If you believe that “money is the problem” or “money is the solution” then I am afraid that you are a “prisoner of money”. Have you ever imagined of setting out on the incredible journey of freedom from your current position as a “prisoner of money” to the attainment of “financial independence”? You can become financial-free when you stop working for money and when the money starts working for you. Let us now embark on this incredible journey from financial slavery to financial freedom and understand the 10 golden principles for achieving it.

1. Proper asset allocation

Asset allocation is the primary premise for wealth creation. The aim of an optimal asset allocation is to invest in a combination of safe and risky assets whose combined risk is much less than the individual constituents. At the same time, it offers a higher degree of return. Therefore, focus on the behaviour of your portfolio and not its constituents. A long-term statistical analysis has shown that 90 per cent of portfolio variability is due to the asset allocation while only 10 per cent of the variability in portfolio performance is due to market timing and stock selection. As a general rule, do not expect higher return from safe investments, but do expect long-term wealth creation from the optimal portfolio allocation.

2. Protecting money from legal financial predators

Legal financial predators are those people who legally take away “big” money from your pocket. The government is the biggest financial predators of all as it legally takes away money from your pocket in the form of taxes not only at the time of earning money but even at the time of saving, spending, investing or taking insurance. Bankers take away your money in the form of interest and inflation. Corporate retailers are parasitic financial predators who legally take away your money by selling you those goods which probably you don’t required by charging the highest rate of interest on those corporate credit cards which you never needed at the first place.

3. Budgeting — paying yourself first

Try to create a budget surplus by ensuring that your income must be more than your expenses. And then channelise your additional income properly into investments. Make paying yourself via budget surplus a priority like how you pay to the government (taxes), bank (loan EMIs), utility bills, school fees etc. Then start a proper systematic investment plan in across various asset classes keeping the first principle in mind.

4. Savings

You have to save money pending investments and learn to convert savings into “investment assets”.

Another benefit of converting money into an “investment asset” is that you can actually gain profit from inflation. This is because if you use money to purchase assets which increase in value with inflation, you are actually benefiting from inflation!

5. Spending — the necessary evil

Expenses rob you of your wealth and ensure that you never reach financial independence. So, why spending comes before investing and insuring? Simply, because some “necessary revenue and capital expenditure” are pressing and can’t wait. Don’t forget that sometimes in this world when we have to take many steps forward, it might be prudent to take a couple of steps backwards before the big leap.

6. Leveraging — the money multiplier

Leverage is a multiplier. Positive leverage will simply multiply your wealth while negative leverage will destroy it. Contrary to popular opinion, leverage is not risky if you know how to harness the power of positive leverage. In fact, the lack of proper leverage might hinder your goal of achieving financial independence. Positive leverage is that debt which multiplies your money by putting it into your pocket while negative leverage is that debt which reduces it by taking it away from your pocket.

7. Investing

Now what? I think it’s reasonably clear that you have reached the seventh stage which is nothing but investing. Don’t ever underestimate this stage because this is the stage which will eventually make or break your financial success. So, allocate your money intelligently in various available asset classes in an appropriate proportion so as to help you create a suitable investment portfolio.

8. Insuring

The main category of financial insurance would include family protection, personal insurance, disability protection, asset protection, loss of profit protection and medical insurance.

9. Avoid common financial mistakes

Don’t throw good money after bad money — meaning that money lost is gone and forget about it, start fresh from today and never make your future financial decisions on the basis of the past.

Always treat money received from all sources as same and equally sacred. Selective thinking is a common and dangerous money illusion which blocks your mind, by not allowing the flow of relevant information to it, for taking a correct financial decision. “Holding on to what you have” is a financial mistake which a few people know and acknowledge. Always behave like a rational and level-minded person while dealing with money. Applying common sense will help you navigate through your financial problems.

10. Rules of money

Never be a slave to money; be the master of it. And once you become the master of your money, you will automatically start walking on the path of financial independence. Invest time before you invest money. Don’t just aim at being rich without any knowledge or experience about money. Learn how money has been made and lost in this world before you commit your own money. If you are not in full control of your money while dealing with it — be it in earning, saving, protecting, budgeting, investing, insuring — then it will control you and you will never be able to achieve financial independence.

The author is General Manager-Investments, Tata Investment Corporation Limited. The views expressed in this article are his own

Explain the mode or paperwork for effecting the gift. Would it be the exchange of letters regarding offering and acceptance of gift or some formal deed needs to be effected, if so, will it required to be registered? — Krishan Dev Uppal

A gift can be made in respect of moveable as well as immovable property. A gift of moveable property can be made by exchange of letters — a letter from the donor in respect of the gift being made and a letter from the donee accepting the said gift. However, the gift of immovable property can only be made by executing a gift deed which will have to be registered with the Sub-Registrar and stamp duty on the market value of the immovable property will have to be paid. It may be added that there is no bar for executing a gift deed in respect of a moveable property and people some time prefer the execution of such a deed so as to avoid any loss of letters which are exchanged for the purposes of gift between the donor and the donee as also to keep a permanent record of the gift made.

Recently, my brother-in-law (58), working in a government department, has died. He is survived by his wife (issueless), mother (getting family pension of her husband), one brother and a sister. It has been now found that deceased has nominated: his mother and his wife jointly for terminal payments (PF, gratuity, pension etc.), and his mother in life insurance policies, demat a/c for equity shares investments, various bank accounts and mutual fund investments.The deceased, who made no will, has willfully tried to deprive his wife (sole legal heir in this case) of his assets by nominating his mother. What are the remedies left for the widowed wife for getting her legal due? — Narinder Sharma

A nominee after the death of a person has a right to receive the payment in respect of accounts or investments and other receivables held in the name of the deceased. A nominee may or may not be a legal heir in accordance with the provisions of the Hindu Succession Act, 1956 when a person dies without making a will. The wife of the deceased is one of the legal heirs along with the mother of the deceased and therefore, the mother would be entitled to her share on the basis of the number of legal heirs who inherited the property on account of the death of a person. The wife can therefore, approach the court for her share of the amount receivable in respect of the life insurance policies, various bank accounts, provident fund, gratuity and investments in shares and units of mutual funds.

Pension should be paid to the legal heirs in accordance with the pension rules under which the scheme had been joined by the deceased. She can also, therefore, claim the amount of pension in case the scheme so permits.

While there have been many discussions about mis-selling, aggressive sales, customer issues in the life insurance sector, it is important to step back and take stock of how this sector has contributed towards the economy and the people.

The insurance penetration in India was 1.7% of GDP in 2000 when the sector opened up to the private players. Today it’s pegged at 4% and would have been higher if the macro environment supported it. In the first decade, since privatisation, the insurance industry grew at a record pace of 24% CAGR, going from Rs 20,000 crore (2002-03) to Rs 120,000 crore (2010-11) in terms of new business premiums (NBPs). This was only possible as the sector invested Rs 65,000 crore of capital, opened over 11,000 branches in over 700 towns and cities of the country. The industry has also made significant investments towards customer education.

In view of the lack of social security in India, the role of insurance becomes even more critical to ensure that the financial impact on the family is minimal in case something happens to the breadwinner. The current young demographic of India will age in the next 20-30 years. So, it will lead to the requirement of more resources to support the retirement needs of citizens, in terms of continuity of income, access to health care and costs associated with higher living standards. There will be a huge retired population which will need a regular flow of income. The only financial instrument that can guarantee this is insurance. The simple premise being that whether one is around or not, this financial instrument ensures that the savings one planned for is available for their family or for retirement.

In addition to ensuring financial security for one’s family, insurance also plays a significant role in boosting the economy. To elucidate:

Impact on capital market and infrastructure funds

The insurance companies are mandatorily expected to invest 50% of asset under management (AUM) in government securities and 15% towards infrastructure funds. The industry invested close to Rs 90,000 crore in 2010-11 in infrastructure which has seen a dip in the last two years. Even in the capital markets, they have been contributing in a big way. In fact, one of the reasons that the government is looking at opening the insurance sector to foreign direct investment (FDI) is to control the current account deficit (CAD).

India has an extremely large and critical need for investments in infrastructure. The demand for infrastructure funding and debt is estimated to increase from the existing about 6 lakh crore to about 20 lakh crore by 2015 and about 45 lakh crore by 2020. The tenure of funding for these infrastructure projects normally ranges from 10 to 15 years. The insurance industry needs to be one of the primary sources for these funds.

Impact on customer and society

As mentioned earlier, insurance is the only instrument in the market that ensures that the income one planned for their family is available for them whether they are around. Case in point, child’s future education. One can choose from multiple products from mutual funds to fixed deposits and invest regularly to create a corpus for one’s child. However, none of these guarantee that the corpus one plans for the child will be available when he turns 18, whether the parent is around. But the claim settlement ratio for most insurance companies is in the top quartile today. And there are enough stories on how families have managed to tide over financial crises in case of the death of the primary breadwinner.

Employment opportunities

With the advent of private players, job opportunities have been created across the spectrum due to this sunrise industry. Even the banks have benefited in a big way from this industry. They created employment and increased their income from the Bancassurance channel. This impacts the overall economic reforms and improves the standard of living in the country due to increased sources of income.

Most of the recent regulatory changes implemented by the Insurance Regulatory Development Authority (IRDA) are positive for the customers and good for the long-term health of the insurance sector. Companies now need to re-configure their own operations in the short-term to meet the new regulations and settle quickly to the new normal. The industry has taken significant steps in the customer-centricity journey and brought about significant changes to the operational models led by innovation and backed by technology.

While some parts of the regulation seek to standardise products and approach, we must ensure that there is no compromise to innovation which will be the key factor to drive growth of this sector and attract and retain talent.

The author is Managing Director and Country Manager, PNB MetLife India Insurance Co. Ltd. The views expressed in this article are his own