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Necessity and Basics of Financial Literacy for Doctors

Financial literacy starts from everyday spending to long-term financial planning and effective money management. If finances are planned well, both professional and personal life will run smoothly. Unlike other professionals, doctors infiltrate every aspect of a person’s life and they must learn about financial wellness and manage their finances.

MedPiper Technologies and JournoMed along with ISA Thrissur City Branch IMA Junior Doctos Network and IMA Women Doctors Wing conducted a webinar on 29th June, 2022 where the speaker, Dr. Tanmay Motiwala spoke about the importance of financial literacy. Dr. Tanmay Motiwala is a Pediatric Surgeon from All India Institute of Medical Sciences (AIIMS), Jodhpur and he has financially guided many medical professionals.

Dr. Motiwala states that most doctors are backbenchers in financial literacy as many of them are not aware of proper financial management. He adds that doctors earn a good amount of money but they don’t know how to make that money to work as they don’t know how to prioritize. “Most of us guard our wealth, which beats inflation. After which, the money keeps on decreasing over time and this is where the problem lies. Money can rule the roost in this materialistic world” says Dr. Motiwala.

Secret to making money- Compounding and Investing

If one understands the power of compounding, they can easily make returns by investing. It is important to remember that money is prolific and has a generating nature. One can gain quick money at higher risks if they possess in-depth knowledge or have full-time job security. Hence it is necessary to focus on low-risk pathways that is accessible to everyone to gain good money.

Why should one invest?

Dr. Motiwala follows Warren’s Principles of Investment. For a secure future, investment is the only option many opt for. One needs to earn more amount to beat the inflation rate. The current inflation rate is around 5.13%.

Investments in a bank account, either in fixed deposits (FDs), or professional provident funds (PPFs), the number of returns gained is very less when compared to investment in stocks. One would receive only 3.5-5% of savings through FDs. The interest rate for PPFs is around 7.2-7.5% over a while and there is a locking period both for FDs and PPFs. Both are long-term investment plans.

These two rules of investing that most of us need to follow are:

  • Do not lose capital
  • Do not forget rule no.1

Dr. Motiwala suggests that the right time to invest is today and is never too late to invest.

Invest in Stock Markets- The concept of doubling time

Investment in Nifty or Sensex gives up historical returns of 14-16% interest over some time. Here the concept of doubling time comes:

Doubling time (in years) = 72\N (Rate of return)

72\7.2= money doubles in 10 yrs. 14% returns mean the money would double in 5 yrs

Bank vs Nifty returns 

The interest rates which Nifty provides are much higher than banks and the returns generated are maximum at Nifty i.e. through stocks

Smart money is the capital that is controlled by institutional investors, market mavens, central banks, funds and other financial professionals. The stock difference observed by investing in stocks is also termed Smart money.

Compound interest

Compound interest is the interest imposed on a loan or deposit amount. Albert Einstein once said “Compound interest is the 8th wonder and one who understands it, earns it and one who don’t understand it, pays for it”. Eg: Investing in EMIs vs Mutual Funds.

Stock Market 

A stock market, equity market or share market is the aggregation of buyers and sellers of stocks (shares), which represent ownership claims on businesses. The Stock Market has been divided into two:

Bombay stock exchange (BSE) or Sensex: The BSE is Asia’s first stock exchange and includes an equities trading platform for small-and-medium enterprises (SMEs). The index for this is Sensex and the top 30 companies come under BSE. The top 30 companies stay the same in both NSE and BSE.

National stock exchange (NSE) or Nifty 50: The Nifty 50 is a benchmark of the Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange. The top 50 companies make up almost 90% of GDP (Gross domestic product).

Investing in stocks can create a considerable amount of wealth for a safe and secure future.

Index Investing 

Index investing is a trading technique of utilizing index funds for building a portfolio. Index funds can be mutual funds or exchange-traded funds (ETFs.) They are built by financial firms to mimic a specific financial index. There are two leading stock indices in India: the Nifty 50 index and the Sensex. The companies are ranked based on the concept of market capitalization (M Cap). Index investing is a better form of investing for a no-nothing investor.

M Cap= No. of shares X Price of Share 

Note: Always never judge a company by its share price. One needs to always check for MCap and how the companies are ranked.

A brief insight on mutual funds 

Mutual funds are professionally managed investment funds that pool up the money from many investors to purchase securities Securities and Exchange Board of India (SEBI) has classified mutual funds into four classes:

  1. Debt fund: A debt fund is like a mutual fund. It is an investment pool in which the core holdings compromise fixed investments.
  2. ELSS (Equity linked saving scheme): It is a diversified saving scheme with a locking period of three consecutive years. If one invests money in this, one can attain a tax exemption of up to 1.5 lakh annually.
  3. Hybrid: The hybrid fund is based on the debt fund and the available equity. Its main aim is to minimize risks and maximize profits. One can follow the systemic reinvestment plan and gain profits.
  4. Equity: In finance, equity is the ownership of assets that may have debts or other liabilities attached to them. Equity funds are investments which are principally invested in stocks. Equity is again divided into Large-cap funds, Small-cap funds and Medium-cap funds.

What returns are good?

Any investment that beats the inflation rate is termed a really good investment.

Never invest in equity, if that money is needed in less than 5 yrs. Equity has fluctuations and the market is never a straight line. For more than 5 yrs, equity is the best investment one can opt for.

Compound annual growth rate (CAGR): It measures an investment’s annual growth rate over a period of time, assuming profits are reinvested at the end of each year. The amount invested at maximum CAGR can produce great amount of wealth in the long term. Few billionaires opt for such risky investments.

Pre-requisites for investing 

  • Term insurance: Invest in a term insurance plan for a family to be secure. Buy a term insurance plan and not ULIPs.
  • Health insurance: Buy a safe and secure health insurance plan for a safe future for your family. One can opt for a cheap insurance plan even attain a tax exemption.
  • Emergency Funds: Invest at least six months of salary parked in as a fixed deposit which can help in securing your family until one attains another job or safe way of gaining money. eg: Loss of income fund, home repair fund.

Investment plans such as Direct and Regular Mutual Funds are another type of investment plan where one can also invest in stock markets. Paytm, ET Money and Groww are a few apps available where one can invest in direct mutual funds. Regular mutual funds can be opted for if the individual has no time and the brokers are involved in it. Auto Fixed Deposit account is another way of investing which can be opted for by a busy person.

Conclusion

Financial literacy is essential for doctors that could guide them personally and professionally, especially in long-term investments and safeguards their future. An individual can stay happy and peaceful if they possess enough wealth for future generations. Always try to invest smartly and learn the techniques where money generates more money and make a smart investment such that it beats the inflation rate to resolve all major issues.

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