A comprehensive guide book on Savings and Investment

INDEX
CHAPTER-1:
SAVING &
INVESTMENT
Page 03 - Page 13
2

Saving &
Investment
Amit, a 26 something techie
received a call from Sumit, a
financial advisor regarding a new
investment plan. Amit replied he
did not see any need for saving
& investment as he believed
in living life to its fullest. Sumit
understood that Amit needed
some lessons on the concepts of
Saving & Investment. He fixedup
a meeting for weekend morning.
As expected, Sumit turned up
and after introducing himself
began explaining the following:
1
3

Chapter 1: Saving &Investment 4
1.1 What is savings and
investment?
In simple and general terms, savings is the
surplus amount left from your income earned
after deducting all the expenditures.
Hence, Savings = Income earned –
expenditures incurred.
Investment, on the other hand is done
out of the savings made. This portion can
either be invested in long term or short
term investments avenues. Investments are
intended to provide a cushion against future
liabilities or otherwise. It can be for a child’s
education, marriage, purchasing of a car,
settlement of EMIs etc.
1.2 What is Investment?
The meaning of Investment is spending your
time or energy on something anticipating
income generation or value addition infuture.
For example: A farmer ploughs his field on a
daily basis under the expectation that he may
reap some returns in the form of grains after
a specified period of time. This means that he
invests his time and energy anticipatingfuture
benefits within a certain time frame.
Once you have read the aforesaid example,
now you already know what an investment
means, let us understand the term investment
in terms of finance:
In finance, the meaning of investment is

Chapter 1: Saving &Investment 5
1.3 How is investing different
from savings?
As mentioned above, savings is the amount
left after meeting expenses and investment
is done out of the savings made to meet future
uncertainties or obligations.
While money kept in savings bank account will
give interest, investment in mutual fund or
any other dynamic investment avenue which
is a blend of both equity and debt will give a
value for money (read that investment can lead
to growth of capital). This is where the main
difference between savings and investment lies.
Also, while investments lead to wealthcreation,
savings is merely liquid cash.
In finance, the meaning of investment is
purchasing or creating an asset anticipating
an interest income, rental income, dividend,
profits or any combination of the mentioned
returns. For example: I purchased 100shares
of a company anticipating dividend from these
shares. In this case, shares are my investment
and I am anticipating dividend income from the
investment made.

Chapter 1: Saving & Investment
1.4 Why should one invest /
why planning for investments
is necessary?
You should invest to get the required sum
of money for any goal at the correct time.
In other words, if you want to achieve
your financial goals in life like creating an
emergency corpus, retirement corpus,children
education corpus etc. then you must start by
making an investment plan which will guide
you step by step as to how to achieve your
goals.
You cannot expect to achieve your financial
goals by following blindly the experience and
products embraced/practiced by previous
6

7Chapter 1: Saving &Investment
1.5 When to start investing?
The legendary investor, Warren Buffet
mentioned “I made my first investment at the
age of eleven. I was wasting my life up until
then.” Hence, there is no right age to invest. It
all depends on your ability to take risk and the
foresightedness to get going.
generation. Cost of major milestones have risen
manifold in the last 25 years with the growth
of Indian economy (read high inflation).There
is a good chance of funds shortage as and
when your goals come up if you don’t have
an investment plan in place right from the
beginning.
Practically, you should start investing as soon
as you start earning money from your job or
business so that you can get the benefit of
starting at an early age and your money has a
long time period to grow.
Amit suddenly realized that he had been working
for little more than 3 years and did not have any
substantial savings.

1.6 What care should one take
while investing?
People have a tendency to invest by listening
to others including the “so-called” expertson
television, newspaper, magazines, neighbor,
friends and relatives.
But it may happen that the stock which they
are suggesting may be suitable for him/her
but not for others since financial net-worth,
risk taking capacity and time plays a key role in
investing.
Say a stock which looks a very poor investment
in the short run could be a very good
investment for the long term.
Hence, the right path would be either to give
your money in expert’s hand or rather start
with your own research.
A novice investor may face gains or losses
initially, however, with experience he shall be
able to build his own strategies and will be able
to invest based on his own wisdom.

1.7 What are various options
available for investment?
Market is flooded with different modes of
investment. However, it depends on the risk
aversion ability of the investor as to whether
invests in high risk option with greater returns,
low risk options with moderate returns or no
risk modes available.
Accordingly, the categorization can be as
follows:
9
Safe
zones
High risk
Moderate
risk
• Real estate
• Gold
Company fixed deposits
Non Convertible Debentures
Shares and other securities
Mutual funds
Investments made in bank fixed
deposit or recurring deposits for
steady returns in terms of interest.
Investment in National Pension
Schemes, National Savings
Certificate, Public Provident fundetc

10
Chapter 1 Saving & Investment 10
1.8 What is meant by Interest?
Interest is the cost of borrowing funds. It is
the amount charged in percentage expressed
as Interest rate. In other words, interest is the
cost of renting money.
Suppose Mr. A borrows Rs. 50,000 at an
interest rate of 5% p.a. Hence, the interest
charged for borrowing the funds at the interest
rate given will be Rs. 50,000*5% = Rs 2500/-

Chapter 1: Saving & Investment
1.9 What factors determine
interest rates?
Interest Rate is used to regulate Inflation by
the central banks. Inflation is the continued
increase in the general price levels of an
economy. On the other hand; interest is the
cost of borrowing funds. The explanation
given below will make you understand that
the primary factor affecting interest rate is
inflation.
Let us discuss two main situations:
Tocooldownhighinflation:the
interest rate is increased.
When interest rate rises, the cost of
borrowing rises. This makes borrowing
expensive. Hence borrowing will decline
and as such the money supply (i.e the
amount of money in circulation) will fall. A
fall in the money supply will lead to people
having lesser money to spend on goods
and services. Hence, they will buy a lesser
amount of goods and services.
This, in turn, will lead to a fall in the
demand for goods and services. With the
supply remaining constant and the demand
for goods and services declining; the price
of goods and services will fall.
11

As inflation is a continuous increase in the
general price level of goods and services so
a fall in the general price level of goods and
services will lead to a decline in inflation
levels.
In low inflationary situations, the
interest rate is reduced
A fall in interest rates will make borrowing
cheaper. Hence, borrowing will increase and
the money supply will also increase. With a
rise in money supply, people will have more
money to spend on goods and services.
So, the demand for goods and services will
increase and with supply remaining constant
this leads to a rise in the price level i.e.
inflation.
Demand for
money

Deposits with
Some banks offer
exclusive facility available
to women in terms
of minimum balance
maintenance & no cost
debit cards
Govt of India offers
Sukanya Samriddhi
Scheme (SSS) meant only
for girl child. This scheme
offers higher interest rates
than most of bank fixed
deposits
loan
Several states impose
lower stamp duty if the
property is registered in
the name of a woman
Home loans are given at
lower interest rates
some banks offer
concession on home loan
processing charges
Insurance
Women typically pay lower
life insurance premiums
Certain health insurance
plans provide maternity
cover at applicble premium
rates
Certain Critical Illness plans
offer coverage for diseases
specific to women
Some motor insurance
companies offer discount on
motor insurance

Basics of
Investment
Planning
2
14

15Chapter 2: Basics of Investment Planning
2.1 What is investment
process?
Investment process means a series of steps
taken to construct and manage your portfolio.
There are six steps in investment planning
process:-
a) Determine what are yourobjectives
b) Decide a value for yourobjectives
c) Conduct security analysis :
a. Technical Analysis
b. Fundamental Analysis
d) Construct the Portfolio
e) Evaluate the Portfolio
f) Revision of the Portfolio
2.2 What are the factors that
determine / affect your
investment capability?
a) Family Information - no of earning
members, no of dependent members , life
expectancy
b) Personal information – age , employability,
nature of job , psyche
c) Financial information – capital base ,
regularity of income (regular or contractualjob)
d) Present networth- amount of assets
already created and any liabilities undertaken
like any loans
e) Past investment experience (if any)
In short, it can be said that your risk appetite
determines or affects your investment profile.

Invest for
a long
period
Invest
regularly
Start Early
2.3 What are the fundamentals
rules of investments?
There are three fundamental rulesof
investments:
a)
b)
c)
Start Early
Invest Regularly
Invest for a long period of time
Example:
Raj started investing money to the tune of Rs. 5000 pm diligently. He began this discipline at the age
of 22 years of age. He was earning a rate of interest of 12% compounded each year. While his friend,
Amrita started investing money to the tune of Rs. 10,000 pm. She was also doing this very religiously.
She also earned 12% compounded. She started the process of doing the investments month on
month, at the age of 30. What is the total investment adding up to at the age of 50 years ofage?

Raj Amrita
Age when investing began 22 30
Monthly investment amount Rs.5,000 Rs.10,000
Total amount invested Rs.16,80,000 Rs.24,00,000
Total market value of investments (approx) Rs.1,36,56,360 Rs.98,92,554
Cost of waiting/ delaying Rs.0 Rs.37,63,806
As you can see from the table
the cost of waiting / delaying
for Amrita is Rs.37,63,806.
Raj benefited from eight more
years of compounded growth
than Amrita.
Therefore it is very important
to start investing early. More
earlier, the better for your
investments.
2.4 What are the investment concerns that
need to be addressed, while investing and
choosing the assets?
The most common concerns that needs to be addressed, while
investing and choosing the assets are-

Chapter 2: Basics of Investment Planning
Returns
The return from the investment could be
in the form of capital gains, cash flows, or
both. A retired person might be needing
regular cash flows to meet daily expenses,
where as a younger person in working
/ accumulation phase might be more
concerned with growth of his investment
for creating a corpus for his retirement.
Capital Protection
The most important aspect of investment
is to protect capital. Majority of indiansare
risk averse. We feel investments are risky
and thus leave most of our saved money in
instruments earning low income, without
understanding the effect of inflation, which
reduces the value of our money every day.
18

Chapter 2: Basics of Investment Planning 19
Risk is part of our lives. There is risk
associated with anything or everything we
do. Even if we cross a road, there is risk of
meeting with an accident. Risk and reward
go hand in hand, higher the risk, more is the
reward expected.
Each of the investment assets has its own
associated risk and reward/return, whichone
must understand before investing his money
in any of the investment vehicles.
Inflation
By definition, inflation is the rise in general
level of prices of goods and services in
an economy over a period of time. When
prices rise, each unit of currency buys fewer
goods and services, resulting in erosion in
the purchasing power of money. The aim
of investment is to get returns in order to
increase the real value of the money. In other
words your investment should be able to
beat inflation.
Taxation
Income from our investment assets isliable
to taxation, which is going to reduce our
returns. You should remember that the
real return (read positive return) from any
investment product would l be the return
after accounting for taxation andinflation.
Liquidity
It is the ability to convert an investment into
cash quickly, without the loss of a significant
amount of the value of the investment. If you
would need a particular amount at a short
notice then invest in a investment product

with high liquidity.
Divisibility
This is the ability to convert part of the
investment asset into cash, without
liquidating whole of the asset. Divisibility
may be an important consideration for many
investors, while choosing an investment
vehicle. For example, while investing Rs.
15 lacs in senior citizen scheme, one could
increase the divisibility without affecting
returns by dividing this investment in ticket
size of Rs. 2-3 lacs, rather than investing
Rs.15 lacs in one go.
Before committing your capital to any
investment vehicle, it is preferable to
consider your financial needs, goals, and
aspirations, as well as the risk profile.
Concerns /
Factors for
chooosing
investment
Taxation
InflationReturns
Capital
Protection
Liquidity

2.5 What are the avenues for
investments?
The various avenues where you can park your
saved money are known as ‘asset ‘in
layman’s language or ‘asset class’ ininvestment
parlance. Broadly there are four asset
classes in India – equity, debt, gold and cash.
2.6 What are the various types
of Assets?
•
•
Financial Assets – cash, debt , equity
Physical / Non-Financial Assets –
commodities , real estate
Alternative Assets – art objects,collectibles
, precious stones and Gold,

Financial Plan
– Concepts
&
Factors
for Success
3
22

23Chapter 3: Financial Plan – Concepts & Factors for Success
3.1 What is Time Value of
Money?
You have won 10 lakh in a lottery. Given a
choice, would you take the 10 lakh as a lump
sum in one shot immediately? Or would you
prefer to receive it in equal yearly installments
of 1 lakh over the next 10 years?
If you are like most people, you will have taken
the money immediately. And this is the right
decision. This is because of the Time Value
of Money (TVM) which is basically power of
compounding.
Where,
FV: Future Value
PV: Present Value
R: rate of return
N:Numberoftimeperiodsforwhichthemoney
is invested
Money that is available today is worth more than
money available at a later date, because you can
invest it and earn a return / interest on it. So, for
example, if you had 10 lakh available today, and
you invested it into a 1 year Bank Fixed Deposit
offering 7.50% in compounding mode, then in 1
year your money would be worth 10.77 lakhs.
The money you save and invest is the Present
Value in your equation.
R is the available market rate of interest – this is
not in our control – available investments offer
FV = PV x (1+R)^ n

3.2 Explain - disciplined and
regular Investing
The most convenient and easiest way to
accumulate wealth is by investing regularly and
in a disciplined manner.
This can be done with any of the asset classes
mentioned previously. For example when
investing into debt market you can opt for a
recurring deposit, or investing into equity you
can go for SIP (systematic investment plan).
The asset class that grows your wealth the most
over a long period of time is equity. Very often
while investing, investors try to get the perfect
entry and exit point of the market – which
certain approximate rates of return, and what
you can do is choose your investmentinstrument
carefully.
The only factor in your control is your N. You can
increase your investing time horizon. The earlier
you start investing, the higher will be your N,and
the greater will be your money’s Future Value.
PowerofCompoundingistheEighthWonderof
World – Albert Einstein

3.3What are the benefitsof
investing via a Systematic
Investment Plan (SIP)?
3.4Howinflationcan affect
your financialplan?
Purchasing power is the quantity of goods or
services that one unit of money can buy. For
example, Rs.100 can purchase much less today
than it could purchase say 20 years ago. If your
income level stays the same, but the prices of
goods or services increases, then it essentially
means that the purchasing power of your
income has reduced.
This increase in the price level is called Inflation.
Thus inflation is the increase in prices that
erodes the purchasing power of your money.
And this is the most important factor to account
for when making your financial plan.
Advantage
of power of
compound-
ing
Benefits
of
SIP
Advantage
of Rupee
Cost
Averaging
Enables
disciplined
amounts to market timing which is very difficult
even if not impossible.
Instead of timing the market, try to let your
investments spend time in the market!
Aviods
market

Purchasing
Power of
money
Cost of Goal
Example: Mr. Prajwal Ingle has a 6 year old
daughter. He plans to send his daughter to col-
lege for graduation at age 18 and post gradua-
tion at age 21, for which he will spend 10 lakhs
and 25 lakhs respectively.
What corpus does Mr. Prajwal need to
accumulate for his daughter’s education
goals? Assume that inflation in college fees is
approximately 10% p.a.
If Mr. Prajwal’s daughter goes to college at age
18 i.e. in 12 years, college fees at that time will
be approximately 31.40 lakhs. This is theamount
Mr.Prajwal has to accumulate in 12 years to
send his daughter for the same standard of
college education available today at 10 lakhs.
Similarly, for his daughter’s post graduation,
in 15 years Mr. Prajwal needs to accumulate
approximately 1.04 crore to give the same level
of post graduate education available for 25lakhs
today. This is the effect inflation has had on
college education fees.

Chapter 3: Financial Plan – Concepts & Factors for Success
3.5 What is the importance of
Asset Allocation?
Asset allocation is a simple concept which
means allocating your investments across
various asset classes so that the poor
performance of any one asset does not affect
the overall performance of the entire portfolio.
Different asset classes are differentlycorrelated
with one another. For example, when equity
does well, debt or gold may not do well,
and vice versa. It is this different correlation
that makes asset allocation such a critical
component of financial planning.
27

Chapter 3: Financial Plan – Concepts & Factors for Success 28
Asset Allocation depends upon the following
factors:
• Your risk profile (appetite andtolerance)
• Your financial goal time horizon
Usually, determining the right asset allocation
for you is best done by your personalfinancial
planner.
include buying a house i.e. accumulating a down
payment in 5 years, sending his son to college in
8 years, and planning for his own retirement in 15
years.
Asset Allocation for Mr.Kaustav and Mr.Anand is
given as follows :
Asset Class Mr Kaustav Mr Anand
Example: Equity 70 % 55 %
Debt 10 % 30 %
Consider two persons: Mr. Kautav and Mr. Gold 15 % 10 %
Anand. Cash / liquid funds 5 % 5 %
Mr. Kaustav is a 30 year old male who is married
and has no children. He wishes to plan for his
retirement, and so his goal time horizon is 25 to
30 years.
Mr. Anand on the other hand is 45 years old,
married and with a 10 year old child. His goals
Mr Kaustav already has
his allocation to real es
his own home.
Mr. Anand is buying a ho
accumulating down-pa
he purchases the home
his own house and hence
tate is simply the value of
me for which he is
yment funds. When
he will be buying real

estate and hence adding real estate to his asset
classes. He has a lower exposure to equity due
to the higher number of goals, their comparative
nearness in terms of years, and his higher age
which reduces his risk appetite and tolerance.
Mr. Kaustav on the other hand has higher
exposure to equity, a riskier investment, because
his only goal is retirement, and the time horizon
of the goal is 25 to 30 years i.e. long term.
Remember, asset allocation is not a one-time
process. It is not static, but dynamic. As your
goal draws nearer, it is important to re-assess
your asset allocation and withdraw fromrisky
investments – to de-risk your goal’sportfolio.
You can decide what your asset allocation
should be for each of your goals. Here are some
guidelines you can follow in deciding asset
allocation:
• If your goal is more than 10 years away, you
can invest up to 70 – 75% of your investiblefunds
into equity, depending on your risk profile. The
remainder of your investment can be put into
debt (15 to 20%) and gold ETFs (around 10%).
• As your goal comes closer, for example when
your goal is 6 years away, you can maintain an
asset allocation of 60% in equity, 30% in debt and
10% in gold ETFs.
• When your goal is less than 3 years away, it
would be wise to not expose the corpus to equity
market volatility. Maintain a 100% exposure to
fixed income instruments.

Remember, those investors who were invested
in equity when the markets crashed in 2008 and
in early 2018, and had a goal such as their child’s
education or their own retirement less than 3
years away, have had to watch their goal funds
get eaten away in the market crash. They also
may not have had enough time to rebuild their
goal corpus. This is why it is absolutely essential
to de-risk your goal portfolio as your goal draws
nearer.
3.6 What’s your risk appetite
and risk tolerance?
Risk appetite simply refers to how much risk
one is willing to accept. Risk tolerance indicates
how much risk our finances can actually handle.
The two might be very different.
Risk
Appetite
Risk
Tolerance
Risk
Profile

Example:
Mr. Arka Roy is a young man, married with a
child. His risk appetite may be high. This may be
based on his investing tendencies, in case he has
done well with equity in the past he is confident
to do well in the future also and hence has a high
appetite for risk.
However, based on his financial situation which
comprises factors such as level of emergency
fund he maintains, if he has any loan EMIs that
are chipping away at his income and so on, his
risk tolerance might be very low indeed.
You should assess your own risk profile to know
where you stand compared to your own risk
appetite and risk tolerance.

Chapter 3: Financial Plan – Concepts & Factors for Success
Risk profilingis an exercise to determine
how much risk is appropriate for an investor.
Risk profile is subjective. Few persons have the
ability or objectivity to determine their riskprofile
appropriately. This is done by asking several
questions as part of a structured data gathering
exercise. Examples of few such questions are:
What is your age?
A young investor will have a higher risk taking
capability than older person due to sheetfact
that he has more time on his side
How many earning members are there in the
family?
If number of earning members are high then risk
taking capacity goes up but if there is only one
earning member then he can have lower risk
taking capacity.
How many dependent members are there in the
family?
How stable are the income streams in the family?
If the job is a permanent full-time one as
compared to a freelance consultant then the
person will be having a higher risk taking capacity
.
What is the level of the investor’s current wealth,
in relation to the fund requirement for
various needs?
Already if the investor has gathered substantial
asset then he can take on higher risk,
What is the liability and loan servicing
requirement of the client?
If the investor has single or multiple loan EMI
32

running then a major portion of income gets
eaten up by such liabilities leaving littlesurplus
for investing and taking risk.
If the market were to fall down by 10%, how will
you respond?
The investor who believes in increasing his
position when the market falls is obviously
comfortable with risk and losses. If a market fall
were to trigger an exit from the investment with
whatever can be recovered, then the investor
is not a candidate for risky approaches to
investment.
Such questions help in understanding the psyche
of the investor and accordingly asset allocation is
customized for the investor.

Chapter 4: How to plan for your life-stage
How to plan
for your
life-stage
You must have heard the
thumb rule of how much
to invest in equity. It states
that you should have (100
- Your Age) % of your net
wealth in equity. So if you
are 40, you should have
60% of your net wealth in
equity.
4
34

35Chapter 4:How to plan for your life-stage
But is this necessarily correct?
Your equity exposure depends on the proximity to
your goals, and it is very doubtful that anybodyhas
only 1 financial goal in their lives. So a single equity
percentage based on your age cannot apply.
Two generations ago, life was comparatively much
simpler financially. You would go to school, maybe
to college, get married in your 20s, have children by
your 30s, work in one company for almost yourentire
working life, buy a home on retirement, and retire
peacefully by 60.
Things are different now. Creating a successful and
powerful plan for your financial life in today’s times
has very little to do with your age and a lot to dowith
major life stages / events when you make the plan.
Let’s see what these life stages / events are and what
the best approach is to deal with your finances in each
one.

Chapter4:Howtoplanforyourlife-stage 36
4.1 Stage 1 - Your First Job
You’ve graduated and just got your first real job.
A critical concern at this time is managing your
cash flow.
Low bank
balance
Financial Goals
limited
No financial
dependents
Unmarried Starter
Salary
Low tax
incidence

4.1.1 Start saving.
Although you might feel like you don’t have
the money, even saving 10% of your income
per month is enough to start planning for your
retirement. If you’re 23 years old and in your first
year of working you manage to save and invest
Rs. 24,000 (Rs. 2000 a month for 12 months),
then at a growth rate of 15% per annum this Rs.
24000 will grow to Rs. 36.75 lakhs by your age of
60.
4.1.2 Insurance
you most likely have no financial dependents at
this time so you might not need life insurance,
but you should definitely opt for health
insurance. This has dual benefits - firstly, your
health is insured and this is most important.
Secondly, you can claim a tax deduction of the
premium paid, under Section 80D.
4.1.3Tax Efficient Investment
If your salary brings you into the 5% or 20% tax
bracket, the first thing you should do is avail
of Section 80C deductions - invest into an ELSS
fund (equity exposure) and into your PPF / EPF
account (debt exposure). The limit is Rs. 1.50 lakh
under Section 80C.
4.1.4Contingency Fund
Start building up a contingency fund for use only
in case of emergencies. Typically this should be
the equivalent of 6 to 12 months of your monthly
expenses - depending on your personal risk
appetite. Set this aside into a liquid mutual fund
to earn a better rate of return than your savings
bank account. But remember that the aim of this
fund is to enable liquidity of money and not just
high returns.

4.2 Stage 2 - Getting Married,
Having Children, Life Goals
Increase
If any equity investments are done at this stage
and held for a long period like 5 – 10 years or
even more would most likely generate a high rate
of return, and therefore beat inflation. At this
stage of life, equity can be taken for the long run.
Married, with or
without children.
May have or take
a home loan / car
loan
Personal goals
would include pro-
gressing in your ca-
reer, caring for your
family (parents,
spouse, children
if any), enhancing
lifestyle (vacations,
car, other regular
lifestyle expenses)
List of financial
goals might include
planning for chil-
dren’s education
& marriage, house
purchase, own re-
tirement, providing
for parents, pur-
chasing a property
as an investment to
yield rental
income
May or may not
have adequate life
insurance. May
not have adequate
health insurance
for the family
Need to grow
wealth, increase
contingency re-
serve

Chapter 4:How to plan for your life-stage 39
4.2.1 Insurance
the first thing you should do is checking your life
insurance requirement. Buy life insurance in the
form of a simple term plan and not any other type
of product. The premium for a term plan is the
lowest; the cover you will get for this premium isthe
highest. This is the best way to protect your familyin
case of your untimely demise, especially if you also
have any liabilities like a home loan / car loan.
A financial planner can help to do an exact
assessment of your insurance requirements and
suggest the most suitable policy from the universe
of hundreds of policies. Also, for health insurance
- take a family floater that covers your dependents.
Ensure that you have sufficient cover for each
member of the family, considering that medical
costs can be quite high these days.

Chapter 4:How to plan for your life-stage
4.2.2 Different Kinds of Loans
Available and How to Ensure
You Don’t Over-Borrow
Unsecured Loans - An unsecured loan refers to
any kind of loan that is not attached by a lien on
any of your specific assets. This means that in
case you default on the loan due to bankruptcy
or any other reason, the unsecured debt lender
does not have the right to claim any specific
asset. Example - credit card debt & personalloan
Secured Loans A secured loan is one where
you, the borrower, pledge some asset of yours
as collateral to the loan. In case of bankruptcy
/ any other reason for defaulting on the loan,
the lender has the right to take possession of
the asset and sell it to recover some of his loss.
Example - car loan & home loan.
Thus there are many options of loans and
different lenders (from banks to housing
finance companies to your relatives), whichcan
help you take a loan when you need one. Now
you face the question of how to ensure that
you don’t over-borrow and put a strain on your
finances.
A simple way to check whether you are over-
leveraged or not is to find out your Debt to
Income Ratio.
Formula = Sum of monthly outflows / EMIs /
total fixed monthly income
Ideally, this ratio should not be more than
30%, else you might be exerting strain on your
income to service your debt.
40

4.2.3 How to Build your Wealth
with a Loan?
Taking a loan can be a great way to build your
wealth provided you know how use it smartly
within the laws of land. For example home loan
& car loan can help you achieve the financial
goal of buying a home or a car (by making
payments over a period of time) without having
to wait and save enough to make an outright
purchase by paying in lumpsum mode.
In case of home loan, there are tax benefits
both on principal repayment and interest
payment.Since you are not going to pay in
lumpsum but via EMIs so it provides a way to
build an appreciating asset like a residential flat.
41

4.2.4 How to save to buy a home?
You can follow the steps given below to ensure
savings to buy your dream home:
Don’t let credit card debt suck you dry
If you have a large amount of debt then there
is no point trying to save money as the interest
you’ll be paying on your loans will faroutweigh
any return you will see on any savings. You need
to get rid of your accumulated debt first.
Also, before you take a home loan, you should
put yourself in a position where you do not have
any other debt to service. Not only will that free
up cash to service your loan but you will be able
to take a higher loan simply because you are not
bogged down by other such payments.
So the first step is to clear your personal loans
and credit card debt.
Start saving with your very next paycheck
You can start investing in an equity fund if you
plan to take loan years after some years. Start a
systematic investment plan (SIP) where a small
amount gets channelized every month towards
an equity mutual fund. If you do not have a long
way to go, opt for debt mutual funds and select
that type of debt fund which matches your time
horizon and risk appetite.
Stop the outflow of expenses
Curb your expenses and you will be surprised at
how the small savings add up. You can start by
eating at home. Reduce your eating out budget

and you will see what a big saver that is. Not to
mention much healthier. Cut down on cigarettes
and alcohol too. Not only will you be healthier
but even richer. Cancel unnecessary magazine
subscriptions. All these small moves will impact
your bank balance positively.
Act on a definite plan
Do you have an idea how much the house is
going to cost you? For instance, if you plan to buy
a home that costs around Rs 50 lakh, then you
will have to ensure that you have Rs 10 lakh as a
down payment. So work with definite figures or
else your savings may fall way below the actual
amount that you need. Also, work with a time
frame. Do you need that amount within a year or
within five years? Once you determine that, the
actual investment avenue can be determined.
Monitor Credit Card debt
Start saving with next
Stop the outflow of expenses
Act on a definite plan

4.2.5 What is an EMI and how
are EMIs calculated?
The Equated Monthly Installment, or the EMI, is
the amount of money paid by borrowers, each
calendar month, to the lender, for clearing their
outstanding loan. Generally, EMI payments
are made every month on a fixed date, for
the entire tenure of the loan, till the entire
outstanding amount has been completely
repaid. The EMI depends on the loan amount,
the rate of interest and the duration or the time
of repayment of loan.
Home loan providers offer different varieties of
loans that are designed to fulfill the diverse
needs of home buyers. But, before opting for
TheComponents ofEquatedMonthly
Installment (EMI)
44
Interest
EMI
the right one, it is important to understand the
most integral part of any loan, and that is EMI.
So, let us understand the composition and how is
EMI calculated?
Principal

4.2.6 Rising Loan Interest Rates –
What should you do?
The most common option when the interest rate goes
up is to either increase the EMI or increase thetenure
of the loan. But there are other options too besides
these as mentioned below:
Increasing the loan tenure and keeping the EMI
constant
When interest rates rise, a sudden rise in EMI could
be quite a pinch especially for individuals in tight
financial conditions, those with more than one debt
and those nearing retirement. At such times, keeping
the EMI constant and increasing the loan tenure
works out as an ideal option.
Lenders accommodate the interest rate increase in
the increased loan tenure and retain the monthly
outflow at the same level. However keep in mind that
by doing so in the long run, you end up paying more
interest for your loan.
Increasing the EMI, with the same loan tenure
For those who can afford it, go for a higher EMI
and maintaining the same loan tenure. This is
because, by increasing the EMI and retaining the
same loan tenure, though the monthly outflow is
higher, the total cost of the loan works out to be
much lesser.
Loan Prepayment
For many borrowers, loan prepayment could be
the last option in times of high interest rates, as
it primarily depends upon the liquidity position.
When going in for a prepayment, remember to
check on the prepayment charges the lender
would quote. Consider prepayment only if the
cost of prepaying the loan works out to be much
lesser than the rise in interest rate.
Loans could also be part prepaid. By doing so, the
loan principal value comes down, thus reducing

the total interest amount you’ll pay. The EMI would
reduce, or at least, the same EMI would remaineven
after an interest rate increase. Some banks may not
even charge a penalty for up to a certain percentage
of prepayment. A combination of a part prepayment
with a marginal EMI hike could sometimes work out
as an ideal option, if funds are available to do so.
Now comes the big question - when is the best time
to prepay a loan?
This question is quite relevant for home loans, as
the amounts (and thus, the interest) involved is very
large. Towards the end of a loan, you are mostly
paying the principal and very little of interest.
Whereas towards the beginning of a loan, you are
mostly paying interest, and very little in terms of
repaying the principal. Therefore, if you repay the
loan towards the beginning, you would be saving a
lot more on the interest than if you repay the loan
towards its end.
Loan Refinance
Loan Refinancing is replacing your existing loan,
with a new one, under fresh terms andconditions.
When interest rates rise, switching over to a
lender who is offering a reduced interest rate,
could serve to be a good deal. For a charge, you
could switch over from a fixed to a floating rate, or
vice versa.
Many lenders are more than happy to attract
borrowers by lowering their interest rates.
However this process does not come easy.
Be ready for a lot of paperwork along with
foreclosure charges, and processing fees.

Chapter4: Howtoplanforyourlife-
stage
47
Increasing loan tenure and keeping EMI constant
Increasing EMI and keeping the loan tenusre same
Loan prepyament
LoanRefinance

stage
48
4.2.7 Why It Is Sometimes NOT
Better ToPrepay Your Loan?
It is not necessary always that prepaying make
financial sense. Simple reason is the opportunity
cost of your money.
For example, if you have a loan which ischarging
you interest at 10% p.a., and you suddenly come
into some surplus funds which you can either
use to prepay full or part of your loan, or to
invest, the first thing you should do is check the
opportunity cost of these surplus funds.
Would it make more sense to prepay the 10%
interest loan, and thereby save yourself from
paying the 10% interest? Or would it make more
sense to invest the funds into an investment
product that can generate more than 10% return -
based on your risk appetite and time horizon?
So remember, if there is an investment
instrument which would give you a long termrate
of return that is higher than the rate of interest
you are paying on your loan, it makes financial
sense to invest the funds and earn the higher rate
of return, than to prepay the loan (in full or in
part) and save yourself the lower rate of interest.

stage
49
4.2.8 What to Do When You
Find Yourself in Too Much
Debt?
If you find yourself in a situation where youfeel
like there is too much debt to handle and you
need to get out from under the debt as soon as
possible, there are some simple steps that will
certainly help:
DoNotIncreaseYourLiabilitiesIfyoufindthat
you are already stretched, you may find that
well-wishers are advising you to take another
loan to pay off your existing loan. You would
simply be delaying the time when you do have
to sit down and pay off the debt.
Do not add to your existing liabilities by taking
on more loans. Once the existing liabilities are
cleared, if you find that you need to takeanother
loan – make sure it is easily serviceable by your
existing, fixed monthly income, and the terms
(tenure, rate of interest) are suitable to you. This
should be done only after your existing liabilities
have been paid off.
TakeStockofYourLiabilitiesMaintainaPersonal
Budget. This simple and oft ignored tool is an
excellent resource in your battle against debtand
by maintaining a good personal budget, success
against debt is achievable.
A personal budget will help you discover the
following:
Your exact cash flows your fixed monthly

stage
50
incomes and all your monthly expenses. Once
you know your expenses, you can see whereyou
are spending on luxuries – and rationalize this
portion. Spend on the necessities only, save the
rest.
Calculate an approximate figure of how much
extra money you can save each month – and
allocate it towards a debt repayment fund.
Your exact liabilities You can track exactly what
debts you have and all their details.
Create a table which contains all details of
the various loans taken, loan type, each loan’s
outstanding tenure, EMI, rate of interest and
outstanding amount. The rule to be followed is
pay off the highest interest rate debt first.
Loans restructuring can be done in two ways.
First, restructure your loan for a lower Interest
rate. Second, refinance your existing high rate
loan by taking a fresh loan at a lower rate.
4.2.9 Contingency Fund
Now, you need to assess your contingency
(emergency) reserve. This should be 6 to 24
months of your monthly expenses, including
EMIs if any. Hold this in a liquid mutual fund
scheme. This should be used only in case of a
financial emergency, which can occur at any
time. Do not use this for big ticket expenses
like contributing to a new car or a vacation.You
never know when an emergency might occur
and how much cash you will need. Think credit
crunch year 2008.

Chapter 4:How to plan for your life-stage 51
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