Calculating your Net Worth
So you think, you are well on your way to building wealth. Let us do a test to measure your current Net Worth:
1. Start with current market value of your major physical assets: house you are living in (if owned) + investment properties + bullion/jewelry. etc.
2. Add current market value of liquid and movable assets: mutual funds, stocks, bonds, bank accounts, derivatives, deposits, retirement accounts (PF), automobile(s), consumer durables (s) etc. Please note that automobiles and consumer durables would have depreciated in value and therefore use a reasonably accurate value of their market value
3. Add payout value (including target bonus) of endowment/investment type insurance policies. Ideally, you should use present value of the proposed payouts - however, if you cannot do this, use the payout value as an approximation. This approximation could overstate the current value of such instruments.
The total is your assets.
Now deduct the following liabilities:
4. Value of outstanding loans taken to buy properties + automobile(s) + consumer durables
5. Value of balance on credit cards + student loans + marriage loans + other loans/commitments
The net result is your current Net Worth. Does the picture still look pretty ?
Typically, one is financially stretched during the family building stage (30 - 50 years) after which a rapid rise in Net Worth is required for comfortable retirement. Please remember that people are retiring earlier and living longer !
Labels: Financial planning in India
posted by Indian Finance Commentator @ 3:24 PM
5 Comments
5 Comments:
Thanks for giving the mechanics of calculating the net worth. I do have a doubt. The technique you have given gives only a "snap shot" of the assets at a particular moment. The value may change, depending on the market fluctuation (mutual funds, stocks etc). Is there a way to minimize the risks associated with market fluctuation (apart from keeping all the assets in cash in a bank!!). Are there any "safe" funds that can give better return than banks. How does one go about finding them?
You are right - this is a snapshot in time. It is often suggested that such a calculation is done periodically (say once a year). This will help you stay abreast of value fluctuations and make the required changes in your portfolio.
In India, the 'safer' instruments could be bank deposits and government supported instruments (e.g. PF, postal savings). Please note that even in the case of deposits, one is better off sticking with the major banks in India (large public sector or private sector banks). In the case of deposits you need to be sure you are with a bank that is large and is known to follow good risk management and governance procedures.
You can also look at mutual funds that are focussed on fixed income securities. Please note that such instruments, while giving you a dividend based on interest paid by the underlying instruments, do carry a price risk - i.e. NAV of the mutual fund could move up or down depending on interest rate scenarios and market demand for the instruments. You could start your search for such funds by either speaking with the securities division of your bank or talking with major mutual fund houses - e.g. Tata, Reliance, Fidelity, etc. Also, please look at the Economic Times or any other financial paper where fund NAV gets quoted regularly - will give you a sense of who the various mutual fund players are.
Please note that Indian bank deposits give a fairly good return these days - e.g. you can get a 8.5 to 9% pa return on a bank deposit. Therefore, it will be challenging for a fixed income mutual fund to give you similar returns without increasing the risk involved.
To add to the Srinivasa discussion:
Mutual Funds are subject to market risk, read the offer document carefully before investing. How many times have you heard that! But if you really want to beat the fixed income yield, ELSS mutual funds that are tax deductible under 80C are recommended. I was advised to take SBI Magnum 93 - its done OK so far (6 months) and has a good reputation. I understand HDFC and Templeton have ELSS funds that are doing well.
These are Equity linked schemes, so obviously have an element of risk, but the fund managers seem to have done well and that is why the funds have performed well and are therefore considered as safe bets. Remember they come with a 3 year lock-in.
I think equity based insurance plans or systematic investment plans can also be a good avenue for long term investments. This is good when you dont want to invest ammount in bulk and plan to invest monthly or periodically.
Can you guide more on prospects of investing in such plans.
Please note that the authors of this blog can only share ideas and experiences. We are not seeking to provide financial advise.
Having said that, in our experience, both are valid instruments for regular savings. One aspect you need to be clear about is what instruments and in what proportions are these plans investing into. Typically, they will articluate whether they are following a conservative, balanced or aggressive portfolio. The more aggressive ones reflect higher equity proportion therefore giving you a chance for higher appreciation in the longer term, provided you can handle the risks(e.g. price volatility in the short to mid term).
Post a Comment
Subscribe to Post Comments [Atom]
<< Home