Here's how you can calculate your net worth

In an interview to CNBC-TV18, Sumeet Vaid, Founder of Ffreedom Financial Planners says a simplistic understanding of net worth is: asset minus liability.

Also read: Here's how portfolio diversification goes wrong Below is a verbatim transcript of the interview: Q: We all have a way of calculating our net worth but we wouldn't know if that is right, how does a person calculate one's net worth? A: It is very simple question but very important because in Indian context net worth is equal to your wajood, your self respect and we Indians are proud for that. It is a very important term. A simplistic understanding of net worth is it is asset minus liability. So for a typical family, assets will include investments, which might be in fixed deposits of banks, in mutual funds, in shares. We, in fact, as a financial planner encourage even jewellery to be included as part of investment because it is for the rainy days. So all kind of investments, your receivables in form of income, which you are getting, any other kind of assets movable/immovable, which is your property, your secondary property which is your second home, even your primary property - many times people do not want to include it though it is a consumption asset, from a net worth point it is very important. So all your assets should be on one side and then all your liabilities – liabilities will include all the loans or money, which you need to repay back to within your family members or any such informal arrangements, which you have got into. When you minus liabilities from assets, the leftover is your net worth and it is becoming increasingly important in a society like India where loans are becoming the way forward and then the worry which I have is people are not understanding and over a period of time net worth erosion we are seeing is happening at a rapid pace in an Indian middle class society. Q: If your husband owns a property, do you count that in your net worth as well? A: It is not very simple question because in the modern families where husband and wife both work together, one needs to understand how the financial system works. We always encourage to have a very transparent system in terms of understanding whether liabilities, which is taken by one member being taken by the other part of the family member. So ideally speaking, if arrangement is that you want to have joint accounts and joint assets then it is part of family net worth but at the same point of time, if you want to keep it separate - in an era where marriages are becoming shorter - that might be a better idea. Q: I want to invest Rs 20,000 per month for one year. Where I can invest? My another target is Rs 1 crore in 10-15 years to buy a flat. A: It is a very good thing which you are doing in terms of articulating your goal so clearly. The goal in front of us is buying a house, time is 15 years and we need to have Rs 1 crore. If you work backwards, asset allocation is very important. We will suggest that you invest in equity, fixed income and gold. We are assuming equity returns to be at nominal gross domestic product (GDP), which is 14 percent, fixed income at 7 percent and gold long-term return at 10 percent seeing the past average of 10-15 years. Keeping that in mind our suggestion will be you should save Rs 24,500 on a monthly basis in systematic investment plan (SIP) in the asset allocation of 70 percent in equity, 20 percent in fixed income, 10 percent in gold. I know it might sound profound right now of saying that you do not have that kind of a surplus or I might not have, but the beauty about setting up a goal is that you know what you need to do in terms of trying to achieve. Once you have set the goal, the funds which you can really go and use to achieve this kind of asset allocation could be HDFC Long Term Equity Fund, you are already doing HDFC Top 200 Fund, you also mentioned about Reliance Equity Fund in your question, it is good. IDFC Premier Equity Fund is a good fund. Birla Sun Life Frontline Equity Fund is a good fund and in the fixed income side there are a lot of dynamic bond funds, which are available in the market. Easier to use like Birla, few of the more like IDFC, ICICI Pru Dynamic Bond Fund and on the gold it can be exchange traded fund (ETF). This is what the asset allocation for this particular goal will be. You have also mentioned you have got Rs 20,000 to be invested for one year. My suggestion will be continue the same asset allocation, because you have not told us when you need the money for. So you can continue the same asset allocation which is Rs 20,000 in the same 70 percent equity, 20 percent fixed income and 10 percent gold. Goals are always important to go and achieve your dreams, so go for it. Q: For gold if he has to invest if this a good time or good year to invest? He has such a long-term time horizon. Do you think he should postpone it for a bit? A: No, he should not. As individuals for us to get the timing right is almost impossible and gold in India has an emotional connect. When we say consumption, we do not like to wear jewellery from the views of gold. We also like to have a backward emergency planning with gold. So we always like suggest gold over a longer period of time and if you have 10-15 years every time is good time to really go and create an asset class like gold. The assumption of return, which we have taken for gold is not very aggressive. We take it very conservative between 7-10 percent over a period of 10-15 years.