What makes good advice timeless and what should an investor look for

One of the things that suddenly became very popular on social media come the start of the New Year, was the #Ten Year Challenge. Great pictures and stories of how companies have progressed, how careers have changed, and of course how all of us have aged, flooded social media timelines. As we reflected on what the past was like, the inevitable predictions of what the next 10 years are like – the next #Ten Year Challenge – also started. Will what was relevant ten years ago, or even today, be relevant ten years later, especially in the context of markets and money, where regulations, markets, and even India change so dramatically? Will technology take over the world, will machines generate alpha and will apps make financial advice obsolete? The temptation is often - especially given how much the last 10 years in markets have brought – to say yes. I thought a lot about this question, and actually – as I reflected on my own life, and on many examples in many domains that surround us, I truly believe that if there is one thing that will stand the test of time – it is financial advice. What makes good advice timeless, and what should an investor look for?

Timeless advice talks behaviour, not technicality

Money management is a business that is full of complex and often very technical jargon, even though at its core investing is a very simple business. There is a human temptation to believe that the value of advice – as an advisor or as an investor – lies in decoding this technical stuff, in the complex analysis of funds and portfolios, in elaborate market outlooks and commentaries. The truth is anything that is technical, can be outsourced beyond a point. What cannot be is managing behaviour, and timeliness advice focuses on the behavioural not the technical. Only a good advisor will tell an investor not to redeem from equities in 2008 or invest in small caps in early 2019. Ask any businessman who is build a successful business and they will tell you their key mentors gave them solid advice on the values needed to build a business, not necessarily the technical nuts and bolts of how to run it. So much of money is about managing human behaviour, and behaviour doesn't change over decades. If it did and if managing behaviour could be outsourced, perhaps parenthood would be out of date!

Timeless advice is customized and specific

Did you know that when Master Blaster Sachin Tendulkar started batting, he held the bat a little lower than normal because it was his brother Ajit Tendulkar's slightly bigger bat? On observation, his now legendary coach, the late Ramakant Achrekar told him to hold the bat a little higher for better grip. On observation after a few games, however, the coach realized Sachin lacked the same control in the new format, and told him to forget what he learnt and go back to his original grip. The approach to holding a bat that may have been right for 95% of players, was not right for Sachin. Incidentally, at Archekar's recently funeral, Sachin said one of the reasons for his longevity in the game across three formats – Test, ODIs and T20 was this specific advice. Just like in sports, there are different strokes for different folks, in money, good advisors customize advice for different customers – depending on their goals, risk profile, and starting point. There is no right asset allocation or right set of funds – the right set differs for every investor. In a world of constantly changing market dynamics, products and regulations – like cricket formats, timeless advice that is customized will be a constant.

Timeless advice focuses on creating opportunities

In markets, change is one of the only things that is permanent, and in every correction there is a new opportunity. Many investors today however are scared to explore these new opportunities – either because of the lack of information, the lack of expertise or just fear and inertia. Great advisors, who stand the test of time, create opportunities for their investors. There is an interesting example from the world of Bollywood, on how film producer and director Karan Johar has played a guiding hand in the careers of many actors – from Saif Ali Khan to Alia Bhatt, most recently. As he said once in an interview, many actors lack outside perspective, and as an advisor, he provides that perspective. He identifies a positioning and gaps in an actor's portfolio, and he creates opportunities to fill those gaps. He becomes the “advisory board” of the actor. Good advisors do the same thing – they define the goals and objectives of a portfolio, find the gaps and identify the opportunities to meet gaps, whether it is planning for retirement a little early, creating international exposure at the right time, or starting new asset classes for the investor.

Timeless advice is focused on a vision and executing it

The Maurya Empire occupies a pride of place in India's history, and while it was formed under the leadership of Chandragupta Maurya, his advisor Chanakya is widely credited with its establishment. Not only did Chanakya groom the emperor into a good leader and commander, but he was the first to see the vision of a unified India and not just a large India. He wanted Chandragupta to not just be remembered as a conqueror and in fact even after this death, he documented many of his principles and vision in the book Arthashastra, which India's former NSA advisor, Shiv Shankar Menon states, is relevant even today. In money too, good advisors will have a vision for their investors financial journey – one that will start from their early 20s ideally when they just start earning, grow into the 30s and 40s as both earnings and responsibilities grow, and then sunset into retirement. A good advisor will map out a financial journey and execute it completely and relentlessly, going the extra mile beyond the portfolio when required including even resolving a family dispute.

I'll end by saying that we at Edelweiss AMC truly do believe that #Advice Zaroori Hai – ten years ago, it is today, and it will be ten years from now. Behind many success stories of great individuals – whether in film, cricket, business, and in fact behind the creation of India, are the stories of great advisors and great advice. Good advice has been sought since 300BC, and while past performance is not indicative of future returns, trust is timeless, goals have no age, and good advice is forever.

                                                                                                                          -advisorkhoj

                                                                                                              

7 things you must know about equity investing

Not everyone likes equity investing. Some see it as a zero sum game, and therefore, wasteful; some equate it with gambling; some are suspicious because money seems to be made easily; some dislike anything that does not come with guarantees; and some love their deposits too much to even bother. But there are some who simply love it, even if they don’t understand a thing about it. Trading in stocks has spread from traditional strongholds to various locations across the country, thanks to the electronic trading screen and technology. 

The real story about equity investing is neither of these two extremes. Mindless trading does not make anyone rich, except for the ardent believer in luck. If a trick cannot be repeated for predictable gain, it is useless. Shunning equity as a gamble also does not help, as it shuts one’s wealth from an otherwise legitimate and democratic way to multiply it. What should an ordinary investor know and keep in mind about equity investing? 

First, to invest in equity is to invest in the future of a business enterprise. There is still no surefire way to tell what the future holds. Despite all pretenses of expertise, no one can tell in advance which business will succeed and which will fail. This reality that you simply do not know how your investment will perform in the future, is what makes equity investing risky, scary, exciting or thrilling, depending on how you are wired. You should like dealing with the unknown without getting stressed about it.

Second, the many stories you hear about how someone bought a stock for a pittance and is now sitting on millions, are sickeningly one-sided. They are all products of hindsight. It is easy to look back and track how brilliantly a stock has moved over the years. An actual investor in the stock will tell you how bumpy that ride was, and how there were many points at which it was unclear whether the stock was still a winner or not. For one success story, there are a hundred failures which no one usually talks about. Be aware that no one pays you for doing nothing. 

Third, there is no easy way to pick a stock. There are multiple factors at play, and you cannot tell which one will become important and which one will fade away. Those who have spent their lives analyzing stocks would have developed the expertise, and an intuitive judgment about what to look for, and how to spot the warning signs. They also cannot be too sure, but they have the experience to guide them. They know that they could go wrong, and therefore, are usually humble and quiet. Discard all tips that are dished out free. 

Fourth, the decision to buy is a tough one. There is the entire universe of listed stocks to choose from, and no one knows which one will turn out to be a multibagger or what the time frame to look at is. Investors form their own selection approaches—we will call them investment theses. In a formal investment management set up, the specific reasons why a stock is being bought is written down. It is a good practice to do that, so performance is tracked in terms of what the original assumptions were. A stock trader sets a price target; a short-term investor sets a time frame; a value investor sets a margin of safety; and so on. Buying must be subject to a discipline and write down why you bought a stock. 

Fifth, an ordinary investor is disadvantaged with respect to access to information and its analysis. A broking house hires and pays for databases, research, qualified manpower, and tracks stocks and sells reports. A mutual fund is able to hire brokers to serve it and offer it recommendations, apart from having in-house expertise in analysis, research, selection and portfolio management. Individual investors have to rely on publicly available information and their own homework. It is very common for highly involved individual investors to work as a group, sharing costs and discussing stocks, and undertaking extensive research on a shared basis. Online chat forums and television programmes should not be mistaken for research. Be prepared for intensive homework, else you are hoping to just get lucky. 

Sixth, money is not made on single bets. Successful entrepreneurs who set up worldchanging businesses are the only exceptions to this rule. Not everyone can become the next Bill Gates or Jeff Bezos. For most of us, there is no courage or conviction to stake all that we have in a single business. We all invest in many stocks, and that is how it should be. Recognise that you are building a portfolio, and focus on its composition— what it holds and how much. Having small bets in a many stocks will not make you rich.  

Seventh, when you do not know the future, and you buy based on incomplete current information, and when that does not perform, your only saving grace is the ability to accept your mistakes and cut your losses. Money is made in equity investing not from stock picking alone, but from recognising that your investment thesis was wrong, and that the stock is not doing as well as you expected. A trader is swift to book losses; he won’t let his capital erode. An investor has to deliberately take the steps to sell what is not working. Many cannot let go and live in false hope. Too many invest when a stock is falling in value, putting good money to chase the bad. Too much has been lost in equity investing by those who refuse to own up to their mistakes. 

A diversified portfolio of stocks, selected for their potential, but replaced when they fail, will deliver the growth you are seeking. Investing in an equity mutual fund is an efficient way to invest in equity. Investing in an index ETF is both efficient and cheap. Investing by yourself is thrilling, but fraught with mistakes as you climb the learning curve. Choose your pick, but do choose equity. 

The wealthiest people in the world today are equity investors. Don’t get left behind because you don’t understand how a business should be run. Someone else has figured it and equity investing offers you a fair, democratic, and efficient opportunity to take part in that success. Don’t wait for names. Spend your energy on putting down your process for participation. 

                                                                                                                                                                                -etwealth

                         

Investors will be better off if they stay put and not react

Is it a good time to enter the market? 

Over the last 2-3 years, there has been lack of clarity on where we are in the economic cycle. There is confusion on interest rate trajectory, sustainability of GDP growth after demonetisation and GST, and more. My sense is that finally we will see a phase of economic expansion. The recent actions of the government and the RBI will precipitate this scenario. RBI has changed its stance and reset inflation expectations, while the government is in expansionary mode given it is election year. The scenario for banks is also improving, as is the trajectory for corporate earnings. For investors, it is a good time to start building a portfolio as the broad markets have corrected dramatically. The pull-back in small and mid-caps has not been led by fundamentals. Clearly, there is value emerging in this space. 

How will your concentrated investing style in funds play out in the current scenario? 

We have 20-25 stocks on an average across funds. When you cross 15-20 holdings, it doesn’t add any diversification benefit to the portfolio. It doesn’t add to risk; it is more about having conviction in your bets rather than having positions that do not materially contribute to the portfolio. Even if there are 50-60 stocks in a fund, the top 20 stocks would end up forming 60-70% of the portfolio. The last 10-15 stocks are not likely to comprise more than 1-2% and won’t add to returns. 

Are you investing aggressively in mid- and small-caps? 

We have ramped up exposure to mid-caps in our multi-cap fund. In our portfolio management services business, almost half the assets across strategies are deployed in this segment. In our Wealth Creation study, we have found that over a five-year period, there is a high probability of crossover from mid-caps to large-caps. In India, some brand leaders are from the mid-cap segment. In the mid- and small-cap space, both gains and losses can be exaggerated. People should avoid falling in or out of love with a particular segment. Over five years, the probability of mid-caps outperforming is significant. Considering the 1-year rolling return of mid-cap index versus Nifty in the last 15-20 years, the midcap index has beaten Nifty by 4% on average. Today, the mid-cap index is more than 20% behind Nifty. 

I don’t agree the industry is profitable today on account of its large retail base. The industry asset base has expanded because it has delivered healthy returns—there has been an appreciation in the fund NAVs. Getting retail business is very expensive. If somebody puts in Rs 3,000 in SIPs, in a year he would be investing Rs 36,000. 

Do you know what is the cost of procuring and processing this Rs 36,000? When a SIP is registered, it costs money to pay the payment gateway and the bank for registering it. For every SIP amount to be debited, we have to pay the bank. We are also paying platforms like NSE or MF Utility, apart from the registrar and transfer agents. Effectively, the cost of processing the SIP itself is around Rs 75-100 per year for the AMC. On an average asset base of Rs 18,000 for the year, the AMC will charge a TER of 2%. Out of this Rs 360, Rs 100 will be the recurring cost of registering and processing instalments, Rs 180 is the commission for the intermediary. Now the TER has been cut by 15-20%. But associated costs are not going to come down. 

So even if the industry has procured two crore SIP in the last couple of years, all those assets are not profitable. If assets appreciate, then it is fine, but if assets depreciate and the cost base keeps going up, then the AMC takes a hit. Passing on the economies of scale to investors is the right thing to do, but my view is that we may have gone a bit too far. It can backfire, particularly as intermediaries also face costs for running their business. They may not feel inclined to serve retail investors if revenues keep falling. 

Will the shift to trail-based commission model add to distributors pain? 

The shift to trail commission is less of an issue compared to the basic remuneration. It is a cash flow issue—whether it is upfront or trail-based. It should be trail-based so there is no incentive to generate more revenue by generating new sales. It cuts out the incentive for mis-selling. The trail ensures alignment of interest with the investor. If the fund performs, the investor makes money and intermediary gets remunerated. It is a good thing. 

The perception around debt funds has soured after recent credit events. Are AMCs geared to provide safety to investors? 

The fixed income practice in AMCs has evolved a lot. AMCs have deepened their teams and enhanced capabilities. We should not form an opinion based on stray instances. Extrapolating from that will lead to wrong conclusions. I keep hearing that banks have capital but AMCs are starved of it. Fact is banks are leveraged; we are not. 

In the last 2-3 years, interest rates have been low. In a low interest rate environment, when you try to maximise return, you end up taking risks. It is a transient phase and I wouldn’t draw any conclusion from recent episodes. The situation is largely under control. If investors panic in a liquidity related issue, it can become a credit related event. Take help of your adviser and take another look at your debt portfolio. If you hold on, there are higher chances that money will come back. Investors are better off if they stay put. If you react, you will lose money. 

                                                                                                                                                                             -etwealth

Three Cheers for Piyush Goyal

The lesson is there for all to see now: if taxes are paid honestly by those at the top (willingly or unwillingly), then the poor and the middle class can reap the rewards of progress. The huge increase in the Section 87A tax rebate has pushed a chunk--around 3 crore people--below the tax threshold. Effectively, with some tax-planning, I doubt whether anyone with a salary of less than Rs 60-65,000 a month will pay any income tax at all.

Amusingly, stand-in Finance Minister Piyush Goyal gave some tax-planning tips right there in the budget speech. This sounded a bit strange but then, being a CA by training, and an All-India rank-holder at that, I guess he couldn't resist the temptation to start giving advice on how to pay less tax! Certainly a pleasant change from the stern lawyer finance ministers we have been used to.

As Mr Goyal himself pointed out, add your PF deduction, insurance and other section 80C investments and the tax free threshold is up to Rs 6.5 lakh. If you can squeeze out a few more savings, you could be at Rs 7 lakh. Then, on top of that (this part the FM didn't spell out, obviously), most private sector employers would step in to restructure salaries which are slightly above the exempt limit. All in all, the big chunk of lower and the middle-middle class is well and truly exempted from paying any tax at all.

From my perspective of a savings cheerleader, I see another bonanza here. For taxpayers who are in the Rs 5 lakh to Rs 7 lakh range before deductions, there is now a much stronger incentive to make tax saving investments. In the low-inflation environment--which Mr Goyal pointed to with great pride--it's relatively less difficult to start saving. In any case, tax incentives play a strong role in getting middle-class Indians to save, and starting early is the best possible thing.

From a personal finance perspective, another interesting measure is the extension of the Section 54 capital gains exemption that one gets from repurchasing one house to two. Nowadays, at a certain stage in their lives, many people need to essentially exchange one older (or larger) house for two smaller or newer ones. Up till now, capital gains exemption would be available on only the proportion of the proceeds that goes in to one of those. It's encouraging to see these kind of nuts-and-bolts fine-tuning in the tax laws that results in substantially more money in the pockets of savers. The fact that this saving is available only once in a lifetime is just the kind of justified limitation that ensures that it can't be abused by those in the real estate business. The same goes for the exemption on the tax exemption on a second self-occupied house. As the FM pointed out, these are now real middle class situations, and not just a problem of the rich.

In fact, looking back at the various things that the budget could have had, one can see the fine line it treads politically. There's no doubt that this is an election budget and it's giveaways--both in terms of fresh expenditures as well as revenue foregone--are done with an eye on votes. That's something you expect in a democracy.

However, there are two things here that have the Modi stamp. One, the bang-to-buck ratio is huge. For example, for the Section 87A hike, 3 crore people get the benefit--but the benefit stays limited to those in the first tax bracket. And two, there is great care taken to not do anything that can be seen as pro-rich. I've been writing these last few weeks for the rollback of last years' capital gains tax on equity investments. However, in the context of the budget that was presented today, it's entirely understandable that such a thing was not possible. At this point of time, you can't be seen to roll back a tax that is paid mostly by the rich. That's the reality. All things considered, there's nothing to complain about, and everything to cheer about.

                                                                                                                                                    -etwealth

Public Provident Fund + SIP Plan: How to retire at 40 in India with Rs 41,000/month Pension or Rs 70 lakh cash

Public Provident Fund + SIP Plan: Financial needs differ from persons to persons as priorities differ for different income groups. But the wish to get rid of mentally taxing jobs could be common among many. While it may be easy for those in the high-income group, as they can obviously save and invest more, those in the middle-income groups can also dream of retiring at 40.

Public Provident Fund + SIP Plan: Nine to Five job is boring. Leaves no 'me time.' This is what a large section of millennials feel today. They want to grow rich and retire early, do what they wish. While literally, it is impossible for a person to retire at any stage of life, it is certainly possible as far as getting freedom from the stranglehold of a routine job is considered. Hence, it is no surprise that "How to retire at 40" is still a trending subject for millennial netizens. A quick Google search of the phrase "How to retire at 40" throws as many as 14,10,00,000 results!

The internet is flooded with strategies for retiring at 40. There are scores of people who have set examples by actually retiring from routine jobs at 40 and moved on to pursue their passions. The crux of all the "How to retire at 40" stories can be summed in two pointers: 

- Be clear about what you mean by retirement. Retirement can not actually mean doing nothing at all.  You need to have a plan, maybe a dream, to do something you will do after retiring from your taxing present-day job. 

- Be clear about your financials. Set goals. Invest. Grow money. Earn More. Save More. Retire with a lump sum that will keep you afloat. 

For financial health, you need to start saving and investing at the earliest possible opportunity. 

Financial needs differ from persons to persons as priorities differ for different income groups. But the wish to get rid of mentally taxing jobs could be common among many. While it may be easy for those in the high-income group, as they can obviously save and invest more, those in the middle-income groups can also dream of retiring at 40. Here's a simple illustration to show how this dream may be realised: 

Suppose you get employed at the age of 25 with an annual income of Rs 6 lakh. By saving and investing Rs 2 lakh of the Rs 6 lakh, one can meet some of the most pressing financial needs. 

For assured returns, it is advisable to split the Rs 2 lakh into two forms of investments - First, in guaranteed returns schemes like Public Provident Fund; Second, in SIPs that generally give good returns in the long run. 

Expecting a minimum return of 12% on a monthly SIP of Rs 8300 (approx Rs 1 lakh/year), one can expect a return of around Rs 41 lakh in 15 years. This money can be used for meeting basic financial needs after the early retirement. By putting this money in schemes like LIC Jeevan Shanti, one can start getting an immediate annuity of around Rs 3 lakh. 

The second Rs 1 lakh can be invested in the PPF which comes with a lock-in period of 15 years. One can extend this account beyond 15 years in an instalment of five years. At the current rate of 8% interest, the PPF account can turn an investment of Rs 1 lakh/year to Rs 29 lakh in 15 years. If this is extended for another 20 years, Rs 29 lakh can grow up to Rs 1.3 crores. 

In case you withdraw Rs 29 lakh of the PPF account at the age of 40, then coupling it with the earning from SIP, you will have a lump sum of Rs 41,000,000+29,000,000 = Rs 70 lakh. By investing this in Jeevan Shanti, you may start getting an immediate annual pension of Rs 5 lakh per annum (Approx Rs 40,000 per month). 

There are many ways in which you can plan your financials for retirement at 40. For best results, take the advice of an expert financial planner. 

                                                                                                                            -zeebusiness

Three Cheers for Piyush Goyal

The lesson is there for all to see now: if taxes are paid honestly by those at the top (willingly or unwillingly), then the poor and the middle class can reap the rewards of progress. The huge increase in the Section 87A tax rebate has pushed a chunk--around 3 crore people--below the tax threshold. Effectively, with some tax-planning, I doubt whether anyone with a salary of less than Rs 60-65,000 a month will pay any income tax at all.

Amusingly, stand-in Finance Minister Piyush Goyal gave some tax-planning tips right there in the budget speech. This sounded a bit strange but then, being a CA by training, and an All-India rank-holder at that, I guess he couldn't resist the temptation to start giving advice on how to pay less tax! Certainly a pleasant change from the stern lawyer finance ministers we have been used to.

As Mr Goyal himself pointed out, add your PF deduction, insurance and other section 80C investments and the tax free threshold is up to Rs 6.5 lakh. If you can squeeze out a few more savings, you could be at Rs 7 lakh. Then, on top of that (this part the FM didn't spell out, obviously), most private sector employers would step in to restructure salaries which are slightly above the exempt limit. All in all, the big chunk of lower and the middle-middle class is well and truly exempted from paying any tax at all.

From my perspective of a savings cheerleader, I see another bonanza here. For taxpayers who are in the Rs 5 lakh to Rs 7 lakh range before deductions, there is now a much stronger incentive to make tax saving investments. In the low-inflation environment--which Mr Goyal pointed to with great pride--it's relatively less difficult to start saving. In any case, tax incentives play a strong role in getting middle-class Indians to save, and starting early is the best possible thing.

From a personal finance perspective, another interesting measure is the extension of the Section 54 capital gains exemption that one gets from repurchasing one house to two. Nowadays, at a certain stage in their lives, many people need to essentially exchange one older (or larger) house for two smaller or newer ones. Up till now, capital gains exemption would be available on only the proportion of the proceeds that goes in to one of those. It's encouraging to see these kind of nuts-and-bolts fine-tuning in the tax laws that results in substantially more money in the pockets of savers. The fact that this saving is available only once in a lifetime is just the kind of justified limitation that ensures that it can't be abused by those in the real estate business. The same goes for the exemption on the tax exemption on a second self-occupied house. As the FM pointed out, these are now real middle class situations, and not just a problem of the rich.

In fact, looking back at the various things that the budget could have had, one can see the fine line it treads politically. There's no doubt that this is an election budget and it's giveaways--both in terms of fresh expenditures as well as revenue foregone--are done with an eye on votes. That's something you expect in a democracy.

However, there are two things here that have the Modi stamp. One, the bang-to-buck ratio is huge. For example, for the Section 87A hike, 3 crore people get the benefit--but the benefit stays limited to those in the first tax bracket. And two, there is great care taken to not do anything that can be seen as pro-rich. I've been writing these last few weeks for the rollback of last years' capital gains tax on equity investments. However, in the context of the budget that was presented today, it's entirely understandable that such a thing was not possible. At this point of time, you can't be seen to roll back a tax that is paid mostly by the rich. That's the reality. All things considered, there's nothing to complain about, and everything to cheer about.

                                                                                                                                                -etwealth

The difference between 'investment' and 'savings'

Often, we have heard of financial planners, advisers and also mutual funds peddle words like 'saving' and 'investment'. But did you know that savings and investment are two separate concepts?

Every month, most of us earn an income. This could either be in the form of our salary or business income. Then, we also have our expenses like food, clothing, rent, electricity and telephone bills, and so on. Once we pay off our expenses from our income, what's left is what we typically call, savings. Obviously, the more we save, the better. And we must always aim to curtail our expenses, but there are always some expenses we just can't avoid, like paying rent or a loan instalment. If the aim is to create wealth, then saving alone is not enough. We have to do something more with our savings.

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That's where investments come in. These are financial instruments that help us increase our money over a period of time. We need to invest because the cost of living goes up every year. It's called inflation. In other words, the value of money goes down. Say, you save Rs10,000 in present times, every month. If you leave this Rs10,000 as it is, it would buy fewer and fewer things as the years pass by. That's because money loses value over time, and prices of goods and services go up. That's why your money also needs to grow-and preferably at a pace faster than inflation-to be able to afford at least the same things that you could buy once upon a time. That's where an investment helps.

A mutual fund is a classic example of an investment. On offer are equity funds and debt funds. But remember, you need to ascertain how much risk you can take. There are investments that grow at a very fast pace, and there are those that grow at a slower pace, but still give returns that are more than inflation.

Fixed deposits and small savings instruments like Public Provident Fund are also forms of investments.

Not every investment instrument is suitable for everyone. If you are in the highest tax bracket, a fixed deposit would not give you returns exceeding inflation. Your money doesn't grow at a meaningful pace and therefore it doesn't necessarily do what a typical investment ought to be doing to your money box. But if you are in the lowest tax bracket and you are risk averse, then a fixed deposit works for you.

Putting money away in a savings bank account can be classified under 'savings' but not 'investment'. This is because in a savings bank account, your money lies idle. Too much savings and too little of investment doesn't create wealth.

In fact, with the proliferation of liquid funds and the instant redemption facility that many of them have started to offer, your savings, too, get a boost if you transfer your excess savings to a liquid fund account and keep a bare minimum in your bank account.

But even a liquid fund is just a parking vehicle; a savings vehicle. That is not investment. You need a basket of equity and debt funds, as per your risk appetite, as investments for wealth creation.

                                                                                                                                               -Value Research

Retirement rules are changing: We are high spenders sans inflation-linked pensions, family support

Travels during the year-end break helps me meet many people. This week’s story is about three seniors I met. The problem with those of us nudging the age 60 mark is that we don’t need much provocation to start worrying about our retirement. Here are some of the observations and lessons swirling in my head. 

Patil Mama is 92. He lives in his village and walks in his fields every day. He enjoys his food, keeps his routine, and sleeps under the stars every night. Shakuntala Mami is 76 and lives by herself in a rented house. She is immersed in spiritual and religious pursuits and spends her time teaching shlokas. Bawa is 68 and lives with his doting wife and son. He is unable to to walk or hold himself straight and his condition is deteriorating. 

First, all three draw pensions from the government. A tidy sum that appreciates every year from dearness allowance, and gets reset when pay commission recommendations are implemented. Even Mami, who draws a widow’s pension, says she has enough. So many of us now work for the private sector. Those who work for the government now have the NPS. The annuity markets pay too little and the era of guaranteed returns is gone. 

When it is time for our retirement, we will have to use finer techniques to draw upon the corpus, without depleting it. Simply depositing the money in a bank and earning interest may not be enough. How do we make the corpus grow while using it? 

Second, they all lead simple and frugal lives. They are not holding back because they have retired, but it is just that their lifestyles have been very simple. They do not care much for the luxuries that we take for granted. They don’t need expensive gadgets or clothes; they eat simple food; they are happy to travel by public transport. It is their simple habits that make their pensions adequate, leaving behind a small saving at the end of the month. 

We on the other hand, have converted into a society of consumers. We love material things; we can’t stop buying and replacing stuff. We also have begun to feel quite entitled to luxuries. Would those of us who are on the verge of retirement, be willing to give up the luxuries our corporate lives have afforded us? We may still need the car; we may have the time but still choose to fly; and we may not turn the air conditioner off just because we have retired. A spending creep has taken over while we haven’t noticed. 

Third, the quality of the seniors’ lives is determined primarily by their relationships and their health. Mama is still the patriarch who the village respects. No decisions in the household or farm are taken without his approval. He presides over most family functions and relatives routinely come by to meet him and seek blessings. Mama is a beneficiary of the fast-fading patriarchal order. Mami is loved for being the dynamic and fearless lady who lives by herself. Her neighbours and friends dote on her. Bawa, however, is a lonely man. He speaks little, is mostly by himself, and his wife worries if he is depressed. 

We are a generation that did not grow roots. We went where the jobs took us, made friends along the way, and hope for a retirement where we will make more new friends in the retirement villa we have bought. We revel at our social skills and feel confident that we won’t be lonely. Will a place filled just with the oldies be a happy one? We hope so! 

Fourth, the qualitative difference in their lives, and the joy in everyday existence is driven primarily by a strong sense of purpose. Mama is keenly following the efforts of his son to create orchards. The conversion of jowar, chilly and bajra fields into guava, sapota and coconut orchards excites him at every step. He has been following the process and keenly learning even at this age. 

Mami is learning new shlokas and hymns each day, so she can teach more people. She does not charge a fee but looks forward to hearing the stories of the women and children who come to her to learn. The buzz and interaction keeps her spirit high. She recently took a batch of North Karnataka women to Kumbakonam for a temple festival, and they can’t stop talking about how much they enjoyed it. 

Bawa is a sad man who does not practice medicine that he learned, or acupuncture and yoga that he mastered. He is not even motivated to improve his own condition with exercise or activity. He has been gripped with fear after an accidental fall a few years ago, and is unwilling to take help for his condition. He spends his time listening to music, sitting in his chair, and brooding over things he won’t talk about. Without purpose, so much of life is lost. 

Fifth, Mama hardly complains of health issues. He rests when tired, and is otherwise active. Mami keeps good health and has her routines of daily walk and exercise. Both of them love good food. Mama is fortunate to have his daughter-in-law cook what he likes. Mami is active enough to make her own food. Bawa sadly, is unwilling to see the doctor to get diagnosed and treated and has all but lost his mobility and independence. 

Many of us have begun obsessing about health—scared by stories of lifestyle diseases afflicting the middle aged. We may have to double our efforts at staying fit. We will have to remain in charge of our limbs and our body, and do whatever we can to stay active. We may also need a plan for our health and care when we age, for we may not have the luxury of a doting family hovering over us. 

While friends tell me lovely new age stories of how the newly retired travel the world, meet friends, eat out, and have a lot of fun, I remain concerned about the safety nets of pension, family, habits and health, not being present below our feet. Bawa’s deterioration sets alarms bells ringing in my head. I wonder if we are truly well prepared. 


                                                                                                                                                                      -etwealth

Why you should choose your tax saving options wisely

One’s personal finance situation changes with age. As a young earner needs to save and invest, but it is likely that his short term needs would eat more into his income. By locking his money into long term tax saving products, he might be making a mistake. He may find it difficult to keep up the investment required, or draw on it when needed. This common mismatch, especially for young investors results in dormant PPF accounts, discontinued subscriptions and missed premium payments. If  tries to access the money during times of need, he is likely to face penalties, lower realisation values or high costs. What he does to save taxes should, therefore, fit within his overall personal financial situation and needs. 

Tax planning is an integral part of financial planning, but should not be the key driver of investment decisions. Once figures out his financial plan, putting aside money to make the most of the available tax breaks would be easier. 

For investors like, liquidity needs may be higher due to unexpected expenses at the early stage of their lives. Tax-saving products come with lock-ins during which time they cannot even be pledged to raise money. He may need a term insurance much more than a Ulip; health insurance coverage more than retirement planning. Tax saving alone should not determine what he chooses to do. It might be a wiser thing to actually pay the taxes and retain the flexibility. 

                                                                                                                                                                            -etwealth