How is Systematic Withdrawal Plan better than Dividend Option: Part 1

At www.advisorkhoj.com we get many queries and comments from investors daily; usually, we get more than 400 queries and comments from investors and advisors every month. Though responding to all the investor queries and comments takes up a lot of my team’s time, it is extremely useful from an investor engagement perspective and helps my team get valuable insights into investor thinking.

Over the past many months, we are seeing a lot of queries on mutual fund dividends and systematic withdrawal plans. In this two part post we will discuss both mutual fund dividend options and systematic withdrawal plans, so that you can make smarter investment decisions.

Investors have always been interested in stock or mutual fund dividends because it provides them cash-flows from time to time. However, we think that, the recent increase in interest in mutual fund dividends is related primarily to two factors – falling interest rates (of bank fixed deposits and Post Office small savings schemes) and the high stock market. While the interest in dividends is understandable, we think that there are a number of misconceptions regarding mutual fund dividends among retail investors. The attraction for high dividends among many retail investors can also make them vulnerable to mis-selling. Investor education and awareness is our mission in Advisorkhoj.com; we will devote the first part of this two part post in discussing dividend options of mutual fund schemes and some common misconceptions regarding mutual fund dividends.

What is dividend option?

Mutual fund dividend options are essentially different modes of profit distribution. A mutual fund scheme makes profit from time to time through buying and selling stocks. In the Growth Option of a scheme the profits are reinvested in the scheme; in the Dividend Option the profits are distributed to the investors as dividends. Dividends are declared on a per unit basis. Let us assume you own 1000 units of a mutual fund scheme. The Asset Management Company (AMC) declares a dividend of Rs 5 per unit; you will receive a total dividend of Rs 5,000.

A scheme can have multiple dividend options e.g. Annual Dividend, Quarterly Dividend, Monthly Dividend etc. depending on the distribution frequency. Investors can choose the option depending on the frequently they want to receive dividends. There is another dividend option known as Dividend re-investment Option, where the dividend declared by the scheme is re-invested to buy units of the scheme at ex-dividend NAVs. Investors can switch between dividend options of a scheme without attracting any exit load, but if you switch from dividend to growth or growth to dividend then exit load rules (if any) will apply.

Investors should know that, the NAVs of different scheme options will be different. The NAVs of Growth Options will be higher than Dividend Options because the profits are re-invested in the scheme instead of being paid out to investors. The NAVs of different Dividend Options of a scheme will also be different. However, the NAVs of Dividend re-investment Option and the corresponding Dividend Option will be the same.

Dividends paid by mutual funds are tax free in the hands of the investors, but some mutual fund schemes may have to pay dividend distribution tax (DDT) before paying dividends to investors. Equity mutual funds (schemes where percentage of equity in asset allocation is more than 65%) do not have to pay dividend distribution tax and hence the dividends are totally tax free for investors. However, non equity mutual funds (schemes where percentage of equity in asset allocation is less than 65%) will have to pay dividend distribution tax (DDT) at the rate of 28.84% before paying dividends to investors. The tax treatment of mutual funds is an important consideration in choosing between Dividend Options and Systematic Withdrawal Plans from Growth Options, which we will discuss in part 2 of this post.

Let us now discuss some common misconceptions regarding mutual fund dividends.

Mutual fund dividend option misconceptions

• Mutual fund schemes which pay high dividends are good because they invest in high dividend yield stocks: Investors should understand that, dividends are paid from the profit of a fund. There can be two sources of profit in a fund – dividends and capital gains. A mutual fund scheme which pays high dividends may not necessarily be investing in high dividend yield stocks; it can simply be churning its portfolio more often to book more profits. Higher portfolio turnover does not necessarily make a fund better; often a long term buy and hold strategy has generated higher long term returns for investors.


• Dividend paying mutual funds are less risky: Whether your mutual fund scheme pays dividends or not, does not make it more or less risky. The risk profile of a mutual fund scheme depends on the asset allocation and the investment strategy (e.g. large cap versus midcap stocks, cyclical versus defensive stocks, growth versus value stocks etc) of the fund manager. It is true that if a mutual fund pays dividends in bull market, then the fall in the bear market that follows will be less in absolute terms since your investment value itself will be lower, but by taking dividends you will be giving up on future returns as well. The decision to invest in growth versus dividend option should depend on your cash-flow needs and not your risk appetite.


• Switching to dividend option in high market is a good idea because the fund manager will book profits in over-valued stocks: The fund portfolio is same for both growth and dividend options. If a fund manager thinks that there are over-valued stocks in the fund portfolio he or she will book profits; in growth options the profits are re-invested in the scheme, whereas in dividend options the profits are distributed to investors.


• Regular plans are better than direct plans because they usually pay higher dividends: It has been seen that, regular plans pay higher dividends than direct plans but it is not due to a difference in performances or because AMCs want to encourage regular plans over direct plans.
  
  We discussed earlier that, dividends are paid from the accumulated profits of a scheme. From an accounting perspective, however, the distributable surplus of a scheme is calculated using the Net Asset Value (NAV), face value, unrealized gains and an accounting term known as Unit Premium Reserve. The accounting of Unit Premium Reserve is outside the scope of this article; suffice to say for the purposes of this article that, Unit Premium Reserves for most direct plans are higher than the regular plans. The higher Unit Premium Reserve makes the distributable surplus of direct plans lower than regular plans and hence they declare lower dividends. It has purely an accounting issue and has got nothing to do with the performances of these plans. The fact is that, direct plans give higher returns than regular plans because the expenses of direct plans are lower than that of regular plans.


• Schemes which have high AUMs are likely to declare more dividends: This is another common misconception. Dividends are paid from the accumulated profits of a fund. Some investors may incorrectly perceive high Assets under Management (AUM) as lot of accumulated profits but it is not true. The AUM can be high for many reasons, not just accumulated profits. Investors should also remember that, mutual fund dividends are paid at the discretion of the fund and are not assured.


• Investing in high dividend paying fund can help investors to book loss and reduce tax: Some investors who may have prior information that a fund is about to pay a high dividend, invest in the fund just before the dividend is declared, get the dividend (equity and balanced fund dividends are tax free) and then immediately redeem to book a loss (the fund NAV falls after the dividend is declared) to offset against other short term capital gains. This practice is known as profit stripping or dividend stripping. Dividend stripping, though not illegal, is against the spirit of the tax laws of the land because it is a case of tax evasion. The Income Tax Department has amended dividend distribution tax laws to discourage dividend stripping. In order to claim a short term capital loss, you need to invest in the fund at least three months before the dividend record date or remain invested in the fund for at least 9 months after the dividend record date.

Conclusion

We in Advisorkhoj.com want you to make investments based on sound principles like investment goals, risk appetite, proper asset allocation, risk profile of a fund and fund manager performance. Making investment decisions based on incorrect perceptions and trying to second guess what the fund manager is doing, will lead you to make wrong investments. If your investment objective is capital appreciation then you invest in Growth Option of the mutual fund scheme. If you need income (regular cash-flows) from your investment then Dividend Option is the appropriate choice. However, there is another smart plan which can also provide you with regular income –Systematic Withdrawal Plan of mutual funds. In the second part of this series, we will discuss, Systematic Withdrawal Plan and compare it with dividend option.

                                                                                                                           -Advisorkhoj

Future Generali India Insurance starts delivering policies via WhatsApp

NEW DELHI: Future Generali India Insurance Co (FGII) today said its has started delivering policies to customers through social networking platform WhatsApp for a instant and convenient service. 

The company said it is the first general insurer to launch this service via WhatsApp. 

This is an instant and an additional delivery option adopted by FGII to enhance convenience and ease of its customers, it said in a statement. 

"WhatsApp has wide acceptability and has grown to become a preferred mode of communication. It's convenient for the customer as he/she gets instant access to the policy document. It is one such app that everyone knows how to use, be it a senior citizen, working professional or a young adult, both in rural and urban areas," said KG Krishnamoorthy Rao, MD and CEO, Future Generali India Insurance Co Ltd in the statement. 

Rao said use of instant messaging service like WhatsApp has the potential to reshape the insurance industry with the increased level of customer engagements. 

"For FGII, technology-driven efficient customer service is of prime importance and we are proud to be the first insurer to launch this service," Rao added. 

Customers who purchase or renew policies with FGII will now receive an instant message on WhatsApp with the confirmation text along with an email apart from physical policy document. 

The company said it has already rolled out delivery of policies through WhatsApp. 

More than 5,200 policies have been delivered via WhatsApp messenger as part of the pilot run which started on 15 June 2018, the company said. 

Among others, in its digital transformation initiatives, FGII launched in-house motor claim settlement platform i-Moss in 2016 that ensures on-the-spot settlement of most motor insurance claims filed with it. 

Earlier this year, it had launched an Intelligent Video Streaming and Settlement (i-ViSS), a video-based motor claim settlement facility for customers. 

FGII is the general insurance arm and a joint-venture between retail giant Future Group and global insurer Generali. 

                                                                                                                                           

                                                                                                                                                              -et wealth

Why Should You Involve Your Wife in Financial Planning

Societies across countries have steadily become modern over the years however it shall take a few decades to absorb the "Ki & Ka" style of living. "Ki & Ka" is a movie where a young Indian married couple have their roles reversed; "Ki" the wife is the only earning member of the house while "Ka" the husband manages the daily household chores. Usually the wife, even if she is the sole earning member of the house does not get involved in the personal financial matters of the family. Most of the time it is because they do not wish to get bothered with the details; not that they are not bothered about the financial well being of the family. Stated below are the two basic reasons why it’s important for a wife to be involved in planning the finances of the family.

In case of sudden misfortune death / temporary or permanent disability of the husband:

This is the most important reason why wife should be involved in the personal financial decisions of the family. In this situation the wife should have basic knowledge of where and how much, the husband has saved and invested the family money. Just to get a proper picture of this, one could look at the unclaimed amounts lying with insurance companies, shares, post office, corporate and inoperative bank accounts is र 37,300 crore; if we add this unclaimed amount lying with employees provident fund organization (EPFO) this amount goes upto र 64,000 Crores.

Moreover the females have a higher life expectancy in comparison to the males and to top that up usually the wife is a couple of years younger to the husband, on account of this usually the wife outlives the husband. To prepare your wife for these days one should involve ones wife in the process of financial planning and investments.

A proper record of the following should be kept to increase your spouse’s understanding of personal financials:

• Details of Bank Accounts  

  - The bank name, branches and account numbers where the husband has saved family money, in the names of the various family members. This could also include the internet banking ID and password, debit card number, pass book and cheque books etc.
• Life insurance & General Insurance policy details: 

  As on December 31, 2015, Life Insurance Corporation (LIC) of India has र 4,426.72 Crores of unclaimed money now transferred to investors’ education fund. This is because either the policy holders have not continued the policies till full term or forgotten completely after taking it or maybe his family or wife having poor or no knowledge of such cover being purchased by the husband. In case of any medical emergency in the family the wife should know where the Mediclaim insurance policies, the cashless medical insurance card, etc are kept. She should either know the agent’s name and number or the emergency contact call centre number of the medical insurance provider to get the list of empanelled hospitals for the cashless facility.

Over and above this she should also know the details of motor insurance policy, personal accident policy and home insurance. For all these policies a proper record consisting of the policy number, sum insured, premium paid and to be paid, premium payment due date should be kept just to make sure that these policies do not lapse for non-payment on premium on time.

• Pension and other retirement emoluments: 

  With employees steadily changing from the idea of working in one or two organization for their whole career to a career where one switches jobs from one organization to another in every couple of years for better package or for a higher designation; the importance of Unique identification number (UIN) just being introduced by the government of India to bring swiftness and transparency in the pension and employees provident fund accounts has increased. This UIN system shall gradually decrease the amount lying unclaimed with the EPFO.
• Investment particulars: 

  Mutual fund folio numbers, Demat & Trading account numbers, under the name of all the family members should also be known to your better half. The internet trading identification details and passwords for these should be kept in proper safekeeping knowledge of the couple. The amount and the date of monthly / quarterly / annual investment made in each one of such investments should be know.
• Loan information: 

  Details of loan taken for purchase of house, land, motor vehicle and consumer durables should be in the knowledge of the wife; for as in case of any mishap the wife sees to it that the equated monthly instalments (EMIs) are paid out on time and there is no penalty / seizure of assets for such non payment. She should also be informed about any mortgage insurance her husband has taken which could be utilized to take off the burden from her head for such payments.

To make your wife financially more responsible

Financial planning is a team work. Take for example, a couple as a set of two batsmen standing on the crease playing for the same team. Both allow each other to keep the runs ticking on the score board. The one not facing the ball does not run unless indicated by the other batsman who is facing the ball. Therefore, if both the batsmen do not play in this co-ordination, the chances are that the team will loose the match. Similarly, the couple should behave like batsmen when playing ‘the financial planning’ game. Stated below are reasons why should a wife be financially more responsible.

• Discretionary spending: 

  If the wife is a working woman and either thinks that the money earned by her is just meant for her discretionary spending and the money should be kept in a single account or this is a combined asset and all such sums should be kept in a "joint" type of account then she is mistaken. The right and the more modern approach would be to use the middle path by keeping the money in "anyone or survivor" type of account; this way both would have access over each other accounts and would have their own amounts of discretionary spend. However if the wife is a compulsive shopper, the husband should open a "joint" instead of an "anyone or survivor" type of account to keep a check on your wife’s spending habits. Nevertheless the husband should remember that in case of emergency joint accounts do create a problem from withdrawal of funds.
• Debt management:  

  If the wife thinks that the loan taken by her husband is not her responsibility, then she should think twice. Just as the wife would receive all the assets of the husband after his demise; the wife would also be responsible to pay off the family debt (unless there is a mortgage insurance or a term plan to take care of such mishaps). A negative credit score of the husband could impact that of the wife.
• Investment appetite: 

  Usually the women of the house are risk averse while the men take risk. If the wife believes that taking no risk and investing in fixed return instruments shall pay off in the long run while the husband is a risk taker; then the couple should differentiate their long term goals from the short term goals. For the short term goals the wife should be given the discretion to invest in safer instruments while the husband could invest a portion of their saving in riskier assets for long term goal planning. If your wife thinks of the financial health of the family but does not like to get involved in planning the family’s budget, the long and short term financial goal planning, then one could make things interesting by including financial goal like purchase of jewellery, foreign vacation or buying a big car etc.

Conclusion

Women in India have touched the skies especially in the finance and banking sector with the likes of Naina Lal Kidwai - Group General Manager and Country Head of HSBC India, Chanda Kochhar - Managing Director & Chief Executive Officer (CEO) of ICICI Bank, Shikha Sharma - MD & CEO of Axis Bank and Arundhoti Bhattacharya - Chairperson of State Bank of India heading leading global bank, leading private sector bank and India’s largest nationalised bank respectively. However with this, we do not see the increase in the percentage of working women taking their own personal finance decisions. Usually working women depend on the male members of their family to take care of their finances and investments. It’s not that women are not capable of handling their own money or they do not understand finance; it’s because women, specially married women, think it’s just another burden on their shoulder over and above the one at office, home, or children etc.

What husbands need to do is to make things simpler and motivating for their wives. Usually near term goals seem rather achievable in contrast to the distant ones. Therefore long goals should be divided into many short term ones which can be decided mutually and reviewed regularly.

Only if both husband and wife work as a team then only a house is converted to a home and thus a financial plan into reality. Besides husband needs to prepare his wife to handle any crisis like situation. One would not like his wife to be dependent / deceived by somebody on any financial issues in his absence.                                                                                                                                                                                                                 -Advisorkhoj                                        

Role of Advisor in your financial planning

Financial Planning is a comprehensive process of deciding the allocation of one’s finances into spending, savings, investment and other categories. Going a little deeper into this statement, it would also mean deciding on where and how to invest suiting risk appetite and reaching financial goals within a specified time period. Financial Planning plays a key role in laying the firm ground for various money decisions in a systematic way. It may sound complicated but the assistance of a financial advisor can help one immensely in taking the right decisions and here are a few reasons why:

Define your goals

- The first step to chalking a financial plan is to decide where one is heading to with the plan, in order to give it direction and a motive. Generally, people are unable to do so due to a lack of knowledge and ideas on the same which leads to a faltering in the first step of the process itself. At times, young people do not have an idea about how to go about with drawing up a plan. This is where the expertise of a financial advisor comes in who can help one in defining goals across the savings and investment lifestyle, determine the specific numbers to reach definite goals. An important note one needs to keep in mind is that a financial plan is not working towards a single goal but multiple goals across different stages of life. Of course, each goal has a different priority depending on the investor where a financial advisor can assist them as to how that can be achieved during the stipulated period. The financial status, income, lifestyle and other things of a person changes over a lifetime which is why financial planning should be an ongoing process, not a one-time activity.

Data Collection

- In order to have a sound plan and execute the same, one needs data for all sorts of activities, like investor’s income, expenses, assets (both physical and financial like property, gold, bank deposits, stocks, bonds, mutual funds etc.), liabilities like home loan or car loan or personal loan etc., life, general and health insurance and other important factors. Data is imperative to start chalking up plans as without that, there is no numerical information to work on. This is why a financial advisor will employ methods like surveys or questionnaires in order to get an idea about the investor’s assets, liabilities, income, property, whether he/she has insurance or not, spending habits, lifestyle and other aspects in order to have an idea about how to plan his/her finances for yielding the best results.

Since the collection of this data is very important, a financial advisor suggests a face to face meeting with the investor in order to gain knowledge about the points, that otherwise would not be possible with surveys. It will also helps an investor to have a one to one interaction with his/her financial planner, share additional details, clarify doubts, expectations as there is subjectivity involved in finance. Sometimes, due to geographical boundaries, one to one meeting is not always possible but one should try making the conversations with their planner personalized even over emails or phone so that they can work accordingly.

As spoken above, people prioritize their goals according to various personal reasons and dimensions. Now, suppose, a man wants to take up a home loan as well as plan for his retirement, maybe 20 years down the line, he has to prioritize between them due to the income constraints. He can take up a home loan but on the contrary, there is no loan that pays for one’s retirement needs. On an emotional basis, he might prioritize the purchase of a home and keep the retirement planning on a secondary platform. This decision, might affect the corpus he would have wanted to achieve on his retirement after a period of time. The home loan, however, can be repaid. The point of this example is that, emotions are involved in financial planning since we are talking about personal finances here, but a good financial advisor will help his/her to remain objective and take similar decisions. Hence, there is a need to have a sound interaction with them.

Data Analysis

- After the collection of data which pertains to all aspects of the financial planning process, an advisor starts to review it. Since he/she knows about the investor’s goals with this plan and the expected time period to achieve the same, it becomes easier to review this data. This is why each step should be chalked out carefully as it is interrelated with the next ones. The investor, at this step should be actively involved with the advisor in order to give his/her own inputs, ideas, changes or share opinions about it.This makes the process of review better and smoother for the advisor as well. According to this analysis itself, the decisions of allocation of funds to pre-defined goals begins.

Plan recommendations

- At this step, the financial advisor is done with the careful analysis of the client’s assets, liabilities, insurance, other financial aspects and according to his/her expertise, will recommend plans to go about for reaching financial goals. Now, sometimes, it so happens that, advisors jump to this point and straight away give recommendations without having a sound background check on the client. This leads to incomprehensive advices and wrong decisions. If the process is not done carefully, this point has no meaning. After the three steps are accomplished, the advisor suggests on the allocation of assets of the client, alternate investment options like mutual funds, traditional debt products, life and health insurance needs, etc. A one to one meeting should be set up for successful implementation of the same.

Implementation/ execution of the plan

- This step brings us to the point where action takes place with regards to the points chalked out earlier. It was all happening on pen and paper until this step but a plan gains life only when it is executed and recognized when it is successful. One needs to be careful with this step as it requires following of a couple of instructions, adherence to legal formalities for completion. Expertise of the advisor should be taken by the client here, even for the smallest of things so that one does not go wrong anywhere. For example, in the purchase of Mutual Funds in any category, one needs to complete the process of KYC or ‘Know your Customer’ formalities. This requires submission of documents, physical presence in places as instructed and various other formalities to be completed. Such things should be done in the hindsight of the financial advisor.

Monitoring and tracking - This step is similar to follow up done by customer service after you buy a product/service in order to know whether the product is working fine, if any after sale service is needed. In general, your feedback on the activity.

On a similar scale, once your financial plan is executed, you need to monitor it again and again to know if it is working out according to the plan made, if any changes are required and so on. One should review the financial plan periodically, to evaluate the effect of changes in income levels on the financial situation, tax situation, new tax rules, the performance of investments, and suitability of new products with respect to changes in market conditions.Normally, your financial planner or adviser will schedule meetings with you at a regular frequency, to review your portfolio and discuss if any changes are to be made in the financial plan, asset allocation strategy and product strategy.

But even if your financial planner or adviser does not schedule regular meetings, you should insist on having these meetings at some regular frequency, e.g. quarterly, semi-annually,annually etc.

Conclusion

Financial planning and successful implementation with satisfactory results for the same are elements which can be combined and executed in a systematic way with the expertise of a financial advisor. He/she will give you the best recommendations according to your personal expectations and will be a friend or guide throughout the process of financial planning and implementation of it. One needs that in order to have a secure financial future.                                                                                                                                                                                                                                                                                                  -Advisorkhoj

Asset allocation is key to managing your wealth

A friend called to celebrate the success of an investment idea. She had purchased shares of a company a few years ago and it turned out to be a spectacular performer. Her small investment was now substantial and she felt good about it. Was this going to make a difference to her wealth? 

It is easy to lose track of the big picture that determines how our wealth is growing and how the different components are feeding it. Mention asset allocation, and most investors think it is a topic for classrooms, and represents theories about investments. Practical, real-life stories are about actual picks and their performances, they argue. 

Consider my friend’s wealth after she made the effort to understand what her star stock meant in macro terms. If her total wealth, including everything of value that she owned, was 100, she had 40% in the house she lived in, 30% in her provident fund, PPF and post office accounts, 10% in bank savings account and fixed deposits, 10% in gems and jewellery, 5% in mutual funds and insurance products and 5% in stocks. This was the asset allocation. 

The stock she was exuberant about had grown four times in value in the past five years. It was now 1% of her wealth. What difference did its performance make to her wealth? Marginal, at best. This is why asset allocation matters. How much you hold in which type of investment matters much more than the actual names, stocks and funds you may have. 

The objective of wealth management is to ensure that all components work towards the specific objectives of risk, return and liquidity. These three are the critical metrics by which to measure whether we have enough, or have too much, or have a misalignment with respect to our needs. It takes a simple table to write down the current value held in each one of the components, the rate of growth for the past year, and the percentage held. The return earned by the wealth is the weighted average of all components. 

This asset allocation provides the much needed big picture view of wealth. How the components will grow will depend on how each one’s value changes, and how much our friend invests on an ongoing basis in them. She has the power to modify the proportions deliberately, by both moving money around and by making additional contributions from her savings. The final number of 9% can be modified thus. 

The changes she makes to her wealth are not about returns alone. She has to consider both risk and liquidity. If she chooses to increase her investment in property, since that asset provides a high level of return and she can obtain a bank loan to fund it, she will find that the asset allocation becomes less liquid. She may not be able to access this asset for small liquidity needs. She cannot sell one of the bedrooms to fund a holiday, or pay a college tuition fee. 

If she decides to keep the money in the bank, she will have liquidity but will sacrifice returns. As she ponders over her decision about allocation, she will have to consider the prospective returns on her assets, which is what we know as risk. The rate of return on bank deposits, as well as PF, PPF and others, have been going down. This will reduce their contribution to her total return. She runs the risk that property prices and equity shares would swing in value significantly year after year. .. 

Asset allocation is thus a strategic decision and an important one. There is no need to be exact about the proportion or choose to modify and rework it too often. What is required is an eye for the components and how they all come together. 

Many enjoyable creative processes are about a combination of components, each one doing its own thing, retaining its distinctive features, while delivering an end result that is harmonious and beneficial. Would you set a single standard of performance for an entire orchestra of varied musical instruments? Would you expect a spin bowler to score runs like an opening batsman? Would you expect the pickle on your plate to equal the contribution of your salad and vegetables? Would you create a garden where all plants and trees fruit all year long? 

Investing is also a similar creative process, where asset allocation is the assembly you create, for the harmony you wish. A PPF account may not do much for returns, but being a stable contributor year after year, it reduces the risk of the portfolio. A single stock may have done a stellar job, like that beautiful sixer hit at the opportune time in a game of cricket, but that may not be enough to win game after game. House ownership may feel like an accomplishment, but an entire musical concert cannot be made up of the stringing sitar that keeps the notes in place. 

Bringing various components together provides the much-needed diversification to your wealth. It offers the comfort that each one has a contribution to make, and is balanced well by another. If returns from bank deposits are lower, equity makes up for it; if equity is risky and volatile, bank deposits reduce their impact. 

Asset allocation is the single most important decision you will make about your wealth. Make it a deliberate and strategic decision, just as a mindful cook would choose ingredients for a fine end product, keeping in mind the preferences of those who are to eat. Consider your target for return, your preference for risk, and your need for liquidity, and get the big picture in place. 

The micro choices you make about which specific stock, which fund, which type of deposit in which bank, would not matter as much as how much of your wealth is in each of these assets. By all means monitor them all and check how each component is working. The game is won by how your team has been composed, so that the unknown googlies do not affect the final outcome. 

                                                                                                                                                                               -et wealth

Why starting to save early and saving enough is the only way to achieve financial independence

Many people ask for different kinds of financial advice. Sometimes, it is about inputs: ‘I have a certain amount of money. What should I do with it?’ Sometimes it is about outputs: ‘I need a certain amount in five years. So what do I need to do to ensure that this happens?’ Sometimes it combines both. 

All these entail well-established and sensible ways of finding solutions. However, there’s one request that is really hard to respond to, and this has to do with financial independence. It may appear to be a vague term, but signifies roughly similar things to different people. This is not having to worry about money, ever. 

It is a common enough dream. Since the daily grind of earning dominates our lives, a permanent relief from this is the freedom that most of us desire. Of course, there are many degrees of financial freedom, and the highest is not having to work to earn for the rest of your life. 

Then again, there are many who do not have to work. There are those with large inheritances, and those whose burden we taxpayers are committed to carrying all our lives. However, it takes most of us our entire working lives to reach that stage, if at all we reach it. 

The fact is that if we save and invest with a modicum of planning, lesser degrees of financial freedom can be achieved earlier in life, and can be just as rewarding. For salaried people, achieving even a mild degree of financial freedom early in life is more important now than it was a decade or two ago. India is clearly passing through a job crisis. There are a number of people among the urban middle-class, who have suddenly lost their jobs. Youngsters are finding it difficult to find jobs, or are forced to accept low-quality employment. Middle-level executives are being shunted out of employment because employers think they can be replaced at a lower cost. 

This widespread crisis in personal financial confidence is different from the way things were a few years ago. Most salaried people were confident in their jobs and sure of frequent increments, either in their current jobs, or better ones. They may not have had actual financial freedom, but effectively felt like they did. One can’t really say when the employment situation will change for the better. 

However, those of us who change their attitude towards money, savings and personal finance will be much happier, and will be able to deal with this new, uncertain world much more easily. While these job-related problems continue, the only people who are relaxed and not stressed are the ones who have enough savings. Unfortunately, the proportion of younger earners in their 20s and 30 who save, is quite low. In fact, the young generation is almost uniformly dedicated to negative savings. As soon as people start earning, they take on loan EMIs, essentially spending future savings today. 

This sounds like the same crusty advice that older people always give to the young, but it happens to be true. Whether the job environment improves or not, saving as much as possible at the beginning of one’s career immeasurably improves one’s happiness levels later. Today, those who have savings that are equivalent to even a year or two’s expenses (including any loan EMIs) feel much more relaxed about their careers. 

Not just that, I’ve seen that those who have achieved even this financial security are able to negotiate in their employment better than those who cannot take any risks. 

This is actually as close to financial independence as most of us can get. It sounds like an obvious thing, but the first step to garner enough savings is to save, and the second step is to save enough. Unfortunately, many of us don’t get started for years after we start earning. Given the hyper-persuasive consumerist culture that surrounds us, it’s not easy to start—and there’s no other way to achieve financial independence. 

......ET Wealth

Thinking of Lumpsum investments in mutual funds: What about STP?

Imagine you have got some lump sump of Rs 8 Lakhs and decided to invest the entire sum into equity mutual funds. However, looking at the current market level which is almost at an all-time high, you may feel unsure to invest the entire amount in one go.

You can take a smart decision and opt for Systematic Investment Plan (SIPs) or go with Systematic Transfer Plans (STPs).

What are the advantages of Systematic Transfer Plans (STPs)? Systematic Transfer Plan (STP) is a mechanism by which an investor is able to transfer a fixed or variable amount from one mutual fund scheme to another mutual fund scheme.For example - An investor can park a lump sum amount in a liquid fund that can be transferred in a staggered manner into another scheme, say an equity fund of the same mutual fund house (AMC) at regular intervals.

The systematic transfer frequency from one fund to the other can be on a daily, weekly, fortnightly, monthly or quarterly basis depending on the option offered by the AMC. There is a minimum fixed amount that needs to be transferred on these frequencies.

Investors who are investing for their long term financial goals like, retirement, children education etc. and at the same time, are concerned about market volatility, they can invest their capital in a low risk debt or money market (e.g. liquid or ultra-short term funds) and use STP to transfer a fixed amount from liquid or ultra-short term funds to equity mutual funds on a regular basis over a period of time suitable to them. On the other hand, if the investors are nearing their financial goals and are worried that markets may be volatile or get into correction when they need the fund, they can transfer a fixed amount from their equity mutual fund scheme to liquid or ultra-short term funds via STP.

STP is a proven way that an investor can take to invest in mutual funds to get the maximum exposure to the equity markets while minimizing the risk. Needless to mention you also get the expertise of a professional fund manager who helps you to get the best return on your investments.

In today’s dynamic equity market scenario, there is an inherent risk involved when taking an advantage of the favorable weather in both equity and debt markets. Therefore, it is advisable to be cautious when taking exposure to these respective assets classes and proceed smartly and prudently. The idea should be to balance between these two assets while minimizing overall risk. The method of STP investing helps you achieve this very easily.

How does mutual fund STP work?

With STP, investors can maintain a balance of risk and return by splitting the investment amount over a period of time. One of the benefits of STP is that during volatile market the investors can invest systematically in equity mutual funds and earn risk free returns by investing in liquid or ultra- short term mutual fund schemes.

Therefore, in your case you can invest your amount of Rs.8 Lakhs as lump sum in a liquid or ultra-short term fund, and then transfer a fixed amount at an interval decided by you to an equity or balanced fund (fund selection should be based on your risk taking ability).

Benefits of Mutual Fund STP

Power of Compounding

Investors also get to compound their wealth and allow it to grow substantially with the help of power of compounding over a long period of time via Systematic Transfer Plans (STP).

Tactical asset allocation and rebalancing

You can change funds as and when you like with STP. For instance, if you have invested in a liquid fund but you perceive the equity to do well and want to take a gradual exposure towards equity then, STP will help you in doing so. On the other hand, if you expect the markets to undergo a corrective phase, and take a decision to gradually disinvest from equity mutual funds, as a smart investor would prefer, again STP can act as potent tool to transfer to the liquid fund from the equity fund.

Mostly, it is seen that investors give redemption request forms, while reallocating assets within categories of mutual fund schemes, and then invest into another mutual fund scheme as they deem fit. Instead investors can choose STPs that is considered as the best mode to transfer the money systematically in such cases.

Therefore, an investor can re-balance the portfolio by switching investments from debt to equity or vice versa with the help of STP.

Therefore, STP enables you:

• Take advantage of the market scenario


• Rebalance your portfolio

Help in financial planning

If you are planning for any important long-term financial goals then STPs can be of great utility to help you create a long term corpus in equities while taking minimal risk and rupee cost averaging. Thereafter, transfer back gradually from equities to debt when you are nearing your long term financial goals.

Disciplined investment

While there will be some judgement involved in your STP investments, financial experts feet that, plan based disciplined investing gives better results than investments made on gut feel or tips or ups and lows of the market levels. As disciplined investing also takes emotions out of the investment process, it helps you remain objective. You should not discontinue or break your STP because of market movements in the short term as it may end up harming your long term investment returns.

For example - You have initiated a 6 months STP from a liquid fund to equity mutual fund. You find that markets are rising post you have started the STP to equity fund, you should not break your STP just because the market rises or falls sharply in a month. STP is a defence mechanism against volatility. Breaking your STP based on sharp stock market movements either ways is trying to time the market which is nearly impossible.Therefore, we can say that the primary objective of an STP is to preclude the need of market timing.

Protection of profit

Sometimes a harsh bear market or crash can wipe out the profits accumulated by investors over the years. This can be very disappointing for investors as it may jeopardize their long term financial plan. A capital appreciation STP can help investors protect their profits by transferring capital appreciation in one scheme (e.g. equity mutual fund) to a low risk scheme (e.g. liquid fund). A capital appreciation STP helps the investors reduce their overall mutual fund portfolio risk, without changing the asset allocation.

Conclusion:

Mutual Fund Systematic Transfer Plan (STP) can be seen as an extension of SIP. In the case of SIPs you can invest in a mutual fund scheme with as low an amount as Rs.500. However, in STP, an investor gets an option to invest a lump sum amount in any debt mutual fund scheme and at periodic interval, can transfer a fixed or variable sum into an equity mutual scheme or any scheme of choice.

An investor who seeks stable returns while taking some exposure to equity or equity oriented mutual funds with an objective of wealth creation can opt for STP facility.

                                                                                                                   - By advisorkhoj

Concerned about your SIP returns? Here’s what you need to know

With the Sensex and Nifty touching new highs over the last few days, your equity portfolio may not reflect the same. There is a high probability that your Systematic Investment Plans (SIPs) in equity mutual funds over the past 8-12 months may show negative returns. Worried? Don't be, as this could be the best thing that has happened to.As investors, we all hate to see our portfolios give negative returns. While investing is easy these days, creating wealth is extremely tough as we go through such market cycles. There is a saying that “the stock market always rewards patient investors” and it’s at times like this our patience is tested.

The silver lining here is that such market cycles help you create wealth for yourself. The investments you are making (in equity mutual funds) and the way of investing (SIP’s/STP’s) are best suited for you to take advantage of market volatility, especially taking into consideration the time frame of your financial goals (the further away your goal in number of years the higher allocation you would have towards aggressive small and mid-cap funds).

We firmly believe that this is not the first or the last time you will be seeing high market volatility and as financial advisors, we are equally confident that being patient and continuing your investments will ensure you meet your financial goals.

Remember, only when the markets fall is when the opportunity is created for higher returns in the future. With SIP’s you are ideally placed to take advantage of this situation as every time the market falls your monthly investments buy more units in your mutual fund. This will ensure larger returns when the market returns to growth mode.

Consider this real life example of an investor who started a SIP of Rs 10,000 per month in Franklin India Prima Fund in January 2010 (fund value today: 21.76 lakhs versus a total invested principal of Rs 9.6 lakhs). The following is only one of several examples of how depressed equity markets during an accumulation phase have paid off richly by creating wealth over six to eight-year time frames.

Market movements are not in our control, however, by making sure your investments are in the right mutual funds as per your risk profile, and through SIP modes, not only reduce risk but ensure that you meet your important financial goals by averaging out (by buying more units when the markets fall).

Although it doesn’t sound good, the best thing to happen to your investments in the initial (accrual) stage is low market returns because that will make a significant difference to your portfolio in later stages when you are close to achieving your goals.

This is where focusing on long-term investment goals provide strength and patience to not get carried away by short-term market movements. Greed and fear are your biggest enemies when it comes to meeting long-term goals. This is not the time to let fear ruin your investment decisions.

The key to success would be to get a good financial advisor who understands your finances and makes investments based on your investment goals.          

                                                                                                                                                                                                            -Money Control....