Financial Plan prepared by me is published in ET Wealth on 04.10.2021

 

Financial Plan prepared by me is published in ET Wealth on 13.09.2021

 

Don’t jump in to debt funds without knowing risk and charges

The correction in Equity market and interest rate yields going up shifted the focus of investors to debt instruments. Government also raised the interest rates for small savings instruments by 0.40% from Oct’2018 to December’2018 quarter. The debt funds of mutual funds are also in lime light. Debt funds obviously scores over traditional instruments if you hold for more than 3 years because of indexation benefit. Yields in mutual funds particularly in credit funds and corporate bond funds are higher compared to traditional investments. The returns of 3 years FMPs are also attractive if you don’t want daily volatility. But is debt risk free? The answer is no.

There is no doubt that debt also plays an important role in the portfolio and you can’t avoid it. But it is also important to note that if you aim for higher returns, higher risk is inbuilt in it. Therefore it is important to know the risk, charges and tax implications before investing in debt funds. You may have to suffer loss if you jump into the debt funds only looking at YTM (Yield till Maturity) which most of the investors do. Knowing Modified duration, tax implications and charges levied are also important aspect before investing in debt funds. Very few know that in hand return is not YTM but YTM minus fund management charges. If you are in a credit funds or corporate bond funds then interest rate movement can also impact funds day to day performance.

SEBI recently lowered the TER both in debt and equity funds and which will bring down overall charges. It is surely going to benefit the investors but it is important to note that final date of implementation is still awaited. More importantly lower charges will not take away the risk of default and risk of interest rate volatility which is likely to continue for some more time. Surprisingly, even charges are regularised there is still difference in charges levied in the schemes within the same category. The difference is too high that if you ignore your return can go down drastically. I think SEBI is also not ware about the disproportion charges levied in the same category. Just to clarify that lower charges does not mean higher returns but the fund management also plays important role. 

The US Federal reserve hiked the interest rate by 0.25% third time in this year. The RBI may also hike the interest rate or change the stance which most of the experts believe in its review meeting to be held on 5^th October’2018. Yields may go up again if RBI raises repo rate. Surely It’s not the time to chase the returns.

Let us evaluate the three major categories of debts which attracts majority of the debt money. Liquid funds are not considered as risk and charges are low compared to other categories. It is true that categorisation will help investors in identifying the nature of risk inbuilt in the product but there are other things also to be looked into. I am sure that this will help you deciding the debt funds very well. The source of information is from Aditya Birla Capital

1) Credit Funds: 

As per SEBI definition given under categorisation these funds have to invest minimum 65% of the corpus below highest rated corporate bonds. Means papers like AA or below rated papers which are too risky. The recent ILFS downgrade has put a question mark on the process of the mutual fund houses while investing people’s money in debt markets. Now its known fact that fund houses depend largely on the rating agencies for ratings and do not have in house mechanism to support it. In credit funds the yields are very high but also the risk is. One mistake and your corpus will be at risk, forget the interest part. We have seen negative returns in liquid funds as well in recent past which tells us that debt funds are also not risk free.

Another important thing I would like to highlight is the charges. There are around 20 schemes in the credit risk category and the average YTM is 9.76% and the average charges is 1.71%. This means your net in hand return will be around 8.05% only post expenses. Most of the investors invest in these funds looking at YTM only and ignore the charges levied or mostly not aware about the same. Even more surprising is the lowest charge in the category is 1.14% and highest is 1.89%. The difference is more than 50%. How this can be allowed and is SEBI ignorant about this?

2) Corporate Bond Funds:

As per SEBI definition given under categorisation these funds have to invest minimum 80% of the corpus in highest rated corporate bonds. These funds are much safer than the credit risk funds but the YTM is also lower. There are around 20 schemes in this category and the average YTM in these funds is 8.59% and the average charges is 0.86%. This means your net in hand return will be around 7.73% only post expenses. Again the lowest charge in the category is 0.44% and highest is 1.55%. The difference is more than 150% which nobody is talking about.

3) Ultra Short Term Fund:

As per SEBI definition given under categorisation these funds have to invest in instruments with duration of 3 to 6 months. Surprisingly there is no mention about credit quality of the papers. That means fund houses can take higher risk at the cost of investors money. Please note that fund giving higher return in the category is taking higher risk by putting money in below rated papers which can backfire. These funds are relatively safer compared to above two funds as the maturity is lower but again low paper can hit your investment badly.  

There are around 20 schemes in this category and the average YTM is 7.84% and the average charges is 0.73%. This means your net in hand return will be around 7.11% only post expenses. Again the lowest charge in the category is 0.20% and highest is 1.15%. The difference is 600% which nobody has noticed till date.

Investing in debt funds is more critical compared to investing in equity. From above comparison it is clear that you should invest in ultra short funds and be happy with 7.11% return instead taking higher risk for just 0.50 to 0.75% higher. Evfen 3 years FMP with quality paper is good option. Therefore “Advisor Jaruri Hai”. Direct plans can save on expenses but what about the credit risk and tax planning? I know the higher charges are passed to distributors but this must stop. I hope SEBI will look into charges within the same category and give relief to investors. There is no denial that charges are within the limits prescribed but high difference with in the category is not justified.

This article first published at indianotes.com

https://www.indianotes.com/en/articles/dont-jump-in-to-debt-funds-without-knowing-risk-and-charges/

Say Good Bye to Dividend Option

This year’s budget hit mutual fund investors very badly. Not only it levied Long Term Capital Gain Tax @10% on Equity Funds but also introduced 10% dividend distribution tax on dividend declared by Equity Funds. Post demonetization and stiff fall in interest rates large chunk of flow came to mutual fund. It’s really unfortunate that large chunk of fund came in balanced funds which invests minimum 65% in equity under monthly dividend option with so called assured 1% return every month. Product was largely missold to the senior citizens who were looking for the regular income every month. The dividend now is falling and new investors are realizing that something is wrong but still most of them are in confused mind. The dividend option takes away 10% in equity funds and around 29% in debt funds.

Normally dividend is declared when there is good appreciation in the NAV due to better performance by the scheme compared to bench mark. But, in practice it is largely misused to garner the new business which is what happening in recent time. Most of the people do not understand this sales pitch and are lured to invest in the fund without understanding the risk involved in the scheme. What exactly happens if dividend is declared can be understood by an example. Suppose “X” an equity fund scheme has NAV of Rs. 20 in growth option as well in dividend option. The scheme was launched at Face Value of Rs. 10 few years back. Suppose the Fund house today decides to declare Rs. 1.20 per unit i.e. 12% as dividend in the dividend option. In above case after the ex-dividend NAV of Growth option in “X” fund will remain the same at Rs. 20 but NAV under  the dividend option will come down to Rs. 18.80 as Rs. 1.20 is paid back to investor by way of dividend. By looking at attractive 12% dividend income you opt to invest Rs. 10,000 which investors have done in recent times. Most of the lay investors think that they will get same kind of dividend every year which is not true. The returns in equity are volatile and also not guaranteed. The corpus can also go negative and fund manager can’t declare dividend if there is no surplus generated. You have to remember while investing in mutual fund that past performance is not indicator of future returns and returns can vary depending on market.

According to me dividend option does not make any sense in both equity and debt. Let us understand the implications for both separately. First if you want regular income periodically than equity is not the correct asset class to invest. Opting for dividend option in debt funds is worst as there is a dividend distribution tax of around 29% compared to 10% in equity funds. Most of the investors are not aware of this because DDT is directly deducted by the AMCs before paying dividend to them. Also distributors do not tell or are not aware of this facts.

On other hand equity investment comes under high risk high return category. You should invest in equity after understanding the risk involved in it.  You must invest in equity only if your time horizon is long term say 5 years or more so that you get better inflation adjusted returns. So if you want to take the advantage of India’s growth you should stay invested in equity for longer period of time. Dividend option reduces your investment by dividend declared amount in equity so it will not give you advantage of power of compounding in longer run. So in equity also dividend option is not advisable.

Dividend Distribution Tax reduces overall return and it is right time to say Good Bye to dividend option. If you want a regular income opt for Systematic Withdrawal Plan in debt funds and avoid equity funds for regular income. Tax planning is very important part of financial planning which most investors ignore. You should know final outcome of the investment post tax and also study the hidden charges while taking financial decision.

To conclude making a new investment in mutual fund on the basis of dividend declared is not at all a good idea. You should take informed decision before investing in mutual fund schemes. You should consult a professional if you want regular flow of income every month and also know tax implications. Investing for short tern gain without understanding the long term impact may hit you badly. SEBI must also intervene and should abolish dividend reinvestment option and also stop monthly dividend option in equity funds to protect the interest of investors.

This article first appeared at indianotes.com on 20th June 2018

https://www.indianotes.com/en/articles/say-good-bye-to-dividend-option/

Where to invest in falling rate scenario?

The Government of India further reduced the rates on small savings instruments by 0.10% w.e.f. 1^st July’2017.  We have witnessed PPF interest lower than 8% for the first time. Term deposit rates are also around 7% for period up to 3 years. Bank fixed deposit rates have also fallen to 6.5/7% from peak of 10%. Traditional fixed return investors are in confused state of mind and are worried where to park the fund which can give them good returns.

Before that you need to understand where the core inflation is moving. The movement of inflation decides where the interest rate will move. CPI inflation has softened from the peak of 10% and at present it is around 2% only. Experts fear that CPI inflation for the month of June’2017 will be lower than 2% and hence it is very much possible that rates may fall further in coming months. Post demonetisation we have seen a lot of changes around us. The prices of food grains, pulses and vegetables have fallen sharply. Construction activity has been also affected. Crude oil is also trading at around $45 a barrel. Rupee has also appreciated against the dollar. All this has lead to sharp fall in inflation in recent past. We should also note that RBI’s current financial year’s inflation target is 4%. RBI’s stance for repo rate is at present neutral looking at international events and also possible jump in inflation post GST roll out but a rate cut is not ruled out in next review meeting.

Before starting any investment investor should finalise the goal for which they are investing. Goal based investment always help you in deciding the right avenue for your investment. The investor should stick to low risk investment avenues when the duration available is lower say less than 3 years. For a time horizon of 3 to 5 years they can take little risk and for the investment for 5 years plus investor can take higher risk products like balanced and equity funds of mutual fund. The second most important thing investor should look at is post tax return and not the gross income or interest rate attached to the instruments. Tax planning is one of the most important aspects of financial planning. Before making any investment decision you should know final outcome post tax. Investors in 20% and 30% tax slab should always stay away from taxable avenues like fixed deposits and postal schemes.

The following are the good options available in mutual fund which can not only give higher return compared to fixed deposits but are also tax efficient. The returns in the schemes are market linked and hence not guaranteed. This single point keeps lakhs of investors away from good investment options which I would like to highlight.

 1) Arbitrage Funds:  

The arbitrage means buying in cash market and selling the same quantity in future and option market. So if any fund or scheme does arbitrage means there is no equity risk as the equity position is hedged in f & o segment. This arbitrage fund can give you debt kind of return depending on the premium available on the stock. You can expect around 6% return from this option. The scheme is good option for higher tax slab investors because they are classified as the equity scheme for income tax purpose. So, the fund will be treated as long term after a period of one year and entire proceeds from arbitrage fund is considered as tax free after 1 year. In case invested for less than one year then investors will be liable to pay tax at 15% on gains which is lesser compare to 30% tax in fixed deposits.

2) Accrual Funds:

The funds mostly invest in corporate and government bonds with average maturity of around 3-4 years. The fund holds the paper till end so there is no major risk of interest rate movement. The fund can give 7-8% return at present which you can identify from the yield to maturity. You have to deduct fund management charges to arrive at final return. This is ideal if your investment horizon is 3 years plus so that investor also gets the indexation benefit. Indexation benefit will lower your net income tax liability and thus give you higher return compared to traditional platforms. Only thing to check is the quality of the papers hold by the scheme. Invest only in funds which hold AA+ and above papers so that risk is lower. In the recent past we have seen that to generate 1% extra fund managers have compromised on the quality of papers and invested in papers of AA- and also below that.

3) Fixed Maturity Plans:

This are debt oriented closed ended funds available for 3 years plus time horizon. In simple word you can say that these FMPs are like fixed deposits for fixed tenure offered by mutual fund houses and automatically mature after the period is over. These also work similar to accrual funds and invest in corporate bonds and commercial papers. The yield is also same which largely depend on quality of papers selected for investment. The only difference is accrual funds are open ended funds in which you can increase the investment in between and also redeem but this facility is not available in FMPs.   

4) MIP funds:

These monthly income plans are riskier than above three categories as these funds invests 15-20% in equity and balance 80-85% in corporate and government bonds. This fund is suitable for time horizon of 3 years plus and those who understands the risk of equity. Again indexation benefit is available after holding the fund for 3 years as these funds come under debt category. I always advise my clients to go for MIP funds when time horizon is 3 years plus. At present 3 year return on these funds is in double digit but surely with some extra risk. 

This article first appeared at indianotes.com

http://www.indianotes.com/Finance-How-to/Where-to-invest-in-falling-rate-scenario/207923/2/T

3 major risk of Demonetisation

There is no doubt that present Modi Government came to power on the issue of corruption and black money. In last two and half years they have tried many things to curb the black money. Government also announced two declaration schemes. One in 2015 for Foreign Assets and in 2016 for assets held in India which ended on 30^th September’2016. There was no major breakthrough in any of the efforts made by them. At last on 8^th November’2016, Government decided to abolish 500 and 100 notes to curb the black money. I strongly think that it’s a master stroke to teach lesson to the people who holds black money but at the same time I also feel that it is poorly executed.   Without going deep into the short term problems let us understand the impact of the decision on our economy and equity investment.

I support the move from the bottom of my heart but would like to assess the situation as financial planner so that people can take informed decision. It is believed that out of total Rs. 15 lakhs crore worth notes which were in circulation around 10 lakhs crore may get deposited in the banks and balance Rs. 5lakhs crore will not come in the system as people holding this notes will never like to be caught in public. Yes there are many positive impacts of this. This move will also largely impact the terrorism funding and also solve the problem of duplicate notes. There will be huge liquidity available in the banking system which will result in sharp rate cuts. The Government’s fiscal position will also improve and give them room for major reforms and infrastructure spending. But there is other side of the coin as well which needs to be understood. If everything was good then there was no reason to panic in stock market. The fall in stock market tells us there is something which needs to be looked into. To me there are 3 major risks of demonetisation.

1)  Economic slowdown:

You might have noted that after the announcement major trade activities have stopped. Everybody is busy in settling their accounts and depositing the cancelled notes in the bank. People have postponed their lifestyle expenses and the demand has reduced to half which will reflect in third quarter results. Except for the necessity of the life every other decision is either on hold or postponed as there was no enough cash available. There is no doubt that it will result in economic slowdown which will directly impact GDP growth of the country. I am sure that India will not grow at 7.80% in this fiscal as targeted but it can reduce to around 5 to 6% this year. There are forecast even below this level which I think is very early to predict.

2) Threat of Deflation:

As there is no demand definitely prices of all commodities are likely to fall which will impact the inflation. Till date we were targeting inflation to around 5% but after this mega event nobody can predict where the inflation will go. The Wholesale Price Index (WPI) is likely to be negative in coming months but if Consumer Price Index (CPI) goes negative then it will create more panic. Government will try it’s best to reduce the rate of interest and also announce various measures to increase the purchasing power of the people but it is going to be tough if the mood of the people does not change. We have witnessed cancellation of many pre and post marriage events, the expense of which runs in lakhs. I have also seen at my native that crops of the farmers are not getting sold at half of the price for the shortage of the cash. Construction activity is also stopped in most of the parts. This will result in low to negative inflation. No country wants deflation or very low inflation. Let us hope that Government will take aggressive steps to overcome this.

3) Create unemployment:

Experts believe that the cash or black economy was much more active compared to legal economy. The size was believed to be 3times legal economy. Overnight many small and medium scale industries will stop working as it will be difficult for them to change to banking system overnight. Angadia services have to close down there business overnight. There will be slow down in construction industry and similar industries where the cash component was more. Slow down in trading activity will directly impact transportation business as well. Cars, Scooters, Electronic items, Catering, Tours and Travels; Hotels and entertainment industry will also see a slowdown in their business. All this tell us that it will create a mass unemployment in the country. Is 14000 layoffs by the Larsen and Toubro is just the beginning? This is really going to be challenging for the Government. Sooner they take some strong actions better for country.

There is no reason to panic yet but to know the consequences of the major move. Government might be prepared for this in advance and can take several steps to overcome the issues at earliest. But as an equity investor you should be careful before you take a major decision. The investors should avoid the noise and rumors around them and consult a professional. They should continue their SIPs. For lump sum investment it is always advisable to invest in ultra short term funds and give STP in equity funds for around 12 to 18 months. It is important to stay invested for longer period as it is rightly said time spent in the market is more important then timing the market. The move can backfire if Government fails to take proactive steps.

This article first appeared at indianotes.com

http://www.indianotes.com/Analysis/3-major-risks-of-Demonetisation/205069/2/T

Equity Income Fund – Better than Fixed Deposits/ FMPs

Tax planning is one of the most important aspects of financial planning. Before making any investment decision you should know final outcome post tax. Just to remind you long back there were two RBI bonds available in the market; one is 6.5% tax free and another one 8% taxable. Because of tax advantage in first option there was a huge inflow in tax free option as to a person in 30% tax bracket was getting additional 0.90% compared to taxable 8% option (net 5.60%). Government had to withdraw the tax free bonds after they realize that smart money is heavily coming in tax free option and government is losing on income tax revenue. You can’t afford to ignore tax planning even you are in lowest tax bracket.

The budget of 2014 made debt funds long term after a period of 3 years instead of previous clause of 1 year. This single amendment changed the entire investment pattern in debt funds and FMPs. We had floods of 1 year FMPs in the market prior to this amendment and also sizable amount came in MIP funds (Monthly Income Plans) due to its tax advantage. The advantage in FMPS and MIP funds had a blow after the change in long term definition of other than equity funds. This advantage has gone now and again the sizable amount has moved to bank fixed deposits which attract tax liability. So is there any other option available to save tax. The answer is yes.

After debt funds are made long term after 3 years, a new category of investment has arrived in the market in the name of equity income fund. J P Morgan and ICICI prudential Mutual Funds are the first to launch this investment option in the market. The equity income funds are similar to MIP funds but these new funds are treated as equity funds for tax purpose. The fund is classified as equity fund if it invests 65% of the fund in equity category and for income tax purpose the fund will be treated long term after a period of one year. So what is the difference if the risk is almost same like MIP funds? These new equity income funds invest up to 25% in equity and up to 40% to 50% in arbitrage which are treated as equity investment and thus classify as equity oriented fund for income tax purpose. The equity income fund invests balance in debt products like government and corporate bonds or money market instruments.

The arbitrage means buying in cash market and selling the same quantity in future and option market. So if any fund does arbitrage means there is no equity risk as the equity position is hedged in f & o segment. This arbitrage will give you debt kind of return depending on the premium available on the stock. So as far as risk is concerned it is same like hybrid aggressive debt oriented funds i.e. MIP funds but tax treatment is like equity funds and not of debt funds. This tax treatment gives equity income fund an edge over MIP funds and FMPs.

But surely this product is not meant for one year time horizon even it gives tax free return after one year. Equity investment always is risky investment and even 25% investment can give you negative return if your time horizon is one year. The equity income fund is suitable for those whose time horizon is 2- 3 years and can extend for another six months if needed. The bank deposit will give around 6% return post tax and 3 year FMP will give around 8% return but this fund can give you 2% more if you take calculated risk. The returns in equity income funds are not guaranteed as the funds are market linked. Investors should definitely consider if they understand the risk involved during this 2-3 years period. 

The funds are very new and have not completed one year so past performance is not available for comparison. Comparing this fund with aggressive MIP funds will give you rough idea about the risk and reward. Normally I don’t recommend any fund which has not completed 3 years time but this new category is almost same like MIP funds so it’s easy to understand and tax treatment is added advantage. Corpus of around Rs. 1,000 crore in less than one year period indicates that smart money has started coming in this funds. Hope with growing demand other AMCs will also follow the suit.

This article first appeared at indianotes.com

http://www.indianotes.com/Analysis/Equity-Income-Fund--Better-than-Fixed-DepositsFMPs/194687/6/PF

Time to shift your home loan

We have seen two repo rate cuts of 25 bps in last 3 months. We have seen immediate reduction in borrowing rates by both banks and housing finance companies but nobody was ready to reduce the lending rate. The benefit of rate cut must be passed to the borrowers but unless there is some action from regulators nothing happens of its own. The strong message by RBI in its last review meeting forced the banks and housing finance companies to reduce the home loan interest. In past we have seen whenever there was a increase in repo rate immediately in 1-2 days the burden is passed to the borrowers but in case of rate cut benefit is not passed to borrowers. This is serious issue and RBI has to see that this does not happen in future.   

Loan and insurance planning are most important part of financial planning. Before jumping to investment, as a financial planner, I always first check the loan and insurance portfolio. The review of both existing loans and insurance according to clients needs is on top priority. Suggesting a suitable option improves the client’s monthly surplus for future investment. Buying own home is the top most priority of every Indian. People also upgrade their existing home and also buy second home for investment once cash flow improves. The trend is very natural as the home loans are available easily. The rate of interest is also competitive compared to other loans available in the market. There are tax benefits available for the payment of principal amount as well as for interest payment which reduces the cost of borrowing. Home loan is a good loan which allows you create asset and also helps you in paying it in instalments. Even it is good you need to be careful and do some home work before opting for it and review the same. The following points will help you to take informed decision.

Home loan is available from both PSU and private banks and also from housing finance companies like HDFC and LIC housing finance. Banks are governed by RBI whereas housing finance companies are governed by National Housing Bank. Banks follow base rate system whereas NHB follow Prime Lending Rate system. Interest rate calculation in Bank is base rate plus spread and in case of NHB it is prime lending rate minus spread. The base rate has direct relation to repo rate and hence it is advisable to take loan from banks and not from housing finance companies.  

Housing loan is also a DEBT and you should be very careful before taking this. Most of the borrowers do not understand the impact of interest payment and apply for the loan. There are different types of home loan available such as fixed rate, floating rate and dual rate of interest. You should be careful while opting for it in the beginning. As per guidelines by both the governing bodies there are no pre payment charges in case of floating rate of interest. There is prepayment charges in both fixed and dual rate (till the initial period of fixed rate) home loans. Therefore it is advisable to take floating rate loan as you can prepay your home loan or you can also shift the existing home loan to other lender who offers competitive deal.

The recent experience of rate cut tells us that it is advisable to shift the existing home loan if your lender has not reduced the base rate. It is also advisable to shift the home loan even if you have bought it under fixed rate by paying penalty for that. Lenders also pass the benefit by lowering your balance tenure for repayment instead of EMI. Here you should also be careful and check the EMI and balance tenure when there is change in repo rate. RBI has also to relook it and stop duration increase and decrease so that borrowers understand what exactly happens when there is some action from RBI.

There is also practise to charge the transfer fee to borrower by same lender for lowering the interest rate which highly objectionable. They are happy to lend to new customers at lower rate and for lowering existing borrower’s rate they ask for onetime fee. You should know that instead of paying fees to the same lender sometimes it makes sense to shift the loan to other lender. You might have to pay nominal processing fees for transfer which is much lower than transfer fees payable to same lender.

Transferring or shifting of existing outstanding home loan to from one lender to other lender is known as balance transfer. So if your lender is charging higher rate of interest compared to competitive rate of interest available in the market, you can opt for balance transfer option and reduce your EMI for the balance tenure. It is important to check Cibil score before applying for shifting any loan because higher score will give you ability to negotiate for the better deal in respect to interest rate and other charges. Don’t allow lenders to charge you more and review your loan portfolio at earliest.  

This article first appeared at myiris.com on 16th April'2015

http://www.myiris.com/financial/storyShow.php?fileR=20150416131613043&secID=finan&secTitle=Financial&dir=2015/04/16

Long term debt funds look promising

Where to invest is a hot topic of discussion everywhere after stable government is formed at the centre. Everybody talks of economy doing better in coming years as faster decisions are likely as new government has committed itself to lowering inflation and focusing on economic growth. RBI in its first policy review after new government took charge kept key rates unchanged clearly indicating inflation needs to be addressed first. Unless inflation comes under control and fiscal deficit reduces, RBI is unlikely to reduce the key rates and unless there is rate cut interest rates are unlikely to soften. Its known fact that high rate of interest are hurdle to economic growth as borrowing become costlier. Corporate world is also eagerly waiting for rate cut so that they can expedite the new projects and increase the supply side.

The problems are part of life and are likely to remain in one or other form, but the important thing is most of the experts are positive and nobody doubts the capabilities of the new government. Most of the experts are bullish on equity market but before taking investment decision we also have to see risk reward ratio. The Nifty has already rallied around 50% from the bottom of 5100 to 7500 in nine months in a scenario when our GDP is growth is below 5%. It’s true that market discounts the future and the rally is for the faster change and hope for the future. The debt market on the other hand is range bound after last repo rate hiked in January this year. The current repo rate is at 8%. The all time repo rate high was 9% in July’2008 and all time low was 4.75% in April’2009. Looking at the current scenario I think that risk reward ratio is in favour of long term debt and gilt funds.

Most of the economists and experts believe that the growth is likely to peak up in coming years then there is earthly reason to believe that interest rate will come down. This will not happen immediately but may take few quarters. The common investors do not know how the debt funds work and how the change in interest rate affect the performance of the debt funds .People needs to be educated about the option available in the market beside traditional instruments. If your time horizon is 2 to 3 years and can bear short term shocks of inflation, debt funds are good bet as of now. If I have to choose between equity and debt, surely I will punt on debt funds knowing the downside risk is low. Debt funds of mutual fund always give better returns when interest rates fall and also has added tax advantage because of indexation benefit which reduces your tax liability if you hold debt funds for more than 12 months.

Let us understand how the debt fund works by taking an example. Suppose Company “A” issues a bond today for 10 years and the price of one bond is Rs. 1,000 with a rate of interest i.e. coupon rate of 10% p.a. The bond is also listed on the exchange. One investor say Mr. X buys 10 bonds by investing Rs. 10,000 in the company. He is likely to get interest of Rs. 1,000 every year as promised by the company. If the rate of interest drops by 2% to 8% p.a. in next two years then the price of the bond will increase from Rs. 1,000 to 1,115. Mr. X is now making a profit on the bond price and he can sell the bond in the market and book profit plus has also earned interest of Rs. 1,000 for two years. The return on his investment is around 15% p.a., subject to long term capital gain but still much higher than traditional instruments like fixed deposits and postal schemes.

The major reason why debt funds are not popular is that they are market related and returns are not guaranteed like fixed deposit and postal schemes. Further any extra pressure on inflation due to internal or external factor can change the interest rate scenario and give negative return. With the stable government at centre and inflation under control rate hike is unlikely and thus indicates very limited downside risk. If you do not want to take credit risk than gilt funds are ideal as it invests in Government of India bonds which enjoy highest safety in Indian markets. By investing in gilt funds you only run interest rate risk. It is advisable to invest in growth option compared to dividend option as there is high dividend distribution tax on debt funds which reduces your overall return. If you really think “Aache Din Aanewale Hain” then the possibility of higher return with moderate risk is possible by investing in long term debt and gilt funds.

2014 - Financial Resolutions !!!

Is current rally in stock market is justified?

The BJP’s 4-0 win over congress in the recent assembly election has kept stock market at fire. The northward journey continues and Nifty has hit all time high mark. There is strong belief in the market that Mr. NarendraModi will become next Prime Minister of India after general elections in 2014 and after that GDPgrowth again will touch 8% mark.But, we should know that still there are six months to go before next general election and anything can happen in this period. We also know that how the elections are fought in India.

The rise in stock market without fundamental support puts a big question mark on the current rally. Stock market is believed to be the mirror of the economy of the country and any up or down in the economy should reflect in the stock market. GDP grew by 4.8% for the 2^nd quarter of 2013-14 compared to 4.4% in 1^st quarter which is well below 8% mark when market first time touched it’s all time high. Its hard fact that India’s GDP is likely to be around 5% in the current fiscal which is not at all a good number for the economy. When Sensex touched 21000 first timebefore 2008 global crisis, our GDP growth was around 8%. Today it is 3% down at 5% and still we are at the higher levelon both Sensex and Nifty as compared to 2008.

How one should view these developmentswhen GDP number is not encouraging and the market is still at all-time high level. It’s putting a big question mark against a well known saying “Market is reflectionof the economy of the country”.I strongly feel that GDP numbers do not support the current rally. It is true that market discounts future.It is believed that worst is over and we will soon see economic revival post elections. But, the true story is 2014 election results are not easy to predict and depend on many possibilities. Assuming NDA will get the majority is too early to believe.

On economic front, it is true that rupee has stabilised against the dollar and crude oil is also under pressure which is good for the Indian economy as it will reduce current account deficit. Iran deal if all goes well, will also be advantageous for us. But, the real problem is inflation. In the scenario where WPI is at 7% and CPI is at 10%, interest rates are unlikely to come down. It is well-known fact that higher interest rate is not good for the corporate world as their earning is largely affected by further hike in the repo rate. We have to wait till next RBI review meet and see what RBI will donext. Most of the experts feel that RBI won’t increase repo rate as the crude price is under pressure and also rupee has stabilised.

The future course of the market will be decided by the three major things and any disappointment on any of the issue will reverse the scenario. The first is the U.S. tapering. We all know that our market is mostly FII driven and the short-term money which comes for investment is not good for overall long-term stability of the market.At present rupee has stabilised against the dollar but major movement can’t be ruled out once the tapering starts in the U.S. Secondly, the inflation numbers are also a major concern and may force RBI to increase the repo-rate further if rupee weakens further.

Third and major is general election next year i.e. mostly within six months. Looking at the present political scenario, definitely BJP has an edge at this point, but will BJP will get clear majority. The answer to this question is not certain and also if BJP comes to power, economic recovery will not happen overnight. The answer to this is also depends on many factors which are difficult to predict at this juncture. The real test of BJP is in U.P., Bihar, four states of southern India and seven states of North East where it has to work very hard to get the numbers. The performance of AAP is also commendable and their future course of action is also important to watch. In the event of hung parliament, which also a possibility, our economy will further deteriorate, as the new government will not be in a position to take bold steps in the interest of economy.

There is no doubt that high inflation numbers, the US tapering and expectation on new government will drive the market for next six months. So it’s good time to take a cautious stand while investing in stock marketparticularly when it is at all-time high level. Investing in equity through mutual fund via monthly SIP makes a lot of sense but it is also advisable to review and rebalance the portfolio as per asset allocation periodically. Next six months are going to be crucial for the stock market. 

This article first published in moneycontrol.com on 11th December'2013. below is the link

http://www.moneycontrol.com/news/economy/is-current-rallyindian-equity-markets-justified_1006214.html

Real Estate is a high risk investment

Campa Cola society in Worli, Mumbai has raised many questions about the inside reality of real estate sector in India. It has highlighted the nexus between politicians, builders and bureaucrats. It has also highlighted the urgency of regulation to safeguard interest of common people and investment risks in a real estate as an asset class. In this article I will focus on investment in real estate as an asset class. In India most of the people consider the real estate investment particularly in residential premises as safe investment with potential of high reward which may not hold true now. The reason why people bet more on this sector is availability of easy loans in recent times and tax benefits available on such home loans. Another major reason is involvement of black money which makes this sector more attractive for those who generate black money and avoid tax payments. It is true that investment in residential premises has given good returns across India in last decade barring the short period of 2008. But, whether will it continue to move northward forever at the same speed? The answer is definitely “NO” as it is also an asset class which also runs through cycles. There are three major risks involved in any investment avenue namely default risk, market and interest rate risk and reinvestment risk but in real estate the risk of illegal activities and regulation violation is major risk with potentials to wipe out your entire investment.

Every investment avenue can be evaluated on the basis of risk and reward attached to it. If there is high reward in any asset class then there is inbuilt high risk attached to it and if the reward is low then the asset class can be considered as a low risk investment. Investments in real estate undoubtedly come under high-risk and high-return category. Nobody in this earth can defy this economic principle of close positive co-relation between risk and reward. Expecting high-return without looking at high-risks involved can spoil your entire financial life. The investment required in real estate is also too high and if your calculations go wrong, you may have to compromise on your other major financial goals.

As I mentioned above that in real estate sector in addition to the market risk, there is huge risk of regulation violation which makes it even more risky.  This cannot be easily found out by a lay investor and comes up only in major incidence like Campa Cola issue. Risk also comes from not knowing about the risk involved in the asset class. Very few of us know that builders and developers have to take as many as 150 approvals from different local and state authorities before starting any construction activity. The permission is required to be obtained ranges from local municipal authorities, state authorities to fire brigade. There is no way that a common person can find out whether particular builder has obtained all the required permissions before starting construction. A common man is comfortable booking or buying a flat when he trusts some builder on the basis of past history or construction of building is complete without any break. A common man is more concerned about the vacant possession of the flat and once the key is handed over to him he feels that everything is in order. He feels even more assured when the electric supply and water supply is given to the building and after that he never bothers to enquire about whether the builder has got Occupancy Certificate or not. Even today there are thousands of building in city like Mumbai where the OC is not given for many years and still lakhs of people stay in these buildings without realising the risk. Even they know the risk, it’s difficult for them to book builder for this due to his connections.  

Campa Cola is just a one incident and can be an eye opener for all of us though even for most of them it is not investment. The major lesson is that nothing happens to builders and bureaucrats as they are shielded by political leaders. It is the poor occupants who suffer as they are ignorant about the legal issues and do not have means to find out the issues in the real estate. It is a hard reality that large chunk of politicians are actively involved in this business as the profit margin is too high. The builders also get associated with political class to bypass the procedures. The cost of legal fight is also too high and it takes years to get the justice even if one is able to get it after spending lakhs of rupees. There are many issues related to construction of buildings on reserved plots, agricultural land and forest land. Building gets constructed; people stay there for years enjoying all civic amenities and after many years legal issues come up.

It is high time that responsibilities are fixed for such illegal constructions. Municipal Authorities should not allow illegal constructions to happen and there should be minimum guideline available to public at large that what they should look before buying any property and have to make mandatory that this should be available to public on demand with all the builders. Municipal authorities also try to put all the details in public domain via websites etc. and try to educate people.  It’s also high time that Government appoints real estate regulator and regulate the entire real estate market to protect the common man. It is also important for investors to look into these issues before jump in to buy the real estate assuming high returns. If you are buying it for self use, you should be extra cautious. It is advisable to appoint an advocate and take legal help before finalising any real estate deal as it involves big monies. A small mistake or hurry can spoil your entire financial life and you have to live measurable life for no fault of yours. The time has come to take informed decision to safe guard your own interest. 

Aticle first appeared at moneycontrol.com on 27th November'13. Below is the link.

http://www.moneycontrol.com/news/real-estate/real-estate-ishigh-risk-investment_996467.html

7 year norm to declare missing person dead must be relaxed

The Kedarnath tragedy has killed thousands of devotees and death toll is likely to go up as thousands of people are still missing. The relatives of the missing persons are praying day and night for their near and dear ones to return but it is not clear that how many days this operation will continue. The rescue operation is still on and after military operation ends the State Government has to work hard for restoring the things in the Kedarnath Valley. It is also true that hundreds of dead bodies are also lying there and needs to be identified and if possible to be handed over to the relatives of the deceased. The major challenge before the Government is to identify the deceased person, but the recent news tells that Government is going ahead with mass funeral next week. Looking at the present condition in many cases either it will not be possible to identify the person or still there will be hundreds of dead bodies which will not be traceable. In the eyes of law person will not be declared dead until his/her body is recovered. What will happen to their finances in the absence of valid death certificate is also a major concern for the remaining family members. They will neither be allowed to claim the money lying in the bank account nor will insurance company or mutual fund house pay them unless they provide copy of death certificate. The life of legal heirs is also likely to be majorly affected financially if the problem is not addressed immediately. Legal heirs might have to also struggle for day to day expense even they have sufficient money and investment in the name of missing person.

If the dead body is not found then what to do to claim the money and investment of missing person requires immediate attention and people should know the provisions of the law in this regard. Those who are dead are unlikely to come back but we should also seriously think about the problems which living family members have to face for their survival. As per section 108 of the Indian Evidence Act’1872 “Person is presumed to dead who is unheard of for more than seven years by those who would naturally have heard of him/her if he/she had been alive”. It means in the absence of valid death certificate family members will not be able to even touch the money and investment for another minimum seven years. The procedure is also long. First family members have to file a missing complaint with local police and after completion of seven years they have to approach appropriate court for the necessary order stating the missing person is presumed to be dead. What time court will take is also not clear, means delay of another six months to one year time to claim the money. The Government has to seriously think about this real life problem and have to review the provisions and reduce the time required for declaring missing person dead particularly in case of natural calamities like what happened in Kedarnath valley recently.

There is also another one possibility if the State Government takes this seriously and acts immediately. Section 10 of Registration of Births and Deaths Act’ 1969 gives power to State Government to appoint any person in this behalf to notify birth or death or both which occurred in such areas as may be prescribed. I think positive step of Uttarakhand Government can solve many problems and give hope to many families who have lost their bread earner. If the death of missing person is notified by the State Government then on the basis of that it is possible to apply for and get the death certificate.

Whether this will happen or not nobody knows but it has highlighted the basic thing that we have to plan for our finances so that in case of unfortunate event loved ones have not to struggle financially in their life. It is important to open a bank account in joint name with either and survivor basis and also advisable to invest jointly with either and survivor basis. We have also to nominate one or two of the family members in all investments wherever such facility available. It is also important to execute a WILL in favour of loved ones so that there is no confusion thereafter. 

One should also note that till you get the death certificate, pay the life insurance premium to continue the policy as non payment of premium in time will lapse the policy. It is also possible to claim the money, if the amount is small, on the basis of indemnity bond filed with the concerned authority, if they agree do so. I also request all the three regulators, RBI,IRDA and SEBI, to do the needful in this regard so that legal heirs can easily get the money back and move forward in their life. 

This article first appeared at moneycontrol.com on 27th June'2013.

http://www.moneycontrol.com/news/others/7-yr-norm-to-declare-missing-person-dead-must-be-relaxed_906681.html

Have you rebalanced your portfolio?

Nifty has crossed 6,100 marks again and experts are looking for an all time new high in the coming months. At this juncture many people, who made good profits, will be very happy, and who failed to participate in the rally, will be seriously looking to invest in the shares or in mutual fund schemes. Before investing or staying invested, one should ask, whether this is the right time to enter or stay invested or to wait for correction or book profit. Most of the investors will be confused as what to do at this stage. The following are some assessment, which one should consider before taking final call.  

Current Facts of market:

1) Nifty has already moved up by 1350 points in last one year from the bottom of 4770 marks made on 4^th June’2012 to recent top of 6115.

2) GDP growth projected for the current financial year is below 6%.

3) Current Account Deficit is at all time high.

4) Fiscal deficit is also a big concern for the government.

5) We will be having general election mostly in the year 2013.

Let me first clarify that neither I am trying to time the market, nor I am predicting market movements to go up or down. I am just trying to highlight the basic principles of financial planning, i.e. ART

A – Asset Allocation

R – Risk Appetite

T – Time horizon.

Asset Allocation plays a major role in deciding your returns over a period of time. Your portfolio returns more depends on asset allocation than fund performance. Asset Allocation means balancing between risk and reward by investing in different kind of asset class such as Equity, Debt and Liquid instruments. In simple words it means do not put your all apples in one basket. Invest according to your risk appetite, time horizon and defined future goals, but never forget your asset allocation on any given point of time. Different asset class has different levels of risk and returns.

You must always invest according to time horizon available for the investment. Longer the time duration available higher should be the equity exposure and if the time horizon is very short than your portfolio should be debt oriented.  Asset Allocation once decided should be followed seriously and accordingly should be rebalanced periodically. Rebalancing is the process of restoring your portfolio back to its original asset allocation. Rebalancing generally should be done every year or when you get some good profits from one asset class like today. You should also rebalance it 2 years prior to reaching your goals and shift major part to debt portfolio. Gold investment should not be more than 10 to 15% of your total portfolio. It is also advisable to take the professional advise which can help you a lot. 

Let us take an example:

Mr. Sachin aged 30 years has decided to invest, as per his asset allocation, in the ratio, 70% in Equity and 30% in Debt. He has invested Rs. 10 lacs last year on 01.06.2012. Accordingly he has invested 7 lakhs in equity and 3 lakhs in Debt.

After one year his value in Equity has gone up to 9.10 lakhs (30% growth) and 3.24 lakhs in debt (10% growth). His total investment has risen to 12.34 lakhs giving him over all return of 23.4% on his total portfolio. Now his investment is 74% in equity and 26% in debt. This clearly shows that he has more exposure to equity compared to his asset allocation and need to book profit in equity and allocate the profit to debt. He has to book profit in equity and has to withdraw an amount of Rs. 46,000 and allocate to debt fund. This will again bring him to his original asset allocation as per his goal and time horizon decided by him.

You should also keep in mind that after every 5 years, you have to change your asset allocation and has to decrease equity exposure and increase debt allocation. In Sachin’s at his age 35, his asset allocation will be 65% in equity and 35% in debt. This rebalancing of portfolio will always keep Sachin in win win situation. Market movements will less affect him, whether market goes up or down as he is rebalancing his portfolio regularly as per asset allocation.

Before taking any investment decision you must do some homework and check ART first. If you are confused and unable to take any decision, just follow the basics.

1) Book Profit if you are getting extra ordinary profit i.e. more than 25 to 30% p.a. in any asset class.

2) Rebalance your portfolio as per asset allocation.

3) Continue your current SIP’s as it is.

4) Do not put a lump sum amount in equity rather split it into minimum 12 months SIP.

5) Never try to time the market.

6) Invest through mutual fund schemes and avoid direct equity investment.

Asset allocation and rebalancing your portfolio regularly is a key to success and financial freedom.

Article first appeared at moneycontrol.com on 16th May'2013.

http://www.moneycontrol.com/news/mf-experts/have-you-rebalanced-your-portfolio_872748.html