Nikhil Walavalka, Economic Times 12/4/2012

source: http://economictimes.indiatimes.com/quickiearticleshow/12631571.cms

All of us know we have to save and invest if we want to achieve our financial goals. We diligently penny-pinch to save money and invest in various financial instruments like bank fixed deposits, company deposits, bonds, mutual funds, stocks and so on.

However, according to financial pundits, most of these ‘invest-as-you-go’ portfolios don’t really deliver the goods. It is mainly because the portfolio is nothing but a host of stuff put together – mostly at the advice of some friends or colleagues or on the basis of the market performance – without a proper thought.

Worse, most people don’t even bother to track their investments regularly or restructure or rebalance the portfolios accordingly.

"Such portfolios typically include too many products which are difficult to track. There is also no thought behind most of these portfolios and these may not be helpful in achieving the financial goals of investors," says Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

Articulate your financial goals

However, this is not to suggest that if you have invested your kitty in such a portfolio you are doomed. You can always take stock of the situation and take remedial measures. Of course, it indeed comes at a cost, and most importantly the lost opportunity cost.

"Make a list of investments you have in your existing portfolio and articulate your financial goals in money terms along with time lines," says Uday Dhoot, deputy chief executive officer at International Money Matters.

The first step of taking stock of investments can be done by going through your investment records. For the purpose of quantifying the financial goals you can either use an excel sheet (if you are savvy enough to use it) or use financial calculators offered by various websites.

Once you have goals and the time to achieve them on paper, tally them with your investments to make sure that you have the right investments to meet your goals. For example, fixed deposits and relatively safe investments, such as short-term bond funds and fixed maturity plans, can be used to achieve short-term goals.

Diversified equity funds with good track record can be aligned with long-term goals. This process will ensure that you switch to goal-based investments from random investments.

Take stock of the situation

Okay, now that you know the details of your investments, it is time to check how they have performed. Don’t look at numbers in isolation, always compare products within the same category and relevant benchmarks to get a complete picture.

"You have to judge each product against the relevant benchmark to ascertain if it has delivered," says Vishal Dhawan. For example, if you have a large-cap oriented fund in your portfolio, you have to compare its performance with indices such as BSE Sensex or BSE-200.

Make sure that you are not making wrong comparisons. For example, you may be currently facing a situation where a fixed deposit with a nationalised bank is offering better returns than a diversified equity fund over one year.

Resist the temptation to hit the sell button on equity investments and transfer all money into fixed deposits. Remind yourself that these products are strictly not comparable, and they have different roles to play in your overall portfolio.

The whole point of the exercise is to get rid of the products that did not deliver against their relevant benchmarks, not all products. You don’t have to necessarily sell everything in your existing portfolio to build a new vibrant portfolio.

Get rid of dud stocks

While selling the underperforming investments, have a look at the charges associated with the exit. For example, most insurance policies have surrender charges – the longer you hold, the lower the charges.

One can also wait for some weeks in case of short-term bond funds, if he is keen to avoid the exit load. In case of equity products, however, you have to be careful.

On many occasions, investors want to hold on to equity investments for some months to make it long-term capital gains. But that may be rather risky.

"An underperforming equity fund can lose money as you wait for the long-term tax-free profits," says Ranjit Dani, a certified financial planner with Nagpur-based Think Consultants.

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Business Standard 27/3/12

source: http://www.business-standard.com/india/news/elss-better-investment-option-than-ppf-nsc-crisil/161624/on

“Our analysis shows that ELSS gave 26% and 22% annualised returns over three and 10 years, respectively, vis-a-vis 8-9% offered by traditional tax saving investment products such as PPF and NSC” : CRISIL

Investments in an Equity-Linked Savings Scheme (ELSS) of a mutual fund have yielded higher returns compared to other instruments like PPF and NSC in the last few years, a report by Crisil has said today.

"Our analysis shows that ELSS gave 26% and 22% annualised returns over three and 10 years, respectively, vis-a-vis 8-9% offered by traditional tax saving investment products such as public provident fund [PPF] and national savings certificates [NSC]," Crisil said.

Crisil added that interest on employees provident fund (EPF) for 2011-12 was slashed to 8.25% from 9.5% in the previous year and thus ELSS can act as a strong alternative to investors.

Though the traditional debt products are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns in the long run.

The PPF accounts fetched 8.12% over the last 10 years and in the similar period, the NSC gave an interest of 9.10%. The average inflation over the past 10 years stood at 6.05%.

"ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed the Nifty 500 across three and 10 years. With average inflation around 7% over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14%, which is significantly higher than returns offered by other tax saving products," Crisil’s senior director Mukesh Agarwal said.

The rating agency, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.

"Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns.

Further, investors must choose funds that have performed well both in good and bad times," Crisil head for Funds and Fixed Income Research Jiju Vidyadharan said.

It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.

VRIDHI’s view: We generally start planning for Tax Saving in Dec – Mar every year. One of the product with shortest lock-in is ELSS. Markets are on the lower end rite now. This is an opportunity for investors to plan Tax saving this April itself for the financial year 2012-2013 and use the low valuations for better returns. Approach VRIDHI today and we will be able to help you plan. 

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Sanjiv Chaudhary, Financial Chronical 6/2/2012

source: http://www.mydigitalfc.com/personal-finance/pf-withdrawal-five-years-job-taxable-023

In India, employees’ provident fund (EPF) is a benefit scheme for salaried individuals for their old age after retirement. Under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (PF Act), employers are required to contribute 12 per cent of their salary towards provident fund (PF) as specified, with a matching contribution by the employees.

In case of employees not being ‘international workers (IW)’ (typically foreign employees coming to or Indian employees going out of India on work, subject to conditions), the employer is mandatorily required to contribute towards PF, if the total number of employees earning salary up to Rs 6,500 per month is 20 or more in the establishment. However, employees earning monthly salary more than Rs 6,500, can voluntarily choose to contribute towards PF. The tax treatment of such amount at the time of contribution into a recognised PF and early withdrawal has been discussed below. The tax implications for IWs has not been discussed.

Salary for the purpose of PF: Salary for the purpose of PF would include basic wages, dearness allowance (including cash value of any food concession) and retaining allowance.

Basic wages means all emoluments which are earned by an employee while on duty /leave / holidays, according to the terms of employment and which are paid or payable in cash. This does not include house-rent allowance, bonus, commission, overtime allowance or any other similar allowance.

PF contribution by the employer: If the employer’s contribution to PF is up to 12 per cent of the salary, then the same is exempt from tax as per the income tax laws. A portion of the employer’s contribution is necessarily to be contributed by the employer into the pension scheme which is restricted to 8.33 per cent of Rs 6,500 per month (that is, Rs 541).

PF contribution by the employee: An employee can claim a deduction from salary up to a maximum of Rs 1,00,000 per annum under Section 80C of the Income-tax Act, 1961, on his contribution towards PF from his taxable income.

It should be noted that the contribution of the employee shall be equal to the contribution payable by the employer. However, the employee may at his option contribute an amount exceeding 12 per cent, subject to the condition that the employer shall not be under an obligation to contribute over and above his contribution payable under the PF act.

Interest on PF contribution: The employee earns interest on the PF amount that is contributed, both by him and his employer. Such interest is exempt from tax.

Transfer of PF: In case of change in employment, the employee is required to transfer his PF balance under the new employer’s account. Such a transfer does not entail any tax implications on the employee.

Withdrawal of PF: A member of the PF scheme shall be entitled to withdraw the PF amount standing to his credit on retirement from service after attainment of 58 years; retirement on account of permanent and total incapacity for work due to bodily or mental infirmity; termination of service in the case of mass or individual retrenchment; after two months of resignation in case of no employment. Under any of the above circumstances, the employee is not taxed on the PF withdrawal.

Taxability in case of premature withdrawal: In case the employee has rendered less than five years of continuous service, the employer’s contribution and interest, thereon, would be fully taxable as ‘salary income’ in the hands of the individual. Further, the employee’s contribution would be taxable to the extent of deduction claimed under Section 80C, if any, under the Income-tax Act,1961 and the interest earned on employee’s total contributions would be taxable as ‘income from other sources’ in the hands of the employee.

In short, PF can be considered as a tax planning measure in addition to being an avenue to provide safety and stability to the employee as well as his family.

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Deepti Bhaskaran, Mint 26/1/2012

Though commissions have increased a bit, NPS remains the cheapest market-linked retirement vehicle

source: http://www.livemint.com/2012/01/25211515/Higher-fee-for-NPS-distributor.html

Troubled by the poor uptake of National Pension System, or NPS, the Pension Fund Regulatory and Development Authority (PFRDA) has changed the incentive structure for the distributors from a fixed sum to a percentage of the investment amount.

This will serve two purposes—one, bringing about a more equitable incentive structure and two, to incentivize the distributors to push NPS. Till now the points of presence or the distributors got a flat Rs. 20 as initial subscription charge and Rs. 20 for any subsequent investment.

Taking a recommendation by the G.N. Bajpai committee—constituted by PFRDA to review NPS—forward, the pension regulator has fixed the incentive at 0.25% of the subscription amount; the committee had suggested 0.50% of the investment, subject to a minimum of Rs. 20 and maximum of Rs. 50,000.

Now a distributor will get a flat Rs. 100 on initial subscription and 0.25% of the initial subscription amount. Moving on, every year on subsequent investments, the point of presence will be entitled to 0.25% of that amount. But the minimum that a point of presence can charge is Rs. 20 and the maximum Rs. 25,000.

The committee had observed that the earlier structure was amounting to the poor subsidizing the rich—a person investing Rs. 6,000 and a person investingRs. 1 lakh were both paying Rs. 20. Also the fixed sum was acting as a deterrent to sell NPS amid better commissions-yielding products such as insurance policies.

NPS which launched in May 2009 was primarily targeted at the unorganized sector, which does not have any form of social security. Despite the crying need for social security and NPS being the answer, so far only about 1 million people out of a workforce of about 400 million in the unorganized sector have joined NPS. This apparent increase in commission, the regulator hopes, will push NPS sales.

What it means for you?

The commissions have increased a tad bit, but NPS remains arguably the cheapest market-linked product. Since unit-linked pension plans are clouded by regulatory guidelines and are not available in the market, we compared NPS with mutual funds. At an expense ratio of just 1% per annum, a Rs. 1 lakh contribution every year in a mutual fund would yield a lump sum of around Rs.1.46 crore in 30 years, assuming the growth is at 10%. On the other hand, a fund management cost of 0.0009%, NPS would return around Rs. 1.8 crore for the same return and tenor.

In fact, cost-wise NPS has become better. With the increase in the number of subscribers, central record-keeping agency (CRA) charges have come down from Rs. 350 to Rs. 280, which is expected to reduce further as volumes increase. Even the transaction charge that CRA levies has come down to Rs. 6 per transaction. In addition, NPS now allows only one-time investment; earlier, you had to invest at least four times, which meant you paid the distributor and the CRA at least four times in a year.

What’s in the pipeline?

There may be more reforms in the pipeline. The Bajpai committee has also recommended broad-basing the distribution network by allowing mobile telecommunication service providers, some fast-moving consumer goods companies and third-party vendors to distribute NPS. Currently, NPS is being sold mainly through banks. The committee has also suggested that pension fund managers be allowed to distribute products.

Also the fund management charge of 0.0009% is hurting the fund managers, who have been lobbying hard to review it. Says Yogesh Agarwal, chairman, PFRDA: “We are reviewing the fund management cost and will come out with fresh guidelines shortly.”

What should you do?

The reforms in NPS are yet to play out fully. But even as the regulator balances the expectations of the industry and the benefits for the investors, NPS is a good retirement option for you. If you have a provident fund or superannuation plan with your employer, you may not need to invest in NPS. Also, if you have an appetite for risk, NPS may not be for you. NPS allows equity exposure only up to 50% of the investment amount. However, for conservative investors looking for retirement vehicles, NPS is a good proposition.

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Money Money Money

Stocks, bonds, gold or real estate this year?

Raghuvir Srinivasan, The Hindu 22/1/2012

source: http://www.thehindu.com/arts/magazine/article2816957.ece

Someone’s sitting in the shade today because someone planted a tree a long time ago.

Warren Buffett, legendary investor.

If you are someone who tried to follow this advice in 2011, chances are that the seed that you planted failed to even germinate! Given the turmoil in global financial markets, it would have been a challenge even for the Oracle of Omaha, as Warren Buffett is known, to multiply his money in 2011. Why talk about lesser mortals like us?

So, what does the picture look like in 2012? Should you buy stocks? Or should you be conservative and go for debt options such as fixed deposits and bonds issued by government companies? Or will it be wise to stick to that time-tested investment — gold? Let’s examine how the picture looks for each of these investment options.

Stocks: Investing wisely

The last year was a wash-out in the stock markets. No matter how savvy an investor you were, it was very difficult to make decent money as the market was on a consistent downtrend. Yet, with most major stocks lying battered and bruised at the moment, you may actually be sitting on a good buying opportunity now.

As Warren Buffett once said, the time to get interested in the stock market is when no one else is. The mistake we often do as investors is to get excited about stocks when everyone around us is excited too. Herd mentality is a dangerous attitude to have in the stock market, as often those who generate the excitement about all the wrong stocks exit them quickly leaving the rest holding duds.

The stock markets are now dull due to reasons such as high interest rates, slowing economic growth and the problems in major economies worldwide. However, we seem to be at the cusp of a change for the better, at least in the limited context of India. Interest rates have probably peaked and they can only fall from hereon, which is good news for borrowers. We will have an indication of the Reserve Bank of India’s thinking on this later this month when it announces its monetary policy.

Industrial growth is on a roller-coaster but given that ours is a consumption-driven economy, a fall in interest rates will set off a virtuous cycle of higher demand, rise in output and growth in investment to meet the demand. This should be good news for the stock market.

So, it may make sense to start investing systematically in carefully chosen shares now. The stock market is dominated by big players such as mutual funds and foreign institutional investors. Volatility in prices has considerably increased, making it a dangerous place for small investors like you and me to directly invest in shares.

It may, therefore, be prudent to invest in the stock market via mutual funds. Choose diversified funds or those that track the major indices. If you don’t need regular dividends, then invest in growth schemes that will offer you a higher return over the long term.

However, if you prefer investing directly in the stock market, choose blue-chip stocks that form part of the major indices such as the BSE Sensex or the Nifty, which is made up of shares of 50 top companies. Most of the blue-chips that constitute the indices are now available at attractive prices.

One word of caution though. Don’t put money that you might need in the next one year in the stock market. You need to give more than a year for your investment in shares to generate a good return. And yes, unless you can watch the shares that you invested in decline by half without having a heart attack, you should not be investing in shares. Those are words of wisdom, again from Warren Buffett.

Debt instruments: The safer bet

This is an opportune time to invest in debt instruments such as fixed deposits, bonds issued by different companies and in mutual funds that invest in debt. Interest rates are probably at their peak level and it will be a good idea to lock into these rates now for the next 2-3 years.

A number of companies are offering good rates of 10-11 per cent on fixed deposits now. Pick only the ‘AAA’ rated companies which are the safest even if the interest offered is relatively lower compared to an ‘AA’ rated company. Of course, interest on these deposits is taxable. So, if you are someone in the 30 per cent tax bracket, your post-tax return will be between 7 and 7.7 per cent only, which is lower than the inflation rate.

A slew of bond offers from government companies are now in the market. The National Highways Authority of India (NHAI) and Power Finance Corporation (PFC) closed their offers last week. With an interest rate of 8.2 per cent for a 10-year term, these bonds offered the twin advantages of being tax free (interest) and also liquidity in the sense that you can sell them in the market if you needed funds urgently.

Never mind if you missed these two offers. There are equally good ones that are open for investment now. IDFC, an infrastructure finance company, and L&T are currently in the market with bond offers. These 10-year secured bonds offer 8.70 per cent interest which is taxable. This means that for someone in the highest tax bracket, the post-tax yield will be just 6.09 per cent. But the benefit is that up to Rs. 20,000 of your investment is eligible for tax deduction under section 80CCF of the Income Tax Act.

There are also unsecured bonds currently on offer from Rural Electrification Corporation and IFCI offering 8.95 per cent and 9.09 per cent interest respectively, which is again taxable but the investment is eligible for 80CCF deduction. Though unsecured, these bonds can be considered for investment since the companies are ‘AAA’ rated with the government being their dominant shareholder.

Don’t forget bank fixed deposits too. If you already have invested in them, ask for a reset of the interest rates. This will mean that you will have to invest for a fresh term from now but it will be worth it because rates are expected to fall and when your deposit matures a few months from now, you might get a lower rate if you choose to reinvest.

Interest from some long-term bank deposits of five years or more is exempt from tax. Also remember, most banks and some companies offer a higher interest rate for deposits made by senior citizens.

Gold: The perennial favourite

Gold is an evergreen investment option and certainly THE choice during difficult times. For Indians, gold has traditionally been the first investment choice, ahead of stocks, debt or real estate. While the yellow metal is no doubt a safe investment, a couple of points need to be noted.

First, returns on gold may not always be attractive. Take the case of 2011. Gold price, in dollar terms, appreciated by just about 11 per cent, though in rupee terms it returned 33 per cent. The higher returns in rupees was because of the depreciation of the currency vis-à-vis the dollar. Assuming that the rupee had remained stable or even appreciated versus the dollar, the returns picture might have been different.

The second point is about a more practical problem. While it is easy to buy gold, either as coins or as biscuits or bars from authorised banks, it is not so easy to sell the same. Banks do not buy back gold coins or biscuits even if they were the same pieces sold by them. While the option of going to your family jeweller is certainly there, he will again not give you money in return. You will have to buy jewellery of equivalent value from him and, again, he will not give you the prevailing market price for the gold that you sell to him. There will be a discount on the price; maybe it will be smaller if you are well known to him.

Liquidity, therefore, is an issue with investment in gold. The asset is one for long-term investment with an eye on your child’s marriage or education. It is certainly not for rolling over short-term cash surpluses. If you still prefer gold for short-term investment, you could go for gold exchange traded funds (ETF) where you invest in paper based on gold. While you can benefit from appreciation in gold price, you are not required to purchase an equivalent quantity of gold. You can trade in gold ETFs just as you trade in company shares.

Real estate

This is the trickiest of all investment options but if you get it right it will offer returns incomparable to any other. If you are unfortunate enough to get it wrong, then it can boomerang badly too. Real estate is a long-term investment by its very nature and the initial investment is, often, on the higher side.

Real estate mutual funds have yet to take off in India due to several issues but when they eventually do, they will offer a good avenue for those interested in an exposure to this asset class. Real estate prices are inextricably linked to interest rates and the prevailing high interest rate regime has put this asset class in the pale. Yet, given the long-term economic growth potential of India, real estate can only appreciate.

Attractive options

As we start 2012, stocks and debt appear the most attractive of the investment options. Those of you who are risk-averse and don’t mind relatively lower returns can opt for the many debt instruments that are now available. Remember, you need to lock into them the next few weeks when many bond offers open to get the best returns.

Stocks are for those who seek returns that beat inflation many times over and understand that the investment is risky per se. Given that the market is at a low now, you can start accumulating the right stocks with some advice from professional money managers. Always follow a systematic strategy of buying in small lots over a period of time which evens out price swings. Here’s to happy investing in 2012.

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