember that a higher limit could permit you to spend beyond your means. This is how the credit-debt trap begins.

Some lenders allow you to exceed the credit limit subject to terms and conditions, but it's best not to indulge in this unless there's a dire need.

It is possible to borrow cash from your credit card, but the interest rates are very high and can damage your financial health. It's best to avoid cash advances unless, again, the need is dire.

Interest rates

When shopping for a credit card, research the interest rate the bank charges for partial and delayed payments. Normally, the interest rate levied is 2% to 3% per month. To avoid paying higher interest and falling into the trap, it's ideal to pay your dues in full and on time every month. Also be aware of any annual fees or other fees attached to the credit card and do a comparative analysis of different banks.

Annual fees

Check if the bank levies annual fees or charges to use the card. If so, look into having them waived. It is common for banks to waive the annual fees / membership fees for the first year. In the second year, fees could be applicable. It's possible to be promised a fee waiver for the second year as well, but you must authenticate this claim with the bank directly to circumvent a 'mis-selling' trap.

Lifetime free cards

'Lifetime free credit cards' are relatively new. While there was a time when most banks charged annual fees on their credit cards, annual fees are being phased out. In effect, clients are offered 'lifetime free cards' - that is, no annual fees for life. Again, double-check any telesales personnel promises with the bank.

Grace period

Another factor to evaluate is the extra time or grace period the bank offers you to pay your outstanding dues without interest. The longer the grace period you have, the better. This can offer a cushion, though it's better to pay off the outstanding dues before you need the grace period.

Rewards and incentives

These days, most credit cards offer reward points and incentives on purchases or dining out that can be redeemed or used at a later date.

For instance, some credit cards allow you to redeem reward points at certain stores or shopping centres. If you are a frequent shopper at these outlets, then consider a card that offers rewards there. Likewise, if you are moviegoer, opt for a card that offers reward points on entertainment. Analyse your spending habits to determine which card suits your needs best.

Irrelevant benefits

Banks smartly advertise their credit cards by adding on auxiliary services and products these days, however be astute enough to assess whether this makes sense to your needs and lifestyle. It may happen that various benefits are offered, like an insurance cover coupled with the credit card, but makes little sense if you already have an insurance provider. As attractive as they might be, be wary about such offerings because the core utility you're looking for is the benefits of a credit card. If a card has features that suits you, opt for it even if there is no insurance cover or other add-ons.

Terms and conditions

Remember, the devil is in the fine print, so take the time to read the terms thoroughly. Unfamiliar terms and conditions can jeopardise your financial well-being. If you find anything, jargon or otherwise, in the terms and conditions section that was not conveyed to you or is contrary to what was conveyed to you, seek a clarification from the bank and avoid taking or using that card.

Once you begin to use the card, it is assumed that you have read the terms and conditions and have agreed to them.

Choosing the best credit card for you is just the first step. How you use this plastic money will determine your long-term financial well-being. Here are few tips to empower you:

Have a budget and spend within your means

Avoid converting large purchases to EMIs

Pay-off your credit card dues in full and on time

Claim waiver on annual fees by keeping a good repayment record

To swipe or not to swipe? That's the question. It's all very simple: Be a wise spender and use credit cards with caution. Avoid opting for many credit cards as it could cause a debt storm if you aren't careful.

PersonalFN believes that owning a credit card can be convenient as long as you have the means to pay off your dues every month.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

A leap of faith can change one's life. But the impact of the change depends on how, when, and from where you jump.

Jumping up and down is excellent cardiovascular exercise. Jumping into a swimming pool is great fun. Bungee jumping is a real thrill. But every jump requires prudent safety measures…no matter how strong your faith. Faith and reason are not mutually exclusive.

Entrepreneurs looking to take a leap of faith in their business should also enact safety measures…no matter how confident they are about their business.

What separates a successful business from an unsuccessful one? Good judgment regarding risk. Launching a new product is as much of a risk as it is an opportunity. And taking a business loan can be a double-edged sword. If the funds are used productively and prudently, they could provide the springboard your business needs. Without careful planning, however, borrowing on a whim or during a crisis is the like bungee jumping without a harness.

Before you apply for a business loan consider:

Why you need funding How long it will take to pay it back Entrepreneurs might borrow for many reasons - from business expansion to working capital requirements. But it is best to borrow to scale up existing business activities or to start new ones. Borrowing to run an existing business should be a last resort. Ideally, a business operates on the cash it generates. Regularly borrowing to sustain your business will cause difficulties sooner or later.

That said, borrowing to expand your business does not automatically make the loan less risky. But it does give you a higher purpose.

Before you apply for a business loan, you need to know how you will earn additional profits to be able to service and retire the loan. Be clear with your business plan. Predicting future cash flows is extremely complicated. And it's not what you aim to earn; it's what your business is capable of earning, which depends on…

The economy Your industry Demand Competition Regulations Common Mistakes When a businessperson starts getting more orders, they tend to become bullish about their business and highly motivated to expand. One more product…one more store…one more market…and so they borrow - sometimes more than they should.

All-out expansion can be risky. Imagine this: After a boom in the automobile industry, a small auto-component maker thinks about doubling his capacity. His business has a reasonable surplus and little debt. He has an aggressive expansion strategy that he's confident he can implement. A bank grants him a loan. But the automobile industry enters a rough patch just as the expansion nears completion. A double whammy: The business has invested heavily in new capacity, but now even the pre-existing capacity is underutilised.

We do not wish to encourage pessimism but a 'wait and watch, slow and steady' approach.

Smart Borrowing is Simple Before you calculate how much you will borrow, you must understand industry trends and dynamics. The pricing power of producers and service providers in your industry is a good signal of the pace of activities. It's the job of the entrepreneur to judge how long that pricing power will last.

More competitors and less demand can puncture the industry wheel. Avoid borrowing when the balance sheet shows all-time high margins and revenues. That's often the end of a cycle. True, not all businesses are cyclical, but demand-supply dynamics are not constant, and no industry is immune to change.

Keep in mind that a strong business with a promising future will always be able to find a financer. If a conservative bank refuses to lend, there may be a lacuna in your analysis. Consider the bungee instructor who prohibits an obese person from jumping. Banks, prudent banks, serve a similar function. They will not let you jump to your death. It's not good for business.

So hash out the details again. But don't waste time on elaborate project reports. Coaxing a loan from a bank through affected presentation may get some success, but it's detrimental in the long run. A loan proposal that is strong at core will see the most success.

When you propose a loan to a bank, they will want to know your:

Personal credit history Trade credit history Business cash flows Collateral security Firm's net worth If you or your business score low on any of these items, a bank will be reluctant to lend you. So before you apply for a loan, take a 'business fitness test'. And don't jump unless you are fit.

Before the financial crisis in 2008, a friend of mine TD invested the bulk of his retirement money in a couple of stocks he was excited about.

One happened to be Lehman Brothers.

As you know, Lehman Brothers went bankrupt in September 2008 and sparked the onset of the financial crisis.

With a significant amount of his portfolio in Lehman, TD's portfolio was decimated. It forced him out of retirement and back to work.

Risk is an element of every business and investment transaction. But it can be managed. We've distilled the “best practices” we developed over the years for managing risk. We've narrowed them down to an essential three.

We are calling them The Wealth Builders Risk Management Strategy. Three simple protocols based on three common - but very dangerous - mistakes.

The first mistake is having too much money invested in only one or two asset classes - most commonly, stocks or bonds.

The second mistake investors make is putting too much money in only one or two investments within an asset class (as TD did when he loaded up on Lehman Brothers).

The third mistake is keeping your money in an investment as values plummet, hoping for a correction - a very common mistake that is easy to fix.

Our Risk Management Strategy has a solid and dependable solution for each of these three mistakes.

Our strategy involves asset allocation, position sizing, and exit strategies. For the purpose of simplicity, think of it as a three-legged stool of safety.

1st Leg: Asset Allocation

The most important risk-reduction strategy is diversification by asset allocation. By that, we mean dividing your investment capital into different asset classes. This way, if one asset class tumbles, you have additional money invested in other classes that may not drop as fast. Or that may hold strong. Or that may even increase in value.

To show you how important asset allocation is, let's look at what would happen to three different investors in case of a stock market crash. We'll assume each used a different allocation strategy.

First, let's look at Ravi. Like TD, Ravi invested 100% of his money in the stock market - let's say 1,000,000. In other words, he had no diversified asset allocation plan. That meant his money was wide open to stock market volatility. So if the market dropped 30% that year, Ravi lost 300,000.

Our second investor, Naina, also invested 10,00,000. But she took a more conservative approach. She followed a traditional asset allocation model - 60% in stocks and 40% in bonds. Let's look at the difference it made.

Like Ravi, Naina lost some money. But she had less money in the stock market. Therefore, she lost less than he did. That alone makes her strategy superior. But it gets better…

Bonds are typically inversely correlated to stocks. So if the stock market is plummeting, bonds might actually rise. Let's say they rose by 5%. So while 60% of Naina's money dropped 30% (the stock market losses), the other 40% of her money actually rose 5% (the bond gains). This means Naina actually lost only 20% of her money - 200,000.

This is a better result. But we have a far better way.

In our view, the two-asset class model is far from optimal. We prefer to diversify over five additional asset classes. Our Asset Allocation Model could include the following seven asset classes:

Cash Bonds Precious Metals Real Estate Options Stocks: shorter-term Stocks: longer-term

Had you diversified your portfolio this way in the face of a financial crisis, you would have had the best results of all our three scenarios.

Let's look at our third investor, Sejal. To make it simple, let's say Sejal spread her 1,000,000 equally between the above seven asset classes - about 14% in each category.

Note: Our official asset allocation model does not weight each asset class equally. Instead, we weight the asset classes based on what counts: how much money you have available to invest and how many years you have left before you want to retire. We provide different categories to fit the wide scope of our many readers' financial and retirement situations. But for simplicity in this example, we're assuming an equal weighting in each asset class.

Now assuming this is how the market moved:

For cash, the average money market fund was up 2%.

For our bond asset class, we'll use the same return from earlier - 5%.

For our precious metals/gold allocation, the price of gold rose 4%.

For real estate, a 15% appreciation.

In our options asset class., let's assume a loss of 15%.

Our asset allocation model divides the “stock” asset class into two categories: shorter - and longer-term stocks. These returns are harder to quantify.

Let's assume the two stock asset classes would have lost 25% overall.

Add up the returns of these seven different asset classes. And you'll find Sejal lost only 8% on her entire portfolio, or 80,000. That's almost 80% less than she would have lost with 100% invested in stocks. And 60% less than the second model (stocks and bonds).

The main advantage of our expanded asset-allocation strategy is obvious from this example: less downside risk.

These seven asset classes are not correlated. That is a good thing. It means less volatility and less damage when things get crazy.

Our asset allocation strategy is unique. But having seven asset classes is only one component. We also provide guidelines as to how much of your money you should have in each class which we'll discuss in the next essay. Stay tuned.

Best, Mark

In my last essay, I introduced you to our unique Risk Management Strategy. We discussed the 1st Leg of the three legged stool system: Asset Allocation - the importance of dividing your investment capital into different asset classes. Today, I will reveal to you the other two legs keeping your investments safe.

2nd Leg: Position Sizing

The second leg of the safety stool is position sizing. This is a simple strategy dressed up in a fancy name. The idea here is to limit risk by deciding you won't put more than Rs X or X% of your capital in any single investment.

Asset Allocation Whereas asset allocation reduces overall risk, position sizing reduces the risk within those asset classes. You do this by putting a limit on what you can put in any one investment.

For example, if you had Rs 7,000,000, you might put 1,000,000 in each of our seven recommended asset classes. That's asset allocation. Position sizing would determine how much of that 1,000,000 you invested within those asset classes. You might say that you'll invest no more than 70,000 in any one deal (7,000,000 x 1% = 70,000). So if that one investment of $70,000 went down to zero, your investible net worth (7,000,000) would go down by only 1%.

Position sizing is how conservative investors protect themselves from catastrophic losses. I am a strong proponents of position sizing. I recommend you pick a limit and stick to it. Especially if you find yourself wanting to “go big” on some gamble like TD did with Lehman Brothers.

And keep this very simple axiom in mind: The smaller you can make the limit, the safer you will be. Currently, my position limit is 1% of my investible net worth. But when you are starting out, it will be hard to set such a small limit. A good rule of thumb for most people is 3-5%.

Okay, we've covered two legs of our three-legged strategy. But you don't need to know much about physics to know that stools cannot stand well on two legs. For maximum safety, we recommend a third strategy. This will further protect you by limiting the amount of money you can lose on any individual investment. I'm talking about having an exit strategy or what I call a “Plan B.”

3rd Leg: Exit Strategies

I'm going to explain the exit strategy by referring to one of the asset classes we identified above: stocks that fit into your long-term portfolio.

You buy these stocks in order to outperform the stock market. When you buy stocks using our position-sizing strategy, you are protected in that you have limited your potential losses to a percentage of your portfolio (1% for me - 3-5% for you, perhaps). But you can further reduce your risk of loss by attaching a “stop loss” to each stock you buy.

A stop-loss price is simply a preset price at which you or your broker will sell the stock if its price drops that low. For example, if you set a 25% stop loss on a Rs 20 stock, you or your broker will sell it if its price drops to Rs 15.

This further reduces the risk you are taking to 25% of your position size. Getting back to our earlier example, if the position limit you set was 70,000, you would never invest more than 70,000 in any one stock. If that stock position's value dropped to 52,500, you would sell it. You would take a loss of 17,500 and no more. Thus your total loss on that investment wouldn't be Rs 70,000 - or 1% of your investible net worth - but 17,500 or only one quarter of 1%.

As you can see, stop losses keep your losses to a minimum. And you have can control what you're willing to lose.

Stop losses are very effective. They remove emotion (an investor's great enemy) from consideration when a stock, a group of stocks, or even the entire stock market is tumbling.

As you can see, when you combine stop-loss limits with position sizing, you reduce risk dramatically. To reiterate, position sizing limits the loss you will take on any one particular investment. Stop losses limit the loss you can take in that particular investment to some predetermined percentage (in our example, 25%).

One more example to make sure you get it:

Let's say you have investible assets of 1,400,000. And you divide that equally into each of our seven asset allocation models. Your risk in any particular asset class is 200,000 or about 14% of your total investible net worth.

Let's say again that you decide never to put more than 2% of that, so Rs 20,000 in any one investment position. That 20,000 is your position size.

You wake up one day and decide to add Super Stock Co. to your portfolio. You plunk down 20,000. And tell your broker to use a 25% stop loss.

You buy the stock at Rs 10. Suddenly, it goes down to Rs 7.50, setting off your stop-loss limit. You sell it, taking a Rs 5,000 loss (25% of 20,000).

Your entire loss at Rs 5,000 is only one-third of 1% of your investible net worth. Not much to fret about. Don't you agree?

Now, there is much more to tell you about how to use stop-loss limits. One thing, for example, is setting a “trailing” stop loss.

There is also much more to learn about how to allocate assets and we will bring you more in future essays.

In Summary

I believe that the first rule of wealth building is “never lose a lot of money.” The best way to follow that rule is to utilize all three of these strategies every time you invest in anything. Remember, a stool can stand very well on three legs. But fails to stand on one leg or two.

Editor's Note: I recently asked some members of the Wealth Builders Club whether they would like any tax-related information. JJ wrote saying, ‘Yes, tax related matters could be of use to most of the members.’ But tax is a broad field and to start with. Another member, SS suggested that we start with personal finance. Luckily for us, personal finance advice is easily available to us because of our partnership with PersonalFN. So here is your first essay on Tax, in our Financial Planning series.

Anisa Virji Managing Editor

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I'm too worked up these days ­- juggling between my business and the constitutional duty of paying taxes. Now I'm rushing to my CA's office to set things right on my tax filing.

According to my CA, I'm liable to dole out a large sum as income tax, despite having made all necessary tax saving investments. I'm wondering how I can lower my tax outgo with some last minute tax planning.

- One of our clients

It's that time of the year again. As the last day to file approaches, many of you are feeling the heat and rushing to your CA's office with (or without) all the requisite documents to file your income-tax (I-T) returns.

You see, paying taxes is not only your legal, but also a moral responsibility. It earns for you the dignity of consciously contributing to the development of the nation. Not to mention that Income-Tax (I-T) returns validate your credit worthiness for financial institutions… and that can help you in accessing many financial benefits such as bank loans and much more.

Due dates for individual returns have been extended from the usual July 31 to August 31. But to avoid the rush at the end of the extension, the finance ministry has asked taxpayers to file early.

Below we've answered some of our clients' most frequently asked questions…

What if I miss the tax-filing deadline?

If you don't file your I-T returns by the due date, you can still do so before the end of the assessment year without penalty. As per Section 139(4) of the Income-Tax Act 1961, one is allowed to file his/her I-T return up to one year after the relevant assessment year or before the completion of the assessment, whichever is earlier.

For the financial year 2014-15, the relevant assessment year is 2015-16. So if you miss filing your income tax return by the due date (July 31, 2015), you can still file before the end of the assessment year (March 31, 2016). This is the latest you can file with out penalty. If you fail to file before March 31, 2016, the Assessing Office may levy a penalty of Rs 5,000.

What if don't pay my taxes on time?

If you don't pay your taxes on time, then a penalty interest of 1% per month (simple interest) will be levied on the amount of tax due or balance tax payable from the due date to the actual date of filing. However, if you are lucky enough to have no tax payable, you won't be liable to pay any interest, even if you file your return after the due date but before the end of relevant assessment year.

What is advance tax and what if I miss paying it?

If you are liable for more than Rs 10,000 in tax, then advance tax needs to be paid in three instalments. At least 30% of your tax payable is due by September 15. At least 60% is due by December 15. And 100% is due by March 15.If you defer any of these payments, then a simple interest of 1% per month penalty will be levied.

Filing your return on time comes with two major benefits:

The right to make amendments:

I-T returns aren't above human error. If you file your return by the deadline, you enjoy the right to correct any errors or make as many changes as you like before March 31 or the date your returns are assessed, whichever is earlier. You should always strive to file a complete and correct return, but if you notice a mistake or forgot to claim a significant tax-saving benefit, as long as you filed on time, you can go back and make the necessary additions or corrections.

The right to carry forward losses:

If you have a capital gains loss in your investment portfolio, the Income Tax Act allows you to carry forward losses to adjust against future gains. However, if you haven't filed your returns on or before the due date, you are disallowed from carrying forward losses. If you do file on time, you may carry forward losses for the next eight years!

On the other hand, not filing your I-T return on time can bring peril, such as:

Risk of prosecution, which may lead to imprisonment from six months to seven years, plus the fine

Difficulty in obtaining bank loans, credit cards, visa application approval, and registration of immovable property

So make sure that you file your I-T returns and pay your taxes before the due date. Even if you aren't earning income which comes under the tax bracket; it is always advantageous to file your returns. But while you do so, make sure the correct form is filed.

Recently, the Central Board of Direct Taxes (CBDT) announced a few changes in the I-T return forms, making them simpler but at the same time taking measures to curb black money. Here are the changes…

Particulars Current Forms New Forms Number of Pages Consists of 14 pages Will consist of only 3 pages, any other detail, if applicable, needs to be filled in the schedules Foreign Travel Those making foreign trips need to furnish the following information: - Details of your passport number, - Name of the place where the passport was issued, - Countries you visited during the year, - Number of times you visited foreign countries (in case you are a resident taxpayer), - Expenses you incurred during your foreign trips from your 'own sources' is required to be provided Those making foreign trips will need to furnish: Only the passport number will be needed to be provided in ITR-2 and ITR-2A Exempt income In case of an exempt income higher than Rs 5,000, ITR-2 is required to be filed In case of exempt income, of any amount, (barring agricultural income of more than Rs 5,000), ITR-1 (Sahaj) will be needed to be filed Individuals and HUFs having income from more than 1 house property ITR-2 is required to be filed by individuals and HUFs having income from more than 1 house property and capital gains Individuals and HUFs having income from more than 1 house property but not capital gains, foreign income/assets or income from business/profession; ITR-2A will be required to be filed Bank account details CBDT expects you to give the following disclosures while filing returns: - All bank accounts held during the year for which income is being reported (including addresses of banks, IFSC codes etc.) - Information about joint holders - Bank-wise closing balance in all accounts as on March 31st of the fiscal year for which income is being reported Going forward, the bank-wise closing balance in all accounts will not be required to be disclosed. Moreover, you won't have to give disclosures for dormant accounts that have not been in operation during the previous 3 years. Only the following details are required to be disclosed: - Account numbers for all the accounts (current and savings) held at any time during the 'previous year' for which income is being reported - IFSC Codes Disclosure of assets held by foreign nationals Foreign nationals who have become ordinary residents in India are required to disclose all their assets held abroad Going forward, foreign nationals who had acquired assets when they were non-residents won't be required to disclose them, as long as no income is being earned from them in the 'previous year'

Moreover, CBDT has made it mandatory for all individuals with a taxable income of over Rs 5 lacs to file their I-T returns online.

If you have an Aadhar card number and have used it to file your I-T returns, you will not need to submit the verification form in a physical form to the Central Processing Centre (CPC) in Bengaluru. An Aadhar linked Electronic Verification Code (EVC) will be used to verify returns filed online. This is how it will work…

Filing your return online with an Aadhar card

Filing your return online with an Aadhar card is hassle-free and ensures your refund won't be delayed. The card also eliminates the risks of sending physical verification forms to the CPC in Bengaluru.

Even if you do not have an Aadhar card, go ahead and file your I-T return on time and be sure to make all necessary disclosures. Don't attempt to hide your income! Not only would it be a grave injustice to your constitutional and moral duty, but the risk of getting caught and the damage that would do to you and your family simply isn't worth it.

That said, it's certainly possible to save on your taxes without violating any law. But that requires prudent tax planning from the beginning. Don't run to your CA or tax advisor at the eleventh hour. It's far too late.

PersonalFN believes that tax planning is much more than merely filing returns and paying taxes. It is a detailed process that considers your larger financial plan and accounts for your age, financial goals, risk tolerance, and investment horizon.

With proper tax planning, you take a crucial step toward meeting your financial goals and ensuring long-term wealth creation. You cannot take this step at the last minute.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Have you ever felt the sting of fear when trying something new? It's the fear of failure. And it comes from our past.

Every time we have a bad experience, a failure or rejection, it leaves a mark on our impressionable minds. It piles up like baggage in storage, cluttering our minds with emotions.

When making decisions, sometimes we get so influenced by our past that we can't be objective anymore. We start relying on emotions.

When it comes to trying something new, starting a business, exploring a new extra income opportunity… we can become choked by fear. To overcome this fear, we need to rely on rational thinking, risk assessment and strategic planning.

Your investment decisions are usually based on your past investment experience and your willingness to take risk. If you have had a successful investing experience, you might become too aggressive and invest only in high-risk assets. But if you have been burnt in the past by losing money in stocks, you might be too conservative and now prefer instruments that are low-risk, low-return.

This is why investment decisions should come not from past experience, but from rational and strategic asset allocation. In this series of essays, we will talk about how to design a good investment strategy.

We will answer the question: Is there a way to identify the ideal asset allocation for your financial situation?

Asset Allocation Balancing Risk and Reward

Asset allocation simply means all the asset classes where you invest your investible surplus - such as equity, debt, gold, real estate or even cash for that matter.

By allocating your portfolio across assets, you are going to balance your portfolio's risk and reward keeping in mind: your risk profile, your financial goals, and your investment time horizon.

The three most important things you need to know about Asset Classes for investment planning -

All asset classes do not move in the same direction at the same time.

This means that when one goes up, another might go down. And that, actually, is a great advantage for investors.

Because if you diversify your investment portfolio across various asset classes to correctly balance your investments - even when one asset class goes down, another will go up, making sure that you are safe and don't lose all your investments.

If stocks are witnessing a bear market, it is unlikely that other asset classes such as gold, debt instruments, real estate will also be witnessing a down-turn at the same time.

That's why you should invest in more than one type of instrument. This will help improve your chances of achieving your long-term investment goals with minimal ups and downs.

You can generate greater returns by thinking ahead, planning well, and knowing yourself

Most people just invest in whatever they like, whenever they like. But as you can imagine, investing willy-nilly in whatever catches your fancy is not the best way to invest. In fact, if you follow this method you don't even really know whether you are getting enough return on investments to achieve your financial goals.

You have to understand your own, personal risk appetite, before figuring out the best strategy for you to invest. If you are going to invest like your buddy, or your brother, that won't work. You need to invest in a way that is uniquely you, and that will give you the most financial satisfaction.

As always with investment, you have to remove yourself from your emotion just a little bit, and focus on strategy. A proper asset allocation actually meant uniquely for you will help you minimize risk and take you towards achieving your financial goals.

Taxes will eat away at your returns

The taxman, as usual, is going to come around to get his share. If you are in the highest tax slab i.e. 30% tax bracket and invest all your savings in fixed deposits (which are considered safe investments), then you are going to have to pay huge tax on your interest income.

You need to keep tax consequences in mind when planning your investment returns, looking at post-tax returns on investments rather than pre-tax returns. Proper asset allocation will help you determine the right investment products that can minimize taxes on your investments.

So turns out there are quite a few things you need to keep in mind to come up with the perfect asset allocation plan - one that will earn the best possible return, minimise risks and taxes, and take you to your financial goals.

So how should you allocate your increasing pile of investible money wisely?

7 factors to keep in mind while defining your own perfect asset allocation -

Your Age

As usual you can get away with a lot more when you are young.

If you are, say 20-30 years old, you can allocate a large chunk of your portfolio towards risky assets, such as stocks. Being young gives you the time and opportunities to recover from any possible setbacks in the value of your portfolio.

If you are middle-aged of course (30-55 years), you still have flexibility but a little prudence is called for. A moderately risky portfolio balancing risky and non-risky assets is probably best at this time.

If you are an aged investor nearing retirement (55 years & above), you might choose a more conservative approach while planning your asset allocation. As you know, Mark Ford himself doesn't believe in taking high risks - he calls himself a timid investor. You should opt for safety as well. Your preference can be debt or fixed income instruments so as to preserve your principal amount and generate regular flow of income. But to beat the inflation bug, you need to maintain a small portion of your portfolio (say 15 to 20%) inn slightly risky assets that can generate higher returns.

Your Income

The amount of income you earn helps you decide the amount you invest. If you are a salaried individual drawing a fixed salary every month, you can allocate your savings systematically to both risky and safe instruments depending on your age.

However, if you are a businessman your profits and losses are not fixed. While higher profits in a year will help you expand your business or invest in various financial instruments, a year of losses will have a direct bearing on your investment plans. So allocate your assets keeping in mind the growth potential of your future income.

Remember, a key component of the Wealth Builders Club is for you to generate extra income that you can then invest for future wealth.

Your Expenses

Living within your means and curtailing your unnecessary expenses can help you keep your financial health in pink in the long-term. While certain expenses such as loan repayments, rent, grocery bills etc. cannot be avoided; you can always streamline few of your unnecessary and extravagant expenses. This will enable you to increase the net free cash available for asset allocation, which if invested wisely in suitable asset classes can help you to create more wealth and fulfil your financial goals.

But cutting expenses doesn't mean cutting down on quality of life. The Living Rich series shows you how to live the best life possible without overspending.

Nearness to Your Financial Goal

If you are many years away from your financial goal, you can allocate a big portion towards risky asset class like equities, and less towards fixed income instruments. If you are closer, make sure your investments are liquid enough to provide for your requirements when you need them. Some investments have a lock-in period and can't be redeemed within that period.

For e.g. if you are contributing towards your Public Provident Fund or PPF account or have investments in an Equity Linked Saving Scheme (ELSS) offered by mutual funds, you cannot withdraw them before compulsory holding period.

If you are planning to invest money that you might need within a year, then these aren't the right investments for you, no matter how good these investments are. Similarly your investments in real estate are sort of illiquid in the short-term. Equities are considered very risky in the short-term while the risk moderates in the long-term. Debt is considered relatively less risky, the returns being much lower, possibly too low to beat inflation even.

It is a good idea to rebalance your portfolio as and when you reach closer to the achievement of your financial goals. And when you are less than, say 3 years, away from your financial goals, you can shift your corpus to fixed income instruments to avoid wealth erosion.

Your Risk Appetite

Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while framing your financial plan.

If you are aggressive i.e. your willingness to take risk is high, you can skew your portfolio towards equities, an asset class known for compensating risk with high returns.

If you are conservative, i.e. your willingness to take risk is relatively low, your portfolio can be skewed more towards fixed income instruments.

Moderate risk takers can take a mix of equity and debt respectively.

Your Assets

When you started on your wealth building journey you made an assessment of your physical and financial assets. Analyse your existing investment portfolio before allocating your funds further. For instance, if a huge chunk of your portfolio is dominated by real estate or equities, then based on the factors we talked about before, you can diversify your assets to reduce your risk.

Your Liabilities

If you have high liabilities, your financial conditions won't let you take high risk. This would make you a risk-averse investor. Irrespective of your age, willingness to invest, nearness to your financial goals, risk tolerance or any other factor, you will be forced to only make lower return generating safer investments, as you cannot afford to let your investments suffer any setbacks from market swings.

Also, this doesn't necessitate saying, but avoid taking loans or increasing your liabilities as far as possible. Read Mark's essay on debt and credit solutions. Also never invest borrowed money in risk assets such as equities, as any losses endured here might worsen your financial situation.

So an effective asset allocation offers the following 4 benefits -

Lowers your investment risk Reduces your dependency on a single asset class Protects during turbulent times Makes timing the markets irrelevant

So here are some examples of asset distribution…

If you are a long-term investor with an aggressive risk appetite, then you can invest upto 70% in risk assets with a long-term view such as equities and real estate, around 20% in safer asset classes such as debt and cash instruments and around 10% in gold.

If you are a moderate investor aiming to provide some stability to your portfolio along with capital growth, then you should invest upto 60% in equities, around 30% in debt and cash and the remaining 10% in gold.

Conservative investors looking for protection of their capital must invest upto 70% in debt and cash, around 10% to 15% in gold, while the rest can be diversified by investing in quality equity instruments.

Asset allocation safeguards the overall value of your portfolio from the misfortune of any particular asset class. This is not a one-time process so keep reviewing your asset allocation regularly to keep it aligned with your financial goals.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Has crisis ever rattled your investment portfolio?

The stock market crash on August 24, 2015, wiped out almost Rs 7 lac crores of investor wealth in a single day and shattered investor sentiment across the world.

Investors were glued to their TVs and tablets as the financial experts fuelled the panic with predictions of a deep crisis ahead.

Of course, few experts thought to guide individual investors with actionable advice…

PersonalFN has years of experience educating and guiding clients and readers with their personal finances. For this reason, many people seek our counsel during extreme conditions.

As soon as he saw the BSE Sensex had shed 1,624 points, one of our clients, Mr Wilson, a 70-year-old retiree, called our investment consultant and asked him to suggest a few good equity mutual funds.

'Be fearful when others are greedy and greedy when others are fearful.' - Warren Buffett

Mr Wilson is very sensitive to his investment portfolio. He closely monitors his investments every single day, though we often tell him that it is not necessary given his well-balanced portfolio. But as a retired individual, every penny matters to him.

After seeing the markets tumble, Mr Wilson wished to invest a huge sum of money in equities to capitalise on the crash. It seemed Mr Wilson wanted to follow the advice of the world's most successful investor.

The Made in China crisis caused a huge sell-off in almost all emerging markets, including India. Everyone became fearful. According to the Sage of Omaha, it can be wise to tap opportunities during such times (especially if you have a relatively long investment horizon).

While this is true and Mr Wilson is right to want to capitalise on the crash, we always advise that risk appetite should correspond to age and financial goals.

An individual in their 30s will have much higher risk appetite vis-à-vis an individual in their late 50s and nearing retirement. Likewise, a 60-year-old retiree will likely have very little risk tolerance.

Considering Mr Wilson's age and the fact that he's retired, his appetite for risk should be lower. Going overboard with equities may not be prudent since his retirement portfolio is the only source of income to take care of his retirement needs.

PersonalFN considers asset allocation as an important element in your investment portfolio; it is crucial in the process of achieving your financial goals, particularly retirement.

By allocating investments across various asset classes, you can make a strategy to minimize risk and possibly increase gains in the long run. But you also stand to benefit from any extraordinary opportunities the market may offer. Proper asset allocation will allow you to take advantage of a crisis.

How this works is that while following an asset allocation strategy, if you see a substantial increase in exposure/profits in any asset class, say equity, then you can rebalance your portfolio, book the profits and move to other safer asset classes, say debt. This way when there is a correction in the markets, i.e. if equities show a great fall, then you can get an opportunity to buy equities again, as Mr. Wilson saw.

So how should you allocate assets in your retirement portfolio?

For individuals between 25 and 35 with a time horizon of 25 to 35 years

Life Stage - Accumulation Phase (Portfolio Type - Aggressive) Asset Allocation You are in the accumulation phase of your life. Hence you may be looking for wealth creation in the long run since you have sufficient time before you hang up your boots. Apart from retirement, you may also have financial goals in the interim such as buying a dream home and car and getting married and starting a family. You will need to prioritise each of your financial goals. Nevertheless, with a sufficient time horizon until your retirement, you can afford to take a higher risk with your retirement savings.

Therefore, there's scope to position your portfolio aggressively by allocating 65-85% of your portfolio in equities and around 5-20% in debt. Based on your preference, you may also hold a 10-15% position in gold for further diversification.

For individuals between 35 and 45 with a time horizon of 15 to 25 years

Life Stage - Mid-asset Accumulation Phase (Portfolio Type - Moderately Aggressive) Asset Allocation You are in the mid-asset accumulation phase of life. You may be planning to buy a house, a car and invest for your child's education. You need to plan your income well and streamline it towards achieving your goals and life style. With a time horizon of around 15 to 25 years on your side, you can take relatively higher risk to grow your retirement portfolio.

Hence your portfolio can be positioned in the moderately aggressive risk profile by allocating 60-70% in equity, 20-35% in debt and holding 5-15% in gold.

For individuals between 45 and 55 with a time horizon of 5 to 15 years

Life Stage - Protection Phase (Portfolio Type - Moderate) Asset Allocation You are in the protection phase of your life cycle. In this age bracket, you may still have life goals to fulfil such as your child's higher education or marriage, or you might still be dreaming of that big house. Hence this is a phase when you need to streamline your finances - both inflows as well as outflows. You need to keep aside sufficient funds for your retirement portfolio. It's still possible that you will fall short on your retirement corpus. But since you have a time horizon of 5-15 years, you can afford to take some amount of risk and not be too conservative.

Hence your portfolio can be positioned moderately by allocating 40-60% towards equity, 35-50% towards debt and 5-10% in gold to hedge the portfolio.

For i ndividuals between 55 and 60 with a time horizon of less than 5 years

Approaching Retirement (Portfolio Type - Moderately Conservative) Asset Allocation You are on the verge of retirement by now. Your regular source of income will soon stop. Hence you ought to be conservative in your asset allocation. It is not advisable to have a high exposure to equities.

You should position your portfolio such that 20-30% of your portfolio is in equity, 60-80% in debt and 5-10% in gold as a hedge.

For individuals above 60 and already retired

Life Stage - Distribution Phase (Portfolio Type - Conservative) Asset Allocation You are probably retired by now. If so, you have completed the conservation and protection phase of your life and have entered the distribution phase. You now have limited income or even no regular income. Thus, at this stage, you may need to dip into the savings and reserves you've built over the years. Hence while you invest to take care of your retirement needs, your portfolio needs to be positioned conservatively.

Around 70-80% of your portfolio should be in fixed income generating instruments to generate post tax returns of at least 7-8% per annum, assuming annual inflation expectation is at 7%. Equities should only be 10%-25% of your portfolio. And 5-10% should be in gold for a hedge.

A note on rebalancing…

Once you have defined the standard allocation to your portfolio, you ought to review your portfolio on a regular basis, say yearly, to check if it needs realignment. This is because the allocation to an asset class may drift significantly away from your initial allocation due to appreciation or depreciation.

If you notice wide deviation in your portfolio allocation due to swift rally or swift fall in any of the asset classes - say a swift fall in equities due to crisis ­- you can consider trimming around 5-10% of your exposure to other asset classes, say debt and gold, and reallocate that amount towards equity and equity mutual fund holdings.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. The images are obtained from PersonalFN research.

It's not easy to get yourself to sit down and think about what would happen if you got really sick, and were unable to make sound financial decisions. Worse, we definitely don't want to think about… being no more. Quite an unpleasant scenario.

Instead, we hide behind these thoughts…

“I am too young to prepare a will” or “I don't need to prepare a will”…

…Because it's unpleasant to think about. We know anything can happen at anytime. We know we want to protect ourselves and our loved ones. That's why we get insurance in the first place.

But we also know what we need to do.

Leaving the world intestate (without preparing a will) can lead to various complications and disagreements among your heirs. You work your entire life to build wealth and a sustainable livelihood for your family members. But you can't even imagine the mess and inconvenience that might be caused to your loved ones because of your unwillingness in not drafting a will for them.

Even if you don't have great wealth or piles of assets, that doesn't matter. You still need to figure out and take the necessary steps to ensure the smooth transfer of assets from one generation to another, also known as estate planning.

Here are some advantages of Estate Planning: You can decide who receives what share of your assets You can decide how and when your beneficiaries will receive their inheritance You can decide who will manage your estate in your absence Estate planning saves your family and loved ones from going through the additional burden of reverting to the law to distribute assets.

In fact, as soon as you start accumulating assets, start figuring out where it would go if you weren't around, and leave clear directions. You don't need to wait till you own lots of assets to transfer or till you turn 65 to create a will.

As we've told you one too many times in this guide (only because we care about you), life is unpredictable and uncertain.

If you care about the people you will be leaving behind, you will take the steps necessary to protect their quality of life when you are gone. So get planning…

The 10 points below will help you while preparing a will:

A will can be prepared by anyone who is 21 years of age, of sound mind, and free from any coercion, fraud and undue influence. With old-age come physical and mental illnesses, people become incapacitated and might even lose their ability to comprehend. A will created at such an age, when a person might not be in his or her right senses might create misunderstandings, doubts and disputes in the family later. So prepare your will while you are still young and healthy to avoid conflicts later.

You must use the title 'Last will and Testament Of (state your name here)' to make it clear that the document is your will and legal. Make sure to state your full name, current address, and the fact that you are of sound mental health and under no duress from any one to make the will.

Name an executor, a person who will carry on the tenets of the will. A trust worthy person should be named as an executor and you must seek their permission before nominating them. This is because if they refuse to become an executor later, then there might be no one to execute the will, leaving it to the court of law to appoint an executor.

A will can be handwritten or typed out. No stamp paper is necessary. You can write a will on a simple A4 size paper, sign and date it with 2 witnesses, and put it away safely. You need not register your will with the Registering Authority; but in order to avoid frauds and tampering, it is better to get it registered. If you wish to register your will then it can be done with the registrar/sub-registrar by paying a nominal registration fee. You need to be personally present at the registrar's office along with witnesses for this. Also, it is better if the witnesses signing your will are not the immediate beneficiaries of your estate or wealth. Any two people who you trust can do it. Also, it would be wise to inform the executor and family members about the whereabouts of your will in order to avoid confusion later.

If you have bequeathed your assets to any minor children, make sure you appoint a guardian for the assets till the time the said minors reach an adult age.

It is extremely important for a will to be simple, precise and clear. Otherwise some people might misconstrue your intentions and your assets might not be transferred to your choice of beneficiaries.

It is possible to make changes or minor alterations in a will if you wish to do so. If there are too many, or major changes, it is better to start over and just make a new one. Always date your will. If more than one will is made then the one having the latest date will nullify all other wills.

Each page of the will should be serially numbered and signed by the Testator (that is the person making the will) and the witnesses. This is to prevent the will being substituted, replaced, or pages being inserted by people intending to commit fraud. At the end of the will you (the Testator) should indicate the total number of pages in the will. Corrections if any should be countersigned.

While writing a will along with the laws of the country, one's religion also plays an important role. Keep that in mind while making your will. For example, in case of Hindus, any assets that you have acquired on your own can be bequeathed as per your wishes. However any property which you have inherited from your father cannot be transferred according to your whims and fancies, as the laws of inheritance will apply to them.

Although it is possible to draft a will on your own, it is always better to take the advice of a trusted lawyer or advocate while writing a will. This will reduce any chances of misinterpretation or frauds from relatives and also reduce the probability of the will being claimed as invalid in the court of law.

All of us have certain wishes about what should be done with our fortune (however big or small) after us.

Unless you appropriately document this in the form of a will, there is no certainty that the assets created by your life long efforts will be transferred to your loved ones.

The law does not know that you wished to leave a larger portion of your wealth to your financially weaker child or you wanted to leave a token of appreciation to some special friends.

There is no guarantee that your special heirlooms will be passed on to those family members who you knew would value them.

Estate planning is one of the most essential aspects of our lives and should not be put off until it's too late. It is a dynamic process, which needs to be reviewed This is an exercise you should repeat every few years, and after every major life change, including marriage, divorce, death, and birth.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Don't put all your eggs in one basket.

Surely you've heard this proverb before. It makes perfect sense: Carry your eggs in one basket and a single accident could destroy them all. What's more, one bad egg can rot the lot. Yet, many of us ignore this admonition and keep our “eggs” together.

We all seek convenience in our day-to-day lives. While convenience is good, we are sometimes tempted into taking the easy way out. Rather than going the prudent way, we take the shortcut. And our misdirection hinders our potential growth.

The great financial author, Robert Kiyosaki, wrote: “Your future is created by what you do today, not tomorrow.”

It's a well-stated reminder to remain undeterred by the easy way and to choose the prudent route instead.

The way to go…

In your journey to wealth, it is vital that you allocate your money wisely across asset classes.

You should base your investment decisions on your risk appetite. Conservative investors may want to invest only in fixed income instruments because they fear losing money. On the other hand, aggressive investors may want to take on high-risk, high-return investments because they are young and can afford to take chances.

Regardless of your approach, don't forget assets don't all move in the same direction. This is why it's important to diversify your portfolio across asset classes. Even if you have a high appetite for risk and look to equities for big returns, you ought to have exposure to other asset classes including debt, gold, and real estate. They will come to your rescue during a crisis.

Asset allocation is an investment strategy that will help you define a road map for your investment portfolio.

How to go about defining asset allocation…

The thumb rule for Equity: 100 minus your present age.

Say you're 30. You have the benefit of time and can take on high risk. Therefore, you can invest 70% (100-30) of your portfolio into equity and the other 30% can go into safer, income-generating debt instruments. This places you in the category of the ‘aggressive investor'.

Asset Allocation by Thumb Rule

As your age progresses - say you're now 40 - the formula calls for a less risky 60% (100-40) of your portfolio and the remainder in debt.

Asset Allocation by Thumb Rule

Now say you're 70 and already retired: A predominant portion - 70% (100-70) - of your portfolio should be in safe debt and fixed income generating instruments. That's because, assuming you have already met your major financial goals, your appetite for risk will be low. However, a small portion in equity to counter inflation is still a good idea.

Asset Allocation by Thumb Rule

On the other hand, if you are still investing to meet financial objectives, it would be better to allocate investments among different assets such as equity, debt, and gold. Your allocation should of course be based on how close you are to your goal.

For example, individuals with a 10-year financial goal should allocate a dominant portion of their portfolio towards equity (around 75%) and to the remainder to gold and debt (about 15% and 10% respectively). But as you near your financial goal, the largest portion of your portfolio should be allocated to debt. This can help not only to diversify your risk across different asset classes but also help rebalance your portfolio.

With this in mind, you must still undergo a holistic assessment considering…

Your age Your income Your expenses Your existing assets & liabilities Your risk appetite Your nearness to financial goals

We'd like to now share the examples of Mohan, Vijay, and Sanjay - clients who asked us to help chart their asset allocation. The following chart will help you understand how to ideally determine asset allocation.

Case Study Name Mohan Vijay Sanjay Age 30 45 60 Life Stage Unmarried Married with 2 Kids Retired Income Medium High Low Expenses Medium High Low Assets Low Medium High Liabilities Medium High Low Time Horizon High Medium Low Willingness towards Risk High Low Medium Overall Risk Appetite High Medium Low Our Advice for Ideal Asset Allocation Equity 80% 65% 20% Debt 15% 25% 75% Gold 5% 10% 5% (The table above is for illustration purpose only.)

Young, unmarried individuals, like Mohan, who have just started earning, may have only few assets. But their time horizon will be long (25-30 years) and their overall risk taking capability is high. So people in this situation can put a majority (around 80%) of their portfolios in equity and the rest in debt and gold. This aggressive portfolio can be expected to yield high returns in the long run. Given the financial situation and time horizon, the portfolio would have a lot more time to recover from the short term jitters of the equity markets.

As in the case of Vijay, high-income earners in the 45-50 age group will likely have dependents and liabilities. Their risk appetite would be moderate, and their time horizon may be 10-15 years. We, therefore, advise 65% of the portfolio in equity, 25% in debt, and 10% in gold. This balanced allocation may be expected to give sufficient returns to achieve future goals.

Just-retired individuals, like Sanjay, may only have a dependent spouse. No longer able to rely on income, they must rely on assets and investments for day-to-day expenses. Their time horizon is short and therefore their overall risk appetite is low. Recognising the need to preserve capital, they should have a predominant portion (around 75%) in debt and fixed income generating instruments, a slight (20%) allocation towards equity, and a small (5%) position in gold. This is low-risk, low-return portfolio, but it's ideal for capital preservation while generating a steady income.

To conclude…

Defining an optimal asset allocation is easy once you understand the basic rules. Asset allocation isn't a one-time process. It must be reviewed from time to time to ensure you achieve your financial goals. But once prudent asset allocation is in place, you can be rest assured that you will earn adequate return, minimize risk and taxes, have sufficient liquidity, and ultimately achieve your financial goals.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Diversify, diversify, diversify!

Financial planners are happy to remind us over and over again that diversification is vital in investment planning. However, despite the recitations, investors rarely follow a correct and complete diversification strategy.

'Stock markets are risky! I lost a lot of my wealth during Lehman crisis in 2008. I am not going to invest in stock markets again.'

'Bond markets are complex. I don't know how they work. So, I prefer to stay invested in fixed deposits. It would double my money in 8 years.'

'Gold! My wife likes to wear gold ornaments and I have bought some gold bars as an investment for my daughter's marriage.'

'There is an upcoming complex in Pune, and the builder is offering a 52 inch LED TV for free if I book within next 15 days. I am going to sell all my investments in stock markets and if need be, mortgage my wife's gold ornaments to book the flat. It will be my next investment.'

Have you heard statements like these from friends, relatives, or colleagues?

Through experience, we can say that many investors buy various stocks, mutual funds, and debt instruments on an ad-hoc basis and believe they're diversifying their portfolio.

But is that really diversification?

We believe diversification is meaningless if it does not counter market uncertainties and reduce risk. True diversification requires wise and effective asset allocation.

Each asset class commands a different risk-return relationship and behaves differently over time. When you allocate assets across the various classes - equity, debt, gold, real estate, cash - you are essentially adopting an investment strategy. Your aim should be to balance your portfolio's risk and reward in accord with your risk profile, financial goals, and investment time horizon.

Wise and effective asset allocation offers a host of benefits.

It minimises portfolio risk.

Wise asset allocation can help protect from market ups and downs. A well-diversified portfolio faces less risk. Growth prospects aren't limited by a single risky security, but spread over a basket of securities of varying risk, in addition to debt, gold, real estate, and cash.

It optimises portfolio returns.

Equity, debt, and gold do not move together. An asset class attracting investors today may be out of favour tomorrow. It is tough to predict when an asset class will perform well. Therefore, allocating your portfolio across different asset classes is a sensible investment approach.

An effective asset allocation, in addition to minimising risk, can optimise your portfolio returns. But you must not invest ad-hoc. This heightens risk and can derail your investment objective. Running behind momentum isn't likely to clock optimal returns.

It aligns investments and time horizon.

Your risk profile and your investment time horizon are crucial in deciding your asset allocation. Where you are in relation to your financial goals determines how to chart your asset allocation in equity, debt, gold, real estate, and cash.

If you have a long way to go to realise your financial goals, a large portion of your investible surplus should be skewed towards equity and less towards debt.

An investor with a shorter investment horizon, of say three years or less, should allocate more funds towards fixed income and a small portion of their portfolio to riskier assets such as gold or equity.

A medium term horizon of more than five years calls for an allocation to riskier asset classes (to take advantage of the higher risk-reward ratio) while maintaining a healthy allocation to fixed income instruments as well.

It makes market timing (almost) irrelevant.

If your asset allocation takes into account your risk profile, your financial goals, and your investment time horizon, timing the market almost becomes irrelevant. This is because your portfolio is well-aligned to your needs.

While traders may enjoy timing the market, the risk to their wealth and health is ominous. If you were invested in the Indian equity markets during the sub-prime mortgage crisis, or you've been burnt by other market downturns, you will know how painful it can be. And you will agree that a well-diversified portfolio with prudent asset allocation can offer protection, and even growth, during times of volatility.

It maintains adequate liquidity.

Liquidity is another vital consideration when making investment decisions. Some investments have a lock-in period and can't be redeemed within that time frame. For example, investments in Public Provident Fund (PPF), tax savings fixed deposits, and Equity Linked Saving Scheme (ELSS) offered by mutual funds carry a minimum lock-in period. While you might enjoy the tax benefits these instruments offer, you will have to wait to withdraw your money. Prudent asset allocation will ensure sufficient liquidity to cover financial goals and emergencies as required.

It minimises your tax outgo.

Most of us are busy making a living. We earn, pay taxes, and invest our hard earned savings. The returns we earn on our investments too are taxable. But one can avoid unnecessarily high taxation by aligning investments, financial planning, and tax planning activity wisely.

If you're in the 30% tax bracket and invest all your savings in fixed deposits to keep your investments safe, then you are making a big mistake: You are paying a huge amount in taxes that could have been saved legitimately.

Tax consequences are different for every individual. But if a prudent asset allocation plan is drawn, it will not only allow you to have the right asset mix, but also facilitate a legitimate optimal-minimal tax outgo, provided your investments are made in tax efficient instruments.

But defining asset allocation is challenging…

Yes, defining an optimal asset allocation is not easy. You must take into account a host of factors, such as:

Age Income Expenses Assets Liabilities Risk appetite Time horizon And most importantly your financial goals

Under ideal circumstances, if your broader objective is capital appreciation, and if you have an aggressive risk appetite, you can invest up to 70% of your portfolio in risky assets such as equities and related instruments and the remaining 30% in safer asset classes such as debt and cash instruments.

If you are aiming to provide some stability to your portfolio along with capital growth and have a moderate risk profile, 60% of your portfolio can be in equity and the remaining 40% in debt and cash.

If your priority is capital protection, and if you are conservative, a predominant 70% of your portfolio should be in debt and cash and the remaining (30%) can be diversified in quality equity instruments.

Please remember these are general, ideal models. You must consider your unique circumstance and goals to draw the most appropriate asset allocation for you.

Also remember you cannot set your asset allocation once and for all. You must review and rebalance based on your age and distance to your financial goals; any windfall gains, unexpected losses, or other changes to your financial circumstances; and any changes in outlook for a particular asset class.

Once you have a prudent asset allocation in place, you can be rest assured that you will earn adequate return, minimize your risk and taxes, have sufficient liquidity, and achieve your financial goals.

This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.