The whole theme of EPFO providing these choices to increase and reduce equity exposure is a case of duplication of effort and design. Financial experts are advising investors to leverage existing options.
Hiral Thanawala | May 02, 2018 11:28 AM IST | Source: Moneycontrol.com
There is good news for over five crore subscribers of retirement fund body EPFO. Soon they may have an option to increase or decrease investments of their provident fund into stocks through exchange-traded funds (ETFs) in the current fiscal. In its last meeting, the Central Board of Trustees decided to explore the possibility of granting an option to increase or reduce equity allocation to subscribers contributing through ETF above the 15% cap.
The Employee Provident Fund Organisation (EPFO) had started investing in ETFs from investible deposits in August 2015. In FY16, it invested five percent of its investible deposits, which was subsequently increased to 10 percent in FY17 and 15 percent in FY18. However, subscribers were not at all pleased with this increase in exposure to equities. There were some who didn’t want to risk their retirement corpus built through the EPF route. While other subscribers were keen to increase exposure to equities for better returns in the long-term.
So, what advice do financial experts have for EPFO subscribers looking to increase their exposure to equities through the ETFs route when the option is opened up?
Who should increase or reduce investments in ETFs?
Several investors are not reasonably patient with their active investments and panic when they see volatility in the market. Chenthil Iyer, a Sebi registered investment adviser and author of ‘Everyone Has an Eye on Your Wallet! Do You?’ said these investors generally invest only in fixed deposits and post office schemes. “For such investors, increasing the equity exposure through EPF route may be a good option as it is a passive mode of investing and ensures a long-term commitment.”
For investors who manage their active investments and have a well-diversified portfolio, Iyer recommends a minimum equity exposure.
Arvind Laddha, Deputy CEO, JLT, Independent Insurance, has a word of caution. “In the past, there have been negative returns for consecutive two-to-three years or even more from equity markets and this could compromise the savings of EPFO subscribers which they are not used to.”
As not all investors understand the risk of equities and their volatile nature of returns, Kalpesh Mehta, Partner at Deloitte India, feels an investor should also consider one’s age, risk appetite, financial obligations and total net worth before increasing exposure to equities through ETFs.
Benefits of increasing investments in ETFs
Here are the benefits of increasing investments in ETFs through EPF contribution as explained by Amit Gopal, Senior Vice President, India Life Capital: 1) Regular monthly SIP because of mandatory contributions; 2) Inexpensive as employees (contributors) don’t have to pay fund management fees in the current model of EPF; and 3) Tax advantages on contributions. To this, Colonel Sanjeev Govila, CEO, Hum Fauji Initiatives lists institutional framework taking care of selection and research of equities while investing.
Drawbacks of increasing investments in ETFs
Gopal highlights drawbacks such as insufficient administrative track record, illiquidity associated with a retirement fund product, absence of choice in fund manager and products.
To this, Iyer cautions, “Putting the responsibility of equity exposure of this fund on the individual may expose it to the vagaries of the individual’s risk perception, leading to possible over-exposure.”
Make EPF more investor friendly
EPF needs to be investor friendly with additional facilities of enhancing and reducing equity allocation which is likely to be made available in the coming two-to-three months. Iyer feels periodic electronic statements should be mailed to the subscribers which clearly mentions the amount and number of units available in ETF.
“Further an automatic mode of distributing the contribution into equity and debt should be made available based on the age of the individual just like NPS.” This, he feels, will ensure minimum manual intervention in decision-making with regard to equity exposure.
According to Goyal, while EPFO have described some methods of passing on returns, nothing concrete has been implemented. “It is unclear how they will ford the system and governance challenges that could arise.”
It would therefore be good if these issues are resolved before increased allocation and employee choices are implemented. An investor needs to keep a track of this developments for their own benefit.
Leverage on existing options instead of duplicating efforts
The whole theme of EPFO providing these choices to increase and reduce equity exposure is a case of duplication of effort and design. Financial experts are advising investors to leverage existing options.
“The NPS already provides the same structure and benefit. Integrating it with the EPFO and permitting portability is a more efficient way of enhancing employee choice. NPS already has the architecture and track record of administering an employee choice model,” Gopal added.
Sarbajeet K Sen | Sep 14, 2017 11:37 AM IST | Source: Moneycontrol.com
Poor performance of a fund must set the investor thinking on whether to continue with the investment.
When did you last review your mutual fund portfolio? Maybe a long time ago. Many investors might feel relaxed after investing in mutual funds with the thought that their money is safe with experts trained in investing and stock selection.
However, the mutual funds landscape is a mixed lot. There are good, high-performing funds and there are laggards who are unable to keep up with performance of the leaders.
Did you check which of these category of fund you have invested? If it is one of the top-performing ones, giving you good returns, you need not worry. But if it is one of the funds that have not performed well in comparison, it might be time to think of a switch to another fund.
So when did you last review your mutual funds investment portfolio to know whether it needs a change? If you do it periodically, well and good, but if you have not reviewed for a long time, you should assess how your various fund investments have been performing.
“Investors should review their mutual fund portfolio at least once in 6 months. They should look at the performance of the fund, the sectoral allocation that they chose and whether there have been any big changes,” S Sridharan, Business Head, Financial Planning, Wealth Ladder Investment Advisors
Sridharan says if the review shows that the fund has performed poorly, it should signal a possible exit and switch to another fund. “Poor performance of a fund must set the investor thinking on whether to continue with the investment. However, exit decision should not be based only on performance of the fund. Investors should look at other parameter like what went wrong and whether the fund manager has the capability of revising the portfolio to the positive side in the near future,” he said.
Vikash Agarwal, CFA & Co-Founder, CAGRfunds, says one should avoid unnecessary churn in portfolio. “The essence of money-making is regular investments in well-managed diversified equity mutual funds. One should avoid unnecessary churns in the portfolio which may enhance cost in terms of exit load and tax implications,” he said.
However, Agarwal says there can be multiple reasons which might merit a review and change of one’s mutual fund holdings. Some of these are:
–Continued underperformance of the fund such that the fund is unable to beat its benchmark
-The fund is able to beat the benchmark but the returns are not commensurate with the levels of risk being taken by the fund
-A particular stock/debt instrument holding which forms a significant holding of the fund is likely to underperform due to a fundamental issue. Example: If a fund has significant exposure to a company which has acquired a loss making company, it might merit a deeper review of the fund
–Change of fund manager: In case there is a change in fund manager, then it is useful to review the fund as the fund style and philosophy might undergo a change and it might not be suitable to investment objective anymore
“If your fund is showing such characteristics then it is ideal for you to exit and switch to a better managed fund,” Agarwal said.
TIMESOFINDIA.COM | Sep 1, 2017, 12:36 IST
You can invest in mutual funds with amount as low as Rs 500. There is no upper limit for investing in mutual funds. Each mutual fund – be it equity or debt – has certain risk due to volatility and uncertainty in market. Ideally, you should be investing 10-20 per cent of your savings in mutual funds through monthly SIP.
Here are few points that you should keep in mind while investing in a debt or equity oriented schemes:
List down all your short-term and long-term goals in future such as holiday, marriage, children, education of children, retairment etc. Invest more into equities for your long-term needs as it is greatly possible to be aggressive in such cases. For your short-term needs, mutual funds with 1 year lock in can be adopted.
2) Risk capacity
The amount of investment risk you are able to take on is generally determined by your financial condition. Sudden financial shocks such as job loss, an accident etc. can affect your investment decisions by altering the amount of risk you’re able to afford. Your financial commitments such as home loan, business loan, car loan, expenditure in kids education etc. may also affect your investment risk capacity.
When it comes to investing, age is as big factor as the other two mentioned above. The best time to start investing is when you are young. The best time to learn about the markets and how to deal with its risks is when you’re young. Young investors have decades before they need the money. They have more time for their investments to recover and make up the shortfall. Once you are into your 30s and 40s, allocate a greater fraction of your portfolio to minimal risk funds or long-term funds. Also allocate some money to equity funds for your aggressive goals.
4) Fund selection – debt or equity
Debt funds can give you steady returns but in a constant range. Since debt funds invest money in treasury bonds, there’s much less risk associated with them. Debt funds are good investment option when market is volatile. Equity mutual funds give good returns over the long period to time as compared to debt funds. However, the possibility of losses and negative returns is also higher when market is volatile. Equity funds are good when the markets are booming.
You may also consult financial experts before taking final decisions. Mutual fund agents and distributors can also help you in this regard.
NIMESH SHAH | Wed, 12 Jul 2017 – 07:35 am | DNA
Dynamic asset allocation funds is a smart way to invest in markets without worrying about market highs or lows
The stock markets are at all-time highs, and it’s understandable if you are confused whether to invest or wait for correction. Timing the market is not easy. And while piling up your savings or putting them into traditional investment options seems like an easier option, it lacks the growth opportunities which capital markets could present.
A smart investor would look to participate in the growth of capital markets but in conservative manner. Introduce yourself to dynamic asset allocation funds, a smart way to invest in markets without worrying about market highs or lows.
Investing in mutual funds which follows the principle of dynamic asset allocation gives you the flexibility of investing in both debt and equity depending on market conditions. These funds aim to benefit from growth of equities with a cushion of debt. Such funds work on an automatic mechanism switching from equity or debt, depending on the relative attractiveness of the asset class.
In a scenario when the equity market rallies, the fund is designed such that profits are booked and the allocation would shift towards debt. On the other hand, if the markets correct, the fund will allocate more to equity, in order to tap into the opportunities available. The basis for this allocation is based on certain models which takes into account various market yardsticks like Price to Book Value amongst several others for portfolio re-balancing.
This model based approach negates the anomaly of subjective decision making, thereby ensuring that the investment made is deployed at all times to tap into the opportunities of both debt and equity market. The other added benefit is that one gets to follow the adage – Buy low, sell high. For an equity investor, this is one maxim which is the hardest to execute, but this fund effectively manages to achieve this objective.
Also, investing in such funds renders an added benefit of tax efficiency as 65% of the portfolio is allocated to equities. Since this category of fund is held with a long tern view, capital gains on equity investment (if invested for over one year), are tax free, as per prevailing tax laws.
So, while the markets are soaring high, you can consider investing in dynamic asset allocation fund to keep you well footed in the market, even during volatile times.
The writer is MD & CEO, ICICI Prudential AMC
PARVATHA VARDHINI C | August 28, 2016 | The Hindu Business Line
The fund’s debt exposure offers downside protection to conservative investors
Equity-oriented balanced funds are a good choice to beat the current volatility in the markets. These funds invest up to 35 per cent of their corpus in debt instruments and thus provide good downside protection for risk-averse investors. Franklin India Balanced is a fund that fits the bill in this category.
Performance and strategy
In falling and yo-yoing markets, Franklin Balanced remains resilient. In 2011, when the bellwethers and broader markets lost 25-27 per cent, the fund lost only 13 per cent.
In the see-sawing markets of 2015, the fund emerged on top, gaining about 5 per cent, while the indices fell 1-5 per cent.
Franklin Balanced managed to stay on top in the 2014 rally too, by deft asset allocation. The fund did not latch on too much to riskier mid- and small-cap stocks to ride the bull run and allocated less than 15 per cent of its equity portfolio to the same. It, instead, took advantage of the rally in bond prices, by increasing its holdings in government securities in this period. A sharp up-move in both equity and bond markets saw the fund clock 47 per cent return in 2014, as against the 30-37 per cent clocked by the bellwethers and the BSE/Nifty 500 indices.
Its returns are better than of peers’ such as Canara Robeco Balance and Reliance Regular Savings Balanced. The performance even matches that of diversified equity funds such as SBI Magnum Equity.
The fund normally keeps its mid-cap allocations to less than 10 per cent of its equity portfolio, barring occasional spikes up to 15 per cent during market upswings. Its top sectors are typically a combination of cyclicals and defensives. The fund has stepped up its holdings in bank stocks after a breather last year due to multiple headwinds hitting the sector. Barring SBI, its choices lean towards private banks such as HDFC, IndusInd, YES Bank, ICICI and Kotak Mahindra Bank currently.
In the auto sector too, the fund pushed up stake in Mahindra and Mahindra, betting on good monsoon. Other holdings here include Hero MotoCorp, Tata Motors and TVS Motors. Power Grid Corporation, Maruti Suzuki, Mahanagar Gas and Oil India are recent entrants. About 26 per cent is allocated to government securities. In the last couple of months, the fund has been trimming its exposure to corporate bonds. While its exposure to corporate bonds is not significant currently, in the past it has stuck with higher rated bonds — those rated AAA or AA.
By Kshitij Anand, ECONOMICTIMES.COM | Aug 10, 2016, 01.51 PM IST
The unique challenges to growth of developed markets make emerging markets, especially India, look attractive. However, a strong upside from current level looks challenging at this point in time, says Nimesh Shah, MD & CEO, ICICI Prudential AMC . In an interview with Kshitij Anand of ETMarkets.com, he shared his views on markets, GST and the behaviour of retail investors. Excerpt-
ETMarkets.com: How significant is GST reform for the economy? It looks like the market has already factored in most of the upside from the reforms? What is your take on the whole equation?
Nimesh Shah: Over the years, the goods and services tax (GST) has become a symbol of reforms in the country for both Indian as well as foreign institutional investors (FIIs). With the passage of the GST bill, sentiments have surely improved, but it is imperative to understand that the GST is unlikely to change things overnight.
As a country, we will be reaping the benefits of this reform over the next five to seven years, and not in next five months. Now the size of the organised sector in several industries is bound to go up, thanks to the improved compliance of taxation because of the nature of GST and its benefits for the economy.
At current valuation, the market seems to have fully factored in the positives of the bill. One must take cognisance of the fact that a rerating of the Indian market is likely to happen over the long run. However, if there is an immediate re-rating, solely based on the expected positives, the market is likely to see some correction.
ETMarkets.com: The domestic market is already trading at valuations that are above historic highs. Is there potential for more upside or should investors brace for a sharp fall? Some experts even call this a new normal. What is your take?
Nimesh Shah: It is premature to say high valuation is the new normal for the Indian equity market. There is a plethora of factors in the form of good monsoon, repressed oil price, bottoming of earnings de-growth, which are currently supporting market valuations.
Adding to this is the unique growth challenges of the developed markets, which make emerging markets, especially India, look attractive. However, a sharp upside from current level looks challenging at this point of time.
At the same time, one cannot completely turn a blind eye to the possibility of volatile times arising due to negative global news flow.
Historically, it has been observed that negatives on the global front have managed to trump the positives on the local front. But prudent action in times of volatility would be to use that as an opportunity.
ETMarkets.com: Has the retail investor matured in the way he invests in equities now?
Nimesh Shah: There has been a remarkable improvement over the past few years in the way retail investors invest in equities. Over the past couple of years, retail investors have preferred to approach stock market via the mutual fund route, rather than investing directly in stocks.
We see this as an acknowledgement of mutual fund industry’s robust track record, well designed and very well regulated product line and transparency.
Within the mutual fund route, the heartening feature is that increasingly funds are coming through the SIP route. As an industry, we have witnessed the SIP book swell from Rs 1,800 crore in March 2015 to nearly Rs 3,000 crore per month and growing. Other than this, the other major positive is the change in investment behaviour.
There was a time when investors used to enter at market highs and would sell in case of a correction, leading to negative investor experience. However, this has changed now, thanks to the relentless investor education initiatives by the media, distributors and fund houses. Now, the mantra is to stay invested and not be swayed by market swings.
ETMarkets.com: Can a retail investor become a crorepati by just following the SIP approach? If yes, on an average how much he needs to set aside every month to achieve that goal?
Nimesh Shah: Yes, if a retail investor invests in a diversified equity fund through a systematic investment plan over the long term, she/he can become a crorepati. For example, Rs 20,000 invested through a monthly SIP for about 15 years can grow to over Rs 1 crore, if you assume a rate of return of 12 per cent.
ETMarkets.com: Is the big bull run intact in in the domestic market? The Indian market is already up 20 per cent from its 52-week low. Do you think the current bull run is driven by liquidity rather than fundamentals? If yes, are we staring at a big slide as soon as the liquidity tap dries up?
Nimesh Shah: The current rally is fuelled by both domestic as well as global factors. One has to take into account that the current rally in emerging markets is happening after 3-4 years of underperformance vis-a-vis developed markets.
At a time when almost all the developed nations of the world are facing a zero or sub-zero interest rates coupled with muted growth, India is emerging as an oasis of growth.
Going forward, gradual improvement in demand and strong operating leverage will drive earnings in the upcoming quarters, rendering the much-required earnings support.
All these factors are likely to support the equity markets, even at a time when liquidity starts to taper down.
ETMarkets.com: What is your call on the bond market? Should investors go for debt funds?
Nimesh Shah: The Indian bond market has been an attractive bet for global investors thus far. The four factors that have worked in favour of India are a) a well-managed current account deficit (CAD), b) benign global commodity prices, c) favourable credit growth trajectory and d) non-inflationary Government policies.
Thanks to the prevailing interest rate scenario in global markets, the Reserve Bank of India (RBI) is likely to maintain an accommodative policy stance given the uncertainties on account of international factors.
We are of the view that yields will head lower in the days ahead. Therefore, we would recommend short to medium duration or accrual funds for incremental allocation.
ETMarkets.com: Fitch said the global bond market is at risk of losing $3.8 trillion. How are we placed in the global equation?
Nimesh Shah: India is far better placed in the context of international fixed income markets. In the developed markets, interest rates are at a historic low while in the case of India, interest rates are still elevated. The focus of monetary policy now is more towards managing inflation and globally it is on renewing growth.
Over the last three years, GOI and the RBI have managed to get current account deficit and domestic inflation under control, along with moderate growth and political stability. As long as this equation is not juggled with, India is well placed in the global equation.
ETMarkets.com: Can you name five stocks that you think could fetch multibagger return over the next 2-3 years. And why?
Nimesh Shah: In the current market, construction, auto ancillaries, pharma and healthcare services are the pockets that are in a position to generate attractive returns in the medium term.
ETMarkets.com: ICICI Prudential AMC has become the largest asset management company in the country. What are your five key takeaways from your journey so far?
Nimesh Shah: Our journey to the top (as the largest asset management company) has been accompanied by much learning. Primarily, as an industry, we realise when a product is transparent and is beneficial to the investor, the industry is bound to multiply several folds, with time.
Our experience shows that a fund house with a proven track record of managing investor money is bound to attract more investments.
As for investment experience, it is a noted phenomenon that investors shy away from investing in equities when valuations are cheap. Therefore, we have products like balanced, dynamic asset allocation funds that aim to benefit out of volatility and provide a better investment experience.
Lastly, one of the inherent challenges has always been simplifying the process of investing. As of now, the inflows into mutual fund schemes are limited through banking channels, thereby missing on the cash payment channel.
Once Sebi’s uniform KYC regulation is implemented, these processes are likely to be simpler, thereby aiding larger participation across financial class.
By Sunil Dhawan | ECONOMICTIMES.COM | Jul 20, 2016, 02.53 PM IST
Gold in its physical form — jewellery or ornaments — has always been popular among Indians, especially women. Unlike in the past when gold was only considered a hedge against inflation and held entirely in physical form, today it finds its place even in an investor’s portfolio and largely as paper gold. Earlier as gold exchange traded funds (Gold ETFs) and now as Sovereign Gold Bonds (SGBs), paper gold offers many advantages to Indian investors now.
The Series I of SGB 2016-17 is currently open for subscription from July 18 to 22. The fourth tranche of SGB, its price has been fixed at Rs 3,119 per gram.
However, before you buy SGBs, you need to be clear about why you need to invest in gold. Is it to meet a financial goal or for pure investment purposes? If it is for the former, then most financial planners will suggest not having more than 10 per cent of the total portfolio in gold. Aniruddha Bose, Director & Business Head, FinEdge Advisory, says, “In our view, investors shouldn’t overexpose themselves to SGBs. They may form 5-10 per cent of the overall asset allocation of an investor.”
Window of opportunity
The bonds will not be available all year round. The government will keep coming out with primary issue of different tranches of SGBs for open purchase. This could typically happen every 2-3 months and the window will remain open for about a week. For investors looking to purchase SGBs between two such primary issues, the only way out is to buy earlier issues (at market value) which are listed in the secondary market.
The biggest advantage of SGBs is clearly on the tax front. The 2016-17 Budget had proposed that the redemption of the bonds by an individual be exempt from the capital gains tax. Therefore, holding till maturity has its tax advantage. Redeeming in stock exchange may, however, result in capital gains or loss and one may have to pay tax accordingly. Interest on the bonds is, however, fully taxable as per the tax rate of an investor. For someone in the 10, 20, or 30 per cent tax bracket, the post-tax return comes to 2.47, 2.18 and 1.9 per cent respectively.
The initial cost of owning physical gold in the form of bars, coins is around 10 per cent and even higher for jewellery. SGBs and Gold ETFs are cost-effective as there is no entry cost in either. In the latter, the expense ratio could be around 1 per cent. Still, owning gold in paper form is cost-effective than owning physical gold.
The returns from gold can be highly volatile, especially over the short term. Therefore, link a long term goal to your gold investments. Goals that are at least 7-8 years away are ideal as SGBs mature after 8 years. The investor could be given an option to roll over his holdings for an additional period. However, one may withdraw prematurely five years from the issue date on interest payment dates. Although one can exit in the secondary market anytime, the liquidity and price risk may exist. There may not be enough buyers for the quantity offered by you and even the market price may be low. These are the concerns when one wants to exit from an investment in a hurry. Goals such a children’s education, marriage, or your own retirement, which are eight years away or more, may be linked to investment in SGBs.
Identify a long term goal and estimate its inflated cost. Calculate the amount you need to save towards it. Similarly, find out the investment required towards other long term goals. Earmark not more than 10 per cent of the total monthly investments towards all your long term goals into SGBs. Bose says, “From a financial planning standpoint, it makes sense to take a larger exposure to more aggressive assets such as equities (as opposed to gold) for the fulfilment of long term goals.”
Treat investment in every tranche (primary issue by government) of SGBs as SIP. Alternatively, Bose suggests, “SGBs are actively traded on the exchanges, so one could always buy more of them at a later stage, from a portfolio balance standpoint.” But remember, not to invest in them when the linked-goal remains 2-3 years away. Let the existing investments in SGBs continue and make sure to redeem them at least a year before the goal to ensure the volatility in gold portfolio is minimal.
Returns in SGBs are market-linked and will depend on gold prices prevalent on maturity after eight years. “Buy SGBs keeping your overall asset allocation in mind, rather than just buying them blindly. Also, understand the risks – gold prices have already gone up sharply in the past year,” says Bose.
Rather than owning gold in physical form and not earning anything on it, SGBs mean owning gold and also earning interest on it. The government has fixed interest of 2.75 per cent per annum on the investment, with no compounding of interest. The interest shall be paid in half-yearly rests and the last one shall be payable on maturity along with the principal.
It will also be important to re-invest the half-yearly interest as the amount could be low and used up unnecessary. To put the interest amount in perspective, on an investment of Rs 1 lakh, Rs 2,750 received yearly yields Rs 22,000 after 8 years.
Gold ETFs provide much better liquidity than SGBs. Owning units is much easier than SGBs as it’s entirely online in the case of ETFs. The risk of owning and holding doesn’t exist in both. The only disadvantage of ETFs is that it won’t help you earn the additional interest of around 2 per cent per annum. So depending on how comfortable you are managing your investments online, choose either ETFs or SGBs.
Source : http://goo.gl/xBb4pN
Vivina Vishwanathan | First Published: Mon, Jul 11 2016. 04 03 AM IST | Live MInt
Actor Sunny Leone’s current business interests include perfumes and online gaming. Personal investments, too, are made with a long-term intent
Sunny Leone is not an ordinary Bollywood star. The 35-year-old has been the most searched person on the Internet in India for four years in a row. The adult movie star-turned-actress was always fascinated with business and was a control freak when it came to finances. But that was before she met husband, Daniel Weber.
“I was 8 or 10 years old when I used to go to the street with my brother and a neighbour in Canada, and shovel snow in the driveways and earn a dollar a piece. But the snow was two-feet high and we thought we should charge more because it was double the work,” says Leone, who was born in Canada and lived there as a child. In fact, as a child, she routinely put up lemonade stands during summers and shovelled snow in the winters to earn money. “I was the girl who sold things for my basketball team and soccer team. That was before I even went to high school.”
Her interest in business continued in high school. “When I went to high school in California, I joined a club called Future Business Leaders of America. That is when I started learning a lot of things about marketing, and supply and demand. I took different classes around business and economics. We would go to young entrepreneurial conferences in that area and that’s kind of where everything started.”
Even at a young age, Leone wanted to start her own venture. “When I became an adult, I realised that (adult content) was a business. But more than that, I wanted to own a website and run my own company.” She used to handle everything. “If I have to be in this industry, I want to make all the money—every dollar. After all, it is my body, my image and my brand.”
So, she learnt to manage her website, learning HTML, video editing, photography, and how to build thumb gallery posts (TGP). “I would do everything from start to finish. That was when I learnt about website traffic. In a digital world, traffic is the best thing you can have. I learnt where to send this traffic and how to capitalise all of it.”
Leone says a business should be grown slowly and steadily. “Believe me, it takes at least a year to three years for a business to turn profitable. I don’t believe in any business that is fast paced. If it is moving very fast, it doesn’t seem right to me. I like the idea of growing slowly and steadily and making the roots of the company strong.”
Move to India
Moving to India was a calculated risk for Leone. When she got an offer to participate in the prime time reality show Bigg Boss in India, Leone initially declined. “I thought it was absolutely insane because I’d got so many hate mails from the Indian community. Because I had got so much hatred, I said I don’t want to go through it again.” But then her husband, Weber, went to her with a PowerPoint presentation and armed with statistics. “We had the viewership and the reach details. We started doing further research. I think at that time Bigg Boss was watched by 25 million people in 10 different countries or something. It was huge. By the time I finished researching, we both came to the conclusion that if we didn’t take this chance, it might be one of the biggest regrets we would ever have.”
She was taking a chance, and she was scared. “There was a lot of negativity and backlash for Viacom, Bigg Boss, and Colors for bringing me here because it was the first time someone from that (adult content) industry was coming to mainstream television. Meanwhile, I thought if I work for a couple of weeks, make money and then come home, I could put a down payment on a house and go back to living in my bubble. I didn’t think anything was going to come from it.”
But when she started working in Bigg Boss, she realised she was breaking into a market that she has been trying to enter for years. “Our research showed that majority of the traffic that came to my website or different social media sites was from India. We were not capitalising the traffic. Nobody made it to the ‘join’ page or purchased anything. Bigg Boss was my chance to break into a market that I had never been able to tap into.” She says people knew her and were at her website but were not spending. “There is definitely a disconnect that happens when you are someone from abroad. Living here is being a part of the Indian culture and there is a connect that happens. Hence, moving to India was very calculated.”
Taking plans further
After Bigg Boss, Leone bagged some Bollywood movies and debuted with Jism-2. She has also done a song for Shah Rukh Khan-starrer Raees, which is expected to hit the screens next year.
While Leone may be getting more and more films now, she knows that her role in the entertainment industry will not last forever. “It can end like tomorrow,” she says. Therefore, she is always thinking of branching out. “Once we got a handle of how it works in India, after signing a bunch of movies and doing different brand endorsements, we have tried to think of ways to branch out.” She considers movies as only a small piece of the puzzle. Among her other ventures are TV shows. Apart from movies, she does a show every year. At present, she co-hosts MTV Splitsvilla.
As part of the expansion plan, she has launched a perfume line—The Lust. “It is manufactured by me. Taking the Kardashian model, and some of the other artists out there in the US, the goal is to keep growing. When the movies or something else ends, I know that we have created something here above, beyond, and bigger than us.”
After perfumes, Leone plans to venture into women’s cosmetics. “I plan to create products for women such as nail polish, skin care, lipsticks…. I’m not sure about clothing right now but it is something we keep talking about,” says Leone. “We have invested a lot of time and money in it. I personally would like to invest more money in merchandising and branding because it is something that can continue forever.”
Recently, Leone wrote a collection of short-stories for the mobile-first digital publishing house Juggernaut. Titled Sweet Dreams, the stories, as defined by Juggernaut, are “fictional stories of power… emotions… desires”. “It was a little bit more difficult than I anticipated. It takes a lot of work to be a good writer.” She is also into online gaming with Teen Patti with Sunny Leone.
The next step, says Leone, may be producing movies in India. “But I am in no rush because there is a shift happening in the entertainment industry and if you don’t have great content and dialogues, usually it doesn’t work.”
Leone has stopped working in the adult content industry. Her focus now is on building her brand. “I stopped working in that industry long time ago. But we have a lot of traffic and we don’t know what to do with it. Now we have a reach of around 100 million people. Hence, let’s say, there is a company that wants me to tweet about something or put it on Facebook, I use this traffic to monetise now.” The same strategy works when she wants to raise money for charity. “We also found that the traffic is now monetised because those people are donating or spreading the word. We are able to do so many things now, which we were just not able to do earlier.”
Leone has over 1.5 million followers on Twitter; a reach she uses for promotions and branding. “Every day, we use social media to get across something that we want to say. A brand will call and say we want you to tweet about our brand once, which we do.” But she says she doesn’t like spamming. “For instance, we do movie promotions. There have been some directors who come and say ‘I want you to keep tweeting every 20 minutes the same thing over and over’. I say it is not going to happen because you are not going to get traction with this. It is not going to work. You are not even letting it get absorbed before having me tweet again. We don’t want to block them (the followers) or get them to unfollow.”
Like her business ventures, in investments, too, Leone has only what she understands. Her investment portfolio has a mix of stocks, mutual funds, real estate, and retirement funds. “In the US, we have invested some of our money in very stable stocks and some mutual funds. We also have some IRAs (Individual Retirement Accounts).” An IRA offers various tax breaks. It’s a basket in which you keep stocks, bonds, mutual funds, and other assets. “We have bought our home there. We have invested a lot of our money in real estate. We do love the idea of getting into real estate a bit more. We are also interested in investment homes. And we obviously save a lot of money.”
When it comes to stocks too, she remains updated. “When this whole Brexit happened, we lost some money, which was not fun. But I do believe that it will steadily go back up and back to normal. This is just a shock to everybody. I didn’t think that this would affect us, but it did.”
The Indian stock market, however, is not part of her portfolio yet. “It is difficult for Overseas Citizens of India and people from outside of India to invest in India. You have to follow the whole process, which is crazy.”
The Indian real estate market, too, is not in her view. “It is really difficult to invest in Indian realty. When there are so many people involved, money just goes away. And then trying to sell the house and transfer the money into our bank account out of India is another huge issue. I think buying stocks and mutual funds is probably little easier with the right people in India, than buying real estate.”
She is not interested in start-ups due to the way their valuations work. “I have been hearing a lot of information about start-ups and how they are getting evaluated. Personally, I think it is a very interesting business model that I don’t think is going to last very long. My husband might think completely opposite. I think it is great if it is a start-up that stays true to what it is, instead of getting evaluated and getting into selling some big dream to somebody else.”
Leone doesn’t look at gold as an investment choice. “I know that there are a lot of families in India that buy gold. I like wearing them—gold, diamond, jewels—rather than looking at them as an investment option.”
Daniel: the financial guru
Before Leone was married, she took care of all her finances. “As far as finances were concerned, I used to put a lot of my money back into my company. But at some point I did have to branch out. You can’t micro manage everything. Before I met Daniel (her husband), I was in control of everything.” Initially she had doubts about doing business with her husband. “When we started doing business together, it was really difficult mentally to bring someone into my inner financial and business circle. But he has a great business mind as well. So when we started discussing all these different things, it was very natural for us to come together and form a company together.” Now she thinks it is the best thing that has ever happened to her. “His business background and mine are totally different. And he just completely streamlined everything and helped me organise things because I was growing faster than I could manage. You need help at that point. You can’t think of doing everything. You will stop growing, since you don’t have the time in a day to do everything.” She says her husband manages everything, ensuring that she and her staff work every day and their money is allocated in the right places in multiple countries. However, financial decisions are always taken after weighing the pros and cons.
Being financially independent
Leone always wanted to be independent. “I wanted to be on my own ever since I was really little. Also my parents would tell me over and over again that you have to be independent. That stuck with me.” Besides financial independence, her parents always tried to tell her to save money. “I grew up in a lower middle-class family, so we didn’t have a lot of money. As I got older, I realised I should save money. She doesn’t have any money regrets. “I am pretty calculated. If I am not 100% convinced that this is going to be financially viable, I won’t take the risk. If I know that it is a risk and if it doesn’t work, I am okay with what is lost too. I think I am realistic when it comes to investments.”
Source : http://goo.gl/u5y8sE
By Chandralekha Mukerji | ET Bureau|Jul 04, 2016, 09.25 AM IST | Economic Times
BENGALURU: A rulebook guides the inexperienced to make rational decisions. This is true for money management too. Money rules help you keep your finances on track. But rule of thumb that do not fit your situation can be a waste of time, or worse, actually worsen your finances. They may be oversimplifying a complex issue which can harm long-term prospects and be a poor substitute for analysis. Here are five personal finance rules that based on your circumstances, you can consider breaking.
Rule 1: Young should have equity-heavy portfolio
Risk appetite is independent of age. A young person usually has higher risk tolerance and a longer investment horizon and therefore advised to keep a heavier chunk of portfolio in equities. However, historical data shows that equity investment requires a commitment of four to five years for good returns. Even if you are 20-something, equities are not for you if you have a lot of debt and many dependents or are saving for short-term (read: 2-3 years) goals.
If there is an ailing family member and a medical emergency can arise unannounced, you should have your savings in debt as chances of capital corrosion are less while the penalty for early exit is not high. On the other hand, you may be 60 and retired, but have enough liquidity to manage your short-term expenses. Then, you must consider allocating a portion towards equities. “The first step to asset allocation is therefore knowing your risk appetite through a risk profiling exercise, step two is understanding the constraints in life and decide your equity-debt investment ratio,” says Vivek Rege, CEO, VR Wealth Advisors.
Rule 2: The key to financial success is cutting expenses
The key to financial success is not in cutting your expenses. It is in creating a surplus that can be invested, which can be done by reducing your costs or increasing your income.
While budgeting is a must, however, some costs can’t be snipped beyond a point. Your financial planner may then advise you to either reduce your goals or push back the target dates or re-prioritise your financial needs. However, what if the financial need can’t be compromised. Take the case of 35-year-old Pravin Kumar, who works for an IT company.
“Although his earnings were enough to meet his present needs, he wanted an overseas education for his 10-year-old daughter, which was not possible considering he had already taken a huge home loan,” says Mimi Partha Sarathy, MD, Sinhasi Consultants and Kumar’s financial planner. One of the constraints for Kumar to earn more was his qualification, so he decided to take up an executive MBA in marketing from a top B-school. “With this new addition to his resume, he negotiated not only a promotion but a 40% increase in his salary with an increased role,” Partha Sarathy. It was then easy to allocate the necessary funds for the child’s future needs.
Rule 3: Debt is bad. Try to avoid debt at all cost
Debt is not always bad but you shouldn’t borrow beyond your repayment limits. Loans can help you lead a lifestyle that you desire by drawing from current and future income. “While in the previous generation, our parents had to wait till they saved up enough to buy a house, we are able to do that easily today through a home loan. Loans give us a lot of flexibility to enjoy a lifestyle today rather than in the future,” says Priya Sunder, director, PeakAlpha Investment Services. However, in case of financial distress, you lose all flexibility since EMIs will have to be paid, with very adverse consequences in case of default.
“Hence it is prudent to create a Plan B in case of a loan default such as hrough insurance covers or collaterals,” adds Sunder. Having an open credit card limit with sufficient insurances is a great emergency planning. “It is a much better idea than building huge emergency corpus,”adds Bhuvana Shreeram, a Mumbai-based Certified Financial Planner. If you are a good borrower, even credit cards are not bad. “Apart from using credit wisely, you can use debt to create appreciating assets like a home not only to gain through appreciation but also tax savings,” says Manish Shah, CEO, Bigdecisions.com.
Rule 4: Realty is the best asset
Too much of anything is bad, especially an unpredictable and illiquid asset like real estate. However, most Indians have a portfolio terribly skewed towards real estate. “They overestimate the returns real estate gives. If they did the math, they would know better,” says says Shreeram. “Even when real estate had a good bull run in the last 10-12 years (2002 to 2014), most investors have made about 9% to 10% after accounting for interest repayment on loans, tax benefit, cost of maintenance etc., which may be better than bank deposit but not worth taking 20-year loans at 10%,”adds Shreeram. Also, the bull run does not last long. So, the investment is not as safe or liquid as bank deposits. The time during 2011 to mid-2014 was a very challenging time for those who had invested in the stock markets. “Many HNIs moved to real estate during this time and at high levels which is now close to impossible to liquidate,” says Partha Sarathy. Sunder of PeakAlpha Investments doesn’t recommend holding more than 60% of portfolio in real estate.
Rule 5: Re-evaluate your portfolio regularly
Yes, there is a need to regularly rebalance and evaluate your portfolio. However, too much tinkering is not good either. “There are people who have long-term goals but have a habit of tracking their investments on a daily basis and get carried away by the emotions of the market,” says Anil Rego,CEO, Right Horizons. Tinkering is either motivated by the need to earn more (greed) or by the need to save whatever is there (fear). “Jumping in and out of investments is the single-most wealth destroyer, followed by waiting in the sidelines and losing precious time,” says the expert. Every investment has a time horizon for it to achieve its expected returns and this must be respected and adhered to.
RAJESHWARI ADAPPA | Tue, 28 Jun 2016-06:55am | dna
Experts advise that you should park the lump sum in avenues such as liquid or ultra-short term funds till you decide where to invest it as putting the money in a savings account not only earns low interest but also tempts you to blow it
Windfalls or coming into large sums of money sure makes you feel rich but if you want to stay rich, then the challenge is to ensure that the money lasts for a really long time.
Incidentally, experts advise that when one does not know what to do with a large sum, the first thing to do is take it off the bank savings account.
“The money lying there not only earns low interest but tempts you to blow it. Hence, park it in short-term avenues such as liquid funds or ultra-short term funds until you decide or get advice on where to invest the money in,” says Vidya Bala, head of mutual fund research, FundsIndia.
If you have a lump sum to invest, it is best to revisit your investment plan, advises certified financial planner Gaurav Mashruwala.
“Firstly, buy adequate health and life insurance. Secondly, if you have any loans, pay up the loans. After that, you can start goal-based investing,” says Mashruwala.
Most people are confused where to invest for the best returns. “Where to invest would depend on whether they have a near-term use for the money,” says Bala.
“If it is retirement money and the investor needs to create an income stream, they could deploy it in a combination of ultra-short and short-term debt funds and do a systematic withdrawal plan to generate their own income. If it is for the long term, a combination of equity and debt funds will work well. So one needs to know the purpose and the time frame before they can decide where to invest,” says Bala.
The most important task is to create a goal for such money and then allocate and invest accordingly. While goals would depend on the individual’s requirements, broadly your goals could include creating funds for a specific purpose such as a retirement fund, an emergency fund, a kids education or a marriage fund or even a fund for personal goals (say a foreign trip), etc.
A retirement fund is a must. HDFC Pension’s CEO Sumit Shukla advises that 20-30% of the sum should be invested for retirement. He suggests investing the lump sum initially in Tier II account of NPS from which some money could be transferred into the Tier I account every month via systematic withdrawal plan. “This would help to ensure that initially the money is invested in debt (Tier II account) and as one invests in the Tier I account, slowly the equity portfolio is also built up,” says Shukla.
“Corporate debt has earned 10.47% while government debt has earned 10.35%. Compared to the 8.8% returns from PF, this difference would work out to be huge over a period of time,” points out Shukla.
Depending on your risk and return profiles, there is a range of avenues. “Investors seeking low to medium risk can examine fixed deposits, debt mutual funds, corporate bonds, tax-free bonds and monthly income plans.
However, investors with higher risk preference can look at balanced & equity funds, direct equities, private equity & real estate funds,” according to a DBS spokesperson.
“Lump Sum investing is fine when it comes to low-risk debt funds. However, when it comes to equity funds, it is important to understand the risk of timing the market by investing in one go. Ability to take near-term falls is a must of one chooses to invest lump sum,” says Bala. A better option is to invest in a phased manner through an SIP (systematic investment plan).
It may be a good idea to take professional advice. “Also, consider the impact of tax on the returns,” says the DBS spokesperson.
The mistake that many people who come into big money suddenly make is that they start living a lavish lifestyle. “Instead, invest in income generating and growth-oriented assets. Use the returns from these assets to enhance your lifestyle,” advises Mashruwala.
The solution is to invest wisely keeping in mind two primary goals: ensuring safety of capital and also growth.
Source : http://goo.gl/4KucZz
By Jayant Pai | Jun 20, 2016, 07.00 AM IST | Economic Times
Every parent fondly looks forward to the day when children will begin earning a steady income. However, for Indian parents, it is difficult to sever the metaphorical umbilical cord even after their child secures financial independence.
There are various reasons parents do not shy away from advising their children on money matters. One, they feel that their naive children will be parted from their money if left to their own devices. Hence, right from the first payday, they will tell you about the virtues of saving and warn against reckless spending. Two, they do not want their children to make the same mistakes they made, be it a failed investment or a loan to a friend which was never returned. Three, errors of commission committed by close family members also play a part in conditioning parents’ thought process.
Why such advice may be less effective today: The previous generation was brought up on the belief that the collective wisdom of elders was indispensable. Today’s generation is a bundle of contradictions. On the one hand, they are avowedly individualistic. On the other, they are swear by the opinions of peers in social media on every topic, be it fashion, electronics or money. Hence, parental influence is waning.
While every generation thinks it knows best when it comes to finance and investments, today’s youngsters have more educational and decision-making tools at their disposal. These may be in the form of blogs, apps, portals and even robo-advisers/algorithms. In fact, they face a glut, rather than a drought, of information. Hence, parents may often be behind the curve.
Today, wealth managers are increasingly viewing such youngsters as an economically viable segment. Hand-holding newbies, with the hope of growing with them as they uptrade, is a strategic choice.
Should children listen to their parents? In most cases, the advice received from parents is well-meaning. That may not necessarily be true in case of advice from outsiders. However, good intentions alone are not sufficient to render it suitable. While certain home truths like avoiding borrowing for consumption or maintaining a high savings rate are worth heeding, others are better ignored.
For instance, many parents dissuade their children from investing in stocks and suggest they opt for fixed deposits or gold. This may stem either from their own poor experience in the stock market or a belief that stocks are risky and another form of gambling. However, by blindly heeding such advice, youngsters may do themselves a great disservice since they forego the power of compounding that equities offer.
Similarly, parents may consider real estate as a great investment option even if they have to avail of a heavy mortgage. Children should follow such advice only after considering the repercussions of paying EMIs for long tenures of 25-30 years. Also, some parents are averse to their children purchasing insurance policies, fearing that this is an invitation to disaster. Such superstitions should not stand in the way of protecting life, limb and health. In a nutshell, when it comes to parental advice, trust them, but verify the advice.
(By Jayant Pai, CFP & Head, Marketing at PPFAS Mutual Fund)
Source : http://goo.gl/iECSwU
By Sanjiv Singhal | Jun 20, 2016, 07.00 AM IST | Economic Times
Interact with a lot of young earners on a daily basis. These are men and women in the first 5-6 years of their working lives, with dreams and hopes that require money to achieve. Some of them are already saving, while others are not, but all are full of questions and want to know how to do it better. It doesn’t matter what job they have and how much they earn; there are mistakes that run through all their stories. Here are some of the most common ones:
“I bought a life insurance policy to save tax.”
The good thing about this confession is that the person understands he made a mistake. For most, it starts at the end of the year when they needed to submit their investment proof to the HR. They scramble around to figure out how and blindly buy an insurance policy (after all, insurance is a good thing to have, no?). Almost every other tax-saving option is better than life insurance. Tax-saving (ELSS) funds are the best option for young earners.
“I wasn’t sure where to invest, so I didn’t.”
When you don’t set aside money regularly, it sits in your bank account and often gets spent. This hurts in two ways. One, it doesn’t create wealth for you, which investing early does. Second, it forms unsustainable spending habits. Start by setting aside 5-10% of your salary every month in a debt fund or in a recurring deposit if you don’t know enough about mutual funds.
“I bought stocks to double my money because my friend did.”
This is a mistake often made due to lack of understanding about how stock investment works and a false sense of knowledge. Greed and stories of exceptional returns also spur one on. The best way to resist this is to check with friends and colleagues about how many actually earned such fantastic returns and how many lost money. Stock investing requires deep knowledge and time. As a young professional, you are better off committing this time to your job.
“I change jobs every year to increase my salary.”
This is not an investing mistake, but one of not investing in yourself. Sticking with a job gives you the opportunity to develop your skills in a specific area. It also gives you the time to learn softer skills – of working with people and managing them. This leads to better career prospects and more wealth.
“I forgot about my education loan.”
A lot of young earners are starting their financial lives with an education loan taken for an MBA or MTech. As they mostly work away from home, they may not get the communication from the bank, or choose to ignore it. The interest mounts up and they are left with a bigger repayment amount. Focus on education loan repayment in a disciplined manner. When you are done with the with the repayment, direct this amount to long-term investments. Avoiding these common mistakes is easy once you know about them. Spending time learning about the principles of money and investing is a good investment to begin with.
(The author is Founder & Head, Product Strategy at Scripbox)
SHREYASH DEVALKAR | Tue, 14 Jun 2016-06:40am | dna
Today investors are spoiled for choice when it comes to avenues available for allocating fund and investing money. They can choose from fixed income products, domestic equities, global equities, derivative products, currencies and much more. With the freedom of options comes the responsibility of choice. Hence, it becomes important that we as informed investors study the advantage and risks associated with such asset classes and invest our money judiciously.
Great strides in technology have seriously shrunk the world, making every corner of the earth accessible to humans. Our daily lives are surrounded by evidence of the global economy. The phones we use are manufactured in Korea, our televisions are made in Japan, our cars are from different pockets of the world and our favourite Lebanese food is just a phone call away. In such an environment it is important to consider investment options beyond the domestic boundaries. Global equities are slowly emerging as a good investment option for domestic investors. The benefits of investing in global equities are myriad.
A fundamental reason to consider international investing and in particular global equities is diversification. Investment in global equities helps in spreading out the risk associated with equity investing as it entails investing in different markets which may not be highly correlated with each other. What this means for the average investor is that since all markets do not move in tandem, losses in one equity market can be offset by gains in another.
By diversifying into global equities the investor may be able to earn the same kind of returns as with a non-diversified portfolio, but with lesser risk, or be able to achieve higher returns, but with the same amount of risk.
International investments have shown an ability to improve risk-adjusted returns. The historical volatility of returns (as measured by standard deviation) for the global portfolio was almost 10% lower.
The MSCI World Index, which captures large and mid-cap companies’ across developed markets and covers approximately 85% of the free-float adjusted market capitalization in each country, the five year and ten year annualised Sharpe ratio is at 0.53 and 0.28, respectively. The corresponding numbers for the MSCI Emerging market index is at -0.15 and 0.18, respectively. In addition to diversification, global equities have the advantage of offering an investor exposure to faster growing economies and provide access to some of the world’s most successful companies.
Some of the world’s top performing markets in CY2015 were Argentina, Hungary, Denmark, Iceland and China while on the other hand the worst performing ones were Colombia, Peru and Bermuda. India’s returns figured in the bottom 50% of the returns computed for 74 of the top stock markets in the world. Quantitative easing might have pushed the European and US markets to multi year highs. However, flow of funds is likely to be directed towards countries which are showing better prospects of growth and fiscal discipline. Excluding India, markets like Taiwan, Vietnam and South Korea are expected to give good risk adjusted returns. Some funds can also be allocated to European equities.
Since the level of expertise and knowledge required in investing in global equities is quite high, the best option for an individual investor is to seek guidance from experts or fund managers of professionally managed funds.
Mutual funds offer various schemes where a portion or the entire fund may be exposed to global equities. In this case, professional fund managers study global markets and allocate the fund’s corpus to the countries where they expect good growth and returns.
The writer is fund manager with BNP Paribas
Source : http://goo.gl/7oMOxr
Babar Zaidi | TNN | Jun 13, 2016, 06.53 AM IST | Times of India
NEW DELHI: The first time Arjun Amlani used an online calculator to assess his retirement needs, he was shocked. The Mumbai-based finance professional, whose gross income was around Rs 10 lakh a year then, needed more than Rs 8 crore to fund his retirement needs. “The eight-digit number was too scary,” he says.
Figures thrown up by excel sheets and online retirement calculators can be intimidating. Here’s an example: if your current monthly expenses are Rs 60,000, even a conservative inflation rate of 7% will push up that requirement to over Rs 4.6 lakh in 30 years. To sustain those expenses for 20 years in retirement, you need a corpus of Rs 9 crore. To some investors, such enormous figures seem so unattainable that they just stop bothering about retirement. That’s a mistake.Retirement cannot be wished away. The paycheques will stop coming, and your living expenses won’t end but keep rising due to inflation. Worse, critical expenses like healthcare will be growing faster than overall inflation. The sooner you start saving for that phase of life, the more comfortable retirement will be.
The big question is: how can one build a nine-figure nest egg when the monthly surplus is Rs 15,000-20,000? Mutual fund sellers claim that an SIP of Rs 15,000 can grow to Rs 10 crore in 30 years. But this calculation assumes compounded annual returns of 15% for the next 30 years.It’s not advisable to base your retirement plan on such over-optimistic assumptions. Life insurance agents will offer plans that will give you an assured sum on retirement. But the returns they will generate are too low and the amount required will be too high. An endowment policy that gives Rs 10 crore after 30 years will have an annual premium of roughly Rs 12 lakh — or Rs 1 lakh per month.
Increasing the investment
When Amlani used the calculator, his monthly income was around Rs 85,000 and he needed to invest almost 20% of this for his retirement. A year later, his income has gone up and so have expectations. The calculator now says he needs to save over Rs 10 crore in the next 27 years, but Amlani is not worried. If he continues putting money in his PF, PPF and equity funds as planned, it won’t be difficult for him to reach the target.
All Amlani has to do is increase the quantum of investment every year. If a 30-year-old with a monthly salary of Rs 50,000 starts saving 10% (Rs 5,000) for his retirement every month in an option that earns 9% per year, he will accumulate Rs 92 lakh by the time he is 60. But if he raises his investment by 10% every year (in line with assumed increase in income), he would have saved Rs 2.76 crore.
It’s surprising that not many investors follow this simple strategy even though their income rises every year.Sure, the annual increment in salary is nullified to some extent by the increase in cost of living. Yet, even when there is a marked increase in investible surplus, people don’t match investments with the increase in income. The silver lining is that contributions to the Provident Fund are linked to income and automatically increase after every annual increment.
The right investment mix
We looked at three types of investors: risk-averse individuals who stay away from equities, moderate investors who have some exposure to stocks and aggressive investors who are willing to take risks. Each starts with a monthly investment of Rs 15,000 spread across different retirement saving options, and increases the investment amount by 10% every year. Unfortunately for the risk-averse investor, his nest egg is considerably smaller than those of the moderate and aggressive investors.
This is because apart from PF and investments in small savings schemes, he has invested in low-yield life insurance policies and pension plans. Life insurance policies offer assured returns and a tax-free corpus. But the returns are very low–even a long-term plan of 25-30 years will not be able to generate more than 6-7%. Pension plans from life insurance companies are also high-cost instruments. While this shows that equity investments are critical for a long-term goal, the other two haven’t taken too much risk either.
The equity exposure of the moderate investor does not exceed 53% while the aggressive investor has a marginally higher allocation to stocks. The moderate investor comes close to the Rs 10-crore mark, while the aggressive investor manages to reach the nine digit figure.
Investing discipline needed
The big problem, however, is the lack of investing discipline. Though our calculations do not allocate too much to equity, we have assumed regular investments for 30 years. In reality, data from AMFI shows small investors withdraw 47% of investments in equity funds and 54% of investments in non-equity funds within two years. In fact, 27% of equity fund investments are withdrawn within a year. “Small investors just don’t have the patience or the long-term vision required to make money from equity investments,” says a senior fund manager. It’s futile to imagine a nest egg of Rs 10 crore if your investment term is only 1-2 years.
The trajectory of equity investments is never a straight line. It will have ups and down, which is an inherent feature of this asset class. However, in the long-term, these investments will prove more rewarding than fixed income options. Although equity funds have churned out much higher returns in the past 15 years, we have assumed a conservative 12% returns from equity investments.
Source : http://goo.gl/qYLTb0
Babar Zaidi | May 16, 2016, 03.14 AM IST | Times of India
When Avinash Chandnani invested in the National Pension System (NPS) last year, he planned to put money in five different pension funds.However, when he was putting the second tranche of `10,000 in another fund, he realised that NPS investors can’t opt for two pension fund managers. He also couldn’t switch to another pension fund for a year.
Our story examines the performance of Tier I funds of the NPS and identifies the best pension funds. The performance of individual schemes does not give an accurate picture because investors put money in a combination of funds. So we looked at blended returns of four combinations of the equity, corporate debt and gilt funds.
Chandnani, for instance, is an aggressive investor, with 50% of his corpus in the equity fund, 30% in the corporate bond fund and 20% in the gilt fund. A balanced allocation would put 33.3% in each of the three funds. A conservative investor would put only 20% in stocks, 30% in corporate bonds and 50% in gilts. The ultra-safe investor would not invest in equities, put 40% in corporate bond fund and 60% in gilt.
The past 9-12 months have not been kind to aggressive investors. While bond prices have risen, the 50% allocated to equities has dragged down returns. But ultra-safe investors who stayed away from stocks or conservative investors who put only 20% in equity funds have earned good returns.
Playing safe has also helped NPS funds for government employees. These funds can invest up to 15% in equities but most have 8-10% allocated to stocks. They have given double-digit returns, thanks to interest rate cuts that have enhanced the value of long-term bonds.
Should you switch from EPF to NPS?
The healthy returns from the NPS come at a time when the interest rate of the EPF is being debated and the interest rate for PPF has been pruned to 8.1%. So, should you shift your retirement savings to the NPS?
A legislation to amend the Employees’ Provident Fund & Miscellaneous Provisions Act has been framed. The amendment allows EPF subscribers to make a switch to the NPS. Once he shifts to NPS, the employee will have a onetime chance to return to the EPF fold. The amendment also seeks to ensure that employers don’t force a scheme down the throats of employees.
However, the tax treatment of the NPS may prove a hurdle. While the EPF corpus is tax-free, this year’s Budget has proposed to make 40% of the NPS corpus tax-free. There is another problem. At least 40% of the NPS maturity corpus has to be put in an annuity to earn a monthly pension. Annuity rates in India are very low compared to what other options can offer. However, investors will face that issue much later. Right now, we identify the best performing funds for various types of investors.
ULTRA SAFE INVESTORS
Whether they invested through SIPs or a lump sum, risk-averse individuals have earned the highest returns. They stayed away from stocks and divided their NPS corpus between gilt funds and corporate debt funds. On average, gilt funds have given 9.75% annualised returns while corporate debt funds have churned out more than 11% in the past five years. Even in the short term, safe investors have been the biggest gainers.
Will the good times continue? The gilt funds of NPS are holding long-term bonds with an average maturity of over 19 years and a modified duration of about nine years. These funds have done well because interest rate cuts have pushed down bond yields. But experts say this trend will not stay forever. “Over a longer period, the portfolios will deliver returns similar to the yieldto-maturity of bonds in the portfolios,” says Manoj Nagpal of Outlook Asia Capital. The average yield-to-maturity of the bonds is 8%, which is higher than the PPF rate but lower than EPF. The average yield-to-maturity of corporate debt funds is higher at 8.25%, and their average tenure is also shorter at seven years. Ultra-safe investors should consider higher allocation to these funds.
Investors who allocated a small portion of their corpus to equity funds have also earned good returns. The best performing ICICI Prudential Pension Fund has given double-digit returns over 5 years.
Including 15-20% equity in your retirement portfolio is a sound strategy as an ultra-safe portfolio won’t be able to beat inflation in the very long-term. NPS funds for government employees also follow a conservative allocation, with a 15% cap on equity exposure.
These funds have also done fairly well. However, younger investors should not play too safe. They can afford to have a larger portion of their NPS corpus in equity funds. Also, it shouldn’t be assumed that bond funds won’t lose money. If interest rates rise, the NAVs of gilt funds holding long term bonds will slip.
Investors who spread their money across all three types of funds have not done too badly. Here again, the shortterm picture is rather bleak. But the medium- and long-term returns are reasonably attractive. ICICI Prudential Pension Fund is again the best performing fund for this allocation, with returns of 9.85% in the past five years.
The balanced approach, which puts 33.3% in each of the three classes of funds, suits most investors. It has the potential to give reasonably good returns in the long term without taking too much of a risk. The investor will need to change his allocation as retirement nears. There are several theories about how much the allocation to equities should be at different ages. Some planners say that it should be 100 minus your age. But the maximum equity allocation in the NPS is 50%. Besides, you might also have invested in other instruments for your retirement.
Investors who can’t take a decision should opt for the lifecycle fund of the NPS. Under this option, the investor’s age decides the equity exposure. The 50% allocation to the equity fund is reduced every year by 2% after the investor turns 35, till it comes down to 10%. The rebalancing happens every year. The PFRDA is considering more asset mix options for these lifecycle funds.
Equity funds of the NPS have not done too well. They have lost money in the past year and delivered lower returns than corporate debt and gilt funds in the past five years. This has dragged down the returns of aggressive investors who allocated 50% to equity funds. But this should not make investors ban this critical asset class from portfolios.
Till last year, equity funds were mirroring the returns of the index because pension funds were supposed to invest in proportion to their weight in the index. But from September 2015, fund managers have been allowed to invest in a larger universe of stocks and follow an active investment strategy that does not mirror the index.
Experts see this as a positive development because a predominantly largecap orientation would have prevented the NPS equity funds from beating the market. More importantly, poor quality index stocks can now be dropped.
Prashant Mahesh, ET Bureau | May 12, 2016, 06.45AM IST | Economic Times
Timing the market or deciding how much to allocate to debt or equity at any point of time is a difficult decision for most investors to make. Investors not willing to invest in a basket of products, could choose balanced funds which automatically rebalances your portfolio .
1. What are balanced funds?
Balanced funds, as the name suggests, are hybrid funds which typically invest in equities and debt instruments. There could be equity oriented as well as debt oriented hybrid plans.
Typically, equity-oriented balanced funds have a 65%-75% exposure to equities with the balanced 25-35% being invested in debt-oriented instruments. Many financial planners suggest firsttime investors into mutual funds begin their journey by investing in balanced funds.
2. What is the advantage of investing in a balanced fund?
Balanced funds offer benefits of asset allocation model in a single structure. The equity component seeks to deliver long-term returns, while the debt component provides stability to the portfolio.
This diversification limits the portfolio from downside risks if either equity or debt enters a bearish phase. When the markets are high, the fund manager has to compulsory sell equity to maintain the maximum level and likewise when the markets are low, the fund manager has to buy equities to maintain the minimum level of equity investment. This is a regular process which a retail investor can’t do because of lack of knowledge and expertise.
3. What taxation benefits do equity oriented balanced fund investors enjoy?
Since balanced funds have an average exposure of 65% to equities, they are taxed as equity funds. These funds enjoy tax-free returns if the holding period is greater than a year; otherwise, they are subject to short-term capital gains tax. Many investors opt for the dividend option in such schemes, as the dividends are tax-free (without any dividend distribution tax) in the hands of the investor.
After the new tax laws where debt funds are taxed as short if held for less than 36 months, the balanced fund is one option where the entire debt holding is tax free if the fund is held for more than one year. If you invest in debt funds of mutual funds, you get advantage of long term capital gains taxation with indexation only after three years.
By Sanket Dhanorkar, ET Bureau | 25 Apr, 2016, 08.00AM IST | Economic Times
The class of 2018 of the Indian Institute of Management-Ahmedabad will pay Rs 19.5 lakh for the two-year course. This is 400% higher than what the premier B-school charged in 2007. If the fees of the two-year management course continues to rise by an average 20% every year, it will cost roughly Rs 95 lakh in 2025.
Even undergraduate courses have not been spared. The tuition fee for engineering courses in the Indian Institute of Technology (IIT) has been hiked from Rs 90,000 to Rs 2 lakh per annum. This is just the tuition fee—the total cost is much higher. At an average running inflation rate of 10%, a four-year engineering course that costs Rs 8 lakh today is likely to set you back by Rs 17 lakh in another eight years’ time.
By 2030, the same would cost more than Rs 30 lakh. If you have not planned well, you could get a rude shock, falling way short of the required corpus when your kid is ready for college. In fact, for engineering and medical aspirants, the costs start even while the student is in high school. Coaching institutes charge anywhere between Rs 80,000-1 lakh a year for preparing the student for the entrance exam.
This sharp spike in fees is a wakeup call for parents saving for the higher education of their children. “Higher education costs have the highest inflation rates in the country. Parents need to realise it is going to be an expensive affair,” asserts Nitin Vyakaranam, CEO, Arthayantra.
This week’s cover story is aimed at parents who are saving for their children’s education. The investment options before them will depend on the age of the child. If the child is 3-4 years old, the investment choices and strategy will be different than for a parent whose child is 15-16 years old. Our story lists the most appropriate investment options for three broad age groups and the strategies to be followed at each stage. Choose the one that fits your situation to achieve your dreams for your child’s higher education.
Higher education costs may be rising at a fast clip, but Delhi-based Balbir Kaur is not perturbed by the projections of future costs. Balbir and her husband Puneet are saving for their son Jivvraj’s higher education. They started small last year with SIPs totalling Rs 5,000 in three mid-cap equity funds.
If they continue with that amount and their funds earn 12% a year, the couple would have roughly Rs 20 lakh by the time 4-year-old Jivvraj is ready for college in 2029. But Balbir has a neat strategy in place. “From this year, I have increased my SIP amount to Rs 10,000 a month. We plan to keep increasing this every year as our income goes up,” she says. If they hike the SIP amount by 20% every year, they will accumulate over Rs 1 crore in 13 years.
The benefits of an early start cannot be stressed enough when you are saving for a long-term goal. If your child is 3-4 years old, you have a good 13-14 years to save. Starting early helps you amass larger sums that may not be possible later in life. Tanwir Alam, MD, Fincart, points out, “The multiplier effect in the power of compounding comes from the investing time horizon; longer time horizons have a higher multiplier effect.”
Starting early also put lesser burden on your finances because it requires a smaller outflow. For instance, if your target is Rs 25 lakh, you need to save only Rs 5,004 a month if you start now. But if you wait for six years, you will have to invest Rs 9,195 a month to reach the target. Wait for three more years and the required amount jumps to Rs 23,875. Worse, you may not be able to invest in certain assets if the time horizon is too short. “If you delay investing, not only do you have to invest a higher amount every month, but it also reduces your ability to take risks,” says Vidya Bala, Head-Mutual Fund Research, FundsIndia.
The investment strategy changes if your child is a little older. Since you have only 5-9 years to save, the risk will have to be lowered. The ideal asset mix at this stage is 50% in stocks and 50% in debt. Instead of equity funds that invest the entire corpus in stocks, go for balanced funds that invest in a mix of stocks and bonds.
If your risk appetite is lower, monthly income plans (MIPs) from mutual funds can be a good alternative. These funds put only 15-20% of their corpus in equities and are therefore less volatile than equity or balanced funds. However, the returns are also lower than those of equity funds. In the past five years, equity funds have delivered compounded annual returns of almost 12%, while balanced funds have given 10.5% and MIPs have given around 8.85%. Investors should also note that the returns from equity and balanced funds are tax free after a year, while the gains from MIPs are taxed at 20% after indexation benefit.
For the debt portion, start a recurring deposit that would mature around the time your child is scheduled to apply for college. If you are in the highest 30% tax bracket, avoid recurring deposits and start an SIP in a short-term debt fund. These funds will give nearly the same returns as fixed deposits but are more tax efficient if the holding period is over three years.
It is also important to review the progress of your investment plan. “You should check every year if you need to step up your contribution towards the higher education kitty,” says Bala. “At times, you may put in a lump sum investment even if you have a SIP running.” Keep monitoring the cost of education on a yearly basis and accordingly adjust your investment requirement.
For parents of teenaged children, the investment strategy should focus on capital protection. With the goal barely 1-4 years away, you cannot afford to take risks with the money accumulated for your child’s education. The equity exposure at this stage should not be more than 10-15%. Kolkata-based Sanat Bharadwaj started investing in a mix of mutual funds and bank deposits for his son Siddhant’s college education almost 12 years ago. But now that the goal is just one year away, he has shifted 75% of the corpus to the safety of a bank deposit.
This shift from growth to capital protection is critical. The 3-4 percentage points that equity investments can potentially give is not worth the risk. A sudden downturn in the equity markets can reduce your corpus by 5-6% and upset your plans. “As you come closer to your target, you should stop SIPs in equity funds and shift to a short-term debt fund,” says Kalpesh Ashar, CFP, Full Circle Financial Planners & Advisors.
As mentioned earlier, the cost of higher education is shooting up. Many parents who started late or chose the wrong investment vehicles may find themselves woefully short of the target. If you face a shortfall, don’t be tempted to dip into your retirement corpus to fill the gap. This is a mistake. “Your retirement should be given priority over your kids’ education,” says Rohit Shah, CEO of Getting You Rich. Instead, you should take an education loan with the child as a co-borrower.
Apart from keeping your retirement savings intact, it will inculcate a savings discipline in your child after she takes up a job. The repayment starts after a 6-12 month moratorium when she completes her education. Banks offer loans of up to Rs 20 lakh for courses in Indian institutes. If your child is keen on a foreign degree, it would require a larger corpus. While banks are willing to lend up to Rs 1.5 crore for foreign courses, they insist on part funding in the form of scholarship or assistance.
When saving for your child’s education, do remember that the whole fianncial plan depends on regular contributions by you. But what if something untoward happens to you? The entire plan can crash. The only way to guard against this is by taking adequate life insurance. A term plan does not cost too much. For a 30-35 year old person, a cover of Rs 1 crore will cost barely Rs 10,000-12,000 per year. That is too small a price for something that safeguards your biggest dream.
Source : http://goo.gl/uTf5qh
Prashant Mahesh | ET Bureau Apr 20, 2016, 05.10AM IST | Economic Times
MUMBAI: Mutual funds and wealth managers have figured a way out to reduce shuffling of equity scheme portfolios by investors in response to short-term swings in the stock market. Financial advisors are asking their clients to link every investment in equity schemes to a goal such as holidays or child’s college education, while mutual funds are pushing products labelled as retirement or children’s fund. Such investment strategies are aimed at encouraging investors to stay put for a longer period.
“When you have defined goals, ability to choose which asset class to invest in and handle volatility in that asset class is better,” says Vishal Dhawan, chief financial planner at Plan Ahead Wealth Managers. Advisors recommend diversified equity or balanced funds with a consistent track record for long-term investments.
To strike a chord with investors, mutual funds have gone one step ahead with some smart branding like children’s education and retirement funds. Axis Children’s Gift Fund, HDFC Children’s Fund and Tata Young Citizens Fund are among the popular schemes in the child savings category, while HDFC Retirement Fund, Reliance Retirement Fund and Franklin India Pension Fund are popular among retirement planners.
“These funds invoke a sense of emotion. When you mark it for a goal, you are mentally prepared to hold it and not withdraw it,” says Harshvardhan Roongta, a Mumbai based financial planner.
Advisors usually suggest investors use the systematic investment plan ( SIP) route to meet their long-term goals. “It is very tough for investors to time the markets and hence systematic investments to help them meet their long-term goals is an option they should consider,” says Sridevi Ganesh, a Chennai-based financial planner.
For instance, for short-term goals like paying school fees for your child which is two months away, investors are asked to invest in debt as an asset class. Similarly, someone aged 35 year old who plans to retire 25 years hence, is recommended an equity fund.
Mutual funds and wealth managers also benefit when an investor stays invested for a longer period.
Source : http://goo.gl/rOyWIy
Don’t tinker with your long-term investment plan. But it is always better to make some critical changes, based on new tax laws and instruments
Sanjay Kumar Singh | April 3, 2016 Last Updated at 22:10 IST | Business Standard
The start of a new financial year is a good time to review your financial plan and take stock of where you stand in relation to your goals. If new goals have emerged, this is the time to make fresh investments for these. While having a steady approach is a virtue here, make some adjustments in the light of developments that have occurred over the past year.
Large-cap funds have fared worse than mid-cap and small-cap ones over the past one year (see table). Over this period at least, the conventional wisdom that large-cap funds tend to be more resilient than mid-cap and small-cap ones in a declining market was overturned. Nilesh Shah, managing director, Kotak Mahindra AMC, offers three reasons. “For the bulk of the previous year, FIIs were sellers of large-cap stocks, whereas domestic institutional investors (DIIs) were buyers of mid- and small-caps. Large-cap stocks are also more linked to global sectors like metal and oil, whereas mid- and small-caps are linked to domestic sectors. The latter has done better than the former, leading to stronger performance by mid- and small-cap stocks. Large-cap stocks’ earning growth decelerated or remained subdued throughout last year while mid- and small-caps delivered better growth,” he says.
Despite last year’s anomalous performance, investors should continue to have the bulk of their core portfolio, 70-75 per cent, in large-cap funds for stability, and only 20-25 per cent in mid-cap and small-cap funds. Large-caps could also fare better in the near future. Says Ashish Shankar, head of investment advisory, Motilal Oswal Private Wealth Management: “IT, pharma and private banks, whose earnings have been growing, will continue to do so. Public sector banks and commodity companies, whose earnings have been bleeding, will not bleed as much. Many might even turn profitable. FII flows turned positive this month and FIIs prefer large-caps. With the US Fed saying it won’t hike interest rates aggressively, global liquidity should improve. If FII flows continue to be stable, large-caps should do better.” Valuations of large-caps are also more attractive.
Among debt funds, the category average return of income funds and dynamic bond funds was lower than that of short-term, ultra short-term and liquid funds (see table). Explains Shah: “Last year, while Reserve Bank of India (RBI) cut policy rates, market yields didn’t soften as much. The yield curve became steeper. The short end of the curve came down more than the long end, which is why shorter-term bonds did better than longer-term gilts.”
Stick to funds that invest in high-quality debt paper, in view of the worsening credit environment. Shankar suggests investing in triple ‘A’ corporate bond funds. “Today, you can build a triple ‘A’ corporate bond portfolio with an expected return of 8.5 per cent. Many of these have expense ratios of 40-50 basis points, so you can expect annual return of around eight per cent. If bond yields come down, you could end up with returns of 8.5-9 per cent. If you redeem in April 2019, you will get three indexation benefits, lowering the tax incidence considerably.” Investors who have invested in dynamic bond funds should hold on to these. “A rate cut is expected in April. Yields will drop and there may be a rally in the bond market,” says Arvind Rao, Certified Financial Planner (CFP), Arvind Rao Associates.
CHANGES YOU NEED TO MAKE
- Fixed deposit rates from banks will be better than returns from the post office deposits in the new financial year
- Choose your tenure first and then, do a comparison of bank fixed deposit rates before making the final choice
- Invest in the yellow metal via gold bonds
- If your liabilities have increased, revise term cover upward
- Revise health cover every three-five years to deal with medical and lifestyle inflation
- Revise sum assured on home insurance if you have added to household assets
- Conservative investors should invest in PPF at the earliest
- Those who can take some risk should bet on ELSS funds via SIP
- Invest Rs 50,000 in NPS
Traditional fixed income
The recent cut in small savings has jolted conservative investors. The rates on these have been linked to the average 10-year bond yield for the past three months. These will be revised every quarter now, make them more volatile. “People who want to invest in debt and want sovereign security should continue to invest in Public Provident Fund (PPF). No other instrument gives a tax-free return of 8.1 per cent with government security,” says Rao.
As for time deposits, financial planner Arnav Pandya suggests, “From April, fixed deposits of banks will give better returns than those of the post office. Decide on your investment tenure, see which bank is offering the best rate for that tenure, and invest in its deposit.” Lock into current rates fast, as even banks are expected to cut their deposit rates.
Tax-free bonds are another good option. Nabard’s recent issue carried a coupon of 7.29 per cent for 10 years and 7.64 per cent for 15 years. Beside getting tax-free income, investors stand to get the benefit of capital appreciation if interest rates are cut.
“People who have some risk appetite may also look at debt mutual funds and fixed deposits of stable companies,” adds Rao.
The sharp run-up in gold prices over three months, owing to the rise in risk aversion globally, took most people by surprise. The sudden spurt emphasises the need to stay diversified and have a 10 per cent allocation to the yellow metal in your portfolio. However, instead of using gold Exchange-traded funds (ETFs), which carry an expense ratio of 0.75-1 per cent, invest via gold bonds, which offer an annual interest rate of 2.75 per cent. The Budget made gold bonds more attractive by exempting these from capital gains tax at redemption.
Start investing in tax-saving instruments from the beginning of the year. “Don’t leave tax planning for the end of the year, otherwise you may have to scramble for funds,” says financial planner Ankur Kapur of ankurkapur.in. For those with the money, Pandya suggests: “Invest the entire amount you need to in PPF before the April 5. That will take care of tax planning for the year and you will also earn interest on your investment.”
Investors with a higher risk appetite could start a Systematic Investment Plan (SIP) in an Equity Linked Savings Schemes (ELSS) fund, which can give higher returns. “If you invest early in the year via an SIP, you will reap the benefit of rupee cost averaging,” says Dinesh Rohira, founder and Chief Executive Officer, 5nance.com. Pankaj Mathpal, MD, Optima Money Managers suggests linking all tax-related investments to financial goals.
If you live in your parents’ house and pay rent to them to claim House Rent Allowance benefits, which is perfectly legal, get a rent agreement prepared.
With 40 per cent of the National Pension System (NPS) corpus having been made tax-free at withdrawal in this Budget (the entire corpus was taxed earlier), this has become more attractive. “Open an NPS account if you have not done so already and enjoy the additional tax deduction of Rs 50,000,” says Anil Rego, CEO & founder, Right Horizons. In view of the low returns from annuities, into which 60 per cent of the final corpus must be compulsorily invested, don’t invest more than Rs 50,000.
Tax deduction under Section 24 is available on the interest repaid on a home loan. “Buying a property to avail of the benefit is not advisable if the family has a primary residence,” says Rego.
While reviewing your financial plan, check if the term cover is adequate. A family’s insurance cover should be able to replace the breadwinner’s income stream. Financial planners take into account household expenses, goals like children’s education and marriage, and liabilities like home loans when deciding on a person’s insurance requirement. “If goals have changed or liabilities have increased, raise the amount of cover,” suggests Mathpal. Kapur says the premium rate is likely to be lower if you buy the term plan before your birthday.
Your health insurance cover might also need to be raised to take care of medical inflation. The same holds true for household insurance if you have reconstructed your house and the structure has become more expensive, or if you have added expensive assets. Rohira suggests buying add-on covers like accidental insurance and critical health insurance for comprehensive protection.
By Vivek Law | Last Updated: February 20, 2016 | 16:13 IST | Business Today
The Budget may not have much for you. So, it’s best to plan your finances in such a way that this does not matter. India is perhaps the only country where the Union Budget is almost like a carnival. What is otherwise meant to be a statement of the government’s finances is a lot more in India. It is also a vision statement of the government’s policies. But that is hardly the reason why every Indian citizen looks forward to it and why it is covered in a high-decibel manner across the media. The reason is: Tax.
Unlike in most countries, the government tweaks tax rates, exemptions and deductions, almost every year. Consistency is not our forte. It is, therefore, not surprising that we all stay glued to the TV to listen to the Budget speech to figure out whether we need to pay more taxes, which product will be cheaper or expensive and, above all, which new products will we now be able to invest in for saving tax. In India, it is the government that does our financial planning. It decides which products we should put our money in by identifying products that qualify for tax deduction. It keeps changing the list every year. And most citizens merely follow the direction given by the government as product manufacturers line up one product after another with one simple hook: “Save Tax”.
Never mind if the product is suitable for us or not. As long as it provides a tax break, we must buy it, we are told. And most of us take the bait and buy it too. Should we save tax? Of course we must. But should we focus on financial planning or merely on tax planning? Tax planning is an integral part of financial planning. The focus should be first on drawing up our financial plan. On finding out our earnings and expenses. On figuring out our Tax rates, exemptions and deductions are tweaked by the govt almost every year By Vivek Law goals in life. On figuring out our need for money in the short term (one-two years) and the long term (more than five years). Once this is done, we must figure out how much to put in equity and how much in debt. How much to set aside for buying our home and how much to set aside for gold. But before all this, have a health insurance policy, and if you have a dependant, a term insurance as well.
After this comes the bit about picking products. The remarkable thing about our successive governments has been how they have clubbed together everything in the bracket of products that allow us tax deductions and exemptions. So, for example, your children’s school fees as well as your provident fund are eligible in the same category. So are your insurance and equity-linked savings scheme (ELSS) investments. There is a separate category for health insurance as also for the National Pension Scheme.
In other words, once you have figured out your financial plan, putting aside money to make the most of tax breaks is easy. What can be dangerous is doing it the other way around. For example, if you do not need a ULIP or an endowment policy, and buy one just because your agent tells you that it gets you a tax break, it is disastrous for your financial plan. Similarly, putting all your money in a PPF account may not be prudent either. Sound financial planning is about asset allocation. Not putting all your eggs in one basket.
Financial plans are also not made for one year. Yes, one must look at one’s financial plan periodically but not change it every year just because the government decides to make changes to the tax-saving products’ list in every Budget. In fact, the government needs to get out of the business of deciding where we invest. It needs to segregate expenditure and investment and not put them in one basket. We are a nation of savers and are laggards when it comes to investments. So, what would I expect from the finance minister this Budget? Given the rather stressed condition of the finances, it would hardly be prudent to expect any great tax breaks from the finance minister. Instead, what would be easy to do is to simplify the sections under which we get our tax breaks. Put expenditure—school fee, home loan etc—in one basket and put core investment products—ELSS, ULIPs, PPF etc—in one.
(In association with Mail Today Bureau)
Source : http://goo.gl/2HrmoK
Kartik Jhaveri | Mon Sep 03 2012, 09:59 hrs | Indian Express
MF A popular mutual fund has about R35 crore in unclaimed redemptions and unclaimed dividends as per report dated July 2012. A listed blue-chip public limited company has about R70 crore worth of share dividend lying unclaimed as on July 2012. Just one mutual fund and just one listed company and we can see about R100 crore unclaimed.
There are about 40 mutual funds registered in India, over 2,000 listed companies on the Bombay Stock Exchange. Then there are over 100 banks having more than 50,000 branches across India. Could we hazard a guess that money lying across all financial institutions might be in excess of say R5 or R10,000 crore? It could be much more. But that’s not the point. The point of contention is “Why do people create money?”, “For whom is this money being created?”
Why does this happen?
Forgetting our investments: Indeed it’s true; we do forget our investments, we are irresponsible, we hide things from the very people for whom we have created assets. Ultimately all this money lands into some investor education and protection fund and in certain instances your assets may ultimately be transferred to the government.
Changing our details: There are some things we should not change. These days the #1 thing we should not change is the mobile number and the email. It is difficult to remember the number of places we have used these items. The other important thing is the bank account. Avoid changing it. Even if you do not want to use one, keep the minimum balance and hold it for a good few years. You never know how and when you might just need it again. There have to be extremely compelling circumstances for changing these fundamental aspects of your financial life.
Dealing with multiple service providers: In your overtly charitable demeanour you entertain many banks, brokers, agents etc and as a result you have your assets all over the place. Just because he is your brother in law or cousin’s friend or some other relative is not reason enough to deal and render financial favours.
Over time things get out of hand and we tend to brush-off these matters for another day. This day never really comes by. Who is to be blamed for this? Is it the institution, the company, the broker or the agent who brought these things at your door? Over the years you perhaps do not even remember which agent sold you which product? Just think about this; who would you ultimately blame? Often people say that the data profiling exercise they do is one of the best financial activities they have done in so many years. This is because they got an opportunity to consolidate everything they had; or atleast the things they remembered they had.
Here’s another twist to the story; over time people die. Often when they die they leave behind problems that are larger than the assets they created. By the time children come to know, a lot of time has already elapsed. Often when they want to take action they are not able to locate the papers. The following are some activities you may need to do to claim what is yours. Note that you may need to do a combination of some of these in certain cases and in certain cases all of these. Such activities are police complaint, certification of such complaint, indemnity, affidavit, surety, multiple NOC, succession certificate/ probate/ letters of administration, notarising documents, many rounds of letters across institutions etc. Naturally this is not an easy process.
What can you do to avoid such situations?
Plan, and while you plan always consolidate. Consolidation is like housekeeping. It is a nice idea to do this all the time. A good advisor will keep doing this from time to time. He would anyways not allow you to spread so much that you are then not in a position to control effectively. A good idea might be to avoid dealing with multiple providers. 2-3 bank accounts are adequate. 1-2 term insurance policies, 1 health insurance policy, non-life policies as needed, 4-6 equity mutual funds, 2-3 debt mutual funds, 10-20 equity stocks, some bonds, 2-3 properties. This is quite a bit already. You can pretty much spend your life across these assets.
How to claim?
Sometimes the process is quite simple i.e. as simple as writing an email/ letter. Sometimes it could take years. Everything is situation specific. The more the changes vis-à-vis records maintained by the institution, the longer it takes to fix matters. The amount of paperwork is also in sync. Basically I reckon if you take care of money; money takes care of you. It is a perfectly symbiotic relationship.
— Author is Director, Transcend Consulting firstname.lastname@example.org
Source : http://goo.gl/TrrkqO
Interview with CIO, Equity, Sundaram Mutual Fund
Ashley Coutinho | Mumbai | January 4, 2016 Last Updated at 22:49 IST | Business Standard
India should view the coming rate increases in the US as positive, as they show the Federal Reserve’s confidence on US growth, says S Krishna Kumar, chief investment officer, equity, at Sundaram Mutual Fund. He tells Ashley Coutinho the trend of rising domestic investment is likely to continue, reflecting a conviction in the India story. Edited excerpts:
Equity markets have seen a sustained fall since March last year. What is your outlook for the year ahead?
India stands out purely on its macro credentials. This macro strength is visible in the rupee’s resilience, fourth among a pack of 24 emerging markets(EMs). Being the largest growing economy in the world, with inflation containment and fiscal prudence, India will continue to remain differentiated in the EM space.
Will EMs such as India be in trouble if the US Fed goes aggressive on rate hikes this year?
The Fed’s December policy statement broadly clarifies three aspects — the policy stance, policy pace and balance sheet size. First, it has announced an end to an early decade-long policy of near-zero interest rates and is looking to normalise. On the pace of rate rise, it indicates a rise of around 100basis points for the year, implying 25 bps each quarter. However, a cut of 50 bps over 2016 is more likely. Third, and more important, it indicated the balance sheet size would not see a contraction and there would be a rollover of maturing treasuries and reinvestment of principal payments. This is of greater importance, as any balance sheet contraction would mean liquidity contraction and a rise in the effective Fed funds rate.
The Fed rate rise comes as a big relief for Indian markets, removing a large cloud of uncertainty. In fact, India should view the moderate rate increases in the US as positive, as this is clearly reflective of the Fed’s confidence on US growth. And, as we all know, better US growth is good for global growth and certainly positive for India.
Your assessment of the third-quarter performance of Indian companies?
We expect it to be much better than the previous quarters, from a year-on-year growth perspective. Further, the profitability improvement due to input cost savings will play a much bigger role in offsetting the deflationary impact of revenue growth. However, we see the global cyclical like commodity players continuing to suffer earnings erosion.
It’s largely the domestic institutional players that supported the market last year. Do you expect this trend to continue in 2016?
The trend of rising domestic investment is likely to continue, reflective of conviction in the India story. More important, in this volatile phase, the average investor has shown remarkable maturity and resilience. The structural increase in households’ savings rate, on the back of falling inflation, coupled with the unattractive returns from physical assets, will continue to support the domestic equity flows.
Which sectors are you bullish on?
The economy is getting back on track, while benefiting from lower inflation and rates. As investors, we are positive on cyclical sectors that feed on the economic recovery theme, such as industrials, engineering & capital goods,transportation and financials. The potential rise in disposable income, on the back of softening inflation in urban India and the seventh pay commission largesse, will definitely help consumer discretionary sectors like automobiles, lifestyle products, durables, retail and entertainment. These represent our positive bias. We remain negative on pharmaceuticals, fast moving consumer goods, telecom, information technology and metals.
Your advice to retail investors?
Retail (small) investors appear to have as much conviction in the India story asus. Still, they need constant support and reiteration in these volatile times. Invest regularly with an asset allocation that is suitable to your needs and risk appetite. Discipline, patience and diversification are important to being successful in long-term wealth creation. After the recent correction, I would recommend investors to also look at lump-sum allocation to equities.
by Sanjiv Singhal | ScripBox.com
Recently, a friend of mine called me – her voice brimming with excitement. She was only a lakh short of 10 Lakhs in her Scripbox account. She started investing very recently and could not get over the fact that in a fairly short time, she was able to accumulate that amount.
The word millionaire does have a nice ring to it. In the Indian context the big indicator of wealth used to be ‘lakhpati’ but with inflation eating away at the value of our earnings, a million or 10 lakhs is now a good goal to aim for.
But, for a lot of young earners starting out on their first job, it seems impossible to have that much money. This article will show you how you too can be a millionaire. All you need is a simple, easy to follow plan.
Let’s say you are a 22 year old making Rs 25,000 a month, and you can save Rs 5000 to begin with.
Here’s your plan:
Year 1: Save Rs 5000 per month and invest in liquid funds or a recurring deposit. We recommend a debt fund because it has no TDS.
Year 2: Increase your savings by 10% to 5500 per month (We’re sure you’ll get a salary hike!) and invest it in liquid funds.
Year 3-8: Again increase your savings by 10% every year but now start investing it into tax saving equity funds. So Rs 6100 in year 3, Rs 6700 in year 4 and so on.
By the time you are thirty, you can expect to have more than Rs 10 lakhs!
*Equity growth is illustrative. It will never grow at a steady pace as shown. Markets tend to fluctuate and you will see large ups and downs.
On your way to becoming a millionaire, you would also have achieved the following 2 things:
1. By the end of year 2, you would have created an emergency fund of Rs 1.35 lakhs or approx. 4 times your salary. This is why we don’t recommend starting with equity in the first year itself.
2. You would not have needed to worry about tax saving investments every year.
Most important, you would have contributed only about Rs 7 lakhs to get to that 10 lakhs wealth. The rest would have come from earnings on your investments.
Tip: if your salary goes up by 20%, you should increase savings also by that amount – you will get to your goal faster.
What if you can only save half this amount?
The amazing part is that it won’t take you twice the number of years to get there. In only 3 more years (when you’re 33), you can get to your million!
And of course if you save more, you get there faster.
What after the first million?
Just keep saving 20-25% of your income each year in a combination of debt and equity funds and you shouldn’t have to worry about a thing. You could also adopt this simple financial plan. (refer link at bottom)
So, no more excuses. Take your first step towards your first million today.
Note: We’ve assume 8% return on your debt fund investments and 14% on equity funds. The historical returns for equity are higher but assuming a lower return is good for planning as the rates of return are not fixed.
Source : https://goo.gl/Rr7zOp
Rajeshwari Adappa | Tuesday, 24 November 2015 – 6:50am IST | Agency: dna | From the print edition
Defensive investment strategy of choosing secure and safe investments over riskier ones give lesser returns in the long run. The allocation to FDs and gold is much higher in India when compared to developed countries and the ownership of equities is very low. To get more bang for their buck, investors need to change their investment strategy as a few decades back, there were not many alternatives and inflation was not a known devil
For the same corpus invested in retirement funds, Indians make lesser money than their western counterparts.
Yogitaa Dand, financial advisor (associated with DSP BlackRock’s Winvestor initiative for women) says, “Yes, I do agree that Indians are not earning as much as they should from their investments, and hence, they do retire poorer than their foreign counterparts.”
“The reasons are manifold. However, the two distinctive reasons are that till date Indians have always given least priority to their retirement corpus and the greatest priority to the education of their children,” says Yogitaa.
Thus, Indians end up dipping into their nest egg, reducing the corpus considerably.
“Secondly, they have been more conservative in their investments, choosing secure and safe investments over riskier ones, which would otherwise have given them better returns in the long run,” adds Yogitaa.
A leading fund manager blames the “limiting thought process” for the comparatively poorer returns on investments. Indians use a ‘defensive’ investment strategy that lays too much stress on the ‘safety’ aspect.
“While we Indians have been very smart savers, unfortunately, we have not been the best of investors with our focus being on secure and assured return vehicles, eventually giving us lower returns,” says Yogitaa.
According to Vaibhav Agrawal, VP & head of research, Angel Broking, the reason for the lower returns on investments is that “the allocation to fixed deposits and gold is much higher in India when compared to developed countries. Also, the ownership of equities is very low in India.”
“In the US, the amount invested in equity mutual funds is $8.3 trillion (approx. Rs 550 lakh crore) and the amount in bank deposits is $10.4 trillion (approx. Rs 690 lakh crore). In India, the amount invested in equity mutual funds is Rs 3.8 lakh crore while the amount invested in bank deposits is Rs 89 lakh crore,” points out Agrawal.
Over a long term period, it has been seen that equity investments have given higher returns than bank FDs. “The compounded return from the top 50 schemes of equity MFs is in the region of 14.5% while the post-tax return on FDs is 6.5%,” says Agrawal. Even if one were to invest in the Nifty stocks, the returns would be in the region of 12% without dividend, and with dividend, the returns would be 13.5%.
Certified financial planner (CFP) Gaurav Mashruwala explains the reason for the bias towards FDs and other ‘safe’ investments. “Indians have seen very high interest rates in the past. The PPF fetched a return of 12% while bank FDs earned about 15-16% and company deposits earned even more at 21-22%,” he says.
“We also need to understand that a few decades back, we did not have many alternatives and choices to investments. Also, inflation was not a known devil,” adds Yogitaa.
Another reason for the ‘safe and defensive’ strategy seems to be the lack of a social security system in India. “We can look at NPS as an alternative to the social security system. However, it cannot be a complete substitute to the same,” points out Yogitaa.
But the volatility and unpredictability of the stock markets is the main roadblock in the case of equity investments. “Equity investments need a different mindset, much like that of a businessman,” points out Mashruwala. Not all investors are comfortable with the rollercoaster-like ups and downs of the stock markets.
The good news is that the scenario is changing. “People have started investing more in equities. The psychology of the investor and the regulator too is changing. Even the provident fund money is now being invested in equities,” adds Mashruwala.
If Indians want to get more bang for their buck, they need to change their investment strategy. “A person with a low risk investment portfolio can earn anywhere between 5-8% while a person with medium risk investment portfolio would earn approximately 8-10%. A person with a high risk investment portfolio would earn anywhere between 12-18% on a CAGR basis over a period of time,” explains Yogitaa. After all, risks and rewards are but two sides of the same coin.
Incidentally, Mashruwala is not too concerned about the western counterpart getting higher returns. “Remember, in all probability, the western counterpart also has more debt compared to the average Indian. It is highly likely that the Indian probably owns the house unlike his western counterpart,” says Mashruwala.
Source : http://goo.gl/hHcZR3
Abhijit Gulanikar | Tuesday, 17 November 2015 – 8:30am IST | Agency: dna | From the print edition
The track record of gold, before adjusting for transaction costs, for giving returns is fair.
For Adwait and his family Diwali is festive time to be enjoyed with family and friends. It is also time to buy gold. Along with Diwali, he buys gold every year during Akshaya Tritiya. He buys gold during all important life events like birth of his daughter, wife’s 30th birthday. This gold has in most cases bought as ornaments for his wife, daughter or himself. He recons that large portion (around 30-35%) of his savings is in form of gold. Adwait is not alone and many Indians have similar habits making India the largest purchaser of gold.
This mindset of investing in gold is received wisdom we have learnt from our forefathers and has been a long tradition in India. But this tradition is from era when financial instruments were not well developed. Today investments that are safer than gold will provide returns equal to or higher than the return on gold. By safer I mean both physical security and price security (capital guarantee). Most financial instruments are in electronic form or physical receipts that can be encashed only after due authentication by the owner (signature/password-OTP). Gold is, on the other hand, subject to theft and robbery. One needs to protect it buy hiring safe deposits lockers or other similar arrangements. Gold is generally safe from point of price security but it is also subject to market fluctuations like other commodities. We have had period where the price of gold has not recovered to previous peak for 4-5 years. Like price of gold is currently around Rs 26,000 for 10 gram, lower than Rs 31,000 we had three years ago.
The track record of gold, before adjusting for transaction costs, for giving returns is fair. Analysis of gold prices over last 40 years reveals that average return for long-term holding (10 years or more) is slightly lower than 10%, whereas inflation during the same period averages around 8%. Gold thus does provide positive real returns, i.e returns higher than the rate of inflation.
Above analysis is purely theoretical based exchange traded prices of gold. In real life the return will be significantly lower on account of transactions costs. Adwait has paid making charges every time he has purchased the ornaments. Making charges vary considerably from jeweller to jeweller but are substantially higher than zero transaction charge for making a bank fixed deposits or buying national saving certificate. Adwait has remade old ornaments from time to time and has paid a deduction for old ornament, and at the same time making charges for the new ornament. Adjusting for these costs and cost of safe keeping the return on gold would not be higher than rate of inflation.
Adwait should go ahead with his tradition of purchase of gold during Diwali as it has a huge sentimental value. Display of ornaments during social occassions also has a huge social value. However it would be judicious to reduce the amount of gold that he purchases. For important life events like his daughters 10th birthday, instead of buying a gold chain, he could invest the same amount in a long-term fixed deposit or mutual fund. Gold purchases should be done purely for sentimental/social reasons and not as part of his financial planning.
The writer is chief officer-business strategy, SBI Life Insurance
Source : http://goo.gl/w3wKkv
Rishabh Parakh | Saturday, 21 November 2015 – 10:00am IST | DNA india
It is important for women to start financial planning early on; it is also important to make these decisions wisely and not emotionally.
These days, financial education is imperative to acquire financial success. However, while some of us might be well-versed with financial theories, staying updated and accurate with the latest financial news is also important.
There are women who go the extra mile to provide for their family, both financially and emotionally — as a professional, mother, daughter wife, friend. However, women also tend to get fondled by emotions easily. It is important for her to focus and make decisions logically and not emotionally when it comes to matters of financial planning.
Here are some smart financial planning tips for women
Choosing best option to invest:
It is not only important to invest, but also to choose your investment plans wisely. This stands true for everyone, not only women, but it is especially important in the case of women because they tend to have a longer life span. It is very important to start planning for retirement or for financial stability in the event of a partner’s death.
Take charge and make a budget:
Many women in India still depend on their husbands for financial decisions. With growing complexities in life, it is advisible for a woman to take charge of her financial life as she may be in a better position to predict her needs going ahead. For this, make a budget that fits your requirement with ease and is flexible enough to accommodate needs with time. It is advisible to start as early as possible and select investment options which will also help you save in taxes.
Research & Plan: Take a financial advisor’s help if needed:
Since the financial world is full of technical jargons and complexities, a thorough research before buying into a financial product, including considering factors like inflation, return on investments, market sentiments, and taxes while planning your finances. Seek advice from an expert if needed, but eventually make the final decision on the basis of your judgement and thorough research. Plan, calculate and research before investing.
Review your income & savings on a regular basis:
After carefully planning and investing, the next, and constant, step is to review your finances on a regular basis. You need to be on the top of your game when it comes to managing finances with respect to the changes in your life — marriage, becoming a parent, career changes, moving abroad/shift, and so on. Then there are other changes that are beyond one’s control — changes in tax laws, interest rates, inflation rates, stock market volatility, recession — so make sure you plan ahead of time and are always ready to accommodate these changes.
Rishabh Parakh is a Chartered Accountant and the Chief Gardener & Founder Director of Money Plant Consulting, a leading Tax & Investment Planning Advisory Service Provider. He also runs a personal finance blog called “Mango Investor” aka AAM Niveshak at http://www.mangoinvestor.com. Readers are invited to send their feedback to email@example.com.
The minimum deposit at any one time shall be raw gold — bars, coins, jewellery excluding stones and other metals — equivalent to 30 grams of gold of 995 fineness.
By: ENS Economic Bureau | Mumbai | Published:October 23, 2015 12:58 am | Indian Express
The Reserve Bank of India (RBI) on Thursday issued directions to all scheduled commercial banks on the implementation of the Gold Monetisation Scheme which will replace the Gold Deposit Scheme of 1999.
According to the guidelines banks will be allowed to fix their own interest rates on gold deposits.
The deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them, according to a press release issued by the RBI. The central bank said that resident Indians that include individuals, HUFs (Hindu Undivided Families), trusts including mutual funds/exchange traded funds registered under Sebi (mutual fund) regulations and companies can make deposits under the scheme.
The minimum deposit at any one time shall be raw gold — bars, coins, jewellery excluding stones and other metals — equivalent to 30 grams of gold of 995 fineness.
“There is no maximum limit for deposit under the scheme. The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central government under the scheme. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold,” it said.
The RBI notification in this regard comes ahead of the formal launch of the scheme by Prime Minister Narendra Modi on November 5. The gold deposit scheme is aimed at mobilising a part of an estimated 20,000 tonnes of idle precious metal with households and institutions.
As per the guidelines, banks will be free to set interest rate on such deposit, and principal and interest of the deposit will be denominated in gold. “Redemption of principal and interest at maturity will, at the option of the depositor be either in Indian rupee equivalent of the deposited gold and accrued interest based on the price of gold prevailing at the time of redemption, or in gold. The option in this regard shall be made in writing by the depositor at the time of making the deposit and shall be irrevocable,” it said.
The interest will be credited in the deposit accounts on the respective due dates and will be withdrawable periodically or at maturity as per the terms of the deposit, it said. “The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes. While the former will be accepted by banks on their own account, the latter will be on behalf of Government of India,” it said.
The short term bank deposits will attract applicable cash reserve ratio (CRR) and statutory liquidity ratio (SLR), it said.
Source : http://goo.gl/kT3v54
While long-term returns of these funds may be subdued compared to diversified equity MFs, they are less volatile
Kayezad E. Adajania | Last Modified: Thu, Oct 15 2015. 08 19 PM IST | LiveMint
How do you make money in a market that goes up, say, 9% (2013) one year, then shoots up 30% (2014) in the next, and then comes crashing down the following year (by 2.42% so far this year)? The tried and tested way is to allocate assets properly; and invest in equities and debt as per your risk profile and market movements. But that’s easier said than done, isn’t it?
Let’s see how balanced funds—these invest across equities and debt—have performed. Between February 2014 and January 2015, the category returned 42% on an average. But since February 2015 till date, the category lost 1.12%.
But there’s another animal that does asset allocation more efficiently than balanced funds. They’re called dynamic asset allocation (AA) funds. As against balanced funds, which maintain a steady balance of equity and debt split, or even diversified equity funds, which always remain invested in equities, dynamic AA funds switch between equities and debt completely; they can invest zero to 100% in equities, depending on how markets behave. But does such dynamism help?
Although all dynamic AA funds switch between equity and debt, not all behave the same way. Funds such as Franklin India Dynamic PE Ratio Fund of Funds (FDPE) and Principal Smart Equity Fund (PSEF) switch based on the price-equity ratio (P-E) of the CNX Nifty index. A P-E ratio, to put it simply, indicates if equity markets are overvalued or undervalued. Higher the P-E, more the markets are considered overvalued; and lower will be these funds’ equity allocation.
DSP BlackRock Dynamic Asset Allocation Fund (DBDA) looks at the yield gap formula. It is calculated by dividing the 10-year government security’s yield by earnings yield of Nifty. The numerator is a proxy for debt markets, and the denominator is a proxy for equity markets. So, the ratio looks at how cheap or expensive equities are when compared to debt markets. If the number is high, it means expected returns from equities are low, and so a higher allocation to debt is necessary.
While PSEF invests directly in equities and debt, funds such as FDPE and Kotak Asset Allocator Fund (KAAF) are fund of funds (FoFs); they invest in other MF schemes. All these FoFs invest in in-house schemes. In cases like FDPE, the schemes are sacrosanct. But schemes like KAAF have earmarked multiple schemes for their debt and equity allocation. “Once the quant model decides the equity-debt split, the fund management team decides which funds (large-cap, mid-cap and so on) the FoF will invest in,” said Lakshmi Iyer, chief investment officer (debt), Kotak Mahindra Asset Management Co. Ltd.
Have they delivered?
Of all the dynamic AA funds, only three have been around for a significant period of time— FDPE, launched in October 2003; PSEF and DHFL Pramerica Dynamic Asset Allocator Fund (DPDA), both launched in December 2010. In rising markets between February 2014 and January 2015, FDPE and DPDA returned 33.27% and 26.68%, respectively, finishing in the bottom quintile of the moderate allocation category, as per data provided by Morningstar, a global MF research firm and data tracker. Morningstar classifies all schemes where equity allocation is between 30% and 75% in this category.
Fortunes changed in 2015, when markets started to fall. KAAF (3.51%), DBDA (2.06%) and FDPE (1.30%) finished in the top quintile between February 2015 and 12 October 2015. But on an average, the category lost 1.12% in the same period.
“There is a myth that people come to mutual funds for high returns. If that were the case, then so much money wouldn’t be invested in fixed deposits. Investors want a good experience. Returns are important, but if a fund is able to give a solution, like rebalancing, and return decent money over long periods of time, investors are happy,” said Kanak Jain, mentor, Ask Circle Mutual Fund Round Table India, one of the country’s largest MF distributor association.
Most of the funds are new in this space so we don’t have long-term data on whether these models have worked or not.
For instance, DBDA, which uses the yield-gap model, was launched only in February 2014. The good news is that months after its equity allocation being static at about 12% since launch, it moved up to 29% in August earlier this year when markets sank sharply, and to about 38% in September, when the Reserve Bank of India cut interest rates.
“The formula did exactly what it was supposed to do, and at the right time,” said Ajit Menon, head-sales and co-head-marketing, DSP BlackRock Investment Managers Pvt. Ltd. Menon admitted it was unnerving that the formula didn’t budge all of last year and most part of this year as well. “But last year, the equity rally was a ‘hope’ rally; there wasn’t much change on the ground,” he said.
While long-term returns may be subdued as compared to that of diversified equity funds, these funds are less volatile. We looked at standard deviation, a measure of a fund’s volatility.
According to Morningstar, average standard deviation of moderate allocation, flexi-cap and large-cap funds together was 11.94, while that of all dynamic AA funds was between 1.95 and 7.19; which is among the lowest.
“The risk-return combinations are important. These funds help significantly reduce volatility in your portfolio,” said Janakiraman R., portfolio manager-Franklin Equity, Franklin Templeton Investments–India.
Mind the tax gap
One drawback that dynamic AA funds have is in terms of taxation. On account of being FoFs, they are classified as debt funds and taxed accordingly, even if they are equity-oriented.
If you sell your debt funds within three years, you pay taxes as per your income tax rates on your gains. The threshold to claim tax benefit on long-term capital gains is three years, and even then, long-term capital gains tax is 20% (with indexation benefits).
That’s one reason why KAAF changed its objective, in October 2014, from being just an equity FoF to one that dynamically allocates its money to debt and equity, based on a certain formula.
“Earlier, all our investments were going in equity funds and yet KAAF was considered a debt fund. A dynamic asset allocation model, therefore, is superior,” said Iyer, adding that an “unfavourable tax structure” has been one of the biggest impediments to this product becoming popular with investors.
Should you invest?
Not all financial planners recommend dynamic AA funds because they feel it is their prerogative to do their client’s asset allocation. But quite a few planners have warmed up to such funds.
Yogin Sabnis, managing director, VSK Financial Consultancy Services Ltd, is a fee-based planner who still manages a motley group of investors from his early days when he didn’t charge fees. Such investors, he explains, either don’t require much financial planning or hesitate to shift to paying fees. Such clients, he said, are advised to invest in dynamic AA funds. “I don’t recommend this product to my fee-based clients because I do their asset allocation. But if someone wants a one-off advice, this is one of the first recommendations because with these funds, even if the customer doesn’t consult an adviser, the fund automatically does the rebalancing,” said Sabnis.
Jain, who has systematic investment plans going on in some of these funds on behalf of two children, feels advisers and distributors should focus more on the long-term goals of clients and their servicing, and leave rebalancing to such funds. Added Janakiraman, “Usually, we do asset allocation only in extreme situations. We don’t do it all the time, which we are supposed to. These funds monitor asset allocation at all times.”
The category does not have many schemes. And the ones that are there, don’t have long-term track records. But the ones that come with a track record have largely worked so far. The yield gap model, for instance, shows promise though DBDA lacks a long-term track record.
It’s best to stick to larger fund houses and also with those that are FoFs, despite their inherent tax disadvantage. If the underlying funds come with a good track record, then the only thing you need to watch out for is the asset allocation model.
Source : http://goo.gl/dgFHiL
Varun Goel | Tuesday, 22 September 2015 – 6:35am IST | Agency: dna | From the print edition
The BSE Sensex delivered return of 100x over approximately thirty years. The index value, which was 260 in December 1984 has now become more than 28000. So if you had invested one lakh in 1984, it would have become one crore in 30 years. The average CAGR return in last thirty years is a stupendous 17%.
It’s time to get over your financial planning worries. The easiest and most convenient wealth creation tool has been ignored by majority of Indians for far too long.
The BSE Sensex delivered return of 100x over approximately thirty years. The index value, which was 260 in December 1984 has now become more than 28000. So if you had invested one lakh in 1984, it would have become one crore in 30 years. The average CAGR return in last thirty years is a stupendous 17%.
No other asset class has given those kinds of returns over the same period. Long term taxation on equity is zero, which means returns are tax-free. Also, the money invested in equity is always liquid and can be redeemed within two days in case of any requirement. So, we have an asset class which is liquid and delivers tax-free high returns (over 1 year). And the best thing is that you don’t have to take stock market advice or go to various stock ‘experts’ as you can just invest in a Nifty or Sensex ETF (exchange traded fund). An ETF is a passively managed fund which mimics Nifty/Sensex composition dynamically and charges a small fee for that.
So, how does this information help us? Let us assume that the average expenses of a middle class household are about 5 lakh rupees per year. Average inflation rate in India has been 8% for the last 35 years. Assuming, the same inflation rate is maintained, this household would need around 50 lakh per year 30 years from now to maintain the same standard of living. If the earning member of the family is about 30 years old, he still has 30 more years of working life left. If this family invests 5 lakh rupees in a Sensex ETF today, he would get 5 crore rupees thirty years from now.
We are assuming that Sensex will continue to deliver a CAGR of 17% return as India is expected to grow at 6% plus growth rates for a long time to come. Add to this the inflation rate of 6%. We have a scenario of nominal GDP growth of 12%. In such a scenario, it is fair to assume that corporate earnings and hence Sensex can grow at a CAGR of 17%.
However, let’s assume that India’s real GDP growth will slow down to 5% going forward, even then we can have a nominal GDP growth of 10%, assuming 5 % inflation. In this scenario also, the household will get 2.5 crore rupees after 30 years while his annual expenditure will only be 21 lakh. So roughly, a ratio of 1:10 for Expenditure: Savings is maintained, which should take care of household expenses in perpetuity with a basic fixed income investment approach.
Of course, this 30-year return does not come in a straight line. There was a lot of volatility over last thirty years with markets going up and down periodically and this will continue going forward. Investors have to stay the course through these upturns and downturns in the market. And yes, equity markets come with a lot of risk. Macroeconomic, geopolitical, political and currency volatility all add to the underlying risk and the investors should be cognizant of that. But then, there are no free lunches in life.
The key learning of this exercise is that a very basic equity investment strategy can take care of the total retirement planning of any household. This approach is hassle free. This is the best demonstration of the power of compounding. Unfortunately less than 5% of India households are invested in equity and thus miss out on this magical formula. It’s time we changed our investment habits for a happier and a prosperous future.
It would be appropriate to add at this moment that pension funds like Employees’ Provident Fund Organization (EPFO) and New Pension Scheme (NPS) should allocate a greater proportion of their investments into equities so as to harness the same power of compounding. This will also enable a lot more number of people to benefit from the stock market investments which they now seem to be indifferent to.
The writer is vice president & fund manager, PMS, Motilal Oswal Asset Management Company
Source : http://goo.gl/FxetbU
K V Vardhan | Aug 11, 2015, 06.07 AM IST | Times of India
I’m 40 years old and work as an insurance adviser . I want to build a Rs 1 crore corpus through SIP in equity mutual funds over the next 20 years.Kindly guide me about how much I have to invest monthly and the type of funds I should invest in. –Sathish Kumar D, Chennai
K V VARDHAN REPLIES
The first step to wealth creation comes from planning and one needs to have the conviction to stick to the plan through the journey. Like the ups and downs associated with investing in the stock market, SIP investments using the mutual fund route is also expected to give you volatility . However, investors who have the conviction to remain invested and continue with their SIP investments through these ups and downs, are bound to achieve their financial goals.
In the past decade, the average yearly sensex return was 13.9%, while well performing mutual fund schemes have returned between 13.4% and 22.7%, and SIPs in the same funds returned between and 13.7% and 25.3%. Hence SIP ,a rupee cost averaging method in a volatile market, has the potential to deliver better return than lump sum investments.
Case 1: Let us considering you require of Rs 1 crore equivalent to today’s value, after 20 years.At 6% per annum rate of inflation, on an inflation-adjusted basis, after 20 years you will require approximately Rs 3.20 crore. To achieve this corpus size, you may consider investing Rs 35,000 per month in equity mutual fund SIPs with an expected annual return of 12%.Alternately , you can invest Rs 24,000 per month in mutual fund SIPs with an expected annual return of 15%. If we have to do asset allocation and create a financial plan for the above case with 70% of your investments going into equity funds and 30% nto debt funds, you may have o invest Rs 44,000 per month. In case you plan to have a 50%-50% ratio with equity and debt mu tual funds, you may have to invest Rs 50,000 per month.
Case 2: Let us considering you require of Rs 1 crore at the end of 20 years. In that case you may consider investing Rs 11,000 per month per month in equity mutual fund SIPs with an expected annual return of 12%. Alternately , you can consider investing Rs 7,500 per month in equity mutual fund SIPs with an expected annual return of 15%. With asset allocation of 70% equity and 30% debt you may have to invest Rs 14,000 per month, while with a 50%-50% equity and debt allocation, you have to invest Rs 15,500 per month.
Here, we assume that annually SIPs in debt funds would return 6% post tax, and equity returns are expected at 12%, also post tax. For an equity investor who is aggressive and has higher risk taking ability , 40% of the corpus should be in midand small-cap funds, 30% in multi-cap funds and the balance in large cap investments.For moderate risk taking ability, the combination should be 30% in midand small-cap funds, 35% in multi-cap funds and the balance in large cap investments. And for a conservative investor, with low risk-taking ability, it should be 20% in midand small-cap funds, 30% multicap funds and the balance in large cap investments.
K V Vardhan is CEO, Ultimate Wealth Managers, Bengaluru
Source : http://goo.gl/FILYlm