ET CONTRIBUTORS | By Raj Khosla | Mar 12, 2018, 02.30 PM IST | Economic Times
Major banks and housing finance companies have raised their lending rates. Whenever home loan rates are hiked, borrowers want to know whether they should prepay their loans to save on interest. In the past, there was no clear answer because there were several investment opportunities that could yield better returns than the interest paid on the home loan.
Not any longer. Stock markets are looking jittery, fixed deposits are tax-inefficient and debt funds are giving poor returns. If a penny saved is a penny earned, prepaying a home loan may be the best investment option available. Where else can you get 8.5% assured ‘returns’ on the surplus cash? Another compelling reason to rework the math and at least partially repay your home loan is the new tax rule that caps the deduction on home loans at Rs 2 lakh a year. If you have a large home loan running, you would do well to make partial prepayments as soon as you can.
There are some obvious benefits of foreclosing a long-term loan. The longer the tenure, the higher is the interest outgo. Just like long-term investments build wealth for you, longterm debt burdens you with high interest. Yet, a long-term loan may be unavoidable in some circumstances. A young person who has just started working may not be able to afford a large EMI. The loan tenure would have to be increased so that the EMI fits his pocket.
In such situations, borrowers are advised to go for a ballooning repayment, where the EMI increases every year in line with an increase in the income. This can have a dramatic impact on the loan tenure. If you take a home loan of Rs 50 lakh at 8.5% for 20 years, the EMI will be Rs 43,391. But a 5% increase in the EMI every year will end the loan in 12 years and two months. If you tighten your belt a bit and increase the EMI by 10% every year, you can become debt-free in less than 10 years (see grphic)
Pay off a 20-year loan in less than 10 years
Hiking the EMI every year reduces the tenure drastically.
Contrary to what T.S. Eliot said, April is not the cruellest month. Any salaried individual will vouch for this. While annual increments are something to celebrate, people with large outstanding debts should also try and increase their EMIs in line with the increase in income. In a few weeks, they will also get their annual bonuses. At least some of that should be used to prepay the home loan.
Reducing your outstanding debt or closing the loan is naturally a psychological boost. It gives the individual a sense of financial freedom.
Some people argue that prepaying the home loan robs the individual of liquidity. That’s not correct. Several banks offer home loans with an overdraft facility that allows the borrower to withdraw money as and when he needs it. Though overdraft facilities normally entail annual maintenance charges, home loan overdraft facilities are exempt from this charge. It’s also a good idea to use a loan against property to repay other costlier loans. For instance, an unsecured personal loan that charges 18-20% can be replaced with a loan against property that costs 8.5%.
(Author is founder and managing director, Mymoneymantra.com)
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of http://www.economictimes.com.
Aim to add incrementally to your portfolio over time particularly when the chips are down.
Dipan Mehta | Mar 05, 2018 10:22 AM IST | Source: Moneycontrol.com
Go for direct equity with the help of an advisor or a portfolio manager because mutual funds have high expense ratio and inherent disadvantages, Dipan Mehta, Director, Elixir Equities said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Q) The tables have turned in favour of bears at least in the medium term. The Indian market has become a sell on rallies kind of market. What is your assessment of the market at current juncture?
A) This the fifth year of a bull market which has been a slow steady one with very little volatility. There have been a few corrections and we are in the middle of one at present. For the long-term investor, this is still a buy on dips market.
Whether this correction will deepen or not will become evident over the next 2-3 weeks. If a lower tops/lower bottoms formation get created and broad market indices trade below their 200 DMA (which they are not at present) then we may be in for an extended sell-off or a mild bear market.
Q) What is your advise to investors who want to put Rs 10 Lakh into markets? He is in the age bracket of 35-40 years. He/she is looking at forming a portfolio with direct equities, MFs, a part of fixed income as well?
A) Go for direct equity with the help of an advisor/portfolio manager. Mutual funds have high expense ratio and inherent disadvantages. Set aside an amount of emergency plus 1 year’s salary/income into debt and put the rest into good quality stocks.
Aim to add incrementally to your portfolio over time particularly when the chips are down.
Q) What should be the ideal strategy for investors in terms of sectors? Do you think PSU banks are a good buy at current levels? What are the sectors which you think are likely to show momentum in the year 2018?
A) PSU Banks, IT and Pharma are to be avoided.
-25-35 percent should be in private sector retail banks and NBFCs.
-15 percent in auto and related ancillaries,
-15 percent in Indian FMCG stocks,
-35 percent rest in domestic consumption stocks such as building materials, appliances, aviation, retail, gaming, entertainment, media, fast food, branded apparels, and innerwear.
Q) The US Fed signalled a minimum of 3 rate hikes for the year 2018. Do you agree the global overhang is likely to weigh on Indian markets for the rest of the year?
A) No, but there will be a knee-jerk reaction whenever there is a global sell-off. With the rise and rise of domestic mutual funds, the influence of the foreign investors has reduced dramatically which means that the co-relation on a medium to long-term has weakened.
Moreover, foreigners have been investing for 2 decades and they have a more mature approach to India. We are a better-understood economy and capital market.
Q) What should be the right strategy for investors right now – sit on cash and wait for a dip or deploy cash incrementally throughout the year?
A) Nibble into the bluest of blue-chip stocks. Companies which have missed in the bull market so far must be targeted for investment. Investors must endeavour to improve the quality of the portfolio.
There are two-fold benefits. If the bull market resurges, then these will be first of the block and gain market leadership. Should a bear market evolve, then the damage will be less and investors will be able to sleep better knowing they have quality stocks in their portfolio.
Q) What will happen in the banking space given the fact that the cost of borrowing is inching higher. The RBI might keep rates on hold in its next policy but may raise rates in 2018?
A) Private sector banks and NBFCs will survive and thrive in every interest rate scenario. Growth and profitability will be temporarily impacted but the process of private sector gaining market share at the expense of PSU lenders will continue and gain traction.
Q) With Dollar gaining strength there is a higher possibility of rupee weakness. Which sectors or stocks likely to benefit the most? What is your target level for the currency?
A) Sectors which will benefit are obvious but be sure to assess the basic underlying fundamentals. No business will create value just because the currency is depreciating. Our view on the Rupee is not so negative.
The high investment by mutual funds could be attributed to strong participation from retail investors.
PTI | Dec 31, 2017 11:15 AM IST | Source: PTI | MoneyControl.com
Domestic mutual funds pumped in a staggering over Rs 1 lakh crore in the stock market during 2017 and remain bullish in the New Year to maximise the returns for investors.
Mutual funds invested Rs 1.2 lakh crore in equities in 2017, much higher than over Rs 48,000 crore infused last year and more than Rs 70,000 crore pumped in during 2015, latest data with the Securities and Exchange Board of India (Sebi) showed.
“We are seeing a clear shift in preference for financial assets over physical assets such as real estate and gold, which is likely to continue even going forward.
“Apart from this trend, the consistent delivery of returns by the mutual fund industry, prudent risk management and increasing initiatives on enhancing investor awareness assisted in increasing the penetration of mutual fund products,” Kotak Mutual Fund CIO Equity Harsha Upadhyaya said.
The high investment by mutual funds could be attributed to strong participation from retail investors.
In fact, retail participation is now providing the much needed liquidity to the stock markets that have been largely driven by Foreign Portfolio Investors (FPIs) for the past few years.
The investment by mutual funds in equities have outshone those by FPIs.
FPIs have infused close to Rs 50,000 crore this year after putting in over Rs 20,500 crore last year and nearly Rs 18,000 crore in 2015. Prior to that, they had pumped in over Rs 97,000 crore in 2014.
“This year the domestic institutional investors have pipped FPIs on net inflows, thus making the market less dependent on FPI money.
“This has also provided greater stability to the market as during the times when FPIs were pulling money out of the Indian equity markets, the stock market continued its upward march with the support from the flows by domestic institutional investors,” Morningstar India Senior Analyst Manager Research Himanshu Srivastava said.
Retail money flew into equities through mutual funds supported the benchmark indices — Sensex and Nifty — that surged by 28 percent and 29 percent respectively this year. Further, retail investor accounts grew by 1.4 crore to 5.3 crore.
The spike in bank deposits and consequent decline in interest rates following demonetisation on November 8, 2016 has also helped mutual funds.
“Mutual fund distributors too have played a key role in connecting with their existing and new customers. This has not only resulted in his increasing wallet share of customer, it has also helped the distributor in getting new customers to the industry,” Amfi Chairman A Balasubramanian said.
“It is also believed that investors are no more interested in buying into traditional asset classes such as real estate and gold, thus moving to financial asset class,” he added.
Mahesh Patil, Co-CIO, Aditya Birla Sun Life AMC on how he is creating alpha in the large cap space, his contra calls and more.
By Morningstar Analysts | 27-12-17 |
The asset size of Aditya Birla Sun Life Frontline Equity Fund has crossed Rs 20,000 crore. Do you see size posing an issue to manage this fund going forward?
We maintain a good diversification in this fund by having exposure across sectors. We aim to beat the benchmark consistently and incrementally rather than taking very large sectoral bets. Given that the fund invests at least 80% of its assets in large cap stocks, we don’t see size posing as a challenge. Besides, the core of the portfolio has very long term holdings. That said, as the fund size increases it becomes slightly more difficult to build or unwind positions in stocks and needs more effort. But it is part of the process and does not affect the performance significantly.
We have a large number of stocks (60-70) in the portfolio as compared to other similar funds in the industry. Before deciding the quantum of exposure warranted in any stock, we take a close look at the liquidity of the stocks. This strategy allows us to manage large size.
It is becoming difficult for managers to generate alpha in the large cap space. How do you overcome this challenge?
We are seeing a huge rally in the mid and small cap stocks and large cap funds obviously can’t take exposure to such stocks. So multi-cap funds have been able to generate decent alpha by maneuvering where the opportunities are.
As markets mature and price discovery happens across stocks its going to become difficult to generate alpha in large caps. The alpha generation which we saw in the last three to four years would compress going ahead. This is because the alpha was high as compared to the historical average, especially during calendar year 2014-16.
We never target to generate superlative alpha in large cap funds. Instead, we endeavor to find some new stock ideas every year which keeps the portfolio fresh. If there is a serious underperformance, we are nimble enough to take corrective action. While everything is fairly priced in the market at this juncture, we try to continuously look out for undervalued companies. Some amount of contrarian investing and moving away from the crowd helps to spot early turning points in stocks/sectors. Similarly, we maintain a discipline to trim exposure in certain stocks that have overshot their valuation target. This strategy enables us to buy stocks which are relatively cheap in terms of valuation. So some amount of active management is also required at this juncture to generate alpha in the large cap space.
In which sectors/themes are you deploying the steady inflows coming in equity and balanced funds?
We have been overweight on banking and financial services. Financial services sector has had a good run and the valuations have moved up. Hence we are more discrete now in choosing the right segments that offer better growth. While we prefer private retail banks, we are slowly warming up to corporate banks because of some clarity emerging on resolutions of bad debts and a cyclical recovery in economy.
Besides, we are positive on consumer discretionary space. We are seeing a higher demand for discretionary consumption as the per capita income is moving up in India. Further, the implementation of GST will benefit players in the building material, consumer durables and retail space. Rural consumption is also starting to improve with normal monsoons and government focus on stepping up rural spending.
We are fairly overweight on metals. Metal prices are steady as China is cutting down capacity on the back of environmental issues which is supporting price. Indian companies are also deleveraging which will increase their equity value.
Another sector where we are taking a contrarian call is telecom. We are seeing consolidation happening faster than we expected in this sector. While there is still some pain for a few quarters, over a three-year time frame it could be a good time to look at some leading telecom companies.
We are selective in the infrastructure space. Road, railways and urban transport are some pockets where there is significant traction. Companies positioned in this sector are expected to see good increase in their order books.
Post SEBI’s diktat on scheme categorization, how are you restructuring your funds? Are you planning to merge smaller schemes?
Fortunately, we have been working on consolidating schemes much before the SEBI circular came out. Most of our equity funds are aligned as per SEBI categorization. We would look to merge some thematic funds.
Overseas fund of funds category is seeing continuous outflows. What are the reasons for the waning demand for this category.
The awareness level about this category is low. Domestic market has been doing well so people are preferring to invest in India. Overseas fund of funds have done well though.
As markets mature and you see enough ownership of domestic funds, people would look to invest outside India. There are a lot of new generation companies which investors can take exposure through these funds.
Though taxation of this category is an issue, you need to realize that if you are making good returns it should not be a problem. HNIs who already have a high exposure to India can look at these funds. Also, those wish to send their children overseas for education can consider these funds because the underlying returns are dollar based. To some extent, you are taking the currency hedge through these funds.
When do you see private-sector investment picking up?
Private sector investment has been elusive. But there are a couple of factors which indicate that investment will pick up one year down the line. Firstly, capacity utilization has bottomed out and is showing early signs of improving. Secondly, while a lot of large corporates in metals and infra space are saddled with high debt were are seeing the deleveraging cycle has started for some companies. Corporate debt to GDP which peaked out in 2016 is starting to come off. Finally, bank recapitalization would enable corporates to re-leverage and begin the next capex cycle. Sectors like Steel, Oil and Gas, fertilizer and auto are the first to see a revival.
During every budget we get to hear about suggestions to reinstate long-term capital gains (LTCG) tax on equity investments. Some say that exemption of LTCGT can lead to market manipulation. What are your views? If the government introduces LTCGT what would be the impact on markets?
The exemption of LTCGT has helped attract investors in equities. But that’s not the only reason why people invest in equities. They invest because they expect better returns. If there is money to be made in markets, I don’t think it would deter investors from this asset class. So introduction of LTCGT would not have an impact on long term investors. However, it could hurt the sentiments in the short run. We could see some curb in short term speculative money moving in stocks having weak fundamentals.
How has your investment philosophy evolved over the years?
While our broad philosophy has remained the same, we have started giving more attention to management quality while evaluating companies. Our time horizon of owning stocks has also increased and we are evaluating companies with a three-year perspective. There is a larger focus on how companies are generating free cash flows and how it is being utilized. These factors impact the PE multiples. So we are willing to pay a premium if these factors are favorable. To sum up, we have been incorporating these factors in our philosophy.
Your favorite book
One book which I found interesting is ‘Good to Great’ authored by Jim Collins. The book gives good insights into building an organization and focuses on what really matters to not only to survive and endure but to excel.
By pooling a lot of stocks or bonds, mutual funds reduce the risk of investing.
By ZeeBiz WebTeam | Updated: Wed, Nov 29, 2017 12:59 pm | ZeeBiz.com
Both stocks and mutual funds market are booming in India, but as an investor, we are often confused to choose between the two for our investment plans.
Investment in equity, bonds or funds comes with higher risk and higher reward, therefore, it is always better to first study about the scheme we plan to invest.
Mutual fund scheme is a pool of savings contributed by multiple investors. The term ‘mutual’ fund means that all risks, rewards, gains or losses pertaining to, or arising from the investments made out of this savings pool are shared by all investors in proportion to their contributions.
There are wide-range of mutual funds in India like – equity, debt, money market, hybrid or balanced, sector-related, index funds, tax-savings fund and lastly fund of funds.
Stock market are usually interesting source of income for both companies and share holders. Under the stock market, anyone can buy stakes of a company in whom they have faith.
Companies which have received better ratings by agencies are generally preferred the most. No matter what may be the circumstances, an investor holds on to the company’s stake for their regular source of income.
Which one is better for investment?
According to Motilal Oswal, if you are typically in your 20s to 30s belt, you can start building your investment portfolio with the help of mutual funds. You need to start off with a very minimum capital and you can find that your investment keeps growing at a gradual space.
The agency believes that for first-time investors, the mutual funds offer a tremendous scope for growth as your funds are invested in diversified forms of revenue generating sources.
On the other hand, Motilal believes that if an investor belongs to late 40s up until 70s of their age and are also seasoned investors, then investing in stocks is a good idea.
It further said that decades of exposure to the financial market helps you gauge the right type of equities, shares or stocks, you need to invest your money in.
Among many advantages of investing in mutual funds is that you can appoint fund managers to select funds, track performance, make appropriate asset allocations and cash-in your profits for you.
These managers try to ensure that an investor’s portfolio consists of well-performing funds, rather than those that might drag down the overall investment returns.
In case, you are stock market investor, and sell your holding within a period of one year, then you have to pay 15% as short-term capital gains tax.
As for mutual funds, there are no gains tax levied on the stocks that are sold by the fund. But one needs to remember that an investor must hold equity funds for a minimum of one year (the longer, the better, really) if they want to avoid paying capital gains tax on the investments.
If you venture into stock investments on your own, brokerage costs of 0.5-1% will be a common expense. Apart from this, you will also have to pay for demat charges.
BankBazaar stated that mutual funds pay only a fraction of the brokerage costs compared to what is charged to individual investors. Investors in Mutual Funds do not need demat accounts.
A well-diversified investment portfolio ideally has around 25-30 stocks, and this kind of portfolio is only achievable with a sizable corpus.
With investment in mutual funds, an investors can buy a certain number of funds which can be invested in various stocks.
The primary objectives of ELSS investments are long-term capital growth and tax saving.
Navneet Dubey | Nov 10, 2017 09:47 AM IST | Source: Moneycontrol.com
Most investors who invest in equity-linked savings scheme (ELSS) do so to save taxes under Section 80C of Income Tax Act. However, they tend to forget that the ELSS schemes can also help them to achieve their financial goal if they remain invested for a long time.
“The primary objective of ELSS investment is long-term capital growth and tax saving. Superior long-term growth is facilitated by the power of compounding. Power of compounding works best over a long investment horizon when gains are reinvested every time they accrue,” said Rahul Parikh, CEO, Bajaj Capital.
The schemes under ELSS category also gives you high inflation-beating returns, similar to PPF they also provide you EEE (exempt-exempt-exempt) benefit.
However, make sure you don’t commit the usual mistakes while investing in ELSS. Here are some of the common mistakes investors make while investing in these schemes:
Trying to time the market: Do not try to time the market when you are investing. Unless you have seasoned investors with a phenomenal understanding of the market, the chances are that you might not be able to identify the precise time to invest.
Ajit Narasimhan, Head – Savings and Investments, BankBazaar said that there is a high amount of uncertainty which makes it next to impossible to correctly predict events or their impact on the market and hence to time the market. Instead, focus on identifying a few good funds. Once you invest, have the patience to ride through the rough and tumble of the stock markets. “Equity investments grow by staying systematically invested for the long run. This is what makes SIP a good option as it averages the cost of investment over time and cancels out the effect of price fluctuation in the market,” he said
Not understanding the fund category: It very important to understand that most of the AMC’s design their ELSS tax saving mutual fund scheme on the basis of large cap, mid cap/small cap and accordingly their risk and returns vary. Here it is vital to first know your risk taking capacity that whether you will be able to risk or not. Take help from your financial adviser to know all holdings mentioned in your scheme and then choose the fund accordingly.
Investing at the last minute: Investment should be a planned activity and not at the spur of the moment.
Narasimhan points out for investments to be successful and provide the required returns, investors should have a financial goal in mind and a plan to work towards it. Leaving it to the last minute can lead to insufficient time to set your goals or create a viable investment plan. “Lack of time may imply that you may have to cut down your research and depend on someone else’s research and opinion to base your investment. This can be very dangerous as the goals, requirements, and risk appetite may not match. It may also cause the investor to invest in one go instead of small regular SIPs. This is an important factor as SIPs provide price averaging and take away the need to time markets,” he said.
Redeeming soon after the lock-in period ends: Minimum investment time period in equities should ideally be for 5-7 years and when you take a decision of redeeming your units before time as mentioned thereon, you may not gain much from it. The longer you remain invested, the more you gain from compounding effect and rupee cost averaging principle. You should always link your investment with a long time horizon financial goal.
Investing in too many funds: ELSS funds have a lock-in of 3 years, If you are investing in too many funds of the same category then it may become difficult for you to review your portfolio since you cannot exit before 3 years. Moreover, too much of diversification may also not help you in proper asset class analysis.
Choosing the dividend option: You should opt for growth option while investing in ELSS mutual fund schemes because if you opt for the dividend, you can lose on gaining from compounding effect. Parikh also said that investing in a growth option ensures that gains are reinvested and grow at the same rate as the principal investment. “However, in dividend payout option, the gains are not reinvested but are paid out and hence not available for compounding, resulting in lower long-term returns. When investing for long-term capital growth in any of the equity mutual fund, one should opt for the growth option,” Parikh said.
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