Investing It!

RBI has started reducing key policy rates, but there is no certainty regarding aggressive rate cuts. Going ahead, while there are expectations of a rate cut, quantum of rate cut is still anybody’s guess, since inflationary pressure has not dwindled. Investment in dynamic bond funds in such a scenario (clear direction but unclear quantum) can be a smart decision from retail investor’s perspective. In this article, we will discuss what dynamic bond funds are, how to analyse them and about the best time to invest in them.

What are Dynamic Bond Funds?

Dynamic bond funds are like normal debt funds from asset allocation perspective, as investment is primarily done in government and corporate bonds. They differ from normal bond funds in management style and proportion of investment in government and corporate bonds at a given point in time. Normal bond funds have fixed proportion of investment in corporate and government bonds where as investment proportion varies from time to time in case of dynamic bond funds as per the discretion of the fund manager. Fund manager actively manages the fund and plays with the duration and maturity of the bonds based on future interest rate scenario, so as to maximise returns. He has the flexibility to shift completely into short term debt securities from long term securities and vice versa in a very short span of time based on expectations regarding the yield curve.

Why to invest in Dynamic Bond Funds?

Prediction is the key word here. The one who predicts the interest rate direction early and correctly will be rewarded the most. Dynamic bond funds provide the opportunity to capitalize on this knowledge. Fund manager can take a directional call at the right moment and churn the maturity and duration of the portfolio to generate appreciable capital gains in a short span. Bond prices are inversely proportional to yield and hence portfolio maturity and duration increase in case of falling interest rate scenario and vice versa. This capital appreciation opportunity is lost in the case of normal bond funds as portfolio churning is not a norm there. As a common investor, we do not possess the right tools and resources to predict the direction of yields but good fund managers can do the same in their capacity.

Fund managers with appreciable track record watch RBI’s open market operations, prevailing inflation, credit growth rate, etc to predict interest rate scenario. Based on their analysis they shift the portfolio towards long term or short term debt securities such as CD’s, CP’s, corporate bonds and government securities. If their insight is correct, this active management results in handsome capital gains for investors.

Word of caution

Investment in dynamic fund should be done keeping capital appreciation/depreciation aspect in mind. Past performance of fund manager in predicting the interest rate scenario should be analysed properly as this is a skill of paramount importance in case of dynamic bond funds. Even though this is a high capital appreciation potential investment, dynamic bond funds are risky compared to normal bond funds. Risk element comes in the form of capital depreciation if the prediction of fund manager goes wrong. Hence, you should invest in dynamic bond funds only if your risk appetite is on the higher side. All said and done, it is important to continuously monitor your portfolio and realign it to reduce the risk element.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com

Calculators

SIP Maturity Calculator

Monthly SIP Calculator

We live in an era where we run against money but can’t find time to manage money. We ask for simple but effective solutions for money management. Thankfully, our dear banks have heard us. They have come up with a simple solution to help us generate decent returns on our savings bank accounts.

Lot of times, we just let our money sit idle in the savings bank accounts just to know that it has only been a dud there. This has made some of the major banks to introduce an innovative concept called Flexi-Deposit.

What is it?

It is just a mix of Savings account and Fixed Deposit. It gives you an option to set a limit and the money which exceeds this limit automatically goes into a fixed deposit.

Let’s take an example:

Mohit has a balance of Rs. 75,000 in his savings account. He sets a limit of Rs. 25,000 for the flexi-deposit. Now, Rs. 25,000 remains in the savings account and the rest (Rs. 50,000) goes into an FD earning the interest prevailing on that particular date (depending on the tenure).

What are the benefits?

This facility gives us the following benefits:

1)      Liquidity

2)      Better returns than savings account

3)      Hassle free investment

Suppose Mohit (in the above example) issues a cheque of Rs. 30,000. Under normal circumstances, if the account does not have sufficient balance, there would be a cheque bounce. However, in this case, the amount which exceeds the limit (Rs. 5,000 in this case) is taken from the fixed deposit account. The rest of the balance keeps earning the interest for the tenure, as usual.

Who needs it?

As specified before, if you are someone looking to stay away from the complicated products in this market and are too busy, this is just tailor made for you. However, if you have enough time to do research on different financial instruments and would like to build a long term portfolio, you might consider it as just another option. The current rates of FD’s hover around 8-9% (expected to fall further) and may not be sufficient to beat inflation in the long run.

Final Word

Carefully evaluate your options while choosing any financial product. There might be an opportunity cost involved in missing a better product while choosing the current one. This product is worth taking a shot. But, if you miss out on other ingredients in your portfolio, you might have to blame yourself in the long run.

About the Author:

A.V.Suresh is our in-house Financial Planner and a personal finance enthusiast. He is a Certified Financial Planner (CFP) and also has an MBA in Finance. He can be reached at expert@investmentyogi.com

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When equity markets deject an investor, he has very limited options left to maximize his returns. This was the story of the past, the conditions have changed and the outperformance of a portfolio is now measured on various parameters. You will not want your investment to dwindle 50 percent of its value before recovering and giving you a return close to 10 percent. The time of recovery is sometimes long and equally frustrating for a person. In such cases an investor has an option to invest in Debt Mutual Funds. Equity linked schemes are often volatile and with global markets intersecting, the moves of domestic bourses are difficult to predict. In such cases, it is advised that you start searching for some alternatives that diversify your portfolio.

Now investing in mutual funds can be through two modes. Either you allocate 100 percent of the money in debt funds or otherwise you can distribute it between equity and debt portion. The company’s policy provides you a choice to allocate your money in Equity and Debt. This can give you dual advantage of high returns from equities and stability from debt. A full fledged debt fund is welcome in case of you are unaware of the functioning of the markets. Retail investors often get surprised to see the options they get from a debt fund. The debt products are generally of three types:

Hybrid Fund: This fund gives the solution to the customer based on his needs and capacity to invest. Hybrid funds include monthly income plans (MIP) as well as multiple asset allocation funds. This includes a high percentage of funds invested in debt that saves money from unnecessary volatility. Another advantage of this scheme is that it can be invested as a Systematic Investment Plan (SIP) and the money can be withdrawn through a Systematic Withdrawal Plan (SWP).

Accrual Fund: This fund is based on the fact that the investor wants a fund of less to medium risk. It harness on the volatility in interest rates and earns income based on the interest rates. This is similar to fixed deposits in banks. SIP can also be used in accrual fund and the benefits of compounding are possible through SIP in such funds.

Cash Management Solution: Apart from these two types of funds, there is a cash management solution for those who don’t want their investments to be exposed to medium or high risks. This fund is therefore less risky than Hybrid and Accrual fund.

Debt funds invest in Government Securities, and Gilts in the current scenario seem ideal. The investments in bonds and G-Sec tend to grow in value as the interest rates are reduced. This is due to the inversely related nature of bond prices and coupon rates. On the other hand, Gilt funds invest in bullions. Considering the attractiveness of Gold among Indians, demand wise Gilt funds have become a hit.

Some of the debt funds and their returns generated are given in the table below:

   Source: Website of Mutualfundindia

Investors with a long term horizon should always put some of the money in bonds through debt funds. The biggest advantage to Indian investors is the end of the rise in benchmark rates. A decline in interest rates in the coming days will be beneficial for the bond markets and investors can hope for much better returns in debt funds.

About the Author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at expert@investmentyogi.com

Calculators:

SIP Maturity Calculator

Monthly SIP Calculator

The decisions taken years before your retirement pave way to how your life would be after retirement. It has been seen that sound financial decisions before retirement bring cheer and peace after retirement when the finances are all the more important. Nobody can doubt the shortage of funds after a person has retreated from the job. The money for day to day expenses gets filtered, as post retirement, a person will be getting pension which is way less than the salary he used to receive during work. Indians mindset is changing day by day and now even young employees are trying to mitigate the risks of future. This is a good idea considering the uncertainties and contingencies that can occur in the future.

Burden in a Recessionary Environment:

The approach of investors before subprime housing and debt crisis in the US and Europe has moved strides away from the approach after the debacle. A future retiree must consider the fact that after recession, the interest rates are pretty low. In a domestic environment, the deposit rates have come down and they are not matching the high inflation levels. In a few countries, the interest rates are close to zero. Lower interest rates make life difficult as the savings need to be increased. A high interest rate means that you could have saved less but had generated returns on your principal. The saving should be more in case of lower interest rates. Therefore, you must save more so that your retirement will not be mourned. The person who retires with lesser savings finds it hard to meet his living expenses. You should plan your retirement particularly in a lower interest rate and higher inflation scenario.

Provident Fund:

Although there is a fixed percentage set that gets deducted from your salary every month, you should look to increase the percentage of money deducted from your account. This is between employer and employee. It will ensure that at the time of retirement, you will have more funds in your Provident Fund account. These savings become a habit once you start following them and you get used to them. In other cases, you will be spending the money not saved, for other expenses; you will have the PF fund but even that will be lesser. If you want the retirement corpus to look more handsome, then ask your employer to deduct more in PF. That will be the employee’s contribution. Employers have no liability to contribute more, they will only contribute in your PF funds as per normal set limit.  

Plan extra income after retirement:

At the time of retirement, few people are fit to continue with the job. In such cases, the employee can apply for part time jobs. In case of private companies, this option is possible in some cases. A retired employee can work part time in the same company or he / she can work in a different organization. You must be aware that experience has a high value. The employer’s stance has changed over the years and they want seasoned personnel. Part time job gets you extra income apart from the pension.

Risk Averse:

You should be risk averse well before retirement. The decisions you took at the time of starting your career are not the decisions you should continue at the time of retirement. A new employee with lower liabilities is more a risk taker. Your priorities should change as your liabilities increase. Make fixed income investments and try and put your hand in Mutual Funds that are more safe rather than investing in Equities. Avoid punters call on specific companies and try and make an investment in good schemes and areas like PPF, NSC and Fixed income bonds. Investment in properties is a risky venture which you should avoid. But, don’t be too conservative, you can look into this area provided you have done due diligence.

Retire at a Later Date:

Unless you got attracted towards lump sum at the time of Voluntary Retirement Scheme (VRS), it is advised that you take retirement at the official date if your health allows you to do so. Having said that VRS schemes are launched by company to company basis and there is a possibility that you don’t have such scheme in your bag. Whatever the case may be, it is better that you retire on the date that is officially set to; this will give you time to save more before retirement. You may also have a chance of higher pension and pay scale revision under the Indian Pay Commission. Whether you are a government employee or not, the chances of annual pay hikes or appraisals are always higher.   

About the Author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at expert@investmentyogi.com

Calculators:

Retirement Corpus Calculator

Monthly Pension Calculator

Suitability of an investment product for investment in financial market is parameterised by the return it generates over a period of time. As return is one of the primary factors which influence investment decisions, it’s important to understand how investment returns are calculated and estimated in real life scenario. We will discuss three simple but effective concepts for measuring investment returns together with the advantages/disadvantages of using them.

What are the various ways of measuring returns?

There are basically three simple ways of measuring investment returns. If you fear maths, it’s time to rethink as doing little maths might make you a winner in the investment fraternity. Proper understanding of return measure requires basic math skills. Do not worry as we will be discussing the concept through examples. Coming back to the return measures, the popular ones are:

1.     Simple Return/Annualised Return

2.     Compounded Return

3.     Compounded Annual growth rate (CAGR)

We will discuss the three methods taking example of a stock investment, but these are general concepts which can be applied to any type of investment.

Simple Return/Annualised Return

Simple return is calculated using the following formula:

Let’s say you buy a stock at Rs 100 and sell it after some time at Rs 112. If we put these two values in the above formula, we will get a simple return of 12%.

In calculation of simple return, we are not concerned about the holding period of your investment. This makes return comparison of two products with different holding period difficult. For example, how will you differentiate between two stocks which have given return of 5% (Stock A) and 6% (Stock B) if you do not know the holding period? To make return parameter more informative, we add holding period variable to it and compute the return with respect to one year of holding period. The formula now become annualised return formula, which is

In the two stocks example above, let’s say the holding period of first stock was 6 months and the holding period of second stock was 8 months. Putting all this data into annualised return formula will give annualised return of A as 10% and annualised return of B as 9%. Now we can say that stock A was a better investment as compared to B, which was not clear earlier without holding period data.

Compounded Return

Compounded return formula has an underlying assumption that whatever you get at the end of compounding period will be reinvested at the compounding rate for the next period. Hence, in this method, your principal amount increases at the end of each compounding period. This results in returns which are superior to the simple return as reinvestment concept is not applicable in case of simple return calculation. The formula for calculating compounded return is given as

Where i = Compounded return

FV = Future value of investment

PV = Present value of investment

n = Holding period in years

Let’s say we buy a stock today at Rs 100 and sell it after 6 years at 165. If we use the above formulae to calculate compounded return we will get compounded return = 8.7%. If we use the formula of simple return, it will be a return of 65% which is highly misleading. Based on this comparison, we can say that compounded return gives a more realistic picture as compared to simple returns.

Compounded Annual Growth Rate (CAGR)

CAGR calculation and assumptions are similar to compounded return calculation with one addition. CAGR also takes into consideration the intermediate cash flows during the holding period. In compounded return calculation, we have no term for intermediate cash flows. Let’s say stock A pays dividend of Rs 5 in the second year. Our compounded return formula will still produce a result of 8.7% return. But, if we use CAGR, we would do the calculation assuming additional cash flow will be reinvested in the stock at current price resulting in enhancement of returns at the end of holding period if there is further price appreciation. So, CAGR gives more realistic picture as compared to simple and annualised returns as it takes cash flow and return volatility into consideration. This is the reason why it is a popular return measure and is used for comparative analysis of investment products.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com

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Every portfolio benefits from bonds; they provide a cushion when the stock market hits a rough patch. But avoiding stocks completely could mean your investment won't grow any faster than the rate of inflation.
 - Suze Orman 

I am sure most of you would agree with this and you are right. Bonds are a much safer investment option than equities. However, many of you would be under the impression that investing in bonds protects your money from any kind of risk and there I’ll take the liberty to correct you.

Despite being safer than equities and commodities, bonds too carry some risks with them. Let me throw light on a few of them for you!

A bond is a debt security in which the issuer acknowledges debt to the purchaser. Thus, if you are buying a bond, you are lending your money to the issuer of the bond. And, when you are lending your money to somebody, there is a risk that you do not receive it back. In other terms, bonds carry credit risk (risk of default) with them. To avoid such risk you should look at the credit rating of the bond instrument and only then make a decision to invest in it.

Organisations such as CRISIL, ICRA issue ratings for most bond issues.

Another big risk associated with bonds is interest rate risk. You must be wondering, when the interest rate which I get on my bond is fixed, then how can this be a risk? It is not, if you are prepared to hold the bond until its maturity. If you intend to trade it in secondary market, then this is a big risk for you as the price of bond (in the secondary market) has an inverse relation with the prevailing interest rate. Let us assume a scenario. You purchased a bond for Rs. 990 that promises to pay 10% semi – annual interest on face value.

There is now a new bond issue in the market, which offers 12% semi – annual interest on face value. Considering the change in the interest rate, very few people will be ready to purchase the bond, you are holding, that too at a low price as they have now an option to buy a bond that has a higher coupon rate.

Liquidity is another risk faced by bond instruments. If you want to sell your bond in the market, and liquidity is low, then you may find it very difficult to get buyers. As a result, price of your bond will fall. However, this risk does not generally apply to government bonds, as there is always a demand for them.

Bonds are definitely the most suitable investment option for risk – averse or moderate investors. Still, do not ever invest in any bond without looking at all the risks associated with it. For those who do not possess much knowledge regarding bond market, mutual fund is the key.

About the Author:

Sapna Tiwari is a Certified Financial Planner and Masters in Financial Management with over half a decade’s experience in the field of personal finance. The views expressed are personal. She can be reached at expert@investmentyogi.com

Calculators:

SIP Maturity Calculator

Monthly SIP Calculator

Akshaya Tritiya is one of the most auspicious days in the Hindu calendar. The word “Akshaya” means imperishable and eternal prosperity which never diminishes. So, new ventures made and valuables purchased on this day would be fruitful and believed to bring luck and success. Traditionally, in India, on this day people purchase gold as it is the symbol of wealth, prosperity and fortune. This year, it will be celebrated on 13^th May, 2013.

Every year, to attract buyers; jewellers and banking institutions offer various attractive schemes such as offering a free silver coin on purchase of gold, discount in making charges on gold jewellery and discounts on gold coins.

Let’s analyse the performance of gold as an investment avenue from Jan-2008 to May-2013 (up to 8^th May, 2013) and 1^st Apr, 2013 to 8^th May, 2013.

Graph 1: Price of gold (per 10 gram) increased by 18% CAGR during Jan-2008 to May-2013

Source: Bloomberg

We saw “Bull Run” of gold price in last 5 years which we can analyse from the above chart. There were various reasons and many investors followed the herd to gain profits by investing in gold. However, investors who invested in gold when prices were at peak would be in loss or nominal profits since there was a drop in price of gold in last one and half months, which is shown in graph 2.

Graph 2: Gold price dropped by 9% in last one and half month

Source: Bloomberg

Analyzing recent correction in prices of gold and with no other positive trigger except for Akshaya Tritiya festival, analysts are expecting prices to stay in the range of Rs 25,000 to 28,000 per 10 gram in near term.

I know various people among family, friends and society who would do not look at co-relation of economy with gold price. They simply have 10 general or superstitious reasons to invest in gold. However, I would like to share 5 reasons why you should not invest in gold on this Akshaya Tritiya:

1. Buying gold on this auspicious day only due to superstitious belief of growing wealth.
2. Investing in gold due to speculation of gold price will continuously increase for next 2 – 3 years.
3. Simply buying gold since your financial advisor told to invest in this yellow metal.
4. If your portfolio already consist of 10% investment in gold.
5. Considering gold can help to grow your wealth. However, fact is, in long term investment in gold helps to preserve wealth, not grow it. 

Stating reasons you should not invest in gold doesn’t mean I have negative view on gold but there should be timing to enter as investor. Portfolio should be well balanced with various asset classes, speculating in the future of gold price will diminish your wealth instead of growing it….!!! 

Most readers would have already made their mindset to invest in gold on the day of Akshaya Tritiya. So, here are various investment options available to invest in gold:

1. Gold Jewellery
2. Gold bar / coins
3. E-gold (National Spot Exchange Limited)
4. Exchange traded fund (Gold ETF)
5. Gold funds

This year, we recommend you to invest in gold ETF / E-gold / gold funds instead of buying physical delivery of gold jewellery from showroom or gold coins from banks.

Reasons:

• There is additional cost to purchase gold from showroom or banks. These additional costs involved will be making charges, VAT on purchase of gold and premium charged by banks on purchase of gold coins. On other hand buying paper gold will involve brokerage, maintenance charge and transaction charge which will be much lower than physical gold.  
• There are holding charges (locker) in the range of Rs 1000 to Rs 2500 per annum on delivery of gold products. In paper gold, you will pay maintenance / demat charges in the range of Rs 150 to Rs 300 per annum.
• The price of physical gold is lowered when we go to sell in shops (impurity of gold and making charges are deducted). In paper gold, you will incur brokerage charges in ETF and in E-gold, if taking delivery of gold, then 1% VAT and 1% as making charges of gold coin.
• Most importantly, paper gold products are considered highly liquid, so, in an emergency they can be sold off quickly.
• Investing in gold saving funds with a systematic investment plan is also one of the best alternative ways to invest regularly in gold. This will help you ride though volatility in gold prices without taking on the risk of bad timing.

Conclusion

Now, after analyzing and discussing the current scenario of gold prices, whether you should invest or not in gold on this auspicious day is a personal choice. It’s recommended to first analyse one’s needs to invest in this yellow glittering metal. If you have decided to invest, then don’t run for attractive schemes offered by showrooms or banks to invest in physical gold. Instead, opt to invest in gold funds with systematic investment plan / gold ETFs / E-gold option which will save additional costs, lower the risk and also offer liquidity.

InvestmentYogi wishes all its subscribers, “A new beginning of greater prosperity, success and happiness on this auspicious day of Akshaya Trithiya. Wishing you all Happy Akshaya Trithiya.”

Author

Hiral Thanawala is a PGDM (Finance) graduate and Certified Financial Planner with an experience of over 5 years in equity market and personal finance domain. The views explained by him are personal. He can be reached at expert@investmentyogi.com.

Calculators:

SIP Maturity Calculator

Monthly SIP Calculator

The life of a person steps towards a great uncertainty after retirement. At this stage, people tend to become reliant on the savings and investments made during the time of regular employment. Since the cash flows are generally low compared to the earning during employment, people want full retirement money in hand without any deductions. One of the important factors that can reduce the retirement corpus is the tax implication on such receivables. Income – Tax Act, 1961 has already provided relaxation by increasing tax slabs for senior citizens. The tax slab now starts from Rs.2,50,000. Here, senior citizen means an individual who is 60 years of age or more and an individual comes under the category of very senior citizen when his/her age is 80 years or more. In addition to the deduction available in slabs, a retired person can do proper investment planning to reduce his tax liability.

Sources of income after retirement and respective tax implications:-

Pension Receivables

Pension is the most common source of income after retirement. It refers to the retirement plan or superannuation which may be set up by government, employers, insurance companies, employer association and trade union, etc.

Pension is generally received on a periodic basis i.e. monthly, quarterly, etc. This type of receivable is called commuted pension, and a non-commuted pension is received by an individual in the form of a lump sum amount.

A non-commuted pension is fully taxable in the hands of all categories of employees, however some exemptions are available for a commuted pension receiver.

Tax implications on commuted pension:

                 It is tax free in the hands of government servants, whereas in the case of other employees:-

Situation1 – where an individual also receives a gratuity along with pension, then one-third of his pension is exempt from tax.

Situation 2- where an individual does not receive a gratuity along with pension, then half of his pension is exempt from tax.

                 Pension received by spouse upon death of a senior citizen is eligible for deduction up to Rs.15, 000 or one-third of the receivable, whichever is less.

Gratuity Income

A gratuity is a part of salary received in a lump sum as a gratitude for the services offered by the employee in the company.

Tax treatment of gratuity received:

             For this purpose, employees are divided into two categories-

• Government employees- they are fully exempt from receipt of gratuity.
• Non-government employees covered under Payment of Gratuity act, 1972

       Actual gratuity received;

 Rs. 10,00,000;

15 days’ salary for each completed year of service or part thereof

                 Note: Here, the number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as-

                             Salary * 15/26

Actual gratuity received;or,  

Rs. 10,00,000; 

Half-month’s average salary for each completed year of service

               Note: Average salary =10 months’ salary (immediately preceding the month of leaving the job)/ 10

             Leave Salary

              Earned leaves which remain unutilized at the time of retirement and the amount received in lieu of this, is called leave encashment or leave salary.

Tax treatment:

The leave salary received by government employees is fully exempt from tax.

The amount received towards leave encashment in the hands of a non-government employee is exempt to the extent of least of the following: 

The Cash equivalent of earned leave to the employee’s credit only at the time of retirement (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service one has retired);

Ten months’ salary, which is calculated on the basis of average salary drawn during the period of 10 months immediately preceding retirement;

Leave encashment actually received at the time of retirement.

Note: The exemption is not more than Rs.3 lacs.

Provident Fund

It is a fund in which both employee and employer make contribution and the entire amount with    accumulated interest is payable to the employee on superannuation. The government employees     participate in statutory provident fund and non-government employees participate in a  recognized provident fund. The amount received with interest from both types of funds is fully exempt from tax, subject to some conditions.

             Compensation received at Voluntary Retirement

Any compensation received for taking voluntary retirement by an individual is eligible for an exemption up to least of the following:

Last drawn salary * 3 * completed year of service or last drawn salary * remaining months of service, whichever is higher;

Actual compensation received;

Rs. 5,00,000.

Conclusion

To conclude we can say that various tax benefits are available for a retired person, especially for a retired government employee. A non-government employee may also reduce his tax liability through proper investment and planning. He can choose the option of commuted pension instead of non-commuted one. It is always better to opt a recognized provident fund.

About the Author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at expert@investmentyogi.com.

Calculators:

Retirement Corpus Calculator

Monthly Pension Calculator

Indian security market is basically divided into two categories i.e. debt and equity. This simple categorization in no way puts a restriction on the number of products traded in the security market. The products are aplenty and their complex structure at the best confuses individual investors. Through this article, I will try to give a brief idea about the available products and their suitability from the individual investor’s perspective. You can use it for quick reference when ever in doubt regarding a particular product.

Categorization based on Debt and Equity Instruments

Investment in equity products makes investor a proportionate owner of the company. By buying equity products, you lend money to the companies but with an ownership interest and you make money when the company is profitable. Similarly, you lose money if the company is in loss.

Investment in debt products on the other hand make you eligible for receiving a fixed payment, usually with interest. Profitability of company is not a mandatory condition for receiving the payment.

Based on the above characteristics various debt and equity products available in Indian market are shown in the figure below:

Brief Introduction of Equity Products

Stocks

Stocks basically represent direct ownership of the company. You are eligible for dividend payments from the company and you can also benefit from capital appreciation (selling stock at higher price as compared to buying price). This instrument is most famous among retail investors.

Mutual Funds

These are products where money is pooled from investors with a common objective and invested in other equity or debt products to generate returns. As stocks, return can be in the form of dividends or capital appreciation. Mutual funds are suitable for investors who have lesser knowledge on stocks. It is one of the biggest mis-sold products in financial market, so caution is warranted while taking investment decision.

Debentures

Debentures have features of both debt and equity depending upon their nature. They come in three flavours i.e. convertible, partially convertible and non convertible debentures. These products are sold by companies for raising long term debt. Convertible debentures are converted to stocks under specified circumstances. Partially convertible are partly converted to common shares and NCD’s are not converted to shares. Payments are in the form of interest at regular intervals or payment at maturity. For convertible debentures, there is a scope of capital appreciation gains too. Debentures are not very popular among retail investors.

Warrants

Warrants basically empower the investor to buy shares of issuing company at a pre determined price on some future date. Returns are in the form of dividends and capital appreciation as they are similar to common shares. These instruments are not famous in retail fraternity and are basically meant for corporate sector.

ETF (Exchange Traded Fund)

ETF’s are open ended funds whose units are traded on the stock exchange. You get an exposure to whole basket of equity (or gold or debt instruments) by just buying one unit of the ETF. The income is in the form of dividend and capital appreciation. This instrument is gaining popularity among common investors in the form of gold ETF’s, but others still have a long way to go.

Derivatives

There are a number of derivative products in market. They are basically classified into Futures and Options and they derive their value from the underlying asset they are based on. Return is in the form of capital appreciation (no dividends). They fall into the category of very risky instruments as leverage is very high. Derivatives are famous among retail investors with high risk appetite.

Brief Introduction of Debt Products

G Sec (Government Securities)

Government needs funds for running the country and arranges part of it by issuing government backed debt products called G Sec. These are basically government backed bonds which promises interest and principle payment on fixed intervals. The return is in the form of interest payments and capital appreciation as bonds are tradable security. G Sec’s are famous among big banks and financial institutions. Retail investors take exposure through debt oriented mutual funds which are quite famous and attract a lot of participation.

Corporate Bonds

Corporate bonds are similar to G Sec’s and the only difference is, they are not issued and backed by government. These bonds are issued and serviced by corporate houses that raise capital by selling these products. Similar to G Sec’s, these products are famous with financial institutions and banks. Retail investors take exposure through debt oriented mutual funds.

Money Market Products

Money market products are used for short term borrowing/lending by banks and corporate. Popular products are T bills, CD’s, commercial paper etc. Retail investors cannot participate directly in Money market as investment amount needed is huge. Returns are slightly better than savings deposit rates. Retail investors take exposure through money market oriented mutual funds.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com.

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National Pension Scheme (NPS) is slowly getting more popular among employees. Even some big conglomerates are offering their employee's option to apply for NPS apart from the usual Employee Provident Fund (EPF) scheme, which is generally a part of the salary structure. Now, here are some points which are making NPS a popular and more accepted option. Firstly, the scheme of NPS is for all individuals and not just restricted to a salaried class person. Secondly, this scheme is more feasible in terms of returns. The idea behind the scheme is to invest the corpus in equities, which is a high risk generating alternative compared to the fixed income option of interest in Provident funds.

Sameer Sethi’s age is 30 years and he is working for an FMCG company in Delhi. He is shifting his focus from a PF scheme in which he was till now investing towards the NPS scheme which his company is offering from current financial year. Talk to him and he will say that it will help him in building sound corpus at the time of his retirement. He said that he is investing in the India growth story considering that the portion of funds i.e. 50 percent of the corpus is invested in equity bureaus under NPS schemes.

Choices Available Under NPS:

There are generally two options that are given to employees by companies offering pension schemes. One option is to invest at a subscriber’s level and the other option is to invest on a company level. Under subscriber level, the employee has the option to choose his fund manager and even the asset allocation. In another option, the company will opt for the fund manager and even the asset is allocated based on company’s choice. In the latter case, companies generally opt for investment options of Central government employees. The company managed funds have also delivered better in terms of returns to employees that range from 9 to 12 percent, much more than the set 8.5 percent limit in case of EPF.

How the scheme works?

Not a rocket science by any sense of imagination. It is a simple procedure where the employee subscribes for the NPS scheme if available in his company. The amount that needs to be deducted under the scheme is also mentioned by the employee. Companies on the other hand can take benefit from Sec 80 CCE by claiming the contribution made by them under business expenditure in P&L account.

Difference of opinion:

Major difference of opinion emerges on the nature of the NPS and EPF scheme. NPS is generally an equity product, as 50 percent of the total funds are invested in equities and on the contrary, EPF is a debt scheme. If the products are different, so is the risk. Risk averse investors need stable returns and safety, for them it is better to continue with the primal provident fund scheme. For those who are early in their career and can take risks should always go for NPS as the returns generated can be far more in the long run compared to EPF. Some of you might be aware that EPF invests in government securities or debt products.

Withdrawal limit:

 In case of EPF, one can withdraw the complete amount before his retirement for specified reasons. However, in case of NPS, if the withdrawal limit is more than 20 percent of the total invested before the age of 60, it leads to foreclosure of account.

Demerits of Scheme:

Having scored on other points over EPF, NPS drags on the tax front. The most important criteria for a middle class salaried employee is to save tax, but NPS gets beaten on that portion by EPF. First and foremost the withdrawal from NPS is taxable under the Income Tax Act. The annuity which is earned after the retirement also attracts tax.

This product needs to be improved on that front, otherwise it lacks the appeal for retirees. Further, an Employee contribution of 10 percent of Basic and Dearness Allowance is deductible under Section 80CCD.

Costs involved in NPS are also a danger. These scheme charges fund management fees which increase the cost of investment which in EPF is NIL.

Looking at both the products from various angles, Employee Provident Fund scores over and above National Pension Scheme.  NPS scheme gets limited only to the returns front as it invests in Equities but under EPF one is getting the benefit of taxation, stable returns, withdrawal limits, security and no costs.

Conclusion:

 If you are looking for decent returns, liquidity and also to save tax, EPF should be your choice. If you are willing to take risk to get better returns through some exposure to equities, NPS is just for you.

About the Author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at expert@investmentyogi.com.

Calculators:

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Monthly Pension Calculator

In India, many employees switch their jobs during the year for better opportunities and for a hike in annual salary. But, while switching jobs, a common problem faced by employees is with transferring their Employee Provident Fund (EPF) account from one company to another. Currently, you need to give physical application to transfer your EPF account from one company to another while switching job, which lacks transparency in process and takes years or months to complete the transfer. In the past, there were cases of people getting frustrated and they didn’t have any clue on which desk their application was lying and the waiting period to complete this transfer of account. Now, to make the process smooth and simple, EPFO has announced launch of online facility of EPF transfer and withdrawal from 1^st July, 2013.

Benefits of Online EPF Facility

• Online facility will reduce the hassle; there will be transparency in the process.
• You will get a facility to track your request by just one click online and also be able to see which stage your application has reached.
• Application process will be quick as employees at EPFO office will not be required to data feed physical application in the system, saving their time. Employees at EPFO now will work directly on more constructive areas such as verifying the details and then complete the procedure smoothly.

How verification process will work after request is placed online?

• You need to apply for transfer or withdrawal on the website of www.epfindia.com with all the personal details, PF account number, old and new employers EPF code.
• An MIS will be generated with the tracking code, which will help in locating the status of application.
• Your application request of transfer will go to the old employer and EPFO, online. Then, the EPFO department takes charge of verifying the details, contacting old and new companies of an employee for verification and complete transfer.
• EPFO staff will be working on stiff deadlines to complete the procedure for transfer of EPF account.

Unsuccessful technology initiatives in the past

EPFO has planned to launch online EPF transfer and withdrawal facility from 1^st July, 2013 onwards. But, in the past, the various measures taken to improve the services and process were not productive. There have been delays in launching services; also earlier initiative for an e-passbook has not tasted success.

EPFO had also made an announcement on account number portability, which should make transfer much easier. In this, each employee will be allotted a single PF number. Also, there will not be any requirement to transfer the EPF account from one employer to another while switching jobs. However, this project has been delayed and expected to be launched after 2 years. Now, focus is on launching these online services.

Conclusion

We advice to wait for 2 months if you can, for this online system to go live or else follow the usual physical process to transfer the account. It’s not recommended to withdraw the money from EPF account after changing the job, so transfer it to the new employer. These are retirement savings which should be preserved for your future consumption.

Author

Hiral Thanawala is a PGDM (Finance) graduate and Certified Financial Planner with an experience of over 5 years in equity market and personal finance domain. The views explained by him are personal. He can be reached at expert@investmentyogi.com.

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Falling gold loan prices bring broad smile on the face of Indians as they love buying gold and jewellery. It’s also a reason to cheer for the government as the price fall will contribute towards reducing the current account deficit. Reduction in current account deficit will be an indicator of strengthening economy and will boost the overall investor sentiments towards investment in stocks. It seems falling gold prices is good news for everyone. But there is a group of investors and borrowers who might not be happy. Which is that lot, and what’s the reason of their concern? We will discuss the impact of falling gold prices on investors and gold loan borrowers in this article.

Gold Loan Borrowers

Crashing gold price is putting pressure on cash flow and balance sheets of gold loan companies as their business model is tightly coupled with gold prices. If we try to understand the business of gold loan companies, in simple words, it can be said that they generate profit out of the interest payment they receive from borrowers.

These borrowers put gold/jewellery as collateral with the companies against which they receive loan. Once the collateral (Gold) price starts falling, there happens to be devaluation of the assets which the companies hold. In case of any default from the borrowers, the companies will have to sell gold which they hold in open market. As the prices in open market are less as compared to the price when the loan was originally sanctioned, it hampers the profitability of the company.

To avoid such situations, companies start pressurising the customers for prepayment or to increase the collateral. Both these situations are not borrower friendly as the borrower might not be in a position to make full payment or deposit extra collateral.

Investors in Gold Loan Companies’ NCD’s

Gold loan companies raise capital by issuing NCD’s and use the capital in expanding branch network and visibility to maintain market leadership position. They use the capital to target new customer segments and use the capital to strengthen operating processes and risk management systems. Post employment of the raised capital, they pay the investors from the profit they generate from the new customer base.

The interest rate which is promised against these NCD’s is in the range of 12%. Now let’s figure out what happens in a falling gold price scenario to the new business they are planning to acquire.  As the gold prices will be low, new customers who are planning to take gold loan will try to defer their requirement as loan to value ratio will be low. They will wait for the gold prices to rise. If this turns out to be a mass behaviour, gold loan companies will face difficulty in acquiring new customers. Lack of new business will put a question mark of their potential to service the NCD’s. This will lead to fall in value of the NCD’s till the gold prices resume their uptrend.

If this scenario persists for long, there might be rating downgrades for the issue. So, as an NCD investor, you face capital loss if you sell the issue in the open market. If you hold on, you face credit risk.

Conclusion

Falling gold price puts gold loan borrowers and lenders at risk. Situation is grimmer for the NCD holders, as, if the situation persists for longer period; they are subject to both capital loss and credit risk. Before taking any investment decision, do a careful analysis of the future price outlook and timeframe you have in mind, as prices are bound to reverse the course some day.

About the Author:

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com.

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Do you want to secure your child’s future? If your answer is yes, one thing you should do immediately is to buy a ‘Child Plan’. Well, if you are a sales agent trying to sell a child plan, this would be the perfect pitch for you. Emotions rule in India. And this is exactly where insurance companies monetize. They will first remind you that nothing is forever and then they will tell you how their product is the ‘Best’ for you. Let’s dig deeper into this very interesting topic and see whether you need a child plan or not!

What is a child plan?

The major difference between a child plan and any other insurance/investment product is the word ‘Child’. Trust me, if you remove this emotional word from the name of the plan, most policies would sound similar. I doubt if even the sales agents would recognize what is what without the policy name.

Child plan as Insurance

A child plan provides the much needed security for your child in case of an unforeseen event. But, I thought there is something called “Term Insurance” specifically designed for that. All you need to do is to just add you child’s future education requirement, marriage costs, etc to your total insurance requirement. Now, you would ask me; why not purchase insurance through a child plan? Good question. I wouldn’t mind doing it, but for the costs involved in doing so. There are mortality costs, administration costs, allocation costs and the list goes on. Why would I pay all these and get insurance only worth peanuts?

Child plan as Investment

The next emotional word that the sales agent would throw at you is ‘Investment’. He would tell you that this will act as a safe investment (only he would know what safe means) and secure your child’s future needs. And you would probably agree with him because you know well about rising inflation and education costs. Does a child plan invest in financial instruments offered out of this planet? I would invest in one right now, if it does. Rather, you could do well to pick 4-5 mutual funds with decent track record and invest in different financial instruments. With everything becoming online, you can do it on the click of a button, unless you are too lazy to do so.

Child plan for Financial Planning

The sales agent will definitely tell you that this would be a part of your overall ‘Financial plan’. The last thing that I would do is to include this ‘Na ghar ka na ghat ka’ policy in my financial plan.  In fact, if you have covered yourself with adequate insurance and planned proper investments, all you need to do is to teach your children financial literacy. This will enable them to protect and build the existing assets.

Final Word

Remember, there’s nothing in a name. You need to first know your goals before taking any financial decision. Do your own homework on a product you want to purchase. The agents will only talk about the positives of the specific policy. They will never know your financial situation in detail. If you do not have sufficient time for research on financial instruments you need, better approach a good financial planner. He will take into account your present financial situation and then help you plan ahead.

About the Author:

A.V.Suresh is our in-house Financial Planner and a personal finance enthusiast. He is a Certified Financial Planner (CFP) and also has an MBA in Finance. He can be reached at expert@investmentyogi.com.

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After the recent fraud exposure of Saradha chit fund, the total idea of Chit fund investing has been shaken to the core. The alleged nexus between the political class and chit fund managers exposed a greater degree of risk that investors were unaware of in the past. From Union Minister of West Bengal to the elite politicians, everybody’s name is popping up, creating a furore on the part of media and investors who lost their hard earned wealth in the scam. Before investing in Chit funds, one should do a proper research and probe on the background of such funds. Having said that, sometimes these Ponzi schemes are very well dramatized to hoodwink investors and it is next to impossible to put hands on the malafide intentions of the Chit fund operators. Therefore, before investing take prior care and understand the business of Chit funds.

Chit Funds:

These are funds that are run in between families, friends, known persons and are generally managed by associates. They are unorganized. There have been many instances when the organizer who can be a close associate to investors has generated money by assuring returns and fled.

How do Unorganized Chit Funds Work?

An Unorganized chit fund is often known by different names. It is called kitty among women or a pool of people. It works in a way where people put their money in the pool and the same is withdrawn by a particular member as per necessity. For example: There are  40 members investing in a chit fund and each invests Rs 1000 per month. This means that there is a pool of Rs 40,000 per month. If any member is in need of money he specifies his intentions. In case there is more than one person in need of money the fund is allocated based on a draw or auction of funds.

The name that comes out of the auction gets the money. However, it must be noted that the fund will not be equivalent to the entire pool which in this case is Rs 40000. There would be an auction for the sum every month. Suppose a person bids the lowest, for Rs 35,000. The remaining amount is distributed among the other members, which is 39 in the above example.

The benefit for the person who gets the funds early in the period is the maximum beneficiary. This is due to the fact that he gets the lump sum, he can invest the sum in some other scheme and earn interest or he can fulfill the necessities.

Funds in Accordance to rule of Act:

This is an organized type of fund; this type of pool is in accordance with the Central Chit Funds Act 1982. These are much more authentic than the unorganized type, but the latter is much more popular. The utilization of funds shall only be for the purpose of chit fund business, giving loans and advances to non prized subscribers on the security of subscriptions paid by subscribers. According to the act, the investments will be deposited with approved banks which will be clearly mentioned in the chit funds.

Is the Credibility lost?

The credibility of such schemes has been seriously dented by the Ponzi and fraudulent activities that have been taking place in the last few years. Investment in such schemes should be based on the need and not a lure. In order to mitigate some big expenses or needs, such schemes are still popular in smaller towns and Tier 2 cities. The idea should be harnessed and not the attractiveness. An easy way is to get linked in a pool among your friends and relatives that is more safe, than to invest in a scheme where the idea is shared by someone who is unknown. The law of the land is soft and you have to be proactive in order to save yourself from dubious schemes.

About the Author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at expert@investmentyogi.com.

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Mutual Funds are increasingly becoming a popular investment option. While more and more people are investing in mutual funds, most of us fail to decipher the offerings of various mutual fund schemes. Every Mutual Fund group offers an array of schemes which differ in the following aspects:

• Underlying asset – Underlying asset is where the money collected under the scheme gets invested. It can be in equity market, debt market or both. Funds investing in equities are called Equity mutual funds. Funds investing in bonds offered by companies and government are called Debt mutual funds. Funds that invest in both, equity and bonds are called Hybrid Mutual funds. Mutual funds invest in other mutual funds and are called Fund of funds. The risks of mutual funds are governed by the underlying assets. Due to the intrinsic nature of equities and debt, Equity mutual funds have higher risk than Debt mutual funds.

• Option of Fund Entry and Exit – An Open ended scheme allows investor to buy and sell units anytime. In Close ended schemes, no investor can enter the fund after the initial offering of the fund is over. While redemption is allowed anytime after the close period in these schemes, purchase of units is not possible, except from the secondary market.

• Ways of redemption – Every scheme offers two options for redemption - Dividend option or Growth option.

Dividend option is one in which profits made by the fund are not re-invested and are paid out to the investor. Here, the value of investment made remains the same. The benefit of this option is that it provides regular source of money. This should be preferred when money is required in short term. The other benefit of dividend option is that it allows one to book profits and limits the investment exposure to the original amount of investment.

Growth option is one in which profits made by the fund are re-invested. The profits are converted into mutual fund units for the investor. In this case, the value of investment increases by the profits made. Growth option benefits more than dividend option as the profits reinvested reap further profits.

          Also read: Growth versus Dividend option in mutual funds

Before investing in a mutual fund, one should perform the following checks:

• Where the money is being invested - If it is equity based fund, then one should know in which sectors major share of fund is invested.

• Historic Performance – While it is important to see the current NAV (Net Asset Value) of the fund, it is also imperative to check the growth path of the fund. It may be possible that a fund may have achieved handsome gains because of which NAV stands high but, at present the performance of fund has become average.

• Mutual Fund Ranking – CRISIL issues Mutual Fund ranking every quarter, which is available on its website. The ranking is done by experts after analyzing a number of parameters of the funds. It is very useful to check the ranking of a fund vis-a-vis its competitors before making an investment.

• Other essential parameters – The size of fund corpus as well as age of the fund can be checked. A large size corpus indicates high investor confidence. If two funds have the same NAVs, the fund which has achieved the NAV in lesser time is better than the other one.

It is well known that mutual funds are subject to market risks and do not offer guaranteed returns. But making a well informed selection of the fund certainly improves the chances of reaping good monetary gains.

About the Author:

Uma N Goel is an MBA (Finance) and has worked for 5 years in financial advisory. She can be reached at expert@investmentyogi.com.

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