Rebalance Portfolio (ET Wealth - 19/04/2021)

 

Govt borrowing plan roils debt market, here’s what you should do

“Looking at the current scenario of fiscal deficit and amidst rising crude prices, investors should stay away from a long duration debt investment,” said Pankaaj Maalde, certified financial planner.

Corporate India has hailed Budget 2021 as bold and growth-oriented while the bourses have also given it a thumbs-up.  However, investors of debt category have a lot to worry with fiscal deficit pegged at 9.5% and 6.8% of the GDP for FY21 and FY22 respectively.

Moreover, government has planned a Rs 12-lakh crore borrowing for FY22 in the budget. This has fuelled negative sentiments in the debt market with yields rising.

“If you have a long duration investment in a commercial paper, the rise in interest rates will bring huge losses. The bond market has turned negative and there is a sell-off in long duration funds. Looking at the current scenario of fiscal deficit and amidst rising crude prices, investors should stay away from a long duration debt investment,” said Pankaaj Maalde, certified financial planner.

Equity funds are riskier for the short-term and investors with goals planned for the next three to four years are usually inclined to debt for diversification. Should one make a change in asset allocation with the recent dent to the debt market? Maalde doesn’t suggest a change.

“Asset allocation is more dependent on time horizon and the risk profile. If the investment is for long duration, then one can opt for 90 percent allocation in equities. One should avoid debt market for two reason – the yield may go up further and there is little room with RBI to cut the rates further due to fiscal rates. Also, when the loan moratorium period is over, there will be clarity on credit risk,” he said.

Experts say they recommend liquid funds or ultra short-term funds, beyond which the risk of rising interest rates are higher.

https://www.money9.com/news/debt/want-to-invest-in-debt-funds-heres-what-you-should-do-5318.html

BT Buzz: Gilt funds witness 237% higher inflows in April; should you invest?

Debt mutual funds may have been in the news for all the wrong reasons over the last one and half years, there is one category that is sitting on high double-digit returns at a time when even equity returns are dismal. Gilt and Gilt with 10-year Constant Duration categories have returned 15 per cent and 17 per cent, respectively in last one year. Returns for three and five years horizon are also in the range of 8-10 per cent.

In fact, the gilt category received inflows of Rs 2,515.61 crore in April compared to just Rs 746.71 crore in March. Now this is where the trouble begins. After the closure of six debt fund schemes by Franklin Templeton, investors have virtually abandoned the credit risk category. It witnessed outflows of Rs 19,238.98 crore in April. On the other hand, inflows in gilt funds, that carry negligible credit risk, more than doubled in a month. If you are keen to invest in gilt funds, you must know while gilt funds do carry very little credit risk due to sovereign backing, they are prone to interest rate risks. Experts believe new investor are unlikely to fetch double digit returns as we are witnessing today. Let's understand gilt funds in detail:

What are gilt funds?

Gilt funds are medium to long duration funds, which invest in government securities maturing between 3 and 20 years. The gilts could be of central and state governments both. Since we don't expect governments to go broke, these are considered the safest form of debt fund investments with negligible credit risk. However, interest rate cycle has a major role to play in how a gilt fund performs. It is called a duration risk. The longer the maturity profiles of the instruments, the higher the duration risk. If interest rates increase, the prices of the underlying debt securities will fall to match the higher return. As a result, your gilt fund will show negative returns. And when you enter a low interest rate regime, the returns go higher - as has happened in the current scenario with the RBI decreasing the interest rates for over a year now. The repo rate currently stands at 4.4 per cent, the lowest ever.

"Gilt funds are different from other bond funds because they are not exposed to credit risk. However they are exposed to interest rate movements and as such, are advised only for those who are aware of these risks and are prepared to accept them. These risks shouldn't be taken lightly and retail investors would be well served to be cautious when investing in them," says debt market expert Rajiv Shastri.

Should you invest in gilts now?

The answer lies in capturing the future movement of interest rates. With the government having raised its gross market borrowing target for the current financial year to Rs 12 lakh crore from the budgeted Rs 7.8 lakh crore, yields on government securities are expected to come under pressure. However, marketmen believe there could be another round of at least 100 bps reduction in repo rate in FY21 as the economic growth will take a hit due to coronavirus lockdown.

"If the GDP falls, the RBI will have to cut rates to fund the growth. Keeping that in mind, gilt funds stand out among other debt investments if you have a six-nine months time horizon," says certified financial planner Pankaaj Maalde. However, he cautions that other factors such as currency movement, crude oil prices and interest rate in global economies also influence RBI's move on policy rates. "With uncertainties around how crude and currency will play out in the short-term, you need to be careful about investing in gilt funds."

That said, if you invest in gilt funds on expectations of receiving similar returns as today, you could be in for a disappointment. "While gilt funds have delivered good returns over the last year or so, this cannot be the only reason for either investing in, or remaining invested in them. And while it is expected that long-term yields will continue to moderate, one needs to bear in mind that there are considerable uncertainties associated with this view. In addition, gilt funds are quite volatile and this needs to be kept in mind when investing in them," says Shastri.

How to choose a gilt fund

There are 29 gilt funds in the market, as per Valueresearch data. All of them returned in the range of 10-19 per cent in last one year. Since all gilt funds invest in government securities, how to select in which fund to invest? Experts say take into account the maturity of papers a fund has invested in and the average yield on the same along with the cost structure, that is, AMC charges. "You need to check the yield-to-maturity, modified duration and expense ratio," suggests Maalde.

Factor in taxation as well. If you hold it for more than three years, at 20 per cent with indexation, the tax rate is still fine, but if you withdraw the amount within three years, you pay taxes as per your slab rate.

"Gilt funds are not a product to be held for more than three years only to save taxes if you have already fetched returns of a falling interest rate cycle. Once you achieve the target, you need to exit. If you are in 30 per cent tax slab and exit with 8 per cent yield, the net return that you will get will be around 5.5 per cent. So, keep that in mind," says Maalde.

Thus, if you are a new investor, invest in gilt funds with the outlook that your principal will stay protected and you will fetch average returns. Don't expect spectacular returns of the past. In fact, debt funds with target maturity structures could be a better choice over gilt funds. Such funds invest in longer maturity papers initially and switch to shorter maturity papers as the maturity period of the fund comes closer.

"Their duration starts at three, five, and 10, etc, and keeps falling over the life.  That way if you hold to maturity you don't have duration risk. These funds exist - and with high quality credit. Bharat Bond, some corporate bond funds, and some banking and PSU funds have target maturity structures. They are called roll-downs also. You can just check the duration of them and match it to your investment goal tenure," explains Radhika Gupta, CEO, Edelweiss Mutual Fund.

https://www.businesstoday.in/bt-buzz/news/bt-buzz-gilt-funds-witness-237-percent-higher-inflows-in-april-should-you-invest/story/403976.html

All you need to know about loans against insurance policies

Your LIC policy can do more than just give you an insurance cover. It can be used to raise loans.

The rates at which loans can be taken have been revised early May 2020.

Loans against the policy ‘Jeevan Shikhar’ are available at the lowest rate of 9 per cent. On all other regular premium endowment plans and money-back policies launched after April 1, 2019, loans would come with a 9.5 per cent interest.

“The revised rate will be applicable on the new loans being availed by policyholders and there will be no change in respect of existing loans,” clarifies LIC.But those opting for loan against single premium traditional policies – namely Jeevan Vridhhi (Plan 808), Jeevan Vaibhav (Plan 809), Jeevan Sugam (Plan 813), Jeevan Shagun (Plan 826), Jeevan Sangam (Plan 831) and Jeevan Utkarsh (Plan 846) – would pay the steepest interest rate of 10 per cent annually.

As per the last Annual Report of the company, Rs 1.14 lakh crore have been given out as loans in India, of which 99.98 per cent are given against non-linked policies or traditional policies as on March 31, 2019.

How the loan against insurance policy works

The interest rate offered on loans against insurance policies are lower, at 9-10 per cent, when compared with personal loans that come at a steep cost of 15-18 per cent and Credit Card debt, which costs you 36-52 per cent.

The best part is that the insurance behemoth doesn’t consider the credit worthiness or the CIBIL score as a parameter for offering this loan as it is an advance paid against the policy’s maturity proceeds. However, income proof and bank statements apart from the original policy documents are needed while requesting for a loan.

You can get a loan for up to 90 per cent of the surrender value of a policy, if the premium has been paid for three consecutive years, without any break. Also, these loans are available only for endowment, whole life and money-back policyholders and not for term plans or ULIP customers.

“A policy acquires a wholesome surrender value only after 10-12 years. So, during the early years of a policy, you would hardly be able to apply for a sufficient loan amount,” suggests certified financial planner Pankaaj Maalde.

LIC offers loans against its policies for a minimum period of six months. Firms such as ICICI Prudential Life Insurance, HDFC Life, and Edelweiss Tokio Life too offer loans directly to their traditional insurance policyholders. You also have the option of taking a loan from any bank against the insurance policies, but the interest rate would differ.

“The life insurer or the bank offering a loan against an insurance policy was ask for partial or full assignment of the policy” says Vivek Damani, proprietor of financial advisory Jeevan Prabandhan

As branches in select regions would still be closed during the current lockdown, you can apply for loans against a policies by going online.

How is the interest paid?

While repaying the loan, you can either service the entire loan, including the principal, or merely pay the interest. The rest of the loan principal can be settled from the policy amount at maturity.

“You must always make sure you never miss the interest payment,” Maalde warns, indicating that the policy may be terminated if the total amount outstanding exceeds the surrender value.

If you take a loan against policies offering pension at regular intervals, then the interest would be deducted from the amount that is paid as pension or annuity. Varishtha Pension Bima Yojana (T-828), Pradhan Mantri Vaya Vandana Yojana (T–842) and Jeevan Shanti (T-850) are some such examples.

The loans taken against insurance policies will not qualify for the moratorium that borrowers were given recently by banks to tide over the COVID-19 crisis.

Loans against insurance policies are merely advances against your policies. If you default, the insurance company would simply foreclose your policy and recover its dues.

https://www.moneycontrol.com/news/business/personal-finance/all-you-need-to-know-about-loans-against-insurance-policies-5239821.html

Rebalance Your Portfolio - Businesstoday.in

Equity markets were trading near all-time highs when all hell broke loose and a black swan - novel coronavirus - bit the world. Its spread and fears of a looming global recession sent world markets, including India's, into a tailspin. The fast-spreading virus has triggered unconventional market trends - not just in equities, but also the debt market, and even gold. Debt funds witnessed heavy redemptions in March after bond yields spiked, though the repo rate cut by the Reserve Bank of India (RBI) has now boosted bond prices. Gold, which was at a high in the first week of March, tanked as much as 10 per cent in the following weeks. It has recouped some losses since.

With wild swings in asset classes, if your portfolio has taken a disproportionate shape not just in returns but also asset allocation, this is the occasion to rebalance it as per your life goals. However, extraordinary times require extraordinary measures.

Your equity allocation may have shrunk below your targets. Conventional wisdom says buy more. But should you really dip into equities when longevity of the Covid-19 crisis and its impact on the stock market is not clear? Wouldn't it be better to take a do-nothing approach?

A person with a key financial goal just a year or two away may prefer the safety of debt instruments compared to someone who can wait at least five years. Similarly, recent investments, for example, a three-year-old mutual fund portfolio, would have incurred losses post the market crash while returns in long-term portfolios are positive (see table). Both portfolios will require a different strategy.

"Your asset allocation should be defined not by how asset classes are performing, but by your own life situation. If your goals are near (one-two years), you cant afford to take the risk of investing in volatile assets. If your goal is more than seven-eight years away, a larger chunk of your investments should be in equities because they have the potential of giving higher returns. Under no circumstances should you overlook your overall asset mix," says Raj Khosla, Founder and MD, MyMoneyMantra.com.

Ultimately, you must have a well-diversified portfolio across asset classes that protects you from sudden shocks such as the one that has gripped the world now.

Well-diversified Portfolios

The recent market correction may have shaved off most equity gains, but if you had diversified a part of your portfolio in debt and gold, it would have supported your overall portfolio returns in the short to medium term. For example, gold has returned 38.48 per cent, 16.08 per cent and 11.33 per cent, respectively, in last one, three and five years. Similarly, 10-year government securities (G-sec) returned 14.65 per cent, 6.85 per cent and 8.06 per cent, respectively, during these years.

"Asset allocation as per your risk appetite becomes important during times of crises. A lot of people at the moment would be avoiding equity markets completely and investing in safe-havens like gold, gold ETFs and gold funds. Aggressive players must be taking exposure to equities to make the most of lower valuations. These times also make it important for you to seee that are you insured properly. Debt investments will help you find a mid-way between equities and gold as there is more certainty attached to them," says Jashan Arora, Director, Master Capital Services.

Here's how investors in various stages of life with different life goals could rebalance their portfolio.

• If You Are 25-35 Years Old

A young person in twenties or early thirties should have about 70 per cent portfolio in equities and the rest in debt and gold. After the market correction, your equity allocation may have reduced by 10-15 per cent and allocation to debt and gold may have increased. However, your life goals will still be the same. For your long-term goals such as buying a house or having adequate retirement funds, you should rebalance your portfolio back to 70 per cent equities. "Aggressive investors can look at overbalancing, that is, going overweight on their equity exposure, say around 10 per cent more than the initial exposure," advises Arun Kumar, Head of Research at FundsIndia.com. However, for short-term life goals, for example, a destination wedding, child's school admission or down-payment for buying a car, you may want to allocate funds in fixed deposits or debt funds.

"Your investments should always be backed up by financial goals. Your investment strategy if are looking to benefit from small blips in the market would be very different from if you are saving and investing for your child's education," says Arora.

It's also important to have some cash reserve, which not only gives you some confidence but also helps in case of, say, a medical emergency. "You can think of investing in liquid funds and overnight funds as they provide liquidity and give small returns too," says Arora.

If some part of your portfolio is invested in gold, it may have risen significantly. Should you book profits and divert the funds into other classes? "Ideally, no, because if the markets remain turbulent, then gold will remain at a high value, and possibly scale newer highs. So, remaining invested would be the best strategy," says Sousthav Chakrabarty, Co-founder and CEO of Capital Quotient.

However, gold should not form a major portion of your portfolio. "Invest only 5-10 per cent in gold. Buying Sovereign Gold Bonds is a better option (than physical gold) as it gives an added interest advantage of 2.5 per cent per annum and also saves on expenses," says certified financial planner Pankaj Malde. So if your gold investment has gone beyond 10 per cent, you may prune it by shifting proceeds towards equity.

• If You Are 35-50 Years Old

People in this age bracket may have more short-term goals, such as children's education or buying a house, as well as long-term goals such as retirement planning.

If you had invested equally in debt and equities, in the current situation, your debt exposure may have gone up significantly. Should you bring it down to divert funds into other asset classes? "This will be a tactical call. Someone with higher risk appetite could bring up the equity levels as per his strategic asset allocation needs. For debt, there are no real substitutes. Within debt, one may look at PSU bonds, tax-free bonds, small savings schemes, bank FDs, etc," suggests Suresh Sadagopan, Founder, Ladder7 Financial.

In this age group, a significant chunk of portfolio may be invested in debt. But one must remember that debt investment is not always safe. "Now that the repo rate is at 4.4 per cent, you should not expect double-digit returns from debt funds. Also, the current lockdown may result in default in payment of interest and principal (by companies). So, there is risk in investing in debt funds. Investing looking at only YTM (yield-to-maturity) is foolishness," says Malde.

Moreover, one must remember that a loss in debt funds is permanent while in equity, good stocks recover in time. "In debt, increasing your investments in VPF (voluntary provident fund) and PPF (Public Provident Fund) makes sense as returns from both are above fixed deposit rates and also tax-free," says Malde.

That said, in the current scenario, if you can take risk, you may consider tactically increasing exposure in equities - at least for discretionary goals three-five years away. "Historically, markets have always recovered from corrections and the initial phase of recovery has been extremely sharp. Given the significant fall of around 35-40 per cent, going by pure math, we are looking at a 50-70 per cent upside return just to get back to earlier levels," says Kumar of FundsIndia. For example, during the global financial crisis of 2008-09, the market (Nifty 500 TRI) had gone up 85 per cent in the first three months of recovery, he adds.

• If You Are in 50-65 Age Group

For this age group, usually, major life goals have been met and retirement fund is of utmost importance. Since retirement is not far away, ideally you should have started shifting your retirement fund invested in equities to debt at points when equities were trading at a high. If you weren't already shifting away from equities, the market crash would have put your portfolio in a soup. But don't panic. Selling equities at such steep losses will be a wrong move. "Stocks, though pulverised at this point, will bounce back with time. If you have sufficient liquidity and contingency funds to tide over this crisis as well as meet short-term needs, you need not worry. In time, all these will recover. If these are long-term funds, then it should not be a matter for concern," says Sadagopan.

Ideally, people in this age bracket should have little equity exposure. However, for the purpose of wealth creation or bequeathing, you may invest in equities. Consider this thumb rule: ideal equity allocation is 100 minus your age. For example, a 60-year-old should not keep more than 40 per cent portfolio in equities.

"In the debt market, we recommend investors to stay invested in traditional instruments like FDs. If they want to further secure their investments, they could venture into AAA-category corporate bonds or PSU and banking bonds," says Tarun Birani, Founder and Director of TBNG Capital Advisors.

If you are 65 years and above, keep all investments in debt instruments, especially those that offer regular income. With the available cash, you may also buy pension plans such as an immediate life annuity with return of purchase price.

What About Real Estate?

Being an illiquid asset, financial planners do not advise purchase of real estate for investment. Pan-India data for last 10 years shows that real estate has appreciated only 2 per cent in the period, according to Crisil. In fact, it has depreciated by 2 per cent in the medium term. "Investment in real estate is not advisable at this juncture. Buying a property for self makes sense, particularly if you are paying high rentals. Buy a ready-to-move in home if you are in a position to service the EMIs. Not only does this help you save rentals, home loan interest (up to Rs 2 lakh) and principal (up to Rs 1.5 lakh) are tax deductible," says Malde.

Cost Involved in Rebalancing

While you rebalance your portfolio, keep in mind the various costs involved such as exit loads, brokerage charges and even taxation. "If an investor considers a portfolio rebalance, he needs to analyse his earnings versus cost and net profitability," says Birani.

For example, selling a stock attracts brokerage charges, equity and debt mutual funds have expense ratios and, in some cases, exit loads. In case of fixed income options, Khosla says, the costs can be in the form of lower interest rates on fixed deposits or a penalty for foreclosing a bond.

Gains on debt instruments are taxed as regular income if the holding period is less than three years and at 20 per cent with inflation indexation if you hold it for more than three years. Equities attract short-term (less than a year) capital gains tax of 15 per cent and long-term capital gains tax of 10 per cent without indexation. Note that long-term profits up to Rs 1 lakh are tax-exempt.

What Should a New Investor Do?

If you are a new investor looking to build your portfolio, start with fixing allocation across asset classes as per your age. Build the equity portfolio over a period of 12 months via systematic investment plans (SIPs) or systematic transfer plans (STPs) on a weekly basis, advises Himanshu Kohli, Co-founder, Client Associates. "For fixed income, park money in high quality short-term or corporate bond funds," he adds.

In equities, pick blue chip stocks and large-cap and multi-cap funds. Besides, if you are a new investor, you should always be ready for 20-30 per cent correction in equities over a six month period. "This should be considered a normal stock market behavior. Once in 8-10 years, investors should also be mentally prepared for a 50 per cent correction," says Kumar of FundsIndia.

In debt, always keep some investments in fixed deposits apart from investing in AAA-category corporate bonds, banking bonds and PSU bond funds. "Exposing your portfolio by investing in anything below AAA-rated securities, credit risk funds and/or in sectors like infrastructure, metal, etc, must be strictly avoided," cautions Birani.

If picking quality investments is a crucial first step towards building of your portfolio, reviewing it periodically is even more crucial. Always keep an eye on your financial goals and balance your asset allocation accordingly to avoid painful shocks when you need money.

https://www.businesstoday.in/magazine/money-today/cover-story/rebalance-your-portfolio/story/401048.html

5 measures that Sebi should consider

The regulator must look beyond just lowering the expense ratios of mutual funds to safeguard the interest of investors, says Pankaaj Maalde.

Abolish dividend reinvestment option

The dividend distributed by equity funds will now be taxed at 10%, reducing investors’ returns. This will make the dividend reinvestment option of equity funds unviable because it will saddle the investor with a tax he can’t avoid. Even earlier, the dividend reinvestment options of equity funds had no advantage over the growth option. It is time these plans are scrapped to protect the interest of lakhs of investors.

Stop monthly dividend plans of equity funds

Demonetisation led to huge inflows into mutual funds. To attract investors, fund houses launched monthly dividend options in balanced funds. Being equity funds, they carry high risk and should not be missold. However, they have been used to lure senior citizens in the name of regular income—‘higher returns compared to fixed deposits’. But the schemes cannot deliver dividends if the market tumbles. Also, it is unethical to declare dividend from the investment amount and not from the gain. So, there is no ‘guaranteed’ income. In fact, most investors are not aware that even their principal can erode, if the market falls. Sebi needs to immediately stop such schemes.

Merge multiple liquid, ultra-short-term plans from same fund house

Most fund houses offer two liquid and two ultra-short-term debt funds. But there is hardly any difference in the portfolio of the two plans offered under these categories, except their expense ratios. Multiple products simply help fund houses garner more businessdistributors push expensive plans to earn higher commission. In fact, you can judge how sound your financial adviser is by checking which liquid fund plan he recommends. If it’s the one with the higher expense ratio, then he is only looking at earning a higher commission. Sebi needs to ask fund houses to merge multiple plans of liquid and ultra-short-term schemes.

Stop closed-ended equity funds

Fund houses try to encash the market tops by launching new fund offers (NFOs). The NFOs’ names and themes are decided according to the market conditions to attract maximum investors. On the one hand, Sebi wants standardisation of mutual fund products and, on the other, it gives permission to launch NFOs that may be very similar to the existing schemes of fund houses. The market regulator should look back to 2008-09 to find out what happened to the NFOs launched then—what returns did they generate? Fund houses too should clearly state why they are launching an NFO, if the new scheme is in no way superior to existing schemes.

Lower the expense ratios of arbitrage funds

Arbitrage funds will be among the worst hit categories on account of the just-imposed long-term capital gains tax on equities, given their already limited returns. The management charges for these funds are very high—1% in case of regular plans—and fund houses pay large commissions to distributors to push these funds. In today’s market, the maximum return these funds can generate will be around 6%. This does not justify their high charges—made worse by the LTCG tax. This category will lose its importance if the charges are not revised immediately.

My article published in Financial Chronicle today (11.07.2017)

Resist buying home with your EPF money

My article appeared in Financial Chronicle on Monday 08.05.2017

RBI could have waited for rate cut

RBI under the new head reduced the repo rate by 0.25% in its review meeting held on 4^th October’2016. The rate cut was in line with the market expectations. The CPI inflation came down to near 5% in August’ 2016 and Government is likely to achieve inflation target of around 5% for the year end March 2017. There is no doubt that monsoon this year is very good and again with record food grain production the inflation will soften further. But I think there are number of factors and events which are likely to unfold in coming two months which are very important for us. I feel RBI should have used pause button this time. I would like to highlight the points which are very important for us in coming days.

1) US President Election will be held in November’2016 and the result is very important for us. It’s early to predict who is ahead or win as in last minute anything can happen.  The result is important because the US government plays a very important role in the world economy. Not only India but the entire world will be watching the outcome very closely.

2) The big FCNR (Foreign Currency non resident) deposit redemption is due from this month amounting to $26 billion. Even Banks and RBI may be well prepared for this there is no reason to take chance till that happens smoothly. This is one of the biggest redemption in debt since last many years and market is curious to know the impact of this.

  

3) The crude oil price again has crossed $50 per barrel. OPEC members also met last month to cut the production but did not come to consensus. But any such move to cut the production can lead to increase in the crude price. Government recently increased the price of petrol and diesel and may have to increase again if crude price goes up. Increase in diesel price will put pressure on inflation.

4) It is now certain that federal bank will increase the rate in the month of December, which may have negative impact on the emerging markets like India. Any large withdrawal from India can weaken the rupee further which is not good for our economy.

5) It is also important to take cautious stand because of the tension at the border.  The recent surgical strike by our Army can also provoke the Pakistan to take some unwanted actions.  I do not have doubt about the capabilities of our Army but any serious situation can hit our economy badly.

6) Last but not the least, RBI is reducing the interest rate so that the money is available at cheaper rate which help corporate to improve their balance sheets. But we should not forget that banks have not fully transferred the earlier repo cut of 1.50% till date. Banks have maximum passed 80 paisa and still there is room to pass the balance 70 paisa so that end user benefits. I think RBI should also have considered this before reducing the rate further.

Across world the deposit rates are NIL and in some countries even the rates are negative. Indian government may also be eyeing that. But in Indian context we should be cautious as the large number of aged people survives on interest income. In the absence of good immediate pension fund options, senior citizens are likely to suffer if rates drop further. Government and RBI should not only aim at high growth but also look at ground reality.

This article first appeared at indianotes.com on 8th October'2016

http://www.indianotes.com/Analysis/RBI-could-have-waited-for-rate-cut/204289/2/T

My debut Startup Plan in New Indian Express (16.05.2016)

Will amnesty scheme for tax evaders work? (ET Wealth - 7th March'2016)

My success story in ICICI Prudential Mutual Fund's monthly magazine (January'2016)

Plan out for an easy post-work life (Financial Chronicle - 6th December'2015)

Start investing early in life to build a retirement corpus. Equity is the best bet in the longer run as it offers inflation-adjusted return

With better medical facilities resulting in higher life expectancy, it is important to plan and work towards accumulating a healthy retirement corpus that could sustain us for at least 20 years after we retire. Remember that you might be without the comfort of regular income from a job.

Our children may or may not support us. While all of us would like to live a tension-free retirement life, the success of it depends on starting saving early and investing the right way. Here is an outline on how to plan for retirement.

First, decide your retirement age. Then calculate your current monthly expenditure. Ask yourself if you want to maintain the same lifestyle or are ready to compromise on it during retirement.

Adjust the money required with an inflation rate of 6-8 per cent per annum till your retirement life. This will tell you the corpus that is needed to give the monthly income you require in retired life. The next step is to know the investment avenues available to achieve your retirement goal.

Three scenarios have been worked out to give you insight to investment needs for tension-free retirement life — someone who would retire after 10 years, after 20 years and after 30 years. All the three situations are based on retirement age at 60 years, an inflation of 8 per cent, a current monthly expenditure of Rs 25,000 and assuming an equity return of 15 per cent.

Scenario A: Ravi Nair is 50-year-old. He has a monthly salary of Rs 50,000 and has decided to retire in the next 10 years. His current monthly expenditure is Rs 25,000 (annual expenditure Rs 3 lakh). At an inflation of 8 per cent, post retirement Nair would require Rs 6.48 lakh every year to maintain the same lifestyle, i.e. a corpus of Rs 1.18 crore for next 20 years. To achieve this corpus, Nair needs to invest Rs 43,000 per month.

Nair’s goal is unachievable since the amount he has to invest is close to the amount he is earning. Nair can achieve only 50 per cent of the corpus required. Since he has 10 years to go, he could consider investing in a balanced fund through a systematic investment plan. A balanced fund allocates 65-70 per cent of the money in equities and the remaining 30-35 per cent in debt.

Says Pankaaj Maalde, a certified financial planner, “This example is a wake-up call to all those who have been postponing working towards their retirement goal. If Nair owns a house he could consider reverse mortgage of his house or will have to postpone his plan of retiring at 60 years.”

Scenario B: Assuming Nair is 40-year-old, his household expenses post retirement would be Rs 13.98 lakh a year. Thus, he would require a corpus of Rs 2.55 crore to sustain him till he is 80-year-old. For this, Nair needs to make a monthly investment of Rs 17,000.

Scenario C: Presuming Nair is 30-year-old, he still has 30 years to retire. Assuming inflation 30 years from now is 8 per cent, his yearly household expenses would be Rs 30.18 lakh. To sustain himself till he is 80, Nair would require a corpus of Rs 5.50 crore.

Since he has 30 years to invest, he should take an equity expose of 100 per cent in a diversified equity fund through a systematic investment plan. Accordingly he needs to invest Rs 8,000 per month to achieve the corpus assuming equity investment would give a return of 15 per cent.

Investment strategy: Your investment strategy should depend on your age, risk profile and the timeframe you have in meeting your goals. In India, majority of the population save in debt such as bank fixed deposits, Public Provident Fund, National Savings Certificate and bonds.

Most perceive equity as risky but if you invest regularly for a longer period say for more than 10 years through systematic investment plans, equities can give on an average return of of more than 12-15 per cent.

For instance, the Sensex in 2008 had a one-year negative return of 52.45 per cent. A person, who had invested prior to a year at the peak of the bull-run, would have seen his capital eroded. However, if the same person had invested in the Sensex five years prior to the bull-run, his return on December 31, 2008 would have been 9.43 per cent while if he had invested in the Sensex for 10 years, his return on December 31,2008 would have been 14.47 per cent compounded annually.

For a long time now, funds parked with provident funds have been high-yielding instruments. The pie generated up to 12 per cent yields between 1990 and 2000, primarily due to the historically high interest rates prevailing then. However, since 2001, interest rates have declined and settled below 9 per cent. This fixed income bias limits growth possibilities of the corpus, also given the high inflation. Since 1990, the average consumer price index or retail inflation has been 7.25 per cent. Compare this with an average yield of 10.39 per cent, which provident funds offer subscribers, thereby giving a real return of about 3 per cent. Even though equity is prone to short-term volatility, it is the best bet in the longer run, as it offers inflation-adjusted return. Further, the risk of loss diminishes as the investment horizon expands.

If you have more than 10 years in meeting your goal, you should invest 90-100 per cent in equities through SIP and the remaining 10 per cent money in debt. Once you are five years away from retirement, transfer all your investments from equities to a debt fund.

Buy adequate insurance: It is very important that you have a pure term insurance policy, health insurance, accidental disability insurance policy and a critical illness policy. This is because in case you contract a dreaded disease, not only your health will get affected but also your ability to work. In case your income stops, you won’t be able to meet your financial goals.

Term insurance is the cheapest way of insuring that your family is financially secure even if tomorrow you are no longer around to care for them. The premium of a term plan is a fraction of what you would have to pay in case you buy a money-back policy, a whole life policy, an endowment plan, or a Ulip policy with the same cover. This is because a term plan does not have an investment component and the entire premium goes in covering the risk.

A pure term insurance plan bought online is highly recommended while invest the remaining investible corpus in instruments offering better returns.

How much insurance do you need?

Before buying a term insurance policy, it is always important to find out the amount of life insurance cover you need. The following factors should be considered before buying a term policy: Your age and number of dependents, your annual income and annual expenses, your outstanding liabilities like home loan, car loan, etc, your investments/savings, your lifestyle expenses and the money your family would require in future to support the same lifestyle in case you are gone.

Says Maalde, “As a thumb rule, people below 35 years of age could look at a cover that is 15 times their annual income, those between 36-45 years of age could look at a sum insured that is 12 times their annual income while those above 45 years of age could look at a sum insured that is 10 times their annual income. In case a person has liabilities such as a home loan, car loan then he needs to add the proportional amount of cover to take care of the liabilities.”

Don’t go for mortgage insurance: In case you have taken a home loan, increase the sum assured of the term plan in proportion to the loan amount. Do not buy a home loan insurance policy as these plans are expensive and the benefits would cease if you transfer your loan to another bank.

Increasing the sum assured of your term plan would help as your family would not be burdened with the loan repayment in case of your premature death. Another benefit of a term plan is that you could change your home loan provider if interest rates shoots up. Also since home loan insurance plans are single premium plans and remember that you cannot surrender the policy.

Don’t take insurance beyond your retirement age: Once you retire, your income drops. Mostly, people clear their liabilities till their retirement. Therefore paying a premium towards an insurance cover would be difficult. It is advisable to choose a tenure that ends by retirement.

Don’t go for fixed deposits and traditional insurance policies: Fixed deposit rates have been falling and in the last one year, banks have cut interest rates one year deposit rates by an average 130 basis points. Similarly, for all other tenures too, deposit rates have fallen in the same range.

Investing through fixed deposits will not help you reach your financial goal as they do not beat inflation nor are they tax efficient. Similarly, if one looks at traditional insurance policies including child plans or money back plans, the internal rate of return (IRR) varies between 2 per cent and 6 per cent. One should avoid fixed deposits and traditional insurance plans as they give lower returns and come with high lock-in.

Reviewing your portfolio is equally important. Continue working towards your goal and review the progress made on a monthly, quarterly, or within a particular timeframe. If you’re not making satisfactory progress on a particular goal, you can change the process to achieve the goal.

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ETFs, MFs, bonds…gold investors are spoilt for choice (Financial Chronicle - 09.11.2015)

Gold has always been considered a hedge against inflation and an insurance against global uncertainty. Most Indians buy physical gold for investment purpose. For those not wanting to invest in physical gold, there are gold exchange traded funds (ETFs), and gold mutual funds. In addition to these existing schemes, the government last week has launched two mega gold-related investment schemes---gold monetisation scheme (GMS) and the gold bond scheme. The purpose is to mobilise the surplus gold holdings held with Indian households and institutions and reduce import dependence. Indians directly or indirectly hold an estimated 22,000 tonne of gold ($800 billion n or 39 per cent of India’s GDP). Incremental gold demand in India is largely met by imports (1.7 per cent of GDP in FY15), driving current account deficit (1.4 per cent of GDP).

Here are the pros and cons of the two schemes to help you decide whether you should go for it:

Gold bond scheme

This scheme is open for investing from November 5-20. The bonds will be issued on November 26, 2015. The sale of sovereign gold bonds will be done via banks and post offices. This is the first tranche of the gold bond scheme and subsequent tranches would be notified later. Facility to invest in the bonds online will also be launched shortly.

Issue price of gold bond scheme: The Reserve Bank of India (RBI) has fixed the issue price for the first tranche of sovereign gold bonds at Rs 2,684 per gram of gold.

Interest rate: The bonds shall bear interest at the rate of 2.75 per cent (fixed rate) per annum on the amount of initial investment payable semi-annually. The redemption price is linked to 999 purity published by India Bullion and Jewellers Association (IBJA).

Maturity: The tenor of the bond will be for a period of eight years with an exit option from the fifth year to be exercised on interest payment dates. These bonds will be tradable on exchanges.

Subscription: The bonds shall be denominated in units of one gram of gold and multiples thereof. Minimum investment in the bonds shall be two grams with a maximum subscription of 500 grams per person per fiscal year (April – March).

Taxation: Interest earned on gold bonds would be taxable and capital gains tax would be levied in the case of physical gold. If you fall in the category of 10 per cent tax rate, you will benefit by a post-tax return of 2.47 per cent. But if you are an investor with 30 per cent tax rate, expect 1.9 per cent post-tax return. If you transfer gold after holding it for 36 months or more, around 10-20 per cent tax will be applicable after indexation. For short-term gains below 36 months, gains are added to income.

Eligibility: Only Indian residents are allowed to invest in sovereign gold bond schemes. The investment can either be done individually or jointly or in the name of minor as well. This investment can be held in paper, certificate or in a demat form. In case of joint holding, the investment limit of 500 grams will be applied to the first applicant only.

Other details: The investors in the gold bond scheme will be issued a stock/holding certificate. Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time. The commission for distribution shall be paid at the rate of one per cent of the subscription amount.

Pros of Investing in gold bond scheme: Since the bonds will be issued by the central bank, they are secure. These bonds are free from issues like making charges and purity, which is of concern while you buy gold in jewelry form. Also there is no risk and cost of storage, since these bonds will be held in demat form, unlike physical gold. These bonds are a better alternative to gold ETFs as there are no recurring annual expenses in these bonds. Gold ETFs and gold mutual funds have a fund management cost of around 0.50-1 per cent

Cons of gold bond scheme: Experts said the biggest drawback of this scheme is that it does not permit withdrawals before completion of five years. Pankaaj Maalde, a certified financial planner said: “The scheme is close-ended and is not liquid. If an investor needs money during the tenure, he can’t withdraw before completion of five years. Liquidity is not always required for unexpected emergencies, but is also needed when your investment is not performing well compared to other options or to rebalance the portfolio as per the desired asset allocation.”

While bonds will be tradable on exchanges from a date to be notified by RBI, if a person needs to sell these bonds before maturity, there may not be enough liquidity on the exchanges.

Another drawback is that the scheme does not permit investing through systematic investment plan. “SIPs in gold fund always reduces the overall risk over a period of time and gives you advantage of rupee cost averaging. Charges in the gold fund are higher than gold ETFs, but the brokerage per transaction and the demat charges payable in gold ETFs reduces the gap between the gold ETFs and gold fund charges,” added Maalde.

In case of sovereign gold bonds, both upside gains and downside risks will be with the investor. However, in case gold prices fall, losses from a systematic investment plan in gold exchange traded funds or gold mutual funds will be lower than for lump sum investments in sovereign gold bonds.

Gold monetisation scheme

The gold monetisation scheme will basically replace the existing gold deposit scheme, 1999. It consists of a revamped gold deposit scheme and gold metal loan scheme. In a bid to create competition, all scheduled banks have been allowed to implement the scheme. Regional rural banks being weak have been excluded.

Interest rate: Investing in gold monetisation scheme can help you earn up to 2.50 per cent interest rate on idle gold. Interest rate on medium and long-term government deposit is 2.25 per cent and 2.20 per cent, respectively. Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier.

Tenure: The deposit tenures are of three types- short term of one to three years, a medium term of five to seven years or a longer term of 12-15 years. The short term deposits of gold will be accepted by banks on their own account, while the medium and long term deposits will be on behalf of government.

Minimum deposit: 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.

Eligibility: Resident Indians (Individuals, HUF, trusts including mutual funds/exchange traded funds registered under Sebi (mutual fund) regulations and companies) can make deposits under the scheme.

Process: The gold will be accepted at the collection and purity testing centres (CPTC) certified by the 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. The principal and interest of the deposit under the scheme will be denominated in gold.

Withdrawal: There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks.

Grievance redressal: Complaints against designated banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption of deposits, payment of interest will be handled first by the bank’s grievance redressal process and then by the Reserve Bank’s banking ombudsman.

Cons of GMS: The GMS scheme envisages holding gold only in its pure form, resulting in the melting of the deposited jewellery and ascertaining its pure gold value. This will be a disincentive for a large number of households who generally want to keep gold in the form of jewellery and may not want to see their family-inherited, emotionally attached, piece of gold lose its identity for meagre returns.

According to India Ratings and Research, “Also, the jewellery making charges paid at the time of buying it will be lost in the process. Moreover, ascertaining of pure gold out of the jewellery will often result in lower valuation of the gold held by households. First, the loss of jewellery making charges and secondly lower valuation together will be a double whammy for households. There is also lack of clarity on the tax treatment, on the conversion of physical gold into the gold deposit scheme.”

Chirag Mehta, senior fund manager-alternative investments, Quantum AMC, said: “The option to select the mode of repayment at the time of deposit may be done away with as customer would not know that 8-10 years down the line, would they require gold or cash. The depositors should be given the option at maturity to select the mode of repayment.”

Ashok Minawala, director, All India Gems & Jewellery Trade Federation, said, “For GMS, the government has presently proposed around 125 of 350 Hallmarking centres to be the collection centres as well as assaying centres in only 14 cities of the country, while the need is to be present in over 300 cities.”

“The industry has already been facing major challenges from the BIS authorised hallmarking centre’s who are the extended arms of BIS but in turn are also a heartburn for them as well since they are all outsourced and not very reliable in the delivery on quality assured by them as over 70 per cent of hallmarked jewellery still continues to fail to stand on their marking standards. BIS is continuously monitoring the operations but lacks a proper way of managing the same,” added Minawala.

falaknaazsyed@mydigitalfc.com

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