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