Understanding Emergency Funds

An emergency fund is a safety net that you should be able to access quickly, without hassle. By definition, you shouldn’t spend more than an hour to get this money. Two key features define an effective emergency fund:

1. Ease of Access – The money should be available almost instantly.
2. Reasonable Returns – While safety is the priority, the funds should still earn some interest.

In terms of speed, Debit Cards are the fastest, followed by Fixed Deposits (FDs). Debt-based mutual funds can also be efficient, but some are still in the T+1 category, meaning you may need to wait a day or two for withdrawals.

This “time gap” can be easily solved when combined with a Credit Card—you can spend instantly and settle the dues once your redemption is credited. Therefore, it makes sense to classify emergency funds into two buckets:

• Fast Access – FDs, Debit-linked accounts, Wallets.
• Relatively Slower (T+1) – Debt Mutual Funds, Arbitrage Funds.

Once this classification is clear, parking emergency reserves in debt mutual funds becomes an easy and rational choice.

The Problem with Debt-Based Instruments

Debt funds and FDs have one drawback – Taxation. No matter how long you hold them, the gains are taxed at your income tax slab rate.

• If you are in the 30% slab, your post-tax returns shrink considerably.
• For those in the 10% or 20% slab, this may not hurt much.

This is where Arbitrage Funds enter the picture as a smarter substitute.

Arbitrage Funds – Equity Tax, Debt-like Safety

Arbitrage Funds are classified as equity funds for taxation purposes because they invest primarily in equity instruments.

• If redeemed within 1 year → Short-Term Capital Gains (STCG) tax of 20% applies.
• If held for more than 1 year → Long-Term Capital Gains (LTCG) tax of 12.5% applies.

This makes Arbitrage Fund particularly attractive for investors in the 30%+ tax bracket, as their tax outgo reduces drastically compared to debt funds.

How Do Arbitrage Funds Work?

The core idea comes from the age-old practice of arbitrage—profiting from price differences in two markets.

Example: Buy diesel in Goa where it is cheaper and sell it in Maharashtra at a higher price to pocket the tax difference.

In financial markets, the concept is applied to equities and futures:

1. Spot Market → Buy the stock at today’s price.
2. Futures Market → Sell the same stock in the futures contract at a slightly higher price.

Since futures usually trade at a premium to spot price (due to interest rates, dividends, and market expectations), the fund locks in a risk-free spread.

This strategy:

• Eliminates market risk (since the buy and sell are simultaneous).
• Provides stable returns (usually between 5%–6.5% annually).
• Enjoys equity taxation benefits.

Why Arbitrage Fund Is Safe

Arbitrage Funds are often misunderstood as risky because they deal in equities. However, unlike typical equity funds, they do not speculate on market movements.

They buy and sell simultaneously, capturing the price difference without exposure to volatility. This makes them:

• Low-risk like debt funds
• Tax-efficient like equity funds

When Should You Use Arbitrage Fund for Emergency Money?

Arbitrage funds are ideal if:

• You are in the 30%+ tax bracket
• You don’t need instant liquidity (T+1 settlement works for you)
• You want better post-tax returns than short-term debt funds or FDs

For investors in lower tax brackets, short-term debt funds or FDs may still make more sense.

Final Thoughts on Arbitrage Fund

For investors in higher tax brackets, Arbitrage Funds are an excellent substitute for debt funds—combining safety, stability, and tax efficiency. When used smartly as part of your emergency fund strategy, they can significantly improve your post-tax returns without compromising on safety.

The post Arbitrage Fund vs Debt Fund: Smart Emergency Planning appeared first on Fleek Finance.

Before diving further, lets understand some common terms in use for Mutual Funds.

Benchmark Index: The Foundation of Active Mutual Funds vs. Index Funds

Benchmark Index is a bucket of stocks, created by BSE/NSE and acts as a window to Markets. It tells you broad picture of the market by taking a bucket of 50-100-200 stocks as a sample. This is the foundation for understanding Active Mutual Funds vs. Index Funds. This bucket itself keeps undergoing change with time. Statistically, the index gives you a clear picture of what the real time market sentiment looks like. For example, global audience views India Markets via NIFTY/Sensex indices. The BSE/NSE decides the list of stocks and their weightage in the index composition

If a fund manager were to invest in such a basket, his/her job was relatively easier. In this case, the system decides for them what to buy and how much to buy. This also takes away the risk of ‘Fund Manager skill’ and automates the process. These benchmarks guide Mutual Fund Managers and help investors judge, how their funds are doing against fixed buckets.

Understanding the Cost Differences in Active Mutual Funds vs. Index Funds

Total Expense Ratio (TER) and Its Calculation

The Total Expense Ratio (TER) is the Annual Fee that an investor pays to the Mutual Fund. It covers operating expenses for the Mutual Fund. These expenses include-

• management fees,
• administrative costs,
• marketing expenses, and
• other operational costs needed to run the fund

An investor will not notice these charges because it is built into the NAV. The daily NAV is the fund value minus the expenses.

Formula for Total Expense Ratio:

Total Expense Ratio= Total Fund Expenses / Total Assets Under Management (AUM)​

This means the higher the expense ratio, the lower the investor’s net returns.

Why Do Expense Ratios Vary Across Funds, and Should You Always Choose the Cheapest One?

Some funds invest in special assets where the operating charges are higher. For example, A fund investing in US Markets will have a higher expense ratio, due to higher brokerage and transaction charges. It can be expensive due to Fund Manager skill. This is where the question of paying extra for activity comes in.

What else does the Total Expense ratio include?

Additionally, TER may include a Mutual Fund ‘Distribution Fee’, which is the money transferred to the Distributor. A few years ago, Asset Management Companies started providing ‘Direct Funds’ instead of regular one to take the ‘Distribution Fee’ out. Almost all Mutual Funds come with a direct and regular plan. The Total Expense ratio includes the Distribution Fee in case of regular fund. This is waived off for direct fund because you don’t buy it through a distributor.

What does an Investor get from a Mutual Fund distributor having paid a higher Expense ratio?

Ideally, The distributors should inform the clients about this fee. Some are doing it diligently, others may be not. One also needs to keep in mind, this fee is directly related to AUM. As your fund size grows, the distribution fee also grows.

A distributor must advise you on your portfolio by providing you information on funds you own. Re-balancing by switching of funds in portfolio can help improve the returns. If a distributor does not add this value, you may want to switch to direct funds. A DIY model is very popular these days because of availability of Direct funds and cheaper Platforms. This has it own disadvantages if not done correctly due to un-advised and uninformed decisions. Especially in a market scenario like current one, this can become trickly and a need for Advisor arises.

Index Funds come with Cheaper Expense Ratio due to Simplicity

A fund Manager of Index funds will simply invest in stocks as per the benchmark recommendation. For example, a NIFTY Index fund would contain all the NIFTY 50 stocks with weightage as per the index. Index Funds come with cheaper expense ratio due to their simplicity.

In their Accumulation Phase, Investors should focus on their primary income more than returns on investment. So, a minor increase in Expense ratio wouldn’t matter much. Index fund is advisable sometimes for peaceful investing as well as cheaper cost. It is peaceful because there are fewer parameters to make it volatile. It just goes based on overall market sentiment.

Check out some Index funds and their expense ratio. As you see, Index funds are cheaper in management. Hence, they come with lower expense ratio compared to actively managed Mutual Funds. An active Mutual Fund charges higher expense ratio in the pretext of generating better returns. We will see later that the data suggests only ~20% of the funds in the Mutual Fund universe beat the Index.

Continued under-performance compared to benchmark indices.

Let’s look at some research data. This SPIVA (S&P Indices Versus Active Funds) India scorecard from 2023, presents a gloomy picture for Active Fund Management:

Large-Cap Funds:

a) 1 year period: The S&P BSE 100 gained 23.2% in 2023, and 51.6% of active managers under-performed the benchmark over that period.
b) 3 to 5 years: Under-performance rates were significantly high over the three- and five-year periods, at 87.5% and 85.7%, respectively.
c) 10 years: Active managers produced relatively better results over the 10-year period, with the under-performance rate dropping to 62.1%.

Mid- & Small-Cap Funds:

a) 1 year period: The benchmark for Indian Equity Mid-/Small-Cap funds, the S&P BSE 400 Mid-SmallCap Index, rose 44.0% in 2023, and 73.6% of active managers under-performed the index over that period.
b) 10 year period: The story for longer period is slightly different from large cap segment. Equity Mid-Small-Cap funds fared the worst in the long run, with 75.4% of them lagging the S&P BSE400 MidSmallCap Index over the 10-year period ending December 2023.

Going by the data presented, most active funds are under-performing the benchmark index. So, why do Investors pay Fund Managers extra in the form of expense ratio, in spite of under-performing? Aren’t the investors better off doing Index fund instead? This also makes it simpler for them as there is less to track and less expense too. It is best to take the money out of these funds.

You would now question whether a high expense ratio of a Mutual Fund is justified. If the Fund Manager does not generate higher returns by managing it actively, why pay high?

Do All Mutual Funds Underperform Their Benchmark?

Check the output list below (Based on data till December 2024). We found 22 Mutual Funds, that stand out in terms of returns against their benchmark. We mined through around 150 mutual funds and arrived at these funds which beat benchmark handsomely across different time frames. These funds have a return greater than the benchmark in 1 year, 5 year and 10 years time frame. Alpha here is simply the difference of fund return from the benchmark return.

Notice, the alpha going down for regular funds because of the extra spend as expense ratio, compared to direct funds. Only 22 of the funds managed to positively beat the benchmark index on a longer time frame. This is not to suggest that returns should be the only benchmark to judge the performance. There are other factors too. But, going purely by returns, there are very few who manage to beat the benchmark in a long term basis. This is not to say we should not choose the other funds. With right allocation and rebalancing, many funds can generate better returns.

Should You Choose Index Funds Over Active Mutual Funds?

Advantages of Index Funds

• Lower expense ratio (typically 0.1%-0.5% vs. 1.5%-2.5% for active funds).
• No fund manager risk – purely tracks the market index.
• Less stress – fewer variables to monitor.

When Active Funds May Be Worth Considering

• If a fund has a consistent history of outperforming the benchmark.
• If the extra cost is justified by better risk-adjusted returns.
• The Fund Manager quality based on their track record.

How to Pick the Right Mutual Fund?

1. Eliminate 70% of underperforming funds based on long-term SPIVA data.
2. Choose Index Funds for simplicity and cost-effectiveness.
3. If opting for active funds, pick only those with a strong track record over 10+ years.
4. There are good resources online which measure the risk adjusted returns ratios to assess quality of funds.
5. You may also want to check Portfolio turnover ratio and the asset allocation to understand better.

Final Thoughts: Making the Right Choice with Active Mutual Funds vs. Index Funds

After looking at various expenses in Mutual Funds, some may move to direct stocks to save the cost. Is it that simple? Do we switch to self-medication to avoid paying fee to a Doctor? Are we expecting everyone to become an expert Fund Manager? Do you think, with your skills, you will beat the Index while ~80% of the expert world can’t? If that is not the case, why get into that trap for saving that extra 1% Expense ratio? If cost is a concern, go for cheaper index fund. Alternatively, switch to a better managed Fund which has consistently generated better returns.

Effective financial planning helps investors make informed decisions about choosing between active mutual funds vs. index funds, ensuring long-term wealth growth. By becoming more informed, you can save on the distribution fee by buying direct funds instead of regular. This is another way to improve your returns. That would mean, you should do your diligence and understand which fund to pick.

The post Active Mutual Funds vs. Index Funds: Costs & Performance Guide appeared first on Fleek Finance.

When people talk about diversification, normally it is from returns perspective. But, at the core of it is managing risk. We diversify because we want to make sure that price fluctuation in individual asset should not impact the overall portfolio. A perfectly diversified portfolio is one where we have inversely correlated assets, i.e. price of one asset grows if other falls and vice versa and on an average level in long term, we manage to generate good return at portfolio level, while managing the risk.

Portfolio Basics and the Need for Diversification

The concept of diversification applies even at single asset class category level too, like Equity. So, if you want to buy some stocks like a Fund Manager, there is a portfolio of stocks which needs to be constructed to ensure that the Equity portfolio is well diversified and we are able to get benefit of different businesses while also mitigating business risk. We will discuss Equity portfolio sometime else. For now, we focus on a wider portfolio consisting of different asset classes.

As you know, there are various asset classes. Typically, investors classify an asset based on its risk category. Risk is directly proportional to returns and hence the returns generated from the asset also depends on amount of risk.

There are different views on definition of risk. For the sake of simplicity, we will define volatility as risk. For example, if an asset price changes by 5-10% every day, it may be called risky because potentially one may make losses in such an asset. If another asset grows at a consistent pace and never falls, it is the least risk or zero risk because potentially there is never a loss. The risk of volatility can also be associated with liquidity or mismatch of demand/supply. When there is huge demand and not enough supply, you would see an asset price rise exponentially. Like, we see in bitcoin for example. Due to volatility, one may call it risky.

To summarize, we want to diversify to have risk adjusted returns which makes the entire portfolio grow consistently while managing risk at individual asset level.

Asset classes and the Risks associated

Lets look at different assets classified broadly based on risk for a diversified portfolio. The risk itself may be caused due to liquidity, credit default, market, business, macros and many other factors.

1. Fixed Rate Assets:

These are fixed income assets where the price appreciation is pre-decided. For example, Bank FDs, Government Bonds, Liquid funds etc. The important thing to understand here is Interest rate. You can understand Interest rate as the fixed price you get for sacrificing your present cash in hand. Money used today is always costlier than used tomorrow. If one wants to borrow it from me, I would demand an interest because I am sacrificing my present. Investors rent money today to gain interest for tomorrow.

Banks give away money as a loan to business as debt and in return, earn interest. As an investor, we deposit money in bank to earn interest. This is normally at a fixed rate based on the dynamics of a country and the central bank. Broadly, the rate is determined by inflation. That explains, why interest rates differ from one country to another.

This is an asset class with almost zero risk. I use the word ‘almost’ because there is always a risk of default in this class. We take sovereign guarantee as a word from God and believe, it will never default. But, we have seen banks default in the past and it can always happen. So, there is a minor risk which you take and that gets added to your return. Banks borrow money from RBI at certain rate and make profit on it. They also borrow from investors and pay them 1-2% higher return. This takes into account inflation and default risk. In Indian context, this returns range from 7-11% depending on the default risk involved.

If you lend it to some unsecured category individual, as some apps like Cred allow, you may get a little higher return. Some Corporate Funds may give you 11-12% return because of the extra risk taken.
Always remember, returns never come without risk. So, if you are getting 1-2% higher, remember the risk you are taking. Never buy the story of risk free return in a fixed income product unless it is a Bank FD or Government bonds. As the famous quote goes, ”In God we trust. All others must bring data.”

2. Gold

This is India’s favorite asset class. Everyone loves the yellow metal and tell stories of high returns it has given. Gold is an asset equivalent to Dollar and you can call it a global currency. Of course, there is a price change due to demand/supply. Normally, this is used by all central Governments to increase foreign reserve and there is always demand/supply mismatch for fixed amount of gold available on earth. Whenever there is a mismatch in demand/supply and there is depreciation of buying power of some currency, the gold price will appreciate. In Indian context, whenever you will see depreciation in value of rupee v/s dollar, gold prices will appreciate. Globally Gold price will appreciate depending on global demand and supply.

Based on the data available by Forbes India for past 25 years, Gold has grown at 11-12% per annum in rupee terms and has been a consistent compounder, helping individuals beat inflation largely and achieve returns better than Fixed income category. There is no liquidity risk in Gold as such since there is enough buying and selling options available. An investor can buy Gold in Physical or digital form via Mutual Funds. Government of India has discontinued fresh selling of Sovereign Gold bond. SGB was a good wealth creator for many in recent years because of it being a combination of asset price appreciation and also regular income. Some amount of Gold in your portfolio is good to keep it shining.

3. Real Estate

Land is another asset available to the world in limited quantity. The price appreciation here depends on demand supply and it is always a local phenomenon. For example, price appreciation in Pune may not be same as Indore, purely in percentage terms. Broadly, this also fits into 10-12% returns to an investor in very long term after taking different expenses into account. The real estate returns are tied to liquidity risk. The biggest risk for an investor is not being able to sell when you want. So, many would classify this as a ‘Use Asset’ for people and not really an investment because you simply buy a house and live there, effectively saving on the growing rental cost.

An individual should consider this as an asset in the diversified portfolio, purely from housing point of view. Getting return etc. will need solid knowledge of property and hence risky. Normal investors should stay away from investing in Real estate as commodity unless there is sufficient knowledge and liquid cash available.

4. Stocks or Equity for a Diversified Portfolio

A misunderstood Asset Class

Equity is a popular asset class with investors. The fact that you can check prices real time makes it an emotionally taxing asset. It requires some amount of financial literacy to make sense of value and price of underlying Assets. Financial world has always kept this as an enigma and the knowledge isn’t much democratized in this space.

Mostly investors just view it from the lens of prices. Business value is always volatile and hence considered risky. An individual should never consider owning stocks directly if they do not understand or do not have the bandwidth to understand.

Fundamentally, one must understand that the underlying asset in a stock price is a Corporate body. So, if you do not know the details of the business, you are taking a risk just based on price and it is not much different from betting in a casino. There are good fund Managers running Mutual Funds to help you own the stocks. An investor with limited bandwidth to understand business must go via Mutual funds and participate in wealth creation journey. This asset class fundamentally can generate much higher return than any other asset because of disproportionate risk involved in the assets.

Business risk and the risk Premium

The biggest risk in Equity is of business. Businesses do go bust, you know. So, the stock prices may come down to zero in such a case. As an investor, if I am taking that kind of risk, the returns expectation also should be higher. So, there is no reason for us to settle at low 10-12% range of returns in long term.

Most of the wealth creation around us is via business only. Either you create a business or own a business created by someone else. The success or failure of the business will depend on macro factors like state of economy, interest rates etc. But, the rewards are always going to be high. Several good Fund Managers have generated 15-20% and higher returns in long term. The key to success here is to think like a business owner and stay invested for a very long time.

Balancing Stocks, Bonds, and Other Assets – How to get a Diversified Portfolio

Now, that we understand the need for diversified portfolio, various asset classes available, lets understand how to diversify.

Debt Funds for Emergency Funds

A smart investor would keep fixed rate investment for emergency funds. Rest of the asset classes if you notice have liquidity risk, i.e. you may not find a buyer when you are in need of money immediately. This is where fixed rate investments are useful if they come with liquidity. PPF/EPF are not liquid assets due to long term lock-in. For emergency funds, one can consider Liquid Funds/FDs/Savings account. Typically, one should have at least 6 months of expense set aside as emergency fund. You may look for Debt-based Mutual Funds/Bank/Post Office or any other mechanism to park your money safely to withdraw on demand.

Liquid funds are not investment. They are just your risk mitigation plan. Do not look at generating high returns there at the cost of locking them up. Anything in the range of 6-8% is good enough. The main purpose here is not to grow money, but to mitigate risk of emergency.

PPF and Government Bonds

Once we have sufficient Emergency Funds, should you own PPF/Government bonds etc.? Once we have sufficient Emergency Funds, we can park money to generate higher risk-adjusted returns. Depending on your risk profile and understanding of asset, one should take risk. Remember, returns are proportionate to risk. So, no risk would also mean no return and hence inability to beat the inflation.

Debt Funds to Manage Risk

Asset allocation is never a straight approach and has diverse views. Broadly for <35 Age category, any money not needed in next 2 years can be exposed to higher risk to generate better returns. For older individuals, nature of job, dependents, short or mid-term goals will decide the risk profile. Allocate funds for near and mid-term goals. But, broadly an investor should look at generating highest possible risk-adjusted returns out of the funds available after we have taken care of Emergency needs and short to mid-term goals.

There is no rule of thumb here and one must get a risk profiling done to understand the level of diversification needed. Sometimes, there are short or medium term goals which need a different asset class. There are many who would suggest Balanced fund or 30:70 ratio for debt to equity ratio. But, it all depends on your risk profile and goal. A Financial Adviser can analyze your financial position in order to create a balanced portfolio of assets.

Adjusting Portfolio Based on Goals

A portfolio needs periodic review depending on market conditions. You will need to adjust the portfolio based on change in immediate goals or change in market conditions. For example, there are years when Equity may not give the expected level of return and optimizing the portfolio by switching some funds to debt or Gold may generate better returns. Multi-Asset Mutual Funds take care of this balancing and is good for peaceful investing technique. Alternatively, an individual can do this exercise. It is not easy to time the markets though and it needs expertise. So, it is advisable to go via Mutual Funds.

Final Thoughts on Diversified Portfolio

A diversified portfolio is key to peaceful investing. An ideal portfolio is where you don’t lose a night’s sleep. Money management should come with peace. Diversification is also a way to achieve peace because it ensures stability irrespective of market conditions. Look at different asset classes and based on your risk profile, allocate sufficient funds in each category. The portfolio needs adjustment based on goals. A Financial Adviser can guide you through the process. It is perfectly fine to manage it on your own if you are equipped with right knowledge. In this internet age, overflow of knowledge can make you confused and you end up making wrong decisions. Hence, consulting an financial expert is always good to ensure you are making a right choice.

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Compounding is a concept which is lost to many because of the shorter time frame of Human mind. We always under estimate long term and over estimate the short term. In my earlier life as a Scrum Master, I saw people under-estimating themselves when giving an estimate for smaller project. If realistically a project takes 3 weeks, the team will say, it can be done in 4 weeks. This would mean a ~30% buffer. They end up finishing it quicker though. On the other hand, we over-estimate ourselves when committing for a longer term project. A realistically 2 years project, will be estimated to 1 year. We don’t have visibility to all the unknowns initially. Hence, we poorly discount the unknown. We are worst at doing long term predictions because we don’t have the ability to logically discount uncertainties from future.

But, we love to predict the long term deliverables. We predict even though we know it will be inaccurate. Deep down, we acknowledge that it will miss the mark by at least 50% margins. But, who likes uncertainty. So, we always start with prediction with low margin of error and as usual the confidence is high.

A case in point is Sydney Opera house construction. It was initially projected to be completed in 4 years with a budget of $7 million. In reality, it took 14 years to finish and cost $102 million—over 14 times the original estimate.

There are many examples where the long term predictions go horribly wrong. The important lesson here is ‘Planning Fallacy’ where we over-estimate our ability to make long term predictions.

Lets stretch this case to compounding in investing. When investing, we are good at predicting 10%-20% upside on a stock. Most of the brokers give you target in that range because that is more believable. If I tell you, a stock is going to be 3 times in 2 years, you will frown at me. Also, the chances are you will book the profits at 20% and call me a clown. While predictors are confident about long term, the prediction buyers are always skeptical. Like we over-estimate ourselves when planning long term projects, we under-estimate the returns when planning investment. Some amount of instant gratification is also playing here. The point here is that we underplay the compounding process like we underplay uncertainty in project execution.

There are very few research analysts who can tell that an investment will compound 3-4 times. They won’t place their bet on long term at the cost of risking their reputation. The short term is always easier to predict. Long term needs patience, delayed gratification and leaving it to chance and luck. Tell me one businessman, who says I will achieve 20% compounding every year for next 10 years. If a business can’t predict, how can an investor do so. Some choose the easier way of focusing on short term wealth. There are very few who can build generational wealth. For that, you have to bet on your winners for the longest term possible enjoying the ‘Joys of Compounding’.

This also explains why real estate compounding works better than equity. This is because we do not make predictions. We just sit through all the cycles and eventually enjoy the ‘Joys of Compounding’. We fail to replicate this in equity because there is a price ticker which rewards prediction higher than uncertainty.

Dealing with long term requires conviction and deeper belief in the projection. The long term has a larger margin of error, but with time on your side, you will achieve compounding. Warren Buffet built most of his wealth from several businesses by combining value investing with patience and delayed gratification.

Experience the joys of compounding once in your life. You will never return to active investing. Instead, you will continue to invest passively.

What is Passive Income and How do we generate it?

So far I was talking about passive investment. Lets look into Passive income now. Passive income is letting your money earn for you while you sleep. This is specially useful during your retirement phase. There are different ways you get there.

1. Real Estate Rental Income

Invest in real estate today and substitute your current cash flow with rental income of future. As you would agree, rents are going to go higher, this is a solid plan in that way. The issue is ability to own multiple properties with large enough rental income. Rental income normally ranges from 3% to 5% of the asset market price. Hence, you need to start early when you can buy it cheap enough. The rental yield doesn’t look good to start with. But, with time as rents go high, it starts looking lucrative. Best case is you don’t have to buy it and happen to own an ancestral property.

2. Dividend Income

Invest in solid dividend paying stocks and live your life through dividend. NIFTY index stocks have roughly 2% dividend yield. This would mean, you have a Equity portfolio of 10 cr. to get an annual income of 20 lac. You will argue, we can buy Coal India. But then, we are talking about a balanced portfolio here. So, first we need to build that size of portfolio to live out of dividend income. Through disciplined passive investing, it is possible. But, it will take patience and time to reach there. That being said, its a volatile asset and market caps can go down.

3. Fixed Interest Income

This is the most stable way of income. Whatever comes, you generate 7%-8% of interest income. A portfolio of roughly 3cr. rupees can help one achieve the same effect as Dividend income discussed earlier. A good systematic withdrawal plan on a debut Mutual Fund can help you achieve this passive income. There are also monthly income scheme available from banks/post office which can do this for you.

Final Thoughts on Compounding and Passive Income

Enjoy the Joys of Compounding by doing Passive investing (mix it with some infrequent activity if you will). Avoid too much activity, its not worth it. Investing and compounding is a slow process. Enjoy the journey, destination will follow with time. One should aim to reach a stage of Passive income to replace the current cash flow in future.

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Wealth Creation is always a subject of experience. Same product may give different results to different people. For example, if we say a Mutual Fund has a CAGR of 15% in last 20 years, it doesn’t mean every investor made that 15%. Depending on the cycle and the time of entry/exit, every investor will have a different outcome. Hence, it is important to take a holistic look and seek professional guidance wherever you don’t have an answer.

While knowledge has become democratized due to internet, this can be a problem many times. Knowing and having the ability to create filtered knowledge is important. If you look up ‘You tube’ or any social media platform, there are 100s of videos, explaining Mutual funds. But, they cannot help you decide which one to invest in. Whether you should invest all in Mutual Funds or diversify? What is the ideal level of diversification? Should you buy gold or real estate? These questions appear simplistic. However, their solution is going to be complex because every individual will have a unique risk profile and unique goals.

Which category of individuals should reach out for Financial Planning or Advice?

There are different kinds of individuals depending on their income and wealth status and risk management profile. Broadly, they can be put into 3 categories:

1. Ultra Wealthy individuals:

Rich HNIs with sufficient money to take care of their present and also future of few generations. Do they need Financial Planning? Of course not. Their focus would be mainly on Investment Planning and multiplication of wealth is their prime focus.

2. Low-income Group:

There are people with income just enough to meet their expenses or literally in the hand to mouth category. Can Financial Planning help them? Certainly not. They should first focus on their income to meet their present cash flow. Once their present is secured, they can plan for future. These are the people working hard to take care of their physiological needs and lowest on Maslow’s hierarchy of Needs. Hence, Financial Planning is not really for them.

3. Mid-income group:

The mid-income category of individuals have surplus cash flow. They desire to utilize their resources effectively to reach a stage when today’s surplus can become tomorrow’s cash flow. This category of individuals can really benefit from right Financial Planning advise. They are generally resourceful individuals as far as their present cash flow is concerned. They are on the edge. They can either rise to 1st or fall into the 2nd category, depending on how they plan it from here. They are either the salaried middle class or upper middle class. They desire to break the chain and move up the ladder. A little professional help can help them achieve their milestones better and with confidence.

Transform Your Financial Planning With Professional Guidance

Financial Planning has some core steps involved before we can arrive at a concrete plan:

1. Understanding Cash Flow today.
2. Understanding the net worth or balance sheet.
3. Taking near term and emergency funds into account. Just talking about it can bring up lot of discipline with Cash Flow Management.
4. Understanding long term goals
5. Preparing for the days when cash flow is gone, i.e. Retirement.

A discussion on these details can be an eye opener for many. There are minor behavioral flaws due to family or neighborhood induced reasons. This can be corrected when you begin these discussions with an experienced Financial Planner. This discussion cannot be about get rich quickly. It is about making maximum out of the limited resources available. The solution can vary for different individuals and situations. It can involve “finding the right job or income.” It may include “cutting down on discretionary expenses.” Another potential solution is “finding the best instrument for investment.” There can be various other solutions. It all depends on the uniqueness of ones situation. This is not just about dealing with money, but also discussing behavior and psychology.

Conclusion:

Financial Planning is a well known concept in many countries and taken very seriously by individuals. However, in Indian context, it is similar to how we avoid going to a doctor and instead depend on self-medication. We try to solve problems based on advice from people around or source information from social Media. We may end up getting into mediocre or risky products without completely understanding how they are going to help. Hence, it is worth reaching out for professional help. This can help get things in your hand and be better prepared for the uncertain future. Are you prepared to sign up with a Financial Advisor? Feel free to reach out Fleek Finance Team to help us plan your better future.

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