Dhana Shiksha (शिक्षा)
Dhana Shiksha (शिक्षा) is the Investor Education initiative of Dhanayoga to create the next generation of financially literate citizens and investors. Enjoy reading the articles, share it with contacts (see left wall for social icons) and consider implementing it in the financial aspect of your life.
For advice on financial or investment planning, welcome to get in touch with us via Contact page or Click-2-Call
For advice on financial or investment planning, welcome to get in touch with us via Contact page or Click-2-Call
Building a Diversified Robust Portfolio
Diversification is not just an academic nicety but a core tenet of investing. It is also completely misunderstood.
Most believe that diversification is about holding different investments in a portfolio. Well, you start with that, but it doesn’t end there.
More aptly. Intelligent diversification means not just investing in a bunch of different things, but in things that respond differently to the same factors.
In a well-diversified portfolio, something that negatively influences investment A might have a positive and offsetting influence on investment B.”
This variability in response not only benefits the portfolio, but also the investor.
1. A diversified portfolio need not be a robust portfolio.
Think about your portfolio and the different environments that you can be in such as:
- high economic growth,
- low economic growth,
- high inflation,
- low inflation.
If your entire portfolio depends on high economic growth and low inflation, then you don't have a robust portfolio.
Think about those different ranges of environments even within a single asset class. Within equities you can ask, "Which of these sectors is going to benefit in which environment?"
For example, if we enter into a recession, financials are not a great place to be. If we don't hit a recession and rates are much higher, then there it could benefit financial sector.
If we have a recession, maybe energy doesn't do so well. But if you have inflation, maybe energy can do well.
Get the picture? You may be buying a business that is modestly cheap but would actually do really well in a particular environment.
2. Your portfolio should not be tied to one single narrative.
Diversification is not about the number of assets, but how they will behave in response to events. It's about making sure that you have some assets that will perform well in a recessionary environment, other assets that will perform well in inflationary environment.
Your portfolio should not be tied to one single narrative. While we don’t know what the future holds, we do know that having a sound framework for investing can help investors avoid mistakes during turbulent market conditions. This, in turn, can provide access to the benefits of compound returns.
Focus less on maximizing returns today and more on building robust portfolios to reach your goals.
By ensuring that the portfolio is less vulnerable to a single economic or market outcome, an effectively diversified portfolio should also deliver fewer surprises for investors.
3. Look at revenue exposure
When we choose a category that gives good diversification, we must consider another element: revenue exposure.
As companies continue to expand their global footprint, traditional means of measuring geographic diversification are increasingly insufficient.
Measuring global diversification along dimensions of fundamental exposures - such as revenue - can provide a more complete picture of funds' degree of diversification.
Small-cap stocks tend to sell more in their home markets, while large caps make more sales away from home. Favouring small caps may then provide more direct exposure to local market fundamentals.
Some sectors are globetrotters, while others are homebodies. Financials, utilities, and real estate stocks typically have local asset bases and clientele and will tend to be most sensitive to fluctuations in local interest rates. Technology stocks have a more global reach.
4. Relying solely on historical correlations can be risky or even misleading.
The correlation is an 'average' and does not tell us much about the behaviour of asset classes during certain market phases. In times of recession, the correlation between stocks and bonds has been positive by 0.09 points. In phases of high inflation (above 5%) it even rose to +0.23.
Diversification isn't solely about how far two asset classes move in different directions. Look for diversifying fundamentals, rather than just “negative correlations" alone.
For example, the correlations between the industrial sectors were all positive in 2022, but, unlike the others, the energy sector had positive returns. Having the energy sector in your portfolio would have provided one of the best diversifications in 2022.
The same applies to the U.S. dollar: it is true that Treasuries have fallen in the last year, but the USD has appreciated greatly due to the differences in the ways and times of monetary policies between the Federal Reserve and the other global central banks.
Also, 2022 is an example of a year where more assets in the portfolio would not have offered more diversification. The only asset classes that have delivered positive returns are the energy sector, the US dollar and some 'niche' markets such as Brazilian equities.
To summarize, Building a properly diversified portfolio is to have multiple assets that are uncorrelated or lowly correlated as evaluated by fundamental exposure (for eg., by revenue) and it's sensitivity to changing economic environments (growth/recession) and Inflation (Low/high) and the asset classes, among other things.
To build a robust portfolio, get in touch us and chart the path to a stable and predictable financial future.
An investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga | www.dhanamar.ga | E: enquiry@dhanayo.ga
Most believe that diversification is about holding different investments in a portfolio. Well, you start with that, but it doesn’t end there.
More aptly. Intelligent diversification means not just investing in a bunch of different things, but in things that respond differently to the same factors.
In a well-diversified portfolio, something that negatively influences investment A might have a positive and offsetting influence on investment B.”
This variability in response not only benefits the portfolio, but also the investor.
1. A diversified portfolio need not be a robust portfolio.
Think about your portfolio and the different environments that you can be in such as:
- high economic growth,
- low economic growth,
- high inflation,
- low inflation.
If your entire portfolio depends on high economic growth and low inflation, then you don't have a robust portfolio.
Think about those different ranges of environments even within a single asset class. Within equities you can ask, "Which of these sectors is going to benefit in which environment?"
For example, if we enter into a recession, financials are not a great place to be. If we don't hit a recession and rates are much higher, then there it could benefit financial sector.
If we have a recession, maybe energy doesn't do so well. But if you have inflation, maybe energy can do well.
Get the picture? You may be buying a business that is modestly cheap but would actually do really well in a particular environment.
2. Your portfolio should not be tied to one single narrative.
Diversification is not about the number of assets, but how they will behave in response to events. It's about making sure that you have some assets that will perform well in a recessionary environment, other assets that will perform well in inflationary environment.
Your portfolio should not be tied to one single narrative. While we don’t know what the future holds, we do know that having a sound framework for investing can help investors avoid mistakes during turbulent market conditions. This, in turn, can provide access to the benefits of compound returns.
Focus less on maximizing returns today and more on building robust portfolios to reach your goals.
By ensuring that the portfolio is less vulnerable to a single economic or market outcome, an effectively diversified portfolio should also deliver fewer surprises for investors.
3. Look at revenue exposure
When we choose a category that gives good diversification, we must consider another element: revenue exposure.
As companies continue to expand their global footprint, traditional means of measuring geographic diversification are increasingly insufficient.
Measuring global diversification along dimensions of fundamental exposures - such as revenue - can provide a more complete picture of funds' degree of diversification.
Small-cap stocks tend to sell more in their home markets, while large caps make more sales away from home. Favouring small caps may then provide more direct exposure to local market fundamentals.
Some sectors are globetrotters, while others are homebodies. Financials, utilities, and real estate stocks typically have local asset bases and clientele and will tend to be most sensitive to fluctuations in local interest rates. Technology stocks have a more global reach.
4. Relying solely on historical correlations can be risky or even misleading.
The correlation is an 'average' and does not tell us much about the behaviour of asset classes during certain market phases. In times of recession, the correlation between stocks and bonds has been positive by 0.09 points. In phases of high inflation (above 5%) it even rose to +0.23.
Diversification isn't solely about how far two asset classes move in different directions. Look for diversifying fundamentals, rather than just “negative correlations" alone.
For example, the correlations between the industrial sectors were all positive in 2022, but, unlike the others, the energy sector had positive returns. Having the energy sector in your portfolio would have provided one of the best diversifications in 2022.
The same applies to the U.S. dollar: it is true that Treasuries have fallen in the last year, but the USD has appreciated greatly due to the differences in the ways and times of monetary policies between the Federal Reserve and the other global central banks.
Also, 2022 is an example of a year where more assets in the portfolio would not have offered more diversification. The only asset classes that have delivered positive returns are the energy sector, the US dollar and some 'niche' markets such as Brazilian equities.
To summarize, Building a properly diversified portfolio is to have multiple assets that are uncorrelated or lowly correlated as evaluated by fundamental exposure (for eg., by revenue) and it's sensitivity to changing economic environments (growth/recession) and Inflation (Low/high) and the asset classes, among other things.
To build a robust portfolio, get in touch us and chart the path to a stable and predictable financial future.
An investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga | www.dhanamar.ga | E: enquiry@dhanayo.ga
Invest in Fixed Deposits or Debt Mutual Funds? - A Quick View
One of the advantages of investing in debt mutual funds as against other fixed income instruments is that investors get the benefit of lower tax rates and get market returns as opposed to fixed deposits.
If held for longer than three years, then long-term capital gain (LTCG) tax, that may work out much lower than FD taxation will be beneficial.
And as far as returns are concerned, it is not only from the accrual of interest income for the bonds in the portfolio, but also due to capital appreciation. One must remember that bonds earn interest income which accrues, and bond prices appreciate when interest rates fall, and bond prices drop when interest rates go up. The returns to your bond fund portfolio are a combination of interest accrual and bond price movement.
As with any investment, there are three factors to keep in mind: liquidity, safety and returns. And since fixed income is to form the stable part of your overall portfolio, you need to ensure that you get this right.
To help investors construct a smart debt portfolio, suggest that it be broken up into THREE parts or components.
Component 1: Emergency Fund
Why do you need this? In a crisis you shouldn’t have to worry about financial stress that will cause you to borrow or sell your current investments
Chief Pursuit: Safety and Liquidity
An emergency, by its intrinsic nature, is meant to urgently cater to the unexpected. Which means, you will need to access the money instantly should the need arise. Hence, keep a laser focus on liquidity and safety.
How much you need to invest here is a very personal issue, but best practices suggest a minimum of 9 months of household expenses. This amount can be place in either one instrument, or a mix of two or three such as.
A bank fixed deposit is one option.
If you want to consider mutual funds, go for liquid and ultra short-term funds.
Liquid funds primarily invest in money market instruments - Commercial paper (CP), treasury bill (T-bill) and certificate of deposit (CD) with low maturity periods.
Ultra short-term funds primarily invest in liquid fixed income securities which have short-term maturities.
Component 2: Core Portfolio
Why do you need this? For asset allocation and stability in a portfolio
Chief Pursuit: Safety, with an eye on post-tax returns
This will form the bulk of your fixed income portfolio. It is what must be considered when you look at your overall portfolio allocation. An optimal portfolio will be multi-layered.
One of the avenues are the assured return investments such as fixed deposits, Public Provident Fund (PPF) which has a limit, RBI bonds, and small savings schemes.
Another avenue which is increasingly popular is debt mutual funds that are low duration risk and credit risk.
To simplify, there are two types of risk:
Duration risk refers to the risk caused by bond price movements. If you invest into mutual funds that are susceptible to volatile movements, this may hurt if you need to withdraw funds or re-allocate. To avoid this, stick to shorter term bond funds.
Credit risk refers to the risk of a loss when a borrower does not pay back. This amount is not easily recovered and should be avoided. The risk of default is worse than duration risk. To avoid this, stick to funds that invest in Banking and PSU Bonds or high quality corporate bonds.
In brief, the funds one can look at to make the core part of the portfolio are funds which hold shorter term paper with maturities up to 3 years, which invest in high quality debt securities like government bonds, PSU and bank bonds, highest quality corporate bonds.
A category which is popular now are the Target Maturity Funds which invest in high quality PSU, government bonds with maturity as on a certain date. Such funds are closed on that date and the funds returned. The reason for investing in such funds is that the approximate return expected is known at the time of investment – if one holds on till maturity (closure of the fund). These can be volatile in the interim, but one holds till maturity does not need to worry about it.
Here are some questions to answer that will guide you in your fund selection.
* What is the quality of the portfolio. If you are unable to fathom that, please take help of an advisor. You should not get a loss due to default. Core portfolio should not carry credit risk.
* What is the weighted average maturity of the bonds in the portfolio? This will give you an indication of duration risk.
* Is it a purely open-ended fund or a “target maturity” fund. You can invest in the latter but be aware that the duration is set and in the interim it can be volatile.
* What does your research on the Liquidity of the portfolio reveal? Your open-ended debt fund must be able to provide for liquidity in the assets that it holds. This means that when faced with redemptions it should have assets that can be liquidated and with reasonable impact costs. When selling assets, the risk profile of the remaining assets should not shoot up or be concentrated, like we have seen in the credit crisis that happened some years ago.
Component 3: Tactical Portfolio
Why do you need this? You don’t, but it does give an option to dabble in certain funds for extra returns if you have a fairly large debt portfolio
Chief Pursuit: Returns, with an eye on safety
This is where you can afford to be a bit adventurous in the hunt for returns. To take advantage of market conditions, 15-20% of your debt allocation can be channelised into this bucket. Having said that, this bucket demands a much deeper understanding of the investing mandate of the types of debt instruments / funds and their corresponding risks.
Gilt funds would fit here. These funds have no credit risk or risk of default. Their risk is interest rate movements. If you expect interest rates to dip in the future, you could consider a tactical investment here.
For many individuals, credit risk funds too would fall in this satellite category. However, caution is advised because there is a risk of default and wiping out capital permanently.
Hence, we reiterate that a much more nuanced expertise is required when allocating money to tactical bets. The risk of a credit fund is totally different from that of a gilt fund. Gilt funds, on the other hand, are not a homogenous lot. The category has actively managed gilt funds of different durations and constant maturity gilt funds.
Dynamic bond funds would also fall under this category. Dynamic bond funds have the investment mandate to *invest across durations and even take credit risk*s. They have no restriction on duration or credit quality. Consider them after ONLY getting well acquainted with the fund's management strategy. Steer clear of funds with skewed credit risk.
Non-convertible debentures (NCD) issued by companies also fall into this category. Again, the risk here cannot be ignored. Study the company and check the rating of the instrument before investing.
One final word of advice: If you are not able to handle this, take professional help.
An investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga/fd.html
If held for longer than three years, then long-term capital gain (LTCG) tax, that may work out much lower than FD taxation will be beneficial.
And as far as returns are concerned, it is not only from the accrual of interest income for the bonds in the portfolio, but also due to capital appreciation. One must remember that bonds earn interest income which accrues, and bond prices appreciate when interest rates fall, and bond prices drop when interest rates go up. The returns to your bond fund portfolio are a combination of interest accrual and bond price movement.
As with any investment, there are three factors to keep in mind: liquidity, safety and returns. And since fixed income is to form the stable part of your overall portfolio, you need to ensure that you get this right.
To help investors construct a smart debt portfolio, suggest that it be broken up into THREE parts or components.
Component 1: Emergency Fund
Why do you need this? In a crisis you shouldn’t have to worry about financial stress that will cause you to borrow or sell your current investments
Chief Pursuit: Safety and Liquidity
An emergency, by its intrinsic nature, is meant to urgently cater to the unexpected. Which means, you will need to access the money instantly should the need arise. Hence, keep a laser focus on liquidity and safety.
How much you need to invest here is a very personal issue, but best practices suggest a minimum of 9 months of household expenses. This amount can be place in either one instrument, or a mix of two or three such as.
A bank fixed deposit is one option.
If you want to consider mutual funds, go for liquid and ultra short-term funds.
Liquid funds primarily invest in money market instruments - Commercial paper (CP), treasury bill (T-bill) and certificate of deposit (CD) with low maturity periods.
Ultra short-term funds primarily invest in liquid fixed income securities which have short-term maturities.
Component 2: Core Portfolio
Why do you need this? For asset allocation and stability in a portfolio
Chief Pursuit: Safety, with an eye on post-tax returns
This will form the bulk of your fixed income portfolio. It is what must be considered when you look at your overall portfolio allocation. An optimal portfolio will be multi-layered.
One of the avenues are the assured return investments such as fixed deposits, Public Provident Fund (PPF) which has a limit, RBI bonds, and small savings schemes.
Another avenue which is increasingly popular is debt mutual funds that are low duration risk and credit risk.
To simplify, there are two types of risk:
Duration risk refers to the risk caused by bond price movements. If you invest into mutual funds that are susceptible to volatile movements, this may hurt if you need to withdraw funds or re-allocate. To avoid this, stick to shorter term bond funds.
Credit risk refers to the risk of a loss when a borrower does not pay back. This amount is not easily recovered and should be avoided. The risk of default is worse than duration risk. To avoid this, stick to funds that invest in Banking and PSU Bonds or high quality corporate bonds.
In brief, the funds one can look at to make the core part of the portfolio are funds which hold shorter term paper with maturities up to 3 years, which invest in high quality debt securities like government bonds, PSU and bank bonds, highest quality corporate bonds.
A category which is popular now are the Target Maturity Funds which invest in high quality PSU, government bonds with maturity as on a certain date. Such funds are closed on that date and the funds returned. The reason for investing in such funds is that the approximate return expected is known at the time of investment – if one holds on till maturity (closure of the fund). These can be volatile in the interim, but one holds till maturity does not need to worry about it.
Here are some questions to answer that will guide you in your fund selection.
* What is the quality of the portfolio. If you are unable to fathom that, please take help of an advisor. You should not get a loss due to default. Core portfolio should not carry credit risk.
* What is the weighted average maturity of the bonds in the portfolio? This will give you an indication of duration risk.
* Is it a purely open-ended fund or a “target maturity” fund. You can invest in the latter but be aware that the duration is set and in the interim it can be volatile.
* What does your research on the Liquidity of the portfolio reveal? Your open-ended debt fund must be able to provide for liquidity in the assets that it holds. This means that when faced with redemptions it should have assets that can be liquidated and with reasonable impact costs. When selling assets, the risk profile of the remaining assets should not shoot up or be concentrated, like we have seen in the credit crisis that happened some years ago.
Component 3: Tactical Portfolio
Why do you need this? You don’t, but it does give an option to dabble in certain funds for extra returns if you have a fairly large debt portfolio
Chief Pursuit: Returns, with an eye on safety
This is where you can afford to be a bit adventurous in the hunt for returns. To take advantage of market conditions, 15-20% of your debt allocation can be channelised into this bucket. Having said that, this bucket demands a much deeper understanding of the investing mandate of the types of debt instruments / funds and their corresponding risks.
Gilt funds would fit here. These funds have no credit risk or risk of default. Their risk is interest rate movements. If you expect interest rates to dip in the future, you could consider a tactical investment here.
For many individuals, credit risk funds too would fall in this satellite category. However, caution is advised because there is a risk of default and wiping out capital permanently.
Hence, we reiterate that a much more nuanced expertise is required when allocating money to tactical bets. The risk of a credit fund is totally different from that of a gilt fund. Gilt funds, on the other hand, are not a homogenous lot. The category has actively managed gilt funds of different durations and constant maturity gilt funds.
Dynamic bond funds would also fall under this category. Dynamic bond funds have the investment mandate to *invest across durations and even take credit risk*s. They have no restriction on duration or credit quality. Consider them after ONLY getting well acquainted with the fund's management strategy. Steer clear of funds with skewed credit risk.
Non-convertible debentures (NCD) issued by companies also fall into this category. Again, the risk here cannot be ignored. Study the company and check the rating of the instrument before investing.
One final word of advice: If you are not able to handle this, take professional help.
An investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga/fd.html
What can Investors learn from the game of ⚽Football?
Playing a successful football game requires three important sub-groups
⚽ Defenders, Forwards and Midfielders
🏦Similarly investments also required mix of different Asset classes
💰 Debt, Equity and Alternative assets (including Hybrid/Dynamic strategies)
▪️Defenders Vs DEBT or FIXED INCOME Asset Class
Defenders - They may not be exciting to watch but they are reliable when the situation calls for them
Fixed Income Investments - Debt Assets are called Risk Control assets and they are excellent defenders of your investment portfolio to provide needed stability
▪️Forwards Vs Equity Asset Class
Forwards - They score as many goals as possible and lend fire power of the team and advance the team's goals and provide morale boost to the team.
Equity Assets - Potential to generate superior returns in long-term and provides much needed boost to the portfolio.
▪️ Midfielders Vs Alternative Asset Class (incl. Hybrid/ Dynamic strategies)
Midfielders - It is where the magic happens through strong technical abilities that combine attack and defence
Alternative Assets and Hybrid/ Dynamic Strategies - Invest in asset categories that could either be Equity (or) Debt (or) Combination of both, they provide long-term growth benefits of equity and stability of Debt.
Finally football players need the RIGHT COACH for strategy and game plan
Similarly successful investing can benefit from capable FINANCIAL ADVISOR to rightly guide on asset allocation and appropriate Investments decision on an ongoing basis
To summarize..
- Right mix of players (assets) required win the game
- Right mix of Asset allocation required to build goal aligned investment portfolio.
- Right coach to guide your family through the long term financial journey
An Investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga/learn.html
⚽ Defenders, Forwards and Midfielders
🏦Similarly investments also required mix of different Asset classes
💰 Debt, Equity and Alternative assets (including Hybrid/Dynamic strategies)
▪️Defenders Vs DEBT or FIXED INCOME Asset Class
Defenders - They may not be exciting to watch but they are reliable when the situation calls for them
Fixed Income Investments - Debt Assets are called Risk Control assets and they are excellent defenders of your investment portfolio to provide needed stability
▪️Forwards Vs Equity Asset Class
Forwards - They score as many goals as possible and lend fire power of the team and advance the team's goals and provide morale boost to the team.
Equity Assets - Potential to generate superior returns in long-term and provides much needed boost to the portfolio.
▪️ Midfielders Vs Alternative Asset Class (incl. Hybrid/ Dynamic strategies)
Midfielders - It is where the magic happens through strong technical abilities that combine attack and defence
Alternative Assets and Hybrid/ Dynamic Strategies - Invest in asset categories that could either be Equity (or) Debt (or) Combination of both, they provide long-term growth benefits of equity and stability of Debt.
Finally football players need the RIGHT COACH for strategy and game plan
Similarly successful investing can benefit from capable FINANCIAL ADVISOR to rightly guide on asset allocation and appropriate Investments decision on an ongoing basis
To summarize..
- Right mix of players (assets) required win the game
- Right mix of Asset allocation required to build goal aligned investment portfolio.
- Right coach to guide your family through the long term financial journey
An Investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga/learn.html
Finite (or) Infinite - What is your Investing style
Infinite Processes vs Finite Results: How Successful People Play The Game of Life and Investing
There are two types of games in life and investing: Finite and infinite.
People who want quick wins, short gains and success at all costs focus on finite games. The biggest aim for them is short term results.
- Day traders are finite game players. They spend a lot of time watching market swings and moves. They are not in it for the long term.
- They aim for quick breaks. And cash out as soon as they make quick gains. It takes a lot of focus and concentration. You can’t keep your eye off the ball.
- Finite players swear by start and finish lines. It’s the only way to survive.
Life in the finite lane is risky. You can quickly lose twice: you miss out on success and end up burned out or stressed.
People who seek overnight success stay in the finite game longer than necessary. They end up losing more than they can afford.
Finite games usually come to an end.
If you are interested in building sustainable and lasting success, the finite game may not be your best option.
People who want to lay an excellent foundation for life choose infinite processes over finite results.
- They are in for the long haul, so they don’t set strict rules.
- They are adaptable and can quickly change principles and processes to keep playing.
Warren Buffett and Charles Munger are infinite game players. They are 91 and 98 years of respectively.
If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes, Warren Buffett once said.
Buffett and Munger have been investing for over five decades and have put the principle of compound growth to work in their favour.
Their secret? Infinite investing game.
They’ve evolved over the years: rebalanced as and when necessary, and reinvented themselves to keep up with the ever-changing world of investing.
Paul Graham has been investing in startups for 17 years. Y Combinator now has over 160 companies valued at $150M+.
Are you in it for the long haul. Success inevitably finds you when you focus on building an engine that can deliver over and over again.
When you play the infinite game of life, you invest in habits, processes, rituals, routines and actions that will help you build lasting success.
- You focus on life and career processes you can sustain.
- You focus on daily practices instead of aiming for one massive win.
The infinite process is more critical than the finite goal.
Build a success engine for life and investing
- A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play
- Highly successful people don’t focus on one massive outcome or goal. They build systems that help them play for as long as possible. Their long-term goal is to compound wins, habits and behaviours.
- For great achievers, long term growth is always the goal. Infinite game players aim to learn, evolve and do more of what’s working.
- They build a solid success engine that can continue to deliver for many years.
Life is an infinite game: investing in tools and systems to help you build a better future is far more beneficial than playing for quick wins.
Infinite game players end up reaping massive results: accumulated gains. They are the most successful, top performers and high achievers.
For long term success in any area of your life, invest in processes and cultivate habits you can use repeatedly.
“A successful harvest is not the end of a gardener’s existence, but only a phase of it. As any gardener knows, the vitality of a garden does not end with a harvest. It simply takes another form. Gardens do not “die” in the winter but quietly prepare for another season,"
Goals have conclusions. Life has no conclusion until you die.
The real-world rewards those who invest in infinite tools, habits and resources.
Choose to play a much better game your future self will be proud of.
The possibilities of an infinite game are endless.
An Investor education and awareness initiative by DHANAYOGA | E: enquiry@dhanayo.ga | W: www.dhanayo.ga/learn.html | www.dhanamar.ga
References:
a. Finite and Infinite Games: A Vision of Life as Play and Possibility - James P. Carse (Amazon: https://www.amazon.in/Finite-Infinite-Games-James-Carse/dp/1476731713/?tag=venkatsethu-21
b. Inspiration - Recent conversation with a High Achiever
There are two types of games in life and investing: Finite and infinite.
People who want quick wins, short gains and success at all costs focus on finite games. The biggest aim for them is short term results.
- Day traders are finite game players. They spend a lot of time watching market swings and moves. They are not in it for the long term.
- They aim for quick breaks. And cash out as soon as they make quick gains. It takes a lot of focus and concentration. You can’t keep your eye off the ball.
- Finite players swear by start and finish lines. It’s the only way to survive.
Life in the finite lane is risky. You can quickly lose twice: you miss out on success and end up burned out or stressed.
People who seek overnight success stay in the finite game longer than necessary. They end up losing more than they can afford.
Finite games usually come to an end.
If you are interested in building sustainable and lasting success, the finite game may not be your best option.
People who want to lay an excellent foundation for life choose infinite processes over finite results.
- They are in for the long haul, so they don’t set strict rules.
- They are adaptable and can quickly change principles and processes to keep playing.
Warren Buffett and Charles Munger are infinite game players. They are 91 and 98 years of respectively.
If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes, Warren Buffett once said.
Buffett and Munger have been investing for over five decades and have put the principle of compound growth to work in their favour.
Their secret? Infinite investing game.
They’ve evolved over the years: rebalanced as and when necessary, and reinvented themselves to keep up with the ever-changing world of investing.
Paul Graham has been investing in startups for 17 years. Y Combinator now has over 160 companies valued at $150M+.
Are you in it for the long haul. Success inevitably finds you when you focus on building an engine that can deliver over and over again.
When you play the infinite game of life, you invest in habits, processes, rituals, routines and actions that will help you build lasting success.
- You focus on life and career processes you can sustain.
- You focus on daily practices instead of aiming for one massive win.
The infinite process is more critical than the finite goal.
Build a success engine for life and investing
- A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play
- Highly successful people don’t focus on one massive outcome or goal. They build systems that help them play for as long as possible. Their long-term goal is to compound wins, habits and behaviours.
- For great achievers, long term growth is always the goal. Infinite game players aim to learn, evolve and do more of what’s working.
- They build a solid success engine that can continue to deliver for many years.
Life is an infinite game: investing in tools and systems to help you build a better future is far more beneficial than playing for quick wins.
Infinite game players end up reaping massive results: accumulated gains. They are the most successful, top performers and high achievers.
For long term success in any area of your life, invest in processes and cultivate habits you can use repeatedly.
“A successful harvest is not the end of a gardener’s existence, but only a phase of it. As any gardener knows, the vitality of a garden does not end with a harvest. It simply takes another form. Gardens do not “die” in the winter but quietly prepare for another season,"
Goals have conclusions. Life has no conclusion until you die.
The real-world rewards those who invest in infinite tools, habits and resources.
Choose to play a much better game your future self will be proud of.
The possibilities of an infinite game are endless.
An Investor education and awareness initiative by DHANAYOGA | E: enquiry@dhanayo.ga | W: www.dhanayo.ga/learn.html | www.dhanamar.ga
References:
a. Finite and Infinite Games: A Vision of Life as Play and Possibility - James P. Carse (Amazon: https://www.amazon.in/Finite-Infinite-Games-James-Carse/dp/1476731713/?tag=venkatsethu-21
b. Inspiration - Recent conversation with a High Achiever
The magic of reinvested stock dividends
Reinvesting stock dividends can make a huge impact on your wealth over the long term.
To illustrate this, we first consider how a total returns index is calculated by assuming dividends are reinvested.
Thanks to Prof. Robert Schiller for making monthly S & P 500 data available from 1871 for calculating the Schiller PE with the trailing 12-month dividend yield.
How to calculate the total returns index
The best way to understand the magic of reinvested dividends is to understand how the total returns index is calculated.
A stock or mutual dividend is NOT a return. It is merely corporate action where a small chunk of the stock’s (or fund’s) value is given to holders in the form of cash or units. Then the price (or NAV) drops to the extent of the dividend.
For calculating investment returns, one must always assume that dividend is reinvested. That is we find out the price or NAV by assuming no dividends were declared. Detailed descriptions of how this is done are given below.
For the purpose of this discussion, let us consider the S & P 500 (USA Broad market index) as a single stock we held such a stock in 1899.
In Jan 1900, suppose a dividend of 0.018 $ per share was issued and price after the issue is 6.1 $.
We now assume the divident amount of 0.018$ is used to buy more shares of the S&P 500 at a price of 6.1 $. Fractional shares are typically not issued, but we will have to assume that they are.
So we can buy 0.018/6.1 = 0.00297 shares!! Taking our grand tally to 1.003 shares. If this looks insignificant, hang on. The total returns index now has a value of 6.1 x 1.003 = 6.118.
The next month, in Feb 1900, the approximate dividend issued per share is again 0.018 $. However, we now hold 1.00297 shares. So the total dividend is 1.003 x 0.018 = 0.019 $. This is reinvested at the current price of 6.21$ per share. Then the no of shares held becomes 1.006.
The total returns index now is 6.21 x 1.006 = 6.24.
The real-world total returns index calculation will require us to factor in corporate action like stock splits and bonuses.
Suppose we keep doing this right up to Sep. 2016, the 1 stock held in 1899 will become 10 stocks by 1940 and 100 stocks by 2000.
Thus the magic of reinvested dividends is due to the additional shares obtained by reinvesting the dividend into one's portfolio*.
This translates to more returns and a higher corpus due to the productivity growth of the country.
Here is the S & P TRI plotted along with the price index. Remember this graph is in log-scale, so the difference is much more significant.
Extra returns from reinvested dividends - Graph for reference.
Reinvestment of dividends can generate extra 1% to 9% p.a over the long term, depending on the valuation of the equity markets and the level of dividends issued by corporates over their long term business history.
This is extra return obtained year after year due to the reinvested dividends.
Are you investing in Direct equity / Equity Mutual Funds? Are you consuming / spending away the dividends issued (or) are you reinvesting the dividends to grow your portfolio?
Dividends may be consumed only if one's has "income need" (for e.g., retired persons, those unable to meet their monthly expenses from salary or their other sources of income).
If you are not falling in the "income need" category, it makes eminent sense to Reinvest the dividends back to your portfolio and gain the benefit of additional returns and compounding over the long term investment horizon
An investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga/mps.html
To illustrate this, we first consider how a total returns index is calculated by assuming dividends are reinvested.
Thanks to Prof. Robert Schiller for making monthly S & P 500 data available from 1871 for calculating the Schiller PE with the trailing 12-month dividend yield.
How to calculate the total returns index
The best way to understand the magic of reinvested dividends is to understand how the total returns index is calculated.
A stock or mutual dividend is NOT a return. It is merely corporate action where a small chunk of the stock’s (or fund’s) value is given to holders in the form of cash or units. Then the price (or NAV) drops to the extent of the dividend.
For calculating investment returns, one must always assume that dividend is reinvested. That is we find out the price or NAV by assuming no dividends were declared. Detailed descriptions of how this is done are given below.
For the purpose of this discussion, let us consider the S & P 500 (USA Broad market index) as a single stock we held such a stock in 1899.
In Jan 1900, suppose a dividend of 0.018 $ per share was issued and price after the issue is 6.1 $.
We now assume the divident amount of 0.018$ is used to buy more shares of the S&P 500 at a price of 6.1 $. Fractional shares are typically not issued, but we will have to assume that they are.
So we can buy 0.018/6.1 = 0.00297 shares!! Taking our grand tally to 1.003 shares. If this looks insignificant, hang on. The total returns index now has a value of 6.1 x 1.003 = 6.118.
The next month, in Feb 1900, the approximate dividend issued per share is again 0.018 $. However, we now hold 1.00297 shares. So the total dividend is 1.003 x 0.018 = 0.019 $. This is reinvested at the current price of 6.21$ per share. Then the no of shares held becomes 1.006.
The total returns index now is 6.21 x 1.006 = 6.24.
The real-world total returns index calculation will require us to factor in corporate action like stock splits and bonuses.
Suppose we keep doing this right up to Sep. 2016, the 1 stock held in 1899 will become 10 stocks by 1940 and 100 stocks by 2000.
Thus the magic of reinvested dividends is due to the additional shares obtained by reinvesting the dividend into one's portfolio*.
This translates to more returns and a higher corpus due to the productivity growth of the country.
Here is the S & P TRI plotted along with the price index. Remember this graph is in log-scale, so the difference is much more significant.
Extra returns from reinvested dividends - Graph for reference.
Reinvestment of dividends can generate extra 1% to 9% p.a over the long term, depending on the valuation of the equity markets and the level of dividends issued by corporates over their long term business history.
This is extra return obtained year after year due to the reinvested dividends.
Are you investing in Direct equity / Equity Mutual Funds? Are you consuming / spending away the dividends issued (or) are you reinvesting the dividends to grow your portfolio?
Dividends may be consumed only if one's has "income need" (for e.g., retired persons, those unable to meet their monthly expenses from salary or their other sources of income).
If you are not falling in the "income need" category, it makes eminent sense to Reinvest the dividends back to your portfolio and gain the benefit of additional returns and compounding over the long term investment horizon
An investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga/mps.html
Dematerialisation of insurance policies
Insurance regulator IRDAI is now giving a big push to “dematerialisation” of insurance policies.
As part of this exercise, the regulator has mandated from December this year, all the new insurance policies will have to be compulsorily issued in a dematerialised form. By December 2023, all the old or existing policies will have to be brought on demat platform. Also, with eKYC becoming mandatory from November 1, the dematerialisation is just what the doctor ordered for the insurance industry.
What exactly is insurance dematerialisation?
Dematerialisation will remove the paper work and physical policies. It will entail conversion of physical policies into modifiable digital documents. Whenever a new insurance policy is issued, it will be in a demat format. The policy document and its details will be taken digitally on a platform.
Simply put, the policies will not be issued in paper form, but digitally, and will be kept in an e-insurance account (eIA) of the customer. eIA is the portfolio of insurance policies of a proposer/policyholder held in an electronic form with an insurance repository.
This is expected to benefit Insurers, insurance repositories and the policyholders. The insurance sector will be the long-term beneficiary.
How will a policyholder benefit by dematerialisation?
The e-insurance account will help policyholders get access to their insurance portfolio at the click of a button. The eIA holder can keep track of insurance policies (life, non-life (medical, Motor, Home etc.,) under one platform. Servicing of policies will be easier and policyholders can borrow against the policies held in electronic form — just like pledging of shares. In addition, fradulent transactions pertaining to insurance claims will significantly come down.
Similarly, Insurers will save considerably on costs, especially on printing and delivering of policies. In 2021-22, the life insurance industry sold three crore policies digitally, aiding in better risk management. Nearly 50 crore non-life policies were sold — imagine the savings on paper if they were all to be dematerialised. There are about 30 crore active life insurance policies and these could eventually get converted into electronic form.
Why IRDAI is promoting dematerialisation?
The regulator on a single dashboard can oversee the entire sector’s activities. This would lead to better monitoring and regulatory oversight of the industry. This is important given the scale of operations of the life insurance industry, which is likely to touch $100 billion in premium receipts.
As the regulator has mandated dematerialisation, it should move forward in full clip. But the pace would depend largely on how the insurance behemoth LIC will push for it. With the market share of over 60 per cent, any move by the LIC to adopt this earnestly will give a fillip to this exercise.
Will policyholders be required to pay for opening eIA or for operating such accounts?
No, e-insurance accounts are offered free of cost to the applicants. There are no charges levied to the individual for opening, maintaining or for changing any details of the eIA.
Insurance repositories would most likely be compensated by the insurance companies for the safekeeping of policy data in electronic form
Courtesy: BL article
An Investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga/insure.html
As part of this exercise, the regulator has mandated from December this year, all the new insurance policies will have to be compulsorily issued in a dematerialised form. By December 2023, all the old or existing policies will have to be brought on demat platform. Also, with eKYC becoming mandatory from November 1, the dematerialisation is just what the doctor ordered for the insurance industry.
What exactly is insurance dematerialisation?
Dematerialisation will remove the paper work and physical policies. It will entail conversion of physical policies into modifiable digital documents. Whenever a new insurance policy is issued, it will be in a demat format. The policy document and its details will be taken digitally on a platform.
Simply put, the policies will not be issued in paper form, but digitally, and will be kept in an e-insurance account (eIA) of the customer. eIA is the portfolio of insurance policies of a proposer/policyholder held in an electronic form with an insurance repository.
This is expected to benefit Insurers, insurance repositories and the policyholders. The insurance sector will be the long-term beneficiary.
How will a policyholder benefit by dematerialisation?
The e-insurance account will help policyholders get access to their insurance portfolio at the click of a button. The eIA holder can keep track of insurance policies (life, non-life (medical, Motor, Home etc.,) under one platform. Servicing of policies will be easier and policyholders can borrow against the policies held in electronic form — just like pledging of shares. In addition, fradulent transactions pertaining to insurance claims will significantly come down.
Similarly, Insurers will save considerably on costs, especially on printing and delivering of policies. In 2021-22, the life insurance industry sold three crore policies digitally, aiding in better risk management. Nearly 50 crore non-life policies were sold — imagine the savings on paper if they were all to be dematerialised. There are about 30 crore active life insurance policies and these could eventually get converted into electronic form.
Why IRDAI is promoting dematerialisation?
The regulator on a single dashboard can oversee the entire sector’s activities. This would lead to better monitoring and regulatory oversight of the industry. This is important given the scale of operations of the life insurance industry, which is likely to touch $100 billion in premium receipts.
As the regulator has mandated dematerialisation, it should move forward in full clip. But the pace would depend largely on how the insurance behemoth LIC will push for it. With the market share of over 60 per cent, any move by the LIC to adopt this earnestly will give a fillip to this exercise.
Will policyholders be required to pay for opening eIA or for operating such accounts?
No, e-insurance accounts are offered free of cost to the applicants. There are no charges levied to the individual for opening, maintaining or for changing any details of the eIA.
Insurance repositories would most likely be compensated by the insurance companies for the safekeeping of policy data in electronic form
Courtesy: BL article
An Investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga/insure.html
What is your financial goal? I want to be rich!!
What is your financial goal? I want to be rich!!
Oh, Me too. Who doesn’t? But the problem is that we all have this amorphous goal of getting rich, without really knowing what it is we truly want to accomplish.
What does it mean to be rich?
If someone had a goal to have Rs. 3 Cr in their retirement account, he/she would consider that to be a financial goal.
The next step would be to find the life goal that supports it. The latter may be a desire for financial independence, a desire for flexibility, a desire to no longer work or to retire early, a desire to leave a legacy, or whatever.
There is always a life goal that precedes the financial goal. When you begin with life exploration, it leads into the direction of financial outcomes.
So when you say that you want to be rich, you must first articulate what that means for you. All financial goals must begin as life questions. Only then can you move in the optimal direction.
So what is rich to you?
Let's get practical..
Starting with needs and dreams helps formulate deeply *personal and extremely relevant goals.
Can you picture these scenarios and then honestly answer the questions.
Scenario 1: You are financially secure. You have enough money to take care of your needs, now and in the future.
- How would I live my life?
- How would I describe a life that is completely and richly mine?
- What would I do with the money?
- Would I change anything?
Scenario 2: You visit your doctor who tells you that you have 5 to 10 years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death.
- What will I do in the time I have remaining to live?
- Will I change my life?
- If yes, how will I do it?
Scenario 3: Your doctor shocks you with the news that you have only one day left to live. Be aware of what feelings arise as you confront your very real mortality.*
- What dreams will be left unfulfilled?
- What do I wish I had finished?
- What do I wish I had been?
- What do I wish I had done?
- What did I miss?
This helps you articulate what it is you want and formulate those desires into goals. Once you get your goals in place, you can design a portfolio towards that end.
The right starting point, which is the articulation of your deepest desires and needs, leads to a realistic plan.
To illustrate, at a recent training workshop, a participant stated that his goal was to buy a particular property, make that project into a reality within a specific time period and earn returns on it.
On answering the questions given above, the individual confessed that his biggest “dream” was to build an authentic and deeper relationship with his 6-year-old son.
If he blindly pursued his goal, he would have had to spend even more time away from his son.
Don’t borrow someone else’s idea of what it means or feels to be rich. You must work with your own life-oriented benchmarks. Once that is done, you can put a figure to it and design a portfolio around it.
Goals are very subjective, and emotional. And then must always start with the heart before they can be worked out by the mind then onto a worksheet!!
Need help, reach out to a qualified financial advisor who can assist in getting it done professionally.
Dhana Vidya - An investor awareness and education initiative by DHANAYOGA | www.dhanayo.ga
Oh, Me too. Who doesn’t? But the problem is that we all have this amorphous goal of getting rich, without really knowing what it is we truly want to accomplish.
What does it mean to be rich?
If someone had a goal to have Rs. 3 Cr in their retirement account, he/she would consider that to be a financial goal.
The next step would be to find the life goal that supports it. The latter may be a desire for financial independence, a desire for flexibility, a desire to no longer work or to retire early, a desire to leave a legacy, or whatever.
There is always a life goal that precedes the financial goal. When you begin with life exploration, it leads into the direction of financial outcomes.
So when you say that you want to be rich, you must first articulate what that means for you. All financial goals must begin as life questions. Only then can you move in the optimal direction.
So what is rich to you?
Let's get practical..
Starting with needs and dreams helps formulate deeply *personal and extremely relevant goals.
Can you picture these scenarios and then honestly answer the questions.
Scenario 1: You are financially secure. You have enough money to take care of your needs, now and in the future.
- How would I live my life?
- How would I describe a life that is completely and richly mine?
- What would I do with the money?
- Would I change anything?
Scenario 2: You visit your doctor who tells you that you have 5 to 10 years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death.
- What will I do in the time I have remaining to live?
- Will I change my life?
- If yes, how will I do it?
Scenario 3: Your doctor shocks you with the news that you have only one day left to live. Be aware of what feelings arise as you confront your very real mortality.*
- What dreams will be left unfulfilled?
- What do I wish I had finished?
- What do I wish I had been?
- What do I wish I had done?
- What did I miss?
This helps you articulate what it is you want and formulate those desires into goals. Once you get your goals in place, you can design a portfolio towards that end.
The right starting point, which is the articulation of your deepest desires and needs, leads to a realistic plan.
To illustrate, at a recent training workshop, a participant stated that his goal was to buy a particular property, make that project into a reality within a specific time period and earn returns on it.
On answering the questions given above, the individual confessed that his biggest “dream” was to build an authentic and deeper relationship with his 6-year-old son.
If he blindly pursued his goal, he would have had to spend even more time away from his son.
Don’t borrow someone else’s idea of what it means or feels to be rich. You must work with your own life-oriented benchmarks. Once that is done, you can put a figure to it and design a portfolio around it.
Goals are very subjective, and emotional. And then must always start with the heart before they can be worked out by the mind then onto a worksheet!!
Need help, reach out to a qualified financial advisor who can assist in getting it done professionally.
Dhana Vidya - An investor awareness and education initiative by DHANAYOGA | www.dhanayo.ga
Know about Advance Tax
Know about Advance (Income) Tax
Advance Tax – What is Advance Tax? Who Should Pay? Due Dates & Advance Tax Calculator
What is Advance Tax?
Advance tax means income tax should be paid in advance instead of lump sum payment at year end. It is also known as pay as you earn tax.
These payments have to be made in instalments as per due dates provided by the income tax department. (see attached image)
Who should pay Advance Tax?
Salaried, freelancers and businesses– If your total tax liability is Rs 10,000 or more in a financial year you have to pay advance tax. Advance tax applies to all taxpayers, salaried, freelancers, and businesses. Senior citizens, who are 60 years or older, and do not run a business, are exempt from paying advance tax.
Presumptive income for Businesses–The taxpayers who have opted for presumptive taxation scheme under section 44AD have to pay the whole amount of their advance tax in one instalment on or before 15 March. They also have an option to pay all of their tax dues by 31 March.
Presumptive income for Professionals– Independent professionals such as doctors, lawyers, architects etc. come under the presumptive scheme under section 44ADA. They have to pay the whole of their advance tax liability in one instalment on or before 15 March. They can also pay the entire amount by 31 March.
When should I pay advance tax?
If your tax liability for a year after reducing TDS exceeds Rs 10,000, you will be liable for payment of advance tax
Is an NRI liable for payment of advance tax?
An NRI, who has an income accruing in India in excess of Rs 10,000, is liable for payment of advance tax.
I am a senior citizen having pension and interest income. Should I pay advance tax?
Resident senior citizens not having income from business or profession are not liable for advance tax.
Will I be penalized if I do not pay advance tax?
Non payment of advance tax will result in levy of penal interest under 234B and 234C of the Income tax Act, 1961.
Can I claim deduction under Sec 80C while estimating income for determining my advance tax?
Yes. You can consider all these deductions while estimating your income for the year for computing your advance tax liability.
What happens if I miss the deadline for payment of the fourth installment of my advance tax i.e. on 15 March?
You can still go ahead with payment of advance tax on or before the 31 March of the year. Such payment will still be treated as advance tax only.
How do I make an advance tax payment?
Advance tax payment is made using Challan 280 just like any other regular tax payment.
Why should advance tax payments be made?
Advance tax payments benefit both the government and the individual/organisation paying it. From the government’s perspective, it provides a continuous flow of income throughout the year. From the individual/organisation’s perspective, it reduces the year-end burden of paying taxes in a lump sum. Non-payment of advance tax could result in the taxpayer being liable to penal interest under the Income Tax law. Hence, timely payments of advance tax should be made.
How to check advance tax payment status?
To check the status of your advance tax payment challan, go to https://tin.tin.nsdl.com/oltas/index.html. Select CIN (Challan Identification Number) Based View. Then enter the required details being asked for, in order to view the status. You can also check the list of advance tax payments made by logging in to your income tax account at https://www.incometaxindiaefiling.gov.in/home and going to My account -> View Form 26AS (Tax Credit), and entering the financial year and type of view/download.
How to make advance income tax payment online?
To make advance tax payment online, follow the steps given below:
Visit the Tax Information Network of the IT dept at https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp
- Click on ‘Proceed’ under the CHALLAN NO./ITNS 280 option.
- Enter the tax applicable, types of payment, mode of payment, PAN, assessment year and other details mentioned in the challan.
- Ensure that once filled-in, you double-check all the data that you have entered.
- You will then be redirected to the bank’s website to complete the payment.
- After completing the payment, you will get a tax receipt on the next screen, on which you can see the payment details.
- You can see the BSR code and challan serial number on the right side of the challan.
- Save a copy of this tax receipt for future reference. You will need to enter the BSR code and challan number in your tax return.
Dhana Vidya - An investor education and literacy initiative by DHANAYOGA | www.dhanayo.ga | www.dhanamar.ga
Advance Tax – What is Advance Tax? Who Should Pay? Due Dates & Advance Tax Calculator
What is Advance Tax?
Advance tax means income tax should be paid in advance instead of lump sum payment at year end. It is also known as pay as you earn tax.
These payments have to be made in instalments as per due dates provided by the income tax department. (see attached image)
Who should pay Advance Tax?
Salaried, freelancers and businesses– If your total tax liability is Rs 10,000 or more in a financial year you have to pay advance tax. Advance tax applies to all taxpayers, salaried, freelancers, and businesses. Senior citizens, who are 60 years or older, and do not run a business, are exempt from paying advance tax.
Presumptive income for Businesses–The taxpayers who have opted for presumptive taxation scheme under section 44AD have to pay the whole amount of their advance tax in one instalment on or before 15 March. They also have an option to pay all of their tax dues by 31 March.
Presumptive income for Professionals– Independent professionals such as doctors, lawyers, architects etc. come under the presumptive scheme under section 44ADA. They have to pay the whole of their advance tax liability in one instalment on or before 15 March. They can also pay the entire amount by 31 March.
When should I pay advance tax?
If your tax liability for a year after reducing TDS exceeds Rs 10,000, you will be liable for payment of advance tax
Is an NRI liable for payment of advance tax?
An NRI, who has an income accruing in India in excess of Rs 10,000, is liable for payment of advance tax.
I am a senior citizen having pension and interest income. Should I pay advance tax?
Resident senior citizens not having income from business or profession are not liable for advance tax.
Will I be penalized if I do not pay advance tax?
Non payment of advance tax will result in levy of penal interest under 234B and 234C of the Income tax Act, 1961.
Can I claim deduction under Sec 80C while estimating income for determining my advance tax?
Yes. You can consider all these deductions while estimating your income for the year for computing your advance tax liability.
What happens if I miss the deadline for payment of the fourth installment of my advance tax i.e. on 15 March?
You can still go ahead with payment of advance tax on or before the 31 March of the year. Such payment will still be treated as advance tax only.
How do I make an advance tax payment?
Advance tax payment is made using Challan 280 just like any other regular tax payment.
Why should advance tax payments be made?
Advance tax payments benefit both the government and the individual/organisation paying it. From the government’s perspective, it provides a continuous flow of income throughout the year. From the individual/organisation’s perspective, it reduces the year-end burden of paying taxes in a lump sum. Non-payment of advance tax could result in the taxpayer being liable to penal interest under the Income Tax law. Hence, timely payments of advance tax should be made.
How to check advance tax payment status?
To check the status of your advance tax payment challan, go to https://tin.tin.nsdl.com/oltas/index.html. Select CIN (Challan Identification Number) Based View. Then enter the required details being asked for, in order to view the status. You can also check the list of advance tax payments made by logging in to your income tax account at https://www.incometaxindiaefiling.gov.in/home and going to My account -> View Form 26AS (Tax Credit), and entering the financial year and type of view/download.
How to make advance income tax payment online?
To make advance tax payment online, follow the steps given below:
Visit the Tax Information Network of the IT dept at https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp
- Click on ‘Proceed’ under the CHALLAN NO./ITNS 280 option.
- Enter the tax applicable, types of payment, mode of payment, PAN, assessment year and other details mentioned in the challan.
- Ensure that once filled-in, you double-check all the data that you have entered.
- You will then be redirected to the bank’s website to complete the payment.
- After completing the payment, you will get a tax receipt on the next screen, on which you can see the payment details.
- You can see the BSR code and challan serial number on the right side of the challan.
- Save a copy of this tax receipt for future reference. You will need to enter the BSR code and challan number in your tax return.
Dhana Vidya - An investor education and literacy initiative by DHANAYOGA | www.dhanayo.ga | www.dhanamar.ga
What is the best time to save and invest money?
What is the best time to save money and invest?
When it comes to saving money and making investment decisions, many of us hold back and attempt to find the best time to invest.
However, in investment parlance, the best time to invest was probably yesterday, while the second-best time is ‘now’.
Warren Buffett, possibly one of the best investors of all time, began investing at the age of 11 and regrets starting late! A wise investor will always start investing early and stay invested for the long term.
However, due to a lack of knowledge and a fear of capital loss, many individuals often delay their investment decisions or invest in suboptimal instruments.
Benefit from the power of compounding
One of the main tenets of wealth creation is starting the investment journey as early as possible. The earlier you start, the more time you give your investments to grow and benefit from the power of compounding.
Compounding is the process by which the capital gains and the interest earned on an investment are regularly added back to the principal amount, so that as time passes, you earn interest not only on your original principal amount, but also on your accumulated interest.
For example, INR 100 invested today at 10% per annum will grow to INR 110 at the end of year 1. Now, in year two you will earn interest on the original principal amount (INR 100) as well as on the interest earned in the first year (INR 10). As the time period increases, the interest earned on accumulated interest will grow exponentially.
Compounding can be the path to your goals
Compounding can play a very important role when you are saving money for long-term goals like retirement planning or even buying a house in the next 8 to 10 years. If you start saving money early, stay invested for the long term and progressively add further (or) top up your investments whenever possible, your money compounds for an extended period of time.
This will ensure that you are able to meet your long-term goals like creating a retirement fund and saving money for making the down payment on a house.
The cost of delay
The longer you stay invested, the greater is the power of compounding. Delaying an investment can cost you dearly in the long-term. Let us compare the investment journey of two investors, Ms. A and Ms. B. Ms. A commenced her investment journey as soon as she started earning and continued investing for the next twenty years.
On the other hand, Ms. B waited a while before starting her investment journey, because of which she could invest only for a period of 15 years. The attached image shows the total returns of Ms. A and Ms. B and highlights the impact of delaying investing by ten years.
Money-saving tips
In the book Rich Dad Poor Dad, the author shares a great money-saving tip. He introduces the concept of paying yourself first.
Typically, most of us allocate our income to expenses first and then to savings. However, the money-saving tip tells us that we must first allocate our income to assets that would generate further income (interest/capital gains), and then spend our money.
By saving first and spending later, we are ensuring that over a period of time, we have the financial means to fulfil our goals.
Based on your risk profile and investment time horizon, you can invest your money across asset classes. For individuals who are just embarking on their investment journey, it might be fine to start with relatively lower risk instruments like Fixed Deposits and Recurring Deposits, and then move to Mutual Funds, followed by equities and commodities.
As the saying goes, time in the market is more important than timing the market. The not-so-magic formula to wealth creation is to start saving money and investing as early as possible.
Dhana Vidya - An Investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga | www.dhanamar.ga (Path to Wealth) | E: enquiry@dhanayo.ga
When it comes to saving money and making investment decisions, many of us hold back and attempt to find the best time to invest.
However, in investment parlance, the best time to invest was probably yesterday, while the second-best time is ‘now’.
Warren Buffett, possibly one of the best investors of all time, began investing at the age of 11 and regrets starting late! A wise investor will always start investing early and stay invested for the long term.
However, due to a lack of knowledge and a fear of capital loss, many individuals often delay their investment decisions or invest in suboptimal instruments.
Benefit from the power of compounding
One of the main tenets of wealth creation is starting the investment journey as early as possible. The earlier you start, the more time you give your investments to grow and benefit from the power of compounding.
Compounding is the process by which the capital gains and the interest earned on an investment are regularly added back to the principal amount, so that as time passes, you earn interest not only on your original principal amount, but also on your accumulated interest.
For example, INR 100 invested today at 10% per annum will grow to INR 110 at the end of year 1. Now, in year two you will earn interest on the original principal amount (INR 100) as well as on the interest earned in the first year (INR 10). As the time period increases, the interest earned on accumulated interest will grow exponentially.
Compounding can be the path to your goals
Compounding can play a very important role when you are saving money for long-term goals like retirement planning or even buying a house in the next 8 to 10 years. If you start saving money early, stay invested for the long term and progressively add further (or) top up your investments whenever possible, your money compounds for an extended period of time.
This will ensure that you are able to meet your long-term goals like creating a retirement fund and saving money for making the down payment on a house.
The cost of delay
The longer you stay invested, the greater is the power of compounding. Delaying an investment can cost you dearly in the long-term. Let us compare the investment journey of two investors, Ms. A and Ms. B. Ms. A commenced her investment journey as soon as she started earning and continued investing for the next twenty years.
On the other hand, Ms. B waited a while before starting her investment journey, because of which she could invest only for a period of 15 years. The attached image shows the total returns of Ms. A and Ms. B and highlights the impact of delaying investing by ten years.
Money-saving tips
In the book Rich Dad Poor Dad, the author shares a great money-saving tip. He introduces the concept of paying yourself first.
Typically, most of us allocate our income to expenses first and then to savings. However, the money-saving tip tells us that we must first allocate our income to assets that would generate further income (interest/capital gains), and then spend our money.
By saving first and spending later, we are ensuring that over a period of time, we have the financial means to fulfil our goals.
Based on your risk profile and investment time horizon, you can invest your money across asset classes. For individuals who are just embarking on their investment journey, it might be fine to start with relatively lower risk instruments like Fixed Deposits and Recurring Deposits, and then move to Mutual Funds, followed by equities and commodities.
As the saying goes, time in the market is more important than timing the market. The not-so-magic formula to wealth creation is to start saving money and investing as early as possible.
Dhana Vidya - An Investor education and awareness initiative by DHANAYOGA | www.dhanayo.ga | www.dhanamar.ga (Path to Wealth) | E: enquiry@dhanayo.ga
The Four Pillars of Investing
Investing is like losing weight
To lose weight, you have to exercise more, eat less and eat right. Simple, but not easy.
To become wealthy, you have to save more, spend less, and invest right. Simple, but not easy.
Presenting the *FOUR pillars of investing*.
Mastery of these pillars can result in a coherent strategy that will enable individuals to accomplish investing’s primary aims: Achieving and maintaining financial independence and sleeping well at night.
A deficiency in any of them will torpedo your investment plan.
Extracted from Peter Bernstein's book The Four Pillars of Investing with inputs from his conversation with Barry Ritholtz and his conversation with Ben Carlson
*Pillar I: Theory*
The most fundamental characteristic of any investment is that its *return and risk go hand in hand*. The correlation between risk and return is almost like the law of gravity in investing. A market that doubles rapidly is just as likely to halve rapidly, and a stock that appreciates 900% is just as likely to fall 90%. Whether you invest in stocks, bonds, or for that matter real estate or any other kind of capital asset, you are rewarded mainly for your exposure to only one thing—risk. Investors must explore the interplay of risk and investment return.
The next thing to grasp is the *theory of diversification* - *how you mix assets*. *Asset allocation is a major driver of portfolio returns*, and *it should be fundamental, even more crucial than asset selection*. There are riskless assets, risky assets and assets you should not be dabbling in – as Tobin’s Separation Theorem alludes to. Junk bonds, for example, are a mistake.
*The biggest risk of all is the failure to diversify properly because it is the behaviour of your portfolio as a whole that matters*. A portfolio can behave in ways radically different than its component parts, and this can be used to your advantage. The science of mixing different asset classes into an effective blend is called "portfolio theory" and occupies centre court in the grand tournament of investing.
*Pillar II: History*
It is a fact that, *from time to time, the markets and investing public go barking mad*. The madness is obvious only in retrospect. But a study of previous manias and crashes will give you at least a fighting chance of recognizing when asset prices have become absurdly expensive and risky and when they have become too depressed and cheap to pass up.
Remember the investors who got suckered into the dot-com mania? Their unappreciation of history came home during the tech bubble of the late 1990s, when people had absolutely no idea that they were living through something that had happened many times before.
There is a script to the movie, and if you read the script, you know how the movie ends. From time to time, the investing public becomes almost psychotically euphoric, and at other times, toxically depressed. Centuries of recorded financial history tell us about the short-term and long-term behaviour of various financial assets.
Finance, is not a "hard science." It is instead a social science. The difference is this: a bridge, electrical circuit, or an aircraft should always respond in exactly the same way to a given set of circumstances. What separates the "hard" sciences of physics, engineering, electronics, or aeronautics from the "social" sciences is that in finance (or sociology, politics, and education) apparently similar systems will behave very differently over time.
Put a different way, a physician, physicist, or chemist who is unaware of their discipline's history does not suffer greatly from the lack thereof; *the investor who is unaware of financial history is irretrievably handicapped*. For this reason, an understanding of financial history provides an additional dimension of expertise. Familiarise yourself with the wondrous clockwork and history of the capital markets. “Those who do not learn from history are doomed to repeat it”.
*Pillar III: Psychology*
Most of what we fondly call "human nature" becomes a deadly quicksand of maladaptive behaviour when allowed to roam free in the investment arena. An example: people tend to be attracted to financial choices that carry low probabilities of high payoffs. In spite of the fact that the average payoff of a lottery ticket is only 50 cents on the dollar, millions "invest" in it. While this is a relatively minor foible for most, it becomes far more menacing as an investment strategy.
One of the *quickest ways to the poorhouse is to make finding the next multi-bagger* your primary investing goal. The individual investor's state of mind affects his or her decision making. Understand behavioural finance to learn how to avoid the most common mistakes and to confront your own dysfunctional investment behaviour.
*Pillar IV: Business*
The business aspects of investing refers to the *people who are selling you the products*. *Investors tend to be almost touchingly naïve about stock brokers, agents and unscrupulous sales driven distributors*. *They are not your friends*. *When a broker calls suggesting that the price of a particular stock will rocket, what he’s really telling you is that he is not overly impressed with your intelligence*.
Otherwise, you would realize that if he actually knew that the price was going to increase, he would not tell it to you or even his own mother. Instead, he would quit his job, borrow to the hilt, purchase as much of the stock as he could, and then go to the beach. Where is the chink in your armour?
The *average investor most often comes to grief because of deficiencies in Pillars I and III*. They usually fail to understand the everyday working relationship between risk and reward and routinely fail to stay the course when things get rough. Of course, this is just a caricature.
The failure modes of individual investors are as varied as their personalities. Introspect to find yours (or) better take the help of a qualified advisor with impeccable integrity to co-partner in your family's financial journey.
An Investor Awareness and Education Initiative from *DHANAYOGA* | *www.dhanayo.ga*
To lose weight, you have to exercise more, eat less and eat right. Simple, but not easy.
To become wealthy, you have to save more, spend less, and invest right. Simple, but not easy.
Presenting the *FOUR pillars of investing*.
Mastery of these pillars can result in a coherent strategy that will enable individuals to accomplish investing’s primary aims: Achieving and maintaining financial independence and sleeping well at night.
A deficiency in any of them will torpedo your investment plan.
Extracted from Peter Bernstein's book The Four Pillars of Investing with inputs from his conversation with Barry Ritholtz and his conversation with Ben Carlson
*Pillar I: Theory*
The most fundamental characteristic of any investment is that its *return and risk go hand in hand*. The correlation between risk and return is almost like the law of gravity in investing. A market that doubles rapidly is just as likely to halve rapidly, and a stock that appreciates 900% is just as likely to fall 90%. Whether you invest in stocks, bonds, or for that matter real estate or any other kind of capital asset, you are rewarded mainly for your exposure to only one thing—risk. Investors must explore the interplay of risk and investment return.
The next thing to grasp is the *theory of diversification* - *how you mix assets*. *Asset allocation is a major driver of portfolio returns*, and *it should be fundamental, even more crucial than asset selection*. There are riskless assets, risky assets and assets you should not be dabbling in – as Tobin’s Separation Theorem alludes to. Junk bonds, for example, are a mistake.
*The biggest risk of all is the failure to diversify properly because it is the behaviour of your portfolio as a whole that matters*. A portfolio can behave in ways radically different than its component parts, and this can be used to your advantage. The science of mixing different asset classes into an effective blend is called "portfolio theory" and occupies centre court in the grand tournament of investing.
*Pillar II: History*
It is a fact that, *from time to time, the markets and investing public go barking mad*. The madness is obvious only in retrospect. But a study of previous manias and crashes will give you at least a fighting chance of recognizing when asset prices have become absurdly expensive and risky and when they have become too depressed and cheap to pass up.
Remember the investors who got suckered into the dot-com mania? Their unappreciation of history came home during the tech bubble of the late 1990s, when people had absolutely no idea that they were living through something that had happened many times before.
There is a script to the movie, and if you read the script, you know how the movie ends. From time to time, the investing public becomes almost psychotically euphoric, and at other times, toxically depressed. Centuries of recorded financial history tell us about the short-term and long-term behaviour of various financial assets.
Finance, is not a "hard science." It is instead a social science. The difference is this: a bridge, electrical circuit, or an aircraft should always respond in exactly the same way to a given set of circumstances. What separates the "hard" sciences of physics, engineering, electronics, or aeronautics from the "social" sciences is that in finance (or sociology, politics, and education) apparently similar systems will behave very differently over time.
Put a different way, a physician, physicist, or chemist who is unaware of their discipline's history does not suffer greatly from the lack thereof; *the investor who is unaware of financial history is irretrievably handicapped*. For this reason, an understanding of financial history provides an additional dimension of expertise. Familiarise yourself with the wondrous clockwork and history of the capital markets. “Those who do not learn from history are doomed to repeat it”.
*Pillar III: Psychology*
Most of what we fondly call "human nature" becomes a deadly quicksand of maladaptive behaviour when allowed to roam free in the investment arena. An example: people tend to be attracted to financial choices that carry low probabilities of high payoffs. In spite of the fact that the average payoff of a lottery ticket is only 50 cents on the dollar, millions "invest" in it. While this is a relatively minor foible for most, it becomes far more menacing as an investment strategy.
One of the *quickest ways to the poorhouse is to make finding the next multi-bagger* your primary investing goal. The individual investor's state of mind affects his or her decision making. Understand behavioural finance to learn how to avoid the most common mistakes and to confront your own dysfunctional investment behaviour.
*Pillar IV: Business*
The business aspects of investing refers to the *people who are selling you the products*. *Investors tend to be almost touchingly naïve about stock brokers, agents and unscrupulous sales driven distributors*. *They are not your friends*. *When a broker calls suggesting that the price of a particular stock will rocket, what he’s really telling you is that he is not overly impressed with your intelligence*.
Otherwise, you would realize that if he actually knew that the price was going to increase, he would not tell it to you or even his own mother. Instead, he would quit his job, borrow to the hilt, purchase as much of the stock as he could, and then go to the beach. Where is the chink in your armour?
The *average investor most often comes to grief because of deficiencies in Pillars I and III*. They usually fail to understand the everyday working relationship between risk and reward and routinely fail to stay the course when things get rough. Of course, this is just a caricature.
The failure modes of individual investors are as varied as their personalities. Introspect to find yours (or) better take the help of a qualified advisor with impeccable integrity to co-partner in your family's financial journey.
An Investor Awareness and Education Initiative from *DHANAYOGA* | *www.dhanayo.ga*
Should we invest some portion of our savings in International Companies?
Yes, and there are three main reasons to consider here...
1. There are not that many innovative companies in India, so if you want to participate in growth of innovative companies like Google and Facebook which are companies of tomorrow, then we have to look beyond our borders. Also, for example, say mobile phones, if you like what you see in that sector or specific company, such as Apple or Samsung, we have to go outside the country because none of them are listed in India, similarly, Google, Facebook, and so on.
2. These global companies are ones that we are very familiar with, we also see how these companies are part of our every day life and continue to be so and we use them in some way or the other. For example, Facebook has Social Media app. It's got WhatsApp, and it's got Instagram and I'm sure everyone knows about these products and we and most other people use these apps almost daily. And also we know how these companies are growing and they're growing at a phenomenal rate. So that's another reason to participate is with the familiarity with the brand, and because of the usage that we are doing on these with these companies.
Thirdly, These are available at very good discounted prices right now i.e, they are they're priced very well, so we're not buying into that expensive valuation currently and it provides a good opportunity to participate in such companies
How can one invest in International companies?
There are three predominant ways to invest in companies abroad.
1. One can open a foreign brokerage account and remit money there. As a Resident Indian one is allowed 250,000 US dollars to remit outside India each year. So one can use that facility and open a brokerage account and buy and sell such companies. Unless you have International currency funds to invest or working in a tax beneficial jurisdiction, we would not advise retail investors to do that, because one will be taxed on every buy and sell transaction. Also there's incidence of inheritance tax in case the first holder passes away. Then, the entire portfolio is taxed at 40% so the American Government will take over 40% of your portfolio. Besides, there can be operational challenges for retail investor say someone who is on a day job, time zone difference, real time news breaks impacting prices, efforts to keep track of portfolio separately and so on. Perhaps one can work with an advisor to invest directly, if one wishes so.
The second way is to invest in a foreign feeder fund. Some of these are available, some of them invest in China, America, Europe, Asia Pacific, ASEAN and Emerging markets (Russia, Brazil, South Africa etc) as well, but they get taxed as a debt fund, where three years is long term, and below three years in short term. In long term, one is taxed at 20% of the indexed capital gain and for period below three years, one is taxed at one's personal income taxes slab.
Thirdly, invest in an Indian equity mutual fund, that deploys part of its money i.e up to 35% in International companies and markets. The benefit of this is that it will be taxed just like an Indian equity mutual fund so long term is more than one year and short term is less than one year, For more than one year, investor is taxed at @10% of gains and less than one year is taxed @15%. So it's similar to any other Indian equity fund.. You will be only taxed when you redeem and not for every transaction (as in the case of investing directly) as the mutual fund through which the investment happens is a pass thru entity.
So the second (or) third option is better for retail investors.
How can investor benefit from Geographical diversification?
There are quite a few benefits to invest beyond our borders.
Primarily, you are not taking country specific risk. For example, if India goes into war with a neighbour (or) prices and inflation rise due to Crude OIl price rise (or) there is political turmoil (or) if the country goes into an economic slowdown, the portfolio will suffer badly and underperform. But having some money invested outside the country will protect you from that risk and that part of the portfolio may not get affected much, hence it balances the portfolio and reduces volatility in the portfolio thereby enables more consistent returns.
Secondly, we don't get globally present and innovative companies in India to invest. To get such innovative companies like an apple Amazon Facebook, Google, we have to look beyond our borders. Such companies will continue to do well, because internet penetration is increasing in India and globally and will increase further in next 10 years and these companies are ones that will hugely benefit. Today there is huge growth in smart phones and next five years 10 years down the line, we think the amount of smartphones will be extensively used globally than what it is today. And the companies and benefits are the ones who are in this business such as Samsung or Apple or Chinese phone giants and software and service companies like Google, Amazon, Facebook etc.
For these companies, we have no close equivalents in India, hence we can participate in them abroad, as they keep innovating the new age technology companies which will do well in the future.
Another reason to consider is "valuation arbitrage". For eg., there is Nestle India which is operating in India, but its global parent is a Swiss Company. So sometimes what we see is that the parent company is available at a much cheaper valuation than the Indian company. So it makes sense to participate in the global parent company than the Indian company. Also there is a case of the royalty payments by the Indian company (and other country subsidiaries) to the parent company. So, when we are holding the parent company, a lot of this money comes to the parent company and it makes sense to own the foreign parent that the Indian listed subsidiary from a valuation perspective.
And as a bonus, we have been seeing the Indian rupee depreciate @3% to 4% per year over the long term, so an Investment of $1000 today (= Rs. 70,000), has scope to generate 3% to 4% depreciation enabled return, even without any change in International investment portfolio. So if rupee depreciates by 10% in 3 years, the same $1000 just because of depreciation will be worth Rs. 77,000 and one additionally earns International investment portfolio appreciation on top of this tailwind gain.
These are the key reasons why we think owning international stocks is beneficial to the investor.
Hence we recommend investing 10% to 15% of one's portfolio in International companies.
Speak to us today for guidance (or) register your interest to invest in international companies at https://www.dhanayo.ga/contact.html
An investor education initiative by DHANAYOGA
Share this article by clicking on one or more social icons on the right border (or) bottom border of this web page
1. There are not that many innovative companies in India, so if you want to participate in growth of innovative companies like Google and Facebook which are companies of tomorrow, then we have to look beyond our borders. Also, for example, say mobile phones, if you like what you see in that sector or specific company, such as Apple or Samsung, we have to go outside the country because none of them are listed in India, similarly, Google, Facebook, and so on.
2. These global companies are ones that we are very familiar with, we also see how these companies are part of our every day life and continue to be so and we use them in some way or the other. For example, Facebook has Social Media app. It's got WhatsApp, and it's got Instagram and I'm sure everyone knows about these products and we and most other people use these apps almost daily. And also we know how these companies are growing and they're growing at a phenomenal rate. So that's another reason to participate is with the familiarity with the brand, and because of the usage that we are doing on these with these companies.
Thirdly, These are available at very good discounted prices right now i.e, they are they're priced very well, so we're not buying into that expensive valuation currently and it provides a good opportunity to participate in such companies
How can one invest in International companies?
There are three predominant ways to invest in companies abroad.
1. One can open a foreign brokerage account and remit money there. As a Resident Indian one is allowed 250,000 US dollars to remit outside India each year. So one can use that facility and open a brokerage account and buy and sell such companies. Unless you have International currency funds to invest or working in a tax beneficial jurisdiction, we would not advise retail investors to do that, because one will be taxed on every buy and sell transaction. Also there's incidence of inheritance tax in case the first holder passes away. Then, the entire portfolio is taxed at 40% so the American Government will take over 40% of your portfolio. Besides, there can be operational challenges for retail investor say someone who is on a day job, time zone difference, real time news breaks impacting prices, efforts to keep track of portfolio separately and so on. Perhaps one can work with an advisor to invest directly, if one wishes so.
The second way is to invest in a foreign feeder fund. Some of these are available, some of them invest in China, America, Europe, Asia Pacific, ASEAN and Emerging markets (Russia, Brazil, South Africa etc) as well, but they get taxed as a debt fund, where three years is long term, and below three years in short term. In long term, one is taxed at 20% of the indexed capital gain and for period below three years, one is taxed at one's personal income taxes slab.
Thirdly, invest in an Indian equity mutual fund, that deploys part of its money i.e up to 35% in International companies and markets. The benefit of this is that it will be taxed just like an Indian equity mutual fund so long term is more than one year and short term is less than one year, For more than one year, investor is taxed at @10% of gains and less than one year is taxed @15%. So it's similar to any other Indian equity fund.. You will be only taxed when you redeem and not for every transaction (as in the case of investing directly) as the mutual fund through which the investment happens is a pass thru entity.
So the second (or) third option is better for retail investors.
How can investor benefit from Geographical diversification?
There are quite a few benefits to invest beyond our borders.
Primarily, you are not taking country specific risk. For example, if India goes into war with a neighbour (or) prices and inflation rise due to Crude OIl price rise (or) there is political turmoil (or) if the country goes into an economic slowdown, the portfolio will suffer badly and underperform. But having some money invested outside the country will protect you from that risk and that part of the portfolio may not get affected much, hence it balances the portfolio and reduces volatility in the portfolio thereby enables more consistent returns.
Secondly, we don't get globally present and innovative companies in India to invest. To get such innovative companies like an apple Amazon Facebook, Google, we have to look beyond our borders. Such companies will continue to do well, because internet penetration is increasing in India and globally and will increase further in next 10 years and these companies are ones that will hugely benefit. Today there is huge growth in smart phones and next five years 10 years down the line, we think the amount of smartphones will be extensively used globally than what it is today. And the companies and benefits are the ones who are in this business such as Samsung or Apple or Chinese phone giants and software and service companies like Google, Amazon, Facebook etc.
For these companies, we have no close equivalents in India, hence we can participate in them abroad, as they keep innovating the new age technology companies which will do well in the future.
Another reason to consider is "valuation arbitrage". For eg., there is Nestle India which is operating in India, but its global parent is a Swiss Company. So sometimes what we see is that the parent company is available at a much cheaper valuation than the Indian company. So it makes sense to participate in the global parent company than the Indian company. Also there is a case of the royalty payments by the Indian company (and other country subsidiaries) to the parent company. So, when we are holding the parent company, a lot of this money comes to the parent company and it makes sense to own the foreign parent that the Indian listed subsidiary from a valuation perspective.
And as a bonus, we have been seeing the Indian rupee depreciate @3% to 4% per year over the long term, so an Investment of $1000 today (= Rs. 70,000), has scope to generate 3% to 4% depreciation enabled return, even without any change in International investment portfolio. So if rupee depreciates by 10% in 3 years, the same $1000 just because of depreciation will be worth Rs. 77,000 and one additionally earns International investment portfolio appreciation on top of this tailwind gain.
These are the key reasons why we think owning international stocks is beneficial to the investor.
Hence we recommend investing 10% to 15% of one's portfolio in International companies.
Speak to us today for guidance (or) register your interest to invest in international companies at https://www.dhanayo.ga/contact.html
An investor education initiative by DHANAYOGA
Share this article by clicking on one or more social icons on the right border (or) bottom border of this web page
How can you benefit from upcoming Interest rate reduction?
In the upcoming Monetary Policy meeting scheduled for first week of June 2019 it is expected that RBI will cut (reduce) interest rates by at least 0.25%. Some experts even say it could be cut by 0.50%.
With Inflation rates prevailing much below 4% (the upper limit of RBI target inflation band), the case for aggresive interest rate reduction is quite strong.
When interest rates reduce, as a consumer you can benefit because loan products (home, durable, vehicle loans etc) are likely to get cheaper.
But, as an investor / saver / retired person dependent on monthly interest income, you get hit badly. How do you protect yourself against lower interest rates and actually even benefit from it?
There is a category of investments called Gilt Funds in which one can invest and insulate against effect of drop in interest rates. Gilt funds invest only in Govt of India (GOI) issued and guaranteed bonds and are of two types, "Short term" and "Medium to Long term".
Short term Gilt funds invest in GOI bonds of less than 1 year maturity tenure, whereas Medium to Long term Gilt funds invest in GOI bonds from "2 yrs to 30 years" maturity tenure.
Gilt Funds have been very consistent and superior in delivering returns when compared to FD and similar schemes. See 1/3/5 year long term and short term (1/3 mths) returns in screenshot attached.
When one invests part of their income generation or fixed return portfolio in Gilt Funds, one gets FOUR major benefits.
1. Gilts are "SUPER SAFE" as the payment of principal and interest is guaranteed by the Govt of India (this is called sovereign guarantee). This is the highest credit rating possible for debt securities (even better than Bank deposits).
2. Gilt Funds GAIN in VALUE when interest rates are reduced by RBI. This is a huge advantage to investors. It essentially means, in addition to the interest received, your principal also appreciates. Principal appreciation is never possible in case of Fixed deposits / Postal savings / Senior citizen or other similar deposits, whether you are drawing income or accumulating interest. Besides when existing FDs mature, you run the risk of investing at lower interest rates, hence earning lesser return on investment. Gilt Funds hence insulate you from Interest rate reduction risk, as well as enhancing returns via Principal appreciation!!
3. Any time Liquidity - Most Gilt funds provide anytime liquidity so if you need to withdraw some money a few months d9wn the line, one can redeem the investment without any tax deduction at source or any penalties. This means there is NO Lock-in unlike FD or other deposit schemes where premature withdrawals is either not permitted or a penalty may be levied or reduced interest paid.
4. HIghly TAX Efficient - Withdrawal of income from GILT funds can be structured so that you pay very low tax, even if you happen to fall in the highest tax bracket of 30%. For those in lower or zero tax bracket, the tax liability is zero to negligible (reduces by 75% to 90% vs. FD or other interest earning schemes). Also one need not have to submit Form 15H etc.
Gilt Funds hence are a great way to derisk and enhance returns from your Fixed Income Portfolio as they provide FOUR major benefits over other types of fixed deposits schemes namely:
1. 100% Safety (Sovereign Guarantee)
2. Principal Appreciation (in addition to interest income)
3. Anytime withdrawal facility and liquidity
4. Highly Tax efficient.
As India moves from a "developing" economy to a "developed" economy status, further more reduction in interest rates is bound to happen in the years ahead. So, investing part of one's Fixed Income allocation in a properly constructed Gilt Funds portfolio is a wise decision.
To learn more, discuss queries and to invest in GILT funds, get in touch with us at DHANAYOGA | enquiry@dhanayo.ga | www.dhanayo.ga
With Inflation rates prevailing much below 4% (the upper limit of RBI target inflation band), the case for aggresive interest rate reduction is quite strong.
When interest rates reduce, as a consumer you can benefit because loan products (home, durable, vehicle loans etc) are likely to get cheaper.
But, as an investor / saver / retired person dependent on monthly interest income, you get hit badly. How do you protect yourself against lower interest rates and actually even benefit from it?
There is a category of investments called Gilt Funds in which one can invest and insulate against effect of drop in interest rates. Gilt funds invest only in Govt of India (GOI) issued and guaranteed bonds and are of two types, "Short term" and "Medium to Long term".
Short term Gilt funds invest in GOI bonds of less than 1 year maturity tenure, whereas Medium to Long term Gilt funds invest in GOI bonds from "2 yrs to 30 years" maturity tenure.
Gilt Funds have been very consistent and superior in delivering returns when compared to FD and similar schemes. See 1/3/5 year long term and short term (1/3 mths) returns in screenshot attached.
When one invests part of their income generation or fixed return portfolio in Gilt Funds, one gets FOUR major benefits.
1. Gilts are "SUPER SAFE" as the payment of principal and interest is guaranteed by the Govt of India (this is called sovereign guarantee). This is the highest credit rating possible for debt securities (even better than Bank deposits).
2. Gilt Funds GAIN in VALUE when interest rates are reduced by RBI. This is a huge advantage to investors. It essentially means, in addition to the interest received, your principal also appreciates. Principal appreciation is never possible in case of Fixed deposits / Postal savings / Senior citizen or other similar deposits, whether you are drawing income or accumulating interest. Besides when existing FDs mature, you run the risk of investing at lower interest rates, hence earning lesser return on investment. Gilt Funds hence insulate you from Interest rate reduction risk, as well as enhancing returns via Principal appreciation!!
3. Any time Liquidity - Most Gilt funds provide anytime liquidity so if you need to withdraw some money a few months d9wn the line, one can redeem the investment without any tax deduction at source or any penalties. This means there is NO Lock-in unlike FD or other deposit schemes where premature withdrawals is either not permitted or a penalty may be levied or reduced interest paid.
4. HIghly TAX Efficient - Withdrawal of income from GILT funds can be structured so that you pay very low tax, even if you happen to fall in the highest tax bracket of 30%. For those in lower or zero tax bracket, the tax liability is zero to negligible (reduces by 75% to 90% vs. FD or other interest earning schemes). Also one need not have to submit Form 15H etc.
Gilt Funds hence are a great way to derisk and enhance returns from your Fixed Income Portfolio as they provide FOUR major benefits over other types of fixed deposits schemes namely:
1. 100% Safety (Sovereign Guarantee)
2. Principal Appreciation (in addition to interest income)
3. Anytime withdrawal facility and liquidity
4. Highly Tax efficient.
As India moves from a "developing" economy to a "developed" economy status, further more reduction in interest rates is bound to happen in the years ahead. So, investing part of one's Fixed Income allocation in a properly constructed Gilt Funds portfolio is a wise decision.
To learn more, discuss queries and to invest in GILT funds, get in touch with us at DHANAYOGA | enquiry@dhanayo.ga | www.dhanayo.ga
Resolving your grievances with Financial Institutions
Citizens, bank customers and Investors should understand more about Banking Ombudsman Grievance Resolution mechanism established by RBI so they can get fair redressal on banking service deficiency issues, in case their complaint thru regular banking customer service channels in not resolved satisfactorily.
Refer Section "Exemplary Cases dealt with by BO offices" for illustrative cases
Link:
https://m.rbi.org.in//Scripts/PublicationsView.aspx?id=18948
Refer Section "Exemplary Cases dealt with by BO offices" for illustrative cases
Link:
https://m.rbi.org.in//Scripts/PublicationsView.aspx?id=18948
How many types of Mutual Funds are there
Many investors think that Mutual Funds means only Equity Funds that invest in shares of listed companies.
SEBI, the regulatory body for MFs has defined and published clear list of a wide range of Mutual Fund categories and it is desirable for investors to know what they are and in what types of securities the investments are done by each category of Mutual Fund.
For more details, check out the enclosed link https://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Considering a Home Loan - Remember these points
Taking a Home Loan is one of the big decision in one's life. While doing so, it is important to understand the various charges and fees and terms and conditions involved so that you can get a good deal that avoids later problems.
The aspects to consider are:
Loan Amount: What % of the Property Value will be funded by the bank or housing finance company. What multiple of one's monthly income will be the loan sanctioned amount?. Higher the better.
Interest rate: Whether Fixed or Variable. If the economy is close to the bottom of the interest rate cycle (as it is now, with interest rates having dropped significantly with scope for further reduction being limited), it makes sense to opt for Fixed Rate. Else go for Variable rate
Loan Rest Period: One giving daily rest is the best choice. Other Options are Monthly, Quarterly and Yearly
EMI (per Rs. 1Lac): While lenders attractively communicate interest rates like "Reduced Interest" etc the proof of the pudding is in how much EMI you will pay each month. This is THE MOST important number to compare across lenders. Lower the better.
Processing Fee: This will be a % of the Loan Amount or a certain min / max fixed fee or combination of both. Lower the better.
Other expenses: For obtaining TIR/Valuation Report/CERSAI Registration, etc.
If lender is offering Processing fee waiver till a certain time period, you can benefit from it.
Pre-sanction Charges: Advocate's fee for property search and title investigation report.
Valuer's fee for valuation report.
Post-sanction Fees: Stamp duty payable for Loan agreement & mortgage and Property insurance premium. Choose an insurer who offers low premium, instead of always going with the lender recommended group company as the only option.
Foreclosure / Prepayment penalty: in case you decide to make pre oayment or close out the loan earlier or switch after a few years to another lender for better terms, just make sure if there are any penalties or charges or waiting period applicable.
Hidden Charges: Always ask for full fee or tariff list so you are sure there are no hidden charges expectrd to be paid in cash or pushed upon you at the last minute with no choice.
Client reference: Being a major decision, it is also advisable to talk 2-3 clients of the lender who have availed such loans to check for transparency, quality, speed and professionalism of services rendered so that you are spared the burden of running after the lender later and get disappointed. After all, real customer feedback is 100 times more valuable to help in right decision, than all the glitzy collateral, advertising, promotion and sweet talk by the service provider who has a huge vested interest in the deal.
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
The aspects to consider are:
Loan Amount: What % of the Property Value will be funded by the bank or housing finance company. What multiple of one's monthly income will be the loan sanctioned amount?. Higher the better.
Interest rate: Whether Fixed or Variable. If the economy is close to the bottom of the interest rate cycle (as it is now, with interest rates having dropped significantly with scope for further reduction being limited), it makes sense to opt for Fixed Rate. Else go for Variable rate
Loan Rest Period: One giving daily rest is the best choice. Other Options are Monthly, Quarterly and Yearly
EMI (per Rs. 1Lac): While lenders attractively communicate interest rates like "Reduced Interest" etc the proof of the pudding is in how much EMI you will pay each month. This is THE MOST important number to compare across lenders. Lower the better.
Processing Fee: This will be a % of the Loan Amount or a certain min / max fixed fee or combination of both. Lower the better.
Other expenses: For obtaining TIR/Valuation Report/CERSAI Registration, etc.
If lender is offering Processing fee waiver till a certain time period, you can benefit from it.
Pre-sanction Charges: Advocate's fee for property search and title investigation report.
Valuer's fee for valuation report.
Post-sanction Fees: Stamp duty payable for Loan agreement & mortgage and Property insurance premium. Choose an insurer who offers low premium, instead of always going with the lender recommended group company as the only option.
Foreclosure / Prepayment penalty: in case you decide to make pre oayment or close out the loan earlier or switch after a few years to another lender for better terms, just make sure if there are any penalties or charges or waiting period applicable.
Hidden Charges: Always ask for full fee or tariff list so you are sure there are no hidden charges expectrd to be paid in cash or pushed upon you at the last minute with no choice.
Client reference: Being a major decision, it is also advisable to talk 2-3 clients of the lender who have availed such loans to check for transparency, quality, speed and professionalism of services rendered so that you are spared the burden of running after the lender later and get disappointed. After all, real customer feedback is 100 times more valuable to help in right decision, than all the glitzy collateral, advertising, promotion and sweet talk by the service provider who has a huge vested interest in the deal.
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
What questions should you ask a person offering to sell you investments?
What questions should you ask a person offering to sell you investments?
1. Are you registered with the respective regulatory Authority of the country and/or state? (see list below)
(If “yes,” check the regulator website to confirm that the person / entity is registered to sell investments / securities in your country / state)
2. Is the product registered as a security for sale in the country or state?
3. Has a client ever filed a complaint against you? If so, how was it resolved?
4. Can you provide me with a prospectus with all the details, costs and risks of the investment?
5. Is this investment guaranteed? (Most are not. Investing in securities involves risk.)
6. Is this investment traded on a regulated exchange?
7. What are the ongoing commissions and fees that you and your company will make on the investment?
8. Can I withdraw my money at any time? If not, how much will it cost to get my money out of the investment?
9. How much money have you invested personally in this deal / security / investment?
10. Will you please call my stockbroker (or banker, lawyer, or trusted financial adviser) with the same deal so I can ask them for another opinion?
11. How long will I have to decide whether to invest? Are there circumstances under which I would have to make up my mind immediately?
12. May I see a sample account statement, and can you explain it to me clearly?
List of Regulatory / Statutory Authorities (India)
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
1. Are you registered with the respective regulatory Authority of the country and/or state? (see list below)
(If “yes,” check the regulator website to confirm that the person / entity is registered to sell investments / securities in your country / state)
2. Is the product registered as a security for sale in the country or state?
3. Has a client ever filed a complaint against you? If so, how was it resolved?
4. Can you provide me with a prospectus with all the details, costs and risks of the investment?
5. Is this investment guaranteed? (Most are not. Investing in securities involves risk.)
6. Is this investment traded on a regulated exchange?
7. What are the ongoing commissions and fees that you and your company will make on the investment?
8. Can I withdraw my money at any time? If not, how much will it cost to get my money out of the investment?
9. How much money have you invested personally in this deal / security / investment?
10. Will you please call my stockbroker (or banker, lawyer, or trusted financial adviser) with the same deal so I can ask them for another opinion?
11. How long will I have to decide whether to invest? Are there circumstances under which I would have to make up my mind immediately?
12. May I see a sample account statement, and can you explain it to me clearly?
List of Regulatory / Statutory Authorities (India)
- Banks / NBFCs / Asset Fin. / Infra Fin. / ARCs / P2P / Fin. Institutions - www.rbi.org.in
- Insurance - www.irdai.gov.in
- Mutual Funds - www.sebi.gov.in, www.amfiindia.com
- Stocks/Futures/Options/Bonds - www.sebi.gov.in, www.bseindia.com, www.nseindia.com
- Commodities/Metals - www.sebi.gov.in, www.mcxindia.com, www.ncdex.com
- Pension / NPS / Annuity - www.pfrda.org.in
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
How 5% increment can add Rs. 18 Lakhs to your wealth!!
Systematic Investment Plan (SIP) is a well known approach to save, invest in mutual funds to create long term wealth.
Many clients who start SIP with an initial monthly contribution when they are young, just maintain the same amount thru the years.
While this is definitely a good sign, if one can increase SIP just by 5% year on year, the wealth created over the long term can be quite substantial.
For e.g., see illustration in image.
- Initial SIP per month: Rs. 5000
- Duration: 20 years (240 months)
- %increase in SIP year on year: 5%
- Rate of return p.a: 12% p.a (equity funds)
The image on left shows the final corpus realised (Rs. 46L) by keeping same SIP p.m kept constant all through.
The image on right shows final corpus realised (Rs. 63.7 L) when SIP p.m is increased just by 5% year on year.
The additional corpus of Rs. 17.7 L (i.e., 38% more!!) happens with just 5% YoY increase.
Build the habit of "STEP up SIP" contribution by atleast 5% every year and watch the magic of wealth creation!!.
After all when one's salary and spending increases year on year, it is also advisable to increase the SIP amount every year!
This can be automatically provisioned right at the time of starting your SIP itself so there is no need to remember or keep track to STEP UP every year!!
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Many clients who start SIP with an initial monthly contribution when they are young, just maintain the same amount thru the years.
While this is definitely a good sign, if one can increase SIP just by 5% year on year, the wealth created over the long term can be quite substantial.
For e.g., see illustration in image.
- Initial SIP per month: Rs. 5000
- Duration: 20 years (240 months)
- %increase in SIP year on year: 5%
- Rate of return p.a: 12% p.a (equity funds)
The image on left shows the final corpus realised (Rs. 46L) by keeping same SIP p.m kept constant all through.
The image on right shows final corpus realised (Rs. 63.7 L) when SIP p.m is increased just by 5% year on year.
The additional corpus of Rs. 17.7 L (i.e., 38% more!!) happens with just 5% YoY increase.
Build the habit of "STEP up SIP" contribution by atleast 5% every year and watch the magic of wealth creation!!.
After all when one's salary and spending increases year on year, it is also advisable to increase the SIP amount every year!
This can be automatically provisioned right at the time of starting your SIP itself so there is no need to remember or keep track to STEP UP every year!!
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
How the INR depreciation will impact one's expense and investments?
INR depreciation against the benchmark currency USD can have the following impact on the debt and equity markets and personal financial decisions, as below
Rupee depreciation
- Increases the cost of Crude oil purchases for the Govt hence increases fiscal deficit (Govt's Income vs. Expense gap).
- This results in higher borrowing by Govt to bridge the gap hence increas in interest rates by 0.25% to 0.5% is expected in the short to medium term (3m to 12m).
- Imported products will become expensive (read Petrol / Diesel) leading to inflation across the board on daily essentials (food, grocery, transport etc.,) hence savings could come down, if expenses are not optimized
- Demand for Rate sensitive sectors like real estate, high value durables may be partially affected
Action (Expense side)
- Reduce your debt (EMIs) via pre payment before rates increase.
- Review your expense pattern to optimize and maintain savings
- If making big ticket purchases via loan / credit, take advantage of current rates and lock-in
Actions (Investment side)
- Invest in short to medium term deposits or debt funds (30d to 1 yr duration)
- Diversify part of your fixed income investing into Alternative assets which benefit from interest rate hike (returns 10% to 11% p.a) (www.dhanayo.ga/aip.html)
- Invest in portfolios of contrarian funds as these have accumulated undervalued export oriented stocks in Pharma, IT, Business Services, Healthcare, Textiles, Footwear and Agri-export over last 1 year. They will now start performing better.
- Invest only thru SIP or STP in equity or hybrid funds. If investing lumpsum, stay with Liquid or Asset allocation funds. Avoid long term debt funds and import sector thematic funds. (www.dhanayo.ga/invest.html)
Need professional guidance? Welcome to reach us at DHANAYOGA | www.dhanayo.ga
Rupee depreciation
- Increases the cost of Crude oil purchases for the Govt hence increases fiscal deficit (Govt's Income vs. Expense gap).
- This results in higher borrowing by Govt to bridge the gap hence increas in interest rates by 0.25% to 0.5% is expected in the short to medium term (3m to 12m).
- Imported products will become expensive (read Petrol / Diesel) leading to inflation across the board on daily essentials (food, grocery, transport etc.,) hence savings could come down, if expenses are not optimized
- Demand for Rate sensitive sectors like real estate, high value durables may be partially affected
Action (Expense side)
- Reduce your debt (EMIs) via pre payment before rates increase.
- Review your expense pattern to optimize and maintain savings
- If making big ticket purchases via loan / credit, take advantage of current rates and lock-in
Actions (Investment side)
- Invest in short to medium term deposits or debt funds (30d to 1 yr duration)
- Diversify part of your fixed income investing into Alternative assets which benefit from interest rate hike (returns 10% to 11% p.a) (www.dhanayo.ga/aip.html)
- Invest in portfolios of contrarian funds as these have accumulated undervalued export oriented stocks in Pharma, IT, Business Services, Healthcare, Textiles, Footwear and Agri-export over last 1 year. They will now start performing better.
- Invest only thru SIP or STP in equity or hybrid funds. If investing lumpsum, stay with Liquid or Asset allocation funds. Avoid long term debt funds and import sector thematic funds. (www.dhanayo.ga/invest.html)
Need professional guidance? Welcome to reach us at DHANAYOGA | www.dhanayo.ga
Which is Better for regular Monthly Income - Fixed Deposit (FD) or Mutual Fund with Systematic Withdrawal Plan (SWP)?
Senior Citizens, people transitioning to own Business, parents making monthly transfer for kid's study (or) Resident/Non-resident indians supporting elderly parents with monthly payments all need regular monthly cash flow.
Very often, they invest a lumpsum amount into Fixed Deposit (FD) in a Bank, Postal MIS scheme (or) Corporate FD and set up a monthly interest payout to credit into their bank a/c.
While this approach is fine, it has adverse implications from taxation, net returns and flexibility points of view.
In particular, let's address challenges faced by Senior citizens in this article. The scenario also applies to a good extent to other categories of investors indicated above.
In the recent budget, the government has permitted Senior Citizens to earn upto Rs. 50,000 interest p.a without Tax.
Still many Senior Citizens (typically >= 60 and <= 80 yrs of age) have been facing following challenges
1. The interest earned from FDs may be inadeqaute to take care of monthly expenses (either because insufficient retirement corpus (or) low Interest rates (or) both)
2. One time payment of Bonus to retired staff arising out of Staff Selection Pay Commission decision (e.g, Central Govt, Defence and some PSUs). This inflow takes total income beyond Min. Tax slab, hence tax liable
3. FDs pay fixed interest - Say if person requires only Rs. 8000 p.m, FD monthly interest inflow could be higher due to higher corpus. The balance amount stays idle in Savings a/c (or) gets redployed into new FDs which increase taxable income
4. Interest rate risk - FDs originally invested at higher rates when come up for renewal, earn lower interest due to prevailing interest rate scenario
5. Redeeming FDs due to contingency needs midway leads to loss of interest and disruption of cash flows
A very effective way to address the above challenges is to consider investing in a right portfolio of Mutual Funds and set up Systematic Withdrawal Plan (SWP) on monthly basis.
This route has multiple benefits namely,
1. Significantly REDUCES TAXES (if FDs interest is taxed at 10%, with MF-SWP route investor pays ~ 0.5% p.a ta, due to MFs treatment as Capital appreciation, not as Interest income
2. Mutual funds provide 100% ease and flexibility of liquidity. If one has to withdraw a contingency amount anytime, it can be done without incurring reduced interest rate penalty
3. One can setup SWP for specific amount depending on need and let the balance amount to appreciate. Say if Mutual funds deliver 11% p.a, one can just withdraw 8% to 9% p.a and allow balance 2% to 3% to appreciate.
4. While FD the principal amount remains the same (and paid back at end of tenure), in Mutual Funds, the Principal amount too has the scope to appreciate handsomely in the longer term, after setting off all monthly withdrawals.
5. One can increase or decrease the SWP amount as one wishes, which is not possible in FD due to fixed interest amount
6. Interest rate risk is minimized as MFs invest in newer Debt Securities on ongoing basis and manage "interest rate risk" by professional management strategies.
7. If one invests in lower rate FDs and if interest rates go up, one loses opportunity to earn higher interest, whereas mutual funds immediately align to changes in Interest rates regime and NAV reflects it daily.
8. NRIs face limitations to invest in Corporate FD and Postal Savings a/c via NRE Account (repatriable). Besides the interest rate on Bank FDs is also going down. MFs provide a good alternative and one can set up SWP to meet needs of parents living in India
There are many more benefits that we will leave for later articles..
The key is to select the right portfolio of mutual funds aligned with one's income cash flow requirements, time horizon and tax category, so that the investor can get TRIPLE benefit of Better Tax adjusted Returns, Great Flexibility and Principal appreciation too!!
You can try out how FDs compare with MF-SWP for monthly income needs via this link. - Click here
Enter Initial Investment Amount (Rs.) and FD interest rate % in Cells shown in Yellow and see bottom of worksheet for summary insights.
If you are not a Senior Citizen, please share this article and help a Senior Citizen in your family or contact circle to know and benefit.
For professional guidance and advice on how you can structure Monthly Income for the family, reach us at www.dhanayo.ga
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Very often, they invest a lumpsum amount into Fixed Deposit (FD) in a Bank, Postal MIS scheme (or) Corporate FD and set up a monthly interest payout to credit into their bank a/c.
While this approach is fine, it has adverse implications from taxation, net returns and flexibility points of view.
In particular, let's address challenges faced by Senior citizens in this article. The scenario also applies to a good extent to other categories of investors indicated above.
In the recent budget, the government has permitted Senior Citizens to earn upto Rs. 50,000 interest p.a without Tax.
Still many Senior Citizens (typically >= 60 and <= 80 yrs of age) have been facing following challenges
1. The interest earned from FDs may be inadeqaute to take care of monthly expenses (either because insufficient retirement corpus (or) low Interest rates (or) both)
2. One time payment of Bonus to retired staff arising out of Staff Selection Pay Commission decision (e.g, Central Govt, Defence and some PSUs). This inflow takes total income beyond Min. Tax slab, hence tax liable
3. FDs pay fixed interest - Say if person requires only Rs. 8000 p.m, FD monthly interest inflow could be higher due to higher corpus. The balance amount stays idle in Savings a/c (or) gets redployed into new FDs which increase taxable income
4. Interest rate risk - FDs originally invested at higher rates when come up for renewal, earn lower interest due to prevailing interest rate scenario
5. Redeeming FDs due to contingency needs midway leads to loss of interest and disruption of cash flows
A very effective way to address the above challenges is to consider investing in a right portfolio of Mutual Funds and set up Systematic Withdrawal Plan (SWP) on monthly basis.
This route has multiple benefits namely,
1. Significantly REDUCES TAXES (if FDs interest is taxed at 10%, with MF-SWP route investor pays ~ 0.5% p.a ta, due to MFs treatment as Capital appreciation, not as Interest income
2. Mutual funds provide 100% ease and flexibility of liquidity. If one has to withdraw a contingency amount anytime, it can be done without incurring reduced interest rate penalty
3. One can setup SWP for specific amount depending on need and let the balance amount to appreciate. Say if Mutual funds deliver 11% p.a, one can just withdraw 8% to 9% p.a and allow balance 2% to 3% to appreciate.
4. While FD the principal amount remains the same (and paid back at end of tenure), in Mutual Funds, the Principal amount too has the scope to appreciate handsomely in the longer term, after setting off all monthly withdrawals.
5. One can increase or decrease the SWP amount as one wishes, which is not possible in FD due to fixed interest amount
6. Interest rate risk is minimized as MFs invest in newer Debt Securities on ongoing basis and manage "interest rate risk" by professional management strategies.
7. If one invests in lower rate FDs and if interest rates go up, one loses opportunity to earn higher interest, whereas mutual funds immediately align to changes in Interest rates regime and NAV reflects it daily.
8. NRIs face limitations to invest in Corporate FD and Postal Savings a/c via NRE Account (repatriable). Besides the interest rate on Bank FDs is also going down. MFs provide a good alternative and one can set up SWP to meet needs of parents living in India
There are many more benefits that we will leave for later articles..
The key is to select the right portfolio of mutual funds aligned with one's income cash flow requirements, time horizon and tax category, so that the investor can get TRIPLE benefit of Better Tax adjusted Returns, Great Flexibility and Principal appreciation too!!
You can try out how FDs compare with MF-SWP for monthly income needs via this link. - Click here
Enter Initial Investment Amount (Rs.) and FD interest rate % in Cells shown in Yellow and see bottom of worksheet for summary insights.
If you are not a Senior Citizen, please share this article and help a Senior Citizen in your family or contact circle to know and benefit.
For professional guidance and advice on how you can structure Monthly Income for the family, reach us at www.dhanayo.ga
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
The perfect recipe for valuations
Known worldwide as an authority on valuation, Aswath Damodaran tells us what it takes to value a business
When you are fighting for a chair in an overpacked auditorium on a Sunday evening to listen to a talk on stock valuation, you know that it's a talk by Aswath Damodaran, professor of finance at Stern School of Business, New York University.
With a blog ('Musings on Markets') that attracts a global fan following that pop stars would envy, Professor Damodaran attracts adulation from students and market veterans alike for his lucid and practical posts on valuation. His willingness to stick his neck out on some of the most hard-to-value assets in the financial world, be they Uber, Tesla, Bitcoin or Facebook, is a big reason for this fan following.
Professor Damodaran recently delivered a talk at a fund-raiser event sponsored by the Rotary Club of Chennai Kilpauk to an eclectic crowd of students, analysts, fund managers and private investors at Chennai.
Here are some of the takeaways from the lecture, which had the audience glued to their seats though dinner time.
Valuation is like cooking
No, the professor isn't referring to the kind of cooking that Indian managements like to do with their companies' books.
He begins his talk with the theoretical question: is valuation an art or a science? Many analysts believe valuation is a science because they work with spreadsheets and calculators to put a precise number to a company's stock price. But he demolishes this notion quickly by pointing out that different folks can arrive at vastly different valuations for the same business. Poking some fun at analysts who can value a business right down to the second decimal place, he points out that mathematics is the only pure science because there's only one right answer to a question. But different people can arrive at different valuations for the same business.
But then, valuation is not wholly an art either, as it isn't based wholly on perception and has a basis in numbers.
He concludes that valuation is a craft, like cooking. He advises people keen on learning about valuation to practise it as often as they can. 'Valuation cannot be learnt by reading books or listening to lectures,' he quips. 'So, go on, pick a company and value it. Just like the first time you cook, it will most probably be a disaster. But keep doing it and you'll get better.'
He regales us with the story of how there was no subject called valuation when he first began teaching his course at the Stern School, NYU. 'Students thought they were enrolling into this boring course called securities analysis. But I taught valuation and gradually the class size expanded.' He found that as he valued more companies, there was more course content to teach!
Number cruncher or story teller?
Most of us in the business of investing think we're hard-headed folks who are great at numbers and have no room for stories. But the professor takes a diametrically opposing view.
To be good at valuation, he claims, you need to be a good story teller and also a good number cruncher. He asks the audience to think if they would describe themselves as number crunchers or story tellers first. He says people usually have an affinity for one or the other. People who love algebra hate English. Those who love literature hate numbers and love nuances and hidden meanings.
But as the audience chuckles, he adds that number crunchers think they have the upper hand, but they don't. Number crunchers suffer from the delusion of precision, the delusion of being objective and the delusion of being in control. But then valuations depend on assumptions and can go badly wrong if the assumptions are wrong.
Story tellers on the other hand get carried away by the delusion of creative exclusivity. They extrapolate too much from a few anecdotes. Often fanciful stories don't translate into real-world valuations.
So, his message is - 'A good valuation is never all about the numbers, and never all about stories. Good valuation is a bridge between stories and numbers.'
Weapons of mass distraction
He takes a mild detour to pick up a $20 bill, put it in an envelope and hand it to a volunteer from the audience.
What would you pay for it, he asks. Then he writes the word 'control' on a piece of paper and slips it into the envelope and challenges, 'Now would you pay three times that sum? Four times?'
His point is that often, in acquisitions, companies use words such as 'control premium', 'synergy' and 'brand value' to justify overpaying for a business. He asks investors to take the 'fairness opinions' done by investment bankers with a bucket of salt. No deal can be fair to both sides. If it is fair to the other side, investment bankers use 'synergies' to justify it, he quips.
He makes a special mention of another really dangerous word - 'strategic'. To mask a stupid deal, companies often call them 'strategic'. Words are weapons of mass distraction in valuation, he concludes. Don't pay for empty words.
Getting to the narrative
So how does one go about mixing and matching narratives with numbers? He cites his own first attempt at valuing Uber in 2014. He had heard about Uber from a friend and decided to hail an Uber to experience the ride for himself.
After asking the driver to drive around the city aimlessly, he chatted with him to find out more about this new taxi service. Not only was he impressed with how promptly the car arrived to pick him up, he was also impressed with the business model which ensured that Uber was an aggregator and not asset owner. It was making profits off every ride simply on account of its technology.
The following was the narrative that formed the basis of his Uber valuation model. Uber was an urban car service company far more convenient than the local taxis. It functioned on very low capital. It could scale up on the back of a local network effect, i.e., new customers and drivers in a locality automatically joined Uber's network because it was the largest there. Thus, he posited that Uber could rapidly eat into the market for conventional taxi services in cities where it managed to be first. Once he had this narrative, all he had to do was model the numbers that fit this narrative. This helped him build out the worksheet where he valued Uber at $6 billion, far below what private-equity investors were then paying for it.
He has two lessons to offer from that. One, to have faith in your valuation and act on it, you need a story that holds together the numbers. Every part of your spreadsheet needs to be consistent with the story you are telling.
Two, private-equity investors are great at 'pricing' companies, not valuing them. They try to second-guess what other investors will pay for a business. The most successful private-equity guys are those who get in and get out at the right time. Mark Cuban of the Shark Tank fame, he points out, made his millions by exiting a tech venture at the top of the dot-com boom.
Five steps to valuation
Drawing on his own experience, he lays down the five steps to valuing any business.
1. Tell a story about a company
2. Evaluate if it is possible, plausible and probable (be realistic).
3. Convert the narrative into numbers in a spreadsheet. Make sure the numbers are consistent with the story.
4. Check your story and numbers with outsiders. Your own circle may be an echo chamber.
5. Keep the feedback loop open.
Taking off from his own Uber example, he talks of how his blog post was shared in a variety of forums around the world. The most valuable feedback he got and one which helped him hugely improve his valuation model was that from a ride-sharing association, whose members had a lot of criticisms on his blog. These taxi drivers gave him insights about Uber's business model that he wouldn't have got from any company management.
His message is that company managements are the last persons to talk to if you want to build a realistic valuation model. It is far better to talk to customers, workers, suppliers, associates. 'I have never ever spoken to the top management of a company I am valuing.'
Keep the feedback loop open
Finally, it is very important to be humble and open-minded. Welcome opportunities to talk to people who will be the devil's advocate on your valuation.
He remembers how an email from Bill Gurley, who was on Uber's board of directors, vastly changed his story about Uber and caused him to sharply revise his valuation upwards. Basically, Gurley made the point that Damodaran was wrong in valuing Uber as a car-services company, when in fact, it was a logistics and delivery company. That small tweak led to a vast upward revision in Uber's potential market size in the professor's spreadsheet and upped its valuation by many billion dollars.
The final message: Don't fall in love with your spreadsheet or story. Revise them as many times as needed based on feedback from those in the know. That's the recipe for a perfect dish.
Courtesy: MINT
When you are fighting for a chair in an overpacked auditorium on a Sunday evening to listen to a talk on stock valuation, you know that it's a talk by Aswath Damodaran, professor of finance at Stern School of Business, New York University.
With a blog ('Musings on Markets') that attracts a global fan following that pop stars would envy, Professor Damodaran attracts adulation from students and market veterans alike for his lucid and practical posts on valuation. His willingness to stick his neck out on some of the most hard-to-value assets in the financial world, be they Uber, Tesla, Bitcoin or Facebook, is a big reason for this fan following.
Professor Damodaran recently delivered a talk at a fund-raiser event sponsored by the Rotary Club of Chennai Kilpauk to an eclectic crowd of students, analysts, fund managers and private investors at Chennai.
Here are some of the takeaways from the lecture, which had the audience glued to their seats though dinner time.
Valuation is like cooking
No, the professor isn't referring to the kind of cooking that Indian managements like to do with their companies' books.
He begins his talk with the theoretical question: is valuation an art or a science? Many analysts believe valuation is a science because they work with spreadsheets and calculators to put a precise number to a company's stock price. But he demolishes this notion quickly by pointing out that different folks can arrive at vastly different valuations for the same business. Poking some fun at analysts who can value a business right down to the second decimal place, he points out that mathematics is the only pure science because there's only one right answer to a question. But different people can arrive at different valuations for the same business.
But then, valuation is not wholly an art either, as it isn't based wholly on perception and has a basis in numbers.
He concludes that valuation is a craft, like cooking. He advises people keen on learning about valuation to practise it as often as they can. 'Valuation cannot be learnt by reading books or listening to lectures,' he quips. 'So, go on, pick a company and value it. Just like the first time you cook, it will most probably be a disaster. But keep doing it and you'll get better.'
He regales us with the story of how there was no subject called valuation when he first began teaching his course at the Stern School, NYU. 'Students thought they were enrolling into this boring course called securities analysis. But I taught valuation and gradually the class size expanded.' He found that as he valued more companies, there was more course content to teach!
Number cruncher or story teller?
Most of us in the business of investing think we're hard-headed folks who are great at numbers and have no room for stories. But the professor takes a diametrically opposing view.
To be good at valuation, he claims, you need to be a good story teller and also a good number cruncher. He asks the audience to think if they would describe themselves as number crunchers or story tellers first. He says people usually have an affinity for one or the other. People who love algebra hate English. Those who love literature hate numbers and love nuances and hidden meanings.
But as the audience chuckles, he adds that number crunchers think they have the upper hand, but they don't. Number crunchers suffer from the delusion of precision, the delusion of being objective and the delusion of being in control. But then valuations depend on assumptions and can go badly wrong if the assumptions are wrong.
Story tellers on the other hand get carried away by the delusion of creative exclusivity. They extrapolate too much from a few anecdotes. Often fanciful stories don't translate into real-world valuations.
So, his message is - 'A good valuation is never all about the numbers, and never all about stories. Good valuation is a bridge between stories and numbers.'
Weapons of mass distraction
He takes a mild detour to pick up a $20 bill, put it in an envelope and hand it to a volunteer from the audience.
What would you pay for it, he asks. Then he writes the word 'control' on a piece of paper and slips it into the envelope and challenges, 'Now would you pay three times that sum? Four times?'
His point is that often, in acquisitions, companies use words such as 'control premium', 'synergy' and 'brand value' to justify overpaying for a business. He asks investors to take the 'fairness opinions' done by investment bankers with a bucket of salt. No deal can be fair to both sides. If it is fair to the other side, investment bankers use 'synergies' to justify it, he quips.
He makes a special mention of another really dangerous word - 'strategic'. To mask a stupid deal, companies often call them 'strategic'. Words are weapons of mass distraction in valuation, he concludes. Don't pay for empty words.
Getting to the narrative
So how does one go about mixing and matching narratives with numbers? He cites his own first attempt at valuing Uber in 2014. He had heard about Uber from a friend and decided to hail an Uber to experience the ride for himself.
After asking the driver to drive around the city aimlessly, he chatted with him to find out more about this new taxi service. Not only was he impressed with how promptly the car arrived to pick him up, he was also impressed with the business model which ensured that Uber was an aggregator and not asset owner. It was making profits off every ride simply on account of its technology.
The following was the narrative that formed the basis of his Uber valuation model. Uber was an urban car service company far more convenient than the local taxis. It functioned on very low capital. It could scale up on the back of a local network effect, i.e., new customers and drivers in a locality automatically joined Uber's network because it was the largest there. Thus, he posited that Uber could rapidly eat into the market for conventional taxi services in cities where it managed to be first. Once he had this narrative, all he had to do was model the numbers that fit this narrative. This helped him build out the worksheet where he valued Uber at $6 billion, far below what private-equity investors were then paying for it.
He has two lessons to offer from that. One, to have faith in your valuation and act on it, you need a story that holds together the numbers. Every part of your spreadsheet needs to be consistent with the story you are telling.
Two, private-equity investors are great at 'pricing' companies, not valuing them. They try to second-guess what other investors will pay for a business. The most successful private-equity guys are those who get in and get out at the right time. Mark Cuban of the Shark Tank fame, he points out, made his millions by exiting a tech venture at the top of the dot-com boom.
Five steps to valuation
Drawing on his own experience, he lays down the five steps to valuing any business.
1. Tell a story about a company
2. Evaluate if it is possible, plausible and probable (be realistic).
3. Convert the narrative into numbers in a spreadsheet. Make sure the numbers are consistent with the story.
4. Check your story and numbers with outsiders. Your own circle may be an echo chamber.
5. Keep the feedback loop open.
Taking off from his own Uber example, he talks of how his blog post was shared in a variety of forums around the world. The most valuable feedback he got and one which helped him hugely improve his valuation model was that from a ride-sharing association, whose members had a lot of criticisms on his blog. These taxi drivers gave him insights about Uber's business model that he wouldn't have got from any company management.
His message is that company managements are the last persons to talk to if you want to build a realistic valuation model. It is far better to talk to customers, workers, suppliers, associates. 'I have never ever spoken to the top management of a company I am valuing.'
Keep the feedback loop open
Finally, it is very important to be humble and open-minded. Welcome opportunities to talk to people who will be the devil's advocate on your valuation.
He remembers how an email from Bill Gurley, who was on Uber's board of directors, vastly changed his story about Uber and caused him to sharply revise his valuation upwards. Basically, Gurley made the point that Damodaran was wrong in valuing Uber as a car-services company, when in fact, it was a logistics and delivery company. That small tweak led to a vast upward revision in Uber's potential market size in the professor's spreadsheet and upped its valuation by many billion dollars.
The final message: Don't fall in love with your spreadsheet or story. Revise them as many times as needed based on feedback from those in the know. That's the recipe for a perfect dish.
Courtesy: MINT
The Upfront EMI Game - How Banks and Consumer Finance companies take you for an INTEREST(ing) ride!!
Now a days when one wishes to purchase a product (Consumer durable, car etc) or a service (e.g, travel / holiday package), increasingly customers tend to avail a Durable or Personal loan.
To make more customers fall for "emotional purchases instantly" get into debt and increase their liabilities, finance firms make it easy and quick to avail such loans whether offline (at dealer showrooms) or via Online (E-Com portals)
While availing such loans, a common tactic adopted by the seller or financier is to insist on ONE or TWO Upfront instalments at time of purchase, ostensibly to "prove your financial standing"
If buyers understand how the Upfront EMI payment really works, then one can make an informed decision.
Upfront EMI's significantly increase the Interest rate paid by buyers like you and me. (See illustrative image)
Let's say if a person takes a Rs. 1 Lakh loan for a tenure of 12 months at 16% interest rate, the EMI works out to Rs 9073 p.m x 12 months.
However if one pays Upfront EMI for ONE or TWO Months, see how much is the "real" interest rate % one incurs.
The difference as you can see is quite significant and is enjoyed by the financier or lending company literally Free of cost, sponsored by YOU the customer!!
This calculation does not even include other fees like "Processing charges" or "Service Charges" etc., (ranging from 0.5% to 2%) that further increase the cost of borrowing and interest % paid by the customer.
What can you do about it?
Some steps you can take to safe guard you from this Upfront EMI Game are:
1. Arrange cash upfront through a separate loan, move funds to your bank a/c, then plan your purchase and and pay by cheque or cash at time of purchase. This approach prevents the 'emotional urgency' to possess the item instantly thru EMI loan at the retail store or e-Com portal
2. Look for financing companies that offer normal mode of payment (no Upfront EMI game!!). It could be banks or financial institutions who maintain a low profile, have a large "low cost" depositor base and provide "normal" loan without upfront EMI requirement.
3. Borrow from a good friend or relative (if willing to lend) at a reasonable rate of interest and give Post dated cheques to pay it off
4. Borrow through other means where an existing asset can be offered as collateral. Usually interest rates are much lower (say 8% to 12%)
5. Set a Goal ahead of time (say 1-3 yrs ahead) for such capital purchases and start saving towards it every month via SIP.
Smart and Intellgent Customers (and investors) follow STEP 5 above. If you are one among them, Congrats!!
If not, it is time to become one.
Try out the calculator yourself at https://tinyurl.com/upfrontemigame
Change the Cell C19 (Yellow color) to see how much more interest you would pay in case of TWO Upfront EMI, ONE Upfront EMI and Normal Loan.
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Contact us at DHANAYOGA to learn how you can define your life goals and start saving towards it systematically and achieve it with a clear plan.
To make more customers fall for "emotional purchases instantly" get into debt and increase their liabilities, finance firms make it easy and quick to avail such loans whether offline (at dealer showrooms) or via Online (E-Com portals)
While availing such loans, a common tactic adopted by the seller or financier is to insist on ONE or TWO Upfront instalments at time of purchase, ostensibly to "prove your financial standing"
If buyers understand how the Upfront EMI payment really works, then one can make an informed decision.
Upfront EMI's significantly increase the Interest rate paid by buyers like you and me. (See illustrative image)
Let's say if a person takes a Rs. 1 Lakh loan for a tenure of 12 months at 16% interest rate, the EMI works out to Rs 9073 p.m x 12 months.
However if one pays Upfront EMI for ONE or TWO Months, see how much is the "real" interest rate % one incurs.
The difference as you can see is quite significant and is enjoyed by the financier or lending company literally Free of cost, sponsored by YOU the customer!!
This calculation does not even include other fees like "Processing charges" or "Service Charges" etc., (ranging from 0.5% to 2%) that further increase the cost of borrowing and interest % paid by the customer.
What can you do about it?
Some steps you can take to safe guard you from this Upfront EMI Game are:
1. Arrange cash upfront through a separate loan, move funds to your bank a/c, then plan your purchase and and pay by cheque or cash at time of purchase. This approach prevents the 'emotional urgency' to possess the item instantly thru EMI loan at the retail store or e-Com portal
2. Look for financing companies that offer normal mode of payment (no Upfront EMI game!!). It could be banks or financial institutions who maintain a low profile, have a large "low cost" depositor base and provide "normal" loan without upfront EMI requirement.
3. Borrow from a good friend or relative (if willing to lend) at a reasonable rate of interest and give Post dated cheques to pay it off
4. Borrow through other means where an existing asset can be offered as collateral. Usually interest rates are much lower (say 8% to 12%)
5. Set a Goal ahead of time (say 1-3 yrs ahead) for such capital purchases and start saving towards it every month via SIP.
Smart and Intellgent Customers (and investors) follow STEP 5 above. If you are one among them, Congrats!!
If not, it is time to become one.
Try out the calculator yourself at https://tinyurl.com/upfrontemigame
Change the Cell C19 (Yellow color) to see how much more interest you would pay in case of TWO Upfront EMI, ONE Upfront EMI and Normal Loan.
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Contact us at DHANAYOGA to learn how you can define your life goals and start saving towards it systematically and achieve it with a clear plan.
How to link Aadhaar with your Insurance Policy
Linking of Aadhaar with insurance policies has been made mandatory. Though the government has extended the timeline to link your Aadhaar details with financial services from 31st December 2017 to 31st of March 2018, still it needs to be done. Problems might arise with claim settlements if the insurance policies are not linked by the given deadline. There are a few ways in which you can link your Aadhaar with your insurance policies.
Documents needed
There are no specific documents required to link your Aadhaar but the policy holder must have their policy number, Aadhaar number and PAN readily available while linking.
In case the Aadhaar Number not available then the policyholder is required to provide proof of application of enrolment for Aadhaar
Further, for the KYC requirement, the policyholder is also required to provide their PAN details. In case the PAN not available then certified copy of an officially valid document needs to be submitted.
The insurance policies can be linked with Aadhaar both online and offline. There are certain companies that have started offering online Aadhaar linking but there are still companies which offer it only by visiting there branch. To link your Aadhaar online, you can login to the company's website where you will be required to provide policy details along with your personal details for verification. Once the verification is done; you will be able to update your Aadhaar number. The linkage can also be done by filling up a form by visiting the company's branch. You need to carry your Aadhaar and PAN card details to complete the process.
Steps to link you LIC policies online with Aadhaar
For general insurance companies the linkage with Aadhaar with the policies can also be done online. It is available for all type of insurance policies from health, motor to travel and home. The linking process of ICICI Lombard of your policy with Aadhaar is mentioned below.
Steps to link your Aadhaar with HDFC life
Steps to link your Aadhaar online for ICICI Lombard
Policyholders who are unable to authenticate through any one of the above mode the linkage can also be done through biometric. "Through Biometric offering, the insurer can authenticate and link policy-holders Aadhaar number using one of the biometric modalities, either iris or fingerprints scan" says, Mehmood Mansoori, Group Head - HDFC ERGO General Insurance.
Implications
The insurance policy is a contract, as defined under the Indian Contract Act, the policy will continue to be in effect even after the deadline. "The PMLA (Prevention of Money Laundering Act) rules have a statutory force. It is hence important that customers do not delay the process and reach out to their respective companies to provide their details" says, Shalabh Saxena, Chief Operating Officer - Canara HSBC OBC Life Insurance.
But the company will require Aadhaar linkage, like during renewals, endorsements or during claims registrations. The insurer can also keep in abeyance the claim payments until the linkage and authentication has been completed. So it is advised policyholders to complete the process at the earliest to avoid any future hassles.
Documents needed
There are no specific documents required to link your Aadhaar but the policy holder must have their policy number, Aadhaar number and PAN readily available while linking.
In case the Aadhaar Number not available then the policyholder is required to provide proof of application of enrolment for Aadhaar
Further, for the KYC requirement, the policyholder is also required to provide their PAN details. In case the PAN not available then certified copy of an officially valid document needs to be submitted.
The insurance policies can be linked with Aadhaar both online and offline. There are certain companies that have started offering online Aadhaar linking but there are still companies which offer it only by visiting there branch. To link your Aadhaar online, you can login to the company's website where you will be required to provide policy details along with your personal details for verification. Once the verification is done; you will be able to update your Aadhaar number. The linkage can also be done by filling up a form by visiting the company's branch. You need to carry your Aadhaar and PAN card details to complete the process.
Steps to link you LIC policies online with Aadhaar
- Go to the 'link Aadhaar and Pan to policy' in the home page of LIC's website or click the link to visit directly - licindia.in/Home/Link_Aadhaar_and_PAN_to_Policy
- A form will pop-up asking for your email and mobile number along with your Aadhaar and PAN numbers
- After filling up the form an OTP will be send to your mobile number registered with UIDAI. (If your mobile number is not linked with Aadhaar, you need to link that first)
- After submitting the form, a message will be shown on the success of the registration for linkage.
- After verification with UIDAI, SMS or mail confirmation will be sent to you. The verification may take a few days.
For general insurance companies the linkage with Aadhaar with the policies can also be done online. It is available for all type of insurance policies from health, motor to travel and home. The linking process of ICICI Lombard of your policy with Aadhaar is mentioned below.
Steps to link your Aadhaar with HDFC life
- Visit the website of HDFC life
- Login to your 'My Account'. The login link - myaccount.hdfclife.com
- Under the menu 'My Policy' select the option - 'Update Aadhaar'
- In the 'My Aadhaar Derails' page enter your policy number & your Aadhar number
- Click submit button to finish your linkage of Aadhaar with the policy
Steps to link your Aadhaar online for ICICI Lombard
- Visit the website of ICICI Lombard, www.icicilombard.com
- Click on the 'link Aadhaar card' option
- You can choose between health, travel Motor and home
- For linking motor insurance policy you need to provide your policy, engine and Chassis number
- For travel, health and home you need to provide policy number and date of birth
- Click submit button to finish your linkage of Aadhaar with the policy
Policyholders who are unable to authenticate through any one of the above mode the linkage can also be done through biometric. "Through Biometric offering, the insurer can authenticate and link policy-holders Aadhaar number using one of the biometric modalities, either iris or fingerprints scan" says, Mehmood Mansoori, Group Head - HDFC ERGO General Insurance.
Implications
The insurance policy is a contract, as defined under the Indian Contract Act, the policy will continue to be in effect even after the deadline. "The PMLA (Prevention of Money Laundering Act) rules have a statutory force. It is hence important that customers do not delay the process and reach out to their respective companies to provide their details" says, Shalabh Saxena, Chief Operating Officer - Canara HSBC OBC Life Insurance.
But the company will require Aadhaar linkage, like during renewals, endorsements or during claims registrations. The insurer can also keep in abeyance the claim payments until the linkage and authentication has been completed. So it is advised policyholders to complete the process at the earliest to avoid any future hassles.
Time to take shelter under ULIPs?
However, mutual funds must still form the core of your portfolio
The Finance Minister’s rather unwelcome move to slap a long-term capital gains tax of 10 per cent on profits from the sale of equity mutual funds has brought unit linked insurance plans(ULIPs) into the spotlight as possible alternatives.
Proceeds from ULIPs enjoy a tax-free status at the time of redemption upon maturity.
But should you rush in to buy ULIPs and exit mutual funds based on tax difference alone? That would be a gross overreaction, as despite the 10 per cent tax on long-term gains, mutual funds still remain dependable bets for future goals.
Over the last ten years, many ULIPs have delivered stellar returns that are close to or, in select cases, even better that those of diversified equity mutual funds. Although ULIP charges are still pretty high vis-à-vis mutual funds, they have come down over the years.
While a major part of your portfolio should go to mutual funds, a small portion can be set aside for ULIPs or insurance pension plans after thoroughly checking their track record and charges.
Costs and returns
Mutual funds are pure investment products, whereas ULIPs combine investment and insurance. Hence, there are additional charges for ULIPs for mortality, premium allocation and fund management.
Typically, equity mutual funds charge 1.8-2.5 per cent as charges for their schemes. If you opt for direct plans, the charges come down by a further 50-75 bps, that is, to around 1.5 per cent annually.
Over a 10-year period, the best of equity schemes have delivered 16-18 per cent annually. If the last five years are considered, the returns are even better at 28-30 per cent for top-quality equity funds. And these are returns generated after all charges. But these gains would be taxed from April 2018, if they exceed ₹1 lakh. Dividends would be taxed too.
A typical ULIP charges 6-7 per cent for the first five years. They come down over subsequent years.
The insurance regulator IRDA specifies a maximum reduction in yield. So, the difference between gross and net (after deduction of charges) yields can be 4 percentage points in year five, 3 percentage points in year 10 and 2.25 percentage points after the 15th year.
The best of ULIPs have delivered 15-18 per cent returns over the last 10 years and 22-25 per cent over a five-year period. But if the charges are applied, the sheen of the returns wears off a bit.
Structure and lock in
Given their simple structure, low costs and strong returns over the long term, equity funds must definitely form the core of your portfolio. Except for tax saving funds, there is no rigid holding period for equity schemes.
But ULIPs have a minimum lock in of five years. Exiting earlier is prohibitively expensive.
Thus, they start paying off over the very long term of 10-15 years and, therefore, are suitable for patient investors with a reasonable risk appetite.
ULIPs allow you to spread investments across debt and equity. You are allowed to choose an investment pattern based on your risk appetite.
Right now, ULIPs proceeds are tax free.
Thus, for those of you with a long horizon of at least 10-15 years and reasonable risk appetite, it would be advisable to invest about 20 per cent of your equity portfolio in ULIPs.
Given that both debt and equity ULIPs are tax-free, there is added incentive for even conservative investors to take exposure for distant goals.
The Finance Minister’s rather unwelcome move to slap a long-term capital gains tax of 10 per cent on profits from the sale of equity mutual funds has brought unit linked insurance plans(ULIPs) into the spotlight as possible alternatives.
Proceeds from ULIPs enjoy a tax-free status at the time of redemption upon maturity.
But should you rush in to buy ULIPs and exit mutual funds based on tax difference alone? That would be a gross overreaction, as despite the 10 per cent tax on long-term gains, mutual funds still remain dependable bets for future goals.
Over the last ten years, many ULIPs have delivered stellar returns that are close to or, in select cases, even better that those of diversified equity mutual funds. Although ULIP charges are still pretty high vis-à-vis mutual funds, they have come down over the years.
While a major part of your portfolio should go to mutual funds, a small portion can be set aside for ULIPs or insurance pension plans after thoroughly checking their track record and charges.
Costs and returns
Mutual funds are pure investment products, whereas ULIPs combine investment and insurance. Hence, there are additional charges for ULIPs for mortality, premium allocation and fund management.
Typically, equity mutual funds charge 1.8-2.5 per cent as charges for their schemes. If you opt for direct plans, the charges come down by a further 50-75 bps, that is, to around 1.5 per cent annually.
Over a 10-year period, the best of equity schemes have delivered 16-18 per cent annually. If the last five years are considered, the returns are even better at 28-30 per cent for top-quality equity funds. And these are returns generated after all charges. But these gains would be taxed from April 2018, if they exceed ₹1 lakh. Dividends would be taxed too.
A typical ULIP charges 6-7 per cent for the first five years. They come down over subsequent years.
The insurance regulator IRDA specifies a maximum reduction in yield. So, the difference between gross and net (after deduction of charges) yields can be 4 percentage points in year five, 3 percentage points in year 10 and 2.25 percentage points after the 15th year.
The best of ULIPs have delivered 15-18 per cent returns over the last 10 years and 22-25 per cent over a five-year period. But if the charges are applied, the sheen of the returns wears off a bit.
Structure and lock in
Given their simple structure, low costs and strong returns over the long term, equity funds must definitely form the core of your portfolio. Except for tax saving funds, there is no rigid holding period for equity schemes.
But ULIPs have a minimum lock in of five years. Exiting earlier is prohibitively expensive.
Thus, they start paying off over the very long term of 10-15 years and, therefore, are suitable for patient investors with a reasonable risk appetite.
ULIPs allow you to spread investments across debt and equity. You are allowed to choose an investment pattern based on your risk appetite.
Right now, ULIPs proceeds are tax free.
Thus, for those of you with a long horizon of at least 10-15 years and reasonable risk appetite, it would be advisable to invest about 20 per cent of your equity portfolio in ULIPs.
Given that both debt and equity ULIPs are tax-free, there is added incentive for even conservative investors to take exposure for distant goals.
Laddering your Fixed Income Portfolio
Laddering is useful for ensuring that you meet your investment objectives
What is laddering?
Laddering refers to the investment technique of having a collection of fixed-income instruments in your portfolio that mature at different points of time.
What are its advantages?
Imagine that you have a fixed-income portfolio comprising fixed deposits, all of which will mature in three years. Such bunching up of the maturity date can lead to reinvestment risk. Interest rates could be at a low point that year, forcing you to reinvest your money at those low rates.
To avoid this, you should ladder your investments. Interest rates tend to move cyclically. By laddering your investments, you can reinvest your fixed-income corpus at different points of time, thereby averaging out the returns you earn.
Laddering is also useful for ensuring that you meet your investment objectives. Invest the money in a laddered manner, so that each instrument in your portfolio matures just when you need it.
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
What is laddering?
Laddering refers to the investment technique of having a collection of fixed-income instruments in your portfolio that mature at different points of time.
What are its advantages?
Imagine that you have a fixed-income portfolio comprising fixed deposits, all of which will mature in three years. Such bunching up of the maturity date can lead to reinvestment risk. Interest rates could be at a low point that year, forcing you to reinvest your money at those low rates.
To avoid this, you should ladder your investments. Interest rates tend to move cyclically. By laddering your investments, you can reinvest your fixed-income corpus at different points of time, thereby averaging out the returns you earn.
Laddering is also useful for ensuring that you meet your investment objectives. Invest the money in a laddered manner, so that each instrument in your portfolio matures just when you need it.
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
10 Investment Commandments for 2018 and beyond
By Mehrab Irani
Do you want to be a slave—wage slave of your employer, tax slave of the government and loan slave of a bank? Why are you adamant about working for money when money is willingly ready to work for you? Once you move from financial slavery to financial freedom, you will be able to fulfil your dreams and achieve your higher self-actualisation goals.
You become financially free when you can stop working for money and when money starts working for you. In the New Year, as you make different wows to improve your health, social and family life, here are 10 commandments to improve your financial health so that you are on the path to achieve financial emancipation.
Commandment 1: Thou Shall Make a Proper Asset Allocation Plan
Asset allocation is the primary premise for investments. Long-term statistical analysis has shown that 90% of the variability in returns is due to asset allocation 9% due to stock selection and 1% because of market timing. All assets move in business and economic cycles of their own and, while one asset might be in a bear market, another asset class might, simultaneously, be in a big bull market. The broader asset groups of equities, bonds, commodities and real estate (others being art and currencies) will lead you to the gateway of long-term wealth creation and sustenance. Portfolios behave differently from their individual constituents. The aim of optimal asset allocation is not to invest only in safe assets but to invest in a combination of safe and risky assets whose combined risk is much less than that of the individual constituents and, at the same time, offer a higher degree of return. While selecting assets, remember to allocate only those funds to equities which you don’t require for at least the next five years and which you have the courage to lose with its value reducing by up to 50% in the short term and not panic on it.
Commandment 2: Thou Shall Do Proper Budgeting
Thou shall not invest what is left after spending but spend what is left after investing. Remember that income-tax reduces your gross income; interest on loans on unnecessary expenses/bad capital assets diminish your net income and the monster of inflation eats up your remaining income. So, unless you budget properly to create investment assets, your dream of achieving financial freedom might remain just a pipedream. Saving must be a priority. You must think of it as a compulsory ‘expense’ which you have to incur for yourself the same way as you pay tax to the government and loan EMIs (not 9 equated monthly instalments) to the bank.
Commandment 3: Thou Shall Take Proper Family Protection
Thou will not confuse insurance with investments. Thou shall take proper insurance cover of at least 10 times your annual after-tax expenses (revenue and average of past three-year capital expenditure). Thou shall also take proper medical insurance.
Commandment 4: Thou Shall Take Proper Asset Protection
Before starting to build fresh wealth, it is our duty to protect our existing assets. Assets like a house, flat, or car must be insured against accidents and natural perils. The event of earthquake or terrorist attack to our flat/ house seems to be remote; but the impact of such events could turn your financial stability upside down. Therefore, protect your house and other major assets with proper insurance.
Commandment 5: Thou Shall Buy Your Own House for Self-occupation
Thou shall look into buying your own house in 2018 with some bargain and discount from the developer while we are close to the bottom in the current interest rate cycle.
Commandment 6: Thou Shall Not Over-invest in Speculative Items
This would include speculative or penny stocks, junk bonds, non-cash-flow-generating commodities like gold or silver and non-revenue-generating posh real estate like beach houses. Investments in these can be done only when you have a clear view on these asset classes and expect to gain from their price movement. But you have to remember that they are speculative in nature and will not go up in perpetuity; hence, you should not remain wedded to those investments but sell them when the right time comes.
Commandment 7: Thou Shall Learn the Difference between Good and Bad Debt
Learn to distinguish between good and bad debt. It’s pertinent to know that bad debt would be what is used to create bad capital assets—assets like car, holiday home or a house—which take away money from your pocket and do not put any money in your pocket. On the other hand, good debt would be that which helps you in creating an asset which then puts money in your pocket (income) as well as has scope for future capital appreciation, e.g., property which earns rent, shares which earn (tax-free) dividends and both have the potential for future capital appreciation. Never borrow to incur a revenue expenditure, like taking a foreign trip or buying a bad capital asset, like a car or beach house, because these will not only take away money from your pocket in the form of interest payments but also put you into recurring wasteful revenue expenditure in the form of maintenance of that bad capital asset like petrol, repairs, property taxes, etc.
Commandment 8: Thou Shall Make a Proper Retirement Plan
If you want to enjoy the same lifestyle that you are currently enjoying even after your retirement or have the joy of bequeathing your wealth to your children, start planning for it today. And be realistic about it—make an estimate of your needs which will keep evolving with your age and time and also consider inflation in your computations.
Commandment 9: Thou Shall Remember These Principles While Investing in Equities:
Commandment 10: Thou shall not forget the above nine commandments and keep reviewing, changing, rebalancing and refining at regular intervals along with changes in your financial condition.
Wish all the readers a very happy and prosperous New Year. May this year commence the financial freedom journey for each and everyone one of you.
To plan and implement the path towards your family's financial freedom, Contact us
Do you want to be a slave—wage slave of your employer, tax slave of the government and loan slave of a bank? Why are you adamant about working for money when money is willingly ready to work for you? Once you move from financial slavery to financial freedom, you will be able to fulfil your dreams and achieve your higher self-actualisation goals.
You become financially free when you can stop working for money and when money starts working for you. In the New Year, as you make different wows to improve your health, social and family life, here are 10 commandments to improve your financial health so that you are on the path to achieve financial emancipation.
Commandment 1: Thou Shall Make a Proper Asset Allocation Plan
Asset allocation is the primary premise for investments. Long-term statistical analysis has shown that 90% of the variability in returns is due to asset allocation 9% due to stock selection and 1% because of market timing. All assets move in business and economic cycles of their own and, while one asset might be in a bear market, another asset class might, simultaneously, be in a big bull market. The broader asset groups of equities, bonds, commodities and real estate (others being art and currencies) will lead you to the gateway of long-term wealth creation and sustenance. Portfolios behave differently from their individual constituents. The aim of optimal asset allocation is not to invest only in safe assets but to invest in a combination of safe and risky assets whose combined risk is much less than that of the individual constituents and, at the same time, offer a higher degree of return. While selecting assets, remember to allocate only those funds to equities which you don’t require for at least the next five years and which you have the courage to lose with its value reducing by up to 50% in the short term and not panic on it.
Commandment 2: Thou Shall Do Proper Budgeting
Thou shall not invest what is left after spending but spend what is left after investing. Remember that income-tax reduces your gross income; interest on loans on unnecessary expenses/bad capital assets diminish your net income and the monster of inflation eats up your remaining income. So, unless you budget properly to create investment assets, your dream of achieving financial freedom might remain just a pipedream. Saving must be a priority. You must think of it as a compulsory ‘expense’ which you have to incur for yourself the same way as you pay tax to the government and loan EMIs (not 9 equated monthly instalments) to the bank.
Commandment 3: Thou Shall Take Proper Family Protection
Thou will not confuse insurance with investments. Thou shall take proper insurance cover of at least 10 times your annual after-tax expenses (revenue and average of past three-year capital expenditure). Thou shall also take proper medical insurance.
Commandment 4: Thou Shall Take Proper Asset Protection
Before starting to build fresh wealth, it is our duty to protect our existing assets. Assets like a house, flat, or car must be insured against accidents and natural perils. The event of earthquake or terrorist attack to our flat/ house seems to be remote; but the impact of such events could turn your financial stability upside down. Therefore, protect your house and other major assets with proper insurance.
Commandment 5: Thou Shall Buy Your Own House for Self-occupation
Thou shall look into buying your own house in 2018 with some bargain and discount from the developer while we are close to the bottom in the current interest rate cycle.
Commandment 6: Thou Shall Not Over-invest in Speculative Items
This would include speculative or penny stocks, junk bonds, non-cash-flow-generating commodities like gold or silver and non-revenue-generating posh real estate like beach houses. Investments in these can be done only when you have a clear view on these asset classes and expect to gain from their price movement. But you have to remember that they are speculative in nature and will not go up in perpetuity; hence, you should not remain wedded to those investments but sell them when the right time comes.
Commandment 7: Thou Shall Learn the Difference between Good and Bad Debt
Learn to distinguish between good and bad debt. It’s pertinent to know that bad debt would be what is used to create bad capital assets—assets like car, holiday home or a house—which take away money from your pocket and do not put any money in your pocket. On the other hand, good debt would be that which helps you in creating an asset which then puts money in your pocket (income) as well as has scope for future capital appreciation, e.g., property which earns rent, shares which earn (tax-free) dividends and both have the potential for future capital appreciation. Never borrow to incur a revenue expenditure, like taking a foreign trip or buying a bad capital asset, like a car or beach house, because these will not only take away money from your pocket in the form of interest payments but also put you into recurring wasteful revenue expenditure in the form of maintenance of that bad capital asset like petrol, repairs, property taxes, etc.
Commandment 8: Thou Shall Make a Proper Retirement Plan
If you want to enjoy the same lifestyle that you are currently enjoying even after your retirement or have the joy of bequeathing your wealth to your children, start planning for it today. And be realistic about it—make an estimate of your needs which will keep evolving with your age and time and also consider inflation in your computations.
Commandment 9: Thou Shall Remember These Principles While Investing in Equities:
- Bull and bear markets run for several years. Hence, determine the primary trend of the market and don’t generally go against the primary trend;
- Market is supreme and above everybody: no government, central bank, industrialist or operator can alter the primary trend of the market. They can only complicate the wave structure;
- Right asset allocation and getting the macro view right are far more important and profitable rather than individual investment ideas;
- Never invest or trade more than you can reasonably afford to lose;
- Put stop-loss at a logical, not convenient, place and always adhere to it;
- Cut losses and let profits run. Don’t let a profit get converted to loss;
- If you wait too long to buy, until every uncertainty is removed and every doubt is lifted at the bottom of a market cycle, you may keep waiting and waiting;
- Act on your own judgement or entirely on the judgement of another;
- Tips are for waiters and not investors;
- When in doubt, stay out and don’t get in when in doubt;
- Don’t over-trade;
- Don’t invest or trade based on hope;
- Learn to accept your mistakes in the market (otherwise, market will make you accept it in a cruel way) and then analyse and learn from your mistakes;
- Wherever possible, trade liquid markets;
- Don’t believe everything which a corporate official says about his / her company’s stock;
- When opinions in the market are unanimous—beware, because markets are famous for doing the unexpected;
- Never be sentimental about an asset class or individual stock;
- Playing the market is more of an art rather than a science;
- Simple logical things work far better in the marketplace rather than complex algorithms, theorems, valuations principles, etc;
- Buy the stocks of companies that have shown consistent growth in earnings and producing those goods / services which people cannot do without;
- Last, but not the least: never try to catch the top and the bottom because only liars and fools can do it.
Commandment 10: Thou shall not forget the above nine commandments and keep reviewing, changing, rebalancing and refining at regular intervals along with changes in your financial condition.
Wish all the readers a very happy and prosperous New Year. May this year commence the financial freedom journey for each and everyone one of you.
To plan and implement the path towards your family's financial freedom, Contact us
How to lose Rs. 24 Crores by investing in Bank Fixed Deposits
How bank fixed deposits have a skewed risk-return equation
The safety that bank fixed deposits offer is too expensive. This illustration can be an eye-opener. Read on
A majority of Indians do not save. Yes, now a majority has a bank account, and many receive their salaries or income via a bank account. But most of it is immediately withdrawn and spent. For a minority of investors, the money is left in the savings account until it is spent.
A still smaller minority does not spend all the income and has some savings. These are the heroes of the Indian financial industry; they put their savings primarily in bank fixed deposits. Some of our heroes shop around for banks and invest in the ones that provide higher interest on their deposits.
The bank deposits give them a feeling of safety. (Practically all of us, including the most sophisticated financial and investment experts among us, indulge in this.)
How exactly are banks providing the returns or interest on fixed deposits? What is the ultimate source of these returns?
The first thing to understand, and this may come as a surprise to many, is that banks are not there to serve us, the depositors. The real customer of a bank is the borrower. So, typically, the lending teams at banks are sourcing potential borrowers and the credit analysis team is carrying out due diligence on projects and companies. A pipeline of projects that can be lent to exists at any point of time. The moment we go and deposit our money in a fixed deposit, the money is allocated to one of these borrowing companies. The companies commit to paying a certain interest rate to the bank for this. This is the primary source of income for the bank, from which it deducts its running expenses and some profits and then pays the rest to the depositors as interest on their fixed deposits.
Typically, when a bank is paying 6% to depositors, it is lending at 10-12% (or even higher) to borrowers. Of course, some borrowers are deemed "safer"; they get lower rates. The "riskier" borrowers get higher rates. So, effectively, as a depositor in bank fixed deposits, you are lending to companies. The bank is acting as your asset manager and charging an asset management fees of 4-6%. (For more efficient banks this could be lower, but usually it is not).
How do companies pay the interest?
They invest the money in assets that will generate returns. A typical Indian company is able to generate 15-25% on its assets. From this they have to pay the interest to the bank. So, a company that can generate a return on assets of 20% and has to pay even 15% as bank interest, is still able to make a profit of 5%. If this company has financed half of its assets with debt, the returns for shareholders would be 25%. If it did not use debt at all, it is still generating 20% for its shareholders.
So the ultimate risk exposure for a bank fixed depositor is the same as investing directly in the company. Of course, the bank loan has a priority over the equity shareholders of the company and hence is "safer". Further, the bank fixed depositor has a priority over the bank shareholders and hence the fixed deposit is safer. Plus, the bank has lent to a diversified portfolio of borrowing companies. That too makes it safer. The bank credit analysis team has expertise in evaluating companies and their projects, which adds to the safety.
But there is a cost of getting this safety.
That cost is the difference between the company shareholder getting 20% (or 25%) versus the bank fixed depositor getting 6-7%. If you are investing in bank fixed deposits at 6% and keep renewing it over a period of 15 years, your initial money will become about 2.5 times during this time. Contrast that with if you had directly invested in the borrowing company, earning 20% return on equity. Your money would be 15.5 times. At 25%, that goes up to 28.5 times.
So if you had invested Rs 10 lakh in the bank, you would end up with Rs 25 lakh after 15 years; while the person investing in the company would end up with Rs 1.5 crore.
A typical working life of 30 years to build a retirement corpus with bank deposits versus investing in company equities shows that the cost of safety for the bank depositor is extremely high. Over a 30-year period, the 6% bank depositor's Rs10 lakh will end up becoming Rs60 lakh (net of taxes, it would be Rs35 lakh). Over the same period, the company equity investor's Rs10 lakh will end up becoming Rs24 crore (net of taxes, it could remain Rs24 crore, or if the company is unlisted, then with long-term capital gains tax of 20%, it would become Rs19-20 crore). This means the cost of safety is about Rs20 crore.
To make the equity investment process safer, one has to develop the expertise of the bank's credit analysis team; has to have equity analysis expertise; has to diversify the portfolio; be alert and monitor the portfolio regularly; and not pay the huge cost of safety. This is possible-you can do this yourself, or through an asset manager. One can recreate a significant portion of the safety of a bank deposit at a much lower cost than Rs20 crore.
Courtesy: MINT
Is it really worth parking all your funds in bank deposits and incur opportunity cost (loss) of Rs. 24 crore thru your life time? Think again!!
If you are open to know more about much better and efficient alternative to Bank deposits, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
The safety that bank fixed deposits offer is too expensive. This illustration can be an eye-opener. Read on
A majority of Indians do not save. Yes, now a majority has a bank account, and many receive their salaries or income via a bank account. But most of it is immediately withdrawn and spent. For a minority of investors, the money is left in the savings account until it is spent.
A still smaller minority does not spend all the income and has some savings. These are the heroes of the Indian financial industry; they put their savings primarily in bank fixed deposits. Some of our heroes shop around for banks and invest in the ones that provide higher interest on their deposits.
The bank deposits give them a feeling of safety. (Practically all of us, including the most sophisticated financial and investment experts among us, indulge in this.)
How exactly are banks providing the returns or interest on fixed deposits? What is the ultimate source of these returns?
The first thing to understand, and this may come as a surprise to many, is that banks are not there to serve us, the depositors. The real customer of a bank is the borrower. So, typically, the lending teams at banks are sourcing potential borrowers and the credit analysis team is carrying out due diligence on projects and companies. A pipeline of projects that can be lent to exists at any point of time. The moment we go and deposit our money in a fixed deposit, the money is allocated to one of these borrowing companies. The companies commit to paying a certain interest rate to the bank for this. This is the primary source of income for the bank, from which it deducts its running expenses and some profits and then pays the rest to the depositors as interest on their fixed deposits.
Typically, when a bank is paying 6% to depositors, it is lending at 10-12% (or even higher) to borrowers. Of course, some borrowers are deemed "safer"; they get lower rates. The "riskier" borrowers get higher rates. So, effectively, as a depositor in bank fixed deposits, you are lending to companies. The bank is acting as your asset manager and charging an asset management fees of 4-6%. (For more efficient banks this could be lower, but usually it is not).
How do companies pay the interest?
They invest the money in assets that will generate returns. A typical Indian company is able to generate 15-25% on its assets. From this they have to pay the interest to the bank. So, a company that can generate a return on assets of 20% and has to pay even 15% as bank interest, is still able to make a profit of 5%. If this company has financed half of its assets with debt, the returns for shareholders would be 25%. If it did not use debt at all, it is still generating 20% for its shareholders.
So the ultimate risk exposure for a bank fixed depositor is the same as investing directly in the company. Of course, the bank loan has a priority over the equity shareholders of the company and hence is "safer". Further, the bank fixed depositor has a priority over the bank shareholders and hence the fixed deposit is safer. Plus, the bank has lent to a diversified portfolio of borrowing companies. That too makes it safer. The bank credit analysis team has expertise in evaluating companies and their projects, which adds to the safety.
But there is a cost of getting this safety.
That cost is the difference between the company shareholder getting 20% (or 25%) versus the bank fixed depositor getting 6-7%. If you are investing in bank fixed deposits at 6% and keep renewing it over a period of 15 years, your initial money will become about 2.5 times during this time. Contrast that with if you had directly invested in the borrowing company, earning 20% return on equity. Your money would be 15.5 times. At 25%, that goes up to 28.5 times.
So if you had invested Rs 10 lakh in the bank, you would end up with Rs 25 lakh after 15 years; while the person investing in the company would end up with Rs 1.5 crore.
A typical working life of 30 years to build a retirement corpus with bank deposits versus investing in company equities shows that the cost of safety for the bank depositor is extremely high. Over a 30-year period, the 6% bank depositor's Rs10 lakh will end up becoming Rs60 lakh (net of taxes, it would be Rs35 lakh). Over the same period, the company equity investor's Rs10 lakh will end up becoming Rs24 crore (net of taxes, it could remain Rs24 crore, or if the company is unlisted, then with long-term capital gains tax of 20%, it would become Rs19-20 crore). This means the cost of safety is about Rs20 crore.
To make the equity investment process safer, one has to develop the expertise of the bank's credit analysis team; has to have equity analysis expertise; has to diversify the portfolio; be alert and monitor the portfolio regularly; and not pay the huge cost of safety. This is possible-you can do this yourself, or through an asset manager. One can recreate a significant portion of the safety of a bank deposit at a much lower cost than Rs20 crore.
Courtesy: MINT
Is it really worth parking all your funds in bank deposits and incur opportunity cost (loss) of Rs. 24 crore thru your life time? Think again!!
If you are open to know more about much better and efficient alternative to Bank deposits, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
A Strategy that simply makes sense
Philip R. Swensen, Ph.D
Of the many hundreds of financial decisions we must make in life, one of the most critical occurs at the point in time when we declare our retirement and replace our salary with steady, dependable income from our investment accounts to support our “golden years.” The decisions that we make at this singularly important point in our lives may have significant impact on the total amount of money available to us throughout our remaining lifetime.
Complicating these decisions are two very important facts. First, the newest mortality calculations suggest that, if we do in fact make it to retirement age, we can expect to live, on the average, between 18 to 22 additional years. Thus, one must conclude that prudent planning requires that we provide for at least a 25 to 30-year time horizon for which income will be needed.
Second, given these ever-increasing investment time horizons, one must plan for the inevitable debilitating effects of even modest inflation rates over the long run. Although we have become accustomed to manageable year-to-year inflation, one must only ponder the total changes in the cost of living compared to, say, 20 years ago to realize the prudence in planning for a retirement income that is increasing through the years at a rate at least equal to the long-run average rate of inflation. These two inescapable facts require thoughtful and careful planning at the point of retirement.
During retirement, we need a safe, steady, dependable and predictable income to replace that which was previously supplied by the paycheck from our employer. Unfortunately, the stock market is anything but safe, steady, dependable and predictable. Such predictability in our income can only be provided by fixed income investments, which inevitably command much lower periodic returns. It is likely that such fixed-income investments which inevitably command much lower periodic returns. It is likely that such fixed-income investments will not yield sufficient returns for the distant years of our planning horizon – especially when those distant years must increase to accommodate inflation. Thus, given the many years for which we must plan, at least a portion of our asset base must remain in the equity markets to capture the larger returns.
These equity investments, however, are often subject to significant short-term volatility. Therein lies the issue at stake for those contemplating retirement. How can I ensure that the money I need in the near term is safe and predictable, and not hostage to day-to-day equity market fluctuations, while I simultaneously put myself into a position to receive equity market returns that will be required to provide an increasing income stream throughout my remaining expected life?
A clear understanding and realization of these facts require us to put into place a strategy for managing our retirement assets prior to when that all important retirement day arrives. With a lack of understanding of the options available to us and the nature of the decisions that we must make, it becomes entirely possible to unwittingly make decisions that will deleteriously affect the efficient use of our retirement asset pool.
I have come to realize that many people make these important decisions in the absence of an understanding of their available options. Many have no strategy for getting the highest income from their hard-earned retirement assets. In developing such a strategy, it is universally known among financial professionals that the investments needed for short-term stability and predictability will be very different than those investments for which we have a relatively long investment horizon. Being fully aware of those differences will occasion the development of a meaningful financial planning strategy.
One such strategy might suggest that one creates “buckets” of investments appropriate to the time frame in which the income need is anticipated. For example, the near-term bucket, say the first 5 years, would be served by a fixed investment which would be impervious to short-term equity market or interest rate market volatility. Income from such an investment would provide a steady, predictable income to the client, thus freeing them from day-to-day equity market fluctuations.
In the intermediate term – say 10 to 15 years – we might select investments which would effectively hedge the downside risk potential, but allow us participation in the higher returns generally provided by the equity markets. For the longer-term buckets – say time frames of 15 to 20 years or more, we could confidently be invested in more aggressive, well-diversified equity.
Of one thing we can be certain. Such investment and retirement strategies must be individual specific. Each of these buckets would be analyzed in light of the total financial picture of a given client. Other sources of income would be considered in the analysis as well. Consideration should also be given to the individual retirement income needs, personal goals and other financial obligations. Each of these factors, and many others, would impact the construction of the various proposed buckets.
However, these basic concepts could evolve into a strategy that would help one maximize his retirement income and avoid the two most common problems facing those in the retirement years. Namely, spending too much and running out of money before we run out of life, and spending too little and thus leaving opportunities foregone that would provide for a full and abundant life.
Start as early as possible to build your retirement fund.
To plan your retirement strategy and get set for a financially stable retired life, Contact us
Of the many hundreds of financial decisions we must make in life, one of the most critical occurs at the point in time when we declare our retirement and replace our salary with steady, dependable income from our investment accounts to support our “golden years.” The decisions that we make at this singularly important point in our lives may have significant impact on the total amount of money available to us throughout our remaining lifetime.
Complicating these decisions are two very important facts. First, the newest mortality calculations suggest that, if we do in fact make it to retirement age, we can expect to live, on the average, between 18 to 22 additional years. Thus, one must conclude that prudent planning requires that we provide for at least a 25 to 30-year time horizon for which income will be needed.
Second, given these ever-increasing investment time horizons, one must plan for the inevitable debilitating effects of even modest inflation rates over the long run. Although we have become accustomed to manageable year-to-year inflation, one must only ponder the total changes in the cost of living compared to, say, 20 years ago to realize the prudence in planning for a retirement income that is increasing through the years at a rate at least equal to the long-run average rate of inflation. These two inescapable facts require thoughtful and careful planning at the point of retirement.
During retirement, we need a safe, steady, dependable and predictable income to replace that which was previously supplied by the paycheck from our employer. Unfortunately, the stock market is anything but safe, steady, dependable and predictable. Such predictability in our income can only be provided by fixed income investments, which inevitably command much lower periodic returns. It is likely that such fixed-income investments which inevitably command much lower periodic returns. It is likely that such fixed-income investments will not yield sufficient returns for the distant years of our planning horizon – especially when those distant years must increase to accommodate inflation. Thus, given the many years for which we must plan, at least a portion of our asset base must remain in the equity markets to capture the larger returns.
These equity investments, however, are often subject to significant short-term volatility. Therein lies the issue at stake for those contemplating retirement. How can I ensure that the money I need in the near term is safe and predictable, and not hostage to day-to-day equity market fluctuations, while I simultaneously put myself into a position to receive equity market returns that will be required to provide an increasing income stream throughout my remaining expected life?
A clear understanding and realization of these facts require us to put into place a strategy for managing our retirement assets prior to when that all important retirement day arrives. With a lack of understanding of the options available to us and the nature of the decisions that we must make, it becomes entirely possible to unwittingly make decisions that will deleteriously affect the efficient use of our retirement asset pool.
I have come to realize that many people make these important decisions in the absence of an understanding of their available options. Many have no strategy for getting the highest income from their hard-earned retirement assets. In developing such a strategy, it is universally known among financial professionals that the investments needed for short-term stability and predictability will be very different than those investments for which we have a relatively long investment horizon. Being fully aware of those differences will occasion the development of a meaningful financial planning strategy.
One such strategy might suggest that one creates “buckets” of investments appropriate to the time frame in which the income need is anticipated. For example, the near-term bucket, say the first 5 years, would be served by a fixed investment which would be impervious to short-term equity market or interest rate market volatility. Income from such an investment would provide a steady, predictable income to the client, thus freeing them from day-to-day equity market fluctuations.
In the intermediate term – say 10 to 15 years – we might select investments which would effectively hedge the downside risk potential, but allow us participation in the higher returns generally provided by the equity markets. For the longer-term buckets – say time frames of 15 to 20 years or more, we could confidently be invested in more aggressive, well-diversified equity.
Of one thing we can be certain. Such investment and retirement strategies must be individual specific. Each of these buckets would be analyzed in light of the total financial picture of a given client. Other sources of income would be considered in the analysis as well. Consideration should also be given to the individual retirement income needs, personal goals and other financial obligations. Each of these factors, and many others, would impact the construction of the various proposed buckets.
However, these basic concepts could evolve into a strategy that would help one maximize his retirement income and avoid the two most common problems facing those in the retirement years. Namely, spending too much and running out of money before we run out of life, and spending too little and thus leaving opportunities foregone that would provide for a full and abundant life.
Start as early as possible to build your retirement fund.
To plan your retirement strategy and get set for a financially stable retired life, Contact us
Getting poorer in retirement
The biggest thing that can damage old-age financials of Indians is their obsession for investing only in fixed incomes
The other day, I received a WhatsApp message from a senior citizen whose returns from a fixed deposit have gone down by 25 per cent. This difference has come about between a five-year deposit that he made in August 2012, and when he renewed it upon maturity in August 2017.
Of course, to those who are just reading the headline numbers on interest rates, this doesn't make sense. Depending on when you are measuring, interest rates have gone down by two or three per cent. However, here's a part of the exact message: 'I was being paid an amount of Rs 35,352/- every month (of course subject to income tax) enabling me to lead a worry free life financially. Now on maturity I have reinvested the amount in the same Bank and I will be paid Rs 26,489/-'.
The interest rate on his FD may have gone done by just about 2.5 per cent, however, his income is down by 25%. In fact, this is essentially an obfuscation in the way the reduction of interest rates is announced and is carried in the media. A reduction in the interest rate on any deposit from 10 to 8 per cent is a reduction of 20 per cent on the income. If you were earning Rs 20,000 a month, you will now earn Rs 16,000 a month. The '2%' reduction is an illusion.
Seniors have retired from the economy
In fact, the entire move towards a lower interest rate economy, while great news for the economy, is of little direct relevance to older, retired people. Lower inflation and interest rates, better fiscal management, and higher economic growth are all very well but will carry no benefit for them because they are no longer in the earning and accumulative phase of their lives. An older person is not going to get a better job, or a higher salary because the economy is growing. That phase of his or her life is over.
However, wishing for higher interest rates is no solution. This yearning for higher rates is there because we have been conditioned to ignore high inflation, which is the evil twin of high interest rates. I'm sorry to say this, but the person in the above example is financially doomed anyway. For the last five years, when he was getting Rs 35,352 as interest income and spending it, he was actually eating away his capital. Out of that income, no more than Rs 7000 to 10,000 was real income. The rest was just the inflated value of the currency.
Here's the key fact that he and crores others like him ignore: his real income has probably not gone down. If he was spending only his real, inflation adjusted income, he would probably find that it has actually increased. And how would he have spent only his real income? The answer is, by spending only about 1.5 % of the deposit per year, and letting the rest compound and accumulate. This is based on the assumption that FD rates are about 1.5% higher than the inflation rate.
Obviously, he would need far more money to do that. Instead of Rs 40 lakh as deposit, he would need more than Rs 2 crore as deposit, which he does not have. There is no complete solution to this particular case. However, even a partial solution can only come from the returns that equity can generate. Real (inflation adjusted) equity returns are actually double or triple that of fixed income. Where a FD may give 1.5 per cent above inflation, equity will generate 3 to 5 per cent.
No way out but equity
There is no way out except to take some exposure to equity in a measured, de-risked and tax-efficient way. The ideal method would be to follow these steps: First, keep roughly three years' expenses aside and gradually invest the remaining amount into a set of two or three conservative hybrid funds (balanced funds). After three years, you can start withdrawing every year, from these balanced funds, an amount that is roughly three to four per cent of the total remaining sum. Roughly speaking, this will give you an amount that is equal to, or more, than what you are earning from a fixed income deposit today. The best part is that the value of the remaining investment will also grow at roughly at the inflation rate. If you can implement this, then there is a virtual certainty that you will not be faced with old age poverty. The icing on the cake is that unlike your deposit interest, this income will be tax free.
As I've said often, if one is to avoid old-age poverty, then this phobia of equity investment in retirement must be gotten rid of. There's no other way out!
Are you a Senior Citizen (or) likely to become one soon?
Do you have Senior Citizen's related to you (or) your family (or) staying with you?
Do you have Senior Citizen neighbours (or) colleagues / ex. colleagues - say an ex. Boss, your Teacher etc.?
They may be facing similar set of problems.
Dhanayoga assists many Senior Citizens to generate a health monthly income through appropriate selection of risk mitigated investment assets. Please share this message (use the "Share" icons floating on the left well of this web page) and help Senior Citizens in your family, relatives circle and neighbourhood and help them to enjoy a healthy and sustainable monthly income and return on capital
An investor education campaign by Dhanayoga | Contact us
The other day, I received a WhatsApp message from a senior citizen whose returns from a fixed deposit have gone down by 25 per cent. This difference has come about between a five-year deposit that he made in August 2012, and when he renewed it upon maturity in August 2017.
Of course, to those who are just reading the headline numbers on interest rates, this doesn't make sense. Depending on when you are measuring, interest rates have gone down by two or three per cent. However, here's a part of the exact message: 'I was being paid an amount of Rs 35,352/- every month (of course subject to income tax) enabling me to lead a worry free life financially. Now on maturity I have reinvested the amount in the same Bank and I will be paid Rs 26,489/-'.
The interest rate on his FD may have gone done by just about 2.5 per cent, however, his income is down by 25%. In fact, this is essentially an obfuscation in the way the reduction of interest rates is announced and is carried in the media. A reduction in the interest rate on any deposit from 10 to 8 per cent is a reduction of 20 per cent on the income. If you were earning Rs 20,000 a month, you will now earn Rs 16,000 a month. The '2%' reduction is an illusion.
Seniors have retired from the economy
In fact, the entire move towards a lower interest rate economy, while great news for the economy, is of little direct relevance to older, retired people. Lower inflation and interest rates, better fiscal management, and higher economic growth are all very well but will carry no benefit for them because they are no longer in the earning and accumulative phase of their lives. An older person is not going to get a better job, or a higher salary because the economy is growing. That phase of his or her life is over.
However, wishing for higher interest rates is no solution. This yearning for higher rates is there because we have been conditioned to ignore high inflation, which is the evil twin of high interest rates. I'm sorry to say this, but the person in the above example is financially doomed anyway. For the last five years, when he was getting Rs 35,352 as interest income and spending it, he was actually eating away his capital. Out of that income, no more than Rs 7000 to 10,000 was real income. The rest was just the inflated value of the currency.
Here's the key fact that he and crores others like him ignore: his real income has probably not gone down. If he was spending only his real, inflation adjusted income, he would probably find that it has actually increased. And how would he have spent only his real income? The answer is, by spending only about 1.5 % of the deposit per year, and letting the rest compound and accumulate. This is based on the assumption that FD rates are about 1.5% higher than the inflation rate.
Obviously, he would need far more money to do that. Instead of Rs 40 lakh as deposit, he would need more than Rs 2 crore as deposit, which he does not have. There is no complete solution to this particular case. However, even a partial solution can only come from the returns that equity can generate. Real (inflation adjusted) equity returns are actually double or triple that of fixed income. Where a FD may give 1.5 per cent above inflation, equity will generate 3 to 5 per cent.
No way out but equity
There is no way out except to take some exposure to equity in a measured, de-risked and tax-efficient way. The ideal method would be to follow these steps: First, keep roughly three years' expenses aside and gradually invest the remaining amount into a set of two or three conservative hybrid funds (balanced funds). After three years, you can start withdrawing every year, from these balanced funds, an amount that is roughly three to four per cent of the total remaining sum. Roughly speaking, this will give you an amount that is equal to, or more, than what you are earning from a fixed income deposit today. The best part is that the value of the remaining investment will also grow at roughly at the inflation rate. If you can implement this, then there is a virtual certainty that you will not be faced with old age poverty. The icing on the cake is that unlike your deposit interest, this income will be tax free.
As I've said often, if one is to avoid old-age poverty, then this phobia of equity investment in retirement must be gotten rid of. There's no other way out!
Are you a Senior Citizen (or) likely to become one soon?
Do you have Senior Citizen's related to you (or) your family (or) staying with you?
Do you have Senior Citizen neighbours (or) colleagues / ex. colleagues - say an ex. Boss, your Teacher etc.?
They may be facing similar set of problems.
Dhanayoga assists many Senior Citizens to generate a health monthly income through appropriate selection of risk mitigated investment assets. Please share this message (use the "Share" icons floating on the left well of this web page) and help Senior Citizens in your family, relatives circle and neighbourhood and help them to enjoy a healthy and sustainable monthly income and return on capital
An investor education campaign by Dhanayoga | Contact us
Navigating the world of Mutual Funds
Everything you wanted to know about equity, debt and balanced funds
Retail investors who face the prospect of falling interest rates on their fixed-income instruments and are looking to dip their toes in the waters of market-oriented financial products so as to increase their returns may justifiably feel intimidated by the maze of investment options.
For a start, investing in stocks on your own requires you to be a bit financially savvy, with the ability to pick sound stocks and, secondly, to ‘time the market’.
For newbies, therefore, investments in mutual funds, where professionals manage your money for a fee, offer a way to get a shot at higher returns by gaining from the managers’ expertise. Such investments also allow you to have a diversified portfolio at relatively low investment thresholds. But then comes the daunting task of getting acquainted with the entire universe of mutual funds, and specifically the asset class that best matches your risk profile and offers the kind of post-tax returns you seek.
The simplest way to classify mutual funds is to see them through the prism of the asset classes they invest in: stocks and bonds. The three broad categories of funds — equity, hybrid and debt — can be further distinguished on the basis of fund houses, each of which has its own style, objective and strategy.
But consider this: among just equity funds, or funds that invest in stocks, there are 300-odd equity-oriented schemes on offer from 42 fund houses!
As for debt funds, which carry relatively lower risk than equity funds, there is a whole gamut of fund categories and strategies.
But in the end, what matters to you as an investor is how well you can construct a portfolio based on your risk tolerance, investment objective and time horizon.
Are equity funds for you?
To build an inflation-beating portfolio and to create wealth over the long term, your best bet is to invest in equity funds. These funds invest at least 65 per cent (and up to 100 per cent) of their assets in stocks. These are ideally suited for investors in their 20s and 30s, who have the benefit of a longer investment horizon.
Diversified equity funds can be further classified as large-cap, mid-cap, small-cap and multi-cap funds, depending on their choice of stocks. Most large-cap funds are required to invest 80 per cent of their corups in large-cap stocks (market capitalisation of over ₹10,000 crore). The top-performing funds in this category have delivered returns of 18 per cent and 12 per cent over five- and 10-year periods, respectively.
Mid- and small-cap funds, on the other hand, invest predominantly in smaller stocks (with market cap of less than ₹10,000 crore). These funds carry slightly higher risk than large-cap funds, but they typically also offer better rewards during market rallies.
For those who prefer stability in returns and have a moderate risk appetite, large-cap funds are a good bet. They deliver inflation-beating returns over the long run, and tend to cap losses in volatile markets.
For those who are game for more risk, mid- and small-cap funds are good options. The top-performing funds delivered stellar returns of 92 per cent in the market rallies of 2014 (against 52 per cent from large-cap funds).
But in falling markets, these funds also tend to fall sharper than large-cap funds. In the 2011 bear market, for instance, these funds lost 26 per cent.
Within equity funds, there are some that bear a higher risk than generic diversified funds because of their exposure to a particular theme or a sector. Thematic funds such as Franklin Build India Fund (infrastructure), Birla SL MNC fund (MNC), Taurus Ethical Fund (Shariah) and Tata Dividend Yield Fund (dividend yield) and contra funds (Invesco India Contra Fund) and sector funds such as those under categories like FMCG, technology, banking, pharma and so on, fall under this category. These funds carry concentrated bets and their performance is prone to cyclical swings.
Investors who look upon the world as their oyster can invest in global funds, but they are riskier than other diversified funds.
For whom are debt funds?
Debt funds may not be as risky as equity funds, but they are not without risk of capital erosion. These funds invest in various fixed-income instruments such as government bonds, corporate bonds and other money market and short term debt instruments. The net asset value of debt funds rises or falls along with the underlying bond prices.
Liquid funds and ultra short-term debt funds work as alternatives to bank savings and fixed deposits; they are riskier than bank FDs, but carry the least risk amongst debt funds. Liquid funds are the safest in this category, investing only in debt securities with a residual maturity of less than or equal to 91 days. Given the short maturity period, the interest rate risk and credit risk (default risk) are minimal. Liquid funds have on average delivered 6.5-8.5 per cent returns annually over the past five years. Ultra short-term debt funds carry a slightly higher risk, given that they invest in debt securities with residual maturity up to one year. The returns, though, can be higher. Over the past five years, returns from this category have averaged 7-9 per cent.
For investors with a slightly higher risk appetite and longer horizon of, say, 2-3 years, debt funds, which generate returns both from accruals and duration calls (only moderately), commend themselves. Short-term income funds and Banking and PSU Debt Funds fall under this category.
Short-term income funds invest in debt securities that mature up to 3-4 years. Their portfolios usually have a small allocation to long-term gilts and higher allocation to AAA-rated, medium-tenure, corporate bonds. Banking and PSU Debt Funds offer stable returns and minimise risk by investing in good-quality debt instruments, mainly issued by banks and public sector undertakings.
Investors willing to bet aggressively on either credit or interest rate movements can consider credit opportunities funds, regular income funds, dynamic income funds and long-term gilt funds.
Credit opportunities funds invest a relatively higher portion in lower-rated bonds, and so carry a higher credit risk, but their duration, at 2-4 years, puts a cap on rate risk. Regular income funds carry a higher rate risk but lower credit risk. Dynamic bond funds essentially ride on rate movements and alter the duration of the fund portfolio depending on the expectation of rate movements.
Gilt funds, which mainly invest in long-term government securities, carry negligible credit risk, but given their typical tenures of 7-10 years, they are more prone to rate risk. They can generate returns of 16-18 per cent when rates fall sharply, but may pinch investors when rates move up sharp.
Hybrid funds: best of both worlds
Hybrid or Balanced funds allocate their assets to equity and debt: the debt portion protects the downside; the equity component boosts returns. The risks vary depending on the mix.
Equity-oriented balanced funds invest more than 65 per cent in equity and the rest in debt. The higher allocation of equity helps deliver superior returns while also offering capital gains tax benefits available for diversified equity funds.
Debt-oriented schemes allocate up to 40 per cent and Monthly Income Plans (MIPs) 10-30 per cent of their corpus into equity, thus pegging the risk. However, the returns are also lower than those from equity-oriented balanced funds. Moreover, as they fall under the category of debt funds, they invite short-term capital gains on investments under three years.
To select the right funds suitable for your return expectations, risk profile, time horizon and liquidity needs, Contact us
Article Courtesy - The Hindu Businessline
Retail investors who face the prospect of falling interest rates on their fixed-income instruments and are looking to dip their toes in the waters of market-oriented financial products so as to increase their returns may justifiably feel intimidated by the maze of investment options.
For a start, investing in stocks on your own requires you to be a bit financially savvy, with the ability to pick sound stocks and, secondly, to ‘time the market’.
For newbies, therefore, investments in mutual funds, where professionals manage your money for a fee, offer a way to get a shot at higher returns by gaining from the managers’ expertise. Such investments also allow you to have a diversified portfolio at relatively low investment thresholds. But then comes the daunting task of getting acquainted with the entire universe of mutual funds, and specifically the asset class that best matches your risk profile and offers the kind of post-tax returns you seek.
The simplest way to classify mutual funds is to see them through the prism of the asset classes they invest in: stocks and bonds. The three broad categories of funds — equity, hybrid and debt — can be further distinguished on the basis of fund houses, each of which has its own style, objective and strategy.
But consider this: among just equity funds, or funds that invest in stocks, there are 300-odd equity-oriented schemes on offer from 42 fund houses!
As for debt funds, which carry relatively lower risk than equity funds, there is a whole gamut of fund categories and strategies.
But in the end, what matters to you as an investor is how well you can construct a portfolio based on your risk tolerance, investment objective and time horizon.
Are equity funds for you?
To build an inflation-beating portfolio and to create wealth over the long term, your best bet is to invest in equity funds. These funds invest at least 65 per cent (and up to 100 per cent) of their assets in stocks. These are ideally suited for investors in their 20s and 30s, who have the benefit of a longer investment horizon.
Diversified equity funds can be further classified as large-cap, mid-cap, small-cap and multi-cap funds, depending on their choice of stocks. Most large-cap funds are required to invest 80 per cent of their corups in large-cap stocks (market capitalisation of over ₹10,000 crore). The top-performing funds in this category have delivered returns of 18 per cent and 12 per cent over five- and 10-year periods, respectively.
Mid- and small-cap funds, on the other hand, invest predominantly in smaller stocks (with market cap of less than ₹10,000 crore). These funds carry slightly higher risk than large-cap funds, but they typically also offer better rewards during market rallies.
For those who prefer stability in returns and have a moderate risk appetite, large-cap funds are a good bet. They deliver inflation-beating returns over the long run, and tend to cap losses in volatile markets.
For those who are game for more risk, mid- and small-cap funds are good options. The top-performing funds delivered stellar returns of 92 per cent in the market rallies of 2014 (against 52 per cent from large-cap funds).
But in falling markets, these funds also tend to fall sharper than large-cap funds. In the 2011 bear market, for instance, these funds lost 26 per cent.
Within equity funds, there are some that bear a higher risk than generic diversified funds because of their exposure to a particular theme or a sector. Thematic funds such as Franklin Build India Fund (infrastructure), Birla SL MNC fund (MNC), Taurus Ethical Fund (Shariah) and Tata Dividend Yield Fund (dividend yield) and contra funds (Invesco India Contra Fund) and sector funds such as those under categories like FMCG, technology, banking, pharma and so on, fall under this category. These funds carry concentrated bets and their performance is prone to cyclical swings.
Investors who look upon the world as their oyster can invest in global funds, but they are riskier than other diversified funds.
For whom are debt funds?
Debt funds may not be as risky as equity funds, but they are not without risk of capital erosion. These funds invest in various fixed-income instruments such as government bonds, corporate bonds and other money market and short term debt instruments. The net asset value of debt funds rises or falls along with the underlying bond prices.
Liquid funds and ultra short-term debt funds work as alternatives to bank savings and fixed deposits; they are riskier than bank FDs, but carry the least risk amongst debt funds. Liquid funds are the safest in this category, investing only in debt securities with a residual maturity of less than or equal to 91 days. Given the short maturity period, the interest rate risk and credit risk (default risk) are minimal. Liquid funds have on average delivered 6.5-8.5 per cent returns annually over the past five years. Ultra short-term debt funds carry a slightly higher risk, given that they invest in debt securities with residual maturity up to one year. The returns, though, can be higher. Over the past five years, returns from this category have averaged 7-9 per cent.
For investors with a slightly higher risk appetite and longer horizon of, say, 2-3 years, debt funds, which generate returns both from accruals and duration calls (only moderately), commend themselves. Short-term income funds and Banking and PSU Debt Funds fall under this category.
Short-term income funds invest in debt securities that mature up to 3-4 years. Their portfolios usually have a small allocation to long-term gilts and higher allocation to AAA-rated, medium-tenure, corporate bonds. Banking and PSU Debt Funds offer stable returns and minimise risk by investing in good-quality debt instruments, mainly issued by banks and public sector undertakings.
Investors willing to bet aggressively on either credit or interest rate movements can consider credit opportunities funds, regular income funds, dynamic income funds and long-term gilt funds.
Credit opportunities funds invest a relatively higher portion in lower-rated bonds, and so carry a higher credit risk, but their duration, at 2-4 years, puts a cap on rate risk. Regular income funds carry a higher rate risk but lower credit risk. Dynamic bond funds essentially ride on rate movements and alter the duration of the fund portfolio depending on the expectation of rate movements.
Gilt funds, which mainly invest in long-term government securities, carry negligible credit risk, but given their typical tenures of 7-10 years, they are more prone to rate risk. They can generate returns of 16-18 per cent when rates fall sharply, but may pinch investors when rates move up sharp.
Hybrid funds: best of both worlds
Hybrid or Balanced funds allocate their assets to equity and debt: the debt portion protects the downside; the equity component boosts returns. The risks vary depending on the mix.
Equity-oriented balanced funds invest more than 65 per cent in equity and the rest in debt. The higher allocation of equity helps deliver superior returns while also offering capital gains tax benefits available for diversified equity funds.
Debt-oriented schemes allocate up to 40 per cent and Monthly Income Plans (MIPs) 10-30 per cent of their corpus into equity, thus pegging the risk. However, the returns are also lower than those from equity-oriented balanced funds. Moreover, as they fall under the category of debt funds, they invite short-term capital gains on investments under three years.
To select the right funds suitable for your return expectations, risk profile, time horizon and liquidity needs, Contact us
Article Courtesy - The Hindu Businessline
Begin your child's financial education early
This will enable her to become a proficient saver, spender and investor as an adult
From a young age, we lay stress on sharpening our children's social, academic and extra-curricular skills. But, often we leave the training in financial management skills for a later day. However, if we want our kids to be competent in handling their finances when they grow up, we need to start training them in money management from a young age.
Financial products for children:
Recognising the importance of making kids proficient at money management, banks have launched a few products aimed at achieving this goal. A key initiative in this direction is allowing children above 10 years to open a savings account. These minor-operated accounts can be managed by children with minimal or no supervision from parents. With defined withdrawal limits and various attractive benefits, these accounts are designed to impart confidence and a sense of responsibility among children.
In a similar vein, pre-paid cards have also been launched for children, which are linked to the mobile numbers of their parents. Parents can decide the amount of top-up on such cards, which are then given to children along with the card pin code. While kids have the liberty to spend the money as they please, parents can monitor their spends through updates on their phone via card-related apps. To make learning about money a fun activity, you can incorporate these products into simple lessons that you can design to teach your kids about personal finance.
Go from simple to complex:
Young minds are always curious and highly malleable. They are more receptive towards learning new concepts and experiencing new things. You can link key financial lessons to fun activities for teaching healthy financial habits to your children. Based on your child's age group, you can start with simple financial lessons and then introduce more complicated concepts as they grow up (See table: Right lessons at the right age).
To ensure that your kids imbibe the right financial habits, use your discretion in deciding the best time to have financial talks. An action repeated over a period of time becomes a habit. Hence, regular, practical exercises embodying key financial concepts can help you cultivate positive financial values in your child. Here are some of the key lessons they need to imbibe:
Patience is a virtue:
Investors are often advised to be patient and have a long-term horizon for making the most of their investments. Being patient if they wish to excel in any sphere is a lesson we must teach our kids. A simple way to develop this habit is by spreading out their demand for toys, new clothes or a picnic over a period of time, instead of offering them instant gratification. When they throw a fit, explain to them that they have to wait for good things to happen. And if they are patient, they will enjoy the fruits even more.
Earning money is difficult:
Teach children the value of hard work, dignity of labour, and the importance of saving with one simple exercise: Link their pocket money to household chores. Define the amount that will be given to them for each activity they do. These chores can include cleaning their room, filling water bottles, polishing their shoes, etc. A small remuneration can be linked to simple activities and this amount can be increased as the chores become more difficult. Part of the money that they earn can be given to them as cash and part can be deposited in their saving accounts or topped-up on their pre-paid cards.
Live within your means:
Allow children to indulge in discretionary spends only from their pocket money. Define spends, such as a McDonald’s meal or a new football, which they must buy from their pocket money. If in a particular month they fall short of the amount they need to buy what they want, ask them to wait until the next month for the same. If they are persistent, you can introduce the concept of borrowing and lending by giving them pocket money in advance and deducting this amount from their next month’s allowance. You could even charge an interest.
Set clear goals:
Ask your children to define a big goal towards which they want to save. Be it a plane ticket for a holiday or a new bicycle — help them plan how they are going to achieve these goals. Let them set a time frame and calculate the amount that they will need to fulfill their goals. You can work out chores which they can do to accumulate the required amount of money. Certain incentives such as a bonus can be offered on completion of milestones, such as on accumulation of every Rs 1,000. This will keep them motivated and on track to achieve their goals.
Start early:
Just as a headstart in a race improves your chances of winning, starting the process of investing early on improves your chances of accumulating wealth. This is because the magic of compounding kicks in to make your money work for you. Encourage your kid to start an SIP with you every month from her/his pocket money. Credit a certain percentage of interest every month on their savings to help them experience the magic of compounding.
Read the fine print:
Doing thorough research is important for making sound financial decisions. Plan grocery store trips with your kids. Ask them to read the prices and expiry date on a product before buying it. Encourage them to compare the price and features of different options available and then pick the right one. This exercise can be extended to teach them about budgeting by giving them a certain amount of money and a list of items they must buy with that money.
Lead by example:
Children pick up habits from their parents. For kids to imbibe healthy financial habits, it is important that parents demonstrate good practices through their own behaviour. Hence, avoid having fights on money matters in front of your children. Make financial planning a family activity and encourage your kids to share their views. Display financial discipline, and keep a healthy asset mix in your portfolio.
Even if you can afford to create a financially comfortable future for your children, remember that they will not truly value this luxury without understanding the real value of money. Use these tips and make a fresh start this Children’s Day in grooming your child to be a financially responsible adult
Article Courtesy: Business Standard
From a young age, we lay stress on sharpening our children's social, academic and extra-curricular skills. But, often we leave the training in financial management skills for a later day. However, if we want our kids to be competent in handling their finances when they grow up, we need to start training them in money management from a young age.
Financial products for children:
Recognising the importance of making kids proficient at money management, banks have launched a few products aimed at achieving this goal. A key initiative in this direction is allowing children above 10 years to open a savings account. These minor-operated accounts can be managed by children with minimal or no supervision from parents. With defined withdrawal limits and various attractive benefits, these accounts are designed to impart confidence and a sense of responsibility among children.
In a similar vein, pre-paid cards have also been launched for children, which are linked to the mobile numbers of their parents. Parents can decide the amount of top-up on such cards, which are then given to children along with the card pin code. While kids have the liberty to spend the money as they please, parents can monitor their spends through updates on their phone via card-related apps. To make learning about money a fun activity, you can incorporate these products into simple lessons that you can design to teach your kids about personal finance.
Go from simple to complex:
Young minds are always curious and highly malleable. They are more receptive towards learning new concepts and experiencing new things. You can link key financial lessons to fun activities for teaching healthy financial habits to your children. Based on your child's age group, you can start with simple financial lessons and then introduce more complicated concepts as they grow up (See table: Right lessons at the right age).
To ensure that your kids imbibe the right financial habits, use your discretion in deciding the best time to have financial talks. An action repeated over a period of time becomes a habit. Hence, regular, practical exercises embodying key financial concepts can help you cultivate positive financial values in your child. Here are some of the key lessons they need to imbibe:
Patience is a virtue:
Investors are often advised to be patient and have a long-term horizon for making the most of their investments. Being patient if they wish to excel in any sphere is a lesson we must teach our kids. A simple way to develop this habit is by spreading out their demand for toys, new clothes or a picnic over a period of time, instead of offering them instant gratification. When they throw a fit, explain to them that they have to wait for good things to happen. And if they are patient, they will enjoy the fruits even more.
Earning money is difficult:
Teach children the value of hard work, dignity of labour, and the importance of saving with one simple exercise: Link their pocket money to household chores. Define the amount that will be given to them for each activity they do. These chores can include cleaning their room, filling water bottles, polishing their shoes, etc. A small remuneration can be linked to simple activities and this amount can be increased as the chores become more difficult. Part of the money that they earn can be given to them as cash and part can be deposited in their saving accounts or topped-up on their pre-paid cards.
Live within your means:
Allow children to indulge in discretionary spends only from their pocket money. Define spends, such as a McDonald’s meal or a new football, which they must buy from their pocket money. If in a particular month they fall short of the amount they need to buy what they want, ask them to wait until the next month for the same. If they are persistent, you can introduce the concept of borrowing and lending by giving them pocket money in advance and deducting this amount from their next month’s allowance. You could even charge an interest.
Set clear goals:
Ask your children to define a big goal towards which they want to save. Be it a plane ticket for a holiday or a new bicycle — help them plan how they are going to achieve these goals. Let them set a time frame and calculate the amount that they will need to fulfill their goals. You can work out chores which they can do to accumulate the required amount of money. Certain incentives such as a bonus can be offered on completion of milestones, such as on accumulation of every Rs 1,000. This will keep them motivated and on track to achieve their goals.
Start early:
Just as a headstart in a race improves your chances of winning, starting the process of investing early on improves your chances of accumulating wealth. This is because the magic of compounding kicks in to make your money work for you. Encourage your kid to start an SIP with you every month from her/his pocket money. Credit a certain percentage of interest every month on their savings to help them experience the magic of compounding.
Read the fine print:
Doing thorough research is important for making sound financial decisions. Plan grocery store trips with your kids. Ask them to read the prices and expiry date on a product before buying it. Encourage them to compare the price and features of different options available and then pick the right one. This exercise can be extended to teach them about budgeting by giving them a certain amount of money and a list of items they must buy with that money.
Lead by example:
Children pick up habits from their parents. For kids to imbibe healthy financial habits, it is important that parents demonstrate good practices through their own behaviour. Hence, avoid having fights on money matters in front of your children. Make financial planning a family activity and encourage your kids to share their views. Display financial discipline, and keep a healthy asset mix in your portfolio.
Even if you can afford to create a financially comfortable future for your children, remember that they will not truly value this luxury without understanding the real value of money. Use these tips and make a fresh start this Children’s Day in grooming your child to be a financially responsible adult
Article Courtesy: Business Standard
70% Investors are Asset Poor - How about you?
70% people feel that they are “Asset Poor” as per a recent survey. What about you?
No matter how much you earn or how much wealth you have created till now, you will fall into one of the following 4 categories.
Suddenly one day, I thought how many people will consider them “Asset Rich” and “Income Rich” ? So I thought of creating a survey which asked people just this simple question. Note that this survey does not represent general population of country, but those who work in big cities, have a decent income/wealth (probably) and are net savvy.
Before I discuss about each category and look more into it. I want to share with you the survey results highlights
No matter how much you earn or how much wealth you have created till now, you will fall into one of the following 4 categories.
- Asset Rich, Income Rich
- Asset Rich, Income Poor
- Asset Poor, Income Rich
- Asset Poor, Income Poor
Suddenly one day, I thought how many people will consider them “Asset Rich” and “Income Rich” ? So I thought of creating a survey which asked people just this simple question. Note that this survey does not represent general population of country, but those who work in big cities, have a decent income/wealth (probably) and are net savvy.
Before I discuss about each category and look more into it. I want to share with you the survey results highlights
- Around 70% people see themselves as “Asset Poor”
- Around 65% people see themselves as “Income Poor”
- Only 10% people felt they were “Asset Rich and Cash Rich” both
|
|
1. Asset Poor, Income Poor
At the bottom of the pyramid are the maximum people who feel them to be both “Asset Poor” and “Income poor” at the same time. As per our survey, it amounts to 45.97% people, or 45 people out of every 100. Think about this, a big chunk of people feel they are not earning enough to lead a great life, nor they have build enough wealth to call themselves RICH. This is alarming !
Also note that these people “feel” themselves as Asset Poor, Income Poor. So it’s all about their own perception about themselves. So even a person earning Rs 50,000 per month might feel he/she is “Asset Poor, Income Poor”. It has a lot to do about your relationship with money.
I think people falling in this category must be highly stressed as they might be surrounded by various people who either own some properties or if not, at least earn decent enough to enjoy various materialistic things in life. One of the earlier survey shows that every 1 out of 2 person in India is stressed because of money related matters.
2. Asset Rich, Income Poor
This is an interesting category of people. A lot of people are asset rich, but Cash poor. You must be wondering how?
The best example of this category are some senior citizens who do not have any source of income, but they have good assets. However they are either living in that property or its used by their kids now.
Another example for this category are families, which own ancestral homes in cities which were bought by their parents, and now those properties are worth crores, however they still don’t have a decent income source. They might be into a small business or some kind of job, but they still earn enough to run the house.
Also in various smaller cities, there are many people who have great amount of wealth, but their lifestyle if base minimum and they don’t spend enough on themselves. My own best friend who lives in Varanasi has wealth upwards of Rs 10 crore (total property worth), but they still run around all day each month trying to earn enough to meet the ends meet, because they can’t sell their lands just to enjoy life .
“What will people say”- is what holds them !
3. Asset Poor, Income Rich
Now comes the third category where 24.44% people fall. These are mostly those people who have recently upgraded from middle class to higher middle class when it comes to income.
They are earning good salaries like 1/2/3 lacs per month (mostly in IT industry) , but they are still struggling to own a house of their own or to create any sizable wealth. Even if they own a house, it’s on a huge bank loan which ultimately makes them just rich on the left side of the balance sheet, but not in totality!
This category finds it very hard to build assets, because their expenses are very high because of their lifestyle. It is said “America is full of high-earning poor people”, most of the people earn decent income, but they fail to save enough money to build wealth. I think many people in big Indian cities are going on the same path.
4. Asset Rich, Income Rich
This is simply the people who are at the higher end of the pyramid. With their several years of experience and discipline they have create good wealth and also earn decent money each month. They are free from debt now (mostly)
A very high level description for these people would be those who have
- A house of their own without any loan
- A good car without loan
- A stable and secure income stream of upwards of 1-2 lacs per month
- Enough money lying in bank accounts or mutual funds/stocks
So what makes you Poor or Rich?
It’s all about how you structure your financial life and what shape you give it over the years. There is a big difference into the cash flow of Poor people and Rich people and below diagram shows it in a very simple way.
Poor people – Earn and simply spend that money on expenses, they keep doing this all their life and never build any assets
Middle Class – While middle class earns better income compared to poor people, still they create enough liabilities which eat up all their income, if anything left after expenses
Rich People – Rich people do something different, they focus on creating assets which generate income for them over the years. It can be dividend from stocks, mutual funds or building real estate which gives income.
How to become “Asset Rich” ?
While this is a topic which calls for a separate book, I will want to give an attempt to talk about it briefly.
To become Asset Rich, you need to first become Income Rich. There is no other option here, unless you have a rich relative who might will leave his fortune to you
So you need to first move to “Income Rich” category from “Income Poor” . When I say Income Rich, I mean you earn enough money each month, which helps you to save good amount of money after all your expenses and EMI’s . Because unless you keep investing good amount of money each month, becoming rich will be tough.
Even if you are generating very good returns like (12% or 15%) , you will not build enough wealth if you do a SIP of Rs 3,000 per month . I hope you get my point.
The amount or quantum of money you put in each month is highly important.
So you need to upgrade your skills, work on increasing your income, save a good amount of it with discipline and take decisions which at least doesn’t loose you money, if not make wealth for you. I don’t want to go into details here, because this is a big topic.
What are Assets and Liability?
I really feel you should once watch this 2 min video from Robert Kiyosaki where he explains about Assets and Liabilities. This will give you some really good background to start thinking how you want your financial life to shape up.
For guidance on how to build a financially predictable and stable future, welcome to get in touch with us >>
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Personal Finance - The right mindset
|
|
How best to use debt funds
Here is how you can use debt funds in combination with other investment options for greater safety, tax efficiency and returns
Investors often believe that while equity investing is complicated, debt investing is as simple as parking your money in a fixed deposit and renewing it. But debt and hybrid mutual funds, if used correctly, can help investors get to that optimum mix of safety, tax efficiency and returns.
Here are three case studies on how debt mutual funds can be used with other instruments to construct a portfolio that meets different goals.
Retiree seeking regular income
Sixty-year-old Guha is set to retire from a private-sector firm as a middle-level corporate executive in August. His firm offers no pension. He hopes to get a final settlement of Rs 40 lakh from his employer by way of EPF balance, leave encashment, etc. He also has Rs 15 lakh, at current market value, in large-cap, mid-cap and small-cap equity funds and another Rs 15 lakh in bank fixed deposits. His banker recommends investing his retirement corpus in balanced funds for tax-free dividends. Should he go for it? He would like to receive regular income and not take too much risk.
No, balanced funds would not be a good option for Guha to park his entire retirement portfolio. Balanced fund returns look good today because of a rising stock market in the last five years, but if markets slump, they can subject him to capital losses. Any hybrid fund with an equity component is a bad idea to earn regular income. He can instead consider the following.
Guha must sign up for a health-insurance plan as soon as possible to cover any medical emergencies. As Guha's first priority is to take care of his monthly expenses, he should park money in safe debt instruments first. Of his retirement benefits of Rs 40 lakh, he can invest Rs 15 lakh in the five-year post-office Senior Citizens Savings Scheme (SCSS). If he locks in before September-end, this scheme offers 8.3 per cent annual interest (credited quarterly) with complete safety of principal.
He can invest the remaining Rs 25 lakh from his retirement proceeds in income and short-term income funds to earn a better post-tax return than a bank FD. He can continue with his existing bank FDs of Rs 15 lakh. But given the low interest rates, he shouldn't lock in for more than one-two years. The bank FD portion can also double up as Guha's emergency fund. This debt portfolio, at prevailing returns, may fetch him an annual income of roughly Rs 4.5 lakh (or a monthly income of about Rs 38,000). (These amounts can vary with market rates). As he will be eligible for Section 80C tax breaks on his SCSS investment up to Rs 1.5 lakh a year, he will be outside the tax net this year.
Assuming a life expectancy of 85 years, Guha will also need investments that will beat inflation during the next 25 years. Given that we are at relatively high stock-market levels and that he is risk-averse, Guha can switch his Rs 15 lakh equity-fund investments to balanced funds, to reduce risk. Guha should not rely on these funds for his needs for the next five years.
Among debt funds, income and short-term income funds are a better bet than long-term gilt funds or dynamic-bond Funds at this juncture because interest rates in the economy have already fallen quite sharply. Given the limited surpluses with Guha, he should choose debt funds which follow low-risk strategies. This would mean selecting funds that usually maintain low average maturity (three years or less) and low exposure to bonds rated below AA. Based on Value Research data, funds such as HDFC Floating Rate Income - Long Term, ICICI Prudential Banking and PSU Debt, Aditya Birla Sun Life Short Term and UTI Short Term Income make the cut. He can divide the proceeds equally between these funds.
Given that the dividend paid out by debt funds is taxed at a flat 28.3 per cent, he can invest in growth plans with a systematic withdrawal facility to get a regular cash flow every month. He should check the performance of his funds at least twice a year or hire an advisor to do so.
Supplement to pension
Seventy-year old Sujatha is the wife of a late government employee. She receives a family pension of Rs 40,000 and has her medical expenses covered by a government scheme. Their life savings of Rs 40 lakh are invested in bank FDs. As bank FD rates have dropped sharply, she would like to supplement her income and if possible leave something to her children. Her advisor is urging her to consider corporate FDs. Would mutual funds be a better option? If so, what kind?
Sujatha already has a lifelong pension that takes care of her basic living expenses. But as the pension is fixed, she will need to plan for inflation in her living expenses over her lifetime. Her current pension and interest income, amounting to roughly Rs 7.6 lakh a year, put her in the taxable bracket. She can use debt and hybrid funds to beat inflation, earn more tax-efficient income and accumulate wealth for her children. Mutual funds would be a better option than corporate FDs because they would help her diversify across many corporate issuers in place of one.
Retaining Rs 10 lakh in bank FDs for emergencies, Sujatha can move Rs 20 lakh into income and short-term income funds. Given that we are closer to the bottom of the rate cycle, it would be best to invest in income or short-term income funds with a higher accrual element than long duration.
Some of the funds that may be suitable include Aditya Birla Sun Life Short Term Fund, HDFC Medium Term Opportunities, UTI Medium Term, ICICI Prudential Banking & PSU Debt and Axis Regular Savings are good choices. She should hold a minimum of three-four funds and invest in the growth option, preferably locking in for three years. At the end of three years, returns on these funds will be subject to long-term capital-gains tax at 20 per cent with indexation benefits.
She can park the remaining Rs 10 lakh in balanced advantage or equity-savings funds. These funds invest a third of their portfolio in equities, a third in equity arbitrage and a third in debt instruments. They are treated as 'equity oriented' for tax purposes and thus offer tax-free returns after one year. But their returns and risk profile resemble debt-oriented hybrid funds. However, given that they carry a one-third equity component, the minimum holding period for such funds to deliver reasonable returns is five years. HDFC Equity Savings Fund, ICICI Prudential Balanced Advantage Fund and Reliance Equity Savings Fund are some funds in this space to consider. The growth option is again the best bet here. With returns from debt funds and equity-savings funds accumulating instead of being paid out, Sujatha may find her tax incidence dropping by two-thirds.
She should check on the performance of her funds at least twice a year or hire an advisor to do so.
Young growth-seekers
Sachin and Saina are a working couple in their late twenties who are just now beginning to think about their long-term goals. They would like to build a corpus towards buying a home in the next ten years, the education of their two-year old daughter and their retirement. While they started SIPs in a couple of mid-cap and micro-cap equity funds a year ago, they are wondering whether they need to switch now that the markets have zoomed. They're also wondering if they need to own debt funds. They would like the investment to be hands-free.
Sachin and Saina should look to buy health insurance for their entire family while they're still young and also get individual term life policies to take care of their dependents in the event of death of one of them.
Given their preference for a hands-free investment, they should look to start SIPs in balanced funds, both towards the down payment on their home in ten years and their daughter's education in 15 years. Balanced funds will take care of both the debt and equity components of their asset allocation. The automatic rebalancing feature of balanced funds will also ensure that profits are booked on the equity portion or debt portion, if returns on either overshoot. Balanced-fund returns are also tax-exempt after one year of holding. HDFC Balanced Fund, Reliance Regular Savings - Balanced, Aditya Birla Sun Life 95 are good options. For their retirement goal, they can invest in two-three multi-cap funds through the SIP route - Franklin India High Growth Companies, DSP BlackRock Equity, ICICI Prudential Value Discovery are good options.
They can hire a financial advisor to set specific financial targets and monitor their portfolios over time.
Click here to identify suitable debt funds based on return, risk and duration parameters to best meet your needs.
Contact us for guidance to start investing (or) diversifying your portfolio into Debt funds
Investors often believe that while equity investing is complicated, debt investing is as simple as parking your money in a fixed deposit and renewing it. But debt and hybrid mutual funds, if used correctly, can help investors get to that optimum mix of safety, tax efficiency and returns.
Here are three case studies on how debt mutual funds can be used with other instruments to construct a portfolio that meets different goals.
Retiree seeking regular income
Sixty-year-old Guha is set to retire from a private-sector firm as a middle-level corporate executive in August. His firm offers no pension. He hopes to get a final settlement of Rs 40 lakh from his employer by way of EPF balance, leave encashment, etc. He also has Rs 15 lakh, at current market value, in large-cap, mid-cap and small-cap equity funds and another Rs 15 lakh in bank fixed deposits. His banker recommends investing his retirement corpus in balanced funds for tax-free dividends. Should he go for it? He would like to receive regular income and not take too much risk.
No, balanced funds would not be a good option for Guha to park his entire retirement portfolio. Balanced fund returns look good today because of a rising stock market in the last five years, but if markets slump, they can subject him to capital losses. Any hybrid fund with an equity component is a bad idea to earn regular income. He can instead consider the following.
Guha must sign up for a health-insurance plan as soon as possible to cover any medical emergencies. As Guha's first priority is to take care of his monthly expenses, he should park money in safe debt instruments first. Of his retirement benefits of Rs 40 lakh, he can invest Rs 15 lakh in the five-year post-office Senior Citizens Savings Scheme (SCSS). If he locks in before September-end, this scheme offers 8.3 per cent annual interest (credited quarterly) with complete safety of principal.
He can invest the remaining Rs 25 lakh from his retirement proceeds in income and short-term income funds to earn a better post-tax return than a bank FD. He can continue with his existing bank FDs of Rs 15 lakh. But given the low interest rates, he shouldn't lock in for more than one-two years. The bank FD portion can also double up as Guha's emergency fund. This debt portfolio, at prevailing returns, may fetch him an annual income of roughly Rs 4.5 lakh (or a monthly income of about Rs 38,000). (These amounts can vary with market rates). As he will be eligible for Section 80C tax breaks on his SCSS investment up to Rs 1.5 lakh a year, he will be outside the tax net this year.
Assuming a life expectancy of 85 years, Guha will also need investments that will beat inflation during the next 25 years. Given that we are at relatively high stock-market levels and that he is risk-averse, Guha can switch his Rs 15 lakh equity-fund investments to balanced funds, to reduce risk. Guha should not rely on these funds for his needs for the next five years.
Among debt funds, income and short-term income funds are a better bet than long-term gilt funds or dynamic-bond Funds at this juncture because interest rates in the economy have already fallen quite sharply. Given the limited surpluses with Guha, he should choose debt funds which follow low-risk strategies. This would mean selecting funds that usually maintain low average maturity (three years or less) and low exposure to bonds rated below AA. Based on Value Research data, funds such as HDFC Floating Rate Income - Long Term, ICICI Prudential Banking and PSU Debt, Aditya Birla Sun Life Short Term and UTI Short Term Income make the cut. He can divide the proceeds equally between these funds.
Given that the dividend paid out by debt funds is taxed at a flat 28.3 per cent, he can invest in growth plans with a systematic withdrawal facility to get a regular cash flow every month. He should check the performance of his funds at least twice a year or hire an advisor to do so.
Supplement to pension
Seventy-year old Sujatha is the wife of a late government employee. She receives a family pension of Rs 40,000 and has her medical expenses covered by a government scheme. Their life savings of Rs 40 lakh are invested in bank FDs. As bank FD rates have dropped sharply, she would like to supplement her income and if possible leave something to her children. Her advisor is urging her to consider corporate FDs. Would mutual funds be a better option? If so, what kind?
Sujatha already has a lifelong pension that takes care of her basic living expenses. But as the pension is fixed, she will need to plan for inflation in her living expenses over her lifetime. Her current pension and interest income, amounting to roughly Rs 7.6 lakh a year, put her in the taxable bracket. She can use debt and hybrid funds to beat inflation, earn more tax-efficient income and accumulate wealth for her children. Mutual funds would be a better option than corporate FDs because they would help her diversify across many corporate issuers in place of one.
Retaining Rs 10 lakh in bank FDs for emergencies, Sujatha can move Rs 20 lakh into income and short-term income funds. Given that we are closer to the bottom of the rate cycle, it would be best to invest in income or short-term income funds with a higher accrual element than long duration.
Some of the funds that may be suitable include Aditya Birla Sun Life Short Term Fund, HDFC Medium Term Opportunities, UTI Medium Term, ICICI Prudential Banking & PSU Debt and Axis Regular Savings are good choices. She should hold a minimum of three-four funds and invest in the growth option, preferably locking in for three years. At the end of three years, returns on these funds will be subject to long-term capital-gains tax at 20 per cent with indexation benefits.
She can park the remaining Rs 10 lakh in balanced advantage or equity-savings funds. These funds invest a third of their portfolio in equities, a third in equity arbitrage and a third in debt instruments. They are treated as 'equity oriented' for tax purposes and thus offer tax-free returns after one year. But their returns and risk profile resemble debt-oriented hybrid funds. However, given that they carry a one-third equity component, the minimum holding period for such funds to deliver reasonable returns is five years. HDFC Equity Savings Fund, ICICI Prudential Balanced Advantage Fund and Reliance Equity Savings Fund are some funds in this space to consider. The growth option is again the best bet here. With returns from debt funds and equity-savings funds accumulating instead of being paid out, Sujatha may find her tax incidence dropping by two-thirds.
She should check on the performance of her funds at least twice a year or hire an advisor to do so.
Young growth-seekers
Sachin and Saina are a working couple in their late twenties who are just now beginning to think about their long-term goals. They would like to build a corpus towards buying a home in the next ten years, the education of their two-year old daughter and their retirement. While they started SIPs in a couple of mid-cap and micro-cap equity funds a year ago, they are wondering whether they need to switch now that the markets have zoomed. They're also wondering if they need to own debt funds. They would like the investment to be hands-free.
Sachin and Saina should look to buy health insurance for their entire family while they're still young and also get individual term life policies to take care of their dependents in the event of death of one of them.
Given their preference for a hands-free investment, they should look to start SIPs in balanced funds, both towards the down payment on their home in ten years and their daughter's education in 15 years. Balanced funds will take care of both the debt and equity components of their asset allocation. The automatic rebalancing feature of balanced funds will also ensure that profits are booked on the equity portion or debt portion, if returns on either overshoot. Balanced-fund returns are also tax-exempt after one year of holding. HDFC Balanced Fund, Reliance Regular Savings - Balanced, Aditya Birla Sun Life 95 are good options. For their retirement goal, they can invest in two-three multi-cap funds through the SIP route - Franklin India High Growth Companies, DSP BlackRock Equity, ICICI Prudential Value Discovery are good options.
They can hire a financial advisor to set specific financial targets and monitor their portfolios over time.
Click here to identify suitable debt funds based on return, risk and duration parameters to best meet your needs.
Contact us for guidance to start investing (or) diversifying your portfolio into Debt funds
Four often repeated Investing mistakes
What you are doing wrong can severely affect your portfolio. Here are some measures you should protect yourself against.
To err maybe human, but it is also a critical part of any learning process. This is applicable in the realm of investing too. While it’s impossible to always make the right choices, the best that investors can do is avoid common investment mistakes which could hurt their investments and hamper their prospects of long-term wealth creation.
Fortunately, most of these investment mistakes are well documented. Unfortunately, they continue to be often repeated. Here we discuss four common ones that investors must avoid.
Investing without planning
Planning is the foundation of investing; the first principle, and sadly the most flouted one. Investing demands discipline and that requires planning. This involves - setting tangible goals, assessing one’s risk appetite, creating an investment plan and then executing it.
Unfortunately, most of the investors believe that the investment process begins with making investments, which is essentially the last step of a financial planning exercise. Many investors mistakenly believe that planning is required only when they have substantial monies to invest. What they fail to understand is that this is exactly the reason why one should plan their investments.
The pitfalls of not planning while making investments are huge. This results in making investments in an ad hoc manner and such investments are directionless often failing to achieve desired results. It should be well understood that investments are not an end, rather they are means to achieve an end. Hence, it is critical to plan one’s investments at the onset.
Making an investment decision based on market levels
This is apt in the current scenario. With the Indian stock market witnessing almost a secular bull run for some time now, investors are confused as to how to proceed with their investments i.e. whether to invest, redeem or wait. While those wanting to invest are wary of high valuations and waiting for a correction, those wanting to redeem are waiting for the markets to move up further. But then there is no certainty where the markets are headed. This uncertain nature of the market is exactly the reason it is an unreliable factor to base one’s investment decision on. Simply put, consistently timing the market accurately is impossible. Therefore, instead of doing that, investors should divert their energy towards setting their investment goals, selecting the right strategies and spreading their investment risks.
Systematic investment plan, or SIP, is an effective investment method to counter the temptation of market timing. Apart from instilling a sense of discipline, rupee-cost averaging can help investors benefit from downturns as well.
Chasing trends
Let’s first understand what it means. The mutual fund industry has often witnessed various trends emerging at different points in time. A trend here could be an investment pattern when a segment or sector suddenly hits a purple patch, catching investors’ fancy and leading to substantial inflows.
For instance, during 1998-99, technology stocks started doing well resulting in many fund houses launching technology sector funds thus attracting many investors. Similarly, 2004-07 was the period when infrastructure sector became a fad resulting in many fund houses launching infrastructure funds. The problem here is that, these trends which are widely marketed and talked about, however, rarely is their suitability for investors discussed or understood. For example, irrespective of any sector’s popularity, a sector fund is apt only for investors who understand the underlying sector’s dynamics and can time their entry and exit from the fund.
Similarly, huge inflows into mid/small-cap funds don’t make them apt for all investors given their high-risk high return nature; or gilt fund’s doing significantly well during down interest rate scenario doesn’t merit an automatic entry in the portfolio of every investor. Investing based on these trends is risky as it ignores the product’s aptness for investor, thereby making it a poor strategy. While these trends may look like hot tips, they can have disastrous results and hence they are better avoided.
Investing and forgetting
Investing is a dynamic exercise. It’s not a one-time activity that one can do and forget. Hence, conducting periodic reviews is critical to ensuring the veracity of the investment portfolio. Further, the review should be conducted in a timely manner, so that deviations (if any) can be identified and rectified.
Review process is also conducted to understand the weak link in the portfolio. For instance, if a fund fails to play its role in the portfolio for which it was included, it needs to be replaced. Also, a change in the fund’s strategy may render it unsuitable for the portfolio warranting, a replacement. Change in the investor’s needs and risk appetite also necessitates a portfolio review process. With passage of time, a new set of needs may emerge; also, the investor’s risk-taking ability might change. The portfolio should be suitably modified to incorporate these changes. Ideally, the investment advisor must play a significant part and aid the investor in the review process.
This post initially appeared in The Deccan Herald.
If you need professional guidance to evolve and implement a proper financial and investment plan for your family or business, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
To err maybe human, but it is also a critical part of any learning process. This is applicable in the realm of investing too. While it’s impossible to always make the right choices, the best that investors can do is avoid common investment mistakes which could hurt their investments and hamper their prospects of long-term wealth creation.
Fortunately, most of these investment mistakes are well documented. Unfortunately, they continue to be often repeated. Here we discuss four common ones that investors must avoid.
Investing without planning
Planning is the foundation of investing; the first principle, and sadly the most flouted one. Investing demands discipline and that requires planning. This involves - setting tangible goals, assessing one’s risk appetite, creating an investment plan and then executing it.
Unfortunately, most of the investors believe that the investment process begins with making investments, which is essentially the last step of a financial planning exercise. Many investors mistakenly believe that planning is required only when they have substantial monies to invest. What they fail to understand is that this is exactly the reason why one should plan their investments.
The pitfalls of not planning while making investments are huge. This results in making investments in an ad hoc manner and such investments are directionless often failing to achieve desired results. It should be well understood that investments are not an end, rather they are means to achieve an end. Hence, it is critical to plan one’s investments at the onset.
Making an investment decision based on market levels
This is apt in the current scenario. With the Indian stock market witnessing almost a secular bull run for some time now, investors are confused as to how to proceed with their investments i.e. whether to invest, redeem or wait. While those wanting to invest are wary of high valuations and waiting for a correction, those wanting to redeem are waiting for the markets to move up further. But then there is no certainty where the markets are headed. This uncertain nature of the market is exactly the reason it is an unreliable factor to base one’s investment decision on. Simply put, consistently timing the market accurately is impossible. Therefore, instead of doing that, investors should divert their energy towards setting their investment goals, selecting the right strategies and spreading their investment risks.
Systematic investment plan, or SIP, is an effective investment method to counter the temptation of market timing. Apart from instilling a sense of discipline, rupee-cost averaging can help investors benefit from downturns as well.
Chasing trends
Let’s first understand what it means. The mutual fund industry has often witnessed various trends emerging at different points in time. A trend here could be an investment pattern when a segment or sector suddenly hits a purple patch, catching investors’ fancy and leading to substantial inflows.
For instance, during 1998-99, technology stocks started doing well resulting in many fund houses launching technology sector funds thus attracting many investors. Similarly, 2004-07 was the period when infrastructure sector became a fad resulting in many fund houses launching infrastructure funds. The problem here is that, these trends which are widely marketed and talked about, however, rarely is their suitability for investors discussed or understood. For example, irrespective of any sector’s popularity, a sector fund is apt only for investors who understand the underlying sector’s dynamics and can time their entry and exit from the fund.
Similarly, huge inflows into mid/small-cap funds don’t make them apt for all investors given their high-risk high return nature; or gilt fund’s doing significantly well during down interest rate scenario doesn’t merit an automatic entry in the portfolio of every investor. Investing based on these trends is risky as it ignores the product’s aptness for investor, thereby making it a poor strategy. While these trends may look like hot tips, they can have disastrous results and hence they are better avoided.
Investing and forgetting
Investing is a dynamic exercise. It’s not a one-time activity that one can do and forget. Hence, conducting periodic reviews is critical to ensuring the veracity of the investment portfolio. Further, the review should be conducted in a timely manner, so that deviations (if any) can be identified and rectified.
Review process is also conducted to understand the weak link in the portfolio. For instance, if a fund fails to play its role in the portfolio for which it was included, it needs to be replaced. Also, a change in the fund’s strategy may render it unsuitable for the portfolio warranting, a replacement. Change in the investor’s needs and risk appetite also necessitates a portfolio review process. With passage of time, a new set of needs may emerge; also, the investor’s risk-taking ability might change. The portfolio should be suitably modified to incorporate these changes. Ideally, the investment advisor must play a significant part and aid the investor in the review process.
This post initially appeared in The Deccan Herald.
If you need professional guidance to evolve and implement a proper financial and investment plan for your family or business, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Beware of Non-term Life Insurance plans
Last year, a life insurance adviser informed me that while more clients are opting for term plans, there are many who prefer non-term plans for their “Survival Benefits”.
I can understand the psychology. If we have a term plan and do not die during the life of the policy, it may seem that the premiums paid are a waste of money. In a non-term traditional insurance policy you get the sum assured plus guaranteed additions. Therefore, since untimely death is unlikely, non-term traditional plans are better than term plans.
Let me explain why this thinking is flawed both conceptually and financially. Its purpose is protection.
If the electrical wiring in your house has been done securely and all your electrical appliances are in excellent condition, you should not expect a short circuit to take place. Yet, chances are you would install a circuit breaker, because a short circuit, however unlikely, can cause a severe hazard. It provides protection from the risk of electrical hazards.
We need protection from both likely and unlikely risks. In fact, unlikely risks are much more dangerous than likely risks because we are less prepared for it. An untimely death, however unlikely, is the most dangerous risk that our families face. Life insurance provides protection against this risk.
Now, do you expect the circuit breaker to serve any other purpose, such as doubling up as a door bell? It sounds ridiculous, but hopefully it reinforces the point that, the purpose of a protective device should be to provide protection against specific risks, nothing more. Similarly, the purpose of life insurance is to provide financial security to your family in the event of your untimely death. It is nothing more and nothing less.
Non-term traditional plans may cause you to be underinsured.
Let us now understand with the help of an example, why non-term traditional life insurance plans, like endowment plans, money back plans, pension plans etc are detrimental to your life insurance objective.
Let’s assume you are 30 years old and your annual income is Rs 20 lakhs. How much life insurance is adequate for you? To get a proper estimate of your required life insurance cover, you should factor in your debt, monthly income your family needs to meet their expenses, and future expenses such as a child’s education or marriage. For the sake of simplicity let us go with a rule of thumb which suggests that your life cover should be at least 10–12 times of your annual income. Based on your annual income of Rs 20 lakh, your life cover or sum assured should be Rs 2 crores.
Let us come to affordability now. Assuming your annual income is Rs 20 lakhs, your estimated net monthly income after mandatory deductions like provident fund and income tax will be around Rs 1.2 lakhs. Let us assume that after paying for all expenses such as rent, servicing of home loans, food, transportation, utility bills, schools fees etc, you are able to save 30% of your net monthly income. This means your monthly savings will be Rs 36,000.
Let us now assume you want to buy a non-term traditional life insurance policy. As discussed earlier, your ideal life cover or sum assured should be Rs 2 crores. Based on premium rates of one of the largest life insurance companies in India, your annual premium for an endowment policy of a 20-year term and Rs 2 crores sum assured, will be Rs 10-11 lakhs. Since your monthly savings is Rs 36,000, you cannot afford a Rs 2 crores sum assured policy. So how much can you afford? Let us assume that you are ready to pay a premium of Rs 25,000 per month or Rs 300,000 per annum. With an annual premium of Rs 300,000 per annum, based on premium rates discussed above, you can buy a 20-year endowment policy of Rs 60 lakhs sum assured. In the event of an unfortunate death, your family will get the death benefit of Rs 60 lakhs.
Let us assume that your family invests the money in a risk free assured return fixed income product yielding 8%, the annual income will be Rs 4.8 lakhs or Rs 40,000 on a monthly basis. Under normal circumstances, you spend Rs 80,000 – 85,000 on a monthly basis for your expenses. But in the event of an untimely death, your family has to survive on less than half of that amount! If you have a loan, the financial distress gets much worse.
There is no doubt in this example, that your decision to buy a non-term traditional insurance cum savings plan has left you underinsured.
What if you survive the policy term?
Based on historical data, the internal rate of returns, or IRR, of life insurance endowment plans is around 6%. The IRR of money back plans are even lower. Some insurers may have given slightly higher returns, but let us go with 6% in our example. If the IRR of your non-term traditional plan is 6% and you pay an annual premium of Rs 300,000 (as in our case study), your policy maturity amount will be Rs 1.1 crores. Many life insurance agents position the maturity amount of your policy as part of your retirement corpus. As discussed earlier, your normal monthly expenses are Rs 80,000–85,000. Applying a 4% long-term inflation rate, assuming you are 30 years old, by the time you retire, your monthly expenses will be Rs 2.6–2.8 lakhs.
Let us see how much your policy maturity amount will earn you, if invested in an annuity product yielding 8%. Your annual income will be Rs 8.8 lakhs. On a post-tax monthly basis, you will earn little more than Rs 65,000. This does not even meet 25% of your income needs during retirement; 75% of your income will have to come from some other investment. So is this a good investment? I am sure you will agree that it is not.
Non-term traditional life insurance plans, like endowment plans, money back plans and pension plans are detrimental to both your life insurance and investment objectives.
What about the tax benefit under Section 80C of the Income Tax Act?
Consider term life insurance plans.
The premiums are much lower than non-term life insurance plans and leave the investor with substantially higher surplus savings to invest towards their long-term financial goals.
Buying a term plan and investing in mutual funds is better than buying non-term life insurance.
Continuing with our previous case study, you need a life cover or sum assured of Rs 2 crores for your life insurance needs. If you choose a term insurance plan, based on premium rates of the same life insurer discussed above, your annual premium for a 20-year term insurance policy for a sum assured of Rs 2 crores will be around Rs 31,000.
As discussed in our case study, your monthly savings is Rs 36,000 or Rs 4.32 lakhs per annum. Very affordable.
The premium is eligible for the 80C benefit.
You can ensure sufficient cover to provide protection to your family in the event of an unfortunate death. The balance money can be invested in an equity linked savings scheme, which will get you a much better return and tax saving under Section 80C.
Conclusion
Going back to the circuit breaker example, the purpose of a protection device is to provide protection against risks; nothing more and nothing less. Just like you cannot expect a plumber to do an electrician’s job and vice versa, you should separate your insurance and investment plans.
Courtesy: Morningstar
If you need help to objectively review your current insurance coverage and opt for a suitable term Insurance plan, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
I can understand the psychology. If we have a term plan and do not die during the life of the policy, it may seem that the premiums paid are a waste of money. In a non-term traditional insurance policy you get the sum assured plus guaranteed additions. Therefore, since untimely death is unlikely, non-term traditional plans are better than term plans.
Let me explain why this thinking is flawed both conceptually and financially. Its purpose is protection.
If the electrical wiring in your house has been done securely and all your electrical appliances are in excellent condition, you should not expect a short circuit to take place. Yet, chances are you would install a circuit breaker, because a short circuit, however unlikely, can cause a severe hazard. It provides protection from the risk of electrical hazards.
We need protection from both likely and unlikely risks. In fact, unlikely risks are much more dangerous than likely risks because we are less prepared for it. An untimely death, however unlikely, is the most dangerous risk that our families face. Life insurance provides protection against this risk.
Now, do you expect the circuit breaker to serve any other purpose, such as doubling up as a door bell? It sounds ridiculous, but hopefully it reinforces the point that, the purpose of a protective device should be to provide protection against specific risks, nothing more. Similarly, the purpose of life insurance is to provide financial security to your family in the event of your untimely death. It is nothing more and nothing less.
Non-term traditional plans may cause you to be underinsured.
Let us now understand with the help of an example, why non-term traditional life insurance plans, like endowment plans, money back plans, pension plans etc are detrimental to your life insurance objective.
Let’s assume you are 30 years old and your annual income is Rs 20 lakhs. How much life insurance is adequate for you? To get a proper estimate of your required life insurance cover, you should factor in your debt, monthly income your family needs to meet their expenses, and future expenses such as a child’s education or marriage. For the sake of simplicity let us go with a rule of thumb which suggests that your life cover should be at least 10–12 times of your annual income. Based on your annual income of Rs 20 lakh, your life cover or sum assured should be Rs 2 crores.
Let us come to affordability now. Assuming your annual income is Rs 20 lakhs, your estimated net monthly income after mandatory deductions like provident fund and income tax will be around Rs 1.2 lakhs. Let us assume that after paying for all expenses such as rent, servicing of home loans, food, transportation, utility bills, schools fees etc, you are able to save 30% of your net monthly income. This means your monthly savings will be Rs 36,000.
Let us now assume you want to buy a non-term traditional life insurance policy. As discussed earlier, your ideal life cover or sum assured should be Rs 2 crores. Based on premium rates of one of the largest life insurance companies in India, your annual premium for an endowment policy of a 20-year term and Rs 2 crores sum assured, will be Rs 10-11 lakhs. Since your monthly savings is Rs 36,000, you cannot afford a Rs 2 crores sum assured policy. So how much can you afford? Let us assume that you are ready to pay a premium of Rs 25,000 per month or Rs 300,000 per annum. With an annual premium of Rs 300,000 per annum, based on premium rates discussed above, you can buy a 20-year endowment policy of Rs 60 lakhs sum assured. In the event of an unfortunate death, your family will get the death benefit of Rs 60 lakhs.
Let us assume that your family invests the money in a risk free assured return fixed income product yielding 8%, the annual income will be Rs 4.8 lakhs or Rs 40,000 on a monthly basis. Under normal circumstances, you spend Rs 80,000 – 85,000 on a monthly basis for your expenses. But in the event of an untimely death, your family has to survive on less than half of that amount! If you have a loan, the financial distress gets much worse.
There is no doubt in this example, that your decision to buy a non-term traditional insurance cum savings plan has left you underinsured.
What if you survive the policy term?
Based on historical data, the internal rate of returns, or IRR, of life insurance endowment plans is around 6%. The IRR of money back plans are even lower. Some insurers may have given slightly higher returns, but let us go with 6% in our example. If the IRR of your non-term traditional plan is 6% and you pay an annual premium of Rs 300,000 (as in our case study), your policy maturity amount will be Rs 1.1 crores. Many life insurance agents position the maturity amount of your policy as part of your retirement corpus. As discussed earlier, your normal monthly expenses are Rs 80,000–85,000. Applying a 4% long-term inflation rate, assuming you are 30 years old, by the time you retire, your monthly expenses will be Rs 2.6–2.8 lakhs.
Let us see how much your policy maturity amount will earn you, if invested in an annuity product yielding 8%. Your annual income will be Rs 8.8 lakhs. On a post-tax monthly basis, you will earn little more than Rs 65,000. This does not even meet 25% of your income needs during retirement; 75% of your income will have to come from some other investment. So is this a good investment? I am sure you will agree that it is not.
Non-term traditional life insurance plans, like endowment plans, money back plans and pension plans are detrimental to both your life insurance and investment objectives.
What about the tax benefit under Section 80C of the Income Tax Act?
Consider term life insurance plans.
The premiums are much lower than non-term life insurance plans and leave the investor with substantially higher surplus savings to invest towards their long-term financial goals.
Buying a term plan and investing in mutual funds is better than buying non-term life insurance.
Continuing with our previous case study, you need a life cover or sum assured of Rs 2 crores for your life insurance needs. If you choose a term insurance plan, based on premium rates of the same life insurer discussed above, your annual premium for a 20-year term insurance policy for a sum assured of Rs 2 crores will be around Rs 31,000.
As discussed in our case study, your monthly savings is Rs 36,000 or Rs 4.32 lakhs per annum. Very affordable.
The premium is eligible for the 80C benefit.
You can ensure sufficient cover to provide protection to your family in the event of an unfortunate death. The balance money can be invested in an equity linked savings scheme, which will get you a much better return and tax saving under Section 80C.
Conclusion
Going back to the circuit breaker example, the purpose of a protection device is to provide protection against risks; nothing more and nothing less. Just like you cannot expect a plumber to do an electrician’s job and vice versa, you should separate your insurance and investment plans.
Courtesy: Morningstar
If you need help to objectively review your current insurance coverage and opt for a suitable term Insurance plan, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Why you must seek Professional Investment Advice?
People typically seek financial advice from friends/relatives or from someone whom one believes has got investment insights. There could be a variety of reasons due to which people take investment advice from their friends/ relatives or colleagues.
First, money and investments are personal issues and people would tend to trust close friends or relatives for providing advice.
Second, lack of awareness of the spectrum of financial products - financial literacy is limited and people are generally aware of only a limited number of investment options, at times those that their friends or family have invested in like fixed deposits, gold, insurance policies, PPF, real estate, etc. The awareness of other investment options such as mutual funds and their role in helping achieve one's financial goals is limited.
Third, lack of access to a trusted and professional advisor - most retail or first-time investors would have limited or no access to expert advice due to the low advisor to population ratio (there are less than 200,000 registered active mutual fund distributors and advisers including employees of banks and wealth management firms involved in distribution of investment products across the country).
However, taking investment decisions based on advice provided by non-qualified person may not always serve the purpose. It is akin to seeking remedy or diagnosis of a major illness from a chemist or a friend without relevant qualifications / expertise.
Each investor has a different risk tolerance. Much of the difference in risk tolerance stems from one’s investment horizon. That is, someone with a short investment time horizon is less able to withstand losses. The remainder of the difference is attributable to the individual’s appetite for risk. Investing and financial planning is a specialized subject requiring expertise, specific qualifications and relevant experience.
Each category of financial instruments or asset classes have specific characteristics, for instance fixed income instruments like Fixed deposits, bonds, debt mutual funds, provide safety but may not be able to beat inflation and be unable to help achieve one's long term investment goals due to low returns. Whereas, equity which can be volatile in short term has the potential to generate higher returns over the long-term vis-a-vis fixed income instruments, beat inflation helping achieve one’s long term investment goals. Similarly, other asset classes such as international equity, gold and real estate have different risk and return characteristics.
Understanding an investor's investment goals and accordingly constructing an investment portfolio consisting of various asset classes in suitable proportions requires an expert and qualified adviser. Obtaining advice from informal sources might result in limiting one's investment options to a single or only few investment options which may not be suited to one's investment goals and risk appetite.
Providing investment advice requires addressing a variety of priorities and concerns. A skilled professional with requisite qualification and experience is in a better position to offer sound investment advice with required reasoning. As an investor, one needs to consult a certified professional financial adviser with relevant experience, who would understand one’s risk appetite and investment goals and accordingly offer investment advice.
Investors should also insist on documenting risk and return objectives and any form of constraints as a part of investment policy statement.
The statement serves as a guide to planning and implementation of an investment portfolio and establishes accountability. It is also important for investors to understand the rationale behind investment recommendation or advice. Prior to agreeing to recommendations an investor should understand the rationale for the advice offered and have their concerns and queries addressed. It is also important to know whether the advice given is aligned to one’s investment goals.
The capital markets regulator, Sebi, has categorized individuals and firms that offer investment products like mutual funds, PMS, etc. into two broad categories –
i) Distributor and ii) Registered Investment Adviser (or RIA). Mutual fund distributors typically offer limited investment advice and earn commissions from the product provider i.e. Asset Management Companies. Whereas, RIAs typically provide comprehensive financial and portfolio planning services for which advisory fees are charged from the investor. They may not obtain commissions from product manufacturers.
As an investor, it is essential to understand whether your adviser is a distributor or RIA and whether they have internal policies in place to avoid conflict of interest arising from how their commissions are earned. This may result in only products with high commissions, which may not be suited to one’s investment objectives, being offered.
Courtesy: Firstpost
If you need professional guidance to evolve and implement a proper financial plan for your family, contact us
First, money and investments are personal issues and people would tend to trust close friends or relatives for providing advice.
Second, lack of awareness of the spectrum of financial products - financial literacy is limited and people are generally aware of only a limited number of investment options, at times those that their friends or family have invested in like fixed deposits, gold, insurance policies, PPF, real estate, etc. The awareness of other investment options such as mutual funds and their role in helping achieve one's financial goals is limited.
Third, lack of access to a trusted and professional advisor - most retail or first-time investors would have limited or no access to expert advice due to the low advisor to population ratio (there are less than 200,000 registered active mutual fund distributors and advisers including employees of banks and wealth management firms involved in distribution of investment products across the country).
However, taking investment decisions based on advice provided by non-qualified person may not always serve the purpose. It is akin to seeking remedy or diagnosis of a major illness from a chemist or a friend without relevant qualifications / expertise.
Each investor has a different risk tolerance. Much of the difference in risk tolerance stems from one’s investment horizon. That is, someone with a short investment time horizon is less able to withstand losses. The remainder of the difference is attributable to the individual’s appetite for risk. Investing and financial planning is a specialized subject requiring expertise, specific qualifications and relevant experience.
Each category of financial instruments or asset classes have specific characteristics, for instance fixed income instruments like Fixed deposits, bonds, debt mutual funds, provide safety but may not be able to beat inflation and be unable to help achieve one's long term investment goals due to low returns. Whereas, equity which can be volatile in short term has the potential to generate higher returns over the long-term vis-a-vis fixed income instruments, beat inflation helping achieve one’s long term investment goals. Similarly, other asset classes such as international equity, gold and real estate have different risk and return characteristics.
Understanding an investor's investment goals and accordingly constructing an investment portfolio consisting of various asset classes in suitable proportions requires an expert and qualified adviser. Obtaining advice from informal sources might result in limiting one's investment options to a single or only few investment options which may not be suited to one's investment goals and risk appetite.
Providing investment advice requires addressing a variety of priorities and concerns. A skilled professional with requisite qualification and experience is in a better position to offer sound investment advice with required reasoning. As an investor, one needs to consult a certified professional financial adviser with relevant experience, who would understand one’s risk appetite and investment goals and accordingly offer investment advice.
Investors should also insist on documenting risk and return objectives and any form of constraints as a part of investment policy statement.
The statement serves as a guide to planning and implementation of an investment portfolio and establishes accountability. It is also important for investors to understand the rationale behind investment recommendation or advice. Prior to agreeing to recommendations an investor should understand the rationale for the advice offered and have their concerns and queries addressed. It is also important to know whether the advice given is aligned to one’s investment goals.
The capital markets regulator, Sebi, has categorized individuals and firms that offer investment products like mutual funds, PMS, etc. into two broad categories –
i) Distributor and ii) Registered Investment Adviser (or RIA). Mutual fund distributors typically offer limited investment advice and earn commissions from the product provider i.e. Asset Management Companies. Whereas, RIAs typically provide comprehensive financial and portfolio planning services for which advisory fees are charged from the investor. They may not obtain commissions from product manufacturers.
As an investor, it is essential to understand whether your adviser is a distributor or RIA and whether they have internal policies in place to avoid conflict of interest arising from how their commissions are earned. This may result in only products with high commissions, which may not be suited to one’s investment objectives, being offered.
Courtesy: Firstpost
If you need professional guidance to evolve and implement a proper financial plan for your family, contact us
Should you buy Home Insurance?
Home insurance continues to remain an ignored insurance product. A basic home insurance policy is a fire insurance cover that insures the structure of your house and its contents against fire and allied perils such as lightning, storms and floods.
A householder's package policy (HPP), on the other hand, is a fire insurance policy that packs in more options. It also insures the contents of your house against burglary, damage and mechanical or electrical breakdowns. A home insurance policy is a must for all homeowners.
Here we tell you some important facts to keep in mind while getting one.
Market value and reinstatement value
The value of your house comprises three broad components, which are: the cost of land, cost of construction, and locality costs (a house in a premium location would cost more).
The insurance covers only cost of construction. A civil contractor or a real estate broker will tell you the cost of construction and while it may vary depending on the city, it doesn't vary too much between one location and another. Now, there are two ways to arriving at the sum insured-first is on a market value basis or a depreciated cost basis, and the second is on a reinstatement basis.
In insurance, market value is the cost of constructing your house after subtracting depreciation; while reinstatement is the full value of construction of the house. Obviously, premiums for insurance plans that are based on the market-value basis, will be cheaper.
Under the reinstatement basis, insurers don't deduct depreciation and therefore such plans are preferable. Typically, insurers offer you a reinstatement-based policy but do check and confirm at the time of buying the cover.
Underinsurance
You also need to be mindful of underinsurance, as the insurer will penalise you by proportionately reducing the claim amount.
For example, if the cost of construction of your house is, say, Rs2,000 per sq. ft, and you buy an insurance cover for Rs1,000 per sq. ft, the insurer will consider this underinsurance. At the time of claim, the insurer would only pay half the claim amount.
Reinstatement in a housing tower
Even if you buy an insurance cover on reinstatement basis, you must remember that insurers will settle the claim only after the house is reconstructed or will make partial payments to help you reconstruct the house.
But then, you still have to get the house reconstructed; and if you live in a flat in a multi-storeyed complex, it means that for you to reconstruct the house, you need to wait for others to reconstruct their houses as well.
In order to deal with such situations, some insurers now offer home insurance on an agreed-value basis.
The agreed value factors in the cost of the area as well; so in the event of a loss, you get the agreed value and the ownership of your house is transferred to the insurer.
You can then take the agreed value and buy a new house, instead of waiting to reconstruct the older house and there is also no threat of any penalty due to underinsurance.
Constructing or owning and furnishing a house is often a big life time dream for many families. Insure it today and choose to insure the contents therein too. Contact us
Courtesy: MINT
If you need help to assess the right level of insurance cover for your home (or) office (or) business facilities, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
A householder's package policy (HPP), on the other hand, is a fire insurance policy that packs in more options. It also insures the contents of your house against burglary, damage and mechanical or electrical breakdowns. A home insurance policy is a must for all homeowners.
Here we tell you some important facts to keep in mind while getting one.
Market value and reinstatement value
The value of your house comprises three broad components, which are: the cost of land, cost of construction, and locality costs (a house in a premium location would cost more).
The insurance covers only cost of construction. A civil contractor or a real estate broker will tell you the cost of construction and while it may vary depending on the city, it doesn't vary too much between one location and another. Now, there are two ways to arriving at the sum insured-first is on a market value basis or a depreciated cost basis, and the second is on a reinstatement basis.
In insurance, market value is the cost of constructing your house after subtracting depreciation; while reinstatement is the full value of construction of the house. Obviously, premiums for insurance plans that are based on the market-value basis, will be cheaper.
Under the reinstatement basis, insurers don't deduct depreciation and therefore such plans are preferable. Typically, insurers offer you a reinstatement-based policy but do check and confirm at the time of buying the cover.
Underinsurance
You also need to be mindful of underinsurance, as the insurer will penalise you by proportionately reducing the claim amount.
For example, if the cost of construction of your house is, say, Rs2,000 per sq. ft, and you buy an insurance cover for Rs1,000 per sq. ft, the insurer will consider this underinsurance. At the time of claim, the insurer would only pay half the claim amount.
Reinstatement in a housing tower
Even if you buy an insurance cover on reinstatement basis, you must remember that insurers will settle the claim only after the house is reconstructed or will make partial payments to help you reconstruct the house.
But then, you still have to get the house reconstructed; and if you live in a flat in a multi-storeyed complex, it means that for you to reconstruct the house, you need to wait for others to reconstruct their houses as well.
In order to deal with such situations, some insurers now offer home insurance on an agreed-value basis.
The agreed value factors in the cost of the area as well; so in the event of a loss, you get the agreed value and the ownership of your house is transferred to the insurer.
You can then take the agreed value and buy a new house, instead of waiting to reconstruct the older house and there is also no threat of any penalty due to underinsurance.
Constructing or owning and furnishing a house is often a big life time dream for many families. Insure it today and choose to insure the contents therein too. Contact us
Courtesy: MINT
If you need help to assess the right level of insurance cover for your home (or) office (or) business facilities, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
How much Health Insurance should you have?
A recent survey has found that 51% of health insurance policyholders in India are underinsured as the sum insured would not suffice in a medical emergency. The study covered 7 lakh policyholders in 82 cities.
Key findings from the survey...
So, how much Health (Medical) Insurance should you have?
Make sure you are not under-insured as unforeseen medical emergencies for self or dependents can quickly and significantly deplete one's savings irrepairably.
To learn more about what aspects of your family's Health can be covered and how to get cashless coverage, click here
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Key findings from the survey...
- 38% of people in the 18-35 years age group are underinsured.
- 62% policyholders above 45 years of age are underinsured
- 75% Underinsurance among people in the age group 61-65 years is the highest.
So, how much Health (Medical) Insurance should you have?
- In your 20s, a health cover of Rs 5 lakh is ideal if you are living in a metro, Tier I or Tier II city.
- In your 30s and 40s, the cover should be at least Rs 7 lakh if you live in a metro or Tier I city and a cover of Rs 6 lakh should suffice in Tier II cities.
- If you are in your 50s and live in a metro or Tier I city, seek policies with Rs 9 lakh cover and In Tier II cities, a cover of Rs 8 lakh should be sufficient.
- Indians above the age of 60 years should have health insurance coverage of at least Rs 10 lakh.
Make sure you are not under-insured as unforeseen medical emergencies for self or dependents can quickly and significantly deplete one's savings irrepairably.
To learn more about what aspects of your family's Health can be covered and how to get cashless coverage, click here
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
How long should long-term be in investing?
Some years ago, Fidelity Investments conducted a study in the US to find out what kind of investor accounts had the best returns.
It turned out that the highest returns were from investors who had completely forgotten about their investments for years, even decades. Not just that, they also discovered that a good proportion of these investors had died a long time ago. So it may be safe to conclude that as far as managing your investment portfolio goes, the most profitable strategy may be to do exactly what a dead person would do—which is do nothing.
There are similar stories in India too. A few days ago, on an investor call-in show aired on a stock market channel, someone had a query that reminded me of the Fidelity study. The caller, who seemed unfamiliar with the equity markets, said that some 25 years ago, an uncle of his had bought 20,000 shares of MRF. He wanted to know if the shares would be worth anything. If the story is true, the shares might be worth around Rs 130 crore today. Even if the number of shares is exaggerated, the fact remains that an investor in this company would have multiplied their investment by close to 200 times over the years. I’m a member of a social media group that is ostensibly dedicated to long-term investing. However, there seems to be a struggle within the group about what long term means. Opinions vary widely, ranging from a high of six to seven months down to anything that is not day-trading.
So what exactly is a long-term investment? How long is long-term? Well, there’s one official answer from the revenue department of the Government of India. For the purpose of calculating your tax liability, investments in listed stocks and equity mutual funds are considered long term if the holding period is one year. For other investments, the limit is three years. This may be the law for taxation, but it doesn’t apply when it comes to investing. One year is a very short period for equity.
So what period can be called long term? To get the answer, let’s get back to the basics and ask the fundamental question: Why should equity investing be done only for the long term? The answer, of course, is volatility. Currently, the five-year return of the BSE Sensex is 12.77 % per annum, or 79% cumulative. However, the five individual one-year periods yielded 9%, 41.8%, -8.9%, 16.2% and 9.5% respectively. This is a powerful argument in favour of equity investments being long term. The returns are great, but the variability is high. During any particular short period, you could face poor returns, or even losses. These are compensated for only by the occasional great phase.
Let’s look at it from a different perspective. The equity markets move in cycles, and often, it takes five to seven years to go through a full cycle of a sharp rise, followed by a decline and stagnation. To get the right level of returns, we need to keep investing throughout the whole cycle. That won’t happen in a year or even two.
There’s yet another way of looking at it. This comes complete with evidence from a study that Value Research conducted earlier this year. We found that on an average, if you invest through an systematic investment plan over four years, your risk of making a loss is negligible. For a typical fund with a multi-decade history, over all possible one year periods, the maximum returns are 160% and the minimum -57%. Over two years, this becomes 82% and -34%. Over three years, 63% and -18% and over five, 54% and 4%. This means there’s never any loss. Over 10 years, the maximum is 30% and the minimum 13%. These are all annualised figures. The trade-off is clear—the shorter the period, the higher the potential gain, but the worse the possible risk.
This evidence squarely puts long-term at FIVE years and above.
So there’s your answer: in equity investment, ‘long-term’ is not a vague hand-waving term which can be defined however someone wishes. It is five years and above, and that is that.
Courtesy: Article Published in Economic Times - Sept 11, 2017
If you need professional guidance to evolve and implement a proper financial and investment plan for your family or business, contact us
It turned out that the highest returns were from investors who had completely forgotten about their investments for years, even decades. Not just that, they also discovered that a good proportion of these investors had died a long time ago. So it may be safe to conclude that as far as managing your investment portfolio goes, the most profitable strategy may be to do exactly what a dead person would do—which is do nothing.
There are similar stories in India too. A few days ago, on an investor call-in show aired on a stock market channel, someone had a query that reminded me of the Fidelity study. The caller, who seemed unfamiliar with the equity markets, said that some 25 years ago, an uncle of his had bought 20,000 shares of MRF. He wanted to know if the shares would be worth anything. If the story is true, the shares might be worth around Rs 130 crore today. Even if the number of shares is exaggerated, the fact remains that an investor in this company would have multiplied their investment by close to 200 times over the years. I’m a member of a social media group that is ostensibly dedicated to long-term investing. However, there seems to be a struggle within the group about what long term means. Opinions vary widely, ranging from a high of six to seven months down to anything that is not day-trading.
So what exactly is a long-term investment? How long is long-term? Well, there’s one official answer from the revenue department of the Government of India. For the purpose of calculating your tax liability, investments in listed stocks and equity mutual funds are considered long term if the holding period is one year. For other investments, the limit is three years. This may be the law for taxation, but it doesn’t apply when it comes to investing. One year is a very short period for equity.
So what period can be called long term? To get the answer, let’s get back to the basics and ask the fundamental question: Why should equity investing be done only for the long term? The answer, of course, is volatility. Currently, the five-year return of the BSE Sensex is 12.77 % per annum, or 79% cumulative. However, the five individual one-year periods yielded 9%, 41.8%, -8.9%, 16.2% and 9.5% respectively. This is a powerful argument in favour of equity investments being long term. The returns are great, but the variability is high. During any particular short period, you could face poor returns, or even losses. These are compensated for only by the occasional great phase.
Let’s look at it from a different perspective. The equity markets move in cycles, and often, it takes five to seven years to go through a full cycle of a sharp rise, followed by a decline and stagnation. To get the right level of returns, we need to keep investing throughout the whole cycle. That won’t happen in a year or even two.
There’s yet another way of looking at it. This comes complete with evidence from a study that Value Research conducted earlier this year. We found that on an average, if you invest through an systematic investment plan over four years, your risk of making a loss is negligible. For a typical fund with a multi-decade history, over all possible one year periods, the maximum returns are 160% and the minimum -57%. Over two years, this becomes 82% and -34%. Over three years, 63% and -18% and over five, 54% and 4%. This means there’s never any loss. Over 10 years, the maximum is 30% and the minimum 13%. These are all annualised figures. The trade-off is clear—the shorter the period, the higher the potential gain, but the worse the possible risk.
This evidence squarely puts long-term at FIVE years and above.
So there’s your answer: in equity investment, ‘long-term’ is not a vague hand-waving term which can be defined however someone wishes. It is five years and above, and that is that.
Courtesy: Article Published in Economic Times - Sept 11, 2017
If you need professional guidance to evolve and implement a proper financial and investment plan for your family or business, contact us
3 Intelligent Thumb Rules of Personal Finance
A few key thumb rules to always keep in mind when it comes to Personal finance...
But remember, by saving time, you are effectively taking a short cut. Thumb rules are imprecise. They are generalizations, and may not specifically apply to you. For personalized advice, you need to speak with your personal financial planner for a financial solution to your specific situation. So is there an in-between solution for people who don’t yet have a personal financial planner and don’t want to follow only broad generalizing thumb rules? Yes there is.
This article will show you some lesser known, more precise thumb rules that will still save time, and will be better for your personal finance situation than just a broad guideline. Let’s see what these thumb rules are:
- Equity – Debt Exposure & Your Goal Time Horizon
There is a thumb rule that people sometimes follow, which states that your equity exposure should be (100 – Your Age)%. The balance should be in debt or fixed income instruments.
So, if you are 30, then 70% of your wealth (100 – 30)% should be in equity.
This isn’t completely perfect or appropriate.
A 30 year old might have a number of short term financial goals due to a significant life event, such as a wedding, or a first born child, or buying a car and so forth. Having 70% of your exposure in equity therefore would be a bad idea, because there is no capital protection and your funds would be exposed to market volatility. If you need to suddenly pull out money, you might take a loss on your investments.
The more appropriate and still easy thumb rule is this:
3 years or less left for your goal = No Equity Exposure.
It might seem difficult, but if you have a goal like the ones stated above that is happening within 3 years, avoid equity completely. Think of the people who invested lump sums of money in the Sensex at 32,000 levels. Their money would still be in the red, even after but is likely to start delivering return probably after a logical time lag.
So, if your goal is at least 3 years or more away, then consider equity investments, otherwise don’t. And the longer the time duration for your goal, the more equity exposure you can have. For example, if you have 5 years to your goal, consider 60% equity, 40% debt. For a goal that is 10 years away, consider 80% equity, 20% debt. Your age has very little to do with it. - Rule of 69 (or simpler Rule of 72)
You have probably heard of the Rule of 72.
It helps you calculate what rate of return it will take to double your money.
For example, if somebody tells you that by investing in so-and-so product, your money will double in only 8 years, the quick calculation would be:
Rate of Return = 72 / Number of Years to Double Money
…and this calculation would tell you that the product the advisor is recommending should be giving you an annual return of 72/8 i.e. 9% p.a.
This is quick, but the reason the number 72 is chosen is because it is easily divisible by many denominators and because it is close enough to the real number, which is 69.
So the more accurate rule is:
Rate of Return = 69 / Number of Years to Double Money
The Rule of 69 will give you a more accurate answer to your double-your-money question.
In the example above, if something is doubling your money in 8 years, then 69 / 8 gives you 8.625% p.a. i.e. lower than 9%. Consider taxation eating into your returns, and suddenly this double-your-money-in-8-years product doesn’t seem very attractive, does it? - Save and Invest at least 25% of your salary
A rule that many people follow is to save and invest 10% of their incomes. In no uncertain terms, this is not enough.
Remember this: the more you save now, the more your money compounds. And if there’s one magical thing about finance, it’s the power of compounding. You might have to cut back on discretionary expenditures to save 25% of your salary, but in the end it will be worth it.
So aim for at least 25% of your take home salary being saved and invested. Invest it as per your goal time horizon (see Rule No. 1) and as your salary increases, remember to at least proportionately increase your investments.
Thumb rules are, by their nature, imprecise. If you want a completely accurate and personalized financial solution to help you achieve your life goals, your financial planner is the person to talk to. Until then, be careful what thumb rules you follow, and err on the side of caution when dealing with your finances.
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Say NO to Endowment Insurance Policies and ULIPs
Say no to endowment policies and ULIPsThis article will tell you why you should avoid ULIPs & endowment policies and what should you opt for instead
ULIPs and endowment plans are very popular in India. Knowingly or unknowingly, most people end up buying these two types of policy. They appear to be simple, transparent and highly beneficial. This article is an earnest attempt by us to dispel the myth (or shall we say hype?) around ULIPs and endowment plans. We will also tell you what are the best alternatives.
What are ULIPs and Endowment plans?
They are both insurance cum investment products. Neither of them is recommended as they offer a sub-optimal combination of insurance and investment.
ULIP is a market-linked insurance scheme where the scheme invests in equity or debt oriented schemes, whereas endowment plans offer a guaranteed benefit called the sum assured.
Why are they so popular?
Three reasons came to our mind and we think you will agree with at least one of the reasons.
What’s wrong with them?
Neither do they provide adequate insurance, nor a good investment solution. Let’s explore the point by looking at the two purposes separately.
Insurance
Most often, people fail to fathom what kind of insurance coverage they need. For instance, in a family of four where you are the only earning member, a life insurance coverage of Rs 5 lakh (see example below) is simply not enough in the event of your untimely death. The effect is more pronounced if you haven’t left them much inheritance and/or if you had loans running. And, then there’s inflation, which will eat away your wealth. To put things in perspective, if a term plan cover of Rs 50 lakh costs you Rs 7000 per annum, it will cost you Rs 5 lakh per annum in case of an ULIP.
Investment
The biggest factor that goes against them are the exorbitant charges. A significant percentage of the premium you pay, particularly in the initial years, are deducted in the form of various fees and charges, the biggest component being distributor commissions. This reduces the amount of your premium that is actually invested to generate returns. Over a long period, that makes a huge impact on the total wealth you are able to accumulate. Below we have presented one aspect of ULIP, its numerous charges.
ULIP
Age: 35
Annual premium: Rs 50,000
Sum Assured: Rs 5,00,000
The table below enlists a set of charges that are levied by ULIPs. Now, mind you that these charges aren’t exactly hidden. You will find them on your policy papers but probably wouldn’t give it much importance. The actual invested amount is after deducting the following charges which make up almost 7% of the total invested amount.
ULIPs and endowment plans are very popular in India. Knowingly or unknowingly, most people end up buying these two types of policy. They appear to be simple, transparent and highly beneficial. This article is an earnest attempt by us to dispel the myth (or shall we say hype?) around ULIPs and endowment plans. We will also tell you what are the best alternatives.
What are ULIPs and Endowment plans?
They are both insurance cum investment products. Neither of them is recommended as they offer a sub-optimal combination of insurance and investment.
ULIP is a market-linked insurance scheme where the scheme invests in equity or debt oriented schemes, whereas endowment plans offer a guaranteed benefit called the sum assured.
Why are they so popular?
Three reasons came to our mind and we think you will agree with at least one of the reasons.
- A lot of Indians buy insurance in haste and that too for the sole purpose of saving tax and they do so without fully understanding the products.
- Often the insurance agent is a neighbour, or a friend or, even worse, a relative. It’s kind of difficult to turn them down. So, we end up buying an endowment or an ULIP without giving it much thought. Also, these policies are pushed hard by agents as they involve attractive commissions.
- Many people see insurance as an useless expense and hence they think it’s better to just buy a product that will give some return as well. Just like they fail to see the effect of inflation, they fail to see the sub-optimal returns from these products.
What’s wrong with them?
Neither do they provide adequate insurance, nor a good investment solution. Let’s explore the point by looking at the two purposes separately.
Insurance
Most often, people fail to fathom what kind of insurance coverage they need. For instance, in a family of four where you are the only earning member, a life insurance coverage of Rs 5 lakh (see example below) is simply not enough in the event of your untimely death. The effect is more pronounced if you haven’t left them much inheritance and/or if you had loans running. And, then there’s inflation, which will eat away your wealth. To put things in perspective, if a term plan cover of Rs 50 lakh costs you Rs 7000 per annum, it will cost you Rs 5 lakh per annum in case of an ULIP.
Investment
The biggest factor that goes against them are the exorbitant charges. A significant percentage of the premium you pay, particularly in the initial years, are deducted in the form of various fees and charges, the biggest component being distributor commissions. This reduces the amount of your premium that is actually invested to generate returns. Over a long period, that makes a huge impact on the total wealth you are able to accumulate. Below we have presented one aspect of ULIP, its numerous charges.
ULIP
Age: 35
Annual premium: Rs 50,000
Sum Assured: Rs 5,00,000
The table below enlists a set of charges that are levied by ULIPs. Now, mind you that these charges aren’t exactly hidden. You will find them on your policy papers but probably wouldn’t give it much importance. The actual invested amount is after deducting the following charges which make up almost 7% of the total invested amount.
So, in 10 years you have paid Rs 5 lakh. However, the actual invested amount, after deducting all the aforementioned charges, will be around Rs 4.68 lakh.
So what are the alternatives?
It is always better to keep insurance and investment separate. If you have financial dependents, the first thing that you should do is to buy a term insurance with an adequate cover. Put the rest of the money in one or two good diversified equity funds. But, what if you are risk averse? In that case, we would suggest you to stick to a term plan & good old PPF. It will still give you better returns than an endowment plan.
A number is worth a thousand words
We don’t want you to take our word (or anyone else’s for that matter) for it. So, let’s examine the shortcomings through an illustration.
In the table below, we have taken the 3 possible options - buying a ULIP, buying an endowment plan, and buying a term plan+equity mutual fund. The table illustrates what kind of returns you would get on each in the last 10 years (based on historical data). For the sake of parity and returns, we have considered the best performing products from each category.
So what are the alternatives?
It is always better to keep insurance and investment separate. If you have financial dependents, the first thing that you should do is to buy a term insurance with an adequate cover. Put the rest of the money in one or two good diversified equity funds. But, what if you are risk averse? In that case, we would suggest you to stick to a term plan & good old PPF. It will still give you better returns than an endowment plan.
A number is worth a thousand words
We don’t want you to take our word (or anyone else’s for that matter) for it. So, let’s examine the shortcomings through an illustration.
In the table below, we have taken the 3 possible options - buying a ULIP, buying an endowment plan, and buying a term plan+equity mutual fund. The table illustrates what kind of returns you would get on each in the last 10 years (based on historical data). For the sake of parity and returns, we have considered the best performing products from each category.
Inference
The table above is pretty self-explanatory. Firstly, in the third option, you get an insurance coverage that is ten times more (50 lakhs) than that of an ULIP. Secondly, the return is significantly better in the third option. So, the verdict seems quite clear.
Advice
Insurance is an expense and it should be treated like an expense. Don’t mix insurance with investment. Mixing the two will give you less than moderate returns from both.
What can you do now?
The table above is pretty self-explanatory. Firstly, in the third option, you get an insurance coverage that is ten times more (50 lakhs) than that of an ULIP. Secondly, the return is significantly better in the third option. So, the verdict seems quite clear.
Advice
Insurance is an expense and it should be treated like an expense. Don’t mix insurance with investment. Mixing the two will give you less than moderate returns from both.
What can you do now?
- There is something called the free-look period that is valid for 15 days. If you are not satisfied with the insurance you bought, you can return it within 15 days of buying and get a refund. Click here for more details.
- If your policy is older than 15 days, we would suggest you to return it, bear the corresponding loss and buy a term plan immediately. Rest of the money, as we said earlier, you should invest in well-diversified equity mutual funds.
The Yield Trick
It’s simple: just based on the wrong formula
Many deposit-taking companies are pulling a fast one about the ‘yields’ they offer in order to attract investors. For instance, DHFL which offers an interest rate of 8 per cent per annum on 120-month cumulative deposits compounded half-yearly, claims that the yield is 11.91 per cent, when it’s actually 8.16 per cent. Others such as Shriram Transport Finance Company, Mahindra Finance, PNB Housing Finance and Sundaram BNP Paribas Home Finance also claim higher yields. What gives?
They calculate the yields using the simple interest formula. But that’s the wrong way to arrive at the number. Yield, going by Finance 101, should be calculated using the formula for compound interest. In a cumulative deposit, interest earned is reinvested and, in turn, earns interest in the subsequent period. These periodic additions to the capital need to be considered while calculating yield. The compound interest formula does that, the simple interest one does not. Not just that, there are companies such as SREI Equipment Finance that advertise yields even on non-cumulative deposits where interest is being paid at regular intervals. This goes against the concept of yield which is typically associated only with cumulative investments that benefit from compounding.
Advertising inflated yields or yields on non-cumulative investments is mis-selling, especially in a low-interest environment, when fixed income investors are desperately searching for safe investments and good returns. It’s time the RBI and SEBI cracked the whip and specified the when and how of calculating yields, ensured that deposit-takers toed the line and withdrew misleading claims. Until then, it is ‘buyer beware’. Check and calculate if the number is right with the help of online calculators or the financial functions in MS-Excel.
Source: The Hindu Business Line
If you need professional guidance to choose and invest in the right Fixed Income / Fixed Deposit plans for your family or organization, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Many deposit-taking companies are pulling a fast one about the ‘yields’ they offer in order to attract investors. For instance, DHFL which offers an interest rate of 8 per cent per annum on 120-month cumulative deposits compounded half-yearly, claims that the yield is 11.91 per cent, when it’s actually 8.16 per cent. Others such as Shriram Transport Finance Company, Mahindra Finance, PNB Housing Finance and Sundaram BNP Paribas Home Finance also claim higher yields. What gives?
They calculate the yields using the simple interest formula. But that’s the wrong way to arrive at the number. Yield, going by Finance 101, should be calculated using the formula for compound interest. In a cumulative deposit, interest earned is reinvested and, in turn, earns interest in the subsequent period. These periodic additions to the capital need to be considered while calculating yield. The compound interest formula does that, the simple interest one does not. Not just that, there are companies such as SREI Equipment Finance that advertise yields even on non-cumulative deposits where interest is being paid at regular intervals. This goes against the concept of yield which is typically associated only with cumulative investments that benefit from compounding.
Advertising inflated yields or yields on non-cumulative investments is mis-selling, especially in a low-interest environment, when fixed income investors are desperately searching for safe investments and good returns. It’s time the RBI and SEBI cracked the whip and specified the when and how of calculating yields, ensured that deposit-takers toed the line and withdrew misleading claims. Until then, it is ‘buyer beware’. Check and calculate if the number is right with the help of online calculators or the financial functions in MS-Excel.
Source: The Hindu Business Line
If you need professional guidance to choose and invest in the right Fixed Income / Fixed Deposit plans for your family or organization, contact us
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
The factors to consider before deciding to repay your loan early
Keep in mind the interest rate, remaining tenure and tax benefit before deciding if it makes sense to repay the loan principal amount
If you are continuing to pay equated monthly instalments (EMIs) on a home loan and wondering if it makes sense to repay the principal rather than continuing it, keep in mind these three checks before making a choice.
As a thumb rule, continuing a loan makes sense if your interest rate is lower than the potential return on investment for the lump sum. Let's say, you have Rs10 lakh left to repay. If you use this for repayment, you save on an annual interest cost of say 8.5%. Now, if you don't repay the loan, you can invest the Rs10 lakh in other securities. If there is an investment opportunity where you can earn more than 8.5% per annum, assume 10%-it will make more sense to utilize the corpus towards the investment rather than repayment. By doing so, your net result is a gain; in this case, it's an annualized gain of 1.5%. You earn 10% on the corpus and utilize 8.5% out of that for the EMI; rest is yours. By repaying the loan in full, you miss the opportunity for higher returns.
If the loan has less than 5 years to finish, chances are that you are repaying more principal with each instalment rather than interest. Interest proportion in an equated monthly payment is on reducing balance. The question of early repayment is more relevant when your interest component is high. Also, it could be that the alternative investment you want to make with the lump sum is in equity or a combination of equity and debt to earn more than the interest you pay. However, equity-linked returns are usually not linear, which means you are likely to see desired annualized return only if you remain invested for at least 5-7 years. Hence, don't substitute such an investment instead of the repayment if time to repayment is only a few years.
A housing loan gives you a tax benefit on the principal repayment and on the interest repayment (if you have the possession). To that extent, if you are claiming tax benefit, your net annual cost of the loan is lower. Make this calculation and then assess if you will be able to earn more per annum by investing the lump sum; if not then it makes sense to repay.
Other than these above considerations, consider pre-payment fee or cost if any.
Source: HT Mint
Share this article via social icons floating on right side wall (desktop) or bottom panel (mobile)
Physical to demat form — hurdles in the way
Signature mismatch to death of the owner are some of the problems. Here’s how to deal with them
Did you find a bunch of yellow certificates while cleaning your parent’s or grandparent’s cupboard? It’s quite possible that those are share certificates, still in the physical form, purchased way back in the seventies or eighties. You need to brace yourself for problems while trying to convert these physical shares into electronic (demat) form.
To start with, the beneficiary (owner of the physical share certificate) should have an active account with a depository institution. Otherwise, he has to open a new account in the name of the beneficiary. This can be done through banks or stock brokerages. Depository participants (DP) from banks and stock brokerages form the interface between beneficiary and depository institutions (National Securities Depository Limited (NSDL) and Central Depository Services India Limited (CDSL)), hand-holding the beneficiary for various services.
After filling the demat request form (DRF), the beneficiary should submit the physical share certificates to the DP. After defacing the certificate, the DP will send the share certificates to the Registrar and Transfer Agent (RTA). At this stage, the certificates are scrutinised for basic signature and mismatches and joint account ownerships.
Besides this, the certificates are also verified — whether they are currently pledged anywhere, any pending court cases on the shares and other forms of possible forging. Also, in case you still retain the physical shares of a company that has been merged with/acquired by another company, you need to send the details to the surviving entity’s RTA.
Mismatches
The problem of signature mismatch for the beneficiary between the company’s ledger during purchase of the physical share and the current signature in the demat request form is highly likely, especially if the physical certificates are few decades old. To even out these differences, after validating the physical shares, the company’s RTA sends an affidavit to be filled by the beneficiary.
On receiving it, the beneficiary should fill in the details and get it attested by his branch bank manager (to which the beneficiaries demat trading account is affiliated with). While sending the details back to the RTA, the beneficiary is also expected to send a photocopy of valid identity (Aadhar/Pan card, passport).
Similarly, it is possible that the format of the name mentioned by the beneficiary in the demat account is differently recorded in the original physical certificate. For example, the beneficiary’s name that was documented as “S Arun” appears as “Arun Sundar” in his demat account.
Here, similar to the signature mismatch case, the RTA sends back a clarifications document (an affidavit) that needs to be filled and sent back by the beneficiary.
However, besides sending proof of valid identity (Pan or Aadhar card) along with the affidavit to RTA, the affidavit needs to be attested by a qualified notary. However, this should not be a cause for concern. You must be able to get the notary attestation for a nominal fee.
Opening a joint account
In case the shares are held jointly, the beneficiaries (generally married couples) are expected to have a joint demat account. This can be opened for a nominal sum of ₹300 before transferring the shares to it. However, it is not mandatory to open a joint account.
The joint share certificate can be transferred to a single account holder using a transfer deed obtained from RTA. Here, a stamp charge of 0.25 per cent of the market value (of the stock) is levied.
But it is advisable to take the demat route rather than transfer share certificates through a transfer deed. In the demat route, the DP indemnifies the loss of shares or any damage that can happen to the share certificates during transit. So, in case of a damage or loss of shares at any stage, the DP takes on the liability to compensate you for all the losses.
Owner’s death
Besides, it is possible that the actual beneficiary of the physical certificates is not alive and there is no joint owner for the share certificate. In such a case, the legal heir (usually sons, daughters and spouse of the owner), after a probate process, is required to transfer the shares to a single person. The shares get credited to this chosen person’s demat account after approval by RTA.
Besides, the respective RTA expects few other documents (copy of death certificate, succession certificate and probate process letter of administration attested by court officer) to be submitted for verification before the transfer of ownership. But if the value of the stocks involved is high, the RTA can also ask for additional documents for further clarifications.
The specific document requirement (including the documents after the probate process, if any) depends on the discretion of the RTA.
Source: The Hindu Business Line
Did you find a bunch of yellow certificates while cleaning your parent’s or grandparent’s cupboard? It’s quite possible that those are share certificates, still in the physical form, purchased way back in the seventies or eighties. You need to brace yourself for problems while trying to convert these physical shares into electronic (demat) form.
To start with, the beneficiary (owner of the physical share certificate) should have an active account with a depository institution. Otherwise, he has to open a new account in the name of the beneficiary. This can be done through banks or stock brokerages. Depository participants (DP) from banks and stock brokerages form the interface between beneficiary and depository institutions (National Securities Depository Limited (NSDL) and Central Depository Services India Limited (CDSL)), hand-holding the beneficiary for various services.
After filling the demat request form (DRF), the beneficiary should submit the physical share certificates to the DP. After defacing the certificate, the DP will send the share certificates to the Registrar and Transfer Agent (RTA). At this stage, the certificates are scrutinised for basic signature and mismatches and joint account ownerships.
Besides this, the certificates are also verified — whether they are currently pledged anywhere, any pending court cases on the shares and other forms of possible forging. Also, in case you still retain the physical shares of a company that has been merged with/acquired by another company, you need to send the details to the surviving entity’s RTA.
Mismatches
The problem of signature mismatch for the beneficiary between the company’s ledger during purchase of the physical share and the current signature in the demat request form is highly likely, especially if the physical certificates are few decades old. To even out these differences, after validating the physical shares, the company’s RTA sends an affidavit to be filled by the beneficiary.
On receiving it, the beneficiary should fill in the details and get it attested by his branch bank manager (to which the beneficiaries demat trading account is affiliated with). While sending the details back to the RTA, the beneficiary is also expected to send a photocopy of valid identity (Aadhar/Pan card, passport).
Similarly, it is possible that the format of the name mentioned by the beneficiary in the demat account is differently recorded in the original physical certificate. For example, the beneficiary’s name that was documented as “S Arun” appears as “Arun Sundar” in his demat account.
Here, similar to the signature mismatch case, the RTA sends back a clarifications document (an affidavit) that needs to be filled and sent back by the beneficiary.
However, besides sending proof of valid identity (Pan or Aadhar card) along with the affidavit to RTA, the affidavit needs to be attested by a qualified notary. However, this should not be a cause for concern. You must be able to get the notary attestation for a nominal fee.
Opening a joint account
In case the shares are held jointly, the beneficiaries (generally married couples) are expected to have a joint demat account. This can be opened for a nominal sum of ₹300 before transferring the shares to it. However, it is not mandatory to open a joint account.
The joint share certificate can be transferred to a single account holder using a transfer deed obtained from RTA. Here, a stamp charge of 0.25 per cent of the market value (of the stock) is levied.
But it is advisable to take the demat route rather than transfer share certificates through a transfer deed. In the demat route, the DP indemnifies the loss of shares or any damage that can happen to the share certificates during transit. So, in case of a damage or loss of shares at any stage, the DP takes on the liability to compensate you for all the losses.
Owner’s death
Besides, it is possible that the actual beneficiary of the physical certificates is not alive and there is no joint owner for the share certificate. In such a case, the legal heir (usually sons, daughters and spouse of the owner), after a probate process, is required to transfer the shares to a single person. The shares get credited to this chosen person’s demat account after approval by RTA.
Besides, the respective RTA expects few other documents (copy of death certificate, succession certificate and probate process letter of administration attested by court officer) to be submitted for verification before the transfer of ownership. But if the value of the stocks involved is high, the RTA can also ask for additional documents for further clarifications.
The specific document requirement (including the documents after the probate process, if any) depends on the discretion of the RTA.
Source: The Hindu Business Line
It pays to get a RuPay Card
Besides the usual debit card, Rupay offers prepaid and international debit cards
Visa and Mastercard have always been the default payment gateway for debit and credit cards. India’s home-grown ‘RuPay’ has however come a long way since its launch as a rural product in 2011. It comes with features such as wider acceptance at many locations locally and globally, cash-back and other benefits. RuPay credit cards may also be issued shortly.
What is it?RuPay is a payment gateway system which is an alternate solution to Mastercard and Visa. It is operated by the National Payment Corporation of India (NPCI). Currently, over 600 banks, including all major public sector banks and many private banks as well as co-operative and rural banks, issue RuPay cards.
Cost efficiency both for banks and for merchants have made these cards popular. Banks pay lower fees per transaction for RuPay cards. Additionally, banks that issue the card do not have to pay any subscription or monthly fees. Costs are lower with RuPay, as processing happens domestically. The benefit to merchants is that the transaction fees are lower — about a third of what is charged by Visa or Mastercard.
Over 300 million RuPay cards are in circulation — this is about 40 per cent of the over 750 million debit cards in the country. Data for January 2017 shows that over 4.6 million RuPay debit card transactions happen each day, averaging ₹710 crore a day. Over 10,000 e-commerce sites have added RuPay as one of the payment options and two million e-commerce transactions for an average of ₹140 crore happen per day.
Card types
RuPay cards come in a few flavours, starting with a simple debit card. There is also a premium (Platinum) version with enhanced limits. These cards can also be used for e-commerce transactions. Banks may charge annual fee for the cards as well as transaction fee beyond certain usage limits. For instance, HDFC Bank charges an annual fee of ₹150 for its premium card.
Daily withdrawal limit on the card varies with bank. In HDFC Bank, the maximum amount that can be withdrawn from ATMs is ₹25,000 and shopping limit (e-commerce and point of sale) is ₹1.25 lakh per day. Axis Bank’s classic debit card comes with withdrawals of ₹40,000 at ATMs. For SBI, the maximum POS limit is ₹25,000 per day.
RuPay also offers a prepaid debit card which can be preloaded with money for transactions. Visa and Mastercard also offer prepaid cards, but RuPay has special tie-ups and deals. For example, the card issued by Union Bank for use at IRCTC sites has a limit of ₹10,000 for partial KYC or ₹50,000 with full KYC. The first five transactions per card for ticket purchase on IRCTC site are free every month; beyond that, users are charged ₹10 per transaction.
RuPay also offers international debit cards, in partnership with global providers such as Discover Financial Services, JCB International and UnionPay International. These cards typically have higher limits for transactions. For example, Bank of Baroda RuPay International Chip Debit Card has ATM cash withdrawal limit of ₹1,00,000 per day. The limit is similar to what you get with Visa International debit card from the bank.
Features
The cards come with features such as SMS alert for transactions. Card holders are entitled to a personal accidental death/permanent disability insurance. The sum assured is ₹1 lakh for regular and ₹2 lakh for premium card holders.
While accident insurance may be offered by other cards, disability insurance is additionally covered for RuPay cards. Similar to Visa and Mastercard holders, various brands and merchants also offer deals to RuPay card users also from time to time.
Premium debit card holders can get concierge services. This service is typically offered by Visa for some debit card categories only. United Bank of India, for instance, does not offer it for its EMV debit card, but makes jt available on its RuPay platinum debit card. Platinum card holders have cash back benefits on utility bills, railway ticket bookings.
Additionally, the premium debit card can get you access to airport lounges in domestic and international airports. Card holders pay an authorisation charge of ₹2 and can use lounge facilities up to 2 times every quarter.
The facility is available at 31 domestic airport lounges and 549 International airport lounges. Some Visa and Mastercard debit cards also offer this feature, but the reach may be limited. For example, Axis bank offers only local airport lounge access on its Mastercard debit card at 28 locations.
Source: The Hindu Business Line
Visa and Mastercard have always been the default payment gateway for debit and credit cards. India’s home-grown ‘RuPay’ has however come a long way since its launch as a rural product in 2011. It comes with features such as wider acceptance at many locations locally and globally, cash-back and other benefits. RuPay credit cards may also be issued shortly.
What is it?RuPay is a payment gateway system which is an alternate solution to Mastercard and Visa. It is operated by the National Payment Corporation of India (NPCI). Currently, over 600 banks, including all major public sector banks and many private banks as well as co-operative and rural banks, issue RuPay cards.
Cost efficiency both for banks and for merchants have made these cards popular. Banks pay lower fees per transaction for RuPay cards. Additionally, banks that issue the card do not have to pay any subscription or monthly fees. Costs are lower with RuPay, as processing happens domestically. The benefit to merchants is that the transaction fees are lower — about a third of what is charged by Visa or Mastercard.
Over 300 million RuPay cards are in circulation — this is about 40 per cent of the over 750 million debit cards in the country. Data for January 2017 shows that over 4.6 million RuPay debit card transactions happen each day, averaging ₹710 crore a day. Over 10,000 e-commerce sites have added RuPay as one of the payment options and two million e-commerce transactions for an average of ₹140 crore happen per day.
Card types
RuPay cards come in a few flavours, starting with a simple debit card. There is also a premium (Platinum) version with enhanced limits. These cards can also be used for e-commerce transactions. Banks may charge annual fee for the cards as well as transaction fee beyond certain usage limits. For instance, HDFC Bank charges an annual fee of ₹150 for its premium card.
Daily withdrawal limit on the card varies with bank. In HDFC Bank, the maximum amount that can be withdrawn from ATMs is ₹25,000 and shopping limit (e-commerce and point of sale) is ₹1.25 lakh per day. Axis Bank’s classic debit card comes with withdrawals of ₹40,000 at ATMs. For SBI, the maximum POS limit is ₹25,000 per day.
RuPay also offers a prepaid debit card which can be preloaded with money for transactions. Visa and Mastercard also offer prepaid cards, but RuPay has special tie-ups and deals. For example, the card issued by Union Bank for use at IRCTC sites has a limit of ₹10,000 for partial KYC or ₹50,000 with full KYC. The first five transactions per card for ticket purchase on IRCTC site are free every month; beyond that, users are charged ₹10 per transaction.
RuPay also offers international debit cards, in partnership with global providers such as Discover Financial Services, JCB International and UnionPay International. These cards typically have higher limits for transactions. For example, Bank of Baroda RuPay International Chip Debit Card has ATM cash withdrawal limit of ₹1,00,000 per day. The limit is similar to what you get with Visa International debit card from the bank.
Features
The cards come with features such as SMS alert for transactions. Card holders are entitled to a personal accidental death/permanent disability insurance. The sum assured is ₹1 lakh for regular and ₹2 lakh for premium card holders.
While accident insurance may be offered by other cards, disability insurance is additionally covered for RuPay cards. Similar to Visa and Mastercard holders, various brands and merchants also offer deals to RuPay card users also from time to time.
Premium debit card holders can get concierge services. This service is typically offered by Visa for some debit card categories only. United Bank of India, for instance, does not offer it for its EMV debit card, but makes jt available on its RuPay platinum debit card. Platinum card holders have cash back benefits on utility bills, railway ticket bookings.
Additionally, the premium debit card can get you access to airport lounges in domestic and international airports. Card holders pay an authorisation charge of ₹2 and can use lounge facilities up to 2 times every quarter.
The facility is available at 31 domestic airport lounges and 549 International airport lounges. Some Visa and Mastercard debit cards also offer this feature, but the reach may be limited. For example, Axis bank offers only local airport lounge access on its Mastercard debit card at 28 locations.
Source: The Hindu Business Line
Risk is finally a question of Perception
Fondness for real estate and gold and dislike for equity is not driven by the actual risk
Do you feel that equity is more risky than real- estate investments? Or that gold is a safe asset? Why is that one is willing to invest in farmland or chit funds and not buy shares of listed companies? In this article, we explore these questions using behavioural psychology. Specifically, we look at why one's fondness for real estate and gold and dislike for equity is not driven by the actual risk of these investments but by the risk you perceive!
Perceived riskTake chit funds, farmland and similar investments. These investments have typically not offered returns commensurate with the associated risk. Yet, one may choose to invest in such schemes. Why? One reason is herding. In some ways, we are like the zebras that crowd together when they spot a predator. That is, you and I find comfort in a crowd.
You choose a restaurant based on how many patrons are inside; more the number, better the restaurant ought to be! One's choice of investments is driven by similar logic. You perceive farmland to be less risky than it actually is for two reasons. For one, you draw comfort from the fact that one's friends are also invested in the same asset. For another, lack of visible prices makes you feel that farmland investment is less risky than equity.
But why is that you perceive gold and traditional real estate to be less risky than equity? You have seen one's family and friends accumulate wealth investing in land and houses.
Importantly, you have not witnessed real-estate prices crash like the stock market. So, you do not fear investing in real estate. In other words, if a crash has not happened in the past, you think it is unlikely or less likely to happen in the future. We call this phenomenon as the Black Swan Error.
Why?You cannot conclude that all swans are white just because all swans you have seen so far are white! You have to spot just one black swan (which you can in Australia) to realise the fallacy of one's argument. Using the same logic, just because a crash has not happened in the past does not mean it cannot happen in the future. one black swan error makes you think that real-estate is significantly less risky than equity.
There is another factor. Being physical assets, real estate and gold act as both consumption and investment asset. So, whenever gold prices decline, you consider them as consumption asset meant for personal use as jewellery or to be gifted to one's children. So, price declines do not hurt you. But whenever prices move up, gold becomes an investment asset that can be sold for profit!
Actual risk
If you perceive real estate and gold to be less risky than equity, you will most likely choose these two assets and invest less in equity. Likewise, you may invest in farmland and such alternative assets because you perceive such investments to be less risky.
Such behaviour can jeopardise one's life goals. Why? Real estate is lumpy and illiquid and cannot be sold quickly. The risk-adjusted return on gold does not typically compare well with equity. That is why one's goal-based portfolios should preferably contain equity and cumulative bank deposits. Equity can give you higher return, but with uncertain cash flow. Cumulative deposits balance this uncertainty offering pre-defined cash flows on maturity without the reinvestment risk.
To overcome one's fear relating to equity investments, set up systematic investment plans on equity mutual funds. The auto debits from one's bank account to the mutual funds in the subsequent months will enable you to distance oneself from the investments. This will help sidestep one's perceived risk about equities and still invest in them!
Do you feel that equity is more risky than real- estate investments? Or that gold is a safe asset? Why is that one is willing to invest in farmland or chit funds and not buy shares of listed companies? In this article, we explore these questions using behavioural psychology. Specifically, we look at why one's fondness for real estate and gold and dislike for equity is not driven by the actual risk of these investments but by the risk you perceive!
Perceived riskTake chit funds, farmland and similar investments. These investments have typically not offered returns commensurate with the associated risk. Yet, one may choose to invest in such schemes. Why? One reason is herding. In some ways, we are like the zebras that crowd together when they spot a predator. That is, you and I find comfort in a crowd.
You choose a restaurant based on how many patrons are inside; more the number, better the restaurant ought to be! One's choice of investments is driven by similar logic. You perceive farmland to be less risky than it actually is for two reasons. For one, you draw comfort from the fact that one's friends are also invested in the same asset. For another, lack of visible prices makes you feel that farmland investment is less risky than equity.
But why is that you perceive gold and traditional real estate to be less risky than equity? You have seen one's family and friends accumulate wealth investing in land and houses.
Importantly, you have not witnessed real-estate prices crash like the stock market. So, you do not fear investing in real estate. In other words, if a crash has not happened in the past, you think it is unlikely or less likely to happen in the future. We call this phenomenon as the Black Swan Error.
Why?You cannot conclude that all swans are white just because all swans you have seen so far are white! You have to spot just one black swan (which you can in Australia) to realise the fallacy of one's argument. Using the same logic, just because a crash has not happened in the past does not mean it cannot happen in the future. one black swan error makes you think that real-estate is significantly less risky than equity.
There is another factor. Being physical assets, real estate and gold act as both consumption and investment asset. So, whenever gold prices decline, you consider them as consumption asset meant for personal use as jewellery or to be gifted to one's children. So, price declines do not hurt you. But whenever prices move up, gold becomes an investment asset that can be sold for profit!
Actual risk
If you perceive real estate and gold to be less risky than equity, you will most likely choose these two assets and invest less in equity. Likewise, you may invest in farmland and such alternative assets because you perceive such investments to be less risky.
Such behaviour can jeopardise one's life goals. Why? Real estate is lumpy and illiquid and cannot be sold quickly. The risk-adjusted return on gold does not typically compare well with equity. That is why one's goal-based portfolios should preferably contain equity and cumulative bank deposits. Equity can give you higher return, but with uncertain cash flow. Cumulative deposits balance this uncertainty offering pre-defined cash flows on maturity without the reinvestment risk.
To overcome one's fear relating to equity investments, set up systematic investment plans on equity mutual funds. The auto debits from one's bank account to the mutual funds in the subsequent months will enable you to distance oneself from the investments. This will help sidestep one's perceived risk about equities and still invest in them!
What are short term investment options as bank rates at lowest point in many years
For expert advice, welcome to get in touch with us via Contact pageEven though term deposit rates are declining there are a variety of mutual fund investment options that, can meet a wide spectrum of investor’s risk return needs provided Investors broaden their horizons and empower themselves with knowledge of debt fund investments. In the next post we will discuss how ultra short term debt funds and liquid funds can fulfil your short term investment needs while giving higher returns.
Ultra-short term debt funds:
Ultra-short term debt funds are money market mutual funds and invest primarily in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits, with the objective of providing investors an opportunity to earn returns, without compromising on the liquidity of the investment. These funds are suitable for investment tenures of more than 3 months to about a year. They provide higher returns than savings bank accounts interest (which is usually around 4%) and sufficient liquidity to meet urgent needs.
For example, SBI Ultra short term Debt fund given 7.7% over the last 1 year; compare this with 4% interest from savings bank account or even interest from less than 365 days bank FDs and you will find that ultra short term debt funds are much more attractive. These funds are suitable for 3 months to 1 year investment tenures. The chart below shows 1 year rolling returns of SBI Ultra Short Term Debt Fund.
The average 1 year rolling return of this fund over the last 5 years was 8.8%. The maximum 1 year rolling return was 10% while the minimum was 7.7%. The returns of this fund over the last 5 years were more than 8%, more than 90% of the times While the returns will decline in the future, if interest rates go down, the current returns are still much higher than the less than 12 months FD rates, while offering much more liquidity than FDs because ultra-short term debt funds can be redeemed at any time without any penalty (exit loads).
Liquid Funds:
Liquid funds, like ultra-short term debt funds, invest in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits. Unlike ultra-short term debt funds, liquid funds invest in money market securities that have a residual maturity of less than or equal to 91 days. As such, they are suitable for parking money for a few days to up to 3 months. Liquid funds usually give much higher returns than savings bank interest rates.
There is no exit load. Withdrawals from liquid funds are processed within 24 hours on business days. However, some liquid funds, like SBI Magnum Instacash Fund offer faster withdrawals. Through the Instant Redemption Facility, investors can redeem units of SBI Magnum Insta Cash Fund and get funds credited to their registered bank accounts within a few minutes of transactions through the SBI mutual fund website or mobile app or limited to a maximum withdrawal limit of Rs 50,000 or redeemable balance (whichever is lower) per transaction.
The Instant Redemption Facility provides almost the same convenience as a savings bank account. However, the returns of liquid funds can be substantially higher than savings bank interest. In the last one year, SBI Magnum Insta Cash Fund gave 6.9% returns. These funds are suitable for 3 months to 1 year investment tenures. The chart below shows 1 year the rolling returns of SBI Magnum Insta Cash Fund.
The average 1 year rolling return of this fund over the last 5 years was 8.6%. The maximum 1 year rolling return was 9.8% while the minimum was 6.9%. The returns of this fund over the last 5 years were more than 8%, around 75% of the times. While the returns will decline in the future, if interest rates go down, the current returns are still much higher than the savings bank interest rates, almost as high as less than 1 year FD rates, while offering savings bank like convenience.
Conclusion
In this post, we have discussed that, even though term deposit rates are declining, there are a variety of mutual fund investment options that, can meet a wide spectrum of investor’s risk return needs. Investors need to broaden their horizons and empower themselves with knowledge of investments; instead of complaining about lower FD interest rates (justifiably so, from their perspectives), they may be able to find more attractive investment options which are aligned to their investment objectives. Investors should discuss with their financial advisors, if various debt mutual fund options are suitable for their short term investment needs.
To invest, get in touch with us via Contact page
Ultra-short term debt funds:
Ultra-short term debt funds are money market mutual funds and invest primarily in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits, with the objective of providing investors an opportunity to earn returns, without compromising on the liquidity of the investment. These funds are suitable for investment tenures of more than 3 months to about a year. They provide higher returns than savings bank accounts interest (which is usually around 4%) and sufficient liquidity to meet urgent needs.
For example, SBI Ultra short term Debt fund given 7.7% over the last 1 year; compare this with 4% interest from savings bank account or even interest from less than 365 days bank FDs and you will find that ultra short term debt funds are much more attractive. These funds are suitable for 3 months to 1 year investment tenures. The chart below shows 1 year rolling returns of SBI Ultra Short Term Debt Fund.
The average 1 year rolling return of this fund over the last 5 years was 8.8%. The maximum 1 year rolling return was 10% while the minimum was 7.7%. The returns of this fund over the last 5 years were more than 8%, more than 90% of the times While the returns will decline in the future, if interest rates go down, the current returns are still much higher than the less than 12 months FD rates, while offering much more liquidity than FDs because ultra-short term debt funds can be redeemed at any time without any penalty (exit loads).
Liquid Funds:
Liquid funds, like ultra-short term debt funds, invest in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits. Unlike ultra-short term debt funds, liquid funds invest in money market securities that have a residual maturity of less than or equal to 91 days. As such, they are suitable for parking money for a few days to up to 3 months. Liquid funds usually give much higher returns than savings bank interest rates.
There is no exit load. Withdrawals from liquid funds are processed within 24 hours on business days. However, some liquid funds, like SBI Magnum Instacash Fund offer faster withdrawals. Through the Instant Redemption Facility, investors can redeem units of SBI Magnum Insta Cash Fund and get funds credited to their registered bank accounts within a few minutes of transactions through the SBI mutual fund website or mobile app or limited to a maximum withdrawal limit of Rs 50,000 or redeemable balance (whichever is lower) per transaction.
The Instant Redemption Facility provides almost the same convenience as a savings bank account. However, the returns of liquid funds can be substantially higher than savings bank interest. In the last one year, SBI Magnum Insta Cash Fund gave 6.9% returns. These funds are suitable for 3 months to 1 year investment tenures. The chart below shows 1 year the rolling returns of SBI Magnum Insta Cash Fund.
The average 1 year rolling return of this fund over the last 5 years was 8.6%. The maximum 1 year rolling return was 9.8% while the minimum was 6.9%. The returns of this fund over the last 5 years were more than 8%, around 75% of the times. While the returns will decline in the future, if interest rates go down, the current returns are still much higher than the savings bank interest rates, almost as high as less than 1 year FD rates, while offering savings bank like convenience.
Conclusion
In this post, we have discussed that, even though term deposit rates are declining, there are a variety of mutual fund investment options that, can meet a wide spectrum of investor’s risk return needs. Investors need to broaden their horizons and empower themselves with knowledge of investments; instead of complaining about lower FD interest rates (justifiably so, from their perspectives), they may be able to find more attractive investment options which are aligned to their investment objectives. Investors should discuss with their financial advisors, if various debt mutual fund options are suitable for their short term investment needs.
To invest, get in touch with us via Contact page
The big question about small savings schemes' interest rate cut
The interest rates on small savings schemes like PPF, KVP and NSC are tumbling. Should you hold on to these or revise your asset allocation?
Interest rates on various small savings schemes like Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and National Savings Certificate have been reduced by 10 basis points for the 1 July to 31 September quarter. One basis point is one-hundredth of a percentage point.
Since April 2016, interest rates of all small saving schemes have been linked to government bond yields and are now recalibrated on a quarterly basis. Over the last couple of years, interest rates of most small savings schemes has witnessed a decline of about 1 percentage point . For instance, the interest rate on Senior Citizen Savings Scheme has come down from 9.3% in FY2015-16 to 8.3% now.
Should this rate cut make you revisit your investment portfolio, especially if you invest substantially in small savings schemes?
Rate cut
Interest rates across all the small saving schemes have been reduced by 10 basis points for the next quarter except the post office savings account, which will remain unchanged at 4% per annum.
Investments in PPF schemes will now fetch an interest rate of 7.8% per annum, compared to 7.9% in quarter ending June 2017. Similarly, a 5-year National Savings Certificate will return 7.8% instead of 7.9% per annum.
New KVP investments would now double in roughly 10 years (they will mature in 115 months) as they will now give a return of 7.5% per annum.
The scheme for girl child savings, Sukanya Samriddhi Account Scheme, and 5-year Senior Citizens Savings Scheme will provide 8.3% returns. The 5-year Monthly Income Scheme will be 7.5%. Term deposits of 1-5 years will offer 6.8-7.6%. The 5-year recurring deposit will earn 7.1% interest.
What should you do?
During the last quarter, the interest rate on PPF deposits went below 8%-to 7.9%-for the first time ever. And now it has further declined to 7.8%.
"The decreases in rates during the last few years (not to miss out the gush of liquidity in the banking system after demonetization) has led to some of these rates currently being at multi-decade lows and most investors are not even aware of this reality," said Santosh Joseph, founder and managing partner, Germinate Wealth Solutions LLP. Even a 1 percentage point decrease in interest rates can make a huge difference over the long term. For instance, if 2 years back you had started investing Rs1.5 lakh in PPF every year for 15 years, when the rate of returns was 8.7% per annum, you would have calculated that your corpus would have been Rs46.76 lakh at the end of 15 years.
However, a 1% percentage point decrease in interest rate after couple of years would reduce your corpus by about Rs3.42 lakh, or 7.31% in total over 15 years period.
"Most investors have made certain calculations about their money's growth or size of their accumulated savings. However, they may be in for a harsh reality check. Key implications (of the rate cut) could be that they would fall short of their desired corpus," said Joseph.
However, some experts point to the differences in real rate of return and absolute returns. They believe that the decline in small savings interest rates may impact those who had taken only the absolute rate of return in these schemes into consideration while designing their portfolio, while those who were working with the real rate of return would not be impacted as much comparatively.
"Interest rates on fixed return products have varied over the years. Their returns are linked to some benchmarks such as current interest rates and inflation. What is relevant is the real interest rate over inflation, and not absolute rate. But as we get used to a quantum of interest, drops are not palatable. If one had used real interest rates, their plans are not impacted," said Lovaii Navlakhi, founder and chief executive officer, International Money Matters Pvt. Ltd.
However, those who have not taken into consideration the real rate of return, or those who depend primarily on the income from these fixed instruments, may need to revisit their portfolio.
"Expecting the savings to give a certain regular income will have to be reviewed. For investors who depend on the interest income as their primary income, this is like a salary cut," said Joseph. "Investors need to think and explore opportunities beyond the conventional sphere of small saving instruments, he added.
Where direct equities are not preferred or advisable for many people, especially those who have a low risk appetite or those who are nearing their different goals or retirement, mutual funds can certainly be an option to consider. "Savvy investors have already begun using debt funds and hybrid mutual funds to beat these blues," said Joseph.
Even retired individuals can opt for investing in debt mutual funds to maintain returns on their portfolio. "The solution lies in clearly defining the requirements of these funds and breaking them up for specific time periods or goals," said Joseph.
With a significant drop in inflation and a further interest rate cut by RBI on the horizon, it is very likely the rates on Government small savings scheme can further drop by another 0.25 to 0.5% p.a within the next 12 months period, making them even less attractive.
Before you make a decision on a product to invest in, compare it with the other avenues. Look at the returns that they generate but at the same time look at other parameters, too, such as taxation and liquidity. Some of the small saving schemes still fit in the portfolio of many individuals because the returns generated from them are tax-free.
Source: HT-MINT
Interest rates on various small savings schemes like Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and National Savings Certificate have been reduced by 10 basis points for the 1 July to 31 September quarter. One basis point is one-hundredth of a percentage point.
Since April 2016, interest rates of all small saving schemes have been linked to government bond yields and are now recalibrated on a quarterly basis. Over the last couple of years, interest rates of most small savings schemes has witnessed a decline of about 1 percentage point . For instance, the interest rate on Senior Citizen Savings Scheme has come down from 9.3% in FY2015-16 to 8.3% now.
Should this rate cut make you revisit your investment portfolio, especially if you invest substantially in small savings schemes?
Rate cut
Interest rates across all the small saving schemes have been reduced by 10 basis points for the next quarter except the post office savings account, which will remain unchanged at 4% per annum.
Investments in PPF schemes will now fetch an interest rate of 7.8% per annum, compared to 7.9% in quarter ending June 2017. Similarly, a 5-year National Savings Certificate will return 7.8% instead of 7.9% per annum.
New KVP investments would now double in roughly 10 years (they will mature in 115 months) as they will now give a return of 7.5% per annum.
The scheme for girl child savings, Sukanya Samriddhi Account Scheme, and 5-year Senior Citizens Savings Scheme will provide 8.3% returns. The 5-year Monthly Income Scheme will be 7.5%. Term deposits of 1-5 years will offer 6.8-7.6%. The 5-year recurring deposit will earn 7.1% interest.
What should you do?
During the last quarter, the interest rate on PPF deposits went below 8%-to 7.9%-for the first time ever. And now it has further declined to 7.8%.
"The decreases in rates during the last few years (not to miss out the gush of liquidity in the banking system after demonetization) has led to some of these rates currently being at multi-decade lows and most investors are not even aware of this reality," said Santosh Joseph, founder and managing partner, Germinate Wealth Solutions LLP. Even a 1 percentage point decrease in interest rates can make a huge difference over the long term. For instance, if 2 years back you had started investing Rs1.5 lakh in PPF every year for 15 years, when the rate of returns was 8.7% per annum, you would have calculated that your corpus would have been Rs46.76 lakh at the end of 15 years.
However, a 1% percentage point decrease in interest rate after couple of years would reduce your corpus by about Rs3.42 lakh, or 7.31% in total over 15 years period.
"Most investors have made certain calculations about their money's growth or size of their accumulated savings. However, they may be in for a harsh reality check. Key implications (of the rate cut) could be that they would fall short of their desired corpus," said Joseph.
However, some experts point to the differences in real rate of return and absolute returns. They believe that the decline in small savings interest rates may impact those who had taken only the absolute rate of return in these schemes into consideration while designing their portfolio, while those who were working with the real rate of return would not be impacted as much comparatively.
"Interest rates on fixed return products have varied over the years. Their returns are linked to some benchmarks such as current interest rates and inflation. What is relevant is the real interest rate over inflation, and not absolute rate. But as we get used to a quantum of interest, drops are not palatable. If one had used real interest rates, their plans are not impacted," said Lovaii Navlakhi, founder and chief executive officer, International Money Matters Pvt. Ltd.
However, those who have not taken into consideration the real rate of return, or those who depend primarily on the income from these fixed instruments, may need to revisit their portfolio.
"Expecting the savings to give a certain regular income will have to be reviewed. For investors who depend on the interest income as their primary income, this is like a salary cut," said Joseph. "Investors need to think and explore opportunities beyond the conventional sphere of small saving instruments, he added.
Where direct equities are not preferred or advisable for many people, especially those who have a low risk appetite or those who are nearing their different goals or retirement, mutual funds can certainly be an option to consider. "Savvy investors have already begun using debt funds and hybrid mutual funds to beat these blues," said Joseph.
Even retired individuals can opt for investing in debt mutual funds to maintain returns on their portfolio. "The solution lies in clearly defining the requirements of these funds and breaking them up for specific time periods or goals," said Joseph.
With a significant drop in inflation and a further interest rate cut by RBI on the horizon, it is very likely the rates on Government small savings scheme can further drop by another 0.25 to 0.5% p.a within the next 12 months period, making them even less attractive.
Before you make a decision on a product to invest in, compare it with the other avenues. Look at the returns that they generate but at the same time look at other parameters, too, such as taxation and liquidity. Some of the small saving schemes still fit in the portfolio of many individuals because the returns generated from them are tax-free.
Source: HT-MINT
Save more than tax with Home Loan
Buying a home which you and your family can proudly call as your own is a life-time experience. It requires a lot of planning by family members about the exact necessities in a home and search for prospective homes and builders etc. Post these; you require finance to buy your dream home. This financing is popularly known as home loan.
What is home loan– Home loan is a secured loan offered by a housing finance company or bank against the security of your house. Home Loan is offered to individuals who wish to purchase or construct a house. The property is mortgaged to the lender (housing finance company or bank) as a security till the loan is repaid along with interest. Normally, the loan is repaid through equal monthly instalments (EMIs).
What is the maximum amount that can be borrowed– The amount of loan that can be borrowed typically depends on the repaying capacity of the customer, his income level (to ascertain how much EMI he can pay) and his credit score. Generally the maximum loan offered is up to 90% of the property cost provided rest of the conditions are fulfilled.
What are the types of home loan rates– The home loan interest rates for home loans are of two types - fixed rate or floating rate. Some lenders may offer partly fixed and/ or partly floating rate, depending on the needs of the borrower.
– The fixed home loan rates comes at a pre-specified interest rate for a fixed period, after which it is repayable at a floating rate
– In the case of a floating rate loan, the rate can vary throughout the loan tenure as it is tied to a reference interest rate which changes based on economic compulsions.
What are the tax benefits on home loan– There are various Income Tax benefits on a home loan and can be classified broadly into three parts –
It is a good investment– A home is a good investment as the price appreciates significantly and provides substantial return on your investments if you hold the property for long term. In fact, owing a property is much better than living in rent as the rent you pay can equal to the EMI to buy a home.
You are free to create your own space– Your home offers tremendous freedom to create the living environment that you have always dreamt of. You can paint rooms with choice of your colors, make floors with material that you wanted, own a pet or have your own garden etc.
You build a credit history– When you take a home loan and pay EMIs in time, it demonstrates to other lenders that you are a good borrower. This also enhances your credit score and therefore, when you need any other loans for buying a car, making improvements to your home or a personal or education loan, you get it very easily.
You build assets– When you pay monthly EMIs, a portion goes towards reducing the amount you owe as loan, and thus it increases your asset. In a sense, paying your EMIs is a form of saving as with each instalment payment your asset amount increases. With passage of time, the value of your home increases and thus increases the asset value further.
You buy mental peace– When you have your home, you feel safe and secured. Your family can enjoy living in the home and lead a stress free life. You are free from the tension of changing homes or increase in rent or landlord’s threat to leave the rented house.
Your home works as a retirement plan– Owing to various reasons, you could not build a retirement corpus while working. There could also be some unforeseen expenses which you could not plan earlier. To meet these financial needs, you need not sell your home to raise the money as during your retirement years a reverse mortgage loan can convert your existing home into an alternative retirement corpus while you continue to enjoy living in it during your lifetime.
While taking a loan is always not advisable but taking a home loan is different from other loans. With a home loan, apart from enjoying tax benefits, you feel safe and secure, create your own space, build an asset and most importantly use the asset during your sunset years, if so required.
What is home loan– Home loan is a secured loan offered by a housing finance company or bank against the security of your house. Home Loan is offered to individuals who wish to purchase or construct a house. The property is mortgaged to the lender (housing finance company or bank) as a security till the loan is repaid along with interest. Normally, the loan is repaid through equal monthly instalments (EMIs).
What is the maximum amount that can be borrowed– The amount of loan that can be borrowed typically depends on the repaying capacity of the customer, his income level (to ascertain how much EMI he can pay) and his credit score. Generally the maximum loan offered is up to 90% of the property cost provided rest of the conditions are fulfilled.
What are the types of home loan rates– The home loan interest rates for home loans are of two types - fixed rate or floating rate. Some lenders may offer partly fixed and/ or partly floating rate, depending on the needs of the borrower.
– The fixed home loan rates comes at a pre-specified interest rate for a fixed period, after which it is repayable at a floating rate
– In the case of a floating rate loan, the rate can vary throughout the loan tenure as it is tied to a reference interest rate which changes based on economic compulsions.
What are the tax benefits on home loan– There are various Income Tax benefits on a home loan and can be classified broadly into three parts –
- Rs. 200,000 deduction on interest paid for self-occupied property can be claimed under Section 24 of the Income Tax Act 1961.
- Rs 150,000 deduction on principal repayment can be claimed for a property which is self-occupied under Section 80C of the Income Tax Act 1961. The total deduction claimed under Section 80C is Rs 150,000 which also includes investments in insurance premiums, PPF deposits, tax saving fixed deposits and ELSS mutual funds etc.
- Another Rs. 50,000 tax benefit can be claimed under section 80EE as “interest on home loan” provided the home loan has been availed from FY 2016-17 onwards, the value of the house is less than Rs 50 Lakhs, the home loan amount is less than Rs 35 Lakhs and on the date of loan sanction the borrower should not own any property. This deduction is over and above the Rs 2 Lakh limit under Section 24 of the Income Tax Act.
It is a good investment– A home is a good investment as the price appreciates significantly and provides substantial return on your investments if you hold the property for long term. In fact, owing a property is much better than living in rent as the rent you pay can equal to the EMI to buy a home.
You are free to create your own space– Your home offers tremendous freedom to create the living environment that you have always dreamt of. You can paint rooms with choice of your colors, make floors with material that you wanted, own a pet or have your own garden etc.
You build a credit history– When you take a home loan and pay EMIs in time, it demonstrates to other lenders that you are a good borrower. This also enhances your credit score and therefore, when you need any other loans for buying a car, making improvements to your home or a personal or education loan, you get it very easily.
You build assets– When you pay monthly EMIs, a portion goes towards reducing the amount you owe as loan, and thus it increases your asset. In a sense, paying your EMIs is a form of saving as with each instalment payment your asset amount increases. With passage of time, the value of your home increases and thus increases the asset value further.
You buy mental peace– When you have your home, you feel safe and secured. Your family can enjoy living in the home and lead a stress free life. You are free from the tension of changing homes or increase in rent or landlord’s threat to leave the rented house.
Your home works as a retirement plan– Owing to various reasons, you could not build a retirement corpus while working. There could also be some unforeseen expenses which you could not plan earlier. To meet these financial needs, you need not sell your home to raise the money as during your retirement years a reverse mortgage loan can convert your existing home into an alternative retirement corpus while you continue to enjoy living in it during your lifetime.
While taking a loan is always not advisable but taking a home loan is different from other loans. With a home loan, apart from enjoying tax benefits, you feel safe and secure, create your own space, build an asset and most importantly use the asset during your sunset years, if so required.