I am 44 years and working in a private company. My net earnings amount to Rs 42,000 a month. My wife, 36, gets rental income of Rs 25,000 a month. She is a homemaker.
My monthly household expense is Rs 15,000. I have monthly commitments of Rs 8,254 towards car loan; Rs 10,000 for home loan EMI and Rs 4,000 towards chit investment. I save Rs 8,000 in post office recurring deposit. I have taken a family-floater health policy for Rs 4 lakh and am paying a premium of Rs 9,300 an annum.
I have a surplus of Rs 1.5 lakh after meeting my annual commitment towards my insurance policies. I have five insurance policies and my annual premium outgo is Rs 90,000 and the sum insured is Rs 10 lakh. My savings in mutual fund is Rs 71,000. I had given Rs 3 lakh to a friend as a loan and am likely to get the money back next month.
Please suggest a saving plan taking these factors into consideration.
My son is in Class VI. I need to provide Rs 20 lakh for his engineering and Rs 30 lakh for post graduation expenses. After retirement I should have a monthly pension equal to my current expenses of Rs 15,000. Please tell me how much I should save monthly to meet my pension requirement? My family health history is good and I may live up to 80 years.
I was investing in MF through systematic investment during 2007 and 2008. I stopped all my investment during the market crash. Please suggest a few schemes. Is it the right time to start SIPs in equity MFs and buy gold ETFs? My MF portfolio consists of HDFC Top 200, HDFC Equity, HDFC Capital Builder, HDFC Prudence, Birla Sun Life International and HDFC Infrastructure.
Is my life cover of Rs 10 lakh adequate or do I need to increase the cover?
Mani, Hyderabad, (name changed on request).
Solutions
You have not mentioned when you get the rental income. Even if you are receiving it only for the past few years, there is big disconnect between your income and investment.
For wealth creation, an individual needs proper financial planning, no matter what the income level or the stage of life.
Financial planning can go a long way in helping you manage expenses and meet your goals. It is mandatory for people with limited income. But, in practice, this segment ignores such planning.
As some of your goals have less than 10 years to play out, it is high time that you have a disciplined and planned approach.
Education: As the graduation needs are spread across four years, if you save Rs 12,400 for next 84 months and if the investment earns a return of 10% you can reach the target of Rs 15 lakh. For the shortfall of Rs 5 lakh you ought to invest the Rs 3 lakh that your friend returns in an plan that gives 10%. The outgo for post graduation starts only in 2020, so you can take higher risk in your investments and target an annualised return of 12%. If you can achieve such a return you need to save Rs 13,000 every month for next 120 months.
Retirement: Retirement planning is often overlooked. Most individuals tend to give attention to it once all emotional goals are accomplished. By that time it would be too late to take risky bets on investments. By trying to save for a shorter duration monthly commitment will be stretched and, in most cases, reaching the target would become arduous.
In your case, the annual requirement of Rs 1.8 lakh, if inflated at 6 per cent, would mean that at the start of 60 years you would need Rs 4.5 lakh. By the time you turn 80, your annual pension need would be Rs 14.6 lakh. The savings in insurance is not adequate to meet the requirement.
Your rental income has the potential to take care of about two-thirds of the retirement needs, provided the income grows to match inflation. For the remaining one-third, you need to save Rs 26,000 monthly from the age of 54 for the subsequent four years. The investment should earn a return of at least 8% to reach Rs 15 lakh. Deploy this along Jeevan Shree maturity proceeds of Rs 10 lakh for your pension needs and it should earn 2% above the inflation to meet your needs till the age of 80 years.
As a backup, your maturity proceeds of other insurance plans need to be redeployed in an investment with small exposure to equity. As you have not mentioned about your provident fund contribution and gratuity, we have not factored them.
Investment: It commonly observed that investors start SIPs in mutual funds when markets are rising, and discontinue their monthly commitment when equities are in a corrective phase. This strategy goes against long-term savings strategy and the concept of SIPs.
Do ensure that all your savings are linked to goals, but do keep track of your investments and take corrective steps, if the investments start underperforming consistently for 4-6 quarters. The fresh SIPs can be started with the existing portfolio barring Birla Sun Life International Fund.
As your investment universe of MF is small, you can stick with domestic schemes as overseas investing is fraught with uncertainties and cannot be easily monitored; in any case, India is one of the fastest growing markets. Thematic funds such as HDFC Infrastructure needs constant monitoring and profit booking, if there is any abnormal rise. If you are a conservative investor, stick to diversified funds. Our picks are DSPBR Equity, HDFC Top 200 and IDFC Primer Equity.
You will be short of funds with the current investment plan. Hence you can discontinue the post office recurring deposit and continue chit investments up to maturity.
The plan suggested to you is based on your current income; do review the strategy once in six to 12 months.
Insurance: Based on your current salary and goals, we suggest that you to buy a pure-term insurance for Rs 80 lakh for next 15years and your annual premium would be Rs 19,300. Regarding your health insurance, the current sum insured of Rs 4 lakh appears reasonable. But once your income rises, you can consider buying a top-up health insurance for Rs 3 lakh.
Wednesday, November 3, 2010
When should you exit your mutual fund investment?
I believe that selling decisions are more difficult than buying calls. It is true of most investments that I can think of: we do a detailed research to buy that latest vehicle; but even when the cost of repairs and maintenance are high, we cannot get ourselves to get rid of the same. The reasons I feel are that we develop an emotional attachment to the asset; and secondly, we do not like selling at a price lower than the purchase price.
Keep a Long Term Approach
One needs to understand the way a mutual fund works. Or at least the way it doesn`t: it is not a share where you buy and sell with the aim to make a profit. We have entrusted our money with the fund manager and expect him to use his expertise and the systems of the fund house to ensure that he invests judiciously. The fund will trade in stocks, in line with the investment mandate, and we as investors will enjoy the gains from this activity. As a financial planner, we focus on the strategic allocation of your funds: how much should be in equity, of which what should be the share of large cap funds, etc. The aim is to select the right scheme for the long run so that there is minimum churn. Yet, there could be reasons to recommend an exit. Before we consider your own circumstances that warrant a change, let us examine market or external factors first.
The External Factors That Trigger an Exit
There could be an error in the selection itself. We have selected some schemes in the past based on `star` fund managers and found that, when the tide turned in the markets, they did not have the systems to execute plan B, and after some time, they jumped ship. That is an obvious reason for exit. The more dangerous situation is when the fund manager takes more (or less) risk than mandated. For example, a large cap fund may swing 40% of its investments into mid cap stocks as that`s where returns are being generated. Financial planners frown on this practice as this could leave their investors marooned. Allocation is a discipline that must be followed fanatically.
Obviously when an asset class rises more than planned, that could be another reason to take profits off the table. There could be a tactical call to reduce weights in mid cap funds, or invest into thematic funds which could warrant a switch as well. But the more fundamental reasons would be your personal needs or goals.
The Internal Factors for an ExitIf you have been dealing with your advisor since long, you would have shared your requirements with him. We for example would like to move funds from the equity asset class to safer avenues in a staggered manner where we know the requirements would be coming up in the next 12 to 18 months. In more volatile times, this period could be enhanced. That way, one can identify fixed income options to invest the money and meet your desired goals. If you get the allocation right, you will be `booking profits` regularly, and sleeping well at night. After all, isn`t peace of mind the main reason you signed up a financial planner for?
Keep a Long Term Approach
One needs to understand the way a mutual fund works. Or at least the way it doesn`t: it is not a share where you buy and sell with the aim to make a profit. We have entrusted our money with the fund manager and expect him to use his expertise and the systems of the fund house to ensure that he invests judiciously. The fund will trade in stocks, in line with the investment mandate, and we as investors will enjoy the gains from this activity. As a financial planner, we focus on the strategic allocation of your funds: how much should be in equity, of which what should be the share of large cap funds, etc. The aim is to select the right scheme for the long run so that there is minimum churn. Yet, there could be reasons to recommend an exit. Before we consider your own circumstances that warrant a change, let us examine market or external factors first.
The External Factors That Trigger an Exit
There could be an error in the selection itself. We have selected some schemes in the past based on `star` fund managers and found that, when the tide turned in the markets, they did not have the systems to execute plan B, and after some time, they jumped ship. That is an obvious reason for exit. The more dangerous situation is when the fund manager takes more (or less) risk than mandated. For example, a large cap fund may swing 40% of its investments into mid cap stocks as that`s where returns are being generated. Financial planners frown on this practice as this could leave their investors marooned. Allocation is a discipline that must be followed fanatically.
Obviously when an asset class rises more than planned, that could be another reason to take profits off the table. There could be a tactical call to reduce weights in mid cap funds, or invest into thematic funds which could warrant a switch as well. But the more fundamental reasons would be your personal needs or goals.
The Internal Factors for an ExitIf you have been dealing with your advisor since long, you would have shared your requirements with him. We for example would like to move funds from the equity asset class to safer avenues in a staggered manner where we know the requirements would be coming up in the next 12 to 18 months. In more volatile times, this period could be enhanced. That way, one can identify fixed income options to invest the money and meet your desired goals. If you get the allocation right, you will be `booking profits` regularly, and sleeping well at night. After all, isn`t peace of mind the main reason you signed up a financial planner for?
The why and how of mutual fund dividends
This article focuses on the dividend income from mutual funds - when is it worth opting for a dividend option? How does one keep track of dividends earned, and what are the tax implications?
The focus, when discussing mutual funds as an investment option, is usually on the increase in a fund`s NAV - that is, the growth in capital. And correctly so since this is the primary return the product delivers. But a mutual fund also offers an opportunity to earn a part of these returns in the form of regular, tax- free dividends. For a long-term investor in mutual funds, it is therefore important to understand the dividend option available in funds, their impact on the size of holdings (units) and the taxation on earnings from these investments.
Choosing a dividend option
All mutual funds have three plans on offer:
a) Dividend payout: Here, the dividend declared by the fund is paid out to the investor. Once the dividend has been declared and paid out, the NAV reduces by the corresponding amount. Example, if the NAV is Rs. 30 and a dividend of Rs. 5 per unit has been declared, the NAV reduces to Rs. 25. This option is suitable for investor seeking periodical income in form of regular profit booking in the fund.
b) Dividend reinvestment: The units equivalent to the value of the dividend declared are added to the folio. Here too, the NAV reduces but the number of units held increase. Example: suppose you own 100 units of NAV Rs. 30 and the fund declares a dividend of Rs. 5 per unit, giving you a dividend sum of Rs. 500. This amount will be used to purchase new units of the fund at the reduced NAV of Rs. 25, giving you a total of 120 units in your folio. This option is suitable for investors who do not require intermittent cash but wish to receive profits from the fund at intervals.
c) Growth option, where the dividend value is not deducted from the fund`s corpus, but is reinvested -leading to higher NAV values. All data available on returns delivered by funds is always based on the Growth option. This option is suitable for investors who not require cash and are willing to hold their investments for long term.
By default, assuming that investment is made with the intention of capital appreciation, the growth option is most suitable for investors. However, depending on the life stage of the investor, or taxation and asset reporting requirements, a dividend option might be more appropriate. We explain the two dividend options.
Dividend Payout
This option is most suitable for investors at a higher life stage, where regular income in the form of dividends is desirable. This is also considered to be a method of profit booking, useful in times of volatile markets.
A lot of investors also use the dividend payout option as a method of portfolio rebalancing. For example, if the initial investment is made heavily in debt and balanced funds for a conservative investor, the dividends received can be used to invest in equity funds. This becomes a systematic way to introduce equity exposure for the investor without putting the initial capital at risk.
However it is important to note that in terms of pure capital appreciation this option would be the least rewarding option since the initial capital investment does not get the benefit of compounding (as is the case with growth option).
Dividend Reinvestment
From the point of view of returns, the dividend reinvestment option does not perform very differently from the growth option in the long term. In most cases we find investors using the dividend reinvestment option when purchasing tax saver (ELSS) funds. Additional units added to the folio from dividends are considered to be fresh investments into the fund, giving investors greater exemption under Section 80C.
Example, if you initially invested Rs. 60,000 at an NAV of Rs. 20 (3000 units) and a dividend of Rs. 5 was declared. The dividend value of Rs. 15,000 will be used to purchase an additional 1000 units (at the ex-dividend NAV of Rs. 15). This Rs. 15,000 will be considered as fresh investment under Section 80C, giving you a total tax exemption of Rs. 75,000.
However, it is important to note that tax saver funds carry a lock-in period of 3 years, and a dividend reinvestment option would mean that every fresh set of units added would be locked in for further three years. Exiting such a fund completely at one point of time would therefore be difficult.
Tracking dividend income
Fundsupermart.com allows you to view dividends received as part of your holdings report. The My Investments > View Holdings module enables you to see an overview of your holdings; this table includes information on dividends received as well.
The focus, when discussing mutual funds as an investment option, is usually on the increase in a fund`s NAV - that is, the growth in capital. And correctly so since this is the primary return the product delivers. But a mutual fund also offers an opportunity to earn a part of these returns in the form of regular, tax- free dividends. For a long-term investor in mutual funds, it is therefore important to understand the dividend option available in funds, their impact on the size of holdings (units) and the taxation on earnings from these investments.
Choosing a dividend option
All mutual funds have three plans on offer:
a) Dividend payout: Here, the dividend declared by the fund is paid out to the investor. Once the dividend has been declared and paid out, the NAV reduces by the corresponding amount. Example, if the NAV is Rs. 30 and a dividend of Rs. 5 per unit has been declared, the NAV reduces to Rs. 25. This option is suitable for investor seeking periodical income in form of regular profit booking in the fund.
b) Dividend reinvestment: The units equivalent to the value of the dividend declared are added to the folio. Here too, the NAV reduces but the number of units held increase. Example: suppose you own 100 units of NAV Rs. 30 and the fund declares a dividend of Rs. 5 per unit, giving you a dividend sum of Rs. 500. This amount will be used to purchase new units of the fund at the reduced NAV of Rs. 25, giving you a total of 120 units in your folio. This option is suitable for investors who do not require intermittent cash but wish to receive profits from the fund at intervals.
c) Growth option, where the dividend value is not deducted from the fund`s corpus, but is reinvested -leading to higher NAV values. All data available on returns delivered by funds is always based on the Growth option. This option is suitable for investors who not require cash and are willing to hold their investments for long term.
By default, assuming that investment is made with the intention of capital appreciation, the growth option is most suitable for investors. However, depending on the life stage of the investor, or taxation and asset reporting requirements, a dividend option might be more appropriate. We explain the two dividend options.
Dividend Payout
This option is most suitable for investors at a higher life stage, where regular income in the form of dividends is desirable. This is also considered to be a method of profit booking, useful in times of volatile markets.
A lot of investors also use the dividend payout option as a method of portfolio rebalancing. For example, if the initial investment is made heavily in debt and balanced funds for a conservative investor, the dividends received can be used to invest in equity funds. This becomes a systematic way to introduce equity exposure for the investor without putting the initial capital at risk.
However it is important to note that in terms of pure capital appreciation this option would be the least rewarding option since the initial capital investment does not get the benefit of compounding (as is the case with growth option).
Dividend Reinvestment
From the point of view of returns, the dividend reinvestment option does not perform very differently from the growth option in the long term. In most cases we find investors using the dividend reinvestment option when purchasing tax saver (ELSS) funds. Additional units added to the folio from dividends are considered to be fresh investments into the fund, giving investors greater exemption under Section 80C.
Example, if you initially invested Rs. 60,000 at an NAV of Rs. 20 (3000 units) and a dividend of Rs. 5 was declared. The dividend value of Rs. 15,000 will be used to purchase an additional 1000 units (at the ex-dividend NAV of Rs. 15). This Rs. 15,000 will be considered as fresh investment under Section 80C, giving you a total tax exemption of Rs. 75,000.
However, it is important to note that tax saver funds carry a lock-in period of 3 years, and a dividend reinvestment option would mean that every fresh set of units added would be locked in for further three years. Exiting such a fund completely at one point of time would therefore be difficult.
Tracking dividend income
Fundsupermart.com allows you to view dividends received as part of your holdings report. The My Investments > View Holdings module enables you to see an overview of your holdings; this table includes information on dividends received as well.
Illustration 
Note: The funds depicted in this image are purely for illustration, and are not meant to be a recommendation or a solicitation to buy any or all of them. NAVs depicted in the table are as at 29 September 2010.
In the image, we see that the HDFC Tax Saver Fund has received dividend of Rs. 504.52. Note the following in the table:
1. Since this is a Dividend Reinvestment option, the units in the Holding Quantity table include the additional units added by the dividend being reinvested
2. The Cost column is the original NAV at the time of initial investment
3. The Book Value is the original investment (Rs. 5000) plus dividend reinvested (Rs. 504.52)
4. The Market Price is the current post-dividend NAV
5. The Market Value is the value of the total number of units at the current post-dividend NAV
For Dividend payout options, the amount of dividend paid out will be listed in the Dividend column. The Market Price column will list the current post-dividend NAV and the Market Value column will show the value of the units held at the current post-dividend NAV.
The mutual fund company whose funds you hold also sends you regular account statements that include information on your dividend income. In the case of non-equity funds, the statement will also include information on the distribution tax paid by the fund on the dividend declared.
Tax Treatment
All dividends are tax free in the hands of the investors. However, fund houses have to pay a dividend distribution tax for dividends declared on non-equity funds, where equity funds are defined as having 65% or more of their corpus invested in equities. The Dividend Distribution Tax (DDT) rate for debt funds (other than liquid funds) is 13.84% and for liquid funds is 27.68% (inclusive of surcharges and cess). This tax amount is paid by the mutual fund itself and you receive the dividend net of DDT.
It is worthwhile to note that in the upcoming Direct Tax Code, which will be applicable from April 2012, a change has been proposed in the tax treatment for dividends on mutual funds. Dividends distributed by equity funds will attract 5% DDT, but will continue to remain tax free in your hands. Dividends distributed by non-equity funds will attract no DDT but will be considered as taxable income in your hands. Confirmation and further clarity on these proposals should be available once DTC comes into force.
Conclusion
Your needs as an investor may be unique yet, it is important for you to understand all the available options and get the best possible fit. Dividend plans available under mutual funds offer regular, tax-free income that can be used to supplement your income, reduce your tax liability or make further investments as required. Happy investing!
Note: The funds depicted in this image are purely for illustration, and are not meant to be a recommendation or a solicitation to buy any or all of them. NAVs depicted in the table are as at 29 September 2010.In the image, we see that the HDFC Tax Saver Fund has received dividend of Rs. 504.52. Note the following in the table:
1. Since this is a Dividend Reinvestment option, the units in the Holding Quantity table include the additional units added by the dividend being reinvested
2. The Cost column is the original NAV at the time of initial investment
3. The Book Value is the original investment (Rs. 5000) plus dividend reinvested (Rs. 504.52)
4. The Market Price is the current post-dividend NAV
5. The Market Value is the value of the total number of units at the current post-dividend NAV
For Dividend payout options, the amount of dividend paid out will be listed in the Dividend column. The Market Price column will list the current post-dividend NAV and the Market Value column will show the value of the units held at the current post-dividend NAV.
The mutual fund company whose funds you hold also sends you regular account statements that include information on your dividend income. In the case of non-equity funds, the statement will also include information on the distribution tax paid by the fund on the dividend declared.
Tax Treatment
All dividends are tax free in the hands of the investors. However, fund houses have to pay a dividend distribution tax for dividends declared on non-equity funds, where equity funds are defined as having 65% or more of their corpus invested in equities. The Dividend Distribution Tax (DDT) rate for debt funds (other than liquid funds) is 13.84% and for liquid funds is 27.68% (inclusive of surcharges and cess). This tax amount is paid by the mutual fund itself and you receive the dividend net of DDT.
It is worthwhile to note that in the upcoming Direct Tax Code, which will be applicable from April 2012, a change has been proposed in the tax treatment for dividends on mutual funds. Dividends distributed by equity funds will attract 5% DDT, but will continue to remain tax free in your hands. Dividends distributed by non-equity funds will attract no DDT but will be considered as taxable income in your hands. Confirmation and further clarity on these proposals should be available once DTC comes into force.
Conclusion
Your needs as an investor may be unique yet, it is important for you to understand all the available options and get the best possible fit. Dividend plans available under mutual funds offer regular, tax-free income that can be used to supplement your income, reduce your tax liability or make further investments as required. Happy investing!
Loan against property - Fixed assets to the rescue Source: BUSINESS LINE (01-NOV-10)
A fixed asset often provides immense value when you require a huge sum. Loan against property (LAP) is one such means that allows you to use a fixed asset as a source for emergency funds.
LAP is a good option to turn to in the case of planned expenses, like funds for education, wedding, or a surgery, which requires hospitalisation and funds. The rate of interest for a loan against property is generally lower.
The loan amount you can avail depends on the value of the property that you place as collateral. It can range between Rs 1 lakh and Rs 30 million. LAP comes with the risk of giving up your home if you are unable to repay. The financial institution concerned has the right to auction your home to claim the dues.
The repayment tenure can be as long as 20 years and the interest rates are between 12% and 17%. Generally a LAP takes time to process, as the valuation for the property has to be completed and verified before the loan is sanctioned.
> For what purposes can a loan against property be taken?
Loan against property can be taken for expanding business; marriage of children; higher studies abroad of children; funding medical treatments.
> What kinds of property can I mortgage for the loan? How much loan can I avail?
You can usually take a loan against your self-occupied or rented residential property. This could be a house or even a piece of land. You can avail up to 60% of the market value of the property.
> What is the eligibility criteria to get a loan against property?
This criteria will vary with banks.
But the common factors are the income, savings, debt obligations of the borrower; the cost or value of the property mortgaged and the repayment track record for other loans, credit cards of the borrower.
> What are the interest rates and tenure for repayment offered for a loan against property?
Interest rates on loan against property range from 12% to 15.75% and the loan tenure can be up to 15 years.
> How is a loan against property different from a personal loan?
A personal loan is given without any mortgage but a LAP is secured. A personal loan usually has higher interest rates - 16 to 21%. The maximum loan eligibility is determined by the individual``s income whereas the value of the property determines the loan value in a LAP. The tenure is restricted to five years in a personal loan. LAP has tenures up to 15 years.
> What documents are required while applying for a loan against property?
Document requirements usually vary with bank.
Salaried: Photographs; identity and residence proofs; latest salary slip; form 16; bank statement of the last six months.
Self-employed professional: Photographs; identity and residence proofs; certificate of educational qualification; proof of business; income-tax returns of last three years; bank statement of the last six months.
Self-employed entrepreneur: Photographs; identity and residence proofs; certificate of educational qualification; proof of business; profit and loss and balance sheet of last three years; income-tax returns of last three years; bank statement of the last six months.
A loan against property is one of the best ways to raise money. The only disadvantage of such a loan is that if the borrower is not able to pay the loan fully, the bank or the financial institution can take possession of the mortgaged property.
LAP is a good option to turn to in the case of planned expenses, like funds for education, wedding, or a surgery, which requires hospitalisation and funds. The rate of interest for a loan against property is generally lower.
The loan amount you can avail depends on the value of the property that you place as collateral. It can range between Rs 1 lakh and Rs 30 million. LAP comes with the risk of giving up your home if you are unable to repay. The financial institution concerned has the right to auction your home to claim the dues.
The repayment tenure can be as long as 20 years and the interest rates are between 12% and 17%. Generally a LAP takes time to process, as the valuation for the property has to be completed and verified before the loan is sanctioned.
> For what purposes can a loan against property be taken?
Loan against property can be taken for expanding business; marriage of children; higher studies abroad of children; funding medical treatments.
> What kinds of property can I mortgage for the loan? How much loan can I avail?
You can usually take a loan against your self-occupied or rented residential property. This could be a house or even a piece of land. You can avail up to 60% of the market value of the property.
> What is the eligibility criteria to get a loan against property?
This criteria will vary with banks.
But the common factors are the income, savings, debt obligations of the borrower; the cost or value of the property mortgaged and the repayment track record for other loans, credit cards of the borrower.
> What are the interest rates and tenure for repayment offered for a loan against property?
Interest rates on loan against property range from 12% to 15.75% and the loan tenure can be up to 15 years.
> How is a loan against property different from a personal loan?
A personal loan is given without any mortgage but a LAP is secured. A personal loan usually has higher interest rates - 16 to 21%. The maximum loan eligibility is determined by the individual``s income whereas the value of the property determines the loan value in a LAP. The tenure is restricted to five years in a personal loan. LAP has tenures up to 15 years.
> What documents are required while applying for a loan against property?
Document requirements usually vary with bank.
Salaried: Photographs; identity and residence proofs; latest salary slip; form 16; bank statement of the last six months.
Self-employed professional: Photographs; identity and residence proofs; certificate of educational qualification; proof of business; income-tax returns of last three years; bank statement of the last six months.
Self-employed entrepreneur: Photographs; identity and residence proofs; certificate of educational qualification; proof of business; profit and loss and balance sheet of last three years; income-tax returns of last three years; bank statement of the last six months.
A loan against property is one of the best ways to raise money. The only disadvantage of such a loan is that if the borrower is not able to pay the loan fully, the bank or the financial institution can take possession of the mortgaged property.
Light up with gold Source: BUSINESS LINE (01-NOV-10)
Buying gold during Diwali is considered auspicious. But is it only superstition or has the `yellow` metal really brought riches for its buyers? Well, investors who bet on gold for capital appreciation have made money, if the trend in the last five years is anything to go by.
The price of gold has gone up from Rs 875/gm during Diwali 2006 to around Rs 1,968/gm now, appreciating at about 22% annually on a compounded basis over the last four years.
So what has helped the yellow metal to put in such a performance? The precious metal benefited immensely from the rising investment demand led by ETFs and Central Bank buying, to the economic downturn in the US and the greenback`s value depreciation seen in the last few years.
The scene back home too hasn`t been any different. Predominantly a gold jewellery market for years, India too has seen increase in gold-related investment demand.
Benchmark Mutual Fund`s gold ETF- GoldBeES, the largest gold-based exchange traded fund in India, has bought 4.6 tons (4,600 kg) of gold over the last two years and holds 6.6 tons currently.
Read on to find out how you can add some bling to your investments.
ETF route
Introduced in 2007, the ETF route to investment in gold is pretty new to India. Presently, there are eight mutual funds that have gold ETF products listed.
Interested investors can buy units of the fund during the NFO period or even through the stock market, as units of gold ETFs are listed in stock exchanges. Each unit of a gold-ETF represents a certain grammage of gold. India-listed gold ETFs generally track the London Bullion Market (in US dollars) and represent standard gold of 99.5% purity.
Being market listed, the gold ETFs, however, behave in tandem with the demand-supply forces in the market, delivering somewhat higher or lower return than the spot gold. GoldBeES has delivered a return of 21% over the last one year while the spot price of gold (in rupee terms) has appreciated 23%.
One thing to watch out for before buying into gold ETFs is the specific ETF`s average daily volumes. Know that scarce volumes increase the cost of transaction. Currently, the Benchmark MF`s GoldBeES has the highest daily volumes. GoldBeES have seen an average volume of 70,000 units every day over the last one month.
Other options
Buying gold from banks is also an option. Banks sell gold as coins and bars of different grammage. Purity and guaranteed caratage is the advantage with buying gold from a bank. But buyers should bear in mind is that banks may charge a stiff premium over the prevailing gold price. The pain point is banks do not buy these coins back if customers intend to sell them. You will then have to go to a local jeweller to sell them. But if you are looking to buy some gold coins , look up our `Check It Out` column, that showcases gold coin offers from many banks.
There`s also an option of buying gold jewellery. However, it isn`t the great way to go about it, unless you are buying it for ornamental value. The wastage charges on old jewellery typically tend to eat into a significant share of your returns.
The other way to buy gold is through the futures contract in the commodity market. Both MCX and NCDEX offer future contracts in gold. Contract sizes vary from 8 gm, 100 gm to 1 kg. If you want to trade in gold, you pay only a margin of 4% of the contract value and buy it. You would, however, have to square your position before expiry or roll it over, if you wish to hold. And, in case you wish to take a delivery, you would be required to pay the full contract value five days before the expiry of the contract, says Jajati Barik, Manager-Commodities, Motilal Oswal Commodities. All deliveries of MCX, however, happen only in Ahmedabad. Among other charges that add up the delivery cost are brokerages, service tax on brokerage and VAT and C&F charges. For an 8 gm Gold Guinea contract, whose current contract value is around Rs 15,500, delivery charges in total would be around Rs 350 (2.2%).
The dollar effect
Gold, be it any form, tracks the international gold rate denominated in US dollars. Returns for Indian investors will depend on rupee`s value against the dollar in that period. A falling rupee will enhance gold returns while an appreciating rupee will erode returns. For example, since last Diwali, gold has appreciated 27% in dollar terms. But in rupee terms, the return is only 23%, as the Indian currency has appreciated from Rs 46.3/dollar last year to Rs 44.56/dollar now.
Health cover, a must for students going abroad Source: BUSINESS LINE (01-NOV-10)
The cost of any medical treatment in most developed countries is quite high, especially for Indians due to the currency exchange rates.
Students planning to go overseas for higher studies will know that nearly all universities abroad have a rule requiring international students to possess medical insurance.
In fact, most universities abroad do not allow admission if the student is without an insurance policy.
Most universities have basic insurance requirements that cover medical expenses due to hospitalisation and personal insurance.
These policies take care of the student`s medical expenses, such as inpatient and outpatient treatment, with some universities even covering specific care, like dental treatment and pre-existing conditions. In addition to buying a comparable insurance cover in their own country, students have an option of buying medical insurance from either the university or a recognised healthcare provider within that country.
You need to consider the conditions, legal and personal safety cover and the basic insurance requirements set by your college.
Before you pick a student insurance, examine the benefits of each insurance provider in order to make an informed decision.
The primary reasons why you should opt for student medical insurance from India are: It is available at almost a fraction of the cost of a similar insurance cover bought abroad; coverage begins the moment you enter the airport to embark on your journey, the premium for the policy is paid in Indian currency, but the compensation paid by the insurance company is in the foreign currency concerned.
While the coverage offered by the university is enough, it only covers medical expenses. Consider situations like when you need assistance with a non-medical emergency - like loss of passport; situations that your student health insurance does not cover. What would you do?
This is why you need to search for an insurance provider that provides the best coverage.
Search for the insurer with the diligence you searched for the university for your course. Pay attention to the sum insured and coverage required. There are several coverage details that you need to consider when looking for student medical insurance in India.
Comprehensive coverage: Get the maximum medical coverage, including medical evacuation and repatriation costs in case of accidental death abroad; with add-ons available for dental treatments, medical expenses due to sports emergencies, treatments for psychological and nervous disorders.
Non-medical coverage for emergencies like loss of checked-in baggage, passport loss, missed connecting flight, trip delay and cancellation, legal liability and sponsor protection should also be on your checklist.
Study interruption: This is important, as it provides you coverage against study interruption in case you miss a semester on medical grounds, and takes care of the medical bills and the tuition fee for that semester.
Compassionate visit: Research for a policy that provides your parents with a two-way compassionate visit cover in case you are hospitalised.
Tie-ups with leading healthcare providers: Search for an insurance company that is associated with reputed hospitals, so that you can avail of quality medical treatment.
Online renewals: Try to find an insurance provider who allows you to renew your policy online. This helps to get an extension instantly.
Easy claims settlement: Your health insurance is only as good as the company`s claim servicing. Choose a provider that offers cashless hospitalisation facility.
(The author is Director-Retail, ICICI Lombard GIC)
Why entrenched investing is riskier Source: BUSINESS LINE (01-NOV-10)
We have in the past discussed Liability-driven Investment (LDI) and its relevance to individual portfolios. LDI refers to portfolio construction process engineered to meet investors pre-defined future liabilities. This investment philosophy has been called to question by many who argue that investors do not always think in terms of their liability structure. We agree. Our aim through this column is to make them think as such. Why?
This article explains the issues related to typical investing process - Entrenched Investment. Specifically, it shows why such investing is sub-optimal within the risk-return matrix, making LDI a more optimal approach.
Entrenched investment
We define Entrenched Investment as the process of buying one security at a time, without concern to the overall portfolio structure. We call it - Entrenched - because the process is deep-rooted among investors.
An investor may buy, say, Reliance Industries, ONGC, HDFC and 25 other stocks one at a time, oblivious to how each stock reacts with the other. We are not saying that investors should always consider cross-correlations among securities.
Rather, we are concerned that separately evaluating each stock and constructing a portfolio as an after-thought could expose them to high risk.
Our point may be completely lost in uptrending markets when Entrenched Investment typically outperform broad market index. But it is important to understand that better performance does not necessary relate to skill. It could be simple case of the portfolio having high beta stocks - stocks with beta greater than one move faster than the broad market index. The problem is that they fall just as fast in a declining market! And that is not all.
Loss aversion effect
Entrenched investment has a large element of market timing. Now, successful market timers are the ones who employ appropriate risk management rules. It is moot whether mass-affluent investors following Entrenched Investment posses the required discipline.
Lack of discipline could lead to loss aversion. That is, lack of discipline could prompt investors to hold on to their loss-making positions for too long. This leads to opportunity cost and large realized losses when the security prices fail to rebound.
Suppose an investor buys a stock hoping that it will move up 25% in three months. Further suppose that the stock instead declines by 15% within one month. Investors adopting Entrenched Investment would typically hold the stock hoping that it would rebound in the next two months. It would be instead worthwhile to ask the question: Can the stock move by 47% in two months to reach its initial target return of 25%?
Goal-based investment
We believe having an investment objective helps the investor ask the right question. Suppose an investor creates a portfolio to buy a house five years hence. Such a portfolio construction process helps in several ways.
One, the investor has an investment horizon - five years in our example. Two, she knows the required portfolio value at the horizon - the amount needed to buy the house. And three, given the initial investment and estimated periodic contributions, she can also calculate the required return. In the portfolio management, this return is called the Minimum Acceptable Return (MAR)
An investment is considered risky if its return is lower than the MAR. A goal-based portfolio helps the investor take action when the asset values decline below the MAR. Importantly, MAR helps the investor is deciding the asset allocation strategy- how much to invest in various asset classes such as stocks, bonds, real estate and commodities. The asset allocation policy is important because it contributes substantially to portfolio returns.
Conclusion
Evaluating securities individually and investing for just returns may be profitable in the short-term, but lack of portfolio perspective will expose investors to higher downside risk over longer horizon. If nothing else, constructing portfolios based on investment objectives helps in better risk management.
Sunday, October 31, 2010
Bond funds are not bonds: Beware the price risk Source: BUSINESS LINE (25-OCT-10)
Investors looking to tactically manage their asset allocation across equities and debt can consider adding exposure to Franklin Templeton India Dynamic PE Ratio FoF. The scheme dynamically changes its asset allocation between equities and debt, based on the weighted average price-earnings ratio (PE ratio) of the NSE Nifty Index.
While at higher PE levels, it reduces the allocation to equities and minimises downside risk, it increases the equity allocation at lower PE levels to capitalise on their upside potential. Such deliberated asset moves have helped the fund contain downsides better than pure-play equity funds and deliver better than debt funds during protracted rallies.
The FoF invests in Franklin India Bluechip, an open-end diversified equity scheme that invests predominantly in large-cap stocks, and Templeton India Income Fund, an open-end income scheme which invests in government securities, PSU bonds and corporate debt. The proportion invested in these funds is decided each month by the PE ratio of the Nifty Index. For instance, while the fund hiked its equity allocation to 91% in March 2009, when the Nifty had hit a new low, it changed the allocation to a 50:50 mix in September that year, by when the PE multiple of the bellwether index had edged over 20 times. Crisil Balanced index and Sensex are its benchmarks.
Performance: This FoF has returned about 15 per cent last year. This is lower than the 22% category average recorded by large-cap equity funds and significantly higher than the 5% average returns of income funds. Over a longer time-frame however, the scheme has beaten both equity and income funds. On a three- and five-year annualised returns basis, it has scored higher or just about in line with that of equity as well as income funds.
For instance, it has delivered a 19% annualised return over the past five years, which is just a shade below the category average (20%) for large-cap equity funds. Much of this can be credited to the scheme`s dynamic asset allocation moves across market cycles. While it allocates over 90% of its portfolio to the Bluechip Fund (the rest to the Income Fund) if the Nifty`s PE falls below 12, it shifts completely in favour of income funds if the index PE ratio moves above 28.
Its asset moves also explain why the scheme`s one-year returns have lagged balanced funds, which follow a fixed asset allocation (65:35 equity-debt mix) across market cycles. It has, nonetheless, comfortably beaten them over longer time periods.
The fund`s performance during periods of market correction merits special note. In the bear market of 2008, its NAV fell by just about 26%, against the 56% decline averaged by diversified equity funds. With the Nifty PE multiple now hovering above 25 times, the scheme`s allocation to equity (through Bluechip Fund) has been cut to 30%.
Suitability: Though the fund has delivered better than most equity funds in the long run, it tends to lag them during periods of protracted market rallies. Tactical asset moves apart, the limited choice of in-house funds too might have restricted its returns - both these funds are consistent but middle-of-the-road performers.
These factors, put together, make the FoF more suitable for investors looking for consistent returns with limited downside risks. It can also be viewed as a good addition to a portfolio of equity funds.
Conclusion
Typical bond funds expose investors to price risk while direct bond exposure does not, if bonds are held till maturity. The positive side to bond fund exposure is that active management can generate higher returns. But there is risk of underperformance. Investors have to consider the associated risks, especially changes in monetary policy, before buying bond funds.
While at higher PE levels, it reduces the allocation to equities and minimises downside risk, it increases the equity allocation at lower PE levels to capitalise on their upside potential. Such deliberated asset moves have helped the fund contain downsides better than pure-play equity funds and deliver better than debt funds during protracted rallies.
The FoF invests in Franklin India Bluechip, an open-end diversified equity scheme that invests predominantly in large-cap stocks, and Templeton India Income Fund, an open-end income scheme which invests in government securities, PSU bonds and corporate debt. The proportion invested in these funds is decided each month by the PE ratio of the Nifty Index. For instance, while the fund hiked its equity allocation to 91% in March 2009, when the Nifty had hit a new low, it changed the allocation to a 50:50 mix in September that year, by when the PE multiple of the bellwether index had edged over 20 times. Crisil Balanced index and Sensex are its benchmarks.
Performance: This FoF has returned about 15 per cent last year. This is lower than the 22% category average recorded by large-cap equity funds and significantly higher than the 5% average returns of income funds. Over a longer time-frame however, the scheme has beaten both equity and income funds. On a three- and five-year annualised returns basis, it has scored higher or just about in line with that of equity as well as income funds.
For instance, it has delivered a 19% annualised return over the past five years, which is just a shade below the category average (20%) for large-cap equity funds. Much of this can be credited to the scheme`s dynamic asset allocation moves across market cycles. While it allocates over 90% of its portfolio to the Bluechip Fund (the rest to the Income Fund) if the Nifty`s PE falls below 12, it shifts completely in favour of income funds if the index PE ratio moves above 28.
Its asset moves also explain why the scheme`s one-year returns have lagged balanced funds, which follow a fixed asset allocation (65:35 equity-debt mix) across market cycles. It has, nonetheless, comfortably beaten them over longer time periods.
The fund`s performance during periods of market correction merits special note. In the bear market of 2008, its NAV fell by just about 26%, against the 56% decline averaged by diversified equity funds. With the Nifty PE multiple now hovering above 25 times, the scheme`s allocation to equity (through Bluechip Fund) has been cut to 30%.
Suitability: Though the fund has delivered better than most equity funds in the long run, it tends to lag them during periods of protracted market rallies. Tactical asset moves apart, the limited choice of in-house funds too might have restricted its returns - both these funds are consistent but middle-of-the-road performers.
These factors, put together, make the FoF more suitable for investors looking for consistent returns with limited downside risks. It can also be viewed as a good addition to a portfolio of equity funds.
Conclusion
Typical bond funds expose investors to price risk while direct bond exposure does not, if bonds are held till maturity. The positive side to bond fund exposure is that active management can generate higher returns. But there is risk of underperformance. Investors have to consider the associated risks, especially changes in monetary policy, before buying bond funds.
Holiday tips Source: BUSINESS LINE (25-OCT-10)
Vacations and holidays form an important part of our lives and we all look forward to them. But they also bring with them unforeseen costs and unnecessary expenditures. Here are a few ways to help you save money during travel, enabling you to move around smartly within budgets.
Plan holidays well in advance: A well-planned holiday always gives you time to decide on the various aspects of the vacation - travel, stay, arrangements back home, good kennelling facilities for your dog, and so on. Apply for leave early and let your workplace know of your unavailability so you`re left undisturbed. The same goes to your travelling companions. Bookings during a holiday season or the `best time to visit` a destination are always more expensive, so book early or plan to go during the beginning or the end of the optimal period.
Get a preview of your vacation: It helps to do a thorough research online or through people who have visited the place before, even if it to your dream holiday location. Enquire about what the various places worth visiting, interesting activities and, more important, what not to do there. This way, you will avoid doing highly publicised but mundane activities that are a waste of money.
Cross-check ticket prices: There are various travel portals that show you the cheapest fares and good deals. It does not hurt to check out all of them and then choose the best prices. Most airlines also have great discounts if you book the flights on their Web site. Choose wisely and book early - it could save you a lot of money. But, most important, watch out for that hidden cost. Also ensure you do not pay anything at the time of boarding.
Flying is not always the best option: Flying is not the must cost-effective way always. You can also have a lot of fun with other methods of transport. While most prefer air travel to get the most out of holidays, some places might be cheaper and faster to get to by road or rail. Many destinations can be an over-night train or bus journey away and if you book in the A/C coaches, it can be more comfortable than delayed flights and expensive cab trips to and from airports.
Create daily budgets: Once you know all the things you`re likely to do on your vacation, create a daily budget for the duration of your stay. Since most tourist spots prefer to trade in cash, carry as much as your daily budget permits. However, do not put all your cash in one play. If you have travelling companions, split between them. This will help you be in check of your expenses and know when your holiday mood is eating into your pockets.
Try out home-stays: Vacations don``t always have to mean five-star stays. You can always try the various home stay options available which give you an authentic local feel and are lighter on the pockets. Most home-stays also give you great recommendations on the local sights and good eateries.
Check your ATM charges: If you`re travelling internationally, check with your banks on international ATM and usage fees. If you have the time, you could open a new account that facilitates easier transactions. Make sure you have more than one credit card.
We hope that these tips come in handy during your vacation and help you save money while having a blast on your holidays.
Plan holidays well in advance: A well-planned holiday always gives you time to decide on the various aspects of the vacation - travel, stay, arrangements back home, good kennelling facilities for your dog, and so on. Apply for leave early and let your workplace know of your unavailability so you`re left undisturbed. The same goes to your travelling companions. Bookings during a holiday season or the `best time to visit` a destination are always more expensive, so book early or plan to go during the beginning or the end of the optimal period.
Get a preview of your vacation: It helps to do a thorough research online or through people who have visited the place before, even if it to your dream holiday location. Enquire about what the various places worth visiting, interesting activities and, more important, what not to do there. This way, you will avoid doing highly publicised but mundane activities that are a waste of money.
Cross-check ticket prices: There are various travel portals that show you the cheapest fares and good deals. It does not hurt to check out all of them and then choose the best prices. Most airlines also have great discounts if you book the flights on their Web site. Choose wisely and book early - it could save you a lot of money. But, most important, watch out for that hidden cost. Also ensure you do not pay anything at the time of boarding.
Flying is not always the best option: Flying is not the must cost-effective way always. You can also have a lot of fun with other methods of transport. While most prefer air travel to get the most out of holidays, some places might be cheaper and faster to get to by road or rail. Many destinations can be an over-night train or bus journey away and if you book in the A/C coaches, it can be more comfortable than delayed flights and expensive cab trips to and from airports.
Create daily budgets: Once you know all the things you`re likely to do on your vacation, create a daily budget for the duration of your stay. Since most tourist spots prefer to trade in cash, carry as much as your daily budget permits. However, do not put all your cash in one play. If you have travelling companions, split between them. This will help you be in check of your expenses and know when your holiday mood is eating into your pockets.
Try out home-stays: Vacations don``t always have to mean five-star stays. You can always try the various home stay options available which give you an authentic local feel and are lighter on the pockets. Most home-stays also give you great recommendations on the local sights and good eateries.
Check your ATM charges: If you`re travelling internationally, check with your banks on international ATM and usage fees. If you have the time, you could open a new account that facilitates easier transactions. Make sure you have more than one credit card.
We hope that these tips come in handy during your vacation and help you save money while having a blast on your holidays.
Financial Planning - Match income and investment Source: BUSINESS LINE (25-OCT-10)
I am 44 years and working in a private company. My net earnings amount to Rs 42,000 a month. My wife, 36, gets rental income of Rs 25,000 a month. She is a homemaker.
My monthly household expense is Rs 15,000. I have monthly commitments of Rs 8,254 towards car loan; Rs 10,000 for home loan EMI and Rs 4,000 towards chit investment. I save Rs 8,000 in post office recurring deposit. I have taken a family-floater health policy for Rs 4 lakh and am paying a premium of Rs 9,300 an annum.
I have a surplus of Rs 1.5 lakh after meeting my annual commitment towards my insurance policies. I have five insurance policies and my annual premium outgo is Rs 90,000 and the sum insured is Rs 10 lakh. My savings in mutual fund is Rs 71,000. I had given Rs 3 lakh to a friend as a loan and am likely to get the money back next month.
Please suggest a saving plan taking these factors into consideration.
My son is in Class VI. I need to provide Rs 20 lakh for his engineering and Rs 30 lakh for post graduation expenses. After retirement I should have a monthly pension equal to my current expenses of Rs 15,000. Please tell me how much I should save monthly to meet my pension requirement? My family health history is good and I may live up to 80 years.
I was investing in MF through systematic investment during 2007 and 2008. I stopped all my investment during the market crash. Please suggest a few schemes. Is it the right time to start SIPs in equity MFs and buy gold ETFs? My MF portfolio consists of HDFC Top 200, HDFC Equity, HDFC Capital Builder, HDFC Prudence, Birla Sun Life International and HDFC Infrastructure.
Is my life cover of Rs 10 lakh adequate or do I need to increase the cover?
Mani, Hyderabad, (name changed on request).
Solutions
You have not mentioned when you get the rental income. Even if you are receiving it only for the past few years, there is big disconnect between your income and investment.
For wealth creation, an individual needs proper financial planning, no matter what the income level or the stage of life.
Financial planning can go a long way in helping you manage expenses and meet your goals. It is mandatory for people with limited income. But, in practice, this segment ignores such planning.
As some of your goals have less than 10 years to play out, it is high time that you have a disciplined and planned approach.
Education: As the graduation needs are spread across four years, if you save Rs 12,400 for next 84 months and if the investment earns a return of 10% you can reach the target of Rs 15 lakh. For the shortfall of Rs 5 lakh you ought to invest the Rs 3 lakh that your friend returns in an plan that gives 10%. The outgo for post graduation starts only in 2020, so you can take higher risk in your investments and target an annualised return of 12%. If you can achieve such a return you need to save Rs 13,000 every month for next 120 months.
Retirement: Retirement planning is often overlooked. Most individuals tend to give attention to it once all emotional goals are accomplished. By that time it would be too late to take risky bets on investments. By trying to save for a shorter duration monthly commitment will be stretched and, in most cases, reaching the target would become arduous.
In your case, the annual requirement of Rs 1.8 lakh, if inflated at 6 per cent, would mean that at the start of 60 years you would need Rs 4.5 lakh. By the time you turn 80, your annual pension need would be Rs 14.6 lakh. The savings in insurance is not adequate to meet the requirement.
Your rental income has the potential to take care of about two-thirds of the retirement needs, provided the income grows to match inflation. For the remaining one-third, you need to save Rs 26,000 monthly from the age of 54 for the subsequent four years. The investment should earn a return of at least 8% to reach Rs 15 lakh. Deploy this along Jeevan Shree maturity proceeds of Rs 10 lakh for your pension needs and it should earn 2% above the inflation to meet your needs till the age of 80 years.
As a backup, your maturity proceeds of other insurance plans need to be redeployed in an investment with small exposure to equity. As you have not mentioned about your provident fund contribution and gratuity, we have not factored them.
Investment: It commonly observed that investors start SIPs in mutual funds when markets are rising, and discontinue their monthly commitment when equities are in a corrective phase. This strategy goes against long-term savings strategy and the concept of SIPs.
Do ensure that all your savings are linked to goals, but do keep track of your investments and take corrective steps, if the investments start underperforming consistently for 4-6 quarters. The fresh SIPs can be started with the existing portfolio barring Birla Sun Life International Fund.
As your investment universe of MF is small, you can stick with domestic schemes as overseas investing is fraught with uncertainties and cannot be easily monitored; in any case, India is one of the fastest growing markets. Thematic funds such as HDFC Infrastructure needs constant monitoring and profit booking, if there is any abnormal rise. If you are a conservative investor, stick to diversified funds. Our picks are DSPBR Equity, HDFC Top 200 and IDFC Primer Equity.
You will be short of funds with the current investment plan. Hence you can discontinue the post office recurring deposit and continue chit investments up to maturity.
The plan suggested to you is based on your current income; do review the strategy once in six to 12 months.
Insurance: Based on your current salary and goals, we suggest that you to buy a pure-term insurance for Rs 80 lakh for next 15years and your annual premium would be Rs 19,300. Regarding your health insurance, the current sum insured of Rs 4 lakh appears reasonable. But once your income rises, you can consider buying a top-up health insurance for Rs 3 lakh.
My monthly household expense is Rs 15,000. I have monthly commitments of Rs 8,254 towards car loan; Rs 10,000 for home loan EMI and Rs 4,000 towards chit investment. I save Rs 8,000 in post office recurring deposit. I have taken a family-floater health policy for Rs 4 lakh and am paying a premium of Rs 9,300 an annum.
I have a surplus of Rs 1.5 lakh after meeting my annual commitment towards my insurance policies. I have five insurance policies and my annual premium outgo is Rs 90,000 and the sum insured is Rs 10 lakh. My savings in mutual fund is Rs 71,000. I had given Rs 3 lakh to a friend as a loan and am likely to get the money back next month.
Please suggest a saving plan taking these factors into consideration.
My son is in Class VI. I need to provide Rs 20 lakh for his engineering and Rs 30 lakh for post graduation expenses. After retirement I should have a monthly pension equal to my current expenses of Rs 15,000. Please tell me how much I should save monthly to meet my pension requirement? My family health history is good and I may live up to 80 years.
I was investing in MF through systematic investment during 2007 and 2008. I stopped all my investment during the market crash. Please suggest a few schemes. Is it the right time to start SIPs in equity MFs and buy gold ETFs? My MF portfolio consists of HDFC Top 200, HDFC Equity, HDFC Capital Builder, HDFC Prudence, Birla Sun Life International and HDFC Infrastructure.
Is my life cover of Rs 10 lakh adequate or do I need to increase the cover?
Mani, Hyderabad, (name changed on request).
Solutions
You have not mentioned when you get the rental income. Even if you are receiving it only for the past few years, there is big disconnect between your income and investment.
For wealth creation, an individual needs proper financial planning, no matter what the income level or the stage of life.
Financial planning can go a long way in helping you manage expenses and meet your goals. It is mandatory for people with limited income. But, in practice, this segment ignores such planning.
As some of your goals have less than 10 years to play out, it is high time that you have a disciplined and planned approach.
Education: As the graduation needs are spread across four years, if you save Rs 12,400 for next 84 months and if the investment earns a return of 10% you can reach the target of Rs 15 lakh. For the shortfall of Rs 5 lakh you ought to invest the Rs 3 lakh that your friend returns in an plan that gives 10%. The outgo for post graduation starts only in 2020, so you can take higher risk in your investments and target an annualised return of 12%. If you can achieve such a return you need to save Rs 13,000 every month for next 120 months.
Retirement: Retirement planning is often overlooked. Most individuals tend to give attention to it once all emotional goals are accomplished. By that time it would be too late to take risky bets on investments. By trying to save for a shorter duration monthly commitment will be stretched and, in most cases, reaching the target would become arduous.
In your case, the annual requirement of Rs 1.8 lakh, if inflated at 6 per cent, would mean that at the start of 60 years you would need Rs 4.5 lakh. By the time you turn 80, your annual pension need would be Rs 14.6 lakh. The savings in insurance is not adequate to meet the requirement.
Your rental income has the potential to take care of about two-thirds of the retirement needs, provided the income grows to match inflation. For the remaining one-third, you need to save Rs 26,000 monthly from the age of 54 for the subsequent four years. The investment should earn a return of at least 8% to reach Rs 15 lakh. Deploy this along Jeevan Shree maturity proceeds of Rs 10 lakh for your pension needs and it should earn 2% above the inflation to meet your needs till the age of 80 years.
As a backup, your maturity proceeds of other insurance plans need to be redeployed in an investment with small exposure to equity. As you have not mentioned about your provident fund contribution and gratuity, we have not factored them.
Investment: It commonly observed that investors start SIPs in mutual funds when markets are rising, and discontinue their monthly commitment when equities are in a corrective phase. This strategy goes against long-term savings strategy and the concept of SIPs.
Do ensure that all your savings are linked to goals, but do keep track of your investments and take corrective steps, if the investments start underperforming consistently for 4-6 quarters. The fresh SIPs can be started with the existing portfolio barring Birla Sun Life International Fund.
As your investment universe of MF is small, you can stick with domestic schemes as overseas investing is fraught with uncertainties and cannot be easily monitored; in any case, India is one of the fastest growing markets. Thematic funds such as HDFC Infrastructure needs constant monitoring and profit booking, if there is any abnormal rise. If you are a conservative investor, stick to diversified funds. Our picks are DSPBR Equity, HDFC Top 200 and IDFC Primer Equity.
You will be short of funds with the current investment plan. Hence you can discontinue the post office recurring deposit and continue chit investments up to maturity.
The plan suggested to you is based on your current income; do review the strategy once in six to 12 months.
Insurance: Based on your current salary and goals, we suggest that you to buy a pure-term insurance for Rs 80 lakh for next 15years and your annual premium would be Rs 19,300. Regarding your health insurance, the current sum insured of Rs 4 lakh appears reasonable. But once your income rises, you can consider buying a top-up health insurance for Rs 3 lakh.
When should you exit your mutual fund investment?
Author: Lovaii Navlakhi
I believe that selling decisions are more difficult than buying calls. It is true of most investments that I can think of: we do a detailed research to buy that latest vehicle; but even when the cost of repairs and maintenance are high, we cannot get ourselves to get rid of the same. The reasons I feel are that we develop an emotional attachment to the asset; and secondly, we do not like selling at a price lower than the purchase price.
Keep a Long Term Approach
One needs to understand the way a mutual fund works. Or at least the way it doesn`t: it is not a share where you buy and sell with the aim to make a profit. We have entrusted our money with the fund manager and expect him to use his expertise and the systems of the fund house to ensure that he invests judiciously. The fund will trade in stocks, in line with the investment mandate, and we as investors will enjoy the gains from this activity. As a financial planner, we focus on the strategic allocation of your funds: how much should be in equity, of which what should be the share of large cap funds, etc. The aim is to select the right scheme for the long run so that there is minimum churn. Yet, there could be reasons to recommend an exit. Before we consider your own circumstances that warrant a change, let us examine market or external factors first.
The External Factors That Trigger an Exit
There could be an error in the selection itself. We have selected some schemes in the past based on `star` fund managers and found that, when the tide turned in the markets, they did not have the systems to execute plan B, and after some time, they jumped ship. That is an obvious reason for exit. The more dangerous situation is when the fund manager takes more (or less) risk than mandated. For example, a large cap fund may swing 40% of its investments into mid cap stocks as that`s where returns are being generated. Financial planners frown on this practice as this could leave their investors marooned. Allocation is a discipline that must be followed fanatically.
Obviously when an asset class rises more than planned, that could be another reason to take profits off the table. There could be a tactical call to reduce weights in mid cap funds, or invest into thematic funds which could warrant a switch as well. But the more fundamental reasons would be your personal needs or goals.
The Internal Factors for an ExitIf you have been dealing with your advisor since long, you would have shared your requirements with him. We for example would like to move funds from the equity asset class to safer avenues in a staggered manner where we know the requirements would be coming up in the next 12 to 18 months. In more volatile times, this period could be enhanced. That way, one can identify fixed income options to invest the money and meet your desired goals. If you get the allocation right, you will be `booking profits` regularly, and sleeping well at night. After all, isn`t peace of mind the main reason you signed up a financial planner for?
The author is the managing director and chief financial planner of International Money Matters.
I believe that selling decisions are more difficult than buying calls. It is true of most investments that I can think of: we do a detailed research to buy that latest vehicle; but even when the cost of repairs and maintenance are high, we cannot get ourselves to get rid of the same. The reasons I feel are that we develop an emotional attachment to the asset; and secondly, we do not like selling at a price lower than the purchase price.
Keep a Long Term Approach
One needs to understand the way a mutual fund works. Or at least the way it doesn`t: it is not a share where you buy and sell with the aim to make a profit. We have entrusted our money with the fund manager and expect him to use his expertise and the systems of the fund house to ensure that he invests judiciously. The fund will trade in stocks, in line with the investment mandate, and we as investors will enjoy the gains from this activity. As a financial planner, we focus on the strategic allocation of your funds: how much should be in equity, of which what should be the share of large cap funds, etc. The aim is to select the right scheme for the long run so that there is minimum churn. Yet, there could be reasons to recommend an exit. Before we consider your own circumstances that warrant a change, let us examine market or external factors first.
The External Factors That Trigger an Exit
There could be an error in the selection itself. We have selected some schemes in the past based on `star` fund managers and found that, when the tide turned in the markets, they did not have the systems to execute plan B, and after some time, they jumped ship. That is an obvious reason for exit. The more dangerous situation is when the fund manager takes more (or less) risk than mandated. For example, a large cap fund may swing 40% of its investments into mid cap stocks as that`s where returns are being generated. Financial planners frown on this practice as this could leave their investors marooned. Allocation is a discipline that must be followed fanatically.
Obviously when an asset class rises more than planned, that could be another reason to take profits off the table. There could be a tactical call to reduce weights in mid cap funds, or invest into thematic funds which could warrant a switch as well. But the more fundamental reasons would be your personal needs or goals.
The Internal Factors for an ExitIf you have been dealing with your advisor since long, you would have shared your requirements with him. We for example would like to move funds from the equity asset class to safer avenues in a staggered manner where we know the requirements would be coming up in the next 12 to 18 months. In more volatile times, this period could be enhanced. That way, one can identify fixed income options to invest the money and meet your desired goals. If you get the allocation right, you will be `booking profits` regularly, and sleeping well at night. After all, isn`t peace of mind the main reason you signed up a financial planner for?
The author is the managing director and chief financial planner of International Money Matters.
The why and how of mutual fund dividends
This article focuses on the dividend income from mutual funds - when is it worth opting for a dividend option? How does one keep track of dividends earned, and what are the tax implications?
The focus, when discussing mutual funds as an investment option, is usually on the increase in a fund`s NAV - that is, the growth in capital. And correctly so since this is the primary return the product delivers. But a mutual fund also offers an opportunity to earn a part of these returns in the form of regular, tax- free dividends. For a long-term investor in mutual funds, it is therefore important to understand the dividend option available in funds, their impact on the size of holdings (units) and the taxation on earnings from these investments.
Choosing a dividend option
All mutual funds have three plans on offer:
a) Dividend payout: Here, the dividend declared by the fund is paid out to the investor. Once the dividend has been declared and paid out, the NAV reduces by the corresponding amount. Example, if the NAV is Rs. 30 and a dividend of Rs. 5 per unit has been declared, the NAV reduces to Rs. 25. This option is suitable for investor seeking periodical income in form of regular profit booking in the fund.
b) Dividend reinvestment: The units equivalent to the value of the dividend declared are added to the folio. Here too, the NAV reduces but the number of units held increase. Example: suppose you own 100 units of NAV Rs. 30 and the fund declares a dividend of Rs. 5 per unit, giving you a dividend sum of Rs. 500. This amount will be used to purchase new units of the fund at the reduced NAV of Rs. 25, giving you a total of 120 units in your folio. This option is suitable for investors who do not require intermittent cash but wish to receive profits from the fund at intervals.
c) Growth option, where the dividend value is not deducted from the fund`s corpus, but is reinvested -leading to higher NAV values. All data available on returns delivered by funds is always based on the Growth option. This option is suitable for investors who not require cash and are willing to hold their investments for long term.
By default, assuming that investment is made with the intention of capital appreciation, the growth option is most suitable for investors. However, depending on the life stage of the investor, or taxation and asset reporting requirements, a dividend option might be more appropriate. We explain the two dividend options.
Dividend Payout
This option is most suitable for investors at a higher life stage, where regular income in the form of dividends is desirable. This is also considered to be a method of profit booking, useful in times of volatile markets.
A lot of investors also use the dividend payout option as a method of portfolio rebalancing. For example, if the initial investment is made heavily in debt and balanced funds for a conservative investor, the dividends received can be used to invest in equity funds. This becomes a systematic way to introduce equity exposure for the investor without putting the initial capital at risk.
However it is important to note that in terms of pure capital appreciation this option would be the least rewarding option since the initial capital investment does not get the benefit of compounding (as is the case with growth option).
Dividend Reinvestment
From the point of view of returns, the dividend reinvestment option does not perform very differently from the growth option in the long term. In most cases we find investors using the dividend reinvestment option when purchasing tax saver (ELSS) funds. Additional units added to the folio from dividends are considered to be fresh investments into the fund, giving investors greater exemption under Section 80C.
Example, if you initially invested Rs. 60,000 at an NAV of Rs. 20 (3000 units) and a dividend of Rs. 5 was declared. The dividend value of Rs. 15,000 will be used to purchase an additional 1000 units (at the ex-dividend NAV of Rs. 15). This Rs. 15,000 will be considered as fresh investment under Section 80C, giving you a total tax exemption of Rs. 75,000.
However, it is important to note that tax saver funds carry a lock-in period of 3 years, and a dividend reinvestment option would mean that every fresh set of units added would be locked in for further three years. Exiting such a fund completely at one point of time would therefore be difficult.
Tracking dividend income
Fundsupermart.com allows you to view dividends received as part of your holdings report. The My Investments > View Holdings module enables you to see an overview of your holdings; this table includes information on dividends received as well.
The focus, when discussing mutual funds as an investment option, is usually on the increase in a fund`s NAV - that is, the growth in capital. And correctly so since this is the primary return the product delivers. But a mutual fund also offers an opportunity to earn a part of these returns in the form of regular, tax- free dividends. For a long-term investor in mutual funds, it is therefore important to understand the dividend option available in funds, their impact on the size of holdings (units) and the taxation on earnings from these investments.
Choosing a dividend option
All mutual funds have three plans on offer:
a) Dividend payout: Here, the dividend declared by the fund is paid out to the investor. Once the dividend has been declared and paid out, the NAV reduces by the corresponding amount. Example, if the NAV is Rs. 30 and a dividend of Rs. 5 per unit has been declared, the NAV reduces to Rs. 25. This option is suitable for investor seeking periodical income in form of regular profit booking in the fund.
b) Dividend reinvestment: The units equivalent to the value of the dividend declared are added to the folio. Here too, the NAV reduces but the number of units held increase. Example: suppose you own 100 units of NAV Rs. 30 and the fund declares a dividend of Rs. 5 per unit, giving you a dividend sum of Rs. 500. This amount will be used to purchase new units of the fund at the reduced NAV of Rs. 25, giving you a total of 120 units in your folio. This option is suitable for investors who do not require intermittent cash but wish to receive profits from the fund at intervals.
c) Growth option, where the dividend value is not deducted from the fund`s corpus, but is reinvested -leading to higher NAV values. All data available on returns delivered by funds is always based on the Growth option. This option is suitable for investors who not require cash and are willing to hold their investments for long term.
By default, assuming that investment is made with the intention of capital appreciation, the growth option is most suitable for investors. However, depending on the life stage of the investor, or taxation and asset reporting requirements, a dividend option might be more appropriate. We explain the two dividend options.
Dividend Payout
This option is most suitable for investors at a higher life stage, where regular income in the form of dividends is desirable. This is also considered to be a method of profit booking, useful in times of volatile markets.
A lot of investors also use the dividend payout option as a method of portfolio rebalancing. For example, if the initial investment is made heavily in debt and balanced funds for a conservative investor, the dividends received can be used to invest in equity funds. This becomes a systematic way to introduce equity exposure for the investor without putting the initial capital at risk.
However it is important to note that in terms of pure capital appreciation this option would be the least rewarding option since the initial capital investment does not get the benefit of compounding (as is the case with growth option).
Dividend Reinvestment
From the point of view of returns, the dividend reinvestment option does not perform very differently from the growth option in the long term. In most cases we find investors using the dividend reinvestment option when purchasing tax saver (ELSS) funds. Additional units added to the folio from dividends are considered to be fresh investments into the fund, giving investors greater exemption under Section 80C.
Example, if you initially invested Rs. 60,000 at an NAV of Rs. 20 (3000 units) and a dividend of Rs. 5 was declared. The dividend value of Rs. 15,000 will be used to purchase an additional 1000 units (at the ex-dividend NAV of Rs. 15). This Rs. 15,000 will be considered as fresh investment under Section 80C, giving you a total tax exemption of Rs. 75,000.
However, it is important to note that tax saver funds carry a lock-in period of 3 years, and a dividend reinvestment option would mean that every fresh set of units added would be locked in for further three years. Exiting such a fund completely at one point of time would therefore be difficult.
Tracking dividend income
Fundsupermart.com allows you to view dividends received as part of your holdings report. The My Investments > View Holdings module enables you to see an overview of your holdings; this table includes information on dividends received as well.
Illustration Note: The funds depicted in this image are purely for illustration, and are not meant to be a recommendation or a solicitation to buy any or all of them. NAVs depicted in the table are as at 29 September 2010.
In the image, we see that the HDFC Tax Saver Fund has received dividend of Rs. 504.52. Note the following in the table:
1. Since this is a Dividend Reinvestment option, the units in the Holding Quantity table include the additional units added by the dividend being reinvested
2. The Cost column is the original NAV at the time of initial investment
3. The Book Value is the original investment (Rs. 5000) plus dividend reinvested (Rs. 504.52)
4. The Market Price is the current post-dividend NAV
5. The Market Value is the value of the total number of units at the current post-dividend NAV
For Dividend payout options, the amount of dividend paid out will be listed in the Dividend column. The Market Price column will list the current post-dividend NAV and the Market Value column will show the value of the units held at the current post-dividend NAV.
The mutual fund company whose funds you hold also sends you regular account statements that include information on your dividend income. In the case of non-equity funds, the statement will also include information on the distribution tax paid by the fund on the dividend declared.
Tax Treatment
All dividends are tax free in the hands of the investors. However, fund houses have to pay a dividend distribution tax for dividends declared on non-equity funds, where equity funds are defined as having 65% or more of their corpus invested in equities. The Dividend Distribution Tax (DDT) rate for debt funds (other than liquid funds) is 13.84% and for liquid funds is 27.68% (inclusive of surcharges and cess). This tax amount is paid by the mutual fund itself and you receive the dividend net of DDT.
It is worthwhile to note that in the upcoming Direct Tax Code, which will be applicable from April 2012, a change has been proposed in the tax treatment for dividends on mutual funds. Dividends distributed by equity funds will attract 5% DDT, but will continue to remain tax free in your hands. Dividends distributed by non-equity funds will attract no DDT but will be considered as taxable income in your hands. Confirmation and further clarity on these proposals should be available once DTC comes into force.
Conclusion
Your needs as an investor may be unique yet, it is important for you to understand all the available options and get the best possible fit. Dividend plans available under mutual funds offer regular, tax-free income that can be used to supplement your income, reduce your tax liability or make further investments as required. Happy investing!
Note: The funds depicted in this image are purely for illustration, and are not meant to be a recommendation or a solicitation to buy any or all of them. NAVs depicted in the table are as at 29 September 2010.In the image, we see that the HDFC Tax Saver Fund has received dividend of Rs. 504.52. Note the following in the table:
1. Since this is a Dividend Reinvestment option, the units in the Holding Quantity table include the additional units added by the dividend being reinvested
2. The Cost column is the original NAV at the time of initial investment
3. The Book Value is the original investment (Rs. 5000) plus dividend reinvested (Rs. 504.52)
4. The Market Price is the current post-dividend NAV
5. The Market Value is the value of the total number of units at the current post-dividend NAV
For Dividend payout options, the amount of dividend paid out will be listed in the Dividend column. The Market Price column will list the current post-dividend NAV and the Market Value column will show the value of the units held at the current post-dividend NAV.
The mutual fund company whose funds you hold also sends you regular account statements that include information on your dividend income. In the case of non-equity funds, the statement will also include information on the distribution tax paid by the fund on the dividend declared.
Tax Treatment
All dividends are tax free in the hands of the investors. However, fund houses have to pay a dividend distribution tax for dividends declared on non-equity funds, where equity funds are defined as having 65% or more of their corpus invested in equities. The Dividend Distribution Tax (DDT) rate for debt funds (other than liquid funds) is 13.84% and for liquid funds is 27.68% (inclusive of surcharges and cess). This tax amount is paid by the mutual fund itself and you receive the dividend net of DDT.
It is worthwhile to note that in the upcoming Direct Tax Code, which will be applicable from April 2012, a change has been proposed in the tax treatment for dividends on mutual funds. Dividends distributed by equity funds will attract 5% DDT, but will continue to remain tax free in your hands. Dividends distributed by non-equity funds will attract no DDT but will be considered as taxable income in your hands. Confirmation and further clarity on these proposals should be available once DTC comes into force.
Conclusion
Your needs as an investor may be unique yet, it is important for you to understand all the available options and get the best possible fit. Dividend plans available under mutual funds offer regular, tax-free income that can be used to supplement your income, reduce your tax liability or make further investments as required. Happy investing!
Subscribe to:
Posts (Atom)