Financial literacy is regarded as an important requirement for the effective functioning for any economy and society. Over the years, financial literacy ensures supports social inclusion and enhances the well-being of our communities. While financial inclusion is the primary criteria while evaluating the level of development & progress of any economy, true financial independence cannot prevail in absence of literacy. In this article, we shall be taking a closer look at what financial literacy truly means and the advantages of it.

What is financial literacy?
Financial literacy refers to the ability to make informed judgments and to take effective decisions regarding the use and management of money. It thus includes the awareness, knowledge and skills to make decisions about savings, investments, borrowings and expenditure in an informed manner. In other words, financial literacy would mean that you understand the risks & rewards associated with every monetary decision and are also aware of the other options available to you.

Signs of financial illiteracy:

• Lack of awareness upon the need and importance of various financial services/ products.
• Lack of access or knowledge as to how to access to services/products
• Lack of knowledge and understanding of financial services/ products
• Inability to 'rightly' chose between alternate financial services/ products
• Inability to make proper assessment of the present & future financial situation
• Inability to understand the risks & rewards of any financial decision

Why financial literacy is needed?
The need for financial literacy is felt in developed and developing countries alike. Even if you have financial inclusion wherein you have easy and fair access to banking, investment and credit products, the real benefit can only be enjoyed if you are financially literate. There are many cases and even high chances that in absence of proper knowledge, one can be exploited by intermediaries and manufacturers, alike, leading to grave financial loses or crisis. In a world with growing financial inclusion, rise in number and complexity of financial products and a need for financial independence, financial literacy has become a must for everyone.

From a regulatory perspective, financial literacy empowers the common man and reduces the burden of providing protection and even grievance redressal to the common man by the regulators. It thus makes the entire financial system more efficient, disciplined and progressive. Financial literacy not only marks an improvement in the quality of life but also on the integrity & quality of the markets.

Who needs financial literacy?
Financial literacy is for anyone who has somthing to do with money. Thus, there is no one who doesn't need it since all of us are either engaged in earning, borrowing or spending money and do take financial decisions in our daily lives. Perhaps only infants, lunatic, godly men or old age dependents may be excluded from this group.

The focus of this article is on financial literacy that relates to you and your family members. Financial literacy is important for you, your spouse, parents and even children. Though one may argue upon the level and depth of the financial literacy knowledge required between different groups, an overall understanding is a must for all. With financial literacy, we have the following advantages

• Clarity of financial concepts and terms
• Making better financial decisions related to savings, investments, borrowings, etc.
• Accessing financial products & services easily, without fear or prejudice
• Building assets and wealth over time, leading to better financial health
• Overcoming vulnerability and avoiding exploitation by people around us
• Planning towards economic security to self and for family

Components for Financial Literacy:
The next question that arises is to what does financial literacy comprise of? You, most probably, may consider yourself as financially literate but may not be able to clearly outline the required knowledge surrounding it. We are presenting the broad outline to test oneself on financial literacy.

The following together can be considered as comprising financial literacy for any individual.

The above may seem to be a very comprehensive outline but the idea is to cover all the major aspects of money that one has to deal in their lives. While detailed knowledge may not be necessary under each heading, one should however have the broad conceptual understanding of the idea and/or knowledge of options, as the case may be.

Conclusion
Financial literacy is the primary step for financial inclusion since introspection changes behavior which in turn makes people seek and receive financial services and products. Financial literacy can lead to financial wisdom and financial independence in knowledge. It will give the ability to manage money not just deal with it and to use skills & knowledge to take wise decisions for the future.

We advise all our readers to ensure that they are 'financially literate' in the truest spirit. We also encourage all the readers to make their family members, especially spouses, parents and growing children financially literate. One may use the outline shared to impart such knowledge. Indeed it would be a great learning for anyone that would otherwise take great time & experience to gain. This would help increase the economic space, self esteem and the confidence level of any individual and make him/her ready to easily engage in the mainstream of the financial systems.

Emotions is what makes us human. Unfortunately, emotions also make us bad investors. As a powerful force, emotions has the strength to often shadow intelligence, rationale and logic. And as investors, it does hurt us. It also drives our investment decisions most of the time, knowingly or unknowingly.

THE CYCLE OF MARKET EMOTIONS :

Markets tend to be more like ECG graphs in the short run while behaving like weighing scales in the long run. No one can actually predict what is going to happen in the short run but we mostly have a fair idea of where the markets are headed over long run. The short run for equity markets can be described as anything less than say 1 to 3 years of time, it can be days or months together. The long run will be say over 3 to 5 years. The longer the period, the better can be the predictability of growth trends and markets. A real problem arises when we observe sharp market behaviour in relatively shorter period of time, stroking the emotions within us. As market moves up and down, the emotions within us change. The worrying part is that these emotions are the opposite to what rational logic would suggest at different peaks & bottoms of the market cycles. Have a proper look at the image below which shows how the emotions of an average investor plays out in response to market movements.

THE UP JOURNEY :

At the time of beginning our investments, we feel optimistic about the future and decide to invest for the long run. Slowly, we as see the markets rising, we are more excited and thrilled. At this time we often also invest more money hoping the trend will continue. When it does, we feel euphoric as if we have really achieved something.

THE DOWN JOURNEY :

However, as the market cycle reverses,we at first are a little worried but we assure ourselves that the trend will be temporary. When it falls further, we deny any down cycle but we begin worrying about investments while continuing to hold them as long-term investors. Slowly, as market falls, we start fearing and then end up panicking when our profits have wiped out and investments are at big loss. We keep hearing and accumulating all the negative news around us and we feel the decision to invest was wrong and it would be now wise to stop our losses by selling – just like everyone else. When the markets reach the bottom, we fell we have made the right decision.

THE RISE AGAIN:

Slowly rationality and logic sets in and there is reversal of the trend after the bottom has been hit. We feel a bit disappointed as the market rises above the levels we have sold. Uncertain of the market direction, we decide to wait and watch. Slowly, as markets rise, our sentiments change from doubt to hope to optimism. After markets have risen well, we feel confident again in future to enter markets. We take our past experience as a lesson in investing and then invest again for long-term. Waiting for the history to repeat itself.

SAYING NO :

What we have learnt from history is that people do not learn from history. The saga of market cycles and emotions continues to play every time and the same herd behavior is often seen in the markets. Investors often jump into investing after seeing very attractive returns already made by others who invested much earlier. And when there is a fall, most are not matured and patient enough to see notional losses in their portfolio and react by selling.

Time in the markets rather than timing is what really matters in the markets if we want to make big returns. But to do this successfully, we have to control our emotions. Most of us are intelligent enough to make right investment decisions but do not have the temperament to carry it through. Dravid, perhaps the greatest middle over batsman from India, was able to survive the most challenging oppositions in foreign soils more because of his steady mind. He did not allow himself to get carried away even after tough sessions of low scoring or falling wickets. He is today remembered for that temperament and discipline.

THE KEY :

The secret of success in investing is known to everyone but practiced rarely. It is about being rational and logical when others are being emotional. It is about avoiding hear behavior by investing when others are selling and being grounded and rational when others are euphoric. Let us remember this simple behavioral aspect of investing and we will be good enough for being successful than a big majority of other impatient investors in the market. Let us hold steady and stay on the crease for long.

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful - Warren Buffett

Today you have many options for investment. In fact the options are so many that one often feels confused as to which is the ideal one! Most of us are also unsure of what important parameters to consider before choosing an option. We often consider a few important parameters but ignore a majority of the same. This article shares with you the important parameters that you may consider evaluating before making any investment decision. Please note that we are not considering important personal parameters like risk appetite, asset allocation, etc. here but only looking at parameters from investment product point of view.

Time Horizon:
Time is of essence and among the most important determinants for any investment decision. You may easily classify your investment time horizon into different categories like for eg. (i) very short term; less than 3 months (ii) short term; 3 to 12 months (iii) medium term; 1 to 3 years (iv) long term; 3 to 10 years (v) very long term; beyond 10 years. As your time horizons increase, the risk nature of investments can increase from money market instruments to short term debt to long term debt and then increasing portions of equity. Ideally, for a long duration and a growing economy like India, equity asset classes offer much greater scope of wealth creation.

Real Returns:
While evaluating returns expected from any investment, we often only look at the returns mentioned or expected. However, we fail to take into consideration factors like inflation and taxation upon these returns. As smart investors, we should always look at Post Tax – Real Returns from any investment. To arrive at this is very simple. Firstly, take the 'gross' returns from an investment – say 8% for 1 year on Bank FD and deduct taxation from this. Eg. If your applicable tax slab is 30% and the interest returs are taxable then the post-tax returns are 8% less 30% or 5.60%. After post-tax returns, the next is adjustment for inflation or price rise by deducting inflation from post-tax returns. Thus, if the inflation is at say, 8% today, then the post-tax, real returns will be 5.60% less 8% or negative 2.4%. Thus, the our investment, as given in example, in reality is going to give you a negative real returns on post-tax basis. This is the recommended method to evaluate any returns for any investment.

Investment Risks:
Investment risks are of many kinds and would arise from (i) markets (ii) nature of asset class (iii) product provider / manufacturer (iv) financial and regulatory environment (v) political climate, etc. Given the nature of asset class, like physical, equity & debt, the risks would vary in nature. Equity risks are mainly market, company & sector driven. Debt risks are generally in nature of credit risk, liquidity, reinvestment, etc.

Tax Considerations:
There are four instances where tax incidence has to be evaluated. First – at time of making investment if the investment is eligible for rebate or deduction. Typically such investments would fall under section 80C, 80D, etc. Second incidence would be the taxability of the income generated from your investments. Income can be broadly in form of interest or dividend income. Third incidence would be that when any investment is redeemed or sold. In such a case, the capital gains , long term or short term, would need to be calculated, depending upon the investment horizon. Fourth tax incidence is that of Wealth Tax, which is more relevant of high networth individuals. Investments can offer tax benefits to you on any combination of these tax incidences. A smart investment decision would be one which will give the best tax benefits and minimum tax liability from your investment.

Liquidity:
Investments can be futile if one is not able to liquidate it at times of need or emergency. Surely, life is uncertain and we would not like our investments to be blocked and unavailable when we need it. Liquidity would mean that you can get your investments back easily, within short period of time and without incuring incurring too much of cost or sacrifice of value while redeeming. An investment option offering high liquidity is preferred since one may not only need it at times of emergency but also to make best use of any investment opportunities that may crop up at any point of time. However, having said this, as investors we should be disciplined enough to not liquidate investments often for non-critical or general expenses every now & then just because we can do so.

Costs:
Different investment products have different types of costs attached. Generally, any investment would have any combination of following three types of costs (i) at time of investing new or additional money (ii) during period when investment is active as percentage of investment value or fixed fees (iii) at time of exiting or withdrawing money. Typically we can mention these costs as entry load / expense / exit load. The costs may be calculated as percentage of amount or a fixed sum of agreed fees. Further, costs may be levied for distribution, transaction services or advisory services. There would be also also be costs while making service or operational requests, which are beyond the normal investment costs. Over time, the costs in many products have fallen but still costs are a major factor to consider when one is investing large amounts in products like PMS scheme, liquid funds, insurance products, etc.

Suitability:
There are customised products available in market directed for specific purposes like pension, retirement, wealth creation, safety of capital, child education, etc. Being clear with your investment objective can also be an imporant factor while considering different options. It is however important to be careful since just naming products after some life goals need not necessarily qualify as good investment for that purpose. You may need to weigh small unique features that such products offer before comitting your money.

Convenience & features.
With improving lifestyle and penetration of technology in our daily lives, we would prefer investment products that can be viewed & managed online. While most financial institutions are now increasingly offering such services, off lately, even government schemes & plans have begun such services. Further, one may also like to evaluate other facilities like nomination, third party transferability, loan facility, acceptability as security for loan by financial institutions. While these options may not be of very critical, it can however be a differentiating factor for persons who intent to use these options.

Often the investment decisions made are not based on careful thinking or evaluation on all these parameters. Decisions are majorly influenced by opinions of close friends, influencial persons in family, recommendations by agents, brokers and even by smarter marketing by companies. Evaluating investment options independent of these influencing factors on the parameters given above can most definitely lead to long term financial well-being. If you are not in position of to evaluate these factors yourself, you can surely ask your financial advisor these questions when required. After all, being wealthy in life is not just about making the best investment decisions but also about avoiding bad decisions.

Few matters in life are regarded, by many, as less relevant than planning for the distribution of estate, or in other words accumulated assets. More so in a country like India where, family legacy can be passed on from father to son and their sons without much tax incidence, and seldom does it require an eye of the expert for distribution among family members. But this scenario is changing fast with more and more families building wealth along with complex family bonds it becomes increasingly difficult for the wealthy to leave a legacy without conflict.

For many families wealth distribution or the estate dissolution takes place within the lifetime of the main owners. Though, same is not the case with every family, some very famous incidents have occurred in some of the wealthiest families clearly highlighting the issue of "Lack of proper Estate Planning" and how quickly a family dispute can spiral into a very public one.

Estate Life Cycle
Just as every asset has a lifecycle, every human being has a lifecycle and so does the estate. In some cases it may stretch to many generations, while in some, it may simply be the case of one generation building other enjoying, but regardless of how many generations the Estate lasts, its life-cycle plays an important role in decision of planning, distribution and continuation of estate.

Figure 2.1: Estate Life-Cycle

To understand the importance of various steps in the life-cycle we must relate those steps to the real life situations of a person involved into this venture. By understanding the reason behind each stage of estate life-cycle we can understand the factors at work in the minds of our clients and the fears, the decision affecting premonitions and why and how would they actually achieve a peaceful resolution, when it comes to their estate being passed to the next stage.

For example: A first generation entrepreneur, building a startup business is not actually thinking or worrying about preservation of that business venture. But only sometime later, when the business itself has moved from the very high growth rate to a moderate growth rate would he/she be actually concern on how to preserve it and then pass it on.

Whereas, a family business owner, who received a venture already established and only require to sustain it, will certainly be worried about the last two stages of:

• Preservation, and Distribution;

With more focus on the latter.

Why to Accumulate Assets?
The need for asset accumulation is the birthplace of the need for estate planning. Therefore, by understanding the reasons behind asset accumulation behavior we can pinpoint the real need of the planning. So, why assets are accumulated? Or, why anyone should accumulate assets throughout life? Given below are some of the common reasons:

A. Income security
One of major reasons and followed by almost everyone. We accumulate assets out of savings for rainy days in future, or for achievement of bigger goals or retirement whichever is your goal, generating additional source of income is an important goal of every family. Following life goals may be considered while targeting income security by individuals and families:

• Retirement
• Kids’ education
• Vacation
• House purchase etc.

These are some goals necessary for every family to prepare for, and some of the goals actually ensure additional income for the family; i.e. house purchase and retirement plans.

B. Better Lifestyle
This goal can be called a part of the income security efforts but due to its static nature we can look at it under a separate lens. Lifestyle expenses are usually met out of regular income of the family/ individual, but some of these expenses may require a bigger outlay, for example: purchase of a car, is one such goal, which may require some amount of savings to go into. Similarly an international vacation may be one of the major wish of the family requiring some amount of savings.

But, are these savings really assets? Perhaps not, the nature of assets divides the lifestyle asset from income generating assets. For Example:

• "Purchase of a car," which may be akin to building a short term asset, with limited utility of five to eight years.
• But "purchase of a vacation home," could be a long term asset, which may even be converted to generate additional income, and thus contribute to the income security of the family as well.

C. Financial Security for next generation
You may ask how it can be different from the objectives mentioned above. To a great extent it is not, but considering the involvement of next generation this objective is very different from the previous two, how? Take for example the following case:

• "Vijay and Kirti are parents to their two kids who are minor, school going children. Considering that it’ll take at least 7 years for one of them to become major and another 3 - 4 years in starting to become financially independent, the parents carry the responsibility to provide not only for their sustenance but also for their education and any medical needs they may face."
• Now consider purchase of a real estate property for income security purpose at Rs. 45 Lakh. Supposing the rent to price ratio is 5% p.a. family will increase their income by Rs. 2.25 Lakh p.a. “What happens if the kids are left to look after the property and themselves all by themselves?”
• The better solution for the family would have been to build sufficient financial assets, which are easier to handle, instead of major real assets, which will be difficult to handle or dispose off in stress scenario.

Therefore, different kinds of assets are required when we are building for the needs of the next generation. Insurance for example could be one.

D. For higher purpose/calling
With the advent of information technology and ease of execution, many of us are now able to follow our hobbies and areas of interest, which may not be directly related to income generation. Some of these areas even require substantial investment in the first place. Some of the hobbies:

• Photography
• Mountaineering
• Running a school
• Social welfare
• Pilgrimage
• Long distance travel etc.

The list can go on and on, but one thing may remain common and that is all of these most of the times are not related to the profession of the individual. Therefore, before launching themselves fulltime into such adventures, we must ensure that the financial needs do not pose a hurdle on the way. Also family and dependents remain provided for while we pursue our hobbies. Sufficient assets will ensure that for you and enable you to continue on your path unhindered.

So we can see the importance of investments and assets in our lives through these objectives, and also what happens when we remove them from the scene or from some family.

• Deserving dependents may have to start from scratch
• Dependents may have to cut down on lifestyle substantially
• Children’s financial future prospects may be jeopardized
• Loved ones may be forced to fend for themselves
• Business/Enterprise may be lost to creditors and distress sale
• That higher calling may have to wait for another day

How Assets are lost?

Asset transfer is one of the major reasons of loss of assets. 27% of the time assets are lost while in transfer to the next generation. Some of these assets take fairly long time to build , so one fact is clear, that by addressing:

1. The lack of discipline in asset use and wealth preservation
2. Wealth Plan &
3. Estate Transfer

We shall be able to reduce our chances of asset loss by 65% which is substantial, and moving further a good wealth plan itself will address the issue of health care and job loss, therefore completely filling up any gaps in asset preservation.

Estate transfer issues will not be completely taken care of by a wealth plan but certainly it forms the first building blocks of a good estate plan. The first ingredients in an estate plan are provided by a good wealth plan by organizing and bringing all assets and their characteristics at one place.

Why to Plan Estate Transfer?
Ensuing family feuds provide harsh enough reason for everyone with sufficient assets to embrace planning for its distribution or disposal in the unfortunate event of their death. But that may not be all. Here are five reasons why estate planning becomes important for everyone who owns substantial assets, or plans for the same:

1. Avoiding Family Disputes:
One of the most important reasons of all, this may be the reason for majority of asset holders out there, to keep family members and loved ones fighting over the leftover assets. Also this one reason has a huge impact on how the assets are to be distributed and there affects the planning directly or in other words is affected by the estate planning directly.

The first question a testator must answer to himself or the planner is that, whether there is a possibility of family expectations and what happens if those expectations are not met? Answering this one question may require much more bonding and clearer understanding of family interconnections and personalities but it also marks a turning point in the plan, when answered accurately.

Though, it will never be really accurate to answer of classify each one of the family members in such manner, but certainly all we need is to reduce the room for conflict, and the rest will be taken care of.

2. Survival of dependents:
Perhaps one of the greatest reasons why estate planning and small steps to ensure wealth transfer to right beneficiaries are just as important as building assets itself. As we have seen under the reasons for asset accumulation one of the reasons is to provide for the better lifestyle and more income security for the dependents, without proper planning transfer of the assets may be expensive and tedious process. Meaning much of the assets may be lost in the process or they may lose their value; for example: distress sale of business stake.

More than that, dependents may include those for whom it’ll be very difficult to survive in absence of external financial support, like children, handicapped relatives, old parents etc. For such dependents it may not even be possible to do rounds and take the effort of claiming most assets their benefactor may have left them, or worked hard to accumulate.

3. Survival and Continuation of Business/Enterprise:
Though this one argument may not be applicable to salaried individuals, but if they acquire stake in some business or enterprise this will also apply to them. Usually, many people including – employees, customers, creditors depend on the enterprise for their financial survival and growth, and thus, every business owner has this important responsibility to prepare for contingencies and pass on the ownership in a manner that ensures smooth transition of business to new owners and its continuation.

A proper estate plan will ensure the baton of ownership is passed unhindered and without much damage to the confidence of the three stakeholders in the enterprise as discussed above.

4. Continuation of Causes/Charities etc.:
With the financial security comes the freedom of will, and with freedom of will comes the desire to act on those higher callings in life, assisting others achieve greatness, promoting social welfare or fighting for a neglected yet important cause. People with substantial financial assets and good financial security are the ones often greatly active in their social lives and helping others overcome their difficulties. If you are one of such people, you would not want your cause to be forgotten after your demise, lack of estate planning might just do that. Therefore, once such causes are undertaken, ensuring their preservation also becomes equally important.

A good planning and forethought will not only allow your all important cause to continue, but may also bring many other likeminded activists along, expanding it multifold.

5. Preserve Family Legacy:
Family legacy is one of the factors which could be really rare and so precious. But like other causes and assets it’ll not protect itself from being lost, overtaken or forgotten by the generations unless it is allowed, through proper planning and guidance to grow and continue to benefit those it intends to, that may sometimes involve general public as well.

In modern times such concerns are taken up by business families, who have built substantial fortunes for themselves and need to forward the values and the enterprise to the next generation, especially in our country where most great businesses are family owned. The continuation of business is not the only challenge faced by businesses, but the continuation of the whole vision of the business which gives impetus to that effort. This will not just required careful planning for succession but also matching of family objectives with that of the enterprise, and further planning to continue the same for many generations to come.

6. Taxation & Transfer Costs:
Cost of transfer of estate is another major factor one should look out for while transferring the estate. Under Indian tax laws gifts and estate transfer to own children may attract least taxation but when it has to be done to minors and daughter-in-laws one should be careful of clubbing provisions. Other than that timely and proper planning may avoid distress sale of assets which diminishes their value.

Therefore, depending on the magnitude of assets a person has, the priority might change from preservation to growth, to transfer, and within transfer whether to simply plan for changing hands or for a foundation, can be a matter of concern for various classes of individuals and families with ownership of small or large estates. But one thing remains common among all, that the estate must serve the purpose of the family and the next generations to come after all that is why it was built in the first place.